UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED June 30, 2004
Commission File Number 0-2525
Huntington Bancshares Incorporated
Maryland | 31-0724920 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
41 South High Street, Columbus, Ohio 43287
Registrants telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
There were 229,685,385 shares of Registrants without par value common stock outstanding on July 31, 2004.
Huntington Bancshares Incorporated
INDEX
2
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
(in thousands, except number of shares) |
June 30, 2004 |
December 31, 2003 |
June 30, 2003 |
|||||||||
(Unaudited) | (Unaudited) | |||||||||||
Assets |
||||||||||||
Cash and due from banks |
$ | 1,162,995 | $ | 899,689 | $ | 1,153,108 | ||||||
Federal funds sold and securities purchased under resale agreements |
193,772 | 96,814 | 74,473 | |||||||||
Interest bearing deposits in banks |
24,009 | 33,627 | 44,906 | |||||||||
Trading account securities |
20,577 | 7,589 | 19,426 | |||||||||
Loans held for sale |
314,262 | 226,729 | 713,722 | |||||||||
Securities available for sale - at fair value |
4,988,270 | 4,925,232 | 3,702,761 | |||||||||
Investment securities held to maturity - fair value $3,224; $3,937 and $6,780, respectively |
3,169 | 3,828 | 6,593 | |||||||||
Loans and leases |
21,775,669 | 21,075,118 | 19,059,533 | |||||||||
Allowance for loan and lease losses |
(286,935 | ) | (299,732 | ) | (307,667 | ) | ||||||
Net loans and leases |
21,488,734 | 20,775,386 | 18,751,866 | |||||||||
Operating lease assets |
888,612 | 1,260,440 | 1,672,608 | |||||||||
Bank owned life insurance |
944,892 | 927,671 | 906,823 | |||||||||
Premises and equipment |
354,534 | 349,712 | 332,916 | |||||||||
Goodwill and other intangible assets |
216,215 | 217,009 | 218,080 | |||||||||
Customers acceptance liability |
6,613 | 9,553 | 8,372 | |||||||||
Accrued income and other assets |
814,552 | 786,047 | 731,559 | |||||||||
Total Assets |
$ | 31,421,206 | $ | 30,519,326 | $ | 28,337,213 | ||||||
Liabilities |
||||||||||||
Deposits |
$ | 19,465,146 | $ | 18,487,395 | $ | 18,371,359 | ||||||
Short-term borrowings |
1,130,830 | 1,452,304 | 918,771 | |||||||||
Federal Home Loan Bank advances |
1,270,455 | 1,273,000 | 1,273,000 | |||||||||
Other long-term debt |
4,557,373 | 4,544,509 | 3,508,397 | |||||||||
Subordinated notes |
1,011,506 | 990,470 | 496,666 | |||||||||
Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely junior subordinated debentures of the parent company |
| | 300,000 | |||||||||
Allowance for unfunded loan commitments and letters of credit |
31,193 | 35,522 | 33,280 | |||||||||
Bank acceptances outstanding |
6,613 | 9,553 | 8,372 | |||||||||
Accrued expenses and other liabilities |
1,561,721 | 1,451,571 | 1,225,169 | |||||||||
Total Liabilities |
29,034,837 | 28,244,324 | 26,135,014 | |||||||||
Shareholders Equity |
||||||||||||
Preferred stock - authorized 6,617,808 shares; none outstanding |
| | | |||||||||
Common stock - without par value; authorized 500,000,000 shares; issued 257,866,255 shares; outstanding 229,475,821; 229,008,088 and 228,660,038 shares, respectively |
2,482,069 | 2,483,542 | 2,483,105 | |||||||||
Less 28,390,434; 28,858,167 and 29,206,217 treasury shares, respectively |
(539,852 | ) | (548,576 | ) | (555,176 | ) | ||||||
Accumulated other comprehensive income (loss) |
(27,204 | ) | 2,678 | 40,817 | ||||||||
Retained earnings |
471,356 | 337,358 | 233,453 | |||||||||
Total Shareholders Equity |
2,386,369 | 2,275,002 | 2,202,199 | |||||||||
Total Liabilities and Shareholders Equity |
$ | 31,421,206 | $ | 30,519,326 | $ | 28,337,213 | ||||||
See notes to unaudited condensed consolidated financial statements
3
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||||
(in thousands, except per share amounts) |
2004 |
2003 |
2004 |
2003 |
|||||||||||
Interest and fee income |
|||||||||||||||
Loans and leases |
|||||||||||||||
Taxable |
$ | 268,409 | $ | 265,694 | $ | 538,771 | $ | 535,939 | |||||||
Taxable-exempt |
444 | 675 | 950 | 1,409 | |||||||||||
Securities |
|||||||||||||||
Taxable |
43,926 | 37,014 | 88,072 | 74,139 | |||||||||||
Taxable-exempt |
7,247 | 5,019 | 14,760 | 9,972 | |||||||||||
Other |
4,141 | 8,923 | 7,545 | 15,880 | |||||||||||
Total Interest Income |
324,167 | 317,325 | 650,098 | 637,339 | |||||||||||
Interest expenses |
|||||||||||||||
Deposits |
59,372 | 76,383 | 118,998 | 156,093 | |||||||||||
Short-term borrowings |
2,789 | 4,313 | 6,102 | 9,872 | |||||||||||
Federal Home Loan Bank advances |
8,098 | 5,634 | 16,139 | 11,219 | |||||||||||
Subordinated notes and other long-term debt including preferred capital securities |
31,345 | 28,554 | 63,611 | 55,955 | |||||||||||
Total Interest Expense |
101,604 | 114,884 | 204,850 | 233,139 | |||||||||||
Net Interest Income |
222,563 | 202,441 | 445,248 | 404,200 | |||||||||||
Provision for credit losses |
5,027 | 49,193 | 30,623 | 86,037 | |||||||||||
Net Interest Income After Provision for Credit Losses |
217,536 | 153,248 | 414,625 | 318,163 | |||||||||||
Operating lease income |
78,706 | 128,574 | 167,573 | 266,767 | |||||||||||
Service charges on deposit accounts |
43,596 | 40,914 | 85,433 | 80,783 | |||||||||||
Trust services |
16,708 | 15,580 | 33,031 | 30,491 | |||||||||||
Brokerage and insurance income |
13,523 | 14,196 | 28,720 | 29,693 | |||||||||||
Mortgage banking |
23,322 | 7,185 | 19,026 | 18,310 | |||||||||||
Bank owned life insurance income |
11,309 | 11,043 | 21,794 | 22,180 | |||||||||||
Gain on sales of automobile loans |
4,890 | 13,496 | 13,894 | 23,751 | |||||||||||
Other service charges and fees |
10,645 | 11,372 | 20,158 | 21,710 | |||||||||||
Securities gains (losses) |
(9,230 | ) | 6,887 | 5,860 | 8,085 | ||||||||||
Other |
24,659 | 27,704 | 50,278 | 48,105 | |||||||||||
Total Non-Interest Income |
218,128 | 276,951 | 445,767 | 549,875 | |||||||||||
Personnel costs |
119,715 | 105,242 | 241,339 | 218,331 | |||||||||||
Operating lease expense |
62,563 | 102,939 | 133,273 | 214,527 | |||||||||||
Outside data processing and other services |
17,563 | 16,104 | 36,025 | 32,683 | |||||||||||
Equipment |
16,228 | 16,341 | 32,314 | 32,753 | |||||||||||
Net occupancy |
16,258 | 15,377 | 33,021 | 31,986 | |||||||||||
Professional services |
7,836 | 9,872 | 15,135 | 19,157 | |||||||||||
Marketing |
8,069 | 8,454 | 15,908 | 15,080 | |||||||||||
Telecommunications |
4,638 | 5,394 | 9,832 | 11,095 | |||||||||||
Printing and supplies |
3,098 | 2,253 | 6,114 | 5,934 | |||||||||||
Amortization of intangibles |
204 | 204 | 408 | 408 | |||||||||||
Restructuring reserve releases |
| (5,315 | ) | | (6,315 | ) | |||||||||
Other |
25,981 | 20,168 | 44,438 | 36,873 | |||||||||||
Total Non-Interest Expense |
282,153 | 297,033 | 567,807 | 612,512 | |||||||||||
Income Before Income Taxes |
153,511 | 133,166 | 292,585 | 255,526 | |||||||||||
Provision for income taxes |
43,384 | 36,676 | 78,285 | 67,306 | |||||||||||
Net Income |
$ | 110,127 | $ | 96,490 | $ | 214,300 | $ | 188,220 | |||||||
Average Common Shares: |
|||||||||||||||
Basic |
229,429 | 228,633 | 229,328 | 229,987 | |||||||||||
Diluted |
232,659 | 230,572 | 232,787 | 231,684 | |||||||||||
Per Common Share: |
|||||||||||||||
Net Income - Basic |
$ | 0.48 | $ | 0.42 | $ | 0.93 | $ | 0.82 | |||||||
Net Income - Diluted |
0.47 | 0.42 | 0.92 | 0.81 | |||||||||||
Cash Dividends Declared |
0.175 | 0.16 | 0.35 | 0.32 |
See notes to unaudited condensed consolidated financial statements
4
Huntington Bancshares Incorporated
Consolidated Statements of Changes in Shareholders Equity
(in thousands) |
Common Stock |
Treasury Shares |
Accumulated Other Comprehensive Income |
Retained |
Total |
||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
||||||||||||||||||||||
Six Months Ended June 30, 2003 (Unaudited): |
|||||||||||||||||||||||||
Balance, beginning of period |
257,866 | $ | 2,484,421 | (24,987 | ) | $ | (475,399 | ) | $ | 62,300 | $ | 118,471 | $ | 2,189,793 | |||||||||||
Comprehensive Income: |
|||||||||||||||||||||||||
Net income |
188,220 | 188,220 | |||||||||||||||||||||||
Unrealized net holding losses on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income |
(4,391 | ) | (4,391 | ) | |||||||||||||||||||||
Unrealized losses on derivative instruments used in cash flow hedging relationships |
(17,092 | ) | (17,092 | ) | |||||||||||||||||||||
Total comprehensive income |
166,737 | ||||||||||||||||||||||||
Cash dividends declared ($0.32 per share) |
(73,238 | ) | (73,238 | ) | |||||||||||||||||||||
Stock options exercised |
(1,316 | ) | 118 | 1,902 | 586 | ||||||||||||||||||||
Treasury shares purchased |
(4,300 | ) | (81,061 | ) | (81,061 | ) | |||||||||||||||||||
Other |
(37 | ) | (618 | ) | (618 | ) | |||||||||||||||||||
Balance, end of period (Unaudited) |
257,866 | $ | 2,483,105 | (29,206 | ) | $ | (555,176 | ) | $ | 40,817 | $ | 233,453 | $ | 2,202,199 | |||||||||||
Six Months Ended June 30, 2004 (Unaudited): |
|||||||||||||||||||||||||
Balance, beginning of period |
257,866 | $ | 2,483,542 | (28,858 | ) | $ | (548,576 | ) | $ | 2,678 | $ | 337,358 | $ | 2,275,002 | |||||||||||
Comprehensive Income: |
|||||||||||||||||||||||||
Net income |
214,300 | 214,300 | |||||||||||||||||||||||
Unrealized net holding losses on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income |
(52,165 | ) | (52,165 | ) | |||||||||||||||||||||
Unrealized gains on derivative instruments used in cash flow hedging relationships |
22,283 | 22,283 | |||||||||||||||||||||||
Total comprehensive income |
184,418 | ||||||||||||||||||||||||
Cash dividends declared ($0.35 per share) |
(80,302 | ) | (80,302 | ) | |||||||||||||||||||||
Stock options exercised |
(951 | ) | 442 | 8,467 | 7,516 | ||||||||||||||||||||
Other |
(522 | ) | 26 | 257 | (265 | ) | |||||||||||||||||||
Balance, end of period (Unaudited) |
257,866 | $ | 2,482,069 | (28,390 | ) | $ | (539,852 | ) | $ | (27,204 | ) | $ | 471,356 | $ | 2,386,369 | ||||||||||
See notes to unaudited condensed consolidated financial statements.
5
Huntington Bancshares Incorporated
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, |
||||||||
(in thousands) |
2004 |
2003 |
||||||
Operating Activities |
||||||||
Net Income |
$ | 214,300 | $ | 188,220 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Provision for credit losses |
30,623 | 86,037 | ||||||
Depreciation on operating lease assets |
132,388 | 187,914 | ||||||
Other depreciation and amortization |
38,995 | 42,209 | ||||||
Deferred income tax expense |
66,243 | 31,479 | ||||||
Increase in trading account securities |
(12,988 | ) | (19,185 | ) | ||||
Increase in mortgages held for sale |
(87,783 | ) | (185,343 | ) | ||||
Gains on sales of securities available for sale |
(5,860 | ) | (8,085 | ) | ||||
Gains on sales/securitizations of loans |
(15,407 | ) | (30,797 | ) | ||||
Restructuring reserve releases |
| (6,315 | ) | |||||
Other, net |
(8,146 | ) | (68,002 | ) | ||||
Net Cash Provided by Operating Activities |
352,365 | 218,132 | ||||||
Investing Activities |
||||||||
Decrease (increase) in interest bearing deposits in banks |
9,618 | (7,606 | ) | |||||
Proceeds from: |
||||||||
Maturities and calls of investment securities held to maturity |
670 | 954 | ||||||
Maturities and calls of securities available for sale |
544,419 | 945,534 | ||||||
Sales of securities available for sale |
885,554 | 591,497 | ||||||
Purchases of securities available for sale |
(1,457,477 | ) | (1,649,721 | ) | ||||
Proceeds from sales/securitizations of loans |
1,382,596 | 1,390,378 | ||||||
Net loan and lease originations, excluding sales |
(2,234,989 | ) | (2,119,933 | ) | ||||
Net decrease in operating lease assets |
240,523 | 340,003 | ||||||
Proceeds from sale of premises and equipment |
334 | 4,049 | ||||||
Purchases of premises and equipment |
(29,298 | ) | (22,220 | ) | ||||
Proceeds from sales of other real estate |
6,460 | 4,872 | ||||||
Net Cash Used for Investing Activities |
(651,590 | ) | (522,193 | ) | ||||
Financing Activities |
||||||||
Increase in deposits |
982,401 | 869,313 | ||||||
Decrease in short-term borrowings |
(321,474 | ) | (1,222,245 | ) | ||||
Proceeds from issuance of subordinated notes |
148,830 | | ||||||
Maturity of subordinated notes |
(100,000 | ) | (250,000 | ) | ||||
Proceeds from Federal Home Loan Bank advances |
455 | 270,000 | ||||||
Maturity of Federal Home Loan Bank advances |
(3,000 | ) | (10,000 | ) | ||||
Proceeds from issuance of long-term debt |
625,000 | 1,235,000 | ||||||
Maturity of long-term debt |
(600,000 | ) | (225,000 | ) | ||||
Dividends paid on common stock |
(80,239 | ) | (73,714 | ) | ||||
Repurchases of common stock |
| (81,061 | ) | |||||
Net proceeds from issuance of common stock |
7,516 | 586 | ||||||
Net Cash Provided by Financing Activities |
659,489 | 512,879 | ||||||
Change in Cash and Cash Equivalents |
360,264 | 208,818 | ||||||
Cash and Cash Equivalents at Beginning of Period |
996,503 | 1,018,763 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 1,356,767 | $ | 1,227,581 | ||||
Supplemental disclosures: |
||||||||
Income taxes paid |
$ | 9,490 | $ | 65,859 | ||||
Interest paid |
206,500 | 247,126 | ||||||
Non-cash activities |
||||||||
Residential mortgage loans securitized and retained in securities available for sale |
115,929 | 171,586 | ||||||
Common stock dividends accrued not paid |
31,562 | 27,932 |
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) 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) 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 Huntingtons 2003 Annual Report on Form 10-K (2003 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 years financial statements have been reclassified to conform to the 2004 presentation.
For statement of cash flows purposes, cash and cash equivalents are defined as the sum of Cash and due from banks and Federal funds sold and securities purchased under resale agreements.
Note 2 New Accounting Pronouncements
Emerging Issues Task Force Issue No. 03-1, The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments (EITF 03-1): The Emerging Issues Task Force reached a consensus about the criteria that should be used to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. EITF 03-1 also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. EITF 03-1 will apply to the evaluation of other-than-temporary impairment in reporting periods beginning after June 15, 2004.
At June 30, 2004, Huntington had $3.3 billion of securities whose fair value was less than book value. The unrealized loss in these securities totaled $88.9 million. Of these securities, Huntington held $3.1 billion of securities, with an unrealized loss of $80.0 million, where the security cannot be contractually prepaid or where Huntington would recover substantially all of its cost if the securities were contractually prepaid. Management continues to evaluate its options with respect to adopting this new accounting guidance and cannot currently estimate the impact of adopting EITF 03-1.
Emerging Issues Task Force Issue No. 03-16, Accounting for Investment in Limited Liability Companies (EITF 03-16): The Task Force reached a consensus that an investment in a limited liability company (LLC) that maintains a specific ownership account for each investor should be viewed as similar to an investment in a limited partnership for purposes of determining whether a noncontrolling investment in an LLC should be accounted for using the cost method or the equity method. The current rules require a noncontrolling investment in a limited partnership to be accounted for under the equity method unless the interest is so minor that the limited partner may have virtually no influence over the partnership operating and financial policies. The guidance for evaluating an investment in a LLC should be applied for reporting periods beginning after June 15, 2004. The impact of EITF 03-16 is not expected to be material to Huntingtons financial condition, results of operations, or cash flows.
SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105): On March 9, 2004, the SEC issued SAB 105, which summarizes the views of the SEC staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. Specifically, SAB 105 indicated that the fair value of loan commitments that are required to follow derivative accounting under FAS 133, Accounting for Derivative Instruments and Hedging Activities, should not consider the expected future cash flows related to the associated servicing of the future loan. Prior to SAB 105, Huntington did not consider the expected future cash flows related to the associated servicing in determining the fair value of loan commitments. The adoption of SAB 105 did not have a material effect on Huntingtons financial results.
7
FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2): In December 2003, a law was approved that expands Medicare benefits, primarily adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. The law also provides a federal subsidy to companies that sponsor postretirement benefit plans providing prescription drug coverage. FSP 106-2 was issued in May 2004 and supersedes FSP 106-1 issued in January 2004. FSP 106-2 specifies that any Medicare subsidy must be taken into account in measuring the employers postretirement health care benefit obligation and will also reduce the net periodic postretirement cost in future periods. The new guidance is effective for the reporting periods beginning on or after June 15, 2004. Accordingly, the postretirement benefit obligations and net periodic costs reported in the accompanying financial statements and notes do not reflect the impact of this legislation. The impact of this new pronouncement is not expected to be material to Huntingtons financial condition, results of operations, or cash flows.
AICPA Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3): In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-3 to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to loans and debt securities acquired in purchase business combinations and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield or valuation allowance, such as the allowance for credit losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004, with early application encouraged. The impact of this new pronouncement is not expected to be material to Huntingtons financial condition, results of operations, or cash flows.
FASB Statement No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (FAS 148): FAS 148 was issued in December 2002, as an amendment of Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to FAS 123s fair value method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure provisions of FAS 123 and Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting (APB 28), to require disclosure in the summary of significant accounting policies of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While FAS 148 does not require companies to account for employee stock options using the fair value method, the disclosure provisions of FAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of FAS 123 or the intrinsic value method of APB 25, which is the method currently used by Huntington. See note 11 for the disclosures.
Note 3 Securities and Exchange Commission Investigation
As previously disclosed, the Securities and Exchange Commission (SEC) is conducting a formal investigation regarding certain financial accounting and disclosure matters, including certain matters that were the subject of prior restatements by Huntington. The SEC staff has notified Huntington that the staff is considering recommending to the SEC that it institute enforcement action against Huntington and certain of its senior officers for, among other possible matters, violations of various provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933 in connection with certain financial accounting matters relating to fiscal years 2002 and earlier, and certain related disclosure matters.
Huntington is presently in negotiations with the staff of the SEC regarding a settlement of its investigation. Huntingtons chief executive officer has indicated he accepts responsibility in his position as the chief executive officer for matters that occur on his watch, and has indicated a willingness to negotiate a settlement with the SEC of these matters. Huntington expects that a settlement of this matter 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 fine and other possible measures. No assurances, however, can be provided as to the ultimate timing or outcome of these matters.
Huntington also remains in active dialogue with its bank regulators concerning these matters and is working diligently with the regulators to resolve them in a manner that permits it to proceed with its pending Unizan acquisition. No assurances, however, can be provided as to the ultimate timing or outcome of these matters.
Donald R. Kimble, who joined Huntington earlier this year as executive vice president in the Finance area, has been named chief financial officer and controller. Prior to joining Huntington, Kimble was executive vice president and controller of AmSouth Bancorporation, and previously held various subsidiary chief financial officer or accounting positions at Bank One Corporation. Michael J. McMennamin and John D. Van Fleet have relinquished their positions of chief financial officer and controller, respectively. Both remain with the company.
8
Note 4 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, with $2.7 billion of assets at December 31, 2003. Under the terms of the agreement, Unizan shareholders will receive 1.1424 shares of Huntington common stock, on a tax-free basis, for each share of Unizan. Based on the $23.10 closing price of Huntingtons common stock on January 26, 2004, this represented a price of $26.39 per Unizan share, and valued the transaction at approximately $587 million. Both boards unanimously approved the merger, and on May 25, 2004, Unizan shareholders approved the merger. Approval by Huntington shareholders is not required.
As reported on June 16, 2004, the Federal Reserve Board had informed Huntington that it had extended its review period to coordinate further with the staff of the SEC regarding the SECs ongoing formal investigation of Huntington and to complete its review of the Community Reinvestment Act aspects of the merger. Huntington remains in active dialogue with its bank regulators concerning these matters and is working diligently with the regulators to resolve them in a manner that permits it to proceed with its pending Unizan acquisition. No assurances, however, can be provided as to the ultimate timing or outcome of these matters (see Note 3 for additional discussion).
Huntington and Unizan are ready to close the merger, subject to the receipt of all necessary regulatory approvals. After the merger, Huntington also intends to purchase approximately 2.5 million common shares from time-to-time in the open market or through privately negotiated transactions depending on market conditions, to offset the dilutive effect of issuing shares to Unizan shareholders.
Note 5 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. Any share repurchases will be made under this authorization. Purchases will be made from time-to-time in the open market or through privately negotiated transactions depending on market conditions. No share repurchases were made under the 2004 repurchase program.
Note 6 Operating Lease Assets
Operating lease assets at June 30, 2004, December 31, 2003, and June 30, 2003, were as follows:
(in thousands) |
June 30, 2004 |
December 31, 2003 |
June 30, 2003 |
|||||||||
Cost of assets under operating leases |
$ | 1,629,552 | $ | 2,136,502 | $ | 2,689,413 | ||||||
Deferred lease origination fees and costs |
(1,033 | ) | (2,117 | ) | (44,586 | ) | ||||||
Accumulated depreciation |
(739,907 | ) | (873,945 | ) | (972,219 | ) | ||||||
Operating Lease Assets, Net |
$ | 888,612 | $ | 1,260,440 | $ | 1,672,608 | ||||||
Depreciation and residual losses at termination related to operating lease assets was $57.4 million and $91.4 million for the three months ended June 30, 2004 and 2003, respectively. For the respective six-month periods, depreciation and residual losses at termination was $121.3 million and $190.7 million.
9
Note 7 Securities Available for Sale
Securities available for sale at June 30, 2004, December 31, 2003, and June 30, 2003 were as follows:
June 30, 2004 |
December 31, 2003 |
June 30, 2003 | ||||||||||||||||
(in thousands of dollars) |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value | ||||||||||||
U.S. Treasury |
||||||||||||||||||
Under 1 year |
$ | 796 | $ | 800 | $ | 1,374 | $ | 1,376 | $ | 327 | $ | 331 | ||||||
1-5 years |
24,480 | 24,404 | 31,356 | 31,454 | 38,930 | 39,543 | ||||||||||||
6-10 years |
754 | 824 | 271,271 | 275,540 | 64,063 | 66,158 | ||||||||||||
Over 10 years |
| | | | | | ||||||||||||
Total U.S. Treasury |
26,030 | 26,028 | 304,001 | 308,370 | 103,320 | 106,032 | ||||||||||||
Federal Agencies |
||||||||||||||||||
Mortgage backed securities |
||||||||||||||||||
1-5 years |
14,181 | 14,548 | 19,899 | 20,434 | 23,879 | 24,661 | ||||||||||||
6-10 years |
155,460 | 155,628 | 198,755 | 201,995 | 248,896 | 254,564 | ||||||||||||
Over 10 years |
1,352,082 | 1,331,790 | 1,593,139 | 1,595,594 | 1,668,613 | 1,699,875 | ||||||||||||
Total Mortgage-Backed |
1,521,723 | 1,501,967 | 1,811,793 | 1,818,023 | 1,941,388 | 1,979,100 | ||||||||||||
Other Federal Agencies |
||||||||||||||||||
Under 1 year |
116,357 | 118,776 | 173,181 | 175,505 | 137,797 | 141,375 | ||||||||||||
1-5 years |
728,472 | 719,339 | 585,561 | 593,662 | 294,977 | 313,029 | ||||||||||||
6-10 years |
343,226 | 322,398 | 403,953 | 390,164 | 171,343 | 169,976 | ||||||||||||
Over 10 years |
| | 201 | 192 | | | ||||||||||||
Total Other Agencies |
1,188,055 | 1,160,512 | 1,162,896 | 1,159,523 | 604,117 | 624,380 | ||||||||||||
Total U.S. Treasury and Other Federal Agencies |
2,735,808 | 2,688,507 | 3,278,690 | 3,285,916 | 2,648,825 | 2,709,512 | ||||||||||||
Municipal Securities |
||||||||||||||||||
Under 1 year |
6,679 | 6,731 | 6,594 | 6,663 | 6,639 | 6,728 | ||||||||||||
1-5 years |
14,191 | 14,424 | 20,015 | 20,569 | 20,402 | 21,150 | ||||||||||||
6-10 years |
69,861 | 68,928 | 69,511 | 71,013 | 52,995 | 54,707 | ||||||||||||
Over 10 years |
311,972 | 303,309 | 332,181 | 334,188 | 219,011 | 223,072 | ||||||||||||
Total Municipal Securities |
402,703 | 393,391 | 428,301 | 432,433 | 299,047 | 305,657 | ||||||||||||
Private Label CMO |
||||||||||||||||||
Under 1 year |
| | 1,973 | 1,973 | | | ||||||||||||
1-5 years |
| | | | | | ||||||||||||
6-10 years |
| | | | | | ||||||||||||
Over 10 years |
585,920 | 577,013 | 388,933 | 388,684 | 197,080 | 198,617 | ||||||||||||
Total Private Label CMO |
585,920 | 577,013 | 390,906 | 390,657 | 197,080 | 198,617 | ||||||||||||
Asset Backed Securities |
||||||||||||||||||
Under 1 year |
| | | | | | ||||||||||||
1-5 years |
30,000 | 30,038 | 30,000 | 29,944 | 30,000 | 29,944 | ||||||||||||
6-10 years |
11,187 | 11,339 | 20,000 | 19,984 | | | ||||||||||||
Over 10 years |
1,074,239 | 1,075,608 | 590,826 | 589,788 | 96,875 | 96,693 | ||||||||||||
Total Asset Backed Securities |
1,115,426 | 1,116,984 | 640,826 | 639,716 | 126,875 | 126,637 | ||||||||||||
Other |
||||||||||||||||||
Under 1 year |
1,611 | 1,642 | 500 | 502 | 1,081 | 1,003 | ||||||||||||
1-5 years |
9,703 | 9,877 | 7,169 | 7,346 | 8,605 | 8,641 | ||||||||||||
6-10 years |
2,854 | 2,948 | 5,047 | 5,510 | 4,994 | 5,267 | ||||||||||||
Over 10 years |
193,652 | 190,545 | 145,103 | 146,685 | 136,226 | 132,948 | ||||||||||||
Retained interest in securitizations |
| | 5,593 | 6,356 | 148,177 | 163,664 | ||||||||||||
Marketable equity securities |
6,658 | 7,364 | 8,547 | 10,111 | 50,809 | 50,815 | ||||||||||||
Total Other |
214,479 | 212,375 | 171,959 | 176,510 | 349,892 | 362,338 | ||||||||||||
Total Securities Available for Sale |
$ | 5,054,335 | $ | 4,988,270 | $ | 4,910,682 | $ | 4,925,232 | $ | 3,621,719 | $ | 3,702,761 | ||||||
The growth from year-end and the year-ago quarter primarily consisted of over 10-year variable-rate asset backed securities.
10
Note 8 Segment Reporting
Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial Group (PFG). A fourth segment includes Huntingtons Treasury functions and capital markets activities and other unallocated assets, liabilities, revenue, and expense. Line of business results are determined based upon Huntingtons management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around Huntingtons organizational and management structure and, accordingly, the results below are not necessarily comparable with similar information published by other financial institutions.
Management relies on operating earnings for review of performance and for critical decision making purposes. Operating earnings exclude the impact of the significant items listed in the reconciliation table below. See Note 12 for further discussions regarding Restructuring Reserves.
The following provides a brief description of the four operating segments of Huntington:
Regional Banking: This segment provides products and services to retail, business banking, and commercial customers. These products and services are offered in seven operating regions within the five states of Ohio, Michigan, West Virginia, Indiana, and Kentucky through the companys traditional banking network. Each region is further divided into Retail and Commercial Banking units. Retail products and services include home equity loans and lines of credit, first mortgage loans, direct installment loans, business loans, personal and business deposit products, as well as sales of investment and insurance services. Retail products and services comprise 57% and 81% of total Regional Banking loans and deposits, respectively. These products and services are delivered to customers through banking offices, ATMs, Direct BankHuntingtons customer service center, and Web Bank at huntington.com. Commercial banking serves middle-market and commercial banking relationships, which use a variety of banking products and services including, 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 automotive dealerships within Huntingtons primary banking markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and Tennessee. This segment finances the purchase of automobiles by customers of the automotive dealerships, purchases automobiles from dealers and simultaneously leases the automobiles under long-term direct financing leases, finances dealership floor plan inventories, real estate, or working capital needs, and provides other banking services to the automotive dealerships and their owners.
Private Financial Group: This segment provides products and services designed to meet the needs of the companys higher net worth customers. Revenue is derived through trust, asset management, investment advisory, brokerage, insurance, and private banking products and services.
Treasury/Other: This segment includes revenue and expense related to assets, liabilities, and equity that are not directly assigned or allocated to one of the three business segments. Assets included in this segment include bank owned life insurance, investment securities, and mezzanine loans originated through Huntington Capital Markets Group.
A match-funded transfer pricing system is used to attribute appropriate interest income and interest expense to other business segments. The Treasury/Other segment includes the net impact of interest rate risk management, including derivative activities. Furthermore, this segments results include the investment securities portfolios and capital markets activities. Additionally, income or expense and provision for income taxes, not allocated to other business segments, are also included.
11
Listed below is certain reported financial information reconciled to Huntingtons three and six month 2004 and 2003 operating results by line of business.
Three Months Ended June 30, |
||||||||||||||||||||
Income Statements (in thousands) |
Regional Banking |
Dealer Sales |
PFG |
Treasury/ Other |
Huntington Consolidated |
|||||||||||||||
2004 |
||||||||||||||||||||
Net interest income |
$ | 155,083 | $ | 43,586 | $ | 11,166 | $ | 12,728 | $ | 222,563 | ||||||||||
Provision for credit losses |
3,949 | (8,261 | ) | (654 | ) | (61 | ) | (5,027 | ) | |||||||||||
Non-Interest income |
82,475 | 85,983 | 27,680 | 21,990 | 218,128 | |||||||||||||||
Non-Interest expense |
(147,840 | ) | (85,768 | ) | (28,559 | ) | (19,986 | ) | (282,153 | ) | ||||||||||
Provision for income taxes |
(32,783 | ) | (12,439 | ) | (3,372 | ) | 5,210 | (43,384 | ) | |||||||||||
Net income, as reported |
60,884 | 23,101 | 6,261 | 19,881 | 110,127 | |||||||||||||||
Gain on sale of automobile loans, net of tax |
| (2,068 | ) | | (1,110 | ) | (3,178 | ) | ||||||||||||
Operating Earnings |
$ | 60,884 | $ | 21,033 | $ | 6,261 | $ | 18,771 | $ | 106,949 | ||||||||||
2003 |
||||||||||||||||||||
Net interest income |
$ | 150,418 | $ | 11,639 | $ | 9,785 | $ | 30,599 | $ | 202,441 | ||||||||||
Provision for credit losses |
(40,525 | ) | (9,191 | ) | 457 | 66 | (49,193 | ) | ||||||||||||
Non-Interest income |
71,790 | 153,303 | 27,850 | 24,008 | 276,951 | |||||||||||||||
Non-Interest expense |
(143,319 | ) | (125,464 | ) | (25,886 | ) | (2,364 | ) | (297,033 | ) | ||||||||||
Provision for income taxes |
(13,427 | ) | (10,600 | ) | (4,272 | ) | (8,377 | ) | (36,676 | ) | ||||||||||
Net income, as reported |
24,937 | 19,687 | 7,934 | 43,932 | 96,490 | |||||||||||||||
Gain on sale of automobile loans, net of tax |
| (2,216 | ) | | (6,556 | ) | (8,772 | ) | ||||||||||||
Restructuring releases, net of taxes |
| | | (3,455 | ) | (3,455 | ) | |||||||||||||
Operating Earnings |
$ | 24,937 | $ | 17,471 | $ | 7,934 | $ | 33,921 | $ | 84,263 | ||||||||||
Six Months Ended June 30, |
||||||||||||||||||||
Income Statements (in thousands) |
Regional Banking |
Dealer Sales |
PFG |
Treasury/ Other |
Huntington Consolidated |
|||||||||||||||
2004 |
||||||||||||||||||||
Net interest income |
$ | 306,145 | $ | 73,891 | $ | 22,295 | $ | 42,917 | $ | 445,248 | ||||||||||
Provision for credit losses |
1,844 | (29,916 | ) | (97 | ) | (2,454 | ) | (30,623 | ) | |||||||||||
Non-Interest income |
154,526 | 196,538 | 56,307 | 38,396 | 445,767 | |||||||||||||||
Non-Interest expense |
(294,932 | ) | (177,137 | ) | (58,020 | ) | (37,718 | ) | (567,807 | ) | ||||||||||
Provision for income taxes |
(58,654 | ) | (22,182 | ) | (7,170 | ) | 9,721 | (78,285 | ) | |||||||||||
Net income, as reported |
108,929 | 41,194 | 13,315 | 50,862 | 214,300 | |||||||||||||||
Gain on sale of automobile loans, net of tax |
| (8,214 | ) | | (817 | ) | (9,031 | ) | ||||||||||||
Operating Earnings |
$ | 108,929 | $ | 32,980 | $ | 13,315 | $ | 50,045 | $ | 205,269 | ||||||||||
2003 |
||||||||||||||||||||
Net interest income |
$ | 296,832 | $ | 27,286 | $ | 19,280 | $ | 60,802 | $ | 404,200 | ||||||||||
Provision for credit losses |
(64,078 | ) | (20,576 | ) | (1,443 | ) | 60 | (86,037 | ) | |||||||||||
Non-Interest income |
143,389 | 311,819 | 55,063 | 39,604 | 549,875 | |||||||||||||||
Non-Interest expense |
(283,623 | ) | (259,633 | ) | (52,521 | ) | (16,735 | ) | (612,512 | ) | ||||||||||
Provision for income taxes |
(32,382 | ) | (20,614 | ) | (7,133 | ) | (7,177 | ) | (67,306 | ) | ||||||||||
Net income, as reported |
60,138 | 38,282 | 13,246 | 76,554 | 188,220 | |||||||||||||||
Gain on sale of automobile loans, net of tax |
| (4,807 | ) | | (10,631 | ) | (15,438 | ) | ||||||||||||
Restructuring releases, net of taxes |
| | | (4,105 | ) | (4,105 | ) | |||||||||||||
Operating Earnings |
$ | 60,138 | $ | 33,475 | $ | 13,246 | $ | 61,818 | $ | 168,677 | ||||||||||
12
Total Assets at |
Total Deposits at | |||||||||||||||||
Period-end Balance Sheet Data (in millions) |
June 30, 2004 |
December 31, 2003 |
June 30, 2003 |
June 30, 2004 |
December 31, 2003 |
June 30, 2003 | ||||||||||||
Regional Banking |
$ | 16,526 | $ | 14,971 | $ | 14,585 | $ | 16,435 | $ | 15,539 | $ | 16,628 | ||||||
Dealer Sales |
6,162 | 7,335 | 6,607 | 71 | 77 | 67 | ||||||||||||
PFG |
1,540 | 1,461 | 1,328 | 1,016 | 1,164 | 1,027 | ||||||||||||
Treasury / Other |
7,193 | 6,752 | 5,817 | 1,943 | 1,707 | 649 | ||||||||||||
Total |
$ | 31,421 | $ | 30,519 | $ | 28,337 | $ | 19,465 | $ | 18,487 | $ | 18,371 | ||||||
Note 9 Comprehensive Income
The components of Huntingtons Other Comprehensive Income in the three and six months ended June 30 were as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(in thousands) |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Unrealized holding (losses) gains on securities available for sale arising during the period: |
||||||||||||||||
Unrealized net (losses) gains |
(136,458 | ) | 9,046 | (74,755 | ) | 1,799 | ||||||||||
Related tax benefit (expense) |
47,760 | (3,162 | ) | 26,399 | (935 | ) | ||||||||||
Net |
(88,698 | ) | 5,884 | (48,356 | ) | 864 | ||||||||||
Less: Reclassification adjustment for net gains (losses) included in net income: |
||||||||||||||||
Realized net gains (losses) |
9,230 | (6,887 | ) | (5,860 | ) | (8,085 | ) | |||||||||
Related tax (expense) benefit |
(3,231 | ) | 2,410 | 2,051 | 2,830 | |||||||||||
Net |
5,999 | (4,477 | ) | (3,809 | ) | (5,255 | ) | |||||||||
Total unrealized holding (losses) gains on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income. |
||||||||||||||||
Net |
(82,699 | ) | 1,407 | (52,165 | ) | (4,391 | ) | |||||||||
Unrealized gains (losses) on derivatives used in cash flow hedging relationships arising during the period: |
||||||||||||||||
Unrealized net gains (losses) |
52,315 | (23,415 | ) | 34,282 | (26,295 | ) | ||||||||||
Related tax (expense) benefit |
(18,310 | ) | 8,195 | (11,999 | ) | 9,203 | ||||||||||
Net |
34,005 | (15,220 | ) | 22,283 | (17,092 | ) | ||||||||||
Total Other Comprehensive Loss |
$ | (48,694 | ) | $ | (13,813 | ) | $ | (29,882 | ) | $ | (21,483 | ) | ||||
13
Activity in Accumulated Other Comprehensive Income for the six months ended June 30, 2004 and 2003 was as follows:
(in thousands) |
Minimum pension liability |
Unrealized gains (losses) on securities available for sale |
Unrealized gains (losses) on derivative instruments used in cash flow hedging relationships |
Total |
||||||||||||
Balance, December 31, 2002 |
$ | (195 | ) | $ | 56,856 | $ | 5,639 | $ | 62,300 | |||||||
Period change |
| (4,391 | ) | (17,092 | ) | (21,483 | ) | |||||||||
Balance, June 30, 2003 |
$ | (195 | ) | $ | 52,465 | $ | (11,453 | ) | $ | 40,817 | ||||||
Balance, December 31, 2003 |
$ | (1,309 | ) | $ | 9,429 | $ | (5,442 | ) | $ | 2,678 | ||||||
Period change |
| (52,165 | ) | 22,283 | (29,882 | ) | ||||||||||
Balance, June 30, 2004 |
$ | (1,309 | ) | $ | (42,736 | ) | $ | 16,841 | $ | (27,204 | ) | |||||
Note 10 Earnings per Share
Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares upon the exercise of stock options. The calculation of basic and diluted earnings per share for each of the three and six months ended June 30 is as follows:
Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||||
(in thousands, except per share amount) |
2004 |
2003 |
2004 |
2003 | ||||||||
Net Income |
$ | 110,127 | $ | 96,490 | $ | 214,300 | $ | 188,220 | ||||
Average common shares outstanding |
229,429 | 228,633 | 229,328 | 229,987 | ||||||||
Dilutive effect of common stock equivalents |
3,230 | 1,939 | 3,459 | 1,697 | ||||||||
Diluted Average Common Shares Outstanding |
$ | 232,659 | $ | 230,572 | $ | 232,787 | $ | 231,684 | ||||
Earnings Per Share |
||||||||||||
Basic |
$ | 0.48 | $ | 0.42 | $ | 0.93 | $ | 0.82 | ||||
Diluted |
$ | 0.47 | $ | 0.42 | $ | 0.92 | $ | 0.81 |
The average market price of Huntingtons 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 Huntingtons common stock for the period.
Approximately 6.8 million and 5.1 million stock options were vested and outstanding at June 30, 2004 and 2003, respectively, but were not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common shares for the period and, therefore, the effect would be antidilutive. The weighted average exercise price for these options was $22.06 per share and $23.73 per share at the end of the same respective periods.
On July 30, 2004, Huntington entered into an agreement with the former shareholders of LeaseNet, Inc. to issue in early 2005 up to 86,118 shares of Huntington common stock previously held in escrow subject to LeaseNet meeting certain contractual performance criteria. A total of 366,576 common shares, previously held in escrow, will be returned to Huntington. All shares in escrow had been accounted for as treasury stock.
14
Note 11 Stock-Based Compensation
Huntingtons 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:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2004 |
2003 |
2004 |
2003 |
|||||||||||||
Stock Options Outstanding at period end (in thousands) |
19,252 | 17,399 | 19,252 | 17,399 | ||||||||||||
Assumptions |
||||||||||||||||
Risk-free interest rate |
3.89 | % | 4.46 | % | 3.82 | % | 4.30 | % | ||||||||
Expected dividend yield |
3.33 | % | 3.26 | % | 3.28 | % | 3.30 | % | ||||||||
Expected volatility of Huntingtons common stock |
30.9 | % | 33.8 | % | 30.9 | % | 33.8 | % | ||||||||
Pro Forma Results (in millions of dollars) |
||||||||||||||||
Net income, as reported |
$ | 110.1 | $ | 96.5 | $ | 214.3 | $ | 188.2 | ||||||||
Less pro forma expense, net of tax, related to options granted |
3.1 | 2.9 | 6.4 | 5.9 | ||||||||||||
Pro Forma Net Income |
$ | 107.0 | $ | 93.6 | $ | 207.9 | $ | 182.3 | ||||||||
Net Income Per Common Share: |
||||||||||||||||
Basic, as reported |
$ | 0.48 | $ | 0.42 | $ | 0.93 | $ | 0.82 | ||||||||
Basic, pro forma |
$ | 0.47 | $ | 0.41 | $ | 0.91 | $ | 0.79 | ||||||||
Diluted, as reported |
$ | 0.47 | $ | 0.42 | $ | 0.92 | $ | 0.81 | ||||||||
Diluted, pro forma |
$ | 0.46 | $ | 0.41 | $ | 0.89 | $ | 0.79 |
Note 12 Restructuring Reserves
On a quarterly basis, Huntington assesses its remaining restructuring reserves and makes adjustments to those reserves as necessary. Huntington had remaining reserves for restructuring of $8.3 million, $9.7 million, and $9.4 million as of June 30, 2004, December 31, 2003, and June 30, 2003, respectively. Huntington expects that the reserves will be adequate to fund the estimated future cash outlays.
Note 13 Benefit Plans
Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan), a non-contributory defined benefit pension plan covering substantially all employees. The Plan provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount that is at least equal to the minimum funding requirements but not more than that deductible under the Internal Revenue Code. In addition, Huntington has an unfunded defined benefit post-retirement plan that provides certain healthcare and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of vesting service under this plan. For any employee retiring on or after January 1, 1993, post-retirement healthcare benefits are based upon the employees number of months of service and are limited to the actual cost of coverage. Life insurance benefits are a percentage of the employees base salary at the time of retirement, with a maximum of $50,000 of coverage.
15
The following table shows the components of net periodic benefit expense:
Pension Benefits Three Months Ended June 30, |
Post Retirement Benefits Three Months Ended June 30, | |||||||||||||
(in thousands) |
2004 |
2003 |
2004 |
2003 | ||||||||||
Service cost |
$ | 3,040 | $ | 2,454 | $ | 326 | $ | 280 | ||||||
Interest cost |
4,371 | 4,162 | 802 | 870 | ||||||||||
Expected return on plan assets |
(5,383 | ) | (6,285 | ) | | | ||||||||
Amortization of transition asset |
| (63 | ) | 276 | 276 | |||||||||
Amortization of prior service cost |
| | 146 | 151 | ||||||||||
Settlements |
1,000 | 1,089 | | | ||||||||||
Recognized net actuarial loss |
1,984 | 444 | | | ||||||||||
Benefit Expense |
$ | 5,012 | $ | 1,801 | $ | 1,550 | $ | 1,577 | ||||||
Pension Benefits Six Months Ended June 30, |
Post Retirement Benefits Six Months Ended June 30, | |||||||||||||
(in thousands) |
2004 |
2003 |
2004 |
2003 | ||||||||||
Service cost |
$ | 6,078 | $ | 4,909 | $ | 650 | $ | 561 | ||||||
Interest cost |
8,741 | 8,323 | 1,604 | 1,739 | ||||||||||
Expected return on plan assets |
(10,764 | ) | (12,568 | ) | | | ||||||||
Amortization of transition asset |
| (126 | ) | 552 | 551 | |||||||||
Amortization of prior service cost |
| | 291 | 303 | ||||||||||
Settlements |
2,000 | 2,176 | | | ||||||||||
Recognized net actuarial loss |
3,968 | 886 | | | ||||||||||
Benefit Expense |
$ | 10,023 | $ | 3,600 | $ | 3,097 | $ | 3,154 | ||||||
Huntington also sponsors other retirement plans. One of those plans is an unfunded Supplemental Executive Retirement Plan. This plan is a nonqualified plan that provides certain former officers of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. Other plans, including plans assumed in various past acquisitions, are unfunded, nonqualified plans that provide certain active and former officers of Huntington and its subsidiaries nominated by Huntingtons compensation committee with deferred compensation, post-employment, and/or defined pension benefits in excess of the qualified plan limits imposed by federal tax law.
Huntington has a 401(k) plan, which is 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 $2.3 million and $2.1 million for the three months ended June 30, 2004 and 2003, respectively. For the respective six-month periods, the cost was $4.7 million and $4.3 million.
16
Note 14 Commitments and Contingent Liabilities
In the ordinary course of business, Huntington makes various commitments to extend credit that are not reflected in the financial statements. The contract amount of these financial agreements at June 30, 2004, December 31, 2003, and June 30, 2003, were as follows:
(in millions) |
June 30, 2004 |
December 31, 2003 |
June 30, 2003 | ||||||
Contract amount represents credit risk |
|||||||||
Commitments to extend credit |
|||||||||
Commercial |
$ | 4,993 | $ | 5,712 | $ | 4,924 | |||
Consumer |
3,868 | 3,652 | 3,157 | ||||||
Commercial real estate |
586 | 952 | 891 | ||||||
Standby letters of credit |
962 | 983 | 978 | ||||||
Commercial letters of credit |
231 | 166 | 215 |
Commitments to extend credit:
Commitments to extend credit generally have fixed expiration dates, are variable-rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customers 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 $3.2 million, $3.8 million, and $3.3 million at June 30, 2004, December 31, 2003, and June 30, 2003, respectively.
Commercial letters of credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and generally have maturities of no longer than 90 days. The merchandise or cargo being traded normally secures these instruments.
Litigation:
In the ordinary course of business, there are various legal proceedings pending against Huntington and its subsidiaries. In the opinion of management, the aggregate liabilities, if any, arising from such proceedings are not expected to have a material adverse effect on Huntingtons consolidated financial position. (See also Note 3.)
17
Item 2. Managements 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. Huntingtons 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 Huntingtons only bank subsidiary.
The following discussion and analysis provides investors and others with information that Management believes to be necessary for an understanding of Huntingtons 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 Managements 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 Huntingtons Annual Report on Form 10-K for the year ended December 31, 2003 (2003 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 Managements 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 Huntingtons 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 Huntingtons business contained in Item 1 of its 2003 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.
Securities and Exchange Commission Investigation
As previously disclosed, the Securities and Exchange Commission (SEC) is conducting a formal investigation regarding certain financial accounting and disclosure matters, including certain matters that were the subject of prior restatements by Huntington. The SEC staff has notified Huntington that the staff is considering recommending to the SEC that it institute enforcement action against Huntington and certain of its senior officers for, among other possible matters, violations of various provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933 in connection with certain financial accounting matters relating to fiscal years 2002 and earlier, and certain related disclosure matters.
Huntington is presently in negotiations with the staff of the SEC regarding a settlement of its investigation. Huntingtons chief executive officer has indicated he accepts responsibility in his position as the chief executive officer for matters that occur on his watch, and has indicated a willingness to negotiate a settlement with the SEC of these matters. Huntington expects that a settlement of this matter 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 fine and other possible measures. No assurances, however, can be provided as to the ultimate timing or outcome of these matters.
Huntington also remains in active dialogue with its bank regulators concerning these matters and is working diligently with the regulators to resolve them in a manner that permits it to proceed with its pending Unizan acquisition. No assurances, however, can be provided as to the ultimate timing or outcome of these matters.
Donald R. Kimble, who joined Huntington earlier this year as executive vice president in the Finance area, has been named chief financial officer and controller. Prior to joining Huntington, Kimble was executive vice president and controller of AmSouth Bancorporation, and previously held various subsidiary chief financial officer or accounting positions at Bank One Corporation. Michael J. McMennamin and John D. Van Fleet have relinquished their positions of chief financial officer and controller, respectively. Both remain with the company.
18
Critical Accounting Policies and Use of Significant Estimates
Note 1 to the companys Notes to Consolidated Financial Statements included in Huntingtons 2003 Form 10-K lists significant accounting policies used in the development and presentation of its financial statements. These significant accounting policies, as well as the following discussion and analysis and other financial statement disclosures, identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of Huntington, its financial position, results of operations, and cash flows.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires Huntingtons management to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in its financial statements. An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements of Huntington if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this interim report should understand that estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from when those estimates were made. Huntingtons management has identified the most significant accounting estimates and their related application in Huntingtons 2003 Form 10-K.
SUMMARY DISCUSSION OF RESULTS
Earnings comparisons from the second quarter of 2003 through the second quarter of 2004 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. Understanding the nature and implications of these factors on financial results is important in understanding the companys income statement, balance sheet, and credit quality trends and the comparison of the current quarter and year-to-date performance with comparable prior-year periods. The key factors impacting the current reporting period comparisons are more fully described in the Significant Factors Influencing Financial Performance Comparisons section, which follows the summary of results below.
2004 Second Quarter versus 2003 Second Quarter
Huntingtons 2004 second quarter earnings were $110.1 million, or $0.47 per common share, up 14% and 12%, respectively, from $96.5 million and $0.42 per common share in the year-ago quarter. This increase in earnings reflected:
| 90% decrease in provision for credit losses, |
| 10% increase in fully taxable equivalent net interest income, and |
| 5% decline in non-interest expenses |
Partially offset by a 21% decline in non-interest income.
The return on average assets (ROA) and return on average equity (ROE), were 1.41% and 19.1%, respectively, compared with 1.38% and 18.0% in the year-ago quarter (see Table 1).
2004 Second Quarter versus 2004 First Quarter
Compared with 2004 first quarter net income of $104.2 million, or $0.45 per common share, 2004 second quarter earnings were up 6% and 4%, respectively. This increase in earnings primarily reflected:
| 80% decline in provision for credit losses, and |
| 1% decline in non-interest expenses |
Partially offset by a 4% decline in non-interest income.
The ROA and ROE were 1.41% and 19.1%, respectively, in the current quarter, compared with 1.36% and 18.4% in the 2004 first quarter (see Table 1).
19
Table 1 - Selected Quarterly Income Statement Data
(in thousands, except per share amounts) |
2004 |
2003 |
2Q04 vs. 2Q03 |
||||||||||||||||||||||||
Second |
First |
Fourth |
Third |
Second |
Amount |
% |
|||||||||||||||||||||
Total interest income |
$ | 324,167 | $ | 325,931 | $ | 335,097 | $ | 333,320 | $ | 317,325 | $ | 6,842 | 2.2 | % | |||||||||||||
Total interest expense |
101,604 | 103,246 | 110,782 | 112,849 | 114,884 | (13,280 | ) | (11.6 | )% | ||||||||||||||||||
Net interest income |
222,563 | 222,685 | 224,315 | 220,471 | 202,441 | 20,122 | 9.9 | % | |||||||||||||||||||
Provision for credit losses |
5,027 | 25,596 | 26,341 | 51,615 | 49,193 | (44,166 | ) | (89.8 | )% | ||||||||||||||||||
Net interest income after provision for credit losses |
217,536 | 197,089 | 197,974 | 168,856 | 153,248 | 64,288 | 42.0 | % | |||||||||||||||||||
Operating lease income |
78,706 | 88,867 | 105,307 | 117,624 | 128,574 | (49,868 | ) | (38.8 | )% | ||||||||||||||||||
Service charges on deposit accounts |
43,596 | 41,837 | 44,763 | 42,294 | 40,914 | 2,682 | 6.6 | % | |||||||||||||||||||
Trust services |
16,708 | 16,323 | 15,793 | 15,365 | 15,580 | 1,128 | 7.2 | % | |||||||||||||||||||
Brokerage and insurance |
13,523 | 15,197 | 14,344 | 13,807 | 14,196 | (673 | ) | (4.7 | )% | ||||||||||||||||||
Mortgage banking |
23,322 | (4,296 | ) | 9,677 | 30,193 | 7,185 | 16,137 | N.M. | |||||||||||||||||||
Bank owned life insurance |
11,309 | 10,485 | 10,410 | 10,438 | 11,043 | 266 | 2.4 | % | |||||||||||||||||||
Gain on sale of automobile loans |
4,890 | 9,004 | 16,288 | | 13,496 | (8,606 | ) | (63.8 | )% | ||||||||||||||||||
Gain on sale of branch office |
| | | 13,112 | | | N.M. | ||||||||||||||||||||
Other service charges and fees |
10,645 | 9,513 | 9,237 | 10,499 | 11,372 | (727 | ) | (6.4 | )% | ||||||||||||||||||
Securities gains (losses) |
(9,230 | ) | 15,090 | 1,280 | (4,107 | ) | 6,887 | (16,117 | ) | N.M. | |||||||||||||||||
Other |
24,659 | 25,619 | 19,411 | 23,543 | 27,704 | (3,045 | ) | (11.0 | )% | ||||||||||||||||||
Total non-interest income |
218,128 | 227,639 | 246,510 | 272,768 | 276,951 | (58,823 | ) | (21.2 | )% | ||||||||||||||||||
Personnel costs |
119,715 | 121,624 | 115,762 | 113,170 | 105,242 | 14,473 | 13.8 | % | |||||||||||||||||||
Operating lease expense |
62,563 | 70,710 | 85,609 | 93,134 | 102,939 | (40,376 | ) | (39.2 | )% | ||||||||||||||||||
Outside data processing and other services |
17,563 | 18,462 | 15,957 | 17,478 | 16,104 | 1,459 | 9.1 | % | |||||||||||||||||||
Equipment |
16,228 | 16,086 | 16,840 | 16,328 | 16,341 | (113 | ) | (0.7 | )% | ||||||||||||||||||
Net occupancy |
16,258 | 16,763 | 14,925 | 15,570 | 15,377 | 881 | 5.7 | % | |||||||||||||||||||
Professional services |
7,836 | 7,299 | 12,175 | 11,116 | 9,872 | (2,036 | ) | (20.6 | )% | ||||||||||||||||||
Marketing |
8,069 | 7,839 | 6,895 | 5,515 | 8,454 | (385 | ) | (4.6 | )% | ||||||||||||||||||
Telecommunications |
4,638 | 5,194 | 5,272 | 5,612 | 5,394 | (756 | ) | (14.0 | )% | ||||||||||||||||||
Printing and supplies |
3,098 | 3,016 | 3,417 | 3,658 | 2,253 | 845 | 37.5 | % | |||||||||||||||||||
Amortization of intangibles |
204 | 204 | 204 | 204 | 204 | | N.M. | ||||||||||||||||||||
Loss on early extinguishment of debt |
| | 15,250 | | | | N.M. | ||||||||||||||||||||
Restructuring reserve releases |
| | (351 | ) | | (5,315 | ) | 5,315 | N.M. | ||||||||||||||||||
Other |
25,981 | 18,457 | 25,510 | 18,397 | 20,168 | 5,813 | 28.8 | % | |||||||||||||||||||
Total non-interest expense |
282,153 | 285,654 | 317,465 | 300,182 | 297,033 | (14,880 | ) | (5.0 | )% | ||||||||||||||||||
Income before provision for income taxes |
153,511 | 139,074 | 127,019 | 141,442 | 133,166 | 20,345 | 15.3 | % | |||||||||||||||||||
Provision for income taxes |
43,384 | 34,901 | 33,758 | 37,230 | 36,676 | 6,708 | 18.3 | % | |||||||||||||||||||
Income before cumulative effect effect of change in accounting principle |
110,127 | 104,173 | 93,261 | 104,212 | 96,490 | 13,637 | 14.1 | % | |||||||||||||||||||
Cumulative effect of change in accounting principle, net of tax (1) |
| | | (13,330 | ) | | | N.M. | |||||||||||||||||||
Net Income |
$ | 110,127 | $ | 104,173 | $ | 93,261 | $ | 90,882 | $ | 96,490 | $ | 13,637 | 14.1 | % | |||||||||||||
Per Common Share |
|||||||||||||||||||||||||||
Income before cumulative effect of change in accounting |
|||||||||||||||||||||||||||
principle - Diluted |
$ | 0.47 | $ | 0.45 | $ | 0.40 | $ | 0.45 | $ | 0.42 | $ | 0.05 | 11.9 | % | |||||||||||||
Net income - Diluted |
0.47 | 0.45 | 0.40 | 0.39 | 0.42 | 0.05 | 11.9 | % | |||||||||||||||||||
Cash dividends declared |
0.175 | 0.175 | 0.175 | 0.175 | 0.16 | 0.02 | 9.4 | % | |||||||||||||||||||
Return on: |
|||||||||||||||||||||||||||
Average total assets (2) |
1.41 | % | 1.36 | % | 1.22 | % | 1.38 | % | 1.38 | % | 0.03 | % | 2.2 | % | |||||||||||||
Average total shareholders equity (2) |
19.1 | % | 18.4 | % | 16.6 | % | 18.5 | % | 18.0 | % | 1.1 | % | 6.1 | % | |||||||||||||
Net interest margin (3) |
3.29 | % | 3.36 | % | 3.42 | % | 3.46 | % | 3.47 | % | (0.18 | )% | (5.2 | )% | |||||||||||||
Efficiency ratio (4) |
62.3 | % | 65.1 | % | 67.1 | % | 60.0 | % | 62.5 | % | (0.2 | )% | (0.3 | )% | |||||||||||||
Effective tax rate |
28.3 | % | 25.1 | % | 26.6 | % | 26.3 | % | 27.5 | % | 0.8 | % | 2.9 | % | |||||||||||||
Revenue - Fully Taxable Equivalent (FTE) |
|||||||||||||||||||||||||||
Net interest income |
$ | 222,563 | $ | 222,685 | $ | 224,315 | $ | 220,471 | $ | 202,441 | $ | 20,122 | 9.9 | % | |||||||||||||
Tax equivalent adjustment (3) |
2,919 | 3,023 | 2,954 | 2,558 | 2,076 | 843 | 40.6 | % | |||||||||||||||||||
Net Interest Income |
225,482 | 225,708 | 227,269 | 223,029 | 204,517 | 20,965 | 10.3 | % | |||||||||||||||||||
Non-Interest Income |
218,128 | 227,639 | 246,510 | 272,768 | 276,951 | (58,823 | ) | (21.2 | )% | ||||||||||||||||||
Total Revenue |
$ | 443,610 | $ | 453,347 | $ | 473,779 | $ | 495,797 | $ | 481,468 | $ | (37,858 | ) | (7.9 | )% | ||||||||||||
(1) | Due to the adoption of FASB Interpretation No. 46 for variable interest entities. |
(2) | Based on income before cumulative effect change in accounting principle, net of tax. |
(3) | On a fully taxable equivalent (FTE) basis assuming a 35% tax rate. |
(4) | Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains (losses). |
N.M. | - Not Meaningful |
20
Table 2 - Selected Year to Date Income Statement Data
Six Months Ending June 30, |
2004 vs. 2003 |
||||||||||||||
(in thousands, except per share amounts) |
2004 |
2003 |
Amount |
% |
|||||||||||
Total interest income |
$ | 650,098 | $ | 637,339 | $ | 12,759 | 2.0 | % | |||||||
Total interest expense |
204,850 | 233,139 | (28,289 | ) | (12.1 | )% | |||||||||
Net interest income |
445,248 | 404,200 | 41,048 | 10.2 | % | ||||||||||
Provision for credit losses |
30,623 | 86,037 | (55,414 | ) | (64.4 | )% | |||||||||
Net interest income after provision for credit losses |
414,625 | 318,163 | 96,462 | 30.3 | % | ||||||||||
Operating lease income |
167,573 | 266,767 | (99,194 | ) | (37.2 | )% | |||||||||
Service charges on deposit accounts |
85,433 | 80,783 | 4,650 | 5.8 | % | ||||||||||
Trust services |
33,031 | 30,491 | 2,540 | 8.3 | % | ||||||||||
Brokerage and insurance |
28,720 | 29,693 | (973 | ) | (3.3 | )% | |||||||||
Mortgage banking |
19,026 | 18,310 | 716 | 3.9 | % | ||||||||||
Bank owned life insurance |
21,794 | 22,180 | (386 | ) | (1.7 | )% | |||||||||
Gain on sale of automobile loans |
13,894 | 23,751 | (9,857 | ) | (41.5 | )% | |||||||||
Other service charges and fees |
20,158 | 21,710 | (1,552 | ) | (7.1 | )% | |||||||||
Securities gains |
5,860 | 8,085 | (2,225 | ) | (27.5 | )% | |||||||||
Other |
50,278 | 48,105 | 2,173 | 4.5 | % | ||||||||||
Total non-interest income |
445,767 | 549,875 | (104,108 | ) | (18.9 | )% | |||||||||
Personnel costs |
241,339 | 218,331 | 23,008 | 10.5 | % | ||||||||||
Operating lease expense |
133,273 | 214,527 | (81,254 | ) | (37.9 | )% | |||||||||
Outside data processing and other services |
36,025 | 32,683 | 3,342 | 10.2 | % | ||||||||||
Equipment |
32,314 | 32,753 | (439 | ) | (1.3 | )% | |||||||||
Net occupancy |
33,021 | 31,986 | 1,035 | 3.2 | % | ||||||||||
Professional services |
15,135 | 19,157 | (4,022 | ) | (21.0 | )% | |||||||||
Marketing |
15,908 | 15,080 | 828 | 5.5 | % | ||||||||||
Telecommunications |
9,832 | 11,095 | (1,263 | ) | (11.4 | )% | |||||||||
Printing and supplies |
6,114 | 5,934 | 180 | 3.0 | % | ||||||||||
Amortization of intangibles |
408 | 408 | | N.M. | |||||||||||
Restructuring reserve releases |
| (6,315 | ) | 6,315 | N.M. | ||||||||||
Other |
44,438 | 36,873 | 7,565 | 20.5 | % | ||||||||||
Total non-interest expense |
567,807 | 612,512 | (44,705 | ) | (7.3 | )% | |||||||||
Income before provision for income taxes |
292,585 | 255,526 | 37,059 | 14.5 | % | ||||||||||
Provision for income taxes |
78,285 | 67,306 | 10,979 | 16.3 | % | ||||||||||
Net Income |
$ | 214,300 | $ | 188,220 | $ | 26,080 | 13.9 | % | |||||||
Per Common Share |
|||||||||||||||
Net income - Diluted |
$ | 0.92 | $ | 0.81 | $ | 0.11 | 13.6 | % | |||||||
Cash dividends declared |
$ | 0.35 | $ | 0.32 | $ | 0.03 | 9.4 | % | |||||||
Return on: |
|||||||||||||||
Average total assets |
1.36 | % | 1.35 | % | 0.01 | % | 0.8 | % | |||||||
Average total shareholders equity |
18.4 | % | 17.3 | % | 1.1 | % | 6.1 | % | |||||||
Net interest margin (1) |
3.32 | % | 3.52 | % | (0.20 | )% | (5.7 | )% | |||||||
Efficiency ratio (2) |
63.7 | % | 64.4 | % | (0.7 | )% | (1.1 | )% | |||||||
Effective tax rate |
26.8 | % | 26.3 | % | 0.5 | % | 1.7 | % | |||||||
Revenue - Fully Taxable Equivalent (FTE) |
|||||||||||||||
Net interest income |
$ | 445,248 | $ | 404,200 | $ | 41,048 | 10.2 | % | |||||||
Tax equivalent adjustment (1) |
5,942 | 4,172 | 1,770 | 42.4 | % | ||||||||||
Net Interest Income |
451,190 | 408,372 | 42,818 | 10.5 | % | ||||||||||
Non-Interest Income |
445,767 | 549,875 | (104,108 | ) | (18.9 | )% | |||||||||
Total Revenue |
$ | 896,957 | $ | 958,247 | $ | (61,290 | ) | (6.4 | )% | ||||||
(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. |
21
2004 First Six Months versus 2003 First Six Months
Earnings for the first six months of 2004 were $214.3 million, or $0.92 per common share, both up 14% from the comparable year-ago period earnings of $188.2 million, or $0.81 per common share. This increase in earnings reflected:
| 64% decrease in provision for credit losses, |
| 10% increase in fully taxable equivalent net interest income, and |
| 7% decline in non-interest expenses |
Partially offset by a 19% decline in non-interest income.
The ROA and ROE were 1.36% and 18.4%, respectively, compared with 1.35% and 17.3% in the year-ago six-month period (see Table 2).
Significant Factors Influencing Financial Performance Comparisons
Earnings comparisons from the second quarter of 2003 through the second quarter of 2004 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.
1. | Automobile leases originated through April 2002 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 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. With no new operating leases originated since April 2002, the operating lease assets are rapidly decreasing and will eventually run-off, along with related operating lease income and expense. Since operating lease income and expense represent a significant percentage of total non-interest income and expense, respectively, throughout this reporting period, 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 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 provision for credit losses. The relative newness and rapid growth of this 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 of the combined total of automobile leases plus operating leases (see the companys 2003 Form 10-K for a full discussion). |
2. | Transition from a weak economic environment in 2003 to a recovering economic environment in 2004. The weak economic environment resulted in significant reductions in non-performing assets (NPAs), charge-offs, and the ALLL, as well as continued weak demand for commercial and industrial (C&I) loans, which contributed to declining C&I loans through the first quarter of 2004. |
3. | Declining interest rates in 2003 with generally increasing interest rates in 2004. Interest rates impacted, among other factors, loan and deposit growth, the net interest margin, and the valuation of mortgage servicing rights (MSRs) and investment securities. |
| The historically low interest rate environment resulted in strong demand and resultant growth in residential real estate, home equity, and commercial real estate (CRE) loans generally throughout this period. Mortgage banking revenue was also favorably impacted by the significant mortgage origination activity. |
22
| As interest rates fell in 2003 and attained historically low absolute levels, it became increasingly difficult to lower interest rates offered on deposit accounts commensurate with the overall decline in interest rates and yields on earning assets. This created an extremely competitive environment in which to grow deposits. These factors resulted in an inability to lower deposit rates commensurate with the overall decline in earning asset rates, which contributed to the decline in the net interest margin throughout this period. |
| Since the second quarter of 2002, the company generally has retained the servicing on mortgage loans it originates and sells. The mortgage servicing right, or 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 affected by prepayments. Prepayments usually increase when interest rates decline and decrease when 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 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 (see Table 3). |
| The company uses gains or losses on investment securities to offset MSR temporary valuation changes. As a result, changes in interest rate levels have also resulted in securities gains or losses. As such, in quarters where an MSR temporary impairment is recognized, investment securities were sold resulting in a gain on sale, and vice versa. The earnings impact of the MSR valuation change and securities gain/loss may not exactly offset due to, among other factors, the difference in the timing of when the MSR valuation is determined and recorded, compared with when the securities are sold and any gain or loss is recorded (see Table 3). |
4. | Management strategies to lower the overall credit risk profile of the balance sheet. Throughout this period, certain strategies were implemented to lower the overall credit risk profile of the balance sheet with the objective of lowering the volatility of earnings. |
| Automobile loan sales One strategy has been to lower the credit exposure to automobile loans and leases to 20% of total credit exposure, as manifested through the sale of 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 3). |
| Reduction in large-individual C&I and CRE credits This strategy has been reflected in the reduction in shared national credits, as well as other, mostly C&I, loans. In addition, the company sold and charged-off lower-quality C&I and CRE credits in 2003 and 2004. This strategy was a contributing factor in the declines in C&I loan balances, NPAs, and the ALLL. In certain quarters, this strategy contributed to higher C&I net charge-offs. |
5. | 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 in the 2003 third quarter for the cumulative effect of a change in accounting principle (see Tables 1 and 2). |
6. | 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 based on estimated costs associated with implementing these strategic initiatives. In contrast, 2003 non-interest expense reflected recoveries of previously established reserves, which were no longer needed (see Table 3) and lowered 2003 non-interest expense (see Note 21 of the companys 2003 Form 10-K Notes to Consolidated Financial Statements). There were no increases or releases of restructuring charges in the first half of 2004. |
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7. | Single commercial 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 3), as well as C&I, total commercial, and total net charge-offs for the quarter (see Table 11). |
The following table quantifies the earnings impact of changes in MSR and investment securities valuation, sales of automobile loans, restructuring reserve releases, and a single, large commercial credit recovery on the specified periods.
Table 3 - Significant Items Influencing Earnings Performance Comparisons
(in millions, except per share ) |
Pre-tax |
Impact After-tax (1) |
EPS |
|||||||||
Three Months Ended: |
||||||||||||
June 30, 2004 - GAAP earnings |
$ | 153.5 | $ | 110.1 | $ | 0.47 | ||||||
Gain on sale of automobile loans |
4.9 | 3.2 | 0.01 | |||||||||
Mortgage servicing right (MSR) temporary impairment recovery |
10.4 | 6.8 | 0.03 | |||||||||
Investment securities losses |
(9.2 | ) | (6.0 | ) | (0.03 | ) | ||||||
Single commercial credit recovery |
9.7 | 6.3 | 0.03 | |||||||||
June 30, 2003 - GAAP earnings |
$ | 133.2 | $ | 96.5 | $ | 0.42 | ||||||
Gain on sale of automobile loans |
13.5 | 8.8 | 0.04 | |||||||||
MSR temporary impairment |
(6.4 | ) | (4.1 | ) | (0.02 | ) | ||||||
Investment securities gains |
6.9 | 4.5 | 0.02 | |||||||||
Restructuring reserve releases |
5.3 | 3.5 | 0.01 | |||||||||
Six Months Ended: |
||||||||||||
June 30, 2004 - GAAP earnings |
$ | 292.6 | $ | 214.3 | $ | 0.92 | ||||||
Gain on sale of automobile loans |
13.9 | 9.0 | 0.04 | |||||||||
MSR temporary impairment recovery |
0.3 | 0.2 | | |||||||||
Investment securities gain on sale |
5.9 | 4.0 | 0.02 | |||||||||
Single commercial credit recovery |
9.7 | 6.3 | 0.03 | |||||||||
June 30, 2003 - GAAP earnings |
$ | 255.5 | $ | 188.2 | $ | 0.81 | ||||||
Gain on sale of automobile loans |
23.8 | 15.0 | 0.06 | |||||||||
MSR temporary impairment |
(6.4 | ) | (4.1 | ) | (0.02 | ) | ||||||
Investment securities gains |
8.1 | 5.0 | 0.02 | |||||||||
Restructuring reserve releases |
6.3 | 4.0 | 0.02 |
(1) | Increase (decrease) to GAAP earnings. |
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RESULTS OF OPERATIONS
Net Interest Income
2004 Second Quarter versus 2003 Second Quarter
Fully taxable equivalent net interest income increased $21.0 million, or 10%, from the year-ago quarter, reflecting the favorable impact of a 16% increase in average earning assets, partially offset by an 18 basis point, or an effective 5%, decline in the net interest margin. The fully taxable equivalent net interest margin decreased to 3.29% from 3.47%, reflecting the continued impact of historically low interest rates and the strategic repositioning of portfolios to reduce automobile loans and increase the relative proportion of lower-rate, and lower-risk, residential real estate-related loans and investment securities.
Average total loans and leases increased $2.5 billion, or 13%, from the 2003 second quarter due primarily to a $2.2 billion, or 23%, increase in average consumer loans. Contributing to the consumer loan growth was a $1.1 billion, or 58%, increase in average residential mortgages and a $0.8 billion, or 23%, increase in average home equity loans. Average total automobile loans and leases increased $0.3 billion, or 8%. This growth from the year-ago quarter reflected the positive impact of underlying new automobile loan originations, the 2003 third quarter consolidation of a $1.0 billion automobile loan securitization trust, and the rapid growth in direct financing leases due to the migration from operating lease assets, which are no longer being originated. Offsetting these positive impacts was the sale of $2.4 billion of automobile loans over this 12-month period (see Loan and Lease Composition for additional discussion and Table 10).
Average total C&I and CRE loans increased $0.3 billion, or 3%, from the year-ago quarter, reflecting an 11% increase in small business C&I and CRE loans and a 9% increase in middle-market CRE loans. Average middle-market C&I loans were down 4% from the year-ago period and reflected both weak demand and the impact from continued strategies to specifically lower exposure to large individual commercial credits, including shared national credits.
Average investment securities increased $1.6 billion, or 43%, from the year-ago quarter, primarily reflecting the investment of a portion of the proceeds from the automobile loan sales. The growth from the year-ago quarter primarily consisted of 10-year variable-rate securities.
Average total core deposits in the second quarter were $16.2 billion, up $0.8 billion, or 5%, from the year-ago quarter. This growth primarily reflected a $1.1 billion, or 18%, increase in interest bearing demand deposits, partially offset by a $0.4 billion, or 14%, decline in retail CDs.
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Tables 4 and 5 reflect quarterly average balance sheets and rates earned and paid on interest-earning assets and interest-bearing liabilities:
Table 4 - Condensed Consolidated Quarterly Average Balance Sheets
Average Balances |
2Q04 vs. 2Q03 |
|||||||||||||||||||||
(in millions) |
2004 |
2003 |
||||||||||||||||||||
Fully Tax Equivalent Basis |
Second |
First |
Fourth |
Third |
Second |
Amount |
Percent |
|||||||||||||||
Assets |
||||||||||||||||||||||
Interest bearing deposits in banks |
$ | 69 | $ | 79 | $ | 83 | $ | 90 | $ | 45 | $ | 24 | 53.3 | % | ||||||||
Trading account securities |
28 | 16 | 11 | 11 | 22 | 6 | 27.3 | |||||||||||||||
Federal funds sold and securities purchased under resale agreements |
168 | 92 | 117 | 103 | 69 | 99 | N.M. | |||||||||||||||
Loans held for sale |
254 | 207 | 295 | 898 | 601 | (347 | ) | (57.7 | ) | |||||||||||||
Securities: |
||||||||||||||||||||||
Taxable |
4,861 | 4,646 | 4,093 | 3,646 | 3,385 | 1,476 | 43.6 | |||||||||||||||
Tax exempt |
410 | 437 | 424 | 358 | 291 | 119 | 40.9 | |||||||||||||||
Total Securities |
5,271 | 5,083 | 4,517 | 4,004 | 3,676 | 1,595 | 43.4 | |||||||||||||||
Loans and Leases: |
||||||||||||||||||||||
Commercial and industrial |
5,536 | 5,365 | 5,382 | 5,380 | 5,626 | (90 | ) | (1.6 | ) | |||||||||||||
Real Estate |
||||||||||||||||||||||
Construction |
1,322 | 1,322 | 1,297 | 1,258 | 1,239 | 83 | 6.7 | |||||||||||||||
Commercial |
2,906 | 2,876 | 2,830 | 2,744 | 2,621 | 285 | 10.9 | |||||||||||||||
Consumer |
||||||||||||||||||||||
Automobile loans |
2,337 | 3,041 | 3,529 | 3,594 | 2,830 | (493 | ) | (17.4 | ) | |||||||||||||
Automobile leases |
2,139 | 1,988 | 1,802 | 1,590 | 1,306 | 833 | 63.8 | |||||||||||||||
Automobile loans and leases |
4,476 | 5,029 | 5,331 | 5,184 | 4,136 | 340 | 8.2 | |||||||||||||||
Home equity |
4,142 | 3,880 | 3,678 | 3,503 | 3,359 | 783 | 23.3 | |||||||||||||||
Residential mortgage |
2,986 | 2,674 | 2,501 | 2,075 | 1,887 | 1,099 | 58.2 | |||||||||||||||
Other loans |
399 | 356 | 387 | 367 | 379 | 20 | 5.3 | |||||||||||||||
Total Consumer |
12,003 | 11,939 | 11,897 | 11,129 | 9,761 | 2,242 | 23.0 | |||||||||||||||
Total Loans and Leases |
21,767 | 21,502 | 21,406 | 20,511 | 19,247 | 2,520 | 13.1 | |||||||||||||||
Allowance for loan and lease losses |
310 | 313 | 350 | 330 | 304 | 6 | 2.0 | |||||||||||||||
Net loans and leases |
21,457 | 21,189 | 21,056 | 20,181 | 18,943 | 2,514 | 13.3 | |||||||||||||||
Total earning assets |
27,557 | 26,979 | 26,429 | 25,617 | 23,660 | 3,897 | 16.5 | |||||||||||||||
Operating lease assets |
977 | 1,166 | 1,355 | 1,565 | 1,802 | (825 | ) | (45.8 | ) | |||||||||||||
Cash and due from banks |
772 | 740 | 766 | 747 | 735 | 37 | 5.0 | |||||||||||||||
Intangible assets |
216 | 217 | 217 | 218 | 218 | (2 | ) | (0.9 | ) | |||||||||||||
All other assets |
2,101 | 2,046 | 2,005 | 2,067 | 1,988 | 113 | 5.7 | |||||||||||||||
Total Assets |
$ | 31,313 | $ | 30,835 | $ | 30,422 | $ | 29,884 | $ | 28,099 | $ | 3,214 | 11.4 | % | ||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||
Core deposits |
||||||||||||||||||||||
Non-interest bearing deposits |
$ | 3,223 | $ | 3,017 | $ | 3,131 | $ | 3,218 | $ | 3,046 | $ | 177 | 5.8 | % | ||||||||
Interest bearing demand deposits |
7,168 | 6,609 | 6,466 | 6,558 | 6,100 | 1,068 | 17.5 | |||||||||||||||
Savings deposits |
2,839 | 2,819 | 2,824 | 2,808 | 2,804 | 35 | 1.2 | |||||||||||||||
Retail certificates of deposit |
2,400 | 2,399 | 2,492 | 2,561 | 2,798 | (398 | ) | (14.2 | ) | |||||||||||||
Other domestic time deposits |
600 | 637 | 631 | 656 | 673 | (73 | ) | (10.8 | ) | |||||||||||||
Total core deposits |
16,230 | 15,481 | 15,544 | 15,801 | 15,421 | 809 | 5.2 | |||||||||||||||
Domestic time deposits of $100,000 or more |
795 | 788 | 828 | 803 | 808 | (13 | ) | (1.6 | ) | |||||||||||||
Brokered time deposits and negotiable CDs |
1,737 | 1,907 | 1,851 | 1,421 | 1,241 | 496 | 40.0 | |||||||||||||||
Foreign time deposits |
542 | 549 | 522 | 536 | 426 | 116 | 27.2 | |||||||||||||||
Total deposits |
19,304 | 18,725 | 18,745 | 18,561 | 17,896 | 1,408 | 7.9 | |||||||||||||||
Short-term borrowings |
1,396 | 1,603 | 1,433 | 1,393 | 1,635 | (239 | ) | (14.6 | ) | |||||||||||||
Federal Home Loan Bank advances |
1,270 | 1,273 | 1,273 | 1,273 | 1,267 | 3 | 0.2 | |||||||||||||||
Subordinated notes and other long-term debt, |
||||||||||||||||||||||
including preferred capital securities |
5,623 | 5,557 | 5,432 | 5,197 | 4,010 | 1,613 | 40.2 | |||||||||||||||
Total interest bearing liabilities |
24,370 | 24,141 | 23,752 | 23,206 | 21,762 | 2,608 | 12.0 | |||||||||||||||
All other liabilities |
1,397 | 1,399 | 1,311 | 1,221 | 1,140 | 257 | 22.5 | |||||||||||||||
Shareholders equity |
2,323 | 2,278 | 2,228 | 2,239 | 2,151 | 172 | 8.0 | |||||||||||||||
Total Liabilities and Shareholders Equity |