UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED March 31, 2004
Commission File Number 0-2525
Huntington Bancshares Incorporated
| Maryland | 31-0724920 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No ¨
There were 229,410,244 shares of Registrant’s without par value common stock outstanding on April 30, 2004.
1
Huntington Bancshares Incorporated
|
Part I. |
Financial Information | |||
|
Item 1. |
Financial Statements | |||
| Consolidated Balance Sheets at March 31, 2004, December 31, 2003, and March 31, 2003 | 3 | |||
| Consolidated Statements of Income For the three months ended March 31, 2004 and 2003 | 4 | |||
| Consolidated Statements of Changes in Shareholders’ Equity For the three months ended March 31, 2004 and 2003 | 5 | |||
| Consolidated Statements of Cash Flows For the three months ended March 31, 2004 and 2003 | 6 | |||
| Notes to Unaudited Consolidated Financial Statements | 7 | |||
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||
|
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 59 | ||
|
Item 4. |
Controls and Procedures | 59 | ||
|
Part II. |
Other Information | |||
|
Item 2. |
Changes in Securities and Use of Proceeds | 60 | ||
|
Item 6. |
Exhibits and Reports on Form 8-K | 60-61 | ||
|
Signatures |
62 | |||
2
Part 1. Financial Information
| Item 1. | Financial Statements |
Huntington Bancshares Incorporated
|
(in thousands, except number of shares) |
March 31,
2004 |
December 31,
2003 |
March 31,
2003 |
|||||||||
| (Unaudited) | (Unaudited) | |||||||||||
|
Assets |
||||||||||||
|
Cash and due from banks |
$ | 766,432 | $ | 899,689 | $ | 863,782 | ||||||
|
Federal funds sold and securities purchased under resale agreements |
224,841 | 96,814 | 46,456 | |||||||||
|
Interest bearing deposits in banks |
54,027 | 33,627 | 36,117 | |||||||||
|
Trading account securities |
16,410 | 7,589 | 22,715 | |||||||||
|
Mortgage loans held for sale |
230,417 | 226,729 | 513,638 | |||||||||
|
Securities available for sale - at fair value |
5,455,138 | 4,925,232 | 3,680,260 | |||||||||
|
Investment securities - fair value $3,294; $3,937 and $7,075, respectively |
3,209 | 3,828 | 6,908 | |||||||||
|
Loans and leases |
21,193,627 | 21,075,118 | 18,896,499 | |||||||||
|
Allowance for loan and lease losses |
(295,377 | ) | (299,732 | ) | (303,636 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
||||
|
Net loans and leases |
20,898,250 | 20,775,386 | 18,592,863 | |||||||||
|
|
|
|
|
|
|
|
|
|
||||
|
Operating lease assets |
1,070,958 | 1,260,440 | 1,951,316 | |||||||||
|
Bank owned life insurance |
938,156 | 927,671 | 895,780 | |||||||||
|
Premises and equipment |
351,073 | 349,712 | 340,223 | |||||||||
|
Goodwill and other intangible assets |
216,805 | 217,009 | 218,363 | |||||||||
|
Customers’ acceptance liability |
7,909 | 9,553 | 10,004 | |||||||||
|
Accrued income and other assets |
805,455 | 786,047 | 726,209 | |||||||||
|
|
|
|
|
|
|
|
|
|
||||
|
Total Assets |
$ | 31,039,080 | $ | 30,519,326 | $ | 27,904,634 | ||||||
|
|
|
|
|
|
|
|
|
|
||||
|
Liabilities |
||||||||||||
|
Deposits |
$ | 18,988,846 | $ | 18,487,395 | $ | 17,688,984 | ||||||
|
Short-term borrowings |
1,076,302 | 1,452,304 | 1,749,128 | |||||||||
|
Bank acceptances outstanding |
7,909 | 9,553 | 10,004 | |||||||||
|
Federal Home Loan Bank advances |
1,273,000 | 1,273,000 | 1,253,000 | |||||||||
|
Subordinated notes |
1,066,705 | 990,470 | 583,897 | |||||||||
|
Other long-term debt |
4,478,599 | 4,544,509 | 2,923,005 | |||||||||
|
Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely junior subordinated debentures of the parent company |
— | — | 300,000 | |||||||||
|
Allowance for unfunded loan commitments and letters of credit |
32,089 | 35,522 | 33,381 | |||||||||
|
Accrued expenses and other liabilities |
1,751,451 | 1,451,571 | 1,207,189 | |||||||||
|
|
|
|
|
|
|
|
|
|
||||
|
Total Liabilities |
28,674,901 | 28,244,324 | 25,748,588 | |||||||||
|
|
|
|
|
|
|
|
|
|
||||
|
Shareholders’ equity |
||||||||||||
|
Preferred stock - authorized 6,617,808 shares; none outstanding |
— | — | — | |||||||||
|
Common stock - without par value; authorized 500,000,000 shares; issued 257,866,255 shares; outstanding 229,410,043; 229,008,088 and 228,641,557 shares, respectively |
2,482,342 | 2,483,542 | 2,483,258 | |||||||||
|
Less 28,456,212; 28,858,167 and 29,224,698 treasury shares, respectively |
(541,048 | ) | (548,576 | ) | (555,042 | ) | ||||||
|
Accumulated other comprehensive income |
21,490 | 2,678 | 54,630 | |||||||||
|
Retained earnings |
401,395 | 337,358 | 173,200 | |||||||||
|
|
|
|
|
|
|
|
|
|
||||
|
Total Shareholders’ Equity |
2,364,179 | 2,275,002 | 2,156,046 | |||||||||
|
|
|
|
|
|
|
|
|
|
||||
|
Total Liabilities and Shareholders’ Equity |
$ | 31,039,080 | $ | 30,519,326 | $ | 27,904,634 | ||||||
|
|
|
|
|
|
|
|
|
|
||||
See notes to unaudited consolidated financial statements.
3
Huntington Bancshares Incorporated
Consolidated Statements of Income
(Unaudited)
|
For the Three Months Ended
March 31, |
||||||||
|
(in thousands, except per share amounts) |
2004
|
2003
|
||||||
|
Interest and fee income |
||||||||
|
Loans and leases |
$ | 270,868 | $ | 270,979 | ||||
|
Securities |
51,659 | 42,078 | ||||||
|
Other |
3,404 | 6,957 | ||||||
|
|
|
|
|
|
|
|||
|
Total Interest and Fee Income |
325,931 | 320,014 | ||||||
|
|
|
|
|
|
|
|||
|
Interest expense |
||||||||
|
Deposits |
59,626 | 79,710 | ||||||
|
Short-term borrowings |
3,313 | 5,559 | ||||||
|
Federal Home Loan Bank advances |
8,041 | 5,585 | ||||||
|
Subordinated notes and other long-term debt including preferred capital securities |
32,266 | 27,401 | ||||||
|
|
|
|
|
|
|
|||
|
Total Interest Expense |
103,246 | 118,255 | ||||||
|
|
|
|
|
|
|
|||
|
Net Interest Income |
222,685 | 201,759 | ||||||
|
Provision for credit losses |
25,596 | 36,844 | ||||||
|
|
|
|
|
|
|
|||
|
Net Interest Income After Provision for Credit Losses |
197,089 | 164,915 | ||||||
|
|
|
|
|
|
|
|||
|
Operating lease income |
88,867 | 138,193 | ||||||
|
Service charges on deposit accounts |
41,837 | 39,869 | ||||||
|
Trust services |
16,323 | 14,911 | ||||||
|
Brokerage and insurance income |
15,197 | 15,497 | ||||||
|
Mortgage banking |
(4,296 | ) | 11,125 | |||||
|
Bank owned life insurance income |
10,485 | 11,137 | ||||||
|
Other service charges and fees |
9,513 | 10,338 | ||||||
|
Gain on sales of automobile loans |
9,004 | 10,255 | ||||||
|
Securities gains |
15,090 | 1,198 | ||||||
|
Other |
25,619 | 20,401 | ||||||
|
|
|
|
|
|
|
|||
|
Total Non-Interest Income |
227,639 | 272,924 | ||||||
|
|
|
|
|
|
|
|||
|
Personnel costs |
121,624 | 113,089 | ||||||
|
Operating lease expense |
70,710 | 111,588 | ||||||
|
Outside data processing and other services |
18,462 | 16,579 | ||||||
|
Equipment |
16,086 | 16,412 | ||||||
|
Net occupancy |
16,763 | 16,609 | ||||||
|
Professional services |
7,299 | 9,285 | ||||||
|
Marketing |
7,839 | 6,626 | ||||||
|
Telecommunications |
5,194 | 5,701 | ||||||
|
Printing and supplies |
3,016 | 3,681 | ||||||
|
Amortization of intangibles |
204 | 204 | ||||||
|
Restructuring reserve releases |
— | (1,000 | ) | |||||
|
Other |
18,457 | 16,705 | ||||||
|
|
|
|
|
|
|
|||
|
Total Non-Interest Expense |
285,654 | 315,479 | ||||||
|
|
|
|
|
|
|
|||
|
Income Before Provision for Income Taxes |
139,074 | 122,360 | ||||||
|
Provision for income taxes |
34,901 | 30,630 | ||||||
|
|
|
|
|
|
|
|||
|
Net Income |
$ | 104,173 | $ | 91,730 | ||||
|
|
|
|
|
|
|
|||
|
Average common shares: |
||||||||
|
Basic |
229,227 | 231,355 | ||||||
|
Diluted |
232,915 | 232,805 | ||||||
|
Per Common Share: |
||||||||
|
Net Income - Basic |
$ | 0.45 | $ | 0.39 | ||||
|
Net Income - Diluted |
0.45 | 0.39 | ||||||
|
Cash Dividends Declared |
0.175 | 0.16 | ||||||
See notes to unaudited consolidated financial statements.
4
Huntington Bancshares Incorporated
Consolidated Statements of Changes in Shareholders’ Equity
|
Common Stock
|
Treasury Shares
|
Accumulated
Income |
Retained Earnings |
Total |
|||||||||||||||||||||
|
(in thousands) |
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||
|
Three Months Ended March 31, 2003: |
|||||||||||||||||||||||||
|
Balance, beginning of period |
257,866 | $ | 2,484,421 | (24,987 | ) | $ | (475,399 | ) | $ | 62,300 | $ | 118,471 | $ | 2,189,793 | |||||||||||
|
Comprehensive Income: |
|||||||||||||||||||||||||
|
Net income |
91,730 | 91,730 | |||||||||||||||||||||||
|
Unrealized net holding losses on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income |
(5,798 | ) | (5,798 | ) | |||||||||||||||||||||
|
Unrealized losses on derivative instruments used in cash flow hedging relationships |
(1,872 | ) | (1,872 | ) | |||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
|
Total comprehensive income |
84,060 | ||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
|
Cash dividends declared ($0.16 per share) |
(37,001 | ) | (37,001 | ) | |||||||||||||||||||||
|
Stock options exercised |
(1,163 | ) | 71 | 1,308 | 145 | ||||||||||||||||||||
|
Treasury shares purchased |
(4,300 | ) | (81,061 | ) | (81,061 | ) | |||||||||||||||||||
|
Other |
(9 | ) | 110 | 110 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Balance, end of period (Unaudited) |
257,866 | $ | 2,483,258 | (29,225 | ) | $ | (555,042 | ) | $ | 54,630 | $ | 173,200 | $ | 2,156,046 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Three Months Ended March 31, 2004: |
|||||||||||||||||||||||||
|
Balance, beginning of period |
257,866 | $ | 2,483,542 | (28,858 | ) | $ | (548,576 | ) | $ | 2,678 | $ | 337,358 | $ | 2,275,002 | |||||||||||
|
Comprehensive Income: |
|||||||||||||||||||||||||
|
Net income |
104,173 | 104,173 | |||||||||||||||||||||||
|
Unrealized net holding gains on securities available for sale arising during the period, net of reclassification adjustment for net gains included in net income |
30,534 | 30,534 | |||||||||||||||||||||||
|
Unrealized losses on derivative instruments used in cash flow hedging relationships |
(11,722 | ) | (11,722 | ) | |||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
|
Total comprehensive income |
122,985 | ||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
|
Cash dividends declared ($0.175 per share) |
(40,136 | ) | (40,136 | ) | |||||||||||||||||||||
|
Stock options exercised |
(832 | ) | 378 | 7,274 | 6,442 | ||||||||||||||||||||
|
Other |
(368 | ) | 24 | 254 | (114 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Balance, end of period (Unaudited) |
257,866 | $ | 2,482,342 | (28,456 | ) | $ | (541,048 | ) | $ | 21,490 | $ | 401,395 | $ | 2,364,179 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
See notes to unaudited consolidated financial statements.
5
Huntington Bancshares Incorporated
Consolidated Statements of Cash Flows
(Unaudited)
|
Three Months Ended
March 31, |
||||||||
|
(in thousands) |
2004
|
2003
|
||||||
|
Operating Activities |
||||||||
|
Net Income |
$ | 104,173 | $ | 91,730 | ||||
|
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
|
Provision for credit losses |
25,596 | 36,844 | ||||||
|
Depreciation on operating lease assets |
63,823 | 98,101 | ||||||
|
Other depreciation and amortization |
35,580 | 21,671 | ||||||
|
Deferred income tax expense |
28,818 | 27,038 | ||||||
|
Increase in trading account securities |
(8,821 | ) | (22,474 | ) | ||||
|
(Increase) decrease in mortgages held for sale |
(3,688 | ) | 14,741 | |||||
|
Gains on sales of securities available for sale |
(15,090 | ) | (1,198 | ) | ||||
|
Gains on sales/securitizations of loans |
(9,004 | ) | (12,819 | ) | ||||
|
Restructuring reserve releases |
— | (1,000 | ) | |||||
|
Other, net |
(27,521 | ) | (102,958 | ) | ||||
|
|
|
|
|
|
|
|||
|
Net Cash Provided by Operating Activities |
193,866 | 149,676 | ||||||
|
|
|
|
|
|
|
|||
|
Investing Activities |
||||||||
|
(Increase) decrease in interest bearing deposits in banks |
(20,400 | ) | 1,183 | |||||
|
Proceeds from: |
||||||||
|
Maturities and calls of investment securities |
628 | 640 | ||||||
|
Maturities and calls of securities available for sale |
242,654 | 608,832 | ||||||
|
Sales of securities available for sale |
450,890 | 218,001 | ||||||
|
Purchases of securities available for sale |
(783,854 | ) | (995,909 | ) | ||||
|
Proceeds from sales/securitizations of loans |
876,686 | 680,564 | ||||||
|
Net loan and lease originations, excluding sales |
(1,138,911 | ) | (1,142,863 | ) | ||||
|
Net decrease in operating lease assets |
126,801 | 151,108 | ||||||
|
Proceeds from sale of premises and equipment |
260 | 3,669 | ||||||
|
Purchases of premises and equipment |
(13,432 | ) | (10,198 | ) | ||||
|
Proceeds from sales of other real estate |
1,562 | 1,924 | ||||||
|
|
|
|
|
|
|
|||
|
Net Cash Used for Investing Activities |
(257,116 | ) | (483,049 | ) | ||||
|
|
|
|
|
|
|
|||
|
Financing Activities |
||||||||
|
Increase in deposits |
494,019 | 205,694 | ||||||
|
Decrease in short-term borrowings |
(376,002 | ) | (391,888 | ) | ||||
|
Proceeds from issuance of subordinated notes |
148,830 | — | ||||||
|
Maturity of subordinated notes |
(100,000 | ) | — | |||||
|
Proceeds from Federal Home Loan Bank advances |
— | 250,000 | ||||||
|
Maturity of Federal Home Loan Bank advances |
— | (10,000 | ) | |||||
|
Proceeds from issuance of long-term debt |
175,000 | 635,000 | ||||||
|
Maturity of long-term debt |
(250,000 | ) | (355,000 | ) | ||||
|
Dividends paid on common stock |
(40,269 | ) | (28,042 | ) | ||||
|
Repurchases of common stock |
— | (81,061 | ) | |||||
|
Net proceeds from issuance of common stock |
6,442 | 145 | ||||||
|
|
|
|
|
|
|
|||
|
Net Cash Provided by Financing Activities |
58,020 | 224,848 | ||||||
|
|
|
|
|
|
|
|||
|
Change in Cash and Cash Equivalents |
(5,230 | ) | (108,525 | ) | ||||
|
Cash and Cash Equivalents at Beginning of Period |
996,503 | 1,018,763 | ||||||
|
|
|
|
|
|
|
|||
|
Cash and Cash Equivalents at End of Period |
$ | 991,273 | $ | 910,238 | ||||
|
|
|
|
|
|
|
|||
|
Supplemental disclosures: |
||||||||
|
Income taxes paid |
$ | 849 | $ | 42,897 | ||||
|
Interest paid |
98,694 | 122,174 | ||||||
|
Non-cash activities |
||||||||
|
Residential mortgage loans securitized and retained in securities available for sale |
115,929 | 108,917 | ||||||
|
Common stock dividends accrued not paid |
31,180 | 37,001 | ||||||
See notes to unaudited consolidated financial statements.
6
Note 1 – Basis of Presentation
The accompanying unaudited consolidated financial statements of Huntington Bancshares Incorporated (Huntington) reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted. The Notes to the Consolidated Financial Statements appearing in Huntington’s 2003 Annual Report on Form 10-K (Form 10-K), which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements.
Certain amounts in the prior year’s financial statements have been reclassified to conform to the 2004 presentation.
For statement of cash flows purposes, cash and cash equivalents are defined as the sum of “Cash and due from banks” and “Federal funds sold and securities purchased under resale agreements”.
Note 2 – New Accounting Pronouncements
SEC Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105): On March 9, 2004, the SEC issued SAB 105. This bulletin was issued to inform registrants of the SEC’s view that the fair value of loan commitments that are required to follow derivative accounting under FAS 133, Accounting for Derivative Instruments and Hedging Activities , should not consider the expected future cash flows related to the associated servicing of the future loan. The SEC believes that incorporating expected future cash flows related to the associated servicing of the loan essentially results in the immediate recognition of a servicing asset, which is only appropriate once the servicing asset has been contractually separated from the underlying loan by sale or by securitization of the loan with servicing retained. Furthermore, no other internally-developed intangible assets, such as customer relationship intangibles, should be recorded as part of the loan commitment derivative. The SEC believes that recognition of such assets is only appropriate in the event of a third-party transaction, such as the purchase of a loan commitment either individually, in a portfolio, or in a business combination.
In addition, SAB 105 requires registrants to disclose their accounting policy for loan commitments pursuant to APB Opinion No. 22, Disclosure of Accounting Policies , including methods and assumptions used to estimate fair value and any associated hedging strategies, as required by FAS 107, Disclosure of Fair Value of Financial Instruments , FAS 133, Accounting for Derivative Instruments and Hedging Activities , and Item 305 of Regulation S-K (Qualitative and Quantitative Disclosures about Market Risk). The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. Huntington enters into such commitments with customers in connection with residential loan applications and at March 31, 2004, had approximately $295 million in notional amount of these commitments outstanding. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.
FASB Staff Position No. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-1): In December 2003, President Bush signed into law a bill that expands Medicare benefits, primarily adding a prescription drug benefit for Medicare-eligible retirees beginning in 2006. The law also provides a federal subsidy to companies that sponsor postretirement benefit plans that provide prescription drug coverage. FSP 106-1 was issued in January 2004 and permits deferring the recognition of the new Medicare provisions’ impact due to the lack of specific authoritative guidance on accounting for the federal subsidy. Huntington has elected to defer accounting for the effects of this new legislation until the specific authoritative guidance is issued. Accordingly, the postretirement benefit obligations and net periodic costs reported in the accompanying financial statements and notes do not reflect the impact of this legislation. The accounting guidance, when issued, could require changes to previously reported financial information. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.
AICPA Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3): In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 03-3, to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to such loans and debt
7
securities acquired in purchase business combinations and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield or valuation allowance, such as the allowance for credit losses. Subsequent to the initial investment, increases in expected cash flows generally should be recognized prospectively through adjustment of the yield on the loan or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004, with early application encouraged. The impact of this new pronouncement is not expected to be material to Huntington’s financial condition, results of operations, or cash flows.
FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (FAS 148): FAS 148 was issued in December 2002, as an amendment of Statement No. 123, Accounting for Stock-Based Compensation , to provide alternative methods of transition to FAS 123’s fair value method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure provisions of FAS 123 and Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting (APB 28), to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While FAS 148 does not require companies to account for employee stock options using the fair value method, the disclosure provisions of FAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of FAS 123 or the intrinsic value method of APB 25, which is the method currently used by Huntington. See note 10 for the anticipated effect of this pronouncement.
Note 3 – Acquisition
On January 27, 2004, Huntington announced the signing of a definitive agreement to acquire Unizan Financial Corp. (Unizan), a financial holding company based in Canton, Ohio, with $2.7 billion of assets at December 31, 2003. Under the terms of the agreement, Unizan shareholders will receive 1.1424 shares of Huntington common stock, on a tax-free basis, for each share of Unizan. Based on the $23.10 closing price of Huntington’s common stock on January 26, 2004, this represented a price of $26.39 per Unizan share, and valued the transaction at approximately $587 million. The merger was unanimously approved by both boards and is expected to close early in the third quarter, pending customary regulatory approvals, as well as Unizan shareholder approval. Huntington also announced its intention to repurchase approximately 2.5 million common shares (approximately 10% of the number of shares issued to Unizan shareholders) after the Unizan shareholders’ meeting.
8
Note 4 – Securities Available for Sale
Securities available for sale at March 31, 2004, December 31, 2003, and March 31, 2003 were as follows:
|
March 31, 2004
|
December 31, 2003
|
March 31, 2003
|
||||||||||||||||
|
(in thousands) |
Amortized
Cost |
Fair Value
|
Amortized
Cost |
Fair Value
|
Amortized
Cost |
Fair Value
|
||||||||||||
|
U.S. Treasury |
||||||||||||||||||
|
Under 1 year |
$ | 2,491 | $ | 2,493 | $ | 1,374 | $ | 1,376 | $ | 325 | $ | 333 | ||||||
|
1-5 years |
24,478 | 25,410 | 31,356 | 31,454 | 12,584 | 13,150 | ||||||||||||
|
6-10 years |
51,239 | 51,352 | 271,271 | 275,540 | 44,304 | 45,494 | ||||||||||||
|
Over 10 years |
— | — | — | — | 412 | 477 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total U.S. Treasury |
78,208 | 79,255 | 304,001 | 308,370 | 57,625 | 59,454 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Federal agencies |
||||||||||||||||||
|
Mortgage backed securities |
||||||||||||||||||
|
1-5 years |
17,487 | 17,939 | 19,899 | 20,434 | 30,431 | 31,646 | ||||||||||||
|
6-10 years |
183,551 | 187,976 | 198,755 | 201,995 | 371,063 | 378,645 | ||||||||||||
|
Over 10 years |
1,553,297 | 1,574,920 | 1,593,139 | 1,595,594 | 1,715,212 | 1,739,662 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total mortgage-backed |
1,754,335 | 1,780,835 | 1,811,793 | 1,818,023 | 2,116,706 | 2,149,953 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Other agencies |
||||||||||||||||||
|
Under 1 year |
106,087 | 107,195 | 173,181 | 175,505 | 102,118 | 105,140 | ||||||||||||
|
1-5 years |
779,563 | 798,034 | 585,561 | 593,662 | 426,449 | 447,026 | ||||||||||||
|
6-10 years |
403,006 | 403,441 | 403,953 | 390,164 | 3,929 | 4,470 | ||||||||||||
|
Over 10 years |
73,625 | 73,625 | 201 | 192 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total other |
1,362,281 | 1,382,295 | 1,162,896 | 1,159,523 | 532,496 | 556,636 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total U.S Treasury and Federal Agencies |
3,194,824 | 3,242,385 | 3,278,690 | 3,285,916 | 2,706,827 | 2,766,043 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Municipal Securities |
||||||||||||||||||
|
Under 1 year |
6,941 | 6,964 | 6,594 | 6,663 | 5,668 | 5,679 | ||||||||||||
|
1-5 years |
19,535 | 19,941 | 20,015 | 20,569 | 25,069 | 25,766 | ||||||||||||
|
6-10 years |
79,236 | 81,027 | 69,511 | 71,013 | 53,876 | 54,803 | ||||||||||||
|
Over 10 years |
312,325 | 316,026 | 332,181 | 334,188 | 169,013 | 170,189 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total Municipal Securities |
418,037 | 423,958 | 428,301 | 432,433 | 253,626 | 256,437 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Private Label CMO |
||||||||||||||||||
|
Under 1 year |
— | — | 1,973 | 1,973 | — | — | ||||||||||||
|
1-5 years |
— | — | — | — | — | — | ||||||||||||
|
6-10 years |
— | — | — | — | — | — | ||||||||||||
|
Over 10 years |
569,776 | 574,002 | 388,933 | 388,684 | 226,386 | 227,868 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total Private Label CMO |
569,776 | 574,002 | 390,906 | 390,657 | 226,386 | 227,868 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Asset Backed Securities |
||||||||||||||||||
|
Under 1 year |
— | — | — | — | — | — | ||||||||||||
|
1-5 years |
30,000 | 30,075 | 30,000 | 29,944 | 30,000 | 29,850 | ||||||||||||
|
6-10 years |
11,780 | 11,783 | 20,000 | 19,984 | — | — | ||||||||||||
|
Over 10 years |
949,747 | 950,286 | 590,826 | 589,788 | 55,000 | 54,897 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total Asset Backed Securities |
991,527 | 992,144 | 640,826 | 639,716 | 85,000 | 84,747 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Other |
||||||||||||||||||
|
Under 1 year |
500 | 742 | 500 | 502 | 1,000 | 1,027 | ||||||||||||
|
1-5 years |
9,317 | 9,724 | 7,169 | 7,346 | 6,863 | 7,129 | ||||||||||||
|
6-10 years |
3,259 | 3,391 | 5,047 | 5,510 | 4,595 | 5,119 | ||||||||||||
|
Over 10 years |
193,280 | 193,997 | 145,103 | 146,685 | 143,264 | 141,519 | ||||||||||||
|
Retained interest in securitizations |
5,365 | 6,050 | 5,593 | 6,356 | 129,137 | 144,626 | ||||||||||||
|
Marketable equity securities |
7,479 | 8,745 | 8,547 | 10,111 | 44,679 | 45,745 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total Other |
219,200 | 222,649 | 171,959 | 176,510 | 329,538 | 345,165 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Total Securities Available for Sale |
$ | 5,393,364 | $ | 5,455,138 | $ | 4,910,682 | $ | 4,925,232 | $ | 3,601,377 | $ | 3,680,260 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
9
Note 5 – Allowances for Credit Losses (ACL)
The ACL is comprised of the allowance for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit (AULC). The following table reflects activity in the ACL for the three-month periods ended March 31, 2004, December 31, 2003, and March 31, 2003:
Note 6 – Operating Lease Assets
Operating lease assets at March 31, 2004, December 31, 2003, and March 31, 2003, were as follows:
|
(in thousands) |
March 31,
2004 |
December 31,
2003 |
March 31,
2003 |
|||||||||
|
Cost of assets under operating leases |
$ | 1,894,687 | $ | 2,136,502 | $ | 3,007,188 | ||||||
|
Deferred lease origination fees and costs |
(2,485 | ) | (2,117 | ) | (48,208 | ) | ||||||
|
Accumulated depreciation |
(821,244 | ) | (873,945 | ) | (1,007,664 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
||||
|
Operating Lease Assets, Net |
$ | 1,070,958 | $ | 1,260,440 | $ | 1,951,316 | ||||||
|
|
|
|
|
|
|
|
|
|
||||
Depreciation expense related to operating lease assets was $63.8 million and $98.1 million for the three months ended March 31, 2004 and 2003, respectively.
Note 7 – Segment Reporting
Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the Private Financial Group (PFG). A fourth segment includes Huntington’s Treasury functions and capital markets activities and other unallocated assets, liabilities, revenue, and expense. Lines of business results are determined based upon Huntington’s management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around Huntington’s organizational and management structure and, accordingly, the results below are not necessarily comparable with similar information published by other financial institutions.
Management relies on “operating earnings” for review of performance and for critical decision making purposes. Operating earnings exclude the impact of the significant items listed in the reconciliation table below. See Note 12 to the consolidated financial statements for further discussions regarding Restructuring Reserves. The financial information that follows is inclusive of the above adjustments on an after-tax basis to reflect the reconciliation to reported net income.
The following provides a brief description of the four operating segments of Huntington:
Regional Banking: This segment provides products and services to retail, business banking, and commercial customers. This segment’s products and services are offered in seven operating regions within the five states of Ohio, Michigan, West
10
Virginia, Indiana, and Kentucky through Huntington’s traditional banking network. Each region is further divided into Retail and Commercial Banking units. Retail products and services include home equity loans and lines of credit, first mortgage loans, direct installment loans, business loans, personal and business deposit products, as well as sales of investment and insurance services. Retail products and services comprise 55% and 82%, of total Regional Banking loans and deposits, respectively. These products and services are delivered to customers through banking offices, ATMs, Direct Bank—Huntington’s customer service center, and Web Bank at huntington.com. Commercial banking products include middle-market and large commercial banking relationships which use a variety of banking products and services including, commercial and industrial loans, international trade, and cash management, leasing, interest rate protection products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities.
Dealer Sales: This segment serves automotive dealerships within Huntington’s primary banking markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and Tennessee. This segment finances the purchase of automobiles by customers of the automotive dealerships, purchases automobiles from dealers and simultaneously leases the automobiles under long-term direct financing leases, finances dealership floor plan inventories, real estate, or working capital needs, and provides other banking services to the automotive dealerships and their owners.
Private Financial Group: This segment provides products and services designed to meet the needs of Huntington’s higher net worth customers. Revenue is derived through trust, asset management, investment advisory, brokerage, insurance, and private banking products and services.
Treasury/Other: This segment includes revenue and expense related to assets, liabilities, and equity that are not directly assigned or allocated to one of the three business segments. Assets included in this segment include bank owned life insurance, investment securities, and mezzanine loans originated through Huntington Capital Markets Group.
A funds transfer pricing system is used to attribute funding costs and credits to other business segments. The Treasury/Other segment includes the net impact of interest rate risk management, including derivative activities. Furthermore, this segment’s results include the investment securities portfolios and capital markets activities. Additionally, income or expense and provision for income taxes, not allocated to other business segments, are also included.
Listed below is certain reported financial information reconciled to Huntington’s first quarter 2004 and 2003 operating results by line of business.
Income Statements
|
(in thousands) |
Regional
Banking |
Dealer
Sales |
PFG
|
Treasury/
Other |
Huntington
Consolidated |
|||||||||||||||
|
2004 |
||||||||||||||||||||
|
Net interest income |
$ | 151,062 | $ | 30,305 | $ | 11,129 | $ | 30,189 | $ | 222,685 | ||||||||||
|
Provision for credit losses |
(2,105 | ) | (21,655 | ) | 557 | (2,393 | ) | (25,596 | ) | |||||||||||
|
Non-Interest income |
72,051 | 110,555 | 28,627 | 16,406 | 227,639 | |||||||||||||||
|
Non-Interest expense |
(147,092 | ) | (91,369 | ) | (29,461 | ) | (17,732 | ) | (285,654 | ) | ||||||||||
|
Provision for income taxes |
(25,871 | ) | (9,743 | ) | (3,798 | ) | 4,510 | (34,901 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income, as reported |
48,045 | 18,093 | 7,054 | 30,980 | 104,173 | |||||||||||||||
|
Gain on sale of automobile loans, net of tax |
— | (6,146 | ) | — | 294 | (5,853 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Operating Earnings |
$ | 48,045 | $ | 11,947 | $ | 7,054 | $ | 31,274 | $ | 98,320 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2003 |
||||||||||||||||||||
|
Net interest income |
$ | 146,414 | $ | 15,647 | $ | 9,495 | $ | 30,203 | $ | 201,759 | ||||||||||
|
Provision for credit losses |
(23,553 | ) | (11,385 | ) | (1,900 | ) | (6 | ) | (36,844 | ) | ||||||||||
|
Non-Interest income |
71,599 | 158,516 | 27,213 | 15,596 | 272,924 | |||||||||||||||
|
Non-Interest expense |
(140,304 | ) | (134,169 | ) | (26,635 | ) | (14,371 | ) | (315,479 | ) | ||||||||||
|
Provision for income taxes |
(18,955 | ) | (10,013 | ) | (2,861 | ) | 1,198 | (30,630 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income, as reported |
35,201 | 18,596 | 5,312 | 32,620 | 91,730 | |||||||||||||||
|
Gain on sale of automobile loans, net of tax |
— | (2,592 | ) | — | (4,074 | ) | (6,666 | ) | ||||||||||||
|
Restructuring releases, net of taxes |
— | — | — | (650 | ) | (650 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Operating Earnings |
$ | 35,201 | $ | 16,004 | $ | 5,312 | $ | 27,897 | $ | 84,414 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
11
Note 8 – Comprehensive Income
The changes in the components of Huntington’s Other Comprehensive Income in each of the three months ended March 31 were as follows:
|
Three Months Ended
March 31, |
||||||||
|
(in thousands) |
2004
|
2003
|
||||||
|
Unrealized holding gains (losses) on securities available for sale arising during the period: |
||||||||
|
Unrealized net gain (loss) |
$ | 62,066 | $ | (7,247 | ) | |||
|
Related tax benefit (expense) |
(21,723 | ) | 2,228 | |||||
|
|
|
|
|
|
|
|||
|
Net |
40,343 | (5,019 | ) | |||||
|
|
|
|
|
|
|
|||
|
Unrealized losses on derivatives used in cash flow hedging relationships arising |
||||||||
|
during the period: |
||||||||
|
Unrealized net losses |
(18,034 | ) | (2,880 | ) | ||||
|
Related tax benefit |
6,312 | 1,008 | ||||||
|
|
|
|
|
|
|
|||
|
Net |
(11,722 | ) | (1,872 | ) | ||||
|
|
|
|
|
|
|
|||
|
Less: Reclassification adjustment for net gains from sales of securities available for sale |
||||||||
|
realized during the period: |
||||||||
|
Realized net gains |
15,090 | 1,198 | ||||||
|
Related tax expense |
(5,281 | ) | (419 | ) | ||||
|
|
|
|
|
|
|
|||
|
Net |
9,809 | 779 | ||||||
|
|
|
|
|
|
|
|||
|
Total Other Comprehensive Income (Loss) |
$ | 18,812 | $ | (7,670 | ) | |||
|
|
|
|
|
|
|
|||
Activity in Accumulated Other Comprehensive Income for the three months ended March 31, 2004 and 2003 was as follows:
12
Note 9 – Earnings per Share
Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares upon the exercise of stock options. The calculation of basic and diluted earnings per share for each of the three-month periods ended March 31 is as follows:
The average market price of Huntington’s common stock for the period was used in determining the dilutive effect of outstanding stock options. Common stock equivalents are computed based on the number of shares subject to stock options that have an exercise price less than the average market price of Huntington’s common stock for the period.
Approximately 6.5 million and 7.6 million stock options were vested and outstanding at March 31, 2004 and 2003, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares for the period and, therefore, the effect would be antidilutive. The weighted average exercise price for these options was $22.53 per share and $22.21 per share at the end of the same respective periods.
At March 31, 2004, a total of 552,966 common shares associated with a 2002 acquisition were held in escrow, subject to future issuance contingent upon meeting certain contractual performance criteria. These shares, which were included in treasury stock, will be included in the computation of basic and diluted earnings per share at the beginning of the period when all conditions necessary for their issuance have been met. Dividends paid on these shares are reinvested in common stock and are also held in escrow.
Note 10 – Stock-Based Compensation
Huntington’s stock-based compensation plans are accounted for based on the intrinsic value method promulgated by APB Opinion 25, Accounting for Stock Issued to Employees , and related interpretations. Compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant.
13
The following pro forma disclosures for net income and earnings per diluted common share is presented as if Huntington had applied the fair value method of accounting of Statement No. 123 in measuring compensation costs for stock options. The fair values of the stock options granted were estimated using the Black-Scholes option-pricing model. This model assumes that the estimated fair value of the options is amortized over the options’ vesting periods and the compensation costs would be included in personnel expense on the income statement. The following table also includes the weighted-average assumptions that were used in the option-pricing model for options granted in each of the quarters presented:
Note 11 – Stock Repurchase Plan
On February 18, 2002, the board of directors authorized Huntington to repurchase from time to time up to 22,000,000 shares of its common stock by means of various methods including, but not limited to, open market purchases and privately negotiated transactions (the 2002 Repurchase Program). As of January 14, 2003, Huntington had purchased 19,358,665 of such shares authorized under the 2002 Repurchase Program.
Effective January 14, 2003, the board of directors authorized a new share repurchase program (the 2003 Repurchase Program) which cancelled the 2002 Repurchase Program and authorized officers of Huntington to repurchase not more than 8,000,000 shares of Huntington common stock. At April 27, 2004, Huntington had purchased 4,100,000 of such shares authorized under the 2003 Repurchase Program.
Effective April 27, 2004, the board of directors authorized a new share repurchase program (the 2004 Repurchase Program) which cancelled the 2003 Repurchase Program and authorized officers of Huntington to repurchase not more than 7,500,000 shares of Huntington common stock. The share repurchases described in Note 3 will be made under this authorization. Purchases will be made from time-to-time in the open market or through privately negotiated transactions depending on market conditions.