Huntington Bancshares Incorporated Presents at 2013 Credit Suisse Financial Services Forum, Feb-12-2013 10:15 AM

Feb.12.13 | About: Huntington Bancshares (HBAN)

Huntington Bancshares Incorporated (NASDAQ:HBAN)

February 12, 2013 10:15 am ET


Donald R. Kimble - Chief Financial Officer and Senior Executive Vice President

Mary W. Navarro - Senior Executive Vice President and Retail & Business Banking Director


Craig Siegenthaler - Crédit Suisse AG, Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

All right. Good morning, everyone, let's get started. Up next, we have Huntington Bancshares, ticker HBAN, a U.S. regional bank with its footprint spread across several Midwest states, including Ohio and Michigan. We note that HBAN's aggressive branch build out and investment strategy may be slowing, as its Giant Eagle and Meijer branches will slow -- their numbers opening will slow significantly over the next 12 months. So this actually could provide some operating leverage.

Here to provide details on the bank, we are pleased to present Huntington Bancshares CFO, Don Kimble; and also Head of Retail and Business Banking, Mary Navarro.

With that, we'll first actually start for some digital Q&A questions. So I don't know if you can bring them up on the screen real quick? So all you in the audience actually have clickers in front of you. So this is the first time we're doing it, so just bear with me. But you'll see the first question here is, what you think is the most important driver for Huntington shares in 2013? So that you have several options here. So you can fill that out in your digital remotes. You have 5 seconds.

All right, question number 2 now: What is your expectation for Huntington's year-over-year loan growth in 2013, including the impact of auto loan securitizations?

All right, number 3: What percentage of earnings do you expect Huntington to return to shareholders in 2013? And this is the dividend and the buyback.

Question 4: What percentage year-over-year operating noninterest expense growth do you expect in 2013 from Huntington? And this is also including the impact of the Fidelity Bank acquisition.

And question 5, the final question, is: Do you expect Huntington to announce another acquisition in 2013?

All right. And that's it. With that, Don, you can begin your presentation.

Donald R. Kimble

Great. Thanks, Craig, and then thanks to the Credit Suisse team for inviting us to the conference today, and to those of you that are in the room and those that are on the call, we appreciate your interest in Huntington and having the opportunity to talk to you today. I'm not sure quite how to interpret the Hotel California theme with the total share buyback and dividend, but I'll have to think about that and get back to you later in the day about that.

But if you take a look at Slide 2, this is our forward-looking statement disclosure, and we'll be making some forward-looking comments throughout the presentation today, so please take the time to review this.

Onto Slide 3, with me today is Mary Navarro, and, as Craig said, that she heads up our Retail and Business Banking segment. Also present today are Todd Beekman and Mark Muth from our Investor Relations function.

Now turning to Slide 4, I'll begin with a few highlights for 2012 and then Mary will follow. She'll be discussing 3 broad, yet related, topics today. The first is the overall retail and branch philosophy, which will then tie into the second topic, which is on our in-store rollout. And then finally, she'll provide some additional updated information on the average new customer acquired over the last 6 months. I'll then close with some comments about our 2013 expectations, our relative performance and a few important messages related to the progress we're making against our breakaway strategy.

Turning onto Slide 5, you can see that 2012 was a solid year for us and we're pleased with our overall results. For the year, we earned a 1.15% ROA. We also earned EPS of $0.71, which is a 20% increase from the previous year. We were able to grow revenues by $204 million during the year.

Now the cornerstone of our strategy has been to invest in the franchise, to grow market share and also share of wallet. Our average core deposits increased 8% and our total demand deposits, which we view as the critical relationship account, increased 27%. Loan growth was up 3% for the year, which was negatively impacted by the sale of $2.5 billion worth of auto loans. The growth continued -- the growth in the continued funding mix shift resulted in a 3 basis point net interest margin expansion for the year resulting in a 5% increase in net interest income. Noninterest income grew by $117 million, as Mortgage Banking posted a record year for us. We completed 2 auto loan securitizations and expanded our customer base, which drove growth in service charges on deposits, as well as allowing us to make up about half of the electronic banking income that we lost due to the Durbin Amendment.

Noninterest expense actually increased $107 million. Much of that investment would have been in people. Since the end of 2011, we added over 550 full-time equivalent employees or a 5% increase as we opened 37 net new branches. We expanded our infrastructure, particularly in risk management and continued to round out our product offerings in the launch of several new verticals in our commercial segment. Even with the addition of $63 million related to the Chapter 7 consumer loans, our nonaccrual loans were down by $133.5 million, or 25% for the year. And our allowance for credit losses as a percentage of nonaccrual loans actually increased to 12 percentage points to 199%.

Now turning to Slide 6. Consumer households and commercial relationships continue to grow at a pace that's well above our Midwest footprint. And importantly, customers are building deeper relationships with Huntington. With regard to capital, 2012 was the first year that we participated in the Federal Reserves' capital program. Over the course of the year, we actually managed our capital within the guidelines they had set forth, redeeming $230 million worth of our higher cost TruPS and buying back 23 million shares, or about 2.5% of our total shares outstanding. Both our tangible common equity and our Tier 1 common risk-based capital increased, up by 46 basis points and 47 basis points, respectively.

Turning to Slide 7, other noteworthy items for the year. Now the backbone of our strategy is convenience and service. This year, we were recognized by 2 prominent names for just that. Money Magazine named Huntington as one of the best banks in America, and this was the second year in a row that we had received recognition from Money Magazine. And more recently, J.D. Power ranked us as the highest in small business banking satisfaction study. We've continued to look for opportunities to optimize the balance sheet and improve the overall franchise. And in 2012, we completed 2 securitization transactions and successfully acquired an integrated Fidelity Bank. Mary will go into this in a little bit more detail later, but we did open a net 37 branches during the year, which included the impact of the consolidation of nearly 5% of our traditional branch network.

Onto Slide 8. While the environment may be difficult, we have and will continue to actively manage and to drive growth and deliver solid profitability. We continue to strive for positive operating leverage as we've accomplished in 2012, where we show here with an adjusted revenue growth of 7% and expense growth of 5%.

So with that, let me turn the presentation over to Mary so she can walk you through some of our more interesting areas of investment within the retail segment. Mary?

Mary W. Navarro

Thank you, Don. Good morning. I want to take a minute here to explain or just kind of remind you how large the commercial -- or the retail part of the company is. We make up about 30% of the earning assets. Of our loan book, $8.8 billion is in consumer loans and about $4 billion is small business. So we have about 70% of our loans in consumer and 30% in small business. On the deposit side, we make up about 60% of the bank's deposits, and we've been working hard to remix the deposit base with more checking balances and customers using many more products and services.

I'm not here really today to talk about our group's financials but instead I want to take the opportunity to communicate how the strategies we have been executing and will continue to execute set us up very well for the future of retail banking.

So moving to Slide 10. Our philosophy starts and stops with our customers, and we know that customer demand -- that our customers demand convenience. But in the digital age, convenience doesn't just mean physical locations. This chart shows 3 types of customers: digital, multichannel and branch dominant. And this is what the research told us. In the first column of numbers 38% of customers view themselves as digital dominant and only 25% as branch dominant. But what customers actually do and what they say they do is different. In the far right-hand column, only 23% are virtual or digital dominant, having 80% of their transactions in phone, ATM or online and less than 1 transaction per month in a branch even though a far larger percentage of them, 38%, think of themselves as more of a virtual customer.

When it comes to branch use at the bottom, 17% of customers are branch dominant, with 80% of their transactions being in a branch. The reality is the vast majority are in the middle, and that's the multichannel, which -- this really means that 80% of customers today still use a physical branch network. And within that, 65% of our customers have visited a branch in the last 30 days. That's for consumers. And business customers visit even more often, with 76% transacting at a branch every month.

Turning to Slide 11. The chart on the left shows that as we look back over the last several years, more and more of our new customers are digital-only, up to 33% -- up to 33% from just 27% 4 years ago. We expect that trend to continue into 2020. And we are well-positioned today with further investments coming to respond to changing channel preferences. The interesting piece is that history has shown and outside experts agree, the multichannel segment has and should remain relatively stable at 60%, over on the far right. The preference mix of customers can be seen in the chart on the right as branch dominant falls to just 7% of the total customers by 2020. But more importantly, the branch dominant and multichannels still represent 2/3 of all customers. Because of this, we need to take a closer look at what's going on at the branches.

So moving to Slide 12, the green section of the stack bars represent the types of transactions happening at the branches. As you can see, the majority of customers prefer a face-to-face for many service items and most importantly, transactions that produce revenue for the bank. So new accounts, loans, investments, mortgages, those are sales that are happening face-to-face. We believe the future of retail banking will be a hybrid of physical and digital convenience. We are working on reducing the cost of service, transactions and sales. We think this will be a model of increased convenience using digital interactions to help personalize the experience for customers.

Turning to Slide 13. This summarizes what we're working on that will optimize our retail network. Over the last 2 years, we have focused on building a very accessible virtual network and a very convenient physical network. This slide is laid out in order of cost to service. And so you'll see that we are investing in growing the more efficient pieces of our network and consolidating our highest-cost touchpoint, the traditional branch.

So starting at the top, right in the middle there, in the digital space, we relaunched our website and expanded its capabilities. We rolled out a full range of mobile apps and are launching mobile deposit this year. We anticipate that over this time, this will be reduce our deposits in the branch by about 5%.

Our ATMs have been rebranded to make them highly noticeable, and we are in the process of upgrading half our ATM network to image deposit ATMs. This means we can give customers same-day credit up to 11:00 at night.

You've been hearing about in-store branches for over 2 years. I will talk about these in more detail in a moment, but I want to comment that we have chosen our partners very carefully, Giant Eagle and Meijer are not only top grocers in our region, but also top retailers. We now have 92 in-store locations, and that's 13% of our total branch network. Traditional branches have and will continue to play a crucial role on maintaining our high level of service and our brand. As we see the impact of our deposit-friendly ATMs, mobile deposit and our in-store branches, we will reduce the staffing and number of traditional branches as needed.

On Slide 14, the gray chart on the left-hand side shows a trend of branch transactions for industry, which is down 4%. Our own transactions, the green section of the bars, shows a 1% growth in transactions, and that's really due to our new customer acquisition being so high. Our household growth is up 32% over the past 3 years and was up 12% last year.

On a per branch basis, that is a 4% increase in the last 4 quarters. Going forward, as people want more convenience, in-store is key. We need to go where the people are. An average customer will visit a grocery store over 2x per week. To put that in perspective, our average branch will see about 6,000 customers per month. An average Giant Eagle or Meijer will see about 80,000 people per month. When those customers go into 1 of our partner stores, they will find a Huntington branch with extended hours, meaning 75 hours a week, deposit automation ATMs and in-person full-service banking.

Let's turn to Slide 15 and talk about how our investment in in-store is rolling to our financials. As we said last year, the overall in-store strategy is expected to break even in 2014 after being about $20 million pretax, pre-provision loss for this past year 2012. Many people have asked for additional clarity on the rollout, so this slide tries help lay out the evolution of the branches. Let me take a moment to explain the table.

This is a waterfall chart that shows how our in-store branches will age between now and the end of 2015. As we've said before, a single store branch turns profitable within 24 months. So the red bars are the branches, which are the highest financial drag and the green bars are those in which we see the largest benefit.

As you can see in the first column of numbers, we have 92 stores up and running at the end of last quarter. As we roll forward for the next 2 years, you can see how the majority of the branches move from negative contributors to positive contributors as they mature. And then finally, in 2014, we will have between 65 and 92 branches in positive territory. That's the dotted box there kind of toward the bottom or the green shaded area. And we'll have very few in the early stages of development or in the pink -- red bars. We have 4 branches that are probable today.

Moving on to Slide 16. We show that customers not only love Huntington but also love these in-store branches. As I mentioned before, we have had 32% household growth, adding nearly 300,000 customers over the last 3 years. The first in-store opened in the fourth quarter of 2010. And in the last year, the in-stores represented 13% of the total branches. During that time, 27% of our customer growth came from the in-stores. We anticipated customers liking the convenience and the fact that these branches are full-service. They have been very complementary as a service, which we measure multiple times a month for every branch.

So the next question is, so what do those customers look like? So turning to Slide 17, you can see a wide range of demographic information. But the takeaway is that our new customers, including our new in-store customers, are high-quality customers. The growth we are attracting is not from low-quality customers, like some have questioned. Our new customers represented by the orange and green horizontal lines, dotted lines, are younger, have higher incomes and are more educated than our overall footprint.

On Slide 18, the new customers have allowed us to replace the lost revenue from several factors: Reg E, Durbin, our Fair Play strategy and the low rate environment. We estimate this to be $235 million over that period. You can see from the slide, we're earning more revenue than we were before this all started in 2010.

Turning to Slide 19 to wrap it up, convenience matters. We are investing in all parts of our network, digital and physical. The new customers we are getting have better-than-average demographics. And the investment we are making will help us to drive more efficient delivery network. In the end, customers want a digital solution, but they also want a physical branch network for those important face-to-face sales transactions.

Don, back to you.

Donald R. Kimble

Thanks, Mary. Turning to Slide 20, it's the same exact slide that we use for our expectations and when we presented our fourth quarter earnings. And today, I'll just highlight a few items. First, we expect to see stronger growth in our Midwest economy compared to the broader country. Second, we expect to hold our net interest margin above the mid-3.30%'s for the year. Third, modest total loan growth overall is expected, excluding the future impacts of additional auto securitizations and is expected to continue. Fourth, noninterest income is expected to be relatively stable as the anticipated slowdown on mortgage banking will be offset by the benefit of our growth in new relationships and increased cross-sell successes. And we've also moderated the pace and size of our planned investments. And on the credit front, we expect net charge-offs to be at about the higher end of our long-term goal by the end of the year.

On Slide 21, the top chart shows that Huntington, which is the green line, has been able to maintain a more stable net interest margin than our peers. Even when you exclude the 5-basis-point benefit in the fourth quarter from our purchase accounting adjustments, we've clearly shown the ability to keep our net interest margin relatively stable. When we talk to most investors, they jump right to the deposit cost and this is shown on the lower right-hand chart. We want to make sure the investors fully appreciate how our sales process and conservative risk culture has helped maintain our loan yields as well. Sure, we could grow pieces of our loan portfolio at a much faster pace than we are today, but we're not going to be giving it up either price or credit standards in order to drive that additional growth.

Turning to Slide 22, we know that the potential decline in mortgage banking income is a concern for many investors. 2012 was a record year for us as far as mortgage banking income. But as you look at these 2 charts, you can see that Huntington has seen a growth in its fee income mix consistent with its peers, while having a relatively smaller benefit from mortgage. This is the power of our OCR cross-sell, base sales process and expect it to continue.

On the right side of this page, you can see that we experienced over $60 million of fee income growth in 2012, when adjusting for the impact of the Durbin Amendment. As we look forward, the new customers who joined Huntington in the middle of 2012 will now contribute to the full year of 2013.

I'm very proud of Slide 23 because I think it illustrates clearly that our strategy is working and our execution is strong. This slide is one that we started using late last year and depicts the rankings of Huntington against the top 100 largest bank holding companies in the U.S. divided into quartiles of various financial metrics. The best performers for each metric are in the top quartile in the light blue on the chart while the worst performers are in the bottom quartile in the green band on the chart.

Starting on the left, our balance sheet is materially stronger than it was 3 years ago. We augmented our capital ratios, and Huntington now ranks above our peers. The same vigor was applied on the credit front. We feel good about the progress we've achieved and expect credit to continue to trend favorably. The infrastructure and the culture that we've invested in and developed around risk management is equally impressive.

One of the areas you can truly see the fruits of our Fair Play, our relationship banking strategy, is in our balance sheet growth and in particular, our non-interest-bearing deposit growth, as we discussed earlier. While all banks have benefited from the 0 interest rate environment to some extent, our growth has significantly outstripped our peers.

This growth in noninterest-bearing deposits has helped us remix the balance sheet, providing one of the key factors that has allowed us to maintain a very stable net interest margin despite the pressures of the yield curve.

Our total revenue growth, as we show here, also compares favorably to our peers.

The next 2 metrics might surprise many of you or may not square with your perception of our company. Despite the investments we've made in the franchise, building out our product set and continued to expand our delivery system, our noninterest expense growth actually has been roughly in line with that of our peers and very close to the average with the top other banks. Further, while we're not close to our long-term target, our efficiency ratio is better than our peers'. Which lead us to the cluster on the far right-hand side of the slide.

Our strategy is effectively driving the earnings levers of the company. Our profitability exceeds our peers on both in our return on assets and our ROE basis. In fact, our ROE places us in the top quartile of the nation's largest bank holding companies. Yet despite our robust customer growth, despite our market share gains and despite our strong financial performance, our shares continue to be valued at a discount compared to peers on a price-to-tangible book basis. You can see that on the far right-hand bar.

In summary, on Slide 24, I'd like to leave you with a few closing thoughts before we take questions. The strategic path we've gone down entails a multiyear story, rather than instant gratification. The investments we have made have strengthened the risk culture of the company, while our strategy of investing in the business to grow the customer base, coupled with our OCR sales process to drive additional cross-sell and improved customer retention is positively impacting the company's financial performance. We continue to believe that we have additional opportunities and levers to pull in this low-rate environment. Last year, our existing investments added over $50 million to pretax income. Looking forward, our in-store strategy is expected to break even in 2014. We are possible and practical. We have adjusted some of our planned future investments to compensate for the economic uncertainty. We're building a culture of continuous improvement and continue to focus on improving operational efficiencies. And finally, there's a high level of alignment between our management team, our Board and the owners of the company. We are in this for the long-haul, and we'll continue to manage the company in a prudent manner with an effective long-term strategic focus.

Thank you for your interest, and as the slides go through the bases of presentation. I'll turn it over to Craig for Q&A.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Before we start, moderator, can we just see the responses from the initial survey. Can we go to the second one? Next, please. Okay, next. And last one. All right. Great. Well, we're going to start with the Q&A now.

Question-and-Answer Session

Craig Siegenthaler - Crédit Suisse AG, Research Division

Just to start, Don, if we can go back to Slide 15, and maybe, Mary, you have some commentary here too. It looks like 2014 could be a pretty good year for you guys, just because you're only opening 4 in-store branches and you have about 60 of them which are coming online for profitability for the first time ever. So maybe provide some commentary around how 2014 may be shaping up? I know it's a long time away.

Donald R. Kimble

Well, it is a long time away but I think that's supported the important message from the slide, is that we do expect the maturation of the branches to evolve, and we expect to be in a breakeven position for that -- that series of investments. And that will be a significant improvement to our bottom line and to our operating efficiency, or operating leverage, for the year. We lost about $20 million in pretax pre-provision earnings in 2012, 2013 will be in the same general range, and to have that go to breakeven will be very helpful. Mary, anything else?

Mary W. Navarro

The only thing I'd add here would be just that we're managing each one of these stores and the profitability of each store very carefully every single month, looking at the balance growth, fee income expenses kind of every aspect of it. So we're not managing it as 1 group of 92, but store to store. That's it.

Craig Siegenthaler - Crédit Suisse AG, Research Division

We have a question here in the audience. Microphone, please?

Unknown Analyst


Donald R. Kimble

The question was as far as positive operating leverage for 2013. In the guidance we provided in the end of the fourth quarter, that is our expectations as we're driving 2 positive operating leverage. We've slowed the pace and size of some of the investments that we have been talking about and that will help allow us to move to that positive operating leverage for '13.

Unknown Analyst

Can you tell us the average deposit balance per account in the retail strategy?

Donald R. Kimble

As far as the in-store or in general?

Unknown Analyst

The in-store.

Donald R. Kimble

The in-store? I don't know that we provided a lot of detail there. I would say that our in-store deposit balances on average are smaller than what they would be for a traditional store. That was part of our expectation going into it. But the revenue and contribution generally have been in line because we've seen a difference in the mix as far as the revenue contributions. Mary, anything else?

Mary W. Navarro

Well, we put the -- when we put this together a few years ago, the rate curve was a little different, so I think that's changed the value -- that has changed the value of deposits, but we're still seeing the results in terms of profitability, so we're pretty happy with the numbers there. But we haven't given people numbers as far as what the actual balances are.

Unknown Analyst

Did you give the actual balances of the traditional branch?

Donald R. Kimble

We've not talked about that as far as the average balance for new accounts, no.

Craig Siegenthaler - Crédit Suisse AG, Research Division

A similar topic here, on Slide 13, you disclosed the operating expense differentials: 5% in-store versus your traditional branch. What drives that and why isn't that larger?

Donald R. Kimble

Mary, you want to take that?

Mary W. Navarro

Yes. The things that drive that, it's a little bit different. Why isn't it larger? We'll start with that, it's because we're open 75 hours a week as compared to 46, 47 hours. So it's 30 more hours. It's just a lot more convenience because there's a lot of people in those locations, that's the primary driver. And then the reason it is somewhat less is because we're a tenant in the in-store location, we're not paying for the electricity and the snowplowing and security and a lot of things, even phones -- so a lot of the things that come with being a tenant, it's just less overhead. Simpler for us actually to operate, too.

Unknown Analyst

For your in-store strategy, when you made the decision to pursue this, was it primarily based on the cost efficiencies in that? Or are you finding that you're able to generate revenues either at or above the level of a traditional branch?

Donald R. Kimble

I'd say as far as the initial decision, it was more from a convenience perspective and also from a cost of distribution, that the initial capital outlay for an in-store branch is about 1/8 of what it would be for a full-service branch. And so it's a more efficient channel from the capital utilization, from that perspective. We also had, through Steve Steinour, our Chairman, had a lot of experience with Giant Eagle in Western Pennsylvania as part of his previous employer and had a lot of success with that. And so we were really able to take that from a starting point and build on that and refine that in a way that we felt was appropriate.

Mary W. Navarro

The other thing was just as customers choose to bank in different ways, whether that be their mobile phone or ATM or whatever, we just felt like we needed to be in places where there were lots of customers so people wouldn't have to make an extra stop. Fine when they're needing a mortgage or something that's pretty important to their financial picture. But for routine things, we think that you just have to be in the cheaper, more convenient location than standalone branches.

Unknown Analyst

Could you touch on the opportunities on the Utica Shale? I saw you hired a new lending team. I think there's a lot of positive economic sentiment from that region, which your branch footprint is very nicely related?

Donald R. Kimble

So we do have some overlap with the shale development. I would say that we haven't seen the impact in the economy yet of any scale or size. It's starting to build. We felt between that and with some of the other areas of our geography in West Virginia that it was important to have more of an expertise in energy. It doesn't mean that we're going to be out there supporting drilling and explore -- exploration type of financing but felt that was a critical piece of our overall effort. And so we've hired a small team to help out with that. It's not going to be a major component, but we did want to have an experienced team to help lead that effort.

Craig Siegenthaler - Crédit Suisse AG, Research Division

It looks like it's it for Q&A. There'll be a breakout session for those of you that have additional questions. But up next in this room is First Republic Bank, and we have another regional bank, Zions Bank Corp over in track 1. Don, Mary, thank you very much.

Donald R. Kimble

Thank you.

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