Huntington Bancshares Inc (HBAN) 2006 Q3 法說會逐字稿

Good afternoon.

My name is [Paula] and I will be your conference operator today.

At this time I would like to welcome everyone to the Huntington Third Quarter earnings Conference Call. [OPERATOR INSTRUCTIONS].

Thank you.

Mr. Gould, you may begin your conference.

Thank you, Paula and welcome, everybody.

I'm Jay Gould, Director of Investor Relations for Huntington.

Copies of the slides we will be reviewing can be found on our website at huntington.com.

This call is being recorded and will be available as a rebroadcast starting about one hour from the close of the call.

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

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 and non-GAAP financial measures where we believe it's 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 the slide presentation.

In its appendix, in the press release, or the quarterly financial review supplement to today's earnings press release which can be also found on our website.

Second is how we will talk about the impact of the Unizan merger on our reported results.

As you know, this merger closed on March first of this year.

The Unizan merger did not have a impact comparing current quarter results with last quarter, however it does have an impact on year-over-year quarterly, as well as year-to-date comparisons.

The methodology we have used to estimate this impact is noted on this slide and there are tables on the earnings press release as well as the slide deck appendix that detail the estimated impact attributed to Unizan merger on loans, deposits and selected income statement line items.

You are encouraged to familiarize yourself with this information as it will help you understand better our quarterly underlying trends.

Slide three reviews additional aspects of the basis of today's presentation and discussion.

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.

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

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

Slide four, 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 risks and uncertainties please refer to this slide and material filed with the SEC, including our most recent Form 10K, 10-Q and 8-K files.

Turning to slide five, presenting today are Tom Hoaglin, Chairman, President and CEO, and Don Kimble, Executive Vice President and CFO, and also present for the Q & A period is Tim Barber, Senior Vice President of Credit Risk Management.

Let's get started.

Tom?

Thank you, Jerry.

Welcome everyone.

Thanks for joining us.

Turning to slide six, I'll begin with a general overview of the quarter's highlights.

Don will then review the quarter's financial performance in more detail with Jay commenting on credit quality trends.

I'll then close with an update on our outlook for full year 2006 performance.

Turning to slide seven, earnings were $0.65 per share , as we pre-announced, this included a $0.19 net positive impact from two items: first, a $0.35 per share positive impact from the resolution of the 2002, 2003 federal income tax audit which reduced federal income tax expense.

This was partially offset by a $0.16 per share investment securities impairment reflecting our decision to reposition our investment securities portfolio to improve its performance going forward.

These were positive developments for the Company.

Not only will our margin benefit but our capital ratios ended the quarter significantly higher.

As noted by our period end 7.13% tangible common equity ratio, up from 6.46% at the end of June and well above our 6.25% to 6.5% targeted range.

Our balance sheet is stronger and we've improved our earnings power.

Don will cover both of these items in a minute.

Excluding the net impact of these two items, earnings were $0.46 per share, just slightly ahead of our expectations and comparable to last quarter.

Our net interest margin was 3.22% in the current quarter, down 12 basis points from the Second Quarter.

This was generally consistent with our expectations announced at the September 27th analyst day in New York City.

This decline was driven by a combination of factors, including higher deposit costs and to a lesser degree, lower home equity loan spreads.

Don has some expanded comments on the margin.

It's important to note that we now anticipate our Fourth Quarter margin will be up 4-6 basis points from this level as a result of the repositioning of our securities portfolio.

Loan growth continues to be challenging.

Total loans grew an annualized 2% or 4% annualized excluding automobile loans and leases, which declined at an annualized 8% rate, reflecting combination of continued low demand for auto leases and our ongoing program of selling a portion of our automobile loan and lease production.

Average total commercial loans grew an annualized 3% pace, primarily reflecting growth in middle market CNI loans as utilization rates again increased slightly this past quarter.

From the consumer side, we saw strong 10% annualized growth in residential real estate loans.

Home equity loan growth was an annualized 1%.

Growing deposits remained extremely competitive with average total core deposits up just 1% annualized.

Deposit money continues to shift into higher fixed rate CDs and out of lower rate money-market and other deposits.

We're confident that we can compete effectively for both loans and deposits, yet we also remain committed to maintaining pricing and underwriting standards.

Fee income performance was mixed.

We saw a growth in deposit account service charges and brokerage and insurance income, but we also saw a decline in mortgage banking income excluding MSR related activity.

While our trust service income declined modestly, thus ending our 11 consecutive quarters of growth, we didn't miss by much and continue to feel good about our ability to grow trust income.

Expenses were especially well controlled and decreased 3% excluding the ongoing decline in auto operating lease expense.

Personnel expense and marketing were the main contributors.

Credit quality remained relatively stable and strong while our net charge off ratio increased 11 basis points to 32 basis points, this was primarily a function of charge-offs associated with the sale of some non-performing loans for which reserves have previously been established.

The positive resolution of loans for which we reserved in the Fourth Quarter of last year but which had not been on non-performing status, as well as the Second Quarter having been an unusually low rate due to higher recoveries in that period.

Yet even at 32 basis points, this was still below the lower end of our longer term 35-45 basis point range.

Our loan loss reserve ratio declined three basis points to 1.06% as provision expense was $7 million less than net charge-offs.

We released excess reserves on NPLs that were either sold or paid off and on the resolution of loans that weren't on NPL but for which we had over reserved as it turned out, and the associated losses were less than the specific reserves established.

Our period NPA ratio was 65 basis points flat with last quarter.

While Don will cover this as well, I think our level of loan loss reserves deserve special mention.

As I know analysts and investors are concerned about when the industry's credit cycle will turn and whether we have adequate reserve levels.

If you simply look at the trend in our NPAs over the last year, you'll see they are up $69.4 million or 68% and our NPA ratio has increased from 42 basis points to 65 basis points.

At the same time, our NPA reserve coverage ratio has dropped from 287% to 187%.

Just looking at these facts might cause one to conclude that our reserve position has weakened, yet the exact opposite is the case.

Of the $69 million increase in NPAs from a year ago, $27 million represented U.S.

Government guaranteed assets, including SBA loans acquired are Unizan and Jennie Mae guaranteed real estate loans and $31 million of the increase represented residential real estate assets where net charge-offs historically have been low.

Stated differently, 84% of the increase over the last year has been in no loss or low loss assets.

This was important when you think about the adequacy of our allowance for credit losses.

Comparing our allowance for credit losses as a percentage of total non-guaranteed commercial NPAs, this coverage ratio at the end of the quarter was a very strong 456% up from 403% at the end of June.

This is why we feel we are very well reserved.

Lastly, our period intangible common equity ratio did increase significantly to 7.13% from 6.46% at the end of June.

In sum, we remain pleased with our performance for the first nine months.

Now let me turn the presentation over to Don and I'll return at the close to provide some updated Fourth Quarter outlook comments.

Don?

Thanks, Tom.

As shown on slide nine, reported GAAP net income was was $157.4 million or $0.65 a share.

Included in the results were the two items Tom noted that resulted in a net $0.19per share positive impact.

Largest item was a $84.5 million reduction of federal income tax expense because of the resolution of our 2002-2003 audit.

This was a one-time adjustment to tax expense and we expect our effective tax rate in the fourth quarter to return to it's more typical level, just below 30%.

The next item was a $57.5 million pretax impairment to $2.1 billion of our investment securities.

I'll discuss this in detail next slide.

In addition we had a $2.1 million pretax write down of certain equity method investments which negatively impacted the quarter by $0.01.

Let me discuss some specifics of investment securities portfolio repositioning.

Subsequent to the end of the quarter, as previously announced, we initiated a review of our investment securities portfolio.

The objective of this review is to reposition the portfolio to improve the predictability of cash flows and reduce Credit Risk.

This repositioning is consistent with steps taken during the third quarter to sell approximately $500 million of securities backed by sub prime loans.

Of the $2.1 billion of securities identified from impairment , $1.5 billion were U.S. securities and agencies and $600 million were CMOs and asset backed securities.

Of this pool, $1.6 billion has already been sold in October.

We expect this repositioning will provide a 5-6 basis point lift to our net interest margin in the coming quarters.

Let me now continue with the usual discussion of the quarter 's results.

Slide 11 provides a summary of Third Quarter financial highlights.

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

Slide 12 shows that net interest income on a fully tax equivalent basis decreased $7 million or 3% from the second quarter.

This was due to the 12 basis point decline in net interest margin as average earning assets were essentially flat.

The chart on the right shows that up until this past quarter, our net interest margin has been remarkably stable; however, we've experienced continued migration to higher rate deposit products by our customers.

We've also experienced the impact of competitors offering 5% money-market rates and other high rate deposit products.

A combination of these factors represented over half of the margin compression experience during the quarter.

We are pleased, however, that we have seen pricing stabilization during September, helping us to support our expectations for net interest margin going forward.

In sum, with repositioning of the securities portfolio, as well as our continued focus on loan and deposit pricing discipline, we believe our Fourth Quarter net interest margin will increase 4-6 basis points from the third quarter level and then be relatively stable thereafter.

Slide 13 reviews trends in loans and leases.

As Tom noted, middle market C&I loans grew with utilization rate again increased this past quarter.

This contributed to an annualized 3% growth in total commercial loans.

On the consumer side, growth remained challenging.

Average automobile loans increased an annualized 7% rate.

The automobile leases continued to shrink, reflecting aggressive pricing by captives as well as lower consumer demand for leases.

Average home equity loan growth slowed to an annualized 1% reflecting continued decline in broker originated loans as well as a continued focus on credit underwriting and pricing discipline in the face of aggressive competition.

Average residential real estate loans grew at an annualized 10% but we expect this will slow as production of the portfolio loans in the third quarter declined by over 20% from the Second Quarter level and we also sold a small mortgage loan portfolio at the end of the Third Quarter.

As a reminder the Unizan merger favorably impacted the year-over-year growth percentage as shown in the far right hand column.

At the end of the appendix, you'll see a slide detailing the impact.

Turning to slide 14, as Tom noted, deposit growth remains challenging and our average total core deposits increased only slightly from the Second Quarter.

Looking at trends by product types, average core CDs increased significantly as customers moved money from lower rate savings and other domestic time deposits into higher rate CDs.

Slide 15 detailed core deposit trends by commercial and consumer deposits.

Growth in average total commercial core deposits was 17% annualized with very strong growth and interest bearing demand deposits.

In contrast, average total consumer core deposits declined by an annualized 7%.

Similar balance trends occurred in the year ago quarter.

The decline in consumer balances were compounded by the competitive pricing in the marketplace this past quarter.

Slide 16 reviews non-interest income trends, looking first at two lines just above the total line at the bottom.

This core securities losses reflect the investment portfolio repositioning discussed earlier.

Automobile operating lease income continued to decline reflecting run-off of this portfolio.

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

Deposit service charge income increased $1.5 million or 3% with the increase split pretty evenly between personal service charges primarily NSF and OD fees and commercial service charges.

Even though trust services did not post the twelfth consecutive quarterly increase, it just barely missed.

Second Quarter revenues included higher tax fees that did not repeat in the third quarter.

Brokerage and insurance revenues increased 2% mostly due to higher credit life insurance sales.

And bank owned life insurance increased $1.5 million reflecting insurance benefits recognized in the quarter.

The $22.5 million decline in mortgage banking and the $14.8 million increase in other income are related.

Since MSR evaluation losses are recorded in the mortgage banking line item and offsetting MSR hedge related gains were recorded in other income.

I'll detail it for you in the next slide.

Also note that the $2.1 million write down in certain equity method investments is booked in other income line items.

Again, the Unizan merger influences comparison to the year ago quarter and slides at the end of the appendix reconcile this impact for you.

Slide 17 provides a complete picture of mortgage banking income and related hedging.

The top half shows various components of mortgage banking income with a bottom showing the net impact of MSR valuation adjustments and related hedging which mostly impacts other non-interest income.

Looking first at core mortgage banking income, this totaled $8.6 million, down from the second quarter's level, mostly due to lower secondary marketing income.

Mortgage loan volumes decreased from the second quarter levels as well as -- as did delivery of loans in the secondary market.

Now looking at the net impact of MSR valuation adjustments and related hedging, third quarter mortgage banking income included $10.7 million negative mark to market adjustment.

However, this was totally offset by a net $10.7 million MSR related trading gain noted at the bottom half of the slide in which we recorded in other non-interest income.

Slide 18 details non-interest expense.

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

Starting at the top again, let me comment only on the significant items.

Personnel costs were down $4.1 million or 3% compared to the Second Quarter.

This decline reflected lower pension and healthcare cost.

In addition, incentive based compensation, including sales commissions decreased.

Marketing expense declined $2.5 million or 24% as a Second Quarter reflected results included up front and development costs of our stepped up television commercial campaign.

Slide 19 shows the trend in reported efficiency ratio on the top line.

It also shows our efficiency ratio trends after adjusting for automobile operating lease expense and other items affecting comparability.

You'll find a complete reconciliation between reported and adjusted amounts in the slide in the appendix.

Our reported efficiency ratio declined slightly to 57.8% whereas adjusted efficiency ratio increased slightly.

What is noticeable is that the difference between the two ratios continued to narrow as the biggest difference is the automobile operating lease expense adjustment.

This adjustment is becoming increasingly immaterial as the portfolio enters its final stages of run-off.

As you know, one of our corporate objectives is to generate positive operating leverage by growing revenues faster than we grow expenses.

Slides 20 & 21 are an analysis designed to show operating leverage performance after adjusting for the impacts of automobile operating lease accounting on revenues and expenses as well as other significant items that affect comparability.

Those of you familiar with Huntington know that automobile operating lease accounting affects both revenue and expense trends, with no new automobile operating leases originated since April 2002, this portfolio has been in a run-off mode ever since.

With the run-off now in its final stages.

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

This slow reported revenue in expense trends, thus distorting underlying revenue and expense growth rates.

Slide 20 shows that compared with a year ago quarter, operating leverage on the adjusted basis was a negative 1.2%.

While quarterly snap shot of operating leverage can be helpful given that our goal is to produce positive operating leverage annually, reviewing a year-to-date operating leverage provides a clearer view of the progress toward this goal.

To this end, we've added slide 21 to the deck.

Slide 21 shows that for the first nine months of 2006, adjusted revenues increased 9% and adjusted expenses increasing 6%.

Thus producing 3% positive operating leverage.

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

Here you can see that our adjusted efficiency ratio for the first nine months was 56.8%, which compares favorably with 58.5% per on a similarly adjusted basis for the first nine months of last year.

Slide 22 details capital trends.

At the end of the third quarter, our tangible equity to asset ratio was 7.13% and our tangible equity to risk weighted asset ratio was 7.94%.

These significant increases from the end of the second quarter were driven by favorable impact of the reduction of federal income tax expense.

No shares were repurchased this quarter since late in the second quarter we entered an accelerated share repurchase program which required us to stay out of the market with additional purchases until that program expired, which it did at the end of the Third Quarter.

With that program now expired, we expect to continue to make share repurchases from the remaining 6.9 million shares under current authorizations from time to time in the open market or through privately negotiated transactions as the situation best warrants.

Importantly, our capital ratios are very strong.

Let me now ask Jay to close our financial review with comments on credit quality as Tom noted was stable.

Thank you, Don.

Slide 23 provides a high level review of key credit quality performance trends.

First our non-performing asset ratio was unchanged, but as Tom mentioned the quality of our non-performing assets continued to improve.

More on this in a moment.

Our net charge off was 32 basis points and remained below our long term targeted range of 35-45 basis points so up 11 basis points from the prior quarter it should be remembered that the Second Quarter represented our lowest level of net charge-offs in many quarters, it was a level that could not be sustained.

It reflected the combined positive impact of lower growth charge offs as well as higher recoveries.

In addition Third Quarter knelt charge off included $2.3 million associated with the sale of non-performing assets from which reserves were previously established.

Our 90 day delinquency ratios continue to be relatively stable with that of recent quarters, though consumer delinquency increase from last quarter to 41 basis points, it was not too dissimilar to delinquency ratios we see at the end of the first and last year's Fourth Quarter level.

As you know, there has been a good deal of media attention given to mortgage and home equity delinquency rates increasing significantly in the Midwest and Ohio in particular.

Nonetheless our portfolios continue to perform as expected.

There's also been some media and investor speculation regarding performance of loans to automobile suppliers.

Such loans for us total total $209 million at the end of the quarter.

I think you would find it of interest that this is down $77 million, or 27% from a year ago.

We have added slide 90 in the appendix, that shows the trends in the auto related commercial loan credits.

The message is so far, so good, and we do not see anything in particular of concern on the horizon.

I guess the back drop of this delinquency performance we continue to be confident that full year net charge-offs will still be slightly below the lower end of our targeted 35 to 45 basis point range.

I'll talk about the other items on the following slides.

First some comments on NPA trends.

Slide 24 illustrates the trend in non-performing assets and has already been noted that 59% of our non-performing assets are now either U.S. government guaranteed assets or low risk residential real estate assets.

In fact the NPA with greatest risk potential is the non- guaranteed commercial NPAs and they declined $11 million or 14 % during the quarter reflecting sale of some NPAs.

We are also very pleased with the granularity of our NPAs.

Slide 127 in the appendix details our NPAs by sector and size, and we have no NPAs greater than 5 million and only six between 2 and $5 million.

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

At September 30 the allowance for loan and lease losses was 280.2 million down 7.3 million from June 30.

As one would expect this resulted in decline in our period end loan loss reserve ratio which went to 1.06 from 1.09.

But one point Tom made earlier bears repeating.

During the quarter we sold certain non-performing assets and also had some pay offs associated with other problem credits for which specific reserves had been established in prior quarters.

Since we were able to sell them at a value higher than implied by their specific reserves, a portion of those specific reserves was recaptured through lower provision expense this quarter.

This accounts for two observations: First, that our provision expense was below charge-offs and second that their transaction reserve of which specific reserves are a part dropped three basis points during the quarter.

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

On slide 26, the allowance for unfunded loan commitments is shown separately from the total allowance for loan and lease losses.

You'll recall we report the allowance for unfunded commitments separately as a liability.

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

The first set of ratios compares a reported allowance for loan and lease losses to period end loans, non-performing assets and NPLs.

On this basis our period end reserve ratio is just noted was 106, down three basis points and our NPA and NPL coverage ratios were 164 and 217% respectively.

The second set of ratios compares the combined allowance for credit losses or ACL to period end loans, non-performing assets and NPLs.

Now in this basis, our period end reserve ratio was 121, also down three basis points, with NPA and NPL coverage ratio of 187% and 247% respectively.

But to emphasize the point Tom made, the fact that these coverage ratios are reserve ratios for that matter declined do not take into account that the potential loss content over non-performing assets is lower today than it was at the end of June.

Analysts that look at changes in coverage ratios and loan loss reserve ratios and conclude that credit has deteriorated or improved or that reserves have been weakened or strengthened do not take into account the quality of non- performing assets, so to help you see more clearly that despite the decline in our coverage and reserve ratios that our credit position at the end of September actually strengthened, We've added a line that calculates the ACL's percent of total non-guaranteed commercial NPA.

Remember it's in the non-guaranteed NPA where the majority of Credit Risk exists.

Here you will note that at the end of the quarter our coverage ratio was 456% up from 403% at the end of June.

In conclusion we're pleased with our overall credit quality performance and our reserve adequacy and believe that credit quality continue to be strong going forward.

This completes the financial review for the quarter.

Let me turn the presentation back to Tom.

Thanks, Jay.

Turning to slide 28, as you know, 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 forecasts of activities; however guidance typically excludes unusual or one-time items as well as selected items where the timing and financial impact is uncertain until the impact can be reasonably forecast.

As noted on this slide, we're targeting GAAP earnings we're targeting GAAP earnings of $2 to $2.02 per share.

Given nine month earnings per share of $1.56 this implies a 2006 Fourth Quarter target of $0.44 to $0.46.

Also shown on our general assumptions for the Fourth Quarter performance which are generally consistent with the guidance we provided in July, specifically we anticipate Fourth Quarter revenue growth in the low single digits with our margin to be up 4-6 basis points for the third quarter.

Loan growth is expected to be modest with commercial continuing to do well and challenges remaining with regard to growing residential mortgages and home equity loans.

Containing expense growth remains a priority and we expect to hold growth to within a low single digit range.

We also continue to believe that revenues will grow faster than expenses and anticipate positive adjusted operating leverage for the full year and continue to improve in our efficiency ratio.

Regarding credit quality, we continue to anticipate a full year net charge off ratio to be below end of our 35-45 basis point targeted range or about 30 to 33 basis points for the Fourth Quarter.

Other credit quality metrics are also expected to remain stable with those at the end of the Third Quarter.

You'll note that we have not assumed any additional share repurchases though as Don noted, we still have 6.9 million shares into the current authorizations.

This completes our prepared remarks and 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].

And we'll pause for just a moment to compile the Q & A roster.

And your first question comes from Kevin Reevey of Ryan Beck.

Good afternoon.

Hi, Kevin.

Tom, can you talk about if you have seen any deposit or customer attrition as a result of the Unizan merger and if that attrition has been above or below expectations?

Kevin, thanks for your question.

With regard to the Unizan deposit base, what I would say is that there has been a slight attrition, that is to say in balances.

We really feel quite pleased with how the whole integration process went and our ability to preserve the customer base both commercial and consumer, but I'd not be honest if I didn't say that we had a slight, and I mean low single digit run-off or exodus if you will, so we don't consider that to be material in any way and it's probably a natural course of events during a transition or integration period such as this, so as far as we're concerned, mission accomplished.

And on the employee side, were there any major or significant key employee defections once the deal closed?

We lost the person who was heading up our Canton area mortgage business.

She went to a non-bank competitor.

She did that at a time when the market was becoming soft, so we really haven't seen any material impact from that.

That hasn't -- we were sorry to see her go but that really hasn't bothered us, and I think the rest of the Canton team remains in place as had been anticipated, and I'm thinking now about Zanesville.

I think the same statement is true.

We did right at the outset, Kevin, in Zanesville lose our trust team.

They went off and started a new operation.

We subsequently hired a replacement team and if I say much stronger that was previously based in the local market, so we really, our balance, have been quite pleased with the staffing transition as well and I think everybody is fitting quite well into Huntington.

And the woman that you lost who was running your mortgage business in Canton, have you found a replacement and has she taken other people with her to her new employer?

I wish I could tell you about the first part of your question in terms of replacement.

I honestly don't know.

We can get back to you on that.

She took a mortgage loan processor with her.

They worked very closely together over many years, but again, we understand from the two of them with whom we have been in contact, that business is awfully slow wherever they went and so we really haven't seen much impact.

An then my next question is either for Jay or Don.

I was looking at your loan loss allowance reserving methodology and I notice that the economic part of your reserve methodology has been 20 basis points and it's been kind of flat for the last several quarters and I was just curious why you would not increase it given what we're seeing and hearing in terms of a slowing economy overall.

Kevin, this is Tim.

I'll take a stab at that.

Our economic reserve is a very quantitative measure, and if you look at slide 133, you can see the very specific description and the four factors or indices that we use.

We've seen a little bit of movement in each of those factors but on a whole or on a net basis, the movement has not been substantial at all.

So, we continue to feel comfortable about where we are from a reserve standpoint and I feel that that economic reserve has captured the level of risk we have in our portfolios.

Great.

Thank you.

And your next question comes from the line of Fred Cummings of KeyBanc Capital Market.

Yes, good afternoon.

Hi, Fred.

Tim, can you touch on the new in flows into non- performing of 55 million and give us some sense for types of loans and give us some sense for any geographic concentrations that may have been evident.

Sur, Greg.

Geographic concentration, it's been pretty spread across our portfolios.

The fact that the concentration has been in the residential side means that the focus on northern Ohio, southeastern Michigan, those mark those market a little higher but not dramatically disproportion at to the level of loans in those regions.

We have seen so A) back to the first part, a big piece of the increase is residential.

Some of that is in the Jennie Mae guaranteed portion of the residential portfolio.

The rest of the movement or as Jay said, non-guaranteed commercial side, the in flow there have been small dollar deals and the granularity continues to be good.

We haven't seen any large deals go and really spread across the franchise.

Okay.

And Don, a question for you.

Did I hear you say that you sold late in the quarter a small part of your residential loan book and if so, was it any of the interest only loans or the no or low documentation loans?

As far as the sale that occurred late in the third quarter it was about about $100 million or so of balances and it was primarily CRA-type credit so it was sold back through the agency, so it wasn't low doc or other unusual loan types.

We really don't have much in the way of the hybrid type of securities that others have issued in the past.

Then Tom, now when we look at loan growth, you guys have very strong C&I growth and if you look at -- I haven't studied each of the geographic regions and I know you include that, is one region really leading that growth and then I want you to, if you can, comment on what's happening in Indianapolis.

I no one of your smaller competitors had just very strong growth here in the third quarter and I'm wondering if you guys might be losing market share in that market specifically.

Fred, I am looking now at slide 88 and just in the third quarter, we feel particularly good about our ability to grow on the C&I side in a variety but not all regions.

Our northern Ohio team which is a relatively new team is doing quite well.

West Virginia is good, but if we look over the course of the year, we're quite pleased with central Ohio, our base, you might imagine this economy is a little bit healthier than some of our other Markets, and we've got a good strong team there, so with regard to Indiana, the C&I balances are down.

We've had some pay offs, not because we've lost business to others but because there have been refinancing, sales of companies or refinancing into the public markets, so the best of my knowledge, we are not losing share.

We don't have a very big share to begin with so let's be clear about that but I don't think that we are seeing market share right away.

Okay.

Thank you.

And your next question comes from the line of Heather Wolf of Merrill Lynch.

Hi.

Good afternoon.

Hi, Heather.

I was hoping to get just a little bit more information on the restructuring.

First, the guidance for 5-6 basis points of margin expansion , does that include any deposit pricing pressure, or is that all else being equal?

Heather this is Don and as far as the guidance, the margin of 4-6 expansion, it more reflects the investment portfolio repositioning though the assumptions do include that we continue to see aggressive deposit pricing within the foot print and would see similar trends of what we experienced in September as far as deposit pricing, so we would think that we've seen a little bit more stability even though our deposit costs continue to go up slightly on a month to month basis.

Okay, so let me just repeat to make sure I understand.

So the 4-6 basis points does include same level of deposit pricing pressure that you saw this quarter?

It assumes the same level that we're experiencing now, that's correct.

And then do you have details on the yields of the securities that you have sold and what you're reinvesting in ?

Yeah, Heather.

As far as the 2.1 billion in securities we didn't provide details on that but if you look at the balance of that as of September 30, and just assume those securities were reinvested in the same security then mark to market-rate, you would pick up about 85 basis points in total yield.

Now, keep in mind the part of the repositioning will allow us to have a little bit more predictable cash flow so we would no longer invest in certain callable securities and being more investing in bullets and other securities that the have again more predictable cash flow and lower Credit Risk so I don't want to say that our pick up will be 85 basis points but it will be in the same general range depending on how we do reposition the portfolio.

And I assume it's all fixed rate then?

It will all be fixed rate and similar duration overall, yes.

The duration of the portfolio that was sold was about 3.5 years.

Okay.

And then just one question on capital.

Is your preference at this point to repurchase shares or are there interesting M & A opportunities that you're keeping your eyes open for?

Heather, this is Tom.

We have always felt that as you know, we've been an active purchaser of our shares over the last several years, but we've always felt that one reason we were doing that and needed to do that is because there were not clear and compelling M & A opportunities for us at many points, and so repurchase of shares is kind of a default position for us.

Going forward, if there continued to be no M & A opportunities that we think will clearly create shareholder value then you could expect us to repurchase shares and for that matter, focus on dividends so that we could continue to deliver value for our shareholders.

If there is something that arises and we think makes more sense from an economic point of view for our shareholders, we would be more inclined to use the excess capital in that M & A.

It just is hard to predict and there isn't anything to talk about in that regard right now, so it will be one or the other.

We don't expect to sit with very high capital positions permanently, so we'll kind of feel our way along and see whether we need to go fourth with share repurchases or whether there are any other alternatives.

Okay, great.

Thanks so much.

Your next question comes from the line of Bob Hughes of KBW.

Hi, good afternoon, guys.

Hi, Bob.

I guess I had a similar question on the margin.

I was looking for clarification there.

I think in your presentation you said you expected the Fourth Quarter margin to -- taking into consideration all of these other factors to actually be up 4-6 basis points from the third quarter level.

Is that the message you were getting across?

That's correct, Bob.

Okay very good.

I was wondering if you had any commentary on the uptick in home equity losses.

Let me ask Tim Barber to respond to you.

Sure.

The home equity activity in the third quarter was clearly higher.

We continued to see an impact from the broker portfolio and the high loan to value portfolio, both of which we have significantly reduced our production of we talked last quarter about the de emphasis about the broker program.

There were a few things that occurred, none that I can specify or create at a specific result but that we ended up with a few more instances of default, especially late in the quarter.

I don't believe that the run rate from second to third will continue to fourth, so we're anticipating similar levels, perhaps slightly lower in the Fourth Quarter, so that really is what occurred and a little bit of a look forward.

Okay.

I scanned the appendix for a few minutes looking for some additional details on the portfolio and I know you guys disclosed the size of the broker and direct portfolios.

Could you give us a sense for maybe some of the characteristics of those two portfolios and how they might differ in terms of FICO, LTV, etc?

I don't think we have that in the appendix, specifically.

The broker channel --

Wait.

Slide 108.

In general, the broker channel is, it has a lower FICO score as you might expect and a clearly higher loan to value , so that's what is driving the broker performance.

If you look at slide 108 a little bit, you can see the distribution.

We're down to less than 10% over our originations coming through that channel.

The high over our originations coming through that channel.

The high loan to value side are the 90% plus is really the FICO scores are actually a little better but the loan to value is very high so when there's a default, the loss given default is essentially close to 100% so those are the two things that are driving those two segments of our portfolio.

The overall look in home equity lending is FICO scores of 720 plus, loan to value of 80% or so which is very consistent with what we would consider high quality borrowers.

That's across the entire portfolio?

Correct.

And the broker channel, would you be willing to disclose the average FICO there?

I don't have it right off the top but it's somewhere just under 700.

Okay.

All right, guys.

And Don, I'm sorry, one more detailed question.

I think other income, I just had a quick question about excluding the impact, I guess of of the 10.7 million in trading gains, it was still a relatively big number.

If I missed it I apologize, but what else might have influenced that number?

As far as I'm saying --

Yeah the change in other non-interest income.

The change in other non-interest income really you have to look at the $19 million change from the impact of the MSR in the Second Quarter versus the the 11 million impact from the third quarter so there's a $19 million change between those two and absent that other income is actually down link quarter and $2 million of that is the write-off of the equity investment and another 2 million lower hedge fund income than what we had in the Second Quarter.

I missed that then.

Thank you, guys.

And your next question comes from the line of Andrew Marquardt of Fox-Pitt Kelton.

Hi, guys.

Hi, Andrew.

Just had a quick question on the implied EPS for Fourth Quarter of 44-46, I just want to get a sense of what gets worse in the next quarter if margins are going to be better and credit quality is going to be not that different.

Is it expenses are tougher or can you help me understand what's a little bit worse?

Andrew, this is Don.

As far as the guidance, I think the biggest difference that you would see is our guidance assumes similar levels of charge-offs essentially with the third quarter but also assumes the allowance ratios remain relatively stable so we were down about three basis points this past quarter and that would not be consistent with the assumption for the Fourth Quarter.

I see, okay.

Thanks.

The next question I had was on the margin.

You mentioned that the margin should be stable after the Fourth Quarter.

Did I hear you correctly?

Our expectation right now is that after the Fourth Quarter it will be stable with that adjusted Fourth Quarter level, that's correct.

Okay and what's the underlying assumption behind that in terms of interest rates and the back drop, what have you?

The assumptions we use are basically based on the forward curve and so if you look at the forward curve, it would assume that the short end of the curve would probably move down a little bit starting about the middle of next year and long term rates would stay relatively stable with where they are today.

We would see some reduction in that in version of the yield curve but it's still a very tough rate environment.

Okay.

And the last question I had was just on the competitive environment.

You'd mentioned at your analyst day that you saw a little bit more rational pricing towards the end of the Third Quarter.

I was wondering if you saw that continuing today if there's any change in that.

We just noted that the deposit pricing was a little bit more stable in the month of September and haven't noticed any significant changes since then.

Okay, thanks.

[OPERATOR INSTRUCTIONS].

And we'll pause for just a moment to compile the Q & A roster.

And your next question comes from Anthony Lombardi of Delaware.

Hi, good afternoon, guys.

Hi, Anthony.

Tim, just back on that economic component of the reserves.

Is there anything else besides the employment trends within each one of your State buckets that is regional in nature or is that all national data?

The ISM manufacturing is in our estimation relatively consistent with our Markets, but the consumer spending and consumer confidence are both clearly national numbers.

And at the State level, the employment trends, do you weight those accordingly in terms of where you're exposed?

You mean within the states?

Yeah, we look at, for example, Ohio independently from Michigan and Indiana, yes.

And then in terms of the growth that you saw in real estate during the quarter within the commercial bucket, the 10% annualized growth, what, is that fairly reflective of the entire quarter or was any kind of linearity that would suggest that it was front end loaded or back end loaded?

This is Tom.

Let me make sure that we understand your question.

I was getting a little confused between residential and commercial.

I'm sorry, it's residential real estate, yeah, the 10% annualized growth rate.

Okay, and sorry to make you repeat.

That's okay.

So your question was: Was the growth rate front end loaded or back end loaded?

Correct.

The production was off third quarter versus second quarter by 20% so I think it is safe to say it's back end loaded.

We saw later in the quarter the effects of the significant downturn in our part of the country in the housing industry so first part of the quarter was more like the Second Quarter, latter part of the quarter is where we saw the reduction.

And lastly, Don, just on the securities restructuring fee , the $500 million or so that you alluded to that had collateral that was essentially sub prime?

Correct.

What was the characteristics of those assets?

Was it newer vintage, older vintage, what was the assets?

Yeah, it was asset backed paper and it was probably purchased about two years ago, I believe, and so it was fairly recent vintage but we just were getting less comfortable with the collateral supporting that asset class and felt it was appropriate to go ahead and reduce that exposure.

Okay.

Thank you.

Thank you.

At this time, there are no further questions.

Mr. Gould, are there any closing remarks?

We would simply like to thank everybody for joining us again and if you have follow-up questions, please give either Susan or myself a call.

Thank you and good day.

This concludes today's Huntington National Bank conference call.

You may now disconnect.