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Huntington Bancshares (NASDAQ:HBAN)

Q4 2010 Earnings Call

January 20, 2011 10:00 am ET

Executives

Daniel Neumeyer - Chief Credit Officer and Senior Executive Vice President

Stephen Steinour - Chairman of the Board, 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

Donald Kimble - Chief Financial Officer, Senior Executive Vice President and Treasurer

Jay Gould - Senior Vice President and Director of Investor Relations

Analysts

David Rochester - Crédit Suisse AG

Anthony Davis - Stifel, Nicolaus & Co., Inc.

Paul Miller - FBR Capital Markets & Co.

Kenneth Usdin - Jefferies & Company, Inc.

Erika Penala - Merrill Lynch

Brian Foran - Goldman Sachs

Ken Zerbe

Operator

Good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Huntington Bancshares Fourth Quarter Earnings Conference Call. [Operator Instructions] Mr. Jay Gould, you may begin your conference.

Jay Gould

Thank you, Simon, and welcome, everyone. I'm Jay Gould, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on our website huntington.com, and this call is being recorded and will be available as a rebroadcast starting about an hour from close. Please call the Investor Relations department at (614) 480-5676 for more information on how to access these recordings or playback or should you have difficulty getting a copy of the slides.

Slides 2, 3 or 4 note several aspects of the basis of today's presentation, and I encourage you to read these but let me point out one key disclosure. This presentation contains both GAAP and non-GAAP financial measures where we believe it's helpful to understanding Huntington's results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentation and its appendix, and the press release and the quarterly financial review supplement to today's earnings release or in the related 8-K filed earlier today, all of which you can find on our website.

Turning to Slide 5. 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 changes and risks and uncertainties, which may cause actual results to differ materially. Huntington assumes no obligation to update such statements. For a complete discussion of risks and uncertainties, please refer to this slide and materials 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 6, participating today are Steve Steinour, Chairman, President, Chief Executive Officer; Don Kimble, Senior Executive Vice President and Chief Financial Officer; and Dan Neumeyer, Senior Executive Vice President and Chief Credit Officer; also present is Todd Beekman, Senior Vice President and Assistant Director of Investor Relations. Let's get started by turning to Slide 7. Steve?

Stephen Steinour

Welcome, everyone. I'll begin with a review of the fourth quarter performance highlights. And after my overview, Don will follow with his usual overview of our financial performance. Dan will provide an update on credit, and I'll then return with a discussion of our 2011 expectations and key messages to our investors.

Before getting into details, I want to make a couple of comments to provide some overall perspective. Fourth quarter results capped a good year, a year full of progress in repositioning the company for better long-term growth and improved shareholder returns as we enter 2011. The repositioning has come in two stages. First, in 2009, a year we aggressively addressed our credit issues. Both what was in the portfolio as well as strengthening the current culture in overall risk management of the bank. We said at the end of 2009 that we believed our credit problems had peaked and 2010 results demonstrated that was true.

Today, our credit quality is returning to normal faster than we envisioned even a year ago with the timeframe shortening significantly. Second was 2010, this was a year we addressed and put behind our capital issues, particularly our lower relative level of common equity. Our capital today is stronger than it's ever been and strong on a relative basis as well.

Throughout these two years, we've also developed and implemented a strategic plan designed to grow overall revenues. Our fourth quarter results reflected continued revenue growth over the last eight consecutive quarters. We've repositioned the bank. Huntington's future is bright, and I believe you will see that coming through in our fourth quarter performance. So let's begin with a more detailed discussion starting on Page 8.

We reported net income of $122.9 million or $0.05 a share on a dollar basis. This represented a 22% improvement from the third quarter, as Don will detail, the current quarter's EPS were negatively impacted by a onetime $0.07 per share deemed dividend as a result of repayment of TARP capital in December. The performance drivers were lower provision expense and higher net interest income, trends, we believe, will continue.

Our pretax pre-provision income was $260 million, down just over $5 million or 2% from the third quarter. We noted at the end of the third quarter that we expected pretax pre-provision income to be flattish with the third quarter's $265 million, so the fourth quarter's performance in this respect was less than we expected. This reflected more pressure than expected on net interest margin and softness in non-interest income on the revenue side and a bit more growth in non-interest expense.

We expect the level of our pretax pre-provision income will remain around these levels going forward through 2011. Nevertheless, we anticipate continued growth in net income throughout 2011, reflecting the continued benefit of lower credit costs. I'll comment on this in more detail in my closing remarks.

Fully taxable equivalent revenue increased $3.5 million or 1%. This reflected a $6.4 million or 2% increase in fully taxable equivalent net interest income. Average total loans grew at a 6% annualized rate of growth in almost every category, auto loans, C&I loans, home equity and residential mortgages. Commercial real estate loans continued their planned decline. But again this quarter and on an absolute basis, core deposit growth exceeded loan growth. This contributed to more growth than originally expected and lower yield investment securities, and this was the main contributing factor in the eight basis point decline in our net interest margin.

We are and will stay on the short end of the curve which reduces spread. Non-interest income declined 1% due to lower deposit service charge income and non-interest expense grew $7.3 million or 2%, reflecting a number of factors, including higher mortgage repurchase, personnel, outside data processing and other services expenses, as well as a higher fraud loss we experienced in the quarter.

Credit quality, again, showed significant improvement with a 21% decrease in non-accrual loans with both new non-accrual and new criticized loans declining. Net charge-offs dropped 7%. Our provision for credit losses declined $32.3 million.

Turning to Slide 9. Our reserves continued to strengthen. With our period end allowance for credit losses as a percentage of loans and leases declining to 3.39% from 3.6% at the end of the third quarter but importantly, our allowance for credit losses as a percentage of non-accrual loans increased significantly to 166% from 140%.

Capital was a big fourth quarter story. We raised all of our $1.4 billion in TARP capital -- we repaid all of our $1.4 billion in TARP capital after highly successful issuances of common equity and subordinated debt. Our period-end tangible common equity ratio was 7.56%, up from 6.2%. And our Tier 1 common risk-based capital ratio increased to 9.25% from 7.39%.

Our regulatory Tier 1 and total risk-based capital ratios ended the quarter at 11.5% and 14.39%, respectively. These were down from the end of the third quarter due to the TARP capital repayment but remained $2.4 billion and $1.9 billion above well-capitalized regulatory thresholds. Yesterday, we announced the repurchase of our TARP-related warrant to purchase 23.6 million shares of common stock for just over $49 million.

This removed any potential dilutive overhang and closes out our TARP related relationship with the U.S. Treasury. Lastly, our liquidity position remained strong. We saw 10% annualized core deposit growth with a stable period-end loan-to-deposit ratio of 91%.

Now on Slide 10. We continue to move forward with our positioning for growth with implementing strategic initiatives designed to grow future revenue. Specifically in the quarter, we opened four Giant Eagle in-store branches, and our equipment finance group launched three new verticals: Business Aircraft, Rail Industry Finance and Lender Finance.

We were also very pleased to have Steve Elliott join our Board of Directors, announced at the start of this year. And a number of you will know, given his 23 year career as a senior banking Executive at BNY Mellon, hefurther strengthens our financial services industry expertise and experience on the board, and he's just a great addition from a practical knowledge and industry strategic perspective. So with that, let me turn the presentation over to Don to review the details. Don?

Donald Kimble

Thanks, Steve. Slide 11 provides a summary of our quarterly earnings trend, many of the performance metrics will be discussed later in the presentation, so let's move on. As noted on Slide 12, our net income for the fourth quarter was $122.9 million or $0.05 per share. One significant item impacted the quarter's results. We recognized a $56.3 million or $0.07 per share deemed dividend from the repayment of our TARP preferred stock. This was more than a onetime reduction to net income available for common shares and to our capital.

Slide 13 is a summary income statement that shows that the $27.3 million increase in pretax income reflected the benefits of a $32.2 million decline in provision expense and a $5.3 million increase in net interest income, which were partially offset by a $7.3 million increase in expense and $2.9 million decrease in non-interest income.

I'll detail these changes in subsequent slides. Turning to Slide 14. We show the trends in our revenues and pretax pre-provision on the left-hand side of the slide. Revenues have continued to grow throughout the last eight quarters. Revenues for the fourth quarter were up 10% over the fourth quarter of last year. Our pretax pre-provision earnings were up 7% from last year despite the 2% decline from the last quarter. This decline was caused by several factors, including a drop in service charge revenues of $10 million.

Highlighted in yellow, the impact of lower service charge in household revenues. You can see total service charge income has declined from $77 million in the year-ago quarter to $56 million this quarter. This decline reflects the impact of Reg E, changes in consumer behavior and our Fair Play banking initiatives. For 2011, we expect pretax pre-provision levels to remain relatively stable, considering the impact of regulatory changes, our Fair Play banking philosophy and lower expected mortgage banking revenues. These challenges will be offset by continued net interest income growth and additional revenues from cross-sell activities.

Slide 15 depicts the trends of our net interest income and margin. During the fourth quarter, our fully tax-equivalent net interest income increased by $6.4 million, reflecting an eight basis point decline in our net interest margin to 3.37% and a $1.8 billion increase to our total average earning asset base. The margin change reflected several impacts. First was a five basis point favorable impact of our deposit mix and pricing changes. Mixed shift from time deposits to more transaction-based core deposits both reduced our cost but also resulted in a much more stable funding base for us as well.

Offsetting this positive impact was the asset mix change with the deposit growth continuing to be reinvested in lower yielding shorter duration securities. Also contributing to this decline was the sale of approximately $320 million of our higher risk private label and all sell mortgage portfolios over the last two quarters. These securities had yields in excess of 6%, and the reinvestment yield was about 2%. The sales data however, reduced the overall risk associated with the portfolio. These combined changes cost about seven basis points with the net interest margin.

Another item impacting the quarter included the lower interest income of our interest rate derivatives due to the accretion of previous gains from termination of swaps. This reduction and accretion will continue for the next couple of quarters. Also the impact of the $6 million reduction in the fourth quarter is reflected as lower yields in our consumer loan portfolio. To manage the impact of this margin compression, we've begun more aggressive migration of promotional money market rates to current market levels.

This, combined with growth in average loan balances that are expected to be more comparable to the growth in average core deposit balances, should support the net interest margin perspectively.

Continuing onto Slide 16. We show the change in the deposit mix over the last five quarters. This shift from 36% of the deposits in time and non-core to 29% has improved the margin by about 20 basis points. Also of note starting in the third quarter of 2011, we should see the start of another round of higher rate time deposits beginning to roll off again with $1.8 billion maturing with an average rate of 2.71%.

Turning to Slide 17. We showed 3% growth in averaged core deposits. This was driven by a strong growth in money market accounts and noninterest bearing and deposits.

Slide 18 shows trends in our loan and lease portfolio. Total commercial loans were up $.1 billion or 1%. The increase reflected the anticipated growth in commercial industrial loans, offset by the decline in Commercial Real Estate balances. The $.4 billion increase in C&I loans reflected improving customer acquisition, resulting from some of the early benefits of our strategic initiatives, including growth in our dealer floor plan balances as well as equipment finance asset period.

Total consumer loans were up $.5 billion or 3% from the prior quarter. The $.4 billion increase in average automobile loans and leases reflected continued strong originations of about $800 million this past quarter. These originations continue to reflect very high credit quality and reasonable returns.

Slide 19 shows the trends in our noninterest income category. Our noninterest income decreased by $2.9 million from the prior quarter. This was almost entirely due to the $10.1 million decline in deposit service charges, reflecting the impact of the adoption of the changes to Reg E and the impact of our Fair Play banking philosophy.

Mortgage banking revenues increased by $1.1 million, reflecting a 35% increase in origination income on $1.8 billion of originations. This increase was offset by a $9.6 million decline to net MSR hedging income.

Slide 20 provides an update of our Fair Play banking philosophy. Over the second half of 2010, the reduction in service charge income related to our 24-hour grace initiative was consistent with our expectations.

Importantly, last year, checking account households grew by 6 1/2%, which was 1% more than expected. However, overall service charge income over the second half of the year was slightly lower than our 2010 midyear expectations, as customers continue to independently manage their account balances. Opt-in rates have continued to improved and are higher than initial estimates.

The Federal Reserve surprised us with their initial comments on interchange income from the Durbin amendment. We had estimated the impact as about a 60% reduction to our annual debit card interchange income or about $54 million. With the $0.07 to $0.12 transaction cap, this will be a 75% to 85% reduction. We would expect these changes to begin in August of this year.

The next slide is a summary of our expense trends. Total expenses were up $7.3 million from the prior quarter. This reflected a $3.9 million increase from personnel costs. The increase reflected a number of factors, including higher salaries due to a 1% increase in staffing and higher sales commissions. Other expenses were up $7.8 million from the previous quarter. Contributing to this increase was a $4.1 million increase to costs associated with our repurchase obligations.

Also during the quarter, we experienced an increase of $2.4 million in operating losses related to fraud. During the fourth quarter, we had several significant items impacting our capital position. On the positive side, we completed our issuance of $920 million of common equity, adding 168 basis points to our TCE ratio. Also net income, that's both common and preferred dividends, added another 16 basis points. Partially offsetting these additions was a 32 basis point reduction due to the impact of changes in interest rates on the market value of our investment securities or derivatives and the annual adjustment to our net pension obligation.

The impact of the deemed dividend was also an 11 basis point hit and a five basis point reduction, reflecting the growth in assets and other changes.

Slide 24 is a summary of our capital trends. The current quarter's significant items impacted all these ratios. The resulting TCE ratio of 7.56% and the Tier 1 common ratio of 9.25% positioned us quite well, even after considering the impact of Basel III.

The current quarter regulatory capital ratios also reflect the impact of an increase with total disallowed deferred tax asset from $113 million at December 30, $161 million at December 31. The deferred tax asset disallowance for regulatory capital purposes reduced the ratios by about 37 basis points. We still expect the impact from disallowance to decline throughout the year with no DTA disallowance at the end of 2011. I'm turning the presentation over to Dan Neumeyer to review the credit trends. Dan?

Daniel Neumeyer

Thanks, Don. Slide 25 provides an overview of our credit quality trends. Credit trends continue on a positive path in virtually every category. Nonperforming loans fell to 2.04% at the end of the fourth quarter, down from 2.62%, one quarter earlier. Similarly, nonperforming assets were reduced to 2.21% from 2.94% in September. The level of criticized assets also saw a meaningful reduction in the quarter, falling from 11.02% to 9.15% at December 31.

Net charge-off ratio also fell from 1.98% to 1.82%. 90-day loans past due at accruing fell slightly in the quarter to 23 basis points, equaling our best result for the year. As I will discuss in a moment, our 30-day past due loans also declined. This is a strong performance particularly in a quarter where seasonal patterns and consumer behavior would've suggested an uptick.

The ACL ratios fell to 3.39% at December 31 from 3.67% at September 30. Importantly, reflecting the noticeable improvement in credit quality, the ACL coverage ratio as a nonperforming loan and nonperforming asset showed significant strengthening, moving to 166% and 153%, respectively, up from 140% and 125%, respectively of the previous quarter end.

The ratio of the ACL to criticized assets also improved to nearly 38% from 33%, reflecting increased coverage on our emerging problem loans. We remain focused on further improvement on our credit quality metrics while maintaining strong underwriting standards in both the commercial and consumer lending areas.

We continue to seek reductions in our non-core Commercial Real Estate portfolio as well and saw an 11% reduction in the portfolio in the fourth quarter.

Slide 26 is a graphical depiction of the trends in nonperforming assets. As a shown on the left-hand side, nonperforming loans and nonperforming assets continued the meaningful downward slope and reflected fairly dramatic improvement over the last year.

The chart on the right depicts nonaccrual loan inflow which were lower in the fourth quarter than in the third, although still higher than the second quarter inflows. Although the uneven economy does not allow us to project with complete confidence, we do believe that nonaccrual inflows will continue to show decreases in future quarters. Slide 27 outlines the non-performing asset flows over the past year. As mentioned, additions to NPA status were down in the fourth quarter compared to the third.

Additionally, loans returning to accruing status, coupled with healthy payments and proceeds from loan sales along with charge-offs, resulted in a 24% reduction quarter-over-quarter. In the fourth quarter, we sold nearly $40 million of residential real estate loans which contributed to the majority of the increase in the loan sales category. Year-over-year, NPAs declined by 59%.

Slide 28 continues our disclosure around the level of criticized commercial loans. Criticized commercial loans saw the most significant reduction this year, falling 15% in the quarter. Additions fell back to the level experienced in the first half of the year, while upgrades and payments remained at solid levels.

New inflow activity from commercial real estate has been fairly modest with a majority of the inflows coming from the various areas within C&I, including middle-market and business banking.

Slide 29 shows a significant reduction in 30-day delinquencies as they fell to 71 basis points from 1.08% at the end of the third quarter. The vast majority of these loans are managed by our Special Assets department and receive intensive monitoring. We continue to have no commercial loans that are 90 days past due and accruing, reflecting our aggressive stance relative to problem loans.

Slide 30 depicts the trend of our consumer portfolios which remained positive in both 30- and 90-day categories. In the 30-day category, there was improvement noted in both home equity and residential mortgage with a very small uptick in auto at four basis points. In the 90-day category, all three areas: auto, home equity and residential mortgages showed improvement quarter-over-quarter.

We continue our very focused efforts to address delinquencies at an early stage when remediation options are available.

Turning to Slide 31. Commercial net charge-offs fell nearly 18% and were lower in both the C&I and CRE segments. We expect a declining trend to continue as we move through 2011. Consumer charge-offs saw a 15% increase due largely to charge-offs associated with the sale of $39.8 million of residential mortgages sold during the quarter that resulted in an incremental charge-off of $16.4 million.

The quarter also included a $4.4 million Franklin-related recovery. Without these two items, overall consumer charge-offs would've declined $3 million for the quarter. Auto and home equity net charge-offs did see small increases in the quarter although they remained lower than the levels experienced one year ago. We remain committed to originating high quality auto and home equity loans and do not anticipate negative trends in charge-off levels.

Although home equity loans remain an area of caution as the lack of available equity will result in losses in the event of default.

Reviewing Slide 32. The loan loss provision for the fourth quarter was $87 million, compared to net charge-offs for the quarter of $172.3 million. The resulting ACL to loan ratio now stands at 3.39%, down from 3.67% one quarter earlier. Importantly the coverage ratio of ACLs to NALs increased to 166% from 140%, reflecting very strong coverage due to our significantly lower level of nonaccrual loans.

We are very comfortable with this level of ACL and believe it is efficient and appropriate given the still unstable economy.

In summary, we're very pleased with the continued credit quality improvement which spans all areas of the organization. Despite a still difficult economy, we continue to see very good progress in the commercial and consumer portfolios and remain optimistic in our ability to drive further improvements over the ensuing quarters. Let me turn the presentation back over to Steve.

Stephen Steinour

I'd like to use Slide 33 to recap our current thinking regarding 2011 expectations. Let's start with the respective economy. We think it'll be relatively stable and potentially improving here in the Midwest.

The key driver of the net income growth for us is expected to be a lower provision for credit losses, and this reflects a continuing expectation of declines in non-performing assets, non-performing loans and net charge-offs. Pretax pre-provision earnings will remain comparable to 2010 second half performance and the $260 million to $265 million per quarter range.

The net interest margin is expected to be flat to up slightly from the fourth quarter level of 3.37%. There's still deposit repricing opportunities that will benefit the margin. And on an absolute basis, we expect growth in deposits will more closely match that of loans as we go forward. So not a lot of pressure incremental from growth to lower yield investment securities are expected.

We anticipate modest loan growth driven by a continued strong growth in auto loans, growth in commercial, industrial loans and modest growth in home equity and residential offset by continued declines in commercial real estate loans.

The income growth will be mixed. With entering 2011 at a higher interest rate level environment, we anticipate mortgage banking income will be under pressure, particularly in the first quarter. While we believe the deposit service charge decline is close to bottoming out at fourth quarter levels, there still could be some additional pressure. Further later in the year, we will see reductions due to lower interchange fees that are expected to be implemented in August. So these are the headwinds on the fee side of the business.

On the other side, we do expect to see growth in fee income lines such as treasury management. Our brokerage business, insurance and trust, driven by increased cross-sell results and reflecting the impact of the strategic initiatives, including improved growth in households and in businesses. Non-interest expense is expected to increase slightly from the fourth quarter level due to continued investments to grow our business. Taking all these together, we anticipate continued growth in net income.

In Slide 34. In closing, I want to remind all the investors of several important messages. First, the balance sheet is strong, and that covers all aspects: liquidity, reserves and capital. With regard to capital, our ratios are strong and will continue to strengthen as we generate more equity through growth in earnings. We have the capacity to now consider assuming more active capital management actions, and we believe the repurchase of the TARP warrant yesterday reflects that capacity.

We already expect to continue to see substantially improved credit quality performance. We hear frequently, how soon will it be before charge-offs and provision expense return to normal levels? And we are continuing to attempt to answer that question. It's clearly shortening, but we're not yet in a position where we want to make that call. Our strategic initiatives continue to gain traction. Everyday, we're making progress in breaking away performance in a number of the units.

This is going to be an exciting year for Huntington, and we hope it will be for our investors as well. We hope that -- we thank you for your interest. So at this point, operator, would you open for questions, please?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Dave Rochester with Credit Suisse.

David Rochester - Crédit Suisse AG

Nice C&I growth this quarter. Can you give us any additional color there on where you saw that growth? Was that primarily middle market? Is there a growing component that's large corporate? And could you quantify how much of that came from the Equipment Finance business?

Daniel Neumeyer

Dave, this is Dan Neumeyer. We really saw a growth evenly spread over many of the units. We are seeing good growth in middle market. Some expansion in large corporate although it's still appropriate for our size and strategic direction. Equipment Finance is ramping up. We have started to see increased fundings there. I can't give you an exact dollar amount. But there definitely is -- we're starting to see the needle move there, and we'll see continued growth as we add the new verticals that Steve referenced earlier. The ABL group, which started up last year, is also gaining some traction. And we remain very active in the SBA market. So really, it's very broad-based growth, encompassing all areas, all segments, as well as pretty much spread throughout the geography.

Stephen Steinour

And we have a pipeline that's reasonable going into the new year, Dave, as well. So whether that's in part a reflection of the accelerated depreciation component of the tax code that was recently passed or more confidence in economic expansions, perhaps it's some combination. But we see activity being better in '11 than it was in '10.

David Rochester - Crédit Suisse AG

And just drilling down on the equipment finance, I know you've talked about that being a big opportunity for you. Can you sort of update us roughly where the portfolio is today, and how much you can see that grow over the next few years?

Stephen Steinour

Well, we're slightly over $1 billion today in terms of outstandings, and we could see that go up by $1 billion to $2 billion over the next couple of years.

David Rochester - Crédit Suisse AG

And switching to the auto side real quick. Could you give some color as to how much of that origination activity is coming from your new markets? And then what you ultimately see is the potential there for a long growth in the new markets in the next couple of years?

Stephen Steinour

We're very early in these newer markets. And so a modest amount of that growth in the quarter was reflective of new markets. We do think they are exciting. We're optimistic about it. And we could see originations in the combined new markets moving into the billion-dollar level over time. But that's a substantial growth from where it is currently.

David Rochester - Crédit Suisse AG

You've got a whole lot of capital flexibility now in terms of future actions, as you said. It sounds like you're expecting to increase the dividend later this year. Is that a fair statement?

Stephen Steinour

Well, we're not in a position to articulate any plans at this point. Nice try, Dave. We are, as a Board, having some discussions about different options. But we do not expect to do anything immediately.

Operator

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

Ken Zerbe

I know in the Investor Day that you guys had a while back, you talked a lot about building out your platform for M&A. And I know you can't comment specifically on any deals but maybe you could just talk about what you're seeing up in your marker right now, on sort of whether there is an increase in sort of what I call zombie banks versus FDIC deals. What are you looking for? What's it going to take for you guys, or when do you plan to start getting more active in thinking about M&A?

Stephen Steinour

Ken, I'm going to ask Don to add to this in a minute. But I'll refer to what we've been saying throughout including on Investor Day. We have to continue to grow the core. That is a strategic imperative, and we're very focused on that. Having said that, we have made some investment in building out capabilities on the acquisition and integration front. We have brought on some people beyond those which we've announced. And as part of expanding capability and increasing capacity to do things, we're not feeling pressure in that regard. However, and again, the priority is grow the core. Don, what would you like to add?

Donald Kimble

I think it's a good thing to begin with Stephen. And as far as what's going on within our footprint, I would say that we have seen more interest being expressed from banks as far as consideration for acquisitions. I don't know if I'd use the phrase zombie banks, but some of the banks that are interested in having discussions have either capital and/or credit quality challenges that they're trying to address and deal with in considering all strategic options. But we're also seeing some pickup and calls from healthy, well-capitalized, strong credit quality type of banks and institutions that may be starting the process as to consider what their strategic options might be. And so I wouldn't want to forecast it as anytime soon as far as initiating any transactions. But I would say that the activity level has picked up from being non-existent, say, a couple quarters ago.

Ken Zerbe

Just in terms of your reserve, obviously, nonperformance is coming down dramatically. And I think we've seen really good progress over the last year. But your reserve ratio coming down but still fairly high, looks like your coverage is high. How quickly would you feel comfortable bringing down your reserve ratio to well below that 3% range?

Stephen Steinour

Well, it's in part a function of the mix. Now we're bringing down -- we're reducing our commercial real estate exposure. And that has been, for the last two years, the single largest concern for us on the credit risk front. But we still are over concentrated. We reduced the pre-portfolio by about $260 million, and we're running usually between $250 million, $300 million a quarter. But we're a billion-plus in aggregate exposure beyond that which we would prefer to be at. And so as we think about credit risks to the extent we are concerned, it's more weighted towards commercial real estate than the other portfolios. Dan, anything you want to add?

Daniel Neumeyer

That obviously is the single largest component of the ACL is the commercial real estate exposure, as Steve mentioned, as we're going to still plan to bring that down probably by another 20%. Obviously, the reserve will go down just from a size of the portfolio but also as we move out some of the problem credits, replaced with stronger credits. So we do see a continued downward trend. And obviously, we still have the general reserve which makes up about a third of the portfolio, and that's very much dependent on the economy. And we certainly aren't ready to call that all clear at this point. So it's an exercise we go through every quarter in analyzing where we want to be.

Stephen Steinour

We try to be cautious and prudent with this, and don't feel pressured to reduce it beyond the rate we're currently at.

Ken Zerbe

And how quickly do think you can get that 20% reduction?

Stephen Steinour

Well, if the trend lines continue, it would be plus or minus a year. But we can't control that, a lot of that's happening through refinance activity. And the CMBS market continues to open up and other things happen, particularly as it relates to the non-core that could create even you can see it in an accelerating environment, if things go well.

Operator

Your next question comes from the line of Brian Foran with Nomura.

Brian Foran - Goldman Sachs

I guess, when I think about the pre-provision outlook, one pushback I hear a lot is, it's more net interest income, it's less fees. And the net interest income includes growth in some products like auto and like equipment leasing that historically have a tendency to be cyclical products that banks historically have gotten in and then had to pull out of. So can you just kind of address as you expand into these new businesses and new geographies, how do you make sure you're getting appropriate risk-adjusted returns and make sure that today's source of growth doesn't become tomorrow's credit problem?

Stephen Steinour

I'll start, and then I'll ask Dan to add to it. First of all, we look at our production weekly on a number of fronts, including credit quality. So we know our FICO LTB every week, for the prior week. And these are markets that have good relative performance in other regions in the country in terms of expansion. And in auto, we've been in it for half a century and we've stayed in it. We've never been in or out. So we have a lot of confidence on the auto front. On the Equipment Finance side, in addition to Rick Remiker, we have been adding expertise both in the channel, and then we've made substantial investments in our credit and credit risk management capabilities over the last two years. And so I'll let Dan pick up from that.

Daniel Neumeyer

When we're looking at expansions, whether it be into new business segments or geographies, part of the analysis that goes in is, can we continue to conduct these businesses with the same risk profile. We are not lowering our standards, as Steve mentioned, when we look at -- we're not going to go into other geographies unless we know that we can maintain the same cutoffs and FICO scores and et cetera. And as Equipment Finance, for an example there, that's an area where we're actually going upmarket. I think the quality of the type of customer we're adding today is much stronger. We have played more on the smaller end. And so I actually think that the growth is going to be with stronger companies and that our performance will actually improve over time because of that. So I think we're very thoughtful before we make any of these moves. All of these ideas are better -- we go through a process of analyzing risk return. And so I don't think we're taking on any outside risk or anything that we're going to have to jump into and jump out of.

Brian Foran - Goldman Sachs

On auto specifically as a follow-up. There's some concern because one of your competitors last week started pulling back from that business because pricing had gotten too competitive. Can you talk about pricing? And if you gave this already, I missed it. Do you have a weighted average price of new originations now, because I guess there's some concern that the auto yields on the balance sheet are slipping each quarter?

Stephen Steinour

As far as the return, our credit adjusted returns have been fairly consistent over the last couple of quarters. We did see origination volume come down a little bit in the fourth quarter from the third quarter. But the volumes were still very strong, and the clients were really more based on the activity. We have not talked about what the go-to rate is for new originations, but typically they've been around 2.25% to 2.5% type of credit adjusted spread. So you will continue to see some declines in that yield prospectively just because the current origination volumes are still below the current rate of roughly 540, that's the average yield in the portfolio.

Operator

Your next question comes from the line of Paul Miller with FBR Capital Markets.

Paul Miller - FBR Capital Markets & Co.

Going back to CRE because it's such an important topic here. What loan categories or what loan segments do you think are doing the worse and relatively, what loan segments are doing the best? And can you remind us what you consider non-core in that CRE book that you would like to run off?

Stephen Steinour

Sure, the non-core are basically single loan relationships. They also tend to include the weaker relationships but they are basically defined as we do not have the full relationship cross-selling of services and so forth. So they are the loans that we are looking to exit unless we can have a fuller relationship with them. To be categorized as core, we also looked at the ability to -- the global debt service coverage availability, excess liquidity and so forth. So the core customers in addition to having a full relationship also tend to be the stronger credits that can sustain themselves through the cycle. And thus far, our core portfolio has held up exceedingly well.

The biggest area of risk for us has been in retail. But we've also made our way through that portfolio. And actually in the last quarter, we actually saw for the first time more edits being upgraded in their risk profile than being downgraded. So in addition to cutting the size of that portfolio, recognizing charge-offs, et cetera, we're also starting to see a bit of a turn there, largely because we've been working that portfolio diligently for about the last 18 months. Many of the other areas continue to be challenged, but we also have, in all areas, reduced the level of exposure and have recognized our biggest hits. So there's nothing out there that we are extremely concerned about, other than in the general context of it's a still difficult environment.

Paul Miller - FBR Capital Markets & Co.

And then getting back to David Rochester's question, and I want to ask it a little bit differently, how do you view overall capital management between returning earnings for shareholders and M&A?

Stephen Steinour

Well, at this point, we haven't articulated that point of view, and it's a discussion that is underway with our board. And we would expect to be back later this year with some guidance on that. But we'll be thoughtful on that regard and want to come forward with a sustaining view. Anything you want to add, Don?

Donald Kimble

I think it's important that we also are very focused on the fact that our dividend is at a low level. And over time that we will want to address that for our retail shareholders especially. But as Steve said, we've had active dialogue with our board as far as prioritization of the use of that capital and making sure that we're prudent in the deployment of that as well.

Paul Miller - FBR Capital Markets & Co.

Because I think one of the things that has surprised me is how the deal values have recovered so quickly after everything was done with FDIC wraps, and now you're seeing some pretty rich deals going on. Steve, can you just address that, and add some color to it? Does that surprise you also? Or did you just can't underestimate the willingness of guys doing -- to do a merger?

Stephen Steinour

Well, I'm sure everybody on the phone is closer to it than us. But since you asked for a specific comment, I am surprised. And when you take loan marks into price, I'm very surprised at this point in the cycle. That's why I keep coming back to our challenge and our priority is for P&L growth. And with that, we would expect to have opportunities that we would find interesting from a return profile, and I think that there will be some out there. But we're not feeling any pressure or any reason to be compelled to get in the M&A game at some of the levels we're seeing.

Paul Miller - FBR Capital Markets & Co.

Steve, I don't know. I got cut off, I don't know if anybody else got cut off. But I got cut off in the very beginning of you answering the question. What did you say in the very beginning?

Stephen Steinour

The rationale for why we believe growing the core is so fundamental to our priority and our focus is in part reflecting this level of pricing. So I'm not going to comment on specific deals or others. But just -- since you asked, I'll share with you, I am surprised in particularly when you take the loan marks into the overall price. I'm very surprised at some of the levels going off at this point in the cycle. So we're not feeling pressured to pursue anything. If we can get something that we think is an interesting return for our shareholders and will be additive to what we're trying to do strategically, then we take a hard look at it. But it is very surprising to me how quickly it's bounced back.

Operator

Your next question comes from the line of Tony Davis with Stifel, Nicolaus.

Anthony Davis - Stifel, Nicolaus & Co., Inc.

I hate to belabor the CRE point, Dan. But I think you got about $2.8 billion of loans maturing or coming up for refinancing this year. I wonder how that breaks out between core and non-core? And how much of that you've addressed at this point? And I guess, maybe you said in the last quarter or so how many of those loans you've actually sort of put to bed?

Daniel Neumeyer

Tony, it's not that of that amount. It's not like these loans haven't been reviewed recently. So when we look at what's coming up from maturity this year, many of those loans have been already reviewed and have been put on short-term extensions. Obviously for our non-core borrowers, we keep them on a shorter string. And so we might do 12-month extensions just to kind of advance them forward and see what the market will bring in a year. So we are not -- these loans get revisited monthly in many cases, so nothing looming out there where we say we have a bunch of problems to deal with. But I would say the core loans tend to have longer maturities on them, the non-core, again, we're just moving those down in shorter-term extensions year-to-year to see how things are going to occur over a 12-month period. So we're not concerned about what we have maturing because we're very much aware of what's there and have plans in place to address each of them upon maturity.

Stephen Steinour

Tony, the vast majority that's already been dealt with once or more in the context of an extension. And the strategy has always been to stay short and look to provide either the benefit of a full relationship in a few cases or additional incentive to refinance.

Anthony Davis - Stifel, Nicolaus & Co., Inc.

Your earlier comment about classification sort of reaching breakeven -- I think, everyone in the CRE, Dan, looking at the total portfolio, can you give us some color, I guess, on where we are in terms of getting to a point where rating upgrades really do begin to outnumber downgrades for everything?

Stephen Steinour

Yes. We've started to see in the middle of, I guess, it was in the spring, we started to see upgrades outpace downgrades. Then if you recall, we had the blip in the summer with a lot of the kind of European crisis. After that, we saw a reversal and so for a time, we actually saw downgrades. But now we're once again in a path of seeing upgrades. So I think we're gaining some momentum. And when you look at the combination of upgrades, payments, et cetera, we are starting to see a lot of improvement. I think that's reflected in some of the TARPs we covered earlier.

Operator

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

Erika Penala - Merrill Lynch

My first question is on the pretax pre-provision guidance. Does that include the adoption of the Durbin amendment as proposed?

Stephen Steinour

It does include an estimate of the impact of the Durbin amendment. But we're still not sure exactly what the final proposal will be. The range was $0.07 to $0.12 cap, as far as per transaction, and we know that's still being reviewed. So our guidance for the full year does include an impact adopted.

Erika Penala - Merrill Lynch

But would you be in that $0.07 or $0.12 range, or are you assuming mitigants on top of that?

Stephen Steinour

I don't know if we've given specificity as far as that. But it would definitely be closer to the $0.12 range as opposed to the $0.07 range as far as our expectations.

Erika Penala - Merrill Lynch

And given the headwinds on the fee side and your Fair Play banking philosophy, we've heard a lot of banks sort of introduce wholesale changes to how they're charging fees on the deposits side. Are you close to doing the same thing? Or is it just an evolving process?

Stephen Steinour

Erika, we're continuing to assess. And I expect we'll be one of the later, if not very last banks to articulate our position and don't feel any compelling reason to take a different timeline. We have been able to grow revenue significantly over the course of the last year and a half or so. And we expect to be able to continue to grow revenue and deal with these headwinds. So it gives us perhaps a bit of a strength at least relative to some of the banks in terms of how we approach this very unique moment in the history of banking, at least modern history of banking.

Erika Penala - Merrill Lynch

Forgive me if I misunderstood this, but at your Analyst Day in the early fall, it seems as if your tone was more aggressive in terms of getting ahead of the market with introducing new products. And it sounds like you're taking the opposite path. Could you give us a sense of what your thought process is behind changing the timing of where you would like to be in introducing fees in your deposit products side?

Stephen Steinour

Fees are only a feature of the products. We have product plans in our treasury management that are rolling out as scheduled. We have other products that are coming online, and we have some deposit product changes that will be occurring later this year on a planned schedule. We're just not articulating what the elements of those will be as it relates to the consumer deposit products at this point. We're very bullish on what's going on with our treasury management products and capabilities and excited for that. And we're just not feeling we need to play the cards yet on what we're thinking about on the consumer side.

Erika Penala - Merrill Lynch

I understand the lack of commitment in terms of the timing to normalize credit. But could you give us a sense in terms of how you define normalized with regards to either a normal charge-off level, or what reserves would look like in a new, more stringent regulatory environment relative to your loan book?

Stephen Steinour

Well, the normalized will probably start with provision and be followed by charge-off. There is, I think, or I hope anyway there'll be some further guidance out of the regulators around procyclical reserving some time this year. As we've said, we would expect to continue to deliver credit quality improvement, and we feel very adequately reserved at this point. So with continued improvement, that will create a basis for some measured reduction in the current reserves, absent other factors like extraordinary loan growth.

Erika Penala - Merrill Lynch

If the regulators are a little behind in terms of giving the industry guidance and procyclicality, where would you be comfortable drawing your reserve down relative to your loan book?

Stephen Steinour

I don't think we've taken that position. We have had internal discussions, and we'll continue with that. And we do, however, believe that the historical 1% is too low. And we do not anticipate getting in or around that zip code. But we haven't gone beyond that.

Operator

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

Kenneth Usdin - Jefferies & Company, Inc.

Can you just talk a little bit about C&I competition? There was another area where the loan yields did come in meaningfully. Can you touch on just what you're seeing across the markets, and is it continuing to get tighter?

Donald Kimble

This is Don, before I ask Steve or Dan to talk about the competition, as far as the loan yields in commercial, they were impacted by this reduction and accretion of the swap income that we had as a result of swaps that were previously terminated, and we have gains and they're being amortized. And so there's about a $6 million reduction that flows through the commercial loan yields as far as the impact. And so that's a big driver of that reduction in absolute yield for that book. So I just want to make sure we put that in context first. But Dan, any thoughts there?

Daniel Neumeyer

I mean, clearly, the competitive aspect of the market is heating up. Everybody's looking for quality credit. And so on the larger, stronger deals, we are seeing margin compression. Although, I think we're still able to get a fair margin. And no matter what loans we're looking at, we are looking to cross-sell other relationships. So we take that into account. There's more than just the interest spread on most of these. In fact, all the way up through our large corporate book, even in our shared national credit book we have 70-plus percent of our loans are cross-sold, 40% deeply cross-sold, so that's an element of it as well. But in answer to your question, there is competition heating up. But we still feel that we're able to gain good quality credits and even move some market share.

Kenneth Usdin - Jefferies & Company, Inc.

Don, to follow on about your point about the swaps, that was going to be my second question is, can you remind us again the magnitude of the swap roll-off that happens throughout the year? And is that clearly embedded in your margin guidance?

Donald Kimble

It is embedded in our margin guidance, and it's about a $6 million reduction for each of the next two quarters.

Kenneth Usdin - Jefferies & Company, Inc.

And can you expand on the margin guidance a little bit more than just the ability to keep it flat to up from here? Is that solely going to be based on the positive repricing that we're going to see throughout the year on deposits? Are there any other factors that we can think about as far as you're potentially keeping the margin flat to growing it?

Donald Kimble

One of the areas of the most pressure on our margin has been the fact that our deposit growth have exceeded loan growth. And our outlook for next year would assume that loan growth approximates deposit growth, and so we won't have that component of the pressure prospectively. And then, we'll continue to see the improvement in the overall mix that we continue to expect to see strong demand deposit growth and shifting for more of the time deposit book into the transaction account, and as well as repricing the money market deposits as well. We had seen a lot of growth occur with the benefit of some teaser rates, and those teaser rates are starting to be migrated back to more the normal or current levels, which should provide some additional margin expansion for us as well.

Kenneth Usdin - Jefferies & Company, Inc.

Just on mortgage banking. It held up very well certainly compared to many of your peers being flat, and you had a great performance in terms of the origination. I was just wondering if you can help us understand what drove that sequential improvement in the origination-related revenues? And if you can help us size any understanding of just how much you might expect mortgage to normalize in 2011 versus '10?

Donald Kimble

We did have strong refinance and origination activity throughout the fourth quarter. We did start to see the application volumes clearly dry up later in the quarter, and so our expectation would be to see pressure there. So we were roughly at $50 million for each of the last two quarters as far as mortgage income. But we would expect it to return to more normal levels prospectively. And so, we will see some pressure early on as far as seeing that drop to probably in the $30 million plus or minus range as far as mortgage origination fee. So that's a part of the expectation.

Kenneth Usdin - Jefferies & Company, Inc.

And if you're going to that much magnitude of drop which is, I think, expected and understandable plus the potential interchange stuff, can you just talk us through what are the biggest areas of other fee categories that you actually see growing to help mitigate those declines?

Donald Kimble

A number of the areas we've talked about include treasury management revenues. And so some of those will come through deposit balance, but we'll also see a lot of fee income coming from treasury management. And that's been a clear initiative for us over the last year and expect to see some very strong performance for that prospectively. Investment management, brokerage type of activities, insurance are all beneficiaries of our cross-sell cross referral efforts. And so we would expect to see growth coming through, through those channels as well. And as we also commented, we do expect our net interest income to continue to grow for us and help to minimize the impact for some of these either regulatory mandated fee reductions and/or the impact of the lower mortgage origination volumes as well.

Operator

We have reached the end of this conference call. I'll turn the call back over to our presenters for closing remarks.

Jay Gould

Thank you, Simon, and thank you, everybody, for participating in the call. If you have further questions, feel free to call myself or Todd. We'll be here to take your questions. Thank you again.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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