EXHIBIT 99.2
JANUARY 7, 2003 9:00A.M. EST - 2002 FOURTH QUARTER CREDIT ACTIONS
CONFERENCE CALL
OPERATOR: Good day ladies and gentlemen and welcome to the Huntington Bancshares
Fourth Quarter Credit Actions conference call. At this time all participants are
in a listen-only mode. Later we will conduct a question and answer session and
instructions will follow at that time. As a reminder this conference call is
being recorded.
I would now like to introduce your host for today's conference, Mr. Jay
Gould. Mr. Gould you may begin.
JAY GOULD:
Thank you Meagan (ph). And 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
Huntington.com. This call is being recorded and will be available as a
rebroadcast starting around noon today.
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 and material filed with the SEC including our
most recent 10-K, 10-Q and 8-K filings.
One last note. The purpose of today's call is to discuss only the announced
fourth quarter credit actions and we intend to keep the subject matter limited
solely to this discussion. As you know we will announce fourth quarter results
on January 16th with a conference call at 1:30 p.m. Eastern time. Any questions
related to other aspects of fourth quarter results beyond the materials
contained in the press release or this conference call's slides, as well as any
2003 outlook questions, will be taken at that time and not today. We appreciate
your understanding about this.
With those ground rules let's begin.
Turning to Slide 2, participating in today's call will be Tom Hoaglin, Chairman
and President and Chief Executive Officer and Mike McMennamin, Vice Chairman and
Chief Financial Officer. Today's presentation will take about 10 minutes and we
want to get to your questions, so let's get started.
Tom?
TOM HOAGLIN:
Thank you Jay. Welcome everyone. Thanks for joining us today. Slide three
highlights the fourth quarter credit actions we announced yesterday
afternoon. Let me review them with you.
First we sold $47 million in non-performing assets. This will result in
incremental fourth quarter charge-offs of $21 million. These non-performing
assets represented 22 relationships and were geographically spread throughout
our footprint. The largest individual credit was for $12 million with the next
largest around $3 million. These were primarily in the manufacturing, services,
and commercial real estate related sectors and included $14 million of shared
national credits.
Second, we will charge off 100% of our $30 million credit exposure to a health
care finance business. You will recall on November 13th we announced we were
putting this credit on non-performing status.
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Why are we taking these actions?
Regarding the healthcare finance credit, and per our earlier announcement, this
problem developed rapidly and unexpectedly. The majority of our exposure was to
their securitizations, which had a high investment grade rating. Significant
uncertainties continue to surround this credit including allegations of fraud.
We feel it prudent to put this entire exposure behind us.
A top priority over the last two years has been to build a fortress balance
sheet and engrain a strong credit culture at Huntington. To that end we've taken
a series of actions, including bringing in outside talent to head a senior
lender position, strengthening our loan review and workout areas, and in 2001
increasing our loan-loss reserve ratio reflecting the weak economy and quality
of loans in our portfolio.
Specifically regarding the strengthening of our loan-loss reserve, you will
recall that at March 31, 2001 this ratio was 1.45%. By June 30 of that year this
had increased to 1.76% and then to 2.05% at December 30, 2001. Since then it has
remained at around this level and was 2.00% at September 30 of this year, the
third strongest ratio among our peers.
Regarding our specialized credit workout group here we again hired outside
talent. The primary purpose of this group is the early identification and
resolution of problem credit situations. In working out problem credits, history
shows that often the lowest losses are the first losses.
Late in the fourth quarter of 2002 this group saw an economically attractive
opportunity to sell $47 million of non-performing assets. We think it's in our
shareholder's best interest to take advantage of this opportunity.
What are the results of these actions?
First, these actions will have no net earnings impact on the 2002 fourth quarter
results we will be announcing on January 16. Existing loan-loss reserves are
sufficient to absorb the related charges.
Second, our non-performing asset coverage ratio increases to 269% from 191% at
the end of September, one of the highest among our peers.
And third, our loan-loss reserve ratio decreases from 2.00% to 1.76%. This
remains well above the third quarter of 1.47% peer median. We are very
comfortable with the adequacy of our loan-loss reserve at 1.76%.
Let me turn the presentation now over to Mike. He will review the numbers
with you. Mike?
MIKE MCMENNAMIN:
Thanks Tom. Slide four highlights the impact of these credit decisions on
fourth quarter results.
The table shows high-level credit quality data for the third and fourth quarters
both before and after the impact of these actions. I'm going to review each.
Non-performing assets at September 30 were $214 million and represented 1.05% of
loans and other real estate owned. In our October 17 earnings conference call we
indicated that our expectations at that time were for a reduction in
non-performing assets by the end of the year. However as we noted in our
November 13 8-K filing, given the $30 million healthcare finance credit going to
non-accrual status this quarter, we, at that time, expected year-end
non-performing assets to be relatively flat with maybe a modest decline in the
non-performing asset ratio, reflecting expected fourth quarter loan growth.
As we show in this table in the before column, you will note that non-performing
assets would have been unchanged at $214 million as we indicated on November 13.
As a result of the fourth quarter actions that have been outlined,
non-performing assets ended the year at $137 million, down $77 million from
September 30. This $77 million decline represents (1) $47 million of sold
non-performing assets plus (2) a $30 million net reduction in other
non-performing assets during the quarter. Though we
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still are working with preliminary data, a large portion of the $30 million
decline in other non-performing assets is (1) payments on loans during the
period and (2) a return to accrual status of those loans.
We're very pleased with the magnitude of the $30 million decline, in that it is
in line with our earlier communication that we had in November. It's important
to note that the change from the end of the third quarter non-performing
assets is not impacted by the $30 million healthcare credit as it was both put
on non-performing asset status during the quarter and charged off during the
quarter. Our non-performing asset ratio from September 30 drops 40 basis points
from 1.05% to 65 basis points.
Net charge offs for the quarter were $44 million, and as was the case with
non-performing assets, our fourth quarter expectation would have been for these
net charge offs to be relatively unchanged from the third quarter. And as shown
in the before column in the table, excluding the impact of these fourth quarter
actions we're announcing today, this was the case with net charge offs of $44
million and a charge off ratio of 84 basis points down slightly from 87 basis
points in the third quarter.
As a result of these fourth quarter actions, total net charge offs will be $95
million in the quarter with a net charge off ratio of 1.84%. The $51 million
increase from the third quarter in net charge offs represents the $21 million
charge offs associated with the sold non-performing assets plus a charge off of
the $30 million healthcare finance credit.
What's going to be the impact on our reserve ratios?
Our loan-loss reserve ratio, which was 2.00% at September 30, will decline to
1.76% and is still very strong on both an absolute and a relative basis. Further
the non-performing asset coverage ratio improved significantly from 191% to
269%. You can see how these ratios compare to our peers on the next slide.
Slide five shows relative peer rankings for both the loan-loss reserve and the
non-performing asset coverage ratio as of September 30. Huntington's December 31
ratios are also shown here, which include the impact of these fourth quarter
actions.
Our loan-loss reserve ratio drops 24 basis points to 1.76% but our relative peer
ranking drops only from third to fifth and remains well above the 1.47% third
quarter peer median. Our non-performing asset coverage ratio increases
significantly from 191% a ranking which is just one notch above the peer median
of 177% percent at September 30, to 269%, the third highest.
In closing let me make just a couple of comments as to why we believe our
year-end 1.76% loan loss reserve ratio is very strong. Let's turn to the next
slide six.
As we mentioned in our third quarter call on October 17 we believe that our
September 30 loan-loss reserve ratio at 2.00% was much stronger than a virtually
identical ratio at the end of 2001 and the 2.0% levels at the end of March and
June of 2002. Why was that?
First of al, from June 30 in 2001 we had purposely reduced our shared national
credit exposure by $500 million to about $1 billion today.
Second, and as was detailed in our third quarter conference call, over the last
two years we have significantly improved the credit quality of auto loan and
lease production. For example for auto loans booked in early 2000 the average
FICO score was about 700, where any score above 700 is considered A quality. For
2001 FICO scores were about 720. And for the first three quarters of 2002 the
FICO scores were above 730. We've had similar trends in our auto lease
production during these same time periods.
Third, approximately 70 percent of our 2002 loan growth has been in residential
mortgages and home equity loans and lines. And as you know these loan products
have very low expected loss rates.
Lastly, as Tom mentioned, since early 2001 we have continually been
strengthening our credit culture and this continues today.
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So in sum, while our reserve ratio remained relatively constant at the 2.00%
level during 2002, the risk profile of our total loan portfolio has
significantly improved. As such we believe the 1.76% loan loss reserve ratio is
still very strong. Let me turn the presentation back over to Tom for closing
comments.
HOAGLIN:
Thanks Mike. I want to emphasize Mike's last point before taking your
questions.
Those of you who have been following Huntington's transformation know we have
made terrific progress on a number of fronts. But I must tell you that one area
with which I'm especially pleased, and you should be as investors, has been in
strengthening our credit culture.
As we have done it all along the credit chain... from underwriting to workout. I
believe this is an essential characteristic of a well-managed bank and a bank
that protects its investors' interest.
This completes our prepared remarks. Mike 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. If you have a question at this time please press the one key on your
touch-tone telephone. If your question has been answered or you wish to remove
yourself from the queue, please press the pound key. Again if you have a
question please press the one key.
Your first question is from Fred Cummings of McDonald Investments.
FRED CUMMINGS: Yes. Good morning Tom and Mike. I had two questions here.
The first is of the remaining $137 million of non-performing assets, how much
of that would be shared national credits and what are your plans for further
dispositions of those credits?
MCMENNAMIN: Fred we're still working with preliminary data but I think there's
about $30 million of the remaining $137 million of non-performers. We don't
think of the shared national credits in the loan workout sense any different
than we do of any of the other credits. We typically would generate a cash flow
forecast for the company in question, discount that back to a present value, and
make a decision based on what we think that that loan is worth at any given
point in time. So there's no real differentiation once it become non-performing.
It's into the workout area whether it's a shared national credit or not.
CUMMINGS: OK. Then secondly as it relates to the healthcare credit, the $30
million you charged off, I think I may have missed your earlier comments as
to why you charged off the full amount. Do you think there's some potential
for a recovery down the road?
MCMENNAMIN: Well that certainly is a possibility. We decided that this issue in
all probability would be tied up in litigation for some time. We don't know if
there's going to be recoveries on this or not. We've seen estimates that people
do expect that they'll get any where from 10% to 25% back. I think that remains
to be seen. We thought the conservative approach was to charge 100% of it off
and if we're fortunate enough to get some recoveries that's great.
CUMMINGS: OK. Thank you.
OPERATOR: Thank you. Your next question is from K.C. Ambrecht of
Millenium.
K.C. AMBRECHT: Hi. Thank you very much. A couple of questions for you on
your credit: Gentlemen what have your NPAs been written down to by now?
MCMENNAMIN: I'm sorry. I missed the question. What are...?
AMBRECHT: What have your NPAs been written down to? Are they 50 cents on
the dollar, 60 cents on the dollar?
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MCMENNAMIN: Well it just depends on the individual asset. As I said we go
through a discounted cash flow estimate of the value of each credit. Some will
be written down considerably from their book value, some would not be that
significant. So it's on a case-by-case situation.
AMBRECHT: OK. Because I'm just trying to decide or figure out if there's
going to be any more potential losses in the portfolio. Could you highlight
how it's been written down, do you have a good average on what it's been
written down to?
HOAGLIN: K.C. this is Tom. I guess what I would say to you is one of the reasons
why a bank establishes what it considers to be strong reserves is so that it's
able to address like non-accrual or non-performing flow. So we are not so much
focused on how far down we have or have not written our non-performing loans, as
making sure that our coverage of non-performing loans is really strong. And I
hope the numbers that we're announcing today really suggest how firmly committed
we are to maintaining a very high coverage ratio.
AMBRECHT: OK. And then just one additional final question; do your watch
list trends kind of follow these actions announced today? And also what's
the absolute on allocated reserve in terms of dollars?
MCMENNAMIN: Well we as I said earlier we're still dealing with preliminary data.
We're not really prepared to talk about the other components of the credit. We
will be addressing those issues in our conference call in a couple of weeks.
AMBRECHT: OK. Thank you very much.
OPERATOR: Thank you. Again if you have a question please press the one
key. Your next question is from Roger Lister of Morgan Stanley.
ROGER LISTER: Yes. On your C & I portfolio, how many of the NPAs are still
paying interest? Is that a fairly significant percentage or a small
percentage?
MCMENNAMIN: I think most of the non-performing assets are still making
payments although we have them on non-performing status.
LISTER: OK. You talk about higher credit quality on auto loan and lease
production. How are you doing in terms of used car prices and lease
residuals against your expectations because that's more of the immediate risk
versus the new loans that you're putting on?
MCMENNAMIN: Well again Roger I think that's something we can talk about in our
conference call in a couple of weeks. We really wanted to limit the discussion
today just to these credit actions.
LISTER: OK. Fair enough. Thank you.
OPERATOR: Thank you. Your next question is from Todd Hagerman of Fox-Pitt
Kelton.
TODD HAGERMAN: Good morning. A couple of questions: One is just if you could
talk a little bit further just in terms of the reserve itself, in terms of your
comfort level going forward in the sense that you've been, you know, pretty
cautious on credit to this point given the status of the economy. Is that the
level that you're looking to maintain here for the next couple of quarters given
everything that you know? And then second could you give us an update just in
terms of the remaining problem loan portfolio of the mix now with the sale that
you initiated where does that leave the mix now? Has it shifted much at all
with, because you had before a large preponderance of the manufacturing and
service credits? And now with the loan sales, is for example, is commercial real
estate now taking on a bigger piece of the remaining problem on the portfolio?
MCMENNAMIN: Commercial real estate is not taking on a larger portion of the
non-performing assets or problem loans. We still remain relatively comfortable
with our commercial real estate portfolio. The two major components of the
non-performing assets as we've mentioned in the past have been in the service
sector and the manufacturing sector. On the loans that were sold, first of all
to put those in perspective, each of those two sectors represented
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about 30% of our non-performing assets at September 30. On the $47 million of
loans that were sold 42% of those loans were manufacturing credits and 23% were
in the service area.
So we don't think there'll be substantive changes in the mix, the mix of the
portfolio after the sale as opposed to before.
HAGERMAN: OK: in terms of the reserve level?
MCMENNAMIN: In terms of the reserve level it's really hard for any bank to tell
you what they're going to do with their reserves in future quarters. It's a
function of what happens to the credit quality of the portfolio, both the
consumer and the commercial portfolio. As Tom indicated we are committed to
maintaining a very strong reserve in relationship to the quality of the loan
portfolio. We feel good about the 1.76% level. We, as we had mentioned I think
in an earlier conference call, we're cautiously optimistic about credit quality
improvement in 2003, but obviously that's somewhat dependent upon the economy.
So each quarter you look at the reserve and make a determination as to whether
or not you feel that your comfortable with the adequacy of that in relationship
to your credit quality trends. And we'll continue to do that. So there's nothing
new there obviously. But I don't know if that answers your question or not.
HAGERMAN: Thanks very much Mike.
OPERATOR: Thank you. You have a follow-up question from Fred Cummings.
CUMMINGS: Yes. Mike can you touch on the geographic concentration? I
really want to focus on do you have a significant amount of the loans being
sold out of the Michigan portfolio?
MCMENNAMIN: Fred the loans really were fairly well geographically
dispersed. There really are not any large concentrations in any of our
areas including Michigan.
CUMMINGS: And then related to that, what about automobile suppliers on the
manufacturing side. Was that a major portion of this manufacturing piece
that was charged off?
MCMENNAMIN: No. It was not. I think you may recall Fred from an earlier
conference call in regard to a question as to how much exposure we had to
auto suppliers, as I recall, the number was about $135 million, something
like that. So that's not a large part of our portfolio in spite of the fact
that we're operating in Ohio and Michigan.
CUMMINGS: OK. And then lastly Mike to go after K.C.'s question further, of
the $47 million in loans that were sold, I'd imagine you had some specific
reserves allocated against those. And can you speak to whether you charged
off much more than the specific reserve that was allocated?
MCMENNAMIN: We would have charged off a little more than the specific reserves
that were allocated, Fred, and part of that is just the difference between
accounting methodology and economic analysis. If you looked at a company that
had cash flow in the future that you expected you are going to be able to
realize $20 million, you'd make your determination. Accounting methodology would
have you make you make your determination of the amount that you'd need in
reserve against that in relationship to the outstanding balance of the loan.
When you get ready to sell those assets you discount those cash flows to a
present value and so you're always going to have a little bit of a difference
just between the present value, the discounted present value and the
undiscounted cash flows. So there would have been specific reserves covering a
significant portion of these charge offs, but not 100%.
CUMMINGS: OK. All right. Thanks Mike.
OPERATOR: Thank you. I am showing no further questions at this time.
GOULD: Very good Operator. We would like to go ahead and thank everybody
for participating in today's call and we look forward to our conference at
1:30 p.m. on the 16th. Thank you.
OPERATOR: Thank you ladies and gentlemen. This concludes today's conference
call. Thank you for your participation. You may disconnect at this time.
Have a good day.
END
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