Huntington National Bank 2003 Annual Report Download - page 41

MANAGEMENT’S DISCUSSION AND ANALYSIS
Earnings per common share (diluted) were $1.61 in 2003, up from $1.33 the prior year. Earnings in 2003 saw the continuation of
pressure on the net interest margin and mortgage-related earning asset yields, as interest rates continued to decline through mid-year.
Some of this pressure was relieved in the second half of the year as interest rates rose. Late in the year, a portion of high cost, long-term
debt was repaid. This resulted in a loss, but will lower funding costs in future periods. It was also a year of strong loan and deposit
growth. Credit quality trends improved materially, and loan concentrations continued to be lowered, aided by the sales of automobile
loans and underperforming commercial and industrial (C&I) and commercial real estate (CRE) loans, including NPAs, among other
strategies. NPAs ended the year at the lowest level in many years. In addition, 2003 reflected the release of certain restructuring reserves
as the costs of implementing the strategic decisions made in 2001, and carried out through 2002 and 2003, were completed, though their
ongoing positive impacts are anticipated to benefit earnings in future periods. The company ended 2003 with a stronger balance sheet,
much-improved credit quality and a decline in net charge-offs, a track record of growing loans and deposits, and earnings momentum.
Results of Operations
S
IGNIFICANT F ACTORS I NFLUENCING F INANCIAL P ERFORMANCE C OMPARISONS
Significant changes in the strategic direction of Huntington initiated in 2001 to improve the overall financial performance of the
company and the subsequent execution of those adopted strategies, materially impacted financial performance comparisons among
2001, 2002, and 2003. Understanding the nature and implications of these factors on financial results, which are described below and
recapped in Table 3, therefore, is critical in assessing underlying performance trends.
1. C
ORPORATE R ESTRUCTURING C HARGES .The 2001 strategic refocusing plan included the intent to sell the Florida banking and
insurance operations, credit-related and other actions to strengthen the balance sheet and financial performance, and the
consolidation of numerous non-Florida banking offices. As a result, non-interest expenses in 2001 and 2002 were higher than they
otherwise would have been, as they included net restructuring charges of $80.0 million pre-tax and $49.0 million pre-tax,
respectively, based on estimated costs associated with implementing these strategic initiatives. In contrast, 2003 non-interest expense
reflected recoveries of $6.7 million pre-tax of previously established reserves, which were no longer needed. (See Note 21 of the
Notes to Consolidated Financial Statements.)
2. S
ALES OF F LORIDA B ANKING AND I NSURANCE O PERATIONS AND M ERCHANT S ERVICES R ESTRUCTURING .In February 2002, the
company completed the sale of its Florida banking operations. This resulted in a $182.5 million pre-tax gain being recorded in non-
interest income. The Florida banking operations sale eliminated $2.8 billion of loans and $4.8 billion of deposits from the 2002
balance sheet, thus impacting related comparisons with 2001. The company also completed the sale of its Florida insurance
operations in the 2002 second quarter, with no significant earnings impact. Combined, the Florida banking and insurance
operations reported a net loss from operations of $1.5 million in 2002 and $14.0 million in 2001. In addition, in 2002, the company
restructured its interest in Huntington Merchant Services, L.L.C. (HMS), which resulted in a $24.6 million pre-tax gain being
recorded to non-interest income. (See Note 22 of the Notes to Consolidated Financial Statements.)
3. S
ALES OF A UTOMOBILE L OANS .In early 2003, Management stated its intention to reduce the credit risk exposure to automobile
financing from approximately one-third of total loans and leases to about 20%. While Management remains firmly committed to
the automobile financing market, the existing concentration was considered to be too high. In 2003, the company sold $2.1 billion of
such loans, and recorded pre-tax gains of $40.0 million. Such sales impact performance comparisons due to the significant one-time
gains recorded in non-interest income in the periods in which loans were sold, while lowering the reported growth rates in net
interest income and automobile loans as the sold loans were removed from the balance sheet. (See Note 7 of the Notes to
Consolidated Financial Statements.)
4. A
DOPTION OF FIN 46. Effective July 1, 2003, the company adopted Financial Accounting Standards Board (FASB) Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities. The adoption of FIN 46 resulted in the consolidation of $1.0 billion of
previously securitized automobile loans and a $13.3 million after-tax charge for the cumulative effect of a change in accounting
principle. (See Tables 1 and 2, and Note 2 of the Notes to Consolidated Financial Statements.)
5. S
ALE OF B ANKING O FFICES .In the third quarter of 2003, the company recorded a $13.1 million pre-tax gain from the sale of four
West Virginia banking offices, which were geographically remote from the core West Virginia banking franchise. (See Note 22 of the
Notes to Consolidated Financial Statements.)
HUNTINGTON BANCSHARES INCORPORATED 39