Huntington Bancshares Inc (HBAN) 2009 Q2 法說會逐字稿

Good afternoon.

I will be your conference operator today.

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

(Operator Instructions).

Mr.

Gould, you may begin your conference.

Thank you, so, much, Sara, and welcome, everybody.

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

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

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

Please call 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 two through four, 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 is helpful to understand Huntington's results of operation or financial position.

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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 on the slide presentation in it's appendix in the press release and the quarterly financial review supplement to today's earning press release, or in the related Form 8-K filed earlier today, all of which are on our website.

Turning to slides 5, 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 changes, risks, and uncertainties which may cause actual results to differ materially.

We assume no obligation to update such statements and for our complete discussion of risks and uncertainties, please refer to this slide and material filed with the SEC, including our most recent Forms 10-K and10-Q and 8-K filed.

Now, turning to today's presentation on slide 6.

Participating today are Steve Steinour, Chairman, President, and Chief Executive Officer, Don Kimble, Senior Executive Vice President, and Chief Financial Officer, and Tim Barber, Senior Vice President, Credit Risk Management.

And also present for the Q&A session, is Kevin Blakely, Senior Executive Vice President and Chief Risk Officer, and Nick Stanutz, Senior Executive Vice President , Auto Finance & Dealer Services, and Mike Cross, Executive Vice President and Senior Commercial Lending Officer.

Let's get started, turning

Thank you, Jay.

Welcome everyone.

First, a word of introduction is in order.

I'm pleased, very pleased to introduce Ken Blakely to you.

He just joined us earlier this month.

Many of you will recall him from his days at Key Corps.

He is a pioneer in developing enterprise-wide risk management, and as we position Huntington for long-term performance, his leadership will be very impactful.

So, welcome, Kevin.

In the past six months,we have made tremendous progress in positioning Huntington for improved long term performance.

To recap, we have moved through the heightened sense of energy and urgency on a number of key issues, increasing liquidity, successfully launching and completing a major expense initiative, restructuring Franklin, understanding and addressing issues within our portfolio, strengthening our capital, restructuring the organization, and expanding our management team.

There is much work to do, yet, looking back, I'm pleased with how far we have come in such a short period of time.

Given the challenging environment, we are enduring some short term pain to get ourselves where we want to be.

I'm confident of where we are headed.

We are positioning Huntington for success in the foreseeable future.

I'll begin with a review of second quarter performance highlights, Don will follow with a detailed review of our financial performance.

Tim will provide an update on credit.

I will then return with some 2009 outlook comments, what I hope our investors take away from our second quarter performance, and our priorities for the second half.

So let's begin the presentation, turning to slide 8, please.

We reported a net loss of $125 million, or $0.40 per common share.

The primary driver of the loss was the provision for loan losses that increased $121.9 million from the first quarter.

Now $79 million of this increase boosted our allowance for credit losses.

Contributing to this increase was a much more detailed commercial, loan portfolio review that we will talk about in more detail in a moment.

Pretax, pre-provision earnings were $229 million, up $4.7 million or 2% from the first quarter, so, we are continuing to make progress.

This reflected a number of very positive trends in underlying performance drivers.

For example, our net interest margin expanded 13 bases points to 3.10%.

And core deposits grew at an annualized 17% rate.

While average loans declined at 18% annualized rate, this reflected planned efforts to reduce our commercial real estate loan exposure, as well as the full impact of the first quarter's $1 billion automobile loan securitization, and a small $200 million residential mortgage portfolio sale.

Make no mistake, we are still making loans.

We originated or renewed $4.1 billion of loans during the quarter, $1.9 billion of commercial and $2.2 billion of consumer.

Fee income performance was mixed.

We kept tight control of our expenses, and as I noted in our earnings press release, I think the lead story for Huntington was the actions we took to significantly stress in our balance sheet, capital, liquidity and reserves.

Regarding capital, we took actions that added 700 -- just under $705 millions to common equity.

This was a multi-prong strategy, including discretionary equity issuances, conversion of preferred stock, common stock offering, and a gain on the cash tender offer of certain trust preferred securities, as well as a gain related to our VISA stock.

In some cases, our action led the industry.

We were particularly pleased with the efficiency of our common stock offering.

Don will review the details.

We have issued 55% more shares since the end of the year, 55% more shares since the end of last year, yet our tangible book value dilution related to these actions were only 3%.

We had and will continue to be cognizant of shareholder value and minimizing the dilutive impact of our capital plans.

Reflecting our actions, all our period and capital ratios saw significant improvement.

For example, our tangible common equity increased to 5.68%, up 103 basis points.

And our Tier 1 common, risk based capital ratio increased 6.8%, up 116 basis points.

Turning to slide 9, another achievement was strength and liquidity.

During the first half of the year, we strengthened our balance sheet liquidity as our available cash increased to $1.3 billion , and our our unpledged securities portfolio value increased by $1.8 billion.

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On top of this, we had the capacity to borrow $8 billion from the Home Loan Bank and Federal Reserve.

The most importantly liquidity improvement however, was our 17% annualized growth in core deposits.

Reflecting the combination of lower loans and deposit growth, our period end loan to deposit ratio was 98%.

Down from 101% at the end of the first quarter, and 108% from a year ago.

Rolling core deposit balances as well as household and businesses are priorities, and we are making very good progress.

When I arrived in January, overall, the highest, immediate priority was having a full understanding of what's in our loan portfolio.

And to make certain our loans are accurately risk-rated during a period of significant economic turbulence and change.

In the fourth quarter of last year, we addressed the evaluation of our Franklin relationship.

And in the first quarter, we successfully restructured it.

The specific aim was to take control of the underlying assets at Franklin, so that we, among other things, could improve collections.

I'm pleased to report that Franklin cash collections in the second quarter were 13% higher than in the first quarter.

At the end of the first quarter, we had $574 million of Franklin-related mortgages and REO.

At the end of the second quarter, this totaled $516 million, a 10% decline.

And in case you were wondering, we had no Franklin-related net charge-offs or further impairments.

In the first quarter, we also completed a concentrated review of single family home builder and retail commercial real estate portfolios, our two highest commercial real estate segments, highest risk segments.

The past quarter, we turned our attention to every non-criticized, every pass rated C&I and commercial rate loan relationship with an aggregate exposure over $500,000.

This review encompassed over 5,000 accounts, representing $13 billion of balances, or 59% of the outstandings.

The depth and breath of the review, as well as ongoing business segment level review processes now put in place are covered in detail in our earnings release.

So I encourage you to take time to read it.

It was an exhaustive exercise, and should give you the same level of comfort that we have, based on the efforts.

What is important for you to know, is that this work was helpful in assessing existing and emerging credit issues in this challenging economy.

We are now-well positioned to proactively mitigate risks going forward.

We expect our commercial loan portfolio will remain under pressure, as we continue to believe the economy will remain weak for the rest of the year.

But, everything we have seen and learned helps us to remain confident that the risks of our commercial loan portfolios are manageable.

On the consumer side, performance reflected the continued pressure from the difficult economic environment environment as well.

Although net charge-offs increased, this was in line with our expectation.

We continue to believe our consumer loan portfolio will show better performance throughout the cycle.

Overall, here are the numbers, $413.7 million in provision expense, up $121.9 million from the first quarter, and $79 million higher than net charge-offs.

A 3.43% annualized net charge-off rate, up nine basis points from the first quarter.

A 4.72% nonaccural loan ratio, up 79 bps from the first quarter, a 13% linked quarter increase in non-performing assets, and a period end allowance for credit losses of 2.51%, up 27 basis points.

Given the extensive review of our commercial portfolio, which we announced at the end of the first quarter, and completed this past quarter, an economy that continues to weaken, these results were not unexpected by us.

It's important to note that this quarter's performance was consistent with the early stages of the two-year cumulative loss assumption used in our loan portfolio stress test analysis announced on May 20th.

In in other words, this quarter's credit performance has not changed the results, the two-year stress test results, or capital implications at all.

Lastly, we launched our three year strategic planning effort.

This discipline is foundational to developing strategies, a clear game plan needed to grow over the long-term.

Many of you have asked me where we want to take Huntington, what will define us for the long-term as a bank, and as an investment, in short, what you should expect.

At this point, we are just completing our discovery phase many the phase that evaluates our situation and opportunities.

So so far, I like very much what I have heard and seen I think we have a lot of untapped opportunities.

We have significant aspirations within the executive management team.

This process is targeted to be completed in the fourth quarter, and we will begin implementation upon completion.

Let me turn the presentation now over to Don to review

Thanks, Steve, Turning to slide 10, we provide a summary of the earnings for the quarter.

Our reported net loss for the quarter was $125.1 million, or $0.40 per common share.

However, the quarter included several significant items as detailed below.

First, the $67.4 million, or $0.10 per share gain resulting from the tender offer for some of our trust preferred securities.

We were able to redeem $166 million of these securities, or about 35%.

Second, $31.4 million, or $0.04 per share gain related to VISA stocks, as we sold our remaining interest in VISA shares during the quarter.

Third, $0.06 per share negative impact from the preferred stock conversion that occurred during the quarter.

This negative impact reflected the value of the additional common shares issued to induce conversion.

Fourth, $23.6 million, or $0.03 per share charge related to the special assessment from FDIC.

Finally, a $4.2 million, or $0.01 per share goodwill impairment charge related to a pending sale of a small (inaudible) business.

Slide 11 provides a summary of our quarterly earnings trends, many of these trends will be reviewed later, so let's move on.

On slide 12, w provide an overview of our pretax preprovision performance metric.

We believe this metric is useful in assessing the underlying operating performance.

We calculate this metric by starting with pretax earnings, and then excluding three items, provision for credit losses, security gains and losses, and amortization and intangibles.

And then we also adjust for certain significant items.

This quarter, we adjusted for the items detailed on slide 10.

On this basis, our pretax preprovision income for the second quarter was $229.3 million, up $4.7 million or 2% from the last quarter.

This increase was on top of the 13% increase realized in the first quarter.

This improvement clearly reflected the management's actions taken during the first half of the year, and we continue to look for additional actions to improve our core operating performance.

Slide 13, provides a trend of our net interest income and our net interest margin.

During the second quarter, our net interest income increased by $10 million, reflecting 13 basis points improvement in the net interest margin, a $1.1 billion decline in average earning assets.

The margin of improvement reflected the favorable impact of our Franklin restructuring and and improved deposit pricing, partially offset by the negative impact of actions taken to improve our on balance sheet liquidity position, and the higher levels of nonperforming assets.

Continuing on to slide 14, we show the linked quarter of loan and lease trends.

Total commercial loans were down $0.9 billion, or 4%, reflecting the impact of the Franklin restructuring, payoffs and charge-offs over the last two quarters.

This decline in the auto loan and lease balances reflected the impact from the $1 billion securitization completed late in the first quarter, as well as the continued runoff of our auto lease portfolios.

One of the real highlights was the growth in our core deposits.

Not only did we grow total core deposits at an annualized 17% rate, but the growth came from the demand deposit and money market category.

We continue to emphasize core deposit growth through our incentive programs and management goals.

We are very pleased with results, today.

Slide 16 shows a trend in our non-interest income categories.

Of note are our service charges on deposit accounts reflected the normal seasonal increase, up 8% from the first quarter.

Brokerage and insurance revenue, also reflected seasonal trends, as insurance income was down $3.7 million from the first quarter, mainly due to contingent fee income.

Mortgage banking income declined $4.6 million from the first quarter, which included a $4.3 million loan sale gain.

Other income for the quarter reflected a $31 million gain related to our VISA sale.

Turning to the next slide, another highlight for the quarter was our expense management.

Many of the expense categories continue to reflect initiatives implemented in the first quarter.

Our personnel costs were down $4.2 million from the first quarter, with the number of employees down 3% from the first quarter, and down 9% from a year ago.

Outside data processing and other services increased $8.8 million, primarily reflecting portfolio servicing fee now paid to Franklin for servicing the related residential mortgage and home equity portfolios.

The reduction of other expense reflected the impact of the gain on the redemption of the trust preferred securities, partially offset by the special assessment from the FDIC, as well as $16.6 million increase in OREO costs.

You'll recall from the first quarter, also included the $2.6 billion goodwill impairment charge.

The three highest risk segments to our investment portfolio are shown on slide 18, our Alt-A mortgaged backed portfolio, our full Trust Preferred securities and our Prime CMO segment.

Over the last year, we recognized over $200 million of impairment, including $19.5 million this quarter.

During the quarter, we adopted new accounting standard rules, prospectively allow us to recognize only the credit portion of the securities impairment and earnings for securities that we do not intend to sell.

The impact of adopting these new standards was an increased retained earnings of $4 million at the beginning of the second quarter.

For previously impaired securities, where we do not have the intent to sell the security, we excluded our Alt-A mortgage portfolio from this adoption.

While the adoption of the new accounting standards for our Alt-A portfolio would have allowed us to increase retained earnings for the noncredit component of impairment, we previously recognized that it would of also limited our ability to opportunistically address these securities in the future.

The performance of the underlying securities in each of these segments continue to reflect economic environments.

Each of the securities subjected to a rigorous monthly review of projected cash flows, as part of our impairment analysis.

These reviews are supported with the analysis from third parties, independent third party.

During the quarter, we made significant progress in improving our capital position.

These actions detailed in the next slide resulted in a 103 basis points improvement to our tangible common equity ratio to 5.68%.

Another indication of our approved capital position is our 116 basis point improvements to our Tier 1 common risk base capital ratio.

All of our regulatory risk base capital ratios also improved significantly.

Slide 20 provides a summary of the capital ratios over the first six months of the year.

In the second quarter, we issued over 160 million shares common, resulting in an increase of almost $550 million after issuance cost.

We exchanged 16.5 million shares of common stock for a convertible preferred in a separately negotiated transaction, increasing our tangible common equity by $92 million.

We followed these issuances with a tender offer for our Trust Preferred, securities and the sale of our VISA stock.

These actions combined added over $700 million of common equity in the second quarter, bringing the total to more than $1 billion for the first six months of the year.

On May 20th, we announced our plans to increase our Tier 1 common equity by $675 million.

Our action, today have added $585 million of the $675 million target.

One of the components of a $675 million plan, was regulatory capital lift from adopting the new accounting standards related to other than temporary impairment for investment securities.

Using the March 31st balances, adoption of this accounting change for the portfolio would have increased our Tier 1 common by approximately $100 million.

This would not have increased tangible equities, but would have improved Tier 1 capital.

As noted earlier, we decided not to adopt this accounting change, the Alt-A mortgage-backed portfolio, the largest contributor to this potential impact.

We are considering other options that could improve the overall risk, and profile of the investment portfolio and other asset categories, thereby reducing the risk weighted assets for the Company.

This reduction would have a similar impact to the overall capital ratios for the company, while overall improving the risk profile.

After implementing these steps related to improving the risk profile, we will have substantially completed the capital plan as announced on May 20th.

Our capital rising efforts have been been opportunistic.

We have tried to balance our objective of improving the components of our capital with our desire to minimize the dilutive impact to our current shareholders.

Slide 21 provides a comparison of our capital raising efforts to some of the regional banks that participated in the Federal Reserve stress test.

As you can see at the top of the slide, many of the regional banks issued the common stock to bolster their capital position, ranging from 3% for PNC, to 71% for region.

The bottom half of the slide shows the impact of tangible book value per share, ruling from the capital initiatives, This analysis uses the March 31st proforma balance sheet, and adjusts for the capital actions completed.

As shown, even though we issued 55% additional common shares to meet our capital target, our tangible book value dilution was only 3.4%, better than most of the other regional banks.

We are able to accomplish this during a time when our stock was trading well below our book value.

We believe this is just one indication of how we are trying to address our capital plan opportunistically.

Let me turn the presentation over to Tim Barber, for a review of credit trends.

Tim?

Thanks, Don.

Turning to slide 22, on an absolute basis, our total charge-offs were lower in the second quarter than the first quarter.

However, when factoring in the Franklin impact on first quarter charge-offs, total non-Franklin net charge-offs were $131.3 higher, 68% of the non-Franklin increase was centered in the commercial real estate portfolio, which increased $89.8 million, more than doubling the first quarter level as we continue to actively deal with project performance issues and declining real estate values.

69% of the commercial real estate net charge-offs came from the two highest risk segments of the portfolio, single family home builders and retail projects.

Both of these continue to show stress as we work with the borrowers in resolving what are challenging credit issues.

For some additional color on the composition of the commercial real estate charge-offs, $31 million of the total were associated with construction projects, with the balance income producing projects.

The loss breakdown is consistent with our overall commercial real estate portfolio distribution between construction and income producing balances.

It is important to note that we continue to believe that the work we did in first quarter that sized expectable losses associated with these two portfolios remains in line with actual performance.

The remaining commercial real estate losses were spread across the portfolio from a project type standpoint, as the economic conditions continue to be stressed.

Multifamily, office and industrial warehouse are the next three project types that were are focused on in the commercial real estate segment.

The increase in non-Franklin C&I net charge-offs was centered in the manufacturing industry, and in the higher risks C&I related to home building.

We expect there will be continued weakness in the C&I portfolio as we obtain and analyze updated financial information throughout the year.

One C&I segment that we feel comfortable with, despite the environment are the C&I loans in our auto finance and dealer services segment .

Despite the dealership closings and related stresses, we do not anticipate any material dealer floor plan losses in the portfolio.

Our dealer selection criteria and focus on high quality multi-dealership groups have proven itself in this environment.

Turning to consumer loans, we continue to have positive performance in the indirect automobile loan and lease portfolio on a linked-quarter comparison .

Home equity and residential mortgage portfolio net charge-offs increased from the prior quarter levels.

However, increase reflected an end to our foreclosure moratorium, and very active loss mitigation efforts, more than a declining asset quality outlook.

While the loss mitigation activity clearly accelerated net charge-offs, it is also the right thing to do for Huntington and our customers.

Our early stage delinquency rates are best indicators of future loss trends.

Excluding the Franklin loans, our home equity and indirect auto early stage delinquency rates were lower indicating future improvement.

Despite the increase in losses, we were generally pleased with the results across our consumer portfolio during the quarter.

Slide 23 represents the net charge ratios associated with our portfolios.

It's worth noting that while automobile loan net charge-offs declined an on absolute basis, the related ratio increased to 1.73% from 1.56%.

This reflected the decline in average balances due to the $1 billion automobile loan securitization completed late in the first quarter.

The $58 million increase in C&I non-accruals reflected the impact of the economic conditions in our market and were not concentrated in any specific region or industry.

In general, those C&I loans supporting the housing or construction segment, with loans associated with the auto industry are experiencing the most stress.

Importantly, less than 10% of the C&I portfolio is associated with these segments.

We have also seen some deterioration in the manufacturing segment, but believe this is more borrower centric than broadly industry related.

The $221 million increase in commercial real estate nonaccruals reflected the continued decline in the housing market and stress on retail sales.

The single family home builder and retail segment again accounted for increase.

There was one $20 million multi-family project that comprised the bulk of the remaining decrease.

The decline in residential mortgage and home equity nonaccruals reflected expected results based on the charge-off levels and loss mitigation strategy.

It is important to note that 23% of the total nonaccruing loans are C&I and commercial real estate loans that are current from a payment stand point.

When considering only the C&I and commercial real estate, nonaccruing loan balances nearly one-third are current.

This is a quantitative representation of how active we have been in the accrual treatment decisions, particularly in the commercial real estate portfolio.

On the other real estate owned front, there was significant decline in the quarter as we actively marketed and sold our OREO property, including OREO generated from the acquired Franklin portfolio.

Slide 25 provides a summary of some key asset quality trends.

Given the restructuring of the Franklin relationship, we now focus on the reported trends only.

The nonaccruing loan ratio increased to 4.72%, as a result of the changes detailed on the previous slide, with a combined nonperforming asset ratio of 5.18% Charge-offs also increased in the quarter to 3.43%.

The increase in the nonaccruing loan and net charge-off ratios are connected, as a number of loans moved into the nonaccrual status had write downs associated with the FAS 114 impairment analysis.

More on this in a future slide.

The active impairment assessment is tangible evidence of the enhanced portfolio management practices discussed by Steve and noted in prior slides.

Another tangible result was the reduction of our commercial accruing 90 day and over delinquencies to zero for the second consecutive quarter, compared to $70 million as of December 31, 2008.

Our allowance for credit loss ratio of 2.51%represents a significant increase from the 2.24% reported in the prior period.

While the resulting recovery ratios have declined slightly, they represent an appropriate level of reserve for the remaining risk in portfolio.

In particular, we believe the allowance for credit loss to nonaccruing loan ratio of 53%, is not representative of the actual risk in the portfolio.

As we continue to increase our disclosure around the nonperforming asset balances, slide 26 shows the allowance for credit loss coverage ratios for both nonaccruing loans and nonperforming assets as reported this quarter.

The middle portion provides details of two components of the nonaccruing loaning balance that we have no reserves assigned.

For the commercial impaired line item, this is the result of the FAS 114 impairment testing process completed each quarter.

The $410 million balance represents the net recoverable balance based on our most recent, as June 30th test.

The prior charge-offs column represents the culmunative level of charge-offs taken on the noted balances.

Within 34% loss severity issue ratio, there were clear variations based on loan type and collateral.

Based on the impairment designation and current valuation, no reserves are assigned

For the Franklin nonaccruing loan line item, the write-down process has been well documented, and we do not expect any additional charge-offs.

Remember, these were transferred onto our balance sheet at current market values as of March 31st.

Again, there are no reserve assigned to these balances.

Eliminating these appropriately valued and non-reserve balances, materially increases the respective nonaccruing loan and nonperforming assets coverage ratios to 91% and 77% respectively.

Since we believe that the covered ratios are used to gauge coverage of potential future losses, and as both segments have been written down to recoverable value, not including these balances provides a more accurate picture of the allowance for credit loss level for Huntington, relative to nonperforming assets.

Slide 27 provides a reconciliation of the quarterly change in the nonperforming asset balances.

You can see the significantly higher charge of activity in the past two quarters ,than in prior periods.

The other significant item is the increasing amount of new additions.

While we have been substantially more active in the identification of nonaccruals in the past two quarters, the increase also reflects the economic stress our borrowers are experiencing.

Of the $750 million of addition, 90% came from the commercial real estate and C&I portfolios, with an average write down of 12% at the time they went into nonaccrual status.

In addition, we have over a $100 million in reserve attributed to the balances.

From a payment standpoint, over $200 million of the additions were current as of June 30th.

The $41 million of loans returned to accrual is also worth noting, as we continue to actively review our portfolio to insure the appropriate approval treatment.

Slide 28 provides a trend of our commercial asset quality portfolio distribution as measured by our internal probability of default risk rating methodology.

As Steve mentioned, during the second quarter, we actively reviewed over $17 billion in commitments, associated with noncriticized loans.

The slide shows the relative consistency in the risk rating distribution over the prior three-quarters, and the significant changes as a result of the portfolio review.

We present this information to assure you there was a meaningful impact from a risk identification standpoint.

The results provide us with a significantly improved view of future risks in the portfolio based on the thorough and current review of each borrower in the portfolio.

While the distribution shift is significant .

While the distribution shifted to significant, it was based on a conservative outlook for our market, and is not necessarily a predictor of heightened future credit issues.

The increased clarity regarding the risk in our portfolio is also important given our reorganization around business segments.

Each segment has developed an approach to maintain this level of clarity in the future, and is committed to reducing the level of future negative migration via more active portfolio management.

The requirement of action plans, even for noncriticized rated borrowers, monthly financial reviews, and active collateral assessment are examples of tangible portfolio management improvements.

We intend to manage the portfolio, along these segments in the future.

As we continue to provide clarity on the direction of our portfolio, slides 29 and 30 provide a reconciliation of changes from a prior quarter.

On slide 29, you can see the material decline in the C&I portfolio associated with the net payoffs takedown line.

This was centered and expected declines in the floor plan balances, as inventory has declined across virtually all dealerships.

And general payoffs and line reductions, as businesses actively manage their balance sheets.

Also, please note that the origination amounts shown on this slide, (inaudible) and exclude renewals and new unfunded commitments.

As such, they are less than earlier quoted commercial loan originated and renewed loan activity amount.

On slide 30, the majority of the commercial real estate decline is reflected charge-offs to date.

But we are actively moving in direction of lower exposures in the commercial real estate portfolio.

Slide 31, shows the changes in our delinquency buckets over time, excluding Franklin and Ginnle Mae guarantee balances.

We have broken this slide down by product to provide additional clarity regarding our performance.

Both the home equity and auto portfolios declined in the 30 and 90 day delinquency category, indicating positive future trends.

The residential delinquencies are higher with a significant increase of it in the first quarter, partially a function of a sale of performing loans during that quarter.

Over all, we remain comfortable with the expected performance of our consumer portfolio.

Slide 32, updates the quarterly collection results from the Franklin portfolio.

You can see the material impact of our refinancing efforts and OREO sales focus have had over the past six months.

The second quarter results were consistent with our expectations, as many of the work rules and strategies that we were able to employ as a result of the restructure, began to show results in the second quarter.

That concludes the credit comments.

Let me

Thank you, Jim.

As we shared with you, before, we intend and are, working hard to increase our disclosures, making sure you get a full, fair and complete level of information for us.

And pleased to have a number of new slides in the deck this quarter that were just reviewed.

Let me share with you some thoughts about 2009 performance.

First as we said, since January, we don't believe there will be any significant economic turnaround this year in our markets.

We continue to believe we have good understanding of the risks in the consumer loan portfolios, and that those portfolios of loans would perform better on a relative basis throughout this cycle, than other (inaudible) portfolios.

Now with all that we have learned through and certainly the results of our second quarter commercial portfolio with you, we think we have a very current view of how our borrowers are performing, what their challenges are, and frankly a number of them are performing very well.

Given our economic view however, we anticipate continued net charge-off levels, and provision expense that will remain elevated, but at a manageable ;level.

We also expect net interest margin will be flat to slightly improving from our second quarter, 3.10% level.

And we expect to continue to build our core deposits growth success.

Loans on the other hand are expected to decline modestly.

For a couple of reasons, first we are planning to reduce our commercial real estate portfolio.

We are taking a number of actions to do that .

Second, the impact of a weak economy, there is actually less loan demand in aggregate out there I believe.

And third, there will be charge-offs that will be greater than prior years.

Fee income is expected to be mixed.

Second half mortgage banking income is expected to be lower than the first half, given the rate environment.

In contrast to our deposit service charges, and some other fee income lines, including our brokerage dealer lines are expected return to seasonally higher levels.

Last, we will continue to control.

We ask in to turn to slide 34 for a couple of key messages.

First, we are seeing good measured improvement in our pretax preprovision performance.

Our focus on growing core deposits is paying off, and our loan and deposit pricing, our loan and deposit pricing discipline is increasingly gaining traction within the Company.

There are opportunities to grow fee income, and we are pursuing those.

And we will remain focused on controlling expenses.

All of these actions are intended to set the stage for an improved performance, as the cycle turns.

Next, and I am especially pleased this, that we have a much improved understanding of the risk in the total loan portfolio.

And we continue to believe any challenges we have will be manageable.

Capital position has been improved.

We believe it's adequate.

We have a little left to do from our target we announced in May And we believe that we will be accomplished this quarter.

Our liquidity position has never been stronger and our strategic plan development is highlighting exciting opportunities in improving our longer term performance.

Last line for your reference is slide 35.

This a second half objectives of management team, the executive team, I'll cover four of them, We believe we can continue to grow pretax preprovision income from the half one -- from the first half of the year.

We will continue to grow core deposits.

Our third goal is to complete this three year strategic plan and begin its implementation.

We want to start taking action.

In fact we'll start to take action in some regards once we reach the decisions which will be as soon as August in some areas.

And with all of that change, we think we need a health check with our colleagues, with our employees.

We will be doing a survey, we will then make that survey -- that survey findings actionable early in 2010.

We have a lot of energy in the Company.

A lot of of excitement.

A lot of progress has been made, and will continue to be made.

And that concludes the report.

Thank you for your interest in Huntington.

We are going to now open for questions.

Sara, if you could help us in that regard.

Jay, back

Thank you, Sara?

(Operator Instructions).

Your first question comes from the line of Matt O'Conner from Deutsche Bank, your line is open.

As we look at the charge-off level for the second quarter, is this a new run rate to grow off from here?

Or was there some up fronting of the commercial real estate losses that you did.

We are at one of the moments in the credit cycle, where it's very difficult to, for us to project.

I would tell you --- I -- we are taking losses earlier, we are recognizing losses earlier than we had been.

There is always a continuum of when you can take loss -- having said that, I don't know how material that would be, second quarter to first.

But, we'll continue to address issues as we see them arise, and move forward.

Okay, And just in general, you guys seem to be one of the few banks out there looking more closely at C&I, at sort of the income producing commercial real estate.

Is it that you are trying to get ahead of the curve, you think your mix might be worst, or others just behind?

I'm trying to reconcile with the folks out there saying there really won't be issues out there with C&I, and CRA, and don't seem to be reserving or charging off any of that stuff.

I don't really know what our competition has in their books.

Matt, it's hard to make a relative comment.

As we have shared with you and others earlier, we are trying to get the entire left hand side of the sheet.

And that is in part what Don referenced by looking at the Alt-A's.

We want to clean the sheet as much as we can this year.

Everything is looked at, or is being looked at.

Literally, every asset on the sheet is being looked at, or has been looked at.

And lastly, as I look at the loan loss reserves, they were below the annualized charge-off this quarter.

Obviously, well below, the nonperformers.

Should we expect more reserve build going toward relative to charge-offs?

We tried to break this out a little bit.

We took a March -- to mark-to-market on Franklin, we moved it in.

That's 20% of our non-performing loans or thereabouts.

We are trying to do a more apple-to-apples comparison.

Franklin unfortunately seems to be relatively unique to us.

We certainly feel the reserves are adequate, or we would have another number there.

Directionally, with the economy worsening, could we build reserves somewhat?

Possibly, but we don't -- we haven't seen anything that concerns us in terms of big buckets of risk that have have not already been reviewed and addressed to extent where we see the inherent risk.

So at this point, to be clear, are you not expecting the reserve build to increase from here.

You would think that number would be also going forward?

I think this quarter you added about $80 million.

And you think that number would be less going forward?

No, I wouldn't say that, but I don't see us -- we are not thinking we need -- you saw a couple of banks take some very large supplementals.

We are not thinking about it in that context.

We have a methodology.

We think it is working.

We'll be sticking with it.

We have a very intensive portfolio management process now for loans of all risk categories.

And that will help to drive our reserves in a dynamic fashion, but we are not thinking there is a one time event that couple of other banks chose to take.

Okay, I understand.

Thank you.

Thank you.

Your next question comes from the line of Tony Davis from Stifel Nicolaus.

Your line is now open.

Good afternoon, Steve, and Tim.

Just a question here, I guess on -- it seems like I guess, are you saying that you reached an inflection point where resi constructions losses may begin to stabilize and that the incremental losses in CRA will be pretty much limited to income property?

Is that fair, Tim?

I think we what we have tried to communicate is the distribution of losses between income producing and construction, as well as provide some clarity around the composition of the portfolio.

Obviously, the construction segment is a relatively small piece of the portfolio.

At this point, talking about whether we have reached an inflection plane et cetera is something we -- I don't think we are prepared to give that with what is happening in the economy today and our markets today.

We are trying to provide as much clarity as we can around what the portfolio looks like, and where the loss experiences that come from.

We are not trying to make this into an exercise of frustration for you.

Rather, but we just want to be cautious.

It has been very dynamic.

Yes, yes, I understand.

Great.

Tim, you would not I guess be in a position to give us a sense of maybe the dollar amount of criticized or classified loans in the income property, CRE for the last quarter or two.

I think that on the slide that we have provided over the course of the entire portfolio commercial real estate, just for a reference.

it was slide 28, commercial real estate as a whole had a significant impact on that change.

I don't have the specific breakdown between construction and income producing property.

It looked like you sold a modest amount of -- I wonder what your expectations are for asset sales over towards the year -- over the course of the year?

We want to make sure we understand the question.

In the first quarter, we did two -- we did (inaudible) billion dollar.

Nonperformers.

We have (inaudible) the second quarter.

It's something we are thinking about for the second half of the year.

But those changes don't reflect bulk sales.

Okay, okay, and one strategic question Steve for you, you have identified roughly a $100 million cost reduction effort and I just wondered where we are today on that.

Well, when we identified it, we went after it.

And we got the pieces, what we are finding nibbling against us now are higher OREO expenses, higher (inaudible) or problem asset collection expenses.

And then we did not have a view after we went after that, what the change in the restructuring change with Franklin would mean to us.

So, our numbers are particularly cloudy, right now, with the cost of servicing, and the OREA write downs, costs with Franklin, and then OREO, and costs of collections coming out of the various business segments.

Okay, thank you very much .

Thank you, Tony.

Your next question comes from the line of Dave Rochester from FBR Capital Markets, your line is now open.

Hey, good afternoon.

Just going back to one of the earlier questions maybe to ask another way.

On the NCA analysis slide, 25 and 26, is there a level in the back of your mind that you are potentially managing to for a minimum reserve coverage for MPA's of going forward?

We don't think of it in that fashion.

Dave.

I have always thought a better ratio, anyways was a coverage ratio, to portfolio.

And understand the quality of the portfolio.

In our case -- in Huntington, we have a lot of confidence in the portfolio performance in the consumer.

So we have 41% of the book, that we believe we can fairly accurately peg even with rising unemployment.

Our work in the first half was to try to start to build that same capability in the commercial portfolio.

So, its very significant to us to have completed this review in a second quarter, because this portfolio management process Tim and I talked about is very robust, and we will maintain it in a very disciplined way, monthly going forward.

So it gives us a lot of confidence, in our ability to mitigate risk because we are seeing it now earlier, where we have opportunities for collateral calls, or other things, they are being made much more timely.

I think the results of that will be reflected into Q2 numbers.

Thanks for that, your outlook for the net interest margin, it seems like there is some real opportunity here for you to see more than just modest margin expansion going forward.

Your cost of CD, is well over 3%.

Can you talk about your ability to reprice those lower over the next six to nine months, and what the current pricing is on that, today?

Well .

As we said at the end of the first quarter, we are trying to be conservative with the outlook on NIM because it has such potential forward -- such a significant forward impact, so we are trying to be cautious with the second quarter statements, now.

But we do think we have a reasonable opportunity to resetting that CD book, and growing the core.

We have not closed out what we are intending to do in the second half, yet, but we are very active in our discussions and we'll do that, shortly.

We don't give forward guidance.

We opted out of that last year.

I am reluctant to go much further.

But we would expect to make some progress on that

Okay, great guys.

Your next question comes from the line of Ken Zerbe from Morgan Stanley.

Your line is now open.

Hi, Ken.

Hi.

My first question that I have, is when you guys talk about your credit performance running in line with the stress test, are you talking -- and to be very specific on that, are you saying that your credit performance is running in line with the adverse case stress test?

Or is it better than what you expected under the adverse case?

The way we are looking at it, we don't see the adverse case, as a number that makes much sense in our portfolio.

So, we're -- depending on what portfolio you are talking about operating either between the base case and the adverse case, or in some cases actually below the base case scenario, as we talk about some of our consumer portfolios.

In aggregate, we think of it as base case, and we will follow up on that.

And really when we came up with our capital plan in May we were using our own internal stress analysis, and the losses that we recognized here in the second quarter are in line with the early stages of that, but that was our own internal analysis, and not necessarily what you saw with the (inaudible) stress test (inaudible)

Understood, but we don't know what your internal assessment was.

But, you are saying it's equal to the base cases.

Okay, the second question I had, on your commercial loan review should why view this as a catchup to current conditions?

Like you just did four reviews, you know where everything is to date.

You took the reserves to protect against today, and then going forward because you have the new policies in place, and procedures that as credit continues to deteriorate from here, there is not going to be another catchup.

But we are going to be see the deterioration going through the provision and charge-off line.

I think the latter is fair Ken.

We are not, again, with the mindset that the economy is flattened out, and we don't think it will happen in the second half.

And we do expect some further deterioration.

We do believe we are in a position to more actively manage and mitigate it now than we have been.

Okay.

All right, great, thank you very much.

Your next question comes from Brian Foran with Goldman Sachs Your line is now open.

Good afternoon.

Hi, Brian.

First, I guess on slide 32, how should we think the collections trending down during the quarter, versus your outlook for flat?

What factors are giving you the confidence that the collections have stabilized.

And second, is there a rule of thumb that -- , and about I realize the marks are heavy right now, but is there a monthly collections number that the marks, a minimum collections that we should track that the current marks can

Lets -- the first question, the April number reflects some of the substantial refinance activity that occurred over the course of March and April.

May and June are more base case months, we also believe there are a number of strategies and programs that we are working on, relative to collection and recognition of value coming out of that portfolio, both first and second, that will continue to see benefits going forward.

So that's the basis for our comments regarding the current quarter and some look in the future as to what we expect from Franklin.

As far as is there a base, a base case or an underlying cash flow assumption associated with the mark.

The answer is yes.

I don't think that is something that we have shared specifically.

I can't give you some kind a base monthly number, but I can say that we expect collections going forward to be reasonably close to where we have seen in the first and second quarter.

Again.

It depends on a lot of our strategies and Franklin's efforts, but we are comfortable with the direction of the portfolio certainly right now.

Keep in mind also, as far as the pricing of what is established for that, includes both a reserve imbedded, both for expected future losses.

And those losses are based on the assumption that home prices continue to decline at a fairly steep pace over the next few years.

The second portion of that discount is related to the assumption of cash flows are discounted at an 18% effective yield.

And since most of those assets are nonperforming, we essentially have both of those reserves available to cover future credit losses associated with the projected cash flow from that as well.

If I could then follow up on capital, given that you are not part of the S-cap assessment, the simulated stress test condition you've done and the capital adequacy you bench marked against that.

Have regulators officially approved that?

Are there any other metrics they are holding you to?

How should we think about, to make sure that the simulated stress test is a fair benchmark of what we are working towards.

Well, we would hope you would view it as a fair bench mark.

we worked quite a bit with your firm to do this.

In terms of trying -- and others to get market datas, since we were not a participant.

And we used that data with the participation from the firm, and we are confident from all that we can tell.

we have not had a review by regulators.

They did not participate in our work.

They haven't subsequently reviewed it.

It's available, available to them as is any information is here.

But there is no sort of scheduled review.

There is no conversation pending.

Any of that stuff, so I don't want to mislead anybody, implying that there is some sort of regulatory stamp on this this.

This was our work.

I guess, I did't mean to -- I don't want to misconstrue the question.

What I meant to say, the regulators have never kind of officially said what standard they are holding the next year of banks too.

Is there any other standard, or is there any other conversations you are having with regulators that would lead us to believe there is a different metric, just your kind of understanding based on your interaction with them, that the stress test simulation is the right way to think about capital for the banks, in the $20 billion to $100 billion asset range.

We have had no conversation that would suggested there is any other approach or formula, or for that matter, even initiative to take the scab test to another level for the next year bank I would tell you, my sense of it, however is that it has been a valuable exercise.

At least for us.

The -- having the benefit of sort of secondhand knowledge about how other banks were treated loss rates helped us, provide bands that we might not otherwise have been able to achieve otherwise.

So at least for us, we found it valuable.

Your next question comes from the line of Greg Ketron from Citigroup.

Your line is now open.

Good afternoon, everyone, thanks for taking my question.

Just a couple, on early delinquency trends on the residential side, and I apologize if you offered this earlier, but any views or information you could provide in terms of what is happening on C&I on the commercial real estate side.

or maybe any color on what is happening on the classified or criticized loan watch list?

On the early stage delinquency in C&I and CRE, we were up marginally as of of the second quarter, compared to the first.

But, down significantly, compared to 12/31/08.

So the longer term trend is positive in the commercial real estate world.

I'm not sure I understand exactly the question you were asking related to the criticized classified number.

Yes, trends that you might be seeing there to the degree that you can discuss it.

Well, I guess I would point you directly back to -- slide 28 and that's as much disclosure we can give, or have ever given on what's happening .

The material move associated with the nine and ten plus classified categories in the portfolio, in the

Thank you, that helps.

And then on page 20, 27 just looking at some of the flows to the nonperforming assets area, it looked like 90% of your charge-offs are coming or arising from NPL inflows.

That was -- not a fair conclusion -- there's the -- there's just the workout process, there's at least a couple of meeting around which an initial resolution discussion going to be had -- or an alternative such as resorting to remedies will occur.

And that will take some time, there is also typically an updating valuation that we'll take to try and make sure we are accurate as possible at the point of charge-off.

So much of that charge-off would be reflective of prior period nonperforming loans.

Okay, so there is a charge -- it's don't draw the conclusion of looking at the inflows, and assuming the charge-offs.

That's correct.

Right.

Okay, because I noticed the charge-off level had increased to 40%, but then what you are saying is, is part of the 40%, coming from the existing NPL inventory versus the influx.

If you peel the NPL number back, deduct Franklin from it, and then take your beginning period, and not end of period, that will give you a better sense of risk in portfolio.

Great, thank you.

Your next question comes from Terry Mcevoy from Oppenheimer.

Your line is open.

Good afternoon.

Hi, Terry.

Just getting back to the credit portfolio review in the quarter.

Was the majority of the losses or the deterioration that was identified in kind of northern Ohio, southeast Michigan which is where commercial losses have occurred for Huntington over the last couple of quarters?

Or was it -- or did it better reflect a majority of where Huntington operates in in terms of the franchise?

Terry, it's Tim, the exercise was clearly across the entire franchise and we saw changes result of the exercise in all of our markets.

There was not a specific concentration in southeast Michigan.

In many cases, southeast Michigan, in Detroit area, we have been through that portfolio so many times, and the economic conditions have been materially different from the rest of the portfolio.

That we have gotten a lot of it out of the way.

In many cases, the results of the review were positive in that market.

Our bankers are absolutely on top of of the borrowers that are - that remain in the portfolio, and we are continuing to serve.

I would say it was a broad based review, and the results were also broad based.

Thanks.

That's just what I was looking for.

And one other question when I hear three year strategic plan, I think one time charge of some sort of expense.

Is that something we should look for in fourth quarter, how do you potentially weigh a charge versus up against embedded losses or future losses we will see.

We are not expecting and did not Juan to apply any charge related to strategic plan, Terry.

Okay, thanks a lot.

Your next question comes from the line of Andrew Marquardt from Fox-Pitt Kelton.

Your line is now open.

Afternoon guys.

Good afternoon.

Just circling back on the capital and stress test analyses you had done before, can you help reconcile the -- I understood how you point about in charge-offs, you are attracting base case scenario.

Can you get any color on the reserve coverage level?

One of the things that stood out in the stress test announced that you had done your assumption of just over 1% reserve coverage versus 2.5% now?

Andrew, this is Don.

As far as that, our model was just to say at the end of the two year time period, after absorbing a level of losses that were included in that stress test, the reserve levels could come down to more the historical levels of reserves.

So, essentially, in this case, since our reserve levels are a lot higher than that, If you followed the stress test model that at some point during the two year time period, that will start to migrate down, as the migration would slow, and realization of losses would occur.

So a potential releasing of reserves, or leading up kind of coverage seems fair over two years.

Is that?

No, not release, it would be utilization of reserve.

Again, it's our understanding this is consistent with the way the 19 modeled it as well.

Were they thinking about individuals kind of historical kind of coverage, which is how I think you came up with kind of the1.2% coverage you were using.

It is our understanding that they did have a historical view, and certainly the asset mix played a big part in that view.

Some of them have different -- some of them had material different mixes today than they had at one point a couple of years ago.

Back to that norm period.

Got it, okay.

That's helpful.

Can can you give a little color on the retail theory losses this quarter?

Is that a bit of a pull forward, losses look like they were almost double -- over 9% versus 5% last quarter.

Is it a pull forward?

In that portfolio, Andrew, we continue to look at it.

That portfolio as an example where they can be changes in value over time, and we are working through those.

And I think this quarter was an appropriate set of actions associated with what we ended up with.

I don't think there is any additional way of describing the 9% number for retail .

Okay, so its not like there was an unusual catch up or being aggressive in realizing losses?

No, I think -- nothing extraordinary, I know we are trying to take losses at an earlier stage, rather than liquidate the collateral and then take the loss by way of comparison.

We are trying to be very active in managing the portfolio and recognizing risk.

We are a little more forward leaning in that regard, than the bank would have been say, last year.

The other element to think about, you generally have your worst credits emerge earlier in the cycle, and as you age into the cycle, you tend to have borrowers that tend to have more capabilities and resources.

And in our case, and we are trying to get to them earlier.

And so, if you would, there is a slightly better classified or criticized quality in the mix than six months ago, there is more to work with.

Okay, thank you.

And the last question I had, on earlier comments about the pretax provision earnings, and looking for additional actions to improve that, can you touch on, again, what are you considering as additional costs saves or?

This is some element of costs we are always going after.

We had an employee driven campaign called the green campaign that we closed out in the second quarter.

I think we shared that with you, Jay is shaking his head, so we didn't.

It was a $6 million number.

But there are always things we are looking to do on the expense side, but we believe we have got some fairly significant revenue opportunities.

With number of business lines essentially shut down for new business, to do the portfolio review in the second quarter.

Someone I think noted, and Don commented on, was the broker dealer income which was very high in the first quarter, a record first quarter, dipped in the second, but it's expected to come back and is on track to do that.

There are a series of actions we are taking now with weekly business line reviews that used to be monthly, that are putting a little more focus and tension into the process, We think all of these things are helpful, we have certain expectations that are more dynamic and we are not just locked into an annual budget .

For example, we are using the forecasting, the monthly forecasting process as a way of driving harder those business segments that have opportunities

Okay, great, thank you.

Your last question comes from the line of Ken Houston from Bank of America Securities, your line is now open.

Thanks, good afternoon.

Two questions.

First, on just on capital, you mentioned in the release that you guys have made a ton of progress on the capital rebuild, and that you might leave the door open to kind of getting back to that target you announced in May.

I'm just wondering.

With the ratio below piers, but much improved from where it was.

One us get to the completing the program, is that completely it for capital raising, and what would lead you to decide if anything that you would still have to top off capital rebuild further?

Sure, Ken.

We have been saying we are very happy with our overall capital.

We will evaluate whether there are components we like to shift into.

And so we'll continue to look at this.

And during our call, we talked about some of the other risk management efforts that could help reduce our risk weighted asset levels, which will have a positive impact on some of the ratios as well.

As we said, we are a little short of the target we laid out, and still evaluating some of the options to get there, and have a few things considered.

Okay, Again, my second question is regarding Steve's point earlier of not expecting any type of a rebound this year, can you just give us your broad thoughts of how the footprint is acting from a broader economic perspective?

How much more shake out are you expecting from the ancillary issues, from the auto industry trickling out, and what do we have to look forward to specific to Huntington to get kind of a turn in your views kind of about the economy, and how that leads into future credit?

A couple things in that regard.

One is we think-- we are sort of at best, mid-stage at the auto shakeout -- for us, it's not a big deal-- we just don't have that much supply or exposure.

The impact to us is more tertiary, but there will be some impact.

So, that's one of the reasons we are still cautious about the year.

Secondly, on the consumer side, I don't see -- we don't see job creation at a level that is mitigating the job loss, so we are expecting expecting higher unemployment.

And so far, we have been able to improve our performance on a number of books, and we expect to continue to do that, but it is impeding the rate of improvement that we would see if we got to a stable environment, let alone a good environment.

And we think as a consequence, there will be some continuing pressure on a variety of businesses, small and medium size in our footprint that will continue through this year.

Beyond what what would have been apparent in the second quarter.

Is that helpful?

Yes, that's helpful.

I think that it is the tertiary point is the most important to understand is how that leaks through to the rest of the footprints, so that's helpful.

And last question, do you have any concept which to help us out in which to think about possible timing for return to profitability?

For returning profitability?

We stopped giving guidance last year, and I am loathe to start it at this particular point.

We obviously are pushing pretax, preprovision, aggressively, dynamically, and we are looking to get our issues on the table dealt with and resolved and move forward.

So, we believe we are turning the ship, and that we have made pretty good progress.

It wasn't a puff piece in my initial remarks.

But we have more work to do, to be sure.

And we are going to suggest which particular quarter.

But having said that, it is foreseeable.

It's not some indefinite long-term point just on the horizon.

We believe -- we are going to continue to make progress in the core and it will hasten the transition point.

Okay, thanks very much.

Thank you.

There are no further questions at this time.

Thank you, Sara.

Thanks, everybody, for participating, if you do have follow-up questions, please give myself or Jim Graham a call.

Thank you, again.

We'll see you next quarter.