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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 JUNE 30, 2003
Commission File Number 0-2525
HUNTINGTON BANCSHARES INCORPORATED
MARYLAND 31-0724920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 SOUTH HIGH STREET, COLUMBUS, OHIO 43287
Registrant's telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
====== =======
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
====== =======
There were 228,693,313 shares of Registrant's without par value common stock
outstanding on July 31, 2003.
HUNTINGTON BANCSHARES INCORPORATED
INTRODUCTORY NOTE
On July 17, 2003, Huntington Bancshares Incorporated (Huntington) announced it
was voluntarily restating prior period results to reflect a series of actions
related to the timing of recognition of origination fees paid to automobile
dealers, commissions paid to employees for deposit gathering activities, certain
residential mortgage loan origination fee income, expense related to pension
settlements, and reserves related to the sale of an automobile debt cancellation
product. The financial impact related to these actions is reflected in the
second quarter financial information included in this report and, for previously
reported periods, is summarized in Part II, Item 5 of this report. Huntington
also stated it would defer origination fees and expenses prospectively for all
loans and leases originated after June 30, 2003.
In addition, Huntington announced that it is reviewing the application of SFAS
91 (Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Cost of Leases) on historical results. SFAS
91 deals with the timing of recognition of loan and lease origination fees and
certain expenses, and requires that such fees and costs, if material, be
deferred and amortized over the estimated life of the asset.
Part II, Item 5 also contains additional disclosures which have no financial
impact on previously reported results, but which will be included in the second
amended 2002 Annual Report on Form 10-K/A and/or the amended 2003 First Quarter
10-Q/A. Huntington is not filing these amended documents at this time because it
has not completed gathering and analyzing data for 1995-1997, which is necessary
to finalize its review of the impact of not having deferred net origination fees
and costs on prior period results. However, based upon information currently
available, Huntington expects the majority of any additional impact that might
result from a restatement for the deferral of all loan origination fees and
costs would be reflected in 1999 and earlier periods, similar to the timing
impact of the restatements announced on July 17, 2003.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2003 and 2002 and December 31, 2002 3
Consolidated Statements of Income -
For the three and six months ended June 30, 2003 and 2002 4
Consolidated Statements of Changes in Shareholders' Equity -
For the six months ended June 30, 2003 and 2002 5
Consolidated Statements of Cash Flows -
For the six months ended June 30, 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 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4. Controls and Procedures 45
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 45
Item 5. Other Information 47
Item 6. Exhibits and Reports on Form 8-K 48
Signatures 50
2
PART 1. FINANCIAL INFORMATION
FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, December 31, June 30,
(in thousands) 2003 2002 2002
- -----------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
ASSETS
Cash and due from banks $ 1,153,108 $ 969,483 $ 858,561
Federal funds sold and securities
purchased under resale agreements 74,473 49,280 75,824
Interest bearing deposits in banks 44,906 37,300 28,385
Trading account securities 19,426 241 10,532
Loans held for sale 713,722 528,379 190,724
Securities available for sale - at fair value 3,702,761 3,403,369 3,006,273
Investment securities - fair value $6,780, $7,725,
and $10,963, respectively 6,593 7,546 10,769
Total loans and direct financing leases 19,098,929 18,619,211 16,784,144
Less allowance for loan and lease losses 340,947 336,648 351,696
- -----------------------------------------------------------------------------------------------------------------
Net loans and direct financing leases 18,757,982 18,282,563 16,432,448
- -----------------------------------------------------------------------------------------------------------------
Operating lease assets 1,717,194 2,252,445 2,801,239
Bank owned life insurance 906,823 886,214 863,327
Premises and equipment 332,916 341,366 353,931
Goodwill and other intangible assets 218,080 218,567 210,685
Customers' acceptance liability 8,372 16,745 16,778
Accrued income and other assets 635,663 522,611 492,766
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 28,292,019 $ 27,516,109 $ 25,352,242
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $ 18,371,359 $ 17,499,326 $ 16,861,100
Short-term borrowings 918,771 2,141,016 1,814,275
Federal Home Loan Bank advances 1,273,000 1,013,000 13,000
Subordinated notes 496,666 738,678 880,706
Other long-term debt 3,508,397 2,495,123 2,082,438
Company obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
junior subordinated debentures of the Parent Company 300,000 300,000 300,000
Bank acceptances outstanding 8,372 16,745 16,778
Accrued expenses and other liabilities 1,144,917 1,053,833 1,055,614
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities 26,021,482 25,257,721 23,023,911
- -----------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock - authorized 6,617,808 shares;
none outstanding --- --- ---
Common stock - without par value; authorized
500,000,000 shares; issued 257,866,255
shares; outstanding 228,660,038, 232,878,851, and
242,919,872 shares, respectively 2,483,105 2,484,421 2,487,887
Less 29,206,217, 24,987,404, and 14,946,383
treasury shares, respectively (555,176) (475,399) (289,705)
Accumulated other comprehensive income 40,817 62,300 28,655
Retained earnings 301,791 187,066 101,494
- -----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,270,537 2,258,388 2,328,331
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,292,019 $ 27,516,109 $ 25,352,242
- -----------------------------------------------------------------------------------------------------------------
See notes to unaudited consolidated financial statements.
3
- --------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
Interest and fee income
Loans and leases $279,506 $274,893 $ 562,462 $ 558,601
Securities 42,033 44,424 84,111 89,205
Other 8,923 3,499 15,880 10,211
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 330,462 322,816 662,453 658,017
- --------------------------------------------------------------------------------------------------------------------------------
Deposits 76,383 93,759 156,093 202,589
Short-term borrowings 4,313 6,156 9,872 14,670
Federal Home Loan Bank advances 5,634 212 11,219 470
Subordinated notes and other long-term debt
including preferred capital securities 28,554 30,695 55,955 62,730
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 114,884 130,822 233,139 280,455
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 215,578 191,994 429,314 377,562
Provision for loan and lease losses 49,193 49,876 86,037 88,886
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 166,385 142,118 343,277 288,676
- --------------------------------------------------------------------------------------------------------------------------------
Operating lease income 124,209 168,047 257,964 343,953
Service charges on deposit accounts 40,914 35,608 80,783 74,423
Trust services 15,580 16,247 30,491 31,748
Gains on sales and securitizations of loans 14,808 1,743 26,922 3,138
Brokerage and insurance income 14,196 16,899 29,693 34,504
Other service charges and fees 11,372 10,529 24,822 28,469
Bank Owned Life Insurance income 11,043 11,443 22,180 23,119
Mortgage banking 11,033 10,115 21,710 21,161
Gain on sale of Florida operations --- --- --- 181,344
Securities gains 6,887 966 8,085 1,423
Other 24,164 16,068 39,587 28,557
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 274,206 287,665 542,237 771,839
- --------------------------------------------------------------------------------------------------------------------------------
Personnel costs 114,047 106,808 235,790 222,491
Operating lease expense 102,939 131,695 214,527 272,480
Equipment 16,341 16,659 32,753 33,608
Outside data processing and other services 16,104 16,592 32,683 35,031
Net occupancy 15,583 14,756 32,398 31,995
Professional services 9,872 7,864 19,157 14,294
Marketing 8,454 7,231 15,080 14,234
Telecommunications 5,394 5,320 11,095 11,338
Printing and supplies 2,253 3,683 5,934 7,520
Restructuring charges (releases) (5,315) --- (6,315) 56,184
Other 20,372 21,083 37,281 42,016
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 306,044 331,691 630,383 741,191
- --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 134,547 98,092 255,131 319,324
Income taxes 37,160 25,081 67,168 150,302
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 97,387 $ 73,011 $ 187,963 $ 169,022
- --------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net Income
Basic $0.43 $0.30 $0.82 $0.68
Diluted $0.42 $0.29 $0.81 $0.68
Cash Dividends Declared $0.16 $0.16 $0.32 $0.32
AVERAGE COMMON SHARES
Basic 228,633 246,106 229,987 248,415
Diluted 230,572 247,867 231,684 249,946
See notes to unaudited consolidated financial statements.
4
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK TREASURY STOCK OTHER
-------------------- -------------------- COMPREHENSIVE RETAINED
(in thousands) SHARES AMOUNT SHARES AMOUNT INCOME (LOSS) EARNINGS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
Six Months Ended June 30, 2002:
Balance, beginning of period 257,866 $2,490,724 (6,672) $(123,849) $ 25,488 $ 11,492 $2,403,855
Comprehensive Income:
Net income 169,022 169,022
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 5,926 5,926
Unrealized losses on derivative instruments
used in cash flow hedging relationships (2,759) (2,759)
-----------
Total comprehensive income 172,189
-----------
Stock issued for acquisition 203 3,952 3,952
Cash dividends declared (79,020) (79,020)
Stock options exercised (2,837) 312 5,365 2,528
Treasury shares purchased (8,789) (175,173) (175,173)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period 257,866 $2,487,887 (14,946) $(289,705) $ 28,655 $101,494 $2,328,331
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2003:
BALANCE, BEGINNING OF PERIOD 257,866 $2,484,421 (24,987) $(475,399) $ 62,300 $187,066 $2,258,388
COMPREHENSIVE INCOME:
NET INCOME 187,963 187,963
UNREALIZED NET HOLDING LOSSES ON SECURITIES
AVAILABLE FOR SALE ARISING DURING THE PERIOD,
NET OF RECLASSIFICATION ADJUSTMENT FOR NET
GAINS INCLUDED IN NET INCOME (4,391) (4,391)
UNREALIZED LOSSES ON DERIVATIVE INSTRUMENTS
USED IN CASH FLOW HEDGING RELATIONSHIPS (17,092) (17,092)
-----------
TOTAL COMPREHENSIVE INCOME 166,480
-----------
CASH DIVIDENDS DECLARED (73,238) (73,238)
STOCK OPTIONS EXERCISED (1,316) 118 1,902 586
TREASURY SHARES PURCHASED (4,300) (81,061) (81,061)
OTHER (37) (618) (618)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD 257,866 $2,483,105 (29,206) $(555,176) $ 40,817 $301,791 $2,270,537
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to unaudited consolidated financial statements.
5
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
(Restated)
OPERATING ACTIVITIES
Net Income $ 187,963 $ 169,022
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan and lease losses 86,037 88,886
Depreciation on operating lease assets 187,914 243,614
Other depreciation and amortization 42,209 30,382
Deferred income tax expense 27,528 244,825
(Increase) decrease in trading account securities (19,185) 2,860
(Increase) decrease in mortgages held for sale (185,343) 438,662
Gains on sales of securities available for sale (8,085) (1,423)
Gains on sales/securitizations of loans (26,922) (3,138)
Gain on sale of Florida banking and insurance operations --- (181,344)
Restructuring charges (releases) (6,315) 56,184
Other, net (63,540) (339,755)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 222,261 748,775
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in interest bearing deposits in banks (7,606) (7,180)
Proceeds from:
Maturities and calls of investment securities 954 1,548
Maturities and calls of securities available for sale 945,534 381,329
Sales of securities available for sale 591,497 456,411
Purchases of securities available for sale (1,649,721) (782,961)
Proceeds from sales/securitizations of loans 1,390,378 226,707
Net loan and lease originations, excluding sales (2,131,396) (1,256,098)
Net decrease (increase) in operating lease inventory 347,337 (27,581)
Proceeds from sale of premises and equipment 4,049 15,180
Purchases of premises and equipment (22,220) (26,389)
Proceeds from sales of other real estate 4,872 4,770
Cash paid in purchase acquisition --- (4,026)
Net cash paid related to sale of Florida banking and insurance operations --- (1,289,917)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (526,322) (2,308,207)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in total deposits 869,313 1,435,665
(Decrease) increase in short-term borrowings (1,222,245) 108,349
Payment of subordinated notes (250,000) ---
Proceeds from Federal Home Loan Bank advances 270,000 ---
Maturity of Federal Home Loan Bank advances (10,000) (4,000)
Proceeds from long term debt 1,235,000 675,000
Maturity of long-term debt (225,000) (690,000)
Dividends paid on common stock (73,714) (80,193)
Repurchases of common stock (81,061) (175,173)
Net proceeds from issuance of common stock 586 2,528
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 512,879 1,272,176
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS 208,818 (287,256)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,018,763 1,221,641
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,227,581 $ 934,385
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Income taxes paid $ 65,668 $ 20,136
Interest paid 247,126 298,235
Non-cash activities
Mortgage loans securitized 171,586 ---
Common stock dividends accrued not paid 27,932 39,040
See notes to unaudited consolidated financial statements.
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
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States (GAAP) have been omitted. The Notes to
the Consolidated Financial Statements appearing in Huntington's amended 2002
Annual Report on Form 10-K/A filed on May 20, 2003 (amended Form 10-K/A), which
include descriptions of significant accounting policies as updated by the
information contained in this report, should be read in conjunction with these
interim financial statements.
In preparing financial statements in conformity with GAAP, management of
Huntington is required to make estimates, assumptions, and judgments that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and reported amounts of revenue and expenses during the reporting period.
An accounting estimate requires assumptions about uncertain matters that could
have a material effect on the financial statements of Huntington if a different
amount within a range of estimates were used or if estimates changed from period
to period. Actual results could differ from those estimates.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the 2003 presentation.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).
This Interpretation changes current practice in the accounting for, and
disclosure of, guarantees which, for Huntington, apply generally to its standby
letters of credit. The Interpretation requires certain guarantees to be recorded
at fair value, which differs from the prior practice of recording a liability
generally when a loss is probable and reasonably estimable, as those terms are
defined in FASB Statement No. 5, Accounting for Contingencies. The
Interpretation also requires a guarantor to make significant new disclosures,
even when the likelihood of making any payments under the guarantee is remote,
which also differs from current practice. The recognition requirements of this
Interpretation were adopted prospectively January 1, 2003. The impact of
adopting FIN 45 was not material.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. This Statement amends
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition to Statement No. 123's fair value method of
accounting for stock-based employee compensation. Statement No. 148 also amends
the disclosure provisions of Statement 123 and Accounting Principles Board (APB)
Opinion No. 28, Interim Financial Reporting, to require disclosure of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. While Statement No. 148 does not 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 (FIN 46). This Interpretation of Accounting Research
Bulletin No. 51 (ARB 51), Consolidated Financial Statements, addresses
consolidation by business enterprises where ownership interests in an entity may
vary over time or, in many cases, of special-purpose entities (SPEs). To be
consolidated for financial reporting, these entities must have certain
characteristics. ARB 51 requires that an enterprise's consolidated financial
statements include subsidiaries in which the enterprise has a controlling
financial interest. This Interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. An
enterprise that holds significant variable interests in such an entity, but is
not the primary beneficiary, is required to disclose certain information
regarding its interests in that entity. This Interpretation applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
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
7
issued financial statements for one or more years with a cumulative effect
adjustment as of the beginning of the first year restated.
Effective July 1, 2003, Huntington adopted FIN 46 resulting in the
consolidation of one of the securitization trusts formed in 2000. The
consolidation of that trust involved recognition of the trust's assets and
liabilities, elimination of the related retained interest and servicing asset,
recognition of other related assets, and establishment of a 1.01% allowance for
loan and lease losses. Reflecting these impacts, the adoption of FIN 46 will
result in a cumulative effect charge of approximately $11 million, or $0.05 per
share, in the third quarter, a reduction of the ALLL by approximately 3 basis
points, and a reduction of the tangible common equity ratio of approximately 30
basis points. Regulatory capital was minimally impacted since these assets were
reflected previously in risk-based assets.
Huntington owns the common stock of two fully-consolidated subsidiary
business trusts, which have issued company-obligated mandatorily redeemable
preferred capital securities to third party investors. The trusts' only assets,
which totaled $300 million at June 30, 2003, are debentures issued by
Huntington, which were acquired by the trusts using proceeds from the issuance
of the preferred securities and common stock. With the implementation of FIN 46
in the third quarter of 2003, Huntington will no longer consolidate these
trusts. Upon de-consolidation, Huntington will include the debentures in other
long-term debt and Huntington's equity interest in the trusts will be included
in "accrued income and other assets" on the balance sheet. For regulatory
reporting purposes, the Federal Reserve Board has advised that such preferred
securities will continue to constitute Tier 1 capital until further notice.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. In
particular, this Statement (1) clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative
discussed in paragraph 6(b) of Statement No. 133, (2) clarifies when a
derivative contains a financing component, (3) amends the definition of an
"underlying" to conform it to language used in FIN 45, and (4) amends certain
other existing pronouncements. Those changes will result in more consistent
reporting of contracts as either derivatives or hybrid instruments. This
Statement is substantially effective on a prospective basis for contracts
entered into or modified after June 30, 2003. Huntington is in the process of
assessing the impact of Statement No. 149 on its results of operations and
financial condition.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer such as Huntington classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The remaining provisions of this Statement are consistent
with the Board's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own equity
shares, depending on the nature of the relationship established between the
holder and the issuer. This Statement does not apply to features that are
embedded in a financial instrument that is not a derivative in its entirety.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. Huntington is in the process of
assessing the impact of Statement No. 150 on its results of operations and
financial condition.
Statement of Financial Accounting Standards No. 91, Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases, (SFAS 91) deals with the timing of recognition
of loan and lease origination fees and certain expenses. The statement requires
that such fees and costs, if material, be deferred and amortized over the
estimated life of the asset. Generally, Huntington records the fees it receives
from loan and lease origination activities, as well as the cost of those
activities, in the period in which the fees are received and the costs incurred.
Effective July 1, 2003, Huntington elected to defer loan origination fees and
related costs prospectively for all loan and lease originations. Management
believes that the deferral of all loan and origination fees will reduce reported
income per share by $0.05 in the second half of 2003. Huntington is reviewing
whether it is appropriate to restate prior periods to reflect the deferral of
origination fees and costs. If prior years are restated, the impact on earnings
for the second half of 2003 would be less.
8
NOTE 3 - RESTATEMENTS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Huntington has voluntarily restated its prior period financial results
to reflect a series of actions related to the timing and recognition of
origination fees paid to automobile dealers, commissions paid to originate
deposits, mortgage origination fee income, and expense related to pension
settlements, and reserves related to the sale of an automobile debt cancellation
product. In addition, Huntington reclassified certain tax consulting expenses
from income tax expense to professional services.
The following table reflects the financial statement line items in
Huntington's balance sheets and income statements, showing the previously
reported financial information included in the Form 10-K/A filed on May 20, 2003
and the related restated amounts.
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002 JUNE 30, 2002
---------------------------- -------------------------------
PREVIOUSLY
PREVIOUSLY REPORTED
(in thousands of dollars) REPORTED RESTATED & RESTATED(1) RESTATED
- --------------------------------------------------------------------------------------------------------------
BALANCE SHEET:
Total loans and leases $ 18,645,189 $ 18,619,211 $ 16,808,113 $ 16,784,144
Net loans and leases 18,308,541 18,282,563 16,456,417 16,432,448
Accrued income and other assets 537,775 522,611 506,957 492,766
Total Assets 27,557,251 27,516,109 25,390,402 25,352,242
Accrued expenses and other liabilities 1,062,868 1,053,833 1,066,319 1,055,614
Total liabilities 25,266,756 25,257,721 23,034,616 23,023,911
Retained earnings 219,172 187,066 128,949 101,494
Total shareholders' equity 2,290,495 2,258,388 2,355,786 2,328,331
Total Liabilities and Shareholders' Equity $ 27,557,251 $ 27,516,109 $ 25,390,402 $ 25,352,242
(1) Reflects impact of amendment to Form 10-K filed on May 20, 2003.
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
----------------------------- ------------------------------
PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED
- --------------------------------------------------------------------------------------------------------------
INCOME STATEMENT:
Interest expense $ 131,835 $ 130,822 $ 282,605 $ 280,455
Net interest income 190,981 191,994 375,412 377,562
Net interest income after provision for loan
and lease losses 141,105 142,118 286,526 288,676
Service charges on deposit accounts 35,354 35,608 73,884 74,423
Mortgage banking income 10,725 10,115 22,982 21,161
Gain on sale of Florida operations --- --- 175,344 181,344
Total non-interest income 288,021 287,665 767,121 771,839
Personnel costs 105,146 106,808 219,431 222,491
Professional services 6,267 7,864 11,668 14,294
Other non-interest expense 20,683 21,083 41,217 42,016
Total non-interest expense 328,032 331,691 734,706 741,191
Income before income taxes 101,094 98,092 318,941 319,324
Income taxes 27,169 25,081 151,875 150,302
Net income $ 73,925 $ 73,011 $ 167,066 $ 169,022
Earnings per share:
Basic $0.30 $0.30 $0.67 $0.68
Diluted $0.30 $0.29 $0.67 $0.68
9
Restated financial information for prior periods has been summarized in
Part II Item 5 of this report. Financial information included in this report for
the three and six months ended June 30, 2002, has also been restated. Net income
was reduced by $0.9 million for the three-month period and increased by $2.0
million, or $0.01 per share, for the six-month period. Total loans and leases
were reduced by $24.0 million, other assets by $14.2 million, other liabilities
by $10.7 million and retained earnings by $27.5 million at June 30, 2002, for
the cumulative effect of the restatement.
NOTE 4 - RESTRUCTURING CHARGES
During the second quarter 2003, Huntington released $5.3 million of
restructuring reserves through a credit to the restructuring charge line of
non-interest expense in the accompanying unaudited consolidated financial
statements. Released reserves of $3.8 million related to those established in
1998 and $1.5 million related to the strategic refocusing plan established in
2001 and 2002. Reserves of $1.0 million and $7.2 million were released in the
first quarter of 2003 and the fourth quarter of 2002, respectively, also related
to the strategic refocusing plan. The 1998 reserve was established for, among
other items, the exit of under performing product lines, including possible
third party claims related to these exits. Management reviewed this reserve and
determined that future claims would be immaterial, and reduced the level of the
reserve accordingly.
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.
As of June 30, 2003, Huntington has remaining reserves for restructuring
of $0.3 million related to the 1998 strategic initiative, and $9.1 million
related to the 2001 strategic initiatives, respectively. Huntington expects that
this remaining reserve will be adequate to fund the remaining estimated future
cash outlays that are expected in the completion of the exit activities
contemplated by Huntington's 2001 strategic refocusing plan.
10
NOTE 5- SECURITIES AVAILABLE FOR SALE
Securities available for sale at June 30, 2003 and December 31, 2002
were as follows:
- -----------------------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------------------
Amortized Amortized
(in thousands of dollars) Cost Fair Value Cost Fair Value
- -----------------------------------------------------------------------------------------------------------------
U.S. Treasury
Under 1 year $ 327 $ 331 $ --- $ --
1-5 years 38,930 39,543 13,434 14,066
6-10 years 64,063 66,158 4,704 5,367
Over 10 years --- --- 412 479
- -----------------------------------------------------------------------------------------------------------------
Total 103,320 106,032 18,550 19,912
- -----------------------------------------------------------------------------------------------------------------
Federal agencies
Mortgage-backed securities
1-5 years 13,353 13,660 34,196 35,166
6-10 years 209,451 215,030 264,219 270,779
Over 10 years 720,332 738,826 873,552 901,417
- -----------------------------------------------------------------------------------------------------------------
Total 943,136 967,516 1,171,967 1,207,362
- -----------------------------------------------------------------------------------------------------------------
Other agencies
Under 1 year 137,797 141,375 34,923 35,966
1-5 years 305,503 324,030 758,032 783,533
6-10 years 210,788 209,510 95,617 97,095
Over 10 years 948,281 961,049 477,185 483,816
- -----------------------------------------------------------------------------------------------------------------
Total 1,602,369 1,635,964 1,365,757 1,400,410
- -----------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and Federal
Agencies 2,648,825 2,709,512 2,556,274 2,627,684
- -----------------------------------------------------------------------------------------------------------------
Other
Under 1 year 7,720 7,731 7,133 7,183
1-5 years 59,007 59,735 62,939 63,886
6-10 years 57,989 59,974 49,581 51,046
Over 10 years 649,192 651,330 451,108 449,958
Retained interest in securitizations 148,177 163,664 146,160 159,978
Marketable equity securities 50,809 50,815 42,846 43,634
- -----------------------------------------------------------------------------------------------------------------
Total 972,894 993,249 759,767 775,685
- -----------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $ 3,621,719 $ 3,702,761 $ 3,316,041 $ 3,403,369
- -----------------------------------------------------------------------------------------------------------------
NOTE 6 - OPERATING LEASE ASSETS
Operating lease assets at June 30, 2003 and 2002 and December 31, 2002,
were as follows:
- ------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
(in thousands of dollars) 2003 2002 2002
- ------------------------------------------------------------------------------------------------------
Cost of automobiles under operating leases $ 2,689,413 $ 3,260,897 $ 3,782,647
Accumulated depreciation (972,219) (1,008,452) (981,408)
- ------------------------------------------------------------------------------------------------------
OPERATING LEASE ASSETS, NET $ 1,717,194 $ 2,252,445 $ 2,801,239
- ------------------------------------------------------------------------------------------------------
Depreciation expense related to leased automobiles was $89.8 million and
$119.6 million for the three months ended June 30, 2003 and 2002, respectively.
For the respective six-month periods, depreciation expense was $187.9 million
and $243.6 million.
11
NOTE 7 - EARNINGS PER SHARE
Basic earnings per share is the amount of earnings for the period
available to each share of common stock outstanding during the reporting period.
Diluted earnings per share is the amount of earnings available to each share of
common stock outstanding during the reporting period adjusted for the potential
issuance of common shares upon the exercise of stock options. The calculation of
basic and diluted earnings per share for each of the three and six months ended
June 30 is as follows:
- -------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- -------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
(Restated) (Restated)
NET INCOME $ 97,387 $ 73,011 $ 187,963 $ 169,022
- -------------------------------------------------------------------------------------------------------
Average common shares outstanding 228,633 246,106 229,987 248,415
Dilutive effect of common stock equivalents 1,939 1,761 1,697 1,531
- -------------------------------------------------------------------------------------------------------
DILUTED AVERAGE COMMON SHARES OUTSTANDING 230,572 247,867 231,684 249,946
- -------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic $0.43 $0.30 $0.82 $0.68
Diluted $0.42 $0.29 $0.81 $0.68
The average market price of Huntington's common stock for the period was
used in determining the dilutive effect of outstanding stock options. Common
stock equivalents are computed based on the number of shares subject to stock
options that have an exercise price less than the average market price of
Huntington's common stock for the period.
Approximately 5.1 million and 3.1 million stock options were outstanding
at June 30, 2003 and 2002, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares for the period
and, therefore, the effect would be antidilutive. The weighted-average exercise
price for these options was $23.73 per share and $26.60 per share at the end of
the same respective periods.
At June 30, 2003, a total of 535,337 common shares associated with a
2002 acquisition were held in escrow, subject to future issuance contingent upon
meeting certain contractual performance criteria. These shares, which were
included in treasury stock, will be included in the computation of basic and
diluted earnings per share at the beginning of the period when all conditions
necessary for their issuance have been met. Dividends paid on these shares are
reinvested in common stock.
NOTE 8 - 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
12
minimum pension liability. The related before and after tax amounts in each of
the three and six months ended June 30 were as follows:
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- ---------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Minimum pension liability:
Unrealized net loss $ --- $ --- $ --- $ ---
Related tax benefit --- --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Net --- --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) on securities available
for sale arising during the period:
Unrealized net gains 9,053 32,852 1,330 10,540
Related tax expense (3,169) (11,498) (466) (3,689)
- ---------------------------------------------------------------------------------------------------------------------
Net 5,884 21,354 864 6,851
- ---------------------------------------------------------------------------------------------------------------------
Unrealized holding losses on derivatives used in cash flow
hedging relationships arising during the period:
Unrealized net losses (23,415) (2,392) (26,295) (4,245)
Related tax benefit 8,195 837 9,203 1,486
- ---------------------------------------------------------------------------------------------------------------------
Net (15,220) (1,555) (17,092) (2,759)
- ---------------------------------------------------------------------------------------------------------------------
Less: Reclassification adjustment for net gains from sales
of securities available for sale realized during the period:
Realized net gains 6,887 966 8,085 1,423
Related tax expense (2,410) (338) (2,830) (498)
- ---------------------------------------------------------------------------------------------------------------------
Net 4,477 628 5,255 925
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME $(13,813) $19,171 $(21,483) $ 3,167
- ---------------------------------------------------------------------------------------------------------------------
Activity in Accumulated Other Comprehensive Income for the six months
ended June 30, 2003 and 2002 was as follows:
- ------------------------------------------------------------------------------------------------------
UNREALIZED GAINS
UNREALIZED GAINS (LOSSES) ON DERIVATIVE
MINIMUM (LOSSES) ON INSTRUMENTS USED IN
PENSION SECURITIES CASH FLOW HEDGING
(in thousands of dollars) LIABILITY AVAILABLE FOR SALE RELATIONSHIPS TOTAL
- ------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ --- $29,469 $ (3,981) $ 25,488
Period change --- 5,926 (2,759) 3,167
- ------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 $ --- $35,395 $ (6,740) $ 28,655
- ------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ (195) $56,856 $ 5,639 $ 62,300
Current-period change --- (4,391) (17,092) (21,483)
- ------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 $ (195) $52,465 $ (11,453) $ 40,817
- ------------------------------------------------------------------------------------------------------
NOTE 9 - STOCK-BASED COMPENSATION
Huntington's stock-based compensation plans are accounted for based on
the intrinsic value method promulgated by APB Opinion 25, Accounting for Stock
Issued to Employees, and related interpretations. Compensation expense for
employee stock options is generally not recognized if the exercise price of the
option equals or exceeds the fair value of the stock on the date of grant.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. This Statement amends
Statement No. 123, Accounting for Stock-Based Compensation, to provide
13
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 expects to 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.
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 the three and
six month periods presented:
- -----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------
PERIOD-END OPTIONS OUTSTANDING (IN THOUSANDS) 17,399 13,729 17,399 13,729
ASSUMPTIONS
Risk-free interest rate 4.46% 4.13% 4.30% 4.13%
Expected dividend yield 3.26% 3.34% 3.30% 3.34%
Expected volatility of Huntington's common stock 33.8% 33.8% 33.8% 33.8%
PRO FORMA RESULTS (IN MILLIONS OF DOLLARS)
Net income, as reported $ 97.4 $ 73.0 $ 188.0 $ 169.0
Less pro forma expense, net of tax, related to
options granted 2.9 2.9 5.9 6.6
- -----------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 94.5 $ 70.1 $ 182.1 $ 162.4
- -----------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic, as reported $0.43 $0.30 $0.82 $0.68
Basic, pro forma 0.41 0.28 0.79 0.65
Diluted, as reported 0.42 0.29 0.81 0.68
Diluted, pro forma 0.41 0.28 0.79 0.65
NOTE 10 - SEGMENT REPORTING
Huntington has three distinct lines of business: Regional Banking,
Dealer Sales, and the Private Financial Group (PFG). A fourth segment includes
Huntington's Treasury function and other unallocated assets, liabilities,
revenue, and expense. Line of business results are determined based upon
Huntington's management reporting system, which assigns balance sheet and income
statement items to each of the business segments. The process is designed around
Huntington's organizational and management structure and, accordingly, the
results below are not necessarily comparable with similar information published
by other financial institutions.
Accounting policies for the lines of business are the same as those used
in the preparation of the unaudited consolidated financial statements with
respect to activities specifically attributable to each business line. However,
the preparation of business line results requires management to establish
methodologies to allocate funding costs and benefits, expenses, and other
financial elements to each line of business. Changes are made in these
methodologies utilized for
14
certain balance sheet and income statement allocations performed by Huntington's
management reporting system, as appropriate. Prior periods are typically not
restated for these changes.
The chief decision-makers for Huntington rely on "operating earnings"
for review of performance and for critical decision-making purposes. Operating
earnings adjust net income as reported to exclude the 2002 gain from the sale of
the Florida operations, the historical Florida banking and insurance operating
results, and restructuring charges or release of previously established
restructuring reserves. See Note 10 to the unaudited consolidated financial
statements for further discussions regarding the 2002 restructuring charges and
Note 11 regarding the 2002 sale of the Florida banking and insurance operations.
The reconciling items between operating earnings and net income as reported are
presented on an after-tax basis.
Operating earnings that were previously reported have been restated,
where appropriate, to reflect a change in the timing of certain revenues and
expenses. See Note 3 to the unaudited consolidated financial statements for
further discussion regarding this restatement.
The following provides a brief description of the four operating segments of
Huntington:
REGIONAL BANKING
This segment provides products and services to retail, business banking, and
commercial customers. This segment's products include home equity loans, first
mortgage loans, direct installment loans, business loans, personal and business
deposit products, as well as sales of investment and insurance services. These
products and services are offered in six operating regions within the five
states of Ohio, Michigan, Indiana, West Virginia, and Kentucky through
Huntington's traditional banking network, Direct Bank--Huntington's customer
service center, and Web Bank at www.huntington.com. Regional Banking also
represents middle-market and large commercial banking relationships which use a
variety of banking products and services including, but not limited to,
commercial loans, commercial real estate loans, international trade, and cash
management.
DEALER SALES
This segment finances the purchase of automobiles by customers of automotive
dealerships, purchases automobiles from dealers and simultaneously leases the
automobile under long-term operating and direct financing leases, finances the
dealership's inventory of automobiles, and provides other banking services to
the automotive dealerships and their owners.
PRIVATE FINANCIAL GROUP (PFG)
This segment provides products and services designed to meet the needs of
Huntington's higher wealth customers. Revenue is derived through the sale of
personal trust, asset management, investment advisory, brokerage, insurance, and
deposit and loan products and services. Income and related expenses from the
sale of brokerage and insurance products is shared with the line of business
that generated the sale or provided the customer referral.
TREASURY / OTHER
This segment includes assets, liabilities, equity, revenue, and expense that are
not directly assigned or allocated to one of the lines of business. Since a
match-funded transfer pricing system is used to allocate interest income and
interest expense to other business segments, Treasury / Other results include
the net impact of any over or under allocations arising from centralized
management of interest rate risk including the net impact of derivatives used to
hedge interest rate sensitivity. Furthermore, this segment's results include the
net impact of administering Huntington's investment securities portfolio as part
of overall liquidity management, as well as the impact of mezzanine lending
activity conducted through Huntington's Capital Markets Group. Additionally,
amortization expense of intangible assets, the 2002 gain on sale of the Florida
operations, the 2002 restructuring charges, and other gains or losses not
allocated to other business segments are also a component.
Listed below is certain reported financial information reconciled to
Huntington's three and six month 2003 and 2002 operating results by line of
business.
15
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
- -----------------------------------------------------------------------------------------------------------
INCOME STATEMENTS Regional Dealer Treasury/ Huntington
(in thousands of dollars) Banking Sales PFG Other Consolidated
- -----------------------------------------------------------------------------------------------------------
2003
Net interest income $ 152,342 $ 21,048 $ 9,794 $ 32,394 $ 215,578
Provision for loan and lease losses 40,525 9,192 (458) (66) 49,193
Non-Interest income 75,684 144,003 27,847 26,672 274,206
Non-Interest expense 150,125 125,590 25,886 4,443 306,044
Income taxes 13,082 10,594 4,275 9,209 37,160
- -----------------------------------------------------------------------------------------------------------
Net income, as reported 24,294 19,675 7,938 45,480 97,387
Restructure charges (releases), net of tax --- --- --- (3,455) (3,455)
- -----------------------------------------------------------------------------------------------------------
Operating earnings $ 24,294 $ 19,675 $ 7,938 $ 42,025 $ 93,932
- -----------------------------------------------------------------------------------------------------------
2002
Net interest income $ 146,411 $ 4,233 $ 8,917 $ 32,433 $ 191,994
Provision for loan and lease losses 36,844 10,737 447 1,848 49,876
Non-Interest income 66,550 175,863 31,344 13,908 287,665
Non-Interest expense 140,082 153,919 26,991 10,699 331,691
Income taxes 12,612 5,404 4,488 2,577 25,081
- -----------------------------------------------------------------------------------------------------------
Net income, as reported 23,423 10,036 8,335 31,217 73,011
Florida operating results, net of tax --- --- 532 --- 532
- -----------------------------------------------------------------------------------------------------------
Operating earnings $ 23,423 $ 10,036 $ 7,803 $ 31,217 $ 72,479
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
- -----------------------------------------------------------------------------------------------------------
INCOME STATEMENTS Regional Dealer Treasury/ Huntington
(in thousands of dollars) Banking Sales PFG Other Consolidated
- -----------------------------------------------------------------------------------------------------------
2003
Net interest income $ 300,936 $ 44,699 $ 19,312 $ 64,367 $ 429,314
Provision for loan and lease losses 64,066 20,577 1,454 (60) 86,037
Non-Interest income 149,944 293,659 55,057 43,577 542,237
Non-Interest expense 297,049 259,930 52,502 20,902 630,383
Income taxes 31,418 20,248 7,145 8,357 67,168
- -----------------------------------------------------------------------------------------------------------
Net income, as reported 58,347 37,603 13,268 78,745 187,963
Restructure charges (releases), net of tax --- --- --- (4,105) (4,105)
- -----------------------------------------------------------------------------------------------------------
Operating earnings $ 58,347 $ 37,603 $ 13,268 $ 74,640 $ 183,858
- -----------------------------------------------------------------------------------------------------------
2002
Net interest income $ 306,734 $ (454) $ 16,398 $ 54,884 $ 377,562
Provision for loan and lease losses 64,356 20,386 2,036 2,108 88,886
Non-Interest income 142,581 356,322 64,125 208,811 771,839
Non-Interest expense 285,575 314,793 54,882 85,941 741,191
Income taxes 34,784 7,241 8,262 100,015 150,302
- -----------------------------------------------------------------------------------------------------------
Net income, as reported 64,600 13,448 15,343 75,631 169,022
- -----------------------------------------------------------------------------------------------------------
Florida operating results, net of tax (1,445) (1,106) (2,746) 6,822 1,525
Gain on sale of Florida operations, net of
tax --- --- --- (60,691) (60,691)
Restructuring charges, net of tax --- --- --- 36,519 36,519
- -----------------------------------------------------------------------------------------------------------
Operating earnings $ 63,155 $ 12,342 $ 12,597 $ 58,281 $ 146,375
- -----------------------------------------------------------------------------------------------------------
16
- -----------------------------------------------------------------------------------------------------------
PERIOD-END BALANCE SHEET DATA TOTAL ASSETS AT JUNE 30, TOTAL DEPOSITS AT JUNE 30,
------------------------- --------------------------
(in millions of dollars) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------
Regional Banking $ 14,624 $ 13,062 $ 16,628 $ 15,121
Dealer Sales 6,652 6,596 67 50
Private Financial Group 1,328 1,000 1,027 826
Treasury / Other 5,688 4,694 649 864
- -----------------------------------------------------------------------------------------------------------
Total $ 28,292 $ 25,352 $ 18,371 $ 16,861
- -----------------------------------------------------------------------------------------------------------
NOTE 11 - DIVESTITURES
On July 25, 2003, Huntington sold four banking offices located in the
eastern panhandle of West Virginia. This sale included approximately $50 million
of loans and $130 million of deposits. Huntington expects to report a pre-tax
gain from this sale of between $12 million and $13 million in the third quarter
of 2003.
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. Though the sale affected selected Non-interest income and
Non-interest expense categories, it had no material gain or impact to net
income.
On February 15, 2002, Huntington completed the sale of its Florida
operations to SunTrust Banks, Inc. Included in the sale were $4.8 billion of
deposits and other liabilities and $2.8 billion of loans and other assets.
Huntington received a deposit premium of 15%, or $711.9 million. The total net
pre-tax gain from the sale was $181.3 million and is reflected in Non-interest
income. The after-tax gain was $60.7 million, or $0.24 per share. Income taxes
related to this transaction were $120.7 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.
NOTE 12 - SEC INVESTIGATION
On June 26, 2003 Huntington announced that the Securities and Exchange
Commission (SEC) staff is conducting a formal investigation, and that Huntington
is cooperating fully with the investigation. The formal investigation began
following Huntington's announcement on April 16, 2003 that it intended to
restate its financial statements in order to reclassify its accounting for
automobile leases from the direct financing lease method to the operating lease
method. The investigation also follows allegations by a former Huntington
employee regarding certain aspects of Huntington's accounting and financial
reporting practices, including the recognition of automobile loan and lease
origination fees and costs, as well as certain year-end reserves. These
allegations were immediately reviewed with the Audit/Risk Committee, a Board
committee composed entirely of independent directors. The Audit/Risk committee
retained independent legal counsel who, in turn, retained independent
accountants to assist it in its investigation of the allegations. While the
investigation is ongoing, progress reports have been shared with the Audit/Risk
Committee and the SEC. The SEC investigation is ongoing and Huntington is
continuing to cooperate fully.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
Huntington Bancshares Incorporated (Huntington) is a multi-state
diversified financial services company organized under Maryland law in 1966 and
headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged
in providing full-service commercial and consumer banking services, mortgage
banking services, automobile financing, equipment leasing, investment
management, trust services, and discount brokerage services, as well as
underwriting credit life and disability insurance, and selling other insurance
and financial products and services. Huntington's banking offices are located in
Ohio, Michigan, Indiana, Kentucky, and West Virginia. Selected financial
services are also conducted in other states including Arizona, Florida, Georgia,
Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington also has a foreign
office in the Cayman Islands and a foreign office in Hong Kong. The Huntington
National Bank (the Bank) is Huntington's only bank subsidiary.
The following discussion and analysis provides investors and others with
information that management believes to be necessary for an understanding of
Huntington's financial condition, changes in financial condition, results of
operations, and cash flows, and should be read in conjunction with the financial
statements, notes, and other information contained in this document.
FORWARD-LOOKING STATEMENTS
This interim report, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements about Huntington. These include descriptions of products or services,
plans, or objectives of management for future operations, and forecasts of
revenues, earnings, cash flows, or other measures of economic performance.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts.
By their nature, forward-looking statements are subject to numerous
assumptions, risks, and uncertainties. A number of factors could cause actual
conditions, events, or results to differ significantly from those described in
the forward-looking statements. These factors include, but are not limited to,
those set forth under the heading "Business Risks" included in Item 1 of
Huntington's amended 2002 Annual Report on Form 10-K/A filed on May 20, 2003
(amended Form 10-K/A) 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
Huntington has voluntarily restated its prior period financial results
to reflect a series of actions related to the timing and recognition of
origination fees paid to automobile dealers, deferral of commissions paid to
originate deposits, mortgage origination fee income, expenses related to pension
settlements, and reserves related to the sale of an automobile debt cancellation
product. In addition, Huntington reclassified certain tax consulting expenses
from income tax expense to professional services.
Financial information included in this report for the three and six
months ended June 30, 2002, has also been restated. Net income was reduced by
$0.9 million for the three-month period and increased by $2.0 million, or $0.01
per common share, for the six-month period. The cumulative effect of this
restatement reduced total loans and leases by $24.0 million, other assets by
$14.2 million, other liabilities by $10.7 million, and retained earnings by
$27.5 million at June 30, 2002.
The results of this restatement are reflected in the unaudited
consolidated financial statements, notes to the unaudited consolidated financial
statements, and management's discussion and analysis for all current and prior
periods reported in this Form 10-Q. Note 3 in the notes to the unaudited
consolidated financial statements contains additional information regarding this
restatement.
18
CRITICAL ACCOUNTING POLICIES
Note 1 to the consolidated financial statements included in Huntington's
amended Form 10-K/A 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 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 Form 10-K/A.
ADOPTION OF FINANCIAL INTERPRETATION NO. (FIN) 46 INVOLVING SPECIAL PURPOSE
ENTITIES (SPEs)
Huntington established two securitization trusts, or SPEs, in 2000.
These two trusts had total assets of approximately $1.1 billion at June 30,
2003. In the securitization transactions, indirect automobile loans that
Huntington originated were sold to these trusts. Under GAAP at June 30, 2003,
these trusts were not required to be consolidated in Huntington's financial
statements. As such, the loans and the debt within the trusts were not included
on Huntington's balance sheets at June 30. See Note 10 to the consolidated
financial statements in Huntington's amended Form 10-K/A for more information
regarding securitized loans.
In January 2003, the Financial Accounting Standards Board (FASB) issued
FIN 46, Consolidation of Variable Interest Entities. This Interpretation of
Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial Statements,
addresses consolidation by business enterprises where ownership interests in an
entity may vary over time or, in many cases, of special-purpose entities (SPEs).
To be consolidated for financial reporting, these entities must have certain
characteristics. ARB 51 requires that an enterprise's consolidated financial
statements include subsidiaries in which the enterprise has a controlling
financial interest. This Interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among parties involved. An
enterprise that holds significant variable interests in such an entity, but is
not the primary beneficiary, is required to disclose certain information
regarding its interests in that entity. This Interpretation applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds an interest that it acquired
before February 1, 2003. It also applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. This Interpretation may
be applied (1) prospectively with a cumulative effect adjustment as of the date
on which it is first applied, or (2) by restating previously issued financial
statements for one or more years with a cumulative effect adjustment as of the
beginning of the first year restated.
Effective July 1, 2003, Huntington adopted FIN 46 resulting in the
consolidation of one of the securitization trusts formed in 2000. The
consolidation of that trust involved recognition of the trust's assets and
liabilities, elimination of the related retained interest and servicing asset,
recognition of other related assets, and establishment of a 1.01% allowance for
loan and lease losses. Reflecting these impacts, the adoption of FIN 46 will
result in a cumulative effect charge of approximately $11 million, or $0.05 per
share, in the third quarter, a reduction of the ALLL by approximately 3 basis
points, and a reduction in the tangible common equity ratio of approximately 30
basis points. Regulatory capital will have minimal impact since these assets are
currently reflected in risk-based assets.
DERIVATIVES AND OTHER OFF-BALANCE SHEET ARRANGEMENTS
Huntington uses a variety of derivatives, principally interest rate
swaps, in its asset and liability management activities to mitigate the risk of
adverse interest rate movements on either cash flows or market value of certain
assets and liabilities.
Like other financial organizations, Huntington uses various commitments
in the ordinary course of business that, under GAAP, are not recorded in the
financial statements. Specifically, Huntington makes various commitments to
extend credit to customers, to sell loans, and to maintain obligations under
operating-type noncancelable leases for its facilities. Derivatives and other
off-balance sheet arrangements are discussed under the "Interest Rate Risk
Management" section of this interim report and in the notes to the unaudited
consolidated financial statements.
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RELATED PARTY TRANSACTIONS
Various directors and executive officers of Huntington, and entities
affiliated with those directors and executive officers, are customers of
Huntington's subsidiaries. All 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 Form 10-K/A. All other related party transactions,
including those reported in Huntington's 2003 Proxy Statement and transactions
subsequent to December 31, 2002, were considered immaterial to its financial
condition, results of operations, and cash flows.
SUMMARY DISCUSSION OF RESULTS
2003 Second Quarter versus 2002 Second Quarter
Huntington's second quarter 2003 earnings were $97.4 million, or $0.42
per common share, up 33% and 45%, respectively, from $73.0 million, or $0.29 per
common share in the year-ago quarter. This primarily reflected the benefit of a
13% increase in fully taxable equivalent net interest income and an 8% decline
in non-interest expense, partially offset by a 5% decline in non-interest
income. The higher percent change in per common share earnings reflected the
benefit of repurchased common shares. The return on average assets (ROA) and
return on average equity (ROE) were 1.39% and 17.5%, respectively, compared with
1.17% and 12.5% in the year-ago quarter.
Fully taxable equivalent net interest income increased $24.6 million, or
13%, reflecting a $4.0 billion, or 20%, increase in average earning assets,
partially offset by a 25 basis point, or an effective 6%, decline in the fully
taxable equivalent net interest margin to 3.69% from 3.94%. The decline in
non-interest expense of $25.6 million, or 8%, primarily reflected a $28.8
million, or 22%, decline in operating lease expense, and $5.3 million decrease
in restructuring charges, partially offset by a $7.2 million, or 7%, increase in
personnel costs. Non-interest income decreased $13.5 million, or 5%, primarily
due to a $43.8 million, or 26%, decline in operating lease income, partially
offset by a $21.2 million increase in other income, which included an $11.6
million gain from the sale of automobile loans.
2003 Second Quarter versus 2003 First Quarter
Compared with the first quarter 2003 earnings of $90.6 million, or $0.39
per common share, second quarter earnings and earnings per common share were up
7% and 8%, respectively. This increase primarily reflected the benefit of a 6%
decline in non-interest expense and 2% increase in non-interest income,
partially offset by a 34% increase in provision for loan and lease losses. Fully
taxable equivalent net interest income was up 1% between quarters. ROA and ROE
were 1.34% and 16.3%, respectively, in the first quarter 2003.
The $18.3 million, or 6%, decline in non-interest expense was driven
primarily by an $8.6 million, or 8%, decline in operating lease expense, a $7.7
million, or 6%, decline in personnel costs, and a $4.3 million decline in
restructuring charges. The $6.2 million, or 2%, increase in non-interest income
reflected the $3.3 million increase in gains from sales of automobile loans and
a $5.7 million increase in securities gains, partially offset by a $9.5 million,
or 7%, decline in operating lease income.
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TABLE 1 - SELECTED QUARTERLY INCOME STATEMENT DATA (1)
2003 2002
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(in thousands, except per share amounts) SECOND First Fourth Third Second
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TOTAL INTEREST INCOME $330,462 $331,991 $341,446 $339,378 $322,816
TOTAL INTEREST EXPENSE 114,884 118,255 130,161 132,912 130,822
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NET INTEREST INCOME 215,578 213,736 211,285 206,466 191,994
Provision for loan and lease losses 49,193 36,844 51,236 54,304 49,876
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 166,385 176,892 160,049 152,162 142,118
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Operating lease income 124,209 133,755 143,465 154,367 168,047
Service charges on deposit accounts 40,914 39,869 41,435 37,706 35,608
Trust services 15,580 14,911 15,306 14,997 16,247
Gains on sales and securitizations of loans 14,808 12,114 4,659 3,234 1,743
Brokerage and insurance income 14,196 15,497 13,941 13,664 16,899
Other service charges and fees 11,372 10,338 10,890 10,837 10,529
Bank Owned Life Insurance income 11,043 11,137 11,443 11,443 11,443
Mortgage banking 11,033 13,789 10,006 5,685 10,115
Merchant Services gain --- --- --- 24,550 ---
Securities gains 6,887 1,198 2,339 1,140 966
Other 24,164 15,423 16,961 18,089 16,068
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TOTAL NON-INTEREST INCOME 274,206 268,031 270,445 295,712 287,665
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Personnel costs 114,047 121,743 119,137 109,056 106,808
Operating lease expense 102,939 111,588 120,747 125,743 131,695
Equipment 16,341 16,412 17,337 17,378 16,659
Outside data processing and other services 16,104 16,579 17,209 15,128 16,592
Net occupancy 15,583 16,815 13,454 14,815 14,756
Professional services 9,872 9,285 9,111 9,680 7,864
Marketing 8,454 6,626 6,186 7,491 7,231
Telecommunications 5,394 5,701 5,714 5,609 5,320
Printing and supplies 2,253 3,681 3,999 3,679 3,683
Restructuring charges (releases) (5,315) (1,000) (7,211) --- ---
Other 20,372 16,909 32,616 19,450 21,083
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TOTAL NON-INTEREST EXPENSE 306,044 324,339 338,299 328,029 331,691
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INCOME BEFORE INCOME TAXES 134,547 120,584 92,195 119,845 98,092
Income taxes 37,160 30,008 21,572 29,122 25,081
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NET INCOME $ 97,387 $ 90,576 $ 70,623 $ 90,723 $ 73,011
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PER COMMON SHARE
Net Income - Diluted $0.42 $0.39 $0.30 $0.38 $0.29
Cash Dividends Declared $0.16 $0.16 $0.16 $0.16 $0.16
RETURN ON:
Average total assets 1.39% 1.34% 1.04% 1.40% 1.17%
Average total shareholders' equity 17.5% 16.3% 12.5% 15.7% 12.5%
Net interest margin (2) 3.69% 3.84% 3.86% 4.00% 3.94%
Efficiency ratio (3) 63.1% 67.2% 70.3% 65.3% 69.1%
Effective tax rate 27.6% 24.9% 23.4% 24.3% 25.6%
REVENUE - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $215,578 $213,736 $211,285 $206,466 $191,994
Tax Equivalent Adjustment (2) 2,076 2,096 1,869 1,096 1,071
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Net Interest Income 217,654 215,832 213,154 207,562 193,065
Non-Interest Income 274,206 268,031 270,445 295,712 287,665
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TOTAL REVENUE $491,860 $483,863 $483,599 $503,274 $480,730
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TOTAL REVENUE EXCLUDING SECURITIES GAINS $484,973 $482,665 $481,260 $502,134 $479,764
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(1) Each of the quarters in 2002 and the first quarter in 2003 have been
restated. Please see note 3 to the unaudited consolidated financial
statements for further information.
(2) Represents the tax-exempt portion of net interest income increased by an
amount equivalent to taxes that would have been paid if this income had
been taxed at a 35% statutory tax rate.
(3) Non-interest expense less amortization of intangible assets divided by the
sum of fully taxable equivalent net interest income and non-interest income
excluding securities gains.
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2003 First Six Months versus 2002 First Six Months
For the first six months of 2003, earnings were $188.0 million, or $0.81
per common share, up 11% and 19%, respectively, from $169.0 million, or $0.68
per common share, in the comparable year-ago period. This increase primarily
reflected the benefits of a 14% increase in fully taxable equivalent net
interest income, a 15% decline in non-interest expense, a 3% decline in
provision for loan and lease losses, and a lower effective tax rate, partially
offset by a 30% decline in non-interest income. The year-ago six-month period
included two significant items. The first consisted of a $181.3 million pre-tax
gain ($60.7 million after tax, or $0.24 per common share) from the sale of the
Florida banking operations reported in non-interest income. The second was $56.2
million ($36.5 million after tax, or $0.15 per common share) in restructuring
charges related to the strategic initiatives announced in July 2001 reported in
non-interest expense. The higher percent change in per common share earnings
reflected the benefit of repurchased shares. ROA and ROE were 1.37% and 16.9%,
respectively, up from 1.32% and 14.4%, in the year-ago six-month period.
The $53.7 million, or 14%, increase in fully taxable equivalent net
interest income reflected a $3.1 billion, or 15%, increase in average earnings
assets, partially offset by a 4 basis point, or an effective 1%, decline in the
fully taxable equivalent net interest margin to 3.75% from 3.79%. The $110.8
million, or 15%, decline in non-interest expense primarily reflected a $62.5
million decline in restructuring charges and a $58.0 million, or 21%, decline in
operating lease expense, partially offset by a $13.3 million, or 6%, increase in
personnel costs. Provision for loan and lease losses decreased $2.8 million, or
3%, and reflected a release of provision associated with the loans sold with
Florida banking operations in the prior year, partially offset by higher
provision expense due to loan growth and higher net charge-offs.
The reduction in tax expense reflects the decline in the effective tax
rate to 26.3% in the current six-month period, down from 47.1%, in the year-ago
six-month period. The higher effective tax rate in the year-ago period reflected
the fact that most of the goodwill relating to the sold Florida operations was
non-deductible for tax purposes.
RESULTS OF OPERATIONS
NET INTEREST INCOME
2003 Second Quarter versus 2002 Second Quarter
Compared with the year-ago quarter, fully taxable equivalent net
interest income increased $24.6 million, or 13%, reflecting the benefit of an
increase in average earning assets, partially offset by a 25 basis point, or an
effective 6%, decline in the net interest margin to 3.69% from 3.94%. The
decline in the fully taxable equivalent net interest margin was driven by a
number of factors including significant repayments and prepayments of higher
rate mortgages and mortgage backed securities, growth in lower rate but higher
quality automobile loans and direct financing leases, and the difficulty in
lowering deposit rates as fast as the decline in rates on loans and securities.
Average total earning assets increased $4.0 billion, or 20%, of which $0.8
billion related to higher securities and $3.2 billion related to higher average
loans and leases and mortgages held for sale.
Average securities increased $0.8 billion, or 29%, from the year-ago
quarter reflecting the investment of deposit inflows, proceeds from loan sales,
and pay downs of operating leases in excess of loan and lease originations.
Average mortgages held for sale increased $0.4 billion, more than twice the
level of a year earlier, due to high loan originations of mortgages reflecting
continued heavy refinancing activity.
Compared with the year-ago quarter, average loans and leases increased
$2.7 billion, or 16%. Average automobile loans and leases increased $1.4
billion, or 52%. This high growth rate was influenced by the significant growth
in direct financing automobile leases as this portfolio is relatively new and
consists only of leases originated after April 2002 with no meaningful
offsetting impact from maturing leases. Average automobile loans were up 10%. As
part of a plan to reduce loan concentration exposure to the automobile financing
business, $569 million of automobile loans were sold in the second quarter 2003,
following the sale of $558 million in the first quarter. This brought 2003
year-to-date sales to $1.1 billion. Each sale occurred at the end of their
respective quarter and, thus, did not have a material impact on average balances
for their respective quarters. However, the first quarter sale did have a
material impact on second quarter 2003 averages and comparisons to the year-ago
quarter. Excluding the impact of the first quarter sale, average automobile
loans in the second quarter 2003 were up 32% from the year-ago quarter.
Average residential mortgages increased $0.5 billion, or 36%, with
average home equity loans and lines up $0.4 billion, or 15%, reflecting the
impact low interest rates had on home borrowing and refinancing. Total average
commercial real estate loans increased $0.4 billion, or 11%. Average commercial
loans were essentially flat with the year-ago period. While small business
banking loans showed some growth, this was offset by declines in larger
commercial loans, including a reduction in exposure to shared national credits.
22
Compared with the year-ago quarter, average core deposits increased $0.7
billion, or 5%, including a $0.7 billion, or 20%, decline in retail CDs. Retail
CDs, which continued to be a relatively expensive source of funds, were
de-emphasized in the company's deposit generation strategies. Average core
deposits excluding retail CDs were up 13% from the year-ago quarter.
2003 Second Quarter versus 2003 First Quarter
Fully taxable equivalent net interest income in the second quarter 2003
increased $1.8 million, or 1%, from the first quarter, reflecting growth in
average earning assets substantially offset by a decline in the net interest
margin. The fully taxable equivalent net interest margin declined to 3.69% from
3.84%, down 15 basis points, or an effective 4%, driven by the same factors that
affected comparisons to the year-ago quarter, as noted above. Average total
earning assets increased $0.9 billion, or 4%, of which $0.4 billion related to
higher securities and $0.5 billion related to higher average loans and leases
and mortgages held for sale.
Average securities increased $0.4 billion, or 11%, from the first
quarter reflecting the investment of deposit inflows, proceeds from loan sales,
and pay downs of operating leases in excess of loan and lease originations.
Average mortgages held for sale increased $0.1 billion, or 31%, from the first
quarter due to high loan originations reflecting continued heavy refinancing
activity.
Average loans and leases increased $0.3 billion, or 2%, from the first
quarter, or 4% excluding the impact of automobile loan sales. Reflecting the
impact of the low interest rate environment, average residential mortgages grew
3% and average home equity loans and lines of credit increased 4%. Average
automobile loans and leases increased 1%, or 12% excluding the impact of the
first quarter sale of $558 million of automobile loans. Loans sold in the first
quarter impacted average loans and leases in that quarter by $459 million.
Year-to-date sales of automobile loans totaled $1.1 billion with such sales
reflecting a strategy to reduce loan concentration exposure to the automobile
financing business. Total average commercial real estate loans increased 3%. In
contrast, average commercial loans we