Huntington Bancshares Inc (HBAN) 2010 Q1 法說會逐字稿

Good morning, my name is Jeff.

I'll be your conference operator today.

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

(Operator Instructions).

Thank you, Mr.

Gould, you may begin your conference.

Thank you, Jeff, welcome.

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

The copies of the slides we will be revealing can be found on our website www.huntington.com.

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

Please call investor relations 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.

Turning to slides two through four, you will notice several aspects of the basis of today's presentation.

I encourage you to read these.

Let me point out one key disclosure.

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

Where non-GAAP financial measures are used, the comparable GAAP financial measure as well as the reconciliation to the comparable GAAP financial measure can be found on the slide presentation and the appendix in the press release, in the quarterly supplemental to today's earnings press release or in the related 8-K filed today, all of which are 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 that may cause actual results to differ materially.

We assume no obligation to update such statements.

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

Now, turning to today's presentation.

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

Also present for the Q&A session is Dan Neumeyer, Senior Executive Vice President and Chief Credit Officer.

Let's get going.

Turning to slide seven, Steve?

Thank you, Jay, and welcome everyone.

I will begin with a review of our first quarter performance highlights, Don will follow with a detailed overview of our financial performance, Tim will provide an update on credit and then I'll return with some 2010 outlook comments and what I hope you and other investors take away from today's presentation.

Let me begin with the presentation, turning to slide eight.

We entered 2010 as a stronger Company with underlying momentum and said we expected to return to profitability some time in 2010.

I am very pleased to report that some time is now.

We reported net income of $39.7 million or $0.01 a share.

This morning, this was a very significant step forward.

It represents a reset of expectations for the year.

For we now expect to report a profit for the full-year of 2010.

The results included a $38.2 million net tax benefit that Don will detail for you.

As you think about performance for the rest of the year, it's important to note that we continue to report very good improvement in pretax, preprovision income.

This was up 4% for the quarter or 16% annualized from the fourth quarter level and represented the fifth consecutive quarterly improvement.

This is 12% higher than a year ago.

We believe this positive performance momentum will increasingly differentiate us from a number of our peers over coming quarters.

The primary driver was the 5% linked quarter increase in net interest income as our net interest margin expanded to 3.47% from 3.19% in the fourth quarter.

As we motioned last quarter, the growth in investment securities in the fourth quarter was in short duration securities about 2.4 year duration.

During the quarter, we modestly repositioned our interest rate risk position for more asset sensitivity for 2011.

Don will provide the details.

We now believe our net interest margin for the rest of the year will remain around a 3.5% level.

Average loans declined slightly as decreases in total commercial loans were partially offset by growth in average total consumer loans.

Non-interest income was down due primarily to seasonal factors though we saw good revenue growth in some key activities.

The increase in expenses reflected a combination of seasonal factors but also investments in growth.

Credit quality trends continue to improve as expected across the board.

NPA's declined 7%.

Importantly, new NPAs for the quarter declined 52%, net chargeoffs declined for the quarter 46% and we saw early-stage delinquencies or commercial loans down 13% and consumer loans down 4%.

Turning to slide nine, while there are some signs of increasing economic stability in some of our markets, the economy remains challenging and as such, we felt it important to maintain our reserve level essentially unchanged from where they were at the end of last year.

Our provision for credit losses is $235 million essentially matching the $238 million in net chargeoffs.

Our allowance for credit losses as a percent of period loans and leases was 4.14%, down 2 bips from the prior quarter.

Relative to non-accrual loans coverage, our reserve coverage ratio increased to 87% from 80%.

Our capital position is strong, our chief tangible capital equity ratio improved 4 basis points to 5.96 during the last quarter and in contrast, our regulatory tier one total risk based capital ratio declined slightly due to an increase in the disallowed deferred tax asset.

Nevertheless, the ratios are strong and $2.5 billion and $1.8 billion respectively above the well-capitalized regulatory thresholds.

Lastly, our liquidity position remains strong.

We fell 5% annualized core deposit growth for the period of loans to deposit ratio of 92%.

The period and cash and investment securities were in excess of $10 billion.

As shown on slide 10, in addition to some well-deserved recognition of the hardworking success for our colleagues in delivering high-quality and value-added services in the area of automobile finance and treasury management customers, we also continue to move forward with the implementation of strategic initiatives designed to grow revenues.

These included during the quarter initiating seven-day banking in our Cleveland market, the first bank to do so.

The addition of the team of seasoned commercial bankers in Michigan.

The announcement of a three-year, $4 billion commitment to small business lending.

The opening of two new Huntington Investment Company offices in central Ohio, and the hiring of a nationally recognized mutual fund wholesaler to open up the distribution of our Huntington funds through third party channels.

Each of these initiatives is specifically targeted to grow revenues.

We're very excited about the opportunities these represent.

With that in mind, let me now turn the presentation over to Don for financial performance details.

Don?

Thanks, Steve.

As noted on slide 11, our net income for the first quarter was $39.7 million, or $0.01 per share.

One significant item impacted the quarter's results.

We recognize that $38.2 million or $0.05 per share net benefit from an increase in the deferred tax asset related to loans acquired from Franklin in 2009.

This benefit was partially offset by the charge related to certain provisions of the Healthcare and Education Reconciliation Act of 2010.

Slide 12 provides a summary of our quarterly earnings trend.

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

On slide 13, we provide an overview of our pretax, preprovision income performance.

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

We calculate this metric by starting out with pretax earnings and then excluding three items.

Provision for credit losses, security gains and losses and amortization of intangibles.

We also adjust for certain significant items where applicable.

On this basis, our pretax, pre-provision income for the first quarter was $252 million, up $10 million or 4% from last quarter and 12% higher than a year ago.

This improvement clearly reflected the management actions taken over the last year and we continue to look for additional opportunities to improve our operating results.

The most significant contributor improvement was our increased net-net interest income.

This improvement will be detailed in our next slide.

Slide 14 depicts the trends of our net interest income and margins.

During the first quarter, our fully taxable equivalent net interest income increased by $19.6 million, reflecting a 28 basis point increase in our net interest margin to 3.47%.

And a $0.6 billion decrease to our average earning asset.

The margin change reflected several favorable impacts.

First was the favorable impact of our asset liability management strategies.

This impact primarily reflected two components.

First, in the third and fourth quarters of 2009, certain interest rates swaps were identified as ineffective.

During the 2010 first quarter, we terminated most of these swaps and rebooked similar new swaps resulting a positive impact on net interest income.

Second, we also entered into new swaps during the quarter to reduce our current asset sensitivity.

The new swaps entered into during the quarter were short in duration, an average of 1.7 years.

While we're retaining a very neutral position throughout all of 2010, we're positioned to become more asset-sensitive beginning in 2011.

We have approximately $6 billion of interest rate swaps maturing in 2011.

Second, we also continue to see our margin benefits from the shift in our deposit mix as well as continued loan and deposit pricing efforts.

It's interesting to see that our margin has improved 50 basis points from a year ago.

This improvement has occurred despite a shift in our overall asset mix from loans to security, significantly improved liquidity position maintaining a neutral interest rate risk position and a continued high-level of nonperforming assets.

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

The total commercial loans were down $1 billion or 5%.

The decline reflected the anticipated decline in commercial real estate balances from paydowns and chargeoffs.

The $0.3 billion decline in CNI loans reflected the impact of a reclass of certain variable rate demand notes from commercial loans in prior periods to municipal securities.

This reclass accounted for the entire decline in this linked quarter balance.

Total consumer loans were up by $0.9 billion or 6% in the prior quarter.

The $0.9 billion increase in average automobile loans and leases primarily reflected the $0.8 billion impact of adopting the new accounting standard to consolidate a previously off balance sheet automobile loan securitization transaction.

These balances were recorded at fair value.

Also during the quarter our auto loan originations remained strong.

Turning to slide 16, we continue to generate strong core positive growth.

Total core deposits grew on an annualized 5% rate, despite a $0.9 billion decline in core time deposits.

We continue to be pleased with the shift in the mix of our deposit base to more transaction accounts.

As noted earlier, this continues to drive the improvements in our net interest margin.

Slide 17 shows the trends in our non-interest income category.

Our non-interest income declined $3.7 million in the prior quarter.

The deposit service charges were down reflecting both normal seasonal trends and the consumer change of consumer behavior that reduced the underlying NSF OD activity.

Other incomes declined by $5.4 million as much as the prior quarter's benefit from derivatives ineffectiveness was recorded in the other non-interest income.

Our brokerage and insurance revenues were up $3.6 million, reflecting the impact of higher contingent insurance income and stronger sales levels.

The next slide is the summary of our expense trend.

Total expenses were up $75.5 million from the prior quarter.

This was primarily due to the fourth quarter, $73.6 million gain on the debt redemption.

Personnel costs were up $3 million reflecting the seasonal impact of higher employment taxes and head count increases related to our strategic initiatives.

We're encouraged to see the $7 million decline in OREO and foreclosure expenses.

Slide 19 is the summary of our capital trend.

The current quarter's profit resulted in a slight increase to our TCE ratio from 5.92% to 5.96%.

In contrast, the regulatory capital ratios declined slightly with the disallowance of the greater portion of our deferred assets.

At March 31, we had $557 million of deferred tax asset, of which only $167 million qualify for inclusion and regulatory capital.

Regulations require that we deduct from tier one capital any deferred tax amount that we can't demonstrate the ability to recover within the next 12-month period.

This adjustment for regulatory capital calculations have no impact on our assessment of the realizability for our deferred tax asset.

Based on the level of our forecasted future taxable income, there was no impairment in deferred tax asset as of March 31, 2010.

We remain very comfortable with our current capital levels, even if we were to experience a more stressed economic environment.

We do not have any current plans to issue additional capital.

Let me turn the presenting a over to Tim Barber to review our credit trends.

Tim?

Thanks, Don.

Slide 20 provides an update on our credit portfolio composition.

We continue to see declines in the CNI book, line utilization remains well and businesses continue to limit capital expenditures.

The commercial real estate balances continue to decline as a result of our overall strategy to reduce the level of commercial real estate exposure.

The bulk of the decrease occurred in the non-core portfolio based on both chargeoffs and payoffs.

We were pleased with the performance of the core portfolio in the quarter as the asset quality metric held steady.

In the consumer report portfolio, the only material change is the inclusion of the auto loan securitization and the balances as of March 31.

These securitized license were originated consistent with our high quality focus and will not have an impact on the ongoing credit quality performance.

I would like to start the asset quality performance discussion with a couple of slides that provide a quantitive basis for our beliefs that our credit-risk issues peaked in 2009.

Slide 21 is new to our disclosure and provides additional clarity on the underlying asset quality trends in the commercial portfolio.

We have detailed the growth and criticized loan levels over the course of 2009 in prior discussions but we have now added a slide to provide specific trends that have driven the changes over time.

The 7% decline evident in the first quarter was the direct result of the significant reduction in new criticized loans.

From a credit risk management perspective the reduced in-flow is more predictive of future trends than an increase in resolutions via upgrades and paydowns.

The trends are also directly connected to the non-accruing loan trends we will discuss on a later slide.

In summary, the decreased flow of loans into the criticized category is a quantitative indicator there that there has been a change in the quality asset trends in the portfolio.

Slide 22 demonstrates the improved credit quality associated with the consumer portfolios, declining trends are evident across all of our portfolios in the 30-day and 90-day past due category.

The decline in the 30-day bucket has been steady since the second quarter of 2009, indicating it's not simply a seasonality or other timing issue.

All of the subsegments reflect the same trends although to different degrees.

The 90-day past-due loans are comprised primarily of real estate secured loans written down to a realizable value.

Nearly half of the 90-plus day past-due loans are Ginnie Mae loans with full government guarantees.

While the overall downward trend is not as significant as the 30-day trend, we don't use the 90-plus category as a predictor of losses due to the writedown policies we have in place.

While our markets continue to be impacted by the economic condition, the declining delinquency rates represent tangible evidence that there are signs of improvement in our portfolio.

Turning to slide 23, the commercial net chargeoffs on the left side of the slide show a generally declining trend since the fourth quarter of 2008 with two notable exceptions.

The outsize 2008 fourth quarter chargeoffs included $128 million associated with Franklin credit relationship.

The fourth quarter of 2009 included a number of significant-sized relationships as discussed last quarter.

The 2010 first-quarter results were consistent with our expectations based on our active portfolio management throughout 2009.

The graph on the right side of the slide shows consumer loan chargeoff trends.

The generally upward trend reflects our proactive loss recognition policies, including aggressive actions on bankrupt borrowers.

The third quarter of 2009 included a non-performing residential loan sale as well as $32 million associated with the policy change to accelerate loss recognition.

We were pleased that total consumer net chargeoffs in the quarter were essentially flat with the prior quarter.

Combined with the declining delinquency rates noted earlier, we're confident the portfolio will perform within our expectations in the coming quarters.

Turning to slide 24.

I will walk everyone through the non-performing loan and non-performing asset trends.

As shown on the graph on the left, non-performing assets declined 12% in the fourth quarter and we're pleased with the additional 7% decline in the first quarter.

Our non-accruing loan ratio has fallen to 4.78% or approximately the same level as the second quarter of 2009 before the extensive portfolio reassessment last year.

The graph on the right shows the trend in new non-accrual loans.

First on an absolute basis, the bars, and then also as a percent of beginning period loans, the lines.

You can see the significant in-flows to non-accrual loans through the third quarter of last year reflecting the impact of our portfolio reviews.

This was followed by a 45% decrease in new non-accrual loans in the fourth quarter and a further 52% decline in the 2010 first quarter or two consecutive significant quarterly declines.

The in-flow of $237.9 million in the quarter represents a cumulative 73% decline from the peak in-flow of $900 million in the 2009 third quarter.

As you can see on slide 25, we also continue to have success in generating payments and returning loans to accrual status.

The special assets division has now been fully staffed for nearly a year and we're seeing the benefits of their work.

While there will continue to be migration into non-accrual status, we're confident that the migration patterns will no longer generate the outside in-flows seen in 2009.

Turning to slide 26, I want to update you on our loan loss reserve position.

After the significant build in the 2009 fourth quarter, provision essentially equalled net chargeoffs in the first quarter.

As a result, our period end allowance represented 4.14% of period end loans and leases, down only slightly from 4.16%.

However, we saw a meaningful improvement in our non-accrual coverage ratio, which increased to 87% of non-accrual loans and up from 80% at the end of last year.

We believe this level is prudent given the continued challenges in the economic environment despite some of the positive asset quality metrics just discussed.

We remain committed to maintaining appropriate reserves and coverage ratios.

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

Slide 27, please.

Let me share with you expectations for 2010.

I will preface it with a comment about the economy.

As we said at the offset, we didn't expect to see a significant economic turnaround in 2010 and while we see some signs of stabilization, a key assumption is that that stabilization stays intact or in fact gets a little better throughout the course of the year.

Certainly don't expect to double dip in the context of this outlook.

Having said that, the net chargeoffs and provision expenses are expected to show improvement further from the first quarter levels.

Our allowance for credit loss is expected to decline on an absolute basis from the March 31, level, reflecting the utilization of existing reserves for inherent losses in the portfolio.

Loans are expected to be flat to up slightly from first quarter levels.

On one hand, we expect the increases in CNI and certain consumer segments as customer confidence improves to be offset, however, by commercial real estate loan decline as we continue to reduce that exposure.

We expect our NIM will remain relatively stable, around 3.5% and we anticipate continued growth in core deposits as we grow our retail and business customer basis, as well as increased cost sales performance to existing customers.

Fee income is expected to grow slightly from the first quarter level.

While we expect growth in asset management, both brokerage insurance revenues that growth will be partially offset by declines coming from Reg E changes in NSF OD.

Expenses are expected to increase slightly from the first quarter level reflecting continued investments and growth in investments in key areas under the strategic initiatives.

We believe the set of expectations will result in our reporting operating profits for the full-year.

Slide 28 shows the quarterly improvement pretax provision performance.

We expect again to continue to improve and get to $275 million target in the third quarter, the achievement will largely depend on our ability to continue to drive net interest income as well as continue to perform in those two categories.

Growth in net interest income is a factor as we expect the sheet will remain relatively stable but the mix will continue to improve particularly on the deposit side in the near-term.

Slightly higher loan and investment security balances will result but continued growth and lower costs for deposit.

Slide 29, in terms of key messages, first the balance sheet is strong, loans, investment security deposits, other funding, we like where we are with the balance sheet at this point.

We have sufficient capital as you heard earlier, no plans to raise additional capital.

The credit performance continues to improve, reserves are strong and problem assets are declining, net chargeoffs and provisions are expected to further decline.

We see increased opportunities in growing revenue and we're playing an expansion or growth game in the institutions now.

We're making investments to grow key businesses, we are getting stronger every day.

We do expect to hit that $275 million pretax preprovision level in the third quarter by driving revenue and we do expect to report a profit for the full year.

So for us, its about execution now and we're getting stronger everyday and focused on driving results everyday.

So with that, let me thank you for your interest in Huntington.

Operator, will you open the line for questions, please?

(Operator Instructions).

Our first question comes from the line of Dave Rochester with FBR Capital Market.

Great quarter.

Thank you.

Now that the profitability picture has improved significantly, are you thinking the TARP repayment is more of a near-term event now or are you looking for more stability in the macro environment?

We want to see more stability in the macro and Dave, we want to experience at least one more quarter of profit to be confident we're on the right path and when we get both of those, and we have an outlook we can have confidence in, we'll revisit the topic.

But, not feeling any pressure to do anything at this point.

Okay.

Thanks and on the margin.

You guys have showed great expansion there and looks look your CD costs are still around, 280, with the core CDs around 290.

Seems like you have a still have a lot of room to move around on those and I would imagine a good chunk of those are maturing the next six months or so.

Is that right?

You're right.

Our CD book has a life on that.

Part of the impact you're seeing, too, we're shrinking that book for others who might be maintaining their level and showing the exchange and the lower rates.

We're not getting the same level of benefits on the absolute rate level.

Are you looking to ultimately run off that entire brokerage CD at this point?

We don't have a need for it.

We have been managing that down and have not been originating new ones and Steve has a challenged to make sure we can find the balance sheet with the core deposits and we want to make sure to deliver against that.

The answer is yes.

Great, on the core CD portfolio, where are you repricing those now?

It depends on the maturity but our round of point, around 15 or so as far as the new time deposits coming on.

Great.

All right, thanks, guys, appreciate it.

Thanks, Dave.

The next question?

Our next question comes from the line of Ken Zerbe with a Morgan Stanley.

Thanks.

Just on the comments you are making about asset sensitivity.

Can you just explain that in maybe a little more detail?

I'm more curious as to why your putting on swaps to reduce your asset sensitivity.

Does it provide like a one-time gain or does it provide higher [NIM] in 2010, but then goes away next year?

How does that work?

Typically, from a asset sensitivity position, you want to be slightly liability sensitive when there's a steep yield curve.

Our balance sheet migrates asset sensitivity on its own without any additional adjustments.

Our position here is that we don't think interest rates will increase significantly throughout 2010 and so we wanted to keep a fairly neutral position throughout the current calendar year.

And as I noted in my comments, we expect to have $6 million of swaps mature throughout 2011 and that will give us plenty of opportunity to take the balance sheet that is more asset sensitive at that time.

There is a slight margin pick up that comes from being more liability sensitive on the steep yield curve, but the new swaps we have on the books are yielding anywhere from about 70 basis points to about 140 basis points and as I said, under a two-year duration so there is not a significant earnings play there.

Its more trying to keep neutrality throughout this year and position the balance rate as rates do increase in 2011 we can benefit from that in the future.

Did you take any gains on the swap terminations you did in the quarter?

We did not take any gains through the P&L.

The gains essentially get amortized throughout the remaining life of those swaps and that is part of the reason we had some pick up in the margin from that.

Okay, great.

The other question I had was on the disallowed DTA you can talk about the path of recognition of that disallowed DTA.

Now that you're profitability, how quickly did that come into earnings or capital?

As far as regulatory capital impact, we start to see that come back in 2011 and most of its realized essentially by early 2012; essentially, what has created a chunk of that is because we have a larger allowance for a loan losses and the tax deduction does not occur until a chargeoff takes place.

Okay, thank you.

Thanks.

Our next question comes from the line of Matthew O'Connor with Deutsche Bank.

Guys.

Hey, Matt.

I will ask the same question I asked last quarter.

Slide 25, the additions to non-performing assets, down sharply last quarter.

I think we're wondering if that had been a sustainable level.

I guess it wasn't.

It came down over 50% this quarter but is there -- we know there is always seasonal patterns and things like that.

Should we expect that to maybe bump up a little bit?

The second quarter is a quarter where you would expect to see increases but we're coming off such high levels, that we don't expect to see meaningful increase in this one.

Okay, then maybe I missed it, but just the all-in outlook from MPA from here then would be still to trend down?

To trend down.

Okay.

And separately, can you talk about the yields you're getting in the auto loan portfolio?

I know there is the off balance sheet consolidation, but I think you have some growth ex that and what kind of absolute yields is that book generating right now?

Gross yields are in the 5.5% to 6% range as far as the underlying asset and continues to be a very nice, positive spread for us even after considering the credit costs and the new originations are very low credit costs and with high FICO scores and loss rates.

We have been pleased with that production.

Okay, great.

Thank you.

Thank you.

Our next question comes from the line of Scott Siefers with Sandler O'Neill.

Hi, Scott.

Steve, I guess the first question is probably for you.

Just on the level of the reserve.

You said last quarter that despite maybe drawing down the allowance being part of the outlook, it would not be necessarily a big earnings driver.

I guess just given another 90 days worth of data and your more upbeat commentary on credit.

Does that still hold true or might there be a bit more material reserve release throughout the year?

Well, the reserve release will be tied to material improvement and changing credit quality and we do expect credit quality to get better.

In terms of the profitability for the year, it's not contingent on reserve release.

Yes.

We're expecting it to be able to drive from the core.

And if there is reserve release based on improve asset quality, that would be incremental.

Okay.

And then Don had a separate question for you.

I was hoping you could just provide a little more color on the margin, two separate questions within there.

I guess if I had thought about it a year ago and said hey, someone's going to stay neutral, will increase their liquidity and increasing the percentage of securities relative to loans, I wouldn't necessarily have said the margin was going to improve anywhere near what your guys did and certainly understand everything that is going in the deposit side, but maybe if you can just get more color on the improvement.

And then, conversely just given the opportunity it looks like it's there on the CD side.

Why wouldn't there be more expansion beyond what we have seen already?

Is that a suggestion of good management?

You got it.

Go ahead and answer it, I'm sorry.

As far as the margin expansion, you're right.

There were a couple of factors that helped drive it for us this year.

If you look at the positive mix change, about half of that 50 basis points is really coming from that mix change we saw throughout the year.

I attribute the most of the rest of that margin improvement coming from the both deposit and loan pricing that we're seeing wider spreads on loan originations than we were, say 18 month ago and the depositive the rates for new time deposits and other products had come down as well helping us to drive the margin.

They're both contributing factors.

Okay and maybe just that presumably there is a little more mix opportunity on the depositive the side particularly with CDs.

Why wouldn't that help the margin expand a bit more than the current outlook would suggest?

Good, good question and sorry for not following up on that and that is a couple of things.

One is that the first quarter does benefit from the day count.

So there is about a four-basis point lift from the margin from that compared to future quarters.

I'd say that the other constraining factors, this quarter the average earning assets were down slightly.

We expect our deposit growth to continue to outpace the loan growth throughout this year and as that adds to earning assets, we don't get the same incremental 3.5% spread on the investment securities compared to the deposit account and we think that can be a deterrent to the overall margin, even though it will be added to the net interest income.

Okay, great.

Thank you very much.

Thank you.

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

Good morning, Steve.

Good quarter.

Good quarter.

Table - - slide 25 shows the gradual decline in loan sales and I'm wondering what has happened to the pace of raw land and lot dispositions here recently and what we probably should expect from the sad folks efforts going forward in terms of the disposition rate?

You're in a seasonal flow the next quarter, Tony and you picked off in two, three and then maybe four, but certainly two and three at this point and these are Oreo sales.

We will expect activity to be consistent with prior periods.

Anything you want to add Tim?

No, I think that is exactly right.

The seasonality is perhaps the biggest factor and we're moving into a timeframe where the markets have opened up a bit and they going to be interested parties in the properties.

Steve, do you have any thoughts in mind about how long it might take to unwind the non-core CRE component?

Well, as we said last time, we think its at least a couple of years and could be longer and there is some encouraging signs about CNBS markets starting to open up and there was a multi issuer.

I don't see it coming back quickly and conversely, I doesn't see any -- we're not under the pressure to dump it or to get to a disposition.

We're going to do this with a lot of focus around capital impacts and make the best decisions.

Running with this level of NPAs and 3.5 NIM I wouldn't have thought possible last year.

Remember in these NPAs, you've got roughly $350 million of Franklin that's already marked.

Just because of the reps we're reporting that distorts us a bit, and penalizes us, if you will with a higher level of MPL.

Final question.

You're gearing up in asset-based lending I know and I guess the question is as the runoffs continue and in the riskier segments, what we should expect in a reasonable time period in terms of when we see the re-emergence of aggregate loan growth as the year plays out?

It's part of the function of the economy.

There is increasingly competitive market and all the banks are facing runoff.

That is changing the competitive dynamics fairly quickly and there is not an enormous amount of net new investment or demand and I think if we start to see stability in outlook, that could change in the second half, but for us, I think we're going to be replacing non-core real estate amortization with CNI and maybe some consumer growth for a while.

I think our capital efficiency is going to get better over time but not necessarily a lot of growth in the balance sheet.

Thank you very much.

Thank you.

Thanks, Tony.

Our next question comes from the line of Bob Patten with Morgan Keegan & Company.

I guess I have two parts to the same question and it's really about thinking forward big picture and revolves around how does Huntington build capital.

If you look at tier one comments about 6.5% and a lot of the raises we have seen have raised that about that quite a bit.

We look at the balance sheet now, the strength that is mostly behind you and if you look at the issues of what you need to do to pay off the TARP.

and I'm respectful of how you described it for us, I'm not looking to pin you down, but the thought process.

You have to be profitable, you guys are there and the view was you had to show access to the capital market, maybe debt raising at some point.

What is your thought process on how Huntington begins to build capital?

First, I think it comes from the core.

We're intending to increase pretex preprovision and at the same time, with the credit metrics improving, roughly the rate from -- that we saw in the first and fourth quarters and we're going to be in a position where we're going to have to look at reducing the overall level of the reserves.

So a combination of those factors, there is a potential, I think, as markets stabilize and perhaps in other respects around the deferred tax asset over time and we may even see some OTTI or OCCI if these markets again stabilize.

But principally, at this point from earnings.

Steve, within the process, who is your key regulator in this decision process when you finally do get to the point you want to address the issue of paying off TARP?

TARP for any bank holding company, the key decision maker is Fed.

You will start with your primary bank regulator support but the Fed has in effect final say.

Bob, this is Don, if I can just add on a few comments this Steve made there as far as our capital ratio.

Keep in mind as Steve said, the DTA negatively impacts it, that that is a 84 basis point impact to our tier one common ratio as that would come back organically through the earnings generation over the next few years.

And the other thing, Huntington is a little bit different than some of our peers as well in that we have convertible preferred that's not TARP but our normal convertible preferred.

If you would add that to our tier one common equivalent, that's another 70 basis points and they would put us over 8% on a core basis adjusting to those two items and we think that puts us in very good standing as far as our capital position.

Good points.

Thanks, guys.

Thank you.

Good question.

Our next question comes from the line of Terry McEvoy with Oppenheimer.

Hi, Terry.

Hi.

One last question with credit less of a concern and more focus on revenue growth, seems to be there is a consensus that the midwest is just not a growth market and the only way for a bank like Huntington to show organic growth would be through market share gains.

Would you agree with that statement?

Do you think that it's too aggressive and as you look at your market share on both sides of the balance sheet, do you think that with the new energy that Huntington has there is the ability to grow market share in your core markets?

We believe so on both sides of the sheet.

In terms of your overall comments on the midwest as you talked to your customers, do you get a sense that there is organic growth in terms of loan demand business activity that could surprise the markets on the upside over the next few years?

Auto clearly would be up year-over-year.

And we had a series of small business round tables in six markets and touched maybe 100 small businesses and I will say the vast majority of those business owners were bullish about this year in terms of revenue up and the majority expected to hire and I think the majority also expected to make some capital investment.

Now if that proves to be reflective of the market overall, that could be a little more positive than expectations.

Having said that, it's still -- the midwest gets painted in one brush, it's more diverse than that and there is still some very tough areas in the midwest and in our primary market.

And there are some reasons for optimism and we would view that cautiously.

Thank you.

Thanks.

Thank you.

Our next question comes from the line of Ken Hueston with Banc of America.

Hi, good morning.

Morning, Ken.

Just one question.

On commercial real estate, I was wondering if you could just give us a little color on migration trends within the book.

Obviously, the early stage would look good and you can walk us through single family home builder that seems to be addressed.

Can you take us through the sub buckets and give us a sense of confidence that you have that you matted down on that book.

Thanks.

Let me start with the comment and I will work on page 92 in the deck for those of you who have the deck and you saw a little bit of reduction in the core $68 million and the combination of chargeoffs and other changes driving the non-core down.

Importantly for us, the core was very stable in that first quarter.

We had one relationship out of all the relationships in the core become a set back and that happened at the end of the quarter because of some unexpected lease issues in the property that we don't finance but it impact the borrower in a significant way.

And so we're feeling if we could buy that performance for the core for the rest of the year, we'll do it today.

We're feeling very good about the core and take to you the buckets, I'll turn it over to Tim and you want to --

I guess I am not sure there is a page and let me go through a couple of them.

A single family, as we talked about last quarter, we really feel that that is not a major driver of performance goal.

Slide 88.

Slide 88.

And in that bucket is, in fact, retail.

Retail continues to be an issue across our markets.

We have been very active in the ongoing portfolio management of those properties or that product type and you can see on 87 what our current performance is and we're happy with some of it.

The delinquencies are flat.

The classified number is, in fact, up, but non-accruals are down a little bit, reserves are down a little bit and so, we really feel like that is flattening out as the overall portfolio metrics would indicate.

The rest is comprise of office, warehouse would be a couple of the other drivers.

We've never had a material issue with the office space and it's primarily suburban.

There is no downtown business district powers we have to worry about and the rest of the portfolio we continue to work aggressively on.

I believe that commercial real estate, Steve's comments around the core and versus non-core are where we're focussed going forward.

And one quick follow up on franchise geography, can you give us a little color on how the different areas of the franchise you expected to rebound and where they are in their economic recovery?

A couple of banks have mentioning Michigan might be bottoming a bit.

Would love your comments on that as well.

Thanks.

The auto zone which would be east Michigan, Toledo through Cleveland, very, very challenged and may be flattening out right now and that is a pretty deep dip.

Western Michigan is night and day different than east and Indi, Cincinnati, Columbus, Pittsburgh and West Virginia are actually getting to the cycle and in good shape and so, we have -- almost have a tale of two worlds in our footprint.

That what you were looking for or do you want more?

I was wondering do you expect to see the resumption of growth coming out of the Michigan footprint on the loan side or is it going to be more from the other footprint as we come out of the cycle?

We'll see it in western Michigan, and I think perhaps later this year but not near-term and maybe east if it just keeps going.

But our demand will come out of Indianapolis and Cinci, Columbus, Pittsburgh markets.

Thanks a lot.

Thank you.

(Operator Instructions).

The next question comes from the line of Erika Penala with UBS.

Good morning, everyone.

Good morning, Erika.

My first question in on the fee income guidance of the year, can you remind us how much NSF overdraft is of your deposit service charges and what you estimated to be the impact or Reg E?

I can help provide color as far as the NSFOD but just using an approximately a baseline of about $300 million of deposit service charges a year and about $180 million of that comes from NSF OD overall.

Roughly $100 million comes from the NSF OD associated with either ATM debit card transactions so that is the potential universe as far as the impact.

We haven't officially disclosed what our plan is as far as addressing that, but we are working working through that and I do believe that we'll be able to mitigate the losses associated with some of the REG E impacts but we will probably provide more color at the end of the second quarter as to the actual plans and the implementation plan associated with that.

Okay.

My second question is on the restructured resi mortgage.

I assume they're all loan mods?

The $243 million?

That's correct.

And can you share with us the reserve that you've taken for that $243 million and what the underlying redefault rate you assumed when determining that reserve?

Sure.

I don't know the reserve specifically associated with those loans, we can get that for you, if you like.

I can tell you that only 27% is about the number have gone delinquent subsequent to the loan modifications/restructure and so we're reasonably pleased with that recidivism rate compared to some of the industry numbers we see.

How long is the forbearance period typically?

I, let's see.

I don't know that there is a typical number on that.

We would generally be solving issues.

We could have a one-year look or two-year look.

We're not necessarily creating, not creating 30-year fixed adjustments.

Okay.

Thank you for taking my questions.

Great.

Thank you, Erika.

Our final question comes from the line of Brian Foran with Goldman Sachs.

Thank you.

As we think past the third quarter and the $275 million of preprovision, you would be at then, what are the key positive and negatives that would make it go higher or flat line from there?

I guess is it more about the environment and resumption of CNI loan growth and things like that or are there further internal opportunities that could drive preprovision higher than $275 million even if the environment remains sluggish?

Sure, Brian.

As far as we're going to take the rest of the year off after hitting $275 million in the third quarter and you can be assured of that.

We think there are a number of initiatives, the growth of $275 million is coming in the economic environment that is very challenged.

We think once the economy does start to recover, we will see a rebound in our commercial lending balances and other activity as you suggested.

And more importantly, part of our strategic planning process, we're identifying other factors to help move the dial even further and one of the key components is to continue to deepen our share of wallet with our existing customers and so focusing on that will continue to be a driver for us as far as continued improvement in that pretax preprovision operating earnings.

That is it for me.

Okay.

Thank you very much.

Appreciate your interest.

Thank you all.

We have no further questions at this time.

Do you have closing remarks?

Yes, this is Jay Gould.

Thank you for participating in our call.

Our slide decks are on the investor website and I would be happy to download those where you can find them.

We look forward to seeing you next quarter.

Thank you, again, if you have questions, give me call.

Good night.

This does conclude today's Huntington first quarter conference call.

Thank you for your participation.

At this time, you may now disconnect.