Huntington Bancshares Incorporated
Q2 2009 Earnings Call Transcript

Published: 24 Jul 2009

[Jay Gould:]

I’m Jay Gould, Director of Investor Relations for Huntington. Copies of the slides we will be reviewing can be found on our website www.Huntington.com. This call is being recorded and will be available as a rebroadcast starting about an 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 note several aspects of the basis of today’s presentation. I encourage you to read this but let me point out one key disclosure. This presentation contains both GAAP and non-GAAP financial measures where we believe it’s helpful to understanding Huntington’s results of operations or financial position. Where non-GAAP financial measures are used the comparable GAAP financial measures 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 and the quarterly financial review supplements of today’s earnings press release or in the related Form 8K filed earlier 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 which may cause actual results to differ materially. We assume no obligation to update such statements and for a complete discussion of the risks and uncertainties, please refer to this Slide and materials filed with the SEC including our most recent Forms 10K, 10Q and 8K filings. Now, turning to today’s presentation on Slide Six. Participating today are Steve Steinour, our Chairman, President 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 for the Q&A session is Kevin Blakely, Senior Executive Vice President and Chief Risk Officer; Nick Stanutz, Senior Executive Vice President of Auto Finance and Dealer Services; and Mike Cross, Executive Vice President and Senior Commercial Lending Officer. Let’s get started. Turning it to you Steve.

[Stephen D. Steinour:]

First, a word of introduction is in order. I’m very pleased to introduce Kevin Blakely to you. He just joined us earlier this month. Many of you will recall him from his days at Key Corp. He’s a pioneer in developing enterprise wide risk management and as we position Huntington for long term performance his leadership will be very impactful. So welcome Kevin. In the past six months we’ve made tremendous progress in positioning Huntington for improved long term performance. To recap, we’ve moved with a heightened sense of energy and urgency on a number of key issues, increasing liquidity, successfully launching and completing a major expense initiative, restructuring Franklin, understanding and addressing issues within our loan portfolios, strengthening our capital, restructuring the organization and expanding our management team. There is much work to do yet looking back I’m pleased with how far we’ve come in such a short period of time. Given the challenging environment we’re enduring some short term pain to get ourselves where we want to be. But, I’m confident of where we are headed. We are positioning Huntington for success in the foreseeable future. I’ll begin with a review of our second quarter performance highlights, Don will follow with the details and review of our financial performance, Tim will provide an update on credit, I’ll then return with some 2009 outlook comments, what I hope our investors take away from second quarter performance and our priorities for the second half. Let’s begin the presentation turning to Slide 8 please. We reported a net loss of $125 million or $0.40 per common share. The primary driver of the loss was the provision for loan losses that increased $121.9 million from the first quarter. Now, $79 million of this increase boosted our allowance for credit losses. Contributing to this increase was a much more detailed commercial loan portfolio review that we’ll talk about in more detail in a moment. Pre-tax pre-provision earnings were $229 million, up $4.7 million or 2% from the first quarter. So, we are continuing to make progress. This reflected a number of very positive trends and underlying performance drivers. For example, our net interest margin expanded 13 basis points to 3.10% and core deposits grew at an annualized 17% rate while average loans declined at an 18% annualized rate. This reflected planned efforts to reduce our commercial real estate loan exposure as well as the full impact of the first quarter’s $1 billion automobile loan securitization and a small $200 million residential mortgage portfolio sale. Make no mistake, we’re still making loans. We originated or renewed $4.1 billion of loans during the quarter, $1.9 billion of commercial and $2.2 of consumer. Fee income performance was mixed. We kept tight control of our expenses and as I noted in our earnings press release, I think the lead story for Huntington was the actions we took to significantly strengthen our balance sheet, capital, liquidity and reserves. Regarding capital we took actions that added just under $705 million to common equity. This was a multipronged strategy including discretionary equity issuances, conversion of preferred stock, a common stock offering and a gain on the cash tender offering of certain trust preferred securities as well as a gain related to our Visa stock. In some cases our action led the industry. We were particularly pleased with the efficiency of our common stock offering. Don will review the details but we’ve issued 55% more shares than the end of the year, 55% more shares since the end of last year yet our tangible book value dilution related to these actions was only 3%. We have and will continue to be cognoscente of shareholder value and minimizing the dilutive impact of our capital plans. Reflecting our actions, all our period end capital ratios saw significant improvement. For example, our tangible common equity increased to 5.68%, up 103 basis points and our tier I common risk based capital ratio increased to 6.8%, up 116 basis points. Turning to Slide Nine another achievement would strengthen liquidity; during the first half of the year we strengthened our balance sheet liquidity as our available cash increased $1.3 billion and our unpledged securities portfolio increased by $1.8 billion. On top of this we had capacity to borrow $8 billion from the Home Loan Bank and Federal Reserve. The most important liquidity improvement however was our 17% annualized growth in core deposits. Reflecting the combination of lower loans and deposit growth, our period end loan to deposit ratio was 98%, down from 101% at the end of the first quarter and 108% from a year ago. Growing core deposit balances as well as households and businesses are priorities and we are making very good progress. When I arrived in January, overall the highest and immediate priority was having a full understanding of what’s in our loan portfolio and to make certain our loans are accurately risk rated during a period of significant economic turbulence and change. In the fourth quarter of last year we addressed the valuation of our Franklin relationship then in the first quarter we successfully restructured it. The specific aim was to take control of the underlying assets at Franklin so that we, among other things, could improve collections. I’m pleased to report that Franklin cash collections in the second quarter were 13% higher than in the first quarter. At the end of the first quarter we had $574 million of Franklin related mortgages and REO. At the end of the second quarter this totaled $516 million, a 10% decline. In case you were wondering we had no Franklin related net charge offs or further impairments. In the first quarter we also completed a concentrated review of single family home builder and retail commercial real estate portfolios, our two highest risk commercial real estate segments. This past quarter we turned our attention to every non-criticized, every past rated C&I and commercial real estate loan relationship with an aggregate exposure over $500,000. This review encompassed over 5,000 accounts representing $13 billion in balances or 59% of the outstandings. The depth and breadth of the review as well as ongoing business segment review processes now put in place are covered in detail in our earnings release so I encourage you to take time to read it. It was an exhaustive exercise and should give you the same level of comfort that we have based on the efforts. What’s important for you to know is that this work was helpful in assessing existing and emerging credit issues in this challenging economy. We are now well positioned to proactively mitigate risk going forward. We expect our commercial loan portfolio will remain under pressure as we continue to believe the economy will remain weak for the rest of the year. But, everything we’ve seen and learned helps us remain confident that the risks of our commercial loan portfolios are manageable. On the consumer side, performance reflected the continued pressure from the difficult economic environment as well. Though net charge offs increased, this was in line with our expectation. We continue to believe our consumer loan portfolio will show better relative performance throughout the cycle. Overall, here are the numbers

[Donald R. Kimble:]

Turning to Slide 10, we provide a summary of the earnings for the quarter. Our reported net loss for the quarter was $125.1 million or $0.40 per common share. However, the quarter included several significant items as detailed below. First, the $67.4 million or $0.10 per share gain resulting from the tender offer for some of our trust preferred securities. We were able to redeem $166 million of these securities or about 35%. Second, $31.4 million or $0.04 per share gain related to Visa stock as we sold our remaining interest in Visa shares during the quarter. Third, $0.06 per share negative impact from the preferred stock conversion that occurred during the quarter. This negative impact reflected the value of the additional common shares issued to induce conversion. Fourth, $23.6 million or $0.03 per share charge related to the special assessment from the FDIC. Finally, a $4.2 million or $0.01 per share goodwill impairment charge related to the [inaudible] sale of a small payments business. Slide 11 provides a summary of our quarterly earnings trends. Many of these trends will be reviewed later so let’s move on. On Slide 12, we provide an overview of our pre-tax pre-provision performance metric. We believe this metric is useful in assessing the underlying operating performance. We calculate this metric by starting with pre-tax earnings than excluding three items

[Tim Barber:]

Turning to Slide 22, on an absolute basis our total charge offs were lower in the second quarter than the first quarter. However, when factoring the Franklin impact on first quarter net charge offs, total non Franklin net charge offs were $131.3 million higher. 68% of the non Franklin increase was centered in the commercial real estate portfolio which increased $89.8 million, more than doubling the first quarter level as we continued to actively deal with project performance issues and declining real estate values. 59% of the commercial real estate net charge offs came from the two highest risk segments of the portfolio

[Stephen D. Steinour:]

As we shared with you before, we intend and are working hard to increase our disclosures making sure you get a full, fair and complete level of information from us and we’re pleased to have a number of new slides in the deck in this quarter that were just reviewed. Let me share with you some thoughts about 2009 performance. First, as we’ve said since January, we don’t believe there will be any significant economic turnaround this year in our markets. We continue to believe we have a good understanding of the risks in the consumer loan portfolios and that those portfolios of loans will perform better on a relative basis throughout this cycle than peers and other portfolios. Now, with all that we’ve learned through and certainly the results of our second quarter commercial portfolio review, we think we have a very current view of how our borrowers are performing, what their challenges are and frankly, there are a number that are performing very well. Given our economic view however, we anticipate continued net charge off levels and provision expense that will remain elevated but at a manageable level. We also expect net interest margin will be flat to slightly improving from our second quarter 3.10% level and we expect to continue to build our core deposit growth success. Loans on the other hand are expected to decline modestly for a couple of reasons

[Operator:]

(Operator Instructions) Your first question comes from Matt O’Conner – Deutsche Bank.

[Matt O’Conner:]

As we look at the charge off level for the second quarter, is this the new kind of run rate to grow off from here or was there some upfronting of the commercial real estate losses as part of the revenue that you did this quarter?

[Stephen D. Steinour:]

Matt, we’re in one of these moments in the credit cycle where it’s very difficult for us to project. I would tell you we’re recognizing losses earlier than we had been. There’s always a continuum of when you can take loss. Having said that, I don’t know how material that would be second quarter to first. But, well continue to address issues as we see them arise and move forward.

[Matt O’Conner:]

Just in general, you guys seem to be one of the few banks out there looking more closely at C&I and some of the income producing commercial real estate. Is it that you’re trying to get ahead of the curve, you think your mix might be a little bit worse, are others just behind? I’m trying to reconcile it to folks out there saying there won’t really be issues in C&I and CRE and don’t seem to be reserving or charging off any of that stuff?

[Stephen D. Steinour:]

I don’t really know what our competition has in their books Matt. It’s hard to make a relative comment. As we’ve shared with you and others earlier, we’re really trying to get the entire left hand side of the sheet and that’s in part what Don referenced by looking at the Alt-As. We want a clean sheet as much as we can this year and so everything has been looked at or is being looked at, wholly every asset on the sheet is being looked at or has been looked at.

[Matt O’Conner:]

Then just lastly, as I look at the loan loss reserves they were below the annualized charge offs this quarter obviously, well below the non-performers. Should we expect more reserve build going forward relative to charge offs?

[Stephen D. Steinour:]

Well, we tried to break this out a little bit. We took a mark-to-market on Franklin when we moved it in and that’s 20% of our non-performing loans or thereabouts. So, we’re trying to do a more apples-to-apples comparison. Franklin unfortunately seems to be relatively unique to us. We certainly feel the reserves are adequate or we’d have another number there. Directionally, with the economy worsening could we build reserves somewhat? Possibly, but we haven’t seen anything that concerns us in terms of big buckets of risk that have not already been reviewed and addressed to the extent that we see the inherent risk.

[Matt O’Conner:]

So at this point, just to be clear, you’re not expecting the reserve build to increase from here? I think this quarter you added about $80 million and you would think that number would be less going forward?

[Stephen D. Steinour:]

No, I wouldn’t say that but I don’t see us – we’re not thinking we need – you saw a couple of banks take some very large supplemental this past quarter, we’re not thinking about it in that context. We’ve got a methodology, we think it’s working, we’ll be sticking with it. We have a very intensive portfolio management process now for loans of all risk categories and that will help drive our reserves in a dynamic fashion but, we’re not thinking there’s a onetime event that a couple of other banks chose to take.

[Operator:]

Your next question comes from Tony Davis – Stifel Nicolaus.

[Tony Davis:]

Just a question here, I guess are you seeing your recent inflection point where resi construction losses may begin to stabilize and the incremental losses in CRE will pretty much be limited to income property? Is that fair Tim?

[Tim Barber:]

I think what we’ve tried to communicate is a distribution of losses between income producing and construction as well as provide some clarity around the composition of the portfolio. Obviously, the construction segment is a relatively small piece of the portfolio at this point. Talking about whether we’ve reached an inflection point, etc. is something that I don’t think we’re prepared to do given what’s happening in the economy and our markets today. So, we’re just trying to provide as much clarity as we can around what the portfolio looks like and where the loss experience has come from.

[Stephen D. Steinour:]

Tony, we’re not trying to make this in to an exercise of frustration for you or others but we just want to be cautious about views. It’s just been very dynamic.

[Tony Davis:]

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

[Tim Barber:]

I think that on the slide that we provide over the course of the entire portfolio, commercial real estate, just for reference it was Slide 28, commercial real estate as a whole certainly had a significant impact on that change. I don’t have the specific breakdown between construction and income producing properties.

[Tony Davis:]

One final question, excluding Franklin it looks like you sold a modest amount of OREO in the quarter but loan sales seems to have picked up a bit here and I just wondered what your expectations are for asset sales over the course of the year?

[Stephen D. Steinour:]

Tony, we just want to make sure we understand the question, in the first quarter we did a securitization of $1 billion –

[Tony Davis:]

I’m talking about non-performers.

[Stephen D. Steinour:]

On non-performers we haven’t done bulk sales in the second quarter. It’s something we are thinking about for the second half of the year but those changes don’t reflect bulk sales.

[Tony Davis:]

One strategic question Steve for you, you’ve identified a roughly $100 million cost reduction effort and I just wondered where we are today on that?

[Stephen D. Steinour:]

Well, when we identified it, we went after it and we got most pieces. What we’re finding nibbling against us now are higher OREO expense, higher NPA or problem asset collection expenses and then we did not have a view when we went after that what the change, the restructuring change with Franklin would mean to us. So, our numbers are particularly cloudy right now with the cost of servicing out of Franklin and then OREO, the cost of collection exercises coming out of the various business segments.

[Operator:]

Your next question comes from David Rochester – Friedman, Billings, Ramsey.

[David Rochester:]

Just going back to one of the earlier questions to maybe ask it another way, on the NPA analysis slides, Slides 25 and 26, is there a level in the back of your minds that your potentially managing to for a minimum reserve coverage to NPAs going forward?

[Stephen D. Steinour:]

We don’t think of it in that fashion Dave. I’ve always thought a better ratio anyway was a coverage ratio to portfolio and then others will understand the quality of the portfolio. In Huntington we have a lot of confidence in the portfolio performance on the consumer so you’ve got 40% to 41% of the book that we believe we can fairly accurately peg even with rising unemployment. The work in the first half was to try to start to build that same capability in the commercial portfolio so it is very significant to us to have completed this revenue in the second quarter because this portfolio management process Tim and I talked about is very robust and we will maintain it in a very disciplined way monthly going forward. So, it gives us a lot of confidence in our ability to mitigate risk because we’re seeing it now earlier. Where we have opportunities for collateral calls or other things they’re being made much more timely. I think the results of that will be reflected in future period numbers.

[David Rochester:]

One last one, on your outlook for the net interest margin, it seems like there is some real opportunity here for you to see more than just modest margin expansion going forward. Your cost of CDs is well over 3%, can you talk about your ability to reprice those lower over the next six to nine months and what current pricing is on that today?

[Stephen D. Steinour:]

As we said on the first quarter, we try to be conservative with outlook on NIM because it has such a significant forward impact and so we’re trying to be cautious with this second quarter statement now. But, we do think we have a reasonable opportunity resetting that CD book and yet growing the core. We have not closed out what we’re intending to do in the second half yet but we’re very active in our discussions and we’ll do that shortly. We don’t give forward guidance, we opted out of that last year. I’m reluctant to go much further but we would expect to make some progress on that CD book.

[Operator:]

Your next question comes Ken Zerbe – Morgan Stanley.

[Ken Zerbe:]

My first question that I have, when you guys talk about your credit performance running in line with the stress test, are you talking, and to be very specific on that, are you saying that your credit performance is running in line with the adverse case stress test or is it better than what you would expect under the adverse case?

[Tim Barber:]

The way we’re looking at it, we don’t see the adverse case as a number that makes much sense in our portfolio. So, depending on what portfolio you’re talking about operating either between the base case and the adverse case or in some cases actually below the base case scenario as we talked about some of our consumer portfolios.

[Stephen D. Steinour:]

In aggregate we think of it as base case.

[Donald R. Kimble:]

Ken just to follow up on that, really when we came up with our capital plan in May, we were using our own internal stress analysis and we’re saying that our losses that we recognize here in the second quarter are in line with the early stages of that outlook as far as our internal analysis. It’s not necessarily what you saw was the [inaudible] stress test loss levels.

[Ken Zerbe:]

The second question I had, just on your commercial loan review, should we view this I guess as sort of a catch up to current conditions like you just did a full review, you know where everything is today, you built the reserves to protect against today and then going forward because you have the new policies in place and procedures that as credit continues to deteriorate from here there’s not going to be another catch up but we’re going to see the deterioration going through the provision and charge off line?

[Stephen D. Steinour:]

I think the later is fair Ken. Again, with the mindset that the economy has flattened out and we don’t think it will happen in the second half and we do except some further deterioration, we do believe we are now in a position to more actively manage and mitigate it than we had been.

[Operator:]

Your next question comes from Brian Foran – Goldman Sachs.

[Brian Foran:]

I guess first on Slide 32, how should we think about the collections trending down during the quarter versus your outlook for flat? What factors are giving you the confidence that the collections are stabilized? Then second, is there a rule of thumb, I realize the marks are pretty heavy right now but is there a monthly collections number that the current marks, a minimum collections number we should track the current marks correspond to?

[Tim Barber:]

The first question, the April number clearly reflects the impact of some of the substantial refinance activity that occurred over the course of March and April. May and June are more base case months. We also believe that there are a number of strategies and programs that we’re working on relative to collection and recognition of value coming out of that portfolio both first and second that will continue to see benefits going forward. So, that’s the basis for our comments regarding the current quarter and some look in the future on what we expect from Franklin. As far as is there a base case or an underlying cash flow assumption associated with to mark, the answer is yes. I don’t think that is something that we have shared specifically and I can’t give you a sort of base monthly number but, I can say that we expect collections going forward to be reasonably close to where we’ve seen them the first and second quarter. Again, it depends on a lot of our strategies and a lot of Franklin’s efforts but we’re comfortable with the direction of the portfolio certainly right now.

[Donald R. Kimble:]

Keep in mind also as far as the pricing [inaudible] includes both reserve for the embedded expected future losses and those losses are based on the assumption that home prices continue to decline over the next couple of years at a fairly steep pace. The second portion of that discounted is related to the assumptions that the cash flows are just kind of at an 18% effective yield. Since most of those assets are non-performing we essentially have both of those reserves available to cover future credit losses associated with the projected cash flows on that as well.

[Brian Foran:]

If I could follow up on capital, given that you are not part of the [SCAB] assessment, the simulated stress test you’ve done and the capital adequacy you’ve benchmarked against that, have the regulators officially approved that? Are there any other metrics they’re holding you to? How should we think about to make sure the simulated stress test is a fair benchmark of what we’re working towards?

[Stephen D. Steinour:]

Well, we hope you would view it as a fair benchmark, we worked quite a bit with your firm to do this, and others, to get market data since we were not a participant. We used that data with the participation from the firms and we’re confident from all that we can tell. We have not had it reviewed by regulators, they did not participate in our work, they haven’t subsequently reviewed it, it’s available to them as any information here is but there’s no sort of scheduled review, there’s no conversation pending, any of that stuff. I don’t want to mislead anybody implying that there’s some sort of regulatory stamp on this. This was our work.

[Brian Foran:]

I don’t want to misconstrue the question, what I meant to say, the regulators have never kind of officially said what standard they’re holding the next tier of banks to. Is there any other standard, or is there any other conversations you’re having with regulators that would lead us to believe there is a different metric or is your kind of understanding based on your interaction with them that the stress test simulation is the right way to think about capital for banks in the $20 to $100 billion of first weighted asset range?

[Stephen D. Steinour:]

We’ve had no conversation that would suggest there’s any other approach or formula or for that matter even initiative to take the [SCAB] test to another level for the next tier banks. I would tell you, my sense of it however is that it’s been a valuable exercise at least for us. Having the benefit of sort of second hand knowledge about how other banks were treated and viewed with loss rates helped us provide bands that we might not have otherwise been able to achieve independently. So at least for us we found it valuable.

[Operator:]

Your next question comes from Greg Ketron – Citigroup.

[Greg Ketron:]

Just a couple, one on early stage delinquency trends, I know in your presentation you had commented on the residential side and I apologize if you offered this earlier but any views or any information you can provide in terms of what’s happening on the C&I and the commercial real estate side? Or, maybe any color on what’s happening with the classified or criticized loan watch list?

[Tim Barber:]

On the early stage delinquency in C&I and CRE we were up marginally as of the second quarter compared to the first but down certainly significantly compared to 12/31/08 so the longer term trend is positive in the commercial real estate world. I’m not sure I understood exactly the question you were asking related to the criticized classified number.

[Greg Ketron:]

Just trends that you might be seeing there to the degree that you can discuss them?

[Tim Barber:]

I guess I would point you directly back to Slide 28 and that is as much disclosure as I think we can give or have ever given on what’s happening. That shows the material move associated with the [inaudible] and 10 plus classified categories in the portfolio in the second quarter.

[Greg Ketron:]

Then on page 27, just looking at some of the flows through the non-performing assets area, it looks like one, 90% of your charge offs are arising from NPLN flows. Is that right?

[Stephen D. Steinour:]

That would not be a fair conclusion. Just the workout process, there are at least a couple of meetings around which an initial resolution discussion is going to be had or an alternative such as resorting to remedies will occur then that will take some time. There’s also typically an updating of valuation that we’ll take to try and make sure we’re as accurate as possible at the point of charge offs. So, much of that charge off would be reflective of prior period non-performing loans.

[Greg Ketron:]

Don’t draw the conclusion of looking at the inflows and assuming the charge offs came through the inflows?

[Stephen D. Steinour:]

That’s correct.

[Greg Ketron:]

Because I noticed the charge off level had increased the 40% but then what you’re saying is part of that 40% is coming from the existing NPLN inventory versus just on the inflows?

[Stephen D. Steinour:]

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

[Operator:]

Your next question comes from Terry McEvoy – Oppenheimer.

[Terry McEvoy:]

Just getting back to the credit portfolio review in the quarter, was a majority of the losses or deterioration that was identified in kind of northern Ohio, southeast Michigan which is where the commercial losses have occurred for Huntington over the last couple of quarters or did it better reflect a majority of where Huntington operates in terms of the franchise?

[Tim Barber:]

The exercise was clearly across the entire franchise and we saw changes as a result of the exercise in all of our markets. There was not a specific concentration in southeast Michigan or northwest Ohio. In many cases southeast Michigan, the Detroit area, we’ve been through that portfolio so many times and the economic conditions have been so materially different than the rest of the portfolio that we’ve gotten a lot of that out of the way. In many cases, the results of the review were positive in that market. Our bankers are absolutely on top of the borrowers that remain in the portfolio and we’re continuing to serve. So, I would say that it was a broad based review and the results were also broad based.

[Terry McEvoy:]

Then just one other question, when I hear three year strategic plan I also think onetime charge or some sort of expense. Is that something we should look for in the fourth quarter? And, how do you potentially weigh a charge up against the capital you’ve raised and maybe some of the embedded losses or future losses that we’ll see over the coming quarter?

[Stephen D. Steinour:]

We’re not expecting and did not intend to imply any charge let alone material charge related to the strategic plans here.

[Operator:]

Your next question comes from Andrew Marquardt – Fox-Pitt Kelton.

[Andrew Marquardt:]

Just circling back on the capital, the stress test analysis that you had done before, can you help reconcile – I understood your point about net charge offs you’re tracking with sort of your base case scenario but can you maybe give some color on the reserve coverage level? One of the things that I think stood out in the stress test analysis that you had done was your assumption of just over 1% reserve coverage versus 2.5% now.

[Donald R. Kimble:]

As far as that, our model was just to say that at the end of the two year time period after absorbing the level of losses were include in that stress test so the reserve level could come down to more the historic level of reserves. So, essentially in this case since our reserve levels are higher than that if you would follow the stress test model that at some point during the two year time period that would start to migrate down as the migration would slow and the realization for those losses would occur.

[Andrew Marquardt:]

So a potential releasing of reserves or bleeding of coverage seems fair over two years?

[Stephen D. Steinour:]

Well not release, it would be utilization of reserves and again, it’s our understanding this is consistent with the way that the [19] modeled it as well.

[Andrew Marquardt:]

Were they also kind of thinking about individuals kind of historical kind of coverage which is how I think you came up with this kind of 1%, 1.2% coverage that you were using?

[Stephen D. Steinour:]

It’s our understanding that they did have a historical view and certainly the asset mix played a big part in that view. Some of them have materially different mixes today than they had at one point a couple of years ago back to that norm period.

[Andrew Marquardt:]

Maybe I missed it but can you give a little color on the retail CRE losses this quarter? Was that a bit of a pull forward? Losses look like they were almost double over 9% versus 5% last quarter.

[Tim Barber:]

In that portfolio Andrew we continue to look at it. That’s a portfolio, as an example, where there can be changes in value over time and we are working through those. I think this quarter was an appropriate set of actions associated with what we ended up with. I don’t think that there’s any additional way of describing the 9% number for retail.

[Andrew Marquardt:]

So it’s not like there was an unusual kind of catch up war being aggressive in realizing losses?

[Stephen D. Steinour:]

No, I think nothing extraordinary. I know we’re trying to take losses at an earlier stage rather than liquidate the collateral and then take the loss by way of comparison. We intend to be very active in managing the portfolio and recognizing risk. We are more forward leaning in that regard than the bank would have been say last year. The other element to think about is you generally have your worst credits emerge earlier in the cycle and as you age in to the cycle you tend to have borrowers that generally have more capabilities and resources and in our case we’re also trying to get to them earlier. So, if you would, there’s a slightly better quality mix of our classified or criticized today than there would have been six months ago, there’s more to work with.

[Andrew Marquardt:]

Then the last question I had was on earlier comments about the pre-tax pre-provision earnings and looking for additional actions to improve that. Can you touch on again what are you considering? Is it additional cost saves?

[Stephen D. Steinour:]

There is some element of costs that we’re always going after. We had an employee driven campaign called the green campaign that we closed out in the second quarter. It was a $6 million number. There are always things we’re looking to do on the expense side but we believe we’ve got some fairly significant revenue opportunities. A number of these business lines essentially shut down from new business to do the portfolio review in the second quarter. Someone I think noted and Don commented on the broker dealer income which was very high in the first quarter, a record first quarter, dipped in the second but it’s expected to come back and is on track to do that. There are a series of actions which we are taking now with weekly business line reviews that use to be monthly that are putting a little more focus and attention in to the process. We think all of these things are helpful. We had certain expectations that are more dynamic and we’re not just locked in to an annual budget for example, we’re using the monthly forecasting process as a way of driving harder those business segments that have opportunities for us.

[Operator:]

Your final question comes from Kenneth Usdin – Bank of America Securities.

[Kenneth Usdin:]

Two questions, first just on capital, you mentioned in the release that you guys had made a ton of progress on the capital rebuild and that you might leave the door open to kind of getting back to that target you announced back in May. I’m just wondering with a TC ratio still below peers but much improved from where it was, once you get to that kind of completing the program, is that completely it for capital raising? And, what would leave you to decide, if anything, that you’d still have to top off capital rebuild further?

[Donald R. Kimble:]

From that perspective I think we’ve been saying for some time that we’re very happy with our overall level of capital, that we’ll continue to reevaluate whether there’s certain components that we’d like to shift in to. So, we’ll continue to take a look at that. During our call we tossed out some of the other risk management efforts that could help reduce our risk weighted asset levels which will have a positive impact on some of the ratios as well. As we said, we’re a little short of the targets we laid out and still evaluating some of the options to get there and have a few things to consider.

[Kenneth Usdin:]

Then my second question is just regarding Steve’s point earlier about not expecting any type of a rebound this year, can you just give us your broad thoughts of how the footprint is acting from a broader economic perspective? How much more shake out are you expecting from the ancillary issues from the auto industry trickling out? And, what do we have to look for specific to Huntington to get kind of a turn in your kind of views about the economy and how that leads in to future credits?

[Stephen D. Steinour:]

A couple of things in that regard, one is we think we are sort of at best mid stage on the auto shake out. For us, it’s not a big deal, we just don’t have that much supplier exposure. The impact to us is more tertiary but there will be some impact. That’s one of the reasons we’re still cautious about the year. Secondly, on the consumer side, we don’t see job creation at a level that’s mitigating the job loss so we’re expecting higher unemployment and so far we’ve been able to improve our performance on a number of books and we expect to continue to do that but it is impeding the rate of improvement we would otherwise see if we got to a stable environment let alone a good environment. We think as a consequence there will be some continuing pressure on a variety of businesses small and medium size in our footprint that will continue through this year beyond what would have been apparent in the second quarter.

[Kenneth Usdin:]

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

[Stephen D. Steinour:]

Well, we stopped giving guidance last year and I’m loath to start it at this particular point. We obviously are pushing pre-tax pre-provision aggressively dynamically. We’re looking to get our issues on the table dealt with and resolved and move forward. We believe we’re turning the ship and that we’ve made pretty good progress. It wasn’t a puff piece in my initial remarks but, we have more work to do to be sure. I’m reluctant to suggest which particular quarter but having said that, it is foreseeable, it’s not some indefinite long term point distant on the horizon. We believe we’re going to continue to make progress on the core and that will hasten the transition point.

[Operator:]

There are no further questions at this time.

[Jay Gould:]

Thank you everybody for participating. If you do have follow up questions, please give myself or Jim Graham a call. Thank you again. We’ll see you next quarter.