Huntington Bancshares Inc (HBAN) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Huntington Bancshares second-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. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. Now it is my pleasure to announce your moderator for today's program, Mr. Jay Gould.

Thank you, operator, and welcome again everybody. We appreciate you dialing back this afternoon to continue this conference call, and we apologize for the interruption we had earlier this afternoon. Everyone from the earlier call is present and will be available for Q&A, including Tom Hoaglin our CEO, Don Kimble our CFO, Nick Stanutz from Dealer Sales and Tim Barber from Credit Risk Management. In the interest of time we will begin with Mr. Kimble's remarks and slide number 8. You will recall Mr. Hoaglin had completed his highlight remarks, which will be available on the replay for anybody on this call who was not on the earlier call, Mr. Kimble's remarks detailed the points made by Mr. Hoaglin so even if you did not participate in the earlier interrupted call you are getting the same information.

While I will dispense with most of my introductory remarks I am obligated to repeat our forward-looking remarks disclaimer. And that is that 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 changes and 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 the material filed with the SEC, including our most recent form 10-K, 10-Q and 8-K filings.

Let's begin Don on slide 8.

As you look at slide 8 our reported or GAAP net income was $106.4 million or $0.45 a share. There were four significant items impacting the quarter's results though on a net basis they had no impact on reported net income or earnings per share. However, since they impacted trends in individual income statement line items we have listed them for you on this slide.

First, as in the prior quarter and as will be the case throughout the remaining quarters of this year, there was a $6.6 million after-tax positive impact on net income reflecting the recognition of the effective federal income tax refunds on income tax expense. These federal tax refunds resulted from the ability to carry back federal tax losses to prior years. This benefited second-quarter earnings by $0.03 a share, the same as in the prior quarter. In 2006 the effective tax rate is anticipated to increase to more typical rate slightly below 30%.

Second was a $4 million pretax negative impact or $0.01 per share related to the net impact of $10.2 million of mortgage servicing rights temporary impairment partially offset by $6.2 million of hedge related trading gains. Consisting of a $5.7 million of hedge related trading gains and half one million dollars of net interest income on MSR hedge related trading assets. Third was a $3.6 million pretax or $0.01 per share severance and other expenses associated with the consolidation of certain operations functions, including the closing of an item processing center in Michigan.

And fourth, a $2.1 million pretax also $0.01 per share write-off of an equity investment. These last two items coupled with $1.7 million worth of non run rate regulatory related expenses, essentially offset the favorable impact of the federal tax loss carryback.

Slight 9 shows that net interest income on a fully tax equivalent basis increased 9% from the year ago quarter and 3% from the first quarter. Last quarter we noted our expectation that our second-quarter net interest margin would improve from the first quarter primarily due to the reduction of some excess liquidity we maintain to meet first-quarter wholesale liability maturities. As shown on the right side of the graph our reported net interest margin was 3.36%, up 5 basis points from last quarter.

While the expectation we shared with you last quarter was the net interest margin would improve modestly in coming quarters that expectation has changed. We now believe that margin will be under pressure during the second half of the year for three primary reasons. First, the pressure on deposit funding rates from the continued highly competitive deposit market environment. Second, we anticipate the yield curve will continue to flatten. And third is a full quarter's funding costs associated with the impact of the 1.8 million shares we repurchased in the second quarter, all in June. Given the lateness in the quarter these share repurchases had no material impact on the second-quarter margin, but the third and fourth quarters will reflect the full funding impact. We estimate that this negative impact to be about one basis point on net interest margin; that adds about $0.01 per share to earnings per share over the second half of the year. Any additional share repurchases in the second half of the year will also add pressure to the net interest margin while benefiting earnings per share. Future repurchases are not factored into our targeted earnings per share outlook.

Slide 10 is one that we have had in our appendix, and I felt it was worth a couple of comments today. And it helps with the understanding why our net interest margin while under pressure held up better than one might have otherwise expected. Since the end of 2003 we have continued to increase the relative portion of asset backed securities in our investment portfolio. These assets generally are variable-rate and have gone from 9% of the portfolio at the end of 2003, to 27% at the end of the second quarter. As such, we believe our investment portfolio has a higher percentage of variable-rate securities and portfolios of many of our peers. So on a relative basis we believe the earnings on our total investment portfolio was less negatively impacted from interest rate increases than for some of our peers.

Slide 11 details our growth in average loans and leases which Tom talked about. Total average loans and leases increased an annualized 10% during the quarter to $24.5 million. This follows a 14% annualized growth in the first quarter. Average middle market C&I balances increased to 16% annualized growth rate following 18% in the first quarter. Average middle market commercial real estate loans increased to 7% rate down from 11% annualized rate in the first quarter. Interestingly, growth during the quarter of C&I and CRE loans of $1 million or more was weighted a bit more to new and existing customers based on the loan amount. 61% for new customers versus 39% for existing customers. This demonstrates our success in reaching new commercial customers. Of this sampling of loans the new customers are Central Ohio, Southern Ohio Kentucky, Indiana and East Michigan regions led the way. On a same basis those regions contributing most loan growth to existing customers were Northeast Ohio, Central Ohio, West Michigan and East Michigan.

Small-business C&I's and CRE loans made through our retail delivery channels grew again at a 9% annualized rate. Total automobile loans and leases increased at a 6% annualized rate from the first quarter due primarily to the 12% annualized growth rate in auto loans. Down from a 20% annualized rate last quarter. As auto direct financing leases were little change from the first quarter. This growth was despite a 2% decline in total automobile loan and lease production from the first quarter. Competition in the auto sector remains aggressive, but we continue to generate high-quality production. It is also worth mentioning, though it had no meaningful impact on the quarter's results that we have entered into a two-year arrangement that will permit us to sell on a regular basis 50 to 75% of our current auto loan production.

This model also allows us to retain a profitable servicing business on loans sold. In the second quarter we sold $53 million of auto loans under this new arrangement and transferred $77 million of auto loans to loans held for sale. This achieves our objective of moving our auto loan production more toward a mortgage banking type of model. As a result, any loan sales going forward will be smaller and much less volatile on a quarterly basis. And we now consider these sales as part of our ongoing run rate earnings.

Operating lease assets classified as nonearning assets and listed near the bottom of the table continue to run off and were down to $400 million in the current quarter. Those of you who are familiar with Huntington know that the auto leases originated since April 2002 have been booked as direct financing leases. The operating lease portfolio is in a runoff mode. 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 to 6% annualized rate, down from 7% annualized rate last quarter. Like other banks with short-term interest rate levels increasing we have experienced customers moving towards fixed rate loans and moving away from variable-rate home equity lines of credit, our primary home equity 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. Further, we continue to originate high-quality loans and will not sacrifice quality or accept higher risk for growth.

There are additional slides in the Appendix that outline our home equity loan and line characteristics. Residential mortgages, primarily adjustable-rate mortgages continued their strong, albeit slower growth. Compared to the fourth quarter, average residential mortgage loans increased 16% on an annualized basis, down from the 24% annualized rate in the first quarter but reflecting an overall slowdown. Current quarter's growth rate was about half that of the year-over-year comparison.

Turning to slide 12 the main point we want to make with this is that all regions participated in the strong loan growth and that this has been the case for several quarters now. Slide 13 shows that average total core deposits decreased an annualized 2% from the prior quarter, so up 5% from a year ago quarter. This quarter there were very mixed deposit flows between deposit categories. So as core deposit categories posting increases for non-interest bearing demand deposits and retail CDs and annualized 5% and 36%, respectively. This growth was more than offset by declines in interest-bearing demand deposits primarily money-market accounts and savings and other time (ph).

Let's turn to the next slide to get some more detail on what drove these trends. Slide 14 is new this quarter and details core deposit trends between commercial and consumer core deposit accounts, which showed opposite trends. Total average commercial core deposits declined at 11% annualized rate from the first quarter while commercial non-interest bearing demand deposits increased 6%. This growth was more than offset by significant decline in interest-bearing demand deposits.

In contrast, total average consumer core deposits increased at a 2% annualized rate, reflecting growth in other deposits primarily retail CDs, partially offset by a decline in interest-bearing demand deposits. The decline in interest-bearing demand deposits reflected aggressive money-market deposit repricing, and this was especially true for commercial money-market accounts in relation to national market price brokered deposits, which are part of our wholesale funding and not part of our core deposits. Reflecting the national market cost advantage, we let commercial money-market accounts decline in preference for funding asset growth with brokered deposits.

Slide 15 showed total deposit trends by business segment. The only point to make here is the decline in commercial deposits was experienced by most regions. The large linked quarter and year-over-year quarter growth rate and treasury other reflected growth in time deposits over $100,000 in brokered deposits.

Slide 16 shows that despite the mix growth and total deposits we are continuing to grow demand deposits account relationships for both consumer households, up 3% over a year ago and small-business relationships, up 8%.

The next two slides, 17 and 18, are new this quarter and support our view that underlying operating leverage that has a growth rate for revenue versus expense was good this quarter. Doing this for Huntington which still has a sizable but shrinking operating lease portfolio takes some effort given the income statement geography issues associated with the operating lease accounting versus more traditional direct finance lease accounting. But let me try and walk you through this.

Slide 17 looks first at the revenue side. Specifically, we begin with reported non-interest income. We then adjust this for operating lease accounting by subtracting operating lease expense so that net operating lease revenue number is reflected in total revenues. Simulating a proxy for direct finance lease accounting. We then net out any net MSR impact, security gains or losses and any non run rate items. This gives us an adjusted non-interest income. We then take reported net interest income and subtract the net spread achieved on MSR related hedge trading assets. The result of this is an adjusted net interest income amount. We add these two together to give us an adjusted total revenue number. What this slide shows is that our adjusted total revenues increased 3.2% from the first quarter. Hold that thought while we turn to expenses.

Slide 18 takes reported non-interest expense and adjusted for operating lease accounting as well as for non run rate related items. What this shows is an adjusted non-interest expense with 2% below the first quarter level. Coupling this with a 3% increase and adjusted revenue results in a 5% revenue to expense spread on this adjusted basis. We feel this provides confirmation that we're making progress and improving our fundamental or underlying operating leverage. This exercise also yields an adjusted efficiency ratio that is more comparable to our peers who for the most part do not have significant operating lease assets and related accounting.

This shows that our reported efficiency ratio in the second quarter was 61.8%, was 56.6% on an adjusted basis. We have said that we felt operating lease accounting negatively impacted our reported efficiency ratio by four to five percentage points. Stated differently, if we did not have the impact of operating lease accounting and some of the non run rate items in the current quarter, our efficiency ratio would have been below 57%. Roughly a three percentage point improvement from the adjusted first quarter.

I hope this analysis has been helpful. You can find more traditional non-interest income and expense slides in the appendix. To begin with slide 19, let me review some of the recent credit trend highlights. This will be brief. The second quarter charge-off performance can be summed up as stable. Total net charge-offs are 27 basis points, down from 47 basis points in the first quarter. You will recall that the first quarter included 24 basis points from a single middle market C&I loan. We now anticipate the total net charge-offs for the year will be in the 32 to 36 basis point range, a range that is 2 basis points tighter at the high end. This range remains at the lower end of our targeted 35 to 45 basis point range assuming a stable economic environment.

Slide 20 shows the trend in NPAs. As you can see, nonperforming assets as a percentage of total loans and leases and other real estate ended the quarter at 40 basis points, up from 30 basis points at the end of the first quarter. While this increase reflected in part loans to companies in the auto supplier sector, this sector represented less than half the increase. We do not think this is the beginning of a trend. Our expectation is that NPAs to remain around these current levels looks absolute and relative for the rest of this year.

Just for perspective let me provide some comments regarding our exposure to the automobile industry. Exclusive of indirect auto loans and leases to consumers, first we have no exposure at all to any of the domestic automobile manufacturers, only to some companies that are suppliers or support the manufacturers. Total loans to companies that derive 50% or more of their revenues from the auto industry are about $1.1 billion. However, about 600 million of this amount represents dealer floor plan loans where historically losses have been virtually zero given that they are secured by auto inventories.

There is another $200 million of exposure to dealer commercial real estate, buildings, land, facilities, etc. This is also well secured. This leaves about $300 million of loans or less than 2% of our total loan and leases, representing direct exposure to auto industry suppliers and the like. And some of those suppliers support auto manufacturers like Honda in Marysville, Ohio.

Slide 21 recaps the trend in auto -- excuse me -- in loan loss reserve, which was previously noted declined to 104 basis points of loans and leases from 109 basis points at the end of the prior quarter. Table to 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 quarter's 5 basis point decline. Primary driver was a 5 basis point decline in the economic reserve. This reflected 3 basis points, transferred to the allowance for unfunded loan commitments to a refinement in reserving methodology. This change reflected no change at all in the underlying credit quality, only a shift from the reserve from one reserve to another. The remaining 2 basis point decline reflected improvements in economic indicators, most notably improved outlook for U.S. profits.

The transaction reserve component declined 4 basis points, reflected overall improvement in the underlying credit quality trends. In contrast, the specific reserves increased 4 basis points, almost entirely related to the second quarter growth in nonperforming loans. For additional insight on the changes in the allowance for credit losses I refer you to the related slides in the Appendix.

I feel very good about the level of our loan loss reserves, and our expectation is that our loan loss reserve ratio will remain around this level for the rest of this year. As demonstrated again this quarter, it is very important for investors to understand that 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 the individual credit situations.

It also bears repeating, especially in light of some of the analyst comments we have read discussing second quarter performance for other banks that within this highly quantitative construct of this methodology the conventional notion that provision expense is somehow understated and earnings quality is less, this provision does not cover charge-offs is not a valid conclusion. With this methodology, if credit quality trends improve, provision expense could be less than the period's net charge-offs which is what happened this quarter.

Turning to slide 22, 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 loan commitments is reported separately as a liability on the balance sheet. However, both of the reserves are available to cover credit losses and for analytical purposes we add these two together and to a total allowance for credit losses amount, the third line on this slide. The first set of ratios compares the reported allowance for loan and lease losses compared to in loans and leases, nonperforming assets and also nonperforming loans. On this basis our period end reserve ratio was 1.04%, and our NPA and NPL coverage ratios were 262% and 304%, respectively.

Second set of ratios compares the combined allowance for credit losses to period in loans and leases, NPAs and NPLs. On this basis our period end reserve ratio was 1.19%, down 3 basis points from the end of the first quarter. The NPA and NPL coverage ratios were 300% and 349%, respectively. Both quite strong.

Slide 23 is my last one and covers the recent capital trends. You will notice our tangible equity-to-asset ratio at June 30th was 7.36%, down 6 basis points from the end of the first quarter. This decline reflects the impact of our purchasing 1.8 million shares during the second quarter. We still have 5.7 million shares left on our authorization and intend to continue to make repurchases from time to time depending on market conditions.

You also notice we have lowered our targeted tangible common equity ratio range from 25 basis points to 6.25% to 6.5%. The earlier target was set back in September 2003, almost two years ago. Since then we have reduced the risk in our balance sheet significantly. For example, we lowered the credit exposure to indirect auto loan and lease financing from 30% to 19% today. We believe this new target properly reflects the lower risk in today's balance sheet. The more telling capital ratio trend and one that confirms the risk taken out of the balance sheet is the tangible equity to risk-weighted assets, which increased and is now above 8%.

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

Thanks, Don. As shown on slide 25 today we are providing 2005 earnings guidance of $1.78 to $1.81 per share. Our current expectations would be for earnings to increase sequentially over the next two quarters. It is our practice to provide earnings guidance on a GAAP basis unless otherwise noted. Our earnings guidance includes the expected results of all significant forecasted activities. However, guidance typically excludes unusual or onetime items, as well as selected items where the timing and financial impact is uncertain until such time as the impact could be reasonably determined.

While this guidance includes the impact of shares repurchased through June 30, it excludes any impact of future share repurchases. Future repurchases, which Don indicated we intend to pursue, have the potential to incrementally improve earnings per share performance. However, such repurchases also put pressure on our net interest margin. As analysts you are free to include or exclude the impact of future repurchase in your models; our guidance today excludes any impact of any future share repurchases.

In addition in 2005 we have departed slightly for providing earnings guidance on a strictly GAAP basis solely to exclude the estimated $0.06 per share benefit for the second half 2005 related to any future benefit from the first half, federal tax loss carryback discussed previously. This is excluded in that it 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 these parameters in mind our 2005 earnings expectations reflect the following.

Good full year revenue growth, excluding operating lease income. We anticipate continued growth in net interest income driven by continued good loan growth that more than offsets the impact of pressure on the net interest margin. We anticipate the margin will likely be lower than the 336 level in the second quarter. This assumes a continuation of the aggressive loan and deposit pricing environment, the likelihood that the yield curve could flatten further and the full impact of funding shares repurchased so far this year.

Loan growth is expected to remain good with C&I growth making up for some slowing in home equity and auto. Deposit levels are expected to continue to be impacted by aggressive market pricing. We will continue to manage our funding with core deposits supported by wholesale funding sources as warrant. Non-interest expense should be relatively flat with the second quarter level exclusive of operating lease expenses.

On the credit side we anticipate continued relative stability with second quarter levels for NPAs and loan loss reserve ratios. For net charge-offs we anticipate full year net charge-offs in the 32 to 36 basis point range.

This completes our prepared remarks. Don, Nick Stanutz, Tim Barber, Jay and I will be happy to take your questions. Let me now turn the meeting back over to the operator who will provide instructions on conducting a question-and-answer period.

(OPERATOR INSTRUCTIONS) Heather Wolf, Merrill Lynch.

I'm wondering if you can address the increase in non-interest bearing deposits in the commercial business and whether or not you think that is sustainable given the rate environment.

As far as the non-interest bearing deposit growth on the commercial environment, we have had a focus over the last couple of years to deepen the relationship with our commercial customers. And not just look at the credit relationship, but also focus on the depository relationship. We feel that non-interest-bearing portion of that relationship is key, and we've had increased sales efforts related to that activity.

I think we reported on our last call at the end of the first quarter that the first quarter was seasonally low in terms of commercial DDAs, (ph) so we had a little bit of a rebound there. So we are pleased about the DDA the non-interest bearing DDA component of our commercial deposit relationships. There was just enormous pricing pressure on money market rates to the tune of 40 or 50 basis points over federal funds, which we weren't able to rationalize. And it was that that made us decide to allow some runoff in that category during the second quarter and seek cheaper funding sources.

Okay, and can you talk a little bit about the drivers that are going to enable you to hold your expenses flat in the back half of the year?

You mean other than committed management?

Ha, ha.

I thought I would get a chuckle out of you. What we have is a management team, a leadership team that understands that prior to 2005 we didn't make the kind of progress we needed to make and wanted to make in our efficiency ratio. And we are dedicated to ferreting out unnecessary expenses and doing all we can to ensure expenses remain flat in spite kind of a natural upward pressure that occurs because of the investments that we make, like in new offices, etc.

We also have built into our management incentive plans for each of our bonus participants, if you will, the factor that rewards or doesn't reward on the basis of NIE to revenue. And for senior executives we've got an added multiplier that in incentives that is predicated upon going beyond plan, if you will in controlling expenses. So we think we've got the management team squarely focused on it. Examples recently of cost takeouts include, as we mentioned in our report the closing of a check processing center in East Michigan. But there are many examples around the Company of kind of surgical efforts to reduce management layers, to eliminate duplicative functions. Invariably we can make a limited progress only limited progress if we don't impact FTEs. So we are looking for opportunities around the Company to make sure that we are running as efficiently as we should.

Just to reiterate that with the $3.6 million charge we took this quarter for severance and other related consolidation expenses the benefit from those actions really haven't been fully felt even against the second quarter. So we should see some of the benefits from those actions impact third and fourth quarters going forward.

Okay, great. Thank you very much.

Lori Appelbaum, Goldman Sachs.

My question relates to the middle market commercial loan yields. It went up 63 basis points sequentially in the quarter while the average LIBOR and prime rate went up 47 basis points. So if you could highlight what factors could have driven a bigger increase in the yield on the portfolio versus what happened to market rates in the quarter.

We did have some negative impact in the first quarter as far as some of the margin items. That second quarter also did include a little bit stronger yield on our mezzanine type loans in the commercial banking group, which added a little bit of additional margin there. I don't have that quantified off of the top of my head, but there was some lift there as well.

So it is a large part of your portfolio that is seeing a bigger increase in yield then what is happening to market rates?

I'm sorry?

I don't know if I understand what happened on the mezzanine portfolio. It is seeing a bigger increase than what happened -- then which occurred in market rates?

That's what we're saying is the first quarter was down a little bit for some unusual items, and those did not reoccur in the second quarter, and second quarter also benefited slightly from the mezzanine related loans that had a higher yield this quarter than what they would have had in the first quarter, as well.

Can you explain the mezzanine related impact? I don't understand that.

There are certain income items related to mezzanine loans that might have some success fee type income or payment in kind type of dividend income that are more on a sporadic basis. And that yield was a little bit stronger this quarter than it was in previous quarters.

And what is the expectation for it going forward?

I don't know that it is disproportionately out of line for where we reported in the quarter.

In the first quarter and maybe more moderate in the back half and that is why I am thinking the margin may be lower?

We are not predicating earnings guidance for the second -- for the full year on the basis of unusual pickup in income from mezzanine.

Todd Hagerman, Fox-Pitt, Kelton.

A couple questions just on the auto portfolio and some of the dynamics there. One, just with respect to your comments, Don, I think you mentioned that kind of on a go forward basis you are going to be selling off some of that production. I was wondering if you could kind of address how that may impact in terms of your desired target mix for the auto book. You kind of historic -- or recently targeted kind of a 20% bogey on that portfolio. How does this change in strategy or the adaption of a mortgage model, so to speak, change that? And then can you talk a little bit more or add a little more color in terms of the potential volatility associated with that model with kind of adding that servicing component, what impact we may expect to see there?

First of all, as far as a 20% target, we had established that a couple of years ago. I don't know if that is a firm target for us going forward. If we are definitely selling upwards of 75% of our auto loan production we would definitely see that concentration shrink below the 20% level.

As far as the profit dynamics going forward, the predictability of the cash flows from the auto loan servicing is much higher and much more precise, I guess, than what you would see in a mortgage business that the average life is much shorter and the cash flow from those auto receivables is much more easy to predict. So based on that I think it is a much more stable and predictable earnings model. It also results in a business for us that contributes more than a 20% ROE for that type of business, which is very desirable for us, as well.

Okay, but I think you mentioned before that the expectation was the numbers, kind of the quarterly run rate or so to speak kind of what we saw here in the second quarter, was kind of like a reasonable predictor in terms of a run rate in terms of the size of these portfolios.

Based on the second quarter we have either sold or transferred or held for sale about $130 million worth of loans, which is slightly less than 50% of production during that quarter. We would expect going forward once we have the full quarter that production levels and sales would be a little bit stronger than that just because production levels are low. But we would anticipate selling about 50% of that going forward.

Let me ask Nick Stanutz, who as you know runs our dealer area just to talk for a minute about what is happening in the production world as a result of some of the changes the major domestic manufacturers are going through.

Thanks, Tom. Clearly there is seasonality to the production in the automobile business with you typically think second and third quarters being the highest point of originations and highest point of auto sales, and that has been the historical trend for 20 years. So I think that you could look at our ability to produce will be a function of what is going on in terms of the time of year. As Tom alludes to, clearly with GM kicking off the end of May employee pricing and now that is being followed by Ford and Chrysler here at the beginning of July, we have clearly seen and industry has seen an uptick in sales. You've read about the numbers for GM for June, best month they've had in four years. We saw a similar increase in volume over the first two months in the quarter. We would expect probably that program to continue to relieve the auto manufacturers and the dealers of their '05 inventory. And then as we have seen historically probably GM will create another program to continue the demand that they desire in the marketplace.

So our origination volumes really picked up in June coincident with the GM program. And I think we have seen a little bit relief in pricing as well, have we not?

That is correct. We've seen more of a stable cost of funds in the second quarter. We continue to see our competition raise prices so the margins are improving, and as a reference point we did relatively the same amount of production, although down 2% from the first quarter but in June alone we did almost 50% of our total quarter production in the month of June. Again kind of meeting the demand that we saw in the marketplace with GM's program.

That is very helpful. So the expectation is that 6% kind of all-inclusive growth will -- is likely to pick up quite considerably on a go forward basis just outside of the seasonality that we saw or that is normally seen in second quarter?

That would be a fair assumption, Todd.

And then just finally with those sales, is there any residual interest or any other kind of retention on any of those sales?

No, we would not retain any residual interest on those sales. The only impact we would have going forward from that is just the servicing fees that we receive for providing the servicing and maintenance of those loans.

Okay, great. That's helpful. Thank you.

Fred Cummings from KeyBanc Capital,

Yes, good afternoon. Two quick questions. One on the $24 million increase in non-accrual, how many loans did that comprise?

I think the first thing I'd want to say is that the largest loan was a little over $5 million. It was automotive supply sector related. We had two or three others over a couple million, and the rest, I guess the total was somewhere around 25. The rest were very, very small.

And then somewhat related to that, maybe, Don, you can answer this one and get a better understanding of your reserve methodology. Now I am assuming these loans are probably on your watch list. In terms of when you establish a specific reserve for a particular credit, must that loan go on non-accrual, or do you have specific reserves allocated against watch list credits?

I'm going to ask Tim Barber of our Credit Risk Management area to respond to you.

Thanks, Tom. Specific reserves in Huntington are almost exclusively assigned to nonperforming assets. So there would be very few, if any, specific reserves attached to watch-listed loans, although it clearly can happen.

Fred, this is Don to follow up on that. We do have reserves on individual credit. But just the specific reserve is just added where it is in excess of what the normal transaction reserve would be calculated for that type of risk profile. So there are reserves established for each individual loan. It is just not segregated on a specific category.

Kevin Reevey, Ryan Beck.

Can you talk a little bit about the growth, especially the commercial loan growth in Central Ohio and Kentucky? It looks like it was a much greater than the rest of your other regions. Is there anything noteworthy going on in that area?

Just as a reminder, when we talk about Kentucky we are talking about just right across the river from Cincinnati. We are operating only in the Northern Kentucky suburbs of Cincinnati. And I must say that the Cincinnati Northern Kentucky team is quite an energized group. They are growing very nicely with a group of very seasoned bankers and have been able to increase market share substantially in that region. We are quite pleased with what is going on down there. So I don't think that there is any sector specific reason for growth and the economy is improving there. But I am not sure that it is booming. But we just have a very competent team there that we are quite pleased about.

In Central Ohio of course our home, if you will, we have a dominant market position. The economy is pretty good. Our team, both with new customers and serving existing clients continues to perform well, and we're not at all surprised that we've got nice growth pattern in commercial C&I there.

And then as far as it relates to the growth in NPAs that you talked about in your press release, it was mainly due to the auto supply sector. Can you give us more color on what is happening with the auto supply sector?

I wouldn't say that it was mainly due. I think what we said was it was in part due. So I don't want to -- I want to make sure nobody is misled about that. But some of our NPA growth was definitely due to the pressure in the auto supplier serving domestic manufacturers. We see this -- where we see it we see it largely in our Northern Ohio, East Michigan region. As we mentioned earlier, exposure to domestic auto suppliers is not significant in our minds. The dollars versus our total C&I portfolio are not great. But we do have customers who have, whose financial status has weakened under pressure and we are continuing to watch those closely, and we obviously had some that affect on NPAs during the quarter.

Great. Thank you.

Chris Chouinard for Morgan Stanley.

A couple of quick questions. The first, you highlighted asset-backed securities being a larger portion of your securities book. What are these -- what type of asset backs are these?

They are mainly either supported by home equity loans and/or auto loans, I believe we have some in that portfolio as well. They tend -- most of the loans or most of the excuse me, securities in that portfolio are variable rate in nature. It is down slightly from the first quarter position, mainly as we look to manage our interest rate sensitivity position.

What are these securities typically rated?

Most of them, I believe, are AA range.

And sort of separately, thinking about your comment earlier that we -- you guys may consider some restructurings later this year, could you talk about some areas of the balance sheet that you might look to be paring back? And also separately if sort of the fact that EITF 03-1 is no longer, it doesn't seem like it is going to be sort of passed in the form that we had all thought it would be. If that changes your thinking in terms of managing the securities book.

One, I guess as far as 03-1, I don't know that changes our perspective much at all. We still have to live with the staff accounting bolt on 59 from the SEC and we think they are providing a little bit more scrutiny on that guidance. But we will continue to take a look at certain parts of our investment portfolio to see if there are changes we need to make there. And we will also continue to evaluate whether or not we need to start bringing back in some of our asset sensitivity position at the end of this quarter. We are right around the same position we were the first quarter and I think we were close to that 1% asset sensitive given a 200 basis point increase in rates. At some point in time we might start to bring that back down and therefore might look to do additional changing of the investment portfolio to manage that interest rate sensitivity position.

As far as other restructurings, we might see continued efforts like we've done in the second quarter where we've had restructurings in that we've had some severance and consolidation related expenses recognized. And as we continue, as Tom said, to look at isolator or specific areas in the organization where there might be opportunities for expense improvement or efficiency improvement, it might result in some additional severance and/or consolidation type charges, as well.

Thanks very much.

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Thank you, John, and thank you everybody for your patience with us today on our conference call. If you have follow-up questions please give Susan or I a call. Thanks again.

Ladies and gentlemen this does conclude your presentation for today. Everyone have a great day. You may now disconnect.