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Exhibit 99.3
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HUNTINGTON BANCSHARES
MODERATOR: LAURIE COUNSEL
JULY 12, 2001
1:00 PM CT
Laurie Counsel: ...I'd like to review a few housekeeping details. This
meeting is being broadcast live, but will also be
available on a replay basis both on the Internet and
telephone. Please call Huntington's Investor Relations
Department at 614-480-5676 for further information on
these replays and access to today's presentation
materials.
You may also obtain information about our earnings
conference call to be held next Tuesday on the seventeenth
at that number. Furthermore, a complete transcript of
today's meeting will be filed with the SEC on Form 8K
tomorrow on the thirteenth.
A few items for those of you here in person, out of
courtesy to other persons in attendance, we respectfully
ask that you turn your cell phones and pagers to the
vibrate setting.
The restrooms are located past the registration table out
there and down the right to the hallway. Beverages and
light refreshments are in the back there for your
enjoyment during the meeting. And we also look forward to
talking with you further at the reception just following
the presentation in the (Reed) Salon across the hallway.
I'd like to now go ahead and read our forward-looking
statement disclosure for the benefit of those in our
listening audience who do not have a copy in front of
them.
Today's conference materials and related questions and
answers conducted at this conference contain
forward-looking statements, including certain plans,
expectations, goals, and projections which are subject to
numerous assumptions, risks, and uncertainties.
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Actual results could differ materially from those
contained or implied by such statements for a variety of
factors, including changes in economic conditions,
movement in interest rates, competitive pricing - or
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, including related questions and answers, are
based on information available at the time of the
conference. Huntington assumes no obligation to update any
forward-looking statements.
Again, we appreciate your time and interest in
Huntington's strategic announcement today. I'd like to now
introduce Tom Hoaglin, Huntington's President and Chief
Executive Officer, who will begin our presentation. Tom?
Tom Hoaglin: About three months into my tenure at Huntington, it came
time for me to get an Ohio driver's license. I'm happy to
report that I passed to test. When it came time for me to
go up to the counter and give information to be on the
driver's license -- height, weight -- the young woman
attending to me asked my hair color. And I said, Brown.
And she did one of these things. And I said, Well it
always has been brown. My wife was on my right side. And I
turned to her, and she said, No. I said, Okay, it's gray.
It's been an intense five months at Huntington. So...
We greatly do appreciate your taking time to be with us
today. I've met some of you in prior years. But none of
you have known me as the CEO. I accepted this opportunity
in February in order to lead the effort to turn around
Huntington's financial performance and rebuild shareholder
value.
At the outset of our presentation, I want to assure you
the entire Huntington management team fully understands
that we work on behalf of our shareholders. We are
absolutely serious about growing earnings and enhancing
returns. And we're excited about our future.
I understand that Huntington has not spoken formally to
you in this kind of setting for quite awhile. We're glad
to be here to report on the results of our strategic
review. And on an ongoing basis, we expect to be very open
with you regularly.
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I'm just going to talk for awhile and then I'll turn to
the slides. During the past several months I've been -
I've spent considerable time reviewing Huntington's
businesses and assessing the strength of our management
team.
I've visited all major markets and listened to employees,
trying to understand the culture and what interferes with
the ability of employees to serve customers and grow their
businesses.
I've met with shareholders and customers and invested a
great deal of time and energy to get employees reengaged
and participating in making Huntington better.
Today we want to give you an honest assessment of
Huntington, our strengths, our challenges, where we're
headed as a company, what actions we plan to take. Suffice
it to say, I found a few more surprises than I expected.
But I'm here to tell you the problems are fixable. And
rocket science is not required.
In a nutshell, internally Huntington has not been working
very well. We have a dedicated team. But they've lacked a
clear sense of direction. Senior management turnover has
taken a toll on the organization. There have been several
Number 2s, for example, over the years. Mike McMennamin is
the fourth CFO in three years.
Too much decision making has been centralized, shifting
the focus away from serving customers and onto the
corporate bureaucracy. We've lacked financial discipline
and accountability for performance. We did not have a
uniform disciplined sales process. Employees have talked
to me about being afraid to deliver bad news and offer
their opinions and suggestions.
On the positive side, as I thought about our shortcomings,
I realized that collectively they represent a very
substantial opportunity for Huntington, given the right
changes.
I think we're in the right businesses in our markets.
Middle market commercial and commercial real estate,
consumer wealth management, and auto finance, which I'll
talk more about in a minute.
Our core Midwest markets are good markets to concentrate
our resources in. And we're sure that we have significant
opportunity to grow market share. We have a strong credit
culture.
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Our credit quality is sound. And we've strengthened our
senior management team substantially.
What we have to do now is improve our execution
dramatically. We have lots of issues to address. And we're
going to address them aggressively. Business as usual,
obviously, will not be good enough. We intend to take some
decisive action now to lift earnings per share, strengthen
capital, clean up the balance sheet, and position
Huntington for future growth.
First, we intend to sell the Florida franchise. To some,
this may seem counter-intuitive. We're growing in Florida.
We have a good team. We like the market.
But there are three important reasons for our decision.
First, Florida is simply not well positioned strategically
for Huntington. We intend to concentrate at home, if you
will, in the Midwest.
Second, we've had to spend a lot of money building an
infrastructure in Florida. And we will have to invest
considerably more to be competitive. As a result, we're
not able to generate as attractive a return on our capital
as we would like and as we believe that others already in
the marketplace would be able to do with our franchise.
Third, the sale of Florida will be significantly accretive
through 2000 and - 2002 and 2003 because of the repurchase
of shares. And it will serve as the catalyst for our
restructuring and repositioning program.
Next, we will further rationalize our retail distribution
network by consolidating 43 banking offices in Ohio,
Michigan, West Virginia, and Indiana. Consolidation will
offer us run-rate improvement, because the offices are in
close proximity to other banking - Huntington branches. We
will eliminate the expense and retain most of the
customers and revenue.
We will take substantial restructuring and other special
charges in the second, third, and fourth quarters. These
charges will clean up our balance sheet and improve future
earnings. And Mike will provide more details for you in a
few minutes.
Finally, we will cut the dividend by 20%. This is a tough
issue for us, because 75% of the stock is owned by retail
investors. Nevertheless, we recognize that our payout
ratio is high. Reducing it will help us to support future
growth and/or repurchase additional shares.
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By taking these actions, we hope to demonstrate that we
are serious about changing Huntington so that shareholders
can be rewarded and customers better served. These steps
are also important because they give us strength and
flexibility to focus on growing the business in our core
markets.
We're quite confident that we have a lot of opportunity
for growth in the Midwest based upon our current market
share, relatively poor execution, new leadership, changes
to our structure and culture, greater customer focus, and
a disciplined sales process. And Ron Baldwin will talk to
you in a few minutes about opportunities in corporate and
retail banking.
I've said the word serious a few times already. And this
is a serious time for Huntington. But I want you to know
that I'm excited about the changes we're making and what
we can accomplish. Employees at all levels of Huntington
are becoming energized. The place is coming alive.
Here's what we plan to present formally to you today.
Later in the presentation, we'll share some earnings
projections, which - for 2002, which I'm sure you'll be
interested in.
I understand that Huntington may have over-promised a bit
at times in the past. From this point forward, Huntington
will not be a company that over-promises and
under-delivers.
Before going further, I want to introduce our senior
executives. As you know, I worked for Bank One for 26
years and was well schooled in the very successful
decentralized operating model. In later years, I led
several cross-organizational initiatives - organizational
change initiatives.
Mike McMennamin joined Huntington last summer and became
our Vice Chairman and CFO in October. Mike and I were
colleagues at Bank One for almost 20 years. We know each
other very well. Mike has brought tremendous strength to
the financial side of Huntington and has also played a
very key role in the overall management of the company.
Ron Baldwin joined the company in April as Vice Chairman
for Retail Banking and Corporate Banking. Ron and I were
colleagues at Bank One for about ten years.
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I recruited Ron because he's a very accomplished banker
with deep experience on both the retail and corporate
sides in a much larger company. He's well versed in the
issues, a proven leader, and represents a substantial
strengthening of Huntington's executive management team.
Now let's talk about other names on this slide. The rest
of the senior team is what I would call a combination of
more new players and Huntington veterans. I'd particularly
like to point out Dan Benhase, Executive Vice President
for our private financial group, or Wealth Management.
Dan has had 20 years of industry experience overseeing
trust, private banking, asset management functions. Prior
to joining Huntington, he spent ten years - the last ten
years running these functions at Star Bank in Cincinnati.
Dave Renke, who just recently joined us, is a Bank One
veteran. Dave is in charge of installing for us the
disciplined sales process, and particularly in our banking
centers. He had this responsibility and did very very well
at it in 2000 offices at Bank One.
I might also say that we've had - we've made many recent
changes in our regional leadership. Now we think we have a
much much stronger team out there. So we have a new, but
an experienced team at Huntington.
So here's a summary assessment from me about Huntington,
first in the financial area. We have an unacceptable level
- an unacceptably low level of earnings given the
franchise potential.
We need additional capital for flexibility. As you know,
we have a high efficiency ratio. Revenues have been flat
over the last few years. Expenses have been increasing. We
need greater financial discipline and performance
accountability.
And I'd like to comment about our technology investment
mix. As you may know, we've spent a lot of money on
e-ventures and not enough on technology - what I would
call front-line employees serving customers.
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We like the potential for eBank. But other ventures have
been disappointing. In the future at Huntington,
technology spending will be on better tools for our own
employees and customers and not on more e-ventures.
At the moment, we're beginning to install a new automated
teller and platform system, which will continue over the
next 18 months to replace a woefully inadequate system.
As to markets, I think we have a good core midwestern
geographic presence. Our franchise is concentrated in
large metropolitan areas. We do not have large share in
many of those markets. They're good markets. But we don't
have large share. So we think we have an opportunity to
substantially increase our share.
As I commented a minute ago, we need to rationalize our
distribution network further. This goes beyond Florida. We
simply have too many offices in close proximity to other
banking centers. Our Florida presence is nonstrategic. And
we need to improve in Michigan.
Performance in Ohio, for example, has been good. But
Michigan has lagged. That's largely due to what I would
call a lack of leadership over time, lots of management
turnover, and a poor merger integration of First Michigan
Bank three or four years ago.
In terms of our business model, management turnover has
adversely impacted the organization and culture, as I've
said. We do have a hardworking dedicated team which lacks
a clear sense of direction.
Decision-making is centralized. We lack customer focus.
There's no uniform disciplined sales process. We do have a
strong credit culture. And as many of you would be aware,
we've had limited deposit growth.
Now I'd like to talk to you a few minutes about our
strategy and my vision. My vision is that Huntington will
be the local bank. This means far more than place. The
local bank is close to its customers, understands their
needs, is responsive, flexible.
But we will be a local bank able to deliver more
sophisticated resources to our customers, for example,
treasury management and capital markets, more
sophisticated resources than could a true small community
bank. I believe this strategy will position us to win in
both large markets and small.
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As the local bank in each of our core markets, we will
focus intensely on our customers. And we intend to expand
our physical presence in many of our core markets in the
Midwest.
I'd now like to talk about the auto finance business. As
you know, many competitors have exited all or part of
this. We've carefully thought about the business and how
we compete. And we've thoroughly scrubbed our numbers. We
continue to believe that it's a good business for
Huntington.
The returns are attractive now and, we think, over the
full economic cycle as well. With the exit by others,
pricing has improved. We believe that we are now managing
the business pretty well. And it's largely within our
retail and commercial footprint.
In auto leasing, as you may know, we feel we've mitigated
significant future exposure by purchasing residual value
insurance. But what we don't want, the auto - what we
don't want is the auto finance business to become a larger
piece of Huntington than it is now. And because we're not
going to push growth, we think we'll be better able to
maintain attractive margins.
Finally, we want to grow our wealth management businesses,
which we call the Private Financial Group. These include
personal, institutional, corporate trust, as well as
investment management, securities brokerage, and
insurance.
While this is still a relatively small part of Huntington,
it's starting to grow rapidly under new leadership, even
with difficult market conditions. We've increased the
sales force substantially, introduced five new proprietary
mutual funds and a new managed asset management account,
and expanded retail investment and insurance programs.
To act as the local bank with decision-making close to
customers, we will change our management structure.
Huntington today operates under a line of business
structure with centralized control.
While this has helped make Huntington more standardized,
we've lost customer focus. So we will give responsibility
for both corporate and retail banking to the region
presidents or, if you will, our local management.
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But the region presidents will be expected to execute the
corporate standards, meaning that we will have common
products and a common approach to pricing, sales and
services, distribution, et cetera. Dealer Sales and the
Private Financial Group will continue as lines of
business.
Now let me review our action steps. One of the things that
I have not yet talked about today is that several months
ago we undertook an effort to reduce our forecasted
expense growth and to generate more revenue. I'm pleased
to report that we've identified $43 million in
opportunities that we will capture in 2001 with a higher
full-year impact in 2002.
As I've mentioned, we're reducing the dividend 20%,
divesting Florida, and taking restructuring and special
charges. All of these together will have the effect of
improving earnings, improving our operating efficiency,
improving our capital position, our balance sheet
flexibility, and giving us the chance to focus on key
strategic markets that will position Huntington for future
growth.
Culture change is hard work, as you know. But in
Huntington's case, it's absolutely key to improving our
financial performance over time. Our culture will have a
strong shareholder orientation with a focus on customers
and customer service by all employees every day. We'll
have strong financial discipline, performance
accountability.
And we'll have high performance standards. I think in the
past Huntington simply has set the bar too low. I mean
that internally in particular. We've expected too little
of each other. That won't be the case in the future.
We will have a culture of expense control. Expense
control, by my way of thinking, is not a project, it's
what we should do every day. It's the way we should live
our professional lives.
Teamwork will be a core value for us, and particularly in
the area of customer service, where too often in the past
Huntington employees have not worked effectively enough to
meet customer needs or solve customer problems.
Employee participation is also going to be a hallmark of
Huntington. All employees must be in the process - must be
involved in the process of making Huntington better.
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I would expect ideas each month, each year, from each
employee. This has not been the case in the past.
Employees are excited to participate. They care about
Huntington. They want to be involved.
We also look forward to broad employee ownership. We're
giving active consideration to programs that would allow
all employees to be owners and to act like owners of
Huntington.
We also expect to emphasize performance-based compensation
to a greater extent. It certainly important to me
philosophically that our senior executives have lots of
skin in the game. We have not put together all of the
details of this. We've been focused on more strategic
issues. But you can expect us to talk more about this in
the future.
I also would like to let you know that our directors have
decided to take all of their compensation this year in the
form of options rather than cash. We very much want to
create a culture of performance.
I'd like to conclude this part of my comments just sharing
with you what I think are appropriate financial targets
for Huntington. Some of these are shorter-term than
others. But they will all be ones that we strive for.
We think that we should aspire to annual earnings per
share growth in the 10% to 12% range, return on equity of
18% to 20% -- you know, we've been far short of that mark
-- and have our dividend payout ration in the 35% to 45%
range with an efficiency ratio of 48% to 52%. It was about
61% in the first quarter.
(Unintelligible) income should comprise about 35% to 40%
of our total revenue base. And we want to have strong
capital ratios, tangible common equity to assets at
6-1/2%, and risk-based capital at 11%.
I'd now like to call on Ron Baldwin to talk about the
corporate and retail banking side of Huntington.
Ron Baldwin: As the Vice Chairman for Retail and Commercial Banking for
the past three months, I will present to you my current
assessment, our competitive strengths, our operating
challenges, and our plans for those challenges.
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I think the first place to start with the assessment is to
provide a little more detail. Tom gave you an overview. We
are competing in seven metropolitan markets.
We are positioned in growing markets with 85% of our
deposits concentrated in Ohio and Michigan in growing
markets. We have good positions outside of Ohio and
Michigan in Indiana and West Virginia.
Our market shares rank us between second and sixth in each
market. And as you can see from these charts, except for
Columbus, our deposit share lagged our branch network
share.
And we do business, as shown in this last bar, with a lot
of customers in those markets, but touch them more
lightly, so our sales and service process should be and
will be focused on retention and cross-selling of our
customer base so that we can compete more effectively
using - and utilize our distribution network and achieve a
more positive leverage there.
While we are - have modest market shares in a lot of the
larger metropolitan markets, as we review that with our
local management team - with my local management team, we
focus on trade area.
For example, in Cleveland it's a $50 billion market. And
while we have a 3-1/2% market share, when we look at our
trade area, we have $14 billion of just deposits within
three miles of our offices. So - and we do not have a
dominant market share within those trade areas. So we have
lots of room for growth - opportunity for growth to
pursue.
On the commercial side, we generally have a better market
position than what would be reflected on the retail side.
Commercial - or one way to complete - continue the
assessment is really to look at growth trends.
In general, our consumer and commercial revenue has grown
more slowly than the market over the last couple of years.
And in general, our loan production has exceeded deposits.
Specifically with regard to commercial growth, you'll see
that loan growth has been good. Our commercial deposit
growth shows a decline in this year. This decline is
explained by three things.
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In general, there is a trend of reducing (DDA) nationwide.
Specifically, there is a trend towards commercial
customers choosing to pay in fees in lieu of balances --
and so our fees are growing -- and customers choosing to
make a good economic decision to sweep accounts from (DDA)
to investments.
And so our investment accounts are growing. And I can
explain about 80% of the negative 9.1% growth with those
two reasons. The issue we have to deal with is in our
business banking franchise, where we have had attrition
that we need to address.
The good news is we have a set of product bundles that are
going to be out September 15 that I think will help us
towards that correction, along with the change we're going
to make in our organizational structure in sales
simplicity.
With regard to our government deposit funding, Mike
McMennamin is going to address that as we talk about
funding strategies.
And the retail trend is somewhat similar, loan growth
good, better in the first five months of this year at a
13.8% growth. Our sales of home equity loans are up 30%,
our average daily balances of home equity loans up 20%,
driving the combined 13.8% growth for the entire retail
loan portfolio, which does not include our dealer - this
does not include dealer sales.
Transaction savings were flat last year. It shows a bounce
up this year. I'm pleased with the 11.9%. I'm not
predicting that that growth rate is sustainable for the
rest of the year. Although it is reflective of something
I'm going to show you next that does give me encouragement
as I complete - or continue my assessment.
CDs, similar to the government funds on commercial, is
part of the funding strategy for the Huntington that Mike
McMennamin will address.
Our retail households are growing. And this slide shows
that up until the middle of last year our defection rate
exceeded our acquisition rate. We were shrinking. We are
now into a sustained positive growth of households for
several reasons, I think.
One, I'm pleased with the quality of the consumer
transaction and loan product portfolio we have. And this
was introduced in May of last year. And we are also seeing
that our front line employees are enthusiastically
embracing the sale of these products.
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And our customers are telling us they like it too,
because our household growth is growing. And this gives me
confidence as we proceed on continuing to drive revenue in
the future.
As we go forward - or that completes my assessment. So now
I want to talk to you about our competitive strengths that
we will use as we move forward. And they are attractive
core markets, experienced team, a new team
(unintelligible) operating platform, and sound credit
quality. I've already talking about metropolitan markets
that are growing.
Another feature you need to know that I emphasize on the
attractive markets is that in every one of our markets one
of our major competitors is going through a major change,
either an acquisition of their own, conversions, or
enterprise restructuring that they're dealing with. And I
think this creates opportunities for us as well.
The competitive strength I'm most excited about is the
experienced team that I have to work with. We have
recruited market veterans to lead our teams under our new
organizational design that Tom alluded to.
In Cleveland, Detroit, and Indianapolis, these are bankers
who have been in those markets for over 20 years in other
larger organizations. And I am very happy with that team.
In addition, we have seasoned people that we've promoted
from inside who are relatively new in their roles in
Cincinnati and Charleston. In Grand Rapids, we do have an
opening there. And we will fill that by July 31.
We're already seeing the results of this new leadership.
In Detroit we are growing deposits. In Cleveland we have
loan and deposit growth. In Indianapolis our loans are
growing. So I'm encouraged with this team.
Another strength is our operating platform. Believe me, I
am very pleased to be part of a team that has one banking
charter, one system to serve all of our markets, that
understands what their quality metrics are so they know
when things are broken and go attack them and fix them,
and the ability in fact to fix things.
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The image-enhanced technology that we have invested in
will also pay off for us as we are able to provide better
service. For example, if you call and you want to know -
you want a photocopy of a check, we can pop that up on a
screen.
In tele-banking we can even tell you what's on that check
in case you don't even need to have that photocopy. And if
you want it, we can push a button and get it to you
electronically.
We'll also be using imaging technology in our wholesale
world. And we will also be driving some revenue as we have
image-enhanced statements to use. And that's a competitive
advantage I'm pleased to be part of.
We have sound credit quality. And Mike McMennamin is going
to talk about that.
Now we've got some challenges and plans. Clearly we need
to address those. The three levers that I think we should
pull are the sales and service organization, which I'll
talk about, distribution network and efficiency, and the
Michigan franchise.
Let's take them one at a time. Sales and service
organization, we will become - our business today - our
organization today is pretty complex. And so we're going
to simplify that. We're going to get bankers closer to the
customer. We'll be their local bank. We'll provide the
central support of line of business.
And I have had the benefit of working in environments
where the sweet spot of the best of local distribution
with the best of line of business support can be achieved.
And that's what we'll strive for. My role is to make sure
that role clarity is achieved and that teamwork is
sustained.
We will be adopting a corporate-wide sales and service
process. I have worked with Dave Renke in the past. I have
seen how effective it can be when you have a daily
discipline of morning meetings, afternoon debriefs, that
you commit yourself to telemarketing and to profiling. And
I've seen the revenue generated as a result of that.
On the commercial side, we will be equally disciplined.
And first our discipline will be around profitability.
Less than 10% of our commercial customers represent 50% of
our revenue. That's an opportunity to either grow more
profitable accounts relationships or trim the commitment
we have to less - to marginal or unprofitable
relationships.
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We've been through quickly a Phase I, optimization. We've
reduced in the commercial line of business 23 FTEs. That
will generate over a $1 million run-rate lift for us. And
that's just the first step.
Incentive plans are key. We will balance the sales,
balance sheet growth, income statements. We will have P&L
statements at the banking center level. We will encourage
our people to become entrepreneurial and reward them
accordingly. Accountability for the results is key to our
process.
Also our success metrics will be cross-sell ratios. We -
for new accounts - not average accounts, but for new
accounts, we're at a 1.5% cross-sell. We should be at 3%.
We've done some arithmetic. A 3-to-1 cross-sell ratio on
a new account is $11 million, $12 million run-rate
annually.
You all know the power of retention. And improving our
retention from 90% to 93% is a large driver of
profitability, as well as deepening penetration in our
market share for commercial.
Our next challenge is distribution and efficiency. We
quickly have done a review of our branch network
optimization opportunities. We have identified 43 offices,
12% of our 368 branches, that would make sense to
consolidate. And in a lot of markets, we don't have enough
offices, and we need to reinvest as the second phase of
our optimization program.
Similarly, ATMs are an opportunity for us. We had 800
off-site ATMs. We are going to be removing a number of
them. We're going to be changing the pricing on a number
of them. We're going to change the features and functions
of the rest of them - or a number of them.
We think this is, combined with the branch consolidation,
a $5.7 million run-rate benefit to us. And we're not -
this is a first opportunity, a first phase of
optimization.
It must be the way we will operate in the future,
continually looking for opportunities to build and as well
as combined. As part of the program Tom alluded to, we've
also looked at revenue enhancements and expense
reductions. And there are clearly those for us.
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Repricing for - to do risk-based pricing for our consumer
lending is a $2 million opportunity pricing on service
charges involving (NSF and OD), another $2 million. Image
statementing, I do believe is an opportunity for us, in
addition to $1 million for revenue, as well as cost
reductions from image statementing.
We've been renegotiating contracts, telecommunication and
Visa. We've eliminated some openings that we don't think
we need with our new structure. And we've reduced some
marketing expenses that we don't think were paying off for
us.
We will be investing in a new platform system. We will be
converting our huntington.com to Corillian. And so we are
making investments there. And those are in the forecast
that Mike will be sharing with you.
The Michigan franchise is key. The Michigan franchise is
under-performing. Tom alluded to some of those issues. I
won't belabor them. I'll just say that now our Detroit
franchise under new leadership is improving.
They've been one of the strong groups for us this year in
our sales and balance sheet growth. We gave them some new
products and new support. And they've been performing
nicely.
Grand Rapids is stable, although it is going to take the
new leader in Grand Rapids, with his team, to recover to
the pre-acquisition performance that that franchise
enjoyed.
We do have the benefit that all systems conversion are
behind us, all new product lines have been introduced. We
are stable in our structure, and therefore must be
opportunistic in taking customers and regaining market
share in these markets. And I'm under no illusion that
this is easy. But this is also basic banking and something
that we know how to do.
In conclusion, on retail and commercial then we are in the
right businesses. We've got new leadership in place. We're
focused on cross-sell and retention with an intention to
have a new and improved sales and service process.
And we know what needs to be done in Michigan. And we've
got the will and the leadership to get it done. And that,
combined with maintaining our historical credit quality,
gives me a lot of encouragement as we move forward.
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Page 17
Now I want to talk about Private Financial Services. This
is a group dedicated to serving and providing investment
management services, mutual fund and annuity products,
trusts, and insurance products.
It is a growth opportunity for us that we have identified.
We believe that off of its revenue base of $170 million,
which is about 12% of (HBI), we can grow 15% to 20% a
year.
One of the ways this is going to be done is new improved
mutual fund products that have been introduced by Dan
Benhase and his group, but also by improved sales efforts.
And this is a good story.
The Huntington Investment Company, which is the group that
we in the retail side of the Huntington align with, has
been a strong partnership and has produced good results.
We are ranked sixteenth out of the top 50 banks in annuity
sales and twenty-seventh out of the top 50 banks in mutual
fund sales.
We will continue to drive off of that positive base. And
as we sell more proprietary Huntington funds in this mix,
we will drive the next lever of performance, which is
increasing assets under management beyond the $8.9 billion
we currently have today.
Insurance sales is also a strong part of the Huntington
story. Yet there is still opportunity to do - have more
penetration of insurance amongst our customer base.
That's an overview of the Retail and Commercial and the
(PFG) lines of business. And now I want to turn the podium
over to Mike McMennamin, our CFO.
Mike McMennamin: Thanks, Ron. Before we get into the financial
restructuring part of the presentation, I want to spend a
few minutes on our dealer sales area, our automobile loans
and leases.
As you can see or as you already know, this represents a
significant part of our asset structure. We've got about
$7 billion of auto loans and leases, which represent a
little bit over 30% of the corporation's total loan and
lease portfolio.
We are a market leader in most of the markets in which we
operate. We have the Number 1 market share among the
non-captives in Cleveland, Columbus, Cincinnati, Kentucky.
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Page 18
We're Number 2 or 3 in Tampa and Orlando. And in the
Michigan and Indiana markets, where it is difficult to get
statistics, we're fairly confident that we are either
Number 1, 2, or 3 in both of those markets. So we've got
good market share, first of all.
The second point I'd make about this business is that the
used car financing is becoming a larger and larger portion
of this business. Forty-five percent of our loan volume is
in used cars today - 40% to 45% I should say. And 25% of
our leasing volume is in the used car segment. And I think
that's significant, because we do not compete with the
captive finance companies in that part of the marketplace.
Our business model provides for a local underwriting
presence in the markets, underwriting and sales. We feel
that that adds a value proposition to the dealer. It's a
little bit more expensive for us from a servicing
standpoint. But we think that's more than offset by the
flexibility that it gives us with the dealer community.
The last point is that we have been aggressive in levying
fees both on the loan and lease business. We do export the
Ohio fees to other states we're doing business in.
And we're charging a whole potpourri of fees, acquisition
fees, disposition fees, early termination or prepayment
fees, late fees, NSF fees, et cetera. We think this
differentiates us a little bit from our competition in
that area.
What are some of the key issues that we're facing in the
auto financing business? First of all, net interest
margins for the industry are at the high levels -
historically high levels versus what we've seen in recent
years.
We estimate that these margins - net interest margins are
over 100 basis points wider today than they've been over
the last five years. Now those changes, we're convinced,
are due to both structural changes in the industry as well
as cyclical changes.
Specifically on the cyclical front, when you get interest
rates declining as they have in recent months, you tend to
get a widening net interest margin. That's here today.
That will go away at some point down the road.
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Page 19
But we are convinced that some of the structural changes
are also impacting in a positive sense this widening of
net interest margins. Specifically, we're having a number
of non-bank and bank competitors either drop out of these
markets or significantly reduce their activities.
GE Credit just exited the market. National City in
Cleveland has exited the leasing market. (Unintelligible)
and Bank One are both cutting back significantly their
activities.
We also have noticed a significant increase in credit
quality in the portfolio that we are - the current
vintages of the portfolio. Here we show some numbers. In
the first quarter of this year versus a year ago, cycle
scores have gone from $6.95 to $7.20.
The percentage of D paper that we are underwriting today
is 5% of the portfolio, versus 15%, a significant
reduction in the number of policy exceptions, going from
6% to 2%. And we think all of these factors bode very well
for future loss rates in that portfolio.
The other point I'd make here is that this portfolio turns
over very quickly. Forty-five percent of the portfolio
that we have today has been originated in the last - in
the loan portfolio has been originated in the last 12
months. Thirty-five percent of the lease portfolio has
been originated in the last 12 months. So changes in
credit quality tend to ripple through that portfolio
relatively quickly.
We also, as Tom mentioned, purchased residual value
insurance for the entire portfolio with an AA-rated
carrier. This is first loss insurance. That is, there is
no deductible.
It insures the difference between the residual value that
is built in to the customer contract and the black book
value, whatever that happens to be, when the car is
actually sold.
So what conclusions did we come to? Well first of all, as
Tom mentioned earlier, we are going to stay in this
business. Secondly, we are going to limit the business -
the loan and lease portfolio as a percentage of the total
loan portfolio. We will not let it grow above its current
percentage of that portfolio.
Thirdly, we think that on a fairly conservative basis over
a cycle - not today, but over a cycle, we expect returns
on equity in the 13% to 16% range for this portfolio.
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Page 20
I also would make the point that that's assuming what we
think is a very conservative capital allocation in this
business, in the 9% to 11% range. Today's rates of return
on the business we're booking, we think, are north of 18%.
That's a function of the wide net interest margins that
we're experiencing today. Certainly on a cyclical basis we
don't expect those to continue for the next few years.
Let's turn now to the financial restructuring plan. And we
also at the end of the presentation will give you an
update or some guidance on 2001 and 2002 earnings. The
financial mission, I think, is obvious. And that is to
maximize the total rate of return on the equity of the
company, not in the next two months, not in the next two
years, but over a reasonable period of time.
Long term earnings growth, EPS growth, we have as a goal
10% to 12%, return on equity 18% to 20%, dividend payout
ratio 35% to 45%. And we are going to operate the company
with a stronger capital base than has been the case in the
past.
Specifically, we will target a tangible common equity
asset - common equity to asset ratio of a minimum of
6-1/2% and a risk-based capital ratio of at least 11%.
We'll talk about a number of initiatives here in just a
second. We'll talk a little bit about the (NIE) initiative
that was referred to earlier, as we mentioned, the
dividend - a 20% dividend reduction, a reduction of some
low margin assets on the balance sheet.
We're going to take a restructuring charge over the next
three quarters, second, third, and fourth quarter,
totaling $140 million after-tax, consolidate 12% of the
non-Florida branches. And we're going to sell the Florida
franchise.
The (NIE) initiative, as Tom mentioned, this is basically
already baked in to our assumptions for 2001. We have
reduced - we've taken what I'd call a down payment step on
reducing our cost structure. We've reduced it $36 million
for this year. That benefit will basically carry forward
to 2002.
We also are looking at the possibility of outsourcing our
information technology and/or our back room operations
areas. Just to give you some - we have not made a final
decision on
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Page 21
that, I would add. We're working with some consultants to
help us think through the strategic implications of that.
Just to give you some idea of the scope of those expenses,
in both IT and back room operations, there's roughly $100
million in each area of expenses. So you're talking about
up to a couple hundred million dollars.
Longer term efficiency ratio objective, 48% to 52%, we
think that in 2002 we'll get down to 55% to 57%. We have a
long ways to go. That's why I referred to it as it a down
payment. But on the other hand, we've started to make
significant progress, at least in these projections,
versus the 61% that we looked at in the first quarter.
Dividend policy, 20% cut, that'll be effective with the
third quarter dividend going from 20 cents to 16 cents a
share. Dividends are obviously a tax-inefficient method of
providing return to the shareholder because of the double
taxation.
We do view this reduction in the dividend as an offensive,
not a defensive strategy. Or stated another way, we don't
feel that the high dividend payout ratio was a positive
factor in the stock.
We think that the shareholders will be much better served
if indeed we retain this capital and use it to either grow
earnings - assets and earnings and/or repurchase stock. A
payout ratio of 35% to 45%, we expect it to be within that
band with the size of this cut. So we would be within our
target range in 2002.
Balance sheet restructuring, just a quick comment on asset
liability management, it's our intent to run the company
with a very limited tolerance for interest rate risk.
We've skinnied down the interest rate risk significantly
in the last year. We currently are in a position where if
rates were to rise by 200 basis points over the forward
curve, our net interest income position would decline
about 2%. We think 3% is probably the policy limit for
that activity.
We also feel that low margin assets -- and by low margin
assets, I'm going to refer to the investment securities
portfolio and the residential mortgage portfolio -- we
think that they are a relatively inefficient use of
capital to retain those assets on the balance sheet.
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Page 22
We have shrunk those assets from 27% of the earning asset
total in 2000 - or in 1999 to where in the second quarter
it now is down to 18%. We intend to try to continue to
shrink this somewhat. If you think of the first bullet
point that we want to run the company with relatively
little interest rate risk, that implies basically a
matched funding strategy.
If you're going to put - if you're going to hold
investment securities, which today are basically for
commercial banks mortgage-backed securities or residential
mortgages, then you need to have some matched funding in
probably the four to five-year duration area.
If you match fund that portfolio, the only thing you're
left with for a spread is the value of the options that
are embedded in that - in those assets. If we choose to
take that option risk, we can write those options and
receive the option income. We don't need to have the
assets on the balance sheet.
Also by keeping the assets on the balance sheet, you also
are tying up some of your funding capacity. In an
environment where loan to deposit ratios are north of 100%
for the industry, all of these assets, in essence, are
being carried at the margin with wholesale national market
funds. We just don't think that's a good use of that
capacity.
On the funding side, Ron Baldwin made the comment both in
terms of our public deposits and also our retail CDs --
you saw their shrinkage in those liability categories --
we simply have not been very aggressive from a pricing
standpoint in either of those areas.
And the reason is that we haven't needed the funding. The
funding has been provided by the sales of the investment
securities portfolio and the - to a lesser degree, the
residential mortgage portfolio.
Now going forward, that's going to change dramatically.
When we sell Florida and lose the deposits down there, we
are going to have a very strong appetite for funding. And
that will dictate a much more aggressive approach in terms
of pricing strategy on retail CDs.
Specifically, in the last week or two we've for the first
time in quite awhile put some very aggressive prices on
retail (unintelligible) as well as bumped the rate up on
our money market accounts to try to attract some deposits.
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Page 23
Now we also think it's important at this stage in our - in
the company that we give Ron Baldwin - we make sure that
his retail sales people have attractively priced products
out there to sell as he tries to rebuild the sales and
service structure of the retail bank.
Restructuring charge, these are pretax numbers here at the
bottom. You see the total pretax charge is $215 million.
That's $140 million after-tax. As we mentioned, that will
be taken over the second, third, and possibly fourth
quarters.
The reason for spreading it out is just accounting
conventions. Accounting convention dictate exactly when
you can take certain charges. Some of them we did not - we
were not able to take in the second quarter.
Sixty-four million dollars in restructuring charges, this
is the branch consolidation, the ATM optimization strategy
that Ron is pursuing. It also includes the estimated cost
of retention for our Florida employees as we sell that
franchise.
There's some corporate overhead and facility changes in
there also. And there also is the writeoff for the sale or
writeoff of all of our e-commerce technology investments
with the exception of eBank, which as Tom alluded to, we
are very excited about.
We also are going to write assets down for asset
impairment purposes by $45 million. There basically are
three areas here. We're going to write down the IO strip,
which is the residual value on two auto loan
securitizations we did in 2000.
The estimated charge-offs associated with those
transactions are no longer applicable. Charge-offs have
increased above and beyond the estimates that we thought
that were appropriate when we set those securitizations
up. So we're going to be writing that asset down.
We also sold our final $15 million investment in Pacific
Gas and Electric commercial paper in the second quarter
and recognized a loss on the sale of that asset.
We are also taking this opportunity in the second quarter
to put more reserves into the auto residual area. I will
tell you that we are comfortable with our reserve levels
today. But we do think that we want to try to get this
even more conservative on our assumptions going forward.
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Page 24
Seventy-two million dollars of increases in our credit
reserves, really four areas, we have three of them posted
up here. There's two portfolios that we are exiting or
have actually exited.
That is the sub-prime auto business that's about $150
million portfolio. We are no longer making those loans. We
have embedded losses in that portfolio. And small truck
and equipment -- these are the large tractor/trailer rigs
-- a $60 million portfolio that we inherited when we
purchased First Michigan three years ago, the embedded
losses in that portfolio will be written off.
Thirdly, you see the 120-day delinquencies. The (FFIEC)
policy dictates that consumer loans rated at 120-days
delinquency are charged off. There are a number of
exceptions to that rule.
This is similar to an accounting policy change. We are
getting into a much more conservative position with regard
to that regulation. That represents, to a certain degree,
an acceleration of charge-offs that in all probability
would have occurred in future months.
The fourth area that we did not put up on here is
bankruptcies. Consumer bankruptcies have increased
significantly in the last year. Nationally they're up 18%.
They're up just about that same percentage for Huntington.
We think that's a function of two factors.
One, the deterioration in the economy certainly has
weakened the consumer's financial position. But also the
discussion in Congress about passing legislation that
would impose more stringent requirements for filing
bankruptcy has led to an acceleration in anticipation of
that event happening. And we've seen increased bankruptcy
filings because of that phenomenon.
We have other reserves which are basically accounting,
legal, and also some small amount of operating reserves
that we will be establishing in the charge, all of which
will be recognized in the second quarter.
Let's turn to credit quality for just a second. Credit
quality is obviously a great deal of concern in this kind
of an economic environment. The deterioration in the
economy has had a significant adverse impact both on the
consumer balance sheet, but also on the corporate balance
sheet.
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Page 25
Credit quality has not been a major problem at Huntington.
But we are experiencing significant increases in
charge-offs that we think are in line with or actually
slightly better than industry performance.
This chart shows - compares the non-performing assets as a
percentage of our total loan portfolio in the last two
years. We're the red line, with the peer group - the group
of peer banks, the yellow line.
As you can see, our non-performing asset totals have been
consistently below that of the industry. And in spite of
the fact that the industry and Huntington's numbers have
deteriorated significantly in the last two quarters --
this is through the first quarter -- you can see that our
relative performance actually has improved slightly as
we've gone up less than the rest of the banks.
(Unintelligible) slide for net charge-offs, basically the
story here is that our charge-offs have been in line with
or slightly below industry averages over the same two-year
time period, albeit again have bounced up significantly
from the second quarter a year ago because of the cyclical
phenomenon.
Also I'd point out here that on consumer - on charge-offs
we probably tend to run a slightly higher charge-off ratio
than other banks because of the portfolio mix. Over 50% of
our portfolio is consumer loans. They tend to be somewhat
higher charge-offs, albeit higher rate assets.
So I think that the story from - a very very brief
overview on our quality is, we certainly are not immune in
the economy. But we don't think we've been affected any
worse. In fact, we think our performance numbers are a
little better than the industry as a whole.
Let's turn to Florida. I'll just give you a quick overview
of Florida. You can see from the map that our Huntington
presence in Florida is a central Florida presence. We have
$4-1/2 billion of deposits and 139 branches, $32 million
of branch - of deposits in the average branch, a little
bit over $2 billion in loans.
In deposits we're Number 8 in the state. And 95% of our
deposits are at MSAs. That represents about - just a
little bit less than 25% of Huntington's total deposits.
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Page 26
Florida obviously is a very attractive market
demographically. We have a relatively small presence in a
market that's dominated by the top three players who have
almost 50% of the market.
Let's talk a little bit about the rationalization for the
sale of Florida. Very simply, it's been an inefficient use
of Huntington's capital. We are earning single-digit
returns on equity in Florida as we speak. And this
represents approximately 30% of our capital. We have
capital of about $2.4 billion. We've got 30% of that,
roughly $700 million, tied up in Florida.
There's about $540 million of goodwill. And in addition,
we have the tangible equity that is required to support
the roughly $2, $2-1/4 billion of loans. If you add those
numbers up, you come up to just about $700 million.
Florida is a wonderful growth market, no question about
it. I think Florida, if we had a smaller investment of our
capital down there, we probably would consider staying
with.
But it simply is going to be very difficult for us
mathematically to generate attractive returns on equity
for the company if we have 30% of the equity tied up in a
business that is earnings single-digit rates.
I also would tell you that the - that we've looked very
hard at this to see if our Florida franchise is a problem
vis-a-vis what other folks are doing. Particularly on the
deposit side, it's interesting. The margins on deposits in
Florida -- and this is true for the banks as a whole, not
just Huntington -- are a lot less attractive than they are
for the rest of the Huntington franchise, for example.
And it's simply a function of deposit mix. We have
significantly - we have about 6% or 7% more CDs in our mix
in Florida, as do almost all the banks, versus what we
would have in the Midwest part of the Huntington
franchise.
That translates into about a 15% to 20% reduced deposit
margin. So it's just a - it's a very strong growth market.
But it's not quite as profitable because of the deposit
mix.
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Page 27
It's not geographically strategic for us. If you look at -
if you think of Huntington, we're a Midwest company with a
Florida appendage. It is not strategically linked to the
rest of the company. As I mentioned, we're a smaller
player in a concentrated market.
The intent is to take the - is to use the capital that
will be freed up from the Florida sale first of all to
replenish our capital coffers. And when I say replenish
our capital coffers, I mean that we are going to adjust
our capital - tangible equity capital back to a minimum of
6-1/2%. Then we will take whatever excess capital is
available and use it to repurchase stock. The sale will be
accretive, not just in 2002, but also in 2003.
So just a quick recap, we're cutting the dividend 20% --
we've talked - tried to explain the rationale behind the
reduction -- the sale of lower margin assets. We're taking
a $140 million restructuring charge, consolidating 12% of
the branches. And we're getting ready to sell Florida.
Let me see if we can give you a little guidance on 2001
and 2002 earnings projections. Just to refresh your
memories, this slide just looks - just takes a look at the
first quarter reported numbers. And we will be reporting
second quarter numbers on Tuesday. And those numbers will
be consistent with the previous guidance of 27 to 29 cents
per share that we have given you.
The first quarter here what we've done is just annualized
the numbers. The run-rate in the first quarter was $1.10 a
share on an annual basis, net interest margins 393 basis
points -- that actually was up nicely from 370 in the
first - in the fourth quarter -- charge-offs 55 basis
points, sky-high efficiency ration of 61 basis points.
Let's look at the key assumptions or drivers of the - for
second half earnings. Loan growth 6% to 8% annualized, I
think the margin will stay pretty much in the $3.90 to
$3.95 range. Charge-offs will pick up from the first
quarter level 65 basis points. That's about the level we
expect for the year.
Revenue growth 2% to 4%, you're getting slower revenue
growth because you are also divesting or selling some of
your other earning assets -- i.e. investment portfolio, et
cetera. So you don't get the increase in the net interest
income. Your total earnings assets are just not growing as
rapidly.
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Page 28
Efficiency ratio of 57% to 59% versus 61% in the first
quarter, when you take those assumptions, factor them in a
model, you come up someplace in the range of $1.15 to
$1.17. Street estimate for us right now is $1.14.
Now the tangible equity ratio, we're assuming that Florida
will get consummated in - the sale of Florida will be
consummated in the fourth quarter. Once Florida is sold,
we estimate that our tangible equity ratio will be
someplace in the 9% to 10% range.
It obviously depends on what kind of a deposit premium we
receive on the sale. But this takes us from being a
marginally capitalized company to a significantly
over-capitalized company in one fell swoop.
Let's move to 2002, the key drivers or assumptions -- loan
growth basically the same, 5% to 7%, margin basically the
same, $3.95 to $4. Charge-offs we're going to assume in
this model that charge-offs don't come down.
Now you can argue that - well why don't they come down,
you've just set aside a significant amount of reserves.
We're trying to be a little conservative here. And it's a
little early in the game to be projecting significant
declines in charge-offs.
Obviously the economic performance - the economy next year
will dictate what happens here. But we've got what we
think is a fairly conservative assumption here.
Revenue growth starts to pick up and be more consistent
with loan growth, because the run-down in the other
earnings assets has basically been accomplished.
Efficiency ratio starts to move down a little further, 55%
to 57%. All of these projections assume that Florida was
sold in the fourth quarter, so it's not in these numbers
at all.
Now let's build the 2002 earnings projection. Let's start
with $1.15, $1.17 for 2001. With the factors that we
mentioned on the previous page, those assumptions model
out to 12 to 13 cents growth.
The run-rate impact of the restructuring charge and the
branch consolidation is in the 4 to 6 cent per share
range. Let me skip over Florida for just a second. The
elimination of goodwill amortization is worth 11 cents a
share to us next year. That's probably a larger percent
increase for us than a lot of our peer banks.
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Page 29
In Florida we've assumed 2 to 6 cents accretion. The
accretion in 2002 is going to be a function of three
variables -- One, what deposit premium do we get; Two,
what - how much stock do we buy back and what is the
timing of that stock buy-back in 2002; and Three, what's
the price that we buy it back at?
So you can all use your own assumptions on that. The point
we would make is that you're going to get - this assumes
about $300 to $400 million stock buy-back in 2002.
You're going to get - that is by no means all of the
capital that gets freed up. You're going to have accretion
in 2003 if that assumption is correct, given what we think
we probably will get for Florida. Those assumptions bring
you down to $1.44 to $1.53 for 2002.
Let me now turn the podium back over to Tom Hoaglin, who I
think is going to make some wrap-up comments. Thank you.
Tom Hoaglin: Mike and Ron, thanks. So going forward we expect to
capture opportunity for near term value creation. We've
certainly talked a lot about that and our particular
action steps today.
A culture of performance with relentless focus on
execution -- execution is very much a key -- leveraging
our core markets, being the local bank with a strategy of
being customer-centric -- pardon me -- a lot of financial
discipline, and a much stronger capital base.
In sum, we are committed to growing earnings per share and
rebuilding shareholder value. We think we're taking
decisive actions to strengthen Huntington and position it
for future growth. Our problems are fixable. And we have
the management team to execute our strategies and grow
this franchise.
Now we'll take...
Mike McMennamin: ...percent. The capital that gets freed up with the sale
used from a tangible equity standpoint is at $530 million,
plus let's just assume 6-1/2% tangible equity on a little
bit over $2 billion of assets.
So it's about $140 million that you'd free up that way. So
you've got just about $700 million of tangible equity that
would be freed up with the sale of Florida, if you sold it
at book value.
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Page 30
Anything north of that number, obviously, would generate
an after-tax gain which would be incremental capital that
would be create through the sale and would also therefore
be available to fill up our equity coffers as well as to
buy back stock.
Man: (Unintelligible).
Mike McMennamin: Well we're not going to get into those numbers. But we've
already suggested to you that we have a $700 million
investment that's earning in the single-digit range.
Tom Hoaglin: Yes, sir?
Man: Last time Huntington presented in New York -- I don't
know, it was maybe two, three years ago -- you talked
about - they talked about turning around Michigan. And it
appears not much has happened since then. Why should we
believe that Michigan will be turned around this time?
What are you doing differently that you think you could
revitalize that?
Tom Hoaglin: I'm not intimately familiar with all of the things that
were said and were certainly done at the last - after the
last time around.
Let me just tell you that I feel that we have a stronger
management team. I think we're more focused. I think we'll
follow through this time around. We'll get it right. We're
going to have better leadership in Michigan.
And the proof's in the pudding. So you're entitled to be
from Missouri. But I hope I'm leaving you with an
impression that this time we mean business.
Man: Just returning to the topic of the Florida franchise
sales, will all of the assets from Florida also be
transferred in terms of the loan assets? And likewise,
will the acquirer be entering into any agreements on - or
with lessors and/or auto lenders in Florida when they
assume the branches?
Mike McMennamin: The $2.2 billion in loans that we showed on the slide
would exclude about $800 million of auto loans and leases.
We certainly would offer those - that $800 million - we
will offer that $800 million loan portfolio to the buyer.
We'll just have to see what the buyer - who the buyer is
and exactly what their interest is.
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Tom Hoaglin: Yes, sir?
Man: Yes, I just wanted to ask, on the auto business, what do
you think would be an optimal size for that business
relative to the total? And if you could, give us a sense
for what you think the bottom range of the cycle is on the
profitability for that business.
Tom Hoaglin: Well we - if you mean the bottom range on the
profitability, I think what we showed was a range of 13%
to 16% return on equity. So we would say the bottom range
would be 13%.
Man: (Unintelligible).
Mike McMennamin: The lower end of the range, if you just do the math on
that, certainly could be below 13%. We think that the
average over the cycle will be 13% to 16%, using what we
think are fairly conservative capital allocation
assumptions.
I think one of the things that is going to help us in the
auto business is it certainly is a cyclical business with
spreads getting extremely wide at times, spreads narrowing
at times. We will no longer be dependent upon that
business from a volume standpoint. We're not going to be
trying to maximize the growth in that business.
We're going to be trying to manage the growth of that
business within the context of the growth of the
Huntington total portfolio. We think that that will give
us the opportunity at those points in the cycle when
there's a lot of pricing pressure to back away from the
market somewhat.
It's very difficult however to just say at that point - at
the low point in the cycle, we're not a lender there at
all, because if you want to get back into that market
later on when conditions have improved, in essence, the
only way you get back in with the dealers is by being the
low-priced provider.
We don't want to be the low-priced provider over a cycle.
We've got ourselves convinced that over a cycle that our
business model will work and will generate reasonable
returns on equity, low to mid-teens, on what we feel is a
fairly conservative capital estimate in terms of the
capital being allocated to the business.
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Tom Hoaglin: Go ahead.
Fred: Can you talk about the profitability of the other states,
Michigan, Ohio, Indiana, and West Virginia?
And also I didn't hear you all talk about what your
outlook is for your mortgage business. Are you - in the
mortgage banking business, are you committed to that
business? Or is that possibly up for sale as well at some
point?
Tom Hoaglin: Well let me tackle the mortgage part of that. Then, Mike,
I'll ask you to tackle the state-by-state.
The mortgage business for Huntington is not a large
business. It has been, as has been the case with other
companies, a good business this year. We're pleased with
our production and our origination volumes.
Interestingly, about 50% of our Florida mortgage
production comes through our branch system. So that
certainly implies a shrinkage - somewhat of a shrinkage in
the business. We expect to remain an originator in the
State of Florida, as some of the others are who don't have
a physical presence.
I think, Fred, honestly, because it is not a large
business for us, it's not particularly an area of
intensive focus right now for us strategically. But we
like what it's doing at present.
Mike, do you want to talk about...
Mike McMennamin: Fred, we're not prepared right now to give
market-by-market profitability. I'll tell you in a
directional sense that the Ohio franchise and,
interestingly enough, the Indiana franchise, which is a
tiny (unintelligible) -- it's only $1/2 billion, $600
million of deposits -- are the profit leaders.
Michigan is challenged as we've already discussed today.
And the profitability in West Virginia would be less than
it is in the Ohio and the Indiana markets.
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Indiana is fascinating because we've just got a very small
presence, which sort of belies sort of the conventional
wisdom that you have to have a big market presence to be
relatively profitable. I think it does help. But Indiana
seems to be an outlier in that area.
Tom Hoaglin: Yes, sir?
Man: ...(unintelligible) Florida. Would you go over again what
might be available for share repurchase subsequently?
Mike McMennamin: Well let me do it a little differently for you. Let's just
assume we sell Florida with no gain whatsoever. We sell it
for the $540 million asset off our - goodwill off our
books, and that's all we achieve.
From a tangible equity standpoint, that would free up the
540 - our tangible equity would go up by $540 million.
Plus we'd take approximately $2-1/4 billion of assets off
the books, which frees up another about $145 million of
capital. So the sale of Florida, if we book no gain
whatsoever, would free up about - just a little bit shy of
$700 million of capital.
Now that $700 million, if we went in at 6-1/2%, if our
objective is to maintain a minimum tangible equity asset
ratio of 6-1/2%, if we entered the Florida at - and were
at the 6-1/2%, then we would have $700 million in that
example to spend for stock acquisition.
In essence, we're just a little bit short of the 6-1/2%
going into - at the end of the second quarter before the
restructuring charge. So we've got to in essence
supplement the capital to the amount of the restructuring
charge, which will be a total of $140 million, plus
another perhaps $20 million that we are short of the
6-1/2% before the restructuring charge.
So in that example, that would take - $160 million would
be required to get us up to the 6-1/2%. And then the
remaining $540 million would be available for stock
repurchase.
That would be assuming that we sell the Florida franchise
at our cost, which as we said is something less than 12%.
So we'd be very surprised - very very surprised if that
number were what the market was willing to pay.
Tom Hoaglin: Yes, sir?
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Man: Okay, that's some more detail. But I was wondering, when
you put up the slide that showed a single-digit ROE for
Florida, were you referring to the $540 million or the
$700 million with this additional 6-1/2% capital?
Mike McMennamin: Referring to the $700 million.
Man: Referring to $700.
Mike McMennamin: Because that's the book equity - that's the equity that we
have on the books, including capitalizing that part of the
franchise at 6-1/2%.
Man: Okay. So even if you assume an 8% ROE, it's 20% of your
profits (unintelligible) Florida.
Mike McMennamin: Assuming an 8% ROE...
Man: On $700 million, that's $56 million. And you have...
Mike McMennamin: Right.
Man: ...roughly $280 million projected of net income this year.
Mike McMennamin: Your math is correct.
Man: Okay. And unless you do a 25% stock buy-back, I don't see
how that's not dilutive.
One thing in the slides in the '02 projections was
goodwill being added back of 10 to 11 cents. Does that
include goodwill from Florida?
Mike McMennamin: The 11 cents?
Man: Yes.
Mike McMennamin: The 11 cents is - whether we sell Florida or do not sell
Florida, the 11 cents would be included in the 2001 - I'm
sorry, the 2002 estimate, because the amortization of that
goes away. So that issue, whether you sell Florida do not,
still adds 11 cents.
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Man: No, but if you sell Florida, you no longer have the
goodwill, right?
Mike McMennamin: Correct.
Man: So why would that be added back? I guess I'm confused on
that. I don't see...
Mike McMennamin: Maybe we can discuss it afterwards.
Man: How much of your goodwill is in Florida? Let me ask that.
Mike McMennamin: I think it's $530 million of a total of $700-plus million,
I think is the number.
Man: Okay. And then lastly, the lease residual insurance,
(KeyCorp) had lease residual insurance too. But they just
announced a restructuring charge, a portion of which was
allocated to an insurance counter-party, which is now
defunct. How does - so it basically turned - it turned the
lease residual exposure, if you will, into insurance
counter-party exposure.
Mike McMennamin: Yes.
Man: Who is your counter-party? If you're not willing to
disclose who it is, are they in good financial condition?
And did...
Mike McMennamin: They're an AA-rated carrier. The carrier is rated AA.
We're not going to disclose who it is. But it is an
AA-rated carrier.
Man: (Unintelligible) the single-digit ROE in Florida, that's
after the goodwill amortization?
Mike McMennamin: No, we backed that out. That's before the goodwill.
Man: So you're earning single digits on $700 million of...
Mike McMennamin: Right.
Man: ...investment before goodwill amortization. After goodwill
amortization is Florida making any money?
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Mike McMennamin: I'm sorry, I...
Man: If you were to take out the goodwill from Florida, is
Florida making any GAAP profit under current accounting...
Mike McMennamin: Very little.
Man: Okay.
Mike McMennamin: Very little.
Man: Now I see how it's accretive. Thank you very much.
Tom Hoaglin: Yes, sir?
Man: Good afternoon. A couple of questions, I wanted - you had
the slides with the branch share and the deposit share.
If you were to like over two or three years be able to get
your deposit share up to your branch share, how much
deposit (unintelligible) would that be?
Ron Baldwin: I haven't looked at it that way. That's - I can do that
arithmetic off that slide with you.
Man: Okay.
Ron Baldwin: Yes.
Man: All right. I guess another question I had was, could you
give us a sense of what the cash yield on your NPAs are or
what the negative carry may be?
Mike McMennamin: The cash yield on the non-performing assets?
Man: Please.
Mike McMennamin: I don't have a number. I'm going to assume that it
probably is something just north of the prime rate.
Man: Thank you.
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Mike McMennamin: And then...
Tom Hoaglin: Other questions? John?
John: Obviously timing of buy-back is one of the most important
factors in the analysis. What are you guys thinking in
terms of if the sale gets done before year end, the timing
of the buy-back?
And then second just sort of a cleanup question, in the
Private Financial Group, does the revenue there exclude
whatever was in Florida?
Tom Hoaglin: We've - to the latter point, John, we've had not
significant Private Financial Group revenue in Florida.
Mike McMennamin: And the first question was what?
John: What you guys are thinking if the sale gets done at the
end of the year.
Mike McMennamin: Well we - that's obviously a key issue. And we're just
exploring the different alternatives that we have. You
know, obviously, the - I guess the three alternatives are
just open market purchases, an accelerated buy-back
program, or perhaps a Dutch auction. There's been no
decision made on either of those methodologies or as to
what the timing might be.
Tom Hoaglin: But I think, Mike, our models, in other words, what our
projections are predicated on or...
Mike McMennamin: Well we've assumed that we would buy back about $300 to
$400 million in 2002.
Tom Hoaglin: Other questions? Anybody else? Great.
Well we really appreciate your attention today. As I said,
we realize it's been along time since Huntington was
before you. We look forward to regular communications like
this and in other ways in the future.
We've tried to tell a much different story about
Huntington today than Huntington has told in the past. I
hope it's come through that we are very excited about our
prospects in the future.
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It's going to involve a lot of hard work. But we're quite
confident about what we're going to be able to achieve.
And we're going to look forward to sharing that with you
as we go forward.
Laurie, we will have a reception in the (Reed) Ballroom
right across the way, is that right?
Laurie Counsel: Yes.
Tom Hoaglin: Okay. Thanks very much for joining us.
END