UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED June 30, 2002
Commission File Number 0-2525
HUNTINGTON BANCSHARES INCORPORATED
MARYLAND 31-0724920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 SOUTH HIGH STREET, COLUMBUS, OHIO 43287
Registrant's telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No | |
There were 240,575,448 shares of Registrant's without par value common stock
outstanding on July 31, 2002.
HUNTINGTON BANCSHARES INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2002 and 2001 and December 31, 2001 3
Consolidated Statements of Income -
For the three and six months ended June 30, 2002 and 2001 4
Consolidated Statements of Changes in Shareholders' Equity -
For the six months ended June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows -
For the six months ended June 30, 2002 and 2001 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 6. Exhibits and Reports on Form 8-K 36-37
Signatures 38
2
PART 1. FINANCIAL INFORMATION
Financial Statements
Consolidated Balance Sheets
JUNE 30, December 31, June 30,
(in thousands) 2002 2001 2001
------------ ------------ ------------
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 858,561 $ 1,138,366 $ 908,686
Interest bearing deposits in banks 28,385 21,205 4,893
Trading account securities 10,532 13,392 4,291
Federal funds sold and securities
purchased under resale agreements 75,824 83,275 59,725
Loans held for sale 190,724 629,386 376,671
Securities available for sale - at fair value 3,006,273 2,849,579 3,190,686
Investment securities - fair value $10,963; $12,499;
and $15,159, respectively 10,769 12,322 14,978
Total loans 19,652,170 21,601,873 21,127,862
Less allowance for loan losses 393,011 410,572 352,243
------------ ------------ ------------
Net loans 19,259,159 21,191,301 20,775,619
------------ ------------ ------------
Bank owned life insurance 863,327 843,183 824,062
Premises and equipment 353,931 452,036 457,749
Goodwill and other intangible assets 210,685 716,054 737,437
Customers' acceptance liability 16,778 13,670 15,335
Accrued income and other assets 496,468 536,390 578,018
------------ ------------ ------------
TOTAL ASSETS $ 25,381,416 $ 28,500,159 $ 27,948,150
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $ 16,861,100 $ 20,187,304 $ 18,996,922
Short-term borrowings 2,064,275 1,955,926 2,585,773
Bank acceptances outstanding 16,778 13,670 15,337
Medium-term notes 1,782,438 1,795,002 1,983,603
Subordinated notes and other long-term debt 943,706 944,330 890,371
Company obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding solely
junior subordinated debentures of the Parent Company 300,000 300,000 300,000
Accrued expenses and other liabilities 1,061,259 887,487 822,622
------------ ------------ ------------
Total Liabilities 23,029,556 26,083,719 25,594,628
------------ ------------ ------------
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 242,919,872; 251,193,814; and
251,056,761 shares, respectively 2,487,887 2,490,724 2,490,682
Less 14,946,383; 6,672,441; and 6,809,494
treasury shares, respectively (289,705) (123,849) (125,095)
Accumulated other comprehensive income (loss) 28,655 25,488 (8,388)
Retained earnings (deficit) 125,023 24,077 (3,677)
------------ ------------ ------------
Total Shareholders' Equity 2,351,860 2,416,440 2,353,522
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,381,416 $ 28,500,159 $ 27,948,150
============ ============ ============
See notes to unaudited consolidated financial statements.
3
Consolidated Statements of Income
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest and fee income
Loans $ 325,771 $ 434,697 $ 667,873 $ 881,482
Securities 44,424 55,434 89,205 119,268
Other 3,592 8,828 10,304 16,184
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 373,787 498,959 767,382 1,016,934
----------- ----------- ----------- -----------
Interest expense
Deposits 94,865 170,288 204,832 355,369
Short-term borrowings 9,283 30,039 20,888 63,202
Medium-term notes 15,266 32,940 31,864 69,603
Subordinated notes and other long-term debt 12,514 17,659 25,114 37,603
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 131,928 250,926 282,698 525,777
----------- ----------- ----------- -----------
Net Interest Income 241,859 248,033 484,684 491,157
Provision for loan losses 53,892 117,495 109,673 150,959
----------- ----------- ----------- -----------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 187,967 130,538 375,011 340,198
----------- ----------- ----------- -----------
Service charges on deposit accounts 35,354 40,673 73,884 79,580
Brokerage and insurance income 17,677 19,388 36,469 38,156
Trust services 16,247 15,178 31,748 29,492
Bank Owned Life Insurance income 11,443 9,561 23,119 19,121
Mortgage banking 10,725 18,733 30,290 28,764
Other service charges and fees 10,529 12,217 21,161 23,315
Other 15,039 14,956 25,970 27,924
----------- ----------- ----------- -----------
Total Non-Interest Income Before Securities
Gains/(Losses) and Gain on Sale of Florida Operations 117,014 130,706 242,641 246,352
Gain on sale of Florida operations -- -- 175,344 --
Securities gains (losses) 966 (2,503) 1,423 (425)
----------- ----------- ----------- -----------
TOTAL NON-INTEREST INCOME 117,980 128,203 419,408 245,927
----------- ----------- ----------- -----------
Personnel costs 105,146 122,068 219,431 239,730
Equipment 16,659 19,844 33,608 39,816
Outside data processing and other services 16,592 17,671 35,031 34,325
Net occupancy 14,756 18,188 31,995 37,968
Marketing 7,231 7,852 14,234 17,791
Professional services 6,267 6,763 11,668 11,732
Telecommunications 5,320 7,207 11,338 14,332
Printing and supplies 3,683 4,565 7,520 9,624
Franchise and other taxes 2,313 2,246 4,641 4,366
Amortization of intangible assets 235 10,435 1,611 21,011
Other 13,858 16,457 28,369 36,691
----------- ----------- ----------- -----------
Total Non-Interest Expense Before Special Charges 192,060 233,296 399,446 467,386
Special charges -- 33,997 56,184 33,997
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 192,060 267,293 455,630 501,383
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 113,887 (8,552) 338,789 84,742
Income taxes 31,647 (10,929) 158,822 14,499
----------- ----------- ----------- -----------
NET INCOME $ 82,240 $ 2,377 $ 179,967 $ 70,243
=========== =========== =========== ===========
PER COMMON SHARE
Net income
Basic $ 0.33 $ 0.01 $ 0.72 $ 0.28
Diluted $ 0.33 $ 0.01 $ 0.72 $ 0.28
Cash dividends declared $ 0.16 $ 0.20 $ 0.32 $ 0.40
AVERAGE COMMON SHARES
Basic 246,106 251,024 248,415 250,984
Diluted 247,867 251,448 249,946 251,479
See notes to unaudited consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
ACCUMULATED
COMMON STOCK TREASURY STOCK OTHER
---------------------- ---------------------- COMPREHENSIVE
(in thousands) SHARES AMOUNT SHARES AMOUNT INCOME (LOSS)
--------- ---------- --------- --------- -------------
Six Months Ended June 30, 2001:
Balance, beginning of period 257,866 $2,493,645 (7,007) $(129,432) $ (24,520)
Comprehensive Income:
Net income
Cumulative effect of change in accounting
principle for derivatives (9,113)
Unrealized net holding gains on securities
available for sale arising during the period, net
of reclassification adjustment for net gains
included in net income 19,893
Unrealized gains on derivative instruments used
in cash flow hedging relationships 5,352
Total comprehensive income
Cash dividends declared
Stock options exercised (2,963) 154 3,626
Treasury shares sold to employee benefit plans 44 711
--------- ---------- --------- --------- ---------
Balance, end of period 257,866 $2,490,682 (6,809) $(125,095) $ (8,388)
========= ========== ========= ========= =========
Six Months Ended June 30, 2002:
Balance, beginning of period 257,866 $2,490,724 (6,672) $(123,849) $ 25,488
Comprehensive Income:
Net income
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 5,926
Unrealized losses on derivative instruments
used in cash flow hedging relationships (2,759)
Total comprehensive income
Stock issued for acquisition -- 203 3,952
Cash dividends declared
Stock options exercised (2,837) 312 5,365
Treasury shares purchased (8,789) (175,173)
--------- ---------- --------- --------- ---------
Balance, end of period 257,866 $2,487,887 (14,946) $(289,705) $ 28,655
========= ========== ========= ========= =========
RETAINED
(in thousands) EARNINGS TOTAL
--------- ---------
Six Months Ended June 30, 2001:
Balance, beginning of period $ 26,354 $2,366,047
--------- ----------
Comprehensive Income:
Net income 70,243 70,243
Cumulative effect of change in accounting
principle for derivatives (9,113)
Unrealized net holding gains on securities
available for sale arising during the period, net
of reclassification adjustment for net gains
included in net income 19,893
Unrealized gains on derivative instruments used
in cash flow hedging relationships 5,352
----------
Total comprehensive income 86,375
----------
Cash dividends declared (100,274) (100,274)
Stock options exercised 663
Treasury shares sold to employee benefit plans 711
--------- ----------
Balance, end of period $ (3,677) $2,353,522
========= ==========
Six Months Ended June 30, 2002:
Balance, beginning of period $ 24,077 $2,416,440
Comprehensive Income:
Net income 179,967 179,967
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 5,926
Unrealized losses on derivative instruments
used in cash flow hedging relationships (2,759)
----------
Total comprehensive income 183,134
----------
Stock issued for acquisition 3,952
Cash dividends declared (79,021) (79,021)
Stock options exercised 2,528
Treasury shares purchased (175,173)
--------- ----------
Balance, end of period $ 125,023 $2,351,860
========= ==========
See notes to unaudited consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
----------------------------
(in thousands of dollars) 2002 2001
------------ ------------
OPERATING ACTIVITIES
Net Income $ 179,967 $ 70,243
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 109,673 150,959
Provision for depreciation and amortization 30,382 51,237
Deferred income tax expense 244,825 12,941
Decrease in trading account securities 2,860 432
Decrease (increase) in mortgages held for sale 438,662 (221,567)
(Gains) losses on sales of securities available for sale (1,423) 425
Gains on sales/securitizations of loans (3,138) (4,869)
Gain on sale of Florida operations (175,344) --
Restructuring and special charges 56,184 33,997
Other, net (133,873) (89,575)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 748,775 4,223
------------ ------------
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in banks (7,180) 77
Proceeds from:
Maturities and calls of investment securities 1,548 990
Maturities and calls of securities available for sale 381,329 633,121
Sales of securities available for sale 456,411 953,722
Purchases of securities available for sale (782,961) (634,687)
Proceeds from sales/securitizations of loans 226,707 303,240
Net loan originations, excluding sales (1,283,679) (962,780)
Proceeds from sale of premises and equipment 15,180 717
Purchases of premises and equipment (26,389) (30,719)
Proceeds from sales of other real estate 4,770 8,271
Cash paid in purchase acquisition (4,026) --
Net cash paid related to sale of Florida operations (1,289,917) --
------------ ------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (2,308,207) 271,952
------------ ------------
FINANCING ACTIVITIES
Increase (decrease) in total deposits 1,435,665 (779,650)
Increase in short-term borrowings 108,349 598,014
Maturity of long-term debt (4,000) (8,000)
Proceeds from issuance of medium-term notes 675,000 400,000
Payment of medium-term notes (690,000) (875,000)
Dividends paid on common stock (80,193) (100,385)
Repurchases of common stock (175,173) --
Net proceeds from issuance of common stock 2,528 1,374
------------ ------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,272,176 (763,647)
------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS (287,256) (487,472)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,221,641 1,455,883
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 934,385 $ 968,411
============ ============
Supplemental disclosures:
Income taxes paid $ 20,136 $ 25
Interest paid $ 298,235 $ 293,715
See notes to unaudited consolidated financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial statements
include the accounts of Huntington and its subsidiaries and were prepared in
accordance with generally accepted accounting principles, and accordingly,
reflect all adjustments consisting of normal recurring accruals, which are,
in the opinion of management, necessary to fairly present Huntington's financial
position, results of operations, and cash flows for the periods presented. As
permitted by the SEC, these unaudited consolidated interim financial statements
do not include certain information and footnotes normally included in annual
financial statements. Accordingly, these unaudited consolidated interim
financial statements should be read in conjunction with Huntington's 2001
Annual Report on Form 10-K.
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current presentation. These reclassifications
had no effect on net income.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is the amount of earnings for the period
available to each share of common stock outstanding during the reporting period.
Diluted earnings per share is the amount of earnings available to each share of
common stock outstanding during the reporting period adjusted for the potential
issuance of common shares for stock options. The calculation of basic and
diluted earnings per share for each of the periods ended June 30, is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Net Income $ 82,240 $ 2,377 $ 179,967 $ 70,243
========== ========== ========== ==========
Average common shares outstanding 246,106 251,024 248,415 250,984
Dilutive effect of stock options 1,761 424 1,531 495
---------- ---------- ---------- ----------
Diluted common shares outstanding 247,867 251,448 249,946 251,479
========== ========== ========== ==========
Earnings per share
Basic $ 0.33 $ 0.01 $ 0.72 $ 0.28
Diluted $ 0.33 $ 0.01 $ 0.72 $ 0.28
Approximately 3.1 million and 7.8 million stock options were outstanding
at the end of June 2002 and 2001, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares for the period
and, therefore, the effect would be antidilutive. The weighted average exercise
price for these options was $26.60 per share and $20.84 at the end of the same
respective periods.
NOTE 3 - INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill is no longer amortized but is subject to annual impairment tests
in accordance with the Statements. Other intangible assets continue to be
amortized over their useful lives. At June 30, 2002 and 2001, Huntington had
$210.7 million and $737.4 million in goodwill and other intangible assets,
respectively. The following table reflects the activity in goodwill and other
intangible assets for the three and six months ended June 30:
7
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(in thousands of dollars) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Intangible Assets:
Balance, beginning of period $ 209,942 $ 745,023 $ 716,054 $ 755,270
Additions 7,978 2,849 8,146 3,178
Sale of Florida operations (7,000) -- (511,904) --
Amortization (235) (10,435) (1,611) (21,011)
---------- ---------- ---------- ----------
BALANCE, END OF PERIOD $ 210,685 $ 737,437 $ 210,685 $ 737,437
========== ========== ========== ==========
The additions totaling $8.0 million for the second quarter of 2002 related
to the April 1st acquisition of Haberer Registered Investment Advisor, Inc.
(Haberer), a Cincinnati-based registered investment advisory firm. Haberer
became part of Huntington's Private Financial Group line of business as a wholly
owned subsidiary of Huntington. The sale of J. Rolfe Davis Insurance Agency,
Inc. (JRD) resulted in a reduction in goodwill of $7 million during the second
quarter of 2002.
Huntington applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. In connection with the
adoption of SFAS No. 142, management assessed the fair values of its lines of
business in relation to their carrying value, including goodwill, in each line
of business. Based on this assessment, there was no impairment of goodwill or
other intangible assets. Huntington will continue to test for impairment on an
annual basis as prescribed by SFAS No. 142.
Before the sale of Huntington's operations in Florida, a majority of
goodwill and other intangible assets related to those operations. A substantial
portion of the remaining goodwill is attributable to the previously acquired
banking operations reported under the Regional Banking line of business. The
application of the non-amortization provisions of SFAS No. 142 resulted in an
increase in net income per share of $0.01 for the second quarter and $0.04 for
the first six months of 2002. Had no amortization of goodwill, net of tax, been
recorded in the prior year, net income and diluted earnings per share for the
second quarter of 2001 would have been greater by $7.7 million, or $0.03 per
share, and $15.5 million, or $0.06 per share, for the first half of 2001.
NOTE 4 - RESTRUCTURING AND SPECIAL CHARGES
In July 2001, Huntington announced a strategic refocusing plan (the
"Plan"). The Plan included the sale of Huntington's Florida banking and
insurance operations, the consolidation of numerous non-Florida branch offices,
as well as certain credit and other actions to strengthen Huntington's balance
sheet and financial performance, including the use of excess regulatory capital
generated by the sale to initiate a share repurchase program. During 2001,
Huntington provided $100.0 million of pre-tax expense to recognize a liability
for these actions and provided $71.7 million of additional allowance for loan
losses in connection with the Plan. In the first quarter of 2002, Huntington
provided an additional $56.2 million of pre-tax expense to recognize additional
liabilities related to the completion of the Plan.
8
Huntington has a remaining liability of $22.8 million at June 30, 2002.
Huntington expects that the remaining liability will be adequate to fund the
estimated future cash outlays that are expected in the completion of the exit
activities contemplated by the Plan.
NOTE 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 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 is reflected in non-interest
income. The after-tax gain was $56.8 million, or $0.22 per share. Income taxes
related to this transaction were $118.6 million, an amount higher than the tax
impact at the statutory rate of 35% because most of the goodwill relating to the
Florida operations was non-deductible for tax purposes. Pro forma financial
information reflecting the effect of the sale is presented and described below.
Since the transaction was completed during the first quarter of 2002, no pro
forma balance sheet is presented in this report.
The following unaudited pro forma consolidated income statement is
presented for the six months ended June 30, 2002, giving effect to the sale as
if it had occurred on January 1, 2002, and does not include the net gain
realized on the sale of Huntington's Florida operations or any related special
charges. These pro forma financial statements do not include any assumptions as
to future share repurchases pursuant to the previously announced share
repurchase program that commenced following the sale.
The pro forma consolidated income statement may not be indicative of the
results of operations that would have actually occurred had the transaction been
consummated during the period indicated. This pro forma financial information is
also not intended to be an indication of the results of operations that may be
attained in the future. These pro forma consolidated financial statements should
be read in conjunction with Huntington's historical financial statements.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT WITHOUT FLORIDA OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Huntington
Pro Forma
Without
Florida Related Florida
(in thousands of dollars) Huntington Operations Transactions Operations
---------- ---------- ------------ ----------
Net interest income $ 484,684 $ (9,724) $ -- $ 474,960
Provision for loan losses 109,673 (5,186) -- 104,487
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 375,011 (4,538) -- 370,473
---------- ---------- ---------- ----------
Non-interest income 419,408 (13,343) (175,344) 230,721
Non-interest expense 455,630 (20,210) (32,728) 402,692
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 338,789 2,329 (142,616) 198,502
Income taxes 158,822 804 (107,098) 52,528
---------- ---------- ---------- ----------
NET INCOME $ 179,967 $ 1,525 $ (35,518) $ 145,974
========== ========== ========== ==========
NET INCOME PER COMMON SHARE -- DILUTED $ 0.72 $ 0.01 $ (0.14) $ 0.59
========== ========== ========== ==========
OPERATING NET INCOME (1) $ 159,696 $ 1,525 $ 161,221
========== ========== ========== ==========
OPERATING NET INCOME PER COMMON
SHARE -- DILUTED (1) $ 0.64 $ 0.01 $ 0.65
========== ========== ========== ==========
(1) Excludes after-tax gain on sale of the Florida operations and
restructuring and special charges.
9
The column entitled Florida Operations includes all direct revenue and
expenses for Florida from January 1, 2002 through February 15, 2002, the results
of operations for JRD for the six months period ended June 30, 2002, and any
indirect revenue and expenses that ceased with the sale of the Florida
operations, including $1.1 million of amortization expense on intangible assets
related to Florida. In addition, net interest income in that column includes:
(1) a funding credit of $5.3 million related to $2.0 billion of funding that
Florida provided to Huntington and (2) $1.9 million of interest that would have
been earned on the $711.9 million deposit premium from January 1, 2002 through
February 15, 2002. Both the funding credit and the assumed interest earned on
the deposit premium are based on the average one-year LIBOR rate of 2.15% for
the period. The column entitled Related Transactions reflects the $175.3 million
net gain on the sale of the Florida operations, $32.7 million of the $56.2
million special charges recorded in the first quarter of 2002 that related to
the sale of Florida, and the applicable income taxes. After excluding the
remaining restructuring and special charges, net of taxes, operating earnings
were $161.2 million and earnings per share was $0.65 for the first half of 2002.
NOTE 6 - AVAILABLE FOR SALE SECURITIES
Securities available for sale at June 30, 2002 and December 31, 2001 were
as follows:
(in thousands of dollars) JUNE 30, 2002 DECEMBER 31, 2001
-------------------------- --------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
U.S. Treasury
Under 1 year $ 995 $ 999 $ 696 $ 711
1-5 years 1,502 3,820 31,399 31,563
6-10 years 7,252 5,603 6,420 6,833
Over 10 years 412 433 413 433
---------- ---------- ---------- ----------
Total 10,161 10,855 38,928 39,540
---------- ---------- ---------- ----------
Federal agencies
Mortgage-backed securities
1-5 years 49,321 50,198 77,975 77,734
6-10 years 142,133 145,578 99,049 100,954
Over 10 years 839,553 858,345 651,187 662,674
---------- ---------- ---------- ----------
Total 1,031,007 1,054,121 828,211 841,362
---------- ---------- ---------- ----------
Other agencies
Under 1 year 25,010 25,117 -- --
1-5 years 888,228 911,112 918,023 940,845
6-10 years 77,917 80,180 77,515 78,925
Over 10 years 420,758 429,105 414,485 421,407
---------- ---------- ---------- ----------
Total 1,411,913 1,445,514 1,410,023 1,441,177
---------- ---------- ---------- ----------
Total U.S. Treasury and Federal
Agencies 2,453,081 2,510,490 2,277,162 2,322,079
---------- ---------- ---------- ----------
Other
Under 1 year 9,006 9,048 11,315 11,374
1-5 years 35,489 35,993 38,986 40,022
6-10 years 35,358 36,612 35,832 35,823
Over 10 years 221,170 220,308 176,524 174,715
Retained interest in securitizations 148,201 148,201 159,790 159,790
Marketable equity securities 42,760 45,621 104,395 105,776
---------- ---------- ---------- ----------
Total 491,984 495,783 526,842 527,500
---------- ---------- ---------- ----------
TOTAL SECURITIES AVAILABLE FOR SALE $2,945,065 $3,006,273 $2,804,004 $2,849,579
========== ========== ========== ==========
10
NOTE 7 - COMPREHENSIVE INCOME
Comprehensive Income includes net income as well as certain items that are
reported directly within a separate component of stockholders' equity that are
not considered part of net income. Currently, Huntington's only components of
Other Comprehensive Income are the unrealized gains (losses) on securities
available for sale and unrealized gains and losses on certain derivatives. The
related before and after tax amounts are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
(in thousands of dollars) 2002 2001 2002 2001
-------- -------- -------- --------
Cumulative effect of change in accounting method for derivatives
used in cash flow hedging relationships:
Unrealized net losses $ -- $ -- $ -- $(14,020)
Related tax benefit -- -- -- 4,907
-------- -------- -------- --------
Net -- -- -- (9,113)
-------- -------- -------- --------
Unrealized holding gains (losses) on securities available for sale
arising during the period:
Unrealized net gains (losses) 32,852 (12,376) 10,540 30,405
Related tax (expense) benefit (11,498) 4,353 (3,689) (10,787)
-------- -------- -------- --------
Net 21,354 (8,023) 6,851 19,618
-------- -------- -------- --------
Unrealized holding (losses) gains on derivatives used in cash flow
hedging relationships arising during the period:
Unrealized net (losses) gains (2,393) 3,429 (4,245) 8,234
Related tax benefit (expense) 838 (1,200) 1,486 (2,882)
-------- -------- -------- --------
Net (1,555) 2,229 (2,759) 5,352
-------- -------- -------- --------
Less: Reclassification adjustment for net gains (losses)
from sales of securities available for sale realized during
the period:
Realized net gains (losses) 966 (2,503) 1,423 (425)
Related tax (expense) benefit (338) 876 (498) 150
-------- -------- -------- --------
Net 628 (1,627) 925 (275)
-------- -------- -------- --------
Total Other Comprehensive (Loss) Income $ 19,171 $ (4,167) $ 3,167 $ 16,132
======== ======== ======== ========
Activity in Accumulated Other Comprehensive Income for the six months
ended June 30, 2002 and 2001 was as follows:
UNREALIZED GAINS
(LOSSES) ON DERIVATIVE
UNREALIZED GAINS (LOSSES) INSTRUMENTS USED IN
ON SECURITIES CASH FLOW HEDGING
(in thousands of dollars) AVAILABLE FOR SALE RELATIONSHIPS
------------------------- ----------------------
Balance, December 31, 2000 $ (24,520) $ --
Change in accounting method -- (9,113)
Current-period change 19,893 5,352
---------- ----------
Balance, June 30, 2001 $ (4,627) $ (3,761)
========== ==========
Balance, December 31, 2001 29,469 (3,981)
Current-period change 5,926 (2,759)
---------- ----------
Balance, June 30, 2002 $ 35,395 $ (6,740)
========== ==========
11
NOTE 8 - SEGMENT REPORTING
Huntington views its operations as four distinct segments. Regional
Banking, Dealer Sales, and the Private Financial Group (PFG) are Huntington's
major business lines. The fourth segment includes Huntington's Treasury function
and other unallocated assets, liabilities, revenue, and expense. Line of
business results are determined based upon Huntington's business profitability
reporting system, which assigns balance sheet and income statement items to each
of the business segments. The process is designed around Huntington's
organizational and management structure and accordingly, the results below are
not necessarily comparable with similar information published by other financial
institutions. During the first quarter of 2002, the previously reported Retail
Banking and Corporate Banking segments were combined and renamed Regional
Banking. Since this segment is managed through six geographically defined
regions where each region's management has responsibility for both retail and
corporate banking business development, combining these two previous segments
better reflects the management accountability and decision making structure. In
addition, changes were made to the methodologies utilized for certain balance
sheet and income statement allocations performed by Huntington's business
profitability reporting system. The prior quarters have not been restated for
these changes.
The chief decision-makers for Huntington rely on "operating earnings" for
review of performance and for critical decision making purposes. Operating
earnings exclude the the gain from the sale of the Florida operations, the
historical Florida results, and restructuring and special charges. See Note 4 to
the unaudited consolidated financial statements for further discussions
regarding restructuring and special charges and Note 5 for the net gain on sale
of Huntington's Florida operations. Net interest income is presented on a fully
tax equivalent (FTE) basis using a 35% tax rate.
The following provides a brief description of the four operating segments of
Huntington:
REGIONAL BANKING: provides products and services to retail, business
banking, and corporate customers. This segment's products include home equity
loans, first mortgage loans, direct installment loans, business loans, personal
and business deposit products, as well as sales of investment and insurance
services. These products and services are offered through Huntington's
traditional banking network; Direct Bank--Huntington's customer service center;
and Web Bank at www.huntington.com. Regional Banking also represents the
middle-market and large corporate banking relationships which use a variety of
banking products and services including, but not limited to, commercial loans,
international trade, and cash management.
DEALER SALES: product offerings pertain to the automobile lending sector
and include indirect consumer loans and leases, as well as floor plan financing.
The consumer loans and leases comprise the vast majority of the business and
involve the financing of vehicles purchased or leased by individuals through
dealerships.
PRIVATE FINANCIAL GROUP: this segment's array of products and services are
designed to meet the needs of Huntington's higher wealth customers. Revenue is
derived through the sale of personal trust, asset management, investment
advisory, brokerage, insurance, and deposit and loan products and services.
Income and related expenses from the sale of brokerage and insurance products is
shared with the line of business that generated the sale or provided the
customer referral.
TREASURY / OTHER: this segment includes assets, liabilities, equity,
revenue, and expense that cannot be directly assigned or allocated to one of the
lines of business. Since a match-funded transfer pricing system is used to
allocate interest income and interest expense to other business segments,
Treasury / Other results include the net impact of any over or under allocations
arising from centralized management of interest rate risk including the net
impact of derivatives used to hedge interest rate sensitivity. Furthermore, this
segment's results include the net impact of administering Huntington's
investment securities portfolio as part of overall liquidity management.
Additionally, amortization expense of intangible assets and gains or losses not
allocated to other business segments are also a component.
Listed below is certain reported financial information reconciled to
Huntington's second quarter and six-month 2002 and 2001 operating results by
line of business.
12
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENTS Regional Dealer XX Treasury/ Huntington
(in thousands of dollars) Banking Sales PFG Other Consolidated
------------ ------------ ------------ ------------ ------------
2002
Net interest income (FTE) $ 146,960 $ 55,502 $ 8,825 $ 31,643 $ 242,930
Provision for loan losses 41,278 12,313 301 -- 53,892
Non-Interest income 78,871 5,886 23,602 9,621 117,980
Non-Interest expense 150,294 18,328 19,228 4,210 192,060
Income taxes/FTE adjustment 11,991 10,761 4,514 5,452 32,718
------------ ------------ ------------ ------------ ------------
Net income, as reported 22,268 19,986 8,384 31,602 82,240
Florida operations, net of tax -- -- (532) -- (532)
------------ ------------ ------------ ------------ ------------
Operating earnings $ 22,268 $ 19,986 $ 7,852 $ 31,602 $ 81,708
============ ============ ============ ============ ============
2001
Net interest income (FTE) $ 198,877 $ 58,383 $ 9,373 $ (16,984) $ 249,649
Provision for loan losses 33,763 83,603 129 -- 117,495
Non-Interest income 96,099 (1,386) 18,148 15,342 128,203
Non-Interest expense 182,095 50,728 20,329 14,141 267,293
Income taxes/FTE adjustment 27,692 (27,067) 2,472 (12,410) (9,313)
------------ ------------ ------------ ------------ ------------
Net income, as reported 51,426 (50,267) 4,591 (3,373) 2,377
Florida operations, net of tax (13,558) (1,141) (1,550) 17,347 1,098
Restructuring and special charges, net of tax 7,303 63,920 -- 904 72,127
------------ ------------ ------------ ------------ ------------
Operating earnings $ 45,171 $ 12,512 $ 3,041 $ 14,878 $ 75,602
============ ============ ============ ============ ============
2Q AVERAGE ASSETS 2Q AVERAGE DEPOSITS
BALANCE SHEETS -------------------------- --------------------------
(in millions of dollars) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Regional Banking $ 12,717 $ 14,737 $ 14,949 $ 18,003
Dealer Sales 7,954 7,396 51 91
PFG 975 745 776 640
Treasury / Other 3,311 5,471 706 371
---------- ---------- ---------- ----------
Subtotal 24,957 28,349 16,482 19,105
Florida operations -- (3,156) -- (4,496)
---------- ---------- ---------- ----------
Total $ 24,957 $ 25,193 $ 16,482 $ 14,609
========== ========== ========== ==========
13
SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------------------------------------------------------
Income Statements Regional Dealer Treasury/ Huntington
(in thousands of dollars) Banking Sales PFG Other Consolidated
------------ ------------ ------------ ------------ ------------
2002
Net interest income (FTE) $ 306,598 $ 108,572 $ 16,460 $ 55,294 $ 486,924
Provision for loan losses 70,247 39,125 301 -- 109,673
Non-Interest income 168,408 8,526 47,168 195,306 419,408
Non-Interest expense 310,575 36,550 36,637 71,868 455,630
Income taxes/FTE adjustment 32,965 14,498 9,341 104,258 161,062
------------ ------------ ------------ ------------ ------------
Net income, as reported 61,219 26,925 17,349 74,474 179,967
Florida operations, net of tax (2,639) (794) (927) 5,885 1,525
Gain on sale of Florida operations, net of tax -- -- -- (56,790) (56,790)
Restructuring and special charges, net of tax -- -- -- 36,519 36,519
------------ ------------ ------------ ------------ ------------
Operating earnings $ 58,580 $ 26,131 $ 16,422 $ 60,088 $ 161,221
============ ============ ============ ============ ============
2001
Net interest income (FTE) $ 400,315 $ 112,739 $ 18,929 $ (37,208) $ 494,775
Provision for loan losses 51,132 99,698 129 -- 150,959
Non-Interest income 175,701 9,887 41,668 18,671 245,927
Non-Interest expense 357,047 64,388 46,994 32,954 501,383
Income taxes/FTE adjustment 58,744 (14,511) 4,716 (30,832) 18,117
------------ ------------ ------------ ------------ ------------
Net income (loss), as reported 109,093 (26,949) 8,758 (20,659) 70,243
Florida operations, net of tax (26,910) (2,525) (3,354) 37,476 4,687
Restructuring and special charges, net of tax 7,303 63,920 -- 904 72,127
------------ ------------ ------------ ------------ ------------
Operating earnings $ 89,486 $ 34,446 $ 5,404 $ 17,721 $ 147,057
============ ============ ============ ============ ============
YTD AVERAGE ASSETS YTD AVERAGE DEPOSITS
BALANCE SHEETS -------------------------- --------------------------
(in millions of dollars) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Regional Banking $ 13,341 $ 14,501 $ 15,846 $ 18,015
Dealer Sales 7,935 7,217 54 87
PFG 939 732 754 639
Treasury / Other 3,531 5,844 546 345
---------- ---------- ---------- ----------
Subtotal 25,746 28,294 17,200 19,086
Florida operations (877) (3,115) (1,178) (4,506)
---------- ---------- ---------- ----------
Total $ 24,869 $ 25,179 $ 16,022 $ 14,580
========== ========== ========== ==========
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. This Statement rescinds
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, Statement No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This Statement also rescinds Statement No.
44, Accounting for Intangible Assets of Motor Carriers. This Statement amends
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. As a
result, gains and losses from extinguishment of debt are classified as
extraordinary items only if they meet the criteria in Accounting Principles
Bulletin (APB) Opinion 30. Applying the provisions of APB Opinion 30 will
distinguish transactions that are part of an entity's recurring operations from
those that are unusual or infrequent or that meet the criteria for
classification as an
14
extraordinary item. In addition, this Statement requires lease modifications to
be accounted for in the same manner as sale-leaseback transactions.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized using fair value when the liability is incurred. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged.
The adoption of Statements No. 145 and No. 146 are not expected to have a
material impact on Huntington's results of operations or financial condition.
NOTE 10 - SUBSEQUENT EVENTS
On July 18, 2002, Huntington announced the restructuring of 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. This transaction resulted in an approximate $25
million pre-tax, non-operating gain ($16 million after tax). Under the
agreement, First Data obtained all of Huntington's Florida-related merchant
business and increased its equity interest in HMS. In addition, as part of the
transaction, Huntington extended its long-term merchant services relationship
with First Data. Huntington remains a nominal equity owner.
On July 2, 2002, Huntington closed the sale of the Orlando, Florida-based
JRD to members of its management team. Huntington acquired JRD in August of 2000
and operated it as a stand-alone property and casualty insurance agency within
Huntington's insurance operations. Huntington's decision to sell JRD is
consistent with its strategic refocusing plan.
These transactions are not expected to have a material impact on
Huntington's future financial results.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Huntington Bancshares Incorporated (Huntington) is a multi-state financial
holding company headquartered in Columbus, Ohio. Its subsidiaries are engaged in
full-service commercial and consumer banking, mortgage banking, lease financing,
trust services, discount brokerage services, underwriting credit life and
disability insurance, issuing commercial paper guaranteed by Huntington, and
selling other insurance and financial products and services. Its subsidiaries
operate domestically in offices located predominately in Ohio, Michigan, West
Virginia, Indiana, and Kentucky. Huntington has a foreign office in the Cayman
Islands and in Hong Kong.
FORWARD-LOOKING STATEMENTS
This interim report, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements about Huntington. These include descriptions of products or services,
plans, or objectives of management for future operations, and forecasts of
revenues, earnings, or other measures of economic performance. Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts.
By their nature, forward-looking statements are subject to numerous
assumptions, risks, and uncertainties. A number of factors, including but not
limited to, those set forth under the heading "Business Risks" included in Item
1 of Huntington's 2001 Annual Report and other factors described from time to
time in other filings with the Securities and Exchange Commission, could cause
actual conditions, events, or results to differ significantly from those
described in the forward-looking statements.
Management encourages readers of this interim report on Form 10-Q to
understand forward-looking statements to be strategic objectives rather than
absolute targets of future performance. Forward-looking statements speak only as
of the date they are made. Huntington does not update forward-looking statements
to reflect circumstances or events that occur after the date the forward-looking
statements were made or to reflect the occurrence of unanticipated events.
The following discussion and analysis, the purpose of which is to provide
investors and others with information that management believes to be necessary
for an understanding of Huntington's financial condition, changes in financial
condition, and results of operations, and should be read in conjunction with the
financial statements, notes, and other information contained in this document.
SIGNIFICANT ACCOUNTING POLICIES
Note 1 to the consolidated financial statements included in Huntington's
2001 Annual Report lists significant accounting policies used in the development
and presentation of its financial statements. This discussion and analysis, the
significant accounting policies, and other financial statement disclosures
identify and address key variables and other qualitative and quantitative
factors that are necessary for an understanding and evaluation of the
organization, its financial position, and results of operations.
SPECIAL PURPOSE ENTITIES (SPES)
Huntington utilized two securitization trusts, or SPEs, in 2000 as funding
sources. In the securitization transactions, indirect auto loans that Huntington
originated were sold to these trusts in exchange for funding collateralized by
these loans. Under GAAP, these trusts are not consolidated in Huntington's
financial statements. As such, the loans and the funding obtained are not
included on Huntington's balance sheets.
The Financial Accounting Standards Board (FASB) has approved for
issuance an Exposure Draft of a proposed Interpretation to ARB No. 51 that
establishes accounting guidance for consolidation of SPEs. The proposed
Interpretation, Consolidation of Certain Special-Purpose Entities, will apply to
any business enterprise--both public and private companies--that has an
ownership interest, contractual relationship, or other business relationship
with an SPE. The comment period on this Exposure Draft concludes August 30,
2002.
The objective of this proposed Interpretation is to improve financial
reporting by enterprises involved with SPEs--not to restrict the use of SPEs.
Current accounting standards require an enterprise to include subsidiaries in
which it has a controlling financial interest in its consolidated financial
statements. The FASB expects to issue a final Interpretation in the fourth
quarter of this year. The accounting guidance would be effective immediately
upon issuance of the
16
Interpretation for new SPEs. Companies such as Huntington with SPEs that existed
before the issuance of the Interpretation would be required to apply the
guidance to the existing SPEs at the beginning of the first fiscal period after
March 15, 2003. Calendar year-end companies would need to apply the guidance on
April 1, 2003.
Huntington is in the initial stages of assessing the implications of this
Interpretation as it applies to the consolidation of the securitization trusts
and its impact to results of operations and financial condition.
OTHER OFF BALANCE SHEET ARRANGEMENTS
Like other financial organizations, Huntington uses various commitments in
the ordinary course of business that, under generally accepted accounting
principles in the United States (GAAP), are not recorded in the financial
statements. Specifically, Huntington makes various commitments to extend credit
to customers and to sell loans, and have obligations under operating-type
noncancelable leases for its facilities.
DERIVATIVES
Huntington uses a variety of derivatives, principally interest rate swaps,
in its asset and liability management activities to protect against the risk of
adverse interest rate movements on either cash flows or market value of certain
assets and liabilities. This, along with other information regarding
derivatives, is discussed under the "Interest Rate Risk Management" section of
this report and in the notes to the unaudited consolidated financial statements.
RELATED PARTY TRANSACTIONS
Various directors and executive officers of Huntington are customers of
its bank subsidiary, The Huntington National Bank (the Bank), and other
affiliates and conducted transactions with these affiliates in the ordinary
course of business. Directors and executive officers may also be affiliated with
entities that are the Bank's customers and Huntington's other affiliates, which
enter into transactions with these affiliates in the ordinary course of
business. A summary of the indebtedness of management can be found in Note 4 to
Huntington's 2001 Annual Report. All other related party transactions, including
those reported in Huntington's 2002 Proxy Statement, were considered immaterial
to its financial condition and results of operations.
STRATEGIC REFOCUSING AND OTHER RESTRUCTURING
In July 2001, Huntington announced a strategic refocusing plan (the Plan).
Key components of the Plan included the intent to sell the Florida banking and
insurance operations, the consolidation of numerous non-Florida branch offices,
as well as credit-related and other actions to strengthen its balance sheet and
financial performance including the use of some of the excess capital to
repurchase outstanding common shares. These initiatives were designed to attain
more positive revenue and earnings for shareholders and to improve capital
efficiency.
The sale of the Florida banking operations to SunTrust Banks, Inc., closed
February 15, 2002, and included 143 banking offices and 456 ATMs with
approximately $2.8 billion in loans and other tangible assets, and $4.8 billion
in deposits and other liabilities. The transaction slightly increased
Huntington's sensitivity to rising interest rates. In addition, the net interest
margin, tangible equity to assets, and efficiency ratios were favorably
impacted.
The sale of the Florida insurance operations involved the sale of
Orlando-based J. Rolfe Davis Insurance Agency, Inc. (JRD), which closed on July
2, 2002, to members of its management team. Huntington remains committed to
growing the insurance business in markets served by its retail and commercial
banking operations. The JRD sale will not materially affect future financial
results.
On February 19, 2002, Huntington announced a new share repurchase program
authorizing the repurchase of up to 22 million shares. Repurchased shares will
be reserved for reissue in connection with Huntington's dividend reinvestment
and employee benefit plans, as well as for acquisitions and other corporate
purposes. Through the end of June 2002, approximately 8.8 million shares of
common stock were repurchased, including 6.9 million shares in the second
quarter through open market and privately negotiated transactions.
17
During the first quarter of 2002, $56.2 million of pre-tax restructuring
and special charges ($36.5 million after-tax, or $0.14 per share) were recorded
related to the Plan. Combined with amounts recorded in 2001, these pre-tax
charges totaled $233.1 million ($151.5 million after-tax, or $0.60 per share).
In the first quarter of 2002, a pre-tax gain of $175.3 million ($56.7 million
after-tax, or $0.23 per share) on the sale of the Florida operations was
recorded. Further information regarding the financial impact of the Plan can be
found in Notes 4 and 5 to the unaudited consolidated financial statements.
SUMMARY DISCUSSION OF RESULTS
Huntington reported second quarter 2002 earnings of $82.2 million, or
$0.33 per common share. This compares with earnings of $2.4 million, or $0.01
per common share, in the year-ago second quarter, and $97.7 million, or $0.39
per common share, in the first quarter of 2002. Year-to-date earnings in 2002
were $180.0 million, or $0.72 per common share, compared with $70.2 million, or
$0.28 per common share, in the comparable year-ago six-month period.
On an operating basis (see Basis of Discussion - Operating Earnings
below), second quarter 2002 earnings were $81.7 million, or $0.33 per common
share, up 8% and 10%, respectively, compared with the year-ago second quarter's
operating earnings of $75.6 million, or $0.30 per share. Second quarter
operating net income and earnings per common share were both up 3% from first
quarter operating earnings of $79.5 million, or $0.32 per common share.
Operating earnings for the first six months of 2002 were $161.2 million, or
$0.65 per common share, up 10% and 12%, respectively, from the comparable
prior-year period operating earnings of $147.1 million, or $0.58 per common
share.
The primary contributing factors to the $6.1 million, or 8%, increase
in operating net income from the year-ago quarter was higher net interest
income, the benefit of which was partially offset by higher provision for loan
losses. Net interest income increased $16.0 million, or 7%, reflecting the
benefit of a higher net interest margin as well as loan and deposit growth. The
provision for loan losses increased $12.0 million, or 29%. The increase in the
provision for loan losses over the prior year quarter reflected higher net
charge-offs and a higher level of loans. Second quarter results compared with
the year-ago quarter also benefited, but to a lesser degree, from a $1.7
million, or 1%, increase in non-interest income, and a $2.3 million, or 1%,
decline in non-interest expense. Income tax expense increased $1.8 million from
the year-ago quarter, reflecting the current quarter's higher level of net
income.
Second quarter 2002 performance measures on an operating basis all
improved from the same quarter of last year. This included the return on average
equity (ROE) that increased from 12.6% to 14.0%, the return on average total
assets (ROA) that increased from 1.20% to 1.31%, an increase in the net interest
margin from 4.03% to 4.30%, and an improvement in the efficiency ratio from
56.0% to 53.2%. (See the Results of Operations discussion below for a complete
discussion).
BASIS OF DISCUSSION - OPERATING EARNINGS
Reported results for the past five quarters have been significantly
impacted by a number of items, primarily related to the strategic refocusing
announced in July 2001 and the subsequent sale of the Florida banking and
insurance operations in 2002. Reported 2002 first quarter results also included
Florida operations for only half the quarter versus a full quarter for each
prior quarter. Therefore, to better understand comparable underlying trends, the
following discussion is on an operating basis. Specifically, operating earnings
exclude the impact of restructuring and other charges, the gain on the sale of
the Florida operations, and excludes the run-rate impact of the sold Florida
banking and insurance operations.
The table on page 19 reconciles reported with operating results for the
second quarter and first six months of 2002 and 2001. The table on page 20
entitled Selected Quarterly Income Statement Data, excluding Florida Operations,
shows operating results beginning with the first quarter of 2001 through the
current quarter. The following tables differ from the table presented in Note 5
to the unaudited consolidated income statements for the six months ended June
30, 2002. The tables below reconcile reported earnings to operating earnings and
therefore exclude the impact of Florida banking and insurance operations and
both Florida-related and non-Florida related restructuring charges. The table
in Note 5 presents Huntington on a pro forma basis without the Florida banking
and insurance operations and the Florida-related restructuring charges and
therefore includes $23.5 million of non-Florida related restructuring charges.
RESULTS OF OPERATIONS
For decision-making purposes, management reviews and analyzes financial
results on an operating basis, which leads to a better understanding of
underlying trends absent the impact of revenue and costs involved in the
strategic refocusing plan announced in July 2001 and the run-rate impact of the
Florida operations. Current and prior year results
18
contained a number of such items. The Results of Operations discussion that
follows is on an operating basis, except as otherwise stated. (See Basis of
Discussion - Operating Earnings above for an expanded discussion of operating
results and reconciliation to reported results.)
Gain on Sale
of Florida
Operations/
Restructuring
Reported and Other Florida Operating
(in thousands, except per share amounts) Earnings Charges Operations Earnings
---------- ---------- ---------- ----------
FOR THE THREE MONTHS ENDED JUNE 30, 2002:
Net interest income $ 241,859 $ 241,859
Provision for loan losses 53,892 53,892
Securities gains 966 966
Non-interest income 117,014 $ -- $ 2,710 114,304
Non-interest expense 192,060 -- 1,875 190,185
---------- ---------- ---------- ----------
Pre-tax income 113,887 -- 835 113,052
Income taxes 31,647 -- 303 31,344
---------- ---------- ---------- ----------
NET INCOME $ 82,240 $ -- $ 532 $ 81,708
========== ========== ========== ==========
Net income per common share -- diluted $ 0.33 $ -- $ 0.00 $ 0.33
========== ========== ========== ==========
FOR THE SIX MONTHS ENDED JUNE 30, 2002:
Net interest income $ 484,684 $ 9,724 $ 474,960
Provision for loan losses 109,673 5,186 104,487
Securities gains 1,423 -- 1,423
Non-interest income 417,985 $ 175,344 13,343 229,298
Non-interest expense 455,630 56,184 20,210 379,236
---------- ---------- ---------- ----------
Pre-tax income 338,789 119,160 (2,329) 221,958
Income taxes 158,822 98,889 (804) 60,737
---------- ---------- ---------- ----------
NET INCOME $ 179,967 $ 20,271 $ (1,525) $ 161,221
========== ========== ========== ==========
Net income per common share -- diluted $ 0.72 $ 0.08 ($ 0.01) $ 0.65
========== ========== ========== ==========
FOR THE THREE MONTHS ENDED JUNE 30, 2001:
Net interest income $ 248,033 $ 22,150 $ 225,883
Provision for loan losses 117,495 $ 71,718 3,840 41,937
Securities (losses) gains (2,503) (5,250) -- 2,747
Non-interest income 130,706 -- 19,845 110,861
Non-interest expense 267,293 33,997 40,853 192,443
---------- ---------- ---------- ----------
Pre-tax (loss) income (8,552) (110,965) (2,698) 105,111
Income taxes (10,929) (38,838) (1,600) 29,509
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 2,377 $ (72,127) $ (1,098) $ 75,602
---------- ---------- ---------- ----------
Net income per common share -- diluted $ 0.01 ($ 0.29) $ 0.00 $ 0.30
========== ========== ========== ==========
FOR THE SIX MONTHS ENDED JUNE 30, 2001:
Net interest income $ 491,157 $ 43,256 $ 447,901
Provision for loan losses 150,959 $ 71,718 7,595 71,646
Securities (losses) gains (425) (5,250) -- 4,825
Non-interest income 246,352 -- 38,918 207,434
Non-interest expense 501,383 33,997 81,126 386,260
---------- ---------- ---------- ----------
Pre-tax (loss) income 84,742 (110,965) (6,547) 202,254
Income taxes 14,499 (38,838) (1,860) 55,197
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 70,243 $ (72,127) $ (4,687) $ 147,057
========== ========== ========== ==========
Net income per common share -- diluted $ 0.28 ($ 0.29) ($ 0.01) $ 0.58
========== ========== ========== ==========
19
SELECTED QUARTERLY INCOME STATEMENT DATA, EXCLUDING FLORIDA OPERATIONS
2002 2001
--------------------- -----------------------------------------------
(in thousands, except per share amounts) (1) SECOND First Fourth Third Second First
-------- -------- -------- -------- -------- --------
TOTAL INTEREST INCOME $373,787 $369,521 $393,078 $427,754 $447,243 $466,298
TOTAL INTEREST EXPENSE 131,928 136,420 157,532 197,292 221,360 244,280
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME 241,859 233,101 235,546 230,462 225,883 222,018
Provision for loan losses 53,892 50,595 54,281 46,027 41,937 29,709
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 187,967 182,506 181,265 184,435 183,946 192,309
-------- -------- -------- -------- -------- --------
Service charges on deposit accounts 35,354 34,282 35,220 33,593 32,650 31,143
Brokerage and insurance income 14,967 14,587 15,066 13,943 13,185 12,232
Trust services 16,247 15,096 14,679 14,816 14,431 13,670
Mortgage banking 10,725 19,644 15,049 13,859 17,672 9,238
Bank Owned Life Insurance income 11,443 11,676 9,560 9,560 9,561 9,560
Other service charges and fees 10,529 9,118 9,582 9,547 9,383 8,415
Other 15,039 10,591 15,135 14,722 13,979 12,315
-------- -------- -------- -------- -------- --------
TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS 114,304 114,994 114,291 110,040 110,861 96,573
Securities gains 966 457 89 1,059 2,747 2,078
-------- -------- -------- -------- -------- --------
TOTAL NON-INTEREST INCOME 115,270 115,451 114,380 111,099 113,608 98,651
-------- -------- -------- -------- -------- --------
Personnel costs 103,589 104,320 100,076 101,866 103,707 99,296
Outside data processing and other services 16,592 17,097 15,414 14,650 15,100 14,122
Equipment 16,608 15,582 18,117 17,580 17,363 17,503
Net occupancy 14,642 14,771 15,251 14,481 13,755 15,568
Marketing 7,219 7,174 5,305 5,717 6,807 8,832
Professional services 6,265 5,242 6,069 5,754 6,481 4,793
Telecommunications 5,302 5,282 5,647 5,728 5,964 5,952
Printing and supplies 3,671 3,519 3,511 3,693 3,688 4,098
Franchise and other taxes 2,313 2,326 2,885 2,439 2,229 2,116
Amortization of intangible assets 203 251 2,555 2,569 2,890 3,031
Other 13,781 13,487 12,599 12,577 14,459 18,506
-------- -------- -------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE 190,185 189,051 187,429 187,054 192,443 193,817
-------- -------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES 113,052 108,906 108,216 108,480 105,111 97,143
Income taxes 31,344 29,393 28,631 27,587 29,509 25,688
-------- -------- -------- -------- -------- --------
NET INCOME $ 81,708 $ 79,513 $ 79,585 $ 80,893 $ 75,602 $ 71,455
======== ======== ======== ======== ======== ========
NET INCOME PER COMMON SHARE - DILUTED $ 0.33 $ 0.32 $ 0.32 $ 0.32 $ 0.30 $ 0.28
RETURN ON
Average total assets 1.31% 1.30% 1.28% 1.30% 1.20% 1.15%
Average total shareholders' equity 14.0% 13.6% 13.4% 13.5% 12.6% 12.1%
Net interest margin (2) 4.30% 4.21% 4.26% 4.17% 4.03% 3.99%
Efficiency ratio 53.2% 54.1% 52.7% 54.0% 56.0% 59.5%
Effective tax rate 27.7% 27.0% 26.5% 25.4% 28.1% 26.4%
REVENUE - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $241,859 $233,101 $235,546 $230,462 $225,883 $222,018
Tax Equivalent Adjustment (2) 1,071 1,169 1,292 1,442 1,616 2,002
-------- -------- -------- -------- -------- --------
Net Interest Income 242,930 234,270 236,838 231,904 227,499 224,020
Non-Interest Income 115,270 115,451 114,380 111,099 113,608 98,651
-------- -------- -------- -------- -------- --------
TOTAL REVENUE $358,200 $349,721 $351,218 $343,003 $341,107 $322,671
======== ======== ======== ======== ======== ========
TOTAL REVENUE EXCLUDING SECURITIES GAINS $357,234 $349,264 $351,129 $341,944 $338,360 $320,593
======== ======== ======== ======== ======== ========
(1) Income component excludes after-tax impact of the $56.8 million gain on
sale of Florida operations in 1Q '02 and restructuring and special charges
($36.5 million in 1Q '02; $9.8 million in 4Q '01; $33.0 million in 3Q '01;
$72.1 million in 2Q '01).
(2) Calculated assuming a 35% tax rate.
20
NET INTEREST INCOME
Net interest income was $241.9 million in the second quarter of 2002, up
7% from the year-ago quarter reflecting a 27 basis point increase in the net
interest margin to 4.30% from 4.03%. The margin increase was due to a
substantial reduction in short-term interest rates and the related steepening of
the yield curve, as well as the maturity in late 2001 of certain interest rate
swaps that had negative spreads. Earning assets were essentially unchanged. (See
net interest margin detail and average balance sheets for the recent five
quarters on the following page.) Average managed loans, which include $1.2
billion of securitized auto loans, increased 5% after normalizing for
residential real estate loan securitizations and the impact of Florida banking
operations sold in the first quarter of 2002. However, this positive was largely
offset by a planned decline in other earning assets, most notably low-yielding
investment securities. A key strategy implemented last year was to improve the
earning asset yield by reducing the level of low-margin investment securities.
Investment securities averaged $2.8 billion in the second quarter of 2002, down
21% from the year-ago quarter. As a result of this decrease, securities
represented 13% of average earning assets in the second quarter of 2002, down
from 16% in the year-ago quarter. Average core deposits were up 13% from the
year-ago quarter, reflecting a 42% increase in money market and other interest
bearing deposits and a 7% increase in other domestic time deposits. Deposit
inflow has been influenced, in part, by turbulence in the financial markets, but
also by the success of sales and deposit growth programs.
Compared with the 2002 first quarter, net interest income increased $8.8
million, or 4%, reflecting a 9 basis point increase in the net interest margin
to 4.30% and a $237 million, or 1%, increase in average earning assets. The
increase in the net interest margin was driven by seasonally higher loan fees
and the positive impact of the interest rate environment, including a
continuation of an upsloping yield curve, partially offset by a reduced benefit
from the lagged repricing of the variable rate home equity loan portfolio.
Average managed loans, normalized for residential real estate loan
securitizations and the impact of Florida banking operations sold in the 2002
first quarter, grew at a 7% annualized rate during the quarter, but this benefit
was partially offset by a decline in other earning assets, primarily mortgages
held for sale. Average core deposits increased $657.4 million, or at a 19%
annualized rate from the first quarter, reflecting continued strong inflows in
interest bearing and other domestic time deposits.
The average managed loans increase continued to be positively impacted by
strong growth in residential mortgages and home equity loans and lines of
credit. Average residential mortgages grew $325.1 million, reflecting a decision
to retain more of these loans on the balance sheet, with home equity loans and
lines of credit up $122.5 million, or at a 17% annualized rate. This reflected
continued strong demand for residential mortgages, refinancing activity, and the
promotion of adjustable mortgage products. Commercial real estate loans
increased $51.8 million, or at a 6% annualized rate, slower than the 15% and 18%
annualized rates in the 2002 first quarter and 2001 fourth quarter,
respectively. These increases were partially offset by declines in other loan
categories reflecting the continued weakness in the economy and certain sectors.
This was especially noticeable in the $47.5 million, or 3% annualized decline in
commercial loans and $50.6 million, or 3% annualized, decline in managed auto
loans and leases.
For the first six months of 2002, net interest income was $475.0 million,
up $27.1 million, or 6%, from the comparable year-ago period. This reflected a
25 basis point increase in the net interest margin to 4.26% from 4.01% as
average earning assets for the first six months of 2002 were essentially
unchanged from the first six months of last year. Comparisons of average earning
assets, loans, investment securities, and deposits for the first six months of
2002 versus the comparable year-ago period reflect the same factors that
affected second quarter comparisons.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the expense necessary to maintain the
allowance for loan losses (ALL) at a level adequate to absorb management's
estimate of inherent losses in the loan portfolio. The provision expense in the
second quarter of 2002 was $53.9 million, up $12.0 million, or 29%, from the
year-ago quarter. This increase reflected loan growth and higher levels of net
charge-offs, and continued economic weakness. At June 30, 2002, the allowance
for loan losses as a percent of period-end loans was 2.00%, up from 1.76% at the
end of the year-ago quarter. (See Credit Risk section for discussion of the ALL,
NPAs and Net charge-offs.)
Compared with the first quarter of this year, the provision for loan
losses increased $3.3 million, and exceeded net charge-offs by $9.0 million,
providing for loan growth as the allowance for loan losses as a percent of
period-end loans was unchanged at 2.00%.
For the first six months of 2002, the provision for loan losses was $104.5
million, up from $71.6 million from the first six months of 2001, reflecting
the same factors that affected second quarter comparisons.
21
CONSOLIDATED QUARTERLY NET INTEREST MARGIN DETAIL AND AVERAGE BALANCES
(in millions)
AVERAGE BALANCES AVERAGE RATES (3)
------------------------------------------- ----------------------------------------------
2002 2001 2002 2001
---------------- ------------------------- ----------------- --------------------------
Fully Tax Equivalent Basis (1) SECOND First Fourth Third Second SECOND First Fourth Third Second
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
ASSETS
Interest bearing deposits in banks $ 29 $ 34 $ 14 $ 5 $ 5 2.44% 2.02% 2.09% 3.75% 5.09%
Trading account securities 6 5 8 8 39 5.37 2.79 3.59 3.83 5.15
Federal funds sold and securities
purchased under resale agreements 68 62 86 86 93 1.51 1.43 2.18 3.20 4.21
Mortgages held for sale 174 381 433 344 420 7.07 6.51 6.64 7.18 6.96
Securities:
Taxable 2,735 2,713 2,720 2,896 3,368 6.33 6.43 6.62 6.71 6.26
Tax exempt 96 102 108 140 201 7.69 7.76 7.81 7.38 7.26
------- ------- ------- ------- ------- ------- ------ ------ ------ -------
Total Securities 2,831 2,815 2,828 3,036 3,569 6.37 6.48 6.66 6.75 6.32
------- ------- ------- ------- ------- ------- ------ ------ ------ -------
LOANS:
Commercial 5,614 5,661 5,751 5,946 5,986 5.50 5.37 5.81 6.93 7.41
Real Estate
Construction 1,420 1,405 1,386 1,281 1,190 4.81 4.91 5.49 6.60 7.44
Commercial 2,233 2,196 2,081 2,034 1,994 6.36 6.66 6.88 7.58 7.95
Consumer
Auto leases - Indirect 3,113 3,166 3,229 3,243 3,222 6.42 6.62 6.58 6.67 6.71
Auto loans - Indirect 2,597 2,560 2,489 2,445 2,289 7.98 7.98 8.29 8.61 8.86
Home equity loans & lines
of credit 2,911 2,788 2,753 2,709 2,664 5.72 6.09 7.05 7.73 8.47
Residential mortgage 1,229 904 672 619 696 6.23 6.60 7.10 7.55 7.70
Other loans 413 424 446 459 485 7.47 7.64 8.26 8.04 8.14
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Total Consumer 10,263 9,842 9,589 9,475 9,356 6.64 6.86 7.27 7.59 7.88
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Total Loans 19,530 19,104 18,807 18,736 18,526 6.15 6.25 6.65 7.32 7.71
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Allowance for loan losses / fees (2) 400 403 371 315 279 0.55 0.49 0.53 0.56 0.60
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Net loans 19,130 18,701 18,436 18,421 18,247 6.70 6.74 7.18 7.88 8.31
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Total earning assets 22,638 22,401 22,176 22,215 22,652 6.64% 6.68% 7.08% 7.69% 7.94%
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Cash and due from banks 722 774 798 831 830
All other assets 1,997 2,008 2,010 2,002 1,990
------- ------- ------- ------- -------
TOTAL ASSETS $24,957 $24,780 $24,613 $24,733 $25,193
======= ======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 2,739 $ 2,738 $ 2,824 $ 2,761 $ 2,667
Interest bearing demand deposits 4,920 4,362 4,014 3,687 3,456 1.84% 1.79% 1.93% 2.73% 2.87%
Savings deposits 2,808 2,830 2,863 2,923 2,977 1.83 1.85 2.08 3.04 3.46
Other domestic time deposits 4,218 4,097 4,123 4,127 3,942 4.61 4.99 5.18 5.52 5.83
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Total core deposits 14,685 14,027 13,824 13,498 13,042 2.29 2.39 2.54 3.09 3.31
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Domestic time deposits of $100,000
or more 852 959 1,008 1,053 1,078 2.82 2.91 4.66 4.70 5.23
Brokered time deposits and
negotiable CDs 649 302 109 120 118 2.48 2.48 3.55 4.42 5.57
Foreign time deposits 296 268 224 250 371 1.38 1.92 1.99 3.40 4.11
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Total deposits 16,482 15,556 15,165 14,921 14,609 2.31 2.41 2.68 3.22 3.49
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Short-term borrowings 1,886 1,925 1,745 1,998 2,628 1.97 2.39 2.73 3.75 4.40
Medium-term notes 1,910 2,645 3,272 3,443 3,476 3.21 3.00 3.45 4.82 5.51
Subordinated notes and other
long-term debt, including
preferred capital securities 1,229 1,232 1,183 1,184 1,180 4.05 4.14 4.96 5.19 5.96
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
Total interest bearing
liabilities 18,768 18,620 18,541 18,785 19,226 2.82% 2.96% 3.37% 4.17% 4.62%
------- ------- ------- ------- ------- ------ ------ ------ ------ -------
All other liabilities 1,107 1,052 887 812 897
Shareholders' equity 2,343 2,370 2,361 2,375 2,403
------- ------- ------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $24,957 $24,780 $24,613 $24,733 $25,193
======= ======= ======= ======= =======
Net interest rate spread 3.82% 3.72% 3.71% 3.52% 3.32%
Impact of non-interest bearing
funds on margin 0.48 0.49 0.55 0.65 0.71
------ ------ ------ ------ -------
NET INTEREST MARGIN 4.30% 4.21% 4.26% 4.17% 4.03%
====== ====== ====== ====== =======
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate.
(2) Total loans with fees rate includes loan fees, whereas individual loan
components above are shown exclusive of fees.
(3) Loan and deposit average rates include impact of applicable derivatives.
22
NON-INTEREST INCOME BEFORE SECURITIES GAINS
Non-interest income before securities gains in the second quarter of 2002
was up $3.4 million, or 3%, from the year-ago quarter despite a $6.9 million, or
39%, decline in mortgage banking income. This reduction in mortgage banking
income reflected a 61% decline in deliveries to the secondary market, primarily
to retain more residential mortgage loans on the books. Excluding mortgage
banking income, second quarter non-interest income before securities gains was
up $10.4 million, or 11%, from the second quarter of last year. The following
table reflects non-interest income detail for the three and six months ended
June 30, 2002 and 2001:
NON-INTEREST INCOME
(in thousands of dollars) THREE MONTHS ENDED JUNE 30,
------------------------------------
2002 2001 % CHANGE
---------- ---------- ----------
Service charges on deposit accounts $ 35,354 $ 32,650 8.3%
Trust services 16,247 14,431 12.6
Brokerage and insurance income 14,967 13,185 13.5
Bank Owned Life Insurance income 11,443 9,561 19.7
Mortgage banking 10,725 17,672 (39.3)
Other service charges and fees 10,529 9,383 12.2
Other 15,039 13,979 7.6
---------- ---------- ----------
TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS 114,304 110,861 3.1
Securities gains 966 2,747 (64.8)
---------- ---------- ----------
TOTAL NON-INTEREST INCOME $ 115,270 $ 113,608 1.5%
========== ========== ==========
SIX MONTHS ENDED JUNE 30,
------------------------------------
2002 2001 % CHANGE
---------- ---------- ----------
Service charges on deposit accounts $ 69,636 $ 63,793 9.2%
Trust services 31,343 28,101 11.5
Brokerage and insurance income 29,554 25,417 16.3
Bank Owned Life Insurance income 23,119 19,121 20.9
Mortgage banking 30,369 26,910 12.9
Other service charges and fees 19,647 17,798 10.4
Other 25,630 26,294 (2.5)
---------- ---------- ----------
TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS 229,298 207,434 10.5
Securities gains 1,423 4,825 (70.5)
---------- ---------- ----------
TOTAL NON-INTEREST INCOME $ 230,721 $ 212,259 8.7%
========== ========== ==========
All remaining non-interest income categories experienced significant
growth from the year-ago quarter. This included a $2.7 million or 8% increase in
deposit service charges, primarily driven by higher corporate maintenance fees.
Brokerage and insurance income was up $1.8 million, or 14%, from the year-ago
quarter primarily due to strong retail investment sales, the benefit of which
was partially offset by lower investment banking and insurance fees. Trust
income was up $1.8 million, or 13%, reflecting the impact of the acquisition of
Haberer Registered Investment Advisors, Inc. (Haberer) in the 2002 first
quarter. The increase in brokerage and insurance income was due to increased
sales of mutual funds and annuities. Income from bank owned life insurance was
up $1.9 million, or 20%. Other service charges increased $1.1 million, or 12%,
reflecting increased debit card and ATM fees. Other income increased $1.1
million, or 8%, reflecting a combination of higher securitization income and a
gain on the sale of a real estate property, which was partially offset by lower
sales of customer derivative products.
Compared with the first quarter of 2002, non-interest income before
securities gains was down $0.7 million, reflecting an $8.9 million decline in
mortgage banking income. Similar to comparisons to the year-ago quarter, this
decline reflected a 64% decrease in deliveries to the secondary market from the
first quarter's very strong performance, and to a lesser degree, a decision to
retain a higher percentage of loans on the balance sheet. Excluding mortgage
banking, non-interest income before securities gains was up $8.2 million, or 9%,
from the first quarter reflecting broad-based increases in other fee income
categories.
Trust income in the second quarter of 2002 was up $1.2 million, or 8%,
from the first quarter, mostly reflecting the impact from the Haberer
acquisition. Corporate trust income increased 26%, largely due to the
seasonality of annual
23
renewal fees and institutional sales activities. Partially offsetting these
increases was the impact of declining asset values. Deposit service charges were
up $1.1 million, or 3%, with the primary driver being higher personal service
charges, especially NSF and overdraft fees. Other service charges were up $1.4
million, or 15%, from the first quarter, reflecting increased ATM and debit card
fees. Other income was up $4.4 million reflecting higher securitization income
and a gain on the sale of a real estate property, partially offset by lower
sales of customer derivative products.
For the first six months of 2002, non-interest income before securities
gains was $229.3 million, up 11% from the comparable year-ago period,
reflecting the same factors that affected second quarter comparisons.
SECURITIES GAINS
Securities gains in the second quarter of 2002 were $1.0 million, down
from $2.7 million in the year-ago quarter and up $0.5 million from the first
quarter of 2002. The gains in the year-ago quarter resulted from investment
securities sold reflecting a strategy to reduce low-margin investment
securities. For the first half of 2002, securities gains were $1.4 million, down
from $4.8 million in the first six months of last year.
NON-INTEREST EXPENSE
Non-interest expense was $190.2 million in the second quarter of 2002,
down $2.3 million, or 1%, from the year-ago quarter. This reflected a $2.7
million decline in intangible amortization expense primarily related to the
reduction of non-Florida operations related intangible amortization due to
implementing SFAS No. 142, described more fully in Note 3 to the unaudited
consolidated financial statements. The following table reflects non-interest
expense detail for the three and six months ended June 30, 2002 and 2001:
NON-INTEREST EXPENSE
(in thousands of dollars) THREE MONTHS ENDED JUNE 30,
------------------------------------
2002 2001 % CHANGE
---------- ---------- ----------
Personnel costs $ 103,589 $ 103,707 (0.1)%
Outside data processing and other services 16,592 15,100 9.9
Equipment 16,608 17,363 (4.3)
Net occupancy 14,642 13,755 6.4
Marketing 7,219 6,807 6.1
Telecommunications 5,302 5,964 (11.1)
Professional services 6,265 6,481 (3.3)
Printing and supplies 3,671 3,688 (0.5)
Franchise and other taxes 2,313 2,229 3.8
Amortization of intangible assets 203 2,890 (93.0)
Other 13,781 14,459 (4.7)
---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE $ 190,185 $ 192,443 (1.2)%
========== ========== ==========
SIX MONTHS ENDED JUNE 30,
------------------------------------
2002 2001 % CHANGE
---------- ---------- ----------
Personnel costs $ 207,909 $ 203,003 2.4%
Outside data processing and other services 33,689 29,222 15.3
Equipment 32,190 34,866 (7.7)
Net occupancy 29,413 29,323 0.3
Marketing 14,393 15,639 (8.0)
Telecommunications 10,584 11,916 (11.2)
Professional services 11,507 11,274 2.1
Printing and supplies 7,190 7,786 (7.7)
Franchise and other taxes 4,639 4,345 6.8
Amortization of intangible assets 454 5,921 (92.3)
Other 27,268 32,965 (17.3)
---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE $ 379,236 $ 386,260 (1.8)%
========== ========== ==========
Personnel costs were essentially flat for the recent quarter when compared
with the year-ago quarter, reflecting the benefit of a 5% decline in period-end
full-time equivalent staff due to planned staff reductions. These were partially
offset by higher sales commission expense. The following table reflects the
number of full-time equivalent staff at the end of each period shown.
Approximately 1,200 full-time equivalent staff were associated with the Florida
banking operations sold in the 2002 first quarter. The 168 full-time equivalent
decrease in staff from March 31, 2002 to June 20,
24
2002, reflected planned staff reductions, primarily Florida-related operations
support staff located outside the state of Florida and not part of the sold
banking operations.
2002 2001
------------------- ------------------------------
Second First Fourth Third Second
-------- -------- -------- -------- --------
Number of employees (full-time equivalent)
Huntington, excluding Florida operations 8,174 8,342 8,521 8,487 8,566
Florida operations -- -- 1,222 1,232 1,215
-------- -------- -------- -------- --------
Total Huntington 8,174 8,342 9,743 9,719 9,781
======== ======== ======== ======== ========
Outside data processing and other services expense increased $1.5 million,
or 10% from the prior year quarter, reflecting higher processing expenses
related to Huntington's loan and deposit products. On a combined basis,
occupancy and equipment costs were up slightly from the year-ago quarter
reflecting higher depreciation associated with technology investments including
a new Internet-banking platform launched in the first quarter of this year,
costs associated with the implementation of a new Customer Service System to
assist personal bankers in branches in providing quicker and more comprehensive
customer service, as well as enhanced product sales capabilities, and mainframe
infrastructure upgrades, which was partially offset by lower depreciation and
building maintenance costs primarily related to planned branch consolidations.
Compared with the first quarter of 2002, non-interest expense was up $1.1
million, or 1%, driven by a $0.9 million increase in occupancy and equipment
costs and a $1.0 million increase in professional services. These increases were
partially offset by a $0.7 million decrease in personnel costs, reflecting, in
part, a 2% decline in full-time equivalent staff from March 31 to June 30 due to
planned staff reductions, and a $0.5 million decline in outside services.
For the first half of 2002, non-interest expense was $379.2 million, down
from $386.3 million, or 2%, reflecting these same factors.
The combination of lower expenses as well as higher revenues positively
affected the efficiency ratio, which expresses expenses (excluding amortization
of intangible assets) as a percentage of revenues (before gains on securities
transactions) on a tax-equivalent basis. The efficiency ratio improved to 53.2%
in the second quarter of 2002 from 56.0% in the year-ago quarter and 54.1% in
the first quarter of 2002.
INCOME TAXES
The provision for income taxes in the second quarter of 2002 was $31.3
million and represented an effective tax rate on income before taxes of 27.7%.
This compares to a provision for income taxes in the year-ago quarter of $29.5
million, or 28.1% of income before taxes, and $29.4 million, or 27.0% in the
2002 first quarter.
CREDIT RISK
Credit risk exposure is managed through the use of consistent underwriting
standards, policies that limit exposure to higher risk credits (e.g. highly
leveraged transactions or nationally syndicated credits), and a strategy of
diversification of exposure by industry sector, geographic region, or other
concentrations. Management has focused its commercial lending to customers with
multiple relationships with the Bank. As a result, outstanding shared national
credits declined to $1.0 billion at June 30, 2002 from $1.5 billion one year
ago. The credit administration function employs extensive credit risk management
techniques, including forecasting, to ensure loans adhere to corporate policy
and problem loans are promptly identified. The loss forecasting process is
performed on a monthly basis to ensure that all changes in the portfolio's
composition and performance are incorporated. These procedures provide executive
management with the information necessary to implement policy adjustments where
necessary, and take corrective actions on a proactive basis.
LOAN COMPOSITION
The following table shows the period-end reported loan portfolio by loan
type and business segment, with the latter including a separate line indicating
loans sold with the Florida banking operations in the first quarter of 2002:
25
(in millions of dollars) June 30, 2002 December 31, 2001 June 30, 2001
---------------------- ---------------------- ----------------------
BY TYPE Balance % Balance % Balance %
--------- --------- --------- --------- --------- ---------
Commercial $ 5,591 28.5 $ 6,439 29.8 $ 6,754 32.0
Commercial real estate 3,699 18.8 3,976 18.4 3,640 17.2
--------- --------- --------- --------- --------- ---------
Total Commercial and
Commercial Real Estate 9,290 47.3 10,415 48.2 10,394 49.2
--------- --------- --------- --------- --------- ---------
Consumer
Auto leases - Indirect 3,120 15.9 3,208 14.8 3,195 15.1
Auto loans - Indirect 2,631 13.4 2,883 13.3 2,675 12.7
Home equity 2,991 15.2 3,582 16.6 3,406 16.1
Residential mortgage 1,211 6.2 971 4.5 844 4.0
Other loans 409 2.0 543 2.6 614 2.9
--------- --------- --------- --------- --------- ---------
Total Consumer 10,362 52.7 11,187 51.8 10,734 50.8
--------- --------- --------- --------- --------- ---------
TOTAL LOANS $ 19,652 100.0 $ 21,602 100.0 $ 21,128 100.0
========= ========= ========= ========= ========= =========
BY BUSINESS SEGMENT
Regional Banking
Central Ohio / West Virginia $ 4,588 23.3 $ 4,264 19.7 $ 4,241 20.1
Northern Ohio 2,723 13.9 2,694 12.5 2,761 13.1
Southern Ohio / Kentucky 1,433 7.3 1,327 6.1 1,286 6.1
West Michigan 1,835 9.3 1,837 8.5 1,845 8.7
East Michigan 1,051 5.3 937 4.3 820 3.9
Indiana 683 3.5 696 3.2 664 3.1
--------- --------- --------- --------- --------- ---------
Total Regional Banking 12,313 62.6 11,755 54.3 11,617 55.0
--------- --------- --------- --------- --------- ---------
Dealer Sales 6,377 32.5 6,239 29.0 6,207 29.4
Private Financial Group 862 4.4 763 3.5 639 3.0
Treasury / Other 100 0.5 122 0.6 86 0.4
--------- --------- --------- --------- --------- ---------
TOTAL LOANS EXCLUDING FLORIDA 19,652 100.0 18,879 87.4 18,549 87.8
--------- --------- --------- --------- --------- ---------
Florida -- -- 2,723 12.6 2,579 12.2
--------- --------- --------- --------- --------- ---------
TOTAL LOANS $ 19,652 100.0 $ 21,602 100.0 $ 21,128 100.0
========= ========= ========= ========= ========= =========
NON-PERFORMING ASSETS
Non-performing assets (NPAs) consist of loans that are no longer accruing
interest, loans that have been renegotiated based upon financial difficulties of
the borrower, and real estate acquired through foreclosure. Commercial and real
estate loans stop accruing interest when collection of principal or interest is
in doubt or generally when the loan is 90 days past due. When interest accruals
are suspended, accrued interest income is reversed with current year accruals
charged to earnings and prior year amounts generally charged off as a credit
loss. Consumer loans are not placed on non-accrual status but are charged off in
accordance with regulatory statutes, which is generally no more than 120 days.
The following table summarizes NPAs at the end of each of the recent five
quarters in addition to past due information:
26
2002 2001
------------------------ ---------------------------------------
(in thousands) Second First Fourth Third Second
--------- --------- --------- --------- ---------
Non-accrual loans:
Commercial $ 156,252 $ 162,959 $ 155,720 $ 143,132 $ 111,363
Commercial real estate 45,795 43,295 45,180 37,772 23,418
Residential mortgage 8,776 11,896 11,086 10,923 10,916
--------- --------- --------- --------- ---------
Total Nonaccrual Loans 210,823 218,150 211,986 191,827 145,697
Renegotiated loans 1,268 1,268 1,276 1,286 1,290
--------- --------- --------- --------- ---------
TOTAL NON-PERFORMING LOANS 212,091 219,418 213,262 193,113 146,987
Other real estate, net 11,146 6,112 6,384 8,050 9,913
--------- --------- --------- --------- ---------
TOTAL NON-PERFORMING ASSETS $ 223,237 $ 225,530 $ 219,646 $ 201,163 $ 156,900
========= ========= ========= ========= =========
Non-performing loans as a% of
total loans 1.08% 1.13% 1.13% 1.02% 0.79%
Non-performing assets as a% of
total loans and other real estate 1.14% 1.17% 1.16% 1.06% 0.85%
ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 58,449 $ 61,746 $ 76,295 $ 79,339 $ 54,228
========= ========= ========= ========= =========
Total NPAs were $223.2 million at June 30, 2002, up from $156.9 million at
the end of the year-ago quarter, but down slightly from $225.5 million at the
end of the first quarter of 2002. The adverse impact was primarily from the
uncertain economic environment in the Midwest, particularly in the manufacturing
and service sectors, primarily resulted in the NPA increase from the year-ago
period. NPAs as a percent of total loans and other real estate were 1.14% at
June 30, 2002, up from 0.85% a year go, but down slightly from 1.17% at March
31, 2002.
Loans past due ninety days at the end of the second quarter of 2002 were
$58.4 million and represented 0.30% of total loans. This was up slightly from
$54.2 million, or 0.29% at June 30, 2001, but down slightly from $61.7 million,
or 0.32% of total loans at March 31, 2002.
NET CHARGE-OFFS
In the second quarter of 2001, as part of the strategic restructuring
plan, a decision was make to exit the sub-prime automobile lending, as well as
truck and equipment lending businesses. At that time, special credit loss
reserves were established to cover the inherent losses in those portfolios and
to which related loan losses have been charged.
Excluding charge-offs related to these exited businesses, net charge-offs
in the second quarter of 2002 were $42.5 million and represented an annualized
0.88% of average loans. This was up from $34.3 million, or 0.74%, in the
year-ago quarter, but down from $45.5 million, or 1.07%, in the first quarter of
2002.
The $8.2 million increase in net charge-offs from the year-ago quarter
reflected a $12.3 million increase in commercial and commercial real estate net
charge-offs, partially offset by a $4.1 million decline in consumer net
charge-offs. The increase in commercial net charge-offs primarily reflected the
impact of the weakened economy while the decline in consumer net charge-offs
primarily reflected lower auto lease and loan losses as a result of a management
decision over the last two years to strengthen the underwriting criteria and
credit score mix of new auto loan and lease originations.
The following table reflects net charge-offs and annualized charge-offs as
a percent of average loans by type of loan:
27
2002 2001
------------------------ ---------------------------------------
(in thousands) Second First Fourth Third Second
--------- --------- --------- --------- ---------
NET CHARGE-OFFS BY LOAN TYPE
Commercial $ 21,468 $ 16,092 $ 19,475 $ 8,755 $ 9,507
Commercial real estate 2,037 3,723 867 3 1,704
--------- --------- --------- --------- ---------
Total commercial and
commercial real estate 23,505 19,815 20,342 8,758 11,211
--------- --------- --------- --------- ---------
Consumer
Auto leases 8,401 12,809 12,634 10,395 11,016
Auto loans 5,733 8,888 8,474 5,351 8,515
Home equity loans & lines of credit 3,096 2,814 3,313 3,772 2,311
Residential mortgage 555 104 370 93 241
Other loans 1,225 1,098 1,388 527 1,036
--------- --------- --------- --------- ---------
Total consumer 19,010 25,713 26,179 20,138 23,119
--------- --------- --------- --------- ---------
Total net charge-offs, excluding exited
businesses 42,515 45,528 46,521 28,896 34,330
Net charge-offs related to exited businesses 2,385 3,748 3,628 7,186 27,382
--------- --------- --------- --------- ---------
TOTAL NET CHARGE-OFFS $ 44,900 $ 49,276 $ 50,149 $ 36,082 $ 61,712
========= ========= ========= ========= =========
NET CHARGE-OFFS AS A% OF AVERAGE LOANS
Commercial 1.53% 1.15% 1.34% 0.58% 0.64%
Commercial real estate 0.22% 0.42% 0.10% 0.00% 0.21%
--------- --------- --------- --------- ---------
Total commercial and
commercial real estate 1.02% 0.87% 0.88% 0.38% 0.49%
--------- --------- --------- --------- ---------
Consumer
Auto leases 1.08% 1.64% 1.55% 1.27% 1.37%
Auto loans 0.92% 1.47% 1.43% 0.87% 1.49%
Home equity loans & lines of credit 0.43% 0.41% 0.48% 0.55% 0.35%
Residential mortgage 0.18% 0.05% 0.22% 0.06% 0.14%
Other loans 1.22% 1.09% 1.29% 0.46% 0.86%
--------- --------- --------- --------- ---------
Total consumer 0.75% 1.07% 1.10% 0.84% 0.99%
--------- --------- --------- --------- ---------
TOTAL NET CHARGE-OFFS 0.88% 0.97% 0.99% 0.61% 0.74%
========= ========= ========= ========= =========
Total Net Charge-offs - Including Exited
Businesses 0.92% 1.05% 1.06% 0.76% 1.33%
========= ========= ========= ========= =========
Management believes consumer net charge-offs could generally improve
slightly from second quarter performance through the end of 2002 reflecting the
decline in consumer delinquencies in recent months and the continued positive
impact from higher quality auto loan and lease originations over the last
several quarters. However, given the recent decline in charge-offs and the
normal seasonal patterns, we expect that charge-offs may increase in the short
run. The outlook for commercial net charge-offs is for gradual improvement.
This expected improvement could be mitigated in the short run should
opportunities exist to accelerate the resolution and/or exiting of certain
troubled credits.
ALLOWANCE FOR LOAN LOSSES
The ALL was $393.0 million at June 30, 2002, up from $326.5 million at the
end of the second quarter of 2001, and $386.1 million at March 31, 2002. The ALL
represented 2.00% of total loans at June 30, 2002, up from 1.76% at the end of
the second quarter last year, but unchanged from March 31, 2002. The period-end
ALL was 185% of NPAs at June 30, 2002, down from 222% a year ago, but up from
176% at March 31, 2002.
28
The following table reflects the activity in the ALL for the recent five
quarters, excluding the Florida operations, and the ALL of $22.3 million related
to $2.8 billion of loans sold in conjunction with the sale of Florida during the
first quarter of 2002.
2002 2001
------------------------ ---------------------------------------
(in thousands) Second First Fourth Third Second
--------- --------- --------- --------- ---------
ALLOWANCE FOR LOAN LOSSES,
BEGINNING OF PERIOD $ 386,053 $ 386,956 $ 334,827 $ 326,495 $ 276,116
Loan losses (57,482) (60,191) (60,110) (45,063) (71,104)
Recoveries 12,582 10,915 9,961 8,981 9,392
--------- --------- --------- --------- ---------
Net loan losses (44,900) (49,276) (50,149) (36,082) (61,712)
--------- --------- --------- --------- ---------
Provision for loan losses 53,892 50,595 104,281 46,027 113,655
Allowance of securitized loans (2,034) (2,222) (2,003) (1,613) (1,564)
--------- --------- --------- --------- ---------
ALLOWANCE FOR LOAN LOSSES,
END OF PERIOD $ 393,011 $ 386,053 $ 386,956 $ 334,827 $ 326,495
========= ========= ========= ========= =========
Allowance for loan losses as a% of
total loans 2.00% 2.00% 2.05% 1.77% 1.76%
Allowance for loan losses as a% of
non-performing loans 185% 176% 181% 173% 222%
Allowance for loan losses and OREO
as a% of non-performing assets 176% 171% 176% 166% 207%
The provision for loan losses for the second quarter of 2001 included
additional charges of $71.7 million to recognize the estimated embedded losses
resulting from Huntington's decision to exit sub-prime automobile lending and
truck and equipment lending, to charge-off delinquent consumer and small
business loans more than 120 days past due, to increase reserves for consumer
bankruptcies, and to increase commercial loan reserves. The provision for loan
losses for the fourth quarter of 2001 included $50.0 million of charges to
increase the loan loss reserve in light of the higher charge-offs and
non-performing assets experienced in the second half of 2001.
The ALL is allocated to each loan category based on expected losses.
Expected losses are a function of the likelihood of default and the loss in the
event of default. A continuous assessment of credit quality is based on
portfolio risk characteristics and other relevant factors such as historical
performance, internal controls, and impacts from mergers and acquisitions. For
the commercial and industrial and commercial real estate credits, expected loss
factors are assigned by credit grade at the individual loan level and are
updated monthly. The aggregation of these factors represents management's
estimate of the inherent loss. The portion of the allowance allocated to the
more homogeneous consumer loan segments is determined by developing expected
loss ratios based on the risk characteristics of the various segments and giving
consideration to existing economic conditions and trends.
Projected loss ratios incorporate factors such as trends in past due and
non-accrual amounts, recent loan loss experience, current economic conditions,
risk characteristics, and concentrations of various loan categories. Actual loss
ratios experienced in the future, however, could vary from those projected as a
loan's performance is a function of not only economic factors but also other
factors unique to each customer. The dollar exposure could significantly vary
from estimated amounts due to losses from large dollar single client exposures,
industry, product, or geographic concentrations, or changes in general economic
conditions. To ensure adequacy to a higher degree of confidence, a portion of
the ALL is considered unallocated. While amounts are allocated to various
portfolio segments, the total ALL, excluding impairment reserves prescribed
under provisions of Statement of Financial Accounting Standard No. 114, is
available to absorb losses from any segment of the portfolio. Unallocated
reserves are based on levels of criticized/classified assets, delinquencies in
the accruing loan portfolios, the level of non-performing loans, and general
economic conditions and volatility. Total unallocated reserves were 13% at June
30, 2002, versus 11% one year ago.
INTEREST RATE RISK MANAGEMENT
Huntington seeks to achieve consistent growth in net interest income and
net income while managing volatility arising from shifts in interest rates. The
Board of Directors and Asset and Liability Management Committee (ALCO) oversee
financial risk management by establishing broad policies and specific operating
limits that govern a variety of financial risks inherent in Huntington's
operations, including liquidity, counterparty, settlement, and market risks.
Market risk is the potential for declines in the fair value of financial
instruments due to changes in interest rates and
29
equity prices. Interest rate risk is Huntington's primary market risk and
results from the timing differences in the repricing of assets and liabilities,
changes in relationships in asset and liability repricing and the potential
exercise of explicit or embedded options.
Interest rate risk management is a dynamic process, encompassing new
business flows onto the balance sheet, prepayments/maturities of existing assets
and liabilities, wholesale investments and funding, and the changing market and
business environment. To accomplish its overall balance sheet objectives,
Huntington regularly accesses a variety of global markets--money, bond, swaps,
futures, and options. ALCO regularly monitors position concentrations and the
interest rate sensitivity to ensure compliance with approved risk tolerances.
Measurement and monitoring of interest rate risk is an ongoing process.
Two key elements used in this process are an income simulation model and a net
present value model. The income simulation model is designed to capture interest
rate risk over the short term i.e., changes in net interest income over the next
12 months resulting in changes in interest rates. The net present value model,
or Economic Value of Equity (EVE), is designed to capture the impact of changes
in interest rates over the entire life of the assets and liabilities thus, the
EVE model captures the impact of changing weights on assets and liabilities
beyond the one-year timeframe of the income simulation model. EVE risk is
measured using a static balance sheet under interest rate shock scenarios.
Assumptions used in these models are inherently uncertain, but management
believes that these models provide a reasonably accurate estimate of
Huntington's interest rate risk exposure.
The income simulation model captures all major assets, liabilities, and
off-balance sheet financial instruments, accounting for significant variables
that are believed to be affected by interest rates. These include prepayment
speeds on mortgages and consumer installment loans, cash flows of loans and
deposits, principal amortization on revolving credit instruments, and balance
sheet growth assumptions. The model also captures options embedded in balance
sheet assets and liabilities, e.g. interest rate caps/floors or call options,
and changes in rate relationships, as various rate indices lead or lag changes
in market rates.
The income simulation model calculates the change in net interest income
for the next twelve months resulting from a gradual (+50 basis points per
quarter), parallel shift in interest rates. The change is measured from the net
interest income level that results from using the current yield curve. It is
estimated that net interest income would decline by 1.3% if rates were to
increase +200 basis points over the next year in a parallel shift from the
current yield curve.
EVE is defined as the discounted present value of asset cash flows and
derivative cash flows, minus the discounted value of liability cash flows. It
captures risk over the duration of the assets and liabilities. The timing and
variability of balance sheet cash flows are critical assumptions, along with
assumptions regarding the speed of loan and investment security prepayments and
the assumed behavior of non-maturity deposits. As of June 30, 2002, an immediate
increase of 100 and 200 basis points was estimated to reduce the EVE by 1.2% and
3.0%, respectively.
LIQUIDITY
Effectively managing liquidity involves meeting the cash flow requirements
of depositors and borrowers, as well as satisfying the operating cash needs of
the organization to fund corporate expansion and other activities. A large
portion of liquidity planning and management involves the level of core
deposits, which are comprised of non-interest bearing and interest bearing
demand deposits, savings accounts, and other domestic time deposits including
certificates of deposit under $100,000 and IRAs. Core deposits comprise 77% of
Huntington's funding needs. ALCO regularly monitors the overall liquidity
position of the business and ensures that various alternative strategies exist
to cover unanticipated events. Management believes sufficient liquidity was
available at the end of the recent quarter to meet estimated funding needs.
Funding sources other than core deposits include the sale or borrowings
against the investment securities portfolio, the securitization and sale of
loans, the ability to acquire national market non-core deposits, and the
issuance of notes and common and preferred securities in the capital markets.
30
The following table shows the composition of deposits by type of deposit
and by business segment, with the latter including a separate line indicating
deposits sold with the Florida banking operations in the first quarter of 2002:
(in millions of dollars) June 30, 2002 December 31, 2001 June 30, 2001
---------------------- ---------------------- ----------------------
BY TYPE Balance % Balance % Balance %
--------- --------- --------- --------- --------- ---------
Demand deposits
Non-interest bearing $ 2,770 16.4 $ 3,635 18.0 $ 3,258 17.2
Interest bearing 5,105 30.3 5,723 28.4 4,878 25.7
Savings deposits 2,839 16.8 3,466 17.2 3,641 19.2
Other domestic time deposits 4,239 25.1 5,868 29.1 5,543 29.2
--------- --------- --------- --------- --------- ---------
Total Core Deposits 14,953 88.6 18,692 92.7 17,320 91.3
--------- --------- --------- --------- --------- ---------
Domestic time deposits of
$100,000 or more 765 4.5 1,131 5.6 1,167 6.1
Brokered time deposits and
negotiable CDs 849 5.1 138 0.7 100 0.5
Foreign time deposits 294 1.8 226 1.0 410 2.1
--------- --------- --------- --------- --------- ---------
TOTAL DEPOSITS $ 16,861 100.0 $ 20,187 100.0 $ 18,997 100.0
========= ========= ========= ========= ========= =========
BY BUSINESS SEGMENT
Regional Banking
Central Ohio / West Virginia $ 5,302 31.4 $ 5,217 25.8 $ 4,703 24.8
Northern Ohio 3,378 20.0 3,256 16.1 3,034 16.0
Southern Ohio / Kentucky 1,345 8.0 1,291 6.4 1,206 6.3
West Michigan 2,546 15.1 2,227 11.0 2,208 11.6
East Michigan 1,945 11.5 1,895 9.4 1,741 9.2
Indiana 610 3.6 578 2.9 543 2.9
--------- --------- --------- --------- --------- ---------
Total Regional Banking 15,126 89.6 14,464 71.6 13,435 70.8
--------- --------- --------- --------- --------- ---------
Dealer Sales 50 0.3 82 0.4 88 0.4
Private Financial Group 811 4.8 717 3.6 595 3.1
Treasury / Other 874 5.3 256 1.3 420 2.2
--------- --------- --------- --------- --------- ---------
TOTAL DEPOSITS EXCLUDING FLORIDA 16,861 100.0 15,519 76.9 14,538 76.5
--------- --------- --------- --------- --------- ---------
Florida -- -- 4,668 23.1 4,459 23.5
--------- --------- --------- --------- --------- ---------
TOTAL DEPOSITS $ 16,861 100.0 $ 20,187 100.0 $ 18,997 100.0
========= ========= ========= ========= ========= =========
The sale of the Florida operations required additional wholesale
borrowings of $1.2 billion, after receipt of the premium on deposits sold. To
help mitigate this funding, management activity grew core deposits over the last
twelve months to reduce its dependence on non-core funding. To further enhance
liquidity, Huntington initiated a $6 billion domestic bank note program in April
of 2002 to replace an older facility of the same size and expects to draw on
this note program in 2002.
CAPITAL
Capital is managed at each legal subsidiary based upon the respective
risks and growth opportunities, as well as regulatory requirements. Huntington
places significant emphasis on the maintenance of strong capital, which promotes
investor confidence, provides access to the national markets under favorable
terms, and enhances business growth and acquisition opportunities. The
importance of managing capital is also recognized and management continually
strives to maintain an appropriate balance between capital adequacy and returns
to shareholders.
Shareholders' equity declined $82.1 million during the second quarter of
2002 from the end of the previous quarter and $64.6 million from December 31,
2001, but remained relatively flat compared to shareholders' equity at June 30,
2001. Comprehensive income for 2002 was more than offset by dividends of $79.0
million and repurchases of common shares of $175.2 million. Activity related to
shareholders' equity can be found on page 5 of this report. Average
shareholders' equity in the second quarter of 2002 declined a modest 1% from the
first quarter of 2002 and 2% from the second quarter of 2001.
31
Cash dividends that were declared in the second and four prior quarters
along with common stock prices (based on NASDAQ intra-day and closing stock
price quotes) were as follows:
2002 2001
------------------------ ---------------------------------------
Second First Fourth Third Second
--------- --------- --------- --------- ---------
High $ 21.770 $ 20.310 $ 17.490 $ 19.280 $ 17.000
Low 18.590 16.660 14.510 15.150 13.875
Close 19.420 19.700 17.190 17.310 16.375
Average Closing Price 20.089 18.332 16.269 17.696 14.936
Cash dividends declared $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.20
The ratio of average equity to average assets in the second quarter of
2002 was 9.39% versus 9.54% a year ago. On a year to date basis, the ratio of
average equity to average assets was 9.47% and 9.52% for the first half of 2002
and 2001, respectively.
Tangible period-end equity to period-end assets, which excludes the
unrealized losses on securities available for sale and intangible assets, was
8.41% at the end of June 2002, up significantly from 5.97% a year earlier, but
down from 9.03% at the end of March 2002. The change in the tangible equity to
asset ratio from the year-ago periods reflected the capital generated from the
sale of the Florida operations and the subsequent share repurchase program in
the first and second quarters of 2002. Continuation of the share repurchase
program in the second half of 2002 at current repurchase levels will reduce the
ratio to 7.50% to 7.75% by year-end 2002. Management has previously indicated
its intent to maintain a minimum tangible equity to asset ratio of 6.50%
Risk-based capital guidelines established by the Federal Reserve Board set
minimum capital requirements and require institutions to calculate risk-based
capital ratios by assigning risk weightings to assets and off-balance sheet
items, such as interest rate swaps, loan commitments, and securitizations. These
guidelines further define "well-capitalized" levels for Tier 1, total capital,
and leverage ratio purposes at 6%, 10%, and 5%, respectively. Huntington's Tier
1 risk-based capital ratio, total risk-based capital ratio, the leverage ratio,
and the risk-adjusted assets for the recent five quarters were as follows:
2002 2001
------------------------ ---------------------------------------
(in millions) Second First Fourth Third Second
--------- --------- --------- --------- ---------
Total Risk-Adjusted Assets $ 25,309 $ 24,954 $ 27,896 $ 27,757 $ 27,375
Tier 1 Risk-Based Capital Ratio 9.72% 10.26% 7.24% 6.97% 7.01%
Total Risk-Based Capital Ratio 12.75% 13.40% 10.29% 10.13% 10.20%
Tier 1 Leverage Ratio 9.94% 9.72% 7.41% 7.10% 6.96%
As Huntington is supervised and regulated by the Federal Reserve, The
Huntington National Bank, Huntington's bank subsidiary, is supervised and
regulated by the Office of the Comptroller of the Currency, which establishes
similar regulatory capital guidelines for banks. The Bank also had regulatory
capital ratios in excess of the levels established for well-capitalized
institutions.
In February 2002, the Board of Directors authorized a new share repurchase
program for up to 22 million shares and cancelled an earlier authorization.
Repurchased shares will be reserved for reissue in connection with dividend
reinvestment and employee benefit plans as well as for acquisitions and other
corporate purposes. Through the end of June 2002, approximately 8.8 million
shares of common stock had been repurchased through open market and privately
negotiated transactions.
LINES OF BUSINESS
Below is a brief description of each line of business and a discussion of
the business segment results. Regional Banking, Dealer Sales, and the Private
Financial Group are the major business lines. The fourth segment includes the
impact of the Treasury function and other unallocated assets, liabilities,
revenue, and expense. Financial information and a full description of each line
of business can also be found in Note 8 to the unaudited consolidated financial
statements along with a reconciliation of reported earnings to operating
earnings.
32
Management reviews financial results on an operating basis, which excludes
the after-tax gain from the sale of the Florida operations, historical
results for Florida, and restructuring and special charges. The following tables
within each segment show performance on this basis for the three and six month
periods ending June 30, 2002 and 2001.
REGIONAL BANKING
Regional Banking provides products and services to retail, business
banking, and corporate customers.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(in thousands of dollars) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Net Interest Income (FTE) $ 146,960 $ 163,752 $ 292,178 $ 329,770
Provision for Loan Losses 41,278 20,799 65,710 35,307
Non-Interest Income 78,871 84,356 162,457 152,947
Non-Interest Expense 150,294 157,815 298,801 309,739
---------- ---------- ---------- ----------
Income before Taxes 34,259 69,494 90,124 137,671
Income Taxes 11,991 24,323 31,544 48,185
---------- ---------- ---------- ----------
Operating income $ 22,268 $ 45,171 $ 58,580 $ 89,486
========== ========== ========== ==========
Regional Banking operating income in the second quarter of 2002 was $22.3
million, down $22.9 million, or 51%, from the year-ago quarter. This decline
reflected higher provisions for loan losses as well as lower revenue (lower net
interest income and non-interest income), which was offset partially by reduced
expenses.
Net interest income was down $16.8 million, or 10%, reflecting a decline
in the internal funds credit for its deposits. Regional Banking is a net
funds provider to other business segments since its deposits exceed loans. As a
result, Regional Banking net interest income receives an internal funds transfer
pricing credit for these excess deposits. Conversely, those business segments
using these excess funds receive an internal funds transfer pricing charge. When
interest rates fall, as they have over the past year, net interest income in
Regional Banking is typically lower due to reduced credits attributed to
deposits.
Residential mortgage loans and home equity loans and lines each
increased 17% from the year-ago quarter with commercial real estate and
construction loans up 9% and 20%, respectively. Commercial loans, reflecting
the weakened economy as well as a specific effort to decrease exposure to
large shared national credits, declined 6% from the second quarter of 2001.
The provision for loan losses increased $20.5 million, almost double the
provision in the year-ago second quarter. This reflected the impact of higher
net charge-offs, as well as an increased provision for loan growth. Net
charge-offs in the second quarter of 2002 were $27.2 million, or an annualized
0.89% of average loans. This compared to $18.4 million, or 0.64% of loans in the
year-ago quarter. The increase in net charge-offs primarily reflected higher
commercial net charge-offs. (See page 27 for discussion of net charge-offs).
Non-interest income was down $5.5 million, or 7% from the second quarter
of last year, due to a decline in mortgage banking income. Mortgage banking
income declined 41% from the year-ago period due to a significant decline in
deliveries of loans to the secondary market and, to a lesser degree, a decision
to retain in the portfolio a higher percentage of originated residential
mortgage loans. Excluding the decline in mortgage banking income, non-interest
income in the second quarter of 2002 was up 2%.
Non-interest expense declined $7.5 million, or 5%. This reflected a 27%
decrease in equipment expense and a 4% decrease in occupancy expense, due to
lower depreciation and maintenance costs, as well as a 43% decline in
telecommunications expense. Partially offsetting these declines, were higher
professional expenses due to an increase in collection costs and higher outside
processing costs. Personnel costs were up only 1%.
Regional Banking contributed 63% of total revenues in the second quarter
of 2002 and represented 63% of total loans and 90% of total deposits at June 30,
2002.
DEALER SALES
Dealer Sales product offerings pertain to the automobile lending sector
and include indirect consumer loans and leases, as well as floor plan financing.
33
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(in thousands of dollars) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Net Interest Income (FTE) $ 55,502 $ 55,122 $ 106,702 $ 106,455
Provision for Loan Losses 12,313 21,009 38,476 36,210
Non-Interest Income 5,886 3,864 8,526 15,137
Non-Interest Expense 18,328 18,728 36,550 32,388
---------- ---------- ---------- ----------
Income before Taxes 30,747 19,249 40,202 52,994
Income Taxes 10,761 6,737 14,071 18,548
---------- ---------- ---------- ----------
Operating income $ 19,986 $ 12,512 $ 26,131 $ 34,446
========== ========== ========== ==========
Dealer Sales operating earnings were $20.0 million in the second quarter
of 2002, up $7.5 million, or 60%, from the year-ago quarter. This increase was
primarily driven by improved credit quality (which resulted in a decline in the
provision for loan losses) and to a lesser degree by higher revenue and lower
non-interest expense.
Net interest income in the second quarter of 2002 was $55.5 million, up
slightly from the year-ago quarter. Both the net interest margin and average
loans were up modestly when compared with the same period last year. The
provision for loan losses was $12.3 million in the second quarter of 2002, down
$8.7 million, or 41%, from the prior-year quarter reflecting the significant
reduction in auto-related net charge-offs. Auto loan and lease net charge-offs
in the second quarter of 2002 totaled $14.2 million, or 0.92% of average loans,
down from $15.8 million, or 1.03% of average loans, in the year-ago quarter.
This improvement reflected stronger underwriting practices for auto loan and
lease originations commencing in late 2000. Non-interest income was $5.9
million, up $2.0 million, or 52%, from the second quarter of 2001, which was
driven by higher securitization income. Non-interest expense remained relatively
flat for the comparable periods.
Dealer sales contributed 17% of total revenues in the second quarter of
2002 and represented 33% of total loans at the end of the recent quarter.
PRIVATE FINANCIAL GROUP
PFG provides an array of products and services designed to meet the needs
of Huntington's higher wealth customers.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(in thousands of dollars) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Net Interest Income (FTE) $ 8,825 $ 9,008 $ 16,757 $ 18,129
Provision for Loan Losses 301 129 301 129
Non-Interest Income 20,892 11,245 39,836 27,507
Non-Interest Expense 17,353 15,445 31,045 37,193
---------- ---------- ---------- ----------
Income before Taxes 12,063 4,679 25,247 8,314
Income Taxes 4,211 1,638 8,825 2,910
---------- ---------- ---------- ----------
Operating income $ 7,852 $ 3,041 $ 16,422 $ 5,404
========== ========== ========== ==========
Private Financial Group (PFG) operating earnings in the second quarter of
2002 were $7.9 million, up 158% from the year-ago quarter, primarily due to
substantially higher non-interest income. Non-interest income was $20.9 million,
up 86% from the year-ago quarter. This increase of $9.6 million resulted from
higher deposit account service charges, increased trust income due to the
acquisition of Haberer early in the second quarter 2002, and higher revenue from
sales of Huntington's proprietary mutual funds and annuities. Non-interest
expense increased $1.9 million, or 12%, from the year-ago quarter reflecting
increased sales commissions and other employee expenses associated with the rise
in non-interest income.
PFG contributed 8% of total revenues in the second quarter of 2002 and
represented 4% of total loans and 5% of total deposits at June 30, 2002.
TREASURY / OTHER
The Treasury / Other segment absorbs unassigned assets, liabilities,
equity, revenue, and expense that cannot be directly assigned or allocated to
one of the lines of business.
34
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(in thousands of dollars) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Net Interest Income (FTE) $ 31,643 $ (383) $ 61,563 $ (2,835)
Provision for Loan Losses -- -- -- --
Non-Interest Income 9,621 14,143 19,902 16,668
Non-Interest Expense 4,210 455 12,840 6,940
---------- ---------- ---------- ----------
Income before Taxes 37,054 13,305 68,625 6,893
Income Taxes 5,452 (1,573) 8,537 (10,828)
---------- ---------- ---------- ----------
Operating income $ 31,602 $ 14,878 $ 60,088 $ 17,721
========== ========== ========== ==========
Treasury / Other reported operating income of $31.6 million in the second
quarter of 2002, up from $14.9 million in the year-earlier quarter. This
primarily reflected the reduction in transfer pricing credits allocated to
Regional Banking for its deposits, the maturity in late 2001 of $2.0 billion of
interest rate risk management positions (swaps) that had significant negative
spreads, and the benefit of lower short-term interest rates, particularly with
the steepened yield curve.
Non-interest income declined $4.5 million from the year-ago quarter
reflecting the year-ago quarter's higher gains from securities transactions, due
to the sale of lower margin investment securities. Non-interest expense in the
second quarter of 2002 increased $3.8 million. This reflected higher unallocated
outside services and processing, occupancy, and telecommunication expenses,
partially offset by lower unallocated personnel costs and a $2.7 million
decline in the amortization of intangibles arising from the implementation of
SFAS No. 142.
Income tax expense for each of the other business segments is calculated
at a statutory 35% tax rate. However, Huntington's overall effective tax rate is
lower. As a result, Treasury / Other reflects any reconciling items to the
statutory tax rate in its Income taxes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures for the current period are found
beginning on page 29 of this report, which includes changes in market risk
exposures from disclosures presented in Huntington's 2001 Annual Report.
35
PART II. OTHER INFORMATION
In accordance with the instructions to Part II, the other specified items in
this part have been omitted because they are not applicable or the information
has been previously reported.
Item 4. Submission of Matters to a Vote of Security Holders
Huntington Bancshares Incorporated held its annual meeting of shareholders
on April 29, 2002. At that meeting, shareholders approved the following
management proposals:
ABSTAIN/ BROKER
FOR AGAINST WITHHELD NONVOTES
--- ------- -------- --------
1. Election of directors
to serve as Class III
Directors until the year 2005
Annual Meeting of
Shareholders as follows:
Don M. Casto III 216,433,426 4,428,373
Patricia T. Hayot 215,083,879 5,777,920
William J. Lhota 215,087,359 5,774,440
Timothy P. Smucker 215,817,092 5,044,707
2. Ratification of Ernst &
Young LLP to serve as
independent auditors for
the Corporation for the
year 2002 213,748,858 5,551,282 1,561,657
Item 5. Other Information
On August 14, 2002, Huntington Preferred Capital, Inc. (HPCI), a fully
consolidated subsidiary of Huntington with a publicly traded class of preferred
securities, requested a five day extension for filing its Form 10-Q for the
quarter ending June 30, 2002, as permitted under the Securities Exchange Act of
1934. HPCI's Form 10-Q was otherwise due on August 14, 2002. The extension was
requested to allow for a complete analysis and correction of the systems and
methodology used to allocate financial information among Huntington's
subsidiaries prior to finalizing HPCI's second quarter Form 10-Q.
This allocation of income, expense and other financial information
among subsidiaries takes place after Huntington's consolidated financial
statements are prepared and reviewed. A preliminary review of the second quarter
2002 allocations indicated that interest income and certain charge-offs and
related provision expense were not fully allocated between The Huntington
National Bank (HNB) and HPCI. Further analysis has determined this discrepancy
has existed since October 1999. Indications are that when corrected, HPCI's
previously reported net income and equity will increase on a cumulative basis
over this period. Earnings coverage of the dividends on the public preferred
stock also will increase, thereby having no impact on HPCI's continued ability
to pay dividends.
Since HPCI and HNB are fully consolidated subsidiaries of Huntington,
any reallocation of financial information between these two subsidiaries has no
impact on Huntington's consolidated results of operations or financial
condition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3. (ii) Amended and Restated Bylaws.
4. Instruments defining the Rights of Security Holders:
Reference is made to Articles Fifth, Eighth and Tenth of
Articles of Restatement of Charter, as amended and
supplemented, previously filed as exhibit 3(i) to annual
report on form 10-K for the year ended December 31, 1993 and
exhibit 3(i)(c) to quarterly report on form 10-Q for the
quarter ended March 31, 1998, and incorporated herein by
reference. Also, reference is made to Rights Plan, dated
February 22, 1990, previously filed as Exhibit 1 to
Registration Statement on Form 8-A, and incorporated herein by
reference and to Amendment No. 1 to the Rights Agreement,
dated as of August 16, 1995, previously filed as Exhibit 4(b)
to Form 8-K filed with the Securities and Exchange
36
Commission on August 28, 1995, and incorporated herein by
reference. Instruments defining the rights of holders of
long-term debt will be furnished to the Securities and
Exchange Commission upon request.
10. Material contracts:
(a)* Executive Deferred Compensation Plan for Huntington
Bancshares Incorporated.
99.1. Earnings to Fixed Charges
99.2 Chief Executive Officer Certification
99.3 Chief Financial Officer Certification
(b) Reports on Form 8-K
1. A report on Form 8-K, dated April 18, 2002, was filed under
report item numbers 5 and 7, concerning Huntington's results
of operations for the first quarter ended March 31, 2002.
* Denotes management contract or compensatory plan or arrangement.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Huntington Bancshares Incorporated
(Registrant)
Date: August 14, 2002 /s/ Thomas E. Hoaglin
--------------------------------------------
Thomas E. Hoaglin
Chairman, Chief Executive Officer and
President
Date: August 14, 2002 /s/ Michael J. McMennamin
--------------------------------------------
Michael J. McMennamin
Vice Chairman, Chief Financial Officer and
Treasurer (Principal Financial Officer)
38