Huntington National Bank 2004 Annual Report Download - page 33

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MANAGEMENT’S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
DISCUSSION OF RESULTS
This section provides a review of financial performance from a consolidated perspective. It also includes a Significant Factors
Influencing Financial Performance Comparisons section that summarizes key issues important for a complete understanding of
performance trends. Key consolidated balance sheet and income statement trends are discussed in this section. All earnings per share
data is reported on a diluted basis. For additional insight on financial performance, this section should be read in conjunction with
the Lines of Business discussion.
Summary
Huntington reported net income in 2004 of $398.9 million, or $1.71 per common share, up 7% and 6%, respectively, from 2003.
Earnings in 2003 were $372.4 million, or $1.61 per common share, up from $323.7 million, or $1.33 per common share, in 2002. The
returns on average total shareholders’ equity (ROE) for 2004, 2003, and 2002 were 16.8%, 17.0%, and 14.5%, respectively, with
returns on average total assets (ROA) of 1.27%, 1.29%, and 1.24%, respectively. (See Tables 1 and 2.)
The period from 2001 to 2004 was one of significant transformation for the Company. During 2001, Management initiated a
comprehensive strategic refocusing plan to improve competitiveness and long-term financial performance, which influenced results
throughout this period. Actions taken included hiring new executive and other managerial leadership, changing the basic business
model to one of local decision-making and refocusing on Midwest markets, as well as other activities such as reducing the overall
credit risk profile and improving credit quality performance, all with the objective of improving overall financial performance. In
2001, the quarterly common stock dividend was reduced 20%, but reflecting the sufficient progress made, the dividend was increased
9% in 2003, and then another 14% in 2004, which restored the quarterly dividend to the level prior to the 2001 reduction. In 2003, a
formal investigation was initiated by the SEC, which awaits resolution. (See the Significant Factors Influencing Financial Performance
Comparisons section for a full discussion of the financial impact of strategic initiatives and other factors influencing financial performance
and comparisons of financial results between reporting periods, as well as the SEC Formal Investigation and Formal Regulatory Supervisory
Agreements sections.)
Earnings per common share 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 was used to repurchase 9% of common shares outstanding and to invest 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.
Average loans and deposits declined 4% and 11%, respectively, reflecting the impact of the sold Florida banking operations. The net
interest margin declined during the second half of the year, reflecting a significant reduction in market interest rates, 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 higher prepayments on the underlying mortgages, with the
resultant cash flow reinvested in lower-yielding earning assets. Earnings benefited by a reduction in the provision for credit losses as
the level of non-performing assets (NPAs) at year end declined 40% from the end of 2001.
Earnings per common share in 2003 were $1.61, up 21% from $1.33 reported for the prior year. Earnings benefited by growth in
average loans and deposits of 15% and 6%, respectively. This benefit was partially offset by a decline in the net interest margin
reflecting the continuation of pressure on the net interest margin and specifically, 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
increased. Late in the year, a portion of high cost, long-term debt was repaid. This resulted in a charge to earnings, but lowered
funding costs in future periods. 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. The provision for credit losses declined
as credit quality trends improved significantly. Loan concentrations continued to be lowered, aided by the sales of automobile loans
and under-performing middle market commercial and industrial (C&I) and middle market commercial real estate (CRE) loans,
including NPAs, among other strategies. NPAs ended the year near the lowest level in many years.
Earnings per common share in 2004 were $1.71, up 6% from $1.61 reported for the prior year. Earnings again benefited from strong
growth in average loans and deposits of 11% and 7%, respectively. Once more, this benefit was partially offset by a decline in the net
interest margin reflecting the continuation of overall declines in interest rates during the first half of the year, though there were
periods of interest rate volatility. Importantly, the net interest margin stabilized in the second half of the year, such that more of the
positive impact of loan growth in that period resulted in net interest income growth. A reduction in loan loss provision expense
significantly benefited earnings. This reflected the maintenance of strong credit quality performance, as well as improved credit quality
trends due to the continued reduction in the concentration of higher-risk loans and increase in lower-risk residential mortgages and
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