Huntington National Bank 2003 Annual Report Download - page 94

MANAGEMENT’S DISCUSSION AND ANALYSIS
Partially offset by:
• $3.0 million, or 13%, decline in other income primarily reflecting lower investment banking income.
• $1.7 million, or 15%, decline in other service charges and fees reflecting lower merchant service revenue due to the lower fee
structure resulting from the VISA settlement, as well as lower ATM surcharge and interchange fees.
Non-interest expense declined $11.8 million, or 4%, from the year-ago quarter. Comparisons with prior-period results are also heavily
influenced by the decline in operating lease expense. Operating lease expense declined $35.1 million, or 29%, from the year-ago
quarter. Excluding operating lease expense, non-interest expense increased $23.3 million, or 11%, from the year-ago quarter. The
primary drivers of the $23.3 million increase were:
• $15.3 million of expense associated with extinguishing the high cost, long-term repurchase agreement debt in the current quarter.
• $5.5 million, or 5%, increase in personnel costs reflecting higher incentive costs and lower deferred loan origination costs, partially
offset by lower mortgage-related sales commissions and benefit expense.
• $6.9 million reduced benefit from restructuring reserves release, which totaled $0.4 million in the current quarter as compared with
$7.2 million in the year-ago quarter.
• $3.1 million, or 34%, increase in professional services, including expenses associated with the SEC formal investigation.
Partially offset by:
• $6.9 million, or 21%, decrease in other expense, as the year-ago quarter included a $3.9 million impairment of an investment in an
unconsolidated subsidiary, higher operating losses, and other miscellaneous expenses.
C
REDIT Q UALITY
In the 2003 fourth quarter, the credit workout group identified an economically attractive opportunity to sell $99 million of lower
quality loans, including $43 million of NPAs. Previously established reserves for these loans were sufficient to absorb the $26.6 million
of related charge-offs, including $17.1 million associated with the sold NPAs. NPAs at December 31, 2003, were $87.4 million and
represented 0.41% of period-end loans and leases, down from $136.7 million, or 0.74%, at the end of the year-ago quarter. This was the
lowest level in many years.
Net charge-offs for the 2003 fourth quarter were $55.1 million, or an annualized 1.03% of average loans and leases, down from 1.83%
in the year-ago quarter. Both quarters included C&I and CRE charge-offs related to credit actions ($26.6 million in 2003 and $51.3
million in 2002.) The total of C&I and CRE net charge-offs were $36.9 million, or an annualized 1.55% of related average loans, in the
2003 fourth quarter, down from 2.92% a year earlier. Total consumer net charge-offs were an annualized 0.61% in the fourth quarter,
down from 0.71% a year ago. Net charge-offs on automobile loans and leases were an annualized 1.00% in the fourth quarter, down
from 1.20%, and reflected a combination of factors including the benefit of higher quality loan originations over this period.
Credit losses on operating lease assets are included in operating lease expense and were $8.8 million, down from $14.3 million in the
year-ago quarter. Recoveries on operating lease assets are included in operating lease income and totaled $1.9 million, down from $2.6
million a year earlier. The ratio of operating lease asset credit losses, net of recoveries, was an annualized 2.05% in the current quarter,
relatively unchanged from 2.02% in the year-ago quarter.
The provision for loan and lease losses in the fourth quarter was $26.3 million, down $24.9 million, or 49%, from the year-ago quarter.
The December 31, 2003, allowance for loan and lease losses was $335.3 million and represented 1.59% of period end loans and leases.
This was down from 1.81% at the end of 2002 and reflected a combination of factors, including the release of specific reserves allocated
to the loans sold, declining overall risk inherent in the portfolio due to lower concentrations in large, individual commercial credits,
downward trending net charge-offs, and a higher percentage of the total loan portfolio being in lower-risk mortgages and home equity
loans. The allowance for loan and lease losses as a percent of non-performing assets increased to 384% at December 31, 2002, from
246% at December 31, 2002.
C
APITAL
At December 31, 2003, the tangible equity to assets ratio was 6.80%, down from 7.22% at December 31, 2002. The decline from the
year-ago period reflected the impact of the 2003 third quarter adoption of FIN 46, which consolidated $1.0 billion of previously
securitized automobile loans, as well as share repurchases in the 2003 first quarter. Both the parent company, as well as the Bank,
exceeded the regulatory “well capitalized” minimum capital ratios.
92 HUNTINGTON BANCSHARES INCORPORATED