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, 2002
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
====== =======
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
====== =======
There were 235,544,525 shares of Registrant's without par value common stock
outstanding on October 31, 2002.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2002 and 2001 and December 31, 2001 3
Consolidated Statements of Income -
For the three and nine months ended September 30, 2002 and 2001 4
Consolidated Statements of Changes in Shareholders' Equity -
For the nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows -
For the nine months ended September 30, 2002 and 2001 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
Item 4. Controls and Procedures 36
PART II. OTHER INFORMATION
Item 2. Changes in securities and use of proceeds 37
Item 6. Exhibits and Reports on Form 8-K 37-38
Signatures 39
Certifications 40-41
2
PART 1. FINANCIAL INFORMATION
Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(in thousands) 2002 2001 2001
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,014,713 $ 1,138,366 $ 1,110,287
Interest bearing deposits in banks 33,700 21,205 4,958
Trading account securities 3,225 13,392 2,292
Federal funds sold and securities
purchased under resale agreements 64,574 83,275 63,311
Loans held for sale 369,724 629,386 294,077
Securities available for sale - at fair value 3,235,546 2,849,579 2,991,167
Investment securities - fair value $9,925; $12,499;
and $14,868, respectively 9,733 12,322 14,629
Total loans 20,455,506 21,601,873 21,583,611
Less allowance for loan losses 408,378 410,572 360,446
- ---------------------------------------------------------------------------------------------------------------------------------
Net loans 20,047,128 21,191,301 21,223,165
- ---------------------------------------------------------------------------------------------------------------------------------
Bank owned life insurance 874,771 843,183 833,623
Premises and equipment 339,984 452,036 447,774
Goodwill and other intangible assets 218,424 716,054 726,094
Customers' acceptance liability 18,340 13,670 16,382
Accrued income and other assets 509,150 536,390 588,416
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 26,739,012 $ 28,500,159 $ 28,316,175
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $ 17,117,811 $ 20,187,304 $ 20,071,388
Short-term borrowings 2,620,022 1,955,926 1,789,043
Bank acceptances outstanding 18,340 13,670 16,382
Medium-term notes 1,737,750 1,795,002 1,995,603
Federal Home Loan Bank Advances 613,000 17,000 17,000
Subordinated notes and other long-term debt 943,168 927,330 882,605
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 1,049,135 887,487 839,748
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 24,399,226 26,083,719 25,911,769
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock - authorized 6,617,808 shares;
none outstanding --- --- ---
Common stock - without par value; authorized
500,000,000 shares; issued 257,866,255 shares;
outstanding 237,544,288; 251,193,814; and
251,193,211 shares, respectively 2,486,345 2,490,724 2,489,564
Less 20,321,967; 6,672,441; and 6,673,044
treasury shares, respectively (391,550) (123,849) (122,485)
Accumulated other comprehensive income 60,556 25,488 38,708
Retained earnings (deficit) 184,435 24,077 (1,381)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,339,786 2,416,440 2,404,406
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 26,739,012 $ 28,500,159 $ 28,316,175
- ---------------------------------------------------------------------------------------------------------------------------------
See notes to unaudited consolidated financial statements.
3
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Interest and fee income
Loans $ 332,595 $ 421,337 $ 1,000,468 $ 1,302,819
Securities 45,800 50,495 135,005 169,763
Other 4,915 7,002 15,219 23,186
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 383,310 478,834 1,150,692 1,495,768
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 95,629 162,982 300,461 518,351
Short-term borrowings 10,014 19,932 30,902 83,134
Medium-term notes 14,855 30,647 46,719 100,250
Federal Home Loan Bank advances 1,176 262 1,644 912
Subordinated notes and other long-term debt 12,220 15,224 36,866 52,177
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 133,894 229,047 416,592 754,824
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 249,416 249,787 734,100 740,944
Provision for loan losses 60,249 49,559 169,922 200,518
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 189,167 200,228 564,178 540,426
- -----------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 37,460 41,719 111,344 121,299
Trust services 14,997 15,485 46,745 44,977
Brokerage and insurance income 13,943 19,912 50,412 58,068
Bank Owned Life Insurance income 11,443 9,560 34,562 28,681
Other service charges and fees 10,837 12,350 31,998 35,665
Mortgage banking 6,289 14,616 36,579 43,380
Other 18,723 15,755 44,693 43,679
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income Before Gain on Sale of
Florida Operations, Merchant Services Gain and
Securities Gains 113,692 129,397 356,333 375,749
Gain on sale of Florida operations -- -- 175,344 --
Merchant Services restructuring gain 24,550 -- 24,550 --
Securities gains 1,140 1,059 2,563 634
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 139,382 130,456 558,790 376,383
- -----------------------------------------------------------------------------------------------------------------------------------
Personnel costs 107,477 120,767 326,908 360,497
Equipment 17,378 20,151 50,986 59,967
Outside data processing and other services 15,128 17,375 50,159 51,700
Net occupancy 14,815 19,266 46,810 57,234
Marketing 7,491 6,921 21,725 24,712
Professional services 6,083 5,912 17,751 17,644
Telecommunications 5,609 6,859 16,947 21,191
Printing and supplies 3,679 4,450 11,199 14,074
Franchise and other taxes 2,283 2,470 6,924 6,836
Amortization of intangible assets 204 10,114 1,815 31,125
Other 13,576 14,605 41,945 51,296
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense Before Special Charges 193,723 228,890 593,169 696,276
Special charges -- 50,817 56,184 84,814
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 193,723 279,707 649,353 781,090
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 134,826 50,977 473,615 135,719
Income taxes 36,703 8,348 195,525 22,847
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 98,123 $ 42,629 $ 278,090 $ 112,872
- -----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income
Basic $ 0.41 $ 0.17 $ 1.13 $ 0.45
Diluted $ 0.41 $ 0.17 $ 1.13 $ 0.45
Cash dividends declared $ 0.16 $ 0.16 $ 0.48 $ 0.56
AVERAGE COMMON SHARES
Basic 239,925 251,148 245,554 251,039
Diluted 241,357 252,203 247,021 251,537
See notes to unaudited consolidated financial statements.
4
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK TREASURY STOCK OTHER
---------------------- ---------------------- COMPREHENSIVE
(in thousands) SHARES AMOUNT SHARES AMOUNT INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2001:
Balance, beginning of period 257,866 $ 2,493,645 (7,007) $ (129,432) $ (24,520)
Comprehensive Income:
Net income
Change in accounting method for derivatives (9,113)
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 67,936
Unrealized gains on derivative instruments
used in cash flow hedging relationships 4,405
Total comprehensive income
Cash dividends declared
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
- ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002:
BALANCE, BEGINNING OF PERIOD 257,866 $ 2,490,724 (6,672) $ (123,849) $ 25,488
Comprehensive Income:
Net income
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 34,166
Unrealized gains on derivative instruments
used in cash flow hedging relationships 902
Total comprehensive income
Stock issued for acquisitions (838) 1,038 19,989
Cash dividends declared
Stock options exercised (3,541) 363 6,585
Treasury shares purchased (15,051) (294,275)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period 257,866 $ 2,486,345 (20,322) $ (391,550) $ 60,556
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RETAINED
EARNINGS
(in thousands) (DEFICIT) TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2001:
Balance, beginning of period $ 26,354 $ 2,366,047
Comprehensive Income:
Net income 112,872 112,872
Change in accounting method for derivatives (9,113)
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 67,936
Unrealized gains on derivative instruments
used in cash flow hedging relationships 4,405
-----------
Total comprehensive income 176,100
-----------
Cash dividends declared (140,607) (140,607)
Stock options exercised 1,661
Treasury shares sold to employee benefit plans 1,205
- ---------------------------------------------------------------------------------------
Balance, end of period $ (1,381) $ 2,404,406
- ---------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002:
BALANCE, BEGINNING OF PERIOD $ 24,077 $ 2,416,440
Comprehensive Income:
Net income 278,090 278,090
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 34,166
Unrealized gains on derivative instruments
used in cash flow hedging relationships 902
-----------
Total comprehensive income 313,158
-----------
Stock issued for acquisitions 19,151
Cash dividends declared (117,732) (117,732)
Stock options exercised 3,044
Treasury shares purchased (294,275)
- ---------------------------------------------------------------------------------------
Balance, end of period $ 184,435 $ 2,339,786
- ---------------------------------------------------------------------------------------
See notes to unaudited consolidated financial statements.
5
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
(in thousands of dollars) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 278,090 $ 112,872
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 169,922 200,518
Provision for depreciation and amortization 41,727 77,335
Deferred income tax expense 269,090 156,668
Decrease in trading account securities 10,167 2,431
Decrease (increase) in loans held for sale 259,662 (138,973)
Gains on sales of securities available for sale (2,563) (634)
Gains on sales/securitizations of loans (6,372) (7,604)
Gain on sale of Florida operations (175,344) --
Restructuring and special charges 56,184 84,814
Other, net (208,887) (264,758)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 691,676 222,669
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in banks (12,495) 12
Proceeds from:
Maturities and calls of investment securities 2,585 1,695
Maturities and calls of securities available for sale 631,982 800,608
Sales of securities available for sale 659,801 1,280,652
Purchases of securities available for sale (1,324,334) (851,581)
Proceeds from sales/securitizations of loans 342,559 401,546
Net loan originations, excluding sales (2,291,869) (1,588,734)
Proceeds from sale of premises and equipment 18,214 2,110
Purchases of premises and equipment (42,553) (43,706)
Proceeds from sales of other real estate 8,924 11,602
Proceeds from restructuring of Huntington Merchant Services, L.L.C. 24,550 --
Cash paid in purchase acquisitions (8,305) --
Net cash paid related to sale of Florida operations (1,289,917) --
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (3,280,858) 14,204
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in total deposits 1,704,526 300,293
Increase (decrease) in short-term borrowings 616,776 (198,716)
Proceeds from issuance of medium-term notes 675,000 440,000
Payment of medium-term notes (735,000) (905,000)
Proceeds from Federal Home Loan Bank advances 600,000 --
Maturity of Federal Home Loan Bank advances (4,000) (8,000)
Dividends paid on common stock (119,243) (150,601)
Repurchases of common stock (294,275) --
Net proceeds from issuance of common stock 3,044 2,866
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 2,446,828 (519,158)
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (142,354) (282,285)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,221,641 1,455,883
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,079,287 $ 1,173,598
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Income taxes paid $ 44,041 $ 25
Interest paid 426,332 797,595
Residential mortgage loans securitized and retained in securities
available for sale 259,042 --
See notes to unaudited consolidated financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements
include the accounts of Huntington Bancshares Incorporated (Huntington) and its
subsidiaries and were prepared in accordance with accounting principles
generally accepted in the United States, and accordingly, reflect all
adjustments consisting of normal recurring accruals, which are, in the opinion
of management, necessary to fairly present Huntington's financial position,
results of operations, and cash flows for the periods presented. As permitted by
the SEC, these unaudited consolidated interim financial statements do not
include certain information and footnotes normally included in annual financial
statements. Accordingly, these unaudited consolidated interim financial
statements should be read in conjunction with Huntington's 2001 Annual Report on
Form 10-K.
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current presentation. These reclassifications had
no effect on net income.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. This Statement rescinds
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This Statement also rescinds Statement No.
44, Accounting for Intangible Assets of Motor Carriers. This Statement amends
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. In addition, Statement No. 145 requires
lease modifications to be accounted for in the same manner as sale-leaseback
transactions.
In September 2002, the FASB issued Statement No. 146, Accounting for
Costs Associated with Exit Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized using fair value when the liability is incurred. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged.
In October 2002, the FASB issued Statement No. 147, Acquisition of
Certain Financial Institutions. This Statement provides guidance on the
accounting for the acquisition of a financial institution, which had previously
been addressed in FASB Statement No. 72, Accounting for Certain Acquisitions of
Banking and Thrift Institutions. The provisions of Statement No. 147 are
effective October 1, 2002. This Statement requires the excess of the fair value
of liabilities assumed over the fair value of the tangible and identifiable
assets in a business combination to be recognized as an unidentifiable
intangible asset in accordance with Statement No. 141 and No. 142. In addition,
any long-term customer-relationship intangible assets, such as
depositor-relationship, borrower-relationship, and credit cardholder intangible
assets, will be required to be tested for impairment in accordance with
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, as amended.
The adoption of Statements No. 145, No. 146, and No. 147 will not have
a material impact on Huntington's results of operations or financial condition.
NOTE 3 - 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
7
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) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 98,123 $ 42,629 $278,090 $112,872
- -------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 239,925 251,148 245,554 251,039
Dilutive effect of stock options 1,432 1,055 1,467 498
- -------------------------------------------------------------------------------------------------------------------
Diluted common shares outstanding 241,357 252,203 247,021 251,537
- -------------------------------------------------------------------------------------------------------------------
Earnings per share
Basic $ 0.41 $ 0.17 $ 1.13 $ 0.45
Diluted $ 0.41 $ 0.17 $ 1.13 $ 0.45
Approximately 6.2 million and 5.8 million stock options were
outstanding at the end of September 2002 and 2001, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
for the period and, therefore, the effect would be antidilutive. The weighted
average exercise price for these options was $23.02 per share and $23.31 at the
end of the same respective periods.
NOTE 4 - INTANGIBLE ASSETS
In September 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 is no longer amortized but is subject to annual impairment
tests in accordance with the Statements. Other intangible assets continue to be
amortized over their useful lives. At September 30, 2002 and 2001, Huntington
had $218.4 million and $726.1 million in goodwill and other intangible assets,
respectively. The following table reflects the activity in goodwill and other
intangible assets for the three and nine months ended September 30:
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Intangible Assets:
Balance, beginning of period $ 210,685 $ 737,437 $ 716,054 $ 755,270
Additions 20,144 665 28,290 3,843
Sale of Florida banking and insurance operations (12,201) -- (517,105) --
Impairment -- (1,894) (7,000) (1,894)
Amortization (204) (10,114) (1,815) (31,125)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 218,424 $ 726,094 $ 218,424 $ 726,094
- -------------------------------------------------------------------------------------------------------------------
The additions totaling $20.1 million for the third quarter of 2002
primarily related to the September acquisition of LeaseNet Group, Inc., a $90
million leasing company. In the third quarter 2002, Huntington completed the
sale of its Florida insurance operations, the J. Rolfe Davis Insurance Agency,
Inc. (JRD), resulting in a $12.2 million write-off of the remaining associated
goodwill. Impairment related to JRD of $7.0 million was recognized in the second
quarter 2002. In the third quarter of 2001, the impairment related to the exit
of an e-commerce business activity.
Huntington applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. In connection with the
adoption of SFAS No. 142, management assessed the fair values of its lines of
business in relation to their carrying value, including goodwill, in each line
of business. Based on this assessment, there was no impairment of goodwill or
other intangible assets. Huntington will continue to test for impairment on an
annual basis as prescribed by SFAS No. 142.
8
Before the sale of Huntington's operations in Florida, a majority of
goodwill and other intangible assets related to those operations. A substantial
portion of the remaining goodwill is attributable to the previously acquired
banking operations reported under the Regional Banking line of business. The
application of the non-amortization provisions of SFAS No. 142 resulted in an
increase in net income per share of $0.01 for the third quarter and $0.04 for
the first nine months of 2002. Had no amortization of goodwill, net of tax, been
recorded in the prior year, net income and diluted earnings per share for the
third quarter of 2001 would have been greater by $7.8 million, or $0.03 per
share, and $23.3 million, or $0.09 per share, for the first nine-months of 2001.
NOTE 5 - RESTRUCTURING OF MERCHANT SERVICES BUSINESS
In August 2002, Huntington restructured its interest in Huntington
Merchant Services, L.L.C. (HMS), Huntington's merchant services business, in a
transaction with First Data Merchant Services Corporation, a subsidiary of First
Data Corp. Under the agreement, Huntington extended its long-term merchant
services relationship with First Data. In addition, as part of the transaction,
First Data obtained all of Huntington's Florida-related merchant business and
increased its equity interest in HMS. This transaction resulted in a $24.5
million pre-tax, non-operating gain ($16.0 million after tax) in the third
quarter of 2002. Huntington remains a nominal equity owner and, going forward,
this transaction is not expected to have a material impact on Huntington's
financial results.
NOTE 6 - RESTRUCTURING AND SPECIAL CHARGES
In July 2001, Huntington announced a strategic refocusing plan (the
"Plan"). The Plan included the sale of Huntington's Florida banking and
insurance operations, the consolidation of numerous non-Florida branch offices,
as well as certain credit and other actions to strengthen Huntington's balance
sheet and financial performance, including the use of excess regulatory capital
generated by the sale to initiate a share repurchase program.
During 2001, Huntington provided $100.0 million of pre-tax expense to
recognize a liability for these actions and provided $71.7 million of additional
allowance for loan losses in connection with the Plan. In addition, special
charges in 2001 included a $5.2 million pre-tax loss associated with the sale of
Pacific Gas & Electric commercial paper that was reflected in non-interest
income in the consolidated statements of income.
In the first quarter of 2002, Huntington provided an additional $56.2
million of pre-tax expense to recognize additional liabilities related to the
completion of the Plan. Huntington has a remaining reserve of $18.8 million at
September 30, 2002. Huntington expects that the remaining reserve will be
adequate to fund the estimated future cash outlays that are expected in the
completion of the exit activities contemplated by the Plan.
NOTE 7 - SALE OF FLORIDA OPERATIONS
On February 15, 2002, Huntington completed the sale of its Florida
operations to SunTrust Banks, Inc. Included in the sale were $4.8 billion of
deposits and other liabilities and $2.8 billion of loans and other assets.
Huntington received a deposit premium of 15%, or $711.9 million. The total net
pre-tax gain from the sale was $175.3 million and was reflected in non-interest
income. The after-tax gain was $56.7 million, or $0.23 per common share. Income
taxes related to this transaction were $118.6 million, an amount higher than the
tax impact at the statutory rate of 35% because most of the goodwill relating to
the Florida operations was non-deductible for tax purposes. Pro forma financial
information reflecting the effect of the sale is presented and described below.
Since the transaction was completed during the first quarter of 2002, no pro
forma balance sheet is presented in this report.
The following unaudited pro forma consolidated income statement is
presented for the nine months ended September 30, 2002, giving effect to the
sale as if it had occurred on January 1, 2002, and does not include the net gain
realized on the sale of Huntington's Florida operations or any related special
charges. These pro forma financial statements do not include any assumptions as
to future share repurchases pursuant to the previously announced share
repurchase program that commenced following the sale.
9
The pro forma consolidated income statement may not be indicative of
the results of operations that would have actually occurred had the transaction
been consummated during the period indicated. This pro forma financial
information is also not intended to be an indication of the results of
operations that may be attained in the future. These pro forma consolidated
financial statements should be read in conjunction with Huntington's historical
financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT WITHOUT FLORIDA OPERATIONS
For the Nine Months Ended September 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
HUNTINGTON
PRO FORMA
WITHOUT
FLORIDA RELATED FLORIDA
(in thousands of dollars) HUNTINGTON OPERATIONS TRANSACTIONS OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 734,100 $ (9,724) $ -- $ 724,376
Provision for loan losses 169,922 (5,186) -- 164,736
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 564,178 (4,538) -- 559,640
- -------------------------------------------------------------------------------------------------------------------------------
Non-interest income 558,790 (13,343) (175,344) 370,103
Non-interest expense 649,353 (20,210) (32,728) 596,415
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 473,615 2,329 (142,616) 333,328
Income taxes 195,525 804 (107,098) 89,231
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 278,090 $ 1,525 $ (35,518) $ 244,097
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE -- DILUTED $ 1.13 $ 0.01 $ (0.14) $ 1.00
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING NET INCOME (1) $ 241,862 $ 1,525 $ 243,387
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING NET INCOME PER COMMON
SHARE -- DILUTED (1) $ 0.98 $ 0.01 $ 0.99
- -------------------------------------------------------------------------------------------------------------------------------
(1) Excludes after-tax Merchant Services restructuring gain, the after-tax
gain on sale of the Florida operations, and restructuring and special
charges.
The column entitled Florida Operations includes all direct revenue and
expenses for Florida from January 1, 2002 through February 15, 2002, the results
of operations for JRD through June 20, 2002, and any indirect revenue and
expenses that ceased with the sale of the Florida operations, including $1.1
million of amortization expense on intangible assets related to Florida. In
addition, net interest income in that column includes: (1) a funding credit of
$5.3 million related to $2.0 billion of funding that Florida provided to
Huntington and (2) $1.9 million of interest that would have been earned on the
$711.9 million deposit premium from January 1, 2002 through February 15, 2002.
Both the funding credit and the assumed interest earned on the deposit premium
are based on the average one-year LIBOR rate of 2.15% for the period. The column
entitled Related Transactions reflects the $175.3 million net gain on the sale
of the Florida operations, $32.7 million of the $56.2 million special charges
recorded in the first quarter of 2002 that related to the sale of the Florida
operations, and the applicable income taxes. After excluding the remaining
restructuring and special charges, net of taxes, and the Merchant Services
restructuring gain, as discussed in Note 5, operating earnings were $243.4
million and earnings per share was $0.99 for the first nine-months of 2002.
10
NOTE 8 - COMPREHENSIVE INCOME
Comprehensive Income includes net income as well as certain items that
are reported directly within a separate component of stockholders' equity that
are not considered part of net income. Currently, Huntington's components of
Other Comprehensive Income are the unrealized gains (losses) on securities
available for sale and unrealized gains (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 of dollars) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting method for
derivatives used in cash flow hedging relationships:
Unrealized net losses $ -- $ -- $ -- $ (14,020)
Related tax benefit -- -- -- 4,907
- -------------------------------------------------------------------------------------------------------------------------------
Net -- -- -- (9,113)
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains on securities available
for sale arising during the period:
Unrealized net gains 39,502 74,971 55,126 105,151
Related tax expense (13,826) (26,240) (19,294) (36,803)
- -------------------------------------------------------------------------------------------------------------------------------
Net 25,676 48,731 35,832 68,348
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) on derivatives used in cash
flow hedging relationships arising during the period:
Unrealized net gains (losses) 10,717 (1,457) 1,388 6,777
Related tax (expense) benefit (3,751) 510 (486) (2,372)
- -------------------------------------------------------------------------------------------------------------------------------
Net 6,966 (947) 902 4,405
- -------------------------------------------------------------------------------------------------------------------------------
Less: Reclassification adjustment for net gains
from sales of securities available for sale realized
during the period:
Realized net gains 1,140 1,059 2,563 634
Related tax expense (399) (371) (897) (222)
- -------------------------------------------------------------------------------------------------------------------------------
Net 741 688 1,666 412
- -------------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income $ 31,901 $ 47,096 $ 35,068 $ 63,228
===============================================================================================================================
Activity in Accumulated Other Comprehensive Income for the nine months
ended September 30, 2002 and 2001 was as follows:
- ---------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAINS
UNREALIZED GAINS (LOSSES) ON DERIVATIVE
(LOSSES) INSTRUMENTS USED IN
ON SECURITIES CASH FLOW HEDGING
(in thousands of dollars) AVAILABLE FOR SALE RELATIONSHIPS
- ---------------------------------------------------------------------------------------------------------------------------
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)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 29,469 (3,981)
Current-period change 34,166 902
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2002 $ 63,635 $ (3,079)
=============================================================================================================================
11
NOTE 9 - SECURITIES AVAILABLE FOR SALE
Securities available for sale at September 30, 2002 and December 31,
2001 were as follows:
- -----------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------
Amortized Amortized
(in thousands of dollars) Cost Fair Value Cost Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury
Under 1 year $ -- $ -- $ 696 $ 711
1-5 years 15,011 15,824 31,399 31,563
6-10 years 4,703 5,407 6,420 6,833
Over 10 years 412 488 413 433
- -----------------------------------------------------------------------------------------------------------------------------
Total 20,126 21,719 38,928 39,540
- -----------------------------------------------------------------------------------------------------------------------------
Federal agencies
Mortgage-backed securities
1-5 years 43,092 44,031 77,975 77,734
6-10 years 164,494 169,647 99,049 100,954
Over 10 years 894,479 924,217 651,187 662,674
- -----------------------------------------------------------------------------------------------------------------------------
Total 1,102,065 1,137,895 828,211 841,362
- -----------------------------------------------------------------------------------------------------------------------------
Other agencies
Under 1 year 25,007 24,930 -- --
1-5 years 814,848 842,966 918,023 940,845
6-10 years 60,564 62,258 77,515 78,925
Over 10 years 543,638 550,882 414,485 421,407
- -----------------------------------------------------------------------------------------------------------------------------
Total 1,444,057 1,481,036 1,410,023 1,441,177
- -----------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and Federal
Agencies 2,566,248 2,640,650 2,277,162 2,322,079
- -----------------------------------------------------------------------------------------------------------------------------
Other
Under 1 year 9,712 9,733 11,315 11,374
1-5 years 33,756 35,318 38,986 40,022
6-10 years 50,871 52,739 35,832 35,823
Over 10 years 289,224 289,354 176,524 174,715
Retained interest in securitizations 144,837 164,269 159,790 159,790
Marketable equity securities 42,741 43,483 104,395 105,776
- -----------------------------------------------------------------------------------------------------------------------------
Total 571,141 594,896 526,842 527,500
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $3,137,389 $3,235,546 $2,804,004 $2,849,579
=============================================================================================================================
NOTE 10 - SEGMENT REPORTING
Huntington has four distinct segments: Regional Banking, Dealer Sales,
and the Private Financial Group (PFG) are Huntington's major business lines. The
fourth 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 below are not necessarily
comparable with similar information published by other financial institutions.
During the first quarter of 2002, the previously reported Retail Banking and
Corporate Banking segments were combined and renamed Regional Banking. Since
this segment is managed through six geographically defined regions where each
region's management has responsibility for both retail and corporate banking
business development, combining these two previous segments better reflects the
management accountability and decision making structure. In addition, changes
were made to the methodologies utilized for certain balance sheet and income
statement allocations performed by Huntington's business profitability reporting
system. The prior quarters have not been restated for these changes.
12
The chief decision-makers for Huntington rely on "operating earnings"
for review of performance and for critical decision making purposes. Operating
earnings exclude the Merchant Services restructuring gain, the gain from the
sale of the Florida operations, the historical Florida operating results, and
restructuring and special charges. See Note 5 to the unaudited consolidated
financial statements for further discussions regarding the restructuring of
Huntington's Merchant Services business, Note 6 related to restructuring and
special charges, and Note 7 for the gain on sale of Huntington's Florida
operations. Net interest income is presented on a fully tax equivalent (FTE)
basis using a 35% tax rate.
The following provides a brief description of the four operating segments of
Huntington:
REGIONAL BANKING: this segment provides products and services to
retail, business banking, and corporate customers. This segment's products
include home equity loans, first mortgage loans, direct installment loans,
business loans, personal and business deposit products, as well as sales of
investment and insurance services. These products and services are offered
through Huntington's traditional banking network; Direct Bank--Huntington's
customer service center; and Web Bank at www.huntington.com. Regional Banking
also represents 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.
DEALER SALES: this segment's product offerings pertain to the
automobile lending sector and include indirect consumer loans and leases, as
well as floor plan financing. The consumer loans and leases comprise the vast
majority of the business and involve the financing of vehicles purchased or
leased by individuals through dealerships.
PRIVATE FINANCIAL GROUP: this segment's array of products and services
are designed to meet the needs of Huntington's higher wealth customers. Revenue
is derived through the sale of personal trust, asset management, investment
advisory, brokerage, insurance, and deposit and loan products and services.
Income and related expenses from the sale of brokerage and insurance products is
shared with the line of business that generated the sale or provided the
customer referral.
TREASURY / OTHER: this segment includes assets, liabilities, equity,
revenue, and expense that are not directly assigned or allocated to one of the
lines of business. Since a match-funded transfer pricing system is used to
allocate interest income and interest expense to other business segments,
Treasury / Other results include the net impact of any over or under allocations
arising from centralized management of interest rate risk including the net
impact of derivatives used to hedge interest rate sensitivity. Furthermore, this
segment's results include the net impact of administering Huntington's
investment securities portfolio as part of overall liquidity management.
Additionally, amortization expense of intangible assets and gains or losses not
allocated to other business segments are also a component.
Listed below is certain reported financial information reconciled to
Huntington's third quarter and nine-month 2002 and 2001 operating results by
line of business.
THREE MONTHS ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS REGIONAL DEALER TREASURY/ HUNTINGTON
(in thousands of dollars) BANKING SALES PFG OTHER CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------
2002
Net interest income (FTE) $146,580 $ 60,918 $ 8,784 $ 34,230 $250,512
Provision for loan losses 31,534 25,860 2,855 -- 60,249
Non-Interest income 76,616 6,822 18,475 12,919 114,832
Non-Interest expense 148,635 19,678 18,849 6,561 193,723
Income taxes/FTE adjustment 15,059 7,771 1,944 4,432 29,206
- ----------------------------------------------------------------------------------------------------------------------------
Operating earnings 27,968 14,431 3,611 36,156 82,166
Merchant Servicies restructuring gain, net of tax -- -- -- 15,957 15,957
Florida operations sold, net of tax -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 27,968 $ 14,431 $ 3,611 $ 52,113 $ 98,123
============================================================================================================================
13
THREE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS REGIONAL DEALER TREASURY/ HUNTINGTON
(in thousands of dollars) BANKING SALES PFG OTHER CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
2001
Net interest income (FTE) $ 155,901 $ 56,245 $ 9,115 $ 10,643 $ 231,904
Provision for loan losses 18,749 26,154 1,124 -- 46,027
Non-Interest income 81,899 6,332 14,600 8,268 111,099
Non-Interest expense 152,837 18,378 13,645 2,194 187,054
Income taxes/FTE adjustment 23,175 6,315 3,132 (3,593) 29,029
- --------------------------------------------------------------------------------------------------------------------------
Operating earnings 43,039 11,730 5,814 20,310 80,893
Florida operations sold, net of tax 10,587 1,592 1,533 (18,945) (5,233)
Restructuring and special charges, net of tax (5,555) -- (2,990) (24,486) (33,031)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 48,071 $ 13,322 $ 4,357 $ (23,121) $ 42,629
==========================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS 3Q AVERAGE ASSETS 3Q AVERAGE DEPOSITS
---------------------------- -------------------------------
(in millions of dollars) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Regional Banking $ 13,055 $ 12,450 $ 15,257 $ 13,974
Dealer Sales 8,423 7,415 52 84
PFG 1,056 768 821 623
Treasury / Other 3,244 4,100 994 240
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 25,778 24,733 17,124 14,921
Florida operations sold -- 3,255 -- 4,567
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 25,778 $ 27,988 $ 17,124 $ 19,488
================================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS REGIONAL DEALER TREASURY/ HUNTINGTON
(in thousands of dollars) BANKING SALES PFG OTHER CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
2002
Net interest income (FTE) $ 438,762 $ 167,508 $ 25,634 $ 95,808 $ 727,712
Provision for loan losses 90,349 69,330 5,057 -- 164,736
Non-Interest income 239,073 15,348 58,311 32,821 345,553
Non-Interest expense 447,251 56,315 56,919 12,474 572,959
Income taxes/FTE adjustment 49,082 20,024 7,678 15,399 92,183
- -----------------------------------------------------------------------------------------------------------------------------------
Operating earnings 91,153 37,187 14,291 100,756 243,387
Florida operations sold, net of tax 2,639 794 927 (5,885) (1,525)
Gain on sale of Florida operations, net of tax -- -- -- 56,790 56,790
Merchant Services restructuring gain, net of tax -- -- -- 15,957 15,957
Restructuring and special charges, net of tax -- -- -- (36,519) (36,519)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 93,792 $ 37,981 $ 15,218 $ 131,099 $ 278,090
===================================================================================================================================
14
NINE MONTHS ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS REGIONAL DEALER TREASURY/ HUNTINGTON
(in thousands of dollars) BANKING SALES PFG OTHER CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------
2001
Net interest income (FTE) $ 485,654 $ 162,700 $ 25,918 $ 9,151 $ 683,423
Provision for loan losses 36,678 80,995 -- -- 117,673
Non-Interest income 234,847 21,469 48,218 18,824 323,358
Non-Interest expense 460,712 50,767 54,954 6,881 573,314
Income taxes/FTE adjustment 78,089 18,342 6,714 (15,301) 87,844
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 145,022 34,065 12,468 36,395 227,950
Florida operations sold, net of tax 36,676 4,781 4,467 (55,844) (9,920)
Restructuring and special charges, net of tax (12,858) (63,920) (2,990) (25,390) (105,158)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 168,840 $ (25,074) $ 13,945 $ (44,839) $ 112,872
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS YTD AVERAGE ASSETS YTD AVERAGE DEPOSITS
------------------------------- --------------------------
(in millions of dollars) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Regional Banking $ 12,831 $ 12,289 $ 14,875 $ 13,699
Dealer Sales 8,040 7,113 53 86
PFG 976 733 767 601
Treasury / Other 3,331 4,878 699 294
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 25,178 25,013 16,394 14,680
Florida operations sold 581 3,163 781 4,526
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 25,759 $ 28,176 $ 17,175 $ 19,206
=============================================================================================================================
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Huntington Bancshares Incorporated (Huntington) is a multi-state
financial holding company headquartered in Columbus, Ohio. Its subsidiaries
engage 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. Its subsidiaries
operate domestically from offices located predominately in Ohio, Michigan, West
Virginia, Indiana, and Kentucky. Huntington has a foreign office in the Cayman
Islands and in Hong Kong.
FORWARD-LOOKING STATEMENTS
This interim report, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements about Huntington. These include descriptions of products or services,
plans, or objectives of management for future operations, and forecasts of
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, including but not
limited to, those set forth under the heading "Business Risks" included in Item
1 of Huntington's 2001 Annual Report and other factors described from time to
time in other filings with the Securities and Exchange Commission, could cause
actual conditions, events, or results to differ significantly from those
described in the forward-looking statements.
Management encourages readers of this interim report on Form 10-Q to
understand forward-looking statements to be strategic objectives rather than
absolute forecasts of future performance. 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 were made or to reflect the occurrence of
unanticipated events.
The following discussion and analysis, the purpose of which is to
provide investors and others with information that management believes to be
necessary for an understanding of Huntington's financial condition, changes in
financial condition, and results of operations should be read in conjunction
with the financial statements, notes, and other information contained in this
document.
SIGNIFICANT ACCOUNTING POLICIES
Note 1 to the consolidated financial statements included in
Huntington's 2001 Annual Report lists significant accounting policies used in
the development and presentation of its financial statements. This discussion
and analysis, the significant accounting policies, and other financial statement
disclosures identify and address key variables and other qualitative and
quantitative factors that are necessary for an understanding and evaluation of
the organization, its financial position, and results of operations.
SPECIAL PURPOSE ENTITIES (SPES)
Huntington utilized two securitization trusts, or SPEs, in 2000 as
funding sources. These two trusts had total assets of $1.1 billion at September
30, 2002. In the securitization transactions, indirect auto loans that
Huntington originated were sold to these trusts in exchange for funding
collateralized by these loans. Under accounting principles generally accepted in
the United States (GAAP), these trusts are not consolidated in Huntington's
financial statements. As such, the loans and the funding obtained are not
included on Huntington's balance sheets.
The Financial Accounting Standards Board (FASB) issued an Exposure
Draft of a proposed Interpretation to ARB No. 51 that establishes accounting
guidance for consolidation of SPEs. The proposed Interpretation, Consolidation
of Certain Special-Purpose Entities, will apply to any business enterprise--both
public and private companies--that has an ownership interest, contractual
relationship, or other business relationship with an SPE. The comment period on
this Exposure Draft concluded August 30, 2002. The objective of this proposed
Interpretation is to improve financial reporting by enterprises involved with
SPEs--not to restrict the use of SPEs. Current accounting standards require an
enterprise to include subsidiaries in which it has a controlling financial
interest in its consolidated financial statements. The FASB expects to issue a
final Interpretation in the fourth quarter of this year. The accounting guidance
would be effective immediately upon issuance of the Interpretation for new SPEs.
Companies such as Huntington with SPEs that existed before the issuance of the
Interpretation would be required to apply the guidance to the existing SPEs at
the beginning of the first fiscal period after March 15, 2003. Because
Huntington is a calendar year-end company, it would
16
need to apply the guidance beginning on April 1, 2003. The Exposure Draft, as
written, could result in the consolidation of the securitization trust assets
and liabilities, results of operations, and cash flows in Huntington's financial
statements.
DERIVATIVES AND OTHER OFF BALANCE SHEET ARRANGEMENTS
Huntington uses a variety of derivatives, principally interest rate
swaps, in its asset and liability management activities to protect against the
risk of adverse interest rate movements on either cash flows or market value of
certain assets and liabilities.
Like other financial organizations, Huntington uses various commitments
in the ordinary course of business that, under GAAP, are not recorded in the
financial statements. Specifically, Huntington makes various commitments to
extend credit to customers and to sell loans, and have obligations under
operating-type noncancelable leases for its facilities. This, along with other
information regarding derivatives, is discussed under the "Interest Rate Risk
Management" section of this report and in the notes to the unaudited
consolidated financial statements.
RELATED PARTY TRANSACTIONS
Various directors and executive officers of Huntington are customers of
its bank subsidiary, The Huntington National Bank (the Bank), and other
subsidiaries, which have conducted transactions with Huntington's directors and
executive officers in the ordinary course of business. Huntington's directors
and executive officers may also be affiliated with entities that are customers
of the Bank and Huntington's other subsidiaries. All transactions with the
affiliates of Huntington's directors and executive officers are conducted in the
ordinary course of business. A summary of the indebtedness of management can be
found in Note 4 to Huntington's 2001 Annual Report. All other related party
transactions, including those reported in Huntington's 2002 Proxy Statement and
transactions subsequent to December 31, 2001, were considered immaterial to its
financial condition, results of operations, and cash flows.
STRATEGIC REFOCUSING AND OTHER RESTRUCTURING
In July 2001, Huntington announced a strategic refocusing plan (the
Plan). Key components of the Plan included the intent to sell the Florida
banking and insurance operations, the consolidation of numerous non-Florida
branch offices, as well as credit-related and other actions to strengthen its
balance sheet and financial performance including the use of some of the excess
capital to repurchase outstanding common shares. These initiatives were designed
to attain more positive revenue and earnings for shareholders and to improve
capital efficiency.
The sale of the Florida banking operations to SunTrust Banks, Inc.,
closed February 15, 2002, and included 143 banking offices and 456 ATMs with
approximately $2.8 billion in loans and other tangible assets, and $4.8 billion
in deposits and other liabilities. The transaction slightly increased
Huntington's sensitivity to rising interest rates. In addition, the net interest
margin, tangible equity to assets, and efficiency ratios were favorably
impacted.
Huntington's Florida insurance operation, the Orlando-based J. Rolfe
Davis Insurance Agency, Inc. (JRD), was sold to members of its management team
on July 2, 2002. Huntington remains committed to growing the insurance business
in markets served by its retail and commercial banking operations. The JRD sale
will not materially affect Huntington's future financial results.
During the first quarter of 2002, $56.2 million of pre-tax
restructuring and special charges ($36.5 million after-tax, or $0.14 per share)
were recorded related to the Plan. Combined with amounts recorded in 2001, these
pre-tax charges totaled $233.1 million ($151.5 million after-tax, or $0.60 per
share). In the first quarter of 2002, a pre-tax gain of $175.3 million ($56.7
million after-tax, or $0.23 per share) on the sale of the Florida operations was
recorded. Further information regarding the financial impact of the Plan can be
found in Notes 6 and 7 to the unaudited consolidated financial statements.
On February 19, 2002, Huntington announced a new share repurchase
program authorizing the repurchase of up to 22 million shares. Repurchased
shares will be reserved for reissue in connection with Huntington's dividend
reinvestment and employee benefit plans, as well as for acquisitions and other
corporate purposes. Through the end of September 2002, 15 million shares of
common stock had been repurchased under this program, including 6.3 million
shares in the third quarter, through open market and privately negotiated
transactions.
In August 2002, Huntington restructured its interest in Huntington
Merchant Services, L.L.C. (HMS), Huntington's merchant services business, in a
transaction with First Data Merchant Services Corporation (First Data), a
subsidiary of First Data Corporation. Under the agreement, Huntington extended
its long-term merchant services relationship with First Data. In addition, as
part of the transaction, First Data obtained all of Huntington's Florida-related
merchant business and increased its equity interest in HMS. This transaction
resulted in a $24.5 million pre-tax, non-operating
17
gain ($16.0 million after tax) in the third quarter of 2002. Huntington remains
a nominal equity owner and, going forward, this transaction is not expected to
have a material impact on Huntington's financial results.
SUMMARY DISCUSSION OF RESULTS
Huntington reported third quarter 2002 net income of $98.1 million, or
$0.41 per common share. This compares with net income of $42.6 million, or $0.17
per common share, in the year-ago third quarter, and $82.2 million, or $0.33 per
common share, in the second quarter of 2002. Year-to-date net income in 2002 was
$278.1 million, or $1.13 per common share, compared with $112.9 million, or
$0.45 per common share, in the nine-month period a year ago.
Third quarter 2002 operating earnings (see Basis of Discussion -
Operating Earnings below) were $82.2 million, or $0.34 per common share, which
excludes the $24.5 million pre-tax ($16.0 million after tax) gain on the
restructuring of Huntington's ownership interest in HMS as mentioned above.
These results were up 1% and 3%, respectively, from second quarter 2002
operating earnings of $81.7 million, or $0.33 per common share, and up 2% and
6%, respectively, compared with operating earnings of $80.9 million, or $0.32
per common share, in the third quarter a year ago. Prior period operating
earnings exclude restructuring and special charges and the impact of the sale of
the Florida banking operations and other non-operating items. Operating earnings
for the first nine months of 2002 were $243.4 million, or $0.99 per common
share, up 7% and 9%, respectively, from the comparable prior-year period
operating earnings of $228.0 million, or $0.91 per common share.
The primary contributing factors to the $1.3 million, or 2%, increase
in operating net income from the year-ago third quarter were higher net interest
income and non-interest income, the benefit of which was partially offset by
higher provision for loan losses and non-interest expense. Net interest income
increased $19.0 million, or 8%, resulting from a 6% increase in average earnings
assets and a 2%, or 9 basis point, increase in the net interest margin to 4.26%
from 4.17%. Non-interest income, excluding securities gains, increased $3.7
million, or 3%, reflecting increases in service charges on deposit accounts,
other service charges and fees, and other income, offset by impairment on
mortgage servicing rights of $6.6 million. The provision for loan losses
increased $14.2 million, or 31% from the year-ago quarter. This increase was due
to $7.6 million in higher net charge-offs supplemented by additional provision
expense related primarily to the growth in loans. Non-interest expense increased
$6.7 million, or 4%, primarily due to higher personnel costs. Income tax expense
increased 2% reflecting the current quarter's higher level of net income.
Return on average equity (ROE) for the third quarter of 2002 was 14.3%,
up from 13.5% in the year-ago quarter. Reflecting the growth in assets, the
return on average total assets (ROA) declined slightly to 1.26% from 1.30%.
Huntington's efficiency ratio (which measures the dollars spent for dollars of
revenue generated) improved to 53.1% from 54.0%.
BASIS OF DISCUSSION - OPERATING EARNINGS
Reported results since the second quarter of 2001 have been
significantly impacted by a number of non-operating items, primarily related to
the strategic restructuring announced in July 2001 and the subsequent sale of
the Florida banking operations in the first quarter of 2002. Therefore, to
better understand comparable underlying trends and for decision-making purposes,
management reviews and analyzes financial results on an operating basis, which
leads to a better understanding of underlying trends absent the impact of
revenue and costs of such non-operating items. As such, the Results of
Operations discussion that follows is presented on an operating basis unless
otherwise indicated. In addition to excluding the third quarter 2002 gain from
the restructuring of Huntington's ownership interest in HMS, operating earnings
in prior periods exclude the impact of restructuring and special charges, the
gain from the sale of Florida banking operations and its related run-rate impact
from prior periods, the related run-rate impact from the sale of Florida
insurance operations, and other non-operating items.
The table on the following page entitled Reconciliation of Reported
Earnings to Operating Earnings reconciles reported results with operating
results for the third quarter and first nine months of 2002 and 2001. The table
on page 20 entitled Selected Quarterly Income Statement Data, excluding Florida
Operations shows operating results beginning with the first quarter of 2001
through the current quarter. The Reconciliation of Reported Earnings to
Operating Earnings table reflects total pre-tax restructuring and special
charges for 2002 of $56.2 million. This presentation differs from the table
presented in Note 7 to the unaudited consolidated financial statements because
the table in Note 7 reflects only the pre-tax restructuring and special charges
for 2002 related to the Florida operations of $32.7 million. Because the table
in Note 7 was intended only to show the pro forma impact without the Florida
operations, non-Florida related restructuring and special charges of $23.5
million remain included in the "Huntington Pro Forma Without Florida Operations"
column of that table.
18
RESULTS OF OPERATIONS
The Results of Operations discussion that follows is on an operating
basis, except as otherwise stated. This is the same basis which management
reviews and analyzes results to better understand underlying trends absent
non-recurring revenue and cost items. (See Basis of Discussion - Operating
Earnings above for an expanded discussion of operating results and
reconciliation to reported results.)
- -----------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF REPORTED EARNINGS TO OPERATING EARNINGS
- -----------------------------------------------------------------------------------------------------------------------------------
GAIN ON SALE OF
FLORIDA OPERATIONS/
RESTRUCTURING
REPORTED AND OTHER FLORIDA OPERATING
(in thousands, except per share amounts) EARNINGS ITEMS OPERATIONS EARNINGS
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002:
Net interest income $249,416 $249,416
Provision for loan losses 60,249 60,249
Securities gains 1,140 1,140
Non-interest income 138,242 $ 24,550 $ --- 113,692
Non-interest expense 193,723 --- --- 193,723
- -----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 134,826 24,550 --- 110,276
Income taxes 36,703 8,593 --- 28,110
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 98,123 $ 15,957 $ --- $ 82,166
===================================================================================================================================
Net income per common share -- diluted $ 0.41 $ 0.07 $ --- $ 0.34
===================================================================================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002:
Net interest income $734,100 $ 9,724 $724,376
Provision for loan losses 169,922 5,186 164,736
Securities gains 2,563 --- 2,563
Non-interest income 556,227 $ 199,894 13,343 342,990
Non-interest expense 649,353 56,184 20,210 572,959
- -----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 473,615 143,710 (2,329) 332,234
Income taxes 195,525 107,482 (804) 88,847
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $278,090 $ 36,228 $ (1,525) $243,387
===================================================================================================================================
Net income per common share -- diluted $ 1.13 $ 0.15 $ (0.01) $ 0.99
===================================================================================================================================
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001:
Net interest income $249,787 $ 19,325 $230,462
Provision for loan losses 49,559 $ --- 3,532 46,027
Securities gains 1,059 --- --- 1,059
Non-interest income 129,397 --- 19,357 110,040
Non-interest expense 279,707 50,817 41,836 187,054
- -----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 50,977 (50,817) (6,686) 108,480
Income taxes 8,348 (17,786) (1,453) 27,587
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 42,629 $ (33,031) $ (5,233) $ 80,893
===================================================================================================================================
Net income per common share -- diluted $ 0.17 $ (0.13) $ (0.02) $ 0.32
===================================================================================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001:
Net interest income $740,944 $ 62,581 $678,363
Provision for loan losses 200,518 $ 71,718 11,127 117,673
Securities gains 634 (5,250) --- 5,884
Non-interest income 375,749 --- 58,275 317,474
Non-interest expense 781,090 84,814 122,962 573,314
- -----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 135,719 (161,782) (13,233) 310,734
Income taxes 22,847 (56,624) (3,313) 82,784
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $112,872 $(105,158) $ (9,920) $227,950
===================================================================================================================================
Net income per common share -- diluted $ 0.45 $ (0.42) $ (0.04) $ 0.91
===================================================================================================================================
19
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED QUARTERLY INCOME STATEMENT DATA, EXCLUDING FLORIDA OPERATIONS (1)
2002 2001
- ------------------------------------------------------------------------------- -----------------------------------------------
(in thousands, except per share amounts) THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $249,416 $241,859 $233,101 $235,546 $230,462 $225,883 $222,018
Provision for loan losses 60,249 53,892 50,595 54,281 46,027 41,937 29,709
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 189,167 187,967 182,506 181,265 184,435 183,946 192,309
- -----------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 37,460 35,354 34,282 35,220 33,593 32,650 31,143
Trust services 14,997 16,247 15,096 14,679 14,816 14,431 13,670
Brokerage and insurance income 13,943 14,967 14,587 15,066 13,943 13,185 12,232
Bank Owned Life Insurance income 11,443 11,443 11,676 9,560 9,560 9,561 9,560
Other service charges and fees 10,837 10,529 9,118 9,582 9,547 9,383 8,415
Mortgage banking 6,289 10,725 19,644 15,049 13,859 17,672 9,238
Other 18,723 15,039 10,591 15,135 14,722 13,979 12,315
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME BEFORE
SECURITIES GAINS 113,692 114,304 114,994 114,291 110,040 110,861 96,573
Securities gains 1,140 966 457 89 1,059 2,747 2,078
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 114,832 115,270 115,451 114,380 111,099 113,608 98,651
- -----------------------------------------------------------------------------------------------------------------------------------
Personnel costs 107,477 103,589 104,320 100,076 101,866 103,707 99,296
Equipment 17,378 16,608 15,582 18,117 17,580 17,363 17,503
Outside data processing and other services 15,128 16,592 17,097 15,414 14,650 15,100 14,122
Net occupancy 14,815 14,642 14,771 15,251 14,481 13,755 15,568
Marketing 7,491 7,219 7,174 5,305 5,717 6,807 8,832
Professional services 6,083 6,265 5,242 6,069 5,754 6,481 4,793
Telecommunications 5,609 5,302 5,282 5,647 5,728 5,964 5,952
Printing and supplies 3,679 3,671 3,519 3,511 3,693 3,688 4,098
Franchise and other taxes 2,283 2,313 2,326 2,885 2,439 2,229 2,116
Amortization of intangible assets 204 203 251 2,555 2,569 2,890 3,031
Other 13,576 13,781 13,487 12,599 12,577 14,459 18,506
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 193,723 190,185 189,051 187,429 187,054 192,443 193,817
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 110,276 113,052 108,906 108,216 108,480 105,111 97,143
Income taxes 28,110 31,344 29,393 28,631 27,587 29,509 25,688
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 82,166 $ 81,708 $ 79,513 $ 79,585 $ 80,893 $ 75,602 $ 71,455
===================================================================================================================================
NET INCOME PER COMMON SHARE - DILUTED $ 0.34 $ 0.33 $ 0.32 $ 0.32 $ 0.32 $ 0.30 $ 0.28
RETURN ON
Average total assets 1.26% 1.31% 1.30% 1.28% 1.30% 1.07% 1.15%
Average total shareholders' equity 14.3% 14.0% 13.6% 13.4% 13.5% 12.6% 12.1%
Net interest margin (2) 4.26% 4.30% 4.21% 4.26% 4.17% 4.03% 3.99%
Efficiency ratio 53.1% 53.2% 54.1% 52.7% 54.0% 56.0% 59.5%
Effective tax rate 25.5% 27.7% 27.0% 26.5% 25.4% 28.1% 26.4%
REVENUE - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $249,416 $241,859 $233,101 $235,546 $230,462 $225,883 $222,018
Tax Equivalent Adjustment (2) 1,096 1,071 1,169 1,292 1,442 1,616 2,002
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 250,512 242,930 234,270 236,838 231,904 227,499 224,020
Non-Interest Income 114,832 115,270 115,451 114,380 111,099 113,608 98,651
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE $365,344 $358,200 $349,721 $351,218 $343,003 $341,107 $322,671
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE EXCLUDING SECURITIES GAINS $364,204 $357,234 $349,264 $351,129 $341,944 $338,360 $320,593
===================================================================================================================================
(1) Income component excludes after-tax Merchant Services gain of $16.0
million, the impact of the $56.7 million gain on sale of Florida operations
in 1Q '02 and restructuring and special charges ($36.5 million in 1Q '02;
$9.8 million in 4Q '01; $33.0 million in 3Q '01; $72.1 million in 2Q '01).
(2) Calculated assuming a 35% tax rate.
20
NET INTEREST INCOME
Net interest income was $249.4 million in the third quarter of 2002, up
$19.0 million, or 8%, from the year-ago quarter reflecting growth in average
earning assets, primarily loans, and the benefit of a higher net interest
margin. Earning assets were $1.2 billion, or 6%, higher than in the same quarter
a year ago. Average loans increased 7% after normalizing for residential real
estate loan securitizations and the impact of Florida banking operations sold in
the first quarter of 2002. Also contributing to the growth in net interest
income was a 2%, or a 9 basis point, increase in the net interest margin to
4.26% from 4.17%. The increase in the net interest margin resulted from a
substantial reduction in short-term interest rates that lowered Huntington's
cost of funds in addition to the maturity in late 2001 of certain interest rate
swaps that had negative spreads. Average core deposits were up 12% from the
year-ago quarter, reflecting a 43% increase in money market and other
interest-bearing deposits and a 4% increase in demand deposits. Growth in core
deposits has been influenced, in part, by turbulence in the financial markets,
but also by the success of deposit growth programs. (See page 22 for the net
interest margin detail and average balance sheets.)
Net interest income for the 2002 third quarter increased $7.6 million,
or 3%, from the immediately preceding quarter. This resulted from a $797
million, or 4%, increase in average earning assets from growth in both loans and
securities, offset by a 4 basis point decrease in the net interest margin to
4.26% from 4.30%. This decrease was driven by a flattening of the yield curve,
lower yields on higher quality auto loan and leases originations, a growing
residential mortgage portfolio with inherently lower spreads, prepayments of
higher yielding mortgage loans, and the increasingly limited ability to lower
deposit rates from already low historical absolute levels.
Average loans for the recent three months increased 12% on an
annualized basis from the second quarter of 2002. This growth rate is normalized
for acquisitions, loan sales, and loan securitizations. During the third quarter
of 2002, Huntington securitized $91 million of residential mortgage loans and
retained these securities in its securities available for sale portfolio. Strong
consumer loan generation continued to positively affect overall loan growth.
Average residential mortgages grew $81 million, or 81% annualized, with average
home equity loans and lines of credit up $151 million, or 18% annualized. This
reflected continued strong demand for residential mortgages, refinancing
activity, and the promotion of adjustable mortgage products by Huntington. In
addition, average auto loans and leases increased 18% annualized, reflecting a
new record level of quarterly production for the Dealer Sales line of business.
Commercial real estate loans increased $93 million, or 10% annualized. These
increases were partially offset by a decline in commercial loans of $112
million, or 8% annualized. Compared with the quarter a year ago, average loans
were up 8%. Average core deposits for the third quarter of 2002 increased $381
million, or 10% annualized, from the second quarter, reflecting strong inflows
in both interest bearing and non-interest bearing demand deposits. Within
interest bearing deposits, money market accounts showed the strongest growth due
to deposit growth programs and a liquidity preference for deposits by customers
in response to a volatile equity market. Compared with the year-ago quarter,
average core deposits were up 12%. Average rates paid on interest-bearing
deposits declined 100 basis points to 2.22% from 3.22% in the third quarter of
2001 and declined 9 basis points from the 2002 second quarter.
For the first nine months of 2002, net interest income was $724.4
million, up $46.0 million, or 7%, from the comparable period last year. This
reflected a 20 basis point increase in the net interest margin to 4.26% from
4.06%, as average earning assets for the first nine months of 2002 were
essentially unchanged from the first nine months a year ago. Comparisons of
average earning assets, loans, investment securities, and deposits for the first
nine months of 2002 versus the comparable year-ago period reflect the same
factors that affected third quarter comparisons.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the expense necessary to maintain the
allowance for loan losses (ALL) at a level adequate to absorb management's
estimate of inherent losses in the total loan portfolio. Taken into
consideration by management are such factors as current period net charge-offs,
which are charged against the ALL, current period loan growth and any related
estimate of likely losses associated with that growth based on historical
experience, the current economic outlook and any anticipated impact on credit
quality of existing loans, and other factors. The provision expense in the third
quarter of 2002 was $60.2 million, up $14.2 million, or 31%, from the year-ago
quarter. This increase was the result of higher levels of net charge-offs and
loan growth. The September 30, 2002, ALL as a percent of period-end loans was
2.00%, significantly higher than 1.77% at the end of the third quarter last
year. The allowance for loan losses as a percent of non-performing assets (NPAs)
increased in the third quarter 2002 to 191% from 176% in the second quarter 2002
and 166% from the third quarter 2001. (See Credit Risk section for discussion of
the ALL, Net charge-offs, and NPAs.)
Provision expense in the third quarter was up $6.4 million, or 12%,
from the second quarter of 2002 and exceeded net charge-offs by $16.5 million.
Net charge-offs were $43.7 million in the recent three months compared with
$44.9 million for the immediately preceding quarter. For the first nine months,
the provision for loan losses was $164.7 million for 2002, up $47.1 million, or
40%, from $117.7 million in 2001, reflecting the same factors that affected
third quarter comparisons.
21
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED QUARTERLY NET INTEREST MARGIN DETAIL AND AVERAGE BALANCES
(in millions)
AVERAGE BALANCES AVERAGE RATES (3)
------------------------------------------ --------------------------------------
2002 2001 2002 2001
- ---------------------------------------------- ------------------------ ---------------- ------------------- -----------------
Fully Tax Equivalent Basis (1) THIRD SECOND FIRST FOURTH THIRD THIRD SECOND FIRST FOURTH THIRD
- ------------------------------------------------------------------------------------------ --------------------------------------
ASSETS
Interest bearing deposits in banks $ 35 $ 29 $ 34 $ 14 $ 5 2.06% 2.44% 2.02% 2.09% 3.75%
Trading account securities 7 6 5 8 8 4.95 5.37 2.79 3.59 3.83
Federal funds sold and securities purchased
under resale agreements 76 68 62 86 86 1.40 1.51 1.43 2.18 3.20
Mortgages held for sale 267 174 381 433 344 6.57 7.07 6.51 6.64 7.18
Securities:
Taxable 2,953 2,735 2,713 2,720 2,896 6.01 6.33 6.43 6.62 6.71
Tax exempt 108 96 102 108 140 7.52 7.69 7.76 7.81 7.38
- ------------------------------------------------------------------------------------------ --------------------------------------
Total Securities 3,061 2,831 2,815 2,828 3,036 6.07 6.37 6.48 6.66 6.75
- ------------------------------------------------------------------------------------------ --------------------------------------
Loans:
Commercial 5,502 5,614 5,661 5,751 5,946 5.46 5.50 5.37 5.81 6.93
Real Estate
Construction 1,430 1,420 1,405 1,386 1,281 4.62 4.81 4.91 5.49 6.60
Commercial 2,316 2,233 2,196 2,081 2,034 6.16 6.36 6.66 6.88 7.58
Consumer
Auto leases - Indirect 3,172 3,113 3,166 3,229 3,243 6.23 6.42 6.62 6.58 6.67
Auto loans - Indirect 2,793 2,597 2,560 2,489 2,445 7.75 7.98 7.98 8.29 8.61
Home equity 3,062 2,911 2,788 2,753 2,709 5.62 5.72 6.09 7.05 7.73
Residential mortgage 1,310 1,229 904 672 619 5.98 6.23 6.60 7.10 7.55
Other loans 404 413 424 446 459 7.41 7.47 7.64 8.26 8.04
- ------------------------------------------------------------------------------------------ --------------------------------------
Total Consumer 10,741 10,263 9,842 9,589 9,475 6.47 6.64 6.86 7.27 7.59
- ------------------------------------------------------------------------------------------ --------------------------------------
Total Loans 19,989 19,530 19,104 18,807 18,736 6.02 6.15 6.25 6.65 7.32
- ------------------------------------------------------------------------------------------ --------------------------------------
Allowance for loan losses / fees (2) 406 400 403 371 315 0.61 0.55 0.49 0.53 0.56
- ------------------------------------------------------------------------------------------ --------------------------------------
Net loans 19,583 19,130 18,701 18,436 18,421 6.63 6.70 6.74 7.18 7.88
- ------------------------------------------------------------------------------------------ --------------------------------------
Total earning assets 23,435 22,638 22,401 22,176 22,215 6.52% 6.64% 6.68% 7.08% 7.69%
- ------------------------------------------------------------------------------------------ --------------------------------------
Cash and due from banks 763 722 774 798 831
Intangible assets 202 213 210 211 215
All other assets 1,784 1,784 1,798 1,799 1,787
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $25,778 $24,957 $24,780 $24,613 $24,733
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 2,868 $ 2,739 $ 2,738 $ 2,824 $ 2,761
Interest bearing demand deposits 5,269 4,920 4,362 4,014 3,687 1.77% 1.84% 1.79% 1.93% 2.73%
Savings deposits 2,766 2,808 2,830 2,863 2,923 1.81 1.83 1.85 2.08 3.04
Other domestic time deposits 4,167 4,218 4,097 4,123 4,127 4.40 4.61 4.99 5.18 5.52
- ------------------------------------------------------------------------------------------ --------------------------------------
Total core deposits 15,070 14,685 14,027 13,824 13,498 2.17 2.29 2.39 2.54 3.09
- ------------------------------------------------------------------------------------------ --------------------------------------
Domestic time deposits of $100,000 or more 777 852 959 1,008 1,053 3.29 2.82 2.91 4.66 4.70
Brokered time deposits and negotiable CDs 907 649 302 109 120 2.37 2.48 2.48 3.55 4.42
Foreign time deposits 370 296 268 224 250 1.43 1.38 1.92 1.99 3.40
- ------------------------------------------------------------------------------------------ --------------------------------------
Total deposits 17,124 16,482 15,556 15,165 14,921 2.22 2.31 2.41 2.68 3.22
- ------------------------------------------------------------------------------------------ --------------------------------------
Short-term borrowings 2,108 1,886 1,925 1,745 1,998 1.88 1.97 2.39 2.73 3.75
Medium-term notes 1,752 1,910 2,645 3,272 3,443 3.37 3.21 3.00 3.45 4.82
Federal Home Loan Bank advances 228 14 17 17 17 2.04 5.97 6.10 6.10 6.10
Subordinated notes and other long-term debt,
including preferred capital securities 1,215 1,215 1,215 1,166 1,167 3.99 4.03 4.12 4.94 5.17
- ------------------------------------------------------------------------------------------ --------------------------------------
Total interest bearing liabilities 19,559 18,768 18,620 18,541 18,785 2.73% 2.82% 2.96% 3.37% 4.17%
- ------------------------------------------------------------------------------------------ --------------------------------------
All other liabilities 1,073 1,107 1,052 887 812
Shareholders' equity 2,278 2,343 2,370 2,361 2,375
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $25,778 $24,957 $24,780 $24,613 $24,733
==========================================================================================
Net interest rate spread 3.79% 3.82% 3.72% 3.71% 3.52%
Impact of non-interest bearing funds on margin 0.47 0.48 0.49 0.55 0.65
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.26% 4.30% 4.21% 4.26% 4.17%
==================================================================================================================================
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate.
(2) Total loans with fees rate includes loan fees, whereas individual loan
components above are shown exclusive of fees.
(3) Loan and deposit average rates include impact of applicable derivatives.
22
NON-INTEREST INCOME BEFORE SECURITIES GAINS
Non-interest income, before securities gains, for the third quarter of
2002 was $113.7 million, up $3.7 million, or 3%, from the year-ago quarter
despite a $7.6 million, or 55%, decline in mortgage banking income. This
reduction in mortgage banking income reflected a $6.6 million impairment of
mortgage servicing rights in the third quarter of 2002 and, to a lesser extent,
a decision by management to retain a higher percentage of originated residential
mortgage loans in the portfolio rather then sell the loans in the secondary
market. Excluding mortgage banking income, third quarter 2002 non-interest
income was up $11.2 million, or 12%, from the same period last year. The
following table reflects non-interest income detail for the three and nine
months ended September 30, 2002 and 2001:
- -------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
- -------------------------------------------------------------------------------------------------
(in thousands of dollars) THREE MONTHS ENDED SEPTEMBER 30,
- -------------------------------------------------------------------------------------------------
2002 2001 % CHANGE
- -------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 37,460 $ 33,593 11.5%
Trust services 14,997 14,816 1.2
Brokerage and insurance income 13,943 13,943 ---
Bank Owned Life Insurance income 11,443 9,560 19.7
Other service charges and fees 10,837 9,547 13.5
Mortgage banking 6,289 13,859 (54.6)
Other 18,723 14,722 27.2
- -------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS 113,692 110,040 3.3
Securities gains 1,140 1,059 7.7
- -------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME $ 114,832 $ 111,099 3.4%
==================================================================================================
NINE MONTHS ENDED SEPTEMBER 30,
- -------------------------------------------------------------------------------------------------
2002 2001 % CHANGE
- -------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 107,096 $ 97,386 10.0%
Trust services 46,340 42,917 8.0
Brokerage and insurance income 43,497 39,360 10.5
Bank Owned Life Insurance income 34,562 28,681 20.5
Other service charges and fees 30,484 27,345 11.5
Mortgage banking 36,658 40,769 (10.1)
Other 44,353 41,016 8.1
- -------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS 342,990 317,474 8.0
Securities gains 2,563 5,884 (56.4)
- -------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME $ 345,553 $ 323,358 6.9%
=================================================================================================
Most of the remaining non-interest income categories experienced growth
from the year-ago quarter. This included a $3.9 million, or 12%, increase in
deposit service charges driven primarily by growth in deposits, improvements in
pricing structure, and higher corporate maintenance fees due to lower credit
given for compensating balances. Trust services income was up slightly
reflecting the positive impact of the acquisition of Haberer Registered
Investment Advisors, Inc. (Haberer) in the second quarter of this year, offset
partially by a decline in investment banking fees. Brokerage and insurance
income was unchanged from the same quarter a year ago. Though retail investment
sales in the third quarter of 2002 were up 36% from the same period last year,
this $2.7 million benefit was offset by a $2.4 million decline in investment
banking fees due to the weaker equity markets, as well as lower insurance fees.
Other service charges and fees increased $1.3 million, or 14%, reflecting
increased debit card transaction and ATM usage fees. Other non-interest income
increased $4.0 million, or 27%, resulting from a combination of higher auto
lease early termination fees, securitization income, trading profits, and
letter-of-credit, collection and exchange fees.
Non-interest income, excluding securities gains, was down $0.6 million,
or 1%, from the second quarter of 2002. This reflected a $4.4 million decline in
mortgage banking income as a result of the aforementioned impairment related to
mortgage servicing rights. Excluding mortgage banking, non-interest income was
up $3.8 million, or 4%, from the second quarter of 2002 driven primarily by a
$2.1 million, or 6%, increase in deposit service charges due primarily to
improvements in rate structures. Trust services income was down $1.3 million, or
8%, while brokerage and insurance income was down $1.0 million, or 7%. Both
declines were driven by weak equity market conditions. Other non-interest
23
income was up $3.7 million from the second quarter of 2002 reflecting an
increase in income from trading activities and customer derivative sales.
For the first nine months of 2002, non-interest income before
securities gains was up $25.5 million, or 8% from the comparable year-ago
period, reflecting the same factors that affected third quarter comparisons.
Excluding mortgage banking income, non-interest income increased $29.6 million,
or 11%.
SECURITIES GAINS
Securities gains in the third quarter of 2002 were $1.1 million,
comparable with the year-ago quarter and up slightly from the second quarter of
2002. For the first nine months of 2002, securities gains were $2.6 million,
down from $5.9 million in the same period last year.
NON-INTEREST EXPENSE
Non-interest expense in the third quarter of 2002 was up $6.7 million,
or 4%, from the year-ago quarter. This included a $2.4 million decline in
amortization of intangible assets from implementing SFAS No. 142, described more
fully in Note 4 to the unaudited consolidated financial statements. The
following table reflects non-interest expense detail for the three and nine
months ended September 30, 2002 and 2001:
- -----------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
- -----------------------------------------------------------------------------------------------------
(in thousands of dollars) THREE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------
2002 2001 % CHANGE
- ----------------------------------------------------------------------------------------------------
Personnel costs $ 107,477 $ 101,866 5.5%
Equipment 17,378 17,580 (1.1)
Outside data processing and other services 15,128 14,650 3.3
Net occupancy 14,815 14,481 2.3
Marketing 7,491 5,717 31.0
Professional services 6,083 5,754 5.7
Telecommunications 5,609 5,728 (2.1)
Printing and supplies 3,679 3,693 (0.4)
Franchise and other taxes 2,283 2,439 (6.4)
Amortization of intangible assets 204 2,569 (92.1)
Other 13,576 12,577 7.9
- ----------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $ 193,723 $ 187,054 3.6%
====================================================================================================
- ----------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------
2002 2001 % CHANGE
- ----------------------------------------------------------------------------------------------------
Personnel costs $ 315,386 $ 304,869 3.4 %
Equipment 49,568 52,446 (5.5)
Outside data processing and other services 48,817 43,872 11.3
Net occupancy 44,228 43,804 1.0
Marketing 21,884 21,356 2.5
Professional services 17,590 17,028 3.3
Telecommunications 16,193 17,644 (8.2)
Printing and supplies 10,869 11,479 (5.3)
Franchise and other taxes 6,922 6,784 2.0
Amortization of intangible assets 658 8,490 (92.2)
Other 40,844 45,542 (10.3)
- ----------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $ 572,959 $ 573,314 (0.1)%
====================================================================================================
Personnel costs for the third quarter of 2002 were up $5.6 million, or
6%, over the same three months last year. This reflected higher staffing in the
Regional Banking line of business, particularly in the mortgage origination and
credit workout areas. The increase was also due to higher production-related
compensation supporting the levels of auto loan and lease production in the
third quarter of 2002.
The following table reflects the number of full-time equivalent staff
at the end of each period shown. Approximately 1,200 full-time equivalent staff
were associated with the Florida banking operations sold in the first quarter of
2002. The 225 full-time equivalent decrease in staff from March 31, 2002, to
September 30, 2002, reflected planned staff reductions, primarily
Florida-related operations support staff located outside the state of Florida
that were not part of the banking operations sold.
24
- ---------------------------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------- --------------------
THIRD SECOND FIRST FOURTH THIRD
- ---------------------------------------------------------------------------------------------------------------------
Number of employees (full-time equivalent)
Total Huntington 8,117 8,174 8,342 9,743 9,719
Florida operations sold --- --- --- 1,222 1,232
- ---------------------------------------------------------------------------------------------------------------------
Huntington, excluding Florida operations sold 8,117 8,174 8,342 8,521 8,487
=====================================================================================================================
Outside data processing and other services expense increased 3% from
the prior year quarter, reflecting higher processing expenses related to
Huntington's loan and deposit products. On a combined basis, occupancy and
equipment costs were up slightly from the quarter a year ago. This reflected
higher depreciation associated with new customer-delivery investments including
a new on-line banking platform launched in the first quarter of this year, costs
associated with the implementation of a new Customer Service System to assist
personal bankers in branches in providing quicker and more comprehensive
customer service, as well as enhanced product sales capabilities, and mainframe
infrastructure upgrades. This higher depreciation for technology investments was
partially offset by lower depreciation and building maintenance costs primarily
related to planned branch consolidations. Marketing expense was up $1.8 million,
or 31%, reflecting implementation of new company-wide marketing campaigns.
Non-interest expense for the third quarter of 2002 was up a $3.5
million, or 2%, from the second quarter of this year driven by a $3.9 million
increase in personnel costs, primarily related to building the Regional Banking
line of business and increases related to higher production levels in Dealer
Sales. Equipment and occupancy costs were up a combined $0.9 million. These
increases were partially offset by a $1.5 million decrease in outside data
processing and other services.
For the first nine months of 2002, non-interest expense was down
slightly over the same period last year. Increases in personnel costs and
outside data processing and other services were more than offset by declines in
the amortization of intangible assets and other non-interest expense. The prior
year's other non-interest expense for nine months included a $4.2 million loss
on $15 million of Pacific Gas & Electric commercial paper investment.
The efficiency ratio, which expresses non-interest expenses (excluding
amortization of intangible assets) as a percentage of revenues on a
tax-equivalent basis (before gains on securities transactions), improved to
53.1% in the third quarter of 2002 from 54.0% in the year-ago quarter. The
combination of the 7% increase in tax-equivalent revenues compared with the
lesser 4% increase in non-interest expenses positively affected the efficiency
ratio. The efficiency ratio was 53.2% in the second quarter of 2002.
INCOME TAXES
The provision for income taxes in the third quarter of 2002 was $36.7
million on reported income before taxes and represented an effective tax rate of
27.2%. This compares to income taxes in the year-ago quarter of $8.3 million, or
16.4% of reported income before taxes.
Huntington's income taxes on pre-tax operating earnings in the third
quarter 2002 was $28.1 million, or 25.5%, essentially unchanged from $27.6
million, or 25.4%, in the same quarter last year, but down from $31.3 million,
or 27.7%, in the second quarter of 2002. Each quarter, estimates of taxes for
the full year are updated and adjustments to the year-to-date tax accruals are
made. Such adjustments can result in fluctuations of quarterly effective tax
rates. For the first nine months of 2002, the effective tax rate was 26.7%,
essentially unchanged from 26.6% for the comparable 2001 period.
CREDIT RISK
Credit risk exposure is managed through the use of consistent
underwriting standards, policies that limit exposure to higher risk credits
(e.g. highly leveraged transactions), and a strategy of diversification of
exposure by industry sector or other concentrations. The credit administration
function employs extensive credit risk management techniques, including
forecasting, to ensure loans adhere to corporate policy and problem loans are
promptly identified. The loss forecasting process is performed on a monthly
basis to ensure that all changes in the portfolio's composition and performance
are incorporated. These procedures provide executive management with the
information necessary to implement policy adjustments where necessary, and take
corrective actions on a proactive basis. Management has focused its commercial
lending to customers with existing or expandable relationships with the Bank. As
a result,
25
outstanding shared national credits declined to $1.0 billion at September 30,
2002, from $1.4 billion at the same period-end last year.
LOAN COMPOSITION
The following table shows the period-end reported loan portfolio by
loan type and business segment, with the latter including a separate line
indicating loans sold with the Florida banking operations in the first quarter
of 2002:
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) SEPTEMBER 30, 2002 DECEMBER 31, 2001 SEPTEMBER 30, 2001
- ------------------------------------------------------------------------- ---------------------------- --------------------------
BY TYPE BALANCE % BALANCE % BALANCE %
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial $ 5,684 27.8 $ 6,439 29.8 $ 6,656 30.8
Commercial real estate 3,769 18.4 3,976 18.4 3,858 17.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total Commercial and
Commercial Real Estate 9,453 46.2 10,415 48.2 10,514 48.7
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer
Auto leases - Indirect 3,206 15.7 3,208 14.9 3,221 14.9
Auto loans - Indirect 2,907 14.2 2,883 13.3 2,885 13.4
Home equity 3,135 15.3 3,582 16.6 3,521 16.3
Residential mortgage 1,355 6.6 971 4.5 859 4.0
Other loans 400 2.0 543 2.5 584 2.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total Consumer 11,003 53.8 11,187 51.8 11,070 51.3
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $20,456 100.0 $21,602 100.0 $21,584 100.0
===================================================================================================================================
BY BUSINESS SEGMENT
- ---------------------------------------------
Regional Banking
Central Ohio / West Virginia $ 4,778 23.4 $ 4,264 19.7 $ 4,348 20.1
Northern Ohio 2,771 13.5 2,694 12.5 2,792 12.9
Southern Ohio / Kentucky 1,456 7.1 1,327 6.1 1,323 6.1
West Michigan 1,826 8.9 1,837 8.5 1,851 8.6
East Michigan 1,136 5.6 937 4.3 886 4.1
Indiana 683 3.3 696 3.2 683 3.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total Regional Banking 12,650 61.8 11,755 54.3 11,883 55.0
- -----------------------------------------------------------------------------------------------------------------------------------
Dealer Sales 6,715 32.8 6,239 29.0 6,327 29.4
Private Financial Group 972 4.8 763 3.5 676 3.1
Treasury / Other 119 0.6 122 0.6 60 0.3
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS EXCLUDING FLORIDA 20,456 100.0 18,879 87.4 18,946 87.8
- -----------------------------------------------------------------------------------------------------------------------------------
Florida --- --- 2,723 12.6 2,638 12.2
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $20,456 100.0 $21,602 100.0 $21,584 100.0
===================================================================================================================================
NET CHARGE-OFFS
In the second quarter of 2001, as part of the strategic restructuring
plan, a decision was make to exit the sub-prime automobile lending business, as
well as truck and equipment lending business. At that time, special credit loss
reserves were established to cover the inherent losses in those portfolios and
against which related loan losses have been charged.
Excluding charge-offs related to these exited businesses, net
charge-offs in the third quarter of 2002 were $41.8 million and represented an
annualized 0.83% of average loans. This was up from $28.9 million, or an
annualized 0.62% of average loans, in the same quarter a year ago, but down
slightly from $42.5 million, or an annualized 0.88% of average loans, in the
second quarter of 2002.
The $12.9 million increase in net charge-offs from the year-ago quarter
was comprised of a $12.1 million increase in commercial and commercial real
estate net charge-offs and a $0.8 million increase in consumer net charge-offs.
The increase in commercial and consumer net charge-offs reflected the impact of
the weakened economy. Auto lease and loan losses were $17.0 million for the
recent three months compared with $15.7 million for the third quarter last year
and $14.1 million for the immediately preceding quarter. Losses on home equity
loans and lines of credit were $2.9 million, $3.8 million, and $3.1 million for
the same respective periods.
26
The following table reflects net charge-offs and annualized charge-offs
as a percent of average loans by type of loan:
- ---------------------------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------- -------------------------
(in thousands) THIRD SECOND FIRST FOURTH THIRD
- ---------------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS BY LOAN TYPE
Commercial $ 16,808 $ 21,468 $ 16,092 $ 19,475 $ 8,755
Commercial real estate 4,085 2,037 3,723 867 3
- ---------------------------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate 20,893 23,505 19,815 20,342 8,758
- ---------------------------------------------------------------------------------------------------------------------------
Consumer
Auto leases 10,117 8,401 12,809 12,634 10,395
Auto loans 6,869 5,733 8,888 8,474 5,351
- ---------------------------------------------------------------------------------------------------------------------------
Total auto leases and loans 16,986 14,134 21,697 21,108 15,746
- ---------------------------------------------------------------------------------------------------------------------------
Home equity loans & lines of credit 2,934 3,096 2,814 3,313 3,772
Residential mortgage 123 555 104 370 93
Other loans 907 1,225 1,098 1,388 527
- ---------------------------------------------------------------------------------------------------------------------------
Total consumer 20,950 19,010 25,713 26,179 20,138
- ---------------------------------------------------------------------------------------------------------------------------
Total net charge-offs, excluding exited
businesses 41,843 42,515 45,528 46,521 28,896
Net charge-offs related to exited businesses 1,857 2,385 3,748 3,628 7,186
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL NET CHARGE-OFFS $ 43,700 $ 44,900 $ 49,276 $ 50,149 $ 36,082
===========================================================================================================================
NET CHARGE-OFFS AS A % OF AVERAGE LOANS
Commercial 1.21% 1.53% 1.15% 1.34% 0.58%
Commercial real estate 0.43% 0.22% 0.42% 0.10% 0.00%
- ---------------------------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate 0.90% 1.02% 0.87% 0.88% 0.38%
- ---------------------------------------------------------------------------------------------------------------------------
Consumer
Auto leases 1.27% 1.08% 1.64% 1.55% 1.27%
Auto loans 1.01% 0.92% 1.47% 1.43% 0.93%
- ---------------------------------------------------------------------------------------------------------------------------
Total auto leases and loans 1.15% 1.01% 1.57% 1.50% 1.13%
- ---------------------------------------------------------------------------------------------------------------------------
Home equity loans & lines of credit 0.38% 0.43% 0.41% 0.48% 0.55%
Residential mortgage 0.04% 0.18% 0.05% 0.22% 0.06%
Other loans 0.91% 1.22% 1.09% 1.29% 0.46%
- ---------------------------------------------------------------------------------------------------------------------------
Total consumer 0.78% 0.75% 1.07% 1.10% 0.86%
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL NET CHARGE-OFFS 0.83% 0.88% 0.97% 0.99% 0.62%
===========================================================================================================================
Total Net Charge-offs - Including Exited
Businesses 0.87% 0.92% 1.05% 1.06% 0.76%
===========================================================================================================================
Despite a decline in consumer delinquencies in recent months and the
continued positive impact from higher quality auto loan and lease originations
over the last several quarters, management believes consumer net charge-offs
could increase slightly in the next one or two quarters given the most recent
increase in net charge-offs and normal seasonal patterns. Management made a
decision approximately two years ago to strengthen the underwriting criteria and
credit score mix of new auto loan and lease originations. Management's outlook
for commercial net charge-offs is for gradual improvement into 2003. This
expected improvement could be mitigated, however, if in the short run
opportunities exist to accelerate the resolution of certain troubled credits.
NON-PERFORMING ASSETS
Non-performing assets (NPAs) consist of loans that are no longer
accruing interest, loans that have been renegotiated to below market rates based
upon financial difficulties of the borrower, and real estate acquired through
foreclosure. Commercial and commercial real estate loans stop accruing interest
when collection of principal or interest
27
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 but are charged
off in accordance with regulatory statutes, which is generally no more than 120
days past due, unless the loan is secured by real estate.
The following table summarizes NPAs at the end of each of the recent
five quarters in addition to 90 day past due information, excluding NPAs and
past due information related to the Florida operations:
- --------------------------------------------------------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------------------------- ----------------------------
(in thousands) THIRD SECOND FIRST FOURTH THIRD
- --------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Commercial $ 147,392 $ 156,252 $ 162,959 $ 155,720 $ 143,132
Commercial real estate 47,537 45,795 43,295 45,180 37,772
Residential mortgage 8,488 8,776 11,896 11,086 10,923
- --------------------------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 203,417 210,823 218,150 211,986 191,827
Renegotiated loans 37 1,268 1,268 1,276 1,286
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS 203,454 212,091 219,418 213,262 193,113
Other real estate, net 10,675 11,146 6,112 6,384 8,050
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $ 214,129 $ 223,237 $ 225,530 $ 219,646 $ 201,163
================================================================================================================================
Non-performing loans as a % of
total loans 0.99% 1.08% 1.13% 1.13% 1.02%
Non-performing assets as a % of
total loans and other real estate 1.05% 1.14% 1.17% 1.16% 1.06%
ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 68,262 $ 58,449 $ 61,746 $ 76,295 $ 79,339
================================================================================================================================
Total NPAs were $214.1 million at September 30, 2002, up from $201.2
million at the end of the same quarter last year, but down from $223.2 million
at the end of the second quarter of this year. The overall increase in NPAs from
a year ago was primarily due to the weakened Midwest economic environment,
particularly in the manufacturing and service sectors. NPAs as a percent of
total loans and other real estate were 1.05% at September 30, 2002, compared
with 1.06% a year ago and 1.14% at June 30, 2002.
Loans past due ninety days and still accruing interest at the end of
the third quarter of 2002 were $68.3 million and represented 0.33% of total
loans. This was down from $79.3 million, or 0.42% of total loans, at September
30, 2001, but up slightly from $58.4 million, or 0.30% of total loans, at the
end of the second quarter this year. The following table reflects the change in
NPAs for the recent five quarters, but in contrast to the data in the table
above includes NPAs in the Florida operations to the date of their sale in the
2002 first quarter:
- ---------------------------------------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------- ---------------------------
(in thousands) THIRD SECOND FIRST FOURTH THIRD
- ---------------------------------------------------------------------------------------------------------------------------------
BEGINNING OF PERIOD $ 223,237 $225,530 $ 227,493 $ 210,061 $165,985
New non-performing assets 47,219 73,002 74,446 85,986 94,990
Acquired 56 --- --- --- ---
Loan losses (25,480) (28,297) (26,072) (34,580) (12,480)
Payments (26,308) (44,303) (37,663) (28,315) (34,219)
Sales (4,154) (2,358) (8,925)(1) (4,131) (3,331)
Other (441) (337) (3,749) (1,528) (884)
- ---------------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $ 214,129 $223,237 $ 225,530 $ 227,493 $210,061
=================================================================================================================================
(1) Includes $6.5 million related to the sale of the Florida operations.
A major contributing factor to the decline in NPAs in the third quarter
of 2002 was the significant decrease in new non-performing assets. New
non-performing assets in the third quarter of 2002 totaled $47.2 million, down
35% from the 2002 second quarter level. Subsequent to the end of the 2002 third
quarter, a company in the medical payments business, to whom Huntington has $30
million credit exposure, disclosed irregularities in one of their public
securitizations. It is not yet clear what impact, if any, this will have on the
credit risk or NPA status of this credit.
28
ALLOWANCE FOR LOAN LOSSES
The ALL was $408.4 million at September 30, 2002, up from $334.8
million at the end of the third quarter of 2001, and $393.0 million at June 30,
2002. The ALL represented 2.00% of total loans at September 30, 2002, up from
1.77% at the end of the third quarter last year, but unchanged from June 30,
2002. The period-end ALL was 191% of NPAs at September 30, 2002, compared with
166% a year ago and 176% at June 30, 2002.
The following table reflects the activity in the ALL for the recent
five quarters, excluding the activity in the Florida operations and the ALL of
$22.3 million related to $2.8 billion of loans sold in conjunction with the sale
of Florida during the first quarter of 2002.
- -----------------------------------------------------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------------------- ----------------------------------
(in thousands) THIRD SECOND FIRST FOURTH THIRD
- -----------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES,
BEGINNING OF PERIOD $ 393,011 $ 386,053 $386,956 $ 334,827 $326,495
Loan losses (56,591) (57,482) (60,191) (60,110) (45,063)
Recoveries 12,891 12,582 10,915 9,961 8,981
- -----------------------------------------------------------------------------------------------------------------------------
Net loan losses (43,700) (44,900) (49,276) (50,149) (36,082)
- -----------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 60,249 53,892 50,595 104,281 46,027
Allowance of purchased loans 1,264 --- --- --- ---
Allowance of securitized loans (2,446) (2,034) (2,222) (2,003) (1,613)
- -----------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES,
END OF PERIOD $ 408,378 $ 393,011 $386,053 $ 386,956 $334,827
=============================================================================================================================
Allowance for loan losses as a % of
total loans 2.00% 2.00% 2.00% 2.05% 1.77%
Allowance for loan losses as a % of
non-performing loans 201% 185% 176% 181% 173%
Allowance for loan losses as a % of
non-performing assets 191% 176% 171% 176% 166%
The provision for loan losses for the fourth quarter of 2001 included
$50.0 million of charges to increase the loan loss reserve in light of the
higher net charge-offs and non-performing assets experienced in the second six
months of 2001 and the general deterioration evident in the economy.
The ALL is allocated to each loan category based on expected losses.
Expected losses are a function of the likelihood of default and the loss in the
event of default. A continuous assessment of credit quality is based on
portfolio risk characteristics and other relevant factors such as historical
performance, internal controls, and impacts from mergers and acquisitions. For
the commercial and commercial real estate credits, expected loss factors are
assigned by credit grade at the individual loan level and are continuously
reviewed for accuracy. The aggregation of these factors represents management's
estimate of the inherent loss. The portion of the allowance allocated to the
more homogeneous consumer loan segments is determined by developing expected
loss ratios based on the risk characteristics of the various segments and giving
consideration to existing economic conditions and trends.
Projected loss ratios incorporate factors such as trends in past due
and non-accrual amounts, recent loan loss experience, current economic
conditions, risk characteristics, and concentrations of various loan categories.
Actual loss ratios experienced in the future, however, could vary from those
projected as a loan's performance is a function of not only economic factors but
also other factors unique to each customer. The dollar exposure could
significantly vary from estimated amounts due to losses from large dollar single
client exposures, industry, product, or geographic concentrations, or changes in
general economic conditions. To ensure adequacy to a higher degree of
confidence, a portion of the ALL is considered unallocated. While amounts are
allocated to various portfolio segments, the total ALL, excluding impairment
reserves prescribed under provisions of Statement of Financial Accounting
Standard 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, the level of
non-performing loans, and general economic conditions and volatility. Total
unallocated reserves were 14% and 11% at September 30, 2002 and 2001,
respectively.
29
INTEREST RATE RISK MANAGEMENT
Huntington seeks consistent income growth by managing the sensitivity
of net interest income and the market value of the bank to changes in market
interest rates. The Board of Directors and Asset and Liability Management
Committee (ALCO) oversee financial risk management by establishing broad
policies and specific operating limits that govern a variety of financial risks
inherent in our operations, including liquidity, counterparty, settlement, and
market risks.
Market risk is the potential for declines in the fair value of
financial instruments due to changes in interest rates, exchange rates, and
equity prices. Interest rate risk is Huntington's primary market risk. It
results from timing differences in the repricing and maturity of assets and
liabilities and changes in relationships between market interest rates and the
rates on the bank's assets and liabilities, including the impact of embedded
options.
Interest rate risk management is a dynamic process that encompasses new
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 overall balance sheet objectives, Huntington regularly accesses
money, bond, futures, and options markets, as well as trading exchanges. In
addition, Huntington contracts with dealers in over-the-counter financial
instruments for interest rate swaps. ALCO regularly monitors position
concentrations and the level of interest rate sensitivity to ensure compliance
with approved risk tolerances.
Interest rate risk modeling is performed monthly. An income simulation
model is used to measure the sensitivity of forecasted net interest income to
changes in market rates. Market value risk (referred to as Economic Value of
Equity, or EVE) is measured using a static balance sheet. The model used for
these measurements takes into account prepayment speeds on mortgage loans,
mortgage-backed securities, and consumer installment loans, as well as cash
flows of loans and deposits. Balance sheet growth assumptions are also
considered in the income simulation model. Moreover, the model incorporates the
effects of embedded options, such as interest rate caps, floors, and call
options, and accounts for changes in relationships among interest rates.
The baseline scenario for the income simulation, with which all others
are compared, is based on market interest rates implied by the shape of the
prevailing yield curve. Alternative market rate scenarios are then employed to
determine their impact on the baseline scenario. These include spot rates
remaining unchanged for the entire measurement period; parallel rate shifts on
both a gradual and immediate basis; as well as movements in rates that alter the
shape of the yield curve. Scenarios are also developed to measure basis risk,
such as the impact of LIBOR-based rates rising or falling faster than the Prime
rate.
When evaluating short-term interest rate risk exposure, Huntington uses
for its primary measurement a scenario that calls for a parallel shift of the
yield curve with all rates increasing gradually by 200 basis points during the
next year. At the end of the third quarter of 2002, that scenario would generate
net interest income 0.5% lower than the internal forecast of net interest income
over the same time period using the current level of forward rates. That
compares with a 1.3% decline in net interest income generated by the same 200
basis point scenario at the end of the second quarter. Management believes
further declines in market rates would also put modest downward pressure on net
interest income, resulting from the implicit floors in the bank's non-maturity
deposits.
Net interest income and the net interest margin have been adversely
impacted in recent months by: (1) the flattening of the yield curve; (2) the
lower net interest margin on the higher quality auto loan and lease
originations; (3) the rapid growth of lower margin residential adjustable-rate
mortgage loans retained on the balance sheet; (4) heavy repayments of
residential mortgage loans and mortgage-backed securities; and (5) fixed-rate
consumer loan repayments being reinvested at lower market rates. Net interest
income will continue to be adversely affected by these factors, should they
continue in the future.
The bank's primary measurement for EVE risk assumes an immediate and
parallel increase in rates of 200 basis points. At September 30, 2002, the model
indicated that such an increase in rates would be expected to reduce the EVE by
3.8% and compares with an estimated negative impact of 3.0% at June 30, 2002.
The model is a useful but simplified representation of the bank's
underlying risk profile. Simulations reflect choices of statistical techniques,
functional forms, model parameters, and numerous uncertain assumptions.
Nonetheless, experience has demonstrated and management believes that the model
provides reliable guidance for measuring and managing interest rate sensitivity.
30
LIQUIDITY
Effectively managing liquidity involves meeting the cash flow
requirements of depositors and borrowers, as well as satisfying the operating
cash needs of the organization to fund corporate expansion and other activities.
ALCO establishes guidelines and regularly monitors the overall liquidity
position of the business and ensures that various alternative strategies exist
to cover unanticipated events. Furthermore, ALCO policies and/or guidelines
ensure that wholesale funding sources are diversified in order to avoid
concentration in any one market source. Management believes sufficient liquidity
was available at the end of the recent quarter to meet estimated funding needs.
Core deposits, which include non-interest bearing and interest bearing
demand deposits, savings accounts, and other domestic time deposits including
certificates of deposit under $100,000 and IRAs, satisfy a majority of
Huntington's funding needs. Funding sources other than core deposits include the
sale or borrowings against the investment securities portfolio, the
securitization and sale of loans, the ability to acquire national market
non-core deposits, collateralized borrowings such as Federal Home Loan Bank
advances, and the issuance of notes and common and preferred securities in the
capital markets.
The following table shows the composition of deposits by type of
deposit and by business segment, with the latter including a separate line
indicating deposits sold with the Florida banking operations in the first
quarter of 2002:
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) SEPTEMBER 30, 2002 DECEMBER 31, 2001 SEPTEMBER 30, 2001
- ------------------------------------------------------------------------ --------------------------- --------------------------
BY TYPE BALANCE % BALANCE % BALANCE %
- -----------------------------------------------------------------------------------------------------------------------------------
Demand deposits
Non-interest bearing $ 2,949 17.2 $ 3,635 18.0 $ 3,464 17.3
Interest bearing 5,204 30.4 5,723 28.4 5,302 26.4
Savings deposits 2,849 16.6 3,466 17.2 3,459 17.2
Other domestic time deposits 4,071 23.8 5,868 29.1 6,035 30.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total Core Deposits 15,073 88.0 18,692 92.7 18,260 91.0
- -----------------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of
$100,000 or more 754 4.4 1,131 5.6 1,315 6.6
Brokered time deposits and
negotiable CDs 979 5.7 138 0.7 129 0.6
Foreign time deposits 312 1.9 226 1.0 367 1.8
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $17,118 100.0 $20,187 100.0 $20,071 100.0
===================================================================================================================================
BY BUSINESS SEGMENT
- --------------------
Regional Banking
Central Ohio / West Virginia $ 5,620 32.8 $ 5,217 25.8 $ 4,923 24.5
Northern Ohio 3,552 20.7 3,256 16.1 3,190 15.9
Southern Ohio / Kentucky 1,346 7.9 1,291 6.4 1,336 6.7
West Michigan 2,420 14.1 2,227 11.0 2,331 11.6
East Michigan 1,938 11.3 1,895 9.4 1,968 9.8
Indiana 658 3.8 578 2.9 558 2.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total Regional Banking 15,534 90.6 14,464 71.6 14,306 71.3
- -----------------------------------------------------------------------------------------------------------------------------------
Dealer Sales 48 0.3 82 0.4 90 0.4
Private Financial Group 773 4.5 717 3.6 757 3.8
Treasury / Other 763 4.6 256 1.3 325 1.6
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS EXCLUDING FLORIDA 17,118 100.0 15,519 76.9 15,478 77.1
- -----------------------------------------------------------------------------------------------------------------------------------
Florida --- --- 4,668 23.1 4,593 22.9
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $17,118 100.0 $20,187 100.0 $20,071 100.0
===================================================================================================================================
The sale of the Florida operations required additional wholesale
borrowings of $1.2 billion, after receipt of the premium on deposits sold. To
help mitigate this funding, management actively grew core deposits over the last
twelve months to reduce its dependence on non-core funding. To further enhance
liquidity, Huntington initiated a $6 billion domestic bank note program in April
of 2002 and has subsequently utilized this program that replaced an older
facility of the same size. In addition to the domestic bank note program,
Huntington has a $2 billion Euronote program and a medium-term note program
issued from Huntington's parent company.
31
CAPITAL
Capital is managed at each legal 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. The
importance of managing capital is also recognized and management continually
strives to maintain an appropriate balance between capital adequacy and returns
to shareholders.
Shareholders' equity declined $12 million during the third quarter of
2002 from the end of the previous quarter and $77 million from December 31,
2001, and $65 million from September 30, 2001. Increases to shareholders' equity
reflecting higher net earnings, equity issued for acquisitions, and the positive
mark to market of securities available for sale for 2002 was more than offset by
dividends of $117.7 million, and repurchases of common shares of $294.3 million.
Activity related to shareholders' equity can be found on page 5 of this report.
Average shareholders' equity in the third quarter of 2002 declined a modest 3%
and 4% from the second quarter of 2002 and the third quarter of 2001,
respectively.
In February 2002, the Board of Directors authorized a new share
repurchase program for up to 22 million shares and cancelled an earlier
authorization. Repurchased shares will be reserved for reissue in connection
with dividend reinvestment and employee benefit plans as well as for
acquisitions and other corporate purposes. Through the end of September 2002, 15
million shares of common stock had been repurchased through open market and
privately negotiated transactions.
During the third quarter of 2002, Huntington acquired LeaseNet Group,
Inc. (LeaseNet), a $90 million leasing company located in Dublin, Ohio.
Huntington paid cash to LeaseNet shareholders and reissued 835,035 shares of its
common stock, all of which were purchased in the open market prior to the
acquisition. During the second quarter of 2002, Huntington acquired Haberer
Investment Advisor, Inc. (Haberer), a Cincinnati-based registered investment
advisory firm with approximately $500 million in assets under management.
Huntington paid cash to Haberer shareholders and reissued 202,695 shares of its
common stock, all of which were purchased in the open market prior to the
acquisition.
Cash dividends that were declared in the third and four prior quarters
along with common stock prices (based on NASDAQ intra-day and closing stock
price quotes) were as follows:
- --------------------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------- ------------------------
THIRD SECOND FIRST FOURTH THIRD
- --------------------------------------------------------------------------------------
High $20.430 $21.770 $20.310 $17.490 $19.280
Low 16.000 18.590 16.660 14.510 15.150
Close 18.190 19.420 19.700 17.190 17.310
Average Closing Price 19.142 20.089 18.332 16.269 17.696
Cash dividends declared $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16
The ratio of average equity to average assets in the third quarter of
2002 was 8.84% versus 9.60% a year ago. On a year to date basis, the ratio of
average equity to average assets was 9.26% and 9.55% for the first nine months
of 2002 and 2001, respectively.
On a reported basis, tangible period-end equity to period-end assets,
which excludes intangible assets, was 8.00% at the end of September 2002, up
significantly from 6.08% a year earlier, but down from 8.51% at the end of June
2002. The change in the tangible equity to asset ratio from the year-ago period
reflected the capital generated from the sale of the Florida operations offset
by the subsequent share repurchase program in the first nine months of 2002.
Management estimates the continuation of the share repurchase program in the
last quarter of 2002 at current repurchase levels would reduce the ratio to a
range of 7.50% to 7.75% by year-end 2002. Management has previously indicated
its intent to maintain a minimum tangible equity to asset ratio of 6.50%
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
32
Tier 1 risk-based capital ratio, total risk-based capital ratio, leverage ratio,
and risk-adjusted assets for the recent five quarters were as follows:
- -----------------------------------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------ ----------------------------
(in millions) THIRD SECOND FIRST FOURTH THIRD
- -----------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Assets $26,343 $ 25,309 $ 24,954 $ 27,896 $ 27,757
Tier 1 Risk-Based Capital Ratio 9.14% 9.72% 10.26% 7.24% 6.97%
Total Risk-Based Capital Ratio 12.10% 12.75% 13.40% 10.29% 10.13%
Tier 1 Leverage Ratio 9.42% 9.94% 9.72% 7.41% 7.10%
As Huntington is supervised and regulated by the Federal Reserve, The
Huntington National Bank, Huntington's bank subsidiary, is supervised and
regulated by the Office of the Comptroller of the Currency, which establishes
similar regulatory capital guidelines for banks. The Bank also had regulatory
capital ratios in excess of the levels established for well-capitalized
institutions.
LINES OF BUSINESS
Below is a brief description of each line of business and a discussion
of the business segment results. Regional Banking, Dealer Sales, and the Private
Financial Group are the major business lines. The fourth segment includes the
impact of the Treasury function and other unallocated assets, liabilities,
revenue, and expense. Financial information and a full description of each line
of business can also be found in Note 10 to the unaudited consolidated financial
statements along with a reconciliation of reported earnings to operating
earnings. (See Basis of Discussion - Operating Earnings above for an expanded
discussion of operating results and reconciliation to reported results.)
The following tables within each segment show performance on this basis
for the three and nine month periods ending September 30, 2002 and 2001.
REGIONAL BANKING
Regional Banking provides products and services to retail, business
banking, and corporate customers.
- ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (FTE) $ 146,580 $ 155,901 $ 438,762 $485,654
Provision for Loan Losses 31,534 18,749 90,349 36,678
Non-Interest Income 76,616 81,899 239,073 234,847
Non-Interest Expense 148,635 152,837 447,251 460,712
- ----------------------------------------------------------------------------------------------------------------------------------
Income before Taxes 43,027 66,214 140,235 223,111
Income Taxes 15,059 23,175 49,082 78,089
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income $ 27,968 $ 43,039 $ 91,153 $145,022
===================================================================================================================================
Regional Banking operating income in the third quarter of 2002 was
$28.0 million, compared with $43.0 million for the same quarter a year ago. This
decline reflected higher provision for loan losses as well as lower revenue
(lower net interest income and non-interest income), which was offset partially
by reduced expenses.
Net interest income was down $9.3 million, or 6%, reflecting a decline
in the internal funding credit paid for this segment's deposits. Regional
Banking is a net funds provider to the Bank's other business segments since its
deposits exceed its loans. As such, in a declining interest rate environment,
net interest income in Regional Banking is typically lower due to reduced
credits attributed to deposits. Average balances of residential mortgage loans
and home equity loans and lines of credit increased 65% and 21%, respectively,
from the year-ago quarter. In addition, commercial real estate loans (including
construction loans) were up 6% while commercial loans declined 3% from the
year-ago quarter. Average total deposits were up approximately $974 million in
the current quarter, or 7%, from the same period a year ago, and up $307
million, or 2%, versus the second quarter of 2002.
The provision for loan losses for the third quarter of 2002 increased
$12.8 million, or 68%, over the same quarter last year. Net charge-offs in the
third quarter of 2002 were $24.7 million. This compared to $12.6 million for the
prior
33
year's third quarter. The provision expense also increased due to higher loan
growth in the recent quarter compared to the same period a year ago.
Non-interest income was down $5.3 million, or 6%, from the third
quarter of last year, due primarily to a decline in Mortgage Banking income.
Mortgage Banking income declined 56% from the year-ago quarter due to a $6.6
million impairment related to mortgage servicing rights and, to a lesser extent,
a decision by management to retain a higher percentage of originated residential
mortgage loans in the portfolio rather then sell the loans in the secondary
market. Excluding the decline in Mortgage Banking income, non-interest income in
the third quarter of 2002 was up 11%. This increase was primarily due to
increases in deposit account service charges (personal 32% and corporate 21%)
and a 16% increase in debit card transaction and ATM fees.
Non-interest expense declined $4.2 million, or 3%, from the third
quarter of 2001. This decline was driven primarily by decreases in equipment and
depreciation expense of $1.3 million, and outside processing and appraisal
services of $1.1 million. Partially offsetting these declines were increases in
personnel costs and travel expenses for generation of new business.
Regional Banking contributed 57% of total revenues in the third quarter
of 2002 and represented 62% of total loans and 91% of total deposits at
September 30, 2002.
DEALER SALES
Dealer Sales product offerings pertain to the automobile lending sector
and include indirect consumer loans and leases, as well as floor plan financing.
- --------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Net Interest Income (FTE) $60,918 $56,245 $167,508 $ 162,700
Provision for Loan Losses 25,860 26,154 69,330 80,995
Non-Interest Income 6,822 6,332 15,348 21,469
Non-Interest Expense 19,678 18,378 56,315 50,767
- --------------------------------------------------------------------------------------------------------------------------
Income before Taxes 22,202 18,045 57,211 52,407
Income Taxes 7,771 6,315 20,024 18,342
- --------------------------------------------------------------------------------------------------------------------------
Operating income $14,431 $11,730 $ 37,187 $ 34,065
==========================================================================================================================
Dealer Sales operating earnings were $14.4 million in the third quarter
of 2002, an increase of $2.7 million, or 23%, from the same period last year.
This increase was attributed to higher revenues, particularly net interest
income, and to improved credit quality, offset in part by increased levels of
non-interest expense.
Net interest income was $60.9 million in the third quarter of 2002, up
$4.7 million, or 8%, from the year-ago quarter. This increase was attributed to
a 4% increase in average loan and lease balances as well as an improved net
interest margin. Originations of indirect auto loans and leases exceeded $1.1
billion in the recent three months versus $985 million in the third quarter of
2001. The provision for loan losses decreased $0.3 million from $26.2 million
for the third quarter of 2001 to $25.9 million for 2002. Auto related net
charge-offs totaled $18.9 million during the third quarter of 2002, down from
$23.2 million during the year-ago quarter. Despite some seasonally higher net
charge-offs, this improvement reflected stronger underwriting practices for auto
loan and lease originations that commenced in late 2000. The benefit from
improved charge-off levels was mostly offset by a $4.0 million increase in the
provision expense attributed to loan growth. Excluding the impact of loan losses
and balances related to businesses that Huntington exited last year, net
charge-offs were $17.0 million and $16.0 million for the third quarter of 2002
and 2001. Total average loans and leases increased $280 million in the third
quarter of 2002 compared to $5 million in the year-ago third quarter.
Non-interest income increased $0.5 million, or 8%, from the third quarter of
2001, reflecting higher levels of income from securitized loans and fees and
other income from terminated lease contracts. Non-interest expense increased
$1.3 million, or 7%, reflecting increased personnel and other costs primarily
associated with higher production and servicing levels, increased lease residual
value insurance costs, and increased costs associated with enhance technological
capabilities.
Dealer Sales contributed 18% of the operating earnings and 17% of
operating revenues for the third quarter of 2002 and represented 33% of total
loans outstanding at September 30, 2002.
34
PRIVATE FINANCIAL GROUP (PFG)
PFG provides an array of products and services designed to meet the
needs of Huntington's higher wealth customers.
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------
Net Interest Income (FTE) $ 8,784 $ 9,115 $25,634 $25,918
Provision for Loan Losses 2,855 1,124 5,057 ---
Non-Interest Income 18,475 14,600 58,311 48,218
Non-Interest Expense 18,849 13,645 56,919 54,954
- -----------------------------------------------------------------------------------------------
Income before Taxes 5,555 8,946 21,969 19,182
Income Taxes 1,944 3,132 7,678 6,714
- -----------------------------------------------------------------------------------------------
Operating income $ 3,611 $ 5,814 $14,291 $12,468
===============================================================================================
PFG's earnings for the third quarter of 2002 were $3.6 million, down
from $5.8 million for the quarter ended September 30, 2001. Most of this decline
was due to an increase in provision for loan losses based primarily on higher
loan growth during the recent quarterly period.
While average loans grew 38% to $920 million and average deposits grew
32% to $821 million from the third quarter of 2001, net interest income was down
4% driven by a shift in product mix combined with increased margin compression,
particularly on consumer loans, reflective of lower consumer mortgage loan
rates. Rate and product mix changes caused the net interest margin to decline
from 4.89% for the third quarter last year to 3.60% for the recent three-month
period.
Non-interest income for the 2002 third quarter was $18.5 million, up
from $14.6 million a year ago. This increase resulted primarily from higher
revenue from the sale of annuity products. Insurance revenue was up $0.2 million
for this year's third quarter, or 10% from the same period last year, largely
due to increased revenue from the title insurance business reflective of
increased mortgage loan refinancing activity. Trust services income increased
$0.2 million, or 1%, from the year-ago period as the increased revenue resulting
from the second quarter 2002 Haberer acquisition offset the decline in revenue
from adverse equity market conditions.
Non-interest expense was $18.8 million for the third quarter 2002
compared with $13.6 million for the quarter last year. This increase was
primarily due to increased sales commissions and other personnel costs. The
increased sales commissions was attributable to the generation of additional
revenue, while the other personnel costs reflected the Haberer acquisition, new
private banking hires in selected markets that assisted in driving the loan and
deposit growth, and additional investment sales associates that helped produce
the increased annuity sales volume.
In order to analyze line of business results that are more
customer-focused, a portion of PFG's brokerage and insurance revenue and
non-interest expense are allocated to the line of business assisting in the sale
or providing the business referral. Therefore, while PFG is still responsible
for the management of these products, the line of business results reflected in
the table above exclude $10.1 million and $10.7 million of allocated revenue and
$6.9 million and $8.0 million of allocated expenses for the third quarter of
2002 and 2001, respectively.
PFG contributed 7% of total revenues in the recent quarter and
represented 5% of both total loans and total deposits at September 30, 2002.
TREASURY / OTHER
The Treasury / Other segment absorbs unassigned assets, liabilities,
equity, revenue, and expense that are not directly assigned or allocated to one
of the lines of business. Since a match-funded transfer pricing system is used
to allocate interest income and interest expense to other business segments,
Treasury / Other results include the net impact of any over or under allocations
arising from centralized management of interest rate risk including the net
impact of derivatives used to hedge interest rate sensitivity. Furthermore, this
segment's results include the net impact of administering Huntington's
investment securities portfolio as part of overall liquidity management.
Additionally, amortization expense of intangible assets and gains or losses not
allocated to other business segments are also a component.
35
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income (FTE) $34,230 $10,643 $ 95,808 $ 9,151
Provision for Loan Losses --- --- --- ---
Non-Interest Income 12,919 8,268 32,821 18,824
Non-Interest Expense 6,561 2,194 12,474 6,881
- -------------------------------------------------------------------------------------------------------------------------
Income before Taxes 40,588 16,717 116,155 21,094
Income Taxes 4,432 (3,593) 15,399 (15,301)
- -------------------------------------------------------------------------------------------------------------------------
Operating income $36,156 $20,310 $100,756 $ 36,395
=========================================================================================================================
Treasury / Other reported operating income of $36.2 million in the
third quarter of 2002, up $15.8 million from the year-earlier quarter. This
primarily reflected the reduction in transfer pricing credits allocated to
Regional Banking for its deposits, the maturity in late 2001 of $2 billion of
interest rate swaps that had significant negative spreads, and the benefit of
lower short-term interest rates, particularly with the steeper yield curve.
Non-interest income was $12.9 million compared with $8.3 million in the
quarter a year ago reflecting the slightly higher gains from securities
transactions in the current quarter, increased Bank Owned Life Insurance income,
and revenue from trading activities. Non-interest expense in the third quarter
of 2002 increased $4.4 million. This reflected higher unallocated outside
services and processing, equipment and occupancy, and telecommunication
expenses, partially offset by lower unallocated personnel costs and a $2.4
million decline in the amortization of intangibles arising from the
implementation of SFAS No. 142.
Income tax expense for each of the other business segments is
calculated at a statutory 35% tax rate. However, Huntington's overall effective
tax rate is lower and, as a result, Treasury / Other reflects the reconciling
items to the statutory tax rate in its Income taxes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures for the current period are
found beginning on page 30 of this report, which includes changes in market risk
exposures from disclosures presented in Huntington's 2001 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
On November 4, 2002, Huntington carried out an evaluation, under the
supervision and with the participation of its management, including the Chief
Executive Officer (CEO) along with the Chief Financial Officer (CFO), of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
CEO along with the CFO concluded that Huntington's disclosure controls and
procedures are effective in timely alerting the CEO and CFO to material
information relating to Huntington (including its consolidated subsidiaries)
required to be included in its periodic SEC filings.
There have been no significant changes in Huntington's internal
controls or in other factors that could significantly affect its internal
controls subsequent to the date it carried out this evaluation.
36
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 2. Changes in securities and use of proceeds
(c) Unregistered shares
In conjunction with the Agreement and Plan of Merger
associated with the April 1, 2002, acquisition by Huntington
of Haberer Registered Investment Advisors, Inc., a
Cincinnati-based registered investment advisory firm with
approximately $500 million in assets under management
("Haberer"), Huntington issued 202,695 unregistered shares of
Huntington common stock, without par value, to shareholders
of Haberer on April 1, 2002. The issuance of shares in this
transaction was deemed to be exempt from registration under
the Securities Act of 1933, as amended, in reliance on Section
4(2) since this was a transaction by an issuer not involving a
public offering.
In conjunction with Agreement and Plan of Merger associated
with the September 19, 2002, acquisition by Huntington of
LeaseNet Group, Inc., a $90 million leasing company located in
Dublin, Ohio ("LeaseNet"). Huntington issued 835,085
unregistered shares of Huntington common stock, without par
value, to three shareholders of LeaseNet on September 19,
2002. The issuance of shares in this transaction was deemed to
be exempt from registration under the Securities Act of 1933,
as amended, in reliance on Section 4(2) since this was a
transaction by an issuer not involving a public offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3. (i)(a). Articles of Restatement of Charter,
Articles of Amendment to Articles of
Restatement of Charter, and Articles
Supplementary - previously filed as
Exhibit 3(i) to Annual Report on Form
10-K for the year ended December 31,
1993, and incorporated herein by
reference.
(i)(b). Articles of Amendment to Articles of
Restatement of Charter - previously
filed as Exhibit 3(i)(c) to Quarterly
Report on Form 10-Q for the quarter
ended March 31, 1998, and incorporated
herein by reference.
This amendment increased the number of
authorized shares of Huntington
Bancshares Incorporated.
(ii). Amended and Restated Bylaws as of July
16, 2002 - previously filed as Exhibit
3(ii) to Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002, and
incorporated herein by reference.
The July 2002 amendment to the Bylaws
amended the age restrictions of
nominating directors.
37
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.
10. Material contracts:
(a)* Second Amendment to the Amended and
Restated 1999 Long-Term Incentive
Compensation Plan for Huntington Bancshares
Incorporated, effective for performance
cycles beginning after January 1, 1999.
(b)* Schedule identifying material details of
Executive Agreements, substantially similar
to Exhibits 10 (b) and 10 (c) to Form 10-K
for the year ended December 31, 2001.
99.1. Earnings to Fixed Charges
99.2 Chief Executive Officer Certification
99.3 Chief Financial Officer Certfication
(b) Reports on Form 8-K
1. A report on Form 8-K, dated July 18, 2002, was filed
under report item numbers 5 and 7, concerning
Huntington's results of operations for the second
quarter ended June 30, 2002.
2. A report on Form 8-K, dated August 14, 2002, was
filed under report item numbers 7 and 9, concerning
the submission on August 14, 2002, to the SEC of
sworn statements of each of the Principal Executive
Officer, Thomas E. Hoaglin, and the Principal
Financial Officer, Michael J. McMennamin, of
Huntington Bancshares Incorporated pursuant to
Securities and Exchange Commission Order No. 4-460.
* Denotes management contract or compensatory plan or arrangement.
38
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, 2002 /s/ Thomas E. Hoaglin
------------------------------------------
Thomas E. Hoaglin
Chairman, Chief Executive Officer and
President
Date: November 14, 2002 /s/ Michael J. McMennamin
-------------------------------------------
Michael J. McMennamin
Vice Chairman, Chief Financial Officer and
Treasurer (Principal Financial Officer)
39
CERTIFICATION
I, Thomas E. Hoaglin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Huntington Bancshares Incorporated;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
------------------
/s/ Thomas E. Hoaglin
---------------------------
Thomas E. Hoaglin
Chief Executive Officer
40
CERTIFICATION
I, Michael J. McMennamin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Huntington Bancshares Incorporated;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
------------------
/s/ Michael J. McMennamin
-----------------------------------
Michael J. McMennamin
Chief Financial Officer
41