Huntington Bancshares Inc (HBAN) 2002 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Unizan Financial Corp. First Quarter 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 star, then the number one on your telephone key pad, 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.

Mr. Pennetti, you may begin your conference.

Good afternoon, everyone, and welcome to Unizan Financial Corp.'s first quarter 2002 financial results conference call. Thank you for joining us this afternoon. Hopefully, everyone has had an opportunity to review the press release we distributed at the opening of the market today.

Joining me this afternoon is Unizan Financial Corp.'s President and CEO, Roger Mann, and Jim Nicholson, Executive Vice President and Chief Operating Officer.

Before we hear from Roger, I'd like to inform you that our 2002 10Q will be filed on or about May 10th, 2002. Also, this conference call is being broadcast live over the internet on our web site at Unizan.com. Additionally, the call is being recorded and will be available later today via webcast replay on the internet, or via the telephone at 1- 800-642-1687, for U.S. participants, or 706-645-9291 outside of the United States. The conference ID number, again, is 3795535.

Before we get started, I'd like to remind you that during the course of this conference call, we may make projections or other forward looking statements regarding future events or the future financial performance of Unizan. We caution you that such statements are only predictions and that actual events or results may differ materially. We refer you to the documents the company files from time to time with the SEC, specifically, reference is made to BankFirst Ohio Corp.'s, UND Corp.'s and Unizan Financial Corp.'s filings, including BankFirst Ohio Corp.'s annual report on form 10K for the year end of 12/31/2000, UNB Corp.'s annual report on form 10K for the year ending December 31st, 2001. These documents describe important factors that could cause the actual results in Unizan's operations to differ materially from those contained in our projections or forward looking statements.

At this time I'd like to turn the call over to Roger.

Thank you, Jim. Good afternoon, everyone, and thank you for participating in this conference call.

We appreciate your continued interest and the confidence you have shown in Unizan Financial Corp. I am pleased with the overall first quarter performance of our business lines and the strength of our core earnings, which gives us optimism for the future. While one time merger related and restructuring charges had an impact on our bottom line results, we believe we have taken the right actions to strengthen our financial position as we move through 2002 and beyond.

As you see from the release, the reported one time merger related and restructuring charges and a special provision expense that impacted our performance in this quarter, there is a lot of information to absorb. In a moment, Jim Pennetti and Jim Nicholson will review these items with you in detail.

We've had an active first quarter, including the integration of the merger between BankFirst Ohio Corp. and UNB Corp. to form Unizan Financial Corp. I am very encouraged by the progress we have made since March 7th. I am pleased that we have nearly completed our computer systems conversion process and have put our management team into place. The strength of this team is being leveraged to provide the best of the best, superior financial service, premier products and efficient delivery channels.

The March 7th closing of our merger marked the culmination of months of preparation. Now we must execute professionally and flawlessly. Wall Street, our client base, shareholders and the communities we serve are keeping a watchful eye on our progress. Our immediate attention is on the thoughtful, deliberate integration of our two companies in a way that best serves our clients, continues to grow our businesses, and presents new opportunities for our staff members. Attention to detail is critical as we work to ensure a smooth and successful integration of our companies. We believe our performance will enhance shareholder and franchise value.

I want to reiterate that excluding one time merger related charges, I am pleased with our core earnings in the first quarter. While we progress through the integration process, our goal will be to continue to provide the best possible service, products and delivery channels at the lowest possible cost to the company. We continue to believe that this transaction will prove to be financially compelling to our shareholders and that Unizan will continue BankFirst's and UNB Corp.'s traditions of earnings per share growth year over year.

Now let's take a look at the financial results, which Jim Pennetti will review with you.

Thank you, Roger. As you are all aware, Unizan Financial Corp. was formed as a result of the merger vehicles between BankFirst Ohio Corp. and UNB Corp., which was completed on March 7th of this year. Thus, this merger is being accounted for under the purchase method of accounting for business combinations.

Also, the first quarter financial results include Unizan's results as of March 7th, 2002, and BankFirst Ohio Corp.'s results prior to the merger. The historical numbers reported for comparison purposes reflect BankFirst Ohio Corp.'s results. And finally, all per share data has been adjusted to give effect to the exchange of one BankFirst Ohio Corp. share to 1.325 shares of UNB Corp. stock.

The net loss for the first quarter, including $6.6 million after tax, of one time merger related and restructuring charges, and additional provision expense, was $1.3 million, or 8 cents per diluted share. This compares with net income of $3.8 million, or 33 cents per diluted share for the first quarter of 2001.

Tangible net income for the first quarter, that's net income excluding the effect of the amortization and the impairment of good will and other intangibles, was $250,000 or 2 cents per diluted share. That compares with $4.3 million or 37 cents per diluted share the first quarter of '01.

Now, net income adjusted for one time merger related and restructuring charges and the additional provision expense was $5.3 million or 35 cents per diluted share. The one time merger related and restructuring charges on an after-tax basis included $638,000 of severance and benefit plan expenses, $89,000 in the write-down of fixed assets and miscellaneous marketing expenses, the recognition of $650,000 of franchise tax expense and a write-down on other real estate owned of $621,000.

The expenses also included a charge to earnings of $1.4 million for the impairment of good will for prior acquisitions made by both BFOH and UNB Corp. An additional provision expense of $3.4 million after tax was also taken as a result of the company's review of general economic conditions and uncertainties, and an updated analysis of the new company's loan portfolio.

Total revenue increased $4 million or 27.8 percent to $18.4 million for the three months ended March 31st, 2002, compared with $14.4 million for the same period a year ago. Net interest income for the first quarter was $14.3 million for an increase of $3.3 million or 29.5 percent, compared with net interest income in the first quarter of 2001. Interest income decreased from $30.3 million to $28.9 million in '02, while interest expense decreased from $19.2 million for the first quarter of 2001 to $14.6 million for the same period in 2002.

Net interest margin at March 31st, 2002 was 3.6 percent compared to 3.08 percent at March 31st, '01. Improvement in the net interest margin was primarily due to lower cost of funding to the new company.

Non-interest income increased from $3.4 million to $4.1 million for 2002, or an increase of 22.3 percent. This was mainly due to increased trust income and customer service fees. Non-interest expense, excluding the one-time merger related expenses and restructuring charges, totaled $10.1 million at March 31st, '02 compared with $8.3 million in 2001. That's an increase of about 22 percent. The increase in non-interest expense was due to an increase in salaries and benefits and data processing expenses.

For the first quarter of '02, Unizan Financial Corp.'s return on average equity on an adjusted basis was 13.01 percent. The return on average tangible equity, again adjusted, was 23.3 percent. For the first quarter of '02, the corporation's return on average equity was a negative 3.05 percent, compared with 14.24 in '01. The return on average tangible equity was .85 percent, compared with 19.79 percent in '01.

The corporation's return on average assets, again on an adjusted basis, was 1.22 percent for the first quarter of '02. And Unizan's return on average assets was a minus .29 percent for the first quarter of '02, compared with 1 percent for the first quarter of '01.

Total assets increased a billion dollars, from $1.6 billion on March 31st, '01, to $2.6 billion on March 31st, '02. Total loans increased from $1.1 billion to $1.9 billion. The breakdown on that was, home equity loans increased 193.7 percent, commercial real estate loans increased 46.3 percent, while residential mortgage loans increased 23 percent from March 31st, '01 to March 31st, '02. Again, these reflect the merger of BankFirst Ohio Corp. and UNB Corp. on March 7th.

Likewise, total deposits increased from $1.1 billion at March 31st, '01 to $1.9 billion at March 31st, '02. And Federal Home Loan Bank borrowings increased from $168 million last year to $266 million this year. Shareholders equity was $283 million at the end of the first quarter 2002 versus $110 million at 12/31/01, and $117 million at December 31st, '01.

As a result of the use of purchase accounting for the merger of equals between BankFirst Ohio Corp. and UNB Corp., the balance sheet has undergone many changes relating to the allocation of the premium over book value. The balance sheet had several categories of intangible assets that I would like to talk to you about.

First of all, the good will of the corporation now totals $94 million. Of that total, $75.5 million was created as a result of the merger between BankFirst Ohio Corp. and UNB Corp. And also included in that total is $18.5 million of good will resulting from the historical purchase accounting acquisitions made by the separate companies. Of this good will, $17.3 million will no longer be amortized, but rather will be tested for impairment as prescribed by the new accounting guidelines. The remaining good will of $1.2 million, which was a result of branch acquisitions that were made by UNB Corp., will continue to be amortized.

The corporation's total core deposit intangibles is $23.5 million, which includes $21.5 million as a result of the merger of equals, and $2 million in earlier acquisitions made by both companies. The corporation will be amortizing the core deposit intangible created from this merger on an accelerate basis over 10 years. The core deposit intangible created as a result of the merger equates to 1.2 percent of the corporation's total deposits of $1.9 billion.

Of the total deposits, $967 million is in time deposits, and the other $889 million is in transaction accounts. Based on the transaction account total, the core deposit intangible equates to about 2.4 percent of core deposits. In 2002, the amortization of good will described previously and the core deposit intangible amortization equates to approximately 14 cents per share.

With that, as was stated in the corporation's March 11th release announcing the completion of the merger, Unizan Financial Corp. expects diluted earnings per share on an adjustment basis to be in the range of $1.55 to $1.58 for the full year 2002. These adjusted earnings exclude the one time merger related and restructuring charges.

With the impact of the costs saved taking effect as we continue further into the second quarter and beyond, and the impact of the expenses we have recognized here in the first quarter, we will have a more normalized run rate of 40 to 41 cents per share for the last three quarters of 2002.

At this time, I'd like to turn the call over to Jim Nicholson, who will discuss asset quality. Jim?

Thank you Jim, and good afternoon everyone.

I'd like to take a moment to discuss asset quality and the performance of our loan portfolio. At the end of the first quarter of '02, Unizan's non-performing assets totaled $20.3 million, compared with $16.9 million for the fourth quarter of '01 and $15 million for the first quarter of '01. As you know, the reported prior period numbers are BankFirst only. To facilitate a better understanding of asset quality trends, it might be more appropriate to compare the current quarter's figures with the combined BankFirst and united 12/31/01 figures.

The combined non-performing assets at December 31st, '01 totaled $21.5 million, which when compared with the reported non-performing assets at the end of this quarter for Unizan, this results in a decline in non-performing assets during the first quarter of approximately $1.2 million. When you factor in the steps taken during the first quarter to write down assets, and charge off loans, non-performing assets actually increased slightly. This is primarily due to an approximately $2 million commercial real estate relationship which moved into the non-performing category during the quarter. Since quarter end, approximately $700,000 of this relationship was disposed of with a loss of less than $10,000.

Non-performing assets as a percentage of loans and other assets owned were 1.07 percent at March 31st, 2002, versus 1.64 percent at 12/31/01 and 1.38 percent at March 31st, '01. Non-performing assets at March 31st, '02 consisted of $10 million of non- accrual loans, $3.6 million which were residential mortgage loans and $830,000 of which were aircraft loans, and $3.6 million accruing loans, 90 days or more past due, $3.9 million of other assets owned, and a $2.8 million restructured loon which continues to perform as agreed.

Net charge-offs were $1.6 million for the first quarter of '02, compared with $449,000 for the fourth quarter of '01 and $446,000 for the first quarter of last year. Net charge-offs to average loans were .52 percent for the quarter ended March 31st, '02, and this compares with .17 percent for both 12/31/01 and March 31st, '01.

Once again for comparative purposes, I'd like to take a look and review the historical combined figures for BankFirst and UNB, and looking at it for a five year period, and in doing so, net charge-offs to average loan ratio results of about 21 basis points. This includes the first quarter '02 results annualized.

The delinquency ratio for all loan portfolios was 1.17 percent as of March 31st, '02 versus 1.17 percent at the end of last year, and 1.1 percent at the end of March 31st, '01. At March 31st, '02, commercial loan delinquency was .98 percent and commercial real estate delinquency was 1.2 percent. Aircraft delinquency was .29 percent, the delinquency on government guaranteed loan portfolio was 4.51 percent and the delinquency on home equity loans was .27 percent, while delinquency on residential real estate loans was 1.43 percent.

As previously mentioned, we took an additional loan loss provision charge during the first quarter, based on our review of general economic conditions and an uncertainties and a review of the new company's portfolio. This strengthened the company's allowance to $26.7 million and improved the allowance to loans ratio to 1.40 percent. This compares to an allowance of $10.6 million at 12/31/01 and $10.2 million on March 31st, '01, which also included ratios of 1.02 percent at 12/31 and .95 percent at March 31st, '01.

In the first quarter of '02 the provision for possible loan losses totaled $5.6 million, compared with $780,000 for the fourth quarter of '01 and $465,000 for the first quarter of '01. The company expects to return to a more normalized provision expense in the second quarter and for the remainder of '02.

I would like to stress that executive management is committed to adopting the same concerted credit culture that was historical at both BankFirst Ohio Corp. and UNB Corp., and evidenced by the historical low level of net charge-offs. By applying this discipline, it is management's intention to improve the performance of this portfolio. Credit quality is a top priority at Unizan Financial Corp., and management will continue to monitor it as we move forward with the new company. Management believes it took a prudent and significant step in the first quarter as it relates to the charge-offs taken, the write-down of other assets, and the provision expense. This position does very well going forward. With Unizan's underlying performance showing strength. I am optimistic about our future performance and our potential for delivering favorable financial results.

At this point, I would now like to turn the call back to the operator, who will begin the question and answer portion of our call.

Thank you, sir. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Steve Covington, with

.

Good afternoon, gentlemen.

Just a quick question on kind of your thoughts on well, actually two questions. The first one is thoughts on the margin and kinds of the direction you expect it to go, or whether just stable can be expected. Secondly is your thoughts on your sensitivity to movements in interest rates and how that may impact both the margin and the balance sheet.

Steve, this is Jim Pennetti. First of all, our preliminary analysis on interest rate sensitivity is, as UNB Corp. and I believe BFOH Corp. was prior, we are slightly sensitive to, liability sensitive. The preliminary analysis shows that the up 100 basis points we have probably somewhere in the neighborhood of a 1 percent impact on income, and up 200 basis points, about probably 1 and a half percent impact on income.

As far as the margin, Steve, we believe that even with rising interest rates here in the first part of 2002, given the structure of our CDs and the maturity schedules on our CDs, we're going to continue to pick up on the interest expense side with those CDs rolling off at lower rates.

So I anticipate here over the coming months that we will, that margin will improve even as rates continue to go up, primarily because of that large concentration of CDs in the portfolio. As we analyze that, as I said, even with rates up here, they continue to roll off at lower rates.

Thanks, Jim, and congratulations on what must have been an unbelievably busy quarter.

Thank you.

Steve, it's Rog, I will have to agree, it has been extremely busy. I am pleased that we did attempt to do our computer conversation at the time of our merger. And I'm glad that is pretty well behind us now, because I would hate to undertake that about a year down the road.

Thanks, guys.

Thank you.

Your next question comes from Steve Alospolos, with Putnam Levell.

Good afternoon, gentlemen.

First off, I applaud your decision to build a reserve, first and foremost. Second, there are a lot of moving parts in the quarter, a balance sheet is a lot easier to get a sense of than the income statement. Could you talk for a minute on some of the core trends that you're seeing? Maybe talk about the trust business, what's going on there with the combined company? Talk about loan demand and what's going on on the deposit side as well?

Steve, Rog. On the trust and wealth management side, we're in the process of putting together a strategic plan to, quite frankly, expand our trust operation. We currently do not have trust representatives in the Columbus-Newark market or even over in our Dayton market. So that is an active plan that we have underway to expand those service.

I'm also doing an in-depth study on the financial planning world and how we're going to address that going forward. As you may or may not know, a number of companies are really taking a look at how they deliver financial plans and how that interfaces with private banking, trust service, and the like. So we've got an awful lot to do for the rest of this year. But we will be looking to expand the financial service area of the corporation.

And maybe talk for a minute on loan demand.

Steve, this is Jim Pennetti. I think loan demand has held up fairly well in some areas. Aircraft is not one of those. Aircraft is fairly flat. We have seen pretty good loan demand in commercial loan and commercial real estate and in the home equity portfolio. So those pipelines are fairly strong. I anticipate continued growth there. As I said, aircraft is fairly flat at this point.

Maybe Jim Nichols can comment on the SBA side.

Yes, I think that is consistent with what we're seeing on the commercial real estate side, continues with the SBA side, to where we're seeing pretty good interest and demand, and pipelines are looking pretty strong in that portfolio.

Steve, this is Rog again. One of the things that I'm a little concerned about going forward is going to be the mortgage world. As you know, housing has been so strong in the last year, year and a half, I think housing is a little bit of an unknown. We've had strong mortgage activity, and I hear our pipeline is strong. But going into the third and fourth quarter, particularly, I think housing is probably an unknown.

Any other aircraft on the watch list currently?

There is one, Steve, the one aircraft that UNB had taken back into other assets. That remains, that is the only one that we have in other assets. We did get a recovery on one that we had taken a charge-off on. But as far as in other assets, we do have one, just one right now, one plan.

Very good, thank you.

Thank you, Steve.

Your next question comes from Fred Cummings with McDonald Investments.

Good afternoon, gentlemen.

Just a couple questions. First, on the reserve going forward, I would imagine you guys are going to maintain your reserve at 140 on a go-forward basis.

Fred, it's Rog. I've always slept better when it's at least in the 130 to 140 range. Yes, sir.

I know you're pretty conservative, Rog. And Jim, a question for you on the tax rate. I know a lot of noise this quarter, as we look out over the next few quarters, what should we be using as a core tax rate?

Typically 33, 34 percent.

Then finally, one last question for you, Rog. Obviously this is a big merger for both companies. What are you doing to make sure that your people, particularly the people who touch the customers, remain focused on that and are not looking over their shoulders and are not too inwardly focused?

Fred, that's an excellent question. Let me a couple of things have happened since March 7th that quite frankly, looking at it strategically going forward, pleases me quite a bit. One, I'm very pleased with the way the two boards are working together. I think our committees at the board level have accomplished much more than I thought they really would, considering the company is only six weeks old. I think our management team and our staff, as they have interfaced in the different markets, are starting to get to know each other well. We're seeing people calling back and forth, working together, and really being client-driven.

So there again, I am glad that we have the computer conversion substantially behind us, and we did this all at once. So now we can continue. Sometimes, crises allows people to get to know each other quicker than they would under normal business conditions. I think by having the computer conversion at the same time as the merger, it's really forced our people to work together and to get to know each other.

So I think we're a little bit ahead of the curve when it comes now to taking care of the client.

Just one follow-up, Roger. Now, with respect to management appointments, do you have all the key management people in place in terms of all the major business lines staffed and headed up?

Yes, we do, Fred. We did a little tweaking on that, but I think we're extremely pleased with the way that that sorted out. The two companies did have some niche businesses, as you're well aware. So I am extremely pleased with the way that's sorted out, and people are actively running their lines of business and we're moving forward.

OK, thank you.

Your next question comes from Ron Peterson with Sadler, O'Neill and Partners.

I guess most of my questions have been asked and answered, but I have a follow-up question regarding the provision. It looks like, during the first quarter, it looks like most of the provision, you consider it to be additional or one-time. I'm just wondering if you could expand on that and also give a little outlook as to what you think a more normalized provision would be going forward, given your long growth assumptions.

Ron, this is Jim Pennetti. The provision expense was about $5.2 million that we would call the special, if you will, of the amount you see there, it would be about $5.2 million. On a going-forward basis, the budget calls for more normalized of about a million two per quarter.

OK. I assume that would be sufficient given your long growth assumptions and the charge-off expectations, to keep it at that 140 range that Roger was alluding to?

That's correct. Our expectation would be that, that we want to be in that 140 range, given what we see now on the horizon with our long loss reserve analysis. That would keep us in that 140 range.

OK, thank you.

I would like to give everyone an additional minute. If you would like to ask a question, press star then the number one on your telephone keypad.

Your next question comes from

, with

Hi, Brad.

Hi, guys, how are you doing?

Good, thank you.

I have a couple of questions here. Regarding the margin, obviously it's fairly skewed for the quarter results. Do you guys measure at monthly, and if so, what was it in March? Even though it's going to be a little bit skewed, it's probably a little bit better indicator.

Well, Mr. Pennetti has papers all over this conference room, Brad, he's digging for those right now.

While he's looking for that

I think he's got it.

First quarter, Brad, was about 3.60.

Right.

March, not sure I have it right here in my fingertips for March, but I can get that for you, Brad.

OK.

Brad, we do look at it on a monthly basis, yes.

OK, that would be helpful. And regarding the computer conversion, obviously that's a fairly big issue. What was the biggest problem, if any, during this process, could you identify?

It's Rog, Brad. Let me tell you how I felt. The first couple of weeks, I think the retail bank was impacted more than others. Obviously we converted in the Canton operation to the Jack Henry system. So there was a period there of acclimating everyone to the new system, even though we conducted extensive training. Then the next couple of weeks, I think we got more into some corporate banking issues and business banking issues as different statements came out which were new. So we've done an awful lot of customer interfacing in the first four weeks of the conversion.

The one thing that's still outstanding, on the UNB side, we have quite a bit of electronic banking activity with our corporate clients. And that is still an ongoing process. I'm not satisfied with where we are at this particular point with that particular product, Brad. But I'm hopeful that in the next week or two we'll have that behind us also. So I think it kind of went, the first couple of weeks there were retail issues. Second couple of weeks, corporate banking. And then the last phase of it, I hope, is the electronic banking portion of it.

So it sounds like it was pretty smooth and there was no wholesale issue such as mailing statements to the wrong people, etc?

Well, no, we didn't on a mass basis. There were individual fires we had to put out each and every day. That's why I am really glad we did this at the time of the merger, be3cause a lot of our people have done an excellent job of communicating with customers and putting out those daily fires as we ran into different situations.

OK, good.

For March, that number was about 379. Your question was margin in March, it was 379l.

OK, good. Good trend. As it relates to asset quality, obviously your non-performers decreased a little bit from December on a consolidated basis. What's the general feel you guys get as far as the business world in Ohio now? Are things getting healthier or what's the sense?

I think the signs are mixed again. I think there's a handful of positive things occurring out there, but those are really being mitigated by some mixed signals on the other side to where I still think that, although there is some optimism starting to build and some positive trends happening, there is still a lot of uncertainty out there.

I think relative to our portfolio and our customer base, I think we're pretty pleased with what we're seeing. We don't see any real concerning negative trends.

Yes, Brad, Rog. I kind of like what I see. I think the difficult times we've been through have made all of us better business people. In speaking with our clients, I think that they've gone through some difficult times but they probably run a better business now than they did maybe a year or two ago. I think as they get the feeling that things are coming back for real, we're going to start to see increased activity.

But right now, I agree with Mr. Nicholson, I think it's pretty spotty.

OK. One last question here as it relates to my modeling purposes. As of the end of the quarter, what was the number of options outstanding in average exercise price?

We have about a 1,922,000 options that are outstanding. I'm looking here if we have I'll have to get you the number here on the average exercise price. But it's about 1,922,000. Exact number is 1,921,687, Brad, on unexercised options out there.

OK. Appreciate it, guys.

Gentlemen, at this time there are no further remarks. Would you have any closing comments?

This is Rog. I would like to thank everybody. I enthusiastically look forward to executing, along with Jim Nicholson, Jim Pennetti and all of our associates, the strategies that will lead Unizan to become a truly superior financial service organization. Again, thanks for joining us today and for your interest in Unizan Financial Corp. I look forward to keeping you abreast of our merger related developments.

In the meantime, if any of you have any questions, please do not hesitate to call us. Our number is 1-866-235-7203. Thanks again, and have a nice day.

We would like to thank you for your participation in today's teleconference. This concludes today's call. You may now disconnect.