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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED MARCH 31, 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 228,628,958 shares of Registrant's without par value common stock
outstanding on April 30, 2003.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2003 and 2002 and December 31, 2002 3
Consolidated Statements of Income -
For the three months ended March 31, 2003 and 2002 4
Consolidated Statements of Changes in Shareholders' Equity -
For the three months ended March 31, 2003 and 2002 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 2003 and 2002 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 44
Item 4. Controls and Procedures 44
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 44-45
Signatures 46
Certifications 47-48
2
PART 1. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31, March 31,
(in thousands) 2003 2002 2002
- ------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks $ 865,724 $ 969,483 $ 654,312
Interest bearing deposits in banks 36,117 37,300 29,537
Trading account securities 22,715 241 4,040
Federal funds sold and securities
purchased under resale agreements 46,456 49,280 60,118
Loans held for sale 513,638 528,379 184,353
Securities available for sale - at fair value 3,680,260 3,403,369 2,869,826
Investment securities - fair value $7,075, $7,725,
and $11,400, respectively 6,908 7,546 11,264
Total loans and leases 18,956,724 18,645,189 16,291,064
Less allowance for loan and lease losses 337,017 336,648 340,851
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans and leases 18,619,707 18,308,541 15,950,213
- ------------------------------------------------------------------------------------------------------------------------------------
Operating lease assets 1,999,524 2,252,445 3,010,194
Bank owned life insurance 895,780 886,214 852,931
Premises and equipment 333,142 341,366 362,135
Goodwill and other intangible assets 218,363 218,567 209,942
Customers' acceptance liability 10,004 16,745 15,558
Accrued income and other assets 650,250 537,775 551,910
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $27,898,588 $27,557,251 $24,766,333
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $17,688,984 $17,499,326 $16,266,785
Short-term borrowings 2,149,128 2,541,016 1,803,250
Bank acceptances outstanding 10,004 16,745 15,558
Medium-term notes 2,473,006 2,045,123 1,969,398
Federal Home Loan Bank advances 1,253,000 1,013,000 17,000
Subordinated notes and other long-term debt 633,896 788,678 921,407
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
Accrued expenses and other liabilities 1,134,778 1,062,868 1,026,756
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 25,642,796 25,266,756 22,320,154
- ------------------------------------------------------------------------------------------------------------------------------------
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 228,641,557; 232,878,851,
and 249,991,932 shares, respectively 2,483,258 2,484,421 2,486,832
Less 29,224,698; 24,987,404 and 7,874,323
treasury shares, respectively (553,100) (475,399) (144,199)
Accumulated other comprehensive income 54,630 62,300 9,484
Retained earnings 271,004 219,173 94,062
- ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,255,792 2,290,495 2,446,179
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $27,898,588 $27,557,251 $24,766,333
====================================================================================================================================
See notes to unaudited consolidated financial statements.
3
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------------------
Interest and fee income
Loans and leases $282,956 $283,708
Securities 42,078 44,781
Other 6,957 6,712
- --------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 331,991 335,201
- --------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 80,817 109,967
Short-term borrowings 10,633 11,603
Medium-term notes 14,899 16,598
Federal Home Loan Bank advances 4,408 258
Subordinated notes and other long-term debt 8,605 12,344
- --------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 119,362 150,770
- --------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 212,629 184,431
Provision for loan and lease losses 36,844 39,010
- --------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 175,785 145,421
- --------------------------------------------------------------------------------------------------------------
Operating lease income 133,755 175,906
Service charges on deposit accounts 39,592 38,530
Brokerage and insurance income 15,497 17,605
Trust services 14,911 15,501
Mortgage banking 14,890 19,565
Bank Owned Life Insurance income 11,137 11,676
Other service charges and fees 10,338 10,632
Securities gains 1,198 457
Gain on sale of Florida operations -- 175,344
Other 26,237 13,884
- --------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 267,555 479,100
- --------------------------------------------------------------------------------------------------------------
Operating lease expense 111,588 140,785
Personnel costs 121,743 114,285
Net occupancy 16,815 17,239
Outside data processing and other services 16,579 18,439
Equipment 16,412 16,949
Marketing 6,626 7,003
Professional services 6,331 5,401
Telecommunications 5,701 6,018
Printing and supplies 3,681 3,837
Restructuring charges -- 56,184
Other 17,009 20,534
- --------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 322,485 406,674
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 120,855 217,847
Income taxes 32,023 124,706
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 88,832 $ 93,141
==============================================================================================================
PER COMMON SHARE
Net income
Basic $0.38 $0.37
Diluted $0.38 $0.37
Cash dividends declared $0.16 $0.16
AVERAGE COMMON SHARES
Basic 231,355 250,749
Diluted 232,805 251,953
See notes to unaudited consolidated financial statements.
4
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
COMMON STOCK TREASURY STOCK
---------------------- ---------------------
(in thousands) SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2002:
Balance, beginning of period 257,866 $2,490,724 (6,672) $(123,849)
Comprehensive Income:
Net income
Unrealized net holding losses on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income
Unrealized losses on derivative instruments
used in cash flow hedging relationships
Total comprehensive income
Cash dividends declared
Stock options exercised (3,892) 258 7,760
Treasury shares purchased (1,460) (28,110)
- --------------------------------------------------------------------------------------------------------
Balance, end of period (Unaudited) 257,866 $2,486,832 (7,874) $(144,199)
========================================================================================================
THREE MONTHS ENDED MARCH 31, 2003:
BALANCE, BEGINNING OF PERIOD 257,866 $2,484,421 (24,987) $(475,399)
COMPREHENSIVE INCOME:
NET INCOME
UNREALIZED NET HOLDING LOSSES ON SECURITIES
AVAILABLE FOR SALE ARISING DURING THE PERIOD,
NET OF RECLASSIFICATION ADJUSTMENT FOR NET
GAINS INCLUDED IN NET INCOME
UNREALIZED LOSSES ON DERIVATIVE INSTRUMENTS
USED IN CASH FLOW HEDGING RELATIONSHIPS
TOTAL COMPREHENSIVE INCOME
CASH DIVIDENDS DECLARED
STOCK OPTIONS EXERCISED (1,163) 71 1,308
TREASURY SHARES PURCHASED (4,300) (79,119)
OTHER (9) 110
- --------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD (UNAUDITED) 257,866 $2,483,258 (29,225) $(553,100)
========================================================================================================
- -----------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED
(in thousands) INCOME (LOSS) EARNINGS TOTAL
- -----------------------------------------------------------------------------------------------
Three Months Ended March 31, 2002:
Balance, beginning of period $25,488 $ 40,904 $2,433,267
Comprehensive Income:
Net income 93,141 93,141
Unrealized net holding losses on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income (14,800) (14,800)
Unrealized losses on derivative instruments
used in cash flow hedging relationships (1,204) (1,204)
----------
Total comprehensive income 77,137
----------
Cash dividends declared (39,983) (39,983)
Stock options exercised 3,868
Treasury shares purchased (28,110)
- -----------------------------------------------------------------------------------------------
Balance, end of period (Unaudited) $ 9,484 $ 94,062 $2,446,179
===============================================================================================
THREE MONTHS ENDED MARCH 31, 2003:
BALANCE, BEGINNING OF PERIOD $62,300 $219,173 $2,290,495
COMPREHENSIVE INCOME:
NET INCOME 88,832 88,832
UNREALIZED NET HOLDING LOSSES ON SECURITIES
AVAILABLE FOR SALE ARISING DURING THE PERIOD,
NET OF RECLASSIFICATION ADJUSTMENT FOR NET
GAINS INCLUDED IN NET INCOME (5,798) (5,798)
UNREALIZED LOSSES ON DERIVATIVE INSTRUMENTS
USED IN CASH FLOW HEDGING RELATIONSHIPS (1,872) (1,872)
----------
TOTAL COMPREHENSIVE INCOME 81,162
----------
CASH DIVIDENDS DECLARED (37,001) (37,001)
STOCK OPTIONS EXERCISED 145
TREASURY SHARES PURCHASED (79,119)
OTHER 110
- -----------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD (UNAUDITED) $54,630 $271,004 $2,255,792
===============================================================================================
See notes to unaudited consolidated financial statements.
5
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002
- ------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net Income $ 88,832 $ 93,141
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan and lease losses 36,844 39,010
Depreciation on operating lease assets 98,101 123,984
Other depreciation and amortization 21,671 17,613
Deferred income tax expense 25,477 8,521
(Increase) decrease in trading account securities (22,474) 9,352
Decrease in mortgages held for sale 14,741 445,033
Gains on sales of securities available for sale (1,192) (457)
Gains on sales/securitizations of loans (10,814) (1,395)
Gain on sale of Florida banking and insurance operations --- (175,344)
Restructuring charges --- 56,184
Other, net (102,777) 17,237
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 148,409 632,879
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Decrease (increase) in interest bearing deposits in banks 1,183 (8,332)
Proceeds from:
Maturities and calls of investment securities 640 1,056
Maturities and calls of securities available for sale 608,826 238,433
Sales of securities available for sale 218,001 226,295
Purchases of securities available for sale (995,909) (497,921)
Proceeds from sales/securitizations of loans 680,564 110,128
Net loan and lease originations, excluding sales (1,145,302) (664,341)
Net decrease (increase) in operating lease assets 154,820 (61,746)
Proceeds from sale of premises and equipment 3,669 13,251
Purchases of premises and equipment (10,198) (21,123)
Proceeds from sales of other real estate 1,924 2,412
Net cash paid related to sale of Florida banking and insurance operations --- (1,289,917)
- ------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (481,782) (1,951,805)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in total deposits 205,694 853,834
Decrease in short-term borrowings (391,888) (152,676)
Proceeds from issuance of medium-term notes 635,000 675,000
Payment of medium-term notes (205,000) (500,000)
Proceeds from Federal Home Loan Bank advances 250,000 ---
Maturity of Federal Home Loan Bank advances (10,000) ---
Maturity of long-term debt (150,000) ---
Dividends paid on common stock (28,042) (40,201)
Repurchases of common stock (79,119) (28,110)
Net proceeds from issuance of common stock 145 3,868
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 226,790 811,715
- ------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (106,583) (507,211)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,018,763 1,221,641
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 912,180 $ 714,430
============================================================================================================
Supplemental disclosures:
Income taxes paid $ 42,865 $ 60
Interest paid 122,174 163,719
Non-cash activities
Mortgage loans securitized 108,917 ---
Common stock dividends accrued not paid 37,001 39,983
See notes to unaudited consolidated financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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 amended 2002 Annual Report on Form 10-K/A
(2002 Annual Report), which include descriptions of significant accounting
policies, should be read in conjunction with these interim financial statements.
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. 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 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, which is the method currently used by Huntington.
In January 2003, the FASB issued Interpretation No. 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.
Huntington is reviewing the implications of Interpretation No. 46 and is
considering the adoption methods permitted. Management believes that the most
significant impact of adoption will be the consolidation of one of the
securitization trusts formed in 2000. The consolidation of that securitization
trust will involve the recognition of the trust's net assets, which, at March
31, 2003, included $1,014 million of indirect automobile loans, $110 million of
cash, and
7
$1,000 million of secured debt obligations with an interest rate based on
commercial paper rates. Adoption will also eliminate the retained interest in
the securitization trust and its servicing asset related to the loans in the
trust, with carrying values at March 31, 2003 of $154 million and $12 million,
respectively. The impact to Huntington's equity and results of operations will
depend on the method of transition adopted under this new interpretation.
Huntington will adopt this new standard no later than the end of the third
quarter of 2003.
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 Interpretation No. 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.
NOTE 3 - RESTATEMENT OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On May 20, 2003, Huntington filed an amended 2002 Annual Report on Form
10-K/A that reflected the restatement of its prior period financial results for
a reclassification of $2.3 billion of automobile leases at December 31, 2002
from the direct financing lease method to the operating lease method of
accounting. The remaining $0.9 billion of automobile leases, as well as all
future originations, are accounted for using the direct financing lease
methodology. The financial statements, comments, and discussion contained in
this report and as described below, reflect the impact of this reclassification
and restatement.
The appropriate classification of automobile leases as operating leases or
direct financing leases under Statement of Financial Accounting Standards No.
13, Accounting for Leases, can be impacted by residual value insurance coverage.
Since October 2000, Huntington has had residual value insurance coverage on its
entire automobile lease portfolio to protect the company from the risk of loss
resulting from declines in used car prices. Such losses arise if the market
value of the automobile at the end of the lease term is less than the residual
value embedded in the original lease contract. Management believes these
policies effectively protect the company from the risk of declining used car
prices. In April 2003, management determined that, due to provisions in certain
of its residual value insurance policies, the leases covered by these policies
would not qualify as direct financing leases.
For leases originated prior to May 2002, the residual value insurance
policies contain aggregate loss caps. The residuals insured under these policies
are not considered guaranteed, and, accordingly, the related leases fail to
qualify as direct financing leases under Statement No. 13. As a result, leases
originated prior to May 2002 have been reclassified as operating leases for all
periods presented. As of December 31, 2002, $2.3 billion of such leases, net of
accumulated depreciation, are reflected in the Consolidated Balance Sheets as
Operating lease assets. All leases originated since April 2002 are covered under
a new residual value insurance policy (the "New Policy") which insures the full
residual value of each vehicle and includes no aggregate loss cap. Leases with
residual gains are netted with leases with residual losses when claims are
settled. The netting provision of the New Policy precluded Huntington from
determining the amount of the guaranteed residual of any individual leased asset
within the portfolio at lease inception. Thus, the related leases failed to
qualify as direct financing leases. Huntington has amended the New Policy,
retroactive to April 2002, by adding an endorsement that adds a level of
insurance sufficient to meet the criteria as a residual value guarantee pursuant
to Statement No. 13, on an individual lease-by-lease basis, with no netting
provisions. In addition, Huntington continues to maintain insurance coverage
that insures the full value of the leased residuals. Accordingly, and in
reliance on guidance furnished by the Securities and Exchange Commission in its
announcement at the Financial Accounting Standards Board Emerging Issues Task
Force meeting on May 15, 2003, all leases covered under the New Policy, as
amended, are now appropriately classified as direct financing leases in the
accompanying financial statements. As of March 31, 2003, $1.2 billion of such
leases were included in loans and leases in the Consolidated Balance Sheets. It
is management's intention to insure the residuals associated with future
originations under the New Policy, as amended, and to classify such new
originations as direct financing leases.
The impact of this restatement also affected the Consolidated Income
Statements. Under the direct financing lease accounting method, interest income
is recognized on leases on a "level-yield" or interest method that ascribes a
portion of each lease payment to interest income, resulting in a constant rate
of interest over the life of the lease. The remaining
8
portion of each payment amortizes the net investment in the lease such that at
the end of the lease term, the net investment equals the residual value as
determined at the inception of the lease. Under operating lease accounting,
lease payments are recorded as rental income, a component of Operating lease
income in the Non-interest income section of the Consolidated Income Statements.
Depreciation expense is recorded on a straight-line basis over the term of the
lease from the cost of the automobile at the inception of the lease to the
estimated residual value at the end of the lease term. Depreciation expense is
included in Operating lease expense in the Non-interest expense section of the
Consolidated Income Statement. Depreciation expense is adjusted prospectively at
any time during the lease term when the estimated market value of the automobile
at the end of the lease term changes. Upon disposition, a gain, reflected in
Non-interest income, or a loss, reflected in Non-interest expense, is recorded
for any difference between the net book value of the lease and the proceeds from
the disposition of the automobile.
Over the term of the lease, the cash flows, the timing of the cash flows,
and total income recognized are identical under either accounting method. One
significant difference between the two methodologies is the timing of income
recognition. Under operating lease accounting, less income is recognized in the
first half of the lease and more income is recognized in the second half than
under direct financing lease accounting.
Another significant difference between the direct financing lease method
and the operating lease method of accounting is the recognition of credit loss
expense. Credit losses occur when a lease is terminated early because the lessee
fails to make the required lease payments. These credit-generated terminations
result in Huntington taking possession of the automobile earlier than expected.
When this occurs, the market value of the automobile may be less than
Huntington's book value, resulting in a loss upon sale or write down to market
value while the vehicle is pending sale. Under the direct financing lease
accounting method, such losses are charged against an allowance for loan and
lease losses that is established at the inception of the lease and is adjusted
periodically as necessary through provision expense. Under operating lease
accounting, the lease is not treated like a loan, but as a depreciable
non-interest earning asset. Therefore, no allowance for loan and lease losses is
established. As such, early termination losses are recognized as a component of
Operating lease expense in the Non-interest expense section of the Consolidated
Income Statements.
The fact that part of the auto lease portfolio is accounted for as
operating leases, with the remainder, including all future production, being
accounted for as direct financing leases, will impact the comparability of
Huntington's financial statements between reporting periods. As leases
originated before May 2002 and accounted for as operating leases run off, and as
new originations are accounted for as direct financing leases, the level of
operating lease income and operating lease expense will decline over future
reporting periods while the level of interest income associated with direct
financing leases will increase. Additionally, management will increase the
provision for loan and lease losses, as appropriate, to provide the necessary
level of reserves for new direct financing lease originations. Balance sheet
classifications will also be impacted as the run off of the operating leases
originated before the New Policy, as amended, reduces non-interest earning
assets while the new direct financing lease originations covered under the New
Policy, as amended, increase loans and leases.
The change to operating lease accounting did not impact 2003 first quarter
earnings per share. The change impacted negatively the 2002 first quarter
earnings by $0.02 per share. The cumulative effect of the restatement on total
equity as of December 31, 2002, was a reduction of $13.3 million. The following
table reflects the previously reported amounts and the restated results by
financial statement line in Huntington's balance sheets at December 31, 2002 and
March 31, 2002, and income statement for the three months ended March 31, 2002:
9
- ----------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002 MARCH 31, 2002
--------------------------- --------------------------
PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED
- ----------------------------------------------------------------------------------------------------------
BALANCE SHEET:
Total loans and leases $20,955,925 $18,645,189 $19,338,947 $16,291,064
Allowance for loan and lease losses 368,395 336,648 386,053 340,851
Net loans and leases 20,587,530 18,308,541 18,952,894 15,950,213
Operating lease assets --- 2,252,445 --- 3,010,194
Accrued income and other assets 532,690 537,775 539,044 551,910
Total Assets 27,578,710 27,557,251 24,745,954 24,766,333
Accrued expenses and other liabilities 1,070,991 1,062,868 1,018,618 1,026,756
Total liabilities 25,274,879 25,266,756 22,312,016 22,320,154
Retained earnings 232,509 219,172 81,821 94,062
Total shareholders' equity 2,303,831 2,290,495 2,433,938 2,446,179
Total Liabilities and Shareholders' Equity $27,578,710 $27,557,251 $24,745,954 $24,766,333
- ---------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2002 PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED
- ---------------------------------------------------------------------------------------
INCOME STATEMENT:
Interest and fee income $393,595 $335,201
Net interest income 242,825 184,431
Provision for loan and lease losses 55,781 39,010
Net interest income after provision for loan and lease losses 187,044 145,421
Operating lease income --- 175,906
Other non-interest income 12,118 13,884
Total non-interest income 301,428 479,100
Operating lease expense --- 140,785
Other non-interest expense 18,215 20,534
Total non-interest expense 263,570 406,674
Income before income taxes 224,902 217,847
Income taxes 127,175 124,706
Net income $ 97,727 $ 93,141
Earnings per share:
Basic $ 0.39 $ 0.37
Diluted $ 0.39 $ 0.37
OTHER INFORMATION -
Net charge-offs $ 55,781 $ 42,972
10
NOTE 4 - SECURITIES AVAILABLE FOR SALE
Securities available for sale at March 31, 2003 and December 31, 2002 were
as follows:
- ----------------------------------------------------------------------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
- ----------------------------------------------------------------------------------------------------
Amortized Amortized
(in thousands of dollars) Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------------------
U.S. Treasury
Under 1 year $ 325 $ 333 $ --- $ ---
1-5 years 12,584 13,150 13,434 14,066
6-10 years 44,304 45,494 4,704 5,367
Over 10 years 412 477 412 479
- ----------------------------------------------------------------------------------------------------
Total 57,625 59,454 18,550 19,912
- ----------------------------------------------------------------------------------------------------
Federal agencies
Mortgage-backed securities
1-5 years 18,005 18,560 34,196 35,166
6-10 years 312,462 319,484 264,219 270,779
Over 10 years 910,621 926,760 873,552 901,417
- ----------------------------------------------------------------------------------------------------
Total 1,241,088 1,264,804 1,171,967 1,207,362
- ----------------------------------------------------------------------------------------------------
Other agencies
Under 1 year 102,118 105,140 34,923 35,966
1-5 years 438,875 460,112 758,032 783,533
6-10 years 62,530 63,630 95,617 97,095
Over 10 years 804,591 812,903 477,185 483,816
- ----------------------------------------------------------------------------------------------------
Total 1,408,114 1,441,785 1,365,757 1,400,410
- ----------------------------------------------------------------------------------------------------
Total U.S. Treasury and Federal Agencies 2,706,827 2,766,043 2,556,274 2,627,684
- ----------------------------------------------------------------------------------------------------
Other
Under 1 year 6,668 6,706 7,133 7,183
1-5 years 61,932 62,745 62,939 63,886
6-10 years 58,471 59,922 49,581 51,046
Over 10 years 574,979 575,789 451,108 449,958
Retained interest in securitizations 147,821 163,310 146,160 159,978
Marketable equity securities 44,679 45,745 42,846 43,634
- ----------------------------------------------------------------------------------------------------
Total 894,550 914,217 759,767 775,685
- ----------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $3,601,377 $3,680,260 $3,316,041 $3,403,369
====================================================================================================
NOTE 5 - OPERATING LEASE ASSETS
Operating lease assets at March 31, 2003 and 2002 and December 31, 2002,
were as follows:
- --------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
(in thousands of dollars) 2003 2002 2002
- --------------------------------------------------------------------------------------------
Cost of automobiles under operating leases $ 3,007,188 $ 3,260,897 $ 3,967,280
Accumulated depreciation (1,007,664) (1,008,452) (957,086)
- --------------------------------------------------------------------------------------------
OPERATING LEASE ASSETS, NET $ 1,999,524 $ 2,252,445 $ 3,010,194
============================================================================================
Depreciation expense related to leased automobiles was $98.1 million and
$124.0 million for the three months ended March 31, 2003 and 2002, respectively.
11
NOTE 6 - COMPREHENSIVE INCOME
The components of Huntington's Other Comprehensive Income are the
unrealized gains (losses) on securities available for sale, unrealized gains
(losses) on derivative instruments used in cash flow hedging relationships, and
minimum pension liability. The related before and after tax amounts in each of
the three months ended March 31 were as follows:
- ---------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
- ---------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002
- ---------------------------------------------------------------------------------------
Minimum pension liability:
Unrealized net loss $ --- $ ---
Related tax benefit --- ---
- ---------------------------------------------------------------------------------------
Net --- ---
- ---------------------------------------------------------------------------------------
Unrealized holding losses on securities available
for sale arising during the period:
Unrealized net losses (7,722) (22,312)
Related tax benefit 2,703 7,809
- ---------------------------------------------------------------------------------------
Net (5,019) (14,503)
- ---------------------------------------------------------------------------------------
Unrealized holding losses on derivatives used in cash flow
hedging relationships arising during the period:
Unrealized net losses (2,880) (1,852)
Related tax benefit 1,008 648
- ---------------------------------------------------------------------------------------
Net (1,872) (1,204)
- ---------------------------------------------------------------------------------------
Less: Reclassification adjustment for net gains from sales
of securities available for sale realized during the period:
Realized net gains 1,198 457
Related tax expense (419) (160)
- ---------------------------------------------------------------------------------------
Net 779 297
- ---------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME $(7,670) $(16,004)
=======================================================================================
Activity in Accumulated Other Comprehensive Income for the three months
ended March 31, 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 --- (14,800) (1,204) (16,004)
- ------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 $ --- $ 14,669 $(5,185) $ 9,484
======================================================================================================
Balance, December 31, 2002 $(195) $ 56,856 $ 5,639 $ 62,300
Current-period change --- (5,798) (1,872) (7,670)
- ------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 $(195) $ 51,058 $ 3,767 $ 54,630
======================================================================================================
12
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 months ended March 31 is as
follows:
- ---------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
- ---------------------------------------------------------------------
(in thousands, except per share amounts) 2003 2002
- ---------------------------------------------------------------------
NET INCOME $ 88,832 $ 93,141
=====================================================================
Average common shares outstanding 231,355 250,749
Dilutive effect of common stock equivalents 1,450 1,204
- ---------------------------------------------------------------------
DILUTED AVERAGE COMMON SHARES OUTSTANDING 232,805 251,953
=====================================================================
EARNINGS PER SHARE
Basic $ 0.38 $ 0.37
Diluted $ 0.38 $ 0.37
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 7.6 million and 5.6 million stock options were outstanding at
March 31, 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 $22.21 per share and $23.34 per share at the end of the
same respective periods.
At March 31, 2003, a total of 530,826 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.
NOTE 8 - 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.
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 2003.
13
The following pro forma disclosures for net income and earnings per diluted
common share is 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 each of the
quarters presented:
- --------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING AT PERIOD END (IN THOUSANDS) 17,637 13,928
ASSUMPTIONS
Risk-free interest rate 4.15% 4.13%
Expected dividend yield 3.34% 3.34%
Expected volatility of Huntington's common stock 33.8% 33.8%
PRO FORMA RESULTS (IN MILLIONS OF DOLLARS)
Net income, as reported $ 88.8 $ 93.1
Less pro forma expense, net of tax, related to options granted 3.0 3.7
- --------------------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 85.8 $ 89.4
============================================================================================
NET INCOME PER COMMON SHARE:
Basic, as reported $ 0.38 $ 0.37
Basic, pro forma 0.37 0.36
Diluted, as reported 0.38 0.37
Diluted, pro forma 0.37 0.35
NOTE 9 - 2002 RESTRUCTURING CHARGES
During the first quarter of 2002, Huntington recorded pre-tax restructuring
charges of $56.2 million related to the implementation of strategic initiatives
announced July 2001. These charges included expenses of $32.7 million related to
the sale of the Florida operations, $8.0 million for asset impairment, $4.3
million for the exit of certain e-commerce activities, $1.8 million related to
facilities, and $9.4 million for other costs. These charges amounted to $36.5
million, or $0.14 per share, on an after-tax basis and are reflected in
Non-interest expense in the accompanying unaudited consolidated financial
statements.
Huntington has a remaining reserve for restructuring of $10.6 million at
March 31, 2003. 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.
14
NOTE 10 - 2002 SALE OF FLORIDA BANKING AND INSURANCE OPERATIONS
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 $175.3 million and is reflected in Non-interest
income. The after-tax gain was $56.7 million, or $0.23 per share. Income taxes
related to this transaction were $118.6 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.
On July 2, 2002, Huntington also completed the sale of its Florida
insurance operations, The J. Rolfe Davis Insurance Agency, Inc., to members of
its management. The sale had no material gain or impact to net income, though it
affected selected Non-interest income and Non-interest expense categories.
NOTE 11 - 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 exclude the 2002 gain from the sale of the Florida operations, the
historical Florida banking and insurance operating results, and the 2002
restructuring charges. See Note 9 to the unaudited consolidated financial
statements for further discussions regarding the 2002 restructuring charges and
Note 10 regarding the 2002 sale of the Florida banking and insurance operations.
The financial information that follows is inclusive of the above adjustments in
2002 on an after-tax basis to reflect the reconciliation to reported net income.
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, international trade, and cash management.
DEALER SALES: 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.
PRIVATE FINANCIAL GROUP: 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.
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
15
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. 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 first quarter 2003 and 2002 operating results by line of business.
- -----------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS Regional Dealer Treasury/ Huntington
(in thousands of dollars) Banking Sales PFG Other Consolidated
- -----------------------------------------------------------------------------------------------------------------------
2003
Net interest income $148,542 $ 23,067 $ 9,516 $ 31,504 $212,629
Provision for loan and lease losses 23,542 11,389 1,913 --- 36,844
Non-Interest income 75,361 149,655 27,210 15,329 267,555
Non-Interest expense 144,989 135,279 26,616 15,601 322,485
Income taxes 19,381 9,119 2,869 654 32,023
- -----------------------------------------------------------------------------------------------------------------------
Operating earnings/Net income, as reported $ 35,991 $ 16,935 $ 5,328 $ 30,578 $ 88,832
=======================================================================================================================
2002
Net interest income $159,113 $ (5,340) $ 7,818 $ 22,840 $184,431
Provision for loan and lease losses 27,813 9,610 1,587 --- 39,010
Non-Interest income 79,150 180,218 31,112 188,620 479,100
Non-Interest expense 149,863 161,236 25,010 70,565 406,674
Income taxes 21,297 1,411 4,316 97,682 124,706
- -----------------------------------------------------------------------------------------------------------------------
Net income, as reported 39,290 2,621 8,017 43,213 93,141
- -----------------------------------------------------------------------------------------------------------------------
Florida operating results, net of tax 762 794 320 (3,933) (2,057)
Gain on sale of Florida operations, net of tax --- --- --- 56,790 56,790
Restructuring charges, net of tax --- --- --- 36,519 36,519
- -----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 38,528 $ 1,827 $ 7,697 $ 26,875 $ 74,927
=======================================================================================================================
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS AT MARCH 31, TOTAL DEPOSITS AT MARCH 31,
PERIOD-END BALANCE SHEET DATA --------------------------- ---------------------------
(in millions of dollars) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------
Regional Banking $14,268 $12,987 $15,403 $15,036
Dealer Sales 6,948 6,553 67 51
PFG 1,267 964 959 727
Treasury / Other 5,416 4,262 1,260 453
- ----------------------------------------------------------------------------------------------
Total $27,899 $24,766 $17,689 $16,267
==============================================================================================
16
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 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 amended 2002 Annual Report on Form 10-K/A (2002 Annual Report) 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.
RESTATEMENT OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On May 20, 2003, Huntington filed an amended 2002 Annual Report on Form
10-K/A that reflected the restatement of its prior period financial results for
a reclassification of $2.3 billion of automobile leases at December 31, 2002
from the direct financing lease method to the operating lease method of
accounting. The remaining $0.9 billion of automobile leases, as well as all
future originations, are accounted for using the direct financing lease
methodology. The financial statements, comments, and discussion contained in
this report and as described below, reflect the impact of this reclassification
and restatement.
The appropriate classification of automobile leases as operating leases or
direct financing leases under Statement of Financial Accounting Standards No.
13, Accounting for Leases, can be impacted by residual value insurance coverage.
Since October 2000, Huntington has had residual value insurance coverage on its
entire automobile lease portfolio to protect the company from the risk of loss
resulting from declines in used car prices. Such losses arise if the market
value of the automobile at the end of the lease term is less than the residual
value embedded in the original lease contract. Management believes these
policies effectively protect the company from the risk of declining used car
prices. In April 2003, management determined that, due to provisions in certain
of its residual value insurance policies, the leases covered by these policies
would not qualify as direct financing leases.
For leases originated prior to May 2002, the residual value insurance
policies contain aggregate loss caps. The residuals insured under these policies
are not considered guaranteed, and, accordingly, the related leases fail to
qualify as direct financing leases under Statement No. 13. As a result, leases
originated prior to May 2002 have been reclassified as operating leases for all
periods presented. As of December 31, 2002, $2.3 billion of such leases, net of
accumulated depreciation, are reflected in the Consolidated Balance Sheets as
operating lease assets. All leases originated since April 2002 are covered under
a new residual value insurance policy (the "New Policy") which insures the full
residual value of each vehicle and includes no aggregate loss cap. Leases with
residual gains are netted with leases with residual losses when claims are
settled. The netting provision of the New Policy precluded Huntington from
determining the amount of the guaranteed residual of any individual leased asset
within the portfolio at lease inception. Thus, the related leases failed to
qualify as direct financing leases. Huntington has amended the New Policy,
retroactive to April 2002, by adding an endorsement that adds a level of
insurance sufficient to meet the criteria as a residual value guarantee pursuant
to Statement No. 13, on an individual lease-by-lease basis, with no netting
provisions. In addition, Huntington continues to maintain
17
insurance coverage that insures the full value of the leased residuals.
Accordingly, and in reliance on guidance furnished by the Staff of the
Securities and Exchange Commission in its announcement at the Financial
Accounting Standards Board Emerging Issues Task Force meeting on May 15, 2003,
all leases covered under the New Policy, as amended, are now appropriately
classified as direct financing leases in the accompanying financial statements.
As of March 31, 2003, $1.2 billion of such leases were included in loans and
leases in the Consolidated Balance Sheets. It is management's intention to
insure the residuals associated with future originations under the New Policy,
as amended, and to classify such new originations as direct financing leases.
The impact of this restatement also affected the Consolidated Income
Statements. Under the direct financing lease accounting method, interest income
is recognized on leases on a "level-yield" or interest method that ascribes a
portion of each lease payment to interest income, resulting in a constant rate
of interest over the life of the lease. The remaining portion of each payment
amortizes the net investment in the lease such that at the end of the lease
term, the net investment equals the residual value as determined at the
inception of the lease. Under operating lease accounting, lease payments are
recorded as rental income, a component of Operating lease income in the
Non-interest income section of the Consolidated Income Statements. Depreciation
expense is recorded on a straight-line basis over the term of the lease from the
cost of the automobile at the inception of the lease to the estimated residual
value at the end of the lease term. Depreciation expense is included in
Operating lease expense in the Non-interest expense section of the Consolidated
Income Statement. Depreciation expense is adjusted prospectively at any time
during the lease term when the estimated market value of the automobile at the
end of the lease term changes. Upon disposition, a gain, reflected in
Non-interest income, or a loss, reflected in Non-interest expense, is recorded
for any difference between the net book value of the lease and the proceeds from
the disposition of the automobile.
Over the term of the lease, the cash flows, the timing of the cash flows,
and total income recognized are identical under either accounting method. One
significant difference between the two methodologies is the timing of income
recognition. Under operating lease accounting, less income is recognized in the
first half of the lease and more income is recognized in the second half than
under direct financing lease accounting.
Another significant difference between the direct financing lease method
and the operating lease method of accounting is the recognition of credit loss
expense. Credit losses occur when a lease is terminated early because the lessee
fails to make the required lease payments. These credit-generated terminations
result in Huntington taking possession of the automobile earlier than expected.
When this occurs, the market value of the automobile may be less than
Huntington's book value, resulting in a loss upon sale or write down to market
value while the vehicle is pending sale. Under the direct financing lease
accounting method, such losses are charged against an allowance for loan and
lease losses that is established at the inception of the lease and is adjusted
periodically as necessary through provision expense. Under operating lease
accounting, the lease is not treated like a loan, but as a depreciable
non-interest earning asset. Therefore, no allowance for loan and lease losses is
established. As such, early termination losses are recognized as a component of
Operating lease expense in the Non-interest expense section of the Consolidated
Income Statements.
The fact that part of the auto lease portfolio is accounted for as
operating leases, with the remainder, including all future production, being
accounted for as direct financing leases, will impact the comparability of
Huntington's financial statements between reporting periods. As leases
originated before April 2002, accounted for as operating leases run off, and as
new originations are accounted for as direct financing leases, the level of
operating lease income and operating lease expense will decline over future
reporting periods while the level of interest income associated with direct
financing leases will increase. Additionally, management will increase the
provision for loan and lease losses as appropriate over time to provide the
necessary level of reserves for new direct financing lease originations. Balance
sheet classifications will also be impacted as the run off of the operating
leases originated before the New Policy, as amended, reduces non-interest
earning assets while the new direct financing lease originations covered under
the New Policy, as amended, increase loans and leases.
As a result, Huntington restated its consolidated financial statements for
the interim periods in 2002 and 2001, and each of the years 1997 through 2000,
and filed an amended 2002 Annual Report with the SEC on May 20, 2003.
The results of the 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 Form 10-Q. Note 3 in the notes to the unaudited consolidated
financial statements contains additional information regarding the restatement.
CRITICAL ACCOUNTING POLICIES
Note 1 to the consolidated financial statements included in Huntington's
amended 2002 Annual Report lists significant accounting policies used in the
development and presentation of its financial statements. This discussion and
analysis, the significant accounting policies, and other financial statement
disclosures identify and address key variables
18
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 amended 2002 Annual Report.
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 March 31, 2003. In
the securitization transactions, indirect automobile loans that Huntington
originated were sold to these trusts. Under current GAAP, these trusts are not
required to be consolidated in Huntington's financial statements. As such, the
loans and the debt within the trusts are not included on Huntington's balance
sheets at March 31. See Note 10 to the consolidated financial statements in
Huntington's amended 2002 Annual Report for more information regarding
securitized loans.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 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.
Huntington is reviewing the implications of Interpretation No. 46 and is
considering the adoption methods permitted. Management believes that the most
significant impact of adoption will be the consolidation of one of the
securitization trusts formed in 2000. The consolidation of that securitization
trust will involve the recognition of the trust's net assets, which, at March
31, 2003, included $1,014 million of indirect automobile loans, $110 million of
cash, and $1,000 million of secured debt obligations with an interest rate based
on commercial paper rates. Adoption will also eliminate the retained interest in
that securitization trust and its servicing asset related to the loans in the
trust, with carrying values at March 31, 2003 of $154 million and $12 million,
respectively. The impact to Huntington's equity and results of operations will
depend on the method of transition adopted under this new interpretation.
Huntington will adopt this new standard no later than the end of the third
quarter of 2003.
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
19
Various directors and executive officers of Huntington, and entities
affiliated with those directors and executive officers, are customers of
Huntington's subsidiaries. All 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 9 to
Huntington's amended 2002 Annual Report. 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
Huntington's first quarter 2003 earnings were $88.8 million, or $0.38 per
common share, down $4.3 million, or 5%, from earnings of $93.1 million, or $0.37
per common share, in the 2002 first quarter, and up $14.4 million, or 19%, from
earnings of $74.4 million, or $0.32 per common share, in the 2002 fourth
quarter.
The decrease in earnings compared to the year-ago quarter was a result of
the sale of Huntington's Florida banking and insurance operations and related
charges which occurred in the 2002 first quarter, as discussed in more detail
below. Excluding the impact of these items, Huntington's first quarter 2003
earnings were up $13.9 million ($19.0 million pre-tax), or 19%, from earnings in
the first quarter 2002 of $74.9 million ($101.9 million pre-tax), or $0.30 per
common share. The primary drivers of this $19.0 million increase in pre-tax
earnings from the year-ago quarter were a $13.3 million, or 3%, increase in
fully taxable equivalent revenue and a $9.7 million, or 3%, decrease in
non-interest expense, partially offset by a $3.0 million, or 9%, increase in the
provision for loan and lease losses.
In July 2001, Huntington announced significant strategic initiatives,
primarily the plan to sell its Florida banking and insurance operations, the
implementation of which had a material impact on Huntington's performance
results. The sale of the Florida banking operations, completed on February 15,
2002, included 143 banking offices and 456 ATMs with approximately $2.8 billion
in loans and leases and other tangible assets and $4.8 billion in deposits and
other liabilities. The 2002 first quarter's results included a $175.3 million
pre-tax gain ($56.7 million after tax, or $0.23 per common share) from the sale
of the Florida banking operations, a $4.1 million pre-tax loss ($2.7 million
after tax loss, or $0.01 loss per common share) from the Florida banking
operations through the mid-February sale, as well as $56.2 million pre-tax
($36.5 million after tax, or $0.14 per common share) in restructuring charges.
The sale of the J. Rolfe Davis Insurance Agency, Inc., Huntington's
Florida-based insurance operations, was completed on July 2, 2002. The year-ago
quarter included the following items associated with these businesses: fully
taxable equivalent net interest income of $9.7 million pre-tax, a provision for
loan losses of $5.2 million pre-tax, non-interest income of $10.6 million
pre-tax excluding the $175.3 million pre-tax gain, and non-interest expense of
$18.3 million pre-tax excluding $56.2 million pre-tax in restructuring charges.
These items plus the gain and restructuring charges, resulted in net income of
$116.0 million pre-tax, or $18.2 million after tax, or $0.07 per share.
A reconciliation of the differences in Huntington's income statements and
balance sheets between the 2002 first quarter on a GAAP basis and as adjusted to
exclude the impact of the sale of the Florida banking and insurance operations
and related charges, referred to as an "operating basis", is presented in Tables
18 and 19 on pages 42 and 43 of this report, respectively.
Net interest income on a fully taxable equivalent basis increased $29.1
million, or 16%, from the year-ago quarter, reflecting a 10% increase in average
earning assets and an 18 basis point, or an effective 5%, increase in the fully
taxable equivalent net interest margin to 3.81% from 3.63%. Excluding the impact
of the sale of Huntington's Florida banking operations, net interest income on a
fully taxable equivalent basis increased $38.8 million, or 22%, reflecting an
18% increase in average earning assets, and a 12 basis point, or an effective
3%, increase in the net interest margin to 3.81% from 3.69%.
Non-interest income decreased $211.5 million, or 44%, from the first
quarter 2002, reflecting primarily the $175.3 gain on the sale of the Florida
banking operations in the year-ago quarter. Non-interest income decreased $25.6
million, or 9%, from the year-ago quarter excluding from the year-ago quarter
the gain from the sale of the Florida banking operations and Florida banking and
insurance operating results. This decrease reflected declines in operating lease
and mortgage banking income, partially offset by increases in service charges on
deposit accounts, brokerage and insurance fees, other service charges and fees,
and other income, which included a $7.0 million gain from the sale of $560
million of automobile loans late in the 2003 first quarter.
The provision for loan and lease losses declined $2.2 million, or 6%,
reflecting the sale of the Florida banking operations in the year-ago first
quarter. Adjusting the year-ago first quarter to exclude the impact of this
sale, the provision for loan and lease losses increased $3.0 million, or 9%,
reflecting primarily loan and lease growth exclusive of Florida.
20
Non-interest expense declined $84.2 million, or 21%, as the year-ago
quarter included $56.2 million of restructuring charges, and was down $28.0
million, or 8%, excluding the impact of these charges. These decreases were
primarily driven by a $29.2 million, or 21%, decrease in operating lease
expense. Other expense items contributing to the decline were outside data
processing and other services, down $1.9 million, or 10%, and other expense,
down $3.5 million, or 17%. The only expense that was up appreciably was
personnel costs, which increased $7.5 million, or 7%. Excluding from the
year-ago quarter the impact of the sale of Huntington's Florida banking and
insurance operations in addition to the restructuring charges, non-interest
expense was down $9.7 million, or 3%. The primary driver of this decrease was a
$29.2 million decline in operating lease expense, partially offset by a $17.4
million, or 17%, increase in personnel costs, and to a smaller degree, increases
in net occupancy, professional services, and equipment.
First quarter 2003 return on average equity (ROE) was 16.1%, slightly
higher than 15.8% in the year-ago quarter, though the return on average assets
(ROA) of 1.31% was down from 1.42% a year earlier. The efficiency ratio for the
first quarter 2003 was 67.0%. Excluding the impact of the sale of Florida
banking and insurance operations and related items, ROE in the year-ago quarter
was 12.7%, with ROA and the efficiency ratio at 1.22% and 70.8%, respectively.
21
- --------------------------------------------------------------------------------
TABLE 1 - SELECTED QUARTERLY INCOME STATEMENT DATA (1)
2003 2002
- ------------------------------------------------------------- ----------------------------------------------------------
(in thousands, except per share amounts) FIRST Fourth Third Second First
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest Income $331,991 $341,446 $339,378 $322,909 $335,201
Total Interest Expense 119,362 131,191 133,894 131,928 150,770
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 212,629 210,255 205,484 190,981 184,431
Provision for loan and lease losses 36,844 51,236 54,304 49,876 39,010
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 175,785 159,019 151,180 141,105 145,421
- -------------------------------------------------------------------------------------------------------------------------------
Operating lease income 133,755 143,465 154,367 168,047 175,906
Service charges on deposit accounts 39,592 41,177 37,460 35,354 38,530
Brokerage and insurance income 15,497 13,941 13,664 16,899 17,605
Trust services 14,911 15,306 14,997 16,247 15,501
Mortgage banking 14,890 11,410 6,289 10,725 19,565
Bank Owned Life Insurance income 11,137 11,443 11,443 11,443 11,676
Other service charges and fees 10,338 10,890 10,837 10,529 10,632
Securities gains 1,198 2,339 1,140 966 457
Gain on sale of Florida operations --- --- --- --- 175,344
Merchant Services gain --- --- 24,550 --- ---
Other 26,237 21,620 21,323 17,811 13,884
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 267,555 271,591 296,070 288,021 479,100
- -------------------------------------------------------------------------------------------------------------------------------
Operating lease expense 111,588 120,747 125,743 131,695 140,785
Personnel costs 121,743 113,852 107,477 105,146 114,285
Net occupancy 16,815 13,454 14,815 14,756 17,239
Outside data processing and other services 16,579 17,209 15,128 16,592 18,439
Equipment 16,412 17,337 17,378 16,659 16,949
Marketing 6,626 6,186 7,491 7,231 7,003
Professional services 6,331 8,026 6,083 6,267 5,401
Telecommunications 5,701 5,714 5,609 5,320 6,018
Printing and supplies 3,681 3,999 3,679 3,683 3,837
Restructuring charges --- --- --- --- 56,184
Other 17,009 25,005 19,050 20,683 20,534
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 322,485 331,529 322,453 328,032 406,674
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 120,855 99,081 124,797 101,094 217,847
Income taxes 32,023 24,687 33,193 27,169 124,706
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 88,832 $ 74,394 $ 91,604 $ 73,925 $ 93,141
===============================================================================================================================
PER COMMON SHARE
Net Income - Diluted $ 0.38 $ 0.32 $ 0.38 $ 0.30 $ 0.37
Cash Dividends Declared $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16
RETURN ON:
Average total assets 1.31% 1.10% 1.41% 1.19% 1.42%
Average total shareholders' equity 16.1% 13.2% 15.9% 12.6% 15.8%
Net interest margin 3.81% 3.83% 3.98% 3.91% 3.63%
Efficiency ratio (2) 67.0% 68.8% 67.6% 68.4% 71.4%
Effective tax rate 26.5% 24.9% 26.6% 26.9% 57.2%
REVENUE - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $212,629 $210,255 $205,484 $190,981 $184,431
Tax Equivalent Adjustment (3) 2,096 1,869 1,096 1,071 1,169
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 214,725 212,124 206,580 192,052 185,600
Non-Interest Income 267,555 271,591 296,070 288,021 479,100
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE $482,280 $483,715 $502,650 $480,073 $664,700
===============================================================================================================================
TOTAL REVENUE EXCLUDING SECURITIES GAINS $481,082 $481,376 $501,510 $479,107 $664,243
===============================================================================================================================
(1) Each of the quarters in 2002 have been restated. Please see note 3 to the
unaudited consolidated financial statements for further information.
(2) Excludes gain on sale of Florida operations, Merchant Services gain, and
securities gains from revenue, and restructuring charges and amortization
of intangible assets from expenses.
(3) Calculated assuming a 35% tax rate.
22
RESULTS OF OPERATIONS
NET INTEREST INCOME
2003 First Quarter versus 2002 First Quarter
Net interest income on a fully-taxable equivalent basis was $214.7 million
in the 2003 first quarter, up $29.1 million, or 16%, from the year-ago quarter
reflecting 10% growth in average earning assets, primarily loans and leases, and
an 18 basis point, or an effective 5%, increase in the fully taxable equivalent
net interest margin to 3.81% from 3.63%. Excluding the impact of the sold
Florida banking operations in the year-ago quarter, net interest income on a
fully taxable equivalent basis was up $38.8 million, or 22%, driven by a $3.5
billion, or 18%, increase in average earning assets, and a 12 basis point, or an
effective 3%, increase in the net interest margin to 3.81% from 3.69%. (See
Tables 18 and 19 on page 42 and 43). The increase in the net interest margin,
excluding the impact of the Florida operations, reflected the positive impact of
the lower rate environment between the two periods, and a higher percentage of
wholesale funding. However, the margin declined in each of the last two quarters
as it became increasingly difficult to lower funding costs commensurate with the
decline on earning asset yields.
Average loans and leases in the 2003 first quarter were $19.0 billion, up
$1.6 billion, or 9%, from the year-ago quarter reflecting $2.9 billion, or 18%,
growth in average non-Florida-related loans and leases, partially offset by the
$1.4 billion in average loans and leases sold with the Florida banking
operations in the year-ago quarter. The $2.9 billion growth in average loans and
leases excluding the sold Florida loans and leases reflected a 9% increase in
commercial real estate loans and a $2.7 billion, or 39%, increase in average
consumer loans. This growth in consumer loans came from residential mortgages
(up 72%) and home equity loans (up 16%) reflecting the increased demand due to
the low interest rate environment, and automobile loans and direct financing
leases (up 56%). The growth in automobile loans and leases reflected annualized
growth in automobile loans of 21%. Direct financing leases averaged $1.0 billion
in the 2003 first quarter, up $0.9 billion from the year-ago quarter, reflecting
the amendment to the new policy as described in Note 3 to the unaudited
consolidated financial statements. Prior to May 2002, all leases were reflected
as operating leases. Average commercial loans, excluding sold Florida loans from
the year-ago quarter, were essentially unchanged reflecting a combination of
factors including continued weakness in the economy, as well as planned
reductions in shared national credits and the sale of certain commercial loans
in the 2002 fourth quarter.
During the recent quarter, Huntington sold $560 million of auto loans as
part of a plan to reduce exposure to the automobile financing business. This
sale had no material impact on average loan and lease balances, however, as the
transaction occurred late in the quarter.
Average core deposits were $15.0 billion in the 2003 first quarter, down
$1.3 billion, or 8%, from the year-ago quarter, as a result of the $2.3 billion
in average core deposits sold with the Florida banking operations in the
year-ago quarter, partially offset by growth of $1.0 billion, or 7%, in
non-Florida-related core deposits. The $1.0 billion increase in average
non-Florida-related core deposits reflected very strong growth in average
interest bearing demand deposits, which increased $1.2 billion, or 28%, from the
year-ago quarter, as retail certificates of deposit (CDs) declined $0.4 billion,
or 10%, reflecting planned reductions in these higher cost deposits.
23
- --------------------------------------------------------------------------------
TABLE 2 - CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN
ANALYSIS
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES AVERAGE RATES (3)
----------------------------------------------- -------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------- ------------------------------------- ----- -----------------------------
Fully Tax Equivalent Basis (1) FIRST Fourth Third Second First FIRST Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 37 $ 34 $ 35 $ 29 $ 34 1.61% 1.93% 2.06% 2.44% 2.02%
Trading account securities 12 9 7 6 5 4.63 3.37 4.95 5.37 2.79
Federal funds sold and securities purchased
under resale agreements 57 83 76 68 62 2.14 1.83 1.40 1.51 1.43
Mortgages held for sale 459 467 267 174 381 5.56 5.84 6.57 7.07 6.51
Securities:
Taxable 3,014 3,029 2,953 2,735 2,713 5.17 5.53 6.01 6.33 6.43
Tax exempt 275 234 108 96 101 7.22 7.15 7.52 7.69 7.76
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities 3,289 3,263 3,061 2,831 2,814 5.34 5.64 6.07 6.37 6.48
- ------------------------------------------------------------------------------------------------------------------------------------
Loans and Leases: (2)
Commercial 5,621 5,553 5,502 5,614 6,045 5.51 5.76 5.86 5.84 5.75
Real Estate
Construction 1,188 1,071 1,248 1,259 1,291 4.23 4.26 4.70 5.14 4.99
Commercial 2,565 2,601 2,316 2,233 2,364 5.76 5.92 6.31 6.54 6.80
Consumer
Automobile loans and leases 4,136 3,745 3,264 2,764 2,822 8.09 8.57 9.73 9.69 8.86
Home equity 3,239 3,168 3,062 2,911 3,209 5.35 5.82 5.96 6.05 6.56
Residential mortgage 1,841 1,702 1,492 1,390 1,185 5.62 5.69 5.96 6.21 6.62
Other loans 388 398 404 413 482 7.47 8.14 8.58 8.62 8.59
- ------------------------------------------------------------------------------------------------------------------------------------
Total Consumer 9,604 9,013 8,222 7,478 7,698 6.67 7.04 7.58 7.57 7.54
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 18,978 18,238 17,288 16,584 17,398 6.05 6.33 6.66 6.66 6.63
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 349 386 367 357 371
- ---------------------------------------------------------------------------------------------
Net loans and leases 18,629 17,852 16,921 16,227 17,027
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 22,832 22,094 20,734 19,692 20,694 5.92% 6.19% 6.54% 6.60% 6.58%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating lease assets 2,126 2,382 2,657 2,906 3,041
Cash and due from banks 740 717 763 722 819
Intangible assets 218 225 202 213 536
All other assets 1,844 1,811 1,792 1,796 1,851
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $27,411 $26,843 $25,781 $24,972 $26,570
=============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 2,958 $ 2,955 $ 2,868 $ 2,739 $ 3,041
Interest bearing demand deposits 5,597 5,305 5,269 4,920 5,148 1.47% 1.57% 1.77% 1.84% 1.80%
Savings deposits 2,771 2,746 2,766 2,808 3,097 1.89 1.73 1.81 1.83 1.87
Other domestic time deposits 3,671 4,002 4,167 4,226 5,015 3.91 4.26 4.40 4.51 4.88
- ------------------------------------------------------------------------------------------------------------------------------------
Total core deposits 14,997 15,008 15,070 14,693 16,301 2.31 2.50 2.68 2.78 2.98
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 743 735 777 844 1,052 2.86 3.29 3.29 3.33 3.58
Brokered time deposits and negotiable CDs 1,155 1,057 907 649 302 1.98 2.25 2.37 2.48 2.48
Foreign time deposits 515 409 370 296 270 1.06 1.29 1.43 1.38 1.91
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 17,410 17,209 17,124 16,482 17,925 2.27 2.49 2.66 2.77 2.99
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,347 2,515 2,108 1,886 1,998 1.84 1.86 1.88 1.97 2.36
Medium-term notes 2,233 1,832 1,752 1,910 1,967 2.71 3.26 3.37 3.21 3.43
Federal Home Loan Bank advances 1,216 848 228 14 17 1.47 1.84 2.04 5.97 6.10
Subordinated notes and other long-term debt,
including preferred capital securities 937 1,147 1,215 1,215 1,216 3.72 3.80 3.99 4.03 4.12
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 21,185 20,596 19,559 18,768 20,082 2.29% 2.53% 2.73% 2.82% 3.04%
- ------------------------------------------------------------------------------------------------------------------------------------
All other liabilities 1,029 1,059 1,075 1,114 1,063
Shareholders' equity 2,239 2,233 2,279 2,351 2,384
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $27,411 $26,843 $25,781 $24,972 $26,570
=============================================================================================
Net interest rate spread 3.63% 3.66% 3.82% 3.78% 3.54%
Impact of non-interest bearing funds on margin 0.18 0.17 0.16 0.13 0.09
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.81% 3.83% 3.98% 3.91% 3.63%
====================================================================================================================================
(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.
24
2003 First Quarter versus 2002 Fourth Quarter
Fully-taxable equivalent net interest income increased $2.6 million from
the fourth quarter reflecting growth in earning assets, primarily loans and
leases, partially offset by a lower net interest margin and the negative impact
of two less days in the quarter. The net interest margin declined to 3.81% from
3.83% driven by a number of factors including growth in lower rate, but higher
quality, auto loans and leases, and heavy prepayments of higher rate mortgages,
partially offset by the maturity of $675 million in high-rate retail
CDs. Average earning assets increased $0.7 billion, or
13% annualized, related to growth in average loans and leases, as other earning
assets were basically unchanged.
Average loans and leases increased 16% on an annualized basis from the
fourth quarter reflecting a 26% annualized growth in consumer loans. Average
residential mortgages grew 33% annualized, reflecting continued strong demand
for residential mortgages, with average home equity loans and lines of credit up
9% annualized. Average automobile loans and leases increased at a 42% annualized
rate reflecting two factors. First, good underlying growth in automobile loans,
and second, the rapid build up of automobile direct financing lease balances as
new leases originated since April 2002 were recorded as direct financing leases.
Total average commercial and commercial real estate loans increased 6%
annualized, reflecting a 5% annualized increase in average commercial loans and
a 9% annualized increase in average commercial real estate loans.
With interest rates at low absolute levels, retail CDs represent a
relatively expensive source of funds. As such, other more attractive funding
sources were emphasized during the 2003 first quarter, which resulted in average
retail CD balances declining $331 million, as $675 million of high-rate CDs
matured during the quarter. Total average core deposits, excluding retail CDs,
increased $320 million, or 12%, annualized.
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 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 and the anticipated impact
on credit quality of existing loans and leases, and other factors.
The provision expense in the first quarter of 2003 was $36.8 million, down
$2.2 million, or 6%, from the year-ago quarter, reflecting the sale of the
Florida banking operations in the year-ago quarter. Excluding the impact of the
loans sold with the Florida banking operations, the provision expense was up
$3.0 million, or 9%, reflecting loan and lease growth partially offset by
reduced net charge-offs. (See Tables 18 and 19 on page 42 and 43)
The provision for loan and lease losses in the first quarter 2003 was down
$14.4 million from the fourth quarter 2002, reflecting lower loan growth in the
first quarter 2003 than the fourth quarter of 2002, and reduced provision
expense for direct financing leases. The current quarter's $36.8 million
provision expense exceeded net charge-offs by $4.0 million, or 12%. The
allowance for loan and lease losses at March 31, 2003 as a percent of period-end
loans and leases was 1.78%, down from 1.81% at the end of last year, and from
2.09% at the end of the year-ago first quarter. The allowance for loan and lease
losses as a percent of non-performing assets (NPAs) decreased to 239% at March
31, 2003 from 246% at the end of the 2002 fourth quarter, but was significantly
higher than the 151% level at the end of the year-ago quarter. (See Credit Risk
section for discussion of the ALLL, NPAs, and net charge-offs).
NON-INTEREST INCOME
2003 First Quarter versus 2002 First Quarter
Non-interest income was $267.6 million in the 2003 first quarter, down
$211.5 million, or 44%, from the year-ago quarter, which included a $175.3
million gain from the sale of the Florida banking operations. Excluding the gain
from the year-ago quarter, as well as $10.6 million of non-interest income
associated with the sold Florida banking and insurance operations, 2003 first
quarter non-interest income was down $25.6 million, or 9%. See Tables 18 and 19
on pages 42 and 43. Table 3 reflects non-interest income detail for the three
months ended March 31, 2003 and 2002:
25
- -----------------------------------------------------------------------------------
TABLE 3 - NON-INTEREST INCOME
(in thousands of dollars) THREE MONTHS ENDED MARCH 31,
- -----------------------------------------------------------------------------------
2003 2002 % CHANGE
- -----------------------------------------------------------------------------------
Operating lease income $133,755 $175,906 (24.0)%
Service charges on deposit accounts 39,592 38,530 2.8
Brokerage and insurance income 15,497 17,605 (12.0)
Trust services 14,911 15,501 (3.8)
Mortgage banking 14,890 19,565 (23.9)
Bank Owned Life Insurance income 11,137 11,676 (4.6)
Other service charges and fees 10,338 10,632 (2.8)
Securities gains 1,198 457 N.M.
Gain on sale of Florida operations --- 175,344 N.M.
Other 26,237 13,884 89.0
- -----------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME $267,555 $479,100 (44.2)%
===================================================================================
As shown in Table 3, and excluding the impact of the year-ago quarter's
gain on sale of the Florida operations, non-interest income was down $36.2
million. This reflected a $42.2 million, or 24%, decrease in operating lease
income (see Operating Lease discussion below).
Other income was $26.2 million in the current quarter, up $12.4 million
including a $7.0 million gain from the sale of $560 million of automobile loans
in the current quarter and a $5.4 million, or 39%, aggregate increase in a
number of activities including trading, investment banking, and merchant
services. Service charges on deposit accounts were up $1.1 million, or 3%,
reflecting a $5.3 million, or 16%, increase due primarily to higher consumer NSF
and overdraft-related fees, substantially offset by the $4.2 million decline
associated with the sold Florida banking and insurance operations. Other service
charges and fees declined $0.3 million, or 3%, from the year-ago quarter,
reflecting a $1.2 million, or 13%, increase related to higher transaction-based
product fees, more than offset by the $1.5 million decrease associated with the
sold Florida banking and insurance operations.
Brokerage and insurance income was $15.5 million in the 2003 first quarter.
This was down $2.1 million, or 12%, reflecting a $4.2 million decline associated
with the sold Florida banking and insurance operations, partially offset by a
$2.1 million, or 16%, increase related to growth in non-Florida related annuity
income (up 34%).
Mortgage banking income was down $4.7 million, or 24%, reflecting a
combination of factors related to the lower level of interest rates in the
current quarter versus a year ago. Loan originations were up 50% from the
year-ago quarter, which increased origination fee income. However, this benefit
was more than offset by the negative impact lower interest rates had on
accelerating the amortization of mortgage servicing rights (MSRs), as well as
the absence of gains on sale of MSRs in the year-ago quarter. The sale of the
Florida banking operations had no material effect on mortgage banking
year-over-year comparisons.
2003 First Quarter versus 2002 Fourth Quarter
Non-interest income was down $4.0 million, or 1%, from the fourth quarter.
This reflected a $9.7 million decline in operating lease income. (See Operating
Lease Assets on page 28 for further discussion). Reflecting seasonal factors,
service charges on deposits declined $1.6 million, or 4%. Trust services income
declined $0.4 million, or 3%, reflecting lower account balances driven by weak
capital markets. Other service charges and fees declined $0.6 million, or 5%,
due to the seasonal decline in transaction-based product fees. Partially
offsetting these declines was a $4.6 million increase in other income, which
included the $7.0 million pre-tax gain on the sale of $560 million of automobile
loans, partially offset by a decrease in letter of credit fees of $2.3 million,
or 11%, related to the adoption of FASB Interpretation No. 45. Mortgage banking
income increased $3.5 million, or 30%, as the fourth quarter 2002 results
included an impairment charge of $6.2 million on mortgage servicing rights. The
current quarter had no such impairment. Brokerage and insurance income increased
$1.6 million, or 11%, driven by record annuity sales and growth in insurance
products.
26
NON-INTEREST EXPENSE
2003 First Quarter versus 2002 First Quarter
Non-interest expense in the 2003 first quarter was $322.5 million, down
$84.2 million, or 21%, from the year-ago quarter, which included $56.2 million
of restructuring charges. Excluding restructuring charges, as well as $18.3
million of non-interest expenses associated with the sold Florida banking and
insurance operations as reflected in Table 18, first quarter non-interest
expense in 2003 was down $9.7 million, or 3%, from the year-ago quarter. See
Tables 18 and 19 on pages 42 and 43. Table 4 reflects non-interest expense
detail for the three months ended March 31, 2003 and 2002:
- ------------------------------------------------------------------------------------------
TABLE 4 - NON-INTEREST EXPENSE
(in thousands of dollars) THREE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------------------------------------
2003 2002 % CHANGE
- ------------------------------------------------------------------------------------------
Operating lease expense $111,588 $140,785 (20.7)%
Personnel costs 121,743 114,285 6.5
Net occupancy 16,815 17,239 (2.5)
Outside data processing and other services 16,579 18,439 (10.1)
Equipment 16,412 16,949 (3.2)
Marketing 6,626 7,003 (5.4)
Professional services 6,331 5,401 17.2
Telecommunications 5,701 6,018 (5.3)
Printing and supplies 3,681 3,837 (4.1)
Restructuring charges --- 56,184 N.M.
Other 17,009 20,534 (17.2)
- ------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $322,485 $406,674 (20.7)%
==========================================================================================
The largest contributor to the year-over-year decrease in non-interest
expense was lower operating lease expense, which decreased $29.2 million, or
21%. (See Operating Lease Assets - Table 5 on page 28 for further discussion).
Net occupancy expense declined $0.4 million, or 2%, from a year ago, reflecting
a $2.5 million decline associated with the sold Florida banking and insurance
operations, partially offset by a $2.0 million, or 14%, increase related to
higher snow removal costs in the current quarter. The other expense category
declined $3.5 million, or 17%, from a year ago, due to a $2.7 million, or 13%,
decline related to lower residual value insurance expense and a $2.2 million
decline associated with the sold Florida banking and insurance operations, of
which $1.2 million related to the elimination of goodwill.
Personnel costs, which totaled $121.7 million in the 2003 first quarter,
were up $7.5 million, or 7%, from the year-ago quarter, and reflected a $17.4
million, or 17%, increase, partially offset by a $10.0 million decline
associated with the sold Florida banking and insurance operations. The $17.4
million increase reflected a combination of factors including increased pension
and health insurance expense, higher staffing in regional banking and the credit
work out areas, as well as higher production-related compensation supporting
higher levels of mortgage origination production. Full-time equivalent staff at
the end of March 2003 was 8,134 compared with 8,342 at the end of the first
quarter last year. This decline in staff reflected planned staff reductions,
primarily Florida-related operations support staff located outside the state of
Florida which were not part of the sold banking operations. Professional
services were up $0.9 million, or 17%, reflecting a $1.1 million, or 21%,
increase due to higher legal and consulting fees mostly related to expanded loan
workout activities, partially offset by a $0.2 million decline associated with
the sold Florida banking and insurance operations.
2003 First Quarter versus 2002 Fourth Quarter
Non-interest expense was down $9.0 million, or 3%, from the fourth quarter
driven primarily by lower operating lease expense, which was down $9.2 million,
or 8% (see Operating Lease Assets - Table 5 on page 28 and the related
discussion), lower other expense, down $8.0 million, and lower professional
services, down $1.7 million. Personnel costs were up $7.9 million, or 7%,
reflecting a combination of factors including the annual FICA reset, higher
pension costs, higher performance-based compensation, and transition expenses
related to a reduction in headcount. The $3.4 million increase in net occupancy
expense reflected higher real estate taxes and snow removal costs.
The efficiency ratio was 67.0% in the 2003 first quarter, down slightly
from 70.8% in the year-ago quarter excluding the impact of the sold Florida
banking and insurance operations, and from 68.8% in the 2002 fourth quarter.
27
OPERATING LEASE ASSETS
Operating lease assets represent automobile leases originated prior to May
2002 and is a portfolio that will run-off over time as all automobile lease
originations since then have been recorded as direct finance leases in the
automobile loan and lease category. As a result, the income and expenses
associated with this portfolio will also decline over time. Average operating
lease assets in the 2003 first quarter were $2.1 billion, down 30% from the
year-ago quarter and 11% from the 2002 fourth quarter.
Operating lease income, which totaled $133.8 million in the 2003 first
quarter, is the largest non-interest income category and represented 50% of
non-interest income. This was down $42.2 million, or 24%, from the year-ago
quarter and $9.7 million, or 7%, from the fourth quarter, reflecting declines in
average operating leases of 30% and 11%, respectively. Since April 2002, new
automobile leases originated by Huntington are accounted for as direct financing
leases, whereas automobile leases prior to that date were accounted for as
operating leases. Thus, the operating lease asset balances continue to decline
through both depreciation expense and lease termination. However, rental income
is only impacted by lease terminations, which decline at a slower rate than the
underlying operating lease balance. Fees and recoveries from early terminations
also declined 83% and 39%, respectively, from the year-ago quarter.
Operating lease expense totaled $111.6 million, down $29.2 million, or 21%,
from the year ago quarter and down $9.2 million, or 8%, from the 2002 fourth
quarter. These declines also reflect the fact that this portfolio will decrease
over time as no new operating leases are being recorded. Losses on early
terminations declined $4.2 million, or 26%, from the year-ago quarter, and $2.0
million from the 2002 fourth quarter.
Losses on operating lease assets consist of residual losses at termination
and losses on early terminations. Residual losses arise if the ultimate value /
sales proceeds from the automobile are less then 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.
Table 5 details operating lease assets performance for the three months
ended March 31, 2003 and 2002:
- ---------------------------------------------------------------------------------------
TABLE 5 - OPERATING LEASE ASSETS PERFORMANCE
THREE MONTHS ENDED MARCH 31,
- ---------------------------------------------------------------------------------------
2003 2002 % CHANGE
- ---------------------------------------------------------------------------------------
BALANCE SHEET (IN MILLIONS)
Average operating lease assets outstanding $ 2,126 $ 3,041 (30.1)%
INCOME STATEMENT (IN THOUSANDS)
Net rental income $130,274 $165,041 (21.1)%
Fees 1,195 7,133 (83.2)
Recoveries - early terminations 2,286 3,732 (38.7)
- ---------------------------------------------------------------------------------------
TOTAL OPERATING LEASE INCOME 133,755 175,906 (24.0)
- ---------------------------------------------------------------------------------------
Depreciation and residual losses at termination 99,283 124,244 (20.1)
Losses - early terminations 12,305 16,541 (25.6)
- ---------------------------------------------------------------------------------------
TOTAL OPERATING LEASE EXPENSE 111,588 140,785 (20.7)
- ---------------------------------------------------------------------------------------
NET EARNINGS CONTRIBUTION $ 22,167 $ 35,121 (36.9)%
- ---------------------------------------------------------------------------------------
Earnings ratios (1)
Net rental income 24.51% 21.71%
Depreciation 18.68% 16.34%
(1) As a percent of average operating lease assets, quarterly amounts
annualized.
INCOME TAXES
The provision for income taxes in the 2003 first quarter was $32.0 million
and represented an effective tax rate on income before taxes of 26.5%. This was
down $92.7 million from the year-ago quarter, primarily due to the fact that the
year-ago quarter included the tax-related impacts associated with the gain on
the sale of the Florida banking operations,
28
restructuring charges, and taxes on the operating results of the sold Florida
banking and insurance operations. Excluding these impacts from the year-ago
quarter, 2003 first quarter taxes were up $5.1 million, or 19%, with the
year-ago quarter representing an effective tax rate of 26.4%. The effective tax
rate in the 2002 fourth quarter was 24.9%. Each quarter, taxes for the full year
are re-estimated and year-to-date tax accrual adjustments made. A number of
factors, such as year-to-date adjustments, can result in fluctuations in
quarterly effective tax rates.
CREDIT RISK
Huntington's exposure to credit risk is managed through the use of
consistent underwriting standards that emphasize "in-market" lending while
avoiding highly leveraged transactions as well as 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 its commercial
lending to customers with existing or potential relationships within
Huntington's primary markets. As a result, outstanding shared national credits
were $994 million at March 31, 2003, up slightly from $979 million at the same
period-end last year, but down from a peak of $1.5 billion at June 30, 2001.
In the first quarter of 2003, Huntington revised and implemented its
internal risk grading system for commercial and commercial real estate credits.
Huntington migrated from a single grading, to a dual risk grading system that
separately measures the probability of default and loss in event of default and
provides Huntington with more specificity in the risk assessment process.
LOAN AND LEASE COMPOSITION
Table 6 shows the period-end loan portfolio by loan type and business
segment:
- ------------------------------------------------------------------------------------------------------
TABLE 6 - LOAN AND LEASE COMPOSITION
- ------------------------------------------------------------------------------------------------------
(in millions of dollars) March 31, 2003 December 31, 2002 March 31, 2002
- ---------------------------------------------------------- ----------------- -----------------
BY TYPE Balance % Balance % Balance %
- ------------------------------------------------------------------------------------------------------
Commercial $ 5,747 30.3 $ 5,606 30.1 $ 5,682 34.9
Commercial real estate 3,778 19.9 3,731 20.0 3,488 21.4
- ------------------------------------------------------------------------------------------------------
Total Commercial and
Commercial Real Estate 9,525 50.2 9,337 50.1 9,170 56.3
- ------------------------------------------------------------------------------------------------------
Consumer
Automobile loans 2,767 14.6 3,072 16.5 2,562 15.7
Automobile direct financing leases 1,161 6.1 893 4.8 78 0.5
Home equity 3,286 17.3 3,200 17.2 2,831 17.4
Residential mortgage 1,835 9.7 1,749 9.4 1,232 7.6
Other loans 383 2.1 394 2.0 418 2.5
- ------------------------------------------------------------------------------------------------------
Total Consumer 9,432 49.8 9,308 49.9 7,121 43.7
- ------------------------------------------------------------------------------------------------------
TOTAL LOANS AND LEASES $18,957 100.0 $18,645 100.0 $16,291 100.0
======================================================================================================
BY BUSINESS SEGMENT
- -------------------
Regional Banking
Central Ohio / West Virginia $ 4,836 25.5 $ 4,824 25.9 $ 4,502 27.6
Northern Ohio 2,709 14.3 2,607 14.0 2,723 16.7
Southern Ohio / Kentucky 1,558 8.2 1,506 8.1 1,391 8.5
West Michigan 1,949 10.3 1,871 10.0 1,842 11.3
East Michigan 1,212 6.4 1,192 6.4 986 6.1
Indiana 692 3.7 682 3.7 690 4.3
- ------------------------------------------------------------------------------------------------------
Total Regional Banking 12,956 68.4 12,682 68.1 12,134 74.5
- ------------------------------------------------------------------------------------------------------
Dealer Sales 4,704 24.8 4,711 25.3 3,226 19.8
Private Financial Group 1,121 5.9 1,062 5.7 809 5.0
Treasury / Other 176 0.9 190 0.9 122 0.7
- ------------------------------------------------------------------------------------------------------
TOTAL LOANS AND LEASES $18,957 100.0 $18,645 100.0 $16,291 100.0
======================================================================================================
29
NET CHARGE-OFFS
Net charge-offs in the first quarter of 2003 were $32.8 million and
represented an annualized 0.69% of average loans and leases. In 2001, Huntington
exited the sub-prime automobile and truck and equipment lending business and at
that time established reserves to cover the inherent losses in these portfolios
and against which future loan losses would be charged. Net charge-off excluding
these exited businesses were $31.2 million, down from $39.2 million, or an
annualized 0.92% of average loans and leases, in the same quarter last year, and
down significantly from $81.3 million, or an annualized 1.79% of average loans
and leases, in the fourth quarter 2002. Huntington initiated two credit actions
associated with commercial and commercial real estate loans in the fourth
quarter 2002. The first was the sale of $47.2 million in non-performing assets
with $21.4 million of related charge-offs. The second action was the full
charge-off of a $29.9 million credit exposure to a single health care finance
company. This credit was identified as a non-performing loan and subsequently
charged-off, all within the fourth quarter of 2002. These credit actions had no
earnings impact, as existing loss reserve levels were sufficient to absorb the
combined $51.3 million in charge-offs.
Table 7 reflects net charge-offs and annualized charge-offs as a percent of
average loans and leases by type of loan:
- ------------------------------------------------------------------------------------------------------------------
TABLE 7 - NET LOAN AND LEASE CHARGE-OFFS
- ------------------------------------------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------- ----------------------------------------------
(in thousands) First Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS
- ---------------
Commercial $14,942 $59,725 $16,808 $21,468 $19,527
Commercial real estate 546 7,536 4,085 2,037 3,983
- ------------------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate 15,488 67,261 20,893 23,505 23,510
- ------------------------------------------------------------------------------------------------------------------
Consumer
Automobile loans 9,268 8,778 6,869 5,733 10,217
Automobile and direct financing leases 920 730 202 498 ---
Home equity loans 4,053 3,526 2,934 3,096 3,950
Residential mortgage 145 72 123 555 122
Other loans 1,330 967 907 1,225 1,425
- ------------------------------------------------------------------------------------------------------------------
Total consumer 15,716 14,073 11,035 11,107 15,714
- ------------------------------------------------------------------------------------------------------------------
Total net charge-offs, excluding exited businesses 31,204 81,334 31,928 34,612 39,224
Net charge-offs related to exited
businesses 1,632 1,824 1,857 2,385 3,748
- ------------------------------------------------------------------------------------------------------------------
TOTAL NET CHARGE-OFFS $32,836 $83,158 $33,785 $36,997 $42,972
==================================================================================================================
NET CHARGE-OFFS AS A % OF AVERAGE LOANS
- ---------------------------------------
Commercial 1.06% 4.30% 1.21% 1.53% 1.31%
Commercial real estate 0.06 0.82 0.45 0.23 0.44
- ------------------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate 0.66 2.92 0.91 1.04 0.98
- ------------------------------------------------------------------------------------------------------------------
Consumer
Automobile loans 1.21 1.21 1.00 0.92 1.59
Automobile direct financing leases 0.36 0.38 0.17 1.20 ---
Home equity loans & lines of credit 0.50 0.45 0.38 0.43 0.50
Residential mortgage 0.03 0.02 0.03 0.16 0.04
Other loans 1.39 0.99 0.91 1.22 1.23
- ------------------------------------------------------------------------------------------------------------------
Total consumer 0.66 0.63 0.54 0.60 0.84
- ------------------------------------------------------------------------------------------------------------------
Total net charge-offs, excluding exited
businesses 0.66 1.79 0.74 0.84 0.92
- ------------------------------------------------------------------------------------------------------------------
TOTAL NET CHARGE-OFFS 0.69% 1.82% 0.78% 0.89% 1.00%
==================================================================================================================
30
Economic activity has remained sluggish and the uncertainty about the
future level of activity has increased recently. Nevertheless, and though net
charge-offs are expected to be higher in the 2003 second quarter than the first
quarter's annualized 0.69% level of average loans, 2003 full-year net
charge-offs are still expected to be in the 0.65% - 0.75% range.
NON-PERFORMING ASSETS
Non-performing assets 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 8 summarizes NPAs at the end of each of the recent five quarters in
addition to 90 day past due information:
- ------------------------------------------------------------------------------------------------------------------
TABLE 8 - NON-PERFORMING ASSETS AND PAST DUE LOANS AND LEASES
- ------------------------------------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------- --------------------------------------------------
(in thousands) First Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------
Non-accrual loans and leases:
Commercial $ 94,754 $ 91,861 $147,392 $156,252 $162,959
Commercial real estate 22,585 26,765 47,537 45,795 43,295
Residential mortgage 9,302 9,443 8,488 8,776 11,896
- ------------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans and Leases 126,641 128,069 203,417 210,823 218,150
Renegotiated loans --- --- 37 1,268 1,268
- ------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS AND LEASES 126,641 128,069 203,454 212,091 219,418
Other real estate, net 14,084 8,654 10,675 11,146 6,112
- ------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $140,725 $136,723 $214,129 $223,237 $225,530
==================================================================================================================
Non-performing loans and leases as a % of
total loans and leases 0.67% 0.69% 1.14% 1.26% 1.35%
Non-performing assets as a % of
total loans and leases and other real estate 0.74% 0.73% 1.20% 1.33% 1.38%
ACCRUING LOANS AND LEASES
PAST DUE 90 DAYS OR MORE $ 58,159 $ 61,526 $ 57,337 $ 47,663 $ 51,446
==================================================================================================================
Total NPAs were $140.7 million at March 31, 2003, up slightly from $136.7
million at the end of 2002, but down significantly from $225.5 million at the
end of the first quarter last year. The overall decrease in NPAs from a year ago
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 0.74% at
March 31, 2003, compared with 1.38% a year ago and 0.73% at December 31, 2002.
Loans and leases past due ninety days or more and still accruing interest
at the end of the first quarter of 2003 and 2002 were $58.2 million and $51.4
million, respectively. These past due loans and leases represented 0.31% and
0.32% of total loans and leases at the end of the first quarter of 2003 and
2002, respectively. At December 31, 2002, these loans and leases amounted to
$61.5 million and represented 0.33% of total loans and leases. Table 9 reflects
the change in NPAs for the recent five quarters:
31
- ---------------------------------------------------------------------------------------------------
TABLE 9 - NON-PERFORMING ASSET ACTIVITY
- ---------------------------------------------------------------------------------------------------
2003 2002
- --------------------------------------- -----------------------------------------------------
(in thousands) First Fourth Third Second First
- ---------------------------------------------------------------------------------------------------
BEGINNING OF PERIOD $136,723 $214,129 $223,237 $225,530 $227,493
New non-performing assets 48,359 65,506 47,275 73,002 74,446
Returns to accruing status (5,993) (12,658) (380) (337) (3,749)
Loan and lease losses (17,954) (72,767) (25,480) (28,297) (26,072)
Payments (15,440) (28,500) (26,308) (44,303) (37,663)
Sales (4,970) (28,987) (4,215) (2,358) (8,925)
- ---------------------------------------------------------------------------------------------------
END OF PERIOD $140,725 $136,723 $214,129 $223,237 $225,530
===================================================================================================
The first quarter of 2003 was the first quarter that Huntington experienced
an increase in its NPA's since the fourth quarter of 2001. Loans and leases
entering nonaccrual status were $48.4 million during the recent quarter while
returns to accruing status were $6.0 million. While the economy has continued
to be weak and the uncertainty about the future level of economic activity has
increased, management continues to expect NPAs to remain around current levels
through the remainder of the year.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The ALLL was $337.0 million at March 31, 2003, down from $340.9 million at
the end of the first quarter of 2002, but relatively unchanged from the $336.6
million at December 31, 2002. The ALLL represented 1.78% of total loans and
leases at March 31, 2003, 1.81% at December 31, 2002, and 2.09% at the end of
the first quarter last year. The decline in the loan loss reserve ratio from
1.81% at the end of last year to 1.78% at March 31, 2003, reflected lower
provision expense for automobile leases due to the revised risk management
methodology. The period-end ALLL was 239% of NPAs at March 31, 2003, compared
with 151% a year ago and 246% at December 31, 2002.
Table 10 reflects the activity in the ALLL for the recent five quarters.
The $3.0 million allowance of sold loans in the 2003 first quarter related to
the $560 million of automobile loans sold in that quarter, with the $22.3
million of ALLL sold in the year-ago quarter reflecting the $2.5 billion of
loans sold in connection with the sale of the Florida banking operations.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 10 - ALLOWANCE FOR LOAN AND LEASE LOSSES AND RELATED STATISTICS
- ---------------------------------------------------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------- --------------------------------------------------------
(in thousands) First Fourth Third Second First
- ---------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN AND LEASE LOSSES,
BEGINNING OF PERIOD $336,648 $371,033 $351,696 $340,851 $369,332
Loan and lease losses (40,265) (93,890) (43,748) (45,728) (50,986)
Recoveries 7,429 10,732 9,963 8,731 8,014
- ---------------------------------------------------------------------------------------------------------------------
Net loan and lease losses (32,836) (83,158) (33,785) (36,997) (42,972)
- ---------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 36,844 51,236 54,304 49,876 39,010
Allowance of (sold) purchased loans (2,981) --- 1,264 --- (22,297)
Allowance of securitized loans (658) (2,463) (2,446) (2,034) (2,222)
- ---------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN AND LEASE LOSSES,
END OF PERIOD $337,017 $336,648 $371,033 $351,696 $340,851
=====================================================================================================================
Allowance for loan and lease losses as
a % of total loans and leases 1.78% 1.81% 2.07% 2.09% 2.09%
Allowance for loan and lease losses as
a % of non-performing loans and leases 266.1% 262.9% 182.4% 165.8% 155.3%
Allowance for loan and lease losses as
a % of non-performing assets 239.5% 246.2% 173.3% 157.5% 151.1%
Huntington allocates the ALLL to each loan and lease category based on an
expected loss ratio determined by continuous assessment of credit quality based
on 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. On a periodic basis, management
reevaluates these credit grades. The aggregation of these factors represents
management's estimate of the inherent loss in the portfolio.
32
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 and non-accrual amounts, recent loan and lease loss
experience, current economic conditions, and risk characteristics of various
loan and lease categories. 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.
Unallocated reserves are based on levels of delinquencies in the accruing
loan and lease portfolios, the level of non-performing loans and leases, and
general economic conditions and volatility. Unallocated reserves were 3% at
March 31, 2003. The revisions made by management to its internal risk grading
system implemented in the first quarter of 2003 reduced the unallocated portion
of the ALLL by more thoroughly allocating the allowance to the various loan and
lease categories, primarily commercial and commercial real estate loans.
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. 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. Balance sheet growth assumptions are also considered in the income
simulation model. 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.
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.
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. 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 March 31, 2003, that scenario modeled net interest
income 0.7% lower than the internal forecast of net interest income over the
same time period using the current level of forward rates, which remained
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
33
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 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 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 March 31, 2003, the model indicated
that such an increase in rates would be expected to reduce the EVE by 2.7% and
compares with an estimated negative impact of 3.8% at December 31, 2002.
The model is 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.
Deposits are Huntington's primary source of funding, of which 87% were
provided by the Regional Banking segment. Table 11 details the types and sources
of deposits by business segment at March 31, 2003, and compares these balances
by type and source to balances at December 31, 2002 and March 31, 2002:
34
- --------------------------------------------------------------------------------
TABLE 11 - DEPOSIT LIABILITIES
- -------------------------------------------------------------------------------------------------------
(in millions of dollars) March 31, 2003 December 31, 2002 March 31, 2002
- -------------------------------------------------------- ------------------ -------------------
BY TYPE Balance % Balance % Balance %
- -------------------------------------------------------------------------------------------------------
Demand deposits
Non-interest bearing $ 2,971 16.8 $ 3,074 17.6 $ 2,857 17.6
Interest bearing 5,850 33.1 5,374 30.7 4,747 29.2
Savings deposits 2,981 16.9 2,851 16.3 2,896 17.8
Other domestic time deposits 3,523 19.9 3,956 22.6 4,180 25.7
- -------------------------------------------------------------------------------------------------------
Total Core Deposits 15,325 86.7 15,255 87.2 14,680 90.3
- -------------------------------------------------------------------------------------------------------
Domestic time deposits of
$100,000 or more 798 4.5 732 4.2 896 5.5
Brokered and negotiable CDs 1,208 6.8 1,093 6.2 451 2.8
Foreign time deposits 358 2.0 419 2.4 240 1.4
- -------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $17,689 100.0 $17,499 100.0 $16,267 100.0
=======================================================================================================
BY BUSINESS SEGMENT
- -------------------
Regional Banking
Central Ohio/West Virginia $ 5,386 30.4 $ 5,361 30.6 $ 5,453 33.5
Northern Ohio 3,536 20.0 3,602 20.6 3,265 20.1
Southern Ohio/Kentucky 1,337 7.6 1,365 7.8 1,336 8.2
West Michigan 2,513 14.2 2,402 13.7 2,510 15.4
East Michigan 2,008 11.4 1,962 11.2 1,909 11.7
Indiana 623 3.5 613 3.5 563 3.5
- -------------------------------------------------------------------------------------------------------
Total Regional Banking 15,403 87.1 15,305 87.4 15,036 92.4
- -------------------------------------------------------------------------------------------------------
Dealer Sales 67 0.4 59 0.3 51 0.3
Private Financial Group 959 5.4 924 5.3 727 4.5
Treasury / Other 1,260 7.1 1,211 7.0 453 2.8
- -------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $17,689 100.0 $17,499 100.0 $16,267 100.0
=======================================================================================================
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 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 $5.1
billion was available at March 31, 2003. In addition, the Bank shares a $2.0
billion Euronote program with the parent company, of which $1.2 billion was
available on March 31, 2003. Also, 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 strong capital, 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.
Shareholder's equity declined $34 million during the first quarter of 2003
from the end of 2002, and $190 million from March 31, 2002. The primary driver
of these declines was the repurchase of 4.3 million common shares at a value of
$79.1 million. The 4.3 million shares repurchased consisted of 0.2 million under
the February 2002 authorization, subsequently cancelled, plus 4.1 million under
the existing January 2003 authorization.
35
In February 2002, the Board of Directors authorized a share repurchase
program for up to 22 million shares and canceled the previously existing
authorization. Under this authorization a total of 19.4 million shares were
repurchased: 19.2 million in 2002, including 1.5 million shares purchased in the
year-ago quarter, and 0.2 million in the 2003 first quarter. In mid-January
2003, the Board of Directors authorized a new share repurchase program,
canceling the 2.6 million shares remaining under the February 2002
authorization, and approved a new share repurchase authorization for up to 8
million shares. Under this authorization 4.1 million shares were repurchased in
the 2003 first quarter, leaving 3.9 million shares remaining for repurchase.
The ratio of average equity to average assets in the first quarter of 2003
was 8.17% versus 8.97% last year. Tangible period-end equity to period-end
assets, which excludes intangible assets, was 7.36% at the end of March 2003,
down significantly from 9.11% a year earlier. The high year-ago tangible equity
to asset ratio in the year-ago quarter reflected the capital generated from the
sale of the Florida operations. The decline in the tangible equity to asset
ratio from the year-ago quarter reflected the subsequent share repurchase
program activity. Given the current asset mix and risk profile, management has a
longer-term targeted tangible equity to asset ratio of 7.00%.
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 12:
- --------------------------------------------------------------------------------
TABLE 12 - CAPITAL DATA
- --------------------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------- -----------------------------------------
(in millions) First Fourth Third Second First
- --------------------------------------------------------------------------------------------------
Total risk-adjusted assets $27,316 $27,215 $26,341 $25,317 $24,974
Tier 1 risk-based capital ratio 8.54% 8.65% 9.13% 9.74% 10.30%
Total risk-based capital ratio 11.42% 11.54% 12.09% 12.76% 13.43%
Tier 1 leverage ratio 8.58% 8.85% 9.41% 9.95% 9.76%
Tangible equity / asset ratio 7.36% 7.58% 7.99% 8.52% 9.11%
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.
Table 13 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 13 - QUARTERLY STOCK SUMMARY
- -----------------------------------------------------------------------------------------
2003 2002
- --------------------------------------- --------------------------------------------
First Fourth Third Second First
- -----------------------------------------------------------------------------------------
High $19.800 $19.980 $20.430 $21.770 $20.310
Low 17.780 16.160 16.000 18.590 16.660
Close 18.590 18.710 18.190 19.420 19.700
Average daily closing price 18.876 18.769 19.142 20.089 18.332
Cash dividends declared $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16
36
LINES OF BUSINESS DISCUSSION
Below is a brief description of each line of business and a discussion of
business segment results for the quarters ending March 31, 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
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.
See Operating Basis discussion on page 41, and Tables 18 and 19 for further
discussion, as well as Note 11 beginning on page 15 for a reconciliation of line
of business results on an operating basis, to a GAAP basis.
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, international trade, and cash management.
- --------------------------------------------------------------------------------
TABLE 14 - REGIONAL BANKING
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002
- --------------------------------------------------------------------------------
Net interest income $148,542 $144,693
Provision for loan and lease losses 23,542 23,276
Non-interest income 75,361 71,218
Non-interest expense 144,989 133,221
- --------------------------------------------------------------------------------
Income before taxes 55,372 59,414
Income taxes 19,381 20,886
- --------------------------------------------------------------------------------
Operating income $ 35,991 $ 38,528
================================================================================
Regional Banking operating income in the first quarter of 2003 was $36.0
million, compared with $38.5 million for the same quarter a year ago. Increased
revenue resulting from balance sheet growth and fee-based revenue was more than
offset by higher expenses.
Net interest income was up $3.8 million, or 3%. The improvement in 2003 net
interest income was attributed to a 7% growth in loans and leases, a 9% growth
in loan fees and a 2% increase in deposits. The favorable impact of higher
deposit balances was offset by declining funding rates paid on deposits.
The average loan and lease balances increase of 7% in 2003 reflected an
increase in consumer loans of 22%, which was partially offset by a 1% decline in
commercial average balances. Average residential mortgage loans and home equity
loans and lines of credit increased 56% and 23%, respectively, from the year-ago
quarter, reflecting strong growth in the mortgage refinance business. Average
total deposits were up $682 million in the current quarter, or 5%, from the 2002
first quarter. Total deposits (excluding time) grew at a rate of 14% over prior
year quarter and 3% over the fourth quarter of 2002.
37
The provision for loan and lease losses for the first quarter of 2003
increased $0.3 million, or 1%, over the same quarter last year. This increase
reflected loan growth, which was partially offset by a decline in net
charge-offs. Net charge-offs in the first quarter of 2003 were $20.4 million
compared to $24.4 million for the prior year's first quarter.
Non-interest income for the recent three months was up $4.1 million, or 6%,
from the first quarter of last year. Increased fee-based revenue was driven by
deposit service charges, electronic banking, and partnership fee sharing
revenue. These increases were partially offset by declines in mortgage banking
income attributed to higher amortization of mortgage servicing rights, and lower
standby letters of credit fee income. The decline in standby letters of credit
was due to the adoption of FASB Interpretation No. 45.
Non-interest expense for the 2003 first quarter increased $11.8 million, or
9%, from the 2002 first quarter. This increase was driven primarily by higher
salaries and benefits, occupancy, and equipment expenses. Increased salaries and
benefits reflect investment in the line's management team and increases in
performance-based incentive compensation. Partially offsetting these increases
were decreases in marketing and a 33% decline in operating losses.
Regional Banking contributed 47% of total revenues and 41% of net income in
the first quarter of 2003 and represented 51% of total assets and 87% of total
deposits at March 31, 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 15 - DEALER SALES
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002
- --------------------------------------------------------------------------------
Net interest income $ 23,067 $ (7,210)
Provision for loan and lease losses 11,389 8,961
Non-interest income 149,655 180,218
Non-interest expense 135,279 161,236
- --------------------------------------------------------------------------------
Income before taxes 26,054 2,811
Income taxes 9,119 984
- --------------------------------------------------------------------------------
Operating income $ 16,935 $ 1,827
===============================================================================
Dealer Sales operating income was $16.9 million in the first quarter of
2003, compared to $1.8 million for the year-ago quarter. This increase was
attributed to growth in the auto loan and lease portfolios.
Dealer Sales financial results are significantly impacted by accounting for
automobile leases. As discussed in Note 3 to Huntington's unaudited consolidated
financial statements, leases originated prior to May 2002 are accounted for as
operating leases, and leases originated since April 2002 are accounted for as
direct financing leases. Therefore, for automobile leases originated prior to
May 2002, the related financial results are reported in non-interest income and
non-interest expense, and there were no loan loss provisions. Net interest
income was negative for the Dealer Sales line of business during these periods
since the cost of funding these leases was included in interest expense while
the related revenue was not shown in interest income. Since April 2002, revenue
from new direct financing lease originations is reported in interest income and
loan and lease loss provision is recorded in order to maintain the appropriate
level of reserve for loan and lease losses. Non-interest income and non-interest
expense will continue to trend lower in subsequent periods since new leases are
not treated as operating leases, and will continue to run-off. As a result,
non-interest income and expense will continue to decline, while net interest
income and provision for loan and lease losses will increase. Huntington expects
net interest income for the Dealer Sales line of business to be positive in
future periods.
Dealer Sales increased its loan and lease average outstandings from $2.8
billion in the first quarter of 2002 to $4.1 billion in the first quarter of
2003, reflecting higher loan and direct financing lease origination volume that
totaled $1.0 billion in the 2003 first quarter compared with $0.5 billion for
the same period a year ago. Over the same period, operating lease assets
declined from $3.0 billion to $2.1 billion.
38
Dealer Sales contributed 36% of total revenue and 19% of net income and
represented 25% of total assets at March 31, 2003.
PRIVATE FINANCIAL GROUP (PFG)
PFG 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 16 - PRIVATE FINANCIAL GROUP
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002
- --------------------------------------------------------------------------------
Net interest income $ 9,516 $ 7,777
Provision for loan losses 1,913 1,587
Non-interest income 27,210 30,036
Non-interest expense 26,616 24,200
- --------------------------------------------------------------------------------
Income before taxes 8,197 12,026
Income taxes 2,869 4,329
- --------------------------------------------------------------------------------
Operating income $ 5,328 $ 7,697
================================================================================
PFG operating income in the first quarter of 2003 was $5.3 million, which
represented a 31% decline from the first quarter of 2002, most of which was due
to a change in methodology in revenue sharing on investment product sales which
resulted in an additional $1.6 million in brokerage revenue shared with Regional
Banking. Application of the same methodology used in the first quarter 2002 to
the 2003 first quarter would have increased first quarter 2003 operating income
to $6.4 million, which would have represented a 17% decrease from the first
quarter 2002.
Net interest income increased $1.7 million, or 22%, from the year-ago
quarter as average loan balances increased 42%, to $1.1 billion, and average
deposit balances increased 30% to $887 million. Most of the loan growth occurred
in personal credit lines and residential real estate loans largely due to the
favorable mortgage rate environment. Most 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, and growth in the premier money market
account due to favorable rate offerings. The significant growth in loans more
than offset margin erosion from declining market interest rates.
Provision for loan losses was $1.9 million for the current quarter compared
with $1.6 million for the same period a year ago. Net charge-offs were $0.5
million for the first three months of 2003 versus no net charge-offs for last
year's first quarter.
Non-interest income decreased $2.8 million, or 9%, from the year-ago
quarter. The decrease resulted primarily from $0.3 million in higher brokerage
revenue and $0.3 million in higher insurance revenue. Before revenue sharing,
total brokerage revenue increased by $1.9 million, or 20%, as a result of record
annuity sales of $174 million in the 2003 first quarter. The increase in
insurance revenue resulted mainly from an increase in title insurance revenue
reflective of increased customer mortgage loan refinancing. Trust revenue
increased $0.1 million, or 1%, reflecting revenue resulting from the Haberer
acquisition in the year-ago second quarter, mostly offset by a 5% revenue
decline due to reduced asset values reflective of the stock market decline.
Non-interest expense increased $2.4 million, or 10%, from the year-ago
quarter primarily due to increased personnel expense of $3.4 million. The
increased personnel expense included the impact of the 2002 second quarter
Haberer acquisition and an increase in the number of private banking and
investment sales associates, which helped produce higher loans and leases,
deposits and annuity sales volume.
PFG contributed 8% of total revenues and 6% of net income in the first
quarter of 2003 and represented 5% of both total assets and total deposits at
March 31, 2003.
39
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. Additionally, amortization expense of
intangible assets and gains or losses not allocated to other business segments
are also a component.
- --------------------------------------------------------------------------------
TABLE 17 - TREASURY / OTHER
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
- --------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002
- --------------------------------------------------------------------------------
Net interest income $31,504 $29,447
Provision for loan losses --- ---
Non-interest income 15,329 11,651
Non-interest expense 15,601 13,498
- --------------------------------------------------------------------------------
Income before taxes 31,232 27,600
Income taxes 654 725
- --------------------------------------------------------------------------------
Operating income $30,578 $26,875
================================================================================
Treasury / Other's operating income was $30.6 million in the first quarter
of 2003, up from last year's first quarter of $26.9 million. Net interest income
rose $2.1 million largely due to offsetting items within Treasury. Declining
interest rates caused a substantial decline in the cost of funds charged on
loans and leases and investments, which was offset by a corresponding decline in
the funding credit paid to deposit providers, most notably Regional Banking. A
one-time transfer pricing charge was made to the indirect auto line of business
for the early termination of funding related to the aforementioned March 2003
sale of automobile loans.
Non-interest income for 2003 first quarter was $15.3 million compared with
$11.7 million for the same period last year. Non-interest expense for the
current quarter increased $2.1 million from the 2002 first quarter. This
increase reflected slightly higher personnel costs.
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.
40
OPERATING BASIS - 2002 FIRST QUARTER RECONCILIATION TO GAAP RESULTS
Results in the 2002 first quarter were impacted by a number of items
related to Huntington's strategic initiatives announced in July 2001, primarily
the plan to sell the Florida banking and insurance operations. The sale of the
Florida banking operations, which included 143 banking offices, 456 ATMs and
$2.5 billion in loans and other tangible assets and $4.8 billion in deposits and
other liabilities, was completed on February 15, 2002. The year-ago quarter's
results included a gain from the sale of the Florida banking operations,
operating results from the Florida banking operations through its sale in
mid-February, as well as restructuring charges. The sale of the J. Rolfe Davis
Insurance Agency, Inc., Huntington's Florida-based insurance operations, was
completed on July 2, 2002. As such, the year-ago quarter represented the last
full quarter's worth of non-interest income and non-interest expense associated
with this business. The financial impact on 2002 first quarter results included:
o Items related to the sold Florida banking operations
$175.3 million pre-tax gain ($56.7 million after tax, or $0.23 per common
share) from the sale
$4.1 million pre-tax loss from operations ($2.7 after tax loss, or $0.01
loss per common share)
$1.4 billion reduction in average loans in the quarter from the loans
sold
$2.4 billion reduction in average deposits in the quarter from the
deposits sold
o Items related to the sold Florida insurance operations
$3.5 million pre-tax of non-interest income
$2.6 million pre-tax of non-interest expense
o $56.2 million pre-tax ($36.5 million after tax, or $0.14 per common
share) in restructuring charges
Since these items are associated with exited businesses and/or
restructurings that have been completed and no longer contribute to current or
future period financial performance, management believes that excluding their
impact from the year-ago quarter provides a clearer picture of underlying
performance and trends, as well as the progress made in improving financial
performance. Financial performance in the year-ago quarter that excludes the
impact of these items from GAAP results is referred to as performance on an
"operating basis". It is on this operating basis that management evaluates
performance and analyzes certain data, including Line of Business performance,
for making strategic decisions and determining incentive compensation.
Please refer to Table 18 for a reconciliation of 2002 first quarter
performance on a GAAP basis to an operating basis for selected income statement
data and performance ratios, and to Table 19 for a similar reconciliation for
selected average balance sheet items. Also, please refer to Huntington's amended
2002 Annual Report for further detailed discussion of the impact of the 2001
strategic refocusing plan.
41
TABLE 18 - SELECTED 2002 FIRST QUARTER INCOME STATEMENT DATA - RECONCILIATION OF
GAAP TO OPERATING BASIS
- -------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) THREE MONTHS ENDED MARCH 31, 2002
- -------------------------------------------------------------------------------------------------------
GAAP SOLD FLORIDA OPERATIONS OPERATING
BASIS & OTHER ITEMS(1) BASIS
- -------------------------------------------------------------------------------------------------------
Net Interest Income $184,431 $ 9,724 $174,707
Provision for loan and lease losses 39,010 5,186 33,824
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 145,421 4,538 140,883
- -------------------------------------------------------------------------------------------------------
Operating lease income 175,906 --- 175,906
Service charges on deposit accounts 38,530 4,248 34,282
Brokerage and insurance income 17,605 4,205 13,400
Trust services 15,501 405 15,096
Mortgage banking 19,565 (79) 19,644
Bank Owned Life Insurance income 11,676 --- 11,676
Other service charges and fees 10,632 1,514 9,118
Gain on sale of Florida operations 175,344 175,344 ---
Securities gains 457 --- 457
Other 13,884 340 13,544
- -------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 479,100 185,977 293,123
- -------------------------------------------------------------------------------------------------------
Operating lease expense 140,785 --- 140,785
Personnel costs 114,285 9,965 104,320
Net occupancy 17,239 2,468 14,771
Outside data processing and other services 18,439 1,342 17,097
Equipment 16,949 1,367 15,582
Marketing 7,003 (171) 7,174
Professional services 5,401 159 5,242
Telecommunications 6,018 736 5,282
Printing and supplies 3,837 318 3,519
Restructuring charges 56,184 56,184 ---
Other 20,534 2,151 18,383
- -------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 406,674 74,519 332,155
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 217,847 115,996 101,851
Income taxes 124,706 97,782 26,924
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 93,141 $ 18,214 $ 74,927
=======================================================================================================
NET INCOME PER COMMON SHARE - DILUTED $ 0.37 $ 0.07 $ 0.30
Return on average total assets 1.42% 1.22%
Return on average total shareholders' equity 15.8 12.7
Net interest margin(2) 3.63 3.69
Efficiency ratio(3) 71.4 70.8
Effective tax rate 57.2 26.4
Net Interest Income $184,431 $ 9,724 $174,707
Tax Equivalent Adjustment(2) 1,169 --- 1,169
- -------------------------------------------------------------------------------------------------------
Net Interest Income - FTE 185,600 9,724 175,876
Non-Interest Income 479,100 185,977 293,123
- -------------------------------------------------------------------------------------------------------
TOTAL REVENUE - FTE $664,700 $195,701 $468,999
=======================================================================================================
TOTAL REVENUE - FTE EXCLUDING SECURITIES GAINS $664,243 $195,701 $468,542
=======================================================================================================
(1) See "Operating Basis - 2002 First Quarter Reconciliation to GAAP Results"
discussion on page 41 for details.
(2) Calculated assuming a 35% tax rate.
(3) Non-interest expense excluding restructuring charges, divided by fully
taxable equivalent revenue less securities gains and significant
non-operating gains.
42
TABLE 19 - SELECTED 2002 FIRST QUARTER AVERAGE BALANCE SHEET DATA -
RECONCILIATION OF GAAP TO OPERATING BASIS
- ------------------------------------------------------------------------------------------------------
(in millions) THREE MONTHS ENDED MARCH 31, 2002
- ------------------------------------------------------------------------------------------------------
GAAP SOLD FLORIDA OPERATIONS OPERATING
BASIS & OTHER ITEMS(1) BASIS
- ------------------------------------------------------------------------------------------------------
SELECTED ASSETS
Interest bearing deposits in banks $ 34 $ - $ 34
Trading account securities 5 --- 5
Federal funds sold and securities purchased
under resale agreements 62 --- 62
Mortgages held for sale 381 --- 381
Securities:
Taxable 2,713 --- 2,713
Tax exempt 101 (1) 102
- ------------------------------------------------------------------------------------------------------
TOTAL SECURITIES 2,814 (1) 2,815
- ------------------------------------------------------------------------------------------------------
Loans and leases:(2)
Commercial 6,045 384 5,661
Real Estate
Construction 1,291 50 1,241
Commercial 2,364 168 2,196
- ------------------------------------------------------------------------------------------------------
Total commercial real estate 3,655 218 3,437
Consumer
Automobile loans and leases 2,822 171 2,651
Home equity 3,209 421 2,788
Residential mortgage 1,185 117 1,068
Other loans 482 58 424
- ------------------------------------------------------------------------------------------------------
Total Consumer 7,698 767 6,931
- ------------------------------------------------------------------------------------------------------
TOTAL LOANS AND LEASES 17,398 1,369 16,029
- ------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN AND LEASE LOSSES 371 11 360
- ------------------------------------------------------------------------------------------------------
Net loans and leases 17,027 1,358 15,669
- ------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 20,694 1,368 19,326
- ------------------------------------------------------------------------------------------------------
Operating lease assets 3,041 --- 3,041
DEPOSITS
Core deposits
Non-interest bearing deposits $ 3,041 $ 303 $ 2,738
Interest bearing demand deposits 5,148 786 4,362
Savings deposits 3,097 267 2,830
Other domestic time deposits 5,015 918 4,097
- ------------------------------------------------------------------------------------------------------
TOTAL CORE DEPOSITS 16,301 2,274 14,027
- ------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 1,052 93 959
Brokered time deposits and negotiable CDs 302 0 302
Foreign time deposits 270 2 268
- ------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $17,925 $2,369 $15,556
- ------------------------------------------------------------------------------------------------------
(1) See "Operating Basis - 2002 First Quarter Reconciliation to GAAP Results"
discussion on page 41 for details.
(2) Individual loan and lease components include applicable fees.
43
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures for the current period are found
beginning on page 33 of this report, which includes changes in market risk
exposures from disclosures presented in Huntington's amended 2002 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
On May 19, 2003, Huntington carried out an evaluation, under the
supervision and with the participation of its management, including the Chief
Executive Officer (CEO) along with the Chief Financial Officer (CFO), of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
CEO along with the CFO concluded that Huntington's disclosure controls and
procedures are effective in timely alerting the CEO and CFO to material
information relating to Huntington (including its consolidated subsidiaries)
required to be included in its periodic SEC filings.
There have been no significant changes in Huntington's internal controls or
in other factors that could significantly affect its internal controls
subsequent to the date it carried out this evaluation.
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 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
44
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 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)* Amended and Restated Executive Deferred Compensation Plan
for Huntington Bancshares Incorporated
99.1. Earnings to Fixed Charges
99.2 Chief Executive Officer Certification
99.3 Chief Financial Officer Certification
(b) Reports on Form 8-K
1. A report on Form 8-K, dated January 7, 2003, was filed under
report item numbers 5 and 7, announcing credit actions taken in
the fourth quarter of 2002. These included the sale of $47
million in non-performing loans with $21 million in incremental
charge-offs and a $30 million charge-off, or 100% of the credit
exposure associated with one customer in the health care finance
business that was previously disclosed as a non-performing loan
in November 2002.
2. A report on Form 8-K, dated January 16, 2003, was filed under
report item numbers 5 and 7, concerning Huntington's results of
operations for the fourth quarter and year ended December 31,
2002.
* Denotes management contract or compensatory plan or arrangement.
45
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: May 20, 2003 /s/ Thomas E. Hoaglin
------------------------------------------
Thomas E. Hoaglin
Chairman, Chief Executive Officer and
President
Date: May 20, 2003 /s/ Michael J. McMennamin
------------------------------------------
Michael J. McMennamin
Vice Chairman, Chief Financial Officer and
Treasurer (Principal Financial Officer)
46
CERTIFICATION
I, Thomas E. Hoaglin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Huntington
Bancshares Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 20, 2003
-----------------------
/s/ Thomas E. Hoaglin
------------------------------------
Thomas E. Hoaglin
Chief Executive Officer
47
CERTIFICATION
I, Michael J. McMennamin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Huntington
Bancshares Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize, and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 20, 2003
-----------------------
/s/ Michael J. McMennamin
------------------------------------
Michael J. McMennamin
Chief Financial Officer
48