UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 2 TO FORM 10-Q)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED JUNE 30, 2003
Commission File Number 0-2525
HUNTINGTON BANCSHARES INCORPORATED
MARYLAND 31-0724920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 SOUTH HIGH STREET, COLUMBUS, OHIO 43287
Registrant's telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
====== =====
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
====== ======
There were 228,693,313 shares of Registrant's without par value common stock
outstanding on July 31, 2003.
HUNTINGTON BANCSHARES INCORPORATED
INTRODUCTORY NOTE
Huntington Bancshares Incorporated (Huntington) originally filed its
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003, with
the Securities and Exchange Commission (SEC) on August 14, 2003. Huntington
filed Amendment No. 1 to its Quarterly Report on Form 10-Q/A (Amendment No. 1 to
Form 10-Q/A) on August 18, 2003, to reflect proofreading changes inadvertently
not made during the Edgarization process which were not detected prior to filing
on August 14, 2003.
This Amendment No. 2 to Quarterly Report on Form 10-Q/A (Amendment No. 2 to
Form 10-Q/A) is being filed to correct and restate Huntington's consolidated
financial statements at June 30, 2003 and 2002 and for the three and six months
ended June 30, 2003 and 2002 to:
- Apply, on a retroactive basis, deferral accounting for loan and lease
origination fees and costs;
- Correct an amount included in Amendment No. 1 to Form 10-Q/A related
to the automobile debt cancellation product; and
- Correct for certain timing errors related to income recognition on a
1998 sale-leaseback transaction, the recognition of a gain on an
interest rate swap initiated in 1992 and sold in 2000, and the
recognition of income on Bank Owned Life Insurance in 2001 and 2002.
All of the above are described in more detail in Note 3, "Restatement of
Results of Operations and Financial Condition," to Huntington's Consolidated
Financial Statements and Supplementary Data included in Item 1 of this report.
In addition, this Amendment No. 2 to Form 10-Q/A is being filed to amend:
- Item 2, Management's Discussion and Analysis of Financial Condition
and Results of Operations, to take into account the effects of the
restatement;
- Item 3, Quantitative and Qualitative Disclosures about Market Risk, to
take into account the effects of the restatement;
- Item 4, Controls and Procedures, to comply with changes in the SEC
regulations which became effective in August 2003; and
- Item 6, Exhibits and Reports on Form 8-K, to update certain exhibits
to take into account the effects of the restatement and to comply with
changes in the SEC regulations which became effective in August 2003.
This Amendment No. 2 to Form 10-Q/A corrects and restates the original
Quarterly Report on Form 10-Q, as amended by Amendment No. 1 to Form 10-Q/A, but
continues to speak as of the date of the original filing of the Form 10-Q on
August 14, 2003. Huntington has not updated the disclosure in this Amendment No.
2 to Form 10-Q/A to speak as of a later date. All information contained in this
Amendment No. 2 to Form 10-Q/A is subject to updating and supplementing as
provided in the periodic reports filed subsequent to the original filing date
with the SEC.
2
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2003 and 2002 and
December 31, 2002 4
Consolidated Statements of Income -
For the three and six months ended June 30, 2003 and 2002 5
Consolidated Statements of Changes in Shareholders' Equity -
For the six months ended June 30, 2003 and 2002 6
Consolidated Statements of Cash Flows - For the six months
ended June 30, 2003 and 2002 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 47
Item 4. Controls and Procedures 47
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 6. Exhibits and Reports on Form 8-K 48
Signatures 50
3
PART 1. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - RESTATED
JUNE 30, December 31, June 30,
(in thousands) 2003 2002 2002
--------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks $ 1,153,108 $ 969,483 $ 858,561
Federal funds sold and securities
purchased under resale agreements 74,473 49,280 75,824
Interest bearing deposits in banks 44,906 37,300 28,385
Trading account securities 19,426 241 10,532
Loans held for sale 713,722 528,379 190,724
Securities available for sale - at fair value 3,702,761 3,403,369 3,006,273
Investment securities - fair value $6,780, $7,725,
and $10,963, respectively 6,593 7,546 10,769
Total loans and direct financing leases 19,059,533 18,587,403 16,767,447
Less allowance for loan and lease losses 340,947 336,648 351,696
--------------------------------------------------------------------------------------------------------------------
Net loans and direct financing leases 18,718,586 18,250,755 16,415,751
--------------------------------------------------------------------------------------------------------------------
Operating lease assets 1,672,608 2,200,525 2,739,207
Bank owned life insurance 906,823 886,214 864,768
Premises and equipment 339,793 341,366 353,931
Goodwill and other intangible assets 218,080 218,567 210,685
Customers' acceptance liability 8,372 16,745 16,778
Accrued income and other assets 724,682 620,355 572,384
--------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 28,303,933 $ 27,530,125 $ 25,354,572
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $ 18,371,359 $ 17,499,326 $ 16,861,100
Short-term borrowings 918,771 2,141,016 1,814,275
Federal Home Loan Bank advances 1,273,000 1,013,000 13,000
Subordinated notes 496,666 738,678 880,706
Other long-term debt 3,508,397 2,495,123 2,082,438
Company obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
junior subordinated debentures of the Parent Company 300,000 300,000 300,000
Bank acceptances outstanding 8,372 16,745 16,778
Accrued expenses and other liabilities 1,225,169 1,136,444 1,122,471
--------------------------------------------------------------------------------------------------------------------
Total Liabilities 26,101,734 25,340,332 23,090,768
--------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock - authorized 6,617,808 shares;
none outstanding -- -- --
Common stock - without par value; authorized
500,000,000 shares; issued 257,866,255
shares; outstanding 228,660,038, 232,878,851, and
242,919,872 shares, respectively 2,483,105 2,484,421 2,487,887
Less 29,206,217, 24,987,404, and 14,946,383
treasury shares, respectively (555,176) (475,399) (289,705)
Accumulated other comprehensive income 40,817 62,300 28,655
Retained earnings 233,453 118,471 36,967
--------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,202,199 2,189,793 2,263,804
--------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,303,933 $ 27,530,125 $ 25,354,572
====================================================================================================================
See notes to unaudited consolidated financial statements.
4
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME - RESTATED
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------
Interest and fee income
Loans and leases $ 266,369 $263,160 $ 537,348 $540,169
Securities 42,033 44,424 84,111 89,205
Other 8,923 3,499 15,880 10,211
------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 317,325 311,083 637,339 639,585
------------------------------------------------------------------------------------------------------------
Deposits 76,383 93,759 156,093 202,589
Short-term borrowings 4,313 6,156 9,872 14,668
Federal Home Loan Bank advances 5,634 212 11,219 468
Subordinated notes and other long-term debt
including preferred capital securities 28,554 30,695 55,955 62,730
------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 114,884 130,822 233,139 280,455
------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 202,441 180,261 404,200 359,130
Provision for loan and lease losses 49,193 49,876 86,037 88,886
------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 153,248 130,385 318,163 270,244
------------------------------------------------------------------------------------------------------------
Operating lease income 128,574 171,617 266,767 347,651
Service charges on deposit accounts 40,914 35,608 80,783 74,423
Trust services 15,580 16,247 30,491 31,748
Brokerage and insurance income 14,196 16,899 29,693 34,504
Gains on sales of automobile loans 13,496 -- 23,751 --
Other service charges and fees 11,372 10,529 21,710 21,161
Bank Owned Life Insurance income 11,043 10,722 22,180 21,678
Mortgage banking 7,185 7,835 18,310 23,909
Gain on sale of Florida operations -- -- -- 182,470
Securities gains 6,887 966 8,085 1,423
Other 27,704 18,291 48,105 32,280
------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 276,951 288,714 549,875 771,247
------------------------------------------------------------------------------------------------------------
Personnel costs 105,242 99,115 218,331 207,144
Operating lease expense 102,939 131,695 214,527 272,480
Equipment 16,341 16,659 32,753 33,608
Outside data processing and other services 16,104 16,592 32,683 35,031
Net occupancy 15,377 14,504 31,986 31,493
Professional services 9,872 7,864 19,157 14,294
Marketing 8,454 7,231 15,080 14,234
Telecommunications 5,394 5,320 11,095 11,338
Printing and supplies 2,253 3,683 5,934 7,520
Restructuring (releases) charges (5,315) -- (6,315) 56,184
Other 20,372 21,083 37,281 42,016
------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 297,033 323,746 612,512 725,342
------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 133,166 95,353 255,526 316,149
Income taxes 36,676 24,375 67,306 149,696
------------------------------------------------------------------------------------------------------------
NET INCOME $ 96,490 $ 70,978 $ 188,220 $166,453
============================================================================================================
PER COMMON SHARE
Net Income
Basic $ 0.42 $ 0.29 $ 0.82 $ 0.67
Diluted $ 0.42 $ 0.29 $ 0.81 $ 0.67
Cash Dividends Declared $ 0.16 $ 0.16 $ 0.32 $ 0.32
AVERAGE COMMON SHARES
Basic 228,633 246,106 229,987 248,415
Diluted 230,572 247,867 231,684 249,946
See notes to unaudited consolidated financial statements.
5
------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON STOCK TREASURY STOCK COMPREHENSIVE RETAINED
--------------------- ---------------------- INCOME EARNINGS
(in thousands) SHARES AMOUNT SHARES AMOUNT (LOSS) (Deficit) TOTAL
---------------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
Six Months Ended June 30, 2002:
Balance, beginning of period 257,866 $2,490,724 (6,672) $(123,849) $ 25,488 $(50,466) $2,341,897
Comprehensive Income:
Net income 166,453 166,453
Unrealized net holding
gains on securities
available for sale
arising during the period,
net of reclassification
adjustment for net gains
included in net income 5,926 5,926
Unrealized losses on
derivative instruments
used in cash flow hedging
relationships (2,759) (2,759)
----------
Total comprehensive income 169,620
----------
Stock issued for acquisition 203 3,952 3,952
Cash dividends declared (79,020) (79,020)
Stock options exercised (2,837) 312 5,365 2,528
Treasury shares purchased (8,789) (175,173) (175,173)
---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period 257,866 $2,487,887 (14,946) $(289,705) $ 28,655 $ 36,967 $2,263,804
=================================================================================================================================
SIX MONTHS ENDED JUNE 30, 2003:
BALANCE, BEGINNING OF PERIOD 257,866 $2,484,421 (24,987) $(475,399) $ 62,300 $118,471 $2,189,793
COMPREHENSIVE INCOME:
NET INCOME 188,220 188,220
UNREALIZED NET HOLDING LOSSES
ON SECURITIES AVAILABLE FOR
SALE ARISING DURING THE PERIOD,
NET OF RECLASSIFICATION
ADJUSTMENT FOR NET
GAINS INCLUDED IN NET INCOME (4,391) (4,391)
UNREALIZED LOSSES ON DERIVATIVE
INSTRUMENTS USED IN CASH FLOW
HEDGING RELATIONSHIPS (17,092) (17,092)
----------
TOTAL COMPREHENSIVE INCOME 166,737
----------
CASH DIVIDENDS DECLARED (73,238) (73,238)
STOCK OPTIONS EXERCISED (1,316) 118 1,902 586
TREASURY SHARES PURCHASED (4,300) (81,061) (81,061)
OTHER (37) (618) (618)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD 257,866 $2,483,105 (29,206) $(555,176) $ 40,817 $233,453 $2,202,199
=================================================================================================================================
See notes to unaudited consolidated financial statements.
6
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - RESTATED
(UNAUDITED)
--------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002
---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 188,220 $ 166,453
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan and lease losses 86,037 88,886
Depreciation on operating lease assets 187,914 243,614
Other depreciation and amortization 42,209 30,382
Deferred income tax expense 31,479 238,325
(Increase) decrease in trading account securities (19,185) 2,860
(Increase) decrease in mortgages held for sale (185,343) 438,662
Gains on sales of securities available for sale (8,085) (1,423)
Gains on sales/securitizations of loans (30,797) (3,138)
Gain on sale of Florida banking operations -- (182,470)
Restructuring (releases) charges (6,315) 56,184
Other, net (68,002) (333,085)
---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 218,132 745,250
---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in interest bearing deposits in banks (7,606) (7,180)
Proceeds from:
Maturities and calls of investment securities 954 1,548
Maturities and calls of securities available for sale 945,534 381,329
Sales of securities available for sale 591,497 456,411
Purchases of securities available for sale (1,649,721) (782,961)
Proceeds from sales/securitizations of loans 1,390,378 226,707
Net loan and lease originations, excluding sales (2,119,933) (1,248,133)
Net decrease (increase) in operating lease inventory 340,003 (32,133)
Proceeds from sale of premises and equipment 4,049 15,180
Purchases of premises and equipment (22,220) (26,389)
Proceeds from sales of other real estate 4,872 4,770
Cash paid in purchase acquisition -- (4,026)
Net cash paid related to sale of Florida banking operations -- (1,289,917)
---------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (522,193) (2,304,794)
---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in total deposits 869,313 1,435,665
(Decrease) increase in short-term borrowings (1,222,245) 108,349
Payment of subordinated notes (250,000) --
Proceeds from Federal Home Loan Bank advances 270,000 --
Maturity of Federal Home Loan Bank advances (10,000) (4,000)
Proceeds from long term debt 1,235,000 675,000
Maturity of long-term debt (225,000) (690,000)
Dividends paid on common stock (73,714) (80,193)
Repurchases of common stock (81,061) (175,173)
Net proceeds from issuance of common stock 586 2,528
---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 512,879 1,272,176
---------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS 208,818 (287,256)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,018,763 1,221,641
---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,227,581 $ 934,385
===============================================================================================================
Supplemental disclosures:
Income taxes paid $ 65,859 $ 20,136
Interest paid 247,126 298,235
Non-cash activities
Mortgage loans securitized 171,586 --
Common stock dividends accrued not paid 27,932 39,040
See notes to unaudited consolidated financial statements.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - RESTATED
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Huntington
Bancshares Incorporated (Huntington) reflect all adjustments consisting of
normal recurring accruals, which are, in the opinion of management, necessary
for a fair presentation of the consolidated financial position, the results of
operations, and cash flows for the periods presented. These unaudited
consolidated financial statements have been prepared according to the rules and
regulations of the Securities and Exchange Commission and, therefore, certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States (GAAP) have been omitted. The Notes to the Consolidated
Financial Statements appearing in Huntington's second amended 2002 Annual Report
on Form 10-K/A, filed on November 14, 2003 (Amendment No. 2 to Form 10-K/A),
which include descriptions of significant accounting policies as updated by the
information contained in this report, should be read in conjunction with these
interim financial statements.
In preparing financial statements in conformity with GAAP, management of
Huntington is required to make estimates, assumptions, and judgments that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and reported amounts of revenue and expenses during the reporting period.
An accounting estimate requires assumptions about uncertain matters that could
have a material effect on the financial statements of Huntington if a different
amount within a range of estimates were used or if estimates changed from period
to period. Actual results could differ from those estimates.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the 2003 presentation.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).
This Interpretation changes current practice in the accounting for, and
disclosure of, guarantees which, for Huntington, apply generally to its standby
letters of credit. The Interpretation requires certain guarantees to be recorded
at fair value, which differs from the prior practice of recording a liability
generally when a loss is probable and reasonably estimable, as those terms are
defined in FASB Statement No. 5, Accounting for Contingencies. The
Interpretation also requires a guarantor to make significant new disclosures,
even when the likelihood of making any payments under the guarantee is remote,
which also differs from current practice. The recognition requirements of this
Interpretation were adopted prospectively January 1, 2003. The impact of
adopting FIN 45 was not material.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. This Statement amends
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition to Statement No. 123's fair value method of
accounting for stock-based employee compensation. Statement No. 148 also amends
the disclosure provisions of Statement 123 and Accounting Principles Board (APB)
Opinion No. 28, Interim Financial Reporting, to require disclosure of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. While Statement No. 148 does not require companies to
account for employee stock options using the fair value method, the disclosure
provisions of Statement No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of Statement No. 123 or the intrinsic value method
of APB Opinion No. 25, which is the method currently used by Huntington.
Huntington will adopt the fair value method of recording stock options under the
transitional guidance of Statement No. 148. Huntington is currently evaluating
which of the three methods under the transitional guidance it will adopt.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). This Interpretation of Accounting Research
Bulletin No. 51 (ARB 51), Consolidated Financial Statements, addresses
consolidation by business enterprises where ownership interests in an entity may
vary over time or, in many cases, of special-purpose entities (SPEs). To be
consolidated for financial reporting, these entities must have certain
characteristics. ARB 51 requires that an enterprise's consolidated financial
statements include subsidiaries in which the enterprise has a controlling
financial interest. This Interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. An
enterprise that holds significant variable interests in such an entity, but is
not the primary beneficiary, is required to disclose certain information
regarding its interests in that entity. This Interpretation applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
8
interest entities in which an enterprise holds an interest that it acquired
before February 1, 2003. It also applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. This Interpretation may
be applied (1) prospectively with a cumulative effect adjustment as of the date
on which it is first applied, or (2) by restating previously issued financial
statements for one or more years with a cumulative effect adjustment as of the
beginning of the first year restated.
Effective July 1, 2003, Huntington adopted FIN 46 resulting in the
consolidation of a securitization trust formed in 2000. The consolidation of
that trust involved recognition of the trust's assets and liabilities,
elimination of the related retained interest and servicing asset, recognition of
other related assets, and establishment of a 1.01% allowance for loan and lease
losses. Reflecting these impacts, the adoption of FIN 46 will result in a
cumulative effect charge of approximately $13 million, or $0.06 per share, in
the third quarter, a reduction of the ALLL by approximately 3 basis points, and
a reduction of the tangible common equity ratio of approximately 30 basis
points. Regulatory capital was minimally impacted since these assets were
reflected previously in risk-based assets.
Huntington owns the common stock of two fully-consolidated subsidiary
unrelated business trusts, which have issued company-obligated mandatorily
redeemable preferred capital securities to third party investors. The trusts'
only assets, which totaled $300 million at June 30, 2003, are debentures issued
by Huntington, which were acquired by the trusts using proceeds from the
issuance of the preferred securities and common stock. With the implementation
of FIN 46 in the third quarter of 2003, Huntington will no longer consolidate
these trusts. Upon de-consolidation, Huntington will include the debentures in
other long-term debt and Huntington's equity interest in the trusts will be
included in "accrued income and other assets" on the balance sheet. For
regulatory reporting purposes, the Federal Reserve Board has advised that such
preferred securities will continue to constitute Tier 1 capital until further
notice.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. In
particular, this Statement (1) clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative
discussed in paragraph 6(b) of Statement No. 133, (2) clarifies when a
derivative contains a financing component, (3) amends the definition of an
"underlying" to conform it to language used in FIN 45, and (4) amends certain
other existing pronouncements. Those changes will result in more consistent
reporting of contracts as either derivatives or hybrid instruments. This
Statement is substantially effective on a prospective basis for contracts
entered into or modified after June 30, 2003. Huntington is in the process of
assessing the impact of Statement No. 149 on its results of operations and
financial condition.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. This
Statement establishes standards for how an issuer such as Huntington classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The remaining provisions of this Statement are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own equity
shares, depending on the nature of the relationship established between the
holder and the issuer. This Statement does not apply to features that are
embedded in a financial instrument that is not a derivative in its entirety.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. Huntington is in the process of
assessing the impact of Statement No. 150 on its results of operations and
financial condition.
NOTE 3 - RESTATEMENTS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Huntington has voluntarily corrected and restated its earnings in this
Amendment No. 2 to its Quarterly Report on Form 10-Q/A (Amendment No. 2 to Form
10-Q/A) to correct for timing errors in the recognition of certain revenues and
expenses. Specifically, this Amendment No. 2 to Form 10-Q/A includes the
following corrections:
9
- Huntington previously did not defer loan and lease origination fees
and certain expenses, but rather recognized the net amount in the
period of origination. This restatement applies, on a retroactive
basis, deferral accounting for loan and lease origination fees and
costs.
- Huntington previously recorded revenue from the sale of a contingent
automobile debt cancellation product by allocating a fixed portion of
the proceeds from each sale to revenue and reserves. The impact of the
restatement increased the amount of the reserve to cover claim losses
on the products purchased by customers.
- In 1998, Huntington entered into a sale-leaseback transaction.
Huntington recognized gains in 1998 and 1999 as a reduction in
occupancy expense above the amounts that should have been recognized
under a normal amortization schedule. The restatement corrects this
timing error.
- In 1998, Huntington marked to market the ineffective portion of an
interest rate swap associated with a fixed rate subordinated debt
offering initiated in 1992. The swap was subsequently sold in 2000.
The restatement marks to market the ineffective portion of the swap
for all periods prior to 1998 and then annually through 2000.
- In 2001, Huntington negotiated a reduction in expenses on Bank Owned
Life Insurance, which resulted in an increase in the cash surrender
value of the policies at year end 2001, but did not recognize the
resulting income until 2002. The restatement corrects this timing
error.
The results of this restatement are reflected in the consolidated
financial statements and these notes for all current and prior periods reported
in this Amendment No. 2 to Form 10-Q/A. The following tables reflect the
previously reported amounts included in Amendment No. 1 to Form 10-Q/A filed on
August 18, 2003, as well as the restated amounts by financial statement line in
Huntington's balance sheets at June 30, 2003, December 31, 2002, and June 30,
and income statements for the three and six months ended June 30, 2003 and June
30, 2002:
---------------------------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002 JUNE 30, 2002
--------------------------- -------------------------- --------------------------
PREVIOUSLY PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
------------------------------------------ ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
BALANCE SHEET:
Total loans and leases $19,098,929 $19,059,533 $18,619,211 $18,587,403 $16,784,144 $16,767,447
Net loans and leases 18,757,982 18,718,586 18,282,563 18,250,755 16,432,448 16,415,751
Operating lease assets 1,717,194 1,672,608 2,252,445 2,200,525 2,801,239 2,739,207
Accrued income
and other assets 635,663 731,559 522,611 620,355 492,766 572,384
Total Assets 28,292,019 28,303,933 27,516,109 27,530,125 25,352,242 25,354,572
Accrued expenses
and other liabilities 1,144,917 1,225,169 1,053,833 1,136,444 1,055,614 1,122,471
Total liabilities 26,021,482 26,101,734 25,257,721 25,340,332 23,023,911 23,090,768
Retained earnings 301,791 233,453 187,066 118,471 101,494 36,967
Total shareholders' equity 2,270,537 2,202,199 2,258,388 2,189,793 2,328,331 2,263,804
Total Liabilities
and Shareholders' Equity $28,292,019 $28,303,933 $27,516,109 $27,530,125 $25,352,242 $25,354,572
--------------------------------------------------------------------------------------------------------------------
10
THREE MONTHS ENDED (UNAUDITED)
----------------------------------------------
JUNE 30, 2003 JUNE 30, 2002
---------------------- ---------------------
PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED
------------------------------------------------------------ ---------------------
INCOME STATEMENT:
Interest income $330,642 $317,325 $322,816 $311,083
Net interest income 215,578 202,441 191,994 180,261
Net interest income after provision
for loan and lease losses 166,385 153,248 142,118 130,385
Operating lease income 124,209 128,574 168,047 171,617
Gains on sales of automobile loans 11,626 13,496 -- --
Bank Owned Life Insurance income 11,043 11,043 11,443 10,722
Mortgage banking income 11,033 7,185 10,115 7,835
Gain on sale of Florida operations -- -- -- --
Other non-interest income 24,164 27,704 16,068 18,291
Total non-interest income 274,206 276,951 287,665 288,714
Personnel costs 114,047 105,242 106,808 99,115
Net occupancy 15,583 15,377 14,756 14,504
Total non-interest expense 306,044 297,033 331,691 323,746
Income before income taxes 134,547 133,166 98,092 95,353
Income taxes 37,160 36,676 25,081 24,375
Net income $ 97,387 $ 96,490 $ 73,011 $ 70,978
Earnings per share:
Basic $0.43 $0.42 $0.30 $0.29
Diluted $0.42 $0.42 $0.29 $0.29
------------------------------------------------------------------------------------
SIX MONTHS ENDED (UNAUDITED)
----------------------------------------------
JUNE 30, 2003 JUNE 30, 2002
---------------------- ---------------------
PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED
------------------------------------------------------------ ---------------------
INCOME STATEMENT:
Interest income $662,543 $637,339 $658,017 $639,585
Net interest income 429,314 404,200 377,562 359,130
Net interest income after provision
for loan and lease losses 343,277 318,163 288,676 270,244
Operating lease income 257,964 266,767 343,953 347,651
Gains on sales of automobile loans 19,876 23,751 -- --
Bank Owned Life Insurance income 22,180 22,180 23,119 21,678
Mortgage banking income 24,822 18,310 28,469 23,909
Gain on sale of Florida operations -- -- 181,344 182,470
Other non-interest income 39,587 48,105 28,557 32,280
Total non-interest income 542,237 549,875 771,839 771,247
Personnel costs 235,790 218,331 222,491 207,144
Net occupancy 32,398 31,986 31,995 31,493
Total non-interest expense 630,383 612,512 741,191 725,342
Income before income taxes 255,131 255,526 319,324 316,149
Income taxes 67,168 67,306 150,302 149,696
Net income $187,963 $188,220 $169,022 $166,453
Earnings per share:
Basic $0.82 $0.82 $0.68 $0.67
Diluted $0.81 $0.81 $0.68 $0.67
------------------------------------------------------------------------------------
11
NOTE 4 - RESTRUCTURING CHARGES
During the second quarter 2003, Huntington released $5.3 million of
restructuring reserves through a credit to the restructuring charge line of
non-interest expense in the accompanying unaudited consolidated financial
statements. Released reserves of $3.8 million related to those established in
1998 and $1.5 million related to the strategic refocusing plan established in
2001 and 2002. The 1998 reserve was established for, among other items, the exit
of under performing product lines, including possible third party claims related
to these exits. Management reviewed this reserve and determined that future
claims would be immaterial and reduced the level of the reserve accordingly.
As of June 30, 2003, Huntington has remaining reserves for restructuring of
$9.4 million. Huntington expects that these remaining reserves will be adequate
to fund the remaining estimated future cash outlays that are expected in the
completion of the exit activities.
NOTE 5- SECURITIES AVAILABLE FOR SALE
Securities available for sale at June 30, 2003 and December 31, 2002 were
as follows:
-------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
-------------------------------------------------------------------------------------------------
Amortized Amortized
(in thousands of dollars) Cost Fair Value Cost Fair Value
-------------------------------------------------------------------------------------------------
U.S. Treasury
Under 1 year $ 327 $ 331 $ -- $ --
1-5 years 38,930 39,543 13,434 14,066
6-10 years 64,063 66,158 4,704 5,367
Over 10 years -- -- 412 479
-------------------------------------------------------------------------------------------------
Total 103,320 106,032 18,550 19,912
-------------------------------------------------------------------------------------------------
Federal agencies
Mortgage-backed securities
1-5 years 23,879 24,661 48,618 50,428
6-10 years 248,896 254,564 356,082 363,596
Over 10 years 1,668,613 1,699,875 1,350,737 1,385,233
-------------------------------------------------------------------------------------------------
Total 1,941,388 1,979,100 1,755,437 1,799,257
-------------------------------------------------------------------------------------------------
Other agencies
Under 1 year 137,797 141,375 34,923 35,966
1-5 years 294,977 313,029 743,609 768,271
6-10 years 171,343 169,976 3,755 4,278
-------------------------------------------------------------------------------------------------
Total 604,117 624,380 782,287 808,515
-------------------------------------------------------------------------------------------------
Total U.S. Treasury and Federal
Agencies 2,648,825 2,709,512 2,556,274 2,627,684
-------------------------------------------------------------------------------------------------
Other
Under 1 year 7,720 7,731 7,133 7,183
1-5 years 59,007 59,735 62,939 63,886
6-10 years 57,989 59,974 49,581 51,046
Over 10 years 649,192 651,330 451,108 449,958
Retained interest in securitizations 148,177 163,664 146,160 159,978
Marketable equity securities 50,809 50,815 42,846 43,634
-------------------------------------------------------------------------------------------------
Total 972,894 993,249 759,767 775,685
-------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $3,621,719 $3,702,761 $3,316,041 $3,403,369
=================================================================================================
12
NOTE 6 - OPERATING LEASE ASSETS
Operating lease assets at June 30, 2003 and 2002 and December 31, 2002,
were as follows:
----------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
(in thousands of dollars) 2003 2002 2002
----------------------------------------------------------------------------------------------
Cost of automobiles under operating leases $ 2,689,413 $ 3,260,897 $ 3,782,647
Accumulated depreciation (972,219) (1,008,452) (981,408)
Deferred origination fees and costs (44,586) (51,920) (62,032)
----------------------------------------------------------------------------------------------
OPERATING LEASE ASSETS, NET $ 1,672,608 $ 2,200,525 $ 2,739,207
==============================================================================================
Depreciation expense related to leased automobiles was $89.8 million and
$119.6 million for the three months ended June 30, 2003 and 2002, respectively.
For the respective six-month periods, depreciation expense was $187.9 million
and $243.6 million.
NOTE 7 - EARNINGS PER SHARE
Basic earnings per share is the amount of earnings for the period available
to each share of common stock outstanding during the reporting period. Diluted
earnings per share is the amount of earnings available to each share of common
stock outstanding during the reporting period adjusted for the potential
issuance of common shares upon the exercise of stock options. The calculation of
basic and diluted earnings per share for each of the three and six months ended
June 30 is as follows:
------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
------------------------------------------------------------------------------------------------
NET INCOME $ 96,490 $ 70,978 $188,220 $166,453
================================================================================================
Average common shares outstanding 228,633 246,106 229,987 248,415
Dilutive effect of common stock equivalents 1,939 1,761 1,697 1,531
------------------------------------------------------------------------------------------------
DILUTED AVERAGE COMMON SHARES OUTSTANDING 230,572 247,867 231,684 249,946
================================================================================================
EARNINGS PER SHARE
Basic $0.42 $0.29 $0.82 $0.67
Diluted $0.42 $0.29 $0.81 $0.67
The average market price of Huntington's common stock for the period was
used in determining the dilutive effect of outstanding stock options. Common
stock equivalents are computed based on the number of shares subject to stock
options that have an exercise price less than the average market price of
Huntington's common stock for the period.
Approximately 5.1 million and 3.1 million stock options were outstanding at
June 30, 2003 and 2002, respectively, but were not included in the computation
of diluted earnings per share because the options' exercise price was greater
than the average market price of the common shares for the period and,
therefore, the effect would be antidilutive. The weighted-average exercise price
for these options was $23.73 per share and $26.60 per share at the end of the
same respective periods.
At June 30, 2003, a total of 535,337 common shares associated with a 2002
acquisition were held in escrow, subject to future issuance contingent upon
meeting certain contractual performance criteria. These shares, which were
included in treasury stock, will be included in the computation of basic and
diluted earnings per share at the beginning of the period when all conditions
necessary for their issuance have been met. Dividends paid on these shares are
reinvested in common stock and are also held in escrow.
13
NOTE 8 - COMPREHENSIVE INCOME
The change in the components of Huntington's Other Comprehensive Income
in each of the three and six months ended June 30 were as follows:
--------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------
Minimum pension liability:
Unrealized net loss $ -- $ -- $ -- $ --
Related tax benefit -- -- -- --
--------------------------------------------------------------------------------------------------------
Net -- -- -- --
--------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) on securities
available for sale arising
during the period:
Unrealized net gains 9,046 32,852 1,799 10,540
Related tax expense (3,162) (11,498) (935) (3,689)
--------------------------------------------------------------------------------------------------------
Net 5,884 21,354 864 6,851
--------------------------------------------------------------------------------------------------------
Unrealized holding losses on derivatives used
in cash flow hedging relationships
arising during the period:
Unrealized net losses (23,415) (2,392) (26,295) (4,245)
Related tax benefit 8,195 837 9,203 1,486
--------------------------------------------------------------------------------------------------------
Net (15,220) (1,555) (17,092) (2,759)
--------------------------------------------------------------------------------------------------------
Less: Reclassification adjustment for net
gains from sales of securities available
for sale realized during the period:
Realized net gains 6,887 966 8,085 1,423
Related tax expense (2,410) (338) (2,830) (498)
--------------------------------------------------------------------------------------------------------
Net 4,477 628 5,255 925
--------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME $(13,813) $ 19,171 $(21,483) $ 3,167
========================================================================================================
Activity in Accumulated Other Comprehensive Income for the six months ended
June 30, 2003 and 2002 was as follows:
------------------------------------------------------------------------------------------------
UNREALIZED GAINS
UNREALIZED GAINS (LOSSES) ON DERIVATIVE
MINIMUM (LOSSES) ON INSTRUMENTS USED IN
PENSION SECURITIES CASH FLOW HEDGING
(in thousands of dollars) LIABILITY AVAILABLE FOR SALE RELATIONSHIPS TOTAL
------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ -- $ 29,469 $ (3,981) $ 25,488
Period change -- 5,926 (2,759) 3,167
------------------------------------------------------------------------------------------------
Balance, June 30, 2002 $ -- $ 35,395 $ (6,740) $ 28,655
================================================================================================
Balance, December 31, 2002 $(195) $ 56,856 $ 5,639 $ 62,300
Current-period change -- (4,391) (17,092) (21,483)
------------------------------------------------------------------------------------------------
Balance, June 30, 2003 $(195) $ 52,465 $(11,453) $ 40,817
================================================================================================
14
NOTE 9 - STOCK-BASED COMPENSATION
Huntington's stock-based compensation plans are accounted for based on the
intrinsic value method promulgated by APB Opinion 25, Accounting for Stock
Issued to Employees, and related interpretations. Compensation expense for
employee stock options is generally not recognized if the exercise price of the
option equals or exceeds the fair value of the stock on the date of grant.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. This Statement amends
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition to Statement No. 123's fair value method of
accounting for stock-based employee compensation. Statement No. 148 also amends
the disclosure provisions of Statement 123 and APB Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While Statement No. 148 does
not amend Statement No. 123 to require companies to account for employee stock
options using the fair value method, the disclosure provisions of Statement No.
148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value
method of Statement No. 123 or the intrinsic value method of APB Opinion No. 25.
The following pro forma disclosures for net income and earnings per diluted
common share are presented as if Huntington had applied the fair value method of
accounting of Statement No. 123 in measuring compensation costs for stock
options. The fair values of the stock options granted were estimated using the
Black-Scholes option-pricing model. This model assumes that the estimated fair
value of the options is amortized over the options' vesting periods and the
compensation costs would be included in personnel expense on the income
statement. The following table also includes the weighted-average assumptions
that were used in the option-pricing model for options granted in the three and
six month periods presented:
------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------
PERIOD-END OPTIONS OUTSTANDING (IN THOUSANDS) 17,399 13,729 17,399 13,729
ASSUMPTIONS
Risk-free interest rate 4.46% 4.13% 4.30% 4.13%
Expected dividend yield 3.26% 3.34% 3.30% 3.34%
Expected volatility of Huntington's common stock 33.8% 33.8% 33.8% 33.8%
PRO FORMA RESULTS (IN MILLIONS OF DOLLARS)
Net income, as reported $ 96.5 $ 71.0 $ 188.2 $ 166.5
Less pro forma expense, net of tax, related to
options granted 2.9 2.9 5.9 6.6
------------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 93.6 $ 68.1 $ 182.3 $ 159.9
============================================================================================================
NET INCOME PER COMMON SHARE:
Basic, as reported $0.42 $0.29 $0.82 $0.67
Basic, pro forma 0.41 0.28 0.79 0.64
Diluted, as reported 0.42 0.29 0.81 0.67
Diluted, pro forma 0.41 0.27 0.79 0.64
15
NOTE 10 - SEGMENT REPORTING
Huntington has three distinct lines of business: Regional Banking, Dealer
Sales, and the Private Financial Group (PFG). A fourth segment includes
Huntington's Treasury function and other unallocated assets, liabilities,
revenue, and expense. Line of business results are determined based upon
Huntington's management reporting system, which assigns balance sheet and income
statement items to each of the business segments. The process is designed around
Huntington's organizational and management structure and, accordingly, the
results below are not necessarily comparable with similar information published
by other financial institutions.
Accounting policies for the lines of business are the same as those used in
the preparation of the unaudited consolidated financial statements with respect
to activities specifically attributable to each business line. However, the
preparation of business line results requires management to establish
methodologies to allocate funding costs and benefits, expenses, and other
financial elements to each line of business. Changes are made in these
methodologies utilized for certain balance sheet and income statement
allocations performed by Huntington's management reporting system, as
appropriate. Prior periods are typically not restated for these changes.
The chief decision-makers for Huntington rely on "operating earnings" for
review of performance and for critical decision-making purposes. Operating
earnings adjust net income as reported to exclude the 2002 gain from the sale of
the Florida operations, the historical Florida banking and insurance operating
results, and restructuring charges or release of previously established
restructuring reserves. See Note 10 to the unaudited consolidated financial
statements for further discussions regarding the 2002 restructuring charges and
Note 11 regarding the 2002 sale of the Florida banking and insurance operations.
The reconciling items between operating earnings and net income as reported are
presented on an after-tax basis.
Operating earnings that were previously reported have been restated, where
appropriate, to reflect a change in the timing of certain revenues and expenses.
See Note 3 to the unaudited consolidated financial statements for further
discussion regarding this restatement.
The following provides a brief description of the four operating segments of
Huntington:
REGIONAL BANKING
This segment provides products and services to retail, business banking,
and commercial customers. This segment's products include home equity loans,
first mortgage loans, direct installment loans, business loans, personal and
business deposit products, as well as sales of investment and insurance
services. These products and services are offered in six operating regions
within the five states of Ohio, Michigan, Indiana, West Virginia, and Kentucky
through Huntington's traditional banking network, Direct Bank--Huntington's
customer service center, and Web Bank at www.huntington.com. Regional Banking
also represents middle-market and large commercial banking relationships which
use a variety of banking products and services including, but not limited to,
commercial loans, commercial real estate loans, international trade, and cash
management.
DEALER SALES
This segment finances the purchase of automobiles by customers of
automotive dealerships, purchases automobiles from dealers and simultaneously
leases the automobile under long-term operating and direct financing leases,
finances the dealership's inventory of automobiles, and provides other banking
services to the automotive dealerships and their owners.
PRIVATE FINANCIAL GROUP (PFG)
This segment provides products and services designed to meet the needs of
Huntington's higher wealth customers. Revenue is derived through the sale of
personal trust, asset management, investment advisory, brokerage, insurance, and
deposit and loan products and services. Income and related expenses from the
sale of brokerage and insurance products is shared with the line of business
that generated the sale or provided the customer referral.
16
TREASURY / OTHER
This segment includes assets, liabilities, equity, revenue, and expense
that are not directly assigned or allocated to one of the lines of business.
Since a match-funded transfer pricing system is used to allocate interest income
and interest expense to other business segments, Treasury / Other results
include the net impact of any over or under allocations arising from centralized
management of interest rate risk including the net impact of derivatives used to
hedge interest rate sensitivity. Furthermore, this segment's results include the
net impact of administering Huntington's investment securities portfolio as part
of overall liquidity management, as well as the impact of mezzanine lending
activity conducted through Huntington's Capital Markets Group. Additionally,
amortization expense of intangible assets, the 2002 gain on sale of the Florida
operations, the 2002 restructuring charges, and other gains or losses not
allocated to other business segments are also a component.
Listed below is certain reported financial information reconciled to
Huntington's three and six month 2003 and 2002 operating results by line of
business.
---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS Regional Dealer Treasury/ Huntington
(in thousands of dollars) Banking Sales PFG Other Consolidated
---------------------------------------------------------------------------------------------------------------------
2003
Net interest income $148,127 $ 11,631 $ 9,794 $ 32,889 $ 202,441
Provision for loan and lease losses 40,525 9,191 (458) (65) 49,193
Non-Interest income 71,836 153,266 27,847 24,002 276,951
Non-Interest expense 141,029 124,513 25,886 5,605 297,033
Income taxes 13,443 10,918 4,275 8,040 36,676
---------------------------------------------------------------------------------------------------------------------
Net income, as reported 24,966 20,275 7,938 43,311 96,490
Restructure charges (releases), net of tax -- -- -- (3,455) (3,455)
---------------------------------------------------------------------------------------------------------------------
Operating earnings $ 24,966 $ 20,275 $ 7,938 $ 39,856 $ 93,035
=====================================================================================================================
2002
Net interest income $141,978 $ (3,496) $ 8,917 $ 32,862 $ 180,261
Provision for loan and lease losses 36,844 10,737 447 1,848 49,876
Non-Interest income 64,270 179,807 31,344 13,293 288,714
Non-Interest expense 131,915 153,005 26,991 11,835 323,746
Income taxes 13,121 4,399 4,488 2,367 24,375
---------------------------------------------------------------------------------------------------------------------
Net income, as reported 24,368 8,170 8,335 30,105 70,978
Florida operating results, net of tax -- -- 532 -- 532
---------------------------------------------------------------------------------------------------------------------
Operating earnings $ 24,368 $ 8,170 $ 7,803 $ 30,105 $ 70,446
=====================================================================================================================
17
----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS Regional Dealer Treasury/ Huntington
(in thousands of dollars) Banking Sales PFG Other Consolidated
----------------------------------------------------------------------------------------------------------------------------
2003
Net interest income $ 292,280 $ 27,252 $ 19,312 $ 65,356 $ 404,200
Provision for loan and lease losses 64,066 20,576 1,454 (59) 86,037
Non-Interest income 143,432 311,676 55,057 39,710 549,875
Non-Interest expense 279,069 257,731 52,502 23,210 612,512
Income taxes 32,402 21,218 7,145 6,541 67,306
----------------------------------------------------------------------------------------------------------------------------
Net income, as reported 60,175 39,403 13,268 75,374 188,220
Restructure charges (releases), net of tax -- -- -- (4,105) (4,105)
----------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 60,175 $ 39,403 $ 13,268 $ 71,269 $ 184,115
============================================================================================================================
2002
Net interest income $ 296,696 $ (9,705) $ 16,398 $ 55,741 $ 359,130
Provision for loan and lease losses 64,356 20,386 2,036 2,108 88,886
Non-Interest income 136,562 360,758 62,708 211,219 771,247
Non-Interest expense 269,241 313,028 56,264 86,809 725,342
Income taxes 34,881 6,173 7,282 101,360 149,696
----------------------------------------------------------------------------------------------------------------------------
Net income, as reported 64,780 11,466 13,524 76,683 166,453
Florida operating results, net of tax (2,639) (794) (927) 5,885 1,525
Gain on sale of Florida operations, net of tax -- -- -- (61,422) (61,422)
Restructuring charges, net of tax -- -- -- 36,519 36,519
----------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 62,141 $ 10,672 $ 12,597 $ 57,665 $ 143,075
============================================================================================================================
----------------------------------------------------------------------------------------------------
PERIOD-END BALANCE SHEET DATA TOTAL ASSETS AT JUNE 30, TOTAL DEPOSITS AT JUNE 30,
------------------------- --------------------------
(in millions of dollars) 2003 2002 2003 2002
----------------------------------------------------------------------------------------------------
Regional Banking $14,585 $13,045 $16,628 $15,121
Dealer Sales 6,607 6,534 67 50
Private Financial Group 1,328 1,000 1,027 826
Treasury / Other 5,784 4,776 649 864
----------------------------------------------------------------------------------------------------
Total $28,304 $25,355 $18,371 $16,861
====================================================================================================
NOTE 11 - DIVESTITURES
On July 25, 2003, Huntington sold four banking offices located in eastern
West Virginia. This sale included approximately $50 million of loans and $130
million of deposits. Huntington expects to report a pre-tax gain from this sale
of approximately $13 million in the third quarter of 2003.
On July 2, 2002, Huntington completed the sale of its Florida insurance
operations, The J. Rolfe Davis Insurance Agency, Inc., to members of its
management. Though the sale affected selected Non-interest income and
Non-interest expense categories, it had no material gain or impact to net
income.
On February 15, 2002, Huntington completed the sale of its Florida
operations to SunTrust Banks, Inc. Included in the sale were $4.8 billion of
deposits and other liabilities and $2.8 billion of loans and other assets.
Huntington received a deposit premium of 15%, or $711.9 million. The total net
pre-tax gain from the sale was $182.5 million and is reflected in Non-interest
income. The after-tax gain was $61.4 million, or $0.24 per share. Income taxes
related to this transaction were $121.0 million, an amount higher than the tax
impact at the statutory rate of 35% because most of the goodwill relating to the
Florida operations was non-deductible for tax purposes.
18
NOTE 12 - SEC INVESTIGATION
On June 26, 2003, Huntington announced that the Securities and Exchange
Commission (SEC) staff is conducting a formal investigation, and that Huntington
is cooperating fully with the investigation. The formal investigation began
following Huntington's announcement on April 16, 2003 that it intended to
restate its financial statements in order to reclassify its accounting for
automobile leases from the direct financing lease method to the operating lease
method. The investigation also follows allegations by a former Huntington
employee regarding certain aspects of Huntington's accounting and financial
reporting practices, including the recognition of automobile loan and lease
origination fees and costs, as well as certain year-end reserves. These
allegations were immediately reviewed with the Audit/Risk Committee, a Board
committee composed entirely of independent directors. The Audit/Risk committee
retained independent legal counsel who, in turn, retained independent
accountants to assist it in its investigation of the allegations. While the
investigation is ongoing, progress reports have been shared with the Audit/Risk
Committee and the SEC. The SEC investigation is ongoing and Huntington is
continuing to cooperate fully.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
Huntington Bancshares Incorporated (Huntington) is a multi-state
diversified financial services company organized under Maryland law in 1966 and
headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged
in providing full-service commercial and consumer banking services, mortgage
banking services, automobile financing, equipment leasing, investment
management, trust services, and discount brokerage services, as well as
underwriting credit life and disability insurance, and selling other insurance
and financial products and services. Huntington's banking offices are located in
Ohio, Michigan, Indiana, Kentucky, and West Virginia. Selected financial
services are also conducted in other states including Arizona, Florida, Georgia,
Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington also has a foreign
office in the Cayman Islands and a foreign office in Hong Kong. The Huntington
National Bank (the Bank) is Huntington's only bank subsidiary.
The following discussion and analysis provides investors and others with
information that management believes to be necessary for an understanding of
Huntington's financial condition, changes in financial condition, results of
operations, and cash flows, and should be read in conjunction with the financial
statements, notes, and other information contained in this document.
FORWARD-LOOKING STATEMENTS
This interim report, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements about Huntington. These include descriptions of products or services,
plans, or objectives of management for future operations, and forecasts of
revenues, earnings, cash flows, or other measures of economic performance.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts.
By their nature, forward-looking statements are subject to numerous
assumptions, risks, and uncertainties. A number of factors could cause actual
conditions, events, or results to differ significantly from those described in
the forward-looking statements. These factors include, but are not limited to,
those set forth under the heading "Business Risks" included in Item 1 of
Huntington's Amendment No. 2 to its 2002 Annual Report on Form 10-K/A (Amendment
No. 2 to Form 10-K/A) filed on November 14, 2003, and other factors described
from time to time in other filings with the Securities and Exchange Commission.
Management encourages readers of this interim report to understand
forward-looking statements to be strategic objectives rather than absolute
forecasts of future performance. Forward-looking statements speak only as of the
date they are made. Huntington does not update forward-looking statements to
reflect circumstances or events that occur after the date the forward-looking
statements were made or to reflect the occurrence of unanticipated events.
RESTATEMENTS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Huntington has voluntarily corrected and restated its earnings in this
Amendment No. 2 to its Quarterly Report on Form 10-Q/A (Amendment No. 2 to Form
10-Q/A) to correct for timing errors in the recognition of certain revenues and
expenses. Specifically, this Amendment No. 2 to Form 10-Q/A includes the
following corrections:
o Huntington previously did not defer loan and lease origination fees
and certain expenses, but rather recognized the net amount in the
period of origination. This restatement applies, on a retroactive
basis, deferral accounting for loan and lease origination fees and
costs.
o Huntington previously recorded revenue from the sale of a contingent
automobile debt cancellation product by allocating a fixed portion of
the proceeds from each sale to revenue and reserves. The impact of the
restatement increased the amount of the reserve to cover claim losses
on the products purchased by customers.
o In 1998, Huntington entered into a sale-leaseback transaction.
Huntington recognized gains in 1998 and 1999 as a reduction in
occupancy expense above the amounts that should have been recognized
under a normal amortization schedule. The restatement corrects this
timing error.
o In 1998, Huntington marked to market the ineffective portion of an
interest rate swap associated with a fixed rate subordinated debt
offering initiated in 1992. The swap was subsequently sold in 2000.
The restatement marks to market the ineffective portion of the swap
for all periods prior to 1998 and then annually through 2000.
20
o In 2001, Huntington negotiated a reduction in expenses on Bank Owned
Life Insurance, which resulted in an increase in the cash surrender
value of the policies at year end 2001, but did not recognize the
resulting income until 2002. The restatement corrects this timing
error.
The results of this restatement are reflected in the unaudited consolidated
financial statements, notes to the unaudited consolidated financial statements,
and management's discussion and analysis for all current and prior periods
reported in this Amendment No. 2 to Form 10-Q/A. Note 3 in the notes to the
unaudited consolidated financial statements contains additional information
regarding this restatement.
CRITICAL ACCOUNTING POLICIES
Note 1 to the consolidated financial statements included in Huntington's
Amendment No. 2 to Form 10-K/A lists significant accounting policies used in the
development and presentation of its financial statements. These significant
accounting policies, as well as this discussion and analysis, and other
financial statement disclosures identify and address key variables and other
qualitative and quantitative factors that are necessary for an understanding and
evaluation of the organization, its financial position, results of operations,
and cash flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires Huntington's
management to establish critical accounting policies and make accounting
estimates, assumptions, and judgments that affect amounts recorded and reported
in its financial statements. An accounting estimate requires assumptions about
uncertain matters that could have a material effect on the financial statements
of Huntington if a different amount within a range of estimates were used or if
estimates changed from period to period. Readers of this interim report should
understand that estimates are made under facts and circumstances at a point in
time and changes in those facts and circumstances could produce actual results
that differ from when those estimates were made. Huntington's management has
identified the most significant accounting estimates and their related
application in Huntington's Amendment No. 2 to Form 10-K/A.
ADOPTION OF FINANCIAL INTERPRETATION NO. (FIN) 46 INVOLVING SPECIAL PURPOSE
ENTITIES (SPES)
Huntington established two securitization trusts, or SPEs, in 2000. These
two trusts had total assets of approximately $1.1 billion at June 30, 2003. In
the securitization transactions, indirect automobile loans that Huntington
originated were sold to these trusts. Under GAAP at June 30, 2003, these trusts
were not required to be consolidated in Huntington's financial statements. As
such, the loans and the debt within the trusts were not included on Huntington's
balance sheets at June 30. See Note 11 to the consolidated financial statements
in Huntington's Amendment No. 2 to Form 10-K/A for more information regarding
securitized loans.
In January 2003, the Financial Accounting Standards Board (FASB) issued FIN
46, Consolidation of Variable Interest Entities. This Interpretation of
Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial Statements,
addresses consolidation by business enterprises where ownership interests in an
entity may vary over time or, in many cases, of special-purpose entities (SPEs).
To be consolidated for financial reporting, these entities must have certain
characteristics. ARB 51 requires that an enterprise's consolidated financial
statements include subsidiaries in which the enterprise has a controlling
financial interest. This Interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. An
enterprise that holds significant variable interests in such an entity, but is
not the primary beneficiary, is required to disclose certain information
regarding its interests in that entity. This Interpretation applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds an interest that it acquired
before February 1, 2003. It also applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. This Interpretation may
be applied (1) prospectively with a cumulative effect adjustment as of the date
on which it is first applied, or (2) by restating previously issued financial
statements for one or more years with a cumulative effect adjustment as of the
beginning of the first year restated.
21
Effective July 1, 2003, Huntington adopted FIN 46 resulting in the
consolidation of one of the securitization trusts formed in 2000. The
consolidation of that trust involved recognition of the trust's assets and
liabilities, elimination of the related retained interest and servicing asset,
recognition of other related assets, and establishment of a 1.01% allowance for
loan and lease losses. Reflecting these impacts, the adoption of FIN 46 will
result in a cumulative effect charge of approximately $13 million, or $0.06 per
share, in the third quarter, a reduction of the ALLL by approximately 3 basis
points, and a reduction in the tangible common equity ratio of approximately 30
basis points. Regulatory capital will have minimal impact since these assets are
currently reflected in risk-based assets.
DERIVATIVES AND OTHER OFF-BALANCE SHEET ARRANGEMENTS
Huntington uses a variety of derivatives, principally interest rate swaps,
in its asset and liability management activities to mitigate the risk of adverse
interest rate movements on either cash flows or market value of certain assets
and liabilities.
Like other financial organizations, Huntington uses various commitments in
the ordinary course of business that, under GAAP, are not recorded in the
financial statements. Specifically, Huntington makes various commitments to
extend credit to customers, to sell loans, and to maintain obligations under
operating-type noncancelable leases for its facilities. Derivatives and other
off-balance sheet arrangements are discussed under the "Interest Rate Risk
Management" section of this interim report and in the notes to the unaudited
consolidated financial statements.
RELATED PARTY TRANSACTIONS
Various directors and executive officers of Huntington, and entities
affiliated with those directors and executive officers, are customers of
Huntington's subsidiaries. All such transactions with Huntington's directors and
executive officers and their affiliates are conducted in the ordinary course of
business under normal credit terms, including interest rate and
collateralization, and do not represent more than the normal risk of collection.
A summary of the indebtedness of management can be found in Note 10 to the
consolidated financial statements in Huntington's Amendment No. 2 to Form
10-K/A. All other related party transactions, including those reported in
Huntington's 2003 Proxy Statement and transactions subsequent to December 31,
2002, were considered immaterial to its financial condition, results of
operations, and cash flows.
SUMMARY DISCUSSION OF RESULTS
2003 Second Quarter versus 2002 Second Quarter
Huntington's second quarter 2003 earnings were $96.5 million, or $0.42 per
common share, up 36% and 45%, respectively, from $71.0 million, or $0.29 per
common share in the year-ago quarter. This primarily reflected the benefit of a
13% increase in fully taxable equivalent net interest income and an 8% decline
in non-interest expense, partially offset by a 4% decline in non-interest
income. The higher percent change in per common share earnings reflected the
benefit of repurchased common shares. The return on average assets (ROA) and
return on average equity (ROE) were 1.38% and 18.0%, respectively, compared with
1.14% and 12.5% in the year-ago quarter.
Fully taxable equivalent net interest income increased $23.2 million, or
13%, reflecting a $4.0 billion, or 20%, increase in average earning assets,
partially offset by a 23 basis point, or an effective 6%, decline in the fully
taxable equivalent net interest margin to 3.47% from 3.70%. The decline in
non-interest expense of $26.7 million, or 8%, primarily reflected a $28.8
million, or 22%, decline in operating lease expense, and $5.3 million decrease
in restructuring charges, partially offset by a $6.1 million, or 6%, increase in
personnel costs. Non-interest income decreased $11.8 million, or 4%, primarily
due to a $43.0 million, or 25%, decline in operating lease income, partially
offset by a $13.5 million gain from the sale of automobile loans.
2003 Second Quarter versus 2003 First Quarter
Compared with the first quarter 2003 earnings of $91.7 million, or $0.39
per common share, second quarter earnings and earnings per common share were up
5% and 8%, respectively. This increase primarily reflected the benefit of a 6%
decline in non-interest expense and 1% increase in non-interest income,
partially offset by a 34% increase in provision for loan and lease losses. Fully
taxable equivalent net interest income was essentially unchanged between
quarters. ROA and ROE were 1.36% and 17.2%, respectively, in the first quarter
2003.
The $18.4 million, or 6%, decline in non-interest expense was driven
primarily by an $8.6 million, or 8%, decline in operating lease expense, a $7.8
million, or 7%, decline in personnel costs, and a $4.3 million decline in
restructuring charges. The $4.0 million, or 1%, increase in non-interest income
reflected the $3.2 million increase in gains from sales of automobile loans and
a $5.7 million increase in securities gains, partially offset by a $9.6 million,
or 7%, decline in operating lease income.
22
--------------------------------------------------------------------------------
Table 1 - Selected Quarterly Income Statement Data (1)
2003 2002
----------------------------------------------------------------------- ---------------------------------
(in thousands, except per share amounts) SECOND First Fourth Third Second
---------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $317,325 $320,014 $329,340 $324,177 $311,083
TOTAL INTEREST EXPENSE 114,884 118,255 130,161 132,912 130,822
---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 202,441 201,759 199,179 191,265 180,261
Provision for loan and lease losses 49,193 36,844 51,236 54,304 49,876
---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 153,248 164,915 147,943 136,961 130,385
---------------------------------------------------------------------------------------------------------------
Operating lease income 128,574 138,193 149,259 160,164 171,617
Service charges on deposit accounts 40,914 39,869 41,435 37,706 35,608
Trust services 15,580 14,911 15,306 14,997 16,247
Brokerage and insurance income 14,196 15,497 13,941 13,664 16,899
Gains on sales of automobile loans 13,496 10,255 --- --- ---
Other service charges and fees 11,372 10,338 10,890 10,837 10,529
Bank Owned Life Insurance income 11,043 11,137 10,722 10,723 10,722
Mortgage banking 7,185 11,125 5,530 2,594 7,835
Securities gains 6,887 1,198 2,339 1,140 966
Merchant Services gain --- --- --- 24,550 ---
Other 27,704 20,401 22,433 22,227 18,291
---------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 276,951 272,924 271,855 298,602 288,714
---------------------------------------------------------------------------------------------------------------
Personnel costs 105,242 113,089 110,231 100,662 99,115
Operating lease expense 102,939 111,588 120,747 125,743 131,695
Equipment 16,341 16,412 17,337 17,378 16,659
Outside data processing and other services 16,104 16,579 17,209 15,128 16,592
Net occupancy 15,377 16,609 13,370 14,676 14,504
Professional services 9,872 9,285 9,111 9,680 7,864
Marketing 8,454 6,626 6,186 7,491 7,231
Telecommunications 5,394 5,701 5,714 5,609 5,320
Printing and supplies 2,253 3,681 3,999 3,679 3,683
Restructuring (releases) charges (5,315) (1,000) (7,211) --- ---
Other 20,372 16,909 32,616 19,450 21,083
---------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 297,033 315,479 329,309 319,496 323,746
---------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 133,166 122,360 90,489 116,067 95,353
Income taxes 36,676 30,630 21,226 28,052 24,375
---------------------------------------------------------------------------------------------------------------
NET INCOME $ 96,490 $ 91,730 $ 69,263 $ 88,015 $ 70,978
===============================================================================================================
PER COMMON SHARE
Net Income - Diluted $0.42 $0.40 $0.30 $0.37 $0.29
Cash Dividends Declared $0.16 $0.16 $0.16 $0.16 $0.16
RETURN ON:
Average total assets 1.38% 1.36% 1.02% 1.35% 1.14%
Average total shareholders' equity 18.0% 17.2% 12.7% 15.8% 12.5%
Net interest margin (2) 3.47% 3.63% 3.62% 3.69% 3.70%
Efficiency ratio (3) 62.5% 66.3% 69.9% 65.2% 69.0%
Effective tax rate 27.5% 25.0% 23.5% 24.2% 25.6%
REVENUE - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $202,441 $201,759 $199,179 $191,265 $180,261
Tax Equivalent Adjustment (2) 2,076 2,096 1,869 1,096 1,071
---------------------------------------------------------------------------------------------------------------
Net Interest Income 204,517 203,855 201,048 192,361 181,332
Non-Interest Income 276,951 272,924 271,855 298,602 288,714
---------------------------------------------------------------------------------------------------------------
TOTAL REVENUE $481,468 $476,779 $472,903 $490,963 $470,046
===============================================================================================================
TOTAL REVENUE EXCLUDING SECURITIES GAINS $474,581 $475,581 $470,564 $489,823 $469,080
===============================================================================================================
(1) See note 3 to the unaudited consolidated financial statements for further
information regarding the restatement.
(2) Represents the tax-exempt portion of net interest income increased by an
amount equivalent to taxes that would have been paid if this income had
been taxed at a 35% statutory tax rate.
(3) Non-interest expense less amortization of intangible assets divided by the
sum of fully taxable equivalent net interest income and non-interest income
excluding securities gains.
23
2003 First Six Months versus 2002 First Six Months
For the first six months of 2003, earnings were $188.2 million, or $0.81
per common share, up 13% and 19%, respectively, from $166.5 million, or $0.67
per common share, in the comparable year-ago period. This increase primarily
reflected the benefits of a 13% increase in fully taxable equivalent net
interest income, a 16% decline in non-interest expense, a 3% decline in
provision for loan and lease losses, and a lower effective tax rate, partially
offset by a 29% decline in non-interest income. The year-ago six-month period
included two significant items. The first consisted of a $182.5 million pre-tax
gain ($61.4 million after tax, or $0.24 per common share) from the sale of the
Florida banking operations reported in non-interest income. The second was $56.2
million ($36.5 million after tax, or $0.15 per common share) in restructuring
charges related to the strategic initiatives announced in July 2001 reported in
non-interest expense. The higher percent change in per common share earnings
reflected the benefit of repurchased shares. ROA and ROE were 1.37% and 17.5%,
respectively, up from 1.30% and 14.5%, in the year-ago six-month period.
The $47.0 million, or 13%, increase in fully taxable equivalent net
interest income reflected a $3.1 billion, or 15%, increase in average earnings
assets, partially offset by a 9 basis point, or an effective 3%, decline in the
fully taxable equivalent net interest margin to 3.36% from 3.45%. The $112.8
million, or 16%, decline in non-interest expense primarily reflected a $62.5
million decline in restructuring charges and a $58.0 million, or 21%, decline in
operating lease expense, partially offset by an $11.2 million, or 5%, increase
in personnel costs. Provision for loan and lease losses decreased $2.8 million,
or 3%, and reflected a release of provision associated with the loans sold with
Florida banking operations in the prior year, partially offset by higher
provision expense due to loan growth and higher net charge-offs.
The reduction in tax expense reflects the decline in the effective tax rate
to 26.3% in the current six-month period, down from 47.3%, in the year-ago
six-month period. The higher effective tax rate in the year-ago period reflected
the fact that most of the goodwill relating to the sold Florida operations was
not deductible for tax purposes.
RESULTS OF OPERATIONS
NET INTEREST INCOME
2003 Second Quarter versus 2002 Second Quarter
Compared with the year-ago quarter, fully taxable equivalent net interest
income increased $23.2 million, or 13%, reflecting the benefit of an increase in
average earning assets, partially offset by a 23 basis point, or an effective
6%, decline in the net interest margin to 3.47% from 3.70%. The decline in the
fully taxable equivalent net interest margin was driven by a number of factors
including significant repayments and prepayments of higher rate mortgages and
mortgage backed securities, growth in lower rate but higher quality automobile
loans and direct financing leases, and the difficulty in lowering deposit rates
as fast as the decline in rates on loans and securities. Average total earning
assets increased $4.0 billion, or 20%, of which $0.8 billion related to higher
securities and $3.1 billion related to higher average loans and leases and
mortgages held for sale.
Average securities increased $0.8 billion, or 29%, from the year-ago
quarter reflecting the investment of deposit inflows, proceeds from loan sales,
and pay downs of operating leases in excess of loan and lease originations.
Average mortgages held for sale increased $0.4 billion, more than twice the
level of a year earlier, due to high loan originations of mortgages reflecting
continued heavy refinancing activity.
Compared with the year-ago quarter, average loans and leases increased $2.7
billion, or 16%. Average automobile loans and leases increased $1.4 billion, or
51%. This high growth rate was influenced by the significant growth in direct
financing automobile leases as this portfolio is relatively new and consists
only of leases originated after April 2002 with no meaningful offsetting impact
from maturing leases. Average automobile loans were up 10%. As part of a plan to
reduce loan concentration exposure to the automobile financing business, $567
million of automobile loans were sold in the second quarter 2003, following the
sale of $556 million in the first quarter. This brought 2003 year-to-date sales
to $1.1 billion. Each sale occurred at the end of their respective quarter and,
thus, did not have a material impact on average balances for their respective
quarters. However, the first quarter sale did have a material impact on second
quarter 2003 averages and comparisons to the year-ago quarter. Excluding the
impact of the first quarter sale, average automobile loans in the second quarter
2003 were up 28% from the year-ago quarter.
Average residential mortgages increased $0.5 billion, or 36%, with average
home equity loans and lines up $0.4 billion, or 16%, reflecting the impact low
interest rates had on home borrowing and refinancing. Total average commercial
real estate loans increased $0.4 billion, or 11%. Average commercial loans were
essentially flat with the year-ago period. While small business banking loans
showed some growth, this was offset by declines in larger commercial loans,
including a reduction in exposure to shared national credits.
24
Compared with the year-ago quarter, average core deposits increased $0.7
billion, or 5%, including a $0.7 billion, or 20%, decline in retail CDs. Retail
CDs, which continued to be a relatively expensive source of funds, were
de-emphasized in the company's deposit generation strategies. Average core
deposits excluding retail CDs were up 13% from the year-ago quarter.
2003 Second Quarter versus 2003 First Quarter
Fully taxable equivalent net interest income in the second quarter 2003
increased $0.7 million from the first quarter, reflecting growth in average
earning assets substantially offset by a decline in the net interest margin. The
fully taxable equivalent net interest margin declined to 3.47% from 3.63%, down
16 basis points, or an effective 4%, driven by the same factors that affected
comparisons to the year-ago quarter, as noted above. Average total earning
assets increased $0.9 billion, or 4%, of which $0.4 billion related to higher
securities and $0.5 billion related to higher average loans and leases and
mortgages held for sale.
Average securities increased $0.4 billion, or 11%, from the first quarter
reflecting the investment of deposit inflows, proceeds from loan sales, and pay
downs of operating leases in excess of loan and lease originations. Average
mortgages held for sale increased $0.1 billion, or 31%, from the first quarter
due to high loan originations reflecting continued heavy refinancing activity.
Average loans and leases increased $0.3 billion, or 2%, from the first
quarter, or 4% excluding the impact of automobile loan sales. Reflecting the
impact of the low interest rate environment, average residential mortgages grew
3% and average home equity loans and lines of credit increased 4%. Average
automobile loans and leases increased 1%, or 12% excluding the impact of the
first quarter sale of $556 million of automobile loans. Loans sold in the first
quarter impacted average loans and leases in that quarter by $457 million.
Year-to-date sales of automobile loans totaled $1.1 billion with such sales
reflecting a strategy to reduce loan concentration exposure to the automobile
financing business. Total average commercial real estate loans increased 3%. In
contrast, average commercial loans were essentially unchanged reflecting a 3%
growth in small business loans, offset by declines in larger commercial credits.
Total average core deposits in the second quarter 2003 increased $0.5
billion, or 3%, from the first quarter including a $0.2 billion, or 6%, decline
in retail CDs. Excluding retail CDs, average core deposits increased 5%.
Table 2 of this report reflects quarterly average balance sheets and rates
earned and paid on Huntington's interest-earning assets and interest-bearing
liabilities.
2003 First Six Months versus 2002 First Six Months
Net interest income on a fully taxable equivalent basis for the first six
months of 2003 increased $47.0 million, or 13%, from the comparable year-ago
period. This reflected 15% growth in average earnings assets, as the fully
taxable equivalent net interest margin declined slightly to 3.36% from 3.45%,
down 9 basis points, or an effective 3%. Average total earning assets increased
$3.1 billion, or 15%, of which $0.7 billion related to higher average
securities, $0.3 billion to higher average mortgages held for sale, and $2.1
billion related to higher average loans and leases.
The higher average balances in securities and mortgages held for sale
reflect the same factors influencing the year-over-year quarterly comparisons
discussed above.
Average loans and leases increased $2.1 billion, or 13%, from the year-ago
six-month period. This increase was driven primarily by a $1.3 billion, or 49%,
increase in average automobile loans and leases, impacted by the significant
growth in direct financing automobile leases given reclassification of all April
2002 and prior originations as operating leases. Average automobile loans
increased 12%, but rose 25% excluding the impact of the loan sales. Average
residential mortgages were up $0.6 billion, or 45%, and average home equity
loans and lines of credit were up $0.2 billion, or 8%. Average commercial real
estate loans were $0.2 million, or 7%, higher than in the year-ago period,
whereas average commercial loans were down $0.2 billion, or 4%, reflecting the
continued weak demand for commercial credits and planned decline in the shared
national credit portfolio, partially offset by growth in small business loans.
Total average core deposits for the first six months of 2003 were down $298
million, or 2%, reflecting the impact of the 2002 first quarter sale of $4.7
billion of deposits sold with the Florida banking operations. Excluding the
impact of these sold deposits, six-month 2003 average core deposits were up $833
million, or 6%, from the comparable year-ago period. Excluding retail CDs,
average core deposits increased 6%.
Table 3 of this report reflects year-to-date 2003 and 2002 average balance
sheets, related interest income and expense, and rates earned and paid on
Huntington's interest-earning assets and interest-bearing liabilities.
25
----------------------------------------------------------------------------------------------------
TABLE 2 - CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
(In millions)
QUARTERLY AVERAGE BALANCES
------------------------------------------------------
2003 2002
------------------------------------------------------------------- -------------------------------
Fully Tax Equivalent Basis (1) SECOND First Fourth Third Second
----------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 45 $ 37 $ 34 $ 35 $ 29
Trading account securities 23 12 9 7 6
Federal funds sold and securities purchased
under resale agreements 69 57 83 76 68
Mortgages held for sale 602 459 467 267 174
Securities:
Taxable 3,382 3,014 3,029 2,953 2,735
Tax exempt 275 274 234 108 96
----------------------------------------------------------------------------------------------------
Total Securities 3,657 3,288 3,263 3,061 2,831
----------------------------------------------------------------------------------------------------
Loans and leases: (2)
Commercial 5,626 5,623 5,555 5,504 5,616
Real Estate
Construction 1,239 1,187 1,070 1,247 1,258
Commercial 2,621 2,565 2,601 2,315 2,232
Consumer
Automobile loans and leases 4,136 4,085 3,699 3,225 2,733
Home equity 3,359 3,238 3,166 3,060 2,907
Residential mortgage 1,887 1,832 1,694 1,486 1,385
Other loans 379 389 399 406 415
----------------------------------------------------------------------------------------------------
Total Consumer 9,761 9,544 8,958 8,177 7,440
----------------------------------------------------------------------------------------------------
Total loans and leases 19,247 18,919 18,184 17,243 16,546
----------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 338 349 386 367 357
----------------------------------------------------------------------------------------------------
Net loans and leases 18,909 18,570 17,798 16,876 16,189
----------------------------------------------------------------------------------------------------
Total earning assets 23,643 22,772 22,040 20,689 19,654
----------------------------------------------------------------------------------------------------
Operating lease assets 1,802 2,076 2,328 2,597 2,842
Cash and due from banks 735 740 717 763 722
Intangible assets 218 218 225 202 213
All other assets 2,005 1,967 1,937 1,905 1,891
----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 28,065 $ 27,424 $ 26,861 $ 25,789 $24,965
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 3,046 $ 2,958 $ 2,955 $ 2,868 $ 2,739
Interest bearing demand deposits 6,100 5,597 5,305 5,269 4,920
Savings deposits 2,804 2,771 2,746 2,766 2,808
Retail certificates of deposit 2,798 2,963 3,305 3,453 3,509
Other domestic time deposits 673 682 702 714 718
----------------------------------------------------------------------------------------------------
Total core deposits 15,421 14,971 15,013 15,070 14,694
----------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 808 769 730 777 843
Brokered time deposits and negotiable CDs 1,241 1,155 1,057 907 649
Foreign time deposits 426 514 409 370 296
----------------------------------------------------------------------------------------------------
Total deposits 17,896 17,409 17,209 17,124 16,482
----------------------------------------------------------------------------------------------------
Short-term borrowings 1,635 1,947 2,115 1,793 1,636
Federal Home Loan Bank advances 1,267 1,216 848 228 14
Subordinated notes and other long-term debt,
including preferred capital securities 4,010 3,570 3,380 3,281 3,375
----------------------------------------------------------------------------------------------------
Total interest bearing liabilities 21,762 21,184 20,597 19,558 18,768
----------------------------------------------------------------------------------------------------
All other liabilities 1,106 1,116 1,146 1,149 1,180
Shareholders' equity 2,151 2,166 2,163 2,214 2,278
----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,065 $ 27,424 $ 26,861 $ 25,789 $24,965
====================================================================================================
Net interest rate spread
Impact of non-interest bearing funds on margin
====================================================================================================
NET INTEREST MARGIN
----------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
TABLE 2 - CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS (continued)
QUARTERLY AVERAGE RATES (3)
--------------------------------------------------
2003 2002
---------------------------------------------- -------------------- ----------------------------
Fully Tax Equivalent Basis (1) SECOND First Fourth Third Second
---------------------------------------------- --------------------------------------------------
ASSETS
Interest bearing deposits in banks 1.58 % 1.61 % 1.93 % 2.06 % 2.44 %
Trading account securities 4.15 4.63 3.37 4.95 5.37
Federal funds sold and securities purchased
under resale agreements 2.19 2.14 1.83 1.40 1.51
Mortgages held for sale 5.42 5.56 5.84 6.57 7.07
Securities:
Taxable 4.59 5.17 5.53 6.01 6.33
Tax exempt 7.29 7.22 7.15 7.52 7.69
----------------------------------------------------------------------------------------------------
Total Securities 4.79 5.34 5.64 6.07 6.37
----------------------------------------------------------------------------------------------------
Loans and leases: (2)
Commercial 5.26 5.40 5.59 5.69 5.67
Real Estate
Construction 4.13 4.06 4.15 4.60 5.05
Commercial 5.25 5.60 5.79 6.17 6.39
Consumer
Automobile loans and leases 6.78 7.40 7.83 8.50 8.67
Home equity 5.02 5.17 5.64 5.83 6.00
Residential mortgage 5.76 5.95 6.06 6.27 6.46
Other loans 7.22 6.60 7.21 7.66 7.70
----------------------------------------------------------------------------------------------------
Total Consumer 5.99 6.33 6.69 7.05 7.16
----------------------------------------------------------------------------------------------------
Total loans and leases 5.56 5.82 6.08 6.32 6.39
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Total earning assets 5.42 % 5.72 % 5.99 % 6.26 % 6.37 %
----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 1.39 % 1.44 % 1.55 % 1.75 % 1.82 %
Savings deposits 1.55 1.85 1.69 1.77 1.79
Retail certificates of deposit 3.75 3.87 4.36 4.37 4.51
Other domestic time deposits 3.85 4.00 4.19 4.37 4.48
----------------------------------------------------------------------------------------------------
Total core deposits 2.09 2.28 2.51 2.65 2.76
----------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 2.55 2.76 2.64 3.27 3.12
Brokered time deposits and negotiable CDs 1.79 1.98 2.25 2.37 2.48
Foreign time deposits 1.03 1.06 1.29 1.43 1.38
----------------------------------------------------------------------------------------------------
Total deposits 2.06 2.24 2.46 2.63 2.74
----------------------------------------------------------------------------------------------------
Short-term borrowings 1.06 1.16 1.40 1.44 1.51
Federal Home Loan Bank advances 1.76 1.84 1.99 2.02 5.89
Subordinated notes and other long-term debt,
including preferred capital securities 2.85 3.12 3.52 3.70 3.64
----------------------------------------------------------------------------------------------------
Total interest bearing liabilities 2.11 % 2.26 % 2.51 % 2.70 % 2.80 %
----------------------------------------------------------------------------------------------------
Net interest rate spread 3.31 % 3.46 % 3.48 % 3.56 % 3.57 %
Impact of non-interest bearing funds on margin 0.16 0.17 0.14 0.13 0.13
----------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.47 % 3.63 % 3.62 % 3.69 % 3.70 %
====================================================================================================
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate.
(2) Individual loan components include applicable fees.
(3) Loan and deposit average rates include impact of applicable derivatives.
26
------------------------------------------------------------------------------------------------------------------------------------
TABLE 3 - CONSOLIDATED SIX-MONTH AVERAGE BALANCE SHEETS, AND NET INTEREST MARGIN ANALYSIS
SIX-MONTH INTEREST INCOME/ SIX-MONTH
AVERAGE BALANCES EXPENSE AVERAGE RATES (3)
------------------------------------------------------------------------------------------------------------------------------------
Fully Tax Equivalent Basis (1) 2003 2002 2003 2002 2003 2002
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 41 $ 31 $ 0.3 $ 0.3 1.59 % 2.21 %
Trading account securities 17 6 0.4 0.1 4.31 4.18
Federal funds sold and securities purchased
under resale agreements 63 65 0.7 0.5 2.16 1.47
Mortgages held for sale 531 277 14.5 9.3 5.47 6.70
Securities:
Taxable 3,199 2,724 77.6 86.7 4.86 6.38
Tax exempt 275 99 10.0 3.8 7.26 7.73
------------------------------------------------------------------------------------------------------------------------------------
Total Securities 3,474 2,823 87.6 90.5 5.05 6.43
------------------------------------------------------------------------------------------------------------------------------------
Loans and leases: (2)
Commercial 5,625 5,830 144.0 157.8 5.16 5.46
Real Estate
Construction 1,214 1,271 23.5 31.8 3.91 5.05
Commercial 2,593 2,297 66.9 72.4 5.23 6.39
Consumer
Automobile loans and leases 4,112 2,763 135.8 114.7 6.71 8.41
Home equity 3,298 3,056 83.2 93.5 5.03 6.11
Residential mortgage 1,859 1,286 49.5 36.5 5.40 5.74
Other loans 384 449 13.8 18.0 7.23 8.05
------------------------------------------------------------------------------------------------------------------------------------
Total Consumer 9,653 7,554 282.3 262.7 5.90 7.00
------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 19,085 16,952 516.7 524.7 5.46 6.24
------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 343 364
---------------------------------------------------------------------------------
Net loans and leases 18,742 16,588
------------------------------------------------------------------------------------------------------------------------------------
Total earning assets / Total interest income / Rate 23,211 20,154 620.2 625.4 5.38 % 6.25 %
------------------------------------------------------------------------------------------------------------------------------------
Operating lease assets 1,937 2,909
Cash and due from banks 738 770
Intangible assets 218 354
All other assets 1,986 1,916
-------------------------------------------------------------------------------
TOTAL ASSETS $ 27,747 $ 25,739
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 2,984 $ 2,889
Interest bearing demand deposits 5,868 5,033 41.9 45.1 1.44 % 1.81 %
Savings deposits 2,788 2,952 22.6 26.2 1.63 1.79
Retail certificates of deposit 2,880 3,863 54.4 91.3 3.81 4.76
Other domestic time deposits 678 759 13.2 17.4 3.92 4.63
-----------------------------------------------------------------------------------------------------------------------------------
Total core deposits 15,198 15,496 132.1 180.0 2.18 2.88
-----------------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 789 944 10.4 14.4 2.66 3.08
Brokered time deposits and negotiable CDs 1,198 476 11.2 5.9 1.88 2.48
Foreign time deposits 470 283 2.4 2.3 1.05 1.63
-----------------------------------------------------------------------------------------------------------------------------------
Total deposits 17,655 17,199 156.1 202.6 2.15 2.85
-----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 1,789 1,692 9.9 14.7 1.11 1.75
Federal Home Loan Bank advances 1,242 16 11.2 0.5 1.80 5.99
Subordinated notes and other long-term debt,
including preferred capital securities 3,792 3,403 55.9 62.7 2.97 3.71
-----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities / Total
interest expense/rate 21,494 19,421 233.1 280.5 2.19 % 2.91 %
-----------------------------------------------------------------------------------------------------------------------------------
All other liabilities 1,096 1,122
Shareholders' equity 2,173 2,307
---------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,747 $ 25,739
=================================================================================
Net interest rate spread 3.19 % 3.34 %
Impact of non-interest bearing funds on margin 0.17 0.11
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME (FTE) (1) / MARGIN $ 387.1 $ 344.9 3.36 % 3.45 %
====================================================================================================================================
(1) Fully tax equivalent net interest income and yields are calculated assuming
a 35% tax rate.
(2) Individual loan components include applicable fees.
(3) Loan and deposit average rates include impact of applicable derivatives.
27
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is the expense necessary to
maintain the allowance for loan and lease losses (ALLL) at a level adequate to
absorb management's estimate of inherent losses in the total loan and lease
portfolio. Taken into consideration are such factors as current period net
charge-offs that are charged against the ALLL, current period loan and lease
growth and any related estimate of likely losses associated with that growth
based on historical experience, the current economic outlook, the anticipated
impact on credit quality of existing loans and leases, and other factors.
2003 Second Quarter versus 2002 Second Quarter
Provision for loan and lease losses in the second quarter was $49.2
million, down $0.7 million, or 1%, from the year-ago quarter. At June 30, 2003,
the allowance for loan and lease losses as a percent of period-end loans and
leases was 1.79%, down from 2.10% at the end of the year-ago quarter. The
decline in this ratio reflected a 40% decrease in non-performing assets between
the end of the year-ago quarter and June 30, 2003. In contrast, as a percent of
non-performing assets, the ALLL increased to 255% at June 30, 2003, from 158% at
June 30, 2002. (See Tables 10 and 11.)
2003 Second Quarter versus 2003 First Quarter
Provision for loan and lease losses in the second quarter was up $12.3
million, or 34%, from the first quarter due primarily to an $8.1 million
provision expense reflecting loan growth, and to a lesser degree higher net
charge-offs between periods. The June 30, 2003, ALLL as a percent of period-end
loans and leases was 1.79%, up slightly from 1.78% at March 31, 2003. The
allowance for loan and lease losses as a percent of non-performing assets
increased to 255% at June 30, 2003, from 240% at the end of the immediately
preceding quarter.
2003 First Six Months versus 2002 First Six Months
Provision for loan and lease losses for the first six months was $86.0
million, down $2.8 million, or 3%, reflecting a $6.1 million, or 8%, decline in
net charge-offs, partially offset by loan and lease growth.
NON-INTEREST INCOME
2003 Second Quarter versus 2002 Second Quarter
Non-interest income in the second quarter 2003 was $277.0 million, down
$11.8 million, or 4%, from $288.7 million in the year-ago quarter. This decline
was driven primarily by a $43.0 million, or 25%, decline in operating lease
income as this portfolio runs off due to the fact that all automobile leases
originated after April 2002 are direct financing leases. Unlike income on
operating leases, the income on direct financing leases is reflected in net
interest income. (See Operating Lease discussion.) Excluding operating lease
income of $128.6 million and $171.6 million from the current and year-ago
quarters, respectively, non-interest income was up $31.3 million, or 27%. (See
Table 4.)
Fee income categories that increased over this period included service
charges on deposit accounts, up $5.3 million, or 15%, due to higher NSF and
overdraft fees on retail accounts. The gains on sales of automobile loans were
$13.5 million in the current quarter. The $9.4 million increase in other income
reflected a $4.4 million increase in trading-related revenue, $4.1 million of
higher fees from automobile lease terminations, and a $3.2 million increase in
the market value of certain equity investments partially offset by declines in
other miscellaneous income categories. Securities gains were up $5.9 million
from the same period last year. Other service charge income increased $0.8
million, or 8%, reflecting higher transaction-based product fees.
Fee income categories that decreased included brokerage and insurance
income, down $2.7 million, or 16%, primarily due to lower insurance income
associated with the sold J. Rolfe Davis Insurance Agency, Inc. Trust services
income was down $0.7 million, or 4%, due to a decline in average asset values.
Mortgage banking income decreased $0.7 million, or 8%, reflecting an
acceleration in the amortization of mortgage servicing rights (MSRs) and a $6.4
million MSR impairment charge in the current quarter versus $0.9 million in the
year-ago quarter, partially offset by higher origination-related fees due to the
increased volume of mortgage originations. The MSR impairment charge and
acceleration in the amortization of MSRs reflected high mortgage prepayment
levels as the low interest rate environment continued to produce high
refinancing activity. At June 30, 2003, MSRs as a percent of serviced mortgages
were 0.72%, down from 1.00% at June 30, 2002. Table 4 shows details of
non-interest income for the three and six-month periods ended June 30, 2003 and
2002:
28
------------------------------------------------------------------------------------------------------------------------
TABLE 4 - NON-INTEREST INCOME
(in thousands of dollars) THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------------------------------------------------
2003 2002 % Change
------------------------------------------------------------------------------------------------------------------------
Operating lease income $ 128,574 $ 171,617 (25.1)%
Service charges on deposit accounts 40,914 35,608 14.9
Trust services 15,580 16,247 (4.1)
Brokerage and insurance income 14,196 16,899 (16.0)
Gains on sales of automobile loans 13,496 --- N.M.
Other service charges and fees 11,372 10,529 8.0
Bank Owned Life Insurance income 11,043 10,722 3.0
Mortgage banking 7,185 7,835 (8.3)
Securities gains 6,887 966 N.M.
Other 27,704 18,291 51.5
------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME $ 276,951 $ 288,714 (4.1)%
========================================================================================================================
(in thousands of dollars) SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------------------------------------------
2003 2002 % Change
-------------------------------------------------------------------------------------------------------------------------
Operating lease income $ 266,767 $ 347,651 (23.3)%
Service charges on deposit accounts 80,783 74,423 8.5
Trust services 30,491 31,748 (4.0)
Brokerage and insurance income 29,693 34,504 (13.9)
Gains on sales of automobile loans 23,751 --- N.M.
Other service charges and fees 21,710 21,161 2.6
Bank Owned Life Insurance income 22,180 21,678 2.3
Mortgage banking 18,310 23,909 (23.4)
Gain on sale of Florida operations --- 182,470 N.M.
Securities gains 8,085 1,423 N.M.
Other 48,105 32,280 49.0
-------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME $ 549,875 $ 771,247 (28.7)%
=========================================================================================================================
2003 Second Quarter versus 2003 First Quarter
Non-interest income of $277.0 million in the second quarter was up $4.0
million, or 1%, from $272.9 million in the first quarter, despite a $9.6 million
decline in operating lease income. Excluding operating lease income of $128.6
million from the current quarter and $138.2 million in the 2003 first quarter,
non-interest income was up $13.6 million, or 10%.
Income categories that increased included other income, up $7.3 million.
This increase reflected higher fees from the termination of operating lease
assets, an increase in the market value of certain equity investments, as well
as higher letter of credit fees offset by lower securitization gains. The gains
on sales of automobile loans were $3.2 million higher than gains in the first
quarter. Securities gains totaled $6.9 million, up $5.7 million from the first
quarter. Service charges on deposit accounts increased $1.0 million, or 3%, due
to higher retail fees. Other service charges and fees were up $1.0 million, or
10%, reflecting higher transaction-based product fees from the seasonally weak
first quarter. Trust services increased $0.7 million, or 4%, due to higher
institutional fees.
Partially offsetting these increases were declines in several fee income
categories, including brokerage and insurance income, down $1.3 million, or 8%,
due to an 18% decline in annuity sales, though mutual fund sales increased 45%.
Mortgage banking income declined $3.9 million, or 35%, from the first quarter
reflecting a $6.4 million impairment of MSR in the current quarter, compared
with no impairment in the first quarter 2003. Excluding the MSR impairment,
mortgage banking income increased $2.5 million, or 22%, reflecting a 34%
increase in closed loan production. At June 30, 2003, MSRs as a percent of
mortgages serviced for others were 0.72%, down from 0.80% at March 31, 2003.
29
2003 First Six Months versus 2002 First Six Months
Non-interest income for the first six months of 2003 was $549.9 million,
down $221.4 million, or 29%, from $771.2 million in the comparable year-ago
period. This decline reflected the $182.5 million gain from the sale of the
Florida banking operations in the year-ago period, as well as an $80.9 million,
or 23%, decline in operating lease income as this portfolio runs off. (See
Operating Lease discussion.) Excluding the year-ago gain, as well as operating
lease income of $266.8 million and $347.7 million from the current and year-ago
six-month periods, respectively, non-interest income was up $42.0 million, or
17%.
Non-interest income categories contributing to the increase included
service charges on deposit accounts, up $6.4 million, or 9%; a $6.7 million
increase in securities gains; and a $15.8 million increase in other income. The
increase in other income was due to a $7.6 million increase in lease termination
fees, and a $7.5 million increase in capital markets-related income including
trading and sales activities, partially offset by a $3.1 million decrease in
standby letter of credit fees related to the implementation of FIN 45, as well
as lower other miscellaneous fees. Gains on sales of automobile loans were $23.8
million in the first six months of 2003. Brokerage and insurance income was down
$4.8 million, or 14%, and trust services declined $1.3 million, or 4%,
reflecting the same factors influencing the declines between second quarters.
Mortgage banking income declined $5.6 million, or 23%, reflecting year-to-date
MSR impairments totaling $6.4 million in 2003 versus $1.1 million in the
year-ago period.
NON-INTEREST EXPENSE
2003 Second Quarter versus 2002 Second Quarter
Non-interest expense in the second quarter 2003 was $297.0 million, down
$26.7 million, or 8%, from $323.7 million in the year-ago quarter. This decline
was driven primarily by a $28.8 million, or 22%, decline in operating lease
expense as this portfolio runs off. (See Operating Lease discussion.) Excluding
operating lease expense of $102.9 million and $131.7 million from the current
and year-ago quarters, respectively, non-interest expense was up $2.0 million,
or 1%. (See Table 5.) This $2.0 million increase reflected a $6.1 million, or
6%, increase in personnel costs with higher salaries, sales commissions, and
benefit expenses each contributing equally to the increase. In the second
quarter, Huntington reversed a reserve it had established for payment of bonuses
to management under its Long Term Incentive Plan for the cycle covering the
years 2000-2002 because it determined that there would be no pay-out under this
plan for that cycle. The reversal decreased personnel expenses by $5.3 million
in that quarter. Additionally, at the end of the second quarter 2003, Huntington
increased its accrual for earned but unpaid salaries of its exempt employees.
This accrual increased personnel expenses by $4.9 million. Full-time equivalent
staff at the end of June 2003 was 8,093, down slightly from 8,174 at the end of
the second quarter last year. Professional services expense increased $2.0
million, or 26%, primarily related to legal and audit expenses associated with
the restatement announced in May of this year and costs pertaining to the
investigation by the SEC. Also contributing to the increase were higher
marketing expenses, up $1.2 million, or 17%.
These increases were partially offset by the benefit of a $5.3 million
release of restructuring reserves, of which $3.8 million related to reserves
established in 1998 and $1.5 million related to reserves established in 2001 and
2002. The 1998 reserve was established for, among other items, the exit of
underperforming product lines, including possible third-party claims related to
these exits. Management reviewed this reserve and determined that future claims
were unlikely or would be immaterial, and therefore, reduced the level of the
reserve through a credit, or reserve release, to the restructuring charge
expense category. As of June 30, 2003, Huntington has remaining reserves for
restructuring of $0.3 million related to the 1998 strategic initiative, and $9.1
million related to the 2001 strategic initiatives, respectively. Huntington
expects that this remaining reserve will be adequate to fund the remaining
estimated future cash outlays that are expected in the completion of the exit
activities contemplated by Huntington's 2001 strategic refocusing plan. Cost for
printing and supplies declined $1.4 million, or 39%, due largely to incentives
received from a new check-printing vendor that partially offset such costs in
the second quarter 2003.
30
Table 5 reflects details of non-interest expense for the three and six
months ended June 30, 2003 and 2002:
--------------------------------------------------------------------------------------------------------------------------------
TABLE 5 - NON-INTEREST EXPENSE
(in thousands of dollars) THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------------------------------------------------
2003 2002 % Change
---------------------------------------------------------------------------------------------------------------------------------
Personnel costs $ 105,242 $ 99,115 6.2 %
Operating lease expense 102,939 131,695 (21.8)
Equipment 16,341 16,659 (1.9)
Outside data processing and other services 16,104 16,592 (2.9)
Net occupancy 15,377 14,504 6.0
Professional services 9,872 7,864 25.5
Marketing 8,454 7,231 16.9
Telecommunications 5,394 5,320 1.4
Printing and supplies 2,253 3,683 (38.8)
Restructuring (releases) charges (5,315) --- N.M.
Other 20,372 21,083 (3.4)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $ 297,033 $ 323,746 (8.3)%
=================================================================================================================================
(in thousands of dollars) SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------------------------------------------------
2003 2002 % Change
---------------------------------------------------------------------------------------------------------------------------------
Personnel costs $ 218,331 $ 207,144 5.4 %
Operating lease expense 214,527 272,480 (21.3)
Equipment 32,753 33,608 (2.5)
Outside data processing and other services 32,683 35,031 (6.7)
Net occupancy 31,986 31,493 1.6
Professional services 19,157 14,294 34.0
Marketing 15,080 14,234 5.9
Telecommunications 11,095 11,338 (2.1)
Printing and supplies 5,934 7,520 (21.1)
Restructuring (releases) charges (6,315) 56,184 N.M.
Other 37,281 42,016 (11.3)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $ 612,512 $ 725,342 (15.6)%
=================================================================================================================================
2003 Second Quarter versus 2003 First Quarter
Non-interest expense of $297.0 million in the current quarter was down
$18.4 million, or 6%, from $315.4 million in the first quarter. This decline
reflected an $8.6 million, or 8%, decline in operating lease expense as the
operating lease portfolio runs off. (See Operating Lease discussion.) Excluding
operating lease expense of $102.9 million and $111.6 million from the current
and prior quarters, respectively, non-interest expense was down $9.8 million, or
5%.
Contributing to the $9.8 million decline were lower personnel costs, down
$7.8 million, or 7%, due to a combination of lower salaries, benefit, and
severance costs. Net occupancy expense decreased $1.2 million, or 7%, as the
first quarter results included significant seasonal costs, while printing and
supplies costs declined $1.4 million, or 39%. Partially offsetting these
declines were increases in a number of expense categories including a $3.5
million, or 20%, increase in other expenses spread across a number of
categories. Marketing expense increased $1.8 million, or 28%, with professional
services expense up $0.6 million, or 6%, primarily related to legal and audit
expenses associated with the restatement announced in May of this year and the
investigation by the SEC. Restructuring releases were $4.3 million higher in the
second quarter than the immediately preceding quarter.
2003 First Six Months versus 2002 First Six Months
Non-interest expense for the first six months of 2003 was $612.5 million,
down $112.8 million, or 16%, from $725.3 million in the comparable year-ago
period. Two items significantly affect this year-over-year comparison. Changes
in restructuring reserves for the six month 2003 period represented a net
credit, or release, to reserves of $6.3 million compared with $56.2 million of
charges in the year-ago period primarily related to the last significant charges
associated with the strategic initiatives announced in July 2001, including the
sale of the Florida banking operations. The second is a $58.0 million, or 21%,
decline in operating lease expense as the portfolio of operating lease assets
runs off. (See Operating Lease discussion.) Excluding the impact of
restructuring charges and releases, as well as operating lease expense of $214.5
million and $272.5 million from the current and year-ago six-month periods,
respectively, non-interest expense was up $7.6 million, or 2%.
31
This $7.6 million increase reflected increases of $11.2 million, or 5%, in
personnel costs, and a $4.9 million, or 34%, increase in professional services.
Partially offsetting these increases were declines of $2.3 million, or 7%, in
outside data processing and other services, and a $1.6 million, or 21%, decline
in printing and supply costs. These year-to-date changes reflect the same
factors influencing comparisons between second quarters. In addition, other
expenses declined $4.7 million, or 11%, reflecting lower state and local tax
expense and amortization of intangible assets.
OPERATING LEASE ASSETS
Operating lease assets represent automobile leases originated before May
2002. This operating lease portfolio will run-off over time since all automobile
lease originations after April 2002 have been recorded as direct finance leases
and are reported in the automobile loan and lease category in earning assets. As
a result, the non-interest income and non-interest expenses associated with the
operating lease portfolio will also decline over time. Average operating lease
assets in the second quarter 2003 were $1.8 billion, down 36% from the year-ago
quarter and 13% from the first quarter 2003.
Operating lease income, which totaled $128.6 million in the second quarter
2003, represented 46% of non-interest income in that quarter. Operating lease
income was down $43.0 million, or 25%, from the year-ago quarter and $9.6
million, or 7%, from the first quarter 2003, reflecting declines in average
operating leases of 36% and 13%, respectively. As no new operating leases have
been originated after April 2002, the operating lease asset balances will
continue to decline through both depreciation and lease terminations. Net rental
income was down 25% and 8%, respectively, from the year-ago and first quarter.
Fees declined 24% and 4%, respectively, from the year-ago and prior quarters.
Recoveries from early terminations declined 31% from the year-ago quarter, but
were up 16% from the first quarter.
Operating lease expense totaled $102.9 million, down $28.8 million, or 22%,
from the year-ago quarter and was down $8.6 million, or 8%, from the 2003 first
quarter. These declines also reflected the fact that this portfolio is
decreasing over time as no new operating leases are being originated. Losses on
early terminations declined $0.2 million, or 2%, from the year-ago quarter, and
$0.8 million, or 6%, from the prior quarter.
For the first six months of 2003, operating lease income totaled $266.8
million, compared with $347.7 million for the same period last year. This
decline reflected 33% lower average operating lease balances for the comparable
periods. Net rental income and fees were down 23% and 22%, respectively, from a
year ago. Recoveries from early terminations declined nearly 35%. Operating
lease expense declined from $272.5 million for the six-month period last year to
$214.5 million. Losses on early terminations declined almost 16% from $28.3
million in the year-ago six month period to $23.9 million this year.
Losses on operating lease assets consist of residual losses at termination
and losses on early terminations. Residual losses arise if the ultimate value or
sales proceeds from the automobile are less than Black Book value, which
represents the insured amount under the company's residual value insurance
policies. This situation may occur due to excess wear-and-tear or excess mileage
not collected from the lessee. Losses on early terminations occur when a lessee,
due to credit or other reasons, turns in the automobile before the end of the
lease term. A loss is realized if the automobile is sold for a value less than
the net book value at the date of turn-in. Such losses are not covered by the
residual value insurance policies. To the extent the company is successful in
collecting any deficiency from the lessee, amounts received are recorded as
recoveries from early terminations.
32
Table 6 details operating lease assets performance for the three and six
months ended June 30, 2003 and 2002:
----------------------------------------------------------------------------------------
TABLE 6 - OPERATING LEASE ASSETS PERFORMANCE
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------------
2003 2002 % Change
----------------------------------------------------------------------------------------
BALANCE SHEET (IN MILLIONS)
Average operating lease assets outstanding $ 1,802 $ 2,842 (36.6) %
INCOME STATEMENT (IN THOUSANDS)
Net rental income $120,502 $160,658 (25.0) %
Fees 5,414 7,108 (23.8)
Recoveries - early terminations 2,658 3,851 (31.0)
----------------------------------------------------------------------------------------
TOTAL OPERATING LEASE INCOME 128,574 171,617 (25.1)
----------------------------------------------------------------------------------------
Depreciation and residual losses at termination 91,387 119,941 (23.8)
Losses - early terminations 11,552 11,754 (1.7)
----------------------------------------------------------------------------------------
TOTAL OPERATING LEASE EXPENSE 102,939 131,695 (21.8)
----------------------------------------------------------------------------------------
NET EARNINGS CONTRIBUTION $25,635 $ 39,922 (35.8) %
----------------------------------------------------------------------------------------
Earnings ratios (1)
Net rental income 26.75% 22.61%
Depreciation 20.29% 16.88%
(1) As a percent of average operating lease assets, quarterly amounts
annualized.
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------------
2003 2002 % Change
----------------------------------------------------------------------------------------
BALANCE SHEET (IN MILLIONS)
Average operating lease assets outstanding $ 1,939 $ 2,909 (33.3) %
INCOME STATEMENT (IN THOUSANDS)
Net rental income $250,776 $325,827 (23.0) %
Fees 11,047 14,241 (22.4)
Recoveries - early terminations 4,944 7,583 (34.8)
----------------------------------------------------------------------------------------
TOTAL OPERATING LEASE INCOME 266,767 347,651 (23.3)
----------------------------------------------------------------------------------------
Depreciation and residual losses at termination 190,670 244,185 (21.9)
Losses - early terminations 23,857 28,295 (15.7)
----------------------------------------------------------------------------------------
TOTAL OPERATING LEASE EXPENSE 214,527 272,480 (21.3)
----------------------------------------------------------------------------------------
NET EARNINGS CONTRIBUTION $ 52,240 $ 75,171 (30.5) %
----------------------------------------------------------------------------------------
Earnings ratios (1)
Net rental income 25.87% 22.40%
Depreciation 19.67% 16.79%
(1) As a percent of average operating lease assets, six-month amounts
annualized.
INCOME TAXES
Income taxes in the second quarter 2003 were $36.7 million and represented
an effective tax rate on income before taxes of 27.5%. This was up $12.3 million
from the year-ago quarter primarily due to higher pre-tax income, as the
effective tax rate in the year-ago quarter was lower at 25.6%. The effective tax
rate in the first quarter 2003 was 25.0%. Each quarter, taxes for the full year
are re-estimated and year-to-date tax accrual adjustments are made. A number of
factors, such as year-to-date adjustments, can result in fluctuations in
quarterly effective tax rates.
33
For the first six months of 2003, income taxes were $67.3 million and
represented an effective tax rate on income before taxes of 26.3%. This was down
$82.4 million from the comparable year-ago period in which the effective tax
rate was 47.3%, reflecting the fact that most of the goodwill relating to the
Florida operations sold in the first quarter of 2002 was not deductible for tax
purposes.
CREDIT RISK
Huntington's exposure to credit risk is managed through the use of
consistent underwriting standards that emphasize "in-market" lending while
avoiding excessive industry and other concentrations. The credit administration
function employs risk management techniques to ensure that loans and leases
adhere to corporate policy and problem loans and leases are promptly identified.
These procedures provide executive management with the information necessary to
implement policy adjustments where necessary, and to take corrective actions on
a proactive basis. Beginning in 2002, management increased its emphasis on
commercial lending to customers with existing or potential relationships within
Huntington's primary markets. As a result, outstanding shared national credits
were $832 million at June 30, 2003, down from $994 million at March 31, 2003,
and $998 million at the same period-end last year, and down from a peak of $1.5
billion at June 30, 2001.
In the first quarter of 2003, Huntington implemented a revised internal
risk grading methodology for commercial and commercial real estate credits.
Huntington's new methodology is a dual risk grading system that separately
measures the probability of default and loss in the event of default and
provides Huntington with more specificity in the risk assessment process.
LOAN AND LEASE COMPOSITION
Table 7 shows the period-end loan portfolio by loan type and business
segment:
--------------------------------------------------------------------------------------------------------------------------
TABLE 7 - LOAN AND LEASE COMPOSITION
--------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) JUNE 30, 2003 December 31, 2002 June 30, 2002
------------------------------------------------------------------------ ------------------------ ----------------------
BY TYPE BALANCE % Balance % Balance %
--------------------------------------------------------------------------------------------------------------------------
Commercial $ 5,532 29.0 $ 5,606 30.2 $ 5,593 33.4
Commercial real estate 3,951 20.7 3,729 20.1 3,529 21.0
--------------------------------------------------------------------------------------------------------------------------
Total Commercial and
Commercial Real Estate 9,483 49.7 9,335 50.3 9,122 54.4
--------------------------------------------------------------------------------------------------------------------------
Consumer
Automobile loans 2,367 12.4 3,042 16.4 2,603 15.5
Automobile direct financing leases 1,481 7.8 874 4.7 270 1.6
Home equity 3,436 18.0 3,198 17.2 2,988 17.8
Residential mortgage 1,915 10.0 1,741 9.4 1,374 8.2
Other loans 378 2.1 397 2.0 410 2.5
--------------------------------------------------------------------------------------------------------------------------
Total Consumer 9,577 50.3 9,252 49.7 7,645 45.6
--------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS AND LEASES $19,060 100.0 $18,587 100.0 $16,767 100.0
==========================================================================================================================
By Business Segment
---------------------------------------------
Regional Banking
Central Ohio / West Virginia $4,876 25.6 $ 4,812 25.9 $ 4,591 27.4
Northern Ohio 2,712 14.2 2,600 14.0 2,727 16.3
Southern Ohio / Kentucky 1,547 8.1 1,502 8.1 1,434 8.6
West Michigan 1,967 10.3 1,866 10.0 1,838 11.0
East Michigan 1,225 6.4 1,189 6.4 1,055 6.3
Indiana 729 3.8 681 3.7 683 4.1
--------------------------------------------------------------------------------------------------------------------------
Total Regional Banking 13,056 68.4 12,650 68.1 12,328 73.7
--------------------------------------------------------------------------------------------------------------------------
Dealer Sales 4,624 24.3 4,711 25.3 3,467 20.7
Private Financial Group 1,181 6.2 1,062 5.7 866 5.2
Treasury / Other 199 1.1 164 0.9 106 0.4
--------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS AND LEASES $19,060 100.0 $18,587 100.0 $16,767 100.0
==========================================================================================================================
34
NET CHARGE-OFFS
Net charge-offs in the second quarter and first six months of 2003 were
$41.1 million and $73.9 million, respectively, and represented an annualized
0.85% and 0.77% of average loans and leases. For the same respective periods in
the prior year, net charge-offs were $37.0 million, or 0.90%, and $80.0 million,
or 0.94%. Table 8 reflects net charge-offs and annualized net charge-offs as a
percent of average loans and leases by type of loan:
---------------------------------------------------------------------------------------------------------------------------
TABLE 8 - NET LOAN AND LEASE CHARGE-OFFS
---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------------------------------------------------------------------
(in thousands) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS
---------------------------------------------------------------------------------------------------------------------------
Commercial $ 26,546 $ 21,528 $ 41,450 $41,114
Commercial real estate 607 2,037 1,153 6,020
---------------------------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate 27,153 23,565 42,603 47,134
---------------------------------------------------------------------------------------------------------------------------
Consumer
Automobile loans 7,524 7,356 18,147 20,115
Automobile direct financing leases 1,422 498 2,342 498
Home equity loans 3,671 3,096 7,724 7,046
Residential mortgage 267 555 412 677
Other loans 1,019 1,927 2,664 4,499
---------------------------------------------------------------------------------------------------------------------------
Total consumer 13,903 13,432 31,289 32,835
---------------------------------------------------------------------------------------------------------------------------
TOTAL NET CHARGE-OFFS $ 41,056 $ 36,997 $ 73,892 $79,969
===========================================================================================================================
ANNUALIZED NET CHARGE-OFFS AS A %
OF AVERAGE LOANS AND LEASES
------------------------------------------------
Commercial 1.89 % 1.54 % 1.47 % 1.41 %
Commercial real estate 0.06 0.23 0.06 0.34
---------------------------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate 1.14 1.04 0.90 1.00
---------------------------------------------------------------------------------------------------------------------------
Consumer
Automobile loans 1.06 1.15 1.23 1.53
Automobile direct financing leases 0.44 1.22 0.40 0.78
Home equity loans & lines of credit 0.44 0.43 0.47 0.46
Residential mortgage 0.06 0.16 0.04 0.11
Other loans 1.08 1.86 1.39 2.00
---------------------------------------------------------------------------------------------------------------------------
Total consumer 0.57 0.72 0.65 0.87
---------------------------------------------------------------------------------------------------------------------------
ANNUALIZED NET CHARGE-OFFS AS A %
OF AVERAGE LOANS AND LEASES 0.85 % 0.90 % 0.77 % 0.94 %
===========================================================================================================================
Commercial charge-offs totaled $26.5 million, or an annualized 1.89% of
average commercial loans, for the second quarter 2003, up from $21.5 million, or
1.54%, in the year-ago quarter, and $14.9 million, or 1.06%, from the first
quarter 2003. The primary driver of this increase was the charge-off of one of
the second quarter's new non-performing assets, and which accounted for 45% of
total commercial charge-offs in the recent quarter. Total consumer net
charge-offs were $13.9 million, or an annualized 0.57% of average consumer
loans, during the second quarter 2003. This compares with $13.4 million, or
0.72%, in the second quarter of last year and $17.4 million, or 0.73%, in the
first quarter 2003. The recent decline from the first quarter was driven by a
$3.1 million, or 29%, drop in automobile loan net charge-offs, from 1.38% to
1.06%. Automobile direct financing lease net charge-offs totaled $1.4 million,
or 0.44%, in the second quarter 2003 versus $0.5 million, or 1.22%, and $0.9
million, or 0.37%, for the second quarter 2002 and first quarter 2003,
respectively. As this lease portfolio is new and rapidly growing, management
anticipates that it may take a year or two to reach a mature, stable net
charge-off run rate, and therefore, the net charge-off ratio is likely to
increase over this period.
35
Management is not anticipating any significant increase in economic
activity in the second half of this year, nor any further weakening. Even though
economic uncertainty exists, management expects net charge-offs for the
full-year 2003 to be in the 0.70%-0.80% range.
NON-PERFORMING ASSETS
Non-performing assets (NPAs) consist of loans and leases that are no
longer accruing interest, loans and leases that have been renegotiated to below
market rates based upon financial difficulties of the borrower, and real estate
acquired through foreclosure. When interest accruals are suspended, accrued
interest income is reversed with current year accruals charged to earnings and
prior year amounts generally charged off as a credit loss. Commercial and
commercial real estate loans are generally placed on non-accrual status when
collection of principal or interest is in doubt or when the loan is 90 days past
due. Consumer loans and leases, excluding residential mortgages, are not placed
on non-accrual status but are charged off in accordance with regulatory
statutes, which is generally no more than 120 days past due. Residential
mortgages, while highly secured, are placed on non-accrual status within 180
days past due as to principal and 210 days past due as to interest, regardless
of security. A charge-off on a residential mortgage is recorded when the loan
has been foreclosed and the loan balance exceeds the fair value of the real
estate. The fair value of the collateral is then recorded as real estate owned.
When, in management's judgment, the borrower's ability to make periodic interest
and principal payments resumes and collectibility is no longer in doubt, the
loan is returned to accrual status.
Table 9 summarizes NPAs at the end of each of the recent five quarters
in addition to 90 day past due information:
TABLE 9 - NON-PERFORMING ASSETS AND PAST DUE LOANS AND LEASES
-------------------------------------------------------------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------------- ------------------------------------------
(in thousands) SECOND FIRST FOURTH THIRD SECOND
-------------------------------------------------------------------------------------------------------------------------
Non-accrual loans and leases:
Commercial $86,021 $94,754 $91,861 $ 147,392 $ 156,252
Commercial real estate 22,398 22,585 26,765 47,537 45,795
Residential mortgage 11,735 9,302 9,443 8,488 8,776
-------------------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans and Leases 120,154 126,641 128,069 203,417 210,823
Renegotiated loans --- --- --- 37 1,268
-------------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS AND LEASES 120,154 126,641 128,069 203,454 212,091
Other real estate, net 13,568 14,084 8,654 10,675 11,146
-------------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $133,722 $ 140,725 $ 136,723 $ 214,129 $ 223,237
========================================================================================================================
Non-performing loans and leases as a %
of total loans and leases 0.63% 0.67% 0.69% 1.14% 1.26%
Non-performing assets as a % of total
loans and leases and other real estate 0.70% 0.74% 0.74% 1.20% 1.33%
ACCRUING LOANS AND LEASES PAST DUE
90 DAYS OR MORE $55,287 $57,241 $61,526 $ 57,337 $47,663
========================================================================================================================
Total NPAs were $133.7 million at June 30, 2003, down $89.5 million, or
40%, from the year-ago quarter, and down $7.0 million, or 5%, from March 31,
2003. The significant decrease in NPAs from the third to fourth quarter of 2002
was primarily due to the sale of NPAs that occurred in the fourth quarter 2002.
NPAs as a percent of total loans and leases and other real estate were 0.70% at
June 30, 2003, compared with 1.33% a year ago and 0.74% at March 31, 2003.
Loans and leases past due ninety days or more and still accruing interest
at the end of the second quarter of 2003 were $55.3 million versus $47.7 million
at the end of the same period a year ago. These past due loans and leases
represented 0.29% and 0.28% of total loans and leases at the end of the second
quarter of 2003 and 2002, respectively. At March 31, 2003, these loans and
leases amounted to $57.2 million and represented 0.30% of total loans and
leases. Table 10 reflects the change in NPAs for the recent five quarters:
36
------------------------------------------------------------------------------------------------------------------------
TABLE 10 - NON-PERFORMING ASSET ACTIVITY
------------------------------------------------------------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------------- -----------------------------------------
(in thousands) SECOND FIRST FOURTH THIRD SECOND
------------------------------------------------------------------------------------------------------------------------
BEGINNING OF PERIOD $140,725 $136,723 $214,129 $223,237 $ 225,530
New non-performing assets 83,104 48,359 65,506 47,275 73,002
Returns to accruing status (9,866) (5,993) (12,658) (380) (337)
Loan and lease losses (30,204) (17,954) (72,767) (25,480) (28,297)
Payments (26,831) (15,440) (28,500) (26,308) (44,303)
Sales (23,206) (4,970) (28,987) (4,215) (2,358)
------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $133,722 $140,725 $136,723 $214,129 $ 223,237
========================================================================================================================
New NPAs increased to $83.1 million during the most recent quarter from
$48.4 million in the first quarter 2003. Approximately 60% of the increase was
concentrated in three commercial credits, one in the manufacturing sector with
part of its business supporting automobile manufacturing, another in the
teleconferencing business, and the third in a combination of businesses
including marine shipping, mining, and raw materials. Of these credits, one was
charged off and another sold during the recent quarter. The level of payments
from the first to the second quarter 2003 increased, returning to levels
experienced in earlier quarters. This increase was spread over a number of
credits with no notable borrower concentrations. Despite the modest decline in
NPAs this recent quarter, management expects the level of NPAs to remain near
current levels throughout the second half of this year.
ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
The ALLL was $340.9 million at June 30, 2003, down from $351.7 million at
the end of the second quarter of 2002, but up slightly from the $337.0 million
at March 31, 2003. The ALLL represented 1.79% of total loans and leases at June
30, 2003, 2.10% at the end of the second quarter last year and 1.78% at March
31, 2003. It is expected that the adoption of FIN 46 will decrease this ratio by
approximately 3 basis points as the 1.01% reserve associated with the $1.0
billion of consolidated loans is less than the 1.79% ratio as of June 30, 2003.
The period-end ALLL was 255% of NPAs at June 30, 2003, compared with 158% a year
ago and 240% at March 31, 2003.
Table 11 reflects the activity in the ALLL for the recent five quarters.
The $3.5 million and $3.0 million allowance of sold loans in the second and
first quarters of 2003 related to the $567 million and $556 million of
automobile loans sold in the respective quarters. The $1.3 million of allowance
related to purchased loans in the third quarter of last year was attributed to
the LeaseNet acquisition.
--------------------------------------------------------------------------------------------------------------------------
TABLE 11 - ALLOWANCE FOR LOAN AND LEASE LOSSES AND RELATED STATISTICS
--------------------------------------------------------------------------------------------------------------------------
2003 2002
--------------------------------------------------------------------------- ---------------------------------------------
(in thousands) SECOND FIRST FOURTH THIRD SECOND
--------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN AND LEASE
LOSSES, BEGINNING OF PERIOD $ 337,017 $336,648 $371,033 $351,696 $340,851
Loan and lease losses (49,985) (40,265) (93,890) (43,748) (45,728)
Recoveries 8,929 7,429 10,732 9,963 8,731
--------------------------------------------------------------------------------------------------------------------------
Net loan and lease losses (41,056) (32,836) (83,158) (33,785) (36,997)
--------------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 49,193 36,844 51,236 54,304 49,876
Allowance of (sold) purchased loans (3,477) (2,981) --- 1,264 ---
Allowance of securitized loans (730) (658) (2,463) (2,446) (2,034)
--------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN AND LEASE
LOSSES, END OF PERIOD $ 340,947 $337,017 $336,648 $371,033 $351,696
==========================================================================================================================
Allowance for loan and lease losses
as a percent of:
Total loans and leases 1.79 % 1.78 % 1.81 % 2.08 % 2.10 %
Non-performing loans and leases 283.8 266.1 262.9 182.4 165.8
Non-performing assets 255.0 239.5 246.2 173.3 157.5
37
Huntington allocates the ALLL to each loan and lease category based on an
expected loss ratio determined by continuous assessment of credit quality
reflecting portfolio risk characteristics and other relevant factors such as
historical performance, significant acquisitions and dispositions of loans, and
internal controls. For the commercial and commercial real estate credits,
expected loss factors are assigned by credit grade at the individual loan and
lease level at the time the loan or lease is originated, then subsequently
re-evaluated on a periodic basis. The aggregation of these factors represents
management's estimate of the inherent loss in the portfolio.
The portion of the allowance allocated to the more homogeneous consumer
loan and lease segments is determined by expected loss ratios based on the risk
characteristics of the various segments and giving consideration to existing
economic conditions and trends. Expected loss ratios incorporate factors such as
trends in past due amounts, recent loan and lease loss experience, and specific
risk characteristics at the loan and lease level. Actual loss ratios experienced
in the future could vary from those expected, as performance is a function of
factors unique to each customer as well as general economic conditions. While
amounts are allocated to various portfolio segments, the total ALLL, excluding
impairment reserves prescribed under provisions of Statement of Financial
Accounting Standard No. 114, is available to absorb losses from any segment of
the portfolio.
As of June 30, 2003, the entire ALLL is allocated to discrete loan
categories with the result being the elimination of any unallocated reserve.
INTEREST RATE RISK MANAGEMENT
Huntington seeks to minimize earnings volatility by managing the
sensitivity of net interest income and the fair value of its net assets to
changes in market interest rates. The Board of Directors and the Asset and
Liability Management Committee (ALCO) oversee various risks by establishing
broad policies and specific operating limits that govern a variety of risks
inherent in operations, including liquidity, counterparty credit risk,
settlement, and market risks.
Market risk is the potential for declines in the fair value of financial
instruments due to changes in interest rates, exchange rates, and equity prices.
Interest rate risk is Huntington's primary market risk. It results from timing
differences in the repricing and maturity of assets and liabilities and changes
in relationships between market interest rates and the yields on assets and
rates on liabilities, including the impact of embedded options.
Interest rate risk management is a dynamic process that encompasses new
business flows onto the balance sheet, wholesale investment and funding, and the
changing market and business environment. Effective management of interest rate
risk begins with appropriately diversified investments and funding sources. To
accomplish overall balance sheet objectives, management regularly accesses
money, bond, futures, and options markets, as well as trading exchanges. In
addition, Huntington contracts with dealers in over-the-counter financial
instruments for interest rate swaps. ALCO regularly monitors position
concentrations and the level of interest rate sensitivity to ensure compliance
with approved risk tolerances. Interest rate risk modeling is performed monthly.
An income simulation model is used to measure the sensitivity of forecasted net
interest income to changes in market rates over a one-year horizon. Although
Bank Owned Life Insurance and automobile operating lease assets are classified
as non-interest earning assets, Huntington includes these portfolios in its
interest sensitivity analysis because both have attributes similar to fixed-rate
interest earning assets. Balance sheet growth assumptions are also considered in
the income simulation model.
The baseline scenario for the income simulation, with which all others are
compared, is based on market interest rates implied by the prevailing yield
curve. Alternative market rate scenarios are then employed to determine their
impact on the baseline scenario. These alternative market rate scenarios include
spot rates remaining unchanged for the entire measurement period, parallel rate
shifts on both a gradual and immediate basis, as well as movements in rates that
alter the shape of the yield curve. Scenarios are also developed to measure
basis risk, such as the impact of LIBOR-based rates rising or falling faster
than the prime rate.
Market value risk (referred to as Economic Value of Equity or EVE) is
measured using a static balance sheet. The models used for these measurements
take into account prepayment speeds on mortgage loans, mortgage-backed
securities, and consumer installment loans, as well as cash flows of other loans
and deposits. Moreover, the models incorporate the effects of embedded options,
such as interest rate caps, floors, and call options, and account for changes in
relationships among interest rates.
38
When evaluating short-term interest rate risk exposure, management uses,
for its primary measurement, scenarios that model parallel shifts in the yield
curve resulting in a gradual 200 basis point increase/decrease in rates over the
next twelve-month period. However, at December 31, 2002, only the 200 basis
point increasing parallel shift in the yield curve was reported because a 200
basis point decrease in the interest rate curve was not feasible given the
overall low level of interest rates. At June 30, 2003, that scenario modeled net
interest income by approximately 0.8% lower than the internal forecast of net
interest income over the same time period using the current level of forward
rates. This was relatively unchanged from the negative impact to net interest
income generated by the same 200 basis point scenario at the end of 2002.
Management believes further declines in market rates would put modest downward
pressure on net interest income, resulting from the implicit pricing floors in
non-maturity deposits.
The net interest margin has been adversely impacted in recent months by:
(1) fixed-rate consumer loan repayments being reinvested at lower market rates;
(2) high repayments and prepayments of residential mortgage loans and
mortgage-backed securities; (3) the implicit floors in retail deposits as rates
declined to historically low levels; (4) the rapid growth of lower-yielding
residential adjustable-rate mortgage loans retained on the balance sheet; (5)
the lower yield on the higher quality automobile loan originations; and (6) the
flattening of the yield curve. The net interest margin will continue to be
adversely affected by some of these factors over the next few quarters.
The primary measurement for EVE risk assumes an immediate and parallel
increase in rates of 200 basis points. At June 30, 2003, the model indicated
that such an increase in rates would be expected to reduce the EVE by
approximately 1.4% compared with an estimated negative impact of approximately
3.8% at December 31, 2002.
These models are a useful but simplified representation of Huntington's
underlying interest rate risk profile. Simulations reflect choices of
statistical techniques, functional forms, model parameters, and numerous other
assumptions. Nonetheless, experience has demonstrated and management believes
that these models provide reliable guidance for measuring and managing interest
rate sensitivity.
LIQUIDITY
Effectively managing liquidity involves meeting the cash flow requirements
of depositors and borrowers, as well as satisfying the operating cash needs of
the organization to fund corporate expansion and other activities. ALCO
establishes guidelines and regularly monitors the overall liquidity position of
the business and ensures that various alternative strategies exist to cover
unanticipated events. Furthermore, ALCO policies and/or guidelines ensure that
wholesale funding sources are diversified in order to avoid concentration in any
one market source. Management believes sufficient liquidity was available at the
end of the recent quarter to meet estimated funding needs of the Bank and parent
company.
39
Deposits are Huntington's primary source of funding, and represent 65% of
total assets of which 91% were provided by the Regional Banking segment. Table
12 details the types and sources of deposits by business segment at June 30,
2003, and compares these balances by type and source to balances at December 31,
2002 and June 30, 2002:
--------------------------------------------------------------------------------------------------------------------------
TABLE 12 - DEPOSIT LIABILITIES
--------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) JUNE 30, 2003 December 31, 2002 June 30, 2002
------------------------------------------------------------------------- -----------------------------------------------
BY TYPE BALANCE % Balance % Balance %
--------------------------------------------------------------------------------------------------------------------------
Demand deposits
Non-interest bearing $ 3,110 16.9 $ 3,074 17.6 $ 2,770 16.4
Interest bearing 6,332 34.5 5,374 30.7 5,105 30.3
Savings deposits 3,085 16.8 2,851 16.3 2,839 16.8
Other domestic time deposits 3,400 18.5 3,956 22.6 4,239 25.2
--------------------------------------------------------------------------------------------------------------------------
Total Core Deposits 15,927 86.7 15,255 87.2 14,953 88.7
--------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of
$100,000 or more 826 4.5 732 4.2 765 4.5
Brokered and negotiable CDs 1,227 6.7 1,093 6.2 849 5.0
Foreign time deposits 391 2.1 419 2.4 294 1.8
--------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $18,371 100.0 $ 17,499 100.0 $ 16,861 100.0
==========================================================================================================================
BY BUSINESS SEGMENT
-----------------------------------------
Regional Banking
Central Ohio / West Virginia $ 6,223 33.9 $ 5,361 30.6 $ 5,295 31.4
Northern Ohio 3,692 20.1 3,602 20.6 3,391 20.1
Southern Ohio / Kentucky 1,412 7.7 1,365 7.8 1,344 8.0
West Michigan 2,582 14.1 2,402 13.7 2,557 15.2
East Michigan 2,079 11.3 1,962 11.2 1,931 11.5
Indiana 640 3.4 613 3.5 603 3.6
--------------------------------------------------------------------------------------------------------------------------
Total Regional Banking 16,628 90.5 15,305 87.4 15,121 89.8
--------------------------------------------------------------------------------------------------------------------------
Dealer Sales 67 0.4 59 0.3 50 0.3
Private Financial Group 1,027 5.6 924 5.3 826 4.9
Treasury / Other 649 3.5 1,211 7.0 864 5.0
--------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $18,371 100.0 $ 17,499 100.0 $ 16,861 100.0
==========================================================================================================================
Core deposits, which include non-interest bearing and interest bearing
demand deposits, savings accounts, and other domestic time deposits, including
certificates of deposit under $100,000 and IRAs, satisfy 86.7% of Huntington's
funding needs. Sources of wholesale funding include Federal funds purchased,
securities sold under repurchase agreement, brokered CDs, and medium- and
long-term debt. Wholesale funding activities are governed by the Bank's ALCO,
which establishes policies and guidelines to diversify funding sources and avoid
borrowing concentrations from any one market source.
Other sources of liquidity include the sale or maturity of investment
securities, the sale or securitization of loans, collateralized borrowings such
as Federal Home Loan Bank advances, and the issuance of common and preferred
securities in the capital markets. Huntington also has available a $6.0 billion
domestic bank note program through its bank subsidiary, Huntington National
Bank, of which $4.9 billion was available at June 30, 2003. In addition, the
Bank shares a $2.0 billion Euronote program with the parent company, of which
$1.4 billion was available on June 30, 2003. In addition, the parent company has
$295 million availability under a $750 million medium term note program as of
the same date.
CAPITAL
Capital is managed at each legal subsidiary based upon the respective risks
and growth opportunities, as well as regulatory requirements. Huntington places
significant emphasis on the maintenance of a strong capital position, which
promotes investor confidence, provides access to the national markets under
favorable terms, and enhances business growth and acquisition opportunities. The
importance of managing capital is also recognized and management continually
strives to maintain an appropriate balance between capital adequacy and returns
to shareholders.
40
Shareholders' equity increased $46 million for the recent quarter and $12
million during the first six months of 2003 but declined $62 million from June
30, 2002. The increase was less for the six-month period in 2003 primarily due
to the repurchase of 4.3 million common shares at a value of $81.1 million in
the 2003 first quarter. In February 2002, the Board of Directors authorized a
common share repurchase program for up to 22 million common shares and canceled
the previously existing authorization. Under this authorization, a total of 19.4
million common shares were repurchased: 19.2 million in 2002, including 8.8
million common shares purchased in the first six months of 2002, and 0.2 million
in the 2003 first quarter. In mid-January 2003, the Board of Directors
authorized a new common share repurchase program, canceling the 2.6 million
common shares remaining under the February 2002 authorization, and approved a
new common share repurchase authorization for up to 8.0 million common shares.
Under this authorization, 4.1 million common shares were repurchased in the 2003
first quarter, leaving 3.9 million common shares remaining for repurchase at
June 30, 2003.
Average equity to average assets in the second quarter of 2003 was 7.67%
versus 9.14% for the same period last year. Tangible period-end equity to
period-end assets, which excludes intangible assets, was 7.07% at the end of
June 2003, down from 8.17% a year earlier. The high tangible equity to asset
ratio in the year-ago quarter reflected excess capital generated from the sale
of the Florida operations in the first quarter 2002. Management has a
longer-term targeted tangible equity to asset ratio of 7.00%, given the current
asset mix and risk profile.
Risk-based capital guidelines established by the Federal Reserve Board set
minimum capital requirements and require institutions to calculate risk-based
capital ratios by assigning risk weightings to assets and off-balance sheet
items, such as interest rate swaps, loan commitments, and securitizations. These
guidelines further define "well-capitalized" levels for Tier 1, total capital,
and leverage ratio purposes at 6%, 10%, and 5%, respectively. Huntington's Tier
1 risk-based capital ratio, total risk-based capital ratio, leverage ratio,
risk-adjusted assets, and its tangible equity to assets ratio for the recent
five quarters are shown in Table 13:
--------------------------------------------------------------------------------------------------------------------------
TABLE 13 - END OF PERIOD CAPITAL DATA
--------------------------------------------------------------------------------------------------------------------------
2003 2002
--------------------------------------------------------------------------------- ---------------------------------------
(in millions) SECOND FIRST FOURTH THIRD SECOND
--------------------------------------------------------------------------------------------------------------------------
Total risk-adjusted assets $27,570 $27,437 $27,132 $26,226 $25,200
Tier 1 risk-based capital ratio 8.32% 8.13% 8.32% 8.82% 9.42%
Total risk-based capital ratio 11.11% 11.00% 11.22% 11.78% 12.46%
Tier 1 leverage ratio 8.25% 8.22% 8.48% 9.05% 9.60%
Tangible equity / asset ratio 7.06% 7.01% 7.22% 7.64% 8.17%
As Huntington is supervised and regulated by the Federal Reserve, The
Huntington National Bank, Huntington's bank subsidiary, is supervised and
regulated by the Office of the Comptroller of the Currency, which establishes
similar regulatory capital guidelines for banks. The Bank also had regulatory
capital ratios in excess of the levels established for well-capitalized
institutions at June 30, 2003.
Table 14 details the cash dividends that were declared in the first quarter
2003 and four prior quarters along with common stock prices (based on NASDAQ
intra-day and closing stock price quotes):
--------------------------------------------------------------------------------------------------------------------------
TABLE 14 - QUARTERLY STOCK SUMMARY
--------------------------------------------------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------- ----------------------------------------------
SECOND FIRST FOURTH THIRD SECOND
--------------------------------------------------------------------------------------------------------------------------
High $ 21.540 $ 19.800 $ 19.980 $ 20.430 $ 21.770
Low 18.030 17.780 16.160 16.000 18.590
Close 19.510 18.590 18.710 18.190 19.420
Average daily closing price 19.790 18.876 18.769 19.142 20.089
Cash dividends declared $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16
In July 2003, the board of directors declared a dividend of $0.175 per
common share for the third quarter 2003, an increase of 9.4% over the previous
quarterly dividend. The dividend is payable October 1, 2003, to shareholders of
record on September 19, 2003. Management has increased its dividend payout
target range to 40%-45% of earnings, up from the previous target range of
35%-45%.
41
LINES OF BUSINESS DISCUSSION
Below is a brief description of each line of business and a discussion of
business segment results for the three and six months ended June 30, 2003 and
2002. Regional Banking, Dealer Sales, and the Private Financial Group are the
major business lines. The fourth segment includes the impact of the Treasury
function and other unallocated assets, liabilities, revenue, and expense.
For analytical purposes in understanding performance trends, strategic
decision making, determining incentive compensation, and evaluating line of
business performance, chief decision-makers review and analyze certain data on
an "operating basis", which excludes the impact of restructuring charges and
releases and other items, as well as the results of operations from the Florida
banking and insurance operations sold in 2002. Since the items excluded are
associated with exited businesses and/or restructurings that have been completed
and no longer contribute to current or future period performance, management
believes their exclusion for analytical purposes provides a clearer picture of
underlying performance trends, as well as progress made in improving the
company's financial performance.
REGIONAL BANKING
Regional Banking provides products and services to retail, business
banking, and commercial customers. This segment's products include home equity
loans, first mortgage loans, direct installment loans, business loans, personal
and business deposit products, as well as sales of investment and insurance
services. These products and services are offered in six operating regions
within the five states of Ohio, Michigan, Indiana, West Virginia, and Kentucky
through Huntington's traditional banking network, Direct Bank--Huntington's
customer service center, and Web Bank at www.huntington.com. Regional Banking
also represents middle-market and large commercial banking relationships which
use a variety of banking products and services including, but not limited to,
commercial loans, commercial real estate loans, international trade, and cash
management.
--------------------------------------------------------------------------------------------------------------------------
TABLE 15 - REGIONAL BANKING
--------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Net interest income $148,127 $ 141,978 $292,280 $ 282,276
Provision for loan and lease losses 40,525 36,844 64,066 59,819
Non-interest income 71,836 64,270 143,432 130,611
Non-interest expense 141,029 131,915 279,069 257,467
--------------------------------------------------------------------------------------------------------------------------
Income before taxes 38,409 37,489 92,577 95,601
Income taxes 13,443 13,121 32,402 33,460
--------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 24,966 $ 24,368 $ 60,175 $ 62,141
==========================================================================================================================
Regional Banking's operating earnings were $25.0 million for the second
quarter 2003, an increase of 2% from $24.4 million for the same period a year
ago. For the six months ended June 30, 2003 and 2002, operating earnings was
$60.2 million and $62.1 million, respectively.
Net interest income in the second quarter 2003 was up $6.1 million, or 4%,
over the prior-year quarter. The increase reflected a 7% increase in average
loans and a 4% increase in average deposits. The increase was largely attributed
to increased mortgage loan balances, which reflected robust refinancing
activity. The net interest income on other loan and deposit growth was largely
offset by continued rate declines and the resulting repricing impact of loans
and deposits. Further margin compression resulted from the lower interest rate
environment and the inability to pass along lower rates to deposit customers.
Total average loans for the 2003 second quarter increased 7% to $13.0
billion from $12.2 billion in the year-ago quarter. Consumer loans grew 16% in
the comparable periods, most notably in home equity loans and lines, as well as
residential mortgage loans, which were up 14% and 28%, respectively. Business
banking loans, including commercial and industrial real estate loans, which are
a continued strategic focus of this segment, grew 6%. Average total deposits for
the second quarter 2003 were up $635 million, or 4%, from the same period a year
ago. This increase reflected a 12% increase in commercial demand deposits.
Retail CDs, which continue to be a relatively expensive source of funds, were
de-emphasized in the company's deposit generation strategies. Excluding retail
CDs, this segment's average core deposits increased 14%.
42
The provision for loan losses for the second quarter 2003 increased $3.7
million, or 10%, over the same quarter last year. This increase was largely
attributed to loan growth. Net charge-offs were $31.5 million, or an annualized
0.97% of average total loans and leases, for the three months ended June 30,
2003, compared to $32.5 million, or 1.07%, for the prior year quarter.
Commercial and commercial real estate net charge-offs declined $1.1 million
along with declines in net charge-offs for residential mortgage loans and other
consumer loans of $0.3 million and $0.4 million, respectively, for the
comparable periods, while net charge-offs for home equity loans increased $0.8
million.
Non-interest income for the second quarter 2003 was up $7.6 million, or
12%, from the year-ago quarter. Increased fee based revenue was driven by
deposit service charges, electronic banking, and mortgage banking revenue,
despite $6.4 million of mortgage servicing rights impairment recognized in the
second quarter of 2003, versus $1.1 million in the year-ago quarter. Standby
letters of credit income was down, due to the January 1, 2003 adoption of FASB
Interpretation No. 45 (see Note 2 to Huntington's unaudited consolidated
financial statements). Revenue generated from sales referrals from investment in
insurance products is included in Regional Banking's non-interest income as fee
sharing. Second quarter referrals generated $4.3 million of higher fee sharing
revenue versus the second quarter of last year.
Non-interest expense for the 2003 second quarter was $141.0 million, up
$9.1 million, or 7%, from the second quarter of 2002. The increase is due
primarily to personnel, occupancy and equipment expense. The increase in
salaries and benefits is reflective of investment in our management team and
volume related increases in performance based incentive compensation. Partially
offsetting these increases were decreases in printing and supplies, charge card
processing, and lower operating losses.
Regional Banking contributed 46% and 27% of total revenues and total
operating earnings, respectively, in the second quarter of 2003, and represented
52% of total assets and 91% of total deposits at June 30, 2003.
DEALER SALES
Dealer Sales serves automotive dealerships within Huntington's primary
banking markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and
Tennessee. This segment finances the purchase of automobiles by customers of the
automotive dealerships, purchases automobiles from dealers and simultaneously
leases the automobile under long-term operating and direct financing leases,
finances the dealership's inventory of automobiles, and provides other banking
services to the automotive dealerships and their owners.
-------------------------------------------------------------------------------------------------------------------------
TABLE 16 - DEALER SALES
-------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 11,631 $ (3,496) $ 27,252 $ (11,575)
Provision for loan and lease losses 9,191 10,737 20,576 19,737
Non-interest income 153,266 179,807 311,676 360,758
Non-interest expense 124,513 153,005 257,731 313,028
-------------------------------------------------------------------------------------------------------------------------
Income before taxes 31,193 12,569 60,621 16,418
Income taxes 10,918 4,399 21,218 5,746
-------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 20,275 $ 8,170 $ 39,403 $ 10,672
=========================================================================================================================
Dealer Sales operating earnings were $20.3 million in the second quarter
2003, up from $8.2 million for the year-ago quarter. For the six months,
operating earnings was $39.4 million for 2003, up from $10.7 million for 2002.
Dealer Sales financial results are significantly impacted by changes made
in regard to accounting for automobile leases. As previously noted, leases
originated before May 2002 are accounted for as operating leases, and leases
originated afterwards accounted for as direct financing leases. Therefore, for
automobile leases originated before May 2002, the related financial results are
reported as non-interest income and non-interest expense with the cost of
funding these leases included in interest expense. Such non-interest income,
non-interest expense, and interest expense will continue to trend lower in
subsequent periods as this portfolio continues to run off. For leases originated
after April 2002, revenue is reported in interest income and a provision for
loan and lease losses is recorded in order to maintain an appropriate level of
reserve for loan and lease losses. As a result, net interest income and the
provision for loan and lease losses for the Dealer Sales line of business should
trend higher in future periods.
43
Net interest income was $11.6 million in the recent quarter, an increase of
$15.1 million from a loss of $3.5 million in the second quarter of 2002. This
increase reflected growth in average loan and direct financing lease balances
from $2.7 billion in 2002 to $4.1 billion in 2003. This change in average
balances was due primarily to direct financing leases, which accounted for $1.1
billion of the increase. The margin was also reduced by a $10.0 million charge
to interest expense associated with unwinding funding related to the loans sold
in the second quarter and $6.0 million related to loans sold in the first
quarter.
The provision for loan and lease losses of $9.2 million for the second
quarter 2003 decreased $1.5 million from $10.7 million for the same period last
year. Net charge-offs totaled $9.1 million for the recent three months, or an
annualized 0.73% of average loans and direct financing leases, compared to $8.7
million, or 1.03%, during the year-ago quarter. This improvement continued to
reflect stronger underwriting practices for automobile loan and lease
originations.
Total non-interest income declined $26.5 million to $153.3 million for the
second quarter 2003 from $179.8 for the same period last year. This reflected a
$43.0 million decline in operating lease income from the second quarter 2002
compared with the current year's second quarter, partially offset by a gain of
$13.5 million on the sale of $567 million of automobile loans in the second
quarter of 2003. Excluding operating lease income in the second quarter of 2003
and 2002 of $128.6 million and $171.6 million, respectively, as well as the
$13.5 million gain on sale of automobile loans in the 2003 second quarter,
noninterest income was up $3.0 million, or 36%.
A decline in operating lease expense of $28.8 million in a year-over-year
comparison for the second quarter drove non-interest expense down to $124.5
million for the second quarter 2003 from $153.0 million for the year ago
quarter. Excluding operating lease expense of $102.9 million in the 2003 second
quarter and $131.7 million in the year-ago quarter, non-interest expense was up
$0.3 million, or 1%.
Dealer Sales contributed 34% of total second quarter 2003 revenues, 22% of
total operating earnings in the second quarter of 2003, and represented 23% of
total assets at June 30, 2003.
PRIVATE FINANCIAL GROUP
The Private Financial Group provides products and services designed to meet
the needs of Huntington's higher wealth customers. Revenue is derived through
the sale of personal trust, asset management, investment advisory, brokerage,
insurance, and deposit and loan products and services. Income and related
expenses from the sale of brokerage and insurance products is shared with the
line of business that generated the sale or provided the customer referral.
-------------------------------------------------------------------------------------------------------------------------
TABLE 17 - PRIVATE FINANCIAL GROUP
-------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 9,794 $ 8,917 $ 19,312 $ 16,695
Provision for loan losses (458) 447 1,454 2,036
Non-interest income 27,847 28,634 55,057 55,376
Non-interest expense 25,886 25,116 52,502 50,672
-------------------------------------------------------------------------------------------------------------------------
Income before taxes 12,213 11,988 20,413 19,363
Income taxes 4,275 4,185 7,145 6,766
-------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 7,938 $ 7,803 $ 13,268 $ 12,597
=========================================================================================================================
Operating earnings in the second quarter 2003 were $7.9 million, compared
with $7.8 million for the second quarter 2002 as improvement in net interest
income and provision for loan losses were offset by lower non-interest income
(net of fee sharing to Regional Banking) and higher non-interest expense. On a
year-to-date basis, operating earnings was $13.3 million for 2003, up slightly
from $12.6 million in the same period of 2002.
44
Net interest income for the 2003 second quarter increased $0.9 million, or
10%, from the year-ago quarter as average loan balances increased 35% to $1.2
billion and average deposit balances increased 23% to $974 million. Most of the
loan growth occurred in personal credit lines and residential mortgage loans
largely due to the favorable mortgage rate environment and refinancing activity.
A majority of the deposit growth occurred in the personal management accounts,
which resulted from a combination of new business and a customer shift in sweep
options from the Huntington Funds money market funds to money market deposit
accounts. The significant balance growth more than offset margin compression
that was caused by a loan product mix shift to lower-yielding products and
deposit rates that did not decrease as much as market rates.
Provision for loan and lease losses for the recent three months decreased
$0.9 million from the year-ago quarter due to a combination of lower charge-offs
and reduced loan provision resulting from the impact of reduced non-performing
assets from the first quarter 2003. Net charge-offs were $0.4 million for the
second quarter 2003, or an annualized 0.15% of average total loans and leases,
compared with $1.1 million, or 0.51%, for the same period a year ago.
Non-interest income decreased $0.8 million, or 3%. However, excluding fee
income shared with Regional Banking of $3.5 million in the 2003 second quarter,
and $2.5 million in the year-ago quarter, non-interest income increased $0.2
million, or 1%, from the year-ago quarter. This increase reflected higher
insurance income and other income partially offset by a decrease in trust and
brokerage revenue. Insurance revenue increased $0.7 million, or 28%, mainly from
an increase in title insurance revenue that was reflective of increased mortgage
loan refinancing. Trust income decreased $0.7 million, or 4%, mainly due to a
market-related decline in average asset values in two product areas that are
mostly market-rate sensitive: personal trust and Huntington Funds. Brokerage
revenue decreased $0.4 million, or 4%, primarily from a decline in mutual fund
revenue that was also reflective of the more bearish market environment.
Although the sales volume from mutual fund trades actually increased from the
year-ago quarter, revenue decreased because much of the increased volume
resulted from several large multi-million dollar trades that generated 12b-1
fees and no upfront revenue. Revenue from annuities also declined due to
decreased sales, but that was offset by revenue from the sale of the new wealth
transfer insurance product. Additional fee sharing income of $1.0 million was
shared out to Regional Banking primarily due to a change in methodology that
equates to approximately 0.75% of total mutual fund and annuity sales generated
through the banking offices.
Non-interest expense for the 2003 second quarter increased $0.8 million, or
3%, from the year-ago quarter.
Private Financial Group contributed 8% of both total revenues and total
operating earnings in the second quarter of 2003, and represented 5% and 6% of
total assets and total deposits at June 30, 2003, respectively.
TREASURY / OTHER
The Treasury / Other segment includes assets, liabilities, equity, revenue,
and expense not directly assigned or allocated to one of the lines of business.
Since a match-funded transfer pricing system is used to allocate interest income
and interest expense to other business segments, Treasury / Other results
include the net impact of any over or under allocations arising from centralized
management of interest rate risk including the net impact of derivatives used to
hedge interest rate sensitivity. Furthermore, this segment's results include the
net impact of administering Huntington's investment securities portfolio as part
of overall liquidity management, as well as the impact of mezzanine lending
activity conducted through Huntington's Capital Markets Group. Additionally,
amortization expense of intangible assets and gains or losses not allocated to
other business segments are also a component.
-------------------------------------------------------------------------------------------------------------------------
TABLE 18 - TREASURY / OTHER
-------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------------------
Net interest income $ 32,889 $ 32,862 $ 65,356 $ 62,010
Provision for loan losses (65) 1,848 (59) 2,108
Non-interest income 24,002 13,293 39,710 28,689
Non-interest expense 9,060 11,835 27,315 27,781
-------------------------------------------------------------------------------------------------------------------------
Income before taxes 47,896 32,472 77,810 60,810
Income taxes 8,040 2,367 6,541 3,145
-------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 39,856 $ 30,105 $ 71,269 $ 57,665
=========================================================================================================================
45
Treasury / Other's operating earnings were $39.9 million and $71.3 million
in the second quarter and first half of 2003, respectively, up from last year's
respective operating earnings of $30.1 million and $57.7 million. Net interest
income for the recent three months was flat compared to the same period last
year despite transfer pricing charges made to the Dealer Sales line of business
for the early termination of funding related to the aforementioned June and
March 2003 sales of automobile loans.
Provision for loan and lease loss activity is related to the Capital
Markets Group, which provides mezzanine loans to customers. This particular
group manages certain loans, which require a level of ALLL that, in management's
judgment, is sufficient to cover losses inherent in the portfolio.
Non-interest income for 2003 second quarter was $24.0 million compared with
$13.3 million for the same period a year ago. Higher securities gains and income
from trading activities were the primary drivers for this increase. Non-interest
expense for the recent quarter was down $2.8 million from the second quarter
last year. This decline reflected higher allocated expenses to other lines of
business due to methodology changes.
Income tax expense for each of the other business segments is calculated at
a statutory 35% tax rate. However, Huntington's overall effective tax rate was
lower and, as a result, Treasury / Other reflected the reconciling items to the
statutory tax rate in its income taxes.
46
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures for the current period are found
beginning on page 36 of this report, which includes changes in market risk
exposures from disclosures presented in Huntington's Amendment No. 2 to its Form
10-K/A.
ITEM 4. CONTROLS AND PROCEDURES
Huntington's management, with the participation of its Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
Huntington's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based upon such evaluation, Huntington's Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, Huntington's disclosure controls and procedures are effective.
There have not been any changes in Huntington's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
Huntington's internal control over financial reporting.
PART II. OTHER INFORMATION
In accordance with the instructions to Part II, the other specified items
in this part have been omitted because they are not applicable or the
information has been previously reported.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Huntington Bancshares Incorporated held its annual meeting of
shareholders on April 24, 2003. At that meeting, shareholders approved
the following management proposals:
ABSTAIN/ BROKER
FOR AGAINST WITHHELD NONVOTES
--- ------- -------- --------
1. Election of directors
to serve as Class I
Directors until the year 2006
Annual Meeting of
Shareholders as follows:
Raymond J. Biggs 195,553,012 5,065,260
John B. Gerlach, Jr. 195,413,444 5,204,828
Thomas E. Hoaglin 195,520,935 5,097,337
Robert H. Schottenstein 195,227,521 5,390,750
2. Election of directors
to serve as Class II
Directors until the year 2004
Annual Meeting of
Shareholders as follows:
David P. Lauer 195,570,699 5,047,573
Kathleen H. Ransier 193,621,762 6,996,510
47
3. Election of directors
to serve as Class III
Directors until the year 2005
Annual Meeting of
Shareholders as follows:
Michael J. Endres 195,838,699 4,779,572
4. Proposal to increase the
number of shares of
Huntington common
Stock authorized for the
Deferred Compensation
Plan for Huntington
Bancshares Incorporated
Directors as follows: 179,719,653 17,238,672 3,659,947
5. Ratification of Ernst &
Young LLP to serve as
independent auditors for
the Corporation for the
year 2003 194,233,436 4,365,241 2,019,595
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. (i)(a). Articles of Restatement of Charter, Articles of Amendment to
Articles of Restatement of Charter, and Articles
Supplementary - previously filed as Exhibit 3(i) to Annual
Report on Form 10-K for the year ended December 31, 1993,
and incorporated herein by reference.
(i)(b). Articles of Amendment to Articles of Restatement of Charter
- previously filed as Exhibit 3(i)(c) to Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, and
incorporated herein by reference.
(ii). Amended and Restated Bylaws as of July 16, 2002 - previously
filed as Exhibit 3(ii) to Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002, and incorporated herein by
reference.
4. Instruments defining the Rights of Security Holders:
Reference is made to Articles Fifth, Eighth and Tenth of Articles of
Restatement of Charter, as amended and supplemented, previously filed
as Exhibit 3(i) to Annual Report on Form 10-K for the year ended
December 31, 1993 and Exhibit 3(i)(c) to Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, and incorporated herein by
reference. Also, reference is made to Rights Plan, dated February 22,
1990, previously filed as Exhibit 1 to Registration Statement on Form
8-A, and incorporated herein by reference and to Amendment No. 1 to
the Rights Agreement, dated as of August 16, 1995, previously filed as
Exhibit 4(b) to Form 8-K filed with the Securities and Exchange
Commission on August 28, 1995, and
48
incorporated herein by reference. Instruments defining the rights of
holders of long-term debt will be furnished to the Securities and
Exchange Commission upon request.
10. Material contracts:
(a)* Sixth Amendment to the Huntington Bancshares Incorporated
1990 Stock Option Plan, previously filed as Exhibit 10(a) to
the Quarterly Report on Form 10-Q for the quarter ended June
30, 2003, and incorporated herein by reference.
(b)* Fourth Amendment to the Amended and Restated Huntington
Bancshares Incorporated 1994 Stock Option Plan, previously
filed as Exhibit 10(b) to the Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003, and incorporated herein
by reference.
12. Earnings to Fixed Charges
31.1 Certification - Chief Executive Officer
31.2 Certification - Chief Financial Officer
32.1 Section 1350 Certification - Chief Executive Officer
32.2 Section 1350 Certification - Chief Financial Officer
(b) Reports on Form 8-K
1. A report on Form 8-K, dated April 16, 2003, was filed under
report item numbers 5, 7, and 9, concerning Huntington's results
of operations for the first quarter ended March 31, 2003.
2. A report on Form 8-K, dated May 20, 2003, was filed under report
item numbers 5, 7, and 9, regarding Huntington's filing of its
amended 2002 annual report on Form 10-K/A and its Form 10-Q for
the first quarter ended March 31, 2003.
3. A report on Form 8-K, dated June 26, 2003, was filed under report
item numbers 5 and 7, concerning the staff of the Securities and
Exchange Commission (SEC) conducting a formal investigation of
Huntington.
* Denotes management contract or compensatory plan or arrangement.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Huntington Bancshares Incorporated
----------------------------------
(Registrant)
Date: November 14, 2003 /s/ Thomas E. Hoaglin
------------------------------------------
Thomas E. Hoaglin
Chairman, Chief Executive Officer and
President
Date: November 14, 2003 /s/ Michael J. McMennamin
-----------------------------------------------------
Michael J. McMennamin
Vice Chairman, Chief Financial Officer and
Treasurer (Principal Financial Officer)
50