UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED March 31, 2005
Commission File Number 0-2525
Huntington Bancshares Incorporated
| Maryland | 31-0724920 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No o
There were 232,294,999 shares of Registrant’s without par value common stock outstanding on April 30, 2005.
Huntington Bancshares Incorporated
INDEX
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Part I. Financial Information
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Item 1. Financial Statements
(Unaudited)
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Condensed Consolidated Balance
Sheets at March 31, 2005, December 31, 2004, and March 31,
2004
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3 | |||||||
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Condensed Consolidated Statements
of Income for the three months ended March 31, 2005 and 2004
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4 | |||||||
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Condensed Consolidated Statements
of Changes in Shareholders’ Equity for the three months ended
March 31, 2005 and 2004
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5 | |||||||
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Condensed Consolidated Statements
of Cash Flows for the three months ended March 31, 2005 and
2004
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6 | |||||||
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Notes to Unaudited Condensed
Consolidated Financial Statements
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7 | |||||||
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Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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16 | |||||||
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Item 3. Quantitative and
Qualitative Disclosures about Market Risk
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70 | |||||||
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Item 4. Controls and Procedures
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70 | |||||||
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Part II. Other Information
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Item 2. Changes in Securities,
Use of Proceeds, and Issuer Purchases of Equity Securities
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71 | |||||||
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Item 6. Exhibits
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71 | |||||||
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Signatures
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73 | |||||||
| Exhibit 10.A | ||||||||
| Exhibit 10.B | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
2
Part 1. Financial Information
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
| March 31, | December 31, | March 31, | ||||||||||
| (in thousands, except number of shares) | 2005 | 2004 | 2004 | |||||||||
| (Unaudited) | (Unaudited) | |||||||||||
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Assets
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Cash and due from banks
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$ | 914,699 | $ | 877,320 | $ | 766,432 | ||||||
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Federal funds sold and securities purchased under resale agreements
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144,980 | 628,040 | 224,841 | |||||||||
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Interest bearing deposits in banks
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29,551 | 22,398 | 54,027 | |||||||||
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Trading account securities
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100,135 | 309,630 | 16,410 | |||||||||
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Loans held for sale
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252,932 | 223,469 | 230,417 | |||||||||
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Investment securities
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4,052,875 | 4,238,945 | 5,458,347 | |||||||||
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Loans and leases
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24,206,465 | 23,560,277 | 21,193,627 | |||||||||
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Allowance for loan and lease losses
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(264,390 | ) | (271,211 | ) | (295,377 | ) | ||||||
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Net loans and leases
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23,942,075 | 23,289,066 | 20,898,250 | |||||||||
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Operating lease assets
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466,550 | 587,310 | 1,070,958 | |||||||||
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Bank owned life insurance
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973,164 | 963,059 | 938,156 | |||||||||
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Premises and equipment
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354,979 | 355,115 | 351,073 | |||||||||
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Goodwill and other intangible assets
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217,780 | 215,807 | 216,805 | |||||||||
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Customers’ acceptance liability
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7,194 | 11,299 | 7,909 | |||||||||
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Accrued income and other assets
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725,685 | 844,039 | 805,455 | |||||||||
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Total Assets
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$ | 32,182,599 | $ | 32,565,497 | $ | 31,039,080 | ||||||
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Liabilities and Shareholders’ Equity
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Liabilities
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Deposits
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$ | 21,770,973 | $ | 20,768,161 | $ | 18,988,846 | ||||||
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Short-term borrowings
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1,033,496 | 1,207,233 | 1,076,302 | |||||||||
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Federal Home Loan Bank advances
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903,871 | 1,271,088 | 1,273,000 | |||||||||
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Other long-term debt
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3,138,626 | 4,016,004 | 4,478,599 | |||||||||
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Subordinated notes
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1,025,612 | 1,039,793 | 1,066,705 | |||||||||
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Allowance for unfunded loan commitments and letters of credit
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31,610 | 33,187 | 32,089 | |||||||||
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Bank acceptances outstanding
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7,194 | 11,299 | 7,909 | |||||||||
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Deferred federal income tax liability
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781,152 | 783,628 | 687,820 | |||||||||
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Accrued expenses and other liabilities
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900,292 | 897,466 | 1,063,631 | |||||||||
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Total Liabilities
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29,592,826 | 30,027,859 | 28,674,901 | |||||||||
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Shareholders’ equity
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Preferred
stock — authorized 6,617,808 shares; none outstanding
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— | — | — | |||||||||
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Common stock — without par value; authorized
500,000,000 shares; issued 257,866,255
shares; outstanding 232,192,017; 231,605,281
and 229,410,043 shares, respectively
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2,484,832 | 2,484,204 | 2,482,342 | |||||||||
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Less 25,674,238; 26,260,974 and 28,456,212
treasury shares, respectively
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(490,139 | ) | (499,259 | ) | (541,048 | ) | ||||||
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Accumulated other comprehensive income (loss)
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(18,686 | ) | (10,903 | ) | 21,490 | |||||||
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Retained earnings
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613,766 | 563,596 | 401,395 | |||||||||
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Total Shareholders’ Equity
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2,589,773 | 2,537,638 | 2,364,179 | |||||||||
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Total Liabilities and Shareholders’ Equity
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$ | 32,182,599 | $ | 32,565,497 | $ | 31,039,080 | ||||||
See notes to unaudited condensed consolidated financial statements
3
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
See notes to unaudited condensed consolidated financial statements
4
Condensed Consolidated Statements of Changes in Shareholders’ Equity
See notes to unaudited condensed consolidated financial statements.
5
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
See notes to unaudited condensed consolidated financial statements.
6
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Huntington
Bancshares Incorporated (Huntington or the Company) 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 condensed consolidated financial statements have been prepared
according to the rules and regulations of the Securities and Exchange Commission (SEC or
Commission) and, therefore, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States (GAAP) have been omitted. The Notes to the Consolidated Financial Statements
appearing in Huntington’s 2004 Annual Report on Form 10-K (2004 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 2005 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
Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004),
Share-Based Payment
(Statement 123R)
– Statement 123R was issued in December 2004, requiring that the compensation cost
relating to share-based payment transactions be recognized in the financial statements. That cost
will be measured based on the fair value of the equity or liability instruments issued. Statement
123R covers a wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Statement 123R replaces FASB Statement No. 123,
Accounting for Stock-Based
Compensation
(Statement 123), and supersedes Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25). Statement 123, as originally issued in 1995,
established as preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted entities the option of continuing
to apply the guidance in APB 25, as long as the footnotes to financial statements disclosed pro
forma net income under the preferable fair-value-based method. In its 2004 Form 10-K, Huntington
disclosed adopting Statement 123R effective January 1, 2005. Subsequently however, new guidance
was issued by the SEC that provides the option to postpone adoption of Statement 123R until the
first annual reporting period that begins after June 15, 2005. As such, Huntington has postponed
the adoption of Statement 123R until January 1, 2006. (
The impact of adopting Statement 123R is
described in Note 9.)
Staff Accounting Bulletin No. 107,
Share Based Payments (SAB 107)
– On March 29, 2005, the SEC
issued SAB 107 to provide public companies additional guidance in applying the provisions of
Statement 123R. Among other things, SAB 107 describes the SEC staff’s expectations in determining
the assumptions that underlie the fair value estimates and discusses the interaction of Statement
123R with certain existing SEC guidance. Huntington will adopt the provisions of SAB 107 in
conjunction with the adoption of FAS 123R beginning January 1, 2006.
(see Note 9.)
FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations (FIN 47)
–
In
March 2005, the FASB issued FIN 47, which clarifies that the term “conditional asset retirement
obligation” as used in FASB Statement No. 143,
Accounting for Asset Retirement Obligations
, refers
to a legal obligation to perform an asset retirement activity in which the timing and (or) method
of settlement are conditional on a future event that may or may not be within the control of the
entity. An entity is required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47
becomes effective for fiscal years ending after December 15, 2005. Huntington is currently
evaluating the impact of adopting FIN 47.
Note 3 – Securities and Exchange Commission Formal Investigation
On June 26, 2003, Huntington announced that the Securities and Exchange Commission staff was
conducting a formal investigation into certain financial accounting matters relating to fiscal
years 2002 and earlier and certain related disclosure matters. On August 9, 2004, Huntington
announced the Company was in negotiations with the staff of the SEC regarding a settlement of the
formal investigation and disclosed that it expected that a settlement of this matter, which is
7
subject to approval by the SEC, would involve the entry of an order requiring, among other
possible matters, Huntington to comply with various provisions of the Securities Exchange Act of
1934 and the Securities Act of 1933, along with the imposition of a civil money penalty.
On April 25, 2005, Huntington announced that it has proposed a settlement to the staff of the
Securities and Exchange Commission regarding the resolution of its previously announced formal
investigation into certain financial accounting matters relating to fiscal years 2002 and earlier
and certain related disclosure matters, and that the staff has agreed to recommend the proposed
settlement offer to the Commission. The proposed settlement, which is subject to approval by the
Commission, is expected to involve the entry of an order requiring Huntington; its chief executive
officer, Thomas E. Hoaglin; its former vice chairman and chief financial officer, Michael J.
McMennamin; and its former controller, John Van Fleet, to comply with various provisions of the
Securities Exchange Act of 1934 and the Securities Act of 1933. The proposed settlement would call
for the payment of a $7.5 million civil money penalty by the company, which, if approved, would be
distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of
2002. This civil money penalty would have no current period financial impact on Huntington’s
results, as reserves for this amount were established and expensed prior to December 31, 2004. The
proposed settlement would also require the disgorgement of $360,000 by Hoaglin in respect of his
previously paid 2002 annual bonus, and disgorgement of previously paid bonuses and prejudgment
interest for McMennamin and Van Fleet of $265,215 and $26,660, respectively. In addition, Hoaglin,
McMennamin, and Van Fleet would pay civil money penalties of $50,000; $75,000; and $25,000;
respectively. The proposed settlement would also impose certain other relief with respect to
McMennamin and Van Fleet.
No assurances can be made as to final timing or outcome.
Note 4 – Formal Regulatory Supervisory Agreements
On March 1, 2005, Huntington announced that it had entered into formal written agreements with
its banking regulators, the Federal Reserve Bank of Cleveland (FRBC) and the Office of the
Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance
its corporate governance, internal audit, risk management, accounting policies and procedures, and
financial and regulatory reporting. The agreements call for independent third-party reviews, as
well as the submission of written plans and progress reports by Management and remain in effect
until terminated by the banking regulators.
Management has been working with its banking regulators over the past several months and has
been taking actions and devoting significant resources to address all of the issues raised.
Management believes that the changes it has already made, and is in the process of making, will
address these issues fully and comprehensively. No assurances, however, can be provided as to the
ultimate timing or outcome of these matters.
Note 5 – Pending 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. On November 3,
2004, Huntington announced that it was negotiating a one-year extension of its pending merger
agreement with Unizan. It was also announced that Huntington was withdrawing its current
application with the FRBC to acquire Unizan and intends to resubmit the application for regulatory
approval of the merger once Huntington has successfully resolved the pending SEC and banking
regulatory concerns. On November 11, 2004, Huntington and Unizan jointly announced they had entered
into an amendment to their January 26, 2004 merger agreement. The amendment extends the term of the
agreement for one year from January 27, 2005 to January 27, 2006.
8
Note 6 — Investment Securities
Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years, and over 10 years) of investment
securities at March 31, 2005, December 31, 2004, and March 31, 2004:
9
Based
upon its assessment, Management does not believe any individual
unrealized loss at March 31, 2005, represents an
other-than-temporary impairment. In addition, Huntington has both the
intent and ability to hold these securities for a time necessary to
recover the amortized cost. There were no temporary impairments of
any securities recognized in either of the three-month periods ended
Note 7 – Other Comprehensive Income
The components of Huntington’s Other Comprehensive Income in the three months ended March 31
were as follows:
Activity in Accumulated Other Comprehensive Income for the three months ended March 31,
2005 and 2004 was as follows:
10
Note 8 – 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 months ended March 31 is as follows:
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.
Options
on approximately 2.6 million and 2.8 million shares were outstanding at March 31, 2005
and 2004, respectively, but were not included in the computation of diluted earnings per share
because the effect would be antidilutive. The weighted average exercise price for these options was
$26.96 per share and $26.74 per share at the end of the same respective periods.
On January 7, 2005, Huntington released from escrow 86,118 shares of Huntington common stock
to former shareholders of LeaseNet, Inc., which were previously issued in September 2002. A total
of 373,896 common shares, previously held in escrow, was returned to Huntington. All shares in
escrow had been accounted for as treasury stock.
Note 9 – Stock-Based Compensation
Huntington’s stock-based compensation plans are accounted for based on the intrinsic value
method promulgated by APB Opinion 25,
Accounting for Stock Issued to Employees
, and related
interpretations. Compensation expense for employee stock options is generally not recognized if the
exercise price of the option equals or exceeds the fair value of the stock on the date of grant.
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:
11
Note 10 – 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 (Post-Retirement Benefit 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.
The following table shows the components of net periodic benefit expense:
There
is no expected minimum contribution for 2005 to the Plan. Although
not required, Huntington made a contribution
to the Plan of $63.7 million in April 2005. Expected contributions for 2005 for the Post-Retirement
Benefit Plan are $4.0 million.
12
Huntington also sponsors other retirement plans, the most significant being the Supplemental
Executive Retirement Plan and the Supplemental Retirement Income Plan. These plans are nonqualified
plans that provide certain former officers and directors of Huntington and its subsidiaries with
defined pension benefits in excess of limits imposed by federal tax law.
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 $2.5 million and $2.4 million for the three
Note 11 – Commitments and Contingent Liabilities
Commitments to extend credit
:
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, 2005, December 31, 2004, and March 31, 2004, were as follows:
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 $3.6 million, $4.1 million, and $3.4 million at March 31, 2005, December
31, 2004, and March 31, 2004, 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.
Commitments to sell loans:
Huntington entered into forward contracts, relating to its mortgage banking business. At March
31, 2005, December 31, 2004, and March 31, 2004, Huntington had commitments to sell residential
real estate loans of $388.5 million, $311.3 million, and $414.5 million, respectively. These
contracts mature in less than one year.
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.
(see Note 3.)
13
Note 12 – Stock Repurchase Plan
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 Management
to repurchase not more than 7,500,000 shares of Huntington common stock. As of March 31, 2005,
there have been no share repurchases made under the 2004 Repurchase Program. On April 25, 2005,
Huntington announced that it intends to reactivate its share repurchase program upon approval by
the Commission of the proposed settlement offer to resolve the SEC formal investigation. It
expects to repurchase these shares from time-to-time in the open market or through privately
negotiated transactions depending on market conditions.
Note 13 – Segment Reporting
Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the
Private Financial Group (PFG). A fourth segment includes the Company’s Treasury function and other
unallocated assets, liabilities, revenue, and expense. Lines of business results are determined
based upon the Company’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. An overview of this
system is provided below, along with a description of each segment and discussion of financial
results.
The following provides a brief description of the four operating segments of Huntington:
Regional Banking:
This segment provides products and services to consumer, small business, and
commercial customers. These products and services are offered in seven operating regions within the
five states of Ohio, Michigan, West Virginia, Indiana, and Kentucky through the Company’s banking
network of 335 branches, over 700 ATMs, plus Internet and telephone banking channels. 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, small
business loans, personal and business deposit products, as well as sales of investment and
insurance services. Retail products and services comprise 61% and 78%, of total regional banking
loans and deposits, respectively. Commercial Banking serves middle market and large commercial
banking relationships, which use a variety of banking products and services including, but not
limited to, commercial loans, international trade, cash management, leasing, interest rate
protection products, capital market alternatives, 401(k) plans, and mezzanine investment
capabilities.
Dealer Sales:
This segment serves more than 3,500 automotive dealerships within Huntington’s
primary banking markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and Tennessee. The
segment finances the purchase of automobiles by customers of the automotive dealerships, purchases
automobiles from dealers and simultaneously leases the automobiles to consumers under long-term
operating or direct finance leases, finances the dealership’s 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
the Company’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 other three business segments.
Assets included in this segment include investment securities, bank owned life insurance, and
mezzanine loans originated through Huntington Capital Markets.
Use of Operating Earnings to Measure Segment Performance
Management uses earnings on an operating basis, rather than on a GAAP basis, to measure
underlying performance trends for each business segment and to determine the success of strategies
and future earnings capabilities. Operating earnings represent GAAP earnings adjusted to exclude
the impact of the significant items listed in the reconciliation table below. For the three months
ending March 31, 2005, operating earnings were the same as reported GAAP earnings.
14
Listed below is certain operating basis financial information reconciled to Huntington’s first
quarter 2005 and 2004 reported results by line of business.
15
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 reinsuring 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, Nevada, 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 for the year ended December 31, 2004 (2004 Form 10-K),
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. Management strives to mitigate 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 operations, (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 2004 Form 10-K, while not all inclusive, discusses
a number of business risks that, in addition to the other information in this report, readers
should carefully consider.
SEC Formal Investigation
On June 26, 2003, Huntington announced that the Securities and Exchange Commission (SEC or
Commission) staff was conducting a formal investigation into certain financial accounting matters
relating to fiscal years 2002 and earlier and certain related disclosure matters. On August 9,
2004, Huntington announced the Company was in negotiations with the staff of the SEC regarding a
settlement of the formal investigation and disclosed that it expected that a settlement of this
matter, which is subject to approval by the SEC, would involve the entry of an order requiring,
among other possible
16
matters, Huntington to comply with various provisions of the Securities Exchange Act of 1934
and the Securities Act of 1933, along with the imposition of a civil money penalty.
On April 25, 2005, Huntington announced that it has proposed a settlement to the staff of the
Securities and Exchange Commission regarding the resolution of its previously announced formal
investigation into certain financial accounting matters relating to fiscal years 2002 and earlier
and certain related disclosure matters, and that the staff has agreed to recommend the proposed
settlement offer to the Commission. The proposed settlement, which is subject to approval by the
Commission, is expected to involve the entry of an order requiring Huntington; its chief executive
officer, Thomas E. Hoaglin; its former vice chairman and chief financial officer, Michael J.
McMennamin; and its former controller, John Van Fleet, to comply with various provisions of the
Securities Exchange Act of 1934 and the Securities Act of 1933. The proposed settlement would call
for the payment of a $7.5 million civil money penalty by the company, which, if approved, would be
distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of
2002. This civil money penalty would have no current period financial impact on Huntington’s
results, as reserves for this amount were established and expensed prior to December 31, 2004. The
proposed settlement would also require the disgorgement of $360,000 by Hoaglin in respect of his
previously paid 2002 annual bonus, and disgorgement of previously paid bonuses and prejudgment
interest for McMennamin and Van Fleet of $265,215 and $26,660, respectively. In addition, Hoaglin,
McMennamin, and Van Fleet would pay civil money penalties of $50,000; $75,000; and $25,000;
respectively. The proposed settlement would also impose certain other relief with respect to
McMennamin and Van Fleet.
No assurances can be made as to final timing or outcome.
Formal Regulatory Supervisory Agreements
On March 1, 2005, Huntington announced that it had entered into formal written agreements with
its banking regulators, the Federal Reserve Bank of Cleveland (FRBC) and the Office of the
Comptroller of the Currency (OCC), providing for a comprehensive action plan designed to enhance
its corporate governance, internal audit, risk management, accounting policies and procedures, and
financial and regulatory reporting. The agreements call for independent third-party reviews, as
well as the submission of written plans and progress reports by Management and remain in effect
until terminated by the banking regulators.
Management has been working with its banking regulators over the past several months and has
been taking actions and devoting significant resources to address all of the issues raised.
Management believes that the changes that it has already made, and is in the process of making,
will address these issues fully and comprehensively.
As announced November 12, 2004, Huntington and Unizan Financial Corp. (Unizan) have entered
into an amendment to their January 26, 2004 merger agreement extending the term of the agreement
for one year from January 27, 2005 to January 27, 2006, and Huntington has withdrawn its
application with the Federal Reserve to acquire Unizan. On March 1, 2005, Huntington announced
that it intends to resubmit the application for regulatory approval of the merger once the
regulatory written agreements have been terminated. No assurance, however, can be provided as to
the ultimate timing or outcome of these matters.
17
SUMMARY DISCUSSION OF RESULTS
Huntington’s 2005 first quarter earnings were $96.5 million, or $0.41 per common share, down
7% from $104.2 million, and down 9% from $0.45 per common share in the year-ago quarter. Compared
with 2004 fourth quarter net income of $91.1 million and $0.39 per common share, 2005 first quarter
earnings and earnings per share were up 6% and 5%, respectively.
The return on average assets (ROA) and return on average equity (ROE) were 1.20% and 15.5%,
respectively, in the current quarter, down from 1.36% and 18.4%, respectively, in the year-ago
quarter, but up from 1.13% and 14.6%, respectively, in the 2004 fourth quarter.
(see Table 1.)
Management’s Summary Review of 2005 First Quarter Performance versus 2004 First and Fourth
Quarters
First
quarter earnings per share performance of $0.41 was slightly below
Management’s expectations.
Management was pleased with loan and deposit growth, and a stable net interest margin and expense
levels, but was disappointed with the weakness in fee revenue and one significant commercial loan
net charge-off.
Loan growth grew strongly across all regions and loan categories. Deposits increased and the
Company added new customers. Average total loans and leases were 11% higher than in the year-ago
quarter. Compared with the 2004 fourth quarter, average total loans grew at a 14% annualized rate,
reflecting 15% and 14% annualized growth in average total consumer and total commercial loans,
respectively.
Average core deposits were 10% higher than a year ago. Compared with the fourth quarter,
average core deposits increased at a 3% annualized growth rate. A slow down in first quarter core
deposit growth is typical due to seasonal factors. However, this year’s 3% linked quarter
annualized increase compared very favorably to the 2% annualized decrease in the year-earlier
quarter. Importantly, the number of the Company’s consumer demand deposit households and small
business demand deposit relationships both continued their positive growth trends and were 3% and
9% higher than a year ago, respectively.
Management was pleased with the relative stability of the net interest margin, as it declined
only one basis point to 3.31% from the fourth quarter’s 3.38% level after taking into account a 6
basis point one-time positive impact to the fourth quarter net interest margin from a funding
adjustment. The Company expects the net interest margin to improve slightly over the rest of the
year from the current quarter’s level. This margin improvement, along with anticipated loan
growth, is expected to be key drivers of higher revenue in coming quarters.
Certain fee income categories declined from the prior period more than anticipated. In
particular, other income declined, reflecting soft equity markets which resulted in lower equity
investment gains in the current quarter compared with gains in the fourth quarter. In addition,
both commercial and personal service charge income declined consistent with recent industry trends.
Management was also pleased with overall credit quality performance, although annualized net
charge-offs at 0.47% was higher than the 0.36% level in the 2004 fourth quarter, reflecting the
negative impact from a single middle market commercial credit charge-off. Non-performing assets
(NPAs) declined, as expected, and were only $73.3 million, or 0.30% of total loans and leases and
other real estate at quarter-end, down from 0.46% at year end, and were the lowest level in many
years. Improvement in the economic outlook and a reduction in specific reserves due to charge-offs
resulted in a decline in the loan loss reserve ratio to 1.09% from 1.15% at year-end. In spite of
this decline in the loan loss reserve ratio, the allowance strengthened in relation to the level of
non-performing loans (NPL) as the NPL coverage ratio increased to 441%, up from 424% at the end of
the fourth quarter, and remains among the highest in the Company’s peer group.
The capital position continued to strengthen. At March 31, 2005, the tangible common equity to
risk-weighted assets ratio was 7.83%, down from 7.86% at year-end.
18
Table 1 — Selected Quarterly Income Statement Data
19
Significant Factors Influencing Financial Performance Comparisons
Earnings comparisons from the beginning of 2004 through the first three months of 2005 were
impacted by a number of factors, some related to changes in the economic and competitive
environment, while others reflected specific Management strategies or changes in accounting
practices. Those key factors are summarized below.
20
21
22
Significant 2005 first quarter performance highlights included:
The following table quantifies the earnings impact of the significant factors noted in #3-11
Table 2 — Significant Items Influencing Earnings Performance Comparisons
RESULTS OF OPERATIONS
Net Interest Income
(This section should be read in conjunction with Significant Factors 1-4 and 10.)
2005 First Quarter versus 2004 First Quarter
Fully taxable equivalent net interest income increased $12.4 million, or 5%, from the year-ago
quarter, reflecting the favorable impact of an 8% increase in average earning assets, partially
offset by a 5 basis point, or an effective 1%, decline in the net interest margin. The fully
taxable equivalent net interest margin decreased to 3.31% from 3.36% in the year-ago quarter. The
decline from the year-ago quarter reflected the impact of the strategic repositioning of portfolios
to reduce automobile loans and increase the relative proportion of lower-rate, lower-risk,
residential real estate-related loans.
23
The net interest margin was also adversely impacted by higher-than-normal levels of short-term
assets. These assets averaged $0.3 billion for the quarter and reduced net interest income by $0.4
million and reduced the net interest margin by 5 basis points. The excess short-term assets
resulted from a decision made in the fourth quarter of 2004 to fund maturities of long-term debt in
the first quarter of 2005, by issuing negotiable certificates of deposit and medium-term bank
notes. Short-term assets at March 31, 2005, represents a level that Management expects for the
remainder of 2005.
Average total loans and leases increased $2.4 billion, or 11%, from the 2004 first quarter due
primarily to a $1.5 billion, or 13%, increase in average consumer loans. Contributing to the
consumer loan growth were a $1.2 billion, or 47%, increase in average residential mortgages and a
$0.8 billion, or 20%, increase in average home equity loans.
Average total automobile loans declined $1.0 billion, or 34%, from the year-ago quarter
reflecting the sale of $1.5 billion of automobile loans over this 12-month period as part of a
strategy of reducing automobile loan and lease exposure as a percent of total credit exposure.
Partially offsetting the decline in automobile loans was growth in direct financing leases due to
the migration from operating lease assets, which have not been originated since April 2002. Average
direct financing leases increased $0.5 billion, or 24%, from the year-ago quarter.
Average total commercial loans were $10.4 billion, up $0.9 billion, or 9%, from the year-ago
quarter. This increase reflected a $0.4 billion, or 12%, increase in middle market real estate
loans and a $0.3 billion, or 6%, increase in middle market commercial and industrial loans.
Average small business loans, which include both commercial and industrial and commercial real
estate loans, increased $0.2 billion, or 11%, reflecting continued success in meeting the needs of
this targeted segment.
Average total core deposits in the first quarter were $17.0 billion, up $1.6 billion, or 10%,
from the year-ago quarter, reflecting a $1.3 billion, or 20%, increase in average interest bearing
demand deposit accounts, and a $0.3 billion, or 10%, increase in non-interest bearing deposits.
Tables 3 and 4 reflect quarterly average balance sheets and rates earned and paid on
interest-earning assets and interest-bearing liabilities:
24
Table 3 — Condensed Consolidated Quarterly Average Balance Sheets
25
Table 4 — Consolidated Quarterly Net Interest Margin Analysis
26
2005 First Quarter versus 2004 Fourth Quarter
Compared with the 2004 fourth quarter, fully taxable equivalent net interest income decreased
$3.9 million, or 2%, reflecting a 7 basis point decrease in the net interest margin to 3.31% from
3.38% in the 2004 fourth quarter, partially offset by the favorable impact of a 2% increase in
average earning assets. As previously disclosed, the 2004 fourth quarter net interest margin
reflected a favorable 6 basis point impact from a $3.7 million funding cost adjustment.
Compared with the 2004 fourth quarter, average total loans and leases in the 2005 first
quarter increased $0.8 billion, or 4%. Average total consumer loans accounted for slightly more
than half of this increase as they increased $0.5 billion, or 4%, reflecting a $0.2 billion, or 6%,
increase in residential mortgages and a $0.1 billion, or 2%, increase in average home equity loans.
These sequential quarterly growth rates for both residential mortgages and home equity loans have
generally trended lower over the last four quarters due to interest rates trending upward. In
addition, average automobile loans and leases increased $0.2 billion, or 4%, due to growth in
automobile loans and, to a slightly lesser degree, growth in direct financing leases. Automobile
loan production increased 20% from the 2004 fourth quarter, which had been the lowest production
quarter in recent history, but was 25% below the year-ago quarter production. The lower overall
automobile loan production reflected continued aggressive competition in this sector. Average total
commercial loans increased $0.4 billion, or 3%, led by a $0.2 billion, or 5%, increase in middle
market commercial and industrial loans, reflecting the continued growth in attracting targeted
commercial clients, as well as higher utilization rates. Average middle market real estate loans
increased 3%, while small business loans increased 2%.
Reflecting typical seasonal factors, average total core deposits increased $0.1 billion, or
1%, from the fourth quarter with interest bearing demand deposits increasing $0.3 billion, or 3%,
and non-interest bearing deposits decreasing $0.1 billion, or 3%. This linked quarter performance
was better than in the comparable 2004 first quarter period when average total core deposits
declined slightly.
Provision for Credit Losses
(This section should be read in conjunction with Significant Factor 5 and the Credit Risk section.)
The provision for credit losses combines the provision for loan and lease losses with the
provision for losses on unfunded loan commitments. The provision for loan and lease losses is the
expense necessary to maintain the ALLL at a level adequate to absorb Management’s estimate of
probable credit losses in the loan and lease portfolio. The provision for losses on unfunded loan
commitments is the expense necessary to maintain the AULC at a level adequate to absorb
Management’s estimate of probable credit losses in the portfolio of unfunded loan commitments.
The provision for credit losses for the 2005 first quarter totaled $19.9 million, down $5.7
million, or 22%, from the year-ago quarter, but up $7.2 million from the 2004 fourth quarter. The
decline from the year-ago quarter primarily reflected improved overall credit quality as reflected
in the reduction in the relative level of each component of the ALLL. The increase from the 2004
fourth quarter primarily reflected the impact of a middle market commercial and industrial
charge-off in excess of allocated reserves.
27
Non-Interest Income
(This section should be read in conjunction with Significant Factor 1, 3, and 4.)
Table 5 — Non-Interest Income
N.M., not a meaningful value.
2005 First Quarter versus 2004 First Quarter
Non-interest income decreased $59.6 million, or 26%, from the year-ago quarter. Reflecting
the run-off of the operating lease portfolio, operating lease income declined $42.1 million, or
47%, from the 2004 first quarter. Excluding operating lease income, non-interest income decreased
$17.5 million, or 13%, from the year-ago quarter with the primary drivers being:
Partially offset by:
28
2005 First Quarter versus 2004 Fourth Quarter
Compared with the 2004 fourth quarter, non-interest income declined $14.9 million, or 8%.
Reflecting the run-off of the operating lease portfolio, operating lease income declined $8.4
million, or 15%, from the 2004 fourth quarter. Excluding operating lease income, non-interest
income decreased $6.5 million, or 5%, from the 2004 fourth quarter with the primary drivers being:
Partially offset by:
29
Non-Interest Expense
(This section should be read in conjunction with Significant Factor 1 and 6-9.)
Table 6 — Non-Interest Expense
2005 First Quarter versus 2004 First Quarter
Non-interest expense decreased $27.4 million, or 10%, from the year-ago quarter. Reflecting
the run-off of the operating lease portfolios, operating lease expense declined $32.8 million, or
46%, from the 2004 first quarter. Excluding operating lease expense, non-interest expense
increased $5.4 million, or 3%, from the year-ago quarter reflecting:
Partially offset by:
2005 First Quarter versus 2004 Fourth Quarter
Compared with the 2004 fourth quarter, non-interest expense decreased $22.7 million, or 8%.
Reflecting the run-off of the operating lease portfolios, operating lease expense declined $10.4
million, or 21%, from the 2004 fourth quarter. Excluding operating lease expense, non-interest
expense decreased $12.4 million, or 5%, from the prior quarter reflecting:
30
Partially offset by:
Operating Lease Assets
(This section should be read in conjunction with Significant Factor 1 and Lease Residual Risk
section.)
Table 7 — Operating Lease Performance
Average operating lease assets in the 2005 first quarter were $0.5 billion, down $0.6
billion, or 55%, from the year-ago quarter and 18% from the 2004 fourth quarter.
(For a discussion
of operating lease accounting, residual value loss determination, and related residual value
insurance, see the Operating Lease Assets section of the Company’s 2004 Form 10-K.)
31
Provision for Income Taxes
The provision for income taxes in the first quarter of 2005 was $28.6 million and represented
an effective tax rate on income before taxes of 22.8%. The provision for income taxes decreased
$6.4 million from the year-ago quarter, primarily due to a reduction in pre-tax earnings, as well
as, the recognition of the effect of federal tax refunds on income tax expense. These federal tax refunds resulted from the ability to carry
back federal tax losses to prior-years. The effective tax rates in the year-ago quarter and fourth
quarter of 2004 were 25.1% and 29.0%, respectively.
Pursuant to APB 28, taxes for the full year are estimated and year-to-date accrual adjustments
are made. Revisions to the full-year estimate of accrued taxes occur periodically due to changes in
the tax rates, audit resolution with taxing authorities, and newly enacted statutory, judicial, and
regulatory guidance. These changes, when they occur, affect accrued taxes and can result in
fluctuations in the quarterly effective tax rate. Management reviews the appropriate tax treatment
of all transactions taking into consideration statutory, judicial, and regulatory guidance in the
context of Huntington’s tax positions. In addition, Management relies on various tax opinions,
recent tax audits, and historical experience.
In accordance with FAS 109,
Accounting for Income Taxes
, no deferred income taxes are to be
recorded when a company intends to reinvest permanently the earnings from a foreign activity. As of
March 31, 2005, the Company intended to reinvest permanently the earnings from its foreign asset
securitization activities of approximately $98.0 million. In accordance with FASB Staff Position
No. 109-2,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision
within the American Jobs Act of 2004
, at March 31, 2005, the range of possible amounts that
Huntington is considering for repatriation in 2005 is between zero and $98.0 million. The related
potential range of income tax is between zero and $5.1 million.
During the first quarter of 2005, the Internal Revenue Service commenced the audit of
Huntington’s consolidated federal income tax returns for tax years 2002 and 2003.
In the ordinary course of business, the Company operates in various taxing jurisdictions and
is subject to income tax. The effective tax rate is based in part on Management’s interpretation of
the relevant current laws. Management believes the aggregate liabilities related to taxes are
appropriately reflected in the consolidated financial statements.
The 2005 first quarter effective tax rate included the after-tax positive impact on net income
due to the federal tax loss carry back, tax-exempt income, bank owned life insurance, asset
securitization activities, and general business credits from investment in low income housing and
historic property partnerships. The lower effective tax rate is expected to impact each quarter in
2005. In 2006, the effective tax rate is anticipated to increase to a more typical rate, slightly
below 30%.
32
CREDIT RISK
Credit risk is the risk of loss due to adverse changes in a borrower’s ability to meet its
financial obligations under agreed upon terms. The Company is subject to credit risk in lending,
trading, and investment activities. The nature and degree of credit risk is a function of the types
of transactions, the structure of those transactions, and the parties involved. The majority of the
Company’s credit risk is associated with lending activities, as the acceptance and management of
credit risk is central to profitable lending. Credit risk is incidental to trading activities and
represents a limited portion of the total risks associated with the investment portfolio. Credit
risk is mitigated through a combination of credit policies and processes and portfolio
diversification. These include origination/underwriting criteria, portfolio monitoring processes,
and effective problem asset management
(see Credit Risk Management section of the Company’s 2004
Form 10-K for additional discussion).
Credit Exposure Composition
Compared with the year-ago period, the composition of the loan and lease portfolio at March
31, 2005, had changed such that lower credit risk home equity loans and residential mortgages
represented 19% and 16%, respectively, of total credit exposure, up from 18% and 12%, respectively,
a year earlier. Conversely, higher risk automobile exposure, which consists of automobile
loans and leases, as well as operating lease assets, declined from 24% to 20% at March 31, 2005.
At the beginning of the 2004 second quarter, the criteria for categorizing commercial loans as
either C&I loans or CRE loans were clarified. The new criteria are based on the purpose of the
loan. Previously, the categorization was based on the nature of the collateral securing, or
partially securing, the loan. Under this new methodology, as new loans are originated or existing
loans renewed, loans secured by owner-occupied real estate are categorized as C&I loans (previously
CRE loans) and unsecured loans for the purpose of developing real estate are categorized as CRE
loans (previously C&I loans). As a result of this change, $282 million in C&I loans were
reclassified to CRE loans effective June 30, 2004. Prior periods were not reclassified. In
addition, this change had no impact on the underlying credit quality of total commercial loans.
Other than this one-time impact, the on-going use of this new methodology has not had a material
impact on reported C&I and/or CRE loan growth rates.
Table 8 reflects period-end loan and lease portfolio mix by type of loan or lease, as well as
by business segment:
33
Table 8 — Credit Exposure Composition
34
Non-Performing Assets and Past Due Loans and Leases
(This section should be
read in conjunction with Significant Factor 5.)
Table 9 reflects period-end NPAs and past due loans and leases detail for each of the last
Table 9 — Non-Performing Assets and Past Due Loans and Leases
35
NPAs were $73.3 million at March 31, 2005, and represented only 0.30% of related assets,
down $18.4 million from $91.7 million, or 0.43%, at the end of the year-ago quarter and down $35.3
million from $108.6 million, or 0.46%, at December 31, 2004. The decrease from the prior quarter
reflected the expected first quarter sale of $35.7 million of other real estate owned (OREO)
properties related to the previously disclosed workout of a troubled mezzanine financing
relationship. Residential real estate NPAs, which historically have demonstrated less potential
for subsequent losses, comprised 41% of total NPAs.
Non-performing loans and leases (NPLs), which exclude OREO, were $59.9 million at March 31,
2005, down 22% from $77.1 million a year earlier and down 6% from the end of the fourth quarter
including the impact of the sale of an $8.8 million pool of NPLs in the fourth quarter. Expressed
as a percent of total loans and leases, NPLs were only 0.25% at March 31, 2005, down from 0.36% at
March 31, 2004, and 0.27% at December 31, 2004.
The over 90-day delinquent, but still accruing, ratio was 0.21% at March 31, 2005, down from
Non-Performing Assets Activity
Table 10 — Non-Performing Asset Activity
Allowances for Credit Losses (ACL) and Provision for Credit Losses
(This section should be read in conjunction with Significant Factor 1, 4-5, and the Credit Risk
section.)
The Company maintains two reserves, both of which are available to absorb possible credit
losses: the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan
commitments (AULC). When summed together, these reserves constitute the total allowances for credit
losses (ACL). Table 11 reflects activity in the ALLL and AULC for the past five quarters:
36
Table 11 — Allowances for Credit Losses
The March 31, 2005, ALLL was $264.4 million, down from $295.4 million a year earlier and
$271.2 million at December 31, 2004. Expressed as a percent of period-end loans and leases, the
ALLL ratio at March 31, 2005, was 1.09%, down from 1.39% a year ago and 1.15% at December 31, 2004.
These declines reflected the improvement in the economic outlook, the change in the mix of the
loan portfolio to lower-risk residential mortgages and home equity loans, and the reduction of
specific reserves related to improved or resolved individual problem commercial credits. Table 11
shows the change in the ALLL ratio from the 2004 first quarter and 2004 fourth quarter.
The ALLL as a percent of NPAs was 361% at March 31, 2005, up from 322% a year ago, and 250% at
December 31, 2004.
The March 31, 2005, AULC was $31.6 million, down slightly from $32.1 million at the end of the
year-ago quarter, and down from $33.2 million at December 31, 2004.
On a combined basis, the ACL as a percent of total loans and leases was 1.22% at March 31,
2005, compared with 1.55% a year earlier and 1.29% at the end of last quarter. Similarly, the ACL
as a percent of NPAs was 404% at March 31, 2005, up from 357% a year earlier and 280% at December
31, 2004.
The provision for credit losses in the 2005 first quarter was $19.9 million, a $5.7 million
reduction from the year-ago quarter, but a $7.2 million increase from the 2004 fourth quarter. The
reduction in provision expense from the year-ago quarter reflected overall improved portfolio
quality performance and a stronger economic outlook, only partially offset by provision expense
related to loan growth. The increase in provision expense from the fourth quarter primarily
reflected an
37
increase in the transaction reserve due to loan growth and higher net charge-offs.
This increase was partially offset by improvement in the economic outlook.
Management has an established process to determine the adequacy of the ALLL that relies on a
number of analytical tools and benchmarks. No single statistic or measurement, in itself,
determines the adequacy of the allowance. For determination purposes, the allowance is comprised of
three components: the transaction reserve, specific reserve, and the economic reserve
(see the
Credit Risk section in the Company’s 2004 Form 10-K for additional discussion.)
38
This methodology allows for a more meaningful discussion of Management’s view of the current
economic conditions and the potential impact on the Company’s credit losses. The continued use of
quantitative methodologies for the transaction reserve and the economic reserve may result in
period-to-period fluctuation in the absolute and relative level of
the ACL.
Net Loan and Lease Charge-Offs
(This section should be read in conjunction with Significant Factor 5.)
Table 12 — Net Loan and Lease Charge-Offs
39
2005 First Quarter versus 2004 First Quarter and 2004 Fourth Quarter
Total net charge-offs for the 2005 first quarter were $28.3 million, or an annualized 0.47% of
average total loans and leases. This was comparable to $28.6 million, or 0.53%, in the year-ago
quarter but represented an increase from $20.9 million, or an annualized 0.36% of average total
loans and leases, in the 2004 fourth quarter. The current quarter included a single $14.2 million
middle market commercial charge-off related to a commercial leasing company with significant
exposure to a service provider that declared bankruptcy. The 0.47% net charge-off ratio for
average total loans and leases in the first quarter included 24 basis points related to this single
credit.
Total commercial net charge-offs in the first quarter were $16.2 million, or an annualized
0.62%, up from $7.6 million, or an annualized 0.32%, in the year-ago quarter. As noted above, the
current quarter included a $14.2 million middle market commercial charge-off, which represented 54
basis points of the 0.62% total commercial net charge-off ratio. Total commercial net charge-offs
in the 2004 fourth quarter were $5.2 million, or an annualized 0.21%.
Total consumer net charge-offs in the current quarter were $12.1 million, or an annualized
0.36% of related loans. This compared with $21.0 million, or 0.70%, in the year-ago quarter with
the decline from the year-ago quarter heavily influenced by lower automobile loan and lease net
charge-offs. Total automobile loan and lease net charge-offs in the 2005 first quarter were $6.2
million, or an annualized 0.56% of related loans and leases, down significantly from $16.6 million,
or an annualized 1.32%, in the year-ago quarter. The year-ago quarter included 37 basis points
from a one-time $4.7 million cumulative adjustment.
Compared with the 2004 fourth quarter, first quarter total consumer net charge-offs decreased
$3.7 million, primarily reflecting a $1.4 million decrease in home equity loan net charge-offs and
a $1.3 million decrease in automobile loan and lease net charge-offs. Current quarter home equity
loan net charge-offs were an annualized 0.35% of related loans, down from 0.48% in the fourth
quarter, and current quarter automobile loan and lease net charge-offs of 0.56% declining from
0.70% of related loans and leases in the 2004 fourth quarter.
MARKET RISK
Market risk represents the risk of loss due to changes in the market value of assets and
liabilities. The Company incurs market risk in the normal course of business. Market risk arises
when the Company extends fixed-rate loans, purchases fixed-rate securities, originates fixed-rate
CDs, obtains funding through fixed-rate borrowings, and leases automobiles and equipment based on
expected lease residual values. The Company has identified three primary sources of market risk:
interest rate risk, lease residual risk, and price risk.
Interest Rate Risk
Interest rate risk is the most significant market risk incurred by the Company. It results
from timing differences in the repricing and maturity of assets and liabilities and changes in
relationships between market interest rates and the yields on assets and rates on liabilities,
including the impact of embedded options.
Management seeks to minimize the impact of changing interest rates on net interest income and
the fair value of assets and liabilities. The board of directors establishes broad policies
regarding interest rate and market risk, liquidity risk, counter-party credit risk, and settlement
risk. The Market Risk Committee (MRC) establishes specific operating limits within the parameters
of the board of directors’ policies.
Interest rate risk management is a dynamic process that encompasses monitoring loan and
deposit flows, investment and funding activities, and assessing the impact of the changing market
and business environment. Effective management of interest rate risk begins with understanding the
interest rate characteristics of assets and liabilities and determining the appropriate interest
rate risk posture given market expectations and policy objectives and constraints. The MRC
regularly monitors position concentrations and the level of interest rate sensitivity to ensure
compliance with board of directors approved risk tolerances.
Interest rate risk modeling is performed monthly. Two broad approaches to modeling interest
rate risk are employed: income simulation and economic value analysis. An income simulation
analysis is used to measure the sensitivity of forecasted net interest income to changes in market
rates over a one-year horizon. Although bank owned life insurance and automobile operating lease
assets are classified as non-interest earning assets, and the income from these
assets is in
40
non-interest income, these portfolios are included in the interest sensitivity
analysis because both have attributes similar to fixed-rate interest earning assets. The economic
value analysis (Economic Value of Equity or EVE) is calculated by subjecting the period-end balance
sheet to changes in interest rates and measuring the impact of the changes in the value of the
assets and liabilities.
The models used for these measurements take into account prepayment speeds on mortgage loans,
mortgage-backed securities, and consumer installment loans, as well as cash flows of other loans
and deposits. Balance sheet growth assumptions are also considered in the income simulation model.
The models include the effects of embedded options, such as interest rate caps, floors, and call
options, and account for changes in relationships among interest rates.
The baseline scenario for the income simulation analysis, with which all other scenarios are
compared, is based on market interest rates implied by the prevailing yield curve as of the period
end. Alternative interest rate scenarios are then compared with the baseline scenario. These
alternative market rate scenarios include parallel rate shifts on both a gradual and immediate
basis, movements in rates that alter the shape of the yield curve (i.e., flatter or steeper yield
curve), and spot rates remaining unchanged for the entire measurement period. Scenarios are also
developed to measure basis risk, such as the impact of LIBOR-based rates rising or falling faster
than the prime rate.
The simulations for evaluating short-term interest rate risk exposure are scenarios that model
gradual 100 and 200 basis point increasing and decreasing parallel shifts in interest rates over
the next 12-month period beyond the interest rate change implied by the current yield curve. The
table below shows the results of the scenarios as of March 31, 2005, and December 31, 2004. All of
Table 13 — Net Interest Income at Risk
The primary simulations for EVE risk assume an immediate and parallel increase in rates
of +/- 100 and +/- 200 basis points beyond any interest rate change implied by the current yield
Table 14 — Economic Value of Equity at Risk
Lease Residual Risk
(This section should be read in conjunction with Significant Factor 1 and the Operating Lease
Assets section.)
Lease residual risk associated with retail automobile and commercial equipment leases is the
potential for declines in the fair market value of the vehicle or equipment below the maturity
value estimated at origination. Most of Huntington’s lease residual risk is in its automobile
leases. Used car values are the primary factor in determining the
magnitude of the risk exposure. Since used car values are subject to many factors, lease
residual risk has been extremely volatile throughout the history of automobile leasing. Management
mitigates lease residual risk by purchasing residual value insurance. Residual
41
value insurance
provides for the recovery of a decline in the vehicle residual value as specified by the Automotive
Lease Guide (ALG), an authoritative industry source, at the inception of the lease. As a result,
the risk associated with market driven declines in used car values is mitigated.
Currently, three distinct residual value insurance policies are in place to address the
residual risk in the portfolio. Two residual value insurance policies cover all vehicles leased
prior to May 2002, and have associated total payment caps of $120 million and $50 million,
respectively. During the 2004 third quarter, the $120 million cap was exceeded on the first policy,
and it is Management’s assessment that the $50 million cap remains sufficient to cover any expected
losses. A third residual insurance policy covers all originations from May 2002 through April 2005,
and does not have a cap. Huntington has negotiated a 30-day extension for this policy.
Price Risk
Price risk represents the risk of loss from adverse movements in the non-interest related
price of financing instruments that are carried at fair value. Price risk is incurred in the
trading securities held by broker-dealer subsidiaries, in the foreign exchange positions that the
Bank holds to accommodate its customers, in investments in private equity limited partnerships
accounted for at fair value, and in the marketable equity securities available for sale held by
insurance subsidiaries. To manage price risk, Management establishes limits as to the amount of
trading securities that can be purchased, the foreign exchange exposure that can be maintained, and
the amount of marketable equity securities that can be held by the insurance subsidiary.
LIQUIDITY RISK
The objective of effective liquidity management is to ensure that cash flow needs can be met
on a timely basis at a reasonable cost under both normal operating conditions and unforeseen
circumstances. The liquidity of the Bank is used to originate loans and leases and to repay deposit
and other liabilities as they become due or are demanded by customers. Liquidity risk arises from
the possibility that funds may not be available to satisfy current or future commitments based on
external macro market issues, asset and liability activities, investor perception of financial
strength, and events unrelated to the Company such as war, terrorism, or financial institution
market specific issues.
(see Liquidity section in the Company’s 2004
Form 10-K
for additional
discussion.)
The primary source of funding is core deposits from retail and commercial customers.
(see
Table 15.)
As of March 31, 2005, core deposits totaled $17.1 billion, and represented 78% of total
deposits. This compared with $15.8 billion, or 83% of total deposits, a year earlier. Most of the
growth in core deposits was attributable to growth in interest bearing and non-interest bearing
demand deposits.
42
Table 15 — Deposit Composition
43
Liquidity policies and limits are established by the board of directors, with operating
limits set by the MRC, based upon analyses of the ratio of loans to deposits and the percentage of
assets funded with non-core or wholesale funding. In addition, guidelines are established to ensure
diversification of wholesale funding by type, source, and maturity and provide sufficient balance
sheet liquidity to cover 100% of wholesale funds maturing within a six-month time period. A
contingency funding plan is in place, which includes forecasted sources and uses of funds under
various scenarios in order to prepare for unexpected liquidity shortages, including the
implications of any rating changes. The MRC meets monthly to identify and monitor liquidity issues,
provide policy guidance, and oversee adherence to, and the maintenance of, an evolving contingency
funding plan.
Credit ratings by the three major credit rating agencies are an important component of the
Company’s liquidity profile. Among other factors, the credit ratings are based on financial
strength, credit quality and concentrations in the loan portfolio, the level and volatility of
earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the
availability of a significant base of core retail and commercial deposits, and the Company’s
ability to access a broad array of wholesale funding sources. Adverse changes in these factors
could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets, but also the
cost of these funds. In addition, certain financial on- and off-balance sheet arrangements contain
credit rating triggers that could increase funding needs if a negative rating change occurs. Letter
of credit commitments for marketable securities, interest rate swap collateral agreements, and
certain asset securitization transactions contain credit rating provisions.
As a result of the formal SEC investigation and the banking regulatory supervisory agreements
announced on November 3, 2004, the following rating agency actions were taken: (1) Moody’s
reaffirmed their Negative outlook and placed all the ratings on review for possible downgrade, (2)
Standard and Poor’s lowered their outlook from Stable to Negative, and (3) Fitch lowered their
outlook from Stable to Negative. The cost of short-term borrowings was not materially affected by
these actions.
On February 8, 2005, Moody’s announced the following rating actions:
On April 6, 2005, Standard and Poor’s announced the following rating actions:
44
To date, these rating agency actions have had no significant adverse impact on rating triggers
inherent in financial contracts. Management believes that sufficient liquidity exists to meet the
funding needs of the Bank and the parent company. Credit ratings as of April 6, 2005, for the
Table 16 — Credit Rating Agency Ratings
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, the Company enters into various off-balance sheet
arrangements. These arrangements include financial guarantees contained in standby letters of
credit issued by the Bank and commitments by the Bank to sell mortgage loans.
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. Approximately 46% of standby letters of credit are
collateralized and nearly 97% are expected to expire without being drawn upon. There were $956
million, $945 million, and $944 million of outstanding standby letters of credit at March 31, 2005,
December 31, 2004, and March 31, 2004, respectively. Non-interest income was recognized from the
issuance of these standby letters of credit of $2.8 million for both the first three months of 2005
and 2004. The carrying amount of deferred revenue related to standby letters of credit at March 31,
2005, was $3.6 million. Standby letters of credit are included in the determination of the amount
of risk-based capital that the Company and the Bank are required to hold.
The Bank enters into forward contracts relating to its mortgage banking business. At March 31,
2005, commitments to sell residential real estate loans totaled $388.5 million. These contracts
mature in less than one year. The parent company and/or the Bank may also have liabilities under
certain contractual agreements contingent upon the occurrence of certain events. A discussion of
significant contractual arrangements under which the parent company and/or the Bank may be held
contingently liable, including guarantee arrangements, is included in Note 11 of the Notes to
Unaudited Condensed Consolidated Financial Statements.
Through its credit process, Management monitors the credit risks of outstanding standby
letters of credit. When it is probable that a standby letter of credit will be drawn and not repaid
in full, losses are recognized in provision for credit losses. Management does not believe that its
off-balance sheet arrangements will have a material impact on its liquidity or capital resources.
CAPITAL
Capital is managed both at the parent and the Bank levels. Capital levels are maintained based
on regulatory capital requirements and the economic capital required to support credit, market, and
operation risks inherent in the Company’s business and to provide the flexibility needed for future
growth and new business opportunities. Management places significant emphasis on the maintenance of
a strong capital position, which promotes investor confidence, provides access to the national
markets under favorable terms, and enhances business growth and acquisition opportunities. The
importance of managing capital is also recognized and Management continually strives to
maintain an appropriate balance between capital adequacy and providing attractive returns to
shareholders.
45
Shareholders’ equity totaled $2.6 billion at March 31, 2005. This balance represented a $52
million increase from December 31, 2004. The growth in shareholders’ equity resulted from the
retention of net income after dividends to shareholders of $50 million, and an increase of $8
million as a result of stock options exercised, offset slightly by a reduction in accumulated other
comprehensive income of $8 million. The decline in accumulated other comprehensive income resulted
from a decline in the market value of securities available for sale at March 31, 2005, compared
with December 31, 2004.
As of March 31, 2005, the Company had unused authority to repurchase up to 7.5 million common
shares under an April 27, 2004, share repurchase authorization. On April 25, 2005, Huntington
announced that it intended to reactivate its share repurchase program upon approval by the
Commission of the proposed settlement offer to resolve the SEC formal investigation. It expects to
repurchase these shares from time-to-time in the open market or through privately negotiated
transactions depending on market conditions.
On January 19, 2005, the board of directors declared a quarterly cash dividend on its common
stock of $0.20 per common share. The dividend was payable April 1, 2005, to shareholders of record
on March 17, 2005. On April 27, 2005, the board of directors declared a quarterly cash dividend on
its common stock of $0.215 per common share, a 7.5% increase. The dividend is payable July 1,
2005, to shareholders of record on June 16, 2005.
Average equity to average assets in the 2005 first quarter was 7.76%, up from 7.39% in the
year ago quarter, and up from 7.74% for the 2004 fourth quarter.
(see Table 17.)
At March 31,
2005, the tangible equity to assets ratio was 7.42%, up from 6.97% a year ago, and 7.18% at
December 31, 2004. At March 31, 2005, the tangible equity
to risk-weighted assets ratio was 7.83%,
up from 7.60% at the end of the year-ago quarter, and down from 7.86% at December 31, 2004. The increase in
the tangible equity to risk-weighted assets ratio reflected primarily the positive impact resulting
from reducing the overall risk profile of earning assets throughout this period, most notably a
Table 17 — Capital Adequacy
46
Table 18 — Quarterly Common Stock Summary
The Federal Reserve Board, which supervises and regulates the Company, sets minimum
capital requirements for each of these regulatory capital ratios. In the calculation of these
risk-based capital ratios, risk weightings are assigned to certain asset and off-balance sheet
items such as interest rate swaps, loan commitments, and securitizations. Huntington’s Tier 1
Risk-based Capital, Total Risk-based Capital, Tier 1 Leverage ratios, and risk-adjusted assets for
the recent five quarters are well in excess of minimum levels established for “well capitalized”
institutions of 6.00%, 10.00%, and 5.00%, respectively. At March 31, 2005, the Company had
regulatory capital ratios in excess of “well capitalized” regulatory minimums.
The Bank is primarily supervised and regulated by the Office of the Comptroller of the
Currency, which establishes regulatory capital guidelines for banks similar to those established
for bank holding companies by the Federal Reserve Board. At March 31, 2005, the Bank had regulatory
capital ratios in excess of “well capitalized” regulatory minimums.
47
LINES OF BUSINESS DISCUSSION
This section reviews financial performance from a line of business perspective and should be
read in conjunction with the Discussion of Results and other sections for a full understanding of
the Company’s consolidated financial performance.
Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the
Private Financial Group (PFG). A fourth segment includes the Company’s Treasury function and other
unallocated assets, liabilities, revenue, and expense. Lines of business results are determined
based upon the Company’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. An overview of this
system is provided below, along with a description of each segment and discussion of financial
results.
Funds Transfer Pricing
The Company uses a centralized funds transfer pricing (FTP) methodology to attribute
appropriate net interest income to the business segments. The Treasury/Other business segment
charges (credits) an internal cost of funds for assets held in (or pays for funding provided by)
each line of business. The FTP rate is based on prevailing market interest rates for comparable
duration assets (or liabilities). Deposits of an indeterminate maturity receive an FTP credit based
on vintage-based pool rate. Other assets, liabilities, and capital are charged (credited) with a
four-year moving average FTP rate. The intent of the FTP methodology is to eliminate all interest
rate risk from the lines of business by providing matched duration funding of assets and
liabilities. The result is to centralize the financial impact of interest rate and liquidity risk
for the Company in Treasury/Other.
The FTP methodology also provides for a charge (credit) to the line of business when a
fixed-rate loan is sold and the internal funding associated with the loan is extinguished. The
charge (credit) to the line of business represents the cost (or benefit) to Treasury/Other of the
early extinguishment of the internal fixed-rate funding. This charge (credit) has no impact on
consolidated financial results.
Use of Operating Earnings
Management uses earnings on an operating basis, rather than on a GAAP basis, to measure
underlying performance trends for each business segment. Operating earnings represent GAAP earnings
adjusted to exclude the impact of certain items discussed in the Significant Factors Influencing
Financial Performance Comparisons section and Table 2. (
In addition to this discussion and Table 2,
see Note 13 of the Notes to Unaudited Condensed Consolidated Financial Statements.
) Analyzing
earnings on an operating basis is very helpful in assessing underlying performance trends, a
critical factor used by Management to determine the success of strategies and future earnings
capabilities.
48
Regional Banking
Regional Banking provides products and services to consumer, small business, and commercial
customers. These products and services are offered in seven operating regions within the five
states of Ohio, Michigan, West Virginia, Indiana, and Kentucky through the Company’s banking
network of 335 branches, over 700 ATMs, plus Internet and telephone banking channels. 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, small
business loans, personal and business deposit products, as well as sales of investment and
insurance services. Retail products and services comprise 61% and 78%, of total regional banking
loans and deposits, respectively. Commercial Banking serves middle market and large commercial
banking relationships, which use a variety of banking products and services including, but not
limited to, commercial loans, international trade, cash management, leasing, interest rate
protection products, capital market alternatives, 401(k) plans, and mezzanine investment
capabilities.
2005 First Quarter versus 2004 First Quarter
Regional Banking contributed $61.5 million of the Company’s net operating earnings in first
quarter 2005, up $9.3 million, or 18%, from 2004 first quarter. This increase primarily reflected a
$27.9 million, or 18%, increase in net interest income resulting from strong loan and deposit
growth, partially offset by a $10.1 million increase in provision for credit losses, a $2.7
million, or 2%, increase in non-interest expense, and a higher provision for income taxes.
Total fully taxable equivalent revenue grew $27.2 million, or 12%, from the year-ago quarter,
primarily reflecting an 18% increase in net interest income driven by a 19% increase in average
loans and a 13% increase in average deposits, partially offset by a 1% decline in non-interest
income.
The $2.7 billion, or 19%, increase in average total loans and leases reflected a 56% increase
in average residential mortgages, a 21% increase in average home equity loans and lines of credit,
and a 29% increase in middle market construction CRE loans. Though interest rates increased during
this period, the level of interest rates remained low on an absolute basis, which continued to
impact demand favorably for real estate-related financing. Average small business loans increased
11% reflecting specific strategies to focus on this business segment.
The $2.0 billion, or 13% increase in average total deposits, reflected strong growth in
average interest bearing deposits, up 23%, domestic time deposits, up 11%, and non-interest bearing
deposits, up 10%. Of the growth in average total deposits, Commercial Banking accounted for $1.0
billion, Retail Banking $0.8 billion, and Small Business $0.2 billion.
Supporting the growth in deposits, and evidence of improved sales success, was a 14,260, or
3%, increase in period-end demand deposit (DDA) household relationships, as well as a 4,218, or 9%,
increase in small business DDA relationships. The DDA is viewed as the primary banking
relationship account as most additional services are cross-sold to customers within the first
90-days after establishing a DDA account. The consumer new 90-day cross-sell ratio increased 23%
to 2.70 in the 2005 first quarter compared with the year-ago period, with the small business new
90-day cross-sell ratio up 12% to 2.29.
Loan and deposit growth also reflected continued focus on customer service and delivery
channel optimization. Since the prior-year quarter, five banking offices were opened, while
two were closed. The number of on-line banking customers ended the first quarter 2005 at over
224,000, a 25% increase, and represented a relatively high 42% penetration of retail banking
households, up from 34% a year earlier.
Net interest margin in the 2005 first quarter was 4.43%, unchanged from the year-ago quarter.
The deposit margin increased as interest rates rose, but this was offset by a decline in loan
margin due to a shift in the loan portfolio mix to lower-margin but higher credit quality consumer
residential mortgage and home equity loans.
Total net charge-offs for the 2005 first quarter were $21.0 million, or an annualized 0.51% of
average total loans and leases, up from $11.6 million, or 0.33%, in the year-ago quarter. The
current quarter included 34 basis points related to a single $14.2 million middle market commercial
charge-off. Consumer net charge-offs have remained little changed over the last five quarters and
represented an annualized 0.27% of average loans and leases in the 2005 first quarter, unchanged
from the year-ago quarter. Total NPAs declined 13% from the year-ago period. Despite steady credit
quality performance, the provision for credit losses increased $10.2 million to $12.3 million,
primarily reflecting the impact of the 2005 first
quarter single commercial credit charge-off, and the strong growth in loans and leases.
(See
Credit Risk for additional discussion regarding charge-offs and allowance for loan loss reserve
methodologies.)
49
Non-interest income decreased $0.7 million, or 1%, compared with the first quarter of 2004.
The decline was driven by declines in deposit service charges and other income of $2.3 million and
$2.0 million, respectively, partially offset by increases in mortgage banking of $2.5 million and
other service charges and fees of $0.6 million. The increase in mortgage banking income resulted
from improved net marketing and higher net servicing fees. Personal service charges decreased $1.1
million, or 5%, primarily due to lower NSF activity. Commercial service charges declined $1.2
million, or 7%, as a result of lower transaction volumes, but was offset by higher commercial
deposit balances. The $2.0 million decrease in other income was related to a one-time commercial
mezzanine fee in the year-ago quarter. Mortgage income increased $2.5 million as a result of the
16% increase in the servicing portfolio.
Non-interest expense increased $2.7 million, or 2%, compared with the year-ago quarter.
Growth in non-personnel costs increased $2.3 million, or 3%, and reflected higher occupancy,
outside services, and operating losses. Personnel costs declined slightly as full-time equivalent
employees decreased 2% from a year ago. The efficiency ratio decreased to 58% compared to 64% in
the first quarter 2004, reflecting revenue growth and continued focus on controlling expenses.
The return on average assets and return on average equity for Regional Banking, were 1.39% and
25.0%, respectively, up from 1.38% and 20.9% in the 2004 first quarter.
2005 First Quarter versus 2004 Fourth Quarter
Regional Banking earnings in the first quarter 2005 decreased $7.1 million, or 10%, from the
2004 fourth quarter driven primarily by increased provision for credit losses. Total revenue
decreased $3.2 million as a result of seasonally lower deposit service charge income while expenses
were essentially unchanged.
Net interest income increased $0.7 million reflecting a 3% increase in average total loans and
leases and 2% increase in average total deposits, partially offset by a 4 basis point decline in
the net interest margin.
The growth in average loans reflected strong growth in residential mortgages and commercial
loans. Residential mortgages increased 6% while middle market C&I loans increased 5% and CRE and
small business loans increased 3% and 2%, respectively.
Average total deposits increased 2%, led by strong 4% growth in average interest bearing
demand deposits and 6% growth in retail CD’s, partially offset by a 3% seasonal decline in
non-interest bearing demand deposits. The 4 basis point decline in the net interest margin
reflected pressure on commercial and consumer loan spreads partially offset by increased spread on
deposits.
The $7.9 million increase in provision for credit losses from the fourth quarter primarily
reflected the impact of the one middle market C&I charge-off mentioned above. Total net charge-offs increased
$11.3 million due to the single $14.2 million middle market commercial charge-off noted above.
Consumer net charge-offs decreased to 27 basis points from 38 basis points in the prior quarter.
Total NPAs as a percent of total loans and leases remained flat at 0.41% compared to the prior
quarter.
Non-interest income decreased $4.0 million, or 5%, primarily due to a $2.2 million decline in
deposit service charges, primarily seasonal, and a $2.2 million decline in other income due to
lower income from terminated equipment leases.
Non-interest expense decreased $0.3 million reflecting a $1.8 million decline in personnel
costs due to lower performance-based compensation, partially offset by a $1.2 million increase in
other expenses, primarily occupancy and marketing. The efficiency ratio was 58% in the current
quarter, essentially unchanged from the 2004 fourth quarter.
The return on average assets and return on average equity for Regional Banking were down from
1.56% and 25.8% in the prior quarter.
50
Table 19 — Regional
Banking
(1)
51
Table 19 - Regional
Banking
(1)
52
Table 19 — Regional
Banking
(1)
53
Dealer Sales
Dealer Sales serves more than 3,500 automotive dealerships within Huntington’s primary banking
markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and Tennessee. The segment finances
the purchase of automobiles by customers of the automotive dealerships, purchases automobiles from
dealers and simultaneously leases the automobiles to consumers under long-term operating or direct
finance leases, finances the dealership’s floor plan inventories, real estate, or working capital
needs, and provides other banking services to the automotive dealerships and their owners.
The accounting for automobile leases significantly impacts the presentation of Dealer Sales’
financial results. Residual values on leased automobiles, including the accounting for residual
value losses, are also an important factor in the overall profitability of auto leases. Automobile
leases originated prior to May 2002 are accounted for as operating leases, with leases originated
since April 2002 accounted for as direct financing leases. This accounting treatment impacts a
number of Dealer Sales’ financial performance results and trends including net interest income,
non-interest income, and non-interest expense.
(See the Operating Lease Assets section and
Significant Factor 1.)
2005 First Quarter versus 2004 First Quarter
Dealer Sales contributed $18.0 million of the Company’s net operating earnings in the first
quarter, up $5.9 million, or 49%, from the 2004 first quarter. This increase primarily reflected
the benefit of a decline in the provision for credit losses reflecting a combination of factors,
most notably lower automobile loans as a result of planned sales. Partially offsetting this
benefit was lower net income from loan and lease assets (net interest income plus operating lease
income less operating lease expense) reflecting the impact of sold loans, as well as a decline in
loan production given intense competition in the market place along with a decline in automobile
sales from the year-ago quarter.
Net interest income increased 8%, due to a higher net interest margin, as average total loans
and leases declined 9% from the year-ago quarter. This decline reflected a $1.0 billion, or 34%,
decline in average automobile loans as $1.5 billion of automobile loans were sold over this period
as part of a planned strategy to lower the Company’s overall credit
exposure to the automobile financing sector. Automobile loan and lease production in the
current quarter was down 25% and 31%, respectively. The decline in average automobile loans was
partially offset by a 24% increase in average automobile leases and a 3% increase in middle market
floor plan C&I loans.
The provision for credit losses declined $14.8 million, or 69%, from the year-ago quarter due
to several factors. These factors included the impact of lower loan balances due to the sale of
loans, improved credit quality, and the fact that provision expense in the year-ago quarter
included a $4.7 million cumulative increase to correct the prior recording of insurance claims
received.
Non-interest income and non-interest expense declined $43.3 million, or 45%, and $34.8
million, or 38%, respectively, reflecting the 56% decline in average operating lease assets between
periods, as the operating lease portfolio continued to run-off (
see Significant Factor 1
). Other
income declined $0.3 million reflecting lower fees earned from leases terminated early. Personnel
costs decreased $0.2 million, or 4%, due to focused expense control.
The return on average assets and return on average equity for Dealer Sales, were 1.20% and
19.5%, respectively, up from 0.66% and 10.8% in 2004.
2005 First Quarter versus 2004 Fourth Quarter
Dealer Sales’ net operating earnings in the first quarter were up $2.7 million, or 18%, from
the 2004 fourth quarter. A soft car market continued to have adverse impacts on the operating
performance of this segment. However this negative impact was partially offset by the benefit of
improved credit quality, as demonstrated by lower net charge-offs and related provision, along with
lower levels of non-interest expenses. The net contribution from loan and lease assets (net
interest income plus operating lease income less operating lease expense) increased slightly from
the fourth quarter.
Net interest income declined $1.7 million, or 4%, from the fourth quarter. The 2004 fourth
quarter reflected a $3.7 million interest adjustment on an auto loan securitization. The net interest margin
was also favorably impacted by the run-off of the operating lease assets due to the fact that all
of the funding cost associated with these assets is reflected in interest expense, whereas the
income is reflected in non-interest income.
54
Average automobile loans increased 5% from the fourth quarter, with automobile leases
increasing 3%. Also contributing to the growth in total loans and leases was a 5% increase in
average middle market C&I loans, primarily dealer floor plan loans.
The provision for credit losses decreased $1.9 million, or 21%, reflecting the impact of
improved credit quality within the existing portfolio, as well as the continued focus on
originating high credit quality loans and leases. Annualized total net charge-offs was 0.48%, down
from 0.58% in the 2004 fourth quarter.
Non-interest income decreased $9.4 million, or 15%, primarily reflecting an $8.6 million
decline in operating lease income as that portfolio continued to run-off. Similarly,
non-interest expense decreased $13.4 million, or 19%, reflecting a $10.6 million decline in
operating lease expense, also reflecting the run-off of the operating lease portfolio. Other
non-interest expense declined $2.4 million, or 15%, primarily due to lower residual value insurance
costs, and personnel costs decreased 6% primarily due to lower headcounts and production related
salary costs.
The return on average assets and return on average equity for Dealer Sales, were 1.20% and
19.5%, respectively, up from 1.01% and 15.9% in the fourth quarter.
55
Table 20 - Dealer Sales
(1)
56
Table 20 — Dealer
Sales
(1)
57
Table 20 — Dealer
Sales
(1)
58
Private Financial Group
The Private Financial Group (PFG) provides products and services designed to meet the needs of
the Company’s higher net worth customers. Revenue is derived through trust, asset management,
investment advisory, brokerage, insurance, and private banking products and services. As of March
31, 2005, the trust division provides fiduciary services to more than 12,000 accounts with assets
totaling $43.5 billion, with $10.0 billion managed by PFG, including approximately $600 million in
assets managed by Haberer Registered Investment Advisor, which provides investment management
services to nearly 600 customers.
PFG also provides investment management and custodial services to the Company’s 29 proprietary
mutual funds, including ten variable annuity funds, which represented more than $3 billion in total
assets under management at March 31, 2005. The Huntington Investment Company offers brokerage and investment advisory services to
both Regional Banking and PFG customers through more than 100 licensed investment sales
representatives and 639 licensed personal bankers. This customer base has over $4.7 billion
in mutual fund and annuity assets. PFG’s insurance entities provide a complete array of insurance
products including individual life insurance products ranging from basic term life insurance, to
estate planning, group life and health insurance, property and casualty insurance, mortgage title
insurance, and reinsurance for payment protection products. Income and related expenses from the
sale of brokerage and insurance products is shared with the line of business that generated the
sale or provided the customer referral, most notably Regional Banking.
2005 First Quarter versus 2004 First Quarter
The PFG contributed $10.1 million of the Company’s net operating earnings in the first quarter
of 2005, up $2.2 million, or 27%, from the first quarter of 2004 primarily as a result of 10%
growth in total revenue, achieved with only a 1% increase in total non-interest expense.
Net interest income increased $1.5 million, or 12%, from the year-ago quarter as average total
loans increased 13%, while average deposit balances remained essentially flat. Loan growth was
largely reflective of PFG’s 2004 initiative to add relationship managers in several markets
targeted for growth opportunities, most notably East and West Michigan and Central and Southern
Ohio.
Credit quality remained strong as indicated by a negative provision for credit losses for the
first quarter of 2005. The negative provision for credit losses reflected the combination of very
low charge-offs and the partial release of prior reserves as a result of a large pay down on a
partially secured loan. The total annualized net charge-off ratio was only 0.06% in the first
quarter and total NPA ratio was only 0.27%.
Non-interest income, net of fees shared with other business units, increased $2.5 million, or
9%, from the year-ago quarter mainly due to growth in trust income. Trust income increased $2.0
million, or 12%, mainly due to revenue growth in personal trust and investment management business.
Total trust assets grew 11% to $43.5 billion at March 31, 2005, from $39.1 billion a year earlier.
For the same comparable periods, managed assets grew 9% from $9.2 billion to $10.0 billion.
Revenue earned from services provided to the Huntington proprietary mutual funds increased as the
total equity and fixed income fund assets increased by 11% and fee waivers were discontinued as a
result of increased money market yields. Brokerage and insurance revenue decreased $1.9 million, or
18%, mainly due to decreased annuity sales. The decreased annuity sales reflected a lower demand
for fixed annuity products resulting from the rising interest rate environment combined with less
attractive rates. Insurance revenue decreased due to reduced sales of life insurance products
through the branch banking offices, as well as fewer large premium policy sales of advanced market
life insurance products. The $2.5 million increase in other non-interest income resulted mainly
from the change in accounting methodology to recognize as gross revenue vendor marketing allowances
that were previously offset with the related expenses.
Non-interest expense increased $0.4 million, or 1%, from the 2004 first quarter. Increased
expenses resulting from the aforementioned accounting methodology change were largely offset by
reduced sales commissions as a result of the decreased brokerage and insurance revenue.
The ROA and ROE for the 2005 first quarter were 2.48% and 35.8%, respectively, up from 2.15%
and 27.1%, respectively, in the year-ago quarter.
59
2005 First Quarter versus 2004 Fourth Quarter
PFG’s $10.1 million net contribution to the Company’s operating earnings in the first quarter
of 2005 was up $3.0 million, or 42%, from the fourth quarter. The increased earnings resulted
primarily from an 8% growth in total revenue and $2.4 million decrease in the provision for credit
losses.
Net interest income increased $0.1 million from the fourth quarter. Commercial and consumer
loans both reflected double digit annualized growth during the quarter. The decline in deposit
balances reflected both seasonality, as well as some redirection of sweep account balances to money
market mutual funds. The net interest margin declined slightly from 3.64% in the prior quarter to
3.62% in the current quarter mainly as a result of a decline in spread rates on allocated capital.
Spread rates on loans remained essentially unchanged, while spread rates on deposits continued to
widen, as customer deposit rates have not increased as quickly as market rates.
Provision for credit losses decreased $2.4 million from the prior quarter. The decrease was
mainly due to lower net charge-offs combined with the partial release of a $0.7 million reserve
established in the fourth quarter 2004 as a result of a significant pay down in the first quarter
of 2005. The total annualized net charge-off ratio decreased to 0.06% from 0.32% and total NPAs
declined to 0.27% from 0.40% of total loans outstanding.
Non-interest income, net of fees shared with other business units and excluding securities
gains, increased $3.4 million, or 12%, from the fourth quarter. Trust income increased $0.9
million, or 5% from the previous quarter, due in part to growth in managed assets from $9.8 billion
to $10.0 billion in the first quarter. Revenue growth also reflected Huntington’s new role as Fund
administrator and the impact of a $0.2 million reserve established in the fourth quarter 2004 for
the potential rebate of certain administrative fees. Personal trust revenue also reflected $0.1
million in annual fees for tax services provided to certain trust accounts. Institutional trust
revenue growth mainly resulted from a large $1.5 billion custody account acquired in fourth quarter
and the expansion of a large institutional investment management account relationship. Corporate
trust revenue declined reflecting normal seasonal timing of annual renewal fees. Brokerage and
insurance revenue increased $0.2 million, or 2%, in the first quarter as a result of increased
retail investment sales. Mutual fund and annuity sales volume increased 22%, which helped generate
additional brokerage revenue of $1.0 million, or 11% in the current quarter. Insurance revenue
declined $0.7 million, or 21%, as fourth quarter 2004 reflected the sale of several large advanced
market policies and the annual renewals of several large policies. The $2.5 million increase in
other non-interest income resulted mainly from the change in accounting methodology to recognize as
gross revenue vendor marketing allowances that were previously offset with the related expenses.
Non-interest expense increased $1.3 million, or 5%, from the prior quarter mainly due to the
aforementioned accounting methodology change. Personnel expenses increased 3% as a result of
increased benefit costs, mainly FICA and unemployment taxes.
The ROA and ROE in the 2005 first quarter were 2.48% and 35.8%, respectively, up from 1.75%
and 23.0%, respectively in the previous quarter.
60
Table 21 — Private Financial Group
(1)
61
Table 21 — Private Financial Group
(1)
(Unaudited)
Three Months Ended
March 31,
(in thousands, except per share amounts)
2005
2004
$
325,668
$
270,363
239
505
38,000
47,169
4,307
4,490
7,891
3,404
376,105
325,931
89,168
59,626
4,828
3,313
8,683
8,041
38,228
32,266
140,907
103,246
235,198
222,685
19,874
25,596
215,324
197,089
46,732
88,867
39,418
41,837
18,196
16,323
13,026
15,197
10,104
10,485
10,159
9,513
12,061
(4,296
)
957
15,090
—
9,004
17,397
25,619
168,050
227,639
123,981
121,624
37,948
70,710
19,242
16,763
18,770
18,462
15,863
16,086
9,459
7,299
6,454
7,839
4,882
5,194
3,094
3,016
204
204
18,380
18,457
258,277
285,654
125,097
139,074
28,578
34,901
$
96,519
$
104,173
231,824
229,227
235,053
232,915
$
0.42
$
0.45
0.41
0.45
0.20
0.175
Accumulated
Other
Common Stock
Treasury Shares
Comprehensive
Retained
(in thousands)
Shares
Amount
Shares
Amount
Income
Earnings
Total
257,866
$
2,483,542
(28,858
)
$
(548,576
)
$
2,678
$
337,358
$
2,275,002
104,173
104,173
30,534
30,534
(11,722
)
(11,722
)
122,985
(40,136
)
(40,136
)
(832
)
378
7,274
6,442
(368
)
24
254
(114
)
257,866
$
2,482,342
(28,456
)
$
(541,048
)
$
21,490
$
401,395
$
2,364,179
257,866
$
2,484,204
(26,261
)
$
(499,259
)
$
(10,903
)
$
563,596
$
2,537,638
96,519
96,519
(20,789
)
(20,789
)
13,006
13,006
88,736
(46,349
)
(46,349
)
198
399
7,577
7,775
430
188
1,543
1,973
257,866
$
2,484,832
(25,674
)
$
(490,139
)
$
(18,686
)
$
613,766
$
2,589,773
(Unaudited)
Three Months Ended
March 31,
(in thousands of dollars)
2005
2004
$
96,519
$
104,173
19,874
25,596
34,703
63,823
4,761
5,351
20,255
20,108
(3,760
)
10,121
2,195
28,818
209,495
(8,821
)
(418,494
)
(363,121
)
389,031
359,433
(957
)
(15,090
)
—
(9,004
)
(10,104
)
(10,485
)
12,304
48,672
54,036
(65,708
)
409,858
193,866
(7,153
)
(20,400
)
110,100
243,282
672,375
450,890
(629,508
)
(783,854
)
—
876,686
(678,043
)
(1,138,911
)
(3,388
)
(1,556
)
85,843
128,357
28
260
(12,708
)
(13,432
)
37,347
1,562
(425,107
)
(257,116
)
1,008,131
494,019
(173,737
)
(376,002
)
—
148,830
—
(100,000
)
7,789
—
(375,006
)
—
—
175,000
(860,000
)
(250,000
)
(45,384
)
(40,269
)
7,775
6,442
(430,432
)
58,020
(445,681
)
(5,230
)
1,505,360
996,503
$
1,059,679
$
991,273
$
14,239
$
849
123,706
98,694
—
115,929
36,804
31,180
March 31, 2005
December 31, 2004
March 31, 2004
Amortized
Amortized
Amortized
(in thousands of dollars)
Cost
Fair Value
Cost
Fair Value
Cost
Fair Value
$
—
$
—
$
—
$
—
$
2,491
$
2,493
24,739
24,376
24,233
24,304
24,478
25,410
248
260
754
832
51,239
51,352
—
—
—
—
—
—
24,987
24,636
24,987
25,136
78,208
79,255
—
—
—
—
—
—
17,649
17,296
1,362
1,390
17,487
17,939
20,835
20,442
38,814
38,589
183,551
187,976
644,058
625,922
945,670
933,538
1,553,297
1,574,920
682,542
663,660
985,846
973,517
1,754,335
1,780,835
—
—
500
503
106,087
107,195
535,760
522,427
535,502
530,670
779,563
798,034
450,231
430,329
450,952
441,072
403,006
403,441
—
—
—
—
73,625
73,625
985,991
952,756
986,954
972,245
1,362,281
1,382,295
1,693,520
1,641,052
1,997,787
1,970,898
3,194,824
3,242,385
63
63
5,997
6,032
8,235
8,258
361
362
9,990
10,392
20,834
21,240
82,923
81,932
83,102
83,771
79,852
81,643
309,063
309,442
311,525
316,029
312,325
316,026
392,410
391,799
410,614
416,224
421,246
427,167
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
435,931
428,839
462,394
458,027
569,776
574,002
435,931
428,839
462,394
458,027
569,776
574,002
—
—
—
—
—
—
30,000
30,000
30,000
30,000
30,000
30,075
6,385
6,419
8,084
8,155
11,780
11,783
1,404,743
1,409,855
1,160,212
1,161,827
949,747
950,286
1,441,128
1,446,274
1,198,296
1,199,982
991,527
992,144
2,100
2,109
2,100
2,118
500
742
11,005
11,219
9,102
9,384
9,317
9,724
2,655
2,622
2,913
2,980
3,259
3,391
120,717
123,490
169,872
173,131
193,280
193,997
—
—
—
—
5,365
6,050
5,190
5,471
5,526
6,201
7,479
8,745
141,667
144,911
189,513
193,814
219,200
222,649
$
4,104,656
$
4,052,875
$
4,258,604
$
4,238,945
$
5,396,573
$
5,458,347
Three Months Ended
March 31,
(in thousands of dollars)
2005
2004
$
(31,165
)
$
62,066
10,998
(21,723
)
(20,167
)
40,343
(957
)
(15,090
)
335
5,281
(622
)
(9,809
)
(20,789
)
30,534
20,009
(18,034
)
(7,003
)
6,312
13,006
(11,722
)
$
(7,783
)
$
18,812
March 31,
December 31,
March 31,
(in millions of dollars)
2005
2004
2004
5,133
5,076
5,091
3,095
2,928
2,729
880
340
668
956
945
944
51
72
112
Assets at
Deposits at
Balance Sheets
March 31,
December 31,
March 31,
March 31,
December 31,
March 31,
(in millions of dollars)
2005
2004
2004
2005
2004
2004
$
18,148
$
17,809
$
15,633
$
17,523
$
17,421
$
15,937
6,091
6,100
6,609
69
75
76
1,655
1,649
1,491
1,139
1,176
1,061
6,289
7,007
7,306
3,040
2,096
1,915
$
32,183
$
32,565
$
31,039
$
21,771
$
20,768
$
18,989
2005
2004
1Q05 vs 1Q04
(in thousands of dollars, except per share amounts)
First
Fourth
Third
Second
First
Amount
Percent
$
376,105
$
359,215
$
338,002
$
324,167
$
325,931
$
50,174
15.4
%
140,907
120,147
110,944
101,604
103,246
37,661
36.5
235,198
239,068
227,058
222,563
222,685
12,513
5.6
19,874
12,654
11,785
5,027
25,596
(5,722
)
(22.4
)
215,324
226,414
215,273
217,536
197,089
18,235
9.3
46,732
55,106
64,412
78,706
88,867
(42,135
)
(47.4
)
39,418
41,747
43,935
43,596
41,837
(2,419
)
(5.8
)
18,196
17,315
17,064
16,708
16,323
1,873
11.5
13,026
12,879
13,200
13,523
15,197
(2,171
)
(14.3
)
10,104
10,484
10,019
11,309
10,485
(381
)
(3.6
)
10,159
10,617
10,799
10,645
9,513
646
6.8
12,061
8,822
4,448
23,322
(4,296
)
16,357
N.M.
957
2,100
7,803
(9,230
)
15,090
(14,133
)
(93.7
)
—
—
312
4,890
9,004
(9,004
)
N.M.
17,397
23,870
17,899
24,659
25,619
(8,222
)
(32.1
)
168,050
182,940
189,891
218,128
227,639
(59,589
)
(26.2
)
123,981
122,738
121,729
119,715
121,624
2,357
1.9
37,948
48,320
54,885
62,563
70,710
(32,762
)
(46.3
)
19,242
26,082
16,838
16,258
16,763
2,479
14.8
18,770
18,563
17,527
17,563
18,462
308
1.7
15,863
15,733
15,295
16,228
16,086
(223
)
(1.4
)
9,459
9,522
12,219
7,836
7,299
2,160
29.6
6,454
5,581
5,000
8,069
7,839
(1,385
)
(17.7
)
4,882
4,596
5,359
4,638
5,194
(312
)
(6.0
)
3,094
3,148
3,201
3,098
3,016
78
2.6
204
205
204
204
204
—
—
—
—
(1,151
)
—
—
—
—
18,380
26,526
22,317
25,981
18,457
(77
)
(0.4
)
258,277
281,014
273,423
282,153
285,654
(27,377
)
(9.6
)
125,097
128,340
131,741
153,511
139,074
(13,977
)
(10.1
)
28,578
37,201
38,255
43,384
34,901
(6,323
)
(18.1
)
$
96,519
$
91,139
$
93,486
$
110,127
$
104,173
$
(7,654
)
(7.3
)%
235,053
235,502
234,348
232,659
232,915
2,138
0.9
%
$
0.41
$
0.39
$
0.40
$
0.47
$
0.45
$
(0.04
)
(8.9
)
0.200
0.200
0.200
0.175
0.175
0.025
14.3
1.20
%
1.13
%
1.18
%
1.41
%
1.36
%
(0.16
)%
(11.8
)
15.5
14.6
15.4
19.1
18.4
(2.9
)
(15.8
)
3.31
3.38
3.30
3.29
3.36
(0.05
)
(1.5
)
63.7
66.4
66.3
62.3
65.1
(1.4
)
(2.2
)
22.8
29.0
29.0
28.3
25.1
(2.3
)
(9.2
)
$
235,198
$
239,068
$
227,058
$
222,563
$
222,685
$
12,513
5.6
2,861
2,847
2,864
2,919
3,023
(162
)
(5.4
)
238,059
241,915
229,922
225,482
225,708
12,351
5.5
168,050
182,940
189,891
218,128
227,639
(59,589
)
(26.2
)
$
406,109
$
424,855
$
419,813
$
443,610
$
453,347
$
(47,238
)
(10.4
)%
(1)
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate.
(2)
Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains (losses).
1.
Automobile leases originated through April 2002 are accounted for as
operating leases.
Automobile leases originated before May 2002 are accounted for
using the operating lease method of accounting because they do not qualify as direct
financing leases. Operating leases are carried in other assets with the related rental
income, other revenue, and credit recoveries reflected as operating lease income, a
component of non-interest income. Under this accounting method, depreciation expenses,
as well as other costs and charge-offs, are reflected as operating lease expense, a
component of non-interest expense. With no new operating leases originated since April
2002, the operating lease assets have declined rapidly and will eventually become
immaterial, as will the related operating lease income and expense. However, since
operating lease income and expense represented a significant percentage of total
non-interest income and expense, respectively, throughout these reporting periods,
their downward trend influenced total non-interest income and non-interest expense
trends.
In contrast, automobile leases originated since April 2002 are accounted for as direct
financing leases, an interest-bearing asset included in total loans and leases with the
related income reflected as interest income and included in the calculation of the net
interest margin. Credit charge-offs and recoveries are reflected in the allowance for
loan and lease losses (ALLL), with related changes in the ALLL reflected in the provision
for credit losses. The relative newness and rapid growth of the direct financing lease
portfolio has resulted in higher reported automobile lease growth rates than in a more
mature portfolio. To better understand overall trends in automobile lease exposure, it is
helpful to compare trends in the combined total of direct financing leases plus operating
leases (see the Company’s 2004 Form 10-K for additional discussion).
2.
Generally recovering economic environment throughout this period.
This
has been reflected in improving demand for loans, including middle market commercial
and industrial (C&I) loans, most notably beginning in the second half of 2004, as well
as contributing to good growth in other consumer portfolios. This recovering trend has
also been a contributing factor to generally improving credit quality performance
throughout this period.
3.
Mortgage servicing rights (MSRs) and related hedging.
Interest rate
levels throughout this period have remained low by historical standards. Nevertheless,
they have been generally increasing which has impacted the valuation of MSRs. MSRs are
volatile when rates change.
•
Since the second quarter of 2002, the Company generally has retained the
servicing on mortgage loans it originates and sells. The mortgage servicing right
(MSR) represents the present value of expected future net servicing income for the
loan. MSR values are very sensitive to movements in interest rates. Expected future
net servicing income depends on the projected outstanding principal balances of the
underlying loans, which can be greatly reduced by prepayments. Prepayments usually
increase when mortgage interest rates decline and decrease when mortgage interest
rates rise. Thus, as interest rates decline, less future income is expected and the
value of MSRs declines and becomes impaired when the valuation is less than the
recorded book value. The Company 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 MSRs for other-than-temporary declines in valuation. Changes and
fluctuations in interest rate levels between quarters resulted in some quarters
reporting an MSR temporary impairment, with others reporting a recovery of
previously reported MSR temporary impairment. Such swings in MSR valuations have
significantly impacted quarterly mortgage banking income throughout this period.
•
The Company uses gains or losses on investment securities, and beginning in 2004
gains or losses and net interest income on trading account assets, to offset MSR
temporary valuation changes. Valuation of trading and investment securities
generally reacts to interest rate changes in an opposite direction compared with MSR
valuations. As a result, changes in interest rate levels that impacted MSR
valuations also resulted in securities or trading gains or losses. As such, in
quarters where an MSR temporary impairment is recognized, investment securities
and/or trading account assets are sold resulting in a gain on sale, and vice versa.
Investment securities gains or losses are reflected in the income statement in a
single non-interest income line item, whereas trading gains or losses are a component
of other non-interest income on the income statement. The earnings impact of the MSR
valuation change, and the combination of securities and/or trading gains/losses may
not exactly offset due to, among other factors, valuation changes may differ in
magnitude or the timing of when the MSR valuation is determined and recorded, may
differ from when the securities are sold and any gain or loss is recorded.
(see Table
2.)
4.
The sale of automobile loans with the objective of lowering the volatility
of earnings.
A key strategy over this time period was to lower the credit exposure
to automobile loans and leases to 20% or less of total credit exposure, primarily by
selling automobile loans. These sales of higher-rate, higher-risk loans impact results
in a number of ways including: lower growth rates in automobile, total consumer, and
total Company loans; the generation of gains reflected in non-interest income; lower
net interest income than otherwise would be the case if the loans were not sold; and
lower net interest margin.
(see Table 2.)
5.
Commercial charge-off and recovery.
A single
commercial credit recovery in the 2004 second quarter on a loan previously charged off
in the 2002 fourth quarter favorably impacted the 2004 second quarter provision expense
(see Table 11)
, as well as middle-market commercial and industrial, total commercial,
and total net charge-offs for the quarter.
(see Table 12.)
In addition, in the 2005
first quarter, a single commercial credit was charged-off. This impacted 2005 first
quarter total net charge-offs as well as this quarter’s provision expense.
(see Tables
2, 11, and 12.)
6.
SEC formal investigation-related expenses and accruals.
On June 26,
2003, Huntington announced that the Securities and Exchange Commission staff was
conducting a formal investigation into certain financial accounting matters relating to
fiscal years 2002 and earlier and certain related disclosure matters. On August 9,
2004, Huntington announced the Company was in negotiations with the staff of the SEC
regarding a settlement of the formal investigation and disclosed that it expected that
a settlement of this matter, which is subject to approval by the SEC, would involve the
entry of an order requiring, among other possible matters, Huntington to comply with
various provisions of the Securities Exchange Act of 1934 and the Securities Act of
1933, along with the imposition of a civil money penalty.
On April 25, 2005, Huntington announced that it has proposed a settlement to the staff of
the Securities and Exchange Commission regarding the resolution of its previously
announced formal investigation into certain financial accounting matters relating to
fiscal years 2002 and earlier and certain related disclosure matters, and that the staff
has agreed to recommend the proposed settlement offer to the Commission. The proposed
settlement, which is subject to approval by the Commission, is expected to involve the
entry of an order requiring Huntington; its chief executive officer, Thomas E. Hoaglin;
its former vice chairman and chief financial officer, Michael J. McMennamin; and its
former controller, John Van Fleet, to comply with various provisions of the Securities
Exchange Act of 1934 and the Securities Act of 1933. The proposed settlement would call
for the payment of a $7.5 million civil money penalty by the company, which, if approved,
would be distributed pursuant to the Fair Fund provisions of Section 308(a) of the
Sarbanes-Oxley Act of 2002. This civil money penalty would have no current period
financial impact on Huntington’s results, as reserves for this amount were established
and expensed prior to December 31, 2004. The proposed settlement would also require the
disgorgement of $360,000 by Hoaglin in respect of his previously paid 2002 annual bonus,
and disgorgement of previously paid bonuses and prejudgment interest for McMennamin and
Van Fleet of $265,215 and $26,660, respectively. In addition, Hoaglin, McMennamin, and
Van Fleet would pay civil money penalties of $50,000; $75,000; and $25,000; respectively.
The proposed settlement would also impose certain other relief with respect to
McMennamin and Van Fleet.
No assurances can be made as to final timing or outcome.
(see Table 2.)
7.
Banking regulatory formal written agreements.
On March 1, 2005,
Huntington announced that it had entered into formal written agreements with its
banking regulators, the FRBC and the OCC, providing for a comprehensive action plan
designed to enhance its corporate governance, internal audit, risk management,
accounting policies and procedures, and financial and regulatory reporting. The
agreements call for independent third-party reviews, as well as the submission of
written plans and progress reports by Management and remain in effect until terminated
by the banking regulators.
Management has been working with its banking regulators over the past several months and
has been taking actions and devoting significant resources to address all of the issues
raised.
(see Table 2.)
Management believes that the changes it has already made, and is in the process
of making, will address these issues fully and comprehensively. No assurances, however,
can be provided as to the ultimate timing or outcome of these matters.
8.
Unizan acquisition system conversion expenses.
As announced November
12, 2004, Huntington and Unizan have entered into an amendment to their January 26,
2004 merger agreement extending the term of the agreement for one year from January 27,
2005 to January 27, 2006, and Huntington has withdrawn its application with the Federal
Reserve to acquire Unizan. On March 1, 2005, Huntington announced that it intends to
resubmit the application for regulatory approval of the merger once the regulatory
written agreements have been terminated. No assurance, however, can be provided as to
the ultimate timing or outcome of these matters.
In the 2004 third and fourth quarters, the Company recorded certain integration planning
and system conversion expenses, which totaled $3.6 million, related to this pending
acquisition.
(see Note 5 of the Notes to Unaudited Condensed Consolidated Financial
Statements.)
9.
Property lease impairment.
As a result of the 2004 fourth quarter
property valuation review, a $7.8 million property lease
impairment was recognized in net occupancy expense.
(see
Table 2.)
10.
Adjustment to consolidated securitization.
In the 2003 third quarter,
an automobile securitization trust was consolidated with the adoption of FIN 46.
Related to the trust were two foreign companies that were also consolidated. In the
2004 fourth quarter, the Company learned of adjustments related to earnings that these
entities had realized on the invested cash that remains offshore. Since the residual
earnings offset the funding cost of this structure, this funding cost adjustment
lowered interest expense by $3.7 million in the fourth quarter.
(see Table 2.)
11.
Effective tax rate.
The 2005 first quarter effective tax rate included
the after-tax positive impact on net income due to a federal tax loss carry back, tax
exempt income, bank owned life insurance, asset securitization activities, and general
business credits from investment in low income housing and historic property
partnerships. The lower effective tax rate is expected to impact each quarter of 2005.
In 2006, the effective tax rate is anticipated to increase to a more typical rate
slightly below 30%.
•
$6.4 million after-tax ($0.03 earnings per share) positive impact on net income
reflecting the recognition of the effect of federal tax refunds on income tax expense.
These federal tax refunds resulted from the ability to carry back federal tax losses
to prior-years.
•
$6.4 million pre-tax ($0.02 earnings per share) unfavorable impact to provision
expense, relating to a $14.2 million middle market commercial charge-off, net of $7.8
million of allocated reserves.
•
$2.0 million pre-tax ($0.01 earnings per share) unfavorable impact from SEC and
regulatory-related expenses.
Impact
(1)
(in millions, except per share amounts)
Earnings
(2)
EPS
$
125.1
$
0.41
6.4
(4)
0.03
(6.4
)
(0.02
)
(2.0
)
(0.01
)
$
128.3
$
0.39
(6.5
)
(0.03
)
(7.8
)
(0.02
)
3.7
0.01
$
139.1
$
0.45
9.0
0.03
(10.1
)
(0.03
)
15.1
0.04
(1)
Favorable (unfavorable) impact on GAAP earnings
(2)
Pre-tax unless otherwise noted
(3)
Includes significant items with $0.01 EPS
impact or greater
(4)
After-tax
Average Balances
Change
Fully taxable equivalent basis
2005
2004
1Q05 vs 1Q04
(in millions of dollars)
First
Fourth
Third
Second
First
Amount
Percent
$
53
$
60
$
55
$
69
$
79
$
(26
)
(32.9)
%
200
228
148
28
16
184
N.M.
475
695
318
168
92
383
N.M.
203
229
283
254
207
(4
)
(1.9
)
3,932
3,858
4,340
4,861
4,646
(714
)
(15.4
)
409
404
398
410
437
(28
)
(6.4
)
4,341
4,262
4,738
5,271
5,083
(742
)
(14.6
)
4,710
4,503
4,298
4,555
4,440
270
6.1
1,642
1,577
1,514
1,272
1,276
366
28.7
1,883
1,852
1,913
1,919
1,873
10
0.5
3,525
3,429
3,427
3,191
3,149
376
11.9
2,183
2,136
2,081
2,018
1,974
209
10.6
10,418
10,068
9,806
9,764
9,563
855
8.9
2,008
1,913
1,857
2,337
3,041
(1,033
)
(34.0
)
2,461
2,388
2,250
2,139
1,988
473
23.8
4,469
4,301
4,107
4,476
5,029
(560
)
(11.1
)
4,570
4,489
4,337
4,107
3,810
760
19.9
3,919
3,695
3,484
2,986
2,674
1,245
46.6
480
479
461
434
426
54
12.7
13,438
12,964
12,389
12,003
11,939
1,499
12.6
23,856
23,032
22,195
21,767
21,502
2,354
10.9
(282
)
(283
)
(288
)
(310
)
(313
)
31
9.9
23,574
22,749
21,907
21,457
21,189
2,385
11.3
29,128
28,506
27,737
27,557
26,979
2,149
8.0
529
648
800
977
1,166
(637
)
(54.6
)
909
880
928
772
740
169
22.8
218
216
216
216
217
1
0.5
2,079
2,094
2,066
2,101
2,046
33
1.6
$
32,581
$
32,061
$
31,459
$
31,313
$
30,835
$
1,746
5.7
%
$
3,314
$
3,401
$
3,276
$
3,223
$
3,017
$
297
9.8
%
7,925
7,658
7,384
7,168
6,609
1,316
19.9
3,309
3,395
3,436
3,439
3,456
(147
)
(4.3
)
2,496
2,454
2,414
2,400
2,399
97
4.0
17,044
16,908
16,510
16,230
15,481
1,563
10.1
1,249
990
886
795
788
461
58.5
2,728
1,948
1,755
1,737
1,907
821
43.1
442
465
476
542
549
(107
)
(19.5
)
21,463
20,311
19,627
19,304
18,725
2,738
14.6
1,179
1,302
1,342
1,396
1,603
(424
)
(26.5
)
1,196
1,270
1,270
1,270
1,273
(77
)
(6.0
)
4,517
5,099
5,244
5,623
5,557
(1,040
)
(18.7
)
25,041
24,581
24,207
24,370
24,141
900
3.7
1,699
1,598
1,564
1,397
1,399
300
21.4
2,527
2,481
2,412
2,323
2,278
249
10.9
$
32,581
$
32,061
$
31,459
$
31,313
$
30,835
$
1,746
5.7
%
(1)
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.
Average Rates
(2)
2005
2004
Fully taxable equivalent basis
(1)
First
Fourth
Third
Second
First
1.88
%
1.61
%
0.91
%
1.05
%
0.71
%
4.14
4.15
4.44
3.02
3.98
2.36
1.99
1.53
1.21
1.41
5.55
5.69
5.25
5.17
5.33
3.87
3.77
3.83
3.83
4.06
6.73
6.89
7.06
7.07
6.88
4.14
4.07
4.10
4.09
4.30
5.02
4.80
4.46
4.05
4.33
5.13
4.65
4.13
3.73
3.68
5.15
4.80
4.45
4.20
4.31
5.14
4.73
4.31
4.02
4.05
5.81
5.67
5.45
5.33
5.46
5.23
4.96
4.62
4.30
4.47
6.83
7.31
7.65
7.20
6.93
4.92
5.00
5.02
5.06
4.94
5.78
6.02
6.21
6.17
6.14
5.60
5.30
4.84
4.75
4.69
5.55
5.53
5.48
5.40
5.51
6.42
6.87
6.54
6.21
5.83
5.67
5.66
5.54
5.49
5.52
5.48
5.34
5.12
4.95
5.04
5.21
%
5.05
%
4.89
%
4.76
%
4.89
%
—
%
—
%
—
%
—
%
—
%
1.45
1.21
1.06
0.94
0.88
1.27
1.26
1.24
1.23
1.41
3.43
3.38
3.32
3.27
3.47
1.76
1.62
1.52
1.45
1.53
2.92
2.51
2.40
2.37
2.14
2.80
2.26
1.84
1.57
1.51
1.41
0.98
0.83
0.76
0.72
1.99
1.73
1.58
1.48
1.53
1.66
1.17
0.92
0.80
0.83
2.90
2.68
2.60
2.52
2.50
3.39
2.67
2.62
2.24
2.33
2.27
%
1.94
%
1.82
%
1.66
%
1.71
%
2.94
%
3.11
%
3.07
%
3.10
%
3.18
%
0.37
0.27
0.23
0.19
0.18
3.31
%
3.38
%
3.30
%
3.29
%
3.36
%
(1)
Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate.
(2)
Loan, lease, and deposit average rates include impact of applicable derivatives and non-deferrable fees.
(3)
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans.
2005
2004
1Q05 vs 1Q04
(in thousands of dollars)
First
Fourth
Third
Second
First
Amount
Percent
$
39,418
$
41,747
$
43,935
$
43,596
$
41,837
$
(2,419
)
(5.8
)%
18,196
17,315
17,064
16,708
16,323
1,873
11.5
13,026
12,879
13,200
13,523
15,197
(2,171
)
(14.3
)
12,061
8,822
4,448
23,322
(4,296
)
16,357
N.M.
10,159
10,617
10,799
10,645
9,513
646
6.8
10,104
10,484
10,019
11,309
10,485
(381
)
(3.6
)
957
2,100
7,803
(9,230
)
15,090
(14,133
)
(93.7
)
17,397
23,870
17,899
24,659
25,619
(8,222
)
(32.1
)
121,318
127,834
125,167
134,532
129,768
(8,450
)
(6.5
)
46,732
55,106
64,412
78,706
88,867
(42,135
)
(47.4
)
168,050
182,940
189,579
213,238
218,635
(50,585
)
(23.1
)
—
—
312
4,890
9,004
(9,004
)
N.M.
$
168,050
$
182,940
$
189,891
$
218,128
$
227,639
$
(59,589
)
(26.2)
%
•
$14.1 million decline in investment securities gains with the current quarter reflecting
only $1.0 million of such gains, compared with $15.1 million of such gains in the 2004
first quarter.
•
$9.0 million gain on sale of automobile loans in the year-ago quarter, with no such
gains in the current quarter.
•
$8.2 million, or 32%, decline in other income primarily due to higher MSR hedge-related
trading losses, lower investment banking income, and lower equity investment gains.
•
$2.4 million, or 6%, decline in service charges on deposit accounts with declines in
commercial service charges and consumer service charges equally contributing to the
decrease. Lower commercial service charges reflected a combination of lower activity and a
preference by commercial customers to pay for services with higher compensating balances
rather than fees as interest rates increase. The decline in consumer service charges
primarily reflected lower personal non-sufficient funds (NSF) and overdraft
service charges.
•
$2.2 million, or 14%, decline in brokerage and insurance income due to lower annuity
sales.
•
$16.4 million increase in mortgage banking income primarily reflecting a $3.8 million
MSR temporary impairment recovery in the current quarter compared with a $10.1 million MSR
temporary impairment in the year-ago quarter and higher net secondary marketing income.
•
$1.9 million, or 11%, increase in trust services due to higher personal trust and mutual
fund fees.
•
$6.5 million, or 27%, decrease in other income primarily reflecting lower equity
investment gains and lower investment banking income.
•
$2.3 million, or 6%, decrease in service charges on deposit accounts primarily
reflecting seasonally lower personal NSF and overdraft service charges.
•
$1.1 million decline in investment securities gains with the current quarter reflecting
only $1.0 million of such gains, compared with $2.1 million of such gains in the 2004
fourth quarter.
•
$3.2 million, or 37%, increase in mortgage banking income reflecting a $3.8 million MSR
temporary impairment recovery in the current quarter, compared with a $0.7 million recovery
in the 2004 fourth quarter.
•
$0.9 million, or 5%, increase in trust income reflecting a 12% increase in Huntington
Fund fees and 5% increase in personal trust income, partially offset by a 34% seasonal
decline in corporate trust fees from the fourth quarter. The 2005 first quarter
represented the sixth consecutive quarterly increase in trust income. Trust assets
increased 2% from the end of last year.
2005
2004
1Q05 vs 1Q04
(in thousands of dollars)
First
Fourth
Third
Second
First
Amount
Percent
$
96,239
$
94,658
$
96,456
$
92,169
$
92,985
$
3,254
3.5
%
27,742
28,080
25,273
27,546
28,639
(897
)
(3.1
)
123,981
122,738
121,729
119,715
121,624
2,357
1.9
19,242
26,082
16,838
16,258
16,763
2,479
14.8
18,770
18,563
17,527
17,563
18,462
308
1.7
15,863
15,733
15,295
16,228
16,086
(223
)
(1.4
)
9,459
9,522
12,219
7,836
7,299
2,160
29.6
6,454
5,581
5,000
8,069
7,839
(1,385
)
(17.7
)
4,882
4,596
5,359
4,638
5,194
(312
)
(6.0
)
3,094
3,148
3,201
3,098
3,016
78
2.6
204
205
204
204
204
—
—
18,380
26,526
22,317
25,981
18,457
(77
)
(0.4
)
220,329
232,694
219,689
219,590
214,944
5,385
2.5
37,948
48,320
54,885
62,563
70,710
(32,762
)
(46.3
)
258,277
281,014
274,574
282,153
285,654
(27,377
)
(9.6
)
—
—
(1,151
)
—
—
—
—
$
258,277
$
281,014
$
273,423
$
282,153
$
285,654
$
(27,377
)
(9.6
)%
•
$2.5 million, or 15%, increase in net occupancy expense primarily reflecting a loss
caused by a refinancing penalty of a real estate partnership minority interest, as well as
lower rental income.
•
$2.4 million, or 2%, increase in personnel costs due to higher salary and incentive plan expenses, partially offset by lower sales commissions.
•
$2.2 million, or 30%, increase in professional services expenses primarily reflecting SEC investigation and regulatory-related expenses.
•
$1.4 million, or 18%, decline in marketing expense primarily reflecting lower print and television advertising expenses.
•
$8.1 million, or 31%, decrease in other expense as the fourth quarter included a $5.5
million SEC-related accrual.
•
$6.8 million, or 26%, decrease in net occupancy as the 2004 fourth quarter included $7.8
million in property lease impairment and write-down on vacated facilities.
•
$1.2 million, or 1%, increase in personnel costs due to higher 2004 incentive plan expenses, partially offset by lower sales commissions.
2005
2004
1Q05 vs 1Q04
(in thousands of dollars)
First
Fourth
Third
Second
First
Amount
Percent
$
529,245
$
647,970
$
800,145
$
976,626
$
1,166,146
$
(636,901
)
(54.6
)%
$
43,554
$
51,016
$
60,267
$
72,402
$
83,517
$
(39,963
)
(47.9
)%
1,857
2,111
2,965
4,838
3,543
(1,686
)
(47.6
)
1,321
1,979
1,180
1,466
1,807
(486
)
(26.9
)
46,732
55,106
64,412
78,706
88,867
(42,135
)
(47.4
)
34,703
45,293
49,917
57,412
63,823
(29,120
)
(45.6
)
3,245
3,027
4,968
5,151
6,887
(3,642
)
(52.9
)
37,948
48,320
54,885
62,563
70,710
(32,762
)
(46.3
)
$
8,784
$
6,786
$
9,527
$
16,143
$
18,157
$
(9,373
)
(51.6
)%
32.9
%
31.5
%
30.1
%
29.7
%
28.6
%
4.3
%
15.0
%
26.2
28.0
25.0
23.5
21.9
4.3
19.6
(1)
As a percent of average operating lease assets, quarterly amounts annualized.
2005
2004
(in thousands of dollars)
March 31,
December 31,
September 30,
June 30,
March 31,
$
4,824,403
19.6
%
$
4,660,141
19.3
%
$
4,352,952
18.7
%
$
4,270,282
18.8
%
$
4,545,930
20.4
%
1,647,999
6.7
1,592,125
6.6
1,538,135
6.6
1,501,248
6.6
1,282,420
5.8
1,913,849
7.8
1,881,835
7.8
1,898,015
8.1
1,959,684
8.6
1,934,777
8.7
3,561,848
14.5
3,473,960
14.4
3,436,150
14.7
3,460,932
15.2
3,217,197
14.5
2,204,278
8.9
2,168,877
8.9
2,124,602
9.2
2,060,259
9.1
1,988,818
8.9
10,590,529
43.0
10,302,978
42.6
9,913,704
42.6
9,791,473
43.1
9,751,945
43.8
2,066,264
8.4
1,948,667
8.1
1,884,924
8.1
1,814,644
8.0
2,267,310
10.2
2,476,098
10.0
2,443,455
10.1
2,316,801
9.9
2,184,633
9.6
2,065,883
9.3
4,594,586
18.6
4,554,540
18.9
4,429,626
19.0
4,255,576
18.8
3,920,882
17.6
3,995,769
16.2
3,829,234
15.9
3,565,670
15.3
3,283,779
14.5
2,756,625
12.4
483,219
1.9
481,403
2.0
476,534
2.0
445,564
2.1
430,982
1.8
13,615,936
55.1
13,257,299
55.0
12,673,555
54.3
11,984,196
53.0
11,441,682
51.3
$
24,206,465
98.1
$
23,560,277
97.6
$
22,587,259
96.9
$
21,775,669
96.1
$
21,193,627
95.1
466,550
1.9
587,310
2.4
717,411
3.1
888,612
3.9
1,070,958
4.8
—
—
—
—
—
—
—
—
27,573
0.1
$
24,673,015
100.0
%
$
24,147,587
100.0
%
$
23,304,670
100.0
%
$
22,664,281
100.0
%
$
22,292,158
100.0
%
$
5,008,912
20.3
%
$
4,979,432
20.6
%
$
4,919,136
21.1
%
$
4,887,889
21.6
%
$
5,431,724
24.4
%
$
6,410,873
26.0
%
$
6,239,021
25.8
%
$
5,950,999
25.5
%
$
5,655,836
25.0
%
$
4,986,411
22.4
%
2,910,071
11.8
2,857,746
11.8
2,810,332
12.1
2,696,268
11.9
2,682,743
12.0
2,023,243
8.2
1,895,180
7.8
1,825,652
7.8
1,758,808
7.8
1,703,006
7.6
2,335,578
9.5
2,271,682
9.4
2,236,001
9.6
2,216,170
9.8
2,154,994
9.7
1,475,868
6.0
1,430,169
5.9
1,387,543
6.0
1,359,098
6.0
1,340,679
6.0
887,239
3.6
882,016
3.7
867,271
3.7
812,929
3.6
809,714
3.6
997,052
4.0
961,700
4.0
862,833
3.7
811,431
3.6
752,850
3.4
17,039,924
69.1
16,537,514
68.4
15,940,631
68.4
15,310,540
67.7
14,430,397
64.7
5,955,634
24.1
5,920,270
24.5
5,765,188
24.7
5,832,367
25.7
6,396,727
28.7
1,496,408
6.1
1,487,800
6.2
1,395,047
6.0
1,380,538
6.1
1,322,259
5.9
181,049
0.7
202,003
0.9
203,804
0.9
140,836
0.5
142,775
0.7
$
24,673,015
100.0
%
$
24,147,587
100.0
%
$
23,304,670
100.0
%
$
22,664,281
100.0
%
$
22,292,158
100.0
%
(1)
Sum of automobile loans and leases, operating lease assets, and securitized loans.
(2)
Prior period amounts have been reclassified to conform to the current period business segment
structure.
2005
2004
(in thousands of dollars)
March 31,
December 31,
September 30,
June 30,
March 31,
$
16,993
$
24,179
$
20,098
$
24,336
$
36,854
6,682
4,582
14,717
11,122
16,097
16,387
14,601
12,087
12,368
12,124
12,498
13,545
13,197
13,952
12,052
7,333
7,055
7,685
—
—
59,893
63,962
67,784
61,778
77,127
10,571
8,762
8,840
8,851
9,132
2,839
35,844
3,852
4,067
5,435
13,410
44,606
12,692
12,918
14,567
$
73,303
$
108,568
$
80,476
$
74,696
$
91,694
0.25
%
0.27
%
0.30
%
0.28
%
0.36
%
0.30
0.46
0.36
0.34
0.43
441
424
417
464
383
361
250
351
384
322
494
476
461
515
425
404
280
389
426
357
$
50,086
$
54,283
$
53,456
$
51,490
$
59,697
0.21
%
0.23
%
0.24
%
0.24
%
0.28
%
(1)
As of September 30, 2004, the Company adopted a policy, consistent with its policy for residential mortgage loans, of placing home equity loans and lines on non-accrual status when they
become greater than 180 days past due. In prior quarters, these
balances were included in “Accruing loans and leases past due 90
days or more.”
(2)
At December 31, 2004, other real estate owned included $35.7 million of properties that related to the work-out of $5.9 million of mezzanine loans. These properties were subject to $29.8
million of non-recourse debt to another financial institution. Both
properties were sold in the first quarter of 2005.
2005
2004
(in thousands of dollars)
First
Fourth
Third
Second
First
$
108,568
$
80,476
$
74,696
$
91,694
$
87,386
33,607
61,684
22,740
25,727
27,208
(3,838
)
(2,248
)
—
(1,493
)
(54
)
(17,281
)
(8,578
)
(5,424
)
(12,872
)
(10,463
)
(10,404
)
(8,829
)
(10,202
)
(13,571
)
(10,717
)
(37,349
)
(13,937
)
(1,334
)
(14,789
)
(1,666
)
$
73,303
$
108,568
$
80,476
$
74,696
$
91,694
(1)
As of September 30, 2004, the Company adopted a policy, consistent with its policy for residential mortgage loans, of placing home equity loans
and lines on non-accrual status when they become greater than
180 days past due. In prior quarters, these balances were
included in “Accruing loans and leases past due 90 days or
more.”
(2)
At December 31, 2004, other real estate owned included $35.7 million of properties that related to the work-out of $5.9 million of mezzanine
loans. These properties were subject to $29.8 million of
non-recourse debt to another financial institution. Both properties
were sold in the first quarter of 2005.
2005
2004
(in thousands of dollars)
First
Fourth
Third
Second
First
$
271,211
$
282,650
$
286,935
$
295,377
$
299,732
(37,213
)
(31,737
)
(26,366
)
(30,845
)
(37,167
)
8,941
10,824
9,886
18,330
8,540
(28,272
)
(20,913
)
(16,480
)
(12,515
)
(28,627
)
21,451
9,474
12,971
5,923
29,029
—
—
(776
)
(1,850
)
(4,757
)
$
264,390
$
271,211
$
282,650
$
286,935
$
295,377
$
33,187
$
30,007
$
31,193
$
32,089
$
35,522
(1,577
)
3,180
(1,186
)
(896
)
(3,433
)
$
31,610
$
33,187
$
30,007
$
31,193
$
32,089
$
296,000
$
304,398
$
312,657
$
318,128
$
327,466
0.81
%
0.78
%
0.84
%
0.86
%
0.91
%
0.27
0.32
0.33
0.36
0.38
0.01
0.05
0.08
0.10
0.10
1.09
%
1.15
%
1.25
%
1.32
%
1.39
%
1.22
%
1.29
%
1.38
%
1.46
%
1.55
%
•
The transaction reserve
– This ALLL component represents an estimate of loss
based on characteristics of each commercial and consumer loan or lease in the portfolio.
Each loan and lease is assigned a probability-of-default and a loss-in-event-of-default
factor that are used to calculate the transaction reserve.
For middle market commercial and industrial, middle market commercial real estate, and small
business loans, the calculation involves the use of a standardized loan grading system that is
applied on an individual loan level and updated on a continuous basis. The reserve factors
applied to these portfolios were developed based on internal credit migration models that
track historical movements of loans between loan ratings over time and a combination of
long-term average loss experience of the Company’s own portfolio and external industry data.
In the case of more homogeneous portfolios, such as consumer loans and leases, and residential
mortgage loans, the determination of the transaction component is conducted at an aggregate,
or pooled, level. For such portfolios, the development of the reserve factors includes the use
of forecasting models to measure inherent loss in these portfolios.
Models and analyses are updated frequently to capture the recent behavioral characteristics of
the subject portfolios, as well as any changes in the loss mitigation or credit origination
strategies. Adjustments to the reserve factors are made, as needed based on observed results
of the portfolio analytics.
•
The specific reserve
– This ALLL component is associated only with the middle
market commercial and industrial, middle market commercial real estate, and small business
segments, and is the result of credit-by-credit reserve decisions for individual loans when
it is determined that the calculated transaction reserve component is insufficient to cover
the estimated losses. Individual non-performing and substandard loans over $250,000 are
analyzed for impairment and possible assignment of a specific reserve. The impairment tests
are done in accordance with applicable accounting standards and regulations.
•
The economic reserve
– Changes in the economic environment are a significant
judgmental factor Management considers in determining the appropriate level of the ACL. The
economic reserve incorporates Management’s determination of the impact of risks associated
with the general economic environment on the portfolio. The economic reserve is designed to
address economic uncertainties and is determined based on a variety of economic factors that
are correlated to the historical performance of the loan portfolio.
In an effort to be as quantitative as possible in the ALLL calculation, Management developed a
revised methodology for calculating the economic reserve portion of the ALLL for
implementation in 2004. The revised methodology is specifically tied to economic indices that
have a high correlation to the Company’s historic charge-off variability. The indices
currently in the model consist of the U.S. Index of Leading Economic Indicators, U.S. Profits
Index, U.S. Unemployment Index, and the University of Michigan Current Consumer Confidence Index. Beginning in 2004, the
calculated economic reserve was determined based upon the variability of credit losses over a
credit cycle. The indices and time frame may be adjusted as actual portfolio performance
changes over time. At the time of implementation, Management retained the capability to
judgmentally adjust the calculated economic reserve amount by a maximum of +/– 20% to reflect,
among other factors, differences in local versus national economic conditions. This adjustment
capability was deemed necessary given the newness of the model and the continuing uncertainty
of forecasting economic environment changes. At March 31, 2005,
there was no judgmental adjustment made by Management to the economic
reserve.
2005
2004
(in thousands of dollars)
First
Fourth
Third
Second
First
$
14,092
$
1,239
$
(102
)
$
(3,642
)
$
4,425
(51
)
704
(19
)
276
1,504
(152
)
1,834
1,490
2,222
(40
)
(203
)
2,538
1,471
2,498
1,464
2,283
1,386
1,195
1,281
1,704
16,172
5,163
2,564
137
7,593
3,216
4,406
5,142
5,604
13,422
3,014
3,104
2,415
2,159
3,159
6,230
7,510
7,557
7,763
16,581
3,963
5,346
4,259
2,569
2,900
439
608
534
302
316
1,468
2,286
1,566
1,744
1,237
12,100
15,750
13,916
12,378
21,034
$
28,272
$
20,913
$
16,480
$
12,515
$
28,627
1.20
%
0.11
%
(0.01
)%
(0.32
)%
0.40
%
(0.01
)
0.18
(0.01
)
0.09
0.47
(0.03
)
0.40
0.31
0.46
(0.01
)
(0.02
)
0.30
0.17
0.31
0.19
0.42
0.26
0.23
0.25
0.35
0.62
0.21
0.10
0.01
0.32
0.64
0.92
1.11
0.96
1.77
0.49
0.52
0.43
0.40
0.64
0.56
0.70
0.74
0.69
1.32
0.35
0.48
0.39
0.25
0.30
0.04
0.07
0.06
0.04
0.05
1.22
1.91
1.36
1.62
1.17
0.36
0.49
0.45
0.41
0.70
0.47
%
0.36
%
0.30
%
0.23
%
0.53
%
Net Interest Income at Risk (%)
-200
-100
+100
+200
-4.0
%
-2.0
%
-2.0
%
-4.0
%
-1.8
%
-0.8
%
+0.6
%
+1.0
%
-1.2
%
-0.5
%
+0.2
%
+0.2
%
Economic Value of Equity at Risk (%)
-200
-100
+100
+200
-12.0
%
-5.0
%
-5.0
%
-12.0
%
-1.3
%
-0.4
%
-2.0
%
-4.8
%
-3.0
%
-0.5
%
-1.0
%
-4.0
%
2005
2004
(in thousands of dollars)
March 31,
December 31,
September 31,
June 30,
March 31,
$
3,186,187
14.6
%
$
3,392,123
16.3
%
$
3,264,145
16.2
%
$
3,327,426
17.1
%
$
2,918,380
15.4
%
7,848,458
36.1
7,786,377
37.5
7,471,779
37.2
7,124,144
36.6
6,866,174
36.2
3,460,633
15.9
3,502,552
16.9
3,570,494
17.8
3,605,778
18.5
3,609,745
19.0
2,555,241
11.7
2,466,965
11.9
2,441,387
12.1
2,412,178
12.4
2,394,940
12.6
17,050,519
78.3
17,148,017
82.6
16,747,805
83.3
16,469,526
84.6
15,789,239
83.2
1,311,495
6.0
1,081,660
5.2
997,952
5.0
808,415
4.2
791,320
4.2
3,007,124
13.8
2,097,537
10.1
1,896,135
9.4
1,679,099
8.6
1,941,963
10.2
401,835
1.9
440,947
2.1
467,133
2.3
508,106
2.6
466,324
2.4
$
21,770,973
100.0
%
$
20,768,161
100.0
%
$
20,109,025
100.0
%
$
19,465,146
100.0
%
$
18,988,846
100.0
%
$
5,218,482
30.6
%
$
5,293,666
30.9
%
$
5,227,613
31.2
%
$
5,080,250
30.8
%
$
4,611,258
29.2
%
11,832,037
69.4
11,854,351
69.1
11,520,192
68.8
11,389,276
69.2
11,177,981
70.8
$
17,050,519
100.0
%
$
17,148,017
100.0
%
$
16,747,805
100.0
%
$
16,469,526
100.0
%
$
15,789,239
100.0
%
$
4,748,903
21.8
%
$
4,705,721
22.7
%
$
4,406,854
21.9
%
$
4,392,653
22.6
%
$
4,389,011
23.1
%
3,929,993
18.1
4,068,385
19.6
4,012,247
20.0
3,771,145
19.4
3,508,376
18.5
1,774,229
8.1
1,742,353
8.4
1,599,685
8.0
1,557,288
8.0
1,475,506
7.8
2,685,054
12.3
2,643,510
12.7
2,699,059
13.4
2,598,397
13.3
2,608,967
13.7
2,298,679
10.6
2,222,191
10.7
2,165,533
10.8
2,078,967
10.7
2,025,914
10.7
1,368,763
6.3
1,375,151
6.6
1,380,934
6.9
1,368,951
7.0
1,291,913
6.8
717,877
3.3
663,927
3.2
665,368
3.3
667,501
3.4
637,090
3.4
17,523,498
80.5
17,421,238
83.9
16,929,680
84.3
16,434,902
84.4
15,936,777
84.0
69,046
0.3
74,969
0.4
68,944
0.3
70,595
0.4
76,031
0.4
1,139,139
5.2
1,176,303
5.7
1,126,807
5.6
1,017,115
5.2
1,060,639
5.6
3,039,290
14.0
2,095,651
10.0
1,983,594
9.8
1,942,534
10.0
1,915,399
10.0
$
21,770,973
100.0
%
$
20,768,161
100.0
%
$
20,109,025
100.0
%
$
19,465,146
100.0
%
$
18,988,846
100.0
%
(1)
Prior period amounts have been reclassified to conform to the current period business segment structure.
(2)
Comprised largely of brokered deposits and negotiable CDs.
Senior Unsecured
Subordinated
Notes
Notes
Short-Term
Outlook
A3
Baal
P-2
Stable
BBB+
BBB
A-2
Stable
A
A-
F1
Negative
A2
A3
P-1
Stable
A-
BBB+
A-2
Stable
A
A-
F1
Negative
2005
2004
(in millions of dollars)
March 31,
December 31,
September 30,
June 30,
March 31,
$
30,276
$
29,542
$
28,679
$
28,416
$
28,247
8.45
%
8.42
%
8.36
%
8.20
%
8.07
%
9.03
9.08
9.10
8.98
8.74
12.32
12.48
12.53
12.56
12.13
7.42
7.18
7.11
6.95
6.97
7.83
7.86
7.83
7.64
7.60
7.76
7.74
7.67
7.42
7.39
2005
2004
(in thousands, except per share amounts)
First
Fourth
Third
Second
First
$
24.780
$
25.380
$
25.150
$
23.120
$
23.780
22.150
23.110
22.700
20.890
21.000
23.900
24.740
24.910
22.980
22.030
23.216
24.241
24.105
22.050
22.501
$
0.200
$
0.200
$
0.200
$
0.175
$
0.175
231,824
231,147
229,848
229,429
229,227
235,053
235,502
234,348
232,659
232,915
232,192
231,605
230,153
229,476
229,410
$
11.16
$
10.96
$
10.69
$
10.40
$
10.31
—
—
—
—
—
(1)
High and low stock prices are intra-day quotes obtained from NASDAQ.
2005
2004
1Q05 vs. 1Q04
First
Fourth
First
Amount
Percent
$
185,203
$
184,470
$
157,325
$
27,878
17.7
%
12,260
4,323
2,105
10,155
N.M.
172,943
180,147
155,220
17,723
11.4
964
700
49
915
N.M.
38,390
40,551
40,702
(2,312
)
(5.7
)
3,528
3,080
3,856
(328
)
(8.5
)
172
225
292
(120
)
(41.1
)
8,578
8,464
6,033
2,545
42.2
10,045
10,494
9,413
632
6.7
9,676
11,830
11,706
(2,030
)
(17.3
)
71,353
75,344
72,051
(698
)
(1.0
)
—
—
—
—
N.M.
71,353
75,344
72,051
(698
)
(1.0
)
799
586
44
755
N.M.
62,706
64,499
63,066
(360
)
(0.6
)
86,133
84,893
83,805
2,328
2.8
149,638
149,978
146,915
2,723
1.9
94,658
105,513
80,356
14,302
17.8
33,130
36,930
28,125
5,005
17.8
$
61,528
$
68,583
$
52,231
$
9,297
17.8
%
$
185,203
$
184,470
$
157,325
$
27,878
17.7
%
267
258
249
18
7.2
185,470
184,728
157,574
27,896
17.7
71,353
75,344
72,051
(698
)
(1.0
)
$
256,823
$
260,072
$
229,625
$
27,198
11.8
%
$
256,823
$
260,072
$
229,625
$
27,198
11.8
%
$
3,398
$
3,238
$
3,293
$
105
3.2
%
1,598
1,546
1,244
354
28.5
1,586
1,551
1,566
20
1.3
2,183
2,136
1,974
209
10.6
8,765
8,471
8,077
688
8.5
3
4
5
(2
)
(40.0
)
4,253
4,176
3,523
730
20.7
3,372
3,169
2,163
1,209
55.9
379
385
348
31
8.9
8,007
7,734
6,039
1,968
32.6
$
16,772
$
16,205
$
14,116
$
2,656
18.8
%
$
15
$
10
$
—
$
15
N.M.
%
$
3,064
$
3,145
$
2,783
$
281
10.1
%
7,195
6,914
5,853
1,342
22.9
2,754
2,773
2,773
(19
)
(0.7
)
4,139
3,910
3,728
411
11.0
402
416
423
(21
)
(5.0
)
$
17,554
$
17,158
$
15,560
$
1,994
12.8
%
N.M., not a meaningful value.
(1)
Operating basis, see Lines of Business section for definition.
(2)
Calculated assuming a 35% tax rate.
2005
2004
1Q05 vs. 1Q04
First
Fourth
First
Amount
Percent
1.39
%
1.56
%
1.38
%
0.01
%
25.0
25.8
20.9
4.1
4.43
4.47
4.43
—
58.3
57.7
64.0
(5.7
)
$
13,396
$
86
$
4,408
$
8,988
N.M.
%
(35
)
896
1,464
(1,499
)
N.M.
2,283
1,386
1,704
579
34.0
15,644
2,368
7,576
8,068
N.M.
—
—
—
—
N.M.
3,963
4,861
2,740
1,223
44.6
268
375
316
(48
)
(15.2
)
1,163
2,160
994
169
17.0
5,394
7,396
4,050
1,344
33.2
$
21,038
$
9,764
$
11,626
$
9,412
81.0
%
1.60
%
0.01
%
0.54
%
1.06
%
—
0.12
0.21
(0.21
)
0.42
0.26
0.35
0.07
0.72
0.11
0.38
0.34
—
—
—
—
0.38
0.46
0.31
0.07
0.03
0.05
0.06
(0.03
)
1.24
2.23
1.15
0.09
0.27
0.38
0.27
—
0.51
%
0.24
%
0.33
%
0.18
%
$
15
$
22
$
30
$
(15
)
(50.0
)%
7
2
10
(3
)
(30.0
)
16
15
12
4
33.3
12
12
11
1
9.1
7
7
—
7
N.M.
57
58
63
(6
)
(9.5
)
—
—
—
—
N.M.
57
58
63
(6
)
(9.5
)
12
9
16
(4
)
(25.0
)
$
69
$
67
$
79
$
(10
)
(12.7
)%
$
41
$
43
$
47
$
(6
)
(12.8
)%
$
174
$
176
$
158
$
16
10.1
%
1.02
%
1.07
%
1.10
%
(0.08
)%
305.3
303.4
250.8
54.5
269.6
276.1
220.3
49.3
0.33
0.35
0.44
(0.11
)
0.41
0.41
0.55
(0.14
)
N.M., not a meaningful value.
eop — End of Period.
(1)
Operating basis, see Lines of Business section for definition.
2005
2004
1Q05 vs. 1Q04
First
Fourth
First
Amount
Percent
4,726
4,746
4,824
(98
)
(2.0)
%
$
5,110
$
4,993
$
4,259
$
851
20.0
%
$
11,467
$
11,311
$
10,683
$
784
7.3
3,379
3,395
3,407
(28
)
(0.8
)
335
334
332
3
0.9
714
704
684
30
4.4
506,209
502,931
491,949
14,260
2.9
2.70
2.77
2.20
0.50
22.7
224,663
211,392
179,681
44,982
25.0
42
%
40
%
34
%
8
%
$
2,183
$
2,136
$
1,974
$
209
10.6
%
$
2,029
$
2,106
$
1,861
$
168
9.0
275
270
270
5
1.9
51,946
50,857
47,728
4,218
8.8
2.29
2.33
2.05
0.24
11.7
$
6,619
$
6,378
$
6,144
$
475
7.7
%
$
3,897
$
3,567
$
2,867
$
1,030
35.9
537
530
543
(6
)
(1.1
)
5,071
5,513
5,527
(456
)
(8.3
)
$
2,860
$
2,698
$
1,739
$
1,121
64.5
%
$
161
$
174
$
149
$
12
8.1
535
551
604
(69
)
(11.4
)
$
762
$
948
$
860
$
(98
)
(11.4
)
364
494
533
(169
)
(31.7
)
335
404
342
(7
)
(2.0
)
10,980
10,755
9,442
1,538
16.3
6,896
6,861
6,523
373
5.7
81.0
77.1
60.4
20.6
34.1
N.M., not a meaningful value.
eop — End of Period.
(1)
Operating basis, see Lines of Business section for definition.
2005
2004
1Q05 vs. 1Q04
First
Fourth
First
Amount
Percent
$
37,907
$
39,595
$
35,069
$
2,838
8.1
%
6,825
8,676
21,655
(14,830
)
(68.5
)
31,082
30,919
13,414
17,668
N.M.
45,768
54,406
88,818
(43,050
)
(48.5
)
158
184
192
(34
)
(17.7
)
545
1,027
510
35
6.9
—
—
—
—
N.M.
—
—
—
—
N.M.
1
1
—
1
N.M.
6,671
6,891
6,925
(254
)
(3.7
)
53,143
62,509
96,445
(43,302
)
(44.9
)
—
—
—
—
N.M.
53,143
62,509
96,445
(43,302
)
(44.9
)
37,149
47,734
70,666
(33,517
)
(47.4
)
5,666
5,996
5,901
(235
)
(4.0
)
13,784
16,223
14,802
(1,018
)
(6.9
)
56,599
69,953
91,369
(34,770
)
(38.1
)
27,626
23,475
18,490
9,136
49.4
9,669
8,216
6,472
3,197
49.4
$
17,957
$
15,259
$
12,018
$
5,939
49.4
%
$
37,907
$
39,595
$
35,069
$
2,838
8.1
%
—
—
—
—
N.M.
37,907
39,595
35,069
2,838
8.1
53,143
62,509
96,445
(43,302
)
(44.9
)
$
91,050
$
102,104
$
131,514
$
(40,464
)
(30.8
)%
$
91,050
$
102,104
$
131,514
$
(40,464
)
(30.8
)%
$
782
$
747
$
756
$
26
3.4
%
6
6
8
(2
)
(25.0
)
65
70
81
(16
)
(19.8
)
853
823
845
8
0.9
2,461
2,388
1,988
473
23.8
2,005
1,909
3,036
(1,031
)
(34.0
)
0
0
0
0
N.M.
91
84
70
21
30.0
4,557
4,381
5,094
(537
)
(10.5
)
$
5,410
$
5,204
$
5,939
$
(529
)
(8.9
)%
$
515
$
638
$
1,166
$
(651
)
(55.8
)%
$
65
$
65
$
65
$
—
—
%
3
2
2
1
50.0
3
5
4
(1
)
(25.0
)
$
71
$
72
$
71
$
—
—
%
N.M., not a meaningful value.
(1)
Operating basis, see Lines of Business section for definition.
(2)
Calculated assuming a 35% tax rate.
2005
2004
1Q05 vs. 1Q04
First
Fourth
First
Amount
Percent
1.20
%
1.01
%
0.66
%
0.54
%
19.5
15.9
10.8
8.7
2.83
3.01
2.37
0.46
62.2
68.5
69.5
(7.3
)
$
—
$
(28
)
$
1
$
(1
)
(100.0
)%
—
—
—
—
N.M.
—
(28
)
1
(1
)
(100.0
)
3,014
3,104
3,159
(145
)
(4.6
)
3,216
4,406
13,422
(10,206
)
(76.0
)
—
—
—
—
N.M.
175
123
211
(36
)
(17.1
)
6,405
7,633
16,792
(10,387
)
(61.9
)
$
6,405
$
7,605
$
16,793
$
(10,388
)
(61.9
)%
—
%
(0.01
)%
—
%
—
%
—
—
—
—
—
(0.01
)
—
—
0.50
0.52
0.64
(0.14
)
0.65
0.92
1.78
(1.13
)
N.M.
N.M.
N.M.
N.M.
0.78
0.58
1.21
(0.43
)
0.57
0.69
1.33
(0.76
)
0.48
%
0.58
%
1.14
%
(0.66
)%
$
—
$
—
$
—
$
—
N.M.
%
—
—
—
—
N.M.
—
—
—
—
N.M.
—
—
—
—
N.M.
—
—
—
—
N.M.
—
—
—
—
N.M.
$
—
$
—
$
—
$
—
N.M.
%
$
6
$
7
$
9
$
(3
)
(33.3
)%
$
38
$
37
$
51
$
(13
)
(25.5
)%
0.69
%
0.69
%
0.96
%
(0.27
)%
N.M.
N.M.
N.M.
N.M.
N.M.
N.M.
N.M.
N.M.
—
—
—
—
—
—
—
—
N.M., not a meaningful value.
eop — End of Period.
(1)
Operating basis, see Lines of Business section for definition.
2005
2004
1Q05 vs. 1Q04
First
Fourth
First
Amount
Percent
397
406
433
(36
)
(8.3
)%
$
366.9
$
306.1
$
487.9
(121
)
(24.8
)%
47.9
%
34.9
%
52.7
%
(4.8
)%
65.0
64.4
64.7
0.3
$
190.9
$
270.5
$
275.4
(85
)
(30.7
)%
99.1
%
99.4
%
98.9
%
0.2
%
53.3
52.0
53.4
(0.1
)
42.7
%
44.5
%
42.3
%
0.4
%
eop — End of Period.
(1)
Operating basis, see Lines of Business section for definition.
2005
2004
1Q05 vs. 1Q04
First
Fourth
First
Amount
Percent
$
13,926
$
13,798
$
12,416
$
1,510
12.2
%
(300
)
2,130
(556
)
256
(46.0
)
14,226
11,668
12,972
1,254
9.7
866
1,008
933
(67
)
(7.2
)
8,748
8,605
10,616
(1,868
)
(17.6
)
18,024
17,090
16,031
1,993
12.4
(277
)
(233
)
(129
)
(148
)
N.M.
113
122
100
13
13.0
3,632
1,156
1,084
2,548
N.M.
31,106
27,748
28,635
2,471
8.6
—
(13
)
—
—
N.M.
31,106
27,735
28,635
2,471
8.6
17,113
16,676
17,800
(687
)
(3.9
)
12,755
11,893
11,661
1,094
9.4
29,868
28,569
29,461
407
1.4
15,464
10,834
12,146
3,318
27.3
5,412
3,792
4,251
1,161
27.3
$
10,052
$
7,042
$
7,895
$
2,157
27.3
%
$
13,926
$
13,798
$
12,416
$
1,510
12.2
%
14
10
9
5
55.6
13,940
13,808
12,425
1,515
12.2
31,106
27,735
28,635
2,471
8.6
$
45,046
$
41,543
$
41,060
$
3,986
9.7
%
$
45,046
$
41,556
$
41,060
$
3,986
9.7
%
$
404
$
392
$
321
$
83
25.9
%
37
26
24
13
54.2
178
177
165
13
7.9
619
595
510
109
21.4
317
313
287
30
10.5
547
526
511
36
7.0
10
10
8
2
25.0
874
849
806
68
8.4
$
1,493
$
1,444
$
1,316
$
177
13.4
%
$
185
$
191
$
169
$
16
9.5
%
727
742
754
(27
)
(3.6
)
42
46
46
(4
)
(8.7
)
119
110
96
23
24.0
21
26
21
—
—
$
1,094
$
1,115
$
1,086
$
8
0.7
%
(1)
Operating basis, see Lines of Business section for definition.
(2)
Calculated assuming a 35% tax rate.
2005
2004
1Q05 vs. 1Q04
First
Fourth
First
Amount
Percent
2.48
%
1.75
%
2.15
%
0.33
%
35.8
23.0
27.1
8.7
3.62
3.64
3.61
0.01
66.3
68.7
71.8
(5.5
)
$
(81
)
$
191
$
16
$
(97
)
N.M.
%
—
250
—
—
N.M.
(81
)
441
16
(97
)
N.M.
—
485
160
(160
)
(100.0
)
171
233
—
171
N.M.
130
3
32
98
N.M.
301
721
192
109
56.8
$
220
$
1,162
$
208
$
12
5.8
%
(0.08
)%
0.19
%
0.02
%
(0.10
)%
—
0.49
—
—
(0.05
)
0.29
0.01
(0.06
)
—
0.62
0.22
(0.22
)
0.13
0.18
—
0.13
5.27
0.12
1.61
3.66
0.14
0.34
0.10
0.04
0.06
%
0.32
%
0.06
%
—
%
&nb