Huntington Bancshares Inc (HBAN) 2006 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Huntington first-quarter earnings release conference call. (OPERATOR INSTRUCTIONS).

Thank you.

Mr. Gould, you may begin your conference.

Thank you, Judy, and welcome, everybody.

Copies of the slides we will be reviewing can be found on our website, Huntington.com, and this call, as has been the case in previous calls, continues to be recorded and will be available for rebroadcast starting about an hour from the close.

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.

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

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

First, this presentation contains both GAAP as well as non-GAAP financial measures where we believe it is 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 of the comparable GAAP financial measure, can be found in the slide presentation in the appendix and the press release or in the quarterly financial review supplement to today's earnings press release, all of which can be found on our website.

Also, certain performance data we will review are shown on an annualized basis, and in the discussion of net interest income, we do this on a fully taxable equivalent basis whether we relate certain onetime revenue and expense items on an after-tax per share basis.

Many of you I know are familiar with these terms and usage, but for those of you are not, we have provided the definitions and rationale on this slide.

Turning to slide three, 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 this slide and material filed with the SEC, including our most recent Form 10-K, 10-Q and 8-K filings.

Let's begin.

Turning to slide four, presenting today are Tom Hoaglin, Chairman, President and CEO, and Don Kimble, Executive Vice President, CFO 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 started, and I will turn it over to you, Tom.

Thank you, Jay, and welcome, everyone.

Thanks again for joining us.

Turning to slide five, as you know, the major event of the quarter was the completion of the Unizan merger on March 1.

Since it impacts how we will talk about first-quarter performance, I want to begin with a high-level overview of its financial impact on reported first-quarter results.

I will then provide a general overview of the quarter's highlights, and Don will review the quarter's financial performance in more detail.

I will close with an update on our outlook for the full year 2006.

Turning to slide seven, let me begin by saying that we are pleased to have completed successfully the Unizan merger at long last.

As of March 1, we added 42 banking offices, 52 ATMs, 610 associates and 2.4 billion in total assets.

As in aside, we intend to close or consolidate seven of the Unizan offices and two former Huntington offices.

At the close Unizan had 1.6 billion in total loans.

Nearly half of those loans were commercial loans with the remainder in the consumer loan category.

In addition, the merger added 1.5 billion in total core deposits.

While this merger had no meaningful impact on the quarter's bottom-line performance, it does impact performance comparisons to prior periods in several ways.

First, it adds about one-third of their closing balances to average loan and deposit balances.

For example, it added about 554 million to first-quarter average loans and 516 million to average deposit balances.

It is also important to note that until Unizan's loan and deposit systems are converted to Huntington's, which will happen this coming weekend, certain loan and deposit subcategory data reported for the 2006 first quarter and as presented in our earnings release material could be subject to reclassification by the time we report second-quarter earnings.

It appears that any such subcategory reclassifications will most likely be concentrated in commercial loans.

Second, income statement results include approximately one month's impact of Unizan's typical quarterly run-rate amounts.

Third, Unizan impacted certain credit quality measures such as net charge-offs, though not materially.

It did materially impact period end and nonperforming assets where Unizan accounted for almost all of this quarter's increase.

In addition, to the usual income and expense run-rate issues just mentioned, first-quarter noninterest expense included 1.0 million of merger-related expenses.

While these costs were spread over a number of expense categories, they were concentrated in personnel costs, primarily due to retention bonuses and in outside programming services and marketing expenses.

With our earnings -- within our earnings press release, as well as in slides Don will be reviewing in a moment, such impacts are quantified for you when they are material.

We believe it is very important that investors have clear visibility of our underlying performance trends.

With that background, let's review the quarter's performance, turning to slide eight.

Earnings were $0.45 per share, up $0.01 from the fourth quarter and 10% higher than a year ago.

This exceeded our expectations slightly, and we believe it represented a good start to the year.

We were again pleased with the relative stability of our net interest margin.

While down 2 basis points from the fourth quarter, it was essentially unchanged after giving consideration to a 3 basis point negative impact related to the timing of recognition of home equity loan annual fees.

Don will elaborate later on this.

On the other hand, a very tough competitive environment continued to make loan and deposit growth challenging.

Average total loans and leases grew at a 1% annualized rate after excluding the impact of the Unizan merger, as well as the decline in average total automobile loans and leases.

You will recall that we have in place an ongoing program to sell about 50% of automobile loan production.

Excluding the impact from the Unizan merger, total commercial loans grew at a 3% annualized rate.

Much of this growth came late in the quarter.

From the end of February to the end of March and before any impact of Unizan, commercial loans increased a very strong 1.5% or at an annualized rate of 18% concurrent with higher utilization rates.

Importantly, our pipeline at quarter end looks strong, so we remain optimistic that growth in commercial loans will improve going forward.

Growth in home equity and residential mortgages was just not there, and average balances declined 3% and stayed flat -- 3% on home equity and flat for residential mortgages -- excluding any impact from Unizan.

These results reflected the continued impact of higher interest rates, as well as our disciplined underwriting and pricing strategy.

On the deposit side and before the benefit of the Unizan merger, average total core deposits grew at an annualized 2% rate.

Again, this reflected our deposit pricing discipline in a very aggressive market.

Competition for loans and deposits remains very intense in our markets, and we intend to remain disciplined in this area.

Importantly, we continued to show increases in retail banking households, as well as commercial and small business relationships, thus laying the foundation for future growth once the interest rate outlook turns more favorable.

Fee income generated by our private financial and capital markets group was especially strong and was a real highlight.

Brokerage and insurance revenue increased 16% from the fourth quarter, and trust services income rose 4% and represented our tenth consecutive quarterly increase.

Their year is off to a great start.

The underlying noninterest expense before operating lease expense increased 6% from the fourth quarter.

This was expected for two reasons.

First, and as previously announced, we began to expense stock options this quarter.

Second, we experienced the typical seasonal increases in personnel cost.

Core expenses were well controlled and versus the year ago quarter were down 3% on a comparable basis.

Also, compared with the year ago quarter, our operating leverage was a positive 4% after adjusting for operating lease accounting and other significant non run-rate items.

Given the impact from the commencement of stock option expensing, we were especially pleased with this performance.

On the credit quality front, net charge-offs increased to 39 basis points in the first quarter.

Importantly, all of this increase reflected the resolution of certain loans classified as nonperforming loans in the 2005 fourth quarter and for which reserves were previously established.

This also explains why provision expense was less than net charge-offs.

Both 90-day and 30-day delinquency ratios were the lowest in many quarters and in some categories the lowest in over five years.

This gives us confidence in our charge-off outlook, and we continue to believe that our full-year net charge-off ratio will be at the lower end of our targeted 35 to 45 basis point range.

While nonperforming assets increased $37.7 million, 33.8 million of this increase reflected the Unizan merger.

About one-third of Unizan's nonperforming assets represented that portion of SBA loans guaranteed by the government -- the remainder of the increase, including the impact of one auto supplier loan in Michigan.

As a result, our NPA ratio increased 11 basis points to .59%.

Loan losses reserve ratios were essentially stable.

Lastly, our period end tangible common equity ratio was 6.97%, above our targeted range even after completion of the merger and the repurchase of common shares during the quarter.

Additional highlights for the quarter are shown on slide nine.

As already noted, we closed the Unizan transaction on March 1 and look forward to the completion of the Unizan system conversion this coming weekend.

So far all of the planning, preparation and mock conversions have gone very well, and we anticipate a smooth transition.

Signs on the Unizan banking offices will be changed to Huntington during the next few weeks.

We have already experienced Unizan and Huntington customers taking advantages of the new offices available to them, even before systems conversions and signage changes.

Associates are quite excited about the opportunities this merger presents to us.

Another highlight, and as we had previously announced, we began expensing stock options January 1 of this year.

This is expected to reduce our full-year 2006 earnings per share by approximately $0.05.

As we noted in January, this is included in our 2006 earnings per share target, which we are confirming again today.

We also continued our open market share repurchase program during the first quarter, repurchasing an additional 4.8 million shares.

This leaves 5 million shares remaining for repurchase under the current 15 million share authorization.

One other highlight of the quarter was our March 31 announced realignment in our regional banking leadership team.

Jim Dunlap, Mary Navarro, and Mike Prescott were named regional banking group residents with all of them now reporting directly to me.

These changes were the results of the previously announced plan retirement of Ron Baldwin, Vice Chairman, at the end of 2006.

Jim Dunlap will continue to function as Regional President for the West Michigan region, but his role has expanded as the East Michigan and Northern Ohio Region Presidents now report to him.

Mary Navarro will continue as head of Retail Banking, but is also taking on responsibility for the commercial line of business in Corporate Marketing.

In addition, the Regional President for the Central Ohio region will report to her.

And Mike Prescott will continue as Regional President of the Southern Ohio, Northern Kentucky region with the Presidents for the West Virginia, Indiana and the newly created East Ohio region reporting to him.

All of these individuals are exceptional leaders, and I look forward to their future contributions.

In closing, we're very pleased with the start of the year.

We remain optimistic in our outlook for 2006 and believe that we are on track to report full-year earnings per common share of $1.78 to $1.84 which we first announced last January.

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

Thanks, Tom.

As shown on slide 11, reported or GAAP net income was $104.5 million or $0.45 a share, up 8% and 10% respectively from the first quarter of 2005.

There are two significant items impacting the quarter's results.

So, on a net basis, they had no impact on our reported earnings per share.

First, there was a $4.6 million pretax positive impact reflecting the mark-to-market on mortgage servicing rights, or MSRs, net of hedge-related trading activity.

This included a $9.2 million positive mark-to-market adjustment to MSRs related to the implementation of FASB statement 156, which was partially offset by $4.6 million of hedge-related trading losses.

The net impact benefited first-quarter earnings by $0.01 per share.

The second item was a $2.4 million pretax or $0.01 per share negative impact related to the adjustment to defer certain annual home equity line fees.

This adjustment should have no impact on perspective earnings.

Slide 12 provides a summary of the first-quarter earnings highlights.

Most of these will be covered in more detail in later slides, so let's move forward.

Slide 13 shows that net interest income on a fully tax equivalent basis was flat with the fourth quarter.

This is not surprising in that the first quarters typically compare unfavorably to fourth quarters all other things being equal since it has two less days.

Our first-quarter net interest income was also negatively impacted by $2.4 million due to an adjustment to defer annual fees on home equity lines of credit.

This was a onetime adjustment and has negatively impacted the quarter's net interest margin by 3 basis points.

So though our net interest margin declined by 2 basis points from the fourth quarter, it would have increased slightly without this onetime deferral adjustment.

The chart on the right hand side of the slide shows the stability of our net interest margin.

As discussed in the past, the reasons for the stability in our net interest margin over the last five quarters include over 50% of our total loans or variable-rate.

Also, about one-third of our investment securities are also variable-rate.

Because of the relatively short duration of our fixed-rate assets, we're not as exposed to the flattening of the long end of the yield curve.

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

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

Slide 14 is the first of three new slides that are designed to help you understand underlying trends in loans and deposits, excluding the impact of our Unizan merger.

Our usual loan and deposit growth slides can be found in the appendix.

As shown at the top, reported average total loans and leases increased at an 8% annualized rate from the fourth quarter.

From this, we make two adjustments.

First, as you know from our previous calls, we have an ongoing program to sell about 50% of our auto loan production.

So it is not surprising that average automobile loan balances have declined from the year ago quarter.

For purposes of determining underlying loan and lease growth, they have been excluded in this analysis.

Second, we adjust the reported numbers to exclude the impact of Unizan loans since they are only in the current quarter and overstay growth rates, all things being equal.

With the two adjustments, we estimate that our underlying growth rate in loans and leases on this basis was an annualized rate of about 1%.

A similar analysis shows that reported average total commercial loans grew at an annualized 13% in the 2005 fourth quarter.

However, after adjusting for the impact of Unizan, the underlying growth rate was closer to 3% annualized.

However, as Tom noted, growth in the month of March was quite strong.

Slide 15 performs a similar analysis on our home equity residential mortgage and auto loan and lease portfolios.

Reported home equity loans grew at an annualized 4% from the fourth quarter.

It declined an annualized 3% excluding Unizan.

Over the last seven quarters, home equity loan production has been declining reflecting the negative impact on consumer demand as interest rates have risen, and we have seen significantly lower volumes from third-party originators.

In addition, consumers continue to pay down their balances as they refinance their variable-rate home equity lines of credit and the fixed-rate mortgages.

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

Average FICO scores on originations remain in the 720 range.

Reported residential mortgages increased an annualized 14%, but underlying growth was less than 1% annualized.

The same factors that impacted home equity loan growth are also reflected in the declining rate of growth in our residential real estate loans.

Reported total automobile loans and leases declined an annualized 13% or 15% excluding Unizan.

This decline reflected lower production levels in prior periods' loan sales, as well as loan sales of $170 million in the current quarter and a modest gain.

Origination volumes have generally declined over the last several quarters, primarily reflecting continued aggressive price competition and our desire to maintain underwriting and the pricing discipline.

As such, we are encouraged to see 2006 first-quarter auto loan production increase 38% from the fourth quarter and represent the second highest level of production in the last seven quarters.

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

The linked quarter decline in auto direct financing leases reflected a 22% decline in origination volume as a result of both lower demand and aggressive pricing competition.

Our exposure to automobile loans and leases continue to drop.

It was less than 17% at quarter-end, down from 18% at the end of last year.

Slide 16 performs a similar analysis but for core and total deposits.

Average total core deposits increased an annualized 14% from the prior quarter.

But 12 percentage points reflect the addition of the Unizan core deposits.

Slides 97 and 98 in the appendix detail deposit trends by type of deposit, as well as by the commercial or consumer classification and by business segment.

The main takeaway from these slides is that CDs less than $100,000 continue to drive our deposit growth, up 50% annualized.

Consumer deposits rather than commercial deposits, however, drove the performance with nearly half the current quarter's growth contributed by Unizan.

The main story continues to be the movement from other interest-bearing deposits into CDs and other time deposits.

Exclusive of Unizan's contribution, with rates rising such accounts continue to be the deposit of choice for rate sensitive retail customers.

Slide 17 reviews non-interest income trends.

Looking first at the bottom two lines, operating lease income continues to decline, reflecting the run-off of this portfolio.

They also remember the $8.8 million in security losses taken in the fourth quarter in conjunction with the repositioning of our securities portfolio.

Both of these items significantly influenced linked quarter growth rate.

Excluding these two items, non-interest income increased 6% from the fourth quarter, generally a good performance.

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

Deposit service charge income reflected seasonally lower personnel NSF and overdraft fees.

Trust services income increased 4%, including about approximately $.5 million from the Unizan merger.

This was the 10th consecutive quarterly increase for trust income.

Brokerage and insurance revenues increased 16% from the fourth quarter due to a 23% increase in annuity sales volume.

We will comment on the next key contributing factors to the 63% increase in mortgage banking on the next slide.

Slide 18 provides a complete picture of the mortgage banking income and hedge-related activity.

The top half shows the various components of mortgage banking income with the bottom showing the impact of MSR evaluation adjustment and related hedging, which mostly impacts other non-interest income.

Looking first at mortgage banking income, this totaled $8.6 million in the first quarter, down from recent quarters reflecting lower secondary marketing fees and other mortgage banking income.

Mortgage origination volumes declined 16% from the fourth-quarter level.

Now looking at the net impact of the MSR hedging, the bottom half of this slide, you'll know that $9.2 million MSR valuation adjustment, which is recorded as part of mortgage banking income, was partially offset by $4.6 million of hedge-related trading losses, which were recorded in other non-interest income.

We believe market value accounting for MSRs will result in substantially less net volatility on this basis in future quarters.

The $9.2 million increased MSR valuation consisted of two parts -- $5.1 million representing the FASB statement 156 mark-to-market adjustment prior to the implementation of fair value hedging strategy.

Note the prior periods reflected temporary impairment or recovery based on accounting for MSRs to lower cost to market.

The remaining $4.1 million of MSR valuation adjustment represented the mark-to-market adjustment after the implementation of fair value accounting and the hedging -- excuse me, the fair value of hedging.

The MSR positive valuation adjustment was partially offset by $4.6 million of net hedge-related trading losses, included in other non-interest income.

Slide 19 details trends in non-interest expense.

As shown at the bottom, operating lease expense continued its decline as this portfolio runs off.

Excluding operating lease expense, the remainder of the non-interest expenses increased $12.2 million from the fourth quarter.

Starting at the top, the largest driver of this increase was in personnel expenses.

Personnel costs increased $15.4 million or 13%, including $2.7 million from Unizan, as well as $4.3 million from stock option expense, which was implemented this quarter.

In addition, benefits expense increased $6.2 million, primarily related to the annual reset of payroll taxes and other benefit expenses.

Other expenses declined $3.4 million, reflecting a $2.1 million decrease in automobile race lease residual value losses, as well as reductions in donations, insurance and other miscellaneous expense.

Lastly, professional services expenses declined $2.1 million as a result of legal expenses returning to more normal levels.

Turning to underlying expense trends is difficult when comparing performance to the fourth quarter as since then we acquired Unizan and begun expensing stock options.

In addition, there is a seasonal increase in personnel costs due to the FICA tax reset.

Though one way to measure our progress in controlling expenses is to take our first-quarter reported expenses before operating lease expense of $223.8 million; then we back out the $4.3 million related to the expensing for stock options, approximately $4.2 million in run-rate expenses for Unizan and $1 million in merger-related expenses.

This results in $214.2 million of total expense, which is down 3% from the 220.4 million of total expense before operating lease expense in the year ago quarter.

So, in sum, we feel very good about our progress in controlling expense growth.

Slide 20 shows the trend in our reported efficiency ratio.

It shows an increase in that ratio to 58.3% in the first quarter from 57.0% in the prior quarter.

The increase is primarily related to stock option expensing, which added 1.1 percentage points to this ratio.

The first quarter of each year also includes a higher level of employee benefits due to the payroll tax.

One of our corporate objectives is to generate positive operating leverage by growing revenues faster than expenses.

Slide 21 is an analysis designed to show how operating leverage performance after adjusting for the effects of operating lease accounting on revenues and expenses, as well as for large items that affect comparability.

Those of you familiar with Huntington know the operating lease accounting impacts both revenues and expense trends.

With no new operating leases originated since April 2002, this portfolio has been in a runoff mode every sense.

As a result, both operating lease income and operating lease expense continue to trend downward.

This lowers both revenue and expense trends, thus distorting the underlying revenue and expense growth rates.

Slide 21 with details shown in slides 61 and 62 of the appendix adjusts the revenues and expenses for operating lease accounting, as well as other large items that affect comparability to determine a more insightful view of operating leverage performance.

Slide 21 shows that compared with the year ago quarter operating leverage on this adjusted basis was a positive 4%.

It was a very good beginning toward our full-year goal of generating positive operating leverage.

Also, shown on the slide at the bottom are the efficiency ratios calculated on a same adjusted basis.

Here you can see that our adjusted efficiency ratio in the first quarter was 56.9%, which is less than the reported 58.3% shown on the previous slide.

This compares with the 54.9% on a similarly adjusted basis in the fourth quarter, 59.4% in the year ago quarter.

Slide 22 shows capital trends.

At the end of the first quarter, our tangible equity to asset ratio had declined to 6.97%, and our tangible equity to risk weighted assets declines to 7.78%.

These declines were driven by share repurchases and to a much lesser degree the acquisition of Unizan.

Specifically of the 22 basis point decline in our tangible equity ratio, the share repurchases contributed about 35 basis points and the Unizan merger about 2 basis points with these negatives partially offset by the positive impact on retained earnings.

During the quarter we repurchased 4.8 million shares, leaving us 5 million shares remaining under our current authorization.

Even with these declines, our capital ratios remain very strong with our tangible common equity ratio still well above our 6.25 to 6.5% targeted range.

As of March 31, we had excess capital of between 160 and $250 million based on the targeted level of tangible capital.

Let me now close my session with some comments on credit quality where underlying performance, as Tom noted earlier, were fairly stable.

As shown on slide 23, our NPA ratio ended the quarter at 59 basis points as NPAs increased $37.7 million.

As Tom mentioned, Unizan contributed $33.8 million of this amount with most of the remaining increase related to a Michigan auto supplier.

Our net charge-off ratio was 39 basis points, up from 29 basis points in the prior quarter but still within our targeted range of 35 to 45 basis points.

The primary driver of this increase was a $7 million increase in commercial net charge-off, reflecting $6.5 million related to the resolution of certain loans that were classified as nonperforming loans at the end of the fourth quarter and for which reserves have previously been established. 90-day and over delinquencies declined slightly and were the lowest they have been in several years.

As you know, there has been a good deal of media attention to mortgage and home equity delinquency rates increasing significantly in the Midwest, leading the nation is what I recall as a characterization.

Quite honestly, we have not seen that.

Our 90-day delinquency ratio for home equity loans and lines increased only 5 basis points from the fourth quarter, and our residential mortgage delinquency ratio dropped by 4 basis points.

This, coupled with the fact that our first-quarter charge-offs are seasonally high, continued to give us confidence that our full-year net charge-offs will still be at the lower end of our targeted 35 to 45 basis point range.

I will talk about the other items in the following slide.

First, some comments on the NPA trend.

Slide 24 illustrates the trend in nonperforming assets and shows that of the $33.7 million increase in year-end, 33.8 million reflected the Unizan acquisition.

Importantly, it shows that about a third of the net additions from Unizan represent a government guaranteed portion of SBA loans and which now accounted for 12% of total NPA.

In addition, about 39% of NPAs represent residential real estate loans, on which historical losses have been very low.

The graph on the left-hand side of slide 25 shows the trend in our allowance for loan and lease losses.

At March 31 the allowance for loan and lease losses was $283.8 million, up $15.5 million from December 31, 2005.

As expected, our period-end loan loss reserve ratio remained relatively stable at 1.09%.

On the right hand side, we show trends in two loan loss reserve components.

Of the 1 basis point decline, all was within the transaction reserve component.

We expect our loan loss reserve ratio will continue to be relatively stable going forward.

You will note that we have conformed our loan loss reserve presentation to that presented in our 2005 annual report on Form 10-K where the previously and separately disclosed specific reserve was combined with the transaction reserve.

Specific reserve has always been a subcomponent of the transaction reserve, so this presentation more accurately portrays how we think about and evaluate our reserve adequacy.

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.

You will recall we report the allowance for unfunded loan commitments separately as a liability.

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

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

On this basis, our period-end reserve ratio as just noted was 1.09%, and our NPA and NPL coverage ratios were 183% and 209% prospectively.

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

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

On this basis, our period-end reserve ratio was 1.24%, also down 1 basis point with our NPA and NPL coverage ratios of 209% to 238% respectively.

It might also be helpful to spend a moment discussing how Unizan loan loss reserve levels related to our loan loss reserve level in so much as their reserve ratio is closer to 1.35%, higher than our 1.09%.

The Unizan reserve ratio represented their total allowance for credit losses.

As such, the more relevant measurement is to compare their ratio of 1.35% to our combined allowance for credit losses of 1.24%, not to 1.09%.

Speaking to the decline in the NPL coverage ratios, it is very important to remember that, as I mentioned a few moments ago, over 50% or over half of our NPLs are either residential real estate loans or government guaranteed portion of SBA loans.

As such, one would expect our NPL coverage ratio would reflect this lower risk content.

In conclusion, we are pleased with our overall credit quality performance and reserve adequacy and believe that full-year credit quality will continue to be in line with our expectations outlined in January.

This completes the financial review for the quarter.

Let me turn it back over to Tom.

Turning to slide 28, as you know, when earnings guidance is given, it is our practice to do so on a GAAP basis unless otherwise noted.

Such guidance includes the expected results of all significant forecast of activities.

However, guidance typically excludes unusual or onetime items, as well as selected items where the timing of financial impact is uncertain until such time as the impact can be reasonably forecast.

Regarding performance drivers, we continue to anticipate revenue growth in the low to mid single digits and expense growth in the low single digit range.

With revenues expected to grow faster than expenses, we anticipate positive operating leverage for the full year and continued improvement in our efficiency ratio.

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

Finally, we expect to repurchase the remaining 5 million shares from the current 15 million share authorization.

Given this type of performance, we are confirming our 2006 full-year GAAP earnings per share guidance of $1.78 to $1.81 inclusive of stock option expensing and the full-year Unizan acquisition effect.

This completes our prepared remarks.

Now 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?

(OPERATOR INSTRUCTIONS).

Fred Cummings, KeyBanc Capital Markets.

A couple of questions.

First on credit, Tom.

You guys may have touched on this.

You sold about 9.1 million of loans this quarter.

What was the nature of those loans that were sold?

Fred, I'm going to ask (multiple speakers)

I'm looking at your (multiple speakers) nonperforming asset flowsheet on page 11 of the handout.

Let me just ask Don Kimble to respond to you, Fred.

Sure.

Fred, on those loans, we did sell about $9 million of nonperforming loans.

We did have an opportunity to sell these loans at a cost that was at or below what our reserve levels were that were established previously and took that opportunity.

So, Don, this was a portfolio of C&I and commercial real estate.

That is correct.

Okay.

And then secondly on that same table, Don, I'm looking at new nonperforming assets coming in at 54 million, pretty consistent with last quarter.

Can you give us some insight as do you have any geographic concentrations?

Particularly looking at Michigan, does Michigan make up a disproportionate share of your new nonperforming assets?

And then can you talk a little about the types?

Is this commercial real estate, C&I, any concentrations by type of loan in the new nonperformers?

Sure.

We might ask Tim Barber to speak up here a little bit to provide a little bit more color on that.

The NPA number was somewhat concentrated in our Michigan and Northern Ohio regions, which is pretty consistent with what we have talked about.

There are no real concentrations from a type standpoint.

The C&I piece really drove more than the CRE piece, but it has been relatively consistent.

You know, NPAs move in and move out over the course of a quarter.

Okay.

And then lastly, looking at loan growth by state, and you guys provide such good information that is why I'm asking these questions, I'm looking at Indiana.

Just on a linked quarter basis, it looks like the loan balances were down relatively sharply.

Can you provide some insight as to what is happening in Indiana?

I thought that was one of the more healthier regions in the Midwest.

You know, I really don't have any specific information I can share with you on that.

We do have a strong C&I CRE pipeline in Indiana.

I can tell you that.

But obviously the dollars are not great in Indiana, and I honestly don't know what would have happened in the first quarter to cause the slight declined.

Kevin Reevey, Ryan Beck.

Tom, can you talk about if you are seeing any attrition with respect to Unizan's customer base?

Have they been pretty receptive to the deal, and do you think going forward they will be receptive to the transition?

Kevin, prior to the regulatory approval and our completion of the transaction on March 1, there were a couple of things that happened.

One was, as we may previously have commented on, their aircraft lending business ran off.

I guess I should say flew away.

In any event we had communicated to them that we were not interested in continuing that.

People involved in the business left.

The balances have rundown.

Secondly -- I'm going to sneeze here in just a second -- secondly, I am going to sneeze -- and secondly, the commercial -- pardon me -- the commercial lending team in the Columbus area for the most part left.

This was a team we would have been delighted to have stay with us, but we really were not concerned when they did leave because of our dominant position in Central Ohio.

Some balances ran down with that.

So we saw two factors influencing a pre-closing rundown on their customer base.

For the most part, the deposit book held pretty well together.

The team of the banking office staff stayed together and customers stayed on the consumer side.

Post the transaction closing, we really have not seen any material exodus at all from Unizan customers.

Now we have not gone through the systems conversions yet, which, as we mentioned, we will do this weekend.

That always stresses things a little bit more.

We feel as if we have communicated very well with customers.

We feel like the former Unizan associates are very well prepared.

We are handling customer questions that arise in advance of the conversions well.

There will always be some churning, but we are quite optimistic I think about our ability to retain the Unizan customer base.

And the team that left in Columbus, do you have any plans on replacing them at all?

That is really not necessary for us.

The team was two or three or four people, and we can accommodate activity very nicely with our own Huntington's Central Ohio team.

And earlier you mentioned that your C&I loan growth was very strong in March.

Can you give us some color as to what that number looks like and if you think going forward that that is indicative of a turnaround in your loan growth?

Yes, the first thing to be said is that January and February were quite soft for us.

March from the end -- the last day of February to the last day of March we grew 1.5% on an absolute basis.

So for the sake of arithmetic integrity, that is 18% on an annualized basis.

In addition, we do have quite full pipelines in almost all of our markets.

A couple of things are happening.

One is, we continue to do well.

Our teams do well in focusing on what we call ideal Huntington clients in the commercial space, and we are winning more business as a result.

Secondly, the current book of customers that we have in some markets, not all, are borrowing more utilizations rates.

Line utilization rates are up a bit.

We have some regions -- Cincinnati and Northern Ohio being one -- that are growing very nicely, and loan demand is reflecting that.

Others, particularly those that are bogged down with automotive, are a little softer, so there is a mix.

But on balance we feel quite encouraged about what is ahead for us this year on the commercial side.

And then on the noninterest PDA, it looks like that slid a little bit on a linked quarter basis even when you include Unizan.

What are your plans to grow that number going forward?

Kevin, this is Don.

As far is that decline on a linked quarter basis, we tend to see seasonal changes in the noninterest bearing deposit balances from fourth quarter and first quarter coming down from tax payments and other purposes like that.

We would see a little bit of a ramp-up in the fourth quarter, and then it comes back down in the first quarter.

We are very focused on trying to grow our non-interest-bearing accounts and focus very much on growing relationships on the consumer side and on the commercial side and doing that through the addition of new households and growing balances that way.

Yes, Don, I guess the point is that the numbers of net new consumer (indiscernible) households continue to grow nicely, so we are pleased about that.

The same thing is true for small-business banking.

So the balances are off a little bit in that category on a linked quarter basis, but we attribute most of that, Kevin, as Don was saying to seasonal factors.

And then my last question will be, can you talk about home equity deferral fees and what was behind that during the quarter?

We in this quarter decided to go ahead and defer certain annual fees that we received with home equity lines of credit.

Most banks were aware of we were recognizing that on a cash basis, and Huntington was one of those banks.

We feel that the more appropriate accounting treatment is to go ahead and defer those and recognize those over the year.

That results in a onetime adjustment for us.

Prospectively that there is no impact as far as the P&L for amortizing those versus recognizing them on a cash basis.

So we think it would be a more appropriate accounting treatment to have adopted that methodology going forward.

Andrea Jao, Lehman Brothers.

I was hoping you could share with us your underlying assumptions in terms of the interest rate environment, as well as balance sheet dynamics that go into your view that the margin will hold steady?

Sure.

This is Don.

As far as our projections for the interest rate environment, each time that we do a new forecast we use the forward curve that is out there in place to use for our baseline.

So that would imply a continuation of a very flat yield curve from the short end to the long end of the curve.

So we are not anticipating much change there.

Also, we continue to monitor if we would either increase -- if short-term rates would increase by another 100 basis points and long-term rates would decrease by another 100 basis points and do that type of a scenario analysis, it would still show that our net interest margin would only go down by about 4 basis points.

So there really is not much impact to us from the flattening of the yield curve or even going inverted at this point in time.

As far as the loan and deposit growth assumptions, it is consistent with what we had talked about in January as far as our guidance for this year.

We expect that our commercial loan growth will be a little bit stronger than our consumer loan growth with commercial loan growth in the mid single digit kind of range.

We would expect the deposit growth to be in the low to mid single digit range as far as the growth rates there.

So those are the underlying assumptions as far as coming up with a fairly flat yield -- or a stable net interest margin, excuse me.

Great, that was helpful.

A follow-up question, one thing you have been able to do quite effectively is focus on the ideal Huntington client.

When you look at Unizan's clientele base, how close or how far would you say it is from the Huntington ideal?

What I would say is, on their -- in their C&I portfolio, we are pretty close.

In other words, they were a good relationship oriented bank and did not chase low participations, originated by others to large companies.

They were a local lender, lender to local businesses, and so we feel that there is probably a pretty good fit there.

On the commercial real estate side, they did quite a bit of originations for investor-owned real estate that has not been a core business for Huntington.

They are a success.

They have been successful at doing this.

Their credit quality is pretty good at that.

We don't intend to discontinue that.

We will probably try to learn from it and make sure that we are not missing out on opportunities in the old Huntington footprint and do more of that.

We would not call that ideal Huntington client type lending.

At least there's a pretty good fit on the C&I side.

Matt O'Conner, UBS.

A couple of questions here.

With more signs that the Fed is about done, would you consider expanding out some of your securities and mortgages, which I think are a little bit shorter in duration than they normally are?

We have talked before in previous quarters that our expectations would be at some point in time we might be looking at extending out some of the investment portfolio securities.

As we have said, there is about a third of those securities are variable rate in nature and might allow us to convert some of those over to the fixed-rate.

Our duration of our portfolio is still fairly short at about 2.8 years.

So we think that is a little shorter than normal for us and a lot shorter than many others in the industry.

So we think that could be an opportunity.

I don't think that we are going to see much of a change in our position as far as the loan side.

As far as our residential real estate loans, we still keep on our portfolio the ARMs and adjustable-rate type of products and are not looking to add much in the way of a 30-year fixed or 15-year fixed type product to our loan portfolio.

In terms of what will get you to extend that out, is it higher long-term rates in absolute terms or just more conviction that the Fed is about done?

Well, I think that we will consider both factors.

Whether or not the Fed is about done and is there any benefit to extending out at this point in time.

Since it is still a relatively flat curve, do we get much benefit from linking the duration of that investment portfolio?

We will take that into consideration with the overall interest rate sensitivity position we have and start making some decisions based on that.

Okay.

And then just separately on the capital management side, you bought back a lot of stock this quarter.

You have 5 million I think left on the repurchase.

Remind us the 2.5 million related to Unizan, where does that come into play?

And then how eager are you guys to bring down your capital to the targeted range?

The 2.5 million would not be included in the original authorization.

So we will move forward with the 5 million remaining under the authorization as planned.

We will need to talk with our Board of Directors with regard to additional authorization relative to Unizan.

I would not say that we are hell-bent to bring our tangible ratios -- tangible capital ratios down as fast as we possibly can, but we do believe we have considerable access capital and want to continue to manage that prudently for our shareholders.

So it is hard to say exactly how quickly it is likely to come down, but we do imagine that it will be coming down to approximate the targeted range that we have had.

All right.

Thank you.

Bob Hughes, KBW.

A couple of questions.

Tom, you mentioned in the press release that commercial loan growth was particularly strong in the month of March.

Was there anything really driving that?

As a follow-on to that, could you perhaps share with us where utilization rates are now versus, say, in the past quarter or two?

Bob, with regard to what is driving the commercial growth, I think it is a combination of factors, one of which is generally not a booming economy, not to your surprise, although we do have pockets within our footprint that are growing just pretty nicely.

While our commercial growth in Indianapolis was a little soft in the quarter, some pipeline is good over there, and that is a growing market.

Greater Cincinnati market is a growing market.

Columbus is a nice market.

But in other markets we have charged up teams that are competing very effectively in the marketplace and winning new business, which kind of counteracts any adherence to local softness in the economy.

We do have clients that are borrowing under their lines more actively.

We are engaged in some expansion activities.

I don't want to overstate this because it is certainly not true throughout the entire Huntington footprint, but we are seeing some greater business activity resulting in greater borrowing activity among our client base.

So good efforts on the part of Huntington bankers, some greater activity from customers, and Jay, what is our experience with regard to the utilization rates?

Yes, sure.

This is on our commercial line of business.

Our utilization rates in the first quarter were 2 percentage points higher than they were in the fourth quarter and were the highest level that they have actually been since the first quarter of '04.

Okay.

So, Bob, I hope that is helpful to you.

Yes, absolutely.

Then I know you guys provide a tremendous amount of information in your appendix.

I am just trying to take a look at the commercial deposit trends, which I'm sure are skewed a bit by Unizan.

But did you see any particular changes there in sort of the Legacy Huntington franchise on commercial deposits?

I mean additional drawdowns or anything that bode for higher credit demand?

Bob, as far as the commercial deposits, I think that the Unizan impact was pretty evenly split as far as the relationship for Huntington and Unizan as far as the mix on commercial versus consumer as well.

So I don't think we saw anything drastically different as far as the commercial growth rates on a relative basis there.

Okay.

And then with respect to auto industry exposure in the C&I category, it looked to me like your loans to suppliers came down pretty dramatically from year-end, at least partially offset by floor plan and dealer floor plan and non-floor plan loans.

I would assume the latter is probably somewhat seasonal, but can you give us some color behind both of those?

Let me talk about the loans to suppliers, and let me ask Nick Stanutz, who is also here representing our Dealer Sales area, to comment on the floor plan business, Bob.

We did see a fairly significant decrease in loans to the auto suppliers sector during the quarter.

Our year-end levels were about 260 million at the end of the first quarter.

It was down to about 216.

We are not disappointed in this, not to your surprise.

We do have some well performing auto supplier customers.

We don't want to paint the entire portfolio with the same brush, but there is no question that there is some stress in that portfolio.

In any event either because of payoffs or simply reduced activity, our exposure was down in that portfolio during the quarter.

And next, Nick Stanutz, what can you say with regard to the dealer floor plan business?

Two comments I would make.

One is that clearly we are seeing the seasonal buildup of inventories.

You know, the typical cars selling period now will happen May, June, July, August.

The dealers are beginning to take inventory in anticipation of sales that they should see here in the next 120 days.

The other factor is we, quite frankly, are winning at acquiring new relationships.

With National City exiting the phone business in November of '05, we are winning against their customer base, and we're winning against the [captures] at acquiring the floor plan business.

So it is really, Bob, a combination of both of those factors.

Christopher Chouinard, Morgan Stanley.

I had a quick question about last quarter's small restructuring of the bond portfolio.

Did that have a positive impact on the net interest margin this quarter?

We would have seen about 1 million 2 or so pickup in the current quarter as far as additional yield from that restructuring.

So that would have been about a basis point impact or so.

Right.

As far as the Unizan, and I apologize in advance if you have already answered this question -- it sounds like you are doing the conversion this weekend.

I'm thinking about the timing of the cost saves and the branches that you plan to close.

Can you give us sort of a timeline as to how quickly you expect that?

You said that the conversions take place this week.

Do we want to make sure we get through those conversions cleanly?

So many of the cost saves won't occur for a number of, say, 30 to 45 days after the conversion timeframe.

We are working on the consolidation of the offices in connection with those conversions as well.

So we think that the run-rate expenses for the most part should be set toward the end of the second quarter with most of them realized from the third quarter going forward.

Okay.

And if you will allow me one last small question.

Slide 59 of your appendix, it looks like the capitalization rate on the MSR went up significantly in the first quarter versus the fourth quarter from 125 basis points to 167.

That really reflects the impact of the adoption of FASB statement 156 that through the fourth quarter we accounted for those on a lower cost or market basis and that starting with the first quarter we account for those on a mark-to-market basis.

So that shows the full impact of that, that there is about an $18 million pretax adjustment that went through the equity section of the balance sheet, and then as we said earlier, there was additional $9 million mark that went through the mortgage banking income this quarter.

Got it.

So going forward this is going to flow through equity or -- as this changes (multiple speakers) or going through the income statement?

Going forward this flows through the income statement, but going forward we also have hedging activity that mitigates the risk associated with that volatility.

So we think that going forward we are in a much better position as far as being able to manage that sensitivity than where we were before in a lower cost or market basis.

Heather Wolf, Merrill Lynch.

I, too, am going to apologize if you have already answered this.

But looking at the chart on page 11 of the supplement, I noticed that the new nonperforming assets remained elevated with last quarter.

I thought that you mentioned last quarter that once you start to see nonperforming assets, new nonperforming assets, that you had to increase your provision.

I'm curious why your provision went down when your new performing assets stayed stable.

This is Don.

As far as our provisioning, it really is not determined whether or not it has been categorized as nonperforming or not.

It is based on the underlying risk associated with the asset.

We've track that throughout the time period as opposed to just taking a look at significantly increasing it when it hits the NPA snag.

We're going to see flows in and out of NPAs going forward, and each quarter we go through or each month actually we go through and regrade our total loan portfolio.

Based on those grades and includes the borrower rating, as well as the collateral rating, we calculate a very quantitative approach to our allowance -- our allowance for loan losses.

So those changes and the migration of the overall quality does get reflected immediately into our allowance.

Okay.

Can you give us a little bit of color on your most recent regrading and how that looked?

Well, we regrade loans throughout the year, so there is not anything specifically as far as a timing and event.

But generally I think that we can say that our current grading of our loan portfolio was slightly better than what it was at the end of last year just because our transaction reserve decreased by about 1 basis point.

So that implies that the overall credit quality improved slightly during that time period, not significantly, but there is a slight impact, and that is why the transaction reserve went down.

Okay.

Can you tell us what your interest recoveries were on the returns to accruing status and also on your sales?

I don't have that information with me right now.

We can get that for you and make sure that we provide that here shortly.

But I don't have it here in the room with me.

Sue.

No problem.

Thanks very much.

Very helpful.

At this time there are no further questions.

I will now turn the call back over to management for any closing remarks.

Thank you, everybody.

We appreciate your interest in Huntington and for joining us today.

If you have any additional questions, please feel free to call Susan Stuart or myself in the Investor Relations Department.

Thank you again and good-bye.

This concludes today's conference call.

You may disconnect at this time.