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, 2004

 

Commission File Number 0-2525

 

Huntington Bancshares Incorporated

 

Maryland   31-0724920

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

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 229,410,244 shares of Registrant’s without par value common stock outstanding on April 30, 2004.

 


 

1


Huntington Bancshares Incorporated

 

INDEX

 

Part I.

   Financial Information     

Item 1.

   Financial Statements     
     Consolidated Balance Sheets at March 31, 2004, December 31, 2003, and March 31, 2003    3
     Consolidated Statements of Income For the three months ended March 31, 2004 and 2003    4
     Consolidated Statements of Changes in Shareholders’ Equity For the three months ended March 31, 2004 and 2003    5
     Consolidated Statements of Cash Flows For the three months ended March 31, 2004 and 2003    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    59

Item 4.

   Controls and Procedures    59

Part II.

   Other Information     

Item 2.

   Changes in Securities and Use of Proceeds    60

Item 6.

   Exhibits and Reports on Form 8-K    60-61

Signatures

   62

 

2


 

Part 1. Financial Information

 

 
Item 1. Financial Statements

 

 

Huntington Bancshares Incorporated

Consolidated Balance Sheets

 

(in thousands, except number of shares)


   March 31,
2004


    December 31,
2003


    March 31,
2003


 
     (Unaudited)           (Unaudited)  

Assets

                        

Cash and due from banks

   $ 766,432     $ 899,689     $ 863,782  

Federal funds sold and securities purchased under resale agreements

     224,841       96,814       46,456  

Interest bearing deposits in banks

     54,027       33,627       36,117  

Trading account securities

     16,410       7,589       22,715  

Mortgage loans held for sale

     230,417       226,729       513,638  

Securities available for sale - at fair value

     5,455,138       4,925,232       3,680,260  

Investment securities - fair value $3,294; $3,937 and $7,075, respectively

     3,209       3,828       6,908  

Loans and leases

     21,193,627       21,075,118       18,896,499  

Allowance for loan and lease losses

     (295,377 )     (299,732 )     (303,636 )
    


 


 


Net loans and leases

     20,898,250       20,775,386       18,592,863  
    


 


 


Operating lease assets

     1,070,958       1,260,440       1,951,316  

Bank owned life insurance

     938,156       927,671       895,780  

Premises and equipment

     351,073       349,712       340,223  

Goodwill and other intangible assets

     216,805       217,009       218,363  

Customers’ acceptance liability

     7,909       9,553       10,004  

Accrued income and other assets

     805,455       786,047       726,209  
    


 


 


Total Assets

   $ 31,039,080     $ 30,519,326     $ 27,904,634  
    


 


 


Liabilities

                        

Deposits

   $ 18,988,846     $ 18,487,395     $ 17,688,984  

Short-term borrowings

     1,076,302       1,452,304       1,749,128  

Bank acceptances outstanding

     7,909       9,553       10,004  

Federal Home Loan Bank advances

     1,273,000       1,273,000       1,253,000  

Subordinated notes

     1,066,705       990,470       583,897  

Other long-term debt

     4,478,599       4,544,509       2,923,005  

Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely junior subordinated debentures of the parent company

     —         —         300,000  

Allowance for unfunded loan commitments and letters of credit

     32,089       35,522       33,381  

Accrued expenses and other liabilities

     1,751,451       1,451,571       1,207,189  
    


 


 


Total Liabilities

     28,674,901       28,244,324       25,748,588  
    


 


 


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 229,410,043; 229,008,088 and 228,641,557 shares, respectively

     2,482,342       2,483,542       2,483,258  

Less 28,456,212; 28,858,167 and 29,224,698 treasury shares, respectively

     (541,048 )     (548,576 )     (555,042 )

Accumulated other comprehensive income

     21,490       2,678       54,630  

Retained earnings

     401,395       337,358       173,200  
    


 


 


Total Shareholders’ Equity

     2,364,179       2,275,002       2,156,046  
    


 


 


Total Liabilities and Shareholders’ Equity

   $ 31,039,080     $ 30,519,326     $ 27,904,634  
    


 


 


 

See notes to unaudited consolidated financial statements.

 

3


 

Huntington Bancshares Incorporated

Consolidated Statements of Income

(Unaudited)

 

     For the Three Months Ended
March 31,


 

(in thousands, except per share amounts)


   2004

    2003

 

Interest and fee income

                

Loans and leases

   $ 270,868     $ 270,979  

Securities

     51,659       42,078  

Other

     3,404       6,957  
    


 


Total Interest and Fee Income

     325,931       320,014  
    


 


Interest expense

                

Deposits

     59,626       79,710  

Short-term borrowings

     3,313       5,559  

Federal Home Loan Bank advances

     8,041       5,585  

Subordinated notes and other long-term debt including preferred capital securities

     32,266       27,401  
    


 


Total Interest Expense

     103,246       118,255  
    


 


Net Interest Income

     222,685       201,759  

Provision for credit losses

     25,596       36,844  
    


 


Net Interest Income After Provision for Credit Losses

     197,089       164,915  
    


 


Operating lease income

     88,867       138,193  

Service charges on deposit accounts

     41,837       39,869  

Trust services

     16,323       14,911  

Brokerage and insurance income

     15,197       15,497  

Mortgage banking

     (4,296 )     11,125  

Bank owned life insurance income

     10,485       11,137  

Other service charges and fees

     9,513       10,338  

Gain on sales of automobile loans

     9,004       10,255  

Securities gains

     15,090       1,198  

Other

     25,619       20,401  
    


 


Total Non-Interest Income

     227,639       272,924  
    


 


Personnel costs

     121,624       113,089  

Operating lease expense

     70,710       111,588  

Outside data processing and other services

     18,462       16,579  

Equipment

     16,086       16,412  

Net occupancy

     16,763       16,609  

Professional services

     7,299       9,285  

Marketing

     7,839       6,626  

Telecommunications

     5,194       5,701  

Printing and supplies

     3,016       3,681  

Amortization of intangibles

     204       204  

Restructuring reserve releases

     —         (1,000 )

Other

     18,457       16,705  
    


 


Total Non-Interest Expense

     285,654       315,479  
    


 


Income Before Provision for Income Taxes

     139,074       122,360  

Provision for income taxes

     34,901       30,630  
    


 


Net Income

   $ 104,173     $ 91,730  
    


 


Average common shares:

                

Basic

     229,227       231,355  

Diluted

     232,915       232,805  

Per Common Share:

                

Net Income - Basic

   $ 0.45     $ 0.39  

Net Income - Diluted

     0.45       0.39  

Cash Dividends Declared

     0.175       0.16  

 

See notes to unaudited consolidated financial statements.

 

 

4


 

Huntington Bancshares Incorporated

Consolidated Statements of Changes in Shareholders’ Equity

 

     Common Stock

    Treasury Shares

   

Accumulated
Other
Comprehensive

Income


   

Retained

Earnings


   

Total


 

(in thousands)


   Shares

   Amount

    Shares

    Amount

       

Three Months Ended March 31, 2003:

                                                   

Balance, beginning of period

   257,866    $ 2,484,421     (24,987 )   $ (475,399 )   $ 62,300     $ 118,471     $ 2,189,793  

Comprehensive Income:

                                                   

Net income

                                        91,730       91,730  

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

                                                84,060  
                                               


Cash dividends declared ($0.16 per share)

                                        (37,001 )     (37,001 )

Stock options exercised

          (1,163 )   71       1,308                       145  

Treasury shares purchased

                (4,300 )     (81,061 )                     (81,061 )

Other

                (9 )     110                       110  
    
  


 

 


 


 


 


Balance, end of period (Unaudited)

   257,866    $ 2,483,258     (29,225 )   $ (555,042 )   $ 54,630     $ 173,200     $ 2,156,046  
    
  


 

 


 


 


 


Three Months Ended March 31, 2004:

                                                   

Balance, beginning of period

   257,866    $ 2,483,542     (28,858 )   $ (548,576 )   $ 2,678     $ 337,358     $ 2,275,002  

Comprehensive Income:

                                                   

Net income

                                        104,173       104,173  

Unrealized net holding gains on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income

                                30,534               30,534  

Unrealized losses on derivative instruments used in cash flow hedging relationships

                                (11,722 )             (11,722 )
                                               


Total comprehensive income

                                                122,985  
                                               


Cash dividends declared ($0.175 per share)

                                        (40,136 )     (40,136 )

Stock options exercised

          (832 )   378       7,274                       6,442  

Other

          (368 )   24       254                       (114 )
    
  


 

 


 


 


 


Balance, end of period (Unaudited)

   257,866    $ 2,482,342     (28,456 )   $ (541,048 )   $ 21,490     $ 401,395     $ 2,364,179  
    
  


 

 


 


 


 


 

See notes to unaudited consolidated financial statements.

 

5


 

Huntington Bancshares Incorporated

Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Months Ended
March 31,


 

(in thousands)


   2004

    2003

 

Operating Activities

                

Net Income

   $ 104,173     $ 91,730  

Adjustments to reconcile net income to net cash provided by operating activities

                

Provision for credit losses

     25,596       36,844  

Depreciation on operating lease assets

     63,823       98,101  

Other depreciation and amortization

     35,580       21,671  

Deferred income tax expense

     28,818       27,038  

Increase in trading account securities

     (8,821 )     (22,474 )

(Increase) decrease in mortgages held for sale

     (3,688 )     14,741  

Gains on sales of securities available for sale

     (15,090 )     (1,198 )

Gains on sales/securitizations of loans

     (9,004 )     (12,819 )

Restructuring reserve releases

     —         (1,000 )

Other, net

     (27,521 )     (102,958 )
    


 


Net Cash Provided by Operating Activities

     193,866       149,676  
    


 


Investing Activities

                

(Increase) decrease in interest bearing deposits in banks

     (20,400 )     1,183  

Proceeds from:

                

Maturities and calls of investment securities

     628       640  

Maturities and calls of securities available for sale

     242,654       608,832  

Sales of securities available for sale

     450,890       218,001  

Purchases of securities available for sale

     (783,854 )     (995,909 )

Proceeds from sales/securitizations of loans

     876,686       680,564  

Net loan and lease originations, excluding sales

     (1,138,911 )     (1,142,863 )

Net decrease in operating lease assets

     126,801       151,108  

Proceeds from sale of premises and equipment

     260       3,669  

Purchases of premises and equipment

     (13,432 )     (10,198 )

Proceeds from sales of other real estate

     1,562       1,924  
    


 


Net Cash Used for Investing Activities

     (257,116 )     (483,049 )
    


 


Financing Activities

                

Increase in deposits

     494,019       205,694  

Decrease in short-term borrowings

     (376,002 )     (391,888 )

Proceeds from issuance of subordinated notes

     148,830       —    

Maturity of subordinated notes

     (100,000 )     —    

Proceeds from Federal Home Loan Bank advances

     —         250,000  

Maturity of Federal Home Loan Bank advances

     —         (10,000 )

Proceeds from issuance of long-term debt

     175,000       635,000  

Maturity of long-term debt

     (250,000 )     (355,000 )

Dividends paid on common stock

     (40,269 )     (28,042 )

Repurchases of common stock

     —         (81,061 )

Net proceeds from issuance of common stock

     6,442       145  
    


 


Net Cash Provided by Financing Activities

     58,020       224,848  
    


 


Change in Cash and Cash Equivalents

     (5,230 )     (108,525 )

Cash and Cash Equivalents at Beginning of Period

     996,503       1,018,763  
    


 


Cash and Cash Equivalents at End of Period

   $ 991,273     $ 910,238  
    


 


Supplemental disclosures:

                

Income taxes paid

   $ 849     $ 42,897  

Interest paid

     98,694       122,174  

Non-cash activities

                

Residential mortgage loans securitized and retained in securities available for sale

     115,929       108,917  

Common stock dividends accrued not paid

     31,180       37,001  

 

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 (SEC) 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 2003 Annual Report on Form 10-K (Form 10-K), which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.

 

Certain amounts in the prior year’s financial statements have been reclassified to conform to the 2004 presentation.

 

For statement of cash flows purposes, cash and cash equivalents are defined as the sum of “Cash and due from banks” and “Federal funds sold and securities purchased under resale agreements”.

 

Note 2 – New Accounting Pronouncements

 

SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105): On March 9, 2004, the SEC issued SAB 105. This bulletin was issued to inform registrants of the SEC’s view that the fair value of loan commitments that are required to follow derivative accounting under FAS 133, Accounting for Derivative Instruments and Hedging Activities , should not consider the expected future cash flows related to the associated servicing of the future loan. The SEC believes that incorporating expected future cash flows related to the associated servicing of the loan essentially results in the immediate recognition of a servicing asset, which is only appropriate once the servicing asset has been contractually separated from the underlying loan by sale or by securitization of the loan with servicing retained. Furthermore, no other internally-developed intangible assets, such as customer relationship intangibles, should be recorded as part of the loan commitment derivative. The SEC believes that recognition of such assets is only appropriate in the event of a third-party transaction, such as the purchase of a loan commitment either individually, in a portfolio, or in a business combination.

 

In addition, SAB 105 requires registrants to disclose their accounting policy for loan commitments pursuant to APB Opinion No. 22, Disclosure of Accounting Policies , including methods and assumptions used to estimate fair value and any associated hedging strategies, as required by FAS 107, Disclosure of Fair Value of Financial Instruments , FAS 133, Accounting for Derivative Instruments and Hedging Activities , and Item 305 of Regulation S-K (Qualitative and Quantitative Disclosures about Market Risk). The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. Huntington enters into such commitments with customers in connection with residential loan applications and at March 31, 2004, had approximately $295 million in notional amount of these commitments outstanding. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.

 

FASB Staff Position No. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-1): In December 2003, President Bush signed into law a bill that expands Medicare benefits, primarily adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. The law also provides a federal subsidy to companies that sponsor postretirement benefit plans that provide prescription drug coverage. FSP 106-1 was issued in January 2004 and permits deferring the recognition of the new Medicare provisions’ impact due to the lack of specific authoritative guidance on accounting for the federal subsidy. Huntington has elected to defer accounting for the effects of this new legislation until the specific authoritative guidance is issued. Accordingly, the postretirement benefit obligations and net periodic costs reported in the accompanying financial statements and notes do not reflect the impact of this legislation. The accounting guidance, when issued, could require changes to previously reported financial information. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.

 

AICPA Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3): In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-3, to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to such loans and debt

 

7


securities acquired in purchase business combinations and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield or valuation allowance, such as the allowance for credit losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004, with early application encouraged. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.

 

FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (FAS 148): FAS 148 was issued in December 2002, as an amendment of Statement No. 123, Accounting for Stock-Based Compensation , to provide alternative methods of transition to FAS 123’s fair value method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure provisions of FAS 123 and Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting (APB 28), 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 FAS 148 does not require companies to account for employee stock options using the fair value method, the disclosure provisions of FAS 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 FAS 123 or the intrinsic value method of APB 25, which is the method currently used by Huntington. See note 10 for the anticipated effect of this pronouncement.

 

Note 3 – Acquisition

 

On January 27, 2004, Huntington announced the signing of a definitive agreement to acquire Unizan Financial Corp. (Unizan), a financial holding company based in Canton, Ohio, with $2.7 billion of assets at December 31, 2003. Under the terms of the agreement, Unizan shareholders will receive 1.1424 shares of Huntington common stock, on a tax-free basis, for each share of Unizan. Based on the $23.10 closing price of Huntington’s common stock on January 26, 2004, this represented a price of $26.39 per Unizan share, and valued the transaction at approximately $587 million. The merger was unanimously approved by both boards and is expected to close early in the third quarter, pending customary regulatory approvals, as well as Unizan shareholder approval. Huntington also announced its intention to repurchase approximately 2.5 million common shares (approximately 10% of the number of shares issued to Unizan shareholders) after the Unizan shareholders’ meeting.

 

8


 

Note 4 – Securities Available for Sale

 

Securities available for sale at March 31, 2004, December 31, 2003, and March 31, 2003 were as follows:

 

     March 31, 2004

   December 31, 2003

   March 31, 2003

(in thousands)


   Amortized
Cost


   Fair Value

   Amortized
Cost


   Fair Value

   Amortized
Cost


   Fair Value

U.S. Treasury

                                         

Under 1 year

   $ 2,491    $ 2,493    $ 1,374    $ 1,376    $ 325    $ 333

1-5 years

     24,478      25,410      31,356      31,454      12,584      13,150

6-10 years

     51,239      51,352      271,271      275,540      44,304      45,494

Over 10 years

     —        —        —        —        412      477
    

  

  

  

  

  

Total U.S. Treasury

     78,208      79,255      304,001      308,370      57,625      59,454
    

  

  

  

  

  

Federal agencies

                                         

Mortgage backed securities

                                         

1-5 years

     17,487      17,939      19,899      20,434      30,431      31,646

6-10 years

     183,551      187,976      198,755      201,995      371,063      378,645

Over 10 years

     1,553,297      1,574,920      1,593,139      1,595,594      1,715,212      1,739,662
    

  

  

  

  

  

Total mortgage-backed

     1,754,335      1,780,835      1,811,793      1,818,023      2,116,706      2,149,953
    

  

  

  

  

  

Other agencies

                                         

Under 1 year

     106,087      107,195      173,181      175,505      102,118      105,140

1-5 years

     779,563      798,034      585,561      593,662      426,449      447,026

6-10 years

     403,006      403,441      403,953      390,164      3,929      4,470

Over 10 years

     73,625      73,625      201      192      —        —  
    

  

  

  

  

  

Total other

     1,362,281      1,382,295      1,162,896      1,159,523      532,496      556,636
    

  

  

  

  

  

Total U.S Treasury and Federal Agencies

     3,194,824      3,242,385      3,278,690      3,285,916      2,706,827      2,766,043
    

  

  

  

  

  

Municipal Securities

                                         

Under 1 year

     6,941      6,964      6,594      6,663      5,668      5,679

1-5 years

     19,535      19,941      20,015      20,569      25,069      25,766

6-10 years

     79,236      81,027      69,511      71,013      53,876      54,803

Over 10 years

     312,325      316,026      332,181      334,188      169,013      170,189
    

  

  

  

  

  

Total Municipal Securities

     418,037      423,958      428,301      432,433      253,626      256,437
    

  

  

  

  

  

Private Label CMO

                                         

Under 1 year

     —        —        1,973      1,973      —        —  

1-5 years

     —        —        —        —        —        —  

6-10 years

     —        —        —        —        —        —  

Over 10 years

     569,776      574,002      388,933      388,684      226,386      227,868
    

  

  

  

  

  

Total Private Label CMO

     569,776      574,002      390,906      390,657      226,386      227,868
    

  

  

  

  

  

Asset Backed Securities

                                         

Under 1 year

     —        —        —        —        —        —  

1-5 years

     30,000      30,075      30,000      29,944      30,000      29,850

6-10 years

     11,780      11,783      20,000      19,984      —        —  

Over 10 years

     949,747      950,286      590,826      589,788      55,000      54,897
    

  

  

  

  

  

Total Asset Backed Securities

     991,527      992,144      640,826      639,716      85,000      84,747
    

  

  

  

  

  

Other

                                         

Under 1 year

     500      742      500      502      1,000      1,027

1-5 years

     9,317      9,724      7,169      7,346      6,863      7,129

6-10 years

     3,259      3,391      5,047      5,510      4,595      5,119

Over 10 years

     193,280      193,997      145,103      146,685      143,264      141,519

Retained interest in securitizations

     5,365      6,050      5,593      6,356      129,137      144,626

Marketable equity securities

     7,479      8,745      8,547      10,111      44,679      45,745
    

  

  

  

  

  

Total Other

     219,200      222,649      171,959      176,510      329,538      345,165
    

  

  

  

  

  

Total Securities Available for Sale

   $ 5,393,364    $ 5,455,138    $ 4,910,682    $ 4,925,232    $ 3,601,377    $ 3,680,260
    

  

  

  

  

  

 

9


Note 5 – Allowances for Credit Losses (ACL)

 

The ACL is comprised of the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC). The following table reflects activity in the ACL for the three-month periods ended March 31, 2004, December 31, 2003, and March 31, 2003:

 

 

(in thousands)


    
March 31,
2004


    December 31,
2003


    March 31,
2003


 

Allowance for Loan and Leases Losses, Beginning of Period

   $ 299,732     $ 336,398     $ 324,827  

Loan and lease losses

     (37,167 )     (68,023 )     (40,265 )

Recoveries of loans previously charged off

     8,540       12,880       7,429  
    


 


 


Net loan and lease losses

     (28,627 )     (55,143 )     (32,836 )
    


 


 


Provision for credit losses

     25,596       26,341       36,844  

Net change in allowance for unfunded loan commitments and letters of credit

     3,433       (1,785 )     (21,560 )

Allowance of assets sold and securitized

     (4,757 )     (6,079 )     (3,639 )
    


 


 


Allowance for Loan and Lease Losses, End of Period

   $ 295,377     $ 299,732     $ 303,636  
    


 


 


Allowance for Unfunded Loan Commitments and Letters of Credit, Beginning of Period

   $ 35,522     $ 33,737     $ 11,821  

Net change

     (3,433 )     1,785       21,560  
    


 


 


Allowance for Unfunded Loan Commitments and Letters of Credit, End of Period

   $ 32,089     $ 35,522     $ 33,381  
    


 


 


 

Note 6 – Operating Lease Assets

 

Operating lease assets at March 31, 2004, December 31, 2003, and March 31, 2003, were as follows:

 

(in thousands)


   March 31,
2004


    December 31,
2003


    March 31,
2003


 

Cost of assets under operating leases

   $ 1,894,687     $ 2,136,502     $ 3,007,188  

Deferred lease origination fees and costs

     (2,485 )     (2,117 )     (48,208 )

Accumulated depreciation

     (821,244 )     (873,945 )     (1,007,664 )
    


 


 


Operating Lease Assets, Net

   $ 1,070,958     $ 1,260,440     $ 1,951,316  
    


 


 


 

Depreciation expense related to operating lease assets was $63.8 million and $98.1 million for the three months ended March 31, 2004 and 2003, respectively.

 

Note 7 – 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 functions and capital markets activities and other unallocated assets, liabilities, revenue, and expense. Lines 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.

 

Management relies on “operating earnings” for review of performance and for critical decision making purposes. Operating earnings exclude the impact of the significant items listed in the reconciliation table below. See Note 12 to the consolidated financial statements for further discussions regarding Restructuring Reserves. The financial information that follows is inclusive of the above adjustments 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 and services are offered in seven operating regions within the five states of Ohio, Michigan, West

 

10


Virginia, Indiana, and Kentucky through Huntington’s traditional banking network. Each region is further divided into Retail and Commercial Banking units. Retail products and services include home equity loans and lines of credit, first mortgage loans, direct installment loans, business loans, personal and business deposit products, as well as sales of investment and insurance services. Retail products and services comprise 55% and 82%, of total Regional Banking loans and deposits, respectively. These products and services are delivered to customers through banking offices, ATMs, Direct Bank—Huntington’s customer service center, and Web Bank at huntington.com. Commercial banking products include middle-market and large commercial banking relationships which use a variety of banking products and services including, commercial and industrial loans, international trade, and cash management, leasing, interest rate protection products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities.

 

Dealer Sales: This segment serves automotive dealerships within Huntington’s primary banking markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and Tennessee. This segment finances the purchase of automobiles by customers of the automotive dealerships, purchases automobiles from dealers and simultaneously leases the automobiles under long-term direct financing leases, finances dealership floor plan inventories, real estate, or working capital needs, 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 net worth customers. Revenue is derived through trust, asset management, investment advisory, brokerage, insurance, and private banking products and services.

 

Treasury/Other: This segment includes revenue and expense related to assets, liabilities, and equity that are not directly assigned or allocated to one of the three business segments. Assets included in this segment include bank owned life insurance, investment securities, and mezzanine loans originated through Huntington Capital Markets Group.

 

A funds transfer pricing system is used to attribute funding costs and credits to other business segments. The Treasury/Other segment includes the net impact of interest rate risk management, including derivative activities. Furthermore, this segment’s results include the investment securities portfolios and capital markets activities. Additionally, income or expense and provision for income taxes, not allocated to other business segments, are also included.

 

Listed below is certain reported financial information reconciled to Huntington’s first quarter 2004 and 2003 operating results by line of business.  

 

Income Statements

 

(in thousands)


   Regional
Banking


    Dealer
Sales


    PFG

    Treasury/
Other


    Huntington
Consolidated


 

2004

                                        

Net interest income

   $ 151,062     $ 30,305     $ 11,129     $ 30,189     $ 222,685  

Provision for credit losses

     (2,105 )     (21,655 )     557       (2,393 )     (25,596 )

Non-Interest income

     72,051       110,555       28,627       16,406       227,639  

Non-Interest expense

     (147,092 )     (91,369 )     (29,461 )     (17,732 )     (285,654 )

Provision for income taxes

     (25,871 )     (9,743 )     (3,798 )     4,510       (34,901 )
    


 


 


 


 


Net income, as reported

     48,045       18,093       7,054       30,980       104,173  

Gain on sale of automobile loans, net of tax

     —         (6,146 )     —         294       (5,853 )
    


 


 


 


 


Operating Earnings

   $ 48,045     $ 11,947     $ 7,054     $ 31,274     $ 98,320  
    


 


 


 


 


2003

                                        

Net interest income

   $ 146,414     $ 15,647     $ 9,495     $ 30,203     $ 201,759  

Provision for credit losses

     (23,553 )     (11,385 )     (1,900 )     (6 )     (36,844 )

Non-Interest income

     71,599       158,516       27,213       15,596       272,924  

Non-Interest expense

     (140,304 )     (134,169 )     (26,635 )     (14,371 )     (315,479 )

Provision for income taxes

     (18,955 )     (10,013 )     (2,861 )     1,198       (30,630 )
    


 


 


 


 


Net income, as reported

     35,201       18,596       5,312       32,620       91,730  

Gain on sale of automobile loans, net of tax

     —         (2,592 )     —         (4,074 )     (6,666 )

Restructuring releases, net of taxes

     —         —         —         (650 )     (650 )
    


 


 


 


 


Operating Earnings

   $ 35,201     $ 16,004     $ 5,312     $ 27,897     $ 84,414  
    


 


 


 


 


 

11


 
      
Total Assets at

   Total Deposits at

Period-end Balance Sheet Data
(in millions)


   March 31,
2004


   December 31,
2003


   March 31,
2003


   March 31,
2004


   December 31,
2003


   March 31,
2003


Regional Banking

   $ 15,635    $ 14,971    $ 14,297    $ 15,938    $ 15,539    $ 15,412

Dealer Sales

     6,609      7,335      6,854      78      77      70

PFG

     1,491      1,461      1,265      1,057      1,164      960

Treasury / Other

     7,304      6,756      5,489      1,916      1,707      1,247
    

  

  

  

  

  

Total

   $ 31,039    $ 30,523    $ 27,905    $ 18,989    $ 18,487    $ 17,689
    

  

  

  

  

  

 

Note 8 – Comprehensive Income

 

The changes in the components of Huntington’s Other Comprehensive Income in each of the three months ended March 31 were as follows:

 

     Three Months Ended
March 31,


 

(in thousands)


   2004

    2003

 

Unrealized holding gains (losses) on securities available for sale arising during the period:

                

Unrealized net gain (loss)

   $ 62,066     $ (7,247 )

Related tax benefit (expense)

     (21,723 )     2,228  
    


 


Net

     40,343       (5,019 )
    


 


Unrealized losses on derivatives used in cash flow hedging relationships arising

                

during the period:

                

Unrealized net losses

     (18,034 )     (2,880 )

Related tax benefit

     6,312       1,008  
    


 


Net

     (11,722 )     (1,872 )
    


 


Less: Reclassification adjustment for net gains from sales of securities available for sale

                

realized during the period:

                

Realized net gains

     15,090       1,198  

Related tax expense

     (5,281 )     (419 )
    


 


Net

     9,809       779  
    


 


Total Other Comprehensive Income (Loss)

   $ 18,812     $ (7,670 )
    


 


 

Activity in Accumulated Other Comprehensive Income for the three months ended March 31, 2004 and 2003 was as follows:

 

(in thousands)


   Minimum
pension
liability


    Unrealized gains
(losses) on
securities
available for sale


     
Unrealized gains
(losses) on derivative
instruments used in
cash flow hedging
relationships


    Total

 

Balance, December 31, 2002

   $ (195 )   $ 56,856     $ 5,639     $ 62,300  

Period change

     —         (5,798 )     (1,872 )     (7,670 )
    


 


 


 


Balance, March 31, 2003

   $ (195 )   $ 51,058     $ 3,767     $ 54,630  
    


 


 


 


Balance, December 31, 2003

   $ (1,309 )   $ 9,429     $ (5,442 )   $ 2,678  

Period change

     —         30,534       (11,722 )     18,812  
    


 


 


 


Balance, March 31, 2004

   $ (1,309 )   $ 39,963     $ (17,164 )   $ 21,490  
    


 


 


 


 

12


Note 9 – Earnings per Share

 

Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares upon the exercise of stock options. The calculation of basic and diluted earnings per share for each of the three-month periods ended March 31 is as follows:

 

      
Three Months Ended
March 31,


(in thousands, except per share amount)


   2004

   2003

Net Income

   $ 104,173    $ 91,730
    

  

Average common shares outstanding

     229,227      231,355

Dilutive effect of common stock equivalents

     3,688      1,450
    

  

Diluted Average Common Shares Outstanding

     232,915      232,805
    

  

Earnings Per Share

             

Basic

   $ 0.45    $ 0.39

Diluted

     0.45      0.39

 

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 6.5 million and 7.6 million stock options were vested and outstanding at March 31, 2004 and 2003, 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 $22.53 per share and $22.21 per share at the end of the same respective periods.

 

At March 31, 2004, a total of 552,966 common shares associated with a 2002 acquisition were held in escrow, subject to future issuance contingent upon meeting certain contractual performance criteria. These shares, which were included in treasury stock, will be included in the computation of basic and diluted earnings per share at the beginning of the period when all conditions necessary for their issuance have been met. Dividends paid on these shares are reinvested in common stock and are also held in escrow.

 

Note 10 – 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.

 

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,


 
     2004

    2003

 

Stock Options Outstanding at period end (in thousands)

     19,421       17,637  

Assumptions

                

Risk-free interest rate

     3.71 %     4.15 %

Expected dividend yield

     3.20 %     3.34 %

Expected volatility of Huntington’s common stock

     30.9 %     33.8 %

Pro Forma Results (in millions of dollars)

                

Net income, as reported

   $ 104.2     $ 91.7  

Less pro forma expense, net of tax, related to options granted

     3.3       3.0  
    


 


Pro Forma Net Income

   $ 100.9     $ 88.7  
    


 


Net Income Per Common Share:

                

Basic, as reported

   $ 0.45     $ 0.39  

Basic, pro forma

     0.44       0.38  

Diluted, as reported

     0.45       0.39  

Diluted, pro forma

     0.43       0.38  

 

Note 11 – Stock Repurchase Plan

 

On February 18, 2002, the board of directors authorized Huntington to repurchase from time to time up to 22,000,000 shares of its common stock by means of various methods including, but not limited to, open market purchases and privately negotiated transactions (the 2002 Repurchase Program). As of January 14, 2003, Huntington had purchased 19,358,665 of such shares authorized under the 2002 Repurchase Program.

 

Effective January 14, 2003, the board of directors authorized a new share repurchase program (the 2003 Repurchase Program) which cancelled the 2002 Repurchase Program and authorized officers of Huntington to repurchase not more than 8,000,000 shares of Huntington common stock. At April 27, 2004, Huntington had purchased 4,100,000 of such shares authorized under the 2003 Repurchase Program.

 

Effective April 27, 2004, the board of directors authorized a new share repurchase program (the 2004 Repurchase Program) which cancelled the 2003 Repurchase Program and authorized officers of Huntington to repurchase not more than 7,500,000 shares of Huntington common stock. The share repurchases described in Note 3 will be made under this authorization. Purchases will be made from time-to-time in the open market or through privately negotiated transactions depending on market conditions.

 

      
2004

   2003

    2002

 

(number of shares in thousands)


   First

   Fourth

   Third

   Second

   First

    Fourth

    Third

    Second

    First

 

Authorized under 2002 repurchase program

                                                                 22,000  

Number of shares repurchased

     —        —        —        —        (200 )     (4,110 )     (6,262 )     (7,329 )     (1,458 )

Cancellation of program

     —        —        —        —        (2,641 )     —         —         —         —    
    

  

  

  

  


 


 


 


 


Remaining shares authorized to repurchase

     —        —        —        —        —         2,841       6,951       13,213       20,542  
    

  

  

  

  


 


 


 


 


Authorized under 2003 repurchase program

                                 8,000                                  

Number of shares repurchased

     —        —        —        —        (4,100 )                                
    

  

  

  

  


                               

Remaining shares authorized to repurchase

     3,900      3,900      3,900      3,900      3,900                                  
    

  

  

  

  


                               

Average price paid per share

   $ —      $ —      $ —      $ —      $ 18.85     $ 18.43     $ 19.02     $ 20.07     $ 19.25  

 

14


Note 12 – Restructuring Reserves

 

On a quarterly basis, Huntington assesses its remaining restructuring reserves and makes adjustments to those reserves as necessary. As of March 31, 2004, Huntington had remaining reserves for restructuring of $13.6 million. Huntington expects that the reserves will be adequate to fund the estimated future cash outlays.

 

Note 13 – Benefit Plans

 

Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan), a non-contributory defined benefit pension plan covering substantially all employees. The Plan provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than that deductible under the Internal Revenue Code. In addition, Huntington has an unfunded defined benefit post-retirement plan that provides certain healthcare and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan. For any employee retiring on or after January 1, 1993, post-retirement healthcare benefits are based upon the employee’s number of months of service and are limited to the actual cost of coverage. Life insurance benefits are a percentage of the employee’s base salary at the time of retirement, with a maximum of $50,000 of coverage.

 

Huntington also sponsors other retirement plans. One of those plans is an unfunded Supplemental Executive Retirement Plan. This plan is a nonqualified plan that provides certain former officers of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. Other plans, including plans assumed in various past acquisitions, are unfunded, nonqualified plans that provide certain active and former officers of Huntington and its subsidiaries nominated by Huntington’s compensation committee with deferred compensation, post-employment, and/or defined pension benefits in excess of the qualified plan limits imposed by federal tax law.

 

The following table shows the components of net periodic benefit expense:

 

      
Pension Benefits
Three Months Ended
March 31,


       Post Retirement Benefits
Three Months Ended
March 31,


(in thousands)


   2004

       2003

       2004

   2003

Service cost

   $ 3,038        $ 2,455        $ 324    $ 281

Interest cost

     4,368          4,161          802      869

Expected return on plan assets

     (5,381 )        (6,283 )        —        —  

Amortization of transistion asset

     —            (63 )        276      275

Amortization of prior service cost

     —            —            145      152

Settlements

     1,000          1,087          —        —  

Recognized net actuarial loss (gain)

     1,984          442          —        —  
    


    


    

  

Benefit Expense

   $ 5,009        $ 1,799        $ 1,547    $ 1,577
    


    


    

  

 

Huntington has a defined contribution plan that is available to eligible employees. Matching contributions by Huntington equal 100% on the first 3%, then 50% on the next 2%, of participant elective deferrals. The cost of providing this plan was $2.4 million and $2.2 million for the three months ended March 31, 2004 and 2003, respectively.

 

15


Note 14 – Commitments and Contingent Liabilities

 

In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the financial statements. The contract amount of these financial agreements at March 31, 2004, December 31, 2003, and March 31, 2003, were as follows:

 

(in millions)


    
March 31,
2004


   December 31,
2003


   March 31,
2003


Contract amount represents credit risk

                    

Commitments to extend credit

                    

Commercial

   $ 5,091    $ 5,712    $ 4,882

Consumer

     3,731      3,652      3,743

Commercial real estate

     668      952      651

Standby letters of credit

     965      983      968

Commercial letters of credit

     168      166      199

 

Commitments to extend credit:

 

Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable-rate nature.

 

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. The carrying amount of deferred revenue associated with these guarantees was $3.4 million, $3.8 million, and $2.0 million at March 31, 2004, December 31, 2003, and March 31, 2003, respectively.

 

Commercial letters of credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and generally have maturities of no longer than 90 days. The merchandise or cargo being traded normally secures these instruments.

 

Litigation:

 

In the ordinary course of business, there are various legal proceedings pending against Huntington and its subsidiaries. In the opinion of management, the aggregate liabilities, if any, arising from such proceedings are not expected to have a material adverse effect on Huntington’s consolidated financial position.

 

Note 15 – Securities and Exchange Commission Investigation

 

On June 26, 2003, Huntington announced that the Securities and Exchange Commission (SEC) staff is conducting a formal investigation. The SEC investigation began following Huntington’s announcement on April 16, 2003, that it intended to restate its financial statements in order to reclassify its accounting for automobile leases from the direct financing lease method to the operating lease method and following allegations by a former Huntington employee regarding certain aspects of Huntington’s accounting and financial reporting practices, including the recognition of automobile loan and lease origination fees and costs, as well as certain year-end reserves. The investigation is ongoing and Huntington continues to cooperate fully with the SEC. To the best of its knowledge, management believes that the actions it has taken to date have addressed all known accounting issues.

 

16


 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

INTRODUCTION

 

Huntington Bancshares Incorporated (Huntington or the company) is a multi-state diversified financial holding 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, West Virginia, Indiana, and Kentucky. Selected financial services are also conducted in other states including Arizona, Florida, Georgia, Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington has a foreign office in the Cayman Islands and a foreign office in Hong Kong. The Huntington National Bank (the Bank), organized in 1866, 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 report.

 

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, including pending acquisitions, 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 below and under the heading “Business Risks” included in Item 1 of Huntington’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2003, and other factors described in this report and from time to time in other filings with the Securities and Exchange Commission.

 

Management encourages readers of this 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 assumes no obligation to 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.

 

Risk Factors

 

Huntington, like other financial companies, is subject to a number of risks, many of which are outside of Management’s control, though Management strives to manage those risks while optimizing returns. Among the risks assumed are: (1) credit risk, which is the risk that loan and lease customers or other counter parties will be unable to perform their contractual obligations, (2) market risk, which is the risk that changes in market rates and prices will adversely affect Huntington’s financial condition or results of operation, (3) liquidity risk, which is the risk that Huntington and / or the Bank will have insufficient cash or access to cash to meet operating needs, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people, or systems, or external events. The description of Huntington’s business contained in Item 1 of its Form 10-K for the year ended December 31, 2003, while not all inclusive, discusses a number of business risks that, in addition to the other information in this report, readers should carefully consider.

 

Securities and Exchange Commission Investigation

 

On June 26, 2003, Huntington announced that the Securities and Exchange Commission (SEC) staff is conducting a formal investigation. The SEC investigation began following Huntington’s announcement on April 16, 2003, that it intended to restate its financial statements in order to reclassify its accounting for automobile leases from the direct financing lease method to the operating lease method, and following allegations by a former Huntington employee regarding certain aspects of Huntington’s accounting and financial reporting practices, including the recognition of automobile loan and lease origination fees and costs, as well as certain year-end reserves. The investigation is ongoing and Huntington continues to cooperate fully with the SEC. To the best of its knowledge, Management believes that the actions it has taken to date have addressed all known accounting issues.

 

17


Critical Accounting Policies and Use of Significant Estimates

 

Note 1 to the consolidated financial statements included in Huntington’s Form 10-K lists significant accounting policies used in the development and presentation of its financial statements. These significant accounting policies, as well as the following discussion and analysis and other financial statement disclosures, identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of Huntington, its financial position, results of operations, and cash flows.

 

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 Form 10-K.

 

SUMMARY DISCUSSION OF RESULTS

 

2004 First Quarter versus 2003 First Quarter

 

Huntington’s 2004 first quarter earnings were $104.2 million, or $0.45 per common share, up 14% and 15%, respectively, from $91.7 million and $0.39 per common share in the year-ago quarter. This reflected the benefit of a 11% increase in fully taxable equivalent net interest income, a 31% decrease in provision for credit losses, and a 9% decline in non-interest expenses, partially offset by a 17% decline in non-interest income. The return on average assets (ROA) and return on average equity (ROE), were 1.36% and 18.4%, respectively, compared with 1.36% and 17.2% in the year-ago quarter (see Table 1).

 

The 11% increase in fully taxable equivalent net interest income reflected a $4.2 billion, or 18%, increase in average earnings assets, partially offset by a 27 basis point, or an effective 7%, decline in the net interest margin. Contributing to growth in average earning assets was a $2.6 billion, or 14%, increase in average loans and leases, as well as a $1.8 billion, or 54%, increase in average investment securities. The increase in average loans and leases reflected very strong growth in residential mortgage, home equity, and commercial real estate loans and automobile leases.

 

The significant increase in average automobile leases reflected the fact that automobile lease originations since April 2002 are recorded as direct financing leases. Previously they were recorded as operating leases. As a result, operating leases are in a run-off mode. Operating lease income is reflected in non-interest income, compared with direct financing leases where the income is reflected in net interest income.

 

Average automobile loans declined slightly from the year-ago quarter. In the 2003 third quarter, a $1.0 billion automobile loan securitization trust was consolidated reflecting the implementation of FIN 46. However, this positive impact was more than offset by sales of automobile loans as part of a strategy to lower the overall credit exposure to this sector. Over the last five quarters, a total of $3.0 billion of automobile loans have been sold. Management has established an automobile loan and lease exposure target of 20%. These sales have reduced the company’s overall credit exposure to this sector from 33% at the end of 2002 to 24% at March 31, 2004. It is expected that automobile loans will continue to be originated and sold in order to manage this exposure target.

 

Average core deposits increased $0.5 billion, or 3%, from the year-ago quarter, despite a $0.6 billion, or 19%, decline in retail CDs.

 

The decline in provision for credit losses reflected improved credit quality trends including a decrease in net charge-offs and lower levels of non-performing assets (NPAs). The $29.8 million decline in non-interest expense was driven by a $40.9 million reduction in operating lease expense, partially offset by an $8.5 million increase in personnel costs.

 

Contributing to the $45.3 million decline in non-interest income were a $49.3 million decrease in operating lease income; a $15.4 million decline in mortgage banking income, mostly due to a $10.1 million mortgage servicing right (MSR) temporary impairment recognized in the 2004 first quarter compared with none in the year-ago quarter; partially offset by a $13.9 million increase in investment securities gains, which totaled $15.1 million in the 2004 first quarter, compared with $1.2 million in the year-ago quarter (see Significant Items Influencing Financial Performance Comparisons).

 

18


 

Table 1 - Selected Quarterly Income Statement Data

 

     2004

    2003

    1Q04 vs. 1Q03

 

(in thousands, except per share amounts)


   First

    Fourth

    Third

    Second

    First

    Amount

    %

 

Total interest income

   $ 325,931     $ 335,097     $ 333,320     $ 317,325     $ 320,014     $ 5,917     1.8 %

Total interest expense

     103,246       110,782       112,849       114,884       118,255       (15,009 )   (12.7 %)
    


 


 


 


 


 


 

Net interest income

     222,685       224,315       220,471       202,441       201,759       20,926     10.4 %

Provision for credit losses

     25,596       26,341       51,615       49,193       36,844       (11,248 )   (30.5 %)
    


 


 


 


 


 


 

Net interest income after provision for credit losses

     197,089       197,974       168,856       153,248       164,915       32,174     19.5 %
    


 


 


 


 


 


 

Operating lease income

     88,867       105,307       117,624       128,574       138,193       (49,326 )   (35.7 %)

Service charges on deposit accounts

     41,837       44,763       42,294       40,914       39,869       1,968     4.9 %

Trust services

     16,323       15,793       15,365       15,580       14,911       1,412     9.5 %

Brokerage and insurance

     15,197       14,344       13,807       14,196       15,497       (300 )   (1.9 %)

Mortgage banking

     (4,296 )     9,677       30,193       7,185       11,125       (15,421 )   N.M.  

Bank owned life insurance

     10,485       10,410       10,438       11,043       11,137       (652 )   (5.9 %)

Other service charges and fees

     9,513       9,237       10,499       11,372       10,338       (825 )   (8.0 %)

Gain on sale of automobile loans

     9,004       16,288       —         13,496       10,255       (1,251 )   (12.2 %)

Gain on sale of branch office

     —         —         13,112       —         —         —       —    

Securities gains (losses)

     15,090       1,280       (4,107 )     6,887       1,198       13,892     N.M.  

Other

     25,619       19,411       23,543       27,704       20,401       5,218     25.6 %
    


 


 


 


 


 


 

Total non-interest income

     227,639       246,510       272,768       276,951       272,924       (45,285 )   (16.6 %)
    


 


 


 


 


 


 

Personnel costs

     121,624       115,762       113,170       105,242       113,089       8,535     7.5 %

Operating lease expense

     70,710       85,609       93,134       102,939       111,588       (40,878 )   (36.6 %)

Outside data processing and other services

     18,462       15,957       17,478       16,104       16,579       1,883     11.4 %

Equipment

     16,086       16,840       16,328       16,341       16,412       (326 )   (2.0 %)

Net occupancy

     16,763       14,925       15,570       15,377       16,609       154     0.9 %

Professional services

     7,299       12,175       11,116       9,872       9,285       (1,986 )   (21.4 %)

Marketing

     7,839       6,895       5,515       8,454       6,626       1,213     18.3 %

Telcommunications

     5,194       5,272       5,612       5,394       5,701       (507 )   (8.9 %)

Loss on early extinguishment of debt

     —         15,250       —         —         —         —       —    

Printing and supplies

     3,016       3,417       3,658       2,253       3,681       (665 )   (18.1 %)

Amortization of intangibles

     204       204       204       204       204       —       —    

Restructuring reserve releases charges

     —         (351 )     —         (5,315 )     (1,000 )     1,000     (100.0 %)

Other

     18,457       25,510       18,397       20,168       16,705       1,752     10.5 %
    


 


 


 


 


 


 

Total non-interest expense

     285,654       317,465       300,182       297,033       315,479       (29,825 )   (9.5 %)
    


 


 


 


 


 


 

Income before provision for income taxes

     139,074       127,019       141,442       133,166       122,360       16,714     13.7 %

Provision for income taxes

     34,901       33,758       37,230       36,676       30,630       4,271     13.9 %
    


 


 


 


 


 


 

Income before cummulative effect of change in accounting principle

     104,173       93,261       104,212       96,490       91,730       12,443     13.6 %

Cummulative effect of change in accounting principle, net of tax (1)

     —         —         (13,330 )     —         —         —       —    
    


 


 


 


 


 


 

Net Income

   $ 104,173     $ 93,261     $ 90,882     $ 96,490     $ 91,730     $ 12,443     13.6 %
    


 


 


 


 


 


 

Per Common Share

                                                      

Income before cummulative effect of change in accounting principle - Diluted

   $ 0.45     $ 0.40     $ 0.45     $ 0.42     $ 0.39     $ 0.06     15.4 %

Net income - Diluted

     0.45       0.40       0.39       0.42       0.39       0.06     15.4  

Cash dividends declared

     0.175       0.175       0.175       0.160       0.160       0.015     9.4  

Return on:

                                                      

Average total assets (2)

     1.36 %     1.22 %     1.38 %     1.38 %     1.36 %     —       —    

Average total shareholders’ equity (2)

     18.4 %     16.6 %     18.5 %     18.0 %     17.2 %     1.2 %   7.0 %

Net interest margin (3)

     3.36 %     3.42 %     3.46 %     3.47 %     3.63 %     (0.27 %)   (7.4 %)

Efficiency ratio (4)

     65.1 %     67.1 %     60.0 %     62.5 %     66.3 %     (1.2 %)   (1.8 %)

Effective tax rate

     25.1 %     26.6 %     26.3 %     27.5 %     25.0 %     0.1 %   0.4 %

Revenue - Fully Taxable Equivalent (FTE)

                                                      

Net interest income

   $ 222,685     $ 224,315     $ 220,471     $ 202,441     $ 201,759     $ 20,926     10.4 %

Tax equivalent adjustment

     3,023       2,954       2,558       2,076       2,096       927     44.2 %
    


 


 


 


 


 


 

Net Interest Income (3)

     225,708       227,269       223,029       204,517       203,855       21,853     10.7 %

Non-Interest Income

     227,639       246,510       272,768       276,951       272,924       (45,285 )   (16.6 %)
    


 


 


 


 


 


 

Total Revenue

   $ 453,347     $ 473,779     $ 495,797     $ 481,468     $ 476,779     $ (23,432 )   (4.9 %)
    


 


 


 


 


 


 

Total Revenue Excluding Securities Gains (Losses)

   $ 438,257     $ 472,499     $ 499,904     $ 474,581     $ 475,581     $ (37,324 )   (7.8 %)
    


 


 


 


 


 


 

 

(1) Due to the adoption of FASB Interpretation No. 46 for variable interest entities.

 

(2) Based on income before cummulative effect change in accounting principle, net of tax.

 

(3) On a fully taxable equivalent basis assuming a 35% tax rate

 

(4) Non-interest expense less amortization of intangible assets divided by the sum of fully taxable equivalent net interest income and non-interest income excluding securities gains (losses)

 

N.M. - Not Meaningful

 

19


2004 First Quarter versus 2003 Fourth Quarter

 

Compared with 2003 fourth quarter net income of $93.3 million, or $0.40 per common share, 2004 first quarter earnings were up 12% and 13%, respectively. This primarily reflected the benefit of a 10% decrease in non-interest expense and 3% decline in provision for credit losses, partially offset by an 8% decline in non-interest income. The ROA and ROE were 1.36% and 18.4%, respectively, in the current quarter, compared with 1.22% and 16.6% in the 2003 fourth quarter (see Table 1).

 

The 10%, or $31.8 million, decrease in non-interest expense reflected a $14.9 million decline in operating lease expense, as well as a comparative benefit versus 2003 fourth quarter expenses as the fourth quarter included $15.3 million of expense associated with the loss on early extinguishment of long-term debt (see Significant Items Influencing Financial Performance Comparisons). The lower provision for credit losses reflected improved credit quality trends. The 8%, or $18.9 million, decline in non-interest income reflected a $16.4 million decline in operating lease income; a $14.0 million decline in mortgage banking income, primarily reflecting the current quarter’s $10.1 million of MSR temporary impairment compared with a $3.5 million MSR temporary impairment recovery in the fourth quarter; and a $13.8 million increase in investment securities gains as the current quarter included $15.1 million of such gains, compared with $1.3 million of such gains in the fourth quarter (see Significant Items Influencing Financial Performance Comparisons).

 

Net interest income declined $1.6 million from the fourth quarter, reflecting a 6 basis point, or an effective 2%, decline in the net interest margin, partially offset by a 2% increase in average earnings assets. Average loans and leases increased only slightly despite strong growth in residential mortgage, home equity, and commercial real estate loans, as automobile loans declined 14% from the fourth quarter reflecting the impact of $1.0 billion of automobile loans sold late in the fourth quarter and $0.9 billion sold late in the 2004 first quarter. These sales represented a continuation of a strategy to lower automobile credit exposure. Some of the proceeds from these loan sales were reinvested in investment securities, contributing to the 13% increase in investment securities from the fourth quarter.

 

Average core deposits excluding retail CDs increased slightly from the fourth quarter and represented a reversal of fourth quarter net outflows.

 

 

Significant Items Influencing Financial Performance Comparisons

 

The following table highlights significant items influencing financial performance comparisons among periods in the results of operations discussion that follows:

 

(in millions, except per share amounts)


   Pre-tax

   

Impact

After-tax  (1)


    EPS

 

2004 First Quarter - GAAP earnings

   $ 139.1     $ 104.2     $ 0.45  

Gain on sale of $868 million of automobile loans

     9.0       5.9       0.03  

Mortgage servicing right (MSR) temporary impairment

     (10.1 )     (6.6 )     (0.03 )

Investment securities gain on sale

     15.1       9.8       0.04  

2003 Fourth Quarter - GAAP earnings

   $ 127.0     $ 93.3     $ 0.40  

Gain on sale of $1.02 billion of automobile loans

     16.3       10.6       0.05  

Mortgage servicing right (MSR) temporary impairment recovery

     3.5       2.3       0.01  

Long-term debt extinguishment

     (15.3 )     (9.9 )     (0.04 )

2003 First Quarter - GAAP earnings

   $ 122.4     $ 91.7     $ 0.39  

Gain on sale of $556 million of automobile loans

     10.3       6.7       0.03  

Restructuring reserve releases

     1.0       0.7       —    

 

(1) Increase (decrease) to GAAP earnings.

 

Gains from sales of automobile loans are the result of the company’s strategy to reduce the overall credit exposure to this sector.

 

Since the second quarter of 2002, Huntington has generally retained the servicing on mortgage loans it originates and sells into the secondary market. The servicing right represents the present value of expected future net servicing income for the loan. Expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly affected by prepayments. Prepayments usually increase when interest rates decline and

 

20


decrease when interest rates rise. Thus, as interest rates decline, less future income is expected and the value of the servicing rights decline. The asset becomes impaired when the valuation declines below recorded book value. Huntington recognizes temporary impairment due to change in interest rates through a valuation reserve and records a direct write-down of the book value of its mortgage servicing rights for other-than-temporary declines in valuation. Investment securities represent a balance sheet hedge to help mitigate the net income impact of mortgage servicing rights temporary valuation changes.

 

The 2003 fourth quarter long-term debt extinguishment reflected a decision to pay-off longer-term, higher interest rate debt. While this resulted in a negative impact to that quarter’s results, it benefits future period results by reducing funding costs. The 2003 first quarter restructuring reserve release reflected the release of previously established reserves that were no longer required.

 

RESULTS OF OPERATIONS

 

Net Interest Income

 

2004 First Quarter versus 2003 First Quarter

 

Fully taxable equivalent net interest income increased $21.9 million, or 11%, from the year-ago quarter, reflecting the favorable impact of an 18% increase in average earning assets, partially offset by a 27 basis point, or an effective 7%, decline in the net interest margin. The fully taxable equivalent net interest margin decreased to 3.36% from 3.63% primarily reflecting the strategic repositioning of portfolios away from automobile loans and toward lower rate, and lower risk, residential real estate-related loans and investment securities.

 

Average loans and leases increased $2.6 billion, or 14%, from the 2003 first quarter almost entirely due to a 25% increase in average consumer loans. Contributing to the consumer loan growth was a $0.9 billion, or 23%, increase in average total automobile loans and leases reflecting the impact of the consolidation of a securitization trust and the migration of leases from operating lease assets to direct financing leases, partially offset by loan sales; a $0.8 billion, or 46%, increase in average residential mortgages; and a $0.6 billion, or 20%, increase in average home equity loans.

 

Average total commercial (C&I) and commercial real estate (CRE) loans increased $0.2 billion, or 2%, reflecting a 12% increase in small business C&I and CRE loans and 10% increase in middle-market CRE loans. Average middle-market C&I loans were down 6% from the year-ago period and reflected, in part, weak demand, but also the impact from continued strategies to specifically lower exposure to large, individual commercial credits, including shared national credits.

 

Average investment securities increased $1.8 billion, or 54%, from the year-ago quarter, and were up $0.6 billion, or 13%, from the fourth quarter primarily reflecting the investment of a portion of the proceeds from the automobile loan sales. Average mortgages held for sale decreased $0.3 billion, or 55%, from the year-ago quarter.

 

Average total core deposits in the first quarter were $15.5 billion, including $2.4 billion of retail CDs. This compared with $15.0 billion in average total core deposits, including $3.0 billion in average retail CDs in the year-ago quarter, and $15.5 billion in average total core deposits, including $2.5 billion of retail CDs, in the 2003 fourth quarter. Average total core deposits excluding retail CDs were up $1.1 billion, or 9%, from the year-ago quarter.

 

Table 2 reflects quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities.

 

21


 

Table 2 - Consolidated Quarterly Average Balance Sheets

 

     Average Balances

   Change March ’04
vs. ’03


 

(in millions)


   2004

   2003

  

Fully Tax Equivalent Basis


   First

   Fourth

   Third

   Second

   First

   Amount

    Percent

 

Assets

                                                 

Interest bearing deposits in banks

   $ 79    $ 83    $ 90    $ 45    $ 37    $ 42     N.M.  %

Trading account securities

     16      11      11      23      12      4     33.3  

Federal funds sold and securities purchased under resale agreements

     92      117      103      69      57      35     61.4  

Mortgages held for sale

     207      295      898      602      459      (252 )   (54.9 )

Securities:

                                                 

Taxable

     4,646      4,093      3,646      3,385      3,016      1,630     54.0  

Tax exempt

     437      424      358      291      289      148     51.2  
    

  

  

  

  

  


 

Total Securities

     5,083      4,517      4,004      3,676      3,305      1,778     53.8  
    

  

  

  

  

  


 

Loans and Leases:

                                                 

Commercial and industrial

     5,365      5,382      5,380      5,626      5,623      (258 )   (4.6 )

Real Estate

                                                 

Construction

     1,322      1,297      1,258      1,239      1,187      135     11.4  

Commercial

     2,876      2,830      2,744      2,621      2,565      311     12.1  

Consumer

                                                 

Automobile loans

     3,041      3,529      3,594      2,830      3,079      (38 )   (1.2 )

Automobile leases

     1,988      1,802      1,590      1,306      1,006      982     97.6  
    

  

  

  

  

  


 

Automobile loans and leases

     5,029      5,331      5,184      4,136      4,085      944     23.1  
    

  

  

  

  

  


 

Home equity

     3,880      3,678      3,503      3,359      3,238      642     19.8  

Residential mortgage

     2,674      2,501      2,075      1,887      1,832      842     46.0  

Other loans

     356      387      367      379      389      (33 )   (8.5 )
    

  

  

  

  

  


 

Total Consumer

     11,939      11,897      11,129      9,761      9,544      2,395     25.1  
    

  

  

  

  

  


 

Total Loans and Leases

     21,502      21,406      20,511      19,247      18,919      2,583     13.7  
    

  

  

  

  

  


 

Allowance for loan and lease losses

     313      350      330      304      337      (24 )   (7.1 )
    

  

  

  

  

  


 

Net loans and leases

     21,189      21,056      20,181      18,943      18,582      2,607     14.0  
    

  

  

  

  

  


 

Total earning assets

     26,979      26,429      25,617      23,662      22,789      4,190     18.4  
    

  

  

  

  

  


 

Operating lease assets

     1,166      1,355      1,565      1,802      2,076      (910 )   (43.8 )

Cash and due from banks

     740      766      747      735      740      0     —    

Intangible assets

     217      217      218      218      218      (1 )   (0.5 )

All other assets

     2,046      2,005      2,067      1,985      1,950      96     4.9  
    

  

  

  

  

  


 

Total Assets

   $ 30,835    $ 30,422    $ 29,884    $ 28,098    $ 27,436    $ 3,399     12.4 %
    

  

  

  

  

  


 

Liabilities and Shareholders’ Equity

                                                 

Core deposits

                                                 

Non-interest bearing deposits

   $ 3,017    $ 3,131    $ 3,218    $ 3,046    $ 2,958    $ 59     2.0 %

Interest bearing demand deposits

     6,609      6,466      6,558      6,100      5,597      1,012     18.1  

Savings deposits

     2,819      2,824      2,808      2,804      2,771      48     1.7  

Retail certificates of deposit

     2,399      2,492      2,561      2,798      2,963      (564 )   (19.0 )

Other domestic time deposits

     637      631      656      673      682      (45 )   (6.6 )
    

  

  

  

  

  


 

Total core deposits

     15,481      15,544      15,801      15,421      14,971      510     3.4  
    

  

  

  

  

  


 

Domestic time deposits of $100,000 or more

     788      828      803      808      769      19     2.5  

Brokered time deposits and negotiable CDs

     1,907      1,851      1,421      1,241      1,155      752     65.1  

Foreign time deposits

     549      522      536      426      514      35     6.8  
    

  

  

  

  

  


 

Total deposits

     18,725      18,745      18,561      17,896      17,409      1,316     7.6  
    

  

  

  

  

  


 

Short-term borrowings

     1,603      1,433      1,393      1,635      1,947      (344 )   (17.7 )

Federal Home Loan Bank advances

     1,273      1,273      1,273      1,267      1,216      57     4.7  

Subordinated notes and other long-term debt, including preferred capital securities

     5,557      5,432      5,197      4,010      3,570      1,987     55.7  
    

  

  

  

  

  


 

Total interest bearing liabilities

     24,141      23,752      23,206      21,762      21,184      2,957     14.0  
    

  

  

  

  

  


 

All other liabilities

     1,399      1,311      1,221      1,139      1,128      271     24.0  

Shareholders’ equity

     2,278      2,228      2,239      2,151      2,166      112     5.2  
    

  

  

  

  

  


 

Total Liabilities and Shareholders’ Equity

   $ 30,835    $ 30,422    $ 29,884    $ 28,098    $ 27,436    $ 3,399     12.4 %
    

  

  

  

  

  


 

 

22


 

Table 3 - Consolidated Quarterly Net Interest Margin Analysis

 

     Average Rates (3)

 

(in millions)


   2004

    2003

 

Fully Tax Equivalent Basis (1)


   First

    Fourth

    Third

    Second

    First

 

Assets

                              

Interest bearing deposits in banks

   0.71 %   0.60 %   0.51 %   1.58 %   1.61 %

Trading account securities

   3.98     2.39     4.70     4.15     4.63  

Federal funds sold and securities purchased under resale agreements

   1.41     1.30     1.92     2.19     2.14  

Mortgages held for sale

   5.33     5.31     5.16     5.42     5.56  

Securities:

                              

Taxable

   4.06     4.24     4.23     4.58     5.15  

Tax exempt

   6.88     6.91     6.93     6.91     6.86  
    

 

 

 

 

Total Securities

   4.30     4.49     4.47     4.77     5.30  
    

 

 

 

 

Loans and Leases: (2)

                              

Commercial and industrial

   4.49     4.82     4.84     5.26     5.40  

Real Estate

                              

Construction

   3.68     4.24     4.17     4.07     4.06  

Commercial

   4.70     4.99     5.22     5.28     5.60  

Consumer

                              

Automobile loans

   6.93     6.90     7.19     7.74     7.85  

Automobile leases

   4.94     4.98     4.99     4.69     6.04  
    

 

 

 

 

Automobile loans and leases

   6.14     6.25     6.51     6.78     7.40  
    

 

 

 

 

Home equity

   4.82     4.87     5.09     5.02     5.17  

Residential mortgage

   5.44     5.20     5.32     5.76     5.95  

Other loans

   7.24     7.19     7.38     7.22     6.60  
    

 

 

 

 

Total Consumer

   5.52     5.64     5.87     5.99     6.33  
    

 

 

 

 

Total Loans and Leases

   5.04     5.26     5.41     5.56     5.82  
    

 

 

 

 

Total earning assets

   4.89 %   5.11 %   5.23 %   5.42 %   5.72 %
    

 

 

 

 

Liabilities and Shareholders’ Equity

                              

Core deposits

                              

Non-interest bearing deposits

                              

Interest bearing demand deposits

   0.88 %   0.91 %   1.04 %   1.39 %   1.43 %

Savings deposits

   0.94     1.22     1.35     1.55     1.85  

Retail certificates of deposit

   3.47     3.54     3.51     3.75     3.87  

Other domestic time deposits

   3.48     3.69     3.89     3.85     4.00  
    

 

 

 

 

Total core deposits

   1.53     1.65     1.76     2.09     2.27  
    

 

 

 

 

Domestic time deposits of $100,000 or more

   2.14     2.37     2.32     2.55     2.76  

Brokered time deposits and negotiable CDs

   1.51     1.52     1.63     1.79     1.98  

Foreign time deposits

   0.72     0.75     0.85     1.03     1.06  
    

 

 

 

 

Total deposits

   1.53     1.64     1.75     2.06     2.23  
    

 

 

 

 

Short-term borrowings

   0.83     0.78     0.85     1.06     1.16  

Federal Home Loan Bank advances

   2.50     2.24     1.81     1.76     1.84  

Subordinated notes and other long-term debt, including preferred capital securities

   2.33     2.63     2.78     2.85     3.12  
    

 

 

 

 

Total interest bearing liabilities

   1.71 %   1.85 %   1.93 %   2.11 %   2.26 %
    

 

 

 

 

Net interest rate spread

   3.18 %   3.26 %   3.30 %   3.31 %   3.46 %

Impact of non-interest bearing funds on margin

   0.18     0.16     0.16     0.16     0.17  
    

 

 

 

 

Net Interest Margin

   3.36 %   3.42 %   3.46 %   3.47 %   3.63 %
    

 

 

 

 

 

(1) Fully tax equivalent yields are calculated assuming a 35% tax rate. See page 19 for the fully taxable equivalent adjustment.

 

(2) Individual loan and lease components include applicable non-deferrable fees.

 

(3) Loan and lease and deposit average rates include impact of applicable derivatives.

 

23


2004 First Quarter versus 2003 Fourth Quarter

 

Compared with the 2003 fourth quarter, fully taxable equivalent net interest income decreased $1.6 million, reflecting the adverse impact of automobile loan sales. Average earnings assets, despite the negative impact from the sale of automobile loans, increased $0.5 billion, or 2%. The fully taxable equivalent net interest margin declined 6 basis points, or an effective 2%, to 3.36% from 3.42%. The decline in the net interest margin from the fourth quarter reflected the same factors as those impacting the decrease from the 2003 first quarter.

 

Average total loans and leases in the first quarter increased only slightly from the 2003 fourth quarter, as the growth rate was mitigated by a $0.9 billion reduction in average automobile loans related to 2003 fourth quarter and 2004 first quarter loan sales. These automobile loan sales also were reflected in a $0.3 billion, or 6%, decline in average automobile loans and leases from the fourth quarter. Growth in mortgage-related consumer loans remained strong with average residential mortgages up $0.2 billion, or 7%, and average home equity loans up $0.2 billion, or 5%. Total average C&I and CRE loans were up slightly from the fourth quarter reflecting a 1% increase in small business C&I and CRE loans and a 2% increase in middle-market CRE loans. Average middle-market C&I loans declined slightly.

 

Compared with the fourth quarter’s 1% net outflow, average total core deposits excluding retail CDs increased slightly in the 2004 first quarter, primarily due to a $0.1 billion, or 2%, increase in interest bearing demand deposits.

 

Provision for Credit Losses

 

The provision for credit losses is the expense necessary to maintain the ALLL and the AULC at levels adequate to absorb Management’s estimate of inherent losses in the total loan and lease portfolio and unfunded loan commitments and letters of credit. Taken into consideration are such factors as current period net charge-offs that are charged against these allowances, current period loan and lease growth and any related estimate of likely losses associated with that growth based on historical experience, the current economic outlook, and the anticipated impact on credit quality of existing loans and leases and unfunded commitments and letters of credit (see Allowances for Credit Losses for additional discussion).

 

The provision for credit losses in the 2004 first quarter was $25.6 million, down $11.2 million, or 31%, from the year-ago quarter, and down $0.7 million, or 3%, from the 2003 fourth quarter, reflecting improved credit quality (see Credit Risk for additional discussion).

 

Non-Interest Income

 

The following table reflects non-interest income detail for each of the last five quarters.

 

 

Table 4 - Non-Interest Income

 

<
     2004

    2003

   1Q04 vs. 1Q03

 

(in thousands)


   First

    Fourth

   Third

    Second

   First

   Amount

    %

 

Service charges on deposit accounts

   $ 41,837     $ 44,763    $ 42,294     $ 40,914    $ 39,869    $ 1,968     4.9 %

Trust services

     16,323       15,793      15,365       15,580      14,911      1,412     9.5  

Brokerage and insurance

     15,197       14,344      13,807       14,196      15,497      (300 )   (1.9 )

Mortgage banking

     (4,296 )     9,677      30,193       7,185      11,125      (15,421 )   N.M.  

Bank owned life insurance

     10,485       10,410      10,438       11,043      11,137      (652 )   (5.9 )

Gain on sale of automobile loans

     9,004       16,288      —         13,496      10,255      (1,251 )   (12.2 )

Gain on sale of branch offices

     —         —        13,112       —        —        —       —    

Other service charges and fees

     9,513       9,237      10,499       11,372      10,338      (825 )   (8.0 )

Securities gains (losses)

     15,090       1,280      (4,107 )     6,887      1,198      13,892     N.M.  

Other

     25,619       19,411      23,543       27,704      20,401      5,218     25.6  
    


 

  


 

  

  


 

Sub-total before operating lease income

     138,772       141,203      155,144       148,377      134,731      4,041     3.0  

Operating lease income

     88,867       105,307      117,624       128,574      138,193      (49,326 )   (35.7 )
    


 

  


 

  

  


 

Total Non-Interest Income

   $ 227,639     $ 246,510    $ 272,768     $ 276,951    $ 272,924    $ (45,285 )   (16.6 )%