Huntington Bancshares Q4 2007 Earnings Call Transcript

| About: Huntington Bancshares (HBAN)

Huntington Bancshares Incorporated (NASDAQ:HBAN)

Q4 2007 Earnings Call

January 17, 2008, 1:00 p.m., ET


Thomas E. Hoaglin – President, Chief Executive Officer

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

Tim Barber – Senior Vice President, Credit Risk Management

Jay Gould - Director of Investor Relations


Andrea Jao - Lehman Brothers

Matthew O’Connor – UBS

Tony Davis - Stifel Nicolaus

Bob Hughes – KBW

David Booth - ELP Partners

Heather Wolf - Merrill Lynch


Good afternoon. My name is Heather and I will be your conference operator today. At this time I would like to welcome everyone to the Huntington fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. (Operator Instructions). Mr. Gould, you may begin your conference.

Jay Gould

Thank you, Heather, and welcome, everybody. I’m 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 one 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 for playback or should you have difficulty getting a copy of the slides.

Slides two and three note several aspects of the basis of today’s presentation. I encourage you to read these, but please let me point out one key disclosure. This presentation contains both GAAP and non-GAAP financial measures where we believe it 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 financial measure, can be found in the slide presentation, in its appendix, in the press release and the quarterly financial review supplement to today’s earnings release, and in the Form 8K which we filed earlier today, all of which can be ultimately found on our website.

Today’s discussion, including Q&A, may contain forward-looking statements. Such statements are based on information and assumptions made available at this time and are subject to change, risk, and uncertainties which may cause actual results to differ materially. We assume no obligation to update such statements.

For a complete discussion of risks and uncertainties please refer to slide four and material filed with the SEC, including our most recent Form 10K, 10Q, and 8K filings.

Now turning to today’s presentation. As noted on slide five, participating today are Tom Hoaglin, Chairman, President, and Chief Executive Officer, Don Kimble, Executive Vice President and Chief Financial Officer, and Tim Barber, Senior Vice President and Credit Risk Management. Let’s get started. Over to you, Tom.

Thomas E. Hoaglin

Thank you, Jay, and welcome, everyone. What a quarter. I join my counterparts who say that the current environment overwhelmed by the housing crisis is the most difficult or one of the most difficult in our banking careers.

Turning to slide six, there are many subjects we plan to address today: Franklin and our restructuring the relationship; the credit picture unrelated to Franklin; other significant items in the fourth quarter; the net interest margin; our capital levels in common stock dividend; our 2008 outlook; merger integration progress; and our thoughts about management succession.

I’ll begin with comments in my assessment of fourth quarter events and performance. Don will then review the quarter’s financials, but in more of a summary fashion. Tim will review our Franklin Credit relationship, which has changed significantly as a result of the restructuring completed at the end of last year. He will then provide a detailed look at credit quality trends and our home builder and mortgage portfolios. Don will then review our 2008 outlook, including earnings targets and performance drivers. I’ll return with summary comments followed by Q&A.

Turning to slide seven, we’re obviously greatly disappointed with our $0.65 share per loss for the quarter. Regarding Franklin, on November 16th we announced we were projecting a negative impact of up to $450 million pre-tax or $300 million after-tax in the fourth quarter with Franklin-related write offs and reserve editions to reflect our lost exposure.

On December 28th we successfully completed a restructure in the relationship resulting in a pre-tax impact of $424 million, which obviously reduced our capital. It also resulted in a 15 basis point one-time reduction to our fourth quarter net interest margin as it represented lost interest while this loan was on non-accrual status in November and through December. This is now behind us and our 2008 first quarter margin will reflect this benefit.

We’re reporting our loans to Franklin as restructured loans and including these loans in non-performing assets. We believe this is the right disclosure to make even though we’re accruing interest income on these loans in accordance with the restructured terms. The inclusion of these assets significantly increases our non-performing asset totals and distorts certain ratios in comparison to the historical values of those ratios and in comparison to our purest ratios. Thus we provided additional information which excludes the Franklin impact to help you sort through these ratios.

We engaged the services of an independent third party in completing the restructure. With the reserves established, coupled with conservative loan loss and payment cash flow assumptions regarding the underlying collateral for our loans, we believe that we have now fully and appropriately addressed the risk from Franklin. We expect that we will not need to revisit this issue. Tim will provide details about the restructuring.

Aside from Franklin, during the quarter we saw deterioration in many credit areas. Most notably residential development, but home equity and auto charge offs also rose. Overall, non-Franklin charge offs were 72 basis points compared to 47 basis points in the third quarter.

We added $106 million to the allowance for loan and lease losses not associated with Franklin versus $37 million in the third quarter. We expect credit losses to remain high in 2008 though at a lower level than the 2007 fourth quarter. More on this later.

Our net interest margin came under pressure during the quarter falling by 11 basis points, excluding the one-time 15 basis point Franklin impact, as price competition for deposits in our markets kept deposit rates from declining in align with loan rates.

The volatility of securities markets, and especially the poor performance of financial securities, also hurt us. We had about $0.11 per share in market-related losses. While we successfully sold a portion of the former Sky loans held for sale, they were classified as non-performing assets as of September 30, 2007. Bids fell below our expectations and further losses were taken. When the markets will stabilize is unclear. The equity investment funds and the investment securities portfolio that have hurt us the most have now been written down to less than $25 million.

While there were negatives in the quarter there were also positives. We are pleased with our 6% annualized commercial loan growth, our ability to maintain deposit levels in the face of competitive pressures, our strong growth in key fee income areas, and our underlying expense control.

Regarding our merger integration progress, during the quarter we achieved additional expense saves bringing our run rate to about 90% of the target of $115 million. Excluding the $13 million in merger costs related to Marty Adams’ unplanned retirement, such costs totaled $31 million for an aggregate amount of $182 million compared to the $200 million target.

We have now estimated future revenue synergies as a result of the merger to be $87 million, including $33 million in 2008. We’ll achieve the remainder over the next three to five years. As a reminder, these will come primarily by achieving Huntington performance levels in the former Sky regions in the sale of retail securities, capital market products, and money management services, and from the sale of insurance agency products by Huntington.

In sum, from the merger integration standpoint it is now business as usual and we’re continuing to focus on better sales and service execution.

Regarding our 2008 outlook there is no question that it will be a challenging year credit wise. Our 2008 earnings target is $1.57 to $1.62 per share. We’ll detail our assumptions supporting this guidance later in our presentation. Nevertheless, we believe this earnings level will permit us to grow capital and make progress in getting our tangible common equity ratio, which was 5.1% at the end of the year, back to its targeted 6% to 5.25% level, albeit taking a bit longer than originally planned.

Therefore, inconsistent with our November announcement, this morning we reported that our board of directors declared a quarterly common stock cash dividend of $0.262 per share payable April 1st.

In the wake of Marty Adams’ retirement I’ve reassumed the role of President. At this point we do not intend to fill the chief operating officer position. As demand has been succession, the board and I do not expect to address this issue through M&A. We’ll discuss it routinely with no specific time table in mind.

For those of you who are interested in our performance in retaining Sky customers let’s look at slide 8. We believe we’re doing well and our success supports our loan deposit revenue assumptions in our 2008 outlook comments that we will cover at the end of our remarks. Here are early observations.

We’ve retained 98% of the pre-conversion deposit balances for the Sky customers and have actually seen a 2% increase of business deposits during this time.

Attrition rates for November and December at returned to pre-acquisition levels.

Retail attrition is concentrated in single-service, low-balance households – the lowest profitability segment.

Again, these are early results that are consistent with or slightly better than our expected attrition rate of 3% given the significant number of branch consolidations.

In sum, it’s good to have 2007 behind us. It had its ups and downs. Our focus now is on delivering targeted 2008 results and continuing to grow the franchise.

With that let me turn the presentation over to Don.

Donald R. Kimble

Thanks, Tom. Turning to slide nine, our reported net loss of $239.3 million or $0.65 per common share for the quarter. These results were negatively impacted by five significant items. First, a $423.6 million charge to earnings or $0.75 per share related to the Franklin relationship. This charge reflected a provision of $405.8 million and a reversal of interest income of $17.9 million. This relationship will be reviewed in more detail later.

Second, $63.5 million or $0.11 per share of net market related losses consisting of four items: $34 million of loss on loans held for sale. This loss included additional marks on the loans sold during the quarter, as well as to the remaining loans included in and held for sale; $11.6 million in net security losses related to certain investment securities backed by mortgages; $9.4 million of equity investment losses; and $8.6 million negative impact from the re-evaluation of mortgage servicing rights (inaudible).

Third, $44.4 million or $0.08 per share of merger costs, including $13.4 million related to the previously announced retirement of Marty Adams.

Fourth, $24.9 million or $0.04 per share of VISA indemnification charge. Our expectation is we will see value in the future IPO of VISA with receipt of stock will more than offset this charge.

Lastly, $8.9 million or $0.02 per share of increases to litigation reserves on existing cases.

Slide 10 provides a quick snapshot of the quarter’s performance. As previously noted, our reported loss was $0.65 per share. Our net interest margin was 3.26%, down 26 basis points. This level reflects a 15 basis point reduction due to the Franklin loans being put on non-accrual status from November until the loans were restructured in late December. All interest payments were received on time during this period but were applied to reduce the exposure of this credit. It’s important to note that this 15 basis point impact only affected fourth quarter results. However, going forward our net interest income will reflect the lower balance of Franklin loans resulting from the $308 million charge off.

Average total commercial loans increased at a 6% annualized pace. Average total consumer loans remained stable with the prior period. And average total core deposits also remained fairly stable during the quarter.

We had good fee income performance during the quarter as deposit service charges income was up 4%. Trust income was up 5%, and brokerage and insurance fees were also up 5%, and other service charges were up 4%.

In contrast, mortgage income and other income reflected a negative impact for the market-related losses previously discussed.

Expense levels were up slightly from the third quarter after adjusting for merger costs and the significant items noted before. This increase was related to commission expense, higher collection costs, and various timing differences.

During the quarter we were able to achieve an additional $5 million, or $20 million annualized, of merger savings. This brings our realized savings to approximately 90% of our target. We expect to achieve at least the remaining committed amounts in the first quarter of 2008.

Our charge off ratio of 3.77% reflected the impact of $308 million of charge offs-related Franklin credit. Excluding these charge offs our net charge off ratio for the quarter would have been 72 basis points.

Our period-end tangible equity ratio declined to 5.08% reflecting the impact of the quarter’s loss as well as the $48 million increase to our intangibles. This increase in our intangibles reflected an insurance agency acquisition and additional purchase price allocation adjustments in the Sky Financial acquisition.

Let me turn the presentation over to Tim, who will provide a detailed credit review. Tim?

Tim Barber

Thanks, Don. Turning to slide 12, Huntington negotiated a significant restructure of the Franklin relationship as of December 28th, 2007. The specifics of the restructure detailed in our January 3rd 8K filing created an appropriate level of debt given the collateral. Interest coverage for the entire bank debt after the restructure is in excess of the 1.25 based on the one-month (inaudible) rate of 4.5%.

Clearly the current interest rate environment has a positive impact on the interest coverage ratio. Huntington’s exposure after the restructure is $1.2 billion with $800 million secured by purchased first and second mortgages and $400 million secured by sub-prime first originated by the Tribeca subsidiary.

Huntington has a reserve of $115 million or 9.7% associated with the Franklin exposure. Huntington will carry these loans as sub-standard on our balance sheet.

We firmly believe that these actions are sufficient to allow for orderly retainment of the restructured debt with no credit quality performance impact on 2008 earnings. We have an ongoing performance analysis structure in place and are committed to formal quarterly impairment testing.

As part of the analysis process we engaged a third party to perform an independent review of the portfolio and our actions. This independent review confirmed our actions as appropriate.

Slide 13 summarizes certain collateral performance assumptions. Conservative expected loss assumptions were modeled over the life of the over 30,000 individual first and second lien residential mortgages. These assumptions were more conservative than performance results communicated by Franklin in 2007. Our modeled results were consistent with an analysis performed by the independent third party.

The model cash flows and estimated losses over the life of the mortgages are consistent with our November 2007 assumption. This results in the interest coverage that is expected to exceed the minimum interest coverage covenant of 1.25x. In addition, a specific reserve of $115 million or 9.7% of the exposure was established.

Slide 14 shows the sources that generate the cash flow for repayment of the bank debt. In addition to payments received on loans that are contractually current, additional payments are received from a delinquent account known by the industry term as recency payments.

As noted earlier, our loss assumptions included 120-day past due as the definition of default. This is a conservative definition as we assume no payments are being received on loans that reach the 120-day past due category. Yet the actual experience is that a number of these loans have made a payment within the last 30 days.

A second cash flow source represents loan pay off activity. This occurs as the loans are refinanced elsewhere. While the level of pay offs has obviously declined substantially from earlier levels, monthly refinance activity over the fourth quarter was stable. This source is most directly affected by the lack of liquidity in the market.

A third source of cash flow is the sale of foreclosed properties. This will be a significant source of cash, particularly for the Tribeca portfolio. The Tribeca loans are generally located in the New York and New Jersey area and were originated as refinances at low loan to values. The property values have held in this area better than national averages, thus supporting both refinance activity and foreclosed property sales that cover the loan amount.

Turning to the next slide, I want to use the next few slides to highlight key credit quality trends and metrics as well as provide comments on some of the key portfolios. Slide 16 provides a high level review of some key credit quality performance trends. As Tom noted earlier, Franklin will have a lingering impact on our reported asset quality ratios. It is important to emphasize that from a regulatory reporting standpoint, Franklin is categorized as a performing loan; it is accruing interest like any other commercial loan. The performing status is as a result of the repayment capabilities associated with the restructured credit.

In contrast, for our GAAP external performing, Franklin is categorized as a troubled debt restructure and part of non-performing assets. This categorization resulted in a significant increase in our reported non-performing assets, even though it is accruing interest. As Tom noted -- and hopefully my review confirms -- this is a credit that we believe we have addressed fully and certainly do not expect any negative impact to credit quality from Franklin on our 2008 performance.

As shown here, our reported non-performing asset ratio increased to 4.13% and our net charge-off ratio was 3.77%. Excluding Franklin, our NPA and net charge-offs ratios were 1.21% and 72 basis points respectively with the increases from the third-quarter levels reflecting deterioration in our core bank performance.

Due to the significant impact of both Franklin and the held-for-sale portfolio, we believe a better measure to track underlying trends are non-accrual loan metrics. As shown on the second line of this table our non-accrual ratio was 80 basis points, up from a comparable 62 basis points in the third quarter.

As shown at the bottom of the graph, we have included a non-accruing loan reserve coverage ratio to both our allowance for loan and lease losses -- the ALLL -- and total credit allowance, the ACL. We believe these reserve coverage ratios continue to represent adequate levels of reserves for the risks inherent in the portfolio.

Slide 17 details our non-accruing loans or NALs, by type and shows the other categories adding up to total NPAs. This shows that the increase in non-accruing loans was concentrated in the middle market commercial real estate, residential mortgage, and small business portfolios. The commercial real estate increase was primarily a function of continued activity in the home builder portfolio which I will specifically address shortly.

The residential mortgage and small business portfolio increases reflected increasing delinquency rates. Both of these segments classify loans as non-accrual based on delinquency. The increase in small business was spread across all of our regions with no particular driver from a geographic standpoint. Slide 18 graphically shows the trends Jeff covered on slide 16. Here it is visually easier to see where our non-accruing loan issues have been concentrated.

Slide 19 details net charge-off activity on both the reported and non-Franklin basis. On a non-Franklin basis, total net charge-offs increased from 47 basis points in the third quarter to 72 basis points. The most significant linked quarter change was in the commercial real estate segment with modest or normal seasonal increases in the other portfolio segments.

Consistent with the non-accrual trends, the commercial real estate charge-off activity was heavily influenced by the homebuilder portfolio. The borrowers in our Eastern Michigan and Northern Ohio regions continue to be the source of the majority of this activity.

Consumer charge-offs increased from 67 basis points to 75 basis points in the quarter and indirect auto and home equity net charge-offs increased, offsetting a decline in the residential mortgages. These results reflected a combination of some seasonal trends, the impact of Sky, and continued pressures on the real estate market in general. Our expectations are for consistent levels of consumer charge-offs for the next several quarters.

While our home equity losses increased from 58 basis points to 67 basis points, the relative change is actually better than industry trends. In fact, our vintage results from 2006 and 2007 originations show improvement over prior periods. This is consistent with our decisions to limit growth for originations and constrain high loan-to-value lending. This provides support for our belief that 2008 will be Huntington’s high water mark for home equity loss.

Slide 20 details charges in our allowance for credit losses and segregates reported amounts and non-Franklin related amounts. The latter, we believe, represents the better indicator of underlying linked quarter performance. Our non-Franklin allowance for loan and lease losses increased to 1.19%, up from 1.14% while our allowance for credit losses increased to 1.36% from 1.28%. Since there was $18 million of Franklin-related reserves at September 30, the net linked quarter increase in the ACL was $35 million. This build in the ACL was centered in the middle market commercial real estate portfolio which accounted for $19 million, or 59% of the increase.

Also contributing to the increase were $3 million related to the indirect auto portfolio and $4 million related to home equity loans. In addition, there was a $3 million increase resulting from the economic reserve calculation.

The point is that the increase in problem loan activity, putting Franklin aside, was primarily centered in the middle market commercial real estate portfolio and within that portfolio, in the single family homebuilder segment. The increases in other portfolios were a result of our quantitative methodology and appropriately represent the risks in the portfolios given the general economic conditions and our footprint.

Let me use slide 21 to give you a more detailed review of our single family homebuilder portfolio. Our single family homebuilder portfolio continues to decrease and now totals less than $1.5 billion. We have added some additional asset quality performance disclosure to this slide, which we hope you find helpful. The level of classified loans has increased by $120 million over the past year to $159 million. The reserves held against the portfolio have increased to 3%.

Those of you who have followed Huntington know about our highly quantitative reserving methodology. This gives us comfort that this 3% level accurately represents the current risk in this portfolio segment. For 2008, we are expecting losses to be relatively consistent with the 2007 level of 1.5%.

It is important to note that we expect the residential developer market to continue to be volatile and anticipate continued pressure on the homebuilder segment in the coming months. It will be the main driver in 2008 credit quality trends. As we continue our ongoing portfolio monitoring, we will make credit and reserve decisions based on the current condition of the borrower or project, combined with our expectations for the future.

I want to use slides 22 and 23 to review our adjustable rate mortgage and alt-A residential mortgage portfolios. As we know, these are areas of investor interest and concern. Details on our ARM exposure and rate resets over the next 24 months are shown at the top of Slide 22. The reset issue is a very real credit risk scenario for borrowers with no refinance options. The current 30-year fixed rates are below the reset rates for most of our borrowers. While there are a number of factors in credit decisions, including income level and loan-to-value, current experience shows that borrowers with current FICO scores over 670 are able to effectively pursue refinance options. Over 80% of our ARM borrowers have current FICO scores over 670.As such, we believe we have a relatively limited exposure to the reset risk.

Nevertheless, we have implemented a proactive effort to ensure that all of our borrowers are aware of the impact of the upcoming reset and have mitigation strategies in place to help those borrowers with payment difficulties.

Our interest-only portfolio, which is a subset of our residential ARM portfolio, continues to perform well with average current FICO scores of 729 and low net charge-off rates primarily as a result of our conservative origination strategies.

Turning to our alt-A product, slide 23 shows our outstanding of $531 million, representing 10% of the total residential portfolio. The product is in a run-off mode as we originated only $33 million of such loans in 2007. The product generated $5 million of losses, a net charge-off rate of 75 basis points and accounted for 46% of the total residential losses for the year. We are currently focusing on customer contact and applying our loss mitigation strategies where appropriate.

I hope this credit review has been helpful. Let me turn the presentation over to Don who will discuss our 2008 outlook.

Donald R. Kimble

Thanks, Tim. Turning to slide 25, we provided additional detail to help analyze our earnings outlook. As we provide our usual line item review of our earnings guidance, we will provide additional detail on our net charge-off expectations, a summary of our identified revenue synergies from the Sky Financial acquisition, and then review our capital assumptions for 2008.

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 of the financial impact is uncertain until the impact can be reasonably forecasted; and it excludes any unusual or one-time items as well. We are targeting 2008 earnings of $1.57 to $1.62 per share, excluding merger costs which are estimated to be $0.01 to $0.02 per share.

We anticipate that the economic environment will continue to be negatively impacted with weaknesses in residential real estate markets and struggles in the manufacturing sector. It continues to be our expectation that any impacts will be greatest among our borrowers in our Eastern Michigan and Northern Ohio markets.

However interest rates may change, we expect to maintain our customary neutral interest rate position. Given this backdrop, here are our outlook comments.

Revenue growth in the low single-digit range. This is expected to reflect a net interest margin of around 3.35%. This is down slightly from the fourth quarter adjusted level of 3.41%; that is a reported 3.26% plus the 15 basis point one-time Franklin impact. Reduction from the 3.41% reflects the impact of the lost interest income due to the charge-off on the loan along with an assumption of continued aggressive pricing in our markets.

Annualized average commercial loan growth in the mid single-digit range with total consumer loans being relatively flat, reflecting continued softness in residential mortgages and home-equity loan growth.

Core deposit growth in the low single-digit range and non-interest income growth in the mid single-digit range.

For non-interest income we are assuming mid single-digit growth with no significant net market-related gains or losses. Keep in mind the investment security contributing to our impairment and the public equity investments now represent less than $25 million. This also includes the realization of Sky revenue synergies and higher lease income.

Non-interest expense is expected to be flat to down from the fourth quarter annualized level. This reflects lower core expenses after adjustment for merger costs, other significant items, and automobile operating lease expense. Please note the flat to down assumption excludes any negative impact for merger costs which are expected to be between $5 million and $10 million in 2008 and excludes any positive impact for the potential reversal of the Visa indemnification charge.

Regarding credit quality performance, we anticipate a net charge-offs ratio of approximately 60 to 65 basis points. We will review this assumption in more detail later.

Non-accrual loans on absolute and relative basis are expected to increase moderately.

Lastly, we anticipate the loan loss reserve ratio will increased modestly also from its December 31 level of 1.44%.

Regarding capital, we are assuming no share repurchase activity. Again, all this results in a targeted reported EPS for 2008 earnings of $1.57 to $1.62 per share excluding any merger costs.

Let me detail a couple of areas. On Slide 26, we detail our assumptions for net charge-offs in our 2008 outlook. As you can see, our outlook assumes charge-offs in the 60 to 65 basis point range, well above our targeted range of 35 to 45 basis points. Each of the individual categories was above their long-term target range with the exception of automobile, with the greatest variance coming from the commercial real estate category. This continues to reflect softness in commercial real estate sector. The 60 to 65 basis point charge off outlook is also slightly higher than the 59 basis points of non-Franklin related charge-offs recognized in the second half of 2007.

Turning to Slide 27 we show the estimated revenue synergies from the Sky Financial acquisition. We’ve identified $87 million of revenue synergies to be achieved over the next three to five years with $33 million included in our expectations for 2008 revenue. The areas of revenue synergies include penetration of Sky Financial customer base with asset management products and services at a comparable level to Huntington, including retail investment sales, trust services, corporate derivatives and other capital market products. Delivery of Huntington deposit products and services including cash management, referral of insurance products and services throughout the combined Huntington footprint, and delivery of equipment finance services to the Sky customer base.

Turning to Slide 28, we provide a summary of the impact the 2008 outlook has on various capital ratios and other metrics. Using our targeted EPS of the $1.57 to $1.62 and for analytical purposes if you annualize our current quarterly dividend, the result would be a dividend payout ratio of 65% to 67%. While this is higher than our targeted range our current view is that it is supportable given our slower expected balance sheet growth.

Using these assumptions, it would result in an ROA of around 1.15%, or return on tangible capital of about 25% and an internal capital generation rate of 3% to 4%.

Finally, we project our tangible common equity ratio will increase by 10 to 12 basis points per quarter, resulting in a ratio of around 5.5% by the end of 2008. It is important to note that our plans include the addition of the issuance of additional capital during 2008. However, this capital would not increase our tangible common equity ratio but would enhance our regulatory capital levels. We have no plan of issuing convertible instruments that would dilute our common equities in the future. Again, we plan no share repurchases in the current year.

Let me turn the presentation back over to Tom for wrap up.

Thomas E. Hoaglin

Thanks, Don. We’ve covered a lot of ground in a short period of time so let me recap the key points we feel are important that our investors understand as we focus on 2008.

First, I realize that your confidence in us has been hurt by our experience with Franklin and we’re working hard to restore it. Based on all we know and all we are anticipating about how this credit and its underlying collateral will perform, we believe that our assumptions and reserves are appropriately conservative and that any performance issues associated with Franklin have been fully addressed.

Second, we believe the remaining risk associated with future negative market-related volatility is minimal.

Third, the credit quality environment is expected to remain difficult. We are expecting 2008 credit losses to exceed the 2007 level. We hope they will peak in 2008 and begin to decline in 2009. Nevertheless, we are confident that we are well-positioned to weather the storm.

Also, our business model is sound and is producing results. With the intensity of merger integration efforts behind us, our focus is on credit and on sales and service execution, particularly in our new regions. While there is still some merger expense saves to be achieved, we are equally excited about the revenue opportunities before us.

Lastly, I want you to hear that the team and I believe that our earnings target of $1.57 to $1.62 per share in 2008 is an achievable -- albeit not easy -- target. Through hard work and focus on performance, we are up to the task.

Operator, we will now open the discussion to questions.

Question-and-Answer Session


Your first question comes from Andrea Jao - Lehman Brothers.

Andrea Jao - Lehman Brothers

Given your net charge-offs ratio of 72 bips and then your projected net charge-off ratio of 60 to 65 in 2008, what drives the decrease? When I put Slide 26 right beside Slide 19, there is no obvious driver of the decrease.

Thomas E. Hoaglin

Let me make a few comments than I will ask Tim Barber to comment as well. What we have done in arriving at this estimate for 2008, we’ve taken a look at the second half of 2007; we’ve looked at name by name by name in our commercial real estate portfolio which is where much activity will come. We’ve looked at what we did in the fourth quarter as well, and both our line originators, our workout people, and our central credit risk people felt comfortable in light of all that with the CRE and middle market C&I portion of that 60 to 65 basis point range.

Tim, why don’t you comment about consumer side?

Tim Barber

On the consumer side, as you know, we have a lot of portfolio metrics. We spent a great deal of time analyzing trends and changes in our borrowers and we believe that 2008 will be exactly within the range of what we presented here in the presentation. Indirect auto will move a little higher, our home equity portfolio will be slightly higher, but pretty close to flat on an overall basis. Our residential mortgage portfolio will be flat for 2007.

Thomas E. Hoaglin

The other comment I would make, Andrea, is that I am well aware that there are no guarantees in this environment. So we have done our level best to dimension what we consider to be a realistic risk to us in 2008, but our crystal ball is not any clearer than anybody else so we certainly don’t offer any guarantees, this is absolutely our best effort.

Andrea Jao - Lehman Brothers

Could you give a bit more detail about the capital issuance, the magnitude, and the timing that you’re looking at if you can at this point?

Tim Barber

We are working through those plans, Andrea, but our thought would be to have a capital issuance probably in the $250 million to $300 million size, and with that we believe that our regulatory capital ratios and our rating agency capital levels would be at or above our peer levels with that type of issuance.


Your next question comes from Matthew O’Connor - UBS.

Matthew O’Connor - UBS

Not to harp on this, but it seems like it’s optimistic to assume home equity losses are flat to the current levels, given what’s going on in home prices and just the economy overall.

Donald R. Kimble

Matt, I guess I would address that in a couple ways. One, we’ve consistently talked through the quality of borrower versus the home price value, if the borrower quality remains high and the probability of default remains low than the value of the home is less of an issue. We’re seeing pretty consistent default rates coming through. That leads us down the path of consistent levels in 2008.

We spent a lot of time looking at vintages and we’ve seen improvement in the vintages of our 2006 and 2007 originations, pretty dramatic improvements and those combined tell us 2008 will be where we’ve projected and we’re seeing 2009 a little bit lower.

Matthew O’Connor - UBS

Did you talk about how much your reserve build will be this year?

Thomas E. Hoaglin

Matt, we didn’t say that explicitly. We just said that the reserve would be an increase modestly from the fourth quarter levels.

Matthew O’Connor - UBS

And that’s relative to loans or in absolute dollars?

Thomas E. Hoaglin

In percentages, so we’re currently at 144 so we think we would have a modest increase in that going forward.

Matthew O’Connor - UBS

What kind of macro assumptions are you using in your estimates?

Donald R. Kimble

Macro in terms of economic? Well what I would say is in our part of the world we do not expect the economy to be a very pretty picture in 2008. In some parts of Michigan, as you are well aware, there are depression-like conditions. We fully expect that will continue to be the case. Most of our other markets are either stable or fairly weak.

Clearly, the sector that is impacted greatest is housing, but we fully expect in ‘08 that there will be some spillover effect in other parts of the economy. So we are not predicating growth assumptions or credit quality assumptions on a rosy picture. We do see very much continued weakness throughout the year.


Your next question comes from Tony Davis - Stifel Nicolaus.

Tony Davis - Stifel Nicolaus

Tim, I wonder if you could tell us what percentage of the middle-market construction development loans have you gotten updated appraisal on here in the last quarter or so? What’s the LTV average of that portfolio right now?

Tim Barber

I can’t give you an average loan to value for the portfolio. We originate in the 65% to 75% LTV range, that’s our goal or our policies. The percentage that we have had reevaluated, I think maybe we’ll have to get back to you with a specific number on the percent. What I can tell you is as these loans come up for renewal or as there are identified issues with individual projects we absolutely get a revaluation immediately.

Tony Davis - Stifel Nicolaus

Of the $1.5 billion, how much of that would be in Northern Ohio and the East Michigan?

Tim Barber

We’ve got slides in the appendix that dimension the East Michigan portfolio at $135 million and we have said Northern Ohio was about $300 million.

Tony Davis - Stifel Nicolaus

Tom, from a growth standpoint, I wonder what loan officers are seeing in terms of a borrow attitude outside of real estate today, for example, versus say three to six months ago? How soft does the general business environment feel in your market?

Thomas E. Hoaglin

Tony, I think that an accurate answer is it varies by geography. It feels pretty bad in most of Michigan; a tremendous amount of caution there, lots of borrowers just hunkered down, if you will. When you go elsewhere -- Central Ohio, Cincinnati, Indianapolis -- a different story. We’re not talking about boom economies here, but there is a greater sense of optimism, a greater inclination to invest.

Keeping in mind that parts of our footprint have significant numbers of export-related industries, many companies there are benefiting as a result of the weak dollar, so while there’s certainly a significant segment of manufacturing that is under stress, there are other portions of it in our part of the world that as captured some of that that are benefiting at the current time.

So if I could generalize I’d say considerable caution but it does vary across portions of our footprint.

Tony Davis - Stifel Nicolaus

Final thing to you Tom. In this environment with what’s happening in asset quality, I would imagine your appetite for deals on the M&A front has been satiated for a bit. Also in that sense, what attitude are you seeing among your smaller competitors?

Thomas E. Hoaglin

Well, an accurate description Tony would be I am stuffed and I’m suffering from indigestion to continue the metaphor. This period of time I think is one of considerable focus on behalf of Huntington for better and better execution of what we have today relative to smaller competitors.

Time will tell whether I’m right or not, I am sensing that everybody is focused on its own challenges now, credit, margin, otherwise, there really is not a focus on M&A activity to any significant degree.


Your next question comes from Bob Hughes - KBW.

Bob Hughes - KBW

I hate to harp on the issue, as Matt said before, but still a little incredulous as to the home equity assumptions. It seems to me that even if you felt like the quality of your borrowers was holding up and the probability of default was not materially changed, that your loss default would have to be going up in this environment based on what you’re seeing in the rest of your portfolio and the actions you are taking against the construction book. Can you help me understand why that would not be the case.

Donald R. Kimble

Our loss given default assumption is essentially 100% on our home equity portfolio so if a borrower defaults, 100% of that flows right through to the loss line and that’s been consistent over the past couple years. There are segments if there is a very low original loan-to-value as an example, that aren’t at 100, but overall the number actually calculates in the high 90% range. That’s really why we’ve spent so much time focusing on the probability of default because we’re assuming 100% loss, given default.

Bob Hughes - KBW

When you look at that borrower base there, based on your own internal analysis can you tell me what you are basing that assumption on? Is that based on FICO scores? Do you believe that to be the number one determinant?

Donald R. Kimble

As we look at our portfolio we update FICO scores on a quarterly basis. The migration of those scorers, the percent in low score categories, as examples, are the things that we look at as primary indicators of our future LTVs.

Bob Hughes - KBW

Because it strikes me that we’ve heard from a number of other companies and maybe your experience will be different, but I’ve heard from a number of other companies that they view FICOs as almost being irrelevant to some degree and that LTV is the number one determining factor. Would you differ from that view?

Donald R. Kimble

From a predicting default standpoint?

Bob Hughes - KBW


Tim Barber

I think that if you are assuming a loss given default of 100%, then the prediction of the default has much more to do with the FICO score. We’ve got years of analysis that would indicate that it is highly predictive. Is it the only factor? Absolutely not. Can you have a high FICO borrower that ends up in an underwater position and something else happens that could cause them to default? Sure.

What we are generally predicating the concept on is if there is repayment capability then you’re going to stay in the house whether or not it happens to be upside down given market conditions. People are not just running out and turning in the keys to their homes because the value has fallen.

So that’s why I would say FICO from a predicting PD standpoint is more important than the loan-to-value.

Bob Hughes - KBW

A follow-up as far as the home equity charge off outlook. There’s two things I think you talked about before that are really impacting that too is that we are seeing less of an impact from the brokered origination that was cut out two years ago. I think you had also talked about the better performances of the recent vintages and those current loss rates were less than half of what they were two and three years ago.

Tim Barber

Right I think you mentioned hearing from peers or hearing from other institutions and clearly there has been a trend last quarter and certainly this quarter regarding material increases in home equity losses forecasted. I think we are different because we made some of the adjustments that banks are making today or very recently back in 2005 and 2006 and the broker channel is probably the best and most obvious indicator or example.

We completely exited it in early 2007 but we began reducing our exposure to the broker channel back in 2005. If not explicitly stated, the underlying assumptions in some of these other banks’ announcements has been significant deterioration in broker channel performance.

Bob Hughes - KBW

I do agree and you got out earlier than most.

Tim Barber

That’s probably the most visible example of why we think we’re a little different than the rest of the market. Clearly our numbers are up but our numbers are not up to the same extent or at the same ratios as some of these that we’re seeing announced recently.

Bob Hughes - KBW

Ex the dollar and charges you had this quarter, would you add a $0.35 run rate? I think by my math you could maybe add $0.03 or so that you get back in the first quarter from the reversal of accrued income I think on Franklin, if that’s accurate? What other adjustments would you make to that $0.38 level going forward that makes your guidance for ‘08 look reasonable?

Thomas E. Hoaglin

Bob, I think the biggest difference there is just as we talked about before, the fourth quarter included 72 basis points of charge-offs and a build of about $37 million of the allowance and our guidance for 2008 based on the conservative review that Tom had talked about would be for 60 to 65 basis points in charge-offs and continued modest increases in the allowance. So that would be the primary reason for the difference between those.


Your next question comes from David Booth - ELP Partners.

David Booth - ELP Partners

Hi, I just spent the last few days looking at the Franklin loan restructuring. To be honest with you, my opinion, I haven’t seen accounting this misleading since Enron. My question regards the accounting treatment of the loan. This is a $1.8 billion loan that we’re contingently liable for along with the other lenders to a $7 million market cap company; we’re almost 45% of the portfolio, the $2 billion portfolio is in default as of second quarter and Franklin is saying that trends are getting worse.

I don’t know how you guys can continue to call this a commercial loan and continue accrual on it when absent our forgiveness of $300 million of that loan, it looks to me like Franklin might be bankrupt right now. Substantially, economically, you have to think that if Huntington took possession of the collateral, how much of that portfolio would go to non-accrual versus the carrying value as you guys carry it as a commercial loan presently?

Thomas E. Hoaglin

I’ll take a first crack at this and Tim can go ahead and step in with additional color here, but keep in mind that what we’re looking at as far as the collection of our loans that we have on our books is the cash flows are generated from the $2 billion of the underlying consumer mortgage loans that are outstanding. The total loans that we have on our books today are less than $1.2 billion. We think that the cash flows that are –

David Booth - ELP Partners

We’re specifically liable for $400 million additional, is that right? The other lenders have recourse to us?

Thomas E. Hoaglin

No, no other recourse is owed from Huntington to the other lenders. No, that’s not correct.

David Booth - ELP Partners

So if Franklin fails those other lenders wouldn’t have recourse?

Thomas E. Hoaglin

They would not have recourse against Huntington, no.

David Booth - ELP Partners

Okay, because I thought your 10-Q said something.

Thomas E. Hoaglin

No, that does not exist and we’ll go back and check our Q and Ks we filed to make sure that’s not stated that way; that’s not our understanding.

David Booth - ELP Partners

I’m just trying to understand how you can call it a commercial loan when Franklin is a $7 million market cap company that they, in their recent filings, said that with the trends in the portfolio that it would pretty much wipe out their equity. How you can continue to call that a commercial loan and continue to accrue on it, I think in my opinion, the proper accounting would be to look at that as underlying collateral and say, how do we treat this if we brought this on balance sheet? Because substantially Huntington is the lender that’s keeping them afloat.

Thomas E. Hoaglin

David, we have definitely looked at the underlying collateral and we believe that the loans is a loan to essentially a pool of loans, and we believe that the collateral and the cash flows that are generated from that collateral more than adequately support the loan balance that we have on our books as well as the loan balances that are carried by the participants in that relationship.

David Booth - ELP Partners

Can you talk about the underlying credit trends in the Franklin portfolio presently and then how it would be reflected if you brought it on balance sheet to Huntington? How much of it would go into non-accrual versus your treatment as a commercial loan presently?

Thomas E. Hoaglin

David, we believe that we have an accruing loans that is well secured and we believe that we have perfectly accounted for that and have it reflected in our balance sheet. If you would like to talk about this further please feel free to give either Jay Gould or give me a call and we could talk about this more one-on-one if you’d like.


Your next questions comes from Heather Wolf - Merrill Lynch.

Heather Wolf - Merrill Lynch

A quick question on the commercial portfolio. Given the view on the economic backdrop and given that unsecured commercial credit quality can be very dependent upon the underlying economy, why do you think the C&I loss rates are going to hold in ‘08?

Thomas E. Hoaglin

What we are concerned about in C&I is anything in C&I that somehow would be dependent upon housing. So in building our loss estimates of C&I, we’ve certainly taken into consideration the direct impact the housing sector might have on it. But on the other hand, with the knowledge of our C&I book, which continues to perform very well, and the composition of the sectors within the C&I book, we decided, again from the relationship to the housing sector, we feel comfortable in maintaining the targeted estimates that we have. That’s the best that I could do to help you out.

Tim Barber

Heather I was just going to add something. In your question you mentioned unsecured and we have really very little C&I unsecured so if you’re thinking about maybe shared national credit or some structure like that, that’s not what the Huntington portfolio looks like.

Heather Wolf - Merrill Lynch

Tim, can you give us a sense for the typical rate of change or rate of credit migration on a C&I loan? How quickly do they usually move through your watch list and delinquency lists?

Tim Barber

Heather, the answer to that really varies dramatically. Some hit the criticized world and then go relatively quickly to loss. Others hit the criticized world and stay there for a while as the company sorts out issues or performance stabilize before returning possibly to the past category. I’m not sure I could give you a general answer to that.

Clearly, we have seen over the last few quarters, downward migration as reflected in our increased reserves.

Thomas E. Hoaglin

Tim I think that’s particularly the case in commercial real estate as opposed to middle-market C&I, where you are subject to periodic updates with regard to appraisals, changing market conditions, thus in some cases triggering downgrades from past to substandard. We really don’t see that kind of precipitous decline generally speaking in the middle market C&I.

Tim Barber

That’s exactly right, the significant migrations are the two-step downgrades, in the commercial real estate phenomenon and we’ve experienced that. The C&I book tends to be more one grade steps as they move but they have not moved with anywhere near the volume that we’ve seen in the commercial real estate side.

Heather Wolf - Merrill Lynch

Just as a refresher, what were your peak C&I losses in the last cycle?

Tim Barber

The last cycle in early 2007, I think 2001 or 2002 may have been the peak, and I can’t remember the number specifically. I can get back to you with that. I would say that those numbers were heavily influenced by the shared national credit portfolio that was on the books at the time. That simply doesn’t exist today and so we’ve materially changed what that C&I portfolio looks like.

If you go back or when we get back to you we can give you some names that you can recognize along with the rates, so I don’t think that is a comparable comparison. It could be ex-ed again given the change in the portfolio.


Your next question comes from Andrea Jao - Lehman Brothers.

Andrea Jao - Lehman Brothers

I just wanted to make sure I heard correctly. You sold $73 million, $74 million held for sale non-performer from Sky after the quarter ended?

Thomas E. Hoaglin

No we sold that prior to quarter end. We also took an additional haircut on the remaining portfolio based on the sales price we received.

Andrea Jao - Lehman Brothers

Okay, great so prior to quarter end.

Thomas E. Hoaglin

That’s correct.


There are no further questions at this time.

Jay Gould

Thank you to everybody for participating in our conference call. If you have follow-up questions, please give myself or Jack a call. Thank you again.

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