Huntington Bancshares Incorporated Q3 2009 Earnings Call Transcript

| About: Huntington Bancshares (HBAN)

Huntington Bancshares Incorporated (NASDAQ:HBAN)

Q3 2009 Earnings Call Transcript

October 22, 2009 1:00 pm ET


Jay Gould – Director, IR

Steve Steinour – Chairman, President and CEO

Don Kimble – EVP and CFO

Tim Barber – SVP, Credit Risk Management


Matthew O'Connor – Deutsche Bank

Ken Zerbe – Morgan Stanley

Jeff Davis – FTN Equity

Ken Usdin – Bank of America Merrill Lynch


Good afternoon my name is Chanel and I will be your conference operator today. At this time I would like to welcome everyone to the Huntington third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session.

(Operator instructions). Thank you. Mr. Gould, you may begin your conference.

Jay Gould

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

Slides two through four, notes several aspects of the basis of today’s presentation. I encourage you to read these, but let me point out one key disclosure. This presentation does contain both GAAP and non-GAAP financial measures, and 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 to today’s earnings press release or in the related Form 8-K filed earlier today, all of which you can find on our website.

Turning to slide 5, today’s discussion including the Q&A period, may contain forward-looking statements. Such statements are based on information and assumptions available at this time and are subject to changes, risks and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. 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 10-K, 10-Q and 8-K filings.

Now, turning to today’s presentation, as noted on slide six, participating today are Steve Steinour, our Chairman, President and Chief Executive Officer; Don Kimble, Senior Executive Vice President and CFO; and Tim Barber, Senior Vice President of Credit Risk Management. Also present for the Q&A session is Dan Neumeyer, Senior Executive Vice President and Chief Credit Officer; and Nick Stanutz, Senior Executive Vice President of Auto Finance and Dealer Services.

Let’s get started by turning to slide seven and Steve.

Steve Steinour

Thank you, Jay, and welcome everyone. First, a word of introduction. I am pleased to introduce Dan Neumeyer to you. He has just joined us early this month. Dan came to us from Comerica where he was the Chief Credit Officer for the Texas bank. He has extensive credit and commercial banking experience with middle market companies and small businesses. He also has experience in commercial credit training that will broaden team skills here in Huntington. Potentially, he brings a demonstrated expertise in portfolio management. He has got a proven track record of performance, which will further strengthen the credit culture here at Huntington. So, welcome Dan.

I think it’s important to note upfront that for the nine months, we’ve made good progress in positioning Huntington for improved long-term performance. I hope you have seen the urgency with which we are moving forward. Our number one objective is to position Huntington to return to profitability as soon as possible with better and consistent long-term performance.

Progressively addressing credit issues is fundamental to achieve in its objective. We made a number of significant decisions in the first half of the year and some more this past quarter is part of our objective to continue to seek opportunities to aggressively identify and resolve problem credits.

Despite the third quarter’s loss, we are encouraged by the progress we are making. As I noted in the last quarter, we are moving towards pulling offsets, and you will see that evident in a number of third quarter performance stats. We are more focused and are seeing improvement in underlying performance in a number of key areas.

I’ll begin with the review of our third quarter performance highlights. Dan will follow up with a detailed overview of our financial performance. Tim will provide an update on credit, and I’ll then return with some 2009 fourth quarter outlook comments while, I hope our investors take away from our third quarter performance.

Let’s begin the presentation by turning to slide 8. We reported a net loss of $166.33 million a share or common share. The driver of the loss was a $475 million provision for credit losses. This provision was $61.4 million, 15% higher than the second quarter. It also was $190 million or 33% higher than net charge-offs thus strengthening our allowance for credit losses.

Contributing to this increase were certain credit actions that we’ll talk about in more detail in a moment, which were consistent with our objective of moving impressively to address problem credits as quickly as possible.

Pre-tax, pre-provision income was $237.1 million, up 7.8 million or 3% from the second quarter, so progress continues. This reflected a number of positive trends in underlying performance drivers. For example, pre-taxable equivalent net interest income increased to $15.9 million or 5% as our net interest margin expanded 10 basis points to 3.2%. And core deposits grew at 10% annualized rate, our third consecutive quarter of meaningful flow.

Average loans declined to $1.2 billion reflecting planned efforts to reduce our commercial real estate loan exposure, but also reflecting old C&I loans to the lower line utilization particularly in all the auto dealer floor plan loans given the success of the “Cash for Clunkers” program and lower dealer inventories.

Weak demand also resulted in a decline in total consumer loans while average loans declined, average investment security increased to $1.3 billion, but the cash from our capital raising efforts was deployed.

Regarding capital [ph] we took further action by adding $587 million to common equity. This was accomplished through a third discretionary equity issuance program and a very successful common stock offering. Reflecting these actions, all our period end capital ratios saw further significant improvement. Our tangible common equity increased to 6.46%, up 78 bips. Remember this was only 404 at the end of last year. I certainly remember the 404.

Our regulatory Tier I and Total risk-based capital ratios increased to 13.04% and 16.24% respectively. These are $3.1 billion and $2.8 billion above the respective regulatory well capitalized 6% and 10% thresholds. We believe we now have sufficient capital to weather a stressed economic scenario.

Liquidity was also further strengthened. A key driver was the strong core deposit growth mentioned earlier. Our loan to deposit ratio at the end of September was 94%, improved from 98% at the end of June and much improved from 108% at the end of last year. At September 30, total cash and due from banks was $1.9 billion, or $1.1 billion higher than at December 31st. Also since last year, our unpledged investment securities portfolio has increased $4.3 billion.

Now turning to slide 9, consistent with our objectives, we took certain credit actions to further aggressively addressing current and emerging credit issues, so as to accelerate the identification, recognition, and resolution of problem credits. We believe our actions will result in timelier resolution.

As related to third quarter performance, these actions contributed to higher commercial loan non-accrual, residential mortgage debt charge-offs and provision for credit loss expenses. With regard to the commercial portfolio and utilizing enhanced portfolio management process sees put in place in the first half of the year. We continued our emphasis of identifying potential emerging problems in our commercial loan portfolio. It's important to note that our change in criticized loans for the quarter was 4%, and that over 55% of the third quarter's newly identified commercial non-accrual loan were less than 30 days past due.

As related to our residential mortgage portfolio we took a more conservative position on the timing of loss recognition and continued active loss mitigation and troubled debt restructuring efforts. Here we also sold some underperforming loans for the first time this year. It's important to note that even though total portfolio net charge-offs were elevated, they continued to be below the two-year cumulative loss assumption used in our loan portfolio stress test analysis announced last May.

There are two other areas I want to highlight. First, we continued to strengthen our board and management team. Bill Robertson joined the board. He is a former president, director and deputy chair and one time CFO of National City Corp in Cleveland. He clearly understands our markets very well, brings a wealth of banking and business development experience to our board.

We also strengthened our management committee. I already mentioned Dan. Also joining our team is Elizabeth Heller Allen, executive vice president, director of corporate public relations and communications. She has outstanding and broad experience and background at several Fortune 100 companies. She will lead the creation and delivery of an integrated communications program that supports and is consistent with the Huntington brand.

In our business segments Dave Hammer recently joined us as president of our Pittsburgh region; and Bill Shivers was appointed president of our Akron/Canton region. Both are important market to us. Both of these individuals bring a wealth of banking and local market experience to Huntington.

Lastly, and as evidence of our shift to offense, on October 2nd we acquired approximately $400 million of deposits of Warren bank, locates in Macomb County in Michigan, just northeast of Detroit in FDIC related transaction. We're very pleased to have a successful bidder for this franchise, and welcome the over 8,000 customers to Huntington.

From a fund raising perspective, this should result in continued improvement in our loan to deposit ratio. We're pleased with the early on results and expect to have all the accounts converted and the customers fully integrated by the middle of January next year.

As further evidence of our progress and playing offense, I'm pleased to announce that just yesterday we've been informed by the US Small Business Administration that for the fiscal year ending September 30 they ranked Huntington the number one SBA lender in Ohio and West Virginia in terms of loans and amount of lending and number one in SBA lending in Indiana and Michigan in terms of loans.

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

Don Kimble

Thank you, Steve. Slide 10 provides a summary of our quarterly earnings trends. Our reported net loss as Steve said earlier for the quarter was $0.33 per common share, or $0.07 per share less than our second quarter loans. Many of the other performance metrics will be discussed later in the presentation, so let's move on.

On slide 11, we provide an overview of our pre-tax pre-provision income performance. We believe this metric is useful in assessing the underlying operating performance. We calculate this metric by starting with the pre-tax earnings, then excluding three items, provision for credit losses, security gains and losses, and amortization of intangibles.

In the past, we've also adjusted for certain significant items. However, this quarter we did not adjust for any items. On this basis, our pre-tax, pre-provision income for the third quarter was $237.1 million, up $7.8 million or 3% from the last quarter. This improvement clearly reflects the management’s actions taken during the first nine months of the year, and we continue to look for additional opportunities to improve our core operating performance.

Slide 12 provides a trend of our net interest income and our margin. During the third quarter, our net interest income increased by $15.9 million, reflecting a 10 basis point improvement in our net interest margin and a stable average earning asset base. The margin improvement reflected a favorable impact of our improved loan pricing and deposit mix, partially offset by the negative impact of the actions taken to improve our on-balance sheet liquidity position, and the higher levels of nonperforming assets.

On slide 13, we show the change in our mix of our investment portfolio. With the growth in our deposits, we've invested the funds primarily in two-year agency securities and three-year agency CMOs.

The short-term nature of these investments provides the flexibility to reposition the portfolio if the yield curve starts to steep in. The three highest risk segments of our investment portfolio are shown on slide 14, our Alt-A mortgaged back, our pool trust preferred and our prime CMO segment.

During the quarter, we sold $97 million of book value of our Alt-A securities. These securities were some of the lower-graded securities we owned. These sales are part of a design plan to lower the risk profile of the portfolio. As a matter of fact, our risk weighted assets associated with the securities declined by more than the amount sold, or by $207 million.

The trust preferred securities continue to reflect the stress of the economic environment with many of the underlying issuers deferring payment. With the increased deferrals and the expected defaults, we recognize an additional $14.6 million of other than temporary impairments on these securities. These losses were offset by security gains on the sales of the Alt-A and certain agency securities.

The prime CMOs reflect the increased prepayments realized during the third quarter. These bonds continue to perform as expected.

Continuing on to slide 15, we show the link quarter loan and lease trends. Total commercial loans were down by $0.9 billion or 4% reflecting the impact of a lower line utilization for commercial borrowers, including auto dealer floor plan loans. The decline reflects the planned lower commercial real estate balances reflecting both paydowns and charge-offs.

The decrease in total loans also reflects a slight decline in total consumer loans.

Turning to slide 16, one of the real highlights for the quarter was the continued growth in our core deposits. Not only did we grow total core deposits on an annualized 10% rate, but the growth came from the demand deposits and money market category. We continue to emphasize core deposit growth through our incentive programs and management goals. We're very pleased with the results to date.

Slide 17 shows the trends in our non-interest income categories. Of note, our service charges on deposit accounts reflect the growth in our demand deposits, up 7% from the second quarter.

Mortgage banking income declined by $9.4 million from the second quarter reflecting lower – from refinance activity. Other income for the quarter was down $15.6 million as the second quarter reflected a $31 million gain related to our Visa stock. The current quarter included a $22.8 million gain from the interest rate swaps deemed as ineffective this quarter. These swaps have been re-designated with the remaining benefit recognized earlier – over the remaining term of two to three years.

Also included in other income for the quarter was a $7.5 million loss from the sale of nonperforming loans.

Turning to the next slide is the summary of our expense trends. Total expenses are up $61 million from the prior quarter. In the second quarter we recognized $67.4 million of gain in the redemption of trust preferred securities.

This quarter our OREO and foreclosure expenses as shown separately and the increase reflect $14 million loss on one commercial OREO property. As shown on slide 19 during the quarter, we completed our announced plan to enhance our capital positions. We completed $150 million discretionary equity issuance program followed by $460 million public issuance. The results of these issuances brought our TCE ratio for the quarter to 6.46%, up 78 basis points.

Our Tier 1 common equity increased by 102 basis points to 7.82%. Slide 20 provides a summary of the capital actions over the first nine months of the year. In total we've increased Tier 1 common by more than $1.6 billion during this time. Although issuing additional capital is not planned at this time we are currently considering additional liability management actions to further bolster our capital ratios and utilize some of the net proceeds and capital raids [ph].

Let me turn the presentation over to Tim Barber to review the credit trend.

Tim Barber

Thanks, Don. Turning to slide 21 our total charge-offs were $21.5 million or 6% higher in the third quarter than the second quarter. However, there were substantial changes in the composition. Total commercial net charge-offs were $32.8 million lower in the quarter as the C&I portfolio showed a significant decline while the commercial real estate portfolio remained constant.

In the consumer portfolio, two discretionary credit actions associated with the residential mortgage portfolio substantially increased the charge-off recognized in the quarter. As the economic conditions in our market continue to be challenging and the home prices remained flat, we adjusted the timing of our loss recognition to ensure that we are taking a conservative view of the value of the real estate collateral. This change accounted for a $32 million loss during the quarter.

In addition, we transferred $45 million of underperforming residential mortgage loans to loans held for sale which resulted in a $17.6 million loss. This sale activity was entirely comprised of Huntington originated loans. We believe that the combination of these two actions best positions Huntington well for the future. The remaining consumer loan portfolios performed much as anticipated with lower auto losses and marginally higher home equity losses primarily as a result of increased short sale activity.

The third quarter represented our highest level of closed loss mitigation structures. It is important to note that all of the consumer portfolio showed improved early stage delinquency levels of our second quarter results. As we consider our asset quality trends and drivers the commercial real estate portfolio remains the most stressed. The bulk of the commercial real estate net charge-offs came from the two highest risk segments of the portfolio, single-family home builders and commercial real estate retail projects. Both of these segments continue to show stress as we work with the borrowers in resolving challenging credit issues.

The 35.3 million decline in non Franklin C&I net charge-offs was a function of lower losses throughout our geographic regions and was also evident in our small business banking portfolio. We expect that there will be continued weakness in the C&I portfolio as we obtain and analyze updated financial information throughout the next year.

One C&I segment that we continue to feel comfortable about despite the environment is the C&I loans in our Auto Finance and Dealer Services portfolio. We do not anticipate any dealer related losses in the portfolio even in the phase [ph] of the dealership closings. Our dealer selection criteria was the focus on multi dealership groups has proven itself in this environment.

Our indirect auto portfolio continues to show very positive performance trends while home equity portfolio did show an increase from the prior quarter. Despite the increase in losses we’re generally pleased with the results across our consumer portfolio during the quarter, particularly given the economic environment in our market.

Slide 22 represents the net charge-off ratios associated with our portfolio. You should note that annualized residential mortgage net charge-off ratios shown as 6.15% would have been 1.73% excluding the previously mentioned $49.6 million in charge-offs related to this quarter's credit action and loss on loan sale. On the same basis, the total net charge-off ratio of 3.76% would have been 3.24%, down from the 3.43% in the second quarter.

Turning to slide 23, non-accrual loans were $2.2 billion at September 30th, representing 5.85% of total loans and leases. This $363 million increase was more than the $265 million increase from the prior quarter from the first quarter to the second quarter as we continued our practice of early recognition of non-accrual treatment in the commercial portfolios. By way of example, over 55% of the new commercial non-accruals identified in the quarter were contractually current as of September 30th. The residential mortgage non-accrual declined in the quarter was a result of the credit actions described earlier.

The $156 million increase in C&I accruals reflected the impact of the economic conditions in our markets and was evident across our regions and industry segments. In general, those C&I loans supporting the housing or construction segments, and non-dealer related loans associated with the auto industry experienced 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 a more borrower centric than industry related issue. The $283 million increase in the commercial real estate non-accruals reflected the continued decline in the housing market, stress on retail sales and a general decline in the economy. The increase this quarter was not concentrated in a specific project type although the single-family homebuilder and retail segments remain the most stressed.

It is important to note that on an overall basis, 35% of the total C&I and commercial real estate non-accruals were current from a payment standpoint. On the non-performing asset front, OREO balance has declined as we actively marketed and sold our properties, including OREO generated from the acquired Franklin portfolio. The increase in the impaired loans held for sale was attributable to the previously mentioned transfer of residential mortgages to loans held for sale.

Slide 24 provides a summary of some key asset quality trends. Our nonaccruing loan ratio increased to 5.85% in larger part due to changes in treatment described earlier. The NPA ratio was 6.26%.

We continue to actively manage the portfolio as evidenced by the reduction in our commercial accruing 90 plus delinquencies to virtually zero for the third consecutive quarter, and a decline in the consumer 90-day delinquency that I will review later. Our reported allowance for credit loss ratio of 2.9% represented a significant increase from the 2.51% reported in the prior period.

Despite the increase in our reserve balance, the resulting nonaccruing loan and non-performing asset covered ratios declined in the quarter. We believe that the allowance for credit loss to nonaccruing loan ratio of 50% is not representative of the actual risk profile of the portfolio.

Slide 25 provides some new details regarding our non-accruing asset balances. On Slide 25, you can see the assessment of the non-accrual loan balances as of September 30th. We believe that Franklin loans have been addressed based on the fact that they have been written down to value as evidenced by the 71% in the prior charge-off column. Subtracting the Franklin non-accruing loans resulted in the $1.8 billion non-Franklin, non-accruing loan amount shown. This amount is more comparable to other banks.

As we think about reserve adequacy, it is important to take into consideration not only the reserve level, but also cumulative losses. On our non-Franklin nonaccruing loans we have taken a cumulative charge-off of 26%. In other words, the $1.8 billion represents a 74% carrying value. In addition, we have an allowance for credit losses representing 18% of the carrying value of the loans to absorb future deterioration.

We think it is also important to give consideration to the fact that embedded in the $1.8 billion are $507 million of loans that were impaired under the FAS 114 analysis process. These loans have been written down by an aggregate of 33%, and per accounting regulation, have no reserve.\

Excluding these impaired commercial loans, leaves an adjusted non Franklin, nonaccruing loan balance of $1.3 billion, which has been written down by a cumulative 23% with an additional 25% reserve against the carrying value to absorb future losses.

It is also of interest to note that of the $1.3 billion of adjusted non Franklin, nonaccruing loans, 50% were less than 30 days past due. Let me emphasize that point. 50% of the adjusted non Franklin, nonaccruing loans were current. We also feel very comfortable that the existing allowance for credit losses on the $96 million of non Franklin residential mortgage and home equity nonaccruing loans is sufficient.

While we acknowledge that the aggregate allowance for credit loss coverage of 50% of nonaccruing loans shown on the previous slide is low relative to other banks, we believe that providing this additional analysis on the confirmation of our nonaccruing loan balances provides a clearer picture of our credit actions associated with these loans and why we are comfortable with our current level of reserve.

Slide 26 provides a reconciliation of the quarterly changes in the nonperforming asset balances. You can see the increasing level of new additions, which continues to be heavily weighted towards commercial real estate. We continue to be focused on the early recognition of non-accruals, particularly as a result of the economic stress, some of our borrowers are experiencing. As we view this slide, it is important to include some comments regarding the underlying migration we are seeing in our portfolio.

While nonaccruing loans increased a net 20% in the quarter, the net level of criticized loans increased by only 4%. As you may recall, and using slide 75 as a reference point, there was substantial migration into the criticized category, a combination of the OLEM and classified segment, in the second quarter as a result of that quarter's broad-based review activity.

We expect to see continued additional migration into the criticized category as the economic environment remains challenging. Of the 4% increase in criticized loans in the third quarter, the bulk of the increase was again associated with the commercial real-estate portfolio. We were encouraged by the low level of net change in criticized C&I and business banking segment loans.

This is consistent with our view that the commercial real estate portfolio of the primary driver of the asset quality performance to date. It is important to note that the level of criticized loans is a leading indicator of future nonaccruing loan and charge-off levels as there are established migration patterns. What we experienced in the third quarter was a more rapid movement into the nonaccruing loan category as we continue to be focused on early recognition.

A final comment on the changes and asset quality in the quarter. We continue to expect losses to be below the stress test results as presented on slide 142. We continue to believe our consumer segments will perform well under the low expectation level shown in that SCAP analysis with our C&I portfolio performance expected to be near the low end of the range and our commercial real estate portfolio approaching the high end of the range.

Again, this is consistent with our belief that the commercial real estate portfolio is by far our most stressed portfolio.

Slide 27 provides a view of the trend in the commercial loan over 30 day and over 90 day delinquency ratios. These ratios include both the C&I and commercial real estate portfolios and is one measure of the underlying quality of the portfolio, especially the over 30 day delinquency ratio.

Turning to slide 28, our C&I portfolio from a credit quality performance perspective continue to operate at manageable levels. Delinquencies were little changed with the prior quarter and the net charge off ratio was lower.

There has been significant news from the industry surrounding the result of the shared national credit examination result. From a Huntington perspective, the asset quality metrics for criticized, classified, and non-accruals associated with our shared national credit portfolio are approximately 50% lower than the reported industry ratios.

Our shared national credit exposure is limited to borrowers in our footprint, where we can develop a non credit relationship in addition to the loan exposure. This strategy in place since the early 2000 has had a direct impact on the further better asset quality ratios.

On slide 29, you can see similar information for our commercial real estate portfolio. As we continue to provide additional disclosure around our commercial real estate portfolio, slide 30 provides a look at the exposure by type of loan, using expanded definitions that provide more clarity regarding this portfolio.

Given the lack of liquidity in the permanent markets, we have now separately defined a permanent qualified category based on positive debt service coverage and loan-to-value position. This segment was previously part of the Mini-Perm segment.

Given the market condition and our focus on shorter term renewals a buildup in the Mini-Perm category is inevitable. It is important to note that we are not looking longer term renewals into the Mini-Perm category and then forgetting them. Our strategy is to maintain a direct and ongoing connection with our borrowers on these projects.

Turning to slide 31, you can see the material difference in asset quality among these newly defined categories. In particular, the permanent eligible category has the best asset quality metrics. The construction and traditional Mini-Perm categories continue to be the source of the bulk of the credit issues in the portfolio.

Importantly, in these higher risk construction and Mini-Perm categories, over 50% is already managed by our special asset division. This ensures that an appropriate collateral valuation has already occurred and is incorporated into our reserve calculation. It is also noteworthy that 15% of the total construction balances are associated with non-developed projects such as owner occupied buildings.

The other new disclosure is found on slide 32, which represents a commercial real estate loan maturity schedule. We have used this maturity schedule as part of our project management process, contacting our borrowers well in advance of a maturity date to facilitate negotiations and solutions.

Our ability directly contact our borrowers is significant differentiation between our portfolio and the majority of the CMBS metrics in the market today. As noted on the prior slide, approximately 50% of the two highest risk segments are already managed by our special assets division.

Slide 33 shows the trend in over 30 and over 90 day delinquencies for our three major consumer loan portfolios excluding Franklin and Ginnie Mae guaranteed balances. The auto loan and lease portfolio performance remain consistent with the prior quarter continuing the positive performance trends we have seen over the prior three quarters. Early stage delinquencies are highly predictive of future performance in this portfolio.

There was an increase in the home equity ratios but we continue to feel comfortable with the performance of this portfolio. The residential delinquencies are lower in both categories as a result of the portfolio actions taken in the quarter. It is important to note that the delinquency rates would have been lower even without the impact of the credit actions.

In summary, we continue to believe performance in our consumer loan portfolios will show better relative performance throughout the cycle notwithstanding the spike in residential mortgage net charge-offs this quarter due to the specific credit actions.

Let me turn the presentation back to Steve for wrap up.

Steve Steinour

Thank you, Tim. Turning to slide 34, let me share with you my expectations about 2009 fourth quarter performance. First, as we've said since January, we still do not believe there will be any significant economic turnaround this year. We continue to believe we are good at understanding the risks in our consumer loan portfolios and that those loans will perform on a relative basis better throughout this cycle.

Nevertheless, as noted earlier, we're continuing to seek opportunities to accelerate the identification, resolution of problem credits, returning Huntington to profitability as soon as possible, is our highest priority, and getting the credit issues identified, addressed, and behind us is key.

As such, we anticipate that net charge-offs, provision expense and loan loss reserves will remain elevated. The good progress we've made in improving our pre-tax, pre-provision income is encouraging by continuing to focus from disciplined loan and deposit pricing, we expect our fourth quarter net interest margins will be flat to slightly higher than the third quarter.

The very interaction we have achieved in growing transaction related core deposits is also expected to continue. However, loans are expected to decline modestly reflecting the impacts of our continued efforts to reduce commercial real estate exposure, the weak economy overall and ongoing net charge-offs. Fee income performance will remain slightly remained mixed and expenses well controlled.

Let me use slide 35 to review key messages that I hope come through from our products.

First, everything we are doing, all of our actions and decisions are focused on returning Huntington to profitable performance as soon as possible. I know everyone will like me to give a timetable, but I am just not feeling I am in a position to do that at this point. The fact is, there are just too many uncertainties regarding the economy. But I can tell you that only when the credit picture brightens will it happen, and that's a two-part equation. The first part is the economy. That's the part of the key equation we can't control. Therefore, I think the most prudent course of action is to prepare for a challenged environment.

The second part of the equation, which the department can control, is making sure we continue to aggressively identify and address credit issues. This could mean more gain before we see the peak. But we'll in the near term and certainly for the long term be better – we will be better off for it. The very good news is that we now have sufficient capital to weather stress the economic scenario. And remember, the net charge-offs this quarter were elevated, and were still below the two-year cumulative loss rates assumed in our internal stress test analysis.

So, the credit quality performance you saw in third quarter in part was more one of timing and not a shift in our overall view. Also, our liquidity positions remain very strong. And as we think about future, we continue to stress that our management team and depth of expertise at all levels.

The development of our strategic plan is well underway and while it won't be officially highlighted until later this year, the exercise is already impacting decisions as we continue our shift to playing offense. This past quarter, playing offense has been the most evident in three areas.

First, our (inaudible) improvement reflecting improved loan and deposit pricing decisions. Second, core deposit growth. And third, the World Bank transaction. As I said at the beginning, I am greatly encouraged by our progress to date. There is still much to do, we're getting stronger everyday. We are getting stronger everyday, thanks for your interest in Huntington.

Operator, we'll now take questions.

Question-and-Answer Session


(Operator instructions). Your first question is from the line of Matthew O'Connor with Deutsche Bank.

Matthew O'Connor – Deutsche Bank

Good afternoon.

Steve Steinour

Hey, Matt.

Matthew O'Connor – Deutsche Bank

First question is, last quarter you deep dived into commercial real estate and C&I to some extent, and I think we had some acceleration of losses related to that. This quarter there is a change in the timing of recognizing losses and resi mortgage. Are there any other things like this that you can see coming down the road in terms of how you deal with the losses or deep dives, and things like that?

Steve Steinour

Well, Matt, we are continuing to be concerned about commercial real estate. We talked about that when we did the fourth quarter April announcement. We think that's the challenge, certainly for the years, and I think most people would say it's going to be a challenge into 2010, and we believe that's the case. Although a quarter doesn't make a trend, we were pleased with what we saw on the commercial and business banking book.

We decided to take some action on the resi mortgage book, which we think was prudent to do. There's nothing that we're working on at this point regarding a change in charge-offs to answer your question, a change in charge-off policy on any of the portfolios.

Matthew O'Connor – Deutsche Bank

Okay. So, maybe, going from here on, it will be just kind of your more normal, abnormal run rate level of losses as opposed to maybe some of these chunky things?

Tim Barber

Matt, this is Tim. I'd add a couple of comments particularly on the residential side. We've been looking at ways to move some of the risk in the residential portfolio for quite a while. We think that we found an opportunity where the execution made sense to us, and so we took advantage of that and that's part of the chunkiness, as you call it, in the third quarter results. So, that wasn't planned, that was a case of taking advantage of an opportunity that presented itself. So, as Steve said, we don't have any other macro changes in charge off policy on the horizon.

Steve Steinour

We did sell a couple of small commercial portfolios as well that were – I'd characterize this is sort of testing the market and understanding if we think there's an opportunity that makes sense, then we proceeded. We're not trying to signal an intent to sell large boxes [ph] of nonperforming or near nonperforming. On the other hand, we're looking at all options. So just, we'll continue to do that.

Matthew O'Connor – Deutsche Bank

Okay. And then just unrelated question for Don, you had mentioned some liability actions that made this capital were being explored. I assume this relates to potentially buying back some debt. How meaningful could that be from an earnings capital point of view? And I assume there'd be no impact on shares from all those stuff that you're talking about, right?

Don Kimble

We would not plan on issuing shares in connection with any type of liability management, and as we get some additional detail, we'll make sure that we announce that. I would not view it as significant as far as an overall impact from any type of liability management.

Matthew O'Connor – Deutsche Bank

Okay, thank you very much.

Tim Barber

Thanks, Matt.


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

Ken Zerbe – Morgan Stanley

Thanks. When you look at your commercial real estate portfolio and I am just speaking specifically about non-construction CRE, what is it that you guys did in terms of your historical lending practices or how you underwrote the loans that is leading to this higher level of losses? I guess I'm just trying to reconcile again the non-construction series losses that you guys are having versus a lot of the other banks where we really haven't seen much in terms of ultimate losses, but we expect to in the future, and trying to understand if you can get through the hump a little bit quicker than they can?

Tim Barber

Ken this is Tim. I would say is that in answer to your question, we were a relatively conservative underwriter in commercial real estate. Much of the activity has supportive guarantor/sponsors. And so the difference that you note between Huntington and the industry I think is more timing. And so you sort of alluded to that yourself that you expect to see the non-construction real estate losses increase at other banks, I do too.

Steve Steinour

Ken, just to follow-up, we did a lot of portfolio review activity on single family and retail first quarter. We picked up the rest of the book CRE and C&I in the second quarter but we shared with you collectively that, that wasn't a one-time exercise. Anything that we identified that was of concern, we want to continue with a very active portfolio review process, and we have done that on a monthly basis, and those activities that we started after that second quarter review are in addition to the monthly review that we began in February of criticized assets.

So there is just enormous intense effort to identify and address issues within the commercial and commercial real estate portfolios. And the CRE [ph] book, I don't know, I can't think of any developer, (inaudible) executive or otherwise I've talked to, or that any of us to have reported back on that suggests it’s passed over [ph] or getting better. So, we're trying to be very realistic in our assumptions, it's not getting better, therefore getting after it now is in fact the appropriate thing to do on multiple fronts, including mitigating loss by taking reasonably aggressive actions at this stage.

Ken Zerbe – Morgan Stanley

Okay. All right. The other question I had was just in terms of bringing on; I guess the early stage delinquent commercial loans on to NPL sooner. I understand that working with the borrowers from an earlier point in time before they become completely delinquent mix it help reduce severity in the long-term. But does it matter if you bring them on NPA now or if you're just working with them while they're still performing?

I guess, why the distinction of bringing on the increasing your NPAs because with only a 30 days delinquent?

Steve Steinour

We're probably not as sensitive to that as perhaps some others, one. Two, the regs [ph] require that if you don't expect to receive repayment of principal and interest, that you may get determination, if you don't expect to you've made a determination as to collectability, and it should go non-accrual.

And the intensiveness of our reviews, cumulative reviews, are getting us to a position, again, going back to your earlier question, maybe a little sooner than some others are. It is hard to speculate what others are doing when we don't know their books, but we're calling it as we see it, and we're trying to be conservative.

Ken Zerbe – Morgan Stanley

Okay, great. Thank you.

Steve Steinour

Thank you.


Your next question is from the line of Jeff Davis with FTN Equity.

Steve Steinour


Don Kimble

Hi Jeff.

Jeff Davis – FTN Equity

Hi. Don, the capital that you just raised through the common raise, is that still sitting at the parent company, or it has been down streamed to the subsidiary bank, and then s an aside how much cash is the parent company sitting on today?

Don Kimble

Yes, the $587 million is still sitting at the parent company. We did, during the third quarter, inject additional common equity down into the bank of about $250 million from previous equity issuances. And, as far as the cash position of the bank, I know it's north of a billion and a half dollars, but I don't know the number off the top of my head right now, but it's significant as far as the cash position.

Jeff Davis – FTN Equity

Okay, that is the sign. And Steve, for you, related to this, in your contacts around the industry, is there a notable difference between the OCC and the state regulators or state chartered banks in terms of calling on the parent companies to inject capital into the subs?

Steve Steinour

You're asking me to really speculate. I don't know a lot of that at the state level. Historically, my experience is having been at a state level and also with the OCC would suggest, and I think we're state level at seven or eight banks – seven or eight states, which suggests there's a marked difference, but I don’t – it would be speculation to suggest that at the moment on my part.

Jeff Davis – FTN Equity

That's fine. The only reason I ask is it seems to be a little bit more prevalent at OCC banks. That's fine. Thank you.

Steve Steinour

Thanks, Jeff.

Don Kimble

Thank you.


Your next question is from the line of Ken Usdin with Bank of America Merrill Lynch.

Ken Usdin – Bank of America Merrill Lynch

Thanks. Good afternoon.

Steve Steinour

Hi, Ken.

Ken Usdin – Bank of America Merrill Lynch

Just two questions for you, Don. First of all, Steve, can you talk about not expecting change in the economy in the near term, but I was just wondering how do you think your footprint would act relative to this broader economic recovery across the country, and what are you not seeing, I guess, that you would like to start seeing as far as starting to see some glimmers of hope?

Steve Steinour

There's almost a tale of two worlds, Ken. You know, if you are in West Michigan, you have a much different outlook than East Michigan. You got parts of East Michigan with mid-20s unemployment. Toledo, where are number one, so I think a 15% unemployment rate. This auto zone in East Michigan, Northwest Ohio, parts of Indianapolis it's very tough there. Now, contrast that with West Michigan, Columbus, and Indianapolis, you know you're like national averages. And there are activities going on in the markets that are much more encouraging, and I think they'll come back faster than, again, some of the auto zone belts.

So, I don't mean to duck your answer but it really depends on the geography. I think there are already actions that are suggesting some of these regions may be stabilizing, but as a whole I wouldn't suggest that's true for the Midwest yet.

Ken Usdin – Bank of America Merrill Lynch

Got you. Okay. And then my second question relates to the investment portfolio, and you touched on this some, I believe, you’ve put a couple billion dollars back into the investment portfolio, and I am just wondering is that going to be kind of the strategy, and how are you balancing that against the kind of keeping capital on hand, so are we going to kind of continue to keeping capital on hand? So, are we going to kind of continue to see earning assets run flattish as you basically just plug the hole for a slower loan growth with investment purchases, and how do you expect that to layer out in advance of rates eventually going higher?

Steve Steinour

Sure. As far as the investment portfolio and overall earning assets, we think earning assets will really be driven by our deposit growth as opposed to any other aspect as to the asset side of the balance sheet. And, so, you probably will see a higher growth in investment securities going forward, because we just don't see the loan demand to really start to see any growth any time soon there.

And as far as the portfolio itself, we'll probably continue to invest fairly short term in nature and use the proceeds in low risk, short-term securities so that it allows us to reposition as the interest rates would start to pick up and as the loan demand would start to pick up as well.

Ken Usdin – Bank of America Merrill Lynch

Right. You're see enough opportunities to keep buying in the market as opposed to just letting the deposit – letting high cost deposits or what's left for your brokered CDs kind of run down?

Steve Steinour

We do plan on actively managing wholesale and brokered, and we have repaid everything with both from a home loan bank without penalty at this point, and we are running off the other wholesale. We expect to increasingly have the total balance sheet deposit funded at levels the company hasn't had before.

Ken Usdin – Bank of America Merrill Lynch

Got you. Going great. Thanks a lot.

Steve Steinour

Thank you.

Don Kimble

Thank you.


There are no further questions at this time.

Steve Steinour

Okay. Well, if that's the case then, thank you very much for participating in the call.

If you have follow-up questions, please be sure to give myself, Jay Gould or my associate, Tim Graham a call. Thank you.


Thank you for joining today's conference. You may now disconnect.

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