EXHIBIT 99.2
HUNTINGTON BANCSHARES INCORPORATED
OCTOBER 16, 2001
2:00 p.m. EDT
OPERATOR: Good afternoon. My name is Amanda and I will be your
conference facilitator today. At this time, I would like to welcome everyone to
the Huntington Bancshares third quarter earnings conference call. All lines have
been placed on mute to prevent any background noise. After the speakers'
remarks, there will be a question and answer period. If you would like to ask a
question during this time, simply press the number one on your telephone keypad
and questions will be taken in the order that they are received. If you would
like to withdraw your question, press the pound key. I would now like to turn
the call over to Tom Hoaglin, chairman, president, and CEO of Huntington
Bancshares. You may begin your conference.
TOM: Thank you, operator. Welcome, everyone. Thanks for joining us
today. Also participating in today's call will be Mike McMennamin, vice chairman
and chief financial officer and Jay Gould, senior vice president and director of
investor relations.
Before I turn to the quarter's results, I'd like to welcome Jay aboard.
Increasing shareholder awareness of Huntington and maintaining open
communications with the investment community is a high priority for us. Jay, as
many of you know, has 20 years experience in heading bank investor relations
efforts and we're extremely pleased to have him bringing this experience and
insight to the team.
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This afternoon I'll provide you with an overview of the progress we're
making at Huntington and key highlights of the third quarter's performance. Mike
will then follow with a detailed review of the quarter. We want to leave ample
time for your questions so let's move ahead.
First Jay has some housekeeping items to cover. Jay.
JAY: Thank you, Tom, and it is a pleasure to be here. This call is
being recorded and will be available as a rebroadcast starting today around 5:00
p.m. through October 30th. It will also be on the Internet for two weeks. Please
call the investor relations department at 614-480-5676 for more information on
how to access these recordings or if you have not yet received the earnings
press release for today's presentation materials.
Today's discussion, including the question and answer period, may
contain forward looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Such statements are based on information and
assumptions available at this time and are subject to change, risks, and
uncertainties which may cause actual results to differ materially. We assume no
obligation to update such statements. For a complete discussion of risks and
uncertainties, please refer to slide two and materials filed with the SEC
including our most recent 10-K, 10-Q and 8-K
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filings. With that, let me turn the meeting back over to Tom.
TOM: Jay, thank you. As you know, we had a very busy third quarter. On
September 26th, we announced the sale of our Florida operations to Sun Trust at
an attractive 15 percent deposit premium. The transaction is expected to close
in February of 2002, a couple of months later than our original target, after
which time, we will begin our share repurchase program. This transaction and
subsequent share repurchase program are key components of our comprehensive
financial and strategic restructuring plan. Another component is the
consolidation of about 40 banking offices outside of Florida. This continues on
track and will be completed by year end.
In a moment, Mike will talk about our third quarter financial results
with which overall we were pleased. Let me overview four key performance items.
First, this quarter's earnings per share of 30 cents exceeded the 29 cents
consensus. Importantly, core EPS was up two cents from the second quarter. My
thanks go to every Huntington employee who helped make this possible.
Second, we maintained the level of loan loss reserves that was
increased substantially through special charges at the end of the second
quarter. You will recall that we have
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previously indicated our attention to allow the reserves to run back down to our
historical level.
Third, and perhaps most encouraging to long term performance is the
fact that we are seeing improving operating margins. Contributing to this on the
revenue side was an expanded net interest margin. This reflected a combination
of factors that Mike will detail.
On a funding note, I was particularly encouraged by the growth in core
deposits. This quarter was the first quarter in a long time that core deposits
increased significantly. In part, this was due to renewed success in attracting
retail deposits. We've also seen significant year over year growth in our fee
income. This was broad based and included a record quarter of annuity sales.
Very importantly, expenses were down and we're going to continue to be
relentless in our cost containment efforts. These factors resulted in a 110
basis point improvement in our efficiency ratio to 57.5 percent in the quarter.
This was also significantly better than the 62 percent ratio in the first
quarter. Yet we still have a lot of work before us. Fourth, while net charge
offs declined, we are disappointed to report a sizeable increase in
non-performing assets.
Let me close with a comment on the outlook. Last July
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we provided second half earnings per share guidance of 58 to 60 cents per share.
Third quarter performance of 30 cents per share would therefore imply a fourth
quarter of 28 to 30 cents per share. We're pleased with the third quarter and
think the fourth quarter will now come in between 29 and 31 cents per share,
even with increases in net charge-offs and non-performing assets while
maintaining strong reserves. This would result in full year earnings of $1.16 to
$1.18 per share.
With respect to our outlook for next year, given the lack of visibility
on the macro level and the potential impact recent events are having on the
economy, it is simply too early at this time to have a clear enough perspective
to update our guidance. My commitment to you as CEO is to continue making
progress on our strategic initiatives and remain as open as possible in
communicating our expectations. But I hope you can appreciate why we're not
prepared to provide updated guidance today.
Let me now turn the call over to Mike who will go through the details
of the quarter. Mike.
MIKE: Thanks, Tom. Let me build on the third quarter accomplishments
that Tom just mentioned with some additional performance highlights.
On the positive side, we continue to see growth in
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total loans, seven percent on an annualized basis during the quarter. We're
delighted to see 11 percent growth in our core deposits. While some of this
growth is seasonal, it also reflects success in our initiative to grow deposits
in anticipation of the sale of our Florida operations.
Net interest margin improved seven basis points during the quarter from
397 to 404, following a four basis point increase in the second quarter and is
now 30 basis points higher than it was a year ago.
Non-interest income excluding securities gains increased 17 percent
from a year ago reflecting strong increases in mortgage banking, brokerage,
insurance, trust, and capital markets revenue. Non-interest expense declined by
4.4 million dollars during the quarter, resulting in 110 basis point improvement
in the efficiency ratio from 58.6 in the second quarter down to 57.5 percent.
One negative aspect in our third quarter performance was a 27 percent
increase in non-performing assets which we'll detail later.
Turning to slide five, we previously reported that in connection with
our strategic refocusing plan, we intend to recognize total restructuring and
other special charges approximating 140 million dollars after tax. In the second
quarter, 72 million dollars of these charges were recognized
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relating primarily to credit and asset impairment issues. As you can see, we
recorded 51 million dollar per-tax, 33 million after tax of these charges in the
third quarter. I'll discuss these items in more detail in the next slide.
The amounts on this slide six are all pre-tax. We've divided the major
components of the third quarter 51 million dollar pre-tax charge into two
categories. Included in the 33 million dollar restructuring component, were 16
million dollars - either the exit or curtailment of certain E-commerce
activities, 10 million dollars in owned or leased facilities the company has or
intends to vacate (that includes space in corporate headquarters and our former
operations center), four million dollars related to the reduction of ATMs and
three million dollars in employee severance and retention expenses.
Included in the 18 million dollar component entitled "other" are
non-recurring legal, accounting, consulting, and other operational costs. Some
of the remaining 53 million pre-tax charge is expected to be recognized in the
fourth quarter with the remainder in the first quarter of next year when the
Florida sales closes. Remaining charges will primarily relate to closing costs
on a non-Florida branches as well as retention and severance costs associated
with the Florida sale.
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My remaining comments today will address third quarter earnings on an
operating basis which excludes the impact of the aforementioned restructuring
and other charges. Slide seven shows earnings per share performance. Operating
and core earnings per share show the underlying earnings power of the company.
Operating earnings excludes the impact of restructuring and other charges that
occurred in all periods shown which is a good starting point. Core earnings per
share eliminates the impact of selected one time items like security gains and
gains from asset sales. This is the primary figure we focus on to measure our
progress and as Tom mentioned, core earnings per share were two cents higher in
the second quarter and one penny higher than last year. Cash earnings per share
represents operating earnings per share after deducting the good will
amortization.
The next slide, slide eight, looks at the trend in some key performance
ratios. One thing I want to highlight here is that the tangible common equity to
asset ratio has remained stable even after this quarter's 33 million dollar
after tax restructuring charge. As announced at our investment conference in
July, our goal is to maintain a minimum tangible common equity to asset ratio of
six and a half percent after the sale of our Florida operations. Completing the
Florida sale will immediately increase this
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ratio above nine percent with the subsequent share repurchase program reducing
it back closer to the minimum six and a half percent target.
This next slide compares the income statements of the third quarter,
second quarter, and the year ago quarter. The interesting comparison is the
current quarter versus last year. While net income declined from 83 million
dollars to 75.7 million, as previously mentioned, core earnings increased
slightly from 29 to 30 cents a share. Net interest income increased 14 million
dollars year over year in spite of a one percent decline in earning assets as
the net interest margin expanded from 374 to 404.
As previously mentioned, non-interest income increased 17 percent or 18
million dollars with most of this increase offset by a 15 million dollar
increase in non-interest expense. Security gains declined from over 11 million
to one million. Provision expense increased by 23 million dollars, reflecting
credit quality deterioration with reported net charge offs increasing from 46 to
74 basis points.
Slide ten shows the favorable trend in net interest income and net
interest margin over the past year. The increase in the margin was driven by two
factors, a richer earning asset mix with a reduction in low margin investment
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securities and residential mortgages from 23 percent of earning assets to 16
percent. Secondly, a slight liability sensitive balance sheet during a period of
declining interest rates. Net interest income and the net interest margin are at
the highest levels since the second half of 1999.
Turning to the next slide, the managed long growth numbers, slide 11,
have been adjusted for the impact of acquisitions, securitization activity, and
asset sales. Managed loans grew at a seven percent annualized rate during the
quarter consistent with the seven percent growth rate versus the year ago
quarter and up slightly from the five percent growth rate in the second quarter.
The four percent annualized decline in commercial loans during the
quarter was driven by continued weakness in automobile floor plan credit.
Excluding floor plan loans, commercial loans increased at a three percent rate
during the quarter. Floor plan credit has declined 21 percent in the last year
as dealers have reduced their auto inventories and the captive auto finance
companies have been very aggressive on pricing, tying their attractive rates on
floor plan loans to their purchase of retail paper.
Commercial real estate loans increased at a 16 percent rate during the
quarter and were up seven percent from a
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year ago. All of our commercial real estate lending has been and continues to be
only to developers in our footprint. The indirect automobile loan and lease
portfolio increased at a very strong seasonally 13 percent rate during the
quarter versus the nine percent rate over last year's quarter. However, we did
see a significant slowing in new origination volume in September following the
terrorist attacks.
Other consumer loans increased at a nine percent annualized rate during
the quarter driven by strong double digit growth in home equity lines of credit
continuing the strength that we've seen over the past year.
The next slide, slide 12, provides details on recent core deposit
trends. Core deposits exclude negotiable CDs and Eurodollar deposits. The eleven
percent annualized growth rate during the quarter was the strongest quarterly
increase in the recent past. While some of this growth is seasonal and we would
not expect this high growth rate to continue, a significant portion of the
growth represents our increased emphasis on attracting retail deposits.
The third quarter growth was driven primarily by strong seasonal demand
deposits in the corporate sector and growth in interest bearing and time
deposits in the retail sector. The retail growth reflected two factors: one,
more
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aggressive pricing in anticipation of the Florida sale and two, support of an
attempt to invigorate our retail sales efforts.
Turning to slide 13, our discussion here is non-interest income and is
going to focus on year over year trends which mitigate seasonal factors that
sometimes impact linked quarter comparisons. Total non-interest income before
security gains increased 19 million dollars or 17 percent versus the same
quarter a year ago. Service charges increased five percent versus a year ago.
Some of the factors contributing to the increase were the impact of lower
interest rates on deposit balances, increased sales of cash management products
and pricing increases.
Brokerage and insurance revenue was 4.3 million dollars or 28 percent
higher than the year ago period, with strong growth in insurance and investment
banking fees which are included in this line item. Huntington Capital Corp,
which is our investment banking subsidiary, had one of its strongest quarters
ever. Brokerage income posted an eight percent year over year increase despite a
volatile equity market while annuity sales increased 53 percent as result of
record sales of 142 million dollars during the quarter.
Trust income increased 17 percent over the prior year, reflecting
increased revenue from Huntington's proprietary
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mutual funds. The increase in revenue was a result of a 12 percent increase in
fund assets to 2.9 billion dollars aided by the introduction of five new funds
as well as fee increases.
Mortgage banking income was particularly strong given the current lower
rate environment, with revenue increasing 5.2 million or 55 percent from a year
ago, although down from the very strong second quarter. Mortgage origination
volume was 737 million dollars during the third quarter, just about double the
365 million dollars from a year earlier.
The 20 percent increase in other non-interest income primarily reflects
a two and a half million dollar increase in revenues on the sale of interest
rate derivative products to corporate customers, which is a new activity for us
this year.
Turning to slide 14, non-interest expense increased 15.3 million or
seven percent compared with the same period last year. Perhaps more importantly
non-interest expense declined 4.4 million dollars or two percent from the second
quarter reflecting our increased focus on cost containment.
The next slide provides an overview of our credit quality. As
previously mentioned, our non-performing assets
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increased 44 million dollars or 27 percent from the second quarter and
represented 97 basis points, almost one percent of period end total loans and
other real estate owned. Reported total net charge-offs were 74 basis points.
Excluding losses on businesses we have exited and for which reserves were
established in the second quarter, net charge-offs on an operating basis were 61
basis points.
Delinquencies over 90 days increased to 43 basis points, up only
slightly from the third quarter of last year. During the earnings call last
quarter, we indicated the allowance for loan losses would decline as the loans
reserved for as a part of the special charge were charged off. However, credit
quality and the economic outlook have weakened since that time. As such we are
maintaining the allowance for loan losses at the higher 1.67 percent level which
we believe is adequate at this time. We will be watching credit trends very
carefully and we'll take whatever actions are necessary to ensure the continued
strength of our balance sheet and the credit loss reserves.
Slide 16 shows the recent trend in non-performing assets as well as
their composition. The 44 million increase in the third quarter included 20.5
million dollars of shared national credits, essentially all of which were in the
manufacturing sector. Of the remaining 24 million
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increase, 13 million dollars related to real estate businesses and seven million
dollars loans to contractors.
The next slide summarizes our credit exposure to industries that may be
particularly vulnerable to the weakening economic environment. As you can see,
these industries represent only six percent of our total 10.4 billion dollar
commercial and commercial real estate portfolio and three percent of our
non-performing assets. Worth noting is the fact that most of our lending in the
restaurant sector is to the fast food or the non-high end segment of the
industry, which we feel will hold up relatively well in a weakening economy.
On the next slide, net charge-offs, slide 18, are shown in two ways.
Total reported net charge-offs in the third quarter were 74 basis points.
Charge-offs on an operating basis exclude the impact of any charge-offs
established in the second quarter special charge and any related subsequent
charge offs. Excluding the 13 basis points of charge-offs related to portfolios
we have exited and for which reserves were provided in the second quarter, net
charge-offs on an operating basis declined from 73 basis points in the second
quarter to 61 basis points in the third quarter. Commercial charge-offs declined
from 67 to 56 basis points and commercial real estate charge-offs declined from
18 basis
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points to zero in the third quarter.
Last quarter, we estimated that total net charge-offs from the second
half of this year including any charge-offs against the reserves established in
the second quarter would be 65 basis points. You can see from this chart that
they actually were 74 basis points for the quarter. We expect that net charge
offs in the fourth quarter will be in the 80 to 90 basis point range.
The next slide provides more detail on our consumer charge-offs, which
on a reported basis totaled 107 basis points for the quarter. Excluding losses
related to the tier two auto loan and the truck and equipment portfolios for
which specific reserves were set aside in the second quarter special charge,
consumer net charge-offs were 85 basis points for the quarter. This compares
with 95 basis points in the second quarter and 72 basis points a year ago.
The remainder of my comments on this slide will focus on the 85 basis
points of operating charge-offs. Net charge-offs in the indirect auto loan
portfolio were 105 basis points, down from both the second quarter and last
year. Second quarter charge offs at 150 basis points included losses associated
with the tier two portfolio, while the third quarter numbers do not, as these
losses are now charged against the reserve established in the second
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quarter.
Excluding these losses from the second quarter would have reduced the
150 basis point charge-off rate to 130 basis points, which is a more meaningful
comparison with the third quarter loss rate of 105 basis points. Also as
reported last quarter, 1.37 percent loss rate on auto leases in the second
quarter included some carry-over losses from the first quarter. Adjusted for
this, the loss rate for the second quarter was 1.21 percent. Adjusting the
second quarter indirect loan and lease loss rates to reflect these issues, the
combined loss rate would be 1.25 percent for the second quarter versus the 1.17
percent in the third quarter.
This improvement in the loan loss rate for the quarter is consistent
with significant improvement that we've seen in vintage loss performance over
the last year. For example, losses on indirect loans originated in the first
quarter of this year had a cumulative loss rate over their first nine months of
36 basis points. This compares with cumulative losses of 61 basis points over
the first nine months for loans originated in the first quarter a year ago.
As we mentioned last quarter, indirect loan and lease charge-offs have
been higher over the last 12 months as a result of lower quality paper that was
originated from the
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fourth quarter of 1999 through the third quarter of 2000, also weaker as a --
also as a result of the weaker economic environment and the increase in the
average loss per vehicle.
As all three factors continue to exert pressure on loss rates in the
third quarter, the relative impact of the lower quality vintages is diminishing.
To put this in perspective in terms of the indirect loan product, fourth quarter
`99 through second quarter 2000 vintages represents 16 percent of the indirect
loan portfolio in the third quarter but were 35 percent of the losses in that
portfolio. In the second quarter, that same vintage represented 20 percent of
the total portfolio and 39 percent of the total losses.
The credit quality of the third quarter loan originations was
essentially unchanged for more recent vintages as average FICO scores remain
well north of 700 and the percentage of "D" paper continued to be nominal in the
portfolio originations. These same trends also apply to the lease portfolio. The
improved risk profile of recent originations will have a favorable impact on
loan and lease charge-offs going forward. However, the ultimate level of losses
in coming quarters also will be very heavily influenced by economic conditions
as well as seasonal factors.
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The increase in installment charge-offs relates to a few unusually
large losses in the home equity loan portfolio. On balance credit quality of
this portfolio and the remaining consumer lending categories was stable and is
performing well.
Slide 20 reconciles the change in the allowance for loan losses from
June 30th to September 30th. I think the main point we just want to make here is
that third quarter provision expense covered 39.7 million dollars in total
charge-offs including the charge-offs for which reserves were established in the
second quarter and also provided for loan growth. As a result, the allowance for
loan losses as a percentage of loans was maintained at 1.67 percent for the
quarter.
The next two slides provided additional detail on the excess capital we
anticipate will be generated or released and the goodwill and core deposit
intangible amortization related to the Florida sale.
This completes our prepared remarks. Tom and I will be delighted to
take any questions you might have. Let me turn the meeting -- we'll be delighted
to take any of your questions. Let me turn the meeting back over to the
operator, who will provide instructions on conducting the question and answer
period.
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JAY: Operator?
AMANDA: At this time, I would like to remind everyone in order to ask a
question, please press the number one on your telephone keypad.
AMANDA: Your first question comes from Michael Granger with JP Morgan.
MICHAEL: Hello. Good afternoon. Can you hear me?
TOM: We can hear you, Mike.
MIKE: Yes, we can.
MICHAEL: Okay. Yeah. My question relates to the reserve, Mike, just and
your comments about maintaining the reserve ratio at 1.67 or there about. Is
that what you would have us model as we go into 2002 and I know you're not
giving guidance yet on 2002, but is that something that we should, you know,
model differently now over the next several quarters than that we would have
done previously? Obviously we would have taken it down in our models to about
1.45 percent, which is, I think, where you were prior to the special provision
of last quarter.
MIKE: Mike, I think that's a reasonable assumption. Yes. We do not --
we had every intention of drawing the reserve down over the next few quarters,
back down to the 1.45 percent, but I think the changes in the economy and also
the changes in our non-performing loans are such that
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we just don't think that's a prudent thing to do. So I think from a modeling
standpoint, using a 16.7 is a reasonable assumption.
MIKE: And again, just in terms of this quarter, obviously, the
provision was higher than maybe what we would've expected if we had assumed that
you would've, you know, brought the ratio down some and I think you referred to
some of the offset to that maybe stronger revenue growth this quarter, the
expenses were maybe a little bit lower. Just going forward and again, realizing
that it's difficult to predict 2002 with all the uncertainties, you feel good
about at least the next quarter or two, those offsets continuing to be there
against that higher provision level?
MIKE: Mike, I think the -- if you went back to the assumptions that we
provided behind the earnings estimate both for the rest of 2001 and for 2002
actually, back in July we had said that we thought charge-offs, total
charge-offs would probably be 65 basis points. We're obviously running higher
than that in the third quarter and we suggested that we're going to run even
higher in the fourth quarter. I think that the offset to a lot of the higher
charge-offs is a higher margin. We had assumed a margin in the second half of
the year, 3.90 to 3.95, as I recall and we came in at 4.04. We think the margin
is going to
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continue to be some place north of four percent as we look forward for the next
couple of quarters anyway, so you've got a higher margin offsetting some of that
and perhaps a little bit better efficiency ratio than we had expected or that we
had built into the model.
MICHAEL: Okay. Thank you.
AMANDA: Your next question comes from Ed Najarian of Merrill Lynch.
ED: Yes. Good afternoon. Several questions, first, just a quick
question. Could you go back over the 33 million dollar component of this quarter
restructuring charge? Second question, could you make any comments on your
expected pace of share repurchase in 2002 and what your thoughts are right now
about trying to accelerate that pace? And then third, any-- I know, obviously,
the outlook is cloudy with the economy, but any kind of near term NPA guidance?
Thanks.
MIKE: Let me take the -- let me take the break out of the charge first,
Ed. 33 million dollars in restructuring, we've got about 16 million dollars of
that relates to the write-off or write-down of some electronic commerce
initiatives we've been involved in. There's one write-down of some common stock
for an E-commerce company we were an investor in. There's other ventures that we
were a
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participant in that we are writing off. That's a total of about 16 million
dollars. There's about 10 million dollars of leases that we are either have or
going to vacate. They relate both to the -- our main office building downtown as
well as a former operations center. Three million dollars of severance as it
relates to some Florida and some non-Florida people. And there's about four
million dollars of costs associated with the reduction of our ATM network.
That's the 33 million dollar break-out.
Regarding non-performing assets, we really don't want to look out
behind the fourth quarter, but we do think that they are in all probability
going to increase further in the fourth quarter and we were up very sharply 27
percent. We don't think that they're going to increase on that kind of
magnitude. I think probably ten percent would be a more reasonable estimate, but
we don't think we've seen the top in that increase.
And I'm embarrassed. I forgot your--
TOM: Repurchase.
MIKE: Oh, repurchase. I don't think we're ready to really talk right
now or we're not ready to talk right now about the pace or the type of
repurchase activity we might enter into and I think a good example is just the
recent market that we've seen in the last 30 days. I think the
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type of repurchase activity will have to be related closely to the kind of
market conditions that we're in. You might have a different strategy if you had
a very strong market than you would if you had a choppy market in which the
market's very nervous. So we're really not prepared to say anything further
about repurchase activity at this time.
ED: Okay. Thanks. And if I could just follow-up. In terms of the
deposit growth, was that fairly even throughout the franchise? Was it weighted
more towards the Midwest than in Florida or more in Florida than in the Midwest
or how should we view that?
MIKE: Sure. Hold on just a second. Let me just get you a -- deposit
growth during the quarter was actually stronger in the Midwest than it was in
Florida. So Florida grew at -- core deposits grew at an annualized rate in the
quarter of seven percent and 13 percent outside of Florida, the rest of the
franchise outside Florida. And it was pretty balanced, I think, through the rest
of the franchise.
ED: Okay. Great. Thanks.
AMANDA: Your next question comes Brock Vandervliet with Lehman
Brothers.
BROCK: Good afternoon. First, I just wanted to confirm the net
charge-off guidance, and secondly, if you could just talk about and characterize
the commercial real
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estate growth linked quarter or sequentially. I just wanted to get a better
flavor of that.
MIKE: Well, the guidance we gave on the non-performing assets were that
we thought there probably would be--
JAY: Charge-offs.
MIKE: -- I'm sorry, charge-offs. Excuse me. Charge-offs we said in the
fourth quarter we think we expect them to be in the 80 to 90 basis point range.
In terms of the commercial loan growth, I really -- I think it was -- commercial
real estate was your question?
BROCK: Yes. And particularly the growth just sequentially. It looked
like accelerated pretty powerfully.
MIKE: It did and there really were no policy changes. We have not
changed our direction in that market at all. We continue to be loaning to just
developers in our foot print. Most of the increase was related to draw downs on
existing facilities as opposed to new facilities. I think the growth was
reasonably broad based across the franchise.
BROCK: Okay. And just a follow-up, if I may, on the mortgage banking
line, does that decline sequentially reflect and just to decline volume or is
that-- is there also a write-down in the mortgage servicing asset included in
there.
MIKE: There was a small write-down, couple of million
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dollars in the servicing portfolio, but we also had some floors that had
appreciated in price that offset that. Most of the decline really was split had
two components to it. We were down about four million dollars in mortgage
banking revenues, couple of million dollars of that was just reduced volume,
delivery to the agencies declined from 771 million to 609 million. And secondly,
you may recall we had small portfolio sale which we recognized a gain of about
two million dollars in the second quarter.
BROCK: Excellent. Thank you.
AMANDA: Your next question comes from Keith Horowitz with Salomon Smith
Barney.
KEITH: Good afternoon. I just wanted to have two points of
clarification. First was on the net charge-off guidance, 80 to 90 basis points,
in the fourth quarter. I think that's reported. I was wondering how -- what that
is, how it breaks down between core and I guess non-core? So you had six one
basis points in core for 3Q. I was wondering what your budgeting for fourth
quarter and also in the increase in new NPAs in third quarter. Were there any
write-downs in NPAs that were reflected in third quarter net charge-offs.
Thanks?
MiKE: In terms of the guidance for the fourth quarter, I don't think we
would go into any break-out of the 80 to 90
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basis points. That would be total charge-offs including any charge-offs against
the reserves that had been established in the second quarter. So that's total
charge-offs, not just what we were reporting on an operating basis.
In terms of the -- there were no write-downs of non-performing assets
in the charge-offs in the third quarter.
KEITH: And just let me follow-up. We're splitting up the core, really
to kind of look at what the core franchise is doing, excluding what you've done
to kind of move aside some of the troubled assets, so in general if you don't
have an exact number, just kind of directionally, are you looking to be flat,
with the 61 basis points, up slightly? Just how you're looking at in general.
MIKE: I think that you're probably going to see some increases. You're
probably going to see some mix change between the third and the fourth quarter
with a little more reported -- remember we had commercial real estate
charge-offs of zero in that third quarter. So those can go no place but flat to
up.
JAY: Next question.
AMANDA: Again, I would like to remind everyone in order to ask a
question, please press the number one on your telephone keypad. Your next
question comes from Ed Najarian with Merrill Lynch.
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ED: Yeah. If I could just follow-up, thanks. With respect to the
margin, I know you indicated that you expect the margin over the next several
quarters to stay north of four. Any more specific near term guidance? Would you
expect some more expansion in the fourth quarter and then could you maybe
provide a little bit of insight on the impact of the most recent interest rate
cuts or any potential future interest rate cuts on how that might impact the
margin subsequent to the fourth quarter? Thanks.
MIKE: Ed, I think the margin -- we'd expect the margin to be flat to
maybe just up a couple of basis points, no significant changes in the fourth
quarter. The -- I think there's two or three factors going on with the recent
change in rates we have represented. We feel we are slightly, very slightly
liability sensitive, and therefore, margin should benefit slightly from rate
reductions. When we have a rate reduction of the magnitude that we had occurring
almost overnight, you tend to get a little margin compression in the short term
and I think we're -- I guess, have a lot of other banks that are probably
experiencing a little bit of that, one factor.
Second factor, somewhat related, we now have got interest rates down to
two and a half percent on Fed funds with the possibility that maybe they'd go
lower. We're
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really testing the lows on exactly what kind of -- how much more we can drop the
rate on our retail deposit. So I think we're going to run into, in the next two
or three quarters in all probability, a little bit of compression just because
the absolute level of rates is so low. So I don't expect the margin to expand
significantly from here. I think if we can maintain it north of four percent,
we'll be doing just fine.
A lot of the margin increase over the last year in our case has been
caused by the what we refer to as a richer mix of earning assets. We've dropped
the investment portfolio and the relatively low margin residential mortgage
portfolio from down to about 16 percent of assets. I think it was 23 percent or
something like that a year ago. So that's provided a reasonable amount of the
margin pop. We probably are near the end of that trend. I do not expect that we
would drop investment portfolios dramatically from these levels.
ED: Okay. Great. Thanks. And just wanted to welcome Jay on board. It'll
be good to work with you again, Jay.
JAY: Thanks, Ed.
AMANDA: Your next question comes from Michael Granger with JP Morgan.
MICHAEL: Hi. That goes for me, too, Jay.
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JAY: Thanks, Mike. I appreciate that.
MICHAEL: Tom, I wondered if you could maybe just give us kind of a view
from where you're sitting on what the economic outlook is, what customers are
saying and so forth in, you know, the wake of the events of September 11th in
terms of, you know, demand side, economic activity, economic outlook and so
forth - that your lenders have been talking to the customers and, you know, just
what kind of feedback are you getting in the Midwest.
TOM: Michael, I think that it's safe to say that all of our customers
large or small and regardless of what sector are uncertain about what the impact
of the last months activities will be. There's a great deal of nervousness and
that doesn't suggest tremendous pessimism, but there's great anxiety and great
nervousness and that, as I said, spreads across all sectors and most businesses
just don't know yet. There's not question that the automotive industries have
been impacted or automotive related industries have been impacted a lot. That's
certainly reflected in Ohio and Michigan economies, for example. And our demand,
our loan demand, particularly in the indirect, the dealer sales area, has been
hurt a bit because of the zero percent financing programs of the captives in
order to stimulate continued levels of demand and so we're down a bit
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in that regard, but more germane, I think, is just some recognition that
anything related to automotive has got a big question mark around it, at least
in this part of the world.
We do expect to have significant impacts on mortgage refinancing just
because of the very low levels of rates so we would think that this would also
be a relatively good thing for new financing, but it certainly will be for
refinancing, so expect a lot of activity on our mortgage side in that regard.
MIKE: Thank you.
MIKE: Mike, in that regard in the fourth -- I'm sorry, in the third
quarter, 42 percent of our mortgage volume, mortgage loan volume was refinancing
versus 16 percent in the third quarter. It'll be interesting to see what happens
to that in the fourth quarter. I think we'll be surprised if we don't see a real
re-financing boom.
TOM: I don't think, Michael, that there's any doubt that our business
customers are hesitant to make that next investment. And they're reluctant as
I'm sure others are throughout the country to move forward with capital
expenditures. We certainly see that reflected. Our loan officers are seeing that
reflected across many industry segments.
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MICHAEL: Okay. Thank you.
AMANDA: At this time, there are no further questions.
TOM: Okay. Well, thank you very much, again, for joining us. We feel on
balance very good about the quarter and recognize the challenges we have ahead
of us, but we're continuing to execute our game plan we've discussed previously.
And we'll sure keep you apprized. Thanks for joining us.