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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file Number 0-2525
HUNTINGTON BANCSHARES INCORPORATED
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(Exact name of registrant as specified in its charter)
MARYLAND 31-0724920
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
HUNTINGTON CENTER, 41 S. HIGH STREET, COLUMBUS, OH 43287
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 480-8300
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK - WITHOUT PAR VALUE
--------------------------------
(Title of class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of December 31, 2001, was $4,019,925,610. As of January 31, 2002,
251,214,602 shares of common stock without par value were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information
from the registrant's definitive Proxy Statement for the 2002 Annual
Shareholders' Meeting.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
Part I.
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 40
Item 8. Financial Statements and Supplementary Data 40
Report of Management 40
Report of Independent Auditors 40
Consolidated Balance Sheets --
December 31, 2001 and 2000 41
Consolidated Statements of Income --
Twelve Months Ended December 31, 2001, 2000 and 1999 42
Consolidated Statements of Changes in Shareholders' Equity --
Twelve Months Ended December 31, 2001, 2000 and 1999 43
Consolidated Statements of Cash Flows --
Twelve Months Ended December 31, 2001, 2000 and 1999 44
Notes to Consolidated Financial Statements 45
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 74
Part III.
Item 10. Directors and Executive Officers of the Registrant 75
Item 11. Executive Compensation 75
Item 12. Security Ownership of Certain Beneficial Owners and Management 75
Item 13. Certain Relationships and Related Transactions 75
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 75
HUNTINGTON BANCSHARES INCORPORATED
PART I
Item 1: Business
Huntington Bancshares Incorporated (Huntington), incorporated in
Maryland in 1966, is a multi-state bank holding company that also qualified as a
financial holding company in March 2000. Huntington is headquartered in
Columbus, Ohio. Its subsidiaries conduct a full-service commercial and consumer
banking business, engage in mortgage banking, merchant banking, lease financing,
trust services, discount brokerage services, underwriting credit life and
disability insurance, selling other insurance products, issuing commercial paper
guaranteed by Huntington, and provide other financial products and services. At
December 31, 2001, Huntington's subsidiaries had 155 banking offices in Ohio,
114 banking offices in Michigan, 143 banking offices in Florida, 30 banking
offices in West Virginia, 21 banking offices in Indiana, 12 banking offices in
Kentucky, and one foreign office in each of the Cayman Islands and Hong Kong.
The Huntington Mortgage Company, a wholly owned subsidiary, has loan origination
offices in the Midwest and on the East Coast. Foreign banking activities, in
total or with any individual country, are not significant to the operations of
Huntington. At December 31, 2001, Huntington and its subsidiaries had 9,743
full-time equivalent employees.
A brief discussion of Huntington's lines of business can be found in
its Management's Discussion and Analysis on beginning on page 32 of this report
and the financial statement results can be found in Note 21 of the Notes to
Consolidated Financial Statements beginning on page 68.
Competition in the form of price and service from other banks and
financial companies such as savings and loans, credit unions, finance companies,
and brokerage firms is intense in most of the markets served by Huntington and
its subsidiaries. Mergers between and the expansion of financial institutions
both within and outside Ohio have provided significant competitive pressure in
major markets. Since 1995, when federal interstate banking legislation became
effective that made it permissible for bank holding companies in any state to
acquire banks in any other state, and for banks to establish interstate branches
(subject to certain limitations by individual states), actual or potential
competition in each of Huntington's markets has been intensified. Internet
banking, offered both by established traditional institutions and by start-up
Internet-only banks, constitutes another significant form of competitive
pressure on Huntington's business. Finally, financial services reform
legislation enacted in November 1999 eliminates the long-standing Glass-Steagall
Act restrictions on securities activities of bank holding companies and banks.
The legislation permits bank holding companies that elect to become financial
holding companies to engage in a broad range of financial activities, including
defined securities and insurance activities, and to affiliate with securities
and insurance firms. Correspondingly, it permits securities and insurance firms
to engage in banking activities under specified conditions. The same legislation
allows banks to have financial subsidiaries that may engage in certain
activities not otherwise permissible for banks.
In July 2001, Huntington announced a comprehensive strategic and
financial restructuring plan designed to refocus its operations on core
activities in the Midwest. As part of the plan, in September 2001, Huntington
entered into an agreement for the sale of its Florida retail and commercial
operations. The sale closed on February 15, 2002. Immediately after the sale of
these Florida operations, Huntington's subsidiaries had a total of 332 domestic
banking offices, only two of which are located in Florida. After the sale,
Huntington had 8,552 full-time equivalent employees.
REGULATORY MATTERS
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to such
statutory or regulatory provisions.
GENERAL
As a financial holding company, Huntington is subject to examination
and supervision by the Board of Governors of the Federal Reserve System (Federal
Reserve Board). Huntington is required to file with the Federal Reserve Board
reports and other information regarding its business operations and the business
operations of its subsidiaries. It is also required to obtain Federal Reserve
Board approval prior to acquiring, directly or indirectly, ownership or control
of voting shares of any bank, if, after such acquisition, it would own or
control more than 5% of the voting stock of such bank.
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Pursuant to the Gramm-Leach-Bliley Act of 1999 (GLB Act), however,
Huntington may engage in, or own or control companies that engage in, any
activities determined by the Federal Reserve Board to be financial in nature or
incidental to activities financial in nature, or complementary to financial
activities, provided that such complementary activities do not pose a
substantial risk to the safety or soundness of depository institutions or the
financial system generally. In addition, the GLB Act designated various other
lending, advisory, insurance underwriting, securities underwriting, dealing and
market-making, and merchant banking activities to those activities previously
approved for bank holding companies by the Federal Reserve Board, as financial
in nature, and authorized the Federal Reserve Board, in coordination with the
Office of the Comptroller of the Currency (OCC), to determine that additional
activities are financial in nature or incidental to activities that are
financial in nature. Except for the acquisition of a savings association,
Huntington may commence any new financial activity with only subsequent 30 day
notice to the Federal Reserve Board.
Huntington's national bank subsidiary is subject to examination and
supervision by the OCC. Its deposits are insured by the Bank Insurance Fund
(BIF) of the Federal Deposit Insurance Corporation (FDIC), although certain
deposits were acquired from savings associations and are insured by the Savings
Association Insurance Fund (SAIF) of the FDIC. Huntington's nonbank subsidiaries
are also subject to examination and supervision by the Federal Reserve Board
(or, in the case of nonbank subsidiaries of the national bank subsidiary, by the
OCC), and examination by other federal and state agencies, including, in the
case of certain securities activities, regulation by the Securities and Exchange
Commission.
In addition to the impact of federal and state regulation, the bank and
nonbank subsidiaries of Huntington are affected significantly by the actions of
the Federal Reserve Board as it attempts to control the money supply and credit
availability in order to influence the economy.
HOLDING COMPANY STRUCTURE
Huntington has one national bank subsidiary and numerous nonbank
subsidiaries. The national bank subsidiary is subject to affiliate transaction
restrictions under federal law which limit the transfer of funds by the
subsidiary bank to the parent and any nonbank subsidiaries of the parent,
whether in the form of loans, extensions of credit, investments, or asset
purchases. Such transfers by a subsidiary bank to its parent corporation or to
any individual nonbank subsidiary of the parent are limited in amount to 10% of
the subsidiary bank's capital and surplus and, with respect to such parent
together with all such nonbank subsidiaries of the parent, to an aggregate of
20% of the subsidiary bank's capital and surplus. Furthermore, such loans and
extensions of credit are required to be secured in specified amounts. In
addition, all affiliate transactions must be conducted on terms and under
circumstances that are substantially the same as such transactions with
unaffiliated entities. Under applicable regulations, at December 31, 2001,
approximately $288.2 million was available for loans to Huntington from its
subsidiary bank.
The Federal Reserve Board has a policy to the effect that a bank
holding company is expected to act as a source of financial and managerial
strength to each of its subsidiary banks and to commit resources to support each
such subsidiary bank. Under the source of strength doctrine, the Federal Reserve
Board may require a bank holding company to make capital injections into a
troubled subsidiary bank, and may charge the bank holding company with engaging
in unsafe and unsound practices for failure to commit resources to such a
subsidiary bank. This capital injection may be required at times when Huntington
may not have the resources to provide it. Any loans by a holding company to its
subsidiary banks are subordinate in right of payment to deposits and to certain
other indebtedness of such subsidiary bank. Moreover, in the event of a bank
holding company's bankruptcy, any commitment by such holding company to a
federal bank regulatory agency to maintain the capital of a subsidiary bank will
be assumed by the bankruptcy trustee and entitled to a priority of payment.
Federal law permits the OCC to order the pro rata assessment of
shareholders of a national bank whose capital stock has become impaired, by
losses or otherwise, to relieve a deficiency in such national bank's capital
stock. This statute also provides for the enforcement of any such pro rata
assessment of shareholders of such national bank to cover such impairment of
capital stock by sale, to the extent necessary, of the capital stock of any
assessed shareholder failing to pay the assessment. Huntington, as the sole
shareholder of its subsidiary bank, is subject to such provisions. Moreover, the
claims of a receiver of an insured depository institution for administrative
expenses and the claims of holders of deposit liabilities of such an institution
are accorded priority over the claims of general unsecured creditors of such an
institution, including the holders of the institution's note obligations, in the
event of a liquidation or other resolution of such institution. Claims of a
receiver for administrative expenses and claims of holders of deposit
liabilities of Huntington's depository subsidiary, including the FDIC, as the
subrogee of such holders, would receive priority over the holders of notes and
other senior debt of such subsidiary in the event of a liquidation or other
resolution and over the interests of Huntington as sole shareholder of its
subsidiary.
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DIVIDEND RESTRICTIONS
Dividends from Huntington's subsidiary bank are a significant source of
funds for payment of dividends to Huntington's shareholders. In the year ended
December 31, 2001, Huntington declared cash dividends to its shareholders of
approximately $180.8 million. There are, however, statutory limits on the amount
of dividends that Huntington's subsidiary bank can pay to Huntington without
regulatory approval.
Huntington's subsidiary bank may not, without prior regulatory
approval, pay a dividend in an amount greater than such bank's undivided
profits. In addition, the prior approval of the OCC is required for the payment
of a dividend by a national bank if the total of all dividends declared by the
bank in a calendar year would exceed the total of its net income for the year
combined with its retained net income for the two preceding years. Under these
provisions and in accordance with the above-described formula, Huntington's
subsidiary bank could, without regulatory approval, declare dividends to
Huntington in 2002 of approximately $91.7 million plus an additional amount
equal to its net profits during 2002.
If, in the opinion of the applicable regulatory authority, a bank under
its jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice which, depending on the financial condition of the bank, could include
the payment of dividends, such authority may require, after notice and hearing,
that such bank cease and desist from such practice. The Federal Reserve Board
and the OCC have issued policy statements that provide that insured banks and
bank holding companies should generally only pay dividends out of current
operating earnings.
FDIC INSURANCE
Huntington's bank subsidiary is classified by the FDIC as a
well-capitalized institution in the highest supervisory subcategory, and is
therefore not obliged under current FDIC assessment practices to pay deposit
insurance premiums, either on its deposits insured by the BIF or on that portion
of its deposits acquired from savings and loan associations and insured by the
SAIF. Although not currently subject to FDIC assessments for insurance premiums,
the bank subsidiary is required to make payments for the servicing of
obligations of the Financing Corporation (FICO) that were issued in connection
with the resolution of savings and loan associations, so long as such
obligations remain outstanding. The FDIC may alter its assessment practices in
the future if required by developments affecting the resources of the BIF or the
SAIF. The FDIC is also conducting a comprehensive review of the deposit
insurance system to study alternatives for pricing, funding, and coverage.
CAPITAL REQUIREMENTS
The Federal Reserve Board has issued risk-based capital ratio and
leverage ratio guidelines for bank holding companies such as Huntington. The
risk-based capital ratio guidelines establish a systematic analytical framework
that makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
explicit account in assessing capital adequacy, and minimizes disincentives to
holding liquid, low-risk assets. Under the guidelines and related policies, bank
holding companies must maintain capital sufficient to meet both a risk-based
asset ratio test and a leverage ratio test on a consolidated basis. The
risk-based ratio is determined by allocating assets and specified off-balance
sheet commitments into four weighted categories, with higher weighting being
assigned to categories perceived as representing greater risk. A bank holding
company's capital is then divided by total risk weighted assets to yield the
risk-based ratio. The leverage ratio is determined by relating core capital to
total assets adjusted as specified in the guidelines. Huntington's subsidiary
bank is subject to substantially similar capital requirements.
Generally, under the applicable guidelines, a financial institution's
capital is divided into two tiers. Institutions that must incorporate market
risk exposure into their risk-based capital requirements may also have a third
tier of capital in the form of restricted short-term subordinated debt. "Tier
1", or core capital, includes common equity, noncumulative perpetual preferred
stock excluding auction rate issues, and minority interests in equity accounts
of consolidated subsidiaries, less goodwill and, with certain limited
exceptions, all other intangible assets. Bank holding companies, however, may
include cumulative preferred stock in their Tier 1 capital, up to a limit of 25%
of such Tier 1 capital. "Tier 2", or supplementary capital, includes, among
other things, cumulative and limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan and lease losses, subject to certain limitations. "Total
capital" is the sum of Tier 1 and Tier 2 capital.
The Federal Reserve Board and the other federal banking regulators
require that all intangible assets, with certain limited exceptions, be deducted
from Tier 1 capital. Under the Federal Reserve Board's rules, the only types of
intangible assets that may be included in (i.e., not deducted from) a bank
holding company's capital are originated or
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purchased mortgage servicing rights, non-mortgage servicing assets, and
purchased credit card relationships, provided that, in the aggregate, the total
amount of these items included in capital does not exceed 100% of Tier 1
capital.
Under the risk-based guidelines, financial institutions are required to
maintain a risk-based ratio, which is total capital to risk-weighted assets, of
8%, of which 4% must be Tier 1 capital. The appropriate regulatory authority may
set higher capital requirements when an institution's circumstances warrant.
Under the leverage guidelines, financial institutions are required to
maintain a leverage ratio, which is Tier 1 capital to adjusted total assets, as
specified in the guidelines, of at least 3%. The 3% minimum ratio is applicable
only to financial institutions that meet certain specified criteria, including
excellent asset quality, high liquidity, low interest rate exposure, and the
highest regulatory rating. Financial institutions not meeting these criteria are
required to maintain a minimum Tier 1 leverage ratio of 4%.
In early 2002, bank regulatory agencies established special minimum
capital requirements for equity investments in nonfinancial companies. The
requirements consist of a series of marginal capital charges that increase
within a range from 8% to 25% as a financial institution's overall exposure to
equity investments increases as a percentage of its Tier 1 capital. At December
31, 2001, capital charges relating to Huntington's equity investments in
nonfinancial companies were immaterial.
Failure to meet applicable capital guidelines could subject the
financial institution to a variety of enforcement remedies available to the
federal regulatory authorities including limitations on the ability to pay
dividends, the issuance by the regulatory authority of a capital directive to
increase capital, and the termination of deposit insurance by the FDIC, as well
as to the measures described below under "Prompt Corrective Action" as
applicable to undercapitalized institutions.
As of December 31, 2001, the Tier 1 risk-based capital ratio, total
risk-based capital ratio, and Tier 1 leverage ratio for Huntington were 7.24%,
10.29%, and 7.41%, respectively. As of December 31, 2001, Huntington's bank
subsidiary also had capital in excess of the minimum requirements.
The risk-based capital standards of the Federal Reserve Board, the OCC,
and the FDIC specify that evaluations by the banking agencies of a bank's
capital adequacy will include an assessment of the exposure to declines in the
economic value of the bank's capital due to changes in interest rates. These
banking agencies issued a joint policy statement on interest rate risk
describing prudent methods for monitoring such risk that rely principally on
internal measures of exposure and active oversight of risk management activities
by senior management.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) requires federal banking regulatory authorities to take "prompt
corrective action" with respect to depository institutions that do not meet
minimum capital requirements. For these purposes, FDICIA establishes five
capital tiers: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
An institution is deemed to be "well-capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of
6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject
to a regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure. An institution is deemed to be
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, a Tier 1 risk-based capital ratio of 4% or greater, and, generally, a
Tier 1 leverage ratio of 4% or greater and the institution does not meet the
definition of a "well-capitalized" institution. An institution that does not
meet one or more of the "adequately capitalized" tests is deemed to be
"undercapitalized". If the institution has a total risk-based capital ratio that
is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a
Tier 1 leverage ratio that is less than 3%, it is deemed to be "significantly
undercapitalized". Finally, an institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
FDICIA generally prohibits a depository institution from making any
capital distribution, including payment of a cash dividend, or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized institutions are subject to
growth limitations and are required to submit a capital restoration plan. If any
depository institution subsidiary of a holding company is required to submit a
capital restoration plan, the holding company would be required to provide a
limited guarantee regarding compliance with the plan as a condition of approval
of such plan by the appropriate federal banking agency. If an undercapitalized
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized. Significantly undercapitalized institutions may
be subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock
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to become adequately capitalized, requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized institutions may not, beginning 60 days after becoming
critically undercapitalized, make any payment of principal or interest on their
subordinated debt. In addition, critically undercapitalized institutions are
subject to appointment of a receiver or conservator within 90 days of becoming
critically undercapitalized.
Under FDICIA, a depository institution that is not well-capitalized is
generally prohibited from accepting brokered deposits and offering interest
rates on deposits higher than the prevailing rate in its market. Huntington
expects that the FDIC's brokered deposit rule will not adversely affect the
ability of its depository institution subsidiary to accept brokered deposits.
Under the regulatory definition of brokered deposits, Huntington's bank
subsidiary had $137.9 million of brokered deposits at December 31, 2001.
GRAMM-LEACH-BLILEY ACT OF 1999
Under the GLB Act enacted in 1999, banks are no longer prohibited by
the Glass-Steagall Act from associating with, or having management interlocks
with, a business organization engaged principally in securities activities. By
qualifying as a new entity known as a "financial holding company", a bank
holding company may acquire new powers not otherwise available to it. In order
to qualify, a bank holding company's depository subsidiaries must all be both
well-capitalized and well managed, and must be meeting their Community
Reinvestment Act obligations. The bank holding company must also declare its
intention to become a financial holding company to the Federal Reserve Board and
certify that its depository subsidiaries meet the capitalization and management
requirements. The repeal of the Glass-Steagall Act and the availability of new
powers both became effective on March 11, 2000, and Huntington became a
financial holding company on March 13, 2000.
Financial holding company powers relate to "financial activities" that
are determined by the Federal Reserve Board, in coordination with the Secretary
of the Treasury, to be financial in nature, incidental to an activity that is
financial in nature, or complementary to a financial activity, provided that the
complementary activity does not pose a safety and soundness risk. The statute
itself defines certain activities as financial in nature, including but not
limited to underwriting insurance or annuities; providing financial or
investment advice; underwriting, dealing in, or making markets in securities;
merchant banking, subject to significant limitations; insurance company
portfolio investing, subject to significant limitations; and any activities
previously found by the Federal Reserve Board to be closely related to banking.
National and state banks are permitted under the GLB Act, subject to
capital, management, size, debt rating, and Community Reinvestment Act
qualification factors, to have "financial subsidiaries" that are permitted to
engage in financial activities not otherwise permissible. However, unlike
financial holding companies, financial subsidiaries may not engage in insurance
or annuity underwriting; developing or investing in real estate; merchant
banking, for at least five years, or insurance company portfolio investing.
Other provisions of the GLB Act establish a system of functional regulation for
financial holding companies and banks involving the Securities and Exchange
Commission, the Commodity Futures Trading Commission, and state securities and
insurance regulators; deal with bank insurance sales and title insurance
activities in relation to state insurance regulation; prescribe consumer
protection standards for insurance sales; and establish minimum federal
standards of privacy to protect the confidentiality of the personal financial
information of consumers and regulate its use by financial institutions. Federal
bank regulatory agencies issued a variety of proposed, interim, and final rules
during the year 2001 for the implementation of the GLB Act.
RECENT REGULATORY DEVELOPMENTS
By the end of 2001, banking regulators had published for comment or had
under advanced consideration new regulations concerning money laundering in the
wake of the terrorist events of September 11, 2001, including possible authority
for financial holding companies to engage in real estate brokerage and property
management services; less burdensome capital requirements than had previously
been proposed for merchant banking investments entered into by financial holding
companies; and more stringent affiliate transaction restrictions that would
treat bank subsidiaries engaging in bank impermissible activities as affiliates
for purposes of the restrictions.
The federal budget for 2003, published in early 2002, indicates a
probable need for an increase in bank deposit insurance premiums in a form that
would affect the bank subsidiary, and draft legislation was introduced in the
Congress that proposed changes in both deposit insurance coverage and in
premiums charged to banks for such insurance was under initial Congressional
committee consideration. In March 2002, the FDIC announced that, on the basis of
current information, an increase in deposit insurance premium was likely in the
second half of 2002. It is not possible at present to assess the positive or
negative impact on Huntington of any of the foregoing proposals if adopted.
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BUSINESS RISKS
Like all other financial companies, Huntington's business and results
of operations are subject to a number of risks, many of which are outside of
Huntington's control. In addition to the other information in this report,
readers should carefully consider that the following important factors, among
others, could materially impact Huntington's business and future results of
operations.
CHANGES IN INTEREST RATES COULD NEGATIVELY IMPACT HUNTINGTON'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Huntington's results of operations depend substantially on its net
interest income, which results from the difference between interest earned on
interest-earning assets, such as investments, loans, and leases, and interest
paid on interest-bearing liabilities, such as deposits and borrowings. Interest
rates are highly sensitive to many factors, including governmental monetary
policies and domestic and international economic and political conditions.
Conditions such as inflation, recession, unemployment, money supply, and other
factors beyond management's control may also affect interest rates. If
Huntington's interest-earning assets mature or reprice more quickly than
interest-bearing liabilities in a given period, a decrease in market interest
rates could adversely affect net interest income. Likewise, if interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in a
given period, an increase in market interest rates could adversely affect net
interest income.
At December 31, 2001, 48.6% of Huntington's earning assets, as measured
by the aggregate outstanding principal amount of loans, amortized cost of
securities available for sale, and the carrying value of other earning assets,
bore interest at adjustable rates and are expected to reprice within one year.
The remainder bore interest at fixed rates. Fixed rate loans increase
Huntington's exposure to interest rate risk in a rising rate environment because
interest-bearing liabilities would be subject to repricing before assets become
subject to repricing. Adjustable-rate loans decrease the risks to a lender
associated with changes in interest rates but involve other risks. As interest
rates rise, the payment by the borrower rises to the extent permitted by the
terms of the loan, and the increased payment increases the potential for
default. At the same time, for secured loans, the marketability of the
underlying collateral may be adversely affected by higher interest rates. In a
declining interest rate environment, there may be an increase in prepayments on
loans as the borrowers refinance their loans at lower interest rates. Under
these circumstances, Huntington's results of operations could be negatively
impacted.
The forward yield curve at December 31, 2001, implied a 150 basis point
increase in short-term interest rates by the end of 2002. The results of
Huntington's recent sensitivity analysis indicated that net interest income
would be 0.6% lower during the next twelve months than if interest rates were
100 basis points higher at the end of that period than implied by forward rates
at December 31, 2001, or 250 basis points from rates at this same date. Net
interest income was estimated to be 1.3% lower if rates were 200 basis points
higher than the yield curve, or 350 basis points overall. Conversely, if rates
were 100 and 200 basis points lower than the yield curve, net interest income
would be 0.3% and 0.9% higher, respectively. At the end of 2000, net interest
income was estimated to be 2.5% higher during the subsequent twelve months if
interest rates were 200 basis points lower than the level implied by forward
rates in twelve months. The decline in sensitivity over the past year was
primarily due to the previously mentioned sales of low margin fixed rate
investment securities. These sales were part of management's effort to
restructure the balance sheet and reduce sensitivity to interest rate changes in
order to stabilize Huntington's revenue base.
Changes in interest rates also can affect the value of loans and other
interest-earning assets, including retained interests in securitizations,
mortgage and non-mortgage servicing rights, and Huntington's ability to realize
gains on the sale or resolution of assets. A portion of Huntington's earnings
results from transactional income, such as accelerated interest income resulting
from loan prepayments, gains on sales of loans and leases, and gains on sales of
real estate. This type of income can vary significantly from quarter-to-quarter
and year-to-year based on a number of different factors, including the interest
rate environment. An increase in interest rates that adversely affects the
ability of borrowers to pay the principal or interest on loans may lead to an
increase in non-performing assets and a reduction of discount accreted into
income, which could have a material adverse effect on Huntington's results of
operations.
Although fluctuations in market interest rates are neither completely
predictable nor controllable, Huntington's Asset and Liability Management
Committee regularly monitors Huntington's interest rate sensitivity position and
oversees its financial risk management by establishing policies and operating
limits.
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HUNTINGTON'S LOANS AND DEPOSITS ARE FOCUSED IN FIVE STATES AND ADVERSE ECONOMIC
CONDITIONS IN THOSE STATES, IN PARTICULAR, COULD NEGATIVELY IMPACT RESULTS FROM
OPERATIONS AND FINANCIAL CONDITION.
Excluding Florida loans and deposits, which were sold to SunTrust
Banks, Inc. on February 15, 2002, most of Huntington's loans and deposits at
December 31, 2001, were located in Ohio, Michigan, Indiana, West Virginia, and
Kentucky. Because of the focus of loans and deposits in these states, in the
event of adverse economic conditions in these states, Huntington could
experience more difficulty in attracting deposit liabilities and experience
higher rates of loss and delinquency on its loans than if the loans were more
geographically diversified. Adverse economic conditions and other factors can
affect real estate and other collateral values; interest rate levels, and the
availability of credit to refinance loans at or prior to maturity. Additionally,
loans in these five states may be subject to a greater risk of default than
other comparable loans in the event of adverse economic, political, or business
developments or natural hazards that may affect these states and the continued
financial stability of a borrower and the borrower's ability to make loan
principal and interest payments, which may be adversely affected by job loss,
recession, divorce, illness, or personal bankruptcy.
HUNTINGTON HAS SIGNIFICANT COMPETITION IN BOTH ATTRACTING AND RETAINING DEPOSITS
AND IN ORIGINATING LOANS.
Competition in the form of price and service from other banks and
financial companies such as savings and loans, credit unions, finance companies,
and brokerage firms is intense in most of the markets Huntington serves. Mergers
between and the expansion of financial institutions both within and outside Ohio
have provided significant competitive pressure in its major markets. Since 1997,
when federal interstate banking legislation became effective that made it
permissible for bank holding companies in any state to acquire banks in any
other state, and for banks to establish interstate branches subject to certain
limitations by individual states, actual or potential competition in each of
Huntington's markets has intensified. Internet banking, offered both by
established traditional institutions and by start-up Internet-only banks,
constitutes another significant form of competitive pressure.
Financial services reform legislation enacted in 1999 eliminated the
long-standing Glass-Steagall Act restrictions on securities activities of bank
holding companies and banks. The new legislation, among other things, permits
securities and insurance firms to engage in banking activities under specified
conditions. Huntington expects to see competition intensify from this relatively
new source of competition.
HUNTINGTON COULD EXPERIENCE LOSSES ON ITS RESIDUAL VALUES RELATED TO ITS
AUTOMOBILE LEASE PORTFOLIO.
Huntington has a $3 billion automobile lease portfolio, which
inherently has residual value risk. Residual value risk arises when a used car
market price at the end of the lease is below Huntington's recorded residual
value. This may occur as a result of a decline in used car prices, subsequent
changes in residual values published by Automotive Lease Guide (ALG), the
industry source Huntington utilizes to track used car values, or a combination
of both. Huntington's policy is to not enhance residual values.
In late 2000, Huntington purchased residual value insurance coverage.
This insurance covers the difference between the recorded residual value and the
fair value of the automobile at the end of the lease term, as evidenced by Black
Book valuations. The insurance provides first dollar loss coverage on the
portfolio at October 1, 2000 and has a cap on insured losses of $120 million.
Insured losses on new lease originations from October 2000 to March 31, 2002
have a cap of $50 million. The insurance coverage is subject to annual renewal.
Insurance does not cover residual losses below Black Book value. That
situation occurs usually when the automobile has excess wear and tear and/or
excess mileage that is not reimbursable by the lessor. Huntington has a reserve
of $34.9 million, which is available to cover this risk. There is no guarantee,
however, that the combined purchased insurance and this reserve are sufficient
to cover all potential residual losses associated with Huntington's automobile
lease portfolio.
NEW, OR CHANGES IN EXISTING, TAX, ACCOUNTING, AND REGULATORY LAWS, REGULATIONS,
RULES, AND STANDARDS COULD SIGNIFICANTLY IMPACT STRATEGIC INITIATIVES, RESULTS
OF OPERATIONS, AND FINANCIAL CONDITION.
The financial services industry is regulated extensively. Federal and
state regulation is designed primarily to protect the deposit insurance funds
and consumers, and not to benefit a financial company's shareholders. These
regulations may sometimes impose significant limitations on operations. These
limitations are described in this report under the heading "Regulatory Matters."
These regulations, along with the currently existing tax and accounting laws,
regulations, rules, and standards, control the methods by which financial
institutions conduct business; implement strategic initiatives, as well as past,
present, and contemplated tax planning; and govern financial disclosures. These
laws, regulations, rules, and standards are constantly evolving and may change
significantly over time. Current events that may not have a direct impact on
Huntington, such as the Enron Corporation bankruptcy and the September 11, 2001
9
terrorist attacks, may result in legislators, regulators, and authoritative
bodies, such as the Financial Accounting Standards Board, to respond by adopting
substantive revisions to the laws, regulations, rules, and standards. The
nature, extent, and timing of the adoption of significant new laws, changes in
existing laws, or repeal of existing laws may have a material impact on
Huntington's business, results of operations, and financial condition; however,
it is impossible to predict at this time the extent to which any such adoption,
change, or repeal would impact Huntington.
THE EXTENDED DISRUPTION OF VITAL INFRASTRUCTURE COULD NEGATIVELY IMPACT
HUNTINGTON'S BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION.
Huntington's operations depend upon, among other things, its
infrastructure, including its equipment and facilities. Extended disruption of
its vital infrastructure by fire, power loss, natural disaster,
telecommunications failure, computer hacking and viruses, terrorist activity or
the domestic and foreign response to such activity, or other events outside of
Huntington's control could have a material adverse impact on the financial
services industry as a whole and on Huntington's business, results of
operations, and financial condition in particular.
HUNTINGTON'S FINANCIAL PERFORMANCE AND PROFITABILITY WILL DEPEND ON ITS ABILITY
TO EXECUTE ITS CORPORATE BUSINESS STRATEGIES, INCLUDING THE RECENTLY ANNOUNCED
COMPREHENSIVE RESTRUCTURING AND STRATEGIC REFOCUSING INITIATIVES.
In July 2001, Huntington announced a comprehensive restructuring and
strategic refocusing plan. This plan included the sale of Huntington's Florida
operations, the consolidation of numerous branch offices, and the taking of
credit related and other actions to strengthen Huntington's balance sheet to
attain more positive revenue and earnings for shareholders and to improve
capital efficiency. Although Huntington has made progress toward completing many
of the elements of this plan, it cannot guarantee the success of the entire plan
or other past, present, or future business plans or strategies. These plans and
strategies may in the future involve acquisitions or other banks or non-banking
businesses. The extent to which any such future businesses acquired by
Huntington are integrated may impact its results of operations.
THE OCC MAY IMPOSE DIVIDEND PAYMENT AND OTHER RESTRICTIONS ON THE HUNTINGTON
NATIONAL BANK, HUNTINGTON'S BANK SUBSIDIARY, WHICH WOULD IMPACT HUNTINGTON'S
ABILITY TO PAY DIVIDENDS TO ITS SHAREHOLDERS OR REPURCHASE ITS STOCK.
The OCC has the right to examine The Huntington National Bank (the
Bank) and its activities. Under certain circumstances, including any
determination that the Bank's activities constitute an unsafe and unsound
banking practice, the OCC has the authority to restrict the Bank's ability to
transfer assets, to make distributions to shareholders, or to redeem preferred
securities.
Under applicable statutes and regulations, all dividends by a national
bank must be paid out of current or retained net profits, after deducting
reserves for losses and bad debts. In addition, a national bank is prohibited
from declaring a cash dividend on its common shares out of net profits until the
surplus fund equals the amount of capital stock or, if the surplus fund does not
equal the amount of capital stock, until certain amounts from net profits are
transferred to the surplus fund. Moreover, the prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
for the year combined with its net profits for the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
securities.
Payment of dividends could also be subject to regulatory limitations if
the Bank became "undercapitalized" for purposes of the OCC prompt corrective
action regulations. "Undercapitalized" is currently defined as having a total
risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of
less than 4.0%, or a core capital, or leverage, ratio of less than 4.0%. The
Bank's inability to pay dividends to Huntington would negatively impact
Huntington's ability to pay dividends to its shareholders or to repurchase its
stock. In January 2002, the Bank received approval from the OCC to transfer
sufficient capital from undivided profits to surplus and from surplus to
Huntington to facilitate the repurchase of Huntington common stock.
At December 31, 2001, the Bank was in compliance with all regulatory
capital requirements. As of that date, total risk-based capital was 10.29%, Tier
1 risk-based capital was 6.34%, and Tier 1 leverage capital was 6.58%.
Huntington intends to maintain the Bank's capital ratios in excess of the
"well-capitalized" levels under the OCC's regulations. Huntington cannot
guarantee, however, that it will be able to keep the capital ratios for the Bank
in excess of "well-capitalized" levels.
10
THE FEDERAL RESERVE BOARD (FRB) MAY REQUIRE HUNTINGTON TO COMMIT CAPITAL
RESOURCES TO SUPPORT ITS BANK SUBSIDIARY, THE HUNTINGTON NATIONAL BANK.
The Federal Reserve Board has a policy to the effect that a bank
holding company is expected to act as a source of financial and managerial
strength to its subsidiary bank and to commit resources to support such
subsidiary bank. Under the source of strength doctrine, the Federal Reserve
Board may require a bank holding company to make capital injections into a
troubled subsidiary bank, and may charge the bank holding company with engaging
in unsafe and unsound practices for failure to commit resources to such a
subsidiary bank. This capital injection may be required at times when the
holding company may not have the resources to provide it, and therefore may be
required to borrow the funds. Any loans by a holding company to its subsidiary
bank are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. Moreover, in the event of a bank holding
company's bankruptcy, any commitment by the holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment. Thus, any
borrowing that must be done by the holding company in order to make the required
capital injection becomes more difficult and expensive and will adversely impact
the holding company's results of operations.
Management does not foresee the need to make capital injections to its
subsidiary bank under the source of strength doctrine in the foreseeable future.
IF HUNTINGTON IS UNABLE TO BORROW FUNDS THROUGH ACCESS TO CAPITAL MARKETS, IT
MAY NOT BE ABLE TO MEET THE CASH FLOW REQUIREMENTS OF ITS DEPOSITORS AND
BORROWERS, OR MEET THE OPERATING CASH NEEDS OF HUNTINGTON TO FUND CORPORATE
EXPANSION AND OTHER ACTIVITIES.
Effectively managing liquidity involves ensuring the cash flow
requirements of depositors and borrowers, as well as meeting the operating cash
needs of Huntington to fund corporate expansion and other activities. Funds are
available from a number of sources, including core deposits, and the ability to
acquire large deposits and issue notes and common and preferred securities in
the capital markets. Huntington's European bank note and bank subsidiary
domestic programs, along with a similar note program at the parent company, are
significant sources of wholesale funding. The proceeds from the parent's note
program are used from time to time to fund certain non-banking activities,
finance acquisitions, repurchase Huntington's common stock, and are used for
other general corporate purposes. Huntington has also issued capital securities
through two of its non-bank subsidiaries and obtains funding from the issuance
of commercial paper through Huntington Bancshares Financial Corporation, another
non-bank subsidiary. Significant liquidity is also available from Huntington's
securities available for sale and loan portfolios through the securitization and
sale of loans.
If Huntington were unable to access any of these funding sources when
needed, it might be unable to meet the needs of its customers, which could
adversely impact Huntington's financial condition, its results of operations,
and its level of regulatory-qualifying capital.
IF HUNTINGTON'S COMMON STOCK PRICE RISES SUBSTANTIALLY OR THE AVAILABILITY OF
SHARES IS LIMITED IN THE MARKETPLACE, MANAGEMENT MAY NOT BE ABLE TO REPURCHASE
COMMON STOCK AS INTENDED UNDER ITS STRATEGIC REFOCUSING PLAN.
Huntington's comprehensive restructuring and strategic refocusing plan
announced in July 2001, included several actions to strengthen its capital
position. On February 18, 2002, Huntington's Board of Director's terminated the
existing stock repurchase program, which had approximately 15.3 million shares
remaining, and authorized a new stock repurchase program. The new program
provides for the repurchase of up to 22 million shares in open market and
privately negotiated transactions. Huntington would be able to repurchase
approximately 8.8% of its outstanding common stock, if it is able to repurchase
the entire authorization, resulting in a minimum equity to asset ratio of 6.50%
and enhanced performance ratios. If the stock price rises substantially or if
the number of willing sellers of Huntington's common stock is limited,
management may be precluded from repurchasing the desired quantity of shares
which would negatively impact its ability to attain its targeted earnings per
share and return on equity ratios.
IF HUNTINGTON'S REAL ESTATE INVESTMENT TRUST (REIT) AFFILIATE FAILS TO QUALIFY
AS A REIT, HUNTINGTON WILL BE SUBJECT TO A HIGHER CONSOLIDATED EFFECTIVE TAX
RATE.
Huntington Preferred Capital, Inc. (HPCI), which is a second tier and
consolidated subsidiary of Huntington, was established to acquire, hold, and
manage mortgage assets and other authorized investments to generate net income
for distribution to its shareholders. It also operates in a manner so as to
qualify as a real estate investment trust (REIT) for federal income tax
purposes. Qualification as a REIT involves application of specific provisions of
the Internal Revenue Code. Two specific provisions are an income test and an
asset test. At least 75% of HPCI's gross income,
11
excluding gross income from prohibited transactions, for each taxable year must
be derived directly or indirectly from investments relating to real property or
mortgages on real property. Additionally, at least 75% of HPCI's total assets
must be represented by real estate assets. At December 31, 2001, HPCI had
qualifying income of 85.2% and qualifying assets of 84.5%.
If this REIT affiliate fails to meet any of the required provisions for
REITs, it will no longer qualify as a REIT and the resulting tax consequences
would increase Huntington's effective tax rate.
HUNTINGTON COULD BE HELD RESPONSIBLE FOR ENVIRONMENTAL LIABILITIES OF PROPERTIES
ACQUIRED THROUGH FORECLOSURE OF LOANS SECURED BY REAL ESTATE.
In the event that Huntington is forced to foreclose on a defaulted
commercial mortgage and/or residential mortgage loan to recover its investment
in the mortgage loan, Huntington may be subject to environmental liabilities in
connection with the underlying real property, which could exceed the value of
the real property. Although Huntington exercises due diligence to discover
potential environmental liabilities prior to the acquisition of any property
through foreclosure, hazardous substances or wastes, contaminants, pollutants,
or their sources may be discovered on properties during Huntington's ownership
or after a sale to a third party. There can be no assurance that Huntington
would not incur full recourse liability for the entire cost of any removal and
clean-up on an acquired property, that the cost of removal and clean-up would
not exceed the value of the property, or that Huntington could recover any of
the costs from any third party.
HUNTINGTON'S FINANCIAL STATEMENTS CONFORM WITH ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED STATES, WHICH REQUIRE MANAGEMENT TO MAKE ESTIMATES AND
ASSUMPTIONS THAT AFFECT AMOUNTS REPORTED IN THE FINANCIAL STATEMENTS. ACTUAL
RESULTS COULD DIFFER FROM THOSE ESTIMATES.
Huntington's financial statements include estimates related to accruals
of income and expenses and determination of fair values or carry values of
certain, but not all, assets and liabilities. These estimates are based on
information available to management at the time the estimates are made. Factors
involved in these estimates could change in the future leading to a change of
those estimates, which could be material to Huntington's results of operations
or financial condition.
IF HUNTINGTON'S CREDIT RATING WERE TO BE DOWNGRADED, HUNTINGTON'S ABILITY TO
ACCESS FUNDING SOURCES MAY BE NEGATIVELY IMPACTED. ANY SUCH DOWNGRADE COULD
TRIGGER ACTIONS THAT COULD ADVERSELY IMPACT HUNTINGTON'S LIQUIDITY.
Certain funding sources, primarily wholesale, are sensitive to credit
ratings. Huntington's ability to issue bank notes or other debt, attract large
corporate deposits or public funds, or access federal funds and euro deposits
could be negatively impacted in the event Huntington's credit rating was
downgraded. Like other financial organizations, Huntington uses various types of
derivative financial instruments, primarily interest rate swaps, to manage its
exposure to changes in interest rates. In the event of a ratings downgrade below
a specified level, Huntington may be required to post additional collateral to
cover unsecured counterparty credit exposure in those agreements governing
derivative transactions.
In addition, a credit downgrade could prohibit Huntington from selling
additional loans to its securitization trusts. Huntington also provides letter
of credit support for marketable debt. These lines could be drawn upon in the
event of a credit downgrade. In any of these events, Huntington would need to
find alternative sources of funding.
12
GUIDE 3 INFORMATION
Information required by Industry Guide 3 relating to statistical
disclosure by bank holding companies is set forth in Items 7 and 8.
ITEM 2: PROPERTIES
The headquarters of Huntington and its lead subsidiary, The Huntington
National Bank, are located in the Huntington Center, a thirty-seven story office
building located in Columbus, Ohio. Of the building's total office space
available, Huntington leases approximately 39 percent. The lease term expires in
2015, with nine five-year renewal options for up to 45 years but with no
purchase option. The Huntington National Bank has an equity interest in the
entity that owns the building. Huntington's other major properties consist of a
thirteen-story and a twelve-story office building, both of which are located
adjacent to the Huntington Center; a twenty-one story office building, known as
the Huntington Building, located in Cleveland, Ohio; an eighteen-story office
building in Charleston, West Virginia; a three-story office building located in
Holland, Michigan; an office building in Lakeland, Florida; an eleven-story
office building in Sarasota, Florida; a 470,000 square foot Business Service
Center in Columbus, Ohio, which serves as Huntington's primary operations and
data center; The Huntington Mortgage Company's building, located in the greater
Columbus area; an office complex located in Troy, Michigan; and two data
processing and operations centers located in Ohio. Of these properties,
Huntington owns the thirteen-story and twelve-story office buildings, and the
Business Service Center. All of the other major properties are held under
long-term leases.
In 1998, Huntington entered into a sale/leaseback agreement that
included the sale of 59 properties. The transaction included a mix of branch
banking offices, regional offices, and operational facilities, including certain
properties described above, which Huntington will continue to operate under a
long-term lease.
The buildings in Lakeland and Sarasota, Florida, were sold in February,
2002 as part of the sale of Huntington's Florida operations.
ITEM 3: LEGAL PROCEEDINGS
Information required by this item is set forth in Item 8 in Note 17 of
Notes to Consolidated Financial Statements on page 64.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of Huntington Bancshares Incorporated is traded on the
NASDAQ Stock Market under the symbol "HBAN". The stock is listed as "HuntgBcshr"
or "HuntBanc" in most newspapers. As of January 31, 2002, Huntington had 30,744
shareholders of record.
Information regarding the high and low sale prices of Huntington Common
Stock and cash dividends declared on such shares, as required by this item, is
set forth in a table entitled "Market Prices, Key Ratios, and Statistics" on
page 39 in Item 7. Information regarding restrictions on dividends, as required
by this item, is set forth in Item 1 "Business-Regulatory Matters-Dividend
Restrictions" above and in Item 8 in Notes 10 and 22 of Notes to Consolidated
Financial Statements on pages 55 and 70, respectively.
13
ITEM 6: SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
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(in thousands of dollars,
except per share amounts) 2001 2000 1999 1998 1997 1996
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SUMMARY OF OPERATIONS
Total interest income $ 1,939,519 $ 2,108,505 $ 2,026,002 $ 1,999,364 $ 1,981,473 $ 1,775,734
Total interest expense 943,337 1,166,073 984,240 978,271 954,243 880,648
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 996,182 942,432 1,041,762 1,021,093 1,027,230 895,086
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Provision for loan losses 308,793 90,479 88,447 105,242 107,797 76,371
Securities gains 723 37,101 12,972 29,793 7,978 17,620
Gains on sale of credit card portfolios --- --- 108,530 9,530 --- ---
Non-interest income 508,757 456,458 452,073 398,877 334,861 296,443
Non-interest expense 1,023,587 885,617 912,119 913,929 803,108 675,510
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 173,282 459,895 614,771 440,122 459,164 457,268
Income taxes (5,239) 131,449 192,697 138,354 166,501 152,999
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Net income $ 178,521 $ 328,446 $ 422,074 $ 301,768 $ 292,663 $ 304,269
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Operating net income (1) $ 293,522 $ 360,946 $ 414,444 $ 362,068 $ 338,897 $ 304,269
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PER COMMON SHARE (2)
Net income
Basic $0.71 $1.32 $1.66 $1.18 $1.15 $1.19
Diluted $0.71 $1.32 $1.65 $1.17 $1.14 $1.18
Diluted--Operating (1) $1.17 $1.45 $1.62 $1.40 $1.32 $1.18
Cash dividends declared $0.72 $0.76 $0.68 $0.62 $0.56 $0.51
Book value at year-end $9.62 $9.43 $8.67 $8.43 $7.94 $7.11
BALANCE SHEET HIGHLIGHTS
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Total assets at year-end $ 28,500,159 $ 28,599,377 $ 29,036,953 $ 28,296,336 $ 26,730,540 $ 24,371,946
Total long-term debt at year-end 944,330 870,976 697,677 707,359 498,889 550,531
Average long-term debt 879,642 823,555 702,974 620,688 526,379 515,664
Average shareholders' equity 2,381,820 2,279,230 2,146,735 2,064,241 1,893,788 1,776,151
Average total assets 28,137,172 28,720,508 28,739,450 26,891,558 25,150,659 23,374,490
KEY RATIOS AND STATISTICS
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MARGIN ANALYSIS--AS A %
OF AVERAGE EARNING ASSETS (3)
Interest Income 7.79 % 8.31 % 7.97 % 8.33 % 8.52 % 8.26 %
Interest Expense 3.77 4.58 3.86 4.05 4.08 4.07
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NET INTEREST MARGIN 4.02 % 3.73 % 4.11 % 4.28 % 4.44 % 4.19 %
- ------------------------------------------------------------------------------------------------------------------------------------
RETURN ON
Average total assets 0.63 % 1.14 % 1.47 % 1.12 % 1.16 % 1.30 %
Average total assets--Operating (1) 1.04 1.26 1.44 1.35 1.35 1.30
Average shareholders' equity 7.50 14.41 19.66 14.62 15.45 17.13
Average shareholders' equity--
Operating (1) 12.32 15.84 19.31 17.54 17.90 17.13
Dividend payout ratio 101.41 57.55 41.53 53.15 49.67 42.22
Average shareholders' equity to
average total assets 8.47 7.94 7.47 7.68 7.53 7.60
Tier I risk-based capital ratio 7.24 7.19 7.52 7.10 8.83 8.11
Total risk-based capital ratio 10.29 10.46 10.72 10.73 11.68 11.29
Tier I leverage ratio 7.41 % 6.93 % 6.72 % 6.37 % 7.77 % 6.80 %
Full-time equivalent employees 9,743 9,693 9,516 10,159 9,485 9,467
(1) Excludes restructuring and special charges and the 1999 gain from the sale
of Huntington's credit card portfolio, net of related taxes.
(2) Adjusted for stock splits and stock dividends, as applicable.
(3) Presented on a fully tax equivalent basis assuming a 35% tax rate.
14
ITEM 7. 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 are engaged in
full-service commercial and consumer banking, mortgage banking, lease financing,
trust services, discount brokerage services, underwriting credit life and
disability insurance, issuing commercial paper guaranteed by Huntington, and
selling other insurance and financial products and services. Huntington's
subsidiaries operate domestically in offices located in Ohio, Michigan, Florida,
West Virginia, Indiana, and Kentucky. Huntington has a foreign office in each of
the Cayman Islands and Hong Kong.
FORWARD-LOOKING STATEMENTS
This 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 its management for future operations, and forecasts of its
revenues, earnings, or other measures of economic performance. Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts.
By their nature, forward-looking statements are subject to numerous
assumptions, risks, and uncertainties. A number of factors, including but not
limited to, those set forth under the heading "Business Risks" included in Item
1 of this report and other factors described from time to time in Huntington's
other filings with the Securities and Exchange Commission, could cause actual
conditions, events, or results to differ significantly from those described in
the forward-looking statements.
The management of Huntington encourages readers of this report to
understand forward-looking statements to be strategic objectives rather than
absolute targets 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 are 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 Huntington's management believes to
be necessary for an understanding of its 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 Huntington's consolidated financial statements 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 Huntington and its results of operations.
STRATEGIC REFOCUSING AND OTHER RESTRUCTURING
In July 2001, Huntington announced a strategic refocusing plan. This plan
included the sale of Huntington's Florida operations, the consolidation of
numerous non-Florida branch offices, credit related and other actions to
strengthen Huntington's balance sheet. These actions were designed to attain
more positive revenue and earnings for shareholders and to improve capital
efficiency. Huntington announced that it expected to record total restructuring
and special charges of approximately $215.0 million pre-tax ($140.0 million
after-tax) related to this refocusing plan. Through the end of 2001, these
pre-tax charges totaled $176.9 million ($115.0 million after-tax, or $0.46 per
share), and consisted of $71.7 million related to credit quality, $37.3 million
for asset impairment, $16.2 million for the exit or curtailment of certain
e-commerce activities, $13.3 million related to owned or leased facilities that
Huntington has or intends to vacate, and $38.4 million related to employee
severance or retention, non-recurring legal, accounting, consulting, reduction
of ATMs, and other operational costs. See note 11 to Huntington's consolidated
financial statements for more information.
In addition to the above, in the fourth quarter of 2001, Huntington
recorded a $50.0 million pre-tax charge to provision for loan losses to increase
its loan loss reserve in light of the higher charge-offs and non-performing
assets experienced in the second half of 2001. Huntington also issued $400.0
million in fixed and variable-rate preferred
15
securities of its Real Estate Investment Trust (REIT) subsidiary, of which $50.0
million was sold to the public and qualified for regulatory capital. This
issuance gave rise to a tax benefit of $32.5 million. The combined charges
related to the strategic refocusing plan and the items announced in the fourth
quarter amounted to $226.9 million on a pre-tax basis. Related income taxes were
$111.9 million, resulting in after-tax charges of $115.0 million.
By the end of the first quarter of 2002, Huntington expects to complete
its strategic refocusing plan. The final costs associated with the actions taken
could be 5% to 7% higher than the original pre-tax estimate of $215.0 million.
The increase relates primarily to higher Florida and other employee severance
and costs to exit certain e-commerce activities.
In 2000 and 1999, Huntington recorded special charges totaling $50.0
million ($32.5 million after-tax, or $0.13 per share) and $96.8 million ($62.9
million after-tax, or $0.25 per share), respectively. The entire charge in 2000
and $58.2 million of the 1999 special charges represent write-downs of residual
values related to Huntington's vehicle lease portfolio. The 1999 special charges
also included $38.6 million related to the company's "Huntington 2000+" program
as well as other one-time expenses, which included amounts paid for management
consulting and other professional services, as well as a special cash award to
employees for achievement of the program goals for 1999. "Huntington 2000+" was
a collaborative effort among all employees to evaluate processes and procedures
and the way Huntington conducts its business with a mission of maximizing
efficiency through all aspects of the organization.
OFF BALANCE SHEET ARRANGEMENTS, SPECIAL PURPOSE ENTITIES (SPES), DERIVATIVES,
AND RELATED PARTY TRANSACTIONS
Like other financial organizations, Huntington uses various commitments in
its ordinary course of business that, under accounting principles generally
accepted in the United States (GAAP), are not recorded in its financial
statements. Huntington makes various commitments to extend credit to customers
and to sell loans, and has obligations under operating-type noncancelable leases
for its facilities. More information related to these matters can be found in
note 17 to Huntington's consolidated financial statements.
Huntington utilized two securitization trusts, or SPEs, in 2000 as funding
sources. In the securitization transactions, loans that Huntington originated
were sold to these trusts in exchange for funding collateralized by these loans.
These trusts, under GAAP, are not consolidated in Huntington's financial
statements. As such, the loans originated by Huntington and the funding it
obtained are not included on the balance sheet. Please refer to note 5 to
Huntington's consolidated financial statements for more information regarding
loan securitizations.
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. New accounting rules adopted by Huntington this year
require on-balance sheet recognition of the fair value of certain derivatives.
This, along with other information regarding derivatives, are discussed under
the "Interest Rate Risk and Liquidity Management" section of this report and
also in note 14 to Huntington's consolidated financial statements.
Various directors and executive officers of Huntington are customers of The
Huntington National Bank, Huntington's bank subsidiary, and other affiliates and
had transactions with these affiliates in the ordinary course of business.
Directors and executive officers of Huntington may also be affiliated with
entities that are customers of Huntington and its affiliates, which enter into
transactions with these affiliates in the ordinary course of business.
Transactions with directors, executive officers, and their affiliates have been
on substantially the same terms, including interest rates and collateral on
loans, as those prevailing at the time for comparable transactions with others
and did not involve more than the normal risk of collectibility or present other
unfavorable features. A summary of the indebtedness of management can be found
in note 4 to Huntington's consolidated financial statements and a discussion of
Huntington's transaction with The Huntington National Bank's Money Market Fund
can be found in the section entitled "Results of Operations". All other related
party transactions, including those reported in Huntington's Proxy Statement,
were considered immaterial to its financial condition and results of operations.
16
OVERVIEW
Huntington reported net income of $178.5 million, or $0.71 per common
share, in 2001, compared with $328.4 million, or $1.32 per common share, in
2000, and $422.1 million, or $1.65 per common share, in 1999. Return on average
common equity (ROE) and average assets (ROA) for 2001 were 7.50% and 0.63%,
respectively, versus 14.41% and 1.14%, respectively, in 2000, and 19.66% and
1.47%, respectively, in 1999.
"Operating earnings" for 2001 excluded the $176.9 million of pre-tax
restructuring and special charges related to the strategic refocusing plan
discussed above, the $50.0 million pre-tax charge to the provision for loan
losses, and the $32.5 million tax benefit related to the sale of REIT preferred
securities. Operating earnings for 2000 and 1999 excluded pre-tax restructuring
and special charges of $50.0 million and $96.8 million discussed above, and a
$108.5 million pre-tax gain ($70.6 million after-tax, or $0.42 per share) in
1999 on the sale of Huntington's credit card portfolio.
Operating earnings were $293.5 million, or $1.17 per common share, in 2001,
$360.9 million, or $1.45 per common share in 2000, and $414.4 million, or $1.62
per common share, in 1999. On this same basis, ROE totaled 12.32% for the recent
twelve months, compared with 15.84% and 19.31% in the two preceding years. ROA
was 1.04% in 2001, 1.26% in 2000, and 1.44% in 1999.
The following table reconciles Huntington's reported results with its
operating earnings for each of the most recent three years ended December 31 (in
thousands, except per share amounts):
- -----------------------------------------------------------------------------------------------------------------------------------
Twelve months ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000
----------------------------------------------------- ---------------------------------------------------
Restructuring Restructuring
Reported and Special Operating Reported and Special Operating
Earnings Charges Earnings Earnings Charges Earnings
- ------------------------------------------------------------------------------ ---------------------------------------------------
Net interest income $ 996,182 $ --- $ 996,182 $ 942,432 $ --- $942,432
Provision for loan losses 308,793 121,718 187,075 90,479 --- 90,479
Non-interest income 509,480 (5,250) 514,730 493,559 --- 493,559
Non-interest expense 1,023,587 99,957 923,630 885,617 50,000 835,617
- ------------------------------------------------------------------------------ ---------------------------------------------------
Pre-tax income 173,282 (226,925) 400,207 459,895 (50,000) 509,895
Income taxes (5,239) (111,924) 106,685 131,449 (17,500) 148,949
- ------------------------------------------------------------------------------ ---------------------------------------------------
NET INCOME $ 178,521 $ (115,001) $ 293,522 $ 328,446 $ (32,500) $360,946
- ------------------------------------------------------------------------------ ---------------------------------------------------
NET INCOME PER COMMON
SHARE -- DILUTED $0.71 ($0.46) $1.17 $1.32 ($0.13) $1.45
- ------------------------------------------------------------------------------ ---------------------------------------------------
Twelve months ended December 31, 1999
- -----------------------------------------------------------------------------
Restructuring
and Special
Charges and
Reported Credit Card Operating
Earnings Sale Gain Earnings
- -----------------------------------------------------------------------------
Net interest income $1,041,762 $ --- $1,041,762
Provision for loan losses 88,447 --- 88,447
Non-interest income 573,575 108,530 465,045
Non-interest expense 912,119 96,791 815,328
- -----------------------------------------------------------------------------
Pre-tax income 614,771 11,739 603,032
Income taxes 192,697 4,109 188,588
- -----------------------------------------------------------------------------
NET INCOME $ 422,074 $ 7,630 $ 414,444
- -----------------------------------------------------------------------------
NET INCOME PER COMMON
SHARE -- DILUTED $1.65 $0.03 $1.62
- -----------------------------------------------------------------------------
17
Cash basis" earnings per share, which exclude the effect of amortization of
goodwill from operating earnings, were $1.29 per common share for 2001 compared
with $1.55 per common share for 2000 and $1.72 per common share for 1999. Cash
basis ROE and ROA, which are computed using cash basis operating earnings as a
percentage of average equity and average tangible assets, were 13.63% and 1.18%,
in 2001, 17.08% and 1.39%, in 2000, and 20.53% and 1.57%, in 1999, respectively.
Total assets were $28.5 billion at December 31, 2001, approximating asset levels
at the end of last year. During 2001, Huntington sold $107 million in
residential mortgages and $1.4 billion in available-for-sale investment
securities in continuation of its efforts to sell low-margin assets as part of
its balance sheet repositioning. Managed average total loans, which include
securitized loans (see note 5 to Huntington's consolidated financial statements
for further information regarding securitized loans), increased 7% over the
prior year, after adjusting for portfolio sales and the Empire Banc Corporation
purchase acquisition in 2000.
Average commercial loans showed modest growth of 2% during the recent year,
hindered by the weakening economy and continued slow-down in automobile floor
plan lending. Floor plan loans declined 20% versus last year due to reduced
dealer inventories and very aggressive financing offered by captive auto finance
companies. Excluding floor plan loans, commercial loans increased 4% for the
year. Commercial real estate loans increased 7% from a year ago, largely
reflecting the funding of previously existing commitments. Activity was
primarily within Huntington's footprint and with long-time customers.
- ----------------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION
- ----------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial $ 6,439 29.9 $ 6,634 32.2 $ 6,300 30.5 $ 6,027 31.0 $ 5,271 29.7
Real Estate
Construction 1,479 6.8 1,319 6.4 1,237 6.0 919 4.7 864 4.9
Commercial 2,496 11.6 2,253 10.9 2,151 10.4 2,232 11.5 2,237 12.6
Consumer
Auto Leases 3,208 14.8 3,106 15.1 2,797 13.5 1,980 10.2 1,626 9.2
Auto Loans-Indirect 2,883 13.3 2,507 12.2 3,521 17.0 3,434 17.6 3,077 17.3
Home Equity Lines 2,536 11.7 2,168 10.5 1,710 8.3 1,434 7.4 1,245 7.0
Residential Mortgage 971 4.5 947 4.6 1,445 7.0 1,408 7.2 1,361 7.7
Other Loans 1,590 7.4 1,676 8.1 1,507 7.3 2,021 10.4 2,057 11.6
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans $ 21,602 100.0 $ 20,610 100.0 $ 20,668 100.0 $ 19,455 100.0 $ 17,738 100.0
- ----------------------------------------------------------------------------------------------------------------------------------
Note: There are no loans outstanding that would be considered a concentration of
lending, or 10% of shareholders' equity, in any particular industry or
group of industries.
- -------------------------------------------------------------------------------
MATURITY SCHEDULE OF SELECTED LOANS
- -------------------------------------------------------------------------------
(in millions of dollars) One Year One to After
AT DECEMBER 31, 2001 or Less Five Years Five Years Total
- -------------------------------------------------------------------------------
Commercial $ 2,993 $2,588 $ 858 $6,439
Real estate - construction 610 663 206 1,479
- -------------------------------------------------------------------------------
Total $ 3,603 $3,251 $1,064 $7,918
- -------------------------------------------------------------------------------
Variable interest rates $ 3,152 $2,515 $ 772 $6,439
Fixed interest rates 451 736 292 1,479
- -------------------------------------------------------------------------------
Total $ 3,603 $3,251 $1,064 $7,918
- -------------------------------------------------------------------------------
Note: Loan balances above are net of unearned income and there are no loans
outstanding that would be a concentration of lending, or 10% or more of
shareholders' equity, in any particular industry or group of industries.
Average consumer loans increased 9% during the recent twelve-month period,
driven by strong double-digit growth in home equity lines, an area of focus and
a strong source of growth for Huntington. Strong cross-selling success to first
mortgage customers during the heavy refinancing period in 2001 contributed to
this growth. First mortgage refinancing activity fueled by the falling interest
rate environment led to an 8% increase in residential real estate loans and an
increase in mortgage loans held for sale at year-end. Indirect automobile loan
and leases
18
increased 9%, although loan origination volumes slowed somewhat towards the
latter portion of 2001 due to the zero percent financing offered by many captive
finance companies.
Core deposits, which are total deposits exclusive of negotiable
certificates of deposits and Eurodollar deposits, were $19.8 billion and $19.1
billion at the end of 2001 and 2000, respectively. Average core deposits
increased slightly during the year due primarily to Huntington's sales
management process aimed at attracting more retail deposits and, to a lesser
extent, the uncertainties in the financial markets. When combined with other
core funding sources, these provided 81% of Huntington's funding needs.
Short and medium-term borrowings continued to decline as a result of
efforts initiated last year in Huntington's balance sheet repositioning program.
Long-term debt increased over last year primarily due to Huntington's $50
million sale to the public of fixed-rate preferred securities of its REIT
subsidiary.
RESULTS OF OPERATIONS
NET INTEREST INCOME
One of Huntington's primary sources of revenue is net interest income. Net
interest income is the difference between interest income on earning assets,
primarily loans and securities, and interest expense on funding sources,
including interest-bearing deposits and borrowings. Net interest income is
impacted by changes in the level of interest rates, earning assets, and
interest-bearing liabilities. Changes in net interest income are measured
through interest spread and net interest margin. The difference between the
yields on earning assets and the rates paid for interest-bearing liabilities
represents the interest spread. The net interest margin is the percentage of net
interest income to average earning assets. Both the interest spread and net
interest margin are presented on a tax-equivalent basis, which means that
tax-free income and dividend income, generated primarily from Huntington's
investment security portfolio, are adjusted and expressed on the same basis as
other taxable income. Because non-interest bearing sources of funds, such as
demand deposits and stockholders' equity, also support earning assets, the net
interest margin exceeds the interest spread.
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) From Increase (Decrease) From
Previous Year Due To: Previous Year Due To:
- -----------------------------------------------------------------------------------------------------------------------------------
Fully Tax Equivalent Basis (1) Yield/ Yield/
(in millions of dollars) Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans $ 41.3 $(157.1) $(115.8) $ 49.8 $ 64.9 $ 114.7
Mortgages held for sale 17.6 (1.3) 16.3 (9.6) 2.0 (7.6)
Securities (83.9) 13.5 (70.4) (37.3) 7.1 (30.2)
Federal funds sold, security resale agreements,
and other investments 1.7 (2.7) (1.0) 4.1 0.4 4.5
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS (23.3) (147.6) (170.9) 7.0 74.4 81.4
- -----------------------------------------------------------------------------------------------------------------------------------
Interest bearing demand deposits 21.8 (31.2) (9.4) 5.2 32.3 37.5
Savings deposits (3.4) (35.3) (38.7) (6.2) 26.6 20.4
Certificates of deposit (12.0) (15.6) (27.6) 5.3 44.8 50.1
Other domestic time deposits (20.2) (5.1) (25.3) 16.4 2.7 19.1
Foreign time deposits (12.7) (10.5) (23.2) 10.4 5.0 15.4
Short-term borrowings 18.4 (35.6) (17.2) (29.4) 28.2 (1.2)
Medium-term notes (53.3) (14.3) (67.6) (13.1) 32.4 19.3
Long-term debt and capital securities 3.9 (17.6) (13.7) 7.8 13.5 21.3
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES (57.5) (165.2) (222.7) (3.6) 185.5 181.9
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 34.2 $ 17.6 $ 51.8 $ 10.6 $ (111.1) $ (100.5)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Calculated assuming a 35% tax rate.
The table above shows changes in tax-equivalent interest income, interest
expense, and net interest income due to volume and rate variances for major
categories of earning assets and interest-bearing liabilities. The change in
interest not solely due to changes in volume or rates has been allocated in
proportion to the absolute dollar amounts of the change in volume and rate.
19
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------------------
Average Balance (in millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Fully Tax Equivalent Basis (1) 2001 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 7 $ 6 $ 9 $ 10 $ 9 $ 14
Trading account securities 25 15 13 11 10 16
Federal funds sold and securities purchased
under resale agreements 107 87 22 229 44 67
Mortgages held for sale 360 109 232 289 131 113
Securities (2):
Taxable 3,144 4,316 4,885 4,896 5,351 5,194
Tax exempt 174 273 297 247 264 291
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 3,318 4,589 5,182 5,143 5,615 5,485
- ------------------------------------------------------------------------------------------------------------------------------------
Loans:
Commercial 6,647 6,446 6,128 5,629 5,302 4,955
Real Estate
Construction 1,362 1,270 1,064 829 813 580
Commercial 2,340 2,187 2,235 2,304 2,251 2,129
Consumer
Auto leases 3,204 2,969 2,361 1,769 1,488 1,018
Auto loans - Indirect 2,697 2,982 3,432 3,249 3,081 3,065
Home equity lines 2,331 1,935 1,542 1,336 1,190 1,040
Residential mortgage 911 1,296 1,425 1,300 1,510 1,485
Other loans 1,657 1,584 1,902 2,018 1,946 1,707
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer 10,800 10,766 10,662 9,672 9,215 8,315
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 21,149 20,669 20,089 18,434 17,581 15,979
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses/loan fees 344 303 301 280 252 231
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans (3) 20,805 20,366 19,788 18,154 17,329 15,748
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets / total interest income / rates 24,966 25,475 25,547 24,116 23,390 21,674
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 912 1,008 1,039 975 910 901
All other assets 2,603 2,541 2,454 2,081 1,103 1,031
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 28,137 $28,721 $28,739 $26,892 $25,151 $23,375
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 3,304 $ 3,421 $ 3,497 $ 3,287 $ 2,774 $ 2,664
Interest-bearing demand deposits 5,005 4,291 4,097 3,585 3,204 3,068
Savings deposits 3,478 3,563 3,740 3,277 3,056 2,836
Certificates of deposit 7,163 7,374 7,272 7,979 7,414 6,959
- ------------------------------------------------------------------------------------------------------------------------------------
Total core deposits 18,950 18,649 18,606 18,128 16,448 15,527
- ------------------------------------------------------------------------------------------------------------------------------------
Other domestic time deposits 128 502 238 182 365 28
Foreign time deposits 283 539 363 103 382 305
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 19,361 19,690 19,207 18,413 17,195 15,860
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,325 1,966 2,549 2,084 2,826 2,883
Medium-term notes 2,024 2,894 3,122 2,903 1,983 1,835
Subordinated notes and other long-term debt,
including capital securities 1,180 1,124 1,003 876 739 516
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities / interest
expense / rates 21,586 22,253 22,384 20,989 19,969 18,430
- ------------------------------------------------------------------------------------------------------------------------------------
All other liabilities 865 768 711 552 514 505
Shareholders' equity 2,382 2,279 2,147 2,064 1,894 1,776
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,137 $28,721 $28,739 $26,892 $25,151 $23,375
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread
Impact of non-interest bearing funds on margin
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate.
(2) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(3) Net loan rate includes loan fees, whereas individual loan components above
are shown exclusive of fees.
20
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income / Expense (in millions of dollars) Average Rate
- --------------------------------------------------------------------- -------------------------------------------------------------
2001 2000 1999 1998 1997 1996 2001 2000 1999 1998 1997 1996
- --------------------------------------------------------------------- -------------------------------------------------------------
$ 0.2 $ 0.3 $ 0.4 $ 1.0 $ 0.5 $ 0.8 3.43 % 5.03 % 4.04 % 5.22 % 5.47 % 5.85 %
1.3 1.1 0.8 0.6 0.6 0.9 5.13 7.11 5.89 5.71 5.70 5.66
4.4 5.5 1.2 12.9 2.4 3.8 4.19 6.33 5.58 5.64 5.50 6.03
25.0 8.7 16.3 20.2 10.1 8.7 6.95 7.96 7.03 6.99 7.75 7.74
206.9 269.5 297.0 308.8 339.8 333.7 6.58 6.24 6.08 6.31 6.35 6.42
13.0 20.8 23.5 21.9 25.3 27.9 7.49 7.61 7.90 8.83 9.55 9.59
- --------------------------------------------------------------------- -------------------------------------------------------------
219.9 290.3 320.5 330.7 365.1 361.6 6.63 6.33 6.18 6.43 6.50 6.59
- --------------------------------------------------------------------- -------------------------------------------------------------
472.1 553.2 483.4 469.0 456.6 396.9 7.10 8.58 7.89 8.33 8.61 8.01
93.8 110.7 86.1 71.7 73.8 50.7 6.89 8.72 8.09 8.65 8.85 8.75
178.5 185.7 181.6 199.6 200.6 189.3 7.63 8.49 8.13 8.66 8.91 8.89
215.0 201.1 159.2 126.1 113.0 79.9 6.71 6.76 6.74 7.13 7.60 7.84
230.3 251.9 271.2 269.4 259.6 245.9 8.54 8.45 7.90 8.29 8.43 8.02
174.7 164.9 119.7 116.8 107.4 97.7 7.50 8.52 7.76 8.75 9.02 9.40
69.0 99.6 107.0 104.6 126.3 123.0 7.58 7.69 7.51 8.04 8.36 8.28
151.6 142.4 180.1 201.7 201.5 179.7 9.15 9.01 9.47 9.99 10.35 10.52
- --------------------------------------------------------------------- -------------------------------------------------------------
840.6 859.9 837.2 818.6 807.8 726.2 7.78 7.99 7.85 8.46 8.77 8.73
- --------------------------------------------------------------------- -------------------------------------------------------------
1,585.0 1,709.5 1,588.3 1,558.9 1,538.8 1,363.1 7.49 8.27 7.91 8.46 8.75 8.53
- --------------------------------------------------------------------- -------------------------------------------------------------
110.1 101.4 107.9 85.4 75.8 49.2
- --------------------------------------------------------------------- -------------------------------------------------------------
1,695.1 1,810.9 1,696.2 1,644.3 1,614.6 1,412.3 8.01 8.76 8.44 8.92 9.18 8.84
- --------------------------------------------------------------------- -------------------------------------------------------------
1,945.9 2,116.8 2,035.4 2,009.7 1,993.3 1,788.1 7.79 % 8.31 % 7.97 % 8.33 % 8.52 % 8.26 %
- --------------------------------------------------------------------- -------------------------------------------------------------
134.6 144.0 106.5 96.4 84.4 80.2 2.69 % 3.36 % 2.60 % 2.69 % 2.64 % 2.61 %
107.7 146.4 126.0 114.0 100.4 86.3 3.10 4.11 3.37 3.48 3.28 3.04
398.2 425.8 375.7 445.6 417.3 394.3 5.56 5.78 5.17 5.58 5.63 5.67
- --------------------------------------------------------------------- -------------------------------------------------------------
640.5 716.2 608.2 656.0 602.1 560.8 3.38 4.70 4.03 4.42 4.40 4.36
- --------------------------------------------------------------------- -------------------------------------------------------------
6.6 31.9 12.8 10.5 21.8 1.5 5.12 6.35 5.40 5.82 5.97 5.36
10.8 34.0 18.6 5.9 22.2 18.4 3.82 6.31 5.14 5.66 5.81 6.03
- --------------------------------------------------------------------- -------------------------------------------------------------
657.9 782.1 639.6 672.4 646.1 580.7 3.40 4.81 4.07 4.44 4.48 4.40
- --------------------------------------------------------------------- -------------------------------------------------------------
95.9 113.1 114.3 97.7 146.4 149.1 4.12 5.75 4.48 4.69 5.18 5.17
121.7 189.3 170.0 164.6 116.2 120.2 6.01 6.54 5.45 5.67 5.86 6.55
67.9 81.6 60.3 43.6 45.5 30.7 5.75 7.26 6.01 4.98 6.16 5.96
- --------------------------------------------------------------------- -------------------------------------------------------------
943.4 1,166.1 984.2 978.3 954.2 880.7 4.37 % 5.24 % 4.40 % 4.66 % 4.78 % 4.78 %
- --------------------------------------------------------------------- -------------------------------------------------------------
$1,002.5 $ 950.7 $ 1,051.2 $ 1,031.4 $ 1,039.1 $ 907.4
- ---------------------------------------------------------------------
3.42 % 3.07 % 3.57 % 3.67 % 3.74 % 3.48 %
0.60 0.66 0.54 0.61 0.70 0.71
-------------------------------------------------------------
4.02 % 3.73 % 4.11 % 4.28 % 4.44 % 4.19 %
-------------------------------------------------------------
21
Tax-equivalent net interest income was $1,002.5 million in 2001, $950.7
million in 2000, and $1,051.2 million in 1999. The net interest margin was 4.02%
during the recent year, compared with 3.73% and 4.11% for 2000 and 1999,
respectively. The increase in the recent year was due to the continued
improvement in the earning asset mix, resulting from a reduction in lower margin
investment securities and reduction in residential mortgage loans. Additionally,
Huntington was slightly liability sensitive during the period and accordingly,
benefited from the decline in short-term rates during the year. The net interest
margin in 2000 was unfavorably impacted by higher funding costs due to rising
interest rates and changes in the mix of Huntington's core deposit base. The mix
of deposits shifted to higher-rate accounts during that year following the
introduction of new products designed to improve customer retention in the
intensely competitive market for retail deposits. The reduction in net interest
income and the margin in 2000 also reflect the impact of the 1999 credit card
sale and the automobile loan securitizations. Average earning assets declined
$509 million from $25.5 billion in 2000 to $25.0 billion while average
interest-bearing liabilities declined $667 million from $22.3 billion to $21.6
billion. Management expects the margin to continue to expand in 2002, especially
in light of the favorable impact expected from the sale of the Florida
operations, as discussed below. Huntington's average balance sheets and net
interest margin analysis can be found on pages 20 and 21.
Huntington regularly enters into various types of derivative financial
instruments, primarily interest rate swaps, to manage its exposure to changes in
interest rates. The cash flows generated by derivative instruments used to
manage risk associated with earning assets and interest bearing liabilities are
recorded along with the interest from the hedged item and consequently impact
the yields on those assets and liabilities. The impact of these derivatives
lowered the net interest margin by two basis points in 2001 and five basis
points in 2000, but increased the net interest margin by eight basis points in
1999. Huntington's interest rate risk position as well as the implementation of
a new accounting standard regarding derivatives is discussed further in the
"Interest Rate Risk Management" section of this report.
PROVISION AND ALLOWANCE 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 loan portfolio. On a reported basis, the
provision expense was $308.8 million for 2001. On an operating basis, the
provision for loan losses was $187.1 million, up from $90.5 million in 2000 and
$88.4 million two years ago, representing significant increases in net
charge-offs and deteriorating economic conditions impacting credit quality. The
operating basis results for 2001 exclude the impact of an additional fourth
quarter provision for loan losses of $50 million to increase the ALL ratio to
1.90% of total loans, reflecting a deterioration in credit quality, and $71.7
million in the second quarter, which included $25.8 million for estimated
increased losses resulting from Huntington's decision to exit sub-prime
automobile and truck and equipment lending, $19.7 million to charge-off
delinquent consumer and small business loans more than 120 days past due, and
$21.2 million to increase reserves for consumer bankruptcies.
The ALL was $410.6 million at December 31, 2001, up from $297.9 million the
end of 2000 and $299.3 million at year-end 1999. This represents 1.90% of total
2001 loans compared with 1.45% of total loans at the end of the prior two years.
The reserve ratio is expected to increase in 2002 after the sale of loans in the
Florida operations. Non-performing loans in 2001 were covered by the ALL 1.9
times versus 3.2 times at the end of last year. Additional information regarding
the ALL and asset quality appears in the "Credit Risk" section.
Huntington allocates the ALL to each loan category based on an expected
loss ratio determined by continuous assessment of credit quality 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 industrial and commercial real estate credits, expected loss
factors are assigned by credit grade at the individual loan level. 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 diversity in size of commercial and
commercial real estate loans can be significant as well. The dollar exposure
could significantly vary from estimated amounts due to diversity. Additionally,
the impact from recent economic events, including the recession and events
22
of September 11, 2001, on individual customers may not yet be known. To ensure
adequacy to a higher degree of confidence, a portion of the ALL is considered
unallocated. For analytical purposes, the allocation of the ALL is provided
below. While amounts are allocated to various p