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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