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Executives

Todd Beekman - Senior Vice President and 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

Kenneth M. Usdin - Jefferies LLC, Research Division

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

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

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

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Huntington Bancshares Incorporated (HBAN) Q4 2013 Earnings Call January 16, 2014 10:00 AM ET

Operator

Good morning, everyone. My name is Sarah, and I'll be your conference operator today. At this time, I'd like to welcome you all to the Huntington Bancshares Incorporated Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Mr. Todd Beekman. You may begin your conference.

Todd Beekman

Thank you, Sarah, and welcome. I'm Todd Beekman, the Director of Investor Relations for Huntington. Copies of the slides that we'll be reviewing can be found on our IR website at www.huntington-ir.com. This call is also being recorded and will be available for rebroadcast starting about an hour after 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. This presentation will reference non-GAAP financial measures, and in that regard, I direct you to the comparable GAAP financial measures and the reconciliation within the presentation, the additional earnings-related material released this morning and in our 8-K filed today, all which can be found on our website.

Turning to Slide 4. Today's discussion, including the Q&A period, may contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to change, 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 our most recent Form 10-K, 10-Q and 8-K filings.

Now turning to today's presentation. As noted on Slide 5, participants are: Steve Steinour, Chairman, President and CEO; Dave Anderson, Interim Chief Financial Officer; and Dan Neumeyer, our Chief Credit Officer. Let's get started. Slide 6.

David S. Anderson

Thank you, Todd. I will review our 2013 fourth quarter and full year financial results. Then, Dan will provide an update on credit. Finally, Steve will give an update on household and commercial relationship growth, as well as expectations for 2014.

Turning to Slide 7. 2013 was a solid year for Huntington. For the full year, we reported net income of $639 million or $0.72 per common share. This resulted in a 1.13% return on average assets and a 12% return on average tangible common equity.

Fully tax equivalent revenue was $2.7 billion, a decrease of $99 million or 3% from last year. Net interest income increased $1 million. The net interest margin was 3.36% for 2013, which is consistent with our guidance that NIM would be in the mid-3.30s for the full year.

Total average loans grew by 4%, primarily due to growth in commercial and industrial loans, as well as auto. Average commercial and industrial loans grew by $1.2 billion or 8%. Average auto loans grew by $1.2 billion or 25% because we have kept more of these loans on our balance sheet instead of selling them through securitizations.

Commercial Real Estate loans declined $0.8 billion or 13%, but as we've been signaling for the last several quarters, the portfolio ended the year at just under $5 billion and is expected to stabilize.

Noninterest income declined $100 million or 9%. Mortgage banking income was down $64 million, and gains on sale of loans were down $40 million due to no auto securitizations in 2013. Service charges increased $10 million in 2013 despite a decrease of $28 million due to a change that we made in February on posting order for our consumer transaction accounts.

Noninterest expense declined $78 million or 4% from last year. If you adjust for the $34 million of significant items, noninterest expense declined by $44 million or 2%. This decrease was primarily due to lower marketing, deposit and other insurance, professional services and other expense. Other expense declined because of lower mortgage repurchase and warranty and OREO and foreclosure expenses. We continue to focus on controlling expenses as we make prudent investments for the future.

Steve will provide additional details later in the call, but you can see that our Optimal Customer Relationship, or OCR methodology, is working. Consumer household and commercial relationships continue to grow in 2013 at a pace well above that of our regional footprint. And importantly, customers are building deeper relationships with Huntington.

Let's turn to Slide 8. Dan will cover credit in more detail later in the call, but on Slide 8, you can see that credit quality improved in 2013. Nonaccrual loans decreased $86 million or 21% from the end of 2012. Net charge-offs were $189 million or 45 basis points in 2013 as compared to $342 million or 85 basis points in 2012.

Our capital continues to be strong. At the end of 2013, the Tier 1 common risk-based capital ratio was 10.90%, and tangible common equity ratio was 8.83%.

I will now discuss the 2013 fourth quarter financial results as compared to the 2013 third quarter. Net income for the fourth quarter was $158 million or $0.18 per common share as compared to $178 million or $0.20 per common share in the third quarter. As you may recall, the third quarter included 2 significant items: The pension curtailment gain of $34 million; and branch closure and other restructuring costs of $70 million. The fourth quarter also had $7 million of additional branch closure and other restructuring costs. If you adjust for these significant items, net income and earnings per share were very similar between the third and the fourth quarter.

Fully tax equivalent revenue for the fourth quarter was $685 million or an increase of $3 million compared to the third quarter. Net interest income increased $7 million. The increase in net interest income was due to a larger balance sheet. On a linked-quarter basis, average loans increased by 11%, while average core deposits at a linked-quarter basis increased by 9%. Loan growth accelerated in the second half of 2013 as compared to the first half. We've also increased average investment securities in the fourth quarter. The net interest margin declined 6 basis points to 3.28% in the fourth quarter.

Noninterest income declined $4 million, primarily due to lower deposit service charges. Mortgage banking income for the fourth quarter was $24 million, which was close to our expected quarterly revenue of $25 million for the mortgage business.

Noninterest expense increased $23 million in the fourth quarter. If you adjust noninterest expense for the $24 million of significant items across both quarters, which I previously discussed, noninterest expense was essentially flat for the last 2 quarters.

Noninterest expense in the fourth quarter was $446 million. As I previously mentioned, the fourth quarter included $7 million of branch closure and other restructuring costs. If you adjust for this significant item, noninterest expense was below $440 million in the fourth quarter.

Included on Slide 9 are some highlights that I would like to mention. In the fourth quarter, we purchased $1.9 billion of investment securities in advance of the Basel III liquidity coverage requirements. At the end of 2013, we reclassified $600 million of direct purchase municipal instruments from C&I loans to available-for-sale investment securities on our balance sheet.

Huntington was the second-largest SBA lender in the nation during the fourth quarter, moving up 1 spot from our #3 rating for the full year. There are a number of awards listed in the last bullet point on this slide, but the most recent was that Huntington was named the Top Performing Bank, over $50 billion in the nation by Bank Director Magazine.

One additional item that I would like to discuss is the impact of the Volcker Rule on our TruPS CDO portfolio. At December 31, 2013, we had investments in 10 different pools of trust-preferred securities. Eight of our pools are included on the nonexclusive list that are exempt from the Volcker Rule that the Federal Banking Agency released in an interim rule on Tuesday. We have analyzed the other 2 pools that were not included on the list and believe that we will be able to continue to own these investments under the Volcker Rule.

Slide 10 is a summary of our quarterly earnings trends and key performance metrics. While this is a great snapshot of our recent trends, many items were discussed elsewhere, so I will move on to the next slide.

On Slide 11, we show the breakdown of operating leverage for 2013. In this slide, we measure the percentage change in revenue and expenses, adjusted for significant items and for volatility for MSR, auto securitizations and last year's bargain purchase gain from the Fidelity acquisition. For 2013, we delivered on our commitment and recorded positive operating leverage. The economy started the year much weaker than we expected, so we made adjustments throughout the year. We continue to be committed to delivering positive operating leverage in 2014.

Slide 12 displays the trends of our net interest income and margin. The right side of this slide shows a 6-basis-point decline in our net interest margin in the fourth quarter compared to the third quarter. There are a few items worth noting that drive this change. Beyond the regular pressure we have been experiencing on loan repricing due to the competitive environment, there are a number of items that reduced NIM by about 1 basis point each. We added $1.9 billion of investment securities in the fourth quarter. One-month LIBOR was lower in the fourth quarter, and derivative income was lower on our commercial book. NIM will be under pressure, but with a larger balance sheet, our outlook is for moderate increase in net interest income in 2014.

The right side of Slide 13 shows the improvement in our deposit mix. The improved deposit mix reflects the success of our Fair Play banking strategy on remixing and growing consumer and commercial, no and low-cost deposits. The improving mix has contributed to the 10-basis-point decline in the average rate paid on total deposits over the last 5 quarters. On the left side of the slide, you will see the maturity schedule of our CD book, which represents a potential opportunity for continuing to lower deposit costs, as about $2.6 billion of CDs are rolling off at an average rate of 95 basis points, and new CDs are coming out between 20 and 40 basis points. Related to these last 2 slides, please refer to Slide 40, which provides additional granularity on the breakout of fixed versus variable assets and liabilities.

Slide 14 provides a summary of the income statement for the last 5 quarters. I covered the quarterly changes in my previous comments. We will continue to focus on expenses and have changed the pace and level of investment to deliver on our positive operating leverage commitment.

Finally, Slide 15 shows the trends in capital. The tangible common equity ratio increased 7 basis points over the last year. Tier 1 common risk-based capital increased 42 basis points to 10.90%. We did not do any share repurchases in the fourth quarter.

Before we get to Q&A, let me remind you that we are not in a position to talk about our CCAR submission.

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

Daniel J. Neumeyer

Thanks, Dave. Slide 16 provides an overview of our credit quality trends. Credit quality showed continued improvement in the quarter, with positive results in all major areas. The net charge-off ratio fell to 43 basis points, well within our long-term target of 35 to 55 basis points. The 43 basis points includes $10.2 million or about 9 basis points related to Chapter 7 bankruptcy loans that were not identified in the 2012 fourth quarter implementation of the OCC's regulatory guidance.

During the course of the third and fourth quarters, we conducted a detailed review of all bankruptcy loans and are confident that existing charge-offs relating to the 2012 guidance have been recognized. On a go-forward basis, we expect modest additional charge-offs based on new bankruptcy flow activity.

Loans past due greater than 90 days and still accruing were lower at 18 basis points, down from 22 basis points the prior quarter. The nonaccrual loan ratio showed continued improvement in the quarter, falling to 75 basis points. The NPA ratio have showed similar improvement, falling from 88 basis points to 82 basis points. Also, the criticized asset ratio decreased from 4.31% to 3.91%. The allowance for loan and lease loss and the allowance for credit loss to loans ratio fell in the quarter from 1.5% and 1.65% respectively, down from 1.57% and 1.72% in the prior quarter, reflecting continued asset quality improvement. The ALLL and ACL coverage ratios both remain healthy.

Slide 17 shows the trends in our nonperforming assets. The chart on the left demonstrates a continued reduction in our NPAs falling another 6% in the fourth quarter. The chart on the right shows the NPA inflows, which were down modestly in the quarter to 26 basis points of beginning of period loans. We expect a continued positive trend going forward.

Slide 18 provides a reconciliation of our nonperforming asset flows. This quarter saw a reduction in inflows, which, combined with loans returning to accruing status, payments and charge-offs, led to a 6% reduction in NPAs in the quarter. For the year, NPAs fell by 21%.

Turning to Slide 19, we provide a similar flow analysis of commercial criticized loans. This quarter saw a sizable reduction in criticized inflows, a contrast to the 4% increase in the prior quarter. Given that we are at more normalized levels of criticized assets, some quarter-to-quarter volatility is likely. An increase in upgrades and paydowns combined for a 10% reduction in criticized loans for the quarter. For the year, commercial criticized loans fell 16%.

Moving to Slide 20, 30-day commercial loan delinquencies remain steady in the fourth quarter at 48 basis points. 90-day delinquencies fell modestly to 24 basis points and consists solely of Fidelity-purchased impaired loans, which were recorded at fair value upon acquisition and remain in accruing status.

Slide 21 outlines consumer loan delinquencies, which are in line with expectations. 30-day consumer delinquencies showed a modest decrease from the third quarter. Individual consumer categories were somewhat mixed, as home equity delinquencies were flat, residential delinquencies were down, while auto delinquencies showed an increase. 90-day delinquencies remain very well-controlled. Auto and home equity delinquencies were in line with the strong quarterly performance we had seen all year. Residential delinquencies were down noticeably to 5 basis points.

Reviewing Slide 22, the loan loss provision of $24.3 million was up from $11.4 million in the prior quarter and was $22.1 million less than net charge-offs. Overall, asset quality improvements resulted in a reduction in the ACL-to-loans ratio of 1.65% compared to 1.72% in the prior quarter. The ratio of ACL to nonaccrual loans was basically flat at 221%. We believe these coverage levels remain adequate and appropriate.

In summary, we had a solid credit quarter and are pleased with the results. We remain focused on quality and are disciplined in our new business originations in a very competitive environment. With regard to our metrics, we anticipate the possibility of some continued quarter-to-quarter volatility, but expect overall improvement, including lower criticized loans, lower NPAs, and charge-offs within our longer-term targets.

Let me turn the presentation over to Steve.

Stephen D. Steinour

Thanks, Dan. Turning to Slide 23. 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 upward trend in consumer checking account households. For the quarter, consumer checking account households grew by 96,000 households or 8% over the last year. The fourth quarter experienced a normal seasonal slowdown in growth. And since we launched this strategy in 2010, fourth quarters have always been the slowest growth quarter of the year as customers' attentions are obviously elsewhere: Holidays, fewer home purchases, kids returning to schools, et cetera.

Because of this, we tend to spend less on marketing in the late fall and early winter, but you also will notice that the full year marketing expense is down $13 million or 20% as we continue to refine our marketing efforts and investments. Over this last year, we've meaningfully increased the number of products and services we provide to these customers. The chart that you're accustomed seeing is in the appendix, but the broader takeaway is the strategy continues to drive new customers and we are establishing deeper relationships. We now have enough managed data to see that our new customers, those that are 2 and 3 years after they have chosen Huntington, have meaningfully higher retention rates. Revenue is down slightly as we continue to see pressure from the operating environment.

Turning to Slide 24, commercial relationships grew at a rate of 6% and have increased by 9,000 commercial customers since this time last year. Very early in the year, we had a meaningful focus on growing small business relationships, most of which are handled through the branch network. You can see the impact in the first and second quarters. The second half of the year had more focus on product penetration and maturing these customers, and that's why you see the continued increase in 4-plus cross-sell and revenues up $14 million year-over-year.

Now turning to Slide 25. 2013 laid a solid foundation for 2014. The environment in 2013 was different than we thought it would be when we began this journey. The economic interest rate and political environments were more dour and volatile, but that also allowed some of Huntington's strengths to show through. This is a company that can execute.

Dave discussed briefly some of the commitments we made this time last year and how we delivered on those commitments. Many of you didn't think positive operating leverage was going to be possible at the mid-year mark, but we ran through our playbook and slowed the pace and scale of our investments. Going into 2014, we built a similar playbook and will, if necessary, adjust. Right now, we're seeing strong momentum as customers seem to have a slightly better mindset as troubles in Washington, D.C. seem to be less of an issue, and the general economic outlook and confidence is more positive. From our year-end customer calls and conversations with CEOs and business owners, there is now definitely more confidence going into 2014 than the prior year.

Modest loan growth is expected to continue and know that we will remain disciplined. C&I pipeline remains robust, and we continue to see increases in customer activity, which as you saw this past quarter, not only helps the balance sheet, but also fee income, like capital markets, SBA, loan sales and other income such as loan and leasing fees.

Auto loan originations remained strong. 2013 was the best year we've ever had. Originations grew 5%, granted the new car industry grew at nearly 10%, but the industry growth is expected to continue, and we should see a benefit in our originations. We know we will get back into the auto securitization market at some point. But at this time, we aren't expecting any securitizations in 2014, as we have a couple of billion dollars of additional balance sheet capacity.

The remainder of loan categories should reflect modest growth. The loan growth, coupled with higher start point for securities, will drive a bigger balance sheet. NIM is expected to be under pressure as competition remains aggressive. Compared to a year ago, we view the rate environment is adding even more pressure as the Fed expects to hold the short-end of the curve low for a while, and the net interest margin is being further diluted by the mix impact of holding additional Basel III Level 1 securities. Even with these negative pressures, the balance sheet growth we expect should result in moderate net interest income growth for the year.

Noninterest income is expected to decline slightly, much less than you saw this past year, as mortgage banking income was near-normal levels during the second half and within about $1 million of -- in the fourth quarter of what we expected it to be. We expected continued modest pressure on mortgage income, as we think 2014 will not be a normal year. There's just too much refi volume pulled forward, but we've seen a nice pickup in new purchase mix. The rest of the fee income areas continue to mature, although we may look for continued opportunities to refine our product set under our Fair Play philosophy.

Noninterest expense has some noise this year, but the underlying level was lower than the previous year, as we took an active stance around delivering on our commitment of positive operating leverage, a commitment we are extending into 2014. We will deliver positive operating leverage again in 2014.

From here, noninterest expense is expected to remain near current levels. The mix will change as we've increased depreciation for past and current investments, but we expect declines in other areas such as our insurance costs, our outside services, and actions we took in the third and fourth quarter will have continuing benefits.

On the credit front, NPAs are expected to experience continued improvement. Net charge-offs are in our long-term range of 35 to 50 basis points -- 55 basis points. But provision, while still experiencing credit dividend throughout the year, is likely to increase. And both are expected to continue to experience some volatility given the absolutely low levels.

At this point, I want to turn it back to Todd to open for Q&A.

Todd Beekman

Sarah, we'll now take a few questions. [Operator Instructions] Thank you.

Question-and-Answer Session

Operator

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

Ken A. Zerbe - Morgan Stanley, Research Division

Quick question, just in terms of the buybacks. Obviously, you didn't buy back any stock this quarter. I think you still have $136 million remaining on last year's CCAR approval. Can you just talk about why you chose not to buy back any stock? And should we expect all the $136 million all to be bought back in this current quarter?

David S. Anderson

Ken, this is Dave. Thank you for the question. We have a very disciplined approach to buying back shares. We look at a number of factors, including the effect on tangible book value. So we -- this is consistent with what we talked about in the third quarter. We didn't do a lot of share repurchases. We continue to look at our capital, and our priority is obviously our core growth, strong dividend, and then everything else, which includes share repurchase, merger acquisition, potential opportunities, as well as potentially also purchasing some of our trust -- higher cost trust-preferred securities back. So we still have $136 million of share repurchases in our original capital plan, and I really can't give you an outlook as to what we would expect in this quarter.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay. So -- and again, I'm trying not to nitpick on that. It's a statement just so I understand what you're saying. But with the comment like tangible book, I mean, I'd hate to say this, but I mean, are you not buying it back because you think your stock is expensive? I mean, I'm not trying to summarize what you just said, but a disciplined approach or maybe I'm thinking more of a consistent approach, because either you're going to use the $136 million by year end or the CCAR year end, or I don't know, maybe you can push it out to the year after that. I don't know.

David S. Anderson

So when we look at tangible book value, we obviously do not want to provide a significant dilution to that tangible book value.

Ken A. Zerbe - Morgan Stanley, Research Division

Okay. Okay, and then just a follow-up question...

Stephen D. Steinour

Ken, there are a number of factors we look at, that's one of a number.

Ken A. Zerbe - Morgan Stanley, Research Division

Understood. And then just a follow-up question. Can you talk about the competitive environment in auto? We've been hearing it's getting a little more competitive. I love your thoughts on what you're seeing out there right now.

Stephen D. Steinour

It has not abated. It's been competitive for last couple of years, and we think it will stay competitive through '14. We've taken an approach that we're focused on returns and not market share or aggregate volume. We happen to be -- because we've been in this for a long time, and I think we're strong through the downturn. We've been able to generate growth, again, a record year in '13 for us. But we did not keep pace with the growth in new car sales.

Ken A. Zerbe - Morgan Stanley, Research Division

And do you find the credit boxes widening out a little bit in terms of being able to...

Stephen D. Steinour

No. Our credit boxes is very tight, and that's not against something we look at every week. And you got stats in the material -- the additional publishing -- our published documents, sorry, that we have here that will show a very tight cycle range and loan-to-value.

Operator

Your next question comes from Ken Usdin of Jefferies.

Kenneth M. Usdin - Jefferies LLC, Research Division

I just want to ask, so just for a clarification, on the fee outlook. Steve, when you're talking about a slight decline, you're talking about year-over-year off of the adjusted fee level, so the $987 million [ph], excluding MSR hedging?

Stephen D. Steinour

Yes.

Kenneth M. Usdin - Jefferies LLC, Research Division

And can you talk a little bit more about what other changes, what other tweaks do you have left to make on the service charges? Because I would have thought that you kind of would've been passed the adjustments you made several over the last couple of years. When should we -- how should we expect that to grow over time?

Stephen D. Steinour

So we -- when we adjusted in February of '13, we gave you a range of $25 million to $30 million of expected posting order impact. We can't be exactly precise with it because of behavioral changes. But the growth in our consumer checking households took us to, I think, a 4% year-over-year increase in that category. Now as we look at all of our consumer fees, and not just related to checking account, we continue to challenge ourselves internally about, do we have opportunities to distinguish? Do we have the ability to create better economics for us over time, consistent with our Fair Play philosophy? And when we did 24-Hour Grace, we thought it would have a payback in a couple of years, it turned out to be a couple of quarters. So that was a very healthy process that we did in '10, and we continue to do that. A consequence of that -- we don't have anything committed at this point for '14, but the consequence of that could be changes we make during the course of the year.

Kenneth M. Usdin - Jefferies LLC, Research Division

Right, okay. And then just one more quick clarification. Last year's operating leverage was with lower revenues but even lower expenses. And as you look forward to just the top line this year, do you think you can put up positive revenue growth and then still be controlling that with a very modest, if any, growth of expenses?

Stephen D. Steinour

We do. We try to give you guidance on net interest income growth, fueled by auto and commercial, largely, modest growth off the other categories despite NIM pressures. And that should help us translate with the tight expense management that you've seen in the last couple of quarters in particular.

David S. Anderson

So our outlook in NIE is that it will be fairly flat year-over-year, with the exception of the net one-time benefit of $10 million for the significant items.

Operator

Your next question comes from Steven Alexopoulos of JPMorgan.

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

Can I start -- I'm trying to understand the line in the guidance, which basically calls for continued refinement of products under Fair Play. Are you looking to eliminate other fees on products, is that what that's saying?

Stephen D. Steinour

We're looking at all of our fees and we have been for the last few years. And from time to time, we'll make decisions on where we may want to adjust them and/or eliminate them. But it's not a new activity per se for us.

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

Okay. But you're pointing out those at this point because we should expect some reduction in...

Stephen D. Steinour

We're challenging ourselves. We think there's a contrarian moment here and much like we thought there was in '09 and '10. And so we're pointing it out for that reason.

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

Okay. And maybe just to follow up on that. Looking at the guidance for flat expenses, near $1.8 billion, how much do you plan on investing this year? Can you break out the dollars for us? I'm curious how much you really need to offset in terms of what you plan on investing.

Stephen D. Steinour

I don't think we provided that kind of specific guidance in the past and are not prepared to do that at this moment.

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

Okay. Steve, do you have the number of what you invested in 2013? We can use that as a base.

Stephen D. Steinour

Well, again, we have it, but I don't think we provided it historically. Okay? Don't mean to frustrate you. Thank you.

Operator

Your next question comes from Bob Ramsey of FBR.

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

Just quickly on the C&I loan growth. I mean, if you adjust for the reclassification of these municipal loans under the securities portfolio, the end-of-period growth was really very strong this quarter, and the average growth was also pretty strong. I mean, I think on a quarterly basis, these are some of the strongest basis we have seen in a long time. Are those levels sustainable on a go-forward basis? I know you said the pipelines look really good, but do they look as good as this quarter?

Stephen D. Steinour

Well, we had across-the-board performance, and I'm not sure that necessarily came through or was picked up by your comments. So it wasn't like one of our verticals or a couple of verticals. We really felt fourth quarter, we were hitting on most cylinders on the commercial side. And as we stepped into the new year, that pipeline, that robust pipeline, commercial pipeline we referenced, is across the board as well.

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

Okay. Okay. So I mean, if you say the similar pace, it would seem that C&I growth could be maybe in the low- to mid-double digits year-over-year, is that fair?

Stephen D. Steinour

Well, I don't think we've given guidance that specific at this point. But we did have a good fourth quarter that at least as we start the year continues with a strong pipeline.

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

Okay, great. And then maybe if I could one more. I know you guys highlighted the security purchases as you prepare for the Basel III liquidity requirements. It looks like, on an average basis, only part of the purchases that you all made in the corner are factored into the average balance sheet. How should we think about, in the first quarter, without fully factored in, what the impact is on margin and earning assets?

Stephen D. Steinour

Well, the margin for us in the fourth quarter was down 6 bps, 3 of that was securities and some swap activity and the rest was -- the other 3 bps were related to the competitive pressures on loans and the inability to close it out over the deposit side. We tried to get ahead of the B III liquidity requirements, and we added about $1.9 billion of investment portfolio, and that came in during the quarter. So it's -- you don't have all of it factored into that 3.28% [ph] margin for the quarter. But there will be ongoing competitive pressures. We will take steps to respond to those pressures, including the $2.5 billion of CDs that repriced during the year and some other things that we were able to do.

Operator

Your next question comes from David Long of Raymond James.

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

In your outlook and how you're talking about your -- how you're looking out to 2014, sometimes, you use the term modest versus moderate. I was wondering if you can maybe help us understand modest versus moderate, how you define that.

Stephen D. Steinour

Let's see, what have we said in the past? Modest is maybe plus or minus 3%, and moderate would be up to 8%.

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

Okay. Okay, that's helpful. And then the -- with the swap that you guys have, about $8 billion of the swap, I guess, my question is one, how did that impact net interest income this quarter? And then secondly, how do you expect to manage that going forward, and maybe remind us your expectations on when we may see that run down?

Stephen D. Steinour

Well, the swaps are on at a 3-year duration. It's a laddered approach. And we expect that, that will come in over time in aggregate, but there'll be some level of swaps on the books for us. We've got -- we made some decisions around Fed guidance that came out in the second half of the year around their interest in holding the short end of the curve low, notwithstanding the prior impact of the tapering comments in the second quarter. And that caused us to reassess a bit where we thought the trade-offs would be for returns and risks with the swap portfolio. So we moved up and moved out a little bit. Dave, do you want to answer the economic trade-offs?

David S. Anderson

For the quarter, the benefit of the derivatives was about $23 million, which is down from prior quarters. But -- I'm sorry, the -- yes, the benefit was about $23 million.

Stephen D. Steinour

That answered it?

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

Yes.

Operator

Your next question comes from Erika Najarian of Bank of America.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

This is Ebrahim on behalf of Erika. A quick question, going back to the earlier questioning on the operating leverage. Just trying to get a sense in terms of the -- if you can provide any color in terms of what the sort of magnitude of the operating leverage could be when you look at maybe the efficiency ratio, and what sort of improvement do you expect there to look out over the next year?

Stephen D. Steinour

We haven't been that specific. We do expect operating leverage, we've committed to that in '14, and we would expect that to translate into an improved deficiency ratio again on both fronts. But we're not going to be more specific than that over time. We've got a long-term shareholder alignment here as most of us are meaningful owners as well. And so as we said last year, we do intend to drive more to the bottom line by working that efficiency ratio, and we'll do that. We have investments that are maturing as well, and we've made a lot of investments in the last few years. You can see it in part on the commercial performance. Across the board, our newer verticals are contributing now with our traditional middle market and other areas for commercial. You can see it on auto, the expansions in different geography in a number of different ways. And we're not mature. We would expect them to continue to benefit from further seasoning and growth.

Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division

Got it. And just one other question in terms of -- I was just saying to tie in your guidance on loan growth and the comments you made around sort of the momentum looks strong, plans are feeling more confident. Should we expect the pace of loan growth to pick up, or is that still unknown?

Stephen D. Steinour

Well, it's an -- normally, fourth quarters are strong, so it would -- we wouldn't traditionally key the fourth quarter in and fully annualize that. But we had a strong quarter, and we have a robust pipeline. We had a strong fourth quarter in '12. Pipeline was a little lighter, certainly by comparison, was lighter, meaningfully different than how we start this year.

David S. Anderson

Well, we saw very good growth in middle-market. The different verticals we've been -- invested in over the last few years are really all contributing, as well as we saw good growth in equipment leasing.

Operator

[Operator Instructions] Your next question comes from Sameer Gokhale of Janney Capital.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Just a couple. Again, just on in terms of C&I loans. One of your -- one of the other banks have reported today sort of they really hadn't seen any increase in their utilization rates on C&I loans. I was wondering if that's the same dynamic that you're seeing as well. And then in terms of the outlook for growth, I mean, C&I has been one of the strongest areas of loan growth, I think, across C&I lenders in general for the last couple of years. So I'm trying to reconcile that with the commentary about the pipeline being strong, because it seems like at some point, we should see a natural slowdown in C&I lending and borrowing, given the fact that there's been so much strength over the last couple of years. So I'm trying to just figure out if that's a function of pricing, banks willing to give up on pricing to drive growth? Or are you seeing kind of risk-adjusted returns remaining relatively constant in C&I loans? So if you could help us give us some color with that, that would be helpful.

Stephen D. Steinour

Certainly. Sameer, our utilization rates are flat. They're at or near all-time lows, by the way. So at some point, there'll be a pickup on utilization. We've made a number of investments in vertical businesses, specialty businesses, energy, ag, food and ag, international, most recently. But there were prior verticals as well. Those verticals, combined with our middle-market and other capabilities of a general nature, seem to be firing together on all cylinders. During the course of the year, we referenced that in some areas that we just weren't comfortable with structure or tenure that we actually backed away. There was a couple hundred million dollars of corporate lending, large corporate lending that frankly reduced balances year-over-year as a consequence of us trying to hold in. As you've seen over the last few years, when we published our portfolio yields, we've held in better than average and certainly, our NIM has held in better than average on a multi-year basis. But the -- so we don't think of ourselves as extraordinarily reaching for growth. You would have seen a wide variability last year in our commercial lending by quarter for -- as another proof point. But we are in a region of the economy that actually has outperformed over the last few years. And we benefited from that, the auto recovery, the gas play, but we were headquartered in Columbus. Columbus has a 6% -- sub-6% unemployment rate as an example. So we are benefiting from our geography perhaps in ways that might not be consistent with how you would have thought of the Midwest over time.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

So just to clarify, it does sound then that you have -- like you haven't increased your leveraging deals in transactions. Your LTV ratios have remained relatively constant as well?

Daniel J. Neumeyer

Yes, this is Dan. That's absolutely correct. We have held very firm in our discipline around leverage lending in particular. It's very well controlled, have not stepped out on margin and also on structure. We don't do any of the covenant-lite transactions. But to Steve's point, I think the -- one of the issues is just the diversification with -- within the portfolio, that's been one of the advantages because the growth has been coming from more areas than what we've seen in the past. And I think last quarter was the first time where we saw all the verticals that we've invested in meaningfully contribute at the same time to the performance. So that's good. And so everything from small business and SBA lending, right up through large corporate. The other component is I think we will also see that we're no longer really going to shrink Commercial Real Estate, so that will be a boost to us in 2013 as that kind of levels out and it could possibly even grow a small amount.

Stephen D. Steinour

So Sameer, as you look at our commercial growth combined over time, you didn't think the -- that core growth in general commercial gets masked by the reduction in Commercial Real Estate. We've now got it -- Commercial Real Estate at a plateau, roughly 100% of capital where we intend to keep it in more or less at that level.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

That's really helpful color and specifically, on the C&I loans, that was very helpful. Just another question, in terms of the auto business and dealer markups, I know that's been an area of focus for the CFPB. I was just trying to get a sense for where you were in that process. Have you already rolled out new policies? Has that somehow affected your relationship with dealerships? Has that really not been an issue for you? Any perspective on that will be helpful.

Stephen D. Steinour

Well, we made some changes in mid-2011 in how we approached price and frankly, the allowable variance in pricing. And my understanding is the industry, Sameer, is somewhere around 250 basis points of variable pricing to the dealers, and we are well inside that by policy as of the middle of 2011. So if we had volume adjustments, we've absorbed them over the last few years. But we like our approach. We're comfortable with how we originate and expect to continue on the basis that we're doing today.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay. I know in 2013, it seems like the CFPB had come up with some new guidance, and it sounds like you're well below industry standards in terms of the markup. So that's helpful.

Operator

There are no further questions at this time. I'll turn the call back over to Mr. Stephen Steinour for closing remarks.

Stephen D. Steinour

Well, thank you very much. We appreciate your interest. 2013 was a solid year for us at Huntington. And if the trend holds, our return on assets of 1.13% should put us in the top quartile of the largest 100 banks in the U.S. again. We delivered positive operating leverage as we dramatically managed the company to reflect how the environment changed, while having strong execution of our long-term strategy. We understand the need to improve our overall efficiency ratio, and in our investments and continuous improvement program are delivering and will continue to deliver sustainable results. And will not only come from the easier lever of expense, but the top line growth, as our investments continue to mature.

In 2013, we delivered positive operating leverage, and then we've said we will do that again. We will deliver positive operating leverage in 2014. And to shareholders and many of our colleagues, our shareholders, if you take nothing else away, remember that we, too, are shareholders, the management board and employees understand the need to balance the investments that drive long-term value-creation and returns.

So again, thanks for your interest. Have a great day.

Operator

And that concludes today's conference call. You may now disconnect.

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