10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 14, 2001
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED September 30, 2001
Commission File Number 0-2525
HUNTINGTON BANCSHARES INCORPORATED
MARYLAND 31-0724920
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 SOUTH HIGH STREET, COLUMBUS, OHIO 43287
Registrant's telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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There were 251,193,211 shares of Registrant's without par value common stock
outstanding on October 31, 2001.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
2
PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS
(1) See page 12 for detail of total loans and total deposits.
See notes to unaudited consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
(1) See page 13 for detail on non-interest income and non-interest expense.
(2) Adjusted for stock splits and stock dividends, as applicable.
See notes to unaudited consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
See notes to unaudited consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to unaudited consolidated financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A. Basis of Presentation
The accompanying unaudited consolidated financial statements reflect
all adjustments consisting of normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the consolidated
financial position, the results of operations, and cash flows for the periods
presented. These unaudited consolidated financial statements have been prepared
according to the rules and regulations of the Securities and Exchange Commission
and, therefore, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The Notes to the Consolidated Financial
Statements appearing in Huntington Bancshares Incorporated's (Huntington) 2000
Annual Report on Form 10-K should be read in conjunction with these interim
financial statements.
B. Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the 2001 presentation. These reclassifications had no
effect on net income.
C. Earnings per Share
Basic earnings per share is the amount of earnings for the period
available to each share of common stock outstanding during the reporting period.
Diluted earnings per share is the amount of earnings available to each share of
common stock outstanding during the reporting period adjusted for the potential
issuance of common shares for stock options. The calculation of basic and
diluted earnings per share for each of the periods ended September 30, is as
follows:
Average common shares outstanding and the dilutive effect of stock options have
been adjusted for subsequent stock dividends and stock splits, as applicable.
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D. Comprehensive Income
Comprehensive Income includes net income as well as certain items that
are reported directly within a separate component of stockholders' equity that
bypass net income. Currently, Huntington's only components of Other
Comprehensive Income are the unrealized gains (losses) on securities available
for sale and unrealized gains and losses on certain derivatives. The related
before and after tax amounts are as follows:
Accumulated Other Comprehensive Income balances at September 30, 2001 are as
follows:
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E. Lines of Business
Huntington views its operations as five distinct segments. Retail
Banking, Corporate Banking, Dealer Sales, and the Private Financial Group are
the company's major business lines. The fifth segment includes Huntington's
Treasury function and other unallocated assets, liabilities, revenue, and
expense. Line of business results are determined based upon Huntington's
business profitability reporting system, which assigns balance sheet and income
statement items to each of the business segments. The process is designed around
Huntington's organizational and management structure and accordingly, the
results are not necessarily comparable with similar information published by
other financial institutions.
Listed below is certain financial information regarding Huntington's
2001 and 2000 results by line of business. For a detailed description of the
individual segments, refer to Huntington's Management's Discussion and Analysis.
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F. Derivatives
Huntington adopted Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities", on
January 1, 2001. SFAS No. 133 requires that derivatives be recognized as either
assets or liabilities in the balance sheet at their fair value. The accounting
for gains or losses resulting from changes in fair value depends on the intended
use of the derivative. For derivatives designated as hedges of changes in the
fair value of recognized assets or liabilities, or unrecognized firm
commitments, gains or losses on the derivative are recognized in earnings
together with the offsetting losses or gains on the hedged items. This results
in earnings only being impacted to the extent that the hedge is ineffective in
achieving offsetting changes in fair value. For derivatives used to hedge
changes in cash flows associated with forecasted transactions, gains or losses
on the effective portion of the derivatives are deferred, and reported as
accumulated other comprehensive income (AOCI), a component of shareholders'
equity, until the period in which the hedged transactions affect earnings.
Changes in the fair value of derivative instruments not designated as hedges are
recognized in earnings. The after-tax transition adjustment for the adoption of
SFAS No. 133 was immaterial to net income and reduced AOCI by $9.1 million.
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The quantitative and qualitative disclosures related to derivatives
presented in footnote F of Huntington's first and second quarter 2001 Form 10-Q
did not materially change during the third quarter of 2001.
G. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations", and No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
Huntington will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. The majority of
Huntington's goodwill and other intangible assets relate to its operations
located in Florida. In July 2001, Huntington announced that it expects to sell
its Florida operations as disclosed in Note H below. The application of the
nonamortization provisions of the Statement to the goodwill not impacted by the
sale is expected to result in an increase in net income of $8.9 million ($.04
per share) per year. During 2002, Huntington will perform the first of the
required impairment tests of the remaining goodwill as of January 1, 2002 and
has not yet determined what the effect of these tests will be on Huntington's
earnings and financial position.
In June 2001, the Financial Accounting Standards Board also issued SFAS
No. 143, "Accounting for Asset Retirement Obligations", effective for fiscal
years beginning after June 15, 2002. This Statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It applies
to legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees.
In August 2001, the Financial Accounting Standards Board also issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
effective for fiscal years beginning after December 15, 2001. This Statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes related, previously issued pronouncements. This
Statement establishes a single accounting model, based on the framework
established in Statement 121, for long-lived assets to be disposed of by sale,
including accounting for a segment of a business accounted for as a discontinued
operation. The Statement also resolves significant implementation issues related
to previously issued Statement 121.
Statements 143 and 144 are not expected to have a material impact on
Huntington's results of operations or financial condition.
H. Sale of Florida Operations
On September 26, 2001, Huntington signed a definitive agreement to sell
its Florida operations to SunTrust Banks, Inc. These operations include
approximately $2.9 billion in loans and other tangible assets and $4.7 billion
in deposits and other liabilities. This transaction, which is subject to
regulatory approval and other conditions, is expected to close in the first
quarter of 2002. At that time, Huntington will receive a 15% premium on
the deposits sold.
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FINANCIAL REVIEW
LOAN PORTFOLIO COMPOSITION
DEPOSIT COMPOSITION
12
FINANCIAL REVIEW
ANALYSIS OF NON-INTEREST INCOME
ANALYSIS OF NON-INTEREST EXPENSE
N.M. - Not Meaningful
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Huntington is a multi-state financial holding company headquartered in
Columbus, Ohio. Its subsidiaries are engaged in full-service commercial and
consumer banking, mortgage banking, lease financing, trust services, discount
brokerage services, underwriting credit life and disability insurance, issuing
commercial paper guaranteed by Huntington, and selling other insurance and
financial products and services. Huntington's subsidiaries operate domestically
in offices located in Ohio, Michigan, Florida, West Virginia, Indiana, and
Kentucky. Huntington has a foreign office in each of the Cayman Islands and Hong
Kong.
Forward-looking Statements
Management's discussion and analysis of financial condition and results
of operations contains forward-looking statements about Huntington, including
descriptions of products or services, plans, or objectives of its management for
future operations, and forecasts of its revenues, earnings, or other measures of
economic performance. Forward-looking statements can be identified by the fact
that they do not relate strictly to historical or current facts.
By their nature, forward-looking statements are subject to numerous
assumptions, risks, and uncertainties. A number of factors, many of which are
beyond Huntington's control, could cause actual conditions, events, or results
to differ significantly from those described in the forward-looking statements.
These factors include, but are not limited to:
- changes in business and economic conditions;
- movements in interest rates;
- competitive pressures on product pricing and services;
- success and timing of business strategies, including the
recently announced comprehensive restructuring and strategic
refocusing initiatives;
- successful integration of acquired businesses;
- the nature, extent, and timing of governmental actions and
reforms; and
- extended disruption of vital infrastructure.
Forward-looking statements speak only as of the date they are made.
Huntington does not update forward-looking statements to reflect circumstances
or events that occur after the date the forward-looking statements are made or
to reflect the occurrence of unanticipated events, such as further market
deterioration that adversely affects credit quality, vehicle lease residual
values, and/or other asset values.
The management of Huntington encourages readers of this Form 10-Q to
understand forward-looking statements to be strategic objectives rather than
absolute targets of future performance. The following discussion and analysis of
the financial performance of Huntington for the third quarter of 2001 should be
read in conjunction with the financial statements, notes, and other information
contained in this document.
Sale Of Florida Operations
On September 26, 2001, Huntington signed a definitive agreement to sell
its Florida operations to SunTrust Banks, Inc. (SunTrust). These operations
include approximately $2.9
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billion in loans and other tangible assets, $4.7 billion in deposits and other
liabilities, 141 banking offices, and 456 ATMs. This transaction, which is
subject to regulatory approval and other conditions, is expected to close
in the first quarter of 2002. At that time, Huntington will receive from
SunTrust a 15% premium on the deposits sold.
OVERVIEW
Huntington reported net income of $42.6 million, or $.17 per common
share, for the third quarter and $112.9 million, or $.45 per common share, for
the nine months of 2001. Net income totaled $50.5 million, or $.20 per common
share, and $252.2 million, or $1.01 per common share in the same periods last
year.
On July 12, 2001, Huntington announced a strategic refocusing plan.
This plan includes restructuring and other charges associated with the sale of
Huntington's Florida operations, the consolidation of numerous branch offices,
credit related and other actions to strengthen Huntington's balance sheet.
Huntington expects to record total after-tax restructuring and other charges of
approximately $140 million ($215 million pre-tax). In the third quarter 2001,
Huntington recorded $33.0 million of after-tax charges ($50.8 million pre-tax).
Through the third quarter 2001, these after-tax charges totaled $105.2 million
($161.8 million pre-tax), or $.42 per common share.
Operating earnings, which excludes the impact of these restructuring
and other charges, were $75.7 million for the third quarter 2001. This compares
with $74.5 million in the second quarter 2001, and $83.0 million in the third
quarter 2000, also adjusted to exclude restructuring and other charges.
Operating earnings for the nine months ended September 30, 2001, were $218.0
million, compared with $284.7 million for the same period in 2000.
The following table reconciles Huntington's reported results to its
operating results for the three and nine month periods ended September 30, 2001
and 2000:
(in thousands of dollars, except per share amounts)
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Included in the third quarter 2001 pre-tax charges of $51 million were
$16 million for the exit or curtailment of certain e-commerce activities, $10
million related to owned or leased facilities that Huntington has or intends to
vacate, $4 million for the reduction of ATMs, $3 million for various employee
severance or retention, and $18 million related to non-recurring legal,
accounting, consulting, and other operational costs.
In the second quarter 2001, Huntington recorded pre-tax charges of $111
million, which consisted of $72 million related to credit quality, $37 million
for asset impairment, and $2 million for other non-recurring costs. After-tax
charges were $72.1 million, or $.29 per common share.
In the third quarter of 2000, Huntington incurred a pre-tax charge of
$50 million ($32.5 million after-tax, or $.13 per common share) to write-down
residual values associated with its $3 billion vehicle lease portfolio.
Earnings per common share for the third quarter and nine months of
2001, excluding the restructuring and other charges, were $.30 and $.87,
respectively, compared with $.33 and $1.14 for the same periods in 2000. On this
same basis, Huntington's return on average assets (ROA) was 1.07% and 1.03% in
the recent three and nine-month periods and its return on average equity (ROE)
were 12.64% and 12.20%. For the same periods a year ago, ROA was 1.15% and 1.32%
while ROE was 14.04% and 16.87%, respectively.
"Cash basis" earnings per share, which excludes the effect of
amortization of goodwill as well as restructuring and other charges, was $.33
for the third quarter 2001, compared with $.36 per share in the same period last
year. Cash basis ROA and ROE, which are computed using cash basis earnings as a
percentage of average tangible assets and average tangible equity, were 1.21%
and 13.93%, respectively, for the quarter just ended. For the nine months of
this year, cash basis ROA and ROE were 1.17% and 13.51%, respectively.
Total assets were $28.3 billion at September 30, 2001, down 1% from
$28.6 billion at the end of 2000. This modest decline reflects the sale of $107
million in residential mortgages during June of this year, and the sale of $1.2
billion in investment securities during the first nine months of 2001 as
Huntington continued to sell low-margin investment securities as part of its
balance sheet repositioning efforts.
Managed total loans, which include securitized loans, increased 7% on
an annualized basis, up from the 5% annual growth rate in the second quarter and
consistent with the rate
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experienced in the third quarter of 2000. Commercial loans showed an annualized
decline of 4%, which was driven by continued slowing in automobile floor plan
lending. Floor plan loans declined 21% versus last year because dealers have
reduced their inventories while captive auto finance companies have been very
aggressive on pricing. Excluding floor plan loans, Commercial loans increased at
a rate of 3% for the quarter. Commercial real estate loans increased 16% during
the quarter and were up 7% from a year ago. Consumer loans increased 9% during
the recent three-month period, driven by strong double-digit growth in home
equity loans. Although loan origination volumes slowed somewhat towards the end
of the third quarter, indirect automobile loan and leases increased 13%,
compared with a 6% growth rate in the second quarter of 2001.
Average core deposits of $19.1 billion increased 11% on an annualized
basis from the second quarter 2001, primarily reflecting an increased emphasis
on attracting retail deposits. Average core deposits were also up 7% from the
third quarter of 2000.
RESULTS OF OPERATIONS
The results discussed below are on an operating basis in all periods.
NET INTEREST INCOME
Net interest income was $249.8 million for the three months ended
September 30, 2001. Net interest income increased $1.8 million from the
immediately preceding quarter and $13.9 million from the third quarter last
year. The net interest margin expanded seven basis points from 3.97% for the
quarter ended June 30, 2001 to 4.04%, and was up thirty basis points over the
three-month period a year ago. The increase in the recent quarter was due to the
continued improvement in the mix of earning assets, exhibited by a reduction in
lower earning investment securities coupled with a reduction in residential
mortgage loans. Additionally, Huntington has been slightly liability sensitive
during the period and accordingly, benefited from the decline in short-term
rates during the quarter and first nine months of this year. On a year-to-date
basis, net interest income was $740.9 million versus $709.4 million and the net
interest margin expanded from 3.74% to 3.99%. Huntington's interest rate risk
position is further discussed in the "Interest Rate Risk Management" section of
this report.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to pre-tax earnings
necessary to maintain the allowance for loan losses (ALL) at a level adequate to
absorb management's estimate of inherent losses in the loan portfolio. On an
operating basis, the provision for loan losses was $49.6 million for the third
quarter, up from $45.8 million in the second quarter and $26.4 million in the
third quarter last year. For the nine months, the provision for loan losses was
$128.8 million versus $57.9 million a year ago, representing significant
increases in net charge-offs and deteriorating economic conditions impacting
credit quality.
Total net charge-offs in the third quarter 2001 were .74%. Excluding 13
basis points of losses charged against reserves established in the second
quarter 2001 special charge for portfolios Huntington has exited (subprime auto
loan and certain truck and equipment loans), net charge-offs were .61%. This
ratio was .73% in the second quarter 2001 and .46% in the third quarter 2000.
Even though this ratio was down in the current quarter versus the second quarter
2001, Huntington expects that future net charge-offs will be higher than the
current quarter levels given the weaker economic conditions as well as seasonal
trends.
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Commercial charge-offs were .56% in the recent quarter versus .67% in
the immediately preceding quarter and .24% in the same period last year.
Consumer charge-offs were 1.07% in the third quarter. Excluding losses related
to the exited businesses for which specific reserves were established in the
second quarter 2001, consumer net charge-offs were .85% in the third quarter
2001, compared with .95% in the preceding quarter and .72% in the third quarter
2000. Indirect auto loan and vehicle lease charge-offs declined in the third
quarter versus the second. This improvement is consistent with the improvement
in vintage loss performance over the past year. However, the third quarter net
charge-offs were favorably impacted because second quarter charge-offs included
losses associated with the subprime lending portfolio. In the third quarter,
these losses were charged against reserves established in the second quarter. On
a year-to-date basis, a lower quality origination mix in the fourth quarter of
1999 through the third quarter of 2000, the economic slowdown, and an increase
in the average loss per vehicle due to lower used car prices continue to provide
unfavorable trends.
NON-INTEREST INCOME
Non-interest income, excluding security gains, increased to $129.4
million for the recent three months from $110.3 million for the same three
months of 2000, or 17.3%. For the nine-month period, non-interest income
increased to $375.7 million from $326.8 million a year ago, or 15.0%. All major
fee income categories were up during the recent quarter versus the third quarter
of 2000. Service charges on deposit accounts increased 5.0% from a year ago,
reflecting the impact of lower interest rates on deposit balances, increased
sales of cash management products, and pricing increases. Brokerage and
insurance revenue increased $4.3 million, or 27.9%, driven by strong growth in
insurance and investment banking fees. Annuity sales increased 53% while
brokerage income increased 8% year-over-year despite a volatile equity market.
Trust income rose 17.5% as a result of increased revenue from the sale of
Huntington's proprietary mutual funds. Mortgage banking income for the third
quarter was up 55.3% over last year due to the lower interest rate environment.
Origination volume increased to $737 million compared with $365 million in the
same period a year ago. Other non-interest income was up due to new revenue from
the sale of interest rate derivative products to corporate customers.
NON-INTEREST EXPENSE
Non-interest expense, excluding special charges, totaled $228.9 million
in the third quarter and $696.3 million for the first three-quarters of this
year, compared with $213.6 million and $611.8 million for the same periods of
2000. This represents increases of 7.2% and 13.8%, respectively. However,
non-interest expenses for the third quarter 2001 were down from the second
quarter. The increase in third quarter expenses from a year ago was primarily
driven by higher sales commissions consistent with the growth in fee income and
other personnel related costs and, to a lesser extent, premiums paid for
insurance on auto lease residual values. Huntington's efficiency ratio dropped
to 57.5% in the recent quarter from 58.6% in the second quarter and 62.0% in the
first quarter.
LINES OF BUSINESS
Below is a brief description of each line of business and a discussion
of the business segment results. The financial information by line of business
can be found in Note E to the unaudited consolidated financial statements.
Retail Banking, Corporate Banking, Dealer Sales, and the Private Financial Group
are the company's major business lines. A fifth segment includes the impact of
Huntington's Treasury function and other unallocated assets, liabilities,
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revenue, and expense. Line of business results are determined based upon
Huntington's business profitability reporting system which assigns balance sheet
and income statement items to each of the business segments. This process is
designed around Huntington's organizational and management structure and,
accordingly, the results are not necessarily comparable with similar information
published by other financial institutions. Operating results, where noted,
exclude the impact of restructuring and other charges.
RETAIL BANKING
Retail Banking provides products and services to retail and business
banking customers. This business unit's products include home equity loans,
first mortgage loans, installment loans, business loans, personal and business
deposit products, as well as investment and insurance services. These products
and services are offered through Huntington's traditional banking network,
in-store branches, Direct Bank, and Web Bank.
Retail Banking reported net income of $25.1 million and $89.1 million
for the third quarter and the nine months of 2001, respectively. These results
include after-tax restructuring and other charges of $4.8 million and $8.7
million (pre-tax of $7.3 million and $13.3 million), respectively. Excluding
these charges, net income was $29.9 million during the third quarter of 2001,
down 16% from the same period last year. The lower interest rate environment
pushed net interest income down 11% but positively impacted mortgage banking
income by $5.3 million from the year ago third quarter, which helped drive
non-interest income up 12%. Non-interest expense increased $7.4 million due to
higher commissions consistent with the increased mortgage fee income and
increases in other personnel related costs. The retail segment contributed 40%
of Huntington's operating net income for the quarter and comprised 30% of its
total loan portfolio and 84% of its core deposits.
CORPORATE BANKING
Customers in this segment represent the middle-market and large
corporate banking relationships which use a variety of banking products and
services including, but not limited to, commercial loans, international trade,
and cash management. Huntington's capital markets division also provides
alternative financing solutions for larger business clients, including privately
placed debt, syndicated commercial lending, and the sale of interest rate
protection products.
Corporate Banking net income was $12.9 million for the recent three
months versus $34.1 million for the same period last year. For nine months, net
income was $54.2 million and $98.6 million for 2001 and 2000, respectively.
After-tax restructuring and other charges for 2001 were $.8 million for the
third quarter and $4.0 million for the nine months. Excluding these charges, net
income was $13.7 million during the third quarter of 2001, down $20.4 million
from the same period last year. Increased loan charge-offs of $8.3 million along
with loan growth contributed to an increase in the provision for loan losses of
$29.0 million for the quarter versus last year. This loan growth helped keep net
interest income steady while interest rates fell. Non-interest income for the
third quarter increased 42% over the same period last year driven by increases
in deposit account services charges, brokerage fees, and letter of credit fees.
Non-interest expense also increased $9.0 million compared with last year.
Corporate Banking contributed 18% of Huntington's operating net income for the
quarter and comprised 36% of its total loan portfolio and 11% of its core
deposits.
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DEALER SALES
Dealer Sales product offerings pertain to the automobile lending sector
and include floor plan financing, as well as indirect consumer loans and leases.
The consumer activities comprise the vast majority of the business and involve
the financing of vehicles purchased or leased by individuals through
dealerships.
Dealer Sales reported net income of $22.2 million for the recent
quarter and $.4 million year-to-date, compared with a net loss of $13.9 million
and net income of $29.5 million for the same periods a year ago. The first nine
months of 2001 are impacted by after-tax restructuring and other charges, which
totaled $60.5 million ($93.1 million pre-tax) recorded in the second quarter of
2001. The year-to-date provision for loan losses included pre-tax charges of
$61.1 million related to deteriorating credit quality. Similarly, non-interest
expenses included pre-tax charges totaling $32.0 million related to asset
impairment. In the third quarter 2000, Huntington recorded charges of $32.5
million ($50.0 million pre-tax) related to the write-down of lease residual
values.
On an operating basis, Dealer Sales earnings were $22.2 million and
$18.6 million for the third quarter 2001 and 2000, and $60.9 million and $62.0
million for the nine-month periods, respectively. Higher securitization income,
wider loan and lease spreads, and loan growth drove the increase for the third
quarter. The increase in expenses continues to reflect the premiums paid for
insurance on Huntington's auto lease residual values. Dealer Sales contributed
29% of Huntington's operating net income for the quarter and comprised 31% of
its outstanding loans.
PRIVATE FINANCIAL GROUP
Huntington's Private Financial Group (PFG) provides an array of
products and services designed to meet the needs of Huntington's higher wealth
banking customers. Revenue is derived through the sale of personal trust, asset
management, investment advisory, insurance, and deposit and loan products and
services.
PFG's net income for the quarter just ended was $3.0 million and $6.9
million for the first nine months of this year. Non-interest income was up 12%
and 16% for the three and nine month periods, respectively, due largely to
higher annuity sales. The results for the current quarter include legal and
accounting costs of $4.6 million and the nine-month period includes the second
quarter $5.3 million loss on the sale of Pacific Gas & Electric commercial
paper. Excluding these charges, earnings were $6.0 million for the recent
quarter and $13.3 million year-to-date. This segment represented 8% of
Huntington's quarterly operating net income and 3% of total loans.
TREASURY/OTHER
The Treasury/Other segment absorbs unassigned assets, liabilities,
equity, revenue, and expense that cannot be directly assigned or allocated to
one of Huntington's lines of business. Furthermore, Huntington uses a
match-funded transfer pricing system to allocate interest income and interest
expense to its business segments. This approach consolidates the interest rate
risk management of Huntington into its Treasury Group. As part of its overall
interest rate risk and liquidity management strategy, the Treasury Group
administers an investment portfolio of approximately $3 billion. Revenue and
expense associated with these activities remain within the Treasury Group.
Additionally, amortization expense of intangible assets is also a significant
component of Treasury/Other.
This segment reported a net loss of $20.6 million and $37.7 million in
the recent three and nine month periods. On an operating basis, excluding asset
impairment and other charges related primarily to the exit or curtailment of
certain e-commerce activities of
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$24.5 million and $25.5 million, respectively, the quarter showed net income of
$3.9 million while results for the nine months was a net loss of $12.2 million.
The widening of spreads impacted net interest income for the three and nine
month periods while the impact from the balance sheet repositioning mentioned
earlier offset some of these positive effects in the year-to-date period.
Non-interest income for three and nine months was significantly lower,
particularly due to security gains in the prior year related to the sale of a
portion of Huntington's investment in S1 Corporation common stock.
INTEREST RATE RISK MANAGEMENT
Huntington seeks to achieve consistent growth in net interest income
and net income while managing volatility arising from shifts in interest rates.
The Asset and Liability Management Committee (ALCO) oversees financial risk
management, establishing broad policies and specific operating limits that
govern a variety of financial risks inherent in Huntington's operations,
including interest rate, liquidity, counterparty, settlement, and market risks.
On and off-balance sheet strategies and tactics are reviewed and monitored
regularly by ALCO to ensure consistency with approved risk tolerances.
Interest rate risk management is a dynamic process, encompassing
business flows onto the balance sheet, wholesale investment and funding, and the
changing market and business environment. Effective management of interest rate
risk begins with appropriately diversified investments and funding sources. To
accomplish its overall balance sheet objectives, Huntington regularly accesses a
variety of global markets--money, bond, futures, and options--as well as
numerous trading exchanges. In addition, dealers in over-the-counter financial
instruments provide availability of interest rate swaps as needed.
Measurement and monitoring of interest rate risk is an ongoing process.
A key element in this process is Huntington's estimation of the amount that net
interest income will change over a twelve to twenty-four month period given a
gradual and directional shift in interest rates. The income simulation model
used by Huntington captures all assets, liabilities, and off-balance sheet
financial instruments, accounting for significant variables that are believed to
be affected by interest rates. These include prepayment speeds on mortgages and
consumer installment loans, cash flows of loans and deposits, principal
amortization on revolving credit instruments, and balance sheet growth
assumptions. The model also captures embedded options, e.g. interest rate
caps/floors or call options, and accounts for changes in rate relationships, as
various rate indices lead or lag changes in market rates. While these
assumptions are inherently uncertain, management assigns probabilities and,
therefore, believes at any point in time that the model provides a reasonably
accurate estimate of Huntington's interest rate risk exposure. Management
reporting of this information is regularly shared with the Board of Directors.
The results of Huntington's recent sensitivity analysis indicated that
net interest income would increase .6% if rates gradually declined 100 basis
points from September 30, 2001 implied forward rate levels and would drop .8% if
rates rose 100 basis points. If rates declined 200 basis points, Huntington
would benefit 1.3%. If rates increased 200 basis points, net interest income
would be expected to decline 1.6%, versus the year-end 2000 sensitivity of 3.0%
to a 200 basis point increase. The unprecedented low level of interest rates
might make the sensitivity of net interest income to falling interest rates less
certain than in the past. The decline in sensitivity over the past year was
primarily due to the previously mentioned sales of low margin fixed rate
investment securities. These sales were part of management's effort to
restructure the balance sheet and reduce sensitivity to interest rate changes in
order to stabilize Huntington's revenue base.
21
CREDIT RISK
Huntington's exposure to credit risk is managed through the use of
consistent underwriting standards that emphasize "in-market" lending while
avoiding highly leveraged transactions as well as excessive industry and other
concentrations. The credit administration function employs extensive risk
management techniques, including forecasting, to ensure that loans adhere to
corporate policy and problem loans are promptly identified. These procedures
provide executive management with the information necessary to implement policy
adjustments where necessary, and take corrective actions on a proactive basis.
Non-performing assets (NPAs) consist of loans that are no longer
accruing interest, loans that have been renegotiated based upon financial
difficulties of the borrower, and real estate acquired through foreclosure.
Commercial and real estate loans are placed on non-accrual status and stop
accruing interest when collection of principal or interest is in doubt or
generally when the loan is 90 days past due. When interest accruals are
suspended, accrued interest income is reversed with current year accruals
charged to earnings and prior year amounts generally charged off as a credit
loss. Consumer loans are not placed on non-accrual status; rather they are
charged off in accordance with regulatory statutes, which is generally no more
than 120 days. A charge-off may be delayed in circumstances when collateral is
repossessed and anticipated to be sold at a future date.
Total NPAs were $210.1 million at September 30, 2001, increasing $44.1
million from $166.0 million at June 30, 2001. Total NPAs were $88.5 million at
September 30, 2000. NPAs as a percent of total loans and other real estate were
.97%, .79%, and .44%, at the end of the same respective periods. Given the
weakened economic conditions, Huntington expects that NPAs will increase from
the recent quarter level.
Loans past due ninety days or more but continuing to accrue interest
increased to $92.8 million from $67.1 million at June 30, 2001, and from $80.3
million at September 30, 2000. This represented .43%, .32% and .39% of total
loans, respectively.
Certain industries have been identified as being particularly
vulnerable to the weakening economic environment such as hotels, restaurants,
amusement/recreation, insurance, and airlines. At September 30, 2001, these
industries comprised only 6% of the total commercial and commercial real estate
portfolios.
The ALL is maintained at a level considered appropriate by management,
based on its estimate of losses inherent in the loan portfolio. The procedures
employed by Huntington to evaluate the adequacy of the ALL include an analysis
of specific credits and the application of relevant reserve factors that
represent relative risk (based on portfolio trends, current and historic loss
experience, and prevailing economic conditions) to specific portfolio segments.
Specific reserves are established on larger, impaired commercial and industrial
and commercial real estate credits and are based on discounted cash flow models
using the loan's initial effective rate or the fair value of the collateral for
collateral-dependent loans. Allocated reserves include management's assessment
of portfolio performance, internal controls, impacts from mergers and
acquisitions, and other pertinent risk factors. For analytical purposes, the ALL
has been allocated to various portfolio segments. However, the total ALL, less
the portion attributable to reserves as prescribed under provisions of SFAS No.
114, is available to absorb losses from any segment of the portfolio.
Unallocated reserves are based on levels of criticized/classified assets,
delinquencies in the accruing loan portfolios, and the level of nonperforming
loans. Total unallocated reserves were 11% and 15% at September 30, 2001 and
2000, respectively.
The ALL reserve ratio was 1.67% at the recent quarter end versus 1.45%
at the most recent year-end and third quarter of last year. As of September 30,
2001, the ALL covered non-performing loans approximately 1.8 times and, when
combined with the allowance for other real estate owned, was 171% of total
nonperforming assets.
22
CAPITAL
Capital is managed at each subsidiary based upon the respective risks
and growth opportunities, as well as regulatory requirements. Huntington places
significant emphasis on the maintenance of strong capital, which promotes
investor confidence, provides access to the national markets under favorable
terms, and enhances business growth and acquisition opportunities. Huntington
also recognizes the importance of managing capital and continually strives to
maintain an appropriate balance between capital adequacy and returns to
shareholders. Huntington's average equity to average assets was 8.49% in the
third quarter, up from 8.20% in the quarter ended September 30, 2000. Tangible
equity to assets, which excludes intangible assets as well as unrealized losses
on securities available for sale and derivatives, was 5.96% at the end of the
recent quarter compared with 5.73% last year.
Risk-based capital guidelines established by the Federal Reserve Board
set minimum capital requirements and require institutions to calculate
risk-based capital ratios by assigning risk weightings to assets and off-balance
sheet items, such as interest rate swaps, loan commitments, and securitizations.
These guidelines further define "well-capitalized" levels for Tier 1, total
capital, and leverage ratio purposes at 6%, 10%, and 5%, respectively.
Huntington's Tier 1 risk-based capital ratio was 6.97%, total risk-based capital
ratio was 10.13%, and the leverage ratio was 7.10% at the recent quarter-end.
The Huntington National Bank, Huntington's bank subsidiary, also had regulatory
capital ratios in excess of the levels established for well-capitalized
institutions.
During the second quarter of 2000, Huntington's Board of Directors
authorized the purchase of an additional 11 million shares under Huntington's
common stock repurchase program. Repurchased shares are being reserved for
reissue in connection with Huntington's dividend reinvestment and employee
benefit plans as well as for stock dividends, acquisitions, and other corporate
purposes. During 2000, Huntington repurchased approximately 8.8 million shares
of its common stock through open market and privately negotiated transactions.
Approximately 7.2 million of these shares were reissued in connection with the
acquisitions of Empire Banc Corporation in June 2000 and the J. Rolfe Davis
Insurance Agency Inc. in August 2000. As of September 30, 2001, approximately
15.3 million shares remained available under the authorization. Huntington has
not repurchased any shares since September 30, 2000.
Huntington's comprehensive restructuring and strategic refocusing plan
announced July 12, 2001 included several actions to strengthen its capital
position, such as the previously mentioned sale of its Florida operations and
subsequent repurchase of shares. This sale will free up a significant amount of
capital. The subsequent repurchase of shares is expected to result in a minimum
tangible equity to asset ratio of 6.50%.
Beginning with the dividends declared in the third quarter 2001,
Huntington reduced its cash dividend to shareholders by 20% to bring its
payout ratio more in line with industry peers.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures for the current period are
found on page 21 of this report, which includes changes in market risk exposures
from disclosures presented in Huntington's Annual Report on Form 10-K for the
year ended December 31, 2000.
24
FINANCIAL REVIEW
SECURITIES AVAILABLE FOR SALE - AMORTIZED COST & FAIR VALUES BY MATURITY AT
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
25
CONSOLIDATED FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts)
(1) Income component excludes the after-tax impact of Restructuring and
Other Charges. ($33,031 in 3Q '01; $72,127 in 2Q '01; $32,500 in 3Q
'00)
(2) Adjusted for stock splits and stock dividends, as applicable.
(3) Tangible or "Cash Basis" net income excludes amortization of goodwill.
Related asset amount excluded from total assets and shareholders'
equity.
26
FINANCIAL REVIEW
LOAN LOSS EXPERIENCE
(1) Including restructuring and other charges unless otherwise indicated.
(2) Income or loss before taxes (excluding restructuring & other charges)
and the provision for loan losses to net loan losses.
NON-PERFORMING ASSETS AND PAST DUE LOANS
27
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES (QUARTERLY DATA)
- --------------------------------------------------
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate.
(2) Net loan rate includes loan fees, whereas individual loan components
above are shown exclusive of fees.
(3) Yields are based on amortized cost.
28
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES (QUARTERLY DATA)
29
SELECTED QUARTERLY INCOME STATEMENT DATA
(1) Excludes the after-tax impact of Restructuring and Other Charges
($33,031 in 3Q 2001; $72,127 in 2Q 2001 and $32,500 in 3Q 2000).
(2) Adjusted for stock splits and stock dividends, as applicable.
(3) Calculated assuming a 35% tax rate.
30
- --------------------------------------------------------------------------------
STOCK SUMMARY, KEY RATIOS AND STATISTICS, AND REGULATORY CAPITAL DATA
QUARTERLY COMMON STOCK SUMMARY (1)
- --------------------------------------------------------------------------------
Note: Stock price quotations were obtained from NASDAQ.
KEY RATIOS AND STATISTICS
- --------------------------------------------------------------------------------
REGULATORY CAPITAL DATA
- --------------------------------------------------------------------------------
(1) Adjusted for stock splits and stock dividends, as applicable.
(2) Presented on a fully tax equivalent basis assuming a 35% tax rate.
(3) Income component excludes the impact of Restructuring and Other Charges.
31
PART II. OTHER INFORMATION
In accordance with the instructions to Part II, the other specified items in
this part have been omitted because they are not applicable or the information
has been previously reported.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2. Purchase and Assumption Agreement, dated
September 25, 2001, among Huntington
Bancshares Incorporated, The Huntington
National Bank, and SunTrust Banks, Inc.
3. (ii) Amended and Restated Bylaws.
4. Instruments defining the Rights of Security
Holders:
Reference is made to Articles Fifth, Eighth
and Tenth of Articles of Restatement of
Charter, as amended and supplemented,
previously filed as exhibit 3(i) to annual
report on form 10-K for the year ended
December 31, 1993 and exhibit 3(i)(c) to
quarterly report on form 10-Q for the
quarter ended March 31, 1998, and
incorporated herein by reference. Also,
reference is made to Rights Plan, dated
February 22, 1990, previously filed as
Exhibit 1 to Registration Statement on Form
8-A, and incorporated herein by reference
and to Amendment No. 1 to the Rights
Agreement, dated as of August 16, 1995,
previously filed as Exhibit 4(b) to Form 8-K
filed with the Securities and Exchange
Commission on August 28, 1995, and
incorporated herein by reference.
Instruments defining the rights of holders
of long-term debt will be furnished to the
Securities and Exchange Commission upon
request.
99. Earnings to Fixed Charges
(b) Reports on Form 8-K
1. A report on Form 8-K, dated July 12, 2001,
was filed under report item numbers 5 and 7,
concerning a comprehensive restructuring and
strategic refocus on Huntington's core
Midwest markets.
2. A report on Form 8-K, dated July 18, 2001,
was filed under report item numbers 5 and 7,
concerning Huntington's results of
operations for the second quarter and year
ended June 30, 2001.
3. A report on Form 8-K, dated August 16, 2001,
was filed under report item number 5,
announcing that Thomas E. Hoaglin was
appointed Chairman of the Board of
Huntington and its principal subsidiary, The
Huntington National Bank ("HNB"), succeeding
Mr. Wobst in these positions.
32
4. A report on Form 8-K, dated September 26,
2001, was filed under report item number 5
and 7, announcing the sale of Huntington's
Florida operations to SunTrust Banks, Inc.
33
SIGNATURES
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 thereunto duly authorized.
Huntington Bancshares Incorporated
----------------------------------
(Registrant)
Date: November 14, 2001 /s/ Richard A. Cheap
------------------------------------
Richard A. Cheap
General Counsel and Secretary
Date: November 14, 2001 /s/ Michael J. McMennamin
------------------------------------
Michael J. McMennamin
Vice Chairman, Chief Financial
Officer and Treasurer (Principal
Financial Officer)
34