EXHIBIT 99.2
HUNTINGTON BANCSHARES
CONFERENCE CALL
LEADER, JAY GOULD
ID #5970472
10/17/02
DATE OF TRANSCRIPTION: OCTOBER 22, 2002
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Operator: Good morning. This is Holly, and I will be
your conference facilitator today. At this
time I would like to welcome everyone to the
Huntington Bancshares 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 session. If you would
like to ask a question during this time,
simply press star and the number one on your
telephone keypad. Questions will be taken in
the order they are received. At this time I
would like to turn the call over to Mr. Jay
Gould. Mr. Gould, you may begin your
conference.
Mr. Gould: Welcome to today's conference call. I'm Jay
Gould, Director of Investor Relations.
Before formal remarks, some usual
housekeeping items. Copies of the slides we
will be reviewing can be found on our
website, www.huntington-ir.com. This call,
as always, is being recorded, and will be
available as a rebroadcast starting around
2:00 o'clock this afternoon 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 playback, or if 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 the slide at the end of
today's presentation, as well as material
filed with the SEC, including our 10-K,
10-Q, 8-K's and the like. Let's begin.
Turning to slide two, participating in
today's call will be Tom Hoaglin, Chairman,
President and Chief Executive Officer, Mike
McMennamin, Vice Chairman and Chief
Financial Officer, and Nick Stanutz,
Executive Vice President and head of our
Dealer Sales Group. From time to time, we
plan to use these quarterly conference calls
to showcase a particular aspect of
Huntington's business and operations. Given
the keen interest in our auto finance
business, having Nick join us today is a
great place to start.
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Turning to slide three, as we've done in
previous conference calls, today's
discussion will review results on an
operating basis unless otherwise noted.
Operating results for the third quarter
exclude the gain from the ownership
restructuring of our Merchant Services
business. Operating results for prior
periods represent reported results adjusted
to exclude the impact of restructuring and
other charges and one-time items, plus the
run rate impact of the sold Florida banking
and insurance operations. We continue to
report numbers on a reported or GAAP basis,
which makes no such adjustments. These you
will find in great detail within this
quarter's earnings press release and
Quarterly Financial Review, including a
reconciliation of reported earnings to
operating earnings, which is also shown on
slide eight of this presentation. These
materials are all available on our website,
www.huntington.com. Today's presentation
will take about 40 minutes. We want to get
to your questions, so let's get started.
I'll turn the meeting over to Tom.
Mr. Hoaglin: Thank you, Jay, and welcome everyone. Thanks
for joining us today. Slide four summarizes
this quarter's accomplishments. Reported
earnings were 41 cents per share, and
included a gain from restructuring the
ownership of our merchant processing
business. You may recall we announced this
restructuring on the day of last quarter's
call. In essence, we sold our Florida
merchant processing operations to First Data
Corp. and restructured the relationship.
Huntington lowered its equity position in
the business and extended our relationship
with First Data for ten years. This resulted
in third quarter pre-tax gain of $24.5
million dollars or $16 million after-tax or
seven cents per share. This also assures
that our merchant clients and the merchant
services business we've targeted for growth
within our footprint will continue to
receive the highest level of service and
attention. There is no material run rate
impact on earnings as a result of this
transaction.
Focusing on operating earnings, we're very
pleased with the third quarter performance
for a number of reasons. First, earnings per
share were 34 cents per share, meeting
Street expectations, even including a $6.6
million dollar pre-tax mortgage servicing
rights impairment. Like other companies,
we've been impacted by the heavy mortgage
refinancing and repayment activity causing
this
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impairment. But our earnings strength
allowed us to absorb the impact and still
hit our target. Average managed loans
increased at an 11% annualized rate, from 8%
in the second quarter, and 5% in the first
quarter. As in recent quarters, residential
real estate and home equity loan growth, as
well as growth in commercial real estate
loans, were the primary drivers. However,
given this summer's big pick-up in auto
sales, the auto loans and leases grew at a
14% annualized rate. Nick will comment more
on this later. Not surprisingly, commercial
loans continued to decline.
The 10% annualized growth in average core
deposits was also positive. Like other
banks, deposit inflow was benefiting from
the turbulent market environment. But we're
also seeing growth in the number of
households served and deposit balances from
our sales efforts.
Total credit quality trends improved during
this quarter. Specifically, non-performing
assets declined 4%, the second consecutive
quarterly decline. This was driven by a 35%
decline in the inflow of new non-performing
assets, the fourth consecutive quarterly
decline. Net charge-offs, excluding exited
portfolios, declined to 83 basis points from
88 basis points in the second quarter, and
represented the third consecutive quarterly
decline. Loan loss provision expense was
high during the quarter given the quarter's
significant loan growth. As a result, the
loan loss provision expense exceeded net
charge-off's by $16.5 million dollars or
38%. The combination of a higher loan loss
reserve and declining non-performing assets
increased our non-performing asset coverage
ratio to 191%.
Lastly, we repurchased 6.2 million shares,
bringing program to date repurchases to 15
million shares, with a total purchase value
of $294 million dollars.
Turning to slide five, there were also
several other meaningful achievements, all
representing investments in Huntington's
future. Under the banner of investing in
Huntington's business, we appointed a new
head of small business banking. This was
done to bring proper focus and dedicated
resources to building this important
business segment, which represents companies
with annual sales of typically less than
five million dollars. This is exactly the
type of bread-and-butter and high margin
customer a
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"local bank with national resources" should
be serving. Expanding our small business
presence should be one of the drivers of
Huntington's future earnings growth.
We also purchased LeaseNet Group, Inc.,
which specializes in network server class
equipment lease financing for businesses.
This exemplifies our commitment to bring
national scope, expertise, and business
solutions to our local customers, while
broadening our product menu to customers and
expanding leasing activities. LeaseNet's 300
clients are primarily located in the Midwest
with some already Huntington customers. As
previously noted, we restructured our
ownership interests in Huntington Merchant
Services, LLC, and we sold our Florida-based
J. Rolf Davis Insurance Agency to its
principals.
Reflecting investment in our employees, we
built on last year's all employee stock
option grant of 400 shares with a new grant
of 300 shares to virtually all full-time
employees. This year's grant has an exercise
price of $19.94, and will vest when
Huntington stock closes at or about $27.00 a
share for five consecutive trading days or
after five years, whichever comes first. We
strongly believe this program, which has
been well received by our associates,
benefits shareholders as employees feel a
sense of ownership at Huntington.
We also made a number of investments in our
customers. Our new enhanced teller system is
now in 64% or 214 of our 336 branches, up
from 13% at the end of last quarter. We
continue to target all branches to be on
this new platform by the end of the year.
For our commercial customers, we have
launched a new commercial loan processing
system, CLOS. This is an internally
developed system, and it integrates and
streamlines the commercial loan
underwriting, booking documentation, and
accounting systems. Our Private Financial
Group launched a new small cap mutual fund
called Situs [Sight-us]. In building on the
success in the second quarter, another 28
new companies were added to our business
401K platform.
With those introductory remarks, let me turn
the presentation over to Mike McMennamin to
provide the details. Mike?
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Mr. McMennamin: Thanks, Tom. Most of the following slides
represent the standard deck that you're
familiar with. Given the fact that this is a
very straightforward quarter, I'm not going
to spend quite as much time on some of them
as we want to make certain that Nick has
sufficient time for his segment of the
program. So let's get started.
Turning to slide seven, the third quarter
highlights compared with second quarter
results include net income of $82.2 million
dollars, 34 cents per common share, up 1%
and 3%, respectively, from the second
quarter. Annualized growth rates in managed
loans and core deposits of 11% and 10%,
respectively. A four point twenty-six
percent net interest margin, down four basis
points. A fifty-three point one percent
efficiency ratio improved slightly from
53.2% in the previous quarter. Eighty-three
basis points in net charge-off's, excluding
the exited portfolios, down five basis
points. A two percent loan loss reserve
ratio, which, as Tom mentioned, was
unchanged during the quarter. An eight
percent tangible common equity to asset
ratio, down 51 basis points, reflecting the
impact of the stock buy-back program. And a
$6.6 million dollar mortgage servicing
rights impairment. I'll provide some more
comments on each of those in the next few
minutes.
Slide eight reconciles reported versus
operating earnings for the third quarter.
The only adjustment was the $24.5 million
pre-tax, $16 million after-tax gain
associated with the ownership restructuring
of our merchant services business. Slide
nine shows performance highlights for the
third quarter compared with the second and
year ago quarters. I'll comment in detail on
most of these later, so let's move on.
Slide ten compares the operating results for
the third, second and year ago quarters. Net
interest income was up $7.6 million or 3%
from the second quarter, reflecting the
growth in earning assets as the margin
contracted four basis points. Non-interest
income before security gains is down
$600,000 dollars or 1% due to the $6.6
million mortgage servicing rights impairment
charge. Reflecting this, total revenue
before securities gains was up 2% from the
second quarter and up 7% from a year ago.
Securities gains were immaterial during the
quarter. The strength of our earnings
allowed us to absorb the $6.6 million
mortgage servicing rights impairment without
having to offset the loss by realizing
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securities gains. Obviously, the recognition
of security gains creates more pressure on
future net interest income and the margin in
future periods as any sale proceeds are
reinvested in lower yielding assets.
Provision expense increased 12% from the
second quarter in spite of the decline in
charge-off's, reflecting this quarter's
strong loan growth. Non-interest expense
increased 2% due to higher personnel costs
primarily related to building the regional
banking function and increased mortgage
banking and dealer sales activities. And
consistent with our practice of truing up
annual tax accruals each quarter, this
quarter's effective tax rate was 25.5%,
which is comparable to 25.4% in the year ago
quarter. On a year to date basis, this makes
our effective tax rate 26.7%, which is just
about unchanged from last year's 26.6% rate.
On balance, we feel this is a very solid
performance for the quarter, particularly
given the state of the economy and the
instability in our financial markets. We
were particularly pleased with the revenue
growth in this type of economic environment.
The left-hand graph on slide eleven shows
the quarterly earnings per share pattern
which, after three flat quarters, has moved
up slightly in the last two quarters, with
high credit costs making it difficult to
accelerate the pace of earnings growth. The
right-hand graph shows a trend in pre-tax
income before provision expense, and also
excluding securities gains. This graph
measures earnings progress before credit
costs, which is perhaps a better metric to
see the underlying progress that we have
made outside of the credit environment.
Pre-tax income on this basis was $169
million dollars, 2% higher than the second
quarter, and 10% higher than a year ago.
The left half of slide twelve shows the four
basis point contraction in the net interest
margin in the third quarter. But despite
this margin contraction, net interest income
in absolute dollars grew 3% from the second
quarter, reflecting the benefit of a $797
million or 4% increase in average earning
assets, which was partially offset by the 1%
decline in the net interest margin. Average
securities increased $230 million from the
second quarter, with over half of this
increase relating to mortgage loans that
were securitized in the second and third
quarters. Compared with the
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year ago quarter, net interest income was up
8%, reflecting a 5% increase in average
earning assets, with the loans component up
7%, and a net margin going up nine basis
points from 4.17%.
The chart on the right side shows the
earning asset composition. In the third
quarter, average earning assets increased
4%, with average loans up $459 million
dollars, and other earning assets up $338
million, mostly due to the higher securities
portfolio.
Slide thirteen lists some of the factors
that have and will continue to create
pressure on the net interest margin. The
flatter yield curve has resulted in lower
yields on new auto loan and lease
originations. In addition, the higher credit
quality of the new auto originations in
recent quarters has resulted in lower net
interest margins on these assets, although
we're comfortable that the lower resultant
charge-off's will lead to a higher net
return.
The growth in residential mortgages in
recent quarters has been primarily five-year
adjustable rate mortgages. The net interest
margin on these assets is lower than our
overall net interest margin, thus putting
downward pressure on the margin. As is the
case with the higher credit quality auto
loans and leases, we're comfortable that the
low charge-off on this product will lead to
an attractive net return. Mortgage
prepayment activity on our mortgage-backed
securities and residential loan portfolios
has resulted in reinvestment in lower rate
assets. We are probably being hurt here less
than other banks because only 15% of our
earning assets are in fixed rate residential
loans and mortgage-backed securities, which
is somewhat lower than some of our peers.
Secondly, over 70% of our residential
mortgage loan portfolio has been originated
over the last year, and thus somewhat less
sensitive to refinancing pressures.
We've been liability sensitive over the last
year, which has benefited our net interest
margin slightly. As shown in slide forty-six
in the appendix, we reduced the liability
sensitivity position this quarter, as
measured by our exposure to a 200 basis
point rate increase over the next twelve
months from negative 1.3% to negative 0.8%.
And subsequent to the end of the third
quarter, the position was further reduced to
negative 0.6%.
Average managed loan growth is highlighted
on slide fourteen, and
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just as a reminder, managed loans include
about 1.1 billion dollars of securitized
auto loans. In the third quarter, average
managed loans increased at an annualized 11%
rate from the second quarter. We're
delighted with this performance, given the
continued difficult environment in which to
grow quality loans. Our focus on originating
the 3-1 and 5-1 adjustable rate mortgage
products continued to produce strong
residential loan growth...81% on an
annualized basis. This has been a good
product for Huntington with our $1.3 billion
in average outstandings, more than double
the level of a year ago. Home equity growth
accelerated to an 18% annualized rate, up
from 17% in the second quarter. Auto loans
and leases increased at a 14% annualized
rate, mirroring the record sales in the auto
industries. However, these portfolios are up
only 2% from the year earlier.
Commercial real estate loans increased at a
10% annualized rate during the quarter. Our
commercial real estate focus continues to
follow our emphasis on quality, real estate
construction projects within our core
developer group, and also within our
geographic footprint. Further, our market
strategy emphasizes construction lending
versus permanent financing as construction
loans provide higher margins, fees and
greater portfolio liquidity. During the
quarter, approximately 20% of our growth is
represented by single-family construction
loans by our mortgage company. Another 40%
of the growth represents increased funding
within previously committed transactions.
Slides 49 and 50 in the appendix provide
breakdowns by property type, region and loan
type for this portfolio.
Commercial loans declined slightly during
the quarter at an 8% rate versus a 3% rate
of decline in the second quarter, and 6%
decline in the first quarter. Corporations
continue to be very cautious in their
inventory management, capital spending and
acquisition programs. Compared to the year
ago quarter, commercial loans have declined
8%, with all of that reduction reflecting
the decline in our shared national credit
portfolio from about a billion and a half
dollars to a billion dollars at the end of
the third quarter.
The 10% annualized growth rate in core
deposits as shown on slide fifteen was again
very strong. Much of the growth continued to
be focused in interest-bearing money market
accounts, both retail and
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business. This past quarter, demand deposits
also increased at a double digit rate in the
corporate demand area. Compared to the year
ago quarter, core deposits were up 12%. The
strong deposit growth continues to be a
function both of the increased focus and
success of our sales management efforts in
the branch network, and the turbulence we're
experiencing in our financial markets.
Slide sixteen shows that non-interest income
was down $600,000 dollars or 1% from the
second quarter, driven by declines in
mortgage banking, brokerage and insurance
and trust income. Mortgage banking income
was down $4.4 million dollars, reflecting
the $6.6 million mortgage servicing
impairment. Excluding the impairment charge,
mortgage banking income was up $2.2 million
dollars, reflecting the stronger origination
activity during the quarter. Brokerage and
insurance income was down a million dollars
from the second quarter, reflecting reduced
mutual fund revenue due to a 41% decline in
sales production. This is only partially
offset by a slight increase in the higher
margin annuity sales revenue, which remained
near record levels.
Trust income declined $1.3 million from the
second quarter, primarily on lower asset
valuations given the weakness in the equity
market. Deposit service charges were up $2.1
million or 6% from the second quarter. Like
last 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 12%, driven equally by
higher personal service charges and
corporate maintenance fees.
Other income in the current quarter was up
$3.7 million dollars, with the largest
contributors to this increase being higher
sales of derivative products to commercial
banking customers and trading profits.
As mentioned a moment ago, third quarter
results included the MSR impairment. Slide
seventeen shows some related data on this
issue. Specifically, our total mortgage
servicing book is $5.2 billion dollars. Of
that total, $3.2 billion is servicing for
other investors, with the remaining two
billion representing Huntington loans that
are serviced. Mortgage servicing rights are
capitalized only for loan service for other
investors. The market value of these MSR's
was 27.9 million dollars or 88 basis points
at the end of the
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third quarter, down from 100 basis points at
the end of the second quarter. MSR's are not
a material issue for Huntington, as
exemplified by the fact that they only
represent 1.2% of Huntington's equity.
Slide eighteen details the change in
non-interest expense, and shows it was up
$3.5 million dollars from the second
quarter. Higher personnel costs account for
most of this increase, and reflected a
combination of factors including higher
staffing in regional banking as we continue
to build that business, as well as in the
credit workout area. Higher mortgage banking
staffing to accommodate the increased
activity, and higher production-related
compensation expense, particularly in
mortgage banking, dealer sales, and in the
credit workout areas.
Slide nineteen shows the trend in our
efficiency ratio, which has continued to
move down from the peak in the first quarter
of last year, and was 53.1% in the third
quarter.
Let me now look at and review some of the
recent credit trends. Slide twenty-one
provides an overview of credit quality
trends. First, our non-performing asset
ratio declined from 1.14% of loans to 1.05%,
roughly equivalent to the level a year ago.
Net charge-off's, excluding losses on the
exiting portfolio, declined from 88 basis
points to 83 basis points during the
quarter. I'll comment a little bit more
specifically on that in just a second. The
90-day delinquency ratio for total loans
increased slightly, but was still below the
year ago levels. The allowance for loan
losses was unchanged at 2%, up from 177% at
the end of the year ago quarter. With the
maintenance of the reserve ratio, and the
modest decline in non-performing assets, our
non-performing asset coverage ratio improved
to 191% during the quarter.
Slide twenty-two shows that the third
quarter represented the second consecutive
quarterly decline in non-performing assets.
We'll provide a little more information on
that in the next slide.
Slide twenty-three shows the recent
quarterly non-performing asset activity. As
you can see, the $47 million dollar inflow
of new non-performing assets during the
quarter was down 35% from the second quarter
level, and was the primary factor behind the
overall decline in non-performing assets.
Sectors contributing to the new
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non-performing assets included lumber,
steel, services and healthcare. Shared
national credits represent 20% of total
non-performing assets, with no newly
identified SNC non-performing assets this
quarter. We have no real concentrations in
communications, recreation, hotel or the
airline sectors, areas that are causing
non-performing asset increases this quarter
for others in the banking industry. The
decline in non-performing assets over the
last three quarters is encouraging. And
assuming no material change in the economy,
we anticipate a further decline in the
fourth quarter.
Slide twenty-four segments the
non-performing assets by industry sector.
The bar chart on the right shows which
sectors have contributed to the $109 million
increase in non-performing assets in the
last 21 months, with the services and
manufacturing sectors accounting for most of
the change. Non-performing assets continue
to be concentrated in these two sectors at
approximately 30% each.
The next slide shows net charge-off's
adjusted to exclude charge-off's on the
exited portfolios. You'll recall from
earlier conference calls, reserves were
established in the second quarter of 2001
for two exited loan portfolios, truck and
equipment, and sub-prime auto loans. Those
portfolios now represent $65 million and $19
million dollars, respectively, on our
balance sheet. Adjusted net charge-off's
declined from 88 basis points to 83 basis
points during the quarter. Commercial net
charge-off's declined from 153 basis points
to 121 during the quarter, with the retail
trade, manufacturing and service sectors
continuing to produce the majority of our
charge-off's. Commercial real estate net
charge-off's increased to 43 basis points
from 22 basis points, reflecting the sale of
one loan. Over the last several quarters, we
have strengthened this group with the
objective of increasing our efforts on the
effective and efficient resolution of
problem commercial credits. Total consumer
net charge-off's increased slightly to 78
basis points from 75 basis points in the
second quarter. This reflected the seasonal
uptick in auto-related net charge-off's,
specifically, the net charge-off ratio for
auto loans increased to 101 basis points
from 92 basis points. Auto leases increased
to 127 basis points from 108 in the second
quarter. The improved credit underwriting of
auto loans and leases should continue to
have a positive impact on these charge-off
ratios over time, excluding
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seasonal factors.
Slide twenty-six shows the business
performance of our indirect auto loan and
lease portfolios, and by now should be very
familiar to you. The performance issues of
the loan and lease 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, the
top lines on both graphs have performed
poorly. About 20% of that volume was
underwritten with FICO scores below 640,
typically considered D quality paper. In
contrast, more recent vintages have been
written at much higher FICO scores,
therefore performing better. Nick will have
more comments on this in his segment of the
presentation. The good news is that the
impact of the high charge-off vintages is
rapidly diminishing. Originations during
that time period represent 17% and 21% of
the current loan and lease portfolios,
respectively.
Slide twenty-seven provides another look at
consumer delinquency trends on a 30+ and 90+
day basis. The 30+ day delinquency rate is
an important early indicator of future
charge-off levels as there are
well-established roll rate patterns from the
30-day delinquency category into the more
severe delinquency categories, and
eventually charge-off's. A sharp decline in
the 30+ day consumer delinquencies in the
first quarter was followed by another 10
basis point improvement during the second
quarter, and another 16 basis point
improvement this quarter. However, giving
consideration to seasonal patterns, we do
expect delinquencies and charge-off's to
increase in the fourth quarter.
Slide twenty-eight recaps the trend in the
loan loss reserve, which, as previously
mentioned, was maintained at 2%. Provision
expense exceeded net charge-off's by $16.5
million dollars, reflecting the strong loan
growth during the third quarter. We began
the year with the reserve ratio at 2%,
reflecting concern over the weakness in the
economy, and also the credit deterioration
that had taken place in our portfolios.
We've maintained the reserve at that level
since then. However, trends are improving.
The non-performing asset coverage ratio has
increased from 166% a year ago, to 176% in
the second quarter, and 191% in the third
quarter as non-performing assets have
declined in each of the last two quarters.
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The credit quality of our auto loan and
lease portfolio in the last year has
improved significantly as we have focused
our effort on originating higher quality
paper. Eighty-three percent of the total
reported loan growth in the last year has
been either residential real estate or home
equity loans, both of which generate low
charge-off's, and therefore require a
relatively low level of reserves. Today our
loan mix is more risk adverse than a year
ago, and we have seen improvements in credit
quality in both the consumer and commercial
portfolios. Arguably, our 2% reserve today
is stronger than the 2% level a couple of
quarters ago. As such, to the degree that we
have opportunities to exit weak and
non-performing credits in coming quarters,
we will aggressively pursue these, and are
willing, if necessary, to use the 2% reserve
to accomplish this purpose.
Let me close my segment with just some brief
comments regarding capital. Slide thirty
shows capital trends, and 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 ratio at year-end
would be 7.5 to 7.75%.
Turing to the next slide, as you know the
board approved a 22 million share repurchase
program in February of this year. We
initiated activity in the open market in
late February, and purchased 1.5 million
shares in the first quarter, and then
another 7.3 million shares in the second
quarter. This quarter we repurchased 6.2
million shares, bringing program to date
repurchases to 15 million shares with a
value of $294 million dollars. As previously
stated, our goal is to utilize our excess
capital to repurchase a total of three to
four hundred million dollars in 2002. We
continue to be disciplined buyers, and will
monitor our stock price and earnings
valuation versus that of our other peer
banks as we make our repurchase decisions.
Let me now turn the call over to Nick
Stanutz, who is going to review trends in
our dealer sales business. Nick?
Mr. Stanutz: Thanks, Mike. Let me begin by profiling the
dealer sales business. As slide thirty-three
shows, this business has been a constant
source of earnings for Huntington for over
50 years. Some banks have entered, exited,
and reentered this business, depending on a
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host of factors. In contrast, our
longstanding and continuous commitment to
serving their needs gives us a competitive
advantage. Our auto dealership clients know
that they can count on us to meet their
financing needs. We manage $7.1 billion in
total auto receivables, with $3.9 billion in
loans, and $3.2 billion in leases. In
addition, we manage over $500 million in
commercial loan balances, primarily new car
floorplan lending. We have 550 associates
that comprise our entire workflow processes
in this line of business, about 7% of
Huntington's employee base, with our
footprint of clients exceeding 3500 new car
franchised dealerships.
Turning to slide thirty-four, our success
can be attributed to three primary levers:
our people, our business model, and our
daily execution. We strongly believe that
people, not products, make our business
great. Knowing our clients by consistently
being in-market allows us to understand and
to respond quickly to their needs and
changes in the local markets. We offer a
robust value proposition that meets all of
the dealer needs, from assisting in the
financing of inventory purchased from the
manufacturer, including the financing for
their real estate facilities, to financing
of their unit sales. And to meeting their
personal and business investment needs
through our suite of retail banking and
Private Financial Group products.
Importantly, our local market teams of sales
and underwriters have on average over nine
years of tenure with us, as well as within
their local communities. They intimately
know their customers and their needs.
Lastly, our service commitment creates
positive customer experiences. There is no
one better at this as evidenced by our
recognition through J.D. Powers' surveys.
Slide thirty-five displays our nine-month
originations within our geographical
footprint. Clearly, with our longest tenured
market being Ohio, we originate almost 40%
of our production there. Central Florida,
being defined as the Tampa-Orlando corridor,
along with the State of Michigan, represent
our next two largest markets. Our
fundamental strategy for the majority of our
originations is to increase penetration in
our existing core banking markets. While our
overall objective is to generally maintain
the relative size of this business to
Huntington in total, having the capability
to pick and choose origination points, as
well as manage
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the quality and quantity of the
originations, assures a steady flow of
profitable originations.
Slide thirty-six reflects our current and
historical market share for our three
largest markets in order of market size.
Achieving size allows us to not only be an
innovator of new product ideas, but also an
implementer of them. Additionally, it allows
us to make process or pricing changes which
enhance the profitability of our products. I
might comment here that in all of our
markets, excluding our new markets, we are
one of the top three market share leaders,
excluding the big three captive finance
companies.
Slide thirty-seven provides an analysis of
the 2002 industry sales for the third
quarter versus our own originations. Our
success in the quarter was assisted by the
big three's decision on July 3rd to increase
the cash-back option, in lieu of zero or low
interest rate financing options, to clear
out 2002 models. Cash rebates approached
three to four thousand dollars in many
cases. Dealers and sales associates were
able to demonstrate to purchasers,
especially those who have a high propensity
to trade prior to the maturity of their loan
or lease, that the cash option provided more
of an economic benefit. As such, the flow of
financing directed to banks continued to be
strong.
Slide thirty-eight reflects a small sampling
of a series of quality metrics reviewed on
each month's production. Here the monthly
production is rolled into quarterly amounts.
Starting with the loans on the top half of
the slide, please note the relationship
between our production and the improvement
in FICO scores in general, and particularly
that segment below 640. In the first quarter
of 2000, almost 20% of our production
represented FICO scores below 640. That
compares to just over 1% in our most recent
quarter. As a point of reference, the
industry considers FICO scores greater than
700 to be "A" credit risks, and below 640 a
"D" risk, one level above the sub-prime
segment. Third quarter production was our
best quarterly volumes ever, as well as our
best FICO scores. You will note that new
cars represented 57% of our current
quarter's production, up from 36% two years
ago. Since costs to originate and service
loans are primarily fixed, the fact that new
cars have higher loan balances than used
cars allows us to leverage our income from
these assets against this fixed cost
structure. Additionally, with new vehicles
we receive the benefit
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of lower credit risks associated with these
types of buyers.
The lease originations shown on the bottom
half of this table reflect very similar
trends. Like loans, the third quarter was
not only our best lease origination quarter
since 1999, but also had the highest FICO
scores.
Turning to slide thirty-nine, you can see
some of these trends portrayed graphically.
Here again, we depict the relationship over
the last eleven quarters of the average FICO
score on that quarter's production against
our internal risk expected losses. Risk
expected losses are based on the
statistically modeled relationship between
FICO scores, loan to value ratios, term, and
age of collateral. Better FICO scores, a
higher mix of new versus used cars, and the
lower loan to value ratios have resulted in
lower risk expected losses in virtually
every quarter for both loans and leases.
Slide forty shows a graphic representation
of loan and lease delinquency trends for
both the static 30-day and 90-day levels
against net charge-off's over the last five
quarters. The result of the continuous
improvement in asset quality of the new
production as shown on slide thirty-nine has
manifested itself into the improved trends
plotted here.
We often get questions about lease residual
risk, so let me use slide forty-one to make
a couple of comments on our strategies to
mitigate this risk. First, it is important
to note that each quarter we mark to market
our residual values and assess our reserve
adequacy. Secondly, the entire book of
residuals is insured through a third party
insurance carrier. And lastly, we use our
own internal reserve, which stands at $30
million dollars at the end of the third
quarter to cover any uninsured residual risk
for things such as excess mileage and wear
and tear. To this we provide incremental
funding on new production.
Slide forty-two highlights some of our
priorities going forward. We continue to
identify dealerships where we have low
product penetration, and focus calling
efforts to increase our share of wallet in
such outlets. Additionally, we continue to
target high share stores for greater product
penetration, such as products in our
commercial suite, and personal products or
services to dealer management teams. To help
control costs and improve
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efficiencies, we will continue to leverage
our infrastructure capacity with recent
enhanced technology capabilities. In
addition, we will position ourselves as
early adopters of emerging technologies like
e-contracting, where the borrower will be
able to sign a contract by the use of a
digital signature pad, allowing the contract
and e-form to be uploaded directly into the
bank's accounting system, thereby taking
costs out of the workflow process. And
finally, we will maintain our focus on
improving overall dealership profitability
by effectively managing all product
profitability components of our products
such as the amount of commission paid and/or
fees assessed as an example.
In closing, the dealership business is an
important segment to Huntington. Past issues
related to pricing and underwriting have
been fully addressed, as Mike noted earlier.
Any related impact on earning's and
charge-off's is quickly diminishing.
Importantly, the production metrics and
related profitability of each quarter's
originations have steadily improved. Lastly,
opportunities continue to exist to increase
the earnings prospects of this business as
we improve product penetration of existing
relationships.
Let me turn it now over to Tom for closing
comments.
Mr. Hoaglin: Thanks, Nick. In closing, the third quarter
was another good one for Huntington. Our
financial results continue to improve.
Revenue is increasing. We continue to watch
our expenses but are spending when necessary
to build the franchise. Loans are growing
nicely in a difficult environment. Deposits
are continuing to grow. Credit quality is
improving. And our investments in the
business, customers, and employees are
showing results. As I have said in prior
quarters, we have not yet arrived, but we
are much better positioned than we were even
just two quarters ago. We still have much to
do, but continue to make good progress.
Regarding our earnings outlook, we believe
fourth quarter earnings per share will be 34
to 35 cents. This keeps us within the range
for full year operating earnings guidance
originally given last January. Frankly,
we'll be a bit disappointed if we make 34
cents per share.
As to guidance for next year, we're in the
middle of our 2003 planning exercise, so it
is premature to share with you specific
HUNTINGTON BANCSHARES
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earnings targets at this time. Obviously, a
lot depends on the state of the economy, the
markets, and interest rates. But we are
confident that we will continue to show
improvement in those areas under our direct
control.
This completes our prepared remarks. Mike,
Nick 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: At this time I would like to remind
everyone, in order to ask a question, please
press star, then the number one on your
telephone keypad. We will pause for just a
moment to compile the Q&A roster. Your first
question comes from Dave George.
Mr. George: Hi, this is Dave George A.G. Edwards. A
philosophical question about the indirect
business since Nick is in the room with you.
It seems to me that it's been really a great
business for the Huntington historically,
and as Nick mentioned, a lot of the
competitors have gotten out of the business,
and the growth and the returns in that
business, at least to me have been in excess
of your cost of capital. So how do you
balance the momentum that you have in the
dealer business with your bigger picture
interest of shrinking the contribution of
that business consistent with Huntington's
overall earnings going forward. Thanks.
Mr. McMennamin: Dave, this is Mike McMennamin. Let me just
make a comment or two. That's obviously a
challenge for us. Nick has a lot of momentum
in his business, and we think it's extremely
well managed. It's very hard to say to a
manager - we don't want you to grow your
business - and we're not doing that with
Nick. We are looking at trying to develop
strategies that would enable us to, in
essence, let Nick continue to grow that
business while maintaining or shrinking it
as part of Huntington's total operation. And
that would involve, for example, finding
other participants who might take some of
that paper, and take the credit risk
associated with that. So we're working on
strategies for that. We don't have anything
to announce, but that's obviously a
challenge for us.
Mr. George: Okay. Thanks, Mike.
HUNTINGTON BANCSHARES
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Operator: Your next question is from Fred Cummings of
McDonald Investment.
Mr. Cummings: Good afternoon. A couple of questions.
First, Tom or Mike, can you talk about your
exposure to automobile suppliers with a net
manufacturing base? And does that sector
make up a large portion of the
non-performing assets?
Mr. Hoaglin: Fred, this is Tom. That sector does not make
up a large portion of our non-performing
assets. There's no question that the
manufacturing sector broadly defined is a
significant component of our non-performing
assets, only a piece of which would relate
to auto suppliers. Operating as we do in the
states of Ohio and Michigan, we do have
relationships with auto suppliers. All
Midwest banks would. But we really do not
have great concern about exposure from a
credit risk standpoint to auto suppliers in
any abnormal way.
Mr. Cummings: Okay. And then the second question Nick.
With respect to trends in your repossession
rates, can you give us an update? And then
what's happening at auction when you go to
sell cars? What's going on with the loss
severity there?
Mr. Stanutz: Fred, let me answer the last question first.
We have begun to see the traditional decline
in used car values as you would see as you
enter the fall period, with the reality
being the dealer will have to hold that
inventory until the spring. We haven't seen
it be any different than the historical
rates of decline, but clearly your
collateral will bring less to you at this
point in time just because of the nature of
the business. As it relates to your first
question, we feel very good about the trend
line that we are seeing in our overall
repossession rates in general. And at this
point in time feel good about it
directionally, that the quality that we've
put on is translating into better
delinquency, better charge-off's, and
therefore fundamentally sound trends in
repossession rates.
Mr. Cummings: And then one last question. As it relates to
this risk expected loss ratio that you
calculate, is that to suggest that as this
portfolio continues to shift towards higher
quality mix and the indirect business, we
could look for charge-off's in the 50-60
basis point range, say over the next couple
of years as you continue to change the mix?
HUNTINGTON BANCSHARES
ID #5970472 PAGE 21
Mr. Stanutz: Fred, you could definitely come to that
conclusion because that's exactly what we
believe in our modeling and our pricing of
how we're building the metrics of the
business.
Mr. Cummings: Okay. Thank you.
Operator: Your next question is from Charles Peabody
of (TAPE CUTS OFF).
Mr. Stanutz: Charles, to answer that, we are not
currently on the Dealer Track system,
meaning that the dealer can send the
application directly to us and bypass our
data entry system. We do receive
applications through Dealer Track. They come
to us though in a faxed copy that we then
data enter that into our system, but we
don't have the ability today to eliminate
the data entry piece. Because it only
represents today in our applications through
the door, 1% of our applications, it's just
a non-existent challenge for us today. But I
think as we go forward, whether it be Dealer
Track, Credit Connection or Route One, which
is the big three venture, clearly there will
be greater burdens put on the banks for
validation as we take out the data entry
piece.
Mr. Peabody: Thank you.
Operator: Again, I would like to remind everyone, in
order to ask a question, please press star,
then the number one on your telephone
keypad. Your next question is from Ed
Najarian of Merrill Lynch.
Mr. Najarian: Good afternoon, guys.
Response: Hey, Ed. Good afternoon.
Mr. Najarian: A couple of quick questions for you.
Hopefully you can give me relatively
specific answers. First of all, once you get
through the repurchase authorization and we
get into 2003, would you expect to continue
to repurchase stock using up some of your
retained earnings in that regard? Obviously
not as aggressively as in '02, but would you
consider that as a use of your excess
capital ongoing? The second question is with
respect to the margin. I think you talked to
some extent about the margin coming down
further. It looks like you might have a
little bit more opportunity
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on the deposit side than some other banks to
reduce your deposit pricing a little bit
further. Potentially if you could comment on
that with respect to future margin
compression. The third question - if you
could give us any kind of an outlook for the
'03 tax rate. And the fourth question, did I
hear your correctly say that charge-off's
would be higher in the fourth quarter?
Thanks.
Mr. Hoaglin: This is Tom. Let me start out by addressing
your question with regard to what happens
with our stock repurchase efforts post the
fulfillment of the current opportunity.
Because we believe that we will end the year
still in a strong capital position and
repurchasing additional stock remains a
possibility for us, it is something that
we'll consider. We've not made a commitment
to do that, but it is something that we will
consider as an opportunity for us. It
depends on a lot of factors, one of which is
how we might otherwise use the capital, so
always looking for opportunities in that
regard. I think we've always thought since
the outset of our share repurchase that
using our excess capital to buy back stock
ought to serve as a return for shareholders.
So opportunities that would provide greater
return we need to consider. And we also
think that it's not bad to have excess
capital. So we're not, I think, entering
next year with a feeling that we've got to
do something with it. That said, we will
certainly think about the possibility of
buying back additional stock. Mike, why
don't you handle some of the others?
Mr. McMennamin: Let's take the tax rate for just a second.
We're almost at 27% effective tax rate
through the three quarters, and think that
that's about where we'll end up the year. It
might be just a tad higher next year;
perhaps a 27 to 28% would be a good range to
look at. In terms of the margins, are there
opportunities on the deposit side to
mitigate any margin compression? We did
change the rates on some of our money market
accounts late in the third quarter, and that
will give us a little bit more benefit for
the fourth quarter of the year - give us the
full quarter benefit as opposed to just
partial. That's something we're looking at.
It's a pretty competitive market out there
for retail deposits these days. You've got
money market account rates, vis-a-vis Fed
funds or vis-a-vis money market fund rates.
They tend to be a little higher than they
have been in past cycles. So we want to make
sure we can continue to grow our deposits,
but we are paying a lot of attention to
those deposit rates. I'm not sure that's
specific enough for you, but I
HUNTINGTON BANCSHARES
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think that's the best I could do right this
second.
Mr. Najarian: Can you give us any outlook on the margin
over the next quarter or two?
Mr. McMennamin: As I said, I think margins have peaked here,
and I think they've peaked for the industry.
How much they will decline, I really don't
want to comment on. I think I suppose you
could see margin declines of at least ten
basis points maybe in the next quarter,
maybe even a little more. The trend during
the quarter was we had a lower margin in
September than we did in July, and also
we'll tend to get a little seasonal weakness
just from the fee side of the equation
because you don't make as many car loans and
leases in the fourth quarter as you do in
the third quarter, so you'll get just a
little seasonal pressure from that
standpoint also.
Mr. Najarian: Okay.
Mr. McMennamin: Charge-off's - I think the comment we made
was that we would expect seasonally
charge-off's in the auto business to
increase a little bit, or perhaps increase a
little bit in the fourth quarter. They did
increase, but we think it's on a seasonal
basis this quarter. We really - I think we
mentioned the last quarter, in a perverse
sense, we would like to accelerate the
resolution of some of these non-performing
commercial credits just as rapidly as we
can. And to the extent we have opportunities
to do that - to exit credits on what we
consider to be favorable economic terms, we
certainly will try to do that.
Mr. Najarian: Okay. All right. That gives me better
clarity there. Thank you.
Operator: At this time, there are no further
questions. Mr. Gould, are there any closing
remarks?
Mr. Gould: Yes. Again, thank you everybody for joining
us this quarter. We look forward to talking
to you ninety days from now. Bye.
Operator: This concludes today's Huntington Bancshares
conference call. You may now disconnect.
[END OF CONFERENCE CALL]