Huntington Bancshares Inc (HBAN) 2008 Q3 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 third quarter earnings conference call.

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

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

(OPERATOR INSTRUCTIONS) .

Thank you.

Mr.

Gould, you may begin your

Thank you Mindy and welcome everyone.

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

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

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

Please call the Investor Relations department at 614-480-5676 for more information on how to access these records, recordings for 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 non-GAAP financial measures where we believe it helpful to understanding Huntington's results of operations or financial position.

Where non-GAAP financial measures are used the comparable GAAP financial measure as well the reconciliation to the comparable GAAP financial measure, can be found on the slide presentation in its appendix in the press release and the quarterly financial review supplement to today's press release.

All of which can also be found on our website.

Today's discussion, including the 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, risk and uncertainties which may cause actual results to differ materially.

We assume no obligation to update such statements.

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

Now turning to today's presentation.

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

Also present for the Q&A session is Nick Stanutz, Senior Vice President of Auto Finance and Dealer Services.

Let's get started.

Tom.

Thank you, Jay and welcome everyone.

Turning to slide six.

We're clearly in unprecedented times, the housing sector, the overall economy and the capital markets are all in turmoil.

To say the least, uncertainties abound so let me begin with some clear messages to our investors and customers about Huntington.

First and foremost, we're making money.

Granted that our earnings are lower than in more normal times, but we are profitable.

Earnings are at a decent level and we expect this to continue.

Second our balance sheet is strong.

Credit costs as measured by net charge-offs and provision levels are clearly elevated.

In times like these, that's to be expected, but even so they're manageable and our loan loss reserve level was both increasing and sound.

Our capital levels are strong.

Our regulatory capital position is around $1 billion more than the well-capitalized regulatory thresholds.

Our capital ratios increased this quarter.

Our tangible capital assets ratio is our now back in 6% to 6.25% targeted range.

Our funding capacity is well-positioned.

There's ample cash at the Holding Company level.

We have a very manageable level of debt maturities at the bank level during the next 12 months which we'll be able to handle without having to access the capital markets and we have no Holding Company debt maturities for several years.

It's also important to note that our local bank and relationship-driven business model is proving to be a competitive advantage.

Underlying activities are performing well as Don will detail for you.

More important is the fact that we know our markets and our customers well.

In 2001 we rededicated ourselves to staying in our Midwest markets and to strengthening our customer relationships.

Staying close to home helped us to avoid the temptation to chase growth outside in unfamiliar markets.

Markets that are having a disproportionate amount of difficulties these days.

And by focusing on developing and nurturing customer relationships, be they individuals or businesses, we've seen customers demonstrate their competency and in loyalty to Huntington in these uncertain days.

For example this past quarter we grew core deposits at a 4% annualized rate.

Their loyalty has been appreciated.

They know we'll continue to work with them throughout these difficult times.

Turning now to our review of the quarter.

Slide seven outlines today's discussion.

I'll begin with my usual overview of performance results.

As we did last quarter, Tim Barber will follow with a review of credit trends and a detailed discussion of our key loan portfolio segments.

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

He'll conclude with an update of our 2008 outlook.

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

Turning to slide eight, reported earnings were $0.28 per share which benefited by a net $0.01 from significant items which Don will detail for you.

With regard to credit quality performance, it was basically as advertised in our last quarterly conference call.

Net charge-offs were 82 basis points and consistent with our expectations that net charge-offs would rise in the second half of this year following reserve increases in the first half of the year.

Our allowance for credit losses increased 10 basis points to 1.90%.

As expected, this was less than the 13 basis point increase in the second quarter.

Non-accrual loans increased 10%, down from a 42% increase in the second quarter.

And non-performing assets increased 5%.

Commercial loans increased at a 4% annualized rate and while consumer loans declined at a 5% annualized rate, this mostly reflected the impact of second quarter mortgage loan sales.

Our exposure to Franklin declined $36 million or 3% as collateral cash flows continued to exceed that required by the 2007 fourth quarter restructuring.

As I mentioned, core deposits increased at a 4% annualized rate.

This reflected good growth in consumer core deposits, primarily core certificates of deposit.

Our Tier one and total risk based capital ratios both increased and our tangible equity ratio is now 6% back in the target range of 6 to 6.25%.

Expenses continued to be very well-controlled, primarily reflecting a decline in staff due to merger efficiencies, with our efficiency ratio now down in the low 50s range.

Fee income performance was not as good as expected.

Many fee-based activity levels declined given the economic environment and lower market valuations decreased the value of managed assets.

But all in all, under the present circumstances, a good quarter with higher earnings per share than in the second quarter.

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

Now let me call on Tim Barber to review our credit quality trends and individual performance, portfolio performance.

Tim?

Thanks, Tom.

I'm going to start with an update of our perspective on the Franklin credit relationship given the announcement of one of our co-lenders yesterday.

Turning to slide nine, the Franklin credit relationship continued to perform as agreed.

We are aware of the actions taken by one of the other participants in the credit, but believe that their actions nearly brought them more in line with our view of the collateral performance.

We have been very up front with our credit performance assumptions over the course of the past year, and continue to watch the actual performance very closely on a real-time basis.

Turning to slide 10, the monthly cash flow has been above the required debt service, allowing for accelerated principal paydowns of nearly $60 million for the first nine months of the year.

As you can see, the absolute level of cash flow declined in the third quarter.

Franklin has continued to actively work the portfolio as evidenced by the number of accounts moving into their modification status in the second quarter results.

Given the current market dynamics, we fully expect the performance of the underlying collateral to continue to be negatively affected, but he we remain convinced that the Franklin servicing platform is operating well and we have appropriately sized the debt and reserves relative to anticipated collections.

We remain comfortable that our credit assumptions regarding the overall portfolio performance are appropriately conservative.

So let me review them quickly.

As you recall, our probability of default assumptions of 70% for Tribeca and Franklin first and 65% for Franklin second remain conservative when compared with Franklin's actual performance.

As recoveries in general and OREO net proceeds in particular make up a larger portion of total collections, it is important to note our recovery assumptions of only 10% for Franklin purchased second, 60% for Franklin purchased first and 90% for Tribeca originated loans.

We continue to monitor cash flow closely, but believe these recovery assumptions remain appropriate.

As a reminder, we have charged off or forgiven $397 million and have an additional reserve of $115 million on our portion of the debt.

Slide 11 provides an overview of our credit quality trends.

Overall, the quarter was much as anticipated from a credit quality standpoint.

First, as noted, the entire Franklin relationship continued to perform as agreed, and continues to accrue interest.

Our non-accruing loan level increased 10% during the quarter, compared with a 42% increase in the second quarter.

I'll provide additional detail on the non-accruing loan levels on a future slide.

Our net charge-off ratio was consistent with our expectations for higher charge-offs in the second half of 2008, based on the reserve build in the first half.

Again, I will provide some detail on a portfolio level basis later in the presentation.

Our 90 plus past due and accruing levels were higher in the C&I and CRE portfolios.

By definition, these commercial loans are either well-secured or in the process of collection, so significant additional non-accruals from these loans are not expected.

Of the total 90 plus days past due level at September 30, $20 million is no longer 90 days past due.

On the consumer side there was a reduction for the second consecutive quarter in the home equity portfolio delinquencies.

This is consistent with our belief that 2008 will represent the high water mark for losses in this portfolio.

Indirect auto delinquencies were slightly higher, reflecting the seasonality inherent in the auto book.

The residential mortgage portfolio delinquencies increased in the quarter after a decline in the second quarter.

In the consumer segments, there is a high correlation between the 90 plus day past due level and charge-offs in future periods.

These trends are consistent with our expectations for performance in the consumer segment.

As Tom noted, the economic environment continues to be very difficult.

But there are areas where we are pleased about the performance.

As the environment has changed we have continued to build our reserve levels appropriately, with our allowance for credit losses or ACL ending the quarter at 190 basis points.

The non-accrual coverage ratio is now 134% and we continue to view the reserve level as adequate.

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 ACL has been a result of this impairment testing process.

As such, we are comfortable that we have taken appropriate action on the non-accruals.

Slide 12 provides the detail associated with the increase in the non-accrual loan level.

As you can see, the majority of the $51 million increase was centered in the C&I and CRE portfolios, with single family home builder accounting for $26 million or over half of the increase.

Increase was a function of a number of small relationships as only two were over $5 million.

The activity was not centered in any one specific region, though it was a bit more concentrated in northern Ohio.

The residential real estate segment showed a modest increase in the quarter, while the home equity levels declined slightly.

Turning to the entire loan portfolio, slide 13 details our portfolio distribution and annualized growth rates.

The commercial real estate portfolio growth was centered in the Pittsburgh and Cincinnati regions and was not connected to single family home builders.

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

There was growth in the retail segment, but the majority was centered in traditional income producing property types such as multi family, office and warehouse.

The growth in our auto loan portfolio has been a constant for us in 2008 and we remain committed to originating loans to prime borrowers.

We did show growth in home equity loans, as borrowers moved into the home equity line of credit product given the lower rates currently available.

We have seen an increase in the number of borrowers using this product secured by a first mortgage.

This segment of borrowers performs extremely well.

We have seen only a small increase in funding on existing lines.

The decline in residential mortgages reflected the significant loan sale we closed in the second quarter.

As I did last quarter, let me now address each individual portfolio from a credit quality standpoint in more detail.

Turning to slide 14, regarding commercial real estate, the credit issues continue to be concentrated in the single family home builder segment.

We remain comfortable with our full year forecast for net charge-offs of 60 to 70 basis points and have actually reduced this targeted range based on actual year-to-date performance.

Slides 15 and 16 provide additional detail on the single family home builder segment.

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

The performance of the portfolio does continue to show the negative impact of the continued difficult market.

On slide 16 we show the five quarter trend of the primary asset quality metrics.

Nearly two-thirds of the increase in 30 plus delinquencies is associated with loans that have contractually matured, but where the renewal or rewriting process has not yet been completed.

In this economic climate, we are being very careful in the renewal decision process in order to assure an appropriate structure for the bank.

As we have previously communicated, we are not in the business of extending additional credit or interest reserves in order to prevent delinquencies.

We do, however, work diligently with our borrowers to create structures that offer the bank additional security, while keeping the customers and/or projects in business.

We have clearly increased the reserve associated with the portfolio in reaction to the changes and anticipate further increases in the future.

Slide 17 and 18 detail our exposure to the commercial real estate retail segment.

The overall portfolio continues to perform well given the market.

The increase in classified loans was spread among a number of projects unlike the first quarter change that was driven by one large credit.

We did show an increase in outstandings, as existing commitments to high quality borrowers and projects continued to fund.

Regarding the C&I portfolio, slide 19 shows this is as a very granular portfolio.

We have already discussed the increase in non-accrual loans, which you will recall was influenced by a small number of credits.

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

Regarding the $1.6 billion shared national credit segment of our C&I portfolio, our credit quality metrics are substantially better than the industry level results announced last week by the Office of the Comptroller of the Currency.

This testifies to our commitment to quality underwriting and client selection.

The OCC comment that the negative trend in shared national credit performance was a result of loans used to, quote, support highly leveraged merger and acquisition transactions originated in 2006 and 2007, that are characterized by weak underwriting standards, end quote, does not apply to the Huntington shared national credit portfolio or the rest of our portfolio, for that matter.

Turning to slide 20, we have continued to experience excellent origination trends through the first nine months of 2008 in our indirect auto portfolio.

Given some recent announcements by others regarding this sector, we continue to want to clearly differentiate our portfolio performance and strategy from others in this business.

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

We increased our average FICO score and reduced the proportion of less than 670 borrowers.

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

We have raised the full year net charge-off expectation slightly, primarily as a result of the auto lease portfolio, as our auto loan portfolio has continued to perform very close to expectations.

Slide 21 provides an overview of our home equity loan portfolio.

The first item to discuss is a change in our reported net charge-offs from the prior quarter.

During the third quarter it was determined that some charge-offs classified in our other consumer portfolio were actually home equity losses.

The results shown here reflect that reclassification.

As a result, previously reported net charge-offs for other loans decreased, and those reported for home equity loans increased.

This reclassification had no impact on the overall Huntington reported charge-offs.

The reclassified first and second quarter results were 84 and 94 basis points respectively, compared with 85 basis points in the third quarter.

Even with the reclassification, these levels remain materially better than the industry as a whole.

The full year forecast has been changed only slightly to reflect the reclassification.

Our view of the home equity portfolio performance is only marginally different today than at the end last quarter.

Our vintage analyses continue to indicate stable portfolio performance and our percentage of broker originations continues to decline.

Slide 22 outlines the origination strategies we have employed over the years associated with residential mortgages.

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

Our exposure is concentrated in our footprint with the vast majority originated directly by a Huntington banker and using generally traditional product structures.

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

Slide 23 provides some detail on the residential mortgage origination and performance.

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

The Alt-A segment represents 35% of expected full year 2008 losses.

As we have noted, we no longer originate this product and the balances are running off.

The adjustable rate mortgage segment represents 70% of the total residential mortgage portfolio and has a current loss factor of less than 20 basis points.

Slides 24 and 25 provide a summarized view of our third quarter and nine months and updated 2008 full year net charge-off expectations by segment.

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 26 our reported net income was $115.2 million or $0.28 per common share for the quarter.

These results were impacted by two significant items.

First, we had $11.8 million or $0.02 per share of net market related gains consisting of the following items.

$21.4million of gains from the extinguishment of debt as we discussed during our second quarter earnings call.

$3.7million of equity investment gains.

$1.9million of positive impact from the revaluation of mortgage servicing rights net of hedging.

This was offset by $15.2 million of net losses from investment securities.

Which included $17.9 million of impairment on certain asset backed securities.

Second, a $3.7 million or $0.01 deferred tax valuation allowance adjustment represented an increase to the previously established capital loss carry forward valuation allowance related to the Visa stock held by Huntington.

In other words our income tax expense went up by $3.7 million for this issue.

Slide 27 provides a quick snapshot of the quarter's performance.

As previously noted our net income was $0.28 per share.

Our net interest margin was 3.29%, stable with the second quarter.

This performance reflected better pricing on loan products offset by more aggressive deposit pricing in our region for this quarter.

Average total commercial loans increased at a 4% annualized pace.

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

Average total consumer loans were down slightly from the prior period, reflecting the impact of the mortgage loan sale late in the second quarter.

Average total core deposits were up at a 4% annualized rate, reflecting the growth in consumer timed deposits, more than offsetting a reduction in certain non relationship collateralized deposits.

These collateralized deposits provide little incremental margin and letting them run off allowed us to reduce the corresponding investment security balances.

Our fee income performance during the quarter reflected the impact of financial markets in several key categories.

Mortgage origination fee income was down by about 42% due to lower origination activity.

Market driven reductions in asset values also resulted in a 6% reduction in trust fees.

Expense levels were down 2% from the second quarter after adjusting for operating lease expense, merger costs and the significant items noted before.

This decrease resulted in an adjusted efficiency ratio of 53%, approaching our long-term target of 50 to 52%.

As Tim noted earlier, our annualized net charge-off ratio was 82 basis points.

Bringing our year-to-date annualized net charge-off level to 65 basis points.

We'll discuss our capital ratios in much more detail in a moment, but it's important to note that our Tier one total capital ratio of 8.9% and our total capital ration of 12.1% were both up from June 30 levels.

Slide 28 shows the trends in both the reported and adjusted efficiency ratios over the last seven quarters.

The adjusted ratio excludes the impact of operating lease accounting and the impact of other items affecting comparability, including merger costs.

These adjustments are detailed in the appendix of our slide deck.

The adjusted ratio is showing a very positive trend, decreasing from 59% to 53% over the last seven quarters.

Clearly reflecting the benefit of the expense and revenue synergies from the Sky acquisition.

This improvement was accomplished despite the impact of much higher collection costs and the impact of market volatility.

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 a snapshot of our asset backed investment security portfolio.

The two components that have had the greatest market volatility are the Alt-A mortgage backed securities and the pooled trust preferred securities.

This quarter we recognized $17.9 million of impairment on two of the 24 securities held in our Alt-A mortgage backed securities portfolio.

Each quarter we analyze projected cash flows for all of these securities.

This quarter our estimates projected an average principal cash flow shortfall of less than 3% for these two securities or about $1.6 million over the remaining life of these bonds.

Yet with a 3% projected shortfall we are required to deem the bonds to be impaired resulting in a mark-to-market impairment of almost $18 million.

The difference between the $1.6 million shortfall and the $17.9 million impairment will be accreted in the income over time.

Our full review of the pool trust -- our full review of the pooled trust preferred portfolio indicated recovery of all principal and accordingly no other than temporary impairment was recognized for this portion of the portfolio.

We continue to monitor all these bonds very closely, using the assistance of third parties to validate our assessment.

Slide 31 provides a review of our liquidity position.

Our Holding Company has sufficient cash for operations.

The only significant demand on that cash represents $60 million of common preferred dividends per quarter.

We do not have any Holding Company debt maturities until 2013 and then it's only $50 million.

We've also conservatively managed the liquidity position of our bank and auto loan securitization and a mortgage loan sale freed up over $1.3 billion of liquidity late in the second quarter.

These actions leave us with a very manageable $1 billion of national market maturities over the next 12 months.

These maturities can be met through core deposit growth, FHLB advances and normal national marketing funding sources including broker deposits and auto loan securitizations.

Like everyone else, we are in the process of evaluating the impact of the FDIC's temporary liquidity program.

We estimate that about $800 million of our maturities qualify for consideration under the program.

Which would result in a potential issuance capacity of approximately $1 billion.

Turning to slide 32, we've provided a summary of our capital ratios for Huntington and peer banks.

Since no peers had announced their third quarter tier one and total capital ratios, we're showing the ratios as of June 30 as an initial benchmark.

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

Last quarter we provided a stress test scenario for our capital levels.

Slide 33 provides an updated stress summary based off September 30 positions.

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 only.

With those caveats, this stress summary uses the following assumptions.

2% annualized asset growth.

And earnings base case level of $1.15 of EPS over the next four quarters.

We chose this as it represents the most recent Street estimate for our 2009 EPS.

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

A base case assumption that net charge-offs over the next 12 months average 82 basis points, an amount equal to third quarter performance and no additional changes to our accumulated other comprehensive income.

With these assumptions, the base case shows our Tier one capital ratio improving over the next four quarters by about 10 basis points per quarter or about 40 basis points over the next 12 months to about 9.3% from now.

To stress this base case result we assumed our net charge-off ratio would double to 164 basis points, with our provision expense increasing by the amount of the change in net charge-offs, or about $345 million pretax.

Under this stress scenario our Tier one capital ratio remains relatively flat.

Tripling that charge-off to 246 basis points would result in an additional pre-tax provision of $690 million.

Again, assuming no other changes to our dividend or additional capital issuance our Tier one capital ratio would decline by only 40 basis points to 8.5%.

In line with the current peer averages.

And would remain significantly above the regulatory well capped capitalized thresholds.

Projections for the tangible equity ration are consistent with the results for the Tier one stress scenarios.

Our tangible equity ratio increases by 40 basis points in the base case, is flat in the first stress scenario and declines only 40 basis points in the severe stress scenario.

This clearly reinforces our case that our capital levels and our dividend payout levels are well positioned for this period of stress in these 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 results of all significant forecasted activities, however, guidance typically excludes selected items where the timing or the financial impact is uncertain until the impact can be reasonably forecast.

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

We are adjusting our 2008 earnings guidance to $1.12 to $1.16 per share.

We anticipate that the economic environment will continue to be negatively impacted by weaknesses in residential real estate markets and 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 relatively stable with the third quarter level adjusted for significant items.

This is expected to reflect a net interest margin that is flat with the third quarter level of 3.29%.

Annualized average commercial loan growth in the low single digit range with total consumer loans being down slightly.

Core deposit growth in the mid single digit range and non-interest expense being relatively stable.

Also non interest income is expected to be relatively stable with the third quarter level as well.

Regarding credit quality performance we anticipate a full year net charge-off ratio of approximately 70 to 75 basis points, implying fourth quarter net charge-offs of between 90 and 110 basis points.

We anticipate that the allowance for credit losses will also increase five to ten basis points from its September 30, 1.9% level.

Again, all of this results in a targeted reported EPS for 2008 earnings of $1.12 to $1.16 per share.

Tom?

Thanks, Don.

Before wrapping this up, there are two other issues to cover.

First, effective with 2009 reporting, we're changing our earnings guidance practices.

We'll continue our practice of providing robust qualitative forward-looking comments regarding all the key earnings drivers.

This includes such things as net interest margin, loan and deposit trends, fee income and expense growth expectations, credit quality trends, capital trends, the impact of changes in the economic environment and the like.

But consistent with much of corporate America these days, we'll no longer provide a specific earnings per share target.

Second, I want to comment on recent government actions to stabilize the credit markets and assist banks.

These actions include the emergency economic stabilization act of which the $700 billion troubled asset relief program or TARP is the centerpiece.

This week, further announcements were made including a plan to take equity interest in banks.

The FDIC announced a temporary liquidity program where it extended FDIC guarantees to certain unsecured senior data banks.

As well as the safety of deposits beyond the $250,000 threshold.

So what are we to make of all this?

First of all, we applaud these bold actions as we believe they will help address the challenges facing many banks and their customers.

Given time they should be helpful in stabilizing the economy and markets by assisting banks with troubled assets and liquidity challenges.

However, we don't know yet what impact if any these actions will mean specifically for Huntington.

It's simply too early to assess these until all the regulations, rules and mechanics of the plans have been defined.

Any comments today would be speculation and could unintentionally set false expectations.

What we can say definitely is that if there is a way these programs can provide long-term benefits for our shareholders, we'll certainly give them serious consideration.

We covered a lot of ground in a short period of time, so let me recap the key points.

We feel very good about our underlying business performance.

We're tracking new customers.

Our net interest margin remains relatively stable.

Loans and core deposits are growing and we continue to focus on controlling unnecessary spending.

And we remain satisfied with the performance of our loans to Franklin credit while remaining interested in eventually exiting the relationship.

Our balance sheet is strong in all its aspects.

This includes loan loss reserves, capital and our funding liquidity position.

Credit quality performance is a challenge.

The prolonged downturn will keep pressure on us to build reserves, and it continues to move the needle up a bit on net charge-off expectations.

While net charge-offs and provision are elevated, they're manageable.

And we continue to believe that actions we've taken over the last several years to reduce risk in our loan portfolios will result in a credit quality performance over this cycle comparing better relative to many of our peers.

Lastly, we expect 2008 will be a successful and profitable year with fourth quarter earnings targeted to be in line with third quarter performance.

We remain as focused as ever on delivering results and convincing investors that our stock price today is far below its true value.

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

(OPERATOR INSTRUCTIONS).

Your first question comes from Ken Zerbe.

Your line is open.

Thank you.

I guess first question is on Franklin.

I was hoping you could just review the cash flow trends a little bit there.

Just in a little more detail.

I saw the presentation.

It does appear that they're still sort of well above your I guess total cash flow expectations but the difference does seem to be coming down quite sharply.

At what point do you guys have to go back and re-evaluate this?

And if you could also just talk about the actual covenants that you have with Franklin.

Because actually I wasn't -- I read through -- I thought I read through the covenants and it didn't seem that it was on a total cash flow basis but yet it was on, say, an interest coverage basis.

If you could go into that, that would be great.

Ken, I'm going to ask Tim Barber to respond to you.

Ken, there are a lot of questions in there, I guess, the first one would be clearly the cash flow has declined over time.

I think we would be -- we're focused more on the relative stability over the last six months than comparing it to a year ago or even very early 2008 numbers, as the portfolio declines, the cash flow will also fall.

We're also looking at the OREO segment or the recovery segment as a significant piece of future cash flows.

That's not necessarily reflected in the current levels and that again is a function of the performance over time.

They're focus on working the OREO properties or the defaulted properties through the system.

So that's one of the reasons we feel -- continue to feel comfortable about the cash flows.

Just to interrupt, Tim for a minute here, what we're experiencing and I feel quite certain others around the country are, what Franklin is experiencing is a court system that is just engulfed in paperwork from lenders trying to gain control and sell properties.

And so there has been a bit of a slowdown in collections from OREO.

That doesn't mean that the collections won't be achieved.

It just has changed a bit, the timing of those over the last few months.

Tim?

Yes.

I think that's fair.

And we were pleased to see the amount of OREO proceeds increase in the month of September relative to July and August within the third quarter.

As it relates to the covenants in the agreement, the original covenant was an interest coverage ratio.

The more current covenants reflect total cash collections versus debt service requirements.

So when will we have to re-evaluate?

I guess we evaluate on an ongoing basis and are comfortable right now.

Certainly if there was a material difference in performance going forward or we changed our projections going forward, we would have to re-evaluate the covenants under which the relationship operates.

Okay.

Just to be clear on that, so you guys have completely scrapped the interest coverage covenants and have moved purely to a total cash flow basis?

The covenants are pure -- are total cash flow.

Obviously, we continue to be focused on what the interest coverage is within that overall cash flow coverage.

Of course.

Okay.

And I just want to make sure I read this chart correctly that as of September 2008, the principle and interest that you were collecting.

If you just look at principle and interest coming from Franklin, that was insufficient to meet their required principle and interest and expenses payments to you, but they're making up the difference in cash flows by selling -- by just selling their real estate?

I mean, is that the right way to read that chart?

Chart ten represents the entire Franklin credit relationship.

That does not represent Huntington's portion of it.

So the principle and interest collections were essentially exactly what the debt service coverage plus servicing costs was for the month of September.

Okay.

And then the last question I had, could you just comment a little bit about what might be the differences in your Franklin exposure versus M&I, who reported yesterday and I know M&I actually wrote down its Franklin exposure during the quarter, but you guys did not.

And I was curious, why the difference there?

Ken, let me just say, this is Tom, do you think that M&I has done what we have done with this exposure in the past?

So just harkening back to what Tim said earlier, we believe that our reserving position has been conservative from the outset and that their activity may have been -- you may see that in the light of catching up to where we've been.

So please don't judge us based upon the actions of others.

Tim?

Yes, I mean, I guess I cannot get into exactly what M&I did.

I can say that we continue to believe that the way we are assessing the risks in the underlying collateral portfolio is conservative and we believe the reserve that we've established for our exposure is appropriate.

Okay.

That was very helpful.

Thank you very much.

Your next question comes from Matthew O'Connor.

Your line is open.

Hi, everyone.

Hi, Matt.

Do you know or think that Huntington will be able to qualify tore the treasury capital?

We'll let you know on November the fourteenth, Matt.

That's the deadline for communication, as you might know, to the treasury with regard to participation.

We are at present still trying to gather information about various programs and that's I think an accurate representation of the status from Huntington's viewpoint.

Okay.

And then assuming that you are eligible, do you view at this point taking the capital as a sign of strength or weakness?

I think there's a lot of debate over this.

Because there is a lot of debate on it, it would be great for us to update you on or about November the fourteenth.

We're all going to learn a lot between now and then, I think.

Okay.

Fair enough.

Maybe switching to a different topic here.

A couple years ago you talked about tightening the underwriting standards in home equity and auto and I think a lot of us, including myself, was doubtful that your home equity losses would level out, which they have done.

But nos, as we kind of look out from a broader perspective, the economy seems like it's going to be a lot weaker than we would have thought just a few months ago.

What are you doing differently say specifically in the commercial and non-residential commercial real estate books?

Matt, it's Tim.

I think we're not doing anything differently today than we were not doing six to 12 months ago.

We've continued to focus on top tier developers in the real estate world and that has gotten a lot of play publicly.

We have essentially exactly the same commitment on the C&I side which is to deal with high quality customers.

Yes.

And I think, Tim, it's safe to say that our underwriting, for example, in the CRE world, was never the same kind of underwriting that some wrote for conduit purposes.

We've always been and continue to be much more conservative than that.

Yes.

I think that's a great point.

In the commercial real estate portfolio specifically, there were deals getting done at 1.05% times debt coverage.

That's something that Huntington just never engaged in.

And so I think we've always had a higher credit quality standard than the market in general.

And so continuing that focus and sharpening that focus maybe in times of economic upheaval or economic distress is where Huntington is related to the commercial world.

By no means are with without blemish.

Let's be perfectly clear about that.

We've certainly made some mistakes along the way but I really do believe that our fundamental approach to underwriting in the commercial environment stands us pretty well as we move into this period of time.

Thank you.

Operator, can you disconnect that line?

Operator ?

You're on, Mr.

Gould.

We got cut off.

We were about ready to take another question.

Are we still on live?

We can go ahead with your next questions.

Your next question comes from [Vic Ghee].

Your line is open.

Operator, could you remind everyone to place their lines on mute?

We are picking up someone else's conversation.

Okay, all of the lines are on mute.

Okay, go ahead.

Let's get the next question.

Hi, thanks.

I actually -- I think everybody's on now.

My question relates to Franklin and I just noticed in their recent 10-Q and I guess I'll just quote from it they say our deficit net worth as of June 30, 2008 will likely result in our noncompliance with the requirements to maintain certain licenses in approximately 21 states.

And consequently the regulators in some or all states may take a number of possible corrective actions in response to our noncompliance including license revocation or suspension, et cetera.

And I just wanted to hear -- I know you filed an 8-K that made reference to this but I just wanted to see the status of that and make sure that all of that has been sort of solved.

This is Tim Barber.

The status of that is that Franklin continues to operate in all of those states.

That was a preliminary view from the company's standpoint, sort of a worst case scenario.

That has proven to not be an issue for them.

So it's been fully resolved?

Yes.

Okay.

Thank you.

Your next question comes from Edward Hemmelgarn.

Your line is open.

Yes, just wondered if you could maybe discuss a little bit of trends that you might be seeing or you might expect to see in net interest margins over the next 12 months, given the additions of liquidity that have been added and the steepening of the yield curve.

Edward, this is Don.

I can go ahead and take a first crack at that.

I think with the improvement in the liquidity position, we are hoping that we'll see some improved deposit pricing throughout our footprint and that's been one of the main reasons why we didn't see a significant lift to our margin over the past quarter.

So we're hoping to see as we said in our guidance stable margins.

That would assume more of the same environment that we have been experiencing and any additional benefit from enhanced liquidity position should help to widen that spread.

Okay.

Thanks.

Thank you.

Your next question comes from Ryan Randall.

Your line is open.

That's okay.

My question was answered.

Thank you, Ryan.

(OPERATOR INSTRUCTIONS) .

Okay, operator, I guess if there are no other questions, I want to thank everybody for participating in today's call.

Jack and I stand by to answer any follow-up questions that you may have.

Thank you.

This concludes today's conference call.

You may now disconnect.