Huntington Bancshares Inc (HBAN) 2009 Q3 法說會逐字稿

Good Afternoon, my name is Chanelle and I will be your conference operator today.

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

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

After the speaker's remarks there will be a question-and-answer session.

(Operator Instructions)

Thank you Chanelle 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, www.huntington.com.

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

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

Slides two through four note several aspects of the basis of the presentation.

I encourage you to read these but let me point out one key disclosure.

This presentation does contain both GAAP and non-GAAP financial measures and where we believe it helpful to understanding Huntington's results of operations or financial position.

Where non-GAAP financial measures are used the comparable measure as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentation in its appendix and the press release and the quarterly financial review supplement to today's earnings press release or in the related Form 8-K filed earlier today all of which you may find on our website.

Turning to slide five, 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.

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

Turning to today's presentation, as noted on slide six participating today are Steve Steinour, Chairman, President, and Chief Executive Officer, Don Kimble, Senior Executive Vice President and CFO and Tim Barber, Senior Vice President of Credit Risk Management.

Also present is Dan Neumeyer, Senior Executive Vice President and Credit Officer and Nick Stanutz, Senior Executive Vice President of Auto Finance and Dealer Services.

Let's get started by turning to slide seven and Steve.

Welcome, good morning everyone.

First a word of introduction.

Pleased to introduce Dan Neumeyer to you.

He just joined us this month.

Dan came to us from Comerica where he was Chief Credit Officer for their Texas bank.

He has extensive credit and commercial banking experience with middle market companies and small businesses.

He also has experience in commercial credit training that will broaden team skills here at Huntington.

Additionally, he brings a demonstrated expertise in portfolio management.

He's got a proven track record of performance which will further strengthen the credit culture here at Huntington.

So welcome, Dan.

I think it's important to note up-front in that nine months we've made good progress in positioning Huntington for improved long-term performance.

I hope you have sensed the urgency with which we are moving forward.

Our number one objective is to position Huntington to return to profitability as soon as possible with better and consistent long term performance.

Aggressively addressing credit issues is fundamental to achieving this objective.

We made a number of significant decisions in the first half of the year and some more this past quarter as part of our objective to continue to seek opportunities to aggressively identify and resolve problem credits.

Despite the third quarter's loss I'm encouraged by the progress we are making.

As I noted last quarter, we're moving towards playing offense and you'll see that evident in a number of third quarter performance trends.

We are more focused and are seeing improvement in underlying performance in a number of key areas.

I will begin with a review of our third quarter performance highlights.

Don will follow up with a detailed overview of our financial performance.

Tim will provide an update on credit, and I'll then return with some 2009 fourth quarter outlook comments.

What I hope our investors take away from our third quarter performance.

Let's begin the presentation by turning to slide eight.

We reported a net loss of $166 million or $0.33 a share per common share.

The driver of the loss was a $475 million provision for credit losses.

This provision was $61.4 million or 15% higher than the second quarter.

It's also -- it also was $119 million or 33% higher than net charge-offs, thus strengthening our allowance for credit losses.

Contributing to this increase were certain credit actions that we'll talk about in more detail in a moment.

Which were consistent with our objective of moving aggressively to address problem credits as quickly as possible.

Pretax pre provision income was $237 million, up $7.8 million or 3% from the second quarter.

So progress continues.

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

For example, fully taxable equivalent net interest income increased $15.9 million or 5% as our net interest margin expanded 10 basis points to 3.2%.

And core deposits grew at a 10% annualized rate.

Our third consecutive quarter of meaningful growth.

Average loans declined $1.2 billion reflecting planned efforts to reduce our commercial real estate loan exposure but also reflecting lower C&I loans due to lower line utilization particularly in the auto dealer floor plan loan given the success of the Cash for Clunkers program that lowered dealer inventories.

Weak demand also resulted in a decline in total consumer loans.

While average loans declined, average investment securities increased $1.3 billion as the cash from our capital raising efforts was deployed.

Regarding capital we took further actions by adding $587 million to common equity.

This was accomplished through a third discretionary equity issuance program and a very successful common stock offering.

Reflecting in these actions are period end capital ratios saw further significant improvement.

Our tangible common equity increased to 6.46%, up 78 bips.

Remember this was only 4.04% at the end of last year.

I certainly remember the 4.04%.

Our regulatory tier one and total risk based capital ratios increased to 13.04% and 16.24% respectively.

These are $3.1 billion and $2.8 billion above the respective regulatory well capitalized 6% and 10% thresholds.

We believe we now have sufficient capital to weather a stressed economic scenario.

Liquidity was also further strengthened.

A key driver was the strong core deposit growth mentioned earlier.

Our loan to deposit ratio at the end of September was 94% improved from 98% at the end of June and much improved from 108% at the end of last year.

At September 30, total cash and due from banks was $1.9 billion, or $1.1 billion higher than at December 31st.

Also since last year end, our unclassed investment securities portfolio has increased $4.3 billion.

Turning to slide nine, consistent with our objectives, we took certain credit actions to further resolve aggressively addressing current and emerging credit issues, so as to accelerate the identification, recognition, and resolution of problem credits.

We believe our actions will result in timelier resolution.

As related to third quarter performance, these actions contributed to higher commercial loan amount pools, residential mortgage debt charge-offs and provision for credit loss expenses.

With regard to the commercial portfolio and utilizing enhanced portfolio management processes put in place in the first half of the year we continued our emphasis of identifying potential emerging problems in our commercial loan portfolio.

It's important to note that our change in criticized loans for the quarter was 4%, and that over 55% of the third quarter's newly identified commercial non accrual loans were less than 30 days past due.

As related to our residential mortgage portfolio we took a more conservative position on the timing of loss recognition and continued active loss mitigation and troubled debt restructuring efforts.

Here we also sold some underperforming loans for the first time this year.

It's important to note that even though total portfolio net charge-offs were elevated they continued to be below the two-year cumulative loss assumption used in our stress test analysis announced last May.

There are two other areas I want to highlight.

First we continued to strengthen our Board and Management team.

Bill Robertson joined the Board.

He was a former President, Director, Deputy Chair and at one time CFO of National Citicorp in Cleveland.

He clearly understands our markets very well, brings a wealth of banking and business development experience to our Board.

We we also strengthened our management committee.

I mentioned Dan.

Also joining is Elizabeth Allen, Executive Vice President, Director of Public Relations and Communications.

She has outstanding and broad experience and background at several fortune 100 companies.

She will lead the creation and delivery of integrated communication program that supports and is consistent with the Huntington brand.

In our business segments Dave Hammer recently joined us as President of our Pittsburgh region, and Bill Shivers was appointed President of our Akron-Canton region.

Both are important markets to us.

Both of these individuals bring a wealth of banking and local market experience to Huntington.

Lastly, and as evidence of our shift to offense, on October 2nd we acquired approximately $400 million of deposits of Warren Bank, located in Macomb County in Michigan.

Just northeast of Detroit.

In an FDIC-related transaction.

We're very pleased to have been a successful bidder for this franchise.

And welcome the over 8,000 customers to Huntington.

From a fund raising perspective this should result in continued improvement in our loan to deposit ratio.

We're pleased with the early on results and expect to have all the accounts converted and customers fully integrated by the middle of January next year.

As further evidence of our progress and playing offense I'm pleased to announce that just yesterday we've been informed by the US Small Business Administration that for the fiscal year ending September 30 they ranked Huntington the number one SBA lender in Ohio and West Virginia in terms of loans and amount of lending and number one in SBA lending in Indiana and Michigan in terms of loans.

Let me turn the presentation over to Don to he review the financial performance.

Don?

Thanks, Steve.

Slide 10 provides a summary of our quarterly earnings trends.

A reported net loss, as Steve said earlier for the quarter was $0.33 per common share, or $0.07 per share less than our second quarter loans.

Many of the other metrics will be discussed later in the presentation, so let's move on.

On slide 11 we provide an overview of our pretax pre provision income performance.

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

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

In the past, we've also adjusted for certain significant items.

However this quarter we did not adjust for any items.

On this basis, our pretax pre provision income for the third quarter was $237.1 million, up $7.8 million, or 3% from the last quarter.

This improvement clearly reflected the management actions taken during the first nine months of the year and we continue to look for additional opportunities to improve our core operating performance.

Slide 12 provides a trend of our net interest income and our margin.

During the third quarter, our net interest income increased by $15.9 million reflecting a 10 basis point improvement in our net interest margin and a stable average earning asset base.

The margin improvement reflected a favorable impact of our improved loan pricing and deposit mix, partially offset by the negative impact of actions taken to improve our on-balance sheet liquidity position and the higher levels of non performing assets.

On slide 13, we show the change in our mix of our investment portfolio.

With the growth in our deposits, we've invested the funds primarily in two-year agency securities and three-year agency CMOs.

The short-term of these investments provides the flexibility to reposition the portfolio if the yield curve starts to steepen.

The three highest risk segments of our portfolio are shown on slide 14.

Our Alt-A mortgage back, our pool trust preferred and our prime CMO segment.

During the quarter we sold $97 million of book value of our Alt-A securities.

These securities were some of the lower graded securities we owned.

These sales are part of a design plan to lower the risk profile of the portfolio.

As a matter of fact, our risk weighted assets associated with the securities declined by more than the amount sold, or by $207 million.

The trust preferred securities continue to reflect the stress of the economic environment with many of the underlying issuers deferring payment.

With the increased deferrals and the expected defaults we recognize an additional $14.6 million of other than temporary impairment on these securities.

These losses were offset by security gains on the sale of the Alt-A and certain agency securities.

The prime CMOs reflect the increased prepayments realized during the third quarter.

These bonds continue to perform as expected.

Continuing on to slide 15, we show linked quarter loan and lease trends.

Total commercial loans were down by $0.9 billion, or 4%, reprotecting the impact of lower line utilization for commercial borrowers including auto dealer floor plan loans.

The decline also reflects planned lower commercial real estate balances reflecting both paydowns and charge-offs.

The decrease in total loans also reflected a slight decline in total consumer loans.

Turning to slide 16, one of the real highlights for the quarter was the continued growth in our core deposits.

Not only did we grow in total core deposits in an annualized 10% rate but the growth came from the demand deposit and money market category.

We're continuing to family size core deposit growth through our incentive programs and management goals.

We're very pleased with the results to date.

Slide 17 shows the trends in our noninterest income categories.

Of note, our service charges on deposit account reflect the growth in our demand deposits up 7% from the second quarter.

Mortgage banking income declined by $9.4 million from the second quarter reflecting lower refinance activity.

Other income for the quarter was down $15.6 million as the second quarter reflected a $31 million gain related to our Visa stock.

The current quarter included a $22.8 million gain from the interest rate swaps deemed as ineffective this quarter.

These swaps have been redesignated with the remaining benefit recognized over the remaining term of two to three years.

Also included in other income for the quarter was a $7.5 million loss from the sale of nonperforming loans.

Turning to the next slide is the summary of our expense trends.

Total expenses are up $61 million from the prior quarter.

Second quarter we recognized $67.4 million of gain in the redemption of trust preferred securities.

This quarter our OREO and foreclosure expenses as shown separately and the increase reflects $14 million loss on one commercial OREO property.

As shown on slide 19 during the quarter, we completed our announced plan to enhance our capital positions.

We completed $150 million discretionary equity issuance program followed by $460 million public issuance.

The results of these issuances brought our TCE ratio for the quarter to 6.46%, up 78 basis points.

Our tier 1 common equity increased by 102 basis points to 7.82%.

Slide 20 provides a summary of the capital actions over the first nine months of the year.

In total we've increased tier one common by more than $1.6 billion during this time.

Although issuing additional capital is not planned at this time we are currently considering additional liability management actions to further bolster our capital ratios and utilize some of the net proceeds and capital raids.

Let me turn the presentation over to Tim Barber to review the credit trend.

Thanks, Don.

Turning to slide 21 our total charge-offs were $21.5 million or 6% higher in the third quarter than the second quarter.

However, there were substantial changes in the composition.

Total commercial net charge-offs were $32.8 million lower in the quarter as the C&I portfolio showed a significant decline on the commercial real estate portfolio remained constant.

In the consumer portfolio, two discretionary credit actions associated with the residential mortgage portfolio substantially increased the charge-off recognized in the quarter.

As the economic conditions in our market continue to be challenging and the home prices remain flat we adjusted the timing of our loss recognition to ensure that we are taking a conservative view of the value of the real estate collateral.

This change accounted for a $32 million loss during the quarter.

In addition, we transferred $45 million of underperforming residential mortgage loans to loans held for sale which resulted in a $17.6 million loss.

This sale activity was entirely comprised of Huntington originated loans.

We believe that the combination of these two actions best positions Huntington well for the future.

The remaining consumer loan portfolios performed much as anticipated with lower auto losses and marginally higher home equity losses primarily as a result of increased short sale activity.

The third quarter represented our highest level of closed loss mitigation structure.

It is important to note that all of the consumer portfolio showed improved early stage delinquency levels over second quarter results.

As we consider our asset quality trends and drivers the commercial real estate portfolio remains the most stressed.

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

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

The $35.3 million decline in non Franklin C&I net charge-offs was a function of lower losses throughout our geographic regions and was also evident in our small business banking portfolio.

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

One C&I segment that we continue to feel comfortable about despite the environment is the C&I loans in our auto finance and dealer services portfolio.

We do not anticipate any dealer related losses in the portfolio even in the face of the dealership closings.

Our dealer selection criteria with a focus on multi dealership groups has proven itself.

Our indirect auto portfolio continued to show very positive performance trends while the home equity portfolio did show an increase from the prior quarter.

Despite the increase in losses we were generally pleased with the results across our consumer portfolio during the quarter, particularly given the economic environment in our market.

Slide 22 represents the net charge-off ratios associated with our portfolio.

You should note that annualized residential mortgage net charge-off ratios shown as 6.15% would have been 1.73% excluding the previously mentioned $49.6 million in charge-offs related to this quarter's credit action and loss on loan sale.

On this same basis, the total net charge-off ratio of 3.76% would have been 3.24%, down from the 3.43% in the second quarter.

Turning to slide 23, non accrual loans were $2.2 billion at September 30th, representing 5.85% of total loans and leases.

This $363 million increase was more than the $265 million increase from the prior quarter from the first quarter to the second quarter as we continued our practice of early recognition of non accrual treatment in the commercial portfolios.

By way of example, over 55% of the new commercial non accruals identified in the quarter were contractually current as of September 30th.

The residential mortgage non accrual decline in the quarter was a result of the credit actions described earlier.

The $156 million increase in C&I non accruals reflected the impact of the economic conditions in our market and was evident across our regions and industry segments.

In general, those C&I loans supporting the housing or construction segment and non dealer related loans associated with the auto industry experienced the most stress.

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

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

The $283 million increase in the commercial real estate non accruals reflected the continued decline in the housing market, stress on retail sales, and the general decline in the economy.

The increase this quarter was not concentrated in a specific project type, although the single-family homebuilder and retail segments remain the most stressed.

It is important to note that on an overall basis, 35% of the total C&I and commercial real estate non accruals were current from a payment standpoint.

On the nonperforming asset front, OREO balances declined as we actively marketed and sold our properties, including OREO generated from the acquired Franklin portfolio.

The increase in the impaired loans held for sale was attributable to the previously mentioned transfer of residential mortgages to loans held for sale.

Slide 24 provides a summary of some key asset quality trends.

Th non accruing loan ratio increased to 5.85% in large part due to changes in treatment described earlier.

The NPA ratio was 6.26%.

We continue to actively manage the portfolio as evidenced by the reduction in our commercial accruing 90 plus delinquencies to virtually zero for the third consecutive quarter and a decline in the consumer 90-day delinquency that I will review later.

Our reported allowance for credit loss ratio of 2.9% represented a significant increase in the 2.51% reported in the prior period.

Despite the increase in the reserve balance, the resulting non accruing loan and nonperforming asset coverage ratios declined in the quarter.

We believe that the allowance for credit loss to nonaccruing loan ratio of 50% is not representative of the actual risk profile of the portfolio.

Slide 25 provides some new details regarding our non accruing asset balances.

On slide 25, you can see an assessment of the nonaccrual loan balances as of September 30th.

We believe the Franklin loans have been addressed based on the fact that they have been written down to value as evidenced by the 71% in the prior charge-off column.

Subtracting the Franklin non accruing loans results in the $1.8 billion non Franklin non-accruing loan amounts shown.

This amount is more comparable to other banks.

As we think about reserve adequacy, it is important to take into consideration not only the reserve level, but also cumulative losses.

On our non-Franklin non accruing loans we have taken a cumulative charge-off of 26%.

In other words, the $1.8 billion represents a 74% carrying value.

In addition, we have an allowance for credit losses representing 18% of the carrying value of the loans to absorb future deterioration.

We think it is also important to give consideration to the fact that embedded in the $1.8 billion are $507 million of loans that were impaired under the FAS 114 analysis process.

These loans have been written down by an aggregate of 33% and per accounting regulation have no reserve.

Excluding these impaired commercial loans, leaves an adjusted non-Franklin non-accruing loan balance of $1.3 billion which has been written down by a cumulative 23% with an additional 25% reserve against the carrying value to absorb future losses.

It is also of interest to note that of the $1.3 billion of adjusted non-Franklin nonaccruing loans, 50% were less than 30 days past due.

Let me emphasize that point.

50% of the adjusted non-Franklin nonaccruing loans were current.

We also feel very comfortable that the existing allowance for credit losses on the $96 million of non-Franklin residential mortgage and home equity nonaccruing loans is sufficient.

While we acknowledge that the aggregate allowance for credit loss coverage of 50% shown on the previous slide is low relative to other banks, we believe that providing this additional analysis on the composition of our non accruing loan balances provides a clearer picture of our credit actions associated with these loans and why we are comfortable with our current level of reserve.

Slide 26 provides a reconciliation of the quarterly changes in the nonperforming asset balances.

You can see the increasing level of new additions which continues to be heavily weighted toward commercial real estate.

We continue to be focused on the early recognition of non accruals, particularly as a result of the economic stress some of our borrowers are experiencing.

As we view this slide, it is important to include some comments regarding the underlying migration we are seeing in the portfolio.

While non accruing loans increased a net 20% in the quarter, the net level of criticized loans increased by only 4%.

As you may recall, in using slide 75 as a reference point, there was substantial migration into the criticized category, a combination of the OLEM and classified segment, in the second quarter as a result of that quarter's broad-based review activity.

We expect to see continued additional migration into the criticized category as the economic environment remains challenging.

Of the 4% increase in criticized loans in the third quarter, the bulk of the increase was again associated with the commercial real-estate portfolio.

We were encouraged by the low level of net change in criticized C&I and business banking segment loans.

This is consistent with our view that the commercial real-estate portfolio of the primary driver of the asset quality performance to date.

It is important to note that the level of criticized loans is a leading indicator of future nonaccruing loan and charge-off levels as there are established migration patterns.

What we experienced in the third quarter was a more rapid movement into the nonaccruing loan category as we continue to be focused on early recognition.

A final comment on the changes and asset quality in the quarter.

We continue to expect losses to be below the [SCAP] stress test results as presented on slide 142.

We continue to believe our consumer segments will perform well under the low expectation levels shown that in SCAP analysis with our C&I performance expected to be near the low end of the range and our commercial real-estate portfolio approaching the high end of the range.

Again, this is consistent with our belief that the commercial real estate portfolio is by far our most stressed portfolio.

Slide 27 provides a view of the trend in the commercial loan over 30 day and over 90 day delinquency ratios.

These ratios include both the C&I and commercial real estate portfolio and is one measure of the underlying quality of the portfolio, especially the over 30-day delinquency ratio.

Turning to slide 28, our C&I portfolio from a credit quality performance perspective continued to operate at manageable levels.

Delinquencies were little changed with the prior quarter and the net charge-off ratio was lower.

There has been significant news from the industry surrounding the results of the shared national credit examination results.

From a Huntington perspective, the asset quality metrics for criticized, classified, and non accruals associated with our shared national credit portfolio are approximately 50% lower than the reported industry ratios.

Our shared national credit exposure is limited to borrowers in our footprint where we can develop a non credit relationship in addition to the loan exposure.

This strategy in place since the early 2000's has had a direct impact on the far better asset quality ratios.

On slide 29, you can see similar information for our commercial real estate portfolio.

As we continue to provide additional disclosure around our commercial real estate portfolio, slide 30 provides a look at the exposure by type of loan, using expanded definitions that provide more clarity regarding this portfolio.

Given the lack of liquidity in the permanent market, we have now separately defined a permanent qualified category based on positive debt service coverage and loan to value position.

This segment was previously part of the mini perm segment.

Given the market condition and our focus on shorter term renewals a buildup in the mini perm category is inevitable.

It is important to note that we are not booking longer term renewals into the mini perm category and then forgetting them.

Our strategy is to maintain a direct and ongoing connection with our borrowers on these projects.

Turning to slide 31, you can see the material difference in asset quality among these newly defined categories.

In particular, the permanent eligible category has the best asset quality metrics.

The construction and traditional mini perm categories continue to be the source of the bulk of the credit issues in the portfolio.

Importantly, in these higher risk construction and mini perm categories, over 50% is already managed by our special asset division.

This ensures that an appropriate collateral valuation has already occurred and is incorporated into our reserve calculation.

It is also note worthy that 15% of the total construction balances are associated with non developed projects such as owner occupied buildings.

The other new disclosure is found on slide 32 which represents a commercial real estate loan maturity schedule.

We have used this maturity schedule as part of our project management process, contacting our borrowers well in advance of a maturity date to facilitate negotiations and solutions.

Our ability directly contact our borrowers is the significant differentiation between our portfolio and the majority of the CMBS metrics in the market today.

As note on the prior slide, approximately 50% of the two highest risk segments are already managed by our special assets division.

Slide 33 shows the trend in over 30 and over 90-day delinquencies for our three major consumer loan portfolios excluding Franklin and Ginnie Mae guaranteed balances.

The auto loan performance remain consistent continuing the positive performance trends we have seen over the prior three-quarters.

Early stage delinquencies are highly predictive of future performance in this portfolio.

There was an increase in the home equity ratios but we continue to feel comfortable with the performance of this portfolio.

The residential delinquencies are lower in both categories as a result of the portfolio actions taken in the quarter.

It is important to note that the delinquency rates would have been lower even without the impact of the credit actions.

In summary, we continue to believe performance in our consumer loan portfolios will show better relative performance throughout the cycle, not withstanding the spike in residential mortgage net charge-offs this quarter due to the specific credit actions.

Let me turn the presentation back to Steve for wrap-up.

Thank you, Tim.

Turning to slide 34 let me share with you my expectations about 2009 fourth quarter performance.

First, as we've said since January we still do not believe there will be any significant economic turnaround this year.

We continue to believe we have a good understanding of the risks in our consumer loan portfolios and that those loans will perform on a relative basis better throughout this cycle.

Nevertheless, as noted earlier, we're continuing to seek opportunities to accelerate the identification and resolution of problem credits, returning Huntington to profitability as soon as possible is our highest priority.

And getting the credit issues identified, addressed, and behind us is key.

As such, we anticipate that net charge-offs, provision expense, loan loss reserves will remain elevated.

The good progress we've made in improving our pretax pre provision income is encouraging.

By continuing to focus on disciplined loan and deposit pricing, we expect our fourth quarter net interest margin will be flat to slightly higher than the third quarter.

The very good traction we have achieved in growing transaction related core deposits is also expected to continue.

However, loans are expected the decline modestly reflecting the impacts of our continued efforts to reduce our commercial real estate exposure, the weak economy overall, and ongoing net charge-offs.

Fee income performance will remain slightly mixed and expenses well controlled.

Let me use slide 35 to review key messages that I hope come through from our comments.

First, everything we are doing, all of our actions and decisions are focused on returning Huntington to profitable performance as soon as possible.

I know everyone would like me to give a timetable, but I'm just not feeling I'm in a position to do that at this point.

The fact is, there are just too many uncertainties regarding the economy.

But I can tell you that only when the credit picture brightens will that happen, an that's two-part equation.

The first part is the economy.

That's the part of the equation we can't control.

Therefore, I think the most prudent course of action is to prepare for a challenged environment.

The second part of the equation, which is the part we can control, is making sure we continue to aggressively identify and address credit issues.

This could mean more pain before we see the peak.

But we'll -- in the near term and certainly for the long term be better -- we will be better off for it.

The very good news is that we now have sufficient capital to weather a stressed economic scenario.

Remember, though net charge-offs this quarter were elevated they were still below the two-year cumulative loss rates assumed in our internal stress test analysis.

So the credit quality performance you saw in third quarter in part was more one of timing and not a shift in our overall view.

Also, our liquidity positions remain very strong.

And as we think about future we continue to stress that our management team and depth of expertise at all levels.

The development of our strategic plan is well underway and while it won't be officially finalized until later this year the exercise is already impacting decisions as we continue our shift to playing offense.

This past quarter playing offense has been most evident in three areas.

First, our new improvement reflecting improved loan and deposit decisions, second, the core deposit growth, and third, the Warren Bank transaction.

As I said at the beginning, I am greatly encouraged by our progress to date.

There is still much to do but we are getting stronger everyday.

We are getting stronger everyday.

Thanks for you interest in Huntington and Operator we'll now take questions.

(Operator Instructions) Your first question is from the line of Matthew O'Connor with Deutsche Bank.

Good afternoon.

Hey, Matt.

First question is, last quarter did you a deep dive into commercial real estate and C&I to some extent.

I think we had some acceleration of losses related to that.

This quarter there's change in the timing of recognizing losses and resi mortgage.

Are there any other things like this that you can see coming down the road in terms of how you deal with losses or deep dives, things like that?

Well, Matt, we're continuing to be concerned about commercial real estate.

We we talked about that when we did the fourth quarter April announcement.

We think that's the challenge, certainly for the years and most people would say it's going to be a challenge into 2010, and we believe that's the case.

Although a quarter doesn't make a trend, we were pleased with what we saw on the commercial and business banking book.

We decided to take some action on the resi mortgage book which we think was prudent to do.

There's nothing that we're working on at this point regarding a change in charge-offs to answer your question, a change in charge-off policy.

On any of the portfolios.

Okay.

So maybe going from here on, it will be just your more normal/abnormal run rate level of losses as opposed to maybe some of these chunky things.

Matt this is Tim.

I'd add a couple of comments.

Particularly on the residential side.

We've been looking at ways to move some of the risk in the residential portfolio for quite awhile.

We think that we found an opportunity where the execution made sense to us, and so we took advantage of that.

And that's part of the chunkiness, as you call it, in the third quarter results.

So that wasn't planned.

That was a case of take advantage of an opportunity that presented itself.

As Steve said, we don't have any other macro changes in charge-off policy on the horizon.

We did sell a couple of small commercial portfolios as well that were -- I'd characterize as sort of testing the market and understanding if we think there's an opportunity that makes sense, then we proceeded.

We're not trying to signal an intent to sell large blocks of nonperforming or near nonperforming.

On the other hand, we're looking at all options.

So -- and we'll continue to do that.

Okay.

And then just unrelated question for Don, you mentioned some liability actions of (inaudible) capital were being explored.

I assume this relates to potentially buying back some debt.

How meaningful could that be from an earnings capital point of view?

I assume there would be no impact on shares from all this stuff you're talking about, right?

We would not plan on issuing shares in connection with any type of liability management, and as we get some additional detail, we'll make sure that we announce that.

I would not view it as significant as far as an overall impact from any type of liability management.

Okay, thank you very much.

Thanks, Matt.

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

When you look at your commercial real estate portfolio, speaking specifically about nonconstruction CRE, what is it that you guys did in terms of your historical lending practices or how you underwrote he the loans that is leading to this higher level of losses?

I guess I'm just trying to reconcile again the non construction series losses that you guys are having versus a lot of the other banks where we really haven't seen much in terms of ultimate losses, but we expect to in the future, and trying to understand if you can get through the hump a little quicker than they can.

Ken this is Tim.

In answer to your question, we were a relatively conservative underwriter in commercial real estate.

Much of the activity has supportive guarantor/sponsors.

And so the difference that you note between between Huntington and the industry I think is more timing.

And so you alluded to that yourself that you expect to see the non construction real estate losses increase at other banks.

I do, too.

Ken, just to follow up, we did a lot of portfolio review activity on single family and retail first quarter.

We picked up the rest of the book pre FC&I in the second quarter but we shared with you collectively that that wasn't a one-time exercise.

Anything that we identified that was of concern we want to continue with a very active portfolio review process, and we have done that on a monthly basis, and those activities that we started after that second quarter review are in addition to the monthly review that we began in February of criticized assets.

So there is just an an enormous and intense effort to identified and address issues within the commercial and commercial real estate portfolios.

And the pre book, I don't know -- I can't think of any developer, (inaudible) executive or otherwise I've talked to or that any of us have reported back on that suggests its plateaued or getting better.

So we're trying to be very realistic in our assumptions, it's not getting better, and therefore getting after it now is in fact the appropriate thing to do on multiple fronts, including mitigating loss by taking reasonably aggressive actions at this stage.

All right, the other question I had was just in terms of bringing on, I guess the early stage delinquent commercial loans on to NPL sooner.

I understand that working with the borrowers from an earlier point in time before they become completely delinquent makes -- helps reduce severity in the long term.

But does it matter if you bring them on NPA now or if you're just working with them while they're still performing?

I guess why the distinction of bringing on increasing your NPAs because with only 30 days delinquent?

We're probably not as sensitive to that as perhaps some others, one.

Two, the regs require that if you don't expect to receive repayment of principal and interest, that you make a determination -- if you don't expect to you've made a determination as to collectability, and it should go nonaccrual.

And the intensiveness of our reviews, cumulative reviews, are getting us to a position, again, going back to your earlier question, maybe a little sooner than some others.

It's hard to speculate what others are doing when we don't know their books.

But we're calling it as we see it, and we're trying to be conservative.

Okay, great, thank you.

Thank you.

Your next question is from the line of Jeff Davis with FTN Equity.

Hi, Jeff.

Don, the capital that you just raised through common raise is that still sitting at the parent company, or it has been down streamed to the subsidiary bank, and as an aside how much cash is the parent company sitting on today?

The $587 million is still sitting at the parent company.

We did, during the third quarter, inject additional common equity down into the bank of $250 million from previous equity issuances.

As far as the cash position of the bank, I know it's north of a billion and a half dollars, but I don't know the number off the top of my head but it's significant as far as the cash position.

And Steve, for you, related to this, in your contacts around the industry, is there a notable difference between the OCC and the state regulators or state charter banks in terms of calling on the parent companies to inject capital into the subs?

You're asking me to really speculate.

I don't know a lot at the state level.

Historically, my experience is having been at a state level and also with the OCC would suggest, and I think we're state level at seven or eight banks--seven or eight states, which suggests there's a marked difference, but it would be speculation to suggest that at the moment on my part.

That's fine.

The only reason I ask, it seems to be a little bit more prevalent at OCC banks.

That's fine.

Thank you.

Thanks, Jeff.

Your next question is from the line of Ken Usdin, Banc of America Securities-Merrill Lynch.

Two questions.

Steve, you talk about not expecting change in the economy in the near term, but I was just wondering how do you think your footprint could act relative to broader economic recovery across the country, and what are you not seeing that you would like to start seeing as far as starting to see some glimmers hope?

There's almost a tale of two worlds, Ken.

If you're in west Michigan, you've got a much different outlook than east Michigan.

You got parts of east Michigan with mid-20s unemployment.

Toledo where, we're number one, I think a 15% unemployment rate.

This auto zone in east Michigan, northwest Ohio, spawning into parts of Indianapolis, it's very tough there.

Now, contrast that with west Michigan, Columbus, Cinci, Indianapolis, you're like national averages, and there are activities going on in these different markets that are much more encouraging, and I think they'll come back faster than, again, some of the auto zone belts.

I don't mean to duck your answer, but really it depends on the geography.

I think there are already actions that are suggesting some of these regions may be stabilizing, but as a whole, I wouldn't suggest that's true for the Midwest yet.

Got you.

My second question relates to the investment portfolio.

You touched on this some.

Obviously you put a couple billion dollars back into the investment portfolio.

I'm just wondering, is that going to be the strategy, and how are you balancing that against the kind of keeping capital on hand, so are we going to continue to see earning assets run flattish as you basically plug the hole for slower loan growth with investment purchases, and how do you expect that to layer out in advance of rates eventually going higher?

Sure.

As far as the investment portfolio, and overall earning assets, we think earning assets will really be driven by deposit growth as opposed to any other aspect as to the asset side of the balance sheet.

So you probably will see a higher growth in investment securities going forward because we just don't see the loan demand to really start to see any growth any time soon there.

As far as the portfolio itself, that we'll probably continue to invest fairly short term in nature, and use the proceeds and low risk short-term securities so that it allows us to reposition that as the interest rates would start to pick up and as loan demand would start to pick up as well.

Right.

You're see going enough opportunities to keep buying in the market as opposed to just letting the deposit -- letting higher cost deposits or what's left of your brokered CDs run down?

We do plan on actively managing wholesale and brokered.

We've repaid everything, other than the home loan bank, without penalty.

We are running off the other wholesale.

We expect to increasingly have the total balance sheet deposit funded at levels the Company hasn't had before.

Got you.

Thanks a lot.

There are no further questions at this time.

Okay.

Well, if that's the case then, thank you very much for participating in the call.

If you have follow-up questions, please be sure to give myself, Jay Gould, or my associate, Tim Graham, a call.

Thank you for joining today's conference.

You may now disconnect.