Huntington Bancshares Inc (HBAN) — Q1 2016 Earnings Call Transcript

Thank you, Tracy, 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 or 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 financials. Mac?

Thanks, Mark, good morning everyone, and thank you for joining us today. We're pleased to report another quarter of solid results and believe 2016 is off to a good start. Huntington's customer-centric strategy continues to deliver consistent growth in market share and share of wallet through execution of our distinctive fair play philosophy, our welcome culture, and our superior customer service. Disciplined execution of our strategy and well-timed investments in our businesses over the past several years are producing solid results for our shareholders, customers, colleagues, and communities. Slide 3 shows some of the financial highlights for the quarter. Earnings per common share of $0.20 was up 5% from the 2015 first quarter, while tangible book value per share increased 8% to $7.12. Return on tangible common equity was 11.9%, while return on assets was 0.96%. Core fundamental trends remain strong and reflect the benefit of our strategic investments over the past several years. Year-over-year revenue growth was 7%, comprised of an 8% increase in net interest income and a 4% increase in non-interest income. We continue to believe that our ability to deliver consistent top-line growth, despite the challenging interest rate environment, distinguishes Huntington from our peers. We also believe that our disciplined investment strategy combined with a focus on achieving positive operating leverage on an annual basis is proving to be a key differentiator. While we achieved positive operating leverage for the quarter, non-interest expense increased 7% year-over-year reflecting our ongoing investments including 44 new in-store branches and digital and technology investments such as our new mortgage origination platform that is currently being piloted. Our efficiency ratio for the quarter was 64.6%, which remains well above our long-term financial goal of 56% to 59%. We will continue to work to improve our operating efficiency organically by growing revenue faster than expense, but we also continue to expect that our recently announced acquisition of FirstMerit will yield meaningful improvement in our pro forma efficiency. Turning to the balance sheet, average loan growth was 6% year-over-year, while average core deposit growth was 5%, continuing a seven quarter trend of year-over-year core deposit growth being greater than 5%. Overall, credit metrics remain solid. Criticized assets remain stable. We incurred only 7 basis points of net charge-offs in the quarter as we continue to benefit from large commercial real estate recoveries. Non-performing assets increased 23 basis points from the previous quarter with the majority of the increase centered in our oil and gas exploration and production and coal portfolios. Our capital ratios remain strong. Tangible common equity ended the quarter at 7.89%, up 7 basis points from year-end. While all regulatory capital ratios, except common equity Tier 1, increased meaningfully during the quarter due to the issuance of $400 million of perpetual preferred stock on March 21. Slide 4 provides a summary income statement, including some additional details on our non-interest income and non-interest expense for the quarter. Relative to the first quarter of 2015, total reported revenue increased 7% to $754 million. Spread revenues accounted for the majority of the increase as net interest income increased 8% to $512 million. We benefited from 8% average earning asset growth partially offset by 4 basis points of net interest margin compression. The NIM was negatively impacted by unfavorable mix shift on both sides of the balance sheet, most notably the increase in our low yielding LCR compliant securities in our earning assets and higher cost senior bank notes in our funding mix. We continue to remain disciplined in the pricing of both loans and deposits. Fee income increased 4% from the year-ago quarter to $242 million primarily driven by continued customer acquisition gains and relationship deepening. Highlights included a 13% increase in service charges on deposit accounts and a 12% increase in card and payment processing income. We also faced some headwinds in the quarter in mortgage banking and trust service income. Mortgage banking income decreased 19% from the year-ago quarter as a result of a 5% decline in origination volume, coupled with a $2 million decrease from net NSR activity. Trust services income declined 21% year-over-year primarily due to the sale of our funds management and servicing businesses at the end of last year. Reported non-interest expense in the 2016 first quarter was $491 million, an increase of $32 million, or 7% from the year-ago quarter. This quarter's non-interest expense included one significant item: $6 million of merger and acquisition related expense from the pending FirstMerit acquisition. As detailed on Page 7 of the press release, non-interest expense adjusted for significant items in both quarters increased $29 million or 6% year-over-year. In March, the FDIC announced the final rule approving the previously disclosed surcharge on banks with assets in excess of $10 billion, including Huntington. In our conference call last quarter, we stated that the surcharge would negatively impact our FDIC insurance expense by approximately $13 million in 2016. Due to the delay in the implementation until July 1st, we now expect the negative impact will be approximately $7 million this year. Slide 5 details the trends in our balance sheet mix. Average loans and leases increased $2.8 billion, or 6% year-over-year as most portfolios continue to experience year-over-year growth. Average securities increased $2.1 billion, or 17%, primarily reflecting growth in LCR compliant securities into a lesser extent growth in our direct purchase municipal securities and our commercial banking segment. We are currently above the 100% threshold for liquidity coverage ratio. Digging into the loan growth a little deeper, average commercial and industrial loans grew $1.5 billion, or 8%, primarily driven by a $0.8 billion increase in asset finance. The quarter also benefited from continued momentum in auto floor planning and broad-based commercial lending. Average automobile loans grew $0.9 billion, or 11% from the year-ago quarter. Auto finance remains a core competency of Huntington and we're committed to this business and our dealer customers. The first quarter of 2016 represented the 9th consecutive quarter of more than $1 billion of automobile loan originations. We have achieved this by remaining consistent in our strategy, which is built around a credit model that is focused on prime and super prime borrowers and a business model of high touch and local delivery. As detailed on Slide 46 and 47, in the appendix, our underwriting has not changed and our credit performance remains superior. Yields on the new auto paper rebounded slightly in the first quarter back up to around 3% compared to the 2.90% to 2.95% range in the fourth quarter. Recall yields last quarter were impacted by the normal seasonal mix shift towards new vehicle sales that occur in the fourth quarter as manufacturers try to drive yearly volume goals. While the first quarter's originations reflected a return to a more normal, new-used mix. The auto portfolio continues to perform very well as expected the seasonal increases in delinquencies and charge-offs that we experienced in the fourth quarter reversed course this quarter with delinquencies declining 26 basis points sequentially and net charge-offs declining 5 basis points. Further, if you compare our delinquencies and non-accrual loans with the year-ago quarter, you will see they are essentially flat. Net charge-offs are up modestly year-over-year but will remain well below the level to which we underwrite the portfolio. Staying on Slide 5 and moving to the right side, average total deposits increased $2.9 billion or 5% over the year-ago quarter including a $2.6 billion or 5% increase in average core deposits. We continue to see strong growth in demand deposits as average non-interest bearing demand deposits increased $1.1 billion, or 7% year-over-year, and average interest bearing demand deposits increased $1.6 billion or 26%. This growth reflects our continued focus on new customer checking household and commercial relationship account acquisition as well as relationship deepening. All of which are detailed on Slides 11 through 13 that Steve will discuss later. We also continue to remix the consumer deposit base at a higher cost of CDs into other less expensive deposit products. Average core CDs increased $0.5 billion, or 19%, year-over-year. Average total demand deposits accounted for 37% of non-equity funding in the 2016 first quarter, while money market and savings deposits accounted for a combined 38%. By contrast, average core CDs accounted for only 3% of our non-equity funding in the quarter. Average total debt increased $2.1 billion, or 34%, as a result of five senior debt issuances over the past five quarters totaling $4.1 billion, including $1 billion issued in March of this year as well as the assumption of debts in the Huntington Technology Finance acquisition. The $1 billion senior debt issuance this quarter was a part of our normal funding strategy. Slide 6 shows our net interest margin plotted against earning asset yields, interest bearing liability cost, and other deposit costs. First quarter NIM decreased 4 basis points year-over-year but increased 2 basis points from the previous quarter to 3.11%. This quarter, the net interest margin benefited from approximately 2 basis points of interest recoveries in the commercial real estate portfolio and another 1 basis point to 2 basis points in day count. Adjusting these benefits out of the first quarter margin, we expect another 2 basis points to 4 basis points of contraction in the second quarter, but remain comfortable reaffirming our previous guidance from last quarter that the net interest margin will remain above 3% for each quarter in 2016. Slide 7 provides an update on our asset sensitivity positioning and how we manage interest rate risk. As shown in the chart on top, we estimate that net interest income would benefit by 3.6% if interest rates were to gradually ramp 200 basis points, in addition to increases already reflected in the current implied forward curve. This is an increase from what we estimated a quarter ago, as we recently updated our non-maturity deposit models, resulting in a reduction in the sensitivity of these deposits. In addition, as we have discussed for some time, our asset swaps are beginning a period of steady amortization as disclosed in our 10-K. We also proactively terminated $1.9 billion of swaps in January taking advantage of volatility in the markets. As we have stated previously, our asset swap portfolio is a laddered portfolio. There are no cliffs looming on the horizon. These actions coupled with changes in our overall balance sheet mix drove the increase in modeled asset sensitivity. As shown on the bottom right in a hypothetical scenario without the $5.8 billion of remaining asset swaps, the estimated benefit would approximate positive 5.4% in the up 200 basis point gradual ramp scenario. The chart on the bottom of the slide shows our $5.8 billion asset swap portfolio and $5.8 billion liability swap portfolio, including the respective average remaining lives and their impact on net interest income. The incremental benefit of swaps was $24 million in the 2016 first quarter, down from $29 million in the 2015 fourth quarter and $25 million in the year-ago quarter. Slide eight shows the trends in our capital ratios. Tangible common equity increased 7 basis points sequentially to the 7.89%. All regulatory capital ratios improved meaningfully from the prior quarter end with the exception of the common equity Tier 1 regulatory capital ratio, which declined slightly. Late in the quarter, we issued 400 million of 6.25 fixed rate non-cumulative preferred equity in order to take advantage of unusual market conditions and a low interest rate environment to lock in low-cost permanent capital. With this issuance, we are now more in line with our peers concerning the amount of preferred equity in our capital structure, although as market conditions allow, you may see us further optimize our capital structure in the future relative to the Basel III rules. Slide nine 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 expectation. Criticized assets remain stable. The loan loss provision was $27.6 million in the first quarter compared to $8.6 million of net charge-offs. Net charge-offs represented 7 basis points of average loans and benefited from the previously mentioned large recovery in our commercial real estate portfolio. As we've stated last quarter, we expect credit costs will gradually migrate back to more normalized levels particularly as recoveries from previously charged-off commercial real estate loans diminish. For 2016, however, we expect net charge-offs will range below our long-term expectations of 35 basis points to 55 basis points. The ACL ratio ticked up one basis point to 1.34% of loans and leases, compared to 1.33% at the prior quarter end. The ratio of allowance to non-accrual loans decreased to 138% compared to 180% a quarter ago due to the uptick in ALs primarily within our oil and gas exploration and production and coal portfolios. We believe the allowance is appropriate and reflects the underlying credit quality of our loan portfolio. Slide 10 shows trends in non-performing assets, delinquencies, and criticized assets. The chart in the upper left shows an increase in the non-performing asset ratio for the quarter to 102 basis points compared to 79 basis points a quarter ago. The increase again primarily reflected several oil and gas exploration and production credits into one large coal credit, which replaced a non-accrual during the quarter. The chart on the upper right reflects our 90-day delinquencies, which remained essentially flat for the past year. The bottom left chart shows the criticized asset ratio, which also has remained relatively stable for the past few quarters. Finally, the chart on the bottom right shows NPA inflows as a percentage of beginning period loans at 48 basis points for the first quarter reflecting the oil and gas exploration and production in coal nonaccrual credits mentioned previously. All credit metrics fully reflect the results of the recently completed Shared National Credit exam. Results were consistent with past exams and then we had a handful of downgrades as well as some upgrades. We processed all the downgrades. However, we only processed a few of the upgrades as we believe we either have more recent or more complete information on the relationship or we simply opted to take a more conservative stance. This practice would also be consistent with past exams. Let me now turn the presentation over to Steve.

Thank you, Mac. Slide 11 shows the continued progress driving what we believe to be industry-leading customer acquisition and associated revenue growth from both acquiring and building meaningful banking relationships with these customers. We owe these results to the unique combination of our Fair Play banking philosophy, our welcome culture, and the execution of our optimal customer relationship or OCR focus on relationship banking. Since 2010, we've increased our consumer checking households and business checking relationships by 8% and 5% compound annual growth rates respectively. These robust customer acquisition rates have allowed us to post the associated 5% and 9% compound annual growth rates in consumer and business revenue, which you can see in the two lower charts in the slide. You've heard me say this for a number of years and you'll hear me say it again in the future. Our focus remains on growing revenues. We continue to grow revenues despite the challenging environment. Slide 12 and 13 illustrate the continued success of our OCR strategy and deepening our consumer and commercial relationships. Our strategy has remained consistent since 2010 and has built around two simple objectives: gained market share and gained share of wallet. Our track record has illustrated and we will continue to demonstrate that this strategy results both in more loyal, satisfied, and stickier customers, as well as revenue growth. As of the quarter end, almost 53% of our consumer checking households use six or more products and services, up from 50% a year ago. Correspondingly, our consumer checking account household revenue was up $33 million or 12% year-over-year in the first quarter. Similarly, almost 48% of our commercial checking customers used four or more products or services at year end, up from 43% a year ago. Commercial revenue increased $4 million or 2% year-over-year and you'll notice a step-up this quarter in the number of business relationships utilizing four or more products or services. This increase results from a recent change in pricing for certain of our treasury management products and related impact on the measurement of products and services utilized by these customers. We expect this will represent a one-time step-up. Slides 14 and 15 provide a glimpse at some of the key economic data for our footprint. Slide 14 illustrates trends in the unemployment rates across our six core Midwestern states as well as other leading coincident and lagging economic data for the region. Unemployment rates in Ohio and Michigan are the lowest since the early 2000s, and the unemployment rates in the four largest states in the footprint—Michigan, Ohio, Indiana, and Pennsylvania—are all at or below national unemployment rates. Further, the higher rate in the Midwest is the highest in the nation. Over 50% of the net manufacturing jobs created in the country since the recession are in Ohio, Michigan, and Indiana. Finally, despite recent market volatility and global macroeconomic uncertainty, average consumer confidence in the Midwest is around what it was in 2002. Slide 15 takes a deeper look at the trends in unemployment rates in our largest metropolitan markets. Most of the large MSAs in the footprint were near 15-year lows for unemployment levels at the end of January. As you can probably gather from this data, we remain bullish on our core Midwestern footprint. The auto industry is an important component of the economy in our footprint, and it appears poised for another stellar year in 2016. Our small and medium-sized commercial customers continue to express confidence in their businesses. Real estate markets across the footprint are improving. There is a significant amount of economic activity in our footprint tied to higher education and healthcare. And I continue to believe the benefit of low energy prices for consumers and manufacturers more than outweighs the isolated pockets of stress on business within the energy sector in our footprint. Our SBA lending also remained quite robust; in fact, March was our best month ever for SBA originations. Turning to slide 16, while we're only one quarter into the year, slide 16 shows that we're off to a good start to execute on our long-term financial goal of annual positive operating leverage. We expect 2016 will represent our fourth consecutive year to deliver positive operating leverage. So, with that let's turn to slide 17 for some closing remarks and messages. We remain focused on delivering consistent through-the-cycle shareholder returns. For 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. Our value proposition for both consumers and businesses continues to drive industry-leading new customer acquisition. We've successfully built a strong and recognizable consumer brand with differentiated products and superior customer service. We continue to execute our strategies and refine or react where necessary. We've invested and will continue to invest in our businesses, particularly around enhanced sales managements, mobile and digital technologies, data analytics, and optimizing our retail distribution network. Importantly, we plan to continue to manage our expenses appropriately within our revenue outlook and we expect to grow revenue. We are optimistic about our core Midwest footprint's local economies and the businesses and consumers within them. We are prudently managing certain industries or sectors potentially impacted by market volatility and global macroeconomic uncertainty. However, we believe these risks remain well contained and the majority of our core consumer and small and medium-sized business customers enjoy a healthy near-term outlook. We see no evidence of near-term deterioration or problem looming on the horizon. Customer sentiment remains positive, and commercial loan utilization rates showed a slight increase for the fourth consecutive quarter. Pressure on our NIM will remain a modest headwind in the near term, but we continue to expect that the NIM will remain above 3% throughout 2016. We expect to grow revenue despite these pressures consistent with our 4% to 6% long-term financial goal, excluding significant items and net event of MSR activity and obviously the impact of FirstMerit. We'll continue to place ongoing investments in our businesses consistent with our revenue outlook and consistent with our long-term goal of annual operating positive leverage. We closely monitor our loan portfolio, and given the absolute low level of our credit metrics in recent market and global economic volatility, we do expect some volatility in our credit metrics going forward. We anticipate that loan loss provisioning for both ourselves and the broader industry will gradually begin to return to more normalized levels. So, let me stress, we do not see any material deterioration on the horizon or simply moving off cyclical lows, and we'll gradually move back toward normal for both provisioning and net charge-offs. We expect our net charge-offs for the year will remain below our long-term expected range of 35 basis points to 55 basis points. Next, we always like to include a reminder that there is little alignment between the Board, Management, our employees, 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 and capital. And finally, before we move into the Q&A period, I'd like to give you a quick update on the status of the FirstMerit acquisition we announced earlier this year. We've filed our application with the regulators and anticipate that we will receive both regulatory and shareholder approval to allow us to close the transaction in the third quarter. We also continue our integration and planning; we've made significant progress in our product and data mapping process, as well as our planning around the organizational structure. The more we get to know the FirstMerit team, the quality and depth of their talent, and similarity of cultures, the more excited I get about this transaction and our ability to deliver on our commitments as we come together. So, I'll now turn it back over to Mark, so we can get to your questions.

Operator, we'll now take questions. We ask that as a courtesy to your peers each person ask only one question, and one related follow-up, and if that person has additional questions, he or she can add themselves back into the queue. Thank you.

Thanks. Good morning.

Hi, Ken.

Good morning, everybody. I just wanted to follow up on the credit side and hearing your points about not seeing much else but expecting the normalization. This is your second quarter of a pretty meaningful reserve build and I think for specific reason. So I guess just the questions are, can you help us understand kind of what you think the core charge-offs are and the size of that recovery, and then just your general premise around building reserves from here? Do you think you've kind of gotten at there for what you need as far as the energy and coal related?

Hey. Good morning. Ken, this is Dan. So, I think the one thing this was a record quarter for us in terms of recoveries. So that 7 basis points charge-off is obviously very good performance, but it is driven by some really unusual – an unusual level of recovery so that is not going to continue. So if there is going to be one difference in the subsequent quarters, it's going to be a more normalized level of recovery, so that in and of itself will take the net charge-off number up, but we are not seeing anything on the horizon that leads us to conclude that there would be any notable changes other than that we've given guidance that we still expect to be below the 35 to 55, so I think that gives you a pretty good range of what we might see. In terms of the energy build this quarter, we think we've been very conservative in identifying the issues that we have there. We are well reserved on that portfolio. We've got our credit mark on that portfolio at 10%, which, given the constituents of our portfolio, energy services have been a big differentiator when we're looking at energy exposure. Ours is all E&P very well secured exposure. So even if you say there is going to be continued low energy prices, we think that portfolio on a relative basis is going to hold up quite well.

Okay. Then just to follow up quickly then is just on reserving builds from here, more for growth or what if you think you've gotten the energy right, then what would be the basis of seeing builds from here?

I think it will be largely driven by portfolio growth, and then again we do point out always there is always unevenness in the C&I portfolio, so you're going to have episodic movements here and there, but we are not seeing any significant movement. I think you see in our criticized asset number holding fairly steady. We still have inflows, but we have a lot of good resolutions as well. So I don't see any tremendous movement there either.

All right. Got it. Thank you.

Thanks, Ken.

Good morning, guys.

Good morning, Scott.

Good morning, Scott.

I just wanted to ask just sort of an energy-related question. So of the total increase, are you guys able to sort of bifurcate how much of that came from the coal versus the E&P side by any chance?

Yes. Absolutely we can and we do that. The coal was one transaction and actually it was not even performance related. This is more of a—there is a lawsuit involved in it, so the coal deal actually is a low-cost producer performing very well and we expect a good resolution to that particular situation.

Okay. This might make the same question a little less relevant, but as you look at – you have said some understandable increase in nonperformers in the energy area, but based on guidance for the entire portfolio, lost content, of course, looks pretty low and still in the aggregate for everything. Just wondering, as you guys are thinking about the sort of stuff that you would keep on watch from the energy portfolio. When or how might actual lost content manifest itself just in the way you guys are thinking about things?

Yes. I mean, it certainly increases the potential for lost content the longer that we have that protected low energy phenomenon. So – but I'll say that the stressed analysis we do, there's still quite a bit of room between where we're at today and where we feel we would incur significant losses. So we do various stressing on the portfolio. Our sensitized case that we use is well below the strip case and we even do modeling that goes well below that, and even under those scenarios, this is going to be a very manageable series of events for us. Just, we have a very small portfolio – it's one half of 1% of our entire portfolio for the overall impact. This is not going to be that dramatic.

Yes. Okay. Perfect. If I can sneak one last one in there, Mac you have said, so you guys disclosed the two basis points margin benefit from the CRE recovery, did you say two basis points benefit from day count, so in other words in total four basis points of kind of net benefit of which you would be forecasting the margin for the second quarter?

Scott, that's exactly the way to think about it.

Okay. All right, perfect. Thank you guys.

Thanks, Scott.

Thanks, Scott.

Hello. Good morning. Thank you for taking the question. I wanted to ask about also – you sound pretty positive, but I guess looking at the year-on-year changes in net charge-offs to strip out some of the seasonality, but that has been a bit of an increase. So, can you talk about the normalization that you're seeing there and what makes you still pretty relaxed on auto credit?

Sure. This is Dan, again. So, one thing we have to look at – we're looking at very low levels of charge-offs. So, I think if you look to a year ago, probably about 19 basis points and then most recent quarter up to about 28 basis points. That is a very low level of charge-offs and well below what we actually modeled. So, I think that's important. There is a bit of an effect in there from we’ve talked about TCPA, which is the Telephone Consumer Protection Act, which limited our ability to make calls to cellphones. That had a small incremental effect. So, we probably have a couple of basis points of additional charge-offs that was in that number, and that the impact of that will dissipate over time. But just as a reminder, our origination strategy on indirect auto has not moved at all. We continue to maintain the same FICO Scores, LTVs, terms; it's a very dealer-centric model. And I think it is important, when we look at our portfolio relative to others. The distinction in terms of our focus on prime and super-prime customers, when we expand into different markets, which we do from time to time, we go in with more conservative origination criteria than for the book as a whole. So, we just feel we have been rock solid in our origination strategies and don't expect to see any significant movement. So, we remain very confident in our performance.

Okay. And then just follow-up, there has been a decline in the Manheim in the last couple of months. What are you budgeting for used car prices and how do you think about that?

Yes. So, we've looked – we obviously follow the Manheim closely, and I think their forecast called for the index to decline about 8% cumulatively over the next few years. And even with that adjustment, we don't see this moving the needle significantly in terms of our performance. I would point out that the mix of our vehicles is a little bit different than what the industry average would be as well. When you focus on a high FICO borrower, when you have to take the vehicles back you tend to get a vehicle that is in better shape and having a higher resale value. I think the mix of our book also has more trucks and SUVs in it, and those values tend to hold up better than vehicles as a whole. So, those factors also aid us, so we feel very confident even though we know there will be some reduction in the Manheim because we've been at historically high levels for probably the last five years or six years.

Great. Thank you very much.

Thanks, Geoff.

Hey, good morning guys. This is actually Kyle Peterson speaking for Bob today. I had a question on mortgage banking, kind of your thoughts on that. Obviously it looks like part of it was down partly due to kind of seasonal trends. But, I noticed it was down year-over-year as well, I'm not sure if you view that is mostly really tied to kind of the MSR impairment or I guess kind of how should we look at mortgage banking moving forward?

Yes. Kyle, this is Mac. So, I think if you take a look on a linked-quarter basis, there was a fairly substantial decline, and that can be explained by two things. One is the MSR impairment, which was $6 million to $7 million on a linked-quarter basis, and the other portion of the decline was just due to lower origination volume. So that – I think that explains linked-quarter pretty well, and actually that's the same explanation for year-over-year, it's MSR and lower origination. So we're pleased with origination volume where it is currently. We do have these seasonal effects and also just the impact of the MSR valuation.

Okay. Thank you. And yes, I guess just one other kind of I guess follow-up kind of modeling question. Is the merger related expense for the HBAN for the FirstMerit merger. Is that falling into the other expense line item or kind of, I guess, where is that $6 million shaking up?

Yes. A fair amount of it's going to be in professional services in that line and other expenses as well. So, that's – I think that’s the way to think about it.

Kyle, that's broken out on page seven on the release. There is the table that will give you some guidance there.

Okay. Great. Thank you very much.

Good morning. It's actually Steve Moss for John. I wanted to just touch based on the inflows to non-performing status; how much of the $240 million was from E&P?

E&P was about 40% of the inflows.

Okay. And then in terms of also in the E&P credits in what basins are your E&P credits located?

Our entire portfolio is – it's broadly syndicated shared national credit, so the distribution tends to be very granular throughout the country, obviously would include the Permian basin which is probably one of the most profitable, but I would say it's very well diversified, no concentrations within the portfolio.

Okay. Thank you very much.

Thanks, Steve.

Hi, everyone.

Hi, Ricky.

I just had a quick follow-up on energy. Have you guys provided the dollar value as of period end for your total energy and coal portfolios?

The aggregate amount of the loans? We've indicated that it's right around 5% of total loans.

0.5%.

I'm sorry – a big difference. Thank you. 0.5%.

And then you said reserves on those loans are about 10%?

Yes. The credit mark, which on a go-forward basis will reference credit mark that takes into account charge-offs and reserves, but it's yes 10% is the number.

Perfect, and then a quick follow-up on recoveries. I think eight of the past nine quarters you've seen some lumpy recoveries in the CRE portfolio. How should we be thinking about that going forward?

That there will be less.

All right. Perfect. Thanks for the time.

Thanks.

Good morning. Thanks for taking my questions.

Hi, Kevin.

Hi, Kevin.

The order growth is very strong this quarter and what – usually January and February are usually pretty slow. How much of this growth is due to existing markets and how much of it was taking market share in the new markets that you're attempting to target?

Which portfolio?

Auto.

So it’s still on the auto portfolio. So, we're stepping into the new market, as Dan mentioned very, very cautiously, we actually increased our standards and how we underwrite in newer markets.

Yes. And I think, in – of the year-over-year increase in originations, about 25% came from Illinois, North Dakota, South Dakota, which were our newest markets that we entered into.

So, roughly, 25% of your incremental was primarily due to the newer market, is that how you would categorize it?

Correct.

Then – and also, a follow-up on the balance sheet items. You obviously shifted gears and become more asset-sensitive when you mentioned some of this last quarter and your NIM has increased this quarter. When we look forward, given your guidance for NIM to decline, how should we look at it going into the back half of the year? And then what your expectations are for the Fed to increase rates?

So, starting with the last question first. I mean, we've budgeted in and continue to forecast 2016 assuming no rate increase. And under that scenario, which is the scenario that we use in order to provide guidance for the year. As Scott pointed out earlier, the 3.11% that we reported probably comes down about four basis points, due to four basis points. And whether that compression has been driven just due to the fact that we're adding the LCR compliant securities. And then on the funding side, a lot of that is coming through on the debt side. So that results in some compression as we move throughout the year there is some additional compression that will take place on certain asset categories. But again based on everything we know today and way the forecast looks for the remainder of the year, we do believe we stay above 3% in every quarter of 2016.

Okay. What would drive the additional compression from outside – is it just lower asset yields or other items that would push down NIM in the back end?

Given the fact that we're at 100% or over 100% for LCR, it's going to be asset compression for the most part, just continued pricing pressure on commercial portfolio. But again, not material as we think about where we are today, and the guidance that we're given for the rest of the year.

Thank you.

Thanks, Kevin.

Hey Mac, I want to clarification in Ricky’s question, I didn't realize he asked about our exposure including coal and oil and gas. And so, when we take the E&P and the coal together it still less than 1% of revenues, but the half percent was in relation to just the E&P did not include coal, but our coal portfolio is actually about half of the size of E&P. So, it's still well under 1% when we combine those. So, I just want to make that clarification.

Okay. Thanks again.

Good morning.

Good morning, Andy.

Good morning, Andy.

What was driving the sequential increase in other non-interest income other than the general lumpiness that can occur in the side?

So, fourth quarter compared to the first quarter?

Yes, sequentially, yes.

So, on Table 6 of the press release, we actually show other non-interest income going down.

Right, it went down pretty substantially – I’m sorry, yes, that's why I mean to say sequential decline…

Yes, I think exactly.

Yes. I just wonder what was driving that if that's a good run rate?

It’s a model.

It's a bit difficult of lines of forecast.

Right.

There are various gains that come through, along with leased income. It can be somewhat inconsistent, so I believe examining the quarterly progress over time and considering an average may be the best approach.

Okay. And, what was your – what's your reserve or your credit marks on oil and gas versus coal, I want to ask that as well?

Actually, they are equal, 10%.

Okay. Okay. Great. Thank you.

Thanks, Andy.

Good morning.

Hi, Peter.

I had a question about the loan growth. So, average loans were pretty solid and then in the period was even stronger. So I was just wondering in terms of the monthly trend, did it start off a little bit slow with all the volatility and then pick up as the year – as the quarter moved on and that would carry over into the second quarter?

Peter, that's a very good conclusion, accurate conclusion, good analogy. And I think the volatility just had people pause as the quarter progressed more confidence emerged. And as we sit here today, our pipelines look reasonably good, going into the second quarter. And frankly, they did at the end of the fourth quarter, again that volatility just created, I think, a bit of a timing issue.

Okay and just a quick follow-up. Steve, you mentioned on the FirstMerit, as you spend more time you feel better about the FirstMerit deal. I was just wondering if you could add some color to that?

Well we’ve spent considerable amount of time with our team and their team. I mentioned we've gotten through much of the product matching and mapping, and so the things that would be done early-stage for integration purposes are well underway, terrific cooperation and communication, and we continue to be very impressed with the quality of the people we have from FirstMerit that we have the pleasure of interacting with. So we had outlined a sequential integration plan when we announced the deal. We’re certainly well on track with that and expecting to get approvals necessary to close in the third quarter.

Okay. Thanks very much.

Thank you.

Operator, we'll now take questions. We ask that as a courtesy to your peers each person ask only one question, and one related follow-up, and if that person has additional questions, he or she can add themselves back into the queue. Thank you.

Thank you. We are off to a good start in 2016 as our first quarter results provided a solid base to build from. We delivered 7% year-over-year revenue growth, 3% net income growth and 5% growth in EPS and an 8% increase in tangible book value per share. So these are solid fundamentals and we're well-positioned to continue to deliver good results through the remainder of the year. You've heard me say this before and it remains true, our strategies are working and our execution remains focused and strong. We expect to continue to gain market share and improve share wallet in both consumers and businesses. We expect to generate annual revenue growth consistent with our long-term financial goals and manage our continued investments in our businesses consistent with the revenue environment and our long-term financial goal of positive operating leverage. We’re optimistic about the economic outlook in our footprint and believe the gradual transition to more normalized credit metrics will be effectively managed. Finally, I want to close by reiterating that our Board and this management team are all long-term shareholders and our top priorities include managing risk, reducing volatility, and driving solid, consistent long-term performance. So thank you for your interest in Huntington. We appreciate you joining us today. Have a great day everybody.