Huntington Bancshares Inc (HBAN) 2008 Q2 法說會逐字稿

Good afternoon.

My name is Mindy, and I will be your conference operator today.

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

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

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

(OPERATOR INSTRUCTIONS).

Thank you.

Mr.

Gould, you may begin.

Thank you, Mindy and welcome everyone.

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

Copies of the slides we will be reviewing can be found on our website, Huntington.com, and as usual this call is being recorded and will be available as a rebroadcast starting at 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 for playback or should you have difficulty getting a copy of the slides.

Slides 2 and 3 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 non-GAAP financial measures where we believe it helpful to understanding Huntington's results of operations of financial position, where non-GAAP financial measures are used, the comparable GAAP financial measure as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentation in its appendix, in the press release, in the quarterly financial review supplements to today's earnings press release, all of which can be found on our website.

Today's discussion, including the Q&A period may contain forward-looking statements and such statements are based on information and assumptions available at this time and are subject to change, risk and uncertainties which may cause actual results to differ materially.

We assume no obligation to update such statements.

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

Turning to today's presentation and slide 5, as noted participating today are Tom Hoaglin, Chairman, President and Chief Executive Officer, Don Kimble, Executive Vice President and Chief Financial Officer, and Tim Barber, Senior Vice President of Credit Management.

Also present for the Q&A session are Mike Cross, Executive Vice President and Senior Lending Officer, and lead on the Franklin Credit relationship, and Nick Stanutz Senior Executive Vice President oF Dealer Sales.

Let's get started.

Over to you, Tom.

Thank you, Jay.

Welcome everyone.

Turning to slide 6, I'll begin with my usual assessment of second quarter events and performance overview, which we think were good, given the environment.

However, we'll spend almost all of our time discussing two issues, credit quality and capital.

We've added a number of slides to help you better understand our assessment of these two key areas.

Tim will begin with a review of credit trends and the detailed discussion of our key loan portfolio segments.

Don will follow with a much abbreviated earnings performance review and spend most of his time discussing our capital position and expectations.

He will conclude with an update of our 2008 outlook.

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

Turning to slide 7, reported earnings per share were $0.25.

This included a net $0.03 negative impact from significant items which Don will detail for you.

But in sum, this primarily represented merger and restructuring costs associated with our continued focus on improving expense efficiencies.

Since credit and capital are the areas of most interest these days, let me begin there.

With regard to credit quality performance, it was basically as advertised in our June 19th preannouncement.

Net charge-offs were 64 basis points, and we removed the $762 million Franklin tranche A loans of non performing asset status.

Non accrual loans increased 42% with most of the increase in the single family home builder segment of commercial real estate loans and certain commercial and industrial loans to companies aligned with the residential development sector.

Our period-end allowance for credit losses was 1.80%, up 13 basis points, reflected a provision for loan losses that exceeded net charge-offs by $55.6 million.

Our tier one and total capital regulatory ratios ended the quarter at 9.03% and 12.31% respectively, up 147 and 145 basis points from the end of March.

These significant increases primarily reflected the benefit of the $569 million of convertible preferred capital raised in April, retained earnings and actions taken to strengthen the balance sheet.

Regarding other financial performance results, our net interest margin improved six basis points to 3.29%.

We saw a good loan growth especially in commercial loans.

Consumer loans increased slightly, but would have increased more had we not elected to sell mortgage loans.

While total average core deposits declined, this reflected our strategic decision to let higher priced, non-relationship collateralized public fund deposits run off.

Overall, we saw good growth in demand deposit balances, our most important deposit segment.

The quarter saw strong linked quarter growth.

In the key fee income activities of service charges on deposit accounts, other service charges, and core mortgage banking income.

The growth in the first two reflected a seasonal rebound from the first quarter and continued underlying growth.

The growth in core mortgage banking income reflected higher secondary marketing and servicing fees.

And lastly, excluding the $7.3 million increase in merger and restructuring costs, expenses were flat with the first quarter.

After adjusting both periods for expense-related significant items and operating lease expenses, second quarter expenses were down 4% and on this same basis, our efficiency ratio was a much-improved 54%.

I'll let Don elaborate on these overview comments later in the presentation.

Let me juice the next slide to provide my assessment of our situation and prospects.

First in the area of credit, it's important for our shareholders to know that our expectation is that the weak economic environment will remain with us well into next year.

This environment will continue to put pressure on our customers and as a result, non-accrual loans are expected to continue to rise for the foreseeable future.

We think any increases will be manageable, and we'll continue to be centered in our commercial real estate portfolio in loans to single family home builders as well within our C&I portfolio related to businesses that continued -- that support residential development.

We think an increase in consumer related non-accruals will be more measured.

Tim will outline why we think that will be the case.

Not surprisingly, therefore, we expect to continue to build our allowance for credit losses and that the ACL ratio by year-end could increase 10 to 20 basis points to 1.90, 2% range.

Our full year net charge-off targeted range is now 65 to 70 basis points.

On June 19th, we said we thought this would be at the high end of our previous target range of 60 to 65 basis points, but over the last 30 days, our most recent forecasts show this increasing to just above that targeted range, though this range remains well below the expectations of many of our peers.

Regarding capital, it now appears that our $569 million capital raise turned out to be the right amount and was certainly at the right time.

It had the desired effect of increasing our regulatory capital ratio significantly.

It is our expectation that these ratios will continue to build from here through retained earnings.

As such, no additional capital actions are contemplated.

Lastly, we're reducing our full year earnings target to $1.25 to $1.35 per share.

This reduction for our previous targeted range of $1.45 to $1.50 reflects higher expected loan loss reserve building as our other 2008 full year financial performance assumptions remain basically in line with our prior expectations.

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

Thanks, Tom.

Slide 9 provides an overview of our credit quality trends.

First, as Tom noted earlier, we moved the tranche A associated with Franklin Credit out of non-performing asset status.

This decision was made based on the performance of the restructured credit over the past six months.

The change in treatment resulted in a $762 million reduction in non-performing assets.

It is important to remember that the entire Franklin Credit relationship continues to perform as agreed, and remains on accrual status.

We did experience a 42% increase in non-accruing loan balances that I will detail in a future slide.

Our charge-off ratio was within our expectations and again, I will provide details on a portfolio level basis later in the presentation.

Our 90 day and over past due levels were lower across the board in the second quarter, after four consecutive quarters of an increasing trend.

As Tom noted, the economic environment continues to be very difficult, but we were generally pleased with this delinquency performance.

As the environment has changed, we have built our reserve levels a appropriately, ending the quarter at 180 basis points.

The non accrual coverage ratio has declined to 138%, however we continue to view the reserve level as adequate based on our overall assessment.

Slide 10 provides the detail associated with the increase in the non-accruing loan levels.

As you can see, the majority of the increase was centered in the C&I and commercial real estate portfolios.

The C&I increase was a function of a number of small relationships as only one was over $10 million.

The activity was not centered in any one specific region, but was more concentrated on a relative basis in the northern Ohio and Southeastern Michigan areas.

On the commercial real estate front, we did have one $30 million new non-performing loan identified in the commercial real estate retail segment.

The remainder of the activity was spread across our footprint and consisted of smaller dollar relationships.

It is important to remember that as we identify new non-accruals, we conduct a formal impairment test that could result in either additional specific reserves or a write-down of the balance.

A significant portion of the increase in the allowance for credit losses noted on the previous slide was a result of this impairment testing process.

As such, we are comfortable that we have taken appropriate action regarding the valuation of the new non-accruals.

The residential real estate segment showed an increase in the quarter, as we continued to actively recognize the risks in the portfolio.

The home equity number was little changed.

Turning to slide 11, the Franklin Credit relationship continued to perform as agreed.

The monthly cash flow has been consistently above the required debt service.

For the six -- I'm sorry, for the first six months, cash flows were $47 million above the required debt service and general and administrative expenses, allowing for additional principal paydowns of the total bank group debt.

As you can see, the June cash flow was below the prior period levels as a result of a decrease in principal payments.

The May results included an unusually high level of principal payments, while June was obviously lower.

We do not believe that there is a downward trend from the June level, and remain comfortable that our credit assumptions regarding the overall portfolio performance are appropriately conservative.

As a reminder, we have charged off or forgiven $308 million and have an additional reserve of $115 million on our portion of the debt.

Given the current market dynamics, we fully expect the performance of the underlying collateral to continue to be effective.

The Franklin servicing platform has been operating well.

Regarding commercial real estate, we did show significant portfolio growth for the quarter.

As noted on slide 12, two-thirds of the increase was a function of additional loans to existing borrowers.

The credit profiles associated with our new borrowers are strong, reflecting the commitment to establishing relationships with the top developers in each region.

Virtually all of the loan growth was centered in traditional income-producing property types, such as multi-family, office and warehouse.

We did no new lending in the single family builder segment.

Slide 13 provides some additional detail on the single family builder segment.

Please note the granularity of the portfolio with only 15 projects over $10 million in outstandings.

The asset quality performance of the portfolio does continue to show the impact of the difficult market.

However, our loss levels remain manageable and they are clearly not expected to reach the levels announced recently by some others in this business.

Again, this is a very granular portfolio, located in our core market footprint with limited exposure to national production builders.

On slide 14, we show the four quarter trend of the related primary asset quality metrics.

We have clearly increased the reserves associated with the portfolio in reaction to the asset quality changes and anticipate further increases in future periods.

Slide 15 and 16 detail our exposure to the retail segment of the commercial real estate portfolio.

While the overall portfolio continues to perform well, as noted earlier, one $30 million credit significantly impacted the delinquency and non-accrual levels in the current quarter.

This credit was identified as a classified loan in prior periods and had been paid as agreed until the second quarter.

Regarding the C&I portfolio, we have already discussed the increase in non-accrual loan levels.

The loan production was heavily concentrated in additional loans to existing borrowers, as we continue to focus on serving our ideal Huntington clients.

Line of credit utilization was up slightly during the quarter, but was not a driver of the increase.

Turning to slides 18 and 19, we have experienced excellent origination trends through the first half of 2008 in our indirect auto portfolio.

Given some other recent announcements regarding this sector, we thought it important to clearly differentiate our portfolio performance and strategy from the industry.

On slide 19, we have provided a seven quarter view of our portfolio performance, origination quality and vintage performance.

As the portfolio performance changed over the course of 2007, we were making adjustments to our underwriting processes and modeling approach.

As you can see, we increased our average FICO score and reduced the level of less than 670 FICO borrowers.

We also increased the usage of our custom score card to further differentiate the risks, even within the higher FICO score ranges.

The expected cumulative loss calculation has been very predictive, and you can see the material change evident in the 2008 originations.

Remember that while 2008 represents an improvement, the 2007 originations will compare favorably to the industry.

We simply felt that even further improvement was prudent for our portfolio, given the changes in the economy we saw back in mid-2007.

The last line on the chart is the most important for understanding the impact of our recent originations.

Despite a worsening economy, the delinquency rate associated with loans that have been on the books for less than six months has declined dramatically over the past two quarters.

The 40 basis points compares favorably to the 2007 and 2006 levels.

Slide 20 outlines the origination strategies we have employed over the years associated with residential real estate mortgages and home equity loans.

As it relates to performance comparisons with the industry, I have presented them in order of importance.

Our exposure is limited to our footprint with the vast majority originated directly by a Huntington banker, not through the broker channel which we have said before we de-emphasized beginning three years ago, and we have generally focused on traditional product structures.

You have heard this message in the past but it bears repeating as we continue to believe that these decisions will allow us to report better than industry credit quality results throughout this credit cycle.

Slides 21 through 23 provide some detail associated with our home equity loan portfolio.

As you saw, our second quarter charge-off results were 76 basis points, actually lower than our first quarter results.

The consistent focus on lending to high quality borrowers, combined with our strategy decisions discussed earlier, are primary reasons for the relatively low result.

Relating to the geography impacts, slide 22 provides a breakdown by state.

You can clearly see that the Michigan portfolio has struggled, and we have reflected that in our origination strategies.

The Indiana performance is more a function of past originations and acquisitions than an indication of the economy in the region.

We believe that our current origination strategies in Indiana are appropriately designed to take advantage of one of the stronger markets in our footprint.

The bulk of the portfolio is in Ohio, with a particular concentration in central Ohio.

Our performance in Ohio is clearly more positive than industry level reports for the state as a whole.

Slide 23 shows the cumulative net loss rates out to 60 months.

As you can see, our highest vintage loss will likely be in the 2% range, making it impossible for the overall portfolio to perform anywhere near some of the national forecasts of 4 to 5% and/or stress tests being conducted and published.

We continue to invest a significant amount of time and energy in the development of origination strategies associated with home equity lending, and tracking the performance metrics.

At this point, we expect our performance to be significantly better than the industry as a result of the origination strategies employed over the past few years.

slide 24 provides some detail on the residential mortgage origination and performance.

We continue to be comfortable with our full year loss estimates for the portfolio.

Slide 25 and 26 provide detail on the 2008 charge-off outlook by segment.

As noted earlier, we have increased our full year net charge-off targeted range from 60 to 65 basis points as of the end of the first quarter, to 65 to 70 basis points, representing about 265 to $285 million.

As in any type of forecasting, some individual portfolio assumptions have changed.

We now have the benefit of second quarter performance behind us and the remaining outlook period is shorter, which brings higher degree of visibility to the forecasts.

Reviewing what has changed by portfolio, our commercial net charge-off targeted range remains unchanged at 55 to 65 basis points.

Our commercial real estate targeted range has been lowered to 70 to 90 basis points from our previous range estimate of 80 to 100 basis points.

Both the C&I and commercial real estate changes include a significant amount of individual loan level analysis.

The results do not indicate any significant deterioration in the portfolio, as commented by some of our peers.

In fact, our original commercial real estate assumptions have proved to be conservative.

Our auto loan and lease net charge-off range has been increased to 95 to 105 basis points, from the 80 to 90 basis point range.

This change is primarily driven by the loss severity impacted by rising gas prices.

Targeted home equity net charge-offs have also increased to 75 to 85 basis points, from 65 to 75 basis points.

And lastly, our residential loan net charge-off targeted range has increased to 30 to 40 basis points from 25 to 35 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 27, our reported net income was $101.4 million, or $0.25 per common share for the quarter.

These results were impacted by three significant items.

First, we had $14.6 million or $0.03 per share of merger and restructuring costs.

In addition to the remaining impact of the merger costs we implemented initiatives that will result in $18 million of run rate expense savings including 250 FTE reductions, and an additional 14 branch consolidations.

This quarter's cost represents substantially all the remaining one-time costs and you should see the benefit of the expense synergies beginning in the third quarter.

Second, $6.8 million or $0.01 per share of net market related losses consisting of the following items.

$7.2 million of loss on the disposition of certain impaired loans held for sale which were acquired with Sky.

As of June 30th, only $14.7 million of loans remained in this pool.

$4.6 million of equity investment losses, $1.3 million of negative impact of the revaluation of mortgage servicing rights net of hedging and these were offset by $2.2 million gains in the extinguishment of debt, $2.1 million of investment security gains and $2.1 million gain from the sale of $473 million of mortgage loans.

This sale was completed in early June and assisted us with our interest rate risk and overall balance sheet management efforts.

Finally, a $3.4 million or $0.01 deferred tax valuation allowance benefit representing a reduction to the previously established capital loss carry-forward valuation allowance related to the Visa stock held by Huntington.

Slide 28 provides a quick snapshot of the quarter's performance.

As previously noted, our reported net income was $0.25 per share.

Our net interest margin was 3.29%, up six basis points.

This improvement was attributed to better pricing on deposits, plus the impact of convertible preferred stock issuance.

Average total commercial loans increased an 11% annualized base.

This growth was comprised of new or increased loan facilities to existing borrowers.

Average total consumer loans were up slightly from the prior period.

Average core deposits were down slightly reflecting the reduction in certain non relationship collateralized deposits.

These deposits provided little incremental margin and allowed us to reduce the corresponding investment balances.

We had strong fee income performance during the quarter in select key categories.

Deposit service charges and other service charges returned to more seasonally adjusted levels and mortgage origination income increased from the refinance activity.

These increases were partially offset by market price driven reductions and trust fees and seasonal declines in insurance revenues.

Expense levels were down 4% from the first quarter after adjusting for operating lease expense, merger costs, and the significant items noted before.

This decrease was achieved despite $2.7 million higher OREO losses and $3.2 million of higher legal costs.

As Tim noted earlier, our charge-off ratio was 64 basis points, and was in line with our June 19th announcement.

We will discuss our capital ratios in much more detail in a few pages.

It's important to note that our Tier 1 capital ratio of 9.03% was one of the highest of our peers and exceeds the well capitalized threshold by over $1 billion.

Slide 29 provides a summary of many of the quarterly performance ratios, most of these have been reviewed in more detail elsewhere so let's move on.

Slide 30 shows the trend in our core deposits for the current quarter.

After adjusting for the managed reduction in our non-relationship collateralized deposits, core deposits were up slightly from the previous quarter.

Also note, our demand deposits showed linked strong quarter growth, up 8% from the first quarter level.

Slides 31 to 33 provide a detailed review of our capital position.

After this discussion, we hope you will understand why we are very comfortable with our current capital and dividend levels.

Our issuance of $569 million of convertible preferred securities in April combined with a reduction in our common stock dividend positions is very well for the current stressed environment.

Starting on slide 31, and focusing on the highlighted box in the middle of the page, our estimated Tier 1 capital ratio at June 30, was about 9.03% and our total capital ratio was 12.31%.

Both well in excess of regulatory thresholds for well capitalized of 6% and 10% respectively.

Again, our capital levels exceed the well capitalized thresholds by over $1 billion.

There were a number of factors contributing to the increase in our capital ratios which I may think is important for you to understand as this is probably a bit more than you may have expected.

Using the Tier 1 capital ratio as an example, it increased 147 basis points from the end of the first quarter.

Of this increase, 118 basis points reflected the issuance of the convertible preferred stock and 14 basis points resulted from the decline in risk weighted assets.

The remaining 15 basis points of improvement primarily reflected earnings net of common and preferred dividends that were paid out.

The actions we took during the quarter to strengthen our balance sheet, including selling residential mortgage loans and managing down our balances of non relationship collateralized public fund deposits and related collateral securities had a cumulative benefit of reducing risk-weighted assets by $1 billion.

With our risk weighted ratios benefiting accordingly.

Turning to slide 32, we have provided a summary of the capital ratios for Huntington and peer banks.

If a peer bank has announced its second quarter tier 1 and total capital ratios, we provided updated capital ratios.

If they have not yet reported, or if they have reported but not provided updated capital ratios, we used as a proxy UBS securities pro forma estimate of the March 31 tier 1 and total capital ratios after consideration for known second quarter capital issuances.

You can see that Huntington has the fifth highest Tier 1 and sixth highest total capital ratios with both being significantly higher than the regulatory thresholds for well capitalized.

Given the current market uncertainty, we have seen several analysts publish credit quality stress test scenarios.

Slide 33 provides a stress summary for our capital ratios from our perspective.

It is important to note -- it is important that you understand the numbers shown on this slide are for analytical purposes only.

We're not making a long-term forecast, nor should you consider any of these assumptions as guidance.

This is a simple what if analysis to test the sensitivity of our capital levels to various net charge-off scenarios.

With those caveats, the stress scenario uses the following assumptions.

A 3% annualized asset growth.

An earnings base case level of $1.30 of EPS over the next four quarters.

We chose this as it represents a level of earnings equal to midpoint of our current 2008 outlook.

An assumption that dividends are held constant at the current quarterly $0.1325 per share level and there are no new capital issuances.

Also assumes a base case assumption that net charge-offs in the next 12 months averages 70 basis points, an amount equal to the high end of our 2008 guidance.

With these assumptions, the base case shows our Tier 1 capital ratio improving over the next four quarters by about 10 points per quarter or about 40 basis points over the next 12 month period to about 9.4% a year from now.

Our total capital ratio would increase by over 20 basis points over the same 12-month period.

To stress this base case result, we assumed our charge-offs would double to 140 basis points, with our provision expense increasing by the amount of the increase in charge-offs or about $290 million pretax.

Under this stress scenario, our Tier 1 and total capital ratios would remain relatively flat.

Tripling the net charge-offs to 210 basis points, would result in an additional pretax provision of $580 million.

Again, assuming no other changes to our dividend or additional capital issuances, our Tier 1 capital ratio would decline by only 30 basis points to 8.7% and our total capital ratio would decline by only 50 basis points to 11.8%, both in line with our peer average and would remain significantly above the regulatory well capitalized threshold.

This clearly reinforces our case that our capital levels and dividend payout levels are well-positioned for this period of stress in the financial markets.

Turning to slide 34, 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 result 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 forecast.

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

We are adjusting our 2008 earnings guidance to $1.25 to $1.35 per share.

This range is wider than what we would typically provide due to the continued stress in the financial markets.

This market stress results in more variability in our estimates of provision expense for the year.

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

However, interest rates may change we expect to maintain a 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 that is flat to slightly up from the second quarter level of 3.29%.

Annualized average commercial loan growth in the mid single digit range, and total consumer loans being relatively flat.

Core deposit growth in the low to mid single digit range.

Non-interest income growth in the low single digit range and non-interest expense is expected to be down slightly from the second quarter annualized level.

This reflects lower core expenses after adjustment for merger costs, other significant items, and automobile operating lease expense.

Also includes $21 million or $0.03 per common share from the gain on debt extinguishment that closed shortly after June 30th.

Regarding credit quality performance, we anticipate a net charge-off ratio of approximately 65 to 70 basis points, and we also anticipate the allowance for credit losses will increase 10 to 20 basis points from its current June 30th, 180 basis point level.

Again, all of this results in a targeted reported EPS for 2008 earnings of $1.25 to $1.35 per share.

As noted before, second quarter earnings were $0.25 per share, or $0.28 per share excluding the impact of the significant items detailed earlier.

So some of you may be wondering what types of things would result in necessary improvement in the run rate earnings that would lift us forward to this target.

I am not going to provide a full detailed list, but here are some of the items for your consideration.

Our net interest margin outlook for the second half of the year could be about $0.03 of improvement.

Lower expenses could add another $0.03 or so.

And the debt extinguishment gain will add about $0.03 as well.

Combined, just these three items could add $0.09 to our second quarter earnings, second half earnings.

In addition, our credit quality outlook assumes full year net charge-offs of 65 to 70 basis points.

Or 150 to $170 million for the second half of the year.

Our outlook also assumes an increase in our allowance of 10 to 20 basis points or 40 to $80 million.

Using these two factors, our resulting provision expense for the second half of the year would be 190 to $250 million.

This compares to the second quarter provision of $121 million, and would translate into an additional estimated EPS benefit of up to $0.09 per share.

So maybe this is helpful as you think about rebuilding your estimate.

Tom, let me turn the presentation back over to you.

Thanks, Don.

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

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

Regarding second quarter performance, we view underlying earnings were $0.28 a share.

Second and considering the environment, we feel pretty good about our credit performance and prospects.

Things have turned only marginally more negative.

I know investors are speculating that our credit quality trends could be much worse, but you need to know with all the information we have and with all of the analysis and scrubbing we have done, we are confident of our forecast.

The detail provided today should help you better appreciate our views.

Our expectation is that Franklin's cash flow performance will remain consistent with the terms of the restructuring.

Even in this difficult environment, our core franchise continues to grow.

And while investors are paying little attention to that these days, it's important to our long-term ability to generate earnings growth and shareholder returns.

And our capital levels are strong and expected to continue to increase even in the unlikely case that our net charge-off assumptions double from our current expectations and remain strong even if net charge-offs turn out to be triple our current expectations.

With regard to our prospects, we have no delusion that the economic environment is going to turn around soon.

However, we don't see it falling off a cliff as some may think be the case.

We think it will get marginally worse before it flattens out sometime well into next year.

This prolonged downturn will keep pressure on us to build reserves and has moved the needle up a bit on net charge-off expectations.

As a result, we lowered our 2008 full year guidance to $1.25 to $1.35 per share.

We know this is still above analyst consensus, but we believe it's our best estimate and is an intellectually honest estimate.

We give you our best estimate and do not play games to lowball a number simply to provide an easier target or to put out a number there to simply match analyst expectations.

We clearly feel that actions we have taken over the last several years to reduce risk in our loan portfolios will eventually result in our credit quality performance over this cycle comparing better relative to many of our peers.

We know we have to earn the right to be believed.

And this is why we're focused on delivering results and convincing investors that our stock price today is way below its true value.

That's why I and a number of our directors and executives purchased shares last month following our June 19th preannouncement.

We believe in our prospects and that our performance will eventually convince others, as well.

Operator, we'll now open the discussion to questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from Ken Zerbe.

Your line is open.

Great.

Thanks.

Ken Zerbe, Morgan Stanley.

Can you talk a little bit about the tranche B Franklin loans.

I know you moved the tranche A out to performing.

That's great.

You still have just under $400 million that is still non performing.

Maybe just talk about the performance on those loans and maybe what the chances are that you may need to write those down sometime in the next couple quarters.

This is Tom Hoaglin.

I'm going to ask Mike Cross, who has been our point person as Jay indicated on the Franklin relationship to respond to you.

Mike?

We believe the performance of the tranche B portfolio loans are consistent with our previous estimates of the underlying quality of the portfolio and we look at the reserve allocation that we have over the entire Franklin Credit exposure and we think that's consistent from our initial assessment.

We look at a very close impairment analysis on a monthly basis and we see no change on our estimate or expectations as it relates to either tranche A or tranche B.

I guess the fact that you moved tranche A to perform but tranche B is not performing, I assume there is a performance difference between the two.

The rationale behind that would be with our reserve allocation of $115 million we thought it would be more prudent to leave B as a TDR category rather than moving the entire A and B off of the TDR status.

Ken, this is Don Kimble as well.

On that topic, I think it's important to note we still have a tranche B as accruing status, so that's not a non-accruing loan, just to reinforce what Mike said, that with $115 million of reserve and most of that allocated to the tranche B, we felt it was prudent to keep that in the TDR status.

Okay.

Great.

The second question that I had was in terms of your NCO estimates, obviously they have moved up a little bit.

Can you just talk about what changed in the thought process, I guess you said over the last 30 days that led to a greater expectation of charge-offs and I guess as investors and analysts, how do we get comfortable that third quarter, fourth quarter, the NCO ratio isn't going to go up even further from here?

Ken, this is Tom.

Before I ask Tim Barber to respond to you, our view is that we have very, very modestly increased the charge-off expectation.

We said on June the 19th that charge-offs were likely to be for the year at the high end of our 60 to 65 basis point range.

Moving from there, so 65 basis points, to a range of 65 to 70 strikes me as being a very small change.

So that's our internal perspective.

Tim?

I would echo that perspective, as you break down the three portfolios that we moved up slightly in.

They're on the consumer side, in direct auto, I think we've clearly seen a continuation of loss severity issues for us, and so the relatively small increase reflects that.

Our default percentages, our probability of default in that business really hasn't changed.

It's the severity.

And in the home equity and residential portfolios, we're just seeing a bit of a continuation of the downturn as we have talked about and again, I guess from my standpoint, 5 to 10 basis point range, given the pretty material changes in gas prices, food prices and that we've seen in the last quarter, are reasonable for our portfolio.

Again, as Tom said, our purpose here is to try to be as clear and concise as possible, provide what we really believe the performance will be, and that's what we've done.

And I think, just all in all on residential, the residential side, we feel that our experience stands up to most, if not all, in the sector.

Okay.

Great.

Thank you very much.

Your next question comes from Andrea Jao.

Your line is open.

Good afternoon, everyone.

Hi, Andrea.

First a quick question on the share count.

For my forecast next quarter, I should be using something closer to 415, -- 414 to 415 million shares, right?

47.6 were not in the diluted share count.

Andrea, this is Don.

As far as that question, you're absolutely right.

With the earnings outlook that the more dilutive capital or EPS calculation would assume the full dilution from the exercise or conversion of those preferred shares.

It would be about 415 million shares outstanding.

Okay.

Perfect.

My follow-up question is for Tim.

Just wanted to circle back to a couple of comments you made earlier.

First of which is regarding your home builder exposure.

You did not expect losses, to approach levels that your peers are talking about which is a good thing and I guess that feeds into your lower net charge-off outlook for commercial real estate.

I was hoping to get more detail as to the -- what you described as a loan by loan approach for building up this outlook.

How much -- what kind of work have you done to dig into the portfolio, if you could give us ideas about LTVs and collateral values.

Sure, Andrea.

I think you're exactly right, that the outlook in the single family builder portfolio clearly affected the commercial real estate overall numbers.

Since Mike Cross is here, I'll ask him to go through this very specific loan by loan analyses we've done.

Let me just -- before Mike responds.

This is Tom.

Introduce him formally.

In addition to his great work on the Franklin relationship, Mike serves as our senior lender that is in charge of the credit approval function on commercial and commercial real estate.

He also receives what we call a special assets group or the workout group.

Mike?

Andrea, what we do is on the single family portfolio in particular, we went through an extensive analysis on literally every loan in the portfolio throughout our entire footprint.

We implemented that process.

It was about I guess 12 months ago.

We were suspecting there were going to be issues in the marketplace.

It's not a situation where we do the analysis and forget about it.

We actually use that as a working document and a tool for us on the credit side to manage the portfolio, manage the risk, try to be ahead of the curve rather than behind and be reactive to what's happening in the market.

That analysis, as I mentioned, is a working document that we use monthly, given all the strain and the stress in the single family space, we've elected this past two weeks to take another extensive deep dive, just to check our numbers and make sure that we're -- the way we're evaluating the portfolio, the way we're evaluating our risk exposure as it relates to declining LTVs is on target and that is a tool that we will continue to use on a monthly basis.

So it's a work in process.

We always obtain appraisals on situations where we need to and we're very quick to establish reserve allocations on any of the loans where we think we might have a shortfall or an impairment.

What have you seen in terms of LTVs, if you could share some numbers with us, even if these are just averages and then, an indication of changes in appraisals, in appraised values.

In some of our markets we've had some rather significant declines in values.

That being Southeastern Michigan and northern Ohio.

For the most part, I would say that the declines in values pretty much track with the national statistics that you see and read about.

And again, when we do have a decline in value on a specific loan or a specific relationship, we check to make sure that there isn't ancillary support, either through a guarantor or other collateral that we may have before we establish a reserve and decide whether or not that the impairment needs to be addressed through that allocation.

Okay.

Great.

Thank you.

Your next question comes from Scott Siefers.

Your line is open.

Good morning, guys.

I had a question on Franklin.

You guys have said that you'll try to get it down to the legal lending limit by the end of the next quarter.

How much would that total exposure have to go down to get to net dollar value and can you sort of discuss top level what you can do to get it there and any accounting ramifications there would be, if any?

This is Don.

As far as the balance, it would have to be at the bank entity, the legal bank.

It's not the consolidated holding company.

It would be in the range of 700 to $725 million as far as the legal lending limit and that can be accomplished by a number of different ways.

One of which could just be a transfer from the bank to the parent company or a sub of the parent company, and there is already underneath the parent that does have some from Franklin loans in it today.

It could be done through sales of any of the tranches of the relationship or it could be just from additional paydown.

So those are the steps would have to be taken.

All right.

And one more follow-up.

You asked if there is any accounting implications.

If it's transferred between the bank and the holding company there is no accounting implication from that transfer.

Okay.

All right.

That's helpful.

And then I guess I just want to make sure I understand the way your guys' diluted share count is going to come out.

This might be kind of a silly question but why would the convertible preferred stock have been anti-dilutive this period?

Well, essentially if you look at the EPS calculation, you take the net income and back out the preferred dividends and so you get a net income available for common shareholders and then you divide that by the average diluted shares that are outstanding.

It's more dilutive in that -- on that basis with our EPS at $0.25 than if you would just take the net income, divide it by the fully diluted shares including the impact of the conversion of the preferred.

Okay.

So going forward, with our guidance we would be earning greater than $0.25 a share per quarter and so the more dilutive approach would be to assume as Andrea asked, about 415 million shares outstanding instead of the $367 million we used for this quarter.

Okay.

Perfect.

Great.

Thank you very much.

Thanks, Scott.

Your next question comes from Matthew O'Connor, your line is open.

Good afternoon.

Hey, Matt.

The trends in the 90 day delinquencies ticked down a little bit both for you and for a few other banks here.

I'm just wondering how the earlier delinquencies are tracking overall.

Matt, I think we're generally pleased with our earlier delinquencies as well.

I believe that there's a slide that details that.

I don't know the number.

Matt, it's slide number 143, shows the 30 day plus 30 day plus delinquencies.

How should we think about these delinquency trends Q to Q.

Is there a seasonality or are we starting to see potentially a churn in some of these credit buckets?

Matt, I think it's a little early to talk about turns, per se.

And there are clearly some seasonalities associated with the consumer side in particular.

In general, we're happy with where we are.

I think we worked hard to get there.

And we're optimistic as you've heard about our loss numbers relative to the industry.

But I don't think we should be drawing lines associated with 30 day delinquent numbers.

Matt, let me ask Nick who is with us and as you know runs our dealer sales business, he also has responsibility for the consumer collections function, just to comment.

And I know, Nick, that one thing we typically have seen in the past is auto charge-offs, auto experience decline in the second quarter from the first and we didn't see that so much this year.

You might talk about that.

Yes.

I would say that I mean, clearly we are seeing the gas prices, the food prices, the stuff that Tim talked about earlier affecting the general consumer population and to a great degree I think that's why we did see some improvement.

But not material in the second quarter and I think I could speak to even around the whole consumer portfolio.

But I would also suggest that we are clearly working more hours on what we would call right party contact time, which is the morning until noon and the evening from 5 to 9, more calls are being made in that time frame.

We're using different tools to get a hold of customers.

Making more attempts, having more contacts and I think that is also helping our success.

And clearly I would say the stimulus package checks have helped to some degree.

Hard to pinpoint to what degree.

But that has clearly helped all the portfolio products from checking accounts to auto loans.

Okay.

Thanks.

And then switching to capital, you gave a lot of good details on the regulatory capital.

Can you remind us, are you targeting a tangible common ratio still, or is it predominantly just the Tier 1 ratio at this point?

We're also targeting a tangible equity to asset ratio that we think with our convertible preferred issuance is a very high equity content form of the capital and so we believe that's appropriate to include that as well and really keeping that same ratio intact that applying it to a tangible equity ratio as opposed to tangible common equity.

That's 5.9 right now.

Remind us the target on that.

6 to 6.25.

Thank you very much.

Your next question comes from Bob Hughes.

Your line is open.

Hi, guys.

Go back and start with maybe slide 11.

Tim, could you help me understand, in the month of May, what is it that drove much higher principal payments?

Because if you kind of look at that chart and you exclude the month of May, it seems like the cash flow is coming out of the Franklin relationship have been declining over the past couple months.

Was May an aberration?

And then secondly, what -- are there any other details you could share with us regarding delinquencies, the underlying assets or anything else that might explain your confidence that that's not actually a deteriorating situation?

I'm going to ask Mike Cross to respond to you.

Yes, we -- the way I look at that, the performance of the collections over the time frame shown in the chart, Bob, is that we tend to view June as the aberration.

If you look at the collection levels, they tend to be closer to $30 million a month and that was a pretty consistent run rate.

We did have during the month of June about $4 million of prepayments that we thought were going to come in and did not.

So we view a lot of that as it relates to timing.

And our objective and goal is that the Franklin team is very focused on cash collections and we try to hit as an average, $1 million a day in collections.

By the luck of the draw with the calendar we lose a day in June which adds up collectively and plus the end of the month was on a Monday which also hurts from a collections standpoint.

So we view June as the aberration.

We're going to try to drive to a higher number, consistent with the averages attained through January through May.

But the results of $24.8 million or roughly $25 million for the run of June in my mind is not the beginning of a trend at least as we look at it today.

Okay.

By the way, to add on the additional detail, we really can't provide additional detail on the Franklin portfolio.

I can tell you that as we look at the performance, it remains within our expectations.

We haven't made any material changes to our original credit assumptions that we talked about six months ago.

Okay.

Great.

And Tim, another question for you, probably on the home equity vintage performance I think is -- it's intriguing in that the performance of the various vintages, even the more recent ones seem to have tracked pretty closely historically but I also look at that chart somewhat skeptically and say well, 2002, 2003 vintages aren't really necessarily relevant to how 2006, 7 or 8 might perform, given what's going on in the housing market.

What else is it about the more recent vintages, aside from the fact that they sort of tracked prior vintages, that gives you confidence those aren't going to deviate?

I mean, I think as you pointed out, vintage analysis is a great, great tool, if everything is exactly the same, changes in the environment, changes in underwriting standards can have an effect.

We think that we have been very consistent in originations over the past few years.

The broker impact clearly exists in the '02, '03, '04 vintages, and it does not exist in the more recent vintages and that's probably a primary obvious difference.

Our origination quality has been consistent.

So I think that's probably the point I would focus on most, as we think about why our more recent won't exceed even the '02, '03, even in this environment.

Okay.

And then maybe Tom, one final question, just how do you think about the local economy going forward?

I mean, obviously the auto industry continues to struggle.

We're seeing industry level sales hit new lows more recently, a lot of announced restructurings, layoffs, et cetera.

How do you perceive the impact of that trickling through the economy at this point?

Is it just, maybe an incremental negative but things have been bad enough that's it's not going to be disastrous or is it something you're worrying about and monitoring certain portfolios?

One thing that gets overlooked sometimes is that Honda of America's headquarters is in central Ohio.

You may have noticed recent sales volumes that theirs were up.

All of their suppliers, which tend to be somewhat fairly near are doing well.

So I don't mean to diminish the impact on the domestics, but it is important for Huntington purposes as we think about automotive to incorporate Honda.

As it relates to places like Michigan, for example, or Ohio communities, Indiana communities that have been hilt by domestic issues, the way I think about it is it's not helpful.

Many consumers are leveraged so much as it is that this kind of an impact really creates severe stress for them.

We believe very much that we've factored that kind of thing into our outlook.

Michigan and Ohio have had -- have long lived with high unemployment rates or at least much higher unemployment levels than the rest of the country.

So we and others I think have had to adapt over time to these kinds of ups and downs in the automotive sector.

Doesn't mean we like it.

Doesn't mean it's going to make it easy because the opposite is the case, but we certainly think it will continue to be imaginable for us.

Thanks a lot, guys.

Your next question comes from Andrew Marquardt.

Your line is open.

Good afternoon, guys.

Hey, Andrew.

Can you talk about the reserve build anticipated in the context of specific versus the economic that you guys often talk about?

Is it being driven by concerns specific to your portfolio or is it driven by the broader economic backdrop?

Andrew, this is Don.

I can ask Tim to follow up up on that.

As far as the current quarter, we had about an $8 million increase in our reserve coming from the economic reserve and the rest of it was coming from the transaction reserve or more loan specific and/or FAS 5 type of reserve builds during the quarter.

I'd say as far as our outlook for the rest of this year, I'd say that it would probably be safe to assume that we would continue to see the economic reserve increase in generally about the same range per quarter and the rest of the 10 to 20 basis point range we talked about as far as the allowance build would be coming from continued migration of the portfolio.

Tim, any thoughts there?

All set.

Separately, how do you guys think about asset sales in this environment in terms of considering relief on your capital?

Andrew, this is Don.

We did have one mortgage loan sale this past quarter that we closed in early June of $473 million.

That was done for balance sheet management and also for interest rate risk perspective.

Again, we feel pretty comfortable as far as our capital position and our outlook from a capital level and also from our dividend and so if we do take on additional asset sales, it will be either for business purposes, interest rate risk management purposes or other reasons and not specifically related to any concerns about capital levels at this point in time.

Great.

Thank you.

Your next question comes from Andrea Jao.

Your line is open.

Hello again.

To continue on with the preceding question, you know, risk weighted assets should still to go down; right?

Because you already extinguished some debt after quarter end and I assume you're getting rid of an equivalent amount of securities.

Andrea, as far as the debt retirement, essentially we funded that with other borrowings we had had available to us and it was a small piece, so it was a $46 million debt we were able to buy back at $0.55 on the dollar.

So it didn't require much in the way of funding for us and as far as risk weighted assets, our assumption going forward is we would continue to see some build there because the impact of the mortgage loan sale that we had occur in the early June time frame was already reflected in our lower level of risk weighted assets as of June 30th.

Got you.

Now, you securitized internally $887 million in auto loans.

Those are going to stay on book, then?

Andrea, this is Don again.

That securitization is on the books and essentially we sold off the AAA rated pieces of that securitization structure and that allowed us to get funding of in excess of $870 million and essentially just provided a source of dedicated funding for Nick's business and we would look at a securitization actions like this going forward as a source of funding for that business going forward.

Okay.

And once securitized, these assets require less capital allocation; right?

That's correct.

Then last question, slide 88 of the appendix, you have your ASF securities overview, hoping to get an update on the mark-to-market, especially in terms of the trust preferred and just kind of check in, double check that, you have no exposure to Fannie, Freddie securities.

Yes, Andrea, again, as far as the mark-to-market, we did see from March 31st to June 30th about $100 million of decline in the market value or the increased unrealized loss associated with our investment portfolio.

It really came in three almost equal pieces.

The first third is coming from the mortgage backed securities.

Included in that is about $1.9 billion worth of agency mortgage backs so it's not agency preferred securities.

This is mortgage backed securities through Fannie or Freddie.

And that was about a third of the deterioration and a good portion of that really came from the steepening of the yield curve as well.

The other third came from additional price depreciation and our asset backed security related to our Alt-A mortgages and again, the spreads widen there and also the impact of the steepening of the yield curve provided additional deterioration in that portfolio from a price perspective, not necessarily from a credit quality perspective because they still are all AAA rated securities and then the last third really came from the pooled trust preferred securities and again, what's happened there is that the underlying assumptions are that the securities are extending in duration, credit spreads are widening and that's resulting in additional price depreciation.

And as far as your question as far as exposure to Fannie or Freddie, again, we have no preferred stock outstanding investments in their preferred stock issuances.

We do have some agency debt, about $350 million and we also have $1.9 billion worth of agency supported mortgage backed securities.

Perfect.

Thank you so much.

Thank you, Andrea.

Your next question comes from Michael Cohen.

Your line is open.

My question's been answered.

Thank you.

At this time, there are no more questions.

Okay.

Operator, well, thank you everybody for participating in the call.

Jack and I will be in our offices shortly to handle any other clarifications or questions that you may have.

Thank you once again.

This concludes today's conference call.

You may now disconnect.