Huntington Bancshares Inc (HBAN) 2007 Q3 法說會逐字稿

Good afternoon, my name is Kenya and I will be your conference Operator today.

At this time, I would like to welcome everyone to the Huntington third quarter earnings conference call.

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, Kenya, and welcome everybody.

I am Jay Gould, Director of Investor Relations for Huntington.

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

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

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

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

I encourage you to read this.

Let me point out a couple of key disclosures.

This presentation contains both GAAP and non-GAAP financial measures and 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 and the press release and the quarterly financial reviews supplement to today's earnings press release or the 8-K filed with the SEC earlier today.

All of which can be found on our website.

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

This includes how we will talk about the impact of the Sky Financial acquisition on our performance.

You will recall this acquisition closed on July 1, 2007.

As such it impacted results for the full quarter.

Since Sky was about the half the size of Huntington this has resulted in significant changes on an absolute basis for balance sheet, income statement, and other items compared with prior periods.

It also impacted performance measures on a relative basis, therefore to help you better understand underlying performance in the quarter we have tried to estimate the acquisitions impact on reported results.

The methodology we've used is described in the basis of presentation discussion at the end of our earnings press release.

Importantly in our discussion today and when comparing post-merger period results to pre-merger periods we will use the following terms--merger related, refers to amounts and percentage changes representing the impact attributable to the merger; merger cost represent expenses primarily associated with merger integration activities; non-merger related refers to performance not attributable to the merger and includes merger efficiencies which are the expense reductions realized as a result of the merger.

Maybe of you are familiar with the remaining items and their usage shown here, but for those of you are not, we provided definitions and rationale on this slide.

Today's discussion turning to slide four including Q&A may contain forward-looking statements.

Such statements are based on information and assumptions available at this time and are subject to change, risk, and uncertainties which may cause actual results to differ materially.

We assume no obligation to update such statements.

For complete discussion of risks and uncertainties please refer to this slide and material filed with the SEC including our most recent Form 10-K, 10-Q, and 8-K filings.

Now turning to today's presentation.

As noted on slide five, participating today are--Tom Hoaglin, Chairman and Chief Executive Officer; Marty Adams, President and Chief Operating Officer; Don Kimble, Executive Vice President and Chef Financial Officer; and Tim Barber, Senior Vice President of Credit Risk Management.

Let's get started, to you, Tom.

Thank you, Jay, and welcome everyone.

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

Don will then review the quarters financial performance in some detail.

And I'll conclude with comments on our outlook for the 2007 fourth quarter.

Marty and Tim will be available during the Q&A period.

Turning to slide seven, in sum, we were pleased with the quarter.

Reported earnings were $0.38 per share, and included $0.06 per share of merger costs and $0.03 per share of net market related losses, at least $0.02 of which we do not expect will recur.

Perhaps the main point I want to make today is that we have an objective of continuing to grow the business in the midst of the merger integration process and we accomplished it.

As we go through the numbers and underlying trends which are certainly complicated by the acquisition of Sky Financial, this message should be clear.

We saw nice loan and deposit growth in spite of all the intense activity associated with the systems conversion of Sky, the training of new associates, and customer transfers.

We achieved annualized non-merger related growth of 8% for total average commercial loans and 3% for total average consumer loans.

On this same basis, average total deposits increased 6%.

Net interest income grew by 2% on a link quarter, non-merger related basis.

Fee income performance was mixed.

There was very good growth in deposit service charges and other service charges including debit card fees and though non-merger related brokerage and insurance income declined, this primarily represented seasonality in brokerage and property and casualty insurance areas.

Income for trust services, mortgage banking and other income was down with the last two negatively impacted by market related items.

Don will detail this later.

September 22, was the date of systems conversions and we're very pleased that this could be accomplished in less than 90 days following the merger close.

There were some bumps along the way, but we've seen a positive customer response overall.

For example, we're getting rave reviews by former Sky business and retail customers who are now using Huntington's more robust online banking capabilities.

Completing this conversion successfully and quickly allowed us to realize more expense saves earlier than we had expected.

As a result, non-merger related expenses were down $20 million or $82 million annualized and represented the realization of 70% over annualized target of merger efficiency of $115 million.

It's nice to see that our adjusted efficiency ratio is now approaching our targeted 50 to 52% range.

As part of the conversion and integration efforts, we've closed or consolidated 88 full and limited service banking offices, closed or have begun the process of closing 13 bank office processing -- I'm sorry, back office processing and call center sites, reduced 828 full-time equivalent staff by quarter end a 6% reduction from where we began the quarter.

With regard to credit, it was a noisy quarter.

On one hand, the net charge off level of 47 basis points was a few basis points higher than we targeted three months ago, but this included $10 million of net charge-offs related to the three commercial credits for which we established specific reserves in the second quarter.

This also accounted for the 1 basis point drop in our reserve ratio.

Non-merger related NPA's increased 3% which, given the difficult environment and what we've seen so far from our peers, we would describe as modest.

Perhaps we recognized credit issues in the residential real estate development sector earlier than some of our peers.

Also, in reflecting conversion to our loan systems which permits fine tuning of loan classifications, I want to update you on our exposure to the home builder sector.

At quarter end, it was $1.6 billion or about 4% of total loans and leases, and is about $300 million less than our pro forma estimate last June.

Finally, I know there's investor interest in our lending relationship with Franklin Credit Management Corp.

You'll recall that we discussed this at length in last quarter's call.

As a reminder, their business model is purchasing primarily so-called scratch and dent mortgage assets at a discount and holding them in portfolio.

This model is unlike the originate to sell model that has caused issues for others.

This has been a long term relationship and you need to know that we understand their model, their value proposition, and the caliber of their management team very well.

We also continuously monitor in detail the performance of the collateral supporting our loans to Franklin, yet since Franklin is a public company and also because of client confidentiality we are unable to disclose this information.

We also cannot comment on any aspects of the third quarter performance ahead of their filing of their 10-Q, and as a reminder like any other commercial loan, it's subject to our standard loan rating and reserving methodology with any changes reflected in our reported results.

What we can say is that we remain comfortable with this relationship and all of our loans to Franklin are performing and there are no delinquencies.

Now let me turn the presentation over to Don for more details.

Thanks, Tom.

Turning to slide nine, our reported net income was $138.2 million or $0.38 per common share.

These results were negatively impacted by two significant items.

First, $32.3 million or $0.06 per share of Sky Financial merger costs.

Second, $18 million or $0.03 per share of net market related losses consisting of four items.

$13.2 million of net security losses including $23.3 million of impairment losses related to certain investment securities backed by mortgages.

$4.4 million of equity investment losses.

And $3.6 million negative impact from the revaluation of mortgage servicing rights net of hedging.

These are partially offset by a $3.2 million gain for the repayment of debt.

Slide 10 provides a quick snapshot of the quarter's performance.

As previously noted reported earnings were $0.38 per share.

Our net interest margin was 3.52% up 26 basis points.

This level is consistent with the pro forma combined second quarter of approximately 3.5%.

Average total commercial loans increased at an 8% annualized non-merger related base.

Average total consumer loaned increased to 3% annualized non-consumer related base.

This reflected growth of our automobile loans combined with relatively stable balances in both home equity and residential real estate loans.

Average total deposits had 6% annualized non-merger related growth while much of this growth came in non-core deposits the balances were related to commercial customer relationships.

We had mixed fee income performance during the quarter as service charge income showed good growth up 5% on a non-merger related basis.

In contrast, mortgage income and other income reflected a negative impact of the market related losses previously discussed.

Tom mentioned earlier we were very pleased with our expense levels for the third quarter.

Total NIE decreased by $20.4 million or 5% on a non-merger related basis.

This level clearly reflected significant progress toward our targeted annualized expense reductions of $115 million related to the acquisition of Sky.

Our charge-off ratio of 47 basis points reflected the impact of $10 million of charge-offs related to the three commercial credits discussed in the second quarter.

You'll recall that these three credits, two commercial real estate relationships in southeastern Michigan and one northern Ohio manufacturing related credit added $24.8 million of provision in the second quarter.

Excluding these charge-offs, our net charge-off ratio for the quarter would have been 37 basis points.

Our period end tangible common equity ratio declined to 5.42%, reflecting the impact of the $2.8 billion of intangibles from the acquisition of Sky Financial.

As well as a $1.5 billion temporary increase in our assets at quarter end, which negatively impacted our tangible common equity ratio by 17 basis points.

Slide 11 provides our customary summary of the quarter's financial metrics.

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

Slide 12 shows that net interest income on a fully taxable equivalent basis increased $158 million from the prior quarter.

This included $152 million of merger related net interest income.

The remaining non-merger related increase of $6 million reflected the growth in our balance sheet.

The right hand side of the slide shows a trend in our net interest margin which increased from 3.26% last quarter to 3.52% this quarter.

The 3.52% margin is consistent with our expectation for relatively stable margin during the quarter compared to a pro forma second quarter level of 3.5%.

Loan and deposit pricing remained relatively stable this past quarter despite a very competitive market.

Slide 13 and the next three slides that follow show the trends in our total loans, deposits, income, and expenses.

To assist with this trend analysis we've included the current quarter, the prior quarter, and last year balances on a reported basis.

We then back out the portion of the change that is merger related.

The merger related balances include the Sky balances and for expenses it also includes any merger costs that occurred in the quarter.

We believe the remaining non-merger related change is a better proxy for the relative change that occurred in those balances.

Starting first with loans, looking at the bottom of the slide, total loans for the third quarter were $39.8 billion, up from $26.4 billion in second quarter of 2007.

Of this $13.4 billion increase, $12.8 billion was merger related.

The remaining non-merger related increase of $0.6 billion or 6% annualized better reflects the linked quarter growth this past quarter.

Of this $0.6 billion growth, $0.5 billion or 8% annualized related to commercial loans.

The increase in commercial loans was spread across all regions, 6 of our 13 regions reported double digit annualized growth and only one reported a net decline.

Consumer loans on a non-merger related basis were up $0.1 billion or 3% annualized.

Total automobile loans and leases continued to increase this past quarter despite decreases in automobile leases.

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

On a non-merger related basis both home equity loans and residential real estate loans remained fairly stable.

The lack of growth in these balances continue to reflect a softness in the real estate market.

Now turning to slide 14, deposit growth as reflected by non-merger related change showed similar seasonal trends as what we experienced in third quarter of last year.

Total core deposit balances were up slightly or 1% on an annualized basis.

Transaction balances showed slight linked quarter decline.

Other deposit category trends continued as we saw a migration from savings account balances into money-market and time deposits.

Slide 15 details trends in our revenues.

Again, using the non-merger related change as a proxy for the linked quarter change our total non-interest income decreased $20.2 million from the second quarter.

This change reflected a $9 million decline in other income, in part due to $4.4 million of equity investment losses in the current quarter and $2.3 million of gains in the second quarter.

A $8.3 million of higher security losses including $13.2 million of net security losses in the current quarter compared with $5.1 million of losses in the second quarter.

The current quarter losses include $23 million of impairment on certain investment securities backed by mortgages.

As of the end of the quarter, these bonds totaled $22 million of which $16 million were considered impaired.

$5.5 of lower brokerage and insurance income as the first half of the year included seasonally higher insurance agency commission income.

$3.7 million decline in mortgage banking income reflecting the higher MSR hedging losses in this category for the current quarter as well as a decline in non-merger related production.

These decreases were partially offset by the $4 million increase in service charge income on deposits.

Slide 16 reviews the non-interest expense trends.

This slide clearly reflects the achievement of a significant portion of the targeted expense savings in the third quarter.

Looking at the bottom right hand corner of the slide our non-merger related decrease in total NIE was $20.4 million from the second quarter.

This reflected realization of over 70% of the $115 million of targeted expense savings.

With the consolidation of branches and other facilities and with the systems and operation conversions taking place late in the third quarter, we are well on our way to achieving this expense efficiency target.

We would expect the achievement of most of the remaining target cost savings to be realized in the fourth quarter.

Starting with personnel costs, our non-merger related decrease was $8.4 million from the second quarter.

This included the impact of the reduction of over 800 full-time equivalent staff during the quarter.

The reductions in other expense of $3.8 million and an occupancy of $3.6 million also reflects the benefits of our merger efficiencies.

Our $3.6 million reduction in marketing reflect the merger efficiencies as well as the impact of the timing of our advertising campaign.

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 affecting comparability including merger costs.

You'll find a complete reconciliation between the reported and the adjusted amounts in slide 75 in the appendix.

Our reported efficiency ratio decreased slightly from the second quarter to 57.7%.

On an adjusted basis, the efficiency ratio decreased dramatically to 53.2%.

This again reflects the impact of the cost reductions achieved from the acquisition.

Upon full realization of our targeted savings, we should be within our long term targeted range of 50 to 52%.

Slide 18 details capital trends.

At the end of the quarter, our tangible equity to asset ratio was 5.42%, well below our targeted range of 6 to 6.25.

The decline in this ratio reflected the impact of the $2.8 billion of intangibles recorded with the Sky acquisition but also reflected a temporary $1.5 billion increase in other assets which cleared in October.

This temporary increase reduced our tangible capital ratio by 17 basis points.

We should expect our tangible capital ratio to be back in our targeted range by the middle of 2008.

We did not repurchase any common shares in the current quarter and would not expect any significant share repurchases until our capital level returns to its targeted range.

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

First, as Tom noted, our NPA ratio increased to 1.08%.

We'll have more on that in a moment.

Our net charge-off ratio was 47 basis points and included $10 million or 10 basis points related to the three commercial credits noted in the last quarter's call.

These three credits resulted in a total provision of $24.8 million in the second quarter.

Adjusting for this $10 million of charge-offs, provision expense exceeded net charge-offs by $5 million.

Consumer charge-offs increased to 67 basis points for the quarter, up from 41 basis points in the prior quarter.

Increase in charge-offs for all consumer categories were seen throughout this quarter reflecting some some seasonal trends also reflecting the impact of Sky and the continued pressures on the real estate markets in general.

But in particular the southeastern Michigan and northern Ohio markets.

Our expectations for consistent levels -- excuse me, our expectations are for consistent levels of consumer charge-offs for the next several quarters.

Our 90 days plus delinquency levels increased slightly from the prior quarter.

Some of this increase might be attributed to the timing of our integration efforts during the quarter.

Our allowance for loan and lease losses remain fairly consistent with the June 30, level of 1.15% of loans, again more on this later.

The non-performing loan and non-performing asset coverage ratios will be reviewed in more detail in subsequent slides.

In sum while there were some changes in selected credit quality ratios, our overall credit quality trends were consistent with the second quarter levels and expectations.

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

First, some comments on the non-performing asset trends.

Slide 20 illustrates the trend in non-performing assets which increased $174 million.

However, this increase was primarily driven by the merger and a decision to classify impaired investment securities as NPA's.

Excluding these impacts, NPA's increased $13 million, a 3% increase from the end of last quarter.

The table on the right provides the detail.

First, the Sky acquisition accounted for $144.5 million of the Company increase and it came in three forms, $100.5 million represented NPL's classified as loans held for sale and represent the impaired loans from Sky that have been identified for sale.

We're in the process of actually marketing these loans and would expect a significant portion of them to be sold by year-end.

The $32.7 million represented acquired non-performing loans that remain characterized as NPL's and $11.3 million of OREO.

The second piece represented $16.3 million of impaired investment securities.

These non-accruing investment securities represent the remaining balance of the investment securities that have been identified as impaired.

Any future cash statements either interest or principal will reduce the remaining balances.

The third and the last piece was the $13 million increase of non-merger related NPL's and OREO.

Slide 21 shows a trend of our net charge off ratios by loan category.

Total commercial charge-offs were $17.3 million or 31 basis points which included the $10 million of charge-offs on the three credits mentioned in the second quarter call.

Absent these charge-offs our middle market C&I and commercial real estate charge-offs would have been below our long term targeted range.

Our small business related charge-offs also continue to be below our expected levels.

Our total consumer charge-offs increased from the previous quarter levels.

Our auto loan and lease charge-offs of 73 basis points returned to more expected ranges up from previous historical low rates.

The home equity and residential real estate charge-offs increased from 43 and 16 basis points to 59 and 32 basis points respectively.

These increases reflect the continued real estate market weaknesses particularly in the southeastern Michigan and northern Ohio.

The graph on the left-hand side of slide 22 shows a trend in our allowance for loan and lease losses.

At quarter end the allowance for loan lease losses was $455 million, up $147 million from the end of the prior quarter.

This increase included the $157 million addition to the allowance from Sky.

Less the $10 million of charge-offs on the free commercial credits against the reserves established for them in the second quarter.

The chart on the right hand side of the slide shows the trend in our ALL components.

The transaction portion of the allowance is determined on a loan by loan basis and provides a very transparent picture of the underlying credit quality of the portfolio.

The economic reserve component is determined based on our trends in four economic indicators.

The quarter end levels of each of the two components, the transaction reserve and the economic reserve as a percent of the loans are very consistent with the pro forma June 30, level of the combined companies.

But no meaningful change occurred throughout the quarter.

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

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

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

The first set of ratios compares a reported allowance for loan and lease losses to the period end loans and leases, NPA's, and NPL's.

On this basis, our period end loan loss reserve ratios as noted before was 1.14%, down 1 basis point, and our NPA and NPL coverage ratios were 105% and 182% respectively.

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

On this basis our period end reserve ratio was 1.28% down 2 basis points with NPA and NPL coverage ratios of 118% and 206% respectively.

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

This is particularly true given the two new additions of NPA categories this quarter.

Keep in mind that the $100 million of NPA's represented by loans held for sale as well as $16 million of NPA's represented by impaired investment securities have already been written down to their lower cost or market value.

Further, a significant portion of the loans held for sale are expected to be sold in the fourth quarter and with all future payments on the impaired investment securities being applied to principal we expect these balances to also decline in the fourth quarter.

If these balances were excluded from our NPA balances, our allowance for loan losses as a percentage of NPA's would increase to 143% and our allowance for credit loss as a percent of NPA's would increase to 161%.

With this factor up I turn the presentation back over to Tom who will provide comments on our 2007 fourth quarter outlook.

Thanks, Don.

Turning to slide 24.

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 it excludes any unusual or one-time items as well.

While it's our practice to provide annual EPS guidance range when it comes to the last quarter of the year, this discussion really boils down to a fourth quarter discussion as noted here.

We'll discuss our 2008 outlook in our January earnings call which -- in which we will include $0.09 of earnings accretion from merger efficiencies as expected.

We are targeting 2007 fourth quarter earnings of $0.45 to $0.47 per share, excluding merger costs.

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

It continues to be our expectation that any impacts will be greatest in their southeastern Michigan and northern Ohio markets and however interest rates may change, we expect to maintain our customary relatively neutral interest rate risk position.

Given this backdrop, here are our outlook comments, which on balance have not changed much since last quarter.

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 third quarters 3.52%, annualized 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, non-interest expense growth in the mid to higher single digit range, non-interest income growth in the mid to higher single digit range, non-interest expense is expected to be flat to down from the third quarter.

Please note this growth rate excludes any negative impact from merger costs but does include the benefit of additional expense efficiencies.

Merger costs for the fourth quarter are expected to be 15 million to $25 million.

Annualized expense efficiencies remain targeted at $115 million with most of the remaining annualized benefit expected to be achieved in the fourth quarter.

Regarding credit quality performance, we anticipate a fourth quarter net charge-off ratio that will approximate the third quarter's performance of 47 basis points plus or minus.

Non-performing loans on an absolute and relative basis are expected to increase modestly.

In contrast, non-performing assets on an absolute and relative basis are expected to decline as related loans held for sale are sold.

Lastly, we anticipate that the loan loss reserve ratio will increase modestly also from its September 30, level of 1.14%.

In addition we are assuming no significant market related losses and no share repurchase activity.

All of this results in a targeted reported EPS for the 2007 fourth quarter earnings of $0.45 to $0.47 per share excluding any additional merger costs.

This completes our prepared remarks.

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

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

Operator?

(OPERATOR INSTRUCTIONS) First question comes from the line of Scott Siefers.

Good afternoon, guys.

Hi, Scott.

I just had a couple of questions.

Tom, I think toward the beginning of your comments when you were going through the unusual items and then the $0.03 of kind of mark-to-market issues in this quarter, I think you said $0.02 of those aren't likely to recur.

I guess I was just curious what you meant by that?

In other words what of those -- do you guys have something in there that is likely to kind of come back again?

We really have no clearer picture quarter to quarter of what the MSR impact is going to be.

This past quarter, Scott, it was larger than it has been in the past.

We hope that will be the case but we're not predicting whether it will or it won't, obviously depends a lot on the market volatility.

We don't expect to incur the same kinds of writedowns on securities that we did this past quarter, and so that comprises the bulk, nor do we expect to have the writedowns negative mark-to-market action we had to take on hedge fund investments.

So that's really what I'm referring to.

Thanks, and then I guess the next question would be for Tim.

I was hoping you could just kind of go through the way you're thinking about the reserve and specifically what I was looking at was the economic reserve and I guess I was just a little surprised to see it decline as a percent of loans, just given kind of what's gone on the last quarter or so, potentially increased risk over session et cetera, How are you guys thinking about that piece of the reserve, what would it take for you to have to boost that piece up, et cetera?

Scott, this is Don.

I'll go ahead and take a crack at this and Tim can jump in and correct me if I lead too far astray but essentially the ratio there for the economic reserve is very consistent with what we would have seen on a po form basis as of June 30.

Essentially Sky had an unallocated reserve and essentially that becomes the economic reserve and so what we are looking at is changes in that relative balance based on relative changes in those four economic indicators.

The net contribution of all four of those indicators was relatively stable this past quarter and there wasn't a huge change.

Tim, anything else on that?

I think that's exactly correct.

So I think, this is Tom, Scott, so I think that component of the reserve is as it always has been subject to change from this point forward as the economic indicators we rely on would change.

Okay, sounds good.

Thank you.

Thanks, Scott.

(OPERATOR INSTRUCTIONS) We have a question from the line of (inaudible).

Hello?

Hi, Andrea.

I have a question for Tim.

I was hope -- I know that you monitor the migration through credit buckets of your commercial and commercial real estate portfolios.

I was hoping you could talk to us about that, about recent trends there?

Sure, Andrea.

The obviously we don't have a lot of history or as much history on the Sky portfolio so talking about individual quarters right now is pretty difficult.

We have seen a general slowdown in the migration into the credit size classified area compared to a couple quarters ago.

Nothing really pops out dramatically one way or another at this point.

We're pretty pleased with some of the particular subcomponents, the single family builder as Tom mentioned, the NPA ratio on that remained relatively constant, haven't seen a lot of movement since we went through our last deep dive or deep dive or scrub of that portfolio.

That sounds good, actually.

How about on changing gears, how about on home equity?

Are you seeing any impact of -- from elevated foreclosures in that portfolio?

Most of what we've seen in the home equity and residential world have been what I'd call market related or it was a loss given default.

We still feel pretty good about the migration into the default category as being relatively consistent.

It's more a matter of the losses given default at this point and again that's something that we spend a great deal of time on and really track on a month to month basis, talk about it quarterly.

Tim, this is Tom.

I think your point of view historically has been you better be right about the people to whom you're lending because when you get to a default, the default is going to be, the loss is going to be severe, so thus our concentration over the last few years has been toward increasing the quality of the borrower to whom we're lending and that's a little bit reflected in our decision a couple years or so ago to back way down on our reliance on brokered originations, if you want to comment further on that?

Yes, I think that's exactly correct.

We've had that conversation in the past.

We spend a great deal of time on the borrower, that has I think borne some fruit in this market as the real estate values continue to decline.

We're assuming the continued 1 to 2% decline overall in values across our markets, at least through the course of 2008 and we will continue to focus on the borrower and our underwriting decisions.

Great.

That helps.

Thank you very much.

Your next question comes from the line of Heather Wolf.

Good afternoon.

Hi, Heather.

I noticed that you guys had a bit of a tick up in the, in charge-offs in the auto book.

I'm wondering if you can give us some color on your outlook there?

Sure, Heather.

We had been over the course of the past four quarters or so at what I'd call historically low levels and we talked about that over the course of this call.

We have anticipated a general increase back up to the ranges that we've laid out as our long term goals and this quarter saw that move.

I don't think that we're going to see or we will not see similar increases over the course of coming quarters but probably reasonably stable with our third quarter results.

Tim, I think that we often see an increase in the third quarter do we not over the second?

There's clearly some seasonality especially with third and fourth quarter over second quarter from a comparison standpoint, and as we talked about or Tom mentioned the portfolio now includes the Sky piece and so there was some impact from that as well.

And just refresh our memories, what do you view as normalized for the auto book?

Auto is 65 to 75 and leases in the 60 basis point range.

50 to 60, if you look at slide 129 Heather you can see the summary of all the loan categories.

Got it, thank you and then just one question on margin.

I don't know if this was in the packet anywhere but can you tell us what your core margin did at the Sky merger?

I'd say that our core margin was fairly stable, that we had predicted on -- or we had shown pro forma margin for the second quarter in the 350 range, we're at 352.

I'd say core margin may have been down 1 basis point or 2 just because of some of the higher national market funding costs but not much impact overall.

Okay, and do you expect any core improvement from Fed easing?

We are positioned about as interest rate neutral as we possibly can be right now, so I don't think that we're going to see any potential lift or harm from Fed movements or lack of movements going forward.

We've always thought, Heather, that the greater risk or opportunity for us comes from the competitive environment, in our local markets as opposed to what national rates do.

Got it.

Great.

Thanks so much.

Thanks, Heather.

Your next question comes from the line of Andrew Marquardt.

Hi, Andrew.

Andrew?

Operator?

Can you guys hear me?

Oh, yes, there we go.

Okay.

Thanks.

Can you guys just review again Franklin Credit?

I appreciated the comments in the beginning but can you flesh that out a little bit in terms of your view with regard to still being committed to reducing that relationship on an absolute and relative basis and is there any color you can help provide, if any, with regard to if that's grown this quarter or not, and if you had to change your amounts of reserves against it this quarter?

Thanks.

Andrew, this is Marty Adams.

Tim and I will take the question.

We have continued to consider financing in the quarter and have done some for Franklin Credit.

We are also, continue to be committed to reducing the overall level of exposure to Franklin Credit, so just consistent with what we've told you in the past.

Tim, do you have anything to add to that?

I guess on the reserve question, we did add a slight amount to the reserve as we applied our normal reserve methodology via the commercial grading system to the portfolio, from where it was as of June 30, on the Sky books.

Okay, is it possible to quantify how much reserves are allocated to this relationship?

Andrew, this is Don.

I would just say that we apply reserves to all of our loan relationships, not just this, and don't feel we should discuss what kind of reserves were established for any of our customers.

Okay, thanks.

Separately with regard to net charge-offs for the fourth quarter 47 basis points, that's still above your normalized range of 35 to 45 basis points.

When do you think one should get back to within that range?

Or should we expect that that kind of at the top end should hold for a little while, now given the environment beyond I guess into '08?

Andrew, this is Don and we'll be providing guidance for 2008 in January.

I'd say that our charge-offs were higher this past quarter because of the commercial charge-offs we saw from those three credits but also because the consumer charge-offs increased and we did say that we expect consumer charge-offs to be more consistent with the current level for the next couple of quarters but beyond that, I think that it would be better to provide guidance in January as far as the overall charge-off ratio.

Okay, great.

Thank you.

Thanks, Andrew.

Your next question comes from the line of Fred Cummings.

Fred?

Hey, Jay?

Hi, Fred.

Hey, Don.

Actually, most of my questions have been answered, but I did have one, and I don't think anyone has asked about the -- any deposit attrition or what you were planning for and how things have gone.

I know it's still pretty early on that front and then even more importantly, your ability to retain key production personnel.

Fred, this is Marty Adams again and it's nice to have a question about the conversion integration which occurred on the 22nd of September and as you know it was very significant and as Tom mentioned, we grew by 50% and very pleased so far.

We did have consolidation of approximately 88 offices, but we had, as we've talked about in the last call, an effort to really contact individually and tell what was happening to each customer, all the highly valued customers, we did that.

We showed a lot of success there.

The conversion went very well, overall, and what helped that was retaining the Sky associates coming over to Huntington.

We did have seven individuals who had not been with Sky very long leave and go with a fringe competitor in the Cleveland market.

Other than that, we're very very pleased with how that went.

Fred, this is Tom.

I don't think there's any question that there has been some customer attrition.

There always is, but I personally have talked to many Sky business customers, as has Marty, consistently the message we're getting is looked good, anchors didn't change, really looking forward to our relationship with Huntington.

So we very much believe that any customer attrition will be well within the assumptions we made when we announced the transaction last December and nothing really out of the ordinary.

And then just one other question, just to clarify on this Franklin Credit situation, if and when you reduce the size of your exposure to Franklin, will you indeed communicate that to investors or is it going to be a function of investors having to look at Franklin's 10-Q?

Fred, as much as there is a desire which we understand and respect on the part of investors and analysts to get lots of information here, we probably wouldn't disclose the extent of a credit relationship we had with you if it were in question and nor can we do so with this one.

So to the degree that Franklin chooses to provide the information then we certainly respect that but we are limited and I hope everybody understands why in the amount of information we can provide directly.

Okay.

Thanks, Tom.

Thanks, Fred.

Your next question comes from the line of Mike Holton.

Hi, Mike.

A clarification on something I think Tim may have said earlier.

Tim, did you say that your assumption was for 1 to 2% in terms of home price depreciation in '08 across your footprint?

Correct.

That seems like that may not be conservative enough.

This is Tom.

One of the things you have to keep in mind is our markets were not driven higher through speculation.

We never had price appreciation in many of our markets, so if you're getting a lot of price depreciation on the Coast, for example, there's probably a good reason for that and we see that our markets are soft.

They're particularly soft in Southeast Michigan.

In Southeast Michigan the price depreciation has been more than that and will continue to be more than that but if you look across the Huntington footprint in the Midwest, I think that 1, 2% or so depreciation probably works out to be on target.

I think as Tom mentioned, it clearly is differentiated by region.

Southeast Michigan is problematic for us but it also reflects what we believe our portfolio contains, so if I was talking about the entire key of the regions we operate I might have a little different opinion.

That's based on who we are lending to and what we expect to happen to our properties.

Operator?

At this time there are no questions.

Okay, well, I'd like to thank everybody for participating in our call then.

If you have follow-up questions as always give Jack and me a call.

We'll see you next quarter.

Bye.

This concludes today's conference.

You may now disconnect.