Huntington Bancshares Inc (HBAN) 2005 Q3 法說會逐字稿

Good afternoon, everyone.

My name is [Paige] and I will be your conference facilitator.

I would like to welcome everyone to the Huntington Bancshares third quarter conference call.

All lines have been placed on mute to prevent background noises.

After the speakers' remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS].

As a reminder, today's conference call is being recorded.

Thank you.

We will now turn the conference call over to [Mr.

Jay Gould], Senior Vice President of Investor Relations.

Mr. Gould, please go ahead.

Thank you, Paige, and welcome, everybody, to our call.

Copies of the slides we will be reviewing can be found on our website, Huntington.com, and this call is being recorded and will be available as a rebroadcast starting about an hour from the close of the call.

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

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

Such statements are based on information and assumptions available at this time and are subject to change, risk and uncertainties, which may cause actual results to differ materially.

We assume no obligation to update such statements.

For a complete discussion of risks and uncertainties please refer to the slide at the end of today's presentation, as well as material filed with the SEC including our most recent form 10-K, 10-Q, and 8-K filings.

Let's begin.

Turning to slide 2, presenting today are Tom Hoaglin, Chairman, President and Chief Executive Officer, and Don Kimble, Executive Vice President, Chief Financial Officer, and Controller.

And also present for the Q&A period is Nick Stanutz, Executive Vice President and Head of Dealer Sales, and [Tim Barber], Senior Vice President of Credit Risk Management.

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

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

First, this presentation contains both GAAP and non-GAAP financial measures where we believe it helpful to understanding Huntington's results of operations or financial position.

Where Non-GAAP financial measures are used, the comparable GAAP financial measure as well as the reconciliation to the comparable GAAP financial measure can be found in today's earnings press release, the slide presentation, in it's appendix, or in the quarterly financial review supplement in today's earnings release.

All of these can be found on our website.

Also, certain performance data we will review are shown on an annualized basis and the discussion of net interest income we do in 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 I know are familiar with these terms and their usage, but for those of you who are not we provided definitions and rationale on this slide.

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

We want to get started.

Let me turn it over to Tom.

Thank you, Jay, and welcome everyone.

We appreciate you joining us today.

Turning to slide 4, I will begin with my assessment of our third quarter events and highlights.

As usual, Don will then review the quarter's financial performance, and I will wrap up with an update on our outlook for full year 2005.

Turning to slide 5, we were pleased with third quarter results.

Earnings were $0.47 per common share, 18% higher than a year ago and 4% better than last quarter.

This was consistent with our expectations.

As Don will explain, we also believe this was representative of our core underlying earnings performance for the quarter and was our strongest quarter to date.

While we previously posted earnings of $0.47 per share in the second quarter of 2004, that quarter contained some favorable run rate items like outsize gains from the sale of auto loans and a large C&I recovery.

The current quarter was much cleaner.

Our earnings momentum makes us comfortable in confirming our full year's earnings guidance of $1.78 to $1.81.

One of the highlights for the quarter was good operating leverage.

After adjusting for operating lease, accounting, and other nonrecurring items, revenue increased 1.8% and expenses declined by 1.8%, thus resulting in a 3.6% spread between revenue and expense performance.

Those of you familiar with our story know that one of our key performance objectives is to maintain this spread on an annual basis at 2% or better.

Don will walk you through the specifics for this quarter.

Underlying loan growth was also good.

On the consumer side, residential mortgages increased at an 8% annualized rate from the second quarter with home equity loans and lines up 4%.

On the commercial side, average middle-market commercial real estate and small business commercial real estate in C&I loans increased at annualized rates of 7% and 4%, respectively.

Reported total middle-market C&I loans declined $193 million, driven by $157 million decline in average dealer floor plan loans.

The success of the employee pricing incentives offered by major auto manufacturers resulted in a decline in auto inventories and a commensurate decline in floor plan loans.

While on the subject of loan growth, the private financial group's performance continued to be strong, with total average loans up an annualized 9% from the second quarter.

So we were pleased with the quality and quantity of our loan growth this past quarter.

Deposit competition continued to be very aggressive.

As such, we are also pleased with a 5% annualized growth rate in average total core deposits.

Average total commercial core deposits increased at a 20% annualized rate, including 28% annualized growth in interest-bearing accounts, primarily represented by public fund money market accounts, and 10% annualized growth in average commercial noninterest bearing accounts.

In contrast, average total consumer core deposits were little changed from second quarter levels.

Other core deposits, primarily retail CDs, remain very attractive with 20% annualized growth, but this was offset by a 22% annualized decline in consumer money market accounts as consumers showed an increasing preference for higher, fixed-rate deposits.

The quarter also saw the continuation of our ability to increase consumer demand deposit households and small business relationships.

The net interest margin decreased 5-basis points, in line with our expectations, to 3.31%.

Of this decline, roughly 2-basis points reflected a lower mezzanine loan yield as the second quarter included higher success fees on mezzanine loans.

Also, an additional 1-basis point of the margin decline was attributed to share repurchases late in the second quarter and early in the third quarter.

Exclusive of these two items, we view the net interest margin as being fairly stable.

We were also pleased with the broad-based nature of the growth in fee income.

This included an 8% increase in service charges on deposit accounts, a 3% increase in brokerage and insurance income, and a 2% increase in other service charges.

Trust service income increased 3% and marked the 8th consecutive quarterly increase.

Private financial group assets under management increased 3% from last quarter, with mutual fund and annuity sales volume increases 5% and 2%, respectively.

Expense performance was a particular highlight as we continue to see the results from our efforts of focusing on expense discipline.

Excluding operating lease expense, total noninterest expense declined 4%.

Our reported efficiency ratio was 57.4%, a decline of over 4-percentage points.

Adjusting for operating lease accounting and other non run rate items, our efficiency ratio was 54.5%, a ratio now much more in line with peer performance and for the first time in many quarters close to the top end of our targeted range of 50% to 54%.

Though we've made significant progress in expense discipline, there is still more we can do in improving operating efficiency.

Third quarter credit quality can be summed up in one word: stable.

Net charge-offs were 29-basis points, up 2-basis points from the last quarter.

Further, the period-end nonperforming asset ratio was 42-basis points, up 2-basis points, and our period-end reserve ratio was 1.04%, unchanged from the June 30 total as was our allowance for credit loss ratio at 1.19%.

We anticipate little change, if any, in these credit quality metrics during the fourth quarter.

Lastly, capital continued to be strong and moved even further above our long-term targeted, tangible common equity range.

In sum, this was a good quarter and we're optimistic about our prospects for the rest of the year and as we head into 2006.

Slide 6 provides other highlights.

First, during the quarter we repurchased 2.6 million shares as part of our share buyback program.

Second, on October 6th, we announced the termination of our formal written agreement with the Office of the Comptroller of the Currency.

And after consultation with the Federal Reserve, we also announced our intention to proceed with the filing of the application to acquire Unizan Financial Corp later this month.

Though the formal written agreement with the Federal Reserve remains in effect, we are pleased with the progress we've made in addressing their concerns and we're confident that we can complete the remaining work in a timely manner.

Third, and just announced late yesterday, we cancelled the existing share repurchase authorization, which had 3.1 million shares remaining under it, and replaced it with a new, 15 million share repurchase authorization.

We are currently growing capital faster than it can be invested effectively, and we want the flexibility to return value to shareholders through additional share repurchases.

Before turning the presentation over to Don, let me make a couple of comments regarding the Unizan merger.

With our announce that we are refiling our application to acquire Unizan, we received inquiries regarding whether or not our original financial impact estimates are still valid.

From the time we withdrew our application last November until just a few days ago, we had to maintain an arms-length agreement with Unizan staff.

It has only been in just the last few days that we've reopened more detailed discussions.

Our intention is to provide an update on its estimated financial impact along with the underlying assumptions in January when we provide our 2006 earnings outlook comments.

We have every confidence in this merger.

It is the right thing to do for both Unizan and Huntington shareholders, and we're committed to completing it and building our franchise.

This will enable us to expand our market share in Ohio, add a good leadership team dedicated to local banking, and sell additional services to a larger customer base.

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

Don?

Thanks, Tom.

As shown on slide 8, reported, or GAAP, net income was $108.6 million, or $0.47 a share.

There were three 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 and individual income statement line items we have listed them for you on this slide.

First, and as in the first and second quarter, and will be the case in the fourth quarter, there was a $6.8 million after tax positive impact reflecting the recognition of 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 it third quarter earnings by $0.03 a share, the same as in each of the prior two quarters; second, with a $5 million, or $0.02 per share, net negative after-tax impact of repatriating foreign earnings.

You will recall we had previously discussed this as a potential event for this -- earlier this year.

Third, with a 2.1 million pre-tax negative impact, or $0.01 per share, related to the net impact of $10.5 million of MSR temporary impairment recovery, more than offset by $12.6 million of net hedge-related trading losses.

Slide 9 shows that net interest income on a fully tax-equivalent basis increased 7% from the year-ago quarter and just up slightly from the second quarter.

Last quarter, we noted our expectation for some pressure on our third quarter net interest margin from the second quarter level of 3.36%.

And as shown on the right-hand side of the graph, our reported net interest margin was 3.31%, down 5-basis points, with 2-basis points of the decline due to higher success fees from mezzanine loans in the prior quarter and 1-basis point due to the share repurchase activity.

As Tom noted, we believe that our underlying margin was fairly stable.

Our expectation is that margin will remain fairly stable around this level for the fourth quarter.

Slide 10 details our growth in average loans and leases, which I will expand on in the next two slides.

So I will make a couple of color comments.

First, growth in middle market CRE and small business C&I and CRE loans was good and has been fairly steady over recent quarters.

Middle market C&I loans declined at an annualized 16% rate and was heavily influenced by the decline in average dealer floor plan loans that Tom talked about.

Second, you will note that auto loans grew at only a 2% annualized rate.

With auto sales strong in the quarter due to auto manufacturer employee discount pricing programs, loan production was very strong, up $113 million, or 31%, compared to the second quarter.

The reason this did not translate into balance sheet growth reflects the success of the auto loans loan sale program we announced last quarter.

You will recall we entered into an arrangement where we could sell 50% to 75% of our auto loan production to a third party.

This program resulted in the sale of $213 million worth of loans during the quarter with a small $500,000 gain.

We are very pleased that this program is working just as designed.

Third, you will note that link quarter decline in auto direct-finance leases.

This reflected a combination of lower demand and aggressive price competition.

Fourth, while residential mortgage and home equity growth was good, the growth rates have been slowing over recent quarters due to maintaining our underwriting and pricing disciplines in the marketplace that remains aggressive in both structure and price.

There are additional slides in the appendix that detail our auto loan and lease, as well as home equity production for those you wanting more detail.

Operating lease assets, classified as nonearning assets, listed near the bottom of the table, continue to run off and declined to $309 million.

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

As such, the operating lease portfolio is in a run-off mode, so this decline is both expected and is a good thing.

Slide 11 and 12 are new this quarter and break down our commercial and consumer loan growth by business segment.

Looking first at slide 11, you will note the significant decline in dealer sales due to the decline in floor plan loans.

Total average commercial loans for regional banks were up slightly.

The large percent decline in Indiana reflected the paydown of three commercial real estate loans.

Slide 12 shows similar data but for consumer loans.

Here you will note the regional banking average total consumer loans increases at 6% annualized rate with all but one region contributing to this growth.

While the dollar amounts are small relative to other regions, we're quite pleased with the performance in our West Virginia region for both commercial and consumer loan growth.

This region is under relatively new leadership and is clearly having a positive impact.

Slide 13 shows that total average core deposits increased an annualized 5% from the prior quarter and were up 4% from the year-ago quarter.

Again this quarter, deposit flows between deposit categories were mixed.

Unlike last quarter, those core deposit categories posting increases -- excuse me -- like last quarter, those core deposit categories posting increases were noninterest bearing demand deposits and retail CDs up an annualized 6% and 64%, respectively.

This growth was partially offset by declines in interest-bearing demand deposits, primarily money market accounts and savings and other time.

This reflected an increasing customer preference for higher, fixed-rate deposit funds.

Let me use the next several slides to quickly highlight what drove these trends.

Slide 14 details core deposit trends between commercial and consumer core deposit accounts, which showed opposite trends.

On the commercial side, total average commercial core deposits increased at a 20% annualized rate from the second quarter, and this growth was seen in all three core deposit categories.

Noninterest bearing demand deposits increased at a 10% annualized rate with interest bearing demand deposits up an annualized 28%, with the latter influenced by success in growing public fund deposits.

In contrast, total average consumer core deposits were essentially unchanged from the prior quarter.

However, there was a significant movement from interest bearing deposits to other deposits, primarily retail CDs.

With rates rising, CDs are the deposit of choice for rate-sensitive retail customers.

Slide 15 details total core deposit growth by business segment and shows that regional banking total core deposits increased at a 6% annualized rate with all but one of the regions posting an increase.

The next slide breaks this down further into commercial core deposits on this slide and the consumer core deposits on the next slide.

As shown on slide 16, the strong growth in commercial core deposits was broad-based throughout our regional bank, something we're very pleased about.

Slide 17 shows the consumer core deposits were little changed throughout our various regions, though the performance of some regions was better than others.

This reflects the broad-based nature of the competitive environment for attracting deposits.

Slide 18 shows that despite the mixed growth between commercial and consumer core deposits and within our various regions, we are continuing to grow demand deposit account relationships for both consumer households which are up 3% from a year ago, and small business relationships up 7%.

This exemplifies that while deposit growth may be a current challenge, we're building the base for better deposit performance in the future.

Slide 19 reviews noninterest income trends.

As expected, operating lease income continued to decline, reflecting the runoff of this portfolio.

Excluding operating lease income, noninterest income increased 11% from the second quarter, with this increase spread over all of our key, fee-income categories.

Deposit service charges increased 8%, with about 2/3 of $3.3 million increase in personal service charges, with the remaining 1/3 represented by higher commercial service charges.

Trust services income increase 3%.

Our trust business has really performed well, and this was the eighth consecutive quarterly increase of trust income.

This quarter's increase reflected a combination of higher fund fees due to growth in assets under management, as well as an increase in institutional trust income.

Brokerage and insurance revenue also increased 3% from the second quarter.

This represented a combination of factors including higher insurance income and annuity sales partially offset by lower revenue due to reduced fixed income and trading volume.

Other service charge income increased 2% due to higher ATM and check card income.

The key contributing factors to the change in mortgage banking and other noninterest income trends are detailed on the next slide.

Slide 20 is new this quarter and provides a complete picture of mortgage banking income and related hedging.

The top half shows the various components of mortgage banking income with the bottom showing the impact of MSR hedging, which mostly impacts other noninterest income.

Looking first at mortgage banking income, you will note that in the third quarter this totaled $10.7 million before the $10.5 million MSR recovery.

Striking a subtotal here helps give a clearer picture of the underlying mortgage banking income trend.

Some of you may find this detail helpful information as you build your earnings model.

As you can see, this $10.7 million was up $2.8 million from the $7.9 million reported in the second quarter. $1.7million of this increase represented higher secondary marketing income, with the remainder reflecting lower amortization of capitalized servicing.

Now, looking at the impact of net MSR hedging.

The bottom half of the slide you will note that the $10.5 million MSR recovery, which is recorded as part of mortgage banking income, was more than offset by $12.8 million of hedge-related trading losses, which was recorded in noninterest income. $12.8 million of hedge-related trading losses in the third quarter compare with a $5.7 million of hedge-related trading gains in the second quarter, which more than accounts for the $15.2 million decline in other noninterest income between quarters, which was noted on slide 19.

Slide 21 details trends in noninterest expense.

This shows the decline from the second quarter was broad-based and with the one exception being the Other noninterest expense categories.

As expected, operating lease expense also declined due to runoff of this portfolio.

Excluding operating lease expense, the remainder of noninterest expense declined $9 million, or 4%, from the second quarter.

The largest contributor to this decline was a $6.6 million, or 5%, decline in personnel costs and reflected three primary factors: first, the decline in sales commissions; second, lower benefit expense; and third, the favorable impact of the 2% decrease in full-time equivalent staff from the end of the second quarter.

The only other expense item I will comment on was a $1 million decline in professional services, all related to lower regulatory-related costs, which were negligible in the third quarter compared with $1.7 million of such costs in the second quarter.

Slide 22 shows a trend in our reported, or GAAP, efficiency ratio.

It shows the continued improvement in that ratio and sizable decline to 57.4% in the third quarter.

Those of you familiar with Huntington note that the operating lease accounting overstates this ratio compared to our peers, who do not have significant operating leases.

As noted, operating lease accounting added about 3-percentage points to this ratio this past quarter.

Also as noted, one of the key financial performance objectives is to grow revenues 2% or more than were expenses.

So to see what really drove the decline in our efficiency ratio we have added the next slide.

Slide 23 supports our view that our underlying operating leverage, that is, the growth rate for revenues versus expenses, was good again this quarter.

This slide looks at trends in noninterest income and noninterest expense after adjusting for operating lease accounting, as well as other significant nonrun rate income and expense items.

Two slides in the appendix provide a full reconciliation from GAAP to the adjusted numbers shown on this slide.

On an adjusted basis, revenue totaled $385.3 million, up 1.8% from the second quarter.

On a comparable basis, adjusted noninterest expense declined 1.8%.

This resulted in a 3.6% favorable spread between revenue and expense performance.

This exercise also allows the calculation of an adjusted efficiency ratio and shows that on an adjusted basis our efficiency ratio in the third quarter was 54.5%.

This is noteworthy for two reasons: first, this was a two -- or full 2-percentage point improvement from last quarter's efficiency ratio computed on a comparable basis and almost a 4-percentage point improvement from the year-ago quarter; second, our focus on expense discipline coupled with our ability to grow revenue has now reduced our efficiency ratio to that roughly comparable to our peers.

Yet as Tom noted, we think we can still do better as our overall efficiency ratio target is between 50% and 54%.

Slide 24 shows recent capital trends.

You will notice that our tangible equity-to-asset ratio as of September 30th was 7.39%, up 3-percentage points from the end of the last quarter.

More telling capital ratio trends, and one that confirms the risk taken out of our balance sheet, is a tangible equity-to-risk weighted asset ratio, which increased to 8.25%.

During the quarter we repurchased 2.6 million shares.

We now have the new 15 million share repurchase authorization in place and will be back in the market from time to time with public and/or privately negotiated transactions as we deem it appropriate to do so.

Let me now close my section with some comments on credit quality.

Since the quarter saw very stable credit quality performance, I will dispense with the usual detailed slides, but you can still find all of this detail in the appendix.

Instead, let me use slide 25 to highlight just the key points.

The NPA ratio ended the quarter at 42-basis points, and the net charge-off ratio was 29-basis points, both up only 2-basis points from the prior quarter.

Our 90-day and overdelinquencies remain stable.

On slide 26, the allowance for unfunded loan commitments is shown separately from the total allowance for loan and lease losses at the top of the slide, as the allowance for unfunded loan commitments is reported separately as a liability.

However, as both reserves are available to cover credit losses and for analytical purposes, you add these two together into a total allowance for credit losses amount, the third line on this slide.

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

On this basis, our period-end reserve ratio is 1.04%, unchanged from the end of last quarter, as the net charge-offs essentially equalled loan loss provision expense.

Our NPA and NPL coverage ratios are 249% and 283%, respectively.

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

We believe this is more comparable to our peers as most do not report the allowance for unfunded loan commitments separately as we do.

On this basis, our period-end reserve ratio was 1.19%, also unchanged from June 30th.

The NPA and NPL coverage ratios were 287% and 326%, respectively; both quite strong.

Let me turn the presentation back over to Tom.

There's been a lot of news and investor concerns circulating in the market related to two topics that I want to address in my closing comments.

With the auto industry and suppliers in particular going through difficult times and restructurings, we have received a number of inquiries regarding our exposure to the auto industry and suppliers, specifically.

Slide 27 recaps this for you.

Our total outstandings to the auto industry, excluding loans and leases to consumers, at September 30 were $976 million.

Of this amount, $459 million represented dealer floor plan loans, which are supported by the dealer's auto inventory.

Another $231 million represents loans to dealers other than floor plan loans, much of which represents commercial real estate.

This leaves only $286 million of exposure directly to suppliers as we have no direct exposure to the major auto manufacturers.

And some of these suppliers support foreign auto manufacturers who are not experiencing the same difficulties as the domestic manufacturers.

As of quarter end, nonperforming loans totaled only $13 million, and net charge-offs, year to date, have only been 21-basis points.

In sum, we're very comfortable with what we feel is modest auto industry exposure.

The second issue of investor concern is delinquency and bankruptcy trends, especially in the Midwest and Ohio in particular.

As shown on slide 28, residential mortgage delinquencies in Ohio have been very high industry-wide.

Recent Federal Reserve data suggest the 90-day and over delinquency ratio was 2.14%.

In contrast, Huntington's Ohio residential delinquency ratio was 1.07%, half that for the entire state.

The next area of great concern has been the fact that the bankruptcy rate in the Midwest and Ohio, specifically, has been high, and that has been the case as shown here.

In the second quarter, and on a nationwide basis, bankruptcies increased 17% from the first quarter, with the Midwest and Ohio posting even higher rates of 22% and 26%, respectively, While Huntington, not surprisingly, has also seen an increase in bankruptcies, second quarter performance was considerably lower than either of the Midwest or Ohio increase, and mirrored more closely nationwide performance.

In conclusion, we feel this performance reflects that we've done an excellent job in underwriting our residential mortgages and other consumer credits and have stayed away from some of the more aggressive product offerings and structures in the marketplace.

We anticipate our residential mortgage, home equity loan and lease, and auto loan net charge-offs to remain very much in line with our long-term expectations of 10- or more basis points, 35- to 45-basis points, and 75- to 85-basis points, respectively.

Let me close with some comments about our expectations for the rest of the year.

As shown on slide 29, today we're reconfirming 2005 earnings guidance of $1.78 to $1.81 per share.

As you know, it is our practice to provide earnings guidance on a GAAP basis unless otherwise noted with such guidance, including the expected results of all significant forecasted activities.

However, guidance typically excludes unusual or one-time items, as well as selected items where the timing and financial impact is uncertain until such time as the impact can be reasonably determined.

While our $1.78 to $1.81 per share guidance includes the impact of shares repurchased through September 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, though they also put pressure on our net interest margin.

As analysts you're free to include or exclude the impact of future repurchases in your models, but our guidance today excludes any impact of future share repurchases.

In addition, in 2005 we have departed slightly from providing earnings guidance on a strictly GAAP basis, solely to exclude the estimated $0.03 per share benefit for the fourth quarter of 2005 related to any future benefit from the federal tax loss carry back discussed previously.

This is excluded in that it impacts only 2005 performance, and because offsetting impacts may occur later in the fourth quarter from possible balance sheet restructurings and/or expense initiatives currently under review.

With these parameters in mind, our 2005 fourth quarter earnings expectation reflect the following: good fee income growth, excluding operating lease income; we anticipate the margin will remain relatively stable with the 3.31% level of the third quarter; loan growth will be somewhat limited given the aggressive marketplace structure and pricing pressure and our desire to maintain our credit underwriting discipline.

However, we're cautiously optimistic with regard to better C&I loan performance in the coming quarter.

With deposit pricing also being very competitive, we expect only limited average deposit growth.

Noninterest expense should be relatively flat with the third quarter level, exclusive of operating lease expenses.

On the credit side, we anticipate continued relative stability with third quarter levels for NPAs and loan loss reserve ratios.

For net charge-offs, we anticipate full-year net charge-offs in the 32- to 34-basis point range.

And while we intend to give our 2006 earnings guidance next January when we report fourth quarter earnings, we have recently seen some analysts forecasting net charge-offs for next year at the top of our 35- to 45-basis point long-term targeted range.

While analysts are free to make their own assumptions, for our investors, I think it is important to mention that our current thinking about next year's net charge-off performance is that it is more likely to be in the lower half of our targeted range than the upper half, and certainly not at the top.

This completes our prepared remarks.

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

Let me turn the meeting over to the Operator, who can provide instructions on conducting the question-and-answer period.

Operator?

[OPERATOR INSTRUCTIONS] Your first question comes from Todd Hagerman with Fox-Pitt, Kelton.

Good afternoon, everybody.

Hi, Todd.

Just a couple of questions.

One, just, Tom, if I could take you back to the discussion on credit quality and some of those hot button segments, if you will, obviously stable in the quarter, but could you give us a little bit more color in terms of maybe the inflow, outflow on the credit side, particularly as it relates to some of these segments like the auto supplier market and so forth, how some of this may have influenced your numbers in the quarter?

Todd, let me ask Tim Barber in Credit Administration to respond to you.

Thanks, Tom.

We track the migration rate on a very regular basis, and we have seen very, what I would call consistent performance on that over the course of the past eight quarters, really.

So there were really no dramatic changes one way or another, and the results were within our expectations.

And that's true across all of the sectors and certainly includes the auto industry, specifically, that Tom talked about.

Okay.

And how would you generally characterize, just if you think back to kind of northeast Ohio has been kind of a more challenging area from an economic perspective, and as you talked about some of those statistics within the slides, in terms of your numbers relative to the Federal Reserve data and otherwise, what are you seeing out there in the market relative to some of these statistics?

Can you give me any more insight as to why your numbers are seemingly holding up so much better relative to the macro commentary that is out there?

Let me comment on two things.

One, just your reference to northeast Ohio, and two, our numbers versus others.

There's no question that northeast Ohio for us has been and continues to be a more challenging credit environment because we have more exposure in that region to the domestic auto sector than we do in other regions.

So we have a disproportionately large share of our weaker credits, commercial credits, coming from that region.

And, yet ,I think we feel that said, both in northeast Ohio and across the company, that we have the situation well overseen.

As we mentioned earlier, we're not concerned about our overall exposure to auto; it just happens to fall more heavily within northeast Ohio.

As to our metrics versus others, we have been focused -- as we reported to you now for a few years -- on improving significantly our underwriting standards.

This isn't something that is a 2005 activity on our part.

And we believe whether it is in auto or home equity, residential mortgage, that that's bearing fruit.

It is not that we don't have bankruptcy filings, certainly; it's not that we don't have foreclosures or charge-offs, but I think all the work that we've put into this effort of cleaning up credit quality and minimizing the possibility of recurrence of credit problems, is paying dividends now.

So I would attribute perhaps a little bit better performance than others as being our focus on credit quality over the last several years.

Okay.

That's helpful.

And if I could just ask an unrelated question for Don.

Just on the expenses, I noticed in the outlook that your -- the expectations is expenses basically comparable with third quarter.

Given your commentary, this quarter, in terms of some of the items in the salary benefit line, seem to be a little bit more one-time in nature, particularly if you think about the benefit expense as well as some of the set of comps that came down substantially.

If you could, Don, maybe just reconcile those issues for me.

The incentive comps being down lower is mainly driven by some of the lower production levels we saw translating into some lower balance sheet growth.

Our forecast wouldn't suggest that balance sheet growth is going to change dramatically, and so I don't know that that would be one time as it relates to the fourth quarter.

The benefit costs, we believe, in the third quarter were pretty consistent with what we would expect for the fourth quarter as well.

So we wouldn't deem those to be one-time in nature, but we will continue to monitor those throughout the next quarter and going forward.

That's helpful.

I didn't mean to say one-time, but rather, just activity levels, in general, fourth quarter generally being a little bit stronger relative to, say, Q3, the expectations you would see a little bit more activity there.

Yes, we are certainly hopeful of seeing a bit stronger lending activity in the fourth quarter.

Because of the softness in our general economy we're not going to be overly optimistic here, but we are hopeful of a pickup and if there is a pickup there might be some increment in expense.

But we overall, I think, feel pretty comfortable in characterizing our expectation for the fourth quarter in expenses as being relatively flattish.

I would agree.

And to the extent that we would see increases in the incentive compensation we would hope to see the offsets in the revenues, so we would be very pleased to see the revenues pick up as well.

Thanks very much.

Thank you.

Your next question comes from Matthew O'Connor with UBS.

Yes, you mentioned using some of the tax credits in 4Q to maybe offset some balance sheet restructuring, and I'm just wondering what kind of things you're looking at there?

I think a big chunk of your securities portfolio is variable rates, so what types of things might be available?

Matt, that is a good observation.

And as far as our investment portfolio, it is somewhere between 35% and 40% of that investment portfolio is variable rate, but we still have a sizable piece that is fixed rate and we'll continue to look at that to see if there is some opportunities there for evaluation of risk and/or market conditions that might suggest a change there.

We can also look at other loan portfolios, either from a credit risk or interest rate risk perspective that might be better for us to reposition that as well.

So we haven't made any final decisions on what we're going to do.

We're just starting to look at those now for the fourth quarter and just view that as one possibility to maybe offset the impact of that tax loss carry back.

Okay.

And can you just remind us when you say variable rates, do you review your price within a few month or a couple years?

They all report price within a three-month time period, I believe, for those that were characterized as variable rate.

Okay.

And just a separate question, you bought back 2 million shares this past quarter but your capital ratios are still well above your target and actually increased a little.

You're not looking for much balance sheet growth in 4Q, so should we expect to pick up in buyback, maybe accelerated buyback?

Matt, we haven't finalized any specific approach to the share buyback, but it is safe to say that the Board's higher authorization for us suggests the desire to do more of this.

But whether it be in accelerated form or opportunistically in the market day by day, we just haven't finalized on that.

Okay.

Thanks.

Thanks, Matt.

Our next question comes from Andrea Jao with Lehman Brothers.

Good afternoon, gentlemen.

Hi, Andrea.

First question is, for the fourth quarter what will swing results from the low end of guidance at the $1.78 at the higher end of guidance, because, obviously, one implies a dip in results in the fourth quarter and another an increase.

Andrea, we just like to keep you on your toes out there.

Andrea, maybe if I could go ahead and take a crack at that.

One is that our allowance methodology is very quantitative.

Our assumptions would be that the allowance and the credit quality ratios would stay relatively stable.

If there were changes in the overall economic indicators that we use to determine our economic portions of the reserve, that could change EPS up or down by a penny or so, and so that could be a driver for the range -- end of the range there.

But beyond that, we think that our performance is going to be pretty consistent overall with what we've shown for the third quarter.

Okay.

Then if we can kind of step back a bit, and while I know it is early, look into 2006, and could you share with us the kind of opportunities and the risks that you see, that you think of, as you think of 2006?

Andrea, we would rather just reserve, look ahead in 2006, to our normal time frame in January when we're reporting fourth quarter earnings.

So this, for us, like for many other banks, is our budgeting and planning season, and we will simply be better prepared to give you an educated look about 2006 when we get together in January.

Fair enough.

Last question, a bit of housekeeping.

Do you already have a forecast for the impact of option expenses or we should wait for '06?

In each of our Q's we've disclosed that impact on an annualized basis.

It is somewhere around $0.05 to $0.06 a share.

We would not anticipate a significant change from that going forward in '06 and beyond, but that is pretty consistent with where we've been in the past couple of years.

Perfect.

Thank you very much.

Thank you.

Your next question comes from Christopher Chouinard with Morgan Stanley.

Hello, good afternoon.

Hi, Chris.

Two questions, the first is just on the decline in floor plan this quarter.

You gave us what the balances were as of September and also, that I think you said that the decline over the course of the quarter was $157 million, or maybe it was a decline in the average balance.

But regardless, it looks like at one point it was down about 25%, which seems a little bit higher than the seasonality we've seen at some other banks.

I was wondering if there is something driving that?

Where do you think it kind of goes from here, and if you think that dealers are going to be keeping just generally lower inventories than they have over the last few years?

Chris, I'm going to ask Nick Stanutz from our dealer sales area to respond to you.

Chris, for us and our dealer base, we spend a lot of time with them making sure that they carry an inventory level on the new car side of no more than 90 days.

And that may explain, to a certain degree ,why we have a different declining rate than others, is that we try to discipline the dealer that it is not in his best interest to keep excessive inventory not knowing what sales will be in the future.

Clearly, for our marketplace in the Midwest, dealers had fabulous sales June, July, and August, and that basically has depleted their inventory.

We follow what we call the utilization rate, the amount of outstandings against floor plan commitment, and we are at really historic lows for a summer selling season at about 60%.

As we talked to the dealers today about inventory that is available to them, across the board, including even the import manufacturers, particularly, in this case Toyota I could speak to, they do not see availability improving significantly really until we get to the first quarter of 2006.

And I will tell you on the domestic side, with the way sales have been in October and what they are probably are forecasted and will end up being, dealers are not going to acquire a lot of inventory until they see more dealership traffic in terms of the customer base at their facilities.

So it sounds like dealers are going to be keeping fairly low levels relative to where they've been.

I think until they see more customer activity or they hear of the next big sales program, probably offered by General Motors, yes, there is not going to be an inclination to acquire a lot of inventory.

And two, GM and Ford are producing less inventory.

They are down 10%, each one of them, in terms of production over last year at this time.

That's right.

Okay.

And separately, on the allowance, and just wondering, I know it is a little bit formulaic when you get to the economic reserve, there has been a big decline in consumer confidence nationally at least, and I know that is one of the things that factors into your reserving.

Was that -- the recent decline reflected in this quarter-end reserve or is that something we would expect if it stays at this level would be reflected in next quarter?

Chris, this is Tim.

I think as we said we utilize a consistent, well-defined methodology and consumer confidence is one the drop was partially reflected.

We anticipate that that move, that number will move a little bit between now and the end of the fourth quarter, certainly.

And so it really will -- it remains to be seen exactly what that number does.

If there is a subsequent drop from today's levels then there will be a corresponding impact on the reserve.

We really try to make sure that we're working with the same indicators at the same time during a quarter so that we're completely consistent, and that may or may not in any one quarter reflect news that, toward the end of the quarter, that might point to a different direction.

I understand.

Okay.

Thanks very much, guys.

Thank you.

[OPERATOR INSTRUCTIONS].

Your next question comes from Heather Wolf with Merrill Lynch.

Hi, good afternoon.

Hi, Heather.

First question, could you explain -- re-explain, I guess -- I guess you've talked about this before, the repatriation, the negative tax implications from the repatriation of foreign earnings?

Sure can.

As far as repatriation, we had some earnings that were -- foreign earnings that were associated with some securitization transactions we had done in the past, they're on balance sheet, securitization transactions.

With the tax law that was passed earlier this year, I believe, we were able to repatriate those earnings back at a 5.25% rate as opposed to paying a 35% rate at a future date in time.

And so as a result of that, we were able to bring back a little over $100 million taxed at a 5.25% rate, resulting in an increase of tax expense for the current period.

Okay.

And so that is a one-time --

That is a one-time debt, that's correct.

Okay.

Okay.

And can you discuss -- I know you don't want to discuss quantitative outlooks for 2006 -- but can you discuss some areas in your expense base that you could reduce to try to offset the impact from stock options and maybe from a slower revenue environment?

Heather, what we are doing is we think and hope, embedding into our culture, our leadership environment, a daily focus on controlling expenses.

We don't have edicts in the company that we won't hire people in this area, or we'll -- anytime somebody leaves, you can't do this, you can't do that.

We simply charge our people with understanding the progress we've got to make and our efficiency and controlling expenses, and they have demonstrated this year, certainly, an ability to ferret out costs that are not necessary to incur in the delivery of service to customers.

So we don't have specific programs that are consultant-led.

We don't have major items that we're planning on initiating.

We're just working very hard on a daily basis to reign in expenses.

And we fully expect that that would continue to be the case next year because we readily acknowledge that it is an environment replete with possibilities for slower revenue growth, so we have to be very effective in addressing NIE.

So that doesn't give you a lot of specifics, but it is a response, I think, about the seriousness with which the leadership team at Huntington views the expense challenge and the attention we're giving to it, and I think results are showing for it.

Do you think if the revenue environment stays this strained, do you think it is possible to -- for you guys to continue to post the continuing improvement in your efficiency ratio like you did this quarter?

We had a big jump this quarter, and what we have said consistently in the past is that we wanted to reduce or improve the efficiency ratio sort of in the range of a percent a year.

We did much better than that.

We've done much better than that thus far this year.

So we're not anticipating the same kind of rapid decline, probably wouldn't now that the third quarter was at the 54.5% level.

But if we can take it down another notch, I think that would be a good thing to do and probably go a long way to continuing positive operating leverage for us.

Okay.

And those comments include the impact from stock options?

As far as overall management expenses or -- ?

Well, just in terms of you had hoped to get to another percentage point decline next year, including stock options?

In general that would be our objective, but we haven't made any observations or comments yet as far as 2006.

That would be our objective long term, is to reduce that by 1% or so a year.

We really have not factored in, Heather, the option expense burden and will be happy to comment to you on that in January.

Okay.

Thank you very much.

Your next question comes from [Jim Aga] with Millennium Partners.

Good afternoon, guys.

Good quarter.

Hi, Jim.

Thank you.

Hi.

I just wanted to ask, I'm sorry if you went over this, I just wanted to ask about slid --on page 10 you go over a slide with your growth in loans.

The reason for the sequential drop in middle market C&I, was it just excessive pay downs?

What was happening there?

Middle market C&I includes dealer floor plan loans.

So we had a decline in the quarter, I think I'm right in saying of $193 million, 157 of which was related to dealer floor plan.

So if you were to remove dealer floor plan from C&I, middle-market C&I where it is categorized, you would still have a decline but it would be slight.

Okay.

Okay.

Perfect.

Thanks a lot.

Thank you.

Your next question comes from [Colin Dunn] with KBW.

Good afternoon.

Hi, Colin.

Sorry to harp on the salary and benefit line, but just, I guess to extend the question asked earlier, it was such a dramatic drop sequentially that I was curious to know if there were any kind of accruals that might reset at the beginning of next year that expired or you guys are done accruing during this quarter, whether it is bonuses or like you said, benefits expense?

Thanks.

There are always new accruals established for the following year that you always reset, pension expense, things like that, on an annual basis.

But as far as changes from second quarter to the third quarter, the only difference really were the performance-related incentive plans, where there were some reductions there, and also reflecting the roughly 2% reduction in FTE that we saw that occurred during the second to second quarter as well.

Okay.

Thanks.

Thank you.

And then, I guess, one quick one on the deposit service charges, to the extent that that was largely driven by the consumer, consumer service charges, and then assess fee, is there anything to read in there about the consumer possibly stretching with expenses and things of that nature during the quarter?

We commented earlier about two-thirds of the increase in service charges were consumer-related.

And probably about two-thirds of that was with more NSF related.

Historically we've seen about a 6% increase in NSF income from the second quarter to the third quarter on a seasonal basis, and what we saw this year for the third quarter was pretty consistent with that trend.

All right.

Well, thank you.

Thank you.

Your next question comes from Fred Cummings with Key Banc Capital Markets.

Yes, good afternoon.

Hi, Fred.

A couple of questions.

One, on the loan growth in Indiana, total commercial loans were down 24% annualized rate.

I thought in previous quarters you guys have had pretty good growth in that market.

Can you speak to what is happening there?

Fred, the primary driver for that was that we had three commercial real estate loans that had prepaid during the third quarter, and that really drove the majority of that reduction, or all of that reduction, excuse me, and that we've consistently had very good growth in Indianapolis and wouldn't expect the overall trend as far as being good performance there to change.

And these were commercial real estate loans, Fred, that matured, so they went into the permanent market.

Okay.

And Tom, can you speak to -- I know you guys have the initiative, the ideal Huntington client, and where you want to -- that you want to focus on, on the commercial side.

Now, are you going to be pushing some clients out of the bank if you can't garner more business from them?

Is that the goal, like the credit-only commercial relationships, would you be weening some of those off the balance sheet?

Fred, I would say that it is important to us, as you understand, to have full relationships with clients; obviously, much more profitable for us.

I wouldn't necessarily say that we would be pushing clients who have a credit-only relationship away from us.

I think they would see less interest and less aggressiveness on our part if we thought that we just weren't able to expand our relationship.

We have had situations this year where we have walked away from credits, where we've been told that a thinly-priced loan was the extent of the relationship we could expect.

So I don't know which direction the pushing would have have occurred, but we are trying our best to be disciplined.

We are always trying to expand relationships.

It is only when we absolutely know that we can't that we are not being very aggressive, or in some cases moving away from client relationships.

Okay.

And one last question on the deposit side.

Looking at the break down of the consumer deposits and even demand deposits overall, demand deposits represent a relatively low percentage of total deposits at the Huntington.

Is that a function of your marketing strategy in terms of offering more interest-bearing checking type account products or what explains that?

We -- you're absolutely right.

The DDA is a lower part of our mix than it would be in some other companies.

We would welcome all the DDA, noninterest DDA that we could get.

We have worked very hard, particularly -- well, in both consumer and commercial environments to increase that.

One of our handicaps fell particularly on the consumer side is that as you know in some markets we have a relatively small physical presence, and as a consequence we're not as convenient as some of our competitors would be.

It's certainly not the case in central Ohio and in some other markets, but in some it is.

And I think that leads to an understandable smaller portion of our overall deposits that would be DDA related.

Okay.

It is not because of lack of interest on -- lack of desire on our part.

Okay.

Thanks, Tom.

Thank you, Fred.

At this time, there are no further questions.

Mr. Gould, are there any closing remarks?

Yes, we just want to thank everybody for participating in the call today and we look forward to seeing you next quarter.

If have you follow-up questions, please give Susan or I a call.

Thanks, everybody.

Thank you.

This concludes today's conference.

You may now disconnect.