EXHIBIT 13
SELECTED FINANCIAL DATA HUNTINGTON BANCSHARES INCORPORATED
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Table 1 -- Selected Financial Data
Year Ended December 31,
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(in thousands of dollars,
except per share amounts) 2002 2001 2000 1999 1998 1997
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Summary of Operations
Total interest income $ 1,531,585 $ 1,939,519 $ 2,108,505 $ 2,026,002 $ 1,999,364 $ 1,981,473
Total interest expense 547,783 943,337 1,166,073 984,240 978,271 954,243
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 983,802 996,182 942,432 1,041,762 1,021,093 1,027,230
- ---------------------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 227,340 308,793 90,479 88,447 105,242 107,797
Securities gains 4,902 723 37,101 12,972 29,793 7,978
Gain on sale of Florida operations 175,344 -- -- -- -- --
Merchant Services gain 24,550 -- -- -- -- --
Gains on sale of credit card portfolios -- -- -- 108,530 9,530 --
Non-interest income 480,015 508,757 456,458 452,073 398,877 334,861
Non-interest expense 795,864 923,630 835,617 815,328 823,929 751,945
Restructuring and other special charges 56,184 99,957 50,000 96,791 90,000 51,163
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 589,225 173,282 459,895 614,771 440,122 459,164
Income taxes 226,000 (5,239)(1) 131,449 192,697 138,354 166,501
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 363,225 $ 178,521 $ 328,446 $ 422,074 $ 301,768 $ 292,663
=================================================================================================================================
Per Common Share (2)
Net income
Basic $1.50 $0.71 $1.32 $1.66 $1.18 $1.15
Diluted 1.49 0.71 1.32 1.65 1.17 1.14
Cash dividends declared 0.64 0.72 0.76 0.68 0.62 0.56
Book value at year-end 9.89 9.62 9.43 8.67 8.43 7.94
Balance Sheet Highlights
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets at year-end $27,578,710 $28,500,159 $28,599,377 $29,036,953 $28,296,336 $26,730,540
Total long-term debt at year-end 788,678 927,330 845,976 697,677 697,359 403,388
Average long-term debt (3) 898,128 860,637 810,543 697,523 567,938 409,379
Average shareholders' equity 2,307,475 2,381,820 2,279,230 2,146,735 2,064,241 1,893,788
Average assets 26,035,530 28,137,172 28,720,508 28,739,450 26,891,558 25,150,659
Key Ratios and Statistics
- ---------------------------------------------------------------------------------------------------------------------------------
Margin Analysis--As a % of Average Earning
Assets (4):
Interest income 6.51% 7.79% 8.31% 7.97% 8.33% 8.52%
Interest expense 2.32 3.77 4.58 3.86 4.05 4.08
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.19% 4.02% 3.73% 4.11% 4.28% 4.44%
=================================================================================================================================
Return on average assets 1.40% 0.63% 1.14% 1.47% 1.12% 1.16%
Return on average shareholders' equity 15.7 7.5 14.4 19.7 14.6 15.4
Dividend payout ratio (5) 43.0 101.4 57.6 41.8 53.9 50.0
Average shareholders' equity to average
assets 8.86 8.47 7.94 7.47 7.68 7.53
Tangible equity to assets (period-end) 7.62 6.12 5.79 5.34 5.25 6.66
Tier I risk-based capital ratio 8.69 7.24 7.19 7.52 7.10 8.83
Total risk-based capital ratio 11.60 10.29 10.46 10.72 10.73 11.68
Tier I leverage ratio 8.89% 7.41% 6.93% 6.72% 6.37% 7.77%
Full-time equivalent employees 8,177 9,743 9,693 9,516 10,159 9,485
Domestic banking offices 343 481 508 515 529 452
(1) Reflects a $32.5 million reduction related to the issuance of $400 million
of REIT subsidiary preferred stock, of which $50 million was issued to the
public.
(2) Adjusted for stock splits and stock dividends, as applicable.
(3) Excludes capital securities and Federal Home Loan Bank advances.
(4) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
(5) Based on diluted earnings per share and not adjusted for stock splits or
stock dividends.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
INTRODUCTION
The following discussion and analysis provides investors and others with
information that management believes to be necessary for an understanding of
Huntington's financial condition, changes in financial condition, results of
operations, and cash flows, and should be read in conjunction with the financial
statements, notes, and other information contained in this document.
Huntington Bancshares Incorporated (Huntington) is a multi-state diversified
financial services company organized under Maryland law in 1966 and
headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged
in providing full-service commercial and consumer banking services, mortgage
banking services, automobile financing, equipment leasing, investment
management, trust services, and discount brokerage services, as well as
underwriting credit life and disability insurance, and selling other insurance
and financial products and services. Huntington's banking offices are located in
Ohio, Michigan, Indiana, Kentucky, and West Virginia. Selected financial
services are also conducted in other states including Arizona, Florida, Georgia,
Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington also has a foreign
office in the Cayman Islands and a foreign office in Hong Kong. The Huntington
National Bank (the Bank) is Huntington's only bank subsidiary.
Forward-Looking Statements
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements about
Huntington. These include descriptions of products or services, plans, or
objectives of management for future operations, and forecasts of revenues,
earnings, cash flows, or other measures of economic performance. Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts.
By their nature, forward-looking statements are subject to numerous assumptions,
risks, and uncertainties. A number of factors could cause actual conditions,
events, or results to differ significantly from those described in the
forward-looking statements. These factors include, but are not limited to, those
set forth under the heading "Business Risks" included in Item 1 of Huntington's
Annual Report on Form 10-K and other factors described from time to time in
other filings with the Securities and Exchange Commission.
Management encourages readers of this report to understand forward-looking
statements to be strategic objectives rather than absolute forecasts of future
performance. Forward-looking statements speak only as of the date they are made.
Huntington does not update forward-looking statements to reflect circumstances
or events that occur after the date the forward-looking statements were made or
to reflect the occurrence of unanticipated events.
Critical Accounting Policies
Note 1 to the consolidated financial statements included in this Annual Report
lists significant accounting policies used in the development and presentation
of Huntington's financial statements. This discussion and analysis, the
significant accounting policies, and other financial statement disclosures
identify and address key variables and other qualitative and quantitative
factors that are necessary for an understanding and evaluation of the
organization, its financial position, results of operations, and cash flows.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires Huntington's management
to establish critical accounting policies and make accounting estimates,
assumptions, and judgments that affect amounts recorded and reported in its
financial statements. An accounting estimate requires assumptions about
uncertain matters that could have a material effect on the financial statements
of Huntington if a different amount within a range of estimates were used or if
estimates changed from period to period. Readers of this report should
understand that estimates are made under facts and circumstances at a point in
time and changes in those facts and circumstances could produce actual results
that differ from when those estimates were made. Huntington's management has
identified the following as the most significant accounting estimates and their
related application:
.. Estimated credit losses inherent in the loan and lease portfolio for the
establishment of the allowance for loan and lease losses, including
estimated future contractual cash flows of certain commercial and commercial
real estate loans for evaluation of impairment of loans,
.. Estimated residual values of automobiles and equipment related to recording
lease receivables and recognition of income on leases,
35
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
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.. Estimated fair values of loan servicing rights and retained interests in
securitizations, including estimates of amounts and timing of future cash
flows of loans, cash flows for costs of servicing these loans, amounts and
timing of credit losses and prepayments of principal, and appropriate
discount rate, for the initial recognition of these assets, amount of
amortization that is recognized, and the assessment of these assets
periodically for impairment,
.. Estimated discount rate, the expected return on retirement plan assets, the
rate of compensation expense increase, and the health care cost trend rates
used in determining Huntington's projected benefit obligations, the fair
value of retirement and other plan assets, and the related benefit cost,
.. Estimated fair values of Huntington's businesses that were used by
management periodically to assess goodwill and other intangibles for
impairment, and
.. Estimated fair value for all derivative financial instruments used to hedge
fair values or cash flows.
Special Purpose Entities (SPEs)
Huntington established two securitization trusts, or SPEs, in 2000. These two
trusts had total assets of approximately $1.2 billion and $1.3 billion at
December 31, 2002 and 2001, respectively. In the securitization transactions,
indirect automobile loans that Huntington originated were sold to these trusts.
Under current GAAP, these trusts are not required to be consolidated in
Huntington's financial statements. As such, the loans and the debt within the
trusts are not included on Huntington's balance sheets at December 31, 2002 and
2001. See Note 9 to the consolidated financial statements for more information
regarding securitized loans.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation of Accounting Research Bulletin
No. 51 (ARB 51), Consolidated Financial Statements, addresses consolidation by
business enterprises where ownership interests in an entity may vary over time
or, in many cases, special-purpose entities (SPEs). To be consolidated for
financial reporting, these entities must have certain characteristics. ARB 51
requires that an enterprise's consolidated financial statements include
subsidiaries in which the enterprise has a controlling financial interest. This
Interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. An enterprise that holds significant
variable interests in such an entity, but is not the primary beneficiary, is
required to disclose certain information regarding its interests in that entity.
This Interpretation applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise holds
an interest that it acquired before February 1, 2003. It also applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. This Interpretation may be applied (1) prospectively with a
cumulative-effect adjustment as of the date on which it is first applied, or (2)
by restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
Huntington is reviewing the implications of Interpretation No. 46 and is
considering the adoption methods permitted. Management believes that the only
impact of adoption will be the consolidation of one of the securitization trusts
formed in 2000. The consolidation of that securitization trust will involve the
recognition of the trust's net assets, which, at December 31, 2002, included
$1,020 million of indirect automobile loans, $100 million of cash, and $1,000
million of secured debt obligations with an interest rate based on commercial
paper rates. Adoption will also eliminate the retained interest in that
securitization trust and its servicing asset related to the loans in the trust,
with carrying values at the end of 2002 of $152 million and $12 million,
respectively. The impact to Huntington's equity and results of operations will
depend on the method of transition adopted under this new interpretation.
Huntington will adopt this new standard no later than the end of the third
quarter of 2003.
Derivatives and Other Off Balance Sheet Arrangements
Huntington uses a variety of derivatives, principally interest rate swaps, in
its asset and liability management activities to mitigate the risk of adverse
interest rate movements on either cash flows or market value of certain assets
and liabilities.
Like other financial organizations, Huntington uses various commitments in the
ordinary course of business that, under GAAP, are not recorded in the financial
statements. Specifically, Huntington makes various commitments to extend credit
to customers, to sell loans, and to maintain obligations under operating-type
noncancelable leases for its facilities.
Derivatives are discussed under the "Interest Rate Risk Management" section of
this report and in Note 17 to the consolidated financial statements. Information
regarding commitments can be found in Note 20 to the consolidated financial
statements.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
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Related Party Transactions
Various directors and executive officers of Huntington, and entities affiliated
with those directors and executive officers, are customers of Huntington's
subsidiaries. All transactions with Huntington's directors and executive
officers and their affiliates are conducted in the ordinary course of business
under normal credit terms, including interest rate and collateralization, and do
not represent more than the normal risk of collection. At December 31, 2002 and
2001, the total amount of their indebtedness to Huntington was $95.6 million and
$133.8 million, respectively. A summary of the aggregate activity of this
indebtedness can be found in Note 8 to the consolidated financial statements.
All other related party transactions, including those reported in Huntington's
2003 Proxy Statement and transactions subsequent to December 31, 2002, were
considered immaterial to its financial condition, results of operations, and
cash flows.
Common Share Repurchase Programs
Early in 2002, Huntington announced a share repurchase program authorizing the
repurchase of up to 22 million shares. Through the end of December 2002, 19.2
million shares of common stock at a cost of $370.0 million had been repurchased
under this program. Huntington repurchased an additional 0.2 million shares in
2003 under this authorization. Subsequently, on January 16, 2003, Huntington
announced a new share repurchase program of 8 million shares, canceling the 2.6
million shares remaining under the prior authorization. Huntington expects to
use this new authorization to complete the purchase of the 2.6 million shares
remaining for repurchase under the prior program with subsequent purchases made
from time to time as deemed appropriate. 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.
Significant Credit Actions
In the fourth quarter of 2002, Huntington initiated two credit actions
associated with commercial and commercial real estate loans. The first was the
sale of $47.2 million in non-performing assets with $21.4 million of related
charge-offs. The second action was the full charge-off of a $29.9 million credit
exposure to a single health care finance company. This credit was identified as
a non-performing loan and subsequently charged-off, all within the fourth
quarter of 2002. These credit actions had no earnings impact, as existing loss
reserve levels were sufficient to absorb the combined $51.3 million in
charge-offs. As a result, the allowance for loan and lease losses as a
percentage of total loans and leases at December 31, 2002, declined to 1.76%
from 2.00% at September 30, 2002, and the non-performing asset (NPA) coverage
ratio (loan and lease loss reserve as a percent of NPAs) improved to 269% from
191% at the end of the third quarter.
OVERVIEW
Reported Earnings
Huntington reported net income of $363.2 million, or $1.49 per common share
(diluted), in 2002, compared with $178.5 million, or $0.71 per common share, in
2001, and $328.4 million, or $1.32 per common share, in 2000. Return on average
common equity (ROE) and average assets (ROA) for 2002 were 15.7% and 1.40%,
respectively, compared with 7.5% and 0.63%, respectively, in 2001, and 14.4% and
1.14%, respectively, in 2000. See Table 1 entitled Selected Financial Data and
Table 2 for Huntington's annual income statements for the recent six years.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
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Table 2 -- Selected Annual Income Statements (Reported Basis)
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars, except per share amounts) 2002 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income $1,531,585 $1,939,519 $2,108,505 $2,026,002 $1,999,364 $1,981,473
Total interest expense 547,783 943,337 1,166,073 984,240 978,271 954,243
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 983,802 996,182 942,432 1,041,762 1,021,093 1,027,230
Provision for loan and lease losses 227,340 308,793 90,479 88,447 105,242 107,797
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan
and Lease Losses 756,462 687,389 851,953 953,315 915,851 919,433
- ---------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 152,521 164,052 160,727 156,315 126,403 117,852
Brokerage and insurance 66,843 79,034 61,871 52,076 36,710 27,084
Trust services 62,051 60,298 53,613 52,030 50,754 48,102
Mortgage banking 47,989 59,148 38,025 56,890 60,006 55,715
Bank owned life insurance 46,005 38,241 39,544 37,560 28,712 --
Other service charges and fees 42,888 48,217 43,883 37,301 29,202 22,705
Other 61,718 59,767 58,795 59,901 67,090 63,403
- ---------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income Before Gain on Sale of
Florida Operations, Merchant Services Gain, Credit
Card Portfolio, and Securities Gains 480,015 508,757 456,458 452,073 398,877 334,861
Gain on sale of Florida operations 175,344 -- -- -- -- --
Merchant Services gain 24,550 -- -- -- -- --
Gains on sale of credit card portfolio -- -- -- 108,530 9,530 --
Securities gains 4,902 723 37,101 12,972 29,793 7,978
- ---------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 684,811 509,480 493,559 573,575 438,200 342,839
- ---------------------------------------------------------------------------------------------------------------------------
Personnel costs 440,760 478,640 421,750 419,901 428,539 392,793
Equipment 68,323 80,560 78,069 66,666 62,040 57,867
Outside data processing and other services 67,368 69,692 62,011 62,886 74,795 66,683
Net occupancy 60,264 77,184 75,882 62,169 54,123 49,509
Marketing 27,911 31,057 34,884 32,506 32,260 32,782
Professional services 25,777 23,879 20,819 21,169 25,160 24,931
Telecommunications 22,661 27,984 26,225 28,519 29,429 21,527
Printing and supplies 15,198 18,367 19,634 20,227 23,673 21,584
Franchise and other taxes 9,456 9,729 11,077 14,674 22,103 19,836
Amortization of intangible assets 2,019 41,225 39,207 37,297 25,689 13,019
Other 56,127 65,313 46,059 49,314 46,118 51,414
- ---------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense Before Special Charges 795,864 923,630 835,617 815,328 823,929 751,945
Special charges 56,184 99,957 50,000 96,791 90,000 51,163
- ---------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense After Special Charges 852,048 1,023,587 885,617 912,119 913,929 803,108
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 589,225 173,282 459,895 614,771 440,122 459,164
Income taxes 226,000 (5,239)(1) 131,449 192,697 138,354 166,501
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 363,225 $ 178,521 $ 328,446 $ 422,074 $ 301,768 $ 292,663
===========================================================================================================================
Per Common Share
Net Income
Basic $1.50 $0.71 $1.32 $1.66 $1.18 $1.15
Diluted 1.49 0.71 1.32 1.65 1.17 1.14
Cash dividends declared 0.64 0.72 0.76 0.68 0.62 0.56
Net Interest Income--Fully Taxable Equivalent (FTE)
Net Interest Income $ 983,802 $ 996,182 $ 942,432 $1,041,762 $1,021,093 $1,027,230
Tax Equivalent Adjustment (2) 5,205 6,352 8,310 9,423 10,307 11,864
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income--FTE $ 989,007 $1,002,534 $ 950,742 $1,051,185 $1,031,400 $1,039,094
===========================================================================================================================
(1) Reflects a $32.5 million reduction related to the issuance of $400 million
of REIT subsidiary preferred stock, of which $50 million was issued to the
public.
(2) Calculated assuming a 35% tax rate.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
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Fully taxable equivalent net interest income in 2002 declined from 2001 levels
by $13.5 million. This decline was attributable to a $364 million decline in
interest income on loans and leases, only partially offset by lower levels of
interest expense. The decrease in interest income on loans and leases was due
to a $982 million decline in the average balances and a decrease in the average
yield earned to 6.60% in 2002 from 8.01% in 2001. The decline in average
balances was due to the sale of loans as a result of the divestiture of
Huntington's Florida banking operations, partially offset by loan growth during
2002. Average deposits fell $2.2 billion reflecting the sale of Florida-related
deposits.
Fully taxable net interest income increased by $51.8 million from 2000 to 2001.
This increase was primarily attributable to a higher net interest margin, which
was 4.02% in 2001, up from 3.73% in 2000. The net interest margin increased as
rates on interest bearing liabilities declined more rapidly than yields on
earning assets reflecting decreases in overall interest rate levels during
2001. Huntington's average balance sheets, interest income and expense, and a
detailed analysis of its net interest margin for the past six years on a
reported basis can be found in Table 4.
Table 3 shows changes in fully taxable equivalent interest income, interest
expense, and net interest income due to volume and rate variances for major
categories of earning assets and interest-bearing liabilities. The change in
interest not solely due to changes in volume or rates has been allocated in
proportion to the absolute dollar amounts of the change in volume and rate.
Table 3 -- Change in Net Interest Income Due to Changes in Average Volume and
Interest Rates (Reported Basis)
2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) From Previous Year Increase (Decrease) From Previous Year
Due To: Due To:
- ----------------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (1) Yield/ Yield/
(in millions of dollars) Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------
Loans and leases $ (75.8) $(288.3) $(364.1) $ 41.3 $(157.0) $(115.7)
Securities (20.9) (15.8) (36.7) (83.9) 13.5 (70.4)
Other earning assets (3.8) (4.4) (8.2) 19.3 (4.0) 15.3
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets (100.5) (308.5) (409.0) (23.3) (147.5) (170.8)
- ----------------------------------------------------------------------------------------------------------------------
Deposits (90.3) (177.6) (267.9) (26.3) (97.9) (124.2)
Short- and medium-term borrowings (16.4) (96.8) (113.2) (34.9) (49.9) (84.8)
Long-term debt 7.9 (22.3) (14.4) 3.9 (17.5) (13.6)
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (98.8) (296.7) (395.5) (57.3) (165.3) (222.6)
- ----------------------------------------------------------------------------------------------------------------------
Net interest income $ (1.7) $ (11.8) $ (13.5) $ 34.0 $ 17.8 $ 51.8
======================================================================================================================
(1) Calculated assuming a 35% tax rate.
At December 31, 2002, total assets were $27.6 billion, down from $28.5 billion
at December 31, 2001. This decline primarily reflected the $2.8 billion of
loans and other tangible assets sold with the Florida banking operations as
discussed previously, partially offset by growth in residential mortgages and
home equity loans and lines of credit. Total deposits were $17.5 billion, down
from $20.2 billion a year earlier. Deposits of $4.8 billion sold in Florida
were mitigated by strong core deposit growth during 2002, particularly in
interest bearing demand accounts, and growth in brokered and negotiable
certificates of deposit.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
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Table 4 -- Consolidated Average Balance Sheets and Net Interest Margin Analysis
(Reported Basis)
(in millions of dollars) Average Balance
- ------------------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (1) 2002 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Assets
Interest bearing deposits in banks $ 33 $ 7 $ 6 $ 9 $ 10 $ 9
Trading account securities 7 25 15 13 11 10
Federal funds sold and securities purchased
under resale agreements 72 107 87 22 229 44
Mortgages held for sale 322 360 109 232 289 131
Securities: (2)
Taxable 2,859 3,144 4,316 4,885 4,896 5,351
Tax exempt 135 174 273 297 247 264
- ------------------------------------------------------------------------------------------------------------------------
Total Securities 2,994 3,318 4,589 5,182 5,143 5,615
- ------------------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans and leases 5,676 6,647 6,446 6,128 5,629 5,302
Real estate
Construction (3) 1,217 1,221 1,184 1,000 764 797
Commercial 2,379 2,340 2,187 2,235 2,304 2,250
Consumer
Automobile leases 3,166 3,204 2,969 2,361 1,769 1,488
Automobile loans--Indirect 2,773 2,697 2,982 3,432 3,249 3,081
Home equity 3,087 3,399 2,991 2,345 1,935 1,644
Residential mortgage (3) 1,444 1,052 1,382 1,489 1,365 1,527
Other loans 425 589 528 1,099 1,419 1,492
- ------------------------------------------------------------------------------------------------------------------------
Total consumer 10,895 10,941 10,852 10,726 9,737 9,232
- ------------------------------------------------------------------------------------------------------------------------
Total loans and leases 20,167 21,149 20,669 20,089 18,434 17,581
- ------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 410 344 303 301 280 252
- ------------------------------------------------------------------------------------------------------------------------
Net loans and leases 19,757 20,805 20,366 19,788 18,154 17,329
- ------------------------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 23,595 24,966 25,475 25,547 24,116 23,390
- ------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 757 912 1,008 1,039 975 910
Intangible assets 293 736 709 682 487 250
All other assets 1,801 1,867 1,832 1,772 1,594 853
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $26,036 $28,137 $28,721 $28,739 $26,892 $25,151
========================================================================================================================
Liabilities and Shareholders' Equity
Core deposits
Non-interest bearing deposits $ 2,902 $ 3,304 $ 3,421 $ 3,497 $ 3,287 $ 2,774
Interest bearing demand deposits 5,161 5,005 4,291 4,097 3,585 3,204
Savings deposits 2,853 3,478 3,563 3,740 3,277 3,056
Other domestic time deposits 4,349 5,883 5,872 5,823 6,291 5,857
- ------------------------------------------------------------------------------------------------------------------------
Total core deposits 15,265 17,670 17,147 17,157 16,440 14,891
- ------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 851 1,280 1,502 1,449 1,688 1,557
Brokered time deposits and negotiable CDs 731 128 502 238 182 365
Foreign time deposits 337 283 539 363 103 382
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 17,184 19,361 19,690 19,207 18,413 17,195
- ------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,128 2,325 1,966 2,549 2,084 2,826
Medium-term notes 1,865 2,024 2,894 3,122 2,903 1,983
Federal Home Loan Bank advances 279 19 13 5 53 117
Subordinated notes and other long-term debt, including preferred capital
securities 1,198 1,161 1,111 998 823 621
- ------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities / interest expense / average rates 19,752 21,586 22,253 22,384 20,989 19,969
- ------------------------------------------------------------------------------------------------------------------------
All other liabilities 1,075 865 768 711 552 514
Shareholders' equity 2,307 2,382 2,279 2,147 2,064 1,894
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $26,036 $28,137 $28,721 $28,739 $26,892 $25,151
========================================================================================================================
Net Interest Income
========================================================================================================================
Net interest rate spread
Impact of non-interest bearing funds on margin
- ------------------------------------------------------------------------------------------------------------------------
Net Interest Margin
========================================================================================================================
(1) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(2) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(3) Residential construction loans have been reclassified from Real
estate--Construction to Residential mortgage loans.
(4) Loan and lease and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and lease components include fees and cash basis interest
received on non-accrual loans.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Interest Income / Expense Average Rate (4)
- ------------------------------------------------------ ---------------------------------------
2002 2001 2000 1999 1998 1997 2002 2001 2000 1999 1998 1997
- ------------------------------------------------------ ---------------------------------------
$ 0.8 $ 0.2 $ 0.3 $ 0.4 $ 1.0 $ 0.5 2.38% 3.43% 5.03% 4.04% 5.22% 5.47%
0.3 1.3 1.1 0.8 0.6 0.6 4.11 5.13 7.11 5.89 5.71 5.70
1.1 4.4 5.5 1.2 12.9 2.4 1.56 4.19 6.33 5.58 5.64 5.50
20.5 25.0 8.7 16.3 20.2 10.1 6.35 6.95 7.96 7.03 6.99 7.75
173.1 206.9 269.5 297.0 308.8 339.8 6.06 6.58 6.24 6.08 6.31 6.35
10.1 13.0 20.8 23.5 21.9 25.3 7.42 7.49 7.61 7.90 8.83 9.55
- ------------------------------------------------------ ---------------------------------------
183.2 219.9 290.3 320.5 330.7 365.1 6.12 6.63 6.33 6.18 6.43 6.50
- ------------------------------------------------------ ---------------------------------------
328.8 493.2 572.8 501.0 488.5 472.2 5.79 7.42 8.89 8.18 8.68 8.91
58.3 88.6 108.2 85.8 71.2 75.1 4.79 7.25 9.14 8.58 9.31 9.42
150.5 180.4 186.7 184.6 201.5 205.1 6.33 7.71 8.53 8.26 8.75 9.12
235.8 250.6 235.9 194.4 142.5 130.3 7.45 7.82 7.94 8.23 8.05 8.75
245.9 260.2 279.0 296.6 291.4 279.0 8.87 9.65 9.36 8.66 9.00 9.13
188.3 286.8 261.1 202.3 180.5 155.0 6.10 8.44 8.73 8.62 9.32 9.43
87.3 79.5 106.1 111.5 109.5 126.5 6.05 7.55 7.68 7.48 8.03 8.29
36.1 55.8 61.0 120.1 159.2 171.4 8.49 9.47 11.57 10.86 11.12 11.31
- ------------------------------------------------------ ---------------------------------------
793.4 932.9 943.1 924.9 883.1 862.2 7.28 8.53 8.69 8.62 9.07 9.34
- ------------------------------------------------------ ---------------------------------------
1,331.0 1,695.1 1,810.8 1,696.3 1,644.3 1,614.6 6.60 8.01 8.76 8.44 8.92 9.18
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
1,536.9 1,945.9 2,116.7 2,035.5 2,009.7 1,993.3 6.51% 7.79% 8.31% 7.97% 8.33% 8.52%
- ------------------------------------------------------ ---------------------------------------
90.1 134.6 144.0 106.5 96.4 84.4 1.75% 2.69% 3.36% 2.60% 2.69% 2.64%
51.7 107.7 146.4 126.0 114.0 100.4 1.81 3.10 4.11 3.37 3.48 3.28
197.1 331.4 335.4 299.1 349.2 329.7 4.53 5.63 5.71 5.14 5.55 5.63
- ------------------------------------------------------ ---------------------------------------
338.9 573.7 625.8 531.6 559.6 514.5 2.74 3.99 4.56 3.89 4.25 4.25
- ------------------------------------------------------ ---------------------------------------
28.8 66.8 90.4 76.6 96.4 87.6 3.39 5.22 6.01 5.28 5.71 5.63
17.3 6.6 31.9 12.8 10.5 21.8 2.36 5.12 6.35 5.40 5.82 5.98
5.0 10.8 34.0 18.7 5.9 22.2 1.47 3.82 6.31 5.14 5.66 5.81
- ------------------------------------------------------ ---------------------------------------
390.0 657.9 782.1 639.7 672.4 646.1 2.73 4.10 4.81 4.07 4.44 4.48
- ------------------------------------------------------ ---------------------------------------
42.7 95.9 113.1 114.3 97.7 146.4 2.01 4.12 5.75 4.48 4.69 5.18
61.7 121.7 189.3 170.0 164.6 116.2 3.31 6.01 6.54 5.45 5.67 5.86
5.6 1.2 0.8 0.3 2.9 6.2 2.00 6.17 6.32 5.19 5.57 5.30
47.9 66.7 80.7 60.0 40.7 39.3 4.00 5.75 7.27 5.93 4.87 6.24
- ------------------------------------------------------ ---------------------------------------
547.9 943.4 1,166.0 984.3 978.3 954.2 2.77% 4.37% 5.24% 4.40% 4.66% 4.78%
- ------------------------------------------------------ ---------------------------------------
$ 989.0 $1,002.5 $ 950.7 $1,051.2 $1,031.4 $1,039.1
=====================================================
3.74% 3.42% 3.07% 3.57% 3.67% 3.74%
0.45 0.60 0.66 0.54 0.61 0.70
---------------------------------------
4.19% 4.02% 3.73% 4.11% 4.28% 4.44%
=======================================
41
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
BASIS OF DISCUSSION--OPERATING BASIS
Results from the 2001 second quarter through the third quarter of 2002 were
significantly impacted by a number of non-operating items, primarily related to
the strategic restructuring announced in July 2001 and the subsequent sale of
the Florida banking and insurance operations in 2002. These non-operating items
are explained in the section entitled Restructuring and Other Non-Operating
Items. For analytical purposes in understanding performance trends and decision
making, management reviews and analyzes certain data on an "operating basis",
which excludes the impact of these non-operating items and the operating
results of the Florida operations sold for 2002, 2001, and 2000 as presented in
Table 5. Accordingly, the discussion that follows is presented on an operating
basis unless otherwise indicated.
OVERVIEW--OPERATING BASIS
Operating earnings for 2002 were $328.5 million, or $1.35 per common share,
compared with $307.5 million, or $1.22 per common share in 2001, and $358.5
million, or $1.44 per common share in 2000. On this same basis, ROE and ROA for
2002 were 14.2% and 1.28%, respectively, compared with 12.9% and 1.23%,
respectively, for 2001, and 15.7% and 1.40%, respectively, in 2000.
Restructuring and Other Non-Operating Items
In July 2001, Huntington announced a strategic refocusing plan (the Plan). Key
components of the Plan included the sale of banking and insurance operations in
Florida, the consolidation of numerous non-Florida branch offices, as well as
credit-related and other actions to strengthen its financial performance
including the use of some of the excess capital to repurchase outstanding
common shares.
2002
The sale of the Florida banking operations to SunTrust Banks, Inc., which
closed February 15, 2002, included 143 banking offices and 456 ATMs, with
approximately $2.8 billion in loans and other tangible assets, and $4.8 billion
in deposits and other liabilities. Huntington's Florida insurance operation,
the Orlando-based J. Rolfe Davis Insurance Agency, Inc. (JRD), was sold on July
2, 2002 to members of its management team. The JRD sale did not materially
affect Huntington's 2002 financial results and is not expected to materially
affect Huntington's future financial results. Huntington remains committed to
growing its other insurance business in markets served by its retail and
commercial banking operations. A pre-tax gain of $175.3 million ($56.7 million
after-tax, or $0.23 per share) on the sale of the Florida banking operations
was recorded in 2002 and was included in non-interest income in Table 5.
Huntington recorded $56.2 million of pre-tax restructuring and special charges
($36.5 million after-tax, or $0.15 per share) related to the Plan in 2002,
which was reflected in non-interest expense. Combined with amounts recorded in
2001, pre-tax restructuring and special charges related to the Plan totaled
$233.1 million ($151.5 million after-tax, or $0.61 per share).
In August 2002, Huntington restructured its interest in Huntington Merchant
Services, L.L.C. (HMS), Huntington's merchant services business, in a
transaction with First Data Merchant Services Corporation (First Data), a
subsidiary of First Data Corporation. Under the agreement, Huntington extended
its long-term merchant services relationship with First Data. In addition, as
part of the transaction, First Data obtained all of Huntington's
Florida-related merchant services business and increased its equity interest in
HMS. This transaction resulted in a $24.5 million pre-tax, non-operating gain
($16.0 million after tax, or $0.07 per share) in non-interest income.
Huntington remains a nominal equity owner in HMS.
2001
In 2001, the provision for loan and lease losses included credit quality
charges related to the Plan of $71.7 million in addition to $50.0 million to
increase Huntington's allowance for loan and lease losses in light of the
higher charge-offs and non-performing assets experienced in the second half of
2001. Included in the 2001 securities gains in Table 5 was a $5.3 million loss
realized from the sale of $15 million of Pacific Gas & Electric commercial
paper acquired from the Huntington Money Market Fund. Restructuring and special
charges related to the Plan totaled $100.0 million ($65.0 million after-tax, or
$0.26 per share) and consisted of $32.1 million for asset impairment, $16.2
million for the exit or curtailment of certain e-commerce activities, $13.3
million related to owned or leased facilities that Huntington has vacated, and
$38.4 million related to employee severance or retention, non-recurring legal,
accounting, consulting, reduction of ATMs, and other operational costs.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
2000
In 2000, restructuring and special charges of $50.0 million ($32.5 million
after-tax, or $0.13 per common share) were recorded to increase the reserve for
automobile lease residual values (in addition to charges of $58.2 million in
1999) due to declines in used car prices and increased average losses per auto.
Table 5 reconciles Huntington's reported results with its operating earnings
for each of the most recent three years.
Table 5 -- Reconciliation of Reported Earnings to Operating Earnings
Gain on Sale of
Florida Operations/
Reported Restructuring and Florida Operating
(in thousands of dollars, except per share amounts) Earnings Other Items (1) Operations(2) Earnings
- --------------------------------------------------------------------------------------------------------------
2002
Net interest income $983,802 $ -- $ 9,724 $974,078
Provision for loan and lease losses 227,340 -- 5,186 222,154
Securities gains 4,902 -- -- 4,902
Non-interest income 480,015 -- 13,343 466,672
Gain on sale of Florida operations 175,344 175,344 -- --
Merchant Services gain 24,550 24,550 -- --
Non-interest expense 795,864 -- 20,210 775,654
Restructuring and special charges 56,184 56,184 -- --
- --------------------------------------------------------------------------------------------------------------
Pre-tax income 589,225 143,710 (2,329) 447,844
Income taxes 226,000 107,482 (804) 119,322
- --------------------------------------------------------------------------------------------------------------
Net Income $363,225 $ 36,228 $ (1,525) $328,522
==============================================================================================================
Net Income Per Common Share--Diluted $1.49 $0.15 $(0.01) $1.35
==============================================================================================================
2001
Net interest income $996,182 $ -- $ 82,273 $913,909
Provision for loan and lease losses 308,793 121,718 15,121 171,954
Securities gains (losses) 723 (5,250) -- 5,973
Non-interest income 508,757 -- 76,992 431,765
Non-interest expense 923,630 -- 162,887 760,743
Restructuring and special charges 99,957 99,957 -- --
- --------------------------------------------------------------------------------------------------------------
Pre-tax income 173,282 (226,925) (18,743) 418,950
Income taxes (5,239) (111,924) (4,730) 111,415
- --------------------------------------------------------------------------------------------------------------
Net income $178,521 $(115,001) $(14,013) $307,535
==============================================================================================================
Net income per common share--diluted $0.71 $(0.46) $(0.05) $1.22
==============================================================================================================
2000
Net interest income $942,432 $ -- $ 92,646 $849,786
Provision for loan and lease losses 90,479 -- 6,907 83,572
Securities gains 37,101 -- -- 37,101
Non-interest income 456,458 -- 46,742 409,716
Non-interest expense 835,617 -- 129,080 706,537
Restructuring and special charges 50,000 50,000 -- --
- --------------------------------------------------------------------------------------------------------------
Pre-tax income 459,895 (50,000) 3,401 506,494
Income taxes 131,449 (17,500) 994 147,955
- --------------------------------------------------------------------------------------------------------------
Net income $328,446 $ (32,500) $ 2,407 $358,539
==============================================================================================================
Net income per common share--diluted $1.32 $(0.13) $0.01 $1.44
==============================================================================================================
(1) See Restructuring and Other Non-Operating Items discussion for further
details.
(2) Represents results of operations for the Florida banking and insurance
operations sold in 2002.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
The presentation of the Florida operations in Table 5 differs from the
disclosure presented in Note 4 to the consolidated financial statements because
Note 4 reflects only the after-tax restructuring and special charges for 2002
related to the Florida operations, which totaled $21.3 million ($32.7 million
pre-tax). Because the disclosure in Note 4 was intended only to show the pro
forma impact without the Florida operations, non-Florida related after-tax
restructuring and special charges of $15.2 million ($23.5 million pre-tax) as
well as the Merchant Services restructuring gain are included in the 2002 pro
forma results (unaudited) presented in Note 4 but are excluded from operating
earnings as presented in Table 6 below.
Table 6 -- Selected Financial Data (Operating Basis)
Years Ended December 31,
- ------------------------------------------------------------------------------------------
(in thousands of dollars, except per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------------------------
Summary of Operations
Net interest income $ 974,078 $ 913,909 $ 849,786
Provision for loan and lease losses 222,154 171,954 83,572
Securities gains 4,902 5,973 37,101
Non-interest income 466,672 431,765 409,716
Non-interest expense 775,654 760,743 706,537
- ------------------------------------------------------------------------------------------
Income before income taxes 447,844 418,950 506,494
Income taxes 119,322 111,415 147,955
- ------------------------------------------------------------------------------------------
Net Income $ 328,522 $ 307,535 $ 358,539
==========================================================================================
Net Income Per Common Share--Diluted (1) $1.35 $1.22 $1.44
==========================================================================================
Revenue--Fully Taxable Equivalent (FTE)
Net Interest Income $ 974,078 $ 913,909 $ 849,786
Tax Equivalent Adjustment (2) 5,205 6,352 8,310
- ------------------------------------------------------------------------------------------
Net Interest Income--FTE 979,283 920,261 858,096
Non-interest Income 471,574 437,738 446,817
- ------------------------------------------------------------------------------------------
Total Revenue--FTE $ 1,450,857 $ 1,357,999 $ 1,304,913
==========================================================================================
Total Revenue Excluding Securities Gains--FTE $ 1,445,955 $ 1,352,026 $ 1,267,812
==========================================================================================
Balance Sheet Highlights
- ------------------------------------------------------------------------------------------
Average loans and leases $19,828,951 $18,595,172 $18,300,592
Average loans--managed (3) 20,988,667 19,891,213 18,998,128
Average earning assets 23,257,615 22,412,659 23,107,486
Average total assets 25,598,761 24,923,610 25,567,519
Average core deposits (4) 14,703,245 13,337,965 13,042,418
Average shareholders' equity 2,307,475 2,381,820 2,279,230
Key Ratios and Statistics
- ------------------------------------------------------------------------------------------
Return on average assets 1.28% 1.23% 1.40%
Return on average shareholders' equity 14.2 12.9 15.7
Net interest margin 4.21 4.11 3.71
Efficiency ratio 53.6 55.4 54.9
Effective tax rate 26.6 26.6 29.2
(1) 2000 adjusted for the stock dividend paid July 2000.
(2) Calculated assuming a 35% tax rate.
(3) Includes securitized indirect auto loans.
(4) Includes non-interest bearing and interest bearing demand deposits, savings
deposits, CDs under $100,000, and all IRA deposits.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Managed Loans
Huntington includes securitized indirect automobile loans when analyzing
certain aspects of its loan and lease portfolio. The combined portfolio of
owned and securitized indirect loans is referred to as "managed loans." Managed
average total loans increased $1.1 billion, or 6%, in 2002 from 2001 and $0.9
billion, or 5%, in 2001 from 2000. Average core deposits increased $1.4
billion, or 10%, and $308.4 million, or 2%, over the same periods.
SUMMARY DISCUSSION OF RESULTS--OPERATING BASIS
Operating earnings for 2002 were $328.5 million, or $1.35 per common share, up
$21.0 million, or 7%, and $0.13 per common share, or 11%, respectively, from
$307.5 million, or $1.22 per common share in 2001. Operating earnings for 2000
were $358.5 million, or $1.44 per common share.
2002 vs. 2001 Performance
The $21.0 million, or 7%, increase in operating earnings from 2001 reflected
the benefit of a 7% increase in revenue before securities gains. This increase
was partially offset by the negative impacts of a 29% increase in provision for
loan and lease losses, a 2% increase in non-interest expenses, and a 7%
increase in income taxes.
The $93.9 million growth in revenue (net interest income on a fully taxable
equivalent basis plus non-interest income) before securities gains reflected a
$59.0 million, or 6%, increase in fully taxable equivalent net interest income,
Huntington's primary source of revenue. This increase reflected a 4% increase
in average earning assets and an effective 2% increase in the net interest
margin to 4.21% from 4.11%. Average managed loans increased 6% reflecting
strong growth in consumer loans, most notably residential mortgages and home
equity lines. Average earning assets grew more slowly reflecting the planned
run-off of lower-margin investment securities and other earning assets. Also
contributing to the revenue increase was a $34.9 million, or 8%, increase in
non-interest income before securities gains. This was driven by a $15.7
million, or 12%, increase in service charges on deposit accounts. With the
exception of mortgage banking income, which declined $7.8 million, all of the
other fee income categories increased, accounting for the remainder of the
increase in non-interest income.
The $50.2 million increase in provision for loan and lease losses primarily
reflected higher total commercial and commercial real estate net charge-offs,
as consumer net charge-offs declined. The higher total commercial and
commercial real estate net charge-offs reflected the impact of the continued
weak economy on some of Huntington's commercial customers, as well as fourth
quarter credit actions that accelerated the sale and disposition of
non-performing commercial loans.
The $14.9 million increase in non-interest expense largely reflected a $24.3
million, or 6%, increase in personnel costs, due to expansion of management and
employee talent at all levels, increased incentive-based pay, and higher
pension and benefits costs. Partially offsetting the personnel cost increases
were declines in a number of expense categories, but most notably a $10.2
million decline in amortization of intangible assets expense as a result of the
implementation of the new goodwill accounting rule, FASB Statement No. 142, at
the beginning of the year. With fully taxable equivalent revenue increasing by
7% and expenses by 2%, the efficiency ratio, which represents expenses as a
percentage of fully taxable equivalent revenue, improved to 53.6% from 55.4%.
The increase in income tax expense reflected the growth in income before taxes,
as the effective tax rate remained unchanged between years at 26.6%.
Earnings per common share increased 11%, compared with the 7% increase in net
income, reflecting the benefit of 3% fewer fully diluted shares outstanding. In
February 2002, the Board of Directors authorized a 22 million-share repurchase
program. During the year, 19.2 million shares were repurchased under this
program, which reduced average shares outstanding by 8.8 million for the year
and contributed $0.04 to earnings per share.
2001 vs. 2000 Performance
The $51.0 million, or 14%, decline in operating earnings from 2000 reflected
the impact of a $31.1 million decline in securities gains, an 8% increase in
expenses, and an $88.4 million increase in provision for loan and lease losses,
partially offset by a 7% increase in revenue before securities gains. This
resulted in an $87.5 million, or 17%, decline in income before taxes.
Reflecting the lower level of income before taxes and the effect of subsidiary
capital activities, income tax expense decreased $36.5 million.
The $84.2 million increase in revenue before securities gains reflected a $62.2
million, or 7%, increase in fully taxable equivalent net interest income. This
increase was due to a higher net interest margin as average earnings assets
declined between years. The average net interest margin increased an effective
11% from 3.71% to 4.11%. Average loans increased 2% between years, led by
45
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
growth in commercial and commercial real estate loans. However, these benefits
were more than offset by a 28% decline in average investment securities. As a
result, average earning assets declined 3% between years.
Also contributing to the growth in revenue before securities gains was a $22.0
million, or 5%, increase in non-interest income, driven mostly by a $17.8
million, or 47%, increase in mortgage banking income. Other fee income
categories that increased included trust services, up $6.7 million, or 13%;
other service charges, up $3.9 million, or 12%; and service charges on deposit
accounts, up $2.9 million, or 2%. In contrast, brokerage and insurance income
declined $7.3 million, or 12%.
Securities gains in 2001 totaled $6.0 million, down from $37.1 million in 2000,
which included significantly higher gains on the sales of marketable equity
securities.
The $88.4 million increase in provision for loan and lease losses primarily
reflected a decision to increase the loan loss reserve due to higher levels of
non-performing assets and higher net charge-offs in 2001, especially in the
commercial and automobile loan and lease portfolios. The increase in
non-performing assets, as well as higher commercial net charge-offs reflected a
weakening economy. The higher automobile loan and lease charge-offs, primarily
reflected charge-offs associated with loan and lease production from the fourth
quarter of 1999 through the fourth quarter of 2000, a period of time when the
company targeted a broader credit quality spectrum of borrowers.
The $54.2 million increase in non-interest expense included a $35.0 million, or
9%, increase in personnel costs driven by higher incentive-based pay, and a
$21.9 million increase in other expenses, which included a $4.2 million
impairment loss related to an investment in Pacific Gas & Electric commercial
paper, as well as premium expense associated with the purchase of automobile
lease residual value insurance. With 2001 revenue increasing less than
expenses, the efficiency ratio deteriorated slightly to 55.4% from 54.9% in
2000.
The $36.5 million decline in income tax expense reflected lower income before
taxes, partially offset by a decline in the effective tax rate to 26.6% from
29.2%.
RESULTS OF OPERATIONS--OPERATING BASIS
Net Interest Income
Huntington's primary source of revenue is net interest income, which is the
difference between interest income on earning assets, primarily loans and
securities, and interest expense on funding sources, including interest-bearing
deposits and borrowings. Net interest income is impacted by changes in the
levels of interest rates, earning assets, and interest-bearing liabilities.
Changes in net interest income are measured through interest spread and net
interest margin. The difference between the yields on earning assets and the
rates paid for interest-bearing liabilities represents the interest spread. The
net interest margin is the calculated percentage of net interest income to
average earning assets. Both the interest spread and net interest margin are
presented on a fully
taxable equivalent basis, which means that tax-free interest income and
dividend income, generated primarily from Huntington's investment securities
portfolio, are adjusted and expressed on the same basis as other taxable
income. Because non-interest bearing sources of funds, such as demand deposits
and stockholders' equity, also support earning assets, the net interest margin
exceeds the interest spread.
Table 7 shows the average annual balance sheets and the net interest margin
analysis for the recent three years, 2002 - 2000, on an operating basis. (See
Table 4 for this corresponding data on a reported basis; i.e. including the
Florida banking operations prior to their sale in the first quarter of 2002).
Table 7 shows the average annual balances for total assets and liabilities, as
well as shareholders' equity, and their various components, most notably loans,
deposits, and borrowings. It also shows the corresponding interest income or
interest expense associated with each earning asset and interest-bearing
liability category along with the average rate associated with each asset or
liability category, the difference resulting in the net interest spread. The
net interest spread plus the positive impact from non-interest bearing funds
represents the net interest margin.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Table 7 -- Consolidated Average Balance Sheets and Net Interest Margin Analysis
(Operating Basis)
(in millions of dollars) Average Balance Interest Income / Expense Average Rate (4)
- -------------------------------------------------------------------------------- --------------------------- ------------------
Fully Taxable Equivalent Basis (1) 2002 2001 2000 2002 2001 2000 2002 2001 2000
- -------------------------------------------------------------------------------- --------------------------- ------------------
Assets
Interest bearing deposits in banks $ 33 $ 7 $ 6 $ 0.8 $ 0.2 $ 0.3 2.38% 3.43% 5.03%
Trading account securities 7 25 15 0.3 1.3 1.1 4.11 5.13 7.11
Federal funds sold and securities purchased under
resale agreements 72 107 87 1.1 4.4 5.5 1.56 4.19 6.33
Mortgages held for sale 322 360 109 20.5 25.0 8.7 6.35 6.95 7.96
Securities: (2)
Taxable 2,859 3,144 4,316 173.1 206.9 269.5 6.06 6.58 6.24
Tax exempt 135 174 273 10.1 13.0 20.8 7.42 7.49 7.61
- -------------------------------------------------------------------------------- --------------------------- ------------------
Total Securities 2,994 3,318 4,589 183.2 219.9 290.3 6.12 6.63 6.33
- -------------------------------------------------------------------------------- --------------------------- ------------------
Loans and leases:
Commercial loans and leases 5,582 5,900 5,799 323.0 435.5 511.8 5.79 7.38 8.83
Real estate
Construction (3) 1,204 1,112 957 57.6 80.3 89.8 4.78 7.22 9.39
Commercial 2,338 2,034 1,901 147.9 158.0 163.4 6.33 7.77 8.60
Consumer
Automobile leases 3,166 3,204 2,969 235.8 250.6 235.9 7.45 7.82 7.94
Automobile loans--Indirect 2,731 2,371 2,772 242.2 235.1 264.7 8.87 9.91 9.55
Home equity 2,983 2,686 2,439 180.1 224.4 216.6 6.04 8.35 8.88
Residential mortgage (3) 1,415 813 1,005 85.3 61.2 81.8 6.03 7.53 8.14
Other loans 410 475 459 34.7 44.9 60.7 8.46 9.42 13.13
- -------------------------------------------------------------------------------- --------------------------- ------------------
Total consumer 10,705 9,549 9,644 778.1 816.2 859.7 7.27 8.55 8.91
- -------------------------------------------------------------------------------- --------------------------- ------------------
Total loans and leases 19,829 18,595 18,301 1,306.6 1,490.0 1,624.7 6.59 8.01 8.88
- -------------------------------------------------------------------------------- --------------------------- ------------------
Allowance for loan and lease losses 408 309 323
- --------------------------------------------------------------------------------
Net loans and leases 19,421 18,286 17,978
- --------------------------------------------------------------------------------
Total earning assets / interest income /
average rates 23,257 22,412 23,107 1,512.5 1,740.8 1,930.6 6.50% 7.77% 8.36%
- -------------------------------------------------------------------------------- --------------------------- ------------------
Cash and due from banks 745 831 826
Intangible assets 207 196 152
All other assets 1,798 1,794 1,806
- --------------------------------------------------------------------------------
Total Assets $25,599 $24,924 $25,568
===============================================================================
Liabilities and Shareholders' Equity
Core deposits
Non-interest bearing deposits $ 2,827 $ 2,723 $ 2,821
Interest bearing demand deposits 4,968 3,619 3,097 86.5 96.2 101.7 1.74% 2.66% 3.28%
Savings deposits 2,787 2,926 2,987 50.3 91.2 123.7 1.81 3.12 4.14
Other domestic time deposits 4,121 4,070 4,138 185.7 229.2 237.1 4.51 5.63 5.73
- -------------------------------------------------------------------------------- --------------------------- ------------------
Total core deposits 14,703 13,338 13,043 322.5 416.6 462.5 2.72 3.92 4.53
- -------------------------------------------------------------------------------- --------------------------- ------------------
Domestic time deposits of $100,000 or more 830 1,071 1,293 27.8 55.1 78.0 3.35 5.15 6.03
Brokered time deposits and negotiable CDs 731 128 502 17.3 6.6 31.9 2.36 5.12 6.35
Foreign time deposits 337 277 536 4.9 10.6 33.8 1.47 3.83 6.31
- -------------------------------------------------------------------------------- --------------------------- ------------------
Total deposits 16,601 14,814 15,374 372.5 488.9 606.2 2.71 4.04 4.83
- -------------------------------------------------------------------------------- --------------------------- ------------------
Short-term borrowings 2,110 2,188 1,864 42.5 91.5 107.7 2.01 4.18 5.78
Medium-term notes 2,032 3,495 4,163 64.7 172.2 277.1 3.18 4.93 6.66
Federal Home Loan Bank advances 279 19 13 5.6 1.2 0.8 2.00 6.17 6.32
Subordinated notes and other long-term debt,
including preferred capital securities 1,198 1,161 1,111 47.9 66.7 80.7 4.00 5.75 7.27
- -------------------------------------------------------------------------------- --------------------------- ------------------
Total interest bearing liabilities / interest expense /
average rates 19,393 18,954 19,704 533.2 820.5 1,072.5 2.75% 4.33% 5.44%
- -------------------------------------------------------------------------------- --------------------------- ------------------
All other liabilities 1,072 865 764
Shareholders' equity 2,307 2,382 2,279
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $25,599 $24,924 $25,568
===============================================================================
Net Interest Income $ 979.3 $ 920.3 $ 858.1
=============================================================================== ===========================
Net interest rate spread 3.75% 3.44% 2.92%
Impact of non-interest bearing funds on margin 0.46 0.67 0.79
- -------------------------------------------------------------------------------- ------------------
Net Interest Margin 4.21% 4.11% 3.71%
=============================================================================== ==================
(1) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(2) Average rates computed using historical cost average balances and do not
give effect to changes in fair value of securities available for sale.
(3) Residential construction loans have been reclassified from Real
estate--Construction to Residential mortgage loans.
(4) Loan and lease and deposit average rates include the impact of applicable
derivatives.
Note: Individual loan and lease components include fees and cash basis interest
received on non-accrual loans.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Table 8 shows changes in fully taxable equivalent interest income, interest
expense, and net interest income due to volume and rate variances for major
categories of earning assets and interest-bearing liabilities on an operating
basis. The change in interest not solely due to changes in volume or rates has
been allocated in proportion to the absolute dollar amounts of the change in
volume and rate.
Table 8 -- Change in Net Interest Income Due to Changes in Average Volume and
Interest Rates (Operating Basis)
2002 2001
- ----------------------------------------------------------------------------------------
Increase (Decrease) From Increase (Decrease) From
Previous Year Due To: Previous Year Due To:
- ----------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (1) Yield/ Yield/
(in millions of dollars) Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------
Loans and leases $ 94.1 $(277.5) $(183.4) $ 25.7 $(160.4) $(134.7)
Securities (20.9) (15.8) (36.7) (83.9) 13.5 (70.4)
Other earning assets (3.8) (4.4) (8.2) 19.3 (4.0) 15.3
- ----------------------------------------------------------------------------------------
Total earning assets 69.4 (297.7) (228.3) (38.9) (150.9) (189.8)
- ----------------------------------------------------------------------------------------
Deposits 35.3 (151.7) (116.4) (36.1) (81.2) (117.3)
Short- and medium-term borrowings (61.5) (95.0) (156.5) (23.4) (97.7) (121.1)
Long-term debt 7.9 (22.3) (14.4) 3.9 (17.5) (13.6)
- ----------------------------------------------------------------------------------------
Total interest-bearing liabilities (18.3) (269.0) (287.3) (55.6) (196.4) (252.0)
- ----------------------------------------------------------------------------------------
Net interest income $ 87.7 $ (28.7) $ 59.0 $ 16.7 $ 45.5 $ 62.2
========================================================================================
(1) Calculated assuming a 35% tax rate.
2002 vs. 2001 Performance
Fully taxable equivalent net interest income was $979.3 million in 2002, up
$59.0 million, or 6%, from $920.3 million in 2001. This reflected a 4% increase
in average earning assets, as well as a 10 basis point, or an effective 2%,
increase in the net interest margin from 4.11% to 4.21%.
The increase in average earning assets reflected a 6% increase in average
managed loans, partially offset by a 10% decrease in average investment
securities. Changes in the balance sheet are discussed in more detail below.
The 10 basis point increase in the net interest margin was influenced by three
factors. The first was the timing and magnitude of declining interest rates in
2001 and 2002, and the fact that rates reached such historically low levels
during the second half of 2002. As interest rates declined in the second half
of 2001, deposit and wholesale funding costs declined more rapidly than yields
on earning assets, most notably loans. As a result, the net interest margin
widened in the second half of 2001. However, as rates continued to decline in
2002, especially in the second half, and given the absolute low levels
attained, it became increasingly difficult to lower deposit funding costs
commensurate with the decline in earning asset yields. As a result, yields on
earning assets fell more rapidly than deposit costs, thus narrowing the net
interest margin in the second half of 2002, particularly in the fourth quarter.
The second factor was a decision early in 2001 to reduce the level of
low-return investment securities. This helped drive the increase in the net
interest margin during the first three quarters of 2001.
The third factor was a change in the loan mix to lower yield, but higher credit
quality loans, which had the effect of mitigating the increase in the net
interest margin. Since the 2001 fourth quarter, consumer loan production
shifted to higher credit quality automobile loan and lease production. Also
contributing to the net interest margin decline was the significant growth in
lower-yield residential mortgages. While this resulted in a reduced net
interest margin, it improved the total risk adjusted return of these assets,
and thus, lower net charge-offs should be experienced in future periods.
Reflecting these factors, during 2001 the net interest margin in the first
quarter was 3.99% and increased steadily throughout the year, peaking at 4.26%
in the fourth quarter. During 2002, the margin peaked at 4.30% in the second
quarter, then declined to 4.26% in the third quarter, and declined to 4.07% in
the fourth quarter.
2001 vs. 2000 Performance
Fully taxable equivalent net interest income was $920.3 million in 2001, up
$62.2 million, or 7%, from $858.1 million in 2000. This increase was driven by
a 40 basis point, or 11%, increase in the net interest margin to 4.11% from
3.71%, as average earning assets declined $0.8 billion, or 4%.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
The decline in average earning assets between the two years was driven by a
$1.3 billion, or 28%, decrease in average investment securities. The higher net
interest margin reflected a decision to reduce the level of residential
mortgages and lower-margin investment securities. In addition, the balance
sheet was slightly liability sensitive during the period and benefited from the
decline in short-term rates during 2000.
Impact from Derivative Financial Instruments
Huntington uses various types of derivative financial instruments, primarily
interest rate swaps, to manage its exposure to changes in interest rates. The
cash flows generated by derivative instruments are recorded along with the
interest income or expense from the hedged asset or liability and consequently
are included in the yields on those assets and liabilities. The impact of these
derivatives increased the net interest margin by 20 basis points in 2002 but
lowered it by 2 and 5 basis points in 2001 and 2000, respectively. Huntington's
interest rate risk position is discussed further in the "Interest Rate Risk
Management" section of this report.
Balance Sheet
Table 9 shows total loans and leases were $21.0 billion on a reported basis at
December 31, 2002, with 55% representing consumer loans and 45% commercial and
commercial real estate loans. Subsequent to the end of 2002, $268 million of
loans at December 31, 2002 were reclassified from commercial loans and leases
to commercial real estate loans. This reclassification, which is reflected in
the table below, did not affect total interest income or net income for any
period. Total loans were up $2.1 billion, or 11%, from the end of 2001,
excluding the impact of the sold Florida banking loans, when the portfolio
consisted of 48% consumer loans and 52% commercial and commercial real estate
loans.
Table 9 -- End of Period Loan and Lease Portfolio Composition (Reported Basis)
At December 31, 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
(in millions of dollars) Amount % Amount % Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------------
Commercial loans and leases (1) $ 5,606 26.8 $ 6,439 29.8 $ 6,634 32.2 $ 6,300 30.5 $ 6,027 31.0
Real estate
Construction 1,012 4.8 1,322 6.1 1,206 5.9 1,159 5.6 868 4.5
Commercial 2,719 13.0 2,496 11.6 2,253 10.9 2,151 10.4 2,232 11.5
- ----------------------------------------------------------------------------------------------------------
Total commercial and
commercial real estate loans 9,337 44.6 10,257 47.5 10,093 49.0 9,610 46.5 9,127 47.0
- ----------------------------------------------------------------------------------------------------------
Consumer
Automobile leases 3,203 15.3 3,208 14.9 3,106 15.1 2,797 13.5 1,980 10.2
Automobile loans--Indirect 3,072 14.7 2,883 13.3 2,507 12.2 3,521 17.0 3,434 17.6
- ----------------------------------------------------------------------------------------------------------
Total automobile loans and leases 6,275 30.0 6,091 28.2 5,613 27.3 6,318 30.5 5,414 27.8
- ----------------------------------------------------------------------------------------------------------
Home equity 3,200 15.3 3,582 16.6 3,205 15.5 2,562 12.4 2,173 11.2
Residential mortgage 1,749 8.3 1,128 5.2 1,060 5.1 1,523 7.4 1,459 7.4
Other consumer loans 395 1.8 544 2.5 639 3.1 655 3.2 1,282 6.6
- ----------------------------------------------------------------------------------------------------------
Total consumer loans 11,619 55.4 11,345 52.5 10,517 51.0 11,058 53.5 10,328 53.0
- ----------------------------------------------------------------------------------------------------------
Total Loans and Leases $20,956 100.0 $21,602 100.0 $20,610 100.0 $20,668 100.0 $19,455 100.0
==========================================================================================================
(1) There were no commercial loans or leases outstanding that would be
considered a concentration of lending to a particular industry or group of
industries.
For 2002, average loans and leases, excluding the impact of the Florida related
loans sold, were $19.8 billion, up $1.2 billion, or 7%, from the prior year,
driven by a 12% increase in consumer loans. Since late 2001, a key focus in
loan growth has been the generation of residential mortgages and home equity
loans and lines of credit. This coincided with heavy demand for refinancing
mortgage assets due to the declining interest rate environment. As a result,
average residential mortgages increased $602 million, or 78%, with home equity
loans and lines up $297 million, or 11%. Average automobile loans and leases
increased $322 million, or 6%. Also contributing to growth in average loans and
leases was a $396 million, or 12%, increase in commercial real estate loans.
These growth rates have been normalized to exclude the impact of acquisitions,
loan sales, and residential mortgage loan securitizations.
In contrast, average commercial loans and leases declined $318 million, or 5%,
reflecting a combination of low demand due to the weak economic environment and
reduced shared national credit exposure.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Average total loans in 2001 were $18.6 billion, up 2% from the prior year. This
growth reflected a 7% increase in commercial loans and a 2% increase in
commercial real estate loans. Average total consumer loans were little changed
between years. While automobile leases and home equity loans and lines
increased 8% and 7%, respectively, this growth was offset by declines in
automobile loans and residential mortgages of 15% and 11%, respectively.
The $0.3 billion, or 10%, decline in average investment securities in 2002
reflected the continued run off of lower-margin earning assets, mostly in the
first half of 2001. The $1.3 billion, or 28%, decline from 2000 to 2001 in
investment securities reflected a decision to sell a significant portion of
lower-yield securities.
As shown in Table 18, deposits were $17.5 billion at December 31, 2002, with
87% representing core deposits. This was up $2.0 billion, or 13%, from the end
of the prior year, excluding Florida deposits sold, when core deposits
represented 92% of total deposits.
Average core deposits, excluding Florida deposits sold, were $14.7 billion in
2002, up $1.4 billion, or 10%, from the prior year and represented 89% of
average total deposits. This growth was driven by a $1.3 billion, or 37%,
increase in interest bearing demand deposits reflecting the combined benefits
of enhanced sales efforts, as well as consumers moving funds out of the equity
markets. Average brokered time deposits and negotiable certificates of deposits
increased $0.6 billion reflecting management's strategy to further diversify
its funding sources.
Average core deposits, excluding Florida deposits sold, in 2001 were $13.3
billion, up 2% from the prior year. This increase was driven by a 17% increase
in average interest bearing demand deposits reflecting successful campaigns to
generate deposit growth as well as fund inflows due to uncertainties in the
equity markets.
Average borrowings in 2002, comprised of short- and medium-term notes, advances
from the Federal Home Loan Bank, and long-term debt including capital
securities, totaled $5.6 billion, down $1.2 billion, or 18%, from the prior
year. Given the growth in average deposits, less borrowed funds were required.
Most of the decline was due to a $1.5 billion decrease in average funding in
medium-term notes. Average borrowings in 2001 totaled $6.9 billion, down 4%
from the year-earlier period. This reflected a combination of factors including
increased funding made available from the planned balance sheet repositioning
program which resulted in a decline in low-margin earnings assets, particularly
in the first half of the year, as well as deposit growth in the second half of
the year.
Provision for Loan and Lease Losses
The provision for loan and lease losses is the expense necessary to maintain
the allowance for loan and lease losses (ALLL) at a level adequate to absorb
management's estimate of inherent losses in the loan and lease portfolio. The
provision expense, on an operating basis, was $222.2 million for 2002 compared
to $172.0 million in 2001 and $83.6 million in 2000. Specific credit actions in
the fourth quarter 2002 included $21.4 million in charge-offs associated with
the sale of non-performing assets and the charge-off of a $29.9 million credit
exposure to a single health care finance company. Existing loan and lease loss
reserves were sufficient to absorb these charges and, accordingly, there was no
impact on 2002 provision expense.
For 2001, provision expense on an operating basis excluded charges associated
with Huntington's strategic refocusing plan discussed earlier. These charges
included estimated losses related to the exit of sub-prime automobile and truck
and equipment lending, losses related to delinquent consumer and small business
loans more than 120 days past due, and increased reserves for consumer
bankruptcies. The significant increase in provision expense in each of the past
two years reflected higher charge-offs associated with the deterioration in
economic conditions. See the "Credit Risk" section for discussion of the ALLL,
net charge-offs, and non-performing assets.
50
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Non-Interest Income
Non-interest income for the recent three years ended December 31 was as follows:
Table 10 -- Non-Interest Income (Operating Basis)
(in thousands of dollars) 2002 2001 2000
----------------------------------------------------------------------------
Service charges on deposit accounts $148,273 $132,606 $129,751
Brokerage and insurance 59,928 54,426 61,756
Trust services 61,646 57,596 50,894
Mortgage banking 48,068 55,818 38,025
Bank owned life insurance 46,005 38,241 39,544
Other services charges and fees 41,374 36,927 32,983
Other 61,378 56,151 56,763
----------------------------------------------------------------------------
Total Non-Interest Income Before Securities Gains 466,672 431,765 409,716
Securities gains 4,902 5,973 37,101
----------------------------------------------------------------------------
Total Non-Interest Income $471,574 $437,738 $446,817
============================================================================
On an operating basis, non-interest income before securities gains was $466.7
million, up $34.9 million, or 8% from 2001. The primary cause was a $15.7
million, or 12%, increase in deposit service charges reflecting higher personal
and commercial service charges. Brokerage and insurance income increased $5.5
million, or 10%, reflecting a 19% increase in combined mutual fund and annuity
sales. Trust services increased $4.1 million, or 7%, due to a 12% increase in
mutual fund fees, as well as a 4% increase in personal trust income. Bank owned
life insurance was up $7.8 million, or 20%. Huntington owns and is the
beneficiary on three Bank owned life insurance policies that were purchased in
1997 and 1998, insuring the lives of selected Huntington officers. Written
consents were obtained from the officers prior to the purchase of the policies.
The policies represented approximately 3% of total assets at December 31, 2002
and 2001. The insurance providers are rated A+ or higher. Additionally, the
cash values of these policies are backed by assets that are maintained in a
separate account to protect Huntington from possible insolvency of the
insurance providers.
Mortgage banking income declined $7.8 million, or 14%, due to $14.1 million of
mortgage servicing impairment in 2002 compared with $6.3 million of such
impairment in 2001. These impairments reflected a significant increase in
prepayments due to heavy mortgage refinancing activity, particularly in the
second half of 2002. Total mortgage loans originated in 2002 were a record $4.1
billion, up from $3.5 billion in 2001 due to heavy refinancing activity as
borrowers took advantage of very low interest rates. At December 31, 2002, the
value of capitalized mortgage servicing rights was 0.78% of loans serviced for
others, down from 0.97% at the end of the prior year.
Other service charges were up $4.4 million, or 12%, primarily driven by higher
check card and on-line bill payment fees. Other income was up $5.2 million, or
9%, reflecting increases spread over a number of miscellaneous fee and services
income categories.
Non-interest income before securities gains in 2001, on an operating basis, was
$431.8 million, up $22.0 million, or 5% from 2000. This increase was driven
mostly by a $17.8 million, or 47%, increase in mortgage banking income due to
higher mortgage origination activity. Total mortgage loan originations in 2001
were $3.5 billion, significantly higher than $1.5 billion in 2000. This
reflected an increase in refinancing activity due to lower interest rates.
Other fee income categories that increased included trust services, up 13%,
other service charges and fees, up 12%, and service charges on deposits, up 2%.
In contrast, brokerage and insurance income declined 12% due to weakening
equity markets.
Securities Gains
Securities gains in 2002 totaled $4.9 million, down $1.1 million, or 18% from
2001. The 2001 operating basis gains reflected gains associated with the sale
of securities to reduce the size of the investment portfolio but exclude a $5.3
million loss on the sale of $15 million of Pacific Gas & Electric commercial
paper acquired from the Huntington Money Market Fund. Securities gains in 2001
were down $31.1 million from 2000. Gains in 2000 included gross gains of $66.5
million from the sale of certain equity investments, substantially offset by
losses from the sale of lower yielding, fixed-income investment securities.
51
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Non-interest expense for the recent three years ended December 31 was as
follows:
Table 11 -- Non-Interest Expense (Operating Basis)
(in thousands of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------
Personnel costs $429,238 $404,945 $369,925
Equipment 66,905 70,563 70,724
Outside data processing and other services 66,026 59,286 57,223
Net Occupancy 57,682 59,055 58,549
Marketing 28,070 26,661 33,201
Professional services 25,616 23,097 20,289
Telecommunications 21,907 23,291 23,134
Printing and supplies 14,868 14,990 16,247
Franchise and other taxes 9,454 9,669 11,016
Amortization of intangible assets 862 11,045 9,951
Other 55,026 58,141 36,278
- --------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $775,654 $760,743 $706,537
================================================================================
On an operating basis, non-interest expense for 2002 was $775.7 million, up
$14.9 million, or 2%. Contributing to this increase were higher personnel costs
and, to a lesser degree, higher outside data processing expenses, which were
partially offset by lower amortization on intangibles and other expenses spread
over a number of expense categories.
Personnel costs increased $24.3 million, or 6%, in 2002 reflecting higher
salaries, incentive-based compensation, and pension and benefit costs. Higher
salaries reflected the expansion of management and employee talent at all
levels, including the credit workout group. In addition, and given a renewed
focus on sales, incentive-based compensation increased throughout the company,
most notably in mortgage banking which had a record production year. Higher
medical and pension costs were partially offset by gains related to stock
received from the demutualization of certain insurance companies where
Huntington owned related insurance policies. Outside services increased $6.7
million, or 11%, reflecting volume-driven costs, mostly mortgage banking
related. Professional services expense increased $2.5 million, or 11%, due
primarily to legal and other costs associated with the resolution of problem
credits. Marketing expense was up $1.4 million, or 5%, reflecting expanded
advertising activities.
Amortization of intangible assets, which includes amortization of goodwill,
declined due to the implementation of FASB Statement No. 142, Goodwill and
Other Intangible Assets, at the beginning of 2002. Equipment costs declined
$3.7 million, or 5%, reflecting lower maintenance costs. Net occupancy expense
was down $1.4 million, or 2%, due to a one-time real estate tax credit. Other
expense was down $3.1 million, or 5%, mostly due to lower insurance and
travel-related expenses, which was partially offset by higher operating losses.
Non-interest expense for 2001, on an operating basis, was $760.7 million, up
$54.2 million, or 8%. This increase was driven by a $35.0 million, or 10%,
increase in personnel costs and $21.9 million, or 60%, increase in other
expenses. The higher personnel costs reflected increased sales commissions
related to mortgage banking, capital markets, and annuity and mutual fund
sales, offset by lower benefit expense. The increase in other expense reflected
a $4.2 million impairment loss related to Pacific Gas & Electric commercial
paper and $7.0 million of premium expense related to the purchase of automobile
lease residual value insurance. See the "Credit Risk" section for more
information regarding automobile lease residual insurance.
INCOME TAXES
Income tax expense on an operating basis for 2002 was $119.3 million compared
with $111.4 million in 2001 and $148.0 million in 2000. On this basis,
Huntington's effective tax rate was 26.6%, 26.6%, and 29.2% in 2002, 2001, and
2000, respectively. Based on information currently available, Huntington
expects its 2003 effective tax rate to be comparable to 2002. Subsequent to
year-end 2002, the Internal Revenue Service completed the audit of Huntington's
consolidated federal income tax returns through the tax year 2001. The tax
audit resulted in no material impact to Huntington's financial statements. See
Note 21 to the consolidated financial statements for more information regarding
reported basis income taxes.
52
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
CREDIT RISK
The following credit risk discussion is on a reported basis. It is not adjusted
for the sale of the Florida loans as their impact on overall credit
performance, including the allowance for loan and lease losses as well as
credit-related ratios (e.g., net charge-offs), was not material.
Huntington's exposure to credit risk is managed through the use of consistent
underwriting standards that emphasize "in-market" lending while avoiding highly
leveraged transactions as well as excessive industry and other concentrations.
The credit administration function employs risk management techniques to ensure
that loans adhere to corporate policy and problem loans are promptly
identified. These procedures provide executive management with the information
necessary to implement policy adjustments where necessary, and to take
corrective actions on a proactive basis. Beginning in 2002, management focused
its commercial lending to customers with existing or potential relationships
within Huntington's primary markets. As a result, outstanding shared national
credits declined to $979 million at December 31, 2002, from $1.1 billion at the
same period-end last year and a peak of $1.5 billion at June 30, 2001.
Also in 2002, Huntington initiated a company-wide project to revise its
internal risk grading system for commercial and commercial real estate credits.
The company migrated from a single grading to a dual risk grading system that
measures the probability of default and loss in event of default separately.
The new dual risk grading system allows Huntington to be significantly more
specific in the risk assessment process. This dual grading process is an
industry standard and management believes that this change positions Huntington
to continue the focus on improving credit quality.
In late 2000, Huntington purchased residual value insurance on its leased
automobiles. The insurance policies insure the difference between the recorded
residual value and the fair value of the automobile at the end of the lease
term as evidenced by Auto Lease Guide Black Book valuations. These policies
provide first dollar loss coverage on the entire automobile lease portfolio at
October 1, 2000 and has a cap on insured losses of $120 million. Insured losses
on new automobile lease originations from October 2000 to April 30, 2002 have a
cap of $50 million and no cap for new automobile lease originations from May 1,
2002 through April 30, 2005, when the current policies expire. Management
believes these policies are sufficient to cover all losses in the portfolio.
Allowance for Loan and Lease Losses (ALLL)
The ALLL was $368.4 million at December 31, 2002, down from $410.6 million at
the end of 2001. This represented 1.76% of total loans and leases at year-end
2002 compared with 1.90% for 2001. Non-performing loans and leases at the end
of 2002 were covered by the ALLL 2.9 times versus 1.9 times at the end of last
year, one of the highest coverage ratios among peer banks. Given all of the
characteristics in Huntington's loan and lease portfolio, management believes
the ALLL is sufficient to absorb all of the credit losses inherent in the
portfolio.
Huntington allocates the ALLL to each loan category based on an expected loss
ratio determined by continuous assessment of credit quality based on portfolio
risk characteristics and other relevant factors such as historical performance,
significant acquisitions and dispositions of loans and leases, and internal
controls. For the commercial and industrial and commercial real estate credits,
expected loss factors are assigned by credit grade at the individual loan level
at the time the loan is originated. On a periodic basis, management reevaluates
these credit grades. 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 expected loss ratios based on the risk
characteristics of the various segments and giving consideration to existing
economic conditions and trends. Expected loss ratios incorporate factors such
as trends in past due and non-accrual amounts, recent loan loss experience,
current economic conditions, and risk characteristics of various loan
categories. Actual loss ratios experienced in the future, could vary from those
expected, as performance is a function of factors unique to each customer as
well as general economic conditions. To ensure adequacy to a higher degree of
confidence, a portion of the ALLL is considered unallocated. For analytical
purposes, the allocation of the ALLL is provided in Table 13. While amounts are
allocated to various portfolio segments, the total ALLL, excluding impairment
reserves prescribed under provisions of Statement of Financial Accounting
Standard No. 114, is available to absorb losses from any segment of the
portfolio.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
The following table shows the activity in Huntington's ALLL, along with
selected credit quality indicators.
Table 12 -- Summary of Allowance for Loan and Lease Losses and Related
Statistics (Reported Basis)
(in thousands of dollars) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 410,572 $ 297,880 $ 299,309 $ 290,948 $ 258,171
Loan and lease losses
Commercial loans and leases (128,868) (65,743) (18,013) (16,203) (24,512)
Real estate
Construction (4,863) (845) (238) (638) (80)
Commercial (15,012) (3,676) (1,522) (2,399) (2,115)
Consumer
Automobile leases (56,916) (52,775) (25,020) (13,209) (13,755)
Automobile loans--Indirect (57,580) (71,638) (47,687) (42,783) (39,107)
Home equity (15,312) (8,744) (5,626) (5,461) (4,905)
Residential mortgage (888) (879) (1,140) (1,404) (1,243)
Other consumer loans (10,399) (23,015) (11,599) (30,194) (40,638)
- ------------------------------------------------------------------------------------------------------------
Total loan and lease losses (289,838) (227,315) (110,845) (112,291) (126,355)
- ------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off
Commercial loans and leases 11,106 6,175 4,201 5,303 4,546
Real estate
Construction 403 179 165 192 441
Commercial 1,831 613 268 1,260 1,800
Consumer
Automobile leases 13,078 9,597 3,578 2,652 1,631
Automobile loans--Indirect 18,465 16,567 15,407 14,201 14,979
Home equity 1,806 719 557 750 398
Residential mortgage 16 94 133 268 367
Other consumer loans 3,814 3,924 3,447 7,579 7,686
- ------------------------------------------------------------------------------------------------------------
Total recoveries 50,519 37,868 27,756 32,205 31,848
- ------------------------------------------------------------------------------------------------------------
Net loan and lease losses (239,319) (189,447) (83,089) (80,086) (94,507)
- ------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses (1) 227,340 308,793 90,479 88,447 105,242
Allowance of securitized loans (9,165) (6,654) (16,719) -- --
Allowance for loans and leases sold (22,297) -- -- -- --
Allowance of loans and leases acquired 1,264 -- 7,900 -- 22,042
- ------------------------------------------------------------------------------------------------------------
Balance, end of year $ 368,395 $ 410,572 $ 297,880 $ 299,309 $ 290,948
============================================================================================================
Net loan and lease losses as a % of average loans and
leases 1.19% 0.90% 0.40% 0.40% 0.51%
Allowance for loan and lease losses as a % of
total end of period loans and leases 1.76 1.90 1.45 1.45 1.50
(1) Includes special provisions for loan and lease losses of $121.7 million in
2001 as discussed in the Restructuring and Other Non-Operating Items
section of this report.
Table 13 -- Allocation of Allowance for Loan and Lease Losses (Reported Basis)
(in thousands of dollars) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Commercial loans and leases $155,577 $174,713 $104,968 $ 94,978 $ 82,129
Real estate
Construction 12,542 17,685 12,596 14,863 10,729
Commercial 35,853 38,177 33,909 32,073 35,206
Consumer
Automobile leases 43,746 41,240 32,951 25,378 17,823
Automobile loans--Indirect 39,622 38,799 28,877 40,043 40,792
Home equity 18,621 24,054 19,246 17,089 15,691
Residential mortgage 8,566 6,013 4,421 5,393 5,247
Other consumer loans 8,085 19,757 22,516 21,523 47,715
- ------------------------------------------------------------------------------------------------------------
Total allocated 322,612 360,438 259,484 251,340 255,332
Total unallocated 45,783 50,134 38,396 47,969 35,616
- ------------------------------------------------------------------------------------------------------------
Total Allowance for Loan and Lease Losses $368,395 $410,572 $297,880 $299,309 $290,948
============================================================================================================
54
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Net Charge-offs
Total net charge-offs as a percent of average total loans and leases were 1.19%
in 2002 compared to 0.90% in 2001. The increase was due largely to $51.3
million in commercial loan charge-offs related to the special credit actions in
the fourth quarter of 2002. In 2001, Huntington made the decision to exit the
sub-prime automobile and truck and equipment lending business, which have a
combined balance of $69.7 million at December 31, 2002, down from $144.3
million at the end of 2001. Excluding net charge-offs related to these exited
businesses, total net charge-offs in 2002 and 2001 were 1.14% and 0.83%,
respectively. Commercial and commercial real estate net charge-offs, spread
over a number of companies in the retail trade, manufacturing, services, and
communications sectors, were 1.20% in the current year versus 0.46% in 2001.
Excluding the net charge-offs related to the fourth quarter 2002 special credit
actions, total net charge-offs and total commercial and commercial real estate
net charge-offs for 2002 were 0.75% and 0.89%, respectively. Consumer
charge-offs were 0.87% in 2002 compared with 1.10% in 2001. Indirect automobile
loan and lease net charge-offs were 1.29% in 2002 compared with 1.67% in 2001.
Table 14 shows the amount of net charge-offs by loan type as a percentage of
average loans and leases.
Table 14 -- Net Loan and Lease Charge-offs (Reported Basis)
(in thousands of dollars) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Net Charge-offs by Type
Commercial loans and leases $117,528 $ 52,000 $13,812 $10,900 $19,966
Commercial real estate 17,641 3,729 1,327 1,585 (46)
- -------------------------------------------------------------------------------------------------------------------
Total commercial and commercial real estate 135,169 55,729 15,139 12,485 19,920
- -------------------------------------------------------------------------------------------------------------------
Consumer
Automobile leases 43,837 47,377 21,442 10,557 12,124
Automobile loans--Indirect 31,597 48,280 32,280 28,582 24,128
- -------------------------------------------------------------------------------------------------------------------
Total automobile leases and loans 75,434 95,657 53,722 39,139 36,252
- -------------------------------------------------------------------------------------------------------------------
Home equity 13,506 14,588 6,909 6,096 5,530
Residential mortgage 872 785 1,007 1,136 876
Other consumer loans 4,524 7,778 6,312 21,230 31,929
- -------------------------------------------------------------------------------------------------------------------
Total consumer 94,336 118,808 67,950 67,601 74,587
- -------------------------------------------------------------------------------------------------------------------
Total Net Charge-offs, Excluding Exited
Businesses 229,505 174,537 83,089 80,086 94,507
Net charge-offs related to exited businesses 9,814 14,910 -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total Net Charge-offs $239,319 $189,447 $83,089 $80,086 $94,507
===================================================================================================================
Net Charge-offs as a % of Average Loans
and Leases
Commercial loans and leases 2.07% 0.78% 0.21% 0.18% 0.35%
Commercial real estate 0.74 0.16 0.06 0.07 --
- -------------------------------------------------------------------------------------------------------------------
Total commercial and commercial real estate 1.20 0.46 0.13 0.12 0.21
- -------------------------------------------------------------------------------------------------------------------
Consumer
Automobile leases 1.38 1.48 0.72 0.45 0.69
Automobile loans--Indirect 1.18 1.90 1.08 0.83 0.74
- -------------------------------------------------------------------------------------------------------------------
Total automobile leases and loans 1.29 1.67 0.90 0.68 0.72
- -------------------------------------------------------------------------------------------------------------------
Home equity 0.44 0.43 0.23 0.26 0.29
Residential mortgage 0.06 0.07 0.07 0.08 0.06
Other consumer loans 1.09 1.37 1.20 1.93 2.25
- -------------------------------------------------------------------------------------------------------------------
Total consumer 0.87 1.10 0.63 0.63 0.77
- -------------------------------------------------------------------------------------------------------------------
Total Net Charge-offs, Excluding Exited
Businesses 1.14% 0.83% 0.40% 0.40% 0.51%
===================================================================================================================
Total Net Charge-offs 1.19% 0.90% 0.40% 0.40% 0.51%
===================================================================================================================
55
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Indirect automobile loan and lease origination vintages in 2002 and 2001
exhibited improved credit quality performance compared with the 1999 fourth
quarter to 2000 fourth quarter vintage, a period when the company targeted a
broader credit quality spectrum of borrowers. This improvement represents a
specific change in credit quality focus, part of Huntington's broader
commitment to improve automobile loan and lease underwriting standards and
credit quality performance. Table 15 reflects vintage performance for
Huntington's managed indirect automobile loan and lease portfolios through
December 31, 2002:
Table 15 -- Managed Indirect Automobile Loan and Lease Portfolio Performance by
Vintage (Reported Basis)
Loan and lease origination period
--------------------------------
4Q '99 to 1Q '01 to 1Q '02 to
Product 4Q '00 4Q '01 4Q '02
- --------------------------------------------------------------------------------------------------------
Indirect automobile loans -- % of portfolio at December 31, 2001 34% 48% --
-- % of portfolio at December 31, 2002 17 27 50%
-- cumulative loss ratios after 2 quarters 0.07 0.04 0.03
-- cumulative loss ratios after 4 quarters 0.79 0.52 0.39
-- cumulative loss ratios after 6 quarters 1.72 1.08 N/A
Indirect automobile leases -- % of portfolio at December 31, 2001 39% 34% --
-- % of portfolio at December 31, 2002 27 27 35%
-- cumulative loss ratios after 2 quarters 0.04 0.06 0.02
-- cumulative loss ratios after 4 quarters 0.60 0.62 0.26
-- cumulative loss ratios after 6 quarters 1.48 1.31 N/A
N/A--Not applicable.
The impact of improved underwriting is shown in the six-quarter cumulative loss
ratios. For the 1999 fourth quarter to 2000 fourth quarter vintage, the
six-month cumulative loss ratios for automobile loans and automobile leases
were 1.72% and 1.48%, respectively. In contrast, the comparable six-quarter
cumulative loss ratios for the 2001 automobile loan and automobile lease
vintages were lower at 1.08% and 1.31%, respectively.
The lower quality 1999 fourth quarter to 2000 fourth quarter vintage
represented 17% and 27% of the automobile loans and leases outstanding at the
end of 2002. These relative percentages declined from 34% and 39%,
respectively, at the end of 2001. Although the relative portion of the poorer
quality vintage is diminishing, these loans and leases nevertheless contributed
to higher loss levels in 2002 compared with 2001, as did a weakened used car
market.
Huntington's management expects favorable trends in credit quality and net
charge-offs entering 2003 assuming no further deterioration in the economy.
Non-performing Assets
Non-performing assets consist of loans and leases that are no longer accruing
interest, loans that have been renegotiated to below market rates based upon
financial difficulties of the borrower, and real estate acquired through
foreclosure. Commercial and commercial real estate loans are generally placed
on non-accrual status when collection of principal or interest is in doubt or
when the loan is 90 days past due. When interest accruals are suspended,
accrued interest income is reversed with current year accruals charged to
earnings and prior year amounts generally charged off as a credit loss.
Consumer loans, excluding residential mortgages, are not placed on non-accrual
status but are charged off in accordance with regulatory statutes, which is
generally no more than 120 days past due. Residential mortgages, while highly
secured, are placed on non-accrual status within 180 days past due as to
principal and 210 days past due as to interest, regardless of security. A
charge-off on a residential mortgage is recorded when the loan has been
foreclosed and the loan balance exceeds the fair value of the real estate. The
fair value of the security is then recorded as real estate owned. When, in
management's judgment, the borrower's ability to make periodic interest and
principal payments resumes and collectibility is no longer in doubt, the loan
is returned to accrual status.
Total NPAs were $136.7 million at December 31, 2002, compared with $227.5
million the end of 2001 and represents 0.65% and 1.05% of total loans and
leases and other real estate. Management expects the level of NPAs to decline
slightly by the end of 2003.
56
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Table 16 -- Non-Performing Assets and Past Due Loans and Leases (Reported Basis)
December 31,
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Non-accrual loans and leases
Commercial loans and leases $ 91,861 $159,637 $ 55,804 $42,958 $34,586
Real estate
Construction 5,554 13,885 8,687 10,785 10,181
Commercial 21,211 34,475 18,015 16,131 13,243
Residential 9,443 11,836 10,174 11,866 14,419
- -----------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans and leases 128,069 219,833 92,680 81,740 72,429
Renegotiated loans -- 1,276 1,304 1,330 4,706
- -----------------------------------------------------------------------------------------------------------------------------
Total Non-Performing Loans and Leases 128,069 221,109 93,984 83,070 77,135
- -----------------------------------------------------------------------------------------------------------------------------
Other real estate, net 8,654 6,384 11,413 15,171 18,964
- -----------------------------------------------------------------------------------------------------------------------------
Total Non-Performing Assets $136,723 $227,493 $105,397 $98,241 $96,099
=============================================================================================================================
Accruing Loans and Leases Past Due 90 Days or More $ 73,122 $ 91,635 $ 80,306 $61,287 $51,037
=============================================================================================================================
Non-performing loans and leases as a % of total loans and leases 0.61% 1.02% 0.46% 0.40% 0.40%
Non-performing assets as a % of total loans and leases and other real estate 0.65 1.05 0.51 0.47 0.49
Allowance for loan and lease losses as a % of non-performing loans and leases 288 186 317 360 377
Allowance for loan and lease losses as a % of non-performing assets 269 181 283 305 303
Accruing loans and leases past due 90 days or more to total loans and leases 0.35 0.42 0.39 0.30 0.26
Note: For 2002, the amount of interest income which would have been recorded
under the original terms for total loans and leases classified as non-accrual
or renegotiated was $12.6 million. Amounts actually collected and recorded as
interest income for these loans and leases was $5.1 million.
Loans and leases past due ninety days or more but continuing to accrue interest
decreased to $73.1 million at December 31, 2002, down from $91.6 million a year
earlier. This represented 0.35% and 0.42% of total loans and leases,
respectively.
Table 17 reflects the change in NPAs for the recent four years and includes
NPAs in the Florida operations to the date of their sale in the 2002 first
quarter:
Table 17 -- Non-Performing Asset Activity (Reported Basis)
(in thousands of dollars) 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Beginning of Period $ 227,493 $ 105,397 $ 98,241 $ 96,099
New non-performing assets 260,229 329,882 113,870 106,014
Returns to accruing status (17,124) (2,767) (5,914) (5,744)
Loan and lease losses (152,616) (67,541) (18,052) (19,547)
Payments (136,774) (106,839) (68,982) (67,682)
Sales (44,485)(1) (30,639) (13,766) (10,899)
- --------------------------------------------------------------------------------------------------------------------
End of Period $ 136,723 $ 227,493 $105,397 $ 98,241
====================================================================================================================
(1) Includes $6.5 million related to the sale of the Florida operations and
$21.4 million related to the 4th quarter special credit actions.
57
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
INTEREST RATE RISK MANAGEMENT
Huntington seeks to minimize earnings volatility by managing the sensitivity of
net interest income and the fair value of its net assets to changes in market
interest rates. The Board of Directors and the Asset and Liability Management
Committee (ALCO) oversee various risks by establishing broad policies and
specific operating limits that govern a variety of risks inherent in
operations, including liquidity, counterparty credit risk, settlement, and
market risks.
Market risk is the potential for declines in the fair value of financial
instruments due to changes in interest rates, exchange rates, and equity
prices. Interest rate risk is Huntington's primary market risk. It results from
timing differences in the repricing and maturity of assets and liabilities and
changes in relationships between market interest rates and the yields on assets
and rates on liabilities, including the impact of embedded options.
Interest rate risk management is a dynamic process that encompasses new
business flows onto the balance sheet, wholesale investment and funding, and
the changing market and business environment. Effective management of interest
rate risk begins with appropriately diversified investments and funding
sources. To accomplish overall balance sheet objectives, management regularly
accesses money, bond, futures, and options markets, as well as trading
exchanges. In addition, Huntington contracts with dealers in over-the-counter
financial instruments for interest rate swaps. ALCO regularly monitors position
concentrations and the level of interest rate sensitivity to ensure compliance
with approved risk tolerances.
Interest rate risk modeling is performed monthly. An income simulation model is
used to measure the sensitivity of forecasted net interest income to changes in
market rates over a one-year horizon. Market value risk (referred to as
Economic Value of Equity, or EVE) is measured using a static balance sheet. The
models used for these measurements take into account prepayment speeds on
mortgage loans, mortgage-backed securities, and consumer installment loans, as
well as cash flows of other loans and deposits. Balance sheet growth
assumptions are also considered in the income simulation model. Moreover, the
models incorporate the effects of embedded options, such as interest rate caps,
floors, and call options, and account for changes in relationships among
interest rates.
The baseline scenario for the income simulation, with which all others are
compared, is based on market interest rates implied by the prevailing yield
curve. Alternative market rate scenarios are then employed to determine their
impact on the baseline scenario. These alternative market rate scenarios
include spot rates remaining unchanged for the entire measurement period,
parallel rate shifts on both a gradual and immediate basis, as well as
movements in rates that alter the shape of the yield curve. Scenarios are also
developed to measure basis risk, such as the impact of LIBOR-based rates rising
or falling faster than the prime rate.
When evaluating short-term interest rate risk exposure, management uses, for
its primary measurement, scenarios that model 200 basis point increasing and
decreasing parallel shifts in the yield curve during the next twelve-month
period. At December 31, 2002, only the 200 basis point increasing parallel
shift in the yield curve was modeled because a 200 basis point decrease in the
interest rate curve was not feasible given the overall low level of interest
rates. At the end of 2002, that scenario modeled net interest income 0.7% lower
than the internal forecast of net interest income over the same time period
using the current level of forward rates. This compares with an internal policy
limit of a 2.0% change in net interest income given a 200 basis point scenario.
Management believes further declines in market rates would put modest downward
pressure on net interest income, resulting from the implicit pricing floors in
non-maturity deposits.
Net interest income and the net interest margin have been adversely impacted in
recent months by: (1) the flattening of the yield curve; (2) the lower yield on
the higher quality automobile loan and lease originations; (3) the rapid growth
of lower-yield residential adjustable-rate mortgage loans retained on the
balance sheet; (4) high repayments of residential mortgage loans and
mortgage-backed securities; and (5) fixed-rate consumer loan repayments being
reinvested at lower market rates. Net interest income will continue to be
adversely affected by these factors, should declines continue in the future.
The primary measurement for EVE risk assumes an immediate and parallel increase
in rates of 200 basis points. At December 31, 2002, the model indicated that
such an increase in rates would be expected to reduce the EVE by 3.8% and
compares with an estimated negative impact of 2.9% at December 31, 2001.
The model is a useful but simplified representation of the bank's underlying
interest rate risk profile. Simulations reflect choices of statistical
techniques, functional forms, model parameters, and numerous uncertain
assumptions. Nonetheless, experience has demonstrated and management believes
that these models provide reliable guidance for measuring and managing interest
rate sensitivity.
58
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
LIQUIDITY
Liquidity is the ability to meet cash flow needs on a timely basis at a
reasonable cost. The liquidity of the Bank is used to make loans and to repay
deposit liabilities as they become due or are demanded by customers.
Huntington's ALCO establishes guidelines and regularly monitors the overall
liquidity position of the Bank and the parent company to ensure that various
alternative strategies exist to cover unanticipated events that could affect
liquidity. Management believes that sufficient liquidity exists at both the
parent company and the Bank to meet their estimated needs.
Bank Liquidity
The Bank manages both its external and internal liquidity. External liquidity
includes maintaining funding sources for the Bank's activities. These
activities primarily consist of making loans to customers, repaying the Bank's
obligations as they become due, and supporting the cost of operating the Bank.
Selected information regarding the Bank's short-term borrowings is found in
Table 19 and the maturity of obligations, including payments due under
operating leases, is reflected in Table 20.
Deposits are the Bank's primary source of funding, 87% provided by the Regional
Banking segment. Table 18 details the types and sources of deposits by business
segment at December 31, 2002, and compares these balances by type and source to
balances at December 31, 2001.
Table 18 -- Deposit Liabilities
(in millions of dollars) December 31, 2002 December 31, 2001
- --------------------------------------------------------------------------------
By Type Balance % Balance %
- --------------------------------------------------------------------------------
Demand deposits
Non-interest bearing $ 3,074 17.6 $ 3,635 18.0
Interest bearing 5,374 30.7 5,723 28.3
Savings deposits 2,851 16.3 3,466 17.2
Other domestic time deposits 3,956 22.6 5,868 29.1
- --------------------------------------------------------------------------------
Total Core Deposits 15,255 87.2 18,692 92.6
- --------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 732 4.2 1,131 5.6
Brokered time deposits and negotiable CDs 1,093 6.2 138 0.7
Foreign time deposits 419 2.4 226 1.1
- --------------------------------------------------------------------------------
Total Deposits $17,499 100.0 $20,187 100.0
================================================================================
By Business Segment
Regional Banking
Central Ohio / West Virginia $ 5,361 30.6 $ 5,217 25.8
Northern Ohio 3,602 20.6 3,256 16.1
Southern Ohio / Kentucky 1,365 7.8 1,291 6.4
West Michigan 2,402 13.7 2,227 11.0
East Michigan 1,962 11.2 1,895 9.4
Indiana 613 3.5 578 2.9
- --------------------------------------------------------------------------------
Total Regional Banking 15,305 87.4 14,464 71.6
- --------------------------------------------------------------------------------
Dealer Sales 59 0.3 82 0.4
Private Financial Group 924 5.3 717 3.6
Treasury / Other 1,211 7.0 256 1.3
- --------------------------------------------------------------------------------
Total Deposits excluding Florida 17,499 100.0 15,519 76.9
Florida -- -- 4,668 23.1
- --------------------------------------------------------------------------------
Total Deposits $17,499 100.0 $20,187 100.0
================================================================================
Domestic time deposits of $100,000 or more, which include brokered time
deposits and negotiable certificates of deposit and IRAs included in Other
domestic time deposits, totaled $1.9 billion at December 31, 2002. These time
deposits mature as follows: $343 million within three months, $182 million
within six but more than three months, $212 million within one year but more
than six
59
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
months, and $1,166 million maturing beyond one year. At December 31, 2002,
Huntington's loans and leases were 120% of total deposits. This compares with
107% of total deposits at December 31, 2001, or 122% excluding the loans and
deposits sold with the Florida operations.
The Bank's ALCO establishes policies and monitors guidelines to diversify the
Bank's wholesale funding sources to avoid concentrations in any one market
source. Wholesale funding sources include Federal funds purchased, securities
sold under repurchase agreements, non-core deposits, and medium- and long-term
debt. To enhance the availability of liquidity, the Bank has a $6.0 billion
domestic bank note program. This program was renewed in 2002. At December 31,
2002, a total of $5.7 billion in domestic bank notes remained available for
future issuance under this program. In addition, the Bank shares a $2.0 billion
Euronote program with the parent company. This program was renewed on February
6, 2003, and is subject to annual renewal. Approximately $1.3 billion was
available under this program at December 31, 2002. Both programs enable the
Bank to issue notes with maturities from one month to thirty years. During
2002, management added significantly to its wholesale borrowings, primarily due
to the loss of deposit funding with the sale of Huntington's Florida banking
operations. In adding wholesale borrowings, management also lengthened the
average maturity of these borrowings. At the end of 2002, the Bank had
wholesale borrowings of $5.9 billion, which had a weighted-average maturity of
1.7 years.
Table 19 -- Short-Term Borrowings
Year Ended December 31,
- --------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------------
Federal Funds purchased and Repurchase Agreements
Balance at year-end $2,458,523 $1,913,607 $1,822,480
Weighted average interest rate at year-end 1.49% 2.24% 5.91%
Maximum amount outstanding at month-end during the
year $2,503,962 $3,094,647 $2,093,546
Average amount outstanding during the year $2,072,075 $2,258,860 $1,831,228
Weighted average interest rate during the year 1.98% 4.11% 5.68%
The Bank is also a member of the Federal Home Loan Bank of Cincinnati (FHLB),
which provides funding through advances to its members that are collateralized
with mortgage-related assets. These advances carry maturities from one month to
twenty years. At December 31, 2002, the Bank had $1.0 billion of advances from
the FHLB, compared with only $17 million of advances at December 31, 2001.
During 2002, the Bank significantly increased its borrowing capability with the
FHLB as these advances provided a flexible source of funding. At December 31,
2002, a total of $2.7 billion of residential mortgage loans, commercial real
estate loans, and home equity loans were pledged to secure borrowing under
these advances.
Table 20 -- Maturity of Bank Obligations
Payments Due by Period
- ---------------------------------------------------------------------------------
2008 &
(in millions of dollars) 2003 2004 2005 2006 2007 After Total
- ---------------------------------------------------------------------------------
Medium-term notes $540.1 $855.0 $510.0 $ -- $ -- $ -- $1,905.1
Subordinated notes 253.0 -- -- -- -- 485.7 738.7
Preferred securities -- -- -- -- -- 50.0 50.0
Federal Home Loan Bank advances 10.0 3.0 100.0 -- 900.0 -- 1,013.0
Operating leases 35.1 33.1 29.7 27.6 26.2 218.6 370.3
- ---------------------------------------------------------------------------------
Total $838.2 $891.1 $639.7 $27.6 $926.2 $754.3 $4,077.1
=================================================================================
Huntington maintains a portfolio of securities that can be used as a secondary
source of liquidity (to the extent that securities are not pledged),
substantially all of which is held by the Bank. At December 31, 2002, the
portfolio of securities available for sale totaled $3.4 billion, of which $2.6
billion was pledged to secure public and trust deposits, trading account
liabilities, U.S. Treasury demand notes, and securities sold under repurchase
agreements. The composition and maturity of these securities are presented in
Table 21. Weighted average yields were calculated using amortized cost and on a
fully taxable equivalent basis assuming a 35% tax rate, excluding marketable
equity securities.
60
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Table 21 -- Securities Available for Sale
December 31,
- -------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
- -------------------------------------------------------------------------------------
U.S. Treasury and Federal Agencies $2,627,684 $2,322,079 $3,284,031
Other 775,685 527,500 806,494
- -------------------------------------------------------------------------------------
Total Securities Available for Sale $3,403,369 $2,849,579 $4,090,525
=====================================================================================
Amortized
Cost Fair Value Yield
- -------------------------------------------------------------------------------------
U.S. Treasury
1-5 years $ 13,434 $ 14,066 3.51%
6-10 years 4,704 5,367 5.51
Over 10 years 412 479 6.07
- -------------------------------------------------------------------------------
Total U.S. Treasury 18,550 19,912 4.07
- -------------------------------------------------------------------------------
Federal Agencies
Mortgage-backed
1-5 years 34,196 35,166 5.29
6-10 years 264,219 270,779 5.33
Over 10 years 873,552 901,417 5.78
- -------------------------------------------------------------------------------
Total Mortgage-backed 1,171,967 1,207,362 5.66
- -------------------------------------------------------------------------------
Other agencies
Under 1 year 34,923 35,966 4.91
1-5 years 758,032 783,533 5.21
6-10 years 95,617 97,095 4.79
Over 10 years 477,185 483,816 5.50
- -------------------------------------------------------------------------------
Total Other 1,365,757 1,400,410 5.27
- -------------------------------------------------------------------------------
Total U.S. Treasury and Federal Agencies 2,556,274 2,627,684 5.44
- -------------------------------------------------------------------------------
Other
Under 1 year 7,133 7,183 8.43
1-5 years 62,939 63,886 6.53
6-10 years 49,581 51,046 6.61
Over 10 years 451,108 449,958 5.71
Retained interest in securitizations 146,160 159,978 15.56
Marketable equity securities 42,846 43,634
- -------------------------------------------------------------------------------
Total Other 759,767 775,685 7.88
- -------------------------------------------------------------------------------
Total Securities Available for Sale at December 31, 2002 $3,316,041 $3,403,369 5.98%
==============================================================================
A significant factor impacting the Bank's internal liquidity is the repayment
of principal and the receipt of interest on the Bank's loans. The Bank's
consumer loan portfolio contains a significant amount of loans with relatively
shorter weighted-average lives to maturity. In addition, commercial loans and
leases and real estate construction portfolios have relatively short maturities
with 44% of the combined principal maturing in one year or less, as reflected
in Table 22.
Table 22 -- Maturity Schedule of Selected Loans and Leases
At December 31, 2002
- ---------------------------------------------------------------------------------------
One Year or One to After
(in millions of dollars) Less Five Years Five Years Total
- ---------------------------------------------------------------------------------------
Commercial loans and leases $2,490 $2,481 $635 $5,606
Real estate--construction 450 544 18 1,012
- ---------------------------------------------------------------------------------------
Total $2,940 $3,025 $653 $6,618
=======================================================================================
Variable interest rates $2,813 $2,582 $509 $5,904
Fixed interest rates 127 443 144 714
- ---------------------------------------------------------------------------------------
Total $2,940 $3,025 $653 $6,618
=======================================================================================
61
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
There are other sources of liquidity should they be needed. These sources
include the sale and securitization of loans, the ability to acquire additional
national market, non-core deposits, additional collateralized borrowings such
as FHLB advances, the issuance of debt securities, and the issuance of
preferred or common securities in public or private transactions. The Bank also
can borrow through the Federal Reserve's discount window. At December 31, 2002,
a total of $1.5 billion of commercial loans had been pledged to secure
potential future borrowings that could be obtained through this facility.
Parent Company Liquidity
Parent company liquidity consists primarily of a program of regular dividends
from its subsidiaries, predominantly the Bank, its medium-term note program,
and a commercial paper program issued through Huntington Bancshares Financial
Corporation, a non-bank subsidiary. The Bank could declare dividends to be paid
to the parent company, without regulatory approval, of $161.5 million at
December 31, 2002.
The parent company uses this liquidity to pay dividends to its stockholders,
repurchase shares of its common stock, meet its financial obligations, fund
certain non-bank activities, finance acquisitions, and for other general
corporate purposes. At December 31, 2002, the parent company had $455 million
issued under a $750 million medium-term note program, leaving $295 million
available for future funding needs. At December 31, 2002, the parent company
had $140 million in medium-term notes outstanding: $40 million will mature in
2003 and $100 million in 2004. As mentioned earlier, the parent company shares
a $2.0 billion Euronote program with the Bank. Availability of funding through
these two programs amounted to $1.6 billion at December 31, 2002.
In 2002, the liquidity of the parent company was favorably affected by the sale
of the Florida banking operations through a subsequent recapitalization of the
Bank. This recapitalization returned $670 million of capital to the parent
company. During 2002, subsequent to the recapitalization, the parent company
repurchased 19.2 million shares of its common stock for $370 million. Details
of this program are discussed further under the Capital section that follows.
At December 31, 2002, the parent company had $546.9 million of cash and cash
equivalents on hand. Management believes that the parent company has sufficient
liquidity to meet its cash flow obligations in 2003, including payment of its
current dividend, without relying upon the capital markets for financing.
CAPITAL
Capital is managed at each legal subsidiary based upon the respective risks and
growth opportunities, as well as regulatory requirements. Management places
significant emphasis on the maintenance of strong capital, which promotes
investor confidence, provides access to the national markets under favorable
terms, and enhances business growth and acquisition opportunities. The
importance of managing capital is also recognized and management continually
strives to maintain an appropriate balance between capital adequacy and returns
to shareholders.
Shareholders' equity declined $112.6 million during 2002 compared with an
increase of $50.4 million in the previous year. Increases to shareholders'
equity reflecting higher net earnings, equity issued for acquisitions, and the
positive mark-to-market of securities available for sale and derivatives used
to hedge cash flows for 2002, were more than offset by dividends and
repurchases of common shares. Cash dividends declared were $0.64 per share in
2002, down from $0.72 per share in 2001, and $0.76 per share in 2000.
Average shareholders' equity in 2002 was $2.3 billion, down modestly from $2.4
billion in 2001. The ratio of average equity to average assets in 2002 was
8.86% versus 8.47% a year ago. Tangible period-end equity to tangible
period-end assets was 7.62% at the end of 2002, up significantly from 6.12% a
year earlier, reflecting the tangible capital generated from the sale of the
Florida operations offset by the subsequent share repurchase program in 2002.
In February 2002, the Board of Directors authorized a share repurchase program
for up to 22 million shares and canceled the previously existing authorization.
Through the end of December 2002, 19.2 million shares of common stock had been
repurchased through open market and privately negotiated transactions. In
January 2003, the Board of Directors authorized a new share repurchase program,
canceling the remaining shares under the prior authorization. The new
repurchase program authorizes the repurchase of 8 million shares in open market
and privately negotiated transactions. Repurchased shares are reserved for
reissue in connection with dividend reinvestment and employee benefit plans as
well as for acquisitions and other corporate purposes. Management has indicated
its intent to maintain a minimum tangible equity to asset ratio of 7.00% on a
long-term basis.
62
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Risk-based capital guidelines established by the Federal Reserve Board set
minimum capital requirements and require institutions to calculate risk-based
capital ratios by assigning risk weightings to assets and off-balance sheet
items, such as interest rate swaps, loan commitments, and securitizations.
Huntington's Tier 1 risk-based capital ratio, total risk-based capital ratio,
leverage ratio, and risk-adjusted assets for the recent five years are shown in
Table 23:
Table 23 -- Capital Adequacy
At December 31,
"Well-Capitalized" --------------------------------------------
(in millions of dollars) Minimums 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Assets N/A $27,235 $27,896 $26,880 $25,298 $24,239
Ratios:
Tier 1 Risk-Based Capital 6.00% 8.69% 7.24% 7.19% 7.52% 7.10%
Total Risk-Based Capital 10.00% 11.60 10.29 10.46 10.72 10.73
Tier 1 Leverage 5.00% 8.89 7.41 6.93 6.72 6.37
Huntington is supervised and regulated by the Federal Reserve whereas the Bank
is primarily supervised and regulated by the Office of the Comptroller of the
Currency, which establishes similar regulatory capital guidelines for banks.
The Bank also had regulatory capital ratios in excess of the levels established
for well-capitalized institutions.
During 2002, Huntington acquired Haberer Investment Advisor, Inc. (Haberer), a
Cincinnati-based registered investment advisory firm with approximately $500
million in assets under management. Huntington paid cash to Haberer
shareholders and issued 202,695 shares of treasury stock. Also during 2002,
Huntington acquired LeaseNet Group, Inc. (LeaseNet), a $90 million leasing
company located in Dublin, Ohio. Huntington paid cash to LeaseNet shareholders
and issued 835,035 shares of treasury stock. See Huntington's Statement of
Changes in Shareholders' Equity for a detail of activity.
LINES OF BUSINESS DISCUSSION--OPERATING BASIS
Below is a brief description of each line of business and a discussion of
business segment results. Regional Banking, Dealer Sales, and the Private
Financial Group are the major business lines. The fourth segment includes the
impact of the Treasury function and other unallocated assets, liabilities,
revenue, and expense. Financial information for each line of business,
including a reconciliation to reported earnings, can also be found in Note 25
to the consolidated financial statements. The chief decision-makers for
Huntington rely on operating basis earnings for review of performance and for
critical decision-making purposes and, therefore, the information below is
presented on an operating basis. During 2002, the previously reported segments,
Retail Banking and Corporate Banking, were combined and renamed Regional
Banking. In addition, changes were made in 2002 to the methodologies utilized
for certain balance sheet and income statement allocations from Huntington's
management reporting system. The prior periods have not been restated for these
methodology changes. The following tables within each segment show performance
on this basis for the most recent three years.
Regional Banking
Regional Banking provides products and services to retail, business banking,
and commercial customers. This segment's products include home equity loans,
first mortgage loans, direct installment loans, business loans, personal and
business deposit products, as well as sales of investment and insurance
services. These products and services are offered in six operating regions
within the five states of Ohio, Michigan, Indiana, West Virginia, and Kentucky
through Huntington's traditional banking network, Direct Bank--Huntington's
customer service center, and Web Bank at www.huntington.com. Regional Banking
also represents middle-market and large commercial banking relationships which
use a variety of banking products and services including, but not limited to,
commercial loans, international trade, and cash management.
Table 24 -- Regional Banking Results
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Net interest income $592,977 $626,647 $656,856
Provision for loan and lease losses 141,190 96,943 36,180
Non-interest income 279,780 262,432 276,350
Non-interest expense 559,302 523,994 570,788
- ------------------------------------------------------------------------------------------------------------------
Income before taxes 172,265 268,142 326,238
Income taxes 60,293 93,850 112,549
- ------------------------------------------------------------------------------------------------------------------
Operating Income $111,972 $174,292 $213,689
==================================================================================================================
63
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Regional Banking's operating income was $112.0 million in 2002 compared to
$174.3 million for 2001 and $213.7 million for 2000. Net interest income
decreased $33.7 million, or 5%, in 2002. Regional Banking provides net funds to
Huntington's other business segments since its deposits exceed its loans and,
therefore, receives an earnings credit for those excess deposits. The declining
interest rate environment resulted in lower credit for this deposit excess and
continued margin compression in 2002.
The provision for loan and lease losses increased $44.2 million in 2002 over
2001 versus an increase of $60.8 million in 2001 over 2000. The increases in
2002 and 2001 were indicative of the deteriorating credit quality that began
late in 2000. Provision expense reflects net charge-offs (excluding the special
charges for 2001) and charges for loan growth for the period. In 2002, net
charge-offs were 0.76% compared with 0.54% for 2001.
Non-interest income rose $17.3 million, or 7%, in 2002, following a $13.9
million, or 5%, decline in 2001. Service charges on deposit accounts increased
12% (personal 9% and corporate 14%) to $144.7 million. The growth in personal
service charges was primarily attributable to a new pricing structure and
deposit volume initiatives. The corporate increase was the result of customers
choosing to pay fees in lieu of maintaining balances due to lower earnings
credit paid to commercial checking customers. In addition, electronic banking
fees increased 10%. These revenue increases were partially offset by a 12%
decline in total mortgage banking income. Gross mortgage banking revenue
increased commensurate with a 22% increase in closed loans, but significant
impairment of mortgage servicing rights pushed total mortgage banking income
down in 2002. The declining rate environment during the recent twelve months
caused accelerated mortgage prepayment expectations and, therefore, recognition
of asset impairment of capitalized mortgage servicing rights and increased
amortization. Excluding mortgage banking income, non-interest income increased
11% in 2002.
Non-interest expense was $559.3 million in 2002, up $35.3 million, or 7%, when
compared to $524.0 million in 2001. Non-interest expense for 2001 was down
$46.8 million, or 8%, from 2000. Personnel costs were $240.9 million, up 8%,
compared with $223.8 million in 2001. The increase reflected investment in
strengthening Regional Banking's management, business banking sales, and credit
administration teams. In addition, this segment experienced increases in
performance-based incentive compensation commensurate with production and
revenue growth.
Total Regional Banking average loans and leases for 2002 increased to $12.3
billion, or 6%, over 2001. Mortgage and home equity lending represented the
majority of the growth in average earning assets. Average mortgage loans
increased 46% from $817 million in 2001 to nearly $1.2 billion in 2002. Home
equity loans and lines of credit increased 19% from $1.8 billion in 2001 to
$2.1 billion in 2002. Commercial real estate loans for 2002 grew $213.6
million, or 7%, while average commercial loans and leases were down $373.1
million, or 8%, from 2001.
Total average deposits for 2002 increased $1.1 billion, or 8%, from 2001. An
enhanced focus on relationship selling and the economic environment propelled
growth in checking and money market deposits. While demand for retail CD's
remained strong, Regional Banking protected interest margins by refraining from
paying aggressive competitive rates resulting in a 2% decline in CD balances
year-over-year. Average deposit growth excluding CD's was 15% in 2002. As noted
in the PFG line of business review that follows, Regional Banking also
experienced growth in its packaged investment product sales through the retail
channel.
Regional Banking contributed 34% of operating earnings in 2002 and comprised
61% of its total loan and lease portfolio and 87% of total deposits at December
31, 2002.
Dealer Sales
Dealer Sales provides products and services pertaining to the automobile
lending sector and includes 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.
64
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Table 25 -- Dealer Sales Results
Year Ended December 31,
- --------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------
Net interest income $227,364 $224,977 $192,140
Provision for loan and lease losses 77,487 74,603 46,113
Non-interest income 19,927 21,643 31,266
Non-interest expense 75,066 67,126 55,751
- --------------------------------------------------------------------------------
Income before taxes 94,738 104,891 121,542
Income taxes 33,158 36,711 42,420
- --------------------------------------------------------------------------------
Operating Income $ 61,580 $ 68,180 $ 79,122
================================================================================
Dealer Sales operating earnings were $61.6 million in 2002, compared to $68.2
million in 2001 and $79.1 million for 2000. Higher provision for loan and lease
losses, reflecting weakened economic conditions, higher bankruptcies, and a
softer used car market, had an adverse impact on operating performance of this
segment in 2002 and 2001.
Net interest income was $227.4 million for 2002, up slightly from $225.0
million for 2001. Net interest income was $192.1 million for 2000. The change
in net interest income resulted from lower interest rates throughout 2002 as
compared to 2001, more than offset by a 5% increase in average loan and lease
balances. Indirect automobile loan and leases balances increased $408 million
to $5.8 billion during 2002 from $5.4 billion in 2001. Total indirect
automobile loan and lease originations were $3.5 billion in 2002 compared with
$3.4 billion in 2001.
The provision for loan and lease losses for 2002 increased $2.9 million from
2001 compared with an increase in 2001 of $28.5 million. Provision expense
attributed to net charge-offs was 1.29% for 2002 and 1.16% for 2001, excluding
the 2001 special charges related to credit quality. See Huntington's discussion
of losses related to certain origination vintages under the "Credit Risk"
section of this report.
Non-interest income decreased $1.7 million, or 8%, from 2001, reflecting lower
levels of insurance and other fee income received on originated loans as well
as lower income from securitized loans. Non-interest expense increased $7.9
million, or 12%, reflecting increased lease residual value insurance costs,
increased legal and collection related expenses, and investments associated
with enhanced technological capabilities.
Dealer Sales contributed 19% and 17% of 2002 operating earnings and operating
revenues, respectively, and represented 34% of total loans and leases
outstanding at December 31, 2002.
Private Financial Group (PFG)
PFG provides products and services designed to meet the needs of Huntington's
higher wealth customers. Revenue is derived through the sale of personal trust,
asset management, investment advisory, brokerage, insurance, and deposit and
loan products and services. Income and related expenses from the sale of
brokerage and insurance products is shared with the line of business that
generated the sale or provided the customer referral.
Table 26 -- PFG Results
Year Ended December 31,
- --------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
- --------------------------------------------------------------------------------
Net interest income $ 35,403 $36,323 $30,502
Provision for loan and lease losses 3,477 408 1,279
Non-interest income 108,817 91,986 57,442
Non-interest expense 100,961 94,025 53,866
- --------------------------------------------------------------------------------
Income before taxes 39,782 33,876 32,799
Income taxes 13,924 11,857 11,343
- --------------------------------------------------------------------------------
Operating Income $ 25,858 $22,019 $21,456
================================================================================
PFG's operating earnings for 2002 were $25.9 million, up 17% from 2001, due
primarily to growth in non-interest income. For 2002, growth in non-interest
income was partially offset by reduced net interest income, increased provision
for loan and lease losses, and increased non-interest expense. Operating
earnings were $21.5 million for 2000.
65
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Average loans grew 36% to $895 million and average deposits grew 30% to $807
million from 2001 to 2002. Net interest income was down 3% driven by a shift in
product mix and margin compression, particularly on consumer loans reflective
of lower consumer mortgage loan rates.
Provision for loan and lease losses for 2002 increased by $3.1 million from
2001 largely reflecting higher net charge-offs. Net charge-offs were 0.20% of
average loans for 2002 versus 0.09% for 2001.
Non-interest income for 2002 was $108.8 million, up 18% from 2001, resulting
primarily from increased brokerage revenue, increased trust revenue, and
increased other income. Brokerage revenue increased by $7.3 million, or 23%,
from 2001 due to increased sales of annuity products. Insurance revenue for
2002 decreased by $0.4 million, or 3%, from 2001 mostly due to decreased sales
volume from the life agency business.
In 2002, PFG restructured its sales/distribution force to eliminate the use of
separate insurance sales personnel to sell insurance products through the
retail branch offices and to utilize the more established brokerage sales force
for retail insurance sales. Although sales volume decreased during this
transition year as the new model was being implemented, significant expense
savings resulted as well. Trust revenue for 2002 increased by $4.0 million, or
7%, from 2001 largely due to the acquisition of Haberer in April 2002.
Increased revenue from investment advisory and other services provided to the
Huntington Funds was also a major source of the increase in trust revenue.
During 2001, PFG introduced five new equity funds. These funds grew to over
$200 million in assets by the end of 2002. Other income for 2002 increased by
$5.6 million from 2001 primarily because of the $4.2 million charge in 2001 for
the impairment loss related to the Pacific Gas & Electric commercial paper held
by the Huntington Money Market Fund.
Non-interest expense for 2002 increased $6.9 million, or 7%, from 2001 driven
by the Haberer operating expenses combined with increased sales commissions and
salary expense. Sales commissions increased $1.7 million as a result of the
increase in non-interest income.
PFG contributed 8% to operating earnings and 10% of total revenues in the
recent year and represented 5% of both total loans and leases and total
deposits at December 31, 2002.
Treasury / Other
The Treasury / Other segment includes assets, liabilities, equity, revenue, and
expense that are not directly assigned or allocated to one of the lines of
business. Since a match-funded transfer pricing system is used to allocate
interest income and interest expense to other business segments, Treasury /
Other results include the net impact of any over or under allocations arising
from centralized management of interest rate risk including the net impact of
derivatives used to hedge interest rate sensitivity. Furthermore, this
segment's results include the net impact of administering Huntington's
investment securities portfolio as part of overall liquidity management.
Additionally, amortization expense of intangible assets and gains or losses not
allocated to other business segments are also a component.
Table 27 -- Treasury / Other Results
Year Ended December 31,
- --------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
- --------------------------------------------------------------------------
Net interest income $118,334 $ 25,962 $(29,712)
Provision for loan and lease losses -- -- --
Non-interest income 63,050 61,677 81,759
Non-interest expense 40,325 75,598 26,132
- --------------------------------------------------------------------------
Income before taxes 141,059 12,041 25,915
Income taxes 11,947 (31,003) (18,357)
- --------------------------------------------------------------------------
Operating Income $129,112 $ 43,044 $ 44,272
==========================================================================
Treasury / Other reported operating income of $129.1 million in 2002, up
significantly from the two preceding years. This primarily reflected the
reduction in transfer pricing credits allocated to Regional Banking for its
deposits, the maturity in late 2001 of $2 billion of interest rate swaps that
had significant negative spreads, and the benefit of lower short-term interest
rates, particularly with the steeper yield curve.
66
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Non-interest income for 2002 was $63.1 million compared with $61.7 million for
2001 reflecting the higher gains from securities transactions in the current
year, increased Bank owned life insurance income, and revenue from trading
activities. Non-interest expense for 2002 declined $35.3 million from 2001.
This reflected a decline in the amortization of intangibles arising from the
implementation of FASB Statement No. 142 and lower unallocated personnel costs
offset by higher unallocated outside services and processing, equipment and
occupancy, and telecommunication expenses.
Income tax expense for each of the other business segments is calculated at a
statutory 35% tax rate. However, Huntington's overall effective tax rate is
lower and, as a result, Treasury / Other reflects the reconciling items to the
statutory tax rate in its Income taxes.
RESULTS FOR THE FOURTH QUARTER
Table 28 presents Huntington's results of operations for the recent eight
quarters on an operating basis. Table 29 reflects Huntington's fourth quarter
2002 results compared with the previous seven quarters on a reported basis and
Table 30 presents selected stock, performance ratios, and capital data for the
same periods.
Reported Earnings
Fourth quarter 2002 reported earnings were $85.1 million, or $0.36 per common
share. This compared with reported earnings of $65.6 million, or $0.26 per
common share, in the year-ago fourth quarter.
Operating Earnings
On an operating basis, fourth quarter earnings of $85.1 million, or $0.36 per
common share, were up 7% and 13%, respectively, from the year-ago fourth
quarter earnings of $79.6 million, or $0.32 per common share. On this same
basis, net interest income for 2002 increased $14.2 million, or 6%, reflecting
the combination of an 11% increase in average earning assets during the recent
year, partially offset by a 4% decline in the net interest margin from 4.26%.
Adjusting for any acquired, securitized, and sold portfolios, average managed
loans increased 10%. This increase was driven by a 16% increase in average
consumer loans, including a 15% increase in home equity loans and lines, a more
than doubling of residential mortgages, and a 5% increase in automobile loans
and leases. Total average commercial and commercial real estate loans were up
2% from the year-ago quarter.
On an operating basis, non-interest income excluding securities gains was up 8%
from a year earlier. Primarily contributing to this year-over-year increase
were a 17% increase in deposit service charges, a 9% increase in brokerage and
insurance income, a 20% increase in bank owned life insurance income, a 14%
increase in other service charges, primarily electronic banking fees, and a 12%
increase in other income. These increases were partially offset by a 24%
decline in mortgage banking income primarily due to mortgage servicing rights
impairment recorded in the fourth quarter of 2002.
On an operating basis, non-interest expense was up $15.3 million, or 8%, from
the year-ago quarter primarily due to a $13.8 million, or 14%, increase in
personnel cost. Contributing equally to this increase were salary expense,
incentive compensation, and benefit costs. The increased salary expense
reflected higher staffing levels associated with the expansion of management
and employee talent at all levels, including the credit workout area. Higher
sales commissions were reflected across all lines of business. Higher fourth
quarter medical and pension costs were somewhat offset by gains related to
stock received from demutualization of certain insurance companies where
Huntington owned related insurance policies. Outside data processing and other
services was up $1.8 million, or 12%, and professional services increased $2.0
million, or 32%. Net occupancy expense decreased $1.8 million, or 12%, while
the amortization of intangible expense declined $2.4 million due the
implementation of FASB Statement No. 142 at the beginning of 2002. The fourth
quarter 2002 efficiency ratio increased to 54.0% from 52.7% in the year-ago
quarter.
Net charge-offs for the 2002 fourth quarter were $94.9 million, or an
annualized 1.84%, including $51.3 million in charge-offs associated with the
fourth quarter special credit actions as mentioned previously. Excluding these
charge-offs, net charge-offs were $43.6 million, or 0.84% of average loans and
leases (annualized). Excluding the impact of the fourth quarter special credit
actions, as well as the net charge-offs on exited portfolios for which reserves
were previously established, net charge-offs represented 0.81% of average loans
and leases, down from 0.99% in the 2001 fourth quarter. Loan and lease loss
provision expense in the fourth quarter was $57.4 million, up $3.1 million, or
6%, from the year-ago quarter.
ROE and ROA were 15.1% and 1.26%, respectively, for the 2002 fourth quarter,
compared to 13.4% and 1.28%, respectively, for the year-ago quarter.
67
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Table 28 -- Selected Quarterly Income Statements (Operating Basis)
2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars,
except per share amounts) Fourth Third Second First Fourth Third Second First
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $249,702 $249,416 $241,859 $233,101 $235,546 $230,462 $225,883 $222,018
Provision for loan and lease losses 57,418 60,249 53,892 50,595 54,281 46,027 41,937 29,709
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Loan and Lease Losses 192,284 189,167 187,967 182,506 181,265 184,435 183,946 192,309
- ---------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 41,177 37,460 35,354 34,282 35,220 33,593 32,650 31,143
Brokerage and insurance 16,431 13,943 14,967 14,587 15,066 13,943 13,185 12,232
Trust services 15,306 14,997 16,247 15,096 14,679 14,816 14,431 13,670
Bank owned life insurance 11,443 11,443 11,443 11,676 9,560 9,560 9,561 9,560
Mortgage banking 11,410 6,289 10,725 19,644 15,049 13,859 17,672 9,238
Other service charges and fees 10,890 10,837 10,529 9,118 9,582 9,547 9,383 8,415
Other 17,025 18,723 15,039 10,591 15,135 14,722 13,979 12,315
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income Before
Securities Gains 123,682 113,692 114,304 114,994 114,291 110,040 110,861 96,573
Securities gains 2,339 1,140 966 457 89 1,059 2,747 2,078
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 126,021 114,832 115,270 115,451 114,380 111,099 113,608 98,651
- ---------------------------------------------------------------------------------------------------------------------------------
Personnel costs 113,852 107,477 103,589 104,320 100,076 101,866 103,707 99,296
Equipment 17,337 17,378 16,608 15,582 18,117 17,580 17,363 17,503
Outside data processing and other
services 17,209 15,128 16,592 17,097 15,414 14,650 15,100 14,122
Net occupancy 13,454 14,815 14,642 14,771 15,251 14,481 13,755 15,568
Professional services 8,026 6,083 6,265 5,242 6,069 5,754 6,481 4,793
Marketing 6,186 7,491 7,219 7,174 5,305 5,717 6,807 8,832
Telecommunications 5,714 5,609 5,302 5,282 5,647 5,728 5,964 5,952
Printing and supplies 3,999 3,679 3,671 3,519 3,511 3,693 3,688 4,098
Franchise and other taxes 2,532 2,283 2,313 2,326 2,885 2,439 2,229 2,116
Amortization of intangible assets 204 204 203 251 2,555 2,569 2,890 3,031
Other 14,182 13,576 13,781 13,487 12,599 12,577 14,459 18,506
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 202,695 193,723 190,185 189,051 187,429 187,054 192,443 193,817
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 115,610 110,276 113,052 108,906 108,216 108,480 105,111 97,143
Income taxes 30,475 28,110 31,344 29,393 28,631 27,587 29,509 25,688
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 85,135 $ 82,166 $ 81,708 $ 79,513 $ 79,585 $ 80,893 $ 75,602 $ 71,455
=================================================================================================================================
Net Income Per Common Share--
Diluted $0.36 $0.34 $0.33 $0.32 $0.32 $0.32 $0.30 $0.28
Return on average assets 1.26% 1.26% 1.31% 1.30% 1.28% 1.30% 1.20% 1.15%
Return on average shareholders' equity 15.1 14.3 14.0 13.6 13.4 13.5 12.6 12.1
Net interest margin 4.07 4.26 4.30 4.21 4.26 4.17 4.03 3.99
Efficiency ratio 54.0 53.1 53.2 54.1 52.7 54.0 56.0 59.5
Effective tax rate 26.4 25.5 27.7 27.0 26.5 25.4 28.1 26.4
Net Interest Income--Fully Taxable
Equivalent (FTE)
Net Interest Income $249,702 $249,416 $241,859 $233,101 $235,546 $230,462 $225,883 $222,018
Tax Equivalent Adjustment (1) 1,869 1,096 1,071 1,169 1,292 1,442 1,616 2,002
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income--FTE $251,571 $250,512 $242,930 $234,270 $236,838 $231,904 $227,499 $224,020
=================================================================================================================================
(1) Calculated assuming a 35% tax rate.
68
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Table 29 -- Selected Quarterly Income Statements (Reported Basis)
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars, except per share amounts) Fourth Third Second First Fourth Third Second First
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $249,702 $249,416 $241,859 $242,825 $255,238 $249,787 $248,033 $243,124
Provision for loan and lease losses 57,418 60,249 53,892 55,781 108,275 49,559 117,495 33,464
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Loan and Lease Losses 192,284 189,167 187,967 187,044 146,963 200,228 130,538 209,660
- ---------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 41,177 37,460 35,354 38,530 42,753 41,719 40,673 38,907
Brokerage and insurance 16,431 13,943 17,677 18,792 20,966 19,912 19,388 18,768
Trust services 15,306 14,997 16,247 15,501 15,321 15,485 15,178 14,314
Bank owned life insurance 11,443 11,443 11,443 11,676 9,560 9,560 9,561 9,560
Mortgage banking 11,410 6,289 10,725 19,565 15,768 14,616 18,733 10,031
Other service charges and fees 10,890 10,837 10,529 10,632 12,552 12,350 12,217 11,098
Other 17,025 18,723 15,039 10,931 16,088 15,755 14,956 12,968
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income Before Gain
on Sale of Florida Operations,
Merchant Services Gain, and
Securities Gains (Losses) 123,682 113,692 117,014 125,627 133,008 129,397 130,706 115,646
Gain on sale of Florida operations -- -- -- 175,344 -- -- -- --
Merchant Services gain -- 24,550 -- -- -- -- -- --
Securities gains (losses) 2,339 1,140 966 457 89 1,059 (2,503) 2,078
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 126,021 139,382 117,980 301,428 133,097 130,456 128,203 117,724
- ---------------------------------------------------------------------------------------------------------------------------------
Personnel costs 113,852 107,477 105,146 114,285 118,143 120,767 122,068 117,662
Equipment 17,337 17,378 16,659 16,949 20,593 20,151 19,844 19,972
Outside data processing and other
services 17,209 15,128 16,592 18,439 17,992 17,375 17,671 16,654
Net occupancy 13,454 14,815 14,756 17,239 19,950 19,266 18,188 19,780
Professional services 8,026 6,083 6,267 5,401 6,235 5,912 6,763 4,969
Marketing 6,186 7,491 7,231 7,003 6,345 6,921 7,852 9,939
Telecommunications 5,714 5,609 5,320 6,018 6,793 6,859 7,207 7,125
Printing and supplies 3,999 3,679 3,683 3,837 4,293 4,450 4,565 5,059
Franchise and other taxes 2,532 2,283 2,313 2,328 2,893 2,470 2,246 2,120
Amortization of intangible assets 204 204 235 1,376 10,100 10,114 10,435 10,576
Other 14,182 13,576 13,858 14,511 14,017 14,605 16,457 20,234
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense Before
Special Charges 202,695 193,723 192,060 207,386 227,354 228,890 233,296 234,090
Special charges -- -- -- 56,184 15,143 50,817 33,997 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 202,695 193,723 192,060 263,570 242,497 279,707 267,293 234,090
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 115,610 134,826 113,887 224,902 37,563 50,977 (8,552) 93,294
Income taxes 30,475 36,703 31,647 127,175 (28,086)(1) 8,348 (10,929) 25,428
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 85,135 $ 98,123 $ 82,240 $ 97,727 $ 65,649 $ 42,629 $ 2,377 $ 67,866
=================================================================================================================================
Net Income Per Common Share--
Diluted $0.36 $0.41 $0.33 $0.39 $0.26 $0.17 $0.01 $0.27
Dividends Declared Per Common Share 0.16 0.16 0.16 0.16 0.16 0.16 0.20 0.20
Net Interest Income--Fully Taxable
Equivalent (FTE)
Net Interest Income $249,702 $249,416 $241,859 $242,825 $255,238 $249,787 $248,033 $243,124
Tax Equivalent Adjustment (2) 1,869 1,096 1,071 1,169 1,292 1,442 1,616 2,002
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income--FTE $251,571 $250,512 $242,930 $243,994 $256,530 $251,229 $249,649 $245,126
=================================================================================================================================
(1) Reflects a $32.5 million reduction related to the issuance of $400 million
of REIT subsidiary preferred stock, of which $50 million was issued to the
public.
(2) Calculated assuming a 35% tax rate.
69
MANAGEMENT'S DISCUSSION AND ANALYSIS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Table 30 -- Quarterly Stock Summary, Key Ratios and Statistics, and Capital
Data (Reported Basis)
Quarterly Common Stock Summary
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) Fourth Third Second First Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock Price
High $19.980 $20.430 $21.770 $20.310 $17.490 $ 19.280 $ 17.000 $ 18.000
Low 16.160 16.000 18.590 16.660 14.510 15.150 13.875 12.625
Close 18.710 18.190 19.420 19.700 17.190 17.310 16.375 14.250
Average closing price 18.769 19.142 20.089 18.332 16.269 17.696 14.936 15.258
Dividends
Cash dividends declared on common
stock $0.16 $0.16 $0.16 $0.16 $0.16 $0.16 $0.20 $0.20
Common Shares Outstanding
Average--Basic 233,581 239,925 246,106 250,749 251,193 251,148 251,024 250,998
Average--Diluted 235,083 241,357 247,867 251,953 251,858 252,203 251,448 251,510
Ending 232,879 237,544 242,920 249,992 251,194 251,193 251,057 251,002
Common Share Repurchase Program
Authorized under repurchase program 22,000
Number of shares repurchased 4,110 6,262 7,329 1,458
- -----------------------------------------------------------------------------------------
Remaining shares authorized to
repurchase (1) 2,841 6,951 13,213 20,542
=========================================================================================
Note: Intra-day and closing stock price quotations were obtained from NASDAQ.
Quarterly Key Ratios and Statistics
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------------------
Margin Analysis--As a % of Average
Earning Assets (2)
Interest income 6.22% 6.54% 6.64% 6.71% 7.13% 7.71% 7.98% 8.39%
Interest expense 2.15 2.28 2.34 2.57 3.02 3.67 4.01 4.46
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.07% 4.26% 4.30% 4.14% 4.11% 4.04% 3.97% 3.93%
=============================================================================================================================
Return on average assets 1.26% 1.51% 1.32% 1.49% 0.93% 0.60% 0.03% 0.97%
Return on average shareholders' equity 15.1 17.1 14.1 16.7 11.0 7.1 0.4 11.5
Capital Data--End of Period
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) Fourth Third Second First Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Assets $27,235 $26,343 $25,309 $24,954 $27,896 $ 27,757 $ 27,375 $ 27,230
Tier 1 Risk-Based Capital Ratio 8.69% 9.14% 9.72% 10.26% 7.24% 6.97% 7.01% 7.19%
Total Risk-Based Capital Ratio 11.60 12.10 12.75 13.40 10.29 10.13 10.20 10.31
Tier 1 Leverage Ratio 8.89 9.42 9.94 9.72 7.41 7.10 6.96 7.12
Tangible Equity / Asset Ratio 7.62 8.00 8.51 9.06 6.12 6.08 5.94 5.99
=============================================================================================================================
(1) A new repurchase program for 8 million shares was authorized in January
2003, canceling the remaining shares under this authorization.
(2) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
70
REPORT OF MANAGEMENT HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
The management of Huntington is responsible for the financial information and
representations contained in the consolidated financial statements and other
sections of this Annual Report. The consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States. In all material respects, they reflect the substance of
transactions that should be included based on informed judgments, estimates,
and currently available information.
Huntington maintains accounting and other control systems that, in the opinion
of management, provide reasonable assurance that (1) transactions are properly
authorized, (2) that the assets are properly safeguarded, and (3) transactions
are properly recorded and reported to permit the preparation of the financial
statements in conformity with accounting principles generally accepted in the
United States. The systems of internal accounting controls include the careful
selection and training of qualified personnel, appropriate segregation of
responsibilities, communication of written policies and procedures, and a broad
program of internal audits. The costs of the controls are balanced against the
expected benefits. During 2002, the Audit/Risk Committee of the Board of
Directors met regularly with management, Huntington's internal auditors, and
the independent auditors, Ernst & Young LLP, to review the scope of the audits
and to discuss the evaluation of internal accounting controls and financial
reporting matters. The independent and internal auditors have free access to
and meet confidentially with the Audit Committee to discuss appropriate
matters. Also during 2002, Huntington formed a Disclosure Review Committee.
This committee's purpose is to design and maintain disclosure controls and
procedures to ensure that material information relating to the financial and
operating condition of Huntington is properly reported to its chief executive
officer, chief financial officer, internal auditors, and the Audit/Risk
Committee of the Board of Directors in connection with the preparation and
filing of periodic reports and the certification of those reports by the chief
executive officer and the chief financial officer.
The independent auditors are responsible for expressing an informed judgment as
to whether the consolidated financial statements present fairly, in accordance
with accounting principles generally accepted in the United States, the
financial position, results of operations, and cash flows of Huntington. They
obtained an understanding of Huntington's internal accounting controls and
conducted such tests and related procedures as they deemed necessary to provide
reasonable assurance, giving due consideration to materiality, that the
consolidated financial statements contain neither misleading nor erroneous data.
/s/ Thomas E. Hoaglin
- -----------------------------------------------
Thomas E. Hoaglin
Chairman, President and Chief Executive Officer
/s/ Michael J. McMennamin
- -----------------------------------------------
Michael J. McMennamin
Vice Chairman, Chief Financial Officer, and
Treasurer
71
INDEPENDENT AUDITOR'S REPORT HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders, Huntington Bancshares Incorporated
We have audited the accompanying consolidated balance sheets of Huntington
Bancshares Incorporated and Subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Huntington
Bancshares Incorporated and Subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 12 to the consolidated financial statements, Huntington
changed its method of accounting for amortization of goodwill in 2002 in
accordance with FASB Statement No.142, Goodwill and Other Intangible Assets.
/s/ Ernst & Young LLP
Columbus, Ohio
January 16, 2003
72
CONSOLIDATED BALANCE SHEETS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars, except share amounts) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 969,483 $ 1,138,366
Federal funds sold and securities purchased under resale agreements 49,280 83,275
Interest bearing deposits in banks 37,300 21,205
Trading account securities 241 13,392
Mortgage loans held for sale 528,379 629,386
Securities available for sale--at fair value 3,403,369 2,849,579
Investment securities--fair value $7,725 and $12,499, respectively 7,546 12,322
Loans and leases, net of unearning income
Commercial loans and leases 5,606,363 6,439,372
Commercial real estate 3,730,080 3,818,441
Consumer
Automobile leases 3,203,421 3,207,514
Automobile loans--Indirect 3,072,017 2,883,279
Home equity 3,200,169 3,582,028
Residential mortgage 1,748,985 1,127,825
Other consumer loans 394,890 543,414
- -------------------------------------------------------------------------------------------------------------------------
Total loans and leases, net of unearned income 20,955,925 21,601,873
Less allowance for loan and lease losses 368,395 410,572
- -------------------------------------------------------------------------------------------------------------------------
Net loans and leases 20,587,530 21,191,301
- -------------------------------------------------------------------------------------------------------------------------
Bank owned life insurance 886,214 843,183
Premises and equipment 341,366 452,036
Goodwill and other intangible assets 218,567 716,054
Customers' acceptance liability 16,745 13,670
Accrued income and other assets 532,690 536,390
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $27,578,710 $28,500,159
=========================================================================================================================
Liabilities and Shareholders' Equity
Liabilities
Demand deposits
Non-interest bearing $ 3,073,869 $ 3,635,173
Interest bearing 5,374,095 5,723,160
Savings deposits 2,851,158 3,466,305
Other domestic time deposits 3,956,306 5,868,451
Domestic time deposits of $100,000 or more 731,959 1,130,563
Brokered time deposits and negotiable CDs 1,092,754 137,915
Foreign time deposits 419,185 225,737
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 17,499,326 20,187,304
- -------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,541,016 1,955,926
Bank acceptances outstanding 16,745 13,670
Medium-term notes 2,045,123 1,795,002
Federal Home Loan Bank Advances 1,013,000 17,000
Subordinated notes and other long-term debt 788,678 927,330
Company obligated mandatorily redeemable preferred capital securities of subsidiary
trusts holding solely junior subordinated debentures of the parent company 300,000 300,000
Accrued expenses and other liabilities 1,070,991 887,487
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 25,274,879 26,083,719
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock--authorized 6,617,808 shares; none outstanding -- --
Common stock--without par value; authorized 500,000,000 shares; issued 257,866,255 shares;
outstanding 232,878,851 and 251,193,814 shares, respectively 2,484,421 2,490,724
Less 24,987,404 and 6,672,441 treasury shares, respectively (475,399) (123,849)
Accumulated other comprehensive income 62,300 25,488
Retained earnings 232,509 24,077
- -------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,303,831 2,416,440
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $27,578,710 $28,500,159
=========================================================================================================================
See notes to consolidated financial statements.
73
CONSOLIDATED INCOME STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Twelve Months Ended December 31,
- ------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------------------------------
Interest and fee income
Loans and leases $1,329,297 $1,692,311 $1,808,254
Securities 179,623 216,215 284,719
Other 22,665 30,993 15,532
- ------------------------------------------------------------------------------------------------
Total Interest Income 1,531,585 1,939,519 2,108,505
- ------------------------------------------------------------------------------------------------
Interest expense
Deposits 389,895 657,892 782,076
Short-term borrowings 42,720 95,859 113,134
Medium-term notes 61,727 121,701 189,311
Federal Home Loan Bank advances 5,574 1,174 824
Subordinated notes, capital notes, and other long-term debt 47,867 66,711 80,728
- ------------------------------------------------------------------------------------------------
Total Interest Expense 547,783 943,337 1,166,073
- ------------------------------------------------------------------------------------------------
Net Interest Income 983,802 996,182 942,432
Provision for loan and lease losses 227,340 308,793 90,479
- ------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan and Lease Losses 756,462 687,389 851,953
- ------------------------------------------------------------------------------------------------
Non-Interest income
Service charges on deposit accounts 152,521 164,052 160,727
Brokerage and insurance 66,843 79,034 61,871
Trust services 62,051 60,298 53,613
Mortgage banking 47,989 59,148 38,025
Bank owned life insurance 46,005 38,241 39,544
Other service charges and fees 42,888 48,217 43,883
Gain on sale of Florida operations 175,344 -- --
Merchant Services gain 24,550 -- --
Securities gains 4,902 723 37,101
Other 61,718 59,767 58,795
- ------------------------------------------------------------------------------------------------
Total Non-Interest Income 684,811 509,480 493,559
- ------------------------------------------------------------------------------------------------
Non-Interest expense
Personnel costs 440,760 478,640 421,750
Equipment 68,323 80,560 78,069
Outside data processing and other services 67,368 69,692 62,011
Net occupancy 60,264 77,184 75,882
Marketing 27,911 31,057 34,884
Professional services 25,777 23,879 20,819
Telecommunications 22,661 27,984 26,225
Printing and supplies 15,198 18,367 19,634
Franchise and other taxes 9,456 9,729 11,077
Amortization of intangible assets 2,019 41,225 39,207
Special charges 56,184 99,957 50,000
Other 56,127 65,313 46,059
- ------------------------------------------------------------------------------------------------
Total Non-Interest Expense 852,048 1,023,587 885,617
- ------------------------------------------------------------------------------------------------
Income Before Income Taxes 589,225 173,282 459,895
Income taxes 226,000 (5,239) 131,449
- ------------------------------------------------------------------------------------------------
Net Income $ 363,225 $ 178,521 $ 328,446
================================================================================================
Per Common Share
Net Income
Basic $1.50 $0.71 $1.32
Diluted 1.49 0.71 1.32
Cash dividends declared 0.64 0.72 0.76
Average Common Shares Outstanding
Basic 242,279 251,078 248,709
Diluted 244,012 251,716 249,570
See notes to consolidated financial statements.
74
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Accumulated
Preferred Common Treasury Other
(in thousands of dollars, ------------ ------------------ ------------------ Comprehensive
except per share amounts) Shares Stock Shares Stock Shares Stock Income
- ------------------------------------------------------------------------------------------------------------------
BALANCE--JANUARY 1, 2000 -- $ -- 233,845 $2,284,956 (4,957) $(137,268) $(94,093)
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 69,573
Total comprehensive income
Stock issued for acquisitions (29,399) 7,175 171,781
Cash dividends declared ($0.76 per
share)
Stock options exercised (3,395) 115 3,751
10% stock dividend 24,021 241,483 (1,182)
Treasury shares purchased (8,188) (168,395)
Treasury shares sold to employee
benefit plans 30 699
- --------------------------------------------------------------------------------------------------------------------
BALANCE--DECEMBER 31, 2000 -- -- 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 53,989
Unrealized gains on derivative
instruments used in cash flow
hedging relationships 5,132
Total comprehensive income
Cash dividends declared
($0.72 per share)
Stock options exercised (2,921) 264 4,378
Treasury shares sold to employee
benefit plans 71 1,205
- --------------------------------------------------------------------------------------------------------------------
BALANCE--DECEMBER 31, 2001 -- -- 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 27,387
Unrealized gains on derivative
instruments used in cash flow
hedging relationships 9,620
Minimum pension liability (195)
Total comprehensive income
Stock issued for acquisitions (838) 1,038 19,989
Cash dividends declared
($0.64 per share)
Stock options exercised (3,545) 373 6,757
Treasury shares purchased (19,161) (370,012)
Other (1,920) (565) (8,284)
- --------------------------------------------------------------------------------------------------------------------
BALANCE--DECEMBER 31, 2002 -- $ -- 257,866 $2,484,421 (24,987) $(475,399) $ 62,300
====================================================================================================================
Retained
(in thousands of dollars, except per share amount) Earnings Total
- ---------------------------------------------------------------------------
BALANCE--JANUARY 1, 2000 $ 128,761 $2,182,356
Comprehensive Income:
Net income 328,446 328,446
Unrealized net holding gains on
securities available for sale arising
during the period, net of
reclassification adjustment for net
gains included in net income 69,573
----------
Total comprehensive income 398,019
----------
Stock issued for acquisitions 142,382
Cash dividends declared ($0.76 per
share) (189,191) (189,191)
Stock options exercised 356
10% stock dividend (241,662) (179)
Treasury shares purchased (168,395)
Treasury shares sold to employee
benefit plans 699
- --------------------------------------------------------------------------
BALANCE--DECEMBER 31, 2000 26,354 2,366,047
- --------------------------------------------------------------------------
Comprehensive Income:
Net income 178,521 178,521
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 53,989
Unrealized gains on derivative
instruments used in cash flow
hedging relationships 5,132
----------
Total comprehensive income 228,529
----------
Cash dividends declared
($0.72 per share) (180,798) (180,798)
Stock options exercised 1,457
Treasury shares sold to employee
benefit plans 1,205
- --------------------------------------------------------------------------
BALANCE--DECEMBER 31, 2001 24,077 2,416,440
- --------------------------------------------------------------------------
Comprehensive Income:
Net income 363,225 363,225
Unrealized net holding gains on
securities available for sale arising
during the period, net of
reclassification adjustment for net
gains included in net income 27,387
Unrealized gains on derivative
instruments used in cash flow
hedging relationships 9,620
Minimum pension liability (195)
----------
Total comprehensive income 400,037
----------
Stock issued for acquisitions 19,151
Cash dividends declared
($0.64 per share) (154,793) (154,793)
Stock options exercised 3,212
Treasury shares purchased (370,012)
Other (10,204)
- --------------------------------------------------------------------------
BALANCE--DECEMBER 31, 2002 $ 232,509 $2,303,831
==========================================================================
See notes to consolidated financial statements.
75
CONSOLIDATED STATEMENTS OF CASH FLOWS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Twelve Months Ended December 31,
- -------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $ 363,225 $ 178,521 $ 328,446
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan and lease losses 227,340 308,793 90,479
Depreciation and amortization 58,132 101,233 110,908
Deferred income tax expense 117,765 118,025 237,336
Decrease (increase) in trading account securities 13,151 (8,669) 3,252
Decrease (increase) in mortgages held for sale 101,007 (474,282) (13,381)
Gains on sales of securities available for sale (4,902) (723) (37,101)
Gains on sales/securitizations of loans (11,031) (9,464) (4,853)
Gain on sale of Florida banking and insurance operations (175,344) -- --
Merchant Services gain (24,550) -- --
Restructuring and special charges 56,184 99,957 50,000
Other, net (44,779) (173,109) (189,164)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 676,198 140,282 575,922
- -------------------------------------------------------------------------------------------------------------------
Investing Activities
(Increase) decrease in interest bearing deposits in banks (16,095) (16,235) 1,588
Proceeds from:
Maturities and calls of investment securities 4,771 4,009 2,408
Maturities and calls of securities available for sale 1,031,935 1,021,766 415,571
Sales of securities available for sale 855,309 1,410,304 1,758,473
Purchases of securities available for sale (1,959,137) (1,056,840) (239,084)
Proceeds from sales/securitizations of loans 465,699 514,897 1,556,093
Net loan originations, excluding sales (3,143,936) (1,788,889) (2,230,489)
Proceeds from sale of premises and equipment 19,390 3,714 3,504
Purchases of premises and equipment (57,761) (63,177) (65,160)
Proceeds from sales of other real estate 13,112 15,733 13,766
Net cash (paid) received in purchase acquisitions (8,305) -- 12,004
Proceeds from restructuring of Merchant Services 27,000 -- --
Net cash paid related to sale of Florida banking and insurance operations (1,277,767) -- --
- -------------------------------------------------------------------------------------------------------------------
Net Cash (Used for) Provided by Investing Activities (4,045,785) 45,282 1,228,674
- -------------------------------------------------------------------------------------------------------------------
Financing Activities
Increase (decrease) in total deposits 2,073,891 423,157 (443,921)
Increase (decrease) in short-term borrowings 537,770 (31,833) (144,230)
Proceeds from issuance of medium-term notes 1,025,000 665,000 580,000
Payment of medium-term notes (782,150) (1,330,000) (1,367,000)
Proceeds from Federal Home Loan Bank advances 1,000,000 -- --
Maturity of Federal Home Loan Bank advances (4,000) (8,000) --
Proceeds from issuance of long-term debt -- 50,000 150,000
Maturity of long-term debt (150,000) -- --
Dividends paid on common stock (167,002) (190,792) (185,103)
Repurchases of common stock (370,012) -- (168,395)
Net proceeds from issuance of common stock 3,212 2,662 1,055
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used for) Financing Activities 3,166,709 (419,806) (1,577,594)
- -------------------------------------------------------------------------------------------------------------------
Change in Cash and Cash Equivalents (202,878) (234,242) 227,002
Cash and Cash Equivalents at Beginning of Period 1,221,641 1,455,883 1,228,881
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,018,763 $ 1,221,641 $ 1,455,883
===================================================================================================================
Supplemental disclosures
Income taxes paid $ 70,463 $ 175 $ 1,210
Interest paid 560,731 986,108 1,175,613
Non-cash activities:
Mortgage loans securitized 386,385 -- 780,998
Stock issued for purchase acquisitions 19,151 -- 142,382
See notes to consolidated financial statements.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Nature of Operations: Huntington Bancshares Incorporated (Huntington) is a
multi-state diversified financial services company organized under Maryland law
in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries,
Huntington is engaged in providing full-service commercial and consumer banking
services, mortgage banking services, automobile financing, equipment leasing,
investment management, trust services, and discount brokerage services, as well
as underwriting credit life and disability insurance, and selling other
insurance and financial products and services. Huntington's banking offices are
located in Ohio, Michigan, Indiana, Kentucky, and West Virginia. Selected
financial services are also conducted in other states including Arizona,
Florida, Georgia, Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington
also has a foreign office in the Cayman Islands and a foreign office in Hong
Kong. Huntington (the parent company) is a financial holding company and a bank
holding company.
Basis of Presentation: The consolidated financial statements include the
accounts of the parent company, and its majority-owned subsidiaries and are
presented in conformity with accounting principles generally accepted in the
United States (GAAP). All significant intercompany accounts and transactions
have been eliminated in consolidation. Other subsidiaries and affiliates are
accounted for by the equity method where there is control and Huntington owns
50% or greater ownership interest. The cost method is generally used where
there is no control and Huntington owns less than a 50% ownership interest.
These assets that are accounted for by either the equity or cost method are
included in other assets in Huntington's statement of financial condition.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect amounts reported in
the financial statements. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
Securities: Securities purchased with the intention of recognizing short-term
profits are classified as trading account securities and reported at fair
value. The unrealized gains or losses on trading securities are recorded in
other non-interest income. Debt securities that Huntington has both the
positive intent and ability to hold to maturity are classified as investment
securities and are reported at amortized cost. Securities not classified as
trading or investments are designated available for sale and reported at fair
value. Unrealized gains or losses on securities available for sale are reported
as a separate component of accumulated other comprehensive income in
shareholders' equity. Declines in the value of debt and marketable equity
securities that are considered other than temporary are recorded in
non-interest income as a loss on securities available for sale.
Nonmarketable equity securities include stock acquired for regulatory purposes,
such as Federal Home Loan Bank stock and Federal Reserve Bank stock. These
securities are generally accounted for at cost and are included in securities
available for sale.
The amortized cost of specific securities sold is used to compute realized
gains and losses. Interest and dividends on securities, including amortization
of premiums and accretion of discounts using the effective interest method over
the period to maturity, are included in interest income.
Loans and Leases: Loans and leases are reported net of unearned income at the
principal amounts outstanding. Interest income is accrued as earned based on
unpaid principal balances. Huntington defers and amortizes referral payments
that it makes to automotive dealers on a straight-line basis over the life of
the loan as a yield adjustment. Huntington records the fees it receives from
other loan and lease origination activities, as well as the costs of those
activities, in the period in which the fees are received and the costs are
incurred. The fees received from loan origination activities are recognized as
interest income and the costs are included in various categories of
non-interest expense. Annually, Huntington compares the net loan origination
fees and costs recognized using this method to the net loan origination fees
and costs that would have been recognized had such fees and costs been deferred
and amortized over the lives of the respective loans and leases on the interest
method. For the three years ended December 31, 2002, the difference in the fees
received and costs incurred versus those that would have been recognized under
a deferral method was immaterial.
Automotive and equipment leases are stated at the sum of all minimum lease
payments and estimated residual values less unearned income. Unearned income is
recognized in interest income on a basis to achieve a constant periodic rate of
return on the outstanding investment. Residual values on automobile leases are
established at the inception of the lease and represent the estimated value of
the automobiles at lease maturity based on an industry guide published by
Automotive Lease Guide (ALG).
In late 2000, Huntington purchased residual value insurance coverage. The
insurance covers the difference between the recorded residual value and the
fair value of the automobile at the end of the lease term as evidenced by ALG
Black Book valuations. The insurance provides first dollar loss coverage on the
portfolio of existing automobile leases at October 1, 2000 and has a cap on
insured losses of $120 million. Insured losses on new lease originations from
October 2000 to April 30, 2002 have a cap of $50 million and no cap for new
automobile lease originations from May 1, 2002 through April 30, 2005. The
insurance coverage is subject to renewal in April 2005.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
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Insurance does not cover residual losses below ALG Black Book value. That
situation occurs usually when the automobile has excess wear and tear and/or
excess mileage not reimbursed by the lessee. At December 31, 2002, Huntington
had a reserve of $20.2 million to cover these losses. This reserve is based on
management's periodic evaluation of several factors including types of
automobiles, lease terms and assumptions concerning automobile supply and
demand, new product offerings, and prices charged by manufacturers.
Commercial loans and leases and commercial loans secured by real estate are
generally placed on non-accrual status and stop accruing interest when
principal or interest payments are 90 days or more past due or the borrower's
creditworthiness is in doubt. A loan or lease may remain in accruing status
when it is sufficiently collateralized, which means the collateral covers the
full repayment of principal and interest, and is in the process of active
collection. 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.
Commercial and commercial real estate loans are evaluated for impairment in
accordance with the provisions of Statement of Financial Accounting Standards
(Statement) No. 114, Accounting by Creditors for Impairment of a Loan. This
Statement requires an allowance to be established as a component of the
allowance for loan losses when it is probable that all amounts due pursuant to
the contractual terms of the loan will not be collected and the recorded
investment in the loan exceeds its fair value. Fair value is measured using
either the present value of expected future cash flows discounted at the loan's
effective interest rate, the observable market price of the loan, or the fair
value of the collateral if the loan is collateral dependent. All loans
considered impaired are included in non-performing assets.
Consumer loans and leases, excluding residential mortgage loans, are subject to
mandatory charge-off at a specified delinquency date and are not classified as
non-performing prior to being charged off. These loans and leases are generally
charged off in full no later than when the loan becomes 120 days past due.
Residential mortgage loans are placed on non-accrual status when principal
payments are 180 days past due or interest payments are 210 days past due. A
charge-off on a residential mortgage loan is recorded when the loan has been
foreclosed and the loan balance exceeds the fair value of the collateral. The
fair value of the collateral is then recorded as real estate owned and is
reflected in other assets in the consolidated statement of financial condition.
Huntington uses the cost recovery method in accounting for cash received on
non-performing loans. Under this method, cash receipts are applied entirely
against principal until the loan has been collected in full, after which time
any additional cash receipts are recognized as interest income. When, in
management's judgment, the borrower's ability to make periodic interest and
principal payments resumes and collectibility is no longer in doubt, the loan
is returned to accrual status.
Securitized Loans: Securitized loans are accounted for in accordance with
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, which was fully adopted by Huntington in
2001. Asset securitization involves the sale of a pool of loan receivables,
generally to a trust, in exchange for funding collaterized by these loans. The
trust then sells undivided interests in the trust to investors, while
Huntington retains the remaining undivided interests, referred to as retained
interest. While the loans are removed from the balance sheet at the time of
sale, this retained interest is recorded as an asset based on its estimated
fair value. An asset is also established for the servicing of the loans sold,
which is retained at the time of sale, based on the fair value of the servicing
rights. Gains and losses on the loans sold, retained interest, and servicing
rights associated with loan securitizations are determined when the related
loans are sold to the trust. Fair values of the retained interests and
servicing rights are based on the present value of expected future cash flows
from the underlying loans, net of interest payments to security holders. The
present value of expected future cash flows is determined using assumptions for
market interest rates, loan losses, servicing costs, and prepayment rates.
Management also uses these assumptions to periodically assess the retained
interests and servicing rights for impairment. The retained interest is
included in securities available for sale and the servicing rights are recorded
in other assets in the consolidated balance sheets.
Allowance for Loan and Lease Losses: The allowance for loan and lease losses
reflects management's judgment as to the level considered appropriate to absorb
inherent credit losses in the loan and lease portfolio. This judgment is based
on the size and current risk characteristics of the portfolio, a review of
individual loans and leases, historical and anticipated loss experience, and a
review of individual relationships where applicable. External influences such
as general economic conditions, economic conditions in the relevant geographic
areas and specific industries, regulatory guidelines, and other factors are
also assessed in determining the level of the allowance.
The allowance is determined subjectively, requiring significant estimates,
including the timing and amounts of expected future cash flows on impaired
loans, consideration of current economic conditions and historical loss
experience pertaining to pools of homogeneous loans, all of which may be
susceptible to change. The allowance is increased through a provision that is
charged to
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
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earnings, based on management's periodic evaluation of the factors previously
mentioned and is reduced by charge-offs, net of recoveries, and the allowance
associated with securitized or sold loans.
The allowance consists of an allocated portion and a small, unallocated
portion. The components of the allowance represent estimates developed pursuant
to Statement No. 5, Accounting for Contingencies, and Statement No. 114. The
allocated portion of the allowance reflects expected losses resulting from
quantitative analyses developed through historical loss experience and specific
credit allocations at the individual loan and lease level for commercial loans
and leases and commercial real estate loans. The specific credit allocations
are based on a continuous analysis of all loans and leases by internal credit
rating. The historical loss element is determined using a loss migration
analysis that examines both the probability of default and the loss in the
event of default by loan category and internal credit rating. The loss
migration analysis is performed periodically and loss factors are updated
regularly based on actual experience. The portion of the allowance allocated to
homogeneous consumer loans is also determined by applying specific probability
of default and loss in the event of default factors to various segments of the
loan and lease portfolio. Management's determination of the amounts necessary
for concentrations and changes in portfolio mix are also included in the
allocated component of the allowance. The unallocated portion of the allowance
is determined based on management's assessment of general economic conditions,
as well as specific economic conditions in the individual markets in which
Huntington operates. This determination inherently involves a higher degree of
subjectivity and considers current risk factors that may not have yet
manifested themselves in Huntington's historical loss factors used to determine
the allocated portion of the allowance.
Resell and Repurchase Agreements: Securities purchased under agreements to
resell and securities sold under agreements to repurchase are generally treated
as collateralized financing transactions and are recorded at the amounts at
which the securities were acquired or sold plus accrued interest. The fair
value of collateral either received from or provided to a third party is
continually monitored and additional collateral is obtained or is requested to
be returned to Huntington as deemed appropriate.
Goodwill and Other Intangible Assets: Under the purchase method of accounting,
the net assets of entities acquired by Huntington were recorded at their
estimated fair value at the date of acquisition. The excess of cost over the
fair value of net assets acquired is recorded as goodwill. Prior to 2002,
goodwill was amortized over periods generally up to 25 years. Effective January
1, 2002, in accordance with Statement No. 142, goodwill is no longer amortized
but is reviewed by management, along with other intangible assets arising from
business combinations, for impairment quarterly or whenever a significant event
occurs that adversely affects operations or when changes in circumstances
indicate that the carrying value may not be recoverable. Other intangible
assets are amortized over their estimated useful lives.
Mortgage Banking Activities: Loans held for sale are primarily composed of
performing 1-to-4-family residential mortgage loans originated for resale and
are carried at the lower of cost (net of purchase discounts or premiums and
effects of hedge accounting) or fair value as determined on an aggregate basis.
Fair value is determined using available secondary market prices for loans with
similar coupons, maturities, and credit quality.
Huntington recognizes the rights to service mortgage loans as separate assets,
which are included in other assets in the consolidated balance sheets, only
when purchased or when servicing is contractually separated from the underlying
mortgage loans by sale or securitization of the loans with servicing rights
retained. The carrying value of loans sold or securitized is allocated between
loans and servicing rights based on the relative fair values of each. Purchased
mortgage servicing rights are initially recorded at cost. All servicing rights
are subsequently carried at the lower of the initial carrying value, adjusted
for amortization, or fair value. Servicing rights are evaluated for impairment
quarterly based on the fair value of those rights, using a disaggregated
approach. The fair value of the servicing rights is determined by estimating
the present value of future net cash flows, taking into consideration market
loan prepayment speeds, discount rates, servicing costs, and other economic
factors. Servicing rights are amortized over the period of and in proportion to
the estimated future net servicing revenue. Amortization is recorded as a
reduction of servicing income, which is reflected in non-interest income in
Huntington's income statement. As of December 31, 2002 and 2001, mortgage
servicing assets, net of valuation reserves, were $29.3 million and $35.3
million, respectively. At December 31, 2002 and 2001, valuation reserves
representing the adjustment to fair value were $21.1 million and $7.0 million,
respectively. Impairment charges, which are reflected in mortgage banking
income, were $14.1 million in 2002, $6.3 million in 2001, and $0.7 million in
2000.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed principally
by the straight-line method over the estimated useful lives of the related
assets. Buildings and building improvements are depreciated over an average of
30 to 40 years and 10 to 20 years, respectively. Land improvements and
furniture and fixtures are depreciated over 10 years while equipment is
depreciated over a range of 3 to 7 years. Leasehold improvements are amortized
over the lesser of the asset life or term of the related leases. Maintenance
and repairs are charged to expense as incurred, while improvements that extend
the useful life of an asset are capitalized and depreciated over the remaining
useful life.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
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Other Real Estate: Other real estate acquired through partial or total
satisfaction of loans, is included in other assets and carried at the lower of
cost or fair value less estimated costs of disposition. At the date of
acquisition, any losses are charged to the allowance for loan losses.
Subsequent write-downs are included in non-interest expense.
Derivative Financial Instruments: Derivative financial instruments, primarily
interest rate swaps, are accounted for in accordance with Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. This
Statement requires every derivative instrument to be recorded in the
consolidated statement of condition as either an asset or liability measured at
its fair value and Huntington to formally document, designate, and assess the
effectiveness of transactions for which hedge accounting is applied. Depending
on the nature of the hedge and the extent to which it is effective, the changes
in fair value of the derivative recorded through earnings will either be offset
against the change in the fair value of the hedged item in earnings or recorded
in comprehensive income and subsequently recognized in earnings in the period
the hedged item affects earnings. The portion of a hedge that is ineffective
and all changes in the fair value of derivatives not designated as hedges,
referred to as trading instruments, are recognized immediately in earnings.
Trading instruments are carried at fair value with changes in fair value
included in other non-interest income. Trading instruments are executed
primarily with Huntington's customers to fulfill their needs. Derivative
instruments used for trading purposes include interest rate swaps, including
callable swaps, interest rate caps and floors, and interest rate and foreign
exchange futures, forwards and options.
Upon adoption in 2001 of Statement No. 133, as amended, Huntington designated
its portfolio of derivative financial instruments used for risk management
purposes into fair value or cash flow hedges. Derivatives used to hedge changes
in fair value of assets and liabilities due to changes in interest rates or
other factors were designated as fair value hedges and those used to hedge
changes in forecasted cash flows, due generally to interest rate risk, were
designated as cash flow hedges. The after-tax transition adjustment of adopting
Statement No. 133, as amended, was immaterial to net income and reduced other
comprehensive income (OCI) $9.1 million in 2001.
Income Taxes: Income taxes are accounted for under the asset and liability
method. Accordingly, deferred tax assets and liabilities are recognized for the
future book and tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are determined
using enacted tax rates expected to apply in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income at the
time of enactment of such change in tax rates.
Treasury Stock: Acquisitions of treasury stock are recorded at cost. Reissuance
of shares in treasury for acquisitions, stock option exercises, or for other
corporate purposes, is recorded at their weighted-average cost.
Stock-Based Compensation: Huntington's stock-based compensation plans are
accounted for based on the intrinsic value method promulgated by Accounting
Principles Board Opinion 25, Accounting for Stock Issued to Employees, and
related interpretations. Compensation expense for employee stock options is
generally not recognized if the exercise price of the option equals or exceeds
the fair value of the stock on the date of grant. See Note 18 regarding pro
forma disclosures for net income and earnings per diluted common share is
presented as if Huntington had applied the fair value method of accounting of
Statement No. 123, Accounting for Stock-Based Compensation, in measuring
compensation costs for stock options.
Huntington expects to adopt the fair value method of recording stock options
under the transitional guidance of Statement No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure. Huntington is currently
evaluating which of the three methods under transitional guidance it will adopt
in 2003. See Note 2 for more information regarding this new standard.
Segment Results: Accounting policies for the lines of business are the same as
those used in the preparation of the consolidated financial statements with
respect to activities specifically attributable to each business line. However,
the preparation of business line results requires management to establish
methodologies to allocate funding costs and benefits, expenses, and other
financial elements to each line of business. Changes are made in these
methodologies utilized for certain balance sheet and income statement
allocations performed by Huntington's management reporting system, as
appropriate. Prior periods are not restated for these changes.
Statement of Cash Flows: Cash and cash equivalents are defined as "Cash and due
from banks" and "Federal funds sold and securities purchased under resale
agreements."
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
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2. New Accounting Standards
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. This Statement rescinds Statement
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that Statement, Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. Statement No. 145 amends
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. In addition, Statement No. 145 requires
lease modifications to be accounted for in the same manner as sale-leaseback
transactions. The provisions of this Statement were effective for financial
statements issued on or after May 15, 2002.
In September 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit Activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). Statement
No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized using fair value when the liability is
incurred. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002.
In October 2002, the FASB issued Statement No. 147, Acquisition of Certain
Financial Institutions. This Statement provides guidance on the accounting for
the acquisition of a financial institution, which had previously been addressed
in FASB Statement No. 72, Accounting for Certain Acquisitions of Banking and
Thrift Institutions. Statement No. 147 requires the excess of the fair value of
liabilities assumed over the fair value of the tangible and identifiable assets
acquired in a business combination to be recognized as an unidentifiable
intangible asset in accordance with Statement No. 141 and No. 142. In addition,
any long-term customer-relationship intangible assets, such as
depositor-relationship, borrower-relationship, and credit cardholder intangible
assets, will be required to be tested for impairment in accordance with
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, as amended. The provisions of Statement No. 147 became effective
October 1, 2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (the Interpretation). The Interpretation will change
current practice in the accounting for, and disclosure of, guarantees, which
for Huntington apply generally to its standby letters of credit. The
Interpretation requires certain guarantees to be recorded at fair value, which
differs from the current practice of recording a liability generally when a
loss is probable and reasonably estimable, as those terms are defined in FASB
Statement No. 5, Accounting for Contingencies. The Interpretation also requires
a guarantor to make significant new disclosures, even when the likelihood of
making any payments under the guarantee is remote, which also differs from
current practice. The recognition requirements of this Interpretation are to be
applied prospectively to guarantees issued or modified after December 31, 2002.
The adoption of Statements No. 145, No. 146, and No. 147 and Interpretation No.
45 are not expected to have a material impact on Huntington's results of
operations or financial condition.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. This Statement amends Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative methods of
transition to Statement No. 123's fair value method of accounting for
stock-based employee compensation. Statement No. 148 also amends the disclosure
provisions of Statement 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While Statement No. 148 does not
amend Statement No. 123 to require companies to account for employee stock
options using the fair value method, the disclosure provisions of Statement No.
148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value
method of Statement No. 123 or the intrinsic value method of APB Opinion No.
25, which is the method currently used by Huntington.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation of Accounting Research Bulletin
No. 51 (ARB 51), Consolidated Financial Statements, addresses consolidation by
business enterprises of where ownership interests in an entity may vary over
time or, in many cases, special-purpose entities (SPEs). To be consolidated for
financial reporting, these entities must have certain characteristics. ARB 51
requires that an enterprise's consolidated financial statements include
subsidiaries in which the enterprise has a controlling financial interest. This
Interpretation requires
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
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existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
parties involved. An enterprise that holds significant variable interests in
such an entity, but is not the primary beneficiary, is required to disclose
certain information regarding its interests in that entity. This Interpretation
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds an interest
that it acquired before February 1, 2003. It also applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
This Interpretation may be applied (1) prospectively with a cumulative-effect
adjustment as of the date on which it is first applied, or (2) by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
Huntington is reviewing the implications of Interpretation No. 46 and is
considering the adoption methods permitted. Management believes that the only
impact of adoption will be the consolidation of one of the securitization
trusts formed in 2000. The consolidation of that securitization trust will
involve the recognition of the trust's net assets, which, at December 31, 2002,
included $1,020 million of indirect automobile loans, $100 million of cash, and
$1,000 million of secured debt obligations with an interest rate based on
commercial paper rates. Adoption will also eliminate the retained interest in
the securitization trust and its servicing asset related to the loans in the
trust, with carrying values at the end of 2002 of $152 million and $12 million,
respectively. The impact to Huntington's equity and results of operations will
depend on the method of transition adopted under this new interpretation.
Huntington will adopt this new standard no later than the end of the third
quarter of 2003.
3. Restructuring
In July 2001, Huntington announced a strategic refocusing plan (the Plan). The
Plan included the sale of Huntington's Florida banking and insurance
operations, the consolidation of numerous non-Florida branch offices, and
credit-related and other actions to strengthen Huntington's balance sheet and
financial performance, including the use of excess regulatory capital generated
by the sale to initiate a share repurchase program. In 2002, pre-tax
restructuring and special charges associated with the Plan totaled $56.2
million ($36.5 million after-tax, or $0.15 per share) and are reflected in
non-interest expense in the accompanying audited consolidated financial
statements.
These charges included expenses of $32.7 million related to the sale of the
Florida operations, $8.0 million for asset impairment, $4.3 million for the
exit of certain e-commerce activities, $1.8 million related to vacating
facilities, and $9.4 million for other non-recurring costs. Combined with the
amounts recorded in 2001, these pre-tax charges totaled $233.1 million ($151.5
million after-tax, or $0.61 per share) and consisted of $71.7 million related
to credit quality, $45.3 million for asset impairment, $34.7 million for the
costs related to sell the Florida operations, $20.1 million for the exit or
curtailment of certain e-commerce activities, $15.6 million related to owned or
leased facilities that Huntington vacated, and $45.7 million related to
reduction of ATMs, employee severance, non-recurring legal, accounting, and
consulting fees, and other operational costs.
Huntington has a remaining reserve for restructuring of $14.4 million at
December 31, 2002. Huntington expects that this remaining reserve will be
adequate to fund the remaining estimated future cash outlays that are expected
in the completion of the exit activities contemplated by the Plan.
Asset impairment charges included in restructuring and special charges recorded
in 2001 included $20.0 million to increase the reserve for auto lease residual
values (in addition to charges of $50.0 million and $58.2 million in 2000 and
1999, respectively) due to declines in used car prices and increased average
losses per auto.
In August 2002, Huntington restructured its interest in Huntington Merchant
Services, L.L.C. (HMS), Huntington's merchant services business, in a
transaction with First Data Merchant Services Corporation, a subsidiary of
First Data Corp. Under the agreement, Huntington extended its long-term
merchant services relationship with First Data. In addition, as part of the
transaction, First Data obtained all of Huntington's Florida-related merchant
business and increased its equity interest in HMS. This transaction resulted in
a $24.5 million pre-tax, non-operating gain ($16.0 million after tax, or $.07
per share) in 2002 while Huntington retained a nominal equity ownership in the
business.
4. Sale of Florida Operations
On February 15, 2002, Huntington completed the sale of its Florida operations
to SunTrust Banks, Inc. Included in the sale were $4.8 billion of deposits and
other liabilities and $2.8 billion of loans and other tangible assets.
Huntington received a deposit premium of 15%, or $711.9 million. The total net
pre-tax gain from the sale was $175.3 million and was reflected in non-interest
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
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income. The after-tax gain was $56.7 million, or $0.23 per common share. Income
taxes related to this transaction were $118.6 million, an amount higher than
the tax impact at the statutory rate of 35% because most of the goodwill
relating to the Florida operations was non-deductible for tax purposes.
On July 2, 2002, Huntington also completed the sale of its Florida insurance
operations, the J. Rolfe Davis Insurance Agency, Inc. (JRD). Pro forma
financial information reflecting the effect of the sales is presented and
described below.
The unaudited pro forma consolidated income statement is presented for the year
ended December 31, 2001, giving effect to the sale as if it had occurred on
January 1, 2001, and does not include the gain realized on the sale of
Huntington's Florida banking and insurance operations. This pro forma
consolidated financial statement is not indicative of the results of operations
that would have actually occurred had the transaction been consummated during
2001 or as the date indicated. This pro forma financial information is also not
intended to be an indication of the results of operations that may be attained
in the future. This pro forma consolidated financial statement should be read
in conjunction with Huntington's historical financial statements.
The income statement column entitled Florida Operations includes all
identifiable direct revenue and expenses for the Florida operations for the
year ended December 31, 2001, and any indirect revenue and expenses that
management expected to cease with the sale. In addition, net interest income in
that column includes a funding credit of $68.5 million related to $1.9 billion
of funding that Florida provided to Huntington. That funding credit was based
on the average one-year LIBOR rate for 2001 of 3.64%. The income statement
column entitled Related Transactions reflects $26.2 million interest that was
expected to be earned on the $711.9 million deposit premium and the $12.2
million proceeds for the sale of JRD over a one-year period at the same LIBOR
rate of 3.64%, the $30.2 million of amortization expense on intangibles related
to the Florida operations, and the applicable income taxes.
Unaudited Pro Forma Consolidated Income Statement for the Year Ended December
31, 2001
Florida Related Huntington
(in thousands of dollars) Huntington Operations Transactions Pro Forma
- -----------------------------------------------------------------------------------------------------
Net interest income $ 996,182 $(108,629) $ 26,356 $913,909
Provision for loan losses 308,793 (15,121) -- 293,672
- -----------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 687,389 (93,508) 26,356 620,237
- -----------------------------------------------------------------------------------------------------
Non-interest income 509,480 (76,992) -- 432,488
Non-interest expense 1,023,587 (132,707) (30,180) 860,700
- -----------------------------------------------------------------------------------------------------
Income Before Income Taxes 173,282 (37,793) 56,536 192,025
Income taxes (5,239) (12,507) 17,237 (509)
- -----------------------------------------------------------------------------------------------------
Net Income $ 178,521 $ (25,286) $ 39,299 $192,534
=====================================================================================================
Net Income Per Common Share--Diluted $0.71 $(0.10) $0.15 $0.76
=====================================================================================================
Operating Net Income (1) $ 293,522 $ (25,286) $ 39,299 $307,535
=====================================================================================================
Operating Net Income Per Common Share--Diluted (1) $1.17 $(0.10) $0.15 $1.22
=====================================================================================================
(1) Excludes restructuring and special charges.
Pro forma net income for 2002 (unaudited), which excluded the after-tax
combined loss of the Florida banking operations through February 15, 2002 and
the Florida insurance operations through June 30, 2002 of $1.5 million, and any
after-tax gains and special charges not related to the sale, was $329.2
million, or $1.35 per share. Excluding the after-tax Merchant Services
restructuring gain and the non-Florida related restructuring charges, pro forma
net income for 2002 (unaudited), was $328.5 million, or $1.35 per share.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
5. Comprehensive Income
The components of Huntington's Other Comprehensive Income are the unrealized
gains (losses) on securities available for sale, unrealized gains (losses) on
derivative instruments used in cash flow hedging relationships, and adjustment
for minimum pension liability. The related before and after tax amounts in each
of the three years ended December 31 were as follows:
(in thousands of dollars) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting method for
derivatives used in cash flow hedging relationships:
Unrealized net losses $ -- $(14,020) $ --
Related tax benefit -- 4,907 --
- ---------------------------------------------------------------------------------------------------------------
Net -- (9,113) --
- ---------------------------------------------------------------------------------------------------------------
Minimum pension liability:
Unrealized net loss (300) -- --
Related tax benefit 105 -- --
- ---------------------------------------------------------------------------------------------------------------
Net (195) -- --
- ---------------------------------------------------------------------------------------------------------------
Unrealized holding gains on securities available
for sale arising during the period:
Unrealized net gains 46,655 84,256 145,011
Related tax expense (16,082) (29,796) (51,323)
- ---------------------------------------------------------------------------------------------------------------
Net 30,573 54,460 93,688
- ---------------------------------------------------------------------------------------------------------------
Unrealized holding gains on derivatives used in cash flow
hedging relationships arising during the period:
Unrealized net gains 14,799 7,895 --
Related tax expense (5,179) (2,763) --
- ---------------------------------------------------------------------------------------------------------------
Net 9,620 5,132 --
- ---------------------------------------------------------------------------------------------------------------
Less: Reclassification adjustment for net gains from sales
of securities available for sale realized during the period:
Realized net gains 4,902 723 37,101
Related tax expense (1,716) (252) (12,986)
- ---------------------------------------------------------------------------------------------------------------
Net 3,186 471 24,115
- ---------------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income $ 36,812 $ 50,008 $ 69,573
===============================================================================================================
Activity in Accumulated Other Comprehensive Income for the most recent three
years is as follows:
Unrealized gains
Unrealized gains (losses) on derivative
Minimum (losses) on instruments used in
pension securities cash flow hedging
(in thousands of dollars) liability available for sale relationships Total
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ -- $(94,093) $ -- $(94,093)
Period change -- 69,573 -- 69,573
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- (24,520) -- (24,520)
Change in accounting method -- -- (9,113) (9,113)
Current-period change -- 53,989 5,132 59,121
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- 29,469 (3,981) 25,488
Current-period change (195) 27,387 9,620 36,812
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $(195) $ 56,856 $ 5,639 $ 62,300
===============================================================================================================
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
6. Earnings Per Share
Basic earnings per share is the amount of earnings for the period available to
each share of common stock outstanding during the reporting period. Diluted
earnings per share is the amount of earnings available to each share of common
stock outstanding during the reporting period adjusted for the potential
issuance of common shares for stock options. The calculation of basic and
diluted earnings per share for each of the three years ended December 31 is as
follows:
(in thousands, except per share amounts) 2002 2001 2000
- -------------------------------------------------------------------------------
Net Income $363,225 $178,521 $328,446
===============================================================================
Average common shares outstanding 242,279 251,078 248,709
Dilutive effect of common stock equivalents 1,733 638 861
- -------------------------------------------------------------------------------
Diluted Average Common Shares Outstanding 244,012 251,716 249,570
===============================================================================
Earnings Per Share
Basic $1.50 $0.71 $1.32
Diluted 1.49 0.71 1.32
Average common shares outstanding and the dilutive effect of stock options have
been adjusted for the 10% stock dividend paid in 2000. The average market price
of Huntington's common stock for the period was used in determining the
dilutive effect of outstanding stock options. Common stock equivalents are
computed based on the number of shares subject to stock options that have an
exercise price less than the average market price of Huntington's common stock
for the period.
Approximately 7.7 million, 9.9 million, and 7.6 million stock options were
outstanding at the end of 2002, 2001, and 2000, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
for the period and, therefore, the effect would be antidilutive. The weighted
average exercise price for these options was $22.19 per share, $20.96 per
share, and $21.49 per share at the end of the same respective periods.
At December 31, 2002, a total of 521,919 common shares associated with a recent
acquisition were held in escrow, subject to future issuance contingent upon
meeting certain contractual performance criteria. These shares, which were
included in treasury stock, will be included in the computation of basic and
diluted earnings per share at the beginning of the period when all conditions
necessary for their issuance have been met.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
7. Securities
Securities available for sale at December 31 were as follows:
Unrealized
--------------
Amortized Gross Gross Fair
(in thousands of dollars) Cost Gains Losses Value
-------------------------------------------------------------------------------
2002
U.S. Treasury $ 18,550 $ 1,362 $ -- $ 19,912
Federal agencies
Mortgage-backed securities 1,171,967 35,649 254 1,207,362
Other agencies 1,365,757 35,197 544 1,400,410
-------------------------------------------------------------------------------
Total U.S. Treasury and Federal agencies 2,556,274 72,208 798 2,627,684
Retained interests in securitizations 146,160 13,818 -- 159,978
Other securities 613,607 5,600 3,500 615,707
-------------------------------------------------------------------------------
Total Securities Available for Sale $3,316,041 $91,626 $4,298 $3,403,369
===============================================================================
2001
U.S. Treasury $ 38,928 $ 612 $ -- $ 39,540
Federal agencies
Mortgage-backed securities 828,211 14,351 1,200 841,362
Other agencies 1,410,023 32,521 1,367 1,441,177
-------------------------------------------------------------------------------
Total U.S. Treasury and Federal agencies 2,277,162 47,484 2,567 2,322,079
Retained interests in securitizations 159,790 -- -- 159,790
Other securities 367,052 5,873 5,215 367,710
-------------------------------------------------------------------------------
Total Securities Available for Sale $2,804,004 $53,357 $7,782 $2,849,579
===============================================================================
Other securities available for sale include privately placed collateralized
mortgage obligations, Federal Home Loan Bank and Federal Reserve Bank stock,
corporate debt and municipal securities, and marketable equity securities.
Contractual maturities of securities available for sale as of December 31 were:
2002 2001
- ---------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(in thousands of dollars) Cost Value Cost Value
- ---------------------------------------------------------------------------------
Under 1 year $ 42,056 $ 43,149 $ 12,011 $ 12,085
1-5 years 868,601 896,651 1,066,383 1,090,164
6-10 years 414,121 424,287 218,816 222,535
Over 10 years 1,802,257 1,835,670 1,242,609 1,259,229
Retained interests in securitizations 146,160 159,978 159,790 159,790
Marketable equity securities 42,846 43,634 104,395 105,776
- ---------------------------------------------------------------------------------
Total Securities Available for Sale $3,316,041 $3,403,369 $2,804,004 $2,849,579
=================================================================================
At December 31, 2002, the carrying value of securities pledged to secure public
and trust deposits, trading account liabilities, U.S. Treasury demand notes and
security repurchase agreements totaled $2.6 billion. There were no securities
of a single issuer, which are non-governmental or government-sponsored, that
exceeded ten percent of shareholders' equity at December 31, 2002.
Gross gains from sales of securities of $5.4 million, $9.2 million, and $66.5
million, were realized in 2002, 2001, and 2000, respectively. Gross losses
totaled $0.5 million in 2002, $8.5 million in 2001, and $29.4 million in 2000.
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Investment securities held to maturity at December 31, 2002 and 2001, were
comprised of investments in obligations of states and political subdivisions.
The amortized cost, unrealized gains and losses, and fair values of investment
securities held to maturity at December 31 were:
(in thousands of dollars) 2002 2001
- ----------------------------------------------------------------------------
Amortized cost $7,546 $12,322
Unrealized gross gains 192 215
Unrealized gross losses 13 38
- ----------------------------------------------------------------------------
Fair Value $7,725 $12,499
============================================================================
Contractual maturities of investment securities held to maturity with yields
adjusted to reflect fully taxable equivalent basis at December 31 were:
2002 2001
----------------------------------------------------------------------------
Amortized Fair Amortized Fair
(in thousands of dollars) Cost Value Yield Cost Value Yield
----------------------------------------------------------------------------
Under 1 year $2,775 $2,793 7.37% $ 3,997 $ 4,016 7.54%
1-5 years 3,096 3,209 8.03 6,369 6,508 7.78
6-10 years 1,432 1,471 8.49 1,713 1,726 8.48
Over 10 years 243 252 8.18 243 249 8.18
----------------------------------------------------------------------------
Total Investment Securities $7,546 $7,725 7.88% $12,322 $12,499 7.81%
============================================================================
8. Loans and Leases
At December 31, loans and leases were comprised of the following:
(in thousands of dollars) 2002 2001
-------------------------------------------------------------------------
Commercial loans and leases $ 5,606,363 $ 6,439,372
Real estate
Commercial loans 2,719,146 2,496,690
Construction loans 1,010,934 1,321,751
-------------------------------------------------------------------------
Total commercial and commercial real estate loans 9,336,443 10,257,813
-------------------------------------------------------------------------
Consumer
Automobile leases 3,203,421 3,207,514
Automobile loans--Indirect 3,072,017 2,883,279
Home equity loans and lines of credit 3,200,169 3,582,028
Residential mortgage loans 1,748,985 1,127,825
Other loans 394,890 543,414
-------------------------------------------------------------------------
Total consumer loans 11,619,482 11,344,060
-------------------------------------------------------------------------
Total Loans and Leases $20,955,925 $21,601,873
=========================================================================
At December 31, 2002, the carrying value of real estate qualifying loans
pledged to secure advances from the Federal Home Loan Bank was $2.7 billion.
Real estate qualifying loans are comprised of home equity loans and lines of
credit and residential mortgage loans secured by first and second liens. At
this same date, $1.5 billion of commercial loans have been pledged to secure
potential discount window borrowings from the Federal Reserve.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Huntington's loan portfolio includes lease financing receivables consisting of
direct financing leases on equipment, which are included in commercial loans,
and on automobiles, which are included in consumer loans. Net investment in
lease financing receivables by category at December 31 were as follows:
(in thousands of dollars) 2002 2001
- ---------------------------------------------------------------------------------------
COMMERCIAL
Lease payments receivable $ 191,034 $ 28,791
Estimated residual value of leased assets 28,388 4,480
- ---------------------------------------------------------------------------------------
Gross investment in commercial lease financing receivables 219,422 33,271
Unearned income (24,678) (2,859)
- ---------------------------------------------------------------------------------------
TOTAL NET INVESTMENT IN COMMERCIAL LEASE FINANCING RECEIVABLES $ 194,744 $ 30,412
=======================================================================================
CONSUMER
Automobile lease payments receivable $1,898,711 $1,898,277
Estimated residual value of leased automobiles 1,688,888 1,763,202
- ---------------------------------------------------------------------------------------
Gross investment in consumer lease financing receivables 3,587,599 3,661,479
Deferred fees and costs 46,787 46,599
Unearned income (430,965) (500,564)
- ---------------------------------------------------------------------------------------
TOTAL NET INVESTMENT IN CONSUMER LEASE FINANCING RECEIVABLES $3,203,421 $3,207,514
=======================================================================================
RELATED PARTY TRANSACTIONS
Huntington has made loans to its officers, directors, and their associates.
These loans were made in the ordinary course of business under normal credit
terms, including interest rate and collateralization, and do not represent more
than the normal risk of collection. These loans to related parties are
summarized as follows:
(in thousands of dollars) 2002 2001
- ---------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 133,844 $ 145,761
Loans made 114,694 236,260
Repayments (145,185) (234,011)
Changes due to status of executive officers and directors (7,792) (14,166)
- ---------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 95,561 $ 133,844
=======================================================================================
NON-PERFORMING ASSETS AND PAST DUE LOANS AND LEASES
At December 31, 2002 and 2001, the loans and leases in non-accrual status and
loans past due 90 days or more and still accruing interest, were as follows:
(in thousands of dollars) 2002 2001
- ---------------------------------------------------------------------------------------
Commercial loans and leases $ 91,861 $159,637
Real Estate
Construction 5,554 13,885
Commercial 21,211 34,475
Residential 9,443 11,836
- ---------------------------------------------------------------------------------------
TOTAL NON-ACCRUAL LOANS AND LEASES $128,069 $219,833
=======================================================================================
ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 73,122 $ 91,635
=======================================================================================
The amount of interest that would have been recorded under the original terms
for total loans and leases classified as non-accrual or renegotiated was $12.6
million for 2002, $10.3 million for 2001, and $6.5 million for 2000. Amounts
actually collected and recorded as interest income for these loans and leases
totalled $5.1 million, $4.9 million, and $3.9 million for 2002, 2001, and 2000,
respectively.
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
9. Loan Securitizations
During 2002 and 2001, Huntington sold automobile loans in securitization
transactions totaling $480.0 million and $439.1 million, respectively.
Huntington retained the interest rate risk and the rights to future cash flows
arising after the investors in the securitization trusts have received their
contractual return. These cash flows arise from cash reserve accounts, loan
collateral in excess of the note amounts issued by the securitization trusts,
and excess interest collections. Huntington's interests are subordinate to
investors' interests. The investors and the securitization trusts have no
recourse to Huntington's other assets for failure of debtors to pay when due.
At December 31, 2002 and 2001, the fair value of Huntington's retained interest
in automobile loan securitizations was $160.0 million and $159.8 million,
respectively. Management periodically reviews the assumptions underlying these
values. If these assumptions change, the related asset and income would be
affected.
Huntington has retained servicing responsibilities and receives annual
servicing fees of 1.0% of the outstanding loan balances. Servicing income, net
of amortization of capitalized servicing assets, amounted to $1.0 million in
2002, $3.6 million in 2001, and $2.0 million in 2000. The related servicing
asset had a value of $12.7 million at the end of 2002 and $17.6 million at the
end of 2001. Impairment charges of retained interests were $4.0 million in 2002
and $12.2 million in 2001. Impairment on capitalized servicing was $1.5 million
in 2002 and $1.3 million in 2001. No impairment of retained interests or
capitalized servicing was recorded in 2000.
Huntington recorded net pre-tax gains of $11.0 million, $6.6 million, and $4.9
million in 2002, 2001, and 2000, respectively, from automobile loan
securitizations. Gains or losses from securitizations depend in part on the
previous carrying amount of the financial assets involved, which are allocated
between the assets sold and the retained interests based on their relative fair
value at the date of transfer.
Quoted market prices are generally not available for retained interest in
automobile loan securitizations. The key economic assumptions used to measure
the fair value of the retained interest at the time of securitization during
2002 are included in the table below. In 2002 and 2001, the interest rate paid
to transferees on variable rate securities was estimated based on the forward
one-month London Interbank Offered Rate (LIBOR) yield plus the average
contractual spread over LIBOR of 34 basis points.
At December 31, 2002, the assumptions and the sensitivity of the current fair
value of the retained interest to immediate 10% and 20% adverse changes in
those assumptions were:
Decline in fair value due to
----------------------------
10% 20%
adverse adverse
(in millions of dollars) Actual change change
- -----------------------------------------------------------------------------------------------------------------------------
Monthly prepayment rate (ABS curve) 1.45 $0.7 $1.4
Expected annual credit losses 1.55% 2.3 4.6
Discount rate 10.00% 1.8 3.6
Interest rate on variable securities--Forward one-month LIBOR yield plus 34 basis points 2.7 5.4
Caution should be used when reading these sensitivities as a change in an
individual assumption and its impact on fair value is shown independent of
changes in other assumptions. Economic factors are dynamic and may counteract
or magnify sensitivities.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Certain cash flows received from and paid to securitization trusts were:
Twelve Months Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
(in million of dollars) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Collections used by the trusts to purchase new balances in revolving securitizations $480 $439
Servicing fees received 12 14
Other cash flows received on retained interest 81 32
Servicing advances -- (3)
Repayments of servicing advances -- 3
Managed Automobile Loans
A summary of the components of managed automobile loans, which represents both
owned and securitized loans, including quantitative information about
delinquencies and net loan losses at December 31, was as follows:
(in millions of dollars) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Loans held in portfolio $3,072 $2,883
Loans securitized 1,119 1,225
- ---------------------------------------------------------------------------------------------------------------------
Total Managed Automobile Loans $4,191 $4,108
=====================================================================================================================
Net loan losses as a % of average managed loans 1.51% 1.67%
Delinquencies (30 days or more) as a percent of year-end managed loans 2.57% 3.64%
Residential Mortgage Loans
During 2002, Huntington securitized $386.4 million of residential mortgage
loans and retained all of the resulting securities and, accordingly,
reclassified the securitized amount from loans to securities available for sale.
10. Allowance for Loan and Lease Losses
A summary of the transactions in the allowance for loan and lease losses and
details regarding impaired loans follows for the three years ended December 31:
(in thousands of dollars) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 410,572 $ 297,880 $ 299,309
Loan and lease losses (289,838) (227,315) (110,845)
Recoveries of loans previously charged off 50,519 37,868 27,756
- ---------------------------------------------------------------------------------------------------------------------
Net charge-offs (239,319) (189,447) (83,089)
- ---------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 227,340 308,793 90,479
Allowance of securitized or sold loans (1) (31,462) (6,654) (16,719)
Allowance of assets acquired 1,264 -- 7,900
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 368,395 $ 410,572 $ 297,880
=====================================================================================================================
Recorded Balance of Impaired Loans, at end of year (2):
With related allowance for loan and lease losses $ 91,578 $ 168,753 $ 51,693
With no related allowance for loan and lease losses 2,972 2,557 5,261
- ---------------------------------------------------------------------------------------------------------------------
Total $ 94,550 $ 171,310 $ 56,954
=====================================================================================================================
Average Balance of Impaired Loans for the Year (2) $ 87,286 $ 111,921 $ 33,705
=====================================================================================================================
Allowance for Loan and Lease Losses Related to Impaired Loans (2) $ 37,984 $ 65,125 $ 12,944
=====================================================================================================================
(1) In conjunction with the automobile loan securitizations in 2002, 2001, and
2000, an allowance for loan and lease losses attributable to the associated
loans sold was included as a component of the loan's carrying value upon
their sale. The allowance associated with the sale of the Florida banking
and insurance operations was $22,297.
(2) Includes impaired commercial and commercial real estate loans with
outstanding balances greater then $500,000. A loan is impaired when it is
probable that Huntington will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impaired loans
are included in non-performing assets. There was no interest recognized in
2002, 2001, and 2000 on impaired loans while they were considered impaired.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
11. Premises and Equipment
At December 31, premises and equipment stated at cost were comprised of the
following:
(in thousands of dollars) 2002 2001
- -------------------------------------------------------------------------------
Land and land improvements $ 56,782 $ 78,272
Buildings 211,700 271,452
Leasehold improvements 123,944 132,267
Equipment 447,374 496,163
- -------------------------------------------------------------------------------
Total premises and equipment 839,800 978,154
Less accumulated depreciation and amortization 498,434 526,118
- -------------------------------------------------------------------------------
Net Premises and Equipment $341,366 $452,036
===============================================================================
Depreciation and amortization charged to expense and rental income credited to
occupancy expense for the year ended December 31 were:
(in thousands of dollars) 2002 2001 2000
- -------------------------------------------------------------------------------------
Total depreciation and amortization of premises and equipment $46,319 $53,805 $49,117
=====================================================================================
Rental income credited to occupancy expense $15,868 $17,662 $16,030
=====================================================================================
12. Intangible Assets
Goodwill and other intangible assets, net of accumulated amortization, and
related activity for the years ended December 31, 2002 and 2001, was as follows:
(in thousands of dollars) 2002 2001
- -------------------------------------------------------------------------------
Balance, beginning of period $ 716,054 $755,270
Sale of Florida banking and insurance operations (524,105) --
Additions 28,637 3,903
Impairment -- (1,894)
Amortization (2,019) (41,225)
- -------------------------------------------------------------------------------
Balance, end of period $ 218,567 $716,054
===============================================================================
At December 31, goodwill and other intangible assets, net of accumulated
amortization, were comprised of:
(in thousands of dollars) 2002 2001
- -------------------------------------------------------------------------------
Goodwill $211,282 $649,179
Core deposit -- 58,776
Leasehold 7,285 8,099
- -------------------------------------------------------------------------------
Balance, end of period $218,567 $716,054
===============================================================================
The additions totaling $28.6 million for 2002 related to the acquisitions of
LeaseNet Group, Inc., a $90 million leasing company, and Haberer Registered
Investment Advisor, Inc., a Cincinnati-based registered investment advisory
firm. During 2002, Huntington completed the sale of its Florida insurance
operations, the J. Rolfe Davis Insurance Agency, Inc. (JRD), resulting in a
$12.2 million write-off of the remaining associated goodwill. Impairment of
$1.9 million in 2001 was related to the exit of an e-commerce business activity
and represented its remaining goodwill balance.
Before the sale of Huntington's operations in Florida, a majority of goodwill
and other intangible assets related to those operations. A substantial portion
of the remaining goodwill is attributable to the previously acquired banking
operations reported under the Regional Banking line of business. The
application of the non-amortization provisions of Statement No. 142 resulted in
an increase in net income per share of $0.05 for 2002. Had no amortization of
goodwill, net of tax, been recorded in the prior year, net income and diluted
earnings per share for 2001 would have been greater by $33.2 million, or $0.13
per share.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
13. Deposit Liabilities
At December 31, deposits were comprised of the following:
(in thousands of dollars) 2002 2001
- -------------------------------------------------------------------------------
Demand deposits
Non-interest bearing $ 3,073,869 $ 3,635,173
Interest bearing 5,374,095 5,723,160
Savings deposits 2,851,158 3,466,305
Other domestic time deposits 3,956,306 5,868,451
- -------------------------------------------------------------------------------
Total Core Deposits 15,255,428 18,693,089
- -------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 731,959 1,130,563
Brokered time deposits and negotiable CDs 1,092,754 137,915
Foreign time deposits 419,185 225,737
- -------------------------------------------------------------------------------
Total Deposits $17,499,326 $20,187,304
===============================================================================
Core deposits were comprised of interest bearing and non-interest bearing
demand deposits, savings deposits, and other domestic time deposits. Other
domestic time deposits are comprised of certificates of deposit under $100,000
and all IRA deposits. Brokered time deposits represent funds that Huntington
has obtained by or through a deposit broker. The entire beneficial interest in
the deposit may be held by a single depositor or Huntington may own a
participation in a given deposit or instrument which the broker has sold to
Huntington and other investors. At December 31, 2002, $787.8 million of
brokered deposits were issued in donominations of $100,000 or more and
participated by the broker in shares of $100,000 or less. Foreign time deposits
were comprised of time certificates of deposit issued by Huntington's foreign
offices in denomination of $100,000 or more. Foreign deposits are interest
bearing and all mature in one year or less.
The aggregate amount of certificates of deposit and other time deposits issued
by domestic offices was $5.8 billion and $7.1 billion at December 31, 2002 and
2001, respectively. The contractual maturity of these deposits at the end of
2002 was as follows: $2.56 billion in 2003; $1.38 billion in 2004; $463 million
in 2005; $386 million in 2006; $402 million in 2007; and $596 million
thereafter.
Domestic certificates of deposit and other time deposits of $100,000 or more
totaled $1.9 billion at the end of 2002 and $1.1 billion at the end of 2001.
The contractual maturity of these deposits at December 31, 2002, was as
follows: $343 million in three months or less; $182 million after three months
through six months; $212 million after six months through twelve months; and
$1,166 million after twelve months.
Demand deposit overdrafts that have been reclassified as loan balances were
$18.2 million and $25.6 million at December 31, 2002 and 2001, respectively.
14. Short-term Borrowings
At December 31, short-term borrowings were comprised of the following:
(in thousands of dollars) 2002 2001
- -------------------------------------------------------------------------------
Federal funds purchased $1,244,637 $ 423,783
Securities sold under agreements to repurchase 1,213,886 1,489,824
Commercial paper 5,031 2,876
Other 77,462 39,443
- -------------------------------------------------------------------------------
Total Short-term Borrowings $2,541,016 $1,955,926
===============================================================================
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Information concerning securities sold under agreements to repurchase at
December 31 is summarized as follows:
(in thousands of dollars) 2002 2001
- -------------------------------------------------------------------------------
Average balance during the year $1,284,406 $1,490,209
Average interest rate during the year 1.97% 3.58%
Maximum month-end balance during the year $1,488,069 $1,620,479
Commercial paper is issued by Huntington Bancshares Financial Corporation, a
non-bank subsidiary, with principal and interest guaranteed by Huntington.
15. Medium- and Long-term Debt
At December 31, Huntington's medium- and long-term debt consisted of the
following:
(in thousands of dollars) 2002 2001
- -------------------------------------------------------------------------------
Medium-term
The Huntington National Bank (maturing through
2005) $1,905,123 $1,755,002
Parent company 140,000 40,000
- -------------------------------------------------------------------------------
Total Medium-term Debt $2,045,123 $1,795,002
===============================================================================
Long-term
Parent company:
7 7/8% subordinated notes due 2002 $ -- $ 149,888
The Huntington National Bank:
7 5/8% subordinated notes due 2003 150,572 157,494
6 3/4% subordinated notes due 2003 102,470 104,942
6 3/5% subordinated notes due 2018 220,824 198,153
Floating rate subordinated notes due 2008 100,000 100,000
8% subordinated notes due 2010 164,812 166,853
- -------------------------------------------------------------------------------
Total subordinated notes 738,678 877,330
- -------------------------------------------------------------------------------
7 7/8% Class C preferred securities of REIT subsidiary 50,000 50,000
- -------------------------------------------------------------------------------
Total Long-term Debt $ 788,678 $ 927,330
===============================================================================
Federal Home Loan Bank advances due through 2007 $1,013,000 $ 17,000
===============================================================================
Amounts above are reported net of unamortized discounts and include values
related to hedging with derivative financial instruments. Huntington uses these
derivative instruments, principally interest rate swaps, to match the funding
rates on certain assets by hedging the cash flow variability associated with
certain variable-rate debt by converting the debt to fixed rate and hedging the
fair values of certain fixed-rate debt by converting the debt to variable rate.
See Note 17 for more information regarding such financial instruments.
The weighted-average interest rate for medium-term notes at December 31, 2002
and 2001, was 1.56% and 2.57%, respectively. The parent company issued $100
million of medium-term notes in 2002 that mature in 2004. The parent company
medium-term notes issued in 2001 will mature in the first quarter of 2003.
The weighted-average interest rate for subordinated notes was 6.47% at December
31, 2002 and 6.79% at the end of 2001. The Huntington National Bank's floating
rate subordinated notes were issued in 1998 and are based on three-month LIBOR.
At December 31, 2002, these notes carried an interest rate of 1.88%. The parent
company 7 7/8% subordinated notes matured in 2002.
In 2001, Huntington issued $50 million of noncumulative preferred securities of
Huntington Preferred Capital, Inc., a real estate investment trust subsidiary
(REIT), which qualify for regulatory capital. Dividends are payable quarterly
at a fixed rate of 7 7/8% and the shares are not redeemable prior to December
31, 2021.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Long-term advances from the Federal Home Loan Bank had weighted average
interest rates of 1.62% at December 31, 2002, and 6.02% at December 31, 2001.
These advances, which had a combination of fixed and variable interest rates in
2002 and fixed in 2001, were collateralized by qualifying real estate loans and
securities.
The terms of Huntington's medium- and long-term debt obligations and its
advances from the Federal Home Loan Bank contain various restrictive covenants
including limitations on the acquisition of additional debt in excess of
specified levels, dividend payments, and the disposition of subsidiaries. As of
December 31, 2002, Huntington was in compliance with all such covenants.
Medium and long-term debt maturities for the next five years are as follows:
$843.2 million in 2003; $958.0 million in 2004; $610.0 million in 2005; none in
2006; $900.0 million in 2007; and $535.6 million in 2008 and thereafter.
16. Capital Securities
Company obligated mandatorily redeemable preferred capital securities of
subsidiary trusts holding solely the junior subordinated debentures of the
parent company (Capital Securities) were issued by two business trusts,
Huntington Capital I and II (the Trusts). Huntington Capital I was formed in
January 1997 while Huntington Capital II was formed in June 1998. The proceeds
from the issuance of the Capital Securities and common securities were used to
purchase debentures of the parent company. The Trusts hold junior subordinated
debentures of the parent company, which are the only assets of the Trusts. Both
the debentures and related income statement effects are eliminated in
Huntington's consolidated financial statements.
The parent company has entered into contractual arrangements that, taken
collectively and in the aggregate, constitute a full and unconditional
guarantee by the parent company of the Trusts' obligations under the capital
securities issued. The contractual arrangements guarantee payment of (a)
accrued and unpaid distributions required to be paid on the Capital Securities;
(b) the redemption price with respect to any capital securities called for
redemption by Huntington Capital I or II; and (c) payments due upon voluntary
or involuntary liquidation, winding-up, or termination of Huntington Capital I
or II. The Capital Securities and common securities, and related debentures are
summarized as follows:
December 31, 2002
------------------------------------------------------------------------------
Interest Rate of Maturity of
Capital Securities and Capital Securities
(in thousands of dollars) Securities Debentures and Debentures
------------------------------------------------------------------------------
Huntington Capital I $200,000 LIBOR + .70% (1) 02/01/2027
Huntington Capital II 100,000 LIBOR + .625% (2) 06/15/2028
------------------------------------------------------------------------------
Total Capital Securities $300,000
==============================================================================
(1) Variable effective rate at December 31, 2002 and 2001, of 2.46% and 2.97%,
respectively.
(2) Variable effective rate at December 31, 2002 and 2001, of 2.04% and 2.50%,
respectively.
The debentures held by Huntington Capital I and II qualify as Tier 1 capital
under Federal Reserve Bank guidelines.
17. Derivative Financial Instruments
Huntington uses a variety of derivative financial instruments, principally
interest rate swaps, in its asset and liability management activities to
protect against the risk of adverse price or interest rate movements on the
value of certain assets and liabilities and on future cash flows. These
instruments provide Huntington with flexibility in adjusting its sensitivity to
changes in interest rates without exposure to loss of principal and higher
funding requirements. By using derivatives to manage interest rate risk, the
effect is a smaller, more efficient balance sheet, with a lower wholesale
funding requirement and a higher net interest margin, but with a comparable
level of net interest revenue and return on equity. All derivatives are
reflected at fair value in Huntington's statements of financial condition.
Market risk, which is the possibility that economic value of net assets or net
interest income will be adversely affected by changes in interest rates or
other economic factors, is managed through the use of derivatives. Derivatives
also meet customers' financing needs but, like other financial instruments,
contain an element of credit risk, which is the possibility that Huntington
will incur a loss because a counterparty fails to meet its contractual
obligations. Notional values of interest rate swaps and other off-balance sheet
financial instruments significantly exceed the credit risk associated with
these instruments and represent contractual balances on which calculations of
amounts to be exchanged are based. Credit exposure is limited to the sum of the
aggregate fair value of
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
positions that have become favorable to Huntington, including any accrued
interest receivable due from counterparties. Potential credit losses are
minimized through careful evaluation of counterparty credit standing, selection
of counterparties from a limited group of high quality institutions, collateral
agreements, and other contract provisions.
Asset and Liability Management
Derivatives that are used in asset and liability management are classified as
fair value hedges or cash flow hedges and are required to meet specific
criteria. To qualify as a hedge, the hedge relationship is designated and
formally documented at inception, detailing the particular risk management
objective and strategy for the hedge. This includes identifying the item and
risk being hedged, the derivative being used, and how the effectiveness of the
hedge is being assessed. A derivative must be highly effective in accomplishing
the objective of offsetting either changes in fair value or cash flows for the
risk being hedged. Correlation is evaluated on a retrospective and prospective
basis using quantitative measures. If a hedge relationship is found to be
ineffective, it no longer qualifies as a hedge and any excess gains or losses
attributable to ineffectiveness, as well as subsequent changes in fair value,
are recognized in other income.
For fair value hedges, Huntington effectively converts specified fixed-rate
deposits, short-term borrowings, and long-term debt to variable rate
obligations by entering into interest rate swap contracts whereby fixed-rate
interest is received in exchange for variable-rate interest without the
exchange of the contract's underlying notional amount. Forward contracts, used
primarily by Huntington in connection with its mortgage banking activities,
settle in cash at a specified future date based on the differential between
agreed interest rates applied to a notional amount. The changes in fair value
of the hedged item and the hedging instrument are reflected in current
earnings. Huntington recognized an insignificant loss in 2002 and no gain or
loss in 2001 in connection with the ineffective portion of its fair value
hedging instruments. Furthermore, there were no gains or losses on derivatives
designated as fair value hedges that were excluded from the assessment of
effectiveness during 2002 and 2001.
For cash flow hedges, Huntington also entered into interest rate swap contracts
that pay fixed-rate interest in exchange for the receipt of variable-rate
interest without the exchange of the contract's underlying notional amount,
which effectively converted a portion of its floating-rate debt to fixed-rate.
This reduced the potentially adverse impact of increases in interest rates on
future interest expense. In like fashion, Huntington effectively converted
certain prime-based and LIBOR-based commercial loans to fixed-rate by entering
into contracts that swap variable-rate interest for fixed-rate interest over
the life of the contracts.
Huntington also used interest rate swaps to manage the interest rate risk
associated with its retained interest in a securitization trust. This retained
interest provides Huntington with the right to receive any future cash flows
arising after the investors in the securitization trust have received their
contractual return. As the trust holds fixed rate indirect automobile loans and
is funded with floating rate notes, the future cash flows associated with the
retained interest will vary with interest rates. The interest rate swaps used
convert the variable portion of these future cash flows to a fixed cash flow.
To the extent these derivatives are effective in offsetting the variability of
the hedged cash flows, changes in the derivatives' fair value will not be
included in current earnings but are reported as a component of Accumulated
Other Comprehensive Income in Shareholders' Equity. These changes in fair value
will be included in earnings of future periods when earnings are also affected
by the changes in the hedged cash flows. To the extent these derivatives are
not effective, changes in their fair values are immediately included in
earnings. During 2002, Huntington recognized a net loss in connection with the
ineffective portion of its cash flow hedging instruments and a net gain in
2001. The amounts were classified in other non-interest income and were
insignificant in both years. No amounts were excluded from the assessment of
effectiveness during 2002 and 2001 for derivatives designated as cash flow
hedges.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Derivatives used to manage Huntington's interest rate risk at December 31,
2002, are shown in the table below.
Weighted-Average
Average Rate
Maturity ----------------
(in thousands of dollars) Notional Value (years) Fair Value Receive Pay
- --------------------------------------------------------------------------------------
Asset conversion swaps
Receive fixed--generic $ 750,000 3.6 $ 48,376 5.12% 1.47%
Pay fixed--generic 750,000 0.9 (12,882) 1.42 3.65
- --------------------------------------------------------------------------------------
Total asset conversion swaps 1,500,000 2.3 35,494 3.27 2.56
- --------------------------------------------------------------------------------------
Liability conversion swaps
Receive fixed--generic 400,000 5.9 24,946 6.97 1.81
Receive fixed--callable 628,500 11.0 (6,020) 5.59 1.51
Pay fixed--generic 1,791,000 1.7 (20,653) 1.49 3.48
Receive fixed--forwards 10,000 N/A -- N/A N/A
Pay fixed--forwards 650,000 N/A (20,717) N/A N/A
- --------------------------------------------------------------------------------------
Total liability conversion swaps 4,229,500 3.6 (35,326) 3.18 2.80
- --------------------------------------------------------------------------------------
Total Swap Portfolio $4,979,500 3.6 $ 13,050 3.21% 2.72%
======================================================================================
The fair value of the swap portfolio used for asset and liability management
was $3.7 million at December 31, 2001. These values must be viewed in the
context of the overall financial structure of Huntington, including the
aggregate net position of all on- and off-balance sheet financial instruments.
As is the case with cash securities, the market value of interest rate swaps is
largely a function of the financial market's expectations regarding the future
direction of interest rates. Accordingly, current market values are not
necessarily indicative of the future impact of the swaps on net interest
income. This will depend, in large part, on the shape of the yield curve as
well as interest rate levels. Management made no assumptions regarding future
changes in interest rates with respect to the variable rate information
presented in the table above.
The next table represents the gross notional value of derivatives used to
manage interest rate risk at December 31, 2002, identified by the underlying
interest rate-sensitive instruments. The notional amounts shown in the tables
above and below should be viewed in the context of Huntington's overall
interest rate risk management activities to assess the impact on the net
interest margin. The hedges associated with medium-term notes, Federal Home
Loan Bank (FHLB) advances, and deposits below include $600.0 million, $50.0
million, and $10.0 million in notional value of forward-starting swaps,
respectively.
Fair Value Cash Flow
(in thousands of dollars) Hedges Hedges Total
- -------------------------------------------------------------------------------
Instruments associated with:
Loans $ -- $ 750,000 $ 750,000
Securities available for sale -- 750,000 750,000
Deposits 638,500 -- 638,500
FHLB Advances -- 400,000 400,000
Medium-term notes -- 1,890,000 1,890,000
Subordinated notes and other long-term debt 400,000 151,000 551,000
- -------------------------------------------------------------------------------
Total Notional Value at December 31, 2002 $1,038,500 $3,941,000 $4,979,500
===============================================================================
The estimated amount of the existing unrealized gains and losses to be
reclassified to pre-tax earnings from Accumulated Other Comprehensive Income
within the next twelve months is expected to be a net loss of $11.4 million.
Huntington regularly enters into collateral agreements as part of the
underlying derivative agreements with its counterparties to mitigate the credit
risk associated with both the derivatives used for asset and liability
management and used in trading activities. At December 31, 2002 and 2001,
Huntington's aggregate credit risk associated with these derivatives, net of
collateral that has been pledged by the counterparty, was $15.9 million and
$45.0 million, respectively. The credit risk associated with interest rate
swaps is calculated after considering master netting agreements.
Huntington entered into these derivative financial instruments to alter the
interest rate risk embedded in its assets and liabilities. Consequently, net
amounts receivable or payable on contracts hedging either interest earning
assets or interest bearing liabilities
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
were accrued as an adjustment to either interest income or interest expense.
The net amount resulted in interest income exceeding interest expense by $48.4
million in 2002, and interest expense exceeding interest income by $6.2 million
and $12.7 million in 2001 and 2000, respectively.
Derivatives Used in Trading Activities
Huntington offers various derivative financial instruments to enable customers
to meet their financing and investing objectives and for risk management
purposes. Derivative financial instruments held in Huntington's trading
portfolio during 2002 and 2001 consisted predominantly of interest rate swaps,
but also included interest rate caps, floors, and futures, as well as foreign
exchange options. Interest rate options grant the option holder the right to
buy or sell an underlying financial instrument for a predetermined price before
the contract expires. Interest rate futures are commitments to either purchase
or sell a financial instrument at a future date for a specified price or yield
and may be settled in cash or through delivery of the underlying financial
instrument. Interest rate caps and floors are option-based contracts that
entitle the buyer to receive cash payments based on the difference between a
designated reference rate and a strike price, applied to a notional amount.
Written options, primarily caps, expose Huntington to market risk but not
credit risk. Purchased options contain both credit and market risk. They are
used to manage fluctuating interest rates as exposure to loss from interest
rate contracts changes.
Supplying these derivatives to customers provides Huntington with fee income.
These instruments are carried at fair value with gains and losses reflected in
other non-interest income. Total trading revenue for customer accommodation was
$6.4 million in 2002, $8.4 million in 2001, and $854,000 in 2000. The total
notional value of derivative financial instruments used by Huntington on behalf
of customers (for which the related interest rate risk is offset by third
parties) was $3.2 billion at the end of 2002 and $2.0 billion at the end of the
prior year. Huntington's credit risk from interest rate swaps used for trading
purposes was $92.1 million and $36.2 million at the same dates.
In connection with its securitization activities, Huntington purchased interest
rate caps with a notional value totaling $1 billion. These purchased caps were
assigned to the securitization trust for the benefit of the security holders.
Interest rate caps were also sold totaling $1 billion outside the
securitization structure. Both the purchased and sold caps are marked to market
through income in accordance with accounting principles generally accepted in
the United States.
18. Stock-Based Compensation
Huntington sponsors nonqualified and incentive stock option plans. These plans
provide for the granting of stock options to officers and other employees.
Huntington's Board of Directors has approved all of the plans. Shareholders
have approved each of the plans, except for the broad-based Employee Stock
Incentive Plan. Approximately 18.1 million shares have been authorized under
the plans, of which 7.7 million were available at December 31, 2002 for future
grants. Options that were granted in the most recent five years vest ratably
over three years or when other conditions are met while those granted in 1994
through 1997 vested ratably over four years. All grants preceding 1994 became
fully exercisable after one year. All options granted have a maximum term of
ten years.
The fair value of the options granted was estimated at the date of grant using
a Black-Scholes option-pricing model. Huntington's stock option activity and
related information for each of the recent three years ended December 31 is
summarized below:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(in thousands, except per share amounts) Options Price Options Price Options Price
- -----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 14,649 $18.70 9,482 $19.26 7,719 $20.07
Granted 5,511 18.78 6,820 17.46 2,526 16.10
Exercised (887) 12.79 (606) 9.30 (298) 8.15
Forfeited/expired (1,249) 19.89 (1,047) 21.13 (465) 22.69
- -----------------------------------------------------------------------------------------------------------
Outstanding at end of year 18,024 $18.97 14,649 $18.70 9,482 $19.26
===========================================================================================================
Exercisable at end of year 8,352 $19.62 7,346 $19.34 5,399 $18.18
===========================================================================================================
Weighted-Average Fair Value of
Options Granted During the Year $ 5.18 $ 4.55 $ 5.58
===========================================================================================================
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Additional information regarding options outstanding as of December 31, 2002,
is as follows:
(in thousands, except per share amounts) Options Outstanding Exercisable Options
- ------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
- ------------------------------------------------------------------------------------------
$6.64 to $10.50 196 0.1 $10.16 196 $10.16
$10.51 to $15.50 3,629 6.1 14.54 3,049 14.47
$15.51 to $20.50 11,358 8.7 18.60 2,266 18.46
$20.51 to $25.50 435 5.2 23.81 435 23.81
$25.51 to $28.35 2,406 6.1 27.26 2,406 27.26
- ------------------------------------------------------------------------------------------
Total 18,024 7.7 $18.97 8,352 $19.62
==========================================================================================
The following pro forma disclosures for net income and earnings per diluted
common share is presented as if Huntington had applied the fair value method of
accounting of Statement No. 123, Accounting for Stock-Based Compensation, in
measuring compensation costs for stock options. The fair values of the stock
options granted were estimated using the Black-Scholes option-pricing model.
This model assumes that the estimated fair value of the options is amortized
over the options' vesting periods and the compensation costs would be included
in personnel expense on the income statement. The following table also includes
the weighted-average assumptions that were used in the option-pricing model for
options granted in each of the last three years:
(in millions of dollars, except per share amounts) 2002 2001 2000
- --------------------------------------------------------------------------------
Assumptions
Risk-free interest rate 4.12% 5.05% 6.14%
Expected dividend yield 3.34 4.99 4.37
Expected volatility of Huntington's common stock 33.8 41.0 45.1
Pro Forma Results
Net income, as reported $363.2 $178.5 $328.4
Less pro forma expense related to options granted 12.7 12.1 10.3
- --------------------------------------------------------------------------------
Pro Forma Net Income $350.5 $166.4 $318.1
================================================================================
Net Income Per Common Share:
Basic, as reported $1.50 $0.71 $1.32
Basic, pro forma 1.45 0.66 1.28
Diluted, as reported 1.49 0.71 1.32
Diluted, pro forma 1.44 0.66 1.27
19. Benefit Plans
Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan), a
non-contributory defined benefit pension plan covering substantially all
employees. The Plan provides benefits based upon length of service and
compensation levels. The funding policy of Huntington is to contribute an
annual amount that is at least equal to the minimum funding requirements but
not more than that deductible under the Internal Revenue Code.
At December 31, 2002 and 2001, The Huntington National Bank, as trustee, held
all Plan assets. The Plan assets consisted of investments in a variety of
Huntington mutual funds and Huntington common stock as follows:
Fair Value
- ------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
- ------------------------------------------------------------------------------
Huntington mutual funds $238,333 $214,357
Huntington common stock 12,019 19,637
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
The number of shares of Huntington common stock held by the Plan was 642,364 at
December 31, 2002 and 1,142,364 at the end of the prior year. Dividends
received by the Plan during 2002 and 2001 were $6.1 million and $7.7 million,
respectively. Huntington common stock comprised approximately 4% of the Plan's
assets at the end of 2002 and approximately 8% at the end of 2001. The Plan has
acquired and held Huntington common stock in compliance at all times with
Section 407 of the Employee Retirement Income Security Act of 1978.
In addition, Huntington has an unfunded defined benefit post-retirement plan
that provides certain health care and life insurance benefits to retired
employees who have attained the age of 55 and have at least 10 years of vesting
service under this plan. For any employee retiring on or after January 1, 1993,
post-retirement healthcare benefits are based upon the employee's number of
months of service and are limited to the actual cost of coverage. Life
insurance benefits are a percentage of the employee's base salary at the time
of retirement, with a maximum of $50,000 of coverage.
The following table reconciles the funded status of the Plan and the
post-retirement benefit plan at the September 30 measurement dates with the
amounts recognized in the consolidated balance sheets at December 31:
Pension Benefits Post-Retirement Benefits
- -----------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at beginning of measurement year $212,935 $209,954 $ 51,430 $ 46,119
Changes due to:
Service cost 8,263 8,394 1,126 1,060
Interest cost 15,458 14,675 3,603 3,435
Benefits paid (18,920) (16,008) (3,456) (3,810)
Curtailment -- (2,475) (1,472) --
Plan amendments 1,423 1,785 -- --
Actuarial assumptions 34,297 (3,390) 2,321 4,626
- -----------------------------------------------------------------------------------------------------------
Total changes 40,521 2,981 2,122 5,311
- -----------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at end of measurement year 253,456 212,935 53,552 51,430
- -----------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at beginning of measurement year 226,959 206,936 -- --
Changes due to:
Actual return on plan assets (16,396) (5,969) -- --
Employer contributions 55,000 42,000 -- --
Benefits paid (18,920) (16,008) -- --
- -----------------------------------------------------------------------------------------------------------
Total changes 19,684 20,023 -- --
- -----------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at end of measurement year 246,643 226,959 -- --
- -----------------------------------------------------------------------------------------------------------
Projected benefit obligation (greater) less than plan assets (6,813) 14,024 (53,552) (51,430)
Unrecognized net actuarial loss (gain) 101,155 26,068 1,924 (399)
Unrecognized prior service cost 1,791 183 5,043 6,450
Unrecognized transition (asset) liability, net of amortization (274) (540) 11,040 13,868
- -----------------------------------------------------------------------------------------------------------
Prepaid (Accrued) Benefit Costs $ 95,859 $ 39,735 $(35,545) $(31,511)
===========================================================================================================
Weighted-average assumptions at September 30
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.50 9.75 N/A N/A
Rate of compensation increase 5.00 5.00 N/A N/A
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
The following table shows the components of pension cost recognized in the most
recent three years:
Pension Benefits Post-Retirement Benefits
- ---------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Service cost $ 8,263 $ 8,394 $ 10,241 $1,126 $1,060 $1,544
Interest cost 15,458 14,675 15,509 3,603 3,435 3,506
Expected return on plan assets (26,417) (22,821) (18,947) -- -- --
Amortization of transition asset (265) (291) (325) 1,104 1,261 1,261
Amortization of prior service cost (185) (69) (318) 605 693 693
Curtailment 2,022 -- -- 2,526 -- --
Recognized net actuarial (gain) loss -- (268) 158 -- (31) --
- ---------------------------------------------------------------------------------------------------------
Benefit Cost $ (1,124) $ (380) $ 6,318 $8,964 $6,418 $7,004
=========================================================================================================
The curtailment reflected above related to the sale of the Florida banking and
insurance operations. This expense was recognized in Huntington's results of
operations in 2002. Management expects pension benefit cost to approximate $3.5
million and post-retirement benefits cost to approximate $6.3 million for 2003.
The 2003 health care cost trend rate was projected to be 13.35% for pre-65
participants and 13.53% for post-65 participants compared with an estimate of
9.00% for both in 2001. These rates are assumed to decrease gradually until
they reach 5.09% for pre-65 participants and 5.17% for post-65 participants in
the year 2017 and remain at that level thereafter. The increase in the health
care cost trend rate, a decline in the discount rate from 7.50% to 6.75%, and a
decrease in the Medicare HMO participation rate from 12% to 0% all increased
the benefit cost and benefit liability. This increase was offset by a decrease
in the number of plan participants. Huntington updated the immediate health
care cost trend rate assumption based on current market data and Huntington's
claims experience. This trend rate is expected to decline over time to a trend
level consistent with medical inflation and long-term economic assumptions.
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one-percentage point increase would increase service and interest
costs and the post-retirement benefit obligation by $83,000 and $1.0 million,
respectively. A one-percentage point decrease would reduce service and interest
costs by $81,000 and the post-retirement benefit obligation by $929,000.
Huntington also sponsors other retirement plans. One of those plans is an
unfunded Supplemental Executive Retirement Plan. This plan is a nonqualified
plan that provides certain former officers of Huntington and its subsidiaries
with defined pension benefits in excess of limits imposed by federal tax law.
At December 31, 2002 and 2001, the accrued pension liability for this plan
totaled $14.3 million and $14.2 million, respectively. Pension expense for the
plan was $1.3 million in 2002, $2.1 million in 2001, and $2.5 million in 2000.
Other plans, including plans assumed in various past acquisitions, are
unfunded, nonqualified plans that provide certain active and former officers of
Huntington and its subsidiaries nominated by Huntington's compensation
committee with deferred compensation, post-employment, and/or defined pension
benefits in excess of limits imposed by federal tax law. These plans had a
collective accrued liability of $15.2 million and $14.5 million at December 31,
2002 and 2001, respectively. Expense for these plans was $2.1 million in 2002,
$1.8 million in 2001, and $1.2 million for 2000. At December 31, 2002, a
minimum pension asset of $1.4 million and a reduction in Accumulated Other
Comprehensive Income of $0.3 million ($0.2 million after-tax) was recorded
collectively for these plans.
Huntington has a defined contribution plan that is available to eligible
employees. Matching contributions by Huntington equal 100% on the first 3% and
50% on the next 2% of participant elective deferrals. The cost of providing
this plan was $8.4 million in 2002, $8.7 million in 2001, and $7.9 million in
2000. The number of shares of Huntington common stock held by this plan was
8,812,405 at December 31, 2002 and 10,303,595 at the end of the prior year. The
market value of these shares was $164.9 million and $177.1 million at the same
respective dates. Dividends received by the plan during 2002 were $11.3 million
and $8.8 million during 2001.
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
20. Commitments and Contingent Liabilities
In the ordinary course of business, Huntington makes various commitments to
extend credit that are not reflected in the financial statements. The contract
amount of these financial agreements at December 31 were:
(in millions of dollars) 2002 2001
- ------------------------------------------------------------------------------
Contract amount represents credit risk
Commitments to extend credit
Commercial $4,435 $4,345
Consumer 3,607 4,283
Commercial real estate 577 715
Standby letters of credit 880 939
Commercial letters of credit 71 175
Commitments to Extend Credit
Commitments to extend credit generally have short-term, fixed expiration dates,
are variable rate, and contain clauses that permit Huntington to terminate or
otherwise renegotiate the contracts in the event of a significant deterioration
in the customer's credit quality. These arrangements normally require the
payment of a fee by the customer, the pricing of which is based on prevailing
market conditions, credit quality, probability of funding, and other relevant
factors. Since many of these commitments are expected to expire without being
drawn upon, the contract amounts are not necessarily indicative of future cash
requirements. The interest rate risk arising from these financial instruments
is insignificant as a result of their predominantly short-term, variable rate
nature.
Standby letters of credit are conditional commitments issued by Huntington to
guarantee the performance of a customer to a third party. These guarantees are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. Most of
these arrangements mature within two years. Approximately 53% of standby
letters of credit are collateralized, and nearly 95% are expected to expire
without being drawn upon. In 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (the Interpretation). The
Interpretation will change current practice in the accounting for, and
disclosure of, guarantees. For Huntington, these changes apply to its standby
letters of credit. The Interpretation requires certain guarantees to be
recorded at fair value, which differs from the current practice of recording a
liability generally when a loss is probable and reasonably estimable, as those
terms are defined in FASB Statement No. 5, Accounting for Contingencies. The
Interpretation's initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Huntington estimates that the implementation of this new
Interpretation will be immaterial to Huntington's results of operations in 2003.
Commercial letters of credit represent short-term, self-liquidating instruments
that facilitate customer trade transactions and have maturities of no longer
than ninety days. The merchandise or cargo being traded normally secures these
instruments.
Commitments to Sell Loans
Huntington entered into forward contracts, relating to its mortgage banking
business. At December 31, 2002 and 2001, Huntington had commitments to sell
residential real estate loans of $782.0 million and $677.4 million,
respectively. These contracts mature in less than one year. In addition,
Huntington had a commitment to sell automobile loans of $38.8 million and $38.2
million at December 31, 2002 and 2001, respectively, under the terms of its
securitization agreement.
Litigation
In the ordinary course of business, there are various legal proceedings pending
against Huntington and its subsidiaries. In the opinion of management, the
aggregate liabilities, if any, arising from such proceedings are not expected
to have a material adverse effect on Huntington's consolidated financial
position.
Commitments Under Capital and Operating Leases
At December 31, 2002, Huntington and its subsidiaries were obligated under
noncancelable leases for land, buildings, and equipment. Many of these leases
contain renewal options, and certain leases provide options to purchase the
leased property during or at the expiration of the lease period at specified
prices. Some leases contain escalation clauses calling for rentals to be
adjusted for increased real estate taxes and other operating expenses, or
proportionately adjusted for increases in the consumer or other price indices.
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
The future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 2002 were $35.1 million in 2003, $33.1 million in 2004, $29.7
million in 2005, $27.6 million in 2006, $26.2 million in 2007, and $218.6
million thereafter. Total minimum lease payments have not been reduced by
minimum sublease rentals of $116.7 million due in the future under
noncancelable subleases. The rental expense for all operating leases was $38.7
million for 2002 compared with $47.5 million for 2001 and $49.6 million in
2000. Huntington had no material obligations under capital leases.
21. Income Taxes
The following is a summary of the provision for income taxes:
(in thousands of dollars) 2002 2001 2000
- ----------------------------------------------------------------------------
Currently payable (receivable)
Federal $108,235 $(123,264) $(106,354)
State -- -- 467
- ----------------------------------------------------------------------------
Total current 108,235 (123,264) (105,887)
- ----------------------------------------------------------------------------
Deferred tax expense
Federal 117,765 118,025 237,336
State -- -- --
- ----------------------------------------------------------------------------
Total deferred 117,765 118,025 237,336
- ----------------------------------------------------------------------------
Income Taxes $226,000 $ (5,239) $ 131,449
============================================================================
Tax expense associated with securities transactions included in the above
amounts was $1.7 million in 2002, $0.3 million in 2001, and $15.9 million in
2000.
The following is a reconcilement of income tax expense to the amount computed
at the statutory rate of 35%:
(in thousands of dollars) 2002 2001 2000
- -------------------------------------------------------------------------------
Income tax expense computed at the statutory rate $206,229 $ 60,649 $160,962
Increases (decreases):
Tax-exempt income (19,629) (17,477) (18,619)
Asset securitization activities (8,244) (21,527) (10,970)
Subsidiary capital activities -- (32,500) --
Nondeductible goodwill 52,500 5,729 5,223
Other, net (4,856) (113) (5,147)
- -------------------------------------------------------------------------------
Income Taxes $226,000 $ (5,239) $131,449
===============================================================================
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Income taxes include a benefit from Bank owned life insurance, included in
tax-exempt income in the previous table, of $16.1 million, $13.4 million and
$13.8 million for 2002, 2001, and 2000, respectively. The significant
components of deferred assets and liabilities at December 31, are as follows:
(in thousands of dollars) 2002 2001
- ---------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan and lease losses $133,490 $127,606
Pension and other employee benefits -- 13,641
Alternative minimum tax 18,308 28,784
Other 98,879 75,282
- ---------------------------------------------------------------------------
Total Deferred Tax Assets 250,677 245,313
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Lease financing 781,334 531,062
Undistributed income of subsidiary 28,123 174,528
Pension and other employee benefits 17,661 --
Mortgage servicing rights 12,308 12,967
Unrealized gains on securities available for sale 30,129 15,868
Other 125,515 118,755
- ---------------------------------------------------------------------------
Total Deferred Tax Liabilities 995,070 853,180
- ---------------------------------------------------------------------------
Net Deferred Tax Liability $744,393 $607,867
===========================================================================
At December 31, 2002, Huntington had an alternative minimum tax credit
carryforward for income tax purposes of $18.3 million. During 2002, the net
deferred tax liability was increased by $14.2 million for the tax effect of
unrealized gains on securities available for sale and $4.5 million from the
acquisition of LeaseNet.
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
22. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 2002 and 2001:
(in thousands of dollars, except per share data) First Second Third Fourth
- ---------------------------------------------------------------------------------------
2002
Interest income $393,595 $373,787 $383,310 $380,893
Interest expense 150,770 131,928 133,894 131,191
- ---------------------------------------------------------------------------------------
Net interest income 242,825 241,859 249,416 249,702
- ---------------------------------------------------------------------------------------
Provision for loan and lease losses 55,781 53,892 60,249 57,418
Gain on sale of Florida operations 175,344 -- -- --
Merchant Services gain -- -- 24,550 --
Securities gains 457 966 1,140 2,339
Non-interest income 125,627 117,014 113,692 123,682
Non-interest expense 207,386 192,060 193,723 202,695
Special charges 56,184 -- -- --
- ---------------------------------------------------------------------------------------
Income before income taxes 224,902 113,887 134,826 115,610
Income taxes 127,175 31,647 36,703 30,475
- ---------------------------------------------------------------------------------------
Net Income $ 97,727 $ 82,240 $ 98,123 $ 85,135
=======================================================================================
Net Income Per Common Share--Basic $0.39 $0.33 $0.41 $0.36
Net Income Per Common Share--Diluted 0.39 0.33 0.41 0.36
2001
Interest income $517,975 $498,959 $478,834 $443,751
Interest expense 274,851 250,926 229,047 188,513
- ---------------------------------------------------------------------------------------
Net interest income 243,124 248,033 249,787 255,238
- ---------------------------------------------------------------------------------------
Provision for loan and lease losses 33,464 117,495 49,559 108,275
Securities gains (losses) 2,078 (2,503) 1,059 89
Non-interest income 115,646 130,706 129,397 133,008
Non-interest expense 234,090 233,296 228,890 227,354
Special charges -- 33,997 50,817 15,143
- ---------------------------------------------------------------------------------------
Income (loss) before income taxes 93,294 (8,552) 50,977 37,563
Income taxes 25,428 (10,929) 8,348 (28,086)
- ---------------------------------------------------------------------------------------
Net income $ 67,866 $ 2,377 $ 42,629 $ 65,649
=======================================================================================
Net Income Per Common Share--Basic $0.27 $0.01 $0.17 $0.26
Net Income Per Common Share--Diluted 0.27 0.01 0.17 0.26
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
23. Regulatory Matters
Huntington and its bank subsidiary, The Huntington National Bank, are subject
to various regulatory capital requirements administered by federal and state
banking agencies. These requirements involve qualitative judgments and
quantitative measures of assets, liabilities, capital amounts, and certain
off-balance sheet items as calculated under regulatory accounting practices.
Failure to meet minimum capital requirements can initiate certain actions by
regulators that, if undertaken, could have a material adverse effect on
Huntington's and The Huntington National Bank's financial statements.
Applicable capital adequacy guidelines require minimum ratios of 4.00% for Tier
1 Risk-based Capital, 8.00% for Total Risk-based Capital, and 4.00% for Tier 1
Leverage Capital. To be considered well capitalized under the regulatory
framework for prompt corrective action, the ratios must be at least 6.00%,
10.00%, and 5.00%, respectively.
As of December 31, 2002 and 2001, Huntington and The Huntington National Bank
have met all capital adequacy requirements and had regulatory capital ratios in
excess of the levels established for well-capitalized institutions. The
period-end capital amounts and capital ratios of Huntington and its bank
subsidiary are as follows:
Tier 1 Total Capital Tier 1 Leverage
- --------------------------------------------------------------------------------------
(in millions of dollars) 2002 2001 2002 2001 2002 2001
- --------------------------------------------------------------------------------------
Huntington Bancshares Incorporated
Amount $2,368 $2,021 $3,159 $2,870 $2,368 $2,021
Ratio 8.69% 7.24% 11.60% 10.29% 8.89% 7.41%
The Huntington National Bank
Amount $1,737 $1,776 $2,779 $2,882 $1,737 $1,776
Ratio 6.40% 6.34% 10.24% 10.29% 6.62% 6.58%
- --------------------------------------------------------------------------------------
Tier 1 Risk-Based Capital consists of total equity plus qualifying capital
securities and minority interest, less unrealized gains and losses accumulated
in other comprehensive income, and non-qualifying intangible and servicing
assets. Total Risk-Based Capital is Tier 1 Risk-Based Capital plus qualifying
subordinated notes and allowable allowance for loan losses (limited to 1.25% of
total risk-weighted assets). Tier 1 Leverage Capital is equal to Tier 1
Capital. Both Tier 1 Capital and Total Capital ratios are derived by dividing
the respective capital amounts by net risk-weighted assets, which are
calculated as prescribed by regulatory agencies. Tier 1 Leverage Capital ratio
is calculated by dividing the Tier 1 capital amount by average adjusted total
assets for the fourth quarter of 2002 and 2001, less non-qualifying intangibles
and other adjustments.
Huntington and its subsidiaries are also subject to various regulatory
requirements that impose restrictions on cash, debt, and dividends. The
Huntington National Bank is required to maintain non-interest bearing cash
balances with the Federal Reserve Bank. During 2002 and 2001, the average
balance of these deposits were $430.5 million and $363.6 million, respectively.
Under current Federal Reserve regulations, The Huntington National Bank is
limited as to the amount and type of loans it may make to the parent company
and non-bank subsidiaries. At December 31, 2002, The Huntington National Bank
could lend $277.9 million to a single affiliate, subject to the qualifying
collateral requirements defined in the regulations.
Dividends from The Huntington National Bank are one of the major sources of
funds for Huntington. These funds aid the parent company in the payment of
dividends to shareholders, expenses, and other obligations. Payment of
dividends to the parent company is subject to various legal and regulatory
limitations. Regulatory approval is required prior to the declaration of any
dividends in excess of available retained earnings. The amount of dividends
that may be declared without regulatory approval is further limited to the sum
of net income for the current year and retained net income for the preceding
two years, less any required transfers to surplus or common stock. The
Huntington National Bank could declare, without regulatory approval, dividends
in 2003 of approximately $161.5 million plus an additional amount equal to its
net income through the date of declaration in 2003.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
24. Parent Company Financial Statements
The parent company condensed financial statements, which include transactions
with subsidiaries, are as follows. Huntington's statement of changes in
shareholders' equity can be found on page 75.
Balance Sheets December 31,
- ------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 546,897 $ 155,618
Securities available for sale 40,041 50,850
Due from The Huntington National Bank 250,759 250,759
Due from non-bank subsidiaries 117,987 83,084
Investment in The Huntington National Bank 1,551,196 2,034,622
Investment in non-bank subsidiaries 453,674 462,805
Goodwill, net of accumulated amortization 9,877 9,877
Accrued interest receivable and other assets 136,804 98,435
- ------------------------------------------------------------------------------------------------------------------
Total Assets $3,107,235 $3,146,050
==================================================================================================================
LIABILITIES
Short- and medium-term borrowings $ 145,556 $ 49,576
Long-term borrowed funds from subsidiary trusts 309,279 309,279
Long-term borrowed funds from unaffiliated companies -- 149,888
Dividends payable, accrued expenses, and other liabilities 348,569 220,867
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities 803,404 729,610
- ------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 2,303,831 2,416,440
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $3,107,235 $3,146,050
==================================================================================================================
Statements of Income Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Income
Dividends from
The Huntington National Bank $221,000 $159,404 $222,330
Non-bank subsidiaries 8,142 14,498 3,000
Interest from
The Huntington National Bank 29,611 20,343 20,749
Non-bank subsidiaries 5,854 4,454 2,741
Securities gains (losses) and other 877 (4,852) 66,134
- ------------------------------------------------------------------------------------------------------------------
Total Income 265,484 193,847 314,954
- ------------------------------------------------------------------------------------------------------------------
Expense
Interest on debt 20,213 29,673 36,687
Other 17,811 21,160 6,756
- ------------------------------------------------------------------------------------------------------------------
Total Expense 38,024 50,833 43,443
- ------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Equity in Undistributed Net Income of Subsidiaries 227,460 143,014 271,511
Income taxes (4,481) (10,738) 12,592
- ------------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Net Income of Subsidiaries 231,941 153,752 258,919
- ------------------------------------------------------------------------------------------------------------------
Equity in undistributed net income (loss) of
The Huntington National Bank 136,004 25,167 66,387
Non-bank subsidiaries (4,720) (398) 3,140
- ------------------------------------------------------------------------------------------------------------------
Net Income $363,225 $178,521 $328,446
==================================================================================================================
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Statements of Cash Flows Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income $ 363,225 $ 178,521 $ 328,446
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiaries (131,284) (24,769) (69,527)
Depreciation and amortization 1,254 2,674 2,987
(Gain) loss on sales of securities available for sale (709) 5,251 (62,140)
Change in other assets and other liabilities 53,382 (20,866) 73,227
Special charges 6,859 5,604 --
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 292,727 146,415 272,993
- ---------------------------------------------------------------------------------------------------------------------
Investing Activities
Decrease (increase) in investments in subsidiaries 670,000 110,019 (5,397)
Repayments from (advances to) subsidiaries 7,397 (62,419) 67,154
Purchase of securities available for sale -- (15,027) (47,000)
Proceeds from sale of securities available for sale 8,977 10,889 68,106
Proceeds from sale of other assets -- -- 11,405
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities 686,374 43,462 94,268
- ---------------------------------------------------------------------------------------------------------------------
Financing Activities
(Decrease) increase in short-term borrowings (4,020) (89,093) 87,342
Proceeds from issuance of medium-term borrowings 100,000 40,000 25,000
Payment of medium-term borrowings -- (25,000) --
Payment of long-term debt (150,000) -- --
Dividends paid on common stock (167,002) (190,792) (185,103)
Acquisition of treasury stock (370,012) -- (168,395)
Proceeds from issuance of treasury stock 3,212 2,662 1,055
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Used for Financing Activities (587,822) (262,223) (240,101)
- ---------------------------------------------------------------------------------------------------------------------
Change in Cash and Cash Equivalents 391,279 (72,346) 127,160
Cash and Cash Equivalents at beginning of year 155,618 227,964 100,804
- ---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at end of year $ 546,897 $ 155,618 $ 227,964
=====================================================================================================================
Supplemental disclosure:
Interest paid $ 20,779 $ 31,067 $ 36,262
Income taxes paid -- -- --
Common stock issued in purchase acquisitions 19,151 -- 142,382
25. Segment Reporting
Huntington has three distinct lines of business: Regional Banking, Dealer
Sales, and the Private Financial Group (PFG). A fourth segment includes
Huntington's Treasury function and other unallocated assets, liabilities,
revenue, and expense. Line of business results are determined based upon
Huntington's management reporting system, which assigns balance sheet and
income statement items to each of the business segments. The process is
designed around Huntington's organizational and management structure and
accordingly, the results below are not necessarily comparable with similar
information published by other financial institutions. During 2002, the
previously reported segments, Retail Banking and Corporate Banking, were
combined and renamed Regional Banking. Since this segment is managed through
six geographically defined regions where each region's management has
responsibility for both retail and corporate banking business development,
combining these two previously separate segments better reflects the management
accountability and decision making structure. In addition, changes were made to
the methodologies utilized for certain balance sheet and income statement
allocations from Huntington's management reporting system. The prior periods
have not been restated for these methodology changes.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
The chief decision-makers for Huntington rely on "operating earnings" for
review of performance and for critical decision making purposes. Operating
earnings exclude the Merchant Services restructuring gain, the gain from the
sale of the Florida operations, the historical Florida operating results, and
restructuring and special charges. See Note 3 to the consolidated financial
statements for further discussions regarding Restructuring and Note 4 regarding
the sale of Huntington's Florida banking and insurance operations. The
financial information that follows also includes these excluded amounts on an
after-tax basis to reflect the reconciliation to reported net income.
The following provides a brief description of the four operating segments of
Huntington:
Regional Banking: this segment provides products and services to retail,
business banking, and commercial customers. This segment's products include
home equity loans, first mortgage loans, direct installment loans, business
loans, personal and business deposit products, as well as sales of investment
and insurance services. These products and services are offered in six
operating regions within the five states of Ohio, Michigan, Indiana, West
Virginia, and Kentucky through Huntington's traditional banking network, Direct
Bank--Huntington's customer service center, and Web Bank at www.huntington.com.
Regional Banking also represents middle-market and large commercial banking
relationships which use a variety of banking products and services including,
but not limited to, commercial loans, international trade, and cash management.
Dealer Sales: this segment provides products and services pertaining to the
automobile lending sector and includes 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 provides products and services designed
to meet the needs of Huntington's higher wealth customers. Revenue is derived
through the sale of personal trust, asset management, investment advisory,
brokerage, insurance, and deposit and loan products and services. Income and
related expenses from the sale of brokerage and insurance products is shared
with the line of business that generated the sale or provided the customer
referral.
Treasury / Other: this segment includes assets, liabilities, equity, revenue,
and expense that are not directly assigned or allocated to one of the lines of
business. Since a match-funded transfer pricing system is used to allocate
interest income and interest expense to other business segments, Treasury /
Other results include the net impact of any over or under allocations arising
from centralized management of interest rate risk including the net impact of
derivatives used to hedge interest rate sensitivity. Furthermore, this
segment's results include the net impact of administering Huntington's
investment securities portfolio as part of overall liquidity management.
Additionally, amortization expense of intangible assets and gains or losses not
allocated to other business segments are also a component.
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Listed below is certain operating basis financial information reconciled to
Huntington's 2002, 2001, and 2000 reported results by line of business:
Income Statements Regional Dealer Treasury/ Huntington
(in thousands of dollars) Banking Sales PFG Other Consolidated
- ---------------------------------------------------------------------------------------------------------------
2002
Net interest income $592,977 $227,364 $ 35,403 $118,334 $ 974,078
Provision for loan and lease losses 141,190 77,487 3,477 -- 222,154
Non-Interest income 279,780 19,927 108,817 63,050 471,574
Non-Interest expense 559,302 75,066 100,961 40,325 775,654
Income taxes 60,293 33,158 13,924 11,947 119,322
- ---------------------------------------------------------------------------------------------------------------
Operating earnings 111,972 61,580 25,858 129,112 328,522
Gain on sale of Florida operations -- -- -- 56,790 56,790
Merchant Services gain -- -- -- 15,957 15,957
Restructuring and special charges -- -- (3,429) (33,090) (36,519)
Florida operations sold 1,270 790 1,428 (5,013) (1,525)
- ---------------------------------------------------------------------------------------------------------------
Reported Earnings $113,242 $ 62,370 $ 23,857 $163,756 $ 363,225
===============================================================================================================
2001
Net interest income $626,647 $224,977 $ 36,323 $ 25,962 $ 913,909
Provision for loan and lease losses 96,943 74,603 408 -- 171,954
Non-Interest income 262,432 21,643 91,986 61,677 437,738
Non-Interest expense 523,994 67,126 94,025 75,598 760,743
Income taxes 93,850 36,711 11,857 (31,003) 111,415
- ---------------------------------------------------------------------------------------------------------------
Operating earnings 174,292 68,180 22,019 43,044 307,535
Restructuring and special charges (43,751) (63,107) (6,402) (1,741) (115,001)
Florida operations sold 19,761 2,902 5,663 (42,339) (14,013)
- ---------------------------------------------------------------------------------------------------------------
Reported Earnings $150,302 $ 7,975 $ 21,280 $ (1,036) $ 178,521
===============================================================================================================
2000
Net interest income $656,856 $192,140 $ 30,502 $(29,712) $ 849,786
Provision for loan and lease losses 36,180 46,113 1,279 -- 83,572
Non-Interest income 276,350 31,266 57,442 81,759 446,817
Non-Interest expense 570,788 55,751 53,866 26,132 706,537
Income taxes 112,549 42,420 11,343 (18,357) 147,955
- ---------------------------------------------------------------------------------------------------------------
Operating earnings 213,689 79,122 21,456 44,272 358,539
Restructuring and special charges -- (32,500) -- -- (32,500)
Florida operations sold 61,630 3,067 1,449 (63,739) 2,407
- ---------------------------------------------------------------------------------------------------------------
Reported Earnings $275,319 $ 49,689 $ 22,905 $(19,467) $ 328,446
===============================================================================================================
Average Assets Average Deposits
Balance Sheets ------------------------------------------------------------------
(in millions of dollars) 2002 2001 2000 2002 2001 2000
------------------------------------------------------------------
Regional Banking $13,338 $12,707 $11,835 $14,940 $13,850 $13,797
Dealer Sales 6,716 6,503 6,590 46 34 76
PFG 1,022 782 586 807 661 600
Treasury / Other 4,523 4,932 6,557 808 269 901
- ----------------------------------- -------------------------------------------------------------------
Subtotal 25,599 24,924 25,568 16,601 14,814 15,374
Florida 437 3,213 3,153 583 4,547 4,316
- ----------------------------------- -------------------------------------------------------------------
Total $ 26,036 $28,137 $28,721 $17,184 $19,361 $19,690
=================================== ===================================================================
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
26. Fair Value of Financial Instruments
The carrying amounts and estimated fair values of Huntington's financial
instruments, including the fair values of derivatives used to hedge related
fair values or cash flows, at December 31 are presented in the following table:
2002 2001
- ------------------------------------------------------------------------------------------------------
Carrying Carrying
(in thousands of dollars) Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------
Financial Assets:
Cash and short-term assets $ 1,056,063 $ 1,056,063 $ 1,242,846 $ 1,242,846
Trading account securities 241 241 13,392 13,392
Mortgages held for sale 528,379 528,379 629,386 629,386
Securities 3,410,915 3,411,201 2,861,901 2,862,348
Loans and leases 20,587,530 21,274,316 21,191,301 21,635,280
Customers' acceptance liability 16,745 16,745 13,670 13,670
Financial Liabilities:
Deposits (17,499,326) (17,653,972) (20,187,304) (20,317,155)
Short-term borrowings (2,541,016) (2,541,016) (1,955,926) (1,955,926)
Bank acceptances outstanding (16,745) (16,745) (13,670) (13,670)
Medium-term notes (2,045,123) (2,051,704) (1,795,002) (1,802,381)
Subordinated notes and other long-term debt (1,801,678) (1,872,101) (944,330) (1,002,830)
Capital securities (300,000) (310,392) (300,000) (299,048)
The terms and short-term nature of certain assets and liabilities result in
their carrying value approximating fair value. These include trading account
securities, customers' acceptance liabilities, short-term borrowings, bank
acceptances outstanding, and cash and short-term assets, which include cash and
due from banks, interest-bearing deposits in banks, and federal funds sold and
securities purchased under resale agreements. Loan commitments and letters of
credit generally have short-term, variable rate features and contain clauses
that limit Huntington's exposure to changes in customer credit quality.
Accordingly, their carrying values, which are immaterial at the respective
balance sheet dates, are reasonable estimates of fair value.
Certain assets, the most significant being Bank owned life insurance and
premises and equipment, do not meet the definition of a financial instrument
and are excluded from this disclosure. Similarly, mortgage and non-mortgage
servicing rights, deposit base, and other customer relationship intangibles are
not considered financial instruments and are not discussed below. Accordingly,
this fair value information is not intended to, and does not, represent
Huntington's underlying value. Many of the assets and liabilities subject to
the disclosure requirements are not actively traded, requiring fair values to
be estimated by management. These estimations necessarily involve the use of
judgment about a wide variety of factors, including but not limited to,
relevancy of market prices of comparable instruments, expected future cash
flows, and appropriate discount rates.
The following methods and assumptions were used by Huntington to estimate the
fair value of the remaining classes of financial instruments:
Mortgages held for sale--valued using outstanding commitments from investors.
Securities available for sale and investment securities--based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments. Retained interests
in securitized assets are valued using a discounted cash flow analysis. The
carrying amount and fair value of securities exclude the fair value of
asset/liability management interest rate contracts designated as hedges of
securities available for sale.
Loans and leases--variable rate loans that reprice frequently are based on
carrying amounts, as adjusted for estimated credit losses. The fair values for
other loans are estimated using discounted cash flow analyses and employ
interest rates currently being offered for loans with similar terms. The rates
take into account the position of the yield curve, as well as an adjustment for
prepayment risk, operating costs, and profit. This value is also reduced by an
estimate of probable losses in the loan portfolio. Although not considered
financial instruments, lease financing receivables have been included in the
loan totals at their carrying amounts.
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED
- --------------------------------------------------------------------------------
Deposits--demand deposits, savings accounts, and money market deposits are, by
definition, equal to the amount payable on demand. The fair values of fixed
rate time deposits are estimated by discounting cash flows using interest rates
currently being offered on certificates with similar maturities.
Debt--fixed rate long-term debt, as well as medium-term notes and Capital
Securities, are based upon quoted market prices or, in the absence of quoted
market prices, discounted cash flows using rates for similar debt with the same
maturities. The carrying amount of variable rate obligations approximates fair
value.
111