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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Commission File Number 0-2525
HUNTINGTON BANCSHARES INCORPORATED
MARYLAND 31-0724920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 SOUTH HIGH STREET, COLUMBUS, OHIO 43287
Registrant's telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
====== =======
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
====== =======
There were 235,544,525 shares of Registrant's without par value common stock
outstanding on October 31, 2002.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2002 and 2001 and December 31, 2001 3
Consolidated Statements of Income -
For the three and nine months ended September 30, 2002 and 2001 4
Consolidated Statements of Changes in Shareholders' Equity -
For the nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows -
For the nine months ended September 30, 2002 and 2001 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
Item 4. Controls and Procedures 36
PART II. OTHER INFORMATION
Item 2. Changes in securities and use of proceeds 37
Item 6. Exhibits and Reports on Form 8-K 37-38
Signatures 39
Certifications 40-41
2
PART 1. FINANCIAL INFORMATION
Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(in thousands) 2002 2001 2001
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,014,713 $ 1,138,366 $ 1,110,287
Interest bearing deposits in banks 33,700 21,205 4,958
Trading account securities 3,225 13,392 2,292
Federal funds sold and securities
purchased under resale agreements 64,574 83,275 63,311
Loans held for sale 369,724 629,386 294,077
Securities available for sale - at fair value 3,235,546 2,849,579 2,991,167
Investment securities - fair value $9,925; $12,499;
and $14,868, respectively 9,733 12,322 14,629
Total loans 20,455,506 21,601,873 21,583,611
Less allowance for loan losses 408,378 410,572 360,446
- ---------------------------------------------------------------------------------------------------------------------------------
Net loans 20,047,128 21,191,301 21,223,165
- ---------------------------------------------------------------------------------------------------------------------------------
Bank owned life insurance 874,771 843,183 833,623
Premises and equipment 339,984 452,036 447,774
Goodwill and other intangible assets 218,424 716,054 726,094
Customers' acceptance liability 18,340 13,670 16,382
Accrued income and other assets 509,150 536,390 588,416
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 26,739,012 $ 28,500,159 $ 28,316,175
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $ 17,117,811 $ 20,187,304 $ 20,071,388
Short-term borrowings 2,620,022 1,955,926 1,789,043
Bank acceptances outstanding 18,340 13,670 16,382
Medium-term notes 1,737,750 1,795,002 1,995,603
Federal Home Loan Bank Advances 613,000 17,000 17,000
Subordinated notes and other long-term debt 943,168 927,330 882,605
Company obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
junior subordinated debentures of the Parent Company 300,000 300,000 300,000
Accrued expenses and other liabilities 1,049,135 887,487 839,748
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 24,399,226 26,083,719 25,911,769
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock - authorized 6,617,808 shares;
none outstanding --- --- ---
Common stock - without par value; authorized
500,000,000 shares; issued 257,866,255 shares;
outstanding 237,544,288; 251,193,814; and
251,193,211 shares, respectively 2,486,345 2,490,724 2,489,564
Less 20,321,967; 6,672,441; and 6,673,044
treasury shares, respectively (391,550) (123,849) (122,485)
Accumulated other comprehensive income 60,556 25,488 38,708
Retained earnings (deficit) 184,435 24,077 (1,381)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,339,786 2,416,440 2,404,406
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 26,739,012 $ 28,500,159 $ 28,316,175
- ---------------------------------------------------------------------------------------------------------------------------------
See notes to unaudited consolidated financial statements.
3
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CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
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Interest and fee income
Loans $ 332,595 $ 421,337 $ 1,000,468 $ 1,302,819
Securities 45,800 50,495 135,005 169,763
Other 4,915 7,002 15,219 23,186
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TOTAL INTEREST INCOME 383,310 478,834 1,150,692 1,495,768
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 95,629 162,982 300,461 518,351
Short-term borrowings 10,014 19,932 30,902 83,134
Medium-term notes 14,855 30,647 46,719 100,250
Federal Home Loan Bank advances 1,176 262 1,644 912
Subordinated notes and other long-term debt 12,220 15,224 36,866 52,177
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TOTAL INTEREST EXPENSE 133,894 229,047 416,592 754,824
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 249,416 249,787 734,100 740,944
Provision for loan losses 60,249 49,559 169,922 200,518
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NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 189,167 200,228 564,178 540,426
- -----------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 37,460 41,719 111,344 121,299
Trust services 14,997 15,485 46,745 44,977
Brokerage and insurance income 13,943 19,912 50,412 58,068
Bank Owned Life Insurance income 11,443 9,560 34,562 28,681
Other service charges and fees 10,837 12,350 31,998 35,665
Mortgage banking 6,289 14,616 36,579 43,380
Other 18,723 15,755 44,693 43,679
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income Before Gain on Sale of
Florida Operations, Merchant Services Gain and
Securities Gains 113,692 129,397 356,333 375,749
Gain on sale of Florida operations -- -- 175,344 --
Merchant Services restructuring gain 24,550 -- 24,550 --
Securities gains 1,140 1,059 2,563 634
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 139,382 130,456 558,790 376,383
- -----------------------------------------------------------------------------------------------------------------------------------
Personnel costs 107,477 120,767 326,908 360,497
Equipment 17,378 20,151 50,986 59,967
Outside data processing and other services 15,128 17,375 50,159 51,700
Net occupancy 14,815 19,266 46,810 57,234
Marketing 7,491 6,921 21,725 24,712
Professional services 6,083 5,912 17,751 17,644
Telecommunications 5,609 6,859 16,947 21,191
Printing and supplies 3,679 4,450 11,199 14,074
Franchise and other taxes 2,283 2,470 6,924 6,836
Amortization of intangible assets 204 10,114 1,815 31,125
Other 13,576 14,605 41,945 51,296
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense Before Special Charges 193,723 228,890 593,169 696,276
Special charges -- 50,817 56,184 84,814
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 193,723 279,707 649,353 781,090
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 134,826 50,977 473,615 135,719
Income taxes 36,703 8,348 195,525 22,847
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 98,123 $ 42,629 $ 278,090 $ 112,872
- -----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income
Basic $ 0.41 $ 0.17 $ 1.13 $ 0.45
Diluted $ 0.41 $ 0.17 $ 1.13 $ 0.45
Cash dividends declared $ 0.16 $ 0.16 $ 0.48 $ 0.56
AVERAGE COMMON SHARES
Basic 239,925 251,148 245,554 251,039
Diluted 241,357 252,203 247,021 251,537
See notes to unaudited consolidated financial statements.
4
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK TREASURY STOCK OTHER
---------------------- ---------------------- COMPREHENSIVE
(in thousands) SHARES AMOUNT SHARES AMOUNT INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2001:
Balance, beginning of period 257,866 $ 2,493,645 (7,007) $ (129,432) $ (24,520)
Comprehensive Income:
Net income
Change in accounting method for derivatives (9,113)
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 67,936
Unrealized gains on derivative instruments
used in cash flow hedging relationships 4,405
Total comprehensive income
Cash dividends declared
Stock options exercised (4,081) 263 5,742
Treasury shares sold to employee benefit plans 71 1,205
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period 257,866 $ 2,489,564 (6,673) $ (122,485) $ 38,708
- ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002:
BALANCE, BEGINNING OF PERIOD 257,866 $ 2,490,724 (6,672) $ (123,849) $ 25,488
Comprehensive Income:
Net income
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 34,166
Unrealized gains on derivative instruments
used in cash flow hedging relationships 902
Total comprehensive income
Stock issued for acquisitions (838) 1,038 19,989
Cash dividends declared
Stock options exercised (3,541) 363 6,585
Treasury shares purchased (15,051) (294,275)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period 257,866 $ 2,486,345 (20,322) $ (391,550) $ 60,556
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RETAINED
EARNINGS
(in thousands) (DEFICIT) TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2001:
Balance, beginning of period $ 26,354 $ 2,366,047
Comprehensive Income:
Net income 112,872 112,872
Change in accounting method for derivatives (9,113)
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 67,936
Unrealized gains on derivative instruments
used in cash flow hedging relationships 4,405
-----------
Total comprehensive income 176,100
-----------
Cash dividends declared (140,607) (140,607)
Stock options exercised 1,661
Treasury shares sold to employee benefit plans 1,205
- ---------------------------------------------------------------------------------------
Balance, end of period $ (1,381) $ 2,404,406
- ---------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002:
BALANCE, BEGINNING OF PERIOD $ 24,077 $ 2,416,440
Comprehensive Income:
Net income 278,090 278,090
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 34,166
Unrealized gains on derivative instruments
used in cash flow hedging relationships 902
-----------
Total comprehensive income 313,158
-----------
Stock issued for acquisitions 19,151
Cash dividends declared (117,732) (117,732)
Stock options exercised 3,044
Treasury shares purchased (294,275)
- ---------------------------------------------------------------------------------------
Balance, end of period $ 184,435 $ 2,339,786
- ---------------------------------------------------------------------------------------
See notes to unaudited consolidated financial statements.
5
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
(in thousands of dollars) 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 278,090 $ 112,872
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 169,922 200,518
Provision for depreciation and amortization 41,727 77,335
Deferred income tax expense 269,090 156,668
Decrease in trading account securities 10,167 2,431
Decrease (increase) in loans held for sale 259,662 (138,973)
Gains on sales of securities available for sale (2,563) (634)
Gains on sales/securitizations of loans (6,372) (7,604)
Gain on sale of Florida operations (175,344) --
Restructuring and special charges 56,184 84,814
Other, net (208,887) (264,758)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 691,676 222,669
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in banks (12,495) 12
Proceeds from:
Maturities and calls of investment securities 2,585 1,695
Maturities and calls of securities available for sale 631,982 800,608
Sales of securities available for sale 659,801 1,280,652
Purchases of securities available for sale (1,324,334) (851,581)
Proceeds from sales/securitizations of loans 342,559 401,546
Net loan originations, excluding sales (2,291,869) (1,588,734)
Proceeds from sale of premises and equipment 18,214 2,110
Purchases of premises and equipment (42,553) (43,706)
Proceeds from sales of other real estate 8,924 11,602
Proceeds from restructuring of Huntington Merchant Services, L.L.C. 24,550 --
Cash paid in purchase acquisitions (8,305) --
Net cash paid related to sale of Florida operations (1,289,917) --
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (3,280,858) 14,204
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in total deposits 1,704,526 300,293
Increase (decrease) in short-term borrowings 616,776 (198,716)
Proceeds from issuance of medium-term notes 675,000 440,000
Payment of medium-term notes (735,000) (905,000)
Proceeds from Federal Home Loan Bank advances 600,000 --
Maturity of Federal Home Loan Bank advances (4,000) (8,000)
Dividends paid on common stock (119,243) (150,601)
Repurchases of common stock (294,275) --
Net proceeds from issuance of common stock 3,044 2,866
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 2,446,828 (519,158)
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (142,354) (282,285)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,221,641 1,455,883
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,079,287 $ 1,173,598
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Income taxes paid $ 44,041 $ 25
Interest paid 426,332 797,595
Residential mortgage loans securitized and retained in securities
available for sale 259,042 --
See notes to unaudited consolidated financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements
include the accounts of Huntington Bancshares Incorporated (Huntington) and its
subsidiaries and were prepared in accordance with accounting principles
generally accepted in the United States, and accordingly, reflect all
adjustments consisting of normal recurring accruals, which are, in the opinion
of management, necessary to fairly present Huntington's financial position,
results of operations, and cash flows for the periods presented. As permitted by
the SEC, these unaudited consolidated interim financial statements do not
include certain information and footnotes normally included in annual financial
statements. Accordingly, these unaudited consolidated interim financial
statements should be read in conjunction with Huntington's 2001 Annual Report on
Form 10-K.
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current presentation. These reclassifications had
no effect on net income.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. This Statement rescinds
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This Statement also rescinds Statement No.
44, Accounting for Intangible Assets of Motor Carriers. This Statement amends
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. In addition, Statement No. 145 requires
lease modifications to be accounted for in the same manner as sale-leaseback
transactions.
In September 2002, the FASB issued Statement No. 146, Accounting for
Costs Associated with Exit Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized using fair value when the liability is incurred. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged.
In October 2002, the FASB issued Statement No. 147, Acquisition of
Certain Financial Institutions. This Statement provides guidance on the
accounting for the acquisition of a financial institution, which had previously
been addressed in FASB Statement No. 72, Accounting for Certain Acquisitions of
Banking and Thrift Institutions. The provisions of Statement No. 147 are
effective October 1, 2002. This Statement requires the excess of the fair value
of liabilities assumed over the fair value of the tangible and identifiable
assets in a business combination to be recognized as an unidentifiable
intangible asset in accordance with Statement No. 141 and No. 142. In addition,
any long-term customer-relationship intangible assets, such as
depositor-relationship, borrower-relationship, and credit cardholder intangible
assets, will be required to be tested for impairment in accordance with
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, as amended.
The adoption of Statements No. 145, No. 146, and No. 147 will not have
a material impact on Huntington's results of operations or financial condition.
NOTE 3 - EARNINGS PER SHARE
Basic earnings per share is the amount of earnings for the period
available to each share of common stock outstanding during the reporting period.
Diluted earnings per share is the amount of earnings available to
7
each share of common stock outstanding during the reporting period adjusted for
the potential issuance of common shares for stock options. The calculation of
basic and diluted earnings per share for each of the periods ended September 30,
is as follows:
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 98,123 $ 42,629 $278,090 $112,872
- -------------------------------------------------------------------------------------------------------------------
Average common shares outstanding 239,925 251,148 245,554 251,039
Dilutive effect of stock options 1,432 1,055 1,467 498
- -------------------------------------------------------------------------------------------------------------------
Diluted common shares outstanding 241,357 252,203 247,021 251,537
- -------------------------------------------------------------------------------------------------------------------
Earnings per share
Basic $ 0.41 $ 0.17 $ 1.13 $ 0.45
Diluted $ 0.41 $ 0.17 $ 1.13 $ 0.45
Approximately 6.2 million and 5.8 million stock options were
outstanding at the end of September 2002 and 2001, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
for the period and, therefore, the effect would be antidilutive. The weighted
average exercise price for these options was $23.02 per share and $23.31 at the
end of the same respective periods.
NOTE 4 - INTANGIBLE ASSETS
In September 2001, the Financial Accounting Standards Board issued SFAS
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill is no longer amortized but is subject to annual impairment
tests in accordance with the Statements. Other intangible assets continue to be
amortized over their useful lives. At September 30, 2002 and 2001, Huntington
had $218.4 million and $726.1 million in goodwill and other intangible assets,
respectively. The following table reflects the activity in goodwill and other
intangible assets for the three and nine months ended September 30:
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- -------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Intangible Assets:
Balance, beginning of period $ 210,685 $ 737,437 $ 716,054 $ 755,270
Additions 20,144 665 28,290 3,843
Sale of Florida banking and insurance operations (12,201) -- (517,105) --
Impairment -- (1,894) (7,000) (1,894)
Amortization (204) (10,114) (1,815) (31,125)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 218,424 $ 726,094 $ 218,424 $ 726,094
- -------------------------------------------------------------------------------------------------------------------
The additions totaling $20.1 million for the third quarter of 2002
primarily related to the September acquisition of LeaseNet Group, Inc., a $90
million leasing company. In the third quarter 2002, Huntington completed the
sale of its Florida insurance operations, the J. Rolfe Davis Insurance Agency,
Inc. (JRD), resulting in a $12.2 million write-off of the remaining associated
goodwill. Impairment related to JRD of $7.0 million was recognized in the second
quarter 2002. In the third quarter of 2001, the impairment related to the exit
of an e-commerce business activity.
Huntington applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. In connection with the
adoption of SFAS No. 142, management assessed the fair values of its lines of
business in relation to their carrying value, including goodwill, in each line
of business. Based on this assessment, there was no impairment of goodwill or
other intangible assets. Huntington will continue to test for impairment on an
annual basis as prescribed by SFAS No. 142.
8
Before the sale of Huntington's operations in Florida, a majority of
goodwill and other intangible assets related to those operations. A substantial
portion of the remaining goodwill is attributable to the previously acquired
banking operations reported under the Regional Banking line of business. The
application of the non-amortization provisions of SFAS No. 142 resulted in an
increase in net income per share of $0.01 for the third quarter and $0.04 for
the first nine months of 2002. Had no amortization of goodwill, net of tax, been
recorded in the prior year, net income and diluted earnings per share for the
third quarter of 2001 would have been greater by $7.8 million, or $0.03 per
share, and $23.3 million, or $0.09 per share, for the first nine-months of 2001.
NOTE 5 - RESTRUCTURING OF MERCHANT SERVICES BUSINESS
In August 2002, Huntington restructured its interest in Huntington
Merchant Services, L.L.C. (HMS), Huntington's merchant services business, in a
transaction with First Data Merchant Services Corporation, a subsidiary of First
Data Corp. Under the agreement, Huntington extended its long-term merchant
services relationship with First Data. In addition, as part of the transaction,
First Data obtained all of Huntington's Florida-related merchant business and
increased its equity interest in HMS. This transaction resulted in a $24.5
million pre-tax, non-operating gain ($16.0 million after tax) in the third
quarter of 2002. Huntington remains a nominal equity owner and, going forward,
this transaction is not expected to have a material impact on Huntington's
financial results.
NOTE 6 - RESTRUCTURING AND SPECIAL CHARGES
In July 2001, Huntington announced a strategic refocusing plan (the
"Plan"). The Plan included the sale of Huntington's Florida banking and
insurance operations, the consolidation of numerous non-Florida branch offices,
as well as certain credit and other actions to strengthen Huntington's balance
sheet and financial performance, including the use of excess regulatory capital
generated by the sale to initiate a share repurchase program.
During 2001, Huntington provided $100.0 million of pre-tax expense to
recognize a liability for these actions and provided $71.7 million of additional
allowance for loan losses in connection with the Plan. In addition, special
charges in 2001 included a $5.2 million pre-tax loss associated with the sale of
Pacific Gas & Electric commercial paper that was reflected in non-interest
income in the consolidated statements of income.
In the first quarter of 2002, Huntington provided an additional $56.2
million of pre-tax expense to recognize additional liabilities related to the
completion of the Plan. Huntington has a remaining reserve of $18.8 million at
September 30, 2002. Huntington expects that the remaining reserve will be
adequate to fund the estimated future cash outlays that are expected in the
completion of the exit activities contemplated by the Plan.
NOTE 7 - SALE OF FLORIDA OPERATIONS
On February 15, 2002, Huntington completed the sale of its Florida
operations to SunTrust Banks, Inc. Included in the sale were $4.8 billion of
deposits and other liabilities and $2.8 billion of loans and other assets.
Huntington received a deposit premium of 15%, or $711.9 million. The total net
pre-tax gain from the sale was $175.3 million and was reflected in non-interest
income. The after-tax gain was $56.7 million, or $0.23 per common share. Income
taxes related to this transaction were $118.6 million, an amount higher than the
tax impact at the statutory rate of 35% because most of the goodwill relating to
the Florida operations was non-deductible for tax purposes. Pro forma financial
information reflecting the effect of the sale is presented and described below.
Since the transaction was completed during the first quarter of 2002, no pro
forma balance sheet is presented in this report.
The following unaudited pro forma consolidated income statement is
presented for the nine months ended September 30, 2002, giving effect to the
sale as if it had occurred on January 1, 2002, and does not include the net gain
realized on the sale of Huntington's Florida operations or any related special
charges. These pro forma financial statements do not include any assumptions as
to future share repurchases pursuant to the previously announced share
repurchase program that commenced following the sale.
9
The pro forma consolidated income statement may not be indicative of
the results of operations that would have actually occurred had the transaction
been consummated during the period indicated. This pro forma financial
information is also not intended to be an indication of the results of
operations that may be attained in the future. These pro forma consolidated
financial statements should be read in conjunction with Huntington's historical
financial statements.
- -----------------------------------------------------------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT WITHOUT FLORIDA OPERATIONS
For the Nine Months Ended September 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
HUNTINGTON
PRO FORMA
WITHOUT
FLORIDA RELATED FLORIDA
(in thousands of dollars) HUNTINGTON OPERATIONS TRANSACTIONS OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 734,100 $ (9,724) $ -- $ 724,376
Provision for loan losses 169,922 (5,186) -- 164,736
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 564,178 (4,538) -- 559,640
- -------------------------------------------------------------------------------------------------------------------------------
Non-interest income 558,790 (13,343) (175,344) 370,103
Non-interest expense 649,353 (20,210) (32,728) 596,415
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 473,615 2,329 (142,616) 333,328
Income taxes 195,525 804 (107,098) 89,231
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 278,090 $ 1,525 $ (35,518) $ 244,097
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE -- DILUTED $ 1.13 $ 0.01 $ (0.14) $ 1.00
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING NET INCOME (1) $ 241,862 $ 1,525 $ 243,387
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING NET INCOME PER COMMON
SHARE -- DILUTED (1) $ 0.98 $ 0.01 $ 0.99
- -------------------------------------------------------------------------------------------------------------------------------
(1) Excludes after-tax Merchant Services restructuring gain, the after-tax
gain on sale of the Florida operations, and restructuring and special
charges.
The column entitled Florida Operations includes all direct revenue and
expenses for Florida from January 1, 2002 through February 15, 2002, the results
of operations for JRD through June 20, 2002, and any indirect revenue and
expenses that ceased with the sale of the Florida operations, including $1.1
million of amortization expense on intangible assets related to Florida. In
addition, net interest income in that column includes: (1) a funding credit of
$5.3 million related to $2.0 billion of funding that Florida provided to
Huntington and (2) $1.9 million of interest that would have been earned on the
$711.9 million deposit premium from January 1, 2002 through February 15, 2002.
Both the funding credit and the assumed interest earned on the deposit premium
are based on the average one-year LIBOR rate of 2.15% for the period. The column
entitled Related Transactions reflects the $175.3 million net gain on the sale
of the Florida operations, $32.7 million of the $56.2 million special charges
recorded in the first quarter of 2002 that related to the sale of the Florida
operations, and the applicable income taxes. After excluding the remaining
restructuring and special charges, net of taxes, and the Merchant Services
restructuring gain, as discussed in Note 5, operating earnings were $243.4
million and earnings per share was $0.99 for the first nine-months of 2002.
10
NOTE 8 - COMPREHENSIVE INCOME
Comprehensive Income includes net income as well as certain items that
are reported directly within a separate component of stockholders' equity that
are not considered part of net income. Currently, Huntington's components of
Other Comprehensive Income are the unrealized gains (losses) on securities
available for sale and unrealized gains (losses) on certain derivatives. The
related before and after tax amounts are as follows:
- --------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting method for
derivatives used in cash flow hedging relationships:
Unrealized net losses $ -- $ -- $ -- $ (14,020)
Related tax benefit -- -- -- 4,907
- -------------------------------------------------------------------------------------------------------------------------------
Net -- -- -- (9,113)
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains on securities available
for sale arising during the period:
Unrealized net gains 39,502 74,971 55,126 105,151
Related tax expense (13,826) (26,240) (19,294) (36,803)
- -------------------------------------------------------------------------------------------------------------------------------
Net 25,676 48,731 35,832 68,348
- -------------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) on derivatives used in cash
flow hedging relationships arising during the period:
Unrealized net gains (losses) 10,717 (1,457) 1,388 6,777
Related tax (expense) benefit (3,751) 510 (486) (2,372)
- -------------------------------------------------------------------------------------------------------------------------------
Net 6,966 (947) 902 4,405
- -------------------------------------------------------------------------------------------------------------------------------
Less: Reclassification adjustment for net gains
from sales of securities available for sale realized
during the period:
Realized net gains 1,140 1,059 2,563 634
Related tax expense (399) (371) (897) (222)
- -------------------------------------------------------------------------------------------------------------------------------
Net 741 688 1,666 412
- -------------------------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income $ 31,901 $ 47,096 $ 35,068 $ 63,228
===============================================================================================================================
Activity in Accumulated Other Comprehensive Income for the nine months
ended September 30, 2002 and 2001 was as follows:
- ---------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAINS
UNREALIZED GAINS (LOSSES) ON DERIVATIVE
(LOSSES) INSTRUMENTS USED IN
ON SECURITIES CASH FLOW HEDGING
(in thousands of dollars) AVAILABLE FOR SALE RELATIONSHIPS
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ (24,520) $ --
Change in accounting method -- (9,113)
Current-period change 67,936 4,405
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2001 $ 43,416 $ (4,708)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 29,469 (3,981)
Current-period change 34,166 902
- ---------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2002 $ 63,635 $ (3,079)
=============================================================================================================================
11
NOTE 9 - SECURITIES AVAILABLE FOR SALE
Securities available for sale at September 30, 2002 and December 31,
2001 were as follows:
- -----------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------
Amortized Amortized
(in thousands of dollars) Cost Fair Value Cost Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury
Under 1 year $ -- $ -- $ 696 $ 711
1-5 years 15,011 15,824 31,399 31,563
6-10 years 4,703 5,407 6,420 6,833
Over 10 years 412 488 413 433
- -----------------------------------------------------------------------------------------------------------------------------
Total 20,126 21,719 38,928 39,540
- -----------------------------------------------------------------------------------------------------------------------------
Federal agencies
Mortgage-backed securities
1-5 years 43,092 44,031 77,975 77,734
6-10 years 164,494 169,647 99,049 100,954
Over 10 years 894,479 924,217 651,187 662,674
- -----------------------------------------------------------------------------------------------------------------------------
Total 1,102,065 1,137,895 828,211 841,362
- -----------------------------------------------------------------------------------------------------------------------------
Other agencies
Under 1 year 25,007 24,930 -- --
1-5 years 814,848 842,966 918,023 940,845
6-10 years 60,564 62,258 77,515 78,925
Over 10 years 543,638 550,882 414,485 421,407
- -----------------------------------------------------------------------------------------------------------------------------
Total 1,444,057 1,481,036 1,410,023 1,441,177
- -----------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and Federal
Agencies 2,566,248 2,640,650 2,277,162 2,322,079
- -----------------------------------------------------------------------------------------------------------------------------
Other
Under 1 year 9,712 9,733 11,315 11,374
1-5 years 33,756 35,318 38,986 40,022
6-10 years 50,871 52,739 35,832 35,823
Over 10 years 289,224 289,354 176,524 174,715
Retained interest in securitizations 144,837 164,269 159,790 159,790
Marketable equity securities 42,741 43,483 104,395 105,776
- -----------------------------------------------------------------------------------------------------------------------------
Total 571,141 594,896 526,842 527,500
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $3,137,389 $3,235,546 $2,804,004 $2,849,579
=============================================================================================================================
NOTE 10 - SEGMENT REPORTING
Huntington has four distinct segments: Regional Banking, Dealer Sales,
and the Private Financial Group (PFG) are Huntington's major business lines. The
fourth segment includes Huntington's Treasury function and other unallocated
assets, liabilities, revenue, and expense. Line of business results are
determined based upon Huntington's business profitability reporting system,
which assigns balance sheet and income statement items to each of the business
segments. The process is designed around Huntington's organizational and
management structure and accordingly, the results below are not necessarily
comparable with similar information published by other financial institutions.
During the first quarter of 2002, the previously reported Retail Banking and
Corporate Banking segments were combined and renamed Regional Banking. Since
this segment is managed through six geographically defined regions where each
region's management has responsibility for both retail and corporate banking
business development, combining these two previous segments better reflects the
management accountability and decision making structure. In addition, changes
were made to the methodologies utilized for certain balance sheet and income
statement allocations performed by Huntington's business profitability reporting
system. The prior quarters have not been restated for these changes.
12
The chief decision-makers for Huntington rely on "operating earnings"
for review of performance and for critical decision making purposes. Operating
earnings exclude the Merchant Services restructuring gain, the gain from the
sale of the Florida operations, the historical Florida operating results, and
restructuring and special charges. See Note 5 to the unaudited consolidated
financial statements for further discussions regarding the restructuring of
Huntington's Merchant Services business, Note 6 related to restructuring and
special charges, and Note 7 for the gain on sale of Huntington's Florida
operations. Net interest income is presented on a fully tax equivalent (FTE)
basis using a 35% tax rate.
The following provides a brief description of the four operating segments of
Huntington:
REGIONAL BANKING: this segment provides products and services to
retail, business banking, and corporate customers. This segment's products
include home equity loans, first mortgage loans, direct installment loans,
business loans, personal and business deposit products, as well as sales of
investment and insurance services. These products and services are offered
through Huntington's traditional banking network; Direct Bank--Huntington's
customer service center; and Web Bank at www.huntington.com. Regional Banking
also represents middle-market and large corporate banking relationships which
use a variety of banking products and services including, but not limited to,
commercial loans, international trade, and cash management.
DEALER SALES: this segment's product offerings pertain to the
automobile lending sector and include indirect consumer loans and leases, as
well as floor plan financing. The consumer loans and leases comprise the vast
majority of the business and involve the financing of vehicles purchased or
leased by individuals through dealerships.
PRIVATE FINANCIAL GROUP: this segment's array of products and services
are designed to meet the needs of Huntington's higher wealth customers. Revenue
is derived through the sale of personal trust, asset management, investment
advisory, brokerage, insurance, and deposit and loan products and services.
Income and related expenses from the sale of brokerage and insurance products is
shared with the line of business that generated the sale or provided the
customer referral.
TREASURY / OTHER: this segment includes assets, liabilities, equity,
revenue, and expense that are not directly assigned or allocated to one of the
lines of business. Since a match-funded transfer pricing system is used to
allocate interest income and interest expense to other business segments,
Treasury / Other results include the net impact of any over or under allocations
arising from centralized management of interest rate risk including the net
impact of derivatives used to hedge interest rate sensitivity. Furthermore, this
segment's results include the net impact of administering Huntington's
investment securities portfolio as part of overall liquidity management.
Additionally, amortization expense of intangible assets and gains or losses not
allocated to other business segments are also a component.
Listed below is certain reported financial information reconciled to
Huntington's third quarter and nine-month 2002 and 2001 operating results by
line of business.
THREE MONTHS ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS REGIONAL DEALER TREASURY/ HUNTINGTON
(in thousands of dollars) BANKING SALES PFG OTHER CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------
2002
Net interest income (FTE) $146,580 $ 60,918 $ 8,784 $ 34,230 $250,512
Provision for loan losses 31,534 25,860 2,855 -- 60,249
Non-Interest income 76,616 6,822 18,475 12,919 114,832
Non-Interest expense 148,635 19,678 18,849 6,561 193,723
Income taxes/FTE adjustment 15,059 7,771 1,944 4,432 29,206
- ----------------------------------------------------------------------------------------------------------------------------
Operating earnings 27,968 14,431 3,611 36,156 82,166
Merchant Servicies restructuring gain, net of tax -- -- -- 15,957 15,957
Florida operations sold, net of tax -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 27,968 $ 14,431 $ 3,611 $ 52,113 $ 98,123
============================================================================================================================
13
THREE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS REGIONAL DEALER TREASURY/ HUNTINGTON
(in thousands of dollars) BANKING SALES PFG OTHER CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------
2001
Net interest income (FTE) $ 155,901 $ 56,245 $ 9,115 $ 10,643 $ 231,904
Provision for loan losses 18,749 26,154 1,124 -- 46,027
Non-Interest income 81,899 6,332 14,600 8,268 111,099
Non-Interest expense 152,837 18,378 13,645 2,194 187,054
Income taxes/FTE adjustment 23,175 6,315 3,132 (3,593) 29,029
- --------------------------------------------------------------------------------------------------------------------------
Operating earnings 43,039 11,730 5,814 20,310 80,893
Florida operations sold, net of tax 10,587 1,592 1,533 (18,945) (5,233)
Restructuring and special charges, net of tax (5,555) -- (2,990) (24,486) (33,031)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 48,071 $ 13,322 $ 4,357 $ (23,121) $ 42,629
==========================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS 3Q AVERAGE ASSETS 3Q AVERAGE DEPOSITS
---------------------------- -------------------------------
(in millions of dollars) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Regional Banking $ 13,055 $ 12,450 $ 15,257 $ 13,974
Dealer Sales 8,423 7,415 52 84
PFG 1,056 768 821 623
Treasury / Other 3,244 4,100 994 240
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 25,778 24,733 17,124 14,921
Florida operations sold -- 3,255 -- 4,567
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 25,778 $ 27,988 $ 17,124 $ 19,488
================================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS REGIONAL DEALER TREASURY/ HUNTINGTON
(in thousands of dollars) BANKING SALES PFG OTHER CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------------
2002
Net interest income (FTE) $ 438,762 $ 167,508 $ 25,634 $ 95,808 $ 727,712
Provision for loan losses 90,349 69,330 5,057 -- 164,736
Non-Interest income 239,073 15,348 58,311 32,821 345,553
Non-Interest expense 447,251 56,315 56,919 12,474 572,959
Income taxes/FTE adjustment 49,082 20,024 7,678 15,399 92,183
- -----------------------------------------------------------------------------------------------------------------------------------
Operating earnings 91,153 37,187 14,291 100,756 243,387
Florida operations sold, net of tax 2,639 794 927 (5,885) (1,525)
Gain on sale of Florida operations, net of tax -- -- -- 56,790 56,790
Merchant Services restructuring gain, net of tax -- -- -- 15,957 15,957
Restructuring and special charges, net of tax -- -- -- (36,519) (36,519)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 93,792 $ 37,981 $ 15,218 $ 131,099 $ 278,090
===================================================================================================================================
14
NINE MONTHS ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS REGIONAL DEALER TREASURY/ HUNTINGTON
(in thousands of dollars) BANKING SALES PFG OTHER CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------
2001
Net interest income (FTE) $ 485,654 $ 162,700 $ 25,918 $ 9,151 $ 683,423
Provision for loan losses 36,678 80,995 -- -- 117,673
Non-Interest income 234,847 21,469 48,218 18,824 323,358
Non-Interest expense 460,712 50,767 54,954 6,881 573,314
Income taxes/FTE adjustment 78,089 18,342 6,714 (15,301) 87,844
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 145,022 34,065 12,468 36,395 227,950
Florida operations sold, net of tax 36,676 4,781 4,467 (55,844) (9,920)
Restructuring and special charges, net of tax (12,858) (63,920) (2,990) (25,390) (105,158)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 168,840 $ (25,074) $ 13,945 $ (44,839) $ 112,872
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS YTD AVERAGE ASSETS YTD AVERAGE DEPOSITS
------------------------------- --------------------------
(in millions of dollars) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Regional Banking $ 12,831 $ 12,289 $ 14,875 $ 13,699
Dealer Sales 8,040 7,113 53 86
PFG 976 733 767 601
Treasury / Other 3,331 4,878 699 294
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 25,178 25,013 16,394 14,680
Florida operations sold 581 3,163 781 4,526
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 25,759 $ 28,176 $ 17,175 $ 19,206
=============================================================================================================================
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Huntington Bancshares Incorporated (Huntington) is a multi-state
financial holding company headquartered in Columbus, Ohio. Its subsidiaries
engage in full-service commercial and consumer banking, mortgage banking, lease
financing, trust services, discount brokerage services, underwriting credit life
and disability insurance, issuing commercial paper guaranteed by Huntington, and
selling other insurance and financial products and services. Its subsidiaries
operate domestically from offices located predominately in Ohio, Michigan, West
Virginia, Indiana, and Kentucky. Huntington has a foreign office in the Cayman
Islands and in Hong Kong.
FORWARD-LOOKING STATEMENTS
This interim report, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements about Huntington. These include descriptions of products or services,
plans, or objectives of management for future operations, and forecasts of
revenues, earnings, or other measures of economic performance. Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts.
By their nature, forward-looking statements are subject to numerous
assumptions, risks, and uncertainties. A number of factors, including but not
limited to, those set forth under the heading "Business Risks" included in Item
1 of Huntington's 2001 Annual Report and other factors described from time to
time in other filings with the Securities and Exchange Commission, could cause
actual conditions, events, or results to differ significantly from those
described in the forward-looking statements.
Management encourages readers of this interim report on Form 10-Q to
understand forward-looking statements to be strategic objectives rather than
absolute forecasts of future performance. Forward-looking statements speak only
as of the date they are made. Huntington does not update forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements were made or to reflect the occurrence of
unanticipated events.
The following discussion and analysis, the purpose of which is to
provide investors and others with information that management believes to be
necessary for an understanding of Huntington's financial condition, changes in
financial condition, and results of operations should be read in conjunction
with the financial statements, notes, and other information contained in this
document.
SIGNIFICANT ACCOUNTING POLICIES
Note 1 to the consolidated financial statements included in
Huntington's 2001 Annual Report lists significant accounting policies used in
the development and presentation of its financial statements. This discussion
and analysis, the significant accounting policies, and other financial statement
disclosures identify and address key variables and other qualitative and
quantitative factors that are necessary for an understanding and evaluation of
the organization, its financial position, and results of operations.
SPECIAL PURPOSE ENTITIES (SPES)
Huntington utilized two securitization trusts, or SPEs, in 2000 as
funding sources. These two trusts had total assets of $1.1 billion at September
30, 2002. In the securitization transactions, indirect auto loans that
Huntington originated were sold to these trusts in exchange for funding
collateralized by these loans. Under accounting principles generally accepted in
the United States (GAAP), these trusts are not consolidated in Huntington's
financial statements. As such, the loans and the funding obtained are not
included on Huntington's balance sheets.
The Financial Accounting Standards Board (FASB) issued an Exposure
Draft of a proposed Interpretation to ARB No. 51 that establishes accounting
guidance for consolidation of SPEs. The proposed Interpretation, Consolidation
of Certain Special-Purpose Entities, will apply to any business enterprise--both
public and private companies--that has an ownership interest, contractual
relationship, or other business relationship with an SPE. The comment period on
this Exposure Draft concluded August 30, 2002. The objective of this proposed
Interpretation is to improve financial reporting by enterprises involved with
SPEs--not to restrict the use of SPEs. Current accounting standards require an
enterprise to include subsidiaries in which it has a controlling financial
interest in its consolidated financial statements. The FASB expects to issue a
final Interpretation in the fourth quarter of this year. The accounting guidance
would be effective immediately upon issuance of the Interpretation for new SPEs.
Companies such as Huntington with SPEs that existed before the issuance of the
Interpretation would be required to apply the guidance to the existing SPEs at
the beginning of the first fiscal period after March 15, 2003. Because
Huntington is a calendar year-end company, it would
16
need to apply the guidance beginning on April 1, 2003. The Exposure Draft, as
written, could result in the consolidation of the securitization trust assets
and liabilities, results of operations, and cash flows in Huntington's financial
statements.
DERIVATIVES AND OTHER OFF BALANCE SHEET ARRANGEMENTS
Huntington uses a variety of derivatives, principally interest rate
swaps, in its asset and liability management activities to protect against the
risk of adverse interest rate movements on either cash flows or market value of
certain assets and liabilities.
Like other financial organizations, Huntington uses various commitments
in the ordinary course of business that, under GAAP, are not recorded in the
financial statements. Specifically, Huntington makes various commitments to
extend credit to customers and to sell loans, and have obligations under
operating-type noncancelable leases for its facilities. This, along with other
information regarding derivatives, is discussed under the "Interest Rate Risk
Management" section of this report and in the notes to the unaudited
consolidated financial statements.
RELATED PARTY TRANSACTIONS
Various directors and executive officers of Huntington are customers of
its bank subsidiary, The Huntington National Bank (the Bank), and other
subsidiaries, which have conducted transactions with Huntington's directors and
executive officers in the ordinary course of business. Huntington's directors
and executive officers may also be affiliated with entities that are customers
of the Bank and Huntington's other subsidiaries. All transactions with the
affiliates of Huntington's directors and executive officers are conducted in the
ordinary course of business. A summary of the indebtedness of management can be
found in Note 4 to Huntington's 2001 Annual Report. All other related party
transactions, including those reported in Huntington's 2002 Proxy Statement and
transactions subsequent to December 31, 2001, were considered immaterial to its
financial condition, results of operations, and cash flows.
STRATEGIC REFOCUSING AND OTHER RESTRUCTURING
In July 2001, Huntington announced a strategic refocusing plan (the
Plan). Key components of the Plan included the intent to sell the Florida
banking and insurance operations, the consolidation of numerous non-Florida
branch offices, as well as credit-related and other actions to strengthen its
balance sheet and financial performance including the use of some of the excess
capital to repurchase outstanding common shares. These initiatives were designed
to attain more positive revenue and earnings for shareholders and to improve
capital efficiency.
The sale of the Florida banking operations to SunTrust Banks, Inc.,
closed February 15, 2002, and included 143 banking offices and 456 ATMs with
approximately $2.8 billion in loans and other tangible assets, and $4.8 billion
in deposits and other liabilities. The transaction slightly increased
Huntington's sensitivity to rising interest rates. In addition, the net interest
margin, tangible equity to assets, and efficiency ratios were favorably
impacted.
Huntington's Florida insurance operation, the Orlando-based J. Rolfe
Davis Insurance Agency, Inc. (JRD), was sold to members of its management team
on July 2, 2002. Huntington remains committed to growing the insurance business
in markets served by its retail and commercial banking operations. The JRD sale
will not materially affect Huntington's future financial results.
During the first quarter of 2002, $56.2 million of pre-tax
restructuring and special charges ($36.5 million after-tax, or $0.14 per share)
were recorded related to the Plan. Combined with amounts recorded in 2001, these
pre-tax charges totaled $233.1 million ($151.5 million after-tax, or $0.60 per
share). In the first quarter of 2002, a pre-tax gain of $175.3 million ($56.7
million after-tax, or $0.23 per share) on the sale of the Florida operations was
recorded. Further information regarding the financial impact of the Plan can be
found in Notes 6 and 7 to the unaudited consolidated financial statements.
On February 19, 2002, Huntington announced a new share repurchase
program authorizing the repurchase of up to 22 million shares. Repurchased
shares will be reserved for reissue in connection with Huntington's dividend
reinvestment and employee benefit plans, as well as for acquisitions and other
corporate purposes. Through the end of September 2002, 15 million shares of
common stock had been repurchased under this program, including 6.3 million
shares in the third quarter, through open market and privately negotiated
transactions.
In August 2002, Huntington restructured its interest in Huntington
Merchant Services, L.L.C. (HMS), Huntington's merchant services business, in a
transaction with First Data Merchant Services Corporation (First Data), a
subsidiary of First Data Corporation. Under the agreement, Huntington extended
its long-term merchant services relationship with First Data. In addition, as
part of the transaction, First Data obtained all of Huntington's Florida-related
merchant business and increased its equity interest in HMS. This transaction
resulted in a $24.5 million pre-tax, non-operating
17
gain ($16.0 million after tax) in the third quarter of 2002. Huntington remains
a nominal equity owner and, going forward, this transaction is not expected to
have a material impact on Huntington's financial results.
SUMMARY DISCUSSION OF RESULTS
Huntington reported third quarter 2002 net income of $98.1 million, or
$0.41 per common share. This compares with net income of $42.6 million, or $0.17
per common share, in the year-ago third quarter, and $82.2 million, or $0.33 per
common share, in the second quarter of 2002. Year-to-date net income in 2002 was
$278.1 million, or $1.13 per common share, compared with $112.9 million, or
$0.45 per common share, in the nine-month period a year ago.
Third quarter 2002 operating earnings (see Basis of Discussion -
Operating Earnings below) were $82.2 million, or $0.34 per common share, which
excludes the $24.5 million pre-tax ($16.0 million after tax) gain on the
restructuring of Huntington's ownership interest in HMS as mentioned above.
These results were up 1% and 3%, respectively, from second quarter 2002
operating earnings of $81.7 million, or $0.33 per common share, and up 2% and
6%, respectively, compared with operating earnings of $80.9 million, or $0.32
per common share, in the third quarter a year ago. Prior period operating
earnings exclude restructuring and special charges and the impact of the sale of
the Florida banking operations and other non-operating items. Operating earnings
for the first nine months of 2002 were $243.4 million, or $0.99 per common
share, up 7% and 9%, respectively, from the comparable prior-year period
operating earnings of $228.0 million, or $0.91 per common share.
The primary contributing factors to the $1.3 million, or 2%, increase
in operating net income from the year-ago third quarter were higher net interest
income and non-interest income, the benefit of which was partially offset by
higher provision for loan losses and non-interest expense. Net interest income
increased $19.0 million, or 8%, resulting from a 6% increase in average earnings
assets and a 2%, or 9 basis point, increase in the net interest margin to 4.26%
from 4.17%. Non-interest income, excluding securities gains, increased $3.7
million, or 3%, reflecting increases in service charges on deposit accounts,
other service charges and fees, and other income, offset by impairment on
mortgage servicing rights of $6.6 million. The provision for loan losses
increased $14.2 million, or 31% from the year-ago quarter. This increase was due
to $7.6 million in higher net charge-offs supplemented by additional provision
expense related primarily to the growth in loans. Non-interest expense increased
$6.7 million, or 4%, primarily due to higher personnel costs. Income tax expense
increased 2% reflecting the current quarter's higher level of net income.
Return on average equity (ROE) for the third quarter of 2002 was 14.3%,
up from 13.5% in the year-ago quarter. Reflecting the growth in assets, the
return on average total assets (ROA) declined slightly to 1.26% from 1.30%.
Huntington's efficiency ratio (which measures the dollars spent for dollars of
revenue generated) improved to 53.1% from 54.0%.
BASIS OF DISCUSSION - OPERATING EARNINGS
Reported results since the second quarter of 2001 have been
significantly impacted by a number of non-operating items, primarily related to
the strategic restructuring announced in July 2001 and the subsequent sale of
the Florida banking operations in the first quarter of 2002. Therefore, to
better understand comparable underlying trends and for decision-making purposes,
management reviews and analyzes financial results on an operating basis, which
leads to a better understanding of underlying trends absent the impact of
revenue and costs of such non-operating items. As such, the Results of
Operations discussion that follows is presented on an operating basis unless
otherwise indicated. In addition to excluding the third quarter 2002 gain from
the restructuring of Huntington's ownership interest in HMS, operating earnings
in prior periods exclude the impact of restructuring and special charges, the
gain from the sale of Florida banking operations and its related run-rate impact
from prior periods, the related run-rate impact from the sale of Florida
insurance operations, and other non-operating items.
The table on the following page entitled Reconciliation of Reported
Earnings to Operating Earnings reconciles reported results with operating
results for the third quarter and first nine months of 2002 and 2001. The table
on page 20 entitled Selected Quarterly Income Statement Data, excluding Florida
Operations shows operating results beginning with the first quarter of 2001
through the current quarter. The Reconciliation of Reported Earnings to
Operating Earnings table reflects total pre-tax restructuring and special
charges for 2002 of $56.2 million. This presentation differs from the table
presented in Note 7 to the unaudited consolidated financial statements because
the table in Note 7 reflects only the pre-tax restructuring and special charges
for 2002 related to the Florida operations of $32.7 million. Because the table
in Note 7 was intended only to show the pro forma impact without the Florida
operations, non-Florida related restructuring and special charges of $23.5
million remain included in the "Huntington Pro Forma Without Florida Operations"
column of that table.
18
RESULTS OF OPERATIONS
The Results of Operations discussion that follows is on an operating
basis, except as otherwise stated. This is the same basis which management
reviews and analyzes results to better understand underlying trends absent
non-recurring revenue and cost items. (See Basis of Discussion - Operating
Earnings above for an expanded discussion of operating results and
reconciliation to reported results.)
- -----------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF REPORTED EARNINGS TO OPERATING EARNINGS
- -----------------------------------------------------------------------------------------------------------------------------------
GAIN ON SALE OF
FLORIDA OPERATIONS/
RESTRUCTURING
REPORTED AND OTHER FLORIDA OPERATING
(in thousands, except per share amounts) EARNINGS ITEMS OPERATIONS EARNINGS
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002:
Net interest income $249,416 $249,416
Provision for loan losses 60,249 60,249
Securities gains 1,140 1,140
Non-interest income 138,242 $ 24,550 $ --- 113,692
Non-interest expense 193,723 --- --- 193,723
- -----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 134,826 24,550 --- 110,276
Income taxes 36,703 8,593 --- 28,110
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 98,123 $ 15,957 $ --- $ 82,166
===================================================================================================================================
Net income per common share -- diluted $ 0.41 $ 0.07 $ --- $ 0.34
===================================================================================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002:
Net interest income $734,100 $ 9,724 $724,376
Provision for loan losses 169,922 5,186 164,736
Securities gains 2,563 --- 2,563
Non-interest income 556,227 $ 199,894 13,343 342,990
Non-interest expense 649,353 56,184 20,210 572,959
- -----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 473,615 143,710 (2,329) 332,234
Income taxes 195,525 107,482 (804) 88,847
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $278,090 $ 36,228 $ (1,525) $243,387
===================================================================================================================================
Net income per common share -- diluted $ 1.13 $ 0.15 $ (0.01) $ 0.99
===================================================================================================================================
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001:
Net interest income $249,787 $ 19,325 $230,462
Provision for loan losses 49,559 $ --- 3,532 46,027
Securities gains 1,059 --- --- 1,059
Non-interest income 129,397 --- 19,357 110,040
Non-interest expense 279,707 50,817 41,836 187,054
- -----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 50,977 (50,817) (6,686) 108,480
Income taxes 8,348 (17,786) (1,453) 27,587
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 42,629 $ (33,031) $ (5,233) $ 80,893
===================================================================================================================================
Net income per common share -- diluted $ 0.17 $ (0.13) $ (0.02) $ 0.32
===================================================================================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001:
Net interest income $740,944 $ 62,581 $678,363
Provision for loan losses 200,518 $ 71,718 11,127 117,673
Securities gains 634 (5,250) --- 5,884
Non-interest income 375,749 --- 58,275 317,474
Non-interest expense 781,090 84,814 122,962 573,314
- -----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 135,719 (161,782) (13,233) 310,734
Income taxes 22,847 (56,624) (3,313) 82,784
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $112,872 $(105,158) $ (9,920) $227,950
===================================================================================================================================
Net income per common share -- diluted $ 0.45 $ (0.42) $ (0.04) $ 0.91
===================================================================================================================================
19
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED QUARTERLY INCOME STATEMENT DATA, EXCLUDING FLORIDA OPERATIONS (1)
2002 2001
- ------------------------------------------------------------------------------- -----------------------------------------------
(in thousands, except per share amounts) THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $249,416 $241,859 $233,101 $235,546 $230,462 $225,883 $222,018
Provision for loan losses 60,249 53,892 50,595 54,281 46,027 41,937 29,709
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 189,167 187,967 182,506 181,265 184,435 183,946 192,309
- -----------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 37,460 35,354 34,282 35,220 33,593 32,650 31,143
Trust services 14,997 16,247 15,096 14,679 14,816 14,431 13,670
Brokerage and insurance income 13,943 14,967 14,587 15,066 13,943 13,185 12,232
Bank Owned Life Insurance income 11,443 11,443 11,676 9,560 9,560 9,561 9,560
Other service charges and fees 10,837 10,529 9,118 9,582 9,547 9,383 8,415
Mortgage banking 6,289 10,725 19,644 15,049 13,859 17,672 9,238
Other 18,723 15,039 10,591 15,135 14,722 13,979 12,315
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME BEFORE
SECURITIES GAINS 113,692 114,304 114,994 114,291 110,040 110,861 96,573
Securities gains 1,140 966 457 89 1,059 2,747 2,078
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 114,832 115,270 115,451 114,380 111,099 113,608 98,651
- -----------------------------------------------------------------------------------------------------------------------------------
Personnel costs 107,477 103,589 104,320 100,076 101,866 103,707 99,296
Equipment 17,378 16,608 15,582 18,117 17,580 17,363 17,503
Outside data processing and other services 15,128 16,592 17,097 15,414 14,650 15,100 14,122
Net occupancy 14,815 14,642 14,771 15,251 14,481 13,755 15,568
Marketing 7,491 7,219 7,174 5,305 5,717 6,807 8,832
Professional services 6,083 6,265 5,242 6,069 5,754 6,481 4,793
Telecommunications 5,609 5,302 5,282 5,647 5,728 5,964 5,952
Printing and supplies 3,679 3,671 3,519 3,511 3,693 3,688 4,098
Franchise and other taxes 2,283 2,313 2,326 2,885 2,439 2,229 2,116
Amortization of intangible assets 204 203 251 2,555 2,569 2,890 3,031
Other 13,576 13,781 13,487 12,599 12,577 14,459 18,506
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 193,723 190,185 189,051 187,429 187,054 192,443 193,817
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 110,276 113,052 108,906 108,216 108,480 105,111 97,143
Income taxes 28,110 31,344 29,393 28,631 27,587 29,509 25,688
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 82,166 $ 81,708 $ 79,513 $ 79,585 $ 80,893 $ 75,602 $ 71,455
===================================================================================================================================
NET INCOME PER COMMON SHARE - DILUTED $ 0.34 $ 0.33 $ 0.32 $ 0.32 $ 0.32 $ 0.30 $ 0.28
RETURN ON
Average total assets 1.26% 1.31% 1.30% 1.28% 1.30% 1.07% 1.15%
Average total shareholders' equity 14.3% 14.0% 13.6% 13.4% 13.5% 12.6% 12.1%
Net interest margin (2) 4.26% 4.30% 4.21% 4.26% 4.17% 4.03% 3.99%
Efficiency ratio 53.1% 53.2% 54.1% 52.7% 54.0% 56.0% 59.5%
Effective tax rate 25.5% 27.7% 27.0% 26.5% 25.4% 28.1% 26.4%
REVENUE - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $249,416 $241,859 $233,101 $235,546 $230,462 $225,883 $222,018
Tax Equivalent Adjustment (2) 1,096 1,071 1,169 1,292 1,442 1,616 2,002
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 250,512 242,930 234,270 236,838 231,904 227,499 224,020
Non-Interest Income 114,832 115,270 115,451 114,380 111,099 113,608 98,651
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE $365,344 $358,200 $349,721 $351,218 $343,003 $341,107 $322,671
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE EXCLUDING SECURITIES GAINS $364,204 $357,234 $349,264 $351,129 $341,944 $338,360 $320,593
===================================================================================================================================
(1) Income component excludes after-tax Merchant Services gain of $16.0
million, the impact of the $56.7 million gain on sale of Florida operations
in 1Q '02 and restructuring and special charges ($36.5 million in 1Q '02;
$9.8 million in 4Q '01; $33.0 million in 3Q '01; $72.1 million in 2Q '01).
(2) Calculated assuming a 35% tax rate.
20
NET INTEREST INCOME
Net interest income was $249.4 million in the third quarter of 2002, up
$19.0 million, or 8%, from the year-ago quarter reflecting growth in average
earning assets, primarily loans, and the benefit of a higher net interest
margin. Earning assets were $1.2 billion, or 6%, higher than in the same quarter
a year ago. Average loans increased 7% after normalizing for residential real
estate loan securitizations and the impact of Florida banking operations sold in
the first quarter of 2002. Also contributing to the growth in net interest
income was a 2%, or a 9 basis point, increase in the net interest margin to
4.26% from 4.17%. The increase in the net interest margin resulted from a
substantial reduction in short-term interest rates that lowered Huntington's
cost of funds in addition to the maturity in late 2001 of certain interest rate
swaps that had negative spreads. Average core deposits were up 12% from the
year-ago quarter, reflecting a 43% increase in money market and other
interest-bearing deposits and a 4% increase in demand deposits. Growth in core
deposits has been influenced, in part, by turbulence in the financial markets,
but also by the success of deposit growth programs. (See page 22 for the net
interest margin detail and average balance sheets.)
Net interest income for the 2002 third quarter increased $7.6 million,
or 3%, from the immediately preceding quarter. This resulted from a $797
million, or 4%, increase in average earning assets from growth in both loans and
securities, offset by a 4 basis point decrease in the net interest margin to
4.26% from 4.30%. This decrease was driven by a flattening of the yield curve,
lower yields on higher quality auto loan and leases originations, a growing
residential mortgage portfolio with inherently lower spreads, prepayments of
higher yielding mortgage loans, and the increasingly limited ability to lower
deposit rates from already low historical absolute levels.
Average loans for the recent three months increased 12% on an
annualized basis from the second quarter of 2002. This growth rate is normalized
for acquisitions, loan sales, and loan securitizations. During the third quarter
of 2002, Huntington securitized $91 million of residential mortgage loans and
retained these securities in its secur