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Exhibit 99.2
HUNTINGTON BANCSHARES INCORPORATED
FIRST QUARTER 2001 EARNINGS ANALYSIS
APRIL 17, 2001
Laurie Counsel, Director of Investor Relations
- - Good morning to our conference call participants. Thanks for taking the
time today to join us.
- - Here for this morning's conference call are: Tom Hoaglin, President and
Chief Executive Officer, and Mike McMennamin, Vice Chairman and Chief
Financial Officer
- - This call is being recorded and will be available as a rebroadcast starting
today at 1 p.m. through April 24th at midnight and is also available on the
Internet for two weeks. Please call the Investor Relations department at
614-480-5676 for more information to access these recordings or if you have
not yet received the news release and presentation for today's call.
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Today's conference call and discussion, including related questions and answers,
may contain forward-looking statements, including certain plans, expectations,
goals, and projections, which are subject to numerous assumptions, risks, and
uncertainties. Actual results could differ materially from those contained or
implied by such statements for a variety of factors including: changes in
economic conditions; movements in interest rates; competitive pressures on
product pricing and services; success and timing of business strategies; the
successful integration of acquired businesses; the nature, extent, and timing of
governmental actions and reforms; and extended disruption of vital
infrastructure. All forward-looking statements included in this conference call
and discussion, including related
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questions and answers, are based on information available at the time of the
call. Huntington assumes no obligation to update any forward-looking statement.
Tom Hoaglin
- - Welcome, everyone. We appreciate your taking time to join us today.
- - In a moment, you'll hear from Mike McMennamin, our CFO, re: First Quarter
Performance and a look ahead.
- - But first I'd like to update you re: my activities during my first 8 weeks
at Huntington. Not to your surprise, I've been busy.
- - I've spent considerable time assessing the strength of our leadership team,
meeting with employees at all levels of the company in all regions,
reviewing our businesses, markets and our financials. While I have not
completed my strategic review, here are some initial observations.
Slide 4 - Organization Chart
First, with regard to the leadership team, Slide 4 depicts our current
organizational structure. Last week I announced a very important step to
strengthen it, with the appointment of Ron Baldwin as Vice Chairman
overseeing both Corporate Banking and Retail Banking. These businesses
constitute roughly 75% of our earnings. I've known Ron for many years. He
has extensive management experience in every aspect of Consumer and
Commercial Banking. His career is a record of achieving aggressive
financial targets, implementing strategic change and building
high-performing teams. Most recently, he was President of Bank One's Retail
Delivery Group, responsible for branches, call centers, ATM's and the
bankone.com internet offering. Previously he held commercial banking
positions with Continental Illinois and The Marine Corporation in Milwaukee
and served as CEO of Bank One, Wisconsin. Ron will bring added focus to
these key businesses.
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- - Although we are not organized by geography, we are certainly not satisfied
with the performance in some regions. It's no secret that we have struggled
in Michigan, both in the western part of the state and around suburban
Detroit. No doubt there are many reasons for this; leadership has to be
one. More recently, we hired a strong new region president for Eastern
Michigan (he started work on April 9), and we have announced a search for a
new president in Grand Rapids. Additionally, a new region president for
Indiana started on April 2 and a new region head in Northern Ohio was
appointed in January. I am confident that collectively we have put in place
a strong regional team.
- - About our employees - It's clear that there has been considerable internal
stress associated with the change last fall to a line-of-business structure
and with leadership changes made over the past few years. Employees tell me
that they are not clear about what Huntington wants to be, but they are
ready for more change in the context of a new positive direction for their
company.
- - Next, to evaluate our businesses, in general I'm focussing on whether they
can generate significant revenue and earnings growth and add to shareholder
value. Among other factors, I'm looking at the profit dynamics, levels of
profitability, product and service capabilities, customer composition, and
distribution network. We're also asking if we deliver the right technology
to both employees and customers, whether we have a strong enough sales and
service culture, and how effectively we use customer data.
- - Next, in regard to our markets, we operate in some low growth markets,
where we also happen to have a low market share. In many markets our share
of retail deposits is substantially less than our share of total banking
offices. This is obviously not satisfactory. So we are actively reviewing
the retail distribution network (branches and ATM's) to determine whether
and where we need to prune. Wherever we operate in the future, we must have
credible opportunities to grow deposits, increase market share and generate
better earnings.
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- - Re: Our Financials - It is my intent to manage the company with a strong,
disciplined financial focus. We are working hard to improve the internal
financial management processes in the company. Individual lines of business
and the company as a whole will be managed with a view toward increasing
shareholder value.
Clearly our efficiency ratio is much too high. One reason is that
Huntington has not focussed enough during the last two years on growing
revenues. But, more important in the short term, expenses have been rising
too rapidly. Too much of our expense base is not targeted in support of
revenue growth and customer service. As a result, the senior management
team has begun a major effort to reduce expenses in 2001 and on a running
rate basis. We do not intend to cut where there would be a negative impact
on revenue growth or customer service. But we are determined to succeed in
improving our cost structure and reducing our efficiency ratio
considerably. Nothing is sacred or beyond review. To illustrate this we
have decided to sell the corporate plane.
Upon the completion of my analysis of the company's business and strategic
plans, we will make a decision as to the appropriateness of a restructuring
charge.
I have also focused on capital management as part of the strategic review.
Capital ratios have improved in the last two years, but we need to further
strengthen these ratios. I think it is important that we operate from a
position of capital and financial strength. In that context, we will review
all aspects of capital planning, including the dividend. It is my hope we
can maintain the dividend, given the large retail ownership of our stock,
but our payout ratio of almost 70% is significantly higher than the
industry.
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- - Mike will update you about our credit quality numbers, but I want you to
know that I have also looked at this critical area. While we have
experienced some weakening and may see a bit more during the remainder of
the year, we feel very good about credit quality overall.
- - I have also spent time reviewing our various technology ventures for their
continued appropriateness. We need to be certain that they will benefit
Huntington's employees or our core customers in the near future, with
associated higher revenues or lower costs. If not, we will either develop
exit strategies or find ways to lower the burden.
- - Now I'd like to call on Mike McMennamin to provide a report on our First
Quarter Financial Performance. Then we'll talk about our future
communication plans. Mike....
Thanks, Tom.
Slide 5 - Earnings per Share
As you recall, in January, we provided earnings guidance for the first quarter
of 26 - 28 cents per share.
Earnings came in @ 27 cents for the quarter, in line with the consensus. Core
earnings came in slightly higher @ 28 cents per share. Reported fourth quarter
earnings were 30 cents per share and core earnings were 28 cents.
This was a pretty straight-forward quarter, with non-core items totaling $2.1
million in net losses. We recognized $2.1 million in security gains during the
quarter, in conjunction with our continued reduction of the investment
portfolio. We also recognized a $4.2 million loss by supporting Huntington's
money market mutual fund, which incurred a loss on the sale of $15 million of
Pacific Gas &
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Electric commercial paper during the quarter. I will comment further on that
later in the presentation.
Slide 6 - Cash Earnings
On a cash basis, 1st quarter earnings were 30 cents per share versus 27 cents on
a reported basis. Cash basis earnings represent reported earnings adjusted for
the after-tax impact of goodwill amortization. Reflecting the pending change in
the accounting rules, we expect to begin reporting earnings in this manner in
the third quarter. In the first quarter, this adjustment would have increased
reported earnings by $7.8 million, after tax.
Slide 7 - Key Performance Indicators
As Tom indicated earlier, many of our key performance indicators are not going
in the direction we would like or need them to be.
We have seen improvements on two fronts, however:
(1) The net interest margin increased from 3.70% to 3.93% and
(2) The tangible equity/asset ratio increased during the quarter to 6.01%, up
from 5.87% in the fourth quarter, 5.49% a year ago, and the low of 5.15% in
the 4th quarter of 1998, following the acquisition of the Barnett branches
in Florida.
Slide 8 - First Quarter Overview
Let's turn to some of the significant events that occurred during the quarter.
We will provide further details on these issues later in the presentation.
1. The 23 basis points increase in the net interest margin.
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2. Slowing in managed loan growth in the consumer area.
3. $10.2 million increase in non-interest expenses. The major drivers were
higher personnel costs, the P G & E loss mentioned previously, and the
purchase of residual value insurance for our auto leasing portfolio.
4. Reported net Charge-offs increased from 50 basis points as a percentage of
average loans in the 4th quarter to 55 basis points in the first quarter.
Consumer charge-offs were basically flat with the increase occuring in
commercial and commercial real estate loans.
5. Non-performing assets increased $20 million during the quarter and
represented .60% of loans and OREO, up from .51% in the previous quarter.
Slide 9 - Income Statement
Earnings for the quarter totaled $68 million, versus $76 million in the 4th
quarter. The $10 million increase in net interest income was offset by a
$14.1 million reduction in non-interest income and a $10.2 million increase
in non-interest expense.
Provision expense increased $1.0 million from the previous quarter, of
which $2.6 million is related to higher charge-offs. Provision expense
related to loan growth declined $1.6 million from the previous quarter as a
result of slower loan growth.
Slide 10 Net Interest Income
1. Net Interest Income increased $10 million from the 4th quarter and was at
the highest level since the 4th quarter of 1999. The net interest margin
increased 23 basis points during the quarter and was also at the highest
level since the 4th quarter of 1999, when it was 3.94%.
2. The 23 basis points increase in the net interest margin was driven by:
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(1) The 150 basis points decline in short rates during the quarter and
(2) The continued reduction of the low-yielding low-spread investment portfolio
Huntington was slightly liability sensitive during and at the end of the last
year. The balance sheet was structured at the end of 2000 such that a gradual
100 basis points decline in rates would benefit net interest income by +1.1%.
With the investment sales in the 1st quarter, the liability sensitivity position
has been reduced slightly to 0.8%.
The sale of the low margin investment securities during the quarter increased
the net interest margin by 13 basis points. The decline in short rates combined
with the liability sensitive position contributed an additional 13 basis points
to the margin. Approximately half of this 13 basis points margin expansion is
related to the repricing lag of the $2.2 billion home equity loan portfolio.
Slide 11 - Managed Loan Growth
The numbers in this slide have been adjusted for the impact of acquisitions,
securitization activity and asset sales.
Managed loan growth slowed during the quarter to a 6% annualized growth rate,
versus 11% in the 4th quarter and 6% in the 3rd quarter. Total loan growth was
8% versus the year ago quarter.
The slowdown in the economy is having a significant adverse impact on consumer
loan growth, particularly in the auto lending and leasing area. Indirect auto
loan and leasing activity was flat for the quarter, versus a 16% annualized
growth rate in the 4th quarter. Direct consumer loans declined from a 18%
annualized rate in the fourth quarter to a 8% rate in the current quarter.
Within that category, home equity loans grew at a 14% rate. While still strong,
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home equity loans were adversely impacted by the strong demand for 1st mortgage
refinancing.
Commercial and commercial real estate loan growth accelerated during the
quarter, from a 6% annualized rate in the 4th quarter to an 8% rate during the
1st quarter.
Slide 12 - Non-Interest Income
Turning to non-interest income, revenues declined $14.1 million versus the prior
quarter, with income from securitization activity declining $8.8 million from
the unusually high level of the 4th quarter. Most other income categories
declined slightly with the exception of a 10% increase in brokerage/insurance
income, driven by a 62% increase in annuity sales to $143 million during the
quarter. We are delighted with our performance in investment sales, particularly
in view of the volatility that the financial markets have exhibited in recent
months. Trust income was basically flat for the quarter but increased 11% over
the prior year. Electronic banking income, predominantly debit card interchange
fees, declined on a seasonal basis from the 4th quarter but increased 13% versus
a year ago. The decline in mortgage banking income during the quarter reflects
$1.7 million of 4th quarter income from the sale of loans and servicing. Income
from that area increased 18% from the year ago quarter and is expected to
increase in the 2nd quarter, reflecting strong mortgage demand. $690 million of
mortgage loans closed in the first quarter, an increase of 152% from the prior
year.
Slide 13 - Non-Interest Expense
Total non-interest expense increased $10.2 million for the quarter.
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Personnel costs increased $11.9 million for the quarter. Benefit expenses
account for $5.4 million of this increase, driven by increased health insurance
costs and seasonal payroll taxes. Fourth quarter accrual reversals of incentive
payments and increases in commission expenses for the quarter account for $5.7
million of the quarterly increase in personnel expenses. Headcount increased by
.5% during the quarter.
Other factors included in the total $10.2 million increase were: $4.2 million
Pacific Gas & Electric loss, $1.5 million premium for the purchase of auto lease
residual insurance policies, and $1.7 million in expenses incurred in
conjunction with the installation of Customer Relationship Management (CRM)
software from e-Bank. E-bank is a company in which we own a majority interest
that provides CRM middleware to financial institutions.
These increases in NIE were partially offset by reductions in a variety of other
expense items, i.e., operating losses, legal fees, franchise taxes, and other
miscellaneous items.
As Tom mentioned earlier, we recognize the need to reduce non-interest expense
and the efficiency ratio. In that regard, we have initiated a NIE reduction
program in the last month, with the goal of reducing NIE from the current
unacceptable levels. We expect the company to begin to see the benefits of that
initiative during the second quarter but we are too early into the program right
now to comment on magnitude.
Slide 14 - Pacific Gas & Electric
Just a further comment on the Pacific Gas & Electric situation. Huntington
National Bank's Money Market Mutual Fund owned $30 million of PG & E commercial
paper at the end of last year. $15 million of the paper was sold during the
first quarter, with a $4.2 million loss incurred. Although the mutual
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fund could have absorbed the loss and still maintained the net asset value at
$1.00 per share, HBI, the parent company, reimbursed the fund for the $4.2
million loss.
The remaining $15 million of paper is being held by the parent company, with a
view to holding the paper until the economic and political ramifications of the
utility's April Chapter 11 bankruptcy filing become known. Interest on the
commercial paper was paid in early April and the asset is currently on an
accrual basis. We will continue to monitor developments in this area and act
accordingly.
Slide 15 & 16 - Residual Value Insurance
Huntington currently has a $3.1 billion automobile lease portfolio. As you are
aware, automobile residual values have declined significantly in the last few
years as used car prices have softened.
Huntington took two special charges related to the decline in residual values in
the last two years, $58 million in the 4th quarter of 1999 and an additional $50
million in the 3rd quarter of 2000. With the last charge, we had marked to
market all the embedded residual loss or risk in the portfolio, fully reflecting
the state of the used car market at that time.
We made the decision late in 2000 that we either needed to insure the residual
risk inherent in a leasing portfolio or exit the business. We have purchased two
residual value insurance policies in the 1st quarter, one for the existing
portfolio, as of October, 2000 and one for all new leases originated after that
date. The carrier is AA rated by Standard & Poor's and A+/XV by Best.
Both policies work in the same fashion, that is they cover the difference
between the contractual residual value embedded in the customer's lease and the
market
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value of the car at the end of the lease term, as evidenced by Black Book
valuations. Recall it is only on leases that go to their full term on which we
have exposure. Both policies have no deductibles but the policy on the existing
portfolio has a $120 million cap. There is no cap on the policy covering new
lease activity.
We will remain liable for full term leases where the sales price is less than
Black Book value for the amount of the difference between Black Book and the
sales price. The insurance carrier is providing insurance coverage for any
general decline in used car prices, as evidenced by Black Book valuations. The
following two examples on Slide 16 should illustrate this point.
In the first example, where the sale price of the automobile is above Black
Book, Huntington is reimbursed by the insurance carrier for the difference
between residual value (in the customer lease contract) and sales price. That
policy reimbursement offsets the loss we incur between the residual value and
the sales price.
In the second example, the sales price for the automobile is below the Black
Book valuation. Huntington incurs a $1,500 loss on the sale of the car, of which
$1,000 is reimbursed by the insurance carrier, i.e., the difference between the
contract residual value and the Black Book valuation. The net loss of $500
reflects the difference between Black Book value and the sales price for the
automobile. We have a $25 million reserve on our books to cover potential
liability from this risk.
We feel the purchase of this insurance, both for the existing portfolio and new
production, significantly reduces the risk inherent in our automobile leasing
business. While this has been a difficult business for the last three years,
recall that we incurred net gains on lease residual activity every year from
1984 - 1997.
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We may well be purchasing this insurance at the trough of used car prices but
feel strongly that it is the prudent course of action for us.
Slide 17 - Capital
As Tom mentioned in his comments, we feel it is important to run the business
with a strong capital position. As such we will be developing a plan to further
strengthen our capital structure in the next few months. While we are not yet
prepared to discuss specifics of the plan, some of the issues we will be looking
at include further restructuring of the balance sheet, the possible issuance of
capital-qualifying debt, and the dividend payout. Given the desire to strengthen
the capital position, we do not anticipate the repurchase of company stock.
Slide 18 - NPAs
Turning to credit quality, non-performing assets increased $20 million or 19%
during the quarter, from $105 million to $125 million. Non-performing assets as
a percentage of Total Loans + Other Real Estate Owned increased from .51% to
.60% during the quarter. As we mentioned in January, we expected non-performing
assets to increase during the first half of 2000 with the softening of economic
activity. We continue to feel that we will see further increases at least
through the second quarter. The expected pick up in economic activity in the
second half could moderate this trend.
We have seen recent increases in non-performing assets from the construction,
transportation, and manufacturing industries. The economic slowdown has
adversely impacted the construction and transportation industries, with the
latter hurt by rising energy costs.
Slide 19 & 20 & 21 - Charge-offs
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Slide 19 - Net Charge-offs on total reported loans increased $2.6 million during
the quarter, from $25.5 million to $28.1 million, with commercial and commercial
real estate charge-offs increasing $3.3 million and charge-offs on consumer
loans declining $0.7 million. Net charge-offs as a percentage of reported loans
increased from .50% to .55%.
On Slide 20, we show that commercial charge-offs increased from .29% to .41% and
commercial real estate increased from an almost non-existent .01% to .15% during
the quarter. Consumer charge-offs were basically unchanged, declining slightly
from .79% to .78%.
Within the consumer portfolio (Slide 21), the only significant changes for the
quarter were an increase in home equity loan charge-offs from .28% to .34% and a
decline in residential real estate from .15% to .03%.
Slide 22 - Credit Quality
Delinquencies 90+ days in the total portfolio increased from .39% of total loans
to .49% during the quarter. Consumer delinquencies increased from .62% to .69%
with commercial and commercial real estate delinquencies increasing from .15% of
total loans to .28%.
The loan loss reserve continues to be maintained at 1.45% of total loans. The
increase in non-performing assets has reduced the loan loss reserve coverage of
these assets from 279% to 239%.
Concluding Comments
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We have spent considerable time in the last two months analyzing the
profitability of the indirect automobile business, both loans and leases.
Current market pricing is providing very attractive rates of return on both the
loan and lease products, that is, rates of return that comfortably meet our
financial objectives. The margins in both businesses are probably at all time
highs, reflecting favorable changes in the competitive environment and the
changing interest rate environment. As you are aware, a number of financial
institutions have exited or significantly reduced their presence in both the
loan and lease markets.
Turning to the future, our estimate for earnings per share for the second
quarter is 27 - 29 cents, based our current assumptions for the key earnings
drivers. While credit quality may deteriorate somewhat in the next quarter, the
net interest margin should be a positive factor in the earnings equation.
For the full year 2001, we are comfortable with the consensus of earnings
estimates.
Tom Hoaglin
Thanks, Mike.
While first quarter earnings were in line with consensus estimates, the level is
not acceptable. My first priority is to improve our financial performance in
coming quarters.
As you know, we have been fairly quiet in our communication with the investment
community during the past several months. This is not how we expect to operate
going forward. In late June or early July, prior to the release of second
quarter earnings, we intend to hold an investor conference in New York to update
you about our strategic direction, to provide guidance about our
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financial performance for the rest of the year and to communicate our thinking
about any restructuring charge and our dividend policy. This information will be
included in our public filings at that time.