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Executives

Jay Gould - Director of Investor Relations

Tom Hoaglin - Chairman and Chief Executive Officer

Marty Adams - President and Chief Operating Officer

Don Kimble - Executive Vice President and Chief Financial Officer

Tim Barber - Senior Vice President of Credit Risk Management.

Analysts

Scott Siefers - Sandler O’Neill

Heather Wolf - Merrill Lynch

Andrea Jao - Lehman Brothers

Andrew Marquardt - Fox-Pitt, Kelton

Mike Holton - T. Rowe Price

Fred Cummings - Key Banc Capital Markets / McDonald

Huntington Bancshares Inc. (HBAN) Q3 2007 Earnings Call October 18, 2007 1:00 PM ET

Operator

Good afternoon everyone. My name is Kenya and I will be your operator later today. At this time, I would like to welcome everyone to the Huntington third quarter earnings quarter call. (Operator instructions) After the speaker’s remarks, there will be a question and answer session. Thank you Mr. Gould, you may begin your conference.

Jay Gould

Thank you Kenya 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, huntinton.com. This call is being recorded and will available as a re-broadcast 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 playbacks, or should you have difficulty getting a copy of the slides.

Slide two notes several aspects of basis of today’s presentation, I encourage you to read this. But let me point out a couple of key disclosures. This presentation contains 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 measure as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentation in it’s appendix in the press release and the quarterly financial reviews supplementing today’s press release or the 8-K filed with the SEC earlier today, all of which can be found on our website.

Further, we relate certain significant one-time revenue and expense items on an after tax per share basis. Also, some of the performance data we will review are shown on an annualized basis and in the discussion of that interest income, we do this on a fully taxable equivalent basis.

Slide three reviews additional aspects of the basis of today’s presentation and discussion. This includes how we will talk about the impact of the Sky financial acquisition on our performance. You will recall, this acquisition closed on July 1, 2007. As such, impacted results for the full quarter. Since Sky was about half the size of Huntington, this has resulted in significant changes on an absolute basis for balance sheet income statement and other items compared with prior periods.

It also impacted performance measures on a relative basis. Therefore, to help you better understand underlying performance into the quarter, we’ve tried to estimate the acquisition’s impact on reported results. The methodology we’ve used is described in the basis of presentation discussion at the end of our earning’s press release.

Importantly, in our discussion today, comparing post merger period results to pre merger periods, we will use the following terms. Merger related refers to amounts and percentage changes, representing the impact attributable to the merger. Merger cost represent expenses primarily associated with merger integration activities. Non-merger related refers to performance not attributable to the merger, and includes merger efficiencies, which are the expense reductions realized as a result of the merger. Many of you are familiar with the remaining items, and there usage shown here, but for those of you who are not, we’ve provided definitions and rational on this slide.

Today’s discussion, turning to slide four, including Q & A, may contain forward-looking statements. Such statements are based on information, and assumptions available at this time, and are subject to change, risk and uncertainties, which may cause actual results that differ materially. We assume no obligation to update such statements. For a complete discussion of risk and uncertainties, please refer to this slide, and material filed with the SEC including our most recent form 10-K, 10-Q and AK filings.

Now, turning to today’s presentation. As noted on slide five, participating today are Tom Hoaglin, Chairman and Chief Executive Officer; Marty Adams, president and Chief Operating Officer; Don Kimble, Executive Vice President and Chief Financial Officer; and Tim Barber, Senior Vice President of credit risk management. Let’s get started, to you Tom.

Tom Hoaglin

Thank you Jay, and welcome everyone. Turning to slide six, I’ll begin with a general overview of the quarter’s highlights. Tom will then review the quarter’s financial performance in some detail. And I’ll conclude with comments on our outlook for the 2007 fourth quarter. Marty and Tim will be available during the Q &A period.

Turning to slide seven. In sum, we were pleased with the quarter. Reported earnings were $0.38 per share, and included $0.06 per share merger cost and $0.03 per share market related losses. At least $0.02 of which we do not expect will recur. Perhaps the main point I want to make today is that we have the objective to continue to grow the business in the midst of the merger integration process, and we accomplished it.

As we through the numbers and underlying trends, which are certainly complicated by the acquisition of Sky Financial, this message should be clear. We saw a nice loan and deposit growth in spite of the intense activity associated with the systems conversion of Sky, the training of new associates, and customer transfers. We achieved annualized non-merger related growth of 8% for total average commercial loans, and 3% for average consumer loans. The average total deposits increased 6%. Net interest income grew by 2% on a link quarter non-merger related basis.

(inaudible) performance was mixed. There was very good growth in deposit service charges and other service charges, including debit fees. And their non-merger related brokerage and insurance income declined. This primarily represented seasonality in brokerage and property in casually insures areas. Income for trust services, mortgage banking and other income was down, with the last two impacted by market related items. Don will detail this later.

September 22nd was the date of systems conversions, and we’re very pleased that this could be accomplished in less than 90 days following the merger close. There were some bumps along the way, but we’ve seen a positive customer response overall. For example, we’re getting rave reviews by former Sky business and retail customers who are now using Huntington’s more robust online banking capabilities. Completing this conversion successfully and quickly allowed us to realize more expense saves earlier than we had expected. As a result, non-merger expenses were down $20 million, or $83 million annualized. It represented the realization of 70% of our annualized targeted merger efficiencies of $115 million. It’s nice to see that our adjusted efficiency ratio is now approaching our targeted 50% to 52% range.

As far as the conversion and integration efforts, we closed and consolidated 88 full and limited service banking offices, closed or have begun the process of closing 13 back-office processing and call center sites, reduced 828 full time equivalent staff in the quarter in a 6% reduction from where we began the quarter.

With regard to credit, it was a noisy quarter. On one hand, that charge off level of 47 basis points was a few basis points higher than we targeted a few months ago. But this included $10 million of net charge-offs related to the three commercial credits for which we established specific reserves in the second quarter. It’s also accounted for a one basis point drop in our reserve ratio.

Non-merger related MPA’s increased 3%, which given the difficult environment and what we’ve seen so far from our peers, we would describe as modest. Perhaps we recognize credit issues in the residential real estate sector earlier than some of our peers. Also, in reflecting the conversion to our load systems, which permits fine-tuning of loan classification, I want to update you on our exposure to the homebuilder sector. At quarter end it was $1.6 billion or about 4% total loans and leases and is about $300 million less than our pro forma estimate last June.

Finally, I know there’s investor interest in our lending relationship with Franklin Credit National Corp. You’ll recall that we discussed this at length in last quarter’s call. As a reminder, their business model is purchasing so-called scratch and dent mortgage assets to a discount and holding them in portfolio. This model is unlike the originate-to-sell model, which has caused issues for others. This has been a long-term relationship and you need to know that we understand their model, their value proposition and the caliber of their management team very well.

We also continuously monitor in detail the performance of the collateral supporting our loans to Franklin. Yet, since Franklin is a public company and because of client confidentiality, we are unable to disclose this information. We also cannot comment on any aspects of their third quarter performance ahead of their filing of their 10-Q. And as a reminder, like any other commercial loan, it’s subject to our standard loan grading and reserving methodology, with any changes reflected in our reported results. What we can say is that we remain comfortable with this relationship and all of our loans to Franklin are performing and there are no delinquencies.

Now let me turn the presentation over to Don for more details.

Don Kimble

Thanks Tom. Turning to slide nine, our reported net income is $138.2 million or $0.38 per common share. These results were negatively impacted by two significant items. First, $32.3 million or $0.06 per share of financial merger costs. Second, $18 million or $0.03 per share of net market-related losses consisting of four items. $13.2 million from net security losses including $23.3 million of (inaudible) losses related to certain investments backed by mortgages. $4.4 million of equity investment losses and $3.6 million negative impact from reevaluation of mortgage servicing rights.

These are partially offset by a $3.2 million gain from repayment of debt. Slide 10 provides a quick snapshot of the quarters performance. As previously noted, recorded earnings were $0.38 per share. Our net interest margin was 3.52%, up 26 basis points. This level is consistent with the pro forma combined second quarter of approximately 3.5%. Average total commercial loans increased at an 8% annualized non-merger related base.

Average total consumer loans increased at 3% annualized non-consumer related base, this reflects a growth of our automobile loans combined with relatively stable balances in both home equity and residential real estate loans. Average sold deposits at 6% annualized non-merger related growth. Much of this growth came in non-core deposits, with balances related to commercial customer relationships.

We had mixed (inaudible) income performance during the quarter, a service charge income showed big growth, up 5% on a non-merger related basis. In contrast, forage income and other income reflected a negative impact of the market-related losses previously discussed.

Tom mentioned earlier, we were very pleased with our expense levels for the third quarter. Total NIE decreased by $20.4 million or 5% on a non-merger related basis. This level clearly reflected significant progress toward our charted annualized expense reduction of $115 million related to the acquisition of Sky. Our charge-off ratio of 47 basis points reflected the impact of $10 million in charge-offs related to the three commercial credits discussed in the second quarter. You’ll recall that these three credits, two commercial real estate relationships in Southeastern Michigan and one Northern Ohio manufacturing related credit, that is $24.8 million in the second quarter.

Excluding these charge-offs, our net charge-off ration for the quarter would have been 37 basis points. Our period end tangible common equity ratios declined to 5.42% reflecting the impact of the $2.8 billion in tangibles from the acquisition of Sky financial, as well as a $1.5 billion temporary increase in our assets at quarter end, which negatively impacted our tangible common equity ratio by 17 basis points.

Slide 11 provides our customer summary of the quarter financial metrics. Most of these will be covered in more detail in later slides. Slide 12 shows that net interest income on a fully taxable equivalent basis increased $158 million from the prior quarter. This included $152 million of merger-related net interest income. The remaining non-merger related increase of %6 million reflected the growth in our balance sheet. The right hand side of the slide shows the trend in our net interest margins, which increased from 3.26% last quarter to 3.52% this quarter. The 3.52% margin is consistent with our expectation for relatively stable margin during the quarter compared to a pro forma second quarter level of 3.5%.

Loan and deposit pricing remain relatively stable this past quarter despite a very competitive market. Slide 15 and the next three slides that follow show the trends in our total loans, deposits, income and expenses. To assist with this trend analysis, we have included the current quarter, the prior quarter and last year’s balances on a reported basis. We then back up the portion of the change that is merger related. The merger related balances include the Sky balances, and for expenses it also includes any merger costs incurred in the quarter. We believe the remaining non-merger related change is a better proxy to the relative change that occurred in those balances.

Starting first with loans, looking at the bottom of the slide, total loans for the third quarter were $39.8 billion, up from $26.4 billion in the second quarter of 2007. Of this $13.4 billion increase, $12.8 billion was merger related. The remaining non-merger related increase of $600 million or 6% annualized better reflects the lend quarter growth this past quarter. Of this $600 million growth, $500 million or 8% annualized related to commercial loans. The increase in commercial loans is spread across all regions. Six of our 13 regions reported double digit annualized growth and only one reported a net decline.

Consumer loans, on a non-merger related basis were up $100 million or 3% annualized. While automobile loans continue to increase this past quarter, despite decreases in automobile leases. Average automobile leases continue to shrink as expected giving continued aggressive pricing by (inaudible). On a non-merger related basis, both home equity loans and residential real estate loans remain fairly stable and continue to reflect the softness in the real estate market.

Now turning to slide 14. Positive growth as reflected by non-merger related change showed similar season trends than what we experienced in the third quarter of last year. Over 4 positive balances were up slightly or 1% on an annualized basis.

Transaction balances show slight link quarter decline. Other deposit category trends continue to heavily see migration from saving account balances into money market and time deposits. Slide 15 details trends in our revenues. Again using the non-merger related change as a proxy for length quarter change our total non-interest income decreased $20.2 million from the second quarter. This change reflected a $9 million decline in other income in part due to $4.4 million of equity investment loses in the current quarter and $2.3 million of gains in the second quarter.

$8.3 million of higher security loses including $13.2 million of net security losses in the current quarter compared with $5.1 million of losses in the second quarter. The current quarter losses include $23 million of impairment on certain investment securities back by mortgages. At the end of the quarter these bond total $22 million of which $16 million were considered impaired. $5.5 million lower brokerage insurance income as the first half of the year included seasonally higher insurance agency commission income. $3.7 million decline in mortgage banking income reflecting the higher MSR hedging losses in this category for the current quarter as well as the decline of non-merge related production. These decreases were partially offset by the $4 million increase in service charge income on deposits

Slide 16 reviews the non-interest expense trends. This slide clearly reflects the achievement of a significant portion of the targeted expense savings in the third quarter. Looking at the bottom right-hand corner of the slide are non-merger related derived in total NIE with $20.4 million from the second quarter. This reflected realization of over 70% of the $115 million targeted expense savings. With the consolidation of branches and other facilities and with the systems and operation conversions taking place late in the third quarter we are well on our way to achieving the expense efficiency target. We would expect the achievement of most of the remaining targeted costs savings to be realized in the fourth quarter.

Starting with personnel costs our non-merger related decrease was $8.4 million from the second quarter. This included the impact of the reduction of over 800 full time equivalent staff during the quarter. The reduction in other expense of $3.8 million and occupancy of $3.6 million also reflect the benefits of our merger efficiencies. Our $3.6 million reduction in marketing reflects the merger efficiencies as well as the impact of the timing of our advertising campaign.

Slide 17 shows the trend of in our reported efficiency ratio on the top line. It also shows our efficiency ratio trend after adjusting for items affecting comparability including merger costs. You will find a complete reconciliation between the reported and the adjusted amounts in slide 75 in the appendix. Our reported efficiency ratio decreased slightly in the second quarter to 57.7%. On an adjusted basis the efficiency ratio decreased dramatically to 53.2%. This again reflects the impact the cost reductions achieve from the acquisition.

Upon full realization of our targeted savings we should be within our long-term targeted range of 50%-52%

Slide 18 details capitol trends. At the end of the quarter our tangible equity asset ratio was 5.42% well below our targeted range of 6 to 6 and a quarter. The decline in this ratio reflects the impact of the $2.8 billion in intangibles reported with the Sky acquisition. It also reflected a temporary $1.5 billion increase in other assets which cleared in October. This temporary increase reduced our tangible capital ratio by 17 basis points. We should expect our tangible capital ratio to be back in our targeted range by the middle of 2008. We did not repurchase any common shares in the current quarter and would not expect any significant share repurchases until our capital levels return to our targeted range.

Slide 19 provides a high level review of some key credit quality performance trends.

First as Tom noted our MTA ratio increased to 1.08% but more on that in a moment.

Our next charge off ratio was 47 basis points and included $10 million or 10 basis points related to the three commercial credits noted in the last quarter’s call.

These 3 credits resulted in a total provision of $24.8 million in the second quarter. Adjusting for this $10 million provision expense exceeded net charge offs by $5 million. Consumer charge off increased at 67 basis points this quarter up from 41 basis points in the prior quarter. Increase in charge off for all consumer categories were seen throughout this quarter reflecting some seasonal trend also reflecting the impact at Sky and the continued pressures on the real estate markets in general but in particular the south eastern Michigan and the northern Ohio markets.

Our expectations for consistent level excuse me are expectations are for consistent level of consumer charge off for the next several quarters.

Our 90 days plus delinquency levels increase slightly from the prior quarters. Some of this increase might be attributed to the timing of our integration efforts during the quarter.

Our allowance for loan or lease losses remain fairly consistent with the June 30th levels of 1.15% of loans again more on this later.

The non-performing loan and non-performing asset coverage ratio will be reviewed in greater detail in subsequent slides.

In sum while there were some changes in selected credit quality ratios our overall credit quality trend were consistent with the second quarter levels and expectations.

We will talk about the other items in the following slides but first some comments on the non-performing asset trend.

Slide 20 illustrates the trend of non-performing assets, which increase $174 million. However, this increase is primarily driven by the merger and the decision to classify impaired investment security as NPA.Excluding these impacts NPA’s increase $13 million, a 3% increase from the end of last quarter.The table on the right provides the details.

First the Sky acquisition accounted for $144.5 million of the increase and came in free form. $100.5 million represented NTL’s classified as loan sell per sale and represent the impaired loans from Sky that have been identified for sale. We are in the process of actually marking these loans and would expect a significant portion of them to be sold by year-end.

$32.7 million represent acquired non-performing loans that remain characterized as NTL’s and $11.3 of OREO. The second piece represented $16.3 mil of impaired investment security. These non-accruing investment securities represent the remaining balance of the investment securities that have been identified as impaired. Any future cash statements either interest or print form will reduce the remaining balances.

The third and the last piece was the $13 million increase of non-merger related NPL and OREO.

Slide 21 shows the trend of our net charge off ratios by loan category. Total commercial charge off for $17.3 million or 31 basis points which included the $10 million in charge offs on the three credits mentioned in the second quarter call.

After these charge offs are middle market C9 and commercial real estate charge offs would have been below our long term targeted ranges.Our small business related charge offs also continue to be below our expected level. Our total consumer charge offs increased from the previous quarter levels.

Our auto loan /lease charge offs of 73 basis points return a more expected ranges up from previous historical low rates. The home equity and residential real estate charge off increased from 43 and 16 basis points to 50 and 32 basis points respectively.

These increases reflect the continued real estate market weakness particularly in the Southeastern Michigan and Northern Ohio.

The graph on the left hand of slide 22 shows the trend in our allowance for loan and lease losses. At quarter end the allowance for loan and lease losses was $455 million up $147 million from the end of the prior quarter. This increase included $157 mil addition to the allowance from Sky less the $10 million of charge offs on three the commercial credit against the reserves established for them in the second quarter.

The chart on the right hand side of the slide shows a trend in our ALLL component. The transaction portion of the allowance is a determined on a loan-by-loan basis and provides a very transparent picture of the underlying credit quality of the portfolio.

Economic reserve component is determined based on a trend for economic indicators.

The quarter end levels of each of the two components the transaction reserve and the economic reserve as a percent of the loan are very consistent with the pro forma June 30th levels of the combined company but no means will change incur throughout the quarter.

On slide 23 the allowance for unfunded loans commitment was shown separately from the total allowance for loan and lease losses. You will recall we report the allowance for unfunded loan commitments separately as a liability. However both reserves are available to cover credit loss and for analytical purposes we add these two together in a total allowance for credit losses amount

The third slide item on the slide. The first set of ratios compares the reported allowance for loan and lease losses to the period in loans and leases NPA and NPL. On this basis our period end loan offer (inaudible) ratios as noted, the core was 1.14% down one basis point and our NPA and NPL covered ratios were 105% and 182% respectively.

The second set of ratios compares the combined allowance for credit losses or ACL to the period end loans and leases to NPA’s and NPL’s. On this basis, our period end reserve ratio was 1.28% down two basis points with NPA and NPL coverage ratios of 118% and 206% respectively.

Looking at changes in coverage ratios in the loan loss reserve ratios and concluding that the credit has deteriorated or improved or that the reserves have been weakened or strengthened in our view is too simplistic. This does not take into account the quality of the NPA. This is particularly true given the two new additions of NPA categories this quarter. Keep in mind that the $100 million of NPA’s represented by loan sell for sale as well as $16 million of NPA’s represented by impaired investment securities have already been written down to their lower cost or market values.

Further, a significant portion of the loans sell for sale are expected to be sold in the fourth quarter. And with all future payments on the impaired investment securities being applied to principle we expect these balances to also decline in the fourth quarter. Yet these balances were excluded from our NPA balances our allowance for loan losses as a percentage of NPA’s would increase to 143% and our allowance for credit losses with percent of NPA’s would increase to 161%. With this backdrop, I turn the presentation back over to Tom who will provide comments on our 2007 fourth quarter outlook.

Tom Hoaglin

Thanks Don. Turning to slide 24. As you know, when earnings guidance is given it is our practice to do so on a GAAP basis unless otherwise noted. Such guidance includes the expected results of all significant forecasted activities. However guidance typically excludes selected items where the timing and financial impact is uncertain until the impact can be reasonably forecast and it excludes any unusual onetime items as well.

Wallets are practiced to provide annual EPS guidance range when it comes to the last quarter of the year this discussion really boils down to fourth quarter discussion as noted here. We’ll discuss our 2008 outlook in our January earnings call, in which we will include $0.09 of earning secretions from merger deficiencies as expected.

We’re targeting 2007 fourth quarter earnings of $0.45 to $0.47 per share excluding merger costs. We anticipate that the economic environment will continue to be negatively impacted by weakness in residential real estate markets and struggles in the automotive manufacturing and suppliers sector. It continues to be our expectation that any impacts will be greatest in their SE Michigan or Northern Ohio markets. And however interest rates may change we expect to maintain our customary relatively neutral interest rate risk position.

Given this backdrop, here are our outlook comments, which on balance have not changed much since last quarter. Revenue growth in the low to mid single digit range. This is expected to reflect a dead interest margin that is relatively stable compared to the third quarter’s 3.52%. Annualized average total loan growth in the mid single digit range with commercial in the mid to upper single digit range total consumer loans being relatively flat reflecting continued softness in residential mortgages and home equity loan growth.

Poor deposit growth in the low to mid single digit range. Non-interest expense growth in the mid to higher single digit range. Non-interest incoming growth in the mid to higher single digit range. Non-interest expense is expected to be flat to down from the third quarter.

Please note this growth rate excludes any negative impact from merger costs but does include the benefit of additional expense efficiencies.

Merger costs for the fourth quarter are expected to be $15 million to $25 million. Annualized expense efficiencies remain targeted at 115 million with most of the remaining annualized benefit expected to be achieved in the fourth quarter. Regarding credit quality performance we anticipate a fourth quarter net charge off ratio that will approximate the third quarter performance at forty seven basis points plus or minus.

Non-performing loans on an absolute relative basis are expected to increase modestly. In contrast not performing assets on an absolute and relative basis are expected to decline as related loans held for sale are sold.

The one loss reserve ratio will increase modestly, also for September 30 level of 1.14 percent. In addition we are assuming no significant market rate related losses and no share reverses activity. All of this results in a targeted reporting APS for the 2007 4th quarter earnings of $0.40 to $0.47 per share excluding any additional merger costs. This completes our prepared remarks. Marty, Don, Tim Barber, Jay and I will be happy to take your questions. We will now turn the meeting back over to the operator who will provide instructions for conducting the question and answer period. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) The question comes from the line of Scott Siefers.

Scott Siefers - Sandler O’Neill

Good afternoon guys, I just had a couple of questions. Tom I think at towards the beginning of your comments when you were kind of going through the unusual items and then there the $0.03 of the market-to-market issues in this quarter, I think you said two of those cents aren’t likely to occur. I was just curious what you meant by that? In other words do you guys have something in there that is likely to kind of come back again?

Tom Hoaglin

We really have no clearer picture quarter to quarter for what the MSR impact is going to be. This past quarter Scott it was larger than it has been in the past we hoped that would be the case but we’re not predicting whether it will or it won’t, obviously depends a lot on market volatility. We don’t expect to incur the same kind of right downs on securities that we did this past quarter and so that comprises the bulk. Nor do we expect to have the (inaudible) negative market to market actually we had to take hedge fund investments so that’s really what I’m referring to.

Scott Siefers - Sandler O’Neill

Okay thanks and then, I guess the next question would be for Tim, I was hoping you could just kind of go through the way you’re thinking about the reserve and specifically what I was looking at was the economic reserve. And I guess I was just a little surprised to see it decline as a percent of loans just given kind of what’s gone on in the last quarter or so you know it’s potentially increased risk over (inaudible), etc… How are you guys thinking about that piece of the reserve? What would it take for you to have to boost that piece up, etc…?

Donald R. Kimble

This is Don, I’ll go ahead and take a crack at this and Tim can jump in and correct me if I lead too far astray. Essentially the ratio there for the economic reserve is very consistent for what we would appear on a performance base as of June 30th. Essentially, Sky had an unallocated reserve and essentially that becomes the economic reserve so what you’re looking at is changes in that relative balance based on relative changes in those four economic indicators. The net contribution of all four of those indicators was relatively stable this past quarter and there wasn’t a huge change. Do you have anything else on that?

Tim Barber

I think that’s exactly correct.

Tom Hoaglin

So, I think. This is Tom, Scott. So, I think that component of the reserve is as it always has been subject to change from this point forward as the economic indicators we rely on which (inaudible).

Scott Siefers - Sandler O’Neill

Okay. Sounds good thank you.

Operator

(Operator Instructions) We have on the line is Andrea Jao

Andrea Jao - Lehman Brothers

Hello. Good Afternoon. Hello. I have a question for Tim. I was hope -- I know that you monitor you know the migration of credit markets of your commercial real-estate portfolios.

Tim Barber

Sure Andrea. The, uh, obviously we don’t have a lot of history, as much history on the Sky portfolios as talking about for individual quarters right now. It’s pretty difficult. We have seen a general slow down in the migration into the criticized classified area compared to a couple quarters ago. Nothing really pops out dramatically one way or another at this point. We’re pretty pleased with some of the part… components of single-family builders as Tom mentioned the NPA ratio on that remained relatively constant. We haven’t seen a lot of improvements since our last deep dive or scrub of that portfolio.

Andrea Jao - Lehman Brothers

That sounds good actually. How about on changing gears, how about on home equity are you seeing any impact of elevated foreclosures in that portfolio?

Tim Barber

Most of what we’ve seen in the home equity and residential world has been what I’d call market related or the loss given to fault. We still feel pretty good about the migration into the default category as being relatively consistent. It’s more a matter of the losses given to (inaudible) at this point and again that’s something we spend a great deal of time on and really track on a month to month basis, talk about it quarterly.

Tom Hoaglin

Tim, this is Tom. I think your point of view historically has been. You better be right about the people to whom you’re lending because when you get to a default, the default is going to be the loss is going to be severe. So, that’s our concentration over the last few years, which has been toward increasing the quality of the borrower to whom we’re lending. That’s a little bit reflective at our decision a couple years ago or so to back way down on our reliance on brokered originations, you want to comment further on that.

Tim Barber

Yeah, I think that’s exactly correct. We’ve had that conversation in the past, we spend a great deal of time on the borrower that has I think borne some fruit in this market as the real-estate values continue to decline we’re assuming that continued 1 to 2% decline overall in values across our market at least through the course of 2008 and we will continue to focus on the borrower in our underwriting decisions.

Andrea Jao - Lehman Brothers

Great that helps, thank you very much.

Operator

Our next question comes from the line of Heather Wolf.

Jay Gould

Hi Heather

Heather Wolf - Merrill Lynch

I noticed you guys had a bit of a pick-up in the (inaudible) the auto book. I’m wondering if you could give us some color on your outlook there?

Tim Barber

Sure Heather, we have been over past over the course of the past 4 quarters or so at what I call historically low levels and we talked about that over the course of those calls. We have anticipated a general increase back up to the ranges that we’ve laid out as our long-term goals and this quarter, this quarter saw that move. I don’t think we’re going to see or we will not see similar increases over the course of coming quarters, but probably reasonably stable with our third quarter results.

Tom Hoaglin

Tim I think that we often see an increase in the third quarter (inaudible) over the second.

Tim Barber

There are some clearly some (inaudible) of this associated with third and fourth quarter over second quarter from a comparison standpoint and as we talked about or Tom mentioned that portfolio and that includes the Sky piece so there was some impact from that as well.

Heather Wolf - Merrill Lynch

Okay and just to refresh your memories, what do you view as normalized for the auto-book?

Tim Barber

Auto (inaudible) 65-75 and leases in the 60-point range.

Unidentified Company Representative

50 to 60, if you look at slide 129 Heather you see that the summary of all the log categories.

Heather Wolf - Merrill Lynch

Got it, got it thank you and then just one question on the margin. I don’t know if this was in the packet anywhere but can you tell us what your core margin did at the side merger?

Unidentified Company Representative

I said our core margin was very stable, that we had predicted, we had shown margins in the second quarter at 350 range, we’re at 352. I say core margin may have been down a basis point or two just because of some of the higher national market funding costs that not much impact overall.

Heather Wolf - Merrill Lynch

Okay and do you expect any core improvement from that (inaudible)?

Unidentified Company Representative

We are positioned by the interest rate neutrals we could possibly be right now so I don’t see any potential lift or harm from that movement or lack of movements going forward.

Tom Hoaglin

We’ve always thought Heather that the greater risk or opportunity for us comes from the competitive environment in our local markets…what national rates do.

Heather Wolf - Merrill Lynch

Got it. Great thanks so much.

Operator

Our next question comes from the line of Andrew Marquardt.

Jay Gould

Hi Andrew. Andrew? Operator?

Andrew Marquardt - Fox-Pitt, Kelton

Hi, can you guys here me?

Jay Gould

Oh Yeah, there we go.

Andrew Marquardt - Fox-Pitt, Kelton

Okay. Thanks. Can you guys just review again Franklin credit, I appreciate the comments in the beginning, but can you flesh that out a little bit in terms of your view with regard to still being committed to reducing that relationship on an absolute and relative basis. Is there any color you can help provide if any with regard to the if that’s grown this quarter if not do you have to change your amounts of reserves against it this quarter? Thanks.

Marty Adams

Hi this is Marty Adams, Tim and I will take the question we have continued to consider to refinancing in the quarter and have done some for Franklin credit, we are also continuing to be committed to reducing the overall level of exposure to Franklin credit so it’s just consistent with what we’ve told you in the past. Tim do you have anything to add to that?

Tim Barber

I guess on the reserve question we did add a slight amount to the reserve as we applied our normal reserve methodology via the commercial grading system to the portfolio from where it was as of June 30th on the Sky books.

Andrew Marquardt - Fox-Pitt, Kelton

Okay, is it possible to quantify to find how many reserves are allocated to this (inaudible).

Tom Hoaglin

Andrew, this is Tom. I would say that we apply reserves to all of our loan relationships (inaudible) don’t feel we should discuss what kind of reserves are established for any of our customers.

Andrew Marquardt - Fox-Pitt, Kelton

Okay. Thanks. Separately, with regards to new charges after the fourth quarter were 47 basis points that’s still above your normalized range of 35 to 45 basis points. When do you think one should get back to in that range or should we expect at that kind of at the top end should hold for a while, not given the environment, beyond, into 2008.

Donald R. Kimble

Andrew this is Don and we’ll be providing guidance for 2008 in January. I’d say our charge-offs were higher than last quarter because of the commercial cut-off we saw from the last three credits, but also because the consumer charge increased. We did say we expect consumer charge fee off the system with the current level for the next couple of quarters.

Unidentified Company Representative

Don I think we’d be better to provide guidance in January when the overall charge operates.

Andrew Marquardt - Fox-Pitt, Kelton

Okay Great. Thank you.

Jay Gould

Thanks, Andrew.

Operator

Our next question comes from the line of Fred Cummings

Jay Gould

Fred?

Fred Cummings

Hey Jay

Jay Gould

Fred.

Fred Cummings - Key Banc Capital Markets / McDonald

Actually, most of my questions have been answered, but I did have one and I don’t think anyone’s asked about the any deposit attrition in what you were planning for and how things have gone it’s still pretty early on that front and then even more importantly the, your ability to retain key production of a personnel?

Marty Adams

Hey, Fred, this is Marty Adams and again it’s nice to have a question about the conversion integration, which occurred on the 22nd of September, as you know it was very significant. As Tom mentioned we grew by (inaudible) percent and are very pleased so far. We did have consolidation of approximately 88 offices, but we had as we talked about in the last call an effort to really contact individually and tell what was happening to each customer all the highly valued customers we did that we showed a lot of success out there. The conversion went very well overall and what helped that was retaining the Sky associates coming over to Huntington. We did have 7 individuals who had not been with Sky very long leave and go with an (inaudible) competitor to the Cleveland Market other than that we’re very very pleased how that went.

Tom Hoaglin

Fred this is Tom, I don’t think there’s any question that there has been customer attrition there always is but I personally have talked to many Sky business customers as has. Marty, consistently the message we’re getting is…

Really looking forward to our relationship with Huntington and so we very much believe that any customer attrition will be well within the assumptions we made when we announced the transaction last December and nothing really out of the ordinary.

Fred Cummings - Key Banc Capital Markets / McDonald

And just one other question just to clarify on this Franklin credit situation if and when you reduce the size of your exposure to Franklin will you indeed communicate that to investors or is going to be a function of investors having to look at 10-Q.

Tom Hoaglin

Fred as much as there is a desire which we understand and respect on the part of investors and analysts to get lots of information here we probably wouldn’t disclose the extent of a credit relationship we had with you if it were in question and more can we do so with this one so to the degree that Franklin chooses to provide the information than we certainly respect that but we are limited I hope everybody understands why in the amount of information we can provide directly.

Fred Cummings - Key Banc Capital Markets / McDonald

OK, thanks Tom.

Tom Hoaglin

Thanks Fred.

Operator

Your next question comes from the line Mike Holton.

Tom Hoaglin

Hi Mike

Mike Holton - T. Rowe Price

Clarification of something that I think Tim may have said earlier Tim did you say that you’re assumption was for one, two 2% in terms of home pricing depreciation in 2008 across your footprint?

Tim Barber

Correct.

Mike Holton - T. Rowe Price

That seems like that may not be conservative enough.

Tom Hoaglin

This is Tom. One of the things you have to keep in mind is our markets were not driven higher through speculation we never had price appreciation in many of our markets so if you’re getting a lot of price depreciation on the coast for example there is probably good reason for that and we fully we see that our markets are soft.

They are particularly soft in SE Michigan in SE Michigan the price depreciation has been more than that and will continue to be more than but if you look across the Huntington footprint in the Midwest I think that 1-2% or so depreciation probably works out to be on target.

Mike Holton - T. Rowe Price

I think that as Tom mentioned it clearly is differentiated by region SE Michigan is problematic for us but it also reflects what we believe our portfolio contains so if I was talking about the entire key of the regions we operate I might have a little different opinion that is based on who we are lending to and what we expect to happen to our properties.

Jay Gould

Operator?

Operator

At this time there are no further questions.

Jay Gould

OK, I would like to thank everybody for participating in our call than if you have follow up questions as always give Jack and me a call we’ll see you next quarter. Bye.

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Source: Huntington Bancshares Q3 2007 Earnings Call Trancript
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