Huntington Bancshares Inc (HBAN) 2002 Q3 法說會逐字稿

Good afternoon, my name is Matt is and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Huntington Bancshares third quarter 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.

If you would like to ask a question, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you, Mr. Gould, you may begin your conference.

Thank you, Matt, welcome to today's conference call.

I am Jay Gould, Director of Investor Relations.

Before formal remarks and usual housekeeping items, copies of the slides we will be reviewing can be found on our website, www.huntington.com and this call is being recorded and will be available as a rebroadcast starting around 2:00 this afternoon through the end of the month.

Please call the investor relations department at 614-480-5676, for more information on how to access these recordings or playback or if you have difficulty getting a copy of the slide.

Today's discussion including the Q&A period may contain forward-looking statements as defined by the private litigations reform act of 1995.

They're subject to change and risks and uncertainties which may cause actual results to differ materially.

We assume no obligation to update such statements.

For complete discussion of risks and uncertainties, refer to the slide at the end of the presentation as well as material filed by the SCC including our 10-K, 10-Q, A-Ks and the like.

Let's begin.

Turning to slide two, participating today areThomas Hoaglin, the Chairman, President, and Chief Executive Officer, Michael McMennamin, Vice Chairman and Chief Financial Officer, and Mick Stannes, Executive Vice President and head of our dealer sales group.

From time to time, we plan to use these quarterly conference calls to showcase a particular aspect of Huntington's business and operations.

Given the keen interest in our auto finance business, having Nick joins today is a great place to start.

On slide 3, today's discussion will review results on an operating basis unless otherwise noted.

Operating results for the third quarter, of the merchant's services business.

Operating results for prior periods represent reported results adjusted to exclude the impact of restructuring or other charges and the run-rate impact of the Florida banking and insurance operations.

We continue to report numbers unreported or gap basis which making no such adjustments.

These you will find in great detail within this quarter's earnings press release and quarterly financial review, including a reconciliation of recorded earnings to operated earnings shown on slide eight of these presentation.

These materials are all available on our website, www.huntington.com.

Today's presentation will take 40 minutes, we want to get to your questions, let's get started.

I will turn the meeting over to Tom.

Thank you, Jay, and welcome everyone.

Thanks for joining us today.

Slide 4 summarizes this quarter's accomplishments.

Reported earnings were 41 cents per share and included a gain from restructuring the ownership of our merchant processing business.

You may recall we announced the restructuring on the day of last quarter's call.

In essence, we sold our Florida merchant prodessing operations.

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

This resulted in third quarter pre-tax gain of $24 1/2 million over 16 million after-tax, or 7 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.

There is no material run-rate impact on earnings as a result of this transaction.

Focusing on operating earnings, we're very pleased with the third quarter performance for a number of reasons.

First earnings per share were 34 cents per share, meaning street expectations, even including a $6.6 million pre-tax mortgage servicing right impairment.

Like other companies, we have been impacted by the mortgage refinancing and repayment activity causing this impairment, but our earning strength allowed us to absorb the impact and still hit our target.

Average managed loans increased at 11% annualized rate up from 8% in the second quarter and 5% in the first quarter.

As in recent quarters, residential real estate and home equity home growth as well as growth and commercial real estate loans were the primary drivers.

However in, giving this summer's big pickup in auto sales, the auto loans and leases grew at a 14% annualized rate.

Dick will comment more on this later.

Not surprisingly, commercial loans continue to decline.

The 10% annualized growth and annual core deposits was also positive .

The deposit in-flow is benefiting from the turbulent market.

We're also seeing growth in a number of household served and deposit of balances from our sales efforts.

Total credit quality trends improved during this quarter.

Specifically nonperforming assets and declines, 4%, the second quarter decline.

This was driven by 35% decline in the in-flow of new nonperforming assets.

The fourth consecutive quarterly decline.

The net chargeoff excluding exited portfolios declined 83 basis points from 88 basis points in the second quarter and represents the third quarter -- consecutive quarterly decline.

Loan loss provision expenses were high during the quarter given the quarter's significant loan growth.

As a result, the low-loss provision expense exceeded net chargeoffs by 16 1/2 million or 38%.

The combination of a higher loan loss reserve and declining nonperforming assets increased our nonperforming asset coverage ratio to 191%.

Lastly,we repurchased 6.2 million shares, bring the program to date repurchases to 15 million shares with a total purchase value of $294 million.

Turning to slide 5, there were other several meaningful achievements, representing investments in huntington's future.

Under the banner of investing in Huntington's business, we appointed a new head of small business banking, this was brought to bring proper focus to this important business segment, which represents companies with annual sales of typically less than $5 million.

This is exactly the type of bread and butter and high margin customer and local bank with national resources should be serving.

Expanding our small business presence should be one of the drivers of Huntington's future earnings growth.

We also purchased Lease Net Group, which specializes in network server class equipment lease financing for businesses.

This exemplifies our commitment to bring national scope, expertise and business solutions to our local customers while broadening our product menu to customers and expanding leasing activities.

Lease that's 300 clients or primarily located in the Midwest, with some already Huntington customers.

As previously noted, we restructured our ownership interest in Huntington Merchant Services LLC and sold our Florida based insurance agency to its principles.

Reflecting investment in our employees, we built on last year's all-employee stock option grant of 400 shares with a new grant of 300 shares to virtually all full-time employees.

This year's grant has an exercise price of $19.94, and will vest when Huntington stock closes at or above $27 a share for five consecutive trading days or after five years, whichever comes first.

We strongly believe this program, which has been well received by our associates, benefits shareholders as employees feel a sense of ownership in Huntington.

We also made a number of investments in our customers.

Our now enhanced teller system is in 64% or 214 of our 336 branches up from 13% at the end of last quarter.

We continue to target all branches to be on this new platform by the end of the year.

For our commercial customers, we have launched a new commercial loan processing system.

This is an internally-developed system that integrates and streamlines the commercial loan underwriting booking documentation and accounting systems.

Our private financial group launched a new small cap mutual fund called CITUS and building on the success in the second quarter, another 28 new companies were added to our business 401K platform.

With those introductory remarks, let me turn the presentation over to Michael McMennamin to provide the details.

Mike.

Thanks, Tom.

Most of the following slides represent the standard deck that you're familiar with.

Given the fact that this was a very straight forward quarter &, I'm not going to spend as much time on some of them as we want to make certain that neck has sufficient time for his segment in the program, so let's get started.

Turning to slide 7, the third quarter highlights compared to the second quarter results include net income of $82.2 million, 34 cents per share, up 1% and 3% respectively from the second quarter.

Annualized growth rates and managed loans and core deposits of 11% and 10% respectively. 4.26% net interest margin, down 4 basis points, 53.1% efficiency ratio improved slightly from 53.2 in the previous quarter. 83 basis points and net chargeoffs excluding the accident portfolios down 5 basis points.

The 2% loan loss reserve ratio, which Tom mentioned was unchanged during the quarter. 8% tangible common equity to asset ratio down 51 basis points, reflects the impact of the stock buyback program and the $6.6 million mortgage servicing rights impairment.

I will provide more comments on each of those in the next few minutes.

Slide 8 reconciles reported versus operated earnings for the third quarter.

The only adjustment was the 24 1/2 million pre-tax, 16 million after-tax gain associated with the ownership restructuring of our merchant services business.

Slide 9 shows performance highlights for the third quarter, compared with the second and year ago quarters.

I'll comment and detail on most of these later.

Let's move on.

Slide 10 compares the operating results for the third second year ago quarters.

Net interest income was up 7.6 million or 3% from the second quarter, reflecting the growth in earning assets as the margin contracted four basis points.

Noninterest income before security gains was down $600,000 or 1% due to the 6.6 million mortgage servicing writing impairment charge.

Reflecting this total revenue before security gains was up 2% from the second quarter and up 7% from a year ago.

Security gains are immaterial during the quarter, the strength of our earnings allowed us to obsorb the 6.6 million mortgage servicing rights impairment without having to offset the loss by recognizing security gains.

Obviously the recognition of security gains creates more pressure on future net interest income and margin as any sale proceeds are reinvested in lower-yielding assets.

Provision expense increased 12% from the second quarter & in spite of the decline in chargeoffs, reflecting this quarter's strong long growth.

Noninterest expense increased 2% to the higher personnel costs, primarily related to building the regional banking function and increased mortgage banking and dealer sales activity.

In consistent with our practice of touring up the annual tax each quarter, this quarter's effective tax rate was 25 1/2%, which was comparable to 25.4% in the year ago quarter, on a year-to-date basis, this makes our effective tax rate 26.7%, which is just about unchanged from last year's 26.6% rate.

On balance, we feel this is a very solid performance for the quarter, particularly given the state of the economy and instability in our financial markets.

We were particularly pleased with the revenue growth in this type of economic environment.

The left hand graph on slide 11 shows the quarterly earnings per share pattern, which after three quarters has moved up slightly in the last two quarters with high credit costs making it difficult to accelerate the pace of earnings growth.

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

This graph measures earnings progress before credit costs, which is perhaps a better metric to see the underlying progress that we have made outside of the credit environment.

Pre-tax income on this basis was 169 million dollars, 2% higher than the second quarter, and 10% higher than a year ago.

The left hand -- left half of slide 12 shows a four basis point contraction in the net interest margin in the third quarter, but despite this margin contraction, net interest income and absolute dollars grew 3% from the second quarter, reflecting the benefit of almost an 800 million or 4% increase in average earning assets, which was partially offset by the 1% decline in the net interest margin.

Average securities increased 230 million from the second quarter with over half of this increase relating to mortgage loans that were securitized in the second and third quarter.

Compared to a year ago quarter, net interest income was up 8%, reflecting a 5% increase in average earning assets with loans up 7%, and the net margin going up 9 basis points from 4.17%.

A chart on the right side shows the earning asset composition and the third quarter average earning assets increased 4% with average loans up $450 million and other assets up 340 million, mostly do you to the higher security portfolio.

Slide 13 lists some of the factors that have and will continue to create pressure on the net interest margin.

The flatter yield curve has resulted in new yields and auto loans on lease originations.

In addition, the higher credit quality of the new auto originations in recent quarters has resulted in lower net interest margins on these assets, although we're comfortable the lower result and chargeoffs will lead to a higher net return.

The growth in residential mortgages in recent quarters has been primarily five year adjustable rate mortgages.

That interest margin is lower an our overall net interest margin, thus putting down the pressure on the margin.

As in the case with the higher credit quality auto loans and leases, we're comfortable that the low chargeoff on this product will lead to an attractive net return.

Mortgage prepayment activity on our mortgage back securities and residential loan portfolios has resulted in reinvestment and lower rate assets.

We're probably being heard here less than other banks because only 15% of our earning assets are in fixed-rate residential loans and mortgage back securities, which is somewhat lower than some of our peers.

Secondly, or 70% of our residential mortgage loan portfolio has been originated over the last year, and thus is somewhat less sensitive to refinancing pressure.

We have been liability sensible in the last year, which has benefited our net interest margin slightly.

As shown in slide flex in the appendix, we reduced the liability sensitivity this quarter as measured by our exposure to a 200 basis point rate increase over the next 12 months from negative 1.3% to negative 0.18%.

The position was further reduced to negative 0.6%.

Average managed loan growth is highlighted on slide 14 and just as a reminder, managed loans include about $1.1 billion of securitized auto loans.

In the third quarter, averaged managed loans increased at an annualized rate of 11% from the second quarter.

We're delighted with this performance, given the continued difficult environment with the quality loss.

Our focus on originating the 3-1 and 5-1 adjustable rate mortgage product continued to produce strong residential loan growth.

This has been a good product for Huntington with our $1.3 billion in average outstanding more than double the level of a year ago.

Home equity growth accelerated to an 18% annualized rate up from 17% in the second quarter.

Auto loans and leases increased at a 14% annualized rate, mirroring the record sales and the auto industries; however, these portfolios are up only 2% from a year earlier.

Commercial real estate loans increased at a 10% annualized rate during the quarter.

Our commercial real estate focus continues to follow our emphasis on quality, real estate construction projects within our core developer group, and also within our geographic footprint.

Further, our market strategy emphasizes construction lendings versus permanent financing as construction loans provide higher margins, fees, and greater portfolio liquidity.

During the quarter, approximately 20% of our growth is represented by single-family construction loans by our mortgage company.

Another 40% of the growth represents increased funding within previously-committed transactions.

Slide 49 and 50 in the appendix provide breakdowns by property-type, region, and loan type for this portfolio.

Commercial loans declined slightly during the quarter at an 8% rate versus a 3% rate of decline in the second quarter, and 6% decline in the first quarter.

Corporations continue to be very cautious in their inventory management, capital spending and acquisition programs.

Compared to the years ago quarter, commercial loans have declined 8% with all of that reduction reflecting of the decline in our shared national credit portfolio from about a billion and a half to a billion-dollars at the end of the third quarter.

The 10% annualized growth rate in core deposits as shown on slide 50 was again very strong.

Much of the growth continued to be focused in interest-bearing money market accounts both retail and business.

This past quarter, demand deposits increased at a double-digit rate in the corporate demand area.

Compared to the years ago quarter, core deposits were up 12%.

The strong deposit growth continues to be a function both on the increase focus and success of our sales management efforts in a branch network and the turbulence we're experiencing in our financial markets.

Slide 16 shows that noninterest income was down $600,000 or 1% from the second quarter, driven by declines in mortgage banking, brokerage and insurance and trust income.

Mortgage banking income was down 4.4 million dollars, reflecting the 6.6 million mortgage servicing impairment.

Excluding the impairment charges it was up $2.2 million reflecting the stronger origination activity during the quarter.

Brokerage and insurance income was down a million-dollars in the second quarter, reflecting reduced mutual fund revenue due to a 41% decline in sales production.

This was only partially offset by a slight increase in the higher margin annuity sales revenue, which remained near record levels.

Trust income declined $1.3 million from the second quarter, primarily on lower-asset valuations given the weakness in the equity market.

Deposit service charges were up 2.1 million or 6% from the second quarter.

Like last quarter, the primary driver of the increase was higher personalized service charges.

Compared to a year ago, deposit service charges increased 12%, driven equally by higher personalized charges and higher corporate maintenance fees.

Other income in the current quarter was up $3.7 million with the largest contributors to the increase being higher sales of derivative products to commercial banking customers and trading profits.

As mentioned a moment ago, third quarter results included the MSR impairment.

Slide 17 shows related data on this issue.

Specifically our total mortgage servicing book is $5.2 billion.

Of that total, $3.2 billion is servicing for other investors what the remaining $2 billion representing Huntington loans that are serviced.

Mortgage servicing rights are capitalized for services for other investors.

The market value of these MSR's was $28 billion or 88 basis points at the end of the third quarter down from 100 basis points at the end of the second quarter.

MSRs are not a material issue for Huntington as exemplified as they only represent 1.2% of huntington's equity.

Slide 18 details the change in noninterest expense and shows it was up $3 1/2 million from the second quarter.

Higher personnel costs account for most of the increase and reflect a combination of factors including higher staffing and regional banking as we continue to build that business as well as in the credit workout area.

Higher mortgage banking staffing to accommodate the increased activity and higher production related compensation expense, particularly in mortgage banking, dealer sales and in the credit workout area.

Slide 19 shows the trend in our efficiency ratio, which has continued to move down from the peak in the first quarter of last year and was 53.1% in the third quarter.

Let me now look at and review some of the recent credit trends.

Slide 21 provides an overview of credit quality trends.

First, our nonperforming asset ratio declined from 1.14% of loans to 1.05%, roughly equivalent to a year ago.

Net chargeoffs excluding losses on the exiting portfolio declined from 88 basis points to 83 basis points during the quarter.

I'll comment more specifically on that in just a second.

The 90 day delinquency ratio for total loans increased slightly but was still a year ago level.

The allowance for loan losses was unchanged at 2%, up from 177 at the end of the year ago quarter.

With the maintenance of the reserve ratio and the modest decline in nonperforming assets, our nonperforming asset coverage ratio improved to 191% during the quarter.

Slide 22 shows the third quarter represented the second consecutive decline, orderly decline in the nonperforming assets, I'll provide more information on that in the next slide.

Slide 23 shows the recent quarterly nonperforming asset activity.

As you can see, the $47 million in-flow of new nonperforming assets during the quarter was down 35% from the second quarter level and was the primary factor behind the overall decline in nonperforming assets.

Sectors contributing to the new nonperforming assets included lumber, steel, services and health care.

Shared national credits represent 20% of total nonperforming assets with no newly identified SNICK, nonperforming assets this quarter.

We have no real concentrations and communications, recreation hotel for the airline sectors.

Areas that are causing nonperforming asset increases this quarter for others in the banking industry.

The decline in nonperforming assets over the last three quarters is encouraging.

And assuming no material change in the economy, we anticipate a further decline in the fourth quarter.

Slide 24 segments a nonperforming assets by industry sector.

The bar chart on the right shows which sectors have contributed to the $109 million increase in nonperforming assets in the last 21 months.

The services and the manufacturing sector accounting for most of the change.

Nonperforming assets continue to be concentrated in these two sectors at approximately 30% each.

The next slide shows net chargeoffs adjusting to exclude chargeoffs on the accident portfolios.

You will recall from earlier conference calls reserves were established in the second quarter of '01 for two exited loan portfolios, truck and equipment, and auto loans.

Those portfolios now represent 65 million and $19 million respectively on our balance sheet.

Adjusted net chargeoffs declined from 88 basis points to 83 basis points during the quarter.

Commercial net chargeoffs declined from 153 basis points to 121 during the quarter, with the retail trade manufacturing and service sectors continuing to produce the majority of our chargeoffs.

Commercial real estate net chargeoffs increased to 43 basis points to 22 basis points reflecting the sale of one loan.

Over the last several quarters, we have strengthened this group with the objective of increasing our effort on the effective and efficient resolution of problem commercial credits.

Total consumer net chargeoffs increased slightly to 78 basis points from 75 basis points in the second quarter.

This reflected the seasonal uptick in auto-related net chargeoffs, specifically the net chargeoff ratio for auto loans increased to 101 basis points from 92 basis points, auto leases increased to 127 basis points from 108 in the second quarter.

The improved underwriting of auto loans and leases should continue to have a positive impact on the chargeoff ratios overtime excluding seasonal factors.

Slide 26 shows the vintage performance of our indirect auto loan and lease portfolios and by now should be very familiar to you.

Performance issues of the loan and lease portfolios are very similar.

As we have stated before, loans and leases originated between the fourth quarter of '99 and the third quarter of 2000, the top lines on both graphs have performed poorly.

About 20% of that volume was underwritten with psycho spores below 640, typically considered D quality paper In contrast, more recent vintages have been written at higher cycle scores and are performing better.

Nick will have more comments on this in his segment of the presentation.

The good news is that impact and the high chargeoff vintages is rapidly diminishing.

Origininations during that time the represent 17 and 21% of the current loan and lease portfolios respectively.

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

The 30 plus day clip delinquency rate is an early indicator of future chargeoff levels as they're well-established, well-rolled off patterns from the 30 day delinquency category into the more severe delinquency category.

The sharp decline in the 30 plus day consumer delinquencies in the first quarter was followed by another 10 basis points improvement during the second quarter and another 16 basis points improvement this quarter; however, giving consideration to seasonal patterns, we expect delinquencies and chargeoffs to increase in the fourth quarter.

Slide 28 recaps the trend in the loan loss reserve, which is previously mentioned maintained at 2%.

Provision expense exceeded net chargeoffs by 16 1/2 million dollars, reflecting the strong loan growth during the third quarter.

We begin the year with a reserve ratio at 2%, reflecting concern over the weakness in the economy and the credit deterioration that has taken place in our portfolio.

We maintained the reserve at that level since then; however, trends are improving the.

The nonperforming asset coverage ratio increased from 166% a year ago to 176% in the second quarter and 191% in the third quarter as nonperforming assets have declined in each of the last two quarters.

The credit quality of our auto loan and lease portfolio in the last year improved significantly as we have focused our effort on originating higher quality paper. 83% of the total reported long growth in the last year has been either residential real estate or home equity loans, both of which generate low chargeoffs and, therefore, require a relatively low level of reserves.

Today, our loan mix is more risk adverse than a year ago, and we have seen improvements in credit quality in both the consumer and commercial portfolio.

Arguably, our 2% reserve today is stronger than the 2% levels a couple of quarters ago.

As such to the degree we have opportunities to exit weak and nonperforming credits in coming quarters, we will aggressively pursue these and are willing if necessary to use the 2% reserve to accomplish this purpose.

Let me close my segment with brief comments regarding capital.

Slide 30 shows capitol trends as an expected, share repurchase activity reduced these capitol ratios during the quarter, all on that on although they remain strong.

Assuming continued repurchase activity levels, the ratio at year end would be 7 1/2 to 7 3/4%.

Turning to the next slide, as you know the board approved a 21 -- I'm sorry, a 22 million share repurchase program in February of this year.

We initiated activity in the open market in late February and purchased 1 1/2 million shares in the first quarter and then another 7.3 million shares in the second quarter.

This quarter we repurchased 6.2 million shares, bringing program to date repurchases to 15 million shares.

But a value of $294 million.

As previously stated, our goal is to utilize our excess capitol to repurchase 3 to 400 million dollars in 2002.

We continue to be disciplined buyers and will monitor our stock price in earnings valuation versus our other bank as we make our repurchase decisions.

Let mow now turn the call over to Mick who is going to review trends in our dealer sales business.

Nick.

Thanks, Mike.

Let mow begin by profiling the dealer sales business as slide 33 shows this business has been a constant source of earnings for huntington for over 50 years.

Some banks have entered, exited and reentered this business depending on a host of factors.

In contrast, our long standing and continuous commitment to serving their needs gives us a competitive advantage.

Our auto dealership clients know they can count on us to meet their financing needs.

We manage 7.1 billion in total auto receivables with 3 bent 9 billion in loans and 3.2 billion in leases.

In addition, we manage over 500 million in commercial loan balances, primarily new car floor plan lending.

We have 550 associates that comprise our entire workload processes in this line of businesses, about 7% of huntington's employee base, with a footprint of clients exceeding 3500 new car dealerships.

Turning to slide 34, our success can be attributed to three primary levels: Our people, business model, and our daily execution.

We strongly believe that people, not products, make our business great.

Knowing our clients by consistently being in market allows us to understand and to respond quickly to their needs and changes in the local market.

We offer a robust value proposition that meets all of their dealer needs from assisting in the financing of inventory purchase from the manufacturers, including the financing for the real estate facilities to the financing of their unit sales and to meet their personal and business investment needs through retail banking and private group products.

Importantly, our local market teams have on average over nine years of tenure with us as well as within their local communities.

They intimately know their customers and their needs.

Lastly, our service commitment creates positive customer experiences.

There is no one better at this as evidenced by our recognition through JD power surveys.

Slide 35 displays our 9 month origininations win our geographical footprint.

Clearly, with our longest tenured market being Ohio, we originated almost 40% of our production there.

Central Florida, being defined as the Orlando Tampa coadore along with Michigan representing our two largest markets.

Our fundamental strategy is to increase penetration in our existing core banking markets.

While our overall objective is to generally maintain the relative size of this business to Huntington in total, having the capability to pick and choose origination points as well as manage the quality and quantity of the originations, assures a steady flow of profitable originations.

Slide 36 reflects our current and historical market share for our three largest markets accroding to market size.

Achieving size allows us to not only be an innovator of new product ideas but also an implementer of them.

Additionally, it allows us to make process or pricing changes enhancing the profitability of our products.

I might comment here in all of our markets excluding our new markets, we're one of the top three market share leaders excluding the big three captive finance companies.

Slide 37 provides an analysis of the 2002 industry sales for the third quarter versus our own originations.

Our success in the quarter was assisted by the big 3s decision on July 3rd to increase the cash-back option in lieu of 0 or low interest financing options to clear out 2002 models.

Cash rebate approached 3,000 dollars in many cases.

Associates were able to demonstrate to purchasers, especially those with a high propensity to trade prior to the maturity of their loan or lease that the cash option provided more of an economic benefit as the financing directed to banks continued to be strong.

Slide 38 reflects sampling of quality metrics reviewed on production of each month.

Here, the monthly production is rolled into quarterly amounts.

Starting with the loops on the top half of the slide, please note the relationship between our production and improvement in psycho scores in general, and particularly that segment below 640, in the first quarter of 2000, almost 20% of production represented psycho scores below 640.

That compares to over 1% in our most recent quarter.

As a point of reference, the industry conconsiders psycho scores greater than 700 to be A credit risk and below 640, D risk, one level above for some prime segments.

Third quarter production was our best quarterly volume ever.

New cars represented 56, 57% of our current quarter's production, up from 36% two years ago.

Since costs to originate in service loans are primarily fixed, the fact that new cars have a higher loan balance than used cars allows it to leverage the income from the assets against the fixed structure.

Additionally, new vehicles we've received the credit risk associated with these types of buyers.

The lease origination hope -- shown on the bottom half of the table shows trends.

Turning to slide 39, you can see some of the trends for trade graphically.

Here again, we detected the relationship over the last 11 quarters over the net quarters production against our internal risk expected losses.

Risk expected losses are basically on the statistical modeling relationship between psyche scores, loan to value ratios, term and age of collateral.

The higher risk of new versus new cars and the lower loan of value ratios resulted in lower risk losses in every quarter for both loans and leases.

Slide 40 shows a graphic representsation for trends in both the 30 day and 90-day levels against net chargeoffs over the last five quarters.

The result in the continuous improvment in asset quality of the new production shown on slide 39 has manifested itself into improved trends plotted here.

The entire book of residuals is not to a third party insurance carrier.

Lastly, we use our own internal reserve standing at $30 million at the end of the third quarter to cover risks for things such as excess mileage and wear and tear.

We provide incremental funding on new production.

Slide 42 highlights some of our priorities going forward.

We continue to identify dealerships where we have low product penetration and focus [INAUDIBLE] to increase the share of wallets in such outlets.

Such as products and our commercial suite and personal products to dealer management teams.

To help control costs and improve efficiencies, we will leverage our infrastructure capacity with recent enhanced technology capabilities.

We will position ourselves as early adopters of emerging technologies like E-contracting where it will be able to sign the contract with the use of additional signature pad allowing the contract and E-form to be uploaded into the bank's accounting system thereby taking costs out of the workload process.

Final, we will maintain our focus on improving overall dealership profitability by effectively managing all product performance of our products such as the amount paid or fees assessed as an example.

In closing, the dealer sales business is an important segment to the Huntington.

Past issues relating to pricing and underwriting having been fully addressed as Mike noted earlier.

Any related impact is quickly diminishing.

Importantly, the production metrics and related profitability have steadily improved.

Lastly, opportunity continues to exist during the earning prospects of the business as we improve and product penetration of existing relationships.

Let me turn it to Tom for closing comments.

Thank you, Mick.

In closing, the third quarter was another good one for Huntington.

Our financial results continue to improve.

Revenues increase, we continue to watch our expenses spending when necessary to build a franchise.

Loans were growing nicely in a difficult environment, deposits are continuing to grow, credit quality's improve and this investments in the business customers and employees are showing results.

As I have said in prior quarters, we have not yet arrived.

We're in a better position than we were even two quarters ago.

We still have much to do, but continue to make good progress.

Regarding our earnings outlook, we believe fourth quarter earnings per share will be 34 to 35 cents.

This keeps us win the range for full-year operating earnings guidance originally given last January.

Frankly, we'll be disappointed if we make 34 cents per share.

As the guidance for next year, we're in the middle of our 2003 planning exercise.

It's premature to share with you targets at this time.

Obviously a lot depends on the state of the economy, markets and interest rates.

We're confident we will continue to show improvement in those areas under our direct control.

This completes our prepared remarks.

Mike, Mick and I will be happy to take your questions.

Let me turn the meeting back over to the operator who will provide instructions on conducting the question and answer period.

Operator.

At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone key pad.

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

Your first question comes from Dave George.

Hi, this is Dave George with A.G. Edwards.

A philosophical question about the indirect business, since Nick is in the room with you.

It seems to me it's been a great business for the Huntington historically, and as Nick mentioned, a lot of the competitors have gotten out of the business and the growth and the returns in that business have, at least to me, been in excess of your cost to capital.

How do you balance the momentum you have in the dealer business with kind of your bigger picture interest of kind of shrinking the contribution that that business, um, consistencies of Huntington's's overall performance going forward.

Thanks.

This is Michael McMennamin.

Let me make a comment or two.

That is obviously a challenge for us.

Nick has a lot of momentum in his business, and we think it's extremely well managed.

It's hard to say to a manager we don't want you to grow your business.

We're not doing that with Nick.

We're looking at trying to develop strategies that will enable us to in essence let Nick continue to grow that business while shrinking as part of huntington's to maintain or shrinking as part of huntington's total operation, and that would involve, um, for example, finding other participants who might take some of that paper and take the credit risk associated with that, so we're work on strategies for that.

We don't have anything to announce.

It's obviously a challenge for us.

Okay, thanks, Mike.

Your next question is from Fred Cummings of McDonald's Investment.

Yes, good afternoon.

A couple of questions.

First, um, Tom or Mike, you can talk about your exposure to animal bill suppliers, what the net manufacturing base, and um, does that sector make up a large portion of the nonperforming assets?

Fred, this is Tom, um, that sector does not make up a large portion of our nonperforming assets.

There is no question that the manufacturing sector broadly defined is a significant component of our top performing assets, only a piece of which would relate to auto suppliers.

Operating as we do in the states of Ohio and Michigan, we do have relationships with auto suppliers, um, all Midwest banks would, um, but we, um, really do not have great concern about, um, exposure from a credit risk standpoint to auto suppliers, um, in any abnormal way.

Okay, then the second question for Mick, with respect to, um, trend negligence your repossession rates, can you give us an update.

What is happening at auction when you go to, you know, sell cars.

What is going on with the loss of severity there?

Um, Fred, let me answer the last question first.

We have begun to see the traditional decline in used car values that you would see as you enter the fall period with the reality being the dealer will have to hold that inventory until the spring.

We haven't seen it be any different than the historical rates of decline, but clearly your collateral will bring less to you at this point in time.

Just because of the nature of the business.

Um, as it relates to your first question, um, we feel very good about the trend lines that we are seeing, um, in our overall repossession rates in general and, um, at this point in time, feel good about directionally the quality that we have put on is translating into better delinquency, better chargeoffs and, obviously therefore, um, you know, fundamentally sound trends and repossession rates.

Then one last question.

As it relates to the risk, um, risk-expected loss ratio that you calculate, is that to Suggest that longer term as this portfolio continues to shift towards a higher quality mix that -- in the indirect business we could look for chargeoffs in the 50, 60 basis-point range say over the next couple of years as you continue to change the mix?

Fred, I think you could definitely come to that conclusion.

That's what we believe in our modeling and our pricing of how we're building the, um, metrics of the business.

Okay, thank you.

Your next question is from Charles Peabody of Port Hills and Partner.

Yeah, three questions, um, are you on the dealer track for originations, if so, what percent of your volumes were this quarter and year to date were there from that, and finally, what sort of follow-up diligence do you do on the consumer coming up from that system?

Um, Charles, to answer, that we're not currently on the dealer track system meaning that the deal Kerr Sunday the application direct -- the dealer can send the application to us and bypass the data entry system.

We do receive applications through the dealer track that come to us in a fax copy that we data enter that into our system, but we don't have the ability today to eliminate the data entry piece, um, because it's only -- it only represents today in our applications through the dor, 1% of our applications, it's just nonexistent challenge for us today, um, but I think as we go forward, whether it's dealer track, credit connection, um, or route 1, which is the big three venture, clearly there will be greater burden put on the banks for validation as we take out the data entry piece.

Thank you.

Again, I would like to remind everyone in order to ask a question, prize press star then the number one on your telephone keypad.

Your next question is from Ed Najarain from Merrill Lynch

Hey, guys.

A couple of quick questions for you.

Hopefully you can give me relative specific answers.

First of all, once you get through the repurchase authorization and we get into '03, would you expect to continue to repurchase stock with using up some of your retained earnings in that regard?

Obviously not as aggressively in '02, but would you, you know, consider that as a use of your excess capital -- capitol ongoing.

Second question is with respect to the margin, I think you talk to some extent about the margin coming down further, um, it looks like you might have a little bit more opportunity on the deposit side, um, than some other banks to reduce your deposit pricing a little further, potentially if you could comment on that with respect to future margin compression.

Third question, um, if you give us any kind of an outlook for the '03 tax rate and fourth question, did I hear you correctly, um, say that chargeoffs would be higher in the fourth quarter.

Thanks.

Yeah, this is Tom.

Let me start out by addressing your question with regard to, um, what happens with our stock repurchase, um, efforts.

The fulfillment of the current, um, the current opportunity.

Because we believe that we will end the year still in a, um, strong capitol position than repurchasing additional stock remains a possibility for us.

It's something that that we'll consider.

We have not made a commitment to do that, but it's something that we consider as an opportunity for us.

Depends on a lot of factors, one of which is how we might otherwise use the capitol to always looking for opportunities in that regard.

Um, I think we have always thought since the outset of our share repurchase that using our excess capitol to buy back stock ought to serve as a return for shareholders, so, opportunities that would provide greater return, we need to consider.

And we also think that it's not bad to have excess capitol, so we're not, I think, entering next year in a -- with a feeling that we have to do something with it, um, with that said, we will certainly think about, um, the possibility of buying back additional stock.

Mike, why don't you handle some of the others.

Ed, you talked about the tax rate for just a second.

We're almost at 27% effective tax rate, um, through the three quarters and think that that's about where we'll end up the year.

It might be a tad higher next year, perhaps a 27 to 28%, um, would be a good range to look at.

Um, in terms of the margin, are there opportunities on the, um, deposit side for -- to mitigate any margin compression?

We did change the rates on some of our money market accounts late in the third quarter and, um, that will give us a little -- that will give us more benefit for the fourth quarter of the year, um, give us a full quarter benefit as opposed to just partial, um, that's something we're looking at, um, it's a pretty competitive market out there for retail deposits these days.

You have money market account rates at least vis-a-v, fed funds or vis-a-v, um, money market fund rates, tend to be a little heighter than they have been in the past cycles, so we want to make sure that -- we want to make sure we can continue to grow our deposits but we're paying a lot of attention to those deposit rates.

I'm not sure that's specific enough for you, but that's the best I can do this second.

Can you give us any outlook on the margin over the next quarter or two?

As I said, I think margins have peaked here and for the industry.

How much they will decline, I really don't tonight comment on it.

They could, um, I think you guys suppose you could see margin declines of 10 bases points maybe in the next quarter, maybe more?

The trend during the quarter was we had a lower [INAUDIBLE] September than we did in July, and also we'll tend to get a little seasonal weakness from the side of the equation.

You don't, um, make as many car loans or leases in the fourth quarter as you do in the third quarter, so you will just get seasonal pressure from that standpoint also.

Okay.

Chargeoffs, um, I think we -- I think the comment we made was that we would expect seasonally chargeoffs in the auto business to increase a little bit or perhaps increase a little bit in the fourth quarter.

They did increase but what we think is seasonal, on a seasonal base this quarter.

We really, um, I think we mentioned the last quarter in a perverse sense we would like to -- we would like to accelerate, um, the resolution of some of the nonperforming commercial predecessors as rapidly as we can and to the extent we have opportunities to do that, to exit credits on what we consider to be favorable economic turns.

We will certainly try to do that.

Okay, all right.

That gives me better clarity there.

Thank you.

At this time, there are no further questions.

Mr. Gould, are there any closing remarks?

Yes, again, thank you everybody for joining us this quarter.

We look forward to talking to you 90 days from now.

Bye-bye.

This concludes today's Huntington Bancshares conference call.

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