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Huntington Bancshares Incorporated (HBAN) is a regional bank headquartered in Columbus, Ohio. HBAN conducts activities through over 600 branches in Ohio, Michigan, Indiana, Kentucky, and West Virginia, and a network of about 988 ATMs. Net interest income contributed 70% of HBAN's adjusted net revenue in 2007, while non-interest sources such as service charges on deposits, mortgage banking, trust, and insurance contributed the balance.

HBAN's operations are grouped into three primary segments: Regional Banking (typically 6070% of company-wide operating earnings), Dealer Sales (2025%), and Private Financial & Capital Markets Group (1015%). Regional Banking provides retail banking services to households and small businesses, and also serves middle-market companies with annual sales of $100500 million headquartered in HBAN s home markets. Dealer Sales provides automobile financing (both dealer floor plan and indirect consumer loans) for more than 3,500 automobile dealers in HBAN s five banking states plus Arizona, Florida, Georgia, Pennsylvania, and Tennessee. Private Financial & Capital Markets Group offers trust, asset management, brokerage services, insurance, and private banking.

Primary real estate loans (including middle-market CRE, residential and home equity) represented more than 51.3% of total loans at December 31, 2007, followed by 25.4% of middle-market C&I, 12.5% of other consumer (primarily auto), and 10.9% of small business (including some additional real estate). As of December 31, 2007, HBAN had $54.7 billion in total assets, $40.0 billion in loans & leases, and $37.7 billion in deposits.

4Q07 earnings as well as the full year earnings suffered a significant setback following the restructuring related to the lending relationship with Franklin Credit Management Corporation, a relation that was inherited following the acquisition of Sky Financial. Continuous weakness in the residential real estate development markets too weighed upon the shares of HBAN as the company was required to build non-Franklin-related loan loss reserves. The company expects to witness weaknesses in the residential real estate development markets and softness in certain manufacturing sectors in the coming quarters. 2008 credit losses are expected to exceed the 2007 level. In fact they are expected to peak up in 2008.

The revised outlook to negative from stable by S&P and the rating downgrade by Fitch for HBAN's issuer default rating to "A-" from "A" and its individual rating to "B/C from "B", would negatively impact HBAN's earnings. The increased provisioning for loan and lease losses and increased non-accrual loans would cause a decrease in interest-earning assets.

The biggest challenge we see at HBAN is the lack of growth. While acquisitions add a one-time pop, organic growth seems hard to come by. Net revenue growth has been negative in each of the last five years now, including a 7% performance in both 2004 and 2005 and negative during 2006 as well. HBAN's long-term expected growth rate is also mediocre at present (although it looks pretty solid next to its Midwest mid-cap peers). To a large extent this reflects management's conscious decision to reduce exposure to auto loans, and represents a trade-off for the better risk profile they have achieved. Practically, though, it also serves to reduce investor appetite for the shares and to depress multiples.


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