Huntington Bancshares Inc (HBAN) 2008 Q4 法說會逐字稿

Good afternoon.

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

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

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

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

(Operator Instructions).

Thank you.

Mr.

Gould, you may begin your conference.

Thank you, Abigail.

Welcome everybody.

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

Copies of the slides we will be reviewing can be found on our website, Huntington.com, and this call is being recorded and will be available as a rebroadcast starting about 1 hour from the close of the call.

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

Slides 2 and 3 note several aspects of the basis of today's presentation.

I encourage you to read these.

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 as the reconciliation to the comparable GAAP financial measure, can be found in the slide presentation in it's Appendix, in the press release, in the quarterly financial review supplement to today's earnings press release, and in the related Form 10-K filed earlier today, all of which can 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, risks 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 materials filed with the SEC, including our most recent Forms 10-K, 10-Q, and 8-K filings.

Now turning to today's presentation, as noted on Slide 5, participating today are Steve Steinour, our newly elected Chairman, President, and CEO, Don Kimble, Executive Vice President and Chief Financial Officer, and Tim Barber, Senior Vice President, Credit Risk Management.

Also present for the Q&A session is Nick Stanutz, Senior Executive Vice President of Auto Finance and Dealer Services, and Mike Cross, Executive Vice President, Senior Commercial Lending Officer.

Let's get started.

Steve?

Thank you, Jay.

Welcome everyone.

This is my first opportunity to address you since joining Huntington.

You need to know up front that I am excited about being here.

These times are certainly challenging, perhaps the most challenging facing the industry and Huntington in decades.

And yet I have always found that in times of great challenge, great opportunities also emerge.

And I firmly believe that is true for Huntington.

We have some issues to address, which we will talk about today, but we are up to the task.

I hope that through our remarks, you will come to the same conclusion.

I have also made it a priority to meet with and get to know as many of you as my schedule will permit, beginning with a round of visits in New York next Tuesday.

So let's begin with the presentation.

Turning to Slide 7, I want to begin with a review of my initial impressions about Huntington, as well as my perspective on key issues.

Don will follow with a quick overview of the fourth quarter financial highlights.

This may be briefer than usual, as I think it is important that Tim spend time walking you through the specifics of our Franklin actions, as well as other credit performance information.

I will share my five key priorities, what I hope to accomplish and focus on in the first 90 days with you, and then I will close with brief comments about 2009 expectations.

So if we turn to Slide 8, some of you may ask, or may be wondering, why anyone would want to be a bank CEO at such a time as this.

For some banks, I would certainly agree with that underlying sentiment, but for Huntington, there is a lot that is attractive and exciting.

And first of all, Huntington overall strategic positioning as a local bank, a relationship bank, is one that I have found that wins over time.

In challenging times, being local has great customer appeal.

We are here, we are present, you can come in and talk to us, cause can access us and access matters.

It also means we are better able to understand your circumstances, the borrower's circumstances, customer circumstances, in good times that is also a winning formula, decisions made locally with local knowledge create relationships that endure.

Second, these are markets I am familiar with, when citizens acquired Charter One, an Ohio-based company, I came to Ohio and Michigan, and I know western Pennsylvania from the Citizens acquisition of certain banking lines from Mellon.

I firmly believe Huntington has an opportunity to grow and take market share in each of these markets, especially with the conditions present today.

Another factor is that Huntington has good overall distribution.

It is a platform for growth with lots of optionality.

We have multiple branch clusters and interesting markets in six states.

Our technology is very good, and we have invested significantly over the years in our IT platforms.

We have the capacity to bolt-on acquisitions, and we have some unique business lines.

I will mention our private banking and investment management businesses, which I think of as jewels, and very scalable businesses.

Huntington's core product and services menu is quite robust, so we have what is essential to compete and win today.

Further, and I know this as a former competitor, Huntington is a known and respected institution.

In my former life, we always found a lot of loyalty when we were soliciting a Huntington customer.

So these last three impressions are ones which every Huntington associate could be proud of, it certainly reflects hard work and commitment and success in serving customer needs over many years.

Despite our current quarter's results, and the fact that we will be facing an increasingly difficult economic environment for the foreseeable future, I believe the challenges can be successfully addressed.

We will make the tough choices, and we are starting with a strong capital position.

Lastly, though admittedly our first priority is to generate organic growth, Huntington is positioned as the logical Midwest bank consolidator.

Now I had a leading role in bank acquisitions at Citizens, which grew from 3 billion to 160 billion in assets, including through acquisitions, and so I am quite familiar with acquisitions and integrations.

And Huntington has a proven customer integration, and system conversion set of capabilities, to be an integrator, to be a player in the integration that is going to occur.

But first, and this bears repeating, we must grow organically.

And we will.

So I want to use the next few slides to provide my perspective on key issues.

The first is our relationship with Franklin Credit Management.

The $454 million pre-tax hit to fourth quarter earnings associated with this relationship was obviously substantial, so the questions are what happened from the end of the third quarter until now?

And where do we now stand in regard to this relationship?

The answer to the first question is that the fourth quarter cash flows declined dramatically, and fell well below expectations.

In addition, as the quarter progressed, it became increasingly clear that the economic environment during the quarter had worsened significantly, and at a much faster pace than expected at the end of the third quarter.

And there was a growing consensus that it would be of getting worse, or certainly remaining challenging throughout this year, if not longer.

And as a result, it was critical that we review the adequacy of our reserve against this deteriorating collateral situation.

The bottom line of all this was the need to charge-off $423 million of our loans to Franklin, and add $438 million to provision expense to build related reserves.

As Tim Barber will detail for you given our write-offs and reserve building, our reserves today are in-line with the expected recoverable amounts.

Our net exposure to Franklin is now $520 million.

That is a $650 million loan, less $130 million reserve, and that reserve is 20% of the loan.

Now another way to look at this, is if you consider only our first mortgage collateral, based on current valuations and assumed realizable factor of 60% of that valuation, plus 23 million of other collateral, mostly cash, the combined collateral is $562 million.

So that is 42 million, or 8% more, than our 520 million net exposure.

This also assumes no credit for 5 million a month in other cash flow, that will directly pay down principle, principally coming from second mortgages, and sale of OREO.

Now looking at this in a different way, our net exposure to Franklin now represents less than 1% of total assets, and in yet a different vein, our valuations are consistent with what we have seen in the marketplace in recent bank acquisitions.

So by taking this charge, we now have the flexibility with the portfolio, that will allow us to maximize the ultimate recovery of our loans to Franklin.

Going forward, our strategies related to this relationship, include creating a structure that will help unlock the value of the Franklin servicing capabilities to third parties.

We are also considering other structural changes, in order to maximize it's value to our shareholders.

Now it is too early to get into specifics, but we are confident that we are positioned with enough flexibility to generate future value here.

I hope this helps answer the second question.

The bottom line is that we believe our actions should substantially address Franklin as an investor issue.

And I think it is important to note that without the charges associated with Franklin, 2008 would have been a profitable year for Huntington, even in this challenging environment.

I am not saying this to minimize or side-step Franklin's impact, but I think this perspective is helpful within the context of addressing our Franklin relationship.

So turning to Slide 10, let me talk about credit management.

The first point is that through the third quarter, Huntington's credit performance has been better than peers, than many of the peers.

And while all of the fourth quarter performance numbers are not in yet from these peers, I believe that Franklin aside, we will continue to compare favorably.

Tim will review this, but I certainly think this will be the case with our home equity, residential mortgage, and auto loan portfolios, and may in fact be the case for the entire portfolio.

Philosophically, I think it is important to have a centrally driven portfolio risk management strategy and overall approach, including risk limit setting.

This doesn't mean that central loan by loan decision making will occur, but what it means is that we are going to set our risk management appetite as a Company, from a central perspective and manage the portfolio against the appetite.

And I also believe very firmly in lending, that lending is not about giving money away.

It is about renting money.

And this means we must put in place the structure and reporting transparencies that provide clarity of accountabilities within the institution, certainly to all of you.

We will make mistakes and when we do, there will be consequences, and that accountability will be apparent.

Turning to Slide 11, I think there are opportunities to improve our profitability as well.

Now one way is to make certain we spend our money wisely and efficiently, and great companies pursue this relentlessly.

So while this is always true, it is especially true in difficult times such as these, and as such, we have launched an expense reduction initiative.

Our discussions at this point are high level, so no numbers or estimates yet, but our management team is in agreement that this is critical to get this fully defined quickly, so that it can benefit results in short order.

We will be looking at everything.

There will be no sacred cows, and nothing is off limits.

My experience has found that these types of initiatives will result in some organization and other adjustments.

And at this point, I don't know what they may be, but I do expect that outcome.

I also think there is additional revenue potential that can be realized here at Huntington.

We need to find and realize additional revenue synergies within the customer base, and improve our overall cross-sell performance.

We also have a number of high growth potential businesses that must be selectively invested in, and would expect to do that.

I think we have the makings of some specialty banking businesses in our various geographic regions.

For example, in west Michigan, we have developed an expertise in serving healthcare providers and servicers, and we need to bring that capacity throughout our footprint.

Now on Slide 12, as you know, as you will recall, last November we received $1.4 billion in TARP capital.

It is important that our associates and customers know that we remain committed to use this capital as intended, to support an increased lending, and our loan modification programs.

And we will remain committed to prudent lending with the TARP capital.

How are we doing?

For the first 45 days from the set of the TARP funds through the end of the year, we originated or renewed $1.2 billion in commercial loans, and $500 million of consumer loans.

So turning to Slide 13, the last issue I want to cover before Don reviews the fourth quarter financial performance are my perspectives on capital and dividends.

On the one hand, our regulatory capital is strong, it is at least 1.9 billion more than the regulatory well capitalized minimum.

And it is in-line with our peers.

Yet our tangible common equity, the equity less tangible assets is below average, and reflecting the quarter's loss declined during the quarter.

This is an important ratio to common stock and fixed income investors, and therefore it is important that we begin rebuilding it.

So with that in mind, and with the 2009 perspective of a challenging year, we reduced the quarterly dividend to $0.01 per share, and this represents the most efficient way to add to our common equity immediately.

In addition, the Board of Directors and management know this dividend cut will be painful for our shareholders.

And I would tell you this was not an easy decision as we know many shareholders depend on this income.

But it is the right decision at this time for the institution as a whole, and certainly for the shareholders as a whole.

Back to my notion of accountability, I believe the interest of management and the Board of Directors must be aligned with shareholders, and that is why we have announced that there will be no senior management bonuses paid for 2008's performance.

Further, the Board will now only be compensated in common stock.

There will be no cash component.

So with that, let me turn it over to you, Don.

Thanks, Steve.

Turning to Slide 14, before detailing the quarter, I think it important to put full year 2008 results in perspective.

Our reported net loss for the year was $113.8 million, or $0.44 per common share.

These results were impacted by several significant items.

First, $454.3 million, or $0.81 per share of negative impact related to Franklin, all in the fourth quarter.

This impact included $438 million of loan loss provision, 9 million of interest income reversal, and 7 million of write-offs related to the interest rate swaps.

These actions reduced the net exposure to Franklin to $520 million.

Tim will review these actions in more detail later.

Next, $215.7 million, or $0.38 per share of market-related losses, including 197.4 million of securities impairment.

Also we had $0.09 EPS from events related to our holdings of VISA stock, including the impact of the IPO, the reversal of the indemnification reserves.

and related tax benefits.

And finally, $0.06 of EPS negative impact, from the combination of restructuring costs and other asset impairments.

The net message for this slide is the significance of the Franklin credit impact for the year.

Adjusted for this impact our earnings would have been a positive $0.37 a share.

Now turning to the quarter, Slide 15 provides a summary of the earnings for this quarter.

Our reported net loss per share(Sic-see press release) for the quarter was $417.3 million, or $1.20 per common share.

These results were impacted by three significant items.

First, the $454 million, or $0.81 of negative impact for the fourth quarter charges for Franklin.

Second, $141.7 million, or $0.25 per share of market-related losses, including 127.1 million of securities impairment, primarily related to our Alt-A mortgage-backed securities.

The forecasted future loss levels for the underlying mortgages increased again in the fourth quarter, resulting in an additional impairment.

It is important to note the impairment charge far exceeds the expected actual credit losses.

The difference will be recognized as a benefit in future earnings.

Finally, two items related to our investment in Visa netted to little impact on our EPS, but did impact various lines on our income statements.

Slide 16 provides a summary of our quarterly earnings trend.

As previously noted, our net loss for the quarter was $417 million.

A major contributor to the loss was the provision expense of $723 million for the quarter, including the Franklin-specific provision of $438 million.

Our noninterest revenues reflected the market-related losses of $142 million.

Even after adjustment for these losses, many of our fee income categories were down from the previous quarter, reflecting the change in the overall financial markets.

Service charges were down 7% from the previous quarter.

Trust services income was down 10%, and Other income was down 20%, or $7.6 million, reflecting the credit losses on other interest rate swaps.

Expenses were up $51 million from the previous quarter.

Remember we recognized a $21 million gain from the prepayment of debt in the third quarter.

This quarter's remaining increase was driven by higher residual losses on our auto lease portfolio, higher FDIC premiums after depletion of our one-time credit, an annual true-up of pension costs, and increases in legal and professional services.

On Slide 17, we provide an overview of the financial performance for the quarter.

Many items will be addressed at different times in our presentation, but I would like to focus on a few items.

First, our Tier-1 capital ratio of 10.8% and our total capital ratio of 14%, each exceeded the well capitalized threshold by $1.9 billion or more.

Second, our net interest margin declined from 3.29% to 3.18% over the last quarter.

All 11 basis points of this decline was related to interest income reversals on nonaccrual loans.

In addition, our margin benefited from the issuance of capital by 3 basis points, which was offset by the impact of competitive deposit pricing on our markets.

Finally, our core deposits increased 3.3% from the previous quarter, despite the very competitive markets.

Slide 18 provides a summary of many of the quarterly performance ratios, many of these will be reviewed in more detail elsewhere.

Let me turn the presentation over to Tim.

Tim?

Thanks, Don.

Let me begin with a detailed review of our Franklin relationship.

Slide 19, you have seen before.

While the cash flow generated by the underlying collateral set a declining trend over the first nine months of 2008, it did continue to exceed the requirements of the 2007 fourth quarter restructuring agreement.

However, as you can see, the level of cash flows declined significantly in the fourth quarter, reflecting a more severe than expected deterioration in the overall economy during the quarter.

In particular, principle payments associated with the first mortgage portfolios contracted, as the availability of credit in the market was further reduced.

A substantial amount of the monthly principle reductions have been associated with the sale of properties, so the tightening credit scenario had a direct negative impact on cash flows.

On the interest collection side, there was a decline across all three segments, but the decline was especially dramatic in the Franklin second mortgage portfolio, as delinquencies continued to increase.

While there was a increase in the level of OREO proceeds in December, that source has a high degree of variability from month to month.

The observed performance in the fourth quarter, coupled with the expectation that the severity of the economic downturn will further weaken the underlying borrower's ability to pay, as well as the value of the collateral, resulted in a significant deterioration in the value of Franklin's cash flow.

As such, the revaluation of the future cash flows at the end of the fourth quarter led to the actions detailed on Slide 20.

The $438 million additional provision was the result of some significant changes to the credit assumptions on the Franklin portfolio.

Particularly affected was the Franklin's second portfolio, which showed a substantial increase in delinquencies and defaults in the fourth quarter.

We are now assigning a default rate of 90%, and a recovery rate of 2%, to the remaining Franklin second portfolio, compared with 65% and 10% as of the third quarter.

Obviously the majority of the reduced cash flow in the future relates to the adjustments on this portfolio.

The Franklin first assumptions also changed, with a default assumption of 75%, and a recovery rate of 60%.

While the default assumption did not change materially, the recovery rate reflects the reduced values in the fourth quarter, and our belief that values will continue to decline in future periods.

The Tribeca portfolio assumptions are now 80% default rate, and a 60% recovery rate.

As with the other portfolios, the increase in the default assumption is a function of the increasing delinquency in default rates experienced over the course of 2008, but particularly in the fourth quarter.

The recovery assumption declined materially as a result of lower than expected results in the fourth quarter, and our now dramatically changed view of the New York/New Jersey metro home values.

After the $423 million charge-off, we have a remaining gross exposure of $650 million, with a $130 million, or 20% specific reserve.

The net exposure to Franklin is now $520 million.

The loan is now on nonaccrual status, and $9 million of interest income was reversed in the fourth quarter.

In addition, we have approximately $23 million in other collateral, primarily cash.

These actions have had no impact on our position, relative to the Franklin servicing platform.

It remains a valuable asset.

The credit actions provide us with an opportunity to best leverage the value of the platform in the future.

Slide 21 summarizes our collateral position relative to the remaining Franklin outstanding.

Over the course of the fourth quarter, updated values were obtained on all of the first mortgage loans.

Huntington's share of the collateral, net of the other creditors under the terms of the restructure, totaled $898 million, to which we assigned a 60% realizable value faster, resulting in collateral value of $539 million.

Please note that we added no value for the $950 million of second mortgages, but did add the $23 million in other collateral, again primarily cash, for a total of $562 million in collateral.

This collateral assessment provides a 108% coverage, against the $520 million net exposure.

While we assigned no value to the second mortgages, that portfolio will generate 5 to $6 million per month in cash flow, that will go directly to pay down the principle balance.

Under the current credit assumptions, the loan will pay out over the course of the next five years.

The bottom half of the slide presents the portfolio performance picture as of December 31, 2008.

As you can see, the portfolio is significantly skewed toward the 120-plus days past due category, across all three portfolio segments.

This is provided for you to see the material default situation embedded in the underlying portfolio, that we addressed in the fourth quarter actions.

Turning now to overall credit performance, slides 22 and 23 detail the charge-off results at the portfolio level.

The trends were up in the fourth quarter across all of the segments, but each had different dynamics.

I will address the specifics of each on a later slide.

Slide 24 provides some key portfolio metrics.

The 30-day past due level showed manageable increases in the C&I and commercial real estate portfolios, compared with third quarter results.

The 2.09% 30-day past due result for the indirect auto portfolio is actually only 7% higher than the fourth quarter of 2007, despite the significant economic challenges.

The home equity portfolio delinquencies also increased, primarily driven by seasonal influences, but we remain confident in the continued consistency and charge-off performance.

The residential portfolio remains flat, albeit at relatively high levels.

In the 90-plus day past due category, the increasing level is reflected in the related reserve.

As discussed earlier, charge-offs to nonaccruing loans were up in all portfolios in the fourth quarter, reflecting the continued economic stress in our markets.

The overall allowance for credit losses is now 2.30% of total loans, and we built reserves across our portfolio.

Slides 25 and 26 reconcile our actual full year 2008 charge-off performance with the targeted ranges presented in October.

As you can see, only the C&I portfolio was materially higher than the targeted range.

The higher losses in this segment were primarily a result of a couple of significant exposures that deteriorated rapidly in the fourth quarter.

The auto portfolio was also higher than anticipated, partially as a result of an even tougher used car market than anticipated, and partially as a result of the declining lease portfolio balances, a business we exited in the fourth quarter.

The indirect auto portfolio origination quality was a full 20% better in 2008 than the 2007 vintage, as we moved to an even higher quality super-prime origination strategy.

Even allowing for the economic stresses, we believe we are well-positioned for the challenges of 2009 in this portfolio.

The home equity loan portfolio continued to perform within our expectations, and substantially below the industry level.

The broker originations continued to run off, and we are seeing the benefits of the interest rate environment on our variable rate borrowers.

The residential portfolio also performed within expectations.

Let me now turn the presentation back over to Steve.

On Slide 27, let me share with you my expectations about 2009's performance.

First, and as background, we expect this to continue to be a challenging year and all year.

While I am hopeful the second half may be better than the first, in this environment, we are going to be guarded with the consistent outlook of a challenging year.

And as it relates to credit, we believe net charge-off levels will remain elevated, and that the provision expense will continue to exceed net charge-offs, until we see the environment stabilizing, and the economy improving.

We also expect that net interest margin will remain under modest pressure.

Deposit pricing is expected to remain aggressive in our markets, which are among perhaps the most aggressive in the nation.

I hope that at some point we will see Midwest deposit rates return to a more rational level, but we are not planning on this to happen.

And with the economy in a weakened state, costs associated with servicing delinquent loans are expected to increase.

So, so much for the negatives.

On the positive side, we expect to realize a meaningful benefit from our expense initiative.

And as I said earlier, more details to follow.

We have continued to show success in growing core deposits, and that is expected to continue.

We also expect to continue to grow our customer base, in terms of taking market share, and to improve our share of wallet.

And lastly, we expect to see growth in core revenue.

So all-in-all, a year with both challenges and opportunities.

On Slide 28, the five key priorities for me in the next 90 days, and as I stated at the outset, we need to address the Franklin relationship as an investor concern, and I hope we have done that today, by articulating with you the basis for the decisions that have been made.

But we want to create opportunities, and obviously share those opportunities with the shareholder, in terms of value creating as we work with Franklin and restructure.

My next priority is to intensively review and assess our lending credit management areas, and I need to understand this more fully, to make certain our risk appetite is prudent and properly balanced, in terms of risk and reward.

I need to review the 2009 budget in light of the expense initiative, as well as against the current economic conditions, and the expectations articulated a minute ago.

I will be working with the executive team to ensure we are organized to drive results with accountability.

And lastly, I want to meet with as many customers and associates, investors and analysts as possible over this 90-day period.

So it is going to be a lot of fun.

A Lot of work.

And I am delighted to have started.

On Slide 29, to summarize what I view as key investor and customer messages, as difficult and disappointing as the fourth quarter results were, our actions have strengthened our financial foundation and position, a must in these uncertain times.

This reflects substantially addressing the Franklin issue, and significantly increasing our loan loss reserves, thus positioning us, and giving us the flexibility to manage future credit challenges.

The dividend action will permit us to allow more retained capital, a build of more retained capital.

And the TARP capital is certainly supporting the needs of our customers, and we plan to use it for that.

Our regulatory capital position remains strong, and our ability to serve existing customers and grow market share has never been better.

As I said at the outset, challenging times create great opportunities.

And lastly, our #1 priority is to grow organically first, and then seek opportunistic acquisitions.

So thank you for your interest in Huntington.

Abigail, would you now open the lines for questions, please?

(Operator Instructions) Your first question comes from Matthew O'Connor with UBS.

Your line is open.

Good afternoon.

Good afternoon, Matt.

Seems like you took a pretty big whack on Franklin here, but as we think about the rest of the book, I definitely would agree that the credit performance has held up better than most of the other banks out there.

Obviously the economy is very weak.

So there probably will be more pressure going forward, but how do you think about how meaningful reserve build could be looking to 2009?

Matt, this is my first full week here, and there are many, many areas.

I just haven't had a chance to really get the opportunity to dig into.

And so the truthful answer is, I don't know.

I don't have an expectation, other than a belief that having intensively reviewed Franklin over the last five days, with the credit, various credit members of the credit team, that I was impressed by their knowledge, and I certainly, before I came here, took a lot of comfort in the track record I saw over the first three quarters.

So, again, I can't answer the question specifically, but I do have some confidence about the organization, and the quality of the book.

Okay.

Because I'm just trying to get a sense of what the organic capital build might be this year, and I guess if we look at what the stock is doing today, combined with the capital ratio, the tangible common is a little bit light here.

The market is saying that they might need to raise capital, or come up with kind of some other plan.

So you talked about building common capital.

You talked about kind of everything being on the table.

Could you just provide I guess more color on how this might play out in terms of addressing the capital ratio?

Matt, this is Don.

As far as our capital ratio, again, we feel that our Tier 1 and total capital ratios are very strong.

If you look at our combined tangible equity ratio, it's still very strong, and we believe we have taken action to address the common with our dividend cut that we have taken this quarter, and as Steve said, we are taking other actions to make sure we can enhance the earnings going forward, to make sure we can build that capital in the future as well.

Okay, and then I asked the same question to one of the other Ohio banks today, about being open to additional government assistance at this point, and they seemed to imply everything was kind of on the table, so I wanted to ask you guys the same question?

Matt, as far as your question there is, whether or not we would be looking to the more TARP type of capital, or other resources?

Correct.

Well, right now, as we stand, we are comfortable with our credit position.

We don't know any additional terms as far as any additional programs that might be out there.

We have heard that they might be considering at some point in time purchasing assets in the future, and as we get more details of any types of programs along those lines, we will have to evaluate that at that time.

But we are not right now contacting the Treasury, or other parties, to see what additional assistance might be available.

Okay.

All right.

Thank you very much.

Thanks, Matt.

Your next question comes from Dave Rochester with FBR.

Your line is open.

Hi, good afternoon, guys.

Hi, Dave.

Hi, Dave.

Just focusing on the credit trends, can you talk about what industries and geographies drove the increase in C&I charge-offs in the fourth quarter?

Looked like growth in that segment really accelerated outside of Franklin.

Dave, this is Tim.

There really was not a pattern or a trend to that.

It was across the footprint.

There were a couple of significant dollars, what I would call significant dollars, but the rest of it really was spread pretty much across our footprint.

There were no industry trends or concentrations embedded in that.

Okay.

Are you seeing more deterioration perhaps in the Sky portfolio, versus the legacy Huntington portfolio with regard to C&I?

Yes, we don't really at this point think a whole lot about the difference between the Sky and the legacy Huntington portfolio.

It has been on our books for 18 months now, and our treatment at this point is the same, so that is how we are moving forward with that.

Okay.

I just want to make sure I understood the Franklin valuation.

In terms of the 40% hair cut, how did you calculate the current value of the collateral?

Was that just an appraisal situation where you just appraised all of the collateral, or did you just use a certain home price indices to get to that valuation?

No, we specifically got evaluation on every one of the first mortgage properties.

That is how we got to the value side of things.

In the fourth quarter.

Correct.

Okay, great.

Thank you very much, guys.

Thank you.

Thank you, Dave.

Your next question comes from Heather Wolf with Merrill Lynch.

Your line is open.

Hi, good afternoon.

Hi, Heather.

Just a quick follow-up on the 60% value.

Is that adjusted for closure costs, and also discounts that you may have to take to sell out of foreclosure?

Yes, Heather, that 60% is a realizable value, so that would be net cash to Franklin that would go directly to pay down the principle on our loan.

And keep in mind, too, Heather, that does not include any value associated with the seconds, and as Tim said earlier, that is receiving 5 to $6 million a month in cash flow, and it does not assign any value to the servicing platform as well, which we continue to believe is a real value to the relationship as well.

Okay, and can you help us think through how this crammed down legislation could impact Franklin if it gets passed?

Well, Heather, we don't know exactly what is going to come out, but at a 60% valuation off of current, as in fourth quarter individual asset valuations, we think we are in a relatively reasonable zone here, and we should be okay with almost anything you can think of coming out of cram down at this point.

Okay.

Okay.

Thanks very much.

Thanks, Heather.

Your next question comes from Tony Davis with Stifel Nicolaus.

Your line is open.

Good afternoon to all of you.

Hi, Tony.

Just so we can read the map, or read the graph correctly, Tim, I recall the excess cash flows I think last quarter, third quarter on Franklin were 13 million or so.

Do you have a number you can fill in on that slide?

I am sorry, Tony.

Are you talking about Slide 19?

Yes, it is the one that is just a chart that we can't read.

Tony, this is Mike Cross.

I can help with you that.

On a cumulative basis throughout the entire year, it is about $50 million, including the fourth quarter--

Okay.

--degradation that you see.

Got you, okay.

We have got the other quarters.

Tim, you also saw nearly a quadrupling linked quarter in charge-offs in the commercial real estate book, and I just wondered if you can give us some color on that by segment retail versus industrial, and some thoughts on the severity of risk as you see in there?

Let me just make sure we are on the same page regarding the increase in commercial real estate.

Yes.

The charge-offs on Slide 23, or 22 rather, 11 to 38.

Right, okay.

Similar to my answer on the C&I side, it was across the regions, the commercial real estate portfolio was clearly concentrated in the single family builder segment of the portfolio.

We continue to see the stress in that portfolio that we have seen and talked about over the course of the last two or three quarters.

The largest charge-off for the quarter, Tim, was a commercial retail project that we had talked about before.

Was that around $7 million?

Is was about $5 million, and that was the property we have talked about in Indianapolis.

Right, right, right.

Okay, and Nick is there.

Ask him a question, too, on the indirect business, I guess, Nick, what has happened to auction sale prices over the last quarter, and can you give some color on the watch list I guess, in the dealer services portfolio, too?

Tony, clearly with the dramatic decline in car sales that we saw in the fourth quarter, car sale rates at 25-year lows, there clearly was a lack of demand at the auction, and if you look at the -- Manheim Market Index, that index fell from the beginning of the year to the end of the year by over 18 points, and I think [Contos] and [Webb at Dessa], and Manheim are reporting that for the fourth quarter, car values were down 5 to 6%, depending on which segment you were in.

Now I will tell you they also are reporting as recently as a week ago, that they have seen a surprising increase in prices as we have entered the first 15 days of January.

Whether that is sustainable or not remains to be seen, but it has been surprising that we have seen this spring rebound, because dealers have clearly focused on selling used cars in this environment, not new cars.

So there is some optimism there.

Okay, and just one final thing to make sure of.

After this reorganization, Steve, Franklin remains qualified as a servicer in all states, and are you still hopeful that perhaps additional contract awards here from the FDIC or other banks might be in the offing?

You are referencing Franklin--

and the servicing perform.

The servicing platform.

We do expect that to be the case.

Okay, thanks.

Thanks, Tony.

Your next question comes from Terry McEvoy with Oppenheimer.

Your line is open.

Thanks, good afternoon.

Hi, Terry.

Hi, Terry.

Question, in the press release you talked about getting these house account borrowers.

I was wondering if you could talk about the window of opportunity.

Is that a short window, or do you expect more of those?

And then in terms of the deposits, have you been getting deposits as part of these new relationships that are coming to Huntington?

Yes, Terry, I can talk about that.

I think we believe the window is open and continues to be open and in the successes we have had in getting additional credit business, the deposits have absolutely come with those relationships.

And with regards to your outlook for just I think elevated level of charge-offs and provisionings, as you look at the five lending categories that you break out in the presentation today, is there any one or two categories that' is really driving that statement, or is it really a combination of all of them showing further deterioration?

I think it is a general combination of all of them.

However, we clearly, as I tried to go through in the comments feel relatively good about our auto business and our home equity business, but again, given the economy, given the stresses in our markets, it really is an across-the-portfolio discussion.

And when do you conduct your annual goodwill impairment test?

Have you taken any goodwill write-downs related to the Sky Financial acquisition?

Terry, this is Don.

Our goodwill impairment test is conducted during the fourth quarter, so we did complete that before we finalized the earnings, and we have not taken any impairment charge on goodwill associated with Sky, or any other acquisition.

Okay.

Thank you very much.

Thank you.

Your next question comes from Greg Ketron with CitiGroup.

Good afternoon.

Hi, Greg.

Just a question around Franklin, I am not sure how much detailed explanation you can go into it, but it seems clear that if you could exit the Franklin relationship, mine the value out of the servicing platform, it might even provide some needed capital at the end of the day.

Any thoughts or discussion you can provide or color you can provide around looking at Franklin, and how you might be able to mine the servicing, or the value of the servicing platform, or potentially pare back the size of the relationship?

Well the charge we took we believe gives us the flexibility to approach the portfolio from a number of different perspectives, and there are ongoing restructuring conversations with Franklin, which we would hope to conclude in the foreseeable future, and around which we would hope to have optimized the recoverable value from all aspects of the relationship.

Okay, and in regards to the servicing platform, I mean is that something that could be done separately, and I don't know, sold or acquired by somebody that would provide some additional value?

Well, the nature of our relationship with Franklin I think has to be addressed first, and there are more comprehensive conversations and negotiations that have been occurring, and if they are fruitful, that would potentially allow Franklin to be in a position to solicit third party business, and I think as you know, there is just enormous demand.

So that platform could grow very quickly and to a very significant extent.

And that is part of how we focus on overall value in the relationship.

But there are no agreements or commitments at this point, and the negotiations will continue, but hopefully conclude in the foreseeable future.

Okay.

So the way to think about it is more of an angle of leveraging the current platform, expanding that, and generating additional proceeds in the future?

Yes.

Okay.

Thank you.

Very helpful.

Thank you.

Thanks, Greg.

Your next question comes from [Eric Connorly with Robeco.] Your line is open.

Hi, my question is about the auto loan segment.

If, as is being discussed in the press, the one or more of the Big 3 cut back their bottom, call it quarter to a third of low volume dealerships, how significantly would that affect, first, your volume of loans to floor plans, and second, to the indirect auto lending business?

Thanks.

Eric, this is Nick.

We tend to focus most of our originations with the larger dealer groups where you have more scalability, making a call at the dealership level, you can generate more loans than dealers that are obviously selling very few cars.

With less dealers being in the footprint, we would suggest that the stronger dealers will obviously pick up that change in market share from being fewer dealers in the footprint.

And from the wholesale side, again, that inventory traditionally gets absorbed by the bigger dealer at the end of the day, and of course dealers have been clearly cutting back inventory in light of the environment that we are in, and they will continue to focus less on new cars, and more on used cars, which has been the key to the success of the dealers that are making money clearly in this environment are the ones that are figuring out a way to sell more used cars, without the new car demand being there.

And this is Tim.

I would just add on we don't really think that there is any direct connection between a reduction in manufacturing capacity, and the performance of our indirect auto loan book.

We will continue to originate to high quality borrowers, manage that as we have in the past.

There may be fewer opportunities, fewer cars sold over the course of a given year, but we are going to attract our portion of that, and it is going to remain high quality.

Okay.

Thank you.

Thanks.

Your next question comes from [Vic Yi] with Owl Creek Asset Management.

Your line is open.

Hello.

Thank you for the call.

My question relates to how you think the end game plays out in respect to TARP?

I know cutting the dividend probably a conserves a lot of cash, but your non-performing assets are rising, even in your core business excluding Franklin, and there is a lot of TARP money you have in your capital structure.

Do you ultimately intend to repay that, or is it probably going to remain outstanding?

I mean how do you see the long-term sort of game plan, in terms of rebuilding capital, and sort of growing the capital base?

Nick, the TARP capital can't be repaid for the first couple of three years, and it is 5% capital until the end of the fifth year, and we have seen severe cycles before, perhaps not quite as severe as this, but '89 and '90 were very difficult for the industry, and by '94 or '93, things were moving ahead quite nicely.

So I do believe in the span of the next five years, the economy will be a lot different than it is today, and that will put us in a position with a lot of different options to address repayment of the TARP in that original time, five-year timeframe.

Okay, great.

And what is the right tangible common equity ratio that you are sort of targeting?

And is it something you can get there, by just sort of earning your way back, or is there some sort of a capital raise that may be necessary?

Historically what we have focused on is our tangible equity ratio, because we have included in that the convertible preferred issuance.

So that would add another 111 basis points to our tangible capital ratio.

With that, we would be in the 5% plus range, and we would typically target something closer to the 6 and 6.25.

We will review that with Steve over time here as well, and make sure that we assess that, that we think that we can earn back to that level with the reduction in dividend over time as well.

Okay.

Thank you very much.

This concludes the question and answer portion of today's call.

I will now turn the call back over to the presenters for any closing remarks.

This is Jay Gould.

I appreciate all of you, and your interest in Huntington.

Thank you for participating today.

We look forward to talking to you in the coming days and next quarter.

Thank you.

This concludes your conference call for today.

You may now disconnect.