Exhibit 13

SELECTED FINANCIAL DATA

 

Table 1—Selected Financial Data

 


    

Year Ended December 31,


 

(in thousands of dollars, except per share amounts)


     2003

     2002

     2001

     2000

     1999

 

Total interest income

     $ 1,305,756      $ 1,293,195      $ 1,654,789      $ 1,833,388      $ 1,795,214  

Total interest expense

       456,770        543,621        939,501        1,163,278        982,370  

    


  


  


  


  


Net interest income

       848,986        749,574        715,288        670,110        812,844  

Provision for loan and lease losses

       163,993        194,426        257,326        61,464        70,335  

    


  


  


  


  


Net interest income after provision for loan and lease losses

       684,993        555,148        457,962        608,646        742,509  

    


  


  


  


  


Securities gains

       5,258        4,902        723        37,101        12,972  

Gain on sale of Florida operations

              182,470                       

Merchant Services gain

              24,550                       

Gains on sale of credit card portfolios

                                   108,530  

Non-interest income

       1,063,895        1,129,782        1,199,219        1,086,101        933,356  

Non-interest expense

       1,236,825        1,325,174        1,482,470        1,283,131        1,147,988  

Restructuring (releases) charges

       (6,666 )      48,973        79,957               46,791  

    


  


  


  


  


Income before income taxes

       523,987        522,705        95,477        448,717        602,588  

Income taxes

       138,294        198,974        (39,319 )(2)      126,299        188,433  

    


  


  


  


  


Income before cumulative effect of change in accounting principle

       385,693        323,731        134,796        322,418        414,155  

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

       (13,330 )                            

    


  


  


  


  


Net Income

     $ 372,363      $ 323,731      $ 134,796      $ 322,418      $ 414,155  

    


  


  


  


  


Per Common Share (3)

                                              

Income before cumulative effect of change in accounting

principle—basic

     $ 1.68      $ 1.34      $ 0.54      $ 1.30      $ 1.63  

Net Income per common share—basic

       1.62        1.34        0.54        1.30        1.63  

Income before cumulative effect of change in accounting

principle—diluted

       1.67        1.33        0.54        1.29        1.62  

Net Income per common share—diluted

       1.61        1.33        0.54        1.29        1.62  

Cash dividends declared

       0.67        0.64        0.72        0.76        0.68  

Book value at year-end

       9.93        9.40        9.32        9.31        8.57  

Balance Sheet Highlights

                                              

    


  


  


  


  


Total assets (period end)

     $ 30,483,804      $ 27,527,932      $ 28,458,769      $ 28,534,567      $ 29,397,036  

Total long-term debt (period end) (4)

       5,534,979        3,233,801        2,722,332        3,363,126        4,001,827  

Average long-term debt (4)

       4,559,140        3,334,393        3,410,475        4,004,502        4,119,252  

Average shareholders’ equity

       2,196,348        2,238,761        2,330,968        2,191,788        2,091,720  

Average total assets

       28,942,770        26,033,243        28,091,603        28,550,540        28,634,986  

Key Ratios and Statistics

                                              

    


  


  


  


  


Margin Analysis—As a % of Average Earning Assets (5)

                                              

Interest income

       5.35 %      6.23 %      7.58 %      8.13 %      7.75 %

Interest expense

       1.86        2.61        4.29        5.13        4.22  

    


  


  


  


  


Net Interest Margin

       3.49 %      3.62 %      3.29 %      3.00 %      3.53 %

    


  


  


  


  


Return on average assets (6)

       1.33 %      1.24 %      0.48 %      1.13 %      1.45 %

Return on average shareholders’ equity (6)

       17.6        14.5        5.8        14.7        19.8  

Efficiency ratio

       63.9        65.6        79.2        70.5        62.1  

Dividend payout ratio (7)

       40.1        48.1        133.3        58.9        42.0  

Average shareholders’ equity to average assets

       7.59        8.60        8.30        7.68        7.30  

Effective tax rate

       26.4        38.1        (41.2 )(2)      28.1        31.3  

Tangible equity to assets (period end)

       6.80        7.22        5.86        5.69        5.18  

Tier I risk-based capital ratio (period end)

       8.53        8.34        7.02        7.13        7.46  

Total risk-based capital ratio (period end)

       11.95        11.25        10.07        10.29        10.57  

Tier I leverage ratio

       7.98        8.51        7.16        6.85        6.64  

Other Data

                                              

    


  


  


  


  


Full-time equivalent employees

       7,983        8,177        9,743        9,693        9,516  

Domestic banking offices

       338        343        481        508        515  

 

(1) Due to the adoption of FASB Interpretation No. 46 for variable interest entities.
(2) Reflects a $32.5 million reduction related to the issuance of $400 million of REIT subsidiary preferred stock, of which $50 million was sold to the public.
(3) Adjusted for stock splits and stock dividends, as applicable.
(4) Excludes capital securities and Federal Home Loan Bank advances.
(5) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
(6) Based on income before cumulative effect of change in accounting principle, net of tax.
(7) Based on diluted earnings per share before cumulative effect of change in accounting principle.

 


34   HUNTINGTON BANCSHARES INCORPORATED


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

INTRODUCTION

 

Huntington Bancshares Incorporated (Huntington or the company) is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged in providing full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, and discount brokerage services, as well as underwriting credit life and disability insurance, and selling other insurance and financial products and services. Huntington’s banking offices are located in Ohio, Michigan, West Virginia, Indiana, and Kentucky. Selected financial services are also conducted in other states including Arizona, Florida, Georgia, Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington has a foreign office in the Cayman Islands and a foreign office in Hong Kong. The Huntington National Bank (the Bank), organized in 1866, is Huntington’s only bank subsidiary.

 

The following discussion and analysis provides investors and others with information that Management believes to be necessary for an understanding of Huntington’s financial condition, changes in financial condition, results of operations, and cash flows, and should be read in conjunction with the financial statements, notes, and other information contained in this report.

 

FORWARD-LOOKING STATEMENTS

 

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements about Huntington. These include descriptions of products or services, plans or objectives of Management for future operations, including pending acquisitions, and forecasts of revenues, earnings, cash flows, or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.

 

By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, those set forth under the heading “Business Risks” included in Item 1 of Huntington’s Annual Report on Form 10-K for the year ended December 31, 2003, and other factors described in this report and from time to time in other filings with the Securities and Exchange Commission.

 

Management encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute forecasts of future performance. Forward-looking statements speak only as of the date they are made. Huntington does not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events.

 

RISK FACTORS

 

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

 

SECURITIES AND EXCHANGE COMMISSION INVESTIGATION

 

On June 26, 2003, Huntington announced that the Securities and Exchange Commission (SEC) staff is conducting a formal investigation. The SEC investigation began following Huntington’s announcement on April 16, 2003, that it intended to restate its financial statements in order to reclassify its accounting for automobile leases from the direct financing lease method to the operating lease method, and following allegations by a former Huntington employee regarding certain aspects of Huntington’s accounting and

 


HUNTINGTON BANCSHARES INCORPORATED   35


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

financial reporting practices, including the recognition of automobile loan and lease origination fees and costs, as well as certain year- end reserves. The investigation is ongoing and Huntington continues to cooperate fully with the SEC. To the best of its knowledge, Management believes that the actions it has taken to date have addressed all known accounting issues.

 

CRITICAL ACCOUNTING POLICIES AND USE OF SIGNIFICANT ESTIMATES

 

Huntington’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires Management to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in its financial statements. Note 1 of the Notes to Consolidated Financial Statements included in this report lists significant accounting policies used by Management in the development and presentation of Huntington’s financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the organization and its financial position, results of operations, and cash flows.

 

An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should understand that estimates are made under facts and circumstances at a point in time, and changes in those facts and circumstances could produce actual results that differ from when those estimates were made. Management has identified the following as the most significant accounting estimates and their related application. This analysis is included to emphasize that estimates are used in connection with the critical and other accounting policies and to illustrate the potential effect on the financial statements if the actual amount were different from the estimated amount.

Allowance for loan and lease losses – At December 31, 2003, the allowance for loan and lease losses (ALLL) was $335.3 million. The ALLL represents Management’s estimate as to the level of a reserve considered appropriate to absorb inherent credit losses in the loan and lease portfolio. Many factors affect the ALLL, some quantitative, some subjective. Management believes the process for determining the ALLL considers the potential factors that could result in credit losses. However, the process includes judgmental elements and may be subject to significant change. To the extent actual outcomes differ from Management estimates, additional provision for credit losses could be required, which could adversely affect earnings or financial performance in future periods. A discussion about the process used to estimate the ALLL is presented in the Credit Risk section of Management’s Discussion and Analysis in this report.
Loan servicing rights – At December 31, 2003, there were $71.1 million of mortgage servicing rights and $17.7 million of automobile servicing rights included in other assets. No active market exists for Management to observe market prices for these financial instruments. To estimate fair values, Management estimates future prepayments on the loans serviced for others, future ancillary revenue, future costs to service these assets, and the appropriate discount rate to use. Note 7 of the Notes to Consolidated Financial Statements contains an analysis of the impact to the fair value of mortgage servicing rights to changes in the estimates used by Management. A discussion about the process used to estimate the fair value of mortgage servicing rights is presented in the non-interest income section of Management’s Discussion and Analysis in this report.
Lease residual values underlying operating leases – At December 31, 2003, there were $814.1 million of residual values related to operating lease assets reflected as a component of operating lease assets on the balance sheet. In March 2001, Huntington purchased two residual value insurance policies to mitigate the risk of declines in residual values. The first policy provides first dollar loss coverage on the portfolio of existing automobile leases at October 1, 2000 and has a cap on insured losses of $120 million. The second policy insures losses on new lease originations from October 2000 through April 2002 and has a cap of $50 million. On a quarterly basis, Management reviews the expected future residual value losses for leased automobiles covered by these two insurance policies taking into consideration the insurance policy caps on insured losses. As a result of that review, Management determines how much impairment, if any, needs to be recognized on these operating leases and whether the residual value should be adjusted prospectively. At December 31, 2003, Management believed the residual values of its leases properly reflected expected residual value losses. However, due to the existence of caps on insured losses within these two insurance policies, future increases in residual value losses in excess of these caps could negatively impact Huntington’s results from operations. Specifically, any residual losses exceeding the cap amounts would result in higher operating lease depreciation expense being recognized over the remaining life of the related leases. Further discussion about the process used to estimate the risk of residual value losses on operating leases is presented in the Market Risk section of Management’s Discussion and Analysis in this report. Notes 1 and 9 to the Notes of the Consolidated Financial Statements included in this report explain the accounting for operating lease assets in more detail.

 


36   HUNTINGTON BANCSHARES INCORPORATED


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

DISCUSSION OF RESULTS

 

Summary

 

Huntington reported net income in 2003 of $372.4 million, or $1.61 per common share (diluted), up 15% and 21%, respectively, from 2002. Earnings in 2002 were $323.7 million, or $1.33 per common share (diluted), up from $134.8 million, or $0.54 per common share (diluted), in 2001. The returns on average common equity (ROE) for 2003, 2002, and 2001 were 17.6%, 14.5%, and 5.8%, respectively, with returns on average assets of 1.33%, 1.24%, and 0.48%, respectively (see Table 1).

 

The period 2001 to 2003 was one of significant transformation for the company. During 2001, the equity markets continued to weaken, economic activity started to slow appreciably after a decade-long expansion, and interest rates fell to historical lows. In addition, consumer confidence was shaken with the 9/11 terrorist attack. There was significant deterioration in both consumer and commercial credit quality trends due to these factors. These external factors influenced Huntington’s 2001 performance and its comprehensive strategic refocusing plan to improve competitiveness and long-term financial performance, which was announced in July 2001.

 

Actions taken to further the strategic plan included the hiring of new executive leadership as part of the first phase of building a new management team. The company’s basic business model was changed to one of local decision-making with a strategic refocusing on Midwest markets. As such, a decision was made to sell the Florida banking operations (see additional discussion below), consolidate banking offices outside of Florida, and use the capital generated to repurchase common stock, as well as reinvest in the business. Management refocused technology spending on investments to improve customer service, rather than making equity investments in technology companies, mostly e-commerce ventures, which had been the strategy in previous years. The quarterly common stock dividend was reduced 20%, and $80.0 million pre-tax in restructuring charges were taken to effect the changes.

 

The key element of the 2001 strategic refocusing plan was the decision to sell the Florida banking operations. There were several factors influencing this decision. First, the Florida banking offices and markets had no geographic or strategic connection to the company’s primary business of retail and commercial banking centered in Midwest markets. Second, while the Florida market for bank deposits was growing more rapidly than Midwest markets, the net interest margin in Florida was lower than that of the rest of the company, given the higher cost of deposits in that market. Third, to capitalize on the growth opportunities of the Florida market, a commercial banking capability needed to be developed on what was primarily a retail banking franchise. Management believed building this capability would have added significantly to operating expenses and further lowered the already low return on invested capital for several years in the future.

 

Earnings per common share (diluted) in 2001 were $0.54, down from $1.29 per common share (diluted) in 2000. Earnings in 2001 were significantly impacted by the actions described above, as well as a restructuring charge related to actions contemplated by the 2001 strategic refocusing plan. In addition, as a result of deteriorating consumer and commercial credit quality trends during the year, credit underwriting practices and policies were strengthened at the point of origination, and an aggressive credit quality review was initiated by Management. Earnings also were negatively impacted by higher loan loss provision expense, which had the effect of increasing the allowance for loan and lease losses (ALLL) as a percent of total loans and leases to 2.00% at the end of 2001 from 1.50% at the end of 2000.

 

Earnings per common share (diluted) in 2002 were $1.33, up from $0.54 in 2001. Earnings in 2002 were impacted by the completion of the sale of the Florida banking operations and restructuring of the company’s Merchant Services business, both of which resulted in significant gains. Capital from these gains, as well as the capital freed up by the sale of the Florida-related assets and liabilities, was used to repurchase 9% of common shares outstanding, and to reinvest in a number of activities including improvements in customer service technology, and the purchases of a small money management firm and a niche equipment leasing company. The Florida insurance operation was also sold, though this had no significant earnings impact. However, earnings were negatively impacted by additional restructuring charges as the 2001 strategic initiatives continued to be implemented. Deposits and loans increased, following prior-year performance of low growth. The level of non-performing assets (NPAs) was reduced significantly by year end. It was also a period in which interest rates declined significantly during the second half of the year, resulting in downward pressure on the net interest margin as interest rates on earning assets, both loans and investment securities, declined more rapidly than deposit rates. The yield on mortgage-backed securities declined sharply as the lower level of interest rates resulted in high prepayments on the underlying mortgages, with the resultant cash flow reinvested in lower-yielding earning assets.

 


HUNTINGTON BANCSHARES INCORPORATED   37


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Table 2—Selected Annual Income Statements

 


 

Year Ended December 31,



  2003

    2002

    2001

    2000

   1999

             Change from 2002

           Change from 2001

                

(in thousands of dollars, except per share amounts)


 
    Amount

    Percent

   
   Amount

    Percent

   
   
  

Total interest income

  $ 1,305,756     $ 12,561     1.0 %   $ 1,293,195    $ (361,594 )   (21.9 )%   $ 1,654,789     $ 1,833,388    $ 1,795,214

Total interest expense

    456,770       (86,851 )   (16.0 )     543,621      (395,880 )   (42.1 )     939,501       1,163,278      982,370

 


 


 

 

  


 

 


 

  

Net Interest Income

    848,986       99,412     13.3       749,574      34,286     4.8       715,288       670,110      812,844

Provision for loan and lease losses

    163,993       (30,433 )   (15.7 )     194,426      (62,900 )   (24.4 )     257,326       61,464      70,335

 


 


 

 

  


 

 


 

  

Net Interest Income After

                                                               

Provision for Loan and Lease Losses

    684,993       129,845     23.4       555,148      97,186     21.2       457,962       608,646      742,509

 


 


 

 

  


 

 


 

  

Operating lease income

    489,698       (167,376 )   (25.5 )     657,074      (34,659 )   (5.0 )     691,733       623,835      489,971

Service charges on deposit accounts

    167,840       14,276     9.3       153,564      (11,448 )   (6.9 )     165,012       161,426      156,783

Trust services

    61,649       (402 )   (0.6 )     62,051      1,753     2.9       60,298       53,613      52,030

Brokerage and insurance

    57,844       (8,999 )   (13.5 )     66,843      (12,191 )   (15.4 )     79,034       61,871      52,076

Mortgage banking

    58,180       26,147     81.6       32,033      (22,485 )   (41.2 )     54,518       32,772      52,960

Bank owned life insurance

    43,028       (95 )   (0.2 )     43,123      2,000     4.9       41,123       39,544      37,560

Other service charges and fees

    41,446       (1,442 )   (3.4 )     42,888      (5,329 )   (11.1 )     48,217       43,883      37,301

Gain on sales of automobile loans

    40,039       40,039     NM                NM                 

Gain on sale of branch offices

    13,112       13,112     NM                NM                 

Securities gains

    5,258       356     7.3       4,902      4,179     NM       723       37,101      12,972

Gain on sale of Florida operations

          (182,470 )   NM       182,470      182,470     NM                 

Merchant Services gain

          (24,550 )   NM       24,550      24,550     NM                 

Gains on sale of credit card portfolio

              NM                NM                  108,530

Other

    91,059       18,853     26.1       72,206      12,922     21.8       59,284       69,157      54,675

 


 


 

 

  


 

 


 

  

Total Non-Interest Income

    1,069,153       (272,551 )   (20.3 )     1,341,704      141,762     11.8       1,199,942       1,123,202      1,054,858

 


 


 

 

  


 

 


 

  

Personnel costs

    447,263       29,226     7.0       418,037      (36,173 )   (8.0 )     454,210       396,230      396,380

Operating lease expense

    393,270       (125,700 )   (24.2 )     518,970      (39,656 )   (7.1 )     558,626       494,800      346,027

Outside data processing and other services

    66,118       (1,250 )   (1.9 )     67,368      (2,324 )   (3.3 )     69,692       62,011      62,886

Equipment

    65,921       (2,402 )   (3.5 )     68,323      (12,237 )   (15.2 )     80,560       78,069      66,666

Net occupancy

    62,481       2,942     4.9       59,539      (16,910 )   (22.1 )     76,449       75,197      71,939

Professional services

    42,448       9,363     28.3       33,085      223     0.7       32,862       22,721      21,169

Marketing

    27,490       (421 )   (1.5 )     27,911      (3,146 )   (10.1 )     31,057       34,884      32,506

Telecommunications

    21,979       (682 )   (3.0 )     22,661      (5,323 )   (19.0 )     27,984       26,225      28,519

Loss on early extinguishment of debt

    15,250       15,250     NM                NM                 

Printing and supplies

    13,009       (2,189 )   (14.4 )     15,198      (3,169 )   (17.3 )     18,367       19,634      20,227

Amortization of intangible assets

    816       (1,203 )   (59.6 )     2,019      (39,206 )   (95.1 )     41,225       39,207      37,296

Restructuring (releases) charges

    (6,666 )     (55,639 )   NM       48,973      (30,984 )   (38.8 )     79,957            46,791

Other

    80,780       (11,283 )   (12.3 )     92,063      625     0.7       91,438       34,153      64,373

 


 


 

 

  


 

 


 

  

Total Non-Interest Expense

    1,230,159       (143,988 )   (10.5 )     1,374,147      (188,280 )   (12.1 )     1,562,427       1,283,131      1,194,779

 


 


 

 

  


 

 


 

  

Income Before Income Taxes

    523,987       1,282     0.2       522,705      427,228     NM       95,477       448,717      602,588

Income taxes

    138,294       (60,680 )   (30.5 )     198,974      238,293     NM       (39,319 )(2)     126,299      188,433

 


 


 

 

  


 

 


 

  

Income before cumulative effect of change in accounting principle

    385,693       61,962     19.1       323,731      188,935     NM       134,796       322,418      414,155

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

    (13,330 )     (13,330 )   NM                NM                 

 


 


 

 

  


 

 


 

  

Net Income

  $ 372,363     $ 48,632     15.0 %   $ 323,731    $ 188,935     140.2 %   $ 134,796     $ 322,418    $ 414,155

 


 


 

 

  


 

 


 

  

Per Common Share

                                                               

Income before cumulative effect of change in accounting principle—basic

  $ 1.68     $ 0.34     25.4 %   $ 1.34    $ 0.80     NM %   $ 0.54     $ 1.30    $ 1.63

Net income per common share—basic

    1.62       0.28     20.9       1.34      0.80     NM       0.54       1.30      1.63

Income before cumulative effect of change in accounting principle—diluted

    1.67       0.34     25.6       1.33      0.79     NM       0.54       1.29      1.62

Net income per common share—diluted

    1.61       0.28     21.1       1.33      0.79     NM       0.54       1.29      1.62

Cash dividends declared

    0.67       0.03     4.7       0.64      (0.08 )   (11.1 )     0.72       0.76      0.68

Net Interest Income—Fully Taxable
Equivalent (FTE)

                                                               

Net interest income

  $ 848,986     $ 99,412     13.3 %   $ 749,574    $ 34,286     4.8 %   $ 715,288     $ 670,110    $ 812,844

Tax equivalent adjustment (3)

    9,684       4,479     86.1       5,205      (1,147 )   (18.1 )     6,352       8,310      9,423

 


 


 

 

  


 

 


 

  

Net Interest Income—FTE

  $ 858,670     $ 103,891     13.8 %   $ 754,779    $ 33,139     4.6 %   $ 721,640     $ 678,420    $ 822,267

 


 


 

 

  


 

 


 

  

 

(1) Due to the adoption of FASB Interpretation No. 46 for variable interest entities.
(2) Reflects a $32.5 million reduction related to the issuance of $400 million of REIT subsidiary preferred stock, of which $50 million was sold to the public.
(3) Calculated assuming a 35% tax rate.

NM, not a meaningful value.

 


38   HUNTINGTON BANCSHARES INCORPORATED


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Earnings per common share (diluted) were $1.61 in 2003, up from $1.33 the prior year. Earnings in 2003 saw the continuation of pressure on the net interest margin and mortgage-related earning asset yields, as interest rates continued to decline through mid-year. Some of this pressure was relieved in the second half of the year as interest rates rose. Late in the year, a portion of high cost, long-term debt was repaid. This resulted in a loss, but will lower funding costs in future periods. It was also a year of strong loan and deposit growth. Credit quality trends improved materially, and loan concentrations continued to be lowered, aided by the sales of automobile loans and underperforming commercial and industrial (C&I) and commercial real estate (CRE) loans, including NPAs, among other strategies. NPAs ended the year at the lowest level in many years. In addition, 2003 reflected the release of certain restructuring reserves as the costs of implementing the strategic decisions made in 2001, and carried out through 2002 and 2003, were completed, though their ongoing positive impacts are anticipated to benefit earnings in future periods. The company ended 2003 with a stronger balance sheet, much-improved credit quality and a decline in net charge-offs, a track record of growing loans and deposits, and earnings momentum.

 

Results of Operations

 

SIGNIFICANT FACTORS INFLUENCING FINANCIAL PERFORMANCE COMPARISONS

 

Significant changes in the strategic direction of Huntington initiated in 2001 to improve the overall financial performance of the company and the subsequent execution of those adopted strategies, materially impacted financial performance comparisons among 2001, 2002, and 2003. Understanding the nature and implications of these factors on financial results, which are described below and recapped in Table 3, therefore, is critical in assessing underlying performance trends.

 

1. CORPORATE RESTRUCTURING CHARGES. The 2001 strategic refocusing plan included the intent to sell the Florida banking and insurance operations, credit-related and other actions to strengthen the balance sheet and financial performance, and the consolidation of numerous non-Florida banking offices. As a result, non-interest expenses in 2001 and 2002 were higher than they otherwise would have been, as they included net restructuring charges of $80.0 million pre-tax and $49.0 million pre-tax, respectively, based on estimated costs associated with implementing these strategic initiatives. In contrast, 2003 non-interest expense reflected recoveries of $6.7 million pre-tax of previously established reserves, which were no longer needed. (See Note 21 of the Notes to Consolidated Financial Statements.)

 

2. SALES OF FLORIDA BANKING AND INSURANCE OPERATIONS AND MERCHANT SERVICES RESTRUCTURING. In February 2002, the company completed the sale of its Florida banking operations. This resulted in a $182.5 million pre-tax gain being recorded in non-interest income. The Florida banking operations sale eliminated $2.8 billion of loans and $4.8 billion of deposits from the 2002 balance sheet, thus impacting related comparisons with 2001. The company also completed the sale of its Florida insurance operations in the 2002 second quarter, with no significant earnings impact. Combined, the Florida banking and insurance operations reported a net loss from operations of $1.5 million in 2002 and $14.0 million in 2001. In addition, in 2002, the company restructured its interest in Huntington Merchant Services, L.L.C. (HMS), which resulted in a $24.6 million pre-tax gain being recorded to non-interest income. (See Note 22 of the Notes to Consolidated Financial Statements.)

 

3. SALES OF AUTOMOBILE LOANS. In early 2003, Management stated its intention to reduce the credit risk exposure to automobile financing from approximately one-third of total loans and leases to about 20%. While Management remains firmly committed to the automobile financing market, the existing concentration was considered to be too high. In 2003, the company sold $2.1 billion of such loans, and recorded pre-tax gains of $40.0 million. Such sales impact performance comparisons due to the significant one-time gains recorded in non-interest income in the periods in which loans were sold, while lowering the reported growth rates in net interest income and automobile loans as the sold loans were removed from the balance sheet. (See Note 7 of the Notes to Consolidated Financial Statements.)

 

4. ADOPTION OF FIN 46. Effective July 1, 2003, the company adopted Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. The adoption of FIN 46 resulted in the consolidation of $1.0 billion of previously securitized automobile loans and a $13.3 million after-tax charge for the cumulative effect of a change in accounting principle. (See Tables 1 and 2, and Note 2 of the Notes to Consolidated Financial Statements.)

 

5. SALE OF BANKING OFFICES. In the third quarter of 2003, the company recorded a $13.1 million pre-tax gain from the sale of four West Virginia banking offices, which were geographically remote from the core West Virginia banking franchise. (See Note 22 of the Notes to Consolidated Financial Statements.)

 


HUNTINGTON BANCSHARES INCORPORATED   39


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

6. LONG-TERM DEBT EXTINGUISHMENT. In the fourth quarter of 2003, the company prepaid $250 million of high-cost, repurchase agreements, resulting in a $15.3 million pre-tax loss being recorded in non-interest expense. This debt, which carried an average rate of 4.98% and matured in 2006, was replaced by funding at significantly lower rates. (See Note 16 of the Notes to Consolidated Financial Statements.)

 

Table 3 reflects the impact on reported (GAAP) net income and earnings per common share of these six items, which affect comparability in 2001-2003. GAAP income adjusted for these six items was the primary measurement Management used to assess underlying performance trends during this period. This adjusted earnings analysis is performed to help assess performance excluding the impact of such items, so that management and investors can better discern underlying performance trends during the period and is not intended to replace reported (GAAP) net income.

 

Table 3—Reconciliation of GAAP Earnings to Earnings Adjusted for Significant Items

 


  

2003


    2002

    2001

(in thousands of dollars)


   Pre-tax

     After-tax

    EPS

    Pre-tax

     After-tax

    EPS

    Pre-tax

   After-tax

   EPS

Net Income—GAAP

   $ 523,987      $ 372,363     $ 1.61     $ 522,705      $ 323,731     $ 1.33     $ 95,477    $ 134,796    $ 0.54

Change from prior year—$

            $ 48,632     $ 0.28              $ 188,935     $ 0.79                      

Change from prior year—%

              15.0 %     21.1 %              NM       NM                      

  


  


 


 


  


 


 

  

  

Restructuring charges (releases)

     (6,666 )      (4,333 )     (0.02 )     48,973        31,832       0.13       79,957      51,972      0.21

Loss from Florida operations

                        2,329        1,525       0.01       18,743      14,013      0.05

Gain on sale of Florida operations

                        (182,470 )      (61,422 )     (0.25 )              

Merchant Services gain

                        (24,550 )      (15,957 )     (0.07 )              

Gain on sale of automobile loans

     (40,039 )      (26,025 )     (0.11 )                                 

Cum. effect of change in accounting

     N/A        13,330       0.06                                   

Gain on sale of branch offices

     (13,112 )      (8,523 )     (0.04 )                                 

Long-term debt extinguishment

     15,250        9,913       0.04                                   

  


  


 


 


  


 


 

  

  

Net Income—Adjusted

   $ 479,420      $ 356,725     $ 1.54     $ 366,987      $ 279,709     $ 1.15     $ 194,177    $ 200,781    $ 0.80

Change from prior year—$

            $ 77,016     $ 0.39              $ 78,928     $ 0.35                      

Change from prior year—%

              27.5 %     33.9 %              39.3 %     43.8 %                    

 

NM, not a meaningful value.

N/A, not available.

 

As shown in Table 3, 2003 GAAP net income was up 15% over 2002, with earnings per share up 21%. The higher growth rate in earnings per common share reflected the full-year impact of the 19.2 million shares repurchased in 2002, plus 4.3 million shares repurchased in the 2003 first quarter. This compared favorably with net income and earnings per common share in 2002 and 2001 of $323.7 million, or $1.33 per share, and $134.8 million, or $0.54 per share, respectively. Net income and earnings per share for 2003 adjusted for the impact of the noted significant items, were up 28% and 34%, respectively, from 2002. Likewise, 2002 net income and earnings per share on an adjusted basis were up 39% and 44%, respectively, from 2001.

 

While not reflected as adjustments in Table 3, the following is a list of other factors impacting comparability of certain performance trends including balance sheet and income statement categories and other financial metrics.

 

7. 2002 AND 2003 FOURTH QUARTER CREDIT ACTIONS. In early 2002, the company strengthened the credit workout group, whose mission is the early identification and aggressive resolution of problem C&I and CRE loans. In the 2002 fourth quarter, this group identified an economically attractive opportunity to sell $47 million of non-performing assets (NPAs) with $21 million of related charge-offs. Also in that quarter, a $30 million credit exposure to one health care finance company, classified as a NPA during the quarter, was charged-off. In the 2003 fourth quarter, this group identified for sale $99 million lower-quality commercial loans, including $43 million of NPAs, with $27 million of related charge-offs, including $17 million associated with the sold NPAs. These actions significantly lowered the level of NPAs and resulted in higher current period net charge-offs. Because these sold loans had specific loan loss reserves sufficient to absorb the charge-offs associated with them, the loan loss reserve declined accordingly, though the NPA coverage ratio increased to 384% at the end of 2003.

 


40   HUNTINGTON BANCSHARES INCORPORATED


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

8. AUTOMOBILE LEASES ORIGINATED THROUGH APRIL 2002 ACCOUNTED FOR AS OPERATING LEASES. Automobile leases originated before May 2002 are accounted for using the operating method of accounting because they do not qualify as direct financing leases. One of the criteria to qualify for the direct financing method of lease accounting is to have the present value of the future minimum lease payments and the guaranteed residual value be 90% or more of fair value of the asset being leased (90% test). This test can be met through the purchase of residual value insurance from a third party. In March 2001, Huntington purchased two residual value insurance policies to mitigate the risk of declines in residual values. The first policy provides first dollar loss coverage on the portfolio of existing automobile leases at October 1, 2000 and has a cap on insured losses of $120 million. The second policy insures losses on new lease originations from October 2000 through April 2002 and has a cap of $50 million. The existence of caps in both policies, and the relative size of the insured residual values compared with the caps in each policy make these insurance policies insufficient to meet the 90% test and qualify the leases for the direct financing method of accounting.

 

In May 2002, Huntington purchased a third residual value insurance policy for new automobiles leased after April 2002. Under this policy, the residual value of each lease is insured up to Automotive Lease Guide (ALG) Black Book value and has no cap on insured losses. However, leases with residual gains were netted with leases with residual losses when claims were settled. The netting provision of the third policy precluded Huntington from determining the amount of the guaranteed residual of any leased asset within the portfolio at lease inception. Consequently, these leases also failed to qualify as direct financing leases. Subsequent to an announcement made by the SEC observer to the Financial Accounting Standards Board’s Emerging Issues Task Force, Huntington amended its third residual value insurance policy, retroactive to April 2002, by adding an endorsement that adds a level of insurance sufficient to meet the 90% test, on a lease-by-lease basis, with no netting provisions. Accordingly, residual values covered under this policy qualify for the direct financing method of accounting. This program is subject to renewal in May 2005.

 

Operating leases are a non-interest earning asset 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. Given that no new operating leases have been originated since April 2002, the operating lease assets are rapidly decreasing and will eventually run-off, along with their related operating lease income and expense. Since operating lease income and expense represent a significant percentage of total non-interest income and expense, respectively, in 2001-2003 their downward trend influences total non-interest income and non-interest expense trends.

 

All automobile leases originated since April 2002 are accounted for as direct financing leases, an interest-earning asset component of total loans and leases. Given the relative newness of this portfolio, coupled with very few maturing or paid-off leases during the first few years following origination, this is a rapidly growing portfolio which results in higher reported automobile lease growth rates than in a more mature portfolio. As the direct financing lease portfolio matures, its growth rate is expected to slow. To better understand overall trends in automobile lease exposure it is helpful to compare trends of the combined total of automobile leases plus operating leases.

 

9. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (STATEMENT) NO. 142, GOODWILL AND OTHER INTANGIBLES. Effective January 1, 2002, the company adopted Statement No. 142 and, accordingly, ceased the amortization of its goodwill and began evaluating this goodwill annually for impairment. In 2001, amortization of goodwill totaled $40.4 million, most of which related to the Florida banking operations’ component of the company’s Regional Banking line of business. No amortization expense for goodwill was recorded in 2003 or 2002. The adoption of this new accounting standard in 2002 affects comparisons of non-interest expense in 2003 and 2002 with non-interest expense in periods prior to 2002.

 


HUNTINGTON BANCSHARES INCORPORATED   41


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Table 4—Consolidated Average Balance Sheets and Net Interest Margin Analysis

 


  

Average Balance



   2003

     2002

     2001

   2000

   1999

Fully Tax Equivalent Basis (1)         Change from 2002

          Change from 2001

                

(in millions of dollars)


  
   Amount

    Percent

    
   Amount

    Percent

    
  
  

Assets

                                                                

Interest bearing deposits in banks

   $ 37    $ 4     12.1 %    $ 33    $ 26     NM %    $ 7    $ 6    $ 9

Trading account securities

     14      7     NM        7      (18 )   (72.0 )      25      15      13

Federal funds sold and securities purchased under resale agreements

     87      15     20.8        72      (35 )   (32.7 )      107      87      22

Mortgages held for sale

     564      242     75.2        322      (38 )   (10.6 )      360      109      232

Securities:

                                                                

Taxable

     3,533      674     23.6        2,859      (285 )   (9.1 )      3,144      4,316      4,885

Tax exempt

     334      199     NM        135      (39 )   (22.4 )      174      273      297

  

  


 

  

  


 

  

  

  

Total securities

     3,867      873     29.2        2,994      (324 )   (9.8 )      3,318      4,589      5,182

  

  


 

  

  


 

  

  

  

Loans and leases:

                                                                

C&I

     5,502      (177 )   (3.1 )      5,679      (971 )   (14.6 )      6,650      6,450      6,133

CRE

                                                                

Construction

     1,246      30     2.5        1,216      (5 )   (0.4 )      1,221      1,184      999

Commercial

     2,691      313     13.2        2,378      38     1.6        2,340      2,186      2,234

Consumer

                                                                

Automobile loans

     3,260      516     18.8        2,744      NM     NM        NM      NM      NM

Automobile leases

     1,423      971     NM        452      NM     NM        NM      NM      NM

  

  


 

  

  


 

  

  

  

Automobile loans and leases

     4,683      1,487     46.5        3,196      357     12.6        2,839      3,123      3,535

  

  


 

  

  


 

  

  

  

Home equity

     3,446      361     11.7        3,085      (313 )   (9.2 )      3,398      2,990      2,345

Residential mortgage

     2,076      638     44.4        1,438      390     37.2        1,048      1,379      1,488

Other loans

     380      (45 )   (10.6 )      425      (165 )   (28.0 )      590      530      1,102

  

  


 

  

  


 

  

  

  

Total consumer

     10,585      2,441     30.0        8,144      269     3.4        7,875      8,022      8,470

  

  


 

  

  


 

  

  

  

Total loans and leases

     20,024      2,607     15.0        17,417      (669 )   (3.7 )      18,086      17,842      17,836

  

  


 

  

  


 

  

  

  

Allowance for loan losses

     358      (16 )   (4.3 )      374      67     21.8        307      274      280

Net loans and leases

     19,666      2,623     15.4        17,043      (736 )   (4.1 )      17,779      17,568      17,556

  

  


 

  

  


 

  

  

  

Total earning assets

     24,593      3,748     18.0        20,845      (1,058 )   (4.8 )      21,903      22,648      23,294

  

  


 

  

  


 

  

  

  

Operating lease inventory

     1,697      (905 )   (34.8 )      2,602      (368 )   (12.4 )      2,970      2,751      2,179

Cash and due from banks

     774      17     2.2        757      (155 )   (17.0 )      912      1,008      1,039

Intangible assets

     218      (75 )   (25.6 )      293      (443 )   (60.2 )      736      709      682

All other assets

     2,020      110     5.8        1,910      19     1.0        1,891      1,729      1,707

  

  


 

  

  


 

  

  

  

Total Assets

   $ 28,944    $ 2,911     11.2 %    $ 26,033    $ (2,072 )   (7.4 )%    $ 28,105    $ 28,571    $ 28,621

  

  


 

  

  


 

  

  

  

Liabilities and Shareholders’ Equity

                                                                

Core deposits

                                                                

Non-interest bearing deposits

   $ 3,080    $ 178     6.1 %    $ 2,902    $ (402 )   (12.2 )%    $ 3,304    $ 3,421    $ 3,497

Interest bearing demand deposits

     6,193      1,032     20.0        5,161      156     3.1        5,005      4,291      4,097

Savings deposits

     2,802      (51 )   (1.8 )      2,853      (625 )   (18.0 )      3,478      3,563      3,740

Retail certificates of deposit

     2,702      (917 )   (25.3 )      3,619      (1,361 )   (27.3 )      4,980      4,930      4,791

Other domestic time deposits

     660      (70 )   (9.6 )      730      (173 )   (19.2 )      903      942      1,032

  

  


 

  

  


 

  

  

  

Total core deposits

     15,437      172     1.1        15,265      (2,405 )   (13.6 )      17,670      17,147      17,157

  

  


 

  

  


 

  

  

  

Domestic time deposits of $100,000 or more

     802      (49 )   (5.8 )      851      (429 )   (33.5 )      1,280      1,502      1,449

Brokered time deposits and negotiable CDs

     1,419      688     94.1        731      603     NM        128      502      238

Foreign time deposits

     500      163     48.4        337      54     19.1        283      539      363

  

  


 

  

  


 

  

  

  

Total deposits

     18,158      974     5.7        17,184      (2,177 )   (11.2 )      19,361      19,690      19,207

  

  


 

  

  


 

  

  

  

Short-term borrowings

     1,600      (256 )   (13.8 )      1,856      (243 )   (11.6 )      2,099      1,966      2,549

Federal Home Loan Bank advances

     1,258      979     NM        279      260     NM        19      13      5

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

     4,559      1,224     36.7        3,335      (76 )   (2.2 )      3,411      4,005      4,120

  

  


 

  

  


 

  

  

  

Total interest bearing liabilities

     22,495      2,743     13.9        19,752      (1,834 )   (8.5 )      21,586      22,253      22,384

  

  


 

  

  


 

  

  

  

All other liabilities

     1,173      33     2.9        1,140      256     29.0        884      705      648

Shareholders’ equity

     2,196      (43 )   (1.9 )      2,239      (92 )   (3.9 )      2,331      2,192      2,092

  

  


 

  

  


 

  

  

  

Total Liabilities and Shareholders’ Equity

   $ 28,944    $ 2,911     11.2 %    $ 26,033    $ (2,072 )   (7.4 )%    $ 28,105    $ 28,571    $ 28,621

  

  


 

  

  


 

  

  

  

Net Interest Income

                                                                

  

  


 

  

  


 

  

  

  

Net interest rate spread

                                                                

Impact of non-interest bearing funds on margin

                                                                

  

  


 

  

  


 

  

  

  

Net Interest Margin

                                                                

  

  


 

  

  


 

  

  

  

 

(1) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(2) Average rates computed using historical cost average balances and do not give effect to changes in fair value of securities available for sale.
(3) Individual loan and lease components include fees and cash basis interest received on non-accrual loans.
(4) Loan and lease and deposit average rates include the impact of applicable derivatives.

NM, not a meaningful value.

 


42   HUNTINGTON BANCSHARES INCORPORATED


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

 

Interest Income / Expense

  

Average Rate(2)(3)(4)

     

   
     
2003

   2002

   2001

   2000

    1999

   2003

    2002

    2001

    2000

    1999

     
                                                         

  
  
  
   
  
   
   
   
   
     
                                                                   
$ 0.6    $ 0.8    $ 0.2    $ 0.3           $ 0.4    1.53 %   2.38 %   3.43 %   5.03 %   4.04 %    
  0.6      0.3      1.3      1.1       0.8    4.02     4.11     5.13     7.11     5.89      
  1.6      1.1      4.5      5.5       1.2    1.80     1.56     4.19     6.33     5.58      
  30.0      20.5      25.0      8.7       16.3    5.32     6.35     6.95     7.96     7.03      
                                                                   
  159.6      173.0      206.9      269.5       297.0    4.52     6.06     6.58     6.24     6.08      
  23.5      10.1      13.0      20.8       23.5    7.04     7.42     7.49     7.61     7.90      


  

  

  


 

  

 

 

 

 

   
  183.1      183.1      219.9      290.3       320.5    4.73     6.12     6.63     6.33     6.18      


  

  

  


 

  

 

 

 

 

   
                                                                   
  274.5      319.4      480.5      557.9       485.8    5.08     5.62     7.22     8.65     7.92      
                                                                   
  53.8      57.1      86.4      106.0       84.4    4.14     4.70     7.08     8.96     8.45      
  141.5      147.4      177.3      184.1       182.0    5.23     6.20     7.58     8.42     8.15      
                                                                   
  242.1      237.9      253.8      271.4       288.7    7.38     8.67     NM     NM     NM      
  72.8      23.2      1.2      (0.5 )     2.5    5.09     5.14     NM     NM     NM      


  

  

  


 

  

 

 

 

 

   
  314.9      261.1      255.0      270.9       291.2    6.68     8.17     8.94     8.67     8.24      


  

  

  


 

  

 

 

 

 

   
  177.2      183.9      279.7      254.8       197.0    5.06     5.96     8.23     8.52     8.40      
  108.3      91.4      81.7      107.1       111.8    5.50     6.36     7.79     7.77     7.51      
  29.5      32.3      49.6      54.9       113.3    7.10     7.59     8.41     10.35     10.30      


  

  

  


 

  

 

 

 

 

   
  629.9      568.7      666.0      687.7       713.3    5.93     6.98     8.44     8.57     8.42      


  

  

  


 

  

 

 

 

 

   
  1,099.7      1,092.6      1,410.2      1,535.7       1,465.5    5.49     6.27     7.79     8.61     8.22      


  

  

  


 

  

 

 

 

 

   
                                                                   
                                                                   


  

  

  


 

  

 

 

 

 

   
  1,315.6      1,298.4      1,661.1      1,841.6       1,804.7    5.35     6.23     7.58     8.13     7.75      


  

  

  


 

  

 

 

 

 

   
                                                                   
                                                                   
                                                                   
                                                                   
                                                                   
                                                                   
                                                                   
                                                                   
                                                                   
                                                                   
  73.0      88.9      133.5      143.1       106.0    1.18     1.71     2.64     3.30     2.56      
  41.7      50.6      106.7      145.7       125.5    1.49     1.77     3.07     4.09     3.36      
  100.4      165.6      281.5      282.2       244.6    3.68     4.58     5.65     5.72     5.10      
  26.0      29.6      48.2      52.0       53.7    3.86     4.05     5.34     5.52     5.20      


  

  

  


 

  

 

 

 

 

   
  241.1      334.7      569.9      623.0       529.8    1.94     2.70     3.95     4.52     3.86      


  

  

  


 

  

 

 

 

 

   
  18.5      28.8      66.8      90.4       76.6    2.50     3.39     5.22     6.01     5.28      
  24.1      17.3      6.6      31.9       12.8    1.70     2.36     5.12     6.35     5.40      
  4.6      4.9      10.8      34.0       18.6    0.92     1.47     3.82     6.31     5.14      


  

  

  


 

  

 

 

 

 

   
  288.3      385.7      654.1      779.3       637.8    1.91     2.69     4.06     4.77     4.05      


  

  

  


 

  

 

 

 

 

   
  15.7      29.0      95.8      113.1       114.3    0.98     1.56     4.57     5.75     4.48      
  24.4      5.6      1.2      0.8       0.3    1.94     2.00     6.17     6.32     5.19      
                                                                   
  128.5      123.3      188.4      270.0       230.0    2.82     3.70     5.52     6.74     5.59      


  

  

  


 

  

 

 

 

 

   
  456.9      543.6      939.5      1,163.2       982.4    2.03     2.75     4.34     5.22     4.38      


  

  

  


 

  

 

 

 

 

   
                                                                   
                                                                   
                                                                   


  

  

  


 

                                  
$ 858.7    $ 754.8    $ 721.6    $ 678.4           $ 822.3                                   


  

  

  


 

                                  
                                    3.32 %   3.48 %   3.24 %   2.91 %   3.37 %    
                                    0.17     0.14     0.05     0.09     0.16      


  

  

  


 

  

 

 

 

 

   
                                    3.49 %   3.62 %   3.29 %   3.00 %   3.53 %    


  

  

  


 

  

 

 

 

 

   

 


HUNTINGTON BANCSHARES INCORPORATED   43


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

NET INTEREST INCOME

 

The company’s primary source of revenue is net interest income, which is the difference between interest income on earning assets, primarily loans, direct financing leases, and securities, and interest expense on funding sources, including interest-bearing deposits and borrowings. Net interest income is impacted by earning asset balances and related funding, as well as changes in the levels of interest rates. Changes in net interest income are measured through the net interest spread and the net interest margin. The difference between the yield on earning assets and the rate paid for interest-bearing liabilities is the interest spread. Non-interest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the non-interest bearing sources of funds is captured in the net interest margin, which is calculated as net interest income divided by average earnings assets. Reflecting the no-cost nature of these non-interest cost of funds, the net interest margin is always higher than the net interest spread. Both the net interest spread and net interest margin are presented on a fully taxable equivalent basis, which means that tax-free interest income is adjusted to pre-tax equivalent income.

 

Table 4 shows the average annual balance sheets and the net interest margin analysis for the recent five years. It details the average annual balances for total assets and liabilities, as well as shareholders’ equity, and their various components, most notably loans and leases, deposits, and borrowings. It also shows the corresponding interest income or interest expense associated with each earning asset and interest-bearing liability category along with the average rate with the difference resulting in the net interest spread. The net interest spread plus the positive impact from the non-interest bearing funds represent the net interest margin.

 

Table 5 shows changes in fully taxable equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest-bearing liabilities. The change in interest income or expense not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amount of the change in volume and rate.

 

Table 5—Change in Net Interest Income Due to Changes in Average Volume and Interest Rates

 


    

2003


       2002

 

    

Increase (Decrease) From

Previous Year Due To:


      

Increase (Decrease) From

Previous Year Due To:


 

Fully Taxable Equivalent Basis (1)

(in millions of dollars)


     Volume

      

Yield/

Rate


       Total

       Volume

      

Yield/

Rate


       Total

 

Loans and direct financing leases

     $ 152.4        $ (145.3 )      $ 7.1        $ (50.5 )      $ (267.1 )      $ (317.6 )

Securities

       49.8          (49.8 )                 (20.9 )        (15.9 )        (36.8 )

Other Earning Assets

       14.0          (3.9 )        10.1          (3.9 )        (4.4 )        (8.3 )

    


    


    


    


    


    


Total Earning Assets

       216.2          (199.0 )        17.2          (75.3 )        (287.4 )        (362.7 )

    


    


    


    


    


    


Deposits

       (12.4 )        (85.0 )        (97.4 )        (89.8 )        (178.6 )        (268.4 )

Short-term borrowings

       (3.6 )        (9.7 )        (13.3 )        (10.0 )        (56.8 )        (66.8 )

Federal Home Loan Bank advances

       19.0          (0.2 )        18.8          5.8          (1.4 )        4.4  

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

       38.7          (33.5 )        5.2          (4.1 )        (61.0 )        (65.1 )

    


    


    


    


    


    


Total Interest-Bearing Liabilities

       41.7          (128.4 )        (86.7 )        (98.1 )        (297.8 )        (395.9 )

    


    


    


    


    


    


Net Interest Income

     $ 174.5        $ (70.6 )      $ 103.9        $ 22.8        $ 10.4        $ 33.2  

    


    


    


    


    


    


 

(1) Calculated assuming a 35% tax rate.

 

2003 versus 2002 Performance

Fully taxable equivalent net interest income was $858.7 million in 2003, up $103.9 million, or 14%, from 2002. This reflected a $3.7 billion, or 18%, increase in average earning assets, partially offset by a 13 basis point, or an effective 4%, decrease in the net interest margin to 3.49% from 3.62%.

 

Average loans and leases increased $2.6 billion, or 15%, and reflected growth in automobile loans and leases, residential mortgages, home equity loans and lines, and CRE loans, partially offset by a decline in C&I loans (see Table 4 and Balance Sheet discussion).

 

The 13 basis point decline in the net interest margin reflected the impact of historically low interest rates during the year. Rates on the loan portfolio declined, reflecting lower rates on variable-rate loan products, such as C&I, CRE, and home equity lines of credit, as well as prepayments and repayments of fixed-rate loans, such as auto and residential mortgage loans. The rate on the securities portfolio

 


44   HUNTINGTON BANCSHARES INCORPORATED


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

also declined, reflecting the same prepayments and repayments of mortgage-related securities, with resultant reinvestment at lower market rates. Rates on deposits and other interest-bearing liabilities declined as well, but less than the declines on loans and the securities portfolio, reflecting competitive pressures in the deposit markets.

 

Two other factors contributing to a lower net interest margin were the growth of lower yielding investment securities and the shift to lower yielding but lower-risk loans. The investment portfolio increased 29% during the year, reflecting redeployment of some of the proceeds from automobile loan sales and the securitization and retention of residential mortgages originated in the mortgage banking business. The improved credit quality of automobile loan and lease originations and the growth in the residential mortgage portfolio resulted in a more risk-averse loan portfolio, with lower expected credit losses, though the portfolio will have a lower net interest margin.

 

Most of the year’s margin decline occurred during the first half of the year, with more modest declines in the third and fourth quarters as interest rates rose slightly in the second half of the year. Specifically, the net interest margin in the 2003 first quarter was 3.63%, 3.47% in the second quarter, 3.46% in the third quarter, and 3.42% in the fourth quarter.

 

2002 versus 2001 Performance

Fully taxable equivalent net interest income was $754.8 million in 2002, up $33.2 million, or 5%, from 2001. This reflected a 33 basis point, or an effective 10%, increase in the net interest margin to 3.62% from 3.29%, partially offset by a 5% decline in average earning assets.

 

The 33 basis point increase in the net interest margin was influenced by two factors. The first was the timing and magnitude of declining interest rates in 2001 and 2002. As interest rates declined in the second half of 2001, deposit and wholesale funding costs declined more rapidly than yields on earning assets, most notably loans and leases. As a result, the net interest margin widened in the second half of 2001. However, as rates continued to decline in 2002, especially in the second half, and given the absolute low levels attained, it became increasingly difficult to lower deposit funding costs commensurate with the decline in earning asset yields. As a result, yields on earning assets fell more rapidly than deposit costs, thus narrowing the net interest margin in the second half of 2002, particularly in the fourth quarter.

 

The second factor was a decision early in 2001 to reduce the level of low-return investment securities. This helped drive the increase in the net interest margin during the first three quarters of 2001. Since the 2001 fourth quarter, consumer loan and lease production shifted to higher credit quality automobile loan and lease production. This change in the loan and lease mix to lower-yield, but higher-credit quality loans and leases mitigated the increase in the net interest margin. Also mitigating the net interest margin increase was the significant growth in lower-yield residential mortgages. While this contributed to a reduced net interest spread on these assets, it improved the total risk adjusted return as lower net charge-offs should be experienced in future periods. Reflecting these factors, the net interest margin in the 2001 first quarter was 3.19% and increased steadily throughout the year, peaking at 3.46% in the fourth quarter. During 2002, the margin peaked at 3.70% in the second quarter and declined to 3.62% in the fourth quarter.

 

The decline in average earning assets reflected a 4% decline in average loans and leases primarily due to the sale of the Florida banking operations, as well as the planned run-off of lower-margin investment securities and other earning assets (see Table 4 and Balance Sheet discussion).

 

BALANCE SHEET

 

LOAN AND LEASE PORTFOLIO MIX

Table 6 shows total loans and leases were $21.1 billion at December 31, 2003, with 45% representing C&I and CRE loans and 55% consumer loans and leases.

 

The relative decline of C&I and CRE loans over the last three years reflected a combination of factors including the objective to reduce exposure to large individual credits, as well as to focus commercial lending to customers with existing or potential relationships within the company’s primary markets. Reflecting this strategy, shared national credit outstandings declined to $704 million at December 31, 2003, down from $979 million at December 31, 2002, and from $1.1 billion at the end of 2001. The 2003 year-end outstandings were down 52% from the $1.5 billion peak at June 30, 2001. In addition, there was weak demand for C&I loans, reflecting the weakness of the economy.

 

On the consumer side, lower-rate, higher-quality residential mortgages represented 12% of total loans and leases (excluding operating lease assets) at the end of last year, up from 9% a year earlier. Automobile loans and leases accounted for 23% of total loans and leases (excluding operating lease assets) at December 31, 2003, up from 21% at the end of the prior year. Over the 2001-2003 period, the

 


HUNTINGTON BANCSHARES INCORPORATED   45


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

credit quality of new automobile loan and lease production continually increased, thus improving the overall credit quality characteristics of the automobile loan and lease portfolio at the end of 2003 compared with prior periods.

 

A key corporate objective in 2003 has been to lower the total risk exposure to automobile loans and leases (see Significant Factor item 3). Total automobile credit exposure represents the sum of automobile loans and leases reflected in total loans and leases, plus operating lease assets, plus any securitized loans and leases. As shown in Table 6, the total automobile credit exposure at December 31, 2003, was 28% down from 33% at the end of the prior year.

 

Table 6—Loan and Lease Portfolio Composition

 

     December 31,  
                                                    

 

   2003

    2002

    2001

    2000

    1999

 

(in millions of dollars)


  
  
   
  
   
  
   
  
   
  
 

C&I (1)

   $ 5,314    25.2 %   $ 5,608    30.2 %   $ 6,442    34.9 %   $ 6,638    37.7 %   $ 6,343    35.2 %

CRE

     4,172    19.8       3,723    20.0       3,812    20.6       3,456    19.6       3,307    18.3  

  

  

 

  

 

  

 

  

 

  

Total Commercial

     9,486    45.0       9,331    50.2       10,254    55.5       10,094    57.3       9,650    53.5  

  

  

 

  

 

  

 

  

 

  

Consumer

                                                                 

Automobile loans

     2,992    14.2       3,042    16.4       2,853    15.4       2,480    14.1       3,489    19.3  

Automobile leases

     1,902    9.0       874    4.7       110    0.6       147    0.8       164    0.9  

Home equity

     3,792    18.0       3,198    17.2       3,580    19.4       2,166    12.3       1,710    9.5  

Residential mortgage

     2,531    12.0       1,746    9.4       1,129    6.1       1,058    6.0       1,521    8.4  

Other loans

     372    1.8       396    2.1       545    3.0       1,678    9.5       1,509    8.4  

  

  

 

  

 

  

 

  

 

  

Total Consumer

     11,589    55.0       9,256    49.8       8,217    44.5       7,529    42.7       8,393    46.5  

  

  

 

  

 

  

 

  

 

  

Total Loans and Leases

   $ 21,075    100.0 %   $ 18,587    100.0 %   $ 18,471    100.0 %   $ 17,623    100.0 %   $ 18,043    100.0 %

  

  

 

  

 

  

 

  

 

  

Total automobile loans and leases

   $ 4,894          $ 3,916          $ 2,963          $ 2,627          $ 3,653       

Operating lease assets

     1,260            2,201            3,006            2,946            2,574       

Securitized loans

     37            1,119            1,225            1,371                  

  

  

 

  

 

  

 

  

 

  

Total Automobile Exposure (2)

   $ 6,191    27.7 %   $ 7,236    33.0 %   $ 7,194    31.7 %   $ 6,944    31.6 %   $ 6,227    30.2 %

Total Credit Exposure

   $ 22,372    100.0 %   $ 21,907    100.0 %   $ 22,702    100.0 %   $ 21,940    100.0 %   $ 20,617    100.0 %

 

(1) There were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.
(2) Total loans and leases, operating lease assets, and securitized loans.

 

AVERAGE BALANCE SHEET DISCUSSION—LOANS, LEASES, AND OTHER EARNING ASSETS

 

2003 versus 2002 Performance

Average loans and leases increased $2.6 billion, or 15%, and reflected growth in automobile loans and leases, residential mortgages, home equity loans and lines, and CRE loans, partially offset by a decline in C&I loans (see Table 4).

 

Average automobile leases increased $1.0 billion with average automobile loans up $0.5 billion. The significant increase in automobile leases reflected automobile lease accounting (see Significant Factors item 8). The $0.5 billion growth in average automobile loans reflected a combination of factors. Contributing to growth were $2.8 billion of new originations, as well as the $0.5 billion average impact of the July 1, 2003, adoption of FIN 46, which consolidated $1.0 billion of previously securitized automobile loans back on the balance sheet (see Significant Factors item 4). These increases were partially offset by the $0.5 billion average impact from the sale of three automobile loan portfolios, which totaled $2.1 billion (see Significant Factors item 3).

 

Also contributing to the growth in average loans and leases was a $0.6 billion, or 44%, growth in average residential mortgages, reflecting the positive impact of lower interest rates on refinancing and new origination activity. Adjustable rate mortgages accounted for 39% of the increase in average residential mortgage originations in 2003. Such factors were also reflected in the $0.4 billion, or 12%, increase in average home equity loans and lines.

 

Average C&I loans declined $0.2 billion, or 3%, reflecting a combination of factors including the lack of significant middle-market demand for loans due to the weak economy, company strategies to reduce exposure to large individual credits, and sales of NPAs (see Significant Factors item 7). Partially offsetting these reductions was growth in small business commercial loans, an area of emphasis.

 


46   HUNTINGTON BANCSHARES INCORPORATED


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Average CRE loans increased $0.3 billion, or 10%. Management is currently reviewing how it defines and reports CRE loans, including owner-occupied real estate loans. Owner-occupied loans are currently reported as CRE loans in the consolidated balance sheet. Management expects to complete its review in the first half of 2004. Any change in the definition of CRE loans would result in a reclassification between the CRE and C&I portfolio and would not have any impact on net income.

 

Also contributing to the increase in average earning assets was a $0.9 billion, or 29%, increase in average securities. This increase reflected an investment of a portion of the proceeds from the automobile loan sales and the securitization and retention of originated residential mortgages.

 

Average operating lease assets were $1.7 billion in 2003, down 35% from the prior year, reflecting the run-off of operating leases, as all new automobile lease originations since April 2002 are direct financing leases and reflected in automobile loans and leases (see Significant Factors item 8).

 


HUNTINGTON BANCSHARES INCORPORATED   47


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Table 7—Consolidated Average Balance Sheets—Excluding Sold Florida Operations

 


   Average Balance


   2002

     2001

         

GAAP Change

from 2001


                Excluding FL
Change from 2001


                 

(in millions of dollars)


   GAAP

   Amount

     Percent

    FL (1)

     Excld. FL

   Amount

     Percent

     GAAP

   FL (1)

    Excld. FL

Assets

                                                                           

Interest bearing deposits in banks

   $ 33    $ 26      NM %   $      $ 33    $ 26      NM %    $ 7    $     $ 7

Trading account securities

     7      (18 )    (72.0 )            7      (18 )    (72.0 )      25            25

Federal funds sold and securities purchased under resale agreements

     72      (35 )    (32.7 )            72      (35 )    (32.7 )      107            107

Mortgages held for sale

     322      (38 )    (10.6 )            322      (38 )    (10.6 )      360            360

Securities:

                                                                           

Taxable

     2,859      (285 )    (9.1 )            2,859      (285 )    (9.1 )      3,144            3,144

Tax exempt

     135      (39 )    (22.4 )            135      (39 )    (22.4 )      174            174

  

  


  

 


  

  


  

  

  


 

Total securities

     2,994      (324 )    (9.8 )            2,994      (324 )    (9.8 )      3,318            3,318

  

  


  

 


  

  


  

  

  


 

Loans and leases:

                                                                           

C&I

     5,679      (971 )    (14.6 )     94        5,585      (318 )    (5.4 )      6,650      747       5,903

CRE

                                                                           

Construction

     1,216      (5 )    (0.4 )     13        1,203      91      8.2        1,221      109       1,112

Commercial

     2,378      38      1.6       41        2,337      303      14.9        2,340      306       2,034

Consumer

                                                                           

Automobile loans and leases

     3,196      357      12.6       42        3,154      640      25.5        2,839      325       2,514

Home equity

     3,085      (313 )    (9.2 )     104        2,981      296      11.0        3,398      713       2,685

Residential mortgage

     1,438      390      37.2       29        1,409      600      74.2        1,048      239       809

Other loans

     425      (165 )    (28.0 )     15        410      (66 )    (13.9 )      590      114       476

  

  


  

 


  

  


  

  

  


 

Total consumer

     8,144      269      3.4       190        7,954      1,470      22.7        7,875      1,391       6,484

  

  


  

 


  

  


  

  

  


 

Total loans and leases

     17,417      (669 )    (3.7 )     338        17,079      1,546      10.0        18,086      2,553       15,533

  

  


  

 


  

  


  

  

  


 

Allowance for loan and lease losses

     374      67      21.8       2        372      99      36.3        307      34       273

  

  


  

 


  

  


  

  

  


 

Net loans and leases

     17,043      (736 )    (4.1 )     336        16,707      1,447      9.5        17,779      2,519       15,260

  

  


  

 


  

  


  

  

  


 

Total earning assets

     20,845      (1,058 )    (4.8 )     338        20,507      1,157      6.0        21,903      2,553       19,350

  

  


  

 


  

  


  

  

  


 

Operating lease assets

     2,602      (368 )    (12.4 )            2,602      (368 )    (12.4 )      2,970            2,970

Cash and due from banks

     757      (155 )    (17.0 )     12        745      (86 )    (10.3 )      912      81       831

Intangible assets

     293      (443 )    (60.2 )     86        207      11      5.6        736      540       196

All other assets

     1,800      (63 )    (3.4 )     3        1,797      7      0.4        1,863      73       1,790

  

  


  

 


  

  


  

  

  


 

Total Assets

   $ 25,923    $ (2,154 )    (7.7 )%   $ 437      $ 25,486    $ 622      2.5 %    $ 28,077    $ 3,213     $ 24,864

  

  


  

 


  

  


  

  

  


 

Liabilities and Shareholders’ Equity

                                                                           

Core deposits

                                                                           

Non-interest bearing deposits

   $ 2,902    $ (402 )    (12.2 )%   $ 75      $ 2,827    $ 104      3.8 %    $ 3,304    $ 581     $ 2,723

Interest bearing demand deposits

     5,161      156      3.1       193        4,968      1,349      37.3        5,005      1,386       3,619

Savings deposits

     2,853      (625 )    (18.0 )     66        2,787      (139 )    (4.8 )      3,478      552       2,926

Other domestic time deposits

     4,349      (1,534 )    (26.1 )     228        4,121      51      1.3        5,883      1,813       4,070

  

  


  

 


  

  


  

  

  


 

Total core deposits

     15,265      (2,405 )    (13.6 )     562        14,703      1,365      10.2        17,670      4,332       13,338

  

  


  

 


  

  


  

  

  


 

Domestic time deposits of $100,000 or more

     851      (429 )    (33.5 )     21        830      (241 )    (22.5 )      1,280      209       1,071

Brokered time deposits and negotiable CDs

     731      603      NM              731      603      NM        128            128

Foreign time deposits

     337      54      19.1              337      60      21.7        283      6       277

  

  


  

 


  

  


  

  

  


 

Total deposits

     17,184      (2,177 )    (11.2 )     583        16,601      1,787      12.1        19,361      4,547       14,814

  

  


  

 


  

  


  

  

  


 

Short-term borrowings

     1,856      (243 )    (11.6 )     18        1,838      (124 )    (6.3 )      2,099      137       1,962

Federal Home Loan Bank Advances

     279      260      NM              279      260      NM        19            19

Subordinated notes

     847      (12 )    (1.4 )            847      (12 )    (1.4 )      859            859

Other long-term debt

     2,488      (64 )    (2.5 )     (167 )      2,655      (1,368 )    (34.0 )      2,552      (1,471 )     4,023

  

  


  

 


  

  


  

  

  


 

Total interest bearing liabilities

     19,752      (1,834 )    (8.5 )     359        19,393      439      2.3        21,586      2,632       18,954

  

  


  

 


  

  


  

  

  


 

All other liabilities

     1,053      194      22.6       3        1,050      191      22.2        859            859

Shareholders’ equity

     2,216      (112 )    (4.8 )            2,216      (112 )    (4.8 )      2,328            2,328

  

  


  

 


  

  


  

  

  


 

Total Liabilities and Shareholders’ Equity

   $ 25,923    $ (2,154 )    (7.7 )%   $ 437      $ 25,486    $ 622      2.5 %    $ 28,077    $ 3,213     $ 24,864

  

  


  

 


  

  


  

  

  


 

 

(1) Average balances from sold Florida operations.

NM, not a meaningful value.

 


48   HUNTINGTON BANCSHARES INCORPORATED


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

2002 versus 2001 Performance

Average total loans and leases for 2002 were $17.4 billion, down $0.7 billion, or 4%, from 2001, as shown in Table 4. This decrease resulted from the impact of the sold Florida related loans, partially offset by a $1.5 billion, or 23%, increase in consumer loans and leases in the remaining loan portfolios. Average Florida related loans were $0.3 billion in 2002 and $2.6 billion in 2001 (see Table 7). The increase in non-Florida consumer loans and leases was attributable to an emphasis, beginning in late 2001, on the generation of residential mortgages. This coincided with heavy demand for refinancing mortgage assets due to the declining interest rate environment. As a result, average non-Florida residential mortgages increased $0.6 billion, or 74%. Non-Florida home equity loans and lines increased $0.3 billion, or 11%. Average non-Florida automobile loans and leases increased $0.6 billion, or 25%. Also contributing to growth in average loans and leases, on this same basis, was a $0.4 billion, or 13%, increase in CRE loans. In contrast, average non-Florida C&I loans declined $0.3 billion, or 5%, reflecting a combination of low demand due to the weak economic environment and reduced shared national credit exposure.

 

The $0.3 billion, or 10%, decline in average investment securities in 2002 reflected the continued run off of lower-margin securities, mostly in the first half of 2001, and was unaffected by the sold Florida banking operations.

 

Average operating lease assets were $2.6 billion in 2002, down 12% from the prior year, reflecting no new operating leases being originated since April 2002, and the run-off of the existing operating leases.

 

AVERAGE BALANCE SHEET DISCUSSION—DEPOSITS AND OTHER FUNDING

 

2003 versus 2002 Performance

As shown in Table 16, deposits were $18.5 billion at December 31, 2003, with 84% representing core deposits, down from 87% at the end of the prior year.

 

Average core deposits were $15.4 billion in 2003, up 1%, as shown in Table 4. This increase reflected 20% growth in interest bearing demand deposits and 6% growth in non-interest bearing demand deposits, areas where growth initiatives were concentrated. However, most of this growth was offset by a 25% decline in average retail certificates of deposit. As interest rates declined throughout the first half of 2003, retail certificates of deposits (CDs) became a relatively expensive source of funding and, as a result, were de-emphasized. Average total deposits, which include core deposits, were $18.2 billion, up 6% from the prior year, and additionally reflected significant growth in brokered time deposits and negotiable CDs, both of which were relatively lower cost deposits.

 

Management uses the non-core funding ratio (total liabilities less core deposits and accrued expenses and other liabilities divided by total assets) to measure the extent to which funding is dependent on wholesale deposits and borrowing sources. For 2003, the average non-core funding ratio was 35%, up from 28% in 2002. This reflected the fact that balance sheet growth during 2003 exceeded that of core deposits and, therefore, required funding through brokered CDs, Federal Home Loan Bank (FHLB) advances, and other long-term debt. As previously mentioned, though it had no significant impact on average balances, $250 million of secured long-term debt was extinguished in the fourth quarter of 2003.

 

2002 versus 2001 Performance

As shown in Table 16, deposits were $17.5 billion at December 31, 2002, with 87% representing core deposits, down from 93% at the end of the prior year, which included the Florida deposits subsequently sold.

 

Average core deposits were $15.3 billion in 2002 as shown in Table 4. The sale of the Florida banking operations reduced average core deposits outstanding by $3.8 billion compared with 2001 (see Table 7). Partially offsetting the impact of these sold deposits was growth in non-Florida core deposit funding of $1.4 billion, or 10%, from the prior year. This growth was driven by a $1.3 billion, or 37%, increase in average non-Florida interest bearing demand deposits reflecting the combined benefits of enhanced sales efforts and consumers moving funds out of the equity markets. Average brokered time deposits and negotiable certificates of deposits, on the same basis, increased $0.6 billion reflecting their relatively lower cost and Management’s strategy to further diversify its funding sources.

 

Average borrowings in 2002, comprised of short-term notes, advances from the FHLB, subordinated notes, and long-term debt including capital securities, totaled $5.5 billion, little changed from the prior year.

 


HUNTINGTON BANCSHARES INCORPORATED   49


 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

PROVISION FOR LOAN AND LEASE LOSSES

 

The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses (ALLL) at a level adequate to absorb management’s estimate of inherent losses in the loan and lease portfolio (see Credit Risk for further discussion).

 

Provision expense for 2003 was $164.0 million, down $30.4 million, or 16%, from 2002. This decline reflected lower net charge-offs, partially offset by additional provision expense related to loan growth. The provision expense for 2002 was $194.4 million, down $62.9 million, or 24%, from $257.3 million in 2001, with $9.9 million of the decline reflecting the sale of the Florida banking operations.

 

NON-INTEREST INCOME

 

Non-interest income for the recent three years ended December 31, 2003 was as follows:

 

Table 8—Non-Interest Income

 

          Change from 2002

         Change from 2001

      

(in thousands of dollars)


   2003

   Amount

      %

    2002

   Amount

      %

     2001

Service charges on deposit accounts

   $ 167,840    $ 14,276      9.3 %   $ 153,564    $ (11,448 )    (6.9 )%    $ 165,012

Trust services

     61,649      (402 )    (0.6 )     62,051      1,753      2.9        60,298

Brokerage and insurance

     57,844      (4,265 )    (6.9 )     62,109      (12,904 )    (17.2 )      75,013

Mortgage banking

     58,180      26,147      81.6       32,033      (22,485 )    (41.2 )      54,518

Bank owned life insurance

     43,028      (95 )    (0.2 )     43,123      2,000      4.9        41,123

Other service charges and fees

     41,446      (1,442 )    (3.4 )     42,888      (5,329 )    (11.1 )      48,217

Securities gains

     5,258      356      7.3       4,902      4,179      NM        723

Other

     91,059      14,119      18.4       76,940      13,635      21.5        63,305

  

  


  

 

  


  

  

Sub-total before operating lease income

     526,304      48,694      10.2       477,610      (30,599 )    (6.0 )      508,209

Operating lease income

     489,698      (167,376 )    (25.5