Huntington Bancshares Incorporated Q2 2009 Earnings Call Transcript

Jul.24.09 | About: Huntington Bancshares (HBAN)

Huntington Bancshares Incorporated (NASDAQ:HBAN)

Q2 2009 Earnings Call

July 23, 2009 1:00 pm ET

Executives

Jay Gould – Director of Investor Relations

Stephen D. Steinour – Chairman of the Board, President & Chief Executive Officer

Donald R. Kimble – Chief Financial Officer, Senior Executive Vice President & Treasurer

Tim Barber – Senior Vice President Credit Risk Management

Kevin M. Blakely – Senior Executive Vice President & Chief Risk Officer

Nick Stanutz – Senior Executive Vice President of Auto Finance and Dealer Services

Michael R. Cross – Executive Vice President and Senior Commercial Lending Officer

Analysts

Matt O’Conner – Deutsche Bank

Tony Davis – Stifel Nicolaus

David Rochester – Friedman, Billings, Ramsey

Ken Zerbe – Morgan Stanley

Brian Foran – Goldman Sachs

Greg Ketron – Citigroup

Terry McEvoy – Oppenheimer

Andrew Marquardt – Fox-Pitt Kelton

Kenneth Usdin – Bank of America Securities

Jay Gould

I’m Jay Gould, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on our website www.Huntington.com. This call is being recorded and will be available as a rebroadcast starting about an hour from the close of the call. 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 Two through Four note several aspects of the basis of today’s presentation. I encourage you to read this 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 measures as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentation in its appendix in the press release and the quarterly financial review supplements of today’s earnings press release or in the related Form 8K filed earlier today, all of which are on our website.

Turning to Slide Five, 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, risks and uncertainties which may cause actual results to differ materially. We assume no obligation to update such statements and for a complete discussion of the risks and uncertainties, please refer to this Slide and materials filed with the SEC including our most recent Forms 10K, 10Q and 8K filings.

Now, turning to today’s presentation on Slide Six. Participating today are Steve Steinour, our Chairman, President and Chief Executive Officer; Don Kimble, Senior Executive Vice President and Chief Financial Officer; and Tim Barber, Senior Vice President of Credit Risk Management. Also present for the Q&A session is Kevin Blakely, Senior Executive Vice President and Chief Risk Officer; Nick Stanutz, Senior Executive Vice President of Auto Finance and Dealer Services; and Mike Cross, Executive Vice President and Senior Commercial Lending Officer.

Let’s get started. Turning it to you Steve.

Stephen D. Steinour

First, a word of introduction is in order. I’m very pleased to introduce Kevin Blakely to you. He just joined us earlier this month. Many of you will recall him from his days at Key Corp. He’s a pioneer in developing enterprise wide risk management and as we position Huntington for long term performance his leadership will be very impactful. So welcome Kevin.

In the past six months we’ve made tremendous progress in positioning Huntington for improved long term performance. To recap, we’ve moved with a heightened sense of energy and urgency on a number of key issues, increasing liquidity, successfully launching and completing a major expense initiative, restructuring Franklin, understanding and addressing issues within our loan portfolios, strengthening our capital, restructuring the organization and expanding our management team.

There is much work to do yet looking back I’m pleased with how far we’ve come in such a short period of time. Given the challenging environment we’re enduring some short term pain to get ourselves where we want to be. But, I’m confident of where we are headed. We are positioning Huntington for success in the foreseeable future.

I’ll begin with a review of our second quarter performance highlights, Don will follow with the details and review of our financial performance, Tim will provide an update on credit, I’ll then return with some 2009 outlook comments, what I hope our investors take away from second quarter performance and our priorities for the second half. Let’s begin the presentation turning to Slide 8 please.

We reported a net loss of $125 million or $0.40 per common share. The primary driver of the loss was the provision for loan losses that increased $121.9 million from the first quarter. Now, $79 million of this increase boosted our allowance for credit losses. Contributing to this increase was a much more detailed commercial loan portfolio review that we’ll talk about in more detail in a moment. Pre-tax pre-provision earnings were $229 million, up $4.7 million or 2% from the first quarter. So, we are continuing to make progress.

This reflected a number of very positive trends and underlying performance drivers. For example, our net interest margin expanded 13 basis points to 3.10% and core deposits grew at an annualized 17% rate while average loans declined at an 18% annualized rate. This reflected planned efforts to reduce our commercial real estate loan exposure as well as the full impact of the first quarter’s $1 billion automobile loan securitization and a small $200 million residential mortgage portfolio sale.

Make no mistake, we’re still making loans. We originated or renewed $4.1 billion of loans during the quarter, $1.9 billion of commercial and $2.2 of consumer. Fee income performance was mixed. We kept tight control of our expenses and as I noted in our earnings press release, I think the lead story for Huntington was the actions we took to significantly strengthen our balance sheet, capital, liquidity and reserves. Regarding capital we took actions that added just under $705 million to common equity. This was a multipronged strategy including discretionary equity issuances, conversion of preferred stock, a common stock offering and a gain on the cash tender offering of certain trust preferred securities as well as a gain related to our Visa stock.

In some cases our action led the industry. We were particularly pleased with the efficiency of our common stock offering. Don will review the details but we’ve issued 55% more shares than the end of the year, 55% more shares since the end of last year yet our tangible book value dilution related to these actions was only 3%. We have and will continue to be cognoscente of shareholder value and minimizing the dilutive impact of our capital plans. Reflecting our actions, all our period end capital ratios saw significant improvement. For example, our tangible common equity increased to 5.68%, up 103 basis points and our tier I common risk based capital ratio increased to 6.8%, up 116 basis points.

Turning to Slide Nine another achievement would strengthen liquidity; during the first half of the year we strengthened our balance sheet liquidity as our available cash increased $1.3 billion and our unpledged securities portfolio increased by $1.8 billion. On top of this we had capacity to borrow $8 billion from the Home Loan Bank and Federal Reserve. The most important liquidity improvement however was our 17% annualized growth in core deposits. Reflecting the combination of lower loans and deposit growth, our period end loan to deposit ratio was 98%, down from 101% at the end of the first quarter and 108% from a year ago. Growing core deposit balances as well as households and businesses are priorities and we are making very good progress.

When I arrived in January, overall the highest and immediate priority was having a full understanding of what’s in our loan portfolio and to make certain our loans are accurately risk rated during a period of significant economic turbulence and change. In the fourth quarter of last year we addressed the valuation of our Franklin relationship then in the first quarter we successfully restructured it. The specific aim was to take control of the underlying assets at Franklin so that we, among other things, could improve collections.

I’m pleased to report that Franklin cash collections in the second quarter were 13% higher than in the first quarter. At the end of the first quarter we had $574 million of Franklin related mortgages and REO. At the end of the second quarter this totaled $516 million, a 10% decline. In case you were wondering we had no Franklin related net charge offs or further impairments.

In the first quarter we also completed a concentrated review of single family home builder and retail commercial real estate portfolios, our two highest risk commercial real estate segments. This past quarter we turned our attention to every non-criticized, every past rated C&I and commercial real estate loan relationship with an aggregate exposure over $500,000. This review encompassed over 5,000 accounts representing $13 billion in balances or 59% of the outstandings. The depth and breadth of the review as well as ongoing business segment review processes now put in place are covered in detail in our earnings release so I encourage you to take time to read it. It was an exhaustive exercise and should give you the same level of comfort that we have based on the efforts.

What’s important for you to know is that this work was helpful in assessing existing and emerging credit issues in this challenging economy. We are now well positioned to proactively mitigate risk going forward. We expect our commercial loan portfolio will remain under pressure as we continue to believe the economy will remain weak for the rest of the year. But, everything we’ve seen and learned helps us remain confident that the risks of our commercial loan portfolios are manageable. On the consumer side, performance reflected the continued pressure from the difficult economic environment as well. Though net charge offs increased, this was in line with our expectation. We continue to believe our consumer loan portfolio will show better relative performance throughout the cycle.

Overall, here are the numbers: $413.7 million of provision expense, up $121.9 million from the first quarter and $79 million higher than net charge offs; a 3.43% annualized net charge off rate, up nine basis points from the first quarter; 4.72% non-accrual loan ratio, up 79 bips from the first quarter; a 13% linked quarter increase in non-performing assets; and a period end allowance for credit losses of 2.51%, up 27 basis points. Given the extensive review of our commercial portfolio which we announced at the end of the first quarter and completed this past quarter and an economy that continues to weaken, these results were not unexpected by us.

It’s important to note that this quarter’s performance was consistent with the early stages of the two year cumulative loss assumption used in our loan portfolio stress test analysis announced on May 20th. In other words, this quarter’s credit performance has not changed the results of the two year stress test result book capital implications at all. Lastly, we launched our three year strategic planning effort. This discipline is foundational to developing strategies and clear game plan needed to grow over the long term.

Many of you have asked me where we want to take Huntington, what will define us for the long term as a bank and as an investment, in short what you should expect. At this point we’re just completing our discovery phase, the phase that evaluates our situation and opportunities. So far, I like very much what I’ve heard and seen. I think we have a lot of untapped opportunities. We certainly have significant aspirations within the executive management team. This process is targeted to be completed in the fourth quarter and will begin implementation upon completion.

Let me turn the presentation now over to Don to review the financial performance.

Donald R. Kimble

Turning to Slide 10, we provide a summary of the earnings for the quarter. Our reported net loss for the quarter was $125.1 million or $0.40 per common share. However, the quarter included several significant items as detailed below. First, the $67.4 million or $0.10 per share gain resulting from the tender offer for some of our trust preferred securities. We were able to redeem $166 million of these securities or about 35%. Second, $31.4 million or $0.04 per share gain related to Visa stock as we sold our remaining interest in Visa shares during the quarter.

Third, $0.06 per share negative impact from the preferred stock conversion that occurred during the quarter. This negative impact reflected the value of the additional common shares issued to induce conversion. Fourth, $23.6 million or $0.03 per share charge related to the special assessment from the FDIC. Finally, a $4.2 million or $0.01 per share goodwill impairment charge related to the [inaudible] sale of a small payments business.

Slide 11 provides a summary of our quarterly earnings trends. Many of these trends will be reviewed later so let’s move on. On Slide 12, we provide an overview of our pre-tax pre-provision performance metric. We believe this metric is useful in assessing the underlying operating performance. We calculate this metric by starting with pre-tax earnings than excluding three items: provision for credit losses; securities gains and loans; and amortization of intangibles.

Then we also adjust for certain significant items. This quarter we adjusted for the items as detailed on Slide 10. On this basis, our pre-tax pre-provision income for the second quarter was $229.3 million, up $4.7 million or 2% from the last quarter. This increase was on top of the 13% increase realized in the first quarter. This improvement clearly reflected the managements’ actions taken during the first half of the year and we continue to look for additional actions to improve our core operating performance.

Slide 13 provides a trend of our net interest income and our net interest margin. During the second quarter our net interest income increased by $10 million reflecting 13 basis points improvement from net interest margin, a $1.1 billion decline in average earning assets. The margin improvement reflected the favorable impacts of our Franklin restructuring and improved deposit pricing partially offset by the negative impacts of actions taken to improve our on balance sheet liquidity position and the higher levels of non-performing assets.

Continuing on to Slide 14, we show the link quarter loan and lease trends. Total commercial loans were down $.9 billion or 4% reflecting the impact of the Franklin restructuring, payoffs and charge offs over the last two quarters. The decline in the auto loan and lease balances reflected the impact from a $1 billion securitization completed late in the first quarter as well as continued run off of our auto lease portfolio.

One of the real highlights of the quarter was the growth in our core deposits. Not only did we grow total core deposits an annualized 17% rate but, the growth came from the demand deposit and money market category. We’re continuing to emphasis the core deposit growth through our incentive programs and management goals. We’re very pleased with the results to date.

Slide 16 shows the trends in our non-interest income categories. Of note, our service charges on deposit accounts reflected the normal seasonal increase, up 8% from the first quarter. Brokerage and insurance revenues also reflected seasonal trends as insurance income was down $3.7 million from the first quarter, mainly due to contingent fee income. Mortgage banking income declined $4.6 million in the first quarter which included a $4.3 million loan sale gain. Other income for the quarter reflected the $31 million gain related to our Visa stock.

Turning to the next Slide, another highlight for the quarter was our expense management. Many expense categories continue to reflect initiatives implemented in the first quarter. Our personnel costs were down $4.2 million in the first quarter with the number of employees down 3% from the first quarter and down 9% from a year ago.

Outside data processing and other services increased $8.8 million primarily reflecting portfolio servicing fees now paid to Franklin for servicing the related residential mortgage and home equity portfolios. A reduction in other expense reflected the impact on the gain on the redemption of trust preferred securities partially offset by the special assessment from the FDIC as well as a $16.6 million increase in OREO costs. You’ll recall from the first quarter [inaudible] also include the $2.6 billion goodwill impairment charge.

The three highest risk segments to our investment portfolio are shown on Slide 18: our Alt-A mortgage backed portfolio; our pool trust preferred securities; and our prime CMO segment. Over the last year we recognized over $200 million of impairments including $19.5 million this quarter. During the quarter we adopted new accounting standards which will prospectively allow us to recognize only the credit portion of a securities impairment and earnings for securities we do not intend to sell.

The impact of adopting these new standards was an increase in retained earnings of $4 million at the beginning of the second quarter for previously impaired securities where we do not have the intent to sell the securities. We’ve excluded our Alt-A mortgage portfolio from this adoption. While the adoption of the new accounting standards for our Alt-A portfolio would have allowed us to increase retained earnings for the non-credit component of impairment we’ve previously recognized, it would have also limited our ability to opportunistically address these securities in the future.

The performance of the underlying securities of each of these segments continue to reflect the economic environment. Each of the securities in these segments is subject to a rigorous monthly review of projected cash flows as part of our impairment analysis. These reviews are supported with the analysis from independent third parties.

During the quarter we made significant progress in improving our capital position. These actions detailed on the next Slide resulted in 103 basis point improvement to our tangible common equity ratio to 5.68%. Another indication of our improved capital position is our 116 basis point improvement to our tier I common risk based capital ratio. All of our regulatory risk based capital ratios also improved significantly.

Slide 20 provides a summary of the capital ratios over the first six months of the year. In the second quarter we issued over 160 million shares of common resulting in an increase of almost $550 million after issuance costs. We also exchanged 16.5 million shares of common stock for our convertible and separately negotiated transactions increasing our tangible common equity by $92 million. We followed these issuances with a tender offer for our trust preferred securities and the sale of our Visa stock. These actions combined added over $700 million of common equity in the second quarter bringing the total to more than $1 billion for the first six months of the year.

On May 20th we announced our plans to increase our tier I common equity by $675 million. Our actions to date have added $585 million of this $675 million target. One of the components of the $675 million plan was to be the regulatory capital lift from adopting the new account standards related to other than temporary impairments for investment securities. Using the March 31st balances, adoption of this accounting change for the portfolio would have increased our tier I common by approximately $100 million. This would not have increased tangible equity but it would have improved tier I capital.

As noted earlier we decided not to adopt this accounting change for the Alt-A mortgage backed portfolio, the largest contributor to this potential impact. We are considering other options that could improve the overall risk profile of the investment portfolio and other asset categories, thereby reducing the risk weighted assets for the company. This reduction would have a similar impact to the overall capital ratios for the company while overall improving the risk profile. After implementing these steps related to improving the risk profile, we will have substantially completed the capital plan as announced on May 20th.

Our capital raising efforts have been opportunistic. We have tried to balance our objective improving the components of our capital with our desire to minimize the dilutive impact to our current shareholders. Slide 21 provides a comparison of our capital raising efforts to some of the regional banks that participated in the Federal Reserve stress test. As you can see at the top of the Slide, many of the regional banks issued significant levels of common stock to bolster their capital position ranging from 3% to PNC to 71% for Regions.

The bottom half of the Slide shows the impact tangible book value per share resulting from the capital initiatives. This analysis uses the March 31st pro forma balance sheet and adjusts for the capital actions completed. As shown, even though we issued 55% additional common shares to meet our capital targets, our tangible book value dilution was only 3.4%, better than most of the other regional banks. We were able to accomplish this during a time when our common stock price was trading well below our tangible book value. We believe this is just one indication of how we’re trying to address our capital plans opportunistically.

Let me turn the presentation over to Tim Barber for a review of credit trends.

Tim Barber

Turning to Slide 22, on an absolute basis our total charge offs were lower in the second quarter than the first quarter. However, when factoring the Franklin impact on first quarter net charge offs, total non Franklin net charge offs were $131.3 million higher. 68% of the non Franklin increase was centered in the commercial real estate portfolio which increased $89.8 million, more than doubling the first quarter level as we continued to actively deal with project performance issues and declining real estate values. 59% of the commercial real estate net charge offs came from the two highest risk segments of the portfolio: single family home builders; and retail projects. Both of these segments continue to show stress as we work with the borrowers in resolving what are challenging credit issues.

For some additional color on the composition of the commercial real estate charge offs, $31 million of the total were associated with construction projects with the balance in income producing projects. The loss breakdown is consistent with our overall commercial real estate portfolio distribution between construction and income producing balances. It is important to note that we continue to believe that the work we did in the first quarter that sized the expected losses associated with these two portfolios remains in line with actual performance.

The remaining commercial real estate losses were spread across the portfolio from a project type standpoint as the economic conditions continued to be stressed. Multifamily, office and industrial warehouse are the next three project types that we are focused on in the commercial real estate segment. The increase in non Franklin C&I net charge offs was centered in the manufacturing industry and the higher risk C&I segment related to home building. We expect there will be continued weakness in the C&I portfolio as we obtain and analysis updated financial information throughout the year.

One C&I segment that we continue to feel comfortable with despite the environment, are the C&I loans in our auto finance and dealer services segment. Despite the dealership closings and related stresses, we do not anticipate any material dealer floor plan losses in the portfolio. Our dealer selection criteria and focus on high quality, multi dealership groups have proven itself in this environment.

Turning to consumer loans, we continue to have positive performance in the indirect automobile loan and lease portfolio on a link quarter comparison. Home equity and residential mortgage portfolio net charge offs both increased from prior quarter levels however, the increase reflected an end to our foreclosure moratorium and very active loss mitigation efforts more than a declining asset quality outlook. Our loss mitigation activity clearly accelerated net charge offs, it is also the right thing to do for both Huntington and our customers.

Our early stage delinquency rates are the best indicator of future loss trends. Excluding the Franklin loans, our home equity and indirect auto early stage delinquency rates were lower indicating future improvement. Despite the increase in losses, we were generally pleased with the results across our consumer portfolio during the quarter.

Slide 23 represents the net charge off ratios associated with our portfolios. It is worth noting that while automobile loan link quarter net charge offs declined on an absolute basis, the related ratio increased to 1.73% from 1.56%. This reflected the decline in average balances due to the $1 billion automobile loan securitization completed late in the first quarter. A $58 million increase in C&I non-accruals reflected the impact of the economic conditions in our markets and were not concentrated in any specific region or industry.

In general, those C&I loans supporting the housing or construction segment and loans associated with the auto industry are experiencing the most stress. Importantly, less than 10% of the C&I portfolio is associated with these segments. We have also seen some deterioration in the manufacturing industry segment but believe this is more borrower centric than more broadly industry related.

The $221 million increase in commercial real estate non-accruals reflected the continued decline in the housing market and stress on retail sales. The single family home builder and retail segments again accounted for the bulk of the increase. There was one $20 million multifamily project that comprised the bulk of the remaining increase. The decline in residential mortgage and home equity non-accruals reflected expected results based on the charge off levels and loss mitigation strategies.

It is important to note that 23% of the total non-accruing loans are C&I and commercial real estate loans that are current from a payment standpoint. When considering only the C&I and commercial real estate non-accruing balances, nearly one third are current. This is a quantitative representation of how active we have been in the accrual treatment decisions particularly in the commercial real estate portfolio. On the other real estate owned front there was a significant decline in the quarter as we actively marketed and sold our OREO properties including OREO generated from the acquired Franklin portfolio.

Slide 25 provides a summary of some key asset quality trends. Given the restructuring of the Franklin relationship, we now focus on the reported trends only. The non-accruing loan ratio increased to 4.72% as a result of the changes detailed on the previous Slide with the combined non-performing asset ratio of 5.18%. Charge offs also increased in the quarter to 3.43%. The increase in the non-accruing loans and net charge off ratios are connected as a number of loans that moved in to the non-accrual status had write downs associated with the FAS 114 impairment analysis, more on this in a future slide.

The active impairment assessment is tangible evidence of the enhanced portfolio management practices discussed by Steve and noted in prior slides. Another tangible result was the reduction of our commercial accruing 90 day and over delinquencies to zero for the second consecutive quarter compared to $70 million as of December 31, 2008. Our allowance for credit loss ratio of 2.51% represents a significant increase from the 2.24% reported in the prior period. While the resulting coverage ratios have declined slightly, they represent an appropriate level of reserves for our remaining risk in the portfolio.

In particular, we believe that the allowance for credit loss to non-accruing loan ratio of 53% is not representative of the actual risk in the portfolio. As we continue to increase our disclosure around the non-performing asset balances, Slide 26 shows the allowance for credit loss coverage ratios for both non-accruing loans and non-performing assets as reported this quarter. The middle portion of this Slide provides the detail around two components of the non-accruing loan balance that we have no reserves assigned.

For the commercial impaired line item, this is a result of a FAS 114 impairment process completed each quarter. The $410 million balance represents the net recoverable balance based on our most recent, as of June 30th test. The prior charge offs column represents a cumulative level of charge offs taken on the noted balances. Within the 34% loss severity ratio there were clear variations based on loan type and collateral. Based on the impairment designation and current valuation, no reserves are assigned.

For the Franklin non-accruing loan item the write down process has been well documented and we do not expect any additional charge offs. Remember, these were transferred on to our balance sheet at current market values as of March 31st. Again, there are no reserves assigned to these balances. Eliminating these appropriately valued and non-reserved balances materially increases the respective non-accruing loan and non-performing asset coverage ratios to 91% and 77% respectively.

Since we believe that the coverage ratios are used to gage coverage of potential future losses and as both segments have already been written down to recoverable value, not including these balances provides a more accurate picture of the allowance for credit loss level for Huntington relative to non-performing assets.

Slide 27 provides a reconciliation of the quarterly change in the non-performing asset balances. You can see the significantly higher charge off activity in the past two quarters than in prior periods. The other significant item is the increasing amount of new additions. While we have been substantially more active in the identification of non-accruals in the past two quarters, the increase also reflects the economic stress our borrowers are experiencing.

Of the $750 million of additions, 90% came from the commercial real estate and C&I portfolios with an average write down of 12% at the time they went to non-accrual status. In addition, we have over $100 million in reserves attributed to the balances. From a payment standpoint, over $200 million of the additions were current as of June 30th. The $41 million of loans returned to accrual is also worth noting as we continue to actively review our portfolio to ensure the appropriate accrual treatment.

Slide 28 provides a trend of our commercial asset quality portfolio distribution as measured by our internal probability of default risk rating methodology. As Steven mentioned, during the second quarter we actively reviewed over $17 billion in commitments associated with non-criticized loans. The Slide shows the relative consistency in the risk rating distribution over the prior three quarters and the significant changes as a result of the portfolio review.

We present this information to assure you that there was a meaningful impact from a risk identification standpoint. The results provide us with a significantly improved view of future risks in the portfolio based on a thorough and current review of each borrower in the portfolio. While the distribution shift is significant, it was based on a conservative outlook for our markets and is not necessarily a predictor of heightened future credit issues.

The increase clarity regarding the risk in our portfolio is also important given our reorganization around business segments. Each segment has developed an approach to maintain this level of clarity in the future and is committed to reducing the level of future negative migration via more active portfolio management. The requirement of action plans, even for non-criticized rated borrowers, monthly financial reviews and active collateral assessments are examples of tangible portfolio management improvements. We intend to manage the portfolio along these segments in the future.

As we continue to provide clarity on the direction of our portfolio, Slides 29 and 30 provide a reconciliation of changes from the prior quarter. On Slide 29 you can see the material decline in the C&I portfolio associated with the net payoffs take down line. This was centered in expected declines in the floor plan balances as inventory has declined across virtually all dealerships and general payoffs and line reductions as businesses actively manage their balance sheets. Also, please note that the origination amount shown on this Slide and the next exclude renewals and new unfunded commitments. As such, they are less than the earlier quoted commercial loan originated and renewed loan activity amount.

On Slide 30, the majority of the commercial real estate decline is reflected charge off to date but we are actively moving in the direction of lower exposures in the commercial real estate portfolio. Slide 31 shows the changes in our consumer delinquency buckets over time excluding Franklin and Ginnie Mae guaranteed balances. We have broken this slide down by product to provide additional clarity regarding our performance.

Both the home equity and auto portfolios declined in both the 30 and 90 day delinquency category indicating positive future trends. The residential delinquencies are higher with the significant increase evident in the first quarter partially a function of a sale of performing loans during that quarter. Overall, we remain comfortable with the expected performance of our consumer portfolio.

Slide 32 updates the quarterly collection results from the Franklin portfolio. You can see the material impact our refinancing efforts and OREO sales focus have had over the past six months. The second quarter results were consistent with our expectations as many of the work rules and strategies that we were able to employ as a result of the restructure began to show results in the second quarter.

That concludes the credit comments. Let me turn the presentation back to Steve for wrap up.

Stephen D. Steinour

As we shared with you before, we intend and are working hard to increase our disclosures making sure you get a full, fair and complete level of information from us and we’re pleased to have a number of new slides in the deck in this quarter that were just reviewed. Let me share with you some thoughts about 2009 performance. First, as we’ve said since January, we don’t believe there will be any significant economic turnaround this year in our markets. We continue to believe we have a good understanding of the risks in the consumer loan portfolios and that those portfolios of loans will perform better on a relative basis throughout this cycle than peers and other portfolios.

Now, with all that we’ve learned through and certainly the results of our second quarter commercial portfolio review, we think we have a very current view of how our borrowers are performing, what their challenges are and frankly, there are a number that are performing very well. Given our economic view however, we anticipate continued net charge off levels and provision expense that will remain elevated but at a manageable level.

We also expect net interest margin will be flat to slightly improving from our second quarter 3.10% level and we expect to continue to build our core deposit growth success. Loans on the other hand are expected to decline modestly for a couple of reasons: first, we’re planning to reduce our commercial real estate portfolio and we’re taking a number of actions to do that; second, the impact of the weak economy, there is actually less loan demand in aggregate out there I believe; and third, there will be charge offs that will be greater than prior years.

Fee income is expected to be mixed. Second half mortgage banking income is expected to be low for the first half given the rate environment. In contrast however, deposit service charges and some other fee income lines including our broker dealer line are expected to return to seasonally higher levels. Last, we continue to control expenses.

Let me ask you to turn to Slide 34 for a couple of key messages. First, we’re seeing good measured improvement in our pre-tax pre-provision performance. Our focus on growing core deposits is paying off and our loan and deposit pricing discipline is increasingly gaining traction within the company. There are opportunities to grow fee income and we’re pursuing them and we will remain focused on controlling expenses. All these actions are intended to set the stage for improved performance as the cycle turns.

Next, and I’m especially pleased with this, is that we have now have a much improved understanding of the risk in the total loan portfolio and we continue to believe any challenges we have will be manageable. Capital position has been improved, we believe it’s adequate. We have a little left to do from our target announced in May and believe that will be accomplished this quarter. Our liquidity position has never been stronger and our strategic planned developments highlighting some exciting opportunities for improving our longer term conformance.

The last slide I’m going to reference is Slide 35, it’s the second half objectives of the management team, executive time. I’ll cover four of them, we believe we can continue to grow pre-tax pre-provision income from the first half of the year. We will continue to grow core deposits. Our third goal is to complete this three year strategic plan and begin its implementation. We want to start taking action, in fact, we will start taking action in some regard once we reach decisions which will be as soon as August in some areas.

With all that change, we think we need a health check with our colleagues, with our employees. We will be doing a survey, we will then make that survey findings actionable early in 2010. But, we’ve got a lot of energy in the company, a lot of excitement, a lot of progress has been made and will continue to be made. That concludes the report. Thank you for your interest in Huntington. We’re going to now open for questions. Operator, if you could help us in that regard.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matt O’Conner – Deutsche Bank.

Matt O’Conner – Deutsche Bank

As we look at the charge off level for the second quarter, is this the new kind of run rate to grow off from here or was there some upfronting of the commercial real estate losses as part of the revenue that you did this quarter?

Stephen D. Steinour

Matt, we’re in one of these moments in the credit cycle where it’s very difficult for us to project. I would tell you we’re recognizing losses earlier than we had been. There’s always a continuum of when you can take loss. Having said that, I don’t know how material that would be second quarter to first. But, well continue to address issues as we see them arise and move forward.

Matt O’Conner – Deutsche Bank

Just in general, you guys seem to be one of the few banks out there looking more closely at C&I and some of the income producing commercial real estate. Is it that you’re trying to get ahead of the curve, you think your mix might be a little bit worse, are others just behind? I’m trying to reconcile it to folks out there saying there won’t really be issues in C&I and CRE and don’t seem to be reserving or charging off any of that stuff?

Stephen D. Steinour

I don’t really know what our competition has in their books Matt. It’s hard to make a relative comment. As we’ve shared with you and others earlier, we’re really trying to get the entire left hand side of the sheet and that’s in part what Don referenced by looking at the Alt-As. We want a clean sheet as much as we can this year and so everything has been looked at or is being looked at, wholly every asset on the sheet is being looked at or has been looked at.

Matt O’Conner – Deutsche Bank

Then just lastly, as I look at the loan loss reserves they were below the annualized charge offs this quarter obviously, well below the non-performers. Should we expect more reserve build going forward relative to charge offs?

Stephen D. Steinour

Well, we tried to break this out a little bit. We took a mark-to-market on Franklin when we moved it in and that’s 20% of our non-performing loans or thereabouts. So, we’re trying to do a more apples-to-apples comparison. Franklin unfortunately seems to be relatively unique to us. We certainly feel the reserves are adequate or we’d have another number there. Directionally, with the economy worsening could we build reserves somewhat? Possibly, but we haven’t seen anything that concerns us in terms of big buckets of risk that have not already been reviewed and addressed to the extent that we see the inherent risk.

Matt O’Conner – Deutsche Bank

So at this point, just to be clear, you’re not expecting the reserve build to increase from here? I think this quarter you added about $80 million and you would think that number would be less going forward?

Stephen D. Steinour

No, I wouldn’t say that but I don’t see us – we’re not thinking we need – you saw a couple of banks take some very large supplemental this past quarter, we’re not thinking about it in that context. We’ve got a methodology, we think it’s working, we’ll be sticking with it. We have a very intensive portfolio management process now for loans of all risk categories and that will help drive our reserves in a dynamic fashion but, we’re not thinking there’s a onetime event that a couple of other banks chose to take.

Operator

Your next question comes from Tony Davis – Stifel Nicolaus.

Tony Davis – Stifel Nicolaus

Just a question here, I guess are you seeing your recent inflection point where resi construction losses may begin to stabilize and the incremental losses in CRE will pretty much be limited to income property? Is that fair Tim?

Tim Barber

I think what we’ve tried to communicate is a distribution of losses between income producing and construction as well as provide some clarity around the composition of the portfolio. Obviously, the construction segment is a relatively small piece of the portfolio at this point. Talking about whether we’ve reached an inflection point, etc. is something that I don’t think we’re prepared to do given what’s happening in the economy and our markets today. So, we’re just trying to provide as much clarity as we can around what the portfolio looks like and where the loss experience has come from.

Stephen D. Steinour

Tony, we’re not trying to make this in to an exercise of frustration for you or others but we just want to be cautious about views. It’s just been very dynamic.

Tony Davis – Stifel Nicolaus

Tim, you would not I guess be in a position to give us a sense about maybe the dollar amount of criticized or classified loans in the income properties, CRE, over last the last quarter or two?

Tim Barber

I think that on the slide that we provide over the course of the entire portfolio, commercial real estate, just for reference it was Slide 28, commercial real estate as a whole certainly had a significant impact on that change. I don’t have the specific breakdown between construction and income producing properties.

Tony Davis – Stifel Nicolaus

One final question, excluding Franklin it looks like you sold a modest amount of OREO in the quarter but loan sales seems to have picked up a bit here and I just wondered what your expectations are for asset sales over the course of the year?

Stephen D. Steinour

Tony, we just want to make sure we understand the question, in the first quarter we did a securitization of $1 billion –

Tony Davis – Stifel Nicolaus

I’m talking about non-performers.

Stephen D. Steinour

On non-performers we haven’t done bulk sales in the second quarter. It’s something we are thinking about for the second half of the year but those changes don’t reflect bulk sales.

Tony Davis – Stifel Nicolaus

One strategic question Steve for you, you’ve identified a roughly $100 million cost reduction effort and I just wondered where we are today on that?

Stephen D. Steinour

Well, when we identified it, we went after it and we got most pieces. What we’re finding nibbling against us now are higher OREO expense, higher NPA or problem asset collection expenses and then we did not have a view when we went after that what the change, the restructuring change with Franklin would mean to us. So, our numbers are particularly cloudy right now with the cost of servicing out of Franklin and then OREO, the cost of collection exercises coming out of the various business segments.

Operator

Your next question comes from David Rochester – Friedman, Billings, Ramsey.

David Rochester – Friedman, Billings, Ramsey

Just going back to one of the earlier questions to maybe ask it another way, on the NPA analysis slides, Slides 25 and 26, is there a level in the back of your minds that your potentially managing to for a minimum reserve coverage to NPAs going forward?

Stephen D. Steinour

We don’t think of it in that fashion Dave. I’ve always thought a better ratio anyway was a coverage ratio to portfolio and then others will understand the quality of the portfolio. In Huntington we have a lot of confidence in the portfolio performance on the consumer so you’ve got 40% to 41% of the book that we believe we can fairly accurately peg even with rising unemployment.

The work in the first half was to try to start to build that same capability in the commercial portfolio so it is very significant to us to have completed this revenue in the second quarter because this portfolio management process Tim and I talked about is very robust and we will maintain it in a very disciplined way monthly going forward. So, it gives us a lot of confidence in our ability to mitigate risk because we’re seeing it now earlier. Where we have opportunities for collateral calls or other things they’re being made much more timely. I think the results of that will be reflected in future period numbers.

David Rochester – Friedman, Billings, Ramsey

One last one, on your outlook for the net interest margin, it seems like there is some real opportunity here for you to see more than just modest margin expansion going forward. Your cost of CDs is well over 3%, can you talk about your ability to reprice those lower over the next six to nine months and what current pricing is on that today?

Stephen D. Steinour

As we said on the first quarter, we try to be conservative with outlook on NIM because it has such a significant forward impact and so we’re trying to be cautious with this second quarter statement now. But, we do think we have a reasonable opportunity resetting that CD book and yet growing the core. We have not closed out what we’re intending to do in the second half yet but we’re very active in our discussions and we’ll do that shortly. We don’t give forward guidance, we opted out of that last year. I’m reluctant to go much further but we would expect to make some progress on that CD book.

Operator

Your next question comes Ken Zerbe – Morgan Stanley.

Ken Zerbe – Morgan Stanley

My first question that I have, when you guys talk about your credit performance running in line with the stress test, are you talking, and to be very specific on that, are you saying that your credit performance is running in line with the adverse case stress test or is it better than what you would expect under the adverse case?

Tim Barber

The way we’re looking at it, we don’t see the adverse case as a number that makes much sense in our portfolio. So, depending on what portfolio you’re talking about operating either between the base case and the adverse case or in some cases actually below the base case scenario as we talked about some of our consumer portfolios.

Stephen D. Steinour

In aggregate we think of it as base case.

Donald R. Kimble

Ken just to follow up on that, really when we came up with our capital plan in May, we were using our own internal stress analysis and we’re saying that our losses that we recognize here in the second quarter are in line with the early stages of that outlook as far as our internal analysis. It’s not necessarily what you saw was the [inaudible] stress test loss levels.

Ken Zerbe – Morgan Stanley

The second question I had, just on your commercial loan review, should we view this I guess as sort of a catch up to current conditions like you just did a full review, you know where everything is today, you built the reserves to protect against today and then going forward because you have the new policies in place and procedures that as credit continues to deteriorate from here there’s not going to be another catch up but we’re going to see the deterioration going through the provision and charge off line?

Stephen D. Steinour

I think the later is fair Ken. Again, with the mindset that the economy has flattened out and we don’t think it will happen in the second half and we do except some further deterioration, we do believe we are now in a position to more actively manage and mitigate it than we had been.

Operator

Your next question comes from Brian Foran – Goldman Sachs.

Brian Foran – Goldman Sachs

I guess first on Slide 32, how should we think about the collections trending down during the quarter versus your outlook for flat? What factors are giving you the confidence that the collections are stabilized? Then second, is there a rule of thumb, I realize the marks are pretty heavy right now but is there a monthly collections number that the current marks, a minimum collections number we should track the current marks correspond to?

Tim Barber

The first question, the April number clearly reflects the impact of some of the substantial refinance activity that occurred over the course of March and April. May and June are more base case months. We also believe that there are a number of strategies and programs that we’re working on relative to collection and recognition of value coming out of that portfolio both first and second that will continue to see benefits going forward. So, that’s the basis for our comments regarding the current quarter and some look in the future on what we expect from Franklin.

As far as is there a base case or an underlying cash flow assumption associated with to mark, the answer is yes. I don’t think that is something that we have shared specifically and I can’t give you a sort of base monthly number but, I can say that we expect collections going forward to be reasonably close to where we’ve seen them the first and second quarter. Again, it depends on a lot of our strategies and a lot of Franklin’s efforts but we’re comfortable with the direction of the portfolio certainly right now.

Donald R. Kimble

Keep in mind also as far as the pricing [inaudible] includes both reserve for the embedded expected future losses and those losses are based on the assumption that home prices continue to decline over the next couple of years at a fairly steep pace. The second portion of that discounted is related to the assumptions that the cash flows are just kind of at an 18% effective yield. Since most of those assets are non-performing we essentially have both of those reserves available to cover future credit losses associated with the projected cash flows on that as well.

Brian Foran – Goldman Sachs

If I could follow up on capital, given that you are not part of the [SCAB] assessment, the simulated stress test you’ve done and the capital adequacy you’ve benchmarked against that, have the regulators officially approved that? Are there any other metrics they’re holding you to? How should we think about to make sure the simulated stress test is a fair benchmark of what we’re working towards?

Stephen D. Steinour

Well, we hope you would view it as a fair benchmark, we worked quite a bit with your firm to do this, and others, to get market data since we were not a participant. We used that data with the participation from the firms and we’re confident from all that we can tell. We have not had it reviewed by regulators, they did not participate in our work, they haven’t subsequently reviewed it, it’s available to them as any information here is but there’s no sort of scheduled review, there’s no conversation pending, any of that stuff. I don’t want to mislead anybody implying that there’s some sort of regulatory stamp on this. This was our work.

Brian Foran – Goldman Sachs

I don’t want to misconstrue the question, what I meant to say, the regulators have never kind of officially said what standard they’re holding the next tier of banks to. Is there any other standard, or is there any other conversations you’re having with regulators that would lead us to believe there is a different metric or is your kind of understanding based on your interaction with them that the stress test simulation is the right way to think about capital for banks in the $20 to $100 billion of first weighted asset range?

Stephen D. Steinour

We’ve had no conversation that would suggest there’s any other approach or formula or for that matter even initiative to take the [SCAB] test to another level for the next tier banks. I would tell you, my sense of it however is that it’s been a valuable exercise at least for us. Having the benefit of sort of second hand knowledge about how other banks were treated and viewed with loss rates helped us provide bands that we might not have otherwise been able to achieve independently. So at least for us we found it valuable.

Operator

Your next question comes from Greg Ketron – Citigroup.

Greg Ketron – Citigroup

Just a couple, one on early stage delinquency trends, I know in your presentation you had commented on the residential side and I apologize if you offered this earlier but any views or any information you can provide in terms of what’s happening on the C&I and the commercial real estate side? Or, maybe any color on what’s happening with the classified or criticized loan watch list?

Tim Barber

On the early stage delinquency in C&I and CRE we were up marginally as of the second quarter compared to the first but down certainly significantly compared to 12/31/08 so the longer term trend is positive in the commercial real estate world. I’m not sure I understood exactly the question you were asking related to the criticized classified number.

Greg Ketron – Citigroup

Just trends that you might be seeing there to the degree that you can discuss them?

Tim Barber

I guess I would point you directly back to Slide 28 and that is as much disclosure as I think we can give or have ever given on what’s happening. That shows the material move associated with the [inaudible] and 10 plus classified categories in the portfolio in the second quarter.

Greg Ketron – Citigroup

Then on page 27, just looking at some of the flows through the non-performing assets area, it looks like one, 90% of your charge offs are arising from NPLN flows. Is that right?

Stephen D. Steinour

That would not be a fair conclusion. Just the workout process, there are at least a couple of meetings around which an initial resolution discussion is going to be had or an alternative such as resorting to remedies will occur then that will take some time. There’s also typically an updating of valuation that we’ll take to try and make sure we’re as accurate as possible at the point of charge offs. So, much of that charge off would be reflective of prior period non-performing loans.

Greg Ketron – Citigroup

Don’t draw the conclusion of looking at the inflows and assuming the charge offs came through the inflows?

Stephen D. Steinour

That’s correct.

Greg Ketron – Citigroup

Because I noticed the charge off level had increased the 40% but then what you’re saying is part of that 40% is coming from the existing NPLN inventory versus just on the inflows?

Stephen D. Steinour

Correct. If you peel that NPLN number back, deduct Franklin from it and then take your beginning period not end of period that will give you a better sense of risk in the portfolio.

Operator

Your next question comes from Terry McEvoy – Oppenheimer.

Terry McEvoy – Oppenheimer

Just getting back to the credit portfolio review in the quarter, was a majority of the losses or deterioration that was identified in kind of northern Ohio, southeast Michigan which is where the commercial losses have occurred for Huntington over the last couple of quarters or did it better reflect a majority of where Huntington operates in terms of the franchise?

Tim Barber

The exercise was clearly across the entire franchise and we saw changes as a result of the exercise in all of our markets. There was not a specific concentration in southeast Michigan or northwest Ohio. In many cases southeast Michigan, the Detroit area, we’ve been through that portfolio so many times and the economic conditions have been so materially different than the rest of the portfolio that we’ve gotten a lot of that out of the way.

In many cases, the results of the review were positive in that market. Our bankers are absolutely on top of the borrowers that remain in the portfolio and we’re continuing to serve. So, I would say that it was a broad based review and the results were also broad based.

Terry McEvoy – Oppenheimer

Then just one other question, when I hear three year strategic plan I also think onetime charge or some sort of expense. Is that something we should look for in the fourth quarter? And, how do you potentially weigh a charge up against the capital you’ve raised and maybe some of the embedded losses or future losses that we’ll see over the coming quarter?

Stephen D. Steinour

We’re not expecting and did not intend to imply any charge let alone material charge related to the strategic plans here.

Operator

Your next question comes from Andrew Marquardt – Fox-Pitt Kelton.

Andrew Marquardt – Fox-Pitt Kelton

Just circling back on the capital, the stress test analysis that you had done before, can you help reconcile – I understood your point about net charge offs you’re tracking with sort of your base case scenario but can you maybe give some color on the reserve coverage level? One of the things that I think stood out in the stress test analysis that you had done was your assumption of just over 1% reserve coverage versus 2.5% now.

Donald R. Kimble

As far as that, our model was just to say that at the end of the two year time period after absorbing the level of losses were include in that stress test so the reserve level could come down to more the historic level of reserves. So, essentially in this case since our reserve levels are higher than that if you would follow the stress test model that at some point during the two year time period that would start to migrate down as the migration would slow and the realization for those losses would occur.

Andrew Marquardt – Fox-Pitt Kelton

So a potential releasing of reserves or bleeding of coverage seems fair over two years?

Stephen D. Steinour

Well not release, it would be utilization of reserves and again, it’s our understanding this is consistent with the way that the [19] modeled it as well.

Andrew Marquardt – Fox-Pitt Kelton

Were they also kind of thinking about individuals kind of historical kind of coverage which is how I think you came up with this kind of 1%, 1.2% coverage that you were using?

Stephen D. Steinour

It’s our understanding that they did have a historical view and certainly the asset mix played a big part in that view. Some of them have materially different mixes today than they had at one point a couple of years ago back to that norm period.

Andrew Marquardt – Fox-Pitt Kelton

Maybe I missed it but can you give a little color on the retail CRE losses this quarter? Was that a bit of a pull forward? Losses look like they were almost double over 9% versus 5% last quarter.

Tim Barber

In that portfolio Andrew we continue to look at it. That’s a portfolio, as an example, where there can be changes in value over time and we are working through those. I think this quarter was an appropriate set of actions associated with what we ended up with. I don’t think that there’s any additional way of describing the 9% number for retail.

Andrew Marquardt – Fox-Pitt Kelton

So it’s not like there was an unusual kind of catch up war being aggressive in realizing losses?

Stephen D. Steinour

No, I think nothing extraordinary. I know we’re trying to take losses at an earlier stage rather than liquidate the collateral and then take the loss by way of comparison. We intend to be very active in managing the portfolio and recognizing risk. We are more forward leaning in that regard than the bank would have been say last year. The other element to think about is you generally have your worst credits emerge earlier in the cycle and as you age in to the cycle you tend to have borrowers that generally have more capabilities and resources and in our case we’re also trying to get to them earlier. So, if you would, there’s a slightly better quality mix of our classified or criticized today than there would have been six months ago, there’s more to work with.

Andrew Marquardt – Fox-Pitt Kelton

Then the last question I had was on earlier comments about the pre-tax pre-provision earnings and looking for additional actions to improve that. Can you touch on again what are you considering? Is it additional cost saves?

Stephen D. Steinour

There is some element of costs that we’re always going after. We had an employee driven campaign called the green campaign that we closed out in the second quarter. It was a $6 million number. There are always things we’re looking to do on the expense side but we believe we’ve got some fairly significant revenue opportunities. A number of these business lines essentially shut down from new business to do the portfolio review in the second quarter. Someone I think noted and Don commented on the broker dealer income which was very high in the first quarter, a record first quarter, dipped in the second but it’s expected to come back and is on track to do that.

There are a series of actions which we are taking now with weekly business line reviews that use to be monthly that are putting a little more focus and attention in to the process. We think all of these things are helpful. We had certain expectations that are more dynamic and we’re not just locked in to an annual budget for example, we’re using the monthly forecasting process as a way of driving harder those business segments that have opportunities for us.

Operator

Your final question comes from Kenneth Usdin – Bank of America Securities.

Kenneth Usdin – Bank of America Securities

Two questions, first just on capital, you mentioned in the release that you guys had made a ton of progress on the capital rebuild and that you might leave the door open to kind of getting back to that target you announced back in May. I’m just wondering with a TC ratio still below peers but much improved from where it was, once you get to that kind of completing the program, is that completely it for capital raising? And, what would leave you to decide, if anything, that you’d still have to top off capital rebuild further?

Donald R. Kimble

From that perspective I think we’ve been saying for some time that we’re very happy with our overall level of capital, that we’ll continue to reevaluate whether there’s certain components that we’d like to shift in to. So, we’ll continue to take a look at that. During our call we tossed out some of the other risk management efforts that could help reduce our risk weighted asset levels which will have a positive impact on some of the ratios as well. As we said, we’re a little short of the targets we laid out and still evaluating some of the options to get there and have a few things to consider.

Kenneth Usdin – Bank of America Securities

Then my second question is just regarding Steve’s point earlier about not expecting any type of a rebound this year, can you just give us your broad thoughts of how the footprint is acting from a broader economic perspective? How much more shake out are you expecting from the ancillary issues from the auto industry trickling out? And, what do we have to look for specific to Huntington to get kind of a turn in your kind of views about the economy and how that leads in to future credits?

Stephen D. Steinour

A couple of things in that regard, one is we think we are sort of at best mid stage on the auto shake out. For us, it’s not a big deal, we just don’t have that much supplier exposure. The impact to us is more tertiary but there will be some impact. That’s one of the reasons we’re still cautious about the year. Secondly, on the consumer side, we don’t see job creation at a level that’s mitigating the job loss so we’re expecting higher unemployment and so far we’ve been able to improve our performance on a number of books and we expect to continue to do that but it is impeding the rate of improvement we would otherwise see if we got to a stable environment let alone a good environment.

We think as a consequence there will be some continuing pressure on a variety of businesses small and medium size in our footprint that will continue through this year beyond what would have been apparent in the second quarter.

Kenneth Usdin – Bank of America Securities

The last question, do you have any concept or context in which to help us out to think about possible timing for a return to profitability?

Stephen D. Steinour

Well, we stopped giving guidance last year and I’m loath to start it at this particular point. We obviously are pushing pre-tax pre-provision aggressively dynamically. We’re looking to get our issues on the table dealt with and resolved and move forward. We believe we’re turning the ship and that we’ve made pretty good progress. It wasn’t a puff piece in my initial remarks but, we have more work to do to be sure. I’m reluctant to suggest which particular quarter but having said that, it is foreseeable, it’s not some indefinite long term point distant on the horizon. We believe we’re going to continue to make progress on the core and that will hasten the transition point.

Operator

There are no further questions at this time.

Jay Gould

Thank you everybody for participating. If you do have follow up questions, please give myself or Jim Graham a call. Thank you again. We’ll see you next quarter.

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