Huntington Bancshares Inc (HBAN) 2002 Q2 法說會逐字稿

Good afternoon.

My name is Corey.

I will be your conference facilitator.

At this time, I'd like welcome everyone to the Huntington 2nd Quarter Earnings Conference Call.

All lines have been placed on mute to prevent background noise.

After the speaker's remarks, there will be a question and answer period.

To ask a question during this time, simply press star 1 on your touch-tone phone.

If you would like to are withdraw your question, press star 2 on your touch-tone phone.

Thank you, Ladies and Gentlemen.

Now I'd like to turn the call over to Mr. Jay Gould, Senior Vice President of Investor Relations.

Mr. Gould, you may begin.

Thank you, Corey and welcome to today's conference call, everybody.

I'm Jay Gould, Director of Investor Relations.

Before formal remarks, the usual housekeeping items, topics of the slides we will be reviewing are on our website, Huntington.ir.com.

This call is being recorded and will be available as a rebroadcast starting later this evening through the end of the month.

Please call the Investor Relations department at 614-480-5676 for more information on how to access the 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.

This is based on information and assumptions available at this time, and are subject to change, risks and uncertainties may cause actual results to differ materially.

We assume no obligation to update the statements.

For a complete discussion of risks and uncertainties, please refer to slide 32 and material filed with the SEC, including our most recent 10K, 10Q, and 8K filings.

Let's begin.

Participating in today's call will be Tom Hoaglin, President and CEO, and Mike McMennamin, Vice Chairman and Chief Financial Officer.

Turning to slide 3, this defines the basis for today's discussion, which has changed from last quarter.

The last quarter's major restructuring initiative reported results -- at last year, a number of non-recurring items.

Therefore, for analytical purposes, when previously discussing underlying trends with analysts and investors, we referred to operating results which excluded the impact of these items.

However, with the 2002 1st Quarter sale of our Florida retail commercial banking business and given the impact on many historical numbers beginning this quarter we are redefining operating results to now also exclude the run rate impact of the sold operations from prior periods results.

Doing this makes underlying performance trends more clear.

Whenever we refer to operating results today, it now represents reported results, adjusted to exclude the impact of restructuring and other charges and one-time items, plus the run rate impact of the sold Florida operations.

Please note, we have provided an appendix B to the slides today which repeats selected tables and charts from the 1st Quarter conference call, for those wishing to see the impact of this definitional change in operating results from last quarter to this.

If you do the comparison, this quarter, as we were finalizing historical restatements to exclude the Florida run rate impact, the methodology of calculating the impact on the net interest income it was refined.

As such, there are slight changes to the net interest income, margin, net income and charge-off numbers presented in the last quarter's data, which excluded Florida.

There was no EPS impact.

We continue to report numbers on a GAAP basis which makes no such adjustments.

These you will find in great detail within our earnings press release and quarterly financial review materials available on our website, Huntington.com.

Today's presentation will take 35 minutes.

We want to get started.

Tom, over to you.

Thank you, Jay.

Welcome everyone, thanks for joining us today.

Before getting into a review of the quarter, there are two recent developments I'd like to cover as you may have questions later about them.

First, on July 2nd, we sold our Orlando, Florida-based property and casualty insurance company, J. Roth Davis back to the management team.

This sale was consistent with our earlier decision to sell our Florida banking operations.

There will be no material gain or loss impact on 3rd Quarter results as a result of the sale.

There will also not be a material net income impact going forward on earnings.

We remain committed to growing the insurance business within our geographic footprint.

The second item was this morning's announcement regarding the restructuring of our ownership interest in Huntington merchant services, the merchant processing business.

This also is consistent with our Florida sales strategy.

In essence, we sold the Florida merchant processing operations to first data corps and restructured the overall relationship.

Huntington lowered equity position in the business and extended our relationship with first data for 10 years.

This will result in a 3rd Quarter gain of about $25 million pre-tax, $16 million after tax, or 6 cents per share.

This also assures that our merchant clients and the merchant services business we have targeted for growth within our footprint will continue to receive the highest level of service and attention.

Going forward, there will not be a material run rate impact on earnings as a result of this transaction.

Now let's turn to slide 5 and begin the 2nd Quarter review.

As we've done before, I will begin with a quick review of 2nd Quarter accomplishments from my perspective.

Mike and Jay will follow with more detailed comments.

We are very pleased with 2nd Quarter results for a number of reasons.

2nd Quarter earnings were a solid 33 cents per share and again met street expectations.

Managed loans increased 7% annualized rate, up from 5% growth in the 1st Quarter.

We are very pleased with the loan growth, given the state of loan and demand in today's market.

Residential real estate and home equity loan growth were particularly strong; not surprisingly, commercial and auto loans and leases continue to decline.

Mike will give details later.

The 19% annualized growth and deposits was a real positive.

We are continuing to make good progress in growing deposits through our sales initiatives and deposit programs, but our growth, like other banks, is also being positively influenced by the current turbulent financial markets.

We're very pleased that core deposits are up 13% over the last year.

Total credit quality trends improved during the quarter, driven by significant improvement in consumer debt charge-offs, partially offset by higher commercial charge-offs.

We maintained a loan loss reserve at 2% for the quarter.

We've built this loan loss reserve from about 1.5% over a year ago, reflecting the weakness in the economic environment and the deterioration of the credit quality of our loan portfolios.

The level of the loss reserve is a reflection of the quality of loan portfolios at a point in time, the level of non-performing assets and the expectation regarding the economic outlook and its impact on future credit quality trends.

We are comfortable with the adequacy of the reserve.

Turning to slide 6, there were several other and meaningful accomplishments.

First, we strengthened the management team with the addition of Mary Navarro to head retail banking.

Mary is an absolutely terrific banker and has a wealth of knowledge and experience in retail and small business banking, especially within Huntington's midwest markets.

She's a great and enthusiastic leader and a wonderful addition to the team.

One product or business customers are seeking and Huntington did not have was a fully functional and user friendly 401(k) capability.

That's why we're pleased to have launched a new state-of-the-art 401(k) platform and system.

We believe so much in the program, this quarter we converted Huntington's employee 401(k) to it.

The conversion was very smooth and was completed well ahead of schedule.

More important, customer reception has been terrific.

We've already signed up 28 new accounts.

Another major accomplishment during the quarter was the completed installation of our customer service system, or CSS.

As we told you last quarter, CSS is branch infrastructure, a state-of-the-art windows and internet-based platform, upon which we can enhance and upgrade many of our systems.

It already provides our personal bankers faster access to customer information, online access to images of checks and deposits, provides customers with hands-on demonstration of Huntington.com, and speeds customer product resolution by providing quick access to corporate information, policies and procedures.

We've also installed a new and enhanced online teller system in 13% of our branches and plan to have it in all of our branches by year-end.

This will replace a 20-year-old system terminal we've used in 70% of our offices, with the remaining 30% using manual calculators.

This new teller system automates many manual functions and provides more information about the total customer relationship.

It's already helping to reduce fraud losses of validating the micro encoding on checks, that identifies counterfeits and will identify losses through notification of cash exception conditions.

Lastly, we repurchased 7.3 million shares of our stock during our program to date repurchases to 8.8 million shares.

With those introductory remarks, I will turn the presentation over to Mike to provide the details.

Mike?

Thanks, Tom.

Slide 8 provides a quick overview of our performance highlights, and as Jay mentioned, all of the following slides are on the new operating basis, which for all prior periods excludes restructuring and other items and the run rate of the sold Florida banking operations.

I'll cover these issues in detail on later slides, but the highlights compared with 1st Quarter results include net income of 81.7 million, 33 cents a share, both up 3%.

As Tom mentioned, the annualized growth rate in managed loans and core deposits of 17 and 19% respectively.

A 4.30% net interest margin, up 9 basis points.

53.2% efficiency ratio, down from 54.1.

88 basis points in net charge-offs excluding accident portfolios, down 9 basis points.

We maintained the 2% loan loss reserve ratio and our tangible common equity ratio was 8.41%.

Turning to slide 9, this slide reconciles reported versus operated earnings with one small adjustment.

The sale of the J. Roth Davis insurance agency that Tom mentioned.

As noted it, it had only a small impact on net income and no impact on earnings per share.

However, the sale does impact non-interest income and expense comparisons, primarily in the brokerage and insurance fee income line and the personnel cost line item.

Slide 10 shows performance highlights for the 2nd Quarter compared with the 1st Quarter and the year-ago quarter.

I will comment in detail on most of these later, so, just a couple of observations.

First, return on assets and return on equity was still below acceptable levels and continued to move upward.

The improved return on equity versus a year ago, is in spite of a lower leverage capital structure.

Second, the reduction in our tangible common equity to asset ratio was expected and is related to our share repurchase activity.

Slide 11 compares the operating results for the 2nd, 1st and year ago quarters.

The increase in net income from the 1st Quarter was driven by a 2% increase in revenue, or up 5% excluding mortgage banking income.

Net interest income increased $8.8 million, partially offset by $3.3 million in higher provision expense, and $1.1 million of higher non-interest expense.

The increase in net interest income resulted from a 9 basis point expansion in the net interest margin to 430, and a 1% increase in average earning assets.

Compared to the year-ago quarter, the 8% increase in net income was driven by a 6% increase in revenue, or 8% excluding mortgage banking income.

The major offset to the revenue growth was an increase in provision expense.

Non-interest expense was down 1%, or flat if you adjust for the elimination of the intangible amortization.

I think the important take-away for investors is a strong, 5-plus percent spread between revenue growth and expense growth over the last year.

We feel this is a very solid performance, especially given the state of the economy and the instability in the financial markets.

We are particularly pleased with the revenue growth and the spread between revenue and expense growth we have achieving in a difficult market environment.

Turning to slide 12, the left-hand graph shows a quarterly earnings per share pattern, which after three flat quarters, moved up slightly.

Not quite the type of increases we'd like to see, but some progress given the continued high credit costs.

The right-hand graph shows a trends and pre-tax income before provision expense and excluding security gains.

This graph measures earnings progress before credit costs, which is perhaps the best metric to see the underlying progress we're making outside of the credit area.

Pre-tax income on this basis was $166 million for the quarter, 4% higher than the 1st Quarter and 15% higher than a year ago.

We're continuing to build a solid foundation for future earnings growth.

Slide 13 shows a steady progress we've made in improving the net interest margin in the last five quarters.

As we've noted in previous conference calls, this margin expansion as occurred at the same time we've been reducing our interest rate exposure.

We continue to be slightly liability-sensitive, and there is further detail on the interest rate risk position on slide 35 and appendix A.

The graph on the right-hand slideshows our earnings mix -- earning asset mix of loans, securities and other earnings assets.

Other earning assets are primarily mortgage loans held for resale, which declined slightly during the quarter.

Average managed loan growth is highlighted on slide 14.

As a reminder, managed loans include about $1.2 billion of securitized auto loans.

For those of you familiar with a table from prior conference calls, note that beginning this quarter we've reclassified all of our home equity lines and home equity loans into one category: home equity.

Previously, home equity lines were shown as a separate category and home equity loans were in the installment category, now labeled other consumer.

All prior period data, including net charge-off data have also been changed to reflect the recategorization.

In the 2nd Quarter, average managed loans increased at an annualized 7% rate from the 1st Quarter.

We're pleased with this given the continued difficult environment in which to grow loans.

As we mentioned in earlier conference calls, we began to emphasize residential mortgage loans, primarily the 31 and 51 arm products, when the declining interest rates last fall created very strong mortgage refinancing activity.

That focus continues in the 2nd Quarter with average residential mortgage balances increasing $325 million.

Home equity loans and line growth accelerated significantly to a 17% annualized rate in the quarter, versus 5% in the 1st Quarter.

Line of credit volumes continue to be positively impacted by the attractiveness of lower rates, as well as our increased emphasis on cross-selling home equity lines to our first mortgage customers.

Our fixed rate loans continue to be pre-paid as a result of the relatively high rates on the loan in relationship to current rates.

Commercial real estate loans increased at 6% annualized rate in the 2nd Quarter, declining from the double digit growth rates of the last three quarters, with most of the activity in construction loans as in previous quarters.

The composition of this portfolio has changed somewhat over the last year.

Consistent with our market strategy to emphasize construction lending versus permanent financing, construction loans have increased from 30% of the portfolio to 36% in the last 12 months.

Construction loans provide higher margins, higher fees and greater portfolio liquidity.

Owner-occupied loans now constitute 35% of the portfolio, up from 33% a year ago.

These loans are really CNI loans, supported by operating company cash flows that are additionally secured by real estate.

Commercial loans declined slightly during the quarter to 3% rate, versus 6% rate of decline in the 1st Quarter as Corporations continue to be very cautious and the inventory management capital spending and acquisition programs.

Commercial loan demand has been soft in the last year, reflecting the weakness and uncertainty in the economic environment.

Our commercial loans are down 6% from the year-ago quarter.

During this time period, we have refined our commercial relationship strategy to re-emphasize client relationships where we are or have the opportunity to be the primary bank and provide other, more profitable non-credit services, such as treasury management, trust and investment services and depository product sales.

In many cases, it is difficult to develop these cross-selling opportunities with shared national credits.

Reflecting that, total loans to shared national credits have declined by about $500 million, or 30%, but $1.5 billion last June to $1 billion today.

That accounts for the entire decline in the commercial loan portfolio from a year ago.

Auto loans and leases declined at a 3% annualized rate during the quarter, as expected seasonal strength did not occur.

Loan and lease originations increased from 700 million in the 1st Quarter to 790 million in the 2nd Quarter, but were down 17% from about 950 million of originations in the year-ago quarter.

New car originations as a percentage of total loan and lease originations increased from about 60% to 70% during the quarter.

The reintroduction of 0% financing being offered by the captains is not expected have a significant adverse impact on volumes, as cashback incentives are being offered in lieu of the 0% financing.

And in the higher credit quality, lower rate deals, the cashback alternative is better for the customer.

Dealers prefer the cashback alternative because conventional bank financing puts more money in their pockets than does the 0% financing package.

Slide 15 shows we had a 19% annualized growth rate in core deposit during the quarter, and that capped a series of strong consecutive quarterly annualized growth rates.

The annualized growth rate was 6% in the 1st Quarter, 10% and 14% respectively in the 4th Quarters and 3rd quarters of last year.

Compared with a year-ago quarter, core deposits are up 13%.

Much of the growth is in the money market accounts, retail and small business.

Personal demand deposits performed strongly, up 12% from the year-ago quarter.

The strong deposit growth is a function both of the increased focus and success of our sales management efforts and the branches and also the turbulence we are experiencing in the financial markets.

This quarter on page 3 of our quarterly financial review, we've added a new table, detailing total deposits by business segment, including our six banking regions.

Total regional banking deposits at June 30th were up 13% from a year ago.

Importantly, all six of our banking regions posted low to mid-teen percentage increases.

Slide 16 is new and shows the change in the average total deposit per branch versus a year ago.

As just mentioned, total deposits are up 13% from a year ago.

As you know, one of our strategic initiatives was to consolidate the number of non-Florida branches.

The deposit increase, in addition to a 10% reduction in the number of branches has resulted in a 26% increase in the average deposits per branch in the last year.

We are considerably more efficient in the deposit gathering function than we were a year ago.

Let me now turn the presentation back to Jay who's going to review non-interest income and non-interest expenses.

Thank you, Mike.

Turning to slide 17, this looks at the trends and non-interest income, excluding security gains compared it with the 1st Quarter and year-ago quarter.

Compared with the first quarter, non-interest income decreased 700,000, or not quite one percent.

However, the very strong mortgage banking income in the 1st Quarter significantly impacts the comparison.

Excluding mortgage banking income, non-interest income was up 9% in the 1st Quarter and 11% from the year-ago quarter.

Mortgage banking income was $10.7 million in the quarter, down $8.9 million or 45% from the 1st Quarter and 39% below the year-ago level.

You will recall that 1st Quarter mortgage banking income was especially strong as we sold the high level of 4th Quarter of origination volume on a light basis into the secondary market.

As such, deliveries to the secondary market in the 2nd Quarter it was down 64%.

Primarily reflecting a decline from the 1st Quarter's very high level, but also reflecting a decision to retain more of our mortgage originations on own balance sheet.

Closed loan volume was down 1% from the 1st Quarter with the recent activity representing 39% of the volume, compared with 60% in the 1st Quarter.

Deposit service charges were up 1.1 million, 3% from the 1st Quarter.

The primary driver of this increase was higher personal service charges, especially NSF and overdraft fees.

Compared to a year ago, deposit service charges increased 8%, driven by higher corporate maintenance fees as corporate treasurers paid hard fees for deposit services rather than the maintained higher demand deposit balances in a low interest rate environment.

Brokerage and insurance income increased 3% from the 1st Quarter, reflecting very strong retail investment sales.

The benefit was partially offset by lower investment banking and insurance fees.

Mutual fund sales volume was $55 million in the 2nd Quarter, up 28% from the 1st Quarter, with annuity sales at $153 million, up 18%, a new record.

And -- which beat the earlier record of $129 million last quarter, compared with the year-ago quarter, brokerage and insurance income was up 14%.

Trust income increased $1.2 million or 8% from the 1st Quarter, mostly reflecting the 1st Quarter acquisition.

You may recall, this is an investment manager in Cincinnati with $500 million in assets under his management.

Corporate trust income increased 26%, largely due to seasonality of annual renewal fees and institutional sales activity.

Partially offsetting these increases was the impact of declining asset values.

Compared with the year-ago, trust income was up 13%, basically reflecting the same factors.

Other service charges were up $1.4 million, or 15% from the 1st Quarter, reflecting increased ATM and debit card fees.

Compared to the 2nd Quarter of last year, they were up 12%.

Other income in the current quarter was up $4.4 million.

This reflected higher securitization income and a small gain on sales and ORER property, partially offset by lower sales of customer derivative products.

Slide 18 details the change in non-interest expense, and shows that non-interest expense was up $1.1 million from the 1st Quarter.

Personnel cost, which account for 54% of total non-interest expense, was down $700,000, reflecting lower benefit expense and lower staff.

Full-time equivalent staff at June 30 was down 168, or 2% from March 31, reflecting planned staff reductions.

The impact of these declines was partially offset by higher mutual fund and annuity sale commissions.

Compared to the year ago quarter, personnel costs were flat.

Occupancy and security was up 900 thousand, affecting mostly higher depreciation associated with technology investments, including the new intrarnet banking platform launched last quarter, the implementation of our customer service system, and mainframe restructure improvements.

Compared with a year ago, occupancy and equipment expense was flat.

Other expenses up $1.5 million or 5%, primarily reflected a $1 million increase in professional services related to higher collection and legal expenses in the consumer lending area.

Compared with the year-ago quarter, other expense was down 5%.

Slide 19 shows the trend in our efficiency ratio, which is continuing to move down from the peak in the 1st Quarter of last year and was 53.2% in the 2nd Quarter.

With those comments, I turn it back to Mike now for credit and capital.

Thanks, Jay.

Slide 21 provides an overview of credit quality trends.

First we saw modest declines in non-performing assets, which resulted in a slight improvement in our non-performing asset ratio, 1.14% of loans, roughly unchanged in the last three quarters.

Net charge-offs, excluding losses on the exited portfolios, declined from 97 basis -- from 97 basis points to 88 basis points during the quarter, with a substantial decline in auto loan and lease charge-offs but an increase in the commercial charge-offs.

90-day plus delinquencies improved slightly in the quarter and basically unchanged from a year ago.

I'll comment on 30-day consumer delinquency trends in just a minute.

The losses was unchanged from 2% and up from 1.76 the year-ago quarter.

With the maintenance of the reserved percentage and the modest decline in non-performing assets, our non-performing asset cover ratio improved slightly to 176% during the quarter.

Slide 22 shows the recent trends in non-performing assets.

Non-performing assets were down slightly for the quarter, the longer term trend is flattened out in the last three quarters.

The midwest with concentration in service and manufacturing sectors continues to be adversely impacted by the uncertain economic environment.

Let me provide additional non-performing asset detail on slide 23.

This slide was introduced last quarter, and shows the recent quarterly non-performing asset activity.

As you can see, the inflow of new non-performing assets slowed slightly to $73 million in the 2nd Quarter and has declined significantly from the $95 million of new non-performing assets added in each of the middle quarters of 2001.

The stablization and slight decline in non-performing assets over the last two quarters is encouraging, although it is certainly too early to say there is a clear-cut trend developing.

However, we expect to see lower non-performing assets by year-end and into next year, assuming the economy continues to improve moderately.

Slide 24 segments the non-performing assets by industry sector.

The bar chart on the right shows which sectors have contributed to the $120 million increase in non-performing assets over the last 18 months.

With the services and manufacturing sectors accounting for most of the change.

Non-performing assets continue to be concentrated in the two sectors at 30% each.

Our loans to the manufacturing industry represent only -- represent only 15% of our total commercial loan.

They represent 30% of non-performing assets.

Similarly, the service sector represents 25% of total commercial loans, but 30% of non-performers.

14% of the non-performers are from the finance, insurance and real estate sector and 6% are in construction.

After that, the sector contribution falls off very rapidly.

Slide 25 shows net charge-offs adjusted to exclude charge-offs on the exited portfolios.

You will recall from earlier conference calls the reserves were established in the year-ago quarter for two loan portfolios we were exiting.

Trunk and equipment and sub-prime auto loans.

Adjusted net charge-offs declined from 97 to 88 basis points during the quarter and this improvement was more than we had anticipated three months ago.

Commercial net charge-offs increased from 115 to 153 basis points during the quarter with the manufacturing and servicing -- service sectors continuing to produce the majority of our charge-off activity.

Capital intensive manufacturers continue to be leveraged from an operating perspective and are experiencing slow or negative revenue growth.

Service-related companies on the computer, entertainment, and healthcare businesses represented 54% of our 2nd Quarter losses.

Commercial real estate charge-offs declined from 42 basis points to 22 basis points, reflecting a decline from the high 1st Quarter charge-off rate, which was caused by one credit.

Total consumer net charge-offs dropped from 107 basis points to 75 basis points in the 1st Quarter.

This was driven by a decline in auto loans and leases, where net charge-offs declined very sharply from 1.56% to 1.01%, following the significant decline in delinquencies that we experienced in the 1st Quarter.

The increase in residential charge-offs during the quarter to 18 basis points was caused by the charge-off of one loan.

Slide 26 shows the vintage performance of our indirect auto loan and lease portfolios.

Performance issues of these two portfolios are very similar.

As we've stated before, loans and leases originated between the 4th Quarter of '99 and the 3rd Quarter of 2000, because of top lines on both graphs have performed poorly.

About 20% of that volume of originations was underwritten, but scores below 640, which is typically considered dequality paper.

In contrast, over the last 12 months, less than 3% of new originations were below this threshold and in the first half of 2000, about 1% of total loans and leases underwritten had FICO scores below 640.

Reflecting this change and other underwriting changes, the average FICO score has increased significantly over the last two years.

We mentioned last quarter that as a rule of thumb about, 2/3 of the expected losses on auto loans and leases tend occur within 24 months of originations.

Loans and leases originated during the late '99, 2000 vintage are now 21 to 30 months old and are at or past their peak of their charge-off cycle.

You also note that this quarter, we've segmented a new 2002 vintage.

This proportionate decline in the 2001 vintage, percentage of the total loan portfolio from 61 to 43% for loans on the left-hand chart, during the quarter, reflects the sale of the Florida auto loans to SunTrust in the 1st Quarter.

The good news is that the impact of a high charge-off vintages is rapidly diminishing.

Originations during that time period represent 20% and 27% of the current loan and lease portfolios respectively.

As such, these vintages should help to reduce future charge-off rates on auto loans and leases.

Slide 27 provides another look at consumer delinquency trends on both a 30-plus day basis and a 90-day basis.

The 30-day delinquency rate is an important early indicator of future charge-off rates as they well establish rural rate trends from the 30-day delinquency category into the more severely delinquency pockets and eventually charge-offs.

The sharp decline in 30-plus days delinquencies in the 1st Quarter has been maintained and actually further improved by 10 basis points during the quarter.

However, giving consideration to seasonal patterns, we do expect delinquencies and charge-offs to increase slightly in this portfolio over the next two quarters.

Slide 28 recaps the trend in our loan loss reserve, which was maintained at 2% during the quarter.

Provision expense exceeded charge-offs by $9 million, thus providing for loan growth for the quarter.

As Tom mentioned, we continue to be very comfortable with the adequacy of our reserve, particularly in light of the following factors.

The improvement consumer delinquency trends experienced in the first half and reduced charge-offs in the 2nd Quarter.

The decline in new additions to non-performing assets over the last two quarters.

The composition of recent loan growth, which heavily looked toward low-risk residential mortgages.

And also tentative that he had the economy is improving, albeit at a slow rate.

Let me close my segment with brief comments regarding capital.

Slide 30 shows capital trends with 1st Quarter ratios significantly bolstered by the excess capital residing from the February sale of Florida banking operations.

As expected, share repurchase activity reduced the capital ratios during the quarter, but we remained very strong.

Assuming continued share repurchase activity at recent levels, the tangible common equity to asset ratio at year-end would be in the 7.5 to 8% range.

Slide 31 shows the board approved a 22 million share repurchase program in February.

We initiated activity in the open market in late February and purchased 1.5 million shares in the 1st Quarter and another 7.3 million in the 2nd Quarter, bringing the program to date repurchases to a total of 8.8 million shares.

The value of shares repurchased was $175 million.

As previously stated, our goal is to utilize our excess capital to repurchase a total of 300 to $400 million of stock in 2002.

We continue to be disciplined buyers and will monitor our stock price and earnings valuation versus that of other peer banks as we make our repurchase decisions.

Let me turn the call back over to Tom for some closing comments.

Thanks, Mike.

In closing, the 2nd Quarter was a good one for Huntington.

Our results continued to improve.

Revenue is increasing.

We continue to get more out of our expense dollars.

Loans are growing nicely in a difficult environment.

The sale of deposits, annuity products and mutual funds all reflect strong growth.

Credit quality is improving.

There are investments in better technology for our people beginning to show results.

In addition, I just finished a series of meetings with Huntington associates in all of our markets over the last 30 days.

I can report to you that Huntington associates are excited about what we're beginning to accomplish together.

They're taking great pride in being part of a Huntington team.

With every new success, they are more motivated and confident.

We still have much to do, but we are making good progress.

At this juncture, and against the backdrop of first half performance, we remain comfortable with $1.32 to $1.36 per share guidance we gave you in January.

This completes our prepared remarks; Mike, Jay and I will be happy to take your questions.

Let me turn it back over to the operator to provide instructions on the Q&A period.

Operator?

Thank you.

At this time, I'd like to remind everyone, if you would like to ask a question, press star, then the number 1 on your touch-tone phone.

We will pause for just a moment to compile the Q&A roster.

Your first question is from Mr. John Balkhide with Fox-Pitt.

Hi, guys.

Hi, John.

Just a quick housekeeping question.

Can you talk about the variance in the securitization in the quarter and what was the actual Oreo gain?

The -- in the 1st Quarter, we actually -- we had a normal level of securitization income in the 2nd Quarter.

The increase was because in the 1st Quarter we had an impairment of $2 million in our interest-only strip that we wrote down.

Association this is just bringing it back to a normal level.

We had a 1 -- a little over a $1 million gain on the sale of an Oreo property down in Florida, it's been with us for some time.

Those two transactions, John, accounted for about -- a little bit over $3 million.

Sounds good.

Appreciate it, Mike.

Your next question comes from Mr. Ed Nagarian with Merrill Lynch.

Good afternoon, guys and congratulations on a good quarter.

Just a quick question on the -- on the credit losses and basically the breakout of the credit losses.

Great job, obviously, reducing the indirect auto losses.

Can you give a little more color on what's driving up the commercial losses, I know you outlined, you know, a -- a bit of color there, but any more insight you can give on what's driving up the commercial losses and -- and if you have any insight on when it might peak future quarters?

Ed, most of the -- as we mentioned, most of -- I think 72% of the losses in the 2nd Quarter were pretty much the same -- the same suspects of manufacturing and -- and service industry.

I know that we are seeing an adverse impact in the manufacturing industries and the service industry in the -- in the midwest, both from the -- the slow down in the auto business and also the problems in the steel industry in Northern Ohio.

About 50% of the losses we incurred in the quarter were from shared national credit.

In terms of when do we expect this to turn around?

I wish I had a crystal ball.

I think as we get towards the back end of the credit cycle, which we do feel -- we're not there, we're just about there.

We're going try to push these problem credits through the pipeline, just as quickly as we can.

So, in a perverse sense, I'm not sure the higher charge-offs are a harbinger of better things going forward.

What we need to see in that regard, if we're going to take that perspective, we do need to see the decline in the non-performing assets.

And we are cautiously optimistic that we're about to see improvement in the numbers, which have been flat for the last flee quarters.

Does it go up before going down or have we reached a peak here or don't want to speculate?

Well, I -- I really don't know.

I would hope that we've reached a peak with 1.5% losses in the commercial portfolio.

But we just don't know right now.

Okay.

And you mentioned something regarding, you know, 52% of those losses were from some kind of -- on the technology side, or could you -- could you get a little more insight on what you said there?

Let me look at my comments.

I think we said that --.

-- something about technology services?

Hold on just one sec.

I will get out my notes.

Service -- just companies within the service industry.

They were in 54% of our losses were in the quarter, were from companies in the service industry from early in the computer, entertainment and healthcare businesses.

Okay, thanks.

Your next question comes from Mr. Dave George from AG Edwards.

Good afternoon, I wondered if you can comment on your outlook for the margin on the second half of the year?

Thanks.

Dave, the margin came in, it was a great quarter for us from a margin standpoint as I think we mentioned.

Part of the strength was just some seasonal loan fees that -- that come in.

I think that the margin probably -- I'd be very surprised if the margin goes up from here and wouldn't be surprised if it goes down a few basis points in the second half of the year.

I think we talked last quarter with we reported a 421 margin, we said there would be a little bit of pressure on the margin in the near-term.

We don't expect to see higher margins going forward.

Super, thanks, Mike, appreciate it.

Yep.

We now have a question from Mr. Fred Cummings of McDonald Investments.

Yes, good afternoon.

Mike, I think you said in reviewing your national share credit exposure, could you review the decline that's occurred year-over-year?

And that portfolio and also talk about where you expect it to be say over the next 12 months?

Fred, the -- the -- the shared national credits and these are numbers as of June 30th, so, unlike the loan numbers we give, they're not average numbers during the quarter, but at June 30th, they declined from a little bit less than a billion and a half dollars a year ago to just to under a billion dollars.

This -- this June 30th.

So they're down about 460 or $470 million.

We're -- we're being a lot more selective in our -- as we look at these, these credits.

If they're credits in our market areas that we have opportunity to provide, then we are or have opportunities to provide non-credit services to, we certainly want to be continuing to loan to those creditworthy companies.

We don't want to just be a lender, however, and I think that strategy, being a little more assertive on that, had an impact in terms of the reduction of those -- those volumes.

And second question, Mike, can you comment on the composition of the inflows into non-accrual -- are those primarily sheer -- national shared credit at the $74 million number, I believe?

Fred, I don't think that -- I don't think they are.

Most of the credits that have been coming in have continued to be in the manufacturing and the services and -- and the financial -- the financial institutions and real estate area.

To my knowledge, they are not -- they're all relatively small credits, so there is one -- there is one manufacturing credit that was a $12 million credit.

The rest of them were $5 million or below.

So, they tend to be the smaller credits for the most part.

Okay.

Thank you.

Your next question comes from Mr. Steven Greznoe with Second Curve capital.

Hi, guys, good afternoon.

Great quarter.

Thanks, Steve.

Just one thing I was looking at here in the -- in the payment pattern you've had in the MPA line looks great and has been increasing at a good clip.

Is there anything we can read into that, that you guys might be doing specifically or have there been certain credits that you've gotten larger payments on than you might have thought in the past and why?

Thanks.

Steve, I think the payment line is -- it really correlates, at least on a loose basis, with the losses we've taken.

We took.

If you look at that slide and went back year-ago quarter, we had $19 million of payments and we took losses of $13 million.

This quarter we had losses of 28 on non-performers were recognized and $44 million of payments, so, we had -- I think the math works out that -- that typically you, you probably expect to lose over a period of time, maybe -- a third have loss as of something like a third on your non-performing loans.

So, that implies for every dollar of losses you take, you get a couple of dollars of sales or payments come in at the same time.

I think it is tied, Steve, to greater recognition of losses in that portfolio.

Thanks.

At this time, there are no further questions.

Gentlemen, are there any closing remarks?

No.

This is Jay, I guess if there are no further questions, we thank you for participating in today's call and look forward to talking to you.

If you have further questions, call Investor Relations, either Susan or myself.

Thank you again.

This concludes today's Huntington 2nd Quarter Earnings Conference Call.

You may now disconnect.