Huntington Bancshares Inc (HBAN) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Huntington Bancshares fourth quarter 2003 conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the conference, please press star then 0 on your touch-tone telephone.

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Jay Gould.

Mr. Gould, you may begin.

Thank you, Patty and welcome again, everyone, to today's conference call.

I'm Jay Gould, Director of Investor Relations.

Before our formal remarks, as you know, we have our usual housekeeping items.

Copies of the slides that we will be reviewing can be found on our website at Huntington.com.

This call is being recorded and will be available as a rebroadcast starting about an hour from the close of the call through the end of this month.

Call the Investor Relations department at 614-480-5676 for more information on how to access these recordings or playback or if you have difficulty getting a copy of the slides.

Today's discussion, including the Q&A period, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Such statements are based on information and assumptions available at this time and are subject to change, risk and uncertainties which may cause actual results to differ materially.

We assume no obligation to update such statements.

For a complete discussion of risks and uncertainties, please refer to the slide at the end of today's presentation and material filed with the SEC including our most recent form 10K/A, 10Q and A/K filing.

Let's begin.

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

Also present for the Q&A period is Nick Stanutz, Executive Vice President and head of our dealer sales line of business and Tim Barber, Senior Vice President of Credit Risk Management.

Turning to slide 3, we note several aspects of the basis of today's presentation.

I encourage you all to read this, but let me point out a couple of key disclosures related to the basis of the presentation.

This presentation contains GAAP financial measures and non-GAAP financial measures where we believe it helpful to understanding Huntington's results of operations or financial position.

Where non-GAAP financial measures are used, the comparable GAAP financial measure as well as the reconciliation to the comparable GAAP financial measure can be found on the slide presentation or in the quarterly financial review supplement to the 2003 fourth quarter earnings press release, which can be found on our website.

Also, certain performance data we will review are shown on an annualized basis.

And in the discussion of net interest income, we do this on a fully taxable equivalent basis.

Further, we relate certain one-time revenue and expense items on an after-tax per share basis.

I know many of you are familiar with the terms and their usage, but for those of you who are not, we have provided definitions and rationale for their usage on this slide.

Today's presentation is going to take about 45 minutes.

We all want to get to your questions, so let's get started.

Tom?

Thank you, Jay, welcome everyone.

Thanks for joining us today.

Turning to slide 4, I will begin with a review of significant fourth quarter and full-year events and highlights.

Mike will then follow with a usual in-depth review of the quarter's financial performance.

I will then wrap up the session with some closing comments regarding our outlook for 2004.

Slide 5 reviews key events and highlights of the quarter.

Fourth quarter earnings were 40 cents per common share.

Loan and lease growth was very strong, up an annualized 17% from the third quarter with consumer loans, especially residential mortgages and equity loans and lines leading the way.

For the first time in a number of quarters, deposits declined.

We think some of this is attributable to the funds flowing out to the equity markets, as well as to lower deposit rates, resulting from our decision in the third quarter to lower the rates on nonmaturing deposit accounts.

Our net interest margin was down 4 basis points to 3.42%.

Most notable, perhaps, was the fact that we took advantage of three opportunities to strengthen our balance sheet and improve our funding costs.

First, we sold $1 billion of auto loans.

Those of you following Huntington know we have an objective of lowering our total exposure to the auto business to around 20% of loans, leases and securitized loans.

Selling auto loans represents one means of accomplishing this.

This sale resulted in a $16.3 million pretax gain.

Second, we prepaid $250 million of high cost long-term debt.

This debt had an average rate of nearly 5% with maturities in 2006.

Extinguishing the debt resulted in a $15.3 million pretax loss but importantly reduces funding costs going forward.

Third, we sold $99 million of commercial loans, including $43 million of non-performing loans.

Importantly, existing reserves, specifically associated with these credits, were sufficient to absorb the $26.6 million of related charge-offs.

This sale significantly impacted our credit quality performance ratios.

Our net charge-off ratio was 1.03%, up from last quarter's .64% but it was only .53% excluding the charge-offs on the sold loans.

Our non-performing asset ratio dropped to only 41 basis points and our NPA coverage ratio increased to 384%.

While our loan loss reserve ratio declined to 1.59%, down 16 basis points from September, as a result of the loan sale and related charge-offs, we view this level as strong and comparing favorably with industry averages.

In sum, we were very pleased with fourth quarter performance.

Slide 6 is a similar review of the key events but for the full year.

Earnings per share were $1.61, up 21% from 2002.

Return on assets and return on equity both improved.

A real highlight of last year was the strong growth in loans and leases, up 18% between fourth quarters, with consumer loans up 33% led by growth in residential mortgages, auto loans and leases and home equity loans.

And CNI and commercial real estate loans were up 3%, reflecting an 11% increase in middle markets as commercial real estate loans and 10% increase in small business loans.

Partially offset by a 4% decline in middle market CNI loans.

Core deposits were up 11%, excluding CDs.

During the year, we made solid progress in reducing our exposure to the auto sector.

We sold $2.1 billion of auto loans, which resulted in $40 million of pretax gains.

More importantly, our total exposure to the auto sector was reduced 5 percentage points from 33% at the end of 2002 to 28% at the end of last year.

We also made some progress in improving our efficiency ratio.

And like most other banks, our net interest margin was under pressure last year, down 13 basis points.

Even so, the loan growth enabled to us increase taxable equivalent net interest income 14%.

Last year also saw significant improvements in our overall credit quality ratios.

The net charge-off ratio declined to 81 basis points from 113 basis points.

The non-performing assets declined to $87 billion, down 36% which resulted in a year-end NPA ratio of 41 basis points, our lowest level in many years.

The progress we made in improving earnings trends enabled us to increase the quarterly dividend 9.4%.

While we sold four West Virginia offices that were less than optimal for our franchise, we opened four new ones.

Huntington ended the year well positioned for continuing our earnings momentum into 2004.

I will comment more on our 2004 outlook later.

Let me now turn the presentation over to Mike who will provide additional details.

Mike?

Thanks, Tom.

Turning to slide 8, reported net income was $93.3 million or 40 cents per share.

Tom has already commented on two of these significant items for the quarter.

The first was a $16.3 million pretax gain, roughly 5 cents a share on the sale of a billion dollars of auto loans.

Second was a $15.3 million pretax loss or about 4 cents a share on the extinguishment of some high-cost repurchase agreements so as to lock in some lower funding costs.

This debt represented repurchase agreements with maturities in 2006 and an average coupon of 4.98%.

Third, we had a recovery of temporary impairment of mortgage servicing rights, MSRs, of $3.5 million pretax or about 1 penny per share.

This follows a $17.8 million pretax or 5 cent per share after tax, impairment recovery in the third quarter.

You may recall that we began recording temporary MSR impairment charges in the third quarter of 2002 as rates were declining.

From the third quarter of 2002 through the second quarter of 2003, the total of such impairment charges were $19.2 million.

We've now come full circle with the temporary MSR impairment recoveries of the last two quarters totaling $21.3 million pretax, offsetting the sum of the previous temporary impairments.

As is our custom in these quarterly earnings calls, the remaining slides are the ones we typically use to review our financial performance.

Please note that additional slides are provided in the appendix to give you more information should you find that helpful.

Slide 9 is our highlights page.

Tom already noted most of the items for the fourth quarter.

Since I'll be covering them in detail later, let's move on to slide 10.

Slide 10 compares the income statement for the fourth quarter, third quarter and year-ago quarter.

Net interest income increased $3.8 million from the third quarter and was up $25.1 million or 13% from a year ago.

Provision expense declined $25.3 million from the third quarter, reflecting the impact of the sold loans and the related loan-loss reserve changes which we'll talk about in more detail later.

Non-interest income declined $26.3 million and non-interest expense increased $17.3 million, impacted by a combination of factors that I will also review in just a few minutes.

The graphs on slide 11 show the quarterly earnings trend in net income and earnings per share with the third quarter reflecting income before the cumulative effect of the change in accounting principal, which you may recall was the adoption of FIN 46.

Slide 12 shows that the fourth quarter net interest income on a fully taxable equivalent basis was up 13% from the year-ago quarter with the margin declining slightly over the last three quarters.

The right-hand side of this chart shows some of the factors that have influenced the net interest margin of recent quarters, as well as may continue to influence it in coming quarters.

First is the in fact our loan mix continues to shift towards lower rate but higher quality loans.

Second, is a reminder that the runoff in our operating loss portfolio has a positive impact on the margin.

This is because all of the funding costs supporting this portfolio are reflected in interest expense but the income is reflected as fee income.

Over time, these funding costs will diminish as the portfolio winds down.

Third is the fact that auto loan sales can have a negative impact on the net interest margin.

And fourth would be any growth in lower yielding investment securities.

Having noted these factors, one other factor that can change quarter-to-quarter is the impact of non-deferable loan fees.

All origination fees are deferred and therefore have relatively little impact on link quarter margin comparisons.

However, non-deferable fees, an example would be late fees, can fluctuate between quarters, sometimes due to seasonal factors which results in some link quarter margin impact.

This was the case in the fourth quarter margin decline.

About three of the four basis-point decline in the net interest margin from the third quarter was attributed to lower non-deferable loan fees.

Average loan and lease growth is highlighted on slide 13.

Middle market CNI loans declined at a 1% annual rate.

This performance compares favorably with the more significant declines we've seen in recent quarters.

Commercial real estate loans are up at a 10% annualized rate, a little slower than the 13% rate in the third quarter and year to date are up 11%.

Small business loans, which are made through our retail delivery channels, grew at a 15% rate, up slightly from 14% in the last quarter and up 10% from a year ago.

We're very, very pleased with this performance as this has been an area of emphasize for Huntington over the last year and a half.

Auto loans declined at a 7% annualized rate.

The $1 billion auto loan sale in early December impacted average balances by about $300 million.

Excluding this impact, the annualized growth rate in the quarter would have been 23% reflecting the full quarter impact of very strong third quarter origination volume.

Comparisons to earlier periods were impacted by the third quarter adoption of FIN 46 and I'll discuss the trends adjusting for this on the next slide.

Auto direct financing leases averaged $1.8 billion in the fourth quarter, up at a 53% annual rate.

You will recall that this is a relatively young and rapidly-growing portfolio as it only affects leases made after April, 2002 as this portfolio grows, as growth rate expected to slow.

Auto leases that were made prior to this period are classified as operating leases which are in a runoff mode.

Home equity loans and lines and residential mortgages, primarily ARMs, continued their strong growth during the quarter and were up 20% and 82% respectively on an annualized growth rate from the third quarter.

Average operating lease assets, which are classified as non-earning assets, continued their runoff as all new auto lease originations since April 2002 have been direct financing leases.

This portfolio has declined 42% from $2.3 billion in the year-ago quarter to $1.4 billion in the current quarter.

Slide 14 adjusts the reported growth rate data that we just provided you on slide 13 to exclude the FIN 46 impact of the third quarter's consolidation of $1 billion of previously securitized auto loans.

This consolidation resulted in some of the year-over-year reported growth rates being higher than the fundamental underlying growth.

For example, this slide shows that after adjusting out the impact of the $1 billion consolidations, auto loans declined 11% from the year-ago quarter versus the 20% increase that was shown on slide 13.

On the same basis, total loans and leases were up 12% versus the 18% shown on the previous slide.

To better understand total credit-related asset generation, we think it's useful to look at the growth rate of combined operating lease assets and total loans and leases.

This combined total is up 6% from the year-ago quarter.

But the growth rate was adversely impacted by the $2.1 billion of auto loans sold over the last year.

Adjusting for the average $1.1 billion impact of the sold auto loans in the fourth quarter, the 6% increase would have been 11%.

Slide 15 shows that total core deposits excluding CDs declined an annualized 6% or $188 million from the third quarter.

You will recall from last quarter's conference call that we lowered the rate on some of our non-maturity accounts early in the third quarter.

We believe that some of the reduction in total core deposits reflected the outflow of money that is moving back into the stock market or other investments.

But even with the current quarter's outflow, total core deposits, excluding CDs, were up 11% from the year-ago quarter.

The average rate paid on total core deposits declined 11 basis points in the fourth quarter.

Slide 16 provides a regional look at retail banking, deposit and loan growth between the fourth quarter a year ago and fourth quarter of '03.

Retail banking accounts for about 75% of total core deposits, 34% of consumer loans and virtually 100% of our small business loans.

What is most noteworthy is the fact that all regions posted impressive double-digit increases in deposits, excluding time deposits and consumer loans.

And all but the Northern Ohio region posted double-digit growth in small business loans.

Northern Ohio's lower growth rate reflects the slower relative economic recovery of that region.

Slide 17 reviews the trends of non-interest income.

As a result of operating lease accounting, which accounts for 43% of non-interest income, total non-interest income was down $26.3 million or 10% from the third quarter.

Excluding the 10% decline in operating lease income, total non-interest income was down $13.9 million or 9% from the third quarter.

The primary drivers of this reduction were: The negative impact of a decline in mortgage banking income and also the absence of a branch sale gain in the fourth quarter versus the $13.1 million gain recognized in the third quarter.

Partially offset by the $16.3 million gain from the auto loan sale.

Mortgage banking income was down $20.5 million, primarily due to a $14.3 million decline in mortgage servicing rights or MSR impairment recoveries between quarters.

Reflecting the slight rise in interest rates in the fourth quarter, these recoveries totaled $3.5 million, down from $17.8 million of recoveries in the third quarter.

The remaining decline in mortgage banking income was due to lower origination fees and lower marketing income, given a 60% decline in mortgage originations.

More on mortgage banking income in just a couple of slides.

Throughout the year, we've seen increases in deposit service charges and this was true again this quarter as they were up $2.5 million or 6% from the third quarter.

This was almost entirely due to an increase in consumer deposit service charges mostly in NSF and overdraft fees, which were up from 16% from the year-ago quarter.

Compared with the year-ago quarter, total deposit service charges were up 8%.

Brokerage insurance income increased 4% from the third quarter, reversing the downward trend of the last two quarters.

This reflected a 12% increase in investment products, primarily due to a 17% increase in annuity sales and a 13% increase in packaged product sales.

Insurance income was down 12%, due to lower title insurance revenue, coincident with the slow down in the mortgage business.

Trust income was up 3%, primarily due to higher personal trust income as a result of the increased market valuations, and to a lesser degree, higher corporate trust income, reflecting a combination of new business and seasonal renewal fees.

Other service charges declined $1.3 million or 12% reflecting lower ATM surcharge and interchange fees, as well as a decline in merchant service revenue, due to the lower fee structure resulting from the Visa settlement.

Other income from the current quarter was down $4.1 million or 18% due primarily to lower investment banking income and trading fees.

As just noted, this quarter had a number of items that could make underlying trends compared with the third quarter difficult to see.

If you take reported non-interest income for both periods, exclude operating lease income for both quarters, exclude the fourth quarter auto loan sales gain, exclude the third quarter branch sale gain and exclude the mortgage servicing right impairment recovery from both quarters, non-interest income would have been down 2% from the third to the fourth quarter.

Slide 18 provides some additional color on our auto loan sales.

During the year, we sold $2.1 billion of auto loans.

Besides the gain on the sale, there are other financial impacts.

One impact is pressure on our net interest margin and earnings.

As shown here, the negative impact on the 2004 net interest margin of these three sales is estimated at about 8 basis points.

Also, sales generally result in higher charge-off rates for the remaining auto portfolio.

As the pools of sold loans do not include any delinquent loans.

This slide also shows that the average FICO score of the sold portfolios was 735 or higher, very high quality paper.

And consistent with the quality we have been originating over the last several quarters.

I refer you slide 83 in the appendix where you can see the details of our quarterly auto loan production and note that the average FICO score on last year's $2.8 billion of auto loan production was 738.

Nevertheless, these sales are estimated to increase the average 2004 auto loan charge-off ratio by about four basis points.

As indicated on the top of this slide, our objective is to lower auto exposure to 20% of loans, leases and securitized loans over a period of time.

This last year we've made very good progress toward that goal.

Reducing our exposure 5 percentage points to 28%.

But it's important to remember that there is a negative earnings impact of selling these loans as we no longer have the benefit of the spread income net of charge-offs, which makes our fourth quarter and full year earnings performance, at least in our view, even more impressive.

We are balancing two objectives here.

Our desire to reduce our auto exposure with our desire to increase earnings.

Turning to mortgage banking, we added slide 19 to our deck last quarter to help illustrate our philosophy regarding mortgage servicing rights.

This is just provided as a reminder so I won't spend much time on it other than to point out that any MSR adjustments have been temporary impairments.

And as I noted earlier, over the last six quarters, the previous impairment charges have been essentially offset by the recoveries of the last two quarters.

Slide 20 provides some details, some statistics, on our mortgage banking and servicing operations.

Mortgage service for other investors totaled $6.4 billion at end of December.

Up 68% from a year ago.

At the end of December, our MSRs were valued at 111 basis points, up from 107 basis points at the end of the third quarter.

At the end of the year, our MSR valuation reserve totaled $6.1 million.

For the year, $6.1 billion of mortgages were originated, a new record.

But note that fourth quarter originations dropped 60% from the third quarter level from $2.2 billion to $900 million.

Slide 21 details trends and non-interest expense.

The primary driver of the increase from the third quarter was the $15.3 million loss on the extinguishment of the repurchase agreements.

Specifically we extinguished or paid early $250 million of repurchase agreements that were maturing in 2006 with an average coupon of 4.98%.

Importantly, this will help lower our funding costs in future quarters.

Looking at some of the other key items, other expense was up $7.1 million reflecting higher auto residual insurance costs, seasonal charitable contribution expense and other miscellaneous expenses.

Personnel costs increased $2.6 million or 2% from the third quarter.

This increase primarily reflected increases in incentive costs and reduced deferral of loan origination costs associated with lower loan origination volumes, partially offset by lower benefit expense.

The continued decline of the operating lease portfolio is reflected in a $7.5 million or 8% decline in operating lease expenses.

Underlying trends and non-interest expense are also hard to see, but again, if you take the reported non-interest expense for both periods back out operating lease expense for both periods, back out the fourth quarter 2003 debt extinguishment loss and back out the restructuring reserve recovery, non-interest expense was up about 5% from the third quarter with the increase in other expenses and personnel costs the main reasons.

SEC-related expenses totaled $1.8 million in the fourth quarter and were $6.9 million for the full year.

Let me review some of the recent credit trend highlights on slide 22 and we will cover these in a little more detail in just a second.

As Tom mentioned, the non-performing asset ratio at year-end was 41 basis points, down from 65 basis points at the end of the third quarter.

Net charge-offs were 103 basis points up from 64 basis points and both the MPA ratio and the charge-off ratio were impacted by the loan sale. 90-day delinquencies improved slightly.

Our loan loss reserve ratio decreased to 1.59%, but our non-performing asset coverage ratio increased to 384%.

Slide 23 graphically just shows the trend in non-performing assets and how favorably the fourth quarter credit actions impacted this level.

It is worth repeating that this 41 basis points of non-performing assets is the lowest level we've seen in many years.

This is about as good as it gets and we anticipate that our non-performing assets will probably remain around these levels for the foreseeable future.

Let me provide a little more non-performing asset detail on slide 24.

The ending balance was down $49.7 million from the total at the end of September.

The fourth quarter credit action impact is isolated so you can see its impact separately from what else was going on.

Specifically, of the $99 million of commercial loans sold during the quarter, $42.5 million of those loans were non-performing, of which $17.1 million were charged off and sale proceeds received for the remaining $25.4 million.

In addition to the credit actions, new inflows, that is new non-performing assets coming into the portfolio, declined to $38.4 million during the quarter versus a $61 million average for the first three quarters of 2003.

There were no individually significant credits in the number.

At the end of the year, we had only one non-performing asset that exceeded $5.5 million and that asset was for $5.4 million.

I'd refer you to slide 66 in the appendix for a detail of our non-performing assets by sector and size.

The next two slides show the trend in net charge-offs over the last five quarters with slide 25 showing the net charge-off ratios and slide 26 the absolute dollar amount of net charge-offs.

Turning to slide 25, as we noted earlier, the total net charge-off ratio increased to 103 basis points or 53 basis points excluding the impact of the sold loans, compared with 64 basis points in the third quarter.

The total CNI and commercial real estate net charge-off ratio was 155 basis points, but 44 basis points excluding the effect of the sold loans, again, our lowest level in many quarters.

Total consumer net charge-off ratio was 61 basis points, flat with the third quarter.

Auto loans increased slightly to 129 basis points, reflecting primarily seasonal trends.

The loan sale, the auto loan sale that occurred in mid-December had a very minimal impact on the quarter's auto net charge-off ratio.

I think it's also helpful to look at the trends in the dollar amount of net charge-offs which is why we added slide 26 to our deck.

Slides 27 and 28 show the trends in 30 and 90-day delinquencies for both commercial and consumer loans respectively.

As shown on slide 27, commercial 30-day delinquencies have been trending generally down for both CNI and commercial real estate portfolios.

The right-hand graph shows that on a 90-day measurement basis, commercial real estate and CNI delinquencies improved slightly during the quarter, also favorably impacted by the loan sale.

Like slide 27, the next slide shows 30 and 90-day delinquencies for consumer loans, with the 30-day ratio continuing to decline and the 90-day ratio holding steady.

Slide 29 recaps the trend in our loan loss reserve which, as we previously noted, declined to 1.59% of loans and leases compared with 1.75% at the end of the prior quarter.

The decline in the ratio was primarily caused by the loan sale and the related release of specific reserves associated with the $99 million of sold commercial loans.

Our provision expense of $26.3 million, although down significantly from the third quarter, essentially covered all the charge-offs not associated with the loan sale.

Also reserves of $6.1 million related to the billion dollars of sold auto loans were released during the quarter.

Slide 30 shows a trend in loan loss provision expense in relationship to net charge-offs over the last five quarters.

Slide 31 is a new slide that we've added to help you see how our mix of loans and leases has changed over the last three years, as well as to make it very clear that we measure our auto exposure as a sum of auto loans and leases, plus operating lease assets, plus any securitized auto loans.

This is a better representation of our exposure than just measuring auto loans and leases to the total loan and lease component.

As we have auto credit exposure in all three of these asset classes.

And while we've talked today about our auto exposure change from 33% at the end of 2002 to 28% at the end of last year as shown on the bottom of this slide, I think it's equally important to note how significantly the risk profile of our loan portfolio has been lowered since the end of 2001.

Most notable over this two-year time period has been the growth and low risk residential real estate loans, from 5 to 11% of our total portfolio.

This is the offset to the reduction in our auto exposure from 32 to 28% and also of our total CNI and CRE exposure from 45 to 43%.

Two key points I want to make.

The first I think is obvious, we have a less risky portfolio composition today than we had two years ago.

Second, we have significantly improved our underwriting standards in both commercial and consumer portfolios.

We think the combination of these two facts bodes well for loan charge-offs in the future.

Let me close with just brief comments about capital.

If you turn to slide 32, you will notice our tangible equity asset ratio as of December 31 was 6.80, up slightly from 6.78 at the end of September.

This remains above our 6.5 to 6.75 target level.

The decline from 7.22 at the end of the fourth quarter a year ago, reflects the combination of adding back the billion dollars of securitized loans, the FIN 46 adoption as well as share repurchases in the first quarter of 2003.

Now, in contrast, if you look at the tangible equity to risk-weighted asset ratio compared with a year ago, that's been stable.

That's because risk-weighted assets, always included, even in the year-ago period, the $1billion of the securitized loans.

The upward trend over the last three quarters in this ratio reflects the fact we've been putting on our books primarily low risk-weighted assets, including home equity loans, residential mortgages and investment securities.

This completes the financial review, so let me turn the meeting back over to Tom for some comments about 2004.

Tom?

Thanks, Mike.

As I noted at the beginning of the call, we are entering 2004 from a position of much-improved earnings momentum with strong reserves in capital.

Turning to slide 34, let me make some general comments about our views regarding the economic environment next year.

Generally, we anticipate that the economic environment in our region will be one characterized by modest economic growth.

Further, we expect interest rates will remain at low absolute levels with some increase over the second half of the year.

But as in any given planning horizon, we see some pluses and minuses.

Working in our favor, we're expecting to see modest demand for CNI loans through our middle market corporate clients.

We also think that demand for commercial real estate, residential mortgages, home equity loans and auto loans, will be relatively strong.

In addition, the securities markets are expected to continue to improve, benefitting our private financial group, our wealth management business.

Further, as our sales efforts continue to gain momentum, we should see the benefit of increased product penetration.

Containing cost and improving productivity continue to be a focus.

Along with the rest of corporate America, we will incur substantial increases in pension costs and benefit expense in 2004, even so, we are confident we can keep our overall expense growth rates sufficiently below the growth rate of revenue to allow a continued improvement in our efficiency ratio.

Lastly, we expect a credit quality environment to remain favorable which should result in lower net charge-offs.

But there are also challenges.

For example, we expect a decline in mortgage refinance volume for the record levels of the past year.

Our net interest margin is expected to remain around the fourth quarter level and there's also the potential for more auto loan sales as we continue to work at lowering our auto exposure.

While such sales may or may not result in gains, they remove earning assets from our balance sheet, putting pressure on revenue and margin.

How all of these factors influence our financial performance expectations is summarized on the next slide.

Our current expectations are that 2004 GAAP earnings per share will be between $1.62 and $1.66.

Excluding any gains from auto loan sales, as well as the negative impact from the continued runoff on the operating leases, revenue growth is expected to increase in the mid-single digit range.

Contributing to this should be good net interest income growth, supported by solid loan growth as the margin is expected to remain around the fourth quarter level.

Which means the average margin for the year will be below that of 2003.

We also anticipate high single-digit growth in non-interest income.

On the expense side, and again, excluding the impact of the operating lease runoff, we expect to hold expense growth to the low-single digit range.

Lastly, looking at credit quality, we expect full year net charge-offs will average between 50 and 60 basis points, though for seasonal reasons any given quarter might fall above or below this range.

As noted earlier in this call, we expect non-performing assets to remain essentially flat with the year-end position.

This completes our prepared remarks.

Mike, Nick Stanutz, Tim Barber, Jay and I will be happy to take your questions.

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

Operator?

Thank you, ladies and gentlemen, if you have a question at this time, please press the 1 key on our touch-tone phone.

If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

Once again, if you have a question, please press the 1 key on your touch-tone telephone.

We will pause one moment.

Once again, if you have a question, please press the 1 key on your touch-tone telephone.

Our first question comes from Ed Najarian of Merrill Lynch.

Good afternoon, guys.

Hi, Ed.

Actually I have two questions.

First question is, in line with a 50 to 60 basis point charge-off ratio, how do you intend to provision for '04?

If you sort of keep taking provisions that match core charge-offs and finance phases come onto the balance sheet pretty rapidly, your reserve to learn ratio is going to continue to drop fairly meaningfully.

I'm just trying to get a perspective there.

Ed, it's Mike McMennamin.

You're correct as the direct financing leases come onto the balance sheet and in essence reserves are established for those leases consistent with what the expected charge-offs are, that would in and of itself tend to drop our reserve ratio.

I think that given the probable improvement in credit quality that we would expect next year, both because of the credit actions that we've taken and the changes in underwriting standards that we've put in place over the last year or two, as well as what we think will be a much better economic environment for 2004, I think it, in all probability, the reserve level will come down somewhat.

How much will just be dependent upon the improvement in credit quality and the loan portfolio.

Okay, so we should expect that ratio to continue to drop?

I think it probably would end up the year, given our outlook for credit quality in 2004, I think it's probably a reasonable assumption that that ratio would be lower a year from now, if the trends develop as we see them, than it is today.

And Ed, we continue to be mindful, as Mike touched on, of the change in the risk profile of our loan portfolio, too.

And how that should be reflected in the reserves.

Okay.

Thanks.

And then, Mike, my second question goes back to a discussion we had in New York a couple of months ago.

You've now sold $1 billion of auto loans, you got about a $16 million gain for that, so that's 1.6% in terms of your gain on the sale from a volume standpoint.

Can you give us some color on profitability of that transaction?

What I'm driving at is, what does it take you to originate $1 billion of oil loans from an expense standpoint?

And therefore when you sell them for $16 million, is that a profitable transaction?

Let me digress for one second and make just one comment and then I will try to get back to your question.

One of the things we have done -- one of the concerns we've had, Ed, with the expectation of rising interest rates in some point in 2004, we've been concerned about our ability to sell auto loans in a rising interest rate environment without incurring a loss on the sale of the fixed rate assets.

So, actually we have established interest rate swaps to protect us from the impact of rising rates, should they occur.

Which would enable us to continue to implement this strategy of sales if we thought it was appropriate.

Your question of the profitability of the loans that we are generating, I gather is, are the loans we're generating sufficiently profitable to enable us to sell those loans at a profit in 2004?

Is that --

My question really is you generated those loans, there's a certain expense to do that.

You sold them for $16 million.

That's the revenue piece from generating those loans.

What's the expense piece?

That's really my question.

I think that we continue as you are aware, Ed to service those loans and receive 1% for servicing income for those loans.

We estimate that our cost of servicing those loans is about 50 basis points.

Okay.

Going forward.

And that gets manifested in the accounting treatment because we, in essence, are required to capitalize the net servicing or the flow of net servicing and expense from those loans.

That's a part of the gain.

Okay.

Well maybe a better question, not to dwell on this too much is to try to get a little bit more sense of the profit dynamics of these transactions if they're going to continue.

Sounds like they are, so, I guess we don't have a sense of how they impact profitability.

So, that would be helpful.

Okay.

Okay, thanks.

Thank you.

Our next question comes from Fred Cummings of McDonald Investments.

Yes, good afternoon.

Hi, Fred.

This is a question for Nick, in the automobile business, can you just talk about, one, the competitive positions.

And I think I heard Mike or Tom say you're still looking for pretty good volume growth next year.

And that there's been some talk about all the incentives leading into the incentives that were put in place last year aiding in the sales this year.

Can you kind of talk about those dynamics, Nick?

Yes, Fred.

I think it's clear from the point of view or this point in time, maybe, that clearly GM is not giving up on the incentives that they've been offering as much as $4,000 per vehicle and you're really seeing the other domestic manufacturers really following suit to a certain degree, clearly some models that are being newly-introduced like maybe the new F-150, Ford is not having to spend that kind of money on the '04s as they did the '03s, but clearly that is creating still very good demand in the marketplace in terms of showroom traffic, although, January typically would be a low point for sales on a annual basis.

But really, we don't see any decline in demand.

Matter of fact, we probably would suggest, as the manufacturers, that there probably will be increasing demand because there's more new product coming into the marketplace in '04 than there has been in the last three or four years.

So, the new product, the incentive, we clearly see a great opportunity to continue to generate the kind of volume that we have been able to do.

As it relates to the competitive forces of the business, clearly we're seeing a lot more pressure on pricing, funding costs have in the last six months of 2003, crept upward and we have seen a little bit more pricing pressure in the last six months than we have seen probably in the last 12 months, taking June of '03 and going backward.

But, things like the announcement of Chase Bank 1, there's one less automobile finance player that will be in the marketplace at some point in time.

So that presents an opportunity for those that are left in the marketplace to compete effectively.

And Nick, can you just refresh our memories, what's your mix between say new car loans versus used in terms of production?

Fred, if you go back to --

Okay, okay, I see. 583, okay.

Plus 2/3, 1/3 or a little bit less than that, new to used.

Okay.

And then one question, Tom, on the commercial real estate loan growth you're seeing.

Is that pretty broad based in terms of across your geographic footprint?

Or is it concentrated in any one area?

It is spread nicely across our regions, Fred and it's not concentrated in any particular sector or commercial real estate lending.

We've got a very well-diversified portfolio both geographically and by type.

I think there is a slide, 547, that can give you a sense of that diversification.

It continues to be a very high quality, well-performing portfolio.

Okay.

Thanks, Tom.

Thank you.

Our next question comes from Jack Micenko of Lehman Brothers.

Hi, guys, good afternoon.

Hi, Jack.

Keeping with the same theme of auto, two questions.

The exposure and totals have run down from 32 to 20% in the past year.

Just curious as to how far out you think it takes you to get to 20?

And trying to figure out if there's going to be more loan sales in that process?

And then if there are, how do you feel about offsetting more of those gains like you did this quarter with some liability restructuring?

Or is that sort of a non-related offset and do you expect some of those to flow through?

Or will you continue to try to structure the margin better in the future periods through that restructuring?

Thanks.

Jack, it's Mike.

We really have not put a timetable on our goal of getting to 20%.

I think it depends on a lot of things.

It depends on what kind of volumes we're originating.

It depends on market conditions and the appetite for this kind of product and this quarter, as you noted, we did take a gain that financially had the impact of offsetting a large part of the loss.

Those were not related to transactions.

As we go forward, and as interest rates rise, we may or may not recognize gains on the sale of the assets.

So we are not making real commitments in terms of whether we're going to sell them, how many we're going to sell or at what price, at least in this stage.

Ed Najarian had asked a question that I don't think I responded very well to.

Let's see if I can do a little better job on that.

I think his question was related to the loan sales and how acquisition costs were covered, were we covering our acquisition costs.

In essence, acquisition costs are deferred and amortized over the life of the loan so that when those loans are sold as they were in the fourth quarter, all of those acquisition costs in essence are associated with that particular group of loans, are written off.

So, yes, they do get covered in the loan sale and the netting of the loan sale gain.

Okay, so there are no additional auto sale gains, I guess, in the $1.66 range for this year, then.

That's correct.

Okay, thanks, guys.

Our next question comes from Erik Eisenstein of Standard and Poor's Equities.

Thank you, my question has been asked and answered.

Thanks again.

Thank you, Erik.

Thank you.

Our next question comes from Chris Chunorth of Morgan Stanley.

Hi, thank you.

Good afternoon, guys.

Hi, Chris, we can barely hear you.

Is this a little better?

Yes, better, thank you.

Okay.

My question relates to just some color on regional deposit trends, in particular I saw some linked quarter weakness in Western Michigan and just was wondering if you could give any color on how things have been going in the regions and in Michigan in particular.

We felt very, very positive about how things have been going in Michigan in general and in Western Michigan, in particular.

That's in lending and deposit growth.

But in the fourth quarter, we did see some decline up there.

It's basically attributed to a couple of factors, one is that we had some corporate money that is commercial deposits as opposed to consumers that left because of, let's call it relatively hot money left for a higher rate.

There was an impact in the fourth quarter for that.

And we did reduce, as we mentioned, rates on some non-maturity products in the third quarter and in Western Michigan there was some runoff in those product categories as a result of the reduction rates, really feels as if it was the right thing to do.

We have every conviction that we'll be able to grow deposits, core deposits in Western Michigan as we have in other areas but we were impacted by those in the fourth quarter.

I think it's also probably relevant to talk a little bit about the deposit growth certainly was adversely impacted, not in Western Michigan particularly, but across the company just with the result of the slow down in the mortgage banking business and, therefore the result to reduction and the escrow deposits associated with the financings.

Does that impact one particular region in an outsized way?

Or something that's universally --

No, I don't know, Chris, what the numbers are region by region, specifically, it was a general comment.

It would affect all regions.

I see.

If I could follow-up, looking at the new incremental non-performing assets this quarter at around $38 million, I believe was one of the lowest numbers in a while, your PowerPoint presentation says that the fourth quarter of '02 was about $35 million where as your press release gives a higher number and I was wondering if, the press release suggested that this might have been the lowest level of new non-performing assets since, over the last com of years, I wondered which one is right and when was the last time you had new non-performing assets coming on at this low a level.

Chris, it's Mike.

I'm trying to go through the press release quickly.

I don't think we referred to or I don't recall our referring in the press release to the level of new non-performing assets.

I believe we were referring to the absolute level itself.

Okay.

And the absolute percentage.

I was looking at page 7 in your press release versus slide 24 in the deck.

Bear with us, we're trying to find it here.

Chris, I can't find that quickly.

We'll touch base back with you on that.

Sounds good.

If that's all right.

All right.

In general, let me say that we were well-pleased with that lower flow of incoming non-performers but the point we're trying to make is that, as Mike indicated, the percentage of non-performers was as low as we've seen for many, many years.

Great, thank you.

Our next question comes from Todd Hagerman of Fox-Pitt.

Good afternoon, everyone.

Hi, Todd.

Mike, if you could, maybe a couple of questions.

One, maybe give us an update in terms of interest rate sensitivity position with the balance sheet and some of the changes.

And in particular, I'm a little curious in terms of kind of your ongoing appetite for more mortgage or consumer-related assets, really given what you've achieved in terms of lowering the risk profile to date.

Todd, I believe that our -- trying to find the slide here, but our net interest income at risk, at the end of the fourth quarter, assuming a gradual 200-basis point increase in rates, was 0.3%, which was actually down a little bit from 1% at the end of the third quarter.

Stated another way, if rates were to go up gradually 200 basis points and that is above and beyond the increases that are implied in the forward curve, we estimate that our net interest income would decline because of that rate change, 3/10 of a percent.

We feel we're slightly liability-sensitive.

That's actually a little bit less liability-sensitive than we've been over the last year and a half, when we've tended to hover between negative half a percent and negative one percent.

Okay.

In terms of the appetite for residential mortgages, as you recall, this has been what we referred to, I think, at times as a transition product for us.

Almost all of those residential mortgages are 5-1 ARMs.

We're not putting fixed rate mortgages on the books.

And to the extent that our capacity or willingness to put those on the books is just a function of what kind of a spread we think we can generate on a relatively match-funded basis for those assets.

There was a lot of volume that came on the books in the third quarter.

And I think in 2004, that's just a function of how attractively those assets are priced on a match-funded basis versus other assets and adjusting for the lower level of risk in the product.

Where are you today in terms of, if you could give me say the mix or percentage of assets tied to say a variable rate instrument.

Boy, I'd have to get back to you that, Todd.

I don't know the number.

We will get back to you on that.

Okay.

And if I could ask just a separate question, forgive me, Tom, maybe if you already mentioned this, can you give us an update kind of where things are with the SEC?

Sure, Todd.

I didn't hear you mention it.

As of last quarter, we've addressed all issues that the SEC has raised, that is all issues we know about.

We think we've worked very well with the SEC.

They have not closed the investigation but we are not working on additional issues at this time.

But they haven't given you any sense of a timeframe for resolution at their end?

They have not.

Okay.

Again, there's nothing that we're working on at this point in time.

Right.

There really has been no change in the status of that since the end of the third quarter.

Okay.

Great.

Thanks very much, guys.

Our next question comes from Anthony Lombardi of Merrill Lynch.

Thank you, good afternoon.

Just a follow-up to the last response.

Have you worked on anything with the SEC since the last quarterly conference call?

We did our filings on November 14th.

That included some restatements and then the 10Q for the third quarter and there has been nothing that we've done since that point in time.

Okay, so, bone dry since then.

That's right.

Just on the net charge-offs, the forecast you're talking about, you had, I don't know, I guess something like 70 basis points, excluding credit actions in the fourth quarter of last year. 53 in the most recent quarter.

Why, with an improving economy, lower risk profile, et cetera, wouldn't that forecast be something below 50 basis points?

Anthony, I think we've talked in our last conference call about how we think given the current portfolio mix that we think that we will gravitate towards charge-offs some place in the 40 to 45 basis point range.

That is once we get past the adverse impact of some of the prior underwriting, et cetera.

So we think we will be some place in the 50-60 basis point range, could conceivably be lower next year, but we're moving we think relatively rapidly towards that kind of a longer term stable outlook.

We still have, Anthony, a bit of the, what I would call, unfortunate underwriting traunch in auto finance of late '99 left in our portfolio that will translate into higher charge-offs or not higher than '03, but still some significant charge-offs in '04.

It's about wound down now, but we're not completely through that yet.

It will take our getting through that before we get to what we would like to think is a more normalized state in the range Mike indicated.

Uh-huh.

Okay.

Just on repurchase activity.

Any thoughts as it relates to '04?

Nothing at this time, no.

And as it relates to Bank One and JP Morgan, if you could just maybe comment on thoughts strategically with what you may or may not do in your own backyard as Bank One goes about the integration process?

I know it's kind of out of market and consumer versus a wholesale bank, et cetera, going together, maybe there's not as much opportunity, but could you just comment on that?

Whenever there are mergers, there is turmoil in markets and we may very well have opportunities in many of our markets to gain additional business.

As you know, our business model is based on local delivery, decentralized decision-making.

It isn't predicated upon size, particularly.

And we think we can be quite nimble in responding to customers and we would like to think we will be able to gain some additional business in the process.

I think people would like to deal with banks where they know the management, management is local.

Chicago is further away from Columbus, New York is even further away.

So I think there probably will be some opportunities.

And just finally, have any of the recent deals here in the last three or four quarters, in terms of M&A activity altered your ability to execute what you want to do externally on the acquisition front, given some of the multiples that have gone on in these transactions?

No, they haven't.

We remain interested but what I would call not trigger-happy.

We want to contemplate acquisition possibilities with a real sense of discipline in terms of pricing and we've got plenty to do in terms of improvement without acquisitions but should we get the opportunity we will want to make sure that it really makes sense for Huntington shareholders.

And so I would say that we're not letting ourselves be affected by some of the recent activity.

Thank you.

Thank you.

Our next question comes from Bob Hughes of KBW.

Hi, good afternoon.

A couple of quick questions.

With respect to the sale, the lower quality commercial loans, could you give us any color as to whether there was any specific geographic or industry concentration in those loans?

And then I have a quick follow-up.

This is Tim Barber.

There really was not, maybe a little bit of Northeast Ohio, but the assets were spread across our -- our footprint.

And industry?

Same thing with the industry.

It really mirrored our portfolio, which is a pretty diverse portfolio.

No specific concentration.

Okay.

And then a final quick question.

What should we be assuming for an effective tax rate in '04?

I think around 26 to 28%.

Nothing significantly different than we're talking this year.

Okay.

Very good.

Thanks.

Our next question comes from Jeff Davis of FTM Securities.

Good afternoon.

Hi, Jeff.

Question for Tim.

The commercial real estate charge-offs have trended up the last couple of quarters from six bits in 2Q to 56 bits the last quarter.

Can you comment on what's driving that?

I don't think that's a systemic change in the portfolio quality.

There were a couple of specific deals, and of course, the credit action that we took in the fourth quarter had any material impact on that number.

Okay, so just in other words just a blip?

Yeah.

But I think the bottom line is it's not a systemic problem in the commercial real estate portfolio.

And it's not a trend that we would anticipate going forward.

Yeah, this is Jay, we mentioned in the third quarter call, the third quarter included one credit for $2.2 million.

Okay.

So, it was a one-off transaction.

Jeff, this is Tom.

I do think, piggibacking what Tim is saying, that when you factor out the impact of the credit actions, the charge-offs net portfolio are really still pretty minimal and well in line.

Okay, very good.

Thank you.

Our next question comes from Fred Cummings of McDonald Investments.

My question was asked.

Thank you.

Thank you.

Once again, if you have a question, please press the 1 key on your touch-tone telephone.

Our next question comes from Tom of BAM.

Who queued me in?

Sorry, sir, did you have a question?

Once again, if you have a question, please press the 1 key on your touch-tone telephone.

We'll pause for one moment.

Gentlemen, we do have a question, Chris of Morgan Stanley.

Hi, Chris.

Mr. Chunorth, did you have a question, sir?

Hi, yes, sorry about that.

That's fine.

Just wanted to follow up with one last question on the auto business.

The gain on sales this quarter, we talked about 160 basis points.

Just wondering why was it below the other levels you had this year?

Could you talk about was there anything -- was it market-related?

Was there anything specifically with these particular loans that drove the lower gain or was there some other reason?

Chris, I don't have the numbers in front of me here, but I think the coupon on the fourth quarter sale was a little lower than the coupons on some of the earlier sales, resulting in a lower gain.

I think it was about a half or 5/8 of a percent lower coupon.

Great.

Thank you very much.

We have one more question.

Todd Hagerman of Fox-Pitt.

Yes, hi, just one quick follow-up on the deposit side again.

Tom, can you give us a sense, thinking in terms of the pricing strategy you've had in place in some of the marketing efforts, you talked about the strength in the Michigan market.

Given your analysis that you've done in the market, kind of, what are the expectations in terms of the core loan growth going forward?

Should we expect to see kind of more of a runoff here given kind of the improving equity markets?

Or what's your sense going forward from a deposit gathering standpoint?

We anticipate deposit growth in '04, but not nearly as high a growth as we saw in '03.

So you should think in terms of low single digits in the deposit growth.

We're quite confident there will be some, it just won't be as strong.

We continue to emphasize the non-maturity deposits as opposed to retail time deposits and there may be some additional runoff in retail tie but we think there's going to be some growth throughout our franchise in what we would call on a core retail deposits.

Okay.

Great.

Thanks a lot.

Operator, we've reached our time limit.

Yes, sir, I'm not showing any further questions at this time.

Would you like to proceed with any closing remarks?

No, other than thanks, everybody, for joining us.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone have a great day!