Huntington Bancshares Incorporated

CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

HUNTINGTON BANCSHARES INCORPORATED
(Exact Name of Registrant as specified in its charter)


Maryland	0-2525	31-0724920

(State or other	(Commission File No.)	(IRS Employer
jurisdiction of		Identification Number)
incorporation or
organization)

Huntington Center
41 South High Street
Columbus, Ohio 43287
(614) 480-8300
(Address, including zip code, and telephone number
including area code of Registrant’s
principal executive offices)

On July 17, 2003, Huntington Bancshares Incorporated (“Huntington”) issued a news release announcing its earnings for the second quarter ended June 30, 2003, the restatement of prior period earnings and accounting changes, and a 9.4% increase in the dividends on its common stock. As part of this news release, Huntington announced a series of voluntary actions resulting in a decision to restate its earnings to correct for certain timing errors related to origination fees paid to automobile dealers, deferral of commissions paid to originate deposits, certain mortgage origination fee income, the recognition of pension settlements, and liabilities related to the sale of an automobile debt cancellation product. Huntington will also defer and amortize, over the estimated life of the asset, origination fees and certain expenses for all of its loans and leases originated after June 30, 2003. The information contained in the news release, which is attached as Exhibit 99.1 to this report, is incorporated herein by reference. Huntington also presented this information during a conference call, which was available via Internet Webcast. The presentation transcript and materials are attached as Exhibits 99.2 and 99.3 to this report, and are incorporated herein by reference.

The information contained or incorporated by reference in this Current Report on Form 8-K contains forward-looking statements, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties. A number of factors, including but not limited to those set forth under the heading “Business Risks” included in Item 1 of Huntington’s amended Annual Report on Form 10-K/A for the year ended December 31, 2002, and other factors described from time to time in Huntington’s other filings with the Securities and Exchange Commission, could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. All forward-looking statements included in this Current Report on Form 8-K are based on information available at the time of the Report. Huntington assumes no obligation to update any forward-looking statement.

Exhibit 99.1 — News release of Huntington Bancshares Incorporated, dated July 17, 2003.

The information included or incorporated by reference under Item 5 of this report is intended to be included under “Item 12. Disclosure of Results of Operations and Financial Condition” and is included under this Item 9 in accordance with SEC Release No. 33-8216.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	HUNTINGTON BANCSHARES INCORPORATED

Date: July 17, 2003	By:	/s/ Michael J. McMennamin
		Michael J. McMennamin, Vice Chairman, Chief Financial Officer, and Treasurer


Exhibit No		Description
Exhibit 99.1		News release of Huntington Bancshares Incorporated, July 17, 2003.
Exhibit 99.2		Presentation transcript, July 17, 2003.
Exhibit 99.3		Presentation materials, July 17, 2003.

	•		REPORTS 2003 SECOND QUARTER EARNINGS OF $0.42 PER SHARE

	•		ANNOUNCES EARNINGS RESTATEMENT AND ACCOUNTING CHANGES

	•		Increases 2003 first quarter net income by $2 million after tax

	•		Reduces 2000-2002 net income by $5 million after tax

	•		Reduces 1999 and prior-year net income by $27 million after tax

	•		Prospectively defer all loan and lease origination fees and expenses

•

DECLARES A 9.4% INCREASE IN THE DIVIDEND ON ITS COMMON STOCK

COLUMBUS, Ohio – Huntington Bancshares Incorporated (NASDAQ: HBAN; www.huntington.com) reported 2003 second quarter earnings of $97.4 million, or $0.42 per common share, up $6.8 million or 8%, from $90.6 million, or $0.39 per common share, in the first quarter, and up $24.4 million or 33%, from $73.0 million, or $0.29 per common share in the year-ago quarter. (All prior period results reflect the restatement announced today and discussed below.)

Significant items impacting quarterly performance comparisons between the first and second quarters of 2003 consisted of:

	•		$11.6 million pre-tax gain from the sale of $569 million of automobile loans late in the quarter; $7.6 million after tax or $0.03 per share.

	•		$6.9 million pre-tax of securities gains; $4.5 million after tax or $0.02 per share.

	•		$6.4 million pre-tax impairment of mortgage servicing rights; $4.1 million after tax or $0.02 per share.

	•		$5.3 million pre-tax release of restructuring reserves; $3.4 million after tax or $0.01 per share.

	•		$8.3 million pre-tax gain from the sale of $558 million of automobile loans late in the quarter; $5.4 million after tax or $0.02 per share.

	•		$1.2 million pre-tax of securities gains; $0.8 million after tax with no material per share impact.

	•		$1.0 million pre-tax release of restructuring reserves; $0.7 million after tax with no material per share impact.

Excluding the impact of these items, 2003 second quarter earnings were $86.1 million, or $0.37 per share, and first quarter earnings were $83.7 million, or $0.36 per common share.

Earnings for the first six months of 2003 were $188.0 million, or $0.81 per common share, up $18.9 million, or 11%, from $169.0 million, or $0.68 per common share, in same year-ago period. Significant items impacting year-to-date performance comparisons consisted of:

	•		$19.9 million pre-tax gain from the sale of $1.1 billion of automobile loans; $12.9 million after tax or $0.06 per share.

	•		$8.1 million pre-tax of securities gains; $5.3 million after tax or $0.02 per share.

	•		$6.4 million pre-tax of mortgage servicing right impairment; $4.1 million after tax or $0.02 per share.

	•		$6.3 million pre-tax release of restructuring reserves; $4.1 million after tax or $0.02 per share.

	•		$181.3 million pre-tax gain from the sale of the Florida banking operations; $60.7 million after tax or $0.24 per common share.

	•		$56.2 million pre-tax of restructuring charges; $36.5 million after tax or $0.15 per common share.

	•		$1.4 million pre-tax of securities gains; $0.9 million after tax with no material per share impact.

	•		$0.6 million pre-tax of mortgage servicing right impairment; $0.4 million after tax with no material per share impact.

Excluding the impact of these items, results for the first six months of 2003 were $169.8 million, or $0.73 per common share, up 18% and 26%, respectively, from $144.3 million, or $0.58 per common share for the first six months of 2002.

“Second quarter results reflected the progress Huntington continues to make in several very important areas,” said Thomas Hoaglin, chairman, president, and chief executive officer. “Earning performance was in line with our expectations. Net interest income increased despite a lower margin due to our continued ability to grow loans and leases. Late in the quarter $569 million of automobile loans were sold, bringing year-to-date sales to $1.1 billion, helping us lower our exposure to the automobile financing sector. Excluding the impact of the prior quarter’s sale of $558 million of automobile loans, average loans and leases increased 4% from the first quarter. Average core deposits excluding retail CDs increased 5%.”

Commenting on credit quality trends, Hoaglin noted, “Net charge-offs increased and non-performing assets declined slightly. This performance was as expected, as the economic

environment remains challenging for many of our customers, especially businesses. The increase in net charge-offs reflected higher commercial net charge-offs primarily related to one borrower. Importantly, commercial delinquencies and our watch list of problem credits continued to show modest improvement. We expect non-performing assets to remain relatively unchanged for the remainder of the year with net charge-offs showing improvement. Loan and lease loss reserves and capital levels remained strong.”

“We remain on schedule to complete the previously announced sale of our Martinsburg, West Virginia banking offices later this month. This will generate an after tax gain of approximately $8 million after tax and free up capital for reinvestment,” he concluded.

In addition to the items impacting comparisons between quarters noted above, second quarter 2003 results compared with first quarter performance reflected:

	•		2% growth in average loans and leases; 4% excluding the impact of the first quarter automobile loan sale.

	•		13% decline in average operating lease assets.

	•		5% growth in core deposits, excluding retail CD’s.

	•		3.69% net interest margin, down from 3.84%.

	•		1.79% loan loss reserve to loans ratio, up from 1.78%.

	•		0.85% annualized net charge-offs, up from 0.69%.

	•		0.70% non-performing assets ratio, down from 0.74%.

	•		255% non-performing assets coverage ratio, up from 239%.

	•		7.31% tangible common equity ratio, up from 7.25%.

Fully taxable equivalent net interest income increased $1.8 million, or 1%, from the first quarter, reflecting growth in average earning assets substantially offset by a decline in the net interest margin. The fully taxable equivalent net interest margin declined to 3.69% from 3.84%, down 15 basis points, or an effective 4%, driven by a number of factors including significant prepayments of higher rate mortgages and mortgage backed securities, growth in lower rate but higher quality automobile loans and direct financing leases, and the difficulty in lowering deposit rates as fast as the decline in rates on loans and securities. Average total earning assets increased $0.9 billion, or 4%, of which $0.4 billion related to higher securities and $0.5 billion related to higher average loans and leases and mortgages held for sale.

Compared with the year-ago quarter, fully taxable equivalent net interest income increased $24.6 million, or 13%, reflecting the benefit of a 20% increase in average earning assets, partially offset by a 25 basis point, or an effective 6%, decline in the net interest margin to 3.69% from 3.94%.

Average securities increased $0.4 billion, or 11%, from the first quarter reflecting the investment of deposit inflows, proceeds from loan sales, and pay downs of operating leases in excess of loan and lease originations. Average mortgages held for sale increased $0.1 billion, or 31%, from the first quarter due to high loan originations reflecting continued heavy refinancing activity.

Average loans and leases increased 2% from the first quarter, or 4% excluding the impact of automobile loan sales. Reflecting the impact of the low interest rate environment, average

residential mortgages grew 3% and average home equity loans and lines of credit increased 4%. Average automobile loans and leases increased 1%, or 12% excluding the impact of the first quarter sale of $558 million of automobile loans. Loans sold in the first quarter impacted average loans and leases in that quarter by $459 million. Year-to-date sales of automobile loans totaled $1.1 billion with such sales reflecting a strategy to reduce balance sheet concentration in automobile finance-related assets. Total average commercial real estate loans increased 3%. In contrast, average commercial loans were essentially unchanged reflecting 3% growth in small business loans, offset by declines in larger commercial credits.

Compared with the year-ago quarter, average loans and leases increased 16%. Average automobile loans and leases increased 52% with average automobile loans up 10%. Average automobile leases were up significantly reflecting the fact that this portfolio consists only of direct financing leases originated after April of last year. Average residential mortgages increased 36%, with average home equity loans and lines up 15%. Total average commercial real estate loans increased 11%.

Total average core deposits in the 2003 second quarter increased $0.5 billion, or 3%, from the first quarter including a $0.2 billion decline in retail certificates of deposits (CDs). Retail CDs, which continue to be a relatively expensive source of funds, are being deemphasized in the company’s deposit generation strategies. Excluding retail CDs, average core deposits increased 5%. Compared with the year-ago quarter, average core deposits increased 5% even with a $0.7 billion decline in retail CDs. Average core deposits excluding retail CDs were up 13% from the year-ago quarter.

Non-interest income increased $6.2 million, or 2%, from the first quarter reflecting a combination of factors. Other income was up $11.4 million with $3.3 million reflecting higher gains from the sale of automobile loans. The remaining $8.1 million of the increase in other income primarily reflected fees from the termination of operating lease assets, an increase in the market value of equity investments, as well as higher letter of credit fees. Securities gains totaled $6.9 million, up from $1.2 million in the first quarter. Service charges on deposits increased $1.0 million, or 3%, due to higher retail fees. Other service charges and fees were up $1.0 million, or 10%, reflecting higher transaction-based product fees off the seasonally weak first quarter. Trust services increased $0.7 million, or 4%, due to higher institutional fees.

Partially offsetting these increases were declines in several fee income categories, including operating lease income, which decreased $9.5 million, or 7%. Operating lease income, as well as operating lease expense, will decline over time since all new automobile leases after April 2002 represent direct financing leases, the income of which is reflected in net interest income. Brokerage and insurance income declined $1.3 million, or 8%, due to an 18% decline in annuity sales, though mutual fund sales increased 45%. Mortgage banking income declined $2.8 million, or 20%, from the first quarter reflecting a $6.4 million impairment of mortgage servicing rights (MSR) in the current quarter, compared with no impairment in the 2003 first quarter. The MSR impairment reflected high mortgage prepayment levels as the low interest rate environment continued to produce high mortgage refinancing activity. Excluding the MSR impairment, mortgage banking income increased $3.6 million, or 26%, reflecting a 34% increase in closed loan production. At June 30, 2003, MSRs as a percent of serviced mortgages were 0.72%, down from 0.80% at March 31, 2003.

Compared with the year-ago quarter, non-interest income declined $13.5 million, or 5%. This included a $43.8 million, or 26%, decline in operating lease income as this portfolio runs

off. This decline was partially offset by a $21.2 million increase in other income including the $11.6 million gain on the sale of automobile loans in the current quarter, higher gains from operating lease terminations, an increase in the market value of equity investments, and increased trading revenue. Another positive factor was the $5.3 million, or 15%, increase in service charges on deposits from the year-ago quarter.

Non-interest expense declined $18.3 million, or 6%, from the first quarter. Expense categories contributing to the decline included operating lease expense, down $8.6 million, or 8%, reflecting the run-off of that portfolio, and personnel costs, down $7.7 million, or 6%, due to a combination of lower salaries, benefit, and severance costs. Net occupancy expense decreased $1.2 million, or 7%, as the first quarter results included significant seasonal costs, while printing and supplies costs declined $1.4 million, or 39%.

Partially offsetting these declines were increases in a number of expense categories including a $3.5 million, or 20%, increase in other expenses spread across a number of categories. Marketing expense increased $1.8 million, or 28%, with professional services expense up $0.6 million, or 6%, primarily related to legal and audit expenses associated with the restatement announced in May of this year and the Securities and Exchange Commission formal investigation.

The 2003 second quarter non-interest expense also benefited from a $5.3 million release of restructuring reserves, of which $3.8 million related to reserves established in 1998 and $1.5 million to reserves established in 2001 and 2002. The 1998 reserve was established for, among other items, the exit of under performing product lines, including possible third party claims related to these exits. Management has reviewed this reserve and determined that future claims were unlikely or would be immaterial, and reduced the level of the reserve through a credit, or reserve release, to the restructuring charge line of non-interest expense. All changes in the estimated restructuring reserves required are now reflected as charges (in the case of increases to the reserve) or releases (in the case of decreases) to the restructuring charge line. This included $1.0 million in the 2003 first quarter and $7.2 million in the fourth quarter of 2002.

Compared with the year-ago quarter, non-interest expense declined $25.6 million, or 8%. This reflected a $28.8 million, or 22%, decrease in operating lease expense and the benefit of the $5.3 million release of restructuring reserves in the current quarter, which were partially offset by a $7.2 million, or 7%, increase in personnel costs.

Net charge-offs for the 2003 second quarter were $41.1 million, or an annualized 0.85% of average loans and leases, up from $32.8 million, or an annualized 0.69%, in the first quarter. This reflected higher commercial loan charge-offs, which were an annualized 1.89% of related loans in the second quarter, up from 1.06% in the first quarter. This increase in commercial net charge-offs primarily reflected one commercial credit in the teleconferencing business. Net charge-offs on automobile loans were an annualized 1.06% in the second quarter, down from 1.38% in the first quarter. Net charge-offs on automobile leases increased to an annualized 0.43% from 0.36% in the first quarter. The automobile lease portfolio represents direct financing leases originated after April 2002. Since these leases are relatively new, they have not yet reached their normalized expected net charge-off run rate. As a result, until this portfolio matures, related net charge-offs are expected to increase. Total net charge-offs in the year-ago quarter were $37.0 million, or an annualized 0.90% of average total loans.

Credit losses on operating lease assets, which are included in operating lease expense, were

$8.9 million, or an annualized 1.93% of average operating lease assets compared with $10.0 million, or 1.89%, in the first quarter and $7.9 million, or 1.09%, in the year-ago quarter. As noted above, this portfolio’s average balances will decrease over time since no new operating lease assets have been generated after April 2002. As a result, while the absolute level of credit losses is expected to decline over time, the ratio of credit losses expressed as a percent of a declining average operating lease assets, is expected to increase.

The over 30-day delinquent, but still accruing, ratio for total loans and leases decreased slightly to 1.32% at June 30, 2003, from 1.34% at the end of the first quarter, and was down significantly from 1.88% at the end of the year-ago quarter. This reflected improvement in total commercial and commercial real estate delinquencies to 0.79% at quarter end, down from 0.85% at March 31, 2003, and 1.62% a year ago, whereas total consumer delinquencies were 1.86% at quarter end, up slightly from 1.84% at the end of the first quarter, but down from 2.20% a year earlier.

Provision for loan and lease losses in the second quarter was $49.2 million, up $12.3 million, or 34%, from the first quarter due primarily to an $8.1 million provision expense reflecting loan growth, and to a lesser degree higher net charge-offs in the current period. The June 30, 2003, allowance for loan losses as a percent of period-end loans was 1.79%, up slightly from 1.78% at March 31, 2003 but down from 2.10% and the end of the year-ago quarter. The allowance for loan and lease losses as a percent of non-performing assets increased to 255% at June 30, 2003, from 239% at March 31, 2003, and was well above the year-ago level of 158% due to the significant decline in non-performing assets as discussed below. Compared with the year-ago quarter, loan and lease loss provision expense was down $0.7 million, or 1%.

Non-performing assets at June 30, 2003 were $133.7 million and represented 0.70% of period-end loans and leases and other real estate. This was down $7.0 million from $140.7 million, or 0.74%, of period-end loans and leases and other real estate owned at March 31, 2003, and down $89.5 million, or 40%, from the end of the year-ago quarter. Non-performing assets continued to be concentrated in the manufacturing and services sectors.

At June 30, 2003, the tangible equity to assets ratio was 7.31%, up slightly from 7.25% at March 31, 2003, but down from 8.42% at June 30, 2002. The decrease from a year ago primarily reflected share repurchase activity from July 1, 2002 through March 31, 2003 as no shares were repurchased during the 2003 second quarter. The existing share repurchase authorization had 3.9 million shares remaining as of June 30, 2003. As discussed below, the implementation of FIN 46 (Consolidation of Variable Interest Entities) will lower capital ratios. As such, no further meaningful share repurchases are planned for the immediate future unless market conditions change or excess capital becomes available through business transactions. In such cases, repurchases might be made from time-to-time in the open market or through privately negotiated transactions.

As required, FIN 46 (Consolidation of Variable Interest Entities) will be adopted effective July 1, 2003. As a result, the company expects that $1.0 billion of indirect automobile loans securitized in 2000 will be reconsolidated on the balance sheet in the third quarter. At the time of the securitization in 2000, outside ownership of 3% qualified the securitization for off balance sheet treatment as a special purpose entity (SPE). Under FIN 46, off balance sheet treatment for an SPE is only possible if the outside ownership is a minimum of 10%.

The company estimates the one-time cumulative effect of this accounting change will be an $18 million pre-tax charge ($12 million after tax or $0.05 per common share) in the 2003 third quarter results. Implementation is expected to reduce the tangible common equity to assets ratio by approximately 30 basis points. The company’s long-term tangible common equity to assets ratio target continues to be 7.00%, given the current asset mix and balance sheet risk profile.

The lack of any meaningful economic recovery so far this year and the absolute low level of interest rates continue to be the most significant factors impacting 2003 performance. Regarding credit quality trends, the expectation is that non-performing asset levels will remain around current levels at least through year end and perhaps longer. Even so, net charge-offs are expected to improve for both commercial and consumer loans. The company anticipates 2003 full-year charge-offs will be in the 70-80 basis point range after giving consideration to the implementation of FIN 46, as well as the impact of the automobile loan sales in the first half of 2003.

Earnings per share guidance continues to be $1.48-$1.52 per share. This is unchanged from the guidance in May, but takes into consideration the one-time negative $0.05 per share cumulative accounting change impact of implementing FIN 46, offset primarily by the positive impacts of the loan sale gains and the current restatement. This target also excludes any impact from the expensing of stock options.

On June 26, 2003, Huntington announced that the staff of the Securities and Exchange Commission (SEC) is conducting a formal investigation. This formal investigation followed the operating lease restatement and allegations by a former Huntington employee regarding certain aspects of Huntington’s accounting and financial reporting practices. The company has also initiated a review of its financial and reporting practices.

Today the company announced a series of voluntary actions related to the investigation including a decision to restate its earnings to correct for certain timing errors related to origination fees paid to automobile dealers, deferral of commissions paid to originate deposits, certain mortgage origination fee income, the recognition of pension settlements, and liabilities related to the sale of an automobile debt cancellation product. The restatement impacts previously reported earnings as follows:

The cumulative impact of the restatement represents 1.3% of equity as of March 31, 2003.

An issue still under review by the company relates to the application of SFAS 91 (Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans

and Initial Direct Cost of Leases). Generally, SFAS 91 deals with the timing of recognition of loan and lease origination fees and certain expenses. The statement requires that such fees and costs, if material, be deferred and amortized over the estimated life of the asset.

Generally, Huntington has not deferred these origination fees and certain expenses, but has recognized the net amount in the period of origination as has been disclosed in its audited financial statements. The company is reviewing the impact of this practice on its historical results. Any retroactive decision to defer these origination fees and expenses would only impact the timing, not the total amount of net revenue recognized over the life of the asset. The company has decided to defer these origination fees and expenses prospectively for all loans and leases originated after June 30, 2003.

As a result of the restatement and these reporting changes announced today, the company will file an amended 2002 Annual Report on Form 10-K/A, as well as an amended Quarterly Report on Form 10-Q/A for the first quarter of 2003. All of the financial information included in this release and related schedules reflect this restatement.

“From the outset, our main objective has been to cooperate fully and insure complete compliance with both the letter and spirit of proper accounting and financial reporting transparency,” said Hoaglin. “The restatement and change in accounting practice announced today address a variety of issues raised by the SEC investigation. While the investigation is on-going, we decided to take these actions now and are continuing to cooperate fully with the SEC staff.”

Huntington today also announced that the board of directors has declared a quarterly cash dividend on its common stock of $0.175 per common share, up 9.4% from the current quarterly dividend of $0.16 per common share. The dividend is payable October 1, 2003, to shareholders of record on September 19, 2003.

“We are especially pleased to announce this increase in our common stock dividend,” said Hoaglin. “We have appreciated the patience and encouragement of our many shareholders who have remained with us despite the actions we took in 2001, including the decision to reduce our dividend. Therefore the board is very pleased that our improved performance enables us to take this action. We are also increasing our dividend payout target range to 40%-45% of earnings, up from the previous target range of 35%-45%.”

Huntington’s senior management will host a conference call today to discuss these developments and results at 1:30p.m. EDT. The call may be accessed via a live Internet webcast at www.huntington-ir.com or through a dial-in telephone number at (800) 493-3979. Slides will be available at www.huntington-ir.com just prior to 1:30p.m. EDT today for review during the call. A replay of the webcast will be archived in the Investor Relations section of Huntington’s web site www.huntington.com. A telephone replay will be available two hours after the completion of the call through July 31, 2003, at (800) 615-3210; conference ID 184926. The conference call transcript and slides will be filed with the Securities and Exchange Commission on Form 8-K.

This press release contains certain forward-looking statements, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties. A number of factors, including but not limited to those set forth under the heading “Business Risks” included in Item 1 of Huntington’s Annual Report on Form 10-K/A for the year ended December 31, 2002, and other factors described from time to time in Huntington’s other filings with the Securities and Exchange Commission, could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. All forward-looking statements included in this news release are based on information available at the time of the release. Huntington assumes no obligation to update any forward-looking statement.

Huntington Bancshares Incorporated is a $28 billion regional bank holding company headquartered in Columbus, Ohio. Through its affiliated companies, Huntington has more than 137 years of serving the financial needs of its customers. Huntington provides innovative retail and commercial financial products and services through more than 300 regional banking offices in Indiana, Kentucky, Michigan, Ohio and West Virginia. Huntington also offers retail and commercial financial services online at www.huntington.com; through its technologically advanced, 24-hour telephone bank; and through its network of more than 850 ATMs. Selected financial service activities are also conducted in other states including: Dealer Sales offices in Florida, Georgia, Tennessee, Pennsylvania and Arizona; Private Financial Group offices in Florida; and Mortgage Banking offices in Florida, Maryland and New Jersey. International banking services are made available through the headquarters office in Columbus and additional offices located in the Cayman Islands and Hong Kong.

Huntington Bancshares Incorporated
Consolidated Quarterly Average Balance Sheets and Net Interest Margin Analysis
(in millions)

[Continued from above table, first column(s) repeated]


					Quarterly Average Rates (3)

					2003						2002

Fully Tax Equivalent Basis (1)					Second			First			Fourth			Third			Second

Assets
Interest bearing deposits in banks						1.58	%		1.61	%		1.93	%		2.06	%		2.44	%
Trading account securities						4.15			4.63			3.37			4.95			5.37
Federal funds sold and securities purchased under resale agreements						2.19			2.14			1.83			1.40			1.51
Mortgages held for sale						5.42			5.56			5.84			6.57			7.07
Securities:
		Taxable				4.59			5.17			5.53			6.01			6.33
		Tax exempt				7.29			7.22			7.15			7.52			7.69

				Total Securities		4.79			5.34			5.64			6.07			6.37

Loans and leases: (2)
	Commercial					5.37			5.51			5.76			5.86			5.84
	Real Estate
			Construction			4.28			4.23			4.26			4.70			5.14
			Commercial			5.40			5.76			5.92			6.31			6.54
	Consumer
				Automobile loans and leases		7.62			8.13			8.61			9.79			9.76
				Home equity		5.21			5.35			5.82			5.96			6.05
				Residential mortgage		5.29			5.64			5.71			5.97			6.23
				Other loans		8.53			7.47			8.14			8.58			8.62

				Total Consumer		6.38			6.69			7.06			7.61			7.59

Total loans and leases						5.82			6.06			6.33			6.66			6.67

Allowance for loan and lease losses

Net loans and leases

Total earning assets						5.63	%		5.93	%		6.20	%		6.55	%		6.61	%

Operating lease assets
Cash and due from banks
Intangible assets
All other assets

Total Assets

Liabilities and Shareholders’ Equity
Core deposits
	Non-interest bearing deposits
	Interest bearing demand deposits					1.43	%		1.46	%		1.56	%		1.76	%		1.83	%
	Savings deposits					1.46			1.80			1.67			1.75			1.77
	Retail certificates of deposit					3.75			3.87			4.36			4.37			4.51
	Other domestic time deposits					3.85			4.00			4.19			4.37			4.48

			Total core deposits			2.09			2.28			2.51			2.65			2.76

Domestic time deposits of $100,000 or more						2.55			2.76			2.64			3.27			3.12
Brokered time deposits and negotiable CDs						1.79			1.98			2.25			2.37			2.48
Foreign time deposits						1.03			1.06			1.29			1.43			1.38

	Total deposits					2.06			2.24			2.46			2.63			2.74

Short-term borrowings						1.06			1.16			1.40			1.44			1.51
Federal Home Loan Bank advances						1.76			1.84			1.99			2.02			5.89
Subordinated notes and other long-term debt, including preferred capital securities						2.85			3.12			3.52			3.70			3.64

	Total interest bearing liabilities					2.11	%		2.26	%		2.51	%		2.70	%		2.80	%

All other liabilities
Shareholders’ equity

Total Liabilities and Shareholders’ Equity

Net interest rate spread						3.52	%		3.67	%		3.69	%		3.85	%		3.81	%
Impact of non-interest bearing funds on margin						0.17			0.17			0.17			0.15			0.13

Net Interest Margin						3.69	%		3.84	%		3.86	%		4.00	%		3.94	%

Huntington Bancshares Incorporated
Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
(in millions)

Huntington Bancshares Incorporated
Quarterly Loan and Lease Loss Reserve and Net Charge-off Analysis

Huntington Bancshares Incorporated
YTD Loan and Lease Loss Reserve and Net Charge-off Analysis

Huntington Bancshares Incorporated
Quarterly Non-Performing Assets and Past Due Loans and Leases

Huntington Bancshares Incorporated
Quarterly Stock Summary, Capital, and Other Data

Page 11 EX-99.2 4 l02205aexv99w2.htm EX-99.2 PRESENTATION TRANSCRIPT EX-99.2 Presentation Transcript

(Genesys Conference Call)
(Confirmation Number: 184926
(Date: July 17, 2003)
(Time: 1:30 p.m. EST)
(Header: Huntington Bancshares
Incorporated)
(Host: Jay S. Gould)
(Length of Call: 1:04:00)

OPERATOR: Good day, ladies and gentlemen, and welcome to the Huntington Bancshares <Company: Huntington Bancshares Inc.; Ticker: HBAN; URL: http://www.huntington.com/> Second Quarter Earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call is being recorded.

I would now like to turn the conference over to your host, Mr. Jay Gould. Please go ahead, sir.

JAY S. GOULD, SENIOR VICE-PRESIDENT AND DIRECTOR OF INVESTOR RELATIONS, HUNTINGTON BANCSHARES INCORPORATED:

Before formal remarks, as you know, there are the usual housekeeping items. Copies of the slides we will be reviewing can be found on our Web site, www.huntington.com. This call is being recorded and will be available as a rebroadcast starting about one hour from the close of the call through the end of this month. Please call the Investor Relations department at 614-480-5676 for more information on how to access these recordings or playback or if you have difficulty getting a copy of the slides.

Today’s discussion, including the Q&A period, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time and are subject to change, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements.

For a complete discussion of risks and uncertainties, please refer to the slide at the end of today’s presentation and material filed with the SEC, including our most recent 10K/A, 10/Q and 8/K filings.

Let’s begin. Presenting during today’s call will be Tom Hoaglin, Chairman, President and Chief Executive Officer and Mike McMennamin, Vice Chairman and Chief Financial Officer. Also present with us today for the Q&A period is Nick Stanutz, Executive Vice-President and head of our Dealer Sales line of business.

On slide two, we note several aspects of the basis of today’s presentation. I encourage you to read this in its entirety but let me point out a couple of key disclosures related to the basis of this presentation. First, all of the prior period data contained in this presentation reflect the restatement announced this morning.

Second this presentation contains GAAP financial measures and non-GAAP financial measures where we believe it is helpful to understanding Huntington’s results of operation or financial position.

Where non-GAAP financial measures are used, a comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the slide presentation or in the quarterly financial review supplement to the 2003 second quarter earnings press release, which can be found on our Web site, www.huntington-ir.com. Also, certain performance data we will review are shown on an “annualized” basis. In the discussion of net interest income, we do this on a “fully taxable equivalent basis”. Further, we relate certain one-time revenue and expense items on an “after tax per share” basis. Many of you are familiar with the terms and usage, but for those of you who are not, we have provided definitions and rationale for their usage on this slide. Today’s presentation will take about 45 minutes. We want to get to your questions, so let’s get started.

THOMAS E. HOAGLIN, CHAIRMAN, PRESIDENT AND CEO, HUNTINGTON BANCSHARES INCORPORATED:

Turning to slide three, you’ll see that today’s agenda is full. Up front, I want to provide an update on the earnings restatement and other accounting and disclosure related changes we announced today.

Second, I’ll review today’s announcement of the dividend increase for our common stock.

Mike and I will then provide a review of our second quarter financial performance as well as the discussion of the implementation of FIN-46, which brings back on the balance sheet in the third quarter $1 billion in securitized auto loans. I’ll then wrap up our formal remarks with some updates on the outlook for second half and full-year performance expectations.

Let’s begin with slide four. On June 26th, we announced that the staff of the Securities and Exchange Commission is conducting a formal investigation. Today’s voluntary earnings restatement and change in accounting practice address a variety of issues related to the SEC investigation.

The earnings restatement includes corrections for certain timing errors related to origination fees paid to automobile dealers, deferral of commissions paid to originate deposits, certain mortgage origination fee income, the recognition of pension settlements and liabilities related to the sale of an automobile debt cancellation product. The impact of the restatement is to reduce previously reported earnings by a net $30 million after tax or 1.3% of equity as of March 31, 2003. Of the $30 million, earnings for periods prior to 2000 account for $27 million after tax.

Turning to slide five. An issue still under review by us relates to the application of SFAS 91. SFAS 91 deals with the timing of recognition of loan and lease origination fees and certain costs. The statement requires that such fees and costs, if material, be deferred and amortized over the estimated life of the asset.

Generally, Huntington has not deferred these origination fees and costs but has recognized the net amount in the period of origination, which has been disclosed in our audited financial statements. The company is reviewing the impact of this practice on its historical results. Any retroactive decision to defer these origination fees would only impact the timing, not the total amount of net revenue recognized over the life of the asset. The company has decided to defer these origination fees expenses prospectively for all loans and leases originated after June 30.

As a result of the restatement and the changes announced today, the company will file an amended 2002 annual report on form 10K/A as well as an amended quarterly report on form 10Q/A for the first quarter.

No one likes to restate their earnings, let alone make two restatements in just a matter of months. What is being corrected are accounting practices that were put in place a number of years ago. While the investigation is ongoing, we decided to take these actions now and are continuing to cooperate fully with the SEC staff.

Turning to slide seven, we’re very pleased today to announce the Board’s decision to increase the dividend 9.4%. Our quarterly common stock dividend increases to 17.5 cents per share from 16 cents per share. This new dividend will be payable on October 1st to shareholders of record on September 19th.

We also announced we are increasing our target dividend payout range to 40 to 45%. It had been 35 to 45%. We believe this represents the proper balance between the company’s need for capital to continue to invest in building the business and our shareholders’ desire for income.

Slide eight shows the primary factors the Board took into consideration in making this decision.

The first was the positive progress we have made in improving our financial performance and the confidence we have in our prospects.

Second, and part of the financial performance improvement, has been the establishment of a strong capital position. Our capital position has strengthened considerably since we announced the 20% dividend cut in 2001. Today, we have a tangible common equity to assets ratio of 7.3%.

Further, our improved financial performance has increased the rate at which we generate internal capital to 9%. We believe this is a rate that generates sufficient capital to grow our business and earnings.

The decision to cut the dividend in 2001 was absolutely the right decision but it was painful to many of our shareholders who depend on dividends for income. The Board and I have very much appreciated your patience, encouragement and loyalty to Huntington during this period. This is why we are so pleased to raise the dividend today.

Now let’s turn to the main reason for today’s conference call, a review of second quarter performance. Remember, all the numbers reviewed reflect this morning’s restatement.

As shown in slide 10, earnings in the second quarter were $97.4 million up from $90.6 million in the first quarter with earnings per share at $0.42, up from $0.39 in the first quarter.

However, the results of both quarters contain some significant items, including: $11.6 million pretax gain from the sale of $569 million of automobile loans late in the quarter, or $7.6 million after tax, or $0.03 a share; $6.9 million pretax of securities gains, or $4.5 million after tax, or $0.02 a share; $6.4 million pretax impairment of mortgage servicing rights, or $4.1 million after tax or $0.02 a share; and $5.3 million pretax release of restructuring reserves, or $3.4 million after tax, or a $0.01 a share.

The 2003 first quarter significant items consisted of: an $8.3 million pretax gain for the sale of $558 million of automobile loans late in that quarter, or $5.4 million after tax, or $0.02 per share; $1.2 million pretax of securities gains, or $800,000 after tax with no material per share impact; and $1.0 million pretax release of restructuring reserves or $700,000 after tax with no material per share impact.

Adjusting for these items, second quarter earnings were $86.1 million or $0.37 a share, and first quarter earnings were $83.7 million or $0.36 per share.

Our ability to grow loans continued to be a positive. Average loans and leases increased at an annualized 7% rate during the second quarter, slower than the 16% rate in the first quarter. However, excluding the impact of the first quarter loan sale, the second quarter growth rate also would have been 16%.

Deposit growth also continues to be strong with core deposits, excluding retail CDs, up an annualized 20% rate, well above the 10% rate in the first quarter. The net interest margin declined 15 basis points to 3.69% from 3.84% in the first quarter. Despite this decline, fully taxable equivalent net interest income increased, reflecting loan and other earning asset growth.

Credit quality trends were mixed. On the one hand, and as expected, the net charge-off ratio increased to 85 basis points from 69 basis points. This was due to higher commercial charge-offs as auto related charge-offs declined. On the other hand, non-performing assets were down slightly, and our NPA coverage ratio increased to 255% at the end of Jun, up from 239% at March 31. Our reserve for loan and lease losses remained strong at 1.79%, up from 1.78% at the end of the prior quarter.

And lastly, our capital improved slightly as indicated by a period end intangible common equity to assets ratio of 7.31%, up from 7.25% of March 31. This ratio had been declining over recent quarters, primarily as a result of our share repurchase program.

We repurchased no shares during the second quarter and at quarter-end there were 3.9 million shares remaining under the current authorization.

All in all, we’re very pleased with this performance, as it was very much in line with our expectations.

Let me turn the presentation over to Mike, who will provide a more detailed financial performance review. Mike?

MICHAEL J. MCMENNAMIN, VICE CHAIRMAN, CFO AND TREASURER, HUNTINGTON BANCSHARES INCORPORATED:

Thanks, Tom. Most of the following slides represent the standard deck you are familiar with, so I think we can move through most of these fairly quickly.

Turning to slide 12, again, all prior periods reflect the restatement we announced this morning. This is an expansion of the slide Tom just reviewed and shows these performance measures over the last five quarters. We will talk about most of these in detail later, but let me emphasize a couple of items. Earnings per share increased from $0.39 in the first quarter to $0.42 in the second quarter, and return on equity moved up to 17.5%. The net interest margin declined 15 basis points to 3.69% from 3.84%. More on this later.

You’ll remember from last quarter’s call, all new auto lease originations after April 2002 are accounted for as direct financing leases. As such, the operating lease balances and related non-interest income and non-interest expense will decline over time. All things being equal, this results in an ongoing improvement in the efficiency ratio until these assets disappear. For the current quarter, the efficiency ratio improved to 63.1% from 67.2% in the first quarter. Of this 410 basis point improvement, 80 basis points represented the impact of the operating financing lease portfolio runoff.

Loans and leases grew at an annualized 7% rate during the quarter with core deposits excluding retail CDs up a very strong 20%. And as Tom mentioned, charge-offs were 85 basis points for the quarter up from 69 basis points in the previous quarter driven by higher commercial and industrial charge-offs as auto loan charge-offs declined. Non-performing assets were down slightly, and our tangible common equity ratio improved slightly.

Slide 13 compares the income statement for the second, first and year-ago quarters. Net interest income increased slightly as the benefit of the increase in average earning assets was mostly offset by the decline in the net interest margin. Non-interest income increased $6.2 million, reflecting a combination of offsetting items I’ll review in a moment. Provision expense increased 12.3 million from the first quarter reflecting both higher net charge-offs and to a lesser degree, loan growth.

Non-interest expense decreased $18.3 million with about half of that related to a decline in operating lease expense, again related to the runoff of that portfolio.

The graphs on slide 14 show the quarterly earnings trend in net income and earnings per share. Recall that the third quarter last year included a $24.5 million pretax, or $0.07 per share after tax, gain due to the restructuring of our merchant servicing unit. Importantly for the last two quarters, a more stabilized pattern is developing.

Slide 15 shows a declining trend in the net interest margin in more recent quarters. The right-hand side of this chart shows some of the factors we’ve previously noted that are continuing to have a negative impact on net interest margin trends but a couple of new items need to be pointed out.

The first is the impact of our rapidly growing direct financing lease portfolio. This portfolio started at zero as of last May and represents all of our auto lease production. As a new portfolio, the rates are lower than one would find in a more mature portfolio that has a component of older, higher rate leases.

The second new item is the growth of the investment securities portfolio. We’re generating strong deposit growth, as we have noted, and additionally have sold auto loans in the last two quarters. These funds are now being reinvested in securities at a time when interest rates are very low.

Going forward, we continue to expect downward pressure in the margin. Some of this will come from the most recent rate reduction by the Federal Reserve. Most of the margin pressure, however, is continuing to come from the

repayment and prepayment of higher rate loans and securities. Any further reductions in the level of interest rates will put additional stress on the margin, as we are increasingly unable to pass on these lower rates to our depositors.

Slide 16 shows two measures of our interest rate sensitivity, net interest income at risk and economic value at risk, given certain changes in rates. We are relatively interest rate insensitive with respect to changes in interest rates currently. At the end of June, we sold $569 million of fixed rate auto loans, and we are in the process of reinvesting these sales proceeds. When these funds have been reinvested in fixed rate assets in the third quarter, we will return to a slightly liability sensitivity position.

Average loan and lease growth is highlighted on slide 17. Second quarter average loans and leases increased at a 7% rate from the first quarter. This rate was impacted by the first quarter sale of auto loans. Excluding the impact of that sale, average loan and lease growth would have been 16%, basically unchanged from the prior quarter. We’re very pleased with this performance.

Total commercial and commercial real estate loans increased at a 5% rate during the quarter consistent with both linked-quarter and year-over-year growth rates. Auto loans were down an annualized 32% from the first quarter due to the impact of the $558 million loan sale late in that quarter. Excluding the impact of that sale, average auto loans were up an annualized 26% versus the 19% rate in the first quarter.

Auto direct financing leases averaged $1.3 billion in the second quarter, up $0.3 million from the first quarter and up $1.1 billion from the year ago quarter. Home equity loans and lines and residential mortgages continued their strong growth pattern and were up an annualized 15% and 12%, respectively from the first quarter. Average operating lease assets continue to run-off. As we have mentioned, all new auto lease or originations since April 2002 have been direct financing leases.

Slide 18 recaps the first and second quarter auto loan sales of $558 million and $569 million, respectively. These sales are part of our strategy to reduce our exposure to the automobile business. Both sales resulted in gains and also put downward pressure on the net interest margins. The sales have also put upward pressure on our net charge-off rate. As a result of these sales, our total auto exposure was 26.9% of recorded total loans, leases and operating lease assets at the end of the quarter, down from 28.2% at March 31st and 29.8% at the end of last year.

Bringing back $1 billion of securitized auto loans onto the balance sheet in the third quarter with the implementation of FIN-46 will add about three percentage points to these ratios. While these sales lower our auto exposure, and we are going to continue to work to reduce that concentration, such sales do negatively impact ongoing earnings power. So, our challenge is to balance the need for earnings with the intent to reduce our auto exposure as we go forward.

Slide 19 shows the rapidly declining operating lease portfolio. Average balances in the second quarter were $1.8 billion, down 36% from the prior year.

Slide 20 should be familiar to you. Total core deposits excluding retail CDs increased at a 20% rate in the quarter, up from the 10% rate last quarter. This growth was concentrated in interest bearing demand, or money market, accounts, which are up at a 36% rate versus 22% in the first quarter.

Slide 21 we usually keep in the appendix but I wanted to focus on this briefly today as this looks at the success that we have had in penetrating our retail deposit customer base with mutual fund and annuity sales. As shown on the top line, mutual fund and annuity sales penetration represent about 6% of our retail deposit base. This means mutual fund and annuity sales in 2002 were 6% of our total retail deposits. Our penetration rate is 76% higher than the industry average and 36% higher than the top quartile bank in 2002. This is an area that Huntington really continues to excel.

Slide 22 reviews the trend in non-interest income. As a result of adopting operating lease accounting, our largest line item is operating lease income, which accounted for 45% of total non-interest income. Operating lease income was down 7% from the first quarter due to the decline in rental income. Deposit service charges increased $1 million, or 3%, from the first quarter. This reflected higher consumer deposit service charges, mostly in the NSF and overdraft fees as commercial service charges declined slightly. Compared to the year-ago quarter, deposit service charges were up 15%.

Brokerage and insurance income declined $1.3 million or 8%. This reflected an 18% decline in annuity sales which totaled $142 million during the quarter, down from the first quarter record sales of $174 million. In contrast, mutual fund sales were $76 million, up 45% from the first quarter. The $1 million, or 10%, increase in other service charges reflected higher transaction-based product fees coming off the seasonally weak first quarter.

Mortgage banking income declined $2.8 million, or 20%, including $6.4 million of mortgage servicing rights impairment versus none in the first quarter. Excluding the impact of this impairment, mortgage-banking income increased $3.6 million, or 26%, reflecting a 34% increase in loan production to $1.7 billion. In the month of June, a record $1.3 billion of applications were received reflecting the lower rate environment in the second quarter. Sixty seven percent of total loan production represented refinancing activity approximately the same rate as in the first quarter.

Securities gains were $6.9 million in the quarter and basically offset the impact of $6.5 million of MSR impairment.

Other income in the quarter was up $11.4 million of which $3.3 million represented the higher gains on auto loan sales in the second quarter versus the first and increases in the market value of equity investments accounted for $3.2 million. The remaining $4.9 million of the increase was due to higher fees from termination of operating lease assets, as well as higher letter of credit fees.

Slide 23 details some statistics on our mortgage banking and servicing operations. Mortgages serviced for investors totaled $5.1 billion at the end of June, up 89% from a year ago. As already mentioned, the current quarter had $6.4 million in MSR impairment due to the heavy refinance activity.

At the end of the June, mortgage servicing rights were valued at 72 basis points down from 80 basis points at the end of the first quarter. During the first half of the year, $3 billion of mortgages were originated, and our current expectations are for a like amount to be originated over the second half of the year.

Slide 24 details trends in non-interest expense. Personnel costs declined $7.7 million or 6% from the first quarter due to lower salaries, benefits and severance costs. The rapid decline of the operating lease portfolio reflected in the $8.6 million, or 8% decline in operating lease expenses. This was primarily due to lower depreciation expense on the declining portfolio and reductions in gross credit losses to $11.6 million from $12.3 million in the first quarter.

Professional services expense was up $600,000 in the first quarter. This reflected additional costs associated with the May 20th accounting restatement as well as expenses incurred in conjunction with the SEC investigation announced on June 26th.

The second quarter also included a $5.3 million release of restructuring reserves versus a $1 million release in the first quarter and $7.2 million released in 2002. Of the $5.3 million, $3.8 million of that related to reserves that were established in 1998 and $1.5 million related to reserves established in 2001 and 2002.

The 1998 reserve was established for, among other items, the exit of under performing product lines, including possible third party claims related to these exits. Management has reviewed this reserve and determined that future claims were unlikely or would be immaterial and as such reduced the level of reserve through a credit, or reserve release, to the restructuring charge line of non-interest expense.

All changes in the estimated restructuring reserves required are now reflected as charges (in the case of increases) to the reserves or a release (in the case of decreases) to restructuring charge line.

Other non-interest expense increased $3.5 million in the first quarter, spread across a variety of categories.

Slide 25 shows the trend in our efficiency ratio. It improved 410 basis points to 63.1%, with 80 basis points of that improvement due to the impact of the runoff of the operating lease portfolio.

Let me review some of the recent credit trend highlights on slide 26. We’ll cover those in more detail in just a moment. Non-performing asset ratio at 70 basis points was down from 74 basis points at the end of the quarter. In contrast, net charge-offs were 85 basis points up from 69 basis points in the first quarter. Delinquencies remained fairly steady in total, although consumer delinquencies declined a bit with commercial delinquencies increasing.

Our loan loss reserve ratio increased slightly to 1.79%, and our non-performing asset coverage ratio increased to 255% from 239%, up significantly from 158% coverage a year ago.

Slide 27 shows a trend in non-performing assets and how favorably the fourth quarter credit actions impacted this level and how flat they have been ever since.

Let me provide a little more non-performing asset detail on slide 28. While the ending balance was down just $7 million, there was a lot of activity centered in a few names. New inflows increased to $83 million during the quarter with 60% of the increase concentrated in three commercial credits. One of these credits is in the manufacturing sector with part of its business supporting auto manufacturing, another in the teleconference business and a third in a combination of businesses including marine shipping and mining or raw materials. Of these credits, one was charged off and another sold during the quarter.

The higher level of payments, which returned to levels experienced in earlier quarters, was spread over a number of credits with no notable borrower concentrations. Sales of $23 million were up significantly with over one half of these representing the disposition of one of the new non-performing assets at 85 cents on the dollar.

Last quarter, we had indicated to you that we had expected modest declines of non-performing assets going forward. However, despite the modest decline in NPAs this quarter, we continue to expect NPAs to remain around the $140 million level at least through year-end.

The next slide shows that net charge-offs were $41.1 million or 85 basis points in the quarter, up from $32.8 million or 69 basis points in the first quarter. Commercial charge-offs totaled $26.5 million up from $14.9 million with the primary driver being one of the quarter’s three new non-performing assets previously mentioned, which accounted for 45% of total commercial charge-offs in the quarter and virtually all of the increase between the second and first quarter.

Total consumer net charge-offs were $13.9 million, or 57 basis points, down from $17.3 million, or 73 basis points in the first quarter. The primary driver of this reduction was a $3.1 million or 29%, drop in auto loan net charge-offs from 138 basis points to 106 basis points.

Auto loan direct finance lease net charge-offs totaled $1.4 million in the second quarter and represented only 43 basis points up from 36 basis points. As this lease portfolio is new and is growing rapidly, it may take another year or so to reach a mature or stable net charge-off run rate. Until then, the net charge-off rate is likely to increase over this period, albeit from a low level.

Slide 30 shows the vintage performance of our indirect auto loan portfolio. The table shows the percentage of the total portfolio represented by each vintage at various points in time. The table also shows cumulative charge-off rates for four vintages beginning in the fourth quarter of 1999. These four vintages represent 97% of the loan portfolio as of June 30th.

Loans originated from the fourth quarter of 1999 to the fourth quarter of 2000 represent 1% of total auto loans at June 30th, down from 34% at the end of 2001. The cumulative charge-offs after 12 months on this vintage were 79 basis points. In contrast, loans originated in 2002 represented 42% of the total portfolio at the end of June but after 12 months had cumulative net charge-offs of 37 basis points, a 53% improvement over the earlier vintage.

Slide 31 portrays consumer delinquency trends on a 30-day and 90-plus-day-basis. Following the expected seasonal decline in the first quarter, the consumer 30-day plus ratio up-ticked slightly. In contrast, the 90-day plus delinquency ratio, which up-ticked in the first quarter, declined as expected.

Slide 32 recaps the trend in the loan loss reserve, which is previously noted, increased slightly to 1.79% of loans and leases compared to the end of the prior quarter. Second quarter provision expense exceeded net charge-offs by $8.1 million, reflecting the growth in loans in the second quarter.

If you’ll turn to slide 33, you’ll notice that our tangible equity to asset ratio as of June 30th was 7.31%, up from 7.25% at the end of March. The decline from a year earlier reflected the impact of the company’s share repurchase program and growth in assets.

During the quarter, we did not repurchase any shares. As of June 30th, there were still 3.9 million shares left under the current authorization.

We expect our tangible common equity ratio will decline about 30 basis points when we bring $1.0 billion of securitized auto loans back on the balance sheet as we implement FIN 46. This will put us pretty close to our long-term target of 7.0%.

As such, no further meaningful share repurchases are planned for the immediate future. However, I would not rule out further share repurchases entirely, I think it’s just fair to say they will be more opportunistic going forward.

If you’ll turn to slide 35, as we previously disclosed, FIN 46, which deals with the consolidation of variable interest entities will be implemented in the third quarter. As a result, we expect $1.0 billion of auto loans that were securitized in 2000 will be reconsolidated onto the balance sheet. At the time of the securitization, a 3% outside ownership of the beneficial interest qualified for off-balance sheet treatment. FIN 46 increases that outside ownership threshold to 10%.

As shown on slide 36, implementation of this accounting standard will be treated as a one-time cumulative effect of an accounting change. This requires the write-down of certain assets and the recognition of others. It also means the establishment of on balance sheet loan loss reserves. Just the opposite of the reserve reduction that occurred at the time the assets were securitized and sold.

While implementation results in a net charge to earnings, future period earnings will benefit from the income generated by these loans. Bringing those assets back on the balance sheet has no impact on our regulatory capital ratios as these assets, though off balance sheet, are already included in risk-based assets. However, it will lower our tangible common equity asset ratio by about 30 basis points.

Slide 37 details all of these expected entries. In summary, the estimated impact of implementing FIN 46 will be a one-time charge of $18 million pretax, $12 million after tax, or about a $0.05 per share booked as a cumulative effect of an accounting change in the third quarter. We will establish a loan loss reserve of 1.01% on these loans. The addition of these loans at a 1.01% loan loss reserve rate will reduce our overall loan loss reserve ratio by about 4 basis points in the third quarter.

Slide 39 shows that our 2003 earnings per share guidance is $1.48 to $1.52 per share. This is unchanged from the guidance provided in May. However this guidance takes into account the one-time negative five cents per share cumulative accounting change impact of implementing FIN 46 offset primarily by the positive impacts of the loan sale gains and the current restatement.

A lot of what happens will depend on the state of the economy and levels of interest rates. We are not anticipating any significant pickup in economic activity in the second half of the year nor are we anticipating further weakening.

We hope these general comments give you some guidance as you review your earnings projections for Huntington in 2003.

This completes our prepared remarks. Mike, Nick Stanutz, and I will be happy to take your questions. Let me turn the meeting back over to the operator, who will provide instructions on conducting the question-and-answer period. Operator?

OPERATOR: Ladies and gentlemen, if you do have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you do have a question, please press the one key now. One moment for questions.

ANTHONY A. LOMBARDI, MERRILL LYNCH: Thanks. I wondered if you could just comment on the voluntary actions you’ve taken so far relative to the SEC investigation and what remains, and I guess it really has to do with the SFAS 91 that you alluded to. Just talk about that and the magnitude of the potential changes we could see there from an accounting standpoint.

MCMENNAMIN: Anthony, it’s Mike. As we mentioned, the investigation is ongoing, we’re fully cooperating with the staff of the SEC. We will be adopting the policy prospectively for all new loans and leases originated after July 1st of deferring the origination fees and associated costs.

We are still looking at the impact of not having deferred the origination fees and costs on our historical numbers. We are continuing to look at that and do further analysis on it, and we’ll see how that analysis comes out.

LOMBARDI: Do you think the magnitude is similar in nature to what you’ve already done on a voluntary basis in terms of the impact?

MCMENNAMIN: Well, we really can’t comment right now on that issue, Anthony. As we said, we’re in the middle of an investigation. Any retroactive decision to defer these origination costs and fees would only impact the timing of the recognition of those net fees, not the total amount recognized over the life of the asset.

LOMBARDI: OK. Then kind of related to the investigation but more so on the decision with respect to the dividend increase, I hear you – on the buybacks, you are not doing anything right now. But talk about the decision on a dividend in view of what’s going on with the SEC, as well as the economic outlook at least that you’re suggesting is fairly weak and the credit backdrop on NPAs, you don’t expect any movement down through the end of the year. I’m curious as to how the Board came to the decision with respect to those two dynamics outside of the ones you alluded to before.

HOAGLIN: When we reduced our dividend in the middle of 2001, we did so saying that we would look forward to reviewing the dividend level as earnings increased. And as you know, we’ve worked hard to improve our financial performance since then. I think it was the Board’s conviction, certainly it was mine, that we’ve got very positive momentum in our earnings over the last several quarters, and we feel positive about our prospects for the future. We felt this increase reflected that and nevertheless allowed us to stay within our previously announced payout ratio of 35% to 45%. So, we just kind of felt like with improving prospects, it was time to make an increase and give shareholders another way to benefit.

MCMENNAMIN: I think, also, Anthony, we are comfortable at current earnings levels that we have plenty of capital even with the dividend increase to finance future growth of the company.

OPERATOR: Thank you. The next question is from the line of Fred Cummings from McDonald Investments. Please go ahead.

FRED A. CUMMINGS, MCDONALD INVESTMENTS: Yes, good morning. Good afternoon, excuse me.

Two questions. One as it relates to the accounting restatement just for point of clarification. You guys note that you’ve initiated a review of financial reporting practices. Is that simply in response to the employees’ allegations or is this some broader review of financial reporting practices?

MCMENNAMIN: Fred, this is Mike. We’ve been reviewing accounting policies and practices for a while. As you know, we’ve been making a lot of changes in the company. These actions we are taking today are just part of our continuing effort to improve transparency for shareholders and, to the extent we can, adopt more robust accounting policies.

Secondly, as it relates to credit quality, can you talk about if the three larger loans that flowed into non-accrual this quarter were any of those tied to the national shared credit review? I don’t think you guys are big players in that and can you talk about how that review might impact non-performers and net charge-offs in the second half of the year?

Each of the three credits would be categorized as a shared national credit. None of the three credits that went into non-performing status, however briefly, were directed as a result of the shared national credit exam. I think it’s safe to say that Huntington was not the lead bank on any of the three credits. The one credit that related to a charge-off was in the teleconferencing audio/visual equipment area and, rightly or wrongly, came as a significant surprise to us and to other banks involved in the syndication.

MCMENNAMIN: Fred, this is Mike. You might note that our shared national credit at the end of the second quarter totaled $831 million, which versus a year ago is down $166 million. So, we continue to make progress in reducing the magnitude of that portfolio.

CUMMINGS: OK, then one last question. Can you just comment on the health of the commercial real estate portfolio particularly your exposure in Columbus? Some of the national data shows that Columbus having pretty high vacancy rates.

HOAGLIN: Fred, this is Tom. You are exactly right about the analysis of the Columbus market. Our commercial real estate portfolio, overall, continues to work very well as you can see in one of the slides. Charge-offs were negligible, delinquencies happened to be very well managed there. We are not significantly exposed in the Columbus commercial real estate, particularly downtown, which is the softest. So we feel quite confident that this will continue to be a well-performing portfolio.

MCMENNAMIN: Fred, this is Mike, and I’d also comment on the multifamily sector of the market. You’ve got two offsetting factors; the very low interest rates have fostered a movement out of apartments by a lot of younger people who are now able to afford a home. That has generated a reduction in occupancy rates. Probably for lots of these projects we used to think of 93% to 96% as being a pretty reasonable occupancy rate.

Today, those numbers would be well into the 80% and sometimes into the mid 80% range. But, offsetting that low occupancy rate has been the fact that the historically low interest rates have reduced the debt service requirement for a lot of these projects. So, you really have two offsetting factors that have tended to balance out and hold that portfolio in reasonably good shape, certainly a lot better than we saw in the 1991 recession.

OPERATOR: Thank you. The next question comes from the line of Erik Eisenstein from S&P Equity Research. Please go ahead.

ERIK EISENSTEIN, S&P EQUITY RESEARCH: This is about the restatement. I was just curious if any issues, which are the subjects of this restatement, came up in connection with any of the prior audits? And I just want to know what, if anything, changed between June 26th, I believe, and today in terms of the confidence you had in your prior financial statements? Thank you.

MCMENNAMIN: As you know, Eric, we restated our financials in the first quarter related to FASB 13 auto leases. That was about a $2 billion restatement. At the time we restated those statements, we certified the financials and came to the conclusion, as did our auditors, that those financials fairly represented our financial position. We were very comfortable with that.

I just want to reiterate the actions we’re taking today are voluntary actions and our attempt to develop even more robust accounting policies. All of the actions we took today relate to the timing of revenue recognition, not the level but the timing of that revenue recognition.

EISENSTEIN: I just wanted to know if there was anything specific that happened in the last two weeks just that might have changed your opinion regarding the previously filed statements?

EISENSTEIN: Because I’m just reading off the statements, and at the time you said we believe or Huntington says we believe Huntington’s financial statements fairly present its financial positions and results of operations.

MCMENNAMIN: That’s correct. I think I would suggest that you look at the total of these items representing 1.3% of our equity on March 31st.

EISENSTEIN: So that’s – I guess the position is that it’s a fair representation because that’s a relatively small amount?

OPERATOR: Thank you. The next question comes from the line of David Hilder of Bear Stearns. Please go ahead.

DAVID B. HILDER, BEAR STEARNS: Good afternoon, gentlemen. Again, I have three questions somewhat unrelated. First, on the auto loan sales, do you intend to make such sales as a regular practice and are these sales complete sales, you know, with no recourse back to Huntington?

MCMENNAMIN: David, let me take the second part, first. Yes, these are complete sales; there is no recourse to Huntington. We do remain a servicer on those loans for which we are paid a servicing fee. But we have no recourse on any potential credit exposure that might exist on those loans.

We stated, I think, on our last conference call that it was our intent to reduce our exposure to auto loans and leases over a period of time to something like 20% of our total loan and lease portfolio. If we include the loans that will be coming back on balance sheet here in the third quarter, we are at approximately 30% today. So, yes, as we implement that policy, the logical impact of that will be in all probability further auto loan sales.

MCMENNAMIN: The timing of those is obviously subject to market conditions, and I think as we mentioned when we did the first loan sale, we actually just reduced the size of the balance sheet by paying-off borrowings. That has

a negative impact on earnings, so as we mentioned, we really need to balance these two conflicting needs. One, the ability to generate over a period of time rising levels of income, at the same time the decision to implement and reduce the magnitude of that portfolio as a percentage of our total portfolio. So, it’s going to be a balancing act. We’re not committed to a specific time period to get that policy implemented.

HILDER: OK. And on page 36 of your presentation, I’m just curious about your statement that future period earnings will be positively impacted by net spread as a result of the adjustments on FIN 46. Do you mean that the earnings will be higher than they otherwise would have been or simply that you’ll recapture some of what you effectively charged down or write down in the FIN 46 adjustment?

MCMENNAMIN: In essence, we will benefit from the earnings on those assets. We’ll have $1 billion more loans on our balance sheet with the net interest income associated with those loans reduced by charge-offs. That will be the positive impact as we go forward.

The negative impact — these loans had been securitized and we actually had the residual interest in these loans so we did have an earning asset in the form of an interest only strip for, as I recall, I think it was on our books for about $150 million. So, the earnings on that asset will reduce our earnings going forward, but that will be more than offset by the net interest income net of charge-offs on the new assets.

MCMENNAMIN: It’s required that it be filed by August 15th. (Correct filing date: August 14, 2003)

OPERATOR: Thank you. The next question comes from the line of Todd Hagerman of Fox-Pitt Kelton. Please go ahead.

Tom, I was wondering if you could, in light of what’s transpired over the past four months or so, I know Nick is in the room there, if you could comment on Huntington’s ongoing strategic commitment to the dealer sales area?

And then, second, if you care to comment as it relates to kind of the statement 91 issues. If you feel that the issues are particular to Huntington or if this is more kind of an industry-wide issue that we’re grappling with here?

HOAGLIN: Todd, nothing that has transpired over the last several months, meaning our reclassification of auto leases or this latest restatement, bears any relationship to our strategic commitment to the auto business.

As you may know, it’s a business we’ve been in for 50 years. We believe – and Nick, you can close your ears now – but we believe it’s being run very well. We believe it’s a very profitable business for us. As you know, we made a change, an important change a couple of years ago relative to the quality of assets generated. That’s working out very well for us and the reclassifications and restatements really do not change at all the economics of the business. It’s about either geography or timing, but not cash flows or profitability.

So, we regret that we’ve had to go through what we’ve had to go through, and believe me, we’ve got lots of people who work very hard for us to get restatements done on a timely basis and done well. But, none of this really impacts our commitment at all to the business.

HOAGLIN: Yes. So, let me just make sure I repeat this before I respond. You’re asking whether I think that our SFAS 91 issue is simply relative to Huntington or it’s an industry-wide issue?

MCMENNAMIN: We’re not really in a position to comment as to what other organizations are doing or not doing with regard to either SFAS 91 issues or SFAS 13 issues. We don’t know their specifics of that organization’s portfolio and policy, so I think it would be inappropriate for to us comment on that.

I would, though, Todd, tell you that you should not link the SFAS 13, SFAS 91 issues we are dealing with over the last few months with an announcement that we are going to reduce our exposure in the auto sector to 20%. Those are not connected whatsoever.

We have been talking for some time and debating for some time the need to reduce our exposure in that area. We are trying to develop a strategy, and we think we are in the process of doing so through auto loan sales, to enable Nick Stanutz to continue to grow his business. We just don’t want to retain the credit risk on balance sheet.

We do want him to continue to grow his business, and we hope to continue to grow the servicing aspect of that business much as we would in a mortgage banking context.

HAGERMAN: No, I understood completely, and I appreciate the comment, but if I may just slip in one last question as it relates to the auto.

If you could just give me a sense, as it relates to the direct finance lease portfolio, what your expectations are from the economics, kind of that normalized charge-off rate, you know, given the expected seasoning in a portfolio, what are your expectations there?

MCMENNAMIN: Todd, I think we’ve talked about expected normalized charge-offs in loans and leases. I think loans we’ve talked about getting to 75 basis points. We think leases might be just a little bit less than that, but not appreciably so. So, maybe in the 65 to75 basis point range as we get on a more normalized basis.

OPERATOR: Thank you. The next question is from the line of Adam Horowitz with Ulysses Management, please go ahead. Good afternoon.

ADAM HOROWITZ, ULYSSES MANAGEMENT: Actually, Todd preceded me and asked most of my questions, but if you could follow up on the auto side. Given that the manufacturers are getting more aggressive in extension of credit, can you give us more information in terms of how you’re playing defensively in extending loans to not getting any adverse selection?

NICHOLAS G. STANUTZ, EXECUTIVE VICE-PRESIDENT, DEALER SALES, HUNTINGTON NATIONAL BANK: Adam this is Nick Stanutz. Actually, what we are seeing in the marketplace is the manufacturers creating the demand through the advertising. It in effect is creating opportunities for us and other banks in the universe simply because most of the incentive programs that are being offered, especially the domestic incentive programs, all have large sums of cash associated as a counter to the low interest rate. And the dealership associates are really showing customers the benefit of taking the cash, because you get the immediate benefit of that versus the interest rate, especially when people are trading their cars maybe every three years or so on five-year loan contracts.

So actually, we are seeing over a period of time, really throughout the whole year of 2003, each quarter our FICO scores are actually getting better. And today, somewhere between 85% and 85% of our production would be considered “A” credit in the auto finance business.

Secondly, our market share actually is going up in all of our footprint locations, and actually, to your surprise probably, the domestic manufacturing market share is actually declining.

OPERATOR: Thank you. The next question is from the line of Daniel Martin of Standard & Poor’s. Please go ahead.

If there are any further questions at this time, please press the one key now. We do have one more question in queue from Dean Unger of Neuberger Berman.

DEAN UNGER, NEUBERGER BERMAN: Hello, hi. Let me ask you just about the guidance. I want to make sure I understand it. If I understand it correctly, it seems like you are saying that the second half earnings are going to be a little bit lower even if you correct for these loan sale gains and restatement impact. In the second half than they were in the first half. Is that what you are saying?

MCMENNAMIN: Well, this is Mike. If you just took the midpoint of our range for the sake of discussion, which would be $1.50, we reported first half earnings of $0.81, $0.39 and $0.42. So by definition, that implies if $1.50 is the midpoint, that implies $0.69 in the second half. That $0.69 includes the adoption of FIN 46, so that’s a nickel so that gets you to $0.74 ...

MCMENNAMIN: ... for the second half. If you ex out the auto gains and the impact of the restatement in the first half, you get $0.36 and $0.37 respectively for the first and second quarters. We’re not sure that it’s quite correct to exclude all of the auto gains but if you did that, you’d get a $0.73 first half and a $0.74, on that math, second half.

UNGER: So, about the same. And when you look at the second half of the year, it seems like the margin will be under some margin pressure and do you expect the same sort of deposit and loan growth, are you still equally optimistic in the second half?

MCMENNAMIN: Well, we certainly don’t expect to see a deposit growth in the 20% range that we happened to see this quarter. I think we do feel optimistic about deposit growth. We think we are developing a good sales franchise that has the capability of selling products, both loans and deposits.

If you looked at our track record over the last few quarters, we’ve done a very nice job, I think, of generating loans in a pretty difficult environment. Your perception is correct. I think we’re going to continue to have margin pressure at Huntington and the rest of the industry. In the second half of the year bank margins are not going to hold up at these kinds of levels if we have 1% interest rates or if interest rates were to go even lower.

HOAGLIN: This is Tom. I also might point out that the sale of our offices in Martinsburg, West Virginia, continues to be on schedule and should be completed later this month. That will produce an after tax gain which is not included in our guidance.

UNGER: OK. And if I could ask one final question then about the salary expense which was down about 8%? You mentioned that it was lower salaries and things like that.

I was wondering if you could maybe give a little bit more details about why the salaries went down and so on?

MCMENNAMIN: Part of it would be seasonal. As you know, salaries are subject to FICA taxes. As you get into the second and certainly the third quarter, those taxes tend to be lower than they are in the first quarter of the year when just about everyone is paying FICA taxes. So, that’s one factor.

We had higher severance costs that were incurred in the first quarter than the second quarter. That was the second factor.

UNGER: So, is the level in the second quarter more of an indicative level of like a basis from going forward?

MCMENNAMIN: I think you probably will see in the second half of the year salary expenses go up a little bit from the second quarter level.

OPERATOR: Thank you. Mr. Gould, there are no more questions in queue at this time.

GOULD: Jeff, thank you. Thank you, everybody, for participating. If you have any questions, please give us a call. Thanks again.

OPERATOR: Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation. You may disconnect at this time.

15 EX-99.3 5 l02205aexv99w3.htm EX-99.3 PRESENTATION MATERIALS EX-99.3 Presentation Materials


FORM 8-K
	Item 5. Other Events.
	Item 7. Financial Statements and Exhibits.
	Item 9. Regulation FD Disclosure.
	SIGNATURES
EX-99.1 News Release
EX-99.2 Presentation Transcript
EX-99.3 Presentation Materials


Contacts:
Analysts		Media
Jay Gould	(614) 480-4060	Jeri Grier	(614) 480-5413
Susan Stuart	(614) 480-3878	Karen Del Toro	(614) 480-3077


($ millions)	Impact	After-tax

2003 first quarter	Increase	$	2
2000-2002	Reduction		(5	)
1999 and prior years	Reduction		(27	)

Total	Reduction	$	(30	)


										Percent Change vs.

(in thousands, except per share amounts)	2Q03			1Q03			2Q02			1Q03			2Q02

Net Interest Income	$	215,578		$	213,736		$	191,994			0.9	%		12.3	%
Provision for Loan and Lease Losses		49,193			36,844			49,876			33.5			(1.4	)
Securities Gains		6,887			1,198			966			N.M.			N.M.
Non-Interest Income		267,319			266,833			286,699			0.2			(6.8	)
Non-Interest Expense		311,359			325,339			331,691			(4.3	)		(6.1	)
Restructuring Charges		(5,315	)		(1,000	)		—			N.M.			—

Income Before Income Taxes		134,547			120,584			98,092			11.6			37.2
Income Taxes		37,160			30,008			25,081			23.8			48.2

Net Income	$	97,387		$	90,576		$	73,011			7.5	%		33.4	%

Net Income per common share — diluted	$	0.42		$	0.39		$	0.29			7.7	%		44.8	%
Cash dividends declared per common share	$	0.16		$	0.16		$	0.16			—	%		—	%
Book value per common share at end of period	$	9.93		$	9.72		$	9.58			2.2	%		3.7	%
Average common shares — basic		228,633			231,355			246,106			(1.2	)%		(7.1	)%
Average common shares — diluted		230,572			232,805			247,867			(1.0	)%		(7.0	)%
Return on average assets		1.39	%		1.34	%		1.17	%
Return on average shareholders’ equity		17.5	%		16.3	%		12.5	%
Net interest margin ⁽¹⁾		3.69	%		3.84	%		3.94	%
Efficiency ratio ⁽²⁾		63.1	%		67.2	%		69.1	%
Average loans and leases	$	19,284,120		$	18,951,793		$	16,560,217			1.8	%		16.4	%
Average earning assets	$	23,679,865		$	22,805,232		$	19,667,976			3.8	%		20.4	%
Average core deposits ⁽³⁾	$	15,421,145		$	14,971,891		$	14,693,332			3.0	%		5.0	%
Average core deposits — linked quarter annualized growth rate ⁽³⁾		12.0	%		(1.1	)%		(39.6	)%
Average core deposits — excluding Retail CDs	$	12,623,311		$	12,008,402		$	11,184,911			5.1	%		12.9	%
Average core deposits excl. Retail CDs — linked quarter annualized growth rate		20.5	%		10.2	%		(29.8	)%
Average total assets	$	28,052,184		$	27,410,256		$	24,961,255			2.3	%		12.4	%
Average shareholders’ equity	$	2,234,330		$	2,247,536		$	2,351,291			(0.6	)%		(5.0	)%
Total assets at end of period	$	28,292,019		$	27,857,087		$	25,352,242			1.6	%		11.6	%
Total shareholders’ equity at end of period	$	2,270,537		$	2,223,487		$	2,328,331			2.1	%		(2.5	)%
Net charge-offs (NCOs)	$	41,056		$	32,836		$	36,997			25.0	%		11.0	%
NCOs as a % of average loans and leases		0.85	%		0.69	%		0.90	%
Non-performing loans and leases (NPLs) at end of period	$	120,154		$	126,641		$	212,091			(5.1	)%		(43.3	)%
Non-performing assets (NPAs) at end of period	$	133,722		$	140,725		$	223,237			(5.0	)%		(40.1	)%
NPAs as a % of total loans and leases and other real estate (OREO)		0.70	%		0.74	%		1.33	%
Allowance for loan and lease losses (ALL) as a % of total loans and leases at the end of period		1.79	%		1.78	%		2.10	%
ALL as a % of NPLs		283.8	%		266.1	%		165.8	%
ALL as a % of NPAs		255.0	%		239.5	%		157.5	%
Tier 1 risk-based capital ^{(4) (5)}		8.60	%		8.43	%		9.64	%
Total risk-based capital ^{(4) (5)}		11.42	%		11.32	%		12.67	%
Tier 1 leverage ⁽⁴⁾		8.48	%		8.48	%		9.86	%
Average equity / assets		7.96	%		8.20	%		9.42	%
Tangible equity / assets ⁽⁵⁾		7.31	%		7.25	%		8.42	%

⁽¹⁾		On a fully tax equivalent basis assuming a 35% tax rate. The net interest margin measured on a non-tax equivalent basis was 3.65% in 2Q03, 3.79% in 1Q03, and 3.92% in 2Q02.

⁽²⁾		Non-interest expense less amortization of intangible assets ($0.2 million, $0.2 million, and $1.4 million, respectively) divided by the sum of fully taxable equivalent net interest income and non-interest income excluding securities gains.

⁽³⁾		Includes non-interest bearing and interest bearing demand deposits, savings deposits, CDs under $100,000 and IRA deposits.

⁽⁴⁾		Estimated at the end of June, 2003.

⁽⁵⁾		At end of period. Tangible equity (total equity less intangible assets) divided by tangible assets (total assets less intangible assets).

N.M. — Not Meaningful.

Table of Contents

Table of Contents

Table of Contents


	Six Months Ended June 30,
							Percent
(in thousands, except per share amounts)	2003			2002			Change

Net Interest Income	$	429,314		$	377,562			13.7	%
Provision for Loan and Lease Losses		86,037			88,886			(3.2	)
Securities Gains		8,085			1,423			N.M.
Non-Interest Income		534,152			589,072			(9.3	)
Gain on Sale of Florida Operations		—			181,344			(100.0	)
Non-Interest Expense		636,698			685,007			(7.1	)
Restructuring Charges		(6,315	)		56,184			N.M.

Income Before Income Taxes		255,131			319,324			(20.1	)
Income Taxes		67,168			150,302			(55.3	)

Net Income	$	187,963		$	169,022			11.2	%

Net Income per common share — diluted	$	0.81		$	0.68			19.1	%
Cash dividends declared per common share	$	0.32		$	0.32			—	%
Average common shares — basic		229,987			248,415			(7.4	)%
Average common shares — diluted		231,684			249,946			(7.3	)%
Return on average assets		1.37	%		1.32	%
Return on average shareholders’ equity		16.9	%		14.4	%
Net interest margin ⁽¹⁾		3.75	%		3.79	%
Efficiency ratio ⁽²⁾		65.1	%		64.3	%
Average loans and leases	$	19,120,291		$	16,964,483			12.7	%
Average earning assets	$	23,246,381		$	20,166,259			15.3	%
Average core deposits ⁽³⁾	$	15,197,759		$	15,495,592			(1.9	)%
Average core deposits — excluding Retail CDs	$	12,317,555		$	11,632,304			5.9	%
Average total assets	$	27,732,993		$	25,753,829			7.7	%
Average shareholders’ equity	$	2,240,897		$	2,366,208			(5.3	)%
Total assets at end of period	$	28,292,019		$	25,352,242			11.6	%
Total shareholders’ equity at end of period	$	2,270,537		$	2,328,331			(2.5	)%
Net charge-offs (NCOs)	$	73,892		$	79,969			(7.6	)%
NCOs as a % of average loans and leases		0.77	%		0.94	%
Non-performing loans and leases (NPLs) at end of period	$	120,154		$	212,091			(43.3	)%
Non-performing assets (NPAs) at end of period	$	133,722		$	223,237			(40.1	)%
NPAs as a % of total loans and leases and other real estate (OREO)		0.70	%		1.33	%
Allowance for loan and lease losses (ALL) as a % of total loans and leases at the end of period		1.79	%		2.10	%
ALL as a % of NPLs		283.8	%		165.8	%
ALL as a % of NPAs		255.0	%		157.5	%
Tier 1 risk-based capital ^{(4) (5)}		8.60	%		9.64	%
Total risk-based capital ^{(4) (5)}		11.42	%		12.67	%
Tier 1 leverage ⁽⁴⁾		8.48	%		9.86	%
Average equity / assets		8.08	%		9.19	%
Tangible equity / assets ⁽⁵⁾		7.31	%		8.42	%


Consolidated Balance Sheets			1
Loans and Leases and Deposits			2
Consolidated Quarterly Average Balance Sheets and Net Interest Margin Analysis			3
Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis			4
Selected Quarterly Income Statement Data			5
Selected YTD Income Statement Data			6
Quarterly Loan and Lease Loss Reserve and Net Charge-Off Analysis			7
YTD Loan and Lease Loss Reserve and Net Charge-Off Analysis			8
Quarterly Non-Performing Assets and Past Due Loans			9
Quarterly Stock Summary, Capital, and Other Data			10


		June 30,			June 30,			Change June '03 vs. '02

(in thousands)		2003			2002			Amount			Percent

Assets
Cash and due from banks		$	1,153,108		$	858,561		$	294,547			34.3	%
Interest bearing deposits in banks			44,906			28,385			16,521			58.2
Trading account securities			19,426			10,532			8,894			84.4
Federal funds sold and securities purchased under resale agreements			74,473			75,824			(1,351	)		(1.8	)
Loans held for sale			713,722			190,724			522,998			N.M.
Securities available for sale — at fair value			3,702,761			3,006,273			696,488			23.2
Investment securities — fair value $6,780 and $10,963, respectively			6,593			10,769			(4,176	)		(38.8	)
Total loans and direct financing leases (1)			19,098,929			16,784,144			2,314,785			13.8
	Less allowance for loan and lease losses		340,947			351,696			(10,749	)		(3.1	)

Net loans and direct financing leases			18,757,982			16,432,448			2,325,534			14.2

Operating lease assets			1,717,194			2,801,239			(1,084,045	)		(38.7	)
Bank owned life insurance			906,823			863,327			43,496			5.0
Premises and equipment			332,916			353,931			(21,015	)		(5.9	)
Goodwill and other intangible assets			218,080			210,685			7,395			3.5
Customers’ acceptance liability			8,372			16,778			(8,406	)		(50.1	)
Accrued income and other assets			635,663			492,766			142,897			29.0

Total Assets		$	28,292,019		$	25,352,242		$	2,939,777			11.6	%

Liabilities and Shareholders’ Equity
Total deposits (1)		$	18,371,359		$	16,861,100		$	1,510,259			9.0	%
Short-term borrowings			918,771			1,814,275			(895,504	)		(49.4	)
Federal Home Loan Bank advances			1,273,000			13,000			1,260,000			N.M.
Subordinated notes			496,666			880,706			(384,040	)		(43.6	)
Other long-term debt			3,508,397			2,082,438			1,425,959			68.5
Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely junior subordinated debentures of the Parent Company			300,000			300,000			—			—
Bank acceptances outstanding			8,372			16,778			(8,406	)		(50.1	)
Accrued expenses and other liabilities			1,144,917			1,055,614			89,303			8.5

	Total Liabilities		26,021,482			23,023,911			2,997,571			13.0

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 228,660,038 and 242,919,872 shares, respectively		2,483,105			2,487,887			(4,782	)		(0.2	)
	Less 29,206,217 and 14,946,383 treasury shares, respectively		(555,176	)		(289,705	)		(265,471	)		91.6
	Accumulated other comprehensive income		40,817			28,655			12,162			42.4
	Retained earnings		301,791			101,494			200,297			N.M.

	Total Shareholders’ Equity		2,270,537			2,328,331			(57,794	)		(2.5	)

Total Liabilities and Shareholders’ Equity		$	28,292,019		$	25,352,242		$	2,939,777			11.6	%

(1)		See Page 2 for detail of Loans, Leases and Deposits.

N.M. — Not Meaningful.


					June 30, 2003				June 30, 2002

By Type					Balance		%		Balance		%

Commercial					$	5,527,955		26.6	$	5,591,280		28.5
Commercial real estate						3,952,359		19.0		3,529,978		18.0

		Total Commercial and Commercial real estate				9,480,314		45.6		9,121,258		46.5

Consumer
		Automobile loans				2,376,635		11.4		2,610,845		13.3
		Automobile direct financing leases				1,510,681		7.3		276,260		1.4
		Home equity				3,435,766		16.5		2,990,726		15.3
		Residential mortgage				1,918,200		9.2		1,376,164		7.0
		Other loans				377,333		1.8		408,891		2.2

		Total Consumer				9,618,615		46.2		7,662,886		39.2

		Total Loans and Direct Financing Leases				19,098,929		91.8		16,784,144		85.7
		Operating lease assets				1,717,194		8.2		2,801,239		14.3

				Total	$	20,816,123		100.0	$	19,585,383		100.0

*By Business Segment (1)*
Regional Banking
	Central Ohio / West Virginia				$	4,875,149		23.4	$	4,583,224		23.4
	Northern Ohio					2,712,094		13.0		2,722,859		13.9
	Southern Ohio / Kentucky					1,547,572		7.4		1,431,148		7.3
	West Michigan					1,967,391		9.5		1,835,323		9.4
	East Michigan					1,224,920		5.9		1,053,660		5.4
	Indiana					729,538		3.5		681,765		3.5

				Total Regional Banking		13,056,664		62.7		12,307,979		62.9

Dealer Sales						6,413,298		30.8		6,334,819		32.3
Private Financial Group						1,180,836		5.7		866,440		4.4
Treasury / Other						165,325		0.8		76,145		0.4

			Total		$	20,816,123		100.0	$	19,585,383		100.0

(1)		Prior period amounts have been adjusted to reflect organizational changes and to conform to the current period’s presentation.

(2)		Core deposits include non-interest bearing and interest bearing demand deposits, savings deposits, CDs under $100,000, and IRA deposits.

(3)		Comprised largely of brokered deposits and negotiable CDs.


					Quarterly Average Balances

					2003				2002

Fully Tax Equivalent Basis (1)					Second		First		Fourth		Third		Second

Assets
Interest bearing deposits in banks					$	45	$	37	$	34	$	35	$	29
Trading account securities						23		12		9		7		6
Federal funds sold and securities purchased under resale agreements						69		57		83		76		68
Mortgages held for sale						601		459		467		267		174
Securities:
		Taxable				3,382		3,014		3,029		2,953		2,735
		Tax exempt				275		275		234		108		96

				Total Securities		3,657		3,289		3,263		3,061		2,831

Loans and leases: (2)
	Commercial					5,623		5,621		5,553		5,502		5,614
	Real Estate
			Construction			1,240		1,188		1,071		1,248		1,259
			Commercial			2,621		2,565		2,601		2,316		2,233
	Consumer
				Automobile loans and leases		4,173		4,116		3,726		3,245		2,744
				Home equity		3,359		3,239		3,168		3,062		2,911
				Residential mortgage		1,890		1,834		1,696		1,487		1,387
				Other loans		379		388		398		405		414

				Total Consumer		9,801		9,577		8,988		8,199		7,456

Total loans and leases						19,285		18,951		18,213		17,265		16,562

Allowance for loan and lease losses						338		349		386		367		357

Net loans and leases						18,947		18,602		17,827		16,898		16,205

Total earning assets						23,680		22,805		22,069		20,711		19,670

Operating lease assets						1,848		2,126		2,382		2,657		2,906
Cash and due from banks						735		740		717		763		722
Intangible assets						218		218		225		202		213
All other assets						1,909		1,870		1,839		1,821		1,807

Total Assets					$	28,052	$	27,410	$	26,846	$	25,787	$	24,961

Liabilities and Shareholders’ Equity
Core deposits
	Non-interest bearing deposits				$	3,046	$	2,958	$	2,955	$	2,868	$	2,739
	Interest bearing demand deposits					6,100		5,597		5,305		5,269		4,920
	Savings deposits					2,804		2,771		2,746		2,766		2,808
	Retail certificates of deposit					2,799		2,963		3,305		3,453		3,509
	Other domestic time deposits					673		682		702		714		718

			Total core deposits			15,422		14,971		15,013		15,070		14,694

Domestic time deposits of $100,000 or more						808		769		730		777		843
Brokered time deposits and negotiable CDs						1,241		1,155		1,057		907		649
Foreign time deposits						426		515		409		370		296

	Total deposits					17,897		17,410		17,209		17,124		16,482

Short-term borrowings						1,634		1,947		2,115		1,793		1,636
Federal Home Loan Bank advances						1,267		1,216		848		228		14
Subordinated notes and other long-term debt, including preferred capital securities						4,010		3,570		3,380		3,281		3,375

	Total interest bearing liabilities					21,762		21,185		20,597		19,558		18,768

All other liabilities						1,010		1,019		1,048		1,066		1,103
Shareholders’ equity						2,234		2,248		2,246		2,295		2,351

Total Liabilities and Shareholders’ Equity					$	28,052	$	27,410	$	26,846	$	25,787	$	24,961

Net interest rate spread
Impact of non-interest bearing funds on margin

Net Interest Margin

(1)		Fully tax equivalent yields are calculated assuming a 35% tax rate.

(2)		Individual loan components include applicable fees.

(3)		Loan and deposit average rates include impact of applicable derivatives.


					YTD				Interest Income /				YTD
					Average Balances				Expense				Average Rates (3)

Fully Tax Equivalent Basis (1)					2003		2002		2003		2002		2003			2002

Assets
Interest bearing deposits in banks					$	41	$	31	$	0.3	$	0.3		1.59	%		2.21	%
Trading account securities						17		6		0.4		0.1		4.31			4.18
Federal funds sold and securities purchased under resale agreements						63		65		0.7		0.5		2.16			1.47
Mortgages held for sale						531		277		14.5		9.3		5.47			6.70
Securities:
		Taxable				3,199		2,724		77.6		86.7		4.86			6.38
		Tax exempt				275		99		10.0		3.8		7.26			7.73

				Total Securities		3,474		2,823		87.6		90.5		5.05			6.43

Loans and leases: (2)
	Commercial					5,622		5,828		151.7		167.3		5.44			5.79
	Real Estate
			Construction			1,215		1,272		26.4		33.1		4.38			5.25
			Commercial			2,593		2,298		70.5		74.4		5.52			6.57
	Consumer
				Automobile loans and leases		4,146		2,772		162.1		128.5		7.87			9.34
				Home equity		3,299		3,059		86.1		95.0		5.23			6.23
				Residential mortgage		1,862		1,288		50.3		40.8		5.46			6.41
				Other loans		383		448		16.0		20.5		8.43			9.21

				Total Consumer		9,690		7,567		314.5		284.8		6.53			7.58

Total loans and leases						19,120		16,965		563.1		559.6		5.94			6.65

Allowance for loan and lease losses						343		364

Net loans and leases						18,777		16,601

Total earning assets / Total interest income / Rate						23,246		20,167		666.6		660.3		5.77	%		6.60	%

Operating lease assets						1,985		2,973
Cash and due from banks						738		770
Intangible assets						218		354
All other assets						1,889		1,854

Total Assets					$	27,733	$	25,754

Liabilities and Shareholders’ Equity
Core deposits
	Non-interest bearing deposits				$	2,984	$	2,889
	Interest bearing demand deposits					5,868		5,033		41.9		45.1		1.44	%		1.81	%
	Savings deposits					2,788		2,952		22.6		26.2		1.63			1.79
	Retail certificates of deposit					2,880		3,863		54.4		91.3		3.81			4.76
	Other domestic time deposits					678		759		13.2		17.4		3.92			4.63

			Total core deposits			15,198		15,496		132.1		180.0		2.18			2.88

Domestic time deposits of $100,000 or more						789		944		10.4		14.4		2.66			3.08
Brokered time deposits and negotiable CDs						1,198		476		11.2		5.9		1.88			2.48
Foreign time deposits						470		283		2.4		2.3		1.05			1.63

	Total deposits					17,655		17,199		156.1		202.6		2.15			2.85

Short-term borrowings						1,789		1,692		9.9		14.7		1.11			1.75
Federal Home Loan Bank advances						1,242		16		11.2		0.5		1.80			5.99
Subordinated notes and other long-term debt, including preferred capital securities						3,792		3,403		55.9		62.7		2.97			3.71

	Total interest bearing liabilities / Total interest expense / Rate					21,494		19,421		233.1		280.5		2.19	%		2.91	%

All other liabilities						1,014		1,078
Shareholders’ equity						2,241		2,366

Total Liabilities and Shareholders’ Equity					$	27,733	$	25,754

Net interest rate spread														3.58	%		3.69	%
Impact of non-interest bearing funds on margin														0.17			0.10

Net Interest Income (FTE) (1) / Margin									$	433.5	$	379.8		3.75	%		3.79	%


																	Second Quarter 2003
		2003						2002									Percent Change vs.

(in thousands, except per share amounts)		Second			First			Fourth			Third			Second			1Q03			2Q02

Total Interest Income		$	330,462		$	331,991		$	341,446		$	339,378		$	322,816			(0.5	)%		2.4	%
Total Interest Expense			114,884			118,255			130,161			132,912			130,822			(2.9	)		(12.2	)

Net Interest Income			215,578			213,736			211,285			206,466			191,994			0.9			12.3
Provision for loan and lease losses			49,193			36,844			51,236			54,304			49,876			33.5			(1.4	)

Net Interest Income After Provision for Loan and Lease Losses			166,385			176,892			160,049			152,162			142,118			(5.9	)		17.1

Operating lease income			124,209			133,755			143,465			154,367			168,047			(7.1	)		(26.1	)
Service charges on deposit accounts			40,914			39,869			41,435			37,706			35,608			2.6			14.9
Trust services			15,580			14,911			15,306			14,997			16,247			4.5			(4.1	)
Brokerage and insurance income			14,196			15,497			13,941			13,664			16,899			(8.4	)		(16.0	)
Other service charges and fees			11,372			10,338			10,890			10,837			10,529			10.0			8.0
Bank Owned Life Insurance income			11,043			11,137			11,443			11,443			11,443			(0.8	)		(3.5	)
Mortgage banking			11,033			13,789			10,006			5,685			10,115			(20.0	)		9.1
Merchant Services gain			—			—			—			24,550			—			—			—
Securities gains			6,887			1,198			2,339			1,140			966			N.M			N.M.
Other			38,972			27,537			21,620			21,323			17,811			41.5			118.8

Total Non-Interest Income			274,206			268,031			270,445			295,712			287,665			2.3			(4.7	)

Personnel costs			114,047			121,743			119,137			109,056			106,808			(6.3	)		6.8
Operating lease expense			102,939			111,588			120,747			125,743			131,695			(7.8	)		(21.8	)
Equipment			16,341			16,412			17,337			17,378			16,659			(0.4	)		(1.9	)
Outside data processing and other services			16,104			16,579			17,209			15,128			16,592			(2.9	)		(2.9	)
Net occupancy			15,583			16,815			13,454			14,815			14,756			(7.3	)		5.6
Professional services			9,872			9,285			9,111			9,680			7,864			6.3			25.5
Marketing			8,454			6,626			6,186			7,491			7,231			27.6			16.9
Telecommunications			5,394			5,701			5,714			5,609			5,320			(5.4	)		1.4
Printing and supplies			2,253			3,681			3,999			3,679			3,683			(38.8	)		(38.8	)
Restructuring charges			(5,315	)		(1,000	)		(7,211	)		—			—			N.M			—
Other			20,372			16,909			32,616			19,450			21,083			20.5			(3.4	)

Total Non-Interest Expense			306,044			324,339			338,299			328,029			331,691			(5.6	)		(7.7	)

Income Before Income Taxes			134,547			120,584			92,195			119,845			98,092			11.6			37.2
Income taxes			37,160			30,008			21,572			29,122			25,081			23.8			48.2

Net Income		$	97,387		$	90,576		$	70,623		$	90,723		$	73,011			7.5	%		33.4	%

Per Common Share
	Net Income — Diluted	$	0.42		$	0.39		$	0.30		$	0.38		$	0.29			7.7	%		44.8	%
	Cash Dividends Declared	$	0.16		$	0.16		$	0.16		$	0.16		$	0.16			—	%		—	%
Return on:
	Average total assets		1.39	%		1.34	%		1.04	%		1.40	%		1.17	%
	Average total shareholders’ equity		17.5	%		16.3	%		12.5	%		15.7	%		12.5	%
Net interest margin (1)			3.69	%		3.84	%		3.86	%		4.00	%		3.94	%
Efficiency ratio (2)			63.1	%		67.2	%		70.3	%		65.3	%		69.1	%
Effective tax rate			27.6	%		24.9	%		23.4	%		24.3	%		25.6	%
Revenue — Fully Taxable Equivalent (FTE)
Net Interest Income		$	215,578		$	213,736		$	211,285		$	206,466		$	191,994			0.9	%		12.3	%
Tax Equivalent Adjustment (1)			2,076			2,096			1,869			1,096			1,071			(1.0	)		93.8

Net Interest Income			217,654			215,832			213,154			207,562			193,065			0.8			12.7
Non-Interest Income			274,206			268,031			270,445			295,712			287,665			2.3			(4.7	)

Total Revenue		$	491,860		$	483,863		$	483,599		$	503,274		$	480,730			1.7	%		2.3	%

Total Revenue Excluding Securities Gains		$	484,973		$	482,665		$	481,260		$	502,134		$	479,764			0.5	%		1.1	%


	2003						2002

(in thousands)	Second			First			Fourth			Third			Second

Non-Performing Assets, Beginning of Period	$	140,725		$	136,723		$	214,129		$	223,237		$	225,530
New non-performing assets		83,104			48,359			65,506			47,219			73,002
Returns to accruing status		(9,866	)		(5,993	)		(12,658	)		(380	)		(337	)
Loan and lease losses		(30,204	)		(17,954	)		(72,767	)		(25,480	)		(28,297	)
Payments		(26,831	)		(15,440	)		(28,500	)		(26,308	)		(44,303	)
Sales		(23,206	)		(4,970	)		(28,987	)		(4,215	)		(2,358	)
Loans and leases acquired		—			—			—			56			—

Non-Performing Assets, End of Period	$	133,722		$	140,725		$	136,723		$	214,129		$	223,237


	2003				2002

	Second		First		Fourth		Third		Second

High	$	21.540	$	19.800	$	19.980	$	20.430	$	21.770
Low		18.030		17.780		16.160		16.000		18.590
Close		19.510		18.590		18.710		18.190		19.420
Average closing price		19.790		18.876		18.769		19.142		20.089
Cash dividends declared	$	0.16	$	0.16	$	0.16	$	0.16	$	0.16
Common shares outstanding (000s)
Average — Basic		228,633		231,355		233,581		239,925		246,106
Average — Diluted		230,572		232,805		235,083		241,357		247,867
Ending		228,660		228,642		232,879		237,544		242,920
Common Share Repurchase Programs (000s) (1)
Number of Shares Repurchased		—		4,300		4,110		6,262		7,329


	2003				2002

	Second (2)		First		Fourth		Third		Second

Number of employees (full-time equivalent)		8,093		8,134		8,177		8,117		8,174
Number of domestic full-service banking offices (3)		341		342		343		336		336

(1)		On a fully tax equivalent basis assuming a 35% tax rate.

(2)		Non-interest expense less amortization of intangible assets divided by the sum of fully taxable equivalent net interest income and non-interest income excluding securities gains.

(3)		For 2002, excluding gain on sale of Florida operations, restructuring charges, and applicable taxes, the effective tax rate was 25.4%.


	2003						2002

(in millions)	Second (2)			First			Fourth			Third			Second

Total risk-adjusted assets	$	27,374		$	27,292		$	27,196		$	26,304		$	25,281
Tier 1 risk-based capital ratio		8.60	%		8.43	%		8.54	%		9.04	%		9.64	%
Total risk-based capital ratio		11.42	%		11.32	%		11.43	%		12.00	%		12.67	%
Tier 1 leverage ratio		8.48	%		8.48	%		8.74	%		9.31	%		9.86	%
Tangible Equity / Asset Ratio		7.31	%		7.25	%		7.47	%		7.89	%		8.42	%
Tangible Equity / Risk-Weighted Asset Ratio		7.50	%		7.35	%		7.50	%		7.95	%		8.38	%

(1)		Under the current authorization, there were 3.9 million of shares remaining to be repurchased at June 30, 2003.

(2)		Estimated.

(3)		Includes three Private Financial Group offices in Florida.