Huntington Bancshares Inc (HBAN) 2005 Q4 法說會逐字稿

Good afternoon, everyone.

My name is Anissa, and I will be your conference operator.

I would like to welcome everyone to the Huntington fourth quarter earnings release 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]

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, sir.

Thank you, Anissa.

And thank you everybody, and welcome to our call.

As usual, opening comments, copy of our slides that 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.

If you have not received any of the information, or are having problems getting copies of slides, please call the Investors Relations department at 614-480-5676.

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 risks and uncertainties, which may cause actual results to differ materially.

We assume no obligation to update such statements.

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

Slide 3 notes several aspects of the basis of today's presentation, and I encourage you to read this, but let me point out a couple of key disclosures, related to the basis of 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 this slide presentation in the Appendix, in the press release, or in the quarterly financial review supplement to today's earnings release, which can be found on our website.

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

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

I know many of you are familiar with these terms and usage.

But for those who are not, we have provided definitions and rationale for their usage on this slide.

Let's begin.

Turning to slide 4, presenting today are Tom Hoaglin, Chairman, President and CEO, and Don Kimble, Executive Vice President, Chief Financial Officer and Controller.

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

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

We want to get going.

Let's get started.

Tom, I turn it over to you.

Thank you Jay, and welcome everyone.

Thanks again for joining us today.

Turning to slide 5, I will begin with my assessment of our fourth quarter highlights.

Don will then review the quarter's financial performance in more detail, and I will provide a recap of our full year highlights, some updated comments on Unizan, and close with our outlook for full year 2006 performance.

Turning to slide 6, earnings were $0.44 per common share, down 6% from the third quarter.

We were disappointed that results came in below our expectations.

Two credit-related items are responsible for this performance.

First was a $13.1 million increase in provision expense, with total provision expense exceeding net charge-offs by $13.3 million.

This was driven by certain commercial loan downgrades late in the quarter.

Those of you following us for sometime know that we use a highly quantitative loan loss reserve methodology, therefore these late quarter downgrades resulted in a higher than expected increase in provision expense.

As a result our loan loss reserve ratio increased to 1.10%, up from 1.04% at the end of September.

The second item was a 15% increase in non-performing assets.

Due to deterioration very late in the quarter, two credits were classified as non-performing loans.

One was an automotive-related industry credit in our northeast Ohio region and the other, a residential-related commercial real estate project in our west Michigan region.

These accounted for $12 million of the $15 million increase in NPAs.

As a result, our year-end NPA ratio was 48 basis points up from 42 basis points at the end of the third quarter.

We do not see either of these items as the beginning of a trend.

Going forward, we would expect our NPA and reserve ratios to remain relatively stable compared with our year-end levels, and that the absolute level of provision expense will more closely reflect that of net charge-offs, as well as loan growth.

Likewise, we expect our NPA ratio will not change much from its year-end level.

While credit quality certainly concerned us, not all of the credit front was negative news.

Our net charge-off ratio was 29 basis points again for this quarter.

Another positive for Huntington was the three basis point improvement in our net interest margin.

This came despite a 1 basis point negative impact from share repurchases.

We also made a decision to reposition our investment securities portfolio, which resulted in an $8.8 million securities loss.

Don will provide the details but this will improve our future performance.

Total average commercial loans increased an annualized 7%, in total middle market C&I, and CRE loans, grew at a 9% annualized rate.

This reflected growth in the central Ohio and east Michigan regions, along with a modest increase in automobile dealer floor plan loans, which had declined significantly in the third quarter.

Average total consumer loans declined at a 4% annualized rate.

Most of this was due to a decline in total automobile loans and leases, as production was more than offset by the impacts of payments and loan sales.

Average home equity loans declined slightly, and residential mortgages were flat.

This reflected the continued slowing growth we have seen over the last few quarters, and was due to lower customer demand as interest rates have increased, also due to customer paydowns, and our continued credit underwriting and pricing discipline.

Additional highlights are shown on slide 7.

Core deposits increased at a 3% annualized rate, mostly driven by growth in CDs less than $100,000.

Total average commercial deposits increased at a 10% annualized rate, led by 14% annualized growth in commercial interest bearing demand deposits, and 8% annualized growth in commercial non-interest bearing DDAs.

Expenses were well-controlled, and we held on to the progress we made in the third quarter, of lowering our efficiency ratio.

Adjusted for operating lease accounting and other large items affecting comparability, our efficiency ratio was 54.9%.

There are slides in the Appendix that reconcile this to the efficiency ratio calculated on a GAAP basis.

And our capital ratios remain strong, though they declined moderately as expected, due to our repurchase of stock.

Non-interest income was essentially flat, after excluding the impact of operating lease income, as well as the securities loss.

In sum, this was a quarter where we see good underlying performance in a number of areas, but we were clearly disappointed with certain aspects of credit quality performance.

Nevertheless, we are optimistic about our prospects going into 2006, and I will comment more on that later.

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

Thanks, Tom.

As shown on slide 9, reported or GAAP net income was $100.6 million, or $0.44 per share.

There were two significant items impacting the quarter's results, though on a net basis they had no impact on reported earnings per share.

First, there was a $7 million after-tax positive impact, reflecting the recognition of federal income tax refunds on income tax expense.

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

This benefited fourth quarter earnings by $0.03 per share.

The same as in each quarter, each of the previous three quarters.

These benefits only impacted 2005 performance, and we anticipate our effective tax rate in 2006, will revert back to its more typical level just below 30%.

The second item was $10.4 million, or $0.03 per share, negative after-tax impact reflecting the combination of $8.8 million of security losses, and a $1.6 million negative impact reflecting an MSR recovery of temporary impairment, more than offset by MSR-related hedging activity.

Slide 10 shows that net interest income on a fully taxed equivalent basis, increased 2% from the year ago quarter, and 1% from the third quarter.

Reasons for the stability in the net interest margin over the last five quarters include, over 50% of our total loans are variable rate, about one-third of our investment portfolio is also variable rate, and because of the relatively short duration of our fixed rate assets, we were not as exposed to flattening at the long end of the yield curve.

We also continue to be disciplined in our deposit pricing strategy.

During the quarter, we restructured a portion of our investment securities portfolio to position it better for performance in coming quarters.

Specifically we have sold $260 million of lower rate agency securities, most of which were callable, which generated $8.8 million of security losses.

The proceeds were reinvested and well structured agency CMOs at higher yields.

We continue to believe that our net interest margin will remain fairly stable going forward.

Slide 11 details our growth in average loans and leases.

At the outset, let me point out that the fourth quarter growth rates for the middle market C&I, and the middle market CRE portfolios, were impacted by a net $500 million reclassification of certain CRE loans for the C&I category.

Largely representing commercial loans secured by owner occupied real estate.

You may recall that in 2004, we established new criteria categorizing new and renewed commercial loans, as either C&I or CRE, based more on the purpose of the loan, than the collateral.

As new loans were made or existing ones were renewed, these new criteria were applied.

In the fourth quarter we applied these criterias to all remaining loans, that had not been renewed.

Which resulted in this quarter's large reclassification.

This now puts all of our C&I and CRE loans on the same definitional basis.

Therefore, and to better understand fourth quarter commercial loan trends, it's best to look at these two loan categories in total.

On a combined basis, middle market C&I plus CRE loans grew at an annualized 9% rate, this growth came from two primary regions, as was supported by a modest rebound in dealer floor plan loans.

This growth was encouraging.

Average total small business C&I and CRE loans declined on an annualized 4% level from third quarter, reflecting weaker demand in the current quarter.

Auto loans declined an annualized 12%, reflecting payments and loan sales.

Our flow sale program continues to work as planned, and during the quarter we sold $148 million of loans and a modest gain.

Our origination volumes declined reflecting seasonality, continued aggressive pricing competition, and our desire to maintain underwriting and pricing discipline.

We continue to originate loans with an average FICA score in the mid-740 range.

The linked-quarter decline in auto direct finance leases reflected a combination of lower demand and aggressive price competition.

At year end, our exposure to automobile loans and leases had dropped to 18%.

Home equity loans and lines declined during the fourth quarter.

Over the last six quarters, home equity line production has been declining.

This reflects the negative impact on consumer demand, as interest rates have risen.

Consumers continue to pay down their balances.

It also reflects the fact that we want to continue to originate only high quality loans.

Average FICO scores on originations are in the 720 range.

These same factors are reflected in the declining rate of growth in our residential real estate loans.

Operating lease assets classified as non-earning assets, and listed near the bottom of the table, continue to run off and declined to $245 million.

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

As such, the operating lease portfolio is in a runoff mode, so this decline is expected.

In the Appendix, you will find additional slides detailing loans and lease growth by business segment, there are also additional slides in the Appendix that detail our auto loan and lease, as well as home equity production, for those of you wanting more detail.

Slide 12 shows that average total core deposits increased annualized 3% from the prior quarter.

As has been the case, for the past several quarters, those core deposit categories posting increases were non-interest bearing demand deposits, and CDs less than $100,000.

Up an annualized 4%, from 33% respectively.

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

This reflected an increase in customer preference for higher fixed rate deposit products.

The next slide highlights what's been driving these trends.

Slide 13 shows core deposit trends between commercial and consumer core deposit accounts.

As can be seen, it has been commercial core deposits that have been driving the net interest in total core deposits as consumer core deposits have been relatively stable.

On the commercial side, total average commercial core deposits increased on a 10% annualized rate from the third quarter.

The non-interest bearing demand deposits increased at an 8% annualized rate, and interest bearing demand deposits increased an annualized 14%.

While average consumer core deposits have seen little growth, the main story here continues to be the movement from other interest-bearing deposits into CDs, and other timed deposits.

With rates rising such accounts continue to be the positive choice for rate-sensitive retail customers.

In the Appendix, you will find additional slides, on core deposit growth by business segment.

Slide 14 reviews non-interest income trends looking first at the bottom two lines.

Operating lease income continued to decline, reflecting the runoff of this portfolio.

You will also note that the $8.8 million of security losses as previously mentioned in conjunction with the repositioning of our securities portfolio.

Excluding these two items, non-interest income was essentially flat with the third quarter with mixed performance.

Let me talk about the primary items starting at the top.

Deposit service charges declined $2.7 million, primarily due to lower commercial service charges, influenced by higher balances and increased crediting rate.

Trust services income increased 4%, our Trust business continued to perform well.

This was the ninth consecutive quarterly increase.

This growth reflected a combination of factors, including higher personal trust income generated in our new Florida offices, higher institutional servicing fees, and mutual fund assets under management.

Brokerage insurance income decreased 6% from the third quarter, this was caused by lower credit insurance revenue, and mutual fund sales.

Key contributing factors that changed in mortgage banking and other non-interest income trends are detailed on the next slide.

Slide 15 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 half showing the net impact of MSR hedging, which mostly impacts other non-interest income.

Looking first at mortgage banking income, you will note that in the fourth quarter this totalled $10.5 million, before a $400,000 MSR recovery of temporary impairment, striking a subtotal here, helps give a clearer picture of the underlying mortgage banking income trend.

As you can see, the $10.5 million was little changed from the third quarter.

The only category with any measurable change from the third quarter was origination fees, which declined, mirroring the decline in mortgage origination. $10.1million decline of MSR recovery of temporary impairment accounted for a $10.2 million decline in total mortgage banking income, noted on the last slide.

Now looking at the net impact of MSR hedging, the bottom half of the slide, you will note that the $400,000 MSR recovery of temporary impairment which is recorded as part of the mortgage banking income, and was more than offset by the $2.1 million of hedge-related trading losses, which was reported in other non-interest income.

The $10.7 million less in trading losses accounted for most of the $13.1 million increase in other income from the third quarter, noted on the previous slide.

Slide 16 details trends of non-interest expense, as shown on the bottom, operating lease expense continues its decline as the portfolio runs off.

Excluding operating lease expense, the remainder of non-interest expense increased a modest $1.4 million from the third quarter.

Starting at the top, and hitting only the significant items, personnel costs decreased $1.4 million, as incentive compensation declined along with the slower loan growth.

Benefits expense also declined.

Net occupancy cost increased $1.3 million, reflecting the true-up of year-end related occupancy cost, and outside data processing and other services increased $1.6 million, as various technology projects were completed during the quarter.

Slide 17 shows the trend in our reporting or GAAP efficiency ratio.

It shows the continued improvement in that ratio, and the slight decline to the 57% in the fourth quarter.

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

Operating lease accounting and other large non-run rate items, added over 2 percentage points to this ratio this past quarter.

Slide 75 to 77 in the Appendix provides the reconciliation for those of you wanting additional details.

Slide 18 shows capital trends.

At year-end, our tangible equity to asset ratio had declined to 7.19%, and our tangible equity of risk-related assets was at 7.88%.

These declines were driven by the repurchase of 5.2 million shares.

We have 9.8 million shares remaining under the current authorization.

Even with these declines, our capital ratios remain strong with our tangible common equity ration well above our 6.25% to 6.50% targeted range.

Let me now close my section with some comments on credit quality, whereas Tom noted, performance was mixed.

As shown on slide 19, our NPA ratio ended the quarter at 48 basis points as NPA's increased $15 million, as Tom mentioned, two credits accounted for $12 million of this increase.

On a more positive note, our net charge-off ratio was 29 basis points, unchanged from the third quarter, and our 90 day and over delinquency rates remain stable, with only a modest uptick on consumer delinquencies.

While on this subject, there's been much dialogue about the impact of the accelerated bankruptcy filings in the fourth quarter, due to the change in the bankruptcy law.

We have not seen any meaningful impact from this event in this quarter.

The main credit disappointment and the one that impacted earnings was the downgrade of certain commercial credits, due to deterioration very late in the quarter.

These downgrades were in the manufacturing, services, and commercial real estate sectors largely in the northern Ohio and eastern Michigan markets.

These downgrades required an increase in our loan loss reserves.

Given our highly quantitative loan loss reserve methodology, as a result provision expense exceeded net charge-offs by $13.3 million, and our loan loss reserve ratio increased to 1.10% from 1.04% at the end of the third quarter.

Though our NPA and NPL coverage ratios declined, they remain strong.

Let me use the next two slides to add some color to our loan loss reserve trends.

The graphs on the left-hand side of slide 20, shows the trend in the allowance for loan and lease losses.

As Tom noted, going forward we would expect the absolute level of our provision expense, will track more closely to the absolute level of net chargeoffs.

Further our loan loss reserve ratio should remain relatively stable going forward.

On the right-hand side, we show the various loan loss reserve components.

The increase in the transaction specific reserve components directly reflected the commercial loan downgrade.

On slide 21, 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 commitment is recorded separately as a liability.

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

The first set of ratios compare the reported allowance for loan and lease losses to period end loans, leases, NPAs, and NPLs.

On this basis, our period end reserve ratio, as just noted, was 1.10%.

And our NPA and NPL coverage ratios, were 229% and 263% respectively.

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

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

On this basis, our period end reserve ratio was 1.25%, with NPA and NPL coverage rations of 261% and 300% respectively.

Both quite strong.

This completes the financial review for the quarter.

Let me turn the presentation back over to Tom.

Thanks, Don.

Before discussing our 2006 outlook, it would be helpful to review some year end 2005 performance highlights, since we manage for the long term and think more in terms of annual performance when measuring progress.

Slide 23 provides some perspective on the year just closed.

First our earnings per share of $1.77, while below our expectation due to the fourth quarter downgrades, was up 4% from last year, and represented a record year.

Second, last year, our shareholders received $0.83 per share in dividends, a 14.5% increase from $0.725 in 2004.

A key accomplishment was achieving 3.5% positive adjusted operating leverage.

More on that in a moment.

We maintained a relatively stable net interest margin in an environment that was one of the most challenging the industry has seen in many years.

Consumer and commercial loan growth were good, up 11% and 8% respectively.

We are very pleased with our 5% growth in average core deposits in an environment of aggressive pricing.

Improvement in our sales and service enabled to us post these results, while maintaining pricing discipline in an aggressive pricing market.

Our fee income performance was mixed, with some successes and some challenges.

We were successful in expense manage, and lowered our efficiency ratios significantly.

That charge-off performance was very good, and stable throughout the year.

The one win we faced was the $26 million, or 48% increase in loan loss provision of which $18 million occurred in the fourth quarter.

Lastly, we continued to build capital throughout the year at very strong levels, and began to use some of that to the benefit of our shareholders through share repurchases.

Slide 24 highlights what was perhaps our most important achievement last year, 3.5% positive adjusted operating leverage.

Overall, reported revenues declined 8%, while expenses decreased 14%, resulting in a reported operating leverage of 6%.

We believe this overstates our operating leverage because of the impact of operating lease accounting, and other large items that affect comparability between the two years.

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

Slide 78 and 79 in the Appendix provide a full reconciliation from GAAP to the adjusted numbers shown on this slide.

On an adjusted basis, revenue increased 2.5% from 2004 and non-interest expense declined 1%.

This resulted in the 3.5% favorable spread between revenue and expense performance.

This exercise also allows the calculation of an adjusted efficiency ratio, and shows that on this adjusted basis, our efficiency ratio for 2005 was 56.5%, down 2 percentage points from 2004.

This is still above our 50 to 52% targeted range, we think was very good progress, and we expect to continue to make further progress on this in 2006.

Slide 25 shows reported net income and earnings per share of $412.1 million, and $1.77.

There were a number of significant items that influenced results over the course of the year.

This is simply provided to show that when taken collectively, these items net out to no significant impact.

The point is, we think that $1.77 is a good base and indicator of last year's performance.

Let me now comment on our Unizan expectations.

As you know, this transaction is awaiting approval by the Federal Reserve.

While we cannot predict the eventual timing or outcome, we told you last quarter that we would provide an update of our financial assumptions during this call, as we had refiled our application.

Here's our current thinking, when originally announced we estimated $0.01 EPS accretion in the first year.

Our current estimate is that there would be $0.03 to $0.04 dilution in the first year.

Why the change?

While there are a number of factors.

The two key ones were a smaller Unizan balance sheet, and a lower net interest margin.

Regarding the balance sheet, earnings assets are lower now for several reasons.

In 2004, a decision was made to exit Unizan's personal aircraft lending business.

And loan balances subsequently declined.

In addition, the Unizan commercial banking team in Columbus departed.

While this was not a particular concern to Huntington, given our strength in Columbus, loan balances did fall.

And loans have also declined in Unizan's financing and indirect areas.

Unizan's base in the Canton, Zanesville, Newark and Dayton markets, our areas of primary interest, have held up just fine.

Unizan's deposit base is also lower, as certain higher cost deposits were allowed to run off and not surprisingly, their margin has been under the same pressure for the same reasons as most banks, namely higher interest rates and a flatter yield curve.

Given our integration work, we are comfortable that additional expense opportunities exist beyond what was determined when the transaction was originally announced.

It's premature to give any specifics, but we are optimistic we can lower the dilution estimate.

This is a transaction that still makes sense for both Unizan and Huntington shareholders, and we look forward to moving ahead with it upon receiving regulatory approval.

With that as a bit of a background, let me comment on our expectations for 2006 by turning to slide 29.

Slide 29 lists our major assumptions.

When earnings guidance is given, it's our practice to do so on a GAAP basis, unless otherwise noted.

Such guidance includes the expected results of all significant forecasted activities; however, guidance typically excludes 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 forecasted.

Overall, the 2006 economic environment is expected to be little changed from 2005.

While weakness in the automotive manufacturing and supplier sector is expected, our related exposure is relatively modest.

How much this weakness impacts other banking activities, however is unknown.

Our assumption is that this will also be modest and mostly concentrated in our east Michigan and northern Ohio regions.

Regarding interest rates, we expect those to be relatively stable.

We are not counting on much change in the shape of the yield curve, and we will continue to target our interest rate risk position in our customary neutral position.

Let me recap what this implies on slide 30.

Within this type of environment and on the same basis as reported 2005 earnings, we anticipate a 2006 Earning per share range of $1.87 to $1.92.

However, two changes must be considered.

One is certainly, and one yet to be determined.

First we will adopt stock option expensing effective January 1st.

This will negatively impact earnings per share about $0.05 for the year.

Second is the Unizan Financial Corp. acquisition.

This has not yet received regulatory approval, and we can make no assurances about it.

As I mentioned previously, if it is approved, we estimate this could negatively impact 2006 Earnings per share by $0.03 to $0.04, unless we are able to capture additional expense savings.

If both of these items are considered, the targeted GAAP earnings per share range would be $1.78 to $1.84.

As analysts, you are certainly free to include or exclude this from your models.

The bottom half of this slide is a list of more specific 2006 performance assumptions.

We anticipate revenue growth in the low to mid-single digits.

This is expected to reflect commercial loan growth in the mid to high-single digit range, core deposit growth in the mid-single digit range, a net interest margin that is relatively stable, and non-interest income growth in the mid-single digit range, including strong trust and brokerage income.

We are targeting expense growth in the low-single digit range.

With revenues expected to grow faster than expenses, we anticipate positive operating leverage, and continue improvement in our efficiency ratio.

Regarding credit quality, we anticipate a net charge-off ratio at the lower end of our 35 to 45 basis points targeted range, and relatively stable NPA and allowance for loan loss ratios.

And lastly, we expect to continue with our share repurchase program, which is 9.8 million shares remaining from the current 15 million share authorization.

Yesterday, Huntington's Board of Directors increased the quarterly cash dividend on our common stock by 16%, to $0.25 per share, payable April 3rd, 2006 to shareholders of record on March 17, 2006.

We previously increased the dividend by 7.5%, at the April 2005 Board meeting.

The current action reflects the Board's optimism about Huntington's future financial performance.

In addition during the last few months, we have spent considerable time listening to shareholders, as we operated in a slower growth environment, we believe that we should return more of the capital we generate to shareholders in the form of cash dividends.

Although this increase results in a payout ratio above our long-term target range of 40 to 50%, we think it's warranted.

We also look forward to continuing our share repurchase program.

This completes our prepared remarks, Don, Tim Barber, Jay, and I will be happy to take your questions.

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

[OPERATOR INSTRUCTIONS] We will pause for just a moment for your first question.

Your first question is from Heather Wolf with Merrill Lynch.

Hi.

Good afternoon.

Hi, Heather.

Let's see, a few questions.

First, just some clarification on Unizan.

Can you update us on the potential closing of that?

Heather, this is Tom.

As I mentioned, we have not yet received a response from the Federal Reserve.

You can think of this as still proceeding on a routine timetable.

We do however, expect to hear from the Federal Reserve within the next few weeks.

We'll set a closing timetable after we do, as you can appreciate, but we do intend upon receiving regulatory approval to complete the transaction pretty swiftly.

Okay.

So the $0.03 to $0.04, is that a full year impact?

We have assumed, Heather, that the transaction would receive, just for the purposes of our planning, we have assumed that the transaction would be closed in the first quarter.

Okay.

And can you refresh our memory on the impact to the capital ratio?

Let me ask Don to do that.

Including the share repurchase that was announced at the time of the transaction would have a dilutive impact to our tangible equity to asset ratio of 30 basis points, or slightly less than that.

Okay.

And then last question on Unizan, the individual line item guidance that you gave us, is that organic, or does that include Unizan?

The guidance is organic growth, it does not include the impact from Unizan.

Okay.

And then just one other question on the restructuring of your securities book.

Can you give us a feel for the margin lift that that provided this quarter, and for ongoing quarters?

The fourth quarter impact was not significant.

It was around $500,000 or so.

The full year impact, we would expect to have a lift of a little bit north of $5 million pretax impact from the restructuring going forward.

I'm sorry -- You said full year $5 million?

That's correct, yes.

Okay.

Great.

Thanks very much.

Thanks, Heather.

Your next question is from David George with A.G. Edwards.

Good afternoon.

A couple of quick questions.

First, on your tax rate, could you talk about what type of tax rate we should expect for you guys for 2006?

It's bounced around a little bit.

And then to follow up quickly with respect to consumer loan growth, was a little soft in the fourth quarter.

Can you kind of characterize what you are expecting for '06, and to the extent it remains weak, do you expect to continue to add securities to the balance sheet?

How should we think about balance sheet composition as we move forward?

Thanks.

Sure, David.

This is Don.

As far as the tax rate, we would expect our 2006 tax rate to be just below 30%, which is more of our historic level, and it would be consistent with our tax rate.

If you back out the impact of our tax loss carry back, and also the repatriation that occurred in the third quarter.

As far as the consumer growth going forward, that we would expect modest growth as far as consumer loan categories, and it would imply kind of low to mid single digit kind of growth as far as the consumer categories, and as far as the investment portfolio going forward, we would expect that to be on a consistent basis as far as relative size of the investment portfolio to our total assets going forward.

David, this is Tom.

Our consumers in our markets, and I would say that almost all of our non-auto-related consumer loan growth is within our retail banking footprint.

Our consumer borrowers, I think have turned a bit more cautious.

We do expect to generate some growth in the home equity portfolio, versus having experience in the fourth quarter of being pretty flat.

But we don't expect that growth to be anywhere resembling the double digit rate that we experienced in '03 and '04.

We do expect to get some first mortgage residential growth, although what has happened is that with the run up in rates, we are now getting less of our mortgage originations in the form of ARMs.

ARMs being the predominant type of loan we actually put on our balance sheet.

So booked growth will be tempered by that, I think.

So I hope that's helpful to you.

It is, Tom.

Thank you.

Your next question is from Fred Cummings with KeyBanc Capital Markets.

Yes, good afternoon.

Hi, Fred.

Hi, Fred.

One quick question on the tenure of the relationships on the automotive side and the commercial real estate credit.

How long have these customers been with you if these loans go back?

Pretty shortly or have , or were they longer term customers, Tom?

They were longer term customers, Fred.

In the automotive situation, as you might appreciate, you know, we had the manufacturer which this company was supplying, asked the company to halt production of its products for a period of time.

And that created a weaker situation which we felt we had to recognize, that this was not a new client for Huntington.

With regard to the commercial real estate transaction in the west Michigan area, I'm just looking at my notes here this involved an industrial park in a city in the west Michigan area.

It's a land loan with a strong guarantor.

The project is taking root a bit more slowly than we had anticipated.

And we -- we feel good about our position for the long term, but, again, felt as if we had to recognize the deteriorating condition in the quarter.

Again, not a new customer to the bank.

Okay.

And then second question for Tim.

Tim, it's interesting to know that your consumer charge-offs were not negatively impacted by the changes of the bankruptcy law in October, what would you attribute that to?

The fact that you guys might be going after higher FICO score customers on the consumer side, what is your take on that?

The first thing, excuse me, Fred, is that the initial impact would be on financial institutions with credit card exposure.

And we really have none.

So that's really the primary reason we saw no movement at all in the fourth quarter, and we had anticipated that, I think, talked about that on the last call.

We'll see a little bit of movement because clearly we had a little higher rate of bankruptcy filings in the fourth quarter, along with everybody else, and we'll see a little bit of impact over the course of 2006, but nothing dramatic.

Okay.

Thank you.

Thank you, Fred.

Your next question is from Andrea Jao with Lehman Brothers.

Good afternoon.

Hi, Andrea.

First a couple of questions on the balance sheet.

Do you have plans over 2006 to sell certain loan categories?

I'm sorry, Andrea as far as selling loan categories?

We sell our auto loans with a similar closed sale arrangements we would have in place today, and we would continue to sell fixed rate mortgage loans as they are originated, but we do not have any plans to incorporate here to make any other wholesale loan portfolio sales.

Got you.

Okay.

And then on the funding side, could you talk about, you know, your propensity to use borrowings versus broker deposits, or probably just, you know, an increase in the use of market funding over the course of 2006?

I think that we'll look at that as need arises.

Historically in the last year or so, we probably relied more heavily on national market deposits, as a funding source.

We thought it was a cost effective source of funding for us at that point in time.

We continue to re-evaluate that with other national market funding, as well as the securitization for certain asset classes.

And so we'll continue to review all three types of funding arrangements, and see which is the best alternative for us going forward.

Andrea, this is Tom, as we look ahead to '06, while we would see loan growth at a slightly higher level than deposit growth.

We don't see a significant gap between the two.

So as maybe to exert a little less pressure on the funding sources than we might have experienced in prior years, when our loan growth was so strong.

Great.

That helps, thank you.

The next question is from Christopher Chouinard with Morgan Stanley.

Could you clarify something on your guidance, you mentioned 1% growth in non-interest expenses as your target for 2006.

Does that include Unizan?

Our expectation was low single digit growth for expenses, and that is our organic growth excluding Unizan.

Got it.

And if I could follow it up.

A couple of other quick questions.

First, floor plan came back this quarter, what was the dollar amount of the delta in floor plan loans this quarter?

The average change in the balances for floor plan was about $50 million increase this quarter versus the third quarter.

It's still about $100 million below the average balance of second quarter of last year.

We still believe the dealer inventories are lower than they have been historically.

Okay.

And as far as the restructuring went this quarter on the securities book, what was the yield differential between what you sold and what you bought, and at what point in the quarter did that transaction take place, early or late?

It was about a 200 basis point lift from the individual securities, and it was transacted mid to late November.

Any more of that to come in '07?

Or, I'm sorry, in '06?

We'll continue to look at our investment portfolio but we are not aware of anything at this point in time, that we would see for a need for repositioning or sales going forward.

Thanks very much.

Your next question is from Bob Hughes with KBW.

Hi, guys.

Hi, Bob.

A quick question for you, regarding the downgrades of commercial credits during the quarter, was there any specific event that drove that?

Was it just part of a typical internal loan review #1, or, you know, potentially driven by regulators over internal re tradings?

I'm not trying to sound alarm bells or anything.

I'm curious what drove that event, #1.

And secondly, among those downgrades, was there any particular geographic or industry concentration?

Bob, this is Tom.

I have reviewed each of the sizable situations personally, just to satisfy myself, as to what has happened or not happened.

Downgrades were not a function of regulatory review.

They came really as a very natural part of our process, either with loan review or in simply working between the origination side, and the credit admin side.

We had several circumstances where we fully anticipated, until late in the quarter, that events would occur that would have precluded the downgrades, or the movement into NPA status.

And as luck would have it, events didn't occur.

And as I have tried to find a particular thread or a theme to all of this, what I would say is most of these just have very peculiar individual, represent peculiar individual circumstances, which makes me comfortable in suggesting that they don't really represent part of a trend ahead.

They cross different industries, different geographies, but in a geography, it wouldn't have been unusual for there to be one downgrade, as opposed to a lot.

So I think, you know, there's just -- there's very little here that I would suggest in the form of a trend.

Okay.

That's very helpful.

I think you have been pretty clear about detailing your thoughts on 2006, but, you know, judging by the reaction of the stock today, it seems like it has a few people spooked.

We are trying to do the very best that we can at articulating what we believe is a positive view of 2006, and others, the people who choose to react to it are on their own, but we feel good about what's ahead for the Company.

As we mentioned earlier in the planned commentary, while we were certainly disappointed with credit quality experience, in the fourth quarter, there were we thought, a lot of positives, not the least of which was in the margin.

It was an expense control that we believe bode pretty favorably for this year, and those, among other things give us good confidence about our ability to deliver in-line with our guidance.

Your next question is from Jeff Davis with FTN Midwest Securities.

Jeff.

Tom, not to get the cart before the horse, but let me try, is to the extent Unizan closes in first quarter, what are your thoughts on additional acquisitions later in the year, or looking forward to 2007?

Where your interests might lie, and are you seeing many banks for sale in a general perspective, whether you are interested or not?

Well, Jeff, as you correctly point out, our top priority is given the opportunity by the regulators to complete the Unizan transaction, and to integrate it very successfully, not too surprised, we feel like we know that company pretty well now.

Right.

-- and so I would like to think that we could move pretty swiftly and effectively through that.

We obviously want to make sure that our financial performance is what it should be, as a company, for 2006, but we have long maintained that we want to get larger in our existing footprint, because we do have a number of markets where we are just not, in our opinion, margined up.

We do expect to open a good number of new offices around the footprint this year.

And would be interested in particular situations, if there are acquisition opportunities that arise.

My current reading of the likelihood of that is that there is still a very significant disparity between seller expectations and buyer's ability, the PEs are still inverted.

And so I don't, I'm not convinced that there will be a lot of activity in the short term, but we want to be ready to respond favorably to the degree there is seller interest, and we think we have a very good story to tell about the kind of place we are, and what we are trying to accomplish, and that the sellers would be interested in Huntington.

So that's how I respond to to you.

Okay.

And then a follow-up, if I may.

For the year, the Company posted a 16 ROE on capital levels that were, I'm going to assume a little bit above what you were targeting going into the year.

What is your thought strategically?

Numbers go up and down and credit situations come and go, and you are in the business of risk taking.

What, is a 16 ROE, is that from your perspective that's pretty good return?

It should be better, or well below expectations?

Jeff, we'd like to get to a minimum of 18%.

Go ahead.

I'm sorry.

That's long been our objective.

That's on the low end of our long-term range.

I do believe that as we move forward in our share repurchase activity, and have the kind of year that we think we are capable of having, you are going to see that ROE number come up pretty nicely, to get closer to that longer term target.

Okay.

Thank you.

Thank you.

Your next question is from Andrew Marquardt with Fox Pitt Kelton.

I wanted to see if there's any additional color on the credit quality front, wanted to see if there's any additional color you could share, with regard to why you feel this is not the beginning of a trend?

Were there just such specific credits or, you know, maybe you can give some additional color there, in terms of the number of credits, the size, and the downgrades?

Sure.

Well, the reason that I feel as I do, is because of the amount of time that I have spent looking into the situations, and satisfying myself.

They would range from, you know, $0.5 million, let's say up to, you know, 5 to $6 million dollars would be a large one.

And what our sense very much here is, that we are very adequately reserved against exposure, that we have situations where we've got very cooperative borrowers, we're working well with them, they aren't all embedded in one or two industries, or one or two geographies.

They all have kind of different stories about them, and that doesn't to me, look like the beginnings of a trend.

We are quite comfortable with our underwriting standards, our approach, the way we work between our origination side and our approval section.

We feel very good about our loan review function as well.

So, you know there's a limit to how much detail I can give you, but I do feel as if we scrubbed this pretty well, and feel comfortable that it isn't the beginning of a trend.

And are these already on NPA status?

Most of the downgrades did not involve going to NPA status.

As we mentioned, we have a couple whose aggregate amount totaled $12 million that did go to NPA status.

Okay.

Thanks.

One other question.

Separately.

The $9.8 million that you are protecting to buy back in '06, is that inclusive of anything related to the Unizan deal?

Sure.

As far as the assumption that we basically we'll take a look at our total capital position and consider even after the impact of the share repurchase, and the Unizan transaction, and the increased dividends, that we're still going to be above our targeted capital range.

But 9.8 million shares, it is reflective of the plan for repurchases for next year.

That includes the pending Unizan?

That does not include the pending Unizan.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question is a follow-up from Andrea Jao with Lehman Brothers.

Hello again.

Hello.

Just wondering if you could remind us what your long-term EPS growth targets are?

And, you know, how you get there.

Andrea, Tom.

Our long-term targets for growth are 10 to 12%, however, I think what we said in the fall of last year, was that we didn't think achievement of those long-material targets was realistic, during a period of relatively slower growth for us and for many regional banks.

So we basically suggested that it makes more sense for us to aspire to mid to high single digit growth, as opposed to the 10 to 12% range.

That isn't to suggest for one minute that the Huntington team is not quite mindful of our aspiration of 10 to 12%, it's just trying to be more realistic given market conditions, of what may happen in the next couple of years.

Okay.

Thank you.

Your next question is a follow-up from Heather Wolf with Merrill Lynch.

Just a follow-up question on the commercial downgrades.

If these credits were to get downgraded further, or to be placed on non-performing status, would you have to take incrementally more provisions against them, or are they at this point, at what you believe to be fully provided for?

Heather, Tom.

With each successive downgrade, the way we do it, comes the need for higher reserving.

So when you place a credit on non-performing status, as opposed to my friend here, Tim Barber is advising me so rather than go further, Tim why don't you respond.

Okay.

Thanks, Tom.

NPA status does not equal more reserves in our model.

Most of the downgrades that Tom has talked about, have moved to a point where the next decision might be non-performing.

That decision would not create additional reserves.

So does charge-off create additional reserves.

I guess I'm trying to figure out, it sounds like from your commentary that you feel like these credits have been downgraded are pretty much fully reserved for.

Exactly.

That's what we're saying.

Okay and is this, is the same true for the $12 million credit, or not for the total $12 million credits that were put on NPA this quarter?

Yes, in other words, we feel as if any loss exposure there, we have recognized in our current level of reserves.

I just want to clarify that we feel the reserves are adequate.

It doesn't mean that we have 100% reserves.

When you say fully reserved, I don't want you to assume here that it would be fully reserved.

Right but in your belief, it's fully reserved, based on what you expect to recover?

That's correct.

And one other thing too, with our guidance we did say that we expected our net charge-offs for 2006 to be at the lower end of our long-term guidance of 35 to 45 basis points, and that would take into consideration projected chargeoffs from these identified credits.

Heather, I hope you have learned your lesson about the risk in getting me to respond.

So I'm glad I have experts around me here.

Okay.

That's very helpful.

Thank you.

Thank you.

Thank you.

Thanks.

At this time, there are no further questions.

Okay.

Everybody, thank you so much for participating in the call.

We look forward to talking with you, if you have further questions, please call Susan or myself.

Thanks again and good day.

That does conclude Huntington's fourth quarter earnings release conference call.

You may now disconnect.