Huntington Bancshares Inc (HBAN) 2007 Q2 法說會逐字稿

Good afternoon.

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

At this time I'd like to welcome everyone to the Huntington second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Gould, you may begin your conference.

Thank you, operator, and welcome, everybody.

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

Copies of the slides we well be reviewing can be found on our Web site, 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 2 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.

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 its appendix, in the press release, in the quarterly financial review supplements to today's earnings release, or the 8-K filed with the SEC earlier today, all of which can be found on our Web site.

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

Also, some of the 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.

Slide 3 reviews additional aspects of the basis of today's presentation and discussion.

This includes how we will talk about the Sky Financial acquisition.

This acquisition, as you know, closed on July 1, 2007.

As such, it had no impact on our reported second quarter balance sheet items, like loans or deposits, nor does it impact any of our reported credit quality metrics.

It also had no impact on our reported revenue, expense or net income.

Its only impact consisted of second quarter merger-related integration costs.

However, in the slide presentation, and its appendix, we have included selected June 30, 2007 pro forma data to assist you in understanding the magnitude of its impact on certain financial performance metrics and as an aid in helping you understand better the base from which performance going forward will be measured.

The data includes estimated pro forma closing entry adjustments which are under review and subject to change.

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

Today's discussion, including the Q&A period, may contain forward-looking statements and 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 materials filed with the SEC, including or most recent Form 10-K, 10-Q and 8-K filings.

Now, turning to today's presentation.

As noted on Slide 5, presenting today are Tom Hoaglin, Chairman and CEO, Marty Adams, President and Chief Operating Officer, 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 6, 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 Tim commenting on credit quality trends.

Don will close with some comments regarding Sky Financial's recent performance trends, and its pro forma impact.

I'll conclude with comments on our outlook for 2007, and Marty will be available during the Q&A period.

Turning to Slide 7.

Here's my quick overview of the quarter.

Our reported earnings per share level of $0.34 was well below our expectations.

This was primarily the result of higher provision expense related to two commercial credit relationships in Eastern Michigan, both associated with the home building sector, and one Northern Ohio commercial loan.

This was especially so in Eastern Michigan, where the sales slowdown and property valuation declines turned out to be much worse than expected.

This resulted in an increase in the level of monitored credits, including non-performing loans, and in higher net charge-offs.

Within this context, our rigorous loan loss reserve methodology required us to build our overall loan loss reserve position.

Our provision expense exceeded net charge-offs by $26 million.

As of the end of the quarter, the necessary credit adjustments had been made based on the current condition of our loan portfolios and what we now expect for the future.

To the degree that we see even more pressure on businesses in our markets, we'll continue to address any emerging issues aggressively and transparently.

In addition to credit-related issues, also negatively impacting the quarter's results, but to a lesser degree, were merger-related integration costs, which were expected, and net market-related losses.

Also negatively impacting results was a 9 basis point decline in our net interest margin, of which 3 basis points resulted from the increase in non-accrual loans.

Credit quality was clearly the major issue in the quarter.

But there were also many positives in our reported results that show we're having success in building the business and which should result in better financial performance over the long-term.

These include strong growth in middle market commercial loans, strong growth in automobile loans, good growth in small business and home equity loans, good growth in core deposits, especially in demand deposit accounts, which we view as the primary customer relationship account and is a growth emphasis for us.

In each of the last two quarters, we've opened more than 35,000 new retail checking accounts, or about 100 new accounts per banking office.

We also experienced strong growth in the key fee income activities of service charges on deposits, other service charges, brokerage and insurance and trust services income.

Lastly, and excluding the impact of merger-related integration costs, expenses were well contained.

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

As one might expect, our most important recent achievement was the financial completion of the acquisition of Sky Financial on July 1.

This acquisition solidifies our position in Ohio.

Great Lakes spans our presence in the Indianapolis market and establishes Western Pennsylvania as a new market.

Customers will have access to more offices, ATMs and products and services.

Third quarter earnings performance will include the impacts of merger charges and expenses associated with integrating systems and making certain our customers have a smooth integration experience.

Major systems conversions will occur in late September.

Every day we continue to 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 the combined shareholder group, our customers, associates and communities.

We remain confident that the financial benefits from this merger will be realized and quite visible in the fourth quarter financial performance results.

Our two main priorities this year have not changed.

Execute our fundamental business plan and integrate Sky customers and associates into Huntington successfully.

We can't control the speed at which market conditions may change, nor the impacts such changes may have on our short-term results, what is important is that we remain focused on the tasks at hand that we'll build the franchise and lay the foundation for improved financial performance.

Now for more details from Don and Tim.

Don?

Thanks, Tom.

Turn to Slide 9.

Reported net income was $80.5 million, or $0.34 per common share.

These results were negatively impacted by three significant items.

First, an increase in provision expense, of which $24.8 million, or $0.07 per share related to two Eastern Michigan real estate-related credit relationships and one Northern Ohio auto industry-related credit.

Second, $7.6 million, or $0.02 per share of Sky Financial merger-related integration costs.

Third, $3.5 million, or $0.01 per share of net market-related losses consisting of four items: $5.1 million in impairment losses related to securities backed by mortgages to low FICO score borrowers, a $4.8 million net negative impact from the revaluation of mortgage servicing rights net of hedging, partially offset by a $4.1 million gain in repayment of FHLB debt, and $2.3 million of equity investment gain.

Slide 10 provide as quick snapshot of the quarter's performance.

As previously noted, reported earnings were $0.34 per share.

Our net interest margin was 3.27%, down 9 basis points.

This was more than expected mostly due to 3 basis points related to higher non-accrual loans and a reclassification of loan fees to non-interest income.

Average total commercial loans increased at a 12% annualized pace.

Average sole consumer loans declined at a 4% annualized pace.

This reflected continued declines in automobile leases and residential mortgages.

The latter impacted by $110 million in mortgage loan sales late in the first quarter.

We were quite pleased with the 19% annualized growth in automobile loans and the 5% annualized growth in home equity loans.

We were also very pleased with the 5% annualized growth in average core deposits, even though the markets remain extremely competitive.

As Tom noted, the strong fee income growth was a real highlight.

This included 12% linked quarter growth in service charges on deposit accounts, 13% growth in other service charges, 7% growth in brokerage and insurance income, and 3% growth in trust services income.

Please note these are not annualized growth rates.

The obvious disappointment for the quarter was in the credit area, where net charge-offs increased to 52 basis points and non-performing assets rose 26%.

The deterioration resulted in a significant increase to the reserve that Tom mentioned earlier, resulting in period end loan loss reserve ratio at 1.15%, up 7 basis points.

During the quarter we also issued $250 million of enhanced trust preferred securities [to] provide capital to assist in the financing of the Sky Financial acquisition.

For period end tangible common equity ratio declined to 6.82%, reflecting the impact of the strong loan growth, as well as an increase in trading securities purchased near the end of the quarter in anticipation of the Sky Financial acquisition.

Slide 11 provides our customary 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 12 shows that net interest income on a fully tax equivalent basis decreased $2.1 million from prior quarter.

This was entirely due to the 9 basis point decline in net interest margin.

Contributing to the decline in the net interest margin from first quarter were 3 basis points related to the impact of the higher non-accrual loans, including the reversal of $1.7 million of accrued interest, 2 basis points related to the increased day count, another 2 basis points related to $1.4 million of loan fees due to reclassification to non-interest income, and 2 basis points from the funding exchanges.

Loan and deposit pricing remained relatively stable this past quarter.

Slide 13 reviews trends in our loans and leases.

As noted earlier, total average commercial loans increased at a 12% annualized rate during the quarter.

The increase in average middle market C&I loans was spread across all regions with the exception of our Northwest Ohio and Michigan regions.

Middle market commercial real estate increased in all but three of our regions.

Average small business loans increased an annualized 5% pace.

Average automobile loans increased on an annualized 19% rate.

This reflected a 12% increase in prime loan auto production, which continued to be favorably impacted by the Huntington Plus program for automobile dealers initiated late last year, and discussed in last quarter's conference call.

Average automobile leases continue to shrink as expected, given continued aggressive pricing by (inaudible).

The increase in average home equity loans was better than expected, reversing the downward trend of recent quarters.

This reflected growth through our retail channel.

As we reported before, we began de-emphasizing broker channel originated loans two years ago.

This past quarter, we made the decision to discontinue broker originated home equity loans all together.

Average residential real estate loans declined on an annualized 13% rate, but would have been relatively flat except for the sale of $110 million of loans the end of the first quarter.

This sale was part of our interest rate risk management efforts.

Slide 14 shows that average total core deposits increased to 5% annualized rate during the quarter with commercial and consumer deposit growth contributing 55% and 45% of the growth respectively.

Average total commercial core deposits grew at an 8% annualized rate, mostly due to growth in other core deposits, primarily CDs, so we are very pleased with the 6% annualized growth in non-interest bearing demand deposits.

Average total consumer core deposits increased at a 4% annualized rate, reflecting strong growth in both interest bearing and non-interest bearing demand deposits.

As shown at the bottom, total non-interest bearing demand deposits grew at a strong 7% annualized rate.

Slide 15 reviews non-interest income trends.

Total non-interest income increased $11 million, or 8% from the first quarter.

Starting at the top, total deposit service charges increased $5.2 million, or 12%, reflecting the rebound from the seasonal decline in NFS deposit service charges in the first quarter.

Other service charge income increased 13% due to increases in fees from higher debit card volume.

The 7% increase in brokerage and insurance fees reflected a strong increase in annuity sales.

The $2.2 million decline in mortgage banking income primarily reflected $5 million of net MSR valuation adjustments compared to $2 million of such losses in the first quarter.

The $9.7 million increase in other income reflected a number of items, including the $2.3 million of equity investment gains compared with $8.5 million of such equity investment losses in the first quarter.

The $10.8 million swing.

It's worth noting that the $2.3 million of equity investment gains represented gains in the same investments where an $8.5 million loss was reported in the first quarter.

A $1.3 million decline in automobile operating lease income, which is no longer reported as a separate income statement line item.

The $5.1 million security loss is reflected in an impairment mentioned earlier.

The securities impairment relates to a $50 million pool of securities of which $9 million have been identified as impaired.

We've recognized $15 million of impairment losses over the last three quarters.

The impaired portion of that portfolio has now been written down to about $0.40 on the dollar.

In addition, we're receiving 4 to $5 million of monthly principle reductions on this pool.

When total non-interest income is adjusted for the impacts of the automobile operating lease income, equity investment gains or losses and investment security gains or losses, total non-interest income was up 4% from the first quarter.

Slide 16 details trends in non-interest expense.

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

The increases in outside data processing, marketing and professional services expenses reflected Sky Financial merger-related integration costs of $3.5 million, $1 million, and $1.5 million respectively.

These were related to systems conversion costs and Sky customer integration activities targeted for late September.

The $4.1 million decline in other expense reflected the benefit of the $4 million gain from the FHLB debt repayment and a $1.9 million decline in litigation losses.

When total non-interest expense in both periods is adjusted for the impact of automobile operating lease expense, Sky Financial merger-related integration costs, the FHLB debt repayment gain, and the prior quarter's litigation losses, total non-interest expense increased 1%.

Slide 17 shows the trend in our reported efficiency ratio on the top line.

It also shows our efficiency ratio trends after adjusting for items effecting comparability.

You'll find a complete reconciliation between the reported and adjusted amounts in Slide 84 in the appendix.

Our reported efficiency ratio was 57.8% or 56.9% on an adjusted basis.

Slide 18 details capital trends.

At the end of the quarter our tangible equity to asset ratio decreased to 6.82% and our tangible equity to risk weighted asset ratio decreased to 7.54%.

These decreases from the end of the prior quarter were principally driven by growth in loans and trading account assets and securities purchased in anticipation of the close of the Sky Financial acquisition.

Our capital ratios remain very strong.

Let me now ask Tim to review trends in credit quality.

Thanks, Don.

As noted previously, the quarter's results were negatively impacted by the credit quality issues, primarily related to the deterioration in the three commercial credit relationships.

Slide 19 provides a high level review of our key credit quality performance trends.

Our non-performing asset ratio increased to 97 basis points.

Of the $54.5 million increase in non-performing assets, the three commercial credits accounted for $43.5 million, or 80% of the increase.

Our net charge-off ratio was 52 basis points, with 18 basis points associated with the two Eastern Michigan commercial real estate credit relationships.

There were no charge-offs associated with the Northern Ohio commercial loan.

Total 90-plus days past due on accruing balances are mostly comprised of consumer loans and at 25 basis points were down slightly from the end of the first quarter.

It is worth noting that this ratio has been relatively stable, particularly associated with consumer loans.

It is also important to note that consumer loan credit quality is expected to remain consistent with prior periods.

The credit quality issues in the quarter were totally within the commercial loan portfolio.

The loan loss reserve ratio increased 7 basis points to 1.15%, reflecting an increase in the level of monitored commercial loans.

The three commercial relationships accounted for over half of the additional required reserve, but the remaining increase associated with the proper recognition of an increase in other monitored relationships.

Although monitored credits increased on both an absolute and relative basis, they were consistent with the level in the year-ago quarter.

Slide 20 illustrates the trend in non-performing assets.

It has already been noted that non-performing assets increased $54.5 million, with the three commercial credits accounting for $43.5 million, or 80% of the increase, $28.5 million for the two Eastern Michigan credit relationships, and $15 million for the one Northern Ohio commercial credit.

Slide 21 shows trends in net charge-offs.

As shown, charge-off issues were entirely related to commercial loans.

As a reminder, the two Eastern Michigan commercial real estate credit relationships represented $12.2 million, or 18 basis points of net charge-offs in the quarter.

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

We believe that our full-year net charge-off ratio for total loans and leases inclusive of Sky Financial results for the second half of the year will be at the mid to upper end of our 35 to 45 basis point long-term targeted range.

Commercial net charge-offs will remain under pressure, but our outlook is that consumer net charge-offs will remain consistent with our expectations.

The graph on the left-hand side of Slide 22 shows the trend in our allowance for loan and lease losses, which has been upward for the last two quarters.

At quarter end, the allowance for loan and lease losses was $307.5 million, up $24.5 million from the end of the prior quarter.

This resulted in the increase in our period end loan loss reserve ratio to 1.15%.

The three commercial relationships accounted for over half of that increase.

We continue to believe the best way to assess whether loss content or overall risk profile of our portfolio is improving or deteriorating is to look to the trend in the transaction reserve component.

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 the increased general economic stress in our markets and the related higher level of monitored credits and not so much increases in specific reserves.

Though the level of monitored credits increased, it now represents the same dollar level as one year ago, with a lower associated percentage of the portfolio.

We have continued to be proactive in recognizing and disclosing changing risks in the portfolio, including disclosing the type and geographic locations of our largest risks.

This focus has created an increase in the reserve level over the past two quarters, better positioning our portfolio for the current changing market dynamics.

On Slide 23, the allowance for unfunded loan commitments is shown separately from the allowance for loan and lease losses.

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 loans and non-performing assets.

On this basis, our non-performing loan and non-performing asset coverage ratios were 145% and 118% 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 was 1.30%, also up 7 basis points, with non-performing loan and non-performing asset coverage ratios of 165% and 134% respectively.

We remain comfortable with the current coverage ratios in part due to the continuing impact of the government guaranteed non-performing loans in the commercial portfolio.

The lower loss volatility associated with the residential non-performing loans in general is also a key component in our internal assessment of the non-performing asset coverage ratio.

As we have noted before, the analysis of credit trends should include a combination of changes in coverage ratios, loan loss reserve ratios, as well as the composition of the non-performing assets.

In conclusion, we remain positive regarding our reserve adequacy based on our proactive risk assessment of the portfolio.

In particular, our focus on a single-family homebuilders is appropriate, given some of the very recent news concerning the sector.

We continue to be pleased with the relatively consistent overall performance of our consumer portfolio.

A home equity and residential portfolio segments in particular, are exposed to the same market dynamics impacting the homebuilders on the commercial side.

The consistent results are a function of early recognition of the risks and improved underwriting over the past two to three years.

The home equity portfolio in East Michigan is relatively small and while the performance has been affected over the past six months, it has not substantially altered the overall results.

Slide 24 summarizes the impact of the three noted relationships on the overall results for non-performing assets, net charge-offs and provision expense.

On the positive front, the non-performing asset level showed a net increase of only $11 million, excluding the three relationships.

The remaining credit loss results were consistent with expectations, as the reported 52 basis points included 18 basis points associated with the two commercial real estate relationships.

Provision expense was also centered in the three relationships, although the result is a function of our risk assessment process and quantitative reserve methodology.

As a result of the significant impact that credit issues in Eastern Michigan had on the quarter's results, I want to use the next two slides to review the commercial loan portfolio in the region and then follow with an update on our overall exposure to homebuilders.

As shown on Slide 25, we have $1.2 billion in commercial loans in our East Michigan region.

Commercial real estate loans total $790 million, or 63% of total commercial loans.

We continue to serve our existing clients as appropriate and add new customers that fit the ideal Huntington customer profile.

We have not extended additional dollars to any of the monitored relationships in the region.

The homebuilder exposure is down compared to the prior quarter, with relatively low levels of land held for development and land under development.

These are the two highest risk components of the single-family homebuilder portfolio.

As of the end of the quarter, we had reviewed all of our exposure in the region and have appropriately risk graded the relationships based on current information.

The economic environment in the region continues to be soft, making longer-term projections difficult.

The C&I segment continues to be extremely competitive, and while we continue to focus on our existing borrowers, we are unwilling to compromise on credit or price to generate loan volume in this market.

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

The total exposure is $936 million, down slightly from $945 million at the end of the first quarter.

The exposure represents 3% of total loans and leases.

Of this amount, $645 million, or 69%, is associated with vertical construction projects, relatively unchanged from the end of last quarter.

Vertical construction represents projects that are currently under construction.

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.

Overall, we continue to be comfortable with the strength of our large production builders, although they are not immune from the market dynamics.

The bulk of the homebuilder portfolio is located across our various Ohio regions.

The Ohio segment includes historically more stable Central Ohio and Southern Ohio region.

The market risks detailed on the slide exist across the country as recent homebuilder announcements indicate, but are particularly acute in the Eastern Michigan market.

We will continue to appropriately discount appraised values based on our current assessment of market conditions, including lower market valuations on finished units and an excess supply of lots.

For example, on the two Eastern Michigan credits, we took a conservative view of the collateral values based on the current market.

This had a direct impact on the losses recognized in the quarter.

This completes the credit review for the quarter.

Let me turn the presentation back over to Don.

Don?

Thanks, Tim.

With the closing of Sky Financial acquisition on July 1, I want to use the next two slides to provide you with additional information that we believe will be helpful in understanding Sky's second quarter performance and help dimension for you the size of the new Huntington post merger.

This should be useful as you build your models for future periods.

Slide 27 recaps Sky's second quarter performance compared with the first quarter performance.

In sum, it was within our expectations.

Their net interest margin was 3.7%, up 6 basis points and produced net interest income of $146 million.

Sky also saw good growth in average total commercial loans, up an annualized 11% to a total of $8.6 billion.

Average total consumer loans decreased an annualized 6% to $4.4 billion.

This included an 11% annualized decline in average residential mortgages, with average home equity loans declining slightly as well.

Fee income had an underlying run rate of about $69 million and reflected 10% growth in service charges on deposits and other service charges.

Non-contingent insurance and brokerage revenues increased 11%.

Contingent fees represent additional revenues and insurance agents based on their customer loss experience.

The underlying expense run rate was approximately $123 million.

Regarding credit quality performance, net charge-offs of $11 million represented 33 basis points of related loans and leases, down 3 basis points from the first quarter.

Non-performing assets increased 2% to $174 million, and the period end NPA ratio was 1.31%, down 1 basis point.

With this as a background, what will the new Huntington look like?

Slide 28 summarizes key pro forma June 30th balance sheet amounts.

Slides 38, 39 and 40 and the appendix show the detail.

It is important to note this represents approximation, as the closing entries are still under review and subject to change.

But this is a fair representation of what the new Huntington will look like.

We'll begin the third quarter with $39.9 billion in loans and $46.6 billion of earning assets.

This total earning asset figure assumes the combined investment portfolio will be $1.5 billion lower than the total of the two separate organizations.

Not surprisingly, goodwill and other intangibles jumped to $3.3 billion.

Total assets are about $54 billion.

Core deposits will total $32 billion with about $5.5 billion of other deposits.

Borrowings total $9 billion, and we have $6.2 billion of total shareholder's equity.

With this backdrop, I'll turn the presentation over to Tom, who will provide comments on our 2007 outlook.

Tom?

Thanks, Don.

Turning to Slide 29.

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 selected items where the timing and financial impact is uncertain until the impact can be reasonably forecast and any unusual or one-time items.

As noted on this slide, we're now targeting earnings of $1.68 to $1.72 per share excluding merger-related integration costs.

Please note three things about this EPS range.

First, it's $0.16 to $0.17 lower than that given in April.

This reflects the second quarter shortfall, as well as the negative impact of raising our net charge-off guidance from the lower half of our targeted net charge-off range of 35 to 45 basis points to the mid to upper half of that range, and the assumption that we'll build our loan loss reserves moderately over the second half of the year.

We clearly face more credit challenges in the quarter than we expected three months ago.

We anticipate that the 2007 economic environment will continue to be negatively impacted by weakness in real estate markets and the automotive manufacturing and supplier sector.

How much of these factors will affect banking activities and overall credit quality trends not known.

However, it's our expectation that any impact will be greatest in the Eastern Michigan and Northern Ohio markets.

Interest rates are expected to remain relatively stable.

Second, our guidance still includes the slight accretion we anticipate from the Sky Financial acquisition but excludes any merger-related integration costs.

Third, and this is important, this range reflects the higher share impact from the Sky Financial acquisition for the second half of the year only.

As a result, this full-year EPS guidance is approximately $0.04 higher than will be the sum of the quarters.

Stated differently, while our first half of the year EPS performance was $0.74, $0.40 in the first quarter and $0.34 this quarter, we expect about $0.90 to $0.94 over the second half of the year, excluding any merger-related integration costs.

Regarding the assumptions listed, they include the impact from the acquisition of Sky Financial.

Further, and this is also important, the basis for the outlook comments is the assumed pro forma June 30 consolidated levels.

That's why we provided you with a pro forma June 30 balance sheet amounts, as well as the second quarter run rate amounts for Sky's net interest income, non-interest income, non-interest expense, as well as their credit quality metrics including provision expense, net charge-offs, NPAs and reserves.

Given these definitions, here are our outlook comments.

Revenue growth in the low to mid single-digit range.

This is expected to reflect a net interest margin that's relatively stable compared with the pro forma 3.50% margin in the 2007 second quarter.

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 loan growth, core deposit growth in the low to mid single-digit range with an emphasis on growing demand deposit balances, non-interest income growth in the mid to higher single-digit range, non-interest expense growth in the low single-digit range.

Please note this growth rate excludes any negative impact from merger-related integration costs, as well as the benefit from any anticipated merger-related expense savings.

Merger-related integration costs for the second half of the year are expected to be 50 to $60 million.

Annualized cost savings for the merger remain targeted at $115 million, with most of the annualized benefit expected to be achieved in the fourth quarter.

Regarding credit quality performance, we anticipate a full-year net charge-off ratio at the mid to upper half of our targeted 35 to 45 basis point range.

The non-performing asset ratio will remain under pressure from its June 30 pro forma level and we anticipate that the loan loss reserve ratio will increase moderately, also from its June 30 pro forma level.

And lastly, no sizable stock repurchase activity is anticipated.

Again, all this results in a targeted reported EPS for 2007 of $1.68 to $1.72, including a slight positive accretion from the proposed Sky Financial acquisition, but excluding merger-related integration costs.

This completes our prepared remarks.

Marty, 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 the line of Andrew Marquardt.

Good afternoon, guys.

Hi, Andrew.

Can you give a little more color on Sky Financial's credit profile in terms of how they're looking in the Midwest?

I was a little surprised that it was actually quite as good as it was given the backdrop that others are seeing.

And if you can comment on any purchase accounting adjustments that could have been, that could have effected what we see right here.

Andrew, this is Don.

As far as the purchase accounting adjustments for what you're seeing, the pro forma items that you have -- balance sheet we see includes estimated mark-to-market for all the balance sheet items.

So it includes the mark-to-market for the interest rate impact for loans and deposits and other income.

It also includes in that balance sheet adjustment about $1 billion of lower investment balances, and that's primarily related to the fact that Sky had started to sell down its investment portfolio prior to the acquisition and Huntington had started to add to its investment portfolio in anticipation of the acquisition, and we ended up having some repo balances between the two organizations which would be eliminated in consolidation.

The last piece of the adjustment that will be in those pro formas would be an assumption that we would be transferring about $70 million worth of commercial loans that would be considered to be impaired to a held for sale category because we intend to sell those off sometime after the merger and have a different plan and disposition for those assets than what Sky currently would have.

Marty, do you want to talk about credit quality a little bit for Sky?

Credit quality, Andrew, is that it's consistent with what we thought it would be and numbers are what they are.

From a provisioning standpoint, we're not quite finished reviewing the Sky portfolio completely, but that should wrap up in the next few weeks.

Just one other follow-up on that, Andrew, as well.

If you would back out the impact of these three (inaudible) relationships, the Huntington, the adjusted charge-off level would have been about 34 basis points, which is very consistent with what Sky thought, 33 basis points.

I think our non-performing assets would have been up around 6 to 8% absent those three relationships as well and Sky was up about 2%.

So I'd say that there's a core portion of the portfolio was performing in a similar level.

Okay.

Thanks.

And then related, can you comment on, or give an update on how Sky's relationship, standalone relationship with Franklin Credit stands at this point and if there's going to be a different perspective on how to think about that credit now that Huntington's going to be looking at it?

Sure, Andrew.

This is Marty Adams again and I'll take that.

We wouldn't specifically comment on a client's business, but I can tell you some things and I'll just give everyone a little bit of background, is that Franklin Credit is in the business of acquiring canned servicing residential mortgage loans, especially subprime and Alt-A first and second mortgages.

Those assets are purchased, the mortgage banks, banks, insurance companies, thrifts and other specialty finance companies.

These assets are nationwide in nature and through a wholly owned subsidiary, Tribeca Lending, they also originate a low [LTV] subprime mortgages and these assets are put into pools, the Tribeca loans are generally held for portfolio, and are funded separately by Sky and other banks.

Franklin has been a bank customer and, again, as I mentioned, it's impossible for us to give information, too much information, but what I can tell you is the bank has had a relationship with Franklin for over 15 years.

During that period, Sky has never experienced a loss or a non-performing loan.

In addition to Sky, Franklin's financing is provided by three other financial institutions.

This reflects a combination of factors, including the fact that on mortgages purchased, is put into pools, Franklin does so at a discount, so these loans, again, already impaired.

Franklin purchases them at a discount well after origination, and this provides the pools with a cash flow cushion.

And given the non-conforming nature of the loans, they carry relatively high coupons.

This has two benefits, the higher coupon.

First, in the cash flows spread cushion this provides, more importantly it also motivates the borrower to refinance these loans as credit situation improves and as a result the average life of these pools is quite short, it's just over three years.

All loans are assigned to Sky in the event of default and all payments on the Franklin pools are processed directly (inaudible) arrangements with Sky which helps assure all cash is applied to principle in a timely matter and the short collateral will be monitored and protected.

And we have continued in this long-term relationship over the past quarter and continue to look at it that way.

And so is it fair to assume that there won't be a change in how one should think about it or, you know, examine it or I would assume, I guess Huntington's already vetted this credit.

Sure.

We remain committed, Andrew, to this long-term relationship and are currently working through the specifics of that.

We will be in a better position to discuss Franklin in our future plans in the third quarter conference call.

Thank you.

Thank you.

Your next question comes from the line of Paul Delaney.

Good morning.

Good afternoon.

Hello.

Hi, Paul.

How are you doing?

Just a couple of quick questions.

Just as a follow-up to the Franklin question.

Just wondering if you can share with us the sort of average LTV on some of those pools.

I don't have that, that number, Tim.

I don't know if you could help me or not.

It varies so widely, I don't think it's probably useful to give sort of an overall, as Marty said, the variety of types of loans purchased that originated make it really difficult to answer that kind of question.

I do think it's important to remember that these are commercial loans on Huntington's books secured by the underlying residential mortgages that Marty described.

Do you have a sense of just sort of the dollar exposure so we can just size the relationship?

Unfortunately, we don't discuss specific customers' numbers and Franklin is a publicly traded company and I think any questions like that, we would ask you to direct to them.

Okay.

And then on the securities losses, can you just give us a little bit more color around those securities, how much you have left, et cetera, et cetera?

Sure.

This is Don Kimble.

And as far as the portfolio that we have about $50 million of securities of similar type, and that we have identified of that pool, $9 million, which we considered impaired and those are currently reported at about $0.40 on the dollar after the $15 million of impairment losses that we recognized over the last three quarters.

We continue to receive principle pay downs on those portfolio securities of about 4 to $5 million each month, so we continue to expect that $50 million that come down fairly quickly.

At the end of last year, the portfolio was about $160 million in outstandings.

We did sell about $30 million of those assets in the first quarter and have continued to receive pay downs beyond that.

The bonds that we have in our portfolio are currently rated either Triple-B or Single-A.

So about 55% of those assets are currently rated Triple-B and about 45% are rated Single-A.

That's great.

Thank you.

Thank you.

Okay.

Your next question comes from the line of Heather Wolf.

Hi.

Good afternoon.

Hi, Heather.

I have a couple of follow-ups as well.

On Sky's margin, is it possible for you to give us a feel for what's going on with the core margin outside of kind of the balance sheet restructuring you guys have done?

Well, I'd say as far as the balance sheet restructuring, that really wasn't implemented until late in the second quarter.

So I'd say that the core margin probably isn't too far off that 370 that was shown there, and the net interest income of $146 million that we're showing as far as net interest income would be fairly comparable to those at core level of net interest income as well.

In the slide, this is Marty again, you'll see that there's is a 4% annualized decline in average total core deposits.

The bulk of that was CDs.

So very disciplined pricing in the CD portfolio which grew rapidly last year.

In our regions, I think all but two of our core regions had very good non-interest CDA linked quarter growth.

About 6.9%.

Okay.

So the securities sales were kind of at the end of the quarter, didn't really impact this at all.

It may have had some slight impact, but it wasn't dramatic.

Okay.

Okay, good.

And then also just a follow-up on Sky's credit.

Can you outline the exposure that Sky has to the two sort of MSAs where Huntington is having problems?

Well, Sky currently is not in Southeastern Michigan, so that is not an issue.

And Marty, as far as the size to the Northern Ohio market?

Yes, Cleveland a relatively new market.

Bought Metropolitan Savings Bank about three years ago, so it would be somewhere around less than $1 billion in total outstandings.

Okay.

Great.

Thank you so much.

Thanks, Heather.

(OPERATOR INSTRUCTIONS) We have a follow-up question from the line of Andrew Marquardt.

Hi, guys, again.

Hi, Andrew.

Hi, Andrew.

Just wanted to ask about if you can provide any additional color on the commentary about moderately higher allowance for loan loss reserves and I believe that's -- you're talking about off of, you know, 120 basis points, is that right?

On a combined basis thereabouts?

Yes.

Am I understanding that properly?

You are, and that's just a ballpark at this point in time until we finalize all the purchase accounting adjustments, but as far as moderate, I would take a look at the allowance increase without the impact of those three credits.

If you take a look at that, it was probably up in the neighborhood of 2 to 3 basis points for the quarter, and I could envision moderate being that same general range as far as increases the allowance throughout the second half, or throughout each of the last two quarters of the year.

So maybe 2 to 3 basis points increase on a quarterly basis?

That's correct.

Okay.

Thanks.

And then my last question is simply just kind of stepping back, I was curious to hear about your thoughts on, I guess, your EPS growth expectations, bigger picture.

You had revised down a couple years ago your target to mid single digits based on economic backdrop, your footprint, to mid single digits and I was just curious how you thought about that right now.

Is that still applicable and also in the context of potential cost saves from Sky Financial providing some lift.

Andrew, this is Tom.

We are quite optimistic, as I mentioned earlier in the call, about our ability to capture the cost savings from the merger that we originally projected.

When we made the announcement of the transaction in December, we said that that would have a positive benefit of 4.5% to earnings in 2008.

Again, we remain feeling very good about that.

As far as the non-merger-related core run rate, I think we still feel good about the, you know, kind of mid to upper mid, if you will, range in annual earnings growth.

This, even in the part of the country where we are, I think is a function of, of mid single-digit loan growth and the ranges that we had given in our outlook for 2007 with very good expense control.

Obviously if we had the kind of severity of deterioration in credit quality as we did in the second quarter, you know, all bets are off on that.

We don't expect that, because we really believe we addressed in an aggressive fashion some of the issues that arose in the second quarter.

But if we -- the region continue to see a marked, markedly deeper decline, then we'd have to rethink that range, but barring that, I think we still feel pretty good about the range that we projected last year.

Thanks.

That's helpful.

So should one think about that you could still do mid upper single-digit NOA but then if you add on the Sky, you're actually going to do better, maybe even upper single-digit if not low double-digit or will credit cost, potentially in the high provision costs to build reserves, will that mitigate that to a certain degree?

Well, when we made our announcement, that's exactly what we were thinking.

In other words, we had a core baseline growth rate in that mid or so single-digit range and the accretion from the Sky transaction was on top of that.

We, it's hard to say about what impact the credit environment will have in '08.

Again, we don't expect it to have the impact that we incurred in the second quarter, and we believe that we're adequately reserved, certainly based upon what we know today, in future outlooks.

So could have some dampening impact, but we still feel good barring a significant downturn in the projections.

Great.

Thank you.

Thanks, Andrew.

(OPERATOR INSTRUCTIONS)

Operator?

There are no further questions at this time, sir.

Okay.

Thank you.

This is Jay Gould, thanking you again for joining for us our conference call.

If you have follow-up questions please call either Jack or myself.

Thank you again.

This concludes today's conference call.

You may now disconnect.