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Huntington Bancshares Incorporated (NASDAQ:HBAN)

Q2 2013 Earnings Call

July 18, 2013 10:00 am ET

Executives

Todd Beekman - Director of Investor Relations

David S. Anderson - Interim Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Controller

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

Analysts

Ken A. Zerbe - Morgan Stanley, Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

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

Brian Foran - Autonomous Research LLP

Bob Ramsey - FBR Capital Markets & Co., Research Division

Erika Penala - BofA Merrill Lynch, Research Division

Josh Levin - Citigroup Inc, Research Division

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

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

Operator

Good morning, my name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to Huntington Bancshares Second Quarter Earnings Conference Call. [Operator Instructions]

Thank you. I'll now introduce and turn the call over to Mr. Todd Beekman. You may begin your conference.

Todd Beekman

Thank you, Tracy, and welcome. This is Todd Beekman, the Director of Investor Relations for Huntington. Copies of the slides that we will be reviewing can be found on our IR website at www.huntington-ir.com.

This call is being recorded and will be available for rebroadcast starting about after an hour after the close of the call. 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.

The presentation will reference non-GAAP financial measures. And in that regard, I direct you to the comparable GAAP financial measures and reconciliation of the comparable GAAP financial measures within the presentation, the additional earnings material released this morning, and the related 8-K, all of which can be found on our website.

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

Let's turn to Slide 5. Participating today are Steve Steinour, Chairman President and CEO; Dave Anderson, Interim Chief Financial Officer; and Dan Neumeyer, Chief Credit Officer.

Let's get started. Dave?

David S. Anderson

Thank you, Todd. I will review our 2013 second quarter financial results. Next, Dan will provide an update on credit. Finally, Steve will provide an update on household and commercial relationship growth, as well as expectations for the balance of 2013.

Turning to Slide 7. Huntington had a good second quarter. Results were very similar to the previous and year-ago quarter. For the second quarter, we reported net income of $151 million or earnings per share of $0.17. This resulted in a 1.08% return on assets and a 12% return on average tangible common equity. Fully-taxable equivalent revenue was $680 million, a decrease of less than 1% from the year-ago quarter. Net interest margin was 3.38%, down 4 basis points. Total average loans were up 1% over the last year-ago quarter. C&I and Automobile loans both increased by 6%. These increases were offset by a decrease in Commercial Real Estate loans of 17%.

Fee income was down slightly as lower mortgage banking income and lower gains on the sale of Low Income Housing Tax Credit investments were offset by growth in electronic banking, service charges on deposits, and trust and brokerage fees.

Expenses increased $1.6 million or less than 1% from the year-ago quarter. Salary and benefits increased due primarily to headcount growth in our in-store initiative and mortgage business. The increase in salaries and benefits was largely offset by lower expenses in marketing, consulting, legal, OREO and foreclosure, and mortgage representation and warranty claims. We continue to focus on controlling expenses as we make prudent investments for the future.

The new rules for Basel III were released 2 weeks ago and we are evaluating the impact on Huntington. At this time, we estimate that the Tier 1 common ratio would decrease by 60 basis points under the final Basel III rules. This potential impact is meaningfully better than our prior estimate of 150 basis points based upon last year's proposed rules. Steve will provide additional detail later in the call, but you can see that our optimal customer relationship methodology is continuing to drive success throughout the company. Consumer household and commercial relationships continue to grow at a pace above that of our regional footprint, and importantly, customers are building deeper relationships with Huntington.

Turning to Slide 8. Dan will cover credit in more detail later in the call, but you can see that credit quality continues to improve in the second quarter. Net charge-offs decreased by $49 million over the last year to an annualized rate of 34 basis points. Charge-offs are now better than our long-term goal of 35 to 55 basis points, a few quarters earlier than we expected.

Even with the addition last year of $63 million related to Chapter 7 consumer loans, nonaccrual loans were down $111 million or 23% over the course of the year, and now represent 87 basis points of total loans and leases.

Our capital remains strong. Tier 1 common risk-based capital increased 63 basis points to 10.71% over the last year. As we compare our results to the first quarter of 2013, net interest margin of 3.38% was down 4 basis points from the last quarter. Mortgage banking income was almost down $12 million to the first quarter of 2013. Last quarter also included a $7.6 million gain from the sale of Low Income Housing Tax Credits. Expenses increased less than 1% due to seasonal-related changes and a 1% increase in headcount.

In the second quarter, we repurchased 10 million shares of stock at an average price of $7.50 under our 2013 capital plan. As a reminder, we have the ability to repurchase up to $227 million dollars worth of common stock from the second quarter of 2013 to the first quarter of 2014, leaving $152 million of authorization remaining for the next 3 quarters. The quarterly level of repurchases will vary based upon the stock price.

Slide 9 is a summary of our quarterly earnings trends and key performance metrics. While this is a great snapshot of our recent results, many of these items will be discussed elsewhere. So I'll move on to Slide 10.

On this slide, we show the breakdown of operating leverage for the first half of the year. In this slide, we measure the growth of revenue and expenses, adjusted for significant items and for the volatility from MSR, the auto securitization gains and last year's bargain purchase gain from the Fidelity acquisition. On the adjusted basis, revenues increased by 0.2% and expenses increased by 0.6%, creating negative operating leverage for the first half of the year. We remain committed to delivering positive operating leverage for the full year, and expect to deliver this through an increase in net interest income and our continued focus on controlling and reducing expenses.

Slide 11 displays the trends of our net interest income and margin. The right side displays a 4 basis point decrease in our net interest margin over the last year to 3.38% for the quarter, which reflected the impact of a 22 basis point increase from the reduction of deposit rates in non-core funding, which reflects the continued benefit of our net remix of deposits and the redemption of trust preferreds; a 21 basis point decline in earning asset yield; and 5 basis points of lower benefit from noninterest-bearing funding.

The right side of Slide 12 shows the improvement in our deposit mix. The improved deposit mix reflects the success of the Fair Play banking strategy by remixing and growing consumer and commercial no- and low-cost deposits. This improving mix has contributed to the 15-basis point decline in the average rate paid on total deposits over the last 5 quarters. On the left side, you'll see the maturities schedule of our CD portfolio, which represents a potential opportunity for continuing to lower our deposit costs, as new CDs are coming in around 30 basis points.

Related to the last 2 slides, we have added a slide to the Appendix, Slide 39, that provides some additional granularity on the breakout of fixed versus variable rate for assets and liabilities.

Slide 13 provides a summary income statement for the last 5 quarters. I spoke earlier about several of the notable changes in non-interest income and expenses, but I would like to touch on these in more detail. Compared to the last quarter, mortgage banking income was down almost $12 million, as the net benefit from the MSR decreased by a similar amount. The vast majority of the MSR asset is held at lower cost to market. With recent increase in the long-term yield -- the long end of yield curve, the asset is now valued on the cost side of that calculation.

Service charges on deposits increased $7 million, as not only commercial treasury management activity picked up, but seasonal trends in customer activity and an 8% annualized growth in consumer checking households more than offset the approximate $2 million drag from the full quarter impact of February's change in posting order.

Capital markets activity increased by over $4 million, to $12 million, which is around the quarterly run rate prior to the particularly low level in the first quarter. As we discussed then, we expected a slowdown in commercial customer activity. As you can tell, that picked up in the second quarter, but it's still not back to what we think is normal. Expenses increased less than 1%, as second quarter marketing experienced its normal seasonality, and personal expenses increased due to a less than 1% increase in headcount and modest merit increases for non-executives. These were offset by lower credit-related costs such as OREO and foreclosure, and lower rep and warranty expenses.

Slide 14 reflects the trends in capital. The tangible common equity ratio decreased 14 basis points from the prior quarter. The decrease was primarily due to a reduction in the value of our investment securities portfolio caused by rising interest rates that flow through to accumulated other comprehensive income. Over the last year, the Tier 1 common risk-based capital ratio increased from 10.08% to 10.71%. Our capital ratios were also impacted by the repurchase of common shares. Total common stock repurchases over the last 4 quarters were 31.6 million shares at an average price of $6.85 per share.

As I mentioned earlier, we currently estimate that Basel III will negatively impact our Tier 1 common ratio by approximately 60 basis points, which is mostly driven by the change in asset risk weightings.

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

Daniel J. Neumeyer

Thanks, Dave. Slide 15 provides an overview of our credit quality trends. Credit quality trends were again very positive in the quarter. The net charge-off ratio fell to 34 basis points on an annualized basis compared to 51 basis points in the prior quarter. This level of charge-offs falls below our longer-term targeted range of 35 to 55 basis points, and is aided by an improved economic environment and healthy recoveries.

Given the absolute low level of charge-offs, some volatility from quarter-to-quarter is likely, although we expect the overall level to continue to be positive. Loans past due greater than 90 days and still accruing were down slightly in the quarter to 23 basis points and remained very well-controlled. The nonaccrual loan ratio showed continued modest improvement in the quarter, falling to 0.87% of total loans. The NPA ratio showed similar improvement, falling from 101 basis points to 95 basis points. The criticized asset ratio also showed improvement, falling from 4.49% to 4.24%.

The allowance for loan and lease loss and the allowance for credit loss to loans ratios fell in the quarter to 1.76% and 1.86%, respectively, down from 1.81% and 1.91% in the prior quarter, reflecting continued asset quality improvement. The ALLL and the ACL coverage ratios both increased modestly due to the reduction in nonperformers in the quarter.

Slide 16 shows the trends in our nonperforming assets. The chart on the left demonstrates the continued reduction in our NPAs, falling another 5% in the second quarter. The chart on the right shows the NPA inflows, which fell in the quarter to 25 basis points of beginning of period loans. We expect this basic trend to continue.

Slide 17 provides a reconciliation of our nonperforming asset flows. As I mentioned before, NPAs fell by 5% in the quarter, and the level of NPA inflows was the lowest experienced in the last year, and is less than 50% of the level of inflows from 1 year ago.

Turning to Slide 18. We provide a similar flow analysis of commercial criticized loans. This quarter saw a similar level of inflow as the prior quarter, with upgrades, paydowns and charge-offs contributing to a 5% reduction for the quarter. All of our reported results incorporate the findings of the recently completed Shared National Credit exam.

Moving to Slide 19. 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. 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 20 outlines consumer loan delinquencies, which were in line with expectations. 30-day consumer delinquencies showed a slight uptick from the first quarter. Home equity delinquencies showed improvement in the quarter, although that was more than offset by an increase in residential delinquencies. Although residential delinquencies were up in the quarter, they were 74 basis points lower than 1 year ago. 90-day delinquencies remain very well-controlled and showed modest improvement in the quarter. Auto, home equity and residential all showed modest improvement quarter-over-quarter.

Reviewing Slide 21, the loan loss provision of $24.7 million was down $5 million from the prior quarter and was $10 million less than net charge-offs. The ratio of the ACL to nonaccrual loans rose from 207% to 214%, due to the previously noted reduction in nonperformers. The ACL to loans was lower at 1.86% compared to 1.91% last quarter. Most of the major credit metrics showed continued improvement and, therefore, we believe these coverage levels remain adequate and appropriate.

In summary, we are pleased with the quarter's credit results. We remain focused on quality and discipline in our new business originations in a very competitive environment. With regard to our metrics, we anticipate the possibility of some quarter-to-quarter volatility, but expect overall improvement, including lower criticized loans and lower NPAs.

Let me turn the presentation over to Steve.

Stephen D. Steinour

Thank you, Dan. Turning to Slide 22. 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 8% and have increased 11% in the last year. Since launching this strategy in the third quarter of 2010, we've increased our consumer customer households by over 330,000. In less than 3 years, we've added the equivalent of the entire population of Cincinnati. At the same time, we've meaningfully increased the number of products and services we provide to those customers. In the last year alone, we've increased the number of customers that use 6 or more products, from over 43% to nearly 47%. As we mentioned last quarter, we are beginning to breakout the percentage of customers with 6-plus products because that is the level we've adjusted our internal targets to focus upon. For the last few years, our 4-plus targets are aimed at increasing customer retention, which is important, as it costs less to keep an existing customer longer than it does to bring another customer in the door.

To that end, as we think about incremental customers and revenue generation, consumer checking household revenue increased $3 million since the second quarter of 2012. That's net of an $8 million negative impact related to last quarter's change in posting order.

Turning to Slide 23. Commercial relationships grew at an annualized rate of over 6% and have increased by over 33,000 commercial customers since the second quarter of 2010. At the end of the quarter, 36% of our commercial relationships utilized 4 or more products or services, which is 3% higher than this time last year. Related commercial revenue of $179 million, while down $11 million from a year ago, is up $3 million from prior quarter, as we began to see commercial activity pick back up from below normal levels in the first quarter. The pipeline continue to rebuild and the third quarter is off to a solid start.

Turning to Slide 24 and 2013 expectations, we do have a few changes to our expectations and I will call these out as we go through the slides.

We continue to benefit from the strength in the Midwest economy, and believe our strategies will continue to drive growth and improve profitability. With regard to interest rates, while the long end has seen a high level of volatility, the shorter end of the curve remains low. With our on-balance sheet loans averaging about 3 years in duration, the movement in the long end does not help us all that much, but we expect the low short end to provide continued opportunity for deposit repricing and continued shift in our deposit mix. We expect net interest margin to remain fairly stable, and for the full year, we do not expect it to fall below the mid 3.30s, as a percent. Modest total loan growth is expected to continue, and know that we will remain disciplined. The C&I pipeline is robust, and we continue to expect stronger growth in the second half of the year when compared to the first half.

Auto loan originations remain strong. As we've moved through the quarter, there were several items that we continued to watch carefully. First was the relative attractiveness of incremental securities reinvestment versus auto loans. Auto loans, with their short duration, 3.25% effective yield and very clean credit quality are the compelling asset class in that comparison. The second factor we've been watching is the securitization market itself. And over the last month, rising rates and widening spreads on the senior subordinate tranches leave less excess spread for residual holders and, in turn, results in a smaller gain. And that gain could be reduced by 30% to 40% lower than our last securitization. For those reasons, we do not expect any auto securitization in 2013. This is a change from past expectations, and the net change you should expect is more auto loans and a steady decline of the available-for-sale securities portfolio.

Commercial Real Estate balances should stabilize around the current $5 billion level, and all other consumer loan categories should reflect modest growth.

Deposit balances will continue -- will reflect continued growth in low cost deposits, resulting in total deposit growth in line with or slightly less than loan growth. The other change in expectations this quarter is related to non-interest income. When compared to the 2012 full year, excluding any impact from securitizations, net change in MSR or one-time gains, 2013's expected to be flat to slightly down, as the expected slowdown in mortgage banking should be mostly offset by the benefit of our growth in new relationships with increased cross-sell, and the continued maturation of our past strategic investments. It's worth noting that, yesterday, the board approved the curtailment of pension benefits. This is expected to result in a one-time noncash gain to be recognized in the third quarter. And we'll have more information on this subsequent event in this quarter's 10-Q.

Noninterest expense is expected to increase slightly due to higher commission expense, driven by higher expected fee revenue and the impact of the continued build-out of our in-store branches. The change in pension should lower expense modestly, and we'll continue to evaluate additional cost-save opportunities, as we remain committed to positive operating leverage for the full year. We will deliver positive operating leverage for the full year.

If the revenue doesn't materialize, we will deliver offsetting expense saves. On the credit front, nonperforming assets are expected to experience continued improvement, net charge-offs and provisions are below the long -- the low end of our long term expected range, and we're several quarters earlier than we expected in achieving these results. So very pleased with the work that Dan and all of his team and other lenders throughout the bank, who have been working diligently for years now to improve credit quality and get us to a normal level, and we believe we've achieved that now.

The risk on the balance sheet today is very different than when I arrived in 2009. We've completely overhauled not just credit, but the entire enterprise risk management throughout the organization. We have a much stronger set of practices that we're working from, and a terrific group of colleagues.

In summary, the environment remains challenging, but we have put a few good quarters together, and the year's off to a solid start. The second quarter had some very strong areas, continued household and commercial growth, several times that of the region. That growth and improving customer activity drove improvements in many fee income areas, namely: Service charges on deposits, electronic banking and capital markets, amongst others; nearly flat expenses when compared to linked quarter and last year; increased cross-sell across the board; and net charge-offs reaching normal levels. As with all banks, there were some challenges. Pricing is tight, and structure is loosening, but I think you're seeing some separation between banks. Discipline, during this time of the cycle, we believe is crucial. Decisions now are what impact the balance sheet and credit during the next cycle. The few of us that have continued to invest are just starting to see the long-term benefits of these multi-year investments. And our differentiated strategies are working. We will grow where we have relationship advantages and competitive advantages. And above all else, we will remain disciplined in the use of our capital and deliver appropriate returns.

Thank you for your interest in Huntington. Operator, we'll now take questions.

Todd Beekman

[Operator Instructions] Thank you. Tracy, we'll take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Ken Zerbe from Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

First question just in terms of operating leverage. Obviously, you've not been hitting it. I know it's a big goal of yours. And, Steve, you're very, I guess, enthusiastic about hitting it this year. Maybe sort of just 2 parts to this. One, what's been the problem in terms of getting operating leverage so far, despite your, I guess, efforts to get positive leverage? And then, two, it seems that we're kind of getting to the point where you've missed in the first half, going into second half, are you at risk of, I guess, taking more aggressive actions like cutting -- just not doing any marketing in the back half the year or something that doesn't -- is not necessarily in the right interest of the bank, but yet it allows you to hit your positive number that may not be sustainable going into '14?

Stephen D. Steinour

Well, Ken, we won't do anything that impairs the long-term objectives and returns of the bank. Remember, we're all long-term shareholders. We changed our structures to include hold-to-retirement. So we will not take decisions and actions that will result in long-term trade-offs, such as you're suggesting. The first quarter started off, as we talked before, with a lot of challenge, I think much of that induced by what was going on in Washington. Second quarter was better. We've said all along, we think the second half gets -- will be better than the first half. We are starting the quarter with a strong commercial pipeline. Activities picked up in the second quarter in trust, brokerage, capital markets, treasury and management, a number of our areas that we expect will offset further decline in mortgage. And as we relayed, we expect modest balance sheet growth and discipline around the NIM. So we will deliver positive operating leverage in the second half. And we've announced initiatives around continuous improvement, the hiring of a new executive to help us enhance our management of processes, and bring more economics through to the company, including the customer -- ease at which our customers do business with us. Does this answer that?

David S. Anderson

Quickly, I'll add to it. If you look at our fourth quarter expenses, we had about a $25 million increase in 2012. And that was really due to us really gearing up for regulatory. So we don't expect to see that repeated in the fourth quarter of 2013.

Stephen D. Steinour

Does that answer your question, Ken?

Ken A. Zerbe - Morgan Stanley, Research Division

It does and I appreciate that. I guess my one follow-up question. Just in terms of auto yields, have they changed noticeably over the last couple of months or so? And does that have any impact on your willingness to grow that portfolio faster than you would have, say, 2 months ago?

Stephen D. Steinour

Well, our yields in the last couple of months are essentially the same as what they were previously. There's been yield compression in that asset class over the last year and a half. And as you've seen last year and continuing this year, we remain disciplined on the pricing side. And despite overall increases in new car sales, our originations are flat year-over-year, and that reflects this discipline. As we've said before, we're not playing the market share game here. We were prepared -- we showed it last year, we let market share in Ohio slip a bit in order to maintain price. And our auto business, just to more fundamentally reflect on it, is a lot about relationships. We do a lot with -- on the wholesale side, and we have a single business unit that drives both the retail and wholesale. And we've been at it for a long time.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay, so new loan yields have not gone up in the last 2 months?

Stephen D. Steinour

The new loan yields have not gone up but they haven't -- I think your question was, have you seen any material change. I thought you're implying reduction.

Operator

Your next question is from Craig Siegenthaler from Crédit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Sticking back on the auto loan topic. Can you tell us what the new money yield was in the second quarter on your average indirect auto loan versus a 3.96% balance?

Stephen D. Steinour

We were originating around the 3.25% in the second quarter.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it, helpful. And then second question, and sticking also back to operating leverage. Can you help us quantify the run rate expense saved quarterly from the curtailment of the pension plan?

Stephen D. Steinour

Well, we've not shared that yet, but there will obviously be a run rate impact, which we flagged in the comments. And you'll pick that up with the gain in the Q.

Operator

Your next question comes from Ken Usdin with Jefferies.

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

So just on the context of NIM, the rate of change has been pretty moderate, and you still have the CD benefits coming through. Just wondering as you guys look forward, how close are we getting to that point, with rates now backing up a little bit, where you can see that eventual stabilization of NIM? Do you have that line of sight into what part maybe of next year you think you can start to bottom that out?

Stephen D. Steinour

Well, it's hard to project with all the volatility, even the differences in comments amongst the Fed governors. So we'd be reluctant to venture too far into that. As you know, we're managing it intensely. We will continue. We've shown a lot of discipline. If you look at this overall multi-year period, we still have a fair amount of CD maturities over the next 4 quarters, and the core strategy of growing low-cost deposits continues to work for us. So we're offsetting the asset compression with managing this liability side, both mix and rate, I think reasonably well, and we expect to continue to do that.

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

Okay. My follow-up, just a more specific question. The securities book has looked like it's kind of lapping the comps. The yield on that book has held pretty consistent, although the book has continued to shrink. So I'm wondering, is there any change with regards to what you're putting on now versus what's rolling off and -- or your desires to start building that back up a little bit, especially if the deposit growth continues to be a little bit ahead of loan growth?

Stephen D. Steinour

Well, the change reflected in the conversation earlier is that the investment portfolio reinvest decisions that we make -- we get roughly $100 million, $125 million of cash flow off the investment portfolio a month. We'll be -- instead of putting that back into securities, at this rate, with the outlook in volatility, we will put it the into the auto loans. We like a short duration, higher-yielding asset without the OCI, which is reflected in that substitution, if you will. There'll be -- perhaps, there will be a moment when there's a greater stability that we'll look at that investment portfolio maybe changing directions, but in the -- through this year, we'll stay with not reinvesting and putting it into the auto portfolio.

Operator

Your next question is from Brian Foran with Autonomous.

Brian Foran - Autonomous Research LLP

I guess just on your noninterest-bearing deposits and kind of the core growth in customer households. Can you remind us -- there's some concern there's a noninterest-bearing deposit bubble in the industry, you guys have had one of the biggest remixes, from kind of 15% of deposits precycled, around 29% now, but you're also still a little bit below average, and you've had some pretty clear strategies to grow that. So I guess when you put it all together, a, what are you assuming in terms of deposits when you kind of evaluate your asset sensitivity? And then, b, kind of any thoughts on how your noninterest-bearing deposits will hold up relative to the industry as rates eventually move someday?

Stephen D. Steinour

Well, as we -- when we launched the strategy in 2009 and expressed that in the Investor Conference in '10, it was with the view all along that we wanted to create long-term, relationship-based, low cost deposits, and thus, the emphasis on cross-sell and the reporting on 4-plus products per household. And so in line with that, we found in 2010, in part of that release, that there was a material difference in the stickiness of those deposits if they had 4-plus products or services with us. So having achieved substantial growth in the 4-plus, and now having shifted to 6-plus, it gives us -- and expecting to continue to grow the 6-plus penetration in the overall cross-sell distribution, we think we're going to get a fairly sticky consumer deposit base here, and expect that to be sustaining through a change in rates. We're -- although we've grown at a pace greater than many in the industry, we're still about 5% below the average. So we do expect -- we think we've got great product in Asterisk-Free and our premium checking product, both coming with 24-Hour Grace, unique feature, we think we've got tremendously differentiated loyalty in the base.

Brian Foran - Autonomous Research LLP

And then as a follow-up on capital with all the recent changes, I mean clearly, you come out in a better place. You were in a good place to begin with, but in a better place now. And I just wonder what are kind of the big puts and takes in terms of how it might affect balance sheet decisions going forward. It doesn't seem like it's changed any of your cautiousness around OCIs, I guess I kind of wanted to verify that. And then, also, it's kind of early to talk about next year's CCAR, but with the benefit of a 10% Basel III ratio, how are you thinking about your setup for capital in 2014 and beyond?

Stephen D. Steinour

Well, these -- the rules just came out. We'll have a lot of board discussion about '14. And of course, we'll get, late in the year, the scenario to review. So it'd be very premature to have any commentary on '14. As we've said before, we think our capital is robust. We were pleased this year to be able to increase the dividend. I like to say up 25%, others reflect it's up $0.01. But the 25% sounds good to me. And then the buyback increase year-over-year was helpful. Our capital priorities haven't changed. Our view of our capital being strong is something that, as an organization, we intend to keep strong capital, but we view the Basel III announcements as possibly creating more flexibility within the Fed. And we'll be reviewing that and try to ascertain that as we go forward.

Operator

[Operator Instructions] Your next question is from Bob Ramsey with FBR.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Just wanted to touch a little bit more on expenses. I know you all said the expense outlook is consistent with prior expectations, and I think that was $10 million to $20 million above the first quarter run rates. You're talking about 4 52, 4 62 a quarter in the back half of the year. Is that right?

Stephen D. Steinour

Yes. You're in the right ZIP code.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay. And I guess, going back to the questions about positive operating leverage. I mean, that sort of implies expenses are flat to higher year-over-year, and your fee income and net interest income pieces sort of implied that those items are flat to down year-over-year. I'm just kind of curious what I'm missing.

Stephen D. Steinour

Well, the fee income was flat to down. The net interest income, we expect balance sheet growth, modest balance sheet growth, and that will be additive. And we flagged with this pension and expense savings, there are other expense opportunities that we have been working on and will continue to work on that we expect to translate as well. So we tried to be cautious in our outlook, given the volatility that's just occurred with interest rates, as we think about the second half.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay. So that sounds like you're hopeful to be at least at the low end of the expense guidance?

Stephen D. Steinour

Well, it depends on volumes, because we've got a fair amount of commission-related volume activities. So I don't mean to be cute on this in any way or hedging, but it does in fact reflect activity-based results.

Operator

Your next question is from Erika Penala with Bank of America Merrill Lynch.

Erika Penala - BofA Merrill Lynch, Research Division

My first question is a follow-up to Ken Usdin's question. You've often talked about your short duration securities portfolio as dry powder. And I heard your message loud and clear in terms of opting to retain auto loans instead. I guess, could you remind us on what your concentration sensitivity is in terms of auto loans, the percentage of your loan book? And would that be a signal that you may lever your balance sheet more aggressively if you reach that limit?

Daniel J. Neumeyer

Hey, Erika, this is Dan. We have plenty of capacity and we look at the auto book in several ways. We look at it as a percentage of capital. We also look at how much we want as a percentage of the loan book. And we have over $2 billion of capacity at this time. We can always revisit those guidelines later, but we feel very comfortable that we can continue to hold those on the sheet and not impinge on any of our guidelines.

Erika Penala - BofA Merrill Lynch, Research Division

Got it. And this is for you as well, Dan. The charge-offs for the industry, and for Huntington specifically, have continued to trend at the low end of normal or even below normal. In your experience of past credit cycles, how long do you think the industry can enjoy sub-normal charge-offs for?

Daniel J. Neumeyer

Obviously, a hard question to answer. But we are -- we still see greater than, I would say, average recoveries. And while that will begin to dissipate a bit, they are still strong at this time. We're still enjoying improvement in the overall portfolio, so criticized and classified are still coming down. We've been very disciplined in our new originations, so I wouldn't expect to see lots of new inflows on the things that we've originated since 2009. So I think that there still is a period of time where we're going to experience pretty low levels of charge-offs. Now we're at a level now where the absolute level any quarter could move around, because in the commercial book at 4 basis points, any one deal is going to move that. But I think, in general, we are going to have -- we feel pretty good in the near-term outlook, and even the medium-term outlook, that there will be a fairly low level of charge-offs.

Operator

Your next question comes from Josh Levin with Citi.

Josh Levin - Citigroup Inc, Research Division

So earlier in the year, I think you and your peers sounded more confident about loan growth picking up in the second half the year. And now, it sounds like everyone's sort of dialed back their expectations a little bit about the second half the year. And a lot of this is being attributed to customer confidence. What's going on? I mean, what's really changed out there that's gotten sort of the customer to retrench a little bit? Or is it -- am I wrong, is there some other cause?

Stephen D. Steinour

Well, at least here at Huntington, so I'm talking on behalf of the industry, the expectation was always that the second half would be stronger than the first half. As we went into the year, we saw a scenario where we thought it would be weak, and it certainly was. Coming with a combination of sequestration, debt cliff, health care and tax reform, it just, in my opinion, stalled what typically would be early investment decisions. And that has continued, in part because of some global volatility, although the confidence is better today and has improved off the first quarter consistently. For us, we've remained disciplined. And you can see that in how the NIMs are holding in. And we're very return-focused. So as the competition has heated up, perhaps even more than we might have expected, it's had a bit of an impact as well. But we're -- we've made strategic decisions to be relationship-focused in 2009. We've maintained that discipline going forward. You can see on the commercial portfolio, as a whole, as we report 4-plus cross-sell, that continues to improve, and we'll maintain the course here. So there's perhaps a bit of frothiness that, with our discipline, we're not -- we're just not playing in. And that's having a marginal impact.

Josh Levin - Citigroup Inc, Research Division

What's the bull case for loan growth picking it up? Is it more like a slow ramp? Or is there potential for more like a coiled spring?

Stephen D. Steinour

I would describe it as a slow ramp and, therefore, consistent with our outlook.

Operator

Your next question is from Steven Alexopoulos with JPMorgan.

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

I wanted to start -- I know you said you didn't expect a large ramp in regulatory costs this year like you saw last year. But as you prepare to become a CCAR bank now, how much incremental expense should we be thinking about for the back half of the year?

Stephen D. Steinour

Well, we were clear last year that, through the middle of the year, we expected to file a CCAR. It was only a midyear change. And we invested, I think we disclosed $10 million around regulatory issues. And you can assume quite a bit of that was related to CCAR preparations. So a lot of our investment is in, and we do not expect to have a disclosable level of further investment in the second half of this year.

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

Okay, that's helpful. And then just for a separate question. Regarding the bulletin that CFPB put out in March on dealer markup, at this stage have you seen a change in behavior at the dealer level? And have you implemented any new practices to limit dealers marking up loans selectively?

Stephen D. Steinour

Well, we haven't seen any change with the dealers. And there's been a further request for information. So this is still pending a review and, frankly, a clarification to the industry by the CFPB, but no change in behavior that we've noticed.

Operator

Your next question is from Jon Arfstrom with RBC Capital Markets.

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

Just a question, checking account question on that Slide 22. How much of that growth is coming from the new in-store branches versus the rest of the footprint?

Stephen D. Steinour

The in-stores are outproducing sort of -- as a percentage of total branches, they're outproducing. They're driving about 30% of the checking account production now. This is what we envisioned. We saw them as an acquisition machine when we announced Giant Eagle initially, being able to create dialogue, create hopefully relationship as a consequence of the dialogue to the [indiscernible] activity that our colleagues engage in, plus the 7-day a week, 80 hours of convenience that we offer in that setting. It has proven to work well for us, and we remain bullish on it.

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

Okay, and those are good numbers. And also just on top of that. Just curious how long do you think the runway is in terms of your ability to continue to put up those kinds of growth numbers. I mean, do you feel like you're getting saturated in some markets or are we just very early?

Stephen D. Steinour

Well, we've been -- the Meijer in-store relationship is still very, very early. It was just announced not even a year ago. And this year, we've got over 30 in-stores that are opening. We -- so we think we've got best product with Asterisk-Free Checking account. We've got unique feature with 24-Hour Grace. The Fair Play banking positioning is a big advantage, and we'll continue to invest in the products and the positioning to drive that growth. It's -- we have a denominator effect as we continue to have households in terms of the rate of growth. But we'll continue to add about 30,000 households a quarter, net to the base.

Operator

[Operator Instructions] Your next question is from Ryan Stevens [ph].

Unknown Analyst

Have you -- just a follow-up to Steve's questions. Have you changed your allowable yield spread premium for the dealers?

Stephen D. Steinour

No, we have not. We have not changed it this year. We made changes a couple of years ago.

Unknown Analyst

Okay. I mean how do you envision going forward? Do you want to move to sort of a flat fee? Do you want to move to sort of 2% caps? I mean, how do you think about that?

Stephen D. Steinour

Well, we're going to wait and let the CFPB's position become clear before we make a decision about which direction we're going to go, if any. We may in fact be well-positioned depending on their findings.

Operator

At this time, there are no further questions in queue. I'll turn the call back over to the presenters.

Todd Beekman

Thank you very much for your interest in Huntington. If you have additional questions, feel free to call Investor Relations at (614) 480-5676. Thank you very much, and have a good day.

Operator

Ladies and gentlemen, thank you for joining. This concludes today's conference call. You may now disconnect.

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