Huntington Bancshares Inc (HBAN) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Huntington Bancshares First Quarter Earnings Conference 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 zero on your touch-tone telephone.

As a reminder this conference is being recorded.

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

Mr. Gould, you may begin.

Thank you, Matt, and welcome everybody.

Copies of the slides we will be reviewing can be found on our Web site at Huntington.com, and this call, as usual, is being recorded and will be available as a rebroadcast starting around four o'clock this evening.

Please call the Investor Relations Department at 614- 480-5676 for more information on how to access these recordings for play back, 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 '95.

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 as well as material filed with the Securities and Exchange Commission, including our most recent Form 10(K), 10(Q) and 8(K) filings.

Let's begin.

Turning to slide two.

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 Nick Stanutz, Senior Executive Vice President and head of Dealer Sales, and Tim Barber, Senior Vice President of Credit Risk Management.

Slide three 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 basis of presentations.

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 the quarterly financial review supplement to today's earnings press release, which can also be found on our Web site.

Also, certain performance data we will review are shown on an annualized basis, and in the discussion of the 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’ve provided definitions and rationale for their usage on this slide.

Today's presentation is going to take about 25 minutes.

We want to get to your questions.

Let me turn it over to Tom.

Thank you Jay, and welcome everyone.

Thanks for joining us.

Turning to slide four, I'll begin with an update on the SEC formal investigation of the banking regulatory written agreements, followed by a review of significant first-quarter events and highlights.

As usual, Don will then review the quarter's financial performance.

I will wrap up the session with an update on our outlook for full-year 2005.

Turning to slide five.

At the outset, let me provide you with an update about the SEC formal investigation, especially in view of our announcement this morning of a proposed settlement.

We are at a very sensitive point in bringing this to resolution so I hope that you can appreciate that I will not be able to comment further about this during the Q-&-A session.

This slide recaps key events in the SEC formal investigation.

These should be familiar to many of you but are provided for some on the call who may be new to following Huntington.

Slide six details this morning's announcement.

Specifically we have proposed a settlement to the staff of the SEC regarding resolution of the formal investigation.

The staff has agreed to recommend a proposed settlement to the commission but it’s important to emphasize that the settlement remains subject to approval by the SEC.

The proposed settlement involves, first, a $7.5 million civil money penalty paid by the Company.

Second, an entry ordering Huntington former Vice Chairman and CFO, Mike McMennamin, former Controller John Van Fleet, and me to comply with various provisions of the Securities Exchange Act of 1934 and Securities Act of 1933.

Third, the return of a portion of my 2002 annual bonus, specifically $360,000, and a return of previously-paid bonuses including accrued interest for McMennamin and Van Fleet, of $265,215 and $26,660, respectively.

Fourth, civil money penalties for McMennamin, Van Fleet, and me of $75,000, $25,000, and $50,000 respectively, and, fifth, the imposition of certain other relief with respect to McMennamin and Van Fleet.

This settlement as proposed would have no current-period financial impact on the Company's results as a reserve to pay the $7.5 million civil money penalty was established and expensed last year.

While no assurances can be made, as this proposed settlement remains subject to approval by the SEC, we are hopeful that this will bring this matter to resolution.

As noted on slide seven, on March 1st, we announced that we had entered into formal written agreements with the Federal Reserve and the Office of the Comptroller of the Currency.

You will recall that last November we announced our expectation of such formal written agreements.

We are confident that we are on the right path to address fully and comprehensively all of their concerns in a timely manner.

We also believe that the changes we have made and are in the process of making are positive for our organization and will position us to be a stronger company in the future.

Further, I want to reaffirm our continued interest in the Unizan transaction and it remains our intention to resubmit our application once we have fully satisfied the requirements of our regulatory written agreements.

However, we can provide no assurance as to the ultimate timing or outcome of these matters or the Unizan transaction.

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

Slide eight reviews key financial performance highlights of the quarter.

Earnings were $0.41 per common share.

This was slightly below our expectation, but we feel there was sufficient momentum in key performance drivers that we are comfortable reaffirming our earlier earnings per share guidance for full-year 2005.

Our ability to grow loans continue to be evident.

Average total loans and leases grew at a 14% annualized rate, down only slightly from a 15% annualized rate in the 2004 fourth quarter.

This growth was led by a strong 14% annualized growth rate in total commercial loans, led by growth in all three commercial categories: middle market C&I at 18%, middle market commercial real estate at 11%, and small business loans at 9%.

Growth in total consumer loans, at a 15% annualized rate, was also strong, led by growth in residential mortgages at 24%, auto loans and leases at 16%, and home equity loans at 7%.

The growth in middle market C&I was particularly encouraging in evidence of some economic strengthening though not robust.

Utilization rates increased slightly.

Average core deposits grew at a 3% annualized rate and were 10% higher than a year ago.

This slower linked-quarter growth reflected the typical first-quarter seasonal slow down for us.

Despite seasonal factors our annualized linked-quarter growth was a positive 3% which compares very favorably to the 2% annualized decline in the comparable year-ago period.

This good performance as well as continued growth in the number of retail DDA households and small business relationships, was a reflection of continued success in our sales efforts.

Our net interest margin was 3.31%.

This was down from the 3.38% fourth-quarter margin.

But as we noted in last quarter's call, the fourth-quarter margin was favorably impacted by six basis points related to a one-time funding cost adjustment for a securitization structure consolidated in that quarter.

So, from our perspective our margin was relatively stable and consistent with our expectations.

We believe the net interest margin will improve modestly from this level throughout the rest of the year.

This is important as it will permit more of the positive impact of loan growth to be reflected in growth in net interest income, a key to our ability to grow revenue and earnings over the coming quarters.

Overall fee income growth was a disappointment, particularly the linked-quarter decline in service charge income though that seems to be consistent with general industry trends.

Conversely, we were pleased with overall expense levels and performance.

C&I net charge-off performance was disappointing, due to the charge-off of one large individual credit.

Nevertheless other credit quality performance was strong.

Net charge-offs were 47 basis points, of which 24 basis points related to one C&I loan to a commercial leasing company.

In spite of this quarter's higher net charge-off level, we remain confident that total net charge-offs this year will remain near the lower end of our long-term targeted range of 35 to 45 basis points for a stable economic environment.

Other credit metrics were strong.

Nonperforming assets declined as expected as we completed the sale of the $35.7 million OREO assets which were added last quarter.

Our NPA ratio at quarter end was only 30 basis points, the lowest in many, many quarters.

Our loan loss reserve ratio declined to 1.09%, reflecting lower required economic reserves, due to an improved economic outlook as well as a decline in a specific reserve component due to utilization of a specific reserve related to the one charged-off commercial leasing company credit.

But our NPA and NPL coverage ratios increased and remain among the highest in our peer group.

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

In sum, we feel good about this quarter’s loan and deposit growth, our stable and net interest margin, and expense performance.

But we were disappointed with weak fee revenue and a significant C&I charge-off.

However, we made sufficient progress in a number of key performance measures to give us confidence in reaffirming our earnings guidance.

We are optimistic about our prospects for the rest of the year.

Slide nine provides some other highlights.

First, we recently announced the signing of an agreement to install 99 ATMs this year at Walgreen stores across Ohio.

In addition, we announced plans to upgrade or replace over 400, well over half, of our existing ATMs this year.

This brings more convenience to our customers and supports our objective of providing "simply the best” service.

We also made some important management appointments.

First, Melinda Ackerman joined the team as Executive Vice President and Human Resources Director.

She was formerly Head of Human Resources at Columbus-based America Electric Power, where she had worked for 30 years.

Second, we hired Mahesh Sankaran as EVP and Treasurer.

He had formerly been with Compass Bancshares and has 20 years of banking experience.

Both Melinda and Mahesh are members of the Management Committee and report directly to me.

We also appointed Jerry Kelsheimer as President of our Northern Ohio region, where he had previously served as EVP and Commercial Manager for that region.

He brings over 17 years of banking experience to this position.

I am excited to have all of these executives on our team.

Lastly, concurrent with our announcement this morning of a proposed settlement with the SEC, we announced the reactivation of our share repurchase program subject to approval of the proposed settlement by the Commission.

As you will recall, the Board has authorized the repurchase of 7.5 million common shares.

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

Don?

Thanks, Tom.

As shown on slide 11, reported or GAAP net income, was $96.5 million or $0.41 a share.

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

First, a $6.4 million after tax positive impact on net income reflecting the recognition of the effect of Federal Income Tax refunds on income tax expense.

These refunds resulted from the ability to carry back federal tax losses to prior years.

This benefited first quarter earnings by $0.03.

The lower effective tax rate in the first quarter is expected to impact each quarter of 2005.

In 2006 the effective tax rate is anticipated to increase to a more reasonable -- excuse me, more typical rate, slightly below 30%.

Second, as Tom noted, we had a single $14.2 million middle-market commercial loan charge-off that resulted in an unfavorable $6.4 million pretax impact as a provision for loan losses.

This is net of $7.8 million of allocated reserves.

This negatively impacted the quarter's results by $0.02 a share.

And third, $2 million worth of pretax unfavorable impact from SEC and regulatory-related expenses.

Slide 12 is our usual highlights page.

Tom hit on some of these items, but there are a couple of things I want to point out as much of this will be covered in detail in a few moments.

First, our efficiency ratio, as reported, was 63.7%.

We estimate that operating lease accounting, SEC, and regulatory-related expenses, and other items, added between four and five percentage points to this reported ratio.

Reducing our efficiency ratio remains a key objective, for we estimate that for every one percentage point reduction adds about $0.04 to $0.07 to annual earnings per share.

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

The quarter-end ratio was 7.92%, 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.

This morning we announced the intention to reactivate our share repurchase program upon approval by the Commission of the proposed settlement of the formal investigation.

At March 31, 2005 we had unused authority to repurchase up to 7.5 million shares or just over 3% of our 232 million shares, under an April 27, 2004 share repurchase authorization.

We expect to repurchase these shares from time to time in the open market or through privately negotiated transactions, depending upon market conditions.

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

Slide 13 shows that net interest income on a fully tax-equivalent basis increased 5% from the year-ago quarter.

Reflecting seasonal factors, net interest income was essentially flat with that in the fourth quarter after excluding a $3.7 million impact of the one-time funding cost adjustment we mentioned the last quarter.

Last quarter, we noted our expectation that our net interest margin would remain relatively stable around the fourth quarter's level of 3.32%, after adjusting for that one-time positive funding adjustment impact.

As shown on the right-hand side of the graph, this happened, as our reported net-interest margin was 3.31%, down only one basis point.

During the quarter, we carried a higher-than-normal level of liquid assets in order to assure adequate liquidity to meet significant, first-quarter wholesale liability maturities.

The additional liquidity increased short term assets by about $345 million, and lowered net interest income by 400,000, resulting in a reduction to the net interest margin by about five basis points.

We do not intend to carry these excess liquid assets through the rest of this year since wholesale liability maturities are not as significant.

We now believe that our net interest margin will improve modestly in the coming quarters.

Slide 14 details our growth in average loans and leases, which Tom talked about.

Total average loans and leases increased an annualized 14% during the quarter to $23.9 billion.

This follows 15% annualized growth in the fourth quarter.

Reported average middle market C&I balances increased at an 18% annualized rate, following a 19% growth rate last quarter.

And average middle market commercial real estate loans increased at an average 11% annualized rate.

Small business C&I and CRE loans made through our retail delivery channels, grew at a 9% annualized rate, still strong though a bit lower than the 11% annualized rate in the prior quarter.

Auto loans increased at a 20% annualized rate, as no loans were sold during the quarter.

Auto loan production in the quarter was 45% below a year ago's quarter production level, but 20% higher than in the fourth quarter.

Auto direct financing leases averaged $2.5 billion, a 12% annualized growth rate.

Though auto lease production was off 29% from the fourth quarter.

Competition in the auto sector remains aggressive and sales are down, but we continue to generate high quality production with resulting good growth in loans.

At March 31, our total exposure to automobile loans and leases was 20%, a target we set at the end of 2003.

Operating lease assets classified as non-earning assets and listed near the bottom of this table continued to run off and were down to $500 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 lease and operating lease portfolios are combined, the total lease portfolio is down 5% from a year ago.

There are slides in the Appendix with additional auto loan production and related statistics for those of you desiring more detail.

Home equity loans and lines grew at 7% annualized rate, down from a 14% annualized rate last quarter.

Like other banks with interest rate levels increasing, we have experienced customers moving toward fixed rate loans and away from variable rate home equity loans, which is our primary product offering.

We expect home equity loan growth rates will be closer to a middle single-digit growth rate for the rest of the year, as higher interest rates continue to slow demand.

Further, we continue to originate high quality loans, and will not sacrifice quality or accept higher risk for growth.

Residential mortgages, primarily adjustable rate mortgages continued their growth, albeit slower growth.

Compared to the fourth quarter, average residential mortgages increased 24% on an annualized basis, comparable to the growth rate in the fourth quarter.

But reflecting an overall slow down, the current quarter's growth rate was about half that of a year-over-year comparison.

Slide 15 is another look at loan growth, only by business segment.

Here the key message is that our loan growth is broad-based, with four of our seven regions experiencing double-digit annualized growth rates this past quarter, and five regions showing double-digit loan growth from the year-over -- year-ago quarter.

The decline in year-over-year growth in dealer sales reflected the impact of auto loan sales.

Slide 16 shows that average total core deposits increased an annualized 3% from the prior quarter, and were up 10% from the year-ago quarter.

Linked-quarter growth and interest-bearing demand remained strong at 14% annualized rate with commercial money market accounts the primary contributor.

Typical seasonal declines in commercial demand deposits drove the decline in demand accounts from the fourth quarter.

In contrast personal demand accounts increased at a 24% annualized rate.

Total demand account balances were 10% higher than a year ago.

Slide 17 shows deposit trends, only by business segment.

As was the case for loans, total deposit growth was geographically broad-based.

Despite negative seasonal influences, three regions showed strong double-digit growth.

Comparisons with the year-ago quarter, which eliminate seasonal influences, show that five of our seven regions posted double-digit deposit growth.

The large-linked quarter, and year-over-year quarter growth rates, and the treasury other, reflected growth in timed deposits over $100,000 and brokered timed deposits.

A contributing factor in our ability to grow deposits has been our improving sales and service culture.

Slide 18 shows that we are continuing to grow demand deposit account relationships for both consumer household and small business relationships.

A key point here is that the momentum begun last year is continuing.

We can still do better, but this is a marked improvement over prior years where relationships were little changed.

Slide 19 shows similar improvements in our 90-day cross-sell ratios for consumers and small businesses, which improved 23% and 12% respectively from the year-ago quarter.

Slide 20 reviews trends in non-interest income.

Total non-interest income declined $14.9 million or 8% from the prior quarter.

Operating lease income accounted for 28% of non-interest income, down from 30% in the fourth quarter, and from 39% in the year-ago quarter.

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

Excluding operating lease income, total non-interest income decreased $6.5 million from the fourth quarter.

The main drivers of this decrease were: $6.5 million decrease in other income, primarily reflecting lower equity investment gains and investment banking income, as well as MSR-related trading losses in the current quarter; $2.3 million decline in service charges on deposit accounts, primarily reflecting seasonally-lower personal NSF and overdraft service charges; and a $1.1 million decline in investment securities gains.

These declines were partially offset by $3.2 million increase in mortgage banking income, reflecting a $3.8 million MSR temporary impairment recovery.

The combined net impact of changes in MSR temporary valuations, and an MSR hedge-related trading or investment securities activities, was not meaningful again this quarter, as this temporary impairment recovery was almost mostly offset by $3.3 million of MSR-related trading losses.

Mortgage originations totaled $800 million down from $900 million in the prior quarter.

Please refer to the Appendix for additional mortgage banking information.

We've added slide 21 to our review this quarter to highlight some encouraging underlying trends in two fee income line items: trust income and brokerage and insurance revenue.

Trust income performance has been very good, with trust fees up 5% from the prior quarter and 11% from a year ago.

As shown on the graph on the right-hand side of this slide, this growth has been steady, with the current quarter representing the sixth, consecutive, quarterly increase in trust income.

This has been supported by a 9% increase in managed assets compared with the year-ago quarter.

Brokerage and insurance revenue has been a challenge with the retail investment sales component decreasing in recent quarters, and insurance revenue flat to down slightly.

Retail investment sales revenue was down 18% from the year-ago quarter.

Importantly though, and the reason for this slide, is that we saw this trend reverse in the first quarter, where retail investment sales revenue increased 11% from the fourth quarter.

This reflected among other factors a 25% increase in mutual fund revenue and a 19% increase in annuity sales revenue.

This change in direction encourages us regarding expectations for continued growth in retail investment sales revenue in the coming quarters.

Insurance revenue is not expected to change direction soon, but it is worth pointing out that the 21% decline from fourth quarter, was due to seasonally strong fourth quarter insurance billing.

Slide 22 details trends in non-interest expense.

Total non-interest expense decreased $22.7 million, or 8% from the prior quarter.

Non-interest expense trends were also heavily influenced by trends in operating lease expense, which accounted for 15% of the quarter's expenses, down from 17% in the prior quarter, and 25% in the year-ago quarter.

Excluding operating lease expense, which will continue to decline, along with operating leases, non-interest expense decreased $12.4 million from the prior quarter.

This was due primarily to an $8.1 million decline in other expense and a $6.8 million decline in net occupancy expense.

You will recall that fourth quarter included a $7.8 million property lease impairment and write down on vacated facilities.

Also impacting expenses as well as comparisons to prior quarters, were SEC and regulatory-related expenses and accruals.

Such expenses totaled $2 million this quarter, with that reflected in the Professional Service category.

In the 2004 fourth quarter, such expenses and accruals totaled $6.5 million of which $5.5 million represented SEC-related accruals reflected in other expense.

Compared with the year-ago quarter, non-interest expense declined 10% or increased 3% without operating lease expense.

Beginning with slide 23, let me review some of the recent credit trend highlights.

This will be brief as first-quarter credit quality performance, with the exception of one C&I charge-off, can be summed up as stable.

A $14.2 million charge-off on one commercial loan, which accounted for all of the 120 basis points middle market C&I net charge-off ratio, and 24 basis points for the total 47 basis points, total net charge-off ratio.

While this single credit had a large impact on the quarter's net charge-off performance, our outlook for the year remains unchanged.

We still anticipate total net charge-offs for the year will be in the 32 to 38 basis point range, which is the lower end of our 35 to 45 basis point range, assuming a stable economic environment.

Slide 24 shows the trend in NPAs, and highlights the second point I want to make regarding this quarter's credit quality performance.

As you can see, NPAs as a percentage of total loans and leases and other real estate, ended the quarter at 30 basis points, down from 46 basis points at year end.

As we noted last quarter, at year end, we had $35.7 million of OREO that we expected to sell early this year.

We are pleased to report that the sale did occur and has accounted for the decline.

At 30 basis points, our NPA ratio is as low as it's been in quite some time.

Importantly it's expected to remain fairly stable around this level for the rest of this year.

It is also worth noting that the lower-risk asset, residential real estate, represented 41% of our NPA, giving us increased confidence that our net charge-offs for the coming quarters will remain contained.

Slide 25 recaps the trend in loan loss reserve, which as previously noted, declined to 109 basis points of loans and leases, compared with 115 basis points at the end of the prior quarter.

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

It is presented to help you understand exactly drives our loan-loss reserve level, specifically to see what drove this quarter's six basis-point decline.

The primary driver was a five basis-point decline in economic reserve, reflecting improved consumer confidence, as well as economic outlook, partially offset by decline in the U.S. profit outlook.

The specific reserve declined four basis points, almost entirely related to the specific reserves associated with the charged-off $14.2 million middle-market C&I loan.

The fact that our specific reserve is down to only one basis point is consistent with the various low level of NDAs.

For additional insight on the changes in the allowance for credit losses, I refer you to the related slides in the Appendix.

We feel very good about the level of loan-loss reserves and our expectation is our loan-loss reserve ratio will remain around this 109 basis point level for the rest of this year.

As demonstrated again this quarter, it is very important for our investors to understand our reserve methodology, which we began using last year, will be more responsive to changes in the portfolio mix, changes in our economic environment, and changes in individual credit situations.

It also bears repeating, especially in light of some of the analyst comments we have read discussing first-quarter performance for other banks, that within this highly-quantitative construct of this methodology, the conventional notion that provision expense is somehow understated, it does not cover net charge-offs, is not a valid conclusion.

With this methodology, if credit quality trends improve significantly, and/or specific reserves are reduced through charge-offs or improved credit quality, provision expense could be less than the period’s net charge-off, which is what happened this quarter.

Turning to slide 26.

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

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

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

On this basis our period-end reserve ratio was 1.09%, and our NPA-coverage ratio increased to 361%.

Our period-ending NPL coverage ratio increased to 441%, which we consider to be very strong.

The second set of ratios compares the combined allowance for credit losses to period-end loans and leases and NPAs.

On this basis, our period-end reserve ratio was 1.22% with a 404% NPA coverage ratio, and a 494% NPL coverage ratio.

We believe these ratios, including the allowance for unfunded loan commitments, are more comparable to what most of what our peers report.

My last slide is number 27.

You will notice that our tangible-equity-to-asset ratio, as of March 31, was 7.42%, up 24 basis points from the end of the year, and well above our 6.5% to 6.75% targeted level.

The more telling capital ratio trend, at least from our perspective, has been our tangible equity to risk-weighted assets, which is now approaching 8%.

This completes the financial review for the quarter and let me turn the presentation back over to Tom for comments on our 2005 outlook.

Thanks, Don.

As shown on slide 29, today we are reaffirming 2005 earnings guidance of $1.78 to $1.83 per share.

Our current expectation is for earnings to increase sequentially over the next three quarters.

It is our practice to provide earnings -- earnings guidance on a GAAP basis, unless otherwise noted.

Our earnings guidance includes the expected results of all significant forecasted activities, but typically excludes unusual or one-time items until such time as the full impact becomes known.

This guidance excludes any impact from future SEC-related expenses, as well as any share repurchases.

It also excludes any impact from the implementation of FAS 123R, accounting for stock options.

In our 2004 10-K we noted we had adopted FAS 123R effective in January.

However, in the 2005 first quarter, new guidance was issued by the SEC that provides the option to postpone adoption of FAS 123R until January 1 of 2006.

As such, we have postponed adoption until next year.

In addition, we have departed slightly from providing strictly GAAP-based guidance, in that our guidance excludes any future benefit from the federal tax loss carry back impact noted earlier.

This is because this impacts only 2005 performance, and because offsetting impacts may occur later in the year from possible balance sheet restructuring and/or expense initiatives currently under review.

With those facts in mind, we believe our earnings expectation will reflect good full-year revenue growth excluding operating lease income and any loan sale gains, a modest improvement in the net interest margin from the first quarter's 3.31% level, strong loan growth, a decline in average investment securities from current levels, good to strong deposit growth, flat full-year expenses with last year's level, after excluding operating lease expense for both years, and continued credit stability.

This completes our prepared remarks.

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

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

Operator?

[Operator instructions] Our first question comes from Heather Wolf, of Merrill Lynch.

Your question?

Hi.

Good afternoon.

Hi Heather.

I just wanted to follow up on your forecast for a flat margin.

First of all, if I heard in your comments correctly, you indicated that you had a five basis point sequential improvement, or sequential detraction from higher liquidity levels.

Is that right?

That's correct.

Yes.

Okay.

So then does that imply that you have essentially five basis points or six basis points of core expansion, right?

Five basis points of core expansion?

I don't --

You're flat quarter-over-quarter.

You have five --

That's correct.

That's correct.

Yes.

Okay.

And so your assumptions for margin improvement going forward, does that assume that that five basis point higher run rate is sustainable?

Our forecast would suggest that that would be part of the reason for the increased margin that we are including in our outlook, yes.

Okay.

And can you just talk in light of that about deposit pricing pressures and your expectations for deposit pricing going forward?

Heather, this is Tom.

Since I read in every other -- the report on every other Midwest bank's first quarter earnings that everybody thinks there's intense deposit pricing pressures, I guess I have to add the same.

There's no question that there is intense competition, pricing competition, in our markets.

And as of this point it doesn't show any signs of abating.

On the other hand, as we've said in the past, we believe we are a little bit less reliant on just pricing than Huntington was in years past.

It doesn't mean we can ignore pricing, but we think our sales efforts are tempering our reliance a little bit.

Typically we do not find ourselves at the top of, offering the top prices on most of our deposit products in most markets.

We would think of ourselves as being a little bit more aggressive on money market savings type rates than we are in certain categories, certain other categories.

But again as we think of ourselves and as we price all the time or shop all the time in the markets we don't believe that we are having to match the top prices in order to grow deposits.

Okay, and then just one other question on the expenses.

You indicated flat expenses for this year.

Can you talk a little bit about the investment required for the ATM expansion and what kind of impact that will have on expenses for the year?

The incremental cost there is fairly insignificant; that many of the ATMs we are using to deploy throughout that project were actually being redeployed from other purposes.

The incremental cost this year should be fairly insignificant.

Okay.

Thank you very much.

Our next question is from Todd Hagerman of Fox-Pitt Kelton.

Your question please?

Good afternoon, everybody.

Hi, Todd.

Don and Tom, if you could maybe -- I'm interested to hear a little bit more in terms of, Tom you mentioned in your guidance, the potential out there for additional balance sheet restructurings if you will, or additional expense initiatives, I'm wondering if you could just talk a little bit more about that in terms of what we may expect or some of the things you are contemplating, particularly on the funding side of the balance sheet?

I don't think that you are going to pick up a paper and see where there's been a significant restructuring or any significant accruals associated with any expense initiatives.

What we are looking at here are just ways that we could consider -- or activities we could consider -- that would offset some of the positive impact we would expect from the tax benefit going forward from the carry back of these tax losses.

Some of the things that we have talked about would be some accruals associated with any type of restructuring that we might have in the balance sheet if it were investment portfolio related which might be minor or if there were any additional costs associated with any expense reduction programs there might be even though we don't believe they would be significant or holistic.

The other thing that we would possibly consider that we had in our 2004 10(K) was that we are reviewing the possibility of repatriating earnings that may result in an additional cost for us if we would go forward with that that.

But we have not made a decision there, it's still our plan to continue to reinvest the funds that we have in connection with the securitization structure that we have.

But at this point that's one of the things that we would be considering as well.

I'm sorry, you said repatriating some of the earnings from a securitization?

I'm not sure I follow you there.

It's in our 2004 10(K).

We talked about that we had $90 million worth of earnings that we have not provided deferred taxes on that may be available for a repatriation that could result in additional taxes of $5 million to $6 million.

And that's one of the things that we are considering doing is repatriating those earnings back and incurring the additional taxes associated with those.

Okay.

Then if you could, Don, maybe just a little bit more color in terms of with the excess liquidity this quarter, and the wholesale borrowings, specifically.

I notice the borrowings came down in the quarter, balance sheet came down a little bit, and then I'm assuming with your guidance and the acceleration in earnings that the expectation is the bond portfolio will increase over the coming quarters and I'm assuming maybe the wholesale side of the balance sheet -- where are we going to go with that?

I wouldn't project significant increases to either the investment portfolio or to the wholesale funding side.

But we've seen that the balance sheet has come down as of the end of the quarter and we would expect the level to be around that general range for the rest of the year as far as the investment portfolio.

And what about in terms of your borrowings?

I notice as you mentioned your other timed deposits and brokered CDs and so forth that that increased fairly materially linked quarter as your borrowings went down--

That is correct.

Is that something that is going to switch in the coming quarters again?

It depends on how the market rates are pricing, are going at that time, that we felt that it was more cost-effective for us to issue some of the larger CDs and broker deposits as opposed to other long-term borrowings; that we'll continue to evaluate that in future quarters.

Very good, thank you.

Thank you.

Our next question is from Andrea Jao of Lehman Brothers.

Your question?

Good afternoon, gentlemen.

Hi Andrea.

The first question I have is could you give us a bit more detail on deposit pricing at this point in time compared to fourth quarter -- I mean first quarter?

Just wanted to get a sense of how much the increase has been in 2Q?

Are you asking, Andrea, on April 25, how does deposit pricing compare to that in the first quarter?

Is that what you are asking?

Yes, if you have some indications set for April.

I think that -- I wouldn't say there's been a material change in deposit pricing over the first few weeks of this month versus the -- I'm sorry -- the first quarter.

As I said earlier pricing is intense.

I think there is somewhat heightened interest on the part of consumers for CDs than there had been in the past.

And one of the reasons why we and other banks were a bit more cautious on retail CDs in prior years was because of very, very, low rates.

There just wasn't any consumer interest out there.

I think that's turned around with the increase in rates, and so I think there's a little bit more competition to gather the money that consumers would prefer to invest in CDs.

But I don't know that things like interest rates on DDA or money market savings have changed significantly over the last few weeks.

Great.

Follow-up question.

If I use the first quarter, an EPS run rate of let's say $0.41, $0.42, condition of only modest margin expansion, your investment portfolio is flattish, loan growth similar to the first quarter, and share repurchases aren't included in your guidance, what would you say the biggest driver would be for continued increases in EPS over the coming quarters?

Andrea, this is Don and I would say--

Hi.

-- that you’ve hit on part of it with the modest expansion in the margin.

We would expect our balance sheet to continue to grow.

We've shown earning assets to grow at an 8% annualized rate over the last four quarters and that's even with having loan sales in the first half of last year.

And so I think we've demonstrated the ability to continue to grow our balance sheet.

So, I think margin growth will be a strong contributor for us.

The other thing that we think will come back for us as well is our fee income growth especially after backing out the impact of the operating leases.

We think on a linked-quarter basis going off the first quarter should show some nice improvement given that first quarter typically is seasonally lower, especially in some of the deposit service charge categories, than what we would expect for the rest of the year.

So we would think we would see some nice growth there as well.

With that being said, we expect our expenses to stay in line and stay flat with current levels and therefore provide some earnings leverage for us.

Great.

Thank you.

Thank you.

Our next question is from Bob Hughes of KBW.

Your question, please?

Hi guys.

Couple questions.

Operating income and lease expense, I know that we are stripping those out.

I'm looking at a lot of core trends.

Perhaps you can give us a sense for what kind of run off you would expect to see in both those categories this year?

We expect those to continue at a similar type of run off level that we have had for the last several quarters which would imply that they would be decreasing, I believe, by about $7 million or $8 million a quarter both in the operating income and operating expense categories.

Bob, this is Tom.

At the end of '05 we expect there to be just a small balance remaining on operating leases.

Okay.

Great.

I know that your guidance, or reaffirmation of guidance does not necessarily include the future benefit of any tax related benefits, I guess.

Am I understanding that correctly?

That is correct, it does not include any benefit from these tax loss carry backs that we recognized in the first quarter.

We would expect that to continue for the next three quarters.

And assuming those continue for the next three quarters and we don't have any offsetting actions, what would be your best guess for an effective tax rate going forward for this year before normalizing to kind of closer to 30%?

I'm sorry, you want the normalized number or with the tax loss benefit?

With the tax loss benefit.

We're right around the 23% which is pretty consistent with what we showed in the first quarter of 22.8%.

Okay.

Okay.

Final question, Tom, perhaps for you, I sense some optimism in talking about credit, certainly credit metrics look great and you had made some adjustments to your economic reserve as well, too.

Could you give us some commentary on the Midwest economy?

What's got you a little more bullish and then how does the auto industry potentially impact that going forward?

Bob, let me, I suppose, start with the negative.

In Southeast Michigan and Northeast Ohio there's no question that we feel the weakness in the auto sector.

Our customers in that sector are largely auto suppliers so we are not, our loan portfolio growth, our commercial, our C&I growth in those areas is not significant.

However, our other regions are not so dominated by that industry, and generally what we are seeing is a greater tone of optimism.

We are not seeing robust growth but we are seeing a customer base an existing customer base that feels a little bit more positive, using their lines more, deciding to go ahead with equipment purchases, that they've been deferring for in some cases, many years.

And we are seeing greater and greater success in new client attraction and cultivation.

We measure something called the “Ideal Huntington Client."

This has certain parameters that we’ve defined internally.

And we've added -- we keep adding nice growth in a number of new middle-market clients that fit those parameters.

So our growth is a reflection of both added demand by existing customers, and the ability to acquire new customers.

But -- so, economy is okay on balance, not roaring.

But in some markets not Southeast Michigan or Northeast Ohio, we are seeing some growth.

Okay.

And then one final question.

Can you just give us an update maybe on where you stand with respect to exposure to auto suppliers, for example, and where that stands today versus maybe a year ago?

I am going to ask Tim Barber of our credit risk management area to respond to you, Bob.

Sure.

We've gone through a pretty exhaustive analysis of the entire portfolio.

About -- or under 5% of total loans and leases is related really at all to the auto industry.

And that includes all of our dealer-related exercising or entities as well.

That's for planning and early exposure to suppliers?

Right.

Exactly.

Bob, over half of that exposure is to dealer floor plan loans so it would have a much different risk characteristic to it than, say, to an auto manufacturer or supplier.

Sure.

Sure.

Okay.

Thank you, guys.

Thank you.

Our next question is from Matt O'Connor of UBS.

Your question, please.

Good afternoon.

Hi, Matt.

Can you give us a sense of how you think reserves are going to play out the rest of the year.

Loan growth is picking up here and credit spreads in general are starting to widen out a little bit.

So do you think you will start building reserves going forward?

We think that our allowance ratio will remain somewhere around the 109 level for the rest of the year.

At least that's what our forecast would assume.

That as our methodology is much more quantitative to the extent that there are changes in the economy, we could see changes in that ratio as well going forward, but that's our expectation at this point in time.

Okay.

So assuming loan growth that would imply a little bit of build from here?

Assuming loan growth, it does assume that we have provision for loan growth going forward, that's correct.

Okay.

How much flexibility is there on some of this commercial loans that are being added that when credit spreads do start to widen that those can be repriced?

I'm sorry, could you ask that again?

I apologize.

Just generally speaking, a lot of the C&I loans that are being added now are at a very thin spread.

I think that when credit spreads starts to widen there's some flexibility to reprice them.

Matt, our -- this is Tom -- our bread and butter, if you will, is not to larger companies.

It's to middle-sized or smaller companies, and I don't want you to think that we think the margins are wide but I think they are a bit more attractive than they are to large companies and off the top of my head I'm not sure how to respond to you on your question with regard to the opportunity to widen spreads.

Okay.

And then last question, if I may.

Your capital levels have obviously been building quite a bit the last couple of years.

How quickly do you think you will be bringing them down to your targeted level?

I don't know that we have a planned time frame for that to come down.

But even if would you look at the full 7.5 million share repurchase authorization; even if that was executed it still would not bring us down into that 6.5 to 6.75 range.

So I think we have some time to manage through that.

We will continue to evaluate what is the appropriate level of capital for us.

But it would take some time for to us get down to that 6.5% range.

Okay.

And then just assuming the SEC settlement goes through relatively quickly here is there a certain period of time you have to wait to buy back stock or--?

I think we just would be prudent in that but I don't know that there's any specific time frames or commitments that we would have or restrictions we would have as far as re-entering into the share repurchase program.

Matt, we want there to be a little bit of time passed so the investor community can fully understand the announcement by the SEC and we don't want to be in the market trading any earlier than we ought to be.

But we’d move forthwith, so I don't know the exact number of days but it wouldn’t be very long after an announcement where we decide to be back in the market.

Okay.

Thank you.

Thank you.

Our next question is from Chris Chouinard of Morgan Stanley.

Your question, please?

Hi.

Good morning.

Or good afternoon, I guess.

I just had two quick clarifications.

First was this $345 million of liquidity you guys mentioned we should be expecting to come down in the second quarter.

I was just wondering where that is in your balance sheet?

Because it looks like there was already a decline in fed funds sold sequentially in the first quarter, relative to the fourth.

Is that the area where you are holding this?

Well, the majority of it is and it's a fed funds sold position and the reason for the decline from the fourth quarter really was related to the customer share, or customer repurchase agreements as opposed to the fed funds sold position.

Okay.

So within the changes in the quarter there was, I guess, a larger decline and then an increase?

That's correct, yes.

Okay.

And secondly was just on the guidance.

I just wanted to be clear that we should, your current guidance does not include any benefits from the tax loss carry forwards but it does include this quarter's?

That's correct, yes.

So, this quarter we include it; for the other, for future quarters, we don't.

That's correct.

Got it.

All right.

Thank you.

Thank you, Chris.

Once again ladies and gentlemen if you have a question please press the one key on your touch tone telephone.

Our next question is from Heather Wolf of Merrill Lynch.

Your question.

Hi, again.

Can you refresh our memory of what the Unizan transaction will do to your tangible common equity ratios?

Heather, this is Don, and the impact would be less than 30 basis point reduction to the tangible capital ratio.

Okay.

We had said earlier, Heather, that we would expect to buy back, I think, 2.5 million shares of our stock in association with any acquisition.

Okay and there is nothing precluding you from getting -- once the SEC investigation is completed -- getting further authorization?

Further repurchase authorization from the Board?

Yes.

There wouldn't be anything to preclude that to our knowledge.

We don't anticipate doing that.

We anticipate at this point in time just executing under the existing authorization.

Okay.

Thank you.

Gentlemen, at this time it appears we have no further questions.

Okay.

This is Jay Gould.

I want to thank everybody for participating in the call this quarter and we will chat with you again three months from now.

Thank you.

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

This concludes the program.

You may now disconnect.

Good day.