Huntington Bancshares Inc (HBAN) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Huntington fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you, Mr. Gould, you may begin your conference.

Thank you, 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 huntington.com.

This call is being recorded and will be available as a 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 and non-GAAP financial measures where we believe it helpful to understanding Huntington's results of operations or financial position.

Where non-GAAP financial measures are used the comparable GAAP financial measure as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentation in the appendix or in the press release or our quarterly financial review supplement to today's earnings press release which also can be found on our website.

Second this presentation contains certain pro forma financial measures which we believe will be helpful in gauging how the proposed merger of Sky Financial Group will impact of results of operations or financial position.

The pro forma data represent actual reported information as of September 30, for both organizations combined arithmetically with no adjustments for purchase accounting made unless otherwise noted.

Sky Financial data also includes Union Federal Bank reported information on a similar pro forma basis as Sky completed this transaction subsequent to September 30.

Third is how we will talk about the impact of the Unizan merger in our reported results.

This merger you will recall closed on March 1.

The Unizan merger did not have a material impact on comparing current quarter results compared with last quarter, however it does have an impact on year-over-year, quarterly, and year to date comparison.

The methodology we've used to estimate it's impact is noted on this slide.

There are tables in the earnings press release as well as the appendix that detail the estimated impact attributable to the Unizan merger for loans, deposits, and selected income statement line items.

You are encouraged to familiarize yourself with this information as it will help you understand better this quarter's 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 managed interest income, we do this on a fully taxable equivalent basis.

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

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

Today's discussion, turning to slide four, including the Q&A 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, 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 10-K, 10-Q and 8-K filings.

Lastly, slide five contains information about where you can find additional information about the Huntington and proposed Sky Financial Group merger.

Now, turning to today's presentation, as noted on slide six, presenting today are Tom Hoaglin, Chairman, President, and CEO;

Don Kimble, Executive Vice President and Chief Financial Officer; and Tim Barber, Senior Vice President of Credit Risk Management.

Let's get started.

Tom.

Thank you, Jay, and welcome, everyone.

Thanks for joining us.

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

Don will then review the quarters financial performance in more detail, with Tim commenting on credit quality trends.

I'll then close with summary comments on 2006 full year performance and our outlook for 2007 and then moderate the Q&A.

Turning to slide eight, reported earnings were $0.37 per share.

You'll recall that third quarter results of $0.65 per share included a $0.35 per share positive impact from the reduction in federal income tax expense partially offset by $0.16 per share of securities impairment given a decision to restructure our balance sheet to improve net interest margin performance in future periods.

This quarter, we incurred $0.05 per share negative impact from completing that balance sheet restructuring, thus resulting in a total of $0.21 per share related to our balance sheet restructuring over the past two quarters.

During our third quarter earnings conference call in October we indicated that we were considering various additional actions as a result of the tax benefit.

Beyond the completion of the balance sheet restructuring, in the fourth quarter we made a $10 million pretax contribution to the Huntington Foundation.

This action will reduce charitable contribution expenses in future years.

We also eliminated 75 positions in regional banking and recognized the associated severance costs.

Electively, these and other related items negatively impacted our earnings in the quarter by $0.10 per share, thus excluding them, earnings were $0.47 per share, slightly ahead of our expectations.

We were pleased that our net interest margin increased 6 basis points to 3.28%, consistent with our prior expectations.

Regarding loan growth, on the positive side, average total commercial loans grew at an annualized 9% rate, considerably better than last quarter's 3% annualized link quarter growth rate.

Average total consumer loans declined at an 8% annualized rate but this was negatively influenced by the sale of residential mortgages as well as our ongoing program of selling a portion of our automobile loan production.

Reported average residential mortgages declined an annualized 10%, reflecting portfolio sales at the end of the 2006 third and fourth quarters of $142 million and $102 million respectively.

Excluding the impact of these portfolio sales, average residential mortgages would have increased an annualized 3%.

Total consumer loans would have declined 4% and total average loan growth would have been 2%.

Average home equity loans declined an annualized 5%.

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

Deposit money continues to shift into higher fixed rate CD's and out of lower rate, money-market and other deposits and while deposit pricing remains aggressive, we noted some relief during the quarter.

We remain 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 and expenses were well contained after giving consideration to the Foundation contribution and severance and consolidation expenses related primarily to the regional banking staff reduction initiative.

Credit quality performance was mixed.

Our net charge-off ratio increased 3 basis points to 35 basis points.

This was primarily attributed to the proactive exit of a troubled Ohio based home builder relationship for which we had increased loan loss reserves earlier in 2006.

Regardless, the charge-off ratio remained at the low end of our long term net charge-off ratio targeted range of 35 to 45 basis points as it has for the past several quarters.

Our loan loss reserve ratio declined 2 basis points to 1.04% as provision expense was $7 million less than net charge-offs.

The sale of the home builder relationship triggered the release of $4.4 million in reserves, approximately 2 million in excess of the charge-off.

Transaction reserves remain flat while the economic reserve portion declined reflecting improvement in consumer confidence and consumer spending components.

Including the unfunded loan committment reserve, our ending allowance for credit loss reserve ratio was 1.19%.

Non-performing assets increased 17% resulting in a year-end NPA ratio of 0.76%.

We're clearly seeing higher levels of non-performing residential real estate related assets both on the commercial side with home builders and developers and in first mortgage and home equity loans.

Nevertheless, we're comfortable with our developer, mortgage , and home equity loan exposures and we believe that on a relative basis, net charge-offs and NPA's going forward will remain at about current levels.

It's important to remember that 60% of total NPA's are secured by residential real estate assets or guaranteed by the U.S. government.

While our reported total allowance for credit losses to NPAs was 156% at the end of the quarter, it represented 389% coverage of the non-guaranteed commercial NPA portion.

Problem loan trends were positive and we continue to believe our loan loss reserve levels are strong as we head into what may be a more challenging credit environment in 2007.

Lastly, our period end tangible common equity ratio decreased to 6.87%.

This decline primarily reflected negative impact of two items.

First, it was a negative 24 basis point hit reflecting the implementation of FASB 158.

The other was the impact from the repurchase of 3.1 million shares during the quarter.

In sum, we were generally pleased with our performance, though it was not without it's challenges.

Importantly, we feel there is good underlying momentum as we head into 2007.

Turning to slide nine, there were other fourth quarter achievements and highlights.

While listed chronologically on this slide, the most notable was the announced pending merger of Sky Financial, the acquisition of Sky Financial Group.

We do not intended today to get into much discussion of that other than to say that we have a well organized integration and planning process and the teams are moving forward with it, but we were pleased with Sky's fourth quarter performance announced this morning.

During the quarter, we announced and closed the acquisition of Unified Fund Service, an Indianapolis based provider of fund accounting, administration, distribution, and transfer agent services to mutual funds.

Unified serves about 45 clients representing over 169,000 shareholders and 9 billion in assets.

In terms of the numbers of accounts serviced, the Company ranks 14th in the fund accounting business and 9th in the transfer agency business. 2006 revenues exceeded $7 million.

This is a nice addition to our private financial and capital markets group.

We also made some important Senior Management appointments, specifically, Dick Witherow was appointed Chief Credit Officer and Mike Cross was appointed Senior Lender.

And we named Rebecca Smith President of our Eastern region -- I'm sorry, Eastern Michigan region.

These are terrific bankers with broad based experience.

Let me now turn the presentation over to Don.

Thanks, Tom.

As shown on slide 11, reported our GAAP net income was was $87.7 million or $0.37 a share.

Included in the results were the items Tom noted that resulted in a negative impact of $0.10 per share.

The largest item was a negative $20.2 million pretax or $0.05 per common share related to the completion of the balance sheet restructuring begun after the end of the third quarter.

Most of this was reflected in two components, $15.8 million of security losses and $3.5 million of costs associated with refinancing a portion of our FHLB advances.

This cost was reflected in other non-interest expense.

There was also a small piece associated with the sale of certain mortgage loans, though this amount was less than $1 million.

I'll give you more details in a moment.

The next most significant item was a $10 million contribution to Huntington Foundation.

The remaining items collectively impacted our earnings negatively by $0.02 per share consisted of--$5.2 million increase in auto lease residual value losses which is reflected in other expense.

This increase included higher relative losses on cars sold at auction, most notably high line imports and large SUVs, also as a result of our quarterly review of our auto lease portfolio, we were determined in addition to our residual value reserves that $2.7 million was appropriate, which was included in the $5.2 million increase.

A $4.5 million in severance and consolidation costs were reflected in personnel expense.

This primarily related to a regional banking staff reduction initiative that eliminated 75 positions.

This reduction is expected to yield an approximate $6 million expense saved per year going forward. $2.5 million in MSR mark-to-market net of hedge related trading activities was reflected in the mortgage banking income.

These were partially offset by the positive impact of $3.3 million of equity investment gains and $2.5 million from the gain on sale of MasterCard stock.

Both reflected in other non-interest income.

Another thing to keep in mind is if you adjust our earnings for the significant items noted above, our effective tax rate for the quarter will be closer to 27% which is more reflective of our normal run rate.

Let me discuss the specifics of our balance sheet restructuring now.

As noted at the end of the third quarter we identified $2.1 billion of investment securities for impairment.

We've now repositioned the portfolio which resulted in the recognition of additional losses during the quarter as interest rates increased through most of the month of October.

We also recognized $6.8 million of additional impairment losses on securities supported by cash flows from sub prime mortgage loans.

These securities were still under review for disposition.

As a result of this restructuring, we will have a portfolio with essentially the same duration, even though we will have less extension and credit risk.

The yield on this $2.1 billion portion of the portfolio increased by 106 basis points.

Late in the quarter, we refinanced d $355 million of FHLB advances, lowering the cost by approximately 45 basis points.

We also completed a sale of approximately $100 million of primarily adjustable rate mortgage loans at a loss of around $900,000 reducing the [Inaudible] in our balance sheet and improving our future margin.

Slide 13 provides a summary of the quarter's financial highlights and most of these will be covered in more detail in later slides so let's move forward.

Slide 14 shows that net interest income on a fully taxable equivalent basis increased $3 million or about 1% from the prior quarter.

This was due to the 6 basis point increase in net interest margin as average earning assets were essentially flat.

The chart on the right shows the improvement in this past quarter in our net interest margin.

Contributing to this improvement was 7 basis points resulting from the balance sheet restructuring; 2 basis points from the change in our average loan mix; and basis points improvement from other funding mix changes reflecting in part the growth in non-interest bearing deposits.

It was partially offset by 7 basis points negatively impact from interest bearing deposit mix changes reflecting the continued migration to time deposits from savings and money-market accounts.

We are pleased, however, that we have seen deposit pricing continue to become a bit more rational though it still remains aggressive.

In sum, with the reposition of our balance sheet, as well as our continued focus on loan and deposit pricing discipline, we believe that our net interest margin will remain relatively stable throughout 2007.

Slide 15 reviews trends in our loans and leases.

As Tom noted , total average commercial loans increased at a 9% annualized rate during the quarter.

On the consumer side, growth was negatively impacted in part by mortgage loan sales as well as the auto loan sale program Tom mentioned earlier.

Average automobile loans increased at an amortized 6% rate even though we continue to sell about half of our auto loan production.

Average automobile leases continue to shrink reflecting the aggressive pricing by captives.

Average home equity loan growth turned negative reflecting lower borrower demand in the face of the softening residential real estate market as well as the continued plan decline in broker originated loans and our continued focus on credit underwriting and pricing discipline in the face of aggressive competition.

Average residential real estate loans declined at an annualized 10% pace reflecting the impact of the third quarter portfolio sale.

Production in the fourth quarter declined 2% and we sold additional loans at the end of the fourth quarter as well which will negatively impact first quarter 2007 growth rate comparisons.

As a reminder, the Unizan merger favorably affected the year-over-year growth percentages shown in the far right hand column.

At the end of the appendix you'll find slides detailing that impact.

Turning to slide 16, as Tom noted, deposit growth remains challenging and our average total core deposits actually declined slightly from the prior quarter.

Looking at trends by-product type, average core CD's increased though their growth rate slowed as more rational marketplace pricing was evident.

Nevertheless customers continued to move money from lower rate savings accounts into higher rate CDs.

One bright spot was the 8% annualized growth rate in average non-interest bearing demand deposits.

Slide 17 details core deposit trends by commercial and consumer deposits.

This shows a growth in average total commercial core deposits increased slightly primarily due to a strong 9% annualized growth rate in commercial demand deposits.

Average total consumer core deposits declined at a 2% annualized rate, despite 4% annualized growth in consumer demand deposits.

Slide 18 reviews non-interest income trends.

Looking first, to the two lines just above the total line at the bottom.

This quarter's security losses reflect a balance sheet restructuring discussed earlier.

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

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

Total service charges increased $0.6 million or 1% reflecting higher other service charges primarily due to fees generated by an increase in debit card volume.

We saw a $1 million or 5% increase in trust services.

A $1.3 million decline in bank owned life insurance reflecting more normal levels of benefits recognized than we had in the third quarter.

A $6.1 million increase in other income primarily reflecting $3.3 million in equity investment income and the $2.5 million gain from the sale of the MasterCard stock.

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

Slide 19 provides a complete picture of mortgage banking income and related hedging.

Beginning this quarter, all MSR hedging related activity is reflected in the mortgage banking income.

You may recall that a portion was previously reported in other income.

This presentation is well as that in our earnings press release materials reflects this change in reporting in all historical periods as well.

We believe that by letting the entire mortgage banking related items flow through one income statement line item the transparency of our net mortgage revenue reporting is improved.

This shows that before MSR valuation and related net hedging activity, mortgage banking income was essentially flat with the third quarter.

Slide 20 details the trends in non-interest expense.

As shown at the bottom, automobile operating lease expense continued it's decline as this portfolio runs off.

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

Personnel costs were $4.1 million or 3% higher than in the prior quarter, which reflects the $4.5 million of severance and consolidation expense.

Professional services increased $2.5 million reflecting a higher collection cost as well as expenses supporting revenue initiatives.

Outside services increased 2 million with the increased spread over a number of miscellaneous outside service categories with no particular concentration in any one activity.

Marketing expenses declined $1.6 million due to the timing of campaigns.

We had $20.2 million increase in other expense, reflecting the $10 million donation to Huntington Foundation that will lower contribution expense in future periods, $5.2 million of higher residual value losses on automobile leases and the $3.5 million associated with a refinancing of the FHLB debt.

Slide 21 shows a trend in our reported efficiency ratios 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 the reported and adjusted amounts in slide 75 in the appendix.

Our reported efficiency ratio increased significantly to 63.3% reflecting the negative impact related to the balance sheet restructuring and other higher expenses, most notably the 10 million foundation contribution and the $5.2 million of automobile lease residual value losses.

On an adjusted basis, the efficiency ratio also increased but much less so.

Slide 22 details capital trends.

At the end of the quarter our tangible equity to asset ratio was 6.87% and our tangible equity or risk weighted asset ratio was 7.61%.

These decreases from the end of the prior quarter were driven by the implementation of FASB Statement Number 158 on pension accounting as well as stock repurchases.

As Tom noted, FASB 158 had a negative impact of 24 basis points to our tangible equity ratio reflecting an $83 million charge to other comprehensive income.

During the quarter, we repurchased 3.1 million shares leaving 3.9 million under the current authorization.

Until the proposed merger with Sky Financial is approved by shareholders, we will not make additional share repurchases.

Importantly, even with these declines, our capital ratios are very strong and remain above our long term targeted range.

Let me now ask Tim to close our financial review with some comments on credit quality.

Tim?

Thanks, Don.

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

First, as Tom noted, our NPA ratio increased to 76 basis points but more on this in a moment.

Our net charge-off ratio was 35 basis points, up slightly but remained at the low end of our long term targeted range of 35 to 45 basis points.

Total commercial net charge-offs were 22 basis points, down slightly from last quarter, but reflecting a net recovery in middle market C&I loans attributed primarily to one large credit charged off in 2002.

This benefit was mostly offset by higher middle market commercial real estate net charge-offs which increased to 42 basis points reflecting as Tom mentioned a charge-off associated with the proactive exit over our exposure to an Ohio based home builder.

Other large builders in the portfolio are well capitalized and are easily handling the downturn.

There may be some potential losses associated with the smaller builders over the course of 2007 but we would expect these to be manageable.

On the consumer side, total net charge-offs were 46 basis points, up from 40 basis points in the prior quarter.

This reflected higher auto loans and lease and residential real estate net charge-offs, partially offset by a decline in home equity net charge-offs.

Slides 129 and 130 in the appendix detail net charge-offs by loan category.

The small business banking and residential portfolio performance merit specific mention.

In the business banking portfolio, there were significant specific losses in each of the past two quarters that inflated our net charge-off results.

We are currently seeing fewer new problem credits in the portfolio providing us with an appropriate comfort level regarding our future performance.

The residential portfolio also experienced larger individual losses in the fourth quarter resulting in an elevated loss ratio.

We will continue to evaluate the performance of the product in light of the housing market, but currently feel comfortable with our expected loss levels.

In sum, although there were the typical pluses and minuses between categories, in total our net charge-off performance remained quite good.

Importantly and one reason why we remain confident in our credit quality outlook is that our 90 day delinquency ratios continue to be relatively stable with those of recent quarters.

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.

Slide 109 in the appendix notes that while Ohio statewide foreclosure rate is running around 3.5%, our experience is less than 1%.

The higher state experience reflects the impact of subprime mortgage lending activity, something that we have never engaged in.

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

Such loans totaled only $180 million at the end of the quarter, down from $209 million at the end of the prior quarter and down 31% from a year ago.

There has also been some industry commentary regarding exposure to dealer floor plan loans.

Our dealer floor plan loans total about $630 million and represent an important component of our overall dealer sales strategy.

All of these portfolio segments continue to perform well.

There were no net charge-offs on any dealer related floor plan loan or on loans to auto suppliers or other dealer related commercial loans for that matter during the quarter.

Further, related NPL's represented only 20 basis points of such credits, the lowest level in many quarters.

We believe this is a testament to the very strong relationships we have established with our dealers and the benefit of the longevity and consistency we have maintained in this business over the last 50 plus years.

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

First some comments on the NPA trends.

Slide 24 illustrates the trend in non-performing assets and as already been noted that 60% of our NPAs are now either U.S. government guaranteed assets or secured by less volatile residential real estate assets.

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

Slide 126 in the appendix details our NPAs by sector and size.

We continue to have no NPAs greater than $5 million and only eight between 2 and $5 million of exposure.

In general, we have seen a slowdown in new non-performing loans and given our detailed review of the home builder portfolio, are confident regarding the future of the commercial non-performing loan inflow.

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

At quarter end the allowance for loan and lease losses was $272.1 million down $8.1 million from the end of the prior quarter.

As one would expect, this result hit in a decline in our period end loan loss reserve ratio to 1.04% from 1.06%.

Though we are seeing softness in the residential real estate market, our transaction reserves remained unchanged at 86 basis points.

This means that neither this softness nor any other general weakening in commercial credit has been manifested in material down grades requiring higher specific reserves.

In fact, our overall criticized and classified loan balances declined during the quarter with a resulting decrease in the dollar level of required reserves.

This gives us some comfort that despite an increase in the absolute level of non-performing assets, there has not been a significant change in the overall risk profile or loss content of our commercial C&I or commercial real estate portfolios.

A significant portion of the overall reserve decline was manifested in lower economic reserves, reflecting a general improvement in the economic conditions, specifically seen in the improvements in the consumer confidence and consumer spending indices used to determine this reserve component.

The economic component is also a reflection of the low volatility in our credit losses.

The very consistent performance over the past two years has caused a reduction in the loss volatility component of the calculation.

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 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 our reported allowance for loan and lease losses to period end loans and leases, non-performing assets and non-performing loans.

On this basis our period end reserve ratio as just noted was 1.04% and down 2 basis points, and our NPA and NPL coverage ratios were 136% and 181% respectively.

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

On this basis, our period end reserve ratio was 1.19%, also down 2 basis points with NPA and NPL coverage ratios of 156% and 208% respectively.

Looking at the changes in coverage ratios and loan loss reserve ratios and concluding that credit has deteriorated or improved or that reserves have been weakened or strengthened in our view is too basic as it does not take into account the quality of the NPAs.

As such, we believe a better way for analysts to assess whether the loss content or overall risk profile of our portfolio is improving or deteriorating is to look at the trend in the specific reserve component.

If credit quality is getting weaker, the relative level of required specific reserves will be increasing and the converse is true if credit quality is improving.

As noted a moment ago, the transaction reserve component was flat, thus indicating no material change in the overall risk profile of our portfolio during the fourth quarter.

It's also worth remembering that an increase in non-performing loans, or OREO, is not necessarily an indicator that higher future net charge-offs are in the offing.

When loans are classified as OREO, they are written down to a current realizable value, as such an increase in OREO is not an indicator of higher future net charge-offs but rather a part of the explanation for current quarters charge-offs.

In the home equity portfolio, a writedown to current value takes place as part of the non-performing loan classification.

To help you see more clearly the strength of our reserve position, especially given the high percentage of non-performing assets that are either U.S. government guaranteed or secured by lower risk residential real estate related assets, we have added a line to this slide that calculates the allowance for credit losses as a percent of total non-guaranteed commercial NPAs.

Remember, it is in the non-guaranteed NPAs where the majority of credit risk exists.

Here you will note that at the end of the quarter that coverage ratio was a strong 389%.

In conclusion, despite mixed credit quality performance during the quarter, we remain pleased with our overall credit quality situation and reserve adequacy.

This completes the financial review for the quarter.

Let me turn the presentation back over to Tom.

Thanks, Tim.

Turning to slide 27, I want to spend the next few slides summarizing full year 2006 performance to set the foundation for our 2007 outlook comments.

Earnings per share were $1.92 for the year, a record.

But this included a net $0.10 per share positive impact related to the third quarter reduction in federal income tax expense, partially offset by the impact of the third quarter investment securities impairment, the fourth quarter completion of our balance sheet restructuring, and the Huntington Foundation contribution and other significant items.

Slides 56 and 61 in the appendix provide all this detail.

Adjusting for these items results in underlying 2006 EPS of $1.82.

We feel this is a more representative base against which to measure our 2007 performance.

Our full year margin was relatively stable at 3.29% down only 4 basis points, and an indication of our ability to manage to an objective of maintaining a stable margin.

Excluding the positive impact from the Unizan merger, average total commercial loans grew 5%, residential mortgages 4%, and home equity loans 1%.

Average total core deposits grew 3%.

In a difficult environment we delivered 1% positive operating leverage after adjusting for operating lease accounting and significant items affecting comparability.

Net charge-offs were 32 basis points, essentially flat.

Reflecting improved underlying credit quality our loan loss reserve ratio dropped 6 basis points to 1.04% and while NPA's increased significantly much of this increase reflected the impact of the Unizan merger and a reclassification of government guaranteed loans from 90 day past due to NPL status.

Lastly, we ended the year with a strong capital position with a period end tangible equity ratio of 6.87%.

Turning to slide 28, now our 2007 outlook comments.

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 forecasted activities.

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

As noted on this slide, we're targeting GAAP earnings of $1.87 to $1.92 per share.

As noted at the bottom this includes $0.01 per share targeted at accretion from the Sky Financial merger assuming an early third quarter close.

We feel this is appropriate target given the continued outlook for slow economic growth in our markets as well as little change in the interest rate environment.

Here are our performance targets, excluding any impact from the proposed Sky Financial merger.

Revenue growth in the low to mid single digit range.

This is expected to reflect average total loan growth in the mid single digit range with commercial in the mid to upper single digit range and total consumer loans being relatively flat, reflecting softness in residential mortgages and home equity loan growth.

Core deposit growth in the low to mid single digit range with an emphasis on growing demand deposit balances.

The net interest margin relatively stable with the fourth quarter 2006 level.

Non-interest income growth excluding auto operating lease income in the mid higher single digit range.

Non-interest expense growth excluding auto operating lease expense in the low single digit range.

Positive operating leverage in the low single digit range, resulting in continued improvement in the efficiency ratio, a net charge-off ratio at the lower end of our long term 35 to 45 basis point targeted range.

Relatively stable NPA and loan loss reserve ratios to those as of December 31, 2006.

And last, no sizeable stock repurchase activity, especially given that we can't be in the market until the proposed Sky Financial merger is approved by shareholders.

Again, this results in a targeted GAAP EPS for 2007 of $1.87 to $1.92.

Including the targeted positive $0.01 per share accretion from the Sky Financial merger, excluding merger charges.

This completes our prepared remarks.

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

Let me now turn the meeting back over to the Operator to provide instructions on conducting the question and answer period.

Operator?

[OPERATOR INSTRUCTIONS] Your first question comes from Bob Hughes with KBW.

Hi, good afternoon, guys.

Hi, Bob.

Bob?

The 2007 outlook, $1.87to $1.92 sounds reasonable based on this year's results obviously.

It's not an extraordinary percentage gain over this year's results, but I guess I'd love to hear your thoughts on the potential for a credit headwind and I understand that you feel pretty good about your numbers today, but if you're targeting mid single digit average loan growth and charge-offs sort of in the 35, let's just say they come in at the low end, 35 basis points and your reserve ratios are relatively stable we're talking about a pretty significant increase in provision and that coupled with a higher normalized tax rate seems like it would create a pretty significant headwind for you.

Bob, this is Don.

I'll take a first crack at that and you're absolutely right.

If you take the assumptions there with charge-offs at the lower end of our targeted range and keeping the allowance relatively stable that would imply a very significant increase to our provision expense from the current $65 million that we reported in 2006.

So what we're assuming going forward is we continue to have positive operating leverage from growing our revenue at a faster pace than we're growing our expenses, and that could come from having the mid single digit loan growth, the low to mid single digit kind of deposit growth, keeping our margin stable and showing some decent fee income growth, and making sure that we control our expense growth to low single digit ranges.

Okay, will we see that tax rate normalize pretty much in the first quarter?

We should see that adjust to more of a normal rate in the first quarter and we commented I think it could be slightly below the 30% level as far as expected tax rates.

Okay.

Very good.

Thanks, guys.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from David Hilder with Bear Stearns.

Good morning, gentlemen or good afternoon, sorry.

I know that you said at the beginning that you were not going to talk a great deal about the pending merger, but I wondered if you could even briefly sort of outline where you are in that process and what kind of actions you may have taken to date or what your time table is over the next quarter or six months.

David this is Tom.

Let me just tackle the time table first.

We would, first of all, we were expecting to close the transaction early in the third quarter.

To be able to do that would require us to hold a shareholder meeting probably around mid second quarter to receive a favorable response from the regulatory authorities in accordance with their normal schedule which would be some time in the second quarter, so that's the time table we're assuming at this junction.

What we have done thus far, we've got our merger integration teams well organized.

We've got a person appointed from each organization.

Each has experience in this role.

With Sky's very active acquisition activity, they've got a kind of well oiled machine, if you will, as it relates to going through merger integration processes, so they really represent an ideal partner for us even though they were in a different position than they normally would be, they know the drill, they know the issues, they're able to respond quickly.

We've got all of our business units well organized, talking to each other, identifying issues, getting issues out on the table, decisions that need to be made well listed.

As you know, as a significant part of the cost savings target that we have is consolidation of banking offices, so that's an important part of the integration process.

Teams are working together well to identify what particular offices might make the most sense.

We would expect to be through that process in a few weeks, obviously communicating well through our people as we do so.

Product mapping is another good example, customer product mapping, that's well under way now, so just to give you rather than ramble a lot, just to give you an idea of the kinds of activities that we've organized thus far and our people are really rolling up their sleeves and working together very nicely.

Thank you very much.

That's quite helpful.

Your next question comes from Heather Wolf with Merrill Lynch.

Hi, good afternoon.

Hi, Heather.

A couple of weeks ago, a company by the name of Franklin Credit put out a press release talking about it's relationship with Sky and I think the filings, Sky's filings actually showed that they had some fairly meaningful exposure to this company and as I understand it, it's a subprime lender that is going down relatively quickly.

Can you talk about your plans vis-a-vis this credit, the exposure and plans vis-a-vis this credit and whether or not it's been sort of factored into the merger discussions?

Heather, this is Don.

Maybe I can go ahead and take a crack at answering your question.

First of all, we are aware of Sky's position as far as their lending relationships and was part of our due diligence that we perform, but as far as specific questions related to any relationships that they would have, I would refer you to the management at Sky Financial as opposed to having us address those at this point in time.

Yes, I was just hoping -- we've tried that.

I was just hoping that, I mean, nobody is really talking about it.

So, I understand you don't want to comment on this call, but it might behoove somebody, whether it's Sky or Huntington to put something out in the press on it.

Heather this is Tom.

Just let me underscore one thing that Don said and that is it was a significant part of our due diligence process, so we absolutely reviewed the relationship, the performance of the relationship and emerged very comfortable with it and so that's a high level kind of comment but I do want to underscore that.

Okay.

Well, thanks a lot.

I appreciate it.

Thank you.

Your next question comes from Andrew Marquardt with Fox-Pitt Kelton.

Good afternoon, guys.

Andrew.

Just to pile on Heather's question there on credit quality, is there any way you guys can give us a little bit more comfort around the due diligence that you performed for Sky?

And the reason I ask is just because Sky has also had fairly optimistic expectations for credit quality in the past and it has run into a bump in the road here and there, partly due to it's acquisitive history and I was just wondering if you could help us in terms of understanding the process that you went through and kind of the overlying of potential outside exposures to certain industries or regions or what have you?

Andrew this is Don again and maybe I can provide a little bit more clarity, but to be consistent with what we talked about at our December 20, call on Sky that as part of the due diligence team that we took a look at 100 largest commercial relationships that Sky has and we also took a look at some of the larger problem related assets they had as well.

The total coverage including that, in the relationships we reviewed was about $2.5 billion which is about 30% or so of the total commercial portfolio.

So the coverage was pretty good, we believe, for that short period of time.

When we reviewed the credit quality, the underwriting standards, and also their identification and quantification of credit risk, we were surprised how close they were to what we had used internally and what our loan review team would have come up with as part of the due diligence.

Take a look at the allowance calculation for Sky using our quantitative model, the allowance required for their portfolio was almost identical to what we would calculate using our model from the findings we had from due diligence so that gave us a lot of comfort that the credit cultures and again the identification and quantification of credit risk were very similar.

Tim, do you have any other follow-up items there?

I would just reiterate what Don said.

We got a pretty good coverage through the due diligence process.

We've spent a lot of time on the mapping of the loan loss reserve methodologies and came out feeling very comfortable about it.

Don, I think it's accurate to say that every problem loan over $1 million we reviewed.

That's correct.

Great that's helpful, guys.

Thank you.

Thank you.

Separately, if I may, one other question.

Just on the margin, net interest margin expectations looking forward and apologies if I missed it in your prepared remarks, but can you help me understand why shouldn't we expect the margin to do better than flattish versus the fourth quarter given the balance sheet restructuring?

Yes, Andrew, just keep in mind that a good portion of the balance sheet restructuring really was reflected in our fourth quarter results that I'd say we might have a basis point or two of additional lift going into next year that's not fully reflected because of some of the timing of those events, but I'd say that the restructuring is pretty much intact.

The other thing to keep in mind is even though we say that deposit pricing is better, it still is quite aggressive and so we think that for us to see much additional material appreciation our margin, we're going to have to see a little better pricing environment from the marketplace and also continued additional stronger growth in our core non-interest bearing deposit accounts as opposed to other funding sources.

Great.

Thank you.

Don, we continue to position ourselves very neutrally from a interest rate risk Management.

That's a good point, Tom, that our forecast was based on the forward curve that exists at the time that we put the budgets together and at that time, we still assumed that the yield curve would be inverted and we intentionally manage our interest rate risk position to about as neutral as you can get given various rate scenarios.

Great.

Thank you.

Thank you.

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

Hi, guys, good afternoon.

Hi, Jim.

Good quarter.

I wanted to ask maybe Don, you could go into the home builder commentary that you were providing earlier, either you or Tom were going over it.

Did you guys actually sell the Ohio builder credit that you had or not?

I misunderstood that.

Tim, do you want to take that?

Yes, we did exit the credit so we sold our exposure to that specific credit.

And when you -- did I understand you correctly then when you did, you actually had, you actually had -- were able to release reserves?

Yes.

We had I think $4.4 million in reserve assigned to that particular credit and there was a $2.4 million charge-off associated with the sale.

Okay, good.

And then separately, can you guys talk about the tax rate going forward?

Again, I thought you had said that it's now at a more normalized level.

Does that mean any upsides in this quarter's earnings from a lower tax rate shouldn't really be looked at as non-recurring benefit?

I'd say as far as our tax rate going forward that we would expect something just shy of the 30% level.

I think that if you look at 2006, adjusted for the unusual items this year, I think the tax rate would be around 28%.

We said that the fourth quarter adjusted for the unusual items was about 27%, so there was just a slight difference this fourth quarter compared to a more normal run rate going forward.

Okay.

Good.

Thanks, guys.

Thank you.

At this time, there are no further questions.

Okay.

I think if that's the case then I'd like to tell everybody thank you very much for participating in our call.

If you have questions please call Investor Relations and we'll get back to you promptly.

Thank you again.

This concludes today's conference.

You may now disconnect.