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 ====== ======= There were 251,193,211 shares of Registrant's without par value common stock outstanding on October 31, 2001. HUNTINGTON BANCSHARES INCORPORATED INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2001 and 2000 and December 31, 2000 3 Consolidated Statements of Income - For the three and nine months ended September 30, 2001 and 2000 4 Consolidated Statements of Changes in Shareholders' Equity - For the nine months ended September 30, 2001 and 2000 5 Consolidated Statements of Cash Flows - For the nine months ended September 30, 2001 and 2000 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 32-33 Signatures 34
2 PART I. FINANCIAL INFORMATION 1. FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, (in thousands of dollars) 2001 2000 2000 - ------------------------------------------------------------ ------------ ------------ ------------ Assets Cash and due from banks .................................... $ 1,110,287 $ 1,322,700 $ 980,199 Interest bearing deposits in banks ......................... 4,958 4,970 4,922 Trading account securities ................................. 2,292 4,723 17,770 Federal funds sold and securities purchased under resale agreements ....................... 63,311 133,183 127,141 Loans held for sale ........................................ 294,077 155,104 115,541 Securities available for sale - at fair value .............. 2,991,167 4,090,525 4,696,241 Investment securities - fair value $14,868; $16,414; and $17,000, respectively ............................... 14,629 16,336 17,053 Total loans(1) ............................................. 21,583,611 20,610,191 20,328,152 Less allowance for loan losses ........................ 360,446 297,880 294,686 ------------ ------------ ------------ Net loans .................................................. 21,223,165 20,312,311 20,033,466 ------------ ------------ ------------ Bank owned life insurance .................................. 833,623 804,941 793,856 Premises and equipment ..................................... 447,774 454,844 442,676 Customers' acceptance liability ............................ 16,382 17,366 14,065 Accrued income and other assets ............................ 1,314,510 1,282,374 1,334,263 ------------ ------------ ------------ TOTAL ASSETS ............................................... $ 28,316,175 $ 28,599,377 $ 28,577,193 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Total deposits(1) .......................................... $ 20,071,388 $ 19,777,245 $ 19,533,166 Short-term borrowings ...................................... 1,789,043 1,987,759 2,133,311 Bank acceptances outstanding ............................... 16,382 17,366 14,065 Medium-term notes .......................................... 1,995,603 2,467,150 2,702,150 Subordinated notes and other long-term debt ................ 899,605 870,976 870,889 Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely junior subordinated debentures of the Parent Company .... 300,000 300,000 300,000 Accrued expenses and other liabilities ..................... 839,748 812,834 740,047 ------------ ------------ ------------ Total Liabilities ..................................... 25,911,769 26,233,330 26,293,628 ------------ ------------ ------------ Shareholders' equity Preferred stock - authorized 6,617,808 shares; none issued or outstanding ....................... -- -- -- Common stock - without par value; AUTHORIZED 500,000,000 shares; ISSUED 257,866,255, 257,866,255, and 257,866,255 shares, respectively; outstanding 251,193,211, 250,859,470, and 250,849,574 shares, respectively ................. 2,489,564 2,493,645 2,493,912 Less 6,673,044, 7,006,785, and 7,016,681 treasury shares, respectively .................... (122,485) (129,432) (128,995) Accumulated other comprehensive income ................ 38,708 (24,520) (81,647) Retained earnings ..................................... (1,381) 26,354 295 ------------ ------------ ------------ Total Shareholders' Equity ............................ 2,404,406 2,366,047 2,283,565 ------------ ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $ 28,316,175 $ 28,599,377 $ 28,577,193 ============ ============ ============
(1) See page 12 for detail of total loans and total deposits. See notes to unaudited consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------- ------------------------------- (in thousands of dollars, except per share amounts) 2001 2000 2001 2000 - ---------------------------------------------------- ------------ ------------ ------------ ------------ Interest and fee income Loans ......................................... $ 421,337 $ 459,860 $ 1,302,819 $ 1,348,103 Securities .................................... 50,495 71,385 169,763 211,427 Other ......................................... 7,002 4,546 23,186 11,314 ------------ ------------ ------------ ------------ TOTAL INTEREST INCOME ............... 478,834 535,791 1,495,768 1,570,844 ------------ ------------ ------------ ------------ Interest expense Deposits ...................................... 162,982 202,659 518,351 577,521 Short-term borrowings ......................... 19,932 30,998 83,134 80,978 Medium-term notes ............................. 30,647 44,292 100,250 143,489 Subordinated notes and other long-term debt ... 15,486 21,973 53,089 59,490 ------------ ------------ ------------ ------------ TOTAL INTEREST EXPENSE .............. 229,047 299,922 754,824 861,478 ------------ ------------ ------------ ------------ NET INTEREST INCOME ................. 249,787 235,869 740,944 709,366 Provision for loan losses .......................... 49,559 26,396 200,518 57,931 ------------ ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 200,228 209,473 540,426 651,435 ------------ ------------ ------------ ------------ Total non-interest income(1) ....................... 130,456 121,652 376,383 363,010 Total non-interest expense(1) ...................... 279,707 263,585 781,090 661,767 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES .......... 50,977 67,540 135,719 352,678 Provision for income taxes ......................... 8,348 17,010 22,847 100,454 ------------ ------------ ------------ ------------ NET INCOME .......................... $ 42,629 $ 50,530 $ 112,872 $ 252,224 ============ ============ ============ ============ PER COMMON SHARE(2) Net income Basic .................................... $ 0.17 $ 0.20 $ 0.45 $ 1.02 Diluted .................................. $ 0.17 $ 0.20 $ 0.45 $ 1.01 Cash dividends declared ....................... $ 0.16 $ 0.20 $ 0.56 $ 0.56 AVERAGE COMMON SHARES(2) Basic .................................... 251,147,660 251,113,540 251,039,150 247,983,936 Diluted .................................. 252,203,027 252,032,874 251,537,099 248,908,848
(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
- ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) ACCUMULATED COMMON STOCK TREASURY STOCK OTHER --------------------- -------------------- COMPREHENSIVE RETAINED SHARES AMOUNT SHARES AMOUNT INCOME (LOSS) EARNINGS - -------------------------------------------------------- ------- ----------- ------- ---------- ------------- ---------- Nine Months Ended September 30, 2000: Balance, beginning of period 233,845 $2,284,956 (4,957) ($137,268) ($94,093) $128,761 Comprehensive Income: Net income 252,224 Unrealized net holding gains on securities available for sale arising during the period 12,446 Total comprehensive income Stock issued for acquisitions (29,399) 7,175 171,781 Cash dividends declared (139,028) Stock options exercised (3,128) 105 3,405 10% stock dividend 24,021 241,483 (1,182) (241,662) Treasury shares purchased (8,188) (167,612) Treasury shares sold to employee benefit plans 30 699 ------- ---------- ------ --------- ----------- -------- Balance, end of period 257,866 $2,493,912 (7,017) ($128,995) ($81,647) $ 295 ======= ========== ====== ========= =========== ======== NINE MONTHS ENDED SEPTEMBER 30, 2001: BALANCE, BEGINNING OF PERIOD 257,866 $2,493,645 (7,007) ($129,432) ($24,520) $ 26,354 Comprehensive Income: Net income 112,872 Change in accounting method for derivatives (9,113) Unrealized net holding gains on securities available for sale arising during the period 67,936 Unrealized gains on derivatives 4,405 Total comprehensive income Cash dividends declared (140,607) Stock options exercised (4,081) 263 5,742 Treasury shares sold to employee benefit plans 71 1,205 ------- ---------- ------ --------- ----------- -------- Balance, end of period 257,866 $2,489,564 (6,673) ($122,485) $38,708 ($ 1,381) ======= ========== ====== ========= =========== ========
- ------------------------------------------------------------------------- (IN THOUSANDS) TOTAL - -------------------------------------------------------- ----------- Nine Months Ended September 30, 2000: Balance, beginning of period $2,182,356 Comprehensive Income: Net income 252,224 Unrealized net holding gains on securities available for sale arising during the period 12,446 ---------- Total comprehensive income 264,670 ---------- Stock issued for acquisitions 142,382 Cash dividends declared (139,028) Stock options exercised 277 10% stock dividend (179) Treasury shares purchased (167,612) Treasury shares sold to employee benefit plans 699 ------------ Balance, end of period $2,283,565 ============ NINE MONTHS ENDED SEPTEMBER 30, 2001: BALANCE, BEGINNING OF PERIOD $2,366,047 Comprehensive Income: Net income 112,872 Change in accounting method for derivatives (9,113) Unrealized net holding gains on securities available for sale arising during the period 67,936 Unrealized gains on derivatives 4,405 ---------- Total comprehensive income 176,100 ---------- Cash dividends declared (140,607) Stock options exercised 1,661 Treasury shares sold to employee benefit plans 1,205 ------------ Balance, end of period $2,404,406 ============
See notes to unaudited consolidated financial statements. 5 CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- (in thousands of dollars) 2001 2000 - ------------------------------------------------------------------------ ----------- ----------- Operating Activities Net Income $ 112,872 $ 252,224 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 200,518 57,931 Provision for depreciation and amortization 76,336 85,053 Deferred income tax expense 156,668 59,114 Decrease (increase) in trading account securities 2,431 (9,795) (Increase) decrease in mortgages held for sale (138,973) 26,182 Securities gains (634) (36,256) (Gains) losses on sales/securitizations of loans (7,604) 4,118 Decrease (increase) in accrued income receivable 4,622 (31,769) Net increase in other assets (109,983) (43,571) (Decrease) increase in accrued expenses (193,308) 33,343 Net decrease in other liabilities 33,911 (10,807) Special charges 84,814 50,000 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 221,670 435,767 ----------- ----------- INVESTING ACTIVITIES Decrease in interest bearing deposits in banks 12 1,636 Proceeds from : Maturities and calls of investment securities 1,695 1,692 Maturities and calls of securities available for sale 800,608 226,039 Sales of securities available for sale 1,280,652 1,096,042 Purchases of securities available for sale (851,581) (168,418) Proceeds from sales/securitizations of loans 401,546 1,264,252 Net loan originations, excluding sales (1,588,734) (1,576,285) Proceeds from sale of premises and equipment 2,110 2,351 Purchases of premises and equipment (43,706) (38,444) Proceeds from sales of other real estate 11,602 12,023 Net cash received in purchase acquisition -- 12,004 ----------- ----------- NET CASH PROVIDED BY INVESTING ACTIVITIES 14,204 832,892 ----------- ----------- FINANCING ACTIVITIES Increase (decrease) in total deposits 300,293 (688,000) (Decrease) increase in short-term borrowings (198,716) 1,322 Proceeds from issuance of long-term debt -- 150,000 Maturity of long-term debt (7,001) -- Proceeds from issuance of medium-term notes 440,000 530,000 Payment of medium-term notes (905,000) (1,082,000) Dividends paid on common stock (150,601) (134,707) Repurchases of common stock -- (167,612) Proceeds from issuance of common stock 2,866 797 ----------- ----------- NET CASH USED FOR FINANCING ACTIVITIES (518,159) (1,390,200) ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS (282,285) (121,541) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,455,883 1,228,881 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,173,598 $ 1,107,340 =========== ===========
See notes to unaudited consolidated financial statements. 6 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:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- (in thousands, except per share amounts) 2001 2000 2001 2000 - ---------------------------------------- -------- -------- -------- -------- Net Income $ 42,629 $ 50,530 $112,872 $252,224 ======== ======== ======== ======== Average common shares outstanding 251,148 251,114 251,039 247,984 Dilutive effect of stock options 1,055 919 498 925 -------- -------- -------- -------- Diluted common shares outstanding 252,203 252,033 251,537 248,909 ======== ======== ======== ======== Earnings per share Basic $ 0.17 $ 0.20 $ 0.45 $ 1.02 Diluted $ 0.17 $ 0.20 $ 0.45 $ 1.01
Average common shares outstanding and the dilutive effect of stock options have been adjusted for subsequent stock dividends and stock splits, as applicable. 7 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:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- (in thousands) 2001 2000 2001 2000 - -------------------------------------------------------- -------- -------- -------- -------- Change in accounting method for derivatives: Unrealized net losses $ -- $ -- $(14,020) $ -- Related tax benefit -- -- 4,907 -- -------- -------- -------- -------- Net -- -- (9,113) -- -------- -------- -------- -------- Unrealized holding gains on securities arising during the period: Unrealized net gains 66,690 49,142 97,094 55,782 Related tax expense (17,959) (17,406) (28,746) (19,770) -------- -------- -------- -------- Net 48,731 31,736 68,348 36,012 -------- -------- -------- -------- Unrealized holding (losses) gains on derivatives arising during the period: Unrealized net (losses) gains (1,457) -- 6,777 -- Related tax benefit (expense) 510 -- (2,372) -- -------- -------- -------- -------- Net (947) -- 4,405 -- -------- -------- -------- -------- Less: Reclassification adjustment for net gains realized during the period: Realized net gains 1,059 11,379 634 36,256 Related tax expense (371) (3,983) (222) (12,690) -------- -------- -------- -------- Net 688 7,396 412 23,566 -------- -------- -------- -------- Total Other Comprehensive Income $ 47,096 $ 24,340 $ 63,228 $ 12,446 ======== ======== ======== ========
Accumulated Other Comprehensive Income balances at September 30, 2001 are as follows:
UNREALIZED GAINS (LOSSES) UNREALIZED GAINS (LOSSES) (in thousands) ON SECURITIES ON DERIVATIVES - --------------------------- ------------------------- ------------------------- Balance, December 31, 2000 $(24,520) $ -- Change in accounting method -- (9,113) Current-period change 67,936 4,405 -------- -------- Balance, September 30, 2001 $ 43,416 $ (4,708) ======== ========
8 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.
- ------------------------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED SEPTEMBER 30, - ------------------------------------------------------------------------------------------------------------------------------------ Private INCOME STATEMENT Retail Corporate Dealer Financial Treasury/ Huntington (in thousands of dollars) Banking Banking Sales Group Other Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ 2001 Net Interest Income (FTE) $ 119,508 $ 68,683 $ 59,850 $ 9,852 $ (6,664) $ 251,229 Provision for Loan Losses 3,635 32,148 13,580 196 -- 49,559 Non-Interest income 77,380 17,699 6,332 21,558 7,487 130,456 Non-Interest expense 154,594 34,447 18,380 26,653 45,633 279,707 Income Taxes/FTE Adjustment 13,531 6,926 11,978 1,596 (24,241) 9,790 --------- --------- --------- --------- --------- --------- Net Income (Loss) $ 25,128 $ 12,861 $ 22,244 $ 2,965 $ (20,569) $ 42,629 ========= ========= ========= ========= ========= ========= BALANCE SHEET (in millions of dollars) Average Assets $ 7,151 $ 7,731 $ 7,769 $ 785 $ 4,552 $ 27,988 Average Deposits $ 16,270 $ 2,221 $ 84 $ 673 $ 240 $ 19,488 - ------------------------------------------------------------------------------------------------------------------------------------ 2000 Net Interest Income (FTE) $ 134,168 $ 68,565 $ 51,115 $ 8,194 $ (24,151) $ 237,891 Provision for Loan Losses 8,330 3,135 14,650 281 -- 26,396 Non-Interest income 68,819 12,445 4,888 19,265 16,235 121,652 Non-Interest expense 139,842 25,435 62,686 17,679 17,943 263,585 Income Taxes/FTE Adjustment 19,185 18,354 (7,466) 3,324 (14,365) 19,032 --------- --------- --------- --------- --------- --------- Net income (Loss) $ 35,630 $ 34,086 $ (13,867) $ 6,175 $ (11,494) $ 50,530 ========= ========= ========= ========= ========= ========= BALANCE SHEET (in millions of dollars) Average Assets $ 7,173 $ 7,085 $ 6,571 $ 636 $ 7,233 $ 28,698 Average Deposits $ 16,259 $ 1,894 $ 80 $ 612 $ 937 $ 19,782
9
- ------------------------------------------------------------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30, - ------------------------------------------------------------------------------------------------------------------------------------ Private INCOME STATEMENT Retail Corporate Dealer Financial Treasury/ Huntington (in thousands of dollars) Banking Banking Sales Group Other Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ 2001 Net Interest Income (FTE) $ 381,306 $ 208,200 $ 172,589 $ 29,522 $ (45,613) $ 746,004 Provision for Loan Losses 23,106 69,920 107,492 -- -- 200,518 Non-Interest income 227,243 46,106 16,219 57,976 28,839 376,383 Non-Interest expense 448,318 100,998 80,773 76,850 74,151 781,090 Income Taxes/FTE Adjustment 47,994 29,186 190 3,727 (53,190) 27,907 --------- --------- --------- --------- --------- --------- Net Income (Loss) $ 89,131 $ 54,202 $ 353 $ 6,921 $ (37,735) $ 112,872 ========= ========= ========= ========= ========= ========= BALANCE SHEET (in millions of dollars) Average Assets $ 6,333 $ 7,492 $ 6,476 $ 653 $ 7,237 $ 28,191 Average Deposits $ 16,019 $ 2,157 $ 86 $ 650 $ 309 $ 19,221 - ------------------------------------------------------------------------------------------------------------------------------------ 2000 Net Interest Income (FTE) $ 393,768 $ 196,145 $ 149,088 $ 24,699 $ (48,081) $ 715,619 Provision for Loan Losses 14,404 8,625 33,809 1,093 -- 57,931 Non-Interest income 204,167 41,506 18,452 50,169 48,716 363,010 Non-Interest expense 418,137 77,397 88,379 47,207 30,647 661,767 Income Taxes/FTE Adjustment 57,888 53,070 15,874 9,299 (29,424) 106,707 --------- --------- --------- --------- --------- --------- Net income $ 107,506 $ 98,559 $ 29,478 $ 17,269 $ (588) $ 252,224 ========= ========= ========= ========= ========= ========= BALANCE SHEET (in millions of dollars) Average Assets $ 6,467 $ 6,901 $ 6,776 $ 540 $ 8,058 $ 28,742 Average Deposits $ 16,311 $ 1,577 $ 76 $ 636 $ 1,149 $ 19,749
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. 10 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. 11 FINANCIAL REVIEW LOAN PORTFOLIO COMPOSITION
SEPTEMBER 30, December 31, September 30, (in thousands of dollars) 2001 2000 2000 - -------------------------------------------------------------------- ------------- ------------ ------------- Commercial (unearned income $1,080; $1,538; $1,728) ................ $ 6,655,550 $ 6,633,985 $ 6,494,013 Real Estate Construction .................................................. 1,483,871 1,318,899 1,288,897 Commercial .................................................... 2,374,168 2,253,477 2,218,825 Consumer Loans (unearned income $3,005; $4,150; $4,523) ................ 6,989,965 6,388,036 6,403,858 Leases (unearned income $517,195; $515,445; $503,369) ......... 3,221,300 3,069,210 3,007,446 Residential Mortgage .......................................... 858,757 946,584 915,113 ----------- ----------- ----------- TOTAL LOANS ................................................... $21,583,611 $20,610,191 $20,328,152 =========== =========== ===========
DEPOSIT COMPOSITION
SEPTEMBER 30, December 31, September 30, (in thousands of dollars) 2001 2000 2000 - -------------------------------------------------------------------- ------------- ------------ ------------- Demand deposits Non-interest bearing .......................................... $ 3,464,430 $ 3,480,876 $ 3,169,099 Interest bearing .............................................. 5,302,394 4,645,127 4,359,430 Savings deposits ................................................... 3,458,986 3,527,796 3,541,828 Certificates of deposit Less than $100,000 ............................................ 5,936,652 5,938,486 5,927,733 $100,000 or more .............................................. 1,413,068 1,520,547 1,547,529 ----------- ----------- ----------- TOTAL CORE DEPOSITS ........................................... 19,575,530 19,112,832 18,545,619 ----------- ----------- ----------- Other domestic time deposits ....................................... 128,878 256,106 666,693 Foreign time deposits .............................................. 366,980 408,307 320,854 ----------- ----------- ----------- TOTAL DEPOSITS ................................................ $20,071,388 $19,777,245 $19,533,166 =========== =========== ===========
12 FINANCIAL REVIEW ANALYSIS OF NON-INTEREST INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- PERCENT ---------------------- PERCENT (in thousands of dollars) 2001 2000 CHANGE 2001 2000 CHANGE - ----------------------------------------------------- -------- -------- ------- -------- -------- ------- Service charges on deposit accounts ................. $ 41,719 $ 39,722 5.0 % $121,299 $121,479 (0.1)% Brokerage and insurance income ...................... 19,912 15,564 27.9 58,068 44,793 29.6 Trust services ...................................... 15,485 13,181 17.5 44,977 39,209 14.7 Mortgage banking .................................... 14,616 9,412 55.3 43,380 26,049 66.5 Electronic banking fees ............................. 12,350 11,238 9.9 35,665 32,337 10.3 Bank Owned Life Insurance income .................... 9,560 9,786 (2.3) 28,681 28,458 0.8 Other ............................................... 15,755 11,370 38.6 43,679 34,429 26.9 -------- -------- -------- -------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS ... 129,397 110,273 17.3 375,749 326,754 15.0 -------- -------- -------- -------- Securities gains .................................... 1,059 11,379 N.M. 634 36,256 N.M. -------- -------- -------- -------- TOTAL NON-INTEREST INCOME ........................... $130,456 $121,652 7.2 % $376,383 $363,010 3.7 % ======== ======== ======== ========
ANALYSIS OF NON-INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- PERCENT ---------------------- PERCENT (in thousands of dollars) 2001 2000 CHANGE 2001 2000 CHANGE - ----------------------------------------------------- -------- -------- ------- -------- -------- ------- Personnel and related costs ......................... $120,767 $109,463 10.3 % $360,497 $315,940 14.1 % Equipment ........................................... 20,151 18,983 6.2 59,967 57,258 4.7 Net occupancy ....................................... 19,266 19,520 (1.3) 57,234 57,268 (0.1) Outside data processing and other services .......... 17,375 15,531 11.9 51,700 45,869 12.7 Amortization of intangible assets ................... 10,114 10,311 (1.9) 31,125 28,713 8.4 Marketing ........................................... 6,921 8,557 (19.1) 24,712 24,292 1.7 Telecommunications .................................. 6,859 6,480 5.9 21,191 19,701 7.6 Legal and other professional services ............... 5,912 4,719 25.3 17,644 14,034 25.7 Printing and supplies ............................... 4,450 4,849 (8.2) 14,074 14,422 (2.4) Franchise and other taxes ........................... 2,470 2,841 (13.1) 6,836 7,914 (13.6) Other ............................................... 14,605 12,331 18.4 51,296 26,356 94.6 ------- ------- -------- -------- TOTAL NON-INTEREST EXPENSE BEFORE SPECIAL CHARGES .......................................... 228,890 213,585 7.2 696,276 611,767 13.8 Special charges ..................................... 50,817 50,000 1.6 84,814 50,000 69.6 ------- ------- -------- -------- TOTAL NON-INTEREST EXPENSE .......................... $279,707 $263,585 6.1 % $781,090 $661,767 18.0 % ======= ======= ======== ========
N.M. - Not Meaningful 13 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 14 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)
Three months ended September 30, ------------------------------------------------------------------------------------------------ 2001 2000 -------------------------------------------- -------------------------------------------- Restructuring Restructuring Reported and Other Operating Reported and Other Operating Earnings Charges Earnings Earnings Charges Earnings --------- ------------- --------- --------- ------------- --------- Net interest income $ 249,787 $ -- $ 249,787 $ 235,869 $ -- $ 235,869 Provision for loan losses 49,559 -- 49,559 26,396 -- 26,396 Non-interest income 130,456 -- 130,456 121,652 -- 121,652 Non-interest expense 279,707 50,817 228,890 263,585 50,000 213,585 --------- --------- --------- --------- --------- --------- Pre-tax income 50,977 (50,817) 101,794 67,540 (50,000) 117,540 Income taxes 8,348 (17,786) 26,134 17,010 (17,500) 34,510 --------- --------- --------- --------- --------- --------- Net income $ 42,629 $ (33,031) $ 75,660 $ 50,530 $ (32,500) $ 83,030 ========= ========= ========= ========= ========= ========= Net income per common share $ 0.17 $ (0.13) $ 0.30 $ 0.20 $ (0.13) $ 0.33 ========= ========= ========= ========= ========= =========
15
Nine months ended September 30, ------------------------------------------------------------------------------------------------ 2001 2000 -------------------------------------------- -------------------------------------------- Restructuring Restructuring Reported and Other Operating Reported and Other Operating Earnings Charges Earnings Earnings Charges Earnings --------- ------------- --------- --------- ------------- --------- Net interest income $ 740,944 $ -- $ 740,944 $ 709,366 $ -- $ 709,366 Provision for loan losses 200,518 71,718 128,800 57,931 -- 57,931 Non-interest income 376,383 (5,250) 381,633 363,010 -- 363,010 Non-interest expense 781,090 84,814 696,276 661,767 50,000 611,767 --------- --------- --------- --------- --------- --------- Pre-tax income 135,719 (161,782) 297,501 352,678 (50,000) 402,678 Income taxes 22,847 (56,624) 79,471 100,454 (17,500) 117,954 --------- --------- --------- --------- --------- --------- Net income $ 112,872 $(105,158) $ 218,030 $ 252,224 $ (32,500) $ 284,724 ========= ========= ========= ========= ========= ========= Net income per common share $ 0.45 $ (0.42) $ 0.87 $ 1.01 $ (0.13) $ 1.14 ========= ========= ========= ========= ========= =========
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 16 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. 17 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, 18 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. 19 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 20 $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
(in thousands of dollars) SEPTEMBER 30, 2001 DECEMBER 31, 2000 - --------------------------------------------------------------------------------------------------------------------------- AMORTIZED Amortized COST FAIR VALUE Cost Fair Value - --------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Under 1 year ..................... $ 1,086 $ 1,108 $ 1,455 $ 1,466 1-5 years ........................ 1,503 1,663 2,007 2,110 6-10 years ....................... 6,417 7,018 6,407 6,706 Over 10 years .................... 413 445 413 446 ---------- ---------- ---------- ---------- Total ......................... 9,419 10,234 10,282 10,728 ---------- ---------- ---------- ---------- Federal agencies Mortgage-backed securities 1-5 years ........................ 36,746 37,491 -- -- 6-10 years ....................... 78,287 80,625 22,757 22,987 Over 10 years .................... 743,357 766,721 1,515,883 1,508,914 ---------- ---------- ---------- ---------- Total ......................... 858,390 884,837 1,538,640 1,531,901 ---------- ---------- ---------- ---------- Other agencies Under 1 year ..................... -- -- 20,000 19,913 1-5 years ........................ 878,862 907,499 1,029,073 1,017,230 6-10 years ....................... 73,120 74,851 146,376 144,313 Over 10 years .................... 465,520 476,017 566,760 559,946 ---------- ---------- ---------- ---------- Total ......................... 1,417,502 1,458,367 1,762,209 1,741,402 ---------- ---------- ---------- ---------- Total U.S. Treasury and Federal Agencies ...................... 2,285,311 2,353,438 3,311,131 3,284,031 ---------- ---------- ---------- ---------- Other Under 1 year ..................... 11,203 11,211 21,098 20,826 1-5 years ........................ 198,660 200,352 215,978 217,453 6-10 years ....................... 45,561 45,841 88,872 87,415 Over 10 years .................... 341,675 330,777 403,730 388,731 Marketable equity securities ..... 50,254 49,548 87,674 92,069 ---------- ---------- ---------- ---------- Total ......................... 647,353 637,729 817,352 806,494 ---------- ---------- ---------- ---------- Total Securities Available for Sale ... $2,932,664 $2,991,167 $4,128,483 $4,090,525 ========== ========== ========== ==========
25 CONSOLIDATED FINANCIAL HIGHLIGHTS (in thousands, except per share amounts)
- ------------------------------------------------ ------------ ------------ ------------ FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 % Change - ------------------------------------------------ ------------ ------------ ------------ NET INCOME(1) .................................. $ 75,660 $ 83,030 (8.9)% PER COMMON SHARE AMOUNTS(2) Net income Basic ................................ $ 0.30 $ 0.33 (9.1) Diluted .............................. $ 0.30 $ 0.33 (9.1) Cash dividends declared ................... $ 0.16 $ 0.20 (20.0) AVERAGE COMMON SHARES OUTSTANDING-DILUTED(2) ... 252,203 252,033 0.1 KEY RATIOS Return on: Average total assets ...................... 1.07% 1.15% (7.0) Average shareholders' equity .............. 12.64% 14.04% (10.0) Efficiency ratio ............................... 57.48% 58.38% (1.6) Average equity/average assets .................. 8.49% 8.20% 3.5 Net interest margin ............................ 4.04% 3.74% 8.0 TANGIBLE OR "CASH BASIS" RATIOS(3) Net Income Per Common Share -- Diluted(2) ...... $ 0.33 $ 0.36 (8.3) Return on: Average total assets ...................... 1.21% 1.29% (6.2) Average shareholders' equity .............. 13.93% 15.33% (9.1)
- ------------------------------------------------ ------------ ------------ ------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 % Change - ------------------------------------------------ ------------ ------------ ------------ NET INCOME(1) .................................. $218,030 $284,724 (23.4)% PER COMMON SHARE AMOUNTS(2) Net income Basic ................................ $ 0.87 $ 1.15 (24.3) Diluted .............................. $ 0.87 $ 1.14 (23.7) Cash dividends declared ................... $ 0.56 $ 0.56 0.0 AVERAGE COMMON SHARES OUTSTANDING-DILUTED(2) ... 251,537 248,909 1.1 KEY RATIOS Return on: Average total assets ...................... 1.03% 1.32% (22.0) Average shareholders' equity .............. 12.20% 16.87% (27.7) Efficiency ratio ............................... 59.30% 55.39% 7.0 Average equity/average assets .................. 8.47% 7.84% 8.0 Net interest margin ............................ 3.99% 3.74% 6.7 TANGIBLE OR "CASH BASIS" RATIOS(3) Net Income Per Common Share -- Diluted(2) ...... $ 0.96 $ 1.23 (22.0) Return on: Average total assets ...................... 1.17% 1.45% (19.3) Average shareholders' equity .............. 13.51% 18.08% (25.3)
(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
THREE MONTHS ENDED NINE MONTHS ENDED (in thousands of dollars) SEPTEMBER 30, SEPTEMBER 30, - ----------------------------------------------------------- --------------------------- --------------------------- 2001(1) 2000 2001(1) 2000 --------- --------- --------- --------- ALLOWANCE FOR LOAN LOSSES, BEGINNING OF PERIOD ............ $ 352,243 $ 296,891 $ 297,880 $ 299,309 Allowance of assets acquired/other ...................... -- -- -- 7,900 Loan losses ............................................. (49,386) (29,499) (160,507) (77,916) Recoveries of loans previously charged off .............. 9,643 5,705 27,206 20,325 Allowance of securitized loans .......................... (1,613) (4,807) (4,651) (12,863) Provision for loan losses ............................... 49,559 26,396 200,518 57,931 --------- --------- --------- --------- ALLOWANCE FOR LOAN LOSSES, END OF PERIOD .................. $ 360,446 $ 294,686 $ 360,446 $ 294,686 ========= ========= ========= ========= AS A % OF AVERAGE TOTAL LOANS Net loan losses--annualized ............................. 0.74% 0.46% 0.85% 0.37% Net loan losses--annualized excluding special charges ... 0.61% 0.46% 0.63% 0.37% Allowance for loan losses as a % of total sales ......... 1.67% 1.45% 1.67% 1.45% Net loan loss coverage(2) ............................... 3.81X 6.05x 3.20X 8.00x
(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
2001 2000 ---------------------------------------- ------------------------ (in thousands of dollars) 3Q 2Q 1Q 4Q 3Q - --------------------------------------------- -------- -------- -------- -------- -------- Non-accrual loans: Commercial ............................... $148,177 $116,044 $ 62,716 $ 55,804 $ 44,918 Real Estate Construction .......................... 10,983 4,572 6,735 8,687 7,973 Commercial ............................ 29,899 22,298 28,158 18,015 13,722 Residential ........................... 11,666 11,868 11,949 10,174 8,588 -------- -------- -------- -------- -------- Total Nonaccrual Loans ...................... 200,725 154,782 109,558 92,680 75,201 Renegotiated loans .......................... 1,286 1,290 1,297 1,304 1,311 -------- -------- -------- -------- -------- TOTAL NON-PERFORMING LOANS .................. 202,011 156,072 110,855 93,984 76,512 Other real estate, net ...................... 8,050 9,913 14,031 11,413 11,982 -------- -------- -------- -------- -------- TOTAL NON-PERFORMING ASSETS ................. $210,061 $165,985 $124,886 $105,397 $ 88,494 ======== ======== ======== ======== ======== NON-PERFORMING LOANS AS A % OF TOTAL LOANS ......................... 0.94% 0.74% 0.53% 0.46% 0.38% NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND OTHER REAL ESTATE ... 0.97% 0.79% 0.60% 0.51% 0.44% ALLOWANCE FOR LOAN LOSES AS A % OF NON-PERFORMING LOANS ..................... 178.43% 225.69% 272.23% 316.95% 385.15% ALLOWANCE FOR LOAN LOSSES AND OTHER REAL ESTATE AS A % OF NON-PERFORMING ASSETS ... 171.08% 211.20% 239.42% 279.16% 326.77% ACCRUING LOANS PAST DUE 90 DAYS OR MORE ..... $ 92,791 $ 67,077 $102,658 $ 80,306 $ 80,290 ======== ======== ======== ======== ========
27 CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES (QUARTERLY DATA)
Fully Tax Equivalent Basis(1) 3RD QUARTER 2001 2ND QUARTER 2001 1ST QUARTER 2001 ------------------- ------------------- ------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ (in millions of dollars) BALANCE RATE BALANCE RATE BALANCE RATE - -------------------------------------------------- ------- ------- ------- ------- ------- ------- ASSETS Interest bearing deposits in banks ............... $ 5 3.75 % $ 5 5.09 % $ 5 5.24 % Trading account securities ....................... 8 3.83 39 5.15 48 5.52 Federal funds sold and securities purchased under resale agreements ....................... 86 3.20 93 4.21 164 5.78 Loans held for sale .............................. 344 7.18 420 6.96 240 7.19 Securities:(3) Taxable ..................................... 2,896 6.71 3,368 6.26 3,606 6.72 Tax exempt .................................. 140 7.38 201 7.26 248 7.55 ------- ------- ------- Total Securities ...................... 3,036 6.75 3,569 6.32 3,854 6.77 ------- ------- ------- Loans: Commercial .................................. 6,681 6.92 6,741 7.44 6,678 8.19 Real Estate Construction .......................... 1,388 6.62 1,303 7.43 1,263 8.31 Commercial ............................ 2,346 7.54 2,294 7.92 2,324 8.40 Consumer Loans ................................. 6,865 8.12 6,552 8.57 6,397 8.95 Leases ................................ 3,214 6.66 3,189 6.71 3,082 6.90 Residential Mortgage .................. 854 7.54 942 7.72 960 7.91 ------- ------- ------- Total Consumer ........................ 10,933 7.65 10,683 7.94 10,439 8.25 ------- ------- ------- Total Loans ...................................... 21,348 7.34 21,021 7.75 20,704 8.25 ------- ------- ------- Allowance for loan losses ........................ 358 316 307 ------- ------- ------- Net loans(2) ..................................... 20,990 7.87 20,705 8.31 20,397 8.74 ------- ------- ------- Total earning assets ............................. 24,827 7.70 % 25,147 7.98 % 25,015 8.39 % ------- ------- ------- Cash and due from banks .......................... 910 910 952 All other assets ................................. 2,609 2,608 2,579 ------- ------- ------- TOTAL ASSETS ..................................... $27,988 $28,349 $28,239 ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Core deposits Non-interest bearing deposits ............... $ 3,341 $ 3,252 $ 3,213 Interest bearing demand deposits ............ 5,096 2.74 % 4,799 2.87 % 4,597 3.29 % Savings deposits ............................ 3,472 3.00 3,547 3.42 3,505 3.85 Certificates of deposit ..................... 7,202 5.40 7,012 5.74 7,318 6.01 ------- ------- ------- Total core deposits ................... 19,111 3.31 18,610 3.55 18,633 3.89 ------- ------- ------- Other domestic time deposits ..................... 120 4.42 118 5.57 167 6.37 Foreign time deposits ............................ 257 3.39 377 4.11 267 5.45 ------- ------- ------- Total deposits .............................. 19,488 3.32 19,105 3.58 19,067 3.94 ------- ------- ------- Short-term borrowings ............................ 2,157 3.69 2,759 4.37 2,504 5.37 Medium-term notes ................................ 1,990 6.12 2,005 6.59 2,240 6.64 Subordinated notes and other long-term debt, including preferred capital securities ........ 1,167 5.19 1,180 5.96 1,171 6.81 ------- ------- ------- Total interest bearing liabilities .......... 21,461 4.23 % 21,797 4.62 % 21,769 5.12 % ------- ------- ------- All other liabilities ............................ 811 897 869 Shareholders' equity ............................. 2,375 2,403 2,388 ------- ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $27,988 $28,349 $28,239 ======= ======= ======= Net interest rate spread ......................... 3.47 % 3.36 % 3.27 % Impact of non-interest bearing funds on margin ... 0.57 % 0.61 % 0.66 % NET INTEREST MARGIN .............................. 4.04 % 3.97 % 3.93 %
- -------------------------------------------------- (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)
Fully Tax Equivalent Basis(1) 4th Quarter 2000 3rd Quarter 2000 ------------------- ------------------- Average Yield/ Average Yield/ (in millions of dollars) Balance Rate Balance Rate - -------------------------------------------------- ------- ------- ------- ------- ASSETS Interest bearing deposits in banks ............... $ 5 5.50 % $ 5 6.13 % Trading account securities ....................... 17 6.56 11 6.54 Federal funds sold and securities purchased under resale agreements ....................... 85 6.53 136 6.43 Loans held for sale .............................. 129 7.74 99 8.51 Securities:(3) Taxable ..................................... 4,410 6.31 4,273 6.33 Tax exempt .................................. 264 7.53 270 7.57 ------- ------- Total Securities ...................... 4,674 6.38 4,543 6.40 ------- ------- Loans: Commercial .................................. 6,543 8.65 6,454 8.74 Real Estate Construction .......................... 1,306 8.87 1,283 8.88 Commercial ............................ 2,227 8.64 2,193 8.60 Consumer Loans ................................. 6,425 8.90 6,392 8.82 Leases ................................ 3,049 6.92 2,976 6.79 Residential Mortgage .................. 940 7.94 1,325 7.64 ------- ------- Total Consumer ........................ 10,414 8.24 10,693 8.11 ------- ------- Total Loans ...................................... 20,490 8.45 20,623 8.41 ------- ------- Allowance for loan losses ........................ 302 302 ------- ------- Net loans(2) ..................................... 20,188 8.96 20,321 8.90 ------- ------- Total earning assets ............................. 25,400 8.47 % 25,417 8.43 % ------- ------- Cash and due from banks .......................... 960 968 All other assets ................................. 2,597 2,615 ------- ------- TOTAL ASSETS ..................................... $28,655 $28,698 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Core deposits Non-interest bearing deposits ............... $ 3,308 $ 3,425 Interest bearing demand deposits ............ 4,496 3.62 % 4,385 3.47 % Savings deposits ............................ 3,498 4.28 3,528 4.14 Certificates of deposit ..................... 7,522 6.07 7,450 5.94 ------- ------- Total core deposits .................... 18,824 4.96 18,788 4.82 ------- ------- Other domestic time deposits ..................... 365 6.68 433 6.55 Foreign time deposits ............................ 322 6.37 561 6.63 ------- ------- Total deposits .............................. 19,511 5.02 19,782 4.93 ------- ------- Short-term borrowings ............................ 2,133 6.00 2,014 6.12 Medium-term notes ................................ 2,665 6.85 2,592 6.81 Subordinated notes and other long-term debt, including preferred capital securities ........ 1,171 7.42 1,171 7.39 ------- ------- Total interest bearing liabilities .......... 22,172 5.46 % 22,134 5.39 % ------- ------- All other liabilities ............................ 822 787 Shareholders' equity ............................. 2,353 2,352 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $28,655 $28,698 ======= ======= Net interest rate spread ......................... 3.01 % 3.04 % Impact of non-interest bearing funds on margin ... 0.69 % 0.70 % NET INTEREST MARGIN .............................. 3.70 % 3.74 %
29 SELECTED QUARTERLY INCOME STATEMENT DATA
2001 2000 ---------------------------------- --------------------- (in thousands of dollars, except per share amounts) (1) 3Q 2Q 1Q 4Q 3Q - ------------------------------------------------------- -------- -------- -------- -------- -------- TOTAL INTEREST INCOME ................................. $478,834 $498,959 $517,975 $537,661 $535,791 TOTAL INTEREST EXPENSE ................................ 229,047 250,926 274,851 304,595 299,922 -------- -------- -------- -------- -------- NET INTEREST INCOME ................................... 249,787 248,033 243,124 233,066 235,869 Provision for loan losses ............................. 49,559 45,777 33,464 32,548 26,396 -------- -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ........................... 200,228 202,256 209,660 200,518 209,473 -------- -------- -------- -------- -------- Service charges on deposit accounts ................... 41,719 40,673 38,907 39,248 39,722 Brokerage and insurance income ........................ 19,912 19,388 18,768 17,078 15,564 Trust services ........................................ 15,485 15,178 14,314 14,404 13,181 Mortgage banking ...................................... 14,616 18,733 10,031 11,976 9,412 Electronic banking fees ............................... 12,350 12,217 11,098 11,546 11,238 Bank Owned Life Insurance income ...................... 9,560 9,561 9,560 11,086 9,786 Other ................................................. 15,755 14,956 12,968 24,366 11,370 -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS .............................................. 129,397 130,706 115,646 129,704 110,273 Securities gains ...................................... 1,059 2,747 2,078 845 11,379 -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME ............................. 130,456 133,453 117,724 130,549 121,652 -------- -------- -------- -------- -------- Personnel and related costs ........................... 120,767 122,068 117,662 105,810 109,463 Equipment ............................................. 20,151 19,844 19,972 20,811 18,983 Net occupancy ......................................... 19,266 18,188 19,780 18,614 19,520 Outside data processing and other services ............ 17,375 17,671 16,654 16,142 15,531 Amortization of intangible assets ..................... 10,114 10,435 10,576 10,494 10,311 Marketing ............................................. 6,921 7,852 9,939 10,592 8,557 Telecommunications .................................... 6,859 7,207 7,125 6,524 6,480 Legal and other professional services ................. 5,912 6,763 4,969 6,785 4,719 Printing and supplies ................................. 4,450 4,565 5,059 5,212 4,849 Franchise and other taxes ............................. 2,470 2,246 2,120 3,163 2,841 Other ................................................. 14,605 16,457 20,234 19,703 12,331 -------- -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE ............................ 228,890 233,296 234,090 223,850 213,585 -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES ............................ 101,794 102,413 93,294 107,217 117,540 Provision for income taxes ............................ 26,134 27,909 25,428 30,995 34,510 -------- -------- -------- -------- -------- NET INCOME ............................................ $ 75,660 $ 74,504 $ 67,866 $ 76,222 $ 83,030 ======== ======== ======== ======== ======== PER COMMON SHARE(2) Net income Diluted .......................................... $ 0.30 $ 0.30 $ 0.27 $ 0.30 $ 0.33 Diluted - Cash Basis ............................. $ 0.33 $ 0.33 $ 0.30 $ 0.33 $ 0.36 Cash Dividends Declared .............................. $ 0.16 $ 0.20 $ 0.20 $ 0.20 $ 0.20 FULLY TAX EQUIVALENT MARGIN: Net Interest Income ................................... $249,787 $248,033 $243,124 $233,066 $235,869 Tax Equivalent Adjustment(3) .......................... 1,442 1,616 2,002 2,057 2,022 -------- -------- -------- -------- -------- Tax Equivalent Net Interest Income .................... $251,229 $249,649 $245,126 $235,123 $237,891 ======== ======== ======== ======== ========
(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) - --------------------------------------------------------------------------------
2001 2000 ------------------------------------------------- ------------------------------ 3Q 2Q 1Q 4Q 3Q -------------- ------------- ------------ ------------- ------------- High............................... $ 19.280 $ 17.000 $ 18.000 $ 16.375 $ 18.813 Low................................ 15.150 13.875 12.625 12.516 14.375 Close.............................. 17.310 16.375 14.250 16.188 14.688 Cash dividends declared............ $ 0.16 $ 0.20 $ 0.20 $ 0.20 $ 0.20
Note: Stock price quotations were obtained from NASDAQ. KEY RATIOS AND STATISTICS - --------------------------------------------------------------------------------
2001 2000 MARGIN ANALYSIS - AS A % ------------------------------------------------- ------------------------------ OF AVERAGE EARNING ASSETS (2) 3Q 2Q 1Q 4Q 3Q - ------------------------------------- -------------- ------------- ------------ ------------- ------------- Interest Income...................... 7.70% 7.98% 8.39% 8.47% 8.43% Interest Expense..................... 3.66% 4.01% 4.46% 4.77% 4.69% -------------- ------------- ------------ ------------- ------------- Net Interest Margin............. 4.04% 3.97% 3.93% 3.70% 3.74% ============== ============= ============ ============= ============= RETURN ON (3) - -------------------------------------------------------------------------------- Average total assets....................... 1.07% 1.05% 0.97% 1.06% 1.15% Average total assets - cash basis.......... 1.21% 1.19% 1.11% 1.19% 1.29% Average shareholders' equity............... 12.64% 12.43% 11.53% 12.89% 14.04% Average shareholders' equity - cash basis.. 13.93% 13.72% 12.86% 14.20% 15.33% Efficiency Ratio (3)....................... 57.48% 58.59% 61.95% 58.48% 58.38% Effective tax rate (3)..................... 25.67% 27.25% 27.26% 28.91% 29.36%
REGULATORY CAPITAL DATA - --------------------------------------------------------------------------------
2001 2000 ------------------------------------------------- ------------------------------ (in millions of dollars) 3Q 2Q 1Q 4Q 3Q - ------------------------------------------ -------------- ------------- ------------ ------------- ------------- Total Risk-Adjusted Assets................ $ 27,757 $ 27,375 $ 27,230 $ 26,880 $ 26,370 Tier 1 Risk-Based Capital Ratio........... 6.97% 7.01% 7.19% 7.19% 7.20% Total Risk-Based Capital Ratio............ 10.13% 10.20% 10.31% 10.46% 10.64% Tier 1 Leverage Ratio..................... 7.10% 6.96% 7.12% 6.93% 6.80% Tangible Equity/Asset Ratio............... 5.96% 5.97% 6.01% 5.87% 5.73%
(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