Huntington Bancshares Inc (HBAN) 2010 Q2 法說會逐字稿

Good afternoon, my name is Christopher, and I will be your conference operator today.

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

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

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

(Operator Instructions).

Thank you.

Mr.

Gould, you may begin your conference.

Thank you, Christopher, 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 web site, Huntington.com.

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

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

Slides two through four in your deck, note several aspects of the basis of today's presentation.

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

This presentation contains both GAAP and non-GAAP financial measures.

And where we believe it helpful to understanding Huntington's result of operations or financial position.

Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure can be found in the slide presentation in its appendix in the press release in the quarterly financial review supplement to today's earnings press release or the related form 8-K filed later today.

All of these can be found on our web site.

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 risk and uncertainties, please refer to this slide and material filed with the SEC including our most recent Forms 10-K, 10-Q, and 8-K.

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

Also present and by way of introduction is Todd Beekman, who recently joined us as Assistant Director of Investor Relations.

He was formerly with Fidelity Management and Research in Boston where he was an Analyst, including several years as a regional bank analyst.

Many of you, I know, know Todd.

We look forward to his contribution to our IR effort.

Let's get started now by turning to slide seven.

Steve?

Welcome, everyone.

I'll begin with the review of the second quarter performance highlights.

After my overview, Don will detail how Franklin impacted our numbers, and then follow with his usual overview of our financial performance.

Tim will provide an update on credit.

I'll then return with a discussion on the impact of recent regulatory changes and 2010 outlook comments.

While we will provide detail in a moment, I want to point out a couple of the key achievements.

Overall we are very pleased with the second quarter performance.

We reported a higher profit than last quarter.

We saw a 3% linked quarter growth in revenue even after excluding a $14.2 million increase in MSR valuation.

Our capital ratios meaningfully improved during the quarter.

And as expected, we saw significant declines in nonperforming assets in-flows, as in-flows of new NPAs and criticized assets continued to fall.

Our period end nonaccruing loan reserve coverage ratio jumped to 120% from 87%.

So in sum, another meaningful step forward, moving Huntington to stronger financial performance.

At the end of the quarter, we transferred all of our Franklin loans to held for sale, and subsequent to quarter end, we sold $274 million of this exposure.

This had a significant impact on second-quarter performance, as it resulted in a $75.5 million charge-off, and also $75.5 million of provision expense, a negative $0.07 per share.

There was another $4.5 million in net charge-offs and provision expense associated with Franklin in the quarter, in the second quarter prior to the transfer and the held for sale.

Don will detail all this for you later in this presentation.

It's important to understand that this transfer into held for sale and subsequent sale was a very positive development.

Let's begin a more detailed presentation.

Turning to slide eight, we reported net income of $48.8 million or $0.03 per share.

This was a significant achievement.

The drivers were substantially improved credit quality and higher pretax, pre-provision income.

We believe these trends will continue.

Our pretax, pre-provision income was $270.5 million, a 7% improvement from the first quarter, and an 18% improvement from a year earlier.

This represented our sixth consecutive quarterly improvement.

The primary driver was a 5% link quarter increase in revenue, reflecting 2% growth in fully taxable equivalent net interest income and 12% in non-interest income.

This was partially offset by a 4% link quarter increase in non-interest expense.

The growth in fully taxable equivalent net interest income reflected modest growth in average total loans.

We saw very strong growth in average automobile loans and leases, up 9%.

As we continued to take advantage of competitive dislocations and benefited from strategic initiatives to expand our end franchise footprint.

Average residential mortgages grew 3%.

Partially offsetting these increases were a 4% decline in average commercial real estate loans, as we continued to reduce that exposure.

While average commercial and industrial loans declined slightly, period end C&I loans were up 1% from the end of March or 3% on the accruing portfolio.

Utilization rates remain historically low and relatively unchanged.

This reflects a combination of several factors, including few opportunities for companies to expand given the weak economy, companies continuing to build strong cash positions and the general lack of confidence that is postponing investment decisions.

Average total investment securities increased 3% as we continued to deploy funds from our strong growth in core deposits.

Our net interest margin was 3.46%, down a basis point, of which 6 basis points related to Franklin loans.

Non-interest income increased 12%, driven mostly by a $14.2 million increase in MSR valuations, primarily reflecting lower prepayment assumptions, though we also benefited from a 34% increase in mortgage originations, which contributed the $6.2 million increase in origination and secondary marketing income.

Non-interest income also benefited from an increase in seasonal service charges on deposit accounts.

The increase in expenses reflected our continued investment in growth.

The real highlight for the quarter was continued significant improvement in credit quality.

This improvement reflects clearly the benefit of last year's focused actions to address credit-related problems.

We anticipate continued improvement over the second half of this year.

On a link-quarter basis, nonperforming assets declined 17%, and we saw a 28% decrease in new nonperforming assets.

We also saw an 8% decline in newly identified criticized commercial loans.

While reported net charge-offs increased from the prior quarter, excluding Franklin-related net charge-offs, they were down 12%, after also adjusting the prior period Franklin-related net charge-offs.

Our provision for credit losses was $193.4 million, or $117.9 million, excluding the $75.5 million related to Franklin.

Both 30 and 90-day delinquencies continued to decline.

Turning to slide nine, our period-end allowance for credit losses as a percentage of total loans and leases declined to 3.9%.

Importantly, and reflecting substantial improvement in credit quality trends, our non-accrual loan coverage ratio jumped to 120% from 87%.

Our capital position is solid with increases in all of our capital ratios.

Our regulatory tier one and total risk-based capital ratios are $2.8 billion and $2 billion above well-capitalized regulatory thresholds.

Tangible and common equity ratio improved 16 BPs to 6.12%.

And our tier-one common risk-based capital ratio improved 51 BPs to 7.04%.

Lastly, our liquidity position remains strong.

We saw a 6% annualized core deposit growth with period end loan to deposit ratio of 93%.

As shown on slide 10 we continued to move forward with strategic initiatives designed to grow future revenue.

These included the hiring or appointment of new key executives in revenue-generating business in our commercial banking segment.

This included a new Director of Commercial Banking in central Ohio, a new Regional President in the greater Cleveland area, and a new President of our Equipment Finance Group.

In our private financial group that their included a new President of Unified Fund Services, a new Chief Operating Officer for Huntington Insurance, and hiring a new team of trust and private bankers in Dayton, Ohio.

We also made progress in expanding or upgrading our distribution capabilities, within our retail and business banking segment.

We've begun the rebranding and refurbishing of banking offices, and initiated in-store and retirement center expansion.

Within PFG, we opened a new office in Wheeling, West Virginia, and a family office in Columbus, devoted to assisting high net worth families with managing and preserving generational wealth.

In support of our initiative to improve cross-sell performance, we launched the first phase of our sales force referral automation system called Max.

And we've kicked off a strategic plan refresh, looking out over the next three years.

Each of these initiatives is specifically targeted to grow revenues.

The appendix has a slide showing all the other initiatives since the first quarter of 2009.

We're very excited about the cumulative impact and the opportunities these initiatives represent.

Turning to slide 11, it's important to understand Franklin's impact on the quarter as well as our rationale for this action.

As noted earlier, at the end of the quarter we transferred all of our Franklin related loans as held for sale, resulting in a $75.5 million net charge-off.

One contributing fact is the higher bank stocks valuation.

As it demonstrated ability to consistently deliver credit-quality performance that is better than peers'.

That's our objective, and what we want to be known for.

And as related to Franklin, since our restructuring in early 2009, this portfolio has performed as expected, and we were prepared to hold these loans through maturity.

However, a negative side effect of retaining these loan has been poorer relative credit quality performance metrics.

The confluence of second-quarter events gave us the opportunity to essentially bring this relationship to a close by moving these loans into held for sale.

As the quarter progressed, we saw renewed buyer interest in distressed debt, this was a positive.

In contrast, we saw an economic outlook turn more uncertain.

Further, the expiration of the tax credits for home purchases and indications that Fannie Mae and Freddie Mac might accelerate home foreclosures and sales of OREOs raised concern that residential real estate prices could be under pressure over time, which would lower the value of the collateral supporting these loans.

So late in the quarter, we made a decision to move these loans to held for sale, which resulted in the $75.5 million of charge-offs, which was disappointing on one hand.

However, I'm pleased to report that on July 20, we sold $274 million of the Franklin-related residential mortgages.

Importantly, given today's much stronger balance sheet and earnings performance, we were able to absorb the related charge-offs and still report growth in earnings and higher capital ratios.

This sale adds to overall future financial performance as we reinvest the proceeds and no longer have to absorb related portfolio servicing and other support costs.

And it more quickly moves us toward attaining our objective of better than peer credit quality performance metrics.

Let me turn the presentation over to Don to review the details.

Thanks, Steve.

The second column of slide 12 details the impact of the transfer of the Franklin related loans to held for sale.

The third column shows other Franklin-related net chargeoffs, that is, those that occurred during the quarter, prior to the transfer to held for sale.

The last column shows the impact from excluding these Franklin-related items.

Focusing on the second column, as of June 30, $398 million of Franklin-related loans were charged down to $323 million, and transferred to held for sale.

This resulted in $75.5 million of charge-offs, and related provision expense.

$14.7 million of the charge-offs were related to Franklin-related home equity loans and $60.8 million of Franklin-related residential mortgages.

When adding in the other $4.5 million of Franklin-related net charge-offs, the total Franklin net charge-offs in the quarter were $80 million.

Net charge-offs as reported and as adjusted to exclude Franklin-related net charge-offs are shown on this slide.

For additional detail and reconciliation of the impact of the Franklin issues on the current as well as prior quarters for all credit-related metrics, please refer to the Franklin reconciliation slide in the appendix.

As Steve noted earlier, the sale of the residential real estate loans was closed on Tuesday, which reduced our NPAs by $225 million.

This would have reduced our NPA ratio from 4.24% to 3.65%.

Turning to slide 13, our net income for the second quarter was $48.8 million or $0.03 per share.

The impacts of our transfer of the Franklin loans to held for sale is our one significant item impacting the quarter's results.

As discussed earlier, we recognized the $75.5 million or $0.07 per share provision expense related to the transfer.

This impact is net of estimated selling cost.

Slide 14 provides a summary of our quarterly earning trends.

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

On slide 15, we provide an overview of our pretax pre-provision income performance.

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

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

We also adjust for certain significant items where applicable.

On this basis, our pretax, pre-provision income for the second quarter was $270 million, up $18 million or 7% from last quarter, and 18% higher than a year ago.

Slide 16 depicts the trend of our net interest income and margin.

During the second quarter, our fully tax equivalent net interest income increased by $6 million, reflecting a 1 basis point decline in our net interest margin of 3.46%, and a $0.3 billion increase to our average earning asset base.

The margin change reflected several items.

First was the impact of our deposit mix and pricing changes.

The mix shift from time deposits to more transaction-based core deposits not only reduces our costs but also produces a more stable deposit base for us, as well.

Offsetting this positive impact was a $6.8 million or 6 basis points reduction of the margin coming from the Franklin-related loans.

During the first quarter, we received more payments on loans that had been already reduced to a zero balance, resulting in an additional interest income.

These payments slowed significantly in the second quarter.

Other items impacted the quarter, included lower interest income on our interest rate derivatives, in part due to the changes in the interest rate environment.

Also, the day count negatively impacted the second-quarter margin.

Going forward, we expect some of the same trends with the Franklin-related sale having a slight reduction to the margin, but a positive impact to the bottom line, after considering the servicing costs previously incurred.

Continuing on to slide 17, we show the change in our deposit mix over the last five quarters.

This shift from 45% of the deposits in time and noncore funds to 29% has improved the margin by 22 basis points.

This mix will also have some impact in the third quarter from the expiration of the tag T program.

We saw $100 million move from transaction accounts to other products including sweep accounts and short-term liabilities.

We also saw approximately $600 million in reductions to our deposits as a result of requirements for FDIC coverage.

Overall, this performance was in line or better than our expectations.

We also have one quarter left of higher priced time deposits running off.

Turn to slide 18.

We continued to generate strong core deposit growth.

Total core deposits grew at an annualized 6% rate, despite $0.8 billion decline in average core time deposits.

Slide 19 shows the trends in our loan and lease portfolio.

This was the first quarter in the last six that we've actually shown loan growth.

Total commercial loans were down $0.4 billion or 2%.

The decline reflected the anticipated decline in commercial real estate balances.

The $0.1 billion decline in C&I loans reflected the continued deleveraging from our commercial customers.

However, we did experience $147 million increase in period end balances from March 31 to June 30.

Total consumer loans were up $0.5 billion or 3% from the prior quarter.

The $0.4 billion increase in average automobile loans and leases reflected record originations of over $900 million this past quarter.

These originations continue to reflect very high credit quality and reasonable returns.

Slide 20 shows the trends in our non-interest income categories.

Our non-interest income increased by $28.8 million from the prior quarter.

Our mortgage banking revenues increased by $20.5 million, reflecting a $14 million increase to the net MSR hedging income.

This increase reflected a reduction to the underlying prepayment assumptions for the MSR assets.

These prepayment assumptions were accelerated throughout 2009 with the expectations that the government programs would increase the refinance activity.

We continue to use a third party to assist in valuing the MSR asset and another to help validate the value assigned.

Deposit service charges were up $6.6 million, and electronic banking revenues were up $3 million, both reflecting normal seasonal trends.

The next slide is a summary of our expense trends.

Total expenses were up $15.7 million from the prior quarter.

This reflected an $11.2 million or 6% increase in personnel costs.

This increase was due to a 4% increase in staffing levels attributed to strategic initiatives implemented over the last two quarters.

The full quarter impact of merit increases awarded late in the first quarter and the reinstatement of the Company's 401K plan matching contribution.

Marketing costs were up $6.5 million attributed to the brand advertising campaign launched in the second quarter.

Other expenses were up $2.8 million, including a $5.4 million increase in cost related to reps and warrants on mortgage loan sales.

$4 million of this increase was attributed to an increase to the reserve for this liability as we're using a more forward-looking estimate, reflecting the increased cost of the current quarter.

Offsetting these increases were declines in OREO, with foreclosure expenses as well as seasonal declines in occupancy cost.

Slide 22 is a summary of our capital trends.

The current quarter's profit resulted in an increase to our tangible common equity ratio from 5.96% to 6.12%.

Reflecting even stronger improvement was our regulatory capital ratios.

Our tier-one common ratio increased to 7.04% from 6.53%, and our tier-one ratio increased to 12.47% from 11.97%.

These increases not only benefited from the capital accretive earnings but also from a decrease in the total disallowed deferred tax asset for regulatory capital purposes, from $390 million at March 31, to $191 million at June 30 as a result of the recognition of the tax impacts of the Franklin-related charge-offs.

The deferred tax asset realization for regulatory capital purposes improved the ratios by approximately 47 basis points.

Turning to slide 23, one cannot talk about capital without some mention of our plans to repay our $1.4 billion in TARP capital.

We believe that we're better positioned for repayment today.

We have strong balance sheet liquidity, and our current regulatory capital is over $2 billion in excess of the existing well capitalized thresholds.

And with another quarter of profitable performance and expectations of continued profitability, we are back to generating capital internally.

However, and as noted last quarter, we believe there are three factors for consideration before repayment.

The first is consistent demonstrated profitable performance with growth in earnings.

We believe we're on our way, yet it's only two quarters in a row.

The second is evidence of the sustained economic recovery.

This outlook turned a little more negative this past quarter, and while we think the economy is stabilizing, it remains fragile.

Third, having better clarity on any new regulatory capital thresholds would be helpful.

While the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act gave the authority to set these standards, it will be some time before the specific regulations are written.

We think our current ratios are above where these new thresholds may eventually be set.

But that's not a certainty.

Based on other banks that have had to raise capital at the time they repaid their TARP, it is likely that we will have to raise capital, as well.

While we believe we're better positioned today than last quarter, we want to continue to be cognizant of our existing shareholders' interest, as well.

We have been under no pressure to repay TARP from anyone.

So in sum, we intend to repay our TARP capital as soon as it's prudent to do so.

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

Tim?

Thanks, Don.

Slide 24 provides an overview of our credit quality trends.

As you have heard, we continue to make substantial progress across all of our credit metrics.

While the Franklin transaction impact was significant, and that allows us to report credit metrics on a comparable basis with our peers, the improvement from our ongoing operations is equally important and also sustainable.

The reduction in nonperforming assets and nonperforming loans in the second quarter, excluding Franklin, was consistent with first-quarter results.

We expect to see a continuation of the trend in the coming quarters, and I will review some of the specifics on an upcoming slide.

Our criticized loan levels also continue to decline with improvement noted across all of our business segments.

And that charge-off ratio associated with our ongoing operations showed solid improvement, and we continued to actively manage our late stage delinquency rate down over time.

Importantly, both the charge-off and delinquency trends are evident across all of our portfolio segments.

Our allowance for credit losses ratio declined from 4.14% to 3.9%, but the coverage ratios for both nonaccruing loans and nonperforming assets improved.

The coverage ratio associated with criticized assets also improved from the prior quarter.

The criticized assets measurement includes commercial criticized loans, consumer over 60-day past-due loans and OREO.

We use this measurement internally, and it provides an additional level of granularity and transparency in our allowance for credit losses coverage, and only looking at the non-accrual coverage ratios.

We continue to feel very comfortable with our reserve level in the context of our portfolio and the market environment.

From an overall portfolio standpoint, we continued to see planned reductions in our commercial real estate portfolio, and the C&I portfolio that held steady for the quarter.

Within the commercial real estate portfolio, we saw very positive performance from our core portfolio.

The core portfolio remained constant in terms of both portfolio level and asset quality metrics.

We have seen no material change in the core portfolio over the past six months.

While we have moved some balances from noncore to core based on our ability to expand the relationships, the loans originally defined as core remain.

The home equity and residential mortgage portfolios remained relatively unchanged in the quarter, but we had a very strong quarter in the auto finance business.

As you know, we feel very comfortable with the high-quality focus this business and the credit quality characteristics including an average FICO score of 770 and returns on the quarterly production were very strong.

Slide 25 provides a graphic representation of the non-accrual loans and nonperforming asset trends on the left side of the slide and the non-accrual loan in-flow on the right side.

As we have discussed over the past couple of quarters, a substantial decline in non-accrual loan in-flow is perhaps the most important measurement when assessing the future trends in the portfolio.

Turning to slide 26, we can review the entire non-performing asset flow analysis.

Of the total decline in nonperforming assets, less than half was related to the Franklin transaction.

The drivers of the reduction were charge-offs and loan payments.

Importantly, the rate of decline in nonperforming assets accelerated this quarter due to the lower in-flow of new NPAs.

Slide 27 continues our disclosure around the level of criticized commercial loans.

We saw a lower level of in-flow during the quarter, and just as importantly, we saw a substantially higher level of upgrades into our past categories.

We have a very focused upgrade process indicating that these borrowers have established a level of profitability and capital position meriting the change.

As with the nonperforming asset trends, we are confident that the declining trend is sustainable in future periods.

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

Slide 28 demonstrates the improved credit quality associated with the consumer portfolios.

Declining trends are evident across all of our portfolios in both the 30-plus and 90-plus days past due categories.

The decline in the over 30-day past due loans has been steady since the second quarter of 2009, indicating that it is not simply seasonality or a 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 that have been written down to a realizable value, while the trend is positive, both the level of delinquencies and losses and the consumer portfolio secured by real estate remain at higher than acceptable levels.

We continued to originate home equity and residential mortgages in our footprint with the focus on a total financial services relationship.

Origination levels and quality metrics are included in the slide deck appendix.

The auto finance portfolio continued to show positive trends, even on a lagged analysis basis.

We have substantial detail in the appendix to the slide deck regarding the ongoing positive performance trends in the auto portfolio.

While our markets continue to be impacted by the adverse economic conditions, the declining delinquency rates shown here represent some tangible evidence of improvement.

Turning to slide 29, the commercial net charge-offs on the left side of the slide show a generally declining trend since the second quarter of 2009, with the exception of the outsized fourth quarter that included a number of individual, significant sized relationships as previously discussed.

Also of note, recoveries in our C&I portfolio for the second quarter were 50% higher than in the first quarter.

While it is too early to call this a trend, we fully expect to recognize increased recoveries in the coming quarters.

The second-quarter results were consistent with our expectations based on our active portfolio management strategies.

Given the trends in non-accrual and criticized loans discussed earlier, we are confident our improvement is sustainable.

The graph on the right side of the slide shows consumer loan charge-off trends.

As you recall, the third quarter of 2009 included a nonperforming residential loan sale, as well as a $32 million loss associated with a policy change to accelerate the timing of loss recognition.

In subsequent quarters, we have maintained our proactive loss recognition policies, including aggressive actions on bankrupt borrowers.

We were pleased that the total consumer net charge-off ratio in the 2010 first quarter was down slightly, and the second quarter results reflected an additional decline, excluding the impacts of the Franklin transaction.

Combined with the declining delinquency rates noted earlier, we are confident our consumer portfolio will continue to perform within our expectations in the coming quarters.

Turning to slide 30, I'd like to reemphasize the level of our allowance for credit losses and resulting coverage ratios.

In the second quarter and excluding the impact from the Franklin transaction, net charge-offs exceeded provision expense by $86 million.

This resulted in an allowance for credit loss level of $1.4 billion, and a resulting ratio to total loans of 3.9%.

Despite the decline, as shown on the right side of the slide, our coverage of non-accrual loans increased from 87% to 120%, a level we believe will compare favorably to our peers.

This level is prudent, given the continued challenges in the economic environment, combined with some of the positive asset quality trends just discussed.

We remain committed to maintaining an appropriate level of reserve for our portfolio and the economic environment.

Let me turn this presentation back to Steve.

So five more slides to recap our current thinking regarding the impact of recent regulatory changes.

On slide 31, this reflects where we expect to see the impacts.

The Federal Reserve recently amended Reg E to prohibit charging overdrafts for ATM or one-time debit card transaction unless the customer opts in.

Our overdraft charges, or NSFOD for short, is a major source of fee income for us and for other banks.

For Huntington, fees run about $90 million a year.

Our basic strategy is to mitigate potential impact by reaching out to customers and alerting them that we can no longer offer such overdrafts unless they opt into our overdraft service.

To date, our results are surpassing our expectations, and according to a recent survey, our opt-in percentages are higher than most of our peers'.

At this point, over 20% of all customers have opted in, and for those customers that avail themselves to this service the most, the opt-in rate is nearly 50%.

While we know some customers will not opt in at first, over time, we believe some will realize that they've not kept a valuable service, and will then opt in.

With the recently passed Dodd-Frank Act, while it's complex, as it relates to how this legislation and subsequent rulemaking will impact our company, at this time we believe there are two meaningful areas which we've highlighted.

Interchange fees and the eventual inability to include trust preferred capital as a component of regulatory capital.

Our annual interchange fees run about $90 million per year.

And most of our fees are what is referred to as signature based.

That is customer signs an authorization at the checkout stand.

Much like a credit card.

The act gives the Federal Reserve and no longer the banks or system owners the ability to set the interchange rate, which we charged merchants for the use of debit cards.

And what the ultimate impact will be cannot be estimated at this time.

We'll have to wait for the Federal Reserve action, and may take many months of proposals, debate, and rulemaking.

I only wanted to mention today the annual revenue at risk.

We believe a fraction and maybe a small fraction, of related revenue will eventually be impacted.

With regard to trust preferred securities, we currently have $570 million outstanding.

And if disallowed would reduce the regulatory tier-one capital by 1.34%.

There's a three-year phase-in beginning January 1, 2013, so there's plenty of time to strategize our capital structure around this new legislation.

Do not believe this is a significant issue for Huntington.

Slide 32 shows various return on asset outcomes given a range of net charge-off assumptions and a pretax, pre-provision income level equal to this quarter's $270 million, about which is where we are today.

We take the $270 million, subtract the intangible amortization expense of $15 million as it's excluded from our pretax, pre-provision income calculation.

We then provide a range of analyzed net charge-offs from 35 to 55 BPs.

While we're not ready to specify our normalized targeted net charge-off ratio range or what that should be, this range is within certain 10 and three-year historical ranges.

We did not consider 2007 for this purpose, as it included a large Franklin charge, which will not recur.

We use these net charge-off assumptions as a proxy for loan loss provision expense.

Subtracting this produces a pretax income range to which we apply a 30% income tax rate, to develop the range of net incomes and calculate the ROA off of that.

We believe we've got a 110 to 120 ROA off the 270 pretax pre-provision.

Turning to slide 33, let me outline our financial performance expectations for the second half of the year.

With regard to the economy and interest rates, we see no meaningful change.

We're not expecting a double dip, but we do believe it's now going to take longer for the economy to recover than we did just 90 days ago.

We anticipate second half pretax pre-provision income levels will be in line with second-quarter reported performance.

NIM is expected to approximate that at the first half of the year.

We expect modest growth in C&I and continued strong growth in automobile loans.

Pre-loans will continue to decline with home equity and residential mortgages remaining relatively flat.

We could see an increase in investment securities as excess cash comes from strong core deposit growth, needing to be deployed.

Fee revenue in the second half is expected to be mixed with certain fee income activities getting a lift from the continued rollout of strategic initiatives, offset by lower mortgage banking income, as well as service charge income to the implementation of Reg E.

Expenses also should be relatively stable with increases due to the continued implementation of strategic initiatives.

Any growth in expenses is expected to be mostly offset by lower loan Franklin portfolio servicing and monitoring expenses, as well as a general decline in credit monitoring-related expenses as nonperforming assets continue to decline.

Charge-offs and provision expenses are anticipated to be generally in line with the second quarter levels, excluding any Franklin impacts.

In sum, this should translate into revenue and earnings improvement from the second quarter.

Slide 34, before wrapping up, wanted to remind of you our 2010 objectives.

Shown on this slide, we believe they're well understood by every colleague, and it's what we're working for our execution and delivery.

In today's presentation, these specifically speak to the second half of the year.

In closing, I'd like to remind you of these 2010 objectives.

They're essentially the same as they have been through the first quarter and first half.

Our balance sheet is getting strong.

Currently the strongest in recent memory.

Our capital levels are sufficient, getting stronger with each profitable quarter.

We're substantially improving underlying credit quality trends, which now been augmented by our decision on Franklin, and that's positioning us for a credit quality performance that is better than peers'.

Underlying earnings and profitability are growing, we continue to see increased opportunities and focusing a great deal of attention on growing revenue.

This is supported by our making investments to grow key fee businesses.

While the environment is challenging, we're committed to continuing our move to higher levels of performance and improved execution.

We're clearly on the move.

So that's it.

Thanks for your interest.

Operator, we'll now take questions.

(Operator Instructions).

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Brian Foran from Goldman Sachs.

Your line is now open.

Hi, good afternoon.

Hi, Brian.

I apologize if I missed it.

But can you update us -- I know you were almost within spitting distance of the pre-provision target you had for 3Q.

Are you going to be rolling forward the targets over the next year or so, and if so, what is the new target?

Yes.

Brian, this is Don.

And as far as we did provide in our guidance that we expected the pretax pre-provision to be generally in line with the second-quarter reported results of [270.5] that we have.

We haven't given the updated number for [275].

We try to shy away from giving specificity like that in our guidance.

And we think with the statement that we're making, it really puts us in that range that we had communicated before.

So we haven't made any additional plans to update that [275] outlook.

And then, again, I apologize if I missed it because I missed a middle window of the call.

But just last quarter and the quarter before that, you guys had given some helpful color, just out talking to clients.

What are they saying about wanting to borrow and relever up?

Do your customers feel better or worse about the world right now?

I'd say marginally worse, Brian.

Events in Europe, the Gulf, just general lack of confidence, ongoing sort of macro agendas around cap and trade and taxes.

There's a lot on the move, so to speak.

And other issues.

And so it feels a little softer today than we would have said 90 days ago.

And that's a generally shared sentiment.

So the expectation is continued deleveraging of both the consumer and business front.

And from a utilization perspective, the 42% you cited right now, do you kind of feel like it will be flat or up or down or just kind of depends on the economy?

Flat.

At this point.

Great.

Thank you.

Thank you, Brian.

Your next question comes from the line of Matt O'Connor from Deutsche Bank.

Your line is now open.

Hey, guys.

Hey, Matt.

Matt.

On slide 34 when you talk about the 2010 objectives, I just wondered if you could give a little more color on the last one.

Continue to explore opportunities to further derisk the balance sheet.

I know you're running off the noncore CRE, but there's -- that's listed separately.

I'm wondering what else will be included in areas that you might look to derisk.

Well, we have been working through our private label CMO.

It's a little bit in the investment portfolio.

Where we've seen a little -- pockets of risk in different portfolios that have been fairly modest were in the scheme of commercial real estate.

We've been working those, we'll continue to work those.

It hasn't been big enough to bring to your attention or other's attentions, Matt.

So we're on the back side of these derisking strategies from where we were a year and a half ago.

But there's still more we want to do.

I assume that would help on the regulatory capital front if you were to reduce some exposures.

Yes, Matt.

You're right.

We have seen a reduction in our risk weighted assets over the last year, and a good chunk of that is really coming from these derisking-type of activities, whether it's for the investment portfolio sales or other actions.

Okay.

And then separately, you mentioned a couple of times about expenses related to Franklin credit going away.

And I might have missed it, but how much are those, and do they go to zero this quarter, or is a couple of quarters before they all go away?

As far as the expenses, we talked a little bit about the charge-offs that were incurred this quarter prior to the transfer to held for sale.

And that was about $4.5 million.

And we've been incurring somewhere in the $8 million to $9 million per quarter type of expenses associated with servicing and other support there.

And a big chunk of those will go away in the third quarter.

We have a portfolio of seconds that will continue to have servicing expenses attached to that.

But we will see fairly significant reductions there.

Okay.

All right.

That's helpful.

Thank you very much.

Thanks, Matt.

Your next question comes from the line of Dave Rochester from FBR Capital Markets.

Your line is now open.

Guys, nice quarter once again.

Thank you.

You highlighted a big spike in the upgrades from the criticized bucket to the past grade.

Can you talk about what you're seeing in your markets as driving that, that's giving you confidence that that trend could continue in the second half despite some greater caution in the market today.

Well, some of that was perhaps more conservative posture and our point about not making sure we had year-end statements before we did upgrades.

Not using some interims in the second half of last year.

But generally we're very pleased having now gotten through a reporting -- fiscal reporting period that the quality of the book.

And I would say that's especially true related to the core real estate.

We've had a very stable book for the first six months.

Even more so than we expected at year end.

So increasing confidence and we think -- what we're seeing and what we think is going to continue is that this deleveraging and the severity of the correction eliminating perhaps some -- some of the competition for some of our customers has put them in a much more stable environment than they might have been a year ago.

And stable to improving.

And not uncommon to hear that on the manufacturing front, distribution anyway, that very good years so far this year and an outlook for a good year.

So it feels like the worst is clearly behind us, and we think because of the efforts last year to identify problems and deal with them, that we, frankly, have gotten well ahead of it.

Great.

One more quick one on the margin.

If I could just drill down into that slide 18 real quick on the CD cost.

Don, you mentioned that you have one more quarter here of higher rate CDs maturing.

Given how high the average cost of CDs was during the quarter, it seems like there was another chunk of higher rate CDs maturing at some point, maybe next year outside the scope of the slide.

Can you talk about that and where you're repricing CDs as they roll today?

Our average is a point and a half because it's more a barbell.

We have a group of group of smaller, shorter, say, 90 day type of maturities.

We have a group in the two to three-year bucket.

There are some sprinkled throughout the remaining quarters that the last three to four have really been impactful as far as repricing that book, and we'll continue to see some pricing down here in the third quarter.

And in terms of the brokerage CDs completely running off, is that an end of year event timing-wise, you think?

Well, we have run those down dramatically.

We've actually maybe thought about doing a little bit of dipping our toe into doing some additional brokered deposits if we want to here in the third quarter.

Just to test the markets and see what kind of rates are available there, as well.

So don't be surprised if you see some limited action there, as well.

And where are those pricing today?

Between 90 basis points and 100 basis points for an 18 to 24-month CD.

Great.

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

Your line is now open.

Thanks.

Can you talk about reserve release going forward.

I think if we exclude Franklin, you provisioned about 60% of charge-offs or so.

Obviously NPL is coming down.

It seems like the credit trends are getting a lot better.

Is this a sustainable ratio of provisioning?

I wouldn't lock into it on a ratio basis, Ken, but we do expect to see an improvement in non-performing and charge-offs in the second half.

And I think if you use the ratio, we're looking -- we're viewing this very dynamically, and we're trying to stay conservative with it given the economic uncertainties.

We're commenting on the large reserves in the quarter and you built up the reserve substantially in the past year.

And that needs to come off at some point and given your credit trends are more favorable, it seems, than a lot of the other firms that we've seen should imply in theory sort of a faster reserve, at least.

Yes.

Ken, it's Tim.

I think we're -- as Steve said, we're working on this as really a dynamic issue for us.

We're looking at the non-accrual levels.

We're also looking at the criticized asset levels.

All of that is included in our analysis of where the reserve needs to be.

I don't think we can talk about a 60% of charge-off ratio at all.

But what occurs over the course of the next few quarters will be a function of how the asset quality improves and also what the charge-off levels are.

Okay.

Now that makes sense.

Just on the pretax, pre-provision number, it seems that if we assume mortgage banking goes back to a more of a normalized $25 million range and you got Reg E, I get that the expenses go down, whatever it is, $8 million or so related to Franklin.

But do the strategic initiatives that you guys mentioned in the slide deck fully offset that differential?

I mean, to keep pre-period at a fairly constant level?

Or is there something else I'm missing?

Ken, no.

I don't know that you're missing a lot there.

I'd say historically over the last several quarters until this one we were seeing the net investment income increase in the $10 million to $14 million a quarter type of level.

We would expect to continue to see some net interest income growth throughout the quarter to quarter.

We also are looking toward our strategic initiatives to help drive some of those other key fee income categories.

And we think the combination of those will offset the shortfalls you've talked about to allow us to get back to pretax pre-provision that's in line with that reported 270.5 type of level from the second quarter.

Thank you.

Thank you.

Your next question comes from the line of Tony Davis from Stifel Nicolaus, your line is now open.

Steve, Don, good quarter.

Thanks.

I would follow up on that.

You mentioned the Max sales management system.

When will it be rolled out completely, and I just wondering, too, if you could give us perspective on the size of the strategic business investments you're making and any thoughts or color on the impact in terms of the operating expense load.

Well, we have -- we have rolled that out systemwide.

So all of our revenue segments, our five revenue segments.

All units within each segment are now on Max.

Okay.

We have some further -- and the basic functionality is in good shape.

We will further phased refinements that will go on up through January.

The next phase is August.

We're very pleased with the tool.

We're very pleased with the acceptance and adoption of the tool, and it's giving us even better -- frankly much better insight than what we were getting off the paper tracking process group-wide.

So our sales management and sales disciplines are getting better, Tony.

We can see it on cross ratios with new customers as well as existing portfolio.

And the learning, the coordination of taking referrals to sales is getting better.

And will continue to improve certainly throughout this year and, I think, possibly even indefinitely.

So we're well underway, I believe, a lot of the expenses associated with our initiatives in terms of hiring and things like that, we accelerated.

We wanted to get that done in the first half, and I'm glad we have.

We probably have a normal revenue lag around this that hopefully will give us the second half lift we're looking for.

And Don, would you want to comment more specifically on any of the economics?

Not right now, Steve.

We have front end loaded a lot of the hiring.

You saw the FTE increases that occurred here in the second quarter, you're seeing a higher level of marketing cost in the second quarter, and we think those are both good indications of run rate going forward.

We will continue to evaluate other initiatives and continue to deploy strategic initiatives that are in the pipeline, but I'd say that the run rate is fairly reflective of the extent of the expense investments we're making at this point.

Okay.

Two-- two questions on lending, I guess.

Your thoughts in here regarding GM's overtures to banks to provide credit more, and more particularly, how far afield are you willing to go in the auto business, both geographically and in terms of credit quality, and then beyond that, I just wonder where you are in -- in gearing up the equipment finance and the asset-based lending businesses, kind of where that stands now.

The auto business, Tony, is -- is very much in footprint.

It's average FICO between 760 and 770.

We review weekly the production and yields, and we're cognizant of maintaining an adequate return off that and a very high credit quality.

And you're seeing the credit quality, as you get into the deck, reflected in the numbers in terms of charge-offs, down year over year over 100 bips.

Delinquency looks good.

So our indicators are very good on that portfolio.

And I'm sorry, what was the second --

Finance on asset-based lending.

ABL is a startup.

It's in a very early stage.

We're closing deals at this point.

We've got largely an experienced team in place that at this stage is adequate.

And they're roughly on track.

On the equipment finance, Rick's been on board about 45 days.

And, his impact was seen in our June numbers.

Pipeline looks good, and we'll be talking about further gearing that business very soon and making some level of additional investments including some segments in the second half of the year.

Don, one final quick one for you.

Really backs to the remaining $190 million in remaining deferred assets, is it reasonable you'd have that back in regulatory capital here by the end of year?

I don't know about that.

Previously, we said that the DTA would come back throughout the 2011 time period for the most part.

And that that we did recognize was primarily related to the Franklin transaction.

And so the -- the timing of the rest of it still will be over the next six-plus quarters.

Okay.

Thanks.

Thank you.

Thanks, Tony.

Your next question comes from the line of Erika Penala from UBS.

Your line is open.

Good afternoon.

Hi, Erika.

My first question is on your thoughts on credit quality and your core residential real estate portfolio.

Given what sounded like more cautious commentary on the housing market, could you give us some insight on how you're thinking about future delinquency trends in the portfolio?

And give us also if you could some insight on what you think your redefault rate could climb to in your portfolio modified single family.

Sure.

On the first side of it, we expect our delinquency trends to continue to be down over time, and our residential portfolio.

The-- there's, back on slide 27 or 28, we give you a pretty good view of the overall total consumer drop and back in the appendix we have some slides on the residential portfolio, specifically.

110.

110 is the actual slide.

So we expect to see some continued improvement in that portfolio.

I think the second half of your question relates to the modified loans.

Yes.

And our expectation for performance continues to be about twice as good as the industry as a whole.

So much of the industry language around that is at about a 50% redefault.

And right now we're in the 20% range.

And I don't see a material change in that coming at us.

And my followup question is in regards to your guidance for modest loan growth and C&I.

A lot of your peers are still seeing a fairly tepid environment for C&I originations.

And I was wondering if you could tell us what you're doing differently and how your pricing compares in the marketplace.

Well, we're -- Erika, it's hard to respond to what we're doing differently because we don't have a lot of insight into other organizations.

We do see some cost initiatives going on in certain banks.

So that may in part be impacting and giving us a competitive advantage at least for the moment.

In terms of pricing, we put very good disciplines and reporting in place, we mentioned earlier, we look at auto pricing weekly, we do the same on, frankly, all of our assets.

And so we're very cognizant of our pricing and risk return in a dynamic fashion.

We don't see that materially changing in certain geographies, little more pressure than others.

In some geographies, there's no pressure.

So don't expect that to materially change in the second half.

Okay.

Thank you.

Thanks, Erika.

Operator, I think we have time for one more question.

Your next question comes from the line of Terry McEvoy from Oppenheimer.

Your line is now open.

Good afternoon.

Don, you mentioned the potential of raising common equity surrounding, or in connection with the TARP repayment.

Do you think should that be the case you'd also look to maybe address that trust-preferred capital legislation and maybe raise little bit more common equity to take that into consideration, or would you really take a look use that full three-year phase-in period and see what happens?

Yes.

Terry, we're not in any big hurty to do really either.

But I guess as far as the trust preferred, we probably would want to evaluate that full three-year time period as far as looking at what the capital implications would be, that rear happy to be back in a position where we have capital accretive earnings and would like to continue to maintain that.

Hopefully we could utilize that to offset the redesignation of those trusts as a tier-two capital as opposed to tier one.

And the common equity issuance would just be in connection with any TARP repayment and the timing of which we aren't certain on yet.

Terry, yes, we've seen a lot can happen over the span of three years.

So we have no contemplation of dealing with trusts in the context of that capital at this point.

And the noncore CRE, you were talking about that earlier in the call, moving that over to core CRE.

Is it getting more business, are you getting more comfortable maybe with the quality of those borrowers.

And is it a large enough size where you feel the need to quantify it?

Let me try and clarify it.

The-- the core commercial real estate has performed very, very well for the first half of the year.

Part of the noncore real estate was a combination of things, but one of those was customers that simply assessed our balance sheet, didn't have broader relationships, deposits, et cetera.

There's probably some sifting that will go on.

We haven't allowed any to occur, just to be able to keep things pure at this point.

But I don't believe that that will be a huge number.

Thank you.

Thanks, Terry.

Chris?

Yes, sir?

Operator, I think we're going to be bringing the conference call to a close.

I know there's still a couple of people on the line.

If you want to follow up with questions, please call the Investor Relations department directly.

And we look forward to your call.

Thank you very much.

This concludes today's conference call.

You may now disconnect.