Huntington Bancshares Incorporated (HBAN) Q2 2012 Earnings Report, Transcript and Summary

Todd Beekman - Director of Investor Relations Donald R. Kimble - Chief Financial Officer and Senior Executive Vice President Daniel J. Neumeyer - Chief Credit Officer and Senior Executive Vice President Stephen D. Steinour - Chairman, Chief Executive Officer, President, Member of Executive Committee, Chairman of The Huntington National Bank, Chief Executive Officer of The Huntington National Bank and President of The Huntington National Bank Nicholas G. Stanutz - Senior Executive Vice President of ABL, CRE and Auto Finance Group Director

Leanne Erika Penala - BofA Merrill Lynch, Research Division Paul J. Miller - FBR Capital Markets & Co., Research Division Kenneth M. Usdin - Jefferies & Company, Inc., Research Division Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division Craig Siegenthaler - Crédit Suisse AG, Research Division R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division Maclovio Pina - Morningstar Inc., Research Division David J. Long - Raymond James & Associates, Inc., Research Division Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Good morning. My name is Kurt, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Huntington Bank's Second Quarter Earnings Call. [Operator Instructions] Thank you. Mr. Todd Beekman, you may begin your conference.

Thank you, Kurt. Welcome. I'm Todd Beekman, the Director of Investor Relations for Huntington. Copies of the slides that we will be reviewing can be found on our website at www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about an hour after the close of the call. Please call Investor Relations at (614) 480-5676 for more information on how to access this recording or playback should you have difficulty getting a copy of the slides. Slides 2 and 3 note several aspects of the basis of today's presentation. I encourage you to read these. Let me point out one key disclosure. This presentation will reference to GAAP -- non-GAAP financial measures. In that regard, I direct you to the comparable GAAP financial measures and the reconciliation to the comparable GAAP financial measures within the presentation. Additional earnings-related material that we released this morning and the related 8-K filed today, all of which can be found on our website. Turning to Slide 4. Today's discussion, including Q&A period, may contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to change, risk and uncertainties, which may cause results to differ materially. We assume no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to the slide and material filed with the SEC, including our most recent 10-K, 10-Q and 8-K filings. Slide 5. Now turning to today's presentation. Participants will be Steve Steinour, CEO; Don Kimble, our CFO; Dan Neumeyer, our Chief Credit Officer; and joining us for the Q&A will be Nick Stanutz, Senior Vice President, Head of Auto and Corporate Real Estate. Let's get started turning to Slide 6, and Don?

Thanks, Todd, and welcome, everyone. We'll begin with a review of our second quarter performance highlights; and then Dan will provide an update on credit; and then Steve will continue with an update on our OCR strategy; and then close with the discussion of our expectations for the remainder of this year. Turning to Slide 7, we reported net income of $152.7 million dollars or $0.17 per share. That's equal to last quarter, but up 5% and 6%, respectively, from the year-ago quarter. Total revenue decreased $17.9 million, or 3% from the first quarter, all due to a decline in noninterest income, as the first quarter included 2 large gains. Noninterest income declined by $31.5 million at the first quarter, included a $23 million gain from our auto loan securitization, and an $11.4 million bargain purchase gain associated with the Fidelity Bank acquisition. Importantly, our net interest income increased $13.6 million, reflecting a 2 basis point increase in the margin and strong organic loan growth, as well as the impact of Fidelity Bank and the municipal lease portfolio purchases that occurred late in the first quarter. Average total core deposits were up 13% annualized from the first quarter, about 1/2 of which related to the Fidelity acquisition. Noninterest expense decreased $18.4 million as the prior quarter included a $23.5 million increase to our litigation reserves. The current quarter also reflected lower deposits and insurance -- other insurance costs of $5 million. It was negatively impacted by the $6.8 million of expenses related to Fidelity. Turning to Slide 8. Steve will go into additional detail later in the call, but you can see that our OCR methodology is continuing to drive success throughout the company. Turning to credit quality, our metrics were fairly stable. Net charge-offs to loans declined from 85 basis points to 82 basis points this quarter. Nonaccrual loans were up 1%, and our allowance for credit losses as a percentage of nonaccrual loans decreased to 192%, which we still believe will continue to compare favorably to our peers. With regard to capital, our tangible common equity ratio rose 8 basis points to 8.41%. Our Tier 1 capital ratio decline reflected the impact of growth in risk-weighted assets, as well as our trust-preferred redemption that was completed this quarter. The Tier 1 and total risk-based capital ratios declined by 29 and 35 basis points, respectively. Turning to Slide 9 and other highlights for the quarter. We successfully completed the integration of Fidelity Bank within 90 days of the acquisition. Cost saves are at or above our planned levels, and we expect to achieve greater than 60% cost saves over the next couple of quarters. We signed an agreement with Meijer, a leading grocer in Michigan, to increase our in-store distribution by over 80 stores. The repurchased 6.4 million shares is part of our capital plan this past quarter at an average price of $6.26 per share. And Pete Kight joined our Board of Directors. Pete is the founder and former Chairman of CheckFree. He'll bring new insights to our board. Slide 10 provides a summary of our quarterly earnings trends, and the performance metrics will be discussed later in the presentation. Turning to Slide 11, we show a summary of income statement. Here, we also show both revenues and expenses adjusted for the impact of significant items in the prior quarter. On both a GAAP on the adjusted basis, revenues and expenses were both up 4% over the prior year. This revenue performance was despite the negative impact of approximately $17 million related to the Durbin Amendment implemented in the fourth quarter of last year. Slide 12 displays the trends of our noninterest -- net interest income and margin. During this quarter, our fully taxable equivalent net interest income increased by $13.6 million, reflecting the benefit of a $1.3 billion increase in our average earning asset and a 2 basis point increase in our net interest margin to 3.42%. The increase in the net interest margin reflected the impact of 5 basis point increase from the reduction in deposit rates and the improvement in the overall deposit mix. A 2 basis point improvement from balance sheet management changes, which were offset by a 5 basis point reduction related to the impact of the extended low-rate environment on loan yields. Slide 13 shows the trends in our loan and lease portfolio. Average total loans and leases increased $2 billion or 5% from the prior quarter, primarily reflecting $1.3 billion or 9% growth in average commercial and industrial loans, reflecting the continued organic growth from multiple business lines, including equipment, finance, large corporate and health care, as well as the impact of our $0.4 billion municipal lease portfolio purchased late in the first quarter. A $0.4 billion or 9% increase in the average automobile loans, as we originated $1.1 billion of loans this quarter, which is a new record for us. The growth in commercial real estate balances reflected the impact of the Fidelity acquisition, as majority of Fidelity loans were commercial real estate. Last quarter, we gave an update on our auto loan pricing, and given the continued level of originations from this business, we thought it would be helpful to update our recent pricing performance. As you know, we originate super prime and direct auto loans. The charts on the left show the industry rates for the super prime new and used vehicles. Huntington comparable rates are shown on the right, again, segregated between new and used autos. Our originations have had an average FICO score of 760, have been fairly stable over the last several years. With regard to loans on new vehicles, as shown on the left, the average industry rate in 2012 first quarter for super prime loans was 3.21%. This rate was down 43 basis points from a year earlier. Huntington's average rate, as shown on the right, in the 2012 first quarter was 3.93%, or 72 basis points higher than the industry average. Further, this was down only 33 basis points from the year prior. The story is similar for used car loans. For the industry, the average rate in the 2012 first quarter for super prime loans was 4.40%, a 66 basis point drop from a year earlier. In contrast, our average rate in the 2012 first quarter was 5.93%, or 153 basis points higher than the comparable industry average. For the second quarter, our new car rate saw 17 basis point improvement, while our used car rate dropped about 31 basis points. Nevertheless, both new and used car average rates of 4.10% and 4 -- 5.62% offer very respectable returns. Onto Slide 15, we have shown continued improvement in our deposit mix in the last 5 quarters, as noninterest-bearing DDA balances increased to 27% from 20% of our total average deposits. The improved deposit mix reflects the success of Fair Play banking on growing our consumer DDA, as well as other treasury management and OCR focus on growing commercial demand deposits. Turning to Slide 16, our total average core deposits are up $1.4 billion or 3%. This reflected a $0.7 billion of deposits from the Fidelity acquisition. The demand deposit growth reflected strong growth in consumer households and commercial relationships, which both increased at about a 12% annualized pace this past quarter. As mentioned last quarter, about $1 billion of our commercial balances reflect temporary deposits, which are expected to decline over the next several quarters. Slide 17 shows the trends in our noninterest income, which decreased $32 million or 11% from the prior quarter. The decrease reflected $23 million of lower gains on loan sales, as the prior quarter included gains associated with our automobile loan securitization. The prior quarter also included the $11.4 million bargain purchase gain related to the Fidelity Bank acquisition. Mortgage banking income showed an $8.1 million decrease related to the $7 million decline in our MSR hedging net gain. Service charges on electronic banking provided linked quarter growth of 9% and 10%, respectively, reflecting the impact of our household growth and cross-sell focus. Capital markets fees increased $3.5 million this past quarter, reflecting the benefits from our investment in the strategic initiative. The next slide summarizes expense trends. Noninterest expense declined $18.4 million or 4%. This reflected the impact of last quarter's $23.5 million increase in our litigation reserves. Other areas of note included $3.6 million decrease in the occupancy costs, which includes seasonal trends, but also a $2 million temporary benefit. A $5 million reduction in deposit and other insurance reflected adjustment to insurance premiums in both the prior and current quarter. Slide 19 reflects the trends in capital. Our tangible common equity ratio increased to 8.41%, up from 8.33% at the end of the prior quarter. The Tier 1 common risk-based capital ratio declined from 10.15% to 10.08%. These ratios reflected the impact of repurchasing 6.4 million shares in the average price of $6.24 per share. Last month, the Federal Reserve issued a notice of proposed rule-making related to the Basel III capital standards for the United States. These proposed rules have been published for comment and are not yet final. But we estimate, that on a fully phased in basis, our Tier 1 common ratio to be negatively impacted by approximately 150 basis points. So with that, let me turn the presentation over to Dan Neumeyer to review the credit terms. Dan?

Thanks, Don. Slide 20 provides an overview of our credit quality trends. The second quarter charge-off ratio showed modest improvement falling from 85 basis points to 82 basis points. Charge-off dollars were fairly flat quarter-over-quarter on an expanding loan portfolio. Loans past due greater than 90 days and still accruing increased in the quarter, with that increase being attributable to the Fidelity portfolio, which is included in our overall numbers in the second quarter. Fidelity loans include accruing purchased impaired loans which were recorded at fair value upon acquisition and will remain in accruing status. The NPA ratio increased slightly as consumer OREO assets were reduced in the quarter, but the ratio was impacted by the $1.3 billion reclassification of automobile loans to held for sale. The nonaccrual loan ratio increased slightly from 1.15% to 1.19% as nonaccrual inflows were up in the quarter. The criticized asset ratio increased from 5.8% to 6.01% due to the addition of the Fidelity portfolio. The allowance for loan and lease loss and the allowance for credit loss-to-loans ratios fell to 2.15% and 2.28%, respectively, from 2.24% and 2.37%, respectively, reflecting continued asset quality improvement. The coverage ratios both fell modestly, although they remain healthy and appropriate given the generally improving loan portfolio. Slide 21 shows the trends of our nonaccrual loans. The charts on the left demonstrate a modest uptick in the nonaccrual loan ratio in the quarter. This was driven by an increase in nonaccrual loan inflows during the past 3 months. During the second quarter, we moved several large credits, primarily in the commercial real estate portfolio to nonaccrual status. The level of inflow is depicted on the charts on the right-hand side of the page. As you can see by the graphs, the movements from quarter-to-quarter tend to be choppy, and the unevenness is confined to the commercial portfolio where the size of the credits can result in larger swings from quarter-to-quarter. Last quarter's inflows were the lowest reported in several years, underscoring uneven nature of the commercial portfolio. Slide 22 provides a reconciliation of our nonperforming asset flows. NPAs fell by 1% in the quarter compared to an 11% reduction in the prior quarter. As already mentioned, inflows increased in the second quarter, as several larger commercial credits were moved to nonaccrual loan status and is reflected of the uneven moves mentioned earlier. The average reduction in NPAs over the last 2 quarters was 6%, consistent with the quarterly reduction experienced in prior quarters. We continue to make good progress in our NPA reductions with the 20% reduction year-over-year. Turning to Slide 23, we provided similar flow analysis of commercial criticized loans. While a significant increase in inflows was depicted, 213 million of the additions are due to the Fidelity transaction. Upgrades of previously criticized loans also increased in the quarter, and along with pay-downs and charge-offs, resulted in a net 4% increase in criticized commercial loans. As you will see in the footnotes, however, excluding the impact of Fidelity, criticized commercial loans were down 7% in the quarter, which is consistent with the level of quarterly reductions over the past year. Moving to Slide 24. Commercial loan delinquencies show an increase in both 30- and 90-day categories. The increase in the 90-day delinquencies are exclusively related to Fidelity-purchased impaired loans, which again, are recorded at fair value upon acquisition and remain an accruing status. Even without the adjustments for Fidelity, delinquencies remained very well controlled. Slide 25 outlines consumer loan delinquencies which are in line with expectations. 30-day delinquencies were flat quarter-over-quarter, as depicted in the chart on the left. Both residential and home equity loans showed improvement quarter-over-quarter, while auto delinquencies were up due to the movement of $1.3 billion of loans to held for sale. In terms of dollar delinquency, the level of auto delinquencies is actually up only modestly from the prior quarter, which is noticeably lower than the 3 quarters prior to that. 90-day delinquencies continue their decline. Reviewing Slide 26, the loan loss provision of $36.5 million was up marginally from the prior quarter and was less than net charge-offs by $47.7 million. The ratio of ACL -- nonaccrual loans fell to 192% from 206%, still providing a healthy coverage level. The allowance for credit losses to loans was lower at 2.28% compared to 2.37% last quarter. We also believe this to be a solid ratio given the continued improvement in the risk profile of the portfolio and overall improving trends. In summary, we are pleased to the quarter's results and expect continued positive movement in the upcoming quarters despite ongoing economic challenges. Let me turn the presentation over to Steve at this point.

Thanks, Dan. As mentioned in Don's opening comments of Fair Play banking philosophy, coupled with our optimal customer relationship, or what we refer to as OCR, is driving continued strength in new customer growth and product penetration. This slide recaps the continued strong upward trend in the consumer checking account households. In the second quarter, consumer checking account household grew at a rate of 11.6% to 1,167,000. Just over 3,000 households were added because of the Fidelity acquisition. We've grown households to the 12% rate over the last year. And since we've launched our new consumer strategy in the middle of 2010, we've added over 200,000 households. 4+ products or services penetration continued to improve, increasing nearly 1% over the last quarter to 76%. It was nearly a 5 percentage point increase since this time last year. And for the second quarter, related revenue was $250 million, up $13 million from the first quarter of 2012, however, it was $10 million lower than a year ago. And as you may recall, the fourth quarter negative impact of Durbin to us was $17 million. So when you compare just our consumer household revenue, we've already made up over 40% of the mandated reduction in debit card interchange fees. Slide 34 and 35 in the appendix provide additional details regarding consumer quarterly OCR trends. We're seeing similar trends in our commercial relationships. As shown on Slide 28, the relationships growth were strong and accelerating. Commercial relationships in the second quarter accrued an annualized rate of 11.9% and were up over 10% from a year ago. At the end of the second quarter, 32.6% of our commercial relationships utilized 4 or more products. This is 0.1 point below last quarter that reflected the combination of both very strong organic growth, the addition of less penetrated Fidelity customer base, and then the typical slightly longer sales cycle that comes with the commercial and small business customers. Related revenue bounced back from its usual seasonal first quarter weakness, increasing $19 million and was up over 13% from second quarter 2011, as we saw the continued benefits in the investments we made in the company we anticipate from the investments we've made: equipment finance, treasury management and capital markets. Slides 36 and 37 in the appendix provide additional details. Turning to Slide 29, our strategy of investing the business to grow the customer base, coupled with our OCR sales process to drive additional cross-sell in improved customer retention is positively impacting the company's performance. The local Midwest economy plays an important role in our customers' needs for additional financial services. As we've been stating for the last couple of quarters, we are concerned with the fragility of the U.S. and global economic recovery, and over the last quarter, have played out with a noticeable economic deceleration. Nevertheless, we continue to benefit from the Midwest recovering faster from the broader U.S., but we remain cautious. With regard to net interest income, we anticipate modest growth. Momentum we are seeing in our total loan growth, excluding any future impact of additional auto securitizations, is expected to continue as is growth in low-cost deposits. So the benefit from this growth is expected to be mostly offset by net interest margin pressure. C&I loans are expected to show meaningful growth, reflecting the benefits of our strategic initiatives to expand our business in commercial lending expertise and related verticals, as well as to other geographies. Commercial real estate loans are expected to decline from current levels. Residential mortgages and home equity loan growth is expected to be relatively flat. This view regarding home equity and residential mortgages is a change from our prior expectations noted last quarter, as we continue to evaluate the impact of the new proposed capital rules recently released by our regulators. We continue to expect to see strong automobile loan originations, though one balance sheet growth will be muted, due to the expectation of completing occasional securitizations. Growth in low- and no-cost deposits remains our focus. Growth in overall total deposits, however, is expected to be slightly less than growth in total loans. Noninterest income is expected to show modest growth from this quarter's level when you exclude any gains from auto securitizations and any net impact from the MSR. This modest growth, we expect, will be driven by increased cross-sell success, both in key activities related to customer growth, as well as increased contribution from our capital markets activities, treasury management and brokerage business. For 2012, we continue to anticipate positive operating leverage and modest improvement in our expense efficiency ratio. This will likely reflect more the benefit of revenue growth, as expenses could increase slightly. While we continue to focus on improving expense efficiencies at the company, we anticipate additional regulatory costs and expenses associated with strategic actions. With credit front, we expect to see continued improvement, albeit at a slower pace than we've seen in the last several quarters. There could be some quarterly volatility given the uncertain and uneven nature of the economic recovery. The level of provision expense, as mentioned earlier, is at the low end of our long-term expectations. As we've done over the last 2 years, our focus is on continuing to execute our core strategy, make selective investments in initiatives to grow long-term profitability. We are pleased with our financial performance over the last quarter even as we added -- with the added work of converting the integrated Fidelity Bank in less than 90 days. We remain disciplined in our growth. In pricing of loans and deposits, there's still some leverage there as we continue to fight for every basis point. Our Fair Play, coupled with OCR, is proving to be absolutely the right strategy and market positioning for us. We continue to believe 2012 will be another year of marked progress in positioning Huntington for better sustained long-term profitability and growth. So thank you for your interest in Huntington. Operator, well now take questions. [Operator Instructions]

[Operator Instructions] Your first question comes from the line of Erika Penala.

My first question was just some clarification on the expense guidance. So you mentioned that there's a chance that it could pick up slightly from here. Now if I add back the gain on the early extinguishment of debt this quarter, that takes me to about 4.46, 4.45. Is that what you're talking about in terms of additional uptick? Or is that the base upon which there could be additional uptick in the second half of the year?

Yes, Erika, this is Don, and I would say that the base as far as our current expense level, that we would be looking for reductions absent the initiatives. And those initiatives include the branch rollout, not only for Giant Eagle, but also for our new relationship with the Meijer organization up in Michigan. And so as a result of those, along with some additional regulatory costs, we would expect to see a slight increase in expenses. Keep in mind, too, that the Fidelity acquisition wasn't in a full expense complement for the second quarter. We do expect to see some cost savings and the fact that we've had some conversion-related expenses associated with that as well.

Your next question comes from the line of Paul Miller. Paul J. Miller - FBR Capital Markets & Co., Research Division: Just question on reserve releases. You've been -- should you -- will we be looking for the roughly $40 million, $50 million per quarter reserve releases going forward? You do have enough reserves, but I was just wondering how to model that going forward?

Well, as we've mentioned, we're probably -- this is Dan, we're probably at the low end of our provision expense, and we do expect continued modest improvement in charge-offs. So I think that probably answers your question. Paul J. Miller - FBR Capital Markets & Co., Research Division: Okay. As a follow-up, just on the credit side, are you seeing any material slowdown? There was a couple of banks over the last 2 days that said that Ohio is one of the most price competitive markets in the country. I just wonder if you can add some color on that, Steve.

We're not seeing a slowdown, Paul, impact in credit at this point. I think there is a slow down in economic investment and related activity. I believe there's already an impact coming from a combination of factors including -- especially the fiscal cliff being topical at this point and an increasing concern or lack of confidence caused by that.

And, Paul, this is Don. I could follow up with a point there as well. As far as competitive nature of the pricing, we really focus on relationship pricing, and we believe we've been able to maintain our spreads in the commercial side even though others may be -- characterize Ohio, and some of our markets are being very competitive. And I guess I would just -- I like to highlight there that as far as our commercial loan yields, they're only down 2 basis points linked quarter, and that happens to be the impact of the LIBOR rates being down on average about 2 basis points as well.

Then finally, Paul, of the 6 states we do business in, pricing really doesn't vary state-to-state.

Your next question comes from the line of Ken Usdin. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: I wanted to ask you, Don, about the Basel III adjustment, the 150 basis points. Can you give us some color on where specifically within the portfolio you're seeing most of the RWA step up?

Yes, good question. We're seeing RWA step up on the residential real estate side and on the off-balance sheet exposure. For the most part, home equity is fairly a net wash given the impact of the first loan position that we have for a lot of our home equity loans. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: And there are nothing in the numerator?

Numerator impact is primarily OCI-related with the mark-to-market portfolio and pension. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: All right. So that was expected. So 8-6 is still a really strong place to be, but the number is probably a little bit lower than people had anticipated. Does that at all change your view about how you think about stress test magnitude of what you'd ask for your next year as far as dividends and buybacks and, in addition, acquisition opportunities? Has anything changed with regards to how you're thinking about capital, utility and management?

Great question, Ken. And you're right, we were surprised by some of the proposal here as well. Keep in mind that it is a proposal that we plan to participate with others in responding to the Fed's proposal. As a result of this, we're going to have to take a look at a number of things. We'll have to take a look at our focus on certain products and our pricing associated with those products, if there truly is a change in the capital charge associated with those. I don't think we are far enough down the road as far as taking a look at what the impact would be for future capital plan recommendations or suggestions, but I do not believe it impacts our current plan or projections.

But you heard from our comments that we're already starting to adjust. And when we know the final rules, we will adjust to minimize impact. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay. And my -- just a follow-up question on credit. Some of the movements to non-accruals of some large commercial loans, can you tell us kind of like what the vintage of that, meaning, are those older loans? And have you seen anything in terms of some of the newer growth you put on start to migrate at all?

They are older vintage. The 2 loans in particular were vintage of approximately 2006, 2007. And, no, we have not seen any of the newer originations, not seen any significant migration in those. Actually, our early stage migration is looking quite strong, which is one of the reasons that we're pretty confident in ongoing improvement in the credit quality metrics.

Your next question comes the line of Steven Alexopoulos. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: For my first question, I wanted to just drill into the comments on the competitive landscape a bit. It's remarkable how well the C&I and CRE loan yields are holding in here. Can you talk about the blended yield that you're adding new loans to the portfolio? And do you expect to see more pressure on those loan yields in the second half?

Yes, this is Don, and as far as the new loan yields, it still is around the LIBOR plus 300. And as far as the spreads going forward, it all depends on the credit outlook for those loans. We tend to focus much more on credit risk-adjusted spreads as opposed to just the absolute loan yield, and we would expect to continue to maintain those credit spreads as we would venture into continued improvement. In the credit quality for new underwriting, we could see some changes there. But that's a reflection of improved expected credit quality as opposed to tighter credit markets. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Yes. And therefore, my follow-up question, one of your midwestern competitors this morning put up higher provision expense citing commercial as part of the reason, are you seeing anything up there? I know your comments on the macro landscape sounded somewhat cautious. Anything that might put upward pressure on your provision level over the next few quarters, given that you did see an inflow into nonaccrual?

Well -- this is Dan, I don't think so. And we do really believe that this quarter was affected by a couple of disparate and unique events that happened to skew the numbers. Generally speaking, we expect the numbers to continue to improve. So I don't see anything in the landscape that would require any big movements there. We do have lumpiness from quarter-to-quarter, and it's our expectation that next quarter, we'll see those move down again.

Over time, we're traditionally seeing second quarter to be a little more lumpy or volatile, just simply because of annual statements coming in and other things. So if you look back to June 11, second quarter, you would see the same thing in our portfolio, not a lot of change, but breaking the trend line.

I would also comment that our results do include this year's niche actions, which for us, were very modest. But usually, we don't have those reflected until the third quarter. This year, the results came in earlier, so we made those adjustments, but again, extremely modest in terms of changes.

Your next question comes from the line of Craig Siegenthaler. Craig Siegenthaler - Crédit Suisse AG, Research Division: Just looking here on Slide 14, which you referenced earlier in your prepared remarks. What were the main drivers that allowed your auto rates to improve by actually a fairly wide margin while the industry is deteriorating?

Nick, you want to take that?

Sure, Craig. Now this is Nick Stanutz. We have, as you know, we have 1,000-point grid that we use around pricing. And we look weekly at approval rates, the funding rates, and it tells how competitive we are in certain grids at the end of the day. So we are very strategic in how we think about the pricing and where the opportunities are in the market. But we really, at the end of the day, are getting rewarded for being in this business. In the downturn of '09 and '10, with so many left this business, the dealers have come to value, not only our value proposition and our model, but the consistency that we have applied to the dealer and the dealer-centric view we have around this business. And that has really allowed us to be successful at putting the rate in the market that you see here. Craig Siegenthaler - Crédit Suisse AG, Research Division: I understand how you could've created value in the crisis when other -- when the cap is sort of pulled out of the market. But what I'd don't understand is what would actually allow the rate to go up sequentially from the first quarter? Is it certain geographies? Is it certain new auto manufactured dealers you've been working with? Anything specific?

Well, when you think about the grid that we use as pricing point, if we take more volume at a certain pricing point over 1 quarter to the next, we'll have a change in that yield going upward, going down. So it's really very specific and very targeted, our focus about how we think about pricing from week-to-week. And what the market intelligence is telling us by, again, the approval rate of whether we book that loan or not at the end of the day.

Yes. One thing we keep in mind, too, is that we monitor not only the pricing, but also the aggregate credit outlook for each of these as well. And so we're seeing very consistent FICO scores, very consistent custom scores associated with the borrowers and very similar average maturity and collateral value levels as well. So as Nick said, it really depends more on individual sales within the grid and what type of volume we're picking up in each of those.

Your next question comes from the line of Scott Siefers. R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division: Steve, I guess, this is probably most appropriate for you. So I think you’re a couple in -- a couple of years into the in-store strategy, and you guys have gone to some length to discuss the kind of the profile of that customer. But now that you're a couple of years into it and then you signed some additional agreements, I wonder if you can talk about how well you're transitioning the customer in terms of product use? There's always that stigma that in-stores are good for deposits, but tough for much else. Now that you're a couple of years into it, maybe if you could talk a little about the success you've had making sort of that customer look like a more traditional branch customer.

Sure. Look, Scott, the convenience proposition of 7-day-a-week and extended hour provides a lot of elements to support consumers holistically. And so we've made good deposit progress, but we've always envisioned these as being full service. So they're oriented, they're geared to product education of our colleagues in the in-stores, is around -- and they're -- is around full menu. And their goals and objectives and their incentives are around full menu. So there's -- it's proving to be a good outlet for us for loans, as well as deposit products, and we're now at a point where we're looking at those -- that channel as one we can do more with small business, again, taking advantage of the extended hour and as well as investments. So it's been 21 months. We like what we see. Obviously, we're pleased with the results today, given the Meijer expansion, and frankly, looking forward to having a low-cost or a lower-cost distribution network as a consequence of how much in-store relative to total that we'll have competitively going forward.

And, Scott, this is Don. If I just could add onto that as well. We look at our cross-sell activity 90 days after the relationship has been initiated, and the cross-sell ratios we're seeing for that 90-day checkpoint are very consistent with what we're seeing in more of the full-service stores. So to Steve's point, we're very pleased with the fact that we're able to just show this is a sales engine force as well and not just a service provider. R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division: All right, that's perfect color. I appreciate that. And then, Don, while I have you, just really quickly -- and my apologies if I missed it, but have you guys given any additional color on the timing of a potential auto securitization and I think you just said second half, but...

We generally just say that we're looking about 2 a year, but that's all we've really said. We haven't provided any more commentary there. We did transfer roughly $1.250 billion or $1.3 billion held for sale at the end of the second quarter, just to give you some additional color there.

Your next question comes from the line of Chris Mutascio. Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division: Don, I wanted to follow up. Ken asked my question, but I want to follow up to your guidance on the capital from the NPR. The increase in the risk weighted assets, I assume that's tied to perhaps the auto securitizations that are off balance sheet. If that's the case, do you change your viewpoint on how you work that business going forward? Do you keep stuff on balance sheet more than securitizing and getting them off, if you're getting a capital hit any way?

That really isn't driving much of a change at all. The change is coming from unused lines of credit and also from the residential real estate and a little bit on the CRE side. But the auto book really isn't significantly impacted from this.

Your next question comes from the line of Mac Pina.

I understand that when you talk about losses in your CRE, we expected to see large swings. But this quarter in particular, I'm wondering if there's a particular story behind that increase in net charge-offs?

There really isn't. These -- there were 2 charge-offs that made up a good portion of that. They were unrelated, both in terms of where they're located, the type of properties and the circumstances. So over time, we tend to look more at where things are trending because you can't have movement from quarter-to-quarter, and we still expect to see continued charge-off performance really across the board, but particularly within commercial real estate.

These were identified as potential problems before and we did have substantial reserves established even before coming into the quarter. So it's not like these were a complete surprise.

Yes. So -- and then the story is more about just naturally lumpiness and the size of the loans...

Yes. And when you get down to the level -- last quarter, we only had $9 million of CRE charge-offs. So when you're dealing with numbers that are that small, a deal or 2 can move the numbers quite substantially.

Right. Right, okay. And also quickly on the credit side and kind of a follow-up on your provision expectation. Looking at it from another point of view, I understand it's under -- on your low side, but as a percentage of loans, not as a percentage of releases, going forward, is -- you're booking at around 40 basis points of loans. Can you remind us like what's your long-term expectation for that?

Long-term expectation, I guess, I'll say it this way. The -- we're at about our kind of a low point for provision, we have not reached the -- our targeted charge-off level yet. We're targeting over the long-term, 35 to 55 basis points of charge-offs. And clearly, we're not there yet, but moving towards that number.

[Operator Instructions] Your next question comes from the line of David Long. David J. Long - Raymond James & Associates, Inc., Research Division: The OCR model is still driving real nice customer acquisitions both in households and businesses. And when you look at the fees, we had real nice increase in the fees, both to service charges and capital markets fees and some other fees. So given the strong performance, have you seen any initiatives by your competitors to try to duplicate the strategy? And if not, why not?

David, we have not seen strong competitive responses. There are some things that, at the product level, are being done by some institutions. As we said, when we launched 24-hour grace, we felt we had first mover advantage. We didn't expect that to be followed for several years, given overall pressures, which have only intensified and the impact of Durbin. So we are of the belief that we're not going to get a competitive response this year, direct competitive response, could be surprised of course. But thankfully, we've got a lot of momentum and positioning with the product, and we're going to be able to continue with that for the foreseeable future without a direct response. As you look at 2013, a lot of challenges coming from this flat yield curve, and you've seen a couple of regionals announced expense programs. And so very hard to compound the expense program with competitive responses that would strip into the revenue side of the equation.

David, if I could just also add that if you look to any of our competitors, they all talk about deepening relationship with their customers, and that's the primary area of focus. And I think that's critical, especially for anybody here in the Midwest, that they have to have deep relationships. And so, I don't think that from that perspective, our strategy is unique. We do have some unique products. I think what does differentiate us is our relentless focus on executing a sales management process. And whether you're talking about retail or business banking or auto or our commercial, we actively manage that on a daily basis, report on a weekly basis. And there is a lot of discipline and rigor around that process, and we think that's what's going to drive our differentiated performance and not just the products set. So that's something that's even harder to replicate because it requires a very consistent and ongoing effort, and just not aware of that existing in other places at the level of those here.

Your next question comes from the line of Jon Arfstrom.

Just one more different question on the competitive environment. Steve, you talked about how parts of the Midwest are recovering faster than the broader U.S. You probably get tired of asking the pricing in the competitive environment question. But maybe you could give us a little bit of a high-level view of some of your submarkets, sub-geographic markets, in terms of which markets you are seeing the best growth and which markets are the most challenging, and I'm particularly interested in your thoughts on the Eastern Ohio, Western Pennsylvania region, and if there's any energy tailwinds that may show up eventually.

Well, you can see the impact of what's going on in the energy side in Eastern Ohio, Western Pennsylvania already. I noted the office market in Pittsburgh being dramatically different than it has been for decades. There's certainly a Mahoning Valley, Youngstown-Warren, there's economic activity that we wouldn't have seen just a couple of years ago. And so, it's early. And I believe there will be more and maybe much economic impact, but it's already observable. In terms of the first part of your question for where we're growing the context of competition, Columbus is where our hometown -- the hometown bank here. So that's a meaningful advantage given the legacies that occurred here. And then we've done well in the number of other markets. I'd point out Cleveland where we went 7-day-a-week with retail banking a couple of years ago, a lot of investments we made in Eastern Michigan. And then certain markets, we've had a track record of doing well over time and they're continuing to perform.

Okay. And just in general, Michigan, what -- you're obviously making a bigger bet there, but what kind of expectations do you have for the Lansing, Ann Arbor markets?

Well, we would expect to grow throughout Michigan and hope we'll be able to achieve that in Lansing and Ann Arbor. Those are new markets to us. We'll rationalize our Meijer distribution over time with further investments. Those -- Ann Arbor is a great market as is Lansing with the state capital and very large university. We intend to significantly invest in Michigan and to grow.

Your next question comes from the line of Terry McEvoy. Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division: Steve, could you talk about the opportunities or desires for additional M&A transactions like Fidelity? And then also, could you talk about the acceptance and the rollout of some of your new products within the Fidelity franchise? And did we see any success with that in the most recent quarter?

Well, as you know, we've made investments in our capabilities, both on diligence and on acquisitions and integration conversion front. So we've staffed those areas, we've put people in place going back now several years. Their early on work was evident, getting an acquisition at quarter end and then converting and integrating inside 90 days, hitting the expected greater than 60% take out. So we like what we've created and in our abilities to execute. There -- this cycle has been a bit of an anomaly in terms of bank failures, I think, for at least for most of us. I'm not sure what that suggests for the future. It certainly isn't getting easier out there on one hand, but that doesn't necessarily mean failure as we've seen over the last couple of years. So where interest we started today, intending to grow the core at the rates, we're achieving or even better. We want to execute our OCR strategy even better and drive core revenue and profitability. If we can find some opportunities that are financially attractive to the shareholder, we'll pursue those. We look at a number of things. But we don't have -- if we don't see anything strategic, there's nothing compelling that we have to do in our footprint, and we're only interested in our footprint. Did that answer your question, Terry? Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division: Then just one other question for Don. As I build out my model on the mortgage banking line in future years, making maybe the assumption that revenue comes down, could you just provide some color into the related expenses connected to mortgage, maybe in the first half of this year, while I'm able to take out the expenses as well, again going forward.

Yes, the incremental expense associated with mortgage volume tends to be around 40% of revenues as a general ballpark assumption.

There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you very much for your interest in Huntington. If you do have any follow-up questions, feel free to reach out to me, Todd Beekman, at (614) 480-3878. Thanks very much, and have a good day.

This concludes today's conference call. You may now disconnect.