Huntington Bancshares Inc (HBAN) 2008 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Huntington first 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, Ashley.

And welcome, everybody.

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

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

And this call as usual is being recorded and will be available as a rebroadcast starting about an hour from the close.

Please call investor relations 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.

Slides two and three note several aspects of the basis of today's presentation.

I encourage you to read these.

But let me point out one key disclosure.

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

Where nonGAAP 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 in the quarterly financial review supplement to yesterday's earnings press release, all of which are also on our website.

Slide four today's discussion including Q&A period may contain forward-looking statements.

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

We assume no obligation to update such statements.

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

Now turning to today's presentation, as noted on slide five participating today are: Tommy Hoaglin, Chairman, President and CEO, Don Kimble, Executive Vice President and Chief Financial Officer, and Tim Barber, Senior Vice President of Credit Risk Management.

Let's get started.

Tom?

Thank you Jay.

Welcome, everyone.

Before beginning the presentation, I want to explain why we reported earnings today rather than at our previously announced date next week.

Over the last few weeks our stock price has been under unusual negative pressure.

We believe our performance this quarter was really pretty decent particularly given the increased softness in the overall and regional economies.

So we wanted to get that information into the marketplace as soon as possible, hence our decision to an announce earnings today.

Now turning to slide six.

I'll begin with my usual assessment of first quarter events and performance.

During this past quarter in given continued and some might argue increased economic uncertainties and market volatility, the issue of capital has become particularly topical.

Yesterday we an announced a 50% dividend reduction.

Not as a result of major credit challenges, but rather to facilitate the issuance of capital.

So in addition to my usual assessment of first quarter results, I'll comment on this decision and our views on capital.

The next topic will be credit quality.

As such Tim will follow me and spend some additional time this morning reviewing this for you.

Don will then review the quarter's financial performance and our 2008 outlook, and I'll return to summary comments followed by Q&A.

So let's get started.

Turning to slide seven, reported earnings were $0.35 per share, this included a net $0.03 positive impact from significant items which Don will detail for you.

Credit quality performance was basically as advertised.

Net charge-offs were 48 basis points, well below our full year estimate of 60 to 65 basis points, which by the way remains unchanged.

Nonaccrual loans increased 18%, mostly in the middle market commercial real estate and middle market C&I portfolio.

Nonperforming assets increased 1%.

Given the environment we built the absolute and relative level of our reserves with a provision that exceeded net charge-offs by $40.2 million.

This was expected as our reserve methodology is designed to build reserves in anticipation of net charge-offs based on changes in the underlying current and anticipated credit worthiness of our borrowers.

Since the 2007 fourth quarter restructuring of our lending relationship with Franklin Credit Management Corporation, there has been a lot of speculation about how this credit would perform going forward.

While one quarter does not make a trend we're off to a good start.

There were no Franklin related net charge-offs provision for credit losses in the quarter.

Our exposure declined by $30 million for 3%.

As you know, as restructured this relationship is more one of cash flow lending than collateral lending.

Generating sufficient cash flow to support the debt is perhaps the issue of greatest investor significance regarding the performance of this lending relationship.

As such and as Tim will detail we're very pleased with restructuring is having the desired effect.

During the quarter cash flow substantially exceeded that required for terms of the restructuring and in fact widened a bit more each successive month.

We know investor comfort with this credit will take time, but we are off to a good start.

Last item of note in my summary about performance is that the net interest margin compressed more than anticipated and was the primary reason underlying earnings came in slightly below our expectations.

The reductions in interest rates this past quarter both in magnitude and speed were unprecedented.

Given the asset sensitive nature of our balance sheet in the short run there was little we could do to minimize a margin squeeze.

Though our margin declined only three basis points the quarter's margin of 3.23% was almost 10 basis points less than our expectations at the time of last quarter's call.

And then we saw good load and deposit growth the absolute level of interest income nevertheless declined.

I'll let Don fill you in on the rest of the quarter's financial performance details later in the presentation.

Turing to slide eight, let me provide our views on capital, why we cut the dividend and summarize our 2008 outlook.

Throughout the quarter we saw increased economic and market uncertainty.

There seemed to be more negative news emerging every week in economic and market uncertainty skyrocketed.

As a result conserving capital took on new importance.

As discussed on last quarter's call we anticipated issuing $250 million to $300 million or more of capital securities.

And we noted our intention that any issuance would be in the form of nondiluted securities.

Unfortunately, the increased market uncertainty which was especially aimed at financial services issuers made issuing such certificates cost prohibitive.

We now anticipate issuing $500 million of capital in the form of convertible preferred securities.

To accelerate the building of capital and lower the cost of issuing such convertible securities the board announced yesterday a 50% reduction in our common stock dividend to $0.1325 per share or $0.265 per share effective with the July 1st dividend payment.

We know this is painful for our shareholders.

Even though we believe that our revised targeted level of 2008 earnings which I'll cover in a moment, could continue to support our previous dividend level, the uncertainties of the current environment demand that we proceed cautiously and conservatively with capital.

We look forward to resuming dividend increases and the market stabilize and our performance improves.

This dividend reduction is a prudent decision to make in these times.

Today we're reducing our 2008 full year earnings estimate to $1.45 to $1.50 per share.

This decline from our prior guidance primarily reflects several factors.

First, the fact that first quarter earnings came in a bit lower than expected.

Second, a higher provision expense.

Third, a lower net interest margin that assumed in our previous guidance, but mostly the estimated diluted impact of a planned capital issuance noted earlier, which we expect to be issued during the second quarter.

With those initial comments let me turn the presentation over to Tim to talk about credit performance and trends.

Thanks Tom.

I'd like to start with some additional discussion on the Franklin credit relationship.

As Tom noted earlier the Franklin relationship performance was consistent with our expectations associated with the negotiated restructuring.

Cash flow substantially exceeded the required debt payment and the loans continued to perform with interest accruing.

The overall bank group debt was reduced by $50 million in the quarter with the Huntington debt reduced by $30 million.

Certain provisions of the negotiated restructuring provide for more rapid amortization on a certain participant's portion of the debt.

These provisions are expected to be satisfied early in the third quarter at which point all of the restructured debt thereafter will be repaid on a prorata basis allowing the Huntington portion of the debt to begin to amortize more rapidly in the second half of the year.

The restructured interest coverage covenant was set at 1.25 times for the entire bank group debt based on a one-month LIBOR rate of 4.5% with an average spread of 238.

The bank group participated in an interest rate swap to Franklin under which the current interest rate on the significant portion of their debt has been locked at a level that at current market rates provides them approximately $25 million in lower interest cost this year.

Franklin, in conjunction with the bank group, is currently in the process of implementing a similar structure for an additional portion of the debt.

These interest rate actions provide protection against rising interest rates in the future.

As seen graphically on slide nine, Franklin generated cash flow at a consistent level over the course of the quarter.

The principal and interest components have been relatively stable in each of the last three months.

The principal repayment in particular has stabilized despite the continuing lack of available credit in the markets for subprime and Alt-A borrowers.

The OREO net proceeds show an upward trend as the pace of sales has increased in each of the last three months.

I've noticed the fact that the cash flow generated on defaulted receivables per Huntington's definition of 120 days past due contractually exceeded our expectations.

This is generally a result of [recent C] payments which we view as one of the indicators of continued solid servicing capabilities.

Our original credit assumptions contemplated a lower level of recent C payments that are currently being generated.

The sales of OREO properties are generating proceeds consistent with our expectations.

Based on our ongoing assessment of the relationship Huntington continues to maintain a reserve of $115 million or 10% associated with the Franklin exposure.

When viewed in the context of the tranches set up as part of the restructuring the reserve level that presents 33% of tranch B.

Given our expectation of the orderly repayment of tranch A over the next four to five years the coverage ratio associated with only tranch B is more meaningful when assessing the adequacy of the reserve.

As is our customary practice we will continue to evaluate the adequacy of the reserve quarterly.

Regarding the performance of the underlying collateral please refer to the Franklin Credit Management Corporation 10K report.

Subsequent performance metrics over the course of the first quarter were consistent with our expectations for performance.

Recall the earlier discussion around cash flow generated from borrowers over 120 days delinquent contract country.

In summary the cash flows being generate by Franklin are more than sufficient to meet the debt service requirements, the loans are paid as agreed with all covenants met and the performance of Franklin Servicing Group continues to meet our expectations.

In addition, Franklin is actively pursuing ancillary servicing opportunities that could provide additional cash flow sources in the future.

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

Slide 10 provides a high-level review of some key credit quality performance trends.

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.

Performing status is result of the positive repayment capabilities associated with the restructure.

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

This resulted in the significant increase in our reported nonperforming assets in the fourth quarter even though these loans are accruing interest.

As shown here our reported NPA ratio declined slightly to 4.08% and our net charge-off ratio was 48 basis points.

Due to the significant impact of both Franklin and the held for sale portfolio which are classified as nonperforming assets, we believe nonaccrual loan metrics provide better tracking of underlying trends and problem assets.

As shown on the second line of this table our nonaccruing loan ratio was 92 basis points, up from 80 basis points in the fourth quarter.

This increase was driven primarily by activity in the middle market C&I and commercial real estate segment.

Our total net charge-off ratio of 48 basis points was substantially below our full year expectation of 60 to 65 basis points.

The middle market C&I and middle market CRE portfolio net charge-offs were significantly lower than the full year expectations.

In contrast, the total consumer portfolio net charge-offs were generally higher than expectations.

We will address each of the portfolio first quarter performance compared with our 2008 full year targets on upcoming slides.

In a moment on slide 11, you will see that the increase in nonaccruing loans was primarily concentrated in the middle market, commercial real estate and middle market C&I portfolios.

The middle market commercial real estate increase was driven by continued activity in the single family home builder portfolio, which I will specifically address shortly.

The residential mortgage results reflected increase in delinquency rates, while the middle market C&I increase primarily related to smaller borrowers generally in the $1 million to $2 million exposure range with no particular geographic concentration.

As shown at the bottom of slide 10 both the allowance for loan and lease losses and the allowance for credit loss ratios have increased as a percentage of related outstandings to 153 basis points and 167 basis points respectively.

A decline in the nonaccruing loan coverage ratio is a function of newly identified nonaccruals not requiring increases to the existing reserve calculations.

The vast majority of the new nonaccruals had previously been identified as substandard loans with an appropriate allowance assigned.

Despite the decline from the prior period levels we believe that these coverage ratios continues to represent adequate levels of reserves.

Slide 11 details our nonaccruing loans and shows the other categories that add up to the total of nonperforming asset level.

On slide 12, our single family home builder portfolio at the end of the quarter totaled $1.7 billion.

The $200 million increase from the amount reported at the end of the prior quarter reflected reclassifications from other commercial real estate segments.

These reclassifications were primarily associated with smaller dollar former Sky borrowers following additional post system conversion review.

This reclassification is part of our continuing assessment review and analysis of our exposure to this industry.

We have continued to provide some asset quality metrics associated with the portfolio which we hope you find helpful.

A level of classified loans increased by $43 million in the quarter to $210 million or 12.4% of the portfolio.

The nonperforming asset level also increased over the quarter to $78 million or 4.6%.

The reserves held against the portfolio increased to 3.9%.

Given the aggressive write downs associated with loans in the nonperforming asset category the current reserve level is adequate given our expectations for 2008.

For 2008 we're expecting single family home builder losses to be in the 150 basis point range.

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

Slide 13 is a new slide and provides similar disclosure for our exposure to retail commercial real estate projects.

Analysts have expressed concern that this commercial real estate segment could be the next one to experience difficulty.

As such we thought detailing our exposure might be helpful.

This $2.5 billion portfolio includes loans booked in both the middle market and business banking portfolios.

We understand the exposure and potential risks associated with it.

In sum, as shown by these metrics it has performed well and we remain comfortable with the current and prospective performance of the portfolio.

I want to use slides 14 through 16 to review our exposure to residential secured loans, industry segments of keen investor interest and concern.

Slide 14 summarizes our residential mortgage portfolio.

We were pleased with the first quarter net charge-off ratio remained below our expected full year targeted range.

The segments of our portfolio defined as nontraditional mortgages include Alt-A and interest only products.

They have never originated any payment operation arms.

Our Alt-A exposure continued to decline and interest-only product continued to perform well.

Our exposure to arm reset risk is mitigated by our updated bureau score distribution and the fact that we serviced our own portfolio.

We have a proactive calling effort to insure all of our borrowers are aware of the impact of the upcoming reset and lost mitigation strategies are helping assist those with payment difficulties.

Turning to the home equity lending portfolio as shown on slide 15, the net charge-off ratio of 80 basis points was higher than our 2008 forecast of 65 to 75 basis points.

First quarter performance included a substantial amount of writedowns based on conservative evaluation assumptions associated with delinquent borrowers.

The housing market in our footprint remains stressed with relatively lower sales activity.

This was the driving force behind our higher levels of net charge-offs in the first quarter.

We continue to be comfortable that our policies and practices have positively differentiated us from the industry in this segment, and believe our home equity net charge-offs will peak this year and compare well to overall expected industry performance.

As we have discussed in past presentations our decision to eliminate broker originate home equity loans beginning in 2005 is a major reason for more positive view compared to what we are hearing to be general industry trends.

Slide 16 represents our home equity vintage charts which you saw for the first time last quarter.

As stated then our vintage performance continues to be within fairly narrow band and the more recent vintages showing better results than the older vintages.

Slide 17 and 18 detail our expected net charge-off outlook by portfolio.

Over overall expectation of 60 to 65 basis points remains unchanged, but we have fine tuned some of the individual portfolio estimates.

We reduce the middle market commercial real estate outlook by 10 basis points based on our first quarter performance and a detailed review of the rest of the portfolio.

The business banking outlook range was increased by 10 basis points reflecting an increased level of stress in our smaller dollar segment.

The higher than anticipated first quarter results in this segment were driven by activity in the under $100,000 aggregate exposure segment.

We have implemented a number of steps to improve our ongoing management of these borrowers and to enhance our underwriting processes.

The auto loan and lease portfolio first quarter results were higher than expected.

However, during the quarter we saw good improvement in the 60 days and over delinquency compared to the fourth quarter of 2007.

A 20% decline as of March 31st with a declining trend allow us to remain comfortable with the full year outlook.

In sum, even though first quarter performance and some segments exceeded our full year targeted range, performance was below expectations in other segments and for other segments was within our targeted range.

On balance we believe these will net out over the course of 2008 and remain comfortable with our full year targeted range at 60 to 65 basis points.

That concludes the credit discussion.

Let me turn the presentation over to Don, who will discuss our first quarter financial performance.

Thanks, Tim.

Turning to slide 19, our reported net income was $127.1 million or $0.35 per common share for the quarter.

These results were impacted by five significant items.

First, the aggregate impact of $37.5 million or $0.07 per share from the Visa IPO.

This included $25.1 million of gain resulting from the proceeds of the IPO and $12.4 million from the reversal of about half the indemnification reserve established in the fourth quarter.

Using yesterday's market price for Visa, we have approximately $44 million of unrecognized value in Visa stock and a $12.4 million reserve for future indemnification.

Second, an $11.1 million or $0.03 per share income tax benefit due to the reduction of the previously established capital loss carried forward evaluation allowance, which is also result of Visa IPO.

Third, we had $20 million or $0.04 per share of net market related losses consisting of three items, $18.8 million of negative impact from the re-evaluation of mortgage servicing rights net of hedging.

This past quarter experienced levels of volatility in the mortgage markets, including the significant expansion of credit spreads.

This volatility significantly increased the negative impact of holding mortgage servicing rights.

Since the end of the quarter and going forward, we have engaged a third party provides evaluation, analytical tools and insight or additional insight for our MSR hedging strategies.

We also had $2.7 million of equity investment losses which were offset by $1.4 million in net security gains.

Fourth, we had $11 million or $0.02 per share of asset impairment including a $5.9 million writeoff of venture capital investment in Skybus airlines, a Columbus, Ohio, based discount airline that filed for bankruptcy in early April.

Lastly, $7.1 million or $0.01 per share of merger costs.

Slide 20 provides a quick snapshot of the quarter's performance.

As previously noted our reported net income was $0.35 per share.

Our net interest margin was 3.23%, down three basis points.

We will cover this in more detail later.

Average commercial loans increased at 6% annualized base and average total consumer loans down slightly from the prior period.

Average core deposits were also down slightly reflecting seasonal reductions in the commercial noninterest bearing balances.

We had mixed the income performance during the quarters, as brokerage insurance fees were up 21% including the seasonal increase in insurance revenues.

Mortgage origination increase increased through the significant pick-up in recent activity reflecting low market interest rate.

Deposit service charge income reflected the normal seasonally downward trend, and trust income was also down slightly due to lower market value of managed assets.

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

This increase was related to seasonally higher employment taxes, occupancy costs due to snow removal and utilities, and automobile operating leases and OREO losses.

These increases were partially offset by the fact that we have now realized 100% of our targeted $115 million of annualized expense efficiencies related to the Sky Financial acquisition.

As Tim noted earlier our charge-off ratio of 48 basis points was below our full year expectation of 60 to 65 basis points.

Our tier-one and total risk based capital ratios increased slightly to 7.55% and 10.86% respectively despite a $500 million increase on risk-related assets.

Slide 21 provides a summary of many of the quarterly performance ratios.

Most of these will be reviewed in more detail later, so let's move on.

Slides 22 and 23 includes trends in both revenues and expenses.

For comparisons with the first quarter of 2007, we provided an adjustment to the merger released impact of the acquisition of Sky Financial.

Starting with revenues on slide 22, nonmerger related net interest income was down from the previous quarter and from a year ago quarter.

These declines reflected the impact of lower margin resulting from declining interest rates and from the impact of the Franklin Credit restructuring.

More on this later.

Nonmerger related fee income was up nicely over the previous year with good growth in deposit service charges, brokerage and insurance revenues and other service charge income.

The changes in mortgage and other income categories reflected the impact of the significant items noted earlier including the net loss on hedging of MSR position and the gain resulting from the Visa IPO.

The link quarter noninterest income comparison reflected a normal seasonal declines for deposit service charges as well as the impact of the significant items noted before.

The expense trends on slide 23 are also adjusted for the merger related impact of Sky Financial acquisition.

In the year over year comparison and for the impact of merger costs in both the year over year and link quarter comparisons.

Both periods show that nonmerger related expenses declined on both a year over year basis and a link quarter basis.

Looking at the link quarter change nonmerger related noninterest expense was down $31.7 million.

The significant items in both periods impacted most of this change including the Visa indemnification charge in the prior quarter and the current quarter's partial reversal of that charge.

These significant items reduced the link quarter expenses by $41.1 million.

Offsetting this reduction was $5.4 million in seasonally higher employment taxes, a $4 million increase in snow removal and utilities expense, $2.6 million in growth in automobile operating lease expenses and $1.5 million of higher OREO expenses.

Adjusting for these items are nonmerger related, noninterest expense would have declined over $4 million.

This decline was largely a result of the full realization of the merger expense efficiencies from the Sky Financial merger.

We remain focused on expenses and are still identifying additional expense opportunities and are targeting lower levels of expense for the rest of the year.

Turning to slide 24, we have provided a summary of the loan trends.

Looking at the quarter trends loan balances increased an annualized 3% driven by growth in commercial loans.

Contributing to growth was an increase in middle market commercial real estate loans reflecting permanent funding in the retail, warehouse, multi-family segment that was not related to increase in the single family home builder segment or funding of interest on existing construction loans.

The growth in middle market (inaudible) was comprised primarily of new or increased loan facilities to existing borrowers.

Consumer loans were relatively stable at the prior period reflecting good growth in automobile loans offset by continued declines in auto leases and residential real estate loans.

Comparisons with the first quarter of 2007 were impacted by the acquisition of Sky Financial.

Slide 25 provides the trends for our deposit balances.

Again focusing on the link quarter change our deposit balances up slightly with core deposits down slightly.

The core deposit decline was due to the seasonal decline in noninterest bearing deposit accounts.

The increase in other deposits primarily came from customer relationships as broker deposits were up relatively stable with the prior quarter.

Turning to slide 26, during the quarter our net interest margin came down by three basis points to 3.23%.

This decline reflected the impact of three primary items.

First, the fourth quarter included a 15 basis point hit from nonaccrual impact of the Franklin loans while they were being restructured.

Second, as a result of the restructuring of the Franklin Credit relationship we have a $400 million lower commercial loan balance and are no longer accreting a purchase accounting discount in the income.

This had a permanent negative impact of 10 basis points for the quarter.

Finally, we are asset sensitive going in the quarter and the relative cost of national market funding increased significantly.

These two issues negatively impact our margin by nine basis points.

During the quarter we added $2.5 billion of interest rate loss to mitigate the impact of any further rate cuts.

Our investment portfolio summary is provided on slide 27.

$4.3 million portfolio consists mainly of $2.2 billion of mortgage backed securities primarily agency securities and AAA rated prime CMOs.

Also had $751 million of asset backed securities including $502 million of AAA rated Alt-A mortgage backed assets, $247 million of pool trust preferred securities, and less than $3 million of net interest margin bonds, which were the primary source of our impairment charges.

We also had $716 million in municipal bonds.

Late in the quarter credit spread increased significantly on our prime CMOs and asset backed portfolios.

This increase resulted in a reduction in the market value of our portfolio of $125 million.

We have reviewed the investments with a third party to verify conclusions that market declines were not reflected of lower expected future cash flows from the securities and are therefore not permanently impaired.

However these prices were used to value the portfolio and resulted in a $70 million after tax reduction to other comprehensive income component of equity.

Slide 28 shows the trends in our capital ratios.

Our risk based capital ratio increased slightly from the end of the prior quarter reflecting the benefits of the earnings retained during the quarter partly offset by an increase in our risk-related assets.

Our tangible equity ratio declined by 16 basis points during the quarter, 14 basis points of this change was related to the $70 million after tax impact of the lower security values mentioned earlier.

Slide 29 provides additional color on our capital position.

First, with our announced dividend reduction and as compared with our revised $1.45 to $1.50 earnings per share target, our run rate payout ratio is expected to decline to 35% to 37%.

This is appropriate given the current environment and our need to build capital given the uncertain economic environment.

Internal capital generation rate improved from 5% to 6%.

Shown next are our regulatory capital ratios.

Each regulatory capital ratio was well above the regulatory defined well capitalized levels.

Finally, our plan $500 million capital issuance is expected to increase these capital ratios by approximately 100 basis points.

Turning to slide 30, we provided additional detail to help analyze our earnings guidance.

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 when the timing and the financial impact is uncertain until the impact can be reasonably forecast.

That excludes any unusual or one time items as well.

We are adjusting our 2008 earnings guidance to $1.45 to $1.50 per share.

We anticipate the economic environment will continue to be negatively impacted by weaknesses in residential real estate markets.

It continues to be our expectations that any impact will be greatest among our borrowers in eastern Michigan and northern Ohio markets.

And however interest rates may change we expect to maintain a relatively neutral interest rate position.

Given this backdrop, here are our outlook comments.

A full year net interest margin around [320].

Full year average total loan growth in the low single digit range off 2007 fourth quarter level with average commercial loan growth in the mid-single digit range and average total consumer loans being relatively flat reflecting continued softness in the residential mortgage and home equity loan grown.

Full year average core deposit in the low single digit range off the 2007 fourth quarter level.

Full year noninterest income growth in the low single digit range with -- from the annualized 2008 first quarter level adjusted for seasonal performance and the significant items noted on slide 19.

Full year noninterest expense level down from the annualized 2008 first quarter noninterest expense level again adjusted for seasonal performance and other significant items.

Regarding credit quality performance we anticipate full year net charge-offs to be in the 60 to 65 basis point range.

Nonaccrual loans on an absolute and relative basis are expected to increase modestly.

Lastly, we anticipate moderate increases in the loan loss reserve ratio from 1.53% level at March 31st through June 30th, with modest increases thereafter throughout the end of the year.

When considering our earnings guidance keep in mind the seasonal impact of the various income statement items including our net interest income was down about $4 million -- $4 million lower than in the first quarter due to the day count.

Our deposit service charges were $9 million lower due to seasonality, and expenses were $9 million higher due to certain seasonal impacts including employment taxes and occupancy costs.

Also our outlook for provision expense would assume modest quarterly increases in the allowance throughout the year and not the $40 million increase reported in the first quarter.

Regarding capital we're assuming the capital issuance mentioned earlier and we're also assuming no share repurchase activity.

Again all this results in a targeted reported EPS for 2008 earnings of $1.45 to $1.50 per share.

Let me turn the presentation back over to Tom.

Thanks Don.

We covered a lot of ground in a short period of time.

Let me recap the key points we feel are important our investors understand.

Reported earnings of $0.35 per share included a net positive impact from $0.03 from significant items with underlying earnings therefore coming in just below expectations mostly due to higher provision for credit losses and margin compression.

Second, we feel pretty good about credit performance and prospects.

Not a great deal has changed in our outlook after three months actual results and a thorough look ahead to remainder of 2008.

Third, our Franklin relationship is doing just fine.

We think that will continue to be the case.

Fourth, our primary businesses are performing well.

Loan and deposit growth was reasonable as was our fee income and expense performance after giving consideration to seasonal factors that generally lowered fees and raised expenses.

Going forward and consistent with our view at the beginning of the year, we are not assuming any relief from the economic environment for the foreseeable future.

This is going to be a tough year.

Given this environment the dividend reduction was a hard but correct we feel decision.

Our reduced earnings estimate of $1.45 to $1.50 reflects the first quarter's performance and assumes continued margin pressure, higher provision expense and a negative impact from planned issuance of diluted capital securities.

We know this new target range is above the current analyst consensus.

Nevertheless the primary assumption difference between our outlook and that of analysts seems to be in the area of credit quality performance expectations.

Analysts are generally more bearish.

Nevertheless we firmly believe in our assumptions.

Lastly, we remain focused on delivering results and rebuilding value for shareholders.

As I stated three months ago we know only by delivering results will we regain credibility with investors.

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

Operator, we're ready to take questions.

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

And our first question comes from the line of Matthew O'Connor with UBS.

Two questions.

First, Don, you mentioned on the expense management side that expenses would trend down from here and you're looking for other ways to reduce cost.

I was just wondering if you could size that up.

You've I think done a pretty good job managing expenses so far, I'm just wondering how much left there is.

We believe our core level of expense after significant items in the first quarter about $370 million, that includes about $9 million worth of what we term to be seasonal issue associated employment taxes and seasonal snow removal.

So we're assuming that adjusted level expenses will be relatively flat to slightly down from that.

We're continuing to focus on areas for additional efficiency improvements by taking a look at where our various components compared to either peers within Huntington or outside of Huntington and continue to push on those opportunities.

Matt, let me just -- this is Tom, let me just say that we as a team recognize when revenues are under pressure and when charge-offs, credit costs in general are elevated expenses need to come down.

So we are highly motivated inside the organization turning overall kinds of rocks.

We have no interest in interfering with our ability to execute against our business model of local bank with national resources, local decisioning, or our value proposition of service excellence.

But given that, there's still a lot of expense that the team understands can be taken out and we're squarely focused on accomplishing that and that's built into our earnings forecast for the balance of the year.

Okay, that's helpful.

And then, Tom, just a separate question here that you often get asked with respect to franchise value.

I've spoken to two of your competitors in recent months here regarding your franchise that they do view as being very valuable.

And I'm wondering how you think about things in light of the capital raise, dividend cut, and just more difficult environment overall.

Are you more up to consolidation now than in the past?

Always nice to know that others share our point of view about the value of the franchise, so we appreciate the feedback there.

Just as a reminder, while we certainly -- let me say this.

While we are quite comfortable with our own outlook for the rest of the year, we are nervous about what the future looks like on a macro basis.

How much worse will the debt markets get or how long will they be in turmoil, how bad will the economic downturn be, etc.?

None of us has ever lived through any of this.

So we're trying to be as cautious as we can, which brought us to the capital raise position.

As it relates to the future, our feeling continues to be we as a team have to demonstrate to our shareholders who certainly have not been extraordinarily rewarded to date, that we're able to execute well and deliver value for them.

We believe that's going to be the case.

We believe that the first quarter and our outlook for the rest of the year in contrast to the experience of others would indicate that to be the case, and we recognize people have to see the results before they buy into that.

In the event that we're not able to execute against that, then we have to consider a wide variety of alternatives, because our commitment is to shareholders, but we believe we're on the right track.

We believe that there are better days ahead and we believe that the conviction we had underlying the purchase of Sky will remain, and that is we have got a slow growth market and value can be created for shareholders by combining, taking costs out, enhancing customer convenience rather than going to other parts of the country.

So we hope to once this stage of the credit cycle passes to continue on that path.

Okay, thank you.

Our next question comes from the line of Scott Siefers.

Just had a couple questions on capital levels.

What is -- I know you guys have historically looked at the tangible common equity ratio.

What I guess following the capital raise are the numbers that you're going to be looking at most heavily internally?

Regulatory ratios aside, where would this put you relative to those numbers?

And then I guess just in terms of the size of the capital raise I know it was much larger than you had suggested a couple months ago.

But by the same token I guess what led you to believe that $500 million was the appropriate number, I guess why not maybe go up a little more than that even?

Scott, this is Tom.

Let me handle the last part of your question, then we will ask Don to be involved with the first part.

I don't know that there's a science aspect to this.

We just have been so frustrated about our ability to access markets for our nondilutive securities even at lower amounts that we felt like we were faced with a choice.

We could issue this kind of security now when there is a demand we believe and end up having too much capital down the road if there aren't -- if conditions improve, or we could wait and not do it and then hope that the markets open up for nondilutive capital later and hope that we are able to access when the needs arise.

We have felt that the far lesser risk was to move forward today.

As far as the amount is concerned, I mean, we are trying very much to balance our caution with regard to just protecting ourselves for the future versus dilution to existing shareholders and we felt that the $500 million target got us to that relatively acceptable balance point.

So I hope that helps.

Yes.

As far as the capital levels as you mentioned before, we previously focused on common tangible equity.

I'd say with the issuance and with the high equity content it provides, we will probably focus on tangible equity.

So this issuance would be included in there.

And so our tangible equity ratio would increase by almost 100 basis points, bringing it very close to the 6% tangible equity ratio.

If you take a look at the other factors that we will consider it will be tier one and total capital ratios with the holding company.

With this issuance we'd be north of an 850 tier one ratio which we view as very, very strong.

The total capital ratio would be very close to the 12% threshold.

And both of those would be at or slightly above what our targeted ranges would be for those levels long term.

Again, as Tom said, that we think it's probably more prudent to have extra capital than to be running the risk that we issue too little, and wish we'd issued more later.

Okay, thank you.

Our next question comes from the line of Brian [Foreman] with Goldman Sachs.

Morning, Brian.

Same point about capital you just made, I mean, is everyone, regulators and rating agencies, comfortable with the chance of a prolonged period where you can have 8.5% tier one, , 6% tangible common, but I mean tangible equity, but tangible common could be 5% give or take for a couple quarters

Brian, that is Tom Hoaglin.

Are you asking have the regulators signed off on this approach?

Yes, exactly.

Is there any scenario where the tangible common ratio would need to be raised via accessing the capital markets, or is it basically a situation where we just forget about tangible common for a while and focus on tangible equity including preferred and tier one?

As far as tangible common that was more of an internal Huntington ratio that we focused on.

If you look at the regulators they look at tier one and total and tier one leverage ratio.

And we're very well positioned for that especially with this $500 million capital raise.

As far as rating agencies they would have their own measures as far as capital adequacy.

When we talked before previously we made an announcement to the street saying that we wanted to raise $250 million to $300 million in capital.

Those conversations were shared with the regulators and rating agencies with no more definitive plans or commitments beyond that.

And so we don't believe we will have any negative reaction at all as far as capital and it should be positive as far as the impact for the capital raise.

And the actions we took as far as dividend would help support that capital level even more.

To state the -- what probably is the obvious, I think in these times banking regulators are interested in more capital in the entire system.

So there's nothing of a Huntington specific concern here at all.

I think people are just appropriately nervous about what might happen somehow albeit ill defined in the future and making sure systemic capital levels are accurate.

Thank you.

Then I know auto isn't necessarily the biggest issue facing the company, but if you look at the losses they're up in a quarter where they're seasonally usually down.

Then on page 28 you've got growth at 34% annualized with a footnote about an impact from loan sales.

Can you just kind of give us more color on the credit and then is that footnote imply you tried to sell loans and weren't able to?

No, the -- let me go in order.

The first quarter is not typically a seasonally down quarter.

Fourth and first are high, second and third are low.

It was a little higher than we thought it would be.

I'm not saying it wasn't, but we remain comfortable with our full year outlook for the auto portfolio.

Yes, let me just jump in there.

As we reported a quarter ago, fourth quarter auto charge-offs were a bit elevated because of the impact of the Sky -- bringing on the Sky portfolio, which was not what we would want it to be in the way of documentation completion, and we had some higher charge-offs as a result of that.

Some of the impact in the first quarter continue to be felt from the Sky portfolio.

The delinquencies -- delinquency trends in the overall auto portfolio are very positive and we have a great deal of positive that the charge-off rates will fall considerably in the coming quarters.

Tim.

Yes.

The comment on [5/28] about loan sales in prior years, 2005 and 2006, we had a flow sale program that we talked about publicly.

When that program ended we were -- we maintained all of our production on our balance sheet.

What we had been selling had a higher risk profile based on the rate.

So that has an impact, but -- and so there's nothing to do with we tried to sell and couldn't.

We think our loans would stack up pretty nicely compared to any of the activity that's going on in the market today actually.

Good point, Tim.

We were selling off about half of our production, and so that's the comment I was getting at, with not selling off half of our productions, our balances will show a little bit artificial growth because we're retaining that on balance sheet as opposed to off balance sheet.

Okay, thank you.

Our next question comes from the line of Terry McEvoy with Oppenheimer and Company.

Thanks, good morning.

Hi, Terry.

Earlier in your discussion when you talked about the reason why you were raising $500 million versus the $250 million and $300 million, increased economic and market uncertainty.

So I was a little surprised to see you didn't raise your full year '08 guidance or outlook for net charge-offs, seems to be one statement says that number might be higher than you felt in January when the first capital raise was announced.

So I guess the question is what gives you the confidence that charge-offs are going to stay within that initial range provided three months ago?

This is Tom, Terry.

And again let me underscore nothing about this capital raise is being done in anticipation of a deterioration in Huntington's credit.

In contrast to what's affecting a number of others.

What gives us as much confidence as you can have in this kind of environment is a very thorough review portfolio by portfolio by portfolio of -- on the commercial side, names, values, exposures, likely deterioration, and on the consumer side, things like delinquency trends, credit characteristics.

Tim, jump in here.

Yes, on the consumer side we're looking at updated FICO scores, we're looking at where the current vintages are performing vis-a-vis prior vintages, those kinds of things.

As we talked about in the credit discussion some of the portfolios were a little higher than our ranges, a couple were significantly below and a couple were right on top of it.

And in aggregate looking forward through 2008 we feel comfortable at 60 to 65.

We recognize that there is a -- not a broad acceptance of our charge-off estimates for the year.

There wasn't a quarter ago and we came in at 48 basis points.

We haven't changed our overall full year and there may not be a broad acceptance of it today.

But with three months actual under our belt and with three months more review of what the next nine months looks like we continue to be comfortable with that 60 to 65 basis points albeit having gotten there shifting around as we said earlier some of the individual components in terms of charge-off levels.

And just one more question.

In order to preserve the franchise value that was brought up earlier what are you doing internally to just manage the disruption cutting the dividends, stock price, etc., to make sure the people in the franchise remains intact and doesn't get distracted through all the noise?

Well, I take it you think there's been some internal disruption.

We haven't seen any internal disruption.

And our people are enthusiastic, they're squarely focused.

I mean they read in the media headlines about the industry just like anybody else.

So they have kind of natural anxieties and they get asked by customers questions about financial service sector in general and Huntington in particular.

But I think they are moved forward with the kind of confidence that we feel.

So believe it or not we have not experienced any disruption internally at all.

It doesn't mean that it's easy to execute, it's a tough environment.

But we haven't lost focus.

Appreciate it, thank you.

Our next question comes from the line of Bob Hughes with KBW.

Hi, Bob.

Bob, your line is open.

Our next question comes from the line of Tommy Davis with Stifel Nicolaus.

Good morning, Don.

Good morning, Tim.

Good morning.

Don, you took a pretty big core margin hit from repricing here this last quarter.

What percent of the loans right now are liable or prime based, and are you considering steps here to mitigate that sensitivity?

Yes, we have already taken steps to mitigate that sensitivity that we were more asset sensitive going into the quarter than what we like to be.

We did increase our interest rate swap position by $2.5 billion to where we're now extremely asset and liability neutral as far as repricing.

Our loans are a little more than 50% variable, either LIBOR or prime based, and we continue to model that out in the performance of those loans and the repricing characteristics compared to our deposit repricing assumption.

Okay.

And post the evaluation allowance adjustment I wonder, what's the size of the servicing portfolio right now, what's the MSR as a percent of that servicing, of the loan servicing?

I guess a more broad question maybe for Tom, is this a business you want to be in long term?

Let me take while we're looking for the numbers here, let me take the last part of that question.

We as a bank that prides itself in being a local bank, we want to make sure that we offer first mortgage lending, first mortgage borrowing opportunities to our customers in each of our markets.

And so we value the continuing relationship with our customers that servicing represents.

What we don't value so much is servicing for noncore banking customers.

And so from time to time as market conditions allow, we pair the portion of our servicing portfolio that we consider to be not core.

Maybe that's the best answer I can give you.

Okay.

As far as the size of the mortgage servicing asset on our balance sheet it's $192 million.

That's on a base of loan service for others at $15.1 billion, which represents about 1.27% of the service portfolio.

Great, Don.

Tim, I can't let you get away here.

Unquestioningly the Michigan and Ohio markets have deteriorated over the last year or so and yet it looks as if the economic component of the loan loss reserve is unchanged.

And I just wonder if you could give us thoughts on that.

We continue -- we have used the essentially the same methodology over the last couple years and have been consistent in our factors.

I think there has been some deterioration or some change in the economic components if you look over the course of third quarter, fourth quarter '07 to first quarter '08, the economic reserve has gone from 17 to 19 basis points, so that is an increase.

I think part of the issue is Ohio and Michigan have been lower economic growth states for quite a while, certainly compared to the nation.

And so while the national numbers may be changing pretty dramatically, Ohio and Michigan were already at a relatively low level so the numbers are not moving maybe as much as you might expect.

The other thing if you're looking prior than the third quarter of '07 when we acquired Sky, we basically took the unallocated reserve at that time and put it into our economic reserve.

And so the relative change may have informed that analysis as well.

Okay.Thanks.

Our next question comes from the line of Bob Hughes with KBW.

Question on your some of your credit assumptions.

I noticed in the text that you talked about moderating consumer charge-offs in the second half of the year, particularly auto and home equity.

And I want to dig into both those a little bit.

Number one, I think we have seen consistent declines in used car values via the Mannheim Index and you indicate you're seeing signs those are strengthening.

I wonder if you could clarify where you're seeing that.

There is a very consistent pattern on an annual basis associated with those values and typically you see an increase in values in the "spring selling season" or in anticipation of the spring selling season.

That was clearly delayed this year, so in prior years we start seeing the increases maybe in February.

We did not see it and that's I think what you're referencing.

What we are starting to see is maybe that becomes an April, May issue as opposed to historically a February issue.

Okay.

And is there reason to believe there are some temporary issues that cause that delay?

In my mind with increase stress on the consumer and skyrocketing oil prices it's maybe premature to assume that used vehicle values are going to rebound.

Well, rebound -- I think they're going to improve.

Consumers are much more likely today to buy a used car than they were a couple years ago.

That's one factor that's out there and that's representative across the industry, it's representative in what we do and what we're originating comparing today versus a couple years ago.

So I think it will -- I think they will come up.

I'm not saying they're going to go up to levels that we saw a couple years ago, but they're certainly not going to stay at the level they have been.

There is definitely a spring selling season.

And, Tim, as far as our charge-offs for auto, it's also more based on the fact we're seeing lower delinquencies as opposed to just based on the used car value as well, as far as our outlook for lower charge-offs.

Okay.

You would see -- seasonally you would see lower delinquencies.

Is that correct?

Yes.

You would say your delinquencies I know you reference your 60 plus delinquencies being down 20% or so from December 31, but how would that compare to prior years of your portfolio?

There is an absolutely a seasonal decline, probably a little stronger in this particular situation than in past quarter comparisons.

Okay.

But you wouldn't necessarily say that you're assuming that loss severity in auto eases over the course of this year then per se?

It will ease compared to the severity in the fourth and first quarter.

It will not be all of a sudden dramatically lower than certainly what we're expecting.

Okay.

Then in home equity I noticed that you talked about losses moderating in the second half of the year, I guess in part owing to runoff in the broker book that's only about 10%.

And then the other piece is loss mitigation program.

I wonder if you could shed more light on what that program consists of.

I'll try.

Certainly we have had loss mitigation programs in place for quite a while.

We became extremely focused on those activities in late fourth quarter and early first quarter of 2008.

And I think we're starting to see some real traction in those actions in the home equity world.

It consists of a wide range of possibilities from working out repayment or different repayment strategies with individual borrowers, taking short sales in certain circumstances that makes sense, completely restructuring loans in others, wrapping the seconds into a restructured first given the current interest rate environment.

All of the above and others are in play today.

It's not something that you can say we will do a lot of work in the month of March and that will have immediate benefit.

What we're working on today would be loans that theoretically would be in line for charge-offs in the third and fourth quarter and that's why we're talking about seeing a moderating number in the second half of the year.

Okay.

Are you guys cutting home equity lines at all?

That's one of the things that we're doing on a proactive basis for a portion of the portfolio that we deem high risk performance based on information we acquire about the consumers.

Okay.

And then one final question if I may.

$0.35 in the first quarter to assumes a run rate of $0.37 to $0.38 over the course of the year.

I guess in part some of that's related to the assumption that provision expense will go down in the second half.

But to me it seems like still a little bit of a stretch just viewed in those simplistic terms.

Given the margin decline in your guidance, 15 basis points accounts for about a $0.13 differential, what's going to help you get there recognizing that you could see some higher provision costs at least in the second quarter?

Is the trajectory actually going to be pretty lumpy, low in the second quarter, then considerably higher in the third and fourth based on lower provisioning, is that how you're envisioning?

Bob, keep in mind too as far as our earnings in the first quarter, it is in fact a bi-seasonal item that the day count cost about $4 million as far as our net interest income.

Okay.

Our deposit service charge about $9 million lower than in the first quarter than they are in any of the other quarters because of seasonal issues.

And then we also had about $9 million of higher expenses associated with the employment taxes and also occupancy costs.

Our snow removal costs alone were almost $3 million for the quarter, and hopefully we won't get a lot of snow in the second through third quarter here.

Right.

So those three items represent about $0.04 a share.

So from that you're right that we would expect our provision expense be lower in the second half of the year than what we're expecting for the first half of the year.

And so there should be some improvement in the provision expense in that time period.

But keep in mind, too, that our first quarter our provision expense exceeded charge-offs by $40 million.

Even if we would have had 60 basis points in charge-offs instead of the 48 that would only eaten up $12 million of the $40 million increase.

So we still had healthy build to our allowance which we would not view as something that would be recurring, especially in the second half of the year.

Okay.

Alright guys, thanks.

Operator, this is Jay Gould.

We're running up against some time constraints.

So we can take one more caller.

Can we do that, please?

Yes, sir.

Our last question comes from the line of Jeff Davis with FTN Midwest.

Thanks, but my questions have been covered.

Great.

Okay.

Operator?

Yes, sir.

I would like to thank everybody for participating.

I know that there are still some people with questions, so please give me or Jack a call.

We will do all we can to respond to those questions.

Appreciate your forbearance with our having some time constraints this morning.

Thank you so much.

Bye.

And this concludes today's conference call.

You may now disconnect.