Huntington Bancshares Inc (HBAN) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Huntington Bancshares fourth quarter 2004 earnings call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the conference please press star then 0 on your touch-tone telephone.

As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference Mr. Jay Gould, Senior Vice President, Investor Relations.

Mr. Gould you may begin.

Thank you, Patty, and welcome everyone.

Couple of the usual opening remarks.

I want to remind you that copies of our slides can be found on our website at Huntington.com.

And as Patty mentioned the call is being recorded.

We expect to have it available as a rebroadcast about an hour from the close of the call.

Please call the Investor Relations department at 614-480-5676 for more information on how to access these recordings or playback or should you have difficulty getting a copy of the slides.

Today's discussion including the Q&A period may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Such statements are based on information and assumptions available at this time and are subject to change, risks, 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 the slide at the end of today's presentation and material filed with the SEC including our most recent Form 10-K, 10-Qs, and 8-K filings.

So let's begin.

Turning to Slide 2.

Presenting today are Tom Hoaglin, Chairman, President, and Chief Executive Officer, and Don Kimble, Executive Vice President, Chief Financial Officer, and Controller.

Also present for the Q&A period is Tim Barber, Senior Vice President of Credit Risk Management.

Slide 3 notes several aspects of the basis of today's presentation.

I encourage you to read this but let me point out a couple of key disclosures related to the presentation.

First, 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 a reconciliation to the comparable GAAP financial measure can be found in the slide presentation in its appendix or in our quarterly financial review supplement to today's earning press release all of which can be found on our website.

Also certain performance data we will review are shown on an annualized basis and in the discussion of net interest income we do this on a fully taxable equivalent basis.

Further we relate certain one-time revenue and expense items on an after tax, per share basis.

Many of you are familiar with these terms and their usage but for those of you who are not we have provided definitions and rationale on the slides.

Today's presentation is going to take about 20 minutes.

We want to get going.

Let's get started.

I'll turn the meeting over to Tom.

Thanks Jay.

Welcome everyone.

Thanks again for joining us today.

Turning to slide 4, I'll begin with a review of significant fourth quarter events and highlights.

Don Kimble will then follow with the usual review of the quarter's financial performance and I'll wrap up the session with an update on our outlook for full year 2005.

At the outset let me tell you what I can about the SEC formal investigation and banking regulatory matters as we will not be able to comment further during the Q&A session.

We're continuing to have ongoing discussions with the SEC staff regarding resolution of their formal investigation.

As previously announced it's anticipated that a settlement of this matter which is subject to approval by the SEC, will involve the entry of an order by the SEC requiring Huntington to comply with various provisions of the Securities Acts of 1934 and 1933 along with the imposition of a civil money penalty.

At year end we had reserves related to the expectation of the imposition of the civil money penalty which we view as sufficient given negotiations with the SEC.

However, no assurances can be made that any assessed penalty may not exceed this amount.

Also, as previously announced, we expect to enter into formal supervisory agreements with our banking regulators, the Federal Reserve and the SEC providing for a comprehensive action plan designed to address our financial reporting and accounting policies, procedures, and controls, and corporate governance for practices.

We remain in active dialogue with them concerning these and related matters and are working diligently to resolve them in a full and comprehensive matter.

With those comments let me turn to the quarter's performance.

Slide 5 reviews key financial performance highlights of the quarter.

Earnings were $0.39 per common share and were negatively impacted by a net $0.04 related to the following -- $0.03 of SEC-related expenses and accruals, $0.02 of one-time property lease impairment partially offset by $0.01 one-time funding cost adjustment for a securitization structure consolidated in the prior period which lowered interest expense and increased the net interest margin by 6 basis points.

Don will provide additional details in a moment.

Our ability to grow loans was again evident.

Average total loans and leases grew at an annualized 15 percent rate led by a strong 19 percent annualized growth rate in total consumer loans with residential mortgage and auto loans and leases the primary contributors.

No auto loans were sold during the quarter.

Average middle market commercial and industrial loans also grew at a 19 percent annualized rate.

Middle market C&I loans have increased 5 months in a row giving us encouragement that the long awaited rebound in C&I growth may be gaining traction.

4 of our 7 regions experienced growth.

Central Ohio, southern Ohio, West Virginia and east Michigan with 6 regions having good pipelines.

Utilization rates remain relatively unchanged.

Importantly we attracted 53 new ideal Huntington clients in the fourth quarter, almost double the rate in the third quarter.

Our success in small business lending a key focus over the last 2 years, is increasingly evident as small business loans grew at an annualized 11 percent rate in the quarter.

This represented the 6th out of the last 7 quarters that the annualized growth rate of small business loans has exceeded 10 percent.

Average core deposits grew at a solid 10 percent annualized rate with particular strength in noninterest bearing and interest bearing demand deposits.

Average retail CDs grew an annualized 7 percent.

Our deposit growth was a reflection of continued success in our sales efforts as well as the increase in the number of retail DDA households and small business relationships.

Our net interest margin was 3.38 percent which includes a 6 basis point positive impact from the one-time funding cost adjustment for the securitization structure consolidated in a prior period.

This was up from 3.30 percent in the third quarter.

This confirms our comments made last quarter where we felt our net interest margin had stabilized.

This stabilization is important as it permits more of the positive impact of loan growth to be reflected in growth of net interest income.

Credit quality performance remains strong.

Net charge-offs were 36 basis points which was higher than the 30 basis points in the third quarter but within our long-term target range of 35 to 45 basis points for a stable economic environment.

It was well below the 103-basis-point level a year ago.

Nonperforming assets increased 28.1 million with all of it related to higher OREO as NPLs declined 3.8 million.

The OREO increase reflected a $35.7 million addition resulting from the workout of a troubled mezzanine relationship which Don will detail later.

Importantly these OREO assets are in contract to sell early in 2005, the sale of which will bring our NPAs back down.

Lastly our capital position continued to increase above our long-term targeted levels.

In sum, we feel good about the quarter and believe it positions us well going into 2005.

Let me turn the presentation over to Don who will provide additional details.

Don.

Thanks, Tom.

As shown on Slide 7 reported or GAAP net income was $91.1 million, of $0.39 per share.

There were three significant items impacting the quarter's results.

First $6.5 million of pretax SEC related expenses and accruals or $0.03 per share.

Second, $7.8 million property lease impairment resulting from our annual fourth quarter review for impairment, or $0.02 per share and third, $3.7 million pretax one-time funding cost adjustment for securitization structure consolidated in a prior period.

Let me provide a little more detail there.

In the third quarter of 2003 we consolidated an automobile trust with the adoption of FIN 46.

In connection with consolidating the trust there were also 2 related foreign companies that we were required to consolidate.

The 2004 fourth quarter we learned of adjustments to the balances of the foreign companies based on information not available previously.

These adjustments relate to earnings that these entities had realized on the invested cash that remains offshore in the two companies.

Since the residual earnings will flow through to Huntington and the offset to funding cost of the structure we reflected this funding cost adjustment as a one-time reduction of interest expense in the fourth quarter.

Turning to Slide 8, over the course of the last several quarters earnings have been impacted by a number of items.

This slide provides a reminder of a year ago's quarter's performance as well as related significant items.

The remaining slides are ones we typically use to review our financial performance and there are additional slides in the appendix to give you more detailed information.

Slide 9 is our highlights page.

Tom's hit on some of these items but there are a couple of things I'd like to point out.

Though much of this will be covered in detail in a few minutes.

First, our efficiency ratio as reported was 66.4 percent, basically flat with the third quarter.

It included about 3 percentage points related to the quarter's significant items.

The impact of this quarter's significant items combined with adjusting for operating lease accounting added about 9 percentage points to this quarter's ratio.

Second you will recall that in the 2004 first quarter we separated the allowance for unfunded loan commitments into a liability account distinct from our total allowance for loan losses.

It is important to remember that both allowances are available to cover credit losses.

Near the bottom of this slide we show that the loan loss reserve ratio excluding the allowance for unfunded loan commitments was 1.15 percent at December 31, but was 1.29 percent when it is included.

Though we have seen in other banks segregate an allowance for unfunded loan commitments this past quarter as we do we still believe most of our peers have not adopted this approach.

Therefore, for analytical purposes we continue to report loan loss reserve ratio metrics both separately and as well as combined with the allowance for unfunded loan commitments.

Third, our upward trend in tangible common equity to risk-weighted assets shown at the bottom of the slide continued.

The quarter end ratio was 7.87 percent up significantly from a year ago.

This improvement is due in large part to the lower risk nature of our balance sheet compared with a year ago as well as growth in retained earnings.

Since I'll be covering most of these items in detail later let's move on to the next slide.

Slide 10 shows the fourth quarter net interest income on a fully tax equivalent basis increased $14.6 million or 6 percent from a year-ago quarter.

Excluding the $3.7 million impact of the one-time funding cost adjustment, that lowered interest expense, net interest income was up $11 million or 5 percent.

And as shown on the right-hand graph our reported net interest margin of 3.38 percent was 3.32 percent adjusted for this one-time funding cost adjustment.

Investors might also find it informative that over the last year we've significantly reduced the percentage of our investment portfolio represented by fixed rate securities.

Specifically at the end of 2004 66 percent of our investment portfolio represented fixed rate securities down from 87 percent a year earlier.

This helps insulate us from some of the negative impacts of the flattening yield curve.

Slide 11 illustrates the change in loan portfolio mix over last 2 years to lower margin, lower risk credit.

As shown in the shaded box at the bottom of the slide at year end our total auto exposure was 21 percent unchanged from the end of September as no auto loans were sold during the quarter.

However, this was down from 28 percent at the end of the prior year.

We are close to our previously stated 20 percent targeted goal.

Offsetting the relative decline in auto loans in the total portfolio has been a corresponding increase in the lower risk residential real estate and home equity loans as shown in the shaded box in the middle of the slide.

Combined these two portfolios have increased from 22 percent of total credit exposure at the end of 2002 to 35 percent at the end of December.

Average loan and lease growth is highlighted on slide 12.

This shows that total average loans and leases increased an annualized 15 percent during the quarter to $23 billion.

Reported average middle market C&I balances showed a significant annualized growth rate of 19 percent, as Tom noted.

Small business C&I and CRE loans made through our retail delivery channels continued to grow at a double-digit pace and increased an 11 percent annualized rate in the quarter this has become a real success story.

Auto loans increased at 12 percent annualized rate as no loans were sold during the quarter.

However, auto lone productions $306 million during the quarter down 15 percent from the third quarter level reflecting continued aggressive competition in this sector.

Auto direct financing leases averaged $2.4 billion in the fourth quarter, a 25 percent annualized growth rate so auto -- though auto lease production was flat with third quarter levels.

Operating lease assets classified as non earning assets and listed near the bottom of the table continued to run off an average $600 million in the current quarter.

Those of you familiar with Huntington know that auto leases originated since April 2002 have been booked as direct financing leases.

When the direct financing leases and operating lease portfolios are combined the total portfolio is down 4 percent from a year ago.

There are slides in the appendix with additional auto loan information related statistics for those of you desiring more detail.

Home equity loans and lines, residential mortgages, primarily adjustable rate mortgages continued their strong growth up 14 percent and 24 percent on an annualized basis respectively from the third quarter.

Slide 13 shows average total core deposits increased an annualized 10 percent from the third quarter and were up 9 percent from a year ago quarter.

Growth in noninterest bearing demand and interest bearing demand deposit accounts were strong with both up an annualized 15 percent from the third quarter.

With interest rates rising CDs are increasingly becoming more attractive to depositors.

In the fourth quarter we saw an annualized 7 percent growth in CDs following a 2 percent annualized growth rate in the third quarter.

Growth on average commercial deposits continue to be particularly strong increasing at a 17 percent annualized rate with consumer deposits increasing at a 6 percent annualized rate.

Slide 14 reviews trends in noninterest income.

Total noninterest income declined $7 million or 4 percent from the third quarter.

Operating lease income accounted for 30 percent of noninterest income down from 34 percent in the third quarter.

By the end of 2005 we expect operating leases will have declined to a point where their accounting impact on our income statement and balance sheet trends will be insignificant.

Excluding operating lease income total noninterest income increased $2.4 million from the third quarter.

Main drivers of this increase were $6 million increase in other income as our investment banking and other equity investments posted good results partially offset by MSR hedge related trading losses.

A 4.4 million increase in mortgage banking income primarily as a result of a $700,000 MSR temporary impairment recovery compared with a $4.1 million MSR temporary impairment loss in the third quarter.

These increases were partially offset by a $5.7 million decline in investment securities gains as such gains totaled only $2.1 million in the current quarter compared with $7.8 million of such gains in the third quarter.

These gains were primarily related to MSR temporary impairment hedging activities.

The combined net impact of changes in MSR temporary valuations and related MSR hedge relate trading or investment securities activities was not meaningful in this quarter.

Should interest rates continue with their gradual rise we anticipate future MSR valuation and related hedging activity volatility should diminish.

Slide 15 details trends in noninterest expense.

Total noninterest expense increased $7.6 million or 3 percent from the third quarter.

Noninterest expense trends were also heavily influenced by trends in operating lease expense which accounted for 17 percent of the quarter's expenses down from 20 percent in the third quarter.

Excluding operating lease expense which will continue decline along with operating leases, noninterest expense increased $14.2 million from the third quarter this was primarily due to a $9.2 million increase in net occupancy costs which as noted earlier included a $7.8 million property lease impairment and write-down on vacated facilities resulting from the fourth quarter impairment review.

Also impacting expenses as well as comparisons to prior quarters were SEC related expenses and accruals as well as Unizan integration planning and systems conversion costs.

SEC-related expenses and accruals totaled $6.5 million in the fourth quarter up from $5.5 of such items in the third quarter.

These expenses and accruals impacted the professional services and other expense categories.

Unizan integration planning and systems conversion expenses totaled $900,000 in the quarter down from $1.8 million in the third quarter these expenses impacted the data processing and other service expense category and to a lesser degree various other expense categories.

Again with Slide 16 let me review some of the recent credit trend highlights.

This slide shows the charge-off ratio trends for the various portfolios over the last 5 quarters.

The total net charge-off ratio was 36 basis points up from 30 basis points in the third quarter.

Increased total commercial net charge-offs drove most of this increase.

In this regard you will note that the beginning of this quarter we have segmented our commercial loan detail into 3 categories.

Commercial market C&I, middle market CRE, and small business C&I and CRE loans.

We believe this increased detail will help you better understand what drives our commercial loan results both balance sheet as well as credit quality.

As you can see the increase in total commercial net charge-off ratio is 21 basis points from 10 basis points in the third quarter was driven by higher middle market C&I and middle market CRE net charge-offs.

While up this performance was nevertheless within expectations and followed third and second quarter net recovery performance for middle market C&I loans.

The total consumer net charge-off ratio was 49 basis points up slightly from 45 basis points.

Current quarter reflected anticipated net charge-off performance in the auto secured and residential real-estate segments.

The increase in other consumer -- other direct consumer loans was also influenced by a partial charge-off on a single loan originated nearly 5 years ago.

Slide 17 shows the trends in NPAs.

As you can see the fourth quarter NPAs as percent of total loans and leases and other real estate was up -- was 46 basis points up from 36 basis points in the third quarter.

As Tom noted earlier all the increase in NPAs represent an increase in OREO as a result of a $35.7 million increase in OREO properties due to a work-out situation on a mezzanine loan relationship.

Included in our nonperforming loans as of the end of the third quarter were 2 mezzanine loans with outstanding balances totaling $7.1 million.

These loans were secured by 2 apartment complexes that were not meeting financial expectations.

The apartment complexes were the sole assets of 2 partnerships.

Our loans were subordinate to the non recourse debt of the partnerships totaling $29.8 million.

To facilitate resolution of the credits during the fourth quarter we acquired majority ownership interest in the partnerships and the partial satisfaction of the mezzanine loan.

The apartment complexes are now under contract for sale early this year at a price which should not result in any additional losses to us.

With our ownership of the partnership interest, GAAP accounting requires Huntington consolidates the assets and liabilities of the partnerships.

As a result of this consolidation, recorded as $35.7 million OREO asset on our books.

That is the apartment complex is.

And also recorded the $29.8 million of non recourse debt on our books as a liability.

The important take-away is that this increase in NPAs is transitory.

No further losses on these assets are expected and our net exposure on these assets is only $6 million after a $1 million charge-off taken in the fourth quarter.

Slide 18 recaps a trend in loan loss reserve which as previously noted declined to 1.15 percent of loans and leases compared with 1.25 percent at the end of the prior quarter.

The table on the right decomposes the end of the period reported reserve ratio into three components.

It is presented to help you understand exactly what drives our loan loss reserve level and specifically to see what drove this quarters 10 basis point decline.

As shown the transaction reserve accounted for 6 basis points of the decline.

This was a direct result of the continuing positive change in the portfolio mix and the sale of certain nonperforming loans.

The 3 basis point decline in the specific reserve also reflected the nonperforming loan sale as well as identified improvement in the credit quality of individual commercial credits.

The 1 basis point decline in the economic reserve reflected a relatively consistent view of the economic outlook.

In general the economic indexes for the fourth quarter showed a slowdown in economic growth from the third quarter.

The current quarter levels are much more consistent with our view of the economic conditions in our particular market.

As demonstrated again this quarter it is very important to our investors to understand that this methodology will be much more responsive to changes in the portfolio mix, our economic environment, and changes in individual credit situations.

Turning to slide 19, the allowance for unfunded loan commitments is shown separately from the total allowance for loan and lease losses at the top of this slide as the allowance for unfunded commitments is reported separately as a liability.

However, as both the reserves are available to cover credit losses and not all banks have adopted this reporting methodology for analytical and peer comparison purposes we added these two together in a total allowance for credit losses amount, the third line on the slide.

The first set of ratios compares our reported allowance for loan and lease losses to period end loans and leases and NPAs.

On this basis our period end reserve ratio was 1.15 percent and our NPA coverage ratio declined to 250 percent with 122 percentage points of this decline related to the increase in OREO which is already marked to market.

A more meaningful indicator of reserve coverage is the NPL coverage ratio which increased to 424 percent from 417 percent at the end of September.

Which we consider to be a very strong level.

Second set of ratios compares the combined allowance for credit losses to period end loans and leases and this NPAs.

On this basis our period end reserve ratio was 1.29 percent with a 280 percent NPA coverage ratio and a 476 percent NPL coverage ratio with the latter up from 461 percent the end of the third quarter.

Again we believe these ratios are more comparable to most of our peers' reports.

If you will turn to slide 20 you will notice that our tangible equity to asset ratio as of December 31, was 7.18 percent up from September 30.

This continued to be well above our 6.5 to 6.75 percent targeted level.

However, the more telling capital ratio trend has been the tangible equity risk weighted assets which have steadily increased from 7.87 percent to -- from 7.31 percent a year ago.

The increase in this ratio clearly demonstrates the progress we made in lowering the credit risk profile of the Company as reflected in the growth in lower risk residential mortgages and home equity loans, and the lowering of our auto loan and lease exposure.

This in turn results in inherently lower expected net charge-off performance.

In sum we are very well capitalized and are getting stronger each quarter.

This completes the review for this quarter.

Before discussing our 2005 outlook let's take a quick look, a quick review of the full year results of 2004 to help set the stage for that discussion.

Slide 21 provides a full year earnings summary as shown reported net income was $398.9 million or $1.71 per share.

Those of you following Huntington know there have been a number of significant items on this past year's performance most notably the SEC related expenses and accruals, auto loan sale gains, and the benefit of lower net charge-offs as reflected in a declining allowance for loan and lease losses.

What we have listed here is a recap of what we viewed as significant items that impacted full year performance and represents a review of what we have presented to you in prior quarters.

Taking into consideration all these items our assessment is that the underlying earnings performance of 2004 was about $1.65 per share.

Slide 22 is similar in concept to Slide 21 providing a similar type of recap for the 2003 earnings which were $1.61 per share on a reported basis.

But we view the underlying performance to be more like $1.54 per share after taking into account the significant items for that year most notably the auto loan sale gains and cumulative effect of an accounting -- change in accounting principles.

With those full year net income reviews let me turn the call back over to Tom to talk about other full-year 2004 performance highlights and our 2005 outlook.

Tom.

Thanks, Don.

Slide 23 provides some additional 2004 full-year performance highlights and some perspective on our performance.

As Don just covered reported EPS was $1.71 though this benefited by about $0.06 by significant items including an improving credit quality environment.

Loan growth was strong up 11 percent with average consumer loans leading the way, average total commercial loans grew only 4 percent reflecting 12 percent growth in small business loans and 11 percent growth in middle market commercial real estate loans partially offset by a 4 percent decline in middle market C&I loans, though we ended the year as we said with 5 months of good momentum.

Our 5 percent growth in average core deposits was good led by a strong 16 percent growth in interest bearing demand deposits and 5 percent growth in noninterest bearing DDA partially offset by a 1 percent decline in retail CDs.

We also showed deposit growth momentum building in the fourth quarter as we said previously.

A very important factor in last year's performance was the decline in the net interest margin.

You'll recall most of the decline resulted from our strategy to reduce the concentration in our loan portfolio of higher yields and higher risk loans this created a headwind in our ability to translate our strong loan growth into net interest income growth.

Importantly the net interest margin stabilized in the second half so our headwind going into 2005 appears to have dissipated.

That is very good news.

On the other hand 2004 earnings benefited by dramatically improving credit quality and we ended the year with our strongest credit quality metrics in several years.

At year end we had a repositioned balance sheet reflecting a higher percentage of our loan assets and lower net charge-off residential and home equity loans.

This resulted in the reduction in our allowance for loan and lease losses and absolute low levels of loan loss provision expense.

This lift in earnings is not repeatable and represents a headwind for us going into 2005.

Two other factors represented key achievements.

Our auto loan exposure was reduced to 21 percent at year end virtually right on top of our 20 percent target.

Perhaps most encouraging was the fact that in 2004 we began to grow the number of our consumer households and small business relationships on a consistent basis.

In sum, 2004 was a year of significant progress on a number of fronts.

Loan and deposit growth, consumer and small business account growth, and strong credit quality performance.

Associates remained very focused on growing our core businesses, improving service quality and attracting new customers.

This last point is worth a couple of additional comments.

Slide 24 shows the trend lines in our growth in a number of consumer households and small business relationships.

Last year we added over 12,000 new consumer households.

This was much, much higher growth than we have seen in recent years.

We also added 4300 new small business relationships up 9 percent.

We're increasingly gaining traction and growing our customer bases and this makes me feel very good going into 2005.

Slide 25 recaps our 2004 and 2003 performance compared with our long-term performance targets.

A couple of observations.

First the EPS growth rates here shown are on a reported basis.

As Don noted earlier both years were impacted by a number of significant items.

As such the reported 26 percent EPS growth rate in 2003 is higher than what we view as that year's underlying performance and conversely the reported 2 percent EPS growth rate for 2004 understates the underlying improvement from 2003 which we view as being closer to 7 percent but still below our long-term aspirations.

Second, and part of the reason for this, was that we did not make the progress we wanted to make on lowering our expense efficiency ratio, making this happen in 2005 is a priority.

Performance on the other key metrics was generally consistent with our long-term performance targets, so in sum we've made good progress but opportunities remain.

Turning to Slide 27 let's look at our 2005 expectations.

Here are the background assumptions for our 2005 outlook which in many regards is very much the same as they were a year ago.

Though 2004 turned out differently in several aspects.

We think the overall economic environment in 2005 will be favorable though not robust.

The economy in our footprint is expected to show modest growth and we're also expecting gradual increases in the level of interest rates.

Factors working in our favor include an approved demand for middle market C&I loans, solid demand for home equity and small business loans, and good growth in residential mortgages, though lower than in 2004.

Modest growth in commercial real estate loans.

We anticipate another year of good deposit growth, reflecting continued improvements in expanding our customer bases as well as improved sales success.

We expect to see more favorable securities market environment with related benefits to our brokerage, money market, and trust businesses -- money management and trust businesses.

We remain focused on improving our product penetration as our sales success continues to gain traction.

Last year we saw a 6 percent increase in our consumer 90-day cross-sell ratio and a 13 percent increase in our small business 90-day cross-sell ratio.

These were good improvements with more to come.

As I noted earlier we expect to do better in improving our cost efficiencies. 2004 was the year when the Company had to absorb a number of one-time and higher than run rate expenses.

We already mentioned the SEC related expenses, Unizan integration costs, as well as costs associated with Sarbanes-Oxley 404 compliance.

And we expect a stable credit quality environment.

Lastly and most importantly we expect our margin to remain relatively stable.

The biggest challenge or headwind is that loan loss provisions will be higher to accommodate loan growth.

What does all this translate into?

As shown on Slide 28 today we're providing 2005 GAAP earnings guidance of $1.78 to $1.83 per share this would represent a 4 to 7 percent increase from our reported 2004 earnings per share of $1.71.

Though we view this as an 8 to 11 percent increase from our underlying 2004 performance of about $1.65 per share.

As we've indicated before, our earnings guidance is on a GAAP basis.

It also excludes any impact from future significant items such as SEC related expenses, the implementation of FAS 123 accounting for stock options and any share repurchases.

These exclusions are important to understand since any or all of these items may ultimately impact 2005 performance but until such time as the timing and amounts of such items become known and foreseeable they're excluded from our guidance.

As analysts you need to make your own determination of what if any of these items you want to factor in to your earnings expectations.

We believe this GAAP earnings expectation will reflect mid single-digit growth in revenue excluding the impact of operating lease income declines, solid loan and deposit growth, a net interest margin that remains throughout the year relatively consistent with the 2004 full-year level of 3.30 percent, mid single-digit growth in noninterest income, again, excluding operating lease income, we're targeting expenses to be flat excluding the impact of operating lease expense declines, and as noted earlier credit quality trends are expected to remain stable.

This we believe will result in net charge-off, NPL, and reserve ratios that remain around those of the 2004 fourth quarter though as noted earlier loan loss provision expense will increase to reflect loan growth.

This completes our prepared remarks.

Don, Tim Barber, Jay, and I will be happy to take your questions.

Let me turn the meeting back over to the operator who will provide instructions on conducting the question-and-answer period.

Operator.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Fred Cummings of Keybanc Capital Markets.

Good afternoon.

Hi, Fred.

Tom or Don, can you address the efficiency ratio?

I think in past quarters you've adjusted the efficiency ratio to exclude the operating lease numbers both on the -- in the revenue side and the expense side, because I think that would distort your -- make your number look higher than it really is, the core expenses.

Fred you're absolutely right.

This is Don.

The efficiency ratio if you adjust it for the operating lease accounting issue and also adjust it for the significant items we talked about, the SEC related charges and also the lease impairment issue it would take it from the the 66 percent range down to the 57 to 58 percent range for the current quarter.

So that would be more comparable to a normalized efficiency ratio for us.

Then maybe a question for Tim.

Now, Tim, I note that the home equity charge-offs seemingly went up due to some reclassification issue.

How do you feel about credit trends there, and are you guys taking on any -- looks like even on a core basis your charge-offs would be a little higher than some of your peers in the home equity business.

Can you just talk about that?

Sure.

I think we have been very consistent in our origination strategy and quality.

We had a couple of large dollar losses that occurred in the fourth quarter that I think make the fourth quarter not representative of what our run rate would be.

And so, you know, that's the fourth quarter or the number you see going from 39 to 48 third quarter to fourth quarter.

Couple of those we expect to see recovery sometime in early 2005.

As far as industry comparisons we've spent a fair amount of time looking at that.

I think the differences in reporting across the other banks and financial institutions make it very difficult to say our specific number is dramatically higher than others.

I think we compare very favorably to the banks that report as we do.

And so that's something that we need to flesh out and work out a little bit more internally, but I would say I feel comfortable with where we are today.

We've got a 30 to 40-basis-point range on the home equity portfolio from a long-term standpoint.

Then one last question for Tom.

Tom, you've had very strong commercial loan growth here.

Can you just give us some sense for what your hiring plans are in terms of increasing the number of relationship managers on the ground in 2005?

Fred, we do not have plans for wholesale increases in commercial relationship managers, calling officers, if you will.

We are quite focused on productivity of our commercial people, and the very significant increases that we're having in attracting new, what we call ideal Huntington clients, we're doing we think in an efficient, productive manner that fits each of our individual markets.

So we'll -- we may add a banker here and there, but we believe we're going to experience some C&I growth in '05 without needing to add a lot of bankers, nor do we expect to bring in a lot from competitors.

Okay.

Thanks, Tom.

Our next question comes from Matthew Clark of Deutsche Bank.

Good afternoon.

Hey, Matt.

Question on expenses, your guidance for '05 is to keep expenses flat X the operating lease noise.

Does that also, however, include the SEC-related expenses and the Unizan expenses that you incurred this year in '04?

Are you asking if you factor those out, so you take them off the table, do we anticipate expenses will be flat?

Right.

Well, yes, I think I would say that's our target.

Let me just say that we believe we're getting more and more efficient, more and more productive all the time.

Nevertheless, we are continuing to invest in our distribution channels in technology.

We believe we're seeing payback there on the revenue side, but we're also incurring higher expense burdens as investments are amortized or depreciated, so there's that upward -- natural upward impact as there is in some of the benefit categories.

So, you know, when you X everything out, as you indicated, I would say flattish is our target.

Whether it's exactly there or not, we think it will be in the vicinity.

Okay.

Because if you assume -- this is back of the envelope -- I think you had in the third quarter 5.5 million of SEC stuff, almost 2 million at Unizan that quarter and then net basis this quarter you have about 10.5 million, so let's just say 17 or 18 million, that gets you to a core noninterest expense base X operating lease of about 8.55.

I guess it appears a little aggressive that you could keep it flattish even modestly up from 8.55 for this coming year.

I guess what are the plans in personnel, and what are some of the programs that you might be pursuing?

Matt, we do not have a game plan that we're announcing to take out X millions of dollars of expenses.

We try to focus on both numerator and denominator and the efficiency ratio, and we are most encouraged about what can happen to the denominator with a stable margin and continued asset growth.

We do believe that it's important for us to continue to invest, and so we're just -- we're not -- let me just say this.

We have NIE to revenue as a key component in our management bonus plans with aggressive targets required to achieve any payouts.

That's something we expect to really ensure that management attention remains in this area, but we aren't announcing any particular detailed programs at this point in time to take out a large amount of expense.

We think we're going to be helped by just continued really good attention to the details of expenses.

Okay.

And then just lastly, as a follow-up, I mean, you still expect regulatory expenses in '05 given that you still are about to enter a formal fed agreement.

I mean, so SEC-related expenses, although they may diminish and go away you're still going to have a pickup in the other?

If you're asking will there be a significant increase in our expense base as a result of efforts to address banking regulatory issues -- is that your question?

Correct.

We believe we have that well factored into our projections.

We're certainly working very hard to make sure the issues are addressed and yet I don't think they will impose a substantial expense burden on us.

Okay.

Fair enough.

Lastly, if I may, in auto loans, I think you said you had about 306 million of production, down 15 percent, but it looks like pricing there fell by about a little over 30 basis points.

Just curious as to what's going on there.

I know it's been very competitive, and I'm just curious as to what you guys are doing.

This is Tim.

We continue to operate in a very competitive environment.

We are looking to originate quality assets at a reasonable return, and I think our fourth quarter results reflect that.

So we remain comfortable with what we've originated.

It is difficult to compete, particularly with V captive.

Go ahead.

We're quite comfortable in seeing production go down if production can't be profitable production.

Thanks for your question.

Thanks.

Your next question comes from Todd Hagerman of Fox-Pitt.

Good afternoon, everybody.

Hi, Todd.

Tom, if I could just follow up a little bit on Matt's question, you addressed a little bit on the expense side of the equation.

Wondering if you could perhaps talk a little bit about in the context of your business plan for '05 and the influence that the regulatory matters are having on your business plan, how that -- how your plan may have changed, or is changing in '05, looking at it from the standpoint of maybe the competitive environment from your staffing viewpoint in terms of, you know, how it's affecting morale and that sort of thing.

Todd, thanks for the question.

I'm pleased to report that there has not been a negative impact on morale.

In fact, as I go around the Company and meet with Huntington associates, I think there is high energy, great enthusiasm.

People are focused, they're feeling positively about the Company and our prospects, and they simply have not been distracted from the mission of growing our businesses and serving customers well.

We have a number of people in the Company who are keenly focused on making sure we are addressing the regulatory concerns and getting better as a Company as a result, stronger, but those who are operating the businesses and focused on customers I think are continuing to do that, and we're just not experiencing any slowdown in the business as a result.

I believe we will emerge from this period of time a better Company, a stronger Company, having addressed the accounting and control and corporate governance issues satisfactorily but we don't expect to lose a step in our business.

We obviously are not in the mode where we're thinking about acquisitions, so we're focused on organic growth in which we had a lot of initiatives as you know underway, anyway, and some of the ratios are reflecting improvement there.

So change in the business I suppose would be not worrying about acquisitions in the near term, and just giving increasing focus on organic growth.

But you're not seeing necessarily a negative impact or effect in terms of, if you think about it, in terms of production, you've mentioned reinvestment particularly in the distribution channels, you don't see a negative influence, per se, say on new product introduction or any other kind of revenue generating, you know, aspect of the business model from these, you know, regulatory pressures?

Not as of this point in time, Todd.

We have always adopted a fairly measured approach, at least since I've been around here, to opening of new offices.

We expect to open new offices in '05.

It's not a large number, nor was it this past year.

But we expect to be able to do that and so, you know, we're just -- we don't anticipate a significant impact.

Great.

If I could just ask one follow-up to Don, could you just address, Don, just quickly in terms of the feeling on the FAS 123 adoption?

Have you just not yet made the decision in terms of the options expensing for '05?

And then secondarily, just thinking in terms of capital management, you guys haven't repurchased any shares for some time now.

You're well above your kind of target comfort zone, if you will.

What are your thoughts kind of going to '05 on the capital management front, and then on just in terms of the stock options expensing this year?

Great, Todd.

As far as the FAS 123 we're still reviewing our options.

If you look at the footnotes we've disclosed in prior years the impact is around $0.05 or $0.06 a share that we know that we will be adopting in 2005 but we just haven't determined what approach we will be using in connection with that adoption at this point in time so it's still under consideration.

Tom, did you want to address the capital issue?

Yes, we're well aware, Todd, of our growing tangible equity base.

As you might imagine it's not appropriate for us to be in the market repurchasing our stock as long as we're continuing to work with the SEC staff toward a resolution.

At such point in time as there is a resolution we would expect to consider our position, our strong capital position and take up the issue of share repurchase, but it's just premature at this point in time for us to be any more definitive than that.

But you're not suggesting that there's a specific restriction in place, per se?

Not that we're aware of, no.

Thank you.

Thank you.

Our next question comes from Chris Chouinard.

Good afternoon.

Hi, Chris.

Two quick questions.

First, I know you guys didn't sell any auto loans this quarter.

Was wondering if that was just a timing issue or if that was a deliberate decision and what is your thoughts on continuing to sell next year?

Yeah, this is Don, and Tim can also jump in here if he has any additional comments.

As you saw, our production for the fourth quarter was $306 million.

So we will tend to take a look at the production levels and the loans that we'd have available for sale and view those periodically throughout the year.

We'll probably be using some sales in the future just to maintain that exposure down to the 20 percent level or so, but that's essentially why we didn't have a sale in the fourth quarter.

And if I could follow up, the apartment buildings you guys have in OREO right now, where are those located?

If you can give us a little more color on, you know, why they weren't performing.

Is this a seasoned project or a new project, or people you've worked with before just some color around, you know, what was driving the performance there?

We do have other relationships with the borrower, and they just were not meeting expectations as far as lease upgrades and based on that, just trying to resolve this exposure that we did have we felt it was necessary to go ahead and take back in the equity interest in those partnerships.

Those in Ohio?

Tim?

Do you recall if they were --.

Yes, 2 of them are in Ohio.

They're in the Columbus area.

Thank you very much.

Our next question comes from David Hilder of Bear Stearns.

Thanks very much.

Just two sort of detailed follow-ups.

One on the stock option issue.

Is it -- are you considering a change to your compensation plans that might mitigate the impact that you've talked about in the footnotes to your prior financial statements?

David this is Tom.

As a result of FAS 123, we who have just used stock options in the past as the only form of equity compensation we've used, we'll be reconsidering, that is to say our compensation committee will be considering additional forms.

We may be in a situation where we use some restricted stock, performance shares, which we would anticipate would consume a lot less shares than we have in the past.

And it's all because we just simply in the past haven't wanted to take on the current period expense of other forms.

Now that all -- now that options will be expensed, that freezes up to consider about alternatives, and we expect to do that later this year.

Good.

That's actually quite helpful.

One minor follow-up.

On the apartment buildings that are in OREO, when do the -- when is the contemplated closing of the sale of those properties?

Both are in contract to close early in 2005.

One should be in mid-quarter, the first quarter.

The other is around the end of the first quarter, maybe going into the second quarter.

I can't remember the exact date there.

But that's likely to be cleaned up from the NPA account more or less at the end of the first quarter?

We fully expect that to be the case.

Whether it's exactly at the end of the first quarter, we're not necessarily in control of the specific timing, but it's going to be in that vicinity.

Thanks very much.

Thank you.

Once again, if you have a question, please press the 1 key on your touch-tone phone.

We'll pause one moment.

We have a follow-up question from Matthew Clark of Deutsche Bank.

Hey, one more time on expenses here.

You talk about becoming more efficient, more productive.

Can you maybe just give us some color as to where there might be excess or where you guys could become more productive?

Matt, the way I look at it is while there is always an opportunity to remove -- that is, extract costs from Huntington and from any other organization -- in other words, there's always a little fat -- I don't view Huntington's situation as having just a tremendous amount of fat that would be an indictment that we have been blind and not going after something that was staring us in the face.

What I do think we've had is a situation where as we've shifted to much lower risk assets, and as you saw during the first half of last year, our margin compressed a lot, the revenue side of the equation was under significant pressure.

And so we've looked a lot less efficient, largely because of that change to lower risk assets while we always felt we were better off from a risk weighted point of view, if you didn't factor in the risk weighting we looked less efficient.

I do think now that the revenue side is going to pick up, as I mentioned earlier, particularly without significant margin compression and a stable margin, and we're going to peck away to make sure that our expenses don't grow this year as our revenues are growing.

So that, to me, would reflect greater, more efficient use of the expenses we're making.

Fair enough.

Thank you.

Our next question comes from Bob Hughes of KBW.

Hi, good afternoon.

Two quick questions.

The first is, Tom, on the SEC-related expenses and accruals can you give us a breakdown on what those two are?

No, I can't, Bob.

It just wouldn't be appropriate to do that.

Suffice it to say without specificity about numbers this reflects things like estimates for civil money penalties and legal expenses associated with the whole process.

But no breakdown in terms of numbers.

Okay.

And do you think you're done with the accruals and we'll slowly see expenses until this is resolved?

The accruals you're mentioning would that be relative to civil money penalties?

Correct, yes.

We believe, based upon what we know today of our discussions with the SEC, that we're adequately reserved in that area.

Okay.

Great.

Just a follow-up, a quickie on the auto space.

It doesn't sound like Nick Spanos is on the phone today but I was just curious if anything has really changed in how you've managed that business.

Have you become more nimble in pricing loans these days?

Now, Bob, are you suggesting that we haven't been nimble in the past?

You wouldn't suggest that.

I think it might have even been suggested by Nick.

Oh, I see.

How is that managed?

Are you sending out monthly pricing sheets to dealers?

Is the pricing being done more on a daily basis as loans come in?

Can you give us some color there?

I would say that we're not in a mode where we simply are looking at pricing once a month.

We're looking at it much more regularly than that and changing prices as necessary in the middle of the month, sometimes our friendly competitors don't always do that, and that creates some challenges for us.

But we are regularly reviewing our pricing based upon funding costs and other parts of the dynamic.

So I'd say that's satisfactorily nimble.

Okay.

Thank you, guys.

Thank you.

Our final question comes from Heather Wolf of Merrill Lynch.

Hi, good afternoon.

Hi, Heather.

Can you just tell m e if you have included the $0.01 to $0.02 of accretion from Unizan in your 2005 forecast?

We have not included Unizan in the numbers now.

Great.

That was it.

Everything else has been asked.

Thank you Heather.

I'm not showing any further questions at this time.

I'd like to turn the program back to Mr. Gould.

Thank you, Patty, and thank you, everybody, for participating in our call.

If you have follow up questions please call Susan Stuart or myself, and we look forward to this call again next quarter.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone have a great day.