Huntington National Bank 2003 Annual Report Download - page 39

MANAGEMENT’S DISCUSSION AND ANALYSIS
DISCUSSION OF RESULTS
Summary
Huntington reported net income in 2003 of $372.4 million, or $1.61 per common share (diluted), up 15% and 21%, respectively, from
2002. Earnings in 2002 were $323.7 million, or $1.33 per common share (diluted), up from $134.8 million, or $0.54 per common share
(diluted), in 2001. The returns on average common equity (ROE) for 2003, 2002, and 2001 were 17.6%, 14.5%, and 5.8%, respectively,
with returns on average assets of 1.33%, 1.24%, and 0.48%, respectively (see Table 1).
The period 2001 to 2003 was one of significant transformation for the company. During 2001, the equity markets continued to weaken,
economic activity started to slow appreciably after a decade-long expansion, and interest rates fell to historical lows. In addition,
consumer confidence was shaken with the 9/11 terrorist attack. There was significant deterioration in both consumer and commercial
credit quality trends due to these factors. These external factors influenced Huntington’s 2001 performance and its comprehensive
strategic refocusing plan to improve competitiveness and long-term financial performance, which was announced in July 2001.
Actions taken to further the strategic plan included the hiring of new executive leadership as part of the first phase of building a new
management team. The company’s basic business model was changed to one of local decision-making with a strategic refocusing on
Midwest markets. As such, a decision was made to sell the Florida banking operations (see additional discussion below), consolidate
banking offices outside of Florida, and use the capital generated to repurchase common stock, as well as reinvest in the business.
Management refocused technology spending on investments to improve customer service, rather than making equity investments in
technology companies, mostly e-commerce ventures, which had been the strategy in previous years. The quarterly common stock
dividend was reduced 20%, and $80.0 million pre-tax in restructuring charges were taken to effect the changes.
The key element of the 2001 strategic refocusing plan was the decision to sell the Florida banking operations. There were several factors
influencing this decision. First, the Florida banking offices and markets had no geographic or strategic connection to the company’s
primary business of retail and commercial banking centered in Midwest markets. Second, while the Florida market for bank deposits
was growing more rapidly than Midwest markets, the net interest margin in Florida was lower than that of the rest of the company,
given the higher cost of deposits in that market. Third, to capitalize on the growth opportunities of the Florida market, a commercial
banking capability needed to be developed on what was primarily a retail banking franchise. Management believed building this
capability would have added significantly to operating expenses and further lowered the already low return on invested capital for
several years in the future.
Earnings per common share (diluted) in 2001 were $0.54, down from $1.29 per common share (diluted) in 2000. Earnings in 2001
were significantly impacted by the actions described above, as well as a restructuring charge related to actions contemplated by the
2001 strategic refocusing plan. In addition, as a result of deteriorating consumer and commercial credit quality trends during the year,
credit underwriting practices and policies were strengthened at the point of origination, and an aggressive credit quality review was
initiated by Management. Earnings also were negatively impacted by higher loan loss provision expense, which had the effect of
increasing the allowance for loan and lease losses (ALLL) as a percent of total loans and leases to 2.00% at the end of 2001 from 1.50%
at the end of 2000.
Earnings per common share (diluted) in 2002 were $1.33, up from $0.54 in 2001. Earnings in 2002 were impacted by the completion of
the sale of the Florida banking operations and restructuring of the company’s Merchant Services business, both of which resulted in
significant gains. Capital from these gains, as well as the capital freed up by the sale of the Florida-related assets and liabilities, was used
to repurchase 9% of common shares outstanding, and to reinvest in a number of activities including improvements in customer service
technology, and the purchases of a small money management firm and a niche equipment leasing company. The Florida insurance
operation was also sold, though this had no significant earnings impact. However, earnings were negatively impacted by additional
restructuring charges as the 2001 strategic initiatives continued to be implemented. Deposits and loans increased, following prior-year
performance of low growth. The level of non-performing assets (NPAs) was reduced significantly by year end. It was also a period in
which interest rates declined significantly during the second half of the year, resulting in downward pressure on the net interest margin
as interest rates on earning assets, both loans and investment securities, declined more rapidly than deposit rates. The yield on
mortgage-backed securities declined sharply as the lower level of interest rates resulted in high prepayments on the underlying
mortgages, with the resultant cash flow reinvested in lower-yielding earning assets.
HUNTINGTON BANCSHARES INCORPORATED 37