Exhibit 99.2
HUNTINGTON BANCSHARES INCORPORATED
Moderator: Laurie Counsel
July 17, 2001
1:00 pm CT
Operator: Good afternoon. My name is (Raina), and I will be your
conference facilitator today. At this time I would like to
welcome everyone to the Huntington Bancshares Second Quarter
Earnings Results conference call. All lines have been placed
on mute to prevent any background noise.
After the speakers' remarks, there will be a question and
answer period. If you would like to ask a question during
this time, simply press the number 1 on your telephone
keypad, and questions will be taken in the order they are
received. If you would like to withdraw your question, press
the pound key. Thank you.
Ms. Counsel, you may begin your conference.
Laurie Counsel: Thank you, (Raina). And good afternoon again to our
conference call participants. Thanks for taking the time
today to join us.
Here for this afternoon's conference call are Tom Hoaglin,
President and Chief Executive Officer, and Mike McMennamin,
Vice Chairman and Chief Financial Officer.
This call is being recorded and will be available as a
rebroadcast starting today at 5:00 pm through July 27 at
midnight. It is also available on the Internet for two
weeks. Please call the Investor Relations Department at 614-
480-5676 for more information to access these recordings or
if you have not yet received the news release and
presentation materials for today's call.
Today's conference call and discussion, including related
questions and answers, may contain forward-looking
statements, including certain plans, expectations, goals,
and projections which are subject to numerous assumptions,
risks, and uncertainties.
Actual results could differ materially from those contained
or implied by such statements for a variety of factors,
including changes in economic conditions, improvements in
interest rates, competitive pressures on product pricing and
services, success and timing of business strategies, the
successful integration of acquired businesses, the nature,
extent, and timing of governmental actions and reforms, and
extended restructuring of vital infrastructure.
All forward-looking statements included in this conference
call and discussion, including related questions and
answers, are based on information that was available at the
time of the call. Huntington assumes no obligation to update
any forward-looking statements.
Now I'd like to turn the call over to our CEO, Tom Hoaglin.
Tom?
Tom Hoaglin: Welcome. And thanks, everyone, for joining us. And I also
want to thank so many of you who participated in our
investor conference last Thursday.
We're very excited about the financial decisions we
announced and the strength and the stability they will
provide, the sale of our Florida franchise,
consolidation of banking offices outside of Florida, the 20%
reduction in our dividend, and the restructuring and special
charges. We're also confident about our ability to grow in
our core Midwest markets as we move forward.
In a moment, Mike McMennamin will talk about our second
quarter financial results. The special charge of $72 million
after taxes obviously had a significant impact on our
results.
We will want you to understand clearly our core operating
performance excluding the charge, so we will review our
estimates for the second half of 2001 and for full-year
2002.
As I mentioned last Thursday, going forward we want
Huntington to be conservative in its projections and
consistent in its record of meeting and exceeding them. We
will also review with you some of our financial analyses
about Florida.
One update since last Thursday, today we are announcing the
appointment of Jim Dunlap as Region President for Western
Michigan. Jim is a 22-year Huntington veteran and has done a
superb job during the last three years as Region President
in Florida. He is energetic, a tremendously effective leader
and team-builder, and a great salesman.
Jim will be based in Grand Rapids and start his new
assignment in mid to late August. His appointment represents
a significant commitment by Huntington to build our customer
base, market share, and financial performance in that key
market.
Now here is our CFO, Mike McMennamin, to review the
financials. Mike?
Mike McMennamin: Thanks, Tom. As we've already announced, we intend to
recognize restructuring and other special charges totaling
$140 million after tax in the second, third, and fourth
quarters.
In the second quarter, $72 million of these charges were
recognized, related primarily to credit and asset impairment
issues. Excluding the $72 million of charges, operating
earnings totaled $74.5 million or 30 cents a share.
The numbers shown on this next slide, Estimated
Restructuring and Other Charges, are pretax. Of the $111
million pretax charge recognized during the quarter, $72
million was credit-related, $37 million was asset
impairment, and $2 million was legal reserves.
Of the $72 million credit-related charge, $26 million
represented lending businesses that we have exited, sub-
prime auto lending, which is a $150 million portfolio that's
being run off, embedded losses estimated at $15 million,
truck and equipment portfolio, a $60 million portfolio with
embedded losses of $11 million. These are loans on the large
tractor/trailer rigs.
Twenty million dollars in consumer and small business loans
greater than 120 days are being charged off or reserved.
This represents a more conservative application of current
banking regulations and represents an acceleration of
charge-offs that would have occurred in coming months.
Twenty-one million dollars of the reserve is increased
reserves for consumer bankruptcies. Bankruptcies have
increased 18% nationally versus a year ago and are up
approximately the same amount at Huntington.
The increase is related to a deterioration of the economy
and the weakening of consumer balance sheets and secondly,
increased bankruptcy filings in anticipation of the proposed
more stringent bankruptcy legislation. Five
million of the total charge represents an increase in
commercial loan reserves. And $37 million represents asset
impairment.
Twelve million of the asset impairment is a write-down of
the residual interest in two auto loan securitizations that
were completed in 2000. Charge-offs on these loans have
increased beyond levels anticipated when the securitizations
were booked.
Five million dollars represents a loss on the sale of $15
million Pacific Gas and Electric Commercial Paper in June.
Twenty million dollars of the reserve represents an increase
in the reserve for auto lease residuals.
The remaining $104 million pretax charge is expected to be
recognized in the third and fourth quarters. The remaining
charge is related to closing costs on branch consolidations,
costs associated with the sale of the Florida branches, the
write-down of technology investments, and the establishment
of legal, accounting, and operational reserves.
My remaining comments today will address the second quarter
operating earnings. Turning to the next slide, Earnings Per
Share, in April we provided earnings guidance for the second
quarter of 27 to 29 cents per share.
Earnings for the quarter came in at 30 cents with core
earnings totaling 28 cents per share, consistent with our
projections. There was $5.9 million pretax income in the
second quarter of non-core earnings, roughly 2 cents a
share.
Residential mortgages totaling $107 million were sold during
the quarter and a $2 million gain recognized. Two point
seven million dollars of security gains were realized. And a
$1.2 million gain was recognized on the sale of a small
branch in Indiana. The core earnings of 28 cents per share
were the
same as were reported in the fourth quarter of 2000 and the
first quarter of this year.
On a cash basis, second quarter earnings were 33 cents per
share, versus the 30 cents on a reported basis, with the
difference being the after-tax amortization of goodwill.
Return on equity on a cash basis improved to 13.7% during
the quarter.
Turning to some of the key performance indicators, the net
interest margin improved slightly during the quarter from
3.93% to 3.97%, following a 23 basis point increase from the
fourth quarter to the first quarter. The efficiency ratio
also declined from 62% in the first quarter to 58.6%.
The tangible common equity to asset ratio was basically
unchanged during the quarter, even after the $72 million
after-tax charge was realized. As announced at our
investment conference last week, our goal was to maintain a
minimum tangible common equity to asset ratio of 6-1/2% when
we are completed with the Florida sale.
The next slide just takes a look at some of the highlights
of the second quarter. As mentioned, the net interest margin
increased 4 basis points during the quarter, with almost all
of the increase related to increased loan fees that are
included in net interest income.
Higher loan fees were generated in the auto loan and lease
business as volume picked up from the first quarter levels
and also in commercial real estate. Managed loan growth
increased at a 5% annualized rate during the quarter.
The decline in the efficiency ratio from 62% to 58.6% was
driven by an $800,000 decline in operating expenses and a
$20 million increase in revenue,
$5 million of net interest income, and $15 million in non-
interest income during the quarter.
Net charge-offs as a percentage of average loans increased
from 55 basis points in the first quarter to 73 basis
points. The increase occurred primarily in our auto loan and
lease portfolio as well as the commercial portfolio. Non-
performing assets as a percentage of total loans and OREO
increased 19 basis points or $41 million during the quarter.
Turning to the income statement, pretax earnings for the
quarter totaled $102.4 million, a $9.1 million increase.
Higher provision expense of $12.3 million was more than
offset by a $4.9 million increase in net interest income and
a $15.1 million increase in non-interest income led by a
very strong performance in the mortgage banking unit. A
small reduction in operating expenses and a small increase
in security gains also benefited the quarter.
Turning to managed loan growth, the following loan growth
information has been adjusted for the impact of
acquisitions, securitization activity, and asset sales.
Managed loan growth slowed only slightly during the quarter
to a 5% annualized growth rate. Growth during the first half
of the year has been at the 5% to 6% range, versus an 8% to
9% rate during the second half of last year, reflecting the
significant slowdown in the economy.
The decline in the growth of commercial loans during the
quarter -the decline in the growth rate, I should say, is
related to a significant slowing in the demand for
automobile floor-plan credit as auto dealers have sharply
curtailed their inventories.
C&I loan to land - C&I loan demand, excluding floor-plan
loans, increased at a 7% rate during the quarter, roughly
the same as in the first quarter. Commercial real estate
loans were basically unchanged during the quarter, as
double-digit growth in construction loans was offset by
declines in permanent loans.
After no growth in the first quarter, auto loans and leases
grew at a 6% annualized rate, helped by seasonal factors
during the quarter, and are up 10% versus the prior year's
quarter.
Consumer loans, other than indirect auto loans, increased at
an 8% rate during the quarter, led by double-digit increases
in home equity line of credit, continuing the strength we've
seen in that area over the last year.
Just a comment on residential real estate loans, as we
discussed at the investor conference, we do not feel that
residential mortgage loans are a good use of our capital or
our funding capacity. As such, we've been selling these
assets in the last year.
Over the last year, these loans have declined from $1-1/2
billion to $900 million. This table, however, shows 9%
growth versus the year-ago quarter. And that represents
organic growth. These numbers in the table have been
adjusted for securitizations and sales activity.
Turning to non-interest income, revenue before security
gains increased $15.1 million or 13% versus the same quarter
last year and also from the same - from the first three
months of 2001.
Mortgage banking income was particularly strong in the
prevailing lower-rate environment with revenue increasing
$10.6 million or 131% from a year ago, an $8.7 million
increase from the first quarter.
Origination volume expanded to $951 million during the quarter,
compared with $363 million a year ago and $690 million in the first
quarter of the year. Mortgage banking results for the period just
ended were also positively impacted by the sale of $107 million of
portfolio loans which generated a gain of approximately $2 million.
Brokerage and insurance revenue was $5.4 million or 39% higher than
the year-ago period, with insurance income as the primary driver.
Brokerage income posted a 5.9% increase, despite a relatively
volatile equity market. Annuity sales continue to be strong,
increasing 53% versus the second quarter of last year.
Trust income was up 15% over the prior year, indicative of increased
revenue from Huntington's proprietary mutual funds. This
improvement is a function of higher asset balances, aided in part by
the introduction of five new funds, as well as price increases.
The $4-1/2 million decline in other non-interest income versus the
prior year is primarily the result of significantly lower
securitization activity. We securitized $556 million of auto loans
in the prior-year quarter, versus only $107 million in the second
quarter of this year.
Turning to non-interest expense, NIE increased $35.2 million or 18%
compared with the same period last year, but was essentially flat
with the first quarter of 2001.
The increase from a year ago was due to several factors, including
$9.8 million of accrual adjustments in the prior-year quarter that
resulted in a low expense base for that period.
The remaining increase was primarily due to higher sales commissions
and other personnel-related costs as well as premium space for the
auto lease residual insurance. The year-over-year impact of
purchased acquisitions also drove expenses higher in the recent
quarter.
Relative to the first quarter of this year, personnel-based costs
increased $4.4 million as annual merit pay adjustments were effected
in the second quarter and sales commissions increased in connection
with the strength in fee-based businesses, particularly mortgage
banking.
Substantially offsetting the higher personnel cost was the $3.8
million reduction in other non-interest expense. This reduction was
related to the first quarter $4.2 million loss associated with the
sale of Pacific Gas and Electric Commercial Paper.
While the efficiency ratio dropped from nearly 62% in the first
quarter to 58.6% in the recent period, the decline was primarily
driven by a $20 million increase in revenues. We do expect
operating expenses to trend lower in the second half, indicative of
the NIE initiative program that we introduced during the second
quarter.
The next slide shows our non-performing asset trend. Non-performing
assets increased $41 million during the quarter from $125 million to
$166 million. Non-performing assets as a percentage of total loans
and other real estate owned increased from 60 basis points to 79
basis points.
This slide depicts how Huntington's non-performing asset performance
has compared in recent quarters with a peer group of banks. The
increase in non-performing assets is primarily attributable to two
credits, a $16 million credit to an assisted living healthcare
operation -- this is the credit that we mentioned
in our last earnings call -- and $14 million to a retailer of farm
and agricultural equipment.
Turning to charge-offs, net charge-offs as a percentage of average
loans increased from 55 basis points in the first quarter to 73
basis points in the second quarter.
Charge-offs increased in both our consumer and commercial
portfolios. The increase in charge-offs in recent quarters appears
to be consistent with increases that are being experienced by other
peer banks.
The next slide shows the components of our net charge-offs by major
portfolio. In the second quarter commercial charge-offs increased
from 41 to 67 basis points. Commercial real estate charge-offs
increased slightly to 18 basis points, but are at a very low level.
Consumer charge-offs increased 17 basis points to 95 basis points
during the quarter.
Of the commercial and commercial real estate charge-offs, no
individual charge-off exceeded $2-1/2 million, nor were charge-offs
concentrated in any particular industry.
The next slide provides more detail on our consumer charge-offs.
The increase from 78 to 95 basis points in charge-offs during the
quarter is related to the indirect auto loan and lease portfolio,
with charge-offs in that area increasing from 113 to 143 basis
points.
The higher indirect charge-offs are the result of lower-quality
paper originated between the fourth quarter of '99 and the third
quarter of 2000, the weaker economic environment and the adverse
impact that is having on consumer balance sheet, and an increase in
the average loss per vehicle.
The increase in charge-offs in the auto lease portfolio during the
quarter from 89 basis points to 137 basis points was partially
related to an operational problem that had the impact of first
quarter charge-offs being booked in the second quarter. X that
change, charge-offs would have increased from 109 to 121 basis
points.
Loans originated in the fourth quarter '99 to the second quarter of
2000 period represent 20% of the loan portfolio and were 39% of the
losses in the second quarter.
Along the same lines, leases originated in the fourth quarter of '99
to the third quarter of 2000 period represent 35% of the lease
portfolio, but 53% of the second quarter losses. We expect
improvement in portfolio credit quality as these vintages become a
smaller percentage of the portfolio and ultimately roll off.
The higher credit quality originations in the last year represent
45% of the total loan portfolio and 35% of the lease portfolio. The
average charge-off in the loan portfolio has increased 23% in the
last year from $5300 per unit to $6500.
In the leasing portfolio the average charge-off per unit has
increased 35% in the last year from $8400 to $11,500. This
increased loss per vehicle is a reflection of the deterioration in
the used car market.
There has been substantial improvement in the risk profile of loan
originations in recent vintages and quarters. Average FICO scores
on loans originated in the first half of 2001 were 713. That
compared with 690 in late '99 and the first half of 2000. The
percentage of D-Tier paper originated declined from 18% to 6% during
the same two time periods. These same trends apply to the lease
portfolios.
With the improvement in the risk profile of recent originations, we
expect to see declines in the charge-off levels that we've seen over
the last six months. The credit quality in the home equity direct
installment and residential real estate portfolio is stable and
performing well.
Turning to the next slide, 90-day-plus delinquencies in the total
portfolio declined from 49 basis points to 32 basis points during
the quarter. If you exclude the impact of the charge-offs that were
included in the second quarter special charge, delinquencies would
have declined from 49 basis points to 42 basis points.
Consumer delinquencies would have been basically unchanged,
declining slightly from 69 to 66 points. And commercial and
commercial real estate delinquencies would have declined from 29
basis points to 17 basis points.
The loan loss reserve was increased from 1.45% to 1.67% during the
quarter, reflecting $44 million of additional credit reserves
associated with a special charge. The expectation is that this
reserve will decline as these loans are charged off.
Despite the larger reserve for loan losses, the $41 million increase
in non-performing assets reduced the loan loss reserve coverage
ratio from 239% to 211%. The next slide just provides some detail
on the impact of the special charge on the allowance for loan losses
in the second quarter.
At last week's investor conference in New York, we provided earnings
guidance for the remainder of 2001 and 2002. We want to provide you
with a little more detail today, particularly on the Florida market
disposition.
The next slide you see, entitled 2002 Earnings Projections, is the
same slide that we showed you last week, creating a 2002 earnings
per share estimate by building on the 2001 estimate of $1.15 to
$1.17 per share.
The next slide, Goodwill and CDI Amortization, breaks out the detail
of our intangible assets, goodwill, and the core deposit intangibles
between Florida and the rest of the company.
These are balances that are projected as of December 2001. Total
Florida intangibles will total $526 million at that date. Only $191
million of goodwill will remain on Huntington's books.
The numbers at the bottom of the slide are the per share
amortization of goodwill and the core deposit intangibles, broken
out again by Florida and the rest of the company. Elimination of
goodwill amortization will have the impact of increasing
Huntington's earnings per share by 11% - I'm sorry by 11 cents in
2002, independent of the sale of Florida. This is the same 11 cents
per share increase in 2002 earnings that you saw on the previous
slide related to accounting change goodwill.
The next slide provides some detail on the excess capital that will
be created or generated from the Florida sale. This shows the
capital is generated and released by the sale of Florida and also
the capital required to offset the $140 million of after-tax
charges, some of which have been recognized in the Second Quarter,
but the remainder be recognized in Third and Fourth Quarter, plus a
small amount of capital required to true up or to bring the tangible
common equity ratio up to 6-1/2% by the end of the year.
Assuming the Florida branches are sold at Huntington's book value,
that is at $526 million of remaining intangibles we highlighted just
a moment ago, capital of $526 million will be generated.
In addition the sale will release $170 million in tangible capital.
We've assumed a ratio here of 6-1/2%. It's currently required to
support the assumed $2.6 billion of tangible assets expected to be
sold late in 2001.
This $696 million total will be augmented by any after-tax gain that
the sale generates. That is, a deposit premium above Huntington's
book value of $526 million. This 696 million plus whatever after-tax
gain is generated will be reduced by the $140 million of after-tax
charges that we will recognize this year, and $18 million in capital
required to bring a tangible common equity asset ratio to 6-1/2%.
Thus the net capital available for stock repurchase is the sum of
$538 million plus whatever after-tax gain you want to assume we
generate on the sale.
The final slide, we had showed in the presentation two to six cents
earnings per share resulting from the disposition of the Florida
branches at the investor presentation. There are three components of
that number.
First of all, the Florida earnings would go away as a result of the
sale. This represents the singe digit return on the $696 million of
equity that Huntington has invested in Florida. As I said last week
these cash earnings are net of, or after, core deposit intangible
amortization. But these foregone earnings exclude the benefit from
the elimination of goodwill amortization in Florida. The earnings
give up on this component is a negative.
The second component is the earnings per share pick up resulting
from the repurchase of Huntington stock. On our model we assumed
$300 to $400 million of stock was repurchased. The source of funds
for the stock repurchase is the net excess capital generated from
the sale, that is the $538 million on the previous slide plus
whatever after-tax gain we might recognize. This repurchase adds to
earnings per share and is a positive component of the
Florida market disposition.
The third component of the earnings - the third component is the
earnings on the excess funding that's created by the disposition.
This is the earnings on the sum of the $538 million plus the after
tax gain, less whatever funds are actually utilized for the stock
repurchase. Hopefully that provides you with a little bit more
detail on some of the discussion that we had last week.
That concludes our presentation this morning. We'd be happy to take
any questions.
Operator: At this time I'd like to remind everyone, in order to ask a question
please press the number 1 on your telephone keypad. Please hold for
your first question.
Your first question comes from Derek Statkevicus with KBW.
Derek Statkevicus: Hi, how are doing today?
Mike McMennamin: Good.
Derek Statkevicus: A quick question on the Florida sale. Again you just went
over some graphs that showed even in what at least I would consider
a fairly conservative sale price for Florida, you come up with round
figures 540 million of capital available stock repurchase. Yet at
the same time, in terms of trying to figure out what the earnings
accretion you'd stock repurchase of $300 to $400 million. What's the
disconnect there? Why not use the, you know, 540 million? Again
assuming that you'll probably sell Florida for at least a small
gain.
Mike McMennamin: Derek, I don't think that there's a disconnect. What we've -
we don't
know exactly how much stock we'll be able to buy back and what the
time period we will be able to buy it back in. The assumption is
just that in 2002 that we'll only be able to buy back something like
$300 to $400 million of stock. If we can buy back more in 2002 then
the benefit will be more - or the transaction will be more
accretive.
I think we did point out that the 2002 does not represent the total
accretion benefit from this sale, rather that we expect that the
remaining stock to be repurchased in 2003 with a corresponding
benefit or accretion in 2003 earnings. So it's just a conservative
assumption. We could have used a higher number, we chose not to.
Derek Statkevicus: Okay. So again, the assumption is that the stock is bought
back in the open market over time, as opposed to some sort of
accelerated, you know, program relatively shortly after the
completion of the sale of Florida.
Mike McMennamin: Well the assumption in the model is just that the stock gets
bought back. There's no assumption - we haven't decided as we
mentioned last week what program or what process we use to buy back.
Derek Statkevicus: Okay, fair enough. Thank you.
Operator: Again I would like to remind everyone, in order to ask a question
simply press the number 1 on your telephone keypad.
Your next question comes from Ed Najarian with Merrill Lynch.
Ed Najarian: Yeah, good afternoon guys. Mike, could you just go over the 72
million of credit related charges - extra charges that you went over
in the beginning of the call and you broke that out - can you break
that out for me once again?
Mike McMennamin: Sure, hold on just one second. Okay it was $26 million, Ed, in
businesses that we have exited. That was sub-prime auto lending that
totaled $15 million. There's another $11 million of estimated
embedded losses in a truck and equipment portfolio, about a $60
million portfolio. These are both portfolios that we are no longer
making loans in. So that's 26 million.
There is $20 million in consumer and small business loans that's
about 75% consumer that are over 120 days delinquent that are being
charged off or reserved for. And this just represents as you
probably know banking regulations require you to charge these loans
off if they're more than 120 days delinquent. But there are a number
of exceptions to that - to those rules. We are just getting a lot
more conservative in the application of those rules to our
portfolio. That's 20 million.
We've got $21 million which are increased reserves for consumer
bankruptcy both related to just the deterioration we're seeing in
consumer balance sheets as well as the increase in bankruptcies as
related to the deterioration of the economy as well as, we think,
some bankruptcy filings in anticipation of the proposed legislation.
Just $5 million represents an increase in commercial loan reserves
and I think that was the total.
Ed Najarian: Okay, thanks. And then when you talk about the core net charge off
ratio which was I believe 70...
Mike McMennamin: Seventy-three basis points.
Ed Najarian: Seventy-three basis points, and then in the press release there's
an actual net charge off ratio which I believe was about 120 net
basis points?
Mike McMennamin: I think the difference Ed is the - the difference is the 125
basis points is total charge off including those that are included
in the special charge, that
was I think $27 million of charge offs that were embedded in the
special charge. If we add those to the charge off that we ran
through the operating part of the income statement we come up to 125
basis points.
Ed Najarian: Okay so now that $27 million difference was essentially the
charges that are -were taken that are in - that are aligned with
that 72 million that you just broke out for me. Is that correct?
Mike McMennamin: The 125 basis points includes $27 million of actual charge
offs...
Ed Najarian: Right.
Mike McMennamin: ...that were embedded in the $72 million. The $72 million
credit portion of the reserves was $27 million of charge offs that
actually were booked and 40 - 44 or $45 million of additional
reserves that were put up. So the additional reserves would show up
in the form of a higher loan loss reserve ratio that went from 145
to 167.
Ed Najarian: Okay. I got that. I'm clear on that. Now that extra 44 to 45
million that was put in to the reserve, how quickly do you expect
that to be used up or charged off? Will we see that go away in the
form of extra charges in the Third and Fourth Quarter above and
beyond the 65 basis point ratio that you talked about last week?
Mike McMennamin: No, we don't think we will. First of all the assumption in
building that $45 million in reserves up is that as those charge
offs occur that those - the reserve would actually be reduced as the
charge offs go against the reserves have already been established.
That would imply that the reserve over some period of time would go
back to the 145 basis points that we were at to begin with which we
did feel was adequate.
Ed Najarian: Okay.
Mike McMennamin: The charge offs that we've assumed - we however in our
earnings forecast for the second half of 2001 and also for the
2002 period we've assumed charge offs of 65 basis points. So you
could argue we've got an element of conservatism that's built in
there.
Ed Najarian: Okay. So in some ways you're - wait, I think I sort of missed that
last point. There won't be then expected additional charges above
and beyond the 65 basis points. There will be some, but not as
much as the 40 to 45 million I guess.
Mike McMennamin: Well we're saying that the - we do not expect charge offs in
the next year and a half to be above 65 basis points.
Ed Najarian: Okay.
Mike McMennamin: Now that would imply - if charge offs stay exactly at the
level that they've been at in the first half excluding this charge
for just a second, charge offs in the first half have averaged 64
basis points. Let's assume for the sake of discussion the charge
offs were to remain at that level for the rest of 2001 and for
2002. That would imply that the reserve would not be drawn down.
Ed Najarian: Right.
Mike McMennamin: So we've got an element of conservatism built into the
numbers. Stated another way, if we're going to draw down the
reserve by $45 million over the next few quarters then you would
expect our reported charge offs to actually decline from the 65
basis points that we've assumed. We're unwilling to make that
assumption today at this stage of the game. So there's an element
of conservatism built in there.
Ed Najarian: Okay. I got it, thanks.
Operator: Your next question comes from Brock Vandervliet with Lehman Brothers.
Brock Vandervliet: Good afternoon. I could just ask a completely unrelated
question tied to the indirect auto securitization page. You
mentioned then in passing Mike that you'd securitized 550 million or
so last year and just 107 or so this year. Was that just due to
market conditions or another reason?
Mike McMennamin: Brock, we had two securitizations last year. There was a $500
million deal effected in the First Quarter. In the Second Quarter
very - we securitized a billion dollars of which on - of which some
that got done in the Second and Third Quarter. That was the 556
million I was referring to. There have been no securitizations done
since that Second Quarter securitization. The $107 million that we
do - the billion dollar securitization was done last year is a
revolving securitization where you have - where you top off the
loans sold on a quarterly basis keeping it up to the billion dollars
outstanding. The top off in the First Quarter - in the Second
Quarter was $107 million of that.
Brock Vandervliet: Okay, thank you.
Operator: Your next question comes from Fred Cummings with McDonald
Investments.
Fred Cummings: Yes, good afternoon. Mike can you touch on how the Florida
operation is impacted 1, the service charge on deposit growth or any
of the - assuming that's the one major line item that Florida
would've - might've influenced. And then related to that you had
pretty good growth in your interest bearing checking accounts and
I'm wondering if you exclude Florida how that growth rate would
look.
Mike McMennamin: Fred I don't have any specific numbers but let me talk
anecdotally. The Florida deposit mix is skewed away from demand
deposits. My recollection is that only 13% of our total deposits in
Florida are demand deposits, verses 19% of the total deposits in the
rest of the company being demand deposits. So the service charge -
your question on the service charge income I'm going to say that the
Florida - Florida should not have been a large component of that.
In terms of the growth in the non-interest bearing deposits...
Tom Hoaglin: Interest bearing deposits.
Mike McMennamin: I'm sorry, interest bearing deposits.
Fred Cummings: Yes.
Mike McMennamin: You're talking interest bearing checking?
Fred Cummings: Yeah, interest - the demand accounts. Yeah, the interest bearing
demand accounts.
Mike McMennamin: Don't really have any illuminating comments on that. I'd have
to check on that and I'll get - I'll be happy to get back to you
later.
Fred Cummings: Ok. And could you characterize how Michigan did, what's on the
deposit growth side?
Mike McMennamin: Michigan has been doing well of late on deposit growth. As you
know and as everyone knows we have been challenged in Michigan. But
the deposits - we ran a couple of the special deposit campaigns up
there and have had some success in the last few months. So Michigan
has really picked up the pace verses a year ago when they were
lagging considerably.
Fred Cummings: Ok, thank you.
Operation: At this time there are no further questions - okay, you have another
question from Brock Vandervliet of Lehman Brothers.
Brock Vandervliet: Yeah Mike this is Brock. If you could just follow up on a
comment you made on the conference call a couple of days ago. You
described the returns earned on the Florida franchise's mid single
digit or single digit. Could you - that strikes me as rather low.
I'm just trying to get at why that was, whether it's small branch
size or the deposit mix. Could you speak to that a little bit?
Thanks.
Mike McMennamin: Brock I think that there's two or three factors that are
involved in the - first of all we've got a relatively large capital
investment down there. We've got on the slides that we just walked
you through it's $696 million, I think we said $700 million in our
presentation. So we $700 million invested down there. That's over
30% of our capital, Florida would represent only 23 or 24% of our
deposits so we've got a disproportionate share of capital down there
because of the purchase accounting. I think that's one factor.
Secondly the deposit mix as I mentioned is skewed away from demand
deposit and heavily toward CDs just because of the demographics of
the population. So you tend to earn - you're - the margin that you
earn on your deposit business are reduced by I want to say about 30
basis points pre-taxed so you're earning less on your deposit
business.
And thirdly unlike the rest of the company Florida has got a loan to
deposit ratio that would be just a little south of 50%. And of
course banks tend to make money when they earn relatively loan to
deposit ratios. So I think that it's a combination that we've got a-
we have a disproportion share of our
capital invested down there, the deposit mix is just not as rich a
mix as we've experienced elsewhere in the franchise, and we have a
relatively low loan to deposit ratio vis-a-vis the rest of the
company down there. I think when you add those factors up that just
creates a relatively low return on our investment.
Brock Vandervliet: Thank you.
Operator: Your next question comes from Ed Najarian with Merrill Lynch.
Ed Najarian: Yeah, it's just a quick follow up. When you're talking about your
$1.15 to $1.17 guidance for this year is that including a 28 cent
Quarter for this Quarter the core number you broke out or the 30
cent operating number?
Mike McMennamin: Let's take the mid point in $1.16. We've reported total
earnings for the first half of 57 cents and we've reported total
core earnings of 56. So Ed there's only a penny difference...
Ed Najarian: Yeah, okay.
Mike McMennamin: From one one way or another. We are tending to think in terms
of core earnings.
Ed Najarian: Okay, thanks.
Operator: Your next question comes from Fred Cummings with McDonald
Investments.
Fred Cummings: Yeah, a follow up. Tom, when you talked about you targeted cost
savings of $36 million pre tax that struck me as being maybe
somewhat conservative as it represents about 4% of your annualized
expense base. Is that a conservative number, and - or is there
something in your cost structure that suggests there - why would -
shouldn't we expect to see more improvement on that front?
Tom Hoaglin: Fred, thanks for the question. I fully expect that you will see
more improvement as we go forward. What we did earlier this year was
to focus our senior management team around what actions we could
take sooner than later to tamper down the expense growth that we
were looking at in our budget and our forecast for 2001.
And my marching orders was not - included not interfering with
serving customers, growing businesses. We needed to focus expense on
the - take out in the near term on areas where it was duplicative or
just not necessary. So what we did not do included in this exercise
was to probably get after some of the tougher decisions. We didn't
do a lot of actions that would have affected significant numbers of
employees. What we did was to make sure the actions could be
implementable in 2001 with savings captured in 2001. So we moved
swiftly.
But we fully understand that that's merely a down payment on our
overall effort to control expenses. Going forward we want to make
sure that as we grow revenues significantly we do not grow expenses
commensurately so that we've got a nice gap between the rate of
revenue growth and a rate of expense growth or hopefully non growth
as the case may be. So we did what we could easily do quickly so
that we could achieve the savings during 2001 but we're by no means
suggest that our work is finished on the expense front.
Fred Cummings: Okay. Thanks Tom.
Operator: At this time there are no further questions.
Laurie Counsel: Okay. Operator I think we will conclude our presentation for
this afternoon. Again thank you for joining us.
Operator: Okay, this concludes your conference. You may now disconnect.
END