Huntington Bancshares Inc (HBAN) 2007 Q4 法說會逐字稿

Good afternoon.

I'll be your conference operator today.

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

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

After the speaker's remarks there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Gould, you may begin your conference.

Thank you.

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

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

This call is being recorded and will be available as a rebroadcast starting about 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 difficult getting a copy of the slides.

Slides two and three note several aspects of the basis of today's presentation, I encourage you to read these, but please let me point out one key disclosure.

This presentation contains both GAAP and non-GAAP financial measures where we believe it's helpful to understanding Huntington's results of operations or financial position.

Where non-GAAP financial measures are used, the comparable GAAP financial measure as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentation, in its appendix, in the press release, and the quarterly financial review supplement to today's earnings release, and in the Form 8-K which we filed earlier today, all of which can also be found on our website.

Today's discussion 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 a complete discussion of risks and uncertainties please refer to slide four 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, participants today are Tom Hoaglin, Chairman, President, and Chief Executive Officer; Don Kimble, Executive Vice President and Chief Financial Officer; and Tim Barber, Senior Vice President in Credit Risk Management.

Let's get started.

Over to you Tom.

Thank you, Jay, and welcome, everyone.

What a quarter.

I join my counterparts who say that the current environment overwhelmed by the housing crisis is the most difficult or one of the most difficult in our banking careers.

Turning to slide six there are many subjects ween tend to cover today.

Franklin and our restructuring of the relationship, the credit picture unrelated to Franklin, other significant items in the fourth quarter, the net interest margin, our capital levels and common stock dividend, our 2008 outlook, merger integration progress and our thoughts about management succession.

I'll begin with comments and my assessment of fourth quarter events and performance.

Don will review then quarter's financials but in more of a summary fashion.

Tim will review our Franklin Credit relationship which has changed significantly as a result of the restructuring completed at the end of last year.

We'll then provide a detailed look at credit quality trends and our home builder and mortgage portfolios.

Dob will then redue our 2008 outlook including earnings targets and performance drivers.

I'll return with summary comments followed by Q&A.

Turning to slide seven.

We're obviously greatly disappointed with our $0.65 per share loss for the quarter.

Regarding Franklin, on November 16, we announced that we were projecting a negative impact of up to $450 million pretax or $300 million after tax in the fourth quarter from Franklin related writeoffs and reserve additions to reflect our loss exposure.

On December 28, we successfully completed a restructuring the relationship resulting in a pretax impact of $424 million which obviously reduced our capital.

It also resulted in a 15 basis point one-time reduction to our fourth quarter net interest margin.

As it represented loss interest while this loan was on nonaccrual status in November and through December.

This is now behind us and our 2008 first quarter margin will reflect this benefit.

We're reporting our loans to Franklin as restructured loans and including these loans in non-performing assets.

We believe this is the right disclosure to make even though we're accruing interest income on these loans in accordance with the restructured terms.

The inclusion of these assets significantly increases our nonperforming asset totals and distorts certain ratios in comparison to the historical values of those ratios and in comparison to our peers ratios, thus we provided additional information which excludes the Franklin impact to help you sort through these ratios.

We engaged the service of an independent third party in completing the restructuring.

With the reserves established coupled with conservative loan loss and payment cash flow assumptions regarding the underlying collateral for our loans we believe that we have now fully and appropriately addressed the risk from Franklin.

We expect that we will not need to revisit this issue.

Tim will provide details about the restructuring.

Aside from Franklin, during the quarter we saw deterioration in many credit areas.

Most notably residential development but home equity and auto chargeoffs also rose.

Overall non-Franklin chargeoffs were 72 basis points compared to 47 basis points in the third quarter.

We added $106 million to the allowance for loan and lease losses not associated with Franklin versus $37 million in the third quarter.

We expect credit losses to remain high in 2008 though at a lower level than the 2007 fourth quarter.

More on this later.

Our net interest margin came under pressure during the quarter falling by 11 basis points excluding the one time 15 basis point Franklin impact as price competition for deposits in our markets kept deposit rates from declining in line with loan rates.

The volatility of securities markets and especially the poor performance of financial securities also hurt us.

We had about $0.11 per share in market-related losses.

While we successfully sold a portion of the former Sky loans held for sale, they were classified as nonperforming assets as of September 30, 2007.

Bids fell below our expectations and further losses were taken.

When the markets will stabilize is unclear.

The equity investment funds and the investment securities portfolio that have hurt us the most have now been written down to less than $25 million.

While there were negatives in the quarter, there were also positives.

We were pleased with our 6% annualized commercial loan growth, our ability to maintain deposit levels in the face of competitive pressures, our strong growth in key fee income areas, and our underlying expense control.

Regarding our merger integration progress, during the quarter we achieved additional expense saves bringing our run rate to about 90% of the target at $115 million.

Excluding the $13 million in merger costs related to Marty Adams unplanned retirement, such costs totaled $31 million for an aggregate amount of $182 million compared to the $200 million target.

We have now estimated future revenue synergies as a result of the merger to be $87 million, including $33 million in 2008.

We'll achieve the remainder over the next three to five years.

As a reminder, these will come primarily by achieving Huntington performance levels in the former Sky regions in the sale of retail securities, capital market products, and money management services and from the sale of insurance agency products by Huntington.

In sum, for the merger integration standpoint, it is now business as usual and we're continuing to focus on better sales and service execution.

Regarding our 2008 outlook, there is no question that it will be a challenging year credit wise.

Our 2008 earnings target is $1.57 to $1.62 per share.

We'll detail our assumptions supporting this guidance later in our presentation, nevertheless, we believe this earnings level will permit us to grow capital and make progress on getting our tangible common equity ratio which was 5.1% at the end of the year back to its targeted 6 to 6.25 level, albeit taking a bit longer than originally planned.

Therefore, and consistent with our November announcement, this morning we reported our Board of Directors declared a quarterly common stock cash dividend of $0.265 per share payable April 1.

In the wake of Marty Adam's retirement, I've reassumed the role of President.

At this point we do not intend to fill the Chief Operating Officer position.

As to management succession, the Board and I do not expect to address this position through M&A.

We'll discuss it routinely with no specific timetable in mind.

For those of you who are interested in our performance in retaining Sky customers, let's look at slide A.

We believe we're doing well and our success supports our loan, deposit, and revenue assumptions in our 2008 outlook comments that we'll cover at the end of our remarks.

Here are our early observations.

We've retained 98% of the preconversion deposit balances for the Sky customers and have actually seen a 2% increase in business deposits during this time.

Attrition rates for November and December have returned to preacquisition levels.

Retail attrition is concentrated in single-service, low balance households, the lowest profitability segment.

Again, these are early results that are consistent with or slightly better than our expected attrition rate of 3% given the significant number of branch consolidations.

In sum, it's good to have 2007 behind us.

It had it's ups and downs.

Our focus now is on delivering targeted 2008 results and continuing to grow the franchise.

With that, let me turn the presentation over to Don.

Thanks Tom, returning to slide 9, our reported net loss is $239.3 million or $0.65 per common share for the quarter.

These results were negatively impact by five significant items.

First a $423.6 million charge to earnings or $0.75 per share related to the Franklin relationship.

This charge reflected a provision of $405.8 million and a reversal of interest income of $17.9 million.

This relationship will be reviewed in more detail later.

Second, $63.5 million or $0.11 per share of net market related losses consisting of four items.

$34 million of loss on loans held for sale.

This loss included additional marks on the loans sold during the quarter, as well as to the remaining loans included in held for sale.

$11.6 million of net securities losses related to certain investment securities backed by mortgages, $9.4 million of equity investment losses, and $8.6 million negative impact from the revaluation of mortgage servicing rights net of hedging.

Third, $44.4 million or $0.08 per share of merger costs including $13.4 million related to previously announced retirement of Marty Adams.

Fourth, $24.9 million or $0.04 per share of Visa indemnification charge.

Our expectation is that we will receivable in the future IPO of Visa with receipt of stock that will more than offset this charge.

Lastly $8.9 million or $0.02 per share of increase to litigation reserves on existing cases.

Slide ten provides a quick snapshot of a quarter's performance.

As previously noted our reported loss was $0.65 per share.

Our net interest margin was 3.26% down 26 basis points.

This level reflects a 15 basis point reduction due to the Franklin loans being put on nonaccrual status from November until the loans were restructured in late December.

All interest payments were received on time during this period but were applied to reduce the exposure of this credit.

It is important to note that this 15 basis point impact only affected fourth quarter results.

However, going forward, our net interest income will reflect a lower balance of Franklin loans resulting from the $308 million chargeoffs.

Average total commercial loans increased at 6% annualized pace.

Average total consumer loans remain stable with the prior period and average total core deposits also remained fairly stable during the quarter.

We had good fee income performance during the quarter as deposit service charge income was up 4%.

Trust income was up 5% and brokage and insurance fees were also up 5% and other service charges were up 4%.

In contrast, mortgage income and other income reflected a negative impact for the mark-related losses previously discussed.

Expense levels were up slightly from the third quarter after adjusting for merger costs and the significant items noted before.

This increase was related to commission expense, higher collection costs, and various timing differences.

During the quarter we were able to achieve an additional $5 million or $20 million annualized of merger savings.

This brings our realized savings to approximately 90% of our target.

We expect to achieve at least the remaining committed amount in the first quarter of 2008.

Our chargeoff ratio of 3.77% reflected the impact of $308 million of chargeoffs related to Franklin credit.

Excluding these chargeoffs our net chargeoff ratio for the quarter would have been 72 basis points.

Our period end tangible common equity ratio declined to 5.08% reflecting the impact of the quarter's loss as well as a $48 million increase to our intangible.

This increase in our intangible is reflected in an insurance agency acquisition and additional purchase price allocation adjustments from the Sky Financial acquisition.

Let me turn the presentation over to Tim who will provide a detailed credit review.

Tim.

Thanks, Don.

Turning to slide 12, Huntington negotiated a significant restructure of the Franklin relationship as of December 28, 2007.

The specifics of the restructure detailed in our January 3, 8-K filing created an appropriate level of debt given the collateral.

Interest coverage for the entire bank debt, after the restructure is in excess of the 1.25 -- or based on the one-month LIBOR rate of 4.5%.

Clearly the current interest rate environment has a positive impact on the interest coverage ratio.

Huntington's exposure after the restructure is $1.2 billion, with $800 million secured by purchases first and second mortgages and $400 million secured by subprime first originated by the Tribeca subsidiary.

Hunting has a reserve of $115 million, or 9.7% associated with the Franklin exposure.

Huntington will carry these loans at substandard on our balance sheet.

We firmly believe that these actions are sufficient to allow for orderly repayment of the restructured debt with no credit quality performance impact on 2008 earnings.

We have an ongoing performance analysis structure in place and are committed to formal quarterly impairment testing.

As part of the analysis process we engaged a third party to perform an independent review of the portfolio and our actions.

This independent review confirmed our actions as appropriate.

Slide 13 summarizes certain collateral performance assumptions.

Conservative expected loss assumptions were modeled over the life of the over 30,000 individual first and second lien residential mortgages.

These assumptions were more conservative than performance results communicated by Franklin in 2007.

Our modeled results were consistent within an analysis performed by the independent third party.

The model cash flows and estimated losses over the life of the mortgages are consistent with our November 2007 assumptions.

This results in the interest coverage that is expected to exceed the minimum interest coverage covenant of 1.25 times.

In addition, a specific reserve of $115 million or 9.7% of the exposure was established.

Slide 14 shows the sources that generate the cash flow for repayment of the bank debt.

In addition to payments received on loans that are contractually current, additional payments are received from a delinquent account known by the industry term as recency payment.

As noted earlier, our loss assumptions included 120 days past due as the definition of default.

This is a conservative definition as we assume no payments are being received on loans that reach the 120 days past due category.

Yet the actual experience is that a number of these loans have made a payment within the last 30 days.

A second cash flow source represents loan payoff activity.

This occurs as the loans are refinanced elsewhere or the level of payoffs has obviously declined substantially from earlier levels.

Monthly refinance activity over the fourth quarter was stable.

This source is most directly affected by the lack of liquidity in the market.

A third source of cash flow is the sale of foreclosed properties.

This will be a significant source of cash particularly for the Tribeca portfolio.

The Tribeca loans are generally located in the New York and New Jersey area and were originated as refinances at low loan to values.

The property values have held in this area better than the national averages, thus supporting both refinance activity and foreclosed property sales that cover the loan amount.

Turning to the next slide, I want to use the next few slides to highlight key credit quality trends and metrics as well as provide comments on some of the key portfolios.

Slide 16 provides a high level review of some key credit quality performance trends.

As Tom noted earlier, Franklin will have a lingering impact on our reported asset quality ratios.

It is important to emphasize that from a regulatory reporting standpoint, Franklin is categorized as a performing loan.

It is accruing interest like any other commercial loan.

The performing status is a result of the repayment capabilities associated with the restructured credit.

In contrast, for our GAAP external reporting, Franklin is categorized as a troubled debt restructure and part of nonperforming assets.

This categorization resulted in the significant increase in our reported nonperforming assets even though it is accruing interest.

As Tom noted and hopefully my review confirms, this is a credit that we believe we have addressed fully and certainly do not expect any negative impact to credit quality from Franklin on our 2008 performance.

As shown here, our reported nonperforming asset ratio increased to 4.13% and our net chargeoff ratio was 3.77%.

Excluding Franklin our NPA and net chargeoff ratios were 1.21% and 72 basis points respectively.

With the increases from the third quarter levels reflecting deterioration in our core bank performance.

Due to the significant impact of both Franklin and the held for sale portfolio, we believe a better measure to track underlying trends are nonaccrual loan metrics.

As shown on the second line of this table, our non-accrual ratio was 80 basis points, up from a comparable 62 basis in from the third quarter.

As shown at the bottom of the graph, we have included a nonaccruing loan reserve coverage ratio to both our allowance for loan and lease losses, the ALLL and total credit allowance the ACL.

We believe these reserve coverage ratios continue to represent adequate levels of reserves to the risks inherent in the portfolio.

Slide 17 details our nonaccruing loans or NALs by type and shows the other categories adding up to total NPAs.

This shows that the increase in non-accruing loans was concentrated in the middle market commercial real estate, residential mortgage, and small business portfolios.

The commercial real estate increase was primarily a function of continued activity in the home builder portfolio which I will specifically address shortly.

The residential mortgage and small business portfolio increases reflected increasing delinquency rates.

Both of these segments classify loans as nonaccrual based on delinquency.

The increase in small business was spread across all of our regions with no particular driver from a geographic standpoint.

Slide 18 graphically shows the trends just covered on slide 16.

Here it is visually easier to see where our nonaccruing loan issues have been concentrated.

Slide 19 details net chargeoff activity on both a reported and non-Franklin basis.

On a non-Franklin basis total net chargeoff increased from 47 basis points in the third quarter to 72 basis points.

The most significant linked quarter change was in the commercial real estate segment with modest or normal seasonal increases in the other portfolio segments.

Consistent with the nonaccrual trends, the commercial real estate chargeoff activity was heavily influenced by the home builder portfolio.

The borrowers in our eastern Michigan and northern Ohio regions continued to be the source of the majority of this activity.

Consumer chargeoffs increased from 67 basis points to 75 basis points in the quarter as indirect auto and home equity net chargeoffs increased offsetting a decline in the residential mortgages.

These results reflected a combination of some seasonal trends, the impact of Sky, and continued pressures on the real estate markets in general.

Our expectations are for consistent levels of consumer chargeoffs for the next several quarters.

While our home equity losses increased from 58 basis points to 67 basis points the relative change is actually better than industry trends.

In fact our vintage results from 2006 and 2007 originations show improvement over prior periods.

This is consistent with our decisions to limit broker originations and constraint high loan to value lending.

This provides support for our belief that 2008 will be Huntington's high watermark for home equity loss.

Slide 20 details changes in our allowance for credit losses and segregates reported amounts and non-Franklin related amounts.

The latter we believe represents the better indicator of underlying linked quarter performance.

Our non-Franklin allowance for loan and lease losses increased to 1.19% up from 1.14%.

While our allowance for credit losses increased to 1.36% from 1.28%.

Since there was $18 million of Franklin related reserves at September 30, the net linked quarter increase in the ACL was $35 million.

This build in the ACL was centered in the middle market commercial real estate portfolio which accounted for $19 million, or 59% of the increase.

Also contributing to the increase were $3 million related to the indirect auto portfolio and $4 million related to home equity loans.

In addition there was a $3 million increase resulting from the economic reserve calculation.

The point is that the increase in problem loan activity, putting Franklin aside was primarily centered in the middle market commercial real estate portfolio and within that portfolio in the single-family home builder segment.

The increases in other portfolios were a result of our quantitative methodology and appropriately represent the risks in the portfolios given the general economic conditions in our footprint.

Let me use slide 21 to give you a more detailed review of our single-family home builder portfolio.

Our single-family home builder portfolio continues to decrease and now totals less than $1.5 billion.

We have added some additional asset quality performance disclosure to this slide which we hope you find helpful.

The level of classified loans has increased by $120 million over the past year to $159 million.

The reserves held against the portfolio have increased to 3%.

Those of you who have followed Huntington know about our highly quantitative reserving methodology, this gives us comfort that the 3% level accurately represents the current risk in this portfolio segment.

For 2008 we are expecting losses to be relatively consistent with the 2007 level of 1.5%.

It is important to note that we expect the residential developer market to continue to be volatile and anticipate continued pressure on the home builder segment in the coming months.

It will be the main driver in 2008 credit quality trends as we continue our ongoing portfolio monitoring we will make credit and reserve decisions based on the current condition of the borrower or project combined with our expectations for the future.

I want to use slides 22 and 23 to review our adjustable rate mortgage and Alt A residential mortgage portfolios as we know these are areas of investor interest and concern.

Details on our ARM exposure and rate resets over the next 24 months are shown at the top of slide 22.

The reset issue is a very real credit risk scenario for borrowers with no refinance options.

The current 30 year fixed rates are below the reset rates for most of our bowers.

Well, there are a number of factors and credit decisions, including income level and loan to value, current experience shows that borrowers with current FICO scores over 670 are able to effectively pursue refinance options.

Over 80% of our ARM borrowers have current FICO scores over 670, as such we believe we have a relatively limited exposure to the reset risk.

Nevertheless we have implemented a proactive calling effort to ensure that all of our borrowers are aware of the impact of the upcoming reset and have mitigation strategies in place to help those borrowers with payment difficulties.

Our interest only portfolio which is a subset of our residential ARM portfolio continues to perform well with average current FICO scores of 729 and low net chargeoff rates.

Primarily as a result of our conservative origination strategy.

Turning to our Alt A product, slide 23 shows our outstandings of $531 million representing 10% of the total residential portfolio.

The product is in a runoff mode as we originated only $33 million of such loans in 2007.

The product generated $5 million of losses, a net chargeoff rate of 75 basis points and accounted for 46% of the total residential losses for the year.

We are currently focusing on customer contact and applying our loss mitigation strategies where appropriate.

I hope this credit review has been helpful.

Let me turn the presentation over to Don who will discuss our 2008 outlook.

Thanks, Tim.

Turning to slide 25 we provided additional detail to help analyze our earnings outlook.

After we provide our usual line item review of our earnings guidance we'll provide additional detail on our net chargeoff expectations, a summary of our identified revenue synergies from Sky Financial acquisition, and then a review of our capital assumptions for 2008.

As you know, when earnings guidance is given it is 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 the financial impact is uncertain until the impact can be reasonably forecasted.

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

We are targeting 2008 earnings of $1.57 to $1.62 per share excluding merger costs which are estimated to be $0.01 to $0.02 a share.

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

It continues to be our expectation that any impacts will be greatest among our borrowers in our eastern Michigan and northern Ohio market.

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.

Revenue growth in the low single-digit range, this is expected to reflect a net interest margin of around 3.35%.

This is down slightly from the fourth quarter adjusted level of 3.41%.

That has a reported 3.26% plus the 15 basis point one time Franklin impact.

The reduction from 3.41% reflects the impact of the loss interest income due to the charged off Franklin loan.

Along with an assumption of continued aggressive pricing in our market.

Annualized average commercial loan growth in the mid single digit range with total consumer loans being relatively flat reflecting continued softness in residential mortgages and home equity loan growth.

Core deposit growth in the low single-digit range and noninterest income growth in the midsingle digit range.

For noninterest income we're assuming mid single-digit growth with no significant net market related gains or losses.

Keep in mind the investment securities contributing to our impairment and the public equity investments now represent less than $25 million.

This also includes the realization of Sky revenue synergies and higher automobile operating lease income.

Noninterest expense is expected to be flat to down from the fourth quarter annualized level.

This reflects lower core expenses after adjustment for merger costs.

Other significant items and automobile operating lease expense.

Please note that flat to down assumption excludes any negative impact for merger costs which are expected to be between 5 million and $10 million in 2008 and excludes any positive impact from the potential reversal of the Visa indemnification charge.

Regarding credit quality performance, we anticipate a net chargeoff ratio of approximately 60 to 65 basis points.

We'll review this assumption in more detail later.

Nonaccrual loans on an absolute and relative bases are expected to increase moderately.

Lastly, we anticipate the loan loss reserve ratio will increase modestly, also from its December 31, level of 1.44%.

Regarding capital, we're assuming no share repurchase activity.

Again, all this results in a targeted reported EPS for 2008 earnings of $1.57 to $1.62 per share excluding any merger costs.

Let me detail a couple of areas.

On slide 26 we detail our assumptions for net chargeoffs in our 2008 outlook.

As you can see, our outlook assumes chargeoffs in the 60 to 65 basis point range, well above our targeted range of 35 to 45 basis points.

Each of the individual categories is above their long term targeted range with the exception of automobile, with the greatest variance coming from the commercial real estate category.

This continues to reflect the expected softness in the commercial real estate sector.

The 60 to 65 basis point chargeoff outlook is also slightly higher than the 59 basis points of non-Franklin related chargeoffs recognized in the second half of 2007.

Turning to slide 27, we show the estimated revenue synergies from the Sky Financial acquisition.

We've identified $87 million of revenue synergies to be achieved over the next three to five years with $33 million included in our expectation for 2008 revenue.

The areas of revenue synergies include penetration of Sky Financial customer base, with asset management products and services at a comparable level to Huntington, including retail investment sales, trust services, corporate derivatives, and other capital market products.

Delivery of Huntington's deposit products and services, including cash management, referral of insurance products and services throughout the combined Huntington footprint, and delivery of equipment finance services to the Sky customer base.

Turn to slide 28 we provide a summary of the impact the 2008 outlook has on various capital ratios and other metrics.

Using our targeted EPS of $1.57 to $1.62 and for analytical purposes, if you annualize our current quarterly dividend, the result would a dividend payout ratio of 65 to 67%.

While this is higher than our targeted range our current view is that it is supportable given our slower expected balance sheet growth.

Using these assumptions it would result in an ROA of around 1.15% a return on tangible capital of about 25% and an internal capital generation rate of 3 to 4%.

Finally, we project our tangible common equity ratio will increase by 10 to 12 basis points per quarter, resulting in a ratio of around 5.5% by the end of 2008.

It is important to note that our plans include the issuance of additional capital during 2008.

However, this capital would not increase our tangible common equity ratio, but would enhance our regulatory capital levels.

We have no plan of issuing convertible instruments that would dilute our common equity in the future.

Again, we plan to share repurchases during the current year.

Let me turn the presentation back over to Tom for wrap up.

Thanks, Don.

We've covered a lot of ground in a short period of time so let me point out the key points we feel that are important that our investors understand as we focus on 2008.

First, I realize that your confidence in us has been hurt by our experience in Franklin and we're working hard to restore it.

Based on all we know and all we're anticipating about how this credit and it's underlying collateral will perform, we believe that our assumptions and reserves are appropriately conservative and that any performance issues associated with Franklin have been fully addressed.

Second, we believe the remaining risk associated with future negative market related volatility is minimal.

Third, the credit quality environment is expected to remain difficult.

We are expecting 2008 credit losses to exceed the 2007 level.

We hope they will peak in 2008 and begin to decline in 2009.

Nevertheless, we're confident that we're well positioned to weather the storm.

Also, our business model is sound and is producing results.

With the intensity of merger integration efforts behind us our focus is on credit and on sales and service execution, particularly in our new regions.

And while there are still some merger expense saves to be achieved, we're equally excited about the revenue opportunities before us.

Lastly, I want you to hear that the team and I believe our earnings target of $1.57 to $1.62 per share in 2008 is an achievable, albeit not easy, target.

Through hard work and focus on performance we're up to the task.

Operator will now open the discussion to questions.

(OPERATOR INSTRUCTIONS) We'll pause for a moment to compile the Q&A roster.

Your first question comes from Andrea Jao with Lehman Brothers.

Hello, hello, Andrea.

Yes, can you hear me?

Yes.

Fantastic.

Given your net chargeoff ratio of 72 bips and then your projected net chargeoff ratio of 60 to 65 in 2008, what drives the decrease because when I pay -- when I put slide 26 right beside slide 19, there is no obvious -- there is no obvious driver of the decrease.

Andrea, this is Tom.

Let me make a few comments then I'll ask Tim Barber to comment as well.

What we have done in arriving at this estimate for 2008, we have taken a look at the second half of 2007, we've looked at in a name by name by name in our commercial real estate portfolios which is where much activity will come, we looked at what we did in the fourth quarter as well, and both our line originators, our workout people, and our central credit risk people felt comfortable in light of all that with the CRE and middle market C&I portion of that 60 to 65 basis point range.

Tim, why don't you comment about the consumer side.

Sure.

On the consumer side, as you know, we have a lot of portfolio metrics, we spend a great deal of time analyzing trends and changes in our borrowers and we believe that 2008 will be exactly where our -- within the range of what we've presented here in the presentation.

And draft auto will move a little higher, our home equity portfolio will be slightly higher but pretty close to flat on an overall basis and our residential mortgage portfolio will be flat to 2007.

The other comment I would make, Andrea, is I'm well aware that there are no guarantees in this environment, so we have done our level best to dimension what we consider to be a realistic risk to us in 2008, but our crystal ball is not any clearer than anybody else's.

So we certainly don't offer any guarantees.

This is absolutely our best effort.

That's very helpful.

My follow-up question is could you give a bit more detail about the capital issuance, the magnitude, and the timing that you're looking at, if you can at this point?

We're still working through those plans, Andrea, but our thought would be to have a capital issuance probably in the 250 million to $300 million size and with that, we believe that our regulatory capital ratios and our rating agency capital levels would be at our above our peer levels with that type of issuance.

Fantastic.

Thank you so much.

Thank you.

Your next question comes from Matthew O'Connor with UBS.

Hi, Matt.

Not to harp on this, but it seems like its kind of optimistic to assume home equity losses are flat to the current levels given what is going on with home prices with the economy overall?

Matt, I guess I would address that in a couple of ways.

One, we've consistently talked through the quality of borrower versus the home price value.

If the borrower quality remains high where the probability of default remains low, then the value of the home is less of an issue and we're seeing pretty consistent default rates coming through and so that leads us down the path of consistent levels in 2008.

We spend a lot of time looking at vintages and we've seen improvement in the vintages of our 2006 and 2007 originations, pretty dramatic improvements and those combined tell us 2008 will be where we've projected and then we're seeing 2009 a little bit lower.

All right.

And then just separately, I might have missed it, but did you talk about how much your reserve build will be this year?

Matt, we didn't say that explicitly, we just said that the reserve would be increased -- I believe it was modestly from the fourth quarter levels.

And that's relative to loans or in absolute dollars?

That's in percentages.

So we're currently at a 144 so we would think to have a modest increase in that going forward.

Okay.

And then just in terms of what kind of macro assumptions are you using?

In your estimates here?

Macro in terms of economic?

Yes.

Well, what I would say in our part of the world we do not expect the economy to be a very pretty picture in 2008.

In some parts of Michigan, as you're well aware, there are depression-like conditions.

We fully expect that that will continue to be the case.

Most of our other markets are either stable or fairly weak.

Clearly the sector that is impacted greatest is housing but we fully expect in '08 that there will be some spill over effect to other parts of the economy so we are not predicating growth assumptions or credit quality assumptions on a rosy picture.

We do see very much continued weaknesses throughout the year.

Okay.

All right.

Thank you.

Thank you, Matt.

Your next question comes from Tony Davis from Stifel Nicolaus.

Tim, I wonder if you could tell us what percentage of the middle market construction development loans have you gotten updated appraisals on here in the last quarter or so, what's the LTV average for that portfolio right now?

I can't give you an average loan to value for the portfolio.

We originate in the 65 to 75% LTV range.

That's our goal or our policy.

The percentage that we've had reevaluated, maybe we'll have to get back to you with a specific number on the percent.

What I can tell you is as these loans come up for renewal or as there are identified issues with individual products or projects we absolutely get a revaluation immediately.

And of the $1.5 billion, Tim, how much of that would be in northern Ohio and eastern Michigan.

We have got slides in the appendix that dimension the east Michigan portfolio at $135 million and we have set northern Ohio at about $300 million.

Okay.

Tom, from a growth standpoint, I wonder what Mary's people are seeing in terms of -- and their loan officers in terms of borrow attitude outside of real estate.

Today, for example, versus say three to six months ago, how soft is the general business environment feel in your market?

Tony, I think that an accurate answer is that it varies by geography.

It feels pretty bad in most of Michigan.

A tremendous amount of caution there.

Lots of borrowers just hunkered down, if you will.

When you go elsewhere, central Ohio, Cincinnati, Indianapolis, a different story.

We're not talking about boom economies here, but there is a greater sense of optimism, a greater inclination to invest.

Keeping in mind that parts of our footprint have significant numbers of export-related industries, many companies there are benefiting as a result of the weak dollar.

So while there certainly is a significant segment of manufacturing that is under stress, there are other portions of it in our part of the world that has captured some of that that are benefiting at the current time.

So if I could generalize, I would say considerable caution but it does vary across portions of our foot print.

Final thing to you too, Tom, in this environment with what is happening in the asset quality, I would imagine your appetite for deals on the M&A front has been satiated for a bit and also in that sense, what attitude you're seeing among your smaller competitors?

Well, an accurate description would be I'm stuffed and I'm suffering from indigestion, to use your -- to continue the metaphor.

And this period of time, I think, is one of considerable focus on behalf of Huntington for better and better execution of what we have today relative to smaller competitors.

I really am sensing, time will tell whether I'm right or not, that everybody is focused on its own challenges now, credit margin, otherwise there really is not a focus on M&A activity to any significant degree.

Thank you much.

Thank you.

Your next question comes from Bob Hughes with KBW.

Hello, Bob?

Hi, guys.

Hello.

A couple of questions I guess.

I'm still -- and again I hate to harp on the issue, as Matt said before, but still a little incredulous as to the home equity assumptions, it seems to me that even if you felt like the quality of your borrowers was holding up and the probability of default was not materially changed, that your loss given default would have to be going up in this environment based on what you're seeing in the rest of your portfolio and the actions you're taking against the construction book.

Can you help me understand why that would not be the case?

Our loss given default assumption is essentially 100% on our home equity portfolio, so if a borrower defaults, 100% of that flows right through to the loss line and that's been consistent over the past couple of years.

There are segments, if there is a very low original loan to value as an example and aren't at 100 but overall the numbers actually calculate in the high 90% range.

So that's really why we spent so much time focusing on the probability of default because we're assuming 100% loss given default.

Okay.

And when you look at that borrower base, based on your own internal analysis, can you tell me what you're basing that assumption on?

Is that based on FICA stores?

Do you believe that to be the number one determinant of--?

Yes, Bob, as we look at our portfolio we regrade -- or, I'm sorry, update FICO scores on a quarterly basis.

The migration of those scores, the percent in low score categories as examples are the things that we look at as primary indicators of our future PDs.

Because it strikes me that we've heard from a number of other companies and maybe your experience will be different, but I've heard from a number of companies that they view FICOs as almost being irrelevant to some degree and that LTV is the number one LTO determining factor.

Would you differ from that view?

From a predicting default standpoint?

Yes.

I guess I think that if you're assuming a loss given default of 100% then the prediction of the default has much more to do with the FICO score.

I mean we've got years of analysis that would indicate that it is highly predictive.

Is it the only factor?

Absolutely not.

Can you have a high FICO borrower that ends up in a underwater position and something else happens to cause them to default?

Sure.

But what we're generally predicating the concept on, is if you've got -- excuse me, if there is a repayment capability, then you're going to stay in the house whether or not it happens to be upside down given the current market conditions.

So people are not just running out and turning in the keys to their homes because the value has fallen.

So that is why I would say FICO from a predicting PD standpoint is more important than the loan to value.

Okay.

Tim, just to follow-up as far as the home equity chargeoff outlook.

There are two things I think you talked about before that are really impacting that too, is we're seeing less of an impact from the broker origination that we've cut out two years ago.

I think you had also talked about the better performance of the recent vintages in those the current loss rates are less than half of what they were two and three years ago.

Right.

I think you mentioned hearing from peers or hearing from other institutions and clearly there hasn't been a trend last quarter and certainly this quarter regarding material increases in home equity losses forecasted.

I think we're different because we made some of the adjustments that banks are making today or very recently, back in 2005 and 2006 and the broker channel is probably the best and most obvious indicator or example.

We completely exited it in early 2007 but we began reducing our exposure to the broker channel back in 2005.

And if not explicitly stated, the underlying assumptions that some of these other banks announcements have been significant deterioration in broker channel performance and so--.

I do agree and you got out earlier than most.

That's probably the most visible example of why we think we're a little different than the rest of the market.

Clearly our numbers are up but our numbers are not up to the same extent or at the same ratios of some of these we're seeing announced recently.

And if I could ask one additional question.

Ex the dollar and charges you had this quarter would put you at a $0.35 run rate.

I think by my math you could maybe add $0.03 or so that you get back in the first quarter from the reversal of accrued income I think on Franklin, if that's accurate.

What other adjustments would you make to to that say $0.38 level going forward that makes your guidance for '08 look reasonable.

Bob, I the biggest there is just we talked about before, the fourth quarter included 72 basis points of chargeoffs and a build of about $37 million the allowance.

And our guidance for 2008 based on the conservative review that Tom had talked about would be for 60 to 65 basis points in chargeoffs and continuing modest increases in the allowance.

So that would be the primary reason for the difference between those.

Okay.

All right.

Thanks guys.

Thank you.

Your next question comes from [David Booth] with [Elk Partners].

Hi.

I just spent the last two days looking at the Franklin loan restructuring and to be honest with you, it's my opinion, I haven't seen accounting this misleading since Enron.

My question regards the accounting treatment of the loan regarding -- this is a $1.8 billion loan that we're contingently liable for, along with the other lenders to a $7 million market cap company where almost 45% of the portfolio, the $2 billion portfolio is in default as of second quarter and Franklin is saying that trends are getting worse.

I don't know how you guys can continue to call this a commercial loan and continue accrual on it when absent our forgiveness of $300 million of that loan, it looks to me like Franklin might be bankrupt right now and substantially economically you have to think that if Huntington took possession of the collateral how much of that portfolio would go to nonaccrual versus the carrying value as you guys carry as a commercial loan presently?

I'll take a first crack at this and Tim can go ahead and step in with additional color here, but keep in mind that what we're looking at as far as the collection of our loan that we have on our books is the cash flows are generated from the $2 billion of underlying consumer mortgage loans that are outstanding.

The total loans that we have on our books today are less than a $1.2 billion.

We think that the cash flows that are projected--.

Well, we're contingently liable for $400 million additional; is that right?

The other lenders have recourse to us?

No.

No other recourse is owed from Huntington to the other lenders.

No, that's not correct.

So if Franklin failed those other lenders wouldn't have recourse?

They would not have recourse against Huntington, no.

I thought your 10-Q said something.

That does not exist.

And we'll go back and check our Q and K's that we filed to make sure that that's not stated that way but that's not our understanding.

I'm just trying to understand how you can call it a commercial loan when Franklin is a $7 million market cap company that they, in their recent filings said that with the trends and their portfolio that it would pretty much wipe out their equity.

How you can continue to call it a commercial loan and continue to accrue on it, I think, in my opinion, the proper accounting would be to look at that as the underlying collateral and say, how would we treat this if we brought this on balance sheet because substantially Huntington is the lender that's keeping them afloat.

David, we have definitely looked at the underlying collateral and we believe that the loan is a loan to a -- basically it's essentially a pool of loans.

And we believe that the collateral and the cash flows that are generated from that collateral more than adequately support the loan balances we have in our books as well as the loan balances are carried by the participants in that relationship.

So.

Can you talk about the underlying credit trends in the Franklin portfolio presently and then how it would be reflected if you put it on balance sheet to Huntington, how much of it will go into nonaccrual versus your treatment of the commercial loan presently?

David, we believe we have an accruing loan that is well secured and we believe that we have appropriately accounted for that and have it reflected in our balance sheet.

If you would like to talk about this further, please feel free too gave either Jay Gould or give me a call and we can talk about this more one on one if you'd like.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Heather Wolf with Merrill Lynch.

Hi there.

A quick question on the C&I book, and then on the--?

Heather, this is Jay, could you speak up?

We're having a hard time hearing you.

Is that better?

Yes.

Thank you.

I can never get these headsets to work.

Quick question on the commercial portfolio.

Given the view on the economic backdrop and given that unsecured commercial credit quality can be very dependent upon the underlying economy, why do you think the C&I loss rates are going to hold in '08?

Well, this is Tom, Heather, we -- what we are concerned about in C&I is anything in C&I that somehow would be dependant upon housing.

So in building our loss estimates in C&I we've certainly taken into consideration the direct impact the housing sector might have on it.

But on the other hand with the knowledge of our C&I book which continues to perform very well and the composition of the sectors within the C&I book, we, aside again from the relationship to the housing sector, we feel comfortable in maintaining the targeted estimates that we have.

That's the best that I can do to help you out.

Okay.

And Tim can you give--?

Heather, I was just going to add something.

In your question you mentioned unsecured and we have really very little C&I unsecured.

So if you're thinking about maybe shared national credit or some structure like that, that's not what the Huntington portfolio looks like.

Okay.

Tim, you can give us a sense for the typical rate of change or rate of credit migration on a C&I loan?

How quickly do they usually move through your watch list and delinquency lists?

Heather, the answer to that really varies dramatically.

Some hit the criticized world and then go relatively quickly to loss.

Others hit the criticized world and stay there for a while as the Company sorts out issues or performance stabilizes before returning possibly to the pass category.

I'm not sure I could give you a general answer to that.

Clearly we have seen over the last -- the last few quarters downward migration as reflected in our increased -- our increased reserve calculation.

Tim, I think that's particularly the case in commercial real estate as opposed to middle market C&I where you're subject to periodic updates with regard to appraisals, changing market conditions.

Thus, in some cases, triggering downgrades from past to substandard but we really don't see that kind of precipitous decline generally speaking in middle market C&I.

That's exactly right.

The significant migration are the two-step downgrades, to use that (inaudible) are a commercial real estate phenomenon and we've experienced that.

The C&I book tends to be more one grade steps as they move, but they have not moved with anywhere near the volume that we've seen in the commercial real estate side.

Okay.

And just as a refresher, what were your C&I losses, peak C&I losses in the last cycle?

The last cycle in early 2000, so I think 2001 or 2002 may have been the peak.

I don't think -- and I can't remember the number specifically.

We can get back to you with that.

But I would say that those numbers were heavily influenced by the shared national credit portfolio that was on the books at the time and that simply doesn't exist today and so we've materially changed what that C&I portfolio looks like.

If you go back -- or when we get back to you, we can give you some names that you'll recognize along with the rates and so I do not think that it's a comparable comparison to say it was X, so it could be X again given the change in the portfolio.

Okay.

That's helpful.

Thanks very much.

Thanks, Heather.

Your next question is a follow-up question from Andrea Jao from Lehman Brothers.

I just want to make sure I heard correctly.

You sold -- was that the 73 million, $74 million held for sale nonperformance from Sky after the quarter ended?

No.

We actually sold that prior to quarter end and we also took an additional haircut on the remaining portfolio based on the sales price we received.

So prior to quarter end.

That's correct.

Okay.

Thank you.

Thank you.

There are no further questions at this time.

Okay.

Well, Heather, thank you and everybody thank you for participating in our call.

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

Thank you again.

Thank you.

This concludes today's Huntington fourth quarter earnings conference call.

You may now disconnect.