Huntington Bancshares Inc (HBAN) 2007 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Huntington Bancshares first 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 re broadcast starting about an hour from now.

Please call the Investor Relations department at 614-480-5676 for more information on how to access these recordings for 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 relating to the basis of the presentation.

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 reconciliation to the comparable GAAP financial measure can be found in the slide presentation in its appendix in the Press Release or in the quarterly financial review supplement to today's earnings Press Release all of which can be found on our website.

Certain performance data we will review are shown on an annualized basis and as a 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.

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

This includes how we'll talk about the impact of the Unizan merger on our reported results.

As you know, this merger closed March 1, of 2006.

The 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 comparison.

This is the last quarter we'll be isolating any Unizan impact.

Methodology we've used to estimate this impact on year-over-year results is noted on this slide and there are tables in the earnings Press Release as well as the appendix that detail the estimated impact attributed to the merger for loans, deposits, and selected income and expense items.

You are encouraged to familiarize yourself with this information as it will help you understand this quarter's underlying trends.

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

Turning to slide four, today's discussion including 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 10-K, Q, and 8-K filings.

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

Turning to today's presentation as noted on slide six, presenting today are Tom Hoaglin, Chairman, President, and Chief Executive Officer; Don Kimble, Executive Vice President and Chief Financial Officer; and Tim Barber , Senior Vice President of Credit Risk Management.

Let's get started.

To

Thank you, Jay, and welcome, everyone.

Thanks again for joining us.

Turning to slide seven, I'll begin with a general over 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 close with summary comments on our outlook for 2007 and then moderate the Q&A.

Turning to slide eight, here is my quick overview of the quarter.

Our reported earnings per share level of $0.40 was below our expectations.

This was the result of three items.

$8.5 million or $0.02 per share of equity investment losses, $2 million or $0.01 per share of negative MSR mark-to-market adjustments net of hedging, and $1.9 million or $0.01 per share of litigation losses associated with a Company acquired more than nine years ago.

On the other hand, underlying earnings were consistent with our expectations.

In fact we were quite pleased with several achievements.

A higher net interest margin, strong growth in middle market C&I and small business loans.

Good core deposit growth, strong growth in mortgage banking, trust, and brokerage insurance income, a decline in non- interest expense, and lower net charge-offs.

We also reported good growth in automobile loans reflecting the purchase under our servicing rights from two maturing 2003 securitizations as well as the positive influence of our dealer sales Huntington Plus program which we're very excited about.

Turning to slide nine, credit quality performance was mixed.

Non-performing assets increased 7% and our provision for credit losses was $13.7 million higher than in the fourth quarter and $11.3 million higher than net charge-offs which were only 28 basis points and well below our 35 to 45 basis point targeted range.

As a result our loan loss reserve ratio increased 4 basis points to 1.08%.

Don and Tim will provide details on all of these performance items.

As you might expect, during the quarter we had considerable focus on the proposed acquisition of Sky Financial Group which was announced last December.

There's a lot of detailed planning and preparation underway.

I'm pleased to report that we remain on track to meet our early third quarter targeted close assuming regulatory and shareholder approvals.

Everyday we see evidence that this merger has the potential to be all we had hoped it would be and that it will deliver significant benefits for our shareholders, customers, associates, and communities.

We have two main priorities this year--Execute our fundamental business game plan, that is deliver good financial results, and integrate Sky customers and associates into Huntington successfully and we're confident that we can accomplish both.

It's unfortunate that we sustain losses in our small portfolio of equity investments and the substantial increase to our loan loss reserves well in excess of net charge-offs does indicate that there are more credits that we're monitoring closely, especially in the residential and commercial real estate area.

But we were pleased with most of the business fundamentals and we remain optimistic about 2007.

Now for more details from Don and Tim.

Don?

Thanks, Tom.

Turning to Slide 11 reported, our GAAP net income was $95.7 million or $0.40 per share.

Included in the results were three significant items.

The first was $8.5 million or $0.02 per share of equity investment losses.

Since 2002 we've invested $15 million in three financial services equity funds.

This was done to improve competitive and market intelligence.

Some of the funds investments are in companies involved in subprime lending or related activities which significantly underperformed during the first quarter.

This was our first quarter of significant loss.

We remain money ahead in all three funds and a total value of these investments at quarter end was $25.9 million.

This loss was reflected in other non-interest income.

The second was a negative $2 million and mortgage servicing rights, mark-to-market net of hedge related trading activities.

This was reflected in mortgage banking income.

The last item was $1.9 million of losses related to litigation inherited from a bank acquired back in 1997.

Slide 12 provides a quick snapshot of fourth quarter performance.

As previously noted reported earnings were $0.40 per share which were negatively impacted by the three items shown here.

We were pleased with our net interest margin increasing 8 basis points to 3.36% consistent with our expectations.

Regarding loan growth, on the positive side, average total commercial loans grew at an annualized 5% rate, middle market C&I loans and small business loans grew, whereas average middle market commercial real estate loans declined reflecting softness in that sector.

Average total consumer loans declined at 7% annualized rate.

Reported average residential mortgages declined an annualized 12% but this reflected the sale of $103 million of loans at the end of the fourth quarter.

Average home equity loans declined an annualized 5% same as in the fourth quarter and consistent with our expectation of continued softness in the residential real estate market.

Average automobile loans and leases decreased an annualized 4%.

We were pleased with the 2% annualized growth in average core deposits as the markets remain extremely competitive.

As Tom noted, credit quality performance was mixed as shown by the next several items on this slide.

They will be covered in more detail later.

Also, as expected, our period end tangible common equity ratio increased to 7.06%.

Slide 13 provides a summary of the quarter's financial metrics.

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 decreased $2.5 million from the prior quarter.

This was due to fewer days in the current quarter compared to last quarter and a decline in average earning assets mostly in investment securities.

This was partially offset by an 8 basis point increase in net interest margin.

Contributing to the improved net interest margin were 4 basis points related to fewer number of days in the quarter, 2 basis points from the change in our average earning asset mix and another 2 basis points improvement from funding mix changes.

We continue to see more rational and stable loan and deposit pricing this past quarter.

Slide 15 reviews trends in our loans and leases.

As noted earlier, total average commercial loans increased an annualized 5% rate during the quarter.

This reflected an annualized 13% increase in middle market C&I loans as utilization rates increased 3 percentage points.

Average small business loans increased an annualized 7% base.

These increases were partially offset by the annualized 9% decline in average middle market commercial real estate loans due to the continued weakness in this sector.

Average automobile loans increased an annualized 20% rate even though we continue to sell about half of our auto loan production.

This reflected two items.

The first was a purchase of the $75 million residual portion of automobile loan balances remaining from two auto loan securitizations.

You'll recall that in 2003 we sold a number of auto loans as part of our program to reduce our overall auto loan exposure.

During the first quarter of this year, these securitized portfolio balances had diminished to the point where we exercised our right of servicer to purchase the remaining balances.

The second factor influencing the growth in automobile loans this quarter was our Huntington Plus program.

This program was initiated in the latter half of last year and is designed to leverage our technology platform.

It allows dealers to send loan applications with credit scores below the prime loans we retain on our books.

These lower credit score loans are originated and sold without recourse within 24 hours to an independent third party.

This capability broadens our relationship with our dealers.

And as a result, we're now seeing a higher percentage of their prime automobile loan applications during the quarter.

During this quarter, prime auto loan production was 18% higher than it was in the fourth quarter.

Average automobile leases continue to shrink as expected given the continued aggressive pricing by captives.

At quarter end, our total exposure to automobile loans and leases was unchanged at 15%.

The decline in average home equity loans was also expected given the continued softness in the residential real estate markets and our continued focus on credit underwriting and pricing.

Average residential real estate loans declined at an annualized 12% pace but would have been relatively flat except for the sale of $103 million of loans at the end of the fourth quarter.

We also sold another $110 million at the end of the 2007 first quarter.

These sales are part of our interest rate risk management efforts.

Slide 16 shows average total core deposits increased at a 2% annualized rate during the quarter.

Average sold commercial core deposits were a little changed primarily due to a 14% annualized decline in non-interest bearing demand deposits partially offset by 2% growth in other core deposits.

Average total consumer core deposits increased 3% reflecting strong growth in interest bearing and non-interest bearing demand deposits partially offset by a slight decline in other core deposits.

Slide 17 reviews non-interest trends.

Total non-interest income increased $4.6 million or 3% from the fourth quarter.

Starting at the top, total service charges declined $4.4 million or 7% reflecting th seasonal decline in NSF deposit service charges.

Also, other service charge income declined due to seasonally lower fees from debit card activity.

Trust services increased $2.4 million with $2.3 million reflecting the first quarter of the inclusion of income from unified acquisition closed in the fourth quarter.

The increase in brokerage insurance fees reflected higher annuity and mutual fund revenues.

Mortgage banking income was higher than last quarter due to the higher gains on the sale of mortgage loans and increased origination and secondary marketing income.

The $14 million decline in other income reflected a number of items.

The $8.5 million of equity investment losses compared with $3.3 million of such gains in the fourth quarter.

This represented an $11.8 million swing.

The $2.4 million decline in automobile operating lease income which is no longer reported as a separate income statement line item.

The fourth quarter included a $2.5 million gain on the sale of MasterCard stock.

These negatives were partially offset by fees related to the new Huntington Plus automobile dealer program.

The $15.9 million improvement in security gains reflects the fourth quarter's losses related to the balance sheet restructuring.

When total non-interest income is adjusted for these impacts of automobile operating lease income, the equity investment gains and losses, investment security gains and losses and the fourth quarter gain on the sale of MasterCard stock our total non-interest income was up 4% from the fourth quarter.

Slide 18 details trends in non-interest expense, again starting at the top let me comment only on the significant items.

Personnel costs declined 2% as the prior quarter included $4.5 million of severance and consolidation expense.

The increase in net occupancy reflected seasonally higher costs.

Professional services decreased $2.5 million reflecting lower collection costs and lower consulting costs associated with revenue initiatives.

The $23.9 million decline in other expense reflected a number of items including fourth quarter's $10 million donation to Huntington Foundation, its $5.2 million of residual value losses on automobile leases, and a $3.5 million associated with refinancing of the FHLB debt and also the first quarter $1.9 million decline in automobile operating lease expense.

I should also mention the first quarter included $800,000 of costs associated with the pending acquisition of Sky Financial.

This included about $600,000 of outside programming expense.

When total non-interest expense in both periods is adjusted for the impacts of automobile operating lease expense and the Unizan merger cost as well as the current quarters litigation cost and Sky Financial merger costs our total non-interest expense was essentially flat with the fourth quarter.

Slide 19 shows a trend in our 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 Slide 76 of the appendix.

Our reported efficiency ratio of 59.2% given the reduced impact of automobile operating lease expense and income, the efficiency ratio on an adjusted basis was a comparable 59.0%.

I think it's worth mentioning the $8.5 million of equity investment losses and $1.9 million litigation losses increase our efficiency ratio by 2 percentage points.

Slide 20 details capital trends.

The end of the quarter our tangible equity to asset ratio increased at 7.06% and our tangible equity to risk weighted asset ratio increased to 7.69%.

These increases from the prior quarter were principally driven by increases to retained earnings.

As noted on the last conference call, until the proposed merger with Sky Financial is approved by shareholders, we're not making share repurchases, and made none during the quarter, so we have 3.9 million shares remaining under our current authorization.

Our capital ratios are very strong and remain well above our long term targeted range.

Now let me turn it over to Tim to review trends and credit quality.

Tim?

Thanks, Don.

Slide 21 provides a high level review of some key credit quality performance trends.

Our non-performing asset ratio increased to 79 basis points.

Our net charge-off ratio was 28 basis points down from last quarter and continued to be below the low end of our long term targeted range of 35to 45 basis points.

Total 90 plus days past due in accruing balances are comprised almost entirely of consumer loans.

We believe the 19 basis point increase in the middle market commercial real estate segment is a one quarter anomaly.

The loan loss reserve ratio increased 4 basis points to 1.08% reflecting an increase in the level of monitored commercial loans.

This increase is a result of the general softness in the Midwest economy, particularly in our East Michigan and Northern Ohio regions.

We have stated in the past that the loan loss reserve ratio is an indicator of the underlying trends in credit quality.

It is important to note that although the level of monitored credit increased from year-end in both absolute as well as relative terms, it remains below the level at the end of a year ago quarter.

We also do not believe that there is any significant risk to the full year charge-off forecast as a result of this activity.

Slide 22 illustrates the trend in non-performing assets and it has already been noted that 56% of our non-performing assets are either U.S.

Government guaranteed assets or secured by less volatile residential real estate assets.

We continue to be very pleased with the granularity of our non-performing assets.

Slide 126 in the appendix details our non-performing assets by sector and size.

We continue to have no NPA's greater than $5 million and only nine between $2 million and $5 million.

Slide 23 shows trends in net charge-offs.

We also continue to be pleased with the consistency of our charge-off activity.

Middle market C&I and CRE segments incurred no net losses in the first quarter as the consistently low gross charge-offs were offset entirely by recoveries in the quarter.

The small business banking portfolio also reported low net charge-offs for the quarter.

On the consumer side the results were very consistent with our expectations and virtually identical to the prior quarter.

While the first quarter's low level of net charge-offs may not be duplicated in coming quarters we remain comfortable that our full year net charge-off ratio for total loans and leases will be at the off our 35 to 45 basis point targeted range.

The graph on the left-hand side of Slide 24 shows the trend in our allowance for loan and lease losses.

At quarter end, the allowance for loan and lease losses was $283 million, up $10.9 million from the end of the prior quarter.

As one would expect, this resulted in an increase in our period end loan loss reserve ratio to 1.08% about where we were one year ago.

The transaction reserve component increased 3 basis points as a result of the continued stress in our markets.

Our economic reserve component represents essentially the same proportion of reserve requirements.

The overall change is primarily a result of the increase in the level of monitored credits but again, does not have any impact on our 2007 net charge off forecast.

While the performance of these credits merit the monitored classification, we continue to believe that the improvements made in our client selection process and the strengthening of our rigorous underwriting standards over the last few years will minimize any potential losses from these credits.

On Slide 25, the allowance for unfunded loan commitments is shown separately from the allowance for loan and lease losses.

You will 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 is 1.08% and our NPA and NPL coverage ratios were 137%, 180% respectively.

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

On this basis, our period end reserve ratio was 1.23% also up 4 basis points with NPA and NPL coverage ratios of 157% and 206% respectively.

As we have noted before, looking at 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 is too simplistic as it does not take into account the quality of the non-performing assets.

As such we believe a better way to assess whether the loss content or overall risk profile of our portfolio is improving or deteriorating is to look to the trend in the transaction reserve component, if credit quality is getting weaker the relative level of required transaction reserves will be increasing and the converse is true if credit quality is improving.

As noted a moment ago, the increase in the transaction reserve was influenced by increased general stress in our markets and a related higher level of monitored credit.

Though the level of monitored credit increased, it remains below the level from one year ago on both an absolute as well as a relative basis.

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 non-performing assets.

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

Here you will note that at the end of the quarter, that coverage ratio was a strong 360%.

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

As a result of the significant announcements regarding subprime lending and stress on the entire residential real estate related industry, we want to use the next four slides to give you as clear picture as possible regarding our exposure in this area.

Slide 26 details our exposure to single family builders in our commercial real estate portfolio.

The total exposure of $945 million represents less than 4% of total loans and leases.

Of this amount, $643 million or 68% is associated with vertical construction projects.

Vertical construction represents projects that are currently under construction.

Overall, we are comfortable with the strength of our production builders.

It is within the smaller builder segment that we have noted over the past few quarters the potential for adverse credit trends.

In fact, some of the previously noted increase in monitored credits came from this segment.

The land under development segment includes exposure to projects that have already completed the horizontal infrastructure but not yet initiated vertical construction.

The final segment is land held for development.

There is no specific geographic concentration associated with our total single family builder exposure.

As you can see, our current quarter's loss rate was minimal at 8 basis points while our trailing 12 month loss rate was higher at 62 basis points reflecting the impact of the strategic exit of a home builder in the fourth quarter of 2006.

Current non-performing asset ratio of 1.41% is up slightly from prior periods.

The general slowdown in the market is well documented and our East Michigan region is a particularly difficult market.

This year's spring and summer selling season will be a significant determinant in the direction of this portfolio segment.

We continue to monitor exposure to this segment very closely both at the individual market level and via our credit administration function.

The consumer side of residential lending has also experienced stress, and I'll review our first mortgage and home equity loans on the next three slides.

Declining home values combined with some liquidity issues as a result of the well publicized subprime events of the last six months have caused higher delinquency and default rates across these segments.

Prior to getting into the detail I want to emphasize once again that Huntington has never originated subprime loans or engaged in option arm or negative amortization structures.

Our first mortgage portfolio currently totals $4.5 billion including $660 million in the Alt A product and $800 million of interest only loans.

They have reduced production of both products over the past 18 months as evidenced by the reduced percentage of production versus overall portfolio composition.

The Alt A product is really a concept more than a product definition.

Within the Alt A world there exists a wide range of credit risk profiles.

In general, Alt A loans exhibit one or a combination of three characteristics--low documentation, high loan to value, and low FICA scores.

Combining these within one credit is called risk layering and doing this is what banking regulators have been and bank investors should be concerned about.

Huntington has always been very conscience of risk layering and we have credit policies designed to limit the combination of these risks.

As an example, while we have offered 90% plus loan to value products, these are generally combined with high FICA score requirements.

A current loss rate in the Alt A segment remains below our original expectations.

Our interest only product is managed by policies and processes designed to identify those borrowers where the interest only product is appropriate.

The interest only portfolio has continued to perform well with negligible loss at stake.

We have also spent a great deal of time and effort assessing the risks embedded in the adjustable rate mortgage portfolio.

While there is obviously a potentially significant change in the interest rate associated with loans originated in 2003 and 2004, we have been proactively calling borrowers to ensure that they understand the impact and are aware of their options.

Slide 28 details our exposure to the home equity segment which totals $4.9 billion.

Since 2004, we have consciously improved the risk profile of our portfolio as measured by FICA score and loan to value.

Since early 2005 we have also significantly reduced our broker originated segment both in terms of origination and portfolio composition.

We are clearly experiencing elevated losses in the portfolio though the level has stabilized over the past three quarters.

The variable rate home equity line of credit component continues to decline as borrowers move to fixed rate and amortizing home equity loans.

Slide 29 details the improving credit quality associated with our first mortgage home equity lines of credit and home equity loan originations over the past five years.

As you can see, the trend has generally been to higher FICA scores and lower loan to values.

And you can also see the decline in our Alt A first mortgage originations.

This completes the credit and financial review for the quarter.

Let me turn the presentation back over to Tom.

Thanks, Tim.

Turning to Slide 30, 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 are uncertain, until the impact can be reasonably forecast.

As noted on this slide, we're now targeting reported earnings of $1.84 to $1.89 per share excluding merger related charges.

Please note two things about this range.

First, this range is $0.03 lower than that given in January and reflects the first quarter's equity investment in litigation losses.

Second, this includes the slight accretion we anticipate from the proposed acquisition of Sky Financial excluding any merger charges and assumes a close early in the third quarter.

Regarding the assumptions listed, please note that these exclude any impact from the proposed acquisition of Sky Financial.

That is to say, these are for Huntington on a stand alone basis.

You'll note that most of these are the same comments made last quarter.

Let me note each briefly.

Revenue growth in the low to mid single digit range.

This is expected to reflect a net interest margin that's relatively stable with the 2007 first quarter level, 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 continued softness in residential mortgages and home equity loans.

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

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

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

As a result we expect revenues to grow faster than expenses resulting in positive operating leverage in the low single digit range coupled with continued improvement in the efficiency ratio.

A net charge-off ratio at the low end of our long term 35 to 45 basis point targeted range.

NPA and loan loss reserve ratios that trend upward modestly through a year-end from March 31, 2007 levels.

And lastly, no sizeable stock repurchase activities, especially given that we cannot be in the market until a proposed Sky Financial merger is approved by shareholders.

Again this results in a targeted reported EPS for 2007 of $1.84 to $1.89 including a slight positive accretion from the proposed Sky Financial merger and excluding merger related charges.

This completes our prepared remarks.

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

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

Operator?

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

Thank you very much.

Just I guess sorry to bother you with this, but on the litigation, could you tell us what the source of that was and whether it was a settlement or a judgment that might be appealed?

Is there insurance coverage?

Basically just sort of wondering if there's any potential for that to create future either costs or benefits?

David this is Tom.

Both cases, we inherited from the acquisition of First Michigan in 1997.

They've obviously been long running cases.

In each case, the amounts represent the settlement, it's over.

We anticipate no further amounts.

Okay, thanks very much.

[OPERATOR INSTRUCTIONS] Your next question comes from Heather Wolf from Merrill Lynch.

Hi, there.

Hi, Heather.

A quick question for you on the charge-offs.

Were there any material recoveries in the quarter that we should know about?

Heather, this is Tim.

We had a couple of recoveries in the commercial portfolio from charge-offs we took in 2002, 2003, that affected the numbers, yes.

Were they meaningfully different than in prior quarters?

Not dramatically different from prior quarters, no.

Okay.

And I'm sorry to make you guys repeat this again but did you say that the guidance excludes the charges that you took for this quarter or includes it?

Heather this is Don, and the guidance would include those charges, so essentially, the decrease of $0.03 a share in our guidance essentially represents the $0.03 to $0.04 shortfall that we would see in our EPS for those significant items.

Got it.

And then, I know that you guys don't expect any material increase in your losses from some of the credit trends that you were talking about, but this quarter, your provision went up as a result of the increase in the non-performers.

Are you expecting any kind of incremental strain from higher provisioning?

Heather, this is Tim.

A couple things.

One, as our monitored credit increased our reserve methodology calculates higher reserves.

It really has nothing to do with the non-performing status.

Credits are graded and receive reserve factors, non-performing status is outside the reserve calculation.

So when we talked about really not expecting the material additional losses of certainly over a seven from this action, that was based just on our review of the individual credits.

But doesn't the question still hold whether they're classified as non-performers or not, you're clearly having supervision when you see problems cropping up.

So I guess that's the question, is now that you're starting to see problems crop up, whether they're monitored loans or non-performing loans, will your provision be higher this year than expected?

Heather, this is Don, and as far as a provision expense, it really does reflect a very transparent picture of our credit quality, as you captured that as our credits would deteriorate in our classification, and that would include 12 credit ratings plus another 15 ratings associated with the collateral to support those loans so you have about 180 different credit ratings essentially that gets assigned to the different credits.

Based on any deterioration you would see an increase in our allowance and so based on that, we have seen higher provision expense than what we would originally expected and are forecasting higher provision expense now than what we were say 90 days ago.

Okay, so then what's the offset because essentially you haven't really changed your guidance including the one-time item.

What's the offset to the higher provision?

Heather this is Don again and essentially the offset that we're seeing is lower expenses number one.

We're also seeing a little bit stronger margin that what we would have expected 90 days ago and our fee income has come in nicely for us so far as well.

So it's offset in a number of different areas.

Okay, great.

And one last question, on the tax rate I think it was a little lower this quarter.

Can you talk about what a sustainable rate is going forward?

Heather the tax rate was right around 26% for the quarter.

That would be our projection for the effective tax rate for full year for Huntington on a stand alone basis.

It's a little bit lower than first quarter last year which would reflect a higher tax exempt income and also some higher business credits than what we expected last year.

Okay.

All right, thanks very much.

Heather, this is Jay, if I can just follow-up to clarify on the recoveries.

Our recoveries this quarter were 9.7 million and that's down from 9.9 million in the fourth quarter.

Oh, okay.

Great.

Thanks.

Thank you.

Your next question comes from Bob Hughes.

Hi, good afternoon, guys.

Hi, Bob.

Don, I was wondering as a follow-on to the tax rate question, so I guess, call it 26% or so is what you would assume to be the sort of full year effective tax rate for Huntington on a stand alone basis?

That's correct.

Did I hear that correctly?

Yes.

And with the addition of Sky, we would see that creep up a little bit?

What we would have to do is look at the blended tax rate effecting Sky and Huntington on a combined basis, so Sky's tax rate is higher than ours and so we would have some type of a blended impact after that point after the acquisition would be completed, that's correct.

And when, can you refresh my memory on when you plan to complete the conversion with Sky?

Is that a fourth quarter event?

Bob, this is Tom.

We haven't publicly announced the conversion date, although I think it's very logical for you to assume that since we're targeting the financial close in the early part of the third quarter that conversions would in all likelihood occur in that quarter, albeit later.

Okay.

Very good.

So we should begin to see some cost savings maybe in the fourth quarter post-conversion?

That's correct.

Okay, and I'm sorry, just as a follow-on, did you say the 2003 auto securitizations that you redeemed that was only $75 million in loans?

That's correct, Bob.

Okay, so there's really no material economic benefits given the size then to you guys right from redeeming the securitizations?

No.

You're absolutely right.

It's more of just a convenience as far as bringing those back on the balance sheet as opposed to continuing the service for third parties.

Thank you.

Thank you.

Your next question comes from [Michael Crohan].

Could you talk a little bit more about the auto loan growth?

It seems to be a theme across regional banks.

Is it a result of kind of focusing efforts there as opposed to on mortgage or do you think it's a little bit a function of captive auto finance companies pulling away a little bit or both?

This is Don, I can comment a little bit about the auto loan growth.

Again, a portion of it really related to the repurchase -- excuse me, the purchase of the remaining balances on these securitizations that were initiated back in 2003.

The rest of it really represents the impact of our ongoing originations of auto loans that we started a program about two years ago to sell off about half of our auto loan production, and as a result of that we started to see our balances decline.

In other words, the ending balances resetting to this new origination level net of those sales, and since we're getting close to that two year point we're actually starting to show a little bit of growth from those origination volumes.

The other thing on the origination volumes with our Huntington Plus program that we implemented this past quarter and really at the end of the fourth quarter of last year, we really have seen an increase in our origination volumes from being able to have a deeper relationship with our existing dealerships and receiving a little bit higher percentage of their prime loans applications.

Yes, so this is Tom.

Let's be clear about this.

The Huntington Plus program targeted toward lower credit rated borrowers, we retained none of those balances, so that doesn't help our growth at all.

It is, however, inducing, because dealers are so enthusiastic about it, it's inducing dealers to do more business in the sweet spot, if you will, that we have meaning the A and A Plus paper send more of their volume to us and that's what's beginning to drive some of the growth.

And who's the natural buyer of the Huntington Plus paper?

Is it Wall Street securitization that's buying it or is it subprime auto companies or is it other banks or is it a combination?

Our relationship is with Americredit and we have a relationship that we can disclose on that and have worked into a very nice relationship as far as being able to leverage our relationship with those dealerships.

When did that relationship begin?

Late in the fourth quarter of last year.

Okay.

And then last question, you noted, I guess one of the charges was related to equity investments and alternative investments.

Is that a sort of a quarterly mark-to-market or is that a realized loss and you're no longer invested?

No.

That's a quarterly mark-to-market.

We record those investment balances at their fair market value and essentially, we invested $15 million over the last five year time period and it's now up to $25.9 million.

So it's about a 14% annualized return on that investment.

It just comes a little fluctuations as far as when we receive those gains.

Is that spread out over a number of different investments or is that one specific investment?

It's three specific investments that we would have and all three are performing quite nicely for us.

Okay.

Great.

Thank you very much.

Thank you.

You have a follow-up question from David Hilder.

Thanks very much.

Two credit quality questions.

First, in the area of commercial real estate and residential real estate, you mentioned seeing some weakness I think in Eastern Michigan, but generally in those categories, could you characterize the performance of markets within your region?

We continue to feel pretty good about the Columbus, Cincinnati, Indianapolis markets, Northern Ohio and East Michigan as we talked about have seen some stress.

West Michigan is doing reasonably well given where they are, given Michigan's the overall economy in Michigan and West Virginia which is our other market really hasn't seen dramatically different performance at all.

Okay.

Thanks and then I see in the non-accrual table that the two categories that showed most significant increase from the end of the year were middle market commercial real estate and small business.

Is there -- can you provide any other detail on what was driving that?

We talked about that a little bit.

There are commercial real estate projects.

There aren't any single projects that drove that number, so it's a wide range of credits in both real estate, primarily real estate oriented across middle market and small business.

So even there's some real estate exposure in the small business line item?

Correct, yes.

Great.

Thanks very much.

Thank you.

Mr.

Gould at this time we have no questions.

Okay, well, everybody thank you so much for participating.

If you have follow-up questions please feel free to give me a call or Jack.

Thank you.

We'll see you next quarter.

This concludes the Huntington conference call.

You may now disconnect.