Huntington's (HBAN) Steve Steinour Q2 2014 Results - Earnings Call Transcript

Jul.18.14 | About: Huntington Bancshares (HBAN)

Huntington Bancshares Inc (NASDAQ:HBAN)

Q2 2014 Results Conference Call

July 18, 2014 / 10:00 A.M. E.T.

Executives

Todd Beekman – Managing Director of Strategies & IR

Steve Steinour – Chairman, President and CEO

Mac McCullough – CFO

Dan Neumeyer – Chief Credit Officer

Analysts

Erika Najarian – BofA Merrill Lynch

Scott Siefers – Sandler O'Neill & Partners

Steven Alexopoulos – JPMorgan Chase & Co.

Ken Zerbe – Morgan Stanley

Bill Carcache – Nomura Asset Management

Bob Ramsey – FBR & Co.

Keith Murray – ISI Group

Ken Usdin – Jefferies & Company

Terry McEvoy – Sterne, Agee & Leach

Chris Mutascio – Keefe, Bruyette & Woods

Chip Dixon – DISCERN

Jon Arfstrom – RBC Capital Markets - Analyst

Operator

Good morning. My name is Tiffany. I will be your conference operator today. At this time, I would like to welcome everyone to the Huntington Bancshares second-quarter earnings conference call.

(Operator Instructions)

Todd Beekman, you may begin your conference.

Todd Beekman

Thank you, Tiffany, and welcome. I'm Todd Beekman, Managing Director of Strategies and Investor Relations for Huntington. Copies of the slides that we will be reviewing can be found on our IR website at Huntington.com. This call is being recorded and be available for rebroadcast starting about 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, and only point out one key disclosure. The presentation will reference non-GAAP financial measures. In that regard, I direct you to the comparable GAAP financial measures and the reconciliation to the comparable GAAP financial measures within the presentation, the earnings-related material released this morning, and the 8-K filed today, all of 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, risk and uncertainties, which may cause actual results to differ materially. We assume no obligation to update these statements. For a complete discussion of the risks and uncertainties, please refer to this slide, the material filed with the SEC, and our most recent Form K, 10-Q and 8-K filings.

Turning to Slide 5, the presenters today are Steve Steinour, Chairman, President and CEO; Mac McCullough, our CFO; Dan Neumeyer, our Chief Credit Officer, will all be participating in the Q&A portion.

Let's get started, turning to Slide 6. Steve?

Steve Steinour

Thank you for joining us today. Huntington had a great second quarter. We executed our strategies and delivered strong results. The industry is dealing with the challenging environment, but this is a quarter when many of our cylinders were firing and demonstrates how many of the investments we've made over the last several years are paying off. We reported net income of $165 million, a 9% increase from the year-ago quarter, and EPS of $0.19 per common share, or a 12% year-over-year increase. This represented a 107% return on average assets and a nearly 12.5% return on tangible common equity. Fully taxable equivalent revenue increased $33 million, or 5% year over year.

Net interest income increased $35 million, or 8% year over year, while non interest income remained relatively flat, despite the $11 million headwind in mortgage banking. Net interest income benefited from two items. Our investments in our auto and commercial segments drove a $3.8 billion, or 9% increase, in loans. And we had to add nearly $2.6 billion of incremental securities as we prepare for the upcoming Basel III Liquidity Coverage Ratio or LCR rules. The benefit of the larger balance sheet was partially offset by a 10-basis point decrease in the net interest margin.

Non interest expense increased $13 million, or $20 million less than revenue. Our efficiency ratio improved to 62.7%, and while this remains above our long-term target, we continue to focus on driving positive operating leverage. We've achieved positive operating leverage year to date and we remain committed to positive operating leverage for the full year.

I will cover OCR in more detail later in the presentation, but we continue to gain market share and share of wallet. Our robust customer growth and OCR sales process are driving long-term shareholder value.

Turning to slide 7, our credit quality continues to trend favorably. Our capital ratios remain strong. At the end of the second quarter, our tangible common equity ratio was 8.38%, down 38 basis points from a year ago, while our Tier 1 common risk-based capital ratio was 10.26%, down 45 basis points from a year ago. Both of these reductions reflect the combination of our disciplined balance sheet growth and strong capital management over the past year.

This quarter, we repurchased 12.1 million common shares at an average cost of $9.17 per share. With the common stock dividend and buybacks combined, we returned 97% of second-quarter earnings to common shareholders.

Slide 8 has a few additional first-quarter highlights. First, we announced the acquisition of 24 branches in Michigan from Bank of America early in the quarter, and within 60 days we received OCC approval for the acquisition. We are targeting a September close and conversion for this transaction.

For the second year in a row, we were recognized for having the highest customer satisfaction rating in the north central region in a JD Power survey of retail banking customers. The customers' experience is a significant differentiator in this industry and this is just the latest acknowledgment of the great job our colleagues do on a daily basis, providing best-in-class service.

We maintained our position as the number one SBA lender in the country, by the number of loans through the first nine months of the SBA's fiscal year. Small business lending is a core competency of Huntington. All of these loans are made to companies in our footprint.

Finally, we were pleased to announce the addition of Eddie Munson to our Board of Directors. The Board looks forward to tapping his knowledge, not just a 32-year accounting professional, focused on regional banks, but also a business and civic leader in Detroit and eastern Michigan.

With that, let me turn it over to Mac for a more detailed review of the numbers. Mac?

Mac McCullough

Thanks, Steve. Good morning, everyone. Slide 9 is a summary of our quarterly trends and key performance metrics. Steve already touched on several of these, so let's move on to slide 10 and drill into the underlying details.

Relative to last year's second quarter, revenue increased $33 million, or 5%, to $717 million. Spread revenues accounted for the entire increase, as net interest income increased 8% to $467 million. Average earning assets increased 12% year over year to $57.1 billion, driving net interest income growth. While we've been building the securities portfolio in preparation for the upcoming Basel III Liquidity Coverage Ratio, or LCR, loan growth drove the majority of the earning asset growth.

The net interest margin compressed 10 basis points year over year to 3.28%. Earning asset yields compressed 15 basis points year over year, including 3 basis points of compression due to the larger investment securities portfolio, offset by 4 basis points of benefit due to an interest recovery on a credit-impaired acquired commercial real estate loan. Funding costs improved by 5 basis points.

Second quarter fee income was $250 million, which represented a $2 million decline, or less than 1% from the year-ago quarter. The benefits of our robust customer acquisition were evident, as service charges on deposit accounts increased 7% year over year and electronic banking increased 13%.

Other income increased $7 million, or 25% year over year, primarily related to various commercial loan fees given the strong lending activity during the quarter, as well as fees related to our consumer and commercial credit card products. As a reminder, we introduced our commercial and consumer credit card products in the second and third quarters of 2013 respectively and we are very pleased with progress to date.

These items helped offset the continued pressure on mortgage banking income, which declined $11 million, or 33%, from the year-ago quarter, as refis continue to decline and the majority of the volume shifts to the purchase market. Non interest expense was $459 million, an increase of $13 million, or 3%, from the year-ago quarter. The largest contributor was a $9 million, or 92% increase in professional services, of which $5 million was one-time consulting expense related to strategic planning.

Outside data processing and other services and equipment expense both increased $4 million from the year-ago quarter, primarily related to technology investments to support growth initiatives. Personnel expense was down $3 million, or 1% from the year-ago quarter, as the curtailment of our pension at the end of last year more than offset the impact of increased salary expense this quarter.

Slide 11 displays the trends in our earning asset mix, net interest income and net interest margin. Average loans increased $3.7 billion, or 9% year over year. This increase included $0.5 million from the Camco acquisition. Commercial and auto remained the primary drivers of our loan growth, although we experienced growth in every portfolio except other consumer, a relatively small portfolio.

Average commercial and industrial, or C&I, loans grew 7% year over year. More than half of the increase occurred in our specialty lending verticals, all of which continue to mature and gain traction.

Business banking and our auto dealer floor plan lending were other key contributors to the growth. Also recall that approximately $600 million of C&I loans were reclassified into investment securities at the end of the fourth quarter of 2013. The auto loan portfolio grew $2.1 billion, or 39%, from the year-ago quarter as originations remain strong and we continue to portfolio all of our production. As you can see on the auto loan slide in the appendix, we did not sacrifice credit quality to drive this volume.

With respect to our auto finance business, I want to remind you that the summer months are seasonally strong. On the other hand, the auto floor plan lending side suffers during this period, as dealers liquidate the prior year's models to make room for the new model year in the fall. While our overall utilization rate ticked up modestly in the quarter, our auto floor plan loan utilization rates have been running a couple percentage points below what we would normally expect, but the strong automobile market in general has more than offset this.

Also during the second quarter, our equipment finance business achieved a notable milestone, as total assets, both loans and securities related to this business, exceeded $3 billion for the first time.

Turning to slide 12, the right side of the slide shows our deposit mix, while the left side lays out the maturity schedule of our CD book. Average core deposits increased $1.9 billion, or 4% year over year. This increase includes $0.5 billion from the Camco acquisition. For the last several years, we have focused on increasing low cost core deposits while reducing our dependence on high cost CDs.

Average demand deposits increased $0.6 billion, or 3% year over year, while average money market deposits increased to $2.6 billion, or 17%. Growth in these categories more than offset the intentional $1.3 billion, or 28%, decrease in average, core certificates of deposits.

There continues to be opportunity to drive an improvement in the mix, but as you can see over the next four quarters, we have approximately $2.2 billion of CDs maturing. This is about half the amount compared to this time last year. Another important piece of the funding mix dynamic that you do not see on this slide is the $3.6 billion year-over-year increase in short- and long-term borrowings, $2.5 billion of which was banked in holding company debt issued over the past year.

As we continue to focus on remixing our deposit base and managing our overall cost of funds, we expect to continue to be active in the debt markets.

Slide 13 shows the trends in capital. The Tier 1 common risk-based capital ratio decreased from 10.71% at June 30, 2013 to 10.26% at June 30, 2014. The decrease was due to balance sheet growth and share repurchases that were partially offset by retained earnings and the stock issued in the Camco acquisition.

During the second quarter of 2014, we repurchased 12.1 million shares of stock at an average cost of $9.17 per share. Over the past four quarters, we have repurchased 28.6 million common shares. Following the $111 million of buybacks this quarter, we have remaining capacity for $139 million of potential buybacks through the end of the 2015 first quarter under our $215 million repurchase authorization.

Slide 14 provides an overview of our credit quality trends. Credit performance remains solid and in line with our expectations. Net charge-offs fell noticeably in the quarter to 25 basis points, aided by lower consumer charge-offs, particularly in home equity and residential mortgage. Commercial charge-offs remain stable.

Loans past due greater than 90 days remain very well controlled at 30 basis points. Nonaccruals were down slightly in the quarter, while the criticized asset ratio fell modestly as well. The criticized asset ratio includes the results of the shared national credit exam and also incorporates ratings activity on a significant portion of the portfolio reviewed upon receipt of year-end financial statements as the second quarter is the most active for credit renewals and reviews.

All of these ratios are operating within our normalized targets and the allowance in associated coverage ratios remain adequate and in line with previous quarter levels.

Slide 15 shows the trend in our nonperforming assets. The chart on the left demonstrates continued improvement, albeit at a reduced rate, as we are operating within a more normalized range. We do expect some modest improvement over the upcoming quarters. The chart on the right shows the NPA inflows, which are also fairly even with the prior quarter.

Reviewing slide 16, the loan loss provision of $294.4 million was up modestly from the year-ago quarter and nearly equal to charge-offs in the second quarter. The allowance-to-loan ratio fell very modestly to 1.50% from 1.56% in the prior quarter. The ratio of allowance to nonaccrual loans ticked up slightly from 211% to 213%. The level of the allowance is adequate and appropriate and reflects the stable to improving credit trends discussed earlier, along with increasing loan volume. In summary, we had a very solid credit quarter with performance at the low end of our long-term expectations.

Let me now turn the presentation back over to Steve.

Steve Steinour

Thank you, Mac. Turning to slide 17, our fair play banking philosophy, coupled with our optimal customer relationship, or OCR disciplines, continue to drive new customer growth and improve product penetration. This slide illustrates the continued upward trend in consumer checking account households. Over the last year, consumer checking account households grew by 100,000 households, or 8%. During the second quarter, the annualized growth rate was almost 10%, illustrating that our momentum is sustained.

The strategy is not just about market share gains, but also gains in share of wallet. We continue to focus on increasing the number of products and services we provide to these customers and the corresponding revenue. Our OCR cross-sell measure of six or more products and services improved to almost 49% this quarter, up more than 200 basis points from a year ago. Our consumer checking account household revenue is up 7% year over year.

Turning to slide 18, while the chart on this slide appears to show a plateau in our acquisition of new commercial relationships over the past couple of quarters, I would remind you that we expected this to occur, as it ties directly to some changes we made in our business banking checking products, which have and will accelerate the closing of about 10,000 lower balance business checking accounts over the course of this year. Our underlying growth of new business customers remains strong. We also continue to progress in the deepening of our commercial relationships.

The percentage of commercial customers with cross-sell of four plus products or services now exceeds 41%, an improvement of approximately 500 basis points from a year ago. Our commercial relationship revenue is up 18% year over year.

Turning to slide 19, our expectations for the second half of the year remain similar to what we laid out in January, after accounting for seasonality. Our local economies continue to recover and confidence has improved among our customers, particularly business. Competition remains challenging and we've seen some moderation in the pull-through rates from pipeline to booking, but we expect continued success in commercial and auto lending to drive overall loan growth, as pipelines remain robust.

Our recent investments in specialty lending verticals continue to mature, and our commitment to middle market and small business remains a cornerstone of the Company. Auto loan origination volumes are strong, although new money yields continue to compress modestly, recently in the range of 2.9%.

We are continuing to monitor the securitization markets, as we've said before, and we'll look to use it as a tool to manage our overall concentration. We'll continue to reinvest cash flows from investment securities into LCR-compliant, high-quality liquid assets. The NIM is expected to remain under pressure, but we expect net interest income to grow as earning asset growth more than offsets the NIM compression.

Non interest income, excluding the net MSR impact, is expected to remain near the second quarter's level. This includes the previously disclosed $6 million quarterly negative impact from a change in our consumer checking products that we will implement later this month. We also expect non interest expense, excluding one-time items, will remain near the second quarter's reported level. We will continue to look for ways to reduce expenses, while not impacting our previously announced growth strategies, or our high level of customer service.

On the credit front, nonperforming assets are expected to experience continued improvement. We expect net charge-offs will remain in or below our long-term expected range of 35 to 55 basis points, while provision was below our long-term expectation during this past quarter. Both are expected to continue to experience modest changes, given their absolute low levels.

Turning to slide 20, as you can see, we're off to a solid start in terms of operating leverage for 2014, and we are committed to positive operating leverage for the full year. Year to date, adjusted total revenue is up about 3%. Adjusted expenses were up less than 1%.

We remain focused on this metric. We still have a lot of work to do over the second half of the year, but I'm pleased with our year-to-date progress.

With that, I turn it back over to Todd.

Todd Beekman

Operator, we'll now take questions. We ask, for the courtesy of your peers, each person ask only one question and one related follow up. Then if the person has additional questions, he or she can add themselves back to the queue. Thank you. Tiffany?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Erika Najarian with Bank of America. Your line is open.

Erika Najarian – BofA Merrill Lynch

My first question is on your comments on expenses, Steve. You did mention at the end of your prepared remarks that you continue to look for ways to reduce expenses.

I believe you gave us a core number last quarter, excluding litigation of something around $438 million. Correct me if I'm wrong, but as we think about your revenue strength, is the better way to think about your expense levels from here and 2015 really through a reduced efficiency ratio rather than just thinking about absolute levels of expenses?

Mac McCullough

Erika, hi, this is Mac. Thanks for the question.

We are comfortable, as we said, with taking a look at the second quarter run rate excluding one-time items and thinking about that as a base going forward. We do have a number of items that will impact the expense related to the growth initiatives around technology investments and those types of things going forward as well. We're comfortable working both sides of the equation on the efficiency ratio.

Clearly, revenue is going to be a focus. We continue to look for opportunities to become more productive as well. Generally, we're going to continue to make the right investments to grow the top line, but understand that it's important to drive operating leverage and that clearly is going to be the focus going forward.

Erika Najarian – BofA Merrill Lynch

Got it. My follow-up question, while it's not entirely related, I apologize, is just, could you give us a sense of how much – what inning we're in terms of the build of liquidity that's related to the LCR, if the rules are finalized as proposed? I just wanted to make sure that we are getting the message correctly, that earning asset growth will outpace loan growth next quarter?

Mac McCullough

We feel like we're really well positioned for LCR. We got ahead of this late last year. If you take a look at the investment security portfolio, it's up 28% year-over-year. We've got about $100 million a month that's maturing and we're putting back into the right type of product in the investment security portfolio.

So I think to the extent we see earning asset going forward, growth, it will come in the loan portfolio. There might be modest increases in investment securities, but we do feel that we're pretty well positioned there.

Erika Najarian – BofA Merrill Lynch

Thank you for taking my questions.

Operator

Your next question comes from the line of Scott Siefers with Sandler O'Neill and Partners. Your line is open.

Scott Siefers – Sandler O'Neill & Partners

Steve or Mac, I was hoping, maybe, first question is just on the BAC branches, if you could just talk to us a little bit about your accretion or dilution expectations? The reason I ask is branch deals have been near-term/long-term story over the last few years, as there haven't been a ton of opportunities to deploy the funds, but you're seeing quite strong loan growth, right? Just wondering if there are more opportunities to deploy that? If that changes your modeling, or overall how you're thinking about the accretion and dilution over the next year or so?

Steve Steinour

Scott, it's 24 branches, as you know, and it's deposit only. We would expect to put our lending products in literally day one. We will get to a more balanced equation over time within those branches, as we do all of our branches.

Again, it's 24, so this is not going to move the needle hugely for us as we go forward. It will be helpful, and it will be accretive.

Scott Siefers – Sandler O'Neill & Partners

Okay, perfect. Then wanted to ask just a separate question on capital management. Just given that this was the first year you went through the CCAR specifically, as opposed to the CapPR. Just was curious, Steve, if you could go through your attitudes, particularly as it relates to the 30% dividend payout limit, just as you looked at your own ask, so to speak?

Then, Mac, I know when you were at USB, you weren't necessarily driving the CCAR, but you've been through more CCARs at another organization. So just curious how you think about things as you look to the next several months and you go through your CCAR as well?

Steve Steinour

As we approach CCAR, I think it was third quarter of last year, Scott, we said we were going to be conservative with the ask first time through. Wanted to make sure we got through and were able to move forward. I think we were consistent with that. The timing of the dividend reflects that, as we discussed on an earlier call, the dividend increase.

It was an event we had prepared for substantially in 2012. The bar keeps moving, changing, raising. So there are always learnings from something like this and more work to do, and we're engaged with that and expect to continue to be able to manage through that process in a consistent fashion.

We will be challenging ourselves to drive with consistency over the years through CCAR and therefore, continuing to learn and invest where we need to to bolster it. Mac, what would you add from your prior perspective?

Mac McCullough

I would say, Scott, I'm very pleased with where we are and how we came through last year's process. What I do know from my previous experience is that this is a journey and that we're going to continue to see the bar raised. I think the important thing is that we know where to focus as we think about 2015, and I think we know what we need to do. I feel very good about the progress that Huntington has made and where we are on the process.

Scott Siefers – Sandler O'Neill & Partners

Okay. That's perfect. I appreciate all the color, guys.

Operator

Your next question comes from the line of Stephen Alexopoulos with JPMorgan. Your line is open.

Steven Alexopoulos – JPMorgan Chase & Co.

Maybe I could start, regarding the auto loan securitization commentary being added back to the outlook slide, are you guys thinking maybe one of these in the second half and maybe $1 billion plus? Just wanted to know your thoughts there?

Steve Steinour

We have said now for probably a year and a half that we have a concentration limit on auto, and as we continue to grow, we don't plan, at least at this point, to change that concentration limit. That would take us to loan securitizations, one or more, in 2015. We're viewing the market now and our lending is robust. There is the possibility we could do something the second half of this year.

Steven Alexopoulos – JPMorgan Chase & Co.

Okay.

Steve Steinour

Although we're not planning it at the moment.

Steven Alexopoulos – JPMorgan Chase & Co.

Got you. Somewhat related question, on the floor plan business, I know that's typically weak in the third quarter as dealers make room for the new model year. With your comments that line utilization was below the normal level, are you signaling to us that you might not see that typical seasonal decline?

Steve Steinour

No, we'll see that, for sure. Sales have been so good in the second quarter, that seasonal decline may have even advanced a little bit in the second quarter.

Steven Alexopoulos – JPMorgan Chase & Co.

Got it. Okay. Thank you.

Operator

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

Ken Zerbe – Morgan Stanley

In terms of expenses, what's changed? I know your guidance doesn't seem like it changed. It was a little higher than what we were looking for. Your guidance, obviously, is for expenses to stay at these levels.

It seems that there's been some upward pressure on the absolute dollar expenses versus last quarter. What's driving that?

Mac McCullough

Ken, this is Mac. Really, I don't think there's anything unusual in what's here. Obviously, we've had some one-time items related to the acquisitions, and we continue to make the investments and recognize the expense related to the historic investments. Again, I think where we're at in the second quarter represents a good run rate, thinking about removing the one-time items.

Ken Zerbe – Morgan Stanley

Okay. Understood. I was just thinking versus last quarter, if we had the same conversation, modest up would have put us still below where we're at, or currently. That's okay.

Then, just same thing on the guidance on net interest income. I think you were saying modestly higher. Given the very good growth this quarter in NII, does that imply that you expect a slightly more stable outlook for the second half? Just wondering how you're thinking about that?

Mac McCullough

I think from a net interest income perspective, we will see growth. It will be driven entirely by earning asset growth, because the NIM will be under pressure. We'll continue to see repricing on the C&I book and that will be the primary source of that pressure. The earning asset growth, based on the robust pipelines that we see in C&I and continued strength in auto lending, will drive the net interest income growth offset by margin pressure.

Ken Zerbe – Morgan Stanley

That's growth from second quarter levels, not just year-over-year?

Mac McCullough

That's from second quarter levels.

Ken Zerbe – Morgan Stanley

Perfect. Thank you.

Operator

Your next question comes from the line of Bill Carcache with Nomura. Your line is open.

Bill Carcache – Nomura Asset Management

I was hoping that you could talk about risk adjusted margins in the auto lending business at this point in the cycle? I think you said new money yields were coming on at 2.9%, but was hoping you could give some context around how the economics of the business look when you factor in credit and funding costs?

Along those lines, I can't tell from the vintage performance data on slide 52, but was hoping you could comment on what kind of peak loss trends you're seeing in auto and whether peak losses have started to rise again? I know there's a lot there, but any flavor or color around what's happening would be great?

Mac McCullough

It's Mac. Given our business model in the auto business, I think given the quality of our portfolio where the FICO is in that 765 range, on a credit-adjusted basis, we really are performing extremely well. You take a look at the history, even through the cycle, our losses have been stellar. If you take a look at it today with 16 basis points of net charge-offs against the yield we're receiving on that portfolio, given the environment, that's actually attractive relative to other alternatives.

So, I'm not sure we're seeing a turn in terms of quality as it relates to our portfolio on a go-forward basis. We're comfortable with the net risk-adjusted yield given the environment and our business model.

Steve Steinour

We've been consistent with the model over the years, Bill, so that the predictability of this has been quite strong. Even though we've expanded and our volumes are up, both the proprietary model and the FICO, when we show you the FICO, give us confidence in the performance.

Bill Carcache – Nomura Asset Management

That's very helpful. Thank you.

If I may, with a follow up, do you foresee any implications for the securitization markets as we approach the point where the Fed begins to withdraw liquidity from the system? If you could talk about what kind of impact you expect to your deposit base? That would be great.

Mac McCullough

It's Mac. We have a very large, stable retail deposit base that we feel very comfortable with in our rising rate environment. We also have fairly low dependence on large commercial deposits, if you take a look at it from a granularity perspective.

We are looking, obviously, at different products and different opportunities that we would take advantage of in a rising rate environment. We do feel like we're positioned well, given the nature of our deposit base and the makeup of our retail versus wholesale funding.

Steve Steinour

Bill, our strategies were launched in 2009. We've had a run of where we've been emphasizing share of wallet, deep relationships. A lot of our penetration of our customer base, involves multiple deposit related on the consumer side, like debit products. We think we've got a very sticky base.

We continue to emphasize share of wallet, and the objectives around that historically were extending the average life of deposits. We have been at it for years. We look at our larger deposits, and we are fairly unconcentrated.

We've been, in the context of LCR, shifting our deposit mix further as it relates to the collateralized deposits, to government entities and others over the last year and a half. We think we're in very good shape.

Bill Carcache – Nomura Asset Management

Great. Thank you very much for taking my questions.

Operator

Your next question comes from the line of Bob Ramsey with FBR Capital Markets. Your line is open.

Bob Ramsey – FBR & Co.

Quick question about the auto book. I'm just curious, is the decision to do a securitization at sometime in 2015, if not before, solely driven by the concentration limits? Or is the lower yields that you all mentioned and maybe the relative attractiveness of securitization markets, is that a factor in the thought process?

Mac McCullough

It's Mac. This is primarily related to the concentration limits. We've been growing that portfolio very nicely.

Again, we're very pleased with the growth and the portfolio itself. Moving to securitization later this year, definitely in 2015, will be all about concentration.

Steve Steinour

As we said a year and a half ago, we like the yield and duration on these assets comparatively, and we still do.

Bob Ramsey – FBR & Co.

Okay. Could you tell me what debt to income typically looks like on the auto loans?

Dan Neumeyer

I don't know that I – this is Dan. I don't know that we can quote specific numbers. It is one of the factors that we use in our customs score, but I don't think we have shared specifics regarding that kind of data. It is one of the main factors that we look at in extending credit.

Bob Ramsey – FBR & Co.

Okay. Has it been relatively constant over the last couple of years?

Dan Neumeyer

Yes, it has.

Bob Ramsey – FBR & Co.

Okay.

Steve Steinour

Our custom also overrides FICO. So, there are 780 FICOs we don't do because of that custom score, which would give you some indication of consumer leverage and us trying to stay on the conservative side of that, Bob.

Bob Ramsey – FBR & Co.

Okay. On the auto floor plan side, I was a little surprised you mentioned that utilization rates have been running lower given just the strength in auto sales. I'm curious what you think has been driving the utilization rates down in that book?

Steve Steinour

Just strong second quarters and inventory positioning. It's not a huge reduction for us. I think it's just an advance of the season.

Bob Ramsey – FBR & Co.

Okay. Alright. Thank you, guys.

Operator

Your next question comes from the line of Keith Murray with ISI. Your line is open.

Keith Murray – ISI Group

Just curious, sorry to beat the dead horse on auto, but does the OCC report that recently highlighted risks in the auto industry as an area of concern? Does that make you rethink the concentration limit that you guys have had in place for a while?

Dan Neumeyer

This is Dan. Absolutely not. We've had consistent, strong performance. It's a core competency, and I think our performance in the long run speaks for itself.

Our concentration limits were set quite sometime ago. We think they are at appropriate levels, both in terms of percentage of capital and the overall mix of the loan book. No, we're comfortable with it, have been, and will remain so.

Keith Murray – ISI Group

Thanks. On the Fair Play checking, we've seen competitors come out now with some type of free checking product, going after some small-dollar depositors. Any concern or risks on your side from competition and potentially seeing a slowdown in deposit gathering there?

Steve Steinour

No, not really. Our consumer relationships are up 8% year-over-year and 9% link-quarter annualized. We have a first-mover advantage.

We have a very, very well recognized market-leading product with one-of-a-kind features with 24-hour grades. We think we've got plenty of running room going forward.

Keith Murray – ISI Group

Okay. Thank you.

Operator

Your next question comes from the line of Ken Usdin with Jefferies. Your line is open.

Ken Usdin – Jefferies & Company

Steve, to your point on the last slide about the 3% and change revenue growth against 0.5% on expense growth, is that the type of magnitude of operating leverage that you think is sustainable as you look out through the rest of this year and next year? What does it mean for the efficiency ratio?

Steve Steinour

We haven't provided that specific guidance on that level of detail, Ken. I'm going to refrain from doing that, if you'll excuse me?

We are very focused on operating leverage and our efficiency. We will continue to be. We're not backing off of our long-term goal, and we expect to make progress.

Ken Usdin – Jefferies & Company

Okay. The second question then, just – sorry to nitpick on the expenses, but in terms of just that explicit expense guide being flat ex one-time items, would you consider the $5 million consulting expense mentioned in the release on page 7 as a one-time item? I'm just getting – is it off of the $458.6 million or is it more off of a $453.6 million?

Mac McCullough

Ken, this is Mac. The one-time item that we mentioned around strategic planning expense, we will see some additional pickup in the third quarter around some investment that we've made in technology, depreciation, amortization, those types of things. We could see that filling in that gap as it relates to that one-time item coming out of the second quarter.

Ken Usdin – Jefferies & Company

Okay, so it's more just around the reported number? Because you guys didn't have an explicit item that you pointed out on page 2 like you had in the past?

Mac McCullough

That's exactly right.

Ken Usdin – Jefferies & Company

Okay, got it. Thanks, guys.

Operator

Your next question comes from the line of Terry McEvoy with Sterne Agee. Your line is open.

Terry McEvoy – Sterne, Agee & Leach

Just your differentiated consumer and commercial products, do they have better success in more urban markets or in some of the smaller markets you operate in? The reason I ask as, if you look at the midwest, Chicago is about three times bigger than Columbus and you're not there. Clearly, it's defined as a midwest market and I'm trying to get a better understanding whether that over the mid to longer term would represent some growth opportunities, given the products and the success you've had over the last five years?

Steve Steinour

Terry, we've found success with this across the franchise. We don't see a noticeable difference between urban, suburban, or even rural. We're measuring our customer growth at the branch level, and it's fairly consistent over an extended period of time.

Terry McEvoy – Sterne, Agee & Leach

Okay. As a follow-up question, the rollout of the enhanced ATMs, is that just a necessity to compete with the larger banks? Or is there something there that differentiates you from your competitors and will allow you to grow market share because of the investments you're making at that level?

Steve Steinour

It has several benefits for us. One is it drives more efficiency through the system by having an imaged capability. As you know, we're completing, this quarter, a branch image-capture system, so our item processing will be very substantially reduced as a consequence.

It also, importantly, put us in a position to make adjustments to how we process and handle cutoff times. We will be more of an industry leader around cutoff times as we move forward post implementation.

Terry McEvoy – Sterne, Agee & Leach

Great. Thanks, Steve.

Operator

Your next question comes from the line of Chris Mutascio with KBW. Your line is open.

Chris Mutascio – Keefe, Bruyette & Woods

Most of my questions have been asked and answered, but I thought I would throw this out there to see if you would take the bait. The $5 million cost on the strategic planning, could you care to elaborate on what type of strategic planning that would incur?

Steve Steinour

The essence of our plan compiled in 2009, we've been talking about it consistently over the last four years. We felt when we initiated it, it would be roughly a five-year plan.

We wanted to step back, challenge ourselves, get a third-party lens in to help us do some benchmarking, do some other things, which frankly have been very, very helpful to us, very constructive. We're in the midst of that process. The engagement has been completed. Thus, Mac was clear that the expenses were second quarter, and we have some things we'll work on that we'll talk about in the future.

Chris Mutascio – Keefe, Bruyette & Woods

Is that something that we might hear from by end of the year heading into next year in terms of any type of new strategic focus?

Steve Steinour

It will be something we'll communicate, if not late this year, then early next year. I would view it as enhanced execution, for sure, and maybe a few newer thoughts, but certainly not revolutionary.

Chris Mutascio – Keefe, Bruyette & Woods

Okay. Great. Thank you very much.

Operator

Your next question comes from the line of Chip Dixon with DISCERN. Your line is open.

Chip Dixon – DISCERN

Question is really on the net interest margin and getting a sense of how long it's going to take in this environment before the interest rate environment stops being a headwind for you guys? In other words, just assuming the status quo and where you are, how long before all the repricing is done and balance sheet growth will equal net interest income growth?

Mac McCullough

Chip, it's Mac. I would say that if you take a look at the current rate environment and expectations in the marketplace, we're probably looking fourth quarter, first quarter in terms of starting to see some of that take place.

It does depend on what's happening from a competition perspective, obviously. It's competitive on the C&I market space, and we're going to continue to see repricing, but we'll also see competitive pressures impacting that margin as well.

Chip Dixon – DISCERN

Okay. Thanks. Separately on the C&I business, why are people borrowing and how does it tell you the economy is changing?

Steve Steinour

We've invested a lot in our capabilities in small business, our middle market, and our specialty verticals, which are substantially focused on in-region activity. There's been a consistent growth throughout Michigan, Ohio, Indiana, our footprint markets. We've been able to, obviously, take some market share along the way. We invested early in 2010 in starting to expand these capabilities as others were pulling back, so just like auto where we invested in a contrarian fashion, we got in early.

The businesses are doing well. Remember, we're in more of a manufacturing center of the country; manufacturing's doing well. There's more on-shoring than off-shoring.

We have great other factors, like low-cost gas coming into play. So, the states themselves are very well run fiscally. Multiple years of billion dollar plus or minus surpluses translating into lower taxes, so very attractive, much more competitive than they were historically.

I think we're in the early innings of that game. There are a lot of foundational elements in place here for us to continue to be able to see businesses grow and prosper. We will retain that focus and I think be a winner as the economies continue to grow in our footprint.

Chip Dixon – DISCERN

Thank you.

Operator

Your next question comes from the line of John Arfstrom with RBC Capital Markets. Your line is open.

Jon Arfstrom – RBC Capital Markets

Just a follow up on that one, at least it's not an auto question on loan growth. The question for you, Steve, is are you more optimistic on the lending outlook today than you were a quarter ago? Are you more optimistic as you look to the second half and later in the year?

Steve Steinour

Yes. I'll expand on that a little bit, if you don't mind, John.

As we said coming into the year, we thought second half would be better than first. It was certainly in 2013, and we saw it that way.

We remain bullish. We've got robust pipelines as we come into the third quarter and a lot of good activity. We see a strengthening of confidence, generally, in the business community.

We are, I think, poised to continue to grow beyond the current level. If we continue to execute well, then we should be in position to move forward with the economy as it improves.

John Arfstrom – RBC Capital Markets

Okay. That's helpful. Then just one follow up on the deposit service charge line. I think we all know you had the $6 million headwind coming in Q3. Is there anything else you feel you need to alter in terms of your checking account products, or is this just about it and it's going to be about account growth going forward?

Steve Steinour

We've said before, we don't have anything else planned. There's an expectation that we will continue to be market leading in terms of consumer growth, and so I don't foresee anything that we have to do. There may be something we choose to do here or there, but I don't foresee anything that we have to do.

John Arfstrom – RBC Capital Markets

Okay, all right. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Steven Alexopoulos with JPMorgan. Your line is open.

Steven Alexopoulos – JPMorgan Chase & Co.

I actually had two quick follow ups. It's actually been quite a few quarters since you last did an auto securitization. If you were to do one here, what's your sense of the market and the rough gain on sale margin you would expect?

Steve Steinour

We think the market is strong, and the gain on sale has clearly come in. I don't know if it's an equivalent $1 billion securitization of a full-in paper as 50%, 60%, 70%, somewhere in that range of what it had been. That may continue to move around a little bit, hopefully strengthens.

Steven Alexopoulos – JPMorgan Chase & Co.

Okay. That's helpful. Just one other one.

Steve, following up on all the comments about increased confidence, can you specifically talk about what you're seeing from small business? Thanks.

Steve Steinour

There's much more small business activity this year than we saw through the first half of 2013. The economies, the town, cities, communities that we work in, are all doing better, and some of them have been doing well for a number of years. But if you think about the important market for us like Cleveland, you've had a couple of pretty significant shots in the arm in the last few weeks. That, if anything, just continues to bolster confidence.

Again, the cities are doing better. There's a great downtown revitalization going on in Cincinnati. There's one under way in Cleveland. I'm very bullish about Detroit as it comes through this bankruptcy.

We like our geography a lot. We believe we've got an important role. We're at the cross roads of a lot of the opportunities in these important geographies for further growth. I think we're well positioned in that regard.

Steven Alexopoulos – JPMorgan Chase & Co.

Okay. Thanks for taking my questions.

Operator

There are no further questions in queue at this time. I would like to turn the conference back over to Steve Steinour.

Steve Steinour

In summary, we're very pleased with our performance in the second quarter, as our strategies and execution drove strong results. There's market acceptance of our value proposition, our best-in-class service, our convenience, and our Fair Play philosophy. You can see this as we continue to gain market share and share of wallet.

We're seeing good customer activity and our local economies to recover and strengthen. It's demonstrated by our 9% average loan growth this quarter. We produced high percent revenue growth and 9% net income growth in a challenging environment. We recognized the interest rate environment and competitive pressures are not going to way overnight, so we have work yet to do to finish out the year as strongly as it's begun.

We remain committed to delivering positive operating leverage for the full year through top-line revenue growth and disciplined expense management. Finally, our Board and our Management team, we're all long-term shareholders, so we're focused on driving long-term performance.

I want to thank you for your interest in Huntington and your participation on the call today. Have a great day.

Operator

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

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