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Edited Transcript of HBAN presentation 6-Mar-17 3:25pm GMT

Thomson Reuters StreetEvents

Huntington Bancshares Inc at Raymond James Institutional Investors Conference

Orlando Apr 10, 2018 (Thomson StreetEvents) -- Edited Transcript of Huntington Bancshares Inc presentation Monday, March 6, 2017 at 3:25:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mac McCullough

Huntington Bancshares Inc. - SVP & CFO

* Nicholas Stanutz

Huntington Bancshares Inc - Senior EVP, Director - Auto Finance and Dealer Services.

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Conference Call Participants

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* David Long

Raymond James - Analyst

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Presentation

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David Long, Raymond James - Analyst [1]

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Good morning, my name is David Long. I'm the research analyst here at Raymond James that covers Huntington Bancshares. We are excited to welcome Huntington to Raymond James Institutional Investors Conference for the first time.

Huntington is $100 billion asset bank headquartered in Columbus, Ohio. Just last year, the bank completed the largest acquisition in its history, adding $26 billion in assets from the acquisition of FirstMerit. Presenting on Huntington's behalf will be its Chief Financial Officer Mac McCullough, who joined Huntington in 2014 in this role.

Mac previously held several leadership roles within US Bancorp, most recently as its Chief Strategy Officer. Also in attendance for Huntington is Nick Stanutz, the bank's long-time Auto Executive, who also now runs Commercial Real Estate and Community Development, and Lending and Leasing. Also here is Director of Investor Relations, Mark Muth. With that I welcome Mac McCullough. Mac, the mike is yours.

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Mac McCullough, Huntington Bancshares Inc. - SVP & CFO [2]

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Good morning, everyone, and thank you, Dave. Really appreciate the opportunity to be here with you today, both those in the room and those on the webcast. Let's take a look at slide 2, before we get started. Please read and understand this slide. We're going to be making some forward-looking statements today.

So let's get into it with a discussion about FirstMerit. So, as you know, we announced the acquisition of FirstMerit a little over a year ago. And we've been hard at work ever since to ensure a smooth and seamless combination of the two companies. I'm going to spend the majority of my time today reviewing the transformational acquisition. After that, Nick will give you an update on our auto business.

So moving to slide 4. I've said this before, but it bears repeating. This acquisition is a classic end-market deal with highly achievable cost take-outs and attractive long-term revenue growth opportunities. The two companies are very similar in terms of customer-focus, sales discipline and credit culture. The combination also significantly enhances our physical distribution in Ohio and Michigan, and provides our commercial and business banking teams with access to the attractive Chicago and Wisconsin markets. Value creation is mostly dependent on the cost take-outs and we are very comfortable with achieving the 40% target that we discussed when we announced the deal. We achieved approximately 50% of the cost take-outs in 2016, and we expect to see the vast majority of remainder implemented during the first and second quarters of this year. As we discussed the deal announcement achieving these cost take-outs will allow us to accelerate the achievement of two of our long-term financial goals, return on tangible common equity and the efficiency ratio.

On slide 5, let me talk a bit more about our strengthened position in Ohio and Michigan. The right side of the slide shows the overall footprint and highlights the significant overlap between the two banks. We completed the elimination of the black dots on this map over President's Day weekend with the consolidation of 102 FirstMerit and legacy Huntington branches significantly, optimizing our branch network. The left side of the slide shows the resulting branch networks for Ohio and Michigan. We now have the Number 1 brand share in both states, providing scale for us today, and branch consolidation opportunities in the future as customer preference and behavior continue to evolve.

Moving to slide 6. This slide very clearly illustrates the scale benefit of the acquisition. On a pro forma basis, Huntington is ranked Number 1 in deposit market share and 14% of our MSAs, and ranked Number 3 or better in 42% of our MSAs. As you can see, this is the third highest among the banks listed and shows the concentrated market position we enjoy. Another proof point for the operational efficiency we expect to achieve.

Slide 7 shows the mechanics of the costs save. The left side of this slide shows the projected cost savings applied to the fourth quarter 2015 actual financials, and the right side shows these cost savings applied to the projected fourth quarter 2017 expense base in our acquisition model, which assumed 3% compound annual growth rate. Inclusive of this growth rate assumption, you see the actual cost savings are expected to be closer to $271 million.

I want to reiterate that we will remain on target to achieve the full cost savings we originally announced, this equates to more than 40% of the FirstMerit cost base and approximately 10% of the cost base of the combined organization.

Let's move to slide 8 and talk about the revenue opportunities. From the very beginning we made it clear that the financial projections did not include revenue synergies. That said, we believe there are significant revenue opportunities, some near term and some longer term, that will be additive to the baseline economics of the deal. These revenue opportunity should help you feel more comfortable to the overall value creation.

Slide 8 frames the fee income opportunity and is consistent with what we disclosed at the announcement. Standalone FirstMerit's non-interest income in 2015 was 26% of total revenue. The comparable number for Huntington in 2015 was 34%. By leveraging our superior product capabilities and subject matter experts, we believe we can boost FirstMerit's non-interest income contribution to match our own. Doing so would increase fee revenue by roughly $100 million, which we believe is easily achievable.

Slide 9 identify a specific revenue opportunities that leverage areas of strength for the combined organization. First, we believe there is a significant opportunity to quickly overlay our optimal customer relationship strategy. We have a strong track record of building deeper relationships with our customers and we are confident we can achieve similar success with our new customer base. We have already seen many instances where our more robust product set has resulted in business wins and capital markets, Middle Market banking, International Banking, government banking, trust and equipment finance.

Next, our entrance into Chicago and Wisconsin represent attractive fee income opportunities in two areas where we've made significant investments and developed strong capabilities, SBA lending and mortgage banking. Our past results confirm the SBA lending is a strength for Huntington, and we're excited to expand into these new markets, especially Chicago where there are more small businesses than the entire state of Ohio, or the entire state of Michigan. Illustrating the strength of our SBA capabilities, we have moved up the charts quickly and are already the sixth largest SBA lender in Chicago. We also feel there is an opportunity to expand our mortgage banking business in these markets. We have made significant investments in our mortgage platform in the past few years, and expansion into Chicago and Wisconsin provides further opportunity to leverage our enhanced capabilities.

Finally, we believe there is an opportunity to expand FirstMerit's attractive recreational finance business. This is their RV and marine lending business, which is a new offering for us. Nick Stanutz, who you will hear from later in this presentation, will run recreational finance with the same discipline, risk management protocols and in some cases technology that he applies to our super-prime auto finance business today.

Slide 10 details some of the statistics regarding the technology conversion that took place over President's Day weekend. This was without a doubt the smoothest technology conversion that I have ever been a part of. Issues were few and relatively minor and we were able to resolve them quickly with minimal to no customer impact. All re-branding is complete, all training has been completed on Huntington systems, products and policies, and our newest colleagues are as excited to represent the Huntington brand as we are excited to welcome them into the Huntington family. Let me just summarize this slide by saying that we are extremely pleased with the results of the technology conversion and where we are in the overall integration process. And we are now laser-focused on the revenue opportunities I mentioned on the previous slide, as well as the significant opportunities we have in our core business.

Finally slide 11 illustrates the achievement of all of our long-term financial goals that we established in late 2014, including the acceleration of the achievement of return on tangible common equity and the efficiency ratio due to the FirstMerit acquisition. We are confident that our highly engaged colleagues, superior brand and focus on disciplined execution, position us well to achieve advantaged growth, advantaged capital generation and advantaged value creation for shareholders.

So with that let me turn the presentation over to the absolute best auto finance executive in the industry and someone I'm very proud to work with, Nick Stanutz. He will give you an update on our auto business.

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Nicholas Stanutz, Huntington Bancshares Inc - Senior EVP, Director - Auto Finance and Dealer Services. [3]

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Thanks, Mac. And good morning to everyone. Before I begin my formal presentation, by way of background, I am celebrating my 32nd year this year with the Huntington, the last 24 as the CEO of the auto finance business. And all inclusive, I now have 37 years in the auto finance retail and commercial lending space. I believe this makes me the longest tenured auto executive in the country and it also says that I'm old.

My first slide today speaks to the essence of Huntington's Auto Finance business, it's relationship focused. Our customer, the dealer, is the center of all of our strategies and execution of adding tangible value which differentiates us from every other lender, captive, bank, independent or credit union with which we compete with across the 23-state footprint. I will speak specifically to our differences in relationship in value here in a few minutes.

As a reminder we are a super-prime auto lender that has been in business for over 60 years of uninterrupted service to dealers, providing inventory, real estate and indirect automobile loans to franchise dealers in our markets. We have a deep commercial lending relationships with over 300 franchise dealers and cross-sell over six products and services, and we've been growing this commercial book by over 10% in balances since 2009. Also calling on the dealership personnel on a weekly basis, we have generated over 500 new personal accounts from this activity, whether they be checking accounts, home mortgages, equity loans or credit cards, thereby building loyalty to Huntington beyond just being a provider of credit to the dealership business.

We are the only super-prime lender to have a local presence in our markets with 11 regional buying centers, covering 23 states with our regional managers having a team of underwriters and commercial sales people focused on local delivery of our products and service. Local matters to us, as we know our markets and our deal much better than our competitors. We deliver better service to our dealers and the 2016 JD Powers dealer satisfaction survey reflected us as the Number 2 Bank in performance and indirect automobile loans and the Number 1 bank in commercial floor plans in the entire United States.

Our staff, like me, have long tenure with Huntington, with our average regional tenure being 14 years in our traditional footprint. Also our staff stays with us over long periods of time with our turnover rate less than 5% annualized since 2009.

Turning to slide 14, I briefly just mentioned a little bit about what makes this truly unique in our approach to the business and this differentiation has allowed us to achieve better-than-market yield returns while attaining superior credit quality. Our local market approach can't be underestimated to our value proposition. Relationships with dealers matter, personal relationships. When you live in the communities we serve, you know those communities better, their economies, and you have more in common with those you engage in. We do a tremendous job of building relationships personally, but more importantly, we use those relationships to figure out the needs of the dealer, what they are and how we're going to solve those particular needs.

Case in point, dealers want fast, but they want consistent credit decisions and as you might know the car buying process takes two to four hours to complete. 70% of our decisions are automated by our credit agent. Those decisions happen in three seconds or less. It took me longer to make that last statement than it does for us to make a credit decision most of the time. For the 30% of the decisions we don't automatically approve or decline, the underwriting engine makes a recommendation to approve or deny that loan request. Less than 2% of the time, we override that recommended decline, which demonstrates the power of our auto decision capability.

Secondly, the entire industry has come to appreciate credit risk based on loan to value in terms. The slightest changes, moving the loan to value by a few basis points or the term by maybe as short as three months, changes the risk and therefore the interest rate that lender is willing to purchase the contract at. We are unique, in that we provide the dealer a matrix of credit decisions. What I mean by that is we not only decision the original request, but we tell the dealer that this customer qualifies for different terms and amounts, so that should the applicant decide to change their mind, put more money down or less money down that would change the loan to value or want a shorter or longer term to solve for a specific monthly payment, we can provide in many cases, up to 20 different approvals, a matrix of credit decisions. Nobody else in the industry can do this.

You might say, why does that matter? Well, the finance process at the dealership is fluid. Customers not only have to decide on what vehicle, what options, what colors, but they have to decide on the terms and the conditions of their financing. In many instances, the customers change their mind, after the application is submitted. For the general industry, these changes in loan to value or terms will require the dealer to resubmit the application or to call the bank and change the information. Our solution, not only makes it easy for the dealer but it's efficient for us. Like underwriting, we have used technology to its fullest extent to make it easier on everyone.

Lastly, getting the dealers their money once they send us a contract to fund is critical. 20 contracts are worth $400,000 on average of a dealer's cash flow. We are industry-leading in paying dealers quickly again using technology as a solution provider. So when you can provide the dealer quick decisions on a majority of their applications, give them multiple credit decisions and make their job easier in funding loans by improving their cash flow, you can differentiate yourself and get a premium on the value you provide of anywhere from 20 to 50 basis points over market competitors like BOA, SunTrust, Fifth Third and Regions to name a few.

Slide 15 lays out the markets with which we operate in. As you can see, we have a very strong dominant presence in our traditional footprint and we are growing our presence in our other markets. As a reminder, being local matters. We hire colleagues with deep dealer relationships and industry experience that know the markets we serve. I do want to mention that Huntington is the sixth largest auto bank lender in the states we serve. And in our traditional markets, we are the Number 1 lender in Ohio, Indiana and Kentucky.

Slide 16 gives you an idea of how our expansion has essentially fueled our loan growth. You can see from 2009 with no market expansion volume to today, it being 25% of our total volume. I would remind you that when we go into a new market even with seasoned colleagues, we use a much tighter scorecard for the first 12 to 18 months, until we see the early vintage performance at the six, nine and 12 month intervals meeting our expected results.

On slide 17, while this slide is quite noisy, I want to bring to your attention the two lines that are labeled loan to value and FICO score. In spite of all the rhetoric around how competitive the market has become and all the growth and balances in the industry as auto debt is now exceeding $1 trillion, when you look at these two lines you see incredible consistency in what we've been doing over the last 10 years.

I would venture to say you won't find this kind of consistency from many other lenders over the same time period. Couple of other comments. If you look at the green boxes labeled one and two, you will see what we would have forecasted as our risk expected loss on those vintage periods. From 2006 to 2010, we were taking on more credit risk in our underwriting, slightly lower FICO scores and higher loan to values. So we expected our risk expected loss to be somewhere in the range of 60 to 80 basis points.

Starting in 2011, we moved up to a higher FICO score 10 to 20 basis points on average, and lower loan to values 8 to 10 basis points and have cut our risk expected loss basically in two-thirds to [less than 30 basis points] on average. I would remind everyone that we are a probability of default lender, not a severity of default. We control the probability by lending to super-prime borrowers and manage the severity by loan to value and by holding term, which is only up three months since 2011.

We can't control the used vehicle market, or the Manheim Index, which we show on this slide as well. And while we have all benefited by a strong used vehicle market since the downturn, we know as more used vehicles cycle back into the market, we will see more pressure on pricing, especially passenger cars, which have fallen out of favor with consumers in favor of crossovers, SUVs and trucks.

Final comment is the line marked charge-off percent. Our actual charge-off rate has mirrored our expected loss rate showing the power of our scorecard with the exception of the great recession where our charge-offs basically doubled in the 2008-2009 period over the expected losses that we had originated in 2006-2007 due to the downturn and due to depressed used vehicle values. The latter two reasons are why we have moved up the FICO score range and lowered our loan to value since 2011.

Finally, while I don't show these numbers on these slides, I will inform you that the amount of business we do that has less than the 640 FICO score is less than 2% of our annual originations. And on those loans that we do, we basically take no layered risk, meaning, we're not extending the term or extending the LTV. And to the point of my focus on extended terms, only 4% of our originations are for greater than 75 months. These numbers are very low when compared to others in the industry.

So to recap, we have been incredibly consistent in what we have originated since 2011 in a very competitive market. Originating high quality loans that outperform better than our expected results.

Slide 18 reflects some moving pieces that were in play during the fourth quarter of 2016 that I want to review with you. First we securitized roughly $1.5 billion in auto loans during the quarter, which significantly affected our auto loan performance trends, primarily the reduction in loan balances without a reduction in losses, which translated to an increase in the portfolio loss rate. This amounted to roughly 4 basis points impacting the portfolio loss rate. There was also a modest impact from the peculiar purchase accounting rules that we applied to the FirstMerit portfolio in which gross charge-offs are run through the net charge off line, but the gross recoveries are run through fee income resulting in the appearance of inflated net charge-offs relative to our actual performance.

One final thought for all of you. Our business model is strong. We are uniquely positioned being local in our markets and we know our dealers well. And we have built a business that the dealers value, because what we do in credit is consistent, our speed of answer is best in class and we reimburse them quickly, and for all of that we rank at the top of the JD Power dealers satisfaction survey. And most importantly, we are getting paid more than what others do in an incredibly consistent operating environment with great credit culture in a highly competitive marketplace.

Mac, let me turn this back to you for some closing comments.

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Mac McCullough, Huntington Bancshares Inc. - SVP & CFO [4]

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Thanks, Nick. So as you can tell we're very, very comfortable with our auto business and the consistency in which we run it, as well as the leadership that we have running the business. So just wanted to make sure that you are all very aware of that, and look forward to any questions you might have in the next few minutes. But let me close on slide 20.

So, we're substantially complete with the FirstMerit integration and we're very pleased with the results. We remain committed to achieving the announced deal economics and we're very confident in our ability to deliver. We remain focused on the areas of our core competency, consumers, small to medium commercial enterprises and auto finance. And we've had a consistent strategy in place since 2009. Customer experience remains a key differentiator for us and it's an area of continued investment. We continue to drive organic growth through a strong and recognizable consumer brand, differentiated products and superior customer service. And we're staying focused on delivering consistent, through the cycle returns to our shareholders.

Finally, we always like to include a reminder that there is a high level of alignment between the Board, management, our employees and our shareholders. So again, thank you for your interest. I'll turn it back over to Dave now, so we can take questions.

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Questions and Answers

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Unidentified Audience Member [1]

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(Inaudible - Microphone inaccessible)

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Mac McCullough, Huntington Bancshares Inc. - SVP & CFO [2]

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The question is one of our peer banks had some issues with cross-selling, and how do we think about that, has it changed anything that we've done historically.

And the answer is it has changed nothing that we've done historically. We've done a complete review. Feel very comfortable with what we do and what our practices are. We have a focus on revenue growth and thinking about revenue in terms of how we incent and expect our employees to drive results. So we don't see any changes in our practices as a result of that.

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Unidentified Audience Member [3]

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(Inaudible - Microphone inaccessible)

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Mac McCullough, Huntington Bancshares Inc. - SVP & CFO [4]

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Sure. The question is just the performance of our in-store network. We've made some large investments in in-store, and we believe very strongly in that model. We are very pleased with the results of our in-store investment. We actually see about one-third of our DDA accounts originated through in-store network. We see our customers adopting the channel for routine transactions, which is a very convenient and a very cost efficient way to deal with routine transactions because of the low cost of operating the stores. And they also have greater convenience because they are seven-day a week operations. So from a financial perspective, we're pleased with the progress that we've made and we will continue to think about opportunities to invest in in-store going forward.

We've actually used in-stores to consolidate and optimize the branch network, perhaps even closing some traditionals and consolidating them into the in-store network. So we have a bit of a different model in terms of how we think about execution in the in-stores. We do have a different colleague that we hire, and we do have expectations around sales that I think make it very different relative to other competitors might be running that network.

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Unidentified Audience Member [5]

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(Inaudible - Microphone inaccessible)

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Mac McCullough, Huntington Bancshares Inc. - SVP & CFO [6]

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The question is the status of the Chicago marketplace and whether we have the infrastructure that we need to be able to continue to grow in that marketplace, or do we need to make investments there.

So we are going to continue to run the Chicago market and the Wisconsin market for that matter in the same manner that FirstMerit was running those markets and that is more of a commercial and small business platform. We actually believe that in the Chicago market in particular FirstMerit was doing of very, very good job in terms of attracting the right people and also the right customers with the right product and the right credit culture.

We are making investments. We've talked a bit about SBA lending and what we're doing there and have made great progress. We rank 6 in the market now. We're also investing with mortgage bankers for home equity and home mortgage lending in the marketplace. So we don't see any additional large investments that we need to make in that marketplace, because we are going to continue the model that FirstMerit put in place.

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David Long, Raymond James - Analyst [7]

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And with that, why don't we conclude, and we will continue the Q&A downstairs (inaudible).

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Mac McCullough, Huntington Bancshares Inc. - SVP & CFO [8]

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Great, thanks Dave.