Exhibit 99.2
HUNTINGTON BANCSHARES
2ND QUARTER EARNINGS
LEADER, JAY GOULD
ID# 4798848
07/18/02
DATE OF TRANSCRIPTION: JULY 21, 2002
HUNTINGTON BANCSHARES
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Operator: Good afternoon. My name is Cory, and I will be your
conference facilitator. At this time I would like to
welcome everyone to the Huntington second quarter
earnings conference call. All lines have been placed
on mute to prevent any background noise. After the
speaker's remarks there will be a question and answer
period. If you would like to ask a question during
this time, simply press star, then the number one on
your telephone keypad. If you would like to withdraw
your question, press star, then the number two on
your telephone keypad. Thank you, ladies and
gentlemen. I would now like to turn the conference
over to Mr. Jay Gould, Senior Vice President of
Investor Relations. Mr. Gould, you may begin your
conference.
Jay Gould: Thank you, Cory, and welcome to today's conference
call, everybody. I'm Jay Gould, Director of Investor
Relations. Before formal remarks, the usual
housekeeping items. Copies of the slides we will be
reviewing can be found on our website,
huntington-ir.com. This call is being recorded and
will be available as a rebroadcast starting later
this evening through the end of this month. Please
call the investor relations department at
614-480-5676 for more information on how to access
these recordings or playbacks or should you have
difficulty getting a copy of the slides.
Today's discussion, including the Q&A 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 32 and material filed with the SEC including
our most recent 10-K, 10-Q, and 8-K filings. Let's
begin.
Participating in today's call will be Tom Hoaglin,
Chairman, President, and CEO; and Mike McMennamin,
Vice Chairman and Chief Financial Officer.
Turning to slide three, this defines the basis for
today's discussion, which has changed from last
quarter. With last quarter's major restructuring
initiative, reported results have included a number
of
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nonrecurring items. Therefore, for analytical
purposes, when previously discussing underlying
trends with analysts and investors, we referred to
operating results, which excluded the impact of these
items.
However, with the 2002 first quarter sale of our
Florida retail and commercial banking business, and
given their material impact on many historical
numbers, beginning this quarter we are redefining
operating results to now also exclude the run rate
impact of those sold operations from prior period's
results. Doing this makes underlying performance
trends more clear. So whenever we refer to operating
results today, it now represents reported results
adjusted to exclude the impact of restructuring and
other charges and on-time items plus the run rate
impact of the sold Florida operations.
Please note that we have provided an appendix B to
the slides today which repeats selected tables and
charts from the first quarter conference call for
those wishing to see the impact of this definitional
change in operating results from last quarter to
this. If you do this comparison, you should know that
this quarter, as we were finalizing the historical
restatement to exclude the Florida run rate impact,
the methodology of calculating the impact on net
interest income was refined. As such, there are very
slight changes to the net interest income, margin,
net income, and charge off numbers presented in last
quarter's data, which excluded Florida. There was no
EPS impact.
We continue to report numbers on a "reported" or GAAP
basis, which makes no such adjustments. These you
will find in great detail within our earnings press
release and quarterly financial review materials
available on our website, huntington.com.
Today's presentation will take about 35 minutes. We
want to get started. Tom, let's turn it over to you.
Tom Hoaglin: Thank you, Jay. Welcome, everyone. Thanks for joining
us today.
Before getting into a review of the quarter, there
are two recent developments I'd like to cover, as
some of you may have questions
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later about this. First, on July the second we sold
our Orlando, Florida based property and casualty
insurance company, J. Rolfe Davis, back to its
management team. This sale was consistent with our
earlier decision to sell our core banking operations.
There will be no material gain or loss impact on
third quarter results as a result of the sale. There
will also not be a material net income impact going
forward on earnings. We remain committed to growing
the insurance business within our geographic
footprint.
The second item was this morning's announcement
regarding the restructuring of our ownership interest
in Huntington Merchant Services, our merchant
processing business. This also is consistent with our
Florida sales strategy. In essence, we sold our
Florida merchant processing operations to First Data
and restructured the overall relationship. Huntington
lowered its equity position in the business and
extended our relationship with First Data for ten
years. This will result in a third quarter gain of
about $25 million pre-tax, 16 million after tax or
$.06 per share.
This also assured that our merchant clients and the
merchant services business we have targeted for
growth within our footprint will continue to receive
the highest level of service and attention. Going
forward there will not be a material run rate impact
on earnings as a result of this transaction.
Now let's turn to slide five and begin the second
quarter review.
As we have done before, I will begin with a quick
review of second quarter accomplishments from my
perspective. Mike and Jay will follow with more
detailed comments.
We are very pleased with second quarter results for a
number of reasons. Second quarter earnings were a
solid $.33 per share and, again, met Street
expectations. Managed loans increased at a 7%
annualized rate, up from 5% growth in the first
quarter. We are very pleased with this loan growth
given the state of loan demand in today's market.
Residential real estate and home equity loan growth
were particularly strong. Not surprisingly,
commercial and auto loans and leases continue to
decline. Mike will give details later.
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The 19% annualized growth in deposits was a
real positive. We are continuing to make
good progress and growing deposits through
our sales initiatives and deposit programs,
but our growth, like other banks, is also
being positively influenced by the current
turbulent financial markets. We are very
pleased that core deposits are up 13% over
the last year.
Total credit quality trends improved during
the quarter driven by a significant
improvement in consumer net charge offs,
partially offset by higher commercial charge
offs. We maintained the loan loss reserve at
2% for the quarter. We have built this loan
loss reserve from about 1.5% over a year
ago, reflecting the weakness in the economic
environment and the deterioration in the
credit quality of our loan portfolios.
The level of a loss reserve is a reflection
of the quality of the loan portfolios at a
point in time, the level of nonperforming
assets, and the expectation regarding the
economic outlook and its impact on future
credit quality trends. We are very
comfortable with the adequacy of the
reserve.
Turning to slide six, there were also
several other meaningful accomplishments.
First, we strengthened the management team
with the addition of Mary Navarro to head
retail banking. Mary is an absolutely
terrific banker and has a wealth of
knowledge and experience in retail and small
business banking, especially within
Huntington's Midwest markets. She is a great
and enthusiastic leader and a wonderful
addition to the team.
One product our business customers are
seeking, and Huntington did not have, was a
fully functional and user-friendly 401-K
capability. That's why we're very pleased to
have launched a new state of the art 401-K
platform and system. We believe so much in
this program, this quarter we converted
Huntington's employee 401-K to it. The
conversion was very smooth and was completed
well ahead of schedule. More important,
customer reception has been terrific. We've
already signed up 28 new accounts.
Another major accomplishment during the
quarter was the
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completed installation of our Customer
Service System, or CSS. As we told you last
quarter, CSS is branch infrastructure, state
of the art, Windows and Internet based
platform upon which we can enhance and
upgrade many of our systems. It already
provides our personal bankers faster access
to customer information, on-line access to
images of checks and deposits, provides
customers with hands on demonstration of
huntington.com, and speeds customer problem
resolution by providing quick access to
corporate information policies and
procedures.
We've also installed a new and enhanced
on-line teller system in 13% of our branches
and plan to have it in all the branches by
year end. This will replace a 20 year old
terminal system we've used in 70% of our
offices with the remaining 30% using manual
calculators. This new teller system
automates many manual functions and provides
more information about the total customer
relationship. It's already helping to reduce
fraud losses by validating the MICR encoding
on checks, which identifies counterfeits. It
will help reduce operating losses through
automated teller balancing and notification
of cash exception conditions.
Lastly, we repurchased 7.3 million shares of
our stock to bring our program to date
repurchases to 8.8 million shares.
With those introductory remarks, let me turn
the presentation over to Mike to provide the
details. Mike.
Mike McMennamin: Thanks, Tom. Slide eight provides a quick
overview of our performance highlights. And,
as Jay mentioned, all of the following
slides are on the new operating basis, which
for all prior periods excludes restructuring
and other items and the run rate of the sold
Florida banking operations.
I'll cover these issues in detail in later
slides, but the highlights compared with
first quarter results include net income of
$81.7 million, $.33 a share, both up 3%; as
Tom mentioned, the annualized growth rate in
managed loans and core deposits of 7 and 19
percent respectively; a 4.30% net interest
margin, up 9 basis points; 53.2% efficiency
ratio, down from 54.1%; 88 basis points
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of net charge offs excluding exited
portfolios, down 9 basis points. We
maintained the 2.00% loan loss reserve
ratio. And our tangible common equity ratio
was 8.41%.
Turning to slide 9, this slide reconciles
reported versus operating earnings with only
one small adjustment, the sale of the J.
Rolfe Davis Insurance Agency that Tom
mentioned. As noted, it had only a small
impact on net income and no impact on
earnings per share. However, the sale does
impact non-interest income and expense
comparisons, primarily in a brokerage and
insurance fee income line and the personnel
cost line item.
Slide 10 shows performance highlights for
the second quarter compared with the first
quarter and the year-ago quarter. I'll
comment in detail on most of these later, so
just a couple of observations. First, return
on assets and return on equity, while still
below acceptable levels, continue to move
upward. The improved return on equity versus
a year ago is in spite of a lower leveraged
capital structure. Second, the reduction in
our tangible common equity to asset ratio
was expected and is related to our share
repurchase activity.
Slide 11 compares the operating results for
the second, first, and year-ago quarters.
The increase in net income from the first
quarter was driven by a 2% increase in
revenue or up 5%, excluding mortgage banking
income. Net interest income increased $8.8
million, partially offset by $3.3 million in
higher provision expense and $1.1 million of
higher non-interest expense. The increase in
net interest income resulted from a 9 basis
point expansion in the net interest margin
to 4.30% and a 1% increase in average
earning assets.
Compared to the year-ago quarter the 8%
increase in net income was driven by a 6%
increase in revenue or 8% excluding mortgage
banking income. The major offset to the
revenue growth was an increase in provision
expense. Non-interest expense was down 1% or
flat if you adjust for the elimination of
the intangible amortization.
I think the important take away for
investors is the strong 5 plus
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percent spread between revenue growth and
expense growth over the last year. We feel
this is a very solid performance, especially
given the state of the economy and the
instability in the financial markets. We are
particularly pleased with the revenue growth
and the spread between revenue and expense
growth we are achieving in a very difficult
market environment.
Turning to slide 12, the left hand graph
shows the quarterly earnings per share
pattern, which after three flat quarters
moved up slightly. Not quite the type of
increases we'd like to see, but some
progress given the continued high credit
costs. The right hand graph shows the trends
in pre-tax income before provision expense
and excluding security gains. This graph
measures earnings progress before credit
costs, which is perhaps the best metric to
see the underlying progress we're making
outside of the credit area. Pre-tax income
on this basis was $166 million for the
quarter, 4% higher than the first quarter
and 15% higher than a year ago. We're
continuing to build a solid foundation for
future earnings growth.
Slide 13 shows the steady progress we've
made in improving the net interest margin in
the last five quarters. As we've noted in
previous conference calls, this margin
expansion has occurred at the same time
we've been reducing our interest rate
exposure. We continue to be slightly
liability sensitive, and there's further
detail on our interest rate risk position on
slide 35 in appendix A.
The graph on the right hand side shows our
earning asset mix of loans, securities, and
other earning assets. Other earning assets
are primarily mortgaged loans held for
resale, which declined slightly during the
quarter.
Average managed loan growth is highlighted
on slide 14. As a reminder, managed loans
include about $1.2 billion of securitized
auto loans. For those of you familiar with
this table from prior conference calls, note
that beginning this quarter we've
reclassified all of our home equity lines
and home equity loans into one category,
home equity. Previously home equity lines
were shown as a separate category, and home
equity loans were in the installment
category, now labeled other consumer. All
prior period data, including net charge off
data, have also been changed to
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reflect this recategorization.
In the second quarter average managed loans
increased at an annualized 7% rate from the
first quarter. We're very pleased with this
given the continued environment, difficult
environment in which to grow loans. As we
mentioned in earlier conference calls, we
began to emphasize residential mortgage
loans, primarily the 3/1 and 5/1 ARM
products when the declining interest rates
last fall created very strong mortgage
refinancing activity. That focus continued
in the second quarter with average
residential mortgage balances increasing
$325 million.
Home equity loan and line growth accelerated
significantly to a 17% annualized rate in
the quarter versus 5% in the first quarter.
Line of credit volumes continue to be
positively impacted by the attractiveness of
lower rates, as well as our increased
emphasis on cross selling home equity lines
to our first mortgage customers... while
fixed rate loans continue to be prepaid as a
result of the relatively high rates on these
loans in relationship to current market
rates.
Commercial real estate loans increased at a
6% annualized rate in the second quarter,
declining from the double digit growth rates
of the last three quarters with most of the
activity in construction loans as in
previous quarters. The composition in this
portfolio has changed somewhat over the last
year. Consistent with our market strategy to
emphasize construction lending versus
permanent financing, construction loans have
increased from 30% of the portfolio to 36%
in the last 12 months. Construction loans
provide higher margins, higher fees, and
greater portfolio liquidity.
Owner-occupied loans now constitute 35% of
the portfolio, up from 33% a year ago. These
loans are really C&I loans supported by
operating company cash flows that are
additionally secured by real estate.
Commercial loans declined slightly during
the quarter to 3% rate versus 6% rate of
decline in the first quarter as corporations
continue to be very cautious in their
inventory management, capital spending, and
acquisition programs. Commercial loan demand
has been soft over the last year, reflecting
the weakness and the uncertainty in the
economic
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environment. Our commercial loans are down
6% from the year-ago quarter.
During this time period we have refined our
commercial relationship strategy to
reemphasize client relationships where we
are or have the opportunity to be the
primary bank and provide other more
profitable non-credit services, such as
treasury management, trust and investment
services, and depository product sales. In
many cases it's difficult to develop these
cross selling opportunities with shared
national credit.
Reflecting that, total loans to shared
national credit declined by about $500
million or 30% from $1.5 billion last June
to $1.0 billion dollars today, which
accounts for the entire decline in our
commercial loan portfolio from a year ago.
Auto loans and leases declined at a 3%
annualized rate during the quarter, as
expected seasonal strength did not occur.
Loan and lease originations did increase
from $700 million in the first quarter to
$790 million in the current... or second
quarter, but were down 17% from about $950
million of originations in the year-ago
quarter. New car originations as a percent
of total loan and lease originations
increased from about 60% to 70% during the
quarter.
The reintroduction of zero percent financing
being offered by the captives is not
expected to have a significant adverse
impact on loan volumes as cash-back
incentives are also being offered in lieu of
the zero percent financing. And in the
higher credit quality, lower rate deals, the
cash back alternative is better for the
customer. Dealers also prefer the cash back
alternative because conventional bank
financing puts more money in their pockets
than does the zero percent financing
package.
Slide 15 shows that we had a 19% annualized
growth rate in core deposit during the
quarter, and that capped a series of strong,
consecutive, quarterly, annualized growth
rates. The annualized growth rate was 6% in
the first quarter, 10% and 14% respectively
in the fourth quarter and third quarters of
last year. Compared with the year-ago
quarter, core deposits are up 13%. Much of
the strong growth is focused in money market
accounts, both retail and small
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business. Personal demand deposits also
performed strongly, up 12% from the year-ago
quarter. The strong deposit growth is a
function both of the increased focus and
success of our sales management efforts in
the branches and also the turbulence we are
experiencing in the financial markets.
This quarter on page three of our quarterly
financial review, we've added a new table
detailing total deposits by business
segment, including our six banking regions.
Total regional banking deposits at June 30th
were up 13% from a year ago. Importantly,
all six of our banking regions posted low to
mid teen percentage increases.
Slide 16 is new and shows the change in the
average total deposits per branch versus a
year ago. As just mentioned, total deposits
were up 13% from a year ago. As you know,
one of our strategic initiatives was to
consolidate the number of non-Florida
branches. The deposit increase, in addition
to a 10% reduction in the number of
branches, has resulted in a 26% increase in
the average deposits per branch in the last
year. We are considerably more efficient in
the deposit gathering function than we were
a year ago.
Let me now turn the presentation back to Jay
who is going to review non-interest income
and non-interest expenses.
Jay Gould: Thank you, Mike. Turning to slide 17, this
looks at the trends in non-interest income,
excluding security gains compared with the
first quarter and year-ago quarter. Compared
with the first quarter, non-interest income
decreased $700,000, not quite 1%. However,
the very strong mortgage banking income in
the first quarter significantly impacts this
comparison. Excluding mortgage banking
income, non-interest income was up 9% from
the first quarter and 11% from the year ago
quarter.
Mortgage banking income was $107 million in
the quarter, down $8.9 million or 45% from
the first quarter and 39% below the year ago
levels. You will recall that first quarter
mortgage banking income was especially
strong as we sold the high level of fourth
quarter origination volume on a lagged basis
into the secondary market. As such,
deliveries to the secondary market in the
second quarter were down 64%, primarily
reflecting a decline from the
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first quarter's very high level, but also
reflecting a decision to retain more of our
mortgage originations on our own balance
sheet. Closed loan volume was down 10% from
first quarter levels with refinance activity
representing 39% of the volume compared with
60% in the first quarter.
Deposit services charges were up $1.1
million or 3% from the first quarter. The
primary driver of this increase was higher
personal service charges, especially NSF and
overdraft fees. Compared to a year ago,
deposit service charges increased 8%, driven
by higher corporate maintenance fees as
corporate treasurers pay hard-dollar fees
for deposit services rather than maintain
higher demand deposit balances in a low
interest rate environment.
Brokerage and insurance income increased 3%
from the first year quarter reflecting very
strong retail investment sales, the benefit
of which was partially offset by lower
investment banking and insurance fees.
Mutual fund sales volume was $55 million in
the second quarter, up 28% from the first
quarter with annuity sales at $153 million,
up 18%, a new record, and which beat the
earlier record of $129 million last quarter.
Compared with the year-ago quarter,
brokerage and insurance income was up 14%.
Trust income increased $1.2 million or 8%
from the first quarter, mostly reflecting
the first quarter acquisition of Haberer.
You may recall, this is an investment
manager in Cincinnati with $500 million in
assets under management. Corporate trust
income increased 26%, largely due to
seasonality of annual renewal fees and
institutional sales activities. Partially
offsetting these increases was the impact of
declining asset values. Compared with a year
ago, trust income was up 13%, basically
reflecting these same factors.
Other service chargers were up $1.4 million
or 15% from the first quarter, reflecting
increased ATM and debit card fees. Compared
with the second quarter of last year, other
service charges were up 12%. Other income in
the current quarter was up $4.4 million.
This reflected higher securitization income
and a small gain on the sale of an OREO
property, partially offset by lower sales of
customer derivative products.
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Slide 18 details the change in non-interest
expense and shows that non-interest expense
was up $1.1 million from the first quarter.
Personnel costs, which account for 54% of
total non-interest expense, were down
$700,000 reflecting lower benefit expense as
well as lower staff. Full time equivalent
staff at June 30 was down 168 or 2% from
March 31 reflecting planned staff
reductions. The impact of these declines is
partially offset by higher mutual fund and
annuity sales commissions. Compared with the
year-ago quarter, personnel costs were flat.
Occupancy and equipment expense was up
$900,000 reflecting mostly higher
depreciation associated with technology
investments, including the new intranet
banking platform launched last quarter, the
implementation of our customer service
system, and mainframe infrastructure
improvement. Compared with a year ago,
occupancy and equipment expense was flat.
Other expenses up $1.5 million or 5%,
primarily reflecting a $1 million increase
in professional services are related to
higher collection and legal expenses in our
consumer lending area. Compared with the
year-ago quarter, other expense was down 5%.
Slide 19 shows the trend in our efficiency
ratio, which is continuing to move down from
the peak in the first quarter of last year
and was 53.2% in the second quarter. For
those comments, let me turn the presentation
back to Mike to review credit and capital.
Mike McMennamin: Thanks, Jay. Slide 21 provides an overview
of our credit quality trends. First, we saw
a modest decline in nonperforming assets,
which resulted in a slight improvement in
our nonperforming asset ratio to 1.14% of
loans in OREO, roughly unchanged in the last
three quarters. Net charge offs, excluding
losses on the exited portfolios, declined
from 97 basis points to 88 basis points
during the quarter with a substantial
decline in auto loan and lease charge offs
but an increase in our commercial charge
offs. Ninety day plus delinquencies improved
slightly during the quarter and were
basically unchanged from a year ago. I'll
comment on 30 day consumer delinquency
trends in just a minute.
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The allowance for loan losses was unchanged
at 2.00% and up from 1.76% at the end of the
year ago quarter. With the maintenance of
the reserve percentage and the modest
decline in nonperforming assets, our
nonperforming asset coverage ratio improved
slightly to 176% during the quarter.
Slide 22 shows the recent trends in
nonperforming assets. Our nonperforming
assets were down slightly for the quarter.
The longer-term trend has flattened out over
the last three quarters. The Midwest, with
its concentration in service and
manufacturing sectors continues to be
adversely impacted by the uncertain economic
environment.
Let me provide some additional nonperforming
asset detail on slide 23. This slide was
introduced last quarter and shows the recent
quarterly nonperforming asset activity. As
you can see, the inflow of new nonperforming
assets slowed slightly to $73 million in the
second quarter and has declined
significantly from the $95 million of new
nonperforming assets added in each of the
middle quarters of 2001. The stabilization
and slight decline in nonperforming assets
over the last two quarters is encouraging,
although it's certainly too early to say
there's any clear-cut trend developing.
However, we do expect to see lower
nonperforming assets by year end and into
next year, assuming the economy continues to
improve moderately.
Slide 24 segments the nonperforming assets
by industry sector. The bar chart on the
right shows which sectors have contributed
to the $120 million increase in
nonperforming assets over the last 18 months
with the services and manufacturing sectors
accounting for most of the change.
Nonperforming assets continue to be
concentrated in these two sectors at 30%
each. While loans for the manufacturing
industry represent only 15% of our total
commercial loans, they represent 30% of
nonperforming assets.
Similarly, the service sector represents 25%
of total commercial loans but 30% of
nonperformers. Fourteen percent of the
nonperformers are from the finance,
insurance, and real estate sector, and six
percent are in construction. After that, the
sector
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contribution falls off very rapidly.
Slide 25 shows net charge offs adjusted to
exclude charge offs from the exited
portfolios. You'll recall from earlier
conference calls, the reserves were
established in the year-ago quarter for two
loan portfolios we were exiting - truck and
equipment, and sub prime auto loans.
Adjusted net charge offs declined from 97 to
88 basis points during the quarter, and this
improvement was more than we had anticipated
three months ago. Commercial net charge offs
increased from 115 to 153 basis points
during the quarter with the manufacturing
and service sectors continuing to produce
the majority of our charge off activity.
Capital intensive manufacturers continue to
be leveraged from an operating perspective
and are experiencing slow or negative
revenue growth. Service related companies in
the computer, entertainment, and health care
businesses represented 54% of our second
quarter losses.
Commercial real estate charge offs declined
from 42 basis points to 22 basis points
reflecting a decline from the high first
quarter charge off rates, which was caused
by one credit. Total consumer net charge
offs dropped from 107 basis points to 75
basis points in the first quarter. This was
driven by a decline in auto loans and leases
where net charge offs declined very sharply
from 1.56% to 1.01%, following the
significant decline in delinquencies that we
experienced in the first quarter. The
increase in residential charge offs during
the quarter to 18 basis points was caused by
the charge off of one loan.
Slide 26 shows the vintage performance of
our indirect auto loan and lease portfolios.
Performance issues of these two portfolios
are very similar. As we've stated before,
loans and leases originated between the
fourth quarter of 1999 and the third quarter
of 2000, which are the top lines on both
graphs, have performed poorly. About 20% of
that volume of originations was underwritten
with FICO scores below 640, which is
typically considered D quality paper.
In contrast, over the last 12 months, less
than 3% of new
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originations were below this threshold. And
in the first half of 2000, about 1% of total
loans and leases underwritten had FICO
scores below 640. Reflecting this change and
other underwriting changes, the average FICO
scores increased significantly over the last
two years.
We mentioned last quarter that as a rule of
thumb about two-thirds of the expected
losses on auto loans and leases tend to
occur within 24 months of origination. Loans
and leases originated during the late 1999 -
2000 vintage are now 21 to 30 months old and
are at or past their peak of their charge
off cycles. You'll also note that this
quarter we've segmented a new 2002 vintage.
The disproportionate decline in the 2001
vintage, percentage of the total loan
portfolio from 61 to 43 percent for loans on
the left hand chart, as during the quarter,
reflects the sale of the Florida auto loans
to SunTrust in the first quarter.
The good news is that the impact of the high
charge off vintages is rapidly diminishing.
Originations during that time period
represent 20% and 27% of the current loan
and lease portfolios respectively. As such,
these vintages should help to reduce future
charge off rates in auto loans and leases.
Slide 27 provides another look at consumer
delinquency trends on both a 30 plus day
basis and a 90 day basis. The 30 day
delinquency rate is an important early
indicator of future charge off rates as our
well established role rate trends from the
30 day delinquency category into the more
severely delinquent buckets and eventually
charge offs.
The sharp decline in 30 plus day
delinquencies in the first quarter has been
maintained and actually further improved by
10 basis points during the quarter. However,
giving consideration to seasonal patterns,
we do expect delinquencies and ultimately
charge offs to increase slightly in this
portfolio over the next two quarters.
Slide 28 recaps the trend in our loan loss
reserve, which was maintained at 2.00%
during the quarter. Provision expense
exceeded charge offs by $9 million, thus
providing for loan growth
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for the quarter.
As Tom mentioned, we continue to be very
comfortable with the adequacy of our
reserves, particularly in light of the
following factors: the improvement in
consumer delinquency trends experienced in
the first half and reduced charge offs in
the second quarter; the decline in new
additions to nonperforming assets over the
last two quarters; the composition of recent
loan growth which is heavily weighted
towards low risk residential mortgages; and,
also, tentative evidence that the economy is
improving, albeit at a slow rate.
Let me close my segment with some brief
comments regarding capital. Slide 30 shows
capital trends with first quarter ratios
significantly bolstered by the excess
capital resulting from the February sale of
Florida banking operations. As expected,
share repurchase activity reduced these
capital ratios during the quarter, although
they remain very strong. Assuming continued
share repurchase activity at recent levels,
the tangible common equity to asset ratio at
year end would be in the 7 1/2 to 8 percent
range.
Slide 31 shows the Board approved a 22
million share repurchase program in
February. We initiated activity in the open
market in late February and purchased 1.5
million shares in the first quarter and
another 7.3 million in the second quarter,
bringing the program to date repurchases to
a total of 8.8 million shares. The value of
shares repurchased was $175 million.
As previously stated, our goal is to utilize
our excess capital to repurchase a total of
$300 to $400 million of stock in 2002. We
continue to be disciplined buyers and will
monitor our stock price and earning
valuation versus that of other peer banks as
we make our repurchase decisions.
Let me turn the call back over to Tom for
some closing comments.
Tom Hoaglin: Thanks, Mike. In closing, the second quarter
was a good quarter for Huntington. Our
results continued to improve. Revenue is
increasing. We continue to get more out of
our expense dollars. Loans are growing
nicely in a difficult environment. The sale
of
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deposits, annuity products, and mutual funds
all reflect strong growth. The credit
quality is improving. Our investments in
better technology for our people are
beginning to show results.
In addition, I just finished a series of
meetings with Huntington associates in all
our markets over the last 30 days. I can
report to you that Huntington associates are
excited about what we're beginning to
accomplish together. They're taking great
pride in being part of a Huntington team.
With every new success they're more
motivated and confident. We still have much
to do, but we are making good progress. At
this juncture and against the backdrop of
first half performance, we remain
comfortable with the $1.32 to $1.36 per
share guidance we gave you in January.
This completes our prepared remarks. Mike,
Jay, and I will be happy to take your
questions. Let me turn the meeting back over
to the operator who will provide
instructions on conducting the question and
answer period. Operator.
Operator: Thank you, sir. At this time I would like to
remind everyone, if you would like to ask a
question, please press star, then the number
one on your telephone keypad. We'll pause
for just a moment to compile the Q&A roster.
Your first question comes from Mr. John
Balkind with Fox Pitt.
John Balkind: Hi, guys.
Male Speaker: Hi, John.
Male Speaker: Hi, John.
John Balkind: Just a quick housekeeping question. Could
you talk a little bit about the variance in
the securitization income in the quarter,
and what was the actual OREO gain?
Mike McMennamin: In the first quarter we actually -- we had a
normal level of securitization level in the
second quarter.
John Balkind: Okay.
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Mike McMennamin: The increase was because in the first
quarter we actually had an impairment of $2
million in our interest only strip that we
wrote down. So this is just bringing it back
to a normal level. We had a little bit over
a one million dollar gain on the sale of an
OREO property down in Florida that's been
with us for some time. So those two
transactions, John, accounted for a little
bit over $3 million.
John Balkind: Sounds good. Appreciate it, Mike.
Operator: Your next question comes from Mr. Ed
Najarian with Merrill Lynch.
Ed Najarian: Good afternoon, guys, and congratulations on
a good quarter. Just a quick question on the
credit losses and basically the break out of
the credit losses. Great job, obviously,
reducing the indirect auto losses. Can you
give a little more color on what's driving
up the commercial losses? I know you
outlined, you know, a bit of color there,
but any more insight you can give on what's
driving up the commercial losses and if you
have any insight on when that might peak in
future quarters.
Mike McMennamin: Ed, as we mentioned, I think 72% of the
losses in the second quarter were pretty
much the same suspects, manufacturing and
service industry. I know that we are seeing
an adverse impact in the manufacturing
industries and the service industry in the
Midwest, both from the slow down in the auto
business and also the problems in the steel
industry in Northern Ohio. About 50% of the
losses we incurred in the quarter were from
shared national credit.
In terms of when do we expect this to turn
around, I wish I had a crystal ball. I think
as we get towards the back end of the credit
cycle, which we do feel we're not there now,
we're just about there, we're going to try
to push these problem credits through the
pipeline just as quickly as we can. So in a
perverse sense, I'm not sure that the higher
charge offs are not a harbinger of better
things as we go forward. Obviously, what we
need to see in that regard, if we're going
to take that perspective, we do need to see
the
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declines in the nonperforming assets, and we
are cautiously optimistic that we're about
to see some improvement in those numbers.
They've basically been flat for the last
three quarters.
Ed Najarian: So do you think that goes up before it goes
down, or have we reached a peak here, or
don't want to speculate?
Mike McMennamin: Well, I really don't know. I would hope that
we've reached a peak with 1.5% losses in the
commercial portfolio. But we just don't know
right now, Ed.
Ed Najarian: And I think you mentioned something
regarding, you know, 52% of those losses
were from some kind of -- on the technology
side, or could you give a little more
insight on what you said there?
Mike McMennamin: I think we, get my comments, I think we said
that --
Ed Najarian:: Something about technology services.
Mike McMennamin: -- hold on just one sec. Let me get out my
notes. Service -- just companies in the
service industry, they were in -- 54% of our
losses were, in the quarter, were from
companies in the service industry, primarily
in the computer, entertainment, and health
care businesses.
Ed Najarian: Okay. Thanks.
Operator: Your next question comes from Mr. Dave
George from A.G. Edwards.
Dave George: Good afternoon. I was wondering if you could
comment on your outlook for the margin in
the second half of the year. Thanks.
Mike McMennamin: Dave, the margin came in -- it was a great
quarter for us from a margin standpoint, as
I think we mentioned, part of the strength
was just some seasonal loan fees that come
in. I think that the margin probably -- I'd
be very surprised if the margin goes up from
here. I would not be surprised if it went
down a few basis points in the second half
of the year. I think we talked last quarter
when we reported a 421 margin we said there
might be just a little bit of
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upward pressure on the margin in the near
term. We do not expect to see higher margins
going forward.
Dave George: Thanks, Mike. I appreciate it.
Mike McMennamin: Yeah.
Operator: We now have a question from Mr. Fred
Cummings of McDonald Investments.
Fred Cummings: Yes. Good afternoon. Mike, I think you said,
in reviewing your national shared credit
exposure, could you review the decline
that's occurred year over year in the
portfolio and also talk about where you
expect it to be, say, over the next 12
months?
Mike McMennamin: Fred, the shared national credit, and these
are numbers as of June 30th, so unlike the
loan numbers we give, they're not average
numbers during the quarter, but at June 30th
they declined from a little bit less than
$1.5 billion a year ago to just under a $1.0
billion, at June 30th. So they're down about
$460 or $470 million dollars.
We're being a lot more selective as we look
at these credits. If they're credits that
are in our market area that we have
opportunities to provide, either we are or
have opportunities to provide noncredit
services to, we certainly want to be
continuing to loan to those credit worthy
companies. We don't want to just be a
lender, however, and I think that strategy
being a little more assertive on that has
had an impact in terms of the reduction of
those volumes.
Fred Cummings: Second question, Mike. Can you comment on
the composition of the inflows into
non-accrual? Are those primarily national
shared credit at the $74 million number I
believe?
Mike McMennamin: Fred, I don't think they are. Most of the
credits that have been coming in have
continued to be in the manufacturing and the
services and the financial institutions and
real estate area. To my knowledge they're
not -- they're all relatively small credits,
so it's one manufacturing credit that, with
a $12 million credit, the rest of
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them were $5 million or below. So they tend
to be the smaller credits for the most part.
Fred Cummings: Okay. Thank you.
Operator: Your next question comes from Mr. Steven
Gresdo with Second Curve Capital.
Steven Gresdo: Hi, guys. Good afternoon. Great quarter.
Male Speaker: Thank you.
Male Speaker: Thanks, Steven.
Steven Gresdo: Just one thing I was looking at here in the
payment pattern you've had in your NPA line
looks great, and it's been increasing at a
pretty good clip. Is there anything we can
read into that that you guys might be doing
specifically, or have there been certain
credits that you've gotten larger payments
on than you might have bought in the past
and why? Thanks.
Mike McMennamin: Steve, I think the payment line really
correlates, at least on a loose basis, with
the losses that you've taken. If you look at
that slide and, with that, year-ago quarter
we had $19 million payments, and we took
losses of $13 million. This quarter we had
losses of $28 on nonperformers that were
recognized and $44 million of payments, so
we had -- I think the math works out that
typically you probably expect to lose over a
period of time, maybe a third have losses,
something like a third on your nonperforming
loans. So that implies that for every dollar
in losses you take, maybe you get a couple
dollars of sales or payments that come in at
the same time. But I think it's really just
tied to the greater recognition of losses in
that portfolio.
Steven Gresdo: Thanks.
Operator: At this time there are no further questions.
Gentlemen, are there any closing remarks?
Jay Gould: No. This is Jay. I guess if there are no
further questions, we thank
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you all for participating in today's call.
We look forward to talking to you. If you
have any further questions, please call
investor relations, either Susan or myself.
Thank you again.
Operator: This concludes today's Huntington's second
quarter earnings conference call. You may
now disconnect.
[END OF CALL]