Huntington Bancshares Inc (HBAN) 2017 Q1 法說會逐字稿

Greetings, and welcome to the Huntington Bancshares First Quarter Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference call over to your host, Mr. Mark Muth, Director of Investor Relations.

Thank you, you may begin.

Thank you, Michelle, and 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 by following the Investor Relations link on 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.

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 2, 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 material 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 3 and an overview of the first quarter financials.

Mac?

Thanks, Mark, and thanks to everyone joining the call today.

As always, we appreciate your interest and support.

Let me start by saying that we are very pleased with what we accomplished in the first quarter.

Not only did we deliver solid core financial performance, we materially completed the FirstMerit systems conversion and branch consolidations over Presidents' Day weekend.

As Steve will discuss later in the call, both the systems conversion and branch consolidations went very well.

And we remain on pace to deliver the expected cost savings and the incremental revenue enhancement opportunities.

We continue to expect that the economics of the FirstMerit acquisition will accelerate the achievement of our long-term financial goals.

As I discuss first quarter results, please keep in mind that all year-over-year comparisons will benefit from the inclusion of FirstMerit as the acquisition closed during the third quarter of 2016.

With that in mind, let me dive into the financials.

On Slide 3, Huntington reported earnings per common share of $0.17 for the first quarter of 2017.

This is inclusive of $0.04 per share of significant items related to the FirstMerit acquisition, which also impacted the financial metrics that I will highlight on this slide.

Return on assets was 0.84%, return on common equity was 8.2% and return on tangible common equity was 11.3%.

The net interest margin was 3.30%, up 19 basis points year-over-year and 5 basis points compared to the fourth quarter of 2016.

Tangible book value per share decreased 8% from the year-ago quarter to $6.55.

Total revenue increased $300 million or 40% year-over-year, which included 45% growth in net interest income and 29% growth in noninterest income.

Noninterest expense increased to $216 million or 44% year-over-year.

Noninterest expense adjusted for the year-over-year change in significant items increased $149 million or 31% year-over-year, reflecting the addition of FirstMerit and ongoing investments in technology and our colleagues.

Our reported efficiency ratio for the quarter was 65.7%.

However, net acquisition-related expense added 6.7 percentage points to the efficiency ratio.

The reconciliation for this number can be found on Slide 16.

Moving on to the balance sheet.

Average total loans grew 32% year-over-year, while average core deposit growth, fully funded loan growth increasing 39% year-over-year.

Credit quality remained strong in the quarter.

Consistent, prudent credit underwriting is one of Huntington's core principles and our financial results continue to reflect that.

Net charge-offs were 24 basis points of average loans, remaining well below our long-term financial goal of 35 to 55 basis points.

This is up from 7 basis points in the year ago quarter, but down slightly from 26 basis points in the fourth quarter of 2016.

The nonperforming asset ratio decreased by 34 basis points from a year ago, benefiting in part from the impact of purchase accounting and the acquired portfolio.

We managed the bank with an aggregate moderate-to-low risk appetite and our results illustrate this disciplined focus.

Finally, our capital ratios continued to increase modestly.

As of quarter-end, our CET1 ratio was 9.67%, well within our 9% to 10% operating guideline, while our TCE ratio was 7.28%.

Turning to Slide 4, let's take a closer look at the income statement.

First quarter revenue was up 40% from the year ago quarter, primarily driven by net interest income, which was up 45%, reflecting the addition of FirstMerit and disciplined organic loan growth.

The net interest margin was 3.30% for the fourth quarter, up 19 basis points from a year ago and up 5 basis points on a linked-quarter basis.

Purchase accounting had a favorable impact of 16 basis points on the net interest margin in the first quarter compared to 18 basis points in the fourth quarter of 2016.

Noninterest income increased to 29% year-over-year, driven by mortgage, trust services, and card and payment processing.

Noninterest expense increased 44% year-over-year.

Significant items again impacted both the first quarters of 2017 and 2016.

For the first quarter of 2017, acquisition-related expense totaled $73 million.

Adjusted noninterest expense for the first quarter grew 31% from the year ago quarter.

For a closer look at the details behind these calculations, please refer to the reconciliations on Page 15 of the presentation slides or in the release.

We remain on track to achieve the $255 million of annual expense savings that were communicated when we announced the FirstMerit acquisition.

In total, we consolidated 110 branches during the first quarter or roughly 10% of their branch network.

We consolidated 101 branches at systems conversion.

In addition, as part of our normal periodic review of our distribution network, we consolidated 9 legacy Huntington branches unrelated to the FirstMerit acquisition during the first quarter.

Slide 5 shows the expected pretax net impact of purchase accounting adjustments on an annual forward-looking basis.

We introduced this slide last fall and believe it is useful in helping you think about purchase accounting accretion going forward.

It is important to note that the purchase accounting accretion estimates on this slide are based on current scheduled accretion and except for what we actually experienced in the first quarter of 2017, do not include any accelerated accretion from early pay-offs in the projected periods.

As our results for the past 3 quarters illustrate, in reality, we are likely to experience loan modifications and early pay-offs resulting in accelerated accretion.

Therefore, you are likely to see the accretion revenue, in the green bars, continue to be pulled forward as modifications and early pay-offs occur.

Let me also remind you that some of the accelerated accretion may be offset by provision expense, as acquired FirstMerit loans renew and we establish a loan loss reserve in a normal course.

As a result, we intend to continue to provide regular updates of this schedule going forward until the majority of the purchase accounting accretion has been recognized.

Slide 6 illustrates that we are off to a positive start with respect to delivering positive operating leverage again in 2017.

Of course, we talk about this every quarter and stress how important annual positive operating leverage is to us as a company.

In 2016, we enjoyed our fourth consecutive year of positive operating leverage, and we are confident that 2017 will be the fifth consecutive year.

Turning to Slide 7. Let's look at balance sheet trends.

Average earning assets grew 38% from the year ago quarter.

This increase was driven primarily by a 57% increase in average securities and a 35% increase in average C&I loans.

The increase in average securities reflected the addition of FirstMerit's portfolio, the reinvestment of cash flows, including the proceeds of the auto securitization in the fourth quarter, and additional investments in Liquidity Coverage Ratio level 1 qualifying securities.

The increase in average C&I loans primarily reflected the FirstMerit acquisition as well as increases in core middle market, the specialty lending verticals, business banking and auto core plan.

Offsetting some of this growth, we saw large corporate borrowers pay down their bank debt by tapping the debt markets in order to lock in current low rates.

Average auto loans increased 14% year-over-year, with the acquired $1.5 billion FirstMerit portfolio, essentially offsetting the impact of the $1.5 billion securitization in the fourth quarter.

Average new money yields on our auto originations were 3.54% in the first quarter, up approximately 25 basis points from the prior quarter, and up about 50 basis points from the year ago quarter.

Average residential mortgage loans increased to 29% year-over-year, as we continued to see strong demand for mortgages across our footprint.

Turning attention to the chart on the right side of Slide 7, average total deposits increased 38% from the year ago quarter, including a 39% increase in average core deposits.

Average demand deposits increased 60% year-over-year.

I want to call your attention to the trend in funding mix, particularly, the increase in low-cost DDA.

This reflects the addition of FirstMerit's low-cost deposit base.

We continue to experience only modest core deposit attrition from the FirstMerit book, limited primarily to some rate-sensitive government deposits.

Importantly, we are ahead of our original pro forma model with respect to retention of deposit balances.

Moving to Slide 8. Our net interest margin was 3.30% for the first quarter, up 19 basis points from the year ago quarter.

The increase reflected a 26 basis point increase in earning asset yields and 1 basis point increase in the benefit of noninterest-bearing deposits, balanced against an 8 basis point increase in funding costs.

On a linked-quarter basis, the net interest margin increased by 5 basis points, driven by a 10 basis point improvement in earning asset yields and 1 basis point increase in the benefit of noninterest-bearing deposits, partially offset by a 6 basis point increase in funding costs.

Purchase accounting contributed 16 basis points to the net interest margin in the first quarter, down from 18 basis points in the fourth quarter.

After adjusting for this impact, the core net interest margin was 3.14% compared to 3.07% in the fourth quarter of 2016, also adjusted for the impact of purchase accounting.

I would also like to call your attention to the orange line at the bottom of the graph on the left.

This shows our cost of deposits, which was only 26 basis points for the first quarter.

This represents a 2 basis point increase over the year ago quarter, clearly illustrating the strong core deposit base we enjoy and our ability to successfully lag deposit pricing.

Slide 9 illustrates the continued progress we have made in rebuilding our regulatory capital ratios following the FirstMerit acquisition.

CET1 ended the quarter at 9.67%, down 6 basis points year-over-year, but up 9 basis points from the previous quarter.

We have mentioned previously that our operating guideline for CET1 is 9% to 10%.

Tangible common equity ended the quarter at 7.28%, down 61 basis points year-over-year, but up 14 basis points linked-quarter.

Moving to Slide 10.

We booked provision expense of $68 million in the first quarter compared to net charge-offs of $39 million.

Net charge-offs represented an annualized 24 basis points of average loans and leases, which remains well below our long-term target of 35 to 55 basis points.

Net charge-offs were down 2 basis points from the prior quarter and up 17 basis points from the year ago quarter, which benefited from material commercial real estate recoveries.

The higher provision expense was due to several factors, including the migration of FirstMerit loans from the acquired portfolio to the originated portfolio, portfolio growth and transitioning the FirstMerit portfolio to Huntington's reserve methodology.

The allowance for credit losses as a percentage of loans increased to 1.14% from 1.10% at year-end.

And the nonaccrual loan coverage ratio increased to 190%.

Asset quality metrics remained stable in the first quarter.

The nonperforming asset ratio eased 4 basis points to 68 basis points.

The criticized asset ratio increased modestly from 3.62% to 3.72%.

Our 90-day plus delinquencies remained flat.

We also experienced lower NPA inflows for the second quarter in a row.

With that, let me turn the presentation over to Steve.

Thanks, Mac.

Moving to the economy.

Slide 12 illustrates a few key economic indicators for our footprint.

Our footprint has outperformed the rest of the nation during the economic recovery in the last several years, and I remain very bullish on the outlook for the local economies across our 8 states.

The bottom left chart illustrates trends in the unemployment rates across our footprint and as you can see, unemployment rates across the majority of our footprint continue to trend favorably.

The charts from the top and bottom right show coincident and leading economic indicators for the region.

I want to call particular attention to the bottom chart, which shows the leading indexes for our footprint as of January, which is the most recent data available.

This is the chart we look to for insights into expected future growth within our footprint.

And as you can see, the chart shows that 7 of our 8 states expect positive economic growth over the next 6 months.

Slide 13 illustrates trends in the unemployment rates for our 10 largest deposit markets.

Now many of the large MSAs in our footprint remain at or near 15-year lows for unemployment as of the end of February.

The labor market in our footprint has proven to be strong in 2016 with several markets, such as here, in Columbus and in Grand Rapids, where we are at structural full employment.

We have noted previously that we are seeing wage inflation in our expense base and our customers are too.

Housing markets across the footprint are strong, displaying home price stability and even increases and remaining -- while remaining some of the most affordable markets in U.S. We continue to see broad-based home price appreciation in all of our footprint states.

Consumers and businesses alike continue to express optimism about a more business-friendly environment expected from Washington.

This optimism is broad-based and shows in our loan pipelines.

I know there has been much focus for this quarter on the Federal Reserve H8 data and the lack of loan growth acceleration for the sector.

For the past several years, we have seen weak performance in the first quarter followed by building strength over the rest of the year.

And based on the acceleration and growth of our pipeline during March, I'm hopeful that this will prove to be the case again in 2017.

That said, we continued to see reduced rates in pull through from the pipeline to book loans, restraining our loan growth overall.

Finally, most of our state and local governments continue to operate with surpluses.

With that, let's turn to Slide 14 for some closing remarks and important messages.

We started the year with good financial performance in the first quarter, but as always, we do not manage the bank around the quarterly earnings cycle, we manage for the long term and remain focused 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.

The integration of FirstMerit continues to progress very well.

The branch and systems conversion went very well, with no widespread issues or challenges.

You probably do not have a good sense of just how much work was involved on the -- in the conversion.

So I'd like to share a few statistics.

There were more than 1,000 colleagues involved, and they converted more than 350 different systems.

Over 750 terabytes of data were converted.

We had 24 separate plans for conversion weekend containing more than 17,000 tasks.

We had more than 230 milestones over the weekend.

And finally, we mailed 1.2 million welcome kits, so it was truly a tremendous amount of hard work and our colleagues, I'm proud to say, performed it very well.

Now with almost all of our technology conversions complete, we are progressing, as planned, toward realizing our targeted $255 million of the annual cost savings from the acquisition with more than 3/4 already implemented.

We also remain on pace with our revenue enhancement opportunities, such as the SBA and home lending expansions in Chicago and Wisconsin, and the RV and Marine lending expansions, which we have discussed at recent investor conferences.

We have previously discussed some of the early wins we had in capital markets and insurance by bringing our superior product offerings to legacy FirstMerit customer base.

We are delivering the promised financial benefits of the FirstMerit acquisition.

I believe you can already see the benefits in our underlying fundamentals.

We approached the branch conversions with the mantra of retain and grow customer relationships and deposits, and I'm very pleased with our success.

When we announced the transaction, we shared that one of our assumptions in our model called for about 10% deposit runoff, and we are clearly outperforming that assumption.

We have invested and will continue to invest in our businesses, particularly with our customer facing teams, and in mobile and digital technologies as well as data analytics.

Importantly, we plan to continue to manage our expenses appropriately within our revenue outlook.

Finally, we always like to include a reminder that there is a high level of alignment between the board, management, our employees and our shareholders.

The board and our colleagues are collectively the fifth largest shareholder of Huntington.

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

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

The first quarter is down the book, so it's time to look forward to the remainder of 2017.

I'd ask you to note that our expectations for the full year 2017 are unchanged from what we shared with you at year-end.

We expect total revenue growth in excess of 20%.

We continue to target positive operating leverage on an annual basis.

We will grow the balance sheet and the average balance sheet in excess of 20%.

We expect to fully implement all the cost savings in the FirstMerit acquisition by the third quarter of 2017.

We also expect asset quality metrics to remain near current levels, including net charge-offs, remain below our long-term target of 35 to 55 basis points.

So with that, I'll turn it back over to Mark, so we can get to your questions.

Thank you.

Thanks, Steve.

Operator, we'll now take questions.

(Operator Instructions) .

(Operator Instructions) Our first question comes from the line of Ken Usdin with Jefferies.

A couple of questions related to the merger.

First of all, you mentioned, Steve, 3 quarters of the saves got through, the conversion was in February.

So can you just help us understand, do we see a step down again in 2Q?

And then also, Mac, to your prior commentary about that $609 million plus amortization by the fourth quarter?

Is that also still what you expect by year-end?

Thanks, Ken.

So absolutely, we're still focused on that $609 million, excluding intangible amortization and nonadjusted for the expense that we need to basically support the revenue initiative, but very confident that we are going to achieve that $609 million in the fourth quarter of 2017.

Regarding how it plays out from here -- keep in mind that there is seasonality as we move through the year, but we're definitely headed towards that $609 million in the fourth quarter of 2017.

So, Mac, just a follow-up on that then.

You mentioned, it's x amortization and x investments.

So how do we think about netting all that together?

How much is that investment?

And how much -- and/or is any of that investment not already in the run rate?

So the investment is coming into the run rate, even as we speak, because of the fact that we're hiring personnel in Chicago, for example, for SBA lending, mortgage banking, those types of activities.

I would think about it in terms of your model, whatever you've assumed for the incremental revenue, that put an efficiency ratio against that revenue and build it in that way.

Okay.

And just one quick follow-up.

Short-term borrowing costs were elevated, you mentioned the release that it was related to liquidity around.

Does any of that roll off?

And does that help to the margin going forward?

We do have some medium-term notes that are rolling off here shortly and that should be of some assistance to the margin going forward.

But clearly, the March rate increase is going to be helpful as well.

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

Just following up on Ken's question on the margin.

Loan yields are up, maybe Mac, can you touch a little bit on what's going on there?

Is that just the impact of the December rate increase?

And could we see a similar-type increase from -- in Q2 from the March hike?

Thanks, Jon.

So -- yes, clearly, we are seeing the impact of the December increase in the first quarter, with the core margin increasing 7 basis points to 3.14%.

I think, probably 2 basis points of that is day basis.

So I'd be thinking more about a 5 basis point increase from a core, excluding day basis.

And we definitely expect the core margin to expand from here.

Purchase accounting is going to be a bit difficult to forecast, which is why we put the slide in the deck to help you do that.

We did have $8 million of accelerated accretion in the quarter, above and beyond the normal accretion, and that's why are we going to continue to see the amortization be pulled forward and likely help the margin.

But I would continue to look at that accelerated accretion and even some of the normal amortization being allocated to the reserve, because as we see the acquired loans move to the organic book for FirstMerit, we have got to provide a reserve for those loans.

Does that help?

Yes, that helps.

I think what you're saying is there is some moving parts, but this is sustainable and we're likely to see some benefits in Q2, is that fair?

Yes.

The core margin will expand.

Okay.

Just quick follow-up on -- you touched on the deposit costs, and I notice they were up modestly 3 basis points.

But anything going on there, are you seeing any kind of pressure or demands from clients to raise those rates?

I think, we don't see a lot of pressure at this point in time.

There are some one-off requests that take place.

In general, I think liquidity is good, in the industry.

And I think, maybe some of the lack of asset growth in the first quarter across the industry is helping to take some pressure off of deposit pricing.

But we've actually seen less than 10% deposit beta since the increase in the Fed cycle starting in December of '15.

So we don't think that there is going to be a lot of pressure around pricing in 2017, at least in the near term.

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

On the credit front, we just wanted to get a little bit of color.

I saw some movement in the past-dues in the 30-plus past-dues on the commercial side of the shop.

And not too concerning just yet, but wondered if you could give us some of the color on the C&I side, they're up, and CRE looked like it was up a good amount in the 30-plus past-dues as well?

Yes.

So there is nothing there that is concerning at all.

In fact, on the CRE side, that movement was -- one credit that was just an administrative past-due, not a payment issue, just wasn't renewed prior to quarter-end.

So -- we are at a very low level of delinquencies overall.

So while there is some movement, it's still all a well-controlled range and the CRE is just a -- again, one item.

So very confident in our delinquency levels.

Okay.

And I apologize if I missed any of this, I hopped on late, but in terms of your retail CRE exposure, have you commented on that in terms of sizing and how it looks?

I haven't, but I will.

So we have a certain level of retail exposures.

Obviously, we have it both in the C&I space and in the CRE space.

So in CRE, we have about $1.7 billion of exposure that is in secured -- secured exposure and the retail project type.

And then we also have about $600 million in our REIT portfolio.

And the REIT portfolio has, obviously, very strong credit profile secured by an unencumbered pool of assets and no credit issues there.

And within the REITs, we have about $250 million of regional mall exposure.

So again, fairly modest exposure there.

A good majority of our exposure is in strip centers, so you'd have grocery-anchored strip centers and other anchored strip centers.

So those are the local destinations, and so not a risk profile that we are overly concerned about.

We do have a list of watched tenants, so we've gone through the entire portfolio and reviewed any of those customers that have filed bankruptcy or intending to file, and then also another tier, where they've announced store closings, et cetera.

And when we go through that entire portfolio and look at the impact of all of those entities, where they just stopped paying their rent, we really have -- we've had a couple of downgrades -- a handful of downgrades of no meaningful amount.

So we feel very good with where we're standing in the CRE portfolio.

Then on the C&I side, obviously, retail is a very broad category, but when you strip out auto dealer and those kinds of exposures, which really aren't what we think as conventional retailers, and then you get down to food and beverage, building materials, nurseries, and then clothing stores, et cetera, we have about $1 billion of outstandings.

And again, no exposure to any of those entities that have been in the headlines filing bankruptcy or maybe intending to.

So overall, very confident in our retail exposure.

Okay, great.

That's helpful.

Lastly, if I could just ask one more on the credit side, on auto.

I just wanted to see if I can get a little bit more color out of you in terms of what you're seeing when it comes to the decline in used car values?

What that could imply in terms of your exposures?

And then also your outlook for growth there?

Sure.

I will answer that, and I'll also give a few reminders of what we stated before in terms of our portfolio, and why we think it's different.

So first of all, in terms of the used car values, the Manheim Index, while moving around a bit is still quite strong, it doesn't impact us quite as much, because as a prime, super-prime lender, we're focused mainly on probability of default, not loss given default.

And we've done some stress analysis on our portfolio as we've mentioned before.

And a fairly significant drop in the Manheim does not impact us to any great degree.

So we aren't concerned about the values, and I think overall they're holding up fairly well, right now.

A reminder, we have consistent FICO, LTV, and term, if you look at the schedules that are included.

No movement there.

We have no leasing.

Again, we are focused on prime and super-prime borrowers.

We have no risk layering.

We're combining low FICOs with high LTVs and extended terms.

And again, we tend to have a little bit more exposure to the used car market, which is much more affordable and -- for our customer base, so -- and our performance continues to demonstrate the consistency in our origination policies.

So again, very confident in the auto book.

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

Just a question on the purchase accounting adjustments.

Just want to make sure I understand Slide 5 properly versus what you reported.

If I got the numbers right, I think you've reported $36 million of PAA and the NII line this quarter, but for the full year, you're saying $68 million.

Does this $68 million include any of the accelerated?

Or is that just sort of the normal scheduled amortization?

Just trying to reconcile the numbers.

Yes.

And so the $68 million does include the first quarter accelerated.

Okay.

So that would imply roughly $32 million of sort of normal amortization for the next 3 quarters accelerated?

Yes.

That looks right.

Got it.

Okay.

Makes sense.

And then just one other question.

On the expenses, just to sort of super, super clarify the $609 million, that -- if we assume that amortization, I don't know, taking $13 million for the quarter, I just want to make sure that you weren't -- I mean, obviously, you're excluding the other one-time items, but just from an investment standpoint, is the right number to think about sort of including amortization, sort of that $620 million, $622 million number?

Or is there -- when you report it, is there going to be sort of other investments, other things that are a little more recurring, that would take that number higher?

Just want to make sure.

Yes, the $609 million, you would need to add the amortization to, right?

Yes.

And I think that was the $14 million.

And then we should -- we shouldn't see any recurring or nonrecurring items related to the FirstMerit acquisition in the fourth quarter.

We think we're going to get through all those expenses in the third quarter.

And then the only other thing you need to think about is the expense associated with the revenue investments that we've spoken about around the FirstMerit acquisition.

Got -- see I think that's what I'm more asking about.

Let's say, you spent $50 million, just hypothetically, to hire more lenders to build out something, then your number would -- your expense number would be meaningfully higher than the $609 million plus amortization.

I just want to make sure that we're all thinking about that it's likely to be higher, if that's the right way of looking at it.

Because...

Yes, that is absolutely the right way to think about it.

And keep in mind, that as we add those, the incremental revenue to -- associated with those initiatives, things like SBA lending and mortgage banking, there are commissions and commission expense that comes along with that revenue.

So...

Got it.

And have you guys quantified just a magnitude of those additional investments?

No, I think, again, I think the best way to think about it is to think about the revenue impact and put an efficiency ratio against it.

And I would use that as an adjustment for the model.

Our next question comes from the line of Bob Ramsey with FBR Capital Markets.

Just on that point, what is the right sort of marginal efficiency rate that you would apply to those incremental revenues?

I would probably -- you have to keep in mind that we're ramping up those investments and that activity.

There is likely to be a higher efficiency ratio in 2017 versus 2018, and efficiency ratio for those businesses in normal times could be in the 55% range, something like that.

So again, it's going to be higher in 2017 related to 2018, because of the fact that we're ramping up the investment.

Okay.

Fair enough.

Shifting gears to talk a little bit about loan growth.

I know you guys have said 4% to 6% for the year.

Obviously, we seem to be off to kind of a slow start for the year, that does seem to be an industry-wide trend.

But I'm just kind of curious how you're thinking about the progression of loan growth over the course of the year?

And what kind of gives you confidence in that 4% to 6% number?

We have seen -- this is Steve, Bob.

We've had pipeline and activity increases late in the first quarter.

So as we came into the second quarter, we were in a reasonably good position.

But if we think back to what we've seen in the last -- I think, 4 of the last 5 years, second half has been stronger than first half for different reasons each year.

But there is sort of a fluency to the year now or the successive years in terms of activity picking up second quarter and translating into -- to better performance in the second half.

We think that will be the case again this year, as it has been recently.

Certainly, pipelines would indicate that.

And so our best indicators are in that fashion.

And we take some confidence in leading economic indicators and other factors, including conversations with customers and potential customers.

So reasonably confident.

We've got the ability to deliver that loan growth range of 4% to 6% for the year.

Our next question comes from Steven Alexopoulos with JPMorgan.

Steve, maybe just to follow up on that in terms of first quarter loan growth being seasonally weak, and you're optimistic of a pick up.

Just about every other bank out there is saying their commercial customers are in wait-and-see mode here, just watching to see what comes out of Washington?

Are you not hearing that from your customers?

Maybe because your margin is clearly performing a little better.

We're clearly seeing a wait-and-see, I think, in the first quarter, and so there is going to be some continuation of that, but the economic development activity in these different states is very, very strong.

There is tremendous foreign direct investment activity in Ohio and Michigan, in particular, where I'm closer.

And I would say it's -- from what they're telling me, it's like record levels of inquiry and review.

The midwest still has a manufacturing core.

And so this -- the conversations around made in the U.S.A.

and import tariffs, I think are spurring a level of activity that we should benefit from in our footprint.

And the states continue to be reasonably well positioned, certainly well run.

Many of the cities are financially doing well.

So I think we're well positioned to enjoy investment -- continued investment growth and relative outperformance to some of the other regions in the U.S.

Okay.

That's helpful.

And maybe for a follow up question.

On the tax rate, many banks are calling out this quarter new accounting guidance around share base compensation.

What was the impact from this in your first quarter?

We have $2.9 million associated with that, from the first quarter.

Our next question comes from Marty Mosby with Vining Sparks.

So I think there's one thing that you could do on Slide 5, when you're talking about the purchase accounting accretion.

Is that -- for this quarter, we just talked about earlier, you had $36 million, you've got $32 million for the rest of the year, so that seems like a fairly significant step down, which the other 2, the other piece doesn't move.

So that looks like that would have a potentially negative impact when you will get the build of allowance related to the shifting of the loans from accretion -- or purchase accounting to the normal loan portfolio.

You built your loan loss allowance about $29 million this quarter.

So that would offset most of the incremental benefit you got from the early prepayments.

Putting that on that slide would help to net it out in a way that would be, I think, better understanding the bottom line impact.

Am I misunderstanding that?

Or is that how that typically is working?

Yes, Marty, I think you're absolutely right.

We do see opportunity related to the accelerated accretion to build the reserve, because of the fact that those loans moving from acquired organic need to have the reserve built.

Now of course there's a process that we go through and -- in determining what the appropriate reserve is.

And I wouldn't want to associate it directly with the accelerated accretion.

And I think, it's also important to keep in mind that there is a Huntington component to this as well, associated with loan growth and those types of things.

But I get your point, and I think, let us see what we can do to better associate that.

Just for instance the -- it looks like the excess, if you just take the $32 million and divided it by 3, gives you about a $11 million, I mean you get about $25 million of extra early accretion, and if you look at the allowance build, it's $29 million.

So little bit more negative on allowance build, but in line with each other.

The other thing is, if you look at expenses, looking at the expense base this particular quarter, there's really 2 pieces that I felt like, we didn't show -- were unfavorable surprises.

One, outside data occupancy and equipment, which are typically kind of related to some of the consolidations you did in the first quarter, so that could just be timing, that was up.

Those 3 categories were actually up a little bit from the fourth quarter, which could have been working on the consolidation and eventually rolling down.

And then deposit insurance, stepped up by $5 million this quarter as well.

So just was curious, if you could address those 2 issues going forward.

Yes.

I would say that the first item is just primarily timing in terms of the activity that we see and the work that we're doing.

We did have a small true-up in the FDIC of about $1.5 billion.

So that is a bit of an unusual item in the quarter.

Our next question comes from the line of Kevin Barker with Piper Jaffray.

I noticed that the follow-up on some of Jon's questions, regarding the credit outlook, I noticed that 90-day delinquency in NPAs are -- trends look okay on a consolidated basis, but the criticized ratio continues to move higher over the last 3 quarters.

Can you just give us a little bit of color around the trends around the criticized ratio and what you're seeing there?

I would say it's mixed, from quarter-to-quarter you're going to see movement of varying degrees, and we're starting to get year-end statements in now.

So that's a piece of it.

But I think generally speaking, the outlook is very good.

I mean, if you look at how it translate into NPAs, NPAs are actually down a fair amount, charge-offs are well controlled.

So we're very much focused on early recognition.

So the minute we see any negative developments, we're very quick to downgrade, but I think the obvious point, and what we are pleased with it is that it does not roll through.

NPAs are very well controlled, 2/3 of our commercial NPAs are current on principal and interest.

I think that points to our conservative stance.

And again, charge-offs very well controlled.

So I think the criticized inflow is about the only credit metric out there that wasn't improved this quarter.

And again, I think it has more to do with early recognition of any potential problems, which gives us more of -- more options in terms of rehabilitating credit, et cetera.

So no concerns on my end there.

I think it speaks more to our risk identification.

Okay.

And then, in relation to some of your guidance around targeting and efficiency ratio and then looking at our revenue.

Can you talk about the timing?

And how you see the efficiency ratio peaking in '17 before it declines back in '18?

Is there any particular quarter you're looking at, where you think the peak will be?

(inaudible)?

I'm sorry.

Kevin, could you repeat?

Where do you see that efficiency ratio peaking in '17 before it starts to decline in '18, in regards to your investments in the business?

I think we likely see a peak here in the first quarter.

There is some seasonally higher expenses in the first quarter, and there's also seasonally lower revenue, especially on the fee side, in the first quarter.

So I would view the first quarter has gained a bit of a peak.

(Operator Instructions) Our next question comes from the line of Geoffrey Elliott with Autonomous Research.

A quick one on CCAR, the changes around the qualitative part of the test.

What does that mean in practice for Huntington?

How are you going to be assessed on the qualitative side going forward?

When that's going to happen?

And what do you think it means in terms of potential capital reserves?

Thanks for the question, Geoff.

So I think that -- we're going to see how this CCAR cycle plays out.

Obviously, this is the first time we've gone through with the difference in the qualitative.

And I think we just have to understand that, that has a material difference or not as we move through it.

Clearly, we would feel that we would have more opportunity to think about the dividend opportunity and also total payout opportunity.

And I think we did position ourselves well, related to the CCAR cycle with what we did with the balance sheet optimization in late 2016, picking up about 43 basis points of CET1.

So really, Geoff, I think we have to see how the process plays out.

And then just switching back to the earlier questions on the retail exposure.

I just wanted to check I got my numbers right.

So you said, $1.7 billion of secured retail plus $600 million of REITs within CRE and that's out of the total $7.1 billion?

Correct.

Just on the -- math is kind of 32% concentration.

So I'm kind of curious what are the concentration limits that you apply there?

We don't actually disclose the individual concentration limits we have.

We have an overall CRE, and then we have a CRE by project type, and we are within all of those limits as it stands today.

Ladies and gentleman, we've reached the end of our question-and-answer session.

I would now like to turn the call back over to Mr. Steve Steinour for closing remarks.

Thank you for joining us today.

We're off to a solid start this year.

We had good financial performance in the first quarter, and equally important, we continued to make very significant progress in the integration of FirstMerit.

Our colleagues have really rallied together as one team bringing the best of Huntington to our customers.

And we're encouraged by the sentiment we're seeing and hearing from our customers, and hopeful the thoughtful action in Washington will help bring about more than just optimism.

Our strategies are working, our execution of goals continues to drive good results.

We expect to continue to gain market share and grow share of wallet.

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

Our top priority remains realizing the full set of opportunities with FirstMerit and growing our core business.

At the same time, we'll continue to manage risks and volatility and drive solid consistent long-term performance.

So thank you for your interest in Huntington.

We appreciate you joining us today.

Have a great day.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation and have a wonderful day.