SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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, 2002
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
(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
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(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/A or any amendment to
this Form 10-K/A. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] Yes [ ] No
The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 28, 2002, determined by using a per share closing price of
$19.42, as quoted by NASDAQ on that date, was $5,007,762,672. As of February 28,
2003, 230,832,180 shares of common stock without par value were outstanding.
Documents Incorporated By Reference
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Parts I and II of this Form 10-K/A incorporates by reference certain
information from the registrant's 2002 amended Annual Report to Shareholders.
Part III of this Form 10-K/A incorporates by reference certain information from
the registrant's definitive Proxy Statement for the 2003 Annual Shareholders'
Meeting.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
Restatement of Results of Operations and Financial Condition 3
Part I.
Item 1. Business 4
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Part II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 61
Item 8. Financial Statements and Supplementary Data 61
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 108
Part III.
Item 10. Directors and Executive Officers of the Registrant 108
Item 11. Executive Compensation 108
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 108
Item 13. Certain Relationships and Related Transactions 108
Item 14. Controls and Procedures 108
Part IV.
Item 15. Principal Accountant Fees and Services 108-109
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 109
Signatures 110
Certifications 111-112
HUNTINGTON BANCSHARES INCORPORATED
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RESTATEMENT OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Huntington restated its financial results to reclassify certain
automobile leases from the direct financing lease method to the operating lease
method of accounting. The appropriate classification of automobile leases as
operating leases or direct financing leases under Statement of Financial
Accounting Standards (Statement) No. 13, Accounting for Leases, can be impacted
by residual value insurance coverage. Since October 2000, Huntington has had
residual value insurance coverage on its entire automobile lease portfolio to
protect it from the risk of loss resulting from declines in used car
prices. Such losses arise if the market value of the automobile at the end of
the lease term is less than the residual value embedded in the original lease
contract. Management believes these policies effectively protect Huntington
from the risk of declining used car prices. In April 2003, management determined
that, due to provisions in certain of its residual value insurance policies, the
leases covered by these policies would not qualify as direct financing leases.
For leases originated prior to May 2002, the residual value insurance
policies contain aggregate loss caps. The residuals insured under these policies
are not considered guaranteed, and, accordingly, the related leases fail to
qualify as direct financing leases under Statement No. 13. As a result, leases
originated prior to May 2002 have been reclassified as operating leases for all
periods presented. As of December 31, 2002, $2.3 billion of such leases, net of
accumulated depreciation, are reflected in the Consolidated Balance Sheets as
operating lease assets. All leases originated since April 2002 are covered under
a new residual value insurance policy (the "New Policy") which insures the full
residual value of each vehicle and includes no aggregate loss cap. Leases with
residual gains are netted with leases with residual losses when claims are
settled. The netting provision of the New Policy precluded Huntington from
determining the amount of the guaranteed residual of any individual leased asset
within the portfolio at lease inception. Thus, the related leases failed to
qualify as direct financing leases. Huntington has amended the New Policy,
retroactive to April 2002, by adding an endorsement that adds a level of
insurance sufficient to meet the criteria as a residual value guarantee pursuant
to Statement No. 13, on an individual lease-by-lease basis, with no netting
provisions. In addition, Huntington continues to maintain insurance coverage
that insures the full value of the leased residuals. Accordingly, and in
reliance on guidance furnished by the Securities and Exchange Commission in its
announcement at the Financial Accounting Standards Board Emerging Issues Task
Force meeting on May 15, 2003, all leases covered under the New Policy, as
amended, are now appropriately classified as direct financing leases in the
accompanying financial statements. As of December 31, 2002, $893 million of such
leases were included in loans and leases in the Consolidated Balance Sheets. It
is management's intention to insure the residuals associated with future
originations under the New Policy, as amended, and to classify such new
originations as direct financing leases.
The impact of this restatement also affected the Consolidated Income
Statements. Under the direct financing lease accounting method, interest income
is recognized on leases on a "level-yield" or interest method that ascribes a
portion of each lease payment to interest income, resulting in a constant rate
of interest over the life of the lease. The remaining portion of each payment
amortizes the net investment in the lease such that at the end of the lease
term, the net investment equals the residual value as determined at the
inception of the lease. Under operating lease accounting, lease payments are
recorded as rental income, a component of Operating lease income in the
Non-interest income section of the Consolidated Income Statements. Depreciation
expense is recorded on a straight-line basis over the term of the lease from the
cost of the automobile at the inception of the lease to the estimated residual
value at the end of the lease term. Depreciation expense is included in
Operating lease expense in the Non-interest expense section of the Consolidated
Income Statement. Depreciation expense is adjusted prospectively at any time
during the lease term when the estimated market value of the automobile at the
end of the lease term changes. Upon disposition, a gain, reflected in
Non-interest income, or a loss, reflected in Non-interest expense, is recorded
for any difference between the net book value of the lease and the proceeds from
the disposition of the automobile.
Over the term of the lease, the cash flows, the timing of the cash
flows, and total income recognized are identical under either accounting method.
One significant difference between the two methodologies is the timing of income
recognition. Under operating lease accounting, less income is recognized in the
first half of the lease and more income is recognized in the second half than
under direct financing lease accounting.
Another significant difference between the direct financing lease
method and the operating lease method of accounting is the recognition of credit
loss expense. Credit losses occur when a lease is terminated early because the
lessee fails to make the required lease payments. These credit-generated
terminations result in Huntington taking possession of the automobile earlier
than expected. When this occurs, the market value of the automobile may be less
than Huntington's book value, resulting in a loss upon sale or write down to
market value while the vehicle is pending sale. Under the direct
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financing lease accounting method, such losses are charged against an allowance
for loan and lease losses that is established at the inception of the lease and
is adjusted periodically as necessary through provision expense. Under operating
lease accounting, the lease is not treated like a loan, but as a depreciable
non-interest earning asset. Therefore, no allowance for loan and lease losses is
established. As such, early termination losses are recognized as a component of
Operating lease expense in the Non-interest expense section of the Consolidated
Income Statements.
The fact that part of the auto lease portfolio is accounted for as
operating leases, with the remainder, including all future production, being
accounted for as direct financing leases, will impact the comparability of
Huntington's financial statements between reporting periods. As leases
originated before May 2002 accounted for as operating leases run off, and as new
originations are accounted for as direct financing leases, the level of
operating lease income and operating lease expense will decline over future
reporting periods while the level of interest income associated with direct
financing leases will increase. Additionally, management will increase the
provision for loan and lease losses, as appropriate, to provide the necessary
level of reserves for new direct financing lease originations. Balance sheet
classifications will also be impacted as the run off of the operating leases
originated before the New Policy, as amended, reduces non-interest earning
assets while the new direct financing lease originations covered under the New
Policy, as amended, increase loans and leases.
Further information regarding the impact of this restatement to
Huntington's results of operations and financial condition can be found in
Management's Discussion and Analysis and in Note 3 to the consolidated financial
statements.
Part I
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ITEM 1: BUSINESS
Huntington was incorporated in Maryland in 1966 and is a diversified,
multi-state financial holding company. Huntington is headquartered in Columbus,
Ohio. Through its subsidiaries, Huntington is engaged in providing full-service
commercial and consumer banking services, mortgage banking services, automobile
financing, equipment leasing, investment management, trust services, and
discount brokerage services, as well as underwriting credit life and disability
insurance, and selling other insurance and financial products and services. At
December 31, 2002, Huntington's bank subsidiary had 161 banking offices in Ohio,
115 banking offices in Michigan, 30 banking offices in West Virginia, 22 banking
offices in Indiana, 12 banking offices in Kentucky, 3 private banking offices in
Florida (the bank subsidiary's other banking offices in Florida were sold in
February 2002), and one foreign office in the Cayman Islands and Hong Kong,
respectively. The Huntington Mortgage Company (a wholly owned subsidiary) had
loan origination offices during 2002 in the Midwest and on the East Coast.
Beginning in 2003, these offices will function as offices of a division of the
bank subsidiary as a result of the merger of the mortgage company into the bank
subsidiary at the end of 2002. Foreign banking activities, in total or with any
individual country, are not significant to the operations of Huntington. At
December 31, 2002, Huntington and its subsidiaries had 8,177 full-time
equivalent employees.
A discussion of Huntington's lines of business can be found in its
Management's Discussion and Analysis of Financial Condition and Results of
Operations beginning on page 43 of this report. The financial statement results
can be found in Note 27 of the Notes to Consolidated Financial Statements
beginning on page 101 of this report.
Huntington competes on price and service with other banks and financial
companies such as savings and loans, credit unions, finance companies, and
brokerage firms. Competition 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 intensified.
Finally, financial services reform legislation enacted in November 1999 (see
Gramm-Leach-Bliley Act of 1999 (GLB Act) below) eliminated 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 securities and insurance activities as defined by the GLB
Act, and to affiliate with both securities and insurance firms. Correspondingly,
it permits both 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.
As part of a comprehensive strategic and financial restructuring plan
(the Plan) adopted in July 2001 to refocus its operations on core activities in
the Midwest, Huntington consummated the sale of its Florida banking operations
in February 2002, and its Florida insurance operation, J. Rolfe Davis Insurance
Agency, Inc., in July 2002. The Plan also
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included the consolidation of numerous non-Florida branch offices as well as
credit-related and other actions to strengthen its financial performance
including the use of some of the excess capital to repurchase outstanding
common shares.
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 (FRB).
Huntington is required to file with the FRB reports and other information
regarding its business operations and the business operations of its
subsidiaries. It is also required to obtain FRB 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.
Pursuant to the GLB Act, however, Huntington may engage in, or own or
control companies that engage in, any activities determined by the FRB 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. The GLB Act
designated various lending, advisory, insurance underwriting, securities
underwriting, dealing and market-making, and merchant banking activities (as
well as those activities previously approved for bank holding companies by the
FRB) as financial in nature, and authorized by the FRB, 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 notice to the FRB within
30 days subsequent to the commencement of the new financial activity.
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). Huntington's nonbank
subsidiaries are also subject to examination and supervision by the FRB (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 (SEC) and the National Association of Securities Dealers.
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 FRB 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. See Exhibit 21 for a list of Huntington's 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 subsidiary 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 within 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.
In December 2002, the FRB issued Regulation W, a comprehensive
regulation to govern affiliate transactions. The new regulation replaces an
extensive collection of prior FRB interpretations and informal FRB staff
guidance.
The FRB 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 policy, the FRB 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
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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.
DIVIDEND RESTRICTIONS
Dividends from Huntington's subsidiary bank are the primary source of
funds for payment of dividends to Huntington's shareholders. In the year ended
December 31, 2002, Huntington declared cash dividends to its shareholders of
$154.8 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 2003 of approximately $98.1 million plus an additional amount
equal to its net profits during 2003.
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 FRB 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
Savings and Loan Association Insurance Fund (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. Since 2001, the
FDIC has been conducting a comprehensive review of the deposit insurance system
to study alternatives for pricing, funding, and coverage.
CAPITAL REQUIREMENTS
The FRB 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
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categories perceived as representing greater risk. A bank holding company's
capital (as described below) is then divided by total risk weighted assets to
yield the risk-based ratio. The leverage ratio is determined by relating core
capital (as described below) 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 FRB and the other federal banking regulators require that all
intangible assets, with certain limited exceptions, be deducted from Tier 1
capital. Under the FRB'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 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 (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 (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 late 2001, bank regulatory agencies amended capital requirements
effective for December 31, 2002, for recourse and direct credit substitutes,
other than financial standby letters of credit subject to the low-level exposure
rule and residual interests involved in securitization transactions subject to a
dollar-for-dollar capital requirement. The amendment requires maintenance of
institution-specific amounts representing its "maximum contractual dollar amount
of exposure" for residual interests in securitization transactions in
risk-weighted assets when calculating risk-based capital ratios. For Huntington,
the amendment reduced its Tier 1 risk-based and total risk-based capital ratios
by approximately 25 basis points.
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 over-all exposure to
equity investments increases as a percentage of its Tier 1 capital.
Failure to meet applicable capital guidelines could subject the
financial institution to a variety of enforcement remedies available to the
federal regulatory authorities. These include 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 the measures described below under "Prompt Corrective Action" as applicable
to under-capitalized institutions.
As of December 31, 2002, the Tier 1 risk-based capital ratio, total
risk-based capital ratio, and Tier 1 leverage ratio for Huntington were 8.65%,
11.54%, and 8.85%, respectively. As of December 31, 2002, Huntington's bank
subsidiary also had capital in excess of the minimum requirements.
The risk-based capital standards of the FRB, 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.
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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, under-capitalized,
significantly under-capitalized, and critically under-capitalized.
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
"under-capitalized". 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
under-capitalized". Finally, an institution is deemed to be "critically
under-capitalized" 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 under-capitalized. Under-capitalized 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 under-capitalized
institution fails to submit an acceptable plan, it is treated as if it is
significantly under-capitalized. Significantly under-capitalized institutions
may be subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock to become adequately-capitalized, requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. Critically under-capitalized institutions may not, beginning 60 days
after becoming critically under-capitalized, make any payment of principal or
interest on their subordinated debt. In addition, critically under-capitalized
institutions are subject to appointment of a receiver or conservator within 90
days of becoming critically under-capitalized.
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 $1,092.8 million of brokered deposits at December 31, 2002.
GRAMM-LEACH-BLILEY ACT OF 1999
The United States Congress in 1999 enacted major financial services
modernization legislation, known as the "Gramm-Leach-Bliley Act of 1999" (GLB
Act), which was signed into law on November 12, 1999. Under the GLB Act, 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 FRB
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 FRB, 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 FRB to be closely related to banking.
8
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 continued to issue a variety of proposed, interim, and
final rules during the year 2002 for the implementation of the GLB Act.
RECENT REGULATORY DEVELOPMENTS
During 2002, banking regulators adopted new regulations expanding the
scope of measures to combat money laundering in the wake of the terrorist events
of September 11, 2001, and imposed more stringent affiliate transaction
restrictions that would treat financial subsidiaries or other bank subsidiaries
engaging in bank impermissible activities as affiliates for purposes of the
restrictions. Possible authority for financial holding companies to engage in
real estate brokerage and property management services remained under
consideration by banking regulators. It is not possible at present to assess the
likelihood of adoption of final regulations granting such authority.
The federal budget for 2004, published in early 2003, proposed changes
in the federal deposit insurance program. If enacted, the changes would (a)
remove the current prohibition on the charging of FDIC deposit insurance
premiums to well-capitalized institutions when the insurance fund's reserve
ratio is 1.25% or greater of insurable deposits, so that such institutions, if
they rapidly expand deposits, could be made to compensate the insurance fund
appropriately; (b) give the FDIC greater flexibility in restoring the insurance
fund's reserve ratio if it falls below 1.25%, instead of the current requirement
for restoration within one year or a minimum 23 basis points premium for all
institutions if the ratio is below 1.25% for more than one year; and (c) merge
the currently separate BIF and the SAIF, with the objective of creating a
stronger and more diversified fund. It is not possible at present to predict if
any or all of these proposals will be enacted, or, if enacted, what their effect
will be on Huntington.
BUSINESS RISKS
Huntington, like all other financial companies, is subject to a number
of risks, many of which are outside of Huntington's control. Management strives
to limit those risks while maximizing profitability. Among the risks that
Huntington assumes are: (1) credit risk, which is the risk that loan and lease
customers or other counterparties to Huntington will be unable to perform their
contractual obligations to Huntington, (2) market risk, or the risk that the
cost of Huntington's interest sensitive liabilities increase more rapidly (or
decrease less rapidly) than the yield on Huntington's interest sensitive assets,
(3) liquidity risk, which is the risk that Huntington and its bank subsidiary
will have insufficient cash or access to cash in order to meet its operating
needs, and (4) operational risk, which is the risk of loss resulting from
inadequate or failed internal processes, people and systems, or from external
events.
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, future results of operations, and
future cash flows.
HUNTINGTON EXTENDS CREDIT TO A VARIETY OF CUSTOMERS BASED ON INTERNALLY SET
STANDARDS AND THE JUDGMENT OF MANAGEMENT. HUNTINGTON MANAGES THE CREDIT RISK IT
TAKES THROUGH A PROGRAM OF UNDERWRITING STANDARDS THAT IT FOLLOWS, THE REVIEW OF
CERTAIN CREDIT DECISIONS, AND AN ON-GOING PROCESS OF ASSESSMENT OF QUALITY OF
THE CREDIT IT HAS ALREADY EXTENDED. THERE CAN BE NO ASSURANCE THAT HUNTINGTON'S
CREDIT STANDARDS AND ITS ON-GOING PROCESS OF CREDIT ASSESSMENT WILL PROTECT
HUNTINGTON FROM SIGNIFICANT CREDIT LOSSES.
Huntington takes credit risk by virtue of funding loans and leases,
purchasing non-governmental securities, extending loan commitments and letters
of credit, and being counterparties to off-balance sheet financial instruments
such as interest rate and foreign exchange derivatives.
Huntington's exposure to credit risk is managed through the use of
consistent underwriting standards that emphasize "in-market" lending while
avoiding highly leveraged transactions as well as excessive industry and other
concentrations. The credit administration function employs risk management
techniques to ensure that loans and leases adhere to corporate policy and
problem loans and leases are promptly identified. These procedures provide
executive
9
management with the information necessary to implement policy adjustments where
necessary, and to take corrective actions on a proactive basis. In 2002,
management reemphasized its focus on commercial lending to customers with
existing or potential relationships within Huntington's primary markets.
Concentration of credit risk generally arises with respect to loans and
leases when a number of loans and leases have borrowers engaged in similar
business activities or activities in the same geographical region. Concentration
of credit risk indicates the relative sensitivity of performance to both
positive and negative developments affecting a particular industry. Huntington's
borrowers, however, do not represent a particular concentration of similar
business activity.
There can be no assurance that Huntington's credit standards and its
on-going process of credit assessment will protect Huntington from significant
credit losses.
HUNTINGTON'S LOANS, LEASES, AND DEPOSITS ARE FOCUSED IN FIVE STATES AND ADVERSE
ECONOMIC CONDITIONS IN THOSE STATES, IN PARTICULAR, COULD NEGATIVELY IMPACT
RESULTS FROM OPERATIONS, CASH FLOWS, AND FINANCIAL CONDITION.
Huntington's customers with loan and/or deposit balances at December
31, 2002, were located predominantly in Ohio, Michigan, West Virginia, Indiana,
and Kentucky. Because of the concentration of loans, leases, and deposits in
these states, in the event of adverse economic conditions in these states,
Huntington could experience more difficulty in attracting deposits and
experience higher rates of loss and delinquency on its loans and leases than if
the loans and leases were more geographically diversified. Adverse economic
conditions and other factors may reduce demand for credit or fee-based products
and could negatively 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 and leases in these five states may be subject to a
greater risk of default than other comparable loans and leases. In the event of
adverse economic, political, or business developments or natural hazards that
may affect these states, the continued financial stability of a borrower and the
borrower's ability to make loan principal and interest payments or lease rental
payments may be adversely affected by job loss, recession, divorce, illness, or
personal bankruptcy.
CHANGES IN INTEREST RATES COULD NEGATIVELY IMPACT HUNTINGTON'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Huntington's results of operations depend substantially on net interest
income, the difference between interest earned on interest-earning assets (such
as investments, loans, and direct financing 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, 2002, 66.3% of Huntington's earning assets, as measured
by the aggregate outstanding principal amount of loans and leases, amortized
cost of securities available for sale, and the carrying value of other earning
assets, bore interest at adjustable rates or are expected to mature or reprice
within one year. The remainder bore interest at fixed rates. Fixed-rate loans
and leases 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 and leases
decrease these risks associated with changes in interest rates but involve other
risks, such as the inability of borrowers to make higher payments in an
increasing interest rate environment. 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, 2002, implied a 150 basis point
increase in short-term interest rates by the end of 2003. The results of
Huntington's recent sensitivity analysis indicated that net interest income
would be 0.7% lower during the next twelve months if interest rates were 200
basis points higher at the end of that period than implied by
10
the forward yield curve at December 31, 2002. Only the 200 basis point
increasing rate scenario was modeled because a 200 basis point decrease in the
interest rate curve was not feasible given the overall low level of interest
rates. Management believes further declines in market rates would put modest
downward pressure on net interest income, resulting from the implicit pricing
floors in non-maturity deposits.
The net interest margin has been adversely impacted in recent months
by: (1) fixed-rate consumer loan repayments being reinvested at lower market
rates; (2) high repayments of residential mortgage loans and mortgage-backed
securities; (3) the implicit floors in retail deposits as rates declined to
historically low levels; (4) the rapid growth of lower-yielding residential
adjustable-rate mortgage loans retained on the balance sheet; (5) the lower
yield on the higher quality automobile loan originations, and; (6) the
flattening of the yield curve. Future net interest income could also be
adversely affected by these factors.
Changes in interest rates also can affect the value of loans and other
assets, including retained interests in securitizations, mortgage and
non-mortgage servicing rights, and Huntington's ability to realize gains on the
sale of assets. A portion of Huntington's earnings results from transactional
income. Examples of this type of earnings result from gains on sales of loans
and securities. 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 and leases 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 and cash flows.
Although fluctuations in market interest rates are neither completely
predictable nor controllable, Huntington's Asset and Liability Management
Committee (ALCO) meets periodically to monitor Huntington's interest rate
sensitivity position and oversee its financial risk management by establishing
policies and operating limits.
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.
Huntington's ALCO establishes guidelines and regularly monitors the
overall liquidity position of the Bank and the parent company to ensure that
various alternative strategies exist to cover unanticipated events that could
affect liquidity. Liquidity is the ability to meet cash flow needs on a timely
basis at a reasonable cost. The liquidity of the Bank is used to make loans and
leases and to repay deposit liabilities as they become due or are demanded by
customers. The Bank's ALCO establishes policies and monitors guidelines to
diversify the Bank's wholesale funding sources to avoid concentrations in any
one market source. Wholesale funding sources include Federal funds purchased,
securities sold under repurchase agreements, non-core deposits, and medium- and
long-term debt, which includes a domestic bank note program and a Euronote
program. The Bank is also a member of the Federal Home Loan Bank of Cincinnati
(FHLB), which provides funding through advances to its members that are
collateralized with mortgage-related assets.
Huntington maintains a portfolio of securities that can be used as a
secondary source of liquidity. There are other sources of liquidity should they
be needed. These sources include the sale or securitization of loans, the
ability to acquire additional national market, non-core deposits, additional
collateralized borrowings such as FHLB advances, the issuance of debt
securities, and the issuance of preferred or common securities in public or
private transactions. The Bank also can borrow through the Federal Reserve's
discount window.
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,
cash flows, and its level of regulatory-qualifying capital.
HUNTINGTON HAS SIGNIFICANT COMPETITION IN BOTH ATTRACTING AND RETAINING DEPOSITS
AND IN ORIGINATING LOANS AND LEASES.
Competition is intense in most of the markets Huntington serves.
Huntington competes on price and service with other banks and financial
companies such as savings and loans, credit unions, finance companies, and
brokerage firms. Competition could intensify in the future as a result of
industry consolidation, the increasing availability of products and services
from non-banks, greater technological developments in the industry, and banking
reform. For example, 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 legislation, among other
things, permits securities and insurance firms to engage in banking activities
under specified conditions.
11
MANAGEMENT MAINTAINS INTERNAL OPERATIONAL CONTROLS AND HUNTINGTON HAS INVESTED
IN TECHNOLOGY TO HELP IT PROCESS LARGE VOLUMES OF TRANSACTIONS. HOWEVER, THERE
CAN BE NO ASSURANCE THAT HUNTINGTON WILL BE ABLE TO CONTINUE PROCESSING AT THE
SAME OR HIGHER LEVELS OF TRANSACTIONS. IF HUNTINGTON'S SYSTEM OF INTERNAL
CONTROLS SHOULD FAIL TO WORK AS EXPECTED, IF ITS SYSTEMS WERE TO BE USED IN AN
UNAUTHORIZED MANNER, OR IF EMPLOYEES WERE TO SUBVERT THE SYSTEM OF INTERNAL
CONTROLS, SIGNIFICANT LOSSES TO HUNTINGTON COULD OCCUR.
Huntington processes large volumes of transactions on a daily basis and
is exposed to numerous types of operational risk. Operational risk generally
refers to the risk of loss resulting from Huntington's operations, including,
but not limited to, the risk of fraud by employees or persons outside
Huntington, the execution of unauthorized transactions by employees, errors
relating to transaction processing and systems, and breaches of the internal
control system and compliance requirements. This risk of loss also includes the
potential legal actions that could arise as a result of the operational
deficiency or as a result of noncompliance with applicable regulatory standards.
Huntington establishes and maintains systems of internal operational
controls that provide management with timely and accurate information about its
level of operational risk. While not foolproof, these systems have been designed
to manage operational risk at appropriate, cost effective levels. Huntington has
also established procedures that are designed to ensure that policies relating
to conduct, ethics, and business practices are followed. From time to time,
Huntington experiences losses from operational risk, including the effects of
operational errors, which are recorded as non-interest expense.
Management believes that its current system of internal controls is
effective. While management continually monitors and improves its system of
internal controls, data processing systems, and corporate-wide processes and
procedures, there can be no assurance that Huntington will not suffer such
losses in the future.
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 or 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, cash flows, and financial condition in particular.
HUNTINGTON COULD EXPERIENCE LOSSES ON ITS RESIDUAL VALUES RELATED TO ITS
AUTOMOBILE LEASE PORTFOLIO.
At December 31, 2002, Huntington had a $3.1 billion automobile lease
portfolio. Inherently, automobile lease portfolios are subject to residual risk,
which arises when the market price of the leased vehicle at the end of the lease
term is below the estimated residual value at the time the lease is originated.
This situation arises due to a decline in used car market values.
Since October 2000 Huntington has had in place residual value insurance
policies on virtually all of its leased automobiles. The first policy covers all
leases originated before October 1, 2000 and has a cap on insured losses of $120
million. A second policy covers leases originated between October 2000 and April
2002, and has a cap of $50 million. A third policy covers originations over a
three year term through April 2005 and has no cap. These policies insure against
any difference that may exist between the residual value recorded at the
inception of the lease and the fair value of the automobile at the end of the
lease, as evidenced by Black Book valuation. However, should the market value of
the automobile at the end of the lease be lower than the Black Book fair value
due to certain conditions such as excess mileage or wear-and-tear on the vehicle
not reimbursed by the lessee, Huntington would bear the risk.
Management believes that these residual value insurance policies
effectively mitigate exposure to significant residual value declines.
12
NEW, OR CHANGES IN EXISTING, TAX, ACCOUNTING, AND REGULATORY LAWS, REGULATIONS,
RULES, STANDARDS, POLICIES, AND INTERPRETATIONS COULD SIGNIFICANTLY IMPACT
STRATEGIC INITIATIVES, RESULTS OF OPERATIONS, CASH FLOWS, AND FINANCIAL
CONDITION.
The financial services industry is extensively regulated. Federal and
state banking regulations are designed primarily to protect the deposit
insurance funds and consumers, not to benefit a financial company's
shareholders. These regulations may sometimes impose significant limitations on
operations. The significant Federal and state banking regulations that affect
Huntington are described in this report under the heading "Regulatory Matters."
These regulations, along with the currently existing tax, accounting,
securities, insurance, and monetary laws, regulations, rules, standards,
policies, and interpretations control the methods by which financial
institutions conduct business, implement strategic initiatives and tax planning,
and govern financial reporting and disclosures. These laws, regulations, rules,
standards, policies, and interpretations are constantly evolving and may change
significantly over time. Events that may not have a direct impact on Huntington,
such as the bankruptcy of major U.S. companies, have resulted in legislators,
regulators, and authoritative bodies, such as the Financial Accounting Standards
Board, the Securities and Exchange Commission, and the Public Company Accounting
Oversight Board, responding by adopting and/or proposing substantive revisions
to laws, regulations, rules, standards, policies, and interpretations. 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 and results of operations; however, it is impossible to
predict at this time the extent to which any such adoption, change, or repeal
would impact Huntington.
THE OCC MAY IMPOSE DIVIDEND PAYMENT AND OTHER RESTRICTIONS ON THE HUNTINGTON
NATIONAL BANK (THE BANK), HUNTINGTON'S BANK SUBSIDIARY, WHICH WOULD IMPACT
HUNTINGTON'S ABILITY TO PAY DIVIDENDS TO ITS SHAREHOLDERS OR REPURCHASE ITS
STOCK.
The OCC is the primary regulatory agency that examines 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 by statute to restrict the Bank's ability to transfer assets, to
make distributions to its shareholder, and to redeem preferred securities.
Under applicable statutes and regulations, dividends by a national bank
may be paid out of current or retained net profits, but a national bank is
prohibited from declaring a cash dividend on shares of its common stock 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 under-capitalized for purposes of the OCC prompt corrective
action regulations. Under-capitalized 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.
At December 31, 2002, the Bank was in compliance with all regulatory
capital requirements. As of that date, total risk-based capital was 11.54%, Tier
1 risk-based capital was 8.65%, and Tier 1 leverage capital was 8.85%.
Management intends to maintain the Bank's capital ratios in excess of the
well-capitalized levels under the OCC's regulations. Management cannot
guarantee, however, that it will be able to keep the capital ratios for the Bank
in excess of well-capitalized levels.
THE FEDERAL RESERVE BOARD MAY REQUIRE HUNTINGTON TO COMMIT CAPITAL RESOURCES TO
SUPPORT ITS BANK SUBSIDIARY.
The FRB, which examines Huntington, has a policy stating that a bank
holding company is expected to act as a source of financial and managerial
strength to a subsidiary bank and to commit resources to support such subsidiary
bank. Under the source of strength doctrine, the FRB 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. A 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
13
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 and cash flows.
Management does not foresee the need to make capital injections to its
subsidiary bank under the source of strength doctrine in the foreseeable future.
HUNTINGTON'S ACQUISITIONS MAY NOT MEET INCOME EXPECTATIONS AND/OR COST SAVINGS
LEVELS OR MAY NOT BE INTEGRATED WITHIN TIMEFRAMES ORIGINALLY ANTICIPATED.
HUNTINGTON MAY ENCOUNTER UNFORESEEN DIFFICULTIES, INCLUDING UNANTICIPATED
INTEGRATION PROBLEMS AND BUSINESS DISRUPTION IN CONNECTION WITH ITS
ACQUISITIONS. ACQUISITIONS COULD ALSO DILUTE STOCKHOLDER VALUE AND ADVERSELY
AFFECT OPERATING RESULTS.
Huntington may acquire or make investments in other businesses,
technologies, services or products. The process of integrating any acquired
business, technology, service or product into its operations may result in
unforeseen operating difficulties and expenditures. Integration of an acquired
company also may consume considerable management time and attention, which could
otherwise be available for ongoing development of the business. The expected
benefits of any acquisition may not be realized. Moreover, Huntington may be
unable to identify, negotiate, or finance future acquisitions successfully.
Future acquisitions could result in potentially dilutive issuances of equity
securities or the incurrence of debt, contingent liabilities, or amortization
expenses.
IF EITHER OF HUNTINGTON'S REAL ESTATE INVESTMENT TRUST (REIT) AFFILIATES FAIL TO
QUALIFY AS A REIT, HUNTINGTON WILL BE SUBJECT TO A HIGHER CONSOLIDATED EFFECTIVE
TAX RATE.
Huntington Preferred Capital, Inc. (HPCI) and Huntington Preferred
Capital II, Inc. (HPC-II) operate as REITs for federal income tax purposes. HPCI
and HPC-II are consolidated subsidiaries of Huntington that were established to
acquire, hold, and manage mortgage assets and other authorized investments to
generate net income for distribution to their shareholders. Qualification as a
REIT involves application of specific provisions of the Internal Revenue Code
relating to income and asset tests. A REIT must satisfy six asset tests
quarterly: (1) 75% of the value of the REIT's total assets must consist of real
estate assets, cash and cash items, and government securities; (2) not more than
25% of the value of the REIT's total assets may consist of securities, other
than those includible under the 75% test; (3) not more than 5% of the value of
its total assets may consist of securities of any one issuer, other than those
securities includible under the 75% test or securities of taxable REIT
subsidiaries; (4) not more than 10% of the outstanding voting power of any one
issuer may be held, other than those securities includible under the 75% test or
securities of taxable REIT subsidiaries; (5) not more that 10% of the total
value of the outstanding securities of any one issuer may be held, other than
those securities includible under the 75% test or securities of taxable REIT
subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT
subsidiaries which comprise more than 20% of its total assets. Also, a REIT must
annually satisfy two gross income tests: (1) 75% of its gross income must be
from qualifying income closely connected with real estate activities; and (2)
95% of its gross income must be derived from sources qualifying for the 75% test
plus dividends, interest and gains from the sale of securities. At December 31,
2002, HPCI and HPC-II met all REIT qualifying tests.
If these REIT affiliates fail to meet any of the required provisions
for REITs, HCPI or HPC-II 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.
14
HUNTINGTON'S FINANCIAL STATEMENTS MUST CONFORM WITH ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN THE UNITED STATES (GAAP), WHICH REQUIRE MANAGEMENT TO MAKE
ESTIMATES AND ASSUMPTIONS THAT AFFECT AMOUNTS REPORTED IN THE FINANCIAL
STATEMENTS. ACTUAL RESULTS COULD DIFFER FROM THOSE ESTIMATES.
The preparation of Huntington's financial statements requires
management to establish critical accounting policies and make accounting
estimates, assumptions, and judgments that affect amounts recorded and reported
in its financial statements. An accounting estimate requires assumptions about
uncertain matters that could have a material effect on the financial statements
of Huntington if results differ in amount or timing from the estimates used.
Huntington's financial statements include estimates related to accruals of
income and expenses and determination of fair values or carrying 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 DOWNGRADED, ITS ABILITY TO ACCESS FUNDING
SOURCES MAY BE NEGATIVELY IMPACTED OR ELIMINATED AND HUNTINGTON'S LIQUIDITY AND
THE MARKET PRICE OF ITS COMMON STOCK COULD BE ADVERSELY IMPACTED.
At December 31, 2002, Huntington's and the Bank's credit ratings are as
follows:
Senior Subordinated Short
Unsecured Notes Notes Term
Moody's Investors Service (1)
Huntington A2 A3 P1
The Bank A1 A2 P1
Standard & Poor's Corporation (2)
Huntington A- BBB+ A2
The Bank A A- A1
Fitch Ratings
Huntington A A- F1
The Bank A A- F1
(1) In September 2000, the outlook was changed from "stable" to
"negative".
(2) In July 2001, the outlook was changed from "stable" to "negative".
Huntington relies on certain funding sources such as large corporate
deposits, public fund deposits, federal funds, Euro deposits, FHLB advances, and
bank notes. Although not contractually tied to credit ratings, Huntington's
ability to access these funding sources may be impacted by negative changes in
credit ratings. In the case of public funds or FHLB advances, a credit downgrade
also may trigger a requirement that Huntington pledge additional collateral
against outstanding borrowings.
A downgraded credit rating by any of the three credit rating agencies
could negatively affect Huntington's common stock price and the timing of the
pass through of cash flows from obligors to its securitization trusts would be
accelerated. In addition, if the unsecured senior debt of the Bank falls below
BBB+ or Baa1, a Servicer Downgrade Event automatically occurs, which will
trigger an early amortization event in Huntington largest securitization. At
that point, Huntington would no longer be permitted to sell additional loans to
the trust.
Huntington currently provides letters of credit for approximately $600
million of taxable and tax-exempt notes and bonds. Huntington Capital
Corporation (HCC), a consolidated subsidiary of Huntington, acts as the
remarketing agent for approximately $500 million of the outstanding issues.
These obligations are currently owned by a variety of money market funds that
have the right to put these bonds back to HCC for remarketing every seven days.
A lower credit rating could impact HCC's ability to remarket these instruments.
A short-term rating downgrade may cause these obligations to be put back to HCC
for subsequent remarketing or inclusion into HCC holdings. Letter of credit
issuance for the purpose of credit enhancement of bond issues may be impacted.
15
GUIDE 3 INFORMATION
Information required by Industry Guide 3 relating to statistical
disclosure by bank holding companies is contained in the information
incorporated by reference in response to Items 7 and 8 of this amended Form
10-K.
AVAILABLE INFORMATION
Huntington makes available free of charge on its Internet website,
www.huntington.com, its Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, in portable document format (PDF) typically
within three business days after Huntington electronically files such reports
with, or furnishes them to, the SEC. Huntington does not provide the reports on
its website on the same day it electronically files such reports with, or
furnishes them to, the SEC because Huntington desires to provide the reports on
its website in portable document format (PDF) and its current provider typically
needs three business days to convert the reports into PDF and post them on
Huntington's website. During the period between the date on which Huntington
electronically files a report with, or furnishes it to, the Securities and
Exchange Commission and the date on which Huntington posts the PDF of the report
on its website, Huntington will provide an electronic or paper copy of such
report free of charge upon request.
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%. 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; a 470,000 square foot Business Service Center in Columbus,
Ohio, which serves as Huntington's primary operations and data center; The
Huntington Mortgage Group'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. The office buildings above serve as regional
administrative offices occupied predominantly by Huntington's Regional and
Private Financial Group lines of business. The Dealer Sales line of business is
primarily located in a three-story office building located in Columbus 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 52 of its locations. 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.
ITEM 3: LEGAL PROCEEDINGS
Information required by this item is set forth in Note 22 of Notes to
Consolidated Financial Statements beginning on page 95 of this report.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
Part II
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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 February 28, 2003, Huntington had 29,894
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 Table 24 entitled "Quarterly Stock Summary, Key Ratios and
Statistics, and Capital Data" on page 50 of this report. Information regarding
restrictions on dividends, as required by this item, is set forth in Item 1
"Business-Regulatory Matters-Dividend Restrictions" on page 6 and in Notes 17
and 25 of Notes to Consolidated Financial Statements beginning on pages 87 and
99, respectively, of this report.
16
ITEM 6. SELECTED FINANCIAL DATA
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 1 - SELECTED FINANCIAL DATA
-----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars, except per share amounts) 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Total interest income $ 1,338,934 $ 1,690,203 $ 1,872,122 $ 1,834,145 $ 1,862,768
Total interest expense 547,783 943,337 1,166,073 984,240 978,271
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income 791,151 746,866 706,049 849,905 884,497
-----------------------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 194,426 257,326 61,464 70,335 81,926
Securities gains 4,902 723 37,101 12,972 29,793
Gain on sale of Florida operations 175,344 --- --- --- ---
Merchant Services gain 24,550 --- --- --- ---
Gains on sale of credit card portfolios --- --- --- 108,530 9,530
Non-interest income 1,129,986 1,208,614 1,091,701 958,502 779,149
Non-interest expense 1,332,504 1,496,639 1,306,954 1,161,355 1,097,216
Restructuring charges 56,184 79,957 --- 46,791 90,000
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 542,819 122,281 466,433 651,428 433,827
Income taxes 209,755 (23,088)(1) 133,736 205,527 136,151
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 333,064 $ 145,369 $ 332,697 $ 445,901 $ 297,676
===================================================================================================================================
PER COMMON SHARE (2)
Net income
Basic $1.37 $0.58 $1.34 $1.76 $1.16
Diluted 1.36 0.58 1.33 1.74 1.15
Cash dividends declared 0.64 0.72 0.76 0.68 0.62
Book value at year-end 9.84 9.69 9.63 8.85 8.51
BALANCE SHEET HIGHLIGHTS
-----------------------------------------------------------------------------------------------------------------------------------
Total assets at year-end $27,557,251 $28,531,346 $28,535,995 $29,036,735 $28,291,464
Total long-term debt at year-end (3) 788,678 927,330 845,976 697,677 697,359
Average long-term debt (3) 898,128 860,637 810,543 697,523 567,938
Average shareholders' equity 2,309,220 2,415,222 2,327,083 2,180,549 2,090,546
Average assets 26,040,395 28,184,457 28,753,046 28,741,544 26,899,722
KEY RATIOS AND STATISTICS
-----------------------------------------------------------------------------------------------------------------------------------
MARGIN ANALYSIS--AS A %
OF AVERAGE EARNING ASSETS (4)
Interest Income 6.43 % 7.74 % 8.29 % 7.91 % 8.38 %
Interest Expense 2.62 4.31 5.14 4.22 4.38
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.81 % 3.43 % 3.15 % 3.69 % 4.00 %
===================================================================================================================================
Return on average assets 1.28 % 0.52 % 1.16 % 1.55 % 1.11 %
Return on average shareholders' equity 14.4 6.0 14.3 20.4 14.2
Efficiency ratio 69.1 74.2 70.2 61.8 64.0
Dividend payout ratio (5) 46.9 124.7 57.0 39.0 53.8
Average shareholders' equity to
average assets 8.87 8.57 8.09 7.59 7.77
Tangible equity to assets (period-end) 7.58 6.17 5.98 5.51 5.33
Tier I risk-based capital ratio 8.65 7.30 7.37 7.72 7.19
Total risk-based capital ratio 11.54 10.34 10.51 10.82 10.75
Tier I leverage ratio 8.85 % 7.46 % 7.10 % 6.89 % 6.45 %
OTHER DATA
-----------------------------------------------------------------------------------------------------------------------------------
Full-time equivalent employees 8,177 9,743 9,693 9,516 10,159
Domestic banking offices 343 481 508 515 529
(1) Reflects a $32.5 million reduction related to the issuance of $400 million
of REIT subsidiary preferred stock, of which $50 million was sold to the
public.
(2) Adjusted for stock splits and stock dividends, as applicable.
(3) Excludes capital securities and Federal Home Loan Bank advances.
(4) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
(5) Based on diluted earnings per share.
17
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Huntington Bancshares Incorporated (Huntington) is a multi-state diversified
financial services company organized under Maryland law in 1966 and
headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged
in providing full-service commercial and consumer banking services, mortgage
banking services, automobile financing, equipment leasing, investment
management, trust services, and discount brokerage services, as well as
underwriting credit life and disability insurance, and selling other insurance
and financial products and services. Huntington's banking offices are located in
Ohio, Michigan, Indiana, Kentucky, and West Virginia. Selected financial
services are also conducted in other states including Arizona, Florida, Georgia,
Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington also has a foreign
office in the Cayman Islands and a foreign office in Hong Kong. The Huntington
National Bank (the Bank) is Huntington's only bank subsidiary.
The following discussion and analysis provides investors and others with
information that management believes to be necessary for an understanding of
Huntington's financial condition, changes in financial condition, results of
operations, and cash flows, and should be read in conjunction with the financial
statements, notes, and other information contained in this document.
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 management for future operations, and forecasts of revenues,
earnings, cash flows, 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 could cause actual conditions,
events, or results to differ significantly from those described in the
forward-looking statements. These factors include, but are not limited to, those
set forth under the heading "Business Risks" included in Item 1 of this report
and other factors described from time to time in other filings with the
Securities and Exchange Commission.
Management encourages readers of this report 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.
RESTATEMENT OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Huntington restated its financial results to reclassify certain automobile
leases from the direct financing lease method to the operating lease method of
accounting. The appropriate classification of automobile leases as operating
leases or direct financing leases under Statement of Financial Accounting
Standards (Statement) No. 13, Accounting for Leases, can be impacted by residual
value insurance coverage. Since October 2000, Huntington has had residual value
insurance coverage on its entire automobile lease portfolio to protect it
from the risk of loss resulting from declines in used car prices. Such
losses arise if the market value of the automobile at the end of the lease term
is less than the residual value embedded in the original lease contract.
Management believes these policies effectively protect Huntington from the risk
of declining used car prices. In April 2003, management determined that, due to
provisions in certain of its residual value insurance policies, the leases
covered by these policies would not qualify as direct financing leases.
For leases originated prior to May 2002, the residual value insurance policies
contain aggregate loss caps. The residuals insured under these policies are not
considered guaranteed, and, accordingly, the related leases fail to qualify as
direct financing leases under Statement No. 13. As a result, leases originated
prior to May 2002 have been reclassified as operating leases for all periods
presented. As of December 31, 2002, $2.3 billion of such leases, net of
accumulated depreciation, are reflected in the Consolidated Balance Sheets as
operating lease assets. All leases originated since April 2002 are covered under
a new residual value insurance policy (the "New Policy") which insures the full
residual value of each vehicle and includes no aggregate loss cap. Leases with
residual gains are netted with leases with residual losses when claims are
settled. The netting provision of the New Policy precluded Huntington from
determining the amount of the guaranteed residual of any individual leased asset
within the portfolio at lease inception. Thus, the related leases failed to
qualify as direct financing leases. Huntington has amended the New Policy,
retroactive to April 2002, by adding an endorsement that adds a level of
insurance sufficient to meet the criteria as a residual value guarantee pursuant
to Statement No. 13,
18
on an individual lease-by-lease basis, with no netting provisions. In addition,
Huntington continues to maintain insurance coverage that insures the full value
of the leased residuals. Accordingly, and in reliance on guidance furnished by
the Securities and Exchange Commission in its announcement at the Financial
Accounting Standards Board Emerging Issues Task Force meeting on May 15, 2003,
all leases covered under the New Policy, as amended, are now appropriately
classified as direct financing leases in the accompanying financial statements.
As of December 31, 2002, $893 million of such leases were included in loans and
leases in the Consolidated Balance Sheets. It is management's intention to
insure the residuals associated with future originations under the New Policy,
as amended, and to classify such new originations as direct financing leases.
The impact of this restatement also affected the Consolidated Income Statements.
Under the direct financing lease accounting method, interest income is
recognized on leases on a "level-yield" or interest method that ascribes a
portion of each lease payment to interest income, resulting in a constant rate
of interest over the life of the lease. The remaining portion of each payment
amortizes the net investment in the lease such that at the end of the lease
term, the net investment equals the residual value as determined at the
inception of the lease. Under operating lease accounting, lease payments are
recorded as rental income, a component of Operating lease income in the
Non-interest income section of the Consolidated Income Statements. Depreciation
expense is recorded on a straight-line basis over the term of the lease from the
cost of the automobile at the inception of the lease to the estimated residual
value at the end of the lease term. Depreciation expense is included in
Operating lease expense in the Non-interest expense section of the Consolidated
Income Statement. Depreciation expense is adjusted prospectively at any time
during the lease term when the estimated market value of the automobile at the
end of the lease term changes. Upon disposition, a gain, reflected in
Non-interest income, or a loss, reflected in Non-interest expense, is recorded
for any difference between the net book value of the lease and the proceeds from
the disposition of the automobile.
Over the term of the lease, the cash flows, the timing of the cash flows, and
total income recognized are identical under either accounting method. One
significant difference between the two methodologies is the timing of income
recognition. Under operating lease accounting, less income is recognized in the
first half of the lease and more income is recognized in the second half than
under direct financing lease accounting.
Another significant difference between the direct financing lease method and the
operating lease method of accounting is the recognition of credit loss expense.
Credit losses occur when a lease is terminated early because the lessee fails to
make the required lease payments. These credit-generated terminations result in
Huntington taking possession of the automobile earlier than expected. When this
occurs, the market value of the automobile may be less than Huntington's book
value, resulting in a loss upon sale or write down to market value while the
vehicle is pending sale. Under the direct financing lease accounting method,
such losses are charged against an allowance for loan and lease losses that is
established at the inception of the lease and is adjusted periodically as
necessary through provision expense. Under operating lease accounting, the lease
is not treated like a loan, but as a depreciable non-interest earning asset.
Therefore, no allowance for loan and lease losses is established. As such, early
termination losses are recognized as a component of Operating lease expense in
the Non-interest expense section of the Consolidated Income Statements.
The fact that part of the auto lease portfolio is accounted for as operating
leases, with the remainder, including all future production, being accounted for
as direct financing leases, will impact the comparability of Huntington's
financial statements between reporting periods. As leases originated before
May 2002 accounted for as operating leases run off, and as new originations
are accounted for as direct financing leases, the level of operating lease
income and operating lease expense will decline over future reporting periods
while the level of interest income associated with direct financing leases will
increase. Additionally, management will increase the provision for loan and
lease losses, as appropriate, to provide the necessary level of reserves for new
direct financing lease originations. Balance sheet classifications will also be
impacted as the run off of the operating leases originated before the New
Policy, as amended, reduces non-interest earning assets while the new direct
financing lease originations covered under the New Policy, as amended, increase
loans and leases.
Further information regarding the impact of this restatement to Huntington's
results of operations and financial condition can be found in Note 3 to the
consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Note 1 to the consolidated financial statements included in this amended Annual
Report lists significant accounting policies used in the development and
presentation of Huntington's 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, results of operations, and cash flows.
19
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires Huntington's management
to establish critical accounting policies and make accounting estimates,
assumptions, and judgments that affect amounts recorded and reported in its
financial statements. An accounting estimate requires assumptions about
uncertain matters that could have a material effect on the financial statements
of Huntington if a different amount within a range of estimates were used or if
estimates changed from period to period. Readers of this report should
understand that estimates are made under facts and circumstances at a point in
time and changes in those facts and circumstances could produce actual results
that differ from when those estimates were made. Huntington's management has
identified the following as the most significant accounting estimates and their
related application:
- Estimated credit losses inherent in the loan portfolio for the establishment
of the allowance for loan losses, including estimated future contractual cash
flows of certain commercial and commercial real estate loans for evaluation of
impairment of loans,
- Estimated fair values of loan servicing rights and retained interests in
securitizations, including estimates of amounts and timing of future cash flows
of loans, cash flows for costs of servicing these loans, amounts and timing of
credit losses and prepayments of principal, and appropriate discount rate, for
the initial recognition of these assets, amount of amortization that is
recognized, and the assessment of these assets periodically for impairment,
- Estimated discount rate, the expected return on retirement plan assets, the
rate of compensation expense increase, and the health care cost trend rates used
in determining Huntington's projected benefit obligations, the fair value of
retirement and other plan assets, and the related benefit cost,
- Estimated fair values of Huntington's businesses that were used by management
periodically to assess goodwill and other intangibles for impairment, and
- Estimated fair value for all derivative financial instruments used to hedge
fair values or cash flows.
SPECIAL PURPOSE ENTITIES (SPEs)
Huntington established two securitization trusts, or SPEs, in 2000. These two
trusts had total assets of approximately $1.2 billion and $1.3 billion at
December 31, 2002 and 2001, respectively. In the securitization transactions,
indirect automobile loans that Huntington originated were sold to these trusts.
Under current GAAP, these trusts are not required to be consolidated in
Huntington's financial statements. As such, the loans and the debt within the
trusts are not included on Huntington's balance sheets at December 31, 2002 and
2001. See Note 10 to the consolidated financial statements for more information
regarding securitized loans.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation of Accounting Research Bulletin
No. 51 (ARB 51), Consolidated Financial Statements, addresses consolidation by
business enterprises where ownership interests in an entity may vary over time
or, in many cases, special-purpose entities (SPEs). To be consolidated for
financial reporting, these entities must have certain characteristics. ARB 51
requires that an enterprise's consolidated financial statements include
subsidiaries in which the enterprise has a controlling financial interest. This
Interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. An enterprise that holds significant
variable interests in such an entity, but is not the primary beneficiary, is
required to disclose certain information regarding its interests in that entity.
This Interpretation applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise holds
an interest that it acquired before February 1, 2003. It also applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. This Interpretation may be applied (1) prospectively with a
cumulative-effect adjustment as of the date on which it is first applied, or (2)
by restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
Huntington is reviewing the implications of Interpretation No. 46 and is
considering the adoption methods permitted. Management believes the only
material impact of adoption will be the consolidation of one of the
securitization trusts formed in 2000. The consolidation of that securitization
trust will involve the recognition of the trust's net assets, which, at December
31, 2002, included $1,020 million of indirect automobile loans, $100 million of
cash, and $1,000 million of secured debt obligations with an interest rate based
on commercial paper rates. In addition to other adjustments and considerations,
adoption will also eliminate the retained interest in that securitization trust
and its servicing asset related to the loans in the trust, with carrying values
at the end of 2002 of $152 million and $12 million, respectively. The impact to
Huntington's equity and results of operations will depend on the method of
transition adopted under this new interpretation. Huntington will adopt this new
standard no later than the end of the third quarter of 2003.
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 mitigate the risk of adverse
interest rate movements on either cash flows or market value of certain assets
and liabilities.
20
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, to sell loans, and to maintain obligations under operating-type
noncancelable leases for its facilities.
Derivatives are discussed under the "Interest Rate Risk Management" section of
this report and in Note 19 to the consolidated financial statements. Information
regarding commitments can be found in Note 22 to the consolidated financial
statements.
RELATED PARTY TRANSACTIONS
Various directors and executive officers of Huntington, and entities affiliated
with those directors and executive officers, are customers of Huntington's
subsidiaries. All transactions with Huntington's directors and executive
officers and their affiliates are conducted in the ordinary course of business
under normal credit terms, including interest rate and collateralization, and do
not represent more than the normal risk of collection. At December 31, 2002 and
2001, the total amount of their indebtedness to Huntington was $95.6 million and
$133.8 million, respectively. A summary of the aggregate activity of this
indebtedness can be found in Note 9 to the consolidated financial statements.
All other related party transactions, including those reported in Huntington's
2003 Proxy Statement and transactions subsequent to December 31, 2002, were
considered immaterial to its financial condition, results of operations, and
cash flows.
COMMON SHARE REPURCHASE PROGRAMS
In February 2002, the Board of Directors authorized a share repurchase program
for up to 22 million shares and canceled the previously existing authorization.
Under this authorization, a total of 19.2 million shares were repurchased at a
cost of $370.0 million through the end of December 2002. An additional 0.2
million shares were repurchased in early January 2003, bringing total shares
repurchased under this authorization to 19.4 million shares. In mid-January
2003, the Board of Directors approved a new share repurchase authorization for
up to 8 million shares, canceling the 2.6 million shares remaining under the
February 2002 authorization. Huntington expects to use this new authorization to
complete the purchase of the 2.6 million shares remaining for repurchase under
the prior authorization. Repurchases of shares will be made from time to time as
deemed appropriate and 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.
SIGNIFICANT CREDIT ACTIONS
In the fourth quarter of 2002, Huntington initiated two credit actions
associated with commercial and commercial real estate loans. The first was the
sale of $47.2 million in non-performing assets with $21.4 million of related
charge-offs. The second action was the full charge-off of a $29.9 million credit
exposure to a single health care finance company. This credit was identified as
a non-performing loan and subsequently charged-off, all within the fourth
quarter of 2002. These credit actions had no earnings impact, as existing loss
reserve levels were sufficient to absorb the combined $51.3 million in
charge-offs. As a result, the allowance for loan and lease losses as a
percentage of total loans and leases at December 31, 2002, declined to 1.81%
from 2.07% at September 30, 2002, and the non-performing asset (NPA) coverage
ratio (loan and lease loss reserve as a percent of NPAs) improved to 246% from
173% at the end of the third quarter.
21
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TABLE 2 - SELECTED ANNUAL INCOME STATEMENTS
-----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars, except per share amounts) 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Total interest income $1,338,934 $ 1,690,203 $ 1,872,122 $ 1,834,145 $ 1,862,768
Total interest expense 547,783 943,337 1,166,073 984,240 978,271
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 791,151 746,866 706,049 849,905 884,497
Provision for loan and lease losses 194,426 257,326 61,464 70,335 81,926
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 596,725 489,540 644,585 779,570 802,571
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease income 641,785 699,857 635,243 506,429 380,272
Service charges on deposit accounts 152,521 164,052 160,727 156,315 126,403
Brokerage and insurance 66,843 79,034 61,871 52,076 36,710
Trust services 62,051 60,298 53,613 52,030 50,754
Mortgage banking 47,989 59,148 38,025 56,890 60,006
Bank owned life insurance 46,005 38,241 39,544 37,560 28,712
Other service charges and fees 42,888 48,217 43,883 37,301 29,202
Gain on sale of Florida operations 175,344 --- --- --- ---
Merchant Services gain 24,550 --- --- --- ---
Gains on sale of credit card portfolio --- --- --- 108,530 9,530
Securities gains 4,902 723 37,101 12,972 29,793
Other 69,904 59,767 58,795 59,901 67,090
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,334,782 1,209,337 1,128,802 1,080,004 818,472
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease expense 518,970 558,626 494,800 346,027 273,287
Personnel costs 440,760 478,640 421,750 419,901 428,539
Equipment 68,323 80,560 78,069 66,666 62,040
Outside data processing and other services 67,368 69,692 62,011 62,886 74,795
Net occupancy 60,264 77,184 75,882 62,169 54,123
Marketing 27,911 31,057 34,884 32,506 32,260
Professional services 25,777 23,879 20,819 21,169 25,160
Telecommunications 22,661 27,984 26,225 28,519 29,429
Printing and supplies 15,198 18,367 19,634 20,227 23,673
Franchise and other taxes 9,456 9,729 11,077 14,674 22,103
Amortization of intangible assets 2,019 41,225 39,207 37,297 25,689
Restructuring charges 56,184 79,957 --- 46,791 90,000
Other 73,797 79,696 22,596 49,314 46,118
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 1,388,688 1,576,596 1,306,954 1,208,146 1,187,216
-----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 542,819 122,281 466,433 651,428 433,827
Income taxes 209,755 (23,088)(1) 133,736 205,527 136,151
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 333,064 $ 145,369 $ 332,697 $ 445,901 $ 297,676
===================================================================================================================================
PER COMMON SHARE
Net Income
Basic $ 1.37 $ 0.58 $ 1.34 $ 1.76 $ 1.16
Diluted 1.36 0.58 1.33 1.74 1.15
Cash dividends declared 0.64 0.72 0.76 0.68 0.62
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 791,151 $ 746,866 $ 706,049 $ 849,905 $ 884,497
Tax Equivalent Adjustment (2) 5,205 6,352 8,310 9,423 10,307
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME - FTE $ 796,356 $ 753,218 $ 714,359 $ 859,328 $ 894,804
===================================================================================================================================
(1) Reflects a $32.5 million reduction related to the issuance of $400 million
of REIT subsidiary preferred stock, of which $50 million was sold to the
public.
(2) Calculated assuming a 35% tax rate.
22
SUMMARY DISCUSSION OF RESULTS
Huntington reported net income of $333.1 million, or $1.36 per common share
(diluted), in 2002, compared with $145.4 million, or $0.58 per common share, in
2001, and $332.7 million, or $1.33 per common share, in 2000. Return on average
common equity (ROE) and average assets (ROA) for 2002 were 14.4% and 1.28%,
respectively, compared with 6.0% and 0.52%, respectively, in 2001, and 14.3% and
1.16%, respectively, in 2000. See Table 1 entitled Selected Financial Data and
Table 2 for Huntington's annual income statements for the recent five years.
2002 VERSUS 2001 PERFORMANCE
The $187.7 million increase in earnings ($420.5 million pre-tax) related to a
combination of items that benefited 2002 performance versus 2001. These items
primarily related to the strategic restructuring announced in 2001 and included
pre-tax gains in 2002 of $175.3 million and $24.6 million associated with the
sale of the Florida banking operations and restructuring of Merchant Services,
respectively, $115.2 million pre-tax in additional provision for loan losses in
2001, a $23.8 million pre-tax reduction in restructuring charges, and a $16.4
million pre-tax reduction in the net loss on results of operations from the sold
Florida banking and insurance operations. Results for 2001 reflected a $32.5
million tax benefit related to the issuance of $400 million of REIT subsidiary
preferred stock, of which $50 million was sold to the public. Excluding the
impact of these items, as well as the net earnings impact from the sold Florida
banking and insurance operations from both 2002 and 2001, net income in 2002
would have been $298.4 million, up $41.2 million, or 16%, from the prior year.
(See Table 25 on page 53.)
Net interest income on a fully taxable equivalent basis increased $43.2 million,
or 6%, reflecting a $1.0 billion, or 5%, decline in average earning assets more
than offset by a 38 basis point, or an effective 11%, increase in the net
interest margin to 3.81% from 3.43%. The decline in average earning assets
reflected a $0.7 billion, or 4%, decline in average loans and leases primarily
due to the sale of the Florida banking operations, as well as the planned
run-off of lower-margin investment securities and other earning assets.
Excluding the impact of the sold Florida banking operations from 2002 and 2001,
net interest income on a fully taxable equivalent basis increased $115.7
million, or 17%, reflecting a $1.2 billion, or 6%, increase in average earning
assets and a 37 basis point, or an effective 11%, increase in the net interest
margin to 3.83% from 3.46%.
The provision for loan and lease losses declined $62.9 million from 2001.
Excluding the $115.2 million of additional provision expense in 2001, as well
as the $9.9 million decline related to the sale of the Florida banking
operations, the provision for loan and lease losses increased $62.2 million,
reflecting loan and lease growth, as well as higher total commercial and
commercial real estate net charge-offs, as consumer net charge-offs declined.
The higher total commercial and commercial real estate net charge-offs reflected
the impact of the continued weak economy on some of Huntington's commercial
customers, as well as fourth quarter credit actions that accelerated the sale
and disposition of non-performing commercial loans.
Non-interest income was up $125.4 million, or 10%, reflecting a $175.3 million
gain from the sale of the Florida banking operations and $24.6 million gain from
the restructuring of Merchant Services. Excluding the impact of these gains and
the reduction of non-interest income due to the sold Florida banking and
insurance operations, non-interest income declined $16.1 million, or 1%. This
decrease was driven by a $58.1 million, or 8%, decrease in operating lease
income and a $7.8 million, or 14%, decline in mortgage banking income, which was
partially offset by a $15.7 million, or 12%, increase in service charges on
deposit accounts and smaller increases spread among the remaining fee income
categories.
23
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 3 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE
-----------------------------------------------------------------------------------------------------------------------------------
Fully Tax Equivalent Basis (1) 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 33 $ 7 $ 6 $ 9 $ 10
Trading account securities 7 25 15 13 11
Federal funds sold and securities purchased
under resale agreements 72 107 87 22 229
Mortgages held for sale 322 360 109 232 289
Securities:
Taxable 2,859 3,144 4,316 4,885 4,896
Tax exempt 135 174 273 297 247
-----------------------------------------------------------------------------------------------------------------------------------
Total Securities 2,994 3,318 4,589 5,182 5,143
-----------------------------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial 5,676 6,647 6,446 6,128 5,629
Real Estate (2)
Construction 1,217 1,221 1,184 1,000 764
Commercial 2,379 2,340 2,187 2,235 2,304
Consumer
Automobile loans and leases 3,233 2,867 3,153 3,564 3,254
Home equity 3,087 3,399 2,991 2,345 1,935
Residential mortgage 1,444 1,052 1,382 1,489 1,365
Other loans 425 589 528 1,099 1,419
-----------------------------------------------------------------------------------------------------------------------------------
Total Consumer 8,189 7,907 8,054 8,497 7,973
-----------------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 17,461 18,115 17,871 17,860 16,670
-----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 374 307 274 280 264
-----------------------------------------------------------------------------------------------------------------------------------
Net Loans and Leases 17,087 17,808 17,597 17,580 16,406
-----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 20,889 21,932 22,677 23,318 22,352
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease assets 2,662 3,031 2,799 2,209 1,755
Cash and due from banks 757 912 1,008 1,039 975
Intangible assets 293 736 709 682 487
All other assets 1,813 1,880 1,834 1,774 1,595
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $26,040 $ 28,184 $28,753 $28,742 $26,900
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 2,902 $ 3,304 $ 3,421 $ 3,497 $ 3,287
Interest bearing demand deposits 5,161 5,005 4,291 4,097 3,585
Savings deposits 2,853 3,478 3,563 3,740 3,277
Other domestic time deposits 4,349 5,883 5,872 5,823 6,291
-----------------------------------------------------------------------------------------------------------------------------------
Total core deposits 15,265 17,670 17,147 17,157 16,440
-----------------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 851 1,280 1,502 1,449 1,688
Brokered time deposits and negotiable CDs 731 128 502 238 182
Foreign time deposits 337 283 539 363 103
-----------------------------------------------------------------------------------------------------------------------------------
Total deposits 17,184 19,361 19,690 19,207 18,413
-----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,128 2,325 1,966 2,549 2,084
Medium-term notes 1,865 2,024 2,894 3,122 2,903
Federal Home Loan Bank advances 279 19 13 5 53
Subordinated notes and other long-term debt,
including preferred capital securities 1,198 1,161 1,111 998 823
-----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 19,752 21,586 22,253 22,384 20,989
-----------------------------------------------------------------------------------------------------------------------------------
All other liabilities 1,077 879 752 680 533
Shareholders' equity 2,309 2,415 2,327 2,181 2,091
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,040 $ 28,184 $28,753 $28,742 $26,900
===================================================================================================================================
NET INTEREST INCOME
===================================================================================================================================
Net interest rate spread
Impact of non-interest bearing funds on margin
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN
===================================================================================================================================
(1) Fully taxable 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) Residential construction loans have been reclassified from Real estate -
Construction to Residential mortgage loans.
(4) Loan and lease and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and lease components include fees and cash basis interest
received on non-accrual loans.
24
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME / EXPENSE
-----------------------------------------------------------------------------------------------------------------------------------
Fully Tax Equivalent Basis (1) 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 0.8 $ 0.2 $ 0.3 $ 0.4 $ 1.0
Trading account securities 0.3 1.3 1.1 0.8 0.6
Federal funds sold and securities purchased
under resale agreements 1.1 4.4 5.5 1.2 12.9
Mortgages held for sale 20.5 25.0 8.7 16.3 20.2
Securities:
Taxable 173.0 206.9 269.5 297.0 308.8
Tax exempt 10.1 13.0 20.8 23.5 21.9
-----------------------------------------------------------------------------------------------------------------------------------
Total Securities 183.1 219.9 290.3 320.5 330.7
-----------------------------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial 328.8 493.2 572.8 501.0 488.5
Real Estate (2)
Construction 58.3 88.6 108.2 85.8 71.2
Commercial 150.5 180.4 186.7 184.6 201.5
Consumer
Automobile loans and leases 289.1 261.4 278.5 299.1 297.3
Home equity 188.3 286.8 261.1 202.3 180.5
Residential mortgage 87.3 79.5 106.1 111.5 109.5
Other loans 36.1 55.8 61.1 120.0 159.2
-----------------------------------------------------------------------------------------------------------------------------------
Total Consumer 600.8 683.5 706.8 732.9 746.5
-----------------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 1,138.4 1,445.7 1,574.5 1,504.3 1,507.7
-----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses
-----------------------------------------------------------------------------------------------------------------------------------
Net Loans and Leases
-----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 1,344.2 1,696.5 1,880.4 1,843.5 1,873.1
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease assets
Cash and due from banks
Intangible assets
All other assets
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 90.1 134.6 144.0 106.5 96.4
Savings deposits 51.7 107.7 146.4 126.0 114.0
Other domestic time deposits 197.1 331.4 335.4 299.1 349.2
-----------------------------------------------------------------------------------------------------------------------------------
Total core deposits 338.9 573.7 625.8 531.6 559.6
-----------------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 28.8 66.8 90.4 76.6 96.4
Brokered time deposits and negotiable CDs 17.3 6.6 31.9 12.8 10.5
Foreign time deposits 4.9 10.8 34.0 18.6 5.9
-----------------------------------------------------------------------------------------------------------------------------------
Total deposits 389.9 657.9 782.1 639.6 672.4
-----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 42.7 95.8 113.1 114.3 97.7
Medium-term notes 61.7 121.7 189.3 170.0 164.6
Federal Home Loan Bank advances 5.6 1.2 0.8 0.3 2.9
Subordinated notes and other long-term debt,
including preferred capital securities 47.9 66.7 80.7 60.0 40.7
-----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 547.8 943.3 1,166.0 984.2 978.3
-----------------------------------------------------------------------------------------------------------------------------------
All other liabilities
Shareholders' equity
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
===================================================================================================================================
NET INTEREST INCOME $ 796.4 $ 753.2 $ 714.4 $ 859.3 $ 894.8
===================================================================================================================================
Net interest rate spread
Impact of non-interest bearing funds on margin
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN
===================================================================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Average Rate (3)
----------------------------------------------------------------------------------------------------------------------------------
Fully Tax Equivalent Basis (1) 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks 2.38 % 3.43 % 5.03 % 4.04 % 5.22 %
Trading account securities 4.11 5.13 7.11 5.89 5.71
Federal funds sold and securities purchased
under resale agreements 1.56 4.19 6.33 5.58 5.64
Mortgages held for sale 6.35 6.95 7.96 7.03 6.99
Securities:
Taxable 6.06 6.58 6.24 6.08 6.31
Tax exempt 7.42 7.49 7.61 7.90 8.83
----------------------------------------------------------------------------------------------------------------------------------
Total Securities 6.12 6.63 6.33 6.18 6.43
----------------------------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial 5.79 7.42 8.89 8.18 8.68
Real Estate (2)
Construction 4.79 7.25 9.14 8.58 9.31
Commercial 6.33 7.71 8.53 8.26 8.75
Consumer
Automobile loans and leases 8.94 9.12 8.83 8.39 9.14
Home equity 6.10 8.44 8.73 8.62 9.32
Residential mortgage 6.05 7.55 7.68 7.48 8.03
Other loans 8.49 9.47 11.57 10.86 11.12
----------------------------------------------------------------------------------------------------------------------------------
Total Consumer 7.34 8.64 8.78 8.63 9.36
----------------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 6.52 7.98 8.81 8.42 9.04
----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses
----------------------------------------------------------------------------------------------------------------------------------
Net Loans and Leases
----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 6.43 % 7.74 % 8.29 % 7.91 % 8.38 %
----------------------------------------------------------------------------------------------------------------------------------
Operating lease assets
Cash and due from banks
Intangible assets
All other assets
----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS
----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 1.75 % 2.69 % 3.36 % 2.60 % 2.69 %
Savings deposits 1.81 3.10 4.11 3.37 3.48
Other domestic time deposits 4.53 5.63 5.71 5.14 5.55
----------------------------------------------------------------------------------------------------------------------------------
Total core deposits 2.74 3.99 4.56 3.89 4.25
----------------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 3.39 5.22 6.01 5.28 5.71
Brokered time deposits and negotiable CDs 2.36 5.12 6.35 5.40 5.82
Foreign time deposits 1.47 3.82 6.31 5.14 5.66
----------------------------------------------------------------------------------------------------------------------------------
Total deposits 2.73 4.10 4.81 4.07 4.44
----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2.01 4.12 5.75 4.48 4.69
Medium-term notes 3.31 6.01 6.54 5.45 5.67
Federal Home Loan Bank advances 2.00 6.17 6.32 5.19 5.57
Subordinated notes and other long-term debt,
including preferred capital securities 4.00 5.75 7.27 5.93 4.87
----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 2.77 % 4.37 % 5.24 % 4.40 % 4.66 %
----------------------------------------------------------------------------------------------------------------------------------
All other liabilities
Shareholders' equity
----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
==================================================================================================================================
NET INTEREST INCOME
==================================================================================================================================
Net interest rate spread 3.66 % 3.37 % 3.05 % 3.51 % 3.72 %
Impact of non-interest bearing funds on margin 0.15 % 0.06 % 0.10 % 0.18 % 0.28 %
----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.81 % 3.43 % 3.25 % 3.69 % 4.00 %
==================================================================================================================================
25
Non-interest expense was down $187.9 million, or 12%. Excluding the impact from
the $142.7 million decline in non-interest expense attributed to the sold
Florida banking and insurance operations, as well as the $23.8 million reduction
in restructuring charges, non-interest expense was down $21.5 million, or 2%.
This decrease largely reflected a $39.7 million, or 7%, decrease in operating
lease expense and a $10.2 million decline in amortization of intangible assets
expense as a result of the implementation of the new goodwill accounting rule,
FASB Statement No. 142, at the beginning of the year. These decreases were
partially offset by a $24.3 million, or 6%, increase in personnel costs, due to
expansion of management and employee talent at all levels, increased
incentive-based pay, and higher pension and benefits costs.
The efficiency ratio, which represents expenses as a percentage of fully taxable
equivalent revenue, was 69.1% in 2002 versus 74.2% in 2001.
Diluted earnings per common share were $1.36 in 2002, up from $0.58 per common
share in 2001. After excluding the impact of Huntington's strategic
restructuring plan, as well as the results associated with the sold Florida
banking and insurance operations from both years, diluted earnings per share
were $1.22 in 2002, up $0.20, or 20%, from 2001. This reflected a 16% increase
in net income on this same basis, as well as the benefit of 3% fewer fully
diluted shares outstanding. In February 2002, the Board of Directors authorized
a 22 million-share repurchase program. During the year, 19.2 million shares were
repurchased under this program, which reduced average shares outstanding by 8.8
million for the year and contributed $0.04 to earnings per share.
2001 VERSUS 2000 PERFORMANCE
The $187.3 million decrease in earnings ($344.2 million pre-tax) related to a
combination of items that negatively impacted 2001 performance. These items
primarily related to the strategic restructuring announced in 2001 and included
a $115.2 million pre-tax increase in the provision for loan and lease losses,
$80.0 million in restructuring charges, and a negative $22.1 million pre-tax
impact from the sold Florida banking and insurance operations, which went from a
$3.4 million positive pre-tax income impact in 2000 to a net loss of $18.7
million pre-tax in 2001. Results for 2001 also reflected a $32.5 million tax
benefit related to the issuance of $400 million of REIT subsidiary preferred
stock, of which $50 million was sold to the public. Excluding the impact of
these items from both 2001 and 2000, net income in 2001 was $257.1 million, down
$73.1 million, or 22%. (See Table 25 on page 53.)
Net interest income on a fully taxable equivalent basis increased $38.8 million,
or 5%, reflecting a $0.7 billion, or 3%, decline in average earning assets which
was more than offset by a 28 basis point, or an effective 9%, increase in the
net interest margin to 3.43% from 3.15%. Average loans and leases increased
slightly between years, led by growth in home equity, commercial, and commercial
real estate loans and leases. However, this benefit was more than offset by a
28% decline in average investment securities.
The provision for loan and lease losses increased $195.9 million reflecting
$115.2 million of provision expense including $65.2 million associated with the
strategic restructuring plan and a $50.0 million addition made in light of the
higher charge-offs and non-performing assets experience in the second half of
2001 especially in the commercial and automobile loan portfolios. The increase
in non-performing assets, as well as higher commercial net charge-offs reflected
a weakening economy. The higher automobile loan charge-offs, primarily reflected
charge-offs associated with loan production from the fourth quarter of 1999
through the fourth quarter of 2000, a period of time when Huntington targeted a
broader credit quality spectrum of borrowers.
Non-interest income increased $80.5 million, or 7%, driven by a $64.6 million
increase in operating lease income, a $21.1 million increase in mortgage banking
income, a $17.2 million increase in brokerage and insurance income and $6.7
million increase in trust services income. Also contributing to the growth in
non-interest income, but to a lesser degree, were increases in service charges
on deposits, and other service charges and fees, up $3.3 million and $4.3
million, respectively. The benefit of these increases was partially offset by a
$36.4 million decrease in securities gains as 2000 results included significant
gains related to the sales of marketable equity securities.
26
Non-interest expense increased $269.6 million, or 21%. This increase reflected
$80.0 million of restructuring charges, as well as a $63.8 million, or 13%,
increase in operating lease expense and a $56.9 million, or 13%, increase in
personnel costs driven by higher incentive-based pay. Other expense increased
$57.1 million, with $28.4 million of the change reflecting premium expense
associated with the purchase of automobile lease residual value insurance. The
efficiency ratio was 74.2% in 2001 versus 70.2% in 2000.
Diluted earnings per common share were $0.58 per common share in 2001, down from
$1.33 per share in 2000. After excluding the impact of Huntington's strategic
restructuring plan, as well as the results associated with the sold Florida
banking and insurance operations from both years, diluted earnings per share
were $1.02 in 2001, down $0.30, or 23%, from 2000.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Huntington's primary source of revenue is net interest income, which is the
difference between interest income on earning assets, primarily loans, direct
financing leases, and securities, and interest expense on funding sources,
including interest-bearing deposits and borrowings. Net interest income is
impacted by changes in the levels 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 calculated
percentage of net interest income to average earning assets. Both the interest
spread and net interest margin are presented on a fully taxable equivalent
basis, which means that tax-free interest income and dividend income, generated
primarily from Huntington's investment securities 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.
Table 3 shows the average annual balance sheets and the net interest margin
analysis for the recent five years (see Table 27 for this corresponding data on
an operating basis; i.e. excluding the impact of Huntington's strategic
restructuring plan, as well as the impact of the Florida banking operations sold
in the first quarter of 2002). Table 3 shows the average annual balances for
total assets and liabilities, as well as shareholders' equity, and their various
components, most notably loans and leases, deposits, and borrowings. It also
shows the corresponding interest income or interest expense associated with each
earning asset and interest-bearing liability category along with the average
rate associated with each asset or liability category, the difference resulting
in the net interest spread. The net interest spread plus the positive impact
from non-interest bearing funds represents the net interest margin.
Table 4 shows changes in fully taxable 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.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 4 - CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES
-----------------------------------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) FROM Increase (Decrease) From
PREVIOUS YEAR DUE TO: Previous Year Due To:
-----------------------------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (1) YIELD/ Yield/
(in millions of dollars) VOLUME RATE TOTAL Volume Rate Total
-----------------------------------------------------------------------------------------------------------------------------------
Loans and leases $ (50.6) $ (256.7) $ (307.3) $ 21.2 $(150.0) $(128.8)
Securities (20.9) (15.9) (36.8) (83.9) 13.5 (70.4)
Other earning assets (3.8) (4.4) (8.2) 19.3 (4.0) 15.3
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS (75.3) (277.0) (352.3) (43.4) (140.5) (183.9)
-----------------------------------------------------------------------------------------------------------------------------------
Deposits (90.3) (177.7) (268.0) (26.3) (97.9) (124.2)
Short- and medium-term borrowings (16.4) (96.7) (113.1) (34.9) (50.0) (84.9)
Long-term debt 7.9 (22.3) (14.4) 3.9 (17.5) (13.6)
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES (98.8) (296.7) (395.5) (57.3) (165.4) (222.7)
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 23.5 $ 19.7 $ 43.2 $ 13.9 $ 24.9 $ 38.8
-----------------------------------------------------------------------------------------------------------------------------------
(1) Calculated assuming a 35% tax rate.
27
2002 VERSUS 2001 PERFORMANCE
Fully taxable equivalent net interest income was $796.4 million in 2002, up
$43.2 million, from 2001. This reflected a 5% decrease in average earning
assets, more than offset by a 38 basis point, or an effective 11%, increase in
the net interest margin to 3.81% from 3.43%.
The decrease in average earning assets reflected a $0.7 billion, or 4%, decline
in average loans and leases primarily due to the sale of the Florida banking
operations, as well as the planned run-off of lower-margin investment securities
and other earning assets. Changes in the balance sheet are discussed in more
detail below.
The 38 basis point increase in the net interest margin was influenced by two
factors. The first was the timing and magnitude of declining interest rates in
2001 and 2002, and the fact that rates reached such historically low levels
during the second half of 2002. As interest rates declined in the second half of
2001, deposit and wholesale funding costs declined more rapidly than yields on
earning assets, most notably loans and leases. As a result, the net interest
margin widened in the second half of 2001. However, as rates continued to
decline in 2002, especially in the second half, and given the absolute low
levels attained, it became increasingly difficult to lower deposit funding costs
commensurate with the decline in earning asset yields. As a result, yields on
earning assets fell more rapidly than deposit costs, thus narrowing the net
interest margin in the second half of 2002, particularly in the fourth quarter.
The second factor was a decision early in 2001 to reduce the level of low-return
investment securities. This helped drive the increase in the net interest margin
during the first three quarters of 2001.
A change in the loan and lease mix to lower yield, but higher credit quality,
loans and leases had the effect of mitigating the increase in the net interest
margin. Since the 2001 fourth quarter, consumer loan and lease production
shifted to higher credit quality automobile loan and lease production. Also
mitigating the net interest margin increase was the significant growth in
lower-yield residential mortgages. While this contributed to a reduced net
interest spread on these assets, it improved the total risk adjusted return as
lower net charge-offs should be experienced in future periods.
Reflecting these factors, during 2001 the net interest margin in the first
quarter was 3.31% and increased steadily throughout the year, peaking at 3.62%
in the fourth quarter. During 2002, the margin peaked at 3.98% in the third
quarter and declined to 3.83% in the fourth quarter.
2001 VERSUS 2000 PERFORMANCE
Fully taxable equivalent net interest income was $753.2 million in 2001, up
$38.8 million, or 5%, from $714.4 million in 2000. This increase was driven by a
28 basis point, or an effective 9%, increase in the net interest margin to 3.43%
from 3.15%, as average earning assets declined $0.7 billion, or 3%.
The decline in average earning assets between the two years was driven by a $1.3
billion, or 28%, decrease in average investment securities as part of the
planned reduction in lower-margin earning assets. Average loans and leases
increased $0.2 billion, or 1%, reflecting a 3% increase in commercial
loans, with average commercial real estate loans up 6%. In contrast,
average total consumer loans and leases decreased 2%, despite a 14% increase in
home equity loans, as residential mortgages and automobile loans and leases
declined 24% and 9%, respectively. The higher net interest margin reflected a
decision to reduce the level of lower-margin residential mortgages and
investment securities. In addition, the balance sheet was slightly liability
sensitive during the period and benefited from the decline in short-term rates
from 2000 to 2001.
IMPACT FROM DERIVATIVE FINANCIAL INSTRUMENTS
Huntington uses 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 are recorded along with the
interest income or expense from the hedged asset or liability and consequently
are included in the yields on those assets and liabilities. The impact of these
derivatives increased the net interest margin by 23 basis points in 2002 but
lowered it by 2 and 6 basis points in 2001 and 2000, respectively. Huntington's
interest rate risk position is discussed further in the "Interest Rate Risk
Management" section of this report.
BALANCE SHEET
Table 5 shows total loans and leases were $18.6 billion at December 31, 2002,
with 50% representing consumer loans and leases and 50% commercial and
commercial real estate loans. Subsequent to the end of 2002, $0.3 billion of
loans at December 31, 2002 were reclassified from commercial loans to commercial
real estate loans. This reclassification, which is reflected in the table below,
did not affect total interest income or net income for any period.
28
---------------------------------------------------------------------------------------------------------------------------------
TABLE 5 - END OF PERIOD LOAN AND LEASE PORTFOLIO COMPOSITION
---------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) AMOUNT % Amount % Amount % Amount % Amount %
---------------------------------------------------------------------------------------------------------------------------------
Commercial loans (1) $ 5,606 30.1 $6,439 34.8 $6,634 37.6 $6,300 35.0 $6,027 34.2
Real estate
Construction 1,012 5.4 1,322 7.1 1,206 6.8 1,159 6.4 868 4.9
Commercial 2,719 14.5 2,496 13.5 2,253 12.8 2,151 11.9 2,232 12.7
---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL AND
COMMERCIAL REAL ESTATE
LOANS 9,337 50.0 10,257 55.4 10,093 57.2 9,610 53.3 9,127 51.8
---------------------------------------------------------------------------------------------------------------------------------
Consumer
Auto loans and leases 3,964 21.3 2,990 16.2 2,648 15.0 3,685 20.4 3,588 20.3
Home equity 3,200 17.2 3,582 19.4 3,205 18.2 2,562 14.2 2,173 12.3
Residential mortgage 1,749 9.4 1,128 6.1 1,060 6.0 1,523 8.5 1,459 8.3
Other loans 395 2.1 544 2.9 639 3.6 655 3.6 1,282 7.3
---------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSUMER LOANS 9,308 50.0 8,244 44.6 7,552 42.8 8,425 46.7 8,502 48.2
---------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS AND LEASES $ 18,645 100.0 $18,501 100.0 $ 17,645 100.0 $ 18,035 100.0 $ 17,629 100.0
=================================================================================================================================
(1) There were no commercial loans outstanding that would be considered a
concentration of lending to a particular industry or group of industries.
For 2002, average total loans and leases were $17.5 billion, down $0.7 billion,
or 4%, from 2001, as shown on Table 3. Excluding the impact of the Florida
related loans sold from both 2002 and 2001, as shown on Table 27, average total
loans and leases were $17.1 billion, up $1.6 billion, or 10%, from the prior
year, driven by a $1.5 billion, or 23%, increase in consumer loans and leases.
Since late 2001, a key focus in loan growth has been the generation of
residential mortgages and home equity loans and lines of credit. This coincided
with heavy demand for refinancing mortgage assets due to the declining interest
rate environment. As a result, average residential mortgages increased $0.6
billion, or 74%, with home equity loans and lines up $0.3 billion, or 11%.
Average automobile loans and leases increased $0.6 billion, or 26%. Also
contributing to growth in average loans and leases, on this same basis, was a
$0.4 billion, or 13%, increase in commercial real estate loans. In contrast,
average commercial loans declined $0.3 billion, or 5%, reflecting a combination
of low demand due to the weak economic environment and reduced shared national
credit exposure.
Average total loans and leases in 2001 were $18.1 billion, up $0.2 billion, or
1%, from the prior year. Average commercial loans increased 3% with commercial
real estate loans up 6% from the prior year. Average total consumer loans were
little changed between years. While home equity loans and lines increased 14%,
this growth was offset by declines in automobile loans and leases and
residential mortgages of 9% and 24%, respectively.
Average operating lease assets were $2.7 billion in 2002, down 12% from the
prior year, in contrast to the 8% growth experienced in 2001. This reflected the
run-off of operating leases, as all new automobile lease originations since
April 2002 are direct financing leases and reflected in automobile loans and
leases.
The $0.3 billion, or 10%, decline in average investment securities in 2002
reflected the continued run off of lower-margin earning assets, mostly in the
first half of 2001. The $1.3 billion, or 28%, decline to 2001 from 2000 in
investment securities reflected a decision to sell a significant portion of
lower-margin securities.
As shown in Table 13, deposits were $17.5 billion at December 31, 2002, with 87%
representing core deposits, down from 93% at the end of the prior year, which
included the Florida deposits subsequently sold.
Average core deposits were $15.3 billion in 2002 as shown in Table 3. Excluding
the impact from average Florida deposits sold, as shown on Table 27, of $0.6
billion in 2002 and $4.3 billion in 2001, average core deposits in 2002 were
$14.7 billion, up $1.4 billion, or 10%, from the prior year and represented 89%
of average total deposits. This growth was driven by a $1.3 billion, or 37%,
increase in interest bearing demand deposits reflecting the combined benefits of
enhanced sales efforts and consumers moving funds out of the equity markets.
Average brokered time deposits and negotiable certificates of deposits increased
$0.6 billion reflecting management's strategy to further diversify its funding
sources.
29
Average core deposits in 2001 were $17.7 billion, up 3% from the prior year.
This increase was driven by a 17% increase in average interest bearing demand
deposits reflecting successful campaigns to generate deposit growth as well as
fund inflows due to uncertainties in the equity markets.
Average borrowings in 2002, comprised of short- and medium-term notes, advances
from the Federal Home Loan Bank, and long-term debt including capital
securities, totaled $5.5 billion, little changed from the prior year. Average
borrowings in 2001 totaled $5.5 billion, down 8% from the year-earlier period.
This reflected a combination of factors including increased funding made
available from the planned balance sheet repositioning program which resulted in
a decline in low-margin earnings assets, particularly in the first half of the
year, as well as deposit growth in the second half of the year.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is the expense necessary to maintain the
allowance for loan and lease losses (ALLL) at a level adequate to absorb
management's estimate of inherent losses in the loan and lease portfolio. The
provision expense was $194.4 million for 2002, down $62.9 million from $257.3
million in 2001. Excluding the $115.2 million of additional provisions in 2001,
as well as the $9.9 million decline related to the sale of the Florida banking
operations, the provision for loan and lease losses increased $62.2 million,
reflecting loan and lease growth, as well as higher total commercial and
commercial real estate net charge-offs, as consumer net charge-offs declined.
Higher total commercial and commercial real estate net charge-offs reflected the
impact of the continued weak economy on some of Huntington's commercial
customers, as well as fourth quarter credit actions that accelerated the sale
and disposition of non-performing commercial loans. Specific credit actions in
the fourth quarter 2002 included $21.4 million in charge-offs associated with
the sale of non-performing assets and the charge-off of a $29.9 million credit
exposure to a single health care finance company. Existing loan and lease loss
reserves were sufficient to absorb these charges and, accordingly, there was no
impact on 2002 provision expense.
For 2001, the provision for loan and lease losses was $257.3 million, up $195.9
million from $61.5 million in 2000. Of this increase, $65.2 million reflected a
charge associated with Huntington's strategic refocusing plan discussed earlier.
These charges included estimated losses related to the exit of sub-prime
automobile and truck and equipment lending, losses related to delinquent
consumer and small business loans and leases more than 120 days past due, and
increased reserves for consumer bankruptcies. In addition, there was a $50.0
million increase to the allowance for loan and lease losses made in light of the
higher charge-offs and non-performing assets experience in the second half of
2001 especially in the commercial and automobile loan and lease portfolios. The
increase in non-performing assets, as well as higher commercial net charge-offs,
reflected a weakening economy. The higher automobile loan and lease charge-offs
primarily reflected charge-offs associated with loan and lease production from
the fourth quarter of 1999 through the fourth quarter of 2000, a period of time
when Huntington targeted a broader credit quality spectrum of borrowers. See
the "Credit Risk" section for discussion of the ALLL, net charge-offs, and
non-performing assets.
NON-INTEREST INCOME
Non-interest income for the recent three years ended December 31 was as follows:
--------------------------------------------------------------------------------------------------------------------------
TABLE 6 - NON-INTEREST INCOME
--------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Operating lease income $ 641,785 $ 699,857 $ 635,243
Service charges on deposit accounts 152,521 164,052 160,727
Brokerage and insurance 66,843 79,034 61,871
Trust services 62,051 60,298 53,613
Mortgage banking 47,989 59,148 38,025
Bank owned life insurance 46,005 38,241 39,544
Other services charges and fees 42,888 48,217 43,883
Gain on sale of Florida operations 175,344 --- ---
Merchant Services gain 24,550 --- ---
Securities gains 4,902 723 37,101
Other 69,904 59,767 58,795
--------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME $ 1,334,782 $1,209,337 $ 1,128,802
--------------------------------------------------------------------------------------------------------------------------
Non-interest income was $1,334.8 million, up $125.4 million, or 10%, reflecting
a $175.3 million gain from the sale of the Florida banking operations and a
$24.6 million gain from the restructuring of Merchant Services. Adjusted to
30
exclude the impact of these gains and the benefit of a $5.3 million reduction in
securities losses, partially offset by the $63.6 million reduction in
non-interest income attributed to the sold Florida banking and insurance
operations, non-interest income was down $16.1 million, or 1%. (See Tables 25
and 26 for further details).
The primary cause of this $16.1 million decrease was a $58.1 million, or 8%,
decrease in operating lease income due to run-off as new production since April
2002 is recorded as direct financing leases. Offsetting this decrease, deposit
service charges increased $15.7 million, or 12%, reflecting higher personal and
commercial service charges; brokerage and insurance income increased $5.5
million, or 10%, reflecting a 19% increase in combined mutual fund and annuity
sales; trust services increased $4.1 million, or 7%, due to a 12% increase in
mutual fund fees, as well as a 4% increase in personal trust income; and bank
owned life insurance was up $7.8 million. Huntington owns and is the beneficiary
on three Bank owned life insurance policies that were purchased in 1997 and
1998, insuring the lives of selected Huntington officers. Written consents were
obtained from the officers prior to the purchase of the policies. The policies
represented approximately 3% of total assets at December 31, 2002 and 2001. The
insurance providers are rated A+ or higher. Additionally, the cash values of
these policies are backed by assets that are maintained in a separate account to
protect Huntington from possible insolvency of the insurance providers.
Mortgage banking income excluding the impact of the sold Florida banking
operations declined $7.8 million, or 14%, due to $14.1 million of mortgage
servicing impairment in 2002 compared with $6.3 million of such impairment in
2001. These impairments reflected a significant increase in prepayments due to
heavy mortgage refinancing activity, particularly in the second half of 2002.
Total mortgage loans originated in 2002 were a record $4.1 billion, up from $3.5
billion in 2001 due to heavy refinancing activity as borrowers took advantage of
very low interest rates. At December 31, 2002, the value of capitalized mortgage
servicing rights was 0.78% of loans serviced for others, down from 0.97% at the
end of the prior year.
Other service charges excluding the impact of the sold Florida banking and
insurance operations was up $4.4 million, or 12%, primarily driven by higher
check card and on-line bill payment fees. Other income on this same comparative
basis was up $13.4 million, or 24%, reflecting increases spread over a number of
miscellaneous fee and service income categories.
Non-interest income was $1,209.3 million in 2001, up $80.5 million, or 7%.
Contributing to this growth was a $64.6 million, or 10%, increase in operating
lease income, reflecting growth in the automobile leases outstanding, and a
$21.1 million, or 56%, increase in mortgage banking income due to higher
mortgage origination activity. Total mortgage loan originations in 2001 were
$3.5 billion, significantly higher than $1.5 billion in 2000. This reflected an
increase in refinancing activity due to lower interest rates. Brokerage and
insurance income increased $17.2 million, or 28%, driven by strong growth in
insurance and investment banking fees. Also increasing were trust services, up
12%, other service charges and fees, up 10%, and service charges on deposits, up
2%.
Securities gains in 2002 totaled $4.9 million, up $4.2 million from the prior
year, which included a $5.3 million loss realized from the sale of $15 million
of Pacific Gas & Electric commercial paper acquired from the Huntington Money
Market Fund. Securities gains in 2001 were $0.7 million, down $36.4 million from
2000. Gains in 2000 included gross gains of $66.5 million from the sale of
certain equity investments substantially offset by losses from the sale of lower
yielding, fixed-income investment securities.
31
NON-INTEREST EXPENSE
Non-interest expense for the recent three years ended December 31 was as
follows:
----------------------------------------------------------------------------------------------------------------------------------
TABLE 7 - NON-INTEREST EXPENSE
----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
Operating lease expense $ 518,970 $558,626 $ 494,800
Personnel costs 440,760 478,640 421,750
Equipment 68,323 80,560 78,069
Outside data processing and other services 67,368 69,692 62,011
Net Occupancy 60,264 77,184 75,882
Marketing 27,911 31,057 34,884
Professional services 25,777 23,879 20,819
Telecommunications 22,661 27,984 26,225
Printing and supplies 15,198 18,367 19,634
Franchise and other taxes 9,456 9,729 11,077
Amortization of intangible assets 2,019 41,225 39,207
Restructuring charges 56,184 79,957 ---
Other 73,797 79,696 22,596
----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $1,388,688 $1,576,596 $ 1,306,954
----------------------------------------------------------------------------------------------------------------------------------
Non-interest expense in 2002 was $1,388.7 million, down $187.9 million, or
12%. Excluding the impact from the $142.7 million decline in non-interest
expense attributed to the sold Florida banking and insurance operations, as well
as the $23.8 million reduction in restructuring charges, non-interest expense
was down $21.5 million, or 2%, reflecting a decline in operating lease expense,
as well as lower amortization of intangibles and other expenses. These were
partially offset by higher personnel costs and outside data processing expenses.
(See Tables 25 and 26 for further details).
Operating lease expense declined $39.7 million, or 7%, reflecting the run-off of
operating leases as all automobile lease originations since April 2002 are
direct financing leases in the automobile loans and leases category.
Personnel costs excluding the impact of the sold Florida banking and insurance
operations increased $24.3 million, or 6%, in 2002 reflecting higher salaries,
incentive-based compensation, and pension and benefit costs. Higher salaries
reflected the expansion of management and employee talent at all levels,
including the credit workout group. In addition, and given a renewed focus on
sales, incentive-based compensation increased throughout Huntington, most
notably in mortgage banking which had a record production year. Higher medical
and pension costs were partially offset by gains related to stock received from
the demutualization of certain insurance companies where Huntington owned
related insurance policies. Outside services increased $6.7 million, or 11%,
reflecting volume-driven costs, mostly mortgage banking related. Professional
services expense increased $2.5 million, or 11%, due primarily to legal and
other costs associated with the resolution of problem credits. Marketing expense
was up $1.4 million, or 5%, reflecting expanded advertising activities.
Expense categories that declined from 2001, excluding the impact of the sold
Florida banking and insurance operations, included a $10.2 million decline in
the amortization of intangible assets, mostly goodwill due to the implementation
of FASB Statement No. 142, Goodwill and Other Intangible Assets at the beginning
of 2002. Equipment costs declined $3.7 million, or 5%, reflecting lower
maintenance costs. Net occupancy expense was down $1.4 million, or 2%, on this
same comparative basis due to a real estate tax credit in 2002.
Restructuring charges totaled $56.2 million in 2002 compared with $80.0 million
in 2001. The charges for 2002 and 2001 were related to the strategic
restructuring announced in July 2001 with the last of such charges recorded in
the 2002 third quarter.
Non-interest expense in 2001 was $1,576.6 million, up $269.6 million, or 21%.
Contributing to this increase was a $63.8 million, or 13%, increase in operating
lease expense, a $56.9 million, or 13%, increase in personnel costs, a $57.1
million increase in the other expense category, and $80.0 million in
restructuring charges. The increase in operating lease expense reflected a $63.3
million increase in depreciation expense. Depreciation on leased automobiles
increased in 2001 when compared with 2000 due to higher levels of leases, as
well as the acceleration of depreciation on vehicles where the expected proceeds
at the end of the lease will be less than the expected residual value. The
higher personnel costs reflected increased sales commissions related to mortgage
banking, capital markets, and annuity and mutual fund sales, offset by lower
benefit expense. The $57.1 million increase in other expense reflected the $28.4
million premium expense related to
32
the purchase of automobile lease residual value insurance, of which there was
none in 2000. See the "Credit Risk" section for more information regarding
automobile lease residual insurance.
INCOME TAXES
Income tax expense was $209.8 million in 2002 compared with an income tax
benefit of $23.1 million in 2001 and income tax expense of $133.7 million in
2000. Tax expense in each of these years was significantly impacted by the
effect of the strategic restructuring and related sale of the Florida banking
and insurance operations, the nature of the restructuring charges, and other
items. Huntington's effective tax rate was 38.6%, -18.9%, and 28.7% in 2002,
2001, and 2000, respectively. Excluding the effect of the strategic
restructuring and related sale of the Florida banking and insurance operations,
the nature of the restructuring charges and other items, Huntington's effective
tax rate was 25.7%, 24.7%, and 28.7% in 2002, 2001, and 2000, respectively.
Based on information currently available, Huntington expects its 2003 effective
tax rate to range from 26% to 28%. Subsequent to year-end 2002, the Internal
Revenue Service completed the audit of Huntington's consolidated federal income
tax returns through the tax year 2001. The tax audit resulted in no material
impact to Huntington's financial statements. See Note 23 to the consolidated
financial statements for more information regarding reported basis income taxes.
CREDIT RISK
Huntington's exposure to credit risk is managed through the use of consistent
underwriting standards that emphasize "in-market" lending while avoiding highly
leveraged transactions as well as excessive industry and other concentrations.
The credit administration function employs risk management techniques to ensure
that loans and leases adhere to corporate policy and problem loans and leases
are promptly identified. These procedures provide executive management with the
information necessary to implement policy adjustments where necessary, and to
take corrective actions on a proactive basis. Beginning in 2002, management
increased its emphasis on its commercial lending to customers with existing or
potential relationships within Huntington's primary markets. As a result,
outstanding shared national credits declined to $979 million at December 31,
2002, from $1.1 billion at the same period-end last year and a peak of $1.5
billion at June 30, 2001.
ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
The ALLL was $336.6 million at December 31, 2002, down from $369.3 million at
the end of 2001. This represented 1.81% of total loans and leases at year-end
2002 compared with 2.00% for 2001. At the end of 2002, the ALLL represented 246%
of non-performing assets up significantly from 162% at the end of last year.
Given all of the characteristics in Huntington's loan and lease portfolio,
management believes the ALLL is sufficient to absorb the credit losses inherent
in the portfolio.
33
The following table shows the activity in Huntington's ALLL, along with selected
credit quality indicators.
------------------------------------------------------------------------------------------------------------------------------
TABLE 8 - SUMMARY OF ALLOWANCE FOR LOAN AND LEASE LOSSES AND RELATED STATISTICS
------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 369,332 $264,929 $ 273,931 $ 273,125 $ 251,540
LOAN AND LEASE LOSSES
Commercial loans (128,868) (65,743) (18,013) (16,203) (24,512)
Real estate
Construction (4,863) (845) (238) (638) (80)
Commercial (15,012) (3,676) (1,522) (2,399) (2,115)
Consumer
Automobile loans and leases (59,010) (71,638) (47,687) (42,783) (39,107)
Home equity (15,312) (16,384) (7,979) (7,233) (6,215)
Residential mortgage (888) (879) (1,140) (1,404) (1,243)
Other consumer loans (10,399) (15,375) (9,246) (28,422) (39,328)
------------------------------------------------------------------------------------------------------------------------------
TOTAL LOAN AND LEASE LOSSES (234,352) (174,540) (85,825) (99,082) (112,600)
------------------------------------------------------------------------------------------------------------------------------
RECOVERIES OF PREVIOUSLY CHARGED OFF LOANS
AND LEASES
Commercial loans 11,106 6,175 4,201 5,303 4,546
Real estate
Construction 403 179 165 192 441
Commercial 1,831 613 268 1,260 1,800
Consumer
Automobile loans and leases 18,464 16,567 15,407 14,201 14,979
Home equity 1,806 1,796 1,070 1,137 685
Residential mortgage 16 94 133 268 367
Other consumer loans 3,814 2,847 2,934 7,192 7,399
------------------------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 37,440 28,271 24,178 29,553 30,217
------------------------------------------------------------------------------------------------------------------------------
NET LOAN AND LEASE LOSSES (196,912) (146,269) (61,647) (69,529) (82,383)
------------------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 194,426 257,326 61,464 70,335 81,926
Allowance for loans sold (22,297) --- --- --- ---
Allowance of securitized loans (9,165) (6,654) (16,719) --- ---
Allowance of loans acquired 1,264 --- 7,900 --- 22,042
------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 336,648 $369,332 $ 264,929 $ 273,931 $ 273,125
==============================================================================================================================
NET LOAN AND LEASE LOSSES AS A % OF AVERAGE
TOTAL LOANS AND LEASES 1.13% 0.81% 0.34% 0.39% 0.49%
ALLOWANCE FOR LOAN AND LEASE LOSSES AS A %
OF TOTAL END OF PERIOD LOANS AND LEASES 1.81% 2.00% 1.50% 1.52% 1.55%
Huntington allocates the ALLL to each loan and lease 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, significant acquisitions and dispositions of loans, and internal
controls. For the commercial and commercial real estate credits, expected loss
factors are assigned by credit grade at the individual loan and lease level at
the time the loan or lease is originated. On a periodic basis, management
reevaluates these credit grades. The aggregation of these factors represents
management's estimate of the inherent loss in the portfolio.
The portion of the allowance allocated to the more homogeneous consumer loan and
lease segments is determined by expected loss ratios based on the risk
characteristics of the various segments and giving consideration to existing
economic conditions and trends. Expected loss ratios incorporate factors such as
trends in past due and non-accrual amounts, recent loan and lease loss
experience, current economic conditions, and risk characteristics of various
loan and lease categories. Actual loss ratios experienced in the future, could
vary from those expected, as performance is a function of factors unique to each
customer as well as general economic conditions.
To ensure adequacy to a higher degree of confidence, a portion of the ALLL is
considered unallocated. For analytical purposes, the allocation of the ALLL is
provided in Table 9. While amounts are allocated to various portfolio segments,
the
34
total ALLL, excluding impairment reserves prescribed under provisions of
Statement of Financial Accounting Standard No. 114, is available to absorb
losses from any segment of the portfolio.
----------------------------------------------------------------------------------------------------------------------------------
TABLE 9 - ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Commercial loans $155,577 $174,713 $104,968 $ 94,978 $ 82,129
Real estate
Construction 12,542 17,685 12,596 14,863 10,729
Commercial 35,853 38,177 33,909 32,073 35,206
Consumer
Automobile loans and leases 51,621 38,799 28,877 40,043 40,792
Home equity 18,621 24,054 19,246 17,089 15,691
Residential mortgage 8,566 6,013 4,421 5,393 5,247
Other consumer loans 8,085 19,757 22,516 21,523 47,715
----------------------------------------------------------------------------------------------------------------------------------
Total allocated 290,865 319,198 226,533 225,962 237,509
Total unallocated 45,783 50,134 38,396 47,969 35,616
----------------------------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCE FOR LOAN AND LEASE LOSSES $336,648 $369,332 $264,929 $273,931 $273,125
==================================================================================================================================
NET CHARGE-OFFS
Total net charge-offs as a percent of average total loans and leases were 1.13%
in 2002 compared to 0.81% in 2001. The increase was due largely to $51.3 million
in commercial loan charge-offs related to the special credit actions in the
fourth quarter of 2002. In 2001, Huntington made the decision to exit the
sub-prime automobile and truck and equipment lending business, which had a
combined balance of $69.7 million at December 31, 2002, down from $144.3 million
at the end of 2001. Excluding net charge-offs related to these exited
businesses, total net charge-offs in 2002 and 2001 were 1.08% and 0.73%,
respectively. Commercial and commercial real estate net charge-offs, spread over
a number of companies in the retail trade, manufacturing, services, and
communications sectors, were 1.46% in the current year versus 0.55% in 2001.
Excluding the net charge-offs related to the fourth quarter 2002 special credit
actions, total net charge-offs and total commercial and commercial real estate
net charge-offs for 2002 were 0.75% and 0.89%, respectively. Consumer
charge-offs were 0.64% in 2002 compared with 0.98% in 2001. Automobile loan and
lease net charge-offs were 1.05% in 2002 compared with 1.94% in 2001. Table 10
shows the amount of net charge-offs by loan and lease type as a percentage of
average loans and leases.
----------------------------------------------------------------------------------------------------------------------------------
TABLE 10 - NET LOAN AND LEASE CHARGE-OFFS
----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS BY TYPE
Commercial loans $ 117,528 $ 52,000 $ 13,812 $ 10,900 $ 19,966
Commercial real estate 17,641 3,729 1,327 1,585 (46)
----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL AND COMMERCIAL REAL ESTATE 135,169 55,729 15,139 12,485 19,920
----------------------------------------------------------------------------------------------------------------------------------
Consumer
Automobile loans and leases 33,027 52,479 32,280 28,582 24,128
Home equity 13,506 14,588 6,909 6,096 5,530
Residential mortgage 872 785 1,007 1,136 876
Other consumer loans 4,524 7,778 6,312 21,230 31,929
----------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSUMER 51,929 75,630 46,508 57,044 62,463
----------------------------------------------------------------------------------------------------------------------------------
Total net charge-offs, excluding exited businesses 187,098 131,359 61,647 69,529 82,383
Net charge-offs related to exited businesses 9,814 14,910 --- --- ---
----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET CHARGE-OFFS $ 196,912 $ 146,269 $ 61,647 $ 69,529 $82,383
==================================================================================================================================
35
-----------------------------------------------------------------------------------------------------------------------
TABLE 10 - NET LOAN AND LEASE CHARGE-OFFS (CONTINUED)
-----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS AS A % OF AVERAGE
LOANS AND LEASES
Commercial loans 2.07% 0.78% 0.21% 0.18% 0.35%
Commercial real estate 0.49% 0.10% 0.04% 0.05% ---
-----------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL AND
COMMERCIAL REAL ESTATE 1.46% 0.55% 0.15% 0.13% 0.23%
-----------------------------------------------------------------------------------------------------------------------
Consumer
Automobile loans and leases 1.05% 1.94% 1.02% 0.80% 0.74%
Home equity 0.44% 0.43% 0.23% 0.26% 0.29%
Residential mortgage 0.06% 0.07% 0.07% 0.08% 0.06%
Other consumer loans 1.09% 1.37% 1.20% 1.93% 2.25%
-----------------------------------------------------------------------------------------------------------------------
TOTAL CONSUMER 0.64% 0.98% 0.58% 0.67% 0.78%
-----------------------------------------------------------------------------------------------------------------------
Total net charge-offs, excluding exited
businesses 1.08% 0.73% 0.34% 0.39% 0.49%
=======================================================================================================================
TOTAL NET CHARGE-OFFS 1.13% 0.81% 0.34% 0.39% 0.49%
=======================================================================================================================
Economic activity has remained sluggish and the uncertainty about the future
level of activity has increased recently. Management expects 2003 full year net
charge-offs to be in the 0.65% - 0.75% range.
Huntington's management expects favorable trends in credit quality and net
charge-offs entering 2003 assuming no further deterioration in the economy.
NON-PERFORMING ASSETS
Non-performing assets consist of loans and leases that are no longer accruing
interest, loans and leases that have been renegotiated to below market rates
based upon financial difficulties of the borrower, and real estate acquired
through foreclosure. Commercial and commercial real estate loans are generally
placed on non-accrual status when collection of principal or interest is in
doubt or when the loan is 90 days past due. When interest accruals are
suspended, accrued interest income is reversed with current year accruals
charged to earnings and prior year amounts generally charged off as a credit
loss. Consumer loans and leases, excluding residential mortgages, are not placed
on non-accrual status but are charged off in accordance with regulatory
statutes, which is generally no more than 120 days past due. Residential
mortgages, while highly secured, are placed on non-accrual status within 180
days past due as to principal and 210 days past due as to interest, regardless
of security. A charge-off on a residential mortgage loan is recorded when the
loan has been foreclosed and the loan balance exceeds the fair value of the real
estate. The fair value of the collateral is then recorded as real estate owned.
When, in management's judgment, the borrower's ability to make periodic interest
and principal payments resumes and collectibility is no longer in doubt, the
loan is returned to accrual status.
Total NPAs were $136.7 million at December 31, 2002, compared with $227.5
million at the end of 2001 and represented 0.73% and 1.23% of total loans and
leases and other real estate. The decline in the level of NPAs from the prior
year-end reflected the sale of NPAs in the fourth quarter of 2002 (see page 30
for discussion). While the economy has continued to be weak and the uncertainty
about the future level of economic activity has increased, management continues
to expect NPAs in 2003 to remain around current levels.
36
--------------------------------------------------------------------------------------------------------------------------
TABLE 11 - NON-PERFORMING ASSETS AND PAST DUE LOANS AND LEASES
--------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------
Non-accrual loans and leases
Commercial loans $ 91,861 $159,637 $ 55,804 $ 42,958 $34,586
Real estate
Construction 5,554 13,885 8,687 10,785 10,181
Commercial 21,211 34,475 18,015 16,131 13,243
Residential 9,443 11,836 10,174 11,866 14,419
--------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans and leases 128,069 219,833 92,680 81,740 72,429
Renegotiated loans --- 1,276 1,304 1,330 4,706
--------------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS AND LEASES 128,069 221,109 93,984 83,070 77,135
--------------------------------------------------------------------------------------------------------------------------
Other real estate, net 8,654 6,384 11,413 15,171 18,964
--------------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $136,723 $227,493 $105,397 $ 98,241 $96,099
==========================================================================================================================
ACCRUING LOANS AND LEASES PAST DUE 90 DAYS OR MORE $ 61,526 $ 76,013 $ 66,665 $ 54,567 $47,789
==========================================================================================================================
NON-PERFORMING LOANS AND LEASES AS A % OF TOTAL LOANS
AND LEASES 0.69% 1.20% 0.53% 0.46% 0.44%
NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND LEASES
AND OTHER REAL ESTATE 0.73% 1.23% 0.60% 0.54% 0.54%
ALLOWANCE FOR LOAN LOSSES AS A % OF NON-PERFORMING LOANS
AND LEASES 263% 167% 282% 330% 354%
ALLOWANCE FOR LOAN AND LEASE LOSSES AS A % OF NON-PERFORMING ASSETS 246% 162% 251% 279% 284%
ACCRUING LOANS AND LEASES PAST DUE 90 DAYS OR MORE
TO TOTAL LOANS AND LEASES 0.33% 0.41% 0.38% 0.30% 0.27%
Note: For 2002, the amount of interest income which would have been recorded
under the original terms for total loans and leases classified as non-accrual
or renegotiated was $12.6 million. Amounts actually collected and recorded as
interest income for these loans and leases was $5.1 million.
Loans and leases past due ninety days or more but continuing to accrue interest
decreased to $61.5 million at December 31, 2002, down from $76.0 million a year
earlier. This represented 0.33% and 0.41% of total loans and leases,
respectively.
Table 12 reflects the change in NPAs for the recent four years and includes NPAs
in the Florida operations to the date of their sale in the 2002 first quarter:
-----------------------------------------------------------------------------------------------------------------------------
TABLE 12 - NON-PERFORMING ASSET ACTIVITY
-----------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
BEGINNING OF PERIOD $227,493 $105,397 $98,241 $96,099
New non-performing assets 260,229 329,882 113,870 106,014
Returns to accruing status (17,124) (2,767) (5,914) (5,744)
Loan and lease losses (152,616) (67,541) (18,052) (19,547)
Payments (136,774) (106,839) (68,982) (67,682)
Sales (44,485)(1) (30,639) (13,766) (10,899)
-----------------------------------------------------------------------------------------------------------------------------
END OF PERIOD $136,723 $227,493 $105,397 $98,241
=============================================================================================================================
(1) Includes $6.5 million related to the sale of the Florida operations and
$21.4 million related to the 4th quarter special credit actions.
INTEREST RATE RISK MANAGEMENT
Huntington seeks to minimize earnings volatility by managing the sensitivity of
net interest income and the fair value of its net assets to changes in market
interest rates. The Board of Directors and the Asset and Liability Management
Committee (ALCO) oversee various risks by establishing broad policies and
specific operating limits that govern a variety of risks inherent in operations,
including liquidity, counterparty credit risk, settlement, and market risks.
37
Market risk is the potential for declines in the fair value of financial
instruments due to changes in interest rates, exchange rates, and equity prices.
Interest rate risk is Huntington's primary market risk. It results from timing
differences in the repricing and maturity of assets and liabilities and changes
in relationships between market interest rates and the yields on assets and
rates on liabilities, including the impact of embedded options.
Interest rate risk management is a dynamic process that encompasses new business
flows onto the balance sheet, wholesale investment and funding, and the changing
market and business environment. Effective management of interest rate risk
begins with appropriately diversified investments and funding sources. To
accomplish overall balance sheet objectives, management regularly accesses
money, bond, futures, and options markets, as well as trading exchanges. In
addition, Huntington contracts with dealers in over-the-counter financial
instruments for interest rate swaps. ALCO regularly monitors position
concentrations and the level of interest rate sensitivity to ensure compliance
with approved risk tolerances.
Interest rate risk modeling is performed monthly. An income simulation model is
used to measure the sensitivity of forecasted net interest income to changes in
market rates over a one-year horizon. Although Bank Owned Life Insurance and
automobile operating lease assets are classified as non-interest earning assets,
Huntington includes these portfolios in its interest sensitivity analysis
because both have attributes similar to fixed-rate interest earning assets.
Market value risk (referred to as Economic Value of Equity, or EVE) is measured
using a static balance sheet. The models used for these measurements take into
account prepayment speeds on mortgage loans, mortgage-backed securities, and
consumer installment loans, as well as cash flows of other loans and deposits.
Balance sheet growth assumptions are also considered in the income simulation
model. Moreover, the models incorporate the effects of embedded options, such as
interest rate caps, floors, and call options, and account for changes in
relationships among interest rates
The baseline scenario for the income simulation, with which all others are
compared, is based on market interest rates implied by the prevailing yield
curve. Alternative market rate scenarios are then employed to determine their
impact on the baseline scenario. These alternative market rate scenarios include
spot rates remaining unchanged for the entire measurement period, parallel rate
shifts on both a gradual and immediate basis, as well as movements in rates that
alter the shape of the yield curve. Scenarios are also developed to measure
basis risk, such as the impact of LIBOR-based rates rising or falling faster
than the prime rate.
When evaluating short-term interest rate risk exposure, management uses, for its
primary measurement, scenarios that model 200 basis point increasing and
decreasing parallel shifts in the yield curve during the next twelve-month
period. At December 31, 2002, only the 200 basis point increasing parallel shift
in the yield curve was modeled because a 200 basis point decrease in the
interest rate curve was not feasible given the overall low level of interest
rates. At the end of 2002, that scenario modeled net interest income 0.7% lower
than the internal forecast of net interest income over the same time period
using the current level of forward rates. This compares with the Board of
Directors policy limit of a 4.0% change in net interest income given a 200 basis
point scenario. Management believes further declines in market rates would put
modest downward pressure on net interest income, resulting from the implicit
pricing floors in non-maturity deposits.
The net interest margin has been adversely impacted in recent months by:
(1) fixed-rate consumer loan repayments being reinvested at lower market rates;
(2) high repayments of residential mortgage loans and mortgage-backed
securities; (3) the implicit floors in retail deposits as rates declined to
historically low levels; (4) the rapid growth of lower-yielding residential
adjustable-rate mortgage loans retained on the balance sheet; (5) the lower
yield on the higher quality automobile loan originations, and; (6) the
flattening of the yield curve. Future net interest income could also be
adversely affected by these factors.
The primary measurement for EVE risk assumes an immediate and parallel increase
in rates of 200 basis points. At December 31, 2002, the model indicated that
such an increase in rates would be expected to reduce the EVE by 3.8% and
compares with an estimated negative impact of 2.9% at December 31, 2001.
The model is a useful but simplified representation of Huntington's underlying
interest rate risk profile. Simulations reflect choices of statistical
techniques, functional forms, model parameters, and numerous uncertain
assumptions. Nonetheless, experience has demonstrated and management believes
that these models provide reliable guidance for measuring and managing interest
rate sensitivity.
38
LIQUIDITY
Liquidity is the ability to meet cash flow needs on a timely basis at a
reasonable cost. The liquidity of the Bank is used to make loans and leases and
to repay deposit liabilities as they become due or are demanded by customers.
Huntington's ALCO establishes guidelines and regularly monitors the overall
liquidity position of the Bank and the parent company to ensure that various
alternative strategies exist to cover unanticipated events that could affect
liquidity. Management believes that sufficient liquidity exists at both the
parent company and the Bank to meet their estimated needs.
BANK LIQUIDITY
The Bank manages both its external and internal liquidity. External liquidity
includes maintaining funding sources for the Bank's activities. These activities
primarily consist of making loans and leases to customers, repaying the Bank's
obligations as they become due, and supporting the cost of operating the Bank.
Selected information regarding the Bank's short-term borrowings is found in
Table 14 and the maturity of obligations, including payments due under operating
lease obligations, is reflected in Table 15.
Deposits are the Bank's primary source of funding, of which 87% were provided by
the Regional Banking segment. Table 13 details the types and sources of deposits
by business segment at December 31, 2002, and compares these balances by type
and source to balances at December 31, 2001.
------------------------------------------------------------------------------------------------------------------------------
TABLE 13 - DEPOSIT LIABILITIES
------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) DECEMBER 31, 2002 December 31, 2001
------------------------------------------------------------------------------------------------------------------------------
BY TYPE BALANCE % Balance %
------------------------------------------------------------------------------------------------------------------------------
Demand deposits
Non-interest bearing $ 3,074 17.6 $ 3,635 18.0
Interest bearing 5,374 30.7 5,723 28.3
Savings deposits 2,851 16.3 3,466 17.2
Other domestic time deposits 3,956 22.6 5,868 29.1
------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE DEPOSITS 15,255 87.2 18,692 92.6
------------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 732 4.2 1,131 5.6
Brokered time deposits and negotiable CDs 1,093 6.2 138 0.7
Foreign time deposits 419 2.4 226 1.1
------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $ 17,499 100.0 $ 20,187 100.0
==============================================================================================================================
BY BUSINESS SEGMENT
------------------------------------------------------------------------------------------------------------------------------
Regional Banking
Central Ohio / West Virginia $ 5,361 30.6 $ 5,217 25.8
Northern Ohio 3,602 20.6 3,256 16.1
Southern Ohio / Kentucky 1,365 7.8 1,291 6.4
West Michigan 2,402 13.7 2,227 11.0
East Michigan 1,962 11.2 1,895 9.4
Indiana 613 3.5 578 2.9
------------------------------------------------------------------------------------------------------------------------------
Total Regional Banking 15,305 87.4 14,464 71.6
------------------------------------------------------------------------------------------------------------------------------
Dealer Sales 59 0.3 82 0.4
Private Financial Group 924 5.3 717 3.6
Treasury / Other 1,211 7.0 256 1.3
------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS EXCLUDING FLORIDA 17,499 100.0 15,519 76.9
------------------------------------------------------------------------------------------------------------------------------
Florida --- --- 4,668 23.1
------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $ 17,499 100.0 $ 20,187 100.0
==============================================================================================================================
Domestic time deposits of $100,000 or more, adjusted to include brokered time
deposits and negotiable certificates of deposit and IRAs included in Other
domestic time deposits, totaled $1.9 billion at December 31, 2002. These time
deposits mature as follows: $343 million within three months, $182 million
within six but more than three months, $212 million within one year but more
than six months, and $1,166 million maturing beyond one year. At December 31,
2002,
39
Huntington's loans and leases were 99.8% of total deposits. This compares
with 89.7% of total deposits at December 31, 2001, or 106% excluding the loans
and deposits sold with the Florida operations.
The Bank's ALCO establishes policies and monitors guidelines to diversify the
Bank's wholesale funding sources to avoid concentrations in any one market
source. Wholesale funding sources include Federal funds purchased, securities
sold under repurchase agreements, non-core deposits, and medium- and long-term
debt. To enhance the availability of liquidity, the Bank has available a $6.0
billion domestic bank note program. This program was renewed in 2002. At
December 31, 2002, a total of $5.7 billion in domestic bank notes remained
available for future issuance under this program. In addition, the Bank shares a
$2.0 billion Euronote program with the parent company. This program was renewed
on February 6, 2003, and is subject to annual renewal. Approximately $1.3
billion was available under this program at December 31, 2002. Both programs
enable the Bank to issue notes with maturities from one month to thirty years.
During 2002, management added significantly to its wholesale borrowings,
primarily due to the loss of deposit funding with the sale of Huntington's
Florida banking operations. In adding wholesale borrowings, management also
lengthened the average maturity of these borrowings. At the end of 2002, the
Bank had wholesale borrowings of $5.9 billion, which had a weighted-average
maturity of 1.7 years.
-------------------------------------------------------------------------------------------------------------------------
TABLE 14 - SHORT-TERM BORROWINGS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
-------------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
Balance at year-end $ 2,458,523 $ 1,913,607 $ 1,822,480
Weighted average interest rate at year-end 1.49% 2.24% 5.91%
Maximum amount outstanding at month-end during the year $ 2,503,962 $ 3,094,647 $ 2,093,546
Average amount outstanding during the year $ 2,072,075 $ 2,258,860 $ 1,831,228
Weighted average interest rate during the year 1.98% 4.11% 5.68%
-------------------------------------------------------------------------------------------------------------------------
The Bank is also a member of the Federal Home Loan Bank of Cincinnati (FHLB),
which provides funding through advances to its members that are collateralized
with mortgage-related assets. These advances carry maturities from one month to
twenty years. At December 31, 2002, the Bank had $1.0 billion of advances from
the FHLB, compared with only $17 million of advances at December 31, 2001.
During 2002, the Bank significantly increased its borrowing capability with the
FHLB as these advances provided a flexible source of funding. At December 31,
2002, a total of $2.7 billion of residential mortgage loans, commercial real
estate loans, and home equity loans were pledged to secure borrowing under these
advances.
---------------------------------------------------------------------------------------------------------------------------------
TABLE 15 - MATURITY OF BANK OBLIGATIONS
---------------------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------------------
2008 &
(in millions of dollars) 2003 2004 2005 2006 2007 AFTER TOTAL
---------------------------------------------------------------------------------------------------------------------------------
Medium-term notes $540.1 $ 855.0 $510.0 $ --- $ --- $ --- $ 1,905.1
Subordinated notes 253.0 --- --- --- --- 485.7 738.7
Preferred securities --- --- --- --- --- 50.0 50.0
Federal Home Loan Bank advances 10.0 3.0 100.0 --- 900.0 --- 1,013.0
Operating lease obligations 35.1 33.1 29.7 27.6 26.2 218.6 370.3
---------------------------------------------------------------------------------------------------------------------------------
TOTAL $838.2 $ 891.1 $639.7 $27.6 $926.2 $ 754.3 $ 4,077.1
=================================================================================================================================
Huntington maintains a portfolio of securities that can be used as a secondary
source of liquidity (to the extent that securities are not pledged),
substantially all of which is held by the Bank. At December 31, 2002, the
portfolio of securities available for sale totaled $3.4 billion, of which $2.6
billion was pledged to secure public and trust deposits, trading account
liabilities, U.S. Treasury demand notes, and securities sold under repurchase
agreements. The composition and maturity of these securities are presented in
Table 16. Weighted average yields were calculated using amortized cost and on a
fully taxable equivalent basis assuming a 35% tax rate, excluding marketable
equity securities.
40
--------------------------------------------------------------------------------------------------------------------------------
TABLE 16 - SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and Federal Agencies $2,627,684 $ 2,322,079 $ 3,284,031
Other 775,685 527,500 806,494
--------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $3,403,369 $ 2,849,579 $ 4,090,525
================================================================================================================================
AMORTIZED FAIR
COST VALUE Yield
-------------------------------------------------------------------------------------------------------------
U.S. Treasury
1-5 years $ 13,434 $ 14,066 3.51%
6-10 years 4,704 5,367 5.51%
Over 10 years 412 479 6.07%
-------------------------------------------------------------------------------------------------------------
Total U.S. Treasury 18,550 19,912 4.07%
------------------------------------------------------------------------------------------------------------
Federal Agencies
Mortgage-backed
1-5 years 34,196 35,166 5.29%
6-10 years 264,219 270,779 5.33%
Over 10 years 873,552 901,417 5.78%
------------------------------------------------------------------------------------------------------------
Total Mortgage-backed 1,171,967 1,207,362 5.66%
------------------------------------------------------------------------------------------------------------
Other agencies
Under 1 year 34,923 35,966 4.91%
1-5 years 758,032 783,533 5.21%
6-10 years 95,617 97,095 4.79%
Over 10 years 477,185 483,816 5.50%
------------------------------------------------------------------------------------------------------------
Total Other 1,365,757 1,400,410 5.27%
------------------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY AND FEDERAL AGENCIES 2,556,274 2,627,684 5.44%
------------------------------------------------------------------------------------------------------------
Other
Under 1 year 7,133 7,183 8.43%
1-5 years 62,939 63,886 6.53%
6-10 years 49,581 51,046 6.61%
Over 10 years 451,108 449,958 5.71%
Retained interest in securitizations 146,160 159,978 15.56%
Marketable equity securities 42,846 43,634
------------------------------------------------------------------------------------------------------------
TOTAL OTHER 759,767 775,685 7.88%
------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $ 3,316,041 $3,403,369 5.98%
============================================================================================================
(1) Weighted average yields were calculated using amortized cost and on a
fully tax equivalent basis assuming a 35% tax rate. Marketable equity
securities are excluded.
Other significant factors impacting the Bank's liquidity are the repayment of
principal and the receipt of interest on the Bank's loans and direct financing
leases, rental income payments from operating lease assets, and proceeds from
the sales of vehicles at the end of the applicable operating lease. The Bank's
consumer loan and lease portfolio contains a significant amount of loans and
leases with relatively shorter weighted-average lives to maturity. In addition,
commercial loans and real estate construction portfolios have relatively short
maturities with 44% of the combined principal maturing in one year or less, as
reflected in Table 17.
41
---------------------------------------------------------------------------------------------------------------------------------
TABLE 17 - MATURITY SCHEDULE OF SELECTED LOANS
---------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) AT DECEMBER 31, 2002
---------------------------------------------------------------------------------------------------------------------------------
One Year One to After
or Less Five Years Five Years Total
---------------------------------------------------------------------------------------------------------------------------------
Commercial loans $ 2,490 $ 2,481 $635 $5,606
Real estate - construction 450 544 18 1,012
---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,940 $ 3,025 $653 $6,618
=================================================================================================================================
Variable interest rates $ 2,813 $ 2,582 $509 $5,904
Fixed interest rates 127 443 144 714
---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,940 $ 3,025 $653 $6,618
=================================================================================================================================
There are other sources of liquidity should they be needed. These sources
include the sale or securitization of loans, the ability to acquire additional
national market, non-core deposits, additional collateralized borrowings such as
FHLB advances, the issuance of debt securities, and the issuance of preferred or
common securities in public or private transactions. The Bank also can borrow
through the Federal Reserve's discount window. At December 31, 2002, a total of
$1.5 billion of commercial loans had been pledged to secure potential future
borrowings that could be obtained through this facility.
PARENT COMPANY LIQUIDITY
Parent company liquidity consists primarily of a program of regular dividends
from its subsidiaries, predominantly the Bank, its medium-term note program, and
a commercial paper program issued through Huntington Bancshares Financial
Corporation, a non-bank subsidiary. The Bank could declare dividends to be paid
to the parent company, without regulatory approval, of $98.1 million at December
31, 2002.
The parent company uses this liquidity to pay dividends to its stockholders,
repurchase shares of its common stock, meet its financial obligations, fund
certain non-bank activities, finance acquisitions, and for other general
corporate purposes. At December 31, 2002, the parent company had $455 million
issued under a $750 million medium-term note program, leaving $295 million
available for future funding needs. At December 31, 2002, the parent company had
$140 million in medium-term notes outstanding: $40 million will mature in 2003
and $100 million in 2004. As mentioned earlier, the parent company shares a $2.0
billion Euronote program with the Bank. Availability of funding through these
two programs amounted to $1.6 billion at December 31, 2002.
In 2002, the liquidity of the parent company was favorably affected by the sale
of the Florida banking operations through a subsequent recapitalization of the
Bank. This recapitalization returned $670 million of capital to the parent
company. During 2002, subsequent to the recapitalization, the parent company
repurchased 19.2 million shares of its common stock for $370 million. Details of
this program are discussed further under the Capital section that follows.
At December 31, 2002, the parent company had $546.9 million of cash and cash
equivalents on hand. Management believes that the parent company has sufficient
liquidity to meet its cash flow obligations in 2003, including payment of its
current dividend, without relying upon the capital markets for financing.
CAPITAL
Capital is managed at each legal subsidiary based upon the respective risks and
growth opportunities, as well as regulatory requirements. Management places
significant emphasis on the maintenance of strong capital, which promotes
investor confidence, provides access to the national markets under favorable
terms, and enhances business growth and acquisition opportunities. The
importance of managing capital is also recognized and management continually
strives to maintain an appropriate balance between capital adequacy and returns
to shareholders.
Shareholders' equity declined $143 million during 2002 compared with an increase
of $17 million in the previous year. Increases to shareholders' equity
reflecting higher net earnings, equity issued for acquisitions, and the positive
mark-to-market of securities available for sale and derivatives used to hedge
cash flows for 2002, were more than offset by dividends and repurchases of
common shares. Cash dividends declared were $0.64 per share in 2002, down from
$0.72 per share in 2001, and $0.76 per share in 2000.
42
Average shareholders' equity in 2002 was $2.3 billion, down modestly from $2.4
billion in 2001. The ratio of average equity to average assets in 2002 was 8.87%
versus 8.57% a year ago. Tangible period-end equity to tangible period-end
assets was 7.58% at the end of 2002, up significantly from 6.17% a year earlier,
reflecting the tangible capital generated from the sale of the Florida
operations offset by the subsequent share repurchase program in 2002. Given the
current asset mix and risk profile, management has a longer term targeted
tangible equity to asset ratio of 7.00%.
In February 2002, the Board of Directors authorized a share repurchase program
for up to 22 million shares and canceled the previously existing authorization.
Under this authorization, a total of 19.2 million shares were repurchased at a
cost of $370.0 million through the end of December 2002. An additional 0.2
million shares were repurchased in early January 2003, bringing total shares
repurchased under this authorization to 19.4 million shares. In mid-January
2003, the Board of Directors approved a new share repurchase authorization for
up to 8 million shares, canceling the 2.6 million shares remaining under the
February 2002 authorization. Huntington expects to use this new authorization to
complete the purchase of the 2.6 million shares remaining for repurchase under
the prior authorization. Repurchases of shares will be made from time to time as
deemed appropriate and 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.
Risk-based capital guidelines established by the Federal Reserve Board set
minimum capital requirements and require institutions to calculate risk-based
capital ratios by assigning risk weightings to assets and off-balance sheet
items, such as interest rate swaps, loan commitments, and securitizations.
Huntington's Tier 1 risk-based capital ratio, total risk-based capital ratio,
leverage ratio, and risk-adjusted assets for the recent five years are shown in
Table 18:
------------------------------------------------------------------------------------------------------------------------------
TABLE 18 - CAPITAL ADEQUACY
------------------------------------------------------------------------------------------------------------------------------
"Well- AT DECEMBER 31,
Capitalized" ---------------------------------------------------------------------------
(in millions of dollars) MINIMUMS 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Assets N/A $ 27,215 $ 27,926 $ 26,911 $ 25,272 $24,226
Ratios:
Tier 1 Risk-Based Capital 6.00% 8.65% 7.30% 7.37% 7.72% 7.19%
Total Risk-Based Capital 10.00% 11.54% 10.34% 10.51% 10.82% 10.75%
Tier 1 Leverage 5.00% 8.85% 7.46% 7.10% 6.89% 6.45%
Huntington is supervised and regulated by the Federal Reserve whereas the Bank
is primarily supervised and regulated by the Office of the Comptroller of the
Currency, which establishes similar regulatory capital guidelines for banks. The
Bank also had regulatory capital ratios in excess of the levels established for
well-capitalized institutions.
During 2002, Huntington acquired Haberer Investment Advisor, Inc. (Haberer), a
Cincinnati-based registered investment advisory firm with approximately $500
million in assets under management. Huntington paid cash to Haberer shareholders
and issued 202,695 shares of common stock from treasury. Also during 2002,
Huntington acquired LeaseNet Group, Inc. (LeaseNet), a $90 million leasing
company located in Dublin, Ohio. Huntington paid cash to LeaseNet shareholders
and issued 835,035 shares of common stock from treasury. See Huntington's
Statement of Changes in Shareholders' Equity for a detail of activity.
LINES OF BUSINESS DISCUSSION
Below is a brief description of each line of business and a discussion of
business segment results. Regional Banking, Dealer Sales, and the Private
Financial Group are the major business lines. The fourth segment includes the
impact of the Treasury function and other unallocated assets, liabilities,
revenue, and expense. Financial information for each line of business, including
a reconciliation to reported earnings, can also be found in Note 27 to the
consolidated financial statements. The chief decision-makers for Huntington rely
on operating basis earnings for review of performance and for critical
decision-making purposes and, therefore, the information below is presented on
an operating basis. During 2002, the previously reported segments, Retail
Banking and Corporate Banking, were combined and renamed Regional Banking. In
addition, changes were made in 2002 to the methodologies utilized for certain
balance sheet and income statement allocations from Huntington's management
reporting system. The prior periods have not been restated for these methodology
changes. The following tables within each segment show performance on this basis
for the most recent three years.
REGIONAL BANKING
Regional Banking provides products and services to retail, business banking, and
commercial 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 in six
43
operating regions within the five states of Ohio, Michigan, Indiana, West
Virginia, and Kentucky 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 commercial banking
relationships which use a variety of banking products and services including,
but not limited to, commercial loans, international trade, and cash management.
--------------------------------------------------------------------------------------------------------------------------
TABLE 19 - REGIONAL BANKING RESULTS
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Net interest income $ 592,977 $ 626,647 $ 656,856
Provision for loan and lease losses 141,190 96,943 36,180
Non-interest income 279,780 262,432 276,350
Non-interest expense 559,302 523,994 570,788
--------------------------------------------------------------------------------------------------------------------------
Income before taxes 172,265 268,142 326,238
Income taxes 60,293 93,850 112,549
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 111,972 $ 174,292 $ 213,689
--------------------------------------------------------------------------------------------------------------------------
Regional Banking's operating income was $112.0 million in 2002 compared to
$174.3 million for 2001 and $213.7 million for 2000. Net interest income
decreased $33.7 million, or 5%, in 2002. Regional Banking provides net funds to
Huntington's other business segments since its deposits exceed its loans and
leases and, therefore, receives an earnings credit for those excess deposits.
The declining interest rate environment resulted in lower credit for this
deposit excess and margin compression in 2002.
The provision for loan and lease losses increased $44.2 million in 2002 over
2001 versus an increase of $60.8 million in 2001 over 2000. The increases in
2002 and 2001 were indicative of the deteriorating credit quality that began
late in 2000. Provision expense reflects net charge-offs (excluding the
restructuring charges for 2001) and charges for loan and lease growth for the
period. In 2002, net charge-offs were 0.76% compared with 0.54% for 2001.
Non-interest income rose $17.3 million, or 7%, in 2002, following a $13.9
million, or 5%, decline in 2001. Service charges on deposit accounts increased
12% (personal 9% and corporate 14%) to $144.7 million. The growth in personal
service charges was primarily attributable to a new pricing structure and
deposit volume initiatives. The corporate increase was the result of customers
choosing to pay fees in lieu of maintaining balances due to lower earnings
credit paid to commercial checking customers. In addition, electronic banking
fees increased 10%. These revenue increases were partially offset by a 12%
decline in total mortgage banking income. Gross mortgage banking revenue
increased commensurate with a 22% increase in closed loans, but significant
impairment of mortgage servicing rights pushed total mortgage banking income
down in 2002. The declining rate environment during the recent twelve months
caused accelerated mortgage prepayment expectations and, therefore, recognition
of asset impairment of capitalized mortgage servicing rights and increased
amortization. Excluding mortgage banking income, non-interest income increased
11% in 2002.
Non-interest expense was $559.3 million in 2002, up $35.3 million, or 7%, when
compared to $524.0 million in 2001. Non-interest expense for 2001 was down $46.8
million, or 8%, from 2000. Personnel costs were $240.9 million, up 8%, compared
with $223.8 million in 2001. The increase reflected investment in strengthening
Regional Banking's management, business banking sales, and credit administration
teams. In addition, this segment experienced increases in performance-based
incentive compensation commensurate with production and revenue growth.
Total Regional Banking average loans and leases for 2002 increased to $12.3
billion, or 6%, over 2001. Mortgage and home equity lending represented the
majority of the growth in average earning assets. Average mortgage loans
increased 46% from $817 million in 2001 to nearly $1.2 billion in 2002. Home
equity loans and lines of credit increased 19% from $1.8 billion in 2001 to $2.1
billion in 2002. Commercial real estate loans for 2002 grew $213.6 million, or
7%, while average commercial loans were down $373.1 million, or 8%, from 2001.
Total average deposits for 2002 increased $1.1 billion, or 8%, from 2001. An
enhanced focus on relationship selling and the economic environment propelled
growth in checking and money market deposits. While demand for retail CD's
remained strong, Regional Banking protected interest margins by refraining from
paying aggressive competitive rates resulting in a 2% decline in CD balances
year-over-year. Average deposit growth excluding CD's was 15% in 2002. As noted
in the PFG line of business review that follows, Regional Banking also
experienced growth in its packaged investment product sales through the retail
channel.
44
Regional Banking contributed 38% of operating earnings in 2002 and comprised 68%
of Huntington's total loan and lease portfolio and 87% of total deposits at
December 31, 2002.
DEALER SALES
Dealer Sales serves automotive dealerships within Huntington's primary banking
markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and Tennessee.
This segment finances the purchase of automobiles by customers of the automotive
dealerships, purchases automobiles from dealers and simultaneously leases the
automobile under long-term operating and direct financing leases, finances the
dealership's inventory of automobiles, and provides other banking services to
the automotive dealerships and their owners.
--------------------------------------------------------------------------------------------------------------------------
TABLE 20 - DEALER SALES RESULTS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Net interest income $ 34,713 $ (24,339) $ (44,243)
Provision for loan and lease losses 44,573 29,655 17,098
Non-interest income 669,898 721,500 666,509
Non-interest expense 611,706 640,135 527,088
--------------------------------------------------------------------------------------------------------------------------
Income before taxes 48,332 27,371 78,080
Income taxes 16,913 9,580 27,207
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 31,419 $ 17,791 $ 50,873
==========================================================================================================================
Dealer Sales operating earnings were $31.4 million in 2002, compared to $17.8
million in 2001 and $50.9 million in 2000. Higher provision for loan and lease
losses and losses on terminated operating leases, reflecting weakened economic
conditions, higher bankruptcies, and a softer used car market, had an adverse
impact on operating performance of this segment in 2002 and 2001. Since April
2002, Huntington began booking leases for automobiles as direct financing leases
instead of operating leases.
Net interest income was $34.7 million for 2002, compared with a negative $24.3
million for 2001. Net interest income was a negative $44.2 million for 2000. Net
interest income was negative for 2001 and 2000 because the funding cost related
to Dealer Sales' operating lease assets, which are non-interest earning assets,
is included in interest expense, whereas the revenue is reported as a component
of non-interest income. The change in net interest income is primarily from
recording automobile leases as direct financing leases rather than operating
leases as had been Huntington's practice prior to May 2002. Automobile loan
balances increased $188.7 million to $3.1 billion during 2002 from $2.9 billion
in 2001. Direct financing lease balances increased $786 million to $893 million
in 2002, while operating lease inventory balances decreased $820 million to $2.3
billion. Total automobile loan and lease (direct financing and operating)
originations were $3.5 billion in 2002 compared with $3.4 billion in 2001.
The provision for loan and lease losses for 2002 increased $14.9 million from
2001 compared with an increase in 2001 of $12.6 million. The increase in
provision expense is from the creation of additional allowance for losses on
loans and leases as required by direct financing lease accounting.
Non-interest income decreased $51.6 million, or 7%, from 2001, reflecting lower
operating lease rental income. Non-interest expense decreased $28.4 million,
reflecting lower depreciation expense on lower operating lease inventory
balances.
Dealer Sales contributed 11% and 37% of 2002 operating earnings and operating
revenues, respectively.
PRIVATE FINANCIAL GROUP (PFG)
PFG provides products and services 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.
45
--------------------------------------------------------------------------------------------------------------------------
TABLE 21 - PRIVATE FINANCIAL GROUP RESULTS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Net interest income $ 35,403 $ 36,323 $ 30,502
Provision for loan and lease losses 3,477 408 1,279
Non-interest income 108,817 91,986 57,442
Non-interest expense 100,961 94,025 53,866
--------------------------------------------------------------------------------------------------------------------------
Income before taxes 39,782 33,876 32,799
Income taxes 13,924 11,857 11,343
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 25,858 $ 22,019 $ 21,456
==========================================================================================================================
PFG's operating earnings for 2002 were $25.9 million, up 17% from 2001, due
primarily to growth in non-interest income. For 2002, growth in non-interest
income was partially offset by reduced net interest income, increased provision
for loan and lease losses, and increased non-interest expense. Operating
earnings were $21.5 million for 2000.
Average loans and leases grew 36% to $895 million and average deposits grew 30%
to $807 million from 2001 to 2002. Net interest income was down 3% driven by a
shift in product mix and margin compression, particularly on consumer loans and
leases reflective of lower consumer mortgage loan rates.
Provision for loan and lease losses for 2002 increased by $3.1 million from 2001
largely reflecting higher net charge-offs. Net charge-offs were 0.20% of average
loans and leases for 2002 versus 0.09% for 2001.
Non-interest income for 2002 was $108.8 million, up 18% from 2001, resulting
primarily from increased brokerage revenue, increased trust revenue, and
increased other income. Brokerage revenue increased by $7.3 million, or 23%,
from 2001 due to increased sales of annuity products. Insurance revenue for 2002
decreased by $0.4 million, or 3%, from 2001 mostly due to decreased sales volume
from the life agency business.
In 2002, PFG restructured its sales/distribution force to eliminate the use of
separate insurance sales personnel to sell insurance products through the retail
branch offices and to utilize the more established brokerage sales force for
retail insurance sales. Although sales volume decreased during this transition
year as the new model was being implemented, significant expense savings
resulted as well. Trust revenue for 2002 increased by $4.0 million, or 7%, from
2001 largely due to the acquisition of Haberer in April 2002. Increased revenue
from investment advisory and other services provided to the Huntington Funds was
also a major source of the increase in trust revenue. During 2001, PFG
introduced five new equity funds. These funds grew to over $200 million in
assets by the end of 2002. Other income for 2002 increased by $5.6 million from
2001 primarily because of the $4.2 million charge in 2001 for the impairment
loss related to the Pacific Gas & Electric commercial paper held by the
Huntington Money Market Fund.
Non-interest expense for 2002 increased $6.9 million, or 7%, from 2001 driven by
the Haberer operating expenses combined with increased sales commissions and
salary expense. Sales commissions increased $1.7 million as a result of the
increase in non-interest income.
PFG contributed 9% of operating earnings in 2002 and 7% of total revenues in
2002.
TREASURY / OTHER
The Treasury / Other 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.
46
---------------------------------------------------------------------------------------------------------------------------
TABLE 22 - TREASURY / OTHER RESULTS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 118,334 $ 25,962 $ (29,712)
Provision for loan and lease losses --- --- ---
Non-interest income 63,050 61,677 81,759
Non-interest expense 40,325 75,598 26,132
---------------------------------------------------------------------------------------------------------------------------
Income before taxes 141,059 12,041 25,915
Income taxes 11,947 (31,003) (18,357)
---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 129,112 $ 43,044 $ 44,272
===========================================================================================================================
Treasury / Other reported operating income of $129.1 million in 2002, up
significantly from the two preceding years. This primarily reflected the
reduction in transfer pricing credits allocated to Regional Banking for its
deposits, the maturity in late 2001 of $2 billion of interest rate swaps that
had significant negative spreads, and the benefit of lower short-term interest
rates, particularly with the steeper yield curve.
Non-interest income for 2002 was $63.1 million compared with $61.7 million for
2001 reflecting the higher gains from securities transactions in the current
year, increased Bank owned life insurance income, and revenue from trading
activities. Non-interest expense for 2002 declined $35.3 million from 2001. This
reflected a decline in the amortization of intangibles arising from the
implementation of FASB Statement No. 142 and lower unallocated personnel costs
offset by higher unallocated outside services and processing, equipment and
occupancy, and telecommunication expenses.
Income tax expense for each of the other business segments is calculated at a
statutory 35% tax rate. However, Huntington's overall effective tax rate is
lower and, as a result, Treasury / Other reflects the reconciling items to the
statutory tax rate in its Income taxes.
47
RESULTS FOR THE FOURTH QUARTER
Table 23 presents Huntington's results of operations for the recent eight
quarters and Table 24 presents selected stock, performance ratios, and capital
data for the same periods.
Fourth quarter 2002 earnings were $74.4 million, or $0.32 per common share. This
compared with earnings of $56.9 million, or $0.23 per common share, in the
year-ago fourth quarter, or earnings of $70.8 million, or $0.28 per common share
excluding the impact associated with Huntington's strategic restructuring plan
and the sold Florida banking and insurance operations. On this same comparative
basis, 2002 fourth quarter earnings and earnings per common share were up 5% and
14%, respectively.
Fully taxable equivalent net interest income for 2002 fourth quarter was up
$14.5 million from the year-ago quarter, or up $34.2 million, or 19%, excluding
the impact of the sold Florida banking operations. This reflected a combination
of a 16% increase in average earning assets, and a 10 basis point, or an
effective 3%, increase in the net interest margin to 3.83% from 3.73%.
The 16% increase in average earning assets from a year ago reflected a 16%
increase in average loans and leases and a 15% increase in average securities.
The growth in loans and leases was driven by a 36% increase in average consumer
loans, including a 15% increase in home equity loans and lines, a more than
doubling of residential mortgages, and a 44% increase in automobile loans and
leases. Automobile leases started to be recorded in the 2002 second quarter as
direct financing leases, which averaged $776 million in the 2002 fourth
quarter. Automobile loans were up 2% from the year-ago fourth quarter. Total
average commercial loans were down 3%, though average commercial real estate
loans were up 11% from the year-ago quarter.
Non-interest income was $271.6 million, down $41.9 million, or 13%, from the
year-ago quarter. Excluding from the year-ago quarter the impact of Huntington's
strategic restructuring plan, as well as the impact of the sold Florida banking
and insurance operations, non-interest income was down $23.2 million, or 8%,
from a year earlier. Primarily contributing to this $23.2 million year-over-year
decrease were a $36.9 million, or 21%, decrease in operating lease income and a
$3.6 million, or 24%, decrease in mortgage banking income (primarily due to a
mortgage servicing rights impairment recorded in the fourth quarter of 2002).
This was partially offset by a 17% increase in deposit service charges, a 9%
increase in brokerage and insurance income, a 20% increase in bank owned life
insurance income, a 14% increase in other service charges, primarily electronic
banking fees, and a 26% increase in other income.
Non-interest expense was $331.5 million in the 2002 fourth quarter, down $53.1
million from the year-ago quarter, but up $2.0 million, or 1%, after excluding
from that quarter $15.1 million in restructuring charges, as well as the
expenses related to the sold Florida banking and insurance operations. This $2.0
million increase was primarily due to a $19.8 million, or 14%, decrease in
operating lease expense, partially offset by a $13.8 million, or 14%, increase
in personnel cost. Contributing equally to the increase in personnel costs were
salary expense, incentive compensation, and benefit costs. The increased salary
expense reflected higher staffing levels associated with the expansion of
management and employee talent at all levels, including the credit workout area.
Higher sales commissions were reflected across all lines of business. Higher
fourth quarter medical and pension costs were somewhat offset by gains related
to stock received from the demutualization of certain insurance companies where
Huntington owned related insurance policies. Outside data processing and other
services was up $1.8 million, or 12%, and professional services increased $2.0
million, or 32%. Net occupancy expense decreased $1.8 million, or 12%, while the
amortization of intangible expense declined $2.4 million due the implementation
of FASB Statement No. 142 at the beginning of 2002. The fourth quarter 2002
efficiency ratio decreased to 68.8%, from 69.2% in the year-ago quarter on an
adjusted basis.
Net charge-offs for the 2002 fourth quarter were $83.2 million, or an annualized
1.82%, including $51.3 million in charge-offs associated with the fourth quarter
special credit actions. Excluding these charge-offs, net charge-offs were $31.9
million, or 0.70%, of average loans and leases (annualized). Loan and lease loss
provision expense in the fourth quarter was $51.2 million, up $4.2 million from
the year-ago quarter after excluding from that quarter an additional $50.0
million charge to the provision, as well as $4.0 million related to the sold
Florida banking operations.
ROE and ROA were 13.2% and 1.10%, respectively, for the 2002 fourth quarter,
compared to 11.8% and 1.14%, respectively, for the year-ago quarter, excluding
the impact resulting from the strategic restructuring and sale of the Florida
banking and insurance operations.
48
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 23 - SELECTED QUARTERLY INCOME STATEMENTS
-----------------------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) FOURTH THIRD SECOND FIRST
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $210,255 $205,484 $ 190,981 $ 184,431
Provision for loan and lease losses 51,236 54,304 49,876 39,010
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 159,019 151,180 141,105 145,421
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease income 143,465 154,367 168,047 175,906
Service charges on deposit accounts 41,177 37,460 35,354 38,530
Brokerage and insurance income 16,431 13,943 17,677 18,792
Trust services 15,306 14,997 16,247 15,501
Bank Owned Life Insurance income 11,443 11,443 11,443 11,676
Mortgage banking 11,410 6,289 10,725 19,565
Other service charges and fees 10,890 10,837 10,529 10,632
Gain on sale of Florida operations --- --- --- 175,344
Merchant Services gain --- 24,550 --- ---
Securities gains (losses) 2,339 1,140 966 457
Other 19,130 21,044 17,033 12,697
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 271,591 296,070 288,021 479,100
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease expense 120,747 125,743 131,695 140,785
Personnel costs 113,852 107,477 105,146 114,285
Equipment 17,337 17,378 16,659 16,949
Outside data processing and other services 17,209 15,128 16,592 18,439
Net occupancy 13,454 14,815 14,756 17,239
Professional services 8,026 6,083 6,267 5,401
Marketing 6,186 7,491 7,231 7,003
Telecommunications 5,714 5,609 5,320 6,018
Printing and supplies 3,999 3,679 3,683 3,837
Franchise and other taxes 2,532 2,283 2,313 2,328
Amortization of intangible assets 204 204 235 1,376
Restructuring charges --- --- --- 56,184
Other 22,269 16,563 18,135 16,830
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 331,529 322,453 328,032 406,674
-----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 99,081 124,797 101,094 217,847
Income taxes 24,687 33,193 27,169 124,706
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 74,394 $ 91,604 $ 73,925 $ 93,141
===================================================================================================================================
NET INCOME PER COMMON SHARE -- DILUTED $0.32 $0.38 $0.30 $0.37
CASH DIVIDENDS DECLARED PER COMMON SHARE $0.16 $0.16 $0.16 $0.16
REVENUE - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $210,255 $205,484 $ 190,981 $ 184,431
Tax Equivalent Adjustment (2) 1,869 1,096 1,071 1,169
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME - FTE $212,124 $206,580 $ 192,052 $ 185,600
===================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------
TABLE 23 - SELECTED QUARTERLY INCOME STATEMENTS
------------------------------------------------------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) Fourth Third Second First
------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 196,294 $ 186,866 $ 185,080 $ 178,626
Provision for loan and lease losses 101,075 34,053 99,444 22,754
------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 95,219 152,813 85,636 155,872
------------------------------------------------------------------------------------------------------------------------------
Operating lease income 180,382 183,642 176,418 159,415
Service charges on deposit accounts 42,753 41,719 40,673 38,907
Brokerage and insurance income 20,966 19,912 19,388 18,768
Trust services 15,321 15,485 15,178 14,314
Bank Owned Life Insurance income 9,560 9,560 9,561 9,560
Mortgage banking 15,768 14,616 18,733 10,031
Other service charges and fees 12,552 12,350 12,217 11,098
Gain on sale of Florida operations --- --- --- ---
Merchant Services gain --- --- --- ---
Securities gains (losses) 89 1,059 (2,503) 2,078
Other 16,088 15,755 14,956 12,968
------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 313,479 314,098 304,621 277,139
------------------------------------------------------------------------------------------------------------------------------
Operating lease expense 140,575 138,538 158,437 121,076
Personnel costs 118,143 120,767 122,068 117,662
Equipment 20,593 20,151 19,844 19,972
Outside data processing and other services 17,992 17,375 17,671 16,654
Net occupancy 19,950 19,266 18,188 19,780
Professional services 6,235 5,912 6,763 4,969
Marketing 6,345 6,921 7,852 9,939
Telecommunications 6,793 6,859 7,207 7,125
Printing and supplies 4,293 4,450 4,565 5,059
Franchise and other taxes 2,893 2,470 2,246 2,120
Amortization of intangible assets 10,100 10,114 10,435 10,576
Restructuring charges 15,143 50,817 13,997 ---
Other 15,580 25,145 6,384 32,587
------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 384,635 428,785 395,657 367,519
------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 24,063 38,126 (5,400) 65,492
Income taxes (32,810)(1) 3,850 (9,825) 15,697
------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 56,873 $ 34,276 $ 4,425 $ 49,795
==============================================================================================================================
NET INCOME PER COMMON SHARE -- DILUTED $0.23 $0.14 $0.02 $0.20
CASH DIVIDENDS DECLARED PER COMMON SHARE $0.16 $0.16 $0.20 $0.20
REVENUE - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 196,294 $ 186,866 $ 185,080 $ 178,626
Tax Equivalent Adjustment (2) 1,292 1,442 1,616 2,002
------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME - FTE $ 197,586 $ 188,308 $ 186,696 $ 180,628
==============================================================================================================================
(1) Reflects a $32.5 million reduction related to the issuance of $400 million
of REIT subsidiary preferred stock, of which $50 million was sold to the
public.
(2) Calculated assuming a 35% tax rate.
49
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 24 - QUARTERLY STOCK SUMMARY, KEY RATIOS AND STATISTICS, AND CAPITAL DATA
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY COMMON STOCK SUMMARY
-----------------------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) FOURTH THIRD SECOND FIRST
-----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK PRICE
High $ 19.980 $ 20.430 $ 21.770 $ 20.310
Low 16.160 16.000 18.590 16.660
Close 18.710 18.190 19.420 19.700
Average daily closing price 18.769 19.142 20.089 18.332
DIVIDENDS
Cash dividends declared on common stock $ 0.16 $ 0.16 $ 0.16 $ 0.16
COMMON SHARES OUTSTANDING
Average -- Basic 233,581 239,925 246,106 250,749
Average -- Diluted 235,083 241,357 247,867 251,953
Ending 232,879 237,544 242,920 249,992
COMMON SHARE REPURCHASE PROGRAM
Authorized under repurchase program 22,000
Number of shares repurchased 4,110 6,262 7,329 1,458
-----------------------------------------------------------------------------------------------------------------------------------
Remaining shares authorized to repurchase (1) 2,841 6,951 13,213 20,542
===================================================================================================================================
Note: Intra-day and closing stock price quotations were obtained from NASDAQ.
----------------------------------------------------------------------------------------------------------------------------------
TABLE 24 - QUARTERLY STOCK SUMMARY, KEY RATIOS AND STATISTICS, AND CAPITAL DATA
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY COMMON STOCK SUMMARY
----------------------------------------------------------------------------------------------------------------------------------
2001
----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) Fourth Third Second First
----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK PRICE
High $ 17.490 $ 19.280 $ 17.000 $ 18.000
Low 14.510 15.150 13.875 12.625
Close 17.190 17.310 16.375 14.250
Average daily closing price 16.269 17.696 14.936 15.258
DIVIDENDS
Cash dividends declared on common stock $ 0.16 $ 0.16 $ 0.20 $ 0.20
COMMON SHARES OUTSTANDING
Average -- Basic 251,193 251,148 251,024 250,998
Average -- Diluted 251,858 252,203 251,448 251,510
Ending 251,194 251,193 251,057 251,002
Note: Intra-day and closing stock price quotations were obtained from NASDAQ.
-----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY KEY RATIOS AND STATISTICS
-----------------------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
-----------------------------------------------------------------------------------------------------------------------------------
MARGIN ANALYSIS - AS A %
OF AVERAGE EARNING ASSETS (2)
Interest income 6.19% 6.54% 6.60% 6.58%
Interest expense 2.36% 2.56% 2.69% 2.95%
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.83% 3.98% 3.91% 3.63%
-----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.10% 1.41% 1.19% 1.42%
Return on average shareholders' equity 13.2% 15.9% 12.6% 15.8%
-----------------------------------------------------------------------------------------------------------------------------------
CAPITAL DATA - END OF PERIOD
-----------------------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) FOURTH THIRD SECOND FIRST
-----------------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Assets $ 27,215 $ 26,341 $ 25,317 $ 24,974
Tier 1 Risk-Based Capital Ratio 8.65% 9.13% 9.74% 10.30%
Total Risk-Based Capital Ratio 11.54% 12.09% 12.76% 13.43%
Tier 1 Leverage Ratio 8.85% 9.41% 9.95% 9.76%
Tangible Equity / Asset Ratio 7.58% 7.99% 8.52% 9.11%
-----------------------------------------------------------------------------------------------------------------------------------
(1) A new repurchase program for 8 million shares was authorized in January
2003, canceling the remaining shares under this authorization.
(2) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY KEY RATIOS AND STATISTICS
----------------------------------------------------------------------------------------------------------------------------------
2001
-----------------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
-----------------------------------------------------------------------------------------------------------------------------------
Margin Analysis - As a %
of Average Earning Assets (2)
Interest income 7.06% 7.65% 7.95% 8.37%
Interest expense 3.44% 4.18% 4.56% 5.06%
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 3.62% 3.47% 3.39% 3.31%
-----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 0.81% 0.49% 0.06% 0.71%
Return on average shareholders' equity 9.5% 5.7% 0.7% 8.3%
-----------------------------------------------------------------------------------------------------------------------------------
CAPITAL DATA - END OF PERIOD
-----------------------------------------------------------------------------------------------------------------------------------
2001
----------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) FOURTH THIRD SECOND FIRST
----------------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Assets $ 27,926 $ 27,781 $ 27,393 $ 27,238
Tier 1 Risk-Based Capital Ratio 7.30% 7.06% 7.13% 7.30%
Total Risk-Based Capital Ratio 10.34% 10.11% 10.22% 10.29%
Tier 1 Leverage Ratio 7.46% 7.18% 7.07% 7.22%
Tangible Equity / Asset Ratio 6.17% 6.08% 5.94% 5.99%
----------------------------------------------------------------------------------------------------------------------------------
(1) A new repurchase program for 8 million shares was authorized in January
2003, canceling the remaining shares under this authorization.
(2) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
50
OPERATING BASIS - PRESENTATION AND RECONCILIATION TO REPORTED GAAP RESULTS
Results from the 2001 second quarter through the third quarter of 2002 were
significantly impacted by the strategic restructuring announced in July 2001,
the subsequent sale of the Florida banking and insurance operations in 2002, as
well as other items. These items are explained in the section entitled
Restructuring and Other Items that follows.
For analytical purposes in understanding performance trends and for decision
making, management reviews and analyzes certain data, including Line of Business
performance, on an "operating basis", which excludes the impact of these items
and the operating results of the Florida operations sold as summarized and
presented in Tables 25 through 28. The specific tables included in this section
that reconcile reported, or GAAP, financial results to operating results
include:
- Table 25 - Reconciliation of Reported Earnings to Operating Earnings
(2002, 2001 and 2000),
- Table 26 - Annual Income Statements, Selected Balance Sheet and
Financial Data (2002, 2001 and 2000),
- Table 27 - Consolidated Average Balance Sheets and Net Interest
Margin Analysis (2002, 2001 and 2000), and
- Table 28 - Selected Quarterly Income Statements - Reconciliation of
Reported to Operating Basis (2002 and 2001).
OPERATING BASIS SUMMARY REVIEW OF PERFORMANCE
Earnings on an operating basis for 2002 were $298.4 million, or $1.22 per common
share, compared with $257.1 million, or $1.02 per common share in 2001, and
$330.3 million, or $1.32 per common share in 2000. On this same basis, ROE and
ROA for 2002 were 12.9% and 1.17%, respectively, compared with 10.6% and 1.03%,
respectively, for 2001, and 14.2% and 1.29%, respectively, in 2000.
RESTRUCTURING AND OTHER ITEMS
In July 2001, Huntington announced a strategic refocusing plan (the Plan). Key
components of the Plan included the sale of banking and insurance operations in
Florida, the consolidation of numerous non-Florida branch offices, as well as
credit-related and other actions to strengthen its financial performance
including the use of some of the excess capital to repurchase outstanding common
shares.
2002
The sale of the Florida banking operations to SunTrust Banks, Inc., which closed
February 15, 2002, 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. Huntington's Florida insurance operation, the
Orlando-based J. Rolfe Davis Insurance Agency, Inc. (JRD), was sold on July 2,
2002 to members of its management team. The JRD sale did not materially affect
Huntington's 2002 financial results and is not expected to materially affect
Huntington's future financial results. Huntington remains committed to growing
its other insurance business in markets served by its retail and commercial
banking operations. A pre-tax gain of $175.3 million ($56.7 million after-tax,
or $0.23 per share) on the sale of the Florida banking operations was recorded
in 2002 and was included in non-interest income in Tables 25 and 26. Huntington
recorded $56.2 million of pre-tax restructuring charges ($36.5 million
after-tax, or $0.14 per share) related to the Plan in 2002, which was reflected
in non-interest expense. Combined with amounts recorded in 2001, pre-tax
restructuring charges related to the Plan totaled $206.6 million ($134.3 million
after-tax, or $0.54 per share).
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 services business and increased its equity interest in HMS. This
transaction resulted in a $24.5 million pre-tax gain ($16.0 million after tax,
or $0.07 per share) in non-interest income. Huntington remains a nominal equity
owner in HMS.
2001
In 2001, the provision for loan and lease losses included credit quality charges
related to the Plan of $65.2 million in addition to $50.0 million to increase
Huntington's allowance for loan and lease losses in light of the higher
charge-offs and non-performing assets experienced in the second half of 2001.
Included in the 2001 securities gains in Tables 25 and 26 was a $5.3 million
loss realized from the sale of $15 million of Pacific Gas & Electric commercial
paper acquired from the Huntington Money Market Fund. Restructuring charges
related to the Plan totaled $80.0 million ($52.0 million after-tax, or $0.21 per
share) and consisted of $12.1 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 had vacated, and $38.4 million
related to employee severance or retention, legal, accounting, consulting,
reduction of ATMs, and other operational costs. In addition, in the fourth
quarter there was a reduction in income taxes resulting form the issuance of
REIT subsidiary preferred securities, of which $50 million was sold to the
public.
51
Tables 25, 26, and 27 reconcile Huntington's reported results with its operating
earnings for each of the most recent three years. Table 28 reconciles reported
quarterly results with its operating earnings for the two most recent years.
The presentation of the Florida operations in Table 25 differs from the
disclosure presented in Note 4 to the consolidated financial statements because
Note 4 reflects only the after-tax restructuring charges for 2002 related to the
Florida operations, which totaled $21.3 million ($32.7 million pre-tax). Because
the disclosure in Note 5 was intended only to show the pro forma impact without
the Florida operations, non-Florida related after-tax restructuring charges of
$15.2 million ($23.5 million pre-tax) as well as the Merchant Services
restructuring gain are included in the 2002 pro forma results (unaudited)
presented in Note 5 but are excluded from operating earnings as presented in
Table 26.
52
---------------------------------------------------------------------------------------------------------------------------
TABLE 25 - RECONCILIATION OF REPORTED EARNINGS TO OPERATING EARNINGS
---------------------------------------------------------------------------------------------------------------------------
GAIN ON SALE OF
FLORIDA OPERATIONS/
RESTRUCTURING
REPORTED AND OTHER FLORIDA OPERATING
(in thousands of dollars, except per share amounts) EARNINGS ITEMS OPERATIONS EARNINGS
---------------------------------------------------------------------------------------------------------------------------
2002
NET INTEREST INCOME $791,151 $ --- $ 9,724 $ 781,427
PROVISION FOR LOAN AND LEASE LOSSES 194,426 --- 5,186 189,240
SECURITIES GAINS 4,902 --- --- 4,902
NON-INTEREST INCOME 1,129,986 --- 13,343 1,116,643
GAIN ON SALE OF FLORIDA OPERATIONS 175,344 175,344 --- ---
MERCHANT SERVICES GAIN 24,550 24,550 --- ---
NON-INTEREST EXPENSE 1,332,504 --- 20,210 1,312,294
RESTRUCTURING CHARGES 56,184 56,184 --- ---
---------------------------------------------------------------------------------------------------------------------------
PRE-TAX INCOME 542,819 143,710 (2,329) 401,438
INCOME TAXES 209,755 107,482 (804) 103,077
---------------------------------------------------------------------------------------------------------------------------
NET INCOME $333,064 $ 36,228 $ (1,525) $ 298,361
===========================================================================================================================
NET INCOME PER COMMON SHARE -- DILUTED $ 1.36 $ 0.15 $ (0.01) $ 1.22
===========================================================================================================================
2001
Net interest income $ 746,866 $ --- $ 82,273 $ 664,593
Provision for loan and lease losses 257,326 115,199 15,121 127,006
Securities gains (losses) 723 (5,250) --- 5,973
Non-interest income 1,208,614 --- 76,992 1,131,622
Non-interest expense 1,496,639 --- 162,887 1,333,752
Restructuring charges 79,957 79,957 --- ---
---------------------------------------------------------------------------------------------------------------------------
Pre-tax income 122,281 (200,406) (18,743) 341,430
Income taxes (23,088) (102,642) (4,730) 84,284
---------------------------------------------------------------------------------------------------------------------------
Net income $ 145,369 $ (97,764) $ (14,013) $ 257,146
===========================================================================================================================
Net income per common share -- diluted $ 0.58 $ (0.39) $ (0.05) $ 1.02
===========================================================================================================================
2000
Net interest income $ 706,049 $ --- $ 92,646 $ 613,403
Provision for loan and lease losses 61,464 --- 6,907 54,557
Securities gains 37,101 --- --- 37,101
Non-interest income 1,091,701 --- 46,742 1,044,959
Non-interest expense 1,306,954 --- 129,080 1,177,874
Restructuring charges --- --- --- ---
---------------------------------------------------------------------------------------------------------------------------
Pre-tax income 466,433 --- 3,401 463,032
Income taxes 133,736 --- 994 132,742
---------------------------------------------------------------------------------------------------------------------------
Net income $ 332,697 $ --- $ 2,407 $ 330,290
===========================================================================================================================
Net income per common share -- diluted $ 1.33 --- $ 0.01 $ 1.32
===========================================================================================================================
53
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 26 - ANNUAL INCOME STATEMENTS, SELECTED BALANCE SHEET AND FINANCIAL DATA
- RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2002 2001
------------------------------------------- -----------------------------------------
---------------------------------------------------------------------------------------- -----------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
--------------------------------------------------------------------------------------- -----------------------------------------
NET INTEREST INCOME $ 791,151 $ (9,724) $ 781,427 $ 746,866 $ (82,273) $ 664,593
Provision for loan and lease losses 194,426 (5,186) 189,240 257,326 (130,320) 127,006
--------------------------------------------------------------------------------------- -----------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 596,725 (4,538) 592,187 489,540 48,047 537,587
--------------------------------------------------------------------------------------- -----------------------------------------
Operating lease income 641,785 --- 641,785 699,857 --- 699,857
Service charges on deposit accounts 152,521 (4,248) 148,273 164,052 (31,446) 132,606
Brokerage and insurance income 66,843 (6,915) 59,928 79,034 (24,608) 54,426
Trust services 62,051 (405) 61,646 60,298 (2,702) 57,596
Mortgage banking 47,989 79 48,068 59,148 (3,330) 55,818
Bank owned life insurance 46,005 --- 46,005 38,241 --- 38,241
Other service charges and fees 42,888 (1,514) 41,374 48,217 (11,290) 36,927
Gain on sale of Florida operations 175,344 (175,344) --- --- --- ---
Merchant Services gain 24,550 (24,550) --- --- --- ---
Securities gains 4,902 --- 4,902 723 5,250 5,973
Other 69,904 (340) 69,564 59,767 (3,616) 56,151
--------------------------------------------------------------------------------------- -----------------------------------------
TOTAL NON-INTEREST INCOME 1,334,782 (213,237) 1,121,545 1,209,337 (71,742) 1,137,595
--------------------------------------------------------------------------------------- -----------------------------------------
Operating lease expense 518,970 --- 518,970 558,626 --- 558,626
Personnel costs 440,760 (11,522) 429,238 478,640 (73,695) 404,945
Equipment 68,323 (1,418) 66,905 80,560 (9,997) 70,563
Outside data processing and other services 67,368 (1,342) 66,026 69,692 (10,406) 59,286
Net occupancy 60,264 (2,582) 57,682 77,184 (18,129) 59,055
Marketing 27,911 159 28,070 31,057 (4,396) 26,661
Professional services 25,777 (161) 25,616 23,879 (782) 23,097
Telecommunications 22,661 (754) 21,907 27,984 (4,693) 23,291
Printing and supplies 15,198 (330) 14,868 18,367 (3,377) 14,990
Franchise and other taxes 9,456 (2) 9,454 9,729 (60) 9,669
Amortization of intangible assets 2,019 (1,157) 862 41,225 (30,180) 11,045
Restructuring charges 56,184 (56,184) --- 79,957 (79,957) ---
Other 73,797 (1,101) 72,696 79,696 (7,172) 72,524
--------------------------------------------------------------------------------------- -----------------------------------------
TOTAL NON-INTEREST EXPENSE 1,388,688 (76,394) 1,312,294 1,576,596 (242,844) 1,333,752
--------------------------------------------------------------------------------------- -----------------------------------------
INCOME BEFORE INCOME TAXES 542,819 (141,381) 401,438 122,281 219,149 341,430
Income taxes 209,755 (106,678) 103,077 (23,088) 107,372 84,284
--------------------------------------------------------------------------------------- -----------------------------------------
NET INCOME $ 333,064 $ (34,703) $ 298,361 $ 145,369 $ 111,777 $ 257,146
======================================================================================= =========================================
PER COMMON SHARE (2)
Net income - basic $1.37 ($0.15) 1.22 $0.58 $0.44 $1.02
Net income - diluted 1.36 (0.14) 1.22 0.58 0.44 1.02
Cash dividends declared 0.64 0.00 0.64 0.72 0.00 0.72
NET INTEREST INCOME (FTE)
Net Interest Income $ 791,151 $ (9,724) 781,427 $ 746,866 $ (82,273) $ 664,593
Tax Equivalent Adjustment (3) 5,205 --- 5,205 6,352 --- 6,352
--------------------------------------------------------------------------------------- -----------------------------------------
Net Interest Income (FTE) 796,356 (9,724) 786,632 753,218 (82,273) 670,945
Non-Interest Income 1,334,782 (213,237) 1,121,545 1,209,337 (71,742) 1,137,595
--------------------------------------------------------------------------------------- -----------------------------------------
TOTAL REVENUE (FTE) $2,131,138 $(222,961) 1,908,177 $1,962,555 $(154,015) $1,808,540
======================================================================================= =========================================
KEY RATIOS AND STATISTICS
Return on average assets 1.28% (0.11)% 1.17% 0.52% 0.51% 1.03%
Return on average shareholders' equity 14.4 (1.5) 12.9 6.0 4.6 10.6
Net interest margin (FTE) 3.81 0.02 3.83 3.43 0.03 3.46
Efficiency ratio (4) 69.1 (0.2) 68.9 74.2 (0.8) 73.4
Effective tax rate 38.6 (12.9) 25.7 (18.9) 43.6 24.7
(1) See page 51 for definition of adjustments.
(2) 2000 adjusted for the stock dividend paid July 2000.
(3) Calculated assuming a 35% tax rate.
(4) Calculated on revenue, excluding gains, and expenses excluding
amortization of intangible assets and restructuring charges.
54
--------------------------------------------------------------------------------------------------------------------------
TABLE 26 - ANNUAL INCOME STATEMENTS, SELECTED BALANCE SHEET AND FINANCIAL DATA
- RECONCILIATION OF REPORTED TO OPERATING BASIS
--------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000
------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating
--------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 706,049 $ (92,646) $ 613,403
Provision for loan and lease losses 61,464 (6,907) 54,557
--------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 644,585 (85,739) 558,846
--------------------------------------------------------------------------------------------------------------------------
Operating lease income 635,243 --- 635,243
Service charges on deposit accounts 160,727 (30,976) 129,751
Brokerage and insurance income 61,871 (115) 61,756
Trust services 53,613 (2,719) 50,894
Mortgage banking 38,025 --- 38,025
Bank owned life insurance 39,544 --- 39,544
Other service charges and fees 43,883 (10,900) 32,983
Gain on sale of Florida operations --- --- ---
Merchant Services gain --- --- ---
Securities gains 37,101 --- 37,101
Other 58,795 (2,032) 56,763
--------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,128,802 (46,742) 1,082,060
--------------------------------------------------------------------------------------------------------------------------
Operating lease expense 494,800 --- 494,800
Personnel costs 421,750 (51,825) 369,925
Equipment 78,069 (7,345) 70,724
Outside data processing and other services 62,011 (4,788) 57,223
Net occupancy 75,882 (17,333) 58,549
Marketing 34,884 (1,683) 33,201
Professional services 20,819 (530) 20,289
Telecommunications 26,225 (3,091) 23,134
Printing and supplies 19,634 (3,387) 16,247
Franchise and other taxes 11,077 (61) 11,016
Amortization of intangible assets 39,207 (29,256) 9,951
Restructuring charges --- --- ---
Other 22,596 (9,781) 12,815
--------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 1,306,954 (129,080) 1,177,874
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 466,433 (3,401) 463,032
Income taxes 133,736 (994) 132,742
--------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 332,697 $ (2,407) $ 330,290
==========================================================================================================================
PER COMMON SHARE (2)
Net income - basic $1.34 ($0.01) $1.33
Net income - diluted 1.33 (0.01) 1.32
Cash dividends declared 0.76 0.00 0.76
NET INTEREST INCOME (FTE)
Net Interest Income $ 706,049 $ (92,646) $ 613,403
Tax Equivalent Adjustment (3) 8,310 --- 8,310
--------------------------------------------------------------------------------------------------------------------------
Net Interest Income (FTE) 714,359 (92,646) 621,713
Non-Interest Income 1,128,802 (46,742) 1,082,060
--------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE (FTE) $1,843,161 $(139,388) $1,703,773
==========================================================================================================================
KEY RATIOS AND STATISTICS
Return on average assets 1.16 % 0.13 % 1.29 %
Return on average shareholders' equity 14.3 (0.1) 14.2
Net interest margin (FTE) 3.15 (0.08) 3.07
Efficiency ratio (4) 69.8 (0.2) 69.6
Effective tax rate 28.7 0.0 28.7
(1) See page 51 for definition of adjustments.
(2) 2000 adjusted for the stock dividend paid July 2000.
(3) Calculated assuming a 35% tax rate.
(4) Calculated on revenue, excluding gains, and expenses excluding
amortization of intangible assets and restructuring charges.
55
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE
--------------------------------------
2002
------------------------------------
(in millions of dollars)
------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 33 $ --- $ 33
Trading account securities 7 --- 7
Federal funds sold and securities purchased
under resale agreements 72 --- 72
Mortgages held for sale 322 --- 322
Securities: (3) ---
Taxable 2,859 --- 2,859
Tax exempt 135 --- 135
------------------------------------------------------------------------------------------------------------
Total Securities 2,994 --- 2,994
------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 5,676 94 5,582
Real estate
Construction (4) 1,217 13 1,204
Commercial 2,379 41 2,338
Consumer
Automobile loans and leases 3,233 42 3,191
Home equity 3,087 104 2,983
Residential mortgage (4) 1,444 29 1,415
Other loans 425 15 410
------------------------------------------------------------------------------------------------------------
Total consumer 8,189 190 7,999
------------------------------------------------------------------------------------------------------------
Total loans and leases 17,461 338 17,123
------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 374 2 372
------------------------------------------------------------------------------------------------------------
Net loans and leases 17,087 336 16,751
------------------------------------------------------------------------------------------------------------
Total earning assets/interest income/average rates 20,889 338 20,551
------------------------------------------------------------------------------------------------------------
Operating lease assets 2,662 --- 2,662
Cash and due from banks 757 12 745
Intangible assets 293 86 207
All other assets 1,813 3 1,810
------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $26,040 $ 437 $25,603
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 2,902 $ 75 $ 2,827
Interest bearing demand deposits 5,161 193 4,968
Savings deposits 2,853 66 2,787
Other domestic time deposits 4,349 228 4,121
------------------------------------------------------------------------------------------------------------
Total core deposits 15,265 562 14,703
------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 851 21 830
Brokered time deposits and negotiable CDs 731 --- 731
Foreign time deposits 337 --- 337
------------------------------------------------------------------------------------------------------------
Total deposits 17,184 583 16,601
------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,128 18 2,110
Medium-term notes 1,865 (167) 2,032
Federal Home Loan Bank advances 279 --- 279
Subordinated notes and other long-term debt,
including preferred capital securities 1,198 --- 1,198
------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rate 19,752 359 19,393
------------------------------------------------------------------------------------------------------------
All other liabilities 1,077 3 1,074
Shareholders' equity 2,309 --- 2,309
------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,040 $ 437 $25,603
============================================================================================================
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate -
Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
Average Balance
-------------------------------------
2001
-------------------------------------
(in millions of dollars)
--------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
--------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 7 $ --- $ 7
Trading account securities 25 --- 25
Federal funds sold and securities purchased
under resale agreements 107 --- 107
Mortgages held for sale 360 --- 360
Securities: (3) ---
Taxable 3,144 --- 3,144
Tax exempt 174 --- 174
--------------------------------------------------------------------------------------------------------------
Total Securities 3,318 --- 3,318
--------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 6,647 747 5,900
Real estate
Construction (4) 1,221 109 1,112
Commercial 2,340 306 2,034
Consumer
Automobile loans and leases 2,867 325 2,542
Home equity 3,399 713 2,686
Residential mortgage (4) 1,052 239 813
Other loans 589 114 475
--------------------------------------------------------------------------------------------------------------
Total consumer 7,907 1,391 6,516
--------------------------------------------------------------------------------------------------------------
Total loans and leases 18,115 2,553 15,562
--------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 306 34 272
--------------------------------------------------------------------------------------------------------------
Net loans and leases 17,809 2,519 15,290
--------------------------------------------------------------------------------------------------------------
Total earning assets/interest income/average rates 21,932 2,553 19,379
--------------------------------------------------------------------------------------------------------------
Operating lease assets 3,031 --- 3,031
Cash and due from banks 912 81 831
Intangible assets 736 540 196
All other assets 1,879 73 1,806
--------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $28,184 $ 3,213 $24,971
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 3,304 $ 581 $ 2,723
Interest bearing demand deposits 5,005 1,386 3,619
Savings deposits 3,478 552 2,926
Other domestic time deposits 5,883 1,813 4,070
--------------------------------------------------------------------------------------------------------------
Total core deposits 17,670 4,332 13,338
--------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 1,280 209 1,071
Brokered time deposits and negotiable CDs 128 --- 128
Foreign time deposits 283 6 277
--------------------------------------------------------------------------------------------------------------
Total deposits 19,361 4,547 14,814
--------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,325 137 2,188
Medium-term notes 2,024 (1,471) 3,495
Federal Home Loan Bank advances 19 --- 19
Subordinated notes and other long-term debt,
including preferred capital securities 1,161 --- 1,161
--------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rate 21,586 2,632 18,954
--------------------------------------------------------------------------------------------------------------
All other liabilities 879 --- 879
Shareholders' equity 2,415 --- 2,415
--------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,184 $ 3,213 $24,971
==============================================================================================================
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate -
Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
Average Balance
------------------------------------
2000
------------------------------------
(in millions of dollars)
----------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
----------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 6 $ --- $ 6
Trading account securities 15 --- 15
Federal funds sold and securities purchased
under resale agreements 87 --- 87
Mortgages held for sale 109 --- 109
Securities: (3) ---
Taxable 4,316 --- 4,316
Tax exempt 273 --- 273
----------------------------------------------------------------------------------------------------------
Total Securities 4,589 --- 4,589
----------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 6,446 647 5,799
Real estate
Construction (4) 1,184 227 957
Commercial 2,187 286 1,901
Consumer
Automobile loans and leases 3,153 210 2,943
Home equity 2,991 552 2,439
Residential mortgage (4) 1,382 377 1,005
Other loans 528 69 459
----------------------------------------------------------------------------------------------------------
Total consumer 8,054 1,208 6,846
----------------------------------------------------------------------------------------------------------
Total loans and leases 17,871 2,368 15,503
----------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 274 (20) 294
----------------------------------------------------------------------------------------------------------
Net loans and leases 17,597 2,388 15,209
----------------------------------------------------------------------------------------------------------
Total earning assets/interest income/average rates 22,677 2,368 20,309
----------------------------------------------------------------------------------------------------------
Operating lease assets 2,799 --- 2,799
Cash and due from banks 1,008 182 826
Intangible assets 709 557 152
All other assets 1,834 26 1,808
----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 28,753 $ 3,153 $25,600
==========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 3,421 $ 600 $ 2,821
Interest bearing demand deposits 4,291 1,194 3,097
Savings deposits 3,563 576 2,987
Other domestic time deposits 5,872 1,734 4,138
----------------------------------------------------------------------------------------------------------
Total core deposits 17,147 4,104 13,043
----------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 1,502 209 1,293
Brokered time deposits and negotiable CDs 502 --- 502
Foreign time deposits 539 3 536
----------------------------------------------------------------------------------------------------------
Total deposits 19,690 4,316 15,374
----------------------------------------------------------------------------------------------------------
Short-term borrowings 1,966 102 1,864
Medium-term notes 2,894 (1,269) 4,163
Federal Home Loan Bank advances 13 --- 13
Subordinated notes and other long-term debt,
including preferred capital securities 1,111 --- 1,111
----------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rate 22,253 2,549 19,704
----------------------------------------------------------------------------------------------------------
All other liabilities 752 4 748
Shareholders' equity 2,327 --- 2,327
----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,753 $ 3,153 $25,600
==========================================================================================================
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate -
Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
56
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME/EXPENSE
----------------------------------
2002
----------------------------------
(in millions of dollars)
-----------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust.(1) Operating
-----------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks $ 0.8 $ --- $ 0.8
Trading account securities 0.3 --- 0.3
Federal funds sold and securities purchased
under resale agreements 1.1 --- 1.1
Mortgages held for sale 20.5 --- 20.5
Securities: (3) ---
Taxable 173.0 --- 173.0
Tax exempt 10.1 --- 10.1
-----------------------------------------------------------------------------------------------------------
Total Securities 183.1 --- 183.1
-----------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 328.8 5.8 323.0
Real estate
Construction (4) 58.3 0.7 57.6
Commercial 150.5 2.6 147.9
Consumer
Automobile loans and leases 289.1 3.8 285.3
Home equity 188.3 8.2 180.1
Residential mortgage (4) 87.3 2.0 85.3
Other loans 36.1 1.3 34.8
-----------------------------------------------------------------------------------------------------------
Total consumer 600.8 15.3 585.5
-----------------------------------------------------------------------------------------------------------
Total loans and leases 1,138.4 24.4 1,114.0
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 1,344.2 24.4 1,319.8
-----------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits --- --- ---
Interest bearing demand deposits 90.1 3.6 86.5
Savings deposits 51.7 1.4 50.3
Other domestic time deposits 197.1 11.4 185.7
-----------------------------------------------------------------------------------------------------------
Total core deposits 338.9 16.4 322.5
-----------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 28.8 1.0 27.8
Brokered time deposits and negotiable CDs 17.3 --- 17.3
Foreign time deposits 4.9 --- 4.9
-----------------------------------------------------------------------------------------------------------
Total deposits 389.9 17.4 372.5
-----------------------------------------------------------------------------------------------------------
Short-term borrowings 42.7 0.2 42.5
Medium-term notes 61.7 (3.0) 64.7
Federal Home Loan Bank advances 5.6 --- 5.6
Subordinated notes and other long-term debt,
including preferred capital securities 47.9 0.1 47.8
-----------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 547.8 14.7 533.1
-----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $796.4 $ 9.7 $786.7
==========================================================================================================
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate -
Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME/EXPENSE
-----------------------------------
2001
-----------------------------------
(in millions of dollars)
---------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) g Reported Adjust.(1) Operating
---------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks $ 0.2 $ --- $ 0.2
Trading account securities 1.3 --- 1.3
Federal funds sold and securities purchased
under resale agreements 4.4 --- 4.4
Mortgages held for sale 25.0 --- 25.0
Securities: (3) ---
Taxable 206.9 --- 206.9
Tax exempt 13.0 --- 13.0
---------------------------------------------------------------------------------------------------------------
Total Securities 219.9 --- 219.9
---------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 493.2 57.7 435.5
Real estate
Construction (4) 88.6 8.3 80.3
Commercial 180.4 22.4 158.0
Consumer
Automobile loans and leases 261.4 25.0 236.4
Home equity 286.8 62.4 224.4
Residential mortgage (4) 79.5 18.3 61.2
Other loans 55.8 11.0 44.8
---------------------------------------------------------------------------------------------------------------
Total consumer 683.5 116.7 566.8
---------------------------------------------------------------------------------------------------------------
Total loans and leases 1,445.7 205.1 1,240.6
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 1,696.5 205.1 1,491.4
---------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits --- --- ---
Interest bearing demand deposits 134.6 38.4 96.2
Savings deposits 107.7 16.5 91.2
Other domestic time deposits 331.4 102.2 229.2
---------------------------------------------------------------------------------------------------------------
Total core deposits 573.7 157.1 416.6
---------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 66.8 11.7 55.1
Brokered time deposits and negotiable CDs 6.6 --- 6.6
Foreign time deposits 10.8 0.2 10.6
---------------------------------------------------------------------------------------------------------------
Total deposits 657.9 169.0 488.9
---------------------------------------------------------------------------------------------------------------
Short-term borrowings 95.8 4.4 91.4
Medium-term notes 121.7 (50.5) 172.2
Federal Home Loan Bank advances 1.2 --- 1.2
Subordinated notes and other long-term debt,
including preferred capital securities 66.7 --- 66.7
---------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 943.3 122.9 820.4
---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $753.2 $ 82.2 $671.0
===============================================================================================================
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate -
Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME/EXPENSE
----------------------------------
2000
---------------------------------
(in millions of dollars)
-----------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust.(1) Operating
-----------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks $ 0.3 $ --- $ 0.3
Trading account securities 1.1 --- 1.1
Federal funds sold and securities purchased
under resale agreements 5.5 --- 5.5
Mortgages held for sale 8.7 --- 8.7
Securities: (3) ---
Taxable 269.5 --- 269.5
Tax exempt 20.8 --- 20.8
----------------------------------------------------------------------------------------------------------
Total Securities 290.3 --- 290.3
----------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 572.8 61.0 511.8
Real estate
Construction (4) 108.2 18.4 89.8
Commercial 186.7 23.3 163.4
Consumer
Automobile loans and leases 278.5 14.3 264.2
Home equity 261.1 44.5 216.6
Residential mortgage (4) 106.1 24.3 81.8
Other loans 61.1 0.3 60.8
----------------------------------------------------------------------------------------------------------
Total consumer 706.8 83.4 623.4
----------------------------------------------------------------------------------------------------------
Total loans and leases 1,574.5 186.1 1,388.4
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 1,880.4 186.1 1,694.3
----------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits --- --- ---
Interest bearing demand deposits 144.0 42.3 101.7
Savings deposits 146.4 22.7 123.7
Other domestic time deposits 335.4 98.3 237.1
----------------------------------------------------------------------------------------------------------
Total core deposits 625.8 163.3 462.5
----------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 90.4 12.4 78.0
Brokered time deposits and negotiable CDs 31.9 --- 31.9
Foreign time deposits 34.0 0.2 33.8
----------------------------------------------------------------------------------------------------------
Total deposits 782.1 175.9 606.2
----------------------------------------------------------------------------------------------------------
Short-term borrowings 113.1 5.4 107.7
Medium-term notes 189.3 (87.8) 277.1
Federal Home Loan Bank advances 0.8 --- 0.8
Subordinated notes and other long-term debt,
including preferred capital securities 80.7 --- 80.7
----------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 1,166.0 93.5 1,072.5
----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $714.4 $ 92.6 $621.8
==========================================================================================================
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate -
Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
57
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE RATE (5)
----------------------------------------
2002
---------------------------------------
(in millions of dollars)
--------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
--------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks 2.38 % --- % 2.38 %
Trading account securities 4.11 --- 4.11
Federal funds sold and securities purchased
under resale agreements 1.56 --- 1.56
Mortgages held for sale 6.35 --- 6.35
Securities: (3)
Taxable 6.06 --- 6.06
Tax exempt 7.42 --- 7.42
--------------------------------------------------------------------------------------------------------------
Total Securities 6.12 --- 6.12
--------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 5.79 --- 5.79
Real estate
Construction (4) 4.79 0.01 4.78
Commercial 6.33 --- 6.33
Consumer
Automobile loans and leases 8.94 --- 8.94
Home equity 6.10 0.06 6.04
Residential mortgage (4) 6.05 0.02 6.03
Other loans 8.49 0.03 8.46
--------------------------------------------------------------------------------------------------------------
Total consumer 7.34 0.02 7.32
--------------------------------------------------------------------------------------------------------------
Total loans and leases 6.52 0.01 6.51
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 6.43 % 0.01 % 6.42 %
--------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 1.75 % 0.01 % 1.74 %
Savings deposits 1.81 --- 1.81
Other domestic time deposits 4.53 0.02 4.51
--------------------------------------------------------------------------------------------------------------
Total core deposits 2.74 0.02 2.72
--------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 3.39 0.04 3.35
Brokered time deposits and negotiable CDs 2.36 --- 2.36
Foreign time deposits 1.47 --- 1.47
--------------------------------------------------------------------------------------------------------------
Total deposits 2.73 0.02 2.71
--------------------------------------------------------------------------------------------------------------
Short-term borrowings 2.01 --- 2.01
Medium-term notes 3.31 0.13 3.18
Federal Home Loan Bank advances 2.00 --- 2.00
Subordinated notes and other long-term debt,
including preferred capital securities 4.00 --- 4.00
--------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 2.77 % 0.02 % 2.75 %
--------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.66 % (0.01)% 3.67 %
Impact of non-interest bearing funds on margin 0.15 (0.01) 0.16
--------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.81 % (0.02)% 3.83 %
==============================================================================================================
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate -
Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE RATE (5)
---------------------------------------
2001
---------------------------------------
(in millions of dollars)
--------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
--------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks 3.43 % --- % 3.43 %
Trading account securities 5.13 --- 5.13
Federal funds sold and securities purchased
under resale agreements 4.19 --- 4.19
Mortgages held for sale 6.95 --- 6.95
Securities: (3)
Taxable 6.58 --- 6.58
Tax exempt 7.49 --- 7.49
--------------------------------------------------------------------------------------------------------------
Total Securities 6.63 --- 6.63
--------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 7.42 0.04 7.38
Real estate
Construction (4) 7.25 0.03 7.22
Commercial 7.71 (0.06) 7.77
Consumer
Automobile loans and leases 9.12 (0.18) 9.30
Home equity 8.44 0.09 8.35
Residential mortgage (4) 7.55 0.02 7.53
Other loans 9.47 0.05 9.42
--------------------------------------------------------------------------------------------------------------
Total consumer 8.64 (0.06) 8.70
--------------------------------------------------------------------------------------------------------------
Total loans and leases 7.98 0.01 7.97
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 7.74 % 0.04 % 7.70 %
--------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 2.69 % 0.03 % 2.66 %
Savings deposits 3.10 (0.02) 3.12
Other domestic time deposits 5.63 --- 5.63
--------------------------------------------------------------------------------------------------------------
Total core deposits 3.99 0.07 3.92
--------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 5.22 0.07 5.15
Brokered time deposits and negotiable CDs 5.12 --- 5.12
Foreign time deposits 3.82 (0.01) 3.83
--------------------------------------------------------------------------------------------------------------
Total deposits 4.10 0.06 4.04
--------------------------------------------------------------------------------------------------------------
Short-term borrowings 4.12 (0.06) 4.18
Medium-term notes 6.01 1.08 4.93
Federal Home Loan Bank advances 6.17 --- 6.17
Subordinated notes and other long-term debt,
including preferred capital securities 5.75 --- 5.75
--------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 4.37 % 0.04 % 4.33 %
--------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.37 % --- % 3.37 %
Impact of non-interest bearing funds on margin 0.06 (0.03) 0.09
--------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.43 % (0.03)% 3.46 %
==============================================================================================================
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate -
Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE RATE (5)
-----------------------------------------
2000
-----------------------------------------
(in millions of dollars)
----------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
----------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks 5.03 % --- % 5.03 %
Trading account securities 7.11 --- 7.11
Federal funds sold and securities purchased
under resale agreements 6.33 --- 6.33
Mortgages held for sale 7.96 --- 7.96
Securities: (3)
Taxable 6.24 --- 6.24
Tax exempt 7.61 --- 7.61
----------------------------------------------------------------------------------------------------------------
Total Securities 6.33 --- 6.33
----------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 8.89 0.06 8.83
Real estate
Construction (4) 9.14 (0.25) 9.39
Commercial 8.53 (0.07) 8.60
Consumer
Automobile loans and leases 8.83 (0.15) 8.98
Home equity 8.73 (0.15) 8.88
Residential mortgage (4) 7.68 (0.46) 8.14
Other loans 11.57 (1.56) 13.13
----------------------------------------------------------------------------------------------------------------
Total consumer 8.78 (0.33) 9.11
----------------------------------------------------------------------------------------------------------------
Total loans and leases 8.81 (0.15) 8.96
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 8.29 % (0.05)% 8.34 %
----------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 3.36 % 0.08 % 3.28 %
Savings deposits 4.11 (0.03) 4.14
Other domestic time deposits 5.71 (0.02) 5.73
----------------------------------------------------------------------------------------------------------------
Total core deposits 4.56 0.03 4.53
----------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 6.01 (0.02) 6.03
Brokered time deposits and negotiable CDs 6.35 --- 6.35
Foreign time deposits 6.31 --- 6.31
----------------------------------------------------------------------------------------------------------------
Total deposits 4.81 (0.02) 4.83
----------------------------------------------------------------------------------------------------------------
Short-term borrowings 5.75 (0.03) 5.78
Medium-term notes 6.54 (0.12) 6.66
Federal Home Loan Bank advances 6.32 --- 6.32
Subordinated notes and other long-term debt,
including preferred capital securities 7.27 --- 7.27
----------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 5.24 % (0.20)% 5.44 %
----------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.05 % 0.15 % 2.90 %
Impact of non-interest bearing funds on margin 0.10 (0.07) 0.17
----------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.15 % 0.08 % 3.07 %
================================================================================================================
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate -
Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and leases components include fees and cash basis interest
received on non-accrual loans.
58
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 28 - SELECTED QUARTERLY INCOME STATEMENTS
- RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
------------------------------------- ------------------------------------
2002 FOURTH QUARTER 2002 THIRD QUARTER
-------------------------------------------------------------------------------------------- ------------------------------------
(in thousands, except per share amounts) Reported Adjust.(1) Operating Reported Adjust.(1) Operating
-------------------------------------------------------------------------------------------- ------------------------------------
NET INTEREST INCOME $ 210,255 $ --- $ 210,255 $ 205,484 $ --- $ 205,484
Provision for loan and lease losses 51,236 --- 51,236 54,304 --- 54,304
-------------------------------------------------------------------------------------------- ------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 159,019 --- 159,019 151,180 --- 151,180
-------------------------------------------------------------------------------------------- ------------------------------------
Operating lease income 143,465 --- 143,465 154,367 154,367
Service charges on deposit accounts 41,177 --- 41,177 37,460 --- 37,460
Brokerage and insurance 16,431 --- 16,431 13,943 --- 13,943
Trust services 15,306 --- 15,306 14,997 --- 14,997
Bank owned life insurance 11,443 --- 11,443 11,443 --- 11,443
Mortgage banking 11,410 --- 11,410 6,289 --- 6,289
Other service charges and fees 10,890 --- 10,890 10,837 --- 10,837
Gain on sale of Florida operations --- --- --- --- --- ---
Merchant Services gain --- --- --- 24,550 24,550 ---
Securities gains (losses) 2,339 --- 2,339 1,140 --- 1,140
Other 19,130 --- 19,130 21,044 --- 21,044
-------------------------------------------------------------------------------------------- ------------------------------------
TOTAL NON-INTEREST INCOME 271,591 --- 271,591 296,070 24,550 271,520
-------------------------------------------------------------------------------------------- ------------------------------------
Operating lease expense 120,747 --- 120,747 125,743 --- 125,743
Personnel costs 113,852 --- 113,852 107,477 --- 107,477
Equipment 17,337 --- 17,337 17,378 --- 17,378
Outside data processing and other services 17,209 --- 17,209 15,128 --- 15,128
Net occupancy 13,454 --- 13,454 14,815 --- 14,815
Professional services 8,026 --- 8,026 6,083 --- 6,083
Marketing 6,186 --- 6,186 7,491 --- 7,491
Telecommunications 5,714 --- 5,714 5,609 --- 5,609
Printing and supplies 3,999 --- 3,999 3,679 --- 3,679
Franchise and other taxes 2,532 --- 2,532 2,283 --- 2,283
Amortization of intangible assets 204 --- 204 204 --- 204
Restructuring Charges --- --- --- --- --- ---
Other 22,269 --- 22,269 16,563 --- 16,563
-------------------------------------------------------------------------------------------- ------------------------------------
TOTAL NON-INTEREST EXPENSE 331,529 --- 331,529 322,453 --- 322,453
-------------------------------------------------------------------------------------------- ------------------------------------
INCOME BEFORE INCOME TAXES 99,081 --- 99,081 124,797 24,550 100,247
Income taxes 24,687 --- 24,687 33,193 8,593 24,600
-------------------------------------------------------------------------------------------- ------------------------------------
NET INCOME $ 74,394 $ --- $ 74,394 $ 91,604 $ 15,957 $ 75,647
============================================================================================ ====================================
NET INCOME PER COMMON SHARE -- DILUTED $ 0.32 $ --- $ 0.32 $ 0.38 $ 0.07 $ 0.31
DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ --- $ 0.16 $ 0.16 $ --- $ 0.16
Return on average assets 1.10% 0.00% 1.10% 1.41% 0.25% 1.16%
Return on average shareholders' equity 13.2% 0.00% 13.2% 15.9% 2.70% 13.2%
Net interest margin 3.83% 0.00% 3.83% 3.98% 0.00% 3.98%
Efficiency ratio 68.8% 0.00% 68.8% 67.6% 0.00% 67.6%
Effective tax rate 24.9% 0.00% 24.9% 26.6% 2.06% 24.5%
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 210,255 $ --- $ 210,255 $ 205,484 $ --- $ 205,484
Tax Equivalent Adjustment (2) 1,869 --- 1,869 1,096 --- 1,096
-------------------------------------------------------------------------------------------- ------------------------------------
NET INTEREST INCOME - FTE $ 212,124 $ --- $ 212,124 $ 206,580 $ --- $ 206,580
============================================================================================ ====================================
(1) See page 51 for definition of adjustments.
(2) Calculated assuming a 35% tax rate.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 28 - SELECTED QUARTERLY INCOME STATEMENTS
- RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
------------------------------------- -------------------------------------
2002 SECOND QUARTER 2002 FIRST QUARTER
----------------------------------------------------- ------------------------------------- -------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
----------------------------------------------------- ------------------------------------- -------------------------------------
NET INTEREST INCOME $ 190,981 $ --- $ 190,981 $ 184,431 $ 9,724 $ 174,707
Provision for loan and lease losses 49,876 --- 49,876 39,010 5,186 33,824
----------------------------------------------------- ------------------------------------- -------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 141,105 --- 141,105 145,421 4,538 140,883
----------------------------------------------------- ------------------------------------- -------------------------------------
Operating lease income 168,047 --- 168,047 175,906 --- 175,906
Service charges on deposit accounts 35,354 --- 35,354 38,530 4,248 34,282
Brokerage and insurance 17,677 2,710 14,967 18,792 4,205 14,587
Trust services 16,247 --- 16,247 15,501 405 15,096
Bank owned life insurance 11,443 --- 11,443 11,676 --- 11,676
Mortgage banking 10,725 --- 10,725 19,565 (79) 19,644
Other service charges and fees 10,529 --- 10,529 10,632 1,514 9,118
Gain on sale of Florida operations --- --- --- 175,344 175,344 ---
Merchant Services gain --- --- --- --- --- ---
Securities gains (losses) 966 --- 966 457 --- 457
Other 17,033 --- 17,033 12,697 340 12,357
----------------------------------------------------- ------------------------------------- -------------------------------------
TOTAL NON-INTEREST INCOME 288,021 2,710 285,311 479,100 185,977 293,123
----------------------------------------------------- ------------------------------------- -------------------------------------
Operating lease expense 131,695 --- 131,695 140,785 --- 140,785
Personnel costs 105,146 1,557 103,589 114,285 9,965 104,320
Equipment 16,659 51 16,608 16,949 1,367 15,582
Outside data processing and other services 16,592 --- 16,592 18,439 1,342 17,097
Net occupancy 14,756 114 14,642 17,239 2,468 14,771
Professional services 6,267 2 6,265 5,401 159 5,242
Marketing 7,231 12 7,219 7,003 (171) 7,174
Telecommunications 5,320 18 5,302 6,018 736 5,282
Printing and supplies 3,683 12 3,671 3,837 318 3,519
Franchise and other taxes 2,313 --- 2,313 2,328 2 2,326
Amortization of intangible assets 235 32 203 1,376 1,125 251
Restructuring Charges --- --- --- 56,184 56,184 ---
Other 18,135 77 18,058 16,830 1,024 15,806
----------------------------------------------------- ------------------------------------- -------------------------------------
TOTAL NON-INTEREST EXPENSE 328,032 1,875 326,157 406,674 74,519 332,155
----------------------------------------------------- ------------------------------------- -------------------------------------
INCOME BEFORE INCOME TAXES 101,094 835 100,259 217,847 115,996 101,851
Income taxes 27,169 303 26,866 124,706 97,782 26,924
----------------------------------------------------- ------------------------------------- -------------------------------------
NET INCOME $ 73,925 $ 532 $ 73,393 $ 93,141 $ 18,214 $ 74,927
===================================================== ===================================== =====================================
NET INCOME PER COMMON SHARE -- DILUTED $ 0.30 $ --- $ 0.30 $ 0.37 $ 0.07 $ 0.30
DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ --- $ 0.16 $ 0.16 $ --- $ 0.16
Return on average assets 1.19% 0.01% 1.18% 1.42% 0.20% 1.22%
Return on average shareholders' equity 12.6% 0.10% 12.5% 15.8% 3.10% 12.7%
Net interest margin 3.91% 0.00% 3.91% 3.63% -0.05% 3.68%
Efficiency ratio 68.4% 0.00% 68.4% 71.4% 0.60% 70.8%
Effective tax rate 26.9% 0.08% 26.8% 57.2% 30.81% 26.4%
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 190,981 $ --- $ 190,981 $ 184,431 $ 9,724 $ 174,707
Tax Equivalent Adjustment (2) 1,071 --- 1,071 1,169 --- 1,169
----------------------------------------------------- ------------------------------------- -------------------------------------
NET INTEREST INCOME - FTE $ 192,052 $ --- $ 192,052 $ 185,600 $ 9,724 $ 175,876
===================================================== ===================================== =====================================
(1) See page 51 for definition of adjustments.
(2) Calculated assuming a 35% tax rate.
59
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 28 - SELECTED QUARTERLY INCOME STATEMENTS
- RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
------------------------------------- ------------------------------------
2001 FOURTH QUARTER 2001 THIRD QUARTER
---------------------------------------------------- ------------------------------------- ------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
---------------------------------------------------- ------------------------------------- ------------------------------------
NET INTEREST INCOME $ 196,294 $ 19,692 $ 176,602 $ 186,866 $ 19,325 $ 167,541
Provision for loan and lease losses 101,075 53,994 47,081 34,053 3,532 30,521
---------------------------------------------------- ------------------------------------- ------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 95,219 (34,302) 129,521 152,813 15,793 137,020
---------------------------------------------------- ------------------------------------- ------------------------------------
Operating lease income 180,382 --- 180,382 183,642 --- 183,642
Service charges on deposit accounts 42,753 7,533 35,220 41,719 8,126 33,593
Brokerage and insurance 20,966 5,900 15,066 19,912 5,969 13,943
Trust services 15,321 642 14,679 15,485 669 14,816
Bank owned life insurance 9,560 --- 9,560 9,560 --- 9,560
Mortgage banking 15,768 719 15,049 14,616 757 13,859
Other service charges and fees 12,552 2,970 9,582 12,350 2,803 9,547
Gain on sale of Florida operations --- --- --- --- --- ---
Merchant Services gain --- --- --- --- --- ---
Securities gains (losses) 89 --- 89 1,059 --- 1,059
Other 16,088 953 15,135 15,755 1,033 14,722
---------------------------------------------------- ------------------------------------- ------------------------------------
TOTAL NON-INTEREST INCOME 313,479 18,717 294,762 314,098 19,357 294,741
---------------------------------------------------- ------------------------------------- ------------------------------------
Operating lease expense 140,575 --- 140,575 138,538 --- 138,538
Personnel costs 118,143 18,067 100,076 120,767 18,901 101,866
Equipment 20,593 2,476 18,117 20,151 2,571 17,580
Outside data processing and other services 17,992 2,578 15,414 17,375 2,725 14,650
Net occupancy 19,950 4,699 15,251 19,266 4,785 14,481
Professional services 6,235 166 6,069 5,912 158 5,754
Marketing 6,345 1,040 5,305 6,921 1,204 5,717
Telecommunications 6,793 1,146 5,647 6,859 1,131 5,728
Printing and supplies 4,293 782 3,511 4,450 757 3,693
Franchise and other taxes 2,893 8 2,885 2,470 31 2,439
Amortization of intangible assets 10,100 7,545 2,555 10,114 7,545 2,569
Restructuring Charges 15,143 15,143 --- 50,817 50,817 ---
Other 15,580 1,418 14,162 25,145 2,028 23,117
---------------------------------------------------- ------------------------------------- ------------------------------------
TOTAL NON-INTEREST EXPENSE 384,635 55,068 329,567 428,785 92,653 336,132
---------------------------------------------------- ------------------------------------- ------------------------------------
INCOME BEFORE INCOME TAXES 24,063 (70,653) 94,716 38,126 (57,503) 95,629
Income taxes (32,810) (56,717) 23,907 3,850 (19,239) 23,089
---------------------------------------------------- ------------------------------------- ------------------------------------
NET INCOME $ 56,873 $ (13,936) $ 70,809 $ 34,276 $ (38,264) $ 72,540
==================================================== ===================================== ====================================
NET INCOME PER COMMON SHARE -- DILUTED $ 0.23 $ (0.05) $ 0.28 $ 0.14 $ (0.15) $ 0.29
DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ --- $ 0.16 $ 0.16 $ --- $ 0.16
Return on average assets 0.81% -0.33% 1.14% 0.49% -0.67% 1.16%
Return on average shareholders' equity 9.5% -2.30% 11.8% 5.7% -6.30% 12.0%
Net interest margin 3.62% -0.11% 3.73% 3.47% -0.06% 3.53%
Efficiency ratio 70.3% 1.10% 69.2% 73.4% 1.30% 72.1%
Effective tax rate -136.4% -161.59% 25.2% 10.1% -14.05% 24.1%
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 196,294 $ 19,692 $ 176,602 $ 186,866 $ 19,325 $ 167,541
Tax Equivalent Adjustment (2) 1,292 --- 1,292 1,442 --- 1,442
---------------------------------------------------- ------------------------------------- ------------------------------------
NET INTEREST INCOME - FTE $ 197,586 $ 19,692 $ 177,894 $ 188,308 $ 19,325 $ 168,983
==================================================== ===================================== ====================================
(1) See page 51 for definition of adjustments.
(2) Calculated assuming a 35% tax rate.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 28 - SELECTED QUARTERLY INCOME STATEMENTS
- RECONCILIATION OF REPORTED TO OPERATING BASIS
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------ -------------------------------------
2001 SECOND QUARTER 2001 FIRST QUARTER
---------------------------------------------------- ------------------------------------ -------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
---------------------------------------------------- ------------------------------------ -------------------------------------
NET INTEREST INCOME $ 185,080 $ 22,150 $ 162,930 $ 178,626 $ 21,106 $ 157,520
Provision for loan and lease losses 99,444 69,039 30,405 22,754 3,755 18,999
---------------------------------------------------- ------------------------------------ -------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 85,636 (46,889) 132,525 155,872 17,351 138,521
---------------------------------------------------- ----------------------------------- -------------------------------------
Operating lease income 176,418 --- 176,418 159,415 --- 159,415
Service charges on deposit accounts 40,673 8,023 32,650 38,907 7,764 31,143
Brokerage and insurance 19,388 6,203 13,185 18,768 6,536 12,232
Trust services 15,178 747 14,431 14,314 644 13,670
Bank owned life insurance 9,561 --- 9,561 9,560 --- 9,560
Mortgage banking 18,733 1,061 17,672 10,031 793 9,238
Other service charges and fees 12,217 2,834 9,383 11,098 2,683 8,415
Gain on sale of Florida operations --- --- --- --- --- ---
Merchant Services gain --- --- --- --- --- ---
Securities gains (losses) (2,503) (5,250) 2,747 2,078 --- 2,078
Other 14,956 977 13,979 12,968 653 12,315
---------------------------------------------------- ------------------------------------ -------------------------------------
TOTAL NON-INTEREST INCOME 304,621 14,595 290,026 277,139 19,073 258,066
---------------------------------------------------- ------------------------------------ -------------------------------------
Operating lease expense 158,437 --- 158,437 121,076 --- 121,076
Personnel costs 122,068 18,361 103,707 117,662 18,366 99,296
Equipment 19,844 2,481 17,363 19,972 2,469 17,503
Outside data processing and other services 17,671 2,571 15,100 16,654 2,532 14,122
Net occupancy 18,188 4,433 13,755 19,780 4,212 15,568
Professional services 6,763 282 6,481 4,969 176 4,793
Marketing 7,852 1,045 6,807 9,939 1,107 8,832
Telecommunications 7,207 1,243 5,964 7,125 1,173 5,952
Printing and supplies 4,565 877 3,688 5,059 961 4,098
Franchise and other taxes 2,246 17 2,229 2,120 4 2,116
Amortization of intangible assets 10,435 7,545 2,890 10,576 7,545 3,031
Restructuring Charges 13,997 13,997 --- --- --- ---
Other 6,384 1,998 4,386 32,587 1,728 30,859
---------------------------------------------------- ------------------------------------ -------------------------------------
TOTAL NON-INTEREST EXPENSE 395,657 54,850 340,807 367,519 40,273 327,246
---------------------------------------------------- ------------------------------------ -------------------------------------
INCOME BEFORE INCOME TAXES (5,400) (87,144) 81,744 65,492 (3,849) 69,341
Income taxes (9,825) (31,156) 21,331 15,697 (260) 15,957
---------------------------------------------------- ------------------------------------ -------------------------------------
NET INCOME $ 4,425 $ (55,988) $ 60,413 $ 49,795 $ (3,589) $ 53,384
==================================================== ==================================== =====================================
NET INCOME PER COMMON SHARE -- DILUTED $ 0.02 $ (0.22) $ 0.24 $ 0.20 $ (0.01) $ 0.21
DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ --- $ 0.20 $ 0.20 $ --- $ 0.20
Return on average assets 0.06% -0.90% 0.96% 0.71% -0.15% 0.86%
Return on average shareholders' equity 0.7% -9.20% 9.9% 8.3% -0.60% 8.9%
Net interest margin 3.39% 0.02% 3.37% 3.31% 0.03% 3.28%
Efficiency ratio 75.2% 0.40% 74.8% 78.3% 0.30% 78.0%
Effective tax rate 181.9% 155.85% 26.1% 24.0% 0.96% 23.0%
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 185,080 $ 22,150 $ 162,930 $ 178,626 $ 21,106 $ 157,520
Tax Equivalent Adjustment (2) 1,616 --- 1,616 2,002 --- 2,002
---------------------------------------------------- ------------------------------------ -------------------------------------
NET INTEREST INCOME - FTE $ 186,696 $ 22,150 $ 164,546 $ 180,628 $ 21,106 $ 159,522
==================================================== ==================================== =====================================
(1) See page 51 for definition of adjustments.
(2) Calculated assuming a 35% tax rate.
60
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is set forth in Item 7 on pages 37 through 42
under the caption "Interest Rate Risk Management" and "Liquidity."
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Huntington is responsible for the financial information and
representations contained in the consolidated financial statements and other
sections of this amended Annual Report. The consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States. In all material respects, they reflect the substance of
transactions that should be included based on informed judgments, estimates, and
currently available information.
Huntington maintains accounting and other control systems that, in the opinion
of management, provide reasonable assurance that (1) transactions are properly
authorized, (2) that the assets are properly safeguarded, and (3) transactions
are properly recorded and reported to permit the preparation of the financial
statements in conformity with accounting principles generally accepted in the
United States. The systems of internal accounting controls include the careful
selection and training of qualified personnel, appropriate segregation of
responsibilities, communication of written policies and procedures, and a broad
program of internal audits. The costs of the controls are balanced against the
expected benefits. During 2002, the Audit/Risk Committee of the Board of
Directors met regularly with management, Huntington's internal auditors, and the
independent auditors, Ernst & Young LLP, to review the scope of the audits and
to discuss the evaluation of internal accounting controls and financial
reporting matters. The independent and internal auditors have free access to and
meet confidentially with the Audit Committee to discuss appropriate matters.
Also during 2002, Huntington formed a Disclosure Review Committee. This
committee's purpose is to design and maintain disclosure controls and procedures
to ensure that material information relating to the financial and operating
condition of Huntington is properly reported to its chief executive officer,
chief financial officer, internal auditors, and the Audit/Risk Committee of the
Board of Directors in connection with the preparation and filing of periodic
reports and the certification of those reports by the chief executive officer
and the chief financial officer.
The independent auditors are responsible for expressing an informed judgment as
to whether the consolidated financial statements present fairly, in accordance
with accounting principles generally accepted in the United States, the
financial position, results of operations, and cash flows of Huntington. They
obtained an understanding of Huntington's internal accounting controls and
conducted such tests and related procedures as they deemed necessary to provide
reasonable assurance, giving due consideration to materiality, that the
consolidated financial statements contain neither misleading nor erroneous data.
/s/ Thomas E. Hoaglin
Chairman, President and Chief Executive Officer
/s/ Michael J. McMennamin
Vice Chairman, Chief Financial Officer, and
Treasurer
61
INDEPENDENT AUDITOR'S REPORT
_____________________
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders, Huntington Bancshares Incorporated
We have audited the accompanying consolidated balance sheets of Huntington
Bancshares Incorporated and Subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Huntington
Bancshares Incorporated and Subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 3 to the consolidated financial statements, Huntington
Bancshares Incorporated and Subsidiaries has restated previously issued 2000,
2001, and 2002 consolidated financial statements.
As discussed in Note 14 to the consolidated financial statements, Huntington
Bancshares Incorporated and Subsidiaries changed its method of accounting for
amortization of goodwill in 2002 in accordance with FASB Statement No. 142,
Goodwill and Other Intangible Assets.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
January 16, 2003, except for Note 3
as to which the date is May 19, 2003
62
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars, except share amounts) 2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
ASSETS
Cash and due from banks $ 969,483 $ 1,138,366
Federal funds sold and securities purchased under resale agreements 49,280 83,275
Interest bearing deposits in banks 37,300 21,205
Trading account securities 241 13,392
Mortgage loans held for sale 528,379 629,386
Securities available for sale - at fair value 3,403,369 2,849,579
Investment securities - fair value $7,725 and $12,499, respectively 7,546 12,322
Loans and leases:
Commercial loans 5,606,363 6,439,372
Commercial real estate 3,730,080 3,818,441
Consumer
Automobile loans and leases 3,964,702 2,989,720
Home equity 3,200,169 3,582,028
Residential mortgage 1,748,985 1,127,825
Other consumer loans 394,890 543,414
-----------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 18,645,189 18,500,800
Less allowance for loan and lease losses 336,648 369,332
-----------------------------------------------------------------------------------------------------------------------------------
Net loans and leases 18,308,541 18,131,468
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease assets 2,252,445 3,072,432
Bank owned life insurance 886,214 843,183
Premises and equipment 341,366 452,036
Goodwill and other intangible assets 218,567 716,054
Customers' acceptance liability 16,745 13,670
Accrued income and other assets 537,775 554,978
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 27,557,251 $ 28,531,346
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Demand deposits
Non-interest bearing $ 3,073,869 $ 3,635,173
Interest bearing 5,374,095 5,723,160
Savings deposits 2,851,158 3,466,305
Other domestic time deposits 3,956,306 5,868,451
Domestic time deposits of $100,000 or more 731,959 1,130,563
Brokered time deposits and negotiable CDs 1,092,754 137,915
Foreign time deposits 419,185 225,737
-----------------------------------------------------------------------------------------------------------------------------------
Total deposits 17,499,326 20,187,304
-----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,541,016 1,955,926
Bank acceptances outstanding 16,745 13,670
Medium-term notes 2,045,123 1,795,002
Federal Home Loan Bank advances 1,013,000 17,000
Subordinated notes and other long-term debt 788,678 927,330
Company obligated mandatorily redeemable preferred capital securities of subsidiary
trusts holding solely junior subordinated debentures of the parent company 300,000 300,000
Accrued expenses and other liabilities 1,062,868 901,848
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 25,266,756 26,098,080
-----------------------------------------------------------------------------------------------------------------------------------
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 232,878,851 and 251,193,814 shares, respectively 2,484,421 2,490,724
Less 24,987,404 and 6,672,441 treasury shares, respectively (475,399) (123,849)
Accumulated other comprehensive income 62,300 25,488
Retained earnings 219,173 40,903
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,290,495 2,433,266
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,557,251 $ 28,531,346
===================================================================================================================================
See notes to consolidated financial statements.
63
CONSOLIDATED INCOME STATEMENTS
TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED) (RESTATED)
Interest and fee income
Loans and leases $ 1,136,646 $ 1,442,995 $ 1,571,871
Securities 179,623 216,215 284,719
Other 22,665 30,993 15,532
------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 1,338,934 1,690,203 1,872,122
------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 389,895 657,892 782,076
Short-term borrowings 42,720 95,859 113,134
Medium-term notes 61,727 121,701 189,311
Federal Home Loan Bank advances 5,574 1,174 824
Subordinated notes, capital notes, and other long-term debt 47,867 66,711 80,728
------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 547,783 943,337 1,166,073
------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 791,151 746,866 706,049
Provision for loan and lease losses 194,426 257,326 61,464
------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 596,725 489,540 644,585
------------------------------------------------------------------------------------------------------------------------
Non-Interest income
Operating lease income 641,785 699,857 635,243
Service charges on deposit accounts 152,521 164,052 160,727
Brokerage and insurance 66,843 79,034 61,871
Trust services 62,051 60,298 53,613
Mortgage banking 47,989 59,148 38,025
Bank owned life insurance 46,005 38,241 39,544
Other service charges and fees 42,888 48,217 43,883
Gain on sale of Florida operations 175,344 -- --
Merchant Services gain 24,550 -- --
Securities gains 4,902 723 37,101
Other 69,904 59,767 58,795
------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,334,782 1,209,337 1,128,802
------------------------------------------------------------------------------------------------------------------------
Non-Interest expense
Operating lease expense 518,970 558,626 494,800
Personnel costs 440,760 478,640 421,750
Equipment 68,323 80,560 78,069
Outside data processing and other services 67,368 69,692 62,011
Net occupancy 60,264 77,184 75,882
Marketing 27,911 31,057 34,884
Professional services 25,777 23,879 20,819
Telecommunications 22,661 27,984 26,225
Printing and supplies 15,198 18,367 19,634
Franchise and other taxes 9,456 9,729 11,077
Amortization of intangible assets 2,019 41,225 39,207
Restructuring charges 56,184 79,957 --
Other 73,797 79,696 22,596
------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 1,388,688 1,576,596 1,306,954
------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 542,819 122,281 466,433
Income taxes 209,755 (23,088) 133,736
------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 333,064 $ 145,369 $ 332,697
========================================================================================================================
PER COMMON SHARE
Net Income
Basic $ 1.37 $ 0.58 $ 1.34
Diluted 1.36 0.58 1.33
Cash dividends declared 0.64 0.72 0.76
AVERAGE COMMON SHARES OUTSTANDING
Basic 242,279 251,078 248,709
Diluted 244,012 251,716 249,570
See notes to consolidated financial statements.
64
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
PREFERRED COMMON
------------------------ ------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) SHARES STOCK SHARES STOCK
------------------------------------------------------------------------------------------------------------------
BALANCE -- JANUARY 1, 2000 -- $ -- 233,845 $2,284,956
Cumulative effect of restatement (See Note 3)
------------------------------------------------------------------------------------------------------------------
BALANCE -- JANUARY 1, 2000, RESTATED -- $ -- 233,845 $2,284,956
------------------------------------------------------------------------------------------------------------------
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
Total comprehensive income
Stock issued for acquisitions (29,399)
Cash dividends declared ($0.76 per share)
Stock options exercised (3,395)
10% stock dividend 24,021 241,483
Treasury shares purchased
Treasury shares sold to employee benefit plans
------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2000 -- -- 491,711 4,778,601
------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income
Cumulative effect of change in accounting
principle for derivatives
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income
Unrealized gains on derivative instruments
used in cash flow hedging relationships
Total comprehensive income
Cash dividends declared ($0.72 per share)
Stock options exercised (2,921)
Treasury shares sold to employee benefit plans
------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2001 -- -- 491,711 4,775,680
------------------------------------------------------------------------------------------------------------------
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
UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS
USED IN CASH FLOW HEDGING RELATIONSHIPS
MINIMUM PENSION LIABILITY
TOTAL COMPREHENSIVE INCOME
STOCK ISSUED FOR ACQUISITIONS (838)
CASH DIVIDENDS DECLARED ($0.64 PER SHARE)
STOCK OPTIONS EXERCISED (3,545)
TREASURY SHARES PURCHASED
OTHER (1,920)
------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2002 -- $ -- 491,711 $4,769,377
==================================================================================================================
ACCUMULATED
TREASURY OTHER
------------------------- COMPREHENSIVE RETAINED
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) SHARES STOCK INCOME EARNINGS TOTAL
----------------------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
BALANCE -- JANUARY 1, 2000 (4,957) $ (137,268) $ (94,093) $ 128,761 $2,182,356
Cumulative effect of restatement (See Note 3) 45,727 45,727
----------------------------------------------------------------------------------------------------------------------------------
BALANCE -- JANUARY 1, 2000, RESTATED (4,957) $ (137,268) $ (94,093) $ 174,488 $2,228,083
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income 332,697 332,697
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 69,573 69,573
----------
Total comprehensive income 402,270
----------
Stock issued for acquisitions 7,175 171,781 142,382
Cash dividends declared ($0.76 per share) (189,191) (189,191)
Stock options exercised 115 3,751 356
10% stock dividend (1,182) (241,662) (179)
Treasury shares purchased (8,188) (168,395) (168,395)
Treasury shares sold to employee benefit plans 30 699 699
----------------------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2000 (11,964) (266,700) (118,613) 250,820 2,416,025
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income 145,369 145,369
Cumulative effect of change in accounting
principle for derivatives (9,113) (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 53,989 53,989
Unrealized gains on derivative instruments
used in cash flow hedging relationships 5,132 5,132
----------
Total comprehensive income 195,377
----------
Cash dividends declared ($0.72 per share) (180,798) (180,798)
Stock options exercised 264 4,378 1,457
Treasury shares sold to employee benefit plans 71 1,205 1,205
----------------------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2001 (11,629) (261,117) (68,605) 215,391 2,433,266
----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME 333,064 333,064
UNREALIZED NET HOLDING GAINS ON SECURITIES
AVAILABLE FOR SALE ARISING DURING THE PERIOD,
NET OF RECLASSIFICATION ADJUSTMENT FOR NET
GAINS INCLUDED IN NET INCOME 27,387 27,387
UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS
USED IN CASH FLOW HEDGING RELATIONSHIPS 9,620 9,620
MINIMUM PENSION LIABILITY (195) (195)
----------
TOTAL COMPREHENSIVE INCOME 369,876
----------
STOCK ISSUED FOR ACQUISITIONS 1,038 19,989 19,151
CASH DIVIDENDS DECLARED ($0.64 PER SHARE) (154,794) (154,794)
STOCK OPTIONS EXERCISED 373 6,757 3,212
TREASURY SHARES PURCHASED (19,161) (370,012) (370,012)
OTHER (565) (8,284) (10,204)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2002 (29,944) $ (612,667) $ (31,793) $ 393,661 $2,290,495
==================================================================================================================================
See notes to consolidated financial statements.
65
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED) (RESTATED)
OPERATING ACTIVITIES
Net Income $ 333,064 $ 145,369 $ 332,697
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan and lease losses 194,426 257,326 61,464
Depreciation on operating lease assets 435,822 468,739 417,707
Other depreciation and amortization 58,132 101,233 110,908
Deferred income tax expense 101,524 100,176 239,624
Decrease (increase) in trading account securities 13,151 (8,669) 3,252
Decrease (increase) in mortgages held for sale 101,007 (474,282) (13,381)
Gains on sales of securities available for sale (4,902) (723) (37,101)
Gains on sales/securitizations of loans (11,031) (9,464) (4,853)
Gain on sale of Florida banking and insurance operations (175,344) -- --
Merchant Services gain (24,550) -- --
Restructuring and special charges 56,184 79,957 --
Other, net (37,520) (148,211) (87,793)
----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,039,963 511,451 1,022,524
----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in banks (16,095) (16,235) 1,588
Proceeds from:
Maturities and calls of investment securities 4,771 4,009 2,408
Maturities and calls of securities available for sale 1,031,935 1,021,766 415,571
Sales of securities available for sale 855,309 1,410,304 1,758,473
Purchases of securities available for sale (1,959,137) (1,056,840) (239,084)
Proceeds from sales/securitizations of loans 465,699 514,897 1,556,093
Net loan and lease originations, excluding sales (3,891,866) (1,609,343) (1,877,154)
Net decrease (increase) in operating lease assets 384,165 (550,715) (799,937)
Proceeds from sale of premises and equipment 19,390 3,714 3,504
Purchases of premises and equipment (57,761) (63,177) (65,160)
Proceeds from sales of other real estate 13,112 15,733 13,766
Net cash (paid) received in purchase acquisitions (8,305) -- 12,004
Proceeds from restructuring of Merchant Services 27,000 -- --
Net cash paid related to sale of Florida banking
and insurance operations (1,277,767) -- --
----------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (4,409,550) (325,887) 782,072
----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in total deposits 2,073,891 423,157 (443,921)
Increase (decrease) in short-term borrowings 537,770 (31,833) (144,230)
Proceeds from issuance of medium-term notes 1,025,000 665,000 580,000
Payment of medium-term notes (782,150) (1,330,000) (1,367,000)
Proceeds from Federal Home Loan Bank advances 1,000,000 -- --
Maturity of Federal Home Loan Bank advances (4,000) (8,000) --
Proceeds from issuance of long-term debt -- 50,000 150,000
Maturity of long-term debt (150,000) -- --
Dividends paid on common stock (167,002) (190,792) (185,103)
Repurchases of common stock (370,012) -- (168,395)
Net proceeds from issuance of common stock 3,212 2,662 1,055
----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 3,166,709 (419,806) (1,577,594)
----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS (202,878) (234,242) 227,002
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,221,641 1,455,883 1,228,881
----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,018,763 $ 1,221,641 $ 1,455,883
==================================================================================================================================
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ 70,463 $ 175 $ 1,210
Interest paid 560,731 986,108 1,175,613
Non-cash activities:
Mortgage loans securitized 386,385 -- 780,998
Stock issued for purchase acquisitions 19,151 -- 142,382
See notes to consolidated financial statements.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
-----------
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Huntington Bancshares Incorporated (Huntington) is a
multi-state diversified financial services company organized under Maryland law
in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries,
Huntington is engaged in providing full-service commercial and consumer banking
services, mortgage banking services, automobile financing, equipment leasing,
investment management, trust services, and discount brokerage services, as well
as underwriting credit life and disability insurance, and selling other
insurance and financial products and services. Huntington's banking offices are
located in Ohio, Michigan, Indiana, Kentucky, and West Virginia. Selected
financial services are also conducted in other states including Arizona,
Florida, Georgia, Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington
also has a foreign office in the Cayman Islands and a foreign office in Hong
Kong. Huntington (the parent company) is a financial holding company and a bank
holding company.
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the parent company, and its majority-owned subsidiaries and are
presented in conformity with accounting principles generally accepted in the
United States (GAAP). All significant intercompany accounts and transactions
have been eliminated in consolidation. Other subsidiaries and affiliates are
accounted for by the equity method where there is control and Huntington owns
50% or greater ownership interest. The cost method is generally used where there
is no control and Huntington owns less than a 50% ownership interest. These
assets that are accounted for by either the equity or cost method are included
in other assets in Huntington's statement of financial condition.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect amounts reported in the
financial statements. Actual results could differ from those estimates. Certain
prior period amounts have been reclassified to conform to the current year's
presentation.
SECURITIES: Securities purchased with the intention of recognizing short-term
profits are classified as trading account securities and reported at fair value.
The unrealized gains or losses on trading securities are recorded in other
non-interest income. Debt securities that Huntington has both the positive
intent and ability to hold to maturity are classified as investment securities
and are reported at amortized cost. Securities not classified as trading or
investments are designated available for sale and reported at fair value.
Unrealized gains or losses on securities available for sale are reported as a
separate component of accumulated other comprehensive income in shareholders'
equity. Declines in the value of debt and marketable equity securities that are
considered other than temporary are recorded in non-interest income as a loss on
securities available for sale.
Nonmarketable equity securities include stock acquired for regulatory purposes,
such as Federal Home Loan Bank stock and Federal Reserve Bank stock. These
securities are generally accounted for at cost and are included in securities
available for sale.
The amortized cost of specific securities sold is used to compute realized gains
and losses. Interest and dividends on securities, including amortization of
premiums and accretion of discounts using the effective interest method over the
period to maturity, are included in interest income.
LOANS AND LEASES: Loans and direct financing leases are reported net of unearned
income at the principal amounts outstanding. Interest income is accrued as
earned based on unpaid principal balances. Huntington defers and amortizes
referral payments that it makes to automotive dealers on a straight-line basis
over the life of the loan or lease as a yield adjustment. Huntington records the
fees it receives from loan and lease origination activities, as well as the
costs of those activities, in the period in which the fees are received and the
costs are incurred. The fees received from loan and lease origination activities
are recognized as interest income and the costs are included in various
categories of non-interest expense. Annually, Huntington compares the net loan
and lease origination fees and costs recognized using this method to the net
loan and lease origination fees and costs that would have been recognized had
such fees and costs been deferred and amortized over the lives of the respective
loans and leases on the interest method. For the three years ended December 31,
2002, the difference in the fees received and costs incurred versus those that
would have been recognized under a deferral method was immaterial.
Automobile loans and leases include loans secured by automobiles and leases of
automobiles that qualify for the direct financing method of accounting. Leases
qualify for the direct financing accounting method if the present values of the
lease payments and the guaranteed residual value are at least 90% of the cost of
the vehicle. Huntington records the
67
residual values of its leases based on estimated future market values of the
automobiles as published in the Black Book. Beginning in October 2000,
Huntington purchased residual value insurance for its entire lease portfolio to
mitigate the risk of declines in residual values. The insurance provides first
dollar loss coverage on the portfolio of existing automobile leases at October
1, 2000 and has a cap on insured losses of $120 million. Insured losses on new
lease originations from October 2000 through April 2002 have a cap of $50
million. There is no cap for insured losses with the policy covering new
automobile lease originations from May 2002 through April 2005 (the "New
Policy"). The New Policy is subject to renewal in April 2005. Leases covered by
the New Policy, as amended, are qualified for the direct financing method of
accounting. Leases covered by the earlier policies are accounted for using the
operating method of accounting and are recorded as operating lease assets in
Huntington's balance sheet.
Residual value losses arise if the market value at the end of the lease term is
less than the residual value embedded in the original lease contract.
Huntington's 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. This insurance, however, does not cover residual
losses below Black Book value, which may arise when the automobile has excess
wear and tear and/or excess mileage, not reimbursed by the lessee.
Commercial loans and commercial loans secured by real estate are generally
placed on non-accrual status and stop accruing interest when principal or
interest payments are 90 days or more past due or the borrower's
creditworthiness is in doubt. A loan may remain in accruing status when it is
sufficiently collateralized, which means the collateral covers the full
repayment of principal and interest, and is in the process of active collection.
Commercial and commercial real estate loans are evaluated for impairment in
accordance with the provisions of Statement of Financial Accounting Standards
(Statement) No. 114, Accounting by Creditors for Impairment of a Loan. This
Statement requires an allowance to be established as a component of the
allowance for loan and lease losses when it is probable that all amounts due
pursuant to the contractual terms of the loan or lease will not be collected and
the recorded investment in the loan or lease exceeds its fair value. Fair value
is measured using either the present value of expected future cash flows
discounted at the loan's or lease's effective interest rate, the observable
market price of the loan or lease, or the fair value of the collateral if the
loan or lease is collateral dependent. All loans and leases considered impaired
are included in non-performing assets.
Consumer loans and leases, excluding residential mortgage loans, are subject to
mandatory charge-off at a specified delinquency date and are not classified as
non-performing prior to being charged off. These loans and leases are generally
charged off in full no later than when the loan or lease becomes 120 days past
due. Residential mortgage loans are placed on non-accrual status when principal
payments are 180 days past due or interest payments are 210 days past due. A
charge-off on a residential mortgage loan is recorded when the loan has been
foreclosed and the loan balance exceeds the fair value of the collateral. The
fair value of the collateral is then recorded as real estate owned and is
reflected in other assets in the consolidated statement of financial condition.
Huntington uses the cost recovery method in accounting for cash received on
non-performing loans and leases. Under this method, cash receipts are applied
entirely against principal until the loan or lease has been collected in full,
after which time any additional cash receipts are recognized as interest income.
When, in management's judgment, the borrower's ability to make periodic interest
and principal payments resumes and collectibility is no longer in doubt, the
loan or lease is returned to accrual status. When interest accruals are
suspended, accrued interest income is reversed with current year accruals
charged to earnings and prior year amounts generally charged off as a credit
loss.
SECURITIZED LOANS: Securitized loans are accounted for in accordance with
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, which was fully adopted by Huntington in
2001. Asset securitization involves the sale of a pool of loan receivables,
generally to a trust, in exchange for funding collaterized by these loans. The
trust then sells undivided interests in the trust to investors, while Huntington
retains the remaining undivided interests, referred to as retained interest.
While the loans are removed from the balance sheet at the time of sale, this
retained interest is recorded as an asset based on its estimated fair value. An
asset is also established for the servicing of the loans sold, which is retained
at the time of sale, based on the fair value of the servicing rights. Gains and
losses on the loans sold, retained interest, and servicing rights associated
with loan securitizations are determined when the related loans are sold to the
trust. Fair values of the retained interests and servicing rights are based on
the present value of expected future cash flows from the underlying loans, net
of interest payments to security holders. The present value of expected future
cash flows is determined using assumptions for market interest rates, loan
losses, servicing costs, and prepayment rates. Management also uses these
assumptions to periodically assess the retained interests and servicing rights
for impairment. The retained interest is included in securities available for
sale and the servicing rights are recorded in other assets in the consolidated
balance sheets.
68
ALLOWANCE FOR LOAN AND LEASE LOSSES: The allowance for loan and lease losses
reflects management's judgment as to the level considered appropriate to absorb
inherent credit losses in the loan and lease portfolio. This judgment is based
on the size and current risk characteristics of the portfolio, a review of
individual loans and leases, historical and anticipated loss experience, and a
review of individual relationships where applicable. External influences such as
general economic conditions, economic conditions in the relevant geographic
areas and specific industries, regulatory guidelines, and other factors are also
assessed in determining the level of the allowance.
The allowance is determined subjectively, requiring significant estimates,
including the timing and amounts of expected future cash flows on impaired loans
and leases, consideration of current economic conditions and historical loss
experience pertaining to pools of homogeneous loans and leases, all of which may
be susceptible to change. The allowance is increased through a provision that is
charged to earnings, based on management's periodic evaluation of the factors
previously mentioned and is reduced by charge-offs, net of recoveries, and the
allowance associated with securitized or sold loans.
The allowance consists of an allocated portion and a small, unallocated portion.
The components of the allowance represent estimates developed pursuant to
Statement No. 5, Accounting for Contingencies, and Statement No. 114. The
allocated portion of the allowance reflects expected losses resulting from
quantitative analyses developed through historical loss experience and specific
credit allocations at the individual loan and lease level for commercial loans
and commercial real estate loans. The specific credit allocations are based on a
continuous analysis of all loans and leases by internal credit rating. The
historical loss element is determined using a loss migration analysis that
examines both the probability of default and the loss in the event of default by
loan and lease category and internal credit rating. The loss migration analysis
is performed periodically and loss factors are updated regularly based on actual
experience. The portion of the allowance allocated to homogeneous consumer loans
and leases is also determined by applying specific probability of default and
loss in the event of default factors to various segments of the loan and lease
portfolio. Management's determination of the amounts necessary for
concentrations and changes in portfolio mix are also included in the allocated
component of the allowance. The unallocated portion of the allowance is
determined based on management's assessment of general economic conditions, as
well as specific economic conditions in the individual markets in which
Huntington operates. This determination inherently involves a higher degree of
subjectivity and considers current risk factors that may not have yet manifested
themselves in Huntington's historical loss factors used to determine the
allocated portion of the allowance.
RESELL AND REPURCHASE AGREEMENTS: Securities purchased under agreements to
resell and securities sold under agreements to repurchase are generally treated
as collateralized financing transactions and are recorded at the amounts at
which the securities were acquired or sold plus accrued interest. The fair value
of collateral either received from or provided to a third party is continually
monitored and additional collateral is obtained or is requested to be returned
to Huntington as deemed appropriate.
GOODWILL AND OTHER INTANGIBLE ASSETS: Under the purchase method of accounting,
the net assets of entities acquired by Huntington were recorded at their
estimated fair value at the date of acquisition. The excess of cost over the
fair value of net assets acquired is recorded as goodwill. Prior to 2002,
goodwill was amortized over periods generally up to 25 years. Effective January
1, 2002, in accordance with Statement No. 142, goodwill is no longer amortized
but is reviewed by management, along with other intangible assets arising from
business combinations, for impairment quarterly or whenever a significant event
occurs that adversely affects operations or when changes in circumstances
indicate that the carrying value may not be recoverable. Other intangible assets
are amortized over their estimated useful lives.
MORTGAGE BANKING ACTIVITIES: Loans held for sale are primarily composed of
performing 1-to-4-family residential mortgage loans originated for resale and
are carried at the lower of cost (net of purchase discounts or premiums and
effects of hedge accounting) or fair value as determined on an aggregate basis.
Fair value is determined using available secondary market prices for loans with
similar coupons, maturities, and credit quality.
Huntington recognizes the rights to service mortgage loans as separate assets,
which are included in other assets in the consolidated balance sheets, only when
purchased or when servicing is contractually separated from the underlying
mortgage loans by sale or securitization of the loans with servicing rights
retained. The carrying value of loans sold or securitized is allocated between
loans and servicing rights based on the relative fair values of each. Purchased
mortgage servicing rights are initially recorded at cost. All servicing rights
are subsequently carried at the lower of the initial carrying value, adjusted
for amortization, or fair value. Servicing rights are evaluated for impairment
quarterly based on the fair value of those rights, using a disaggregated
approach. The fair value of the servicing rights is determined by estimating the
present value of future net cash flows, taking into consideration market loan
prepayment speeds, discount rates, servicing costs, and other economic factors.
Servicing rights are amortized over the period of and in proportion to the
estimated future net servicing revenue. Amortization is recorded as a reduction
of servicing income, which is reflected in non-interest
69
income in Huntington's income statement. As of December 31, 2002 and 2001,
mortgage servicing assets, net of valuation reserves, were $29.3 million and
$35.3 million, respectively. At December 31, 2002 and 2001, valuation reserves
representing the adjustment to fair value were $21.1 million and $7.0 million,
respectively. Impairment charges, which are reflected in mortgage banking
income, were $14.1 million in 2002, $6.3 million in 2001, and $0.7 million in
2000.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed principally
by the straight-line method over the estimated useful lives of the related
assets. Buildings and building improvements are depreciated over an average of
30 to 40 years and 10 to 20 years, respectively. Land improvements and furniture
and fixtures are depreciated over 10 years while equipment is depreciated over a
range of 3 to 7 years. Leasehold improvements are amortized over the lesser of
the asset life or term of the related leases. Maintenance and repairs are
charged to expense as incurred, while improvements that extend the useful life
of an asset are capitalized and depreciated over the remaining useful life.
OPERATING LEASE ASSETS: Operating lease assets consist of automobiles leased to
customers, which are reported at cost, including net deferred origination costs,
less accumulated depreciation. Net deferred origination costs include the
referral payments Huntington makes to automobile dealers, which are deferred and
amortized on a straight-line basis over the life of the lease.
Lease payments are recorded as rental income, a component of Operating lease
income in the Non-interest income section of the Consolidated Income Statements.
Huntington records the fees it receives from the origination of operating
leases, and the costs of its origination efforts, in the period in which the
fees are received and the costs are incurred. Origination fees are recorded as
Operating lease income. Depreciation expense is recorded on a straight-line
basis over the term of the lease from the cost of the automobile at the
inception of the lease to the estimated residual value at the end of the lease
term. Depreciation expense is included in Operating lease expense in the
Non-interest expense section of the Consolidated Income Statement. Depreciation
expense is adjusted prospectively at any time during the lease term when the
estimated market value of the automobile at the end of the lease term changes.
Upon disposition, a gain or loss is recorded for any difference between the net
book value of the lease and the proceeds from the disposition of the automobile.
Credit losses occur when a lease is terminated early because the lessee cannot
make the required lease payments. These credit-generated terminations result in
Huntington taking possession of the automobile earlier than expected. When this
occurs, the market value of the automobile may be less than Huntington's book
value, resulting in a loss upon sale or write down to market value while the
vehicle is in inventory pending sale. Rental income payments accrued, but not
received, are written off when they reach 120 days past due and at that time the
asset is evaluated for impairment.
DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments, primarily
interest rate swaps, are accounted for in accordance with Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. This
Statement requires every derivative instrument to be recorded in the
consolidated statement of condition as either an asset or liability measured at
its fair value and Huntington to formally document, designate, and assess the
effectiveness of transactions for which hedge accounting is applied. Depending
on the nature of the hedge and the extent to which it is effective, the changes
in fair value of the derivative recorded through earnings will either be offset
against the change in the fair value of the hedged item in earnings or recorded
in comprehensive income and subsequently recognized in earnings in the period
the hedged item affects earnings. The portion of a hedge that is ineffective and
all changes in the fair value of derivatives not designated as hedges, referred
to as trading instruments, are recognized immediately in earnings. Trading
instruments are carried at fair value with changes in fair value included in
other Non-interest income. Trading instruments are executed primarily with
Huntington's customers to fulfill their needs. Derivative instruments used for
trading purposes include interest rate swaps, including callable swaps, interest
rate caps and floors, and interest rate and foreign exchange futures, forwards
and options.
Upon adoption in 2001 of Statement No. 133, as amended, Huntington designated
its portfolio of derivative financial instruments used for risk management
purposes into fair value or cash flow hedges. Derivatives used to hedge changes
in fair value of assets and liabilities due to changes in interest rates or
other factors were designated as fair value hedges and those used to hedge
changes in forecasted cash flows, due generally to interest rate risk, were
designated as cash flow hedges. The after-tax transition adjustment of adopting
Statement No. 133, as amended, was immaterial to net income and reduced other
comprehensive income (OCI) $9.1 million in 2001.
INCOME TAXES: Income taxes are accounted for under the asset and liability
method. Accordingly, deferred tax assets and liabilities are recognized for the
future book and tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are determined
using enacted tax rates expected to apply in the year in which those temporary
differences are
70
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income at the time of
enactment of such change in tax rates.
TREASURY STOCK: Acquisitions of treasury stock are recorded at cost. Reissuance
of shares in treasury for acquisitions, stock option exercises, or for other
corporate purposes, is recorded at their weighted-average cost.
STOCK-BASED COMPENSATION: Huntington's stock-based compensation plans are
accounted for based on the intrinsic value method promulgated by Accounting
Principles Board Opinion 25, Accounting for Stock Issued to Employees, and
related interpretations. Compensation expense for employee stock options is
generally not recognized if the exercise price of the option equals or exceeds
the fair value of the stock on the date of grant. See Note 20 regarding pro
forma disclosures for net income and earnings per diluted common share is
presented as if Huntington had applied the fair value method of accounting of
Statement No. 123, Accounting for Stock-Based Compensation, in measuring
compensation costs for stock options.
Huntington expects to adopt the fair value method of recording stock options
under the transitional guidance of Statement No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. Huntington is currently evaluating
which of the three methods under transitional guidance it will adopt in 2003.
See Note 2 for more information regarding this new standard.
SEGMENT RESULTS: Accounting policies for the lines of business are the same as
those used in the preparation of the consolidated financial statements with
respect to activities specifically attributable to each business line. However,
the preparation of business line results requires management to establish
methodologies to allocate funding costs and benefits, expenses, and other
financial elements to each line of business. Changes are made in these
methodologies utilized for certain balance sheet and income statement
allocations performed by Huntington's management reporting system, as
appropriate. Prior periods are not restated for these changes.
STATEMENT OF CASH FLOWS: Cash and cash equivalents are defined as "Cash and due
from banks" and "Federal funds sold and securities purchased under resale
agreements."
2. NEW ACCOUNTING STANDARDS
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. Statement No. 145 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. The provisions of this Statement were effective for financial
statements issued on or after May 15, 2002.
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). Statement No.
146 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.
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. Statement No. 147 requires the excess of the fair value of
liabilities assumed over the fair value of the tangible and identifiable assets
acquired 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 provisions of Statement No. 147 became effective October
1, 2002.
71
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (the Interpretation). The Interpretation will change
current practice in the accounting for, and disclosure of, guarantees, which for
Huntington apply generally to its standby letters of credit. The Interpretation
requires certain guarantees to be recorded at fair value, which differs from the
current practice of recording a liability generally when a loss is probable and
reasonably estimable, as those terms are defined in FASB Statement No. 5,
Accounting for Contingencies. The Interpretation also requires a guarantor to
make significant new disclosures, even when the likelihood of making any
payments under the guarantee is remote, which also differs from current
practice. The recognition requirements of this Interpretation are to be applied
prospectively to guarantees issued or modified after December 31, 2002.
The adoption of Statements No. 145, No. 146, and No. 147 and Interpretation No.
45 are not expected to have a material impact on Huntington's results of
operations or financial condition.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. This Statement amends Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition to Statement No. 123's fair value method of accounting for
stock-based employee compensation. Statement No. 148 also amends the disclosure
provisions of Statement 123 and APB Opinion No. 28, Interim Financial Reporting,
to require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. While Statement No. 148 does not amend Statement No. 123
to require companies to account for employee stock options using the fair value
method, the disclosure provisions of Statement No. 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of Statement No. 123
or the intrinsic value method of APB Opinion No. 25, which is the method
currently used by Huntington.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation of Accounting Research Bulletin
No. 51 (ARB 51), Consolidated Financial Statements, addresses consolidation by
business enterprises where ownership interests in an entity may vary over time
or, in many cases, of special-purpose entities (SPEs). To be consolidated for
financial reporting, these entities must have certain characteristics. ARB 51
requires that an enterprise's consolidated financial statements include
subsidiaries in which the enterprise has a controlling financial interest. This
Interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. An enterprise that holds significant
variable interests in such an entity, but is not the primary beneficiary, is
required to disclose certain information regarding its interests in that entity.
This Interpretation applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise holds
an interest that it acquired before February 1, 2003. It also applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. This Interpretation may be applied (1) prospectively with a
cumulative-effect adjustment as of the date on which it is first applied, or (2)
by restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
Huntington is reviewing the implications of Interpretation No. 46 and is
considering the adoption methods permitted. Management believes that the most
significant impact of adoption will be the consolidation of one of the
securitization trusts formed in 2000. The consolidation of that securitization
trust will involve the recognition of the trust's net assets, which, at December
31, 2002, included $1,020 million of indirect automobile loans, $100 million of
cash, and $1,000 million of secured debt obligations with an interest rate based
on commercial paper rates. Adoption will also eliminate the retained interest in
the securitization trust and its servicing asset related to the loans in the
trust, with carrying values at the end of 2002 of $152 million and $12 million,
respectively. The impact to Huntington's equity and results of operations will
depend on the method of transition adopted under this new interpretation.
Huntington will adopt this new standard no later than the end of the third
quarter of 2003.
72
3. RESTATEMENT OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Huntington restated its financial results to reclassify certain automobile
leases from the direct financing lease method to the operating lease method of
accounting. The appropriate classification of automobile leases as operating
leases or direct financing leases under Statement of Financial Accounting
Standards (Statement) No. 13, Accounting for Leases, can be impacted by residual
value insurance coverage. Since October 2000, Huntington has had residual value
insurance coverage on its entire automobile lease portfolio to protect it
from the risk of loss resulting from declines in used car prices. Such
losses arise if the market value of the automobile at the end of the lease term
is less than the residual value embedded in the original lease contract.
Management believes these policies effectively protect Huntington from the risk
of declining used car prices. In April 2003, management determined that, due to
provisions in certain of its residual value insurance policies, the leases
covered by these policies would not qualify as direct financing leases.
For leases originated prior to May 2002, the residual value insurance policies
contain aggregate loss caps. The residuals insured under these policies are not
considered guaranteed, and, accordingly, the related leases fail to qualify as
direct financing leases under Statement No. 13. As a result, leases originated
prior to May 2002 have been reclassified as operating leases for all periods
presented. As of December 31, 2002, $2.3 billion of such leases, net of
accumulated depreciation, are reflected in the Consolidated Balance Sheets as
operating lease assets. All leases originated since April 2002 are covered under
a new residual value insurance policy (the "New Policy") which insures the full
residual value of each vehicle and includes no aggregate loss cap. Leases with
residual gains are netted with leases with residual losses when claims are
settled. The netting provision of the New Policy precluded Huntington from
determining the amount of the guaranteed residual of any individual leased asset
within the portfolio at lease inception. Thus, the related leases failed to
qualify as direct financing leases. Huntington has amended the New Policy,
retroactive to April 2002, by adding an endorsement that adds a level of
insurance sufficient to meet the criteria as a residual value guarantee pursuant
to Statement No. 13, on an individual lease-by-lease basis, with no netting
provisions. In addition, Huntington continues to maintain insurance coverage
that insures the full value of the leased residuals. Accordingly, and in
reliance on guidance furnished by the Securities and Exchange Commission in its
announcement at the Financial Accounting Standards Board Emerging Issues Task
Force meeting on May 15, 2003, all leases covered under the New Policy, as
amended, are now appropriately classified as direct financing leases in the
accompanying financial statements. As of December 31, 2002, $893 million of such
leases were included in loans and leases in the Consolidated Balance Sheets. It
is management's intention to insure the residuals associated with future
originations under the New Policy, as amended, and to classify such new
originations as direct financing leases.
The results of the restatement are reflected in the consolidated financial
statements, these notes to the consolidated financial statements, and
management's discussion and analysis for all current and prior periods reported
in this Form 10-K/A. The following tables reflect the previously reported
amounts and the restated results by financial statement line in Huntington's
balance sheets at December 31, 2002 and December 31, 2001, and income statements
for the years and all quarters in 2002 and 2001, and for the year 2000:
-----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------------------ ------------------------------
PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED
-----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET:
Total loans and leases $20,955,925 $18,645,189 $21,601,873 $18,500,800
Allowance for loan and lease losses 368,395 336,648 410,572 369,332
Net loans and leases 20,587,530 18,308,541 21,191,301 18,131,468
Operating lease assets -- 2,252,445 -- 3,072,432
Accrued income and other assets 532,690 537,775 536,390 554,978
Total Assets 27,578,710 27,557,251 28,500,159 28,531,346
Accrued expenses and other
liabilities 1,070,991 1,062,868 887,487 901,848
Total liabilities 25,274,879 25,266,756 26,083,719 26,098,080
Retained earnings 232,509 219,173 24,077 40,903
Total shareholders' equity 2,303,831 2,290,495 2,416,440 2,433,266
Total Liabilities and
Shareholders' Equity $27,578,710 $27,557,251 $28,500,159 $28,531,346
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73
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TWELVE MONTHS ENDED DECEMBER 31,
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2002 2001 2000
----------------------------- ------------------------------ -------------------------------
INCOME STATEMENT: PREVIOUSLY PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 983,802 $ 791,151 $ 996,182 $ 746,866 $ 942,432 $ 706,049
Provision for loan and
lease losses 227,340 194,426 308,793 257,326 90,479 61,464
Net interest income after
provision for loan and
lease losses 756,462 596,725 687,389 489,540 851,953 644,585
Operating lease income -- 641,785 -- 699,857 -- 635,243
Other non-interest income 61,718 69,904 59,767 59,767 58,795 58,795
Total non-interest income 684,811 1,334,782 509,480 1,209,337 493,559 1,128,802
Operating lease expense -- 518,970 -- 558,626 -- 494,800
Restructuring charges 56,184 56,184 99,957 79,957 50,000 --
Other non-interest expense 56,127 73,797 65,313 79,696 46,059 22,596
Total non-interest expense 852,048 1,388,688 1,023,587 1,576,596 885,617 1,306,954
Income before income taxes 589,225 542,819 173,282 122,281 459,895 466,433
Income taxes 226,000 209,755 (5,239) (23,088) 131,449 133,736
Net income $ 363,225 $ 333,064 $ 178,521 $ 145,369 $ 328,446 $ 332,697
Earnings per share:
Basic $ 1.50 $ 1.37 $ 0.71 $ 0.58 $ 1.32 $ 1.34
Diluted $ 1.49 $ 1.36 $ 0.71 $ 0.58 $ 1.32 $ 1.33
OTHER INFORMATION:
Net charge-offs $ 239,319 $ 196,912 $ 189,447 $ 146,269 $ 83,089 $ 61,647
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THREE MONTHS ENDED (UNAUDITED)
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DECEMBER 31, 2002 SEPTEMBER 30, 2002 JUNE 30, 2002
------------------------------ ---------------------------- ----------------------------
INCOME STATEMENT: PREVIOUSLY PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income $249,702 $210,255 $249,416 $205,484 $241,859 $190,981
Provision for loan and lease
losses 57,418 51,236 60,249 54,304 53,892 49,876
Net interest income after provision
for loan and lease losses 192,284 159,019 189,167 151,180 187,967 141,105
Operating lease income -- 143,465 -- 154,367 -- 168,047
Other non-interest income 17,025 19,130 18,723 21,044 15,039 17,033
Total non-interest income 126,021 271,591 139,382 296,070 117,980 288,021
Operating lease expense -- 120,747 -- 125,743 -- 131,695
Other non-interest expense 14,182 22,269 13,576 16,563 13,858 18,135
Total non-interest expense 202,695 331,529 193,723 322,453 192,060 328,032
Income before income taxes 115,610 99,081 134,826 124,797 113,887 101,094
Income taxes 30,475 24,687 36,703 33,193 31,647 27,169
Net income $ 85,135 $ 74,394 $ 98,123 $ 91,604 $ 82,240 $ 73,925
Earnings per share:
Basic $ 0.36 $ 0.32 $ 0.41 $ 0.38 $ 0.33 $ 0.30
Diluted $ 0.36 $ 0.32 $ 0.41 $ 0.38 $ 0.33 $ 0.30
OTHER INFORMATION:
Net charge-offs $ 94,938 $ 83,158 $ 43,700 $ 33,785 $ 44,900 $ 36,997
-----------------------------------------------------------------------------------------------------------------------------------
74
-----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED (UNAUDITED)
----------------------------------------------------------------------------------------------
MARCH 31, 2002 DECEMBER 31, 2001 SEPTEMBER 30, 2001
-------------------------------- ------------------------------- ------------------------
INCOME STATEMENT: PREVIOUSLY PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 242,825 $ 184,431 $ 255,238 $ 196,294 $ 249,787 $ 186,866
Provision for loan and lease
losses 55,781 39,010 108,275 101,075 49,559 34,053
Net interest income after provision
for loan and lease losses 187,044 145,421 146,963 95,219 200,228 152,813
Operating lease income -- 175,906 -- 180,382 -- 183,642
Other non-interest income 10,931 12,697 16,088 16,088 15,755 15,755
Total non-interest income 301,428 479,100 133,097 313,479 130,456 314,098
Operating lease expense -- 140,785 -- 140,575 -- 138,538
Other non-interest expense 14,511 16,830 14,017 15,580 14,605 25,145
Total non-interest expense 263,570 406,674 242,497 384,635 279,707 428,785
Income before income taxes 224,902 217,847 37,563 24,063 50,977 38,126
Income taxes 127,175 124,706 (28,086) (32,810) 8,348 3,850
Net income $ 97,727 $ 93,141 $ 65,649 $ 56,873 $ 42,629 $ 34,276
Earnings per share:
Basic $ 0.39 $ 0.37 $ 0.26 $ 0.23 $ 0.17 $ 0.14
Diluted $ 0.39 $ 0.37 $ 0.26 $ 0.23 $ 0.17 $ 0.14
OTHER INFORMATION:
Net charge-offs $ 55,781 $ 42,972 $ 56,146 $ 47,711 $ 39,743 $ 29,348
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------
JUNE 30, 2001 MARCH 31, 2001
-------------------------------- ---------------------------
INCOME STATEMENT: PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 248,033 $ 185,080 $ 243,124 $ 178,626
Provision for loan and lease losses 117,495 99,444 33,464 22,754
Net interest income after
provision for loan and lease losses 130,538 85,636 209,660 155,872
Operating lease income -- 176,418 -- 159,415
Other non-interest income 14,956 14,956 12,968 12,968
Total non-interest income 128,203 304,621 117,724 277,139
Operating lease expense -- 158,437 -- 121,076
Other non-interest expense 16,457 6,384 20,234 32,587
Total non-interest expense 267,293 395,657 234,090 367,519
Income before income taxes (8,552) (5,400) 93,294 65,492
Income taxes (10,929) (9,825) 25,428 15,697
Net income $ 2,377 $ 4,425 $ 67,866 $ 49,795
Earnings per share:
Basic $ 0.01 $ 0.02 $ 0.27 $ 0.20
Diluted $ 0.01 $ 0.02 $ 0.27 $ 0.20
OTHER INFORMATION:
Net charge-offs $ 65,465 $ 47,930 $ 28,093 $ 21,280
75
4. RESTRUCTURING
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, and credit-related 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. In 2002, pre-tax restructuring
charges associated with the Plan totaled $56.2 million ($36.5 million after-tax,
or $0.15 per share) and are reflected in non-interest expense in the
accompanying audited consolidated financial statements.
These charges included expenses of $32.7 million related to the sale of the
Florida operations, $8.0 million for asset impairment, $4.3 million for the exit
of certain e-commerce activities, $1.8 million related to vacating facilities,
and $9.4 million for other costs. Combined with the amounts recorded in 2001,
these pre-tax charges totaled $206.6 million ($134.3 million after-tax, or $0.54
per share) and consisted of $65.2 million related to credit quality, $25.3
million for asset impairment, $34.7 million for the costs related to sell the
Florida operations, $20.1 million for the exit or curtailment of certain
e-commerce activities, $15.6 million related to owned or leased facilities that
Huntington vacated, and $45.7 million related to reduction of ATMs, employee
severance, legal, accounting, and consulting fees, and other operational costs.
Huntington has a remaining reserve for restructuring of $14.4 million at
December 31, 2002. Huntington expects that this remaining reserve will be
adequate to fund the remaining estimated future cash outlays that are expected
in the completion of the exit activities contemplated by the Plan.
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 gain ($16.0 million after tax, or $.07 per share) in 2002 while
Huntington retained a nominal equity ownership in the business.
5. 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 tangible 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.
On July 2, 2002, Huntington also completed the sale of its Florida insurance
operations, the J. Rolfe Davis Insurance Agency, Inc. (JRD). Pro forma financial
information reflecting the effect of the sales is presented and described below.
The unaudited pro forma consolidated income statement is presented for the year
ended December 31, 2001, giving effect to the sale as if it had occurred on
January 1, 2001, and does not include the gain realized on the sale of
Huntington's Florida banking and insurance operations. This pro forma
consolidated financial statement is not indicative of the results of operations
that would have actually occurred had the transaction been consummated during
2001 or as the date 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. This pro forma consolidated financial statement should be read in
conjunction with Huntington's historical financial statements.
The income statement column entitled Florida Operations includes all
identifiable direct revenue and expenses for the Florida operations for the year
ended December 31, 2001, and any indirect revenue and expenses that management
expected to cease with the sale. In addition, net interest income in that column
includes a funding credit of $68.5 million related to $1.9 billion of funding
that Florida provided to Huntington. That funding credit was based on the
average one-year LIBOR rate for 2001 of 3.64%. The income statement column
entitled Related Transactions reflects $26.4 million interest that was expected
to be earned on both the $711.9 million deposit premium and the $12.2 million
proceeds for the sale of JRD over a one-year period at the same LIBOR rate of
3.64%, the $30.2 million of amortization expense on intangibles related to the
Florida operations, and the applicable income taxes.
76
------------------------------------------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2001
------------------------------------------------------------------------------------------------------------------
Florida Related Huntington
(in thousands of dollars) Huntington Operations Transactions Pro Forma
------------------------------------------------------------------------------------------------------------------
Net interest income $ 746,866 $ (108,629) $ 26,356 $ 664,593
Provision for loan and lease losses 257,326 (15,121) -- 242,205
------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 489,540 (93,508) 26,356 422,388
------------------------------------------------------------------------------------------------------------------
Non-interest income 1,209,337 (76,992) -- 1,132,345
Non-interest expense 1,576,596 (132,707) (30,180) 1,413,709
------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 122,281 (37,793) 56,536 141,024
Income taxes (23,088) (12,507) 17,237 (18,358)
------------------------------------------------------------------------------------------------------------------
NET INCOME $ 145,369 $ (25,286) $ 39,299 $ 159,382
==================================================================================================================
NET INCOME PER COMMON
SHARE -- DILUTED $ 0.58 ($ 0.10) $ 0.15 $ 0.63
==================================================================================================================
OPERATING NET INCOME (1) $ 243,133 $ (25,286) $ 39,299 $ 257,146
==================================================================================================================
OPERATING NET INCOME PER COMMON
SHARE -- DILUTED (1) $ 0.97 ($ 0.10) $ 0.15 $ 1.02
==================================================================================================================
(1) Excludes restructuring charges.
Pro forma net income for 2002 (unaudited), which excluded the after-tax combined
loss of the Florida banking operations through February 15, 2002 and the Florida
insurance operations through June 30, 2002 of $1.5 million, and any after-tax
gains and restructuring charges not related to the sale, was $299.1 million, or
$1.23 per share. Excluding the after-tax Merchant Services restructuring gain
and the non-Florida related restructuring charges, pro forma net income for 2002
(unaudited), was $298.4 million, or $1.22 per share.
6. EARNINGS PER SHARE
Basic earnings per share is the amount of earnings for the period available to
each share of common stock outstanding during the reporting period. Diluted
earnings per share is the amount of earnings available to each share of common
stock outstanding during the reporting period adjusted for the potential
issuance of common shares for stock options. The calculation of basic and
diluted earnings per share for each of the three years ended December 31 is as
follows:
-------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2000
-------------------------------------------------------------------------------------------------
NET INCOME $333,064 $145,369 $332,697
=================================================================================================
Average common shares outstanding 242,279 251,078 248,709
Dilutive effect of common stock equivalents 1,733 638 861
-------------------------------------------------------------------------------------------------
DILUTED AVERAGE COMMON SHARES OUTSTANDING 244,012 251,716 249,570
=================================================================================================
EARNINGS PER SHARE
Basic $ 1.37 $ 0.58 $ 1.34
Diluted $ 1.36 $ 0.58 $ 1.33
Average common shares outstanding and the dilutive effect of stock options have
been adjusted for the 10% stock dividend paid in 2000. The average market price
of Huntington's common stock for the period was used in determining the dilutive
effect of outstanding stock options. Common stock equivalents are computed based
on the number of shares subject to stock options that have an exercise price
less than the average market price of Huntington's common stock for the period.
77
Approximately 7.7 million, 9.9 million, and 7.6 million stock options were
outstanding at the end of 2002, 2001, and 2000, 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 $22.19 per share, $20.96 per share,
and $21.49 per share at the end of the same respective periods.
At December 31, 2002, a total of 521,919 common shares associated with a recent
acquisition were held in escrow, subject to future issuance contingent upon
meeting certain contractual performance criteria. These shares, which were
included in treasury stock, will be included in the computation of basic and
diluted earnings per share at the beginning of the period when all conditions
necessary for their issuance have been met.
7. COMPREHENSIVE INCOME
The components of Huntington's Other Comprehensive Income are the unrealized
gains (losses) on securities available for sale, unrealized gains (losses) on
derivative instruments used in cash flow hedging relationships, and adjustment
for minimum pension liability. The related before and after tax amounts in each
of the three years ended December 31 were as follows:
---------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
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) --
---------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability:
Unrealized net loss (300) -- --
Related tax benefit 105 -- --
---------------------------------------------------------------------------------------------------------------------------------
Net (195) -- --
---------------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains on securities available for sale arising during the
period:
Unrealized net gains 46,655 84,256 145,011
Related tax expense (16,082) (29,796) (51,323)
---------------------------------------------------------------------------------------------------------------------------------
Net 30,573 54,460 93,688
---------------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains on derivatives used in cash flow hedging relationships
arising during the period:
Unrealized net gains 14,799 7,895 --
Related tax expense (5,179) (2,763) --
---------------------------------------------------------------------------------------------------------------------------------
Net 9,620 5,132 --
---------------------------------------------------------------------------------------------------------------------------------
Less: Reclassification adjustment for net gains from sales
of securities available for sale realized during the period:
Realized net gains 4,902 723 37,101
Related tax expense (1,716) (252) (12,986)
---------------------------------------------------------------------------------------------------------------------------------
Net 3,186 471 24,115
---------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME $ 36,812 $ 50,008 $ 69,573
=================================================================================================================================
78
Activity in Accumulated Other Comprehensive Income for the most recent three
years is as follows:
---------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAINS
UNREALIZED GAINS (LOSSES) ON DERIVATIVE
MINIMUM (LOSSES) ON INSTRUMENTS USED IN
PENSION SECURITIES CASH FLOW HEDGING
(in thousands of dollars) LIABILITY AVAILABLE FOR SALE RELATIONSHIPS TOTAL
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ -- $(94,093) $ -- $(94,093)
Period change -- 69,573 -- 69,573
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- (24,520) -- (24,520)
Change in accounting method -- -- (9,113) (9,113)
Current-period change -- 53,989 5,132 59,121
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- 29,469 (3,981) 25,488
Current-period change (195) 27,387 9,620 36,812
---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ (195) $ 56,856 $ 5,639 $ 62,300
===========================================================================================================================
8. SECURITIES
Securities available for sale at December 31 were as follows:
-----------------------------------------------------------------------------------------------------------------------------
UNREALIZED
-------------------------------
AMORTIZED GROSS GROSS FAIR
(in thousands of dollars) COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------------------------
2002
U.S. Treasury $ 18,550 $ 1,362 $ -- $ 19,912
Federal agencies
Mortgage-backed securities 1,171,967 35,649 254 1,207,362
Other agencies 1,365,757 35,197 544 1,400,410
-----------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and Federal agencies 2,556,274 72,208 798 2,627,684
Retained interests in securitizations 146,160 13,818 -- 159,978
Other securities 613,607 5,600 3,500 615,707
-----------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $3,316,041 $ 91,626 $ 4,298 $3,403,369
=============================================================================================================================
-----------------------------------------------------------------------------------------------------------------------------
2001
U.S. Treasury $ 38,928 $ 612 $ -- $ 39,540
Federal agencies
Mortgage-backed securities 828,211 14,351 1,200 841,362
Other agencies 1,410,023 32,521 1,367 1,441,177
-----------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and Federal agencies 2,277,162 47,484 2,567 2,322,079
Retained interests in securitizations 159,790 -- -- 159,790
Other securities 367,052 5,873 5,215 367,710
-----------------------------------------------------------------------------------------------------------------------------
Total Securities Available For Sale $2,804,004 $ 53,357 $ 7,782 $2,849,579
=============================================================================================================================
Other securities available for sale include privately placed collateralized
mortgage obligations, Federal Home Loan Bank and Federal Reserve Bank stock,
corporate debt and municipal securities, and marketable equity securities.
79
Contractual maturities of securities available for sale as of December 31 were:
---------------------------------------------------------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR Amortized Fair
(in thousands of dollars) COST VALUE Cost Value
---------------------------------------------------------------------------------------------------------------------
Under 1 year $ 42,056 $ 43,149 $ 12,011 $ 12,085
1 - 5 years 868,601 896,651 1,066,383 1,090,164
6 - 10 years 414,121 424,287 218,816 222,535
Over 10 years 1,802,257 1,835,670 1,242,609 1,259,229
Retained interests in securitizations 146,160 159,978 159,790 159,790
Marketable equity securities 42,846 43,634 104,395 105,776
---------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $3,316,041 $3,403,369 $2,804,004 $2,849,579
=====================================================================================================================
At December 31, 2002, the carrying value of securities pledged to secure public
and trust deposits, trading account liabilities, U.S. Treasury demand notes and
security repurchase agreements totaled $2.6 billion. There were no securities of
a single issuer, which are non-governmental or government-sponsored, that
exceeded ten percent of shareholders' equity at December 31, 2002.
Gross gains from sales of securities of $5.4 million, $9.2 million, and $66.5
million, were realized in 2002, 2001, and 2000, respectively. Gross losses
totaled $0.5 million in 2002, $8.5 million in 2001, and $29.4 million in 2000.
Investment securities held to maturity at December 31, 2002 and 2001, were
comprised of investments in obligations of states and political subdivisions.
The amortized cost, unrealized gains and losses, and fair values of investment
securities held to maturity at December 31 were:
-------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
-------------------------------------------------------------------------------
Amortized cost $ 7,546 $12,322
Unrealized gross gains 192 215
Unrealized gross losses 13 38
-------------------------------------------------------------------------------
FAIR VALUE $ 7,725 $12,499
===============================================================================
Contractual maturities of investment securities held to maturity with yields
adjusted to reflect fully taxable equivalent basis at December 31 were:
-----------------------------------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR Amortized Fair
(in thousands of dollars) COST VALUE YIELD Cost Value Yield
-----------------------------------------------------------------------------------------------------------------------------------
Under 1 year $ 2,775 $ 2,793 7.37% $ 3,997 $ 4,016 7.54%
1 - 5 years 3,096 3,209 8.03% 6,369 6,508 7.78%
6 - 10 years 1,432 1,471 8.49% 1,713 1,726 8.48%
Over 10 years 243 252 8.18% 243 249 8.18%
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES $ 7,546 $ 7,725 7.88% $12,322 $12,499 7.81%
===================================================================================================================================
80
9. LOANS AND LEASES
At December 31, loans and leases were comprised of the following:
------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
------------------------------------------------------------------------------------------------------------------------------
Commercial loans $ 5,606,363 $ 6,439,372
Real estate
Commercial loans 2,719,146 2,496,690
Construction loans 1,010,934 1,321,751
------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS 9,336,443 10,257,813
------------------------------------------------------------------------------------------------------------------------------
Consumer
Automobile loans and leases 3,964,702 2,989,720
Home equity loans and lines of credit 3,200,169 3,582,028
Residential mortgage loans 1,748,985 1,127,825
Other loans 394,890 543,414
------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSUMER LOANS 9,308,746 8,242,987
------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS AND LEASES $18,645,189 $18,500,800
==============================================================================================================================
At December 31, 2002, the carrying value of real estate qualifying loans pledged
to secure advances from the Federal Home Loan Bank was $2.7 billion. Real estate
qualifying loans are comprised of home equity loans and lines of credit and
residential mortgage loans secured by first and second liens. At this same date,
$1.5 billion of commercial loans have been pledged to secure potential discount
window borrowings from the Federal Reserve.
Huntington's loan and lease portfolio includes lease financing receivables
consisting of direct financing leases on equipment, which are included in
commercial loans, and on automobiles, which are included in automobile loans and
leases. Net investment in lease financing receivables by category at December 31
were as follows:
-----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
-----------------------------------------------------------------------------------------------------------------------------
Commercial
Lease payments receivable $ 191,034 $ 28,791
Estimated residual value of leased assets 28,388 4,480
-----------------------------------------------------------------------------------------------------------------------------
Gross investment in commercial lease financing receivables 219,422 33,271
Unearned income (24,678) (2,859)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL NET INVESTMENT IN COMMERCIAL LEASE FINANCING RECEIVABLES 194,744 30,412
=============================================================================================================================
Consumer
Lease payments receivable 645,544 86,662
Estimated residual value of leased assets 362,474 28,091
-----------------------------------------------------------------------------------------------------------------------------
Gross investment in consumer lease financing receivables 1,008,018 114,753
Deferred fees and costs 18,126 1,119
Unearned income (133,459) (9,431)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL NET INVESTMENT IN CONSUMER LEASE FINANCING RECEIVABLES $ 892,685 $ 106,441
=============================================================================================================================
81
RELATED PARTY TRANSACTIONS
Huntington has made loans to its officers, directors, and their associates.
These loans were made in the ordinary course of business under normal credit
terms, including interest rate and collateralization, and do not represent more
than the normal risk of collection. These loans to related parties are
summarized as follows:
------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 133,844 $ 145,761
Loans made 114,694 236,260
Repayments (145,185) (234,011)
Changes due to status of executive officers and directors (7,792) (14,166)
------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 95,561 $ 133,844
==============================================================================================================================
NON-PERFORMING ASSETS AND PAST DUE LOANS
At December 31, 2002 and 2001, the loans in non-accrual status and loans past
due 90 days or more and still accruing interest, were as follows:
----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
----------------------------------------------------------------------------------------------------------------------------
Commercial $ 91,861 $ 159,637
Real Estate
Construction 5,554 13,885
Commercial 21,211 34,475
Residential 9,443 11,836
----------------------------------------------------------------------------------------------------------------------------
TOTAL NON-ACCRUAL LOANS $ 128,069 $ 219,833
============================================================================================================================
ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 61,526 $ 76,013
============================================================================================================================
The amount of interest that would have been recorded under the original terms
for total loans classified as non-accrual or renegotiated was $12.6 million for
2002, $10.3 million for 2001, and $6.5 million for 2000. Amounts actually
collected and recorded as interest income for these loans totaled $5.1 million,
$4.9 million, and $3.9 million for 2002, 2001, and 2000, respectively.
10. LOAN SECURITIZATIONS
During 2002 and 2001, Huntington sold automobile loans in securitization
transactions totaling $480.0 million and $439.1 million, respectively.
Huntington retained the interest rate risk and the rights to future cash flows
arising after the investors in the securitization trusts have received their
contractual return. These cash flows arise from cash reserve accounts, loan
collateral in excess of the note amounts issued by the securitization trusts,
and excess interest collections. Huntington's interests are subordinate to
investors' interests. The investors and the securitization trusts have no
recourse to Huntington's other assets for failure of debtors to pay when due. At
December 31, 2002 and 2001, the fair value of Huntington's retained interest in
automobile loan securitizations was $160.0 million and $159.8 million,
respectively. Management periodically reviews the assumptions underlying these
values. If these assumptions change, the related asset and income would be
affected.
Huntington has retained servicing responsibilities and receives annual servicing
fees of 1.0% of the outstanding loan balances. Servicing income, net of
amortization of capitalized servicing assets, amounted to $1.0 million in 2002,
$3.6 million in 2001, and $2.0 million in 2000. The related servicing asset had
a value of $12.7 million at the end of 2002 and $17.6 million at the end of
2001. Impairment charges of retained interests were $4.0 million in 2002 and
$12.2 million in 2001. Impairment on capitalized servicing was $1.5 million in
2002 and $1.3 million in 2001. No impairment of retained interests or
capitalized servicing was recorded in 2000.
Huntington recorded net pre-tax gains of $11.0 million, $6.6 million, and $4.9
million in 2002, 2001, and 2000, respectively, from automobile loan
securitizations. Gains or losses from securitizations depend in part on the
previous carrying amount of the financial assets involved, which are allocated
between the assets sold and the retained interests based on their relative fair
value at the date of transfer.
82
Quoted market prices are generally not available for retained interest in
automobile loan securitizations. The key economic assumptions used to measure
the fair value of the retained interest at the time of securitization during
2002 are included in the table below. In 2002 and 2001, the interest rate paid
to transferees on variable rate securities was estimated based on the forward
one-month London Interbank Offered Rate (LIBOR) yield plus the average
contractual spread over LIBOR of 34 basis points.
At December 31, 2002, the assumptions and the sensitivity of the current fair
value of the retained interest to immediate 10% and 20% adverse changes in those
assumptions were:
--------------------------------------------------------------------------------------------------------------------------
Decline in fair value
due to
----------------------
10% 20%
----------------------------------------------------------------------------------------------- adverse adverse
(in millions of dollars) Actual change change
--------------------------------------------------------------------------------------------------------------------------
Monthly prepayment rate (ABS curve) 1.45 $ 0.7 $ 1.4
Expected annual credit losses 1.55% 2.3 4.6
Discount rate 10.00% 1.8 3.6
Interest rate on variable securities - Forward one-month LIBOR
yield plus 34 basis points 2.7 5.4
Caution should be used when reading these sensitivities as a change in an
individual assumption and its impact on fair value is shown independent of
changes in other assumptions. Economic factors are dynamic and may counteract or
magnify sensitivities.
Certain cash flows received from and paid to securitization trusts were:
--------------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED
DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------
(in million of dollars) 2002 2001
--------------------------------------------------------------------------------------------------------------------------
Collections used by the trusts to purchase new
balances in revolving securitizations $ 480 $ 439
Servicing fees received 12 14
Other cash flows received on retained interest 81 32
Servicing advances --- (3)
Repayments of servicing advances --- 3
RESIDENTIAL MORTGAGE LOANS
During 2002, Huntington securitized $386.4 million of residential mortgage loans
and retained all of the resulting securities and, accordingly, reclassified the
securitized amount from loans to securities available for sale.
83
11. ALLOWANCE FOR LOAN AND LEASE LOSSES
A summary of the transactions in the allowance for loan and lease losses and
details regarding impaired loans and leases follows for the three years ended
December 31:
------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 369,332 $ 264,929 $ 273,931
Loan and lease losses (234,352) (174,540) (85,825)
Recoveries of previously charged off loans and leases 37,440 28,271 24,178
------------------------------------------------------------------------------------------------------------------
Net charge-offs (196,912) (146,269) (61,647)
------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 194,426 257,326 61,464
Allowance of securitized or sold loans (1) (31,462) (6,654) (16,719)
Allowance of assets acquired 1,264 -- 7,900
------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 336,648 $ 369,332 $ 264,929
==================================================================================================================
RECORDED BALANCE OF IMPAIRED LOANS, AT END OF YEAR (2):
With related allowance for loan and lease losses $ 91,578 $ 168,753 $ 51,693
With no related allowance for loan and lease losses 2,972 2,557 5,261
------------------------------------------------------------------------------------------------------------------
TOTAL $ 94,550 $ 171,310 $ 56,954
==================================================================================================================
AVERAGE BALANCE OF IMPAIRED LOANS FOR THE YEAR (2) $ 87,286 $ 111,921 $ 33,705
===========================================================
ALLOWANCE FOR LOAN AND LEASE LOSS RELATED
TO IMPAIRED LOANS (2) $ 37,984 $ 65,125 $ 12,944
===========================================================
(1) In conjunction with the automobile loan securitizations in 2002, 2001, and
2000, an allowance for loan and lease losses attributable to the associated
loans sold was included as a component of the loan's carrying value upon their
sale. The allowance associated with the sale of the Florida banking and
insurance operations was $22,297.
(2) Includes impaired commercial and commercial real estate loans with
outstanding balances greater then $500,000. A loan is impaired when it is
probable that Huntington will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Impaired loans are included in
non-performing assets. There was no interest recognized in 2002, 2001, and 2000
on impaired loans while they were considered impaired.
12. OPERATING LEASE ASSETS
Huntington purchases vehicles, primarily automobiles, for lease to consumers
under operating lease arrangements. These operating lease assets typically
require the lessee to make a fixed monthly rental payment over a specified lease
term, typically from 24 to 66 months. These vehicles, net of accumulated
depreciation are recorded as operating lease assets on the balance sheet. Rental
income is earned by Huntington on the operating lease assets and reported as
non-interest income. These vehicles are depreciated over the term of the lease
to the estimated fair value of the vehicle at the end of the lease. The
depreciation of these vehicles is reported as a component of non-interest
expense. At the end of the lease, the vehicle is either purchased by the lessee
or returned to Huntington. The following is a summary of operating lease assets
at December 31:
-------------------------------------------------------------------------------
(in thousands) 2002 2001
-------------------------------------------------------------------------------
Cost of Operating Lease Assets $ 3,260,897 $ 3,984,836
Accumulated depreciation (1,008,452) (912,404)
-------------------------------------------------------------------------------
Operating Lease Assets, Net $ 2,252,445 $ 3,072,432
===============================================================================
The future lease rental payments due from customers on operating lease assets at
December 31, 2002, totaled $1,254.9 million and are due as follows: $499.9
million in 2003; $379.1 million in 2004; $241.9 million in 2005; $116.9 million
in 2006; and $17.1 million in 2007. Depreciation expense for each of the years
ended December 31, 2002, 2001, and 2000 was $435.8 million, $468.7 million, and
$417.7 million, respectively.
84
13. PREMISES AND EQUIPMENT
At December 31, premises and equipment stated at cost were comprised of the
following:
-----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
-----------------------------------------------------------------------------------------------------------------------------
Land and land improvements $ 56,782 $ 78,272
Buildings 211,700 271,452
Leasehold improvements 123,944 132,267
Equipment 447,374 496,163
-----------------------------------------------------------------------------------------------------------------------------
Total premises and equipment 839,800 978,154
Less accumulated depreciation and amortization 498,434 526,118
-----------------------------------------------------------------------------------------------------------------------------
NET PREMISES AND EQUIPMENT $341,366 $ 452,036
=============================================================================================================================
Depreciation and amortization charged to expense and rental income credited to
occupancy expense for the year ended December 31 were:
----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------
Total depreciation and amortization of premises and equipment $ 46,319 $ 53,805 $49,117
============================================================================================================================
Rental income credited to occupancy expense $ 15,868 $ 17,662 $16,030
============================================================================================================================
14. INTANGIBLE ASSETS
Goodwill and other intangible assets, net of accumulated amortization, and
related activity for the years ended December 31, 2002 and 2001, was as follows:
-------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
-------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 716,054 $ 755,270
Sale of Florida banking and insurance operations (524,105) ---
Additions 28,637 3,903
Impairment --- (1,894)
Amortization (2,019) (41,225)
-------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 218,567 $ 716,054
========================================================================================================================
At December 31, goodwill and other intangible assets, net of accumulated
amortization, were comprised of:
-------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
-------------------------------------------------------------------------------------------------------------------------
Goodwill $ 211,282 $ 649,179
Core deposit --- 58,776
Leasehold 7,285 8,099
-------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $ 218,567 $ 716,054
========================================================================================================================
The additions totaling $28.6 million for 2002 related to the acquisitions of
LeaseNet Group, Inc., a $90 million leasing company, and Haberer Registered
Investment Advisor, Inc., a Cincinnati-based registered investment advisory
firm. During 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 of $1.9
million in 2001 was related to the exit of an e-commerce business activity and
represented its remaining goodwill balance.
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 Statement No. 142 resulted in an increase
in net income per share of $0.05 for 2002. Had no amortization of goodwill, net
of tax, been recorded in the prior year, net income and diluted earnings per
share for 2001 would have been greater by $33.2 million, or $0.13 per share.
85
15. DEPOSIT LIABILITIES
Core deposits were comprised of interest bearing and non-interest bearing demand
deposits, savings deposits, and other domestic time deposits. Other domestic
time deposits are comprised of certificates of deposit under $100,000 and all
IRA deposits. Brokered time deposits represent funds that Huntington has
obtained by or through a deposit broker. The entire beneficial interest in the
deposit may be held by a single depositor or Huntington may participate in a
given deposit or instrument which the broker has sold to Huntington and other
investors. At December 31, 2002, $787.8 million of brokered deposits were issued
in denominations of $100,000 or more and participated by the broker in shares of
$100,000 or less. Foreign time deposits were comprised of time certificates of
deposit issued by Huntington's foreign offices in denomination of $100,000 or
more. Foreign deposits are interest bearing and all mature in one year or less.
At December 31, deposits were comprised of the following:
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
Demand deposits
Non-interest bearing $ 3,073,869 $ 3,635,173
Interest bearing 5,374,095 5,723,160
Savings deposits 2,851,158 3,466,305
Other domestic time deposits 3,956,306 5,868,451
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE DEPOSITS 15,255,428 18,693,089
-----------------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 731,959 1,130,563
Brokered time deposits and negotiable CDs 1,092,754 137,915
Foreign time deposits 419,185 225,737
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $ 17,499,326 $ 20,187,304
===================================================================================================================================
The aggregate amount of certificates of deposit and other time deposits issued
by domestic offices was $5.8 billion and $7.1 billion at December 31, 2002 and
2001, respectively. The contractual maturity of these deposits at the end of
2002 was as follows: $2.56 billion in 2003; $1.38 billion in 2004; $463 million
in 2005; $386 million in 2006; $402 million in 2007; and $596 million
thereafter.
Domestic certificates of deposit and other time deposits of $100,000 or more
totaled $1.9 billion at the end of 2002 and $1.1 billion at the end of 2001. The
contractual maturity of these deposits at December 31, 2002, was as follows:
$343 million in three months or less; $182 million after three months through
six months; $212 million after six months through twelve months; and $1,166
million after twelve months.
Demand deposit overdrafts that have been reclassified as loan balances were
$18.2 million and $25.6 million at December 31, 2002 and 2001, respectively.
16. SHORT-TERM BORROWINGS
At December 31, short-term borrowings were comprised of the following:
------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased $ 1,244,637 $ 423,783
Securities sold under agreements to repurchase 1,213,886 1,489,824
Commercial paper 5,031 2,876
Other 77,462 39,443
------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM BORROWINGS $ 2,541,016 $1,955,926
==============================================================================================================================
86
Information concerning securities sold under agreements to repurchase at
December 31 is summarized as follows:
--------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Average balance during the year $ 1,284,406 $ 1,490,209
Average interest rate during the year 1.97% 3.58%
Maximum month-end balance during the year $ 1,488,069 $ 1,620,479
Commercial paper is issued by Huntington Bancshares Financial Corporation, a
non-bank subsidiary, with principal and interest guaranteed by Huntington.
17. MEDIUM- AND LONG-TERM DEBT
At December 31, Huntington's medium- and long-term debt consisted of the
following:
----------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
----------------------------------------------------------------------------------------------------------
MEDIUM-TERM
The Huntington National Bank (maturing through 2005) $1,905,123 $1,755,002
Parent company 140,000 40,000
----------------------------------------------------------------------------------------------------------
TOTAL MEDIUM-TERM DEBT $2,045,123 $1,795,002
==========================================================================================================
LONG-TERM
Parent company:
7 7/8% subordinated notes due 2002 $ --- $ 149,888
The Huntington National Bank:
7 5/8 % subordinated notes due 2003 150,572 157,494
6 3/4% subordinated notes due 2003 102,470 104,942
6 3/5% subordinated notes due 2018 220,824 198,153
Floating rate subordinated notes due 2008 100,000 100,000
8% subordinated notes due 2010 164,812 166,853
----------------------------------------------------------------------------------------------------------
Total subordinated notes 738,678 877,330
----------------------------------------------------------------------------------------------------------
7 7/8% Class C preferred securities of REIT subsidiary 50,000 50,000
----------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 788,678 $ 927,330
==========================================================================================================
FEDERAL HOME LOAN BANK ADVANCES DUE THROUGH 2007 $1,013,000 $ 17,000
==========================================================================================================
Amounts above are reported net of unamortized discounts and include values
related to hedging with derivative financial instruments. Huntington uses these
derivative instruments, principally interest rate swaps, to match the funding
rates on certain assets by hedging the cash flow variability associated with
certain variable-rate debt by converting the debt to fixed rate and hedging the
fair values of certain fixed-rate debt by converting the debt to variable rate.
See Note 19 for more information regarding such financial instruments.
The weighted-average interest rate for medium-term notes at December 31, 2002
and 2001, was 1.56% and 2.57%, respectively. The parent company issued $100
million of medium-term notes in 2002 that mature in 2004. The parent company
medium-term notes issued in 2001 will mature in the first quarter of 2003.
The weighted-average interest rate for subordinated notes was 6.47% at December
31, 2002 and 6.79% at the end of 2001. The Huntington National Bank's floating
rate subordinated notes were issued in 1998 and are based on three-month LIBOR.
At December 31, 2002, these notes carried an interest rate of 1.88%. The parent
company 7 7/8% subordinated notes matured in 2002.
In 2001, Huntington issued $50 million of noncumulative preferred securities of
Huntington Preferred Capital, Inc., a real estate investment trust subsidiary
(REIT), which qualify for regulatory capital. Dividends are payable quarterly at
a fixed rate of 7 7/8% and the shares are not redeemable prior to December 31,
2021.
87
Long-term advances from the Federal Home Loan Bank had weighted average interest
rates of 1.62% at December 31, 2002, and 6.02% at December 31, 2001. These
advances, which had a combination of fixed and variable interest rates in 2002
and fixed in 2001, were collateralized by qualifying real estate loans and
securities.
The terms of Huntington's medium- and long-term debt obligations and its
advances from the Federal Home Loan Bank contain various restrictive covenants
including limitations on the acquisition of additional debt in excess of
specified levels, dividend payments, and the disposition of subsidiaries. As of
December 31, 2002, Huntington was in compliance with all such covenants.
Medium and long-term debt maturities for the next five years are as follows:
$843.2 million in 2003; $958.0 million in 2004; $610.0 million in 2005; none in
2006; $900.0 million in 2007; and $535.6 million in 2008 and thereafter.
18. CAPITAL SECURITIES
Company obligated mandatorily redeemable preferred capital securities of
subsidiary trusts holding solely the junior subordinated debentures of the
parent company (Capital Securities) were issued by two business trusts,
Huntington Capital I and II (the Trusts). Huntington Capital I was formed in
January 1997 while Huntington Capital II was formed in June 1998. The proceeds
from the issuance of the Capital Securities and common securities were used to
purchase debentures of the parent company. The Trusts hold junior subordinated
debentures of the parent company, which are the only assets of the Trusts. Both
the debentures and related income statement effects are eliminated in
Huntington's consolidated financial statements.
The parent company has entered into contractual arrangements that, taken
collectively and in the aggregate, constitute a full and unconditional guarantee
by the parent company of the Trusts' obligations under the capital securities
issued. The contractual arrangements guarantee payment of (a) accrued and unpaid
distributions required to be paid on the Capital Securities; (b) the redemption
price with respect to any capital securities called for redemption by Huntington
Capital I or II; and (c) payments due upon voluntary or involuntary liquidation,
winding-up, or termination of Huntington Capital I or II. The Capital Securities
and common securities, and related debentures are summarized as follows:
---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002
---------------------------------------------------------------------------------------------------------------------------
Interest Rate of Maturity of
Capital Securities and Capital Securities
(in thousands of dollars) Securities Debentures and Debentures
---------------------------------------------------------------------------------------------------------------------------
Huntington Capital I $200,000 LIBOR + .70%(1) 02/01/2027
Huntington Capital II 100,000 LIBOR + .625%(2) 06/15/2028
---------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL SECURITIES $300,000
===========================================================================================================================
(1) Variable effective rate at December 31, 2002 and 2001, of 2.46% and 2.97%,
respectively.
(2) Variable effective rate at December 31, 2002 and 2001, of 2.04% and 2.50%,
respectively.
The debentures held by Huntington Capital I and II qualify as Tier 1 capital
under Federal Reserve Bank guidelines.
19. DERIVATIVE FINANCIAL INSTRUMENTS
Huntington uses a variety of derivative financial instruments, principally
interest rate swaps, in its asset and liability management activities to protect
against the risk of adverse price or interest rate movements on the value of
certain assets and liabilities and on future cash flows. These instruments
provide Huntington with flexibility in adjusting its sensitivity to changes in
interest rates without exposure to loss of principal and higher funding
requirements. By using derivatives to manage interest rate risk, the effect is a
smaller, more efficient balance sheet, with a lower wholesale funding
requirement and a higher net interest margin, but with a comparable level of net
interest revenue and return on equity. All derivatives are reflected at fair
value in Huntington's statements of financial condition.
Market risk, which is the possibility that economic value of net assets or net
interest income will be adversely affected by changes in interest rates or other
economic factors, is managed through the use of derivatives. Derivatives also
meet customers' financing needs but, like other financial instruments, contain
an element of credit risk, which is the possibility that Huntington will incur a
loss because a counterparty fails to meet its contractual obligations. Notional
values of interest rate swaps and other off-balance sheet financial instruments
significantly exceed the credit risk associated with these instruments and
represent contractual balances on which calculations of amounts to be exchanged
are based. Credit
88
exposure is limited to the sum of the aggregate fair value of positions that
have become favorable to Huntington, including any accrued interest receivable
due from counterparties. Potential credit losses are minimized through careful
evaluation of counterparty credit standing, selection of counterparties from a
limited group of high quality institutions, collateral agreements, and other
contract provisions.
ASSET AND LIABILITY MANAGEMENT
Derivatives that are used in asset and liability management are classified as
fair value hedges or cash flow hedges and are required to meet specific
criteria. To qualify as a hedge, the hedge relationship is designated and
formally documented at inception, detailing the particular risk management
objective and strategy for the hedge. This includes identifying the item and
risk being hedged, the derivative being used, and how the effectiveness of the
hedge is being assessed. A derivative must be highly effective in accomplishing
the objective of offsetting either changes in fair value or cash flows for the
risk being hedged. Correlation is evaluated on a retrospective and prospective
basis using quantitative measures. If a hedge relationship is found to be
ineffective, it no longer qualifies as a hedge and any excess gains or losses
attributable to ineffectiveness, as well as subsequent changes in fair value,
are recognized in other income.
For fair value hedges, Huntington effectively converts specified fixed-rate
deposits, short-term borrowings, and long-term debt to variable rate obligations
by entering into interest rate swap contracts whereby fixed-rate interest is
received in exchange for variable-rate interest without the exchange of the
contract's underlying notional amount. Forward contracts, used primarily by
Huntington in connection with its mortgage banking activities, settle in cash at
a specified future date based on the differential between agreed interest rates
applied to a notional amount. The changes in fair value of the hedged item and
the hedging instrument are reflected in current earnings. Huntington recognized
an insignificant loss in 2002 and no gain or loss in 2001 in connection with the
ineffective portion of its fair value hedging instruments. Furthermore, there
were no gains or losses on derivatives designated as fair value hedges that were
excluded from the assessment of effectiveness during 2002 and 2001.
For cash flow hedges, Huntington also entered into interest rate swap contracts
that pay fixed-rate interest in exchange for the receipt of variable-rate
interest without the exchange of the contract's underlying notional amount,
which effectively converted a portion of its floating-rate debt to fixed-rate.
This reduced the potentially adverse impact of increases in interest rates on
future interest expense. In like fashion, Huntington effectively converted
certain prime-based and LIBOR-based commercial loans to fixed-rate by entering
into contracts that swap variable-rate interest for fixed-rate interest over the
life of the contracts.
Huntington also used interest rate swaps to manage the interest rate risk
associated with its retained interest in a securitization trust. This retained
interest provides Huntington with the right to receive any future cash flows
arising after the investors in the securitization trust have received their
contractual return. As the trust holds fixed rate indirect automobile loans and
is funded with floating rate notes, the future cash flows associated with the
retained interest will vary with interest rates. The interest rate swaps used
convert the variable portion of these future cash flows to a fixed cash flow.
To the extent these derivatives are effective in offsetting the variability of
the hedged cash flows, changes in the derivatives' fair value will not be
included in current earnings but are reported as a component of Accumulated
Other Comprehensive Income in Shareholders' Equity. These changes in fair value
will be included in earnings of future periods when earnings are also affected
by the changes in the hedged cash flows. To the extent these derivatives are not
effective, changes in their fair values are immediately included in earnings.
During 2002, Huntington recognized a net loss in connection with the ineffective
portion of its cash flow hedging instruments and a net gain in 2001. The amounts
were classified in other non-interest income and were insignificant in both
years. No amounts were excluded from the assessment of effectiveness during 2002
and 2001 for derivatives designated as cash flow hedges.
89
Derivatives used to manage Huntington's interest rate risk at December 31, 2002,
are shown in the table below:
--------------------------------------------------------------------------------------------------------------------------
Weighted-Average
Average Rate
Notional Maturity Fair -------------------------
(in thousands of dollars) Value (years) Value Receive Pay
--------------------------------------------------------------------------------------------------------------------------
Asset conversion swaps
Receive fixed - generic $ 750,000 3.6 $ 48,376 5.12% 1.47%
Pay fixed - generic 750,000 0.9 (12,882) 1.42% 3.65%
--------------------------------------------------------------------------------------------------------------------------
Total asset conversion swaps 1,500,000 2.3 35,494 3.27% 2.56%
--------------------------------------------------------------------------------------------------------------------------
Liability conversion swaps
Receive fixed - generic 400,000 5.9 24,946 6.97% 1.81%
Receive fixed - callable 628,500 11.0 (6,020) 5.59% 1.51%
Pay fixed - generic 1,791,000 1.7 (20,653) 1.49% 3.48%
Receive fixed - forwards 10,000 N/A --- N/A N/A
Pay fixed - forwards 650,000 N/A (20,717) N/A N/A
--------------------------------------------------------------------------------------------------------------------------
Total liability conversion swaps 3,479,500 4.4 (22,444) 3.18% 2.80%
--------------------------------------------------------------------------------------------------------------------------
TOTAL SWAP PORTFOLIO $ 4,979,500 3.6 $ 13,050 3.21% 2.72%
==========================================================================================================================
The fair value of the swap portfolio used for asset and liability management was
$3.7 million at December 31, 2001. These values must be viewed in the context of
the overall financial structure of Huntington, including the aggregate net
position of all on- and off-balance sheet financial instruments.
As is the case with cash securities, the market value of interest rate swaps is
largely a function of the financial market's expectations regarding the future
direction of interest rates. Accordingly, current market values are not
necessarily indicative of the future impact of the swaps on net interest income.
This will depend, in large part, on the shape of the yield curve as well as
interest rate levels. Management made no assumptions regarding future changes in
interest rates with respect to the variable rate information presented in the
table above.
The next table represents the gross notional value of derivatives used to manage
interest rate risk at December 31, 2002, identified by the underlying interest
rate-sensitive instruments. The notional amounts shown in the tables above and
below should be viewed in the context of Huntington's overall interest rate risk
management activities to assess the impact on the net interest margin. The
hedges associated with medium-term notes, Federal Home Loan Bank (FHLB)
advances, and deposits below include $600.0 million, $50.0 million, and $10.0
million in notional value of forward-starting swaps, respectively.
------------------------------------------------------------------------------------------------------------------
Fair Value Cash Flow
(in thousands of dollars) Hedges Hedges Total
------------------------------------------------------------------------------------------------------------------
Instruments associated with:
Loans $ -- $ 750,000 $ 750,000
Securities available for sale -- 750,000 750,000
Deposits 638,500 -- 638,500
FHLB Advances -- 400,000 400,000
Medium-term notes -- 1,890,000 1,890,000
Subordinated notes and other long-term debt 400,000 151,000 551,000
------------------------------------------------------------------------------------------------------------------
TOTAL NOTIONAL VALUE AT DECEMBER 31, 2002 $1,038,500 $3,941,000 $4,979,500
------------------------------------------------------------------------------------------------------------------
90
The estimated amount of the existing unrealized gains and losses to be
reclassified to pre-tax earnings from Accumulated Other Comprehensive Income
within the next twelve months is expected to be a net loss of $11.4 million.
Huntington regularly enters into collateral agreements as part of the underlying
derivative agreements with its counterparties to mitigate the credit risk
associated with both the derivatives used for asset and liability management and
used in trading activities. At December 31, 2002 and 2001, Huntington's
aggregate credit risk associated with these derivatives, net of collateral that
has been pledged by the counterparty, was $15.9 million and $45.0 million,
respectively. The credit risk associated with interest rate swaps is calculated
after considering master netting agreements.
Huntington entered into these derivative financial instruments to alter the
interest rate risk embedded in its assets and liabilities. Consequently, net
amounts receivable or payable on contracts hedging either interest earning
assets or interest bearing liabilities were accrued as an adjustment to either
interest income or interest expense. The net amount resulted in interest income
exceeding interest expense by $48.4 million in 2002, and interest expense
exceeding interest income by $6.2 million and $12.7 million in 2001 and 2000,
respectively.
DERIVATIVES USED IN TRADING ACTIVITIES
Huntington offers various derivative financial instruments to enable customers
to meet their financing and investing objectives and for risk management
purposes. Derivative financial instruments held in Huntington's trading
portfolio during 2002 and 2001 consisted predominantly of interest rate swaps,
but also included interest rate caps, floors, and futures, as well as foreign
exchange options. Interest rate options grant the option holder the right to buy
or sell an underlying financial instrument for a predetermined price before the
contract expires. Interest rate futures are commitments to either purchase or
sell a financial instrument at a future date for a specified price or yield and
may be settled in cash or through delivery of the underlying financial
instrument. Interest rate caps and floors are option-based contracts that
entitle the buyer to receive cash payments based on the difference between a
designated reference rate and a strike price, applied to a notional amount.
Written options, primarily caps, expose Huntington to market risk but not credit
risk. Purchased options contain both credit and market risk. They are used to
manage fluctuating interest rates as exposure to loss from interest rate
contracts changes.
Supplying these derivatives to customers provides Huntington with fee income.
These instruments are carried at fair value with gains and losses reflected in
other non-interest income. Total trading revenue for customer accommodation was
$6.4 million in 2002, $8.4 million in 2001, and $854,000 in 2000. The total
notional value of derivative financial instruments used by Huntington on behalf
of customers (for which the related interest rate risk is offset by third
parties) was $3.2 billion at the end of 2002 and $2.0 billion at the end of the
prior year. Huntington's credit risk from interest rate swaps used for trading
purposes was $92.1 million and $36.2 million at the same dates.
In connection with its securitization activities, Huntington purchased interest
rate caps with a notional value totaling $1 billion. These purchased caps were
assigned to the securitization trust for the benefit of the security holders.
Interest rate caps were also sold totaling $1 billion outside the securitization
structure. Both the purchased and sold caps are marked to market through income
in accordance with accounting principles generally accepted in the United
States.
20. STOCK-BASED COMPENSATION
Huntington sponsors nonqualified and incentive stock option plans. These plans
provide for the granting of stock options to officers and other employees.
Huntington's Board of Directors has approved all of the plans. Shareholders have
approved each of the plans, except for the broad-based Employee Stock Incentive
Plan. Approximately 18.1 million shares have been authorized under the plans, of
which 7.7 million were available at December 31, 2002 for future grants. Options
that were granted in the most recent five years vest ratably over three years or
when other conditions are met while those granted in 1994 through 1997 vested
ratably over four years. All grants preceding 1994 became fully exercisable
after one year. All options granted have a maximum term of ten years.
91
The fair value of the options granted was estimated at the date of grant using a
Black-Scholes option-pricing model. Huntington's stock option activity and
related information for each of the recent three years ended December 31 is
summarized below:
-------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
(in thousands, except per share amounts) OPTIONS PRICE Options Price Options Price
-------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT BEGINNING OF YEAR 14,649 $ 18.70 9,482 $ 19.26 7,719 $ 20.07
Granted 5,511 18.78 6,820 17.46 2,526 16.10
Exercised (887) 12.79 (606) 9.30 (298) 8.15
Forfeited/expired (1,249) 19.89 (1,047) 21.13 (465) 22.69
-------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT END OF YEAR 18,024 $ 18.97 14,649 $ 18.70 9,482 $ 19.26
===============================================================================================================================
EXERCISABLE AT END OF YEAR 8,352 $ 19.62 7,346 $ 19.34 5,399 $ 18.18
===============================================================================================================================
WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS
GRANTED DURING THE YEAR $ 5.18 $ 4.55 $ 5.58
===============================================================================================================================
Additional information regarding options outstanding as of December 31, 2002, is
as follows:
(in thousands, except per share amounts) Options Outstanding Exercisable Options
-------------------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (Years) Price Shares Price
-------------------------------------------------------------------------------------------------------------------------
$6.64 to $10.50 196 0.1 $ 10.16 196 $ 10.16
$10.51 to $15.50 3,629 6.1 14.54 3,049 14.47
$15.51 to $20.50 11,358 8.7 18.60 2,266 18.46
$20.51 to $25.50 435 5.2 23.81 435 23.81
$25.51 to $28.35 2,406 6.1 27.26 2,406 27.26
-------------------------------------------------------------------------------------------------------------------------
TOTAL 18,024 7.7 $ 18.97 8,352 $ 19.62
=========================================================================================================================
The following pro forma disclosures for net income and earnings per diluted
common share is presented as if Huntington had applied the fair value method of
accounting of Statement No. 123, Accounting for Stock-Based Compensation, in
measuring compensation costs for stock options. The fair values of the stock
options granted were estimated using the Black-Scholes option-pricing model.
This model assumes that the estimated fair value of the options is amortized
over the options' vesting periods and the compensation costs would be included
in personnel expense on the income statement. The following table also includes
the weighted-average assumptions that were used in the option-pricing model for
options granted in each of the last three years:
92
--------------------------------------------------------------------------------------------------------------------------
(in millions of dollars, except per share amounts) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------
ASSUMPTIONS
Risk-free interest rate 4.12% 5.05% 6.14%
Expected dividend yield 3.34% 4.99% 4.37%
Expected volatility of Huntington's common stock 33.8% 41.0% 45.1%
PRO FORMA RESULTS
Net income, as reported $ 333.1 $145.4 $332.7
Less pro forma expense related to options granted 12.7 12.1 10.3
--------------------------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 320.4 $133.3 $322.4
==========================================================================================================================
NET INCOME PER COMMON SHARE:
Basic, as reported $1.37 $0.58 $1.34
Basic, pro forma 1.32 0.53 1.30
Diluted, as reported 1.36 0.58 1.33
Diluted, pro forma 1.31 0.53 1.29
21. BENEFIT PLANS
Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan), a
non-contributory defined benefit pension plan covering substantially all
employees. The Plan provides benefits based upon length of service and
compensation levels. The funding policy of Huntington is to contribute an annual
amount that is at least equal to the minimum funding requirements but not more
than that deductible under the Internal Revenue Code.
At December 31, 2002 and 2001, The Huntington National Bank, as trustee, held
all Plan assets. The Plan assets consisted of investments in a variety of
Huntington mutual funds and Huntington common stock as follows:
FAIR VALUE
-------------------------------------------------------------------
(in thousands of dollars) 2002 2001
-------------------------------------------------------------------
Huntington mutual funds $238,333 $214,357
Huntington common stock 12,019 19,637
The number of shares of Huntington common stock held by the Plan was 642,364 at
December 31, 2002 and 1,142,364 at the end of the prior year. Dividends received
by the Plan during 2002 and 2001 were $6.1 million and $7.7 million,
respectively. Huntington common stock comprised approximately 4% of the Plan's
assets at the end of 2002 and approximately 8% at the end of 2001. The Plan has
acquired and held Huntington common stock in compliance at all times with
Section 407 of the Employee Retirement Income Security Act of 1978.
In addition, Huntington has an unfunded defined benefit post-retirement plan
that provides certain health care and life insurance benefits to retired
employees who have attained the age of 55 and have at least 10 years of vesting
service under this plan. For any employee retiring on or after January 1, 1993,
post-retirement healthcare benefits are based upon the employee's number of
months of service and are limited to the actual cost of coverage. Life insurance
benefits are a percentage of the employee's base salary at the time of
retirement, with a maximum of $50,000 of coverage.
93
The following table reconciles the funded status of the Plan and the
post-retirement benefit plan at the September 30 measurement dates with the
amounts recognized in the consolidated balance sheets at December 31:
-----------------------------------------------------------------------------------------------------------------------------------
PENSION POST-RETIREMENT
BENEFITS BENEFITS
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION AT
BEGINNING OF MEASUREMENT YEAR $ 212,935 $ 209,954 $51,430 $46,119
Changes due to:
Service cost 8,263 8,394 1,126 1,060
Interest cost 15,458 14,675 3,603 3,435
Benefits paid (18,920) (16,008) (3,456) (3,810)
Curtailment --- (2,475) (1,472) ---
Plan amendments 1,423 1,785 --- ---
Actuarial assumptions 34,297 (3,390) 2,321 4,626
-----------------------------------------------------------------------------------------------------------------------------------
Total changes 40,521 2,981 2,122 5,311
-----------------------------------------------------------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION AT END OF MEASUREMENT YEAR 253,456 212,935 53,552 51,430
-----------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT BEGINNING
OF MEASUREMENT YEAR 226,959 206,936 --- ---
Changes due to:
Actual return on plan assets (16,396) (5,969) --- ---
Employer contributions 55,000 42,000 --- ---
Benefits paid (18,920) (16,008) --- ---
-----------------------------------------------------------------------------------------------------------------------------------
Total changes 19,684 20,023 --- ---
-----------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF MEASUREMENT YEAR 246,643 226,959 --- ---
-----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (greater) less
than plan assets (6,813) 14,024 (53,552) (51,430)
Unrecognized net actuarial loss (gain) 101,155 26,068 1,924 (399)
Unrecognized prior service cost 1,791 183 5,043 6,450
Unrecognized transition (asset) liability,
net of amortization (274) (540) 11,040 13,868
-----------------------------------------------------------------------------------------------------------------------------------
PREPAID (ACCRUED) BENEFIT COSTS $ 95,859 $ 39,735 $ (35,545) $(31,511)
===================================================================================================================================
WEIGHTED-AVERAGE ASSUMPTIONS AT SEPTEMBER 30:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.50% 9.75% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
The following table shows the components of pension cost recognized in the most
recent three years:
----------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS POST-RETIREMENT BENEFITS
----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
Service cost $ 8,263 $ 8,394 $ 10,241 $ 1,126 $ 1,060 $ 1,544
Interest cost 15,458 14,675 15,509 3,603 3,435 3,506
Expected return on plan assets (26,417) (22,821) (18,947) --- --- ---
Amortization of transition asset (265) (291) (325) 1,104 1,261 1,261
Amortization of prior service cost (185) (69) (318) 605 693 693
Curtailment 2,022 --- --- 2,526 --- ---
Recognized net actuarial (gain) loss --- (268) 158 --- (31) ---
----------------------------------------------------------------------------------------------------------------------------------
BENEFIT COST $ (1,124) $ (380) $ 6,318 $8,964 $ 6,418 $ 7,004
==================================================================================================================================
The curtailment reflected above related to the sale of the Florida banking and
insurance operations. This expense was recognized in Huntington's results of
operations in 2002. Management expects pension benefit cost to approximate $3.5
million and post-retirement benefits cost to approximate $6.3 million for 2003.
94
The 2003 health care cost trend rate was projected to be 13.35% for pre-65
participants and 13.53% for post-65 participants compared with an estimate of
9.00% for both in 2001. These rates are assumed to decrease gradually until they
reach 5.09% for pre-65 participants and 5.17% for post-65 participants in the
year 2017 and remain at that level thereafter. The increase in the health care
cost trend rate, a decline in the discount rate from 7.50% to 6.75%, and a
decrease in the Medicare HMO participation rate from 12% to 0% all increased the
benefit cost and benefit liability. This increase was offset by a decrease in
the number of plan participants. Huntington updated the immediate health care
cost trend rate assumption based on current market data and Huntington's claims
experience. This trend rate is expected to decline over time to a trend level
consistent with medical inflation and long-term economic assumptions.
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one-percentage point increase would increase service and interest
costs and the post-retirement benefit obligation by $83,000 and $1.0 million,
respectively. A one-percentage point decrease would reduce service and interest
costs by $81,000 and the post-retirement benefit obligation by $929,000.
Huntington also sponsors other retirement plans. One of those plans is an
unfunded Supplemental Executive Retirement Plan. This plan is a nonqualified
plan that provides certain former officers of Huntington and its subsidiaries
with defined pension benefits in excess of limits imposed by federal tax law. At
December 31, 2002 and 2001, the accrued pension liability for this plan totaled
$14.3 million and $14.2 million, respectively. Pension expense for the plan was
$1.3 million in 2002, $2.1 million in 2001, and $2.5 million in 2000. Other
plans, including plans assumed in various past acquisitions, are unfunded,
nonqualified plans that provide certain active and former officers of Huntington
and its subsidiaries nominated by Huntington's compensation committee with
deferred compensation, post-employment, and/or defined pension benefits in
excess of limits imposed by federal tax law. These plans had a collective
accrued liability of $15.2 million and $14.5 million at December 31, 2002 and
2001, respectively. Expense for these plans was $2.1 million in 2002, $1.8
million in 2001, and $1.2 million for 2000. At December 31, 2002, a minimum
pension asset of $1.4 million and a reduction in Accumulated Other Comprehensive
Income of $0.3 million ($0.2 million after-tax) was recorded collectively for
these plans.
Huntington has a defined contribution plan that is available to eligible
employees. Matching contributions by Huntington equal 100% on the first 3% and
50% on the next 2% of participant elective deferrals. The cost of providing this
plan was $8.4 million in 2002, $8.7 million in 2001, and $7.9 million in 2000.
The number of shares of Huntington common stock held by this plan was 8,812,405
at December 31, 2002 and 10,303,595 at the end of the prior year. The market
value of these shares was $164.9 million and $177.1 million at the same
respective dates. Dividends received by the plan during 2002 were $11.3 million
and $8.8 million during 2001.
22. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, Huntington makes various commitments to
extend credit that are not reflected in the financial statements. The contract
amount of these financial agreements at December 31 were:
-------------------------------------------------------------------------------
(in millions of dollars) 2002 2001
-------------------------------------------------------------------------------
CONTRACT AMOUNT REPRESENTS CREDIT RISK
Commitments to extend credit
Commercial $ 4,435 $4,345
Consumer 3,607 4,283
Commercial real estate 577 715
Standby letters of credit 880 939
Commercial letters of credit 71 175
COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit generally have short-term, fixed expiration dates,
are variable rate, and contain clauses that permit Huntington to terminate or
otherwise renegotiate the contracts in the event of a significant deterioration
in the customer's credit quality. These arrangements normally require the
payment of a fee by the customer, the pricing of which is based on prevailing
market conditions, credit quality, probability of funding, and other relevant
factors. Since many of these commitments are expected to expire without being
drawn upon, the contract amounts are not necessarily indicative of future cash
requirements. The interest rate risk arising from these financial instruments is
insignificant as a result of their predominantly short-term, variable rate
nature.
95
Standby letters of credit are conditional commitments issued by Huntington to
guarantee the performance of a customer to a third party. These guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. Most of these
arrangements mature within two years. Approximately 53% of standby letters of
credit are collateralized, and nearly 95% are expected to expire without being
drawn upon. In 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (the Interpretation). The Interpretation
will change current practice in the accounting for, and disclosure of,
guarantees. For Huntington, these changes apply to its standby letters of
credit. The Interpretation requires certain guarantees to be recorded at fair
value, which differs from the current practice of recording a liability
generally when a loss is probable and reasonably estimable, as those terms are
defined in Statement No. 5, Accounting for Contingencies. The Interpretation's
initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
Huntington estimates that the implementation of this new Interpretation will be
immaterial to Huntington's results of operations in 2003.
Commercial letters of credit represent short-term, self-liquidating instruments
that facilitate customer trade transactions and have maturities of no longer
than ninety days. The merchandise or cargo being traded normally secures these
instruments.
COMMITMENTS TO SELL LOANS
Huntington entered into forward contracts, relating to its mortgage banking
business. At December 31, 2002 and 2001, Huntington had commitments to sell
residential real estate loans of $782.0 million and $677.4 million,
respectively. These contracts mature in less than one year. In addition,
Huntington had a commitment to sell automobile loans of $38.8 million and $38.2
million at December 31, 2002 and 2001, respectively, under the terms of its
securitization agreement.
LITIGATION
In the ordinary course of business, there are various legal proceedings pending
against Huntington and its subsidiaries. In the opinion of management, the
aggregate liabilities, if any, arising from such proceedings are not expected to
have a material adverse effect on Huntington's consolidated financial position.
COMMITMENTS UNDER CAPITAL AND OPERATING LEASE OBLIGATIONS
At December 31, 2002, Huntington and its subsidiaries were obligated under
noncancelable leases for land, buildings, and equipment. Many of these leases
contain renewal options, and certain leases provide options to purchase the
leased property during or at the expiration of the lease period at specified
prices. Some leases contain escalation clauses calling for rentals to be
adjusted for increased real estate taxes and other operating expenses, or
proportionately adjusted for increases in the consumer or other price indices.
The future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 2002 were $35.1 million in 2003, $33.1 million in 2004, $29.7
million in 2005, $27.6 million in 2006, $26.2 million in 2007, and $218.6
million thereafter. Total minimum lease payments have not been reduced by
minimum sublease rentals of $116.7 million due in the future under noncancelable
subleases. The rental expense for all operating leases was $38.7 million for
2002 compared with $47.5 million for 2001 and $49.6 million in 2000. Huntington
had no material obligations under capital leases.
23. INCOME TAXES
The following is a summary of the provision for income taxes:
----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------
Currently (receivable) payable
Federal $ 108,231 $ (123,264) $(106,355)
State --- --- 467
----------------------------------------------------------------------------------------------------------------------------
Total current 108,231 (123,264) (105,888)
----------------------------------------------------------------------------------------------------------------------------
Deferred tax expense
Federal 101,524 100,176 239,624
State --- --- ---
----------------------------------------------------------------------------------------------------------------------------
Total deferred 101,524 100,176 239,624
----------------------------------------------------------------------------------------------------------------------------
INCOME TAXES $ 209,755 $ (23,088) $133,736
============================================================================================================================
96
Tax expense associated with securities transactions included in the above
amounts was $1.7 million in 2002, $0.3 million in 2001, and $15.9 million in
2000.
The following is a reconcilement of income tax expense to the amount computed at
the statutory rate of 35%:
-----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Income tax expense computed at the statutory rate $ 189,987 $ 42,798 $ 163,252
Increases (decreases):
Tax-exempt income (19,629) (17,477) (18,619)
Asset securitization activities (8,244) (21,527) (10,970)
Subsidiary capital activities --- (32,500) ---
Nondeductible goodwill 52,500 5,729 5,223
Other, net (4,859) (111) (5,150)
-----------------------------------------------------------------------------------------------------------------------------
INCOME TAXES $ 209,755 $ (23,088) $ 133,736
=============================================================================================================================
Income taxes include a benefit from Bank owned life insurance, included in
tax-exempt income in the previous table, of $16.1 million, $13.4 million and
$13.8 million for 2002, 2001, and 2000, respectively. The significant components
of deferred assets and liabilities at December 31, are as follows:
---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
---------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 76,980 $ 82,617
Pension and other employee benefits --- 13,641
Alternative minimum tax 18,308 28,784
Other 98,879 75,282
---------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 194,167 200,324
---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Lease financing 717,643 495,133
Undistributed income of subsidiary 28,123 174,528
Pension and other employee benefits 17,661 ---
Mortgage servicing rights 12,308 12,967
Unrealized gains on securities available for sale 30,129 15,868
Other 125,515 118,755
---------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 931,379 817,251
---------------------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 737,212 $ 616,927
===========================================================================================================================
At December 31, 2002, Huntington had an alternative minimum tax credit
carryforward for income tax purposes of $18.3 million. During 2002, the net
deferred tax liability was increased by $14.2 million for the tax effect of
unrealized gains on securities available for sale and $4.5 million from the
acquisition of LeaseNet.
97
24. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations, as
restated, for the years ended December 31, 2002 and 2001:
---------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars, except per share data) FIRST SECOND THIRD FOURTH
---------------------------------------------------------------------------------------------------------------------------------
2002
INTEREST INCOME $ 335,201 $ 322,909 $ 339,378 $ 341,446
INTEREST EXPENSE 150,770 131,928 133,894 131,191
---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 184,431 190,981 205,484 210,255
---------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN AND LEASE LOSSES 39,010 49,876 54,304 51,236
GAIN ON SALE OF FLORIDA OPERATIONS 175,344 --- --- ---
MERCHANT SERVICES GAIN --- --- 24,550 ---
SECURITIES GAINS 457 966 1,140 2,339
NON-INTEREST INCOME 303,299 287,055 270,380 269,252
NON-INTEREST EXPENSE 350,490 328,032 322,453 331,529
RESTRUCTURE CHARGES 56,184 --- --- ---
---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 217,847 101,094 124,797 99,081
INCOME TAXES 124,706 27,169 33,193 24,687
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 93,141 $ 73,925 $ 91,604 $ 74,394
=================================================================================================================================
NET INCOME PER COMMON SHARE -- BASIC $ 0.37 $ 0.30 $ 0.38 $ 0.32
NET INCOME PER COMMON SHARE -- DILUTED $ 0.37 $ 0.30 $ 0.38 $ 0.32
---------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars, except per share data) First Second Third Fourth
---------------------------------------------------------------------------------------------------------------------------------
2001
Interest income $ 453,477 $ 436,006 $ 415,913 $ 384,807
Interest expense 274,851 250,926 229,047 188,513
---------------------------------------------------------------------------------------------------------------------------------
Net interest income 178,626 185,080 186,866 196,294
---------------------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 22,754 99,444 34,053 101,075
Securities gains (losses) 2,078 (2,503) 1,059 89
Non-interest income 275,061 307,124 313,039 313,390
Non-interest expense 367,519 381,660 377,968 369,492
Restructure charges --- 13,997 50,817 15,143
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 65,492 (5,400) 38,126 24,063
Income taxes 15,697 (9,825) 3,850 (32,810)
---------------------------------------------------------------------------------------------------------------------------------
Net income $ 49,795 $ 4,425 $ 34,276 $ 56,873
=================================================================================================================================
Net Income Per Common Share -- Basic $ 0.20 $ 0.02 $ 0.14 $ 0.23
Net Income Per Common Share -- Diluted $ 0.20 $ 0.02 $ 0.14 $ 0.23
98
25. REGULATORY MATTERS
Huntington and its bank subsidiary, The Huntington National Bank, are subject to
various regulatory capital requirements administered by federal and state
banking agencies. These requirements involve qualitative judgments and
quantitative measures of assets, liabilities, capital amounts, and certain
off-balance sheet items as calculated under regulatory accounting practices.
Failure to meet minimum capital requirements can initiate certain actions by
regulators that, if undertaken, could have a material adverse effect on
Huntington's and The Huntington National Bank's financial statements. Applicable
capital adequacy guidelines require minimum ratios of 4.00% for Tier 1
Risk-based Capital, 8.00% for Total Risk-based Capital, and 4.00% for Tier 1
Leverage Capital. To be considered well capitalized under the regulatory
framework for prompt corrective action, the ratios must be at least 6.00%,
10.00%, and 5.00%, respectively.
As of December 31, 2002 and 2001, Huntington and The Huntington National Bank
have met all capital adequacy requirements and had regulatory capital ratios in
excess of the levels established for well-capitalized institutions. The
period-end capital amounts and capital ratios of Huntington and its bank
subsidiary are as follows:
--------------------------------------------------------------------------------------------------------------------------
TIER 1 TOTAL CAPITAL TIER 1 LEVERAGE
------------------------ ------------------------ ------------------------
(in millions of dollars) 2002 2001 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------
Huntington Bancshares Incorporated
Amount $ 2,355 $ 2,037 $ 3,141 $ 2,887 $ 2,355 $2,037
Ratio 8.65% 7.30% 11.54% 10.34% 8.85% 7.46%
THE HUNTINGTON NATIONAL BANK
Amount $ 1,720 $ 1,797 $ 2,761 $ 2,898 $ 1,720 $1,797
Ratio 6.34% 6.41% 10.18% 10.34% 6.56% 6.64%
--------------------------------------------------------------------------------------------------------------------------
Tier 1 Risk-Based Capital consists of total equity plus qualifying capital
securities and minority interest, less unrealized gains and losses accumulated
in other comprehensive income, and non-qualifying intangible and servicing
assets. Total Risk-Based Capital is Tier 1 Risk-Based Capital plus qualifying
subordinated notes and allowable allowance for loan and lease losses (limited to
1.25% of total risk-weighted assets). Tier 1 Leverage Capital is equal to Tier 1
Capital. Both Tier 1 Capital and Total Capital ratios are derived by dividing
the respective capital amounts by net risk-weighted assets, which are calculated
as prescribed by regulatory agencies. Tier 1 Leverage Capital ratio is
calculated by dividing the Tier 1 capital amount by average adjusted total
assets for the fourth quarter of 2002 and 2001, less non-qualifying intangibles
and other adjustments.
Huntington and its subsidiaries are also subject to various regulatory
requirements that impose restrictions on cash, debt, and dividends. The
Huntington National Bank is required to maintain cash reserves based on the
level of certain of its deposits. This reserve requirement may be met by holding
cash in branches or on deposit at the Federal Reserve Bank. During 2002 and
2001, the average balance of these deposits were $70.0 million and $72.1
million, respectively.
Under current Federal Reserve regulations, The Huntington National Bank is
limited as to the amount and type of loans it may make to the parent company and
non-bank subsidiaries. At December 31, 2002, The Huntington National Bank could
lend $276.1 million to a single affiliate, subject to the qualifying collateral
requirements defined in the regulations.
Dividends from The Huntington National Bank are one of the major sources of
funds for Huntington. These funds aid the parent company in the payment of
dividends to shareholders, expenses, and other obligations. Payment of dividends
to the parent company is subject to various legal and regulatory limitations.
Regulatory approval is required prior to the declaration of any dividends in
excess of available retained earnings. The amount of dividends that may be
declared without regulatory approval is further limited to the sum of net income
for the current year and retained net income for the preceding two years, less
any required transfers to surplus or common stock. The Huntington National Bank
could declare, without regulatory approval, dividends in 2003 of approximately
$98.1 million plus an additional amount equal to its net income through the date
of declaration in 2003.
99
26. PARENT COMPANY FINANCIAL STATEMENTS
The parent company condensed financial statements, which include transactions
with subsidiaries, are as follows. Huntington's statement of changes in
shareholders' equity can be found on page 65.
-------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 546,897 $ 155,618
Securities available for sale 40,041 50,850
Due from The Huntington National Bank 250,759 250,759
Due from non-bank subsidiaries 117,987 83,084
Investment in The Huntington National Bank 1,537,860 2,051,448
Investment in non-bank subsidiaries 453,674 462,805
Goodwill, net of accumulated amortization 9,877 9,877
Accrued interest receivable and other assets 136,804 98,435
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,093,899 $ 3,162,876
===============================================================================================================================
LIABILITIES
Short- and medium-term borrowings $ 145,556 $ 49,576
Long-term borrowed funds from subsidiary trusts 309,279 309,279
Long-term borrowed funds from unaffiliated companies --- 149,888
Dividends payable, accrued expenses, and other liabilities 348,569 220,867
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 803,404 729,610
-------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 2,290,495 2,433,266
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,093,899 $ 3,162,876
===============================================================================================================================
STATEMENTS OF INCOME YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
INCOME
Dividends from
The Huntington National Bank $ 221,000 $ 159,404 $ 222,330
Non-bank subsidiaries 8,142 14,498 3,000
Interest from
The Huntington National Bank 29,611 20,343 20,749
Non-bank subsidiaries 5,854 4,454 2,741
Securities gains (losses) and other 877 (4,852) 66,134
-----------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 265,484 193,847 314,954
-----------------------------------------------------------------------------------------------------------------------------
EXPENSE
Interest on debt 20,213 29,673 36,687
Other 17,811 21,160 6,756
-----------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSE 38,024 50,833 43,443
-----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 227,460 143,014 271,511
Income taxes (4,481) (10,738) 12,592
-----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 231,941 153,752 258,919
-----------------------------------------------------------------------------------------------------------------------------
Equity in undistributed net income (loss) of
The Huntington National Bank 105,843 (7,985) 70,638
Non-bank subsidiaries (4,720) (398) 3,140
-----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 333,064 $ 145,369 $ 332,697
=============================================================================================================================
100
----------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 333,064 $ 145,369 $ 332,697
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (101,123) 8,383 (73,778)
Depreciation and amortization 1,254 2,674 2,987
(Gain) loss on sales of securities available for sale (709) 5,251 (62,140)
Change in other assets and other liabilities 53,382 (20,866) 73,227
Restructuring charges 6,859 5,604 ---
----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 292,727 146,415 272,993
----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Decrease (increase) in investments in subsidiaries 670,000 110,019 (5,397)
Repayments from (advances to) subsidiaries 7,397 (62,419) 67,154
Purchase of securities available for sale --- (15,027) (47,000)
Proceeds from sale of securities available for sale 8,977 10,889 68,106
Proceeds from sale of other assets --- --- 11,405
----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 686,374 43,462 94,268
----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in short-term borrowings (4,020) (89,093) 87,342
Proceeds from issuance of medium-term borrowings 100,000 40,000 25,000
Payment of medium-term borrowings --- (25,000) ---
Payment of long-term debt (150,000) --- ---
Dividends paid on common stock (167,002) (190,792) (185,103)
Acquisition of treasury stock (370,012) --- (168,395)
Proceeds from issuance of treasury stock 3,212 2,662 1,055
----------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (587,822) (262,223) (240,101)
----------------------------------------------------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS 391,279 (72,346) 127,160
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 155,618 227,964 100,804
----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 546,897 $ 155,618 $ 227,964
============================================================================================================================
Supplemental disclosure:
Interest paid $ 20,779 $ 31,067 $ 36,262
Income taxes paid --- --- ---
Common stock issued in purchase acquisitions 19,151 --- 142,382
27. SEGMENT REPORTING
Huntington has three distinct lines of business: Regional Banking, Dealer Sales,
and the Private Financial Group (PFG). A 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
management 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 2002, the previously reported segments,
Retail Banking and Corporate Banking, 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 previously separate
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 from Huntington's
management reporting system. The prior periods have not been restated for these
methodology changes.
101
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
charges. See Note 4 to the consolidated financial statements for further
discussions regarding Restructuring and Note 5 regarding the sale of
Huntington's Florida banking and insurance operations. The financial information
that follows is inclusive of the above adjustments on an after-tax basis to
reflect the reconciliation to reported net income.
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 commercial 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 in six operating
regions within the five states of Ohio, Michigan, Indiana, West Virginia, and
Kentucky 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 commercial 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 serves automotive dealerships within Huntington's
primary banking markets, as well as in Arizona, Florida, Georgia, Pennsylvania,
and Tennessee. This segment finances the purchase of automobiles by customers of
the automotive dealerships, purchases automobiles from dealers and
simultaneously leases the automobile under long-term operating and direct
financing leases, finances the dealership's inventory of automobiles, and
provides other banking services to the automotive dealerships and their owners.
PRIVATE FINANCIAL GROUP: This segment provides products and services 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.
102
Listed below is certain operating basis financial information reconciled to
Huntington's 2002, 2001, and 2000 reported results by line of business:
------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS Regional Dealer Treasury/ Huntington
(in thousands of dollars) Banking Sales PFG Other Consolidated
------------------------------------------------------------------------------------------------------------------------------------
2002
Net interest income $ 592,977 $ 34,713 $ 35,403 $ 118,334 $ 781,427
Provision for loan losses 141,190 44,573 3,477 -- 189,240
Non-Interest income 279,780 669,898 108,817 63,050 1,121,545
Non-Interest expense 559,302 611,706 100,961 40,325 1,312,294
Income taxes 60,293 16,913 13,924 11,947 103,077
----------------------------------------------------------------------------------------------------------------------------------
Operating earnings 111,972 31,419 25,858 129,112 298,361
Gain on sale of Florida operations -- -- -- 56,790 56,790
Merchant Services restructuring gain -- -- -- 15,957 15,957
Restructuring and special charges -- -- (3,429) (33,090) (36,519)
Florida operations sold 1,270 790 1,428 (5,013) (1,525)
----------------------------------------------------------------------------------------------------------------------------------
Reported earnings $ 113,242 $ 32,209 $ 23,857 $ 163,756 $ 333,064
==================================================================================================================================
2001
Net interest income $ 626,647 $ (24,339) $ 36,323 $ 25,962 $ 664,593
Provision for loan losses 96,943 29,655 408 -- 127,006
Non-Interest income 262,432 721,500 91,986 61,677 1,137,595
Non-Interest expense 523,994 640,135 94,025 75,598 1,333,752
Income taxes 93,850 9,580 11,857 (31,003) 84,284
----------------------------------------------------------------------------------------------------------------------------------
Operating earnings 174,292 17,791 22,019 43,044 257,146
Restructuring charges (43,751) (45,870) (6,402) (1,741) (97,764)
Florida operations sold 19,761 2,902 5,663 (42,339) (14,013)
----------------------------------------------------------------------------------------------------------------------------------
Reported earnings (loss) $ 150,302 $ (25,177) $ 21,280 $ (1,036) $ 145,369
==================================================================================================================================
2000
Net interest income $ 656,856 $ (44,243) $ 30,502 $ (29,712) $ 613,403
Provision for loan losses 36,180 17,098 1,279 -- 54,557
Non-Interest income 276,350 666,509 57,442 81,759 1,082,060
Non-Interest expense 570,788 527,088 53,866 26,132 1,177,874
Income taxes 112,549 27,207 11,343 (18,357) 132,742
----------------------------------------------------------------------------------------------------------------------------------
Operating earnings 213,689 50,873 21,456 44,272 330,290
Florida operations sold 61,630 3,067 1,449 (63,739) 2,407
----------------------------------------------------------------------------------------------------------------------------------
Reported earnings (loss) $ 275,319 $ 53,940 $ 22,905 $ (19,467) $ 332,697
==================================================================================================================================
----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS AVERAGE ASSETS AVERAGE DEPOSITS
------------------------------------------- -------------------------------------------
(in millions of dollars) 2002 2001 2000 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
Regional Banking $13,338 $12,707 $11,835 $14,940 $13,850 $13,797
Dealer Sales 6,720 6,550 6,622 46 34 76
PFG 1,022 782 586 807 661 600
Treasury / Other 4,523 4,932 6,557 808 269 901
----------------------------------------------------------------------------------------------------------------------------------
Subtotal 25,603 24,971 25,600 16,601 14,814 15,374
Florida 437 3,213 3,153 583 4,547 4,316
----------------------------------------------------------------------------------------------------------------------------------
Total $26,040 $28,184 $28,753 $17,184 $19,361 $19,690
==================================================================================================================================
103
28. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of Huntington's financial
instruments, including the fair values of derivatives used to hedge related fair
values or cash flows, at December 31 are presented in the following table:
-----------------------------------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(in thousands of dollars) AMOUNT VALUE AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and short-term assets $ 1,056,063 $ 1,056,063 $ 1,242,846 $ 1,242,846
Trading account securities 241 241 13,392 13,392
Mortgages held for sale 528,379 528,379 629,386 629,386
Securities 3,410,915 3,411,201 2,861,901 2,862,348
Loans and leases 18,308,541 18,995,327 18,131,468 18,575,447
Customers' acceptance liability 16,745 16,745 13,670 13,670
FINANCIAL LIABILITIES:
Deposits (17,499,326) (17,653,972) (20,187,304) (20,317,155)
Short-term borrowings (2,541,016) (2,541,016) (1,955,926) (1,955,926)
Bank acceptances outstanding (16,745) (16,745) (13,670) (13,670)
Medium-term notes (2,045,123) (2,051,704) (1,795,002) (1,802,381)
Subordinated notes and other long-term debt (1,801,678) (1,872,101) (944,330) (1,002,830)
Capital securities (300,000) (310,392) (300,000) (299,048)
The terms and short-term nature of certain assets and liabilities result in
their carrying value approximating fair value. These include trading account
securities, customers' acceptance liabilities, short-term borrowings, bank
acceptances outstanding, and cash and short-term assets, which include cash and
due from banks, interest-bearing deposits in banks, and federal funds sold and
securities purchased under resale agreements. Loan commitments and letters of
credit generally have short-term, variable rate features and contain clauses
that limit Huntington's exposure to changes in customer credit quality.
Accordingly, their carrying values, which are immaterial at the respective
balance sheet dates, are reasonable estimates of fair value.
Certain assets, the most significant being operating lease assets, Bank owned
life insurance and premises and equipment, do not meet the definition of a
financial instrument and are excluded from this disclosure. Similarly, mortgage
and non-mortgage servicing rights, deposit base, and other customer relationship
intangibles are not considered financial instruments and are not discussed
below. Accordingly, this fair value information is not intended to, and does
not, represent Huntington's underlying value. Many of the assets and liabilities
subject to the disclosure requirements are not actively traded, requiring fair
values to be estimated by management. These estimations necessarily involve the
use of judgment about a wide variety of factors, including but not limited to,
relevancy of market prices of comparable instruments, expected future cash
flows, and appropriate discount rates.
The following methods and assumptions were used by Huntington to estimate the
fair value of the remaining classes of financial instruments:
Mortgages held for sale--valued using outstanding commitments from investors.
Securities available for sale and investment securities--based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments. Retained interests
in securitized assets are valued using a discounted cash flow analysis. The
carrying amount and fair value of securities exclude the fair value of
asset/liability management interest rate contracts designated as hedges of
securities available for sale.
Loans and leases--variable rate loans that reprice frequently are based on
carrying amounts, as adjusted for estimated credit losses. The fair values for
other loans and leases are estimated using discounted cash flow analyses and
employ interest rates currently being offered for loans and leases with similar
terms. The rates take into account the position of the yield curve, as well as
an adjustment for prepayment risk, operating costs, and profit. This value is
also reduced by an estimate of probable losses in the loan and lease portfolio.
Deposits--demand deposits, savings accounts, and money market deposits are, by
definition, equal to the amount payable on demand. The fair values of fixed rate
time deposits are estimated by discounting cash flows using interest rates
currently being offered on certificates with similar maturities.
104
Debt--fixed rate long-term debt, as well as medium-term notes and Capital
Securities, are based upon quoted market prices or, in the absence of quoted
market prices, discounted cash flows using rates for similar debt with the same
maturities. The carrying amount of variable rate obligations approximates fair
value.
105
GLOSSARY OF SELECTED FINANCIAL TERMS
ALLOWANCE FOR LOAN AND LEASE LOSSES - The reserve established by management to
cover unrecognized credit losses inherent in the loan and lease portfolio.
BOOK VALUE PER COMMON SHARE -Total common shareholders' equity divided by the
total number of common shares outstanding.
COMMON SHARES OUTSTANDING - Total number of shares of common stock issued less
common shares held in treasury.
CORE DEPOSITS - Total deposits, excluding foreign deposits, brokered time
deposits, negotiable certificates of deposit and domestic time deposits greater
than $100,000.
DERIVATIVE - A contractual agreement between two parties to exchange cash or
other assets in response to changes in an external factor, such as an interest
rate or a foreign exchange rate.
DIVIDEND PAYOUT RATIO - Dividends per common share divided by net income per
diluted common share.
EFFECTIVE TAX RATE - Income tax expense divided by income before taxes.
EFFICIENCY RATIO - Non-interest expense (excluding restructuring charges and
amortization of intangible assets) divided by the sum of fully taxable
equivalent net interest income and non-interest income (excluding net securities
transactions, gain on sale of Florida operations, Merchant Services gain, and
gain on the sale of credit card portfolio).
GOODWILL - The excess of the purchase price of net assets over the fair value of
net assets acquired in a business combination.
NET CHARGE-OFFS - Loan and lease losses less related recoveries of loans and
leases previously charged off.
NET INCOME PER COMMON SHARE -
BASIC - Net income divided by the number of weighted-average common shares
outstanding.
DILUTED - Net income divided by the sum of weighted-average common shares
outstanding plus the effect of common stock equivalents that have the potential
to be converted into common shares outstanding.
NET INTEREST INCOME - The difference between interest income and interest
expense.
NET INTEREST MARGIN - Net interest income on a fully taxable equivalent basis
divided by total average earning assets.
NON-PERFORMING ASSETS - Loans and leases on which interest income is not being
accrued for financial reporting purposes; loans for which the interest rates or
terms of repayment have been renegotiated; and real estate which has been
acquired through foreclosure.
PROVISION FOR LOAN AND LEASE LOSSES - The periodic expense needed to maintain
the level of the allowance for loan and lease losses.
REPORTED BASIS - Amounts presented in accordance with accounting principles
generally accepted in the United States (GAAP).
RESIDUAL VALUE - The expected value of a leased asset at the end of the lease
term.
RETURN ON AVERAGE ASSETS - Net income as a percent of average total assets.
RETURN ON AVERAGE EQUITY - Net income as a percent of average shareholders'
equity.
SERVICING RIGHT - A contractual agreement to provide certain billing,
bookkeeping and collection services with respect to a pool of loans.
TANGIBLE EQUITY RATIO - Total equity less intangible assets, primarily goodwill,
divided by total assets less intangible assets.
TIER 1 LEVERAGE RATIO - Tier 1 Risk-Based Capital divided by average adjusted
quarterly total assets. Average adjusted quarterly assets are adjusted to
exclude non-qualifying intangible assets.
TIER 1 RISK-BASED CAPITAL - Total shareholders' equity (excluding unrealized
gains and losses on securities available for sale) less non-qualifying goodwill
and other intangibles.
TOTAL RISK-ADJUSTED ASSETS - The sum of assets and credit equivalent off-balance
sheet amounts that have been adjusted according to assigned regulatory risk
weights, excluding the non-qualifying portion of allowance for loan and lease
losses, goodwill and other intangible assets.
TOTAL RISK-BASED CAPITAL - Tier 1 Risk-Based Capital plus qualifying long-term
debt and the allowance for loan and lease losses.
TREASURY STOCK - Common stock repurchased and held by the issuing corporation
for possible future issuance.
106
GLOSSARY OF SELECTED FINANCIAL TERMS
OTHER FINANCIAL TERMS
For analytical purposes, including understanding performance trends,
decision-making, and peer comparison, management makes certain adjustments to
some data. The following terms define some of those adjustments.
ANNUALIZED - A return, yield, performance ratio, or growth rate for a time
period less than one year that is adjusted to represent an annual time period.
Returns, yields, performance ratios, and growth rates are typically quoted on an
annual basis for analytical purposes and for performance comparisons to
competitors.
FULLY TAXABLE EQUIVALENT INTEREST INCOME - Income from tax-exempt earning assets
that has been increased by an amount equivalent to the taxes that would have
been paid if this income had been taxable at statutory rates. This adjustment
puts all earning assets, most notably tax-exempt municipal securities, on a
common basis that facilitates comparison of net interest margin to competitors.
OPERATING BASIS - Reported (GAAP) basis amount excluding impact of certain gains
and restructuring charges. See details beginning on page 51. By excluding
certain items, management views operating basis to be a useful indicator of
underlying, or run-rate, business trends.
107
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
Part III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is set forth under the captions
"Class I Directors," "Class II Directors," and "Class III Directors" on pages 2
through 4 under the caption "Executive Officers of the Corporation" on page 19,
and under the caption "Section 16(a) Beneficial Ownership Reporting Compliance"
on page 9 of Huntington's 2003 Proxy Statement, and is incorporated herein by
reference.
ITEM 11: EXECUTIVE COMPENSATION
Information required by this item is set forth under the caption
"Executive Compensation" on pages 10 through 18 and under the caption
"Compensation of Directors" on pages 6 through 9 of Huntington's 2003 Proxy
Statement, and is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is set forth under the caption
"Ownership of Voting Stock" on pages 8 and 9 and in a table entitled "Plan
Benefits" on page 21 of Huntington's 2003 Proxy Statement, and is incorporated
herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under the caption
"Transactions With Directors and Executive Officers" on pages 6 and 7 and under
the caption "Compensation Committee Interlocks and Insider Participation" on
page 15 of Huntington's 2003 Proxy Statement, and is incorporated herein by
reference.
ITEM 14: CONTROLS AND PROCEDURES
On May 19, 2003, Huntington carried out an evaluation, under the
supervision and with the participation of its management, including the Chief
Executive Officer (CEO) and the Chief Financial Officer (CFO), of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
each of the CEO and CFO concluded that Huntington's disclosure controls and
procedures are effective in timely alerting the CEO and CFO to material
information relating to Huntington (including its consolidated subsidiaries)
required to be included in its periodic SEC filings.
There have been no significant changes in Huntington's internal
controls or in other factors that could significantly affect its internal
controls subsequent to the date it carried out this evaluation.
Part IV
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Ernst & Young LLP was selected by Huntington's Board of Directors to serve as
auditors for Huntington for the year 2002, which selection was ratified by
Huntington's shareholders at the 2002 Annual Meeting of Shareholders. Commencing
for the year 2003, Huntington's Audit/Risk Committee is responsible for the
appointment (subject, if applicable, to shareholder ratification) of
Huntington's independent auditors and pre-approves all audit and non-audit
services provided by the independent auditors. The Audit/Risk Committee, the
members of which are all independent directors, may delegate pre-approval
authority to a member of the Audit/Risk Committee, who must present such
member's decisions to the full Audit/Risk Committee at its next scheduled
meeting. The Audit/Risk Committee appointed Ernst & Young LLP to serve as
auditors for Huntington for the year 2003.
108
Fees billed by Ernst & Young LLP to Huntington.
Audit Fees. The aggregate fees billed by Ernst & Young LLP for professional
services rendered for the audit of Huntington's annual financial statements for
the fiscal years ended December 31, 2002, and the review of the financial
statements included in Huntington's Forms 10-Q for the fiscal year 2002, were
$776,000. The aggregate fees billed for these services in 2001 were also
$776,000. The aggregate fees billed for services provided in connection with
statutory and regulatory filings, including comfort letters, attestation
services, and consents, as well as the audit of Huntington Preferred Capital,
Inc. (HPCI), Huntington's subsidiary with a class of publicly-held shares, were
$276,000 in 2002 and also in 2001. Total audit fees billed by Ernst & Young LLP
were $1,052,000 in 2002 and also in 2001.
Audit-Related Fees. The aggregate fees billed by Ernst & Young LLP for
audit-related services rendered for Huntington and its subsidiaries, including
HPCI, for the fiscal years ended December 31, 2002 and 2001, were $317,000 in
each year. Audit related fees generally include fees for assurance services such
as audits of pension plans, compliance related to servicing of assets, SAS 70
reports, as well as the restatement of HPCI's 2002 financial statements, and
services related to HPCI's public offering of preferred securities.
Tax Fees. The aggregate fees billed by Ernst & Young LLP for tax-related
services rendered for Huntington and its subsidiaries for the fiscal years ended
December 31, 2002 and 2001, were $126,000 and $129,000, respectively. The
tax-related services were all in the nature of tax compliance.
All Other Fees. There were no other fees billed by Ernst & Young LLP for the
fiscal year ended December 31, 2002. In addition to the audit, audit-related,
and tax fees reported above, Ernst & Young LLP billed Huntington an aggregate of
$610,000 for the fiscal year ended December 31, 2001, for the review of
Huntington's cash management services.
The Audit/Risk Committee was not required to, and generally did not, approve
the audit-related fees, tax fees, and other fees billed by Ernst & Young LLP in
2002 and 2001.
ITEM 16: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) The report of independent auditors and consolidated financial statements
appearing in Item 8.
(2) Huntington is not filing separately financial statement schedules
because of the absence of conditions under which they are required or
because the required information is included in the consolidated
financial statements or the notes thereto.
(3) The exhibits required by this item are listed in the Exhibit Index on
pages 113 through 116 of this amended Form 10- K/A. The management
contracts and compensation plans or arrangements required to be filed as
exhibits to this amended Form 10-K/A are listed as Exhibits 10(a)
through 10(t) in the Exhibit Index.
(b) During the quarter ended December 31, 2002, Huntington filed three Current
Reports on Form 8-K and one Current Report on Form 8-K/A. The first 8-K
report, dated October 16, 2002, was filed under Items 5 and 7, concerning
the retirement of Mr. Don Conrad from the Huntington Bancshares
Incorporated Board of Directors. The second 8-K report, dated October 17,
2002, filed under Items 5 and 7, and the 8-K/A report, dated October 17,
2002, filed under Items 5 and 7, reported Huntington's results of
operations for the quarter and nine months ended September 30, 2002. The
third 8-K report, dated November 13, 2002, was filed under Item 5,
provided guidance on the non-performing asset levels expected for the
fourth quarter 2002.
(c) The exhibits to this amended Form 10-K/A begin on page 113.
(d) See Item 16(a)(2) above.
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 20th day of
May, 2003.
HUNTINGTON BANCSHARES INCORPORATED
(Registrant)
By: /s/ Thomas E. Hoaglin By: /s/ Michael J. McMennamin
--------------------------------------- ---------------------------------------------
Thomas E. Hoaglin Michael J. McMennamin
Chairman, President, Chief Executive Vice Chairman, Chief Financial Officer,
Officer, and Director (Principal Executive and Treasurer (Principal Financial Officer)
Officer)
By: /s/ John D. Van Fleet
--------------------------------------------------
John D. Van Fleet
Senior Vice President and Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 20th day of May, 2003.
Raymond J. Biggs * Wm. J. Lhota *
-------------------------------------------- --------------------------------------------
Raymond J. Biggs Wm. J. Lhota
Director Director
Don M. Casto, III *
-------------------------------------------- --------------------------------------------
Don M. Casto, III Kathleen H. Ransier
Director Director
-------------------------------------------- --------------------------------------------
Michael J. Endres Robert H. Schottenstein
Director Director
John B. Gerlach, Jr. * George A. Skestos *
-------------------------------------------- --------------------------------------------
John B. Gerlach, Jr. George A. Skestos
Director Director
Patricia T. Hayot *
-------------------------------------------- --------------------------------------------
Patricia T. Hayot Lewis R. Smoot, Sr.
Director Director
--------------------------------------------
David P. Lauer
Director
* /s/ Michael J. McMennamin
------------------------------------------------------
Michael J. McMennamin
Attorney-in fact for each of the persons indicated
110
CERTIFICATION
I, Thomas E. Hoaglin, certify that:
1. I have reviewed this annual report on Form 10-K/A of
Huntington Bancshares Incorporated;
2. Based on my knowledge, this amended annual report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this amended annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this amended annual report,
fairly present in all material respects the financial
condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this
amended annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this amended
annual report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
amended annual report (the "Evaluation Date"); and
c) presented in this amended annual report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this amended annual report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 20, 2003
----------------------
/s/ Thomas E. Hoaglin
-----------------------------
Thomas E. Hoaglin
Chief Executive Officer
111
CERTIFICATION
I, Michael J. McMennamin, certify that:
1. I have reviewed this annual report on Form 10-K/A of
Huntington Bancshares Incorporated;
2. Based on my knowledge, this amended annual report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this amended annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this amended annual report,
fairly present in all material respects the financial
condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this
amended annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this amended
annual report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
amended annual report (the "Evaluation Date"); and
c) presented in this amended annual report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this amended annual report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 20, 2003
----------------------
/s/ Michael J. McMennamin
--------------------------------------------
Michael J. McMennamin
Chief Financial Officer
112
EXHIBIT INDEX
3(i)(a). Articles of Restatement of Charter, Articles of Amendment to
Articles of Restatement of Charter, and Articles Supplementary
-- previously filed as Exhibit 3(i) to Annual Report on Form
10-K for the year ended December 31, 1993, and incorporated
herein by reference.
(i)(b). Articles of Amendment to Articles of Restatement of Charter --
previously filed as Exhibit 3(i)(c) to Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, and
incorporated herein by reference.
(ii)(a). Amended and Restated Bylaws as of July 16, 2002 - previously
filed as Exhibit 3(ii) to Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002, and incorporated herein by
reference.
4.(a). Instruments defining the Rights of Security Holders --
reference is made to Articles Fifth, Eighth, and Tenth of
Articles of Restatement of Charter, as amended and
supplemented. Instruments defining the rights of holders of
long-term debt will be furnished to the Securities and
Exchange Commission upon request.
(b). Rights Plan, dated February 22, 1990, between Huntington
Bancshares Incorporated and The Huntington National Bank (as
successor to The Huntington Trust Company, National
Association) -- previously filed as Exhibit 1 to Registration
Statement on Form 8-A, filed with the Securities and Exchange
Commission on February 22, 1990, and incorporated herein by
reference.
(c). Amendment No. 1 to the Rights Agreement, dated August 16, 1995
-- previously filed as Exhibit 4(b) to Form 8-K, dated
August 16, 1995, and incorporated herein by reference.
10. Material contracts:
(a). * Tier I Executive Agreement for certain executive officers --
previously filed as Exhibit 10(a) to Annual Report on Form
10-K for the year ended December 31, 2002, and incorporated
herein by reference.
(b). * Tier II Executive Agreement for certain executive officers
-- previously filed as Exhibit 10(b) to Annual Report on Form
10-K for the year ended December 31, 2002, and incorporated
herein by reference.
(c). * Schedule identifying material details of Executive
Agreements, substantially similar to Exhibits 10(a) and 10(b)
-- previously filed as Exhibit 10(c) to Annual Report on Form
10-K for the year ended December 31, 2002, and incorporated
herein by reference.
(d)(1). * Huntington Bancshares Incorporated Amended and Restated
Incentive Compensation Plan, effective for performance cycles
beginning on or after January 1, 1999 -- previously filed as
Exhibit 10(e) to Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference.
(d)(2). * First Amendment to the Huntington Bancshares Incorporated
Amended and Restated 1999 Incentive Compensation Plan --
previously filed as Exhibit 10(g) to Quarterly Report on Form
10-Q for the quarter ended March 31, 2002, and incorporated
herein by reference.
(d)(3). * Second Amendment to the Huntington Bancshares Incorporated
Amended and Restated 1999 Incentive Compensation Plan --
previously filed as Exhibit 10(a) to Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and
incorporated herein by reference.
(e). * Amended and Restated Long-Term Incentive Compensation Plan,
effective for performance cycles beginning on or after January
1, 1999 - reference is made to Form S-8, Registration No.
33-52394, filed with the Securities and Exchange Commission on
December 21, 2000, and incorporated herein by reference.
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(f). * Huntington Bancshares Incorporated Retirement Plan For
Outside Directors -- previously filed as Exhibit 10(t) to
Annual Report on Form 10-K for the year ended December 31,
1992, and incorporated herein by reference.
(g)(1). * Restated Huntington Supplemental Executive Retirement Plan
-- previously filed as Exhibit 10(n) to Annual Report on Form
10-K for the year ended December 31, 1999, and incorporated
herein by reference.
(g)(2). * Supplemental Executive Retirement Plan with First and Second
Amendments -- previously filed as Exhibit 10(g) to Annual
Report on Form 10-K for the year ended December 31, 1987, and
incorporated herein by reference.
(g)(3). * Third Amendment to Supplemental Executive Retirement Plan --
previously filed as Exhibit 10(k)(2) to Annual Report on Form
10-K for the year ended December 31, 1997, and incorporated
herein by reference.
(g)(4). * Fourth Amendment to Supplemental Executive Retirement Plan
-- previously filed as Exhibit 10(g)(3) to Annual Report on
Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.
(h). * Deferred Compensation Plan and Trust for Directors --
reference is made to Exhibit 4(a) of August 16, 1995, and
incorporated herein by reference. Post-Effective Amendment No.
2 to Registration Statement on Form S-8, Registration No.
33-10546, filed with the Securities and Exchange Commission on
January 28, 1991, and incorporated herein by reference.
(i)(1). * Deferred Compensation Plan and Trust for Huntington
Bancshares Incorporated Directors -- reference is made to
Exhibit 4(a) of Registration Statement on Form S-8,
Registration No. 33-41774, filed with the Securities and
Exchange Commission on July 19, 1991, and incorporated herein
by reference.
(i)(2). * First Amendment to Huntington Bancshares Incorporated
Deferred Compensation Plan and Trust for Huntington Bancshares
Incorporated Directors - previously filed as Exhibit 10(q) to
Quarterly Report 10-Q for the quarter ended March 31, 2001,
and incorporated herein by reference.
(j). * Executive Deferred Compensation Plan for Huntington
Bancshares Incorporated - previously filed as Exhibit 10(a) to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, and incorporated herein by reference.
(k)(1). * The Huntington Supplemental Stock Purchase and Tax Savings
Plan and Trust (as amended and restated as of February 9,
1990) -- previously filed as Exhibit 4(a) to Registration
Statement on Form S-8, Registration No. 33-44208, filed with
the Securities and Exchange Commission on November 26, 1991,
and incorporated herein by reference.
(k)(2). * First Amendment to The Huntington Supplemental Stock
Purchase and Tax Savings Plan and Trust Plan -- previously
filed as Exhibit 10(o)(2) to Annual Report on Form 10-K for
the year ended December 31, 1997, and incorporated herein by
reference.
(l)(1). * 1983 Stock Option Plan -- reference is made to Exhibit 4A of
Registration Statement on Form S-8, Registration No. 2-89672,
filed with the Securities and Exchange Commission on February
27, 1984, and incorporated herein by reference.
(l)(2). * 1983 Stock Option Plan -- Second Amendment -- previously
filed as Exhibit 10(j)(2) to Annual Report on Form 10-K for
the year ended December 31, 1987, and incorporated herein by
reference.
(l)(3). * 1983 Stock Option Plan -- Third Amendment -- previously
filed as Exhibit 10(j)(3) to Annual Report on Form 10-K for
the year ended December 31, 1987, and incorporated herein by
reference.
(l)(4). * 1983 Stock Option Plan -- Fourth Amendment -- previously
filed as Exhibit (m)(4) to Annual Report on Form 10-K for the
year ended December 31, 1993, and incorporated herein by
reference.
114
(l)(5). * 1983 Stock Option Plan -- Fifth Amendment -- previously
filed as Exhibit (m)(5) to Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by
reference.
(l)(6). * 1983 Stock Option Plan -- Sixth Amendment -- previously
filed as Exhibit 10(c) to Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000, and incorporated herein by
reference.
(m)(1). * 1990 Stock Option Plan -- reference is made to Exhibit 4(a)
of Registration Statement on Form S-8, Registration No.
33-37373, filed with the Securities and Exchange Commission on
October 18, 1990, and incorporated herein by reference.
(m)(2). * First Amendment to Huntington Bancshares Incorporated 1990
Stock Option Plan -- previously filed as Exhibit 10(q)(2) to
Annual Report on Form 10-K for the year ended December 31,
1991, and incorporated herein by reference.
(m)(3). * Second Amendment to Huntington Bancshares Incorporated 1990
Stock Option Plan -- previously filed as Exhibit 10(n)(3) to
Annual Report on Form 10-K for the year ended December 31,
1996, and incorporated herein by reference.
(m)(4). * Third Amendment to Huntington Bancshares Incorporated 1990
Stock Option Plan -- previously filed as Exhibit 10(b) to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, and incorporated herein by reference.
(m)(5). * Fourth Amendment to Huntington Bancshares Incorporated 1990
Stock Option Plan -- previously filed as Exhibit 10(a) to
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002, and incorporated herein by reference.
(m)(6). * Fifth Amendment to Huntington Bancshares Incorporated 1990
Stock Option Plan -- previously filed as Exhibit 10(b) to
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002, and incorporated herein by reference.
(n)(1). * Amended and Restated 1994 Stock Option Plan -- previously
filed as Exhibit 10(r) to Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by
reference.
(n)(2). * First Amendment to Huntington Bancshares Incorporated 1994
Stock Option Plan -- previously filed as Exhibit 10(a) to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000, and incorporated herein by reference.
(n)(3). * First Amendment to Huntington Bancshares Incorporated
Amended and Restated 1994 Stock Option Plan -- previously
filed as Exhibit 10(c) to Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002, and incorporated herein by
reference.
(n)(4). * Second Amendment to Huntington Bancshares Incorporated
Amended and Restated 1994 Stock Option Plan -- previously
filed as Exhibit 10(d) to Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002, and incorporated herein by
reference.
(n)(5). * Third Amendment to Huntington Bancshares Incorporated
Amended and Restated 1994 Stock Option Plan -- previously
filed as Exhibit 10(e) to Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002, and incorporated herein by
reference.
(o)(1). * Huntington Bancshares Incorporated 2001 Stock and Long-Term
Incentive Plan -- previously filed as Exhibit 10(r) to
Quarterly Report 10-Q for the quarter ended March 31, 2001,
and incorporated herein by reference.
(o)(2). * First Amendment to the Huntington Bancshares Incorporated
2001 Stock and Long-Term Incentive Plan -- previously filed as
Exhibit 10(h) to Quarterly Report 10-Q for the quarter ended
March 31, 2002, and incorporated herein by reference.
115
(o)(3). * Second Amendment to the Huntington Bancshares Incorporated
2001 Stock and Long-Term Incentive Plan -- previously filed as
Exhibit 10(i) to Quarterly Report 10-Q for the quarter ended
March 31, 2002, and incorporated herein by reference.
(p). * Employment Agreement, dated February 15, 2001, between
Huntington Bancshares Incorporated and Thomas E. Hoaglin -
previously filed as Exhibit 10(p) on Form 10-K for the year
ended December 31, 2000, and incorporated herein by reference.
(q) * Huntington Investment and Tax Savings Plan -- reference is
made to Exhibit 4(a) of Post-effective Amendment No. 1 to
Registration Statement on Form S-8, Registration 33-46327,
previously filed with the Securities and Exchange Commission
on April 1, 1998.
(r) * Huntington Bancshares Incorporated Employee Stock Incentive
Plan (incorporating changes made by first amendment to Plan) -
reference is made to Exhibit 4(a) of Registration Statement on
Form S-8, Registration 333-75032, previously filed with the
Securities and Exchange Commission on December 13, 2001.
(s) * Second Amendment to Huntington Bancshares Incorporated
Employee Stock Incentive Plan -- previously filed as Exhibit
10(s) to Annual Report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference.
(t). Purchase and Assumption Agreement, dated September 25, 2001,
among Huntington Bancshares Incorporated, The Huntington
National Bank, and SunTrust Banks, Inc. - previously filed as
Exhibit 2 to Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001, and incorporated herein by
reference.
21. Subsidiaries of the Registrant -- previously filed as Exhibit
21 to Annual Report on Form 10-K for the year ended December
31, 2002, and incorporated herein by reference.
23. Consent of Ernst & Young LLP, Independent Auditors.
24. Power of Attorney -- previously filed as Exhibit 24 to Annual
Report on Form 10-K for the year ended December 31, 2002, and
incorporated herein by reference.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the of Registration Statement on
Form Sarbanes-Oxley Act of 2002 - signed by Thomas E. Hoaglin,
Chief Executive Officer.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
signed by Michael J. McMennamin, Chief Financial Officer.
99.3 Ratio of Earnings to Fixed Charges.
--------------------------
*Denotes management contract or compensatory plan or arrangement.
116