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Huntington Bancshares Incorporated (NASDAQ:HBAN)

Q1 2013 Earnings Call

April 17, 2013 10:00 am ET

Executives

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, President, and Chief Executive Officer

Analysts

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Adam Chaim - Deutsche Bank AG, Research Division

Josh Levin - Citigroup Inc, Research Division

Thomas Frick - FBR Capital Markets & Co., Research Division

Keith Murray - Nomura Securities Co. Ltd., Research Division

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

Erika Penala - BofA Merrill Lynch, Research Division

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

David J. Long - Raymond James & Associates, Inc., Research Division

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Brian Foran - Autonomous Research LLP

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Huntington Bancshares First Quarter Earnings Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Todd Beekman, Director of Investor Relations. Sir, you may begin your conference.

Todd Beekman

Thank you, Paula, and welcome. I'm Todd Beekman, the Director of Relations -- of Investor Relations for Huntington. Copies of the slides can be reviewed -- 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 after an hour after the call.

Please call Investor Relations at (614) 480-5676 for more information on how to access the recording or playback if you have difficulty getting copy of the slides.

Slides 2 and 3 note several aspects of the basis of today's presentation. I encourage you to read these, but let me point out one key disclosure. This presentation will reference non-GAAP financial measures. And in that regard, I direct you to the comparable GAAP financial measures and reconciliations to the comparable GAAP financial measures within the presentation, additional earnings-related material released this morning as an 8-K, that all can be found on our website.

Turning to Slide 4. Today's presentation, including the Q&A, may contain forward-looking statements, as such statements are based on information and assumptions available at the time and are subject to risks, change and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of the risks and uncertainties, please refer to this slide, the material filed with the SEC including our most recent Forms 10-K, 10-Q and 8-K filings.

Now turning to today's presentation. As noted on Slide 5, participating are Steve Steinour, Chairman President and CEO; Don Kimble, our Chief Financial Officer; and Dan Neumeyer, our Chief Credit Officer. Let's get started. Don?

Donald R. Kimble

Thanks, Todd, and welcome, everyone. I'll begin with a review of some the quarter's financial performance highlights and will be followed by Dan, who'll provide a brief update on credit. Steve will then wrap up with an update on our continued household and commercial relationship growth and a discussion of our 2013 expectations.

Turning to Slide 7. First quarter of 2013 was a solid start for the year for Huntington. For the quarter, we reported EPS of $0.17 per share, resulting in a 1.1% return on assets and a 12.4% return on tangible common equity.

This quarter's performance reflected a $24 million or 3% decline in total revenues from the first quarter of last year, driven by a $33 million decline in noninterest income. This decline reflects the absence of the securitization transaction, which contributed $23 million in 2012 and the $11.4 million bargain purchase price gain last year. Offsetting this decline was a $9 million increase in net interest income. Net interest margin increased by 2 basis points to 3.42%. Loans increased 4% over the year, led by commercial and industrial loans, up 14% from last year and auto loans, which were up 6%.

Expenses declined $20 million from a year-ago quarter, as we recognized a $23 million increase to litigation reserves last year. This quarter, we delivered a positive operating leverage and a slight improvement to our efficiency ratio to 63.3%.

Turning to Slide 8. Steve will provide additional detail later in the call, but you can see that our OCR methodology is continuing to drive success throughout the company. Consumer households and commercial relationships continue to grow at a pace well above that of our Midwest footprint. And importantly, customers are building deeper relationships with Huntington.

Turning to credit quality. Net charge-offs decreased by $31 million over last year to an annualized base of 51 basis points. This represents the first time since the first quarter of 2008 that we've been in our long-term target range of 35 to 55 basis points. Even with the addition last year of $63 million related to the Chapter 7 consumer loans, nonaccrual loans were down $87 million or 19% over the course of the year and our allowance for credit losses as a percent of nonaccrual loans increased 1 percentage point to 207%.

Our capital remains strong, our TCE and Tier 1 common ratios were both up around 0.5%. Our Tier 1 and total risk-based capital ratios were both impacted by last year's redemption of $230 million for a higher cost of trust preferred securities.

Turning to Slide 9 for comparisons with the fourth quarter of 2012. In addition to some of the earlier observations, the comparisons with the fourth quarter reflected a reduction in our net interest margin, as 2012 fourth quarter included 5 basis points of purchase accounting and other temporary benefits, while the current quarter included only 2 basis points of similar items.

Also a $16.5 million of lower mortgage banking income reflecting the 3.6% low origination volumes and tighter spreads on sales of mortgages. We also completed the share repurchases under our 2012 capital plan with the repurchase of 4.7 million shares at an average cost of $7.07.

Turning to Slide 10 and other highlights for the quarter. As previously disclosed, we received a non-objection from the Federal Reserve for our 2013 annual capital plan. This plan included a 25% increase to our common dividend to $0.05 per share and also included a share repurchases totaling $227 million for the fourth quarter. We completed the sale of certain low income housing investments that result in a $7.6 million gain, and we exceeded our $4 billion 2010 lending commitment to small businesses.

We are pleased with additional third-party validation of our commitment to service quality and strong growth. We were the recipient of a TNS Choice Award for the central region or about 1/3 of the U.S. for our outstanding customer acquisition, retention and satisfaction. And for the fourth time, we are recognized for outstanding customer service of the APECS 2012 Top Advocacy Award for Customer Service in our region.

Turning to Slide 11. This is a summary of our quarterly earnings trends. Many of these performance metrics will be discussed later in the presentation.

So turning to Slide 12. This shows our breakdown of our operating leverage for the first quarter. Several people have asked to clarify how we think about our operating leverage. And simply put, revenue outgrows expenses when we adjust for significant items and the volatility of the MSR from the timing of our auto securitizations.

As shown here, we've produced positive operating leverage for the period. On this adjusted basis, revenues increased by 1.2% and expenses increased by 0.8%.

Slide 13 displays the trends of our net interest income and margin. The right side displays a 2 basis point increase in our net interest margin over the last year to 3.42% for the quarter, which reflected the impact of 23 basis point increase from the reduction in deposit rates and lower noncore funding, reflecting the continued remix of our deposits and the redemption of the trust preferred securities. This is offset by a 16 basis point decline in earning asset yield and 5 basis points of lower benefit from net free funds.

Turning to Slide 14. On the right, we have shown continued improvement in our deposit mix. The improved deposit mix reflects the success of Fair Play banking on growing consumer DDA, as well as the focus on growing commercial demand deposits. This improving mix has contributed to the 17 basis point decline in the average rate paid on total deposits over the last 5 quarters. The current quarter balances reflected efforts to reduce the level of collateralized deposits.

On the left-hand side of the slide, you see that the maturity schedule of our CD portfolio, and another wave of higher-cost CDs are expected to mature in the second quarter of 2013.

Slide 15 provides a summary income statement and some color on items impacting the linked quarter performance. Items of note included -- last quarter included $17 million of securitization gains, as we completed the $1 billion auto loan sale for the fourth quarter. As we continue to be well below our overall concentration limit of 20%, there's a clear opportunity given the environment to retain more of our auto loan production compared to other investment alternatives.

These loans carry shorter duration and a higher yield than the securities we otherwise would have purchased and do not have the OCI risk. The interest income nearly offsets the loss fee income in 2013 with the net impact being well less than $0.01 of unfavorability in 2013.

However, in 2014, the net impact increases EPS by about $0.01. We also had $16.5 million linked quarter decline in mortgage banking revenues. This reduction reflected lower secondary marketing gains and a 3.6% decline to origination volumes. We also recorded a $10 million positive net MSR benefit for this quarter, essentially equal to that of the fourth quarter.

Noninterest expenses decreased by $27.8 million this quarter, reflecting a $15 million decrease to professional services, primarily related to temporary regulatory costs incurred last year.

Marketing costs were down seasonally by $5.5 million and other personnel costs were up $5 million this quarter, the majority related to increases in employee-related taxes this quarter, which were partially offset by lower commission expense.

Slide 16 reflects the trends in capital. Tangible common equity ratio increased 59 basis points from the prior quarter -- prior year's quarter and slightly up from the 2012 fourth quarter to 8.92%. The Tier 1 common risk-based capital ratio increased 10.62% from 10.15% at the end of the year-ago quarter. These ratios reflected the impact of repurchasing 28.1 million common shares at an average price of $6.48.

Let me turn the presentation over to Dan Neumeyer to review the credit trends.

Daniel J. Neumeyer

Thanks, Donald. Slide 17 presents an overview of our credit quality trends. Credit quality trends in the first quarter were very positive, led by the net charge-off ratio, which fell to 51 basis points on an annualized basis compared to 69 basis points in the prior quarter. This level of charge-offs falls within our long-term targeted range of 35 to 55 basis points. It is worth noting that given the absolute low level of charge-offs, some volatility from quarter-to-quarter is possible, although we expect the overall trend to continue to be positive.

Loans past due greater than 90 days and still accruing were stable in the quarter and remained very well controlled. You'll recall that in -- the second quarter uptick in last year in past dues was caused by the acquired Fidelity portfolio. Fidelity loans include accruing purchased impaired loans, which were recorded at fair value upon acquisition and will remain in accruing status.

The nonaccrual loan ratio showed continued modest improvement in the quarter following [indiscernible] of total loans. The NPA ratio showed similar improvement through the continued reduction in commercial OREO balances in the quarter. The criticized asset ratio also showed improvement falling from 4.79% to 4.49%.

The allowance for loan and lease loss and the allowance for credit loss to loans ratios fell in the quarter to 1.81% and 1.91%, respectively, down from 1.89% and 1.99% in the prior quarter, reflecting continued asset quality improvement. The ALLL and ACL coverage ratios both increased modestly due to the reduction in nonperformers in the quarter.

Slide 18 shows the trends in our nonperforming assets. The chart on the left demonstrates continued reduction in our NPAs, decreasing 21% over the last year. The chart on the right shows the NPA inflows, which fell in the quarter to 28 basis points of beginning of period loans.

Slide 19 provides a reconciliation of our nonperforming asset flows. NPAs fell by 7% in the quarter. The level of NPA inflows was the lowest experienced in the last year and the lower inflows drove the overall reduction.

Turning to Slide 20. We provide a similar flow analysis of commercial criticized loans. This quarter saw a similar level of inflow as the prior quarter, with upgrades, pay-downs and charge-offs contributing to a 6% reduction for the quarter.

Moving to Slide 21. Commercial loan delinquencies remained elevated in both the 30- and 90-day categories over what we had shown from the first quarter of '11 through the first quarter of '12. Again, the increase is due to the addition of the Fidelity portfolio. All of the 90-day delinquencies are related to the Fidelity purchased impaired loans, which are recorded at fair value upon acquisition and remain in accruing status. However, delinquencies remain very well controlled in the aggregate.

Slide 22 outlines consumer loan delinquencies, which are in line with expectations and reveal a generally improving trend. In aggregate, 30-day consumer delinquencies showed noticeable improvement quarter-over-quarter, as depicted in the chart on the left. All of the individual consumer loan categories showed improvement quarter-over-quarter.

90-day delinquencies showed modest improvement in the quarter with auto, home equity and other consumer all showing reductions.

Reviewing Slide 23, the loan-loss provision of $29.6 million was down $10 million from the prior quarter and was $22 million less than net charge-offs. The ratio of ACL to the nonaccrual loans rose from 199% to 207%, due to the previously noted reduction in nonperformers.

The ACL to loans was lower at 1.91% compared to 1.99% last quarter. Most of the major credit metrics showed continued improvement, and therefore, we believe this coverage levels remain adequate and appropriate.

In summary, we are pleased with this quarter's credit results. We expect continued volatility but overall improvement in our credit metrics, including lower criticized loans and lower NPAs.

Let me turn the presentation over to Steve.

Stephen D. Steinour

Turning to Slide 24. Our Fair Play banking philosophy coupled with our optimal customer relationship, or OCR, continues to drive new customer growth and strength in product penetration.

This slide recaps the continued strong upward trend in consumer checking account households. For the quarter, consumer checking account households grew at an annualized rate of 11.8%.

Our 4+ product through services penetration grew to 80%, an increase of 5% since this time last year. It's worth noting that in the second quarter, we anticipate making a change in our product and service count to a more conservative definition that will be most notable -- noticeable as modest decrease in our 4+ percentage. This change is a natural evolution, as we've made significant strides towards our 4+ cross-sell threshold. And as we hold ourselves to a higher standard, we are increasing our goals and measurement to drive 6+ products and services for our consumer, customers.

For the fourth quarter-related revenue was $239 million, down $12 million from the quarter in 2012 mainly due to 2 items. That's -- the 2 -- first there are 2 -- few number of days, resulting in lower net interest income; and secondly, a decrease in service charges on deposit accounts. That decline reflects typical seasonality in the February implementation of a new posting order for consumer transaction accounts. Full year impact from the new posting order, which was incorporated in the previous 2013 guidance, is estimated to be between $25 million and $30 million. From here, we expect service charges on deposits to trend with overall household growth.

Turning to Slide 25. Commercial relationships grew at an annualized rate of nearly 12%, as we experienced very strong growth in small business. At the end of the quarter, 36% of our commercial relationships utilized 4+ -- utilized 4 or more products and services. This is 3% higher than this time last year. Related commercial revenue of $175 million, while up $5 million from a year ago, is down $15 million from the fourth quarter of 2012.

While the fourth quarter was particularly strong, the decline was larger than we expected, as we saw a noticeable change in commercial customer activity.

Capital markets activity started off very slow, as many companies moved up transactions into December, given the uncertainties that existed at that time. Late in the quarter, we saw the pipeline rebuild and the second quarter is off to a solid start.

Turning to Slide 26 and 2013 expectations. For the most part, we aren't changing our expectations all that much from what we stated in January. There are a few changes, and I will note these. We continue to benefit from the strength in the Midwest and believe our strategies will continue to drive growth and improve profitability.

With regard to interest rates, we expect the interest rate environment will remain relatively stable. With the opportunities for deposit repricing and mix shift, we expect net interest margin to remain fairly stable and, for the full year, do not expect it to fall below the mid-3.30s percent. Modest total loan growth, excluding any future impacts of additional auto securitizations, is expected to continue.

C&I pipeline is robust. Yet with the current economic uncertainties, we expect this to translate to stronger growth in the second half of this year.

Auto loan originations remain strong. As we said last quarter, with the opportunity to change the size and timing of securitizations, the one change is that we are currently planning only one securitization for later in the year. Even with this change, we expect to continue to be well below our overall concentration limit of 20%.

There's a clear opportunity given the environment to trade some of the securities reinvestments for auto loans. These loans carry a shorter duration and higher yield and do not have the OCI risk.

The interest income gained by not securitizing nearly offsets the loss fee income in 2013, the net impact being well less than $0.01 and favorable in 2013. However, in 2014, the net impact due to higher interest income increases EPS by about $0.01.

Our CRE balances, commercial real estate balances, should stabilize in 2013. We now expect that to be around $5 billion. Other consumer loan categories should reflect modest growth. Deposit balances will reflect continued growth in low-cost deposits, resulting in total deposit growth, in line with to slightly less than total loan growth.

Noninterest income for the full year, excluding any impact from securitizations or change in net MSR, is expected to be relatively stable as the expected slowdown in mortgage banking will be offset by the benefit of our growth in new relationships and increased cross-sell success.

Noninterest expenses in the first quarter were $10 million to $20 million lower than the quarterly run rate we expect for the remainder of the year.

This slide lists a few areas where we expect to see an increase next quarter. But even with these increases, we remain committed to positive operating leverage for the full year.

On the credit front, overall credit quality is expected to experience continued improvement and net charge-offs well in the normalized range this quarter -- this past quarter, are expected to remain volatile but reach sustainable normalized levels by the end of 2013. The level of provision for credit losses was at the low end of our long-term expectation.

In summary, the environment remains challenging but 2013 is off to a solid start. The first quarter had some strong areas of performance: Double-digit annualized consumer and commercial relationship growth; net interest margin up 2 basis points from a year ago, with the cost of funds dropped another 23 basis points during that period; nearly $20 million in linked quarter decline in expenses; increased cross-sell across the board; 25% increase in our declared dividend and the approved buyback authorization; 5% annualized loan growth.

Now as with all banks, there was some challenges. Pricing is tight and structure is loosening, but I think we are starting to see some separation between banks. A few of us that continue to invest are just starting to see some of the long-term benefits of these multiyear investments. Our differentiated strategies are working, and we will grow where we have relationship advantages and competitive advantages.

We, our board, our management team and our employees are all long-term shareholders. So above all else, we'll remain disciplined in the use of our capital to drive appropriate risk-adjusted returns.

Thanks for your interest in Huntington.

Todd Beekman

Operator, we'll now take questions. [Operator Instructions] Paula?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Scott Siefers of Sandler O'Neill.

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Steve, I was hoping you could just expand upon some of the comments you made both in the text of the outlook and then toward the -- just toward the end of your prepared remarks there about some of the deterioration in structure and just not only pricing that you're seeing just in the market as a whole.

Stephen D. Steinour

I'll ask Dan Neumeyer to start, and I'll add to it. Dan, why don't you go ahead?

Daniel J. Neumeyer

Sure. Well, as we've said for a number of quarters, obviously, pricing has been under pressure for some time. I think in the last quarter, we actually saw more instances of structural give-ups. And so there are probably more instances where we have actually had to walk away from deals because of structure, and that could be reduction in the amount of recourse on some of the commercial real estate loans, higher cash flow multiples, looser covenants, et cetera, all senior deals being done where we may have seen a strip of mezzanine in the past or deals where we would apply an SBA guarantee that are getting done in the conventional basis. So those are some of the things that probably increased a bit more in the last quarter.

Stephen D. Steinour

Scott, I'll add to that. Auto pricing is a bit sharper, and these are normal recovery competitive dynamics at play and probably even further accentuated by this artificial rate environment.

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Okay. Yes, definitely make sense. And then I was just hoping to ask a question on auto specifically. If you guys have any thoughts on that recent CFPB guidance, anything it will do either to kind of profitability of the business, the way you look at it, et cetera.

Stephen D. Steinour

We, of course, are following it. It's -- there's a lot still to evolve. We started with a view of this business consistent with our Fair Play overall. So we don't have any intended changes at this point and we like the business that we're able to produce today, and we watch this every week. So no change at this point but obviously, focused on what the CFPB is intending to do by way of new regulation.

Operator

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

Ken A. Zerbe - Morgan Stanley, Research Division

My question on auto, what exactly prompted the change in your thought process in terms of the securitizations? And I ask because I think the answer, Steve, you gave in your prepared remarks, you probably could have given that same answer last quarter or 2 or 3 quarters ago. What changes that makes you want to retain more? And I guess also, should we now assume that the balance is -- I know you got plenty of room before you get to your 20%. Should we assume instead of a sort of $4 billion to $5 billion number we average something much higher?

Donald R. Kimble

Ken, this is Don. As far as the thought process behind that, you hit on some of the key points with making sure that we keep below -- we are well below the 20% limitation there, and so we do have a lot of additional room to move up. And part of it too is, is that the -- part of the benefit is really the capital efficiency associated with this transaction and with our current capital actions. We felt that there was capacity to go ahead and keep some of those on balance sheet. Another component that we're focusing on a lot more is, yes, this is a very liquid asset for us, and it is a substitute for certain other investments that we might choose to make. And those other investments in our portfolio would result in potential OCI risk to us. And so that step is another benefit that we're pursuing as far as the securitization transaction decision.

Stephen D. Steinour

There's much more discussion about the debt policy and when does it end, how does it end and timing, Ken, and that's caused us to relook at the -- at OCI risk and, frankly, other balance sheet-related risk.

Ken A. Zerbe - Morgan Stanley, Research Division

Got it, okay. And just a quick follow-up. The sale of your tax credit investments or a portion, does that have an impact on your effective tax rate going forward?

Donald R. Kimble

It will have a slight increase to the tax rate as a result of that but not material.

Operator

Your next question comes from the line of Ryan Nash of Goldman Sachs.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Steve, can you give us just a little bit more color on what drove the policy change in the ordering of transactions? Was it regulatory driven? And can you remind us what the current policy is at this point relative to what it changed from?

Stephen D. Steinour

There was no regulatory effort or initiative around this, Ryan. But as we looked at Fair Play and as we continue to look at Fair Play and how we're proceeding, we look at our -- all of our products. And this is one where we felt it was prudent to make a change. We planned for that change last year and incorporated it into the forecast for this year. We have gone with a change in the logic, so that it's a more chronological and sequential approach. So it starts with electronic transactions, debit and ATM, principally getting posted chronologically. And so that's based on time of transaction. And then checks getting posted sequentially based on check number. Anything else with the date and time stamp we post low to high, and then fees and interest post last. So that's the -- that's -- we think the fairest approach. We have studied a number of banks that have made changes. Few banks haven't made changes yet. We thought this was completely consistent with our philosophy and something that we planned for last year and are pleased to have implemented.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Great. Just as a follow-up, just in terms of your expectations for loan growth, particularly in the C&I business, you are assuming a pickup in the back half of the year, are you still assuming no change to the economic environment? Is this more about just on-boarding clients and getting pipelines converted?

Stephen D. Steinour

Well, there was a sense that -- and a hope that we would have more stability out of Washington, fiscal policy that would set an outcome together in the first half of the year that the outlook was based on. Because heading into the New Year with the first cliff on January 9 to us presented a higher risk. And our calling activities for the first quarter were very consistent month-to-month, but we just found deferrals of decisions going on. And to some extent, there was a bit of pull-forward more than we expected out of the capital markets business that was probably tax-related at year-end. So we're sitting as we come into the second quarter -- or as we went to the first quarter, January was a disappointing month; February, got a bit better; March, much back -- much closer to normal. As we come into the second quarter, we're sitting with a strong pipeline in commercial. But the overall activities month-to-month for the first 3 months and continuing through April are essentially the same in terms of calling activity and contact. So I think that second half will continue and we may -- given that where the pipeline is, we expect to have a good second quarter.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Okay. If I could squeeze one last one in. Steve, you commented that auto is sharper, are you just seeing competitors conceding on price, or are you actually seeing loosening of standards, things around like lease terms, residuals and stuff? Any clarity there?

Stephen D. Steinour

There's more leasing activity to be sure that's emerging, and that becomes challenging in terms of volume. That's particularly true on the new side. So pricing on new is -- I should have clarified my earlier remark, it's much more around new car pricing than used, even though we do a majority of our lending on used and we're seeing that mix continue to shift up a bit. So that has given us more capacity to adjust and retain pricing at the levels we want.

Operator

Your next question comes from Ken Usdin of Jefferies.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Don, a couple of questions on the fee side. So with the mid-February change, can we assume that the fee change impact is halfway through from a run rate perspective, to that -- to get to that $25 million? How do we think about the $25 million to $30 million as far as what was in the first quarter run rate?

Donald R. Kimble

I would assume those changes as far as check order were done in early February, so the impact in the current quarter was roughly about a $5 million impact. Keep in mind, too, that there is some seasonality to the fees with the fourth quarter tending to be higher than what the first quarter activity level would be.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Yes. Okay, got it. And my second question is I just wanted to understand the base starting point for that stable fee comparison. So last year fees were $1.1 billion. You talked about going x auto sales, x MSR, that was 40 and 14, and then x the bargain purchase gain. So is it fair to say that, that core base is about $1.03 billion as a start? And then you think about moving parts to fee out -- the fee change, core growth, mortgage challenges and then you go from there?

Donald R. Kimble

I think you've summed it up pretty well, yes. So we will be backing out the impact of the auto securitization gains and MSR for both periods. And then on a core basis, we would expect the growth in core revenues to offset some of the challenges we're seeing mainly on the mortgage side compared to the previous year.

Operator

Your next question comes from Matt O'Connor of Deutsche Bank.

Adam Chaim - Deutsche Bank AG, Research Division

This is actually Adam Chaim in for Matt O'Connor. I have a couple for you. Looking back 2 to 3 years, you expanded your auto business into new geographies. I don't think you've done much since. Is there additional opportunity for expansion possibly to continue to fuel the securitization sales? And the second one is -- actually, go ahead.

Stephen D. Steinour

Sorry, Adam, I didn't mean to cut you off. This is Steve. We were always thinking about expansion and we don't have any commitments to do so at this point. But we like the asset class and we like the performance of it over time and believe we've got some competitive advantage with it, so there's a continuous assessment.

Adam Chaim - Deutsche Bank AG, Research Division

Okay. And the second one is last quarter you noted that, in response to your economic outlook, you moderated the pace and size of planned investments. This might be looking a little bit further out, but what signs are you looking for to reset investment spend back to previous levels?

Stephen D. Steinour

We would -- I think, if we get a fiscal plan in Washington that there's an economic expansion that will be stronger than the current outlook for GDP. And that would be something, I think, we could confirm fairly quickly in our commercial base with decisions that have been deferred. And in that context, if we see an expansion, our customer is actually moving more dynamically than we would follow.

Operator

Your next question comes from Josh Levin of Citigroup.

Josh Levin - Citigroup Inc, Research Division

Steve, can you just elaborate on something, I think the answer to one of the previous questions. What specifically are you seeing that gives you confidence that the C&I loan growth will pick up at the back half of the year? Is it just primarily the pipeline?

Stephen D. Steinour

Well, pipeline activity and then discussions with the different customers that sort of went into a wait-and-see mode in the first quarter. They have plans that are very specific. They actually have sales outlooks and in some cases even demand that will cause them to expand. Here in the Midwest, we talk about auto manufacturing and energy as being drivers in our commercial book. But emerging in the first quarter is also the housing side. There's been a stabilization, an increase in new housing start in many of the markets that will also, I think, be sustained and felt during the year.

Josh Levin - Citigroup Inc, Research Division

Okay. And just a quick question about credit. It looks like the TDRs were up quarter-over-quarter and year-over-year. Any color on that?

Daniel J. Neumeyer

Yes. So the increase in the TDRs was primarily in the home equity category. We've got some of our 10-year balloons starting to mature. And so in many cases, the best alternative for both the customer and ourselves is to put them into a 20-year amortizing product, and so that's what we've done here. But the reason they're categorized as TDRs is in some cases or in many of these cases, based on their FICO score or the LTV in the property, we wouldn't have originated a new loan with a 20-year am. And therefore, we view that as the concession. So I think it's a great outcome for the customer. It's the right outcome for the bank. But we are designating those as TDRs.

Operator

Your next question comes from Bob Ramsey of FBR.

Thomas Frick - FBR Capital Markets & Co., Research Division

This is actually Tom Frick for Bob. On mortgage banking, it looks like your originations held up relatively well this quarter compared to peers. Can you tell us how much of your production is HARP? And how the recently announced HARP extension will impact your mortgage banking going forward?

Donald R. Kimble

Roughly about 1/4 of the production is HARP-related that's fairly consistent with what we saw towards the end of last year. And we think that the extension for 2 years will be net incremental. But some of the things we're excited about are just some of the increased activity as far as purchase mortgages as well. And so our pipeline and our activity level will give us a pretty good clarity as far as the next 30 to 60 days as far as closing, and we've seen a lot of strong volumes there just given the recent rate limits as well.

Thomas Frick - FBR Capital Markets & Co., Research Division

Okay, great. And then to follow up on gain on sale margins. Looks like you experienced a 140 basis points of contraction this quarter. I mean, do you expect that to stabilize from these levels?

Donald R. Kimble

Well, one, the origination volumes include those that we keep in portfolio. And so if you just look at the volume that we actually sold in the secondary market, the reduction will be about 19%. And so what we did see as far as the actual contraction and gain on sale was about 30 basis points. So it was far less than what you're showing there, but that's mainly because of the difference of what we're keeping on books versus selling.

Thomas Frick - FBR Capital Markets & Co., Research Division

Okay, so how much did you sell?

Donald R. Kimble

We sold roughly $800 million this year out of the $1.1 billion originations.

Operator

Your next question comes from Keith Murray of Nomura.

Keith Murray - Nomura Securities Co. Ltd., Research Division

Could we focus in on the loan pricing, is there sort of a floor whether it's related to ROE or related to a spread where it hit the limit and you guys decide to walk away?

Donald R. Kimble

Yes. We clearly have that at every individual product and every individual relationship and we have pricing grids for our commercial and also for consumer. And Dan's team is part of the credit approval process, who review the return that we're getting on, the extension of credit and making sure that we're remaining disciplined there. That's one of the reasons why we believe that we've been able to maintain a very stable margin compared to many in the business and combined that with the aggressive management of our deposit costs that allowed us to keep that stability.

Stephen D. Steinour

In the first quarter, we've walked away from more than we have in any prior quarter as a consequence to that risk return trade-off.

Keith Murray - Nomura Securities Co. Ltd., Research Division

Okay. Any specifics on sort of what the ROE limit might be?

Donald R. Kimble

We haven't publicly stated what our floor ROE is, and we do have guidelines for each of our bankers, and they are well aware of it. But they haven't provided any additional guidance there and we remain very disciplined on that.

Keith Murray - Nomura Securities Co. Ltd., Research Division

Okay. And then on Basel III, if you guys are willing to provide an update and where you guys are in Basel III?

Donald R. Kimble

We really haven't. The last time we had provided that was second quarter of last year. It was about 150 basis point hit to our Tier 1 common, and we feel it's in our best interest to wait until the rules are finalized before we update those. But we're reluctant to provide any clarity there until we get clarity on what the new rules are going to be.

Operator

Your next question comes from the line of Kevin St. Pierre of Sanford Bernstein.

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

A couple of points on net interest margin dynamics sequentially. Your spread was stable but the contribution from noninterest-bearing deposits was down about 3 basis points. There was about $1 billion decline, almost $1 billion decline in noninterest bearing, average noninterest bearing. But the period-end balances were significantly higher than the average. Is there anything unusual with respect to noninterest-bearing deposits during the quarter?

Donald R. Kimble

Throughout the quarter and some of these occurred late in the fourth quarter, but that we had 3 impacts really drove some of the changes. One was the impact of our decision to reduce some of our collateralized deposits. Again, we mentioned earlier in the call, concerns about the OCI risk prospectively. And for collateralized deposits, we're required to keep 105% of those balances in basically agency-backed securities, which today in the market are earning somewhere between 150 and 175 basis points. And we feel that there is real risk to our OCI for maintaining that and there isn't sufficient reward for those deposit relationships. Second was the expiration of TAGP, and that had a couple hundred million dollar type of impact to our balances and has resulted in a much more stability there after that. So it's not a large impact but it did add some. And the third was the combination of normal seasonal trends we see going from fourth quarter to the first quarter, but also we did see some of our small business banking customers start to utilize some of their cash positions as opposed to draw down on lines and ask for additional credit. And so those really contributed to the remaining piece of the impact on DDA balances.

Kevin J. St. Pierre - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then somewhat related to that, as you look forward to an eventual rise in rates, could you talk about your assumptions in terms of your rate sensitivity and what you give us quarterly around the impact of potential rise in rates on what your assumptions are around the retention of noninterest-bearing deposits, and whether the Fair Play sticky customers might have -- might actually mute that?

Donald R. Kimble

We think that clearly we'll have a benefit and an advantage for us as we look at our deposit mix. And to date, our deposit mix is more biased toward the retail side than the commercial side compared to many of our peers. And as a result of that, we'll have greater stability in that deposit mix and base even when rates do increase. We continue to watch and try to anticipate what the impact would be for our commercial borrowers. But keep in mind that a significant portion of those balances are being utilized to help offset the deposit service charges and activity fees that will require them to still maintain some of those balance even as rates go up. And so we think we'll be well positioned as far as retention of those balances.

Operator

Your next question comes from the line of Erika Penala of Bank of America Merrill Lynch.

Erika Penala - BofA Merrill Lynch, Research Division

My first question is a follow-up to Scott's question on the CFPB release on dealer markups. Some investors have concluded that this could potentially have further downward impact on spreads on that business. And I just wanted to get your thoughts, is it way too early to draw that conclusion? Or is the way that release is written lead you to believe that, that would have no impact to the dynamics of pricing?

Stephen D. Steinour

It's too early, Erika, to reach that conclusion. There's a lot of ongoing discussion, I believe, with some in the industry, some of the larger ones in the industry and the CFPB. And obviously, a lot of industry concern where auto is recovering, not to somehow inadvertently dislocate financing in the market.

Erika Penala - BofA Merrill Lynch, Research Division

Okay. And my follow-up question is one to Ken Usdin's question. I think the investor community looks at the year-over-year progression on deposit service charges as part of their measure of the success of Fair Play. And, Don, to your point, if the posting order change added -- or deducted $5 million from the run rate, and we look at that comparison year-over-year and you add that back, is it fair to conclude then that the year-over-year progression on an apples-to-apples basis on this line item was up 9%?

Donald R. Kimble

I think that's a fair analysis, Erika. Yes.

Operator

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

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Question that you have a comment on the release about expecting to keep a greater portion of mortgages on the balance sheet. Could you just talk a little bit about that decision, and what makes sense and what doesn't make sense?

Donald R. Kimble

Yes, this is Don. And as far as that decision, we're keeping some of our 10- and 15-year fixed rate, fully amortizing mortgage loans on balance sheet over the last year. So we've been selling those off as far as the production. The benefit to us there is, is that right now, with the Fed in the market on a monthly basis buying $85 billion of the same type of product we would usually buy and put in our investment portfolio, we feel that the spreads are tight there, and by keeping the mortgage loans on our balance sheet, it still provides us a very active source of liquidity and minimizes the OCI risk, again, for us. And so that again is another substitute that we feel is appropriate. The 10- and 15-year paper is fairly predictable as far as cash flow and is underwritten by Huntington. And so we're very confident with the underlying credit quality associated with that as well.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

So similar in some ways to the auto decision but maybe a little different duration -- dynamic?

Donald R. Kimble

Very consistent, yes.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Okay. And then just a follow-up to the many follow-ups on auto. But how do we think about the size of the held-for-sale portfolio, meaning the size of the securitization later in the year, and how do you make a determination in terms of what to put on the balance sheet or what to put on held-for-sale?

Stephen D. Steinour

We originate the same quality and have -- so we're -- from a credit -- we're indifferent whether we securitize or hold it. And then as we approach year end, we'll have a number of factors to look at, including where we think interest rates are going and response to QE and OCI risk, as well as our outlook in terms of '14 production with -- we have a fair amount of room with our 20% cap. We're originating $4-plus billion a year now, so we will have a combination of factors to go through [ph].

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

So there's no plan to keep it all on the balance sheet, it could go in either bucket?

Donald R. Kimble

Well, essentially, we've put it all in our loans initially. And then as we get closer to making a decision for securitization, at that point where it becomes probable, we do transfer those balances into a held-for-sale type of category. So what goes in the securitization is almost identical to what we keep on the balance sheet. So there isn't a designation at time of origination, of this loan is for the securitization and the other loan is for our portfolio. And so we make those decisions and transfers as we get clarity on the timing of the securitization transaction.

Operator

Your next question comes from the line of Craig Siegenthaler of Crédit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

I just wanted to make sure I heard one of your points in the prepared remarks near the end of the call. Steve, did you guide up NIE for the remaining quarters of 2013 by $12 million? I may have missed what you said there.

Stephen D. Steinour

We said $10 million to $20 million, and that will be seasonal -- comprised of seasonal differences and marketing principally, along with commission and related incentive with incremental capital markets and other fee products that are sold.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And does that also cover professional services and also litigation, travel, which I think were also low? Or do you think those items will remain kind of at this new base here?

Donald R. Kimble

We don't provide a lot of guidance on individual line items. I'd say that in general, some of those categories were closer to the long-term rates but that there are some variability in some of those categories based on activity.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And then can you just help us with your expectations for the securities portfolio here given both kind of what you think on the loan growth and deposit side? And also loan -- securities yields are actually still quite elevated. And I'm wondering, is that really held-to-maturity math driving that? Or is it short-term lower yielding securities that are running off?

Donald R. Kimble

As far as our guidance, we would show that securities portfolio coming down over the remainder of the year, reflecting both the decision on the mortgages and also the indirect auto. And it wouldn't be quite a dollar-for-dollar offset but it clearly would have some impact there. And as far as the yield holding up, it's a combination of factors that you did talk about. Some of the lower yielding securities have matured. We did have some variable rate securities or short-duration type securities that have either matured or have been sold off. And we have seen a little bit of a shift in some of the mix that some of the purchases that we have been taking over the last quarter or so have been slightly longer in duration but less extension risk, so we've been looking at more bullet type of securities than what we had historically.

Operator

Your next question comes from the line of Steven Alexopoulos of JPMorgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

I wanted to start, looking at the growth in consumer checking accounts in the first quarter, it was around 36,000. Can you give us a sense, what was the average balance of these accounts when the account was initially opened?

Donald R. Kimble

I don't think we've provided a lot of details on that because as those accounts that are initially opened, usually take at least 90 days to see -- to build up. And so I would say that generally the new accounts that we've been adding, we probably had an outsized proportion coming from our in-store and we have publicly stated that the in-store deposit balances on average have been coming in at a lower level, that the customer base there tends to be a little bit younger, still high income levels and good demographics. But as a result of their age, coming in at a slightly lower balance. But again, generally, we've been pleased with the accounts we've been picking up.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay. When I look at the consumer checking revenue, which I guess is up $2 million or $7 million if you adjust for the check ordering, and the new checking households are up 131,000 year-over-year. What am I missing, that it doesn't appear you're making that much of a return on the new customers you're bringing over?

Donald R. Kimble

So what's impacting our retail business in general and is impacting on all retail businesses throughout the country is just this lower rate environment continues to phase in. And so the credit that they're receiving as a business segment for those deposit balances continues to shrink. And so the margin that we're seeing for that business is lower than where it was historically. The benefit for that is it offset another area, which should allow us to maintain a favorable margin but low rates have a clear negative impact on the margin for retail.

Stephen D. Steinour

So the funds transfer pricing reduces what would -- if we did this on a constant basis, you'd see a much different number. Part of the reason we like this rate of expansion, when we get to a normalized curve, there'll be a significant incremental contribution coming off of that deposit base.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

I get it. That's helpful. And just one follow-up on the margin. Where do you see the portfolio loan yield bottoming?

Donald R. Kimble

We really haven't talked about that explicitly either. What we continue to talk about it is that our guidance would suggest that margin will still remain above the mid-30s at those levels throughout the year, and that anticipates further compression on loan yields.

Stephen D. Steinour

That's mid-3.30s.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Mid-3.30s. Steve, did you say in your comments that you thought the margin would be relatively stable this year?

Stephen D. Steinour

Well, I think we've tried to guide that outlook from the fourth quarter. As for the full year, mid-3.30s. We were pleased with the first quarter at 3.42%.

Operator

Your next question comes from the line of David Long of Raymond James.

David J. Long - Raymond James & Associates, Inc., Research Division

So within your footprint, are there any MSAs where you're seeing a stronger pipeline of C&I or where your business customers seem to be more bullish?

Stephen D. Steinour

We have, I think, strength in the number of the MSAs. It's hard to compare one versus another, David, not to ignore the question. There is -- economy in Pittsburgh is doing quite well. The economy in Indianapolis, equally strong. So the 3 largest cities in Ohio are doing well. So Michigan is doing well. So can't distinguish one from another.

David J. Long - Raymond James & Associates, Inc., Research Division

What about on pricing pressure within C&I. Is it more intense in any particular MSA that you can talk about?

Stephen D. Steinour

Not really.

Operator

Your next question comes from Jack Micenko of SIG.

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

On the marketing line, I know, Don, you don't give guidance. And the press release talked about a ramp-up on the marketing program at the end of quarter. You've been around $75 million in '11 and '12 on the full year. Is it reasonable to think that the full year number reverts back to that historical trend with that new program coming on late in the quarter?

Donald R. Kimble

The $75 million is more of on a historic definition of marketing that we did change and loosen the things out of marketing that were more contract related and not necessarily marketing specific. And so if you look at the last calendar year that we had about $64 million of marketing and -- or $11 million of marketing in the first quarter of this year would be fairly comparable to that general type of trend with the various seasonal changes.

Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Okay. Okay, great. And then Steve, you're talking about earlier a definitional change in cross-sell. And I was wondering if you could -- as you do the transaction ordering, maybe talk about to and from, so to speak, where it is, what the material changes maybe would be and what to look forward next quarter when those new numbers come out.

Stephen D. Steinour

So we won't have financial impact, and we're still working through it. So I don't want to be -- it'd be premature for me to comment. The -- and it's consistent with us moving from 4 to 6 products per household and just relooking at it. We're trying to focus on quality and revenue as we do this. But we'll have more to talk about next quarter.

Operator

Your next question comes from Terry McEvoy of Oppenheimer.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

First question, are you seeing different competitors on the lending side in the Midwest? Or has the competitive landscape changed at all in terms of the names? The reason I ask is that the bank that reported yesterday showed loan growth in Michigan for the first time in a while, and it's a well-known bank in that state.

Stephen D. Steinour

Well, it's essentially the same list of competitors, some may be more active or have had more focus than recently, but we've been competing against the same group over the last 4 years or more.

Daniel J. Neumeyer

Yes. And Terry, this is Dan. I would say that basically, the competitors are the same. We have seen a few of our competitors move a little bit more in and out of the market over the last few years as they've been looking at either to move away from commercial real estate or auto exposure, et cetera. And I think now some of them are starting to come back in. So that would be probably the one difference is maybe a couple of the banks starting to be more interested in Michigan again.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

And then my follow-up, weeks doesn't pass without an article about the growing acceptance of prepaid debit cards. I'm just wondering how does that trend, if it does impact the Asterisk-Free product, the 24-Hour Grace product that you guys have. And is that a threat at all to future growth?

Stephen D. Steinour

Well we don't offer a reloadable or prepaid at this time. We do not see it having a meaningful impact on our Asterisk-Free. And the uniqueness of 24-Hour Grace continues to be compelling, even though the vast majority of our customers will never use that feature.

Operator

Your final question comes from the line of Brian Foran of Autonomous.

Brian Foran - Autonomous Research LLP

I guess, you've referenced a couple of different changes around OCI risk and maturity extension. And I guess, it's a general thought process that you're looking at the market and actually worried about Fed coming out earlier, how the specific rates for you versus how much of it is driven by some increased concern around rates being part of the stress test and you don't want it to affect your capital planning going forward. I guess more broadly, just why so much focus on OCI and the maturity extension this quarter incrementally?

Stephen D. Steinour

It's nothing to do with stress test. It's a more a view and a forward positioning and trying to be in a position where we've got a very, very sound balance sheet in a different rate environment. And so we saw a backup early in the year in rates, and it -- as a consequence, we reacted. And we think what we're doing is proof for the long-term interest of the shareholders.

Thank you very much. We're very grateful for the interest. I appreciate the questions and the exchange today. Todd is available as he has been in the past if there are follow-ups to any of the questions. Have a great day. Thank you.

Operator

Thank you. This concludes your conference. You may now disconnect.

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