MARYLAND 31-0724920
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
HUNTINGTON CENTER, 41 S. HIGH STREET, COLUMBUS, OH 43287
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(Address of principal executive offices) (Zip Code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [X] Yes [ ] No
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2002, determined by using a per share closing price of $19.42, as quoted by NASDAQ on that date, was $5,007,762,672. As of February 28, 2003, 230,832,180 shares of common stock without par value were outstanding.
Documents Incorporated By Reference
Parts I and II of this Form 10-K/A incorporates by reference certain information from the registrant's 2002 amended Annual Report to Shareholders. Part III of this Form 10-K/A incorporates by reference certain information from the registrant's definitive Proxy Statement for the 2003 Annual Shareholders' Meeting.
Restatement of Results of Operations and Financial Condition 3
Part I.
Item 1. Business 4
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Part II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 61
Item 8. Financial Statements and Supplementary Data 61
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 108
Part III.
Item 10. Directors and Executive Officers of the Registrant 108
Item 11. Executive Compensation 108
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 108
Item 13. Certain Relationships and Related Transactions 108
Item 14. Controls and Procedures 108
Part IV.
Item 15. Principal Accountant Fees and Services 108-109
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 109
Signatures 110
Certifications 111-112
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RESTATEMENT OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Huntington restated its financial results to reclassify certain
automobile leases from the direct financing lease method to the operating lease
method of accounting. The appropriate classification of automobile leases as
operating leases or direct financing leases under Statement of Financial
Accounting Standards (Statement) No. 13, Accounting for Leases, can be impacted
by residual value insurance coverage. Since October 2000, Huntington has had
residual value insurance coverage on its entire automobile lease portfolio to
protect it from the risk of loss resulting from declines in used car
prices. Such losses arise if the market value of the automobile at the end of
the lease term is less than the residual value embedded in the original lease
contract. Management believes these policies effectively protect Huntington
from the risk of declining used car prices. In April 2003, management determined
that, due to provisions in certain of its residual value insurance policies, the
leases covered by these policies would not qualify as direct financing leases.
For leases originated prior to May 2002, the residual value insurance policies contain aggregate loss caps. The residuals insured under these policies are not considered guaranteed, and, accordingly, the related leases fail to qualify as direct financing leases under Statement No. 13. As a result, leases originated prior to May 2002 have been reclassified as operating leases for all periods presented. As of December 31, 2002, $2.3 billion of such leases, net of accumulated depreciation, are reflected in the Consolidated Balance Sheets as operating lease assets. All leases originated since April 2002 are covered under a new residual value insurance policy (the "New Policy") which insures the full residual value of each vehicle and includes no aggregate loss cap. Leases with residual gains are netted with leases with residual losses when claims are settled. The netting provision of the New Policy precluded Huntington from determining the amount of the guaranteed residual of any individual leased asset within the portfolio at lease inception. Thus, the related leases failed to qualify as direct financing leases. Huntington has amended the New Policy, retroactive to April 2002, by adding an endorsement that adds a level of insurance sufficient to meet the criteria as a residual value guarantee pursuant to Statement No. 13, on an individual lease-by-lease basis, with no netting provisions. In addition, Huntington continues to maintain insurance coverage that insures the full value of the leased residuals. Accordingly, and in reliance on guidance furnished by the Securities and Exchange Commission in its announcement at the Financial Accounting Standards Board Emerging Issues Task Force meeting on May 15, 2003, all leases covered under the New Policy, as amended, are now appropriately classified as direct financing leases in the accompanying financial statements. As of December 31, 2002, $893 million of such leases were included in loans and leases in the Consolidated Balance Sheets. It is management's intention to insure the residuals associated with future originations under the New Policy, as amended, and to classify such new originations as direct financing leases.
The impact of this restatement also affected the Consolidated Income Statements. Under the direct financing lease accounting method, interest income is recognized on leases on a "level-yield" or interest method that ascribes a portion of each lease payment to interest income, resulting in a constant rate of interest over the life of the lease. The remaining portion of each payment amortizes the net investment in the lease such that at the end of the lease term, the net investment equals the residual value as determined at the inception of the lease. Under operating lease accounting, lease payments are recorded as rental income, a component of Operating lease income in the Non-interest income section of the Consolidated Income Statements. Depreciation expense is recorded on a straight-line basis over the term of the lease from the cost of the automobile at the inception of the lease to the estimated residual value at the end of the lease term. Depreciation expense is included in Operating lease expense in the Non-interest expense section of the Consolidated Income Statement. Depreciation expense is adjusted prospectively at any time during the lease term when the estimated market value of the automobile at the end of the lease term changes. Upon disposition, a gain, reflected in Non-interest income, or a loss, reflected in Non-interest expense, is recorded for any difference between the net book value of the lease and the proceeds from the disposition of the automobile.
Over the term of the lease, the cash flows, the timing of the cash flows, and total income recognized are identical under either accounting method. One significant difference between the two methodologies is the timing of income recognition. Under operating lease accounting, less income is recognized in the first half of the lease and more income is recognized in the second half than under direct financing lease accounting.
Another significant difference between the direct financing lease method and the operating lease method of accounting is the recognition of credit loss expense. Credit losses occur when a lease is terminated early because the lessee fails to make the required lease payments. These credit-generated terminations result in Huntington taking possession of the automobile earlier than expected. When this occurs, the market value of the automobile may be less than Huntington's book value, resulting in a loss upon sale or write down to market value while the vehicle is pending sale. Under the direct financing lease accounting method, such losses are charged against an allowance for loan and lease losses that is established at the inception of the lease and is adjusted periodically as necessary through provision expense. Under operating lease accounting, the lease is not treated like a loan, but as a depreciable non-interest earning asset. Therefore, no allowance for loan and lease losses is established. As such, early termination losses are recognized as a component of Operating lease expense in the Non-interest expense section of the Consolidated Income Statements.
The fact that part of the auto lease portfolio is accounted for as operating leases, with the remainder, including all future production, being accounted for as direct financing leases, will impact the comparability of Huntington's financial statements between reporting periods. As leases originated before May 2002 accounted for as operating leases run off, and as new originations are accounted for as direct financing leases, the level of operating lease income and operating lease expense will decline over future reporting periods while the level of interest income associated with direct financing leases will increase. Additionally, management will increase the provision for loan and lease losses, as appropriate, to provide the necessary level of reserves for new direct financing lease originations. Balance sheet classifications will also be impacted as the run off of the operating leases originated before the New Policy, as amended, reduces non-interest earning assets while the new direct financing lease originations covered under the New Policy, as amended, increase loans and leases.
Further information regarding the impact of this restatement to Huntington's results of operations and financial condition can be found in Management's Discussion and Analysis and in Note 3 to the consolidated financial statements.
ITEM 1: BUSINESS
Huntington was incorporated in Maryland in 1966 and is a diversified, multi-state financial holding company. Huntington is headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged in providing full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, and discount brokerage services, as well as underwriting credit life and disability insurance, and selling other insurance and financial products and services. At December 31, 2002, Huntington's bank subsidiary had 161 banking offices in Ohio, 115 banking offices in Michigan, 30 banking offices in West Virginia, 22 banking offices in Indiana, 12 banking offices in Kentucky, 3 private banking offices in Florida (the bank subsidiary's other banking offices in Florida were sold in February 2002), and one foreign office in the Cayman Islands and Hong Kong, respectively. The Huntington Mortgage Company (a wholly owned subsidiary) had loan origination offices during 2002 in the Midwest and on the East Coast. Beginning in 2003, these offices will function as offices of a division of the bank subsidiary as a result of the merger of the mortgage company into the bank subsidiary at the end of 2002. Foreign banking activities, in total or with any individual country, are not significant to the operations of Huntington. At December 31, 2002, Huntington and its subsidiaries had 8,177 full-time equivalent employees.
A discussion of Huntington's lines of business can be found in its Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 43 of this report. The financial statement results can be found in Note 27 of the Notes to Consolidated Financial Statements beginning on page 101 of this report.
Huntington competes on price and service with other banks and financial companies such as savings and loans, credit unions, finance companies, and brokerage firms. Competition is intense in most of the markets served by Huntington and its subsidiaries. Mergers between and the expansion of financial institutions both within and outside Ohio have provided significant competitive pressure in major markets. Since 1995, when federal interstate banking legislation became effective that made it permissible for bank holding companies in any state to acquire banks in any other state, and for banks to establish interstate branches (subject to certain limitations by individual states), actual or potential competition in each of Huntington's markets has intensified. Finally, financial services reform legislation enacted in November 1999 (see Gramm-Leach-Bliley Act of 1999 (GLB Act) below) eliminated the long-standing Glass-Steagall Act restrictions on securities activities of bank holding companies and banks. The legislation permits bank holding companies that elect to become financial holding companies to engage in a broad range of financial activities, including securities and insurance activities as defined by the GLB Act, and to affiliate with both securities and insurance firms. Correspondingly, it permits both securities and insurance firms to engage in banking activities under specified conditions. The same legislation allows banks to have financial subsidiaries that may engage in certain activities not otherwise permissible for banks.
As part of a comprehensive strategic and financial restructuring plan (the Plan) adopted in July 2001 to refocus its operations on core activities in the Midwest, Huntington consummated the sale of its Florida banking operations in February 2002, and its Florida insurance operation, J. Rolfe Davis Insurance Agency, Inc., in July 2002. The Plan also included the consolidation of numerous non-Florida branch offices as well as credit-related and other actions to strengthen its financial performance including the use of some of the excess capital to repurchase outstanding common shares.
REGULATORY MATTERS
To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to such statutory or regulatory provisions.
GENERAL
As a financial holding company, Huntington is subject to examination and supervision by the Board of Governors of the Federal Reserve System (FRB). Huntington is required to file with the FRB reports and other information regarding its business operations and the business operations of its subsidiaries. It is also required to obtain FRB approval prior to acquiring, directly or indirectly, ownership or control of voting shares of any bank, if, after such acquisition, it would own or control more than 5% of the voting stock of such bank.
Pursuant to the GLB Act, however, Huntington may engage in, or own or control companies that engage in, any activities determined by the FRB to be financial in nature or incidental to activities financial in nature, or complementary to financial activities, provided that such complementary activities do not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The GLB Act designated various lending, advisory, insurance underwriting, securities underwriting, dealing and market-making, and merchant banking activities (as well as those activities previously approved for bank holding companies by the FRB) as financial in nature, and authorized by the FRB, in coordination with the Office of the Comptroller of the Currency (OCC), to determine that additional activities are financial in nature or incidental to activities that are financial in nature. Except for the acquisition of a savings association, Huntington may commence any new financial activity with notice to the FRB within 30 days subsequent to the commencement of the new financial activity.
Huntington's national bank subsidiary is subject to examination and supervision by the OCC. Its deposits are insured by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC). Huntington's nonbank subsidiaries are also subject to examination and supervision by the FRB (or, in the case of nonbank subsidiaries of the national bank subsidiary, by the OCC), and examination by other federal and state agencies, including, in the case of certain securities activities, regulation by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers.
In addition to the impact of federal and state regulation, the bank and nonbank subsidiaries of Huntington are affected significantly by the actions of the FRB as it attempts to control the money supply and credit availability in order to influence the economy.
HOLDING COMPANY STRUCTURE
Huntington has one national bank subsidiary and numerous nonbank subsidiaries. See Exhibit 21 for a list of Huntington's subsidiaries. The national bank subsidiary is subject to affiliate transaction restrictions under federal law, which limit the transfer of funds by the subsidiary bank to the parent and any nonbank subsidiary of the parent, whether in the form of loans, extensions of credit, investments, or asset purchases. Such transfers by a subsidiary bank to its parent corporation or to any individual nonbank subsidiary of the parent are limited in amount to 10% of the subsidiary bank's capital and surplus and, with respect to such parent together with all such nonbank subsidiaries of the parent, to an aggregate of 20% of the subsidiary bank's capital and surplus. Furthermore, such loans and extensions of credit are required to be secured within specified amounts. In addition, all affiliate transactions must be conducted on terms and under circumstances that are substantially the same as such transactions with unaffiliated entities.
In December 2002, the FRB issued Regulation W, a comprehensive regulation to govern affiliate transactions. The new regulation replaces an extensive collection of prior FRB interpretations and informal FRB staff guidance.
The FRB has a policy to the effect that a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank. Under the source of strength policy, the FRB may require a bank holding company to make capital injections into a troubled subsidiary bank, and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. This capital injection may be required at times when Huntington may not have the resources to provide it. Any loans by a holding company to its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. Moreover, in the event of a bank holding company's bankruptcy, any commitment by such holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Federal law permits the OCC to order the pro rata assessment of shareholders of a national bank whose capital stock has become impaired, by losses or otherwise, to relieve a deficiency in such national bank's capital stock. This statute also provides for the enforcement of any such pro rata assessment of shareholders of such national bank to cover such impairment of capital stock by sale, to the extent necessary, of the capital stock of any assessed shareholder failing to pay the assessment. Huntington, as the sole shareholder of its subsidiary bank, is subject to such provisions. Moreover, the claims of a receiver of an insured depository institution for administrative expenses and the claims of holders of deposit liabilities of such an institution are accorded priority over the claims of general unsecured creditors of such an institution, including the holders of the institution's note obligations, in the event of a liquidation or other resolution of such institution. Claims of a receiver for administrative expenses and claims of holders of deposit liabilities of Huntington's depository subsidiary (including the FDIC, as the subrogee of such holders) would receive priority over the holders of notes and other senior debt of such subsidiary in the event of a liquidation or other resolution and over the interests of Huntington as sole shareholder of its subsidiary.
DIVIDEND RESTRICTIONS
Dividends from Huntington's subsidiary bank are the primary source of funds for payment of dividends to Huntington's shareholders. In the year ended December 31, 2002, Huntington declared cash dividends to its shareholders of $154.8 million. There are, however, statutory limits on the amount of dividends that Huntington's subsidiary bank can pay to Huntington without regulatory approval.
Huntington's subsidiary bank may not, without prior regulatory approval, pay a dividend in an amount greater than such bank's undivided profits. In addition, the prior approval of the OCC is required for the payment of a dividend by a national bank if the total of all dividends declared by the bank in a calendar year would exceed the total of its net income for the year combined with its retained net income for the two preceding years. Under these provisions and in accordance with the above-described formula, Huntington's subsidiary bank could, without regulatory approval, declare dividends to Huntington in 2003 of approximately $98.1 million plus an additional amount equal to its net profits during 2003.
If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FRB and the OCC have issued policy statements that provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings.
FDIC INSURANCE
Huntington's bank subsidiary is classified by the FDIC as a well-capitalized institution in the highest supervisory subcategory and is therefore not obliged under current FDIC assessment practices to pay deposit insurance premiums, either on its deposits insured by the BIF or on that portion of its deposits acquired from savings and loan associations and insured by the Savings and Loan Association Insurance Fund (SAIF). Although not currently subject to FDIC assessments for insurance premiums, the bank subsidiary is required to make payments for the servicing of obligations of the Financing Corporation (FICO) that were issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding.
The FDIC may alter its assessment practices in the future if required by developments affecting the resources of the BIF or the SAIF. Since 2001, the FDIC has been conducting a comprehensive review of the deposit insurance system to study alternatives for pricing, funding, and coverage.
CAPITAL REQUIREMENTS
The FRB has issued risk-based capital ratio and leverage ratio guidelines for bank holding companies such as Huntington. The risk-based capital ratio guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures into explicit account in assessing capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into four weighted categories, with higher weighting being assigned to categories perceived as representing greater risk. A bank holding company's capital (as described below) is then divided by total risk weighted assets to yield the risk-based ratio. The leverage ratio is determined by relating core capital (as described below) to total assets adjusted as specified in the guidelines. Huntington's subsidiary bank is subject to substantially similar capital requirements.
Generally, under the applicable guidelines, a financial institution's capital is divided into two tiers. Institutions that must incorporate market risk exposure into their risk-based capital requirements may also have a third tier of capital in the form of restricted short-term subordinated debt. "Tier 1", or core capital, includes common equity, noncumulative perpetual preferred stock (excluding auction rate issues), and minority interests in equity accounts of consolidated subsidiaries, less goodwill and, with certain limited exceptions, all other intangible assets. Bank holding companies, however, may include cumulative preferred stock in their Tier 1 capital, up to a limit of 25% of such Tier 1 capital. "Tier 2", or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations. "Total capital" is the sum of Tier 1 and Tier 2 capital.
The FRB and the other federal banking regulators require that all intangible assets, with certain limited exceptions, be deducted from Tier 1 capital. Under the FRB's rules the only types of intangible assets that may be included in (i.e., not deducted from) a bank holding company's capital are originated or purchased mortgage servicing rights, non-mortgage servicing assets, and purchased credit card relationships, provided that, in the aggregate, the total amount of these items included in capital does not exceed 100% of Tier 1 capital.
Under the risk-based guidelines, financial institutions are required to maintain a risk-based ratio (total capital to risk-weighted assets) of 8%, of which 4% must be Tier 1 capital. The appropriate regulatory authority may set higher capital requirements when an institution's circumstances warrant.
Under the leverage guidelines, financial institutions are required to maintain a leverage ratio (Tier 1 capital to adjusted total assets, as specified in the guidelines) of at least 3%. The 3% minimum ratio is applicable only to financial institutions that meet certain specified criteria, including excellent asset quality, high liquidity, low interest rate exposure, and the highest regulatory rating. Financial institutions not meeting these criteria are required to maintain a minimum Tier 1 leverage ratio of 4%.
In late 2001, bank regulatory agencies amended capital requirements effective for December 31, 2002, for recourse and direct credit substitutes, other than financial standby letters of credit subject to the low-level exposure rule and residual interests involved in securitization transactions subject to a dollar-for-dollar capital requirement. The amendment requires maintenance of institution-specific amounts representing its "maximum contractual dollar amount of exposure" for residual interests in securitization transactions in risk-weighted assets when calculating risk-based capital ratios. For Huntington, the amendment reduced its Tier 1 risk-based and total risk-based capital ratios by approximately 25 basis points.
In early 2002, bank regulatory agencies established special minimum capital requirements for equity investments in nonfinancial companies. The requirements consist of a series of marginal capital charges that increase within a range from 8% to 25% as a financial institution's over-all exposure to equity investments increases as a percentage of its Tier 1 capital.
Failure to meet applicable capital guidelines could subject the financial institution to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital, and the termination of deposit insurance by the FDIC, as well as the measures described below under "Prompt Corrective Action" as applicable to under-capitalized institutions.
As of December 31, 2002, the Tier 1 risk-based capital ratio, total risk-based capital ratio, and Tier 1 leverage ratio for Huntington were 8.65%, 11.54%, and 8.85%, respectively. As of December 31, 2002, Huntington's bank subsidiary also had capital in excess of the minimum requirements.
The risk-based capital standards of the FRB, the OCC, and the FDIC specify that evaluations by the banking agencies of a bank's capital adequacy will include an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. These banking agencies issued a joint policy statement on interest rate risk describing prudent methods for monitoring such risk that rely principally on internal measures of exposure and active oversight of risk management activities by senior management.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal banking regulatory authorities to take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized.
An institution is deemed to be "well-capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be "adequately-capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and, generally, a Tier 1 leverage ratio of 4% or greater and the institution does not meet the definition of a "well-capitalized" institution. An institution that does not meet one or more of the "adequately-capitalized" tests is deemed to be "under-capitalized". If the institution has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a Tier 1 leverage ratio that is less than 3%, it is deemed to be "significantly under-capitalized". Finally, an institution is deemed to be "critically under-capitalized" if it has a ratio of tangible equity, as defined in the regulations, to total assets that is equal to or less than 2%.
FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a cash dividend or paying any management fee to its holding company if the depository institution would thereafter be under-capitalized. Under-capitalized institutions are subject to growth limitations and are required to submit a capital restoration plan. If any depository institution subsidiary of a holding company is required to submit a capital restoration plan, the holding company would be required to provide a limited guarantee regarding compliance with the plan as a condition of approval of such plan by the appropriate federal banking agency. If an under-capitalized institution fails to submit an acceptable plan, it is treated as if it is significantly under-capitalized. Significantly under-capitalized institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately-capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically under-capitalized institutions may not, beginning 60 days after becoming critically under-capitalized, make any payment of principal or interest on their subordinated debt. In addition, critically under-capitalized institutions are subject to appointment of a receiver or conservator within 90 days of becoming critically under-capitalized.
Under FDICIA, a depository institution that is not well-capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. Huntington expects that the FDIC's brokered deposit rule will not adversely affect the ability of its depository institution subsidiary to accept brokered deposits. Under the regulatory definition of brokered deposits, Huntington's bank subsidiary had $1,092.8 million of brokered deposits at December 31, 2002.
GRAMM-LEACH-BLILEY ACT OF 1999
The United States Congress in 1999 enacted major financial services modernization legislation, known as the "Gramm-Leach-Bliley Act of 1999" (GLB Act), which was signed into law on November 12, 1999. Under the GLB Act, banks are no longer prohibited by the Glass-Steagall Act from associating with, or having management interlocks with, a business organization engaged principally in securities activities. By qualifying as a new entity known as a "financial holding company", a bank holding company may acquire new powers not otherwise available to it. In order to qualify, a bank holding company's depository subsidiaries must all be both well-capitalized and well managed, and must be meeting their Community Reinvestment Act obligations. The bank holding company must also declare its intention to become a financial holding company to the FRB and certify that its depository subsidiaries meet the capitalization and management requirements. The repeal of the Glass-Steagall Act and the availability of new powers both became effective on March 11, 2000, and Huntington became a financial holding company on March 13, 2000.
Financial holding company powers relate to "financial activities" that are determined by the FRB, in coordination with the Secretary of the Treasury, to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity (provided that the complementary activity does not pose a safety and soundness risk). The statute itself defines certain activities as financial in nature, including but not limited to underwriting insurance or annuities; providing financial or investment advice; underwriting, dealing in, or making markets in securities; merchant banking, subject to significant limitations; insurance company portfolio investing, subject to significant limitations; and any activities previously found by the FRB to be closely related to banking.
National and state banks are permitted under the GLB Act (subject to capital, management, size, debt rating, and Community Reinvestment Act qualification factors) to have "financial subsidiaries" that are permitted to engage in financial activities not otherwise permissible. However, unlike financial holding companies, financial subsidiaries may not engage in insurance or annuity underwriting; developing or investing in real estate; merchant banking (for at least five years); or insurance company portfolio investing. Other provisions of the GLB Act establish a system of functional regulation for financial holding companies and banks involving the Securities and Exchange Commission, the Commodity Futures Trading Commission, and state securities and insurance regulators; deal with bank insurance sales and title insurance activities in relation to state insurance regulation; prescribe consumer protection standards for insurance sales; and establish minimum federal standards of privacy to protect the confidentiality of the personal financial information of consumers and regulate its use by financial institutions. Federal bank regulatory agencies continued to issue a variety of proposed, interim, and final rules during the year 2002 for the implementation of the GLB Act.
RECENT REGULATORY DEVELOPMENTS
During 2002, banking regulators adopted new regulations expanding the scope of measures to combat money laundering in the wake of the terrorist events of September 11, 2001, and imposed more stringent affiliate transaction restrictions that would treat financial subsidiaries or other bank subsidiaries engaging in bank impermissible activities as affiliates for purposes of the restrictions. Possible authority for financial holding companies to engage in real estate brokerage and property management services remained under consideration by banking regulators. It is not possible at present to assess the likelihood of adoption of final regulations granting such authority.
The federal budget for 2004, published in early 2003, proposed changes in the federal deposit insurance program. If enacted, the changes would (a) remove the current prohibition on the charging of FDIC deposit insurance premiums to well-capitalized institutions when the insurance fund's reserve ratio is 1.25% or greater of insurable deposits, so that such institutions, if they rapidly expand deposits, could be made to compensate the insurance fund appropriately; (b) give the FDIC greater flexibility in restoring the insurance fund's reserve ratio if it falls below 1.25%, instead of the current requirement for restoration within one year or a minimum 23 basis points premium for all institutions if the ratio is below 1.25% for more than one year; and (c) merge the currently separate BIF and the SAIF, with the objective of creating a stronger and more diversified fund. It is not possible at present to predict if any or all of these proposals will be enacted, or, if enacted, what their effect will be on Huntington.
BUSINESS RISKS
Huntington, like all other financial companies, is subject to a number of risks, many of which are outside of Huntington's control. Management strives to limit those risks while maximizing profitability. Among the risks that Huntington assumes are: (1) credit risk, which is the risk that loan and lease customers or other counterparties to Huntington will be unable to perform their contractual obligations to Huntington, (2) market risk, or the risk that the cost of Huntington's interest sensitive liabilities increase more rapidly (or decrease less rapidly) than the yield on Huntington's interest sensitive assets, (3) liquidity risk, which is the risk that Huntington and its bank subsidiary will have insufficient cash or access to cash in order to meet its operating needs, and (4) operational risk, which is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
In addition to the other information in this report, readers should carefully consider that the following important factors, among others, could materially impact Huntington's business, future results of operations, and future cash flows.
HUNTINGTON EXTENDS CREDIT TO A VARIETY OF CUSTOMERS BASED ON INTERNALLY SET STANDARDS AND THE JUDGMENT OF MANAGEMENT. HUNTINGTON MANAGES THE CREDIT RISK IT TAKES THROUGH A PROGRAM OF UNDERWRITING STANDARDS THAT IT FOLLOWS, THE REVIEW OF CERTAIN CREDIT DECISIONS, AND AN ON-GOING PROCESS OF ASSESSMENT OF QUALITY OF THE CREDIT IT HAS ALREADY EXTENDED. THERE CAN BE NO ASSURANCE THAT HUNTINGTON'S CREDIT STANDARDS AND ITS ON-GOING PROCESS OF CREDIT ASSESSMENT WILL PROTECT HUNTINGTON FROM SIGNIFICANT CREDIT LOSSES.
Huntington takes credit risk by virtue of funding loans and leases, purchasing non-governmental securities, extending loan commitments and letters of credit, and being counterparties to off-balance sheet financial instruments such as interest rate and foreign exchange derivatives.
Huntington's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize "in-market" lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The credit administration function employs risk management techniques to ensure that loans and leases adhere to corporate policy and problem loans and leases are promptly identified. These procedures provide executive management with the information necessary to implement policy adjustments where necessary, and to take corrective actions on a proactive basis. In 2002, management reemphasized its focus on commercial lending to customers with existing or potential relationships within Huntington's primary markets.
Concentration of credit risk generally arises with respect to loans and leases when a number of loans and leases have borrowers engaged in similar business activities or activities in the same geographical region. Concentration of credit risk indicates the relative sensitivity of performance to both positive and negative developments affecting a particular industry. Huntington's borrowers, however, do not represent a particular concentration of similar business activity.
There can be no assurance that Huntington's credit standards and its on-going process of credit assessment will protect Huntington from significant credit losses.
HUNTINGTON'S LOANS, LEASES, AND DEPOSITS ARE FOCUSED IN FIVE STATES AND ADVERSE ECONOMIC CONDITIONS IN THOSE STATES, IN PARTICULAR, COULD NEGATIVELY IMPACT RESULTS FROM OPERATIONS, CASH FLOWS, AND FINANCIAL CONDITION.
Huntington's customers with loan and/or deposit balances at December 31, 2002, were located predominantly in Ohio, Michigan, West Virginia, Indiana, and Kentucky. Because of the concentration of loans, leases, and deposits in these states, in the event of adverse economic conditions in these states, Huntington could experience more difficulty in attracting deposits and experience higher rates of loss and delinquency on its loans and leases than if the loans and leases were more geographically diversified. Adverse economic conditions and other factors may reduce demand for credit or fee-based products and could negatively affect real estate and other collateral values, interest rate levels, and the availability of credit to refinance loans at or prior to maturity.
Additionally, loans and leases in these five states may be subject to a greater risk of default than other comparable loans and leases. In the event of adverse economic, political, or business developments or natural hazards that may affect these states, the continued financial stability of a borrower and the borrower's ability to make loan principal and interest payments or lease rental payments may be adversely affected by job loss, recession, divorce, illness, or personal bankruptcy.
CHANGES IN INTEREST RATES COULD NEGATIVELY IMPACT HUNTINGTON'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Huntington's results of operations depend substantially on net interest income, the difference between interest earned on interest-earning assets (such as investments, loans, and direct financing leases) and interest paid on interest-bearing liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply, and other factors beyond management's control may also affect interest rates. If Huntington's interest-earning assets mature or reprice more quickly than interest-bearing liabilities in a given period, a decrease in market interest rates could adversely affect net interest income. Likewise, if interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, an increase in market interest rates could adversely affect net interest income.
At December 31, 2002, 66.3% of Huntington's earning assets, as measured by the aggregate outstanding principal amount of loans and leases, amortized cost of securities available for sale, and the carrying value of other earning assets, bore interest at adjustable rates or are expected to mature or reprice within one year. The remainder bore interest at fixed rates. Fixed-rate loans and leases increase Huntington's exposure to interest rate risk in a rising rate environment because interest-bearing liabilities would be subject to repricing before assets become subject to repricing. Adjustable-rate loans and leases decrease these risks associated with changes in interest rates but involve other risks, such as the inability of borrowers to make higher payments in an increasing interest rate environment. At the same time, for secured loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as the borrowers refinance their loans at lower interest rates. Under these circumstances, Huntington's results of operations could be negatively impacted.
The forward yield curve at December 31, 2002, implied a 150 basis point increase in short-term interest rates by the end of 2003. The results of Huntington's recent sensitivity analysis indicated that net interest income would be 0.7% lower during the next twelve months if interest rates were 200 basis points higher at the end of that period than implied by the forward yield curve at December 31, 2002. Only the 200 basis point increasing rate scenario was modeled because a 200 basis point decrease in the interest rate curve was not feasible given the overall low level of interest rates. Management believes further declines in market rates would put modest downward pressure on net interest income, resulting from the implicit pricing floors in non-maturity deposits.
The net interest margin has been adversely impacted in recent months by: (1) fixed-rate consumer loan repayments being reinvested at lower market rates; (2) high repayments of residential mortgage loans and mortgage-backed securities; (3) the implicit floors in retail deposits as rates declined to historically low levels; (4) the rapid growth of lower-yielding residential adjustable-rate mortgage loans retained on the balance sheet; (5) the lower yield on the higher quality automobile loan originations, and; (6) the flattening of the yield curve. Future net interest income could also be adversely affected by these factors.
Changes in interest rates also can affect the value of loans and other assets, including retained interests in securitizations, mortgage and non-mortgage servicing rights, and Huntington's ability to realize gains on the sale of assets. A portion of Huntington's earnings results from transactional income. Examples of this type of earnings result from gains on sales of loans and securities. This type of income can vary significantly from quarter-to-quarter and year-to-year based on a number of different factors, including the interest rate environment. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans and leases may lead to an increase in non-performing assets and a reduction of discount accreted into income, which could have a material adverse effect on Huntington's results of operations and cash flows.
Although fluctuations in market interest rates are neither completely predictable nor controllable, Huntington's Asset and Liability Management Committee (ALCO) meets periodically to monitor Huntington's interest rate sensitivity position and oversee its financial risk management by establishing policies and operating limits.
IF HUNTINGTON IS UNABLE TO BORROW FUNDS THROUGH ACCESS TO CAPITAL MARKETS, IT MAY NOT BE ABLE TO MEET THE CASH FLOW REQUIREMENTS OF ITS DEPOSITORS AND BORROWERS, OR MEET THE OPERATING CASH NEEDS OF HUNTINGTON TO FUND CORPORATE EXPANSION AND OTHER ACTIVITIES.
Huntington's ALCO establishes guidelines and regularly monitors the overall liquidity position of the Bank and the parent company to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the Bank is used to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers. The Bank's ALCO establishes policies and monitors guidelines to diversify the Bank's wholesale funding sources to avoid concentrations in any one market source. Wholesale funding sources include Federal funds purchased, securities sold under repurchase agreements, non-core deposits, and medium- and long-term debt, which includes a domestic bank note program and a Euronote program. The Bank is also a member of the Federal Home Loan Bank of Cincinnati (FHLB), which provides funding through advances to its members that are collateralized with mortgage-related assets.
Huntington maintains a portfolio of securities that can be used as a secondary source of liquidity. There are other sources of liquidity should they be needed. These sources include the sale or securitization of loans, the ability to acquire additional national market, non-core deposits, additional collateralized borrowings such as FHLB advances, the issuance of debt securities, and the issuance of preferred or common securities in public or private transactions. The Bank also can borrow through the Federal Reserve's discount window.
If Huntington were unable to access any of these funding sources when needed, it might be unable to meet the needs of its customers, which could adversely impact Huntington's financial condition, its results of operations, cash flows, and its level of regulatory-qualifying capital.
HUNTINGTON HAS SIGNIFICANT COMPETITION IN BOTH ATTRACTING AND RETAINING DEPOSITS AND IN ORIGINATING LOANS AND LEASES.
Competition is intense in most of the markets Huntington serves. Huntington competes on price and service with other banks and financial companies such as savings and loans, credit unions, finance companies, and brokerage firms. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry, and banking reform. For example, financial services reform legislation enacted in 1999 eliminated the long-standing Glass-Steagall Act restrictions on securities activities of bank holding companies and banks. The legislation, among other things, permits securities and insurance firms to engage in banking activities under specified conditions.
MANAGEMENT MAINTAINS INTERNAL OPERATIONAL CONTROLS AND HUNTINGTON HAS INVESTED IN TECHNOLOGY TO HELP IT PROCESS LARGE VOLUMES OF TRANSACTIONS. HOWEVER, THERE CAN BE NO ASSURANCE THAT HUNTINGTON WILL BE ABLE TO CONTINUE PROCESSING AT THE SAME OR HIGHER LEVELS OF TRANSACTIONS. IF HUNTINGTON'S SYSTEM OF INTERNAL CONTROLS SHOULD FAIL TO WORK AS EXPECTED, IF ITS SYSTEMS WERE TO BE USED IN AN UNAUTHORIZED MANNER, OR IF EMPLOYEES WERE TO SUBVERT THE SYSTEM OF INTERNAL CONTROLS, SIGNIFICANT LOSSES TO HUNTINGTON COULD OCCUR.
Huntington processes large volumes of transactions on a daily basis and is exposed to numerous types of operational risk. Operational risk generally refers to the risk of loss resulting from Huntington's operations, including, but not limited to, the risk of fraud by employees or persons outside Huntington, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes the potential legal actions that could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards.
Huntington establishes and maintains systems of internal operational controls that provide management with timely and accurate information about its level of operational risk. While not foolproof, these systems have been designed to manage operational risk at appropriate, cost effective levels. Huntington has also established procedures that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. From time to time, Huntington experiences losses from operational risk, including the effects of operational errors, which are recorded as non-interest expense.
Management believes that its current system of internal controls is effective. While management continually monitors and improves its system of internal controls, data processing systems, and corporate-wide processes and procedures, there can be no assurance that Huntington will not suffer such losses in the future.
THE EXTENDED DISRUPTION OF VITAL INFRASTRUCTURE COULD NEGATIVELY IMPACT HUNTINGTON'S BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION.
Huntington's operations depend upon, among other things, its infrastructure, including its equipment and facilities. Extended disruption of its vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking or viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of Huntington's control could have a material adverse impact on the financial services industry as a whole and on Huntington's business, results of operations, cash flows, and financial condition in particular.
HUNTINGTON COULD EXPERIENCE LOSSES ON ITS RESIDUAL VALUES RELATED TO ITS AUTOMOBILE LEASE PORTFOLIO.
At December 31, 2002, Huntington had a $3.1 billion automobile lease portfolio. Inherently, automobile lease portfolios are subject to residual risk, which arises when the market price of the leased vehicle at the end of the lease term is below the estimated residual value at the time the lease is originated. This situation arises due to a decline in used car market values.
Since October 2000 Huntington has had in place residual value insurance policies on virtually all of its leased automobiles. The first policy covers all leases originated before October 1, 2000 and has a cap on insured losses of $120 million. A second policy covers leases originated between October 2000 and April 2002, and has a cap of $50 million. A third policy covers originations over a three year term through April 2005 and has no cap. These policies insure against any difference that may exist between the residual value recorded at the inception of the lease and the fair value of the automobile at the end of the lease, as evidenced by Black Book valuation. However, should the market value of the automobile at the end of the lease be lower than the Black Book fair value due to certain conditions such as excess mileage or wear-and-tear on the vehicle not reimbursed by the lessee, Huntington would bear the risk.
Management believes that these residual value insurance policies effectively mitigate exposure to significant residual value declines.
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a financial company's shareholders. These regulations may sometimes impose significant limitations on operations. The significant Federal and state banking regulations that affect Huntington are described in this report under the heading "Regulatory Matters." These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax planning, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on Huntington, such as the bankruptcy of major U.S. companies, have resulted in legislators, regulators, and authoritative bodies, such as the Financial Accounting Standards Board, the Securities and Exchange Commission, and the Public Company Accounting Oversight Board, responding by adopting and/or proposing substantive revisions to laws, regulations, rules, standards, policies, and interpretations. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on Huntington's business and results of operations; however, it is impossible to predict at this time the extent to which any such adoption, change, or repeal would impact Huntington.
THE OCC MAY IMPOSE DIVIDEND PAYMENT AND OTHER RESTRICTIONS ON THE HUNTINGTON NATIONAL BANK (THE BANK), HUNTINGTON'S BANK SUBSIDIARY, WHICH WOULD IMPACT HUNTINGTON'S ABILITY TO PAY DIVIDENDS TO ITS SHAREHOLDERS OR REPURCHASE ITS STOCK.
The OCC is the primary regulatory agency that examines the Bank and its activities. Under certain circumstances, including any determination that the Bank's activities constitute an unsafe and unsound banking practice, the OCC has the authority by statute to restrict the Bank's ability to transfer assets, to make distributions to its shareholder, and to redeem preferred securities.
Under applicable statutes and regulations, dividends by a national bank may be paid out of current or retained net profits, but a national bank is prohibited from declaring a cash dividend on shares of its common stock out of net profits until the surplus fund equals the amount of capital stock or, if the surplus fund does not equal the amount of capital stock, until certain amounts from net profits are transferred to the surplus fund. Moreover, the prior approval of the OCC is required for the payment of a dividend if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits for the year combined with its net profits for the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred securities.
Payment of dividends could also be subject to regulatory limitations if the Bank became under-capitalized for purposes of the OCC prompt corrective action regulations. Under-capitalized is currently defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a core capital, or leverage, ratio of less than 4.0%. The Bank's inability to pay dividends to Huntington would negatively impact Huntington's ability to pay dividends to its shareholders or to repurchase its stock.
At December 31, 2002, the Bank was in compliance with all regulatory capital requirements. As of that date, total risk-based capital was 11.54%, Tier 1 risk-based capital was 8.65%, and Tier 1 leverage capital was 8.85%. Management intends to maintain the Bank's capital ratios in excess of the well-capitalized levels under the OCC's regulations. Management cannot guarantee, however, that it will be able to keep the capital ratios for the Bank in excess of well-capitalized levels.
THE FEDERAL RESERVE BOARD MAY REQUIRE HUNTINGTON TO COMMIT CAPITAL RESOURCES TO SUPPORT ITS BANK SUBSIDIARY.
The FRB, which examines Huntington, has a policy stating that a bank holding company is expected to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the source of strength doctrine, the FRB may require a bank holding company to make capital injections into a troubled subsidiary bank, and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it, and therefore may be required to borrow the funds. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. Moreover, in the event of a bank holding company's bankruptcy, any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company's results of operations and cash flows.
Management does not foresee the need to make capital injections to its subsidiary bank under the source of strength doctrine in the foreseeable future.
HUNTINGTON'S ACQUISITIONS MAY NOT MEET INCOME EXPECTATIONS AND/OR COST SAVINGS LEVELS OR MAY NOT BE INTEGRATED WITHIN TIMEFRAMES ORIGINALLY ANTICIPATED. HUNTINGTON MAY ENCOUNTER UNFORESEEN DIFFICULTIES, INCLUDING UNANTICIPATED INTEGRATION PROBLEMS AND BUSINESS DISRUPTION IN CONNECTION WITH ITS ACQUISITIONS. ACQUISITIONS COULD ALSO DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OPERATING RESULTS.
Huntington may acquire or make investments in other businesses, technologies, services or products. The process of integrating any acquired business, technology, service or product into its operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may consume considerable management time and attention, which could otherwise be available for ongoing development of the business. The expected benefits of any acquisition may not be realized. Moreover, Huntington may be unable to identify, negotiate, or finance future acquisitions successfully. Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities, or amortization expenses.
IF EITHER OF HUNTINGTON'S REAL ESTATE INVESTMENT TRUST (REIT) AFFILIATES FAIL TO QUALIFY AS A REIT, HUNTINGTON WILL BE SUBJECT TO A HIGHER CONSOLIDATED EFFECTIVE TAX RATE.
Huntington Preferred Capital, Inc. (HPCI) and Huntington Preferred Capital II, Inc. (HPC-II) operate as REITs for federal income tax purposes. HPCI and HPC-II are consolidated subsidiaries of Huntington that were established to acquire, hold, and manage mortgage assets and other authorized investments to generate net income for distribution to their shareholders. Qualification as a REIT involves application of specific provisions of the Internal Revenue Code relating to income and asset tests. A REIT must satisfy six asset tests quarterly: (1) 75% of the value of the REIT's total assets must consist of real estate assets, cash and cash items, and government securities; (2) not more than 25% of the value of the REIT's total assets may consist of securities, other than those includible under the 75% test; (3) not more than 5% of the value of its total assets may consist of securities of any one issuer, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (4) not more than 10% of the outstanding voting power of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; (5) not more that 10% of the total value of the outstanding securities of any one issuer may be held, other than those securities includible under the 75% test or securities of taxable REIT subsidiaries; and (6) a REIT cannot own securities in one or more taxable REIT subsidiaries which comprise more than 20% of its total assets. Also, a REIT must annually satisfy two gross income tests: (1) 75% of its gross income must be from qualifying income closely connected with real estate activities; and (2) 95% of its gross income must be derived from sources qualifying for the 75% test plus dividends, interest and gains from the sale of securities. At December 31, 2002, HPCI and HPC-II met all REIT qualifying tests.
If these REIT affiliates fail to meet any of the required provisions for REITs, HCPI or HPC-II will no longer qualify as a REIT and the resulting tax consequences would increase Huntington's effective tax rate.
HUNTINGTON COULD BE HELD RESPONSIBLE FOR ENVIRONMENTAL LIABILITIES OF PROPERTIES ACQUIRED THROUGH FORECLOSURE OF LOANS SECURED BY REAL ESTATE.
In the event that Huntington is forced to foreclose on a defaulted commercial mortgage and/or residential mortgage loan to recover its investment in the mortgage loan, Huntington may be subject to environmental liabilities in connection with the underlying real property, which could exceed the value of the real property. Although Huntington exercises due diligence to discover potential environmental liabilities prior to the acquisition of any property through foreclosure, hazardous substances or wastes, contaminants, pollutants, or their sources may be discovered on properties during Huntington's ownership or after a sale to a third party. There can be no assurance that Huntington would not incur full recourse liability for the entire cost of any removal and clean-up on an acquired property, that the cost of removal and clean-up would not exceed the value of the property, or that Huntington could recover any of the costs from any third party.
HUNTINGTON'S FINANCIAL STATEMENTS MUST CONFORM WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES (GAAP), WHICH REQUIRE MANAGEMENT TO MAKE ESTIMATES AND ASSUMPTIONS THAT AFFECT AMOUNTS REPORTED IN THE FINANCIAL STATEMENTS. ACTUAL RESULTS COULD DIFFER FROM THOSE ESTIMATES.
The preparation of Huntington's financial statements requires management to establish critical accounting policies and make accounting estimates, assumptions, and judgments that affect amounts recorded and reported in its financial statements. An accounting estimate requires assumptions about uncertain matters that could have a material effect on the financial statements of Huntington if results differ in amount or timing from the estimates used. Huntington's financial statements include estimates related to accruals of income and expenses and determination of fair values or carrying values of certain, but not all, assets and liabilities. These estimates are based on information available to management at the time the estimates are made. Factors involved in these estimates could change in the future leading to a change of those estimates, which could be material to Huntington's results of operations or financial condition.
IF HUNTINGTON'S CREDIT RATING WERE DOWNGRADED, ITS ABILITY TO ACCESS FUNDING SOURCES MAY BE NEGATIVELY IMPACTED OR ELIMINATED AND HUNTINGTON'S LIQUIDITY AND THE MARKET PRICE OF ITS COMMON STOCK COULD BE ADVERSELY IMPACTED.
At December 31, 2002, Huntington's and the Bank's credit ratings are as follows:
Senior Subordinated Short
Unsecured Notes Notes Term
Moody's Investors Service (1)
Huntington A2 A3 P1
The Bank A1 A2 P1
Standard & Poor's Corporation (2)
Huntington A- BBB+ A2
The Bank A A- A1
Fitch Ratings
Huntington A A- F1
The Bank A A- F1
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(1) In September 2000, the outlook was changed from "stable" to "negative".
(2) In July 2001, the outlook was changed from "stable" to "negative".
Huntington relies on certain funding sources such as large corporate deposits, public fund deposits, federal funds, Euro deposits, FHLB advances, and bank notes. Although not contractually tied to credit ratings, Huntington's ability to access these funding sources may be impacted by negative changes in credit ratings. In the case of public funds or FHLB advances, a credit downgrade also may trigger a requirement that Huntington pledge additional collateral against outstanding borrowings.
A downgraded credit rating by any of the three credit rating agencies could negatively affect Huntington's common stock price and the timing of the pass through of cash flows from obligors to its securitization trusts would be accelerated. In addition, if the unsecured senior debt of the Bank falls below BBB+ or Baa1, a Servicer Downgrade Event automatically occurs, which will trigger an early amortization event in Huntington largest securitization. At that point, Huntington would no longer be permitted to sell additional loans to the trust.
Huntington currently provides letters of credit for approximately $600 million of taxable and tax-exempt notes and bonds. Huntington Capital Corporation (HCC), a consolidated subsidiary of Huntington, acts as the remarketing agent for approximately $500 million of the outstanding issues. These obligations are currently owned by a variety of money market funds that have the right to put these bonds back to HCC for remarketing every seven days. A lower credit rating could impact HCC's ability to remarket these instruments. A short-term rating downgrade may cause these obligations to be put back to HCC for subsequent remarketing or inclusion into HCC holdings. Letter of credit issuance for the purpose of credit enhancement of bond issues may be impacted.
GUIDE 3 INFORMATION
Information required by Industry Guide 3 relating to statistical disclosure by bank holding companies is contained in the information incorporated by reference in response to Items 7 and 8 of this amended Form 10-K.
AVAILABLE INFORMATION
Huntington makes available free of charge on its Internet website, www.huntington.com, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, in portable document format (PDF) typically within three business days after Huntington electronically files such reports with, or furnishes them to, the SEC. Huntington does not provide the reports on its website on the same day it electronically files such reports with, or furnishes them to, the SEC because Huntington desires to provide the reports on its website in portable document format (PDF) and its current provider typically needs three business days to convert the reports into PDF and post them on Huntington's website. During the period between the date on which Huntington electronically files a report with, or furnishes it to, the Securities and Exchange Commission and the date on which Huntington posts the PDF of the report on its website, Huntington will provide an electronic or paper copy of such report free of charge upon request.
ITEM 2: PROPERTIES
The headquarters of Huntington and its lead subsidiary, The Huntington National Bank, are located in the Huntington Center, a thirty-seven-story office building located in Columbus, Ohio. Of the building's total office space available, Huntington leases approximately 39%. The lease term expires in 2015, with nine five-year renewal options for up to 45 years but with no purchase option. The Huntington National Bank has an equity interest in the entity that owns the building. Huntington's other major properties consist of a thirteen-story and a twelve-story office building, both of which are located adjacent to the Huntington Center; a twenty-one story office building, known as the Huntington Building, located in Cleveland, Ohio; an eighteen-story office building in Charleston, West Virginia; a three-story office building located in Holland, Michigan; a 470,000 square foot Business Service Center in Columbus, Ohio, which serves as Huntington's primary operations and data center; The Huntington Mortgage Group's building, located in the greater Columbus area; an office complex located in Troy, Michigan; and two data processing and operations centers located in Ohio. The office buildings above serve as regional administrative offices occupied predominantly by Huntington's Regional and Private Financial Group lines of business. The Dealer Sales line of business is primarily located in a three-story office building located in Columbus Ohio. Of these properties, Huntington owns the thirteen-story and twelve-story office buildings, and the Business Service Center. All of the other major properties are held under long-term leases. In 1998, Huntington entered into a sale/leaseback agreement that included the sale of 52 of its locations. The transaction included a mix of branch banking offices, regional offices, and operational facilities, including certain properties described above, which Huntington will continue to operate under a long-term lease.
ITEM 3: LEGAL PROCEEDINGS
Information required by this item is set forth in Note 22 of Notes to Consolidated Financial Statements beginning on page 95 of this report.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The common stock of Huntington Bancshares Incorporated is traded on the NASDAQ Stock Market under the symbol "HBAN". The stock is listed as "HuntgBcshr" or "HuntBanc" in most newspapers. As of February 28, 2003, Huntington had 29,894 shareholders of record.
Information regarding the high and low sale prices of Huntington Common Stock and cash dividends declared on such shares, as required by this item, is set forth in Table 24 entitled "Quarterly Stock Summary, Key Ratios and Statistics, and Capital Data" on page 50 of this report. Information regarding restrictions on dividends, as required by this item, is set forth in Item 1 "Business-Regulatory Matters-Dividend Restrictions" on page 6 and in Notes 17 and 25 of Notes to Consolidated Financial Statements beginning on pages 87 and 99, respectively, of this report.
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TABLE 1 - SELECTED FINANCIAL DATA
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YEAR ENDED DECEMBER 31,
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(in thousands of dollars, except per share amounts) 2002 2001 2000 1999 1998
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SUMMARY OF OPERATIONS
Total interest income $ 1,338,934 $ 1,690,203 $ 1,872,122 $ 1,834,145 $ 1,862,768
Total interest expense 547,783 943,337 1,166,073 984,240 978,271
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Net interest income 791,151 746,866 706,049 849,905 884,497
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Provision for loan and lease losses 194,426 257,326 61,464 70,335 81,926
Securities gains 4,902 723 37,101 12,972 29,793
Gain on sale of Florida operations 175,344 --- --- --- ---
Merchant Services gain 24,550 --- --- --- ---
Gains on sale of credit card portfolios --- --- --- 108,530 9,530
Non-interest income 1,129,986 1,208,614 1,091,701 958,502 779,149
Non-interest expense 1,332,504 1,496,639 1,306,954 1,161,355 1,097,216
Restructuring charges 56,184 79,957 --- 46,791 90,000
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Income before income taxes 542,819 122,281 466,433 651,428 433,827
Income taxes 209,755 (23,088)(1) 133,736 205,527 136,151
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NET INCOME $ 333,064 $ 145,369 $ 332,697 $ 445,901 $ 297,676
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PER COMMON SHARE (2)
Net income
Basic $1.37 $0.58 $1.34 $1.76 $1.16
Diluted 1.36 0.58 1.33 1.74 1.15
Cash dividends declared 0.64 0.72 0.76 0.68 0.62
Book value at year-end 9.84 9.69 9.63 8.85 8.51
BALANCE SHEET HIGHLIGHTS
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Total assets at year-end $27,557,251 $28,531,346 $28,535,995 $29,036,735 $28,291,464
Total long-term debt at year-end (3) 788,678 927,330 845,976 697,677 697,359
Average long-term debt (3) 898,128 860,637 810,543 697,523 567,938
Average shareholders' equity 2,309,220 2,415,222 2,327,083 2,180,549 2,090,546
Average assets 26,040,395 28,184,457 28,753,046 28,741,544 26,899,722
KEY RATIOS AND STATISTICS
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MARGIN ANALYSIS--AS A %
OF AVERAGE EARNING ASSETS (4)
Interest Income 6.43 % 7.74 % 8.29 % 7.91 % 8.38 %
Interest Expense 2.62 4.31 5.14 4.22 4.38
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NET INTEREST MARGIN 3.81 % 3.43 % 3.15 % 3.69 % 4.00 %
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Return on average assets 1.28 % 0.52 % 1.16 % 1.55 % 1.11 %
Return on average shareholders' equity 14.4 6.0 14.3 20.4 14.2
Efficiency ratio 69.1 74.2 70.2 61.8 64.0
Dividend payout ratio (5) 46.9 124.7 57.0 39.0 53.8
Average shareholders' equity to
average assets 8.87 8.57 8.09 7.59 7.77
Tangible equity to assets (period-end) 7.58 6.17 5.98 5.51 5.33
Tier I risk-based capital ratio 8.65 7.30 7.37 7.72 7.19
Total risk-based capital ratio 11.54 10.34 10.51 10.82 10.75
Tier I leverage ratio 8.85 % 7.46 % 7.10 % 6.89 % 6.45 %
OTHER DATA
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Full-time equivalent employees 8,177 9,743 9,693 9,516 10,159
Domestic banking offices 343 481 508 515 529
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(1) Reflects a $32.5 million reduction related to the issuance of $400 million of REIT subsidiary preferred stock, of which $50 million was sold to the public.
(2) Adjusted for stock splits and stock dividends, as applicable.
(3) Excludes capital securities and Federal Home Loan Bank advances.
(4) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
(5) Based on diluted earnings per share.
INTRODUCTION
Huntington Bancshares Incorporated (Huntington) is a multi-state diversified financial services company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged in providing full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, and discount brokerage services, as well as underwriting credit life and disability insurance, and selling other insurance and financial products and services. Huntington's banking offices are located in Ohio, Michigan, Indiana, Kentucky, and West Virginia. Selected financial services are also conducted in other states including Arizona, Florida, Georgia, Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington also has a foreign office in the Cayman Islands and a foreign office in Hong Kong. The Huntington National Bank (the Bank) is Huntington's only bank subsidiary.
The following discussion and analysis provides investors and others with information that management believes to be necessary for an understanding of Huntington's financial condition, changes in financial condition, results of operations, and cash flows, and should be read in conjunction with the financial statements, notes, and other information contained in this document.
FORWARD-LOOKING STATEMENTS
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements about
Huntington. These include descriptions of products or services, plans, or
objectives of management for future operations, and forecasts of revenues,
earnings, cash flows, or other measures of economic performance. Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts.
By their nature, forward-looking statements are subject to numerous assumptions, risks, and uncertainties. A number of factors could cause actual conditions, events, or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, those set forth under the heading "Business Risks" included in Item 1 of this report and other factors described from time to time in other filings with the Securities and Exchange Commission.
Management encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute forecasts of future performance. Forward-looking statements speak only as of the date they are made. Huntington does not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events.
RESTATEMENT OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Huntington restated its financial results to reclassify certain automobile
leases from the direct financing lease method to the operating lease method of
accounting. The appropriate classification of automobile leases as operating
leases or direct financing leases under Statement of Financial Accounting
Standards (Statement) No. 13, Accounting for Leases, can be impacted by residual
value insurance coverage. Since October 2000, Huntington has had residual value
insurance coverage on its entire automobile lease portfolio to protect it
from the risk of loss resulting from declines in used car prices. Such
losses arise if the market value of the automobile at the end of the lease term
is less than the residual value embedded in the original lease contract.
Management believes these policies effectively protect Huntington from the risk
of declining used car prices. In April 2003, management determined that, due to
provisions in certain of its residual value insurance policies, the leases
covered by these policies would not qualify as direct financing leases.
For leases originated prior to May 2002, the residual value insurance policies contain aggregate loss caps. The residuals insured under these policies are not considered guaranteed, and, accordingly, the related leases fail to qualify as direct financing leases under Statement No. 13. As a result, leases originated prior to May 2002 have been reclassified as operating leases for all periods presented. As of December 31, 2002, $2.3 billion of such leases, net of accumulated depreciation, are reflected in the Consolidated Balance Sheets as operating lease assets. All leases originated since April 2002 are covered under a new residual value insurance policy (the "New Policy") which insures the full residual value of each vehicle and includes no aggregate loss cap. Leases with residual gains are netted with leases with residual losses when claims are settled. The netting provision of the New Policy precluded Huntington from determining the amount of the guaranteed residual of any individual leased asset within the portfolio at lease inception. Thus, the related leases failed to qualify as direct financing leases. Huntington has amended the New Policy, retroactive to April 2002, by adding an endorsement that adds a level of insurance sufficient to meet the criteria as a residual value guarantee pursuant to Statement No. 13, on an individual lease-by-lease basis, with no netting provisions. In addition, Huntington continues to maintain insurance coverage that insures the full value of the leased residuals. Accordingly, and in reliance on guidance furnished by the Securities and Exchange Commission in its announcement at the Financial Accounting Standards Board Emerging Issues Task Force meeting on May 15, 2003, all leases covered under the New Policy, as amended, are now appropriately classified as direct financing leases in the accompanying financial statements. As of December 31, 2002, $893 million of such leases were included in loans and leases in the Consolidated Balance Sheets. It is management's intention to insure the residuals associated with future originations under the New Policy, as amended, and to classify such new originations as direct financing leases.
The impact of this restatement also affected the Consolidated Income Statements. Under the direct financing lease accounting method, interest income is recognized on leases on a "level-yield" or interest method that ascribes a portion of each lease payment to interest income, resulting in a constant rate of interest over the life of the lease. The remaining portion of each payment amortizes the net investment in the lease such that at the end of the lease term, the net investment equals the residual value as determined at the inception of the lease. Under operating lease accounting, lease payments are recorded as rental income, a component of Operating lease income in the Non-interest income section of the Consolidated Income Statements. Depreciation expense is recorded on a straight-line basis over the term of the lease from the cost of the automobile at the inception of the lease to the estimated residual value at the end of the lease term. Depreciation expense is included in Operating lease expense in the Non-interest expense section of the Consolidated Income Statement. Depreciation expense is adjusted prospectively at any time during the lease term when the estimated market value of the automobile at the end of the lease term changes. Upon disposition, a gain, reflected in Non-interest income, or a loss, reflected in Non-interest expense, is recorded for any difference between the net book value of the lease and the proceeds from the disposition of the automobile.
Over the term of the lease, the cash flows, the timing of the cash flows, and total income recognized are identical under either accounting method. One significant difference between the two methodologies is the timing of income recognition. Under operating lease accounting, less income is recognized in the first half of the lease and more income is recognized in the second half than under direct financing lease accounting.
Another significant difference between the direct financing lease method and the operating lease method of accounting is the recognition of credit loss expense. Credit losses occur when a lease is terminated early because the lessee fails to make the required lease payments. These credit-generated terminations result in Huntington taking possession of the automobile earlier than expected. When this occurs, the market value of the automobile may be less than Huntington's book value, resulting in a loss upon sale or write down to market value while the vehicle is pending sale. Under the direct financing lease accounting method, such losses are charged against an allowance for loan and lease losses that is established at the inception of the lease and is adjusted periodically as necessary through provision expense. Under operating lease accounting, the lease is not treated like a loan, but as a depreciable non-interest earning asset. Therefore, no allowance for loan and lease losses is established. As such, early termination losses are recognized as a component of Operating lease expense in the Non-interest expense section of the Consolidated Income Statements.
The fact that part of the auto lease portfolio is accounted for as operating leases, with the remainder, including all future production, being accounted for as direct financing leases, will impact the comparability of Huntington's financial statements between reporting periods. As leases originated before May 2002 accounted for as operating leases run off, and as new originations are accounted for as direct financing leases, the level of operating lease income and operating lease expense will decline over future reporting periods while the level of interest income associated with direct financing leases will increase. Additionally, management will increase the provision for loan and lease losses, as appropriate, to provide the necessary level of reserves for new direct financing lease originations. Balance sheet classifications will also be impacted as the run off of the operating leases originated before the New Policy, as amended, reduces non-interest earning assets while the new direct financing lease originations covered under the New Policy, as amended, increase loans and leases.
Further information regarding the impact of this restatement to Huntington's results of operations and financial condition can be found in Note 3 to the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Note 1 to the consolidated financial statements included in this amended
Annual
Report lists significant accounting policies used in the development and presentation
of Huntington's financial statements. This discussion and analysis, the significant
accounting policies, and other financial statement disclosures identify and
address key variables and other qualitative and quantitative factors that are
necessary for an understanding and evaluation of the organization, its financial
position, results of operations, and cash flows.
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:
SPECIAL PURPOSE ENTITIES (SPEs)
Huntington established two securitization trusts, or SPEs, in 2000. These two
trusts had total assets of approximately $1.2 billion and $1.3 billion at December
31, 2002 and 2001, respectively. In the securitization transactions, indirect
automobile loans that Huntington originated were sold to these trusts. Under
current GAAP, these trusts are not required to be consolidated in Huntington's
financial statements. As such, the loans and the debt within the trusts are
not included on Huntington's balance sheets at December 31, 2002 and 2001. See
Note 10 to the consolidated financial statements for more information regarding
securitized loans.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation of Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial Statements, addresses consolidation by business enterprises where ownership interests in an entity may vary over time or, in many cases, special-purpose entities (SPEs). To be consolidated for financial reporting, these entities must have certain characteristics. ARB 51 requires that an enterprise's consolidated financial statements include subsidiaries in which the enterprise has a controlling financial interest. This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. An enterprise that holds significant variable interests in such an entity, but is not the primary beneficiary, is required to disclose certain information regarding its interests in that entity. This Interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds an interest that it acquired before February 1, 2003. It also applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. This Interpretation may be applied (1) prospectively with a cumulative-effect adjustment as of the date on which it is first applied, or (2) by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated.
Huntington is reviewing the implications of Interpretation No. 46 and is considering the adoption methods permitted. Management believes the only material impact of adoption will be the consolidation of one of the securitization trusts formed in 2000. The consolidation of that securitization trust will involve the recognition of the trust's net assets, which, at December 31, 2002, included $1,020 million of indirect automobile loans, $100 million of cash, and $1,000 million of secured debt obligations with an interest rate based on commercial paper rates. In addition to other adjustments and considerations, adoption will also eliminate the retained interest in that securitization trust and its servicing asset related to the loans in the trust, with carrying values at the end of 2002 of $152 million and $12 million, respectively. The impact to Huntington's equity and results of operations will depend on the method of transition adopted under this new interpretation. Huntington will adopt this new standard no later than the end of the third quarter of 2003.
DERIVATIVES AND OTHER OFF BALANCE SHEET ARRANGEMENTS
Huntington uses a variety of derivatives, principally interest rate swaps, in
its asset and liability management activities to mitigate the risk of adverse
interest rate movements on either cash flows or market value of certain assets
and liabilities.
Like other financial organizations, Huntington uses various commitments in the ordinary course of business that, under GAAP, are not recorded in the financial statements. Specifically, Huntington makes various commitments to extend credit to customers, to sell loans, and to maintain obligations under operating-type noncancelable leases for its facilities.
Derivatives are discussed under the "Interest Rate Risk Management" section of this report and in Note 19 to the consolidated financial statements. Information regarding commitments can be found in Note 22 to the consolidated financial statements.
RELATED PARTY TRANSACTIONS
Various directors and executive officers of Huntington, and entities affiliated
with those directors and executive officers, are customers of Huntington's subsidiaries.
All transactions with Huntington's directors and executive officers and their
affiliates are conducted in the ordinary course of business under normal credit
terms, including interest rate and collateralization, and do not represent more
than the normal risk of collection. At December 31, 2002 and 2001, the total
amount of their indebtedness to Huntington was $95.6 million and $133.8 million,
respectively. A summary of the aggregate activity of this indebtedness can be
found in Note 9 to the consolidated financial statements. All other related
party transactions, including those reported in Huntington's 2003 Proxy Statement
and transactions subsequent to December 31, 2002, were considered immaterial
to its financial condition, results of operations, and cash flows.
COMMON SHARE REPURCHASE PROGRAMS
In February 2002, the Board of Directors authorized a share repurchase program
for up to 22 million shares and canceled the previously existing authorization.
Under this authorization, a total of 19.2 million shares were repurchased at
a cost of $370.0 million through the end of December 2002. An additional 0.2
million shares were repurchased in early January 2003, bringing total shares
repurchased under this authorization to 19.4 million shares. In mid-January
2003, the Board of Directors approved a new share repurchase authorization for
up to 8 million shares, canceling the 2.6 million shares remaining under the
February 2002 authorization. Huntington expects to use this new authorization
to complete the purchase of the 2.6 million shares remaining for repurchase
under the prior authorization. Repurchases of shares will be made from time
to time as deemed appropriate and will be reserved for reissue in connection
with Huntington's dividend reinvestment and employee benefit plans, as well
as for acquisitions and other corporate purposes.
SIGNIFICANT CREDIT ACTIONS
In the fourth quarter of 2002, Huntington initiated two credit actions associated
with commercial and commercial real estate loans. The first was the sale of
$47.2 million in non-performing assets with $21.4 million of related charge-offs.
The second action was the full charge-off of a $29.9 million credit exposure
to a single health care finance company. This credit was identified as a non-performing
loan and subsequently charged-off, all within the fourth quarter of 2002. These
credit actions had no earnings impact, as existing loss reserve levels were
sufficient to absorb the combined $51.3 million in charge-offs. As a result,
the allowance for loan and lease losses as a percentage of total loans and leases
at December 31, 2002, declined to 1.81% from 2.07% at September 30, 2002, and
the non-performing asset (NPA) coverage ratio (loan and lease loss reserve as
a percent of NPAs) improved to 246% from 173% at the end of the third quarter.
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TABLE 2 - SELECTED ANNUAL INCOME STATEMENTS
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YEAR ENDED DECEMBER 31,
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(in thousands of dollars, except per share amounts) 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Total interest income $1,338,934 $ 1,690,203 $ 1,872,122 $ 1,834,145 $ 1,862,768
Total interest expense 547,783 943,337 1,166,073 984,240 978,271
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NET INTEREST INCOME 791,151 746,866 706,049 849,905 884,497
Provision for loan and lease losses 194,426 257,326 61,464 70,335 81,926
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 596,725 489,540 644,585 779,570 802,571
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease income 641,785 699,857 635,243 506,429 380,272
Service charges on deposit accounts 152,521 164,052 160,727 156,315 126,403
Brokerage and insurance 66,843 79,034 61,871 52,076 36,710
Trust services 62,051 60,298 53,613 52,030 50,754
Mortgage banking 47,989 59,148 38,025 56,890 60,006
Bank owned life insurance 46,005 38,241 39,544 37,560 28,712
Other service charges and fees 42,888 48,217 43,883 37,301 29,202
Gain on sale of Florida operations 175,344 --- --- --- ---
Merchant Services gain 24,550 --- --- --- ---
Gains on sale of credit card portfolio --- --- --- 108,530 9,530
Securities gains 4,902 723 37,101 12,972 29,793
Other 69,904 59,767 58,795 59,901 67,090
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TOTAL NON-INTEREST INCOME 1,334,782 1,209,337 1,128,802 1,080,004 818,472
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease expense 518,970 558,626 494,800 346,027 273,287
Personnel costs 440,760 478,640 421,750 419,901 428,539
Equipment 68,323 80,560 78,069 66,666 62,040
Outside data processing and other services 67,368 69,692 62,011 62,886 74,795
Net occupancy 60,264 77,184 75,882 62,169 54,123
Marketing 27,911 31,057 34,884 32,506 32,260
Professional services 25,777 23,879 20,819 21,169 25,160
Telecommunications 22,661 27,984 26,225 28,519 29,429
Printing and supplies 15,198 18,367 19,634 20,227 23,673
Franchise and other taxes 9,456 9,729 11,077 14,674 22,103
Amortization of intangible assets 2,019 41,225 39,207 37,297 25,689
Restructuring charges 56,184 79,957 --- 46,791 90,000
Other 73,797 79,696 22,596 49,314 46,118
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TOTAL NON-INTEREST EXPENSE 1,388,688 1,576,596 1,306,954 1,208,146 1,187,216
-----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 542,819 122,281 466,433 651,428 433,827
Income taxes 209,755 (23,088)(1) 133,736 205,527 136,151
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NET INCOME $ 333,064 $ 145,369 $ 332,697 $ 445,901 $ 297,676
===================================================================================================================================
PER COMMON SHARE
Net Income
Basic $ 1.37 $ 0.58 $ 1.34 $ 1.76 $ 1.16
Diluted 1.36 0.58 1.33 1.74 1.15
Cash dividends declared 0.64 0.72 0.76 0.68 0.62
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 791,151 $ 746,866 $ 706,049 $ 849,905 $ 884,497
Tax Equivalent Adjustment (2) 5,205 6,352 8,310 9,423 10,307
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME - FTE $ 796,356 $ 753,218 $ 714,359 $ 859,328 $ 894,804
===================================================================================================================================
|
(1) Reflects a $32.5 million reduction related to the issuance of $400 million of REIT subsidiary preferred stock, of which $50 million was sold to the public.
(2) Calculated assuming a 35% tax rate.
Huntington reported net income of $333.1 million, or $1.36 per common share (diluted), in 2002, compared with $145.4 million, or $0.58 per common share, in 2001, and $332.7 million, or $1.33 per common share, in 2000. Return on average common equity (ROE) and average assets (ROA) for 2002 were 14.4% and 1.28%, respectively, compared with 6.0% and 0.52%, respectively, in 2001, and 14.3% and 1.16%, respectively, in 2000. See Table 1 entitled Selected Financial Data and Table 2 for Huntington's annual income statements for the recent five years.
2002 VERSUS 2001 PERFORMANCE
The $187.7 million increase in earnings ($420.5 million pre-tax) related to
a combination of items that benefited 2002 performance versus 2001. These items
primarily related to the strategic restructuring announced in 2001 and included
pre-tax gains in 2002 of $175.3 million and $24.6 million associated with the
sale of the Florida banking operations and restructuring of Merchant Services,
respectively, $115.2 million pre-tax in additional provision for loan losses
in 2001, a $23.8 million pre-tax reduction in restructuring charges, and a $16.4
million pre-tax reduction in the net loss on results of operations from the
sold Florida banking and insurance operations. Results for 2001 reflected a
$32.5 million tax benefit related to the issuance of $400 million of REIT subsidiary
preferred stock, of which $50 million was sold to the public. Excluding the
impact of these items, as well as the net earnings impact from the sold Florida
banking and insurance operations from both 2002 and 2001, net income in 2002
would have been $298.4 million, up $41.2 million, or 16%, from the prior year.
(See Table 25 on page 53.)
Net interest income on a fully taxable equivalent basis increased $43.2 million, or 6%, reflecting a $1.0 billion, or 5%, decline in average earning assets more than offset by a 38 basis point, or an effective 11%, increase in the net interest margin to 3.81% from 3.43%. The decline in average earning assets reflected a $0.7 billion, or 4%, decline in average loans and leases primarily due to the sale of the Florida banking operations, as well as the planned run-off of lower-margin investment securities and other earning assets. Excluding the impact of the sold Florida banking operations from 2002 and 2001, net interest income on a fully taxable equivalent basis increased $115.7 million, or 17%, reflecting a $1.2 billion, or 6%, increase in average earning assets and a 37 basis point, or an effective 11%, increase in the net interest margin to 3.83% from 3.46%.
The provision for loan and lease losses declined $62.9 million from 2001. Excluding the $115.2 million of additional provision expense in 2001, as well as the $9.9 million decline related to the sale of the Florida banking operations, the provision for loan and lease losses increased $62.2 million, reflecting loan and lease growth, as well as higher total commercial and commercial real estate net charge-offs, as consumer net charge-offs declined. The higher total commercial and commercial real estate net charge-offs reflected the impact of the continued weak economy on some of Huntington's commercial customers, as well as fourth quarter credit actions that accelerated the sale and disposition of non-performing commercial loans.
Non-interest income was up $125.4 million, or 10%, reflecting a $175.3 million gain from the sale of the Florida banking operations and $24.6 million gain from the restructuring of Merchant Services. Excluding the impact of these gains and the reduction of non-interest income due to the sold Florida banking and insurance operations, non-interest income declined $16.1 million, or 1%. This decrease was driven by a $58.1 million, or 8%, decrease in operating lease income and a $7.8 million, or 14%, decline in mortgage banking income, which was partially offset by a $15.7 million, or 12%, increase in service charges on deposit accounts and smaller increases spread among the remaining fee income categories.
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TABLE 3 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
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AVERAGE BALANCE
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Fully Tax Equivalent Basis (1) 2002 2001 2000 1999 1998
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ASSETS
Interest bearing deposits in banks $ 33 $ 7 $ 6 $ 9 $ 10
Trading account securities 7 25 15 13 11
Federal funds sold and securities purchased
under resale agreements 72 107 87 22 229
Mortgages held for sale 322 360 109 232 289
Securities:
Taxable 2,859 3,144 4,316 4,885 4,896
Tax exempt 135 174 273 297 247
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Total Securities 2,994 3,318 4,589 5,182 5,143
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Loans and leases:
Commercial 5,676 6,647 6,446 6,128 5,629
Real Estate (2)
Construction 1,217 1,221 1,184 1,000 764
Commercial 2,379 2,340 2,187 2,235 2,304
Consumer
Automobile loans and leases 3,233 2,867 3,153 3,564 3,254
Home equity 3,087 3,399 2,991 2,345 1,935
Residential mortgage 1,444 1,052 1,382 1,489 1,365
Other loans 425 589 528 1,099 1,419
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Total Consumer 8,189 7,907 8,054 8,497 7,973
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Total Loans and Leases 17,461 18,115 17,871 17,860 16,670
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Allowance for loan and lease losses 374 307 274 280 264
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Net Loans and Leases 17,087 17,808 17,597 17,580 16,406
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Total Earning Assets 20,889 21,932 22,677 23,318 22,352
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Operating lease assets 2,662 3,031 2,799 2,209 1,755
Cash and due from banks 757 912 1,008 1,039 975
Intangible assets 293 736 709 682 487
All other assets 1,813 1,880 1,834 1,774 1,595
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TOTAL ASSETS $26,040 $ 28,184 $28,753 $28,742 $26,900
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 2,902 $ 3,304 $ 3,421 $ 3,497 $ 3,287
Interest bearing demand deposits 5,161 5,005 4,291 4,097 3,585
Savings deposits 2,853 3,478 3,563 3,740 3,277
Other domestic time deposits 4,349 5,883 5,872 5,823 6,291
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Total core deposits 15,265 17,670 17,147 17,157 16,440
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Domestic time deposits of $100,000 or more 851 1,280 1,502 1,449 1,688
Brokered time deposits and negotiable CDs 731 128 502 238 182
Foreign time deposits 337 283 539 363 103
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Total deposits 17,184 19,361 19,690 19,207 18,413
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Short-term borrowings 2,128 2,325 1,966 2,549 2,084
Medium-term notes 1,865 2,024 2,894 3,122 2,903
Federal Home Loan Bank advances 279 19 13 5 53
Subordinated notes and other long-term debt,
including preferred capital securities 1,198 1,161 1,111 998 823
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Total interest bearing liabilities 19,752 21,586 22,253 22,384 20,989
-----------------------------------------------------------------------------------------------------------------------------------
All other liabilities 1,077 879 752 680 533
Shareholders' equity 2,309 2,415 2,327 2,181 2,091
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,040 $ 28,184 $28,753 $28,742 $26,900
===================================================================================================================================
NET INTEREST INCOME
===================================================================================================================================
Net interest rate spread
Impact of non-interest bearing funds on margin
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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.
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INTEREST INCOME / EXPENSE
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Fully Tax Equivalent Basis (1) 2002 2001 2000 1999 1998
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ASSETS
Interest bearing deposits in banks $ 0.8 $ 0.2 $ 0.3 $ 0.4 $ 1.0
Trading account securities 0.3 1.3 1.1 0.8 0.6
Federal funds sold and securities purchased
under resale agreements 1.1 4.4 5.5 1.2 12.9
Mortgages held for sale 20.5 25.0 8.7 16.3 20.2
Securities:
Taxable 173.0 206.9 269.5 297.0 308.8
Tax exempt 10.1 13.0 20.8 23.5 21.9
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Total Securities 183.1 219.9 290.3 320.5 330.7
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Loans and leases:
Commercial 328.8 493.2 572.8 501.0 488.5
Real Estate (2)
Construction 58.3 88.6 108.2 85.8 71.2
Commercial 150.5 180.4 186.7 184.6 201.5
Consumer
Automobile loans and leases 289.1 261.4 278.5 299.1 297.3
Home equity 188.3 286.8 261.1 202.3 180.5
Residential mortgage 87.3 79.5 106.1 111.5 109.5
Other loans 36.1 55.8 61.1 120.0 159.2
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Total Consumer 600.8 683.5 706.8 732.9 746.5
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Total Loans and Leases 1,138.4 1,445.7 1,574.5 1,504.3 1,507.7
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Allowance for loan and lease losses
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Net Loans and Leases
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Total Earning Assets 1,344.2 1,696.5 1,880.4 1,843.5 1,873.1
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Operating lease assets
Cash and due from banks
Intangible assets
All other assets
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TOTAL ASSETS
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 90.1 134.6 144.0 106.5 96.4
Savings deposits 51.7 107.7 146.4 126.0 114.0
Other domestic time deposits 197.1 331.4 335.4 299.1 349.2
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Total core deposits 338.9 573.7 625.8 531.6 559.6
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Domestic time deposits of $100,000 or more 28.8 66.8 90.4 76.6 96.4
Brokered time deposits and negotiable CDs 17.3 6.6 31.9 12.8 10.5
Foreign time deposits 4.9 10.8 34.0 18.6 5.9
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Total deposits 389.9 657.9 782.1 639.6 672.4
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Short-term borrowings 42.7 95.8 113.1 114.3 97.7
Medium-term notes 61.7 121.7 189.3 170.0 164.6
Federal Home Loan Bank advances 5.6 1.2 0.8 0.3 2.9
Subordinated notes and other long-term debt,
including preferred capital securities 47.9 66.7 80.7 60.0 40.7
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Total interest bearing liabilities 547.8 943.3 1,166.0 984.2 978.3
-----------------------------------------------------------------------------------------------------------------------------------
All other liabilities
Shareholders' equity
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
===================================================================================================================================
NET INTEREST INCOME $ 796.4 $ 753.2 $ 714.4 $ 859.3 $ 894.8
===================================================================================================================================
Net interest rate spread
Impact of non-interest bearing funds on margin
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NET INTEREST MARGIN
===================================================================================================================================
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Average Rate (3)
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Fully Tax Equivalent Basis (1) 2002 2001 2000 1999 1998
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ASSETS
Interest bearing deposits in banks 2.38 % 3.43 % 5.03 % 4.04 % 5.22 %
Trading account securities 4.11 5.13 7.11 5.89 5.71
Federal funds sold and securities purchased
under resale agreements 1.56 4.19 6.33 5.58 5.64
Mortgages held for sale 6.35 6.95 7.96 7.03 6.99
Securities:
Taxable 6.06 6.58 6.24 6.08 6.31
Tax exempt 7.42 7.49 7.61 7.90 8.83
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Total Securities 6.12 6.63 6.33 6.18 6.43
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Loans and leases:
Commercial 5.79 7.42 8.89 8.18 8.68
Real Estate (2)
Construction 4.79 7.25 9.14 8.58 9.31
Commercial 6.33 7.71 8.53 8.26 8.75
Consumer
Automobile loans and leases 8.94 9.12 8.83 8.39 9.14
Home equity 6.10 8.44 8.73 8.62 9.32
Residential mortgage 6.05 7.55 7.68 7.48 8.03
Other loans 8.49 9.47 11.57 10.86 11.12
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Total Consumer 7.34 8.64 8.78 8.63 9.36
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Total Loans and Leases 6.52 7.98 8.81 8.42 9.04
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Allowance for loan and lease losses
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Net Loans and Leases
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Total Earning Assets 6.43 % 7.74 % 8.29 % 7.91 % 8.38 %
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Operating lease assets
Cash and due from banks
Intangible assets
All other assets
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TOTAL ASSETS
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LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 1.75 % 2.69 % 3.36 % 2.60 % 2.69 %
Savings deposits 1.81 3.10 4.11 3.37 3.48
Other domestic time deposits 4.53 5.63 5.71 5.14 5.55
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Total core deposits 2.74 3.99 4.56 3.89 4.25
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Domestic time deposits of $100,000 or more 3.39 5.22 6.01 5.28 5.71
Brokered time deposits and negotiable CDs 2.36 5.12 6.35 5.40 5.82
Foreign time deposits 1.47 3.82 6.31 5.14 5.66
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Total deposits 2.73 4.10 4.81 4.07 4.44
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Short-term borrowings 2.01 4.12 5.75 4.48 4.69
Medium-term notes 3.31 6.01 6.54 5.45 5.67
Federal Home Loan Bank advances 2.00 6.17 6.32 5.19 5.57
Subordinated notes and other long-term debt,
including preferred capital securities 4.00 5.75 7.27 5.93 4.87
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Total interest bearing liabilities 2.77 % 4.37 % 5.24 % 4.40 % 4.66 %
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All other liabilities
Shareholders' equity
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
==================================================================================================================================
NET INTEREST INCOME
==================================================================================================================================
Net interest rate spread 3.66 % 3.37 % 3.05 % 3.51 % 3.72 %
Impact of non-interest bearing funds on margin 0.15 % 0.06 % 0.10 % 0.18 % 0.28 %
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NET INTEREST MARGIN 3.81 % 3.43 % 3.25 % 3.69 % 4.00 %
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Non-interest expense was down $187.9 million, or 12%. Excluding the impact from the $142.7 million decline in non-interest expense attributed to the sold Florida banking and insurance operations, as well as the $23.8 million reduction in restructuring charges, non-interest expense was down $21.5 million, or 2%. This decrease largely reflected a $39.7 million, or 7%, decrease in operating lease expense and a $10.2 million decline in amortization of intangible assets expense as a result of the implementation of the new goodwill accounting rule, FASB Statement No. 142, at the beginning of the year. These decreases were partially offset by a $24.3 million, or 6%, increase in personnel costs, due to expansion of management and employee talent at all levels, increased incentive-based pay, and higher pension and benefits costs.
The efficiency ratio, which represents expenses as a percentage of fully taxable equivalent revenue, was 69.1% in 2002 versus 74.2% in 2001.
Diluted earnings per common share were $1.36 in 2002, up from $0.58 per common share in 2001. After excluding the impact of Huntington's strategic restructuring plan, as well as the results associated with the sold Florida banking and insurance operations from both years, diluted earnings per share were $1.22 in 2002, up $0.20, or 20%, from 2001. This reflected a 16% increase in net income on this same basis, as well as the benefit of 3% fewer fully diluted shares outstanding. In February 2002, the Board of Directors authorized a 22 million-share repurchase program. During the year, 19.2 million shares were repurchased under this program, which reduced average shares outstanding by 8.8 million for the year and contributed $0.04 to earnings per share.
2001 VERSUS 2000 PERFORMANCE
The $187.3 million decrease in earnings ($344.2 million pre-tax) related to
a combination of items that negatively impacted 2001 performance. These items
primarily related to the strategic restructuring announced in 2001 and included
a $115.2 million pre-tax increase in the provision for loan and lease losses,
$80.0 million in restructuring charges, and a negative $22.1 million pre-tax
impact from the sold Florida banking and insurance operations, which went from
a $3.4 million positive pre-tax income impact in 2000 to a net loss of $18.7
million pre-tax in 2001. Results for 2001 also reflected a $32.5 million tax
benefit related to the issuance of $400 million of REIT subsidiary preferred
stock, of which $50 million was sold to the public. Excluding the impact of
these items from both 2001 and 2000, net income in 2001 was $257.1 million,
down $73.1 million, or 22%. (See Table 25 on page 53.)
Net interest income on a fully taxable equivalent basis increased $38.8 million, or 5%, reflecting a $0.7 billion, or 3%, decline in average earning assets which was more than offset by a 28 basis point, or an effective 9%, increase in the net interest margin to 3.43% from 3.15%. Average loans and leases increased slightly between years, led by growth in home equity, commercial, and commercial real estate loans and leases. However, this benefit was more than offset by a 28% decline in average investment securities.
The provision for loan and lease losses increased $195.9 million reflecting $115.2 million of provision expense including $65.2 million associated with the strategic restructuring plan and a $50.0 million addition made in light of the higher charge-offs and non-performing assets experience in the second half of 2001 especially in the commercial and automobile loan portfolios. The increase in non-performing assets, as well as higher commercial net charge-offs reflected a weakening economy. The higher automobile loan charge-offs, primarily reflected charge-offs associated with loan production from the fourth quarter of 1999 through the fourth quarter of 2000, a period of time when Huntington targeted a broader credit quality spectrum of borrowers.
Non-interest income increased $80.5 million, or 7%, driven by a $64.6 million increase in operating lease income, a $21.1 million increase in mortgage banking income, a $17.2 million increase in brokerage and insurance income and $6.7 million increase in trust services income. Also contributing to the growth in non-interest income, but to a lesser degree, were increases in service charges on deposits, and other service charges and fees, up $3.3 million and $4.3 million, respectively. The benefit of these increases was partially offset by a $36.4 million decrease in securities gains as 2000 results included significant gains related to the sales of marketable equity securities.
Non-interest expense increased $269.6 million, or 21%. This increase reflected $80.0 million of restructuring charges, as well as a $63.8 million, or 13%, increase in operating lease expense and a $56.9 million, or 13%, increase in personnel costs driven by higher incentive-based pay. Other expense increased $57.1 million, with $28.4 million of the change reflecting premium expense associated with the purchase of automobile lease residual value insurance. The efficiency ratio was 74.2% in 2001 versus 70.2% in 2000.
Diluted earnings per common share were $0.58 per common share in 2001, down from $1.33 per share in 2000. After excluding the impact of Huntington's strategic restructuring plan, as well as the results associated with the sold Florida banking and insurance operations from both years, diluted earnings per share were $1.02 in 2001, down $0.30, or 23%, from 2000.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Huntington's primary source of revenue is net interest income, which is the
difference between interest income on earning assets, primarily loans, direct
financing leases, and securities, and interest expense on funding sources, including
interest-bearing deposits and borrowings. Net interest income is impacted by
changes in the levels of interest rates, earning assets, and interest-bearing
liabilities. Changes in net interest income are measured through interest spread
and net interest margin. The difference between the yields on earning assets
and the rates paid for interest-bearing liabilities represents the interest
spread. The net interest margin is the calculated percentage of net interest
income to average earning assets. Both the interest spread and net interest
margin are presented on a fully taxable equivalent basis, which means that tax-free
interest income and dividend income, generated primarily from Huntington's investment
securities portfolio, are adjusted and expressed on the same basis as other
taxable income. Because non-interest bearing sources of funds, such as demand
deposits and stockholders' equity, also support earning assets, the net interest
margin exceeds the interest spread.
Table 3 shows the average annual balance sheets and the net interest margin analysis for the recent five years (see Table 27 for this corresponding data on an operating basis; i.e. excluding the impact of Huntington's strategic restructuring plan, as well as the impact of the Florida banking operations sold in the first quarter of 2002). Table 3 shows the average annual balances for total assets and liabilities, as well as shareholders' equity, and their various components, most notably loans and leases, deposits, and borrowings. It also shows the corresponding interest income or interest expense associated with each earning asset and interest-bearing liability category along with the average rate associated with each asset or liability category, the difference resulting in the net interest spread. The net interest spread plus the positive impact from non-interest bearing funds represents the net interest margin.
Table 4 shows changes in fully taxable equivalent interest income, interest expense, and net interest income due to volume and rate variances for major categories of earning assets and interest-bearing liabilities. The change in interest not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amounts of the change in volume and rate.
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TABLE 4 - CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES
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2002 2001
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INCREASE (DECREASE) FROM Increase (Decrease) From
PREVIOUS YEAR DUE TO: Previous Year Due To:
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Fully Taxable Equivalent Basis (1) YIELD/ Yield/
(in millions of dollars) VOLUME RATE TOTAL Volume Rate Total
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Loans and leases $ (50.6) $ (256.7) $ (307.3) $ 21.2 $(150.0) $(128.8)
Securities (20.9) (15.9) (36.8) (83.9) 13.5 (70.4)
Other earning assets (3.8) (4.4) (8.2) 19.3 (4.0) 15.3
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TOTAL EARNING ASSETS (75.3) (277.0) (352.3) (43.4) (140.5) (183.9)
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Deposits (90.3) (177.7) (268.0) (26.3) (97.9) (124.2)
Short- and medium-term borrowings (16.4) (96.7) (113.1) (34.9) (50.0) (84.9)
Long-term debt 7.9 (22.3) (14.4) 3.9 (17.5) (13.6)
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TOTAL INTEREST-BEARING LIABILITIES (98.8) (296.7) (395.5) (57.3) (165.4) (222.7)
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NET INTEREST INCOME $ 23.5 $ 19.7 $ 43.2 $ 13.9 $ 24.9 $ 38.8
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(1) Calculated assuming a 35% tax rate.
The decrease in average earning assets reflected a $0.7 billion, or 4%, decline in average loans and leases primarily due to the sale of the Florida banking operations, as well as the planned run-off of lower-margin investment securities and other earning assets. Changes in the balance sheet are discussed in more detail below.
The 38 basis point increase in the net interest margin was influenced by two factors. The first was the timing and magnitude of declining interest rates in 2001 and 2002, and the fact that rates reached such historically low levels during the second half of 2002. As interest rates declined in the second half of 2001, deposit and wholesale funding costs declined more rapidly than yields on earning assets, most notably loans and leases. As a result, the net interest margin widened in the second half of 2001. However, as rates continued to decline in 2002, especially in the second half, and given the absolute low levels attained, it became increasingly difficult to lower deposit funding costs commensurate with the decline in earning asset yields. As a result, yields on earning assets fell more rapidly than deposit costs, thus narrowing the net interest margin in the second half of 2002, particularly in the fourth quarter.
The second factor was a decision early in 2001 to reduce the level of low-return investment securities. This helped drive the increase in the net interest margin during the first three quarters of 2001.
A change in the loan and lease mix to lower yield, but higher credit quality, loans and leases had the effect of mitigating the increase in the net interest margin. Since the 2001 fourth quarter, consumer loan and lease production shifted to higher credit quality automobile loan and lease production. Also mitigating the net interest margin increase was the significant growth in lower-yield residential mortgages. While this contributed to a reduced net interest spread on these assets, it improved the total risk adjusted return as lower net charge-offs should be experienced in future periods.
Reflecting these factors, during 2001 the net interest margin in the first quarter was 3.31% and increased steadily throughout the year, peaking at 3.62% in the fourth quarter. During 2002, the margin peaked at 3.98% in the third quarter and declined to 3.83% in the fourth quarter.
2001 VERSUS 2000 PERFORMANCE
Fully taxable equivalent net interest income was $753.2 million in 2001, up
$38.8 million, or 5%, from $714.4 million in 2000. This increase was driven
by a 28 basis point, or an effective 9%, increase in the net interest margin
to 3.43% from 3.15%, as average earning assets declined $0.7 billion, or 3%.
The decline in average earning assets between the two years was driven by a $1.3 billion, or 28%, decrease in average investment securities as part of the planned reduction in lower-margin earning assets. Average loans and leases increased $0.2 billion, or 1%, reflecting a 3% increase in commercial loans, with average commercial real estate loans up 6%. In contrast, average total consumer loans and leases decreased 2%, despite a 14% increase in home equity loans, as residential mortgages and automobile loans and leases declined 24% and 9%, respectively. The higher net interest margin reflected a decision to reduce the level of lower-margin residential mortgages and investment securities. In addition, the balance sheet was slightly liability sensitive during the period and benefited from the decline in short-term rates from 2000 to 2001.
IMPACT FROM DERIVATIVE FINANCIAL INSTRUMENTS
Huntington uses various types of derivative financial instruments, primarily
interest rate swaps, to manage its exposure to changes in interest rates. The
cash flows generated by derivative instruments are recorded along with the interest
income or expense from the hedged asset or liability and consequently are included
in the yields on those assets and liabilities. The impact of these derivatives
increased the net interest margin by 23 basis points in 2002 but lowered it
by 2 and 6 basis points in 2001 and 2000, respectively. Huntington's interest
rate risk position is discussed further in the "Interest Rate Risk Management"
section of this report.
BALANCE SHEET
Table 5 shows total loans and leases were $18.6 billion at December 31, 2002,
with 50% representing consumer loans and leases and 50% commercial and commercial
real estate loans. Subsequent to the end of 2002, $0.3 billion of loans at December
31, 2002 were reclassified from commercial loans to commercial real estate loans.
This reclassification, which is reflected in the table below, did not affect
total interest income or net income for any period.
--------------------------------------------------------------------------------------------------------------------------------- TABLE 5 - END OF PERIOD LOAN AND LEASE PORTFOLIO COMPOSITION --------------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 2002 2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------------------- (in millions of dollars) AMOUNT % Amount % Amount % Amount % Amount % --------------------------------------------------------------------------------------------------------------------------------- Commercial loans (1) $ 5,606 30.1 $6,439 34.8 $6,634 37.6 $6,300 35.0 $6,027 34.2 Real estate Construction 1,012 5.4 1,322 7.1 1,206 6.8 1,159 6.4 868 4.9 Commercial 2,719 14.5 2,496 13.5 2,253 12.8 2,151 11.9 2,232 12.7 --------------------------------------------------------------------------------------------------------------------------------- TOTAL COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS 9,337 50.0 10,257 55.4 10,093 57.2 9,610 53.3 9,127 51.8 --------------------------------------------------------------------------------------------------------------------------------- Consumer Auto loans and leases 3,964 21.3 2,990 16.2 2,648 15.0 3,685 20.4 3,588 20.3 Home equity 3,200 17.2 3,582 19.4 3,205 18.2 2,562 14.2 2,173 12.3 Residential mortgage 1,749 9.4 1,128 6.1 1,060 6.0 1,523 8.5 1,459 8.3 Other loans 395 2.1 544 2.9 639 3.6 655 3.6 1,282 7.3 --------------------------------------------------------------------------------------------------------------------------------- TOTAL CONSUMER LOANS 9,308 50.0 8,244 44.6 7,552 42.8 8,425 46.7 8,502 48.2 --------------------------------------------------------------------------------------------------------------------------------- TOTAL LOANS AND LEASES $ 18,645 100.0 $18,501 100.0 $ 17,645 100.0 $ 18,035 100.0 $ 17,629 100.0 ================================================================================================================================= |
(1) There were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries.
For 2002, average total loans and leases were $17.5 billion, down $0.7 billion, or 4%, from 2001, as shown on Table 3. Excluding the impact of the Florida related loans sold from both 2002 and 2001, as shown on Table 27, average total loans and leases were $17.1 billion, up $1.6 billion, or 10%, from the prior year, driven by a $1.5 billion, or 23%, increase in consumer loans and leases. Since late 2001, a key focus in loan growth has been the generation of residential mortgages and home equity loans and lines of credit. This coincided with heavy demand for refinancing mortgage assets due to the declining interest rate environment. As a result, average residential mortgages increased $0.6 billion, or 74%, with home equity loans and lines up $0.3 billion, or 11%. Average automobile loans and leases increased $0.6 billion, or 26%. Also contributing to growth in average loans and leases, on this same basis, was a $0.4 billion, or 13%, increase in commercial real estate loans. In contrast, average commercial loans declined $0.3 billion, or 5%, reflecting a combination of low demand due to the weak economic environment and reduced shared national credit exposure.
Average total loans and leases in 2001 were $18.1 billion, up $0.2 billion, or 1%, from the prior year. Average commercial loans increased 3% with commercial real estate loans up 6% from the prior year. Average total consumer loans were little changed between years. While home equity loans and lines increased 14%, this growth was offset by declines in automobile loans and leases and residential mortgages of 9% and 24%, respectively.
Average operating lease assets were $2.7 billion in 2002, down 12% from the prior year, in contrast to the 8% growth experienced in 2001. This reflected the run-off of operating leases, as all new automobile lease originations since April 2002 are direct financing leases and reflected in automobile loans and leases.
The $0.3 billion, or 10%, decline in average investment securities in 2002 reflected the continued run off of lower-margin earning assets, mostly in the first half of 2001. The $1.3 billion, or 28%, decline to 2001 from 2000 in investment securities reflected a decision to sell a significant portion of lower-margin securities.
As shown in Table 13, deposits were $17.5 billion at December 31, 2002, with 87% representing core deposits, down from 93% at the end of the prior year, which included the Florida deposits subsequently sold.
Average core deposits were $15.3 billion in 2002 as shown in Table 3. Excluding the impact from average Florida deposits sold, as shown on Table 27, of $0.6 billion in 2002 and $4.3 billion in 2001, average core deposits in 2002 were $14.7 billion, up $1.4 billion, or 10%, from the prior year and represented 89% of average total deposits. This growth was driven by a $1.3 billion, or 37%, increase in interest bearing demand deposits reflecting the combined benefits of enhanced sales efforts and consumers moving funds out of the equity markets. Average brokered time deposits and negotiable certificates of deposits increased $0.6 billion reflecting management's strategy to further diversify its funding sources.
Average core deposits in 2001 were $17.7 billion, up 3% from the prior year. This increase was driven by a 17% increase in average interest bearing demand deposits reflecting successful campaigns to generate deposit growth as well as fund inflows due to uncertainties in the equity markets.
Average borrowings in 2002, comprised of short- and medium-term notes, advances from the Federal Home Loan Bank, and long-term debt including capital securities, totaled $5.5 billion, little changed from the prior year. Average borrowings in 2001 totaled $5.5 billion, down 8% from the year-earlier period. This reflected a combination of factors including increased funding made available from the planned balance sheet repositioning program which resulted in a decline in low-margin earnings assets, particularly in the first half of the year, as well as deposit growth in the second half of the year.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is the expense necessary to maintain
the allowance for loan and lease losses (ALLL) at a level adequate to absorb
management's estimate of inherent losses in the loan and lease portfolio. The
provision expense was $194.4 million for 2002, down $62.9 million from $257.3
million in 2001. Excluding the $115.2 million of additional provisions in 2001,
as well as the $9.9 million decline related to the sale of the Florida banking
operations, the provision for loan and lease losses increased $62.2 million,
reflecting loan and lease growth, as well as higher total commercial and commercial
real estate net charge-offs, as consumer net charge-offs declined. Higher total
commercial and commercial real estate net charge-offs reflected the impact of
the continued weak economy on some of Huntington's commercial customers, as
well as fourth quarter credit actions that accelerated the sale and disposition
of non-performing commercial loans. Specific credit actions in the fourth quarter
2002 included $21.4 million in charge-offs associated with the sale of non-performing
assets and the charge-off of a $29.9 million credit exposure to a single health
care finance company. Existing loan and lease loss reserves were sufficient
to absorb these charges and, accordingly, there was no impact on 2002 provision
expense.
For 2001, the provision for loan and lease losses was $257.3 million, up $195.9 million from $61.5 million in 2000. Of this increase, $65.2 million reflected a charge associated with Huntington's strategic refocusing plan discussed earlier. These charges included estimated losses related to the exit of sub-prime automobile and truck and equipment lending, losses related to delinquent consumer and small business loans and leases more than 120 days past due, and increased reserves for consumer bankruptcies. In addition, there was a $50.0 million increase to the allowance for loan and lease losses made in light of the higher charge-offs and non-performing assets experience in the second half of 2001 especially in the commercial and automobile loan and lease portfolios. The increase in non-performing assets, as well as higher commercial net charge-offs, reflected a weakening economy. The higher automobile loan and lease charge-offs primarily reflected charge-offs associated with loan and lease production from the fourth quarter of 1999 through the fourth quarter of 2000, a period of time when Huntington targeted a broader credit quality spectrum of borrowers. See the "Credit Risk" section for discussion of the ALLL, net charge-offs, and non-performing assets.
NON-INTEREST INCOME
Non-interest income for the recent three years ended December 31 was as follows:
-------------------------------------------------------------------------------------------------------------------------- TABLE 6 - NON-INTEREST INCOME -------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 2002 2001 2000 -------------------------------------------------------------------------------------------------------------------------- Operating lease income $ 641,785 $ 699,857 $ 635,243 Service charges on deposit accounts 152,521 164,052 160,727 Brokerage and insurance 66,843 79,034 61,871 Trust services 62,051 60,298 53,613 Mortgage banking 47,989 59,148 38,025 Bank owned life insurance 46,005 38,241 39,544 Other services charges and fees 42,888 48,217 43,883 Gain on sale of Florida operations 175,344 --- --- Merchant Services gain 24,550 --- --- Securities gains 4,902 723 37,101 Other 69,904 59,767 58,795 -------------------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST INCOME $ 1,334,782 $1,209,337 $ 1,128,802 -------------------------------------------------------------------------------------------------------------------------- |
Non-interest income was $1,334.8 million, up $125.4 million, or 10%, reflecting a $175.3 million gain from the sale of the Florida banking operations and a $24.6 million gain from the restructuring of Merchant Services. Adjusted to exclude the impact of these gains and the benefit of a $5.3 million reduction in securities losses, partially offset by the $63.6 million reduction in non-interest income attributed to the sold Florida banking and insurance operations, non-interest income was down $16.1 million, or 1%. (See Tables 25 and 26 for further details).
The primary cause of this $16.1 million decrease was a $58.1 million, or 8%, decrease in operating lease income due to run-off as new production since April 2002 is recorded as direct financing leases. Offsetting this decrease, deposit service charges increased $15.7 million, or 12%, reflecting higher personal and commercial service charges; brokerage and insurance income increased $5.5 million, or 10%, reflecting a 19% increase in combined mutual fund and annuity sales; trust services increased $4.1 million, or 7%, due to a 12% increase in mutual fund fees, as well as a 4% increase in personal trust income; and bank owned life insurance was up $7.8 million. Huntington owns and is the beneficiary on three Bank owned life insurance policies that were purchased in 1997 and 1998, insuring the lives of selected Huntington officers. Written consents were obtained from the officers prior to the purchase of the policies. The policies represented approximately 3% of total assets at December 31, 2002 and 2001. The insurance providers are rated A+ or higher. Additionally, the cash values of these policies are backed by assets that are maintained in a separate account to protect Huntington from possible insolvency of the insurance providers.
Mortgage banking income excluding the impact of the sold Florida banking operations declined $7.8 million, or 14%, due to $14.1 million of mortgage servicing impairment in 2002 compared with $6.3 million of such impairment in 2001. These impairments reflected a significant increase in prepayments due to heavy mortgage refinancing activity, particularly in the second half of 2002. Total mortgage loans originated in 2002 were a record $4.1 billion, up from $3.5 billion in 2001 due to heavy refinancing activity as borrowers took advantage of very low interest rates. At December 31, 2002, the value of capitalized mortgage servicing rights was 0.78% of loans serviced for others, down from 0.97% at the end of the prior year.
Other service charges excluding the impact of the sold Florida banking and insurance operations was up $4.4 million, or 12%, primarily driven by higher check card and on-line bill payment fees. Other income on this same comparative basis was up $13.4 million, or 24%, reflecting increases spread over a number of miscellaneous fee and service income categories.
Non-interest income was $1,209.3 million in 2001, up $80.5 million, or 7%. Contributing to this growth was a $64.6 million, or 10%, increase in operating lease income, reflecting growth in the automobile leases outstanding, and a $21.1 million, or 56%, increase in mortgage banking income due to higher mortgage origination activity. Total mortgage loan originations in 2001 were $3.5 billion, significantly higher than $1.5 billion in 2000. This reflected an increase in refinancing activity due to lower interest rates. Brokerage and insurance income increased $17.2 million, or 28%, driven by strong growth in insurance and investment banking fees. Also increasing were trust services, up 12%, other service charges and fees, up 10%, and service charges on deposits, up 2%.
Securities gains in 2002 totaled $4.9 million, up $4.2 million from the prior year, which included a $5.3 million loss realized from the sale of $15 million of Pacific Gas & Electric commercial paper acquired from the Huntington Money Market Fund. Securities gains in 2001 were $0.7 million, down $36.4 million from 2000. Gains in 2000 included gross gains of $66.5 million from the sale of certain equity investments substantially offset by losses from the sale of lower yielding, fixed-income investment securities.
NON-INTEREST EXPENSE
Non-interest expense for the recent three years ended December 31 was as follows:
---------------------------------------------------------------------------------------------------------------------------------- TABLE 7 - NON-INTEREST EXPENSE ---------------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- Operating lease expense $ 518,970 $558,626 $ 494,800 Personnel costs 440,760 478,640 421,750 Equipment 68,323 80,560 78,069 Outside data processing and other services 67,368 69,692 62,011 Net Occupancy 60,264 77,184 75,882 Marketing 27,911 31,057 34,884 Professional services 25,777 23,879 20,819 Telecommunications 22,661 27,984 26,225 Printing and supplies 15,198 18,367 19,634 Franchise and other taxes 9,456 9,729 11,077 Amortization of intangible assets 2,019 41,225 39,207 Restructuring charges 56,184 79,957 --- Other 73,797 79,696 22,596 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST EXPENSE $1,388,688 $1,576,596 $ 1,306,954 ---------------------------------------------------------------------------------------------------------------------------------- |
Non-interest expense in 2002 was $1,388.7 million, down $187.9 million, or 12%. Excluding the impact from the $142.7 million decline in non-interest expense attributed to the sold Florida banking and insurance operations, as well as the $23.8 million reduction in restructuring charges, non-interest expense was down $21.5 million, or 2%, reflecting a decline in operating lease expense, as well as lower amortization of intangibles and other expenses. These were partially offset by higher personnel costs and outside data processing expenses. (See Tables 25 and 26 for further details).
Operating lease expense declined $39.7 million, or 7%, reflecting the run-off of operating leases as all automobile lease originations since April 2002 are direct financing leases in the automobile loans and leases category.
Personnel costs excluding the impact of the sold Florida banking and insurance operations increased $24.3 million, or 6%, in 2002 reflecting higher salaries, incentive-based compensation, and pension and benefit costs. Higher salaries reflected the expansion of management and employee talent at all levels, including the credit workout group. In addition, and given a renewed focus on sales, incentive-based compensation increased throughout Huntington, most notably in mortgage banking which had a record production year. Higher medical and pension costs were partially offset by gains related to stock received from the demutualization of certain insurance companies where Huntington owned related insurance policies. Outside services increased $6.7 million, or 11%, reflecting volume-driven costs, mostly mortgage banking related. Professional services expense increased $2.5 million, or 11%, due primarily to legal and other costs associated with the resolution of problem credits. Marketing expense was up $1.4 million, or 5%, reflecting expanded advertising activities.
Expense categories that declined from 2001, excluding the impact of the sold Florida banking and insurance operations, included a $10.2 million decline in the amortization of intangible assets, mostly goodwill due to the implementation of FASB Statement No. 142, Goodwill and Other Intangible Assets at the beginning of 2002. Equipment costs declined $3.7 million, or 5%, reflecting lower maintenance costs. Net occupancy expense was down $1.4 million, or 2%, on this same comparative basis due to a real estate tax credit in 2002.
Restructuring charges totaled $56.2 million in 2002 compared with $80.0 million in 2001. The charges for 2002 and 2001 were related to the strategic restructuring announced in July 2001 with the last of such charges recorded in the 2002 third quarter.
Non-interest expense in 2001 was $1,576.6 million, up $269.6 million, or 21%. Contributing to this increase was a $63.8 million, or 13%, increase in operating lease expense, a $56.9 million, or 13%, increase in personnel costs, a $57.1 million increase in the other expense category, and $80.0 million in restructuring charges. The increase in operating lease expense reflected a $63.3 million increase in depreciation expense. Depreciation on leased automobiles increased in 2001 when compared with 2000 due to higher levels of leases, as well as the acceleration of depreciation on vehicles where the expected proceeds at the end of the lease will be less than the expected residual value. The higher personnel costs reflected increased sales commissions related to mortgage banking, capital markets, and annuity and mutual fund sales, offset by lower benefit expense. The $57.1 million increase in other expense reflected the $28.4 million premium expense related to the purchase of automobile lease residual value insurance, of which there was none in 2000. See the "Credit Risk" section for more information regarding automobile lease residual insurance.
INCOME TAXES
Income tax expense was $209.8 million in 2002 compared with an income tax benefit
of $23.1 million in 2001 and income tax expense of $133.7 million in 2000. Tax
expense in each of these years was significantly impacted by the effect of the
strategic restructuring and related sale of the Florida banking and insurance
operations, the nature of the restructuring charges, and other items. Huntington's
effective tax rate was 38.6%, -18.9%, and 28.7% in 2002, 2001, and 2000, respectively.
Excluding the effect of the strategic restructuring and related sale of the
Florida banking and insurance operations, the nature of the restructuring charges
and other items, Huntington's effective tax rate was 25.7%, 24.7%, and 28.7%
in 2002, 2001, and 2000, respectively. Based on information currently available,
Huntington expects its 2003 effective tax rate to range from 26% to 28%. Subsequent
to year-end 2002, the Internal Revenue Service completed the audit of Huntington's
consolidated federal income tax returns through the tax year 2001. The tax audit
resulted in no material impact to Huntington's financial statements. See Note
23 to the consolidated financial statements for more information regarding reported
basis income taxes.
CREDIT RISK
Huntington's exposure to credit risk is managed through the use of
consistent underwriting standards that emphasize "in-market" lending
while avoiding highly leveraged transactions as well as excessive industry and
other concentrations. The credit administration function employs risk management
techniques to ensure that loans and leases adhere to corporate policy and problem
loans and leases are promptly identified. These procedures provide executive
management with the information necessary to implement policy adjustments where
necessary, and to take corrective actions on a proactive basis. Beginning in
2002, management increased its emphasis on its commercial lending to customers
with existing or potential relationships within Huntington's primary markets.
As a result, outstanding shared national credits declined to $979 million at
December 31, 2002, from $1.1 billion at the same period-end last year and a
peak of $1.5 billion at June 30, 2001.
ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)
The ALLL was $336.6 million at December 31, 2002, down from $369.3 million at
the end of 2001. This represented 1.81% of total loans and leases at year-end
2002 compared with 2.00% for 2001. At the end of 2002, the ALLL represented
246% of non-performing assets up significantly from 162% at the end of last
year. Given all of the characteristics in Huntington's loan and lease portfolio,
management believes the ALLL is sufficient to absorb the credit losses inherent
in the portfolio.
The following table shows the activity in Huntington's ALLL, along with selected credit quality indicators.
------------------------------------------------------------------------------------------------------------------------------
TABLE 8 - SUMMARY OF ALLOWANCE FOR LOAN AND LEASE LOSSES AND RELATED STATISTICS
------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 369,332 $264,929 $ 273,931 $ 273,125 $ 251,540
LOAN AND LEASE LOSSES
Commercial loans (128,868) (65,743) (18,013) (16,203) (24,512)
Real estate
Construction (4,863) (845) (238) (638) (80)
Commercial (15,012) (3,676) (1,522) (2,399) (2,115)
Consumer
Automobile loans and leases (59,010) (71,638) (47,687) (42,783) (39,107)
Home equity (15,312) (16,384) (7,979) (7,233) (6,215)
Residential mortgage (888) (879) (1,140) (1,404) (1,243)
Other consumer loans (10,399) (15,375) (9,246) (28,422) (39,328)
------------------------------------------------------------------------------------------------------------------------------
TOTAL LOAN AND LEASE LOSSES (234,352) (174,540) (85,825) (99,082) (112,600)
------------------------------------------------------------------------------------------------------------------------------
RECOVERIES OF PREVIOUSLY CHARGED OFF LOANS
AND LEASES
Commercial loans 11,106 6,175 4,201 5,303 4,546
Real estate
Construction 403 179 165 192 441
Commercial 1,831 613 268 1,260 1,800
Consumer
Automobile loans and leases 18,464 16,567 15,407 14,201 14,979
Home equity 1,806 1,796 1,070 1,137 685
Residential mortgage 16 94 133 268 367
Other consumer loans 3,814 2,847 2,934 7,192 7,399
------------------------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 37,440 28,271 24,178 29,553 30,217
------------------------------------------------------------------------------------------------------------------------------
NET LOAN AND LEASE LOSSES (196,912) (146,269) (61,647) (69,529) (82,383)
------------------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 194,426 257,326 61,464 70,335 81,926
Allowance for loans sold (22,297) --- --- --- ---
Allowance of securitized loans (9,165) (6,654) (16,719) --- ---
Allowance of loans acquired 1,264 --- 7,900 --- 22,042
------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 336,648 $369,332 $ 264,929 $ 273,931 $ 273,125
==============================================================================================================================
NET LOAN AND LEASE LOSSES AS A % OF AVERAGE
TOTAL LOANS AND LEASES 1.13% 0.81% 0.34% 0.39% 0.49%
ALLOWANCE FOR LOAN AND LEASE LOSSES AS A %
OF TOTAL END OF PERIOD LOANS AND LEASES 1.81% 2.00% 1.50% 1.52% 1.55%
|
Huntington allocates the ALLL to each loan and lease category based on an expected loss ratio determined by continuous assessment of credit quality based on portfolio risk characteristics and other relevant factors such as historical performance, significant acquisitions and dispositions of loans, and internal controls. For the commercial and commercial real estate credits, expected loss factors are assigned by credit grade at the individual loan and lease level at the time the loan or lease is originated. On a periodic basis, management reevaluates these credit grades. The aggregation of these factors represents management's estimate of the inherent loss in the portfolio.
The portion of the allowance allocated to the more homogeneous consumer loan and lease segments is determined by expected loss ratios based on the risk characteristics of the various segments and giving consideration to existing economic conditions and trends. Expected loss ratios incorporate factors such as trends in past due and non-accrual amounts, recent loan and lease loss experience, current economic conditions, and risk characteristics of various loan and lease categories. Actual loss ratios experienced in the future, could vary from those expected, as performance is a function of factors unique to each customer as well as general economic conditions.
To ensure adequacy to a higher degree of confidence, a portion of the ALLL is considered unallocated. For analytical purposes, the allocation of the ALLL is provided in Table 9. While amounts are allocated to various portfolio segments, the total ALLL, excluding impairment reserves prescribed under provisions of Statement of Financial Accounting Standard No. 114, is available to absorb losses from any segment of the portfolio.
----------------------------------------------------------------------------------------------------------------------------------
TABLE 9 - ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES
----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
Commercial loans $155,577 $174,713 $104,968 $ 94,978 $ 82,129
Real estate
Construction 12,542 17,685 12,596 14,863 10,729
Commercial 35,853 38,177 33,909 32,073 35,206
Consumer
Automobile loans and leases 51,621 38,799 28,877 40,043 40,792
Home equity 18,621 24,054 19,246 17,089 15,691
Residential mortgage 8,566 6,013 4,421 5,393 5,247
Other consumer loans 8,085 19,757 22,516 21,523 47,715
----------------------------------------------------------------------------------------------------------------------------------
Total allocated 290,865 319,198 226,533 225,962 237,509
Total unallocated 45,783 50,134 38,396 47,969 35,616
----------------------------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCE FOR LOAN AND LEASE LOSSES $336,648 $369,332 $264,929 $273,931 $273,125
==================================================================================================================================
|
NET CHARGE-OFFS
Total net charge-offs as a percent of average total loans and leases were 1.13%
in 2002 compared to 0.81% in 2001. The increase was due largely to $51.3 million
in commercial loan charge-offs related to the special credit actions in the
fourth quarter of 2002. In 2001, Huntington made the decision to exit the sub-prime
automobile and truck and equipment lending business, which had a combined balance
of $69.7 million at December 31, 2002, down from $144.3 million at the end of
2001. Excluding net charge-offs related to these exited businesses, total net
charge-offs in 2002 and 2001 were 1.08% and 0.73%, respectively. Commercial
and commercial real estate net charge-offs, spread over a number of companies
in the retail trade, manufacturing, services, and communications sectors, were
1.46% in the current year versus 0.55% in 2001. Excluding the net charge-offs
related to the fourth quarter 2002 special credit actions, total net charge-offs
and total commercial and commercial real estate net charge-offs for 2002 were
0.75% and 0.89%, respectively. Consumer charge-offs were 0.64% in 2002 compared
with 0.98% in 2001. Automobile loan and lease net charge-offs were 1.05% in
2002 compared with 1.94% in 2001. Table 10 shows the amount of net charge-offs
by loan and lease type as a percentage of average loans and leases.
---------------------------------------------------------------------------------------------------------------------------------- TABLE 10 - NET LOAN AND LEASE CHARGE-OFFS ---------------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 2002 2001 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------------- NET CHARGE-OFFS BY TYPE Commercial loans $ 117,528 $ 52,000 $ 13,812 $ 10,900 $ 19,966 Commercial real estate 17,641 3,729 1,327 1,585 (46) ---------------------------------------------------------------------------------------------------------------------------------- TOTAL COMMERCIAL AND COMMERCIAL REAL ESTATE 135,169 55,729 15,139 12,485 19,920 ---------------------------------------------------------------------------------------------------------------------------------- Consumer Automobile loans and leases 33,027 52,479 32,280 28,582 24,128 Home equity 13,506 14,588 6,909 6,096 5,530 Residential mortgage 872 785 1,007 1,136 876 Other consumer loans 4,524 7,778 6,312 21,230 31,929 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL CONSUMER 51,929 75,630 46,508 57,044 62,463 ---------------------------------------------------------------------------------------------------------------------------------- Total net charge-offs, excluding exited businesses 187,098 131,359 61,647 69,529 82,383 Net charge-offs related to exited businesses 9,814 14,910 --- --- --- ---------------------------------------------------------------------------------------------------------------------------------- TOTAL NET CHARGE-OFFS $ 196,912 $ 146,269 $ 61,647 $ 69,529 $82,383 ================================================================================================================================== |
----------------------------------------------------------------------------------------------------------------------- TABLE 10 - NET LOAN AND LEASE CHARGE-OFFS (CONTINUED) ----------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 2002 2001 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- NET CHARGE-OFFS AS A % OF AVERAGE LOANS AND LEASES Commercial loans 2.07% 0.78% 0.21% 0.18% 0.35% Commercial real estate 0.49% 0.10% 0.04% 0.05% --- ----------------------------------------------------------------------------------------------------------------------- TOTAL COMMERCIAL AND COMMERCIAL REAL ESTATE 1.46% 0.55% 0.15% 0.13% 0.23% ----------------------------------------------------------------------------------------------------------------------- Consumer Automobile loans and leases 1.05% 1.94% 1.02% 0.80% 0.74% Home equity 0.44% 0.43% 0.23% 0.26% 0.29% Residential mortgage 0.06% 0.07% 0.07% 0.08% 0.06% Other consumer loans 1.09% 1.37% 1.20% 1.93% 2.25% ----------------------------------------------------------------------------------------------------------------------- TOTAL CONSUMER 0.64% 0.98% 0.58% 0.67% 0.78% ----------------------------------------------------------------------------------------------------------------------- Total net charge-offs, excluding exited businesses 1.08% 0.73% 0.34% 0.39% 0.49% ======================================================================================================================= TOTAL NET CHARGE-OFFS 1.13% 0.81% 0.34% 0.39% 0.49% ======================================================================================================================= |
Economic activity has remained sluggish and the uncertainty about the future level of activity has increased recently. Management expects 2003 full year net charge-offs to be in the 0.65% - 0.75% range.
Huntington's management expects favorable trends in credit quality and net charge-offs entering 2003 assuming no further deterioration in the economy.
NON-PERFORMING ASSETS
Non-performing assets consist of loans and leases that are no longer accruing
interest, loans and leases that have been renegotiated to below market rates
based upon financial difficulties of the borrower, and real estate acquired
through foreclosure. Commercial and commercial real estate loans are generally
placed on non-accrual status when collection of principal or interest is in
doubt or when the loan is 90 days past due. When interest accruals are suspended,
accrued interest income is reversed with current year accruals charged to earnings
and prior year amounts generally charged off as a credit loss. Consumer loans
and leases, excluding residential mortgages, are not placed on non-accrual status
but are charged off in accordance with regulatory statutes, which is generally
no more than 120 days past due. Residential mortgages, while highly secured,
are placed on non-accrual status within 180 days past due as to principal and
210 days past due as to interest, regardless of security. A charge-off on a
residential mortgage loan is recorded when the loan has been foreclosed and
the loan balance exceeds the fair value of the real estate. The fair value of
the collateral is then recorded as real estate owned. When, in management's
judgment, the borrower's ability to make periodic interest and principal payments
resumes and collectibility is no longer in doubt, the loan is returned to accrual
status.
Total NPAs were $136.7 million at December 31, 2002, compared with $227.5 million at the end of 2001 and represented 0.73% and 1.23% of total loans and leases and other real estate. The decline in the level of NPAs from the prior year-end reflected the sale of NPAs in the fourth quarter of 2002 (see page 30 for discussion). While the economy has continued to be weak and the uncertainty about the future level of economic activity has increased, management continues to expect NPAs in 2003 to remain around current levels.
--------------------------------------------------------------------------------------------------------------------------
TABLE 11 - NON-PERFORMING ASSETS AND PAST DUE LOANS AND LEASES
--------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------
Non-accrual loans and leases
Commercial loans $ 91,861 $159,637 $ 55,804 $ 42,958 $34,586
Real estate
Construction 5,554 13,885 8,687 10,785 10,181
Commercial 21,211 34,475 18,015 16,131 13,243
Residential 9,443 11,836 10,174 11,866 14,419
--------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans and leases 128,069 219,833 92,680 81,740 72,429
Renegotiated loans --- 1,276 1,304 1,330 4,706
--------------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS AND LEASES 128,069 221,109 93,984 83,070 77,135
--------------------------------------------------------------------------------------------------------------------------
Other real estate, net 8,654 6,384 11,413 15,171 18,964
--------------------------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $136,723 $227,493 $105,397 $ 98,241 $96,099
==========================================================================================================================
ACCRUING LOANS AND LEASES PAST DUE 90 DAYS OR MORE $ 61,526 $ 76,013 $ 66,665 $ 54,567 $47,789
==========================================================================================================================
NON-PERFORMING LOANS AND LEASES AS A % OF TOTAL LOANS
AND LEASES 0.69% 1.20% 0.53% 0.46% 0.44%
NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND LEASES
AND OTHER REAL ESTATE 0.73% 1.23% 0.60% 0.54% 0.54%
ALLOWANCE FOR LOAN LOSSES AS A % OF NON-PERFORMING LOANS
AND LEASES 263% 167% 282% 330% 354%
ALLOWANCE FOR LOAN AND LEASE LOSSES AS A % OF NON-PERFORMING ASSETS 246% 162% 251% 279% 284%
ACCRUING LOANS AND LEASES PAST DUE 90 DAYS OR MORE
TO TOTAL LOANS AND LEASES 0.33% 0.41% 0.38% 0.30% 0.27%
|
Note: For 2002, the amount of interest income which would have been recorded under the original terms for total loans and leases classified as non-accrual or renegotiated was $12.6 million. Amounts actually collected and recorded as interest income for these loans and leases was $5.1 million.
Loans and leases past due ninety days or more but continuing to accrue interest decreased to $61.5 million at December 31, 2002, down from $76.0 million a year earlier. This represented 0.33% and 0.41% of total loans and leases, respectively.
Table 12 reflects the change in NPAs for the recent four years and includes NPAs in the Florida operations to the date of their sale in the 2002 first quarter:
----------------------------------------------------------------------------------------------------------------------------- TABLE 12 - NON-PERFORMING ASSET ACTIVITY ----------------------------------------------------------------------------------------------------------------------------- (in thousands) 2002 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- BEGINNING OF PERIOD $227,493 $105,397 $98,241 $96,099 New non-performing assets 260,229 329,882 113,870 106,014 Returns to accruing status (17,124) (2,767) (5,914) (5,744) Loan and lease losses (152,616) (67,541) (18,052) (19,547) Payments (136,774) (106,839) (68,982) (67,682) Sales (44,485)(1) (30,639) (13,766) (10,899) ----------------------------------------------------------------------------------------------------------------------------- END OF PERIOD $136,723 $227,493 $105,397 $98,241 ============================================================================================================================= |
(1) Includes $6.5 million related to the sale of the Florida operations and $21.4 million related to the 4th quarter special credit actions.
INTEREST RATE RISK MANAGEMENT
Huntington seeks to minimize earnings volatility by managing the sensitivity of net interest income and the fair value of its net assets to changes in market interest rates. The Board of Directors and the Asset and Liability Management Committee (ALCO) oversee various risks by establishing broad policies and specific operating limits that govern a variety of risks inherent in operations, including liquidity, counterparty credit risk, settlement, and market risks.
Market risk is the potential for declines in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. Interest rate risk is Huntington's primary market risk. It results from timing differences in the repricing and maturity of assets and liabilities and changes in relationships between market interest rates and the yields on assets and rates on liabilities, including the impact of embedded options.
Interest rate risk management is a dynamic process that encompasses new business flows onto the balance sheet, wholesale investment and funding, and the changing market and business environment. Effective management of interest rate risk begins with appropriately diversified investments and funding sources. To accomplish overall balance sheet objectives, management regularly accesses money, bond, futures, and options markets, as well as trading exchanges. In addition, Huntington contracts with dealers in over-the-counter financial instruments for interest rate swaps. ALCO regularly monitors position concentrations and the level of interest rate sensitivity to ensure compliance with approved risk tolerances.
Interest rate risk modeling is performed monthly. An income simulation model is used to measure the sensitivity of forecasted net interest income to changes in market rates over a one-year horizon. Although Bank Owned Life Insurance and automobile operating lease assets are classified as non-interest earning assets, Huntington includes these portfolios in its interest sensitivity analysis because both have attributes similar to fixed-rate interest earning assets. Market value risk (referred to as Economic Value of Equity, or EVE) is measured using a static balance sheet. The models used for these measurements take into account prepayment speeds on mortgage loans, mortgage-backed securities, and consumer installment loans, as well as cash flows of other loans and deposits. Balance sheet growth assumptions are also considered in the income simulation model. Moreover, the models incorporate the effects of embedded options, such as interest rate caps, floors, and call options, and account for changes in relationships among interest rates
The baseline scenario for the income simulation, with which all others are compared, is based on market interest rates implied by the prevailing yield curve. Alternative market rate scenarios are then employed to determine their impact on the baseline scenario. These alternative market rate scenarios include spot rates remaining unchanged for the entire measurement period, parallel rate shifts on both a gradual and immediate basis, as well as movements in rates that alter the shape of the yield curve. Scenarios are also developed to measure basis risk, such as the impact of LIBOR-based rates rising or falling faster than the prime rate.
When evaluating short-term interest rate risk exposure, management uses, for its primary measurement, scenarios that model 200 basis point increasing and decreasing parallel shifts in the yield curve during the next twelve-month period. At December 31, 2002, only the 200 basis point increasing parallel shift in the yield curve was modeled because a 200 basis point decrease in the interest rate curve was not feasible given the overall low level of interest rates. At the end of 2002, that scenario modeled net interest income 0.7% lower than the internal forecast of net interest income over the same time period using the current level of forward rates. This compares with the Board of Directors policy limit of a 4.0% change in net interest income given a 200 basis point scenario. Management believes further declines in market rates would put modest downward pressure on net interest income, resulting from the implicit pricing floors in non-maturity deposits.
The net interest margin has been adversely impacted in recent months by:
(1) fixed-rate consumer loan repayments being reinvested at lower market rates;
(2) high repayments of residential mortgage loans and mortgage-backed securities;
(3) the implicit floors in retail deposits as rates declined to historically
low levels;
(4) the rapid growth of lower-yielding residential adjustable-rate mortgage
loans retained on the balance sheet;
(5) the lower yield on the higher quality automobile loan originations, and;
(6) the flattening of the yield curve. Future net interest income could also
be adversely affected by these factors.
The primary measurement for EVE risk assumes an immediate and parallel increase in rates of 200 basis points. At December 31, 2002, the model indicated that such an increase in rates would be expected to reduce the EVE by 3.8% and compares with an estimated negative impact of 2.9% at December 31, 2001.
The model is a useful but simplified representation of Huntington's underlying interest rate risk profile. Simulations reflect choices of statistical techniques, functional forms, model parameters, and numerous uncertain assumptions. Nonetheless, experience has demonstrated and management believes that these models provide reliable guidance for measuring and managing interest rate sensitivity.
LIQUIDITY
Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the Bank is used to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers. Huntington's ALCO establishes guidelines and regularly monitors the overall liquidity position of the Bank and the parent company to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Management believes that sufficient liquidity exists at both the parent company and the Bank to meet their estimated needs.
BANK LIQUIDITY
The Bank manages both its external and internal liquidity. External liquidity
includes maintaining funding sources for the Bank's activities. These activities
primarily consist of making loans and leases to customers, repaying the Bank's
obligations as they become due, and supporting the cost of operating the Bank.
Selected information regarding the Bank's short-term borrowings is found in
Table 14 and the maturity of obligations, including payments due under operating
lease obligations, is reflected in Table 15.
Deposits are the Bank's primary source of funding, of which 87% were provided by the Regional Banking segment. Table 13 details the types and sources of deposits by business segment at December 31, 2002, and compares these balances by type and source to balances at December 31, 2001.
------------------------------------------------------------------------------------------------------------------------------
TABLE 13 - DEPOSIT LIABILITIES
------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) DECEMBER 31, 2002 December 31, 2001
------------------------------------------------------------------------------------------------------------------------------
BY TYPE BALANCE % Balance %
------------------------------------------------------------------------------------------------------------------------------
Demand deposits
Non-interest bearing $ 3,074 17.6 $ 3,635 18.0
Interest bearing 5,374 30.7 5,723 28.3
Savings deposits 2,851 16.3 3,466 17.2
Other domestic time deposits 3,956 22.6 5,868 29.1
------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE DEPOSITS 15,255 87.2 18,692 92.6
------------------------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 732 4.2 1,131 5.6
Brokered time deposits and negotiable CDs 1,093 6.2 138 0.7
Foreign time deposits 419 2.4 226 1.1
------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $ 17,499 100.0 $ 20,187 100.0
==============================================================================================================================
BY BUSINESS SEGMENT
------------------------------------------------------------------------------------------------------------------------------
Regional Banking
Central Ohio / West Virginia $ 5,361 30.6 $ 5,217 25.8
Northern Ohio 3,602 20.6 3,256 16.1
Southern Ohio / Kentucky 1,365 7.8 1,291 6.4
West Michigan 2,402 13.7 2,227 11.0
East Michigan 1,962 11.2 1,895 9.4
Indiana 613 3.5 578 2.9
------------------------------------------------------------------------------------------------------------------------------
Total Regional Banking 15,305 87.4 14,464 71.6
------------------------------------------------------------------------------------------------------------------------------
Dealer Sales 59 0.3 82 0.4
Private Financial Group 924 5.3 717 3.6
Treasury / Other 1,211 7.0 256 1.3
------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS EXCLUDING FLORIDA 17,499 100.0 15,519 76.9
------------------------------------------------------------------------------------------------------------------------------
Florida --- --- 4,668 23.1
------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $ 17,499 100.0 $ 20,187 100.0
==============================================================================================================================
|
Domestic time deposits of $100,000 or more, adjusted to include brokered time deposits and negotiable certificates of deposit and IRAs included in Other domestic time deposits, totaled $1.9 billion at December 31, 2002. These time deposits mature as follows: $343 million within three months, $182 million within six but more than three months, $212 million within one year but more than six months, and $1,166 million maturing beyond one year. At December 31, 2002, Huntington's loans and leases were 99.8% of total deposits. This compares with 89.7% of total deposits at December 31, 2001, or 106% excluding the loans and deposits sold with the Florida operations.
The Bank's ALCO establishes policies and monitors guidelines to diversify the Bank's wholesale funding sources to avoid concentrations in any one market source. Wholesale funding sources include Federal funds purchased, securities sold under repurchase agreements, non-core deposits, and medium- and long-term debt. To enhance the availability of liquidity, the Bank has available a $6.0 billion domestic bank note program. This program was renewed in 2002. At December 31, 2002, a total of $5.7 billion in domestic bank notes remained available for future issuance under this program. In addition, the Bank shares a $2.0 billion Euronote program with the parent company. This program was renewed on February 6, 2003, and is subject to annual renewal. Approximately $1.3 billion was available under this program at December 31, 2002. Both programs enable the Bank to issue notes with maturities from one month to thirty years. During 2002, management added significantly to its wholesale borrowings, primarily due to the loss of deposit funding with the sale of Huntington's Florida banking operations. In adding wholesale borrowings, management also lengthened the average maturity of these borrowings. At the end of 2002, the Bank had wholesale borrowings of $5.9 billion, which had a weighted-average maturity of 1.7 years.
-------------------------------------------------------------------------------------------------------------------------
TABLE 14 - SHORT-TERM BORROWINGS
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
-------------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
Balance at year-end $ 2,458,523 $ 1,913,607 $ 1,822,480
Weighted average interest rate at year-end 1.49% 2.24% 5.91%
Maximum amount outstanding at month-end during the year $ 2,503,962 $ 3,094,647 $ 2,093,546
Average amount outstanding during the year $ 2,072,075 $ 2,258,860 $ 1,831,228
Weighted average interest rate during the year 1.98% 4.11% 5.68%
-------------------------------------------------------------------------------------------------------------------------
|
The Bank is also a member of the Federal Home Loan Bank of Cincinnati (FHLB), which provides funding through advances to its members that are collateralized with mortgage-related assets. These advances carry maturities from one month to twenty years. At December 31, 2002, the Bank had $1.0 billion of advances from the FHLB, compared with only $17 million of advances at December 31, 2001. During 2002, the Bank significantly increased its borrowing capability with the FHLB as these advances provided a flexible source of funding. At December 31, 2002, a total of $2.7 billion of residential mortgage loans, commercial real estate loans, and home equity loans were pledged to secure borrowing under these advances.
---------------------------------------------------------------------------------------------------------------------------------
TABLE 15 - MATURITY OF BANK OBLIGATIONS
---------------------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------------------
2008 &
(in millions of dollars) 2003 2004 2005 2006 2007 AFTER TOTAL
---------------------------------------------------------------------------------------------------------------------------------
Medium-term notes $540.1 $ 855.0 $510.0 $ --- $ --- $ --- $ 1,905.1
Subordinated notes 253.0 --- --- --- --- 485.7 738.7
Preferred securities --- --- --- --- --- 50.0 50.0
Federal Home Loan Bank advances 10.0 3.0 100.0 --- 900.0 --- 1,013.0
Operating lease obligations 35.1 33.1 29.7 27.6 26.2 218.6 370.3
---------------------------------------------------------------------------------------------------------------------------------
TOTAL $838.2 $ 891.1 $639.7 $27.6 $926.2 $ 754.3 $ 4,077.1
=================================================================================================================================
|
Huntington maintains a portfolio of securities that can be used as a secondary source of liquidity (to the extent that securities are not pledged), substantially all of which is held by the Bank. At December 31, 2002, the portfolio of securities available for sale totaled $3.4 billion, of which $2.6 billion was pledged to secure public and trust deposits, trading account liabilities, U.S. Treasury demand notes, and securities sold under repurchase agreements. The composition and maturity of these securities are presented in Table 16. Weighted average yields were calculated using amortized cost and on a fully taxable equivalent basis assuming a 35% tax rate, excluding marketable equity securities.
--------------------------------------------------------------------------------------------------------------------------------
TABLE 16 - SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and Federal Agencies $2,627,684 $ 2,322,079 $ 3,284,031
Other 775,685 527,500 806,494
--------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $3,403,369 $ 2,849,579 $ 4,090,525
================================================================================================================================
|
AMORTIZED FAIR
COST VALUE Yield
-------------------------------------------------------------------------------------------------------------
U.S. Treasury
1-5 years $ 13,434 $ 14,066 3.51%
6-10 years 4,704 5,367 5.51%
Over 10 years 412 479 6.07%
-------------------------------------------------------------------------------------------------------------
Total U.S. Treasury 18,550 19,912 4.07%
------------------------------------------------------------------------------------------------------------
Federal Agencies
Mortgage-backed
1-5 years 34,196 35,166 5.29%
6-10 years 264,219 270,779 5.33%
Over 10 years 873,552 901,417 5.78%
------------------------------------------------------------------------------------------------------------
Total Mortgage-backed 1,171,967 1,207,362 5.66%
------------------------------------------------------------------------------------------------------------
Other agencies
Under 1 year 34,923 35,966 4.91%
1-5 years 758,032 783,533 5.21%
6-10 years 95,617 97,095 4.79%
Over 10 years 477,185 483,816 5.50%
------------------------------------------------------------------------------------------------------------
Total Other 1,365,757 1,400,410 5.27%
------------------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY AND FEDERAL AGENCIES 2,556,274 2,627,684 5.44%
------------------------------------------------------------------------------------------------------------
Other
Under 1 year 7,133 7,183 8.43%
1-5 years 62,939 63,886 6.53%
6-10 years 49,581 51,046 6.61%
Over 10 years 451,108 449,958 5.71%
Retained interest in securitizations 146,160 159,978 15.56%
Marketable equity securities 42,846 43,634
------------------------------------------------------------------------------------------------------------
TOTAL OTHER 759,767 775,685 7.88%
------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $ 3,316,041 $3,403,369 5.98%
============================================================================================================
|
(1) Weighted average yields were calculated using amortized cost and on a fully tax equivalent basis assuming a 35% tax rate. Marketable equity securities are excluded.
Other significant factors impacting the Bank's liquidity are the repayment of principal and the receipt of interest on the Bank's loans and direct financing leases, rental income payments from operating lease assets, and proceeds from the sales of vehicles at the end of the applicable operating lease. The Bank's consumer loan and lease portfolio contains a significant amount of loans and leases with relatively shorter weighted-average lives to maturity. In addition, commercial loans and real estate construction portfolios have relatively short maturities with 44% of the combined principal maturing in one year or less, as reflected in Table 17.
---------------------------------------------------------------------------------------------------------------------------------
TABLE 17 - MATURITY SCHEDULE OF SELECTED LOANS
---------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) AT DECEMBER 31, 2002
---------------------------------------------------------------------------------------------------------------------------------
One Year One to After
or Less Five Years Five Years Total
---------------------------------------------------------------------------------------------------------------------------------
Commercial loans $ 2,490 $ 2,481 $635 $5,606
Real estate - construction 450 544 18 1,012
---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,940 $ 3,025 $653 $6,618
=================================================================================================================================
Variable interest rates $ 2,813 $ 2,582 $509 $5,904
Fixed interest rates 127 443 144 714
---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,940 $ 3,025 $653 $6,618
=================================================================================================================================
|
There are other sources of liquidity should they be needed. These sources include the sale or securitization of loans, the ability to acquire additional national market, non-core deposits, additional collateralized borrowings such as FHLB advances, the issuance of debt securities, and the issuance of preferred or common securities in public or private transactions. The Bank also can borrow through the Federal Reserve's discount window. At December 31, 2002, a total of $1.5 billion of commercial loans had been pledged to secure potential future borrowings that could be obtained through this facility.
PARENT COMPANY LIQUIDITY
Parent company liquidity consists primarily of a program of regular dividends
from its subsidiaries, predominantly the Bank, its medium-term note program,
and a commercial paper program issued through Huntington Bancshares Financial
Corporation, a non-bank subsidiary. The Bank could declare dividends to be paid
to the parent company, without regulatory approval, of $98.1 million at December
31, 2002.
The parent company uses this liquidity to pay dividends to its stockholders, repurchase shares of its common stock, meet its financial obligations, fund certain non-bank activities, finance acquisitions, and for other general corporate purposes. At December 31, 2002, the parent company had $455 million issued under a $750 million medium-term note program, leaving $295 million available for future funding needs. At December 31, 2002, the parent company had $140 million in medium-term notes outstanding: $40 million will mature in 2003 and $100 million in 2004. As mentioned earlier, the parent company shares a $2.0 billion Euronote program with the Bank. Availability of funding through these two programs amounted to $1.6 billion at December 31, 2002.
In 2002, the liquidity of the parent company was favorably affected by the sale of the Florida banking operations through a subsequent recapitalization of the Bank. This recapitalization returned $670 million of capital to the parent company. During 2002, subsequent to the recapitalization, the parent company repurchased 19.2 million shares of its common stock for $370 million. Details of this program are discussed further under the Capital section that follows.
At December 31, 2002, the parent company had $546.9 million of cash and cash equivalents on hand. Management believes that the parent company has sufficient liquidity to meet its cash flow obligations in 2003, including payment of its current dividend, without relying upon the capital markets for financing.
CAPITAL
Capital is managed at each legal subsidiary based upon the respective risks
and growth opportunities, as well as regulatory requirements. Management places
significant emphasis on the maintenance of strong capital, which promotes investor
confidence, provides access to the national markets under favorable terms, and
enhances business growth and acquisition opportunities. The importance of managing
capital is also recognized and management continually strives to maintain an
appropriate balance between capital adequacy and returns to shareholders.
Shareholders' equity declined $143 million during 2002 compared with an increase of $17 million in the previous year. Increases to shareholders' equity reflecting higher net earnings, equity issued for acquisitions, and the positive mark-to-market of securities available for sale and derivatives used to hedge cash flows for 2002, were more than offset by dividends and repurchases of common shares. Cash dividends declared were $0.64 per share in 2002, down from $0.72 per share in 2001, and $0.76 per share in 2000.
Average shareholders' equity in 2002 was $2.3 billion, down modestly from $2.4 billion in 2001. The ratio of average equity to average assets in 2002 was 8.87% versus 8.57% a year ago. Tangible period-end equity to tangible period-end assets was 7.58% at the end of 2002, up significantly from 6.17% a year earlier, reflecting the tangible capital generated from the sale of the Florida operations offset by the subsequent share repurchase program in 2002. Given the current asset mix and risk profile, management has a longer term targeted tangible equity to asset ratio of 7.00%.
In February 2002, the Board of Directors authorized a share repurchase program for up to 22 million shares and canceled the previously existing authorization. Under this authorization, a total of 19.2 million shares were repurchased at a cost of $370.0 million through the end of December 2002. An additional 0.2 million shares were repurchased in early January 2003, bringing total shares repurchased under this authorization to 19.4 million shares. In mid-January 2003, the Board of Directors approved a new share repurchase authorization for up to 8 million shares, canceling the 2.6 million shares remaining under the February 2002 authorization. Huntington expects to use this new authorization to complete the purchase of the 2.6 million shares remaining for repurchase under the prior authorization. Repurchases of shares will be made from time to time as deemed appropriate and will be reserved for reissue in connection with Huntington's dividend reinvestment and employee benefit plans, as well as for acquisitions and other corporate purposes.
Risk-based capital guidelines established by the Federal Reserve Board set minimum capital requirements and require institutions to calculate risk-based capital ratios by assigning risk weightings to assets and off-balance sheet items, such as interest rate swaps, loan commitments, and securitizations. Huntington's Tier 1 risk-based capital ratio, total risk-based capital ratio, leverage ratio, and risk-adjusted assets for the recent five years are shown in Table 18:
------------------------------------------------------------------------------------------------------------------------------
TABLE 18 - CAPITAL ADEQUACY
------------------------------------------------------------------------------------------------------------------------------
"Well- AT DECEMBER 31,
Capitalized" ---------------------------------------------------------------------------
(in millions of dollars) MINIMUMS 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Assets N/A $ 27,215 $ 27,926 $ 26,911 $ 25,272 $24,226
Ratios:
Tier 1 Risk-Based Capital 6.00% 8.65% 7.30% 7.37% 7.72% 7.19%
Total Risk-Based Capital 10.00% 11.54% 10.34% 10.51% 10.82% 10.75%
Tier 1 Leverage 5.00% 8.85% 7.46% 7.10% 6.89% 6.45%
|
Huntington is supervised and regulated by the Federal Reserve whereas the Bank is primarily supervised and regulated by the Office of the Comptroller of the Currency, which establishes similar regulatory capital guidelines for banks. The Bank also had regulatory capital ratios in excess of the levels established for well-capitalized institutions.
During 2002, Huntington acquired Haberer Investment Advisor, Inc. (Haberer), a Cincinnati-based registered investment advisory firm with approximately $500 million in assets under management. Huntington paid cash to Haberer shareholders and issued 202,695 shares of common stock from treasury. Also during 2002, Huntington acquired LeaseNet Group, Inc. (LeaseNet), a $90 million leasing company located in Dublin, Ohio. Huntington paid cash to LeaseNet shareholders and issued 835,035 shares of common stock from treasury. See Huntington's Statement of Changes in Shareholders' Equity for a detail of activity.
LINES OF BUSINESS DISCUSSION
Below is a brief description of each line of business and a discussion
of business segment results. Regional Banking, Dealer Sales, and the Private
Financial Group are the major business lines. The fourth segment includes the
impact of the Treasury function and other unallocated assets, liabilities, revenue,
and expense. Financial information for each line of business, including a reconciliation
to reported earnings, can also be found in Note 27 to the consolidated financial
statements. The chief decision-makers for Huntington rely on operating basis
earnings for review of performance and for critical decision-making purposes
and, therefore, the information below is presented on an operating basis. During
2002, the previously reported segments, Retail Banking and Corporate Banking,
were combined and renamed Regional Banking. In addition, changes were made in
2002 to the methodologies utilized for certain balance sheet and income statement
allocations from Huntington's management reporting system. The prior periods
have not been restated for these methodology changes. The following tables within
each segment show performance on this basis for the most recent three years.
REGIONAL BANKING
Regional Banking provides products and services to retail, business banking,
and commercial customers. This segment's products include home equity loans,
first mortgage loans, direct installment loans, business loans, personal and
business deposit products, as well as sales of investment and insurance services.
These products and services are offered in six operating regions within the
five states of Ohio, Michigan, Indiana, West Virginia, and Kentucky through
Huntington's traditional banking network, Direct Bank--Huntington's customer
service center, and Web Bank at www.huntington.com. Regional Banking also represents
middle-market and large commercial banking relationships which use a variety
of banking products and services including, but not limited to, commercial loans,
international trade, and cash management.
--------------------------------------------------------------------------------------------------------------------------
TABLE 19 - REGIONAL BANKING RESULTS
Year Ended December 31,
--------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Net interest income $ 592,977 $ 626,647 $ 656,856
Provision for loan and lease losses 141,190 96,943 36,180
Non-interest income 279,780 262,432 276,350
Non-interest expense 559,302 523,994 570,788
--------------------------------------------------------------------------------------------------------------------------
Income before taxes 172,265 268,142 326,238
Income taxes 60,293 93,850 112,549
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 111,972 $ 174,292 $ 213,689
--------------------------------------------------------------------------------------------------------------------------
|
Regional Banking's operating income was $112.0 million in 2002 compared to $174.3 million for 2001 and $213.7 million for 2000. Net interest income decreased $33.7 million, or 5%, in 2002. Regional Banking provides net funds to Huntington's other business segments since its deposits exceed its loans and leases and, therefore, receives an earnings credit for those excess deposits. The declining interest rate environment resulted in lower credit for this deposit excess and margin compression in 2002.
The provision for loan and lease losses increased $44.2 million in 2002 over 2001 versus an increase of $60.8 million in 2001 over 2000. The increases in 2002 and 2001 were indicative of the deteriorating credit quality that began late in 2000. Provision expense reflects net charge-offs (excluding the restructuring charges for 2001) and charges for loan and lease growth for the period. In 2002, net charge-offs were 0.76% compared with 0.54% for 2001.
Non-interest income rose $17.3 million, or 7%, in 2002, following a $13.9 million, or 5%, decline in 2001. Service charges on deposit accounts increased 12% (personal 9% and corporate 14%) to $144.7 million. The growth in personal service charges was primarily attributable to a new pricing structure and deposit volume initiatives. The corporate increase was the result of customers choosing to pay fees in lieu of maintaining balances due to lower earnings credit paid to commercial checking customers. In addition, electronic banking fees increased 10%. These revenue increases were partially offset by a 12% decline in total mortgage banking income. Gross mortgage banking revenue increased commensurate with a 22% increase in closed loans, but significant impairment of mortgage servicing rights pushed total mortgage banking income down in 2002. The declining rate environment during the recent twelve months caused accelerated mortgage prepayment expectations and, therefore, recognition of asset impairment of capitalized mortgage servicing rights and increased amortization. Excluding mortgage banking income, non-interest income increased 11% in 2002.
Non-interest expense was $559.3 million in 2002, up $35.3 million, or 7%, when compared to $524.0 million in 2001. Non-interest expense for 2001 was down $46.8 million, or 8%, from 2000. Personnel costs were $240.9 million, up 8%, compared with $223.8 million in 2001. The increase reflected investment in strengthening Regional Banking's management, business banking sales, and credit administration teams. In addition, this segment experienced increases in performance-based incentive compensation commensurate with production and revenue growth.
Total Regional Banking average loans and leases for 2002 increased to $12.3 billion, or 6%, over 2001. Mortgage and home equity lending represented the majority of the growth in average earning assets. Average mortgage loans increased 46% from $817 million in 2001 to nearly $1.2 billion in 2002. Home equity loans and lines of credit increased 19% from $1.8 billion in 2001 to $2.1 billion in 2002. Commercial real estate loans for 2002 grew $213.6 million, or 7%, while average commercial loans were down $373.1 million, or 8%, from 2001.
Total average deposits for 2002 increased $1.1 billion, or 8%, from 2001. An enhanced focus on relationship selling and the economic environment propelled growth in checking and money market deposits. While demand for retail CD's remained strong, Regional Banking protected interest margins by refraining from paying aggressive competitive rates resulting in a 2% decline in CD balances year-over-year. Average deposit growth excluding CD's was 15% in 2002. As noted in the PFG line of business review that follows, Regional Banking also experienced growth in its packaged investment product sales through the retail channel.
Regional Banking contributed 38% of operating earnings in 2002 and comprised 68% of Huntington's total loan and lease portfolio and 87% of total deposits at December 31, 2002.
DEALER SALES
Dealer Sales serves automotive dealerships within Huntington's primary banking
markets, as well as in Arizona, Florida, Georgia, Pennsylvania, and Tennessee.
This segment finances the purchase of automobiles by customers of the automotive
dealerships, purchases automobiles from dealers and simultaneously leases the
automobile under long-term operating and direct financing leases, finances the
dealership's inventory of automobiles, and provides other banking services to
the automotive dealerships and their owners.
--------------------------------------------------------------------------------------------------------------------------
TABLE 20 - DEALER SALES RESULTS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Net interest income $ 34,713 $ (24,339) $ (44,243)
Provision for loan and lease losses 44,573 29,655 17,098
Non-interest income 669,898 721,500 666,509
Non-interest expense 611,706 640,135 527,088
--------------------------------------------------------------------------------------------------------------------------
Income before taxes 48,332 27,371 78,080
Income taxes 16,913 9,580 27,207
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 31,419 $ 17,791 $ 50,873
==========================================================================================================================
|
Dealer Sales operating earnings were $31.4 million in 2002, compared to $17.8 million in 2001 and $50.9 million in 2000. Higher provision for loan and lease losses and losses on terminated operating leases, reflecting weakened economic conditions, higher bankruptcies, and a softer used car market, had an adverse impact on operating performance of this segment in 2002 and 2001. Since April 2002, Huntington began booking leases for automobiles as direct financing leases instead of operating leases.
Net interest income was $34.7 million for 2002, compared with a negative $24.3 million for 2001. Net interest income was a negative $44.2 million for 2000. Net interest income was negative for 2001 and 2000 because the funding cost related to Dealer Sales' operating lease assets, which are non-interest earning assets, is included in interest expense, whereas the revenue is reported as a component of non-interest income. The change in net interest income is primarily from recording automobile leases as direct financing leases rather than operating leases as had been Huntington's practice prior to May 2002. Automobile loan balances increased $188.7 million to $3.1 billion during 2002 from $2.9 billion in 2001. Direct financing lease balances increased $786 million to $893 million in 2002, while operating lease inventory balances decreased $820 million to $2.3 billion. Total automobile loan and lease (direct financing and operating) originations were $3.5 billion in 2002 compared with $3.4 billion in 2001.
The provision for loan and lease losses for 2002 increased $14.9 million from 2001 compared with an increase in 2001 of $12.6 million. The increase in provision expense is from the creation of additional allowance for losses on loans and leases as required by direct financing lease accounting.
Non-interest income decreased $51.6 million, or 7%, from 2001, reflecting lower operating lease rental income. Non-interest expense decreased $28.4 million, reflecting lower depreciation expense on lower operating lease inventory balances.
Dealer Sales contributed 11% and 37% of 2002 operating earnings and operating revenues, respectively.
PRIVATE FINANCIAL GROUP (PFG)
PFG provides products and services designed to meet the needs of Huntington's
higher wealth customers. Revenue is derived through the sale of personal trust,
asset management, investment advisory, brokerage, insurance, and deposit and
loan products and services. Income and related expenses from the sale of brokerage
and insurance products is shared with the line of business that generated the
sale or provided the customer referral.
--------------------------------------------------------------------------------------------------------------------------
TABLE 21 - PRIVATE FINANCIAL GROUP RESULTS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------
Net interest income $ 35,403 $ 36,323 $ 30,502
Provision for loan and lease losses 3,477 408 1,279
Non-interest income 108,817 91,986 57,442
Non-interest expense 100,961 94,025 53,866
--------------------------------------------------------------------------------------------------------------------------
Income before taxes 39,782 33,876 32,799
Income taxes 13,924 11,857 11,343
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 25,858 $ 22,019 $ 21,456
==========================================================================================================================
|
PFG's operating earnings for 2002 were $25.9 million, up 17% from 2001, due primarily to growth in non-interest income. For 2002, growth in non-interest income was partially offset by reduced net interest income, increased provision for loan and lease losses, and increased non-interest expense. Operating earnings were $21.5 million for 2000.
Average loans and leases grew 36% to $895 million and average deposits grew 30% to $807 million from 2001 to 2002. Net interest income was down 3% driven by a shift in product mix and margin compression, particularly on consumer loans and leases reflective of lower consumer mortgage loan rates.
Provision for loan and lease losses for 2002 increased by $3.1 million from 2001 largely reflecting higher net charge-offs. Net charge-offs were 0.20% of average loans and leases for 2002 versus 0.09% for 2001.
Non-interest income for 2002 was $108.8 million, up 18% from 2001, resulting primarily from increased brokerage revenue, increased trust revenue, and increased other income. Brokerage revenue increased by $7.3 million, or 23%, from 2001 due to increased sales of annuity products. Insurance revenue for 2002 decreased by $0.4 million, or 3%, from 2001 mostly due to decreased sales volume from the life agency business.
In 2002, PFG restructured its sales/distribution force to eliminate the use of separate insurance sales personnel to sell insurance products through the retail branch offices and to utilize the more established brokerage sales force for retail insurance sales. Although sales volume decreased during this transition year as the new model was being implemented, significant expense savings resulted as well. Trust revenue for 2002 increased by $4.0 million, or 7%, from 2001 largely due to the acquisition of Haberer in April 2002. Increased revenue from investment advisory and other services provided to the Huntington Funds was also a major source of the increase in trust revenue. During 2001, PFG introduced five new equity funds. These funds grew to over $200 million in assets by the end of 2002. Other income for 2002 increased by $5.6 million from 2001 primarily because of the $4.2 million charge in 2001 for the impairment loss related to the Pacific Gas & Electric commercial paper held by the Huntington Money Market Fund.
Non-interest expense for 2002 increased $6.9 million, or 7%, from 2001 driven by the Haberer operating expenses combined with increased sales commissions and salary expense. Sales commissions increased $1.7 million as a result of the increase in non-interest income.
PFG contributed 9% of operating earnings in 2002 and 7% of total revenues in 2002.
TREASURY / OTHER
The Treasury / Other segment includes assets, liabilities, equity, revenue,
and expense that are not directly assigned or allocated to one of the lines
of business. Since a match-funded transfer pricing system is used to allocate
interest income and interest expense to other business segments, Treasury /
Other results include the net impact of any over or under allocations arising
from centralized management of interest rate risk including the net impact of
derivatives used to hedge interest rate sensitivity. Furthermore, this segment's
results include the net impact of administering Huntington's investment securities
portfolio as part of overall liquidity management. Additionally, amortization
expense of intangible assets and gains or losses not allocated to other business
segments are also a component.
---------------------------------------------------------------------------------------------------------------------------
TABLE 22 - TREASURY / OTHER RESULTS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 118,334 $ 25,962 $ (29,712)
Provision for loan and lease losses --- --- ---
Non-interest income 63,050 61,677 81,759
Non-interest expense 40,325 75,598 26,132
---------------------------------------------------------------------------------------------------------------------------
Income before taxes 141,059 12,041 25,915
Income taxes 11,947 (31,003) (18,357)
---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 129,112 $ 43,044 $ 44,272
===========================================================================================================================
|
Treasury / Other reported operating income of $129.1 million in 2002, up significantly from the two preceding years. This primarily reflected the reduction in transfer pricing credits allocated to Regional Banking for its deposits, the maturity in late 2001 of $2 billion of interest rate swaps that had significant negative spreads, and the benefit of lower short-term interest rates, particularly with the steeper yield curve.
Non-interest income for 2002 was $63.1 million compared with $61.7 million for 2001 reflecting the higher gains from securities transactions in the current year, increased Bank owned life insurance income, and revenue from trading activities. Non-interest expense for 2002 declined $35.3 million from 2001. This reflected a decline in the amortization of intangibles arising from the implementation of FASB Statement No. 142 and lower unallocated personnel costs offset by higher unallocated outside services and processing, equipment and occupancy, and telecommunication expenses.
Income tax expense for each of the other business segments is calculated at a statutory 35% tax rate. However, Huntington's overall effective tax rate is lower and, as a result, Treasury / Other reflects the reconciling items to the statutory tax rate in its Income taxes.
RESULTS FOR THE FOURTH QUARTER
Table 23 presents Huntington's results of operations for the recent
eight quarters and Table 24 presents selected stock, performance ratios, and
capital data for the same periods.
Fourth quarter 2002 earnings were $74.4 million, or $0.32 per common share. This compared with earnings of $56.9 million, or $0.23 per common share, in the year-ago fourth quarter, or earnings of $70.8 million, or $0.28 per common share excluding the impact associated with Huntington's strategic restructuring plan and the sold Florida banking and insurance operations. On this same comparative basis, 2002 fourth quarter earnings and earnings per common share were up 5% and 14%, respectively.
Fully taxable equivalent net interest income for 2002 fourth quarter was up $14.5 million from the year-ago quarter, or up $34.2 million, or 19%, excluding the impact of the sold Florida banking operations. This reflected a combination of a 16% increase in average earning assets, and a 10 basis point, or an effective 3%, increase in the net interest margin to 3.83% from 3.73%.
The 16% increase in average earning assets from a year ago reflected a 16% increase in average loans and leases and a 15% increase in average securities. The growth in loans and leases was driven by a 36% increase in average consumer loans, including a 15% increase in home equity loans and lines, a more than doubling of residential mortgages, and a 44% increase in automobile loans and leases. Automobile leases started to be recorded in the 2002 second quarter as direct financing leases, which averaged $776 million in the 2002 fourth quarter. Automobile loans were up 2% from the year-ago fourth quarter. Total average commercial loans were down 3%, though average commercial real estate loans were up 11% from the year-ago quarter.
Non-interest income was $271.6 million, down $41.9 million, or 13%, from the year-ago quarter. Excluding from the year-ago quarter the impact of Huntington's strategic restructuring plan, as well as the impact of the sold Florida banking and insurance operations, non-interest income was down $23.2 million, or 8%, from a year earlier. Primarily contributing to this $23.2 million year-over-year decrease were a $36.9 million, or 21%, decrease in operating lease income and a $3.6 million, or 24%, decrease in mortgage banking income (primarily due to a mortgage servicing rights impairment recorded in the fourth quarter of 2002). This was partially offset by a 17% increase in deposit service charges, a 9% increase in brokerage and insurance income, a 20% increase in bank owned life insurance income, a 14% increase in other service charges, primarily electronic banking fees, and a 26% increase in other income.
Non-interest expense was $331.5 million in the 2002 fourth quarter, down $53.1 million from the year-ago quarter, but up $2.0 million, or 1%, after excluding from that quarter $15.1 million in restructuring charges, as well as the expenses related to the sold Florida banking and insurance operations. This $2.0 million increase was primarily due to a $19.8 million, or 14%, decrease in operating lease expense, partially offset by a $13.8 million, or 14%, increase in personnel cost. Contributing equally to the increase in personnel costs were salary expense, incentive compensation, and benefit costs. The increased salary expense reflected higher staffing levels associated with the expansion of management and employee talent at all levels, including the credit workout area. Higher sales commissions were reflected across all lines of business. Higher fourth quarter medical and pension costs were somewhat offset by gains related to stock received from the demutualization of certain insurance companies where Huntington owned related insurance policies. Outside data processing and other services was up $1.8 million, or 12%, and professional services increased $2.0 million, or 32%. Net occupancy expense decreased $1.8 million, or 12%, while the amortization of intangible expense declined $2.4 million due the implementation of FASB Statement No. 142 at the beginning of 2002. The fourth quarter 2002 efficiency ratio decreased to 68.8%, from 69.2% in the year-ago quarter on an adjusted basis.
Net charge-offs for the 2002 fourth quarter were $83.2 million, or an annualized 1.82%, including $51.3 million in charge-offs associated with the fourth quarter special credit actions. Excluding these charge-offs, net charge-offs were $31.9 million, or 0.70%, of average loans and leases (annualized). Loan and lease loss provision expense in the fourth quarter was $51.2 million, up $4.2 million from the year-ago quarter after excluding from that quarter an additional $50.0 million charge to the provision, as well as $4.0 million related to the sold Florida banking operations.
ROE and ROA were 13.2% and 1.10%, respectively, for the 2002 fourth quarter, compared to 11.8% and 1.14%, respectively, for the year-ago quarter, excluding the impact resulting from the strategic restructuring and sale of the Florida banking and insurance operations.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 23 - SELECTED QUARTERLY INCOME STATEMENTS
-----------------------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) FOURTH THIRD SECOND FIRST
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $210,255 $205,484 $ 190,981 $ 184,431
Provision for loan and lease losses 51,236 54,304 49,876 39,010
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 159,019 151,180 141,105 145,421
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease income 143,465 154,367 168,047 175,906
Service charges on deposit accounts 41,177 37,460 35,354 38,530
Brokerage and insurance income 16,431 13,943 17,677 18,792
Trust services 15,306 14,997 16,247 15,501
Bank Owned Life Insurance income 11,443 11,443 11,443 11,676
Mortgage banking 11,410 6,289 10,725 19,565
Other service charges and fees 10,890 10,837 10,529 10,632
Gain on sale of Florida operations --- --- --- 175,344
Merchant Services gain --- 24,550 --- ---
Securities gains (losses) 2,339 1,140 966 457
Other 19,130 21,044 17,033 12,697
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 271,591 296,070 288,021 479,100
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease expense 120,747 125,743 131,695 140,785
Personnel costs 113,852 107,477 105,146 114,285
Equipment 17,337 17,378 16,659 16,949
Outside data processing and other services 17,209 15,128 16,592 18,439
Net occupancy 13,454 14,815 14,756 17,239
Professional services 8,026 6,083 6,267 5,401
Marketing 6,186 7,491 7,231 7,003
Telecommunications 5,714 5,609 5,320 6,018
Printing and supplies 3,999 3,679 3,683 3,837
Franchise and other taxes 2,532 2,283 2,313 2,328
Amortization of intangible assets 204 204 235 1,376
Restructuring charges --- --- --- 56,184
Other 22,269 16,563 18,135 16,830
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 331,529 322,453 328,032 406,674
-----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 99,081 124,797 101,094 217,847
Income taxes 24,687 33,193 27,169 124,706
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 74,394 $ 91,604 $ 73,925 $ 93,141
===================================================================================================================================
NET INCOME PER COMMON SHARE -- DILUTED $0.32 $0.38 $0.30 $0.37
CASH DIVIDENDS DECLARED PER COMMON SHARE $0.16 $0.16 $0.16 $0.16
REVENUE - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $210,255 $205,484 $ 190,981 $ 184,431
Tax Equivalent Adjustment (2) 1,869 1,096 1,071 1,169
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME - FTE $212,124 $206,580 $ 192,052 $ 185,600
===================================================================================================================================
|
(1) Reflects a $32.5 million reduction related to the issuance of $400 million of REIT subsidiary preferred stock, of which $50 million was sold to the public.
(2) Calculated assuming a 35% tax rate.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 24 - QUARTERLY STOCK SUMMARY, KEY RATIOS AND STATISTICS, AND CAPITAL DATA
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY COMMON STOCK SUMMARY
-----------------------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) FOURTH THIRD SECOND FIRST
-----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK PRICE
High $ 19.980 $ 20.430 $ 21.770 $ 20.310
Low 16.160 16.000 18.590 16.660
Close 18.710 18.190 19.420 19.700
Average daily closing price 18.769 19.142 20.089 18.332
DIVIDENDS
Cash dividends declared on common stock $ 0.16 $ 0.16 $ 0.16 $ 0.16
COMMON SHARES OUTSTANDING
Average -- Basic 233,581 239,925 246,106 250,749
Average -- Diluted 235,083 241,357 247,867 251,953
Ending 232,879 237,544 242,920 249,992
COMMON SHARE REPURCHASE PROGRAM
Authorized under repurchase program 22,000
Number of shares repurchased 4,110 6,262 7,329 1,458
-----------------------------------------------------------------------------------------------------------------------------------
Remaining shares authorized to repurchase (1) 2,841 6,951 13,213 20,542
===================================================================================================================================
|
Note: Intra-day and closing stock price quotations were obtained from NASDAQ.
----------------------------------------------------------------------------------------------------------------------------------
TABLE 24 - QUARTERLY STOCK SUMMARY, KEY RATIOS AND STATISTICS, AND CAPITAL DATA
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY COMMON STOCK SUMMARY
----------------------------------------------------------------------------------------------------------------------------------
2001
----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) Fourth Third Second First
----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK PRICE
High $ 17.490 $ 19.280 $ 17.000 $ 18.000
Low 14.510 15.150 13.875 12.625
Close 17.190 17.310 16.375 14.250
Average daily closing price 16.269 17.696 14.936 15.258
DIVIDENDS
Cash dividends declared on common stock $ 0.16 $ 0.16 $ 0.20 $ 0.20
COMMON SHARES OUTSTANDING
Average -- Basic 251,193 251,148 251,024 250,998
Average -- Diluted 251,858 252,203 251,448 251,510
Ending 251,194 251,193 251,057 251,002
|
Note: Intra-day and closing stock price quotations were obtained from NASDAQ.
-----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY KEY RATIOS AND STATISTICS
-----------------------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
-----------------------------------------------------------------------------------------------------------------------------------
MARGIN ANALYSIS - AS A %
OF AVERAGE EARNING ASSETS (2)
Interest income 6.19% 6.54% 6.60% 6.58%
Interest expense 2.36% 2.56% 2.69% 2.95%
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.83% 3.98% 3.91% 3.63%
-----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.10% 1.41% 1.19% 1.42%
Return on average shareholders' equity 13.2% 15.9% 12.6% 15.8%
-----------------------------------------------------------------------------------------------------------------------------------
CAPITAL DATA - END OF PERIOD
-----------------------------------------------------------------------------------------------------------------------------------
2002
-----------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) FOURTH THIRD SECOND FIRST
-----------------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Assets $ 27,215 $ 26,341 $ 25,317 $ 24,974
Tier 1 Risk-Based Capital Ratio 8.65% 9.13% 9.74% 10.30%
Total Risk-Based Capital Ratio 11.54% 12.09% 12.76% 13.43%
Tier 1 Leverage Ratio 8.85% 9.41% 9.95% 9.76%
Tangible Equity / Asset Ratio 7.58% 7.99% 8.52% 9.11%
-----------------------------------------------------------------------------------------------------------------------------------
|
(1) A new repurchase program for 8 million shares was authorized in January 2003, canceling the remaining shares under this authorization.
(2) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY KEY RATIOS AND STATISTICS
----------------------------------------------------------------------------------------------------------------------------------
2001
-----------------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST
-----------------------------------------------------------------------------------------------------------------------------------
Margin Analysis - As a %
of Average Earning Assets (2)
Interest income 7.06% 7.65% 7.95% 8.37%
Interest expense 3.44% 4.18% 4.56% 5.06%
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 3.62% 3.47% 3.39% 3.31%
-----------------------------------------------------------------------------------------------------------------------------------
Return on average assets 0.81% 0.49% 0.06% 0.71%
Return on average shareholders' equity 9.5% 5.7% 0.7% 8.3%
-----------------------------------------------------------------------------------------------------------------------------------
CAPITAL DATA - END OF PERIOD
-----------------------------------------------------------------------------------------------------------------------------------
2001
----------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) FOURTH THIRD SECOND FIRST
----------------------------------------------------------------------------------------------------------------------------------
Total Risk-Adjusted Assets $ 27,926 $ 27,781 $ 27,393 $ 27,238
Tier 1 Risk-Based Capital Ratio 7.30% 7.06% 7.13% 7.30%
Total Risk-Based Capital Ratio 10.34% 10.11% 10.22% 10.29%
Tier 1 Leverage Ratio 7.46% 7.18% 7.07% 7.22%
Tangible Equity / Asset Ratio 6.17% 6.08% 5.94% 5.99%
----------------------------------------------------------------------------------------------------------------------------------
|
(1) A new repurchase program for 8 million shares was authorized in January 2003, canceling the remaining shares under this authorization.
(2) Presented on a fully taxable equivalent basis assuming a 35% tax rate.
For analytical purposes in understanding performance trends and for decision making, management reviews and analyzes certain data, including Line of Business performance, on an "operating basis", which excludes the impact of these items and the operating results of the Florida operations sold as summarized and presented in Tables 25 through 28. The specific tables included in this section that reconcile reported, or GAAP, financial results to operating results include:
OPERATING BASIS SUMMARY REVIEW OF PERFORMANCE
Earnings on an operating basis for 2002 were $298.4 million, or $1.22 per common
share, compared with $257.1 million, or $1.02 per common share in 2001, and
$330.3 million, or $1.32 per common share in 2000. On this same basis, ROE and
ROA for 2002 were 12.9% and 1.17%, respectively, compared with 10.6% and 1.03%,
respectively, for 2001, and 14.2% and 1.29%, respectively, in 2000.
RESTRUCTURING AND OTHER ITEMS
In July 2001, Huntington announced a strategic refocusing plan (the Plan). Key
components of the Plan included the sale of banking and insurance operations
in Florida, the consolidation of numerous non-Florida branch offices, as well
as credit-related and other actions to strengthen its financial performance
including the use of some of the excess capital to repurchase outstanding common
shares.
2002
The sale of the Florida banking operations to SunTrust Banks, Inc., which closed
February 15, 2002, included 143 banking offices and 456 ATMs, with approximately
$2.8 billion in loans and other tangible assets, and $4.8 billion in deposits
and other liabilities. Huntington's Florida insurance operation, the Orlando-based
J. Rolfe Davis Insurance Agency, Inc. (JRD), was sold on July 2, 2002 to members
of its management team. The JRD sale did not materially affect Huntington's
2002 financial results and is not expected to materially affect Huntington's
future financial results. Huntington remains committed to growing its other
insurance business in markets served by its retail and commercial banking operations.
A pre-tax gain of $175.3 million ($56.7 million after-tax, or $0.23 per share)
on the sale of the Florida banking operations was recorded in 2002 and was included
in non-interest income in Tables 25 and 26. Huntington recorded $56.2 million
of pre-tax restructuring charges ($36.5 million after-tax, or $0.14 per share)
related to the Plan in 2002, which was reflected in non-interest expense. Combined
with amounts recorded in 2001, pre-tax restructuring charges related to the
Plan totaled $206.6 million ($134.3 million after-tax, or $0.54 per share).
In August 2002, Huntington restructured its interest in Huntington Merchant Services, L.L.C. (HMS), Huntington's merchant services business, in a transaction with First Data Merchant Services Corporation (First Data), a subsidiary of First Data Corporation. Under the agreement, Huntington extended its long-term merchant services relationship with First Data. In addition, as part of the transaction, First Data obtained all of Huntington's Florida-related merchant services business and increased its equity interest in HMS. This transaction resulted in a $24.5 million pre-tax gain ($16.0 million after tax, or $0.07 per share) in non-interest income. Huntington remains a nominal equity owner in HMS.
2001
In 2001, the provision for loan and lease losses included credit quality charges
related to the Plan of $65.2 million in addition to $50.0 million to increase
Huntington's allowance for loan and lease losses in light of the higher charge-offs
and non-performing assets experienced in the second half of 2001. Included in
the 2001 securities gains in Tables 25 and 26 was a $5.3 million loss realized
from the sale of $15 million of Pacific Gas & Electric commercial paper
acquired from the Huntington Money Market Fund. Restructuring charges related
to the Plan totaled $80.0 million ($52.0 million after-tax, or $0.21 per share)
and consisted of $12.1 million for asset impairment, $16.2 million for the exit
or curtailment of certain e-commerce activities, $13.3 million related to owned
or leased facilities that Huntington had vacated, and $38.4 million related
to employee severance or retention, legal, accounting, consulting, reduction
of ATMs, and other operational costs. In addition, in the fourth quarter there
was a reduction in income taxes resulting form the issuance of REIT subsidiary
preferred securities, of which $50 million was sold to the public.
Tables 25, 26, and 27 reconcile Huntington's reported results with its operating earnings for each of the most recent three years. Table 28 reconciles reported quarterly results with its operating earnings for the two most recent years.
The presentation of the Florida operations in Table 25 differs from the disclosure presented in Note 4 to the consolidated financial statements because Note 4 reflects only the after-tax restructuring charges for 2002 related to the Florida operations, which totaled $21.3 million ($32.7 million pre-tax). Because the disclosure in Note 5 was intended only to show the pro forma impact without the Florida operations, non-Florida related after-tax restructuring charges of $15.2 million ($23.5 million pre-tax) as well as the Merchant Services restructuring gain are included in the 2002 pro forma results (unaudited) presented in Note 5 but are excluded from operating earnings as presented in Table 26.
---------------------------------------------------------------------------------------------------------------------------
TABLE 25 - RECONCILIATION OF REPORTED EARNINGS TO OPERATING EARNINGS
---------------------------------------------------------------------------------------------------------------------------
GAIN ON SALE OF
FLORIDA OPERATIONS/
RESTRUCTURING
REPORTED AND OTHER FLORIDA OPERATING
(in thousands of dollars, except per share amounts) EARNINGS ITEMS OPERATIONS EARNINGS
---------------------------------------------------------------------------------------------------------------------------
2002
NET INTEREST INCOME $791,151 $ --- $ 9,724 $ 781,427
PROVISION FOR LOAN AND LEASE LOSSES 194,426 --- 5,186 189,240
SECURITIES GAINS 4,902 --- --- 4,902
NON-INTEREST INCOME 1,129,986 --- 13,343 1,116,643
GAIN ON SALE OF FLORIDA OPERATIONS 175,344 175,344 --- ---
MERCHANT SERVICES GAIN 24,550 24,550 --- ---
NON-INTEREST EXPENSE 1,332,504 --- 20,210 1,312,294
RESTRUCTURING CHARGES 56,184 56,184 --- ---
---------------------------------------------------------------------------------------------------------------------------
PRE-TAX INCOME 542,819 143,710 (2,329) 401,438
INCOME TAXES 209,755 107,482 (804) 103,077
---------------------------------------------------------------------------------------------------------------------------
NET INCOME $333,064 $ 36,228 $ (1,525) $ 298,361
===========================================================================================================================
NET INCOME PER COMMON SHARE -- DILUTED $ 1.36 $ 0.15 $ (0.01) $ 1.22
===========================================================================================================================
2001
Net interest income $ 746,866 $ --- $ 82,273 $ 664,593
Provision for loan and lease losses 257,326 115,199 15,121 127,006
Securities gains (losses) 723 (5,250) --- 5,973
Non-interest income 1,208,614 --- 76,992 1,131,622
Non-interest expense 1,496,639 --- 162,887 1,333,752
Restructuring charges 79,957 79,957 --- ---
---------------------------------------------------------------------------------------------------------------------------
Pre-tax income 122,281 (200,406) (18,743) 341,430
Income taxes (23,088) (102,642) (4,730) 84,284
---------------------------------------------------------------------------------------------------------------------------
Net income $ 145,369 $ (97,764) $ (14,013) $ 257,146
===========================================================================================================================
Net income per common share -- diluted $ 0.58 $ (0.39) $ (0.05) $ 1.02
===========================================================================================================================
2000
Net interest income $ 706,049 $ --- $ 92,646 $ 613,403
Provision for loan and lease losses 61,464 --- 6,907 54,557
Securities gains 37,101 --- --- 37,101
Non-interest income 1,091,701 --- 46,742 1,044,959
Non-interest expense 1,306,954 --- 129,080 1,177,874
Restructuring charges --- --- --- ---
---------------------------------------------------------------------------------------------------------------------------
Pre-tax income 466,433 --- 3,401 463,032
Income taxes 133,736 --- 994 132,742
---------------------------------------------------------------------------------------------------------------------------
Net income $ 332,697 $ --- $ 2,407 $ 330,290
===========================================================================================================================
Net income per common share -- diluted $ 1.33 --- $ 0.01 $ 1.32
===========================================================================================================================
|
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 26 - ANNUAL INCOME STATEMENTS, SELECTED BALANCE SHEET AND FINANCIAL DATA
- RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2002 2001
------------------------------------------- -----------------------------------------
---------------------------------------------------------------------------------------- -----------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
--------------------------------------------------------------------------------------- -----------------------------------------
NET INTEREST INCOME $ 791,151 $ (9,724) $ 781,427 $ 746,866 $ (82,273) $ 664,593
Provision for loan and lease losses 194,426 (5,186) 189,240 257,326 (130,320) 127,006
--------------------------------------------------------------------------------------- -----------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 596,725 (4,538) 592,187 489,540 48,047 537,587
--------------------------------------------------------------------------------------- -----------------------------------------
Operating lease income 641,785 --- 641,785 699,857 --- 699,857
Service charges on deposit accounts 152,521 (4,248) 148,273 164,052 (31,446) 132,606
Brokerage and insurance income 66,843 (6,915) 59,928 79,034 (24,608) 54,426
Trust services 62,051 (405) 61,646 60,298 (2,702) 57,596
Mortgage banking 47,989 79 48,068 59,148 (3,330) 55,818
Bank owned life insurance 46,005 --- 46,005 38,241 --- 38,241
Other service charges and fees 42,888 (1,514) 41,374 48,217 (11,290) 36,927
Gain on sale of Florida operations 175,344 (175,344) --- --- --- ---
Merchant Services gain 24,550 (24,550) --- --- --- ---
Securities gains 4,902 --- 4,902 723 5,250 5,973
Other 69,904 (340) 69,564 59,767 (3,616) 56,151
--------------------------------------------------------------------------------------- -----------------------------------------
TOTAL NON-INTEREST INCOME 1,334,782 (213,237) 1,121,545 1,209,337 (71,742) 1,137,595
--------------------------------------------------------------------------------------- -----------------------------------------
Operating lease expense 518,970 --- 518,970 558,626 --- 558,626
Personnel costs 440,760 (11,522) 429,238 478,640 (73,695) 404,945
Equipment 68,323 (1,418) 66,905 80,560 (9,997) 70,563
Outside data processing and other services 67,368 (1,342) 66,026 69,692 (10,406) 59,286
Net occupancy 60,264 (2,582) 57,682 77,184 (18,129) 59,055
Marketing 27,911 159 28,070 31,057 (4,396) 26,661
Professional services 25,777 (161) 25,616 23,879 (782) 23,097
Telecommunications 22,661 (754) 21,907 27,984 (4,693) 23,291
Printing and supplies 15,198 (330) 14,868 18,367 (3,377) 14,990
Franchise and other taxes 9,456 (2) 9,454 9,729 (60) 9,669
Amortization of intangible assets 2,019 (1,157) 862 41,225 (30,180) 11,045
Restructuring charges 56,184 (56,184) --- 79,957 (79,957) ---
Other 73,797 (1,101) 72,696 79,696 (7,172) 72,524
--------------------------------------------------------------------------------------- -----------------------------------------
TOTAL NON-INTEREST EXPENSE 1,388,688 (76,394) 1,312,294 1,576,596 (242,844) 1,333,752
--------------------------------------------------------------------------------------- -----------------------------------------
INCOME BEFORE INCOME TAXES 542,819 (141,381) 401,438 122,281 219,149 341,430
Income taxes 209,755 (106,678) 103,077 (23,088) 107,372 84,284
--------------------------------------------------------------------------------------- -----------------------------------------
NET INCOME $ 333,064 $ (34,703) $ 298,361 $ 145,369 $ 111,777 $ 257,146
======================================================================================= =========================================
PER COMMON SHARE (2)
Net income - basic $1.37 ($0.15) 1.22 $0.58 $0.44 $1.02
Net income - diluted 1.36 (0.14) 1.22 0.58 0.44 1.02
Cash dividends declared 0.64 0.00 0.64 0.72 0.00 0.72
NET INTEREST INCOME (FTE)
Net Interest Income $ 791,151 $ (9,724) 781,427 $ 746,866 $ (82,273) $ 664,593
Tax Equivalent Adjustment (3) 5,205 --- 5,205 6,352 --- 6,352
--------------------------------------------------------------------------------------- -----------------------------------------
Net Interest Income (FTE) 796,356 (9,724) 786,632 753,218 (82,273) 670,945
Non-Interest Income 1,334,782 (213,237) 1,121,545 1,209,337 (71,742) 1,137,595
--------------------------------------------------------------------------------------- -----------------------------------------
TOTAL REVENUE (FTE) $2,131,138 $(222,961) 1,908,177 $1,962,555 $(154,015) $1,808,540
======================================================================================= =========================================
KEY RATIOS AND STATISTICS
Return on average assets 1.28% (0.11)% 1.17% 0.52% 0.51% 1.03%
Return on average shareholders' equity 14.4 (1.5) 12.9 6.0 4.6 10.6
Net interest margin (FTE) 3.81 0.02 3.83 3.43 0.03 3.46
Efficiency ratio (4) 69.1 (0.2) 68.9 74.2 (0.8) 73.4
Effective tax rate 38.6 (12.9) 25.7 (18.9) 43.6 24.7
|
(1) See page 51 for definition of adjustments.
(2) 2000 adjusted for the stock dividend paid July 2000.
(3) Calculated assuming a 35% tax rate.
(4) Calculated on revenue, excluding gains, and expenses excluding amortization of intangible assets and restructuring charges.
--------------------------------------------------------------------------------------------------------------------------
TABLE 26 - ANNUAL INCOME STATEMENTS, SELECTED BALANCE SHEET AND FINANCIAL DATA
- RECONCILIATION OF REPORTED TO OPERATING BASIS
--------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000
------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating
--------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 706,049 $ (92,646) $ 613,403
Provision for loan and lease losses 61,464 (6,907) 54,557
--------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 644,585 (85,739) 558,846
--------------------------------------------------------------------------------------------------------------------------
Operating lease income 635,243 --- 635,243
Service charges on deposit accounts 160,727 (30,976) 129,751
Brokerage and insurance income 61,871 (115) 61,756
Trust services 53,613 (2,719) 50,894
Mortgage banking 38,025 --- 38,025
Bank owned life insurance 39,544 --- 39,544
Other service charges and fees 43,883 (10,900) 32,983
Gain on sale of Florida operations --- --- ---
Merchant Services gain --- --- ---
Securities gains 37,101 --- 37,101
Other 58,795 (2,032) 56,763
--------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,128,802 (46,742) 1,082,060
--------------------------------------------------------------------------------------------------------------------------
Operating lease expense 494,800 --- 494,800
Personnel costs 421,750 (51,825) 369,925
Equipment 78,069 (7,345) 70,724
Outside data processing and other services 62,011 (4,788) 57,223
Net occupancy 75,882 (17,333) 58,549
Marketing 34,884 (1,683) 33,201
Professional services 20,819 (530) 20,289
Telecommunications 26,225 (3,091) 23,134
Printing and supplies 19,634 (3,387) 16,247
Franchise and other taxes 11,077 (61) 11,016
Amortization of intangible assets 39,207 (29,256) 9,951
Restructuring charges --- --- ---
Other 22,596 (9,781) 12,815
--------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 1,306,954 (129,080) 1,177,874
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 466,433 (3,401) 463,032
Income taxes 133,736 (994) 132,742
--------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 332,697 $ (2,407) $ 330,290
==========================================================================================================================
PER COMMON SHARE (2)
Net income - basic $1.34 ($0.01) $1.33
Net income - diluted 1.33 (0.01) 1.32
Cash dividends declared 0.76 0.00 0.76
NET INTEREST INCOME (FTE)
Net Interest Income $ 706,049 $ (92,646) $ 613,403
Tax Equivalent Adjustment (3) 8,310 --- 8,310
--------------------------------------------------------------------------------------------------------------------------
Net Interest Income (FTE) 714,359 (92,646) 621,713
Non-Interest Income 1,128,802 (46,742) 1,082,060
--------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE (FTE) $1,843,161 $(139,388) $1,703,773
==========================================================================================================================
KEY RATIOS AND STATISTICS
Return on average assets 1.16 % 0.13 % 1.29 %
Return on average shareholders' equity 14.3 (0.1) 14.2
Net interest margin (FTE) 3.15 (0.08) 3.07
Efficiency ratio (4) 69.8 (0.2) 69.6
Effective tax rate 28.7 0.0 28.7
|
(1) See page 51 for definition of adjustments.
(2) 2000 adjusted for the stock dividend paid July 2000.
(3) Calculated assuming a 35% tax rate.
(4) Calculated on revenue, excluding gains, and expenses excluding amortization of intangible assets and restructuring charges.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE
--------------------------------------
2002
------------------------------------
(in millions of dollars)
------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 33 $ --- $ 33
Trading account securities 7 --- 7
Federal funds sold and securities purchased
under resale agreements 72 --- 72
Mortgages held for sale 322 --- 322
Securities: (3) ---
Taxable 2,859 --- 2,859
Tax exempt 135 --- 135
------------------------------------------------------------------------------------------------------------
Total Securities 2,994 --- 2,994
------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 5,676 94 5,582
Real estate
Construction (4) 1,217 13 1,204
Commercial 2,379 41 2,338
Consumer
Automobile loans and leases 3,233 42 3,191
Home equity 3,087 104 2,983
Residential mortgage (4) 1,444 29 1,415
Other loans 425 15 410
------------------------------------------------------------------------------------------------------------
Total consumer 8,189 190 7,999
------------------------------------------------------------------------------------------------------------
Total loans and leases 17,461 338 17,123
------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 374 2 372
------------------------------------------------------------------------------------------------------------
Net loans and leases 17,087 336 16,751
------------------------------------------------------------------------------------------------------------
Total earning assets/interest income/average rates 20,889 338 20,551
------------------------------------------------------------------------------------------------------------
Operating lease assets 2,662 --- 2,662
Cash and due from banks 757 12 745
Intangible assets 293 86 207
All other assets 1,813 3 1,810
------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $26,040 $ 437 $25,603
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 2,902 $ 75 $ 2,827
Interest bearing demand deposits 5,161 193 4,968
Savings deposits 2,853 66 2,787
Other domestic time deposits 4,349 228 4,121
------------------------------------------------------------------------------------------------------------
Total core deposits 15,265 562 14,703
------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 851 21 830
Brokered time deposits and negotiable CDs 731 --- 731
Foreign time deposits 337 --- 337
------------------------------------------------------------------------------------------------------------
Total deposits 17,184 583 16,601
------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,128 18 2,110
Medium-term notes 1,865 (167) 2,032
Federal Home Loan Bank advances 279 --- 279
Subordinated notes and other long-term debt,
including preferred capital securities 1,198 --- 1,198
------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rate 19,752 359 19,393
------------------------------------------------------------------------------------------------------------
All other liabilities 1,077 3 1,074
Shareholders' equity 2,309 --- 2,309
------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,040 $ 437 $25,603
============================================================================================================
|
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate - Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable derivatives.
Note: Individual loan and leases components include fees and cash basis interest received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
Average Balance
-------------------------------------
2001
-------------------------------------
(in millions of dollars)
--------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
--------------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 7 $ --- $ 7
Trading account securities 25 --- 25
Federal funds sold and securities purchased
under resale agreements 107 --- 107
Mortgages held for sale 360 --- 360
Securities: (3) ---
Taxable 3,144 --- 3,144
Tax exempt 174 --- 174
--------------------------------------------------------------------------------------------------------------
Total Securities 3,318 --- 3,318
--------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 6,647 747 5,900
Real estate
Construction (4) 1,221 109 1,112
Commercial 2,340 306 2,034
Consumer
Automobile loans and leases 2,867 325 2,542
Home equity 3,399 713 2,686
Residential mortgage (4) 1,052 239 813
Other loans 589 114 475
--------------------------------------------------------------------------------------------------------------
Total consumer 7,907 1,391 6,516
--------------------------------------------------------------------------------------------------------------
Total loans and leases 18,115 2,553 15,562
--------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 306 34 272
--------------------------------------------------------------------------------------------------------------
Net loans and leases 17,809 2,519 15,290
--------------------------------------------------------------------------------------------------------------
Total earning assets/interest income/average rates 21,932 2,553 19,379
--------------------------------------------------------------------------------------------------------------
Operating lease assets 3,031 --- 3,031
Cash and due from banks 912 81 831
Intangible assets 736 540 196
All other assets 1,879 73 1,806
--------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $28,184 $ 3,213 $24,971
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 3,304 $ 581 $ 2,723
Interest bearing demand deposits 5,005 1,386 3,619
Savings deposits 3,478 552 2,926
Other domestic time deposits 5,883 1,813 4,070
--------------------------------------------------------------------------------------------------------------
Total core deposits 17,670 4,332 13,338
--------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 1,280 209 1,071
Brokered time deposits and negotiable CDs 128 --- 128
Foreign time deposits 283 6 277
--------------------------------------------------------------------------------------------------------------
Total deposits 19,361 4,547 14,814
--------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,325 137 2,188
Medium-term notes 2,024 (1,471) 3,495
Federal Home Loan Bank advances 19 --- 19
Subordinated notes and other long-term debt,
including preferred capital securities 1,161 --- 1,161
--------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rate 21,586 2,632 18,954
--------------------------------------------------------------------------------------------------------------
All other liabilities 879 --- 879
Shareholders' equity 2,415 --- 2,415
--------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,184 $ 3,213 $24,971
==============================================================================================================
|
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate - Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable derivatives.
Note: Individual loan and leases components include fees and cash basis interest received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
Average Balance
------------------------------------
2000
------------------------------------
(in millions of dollars)
----------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
----------------------------------------------------------------------------------------------------------
ASSETS
Interest bearing deposits in banks $ 6 $ --- $ 6
Trading account securities 15 --- 15
Federal funds sold and securities purchased
under resale agreements 87 --- 87
Mortgages held for sale 109 --- 109
Securities: (3) ---
Taxable 4,316 --- 4,316
Tax exempt 273 --- 273
----------------------------------------------------------------------------------------------------------
Total Securities 4,589 --- 4,589
----------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 6,446 647 5,799
Real estate
Construction (4) 1,184 227 957
Commercial 2,187 286 1,901
Consumer
Automobile loans and leases 3,153 210 2,943
Home equity 2,991 552 2,439
Residential mortgage (4) 1,382 377 1,005
Other loans 528 69 459
----------------------------------------------------------------------------------------------------------
Total consumer 8,054 1,208 6,846
----------------------------------------------------------------------------------------------------------
Total loans and leases 17,871 2,368 15,503
----------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses 274 (20) 294
----------------------------------------------------------------------------------------------------------
Net loans and leases 17,597 2,388 15,209
----------------------------------------------------------------------------------------------------------
Total earning assets/interest income/average rates 22,677 2,368 20,309
----------------------------------------------------------------------------------------------------------
Operating lease assets 2,799 --- 2,799
Cash and due from banks 1,008 182 826
Intangible assets 709 557 152
All other assets 1,834 26 1,808
----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 28,753 $ 3,153 $25,600
==========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 3,421 $ 600 $ 2,821
Interest bearing demand deposits 4,291 1,194 3,097
Savings deposits 3,563 576 2,987
Other domestic time deposits 5,872 1,734 4,138
----------------------------------------------------------------------------------------------------------
Total core deposits 17,147 4,104 13,043
----------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 1,502 209 1,293
Brokered time deposits and negotiable CDs 502 --- 502
Foreign time deposits 539 3 536
----------------------------------------------------------------------------------------------------------
Total deposits 19,690 4,316 15,374
----------------------------------------------------------------------------------------------------------
Short-term borrowings 1,966 102 1,864
Medium-term notes 2,894 (1,269) 4,163
Federal Home Loan Bank advances 13 --- 13
Subordinated notes and other long-term debt,
including preferred capital securities 1,111 --- 1,111
----------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rate 22,253 2,549 19,704
----------------------------------------------------------------------------------------------------------
All other liabilities 752 4 748
Shareholders' equity 2,327 --- 2,327
----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,753 $ 3,153 $25,600
==========================================================================================================
|
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate - Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable derivatives.
Note: Individual loan and leases components include fees and cash basis interest received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME/EXPENSE
----------------------------------
2002
----------------------------------
(in millions of dollars)
-----------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust.(1) Operating
-----------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks $ 0.8 $ --- $ 0.8
Trading account securities 0.3 --- 0.3
Federal funds sold and securities purchased
under resale agreements 1.1 --- 1.1
Mortgages held for sale 20.5 --- 20.5
Securities: (3) ---
Taxable 173.0 --- 173.0
Tax exempt 10.1 --- 10.1
-----------------------------------------------------------------------------------------------------------
Total Securities 183.1 --- 183.1
-----------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 328.8 5.8 323.0
Real estate
Construction (4) 58.3 0.7 57.6
Commercial 150.5 2.6 147.9
Consumer
Automobile loans and leases 289.1 3.8 285.3
Home equity 188.3 8.2 180.1
Residential mortgage (4) 87.3 2.0 85.3
Other loans 36.1 1.3 34.8
-----------------------------------------------------------------------------------------------------------
Total consumer 600.8 15.3 585.5
-----------------------------------------------------------------------------------------------------------
Total loans and leases 1,138.4 24.4 1,114.0
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 1,344.2 24.4 1,319.8
-----------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits --- --- ---
Interest bearing demand deposits 90.1 3.6 86.5
Savings deposits 51.7 1.4 50.3
Other domestic time deposits 197.1 11.4 185.7
-----------------------------------------------------------------------------------------------------------
Total core deposits 338.9 16.4 322.5
-----------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 28.8 1.0 27.8
Brokered time deposits and negotiable CDs 17.3 --- 17.3
Foreign time deposits 4.9 --- 4.9
-----------------------------------------------------------------------------------------------------------
Total deposits 389.9 17.4 372.5
-----------------------------------------------------------------------------------------------------------
Short-term borrowings 42.7 0.2 42.5
Medium-term notes 61.7 (3.0) 64.7
Federal Home Loan Bank advances 5.6 --- 5.6
Subordinated notes and other long-term debt,
including preferred capital securities 47.9 0.1 47.8
-----------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 547.8 14.7 533.1
-----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $796.4 $ 9.7 $786.7
==========================================================================================================
|
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate - Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable derivatives.
Note: Individual loan and leases components include fees and cash basis interest received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME/EXPENSE
-----------------------------------
2001
-----------------------------------
(in millions of dollars)
---------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) g Reported Adjust.(1) Operating
---------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks $ 0.2 $ --- $ 0.2
Trading account securities 1.3 --- 1.3
Federal funds sold and securities purchased
under resale agreements 4.4 --- 4.4
Mortgages held for sale 25.0 --- 25.0
Securities: (3) ---
Taxable 206.9 --- 206.9
Tax exempt 13.0 --- 13.0
---------------------------------------------------------------------------------------------------------------
Total Securities 219.9 --- 219.9
---------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 493.2 57.7 435.5
Real estate
Construction (4) 88.6 8.3 80.3
Commercial 180.4 22.4 158.0
Consumer
Automobile loans and leases 261.4 25.0 236.4
Home equity 286.8 62.4 224.4
Residential mortgage (4) 79.5 18.3 61.2
Other loans 55.8 11.0 44.8
---------------------------------------------------------------------------------------------------------------
Total consumer 683.5 116.7 566.8
---------------------------------------------------------------------------------------------------------------
Total loans and leases 1,445.7 205.1 1,240.6
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 1,696.5 205.1 1,491.4
---------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits --- --- ---
Interest bearing demand deposits 134.6 38.4 96.2
Savings deposits 107.7 16.5 91.2
Other domestic time deposits 331.4 102.2 229.2
---------------------------------------------------------------------------------------------------------------
Total core deposits 573.7 157.1 416.6
---------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 66.8 11.7 55.1
Brokered time deposits and negotiable CDs 6.6 --- 6.6
Foreign time deposits 10.8 0.2 10.6
---------------------------------------------------------------------------------------------------------------
Total deposits 657.9 169.0 488.9
---------------------------------------------------------------------------------------------------------------
Short-term borrowings 95.8 4.4 91.4
Medium-term notes 121.7 (50.5) 172.2
Federal Home Loan Bank advances 1.2 --- 1.2
Subordinated notes and other long-term debt,
including preferred capital securities 66.7 --- 66.7
---------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 943.3 122.9 820.4
---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $753.2 $ 82.2 $671.0
===============================================================================================================
|
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate - Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable derivatives.
Note: Individual loan and leases components include fees and cash basis interest received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME/EXPENSE
----------------------------------
2000
---------------------------------
(in millions of dollars)
-----------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust.(1) Operating
-----------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks $ 0.3 $ --- $ 0.3
Trading account securities 1.1 --- 1.1
Federal funds sold and securities purchased
under resale agreements 5.5 --- 5.5
Mortgages held for sale 8.7 --- 8.7
Securities: (3) ---
Taxable 269.5 --- 269.5
Tax exempt 20.8 --- 20.8
----------------------------------------------------------------------------------------------------------
Total Securities 290.3 --- 290.3
----------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 572.8 61.0 511.8
Real estate
Construction (4) 108.2 18.4 89.8
Commercial 186.7 23.3 163.4
Consumer
Automobile loans and leases 278.5 14.3 264.2
Home equity 261.1 44.5 216.6
Residential mortgage (4) 106.1 24.3 81.8
Other loans 61.1 0.3 60.8
----------------------------------------------------------------------------------------------------------
Total consumer 706.8 83.4 623.4
----------------------------------------------------------------------------------------------------------
Total loans and leases 1,574.5 186.1 1,388.4
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 1,880.4 186.1 1,694.3
----------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits --- --- ---
Interest bearing demand deposits 144.0 42.3 101.7
Savings deposits 146.4 22.7 123.7
Other domestic time deposits 335.4 98.3 237.1
----------------------------------------------------------------------------------------------------------
Total core deposits 625.8 163.3 462.5
----------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 90.4 12.4 78.0
Brokered time deposits and negotiable CDs 31.9 --- 31.9
Foreign time deposits 34.0 0.2 33.8
----------------------------------------------------------------------------------------------------------
Total deposits 782.1 175.9 606.2
----------------------------------------------------------------------------------------------------------
Short-term borrowings 113.1 5.4 107.7
Medium-term notes 189.3 (87.8) 277.1
Federal Home Loan Bank advances 0.8 --- 0.8
Subordinated notes and other long-term debt,
including preferred capital securities 80.7 --- 80.7
----------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 1,166.0 93.5 1,072.5
----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $714.4 $ 92.6 $621.8
==========================================================================================================
|
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate - Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable derivatives.
Note: Individual loan and leases components include fees and cash basis interest received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE RATE (5)
----------------------------------------
2002
---------------------------------------
(in millions of dollars)
--------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
--------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks 2.38 % --- % 2.38 %
Trading account securities 4.11 --- 4.11
Federal funds sold and securities purchased
under resale agreements 1.56 --- 1.56
Mortgages held for sale 6.35 --- 6.35
Securities: (3)
Taxable 6.06 --- 6.06
Tax exempt 7.42 --- 7.42
--------------------------------------------------------------------------------------------------------------
Total Securities 6.12 --- 6.12
--------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 5.79 --- 5.79
Real estate
Construction (4) 4.79 0.01 4.78
Commercial 6.33 --- 6.33
Consumer
Automobile loans and leases 8.94 --- 8.94
Home equity 6.10 0.06 6.04
Residential mortgage (4) 6.05 0.02 6.03
Other loans 8.49 0.03 8.46
--------------------------------------------------------------------------------------------------------------
Total consumer 7.34 0.02 7.32
--------------------------------------------------------------------------------------------------------------
Total loans and leases 6.52 0.01 6.51
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 6.43 % 0.01 % 6.42 %
--------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 1.75 % 0.01 % 1.74 %
Savings deposits 1.81 --- 1.81
Other domestic time deposits 4.53 0.02 4.51
--------------------------------------------------------------------------------------------------------------
Total core deposits 2.74 0.02 2.72
--------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 3.39 0.04 3.35
Brokered time deposits and negotiable CDs 2.36 --- 2.36
Foreign time deposits 1.47 --- 1.47
--------------------------------------------------------------------------------------------------------------
Total deposits 2.73 0.02 2.71
--------------------------------------------------------------------------------------------------------------
Short-term borrowings 2.01 --- 2.01
Medium-term notes 3.31 0.13 3.18
Federal Home Loan Bank advances 2.00 --- 2.00
Subordinated notes and other long-term debt,
including preferred capital securities 4.00 --- 4.00
--------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 2.77 % 0.02 % 2.75 %
--------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.66 % (0.01)% 3.67 %
Impact of non-interest bearing funds on margin 0.15 (0.01) 0.16
--------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.81 % (0.02)% 3.83 %
==============================================================================================================
|
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate - Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable derivatives.
Note: Individual loan and leases components include fees and cash basis interest received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE RATE (5)
---------------------------------------
2001
---------------------------------------
(in millions of dollars)
--------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
--------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks 3.43 % --- % 3.43 %
Trading account securities 5.13 --- 5.13
Federal funds sold and securities purchased
under resale agreements 4.19 --- 4.19
Mortgages held for sale 6.95 --- 6.95
Securities: (3)
Taxable 6.58 --- 6.58
Tax exempt 7.49 --- 7.49
--------------------------------------------------------------------------------------------------------------
Total Securities 6.63 --- 6.63
--------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 7.42 0.04 7.38
Real estate
Construction (4) 7.25 0.03 7.22
Commercial 7.71 (0.06) 7.77
Consumer
Automobile loans and leases 9.12 (0.18) 9.30
Home equity 8.44 0.09 8.35
Residential mortgage (4) 7.55 0.02 7.53
Other loans 9.47 0.05 9.42
--------------------------------------------------------------------------------------------------------------
Total consumer 8.64 (0.06) 8.70
--------------------------------------------------------------------------------------------------------------
Total loans and leases 7.98 0.01 7.97
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 7.74 % 0.04 % 7.70 %
--------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 2.69 % 0.03 % 2.66 %
Savings deposits 3.10 (0.02) 3.12
Other domestic time deposits 5.63 --- 5.63
--------------------------------------------------------------------------------------------------------------
Total core deposits 3.99 0.07 3.92
--------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 5.22 0.07 5.15
Brokered time deposits and negotiable CDs 5.12 --- 5.12
Foreign time deposits 3.82 (0.01) 3.83
--------------------------------------------------------------------------------------------------------------
Total deposits 4.10 0.06 4.04
--------------------------------------------------------------------------------------------------------------
Short-term borrowings 4.12 (0.06) 4.18
Medium-term notes 6.01 1.08 4.93
Federal Home Loan Bank advances 6.17 --- 6.17
Subordinated notes and other long-term debt,
including preferred capital securities 5.75 --- 5.75
--------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 4.37 % 0.04 % 4.33 %
--------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.37 % --- % 3.37 %
Impact of non-interest bearing funds on margin 0.06 (0.03) 0.09
--------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.43 % (0.03)% 3.46 %
==============================================================================================================
|
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate - Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable derivatives.
Note: Individual loan and leases components include fees and cash basis interest received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 27 - CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE RATE (5)
-----------------------------------------
2000
-----------------------------------------
(in millions of dollars)
----------------------------------------------------------------------------------------------------------------
Fully Taxable Equivalent Basis (2) Reported Adjust. (1) Operating
----------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest bearing deposits in banks 5.03 % --- % 5.03 %
Trading account securities 7.11 --- 7.11
Federal funds sold and securities purchased
under resale agreements 6.33 --- 6.33
Mortgages held for sale 7.96 --- 7.96
Securities: (3)
Taxable 6.24 --- 6.24
Tax exempt 7.61 --- 7.61
----------------------------------------------------------------------------------------------------------------
Total Securities 6.33 --- 6.33
----------------------------------------------------------------------------------------------------------------
Loans and leases:
Commercial loans 8.89 0.06 8.83
Real estate
Construction (4) 9.14 (0.25) 9.39
Commercial 8.53 (0.07) 8.60
Consumer
Automobile loans and leases 8.83 (0.15) 8.98
Home equity 8.73 (0.15) 8.88
Residential mortgage (4) 7.68 (0.46) 8.14
Other loans 11.57 (1.56) 13.13
----------------------------------------------------------------------------------------------------------------
Total consumer 8.78 (0.33) 9.11
----------------------------------------------------------------------------------------------------------------
Total loans and leases 8.81 (0.15) 8.96
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Total earning assets / interest income / average rates 8.29 % (0.05)% 8.34 %
----------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Core deposits
Non-interest bearing deposits
Interest bearing demand deposits 3.36 % 0.08 % 3.28 %
Savings deposits 4.11 (0.03) 4.14
Other domestic time deposits 5.71 (0.02) 5.73
----------------------------------------------------------------------------------------------------------------
Total core deposits 4.56 0.03 4.53
----------------------------------------------------------------------------------------------------------------
Domestic time deposits of $100,000 or more 6.01 (0.02) 6.03
Brokered time deposits and negotiable CDs 6.35 --- 6.35
Foreign time deposits 6.31 --- 6.31
----------------------------------------------------------------------------------------------------------------
Total deposits 4.81 (0.02) 4.83
----------------------------------------------------------------------------------------------------------------
Short-term borrowings 5.75 (0.03) 5.78
Medium-term notes 6.54 (0.12) 6.66
Federal Home Loan Bank advances 6.32 --- 6.32
Subordinated notes and other long-term debt,
including preferred capital securities 7.27 --- 7.27
----------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities/interest expense/average rates 5.24 % (0.20)% 5.44 %
----------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.05 % 0.15 % 2.90 %
Impact of non-interest bearing funds on margin 0.10 (0.07) 0.17
----------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.15 % 0.08 % 3.07 %
================================================================================================================
|
(1) See page 51 for definition of adjustments.
(2) Fully taxable equivalent yields are calculated assuming a 35% tax rate.
(3) Average rates computed using historical cost average balances and do not give effect to changes in fair value of securities available for sale.
(4) Residential construction loans have been reclassified from Real estate - Construction to Residential mortgage loans.
(5) Loan, lease, and deposit average rates include the impact of applicable derivatives.
Note: Individual loan and leases components include fees and cash basis interest received on non-accrual loans.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 28 - SELECTED QUARTERLY INCOME STATEMENTS
- RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
------------------------------------- ------------------------------------
2002 FOURTH QUARTER 2002 THIRD QUARTER
-------------------------------------------------------------------------------------------- ------------------------------------
(in thousands, except per share amounts) Reported Adjust.(1) Operating Reported Adjust.(1) Operating
-------------------------------------------------------------------------------------------- ------------------------------------
NET INTEREST INCOME $ 210,255 $ --- $ 210,255 $ 205,484 $ --- $ 205,484
Provision for loan and lease losses 51,236 --- 51,236 54,304 --- 54,304
-------------------------------------------------------------------------------------------- ------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 159,019 --- 159,019 151,180 --- 151,180
-------------------------------------------------------------------------------------------- ------------------------------------
Operating lease income 143,465 --- 143,465 154,367 154,367
Service charges on deposit accounts 41,177 --- 41,177 37,460 --- 37,460
Brokerage and insurance 16,431 --- 16,431 13,943 --- 13,943
Trust services 15,306 --- 15,306 14,997 --- 14,997
Bank owned life insurance 11,443 --- 11,443 11,443 --- 11,443
Mortgage banking 11,410 --- 11,410 6,289 --- 6,289
Other service charges and fees 10,890 --- 10,890 10,837 --- 10,837
Gain on sale of Florida operations --- --- --- --- --- ---
Merchant Services gain --- --- --- 24,550 24,550 ---
Securities gains (losses) 2,339 --- 2,339 1,140 --- 1,140
Other 19,130 --- 19,130 21,044 --- 21,044
-------------------------------------------------------------------------------------------- ------------------------------------
TOTAL NON-INTEREST INCOME 271,591 --- 271,591 296,070 24,550 271,520
-------------------------------------------------------------------------------------------- ------------------------------------
Operating lease expense 120,747 --- 120,747 125,743 --- 125,743
Personnel costs 113,852 --- 113,852 107,477 --- 107,477
Equipment 17,337 --- 17,337 17,378 --- 17,378
Outside data processing and other services 17,209 --- 17,209 15,128 --- 15,128
Net occupancy 13,454 --- 13,454 14,815 --- 14,815
Professional services 8,026 --- 8,026 6,083 --- 6,083
Marketing 6,186 --- 6,186 7,491 --- 7,491
Telecommunications 5,714 --- 5,714 5,609 --- 5,609
Printing and supplies 3,999 --- 3,999 3,679 --- 3,679
Franchise and other taxes 2,532 --- 2,532 2,283 --- 2,283
Amortization of intangible assets 204 --- 204 204 --- 204
Restructuring Charges --- --- --- --- --- ---
Other 22,269 --- 22,269 16,563 --- 16,563
-------------------------------------------------------------------------------------------- ------------------------------------
TOTAL NON-INTEREST EXPENSE 331,529 --- 331,529 322,453 --- 322,453
-------------------------------------------------------------------------------------------- ------------------------------------
INCOME BEFORE INCOME TAXES 99,081 --- 99,081 124,797 24,550 100,247
Income taxes 24,687 --- 24,687 33,193 8,593 24,600
-------------------------------------------------------------------------------------------- ------------------------------------
NET INCOME $ 74,394 $ --- $ 74,394 $ 91,604 $ 15,957 $ 75,647
============================================================================================ ====================================
NET INCOME PER COMMON SHARE -- DILUTED $ 0.32 $ --- $ 0.32 $ 0.38 $ 0.07 $ 0.31
DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ --- $ 0.16 $ 0.16 $ --- $ 0.16
Return on average assets 1.10% 0.00% 1.10% 1.41% 0.25% 1.16%
Return on average shareholders' equity 13.2% 0.00% 13.2% 15.9% 2.70% 13.2%
Net interest margin 3.83% 0.00% 3.83% 3.98% 0.00% 3.98%
Efficiency ratio 68.8% 0.00% 68.8% 67.6% 0.00% 67.6%
Effective tax rate 24.9% 0.00% 24.9% 26.6% 2.06% 24.5%
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 210,255 $ --- $ 210,255 $ 205,484 $ --- $ 205,484
Tax Equivalent Adjustment (2) 1,869 --- 1,869 1,096 --- 1,096
-------------------------------------------------------------------------------------------- ------------------------------------
NET INTEREST INCOME - FTE $ 212,124 $ --- $ 212,124 $ 206,580 $ --- $ 206,580
============================================================================================ ====================================
|
(1) See page 51 for definition of adjustments.
(2) Calculated assuming a 35% tax rate.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 28 - SELECTED QUARTERLY INCOME STATEMENTS
- RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
------------------------------------- -------------------------------------
2002 SECOND QUARTER 2002 FIRST QUARTER
----------------------------------------------------- ------------------------------------- -------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
----------------------------------------------------- ------------------------------------- -------------------------------------
NET INTEREST INCOME $ 190,981 $ --- $ 190,981 $ 184,431 $ 9,724 $ 174,707
Provision for loan and lease losses 49,876 --- 49,876 39,010 5,186 33,824
----------------------------------------------------- ------------------------------------- -------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 141,105 --- 141,105 145,421 4,538 140,883
----------------------------------------------------- ------------------------------------- -------------------------------------
Operating lease income 168,047 --- 168,047 175,906 --- 175,906
Service charges on deposit accounts 35,354 --- 35,354 38,530 4,248 34,282
Brokerage and insurance 17,677 2,710 14,967 18,792 4,205 14,587
Trust services 16,247 --- 16,247 15,501 405 15,096
Bank owned life insurance 11,443 --- 11,443 11,676 --- 11,676
Mortgage banking 10,725 --- 10,725 19,565 (79) 19,644
Other service charges and fees 10,529 --- 10,529 10,632 1,514 9,118
Gain on sale of Florida operations --- --- --- 175,344 175,344 ---
Merchant Services gain --- --- --- --- --- ---
Securities gains (losses) 966 --- 966 457 --- 457
Other 17,033 --- 17,033 12,697 340 12,357
----------------------------------------------------- ------------------------------------- -------------------------------------
TOTAL NON-INTEREST INCOME 288,021 2,710 285,311 479,100 185,977 293,123
----------------------------------------------------- ------------------------------------- -------------------------------------
Operating lease expense 131,695 --- 131,695 140,785 --- 140,785
Personnel costs 105,146 1,557 103,589 114,285 9,965 104,320
Equipment 16,659 51 16,608 16,949 1,367 15,582
Outside data processing and other services 16,592 --- 16,592 18,439 1,342 17,097
Net occupancy 14,756 114 14,642 17,239 2,468 14,771
Professional services 6,267 2 6,265 5,401 159 5,242
Marketing 7,231 12 7,219 7,003 (171) 7,174
Telecommunications 5,320 18 5,302 6,018 736 5,282
Printing and supplies 3,683 12 3,671 3,837 318 3,519
Franchise and other taxes 2,313 --- 2,313 2,328 2 2,326
Amortization of intangible assets 235 32 203 1,376 1,125 251
Restructuring Charges --- --- --- 56,184 56,184 ---
Other 18,135 77 18,058 16,830 1,024 15,806
----------------------------------------------------- ------------------------------------- -------------------------------------
TOTAL NON-INTEREST EXPENSE 328,032 1,875 326,157 406,674 74,519 332,155
----------------------------------------------------- ------------------------------------- -------------------------------------
INCOME BEFORE INCOME TAXES 101,094 835 100,259 217,847 115,996 101,851
Income taxes 27,169 303 26,866 124,706 97,782 26,924
----------------------------------------------------- ------------------------------------- -------------------------------------
NET INCOME $ 73,925 $ 532 $ 73,393 $ 93,141 $ 18,214 $ 74,927
===================================================== ===================================== =====================================
NET INCOME PER COMMON SHARE -- DILUTED $ 0.30 $ --- $ 0.30 $ 0.37 $ 0.07 $ 0.30
DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ --- $ 0.16 $ 0.16 $ --- $ 0.16
Return on average assets 1.19% 0.01% 1.18% 1.42% 0.20% 1.22%
Return on average shareholders' equity 12.6% 0.10% 12.5% 15.8% 3.10% 12.7%
Net interest margin 3.91% 0.00% 3.91% 3.63% -0.05% 3.68%
Efficiency ratio 68.4% 0.00% 68.4% 71.4% 0.60% 70.8%
Effective tax rate 26.9% 0.08% 26.8% 57.2% 30.81% 26.4%
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 190,981 $ --- $ 190,981 $ 184,431 $ 9,724 $ 174,707
Tax Equivalent Adjustment (2) 1,071 --- 1,071 1,169 --- 1,169
----------------------------------------------------- ------------------------------------- -------------------------------------
NET INTEREST INCOME - FTE $ 192,052 $ --- $ 192,052 $ 185,600 $ 9,724 $ 175,876
===================================================== ===================================== =====================================
|
(1) See page 51 for definition of adjustments.
(2) Calculated assuming a 35% tax rate.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 28 - SELECTED QUARTERLY INCOME STATEMENTS
- RECONCILIATION OF REPORTED TO OPERATING BASIS
-----------------------------------------------------------------------------------------------------------------------------------
------------------------------------- ------------------------------------
2001 FOURTH QUARTER 2001 THIRD QUARTER
---------------------------------------------------- ------------------------------------- ------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
---------------------------------------------------- ------------------------------------- ------------------------------------
NET INTEREST INCOME $ 196,294 $ 19,692 $ 176,602 $ 186,866 $ 19,325 $ 167,541
Provision for loan and lease losses 101,075 53,994 47,081 34,053 3,532 30,521
---------------------------------------------------- ------------------------------------- ------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 95,219 (34,302) 129,521 152,813 15,793 137,020
---------------------------------------------------- ------------------------------------- ------------------------------------
Operating lease income 180,382 --- 180,382 183,642 --- 183,642
Service charges on deposit accounts 42,753 7,533 35,220 41,719 8,126 33,593
Brokerage and insurance 20,966 5,900 15,066 19,912 5,969 13,943
Trust services 15,321 642 14,679 15,485 669 14,816
Bank owned life insurance 9,560 --- 9,560 9,560 --- 9,560
Mortgage banking 15,768 719 15,049 14,616 757 13,859
Other service charges and fees 12,552 2,970 9,582 12,350 2,803 9,547
Gain on sale of Florida operations --- --- --- --- --- ---
Merchant Services gain --- --- --- --- --- ---
Securities gains (losses) 89 --- 89 1,059 --- 1,059
Other 16,088 953 15,135 15,755 1,033 14,722
---------------------------------------------------- ------------------------------------- ------------------------------------
TOTAL NON-INTEREST INCOME 313,479 18,717 294,762 314,098 19,357 294,741
---------------------------------------------------- ------------------------------------- ------------------------------------
Operating lease expense 140,575 --- 140,575 138,538 --- 138,538
Personnel costs 118,143 18,067 100,076 120,767 18,901 101,866
Equipment 20,593 2,476 18,117 20,151 2,571 17,580
Outside data processing and other services 17,992 2,578 15,414 17,375 2,725 14,650
Net occupancy 19,950 4,699 15,251 19,266 4,785 14,481
Professional services 6,235 166 6,069 5,912 158 5,754
Marketing 6,345 1,040 5,305 6,921 1,204 5,717
Telecommunications 6,793 1,146 5,647 6,859 1,131 5,728
Printing and supplies 4,293 782 3,511 4,450 757 3,693
Franchise and other taxes 2,893 8 2,885 2,470 31 2,439
Amortization of intangible assets 10,100 7,545 2,555 10,114 7,545 2,569
Restructuring Charges 15,143 15,143 --- 50,817 50,817 ---
Other 15,580 1,418 14,162 25,145 2,028 23,117
---------------------------------------------------- ------------------------------------- ------------------------------------
TOTAL NON-INTEREST EXPENSE 384,635 55,068 329,567 428,785 92,653 336,132
---------------------------------------------------- ------------------------------------- ------------------------------------
INCOME BEFORE INCOME TAXES 24,063 (70,653) 94,716 38,126 (57,503) 95,629
Income taxes (32,810) (56,717) 23,907 3,850 (19,239) 23,089
---------------------------------------------------- ------------------------------------- ------------------------------------
NET INCOME $ 56,873 $ (13,936) $ 70,809 $ 34,276 $ (38,264) $ 72,540
==================================================== ===================================== ====================================
NET INCOME PER COMMON SHARE -- DILUTED $ 0.23 $ (0.05) $ 0.28 $ 0.14 $ (0.15) $ 0.29
DIVIDENDS DECLARED PER COMMON SHARE $ 0.16 $ --- $ 0.16 $ 0.16 $ --- $ 0.16
Return on average assets 0.81% -0.33% 1.14% 0.49% -0.67% 1.16%
Return on average shareholders' equity 9.5% -2.30% 11.8% 5.7% -6.30% 12.0%
Net interest margin 3.62% -0.11% 3.73% 3.47% -0.06% 3.53%
Efficiency ratio 70.3% 1.10% 69.2% 73.4% 1.30% 72.1%
Effective tax rate -136.4% -161.59% 25.2% 10.1% -14.05% 24.1%
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 196,294 $ 19,692 $ 176,602 $ 186,866 $ 19,325 $ 167,541
Tax Equivalent Adjustment (2) 1,292 --- 1,292 1,442 --- 1,442
---------------------------------------------------- ------------------------------------- ------------------------------------
NET INTEREST INCOME - FTE $ 197,586 $ 19,692 $ 177,894 $ 188,308 $ 19,325 $ 168,983
==================================================== ===================================== ====================================
|
(1) See page 51 for definition of adjustments.
(2) Calculated assuming a 35% tax rate.
-----------------------------------------------------------------------------------------------------------------------------------
TABLE 28 - SELECTED QUARTERLY INCOME STATEMENTS
- RECONCILIATION OF REPORTED TO OPERATING BASIS
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------ -------------------------------------
2001 SECOND QUARTER 2001 FIRST QUARTER
---------------------------------------------------- ------------------------------------ -------------------------------------
(in thousands, except per share amounts) Reported Adjust. (1) Operating Reported Adjust. (1) Operating
---------------------------------------------------- ------------------------------------ -------------------------------------
NET INTEREST INCOME $ 185,080 $ 22,150 $ 162,930 $ 178,626 $ 21,106 $ 157,520
Provision for loan and lease losses 99,444 69,039 30,405 22,754 3,755 18,999
---------------------------------------------------- ------------------------------------ -------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 85,636 (46,889) 132,525 155,872 17,351 138,521
---------------------------------------------------- ----------------------------------- -------------------------------------
Operating lease income 176,418 --- 176,418 159,415 --- 159,415
Service charges on deposit accounts 40,673 8,023 32,650 38,907 7,764 31,143
Brokerage and insurance 19,388 6,203 13,185 18,768 6,536 12,232
Trust services 15,178 747 14,431 14,314 644 13,670
Bank owned life insurance 9,561 --- 9,561 9,560 --- 9,560
Mortgage banking 18,733 1,061 17,672 10,031 793 9,238
Other service charges and fees 12,217 2,834 9,383 11,098 2,683 8,415
Gain on sale of Florida operations --- --- --- --- --- ---
Merchant Services gain --- --- --- --- --- ---
Securities gains (losses) (2,503) (5,250) 2,747 2,078 --- 2,078
Other 14,956 977 13,979 12,968 653 12,315
---------------------------------------------------- ------------------------------------ -------------------------------------
TOTAL NON-INTEREST INCOME 304,621 14,595 290,026 277,139 19,073 258,066
---------------------------------------------------- ------------------------------------ -------------------------------------
Operating lease expense 158,437 --- 158,437 121,076 --- 121,076
Personnel costs 122,068 18,361 103,707 117,662 18,366 99,296
Equipment 19,844 2,481 17,363 19,972 2,469 17,503
Outside data processing and other services 17,671 2,571 15,100 16,654 2,532 14,122
Net occupancy 18,188 4,433 13,755 19,780 4,212 15,568
Professional services 6,763 282 6,481 4,969 176 4,793
Marketing 7,852 1,045 6,807 9,939 1,107 8,832
Telecommunications 7,207 1,243 5,964 7,125 1,173 5,952
Printing and supplies 4,565 877 3,688 5,059 961 4,098
Franchise and other taxes 2,246 17 2,229 2,120 4 2,116
Amortization of intangible assets 10,435 7,545 2,890 10,576 7,545 3,031
Restructuring Charges 13,997 13,997 --- --- --- ---
Other 6,384 1,998 4,386 32,587 1,728 30,859
---------------------------------------------------- ------------------------------------ -------------------------------------
TOTAL NON-INTEREST EXPENSE 395,657 54,850 340,807 367,519 40,273 327,246
---------------------------------------------------- ------------------------------------ -------------------------------------
INCOME BEFORE INCOME TAXES (5,400) (87,144) 81,744 65,492 (3,849) 69,341
Income taxes (9,825) (31,156) 21,331 15,697 (260) 15,957
---------------------------------------------------- ------------------------------------ -------------------------------------
NET INCOME $ 4,425 $ (55,988) $ 60,413 $ 49,795 $ (3,589) $ 53,384
==================================================== ==================================== =====================================
NET INCOME PER COMMON SHARE -- DILUTED $ 0.02 $ (0.22) $ 0.24 $ 0.20 $ (0.01) $ 0.21
DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ --- $ 0.20 $ 0.20 $ --- $ 0.20
Return on average assets 0.06% -0.90% 0.96% 0.71% -0.15% 0.86%
Return on average shareholders' equity 0.7% -9.20% 9.9% 8.3% -0.60% 8.9%
Net interest margin 3.39% 0.02% 3.37% 3.31% 0.03% 3.28%
Efficiency ratio 75.2% 0.40% 74.8% 78.3% 0.30% 78.0%
Effective tax rate 181.9% 155.85% 26.1% 24.0% 0.96% 23.0%
NET INTEREST INCOME - FULLY TAXABLE EQUIVALENT (FTE)
Net Interest Income $ 185,080 $ 22,150 $ 162,930 $ 178,626 $ 21,106 $ 157,520
Tax Equivalent Adjustment (2) 1,616 --- 1,616 2,002 --- 2,002
---------------------------------------------------- ------------------------------------ -------------------------------------
NET INTEREST INCOME - FTE $ 186,696 $ 22,150 $ 164,546 $ 180,628 $ 21,106 $ 159,522
==================================================== ==================================== =====================================
|
(1) See page 51 for definition of adjustments.
(2) Calculated assuming a 35% tax rate.
Information required by this item is set forth in Item 7 on pages 37 through 42 under the caption "Interest Rate Risk Management" and "Liquidity."
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Huntington is responsible for the financial information and representations contained in the consolidated financial statements and other sections of this amended Annual Report. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. In all material respects, they reflect the substance of transactions that should be included based on informed judgments, estimates, and currently available information.
Huntington maintains accounting and other control systems that, in the opinion of management, provide reasonable assurance that (1) transactions are properly authorized, (2) that the assets are properly safeguarded, and (3) transactions are properly recorded and reported to permit the preparation of the financial statements in conformity with accounting principles generally accepted in the United States. The systems of internal accounting controls include the careful selection and training of qualified personnel, appropriate segregation of responsibilities, communication of written policies and procedures, and a broad program of internal audits. The costs of the controls are balanced against the expected benefits. During 2002, the Audit/Risk Committee of the Board of Directors met regularly with management, Huntington's internal auditors, and the independent auditors, Ernst & Young LLP, to review the scope of the audits and to discuss the evaluation of internal accounting controls and financial reporting matters. The independent and internal auditors have free access to and meet confidentially with the Audit Committee to discuss appropriate matters. Also during 2002, Huntington formed a Disclosure Review Committee. This committee's purpose is to design and maintain disclosure controls and procedures to ensure that material information relating to the financial and operating condition of Huntington is properly reported to its chief executive officer, chief financial officer, internal auditors, and the Audit/Risk Committee of the Board of Directors in connection with the preparation and filing of periodic reports and the certification of those reports by the chief executive officer and the chief financial officer.
The independent auditors are responsible for expressing an informed judgment as to whether the consolidated financial statements present fairly, in accordance with accounting principles generally accepted in the United States, the financial position, results of operations, and cash flows of Huntington. They obtained an understanding of Huntington's internal accounting controls and conducted such tests and related procedures as they deemed necessary to provide reasonable assurance, giving due consideration to materiality, that the consolidated financial statements contain neither misleading nor erroneous data.
/s/ Thomas E. Hoaglin Chairman, President and Chief Executive Officer /s/ Michael J. McMennamin Vice Chairman, Chief Financial Officer, and Treasurer |
INDEPENDENT AUDITOR'S REPORT
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders, Huntington Bancshares Incorporated
We have audited the accompanying consolidated balance sheets of Huntington Bancshares Incorporated and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Huntington Bancshares Incorporated and Subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 3 to the consolidated financial statements, Huntington Bancshares Incorporated and Subsidiaries has restated previously issued 2000, 2001, and 2002 consolidated financial statements.
As discussed in Note 14 to the consolidated financial statements, Huntington Bancshares Incorporated and Subsidiaries changed its method of accounting for amortization of goodwill in 2002 in accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
January 16, 2003, except for Note 3
as to which the date is May 19, 2003
|
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars, except share amounts) 2002 2001
-----------------------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
ASSETS
Cash and due from banks $ 969,483 $ 1,138,366
Federal funds sold and securities purchased under resale agreements 49,280 83,275
Interest bearing deposits in banks 37,300 21,205
Trading account securities 241 13,392
Mortgage loans held for sale 528,379 629,386
Securities available for sale - at fair value 3,403,369 2,849,579
Investment securities - fair value $7,725 and $12,499, respectively 7,546 12,322
Loans and leases:
Commercial loans 5,606,363 6,439,372
Commercial real estate 3,730,080 3,818,441
Consumer
Automobile loans and leases 3,964,702 2,989,720
Home equity 3,200,169 3,582,028
Residential mortgage 1,748,985 1,127,825
Other consumer loans 394,890 543,414
-----------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 18,645,189 18,500,800
Less allowance for loan and lease losses 336,648 369,332
-----------------------------------------------------------------------------------------------------------------------------------
Net loans and leases 18,308,541 18,131,468
-----------------------------------------------------------------------------------------------------------------------------------
Operating lease assets 2,252,445 3,072,432
Bank owned life insurance 886,214 843,183
Premises and equipment 341,366 452,036
Goodwill and other intangible assets 218,567 716,054
Customers' acceptance liability 16,745 13,670
Accrued income and other assets 537,775 554,978
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 27,557,251 $ 28,531,346
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Demand deposits
Non-interest bearing $ 3,073,869 $ 3,635,173
Interest bearing 5,374,095 5,723,160
Savings deposits 2,851,158 3,466,305
Other domestic time deposits 3,956,306 5,868,451
Domestic time deposits of $100,000 or more 731,959 1,130,563
Brokered time deposits and negotiable CDs 1,092,754 137,915
Foreign time deposits 419,185 225,737
-----------------------------------------------------------------------------------------------------------------------------------
Total deposits 17,499,326 20,187,304
-----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 2,541,016 1,955,926
Bank acceptances outstanding 16,745 13,670
Medium-term notes 2,045,123 1,795,002
Federal Home Loan Bank advances 1,013,000 17,000
Subordinated notes and other long-term debt 788,678 927,330
Company obligated mandatorily redeemable preferred capital securities of subsidiary
trusts holding solely junior subordinated debentures of the parent company 300,000 300,000
Accrued expenses and other liabilities 1,062,868 901,848
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 25,266,756 26,098,080
-----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock - authorized 6,617,808 shares; none outstanding -- --
Common stock - without par value; authorized 500,000,000 shares; issued
257,866,255 shares; outstanding 232,878,851 and 251,193,814 shares, respectively 2,484,421 2,490,724
Less 24,987,404 and 6,672,441 treasury shares, respectively (475,399) (123,849)
Accumulated other comprehensive income 62,300 25,488
Retained earnings 219,173 40,903
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 2,290,495 2,433,266
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,557,251 $ 28,531,346
===================================================================================================================================
|
See notes to consolidated financial statements.
TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED) (RESTATED)
Interest and fee income
Loans and leases $ 1,136,646 $ 1,442,995 $ 1,571,871
Securities 179,623 216,215 284,719
Other 22,665 30,993 15,532
------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 1,338,934 1,690,203 1,872,122
------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 389,895 657,892 782,076
Short-term borrowings 42,720 95,859 113,134
Medium-term notes 61,727 121,701 189,311
Federal Home Loan Bank advances 5,574 1,174 824
Subordinated notes, capital notes, and other long-term debt 47,867 66,711 80,728
------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 547,783 943,337 1,166,073
------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 791,151 746,866 706,049
Provision for loan and lease losses 194,426 257,326 61,464
------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 596,725 489,540 644,585
------------------------------------------------------------------------------------------------------------------------
Non-Interest income
Operating lease income 641,785 699,857 635,243
Service charges on deposit accounts 152,521 164,052 160,727
Brokerage and insurance 66,843 79,034 61,871
Trust services 62,051 60,298 53,613
Mortgage banking 47,989 59,148 38,025
Bank owned life insurance 46,005 38,241 39,544
Other service charges and fees 42,888 48,217 43,883
Gain on sale of Florida operations 175,344 -- --
Merchant Services gain 24,550 -- --
Securities gains 4,902 723 37,101
Other 69,904 59,767 58,795
------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,334,782 1,209,337 1,128,802
------------------------------------------------------------------------------------------------------------------------
Non-Interest expense
Operating lease expense 518,970 558,626 494,800
Personnel costs 440,760 478,640 421,750
Equipment 68,323 80,560 78,069
Outside data processing and other services 67,368 69,692 62,011
Net occupancy 60,264 77,184 75,882
Marketing 27,911 31,057 34,884
Professional services 25,777 23,879 20,819
Telecommunications 22,661 27,984 26,225
Printing and supplies 15,198 18,367 19,634
Franchise and other taxes 9,456 9,729 11,077
Amortization of intangible assets 2,019 41,225 39,207
Restructuring charges 56,184 79,957 --
Other 73,797 79,696 22,596
------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 1,388,688 1,576,596 1,306,954
------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 542,819 122,281 466,433
Income taxes 209,755 (23,088) 133,736
------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 333,064 $ 145,369 $ 332,697
========================================================================================================================
PER COMMON SHARE
Net Income
Basic $ 1.37 $ 0.58 $ 1.34
Diluted 1.36 0.58 1.33
Cash dividends declared 0.64 0.72 0.76
AVERAGE COMMON SHARES OUTSTANDING
Basic 242,279 251,078 248,709
Diluted 244,012 251,716 249,570
|
See notes to consolidated financial statements.
PREFERRED COMMON
------------------------ ------------------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) SHARES STOCK SHARES STOCK
------------------------------------------------------------------------------------------------------------------
BALANCE -- JANUARY 1, 2000 -- $ -- 233,845 $2,284,956
Cumulative effect of restatement (See Note 3)
------------------------------------------------------------------------------------------------------------------
BALANCE -- JANUARY 1, 2000, RESTATED -- $ -- 233,845 $2,284,956
------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income
Total comprehensive income
Stock issued for acquisitions (29,399)
Cash dividends declared ($0.76 per share)
Stock options exercised (3,395)
10% stock dividend 24,021 241,483
Treasury shares purchased
Treasury shares sold to employee benefit plans
------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2000 -- -- 491,711 4,778,601
------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income
Cumulative effect of change in accounting
principle for derivatives
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income
Unrealized gains on derivative instruments
used in cash flow hedging relationships
Total comprehensive income
Cash dividends declared ($0.72 per share)
Stock options exercised (2,921)
Treasury shares sold to employee benefit plans
------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2001 -- -- 491,711 4,775,680
------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME
UNREALIZED NET HOLDING GAINS ON SECURITIES
AVAILABLE FOR SALE ARISING DURING THE PERIOD,
NET OF RECLASSIFICATION ADJUSTMENT FOR NET
GAINS INCLUDED IN NET INCOME
UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS
USED IN CASH FLOW HEDGING RELATIONSHIPS
MINIMUM PENSION LIABILITY
TOTAL COMPREHENSIVE INCOME
STOCK ISSUED FOR ACQUISITIONS (838)
CASH DIVIDENDS DECLARED ($0.64 PER SHARE)
STOCK OPTIONS EXERCISED (3,545)
TREASURY SHARES PURCHASED
OTHER (1,920)
------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2002 -- $ -- 491,711 $4,769,377
==================================================================================================================
|
ACCUMULATED
TREASURY OTHER
------------------------- COMPREHENSIVE RETAINED
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) SHARES STOCK INCOME EARNINGS TOTAL
----------------------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED)
BALANCE -- JANUARY 1, 2000 (4,957) $ (137,268) $ (94,093) $ 128,761 $2,182,356
Cumulative effect of restatement (See Note 3) 45,727 45,727
----------------------------------------------------------------------------------------------------------------------------------
BALANCE -- JANUARY 1, 2000, RESTATED (4,957) $ (137,268) $ (94,093) $ 174,488 $2,228,083
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income 332,697 332,697
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 69,573 69,573
----------
Total comprehensive income 402,270
----------
Stock issued for acquisitions 7,175 171,781 142,382
Cash dividends declared ($0.76 per share) (189,191) (189,191)
Stock options exercised 115 3,751 356
10% stock dividend (1,182) (241,662) (179)
Treasury shares purchased (8,188) (168,395) (168,395)
Treasury shares sold to employee benefit plans 30 699 699
----------------------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2000 (11,964) (266,700) (118,613) 250,820 2,416,025
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net income 145,369 145,369
Cumulative effect of change in accounting
principle for derivatives (9,113) (9,113)
Unrealized net holding gains on securities
available for sale arising during the period,
net of reclassification adjustment for net
gains included in net income 53,989 53,989
Unrealized gains on derivative instruments
used in cash flow hedging relationships 5,132 5,132
----------
Total comprehensive income 195,377
----------
Cash dividends declared ($0.72 per share) (180,798) (180,798)
Stock options exercised 264 4,378 1,457
Treasury shares sold to employee benefit plans 71 1,205 1,205
----------------------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2001 (11,629) (261,117) (68,605) 215,391 2,433,266
----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
NET INCOME 333,064 333,064
UNREALIZED NET HOLDING GAINS ON SECURITIES
AVAILABLE FOR SALE ARISING DURING THE PERIOD,
NET OF RECLASSIFICATION ADJUSTMENT FOR NET
GAINS INCLUDED IN NET INCOME 27,387 27,387
UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS
USED IN CASH FLOW HEDGING RELATIONSHIPS 9,620 9,620
MINIMUM PENSION LIABILITY (195) (195)
----------
TOTAL COMPREHENSIVE INCOME 369,876
----------
STOCK ISSUED FOR ACQUISITIONS 1,038 19,989 19,151
CASH DIVIDENDS DECLARED ($0.64 PER SHARE) (154,794) (154,794)
STOCK OPTIONS EXERCISED 373 6,757 3,212
TREASURY SHARES PURCHASED (19,161) (370,012) (370,012)
OTHER (565) (8,284) (10,204)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE -- DECEMBER 31, 2002 (29,944) $ (612,667) $ (31,793) $ 393,661 $2,290,495
==================================================================================================================================
|
See notes to consolidated financial statements.
TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
(RESTATED) (RESTATED) (RESTATED)
OPERATING ACTIVITIES
Net Income $ 333,064 $ 145,369 $ 332,697
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan and lease losses 194,426 257,326 61,464
Depreciation on operating lease assets 435,822 468,739 417,707
Other depreciation and amortization 58,132 101,233 110,908
Deferred income tax expense 101,524 100,176 239,624
Decrease (increase) in trading account securities 13,151 (8,669) 3,252
Decrease (increase) in mortgages held for sale 101,007 (474,282) (13,381)
Gains on sales of securities available for sale (4,902) (723) (37,101)
Gains on sales/securitizations of loans (11,031) (9,464) (4,853)
Gain on sale of Florida banking and insurance operations (175,344) -- --
Merchant Services gain (24,550) -- --
Restructuring and special charges 56,184 79,957 --
Other, net (37,520) (148,211) (87,793)
----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,039,963 511,451 1,022,524
----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in banks (16,095) (16,235) 1,588
Proceeds from:
Maturities and calls of investment securities 4,771 4,009 2,408
Maturities and calls of securities available for sale 1,031,935 1,021,766 415,571
Sales of securities available for sale 855,309 1,410,304 1,758,473
Purchases of securities available for sale (1,959,137) (1,056,840) (239,084)
Proceeds from sales/securitizations of loans 465,699 514,897 1,556,093
Net loan and lease originations, excluding sales (3,891,866) (1,609,343) (1,877,154)
Net decrease (increase) in operating lease assets 384,165 (550,715) (799,937)
Proceeds from sale of premises and equipment 19,390 3,714 3,504
Purchases of premises and equipment (57,761) (63,177) (65,160)
Proceeds from sales of other real estate 13,112 15,733 13,766
Net cash (paid) received in purchase acquisitions (8,305) -- 12,004
Proceeds from restructuring of Merchant Services 27,000 -- --
Net cash paid related to sale of Florida banking
and insurance operations (1,277,767) -- --
----------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (4,409,550) (325,887) 782,072
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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
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NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 3,166,709 (419,806) (1,577,594)
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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
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,018,763 $ 1,221,641 $ 1,455,883
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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
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See notes to consolidated financial statements.
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Huntington Bancshares Incorporated (Huntington) is a multi-state diversified financial services company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged in providing full-service commercial and consumer banking services, mortgage banking services, automobile financing, equipment leasing, investment management, trust services, and discount brokerage services, as well as underwriting credit life and disability insurance, and selling other insurance and financial products and services. Huntington's banking offices are located in Ohio, Michigan, Indiana, Kentucky, and West Virginia. Selected financial services are also conducted in other states including Arizona, Florida, Georgia, Maryland, New Jersey, Pennsylvania, and Tennessee. Huntington also has a foreign office in the Cayman Islands and a foreign office in Hong Kong. Huntington (the parent company) is a financial holding company and a bank holding company.
BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the parent company, and its majority-owned subsidiaries and are presented in conformity with accounting principles generally accepted in the United States (GAAP). All significant intercompany accounts and transactions have been eliminated in consolidation. Other subsidiaries and affiliates are accounted for by the equity method where there is control and Huntington owns 50% or greater ownership interest. The cost method is generally used where there is no control and Huntington owns less than a 50% ownership interest. These assets that are accounted for by either the equity or cost method are included in other assets in Huntington's statement of financial condition.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform to the current year's presentation.
SECURITIES: Securities purchased with the intention of recognizing short-term profits are classified as trading account securities and reported at fair value. The unrealized gains or losses on trading securities are recorded in other non-interest income. Debt securities that Huntington has both the positive intent and ability to hold to maturity are classified as investment securities and are reported at amortized cost. Securities not classified as trading or investments are designated available for sale and reported at fair value. Unrealized gains or losses on securities available for sale are reported as a separate component of accumulated other comprehensive income in shareholders' equity. Declines in the value of debt and marketable equity securities that are considered other than temporary are recorded in non-interest income as a loss on securities available for sale.
Nonmarketable equity securities include stock acquired for regulatory purposes, such as Federal Home Loan Bank stock and Federal Reserve Bank stock. These securities are generally accounted for at cost and are included in securities available for sale.
The amortized cost of specific securities sold is used to compute realized gains and losses. Interest and dividends on securities, including amortization of premiums and accretion of discounts using the effective interest method over the period to maturity, are included in interest income.
LOANS AND LEASES: Loans and direct financing leases are reported net of unearned income at the principal amounts outstanding. Interest income is accrued as earned based on unpaid principal balances. Huntington defers and amortizes referral payments that it makes to automotive dealers on a straight-line basis over the life of the loan or lease as a yield adjustment. Huntington records the fees it receives from loan and lease origination activities, as well as the costs of those activities, in the period in which the fees are received and the costs are incurred. The fees received from loan and lease origination activities are recognized as interest income and the costs are included in various categories of non-interest expense. Annually, Huntington compares the net loan and lease origination fees and costs recognized using this method to the net loan and lease origination fees and costs that would have been recognized had such fees and costs been deferred and amortized over the lives of the respective loans and leases on the interest method. For the three years ended December 31, 2002, the difference in the fees received and costs incurred versus those that would have been recognized under a deferral method was immaterial.
Automobile loans and leases include loans secured by automobiles and leases of automobiles that qualify for the direct financing method of accounting. Leases qualify for the direct financing accounting method if the present values of the lease payments and the guaranteed residual value are at least 90% of the cost of the vehicle. Huntington records the residual values of its leases based on estimated future market values of the automobiles as published in the Black Book. Beginning in October 2000, Huntington purchased residual value insurance for its entire lease portfolio to mitigate the risk of declines in residual values. The insurance provides first dollar loss coverage on the portfolio of existing automobile leases at October 1, 2000 and has a cap on insured losses of $120 million. Insured losses on new lease originations from October 2000 through April 2002 have a cap of $50 million. There is no cap for insured losses with the policy covering new automobile lease originations from May 2002 through April 2005 (the "New Policy"). The New Policy is subject to renewal in April 2005. Leases covered by the New Policy, as amended, are qualified for the direct financing method of accounting. Leases covered by the earlier policies are accounted for using the operating method of accounting and are recorded as operating lease assets in Huntington's balance sheet.
Residual value losses arise if the market value at the end of the lease term is less than the residual value embedded in the original lease contract. Huntington's insurance covers the difference between the recorded residual value and the fair value of the automobile at the end of the lease term as evidenced by Black Book valuations. This insurance, however, does not cover residual losses below Black Book value, which may arise when the automobile has excess wear and tear and/or excess mileage, not reimbursed by the lessee.
Commercial loans and commercial loans secured by real estate are generally placed on non-accrual status and stop accruing interest when principal or interest payments are 90 days or more past due or the borrower's creditworthiness is in doubt. A loan may remain in accruing status when it is sufficiently collateralized, which means the collateral covers the full repayment of principal and interest, and is in the process of active collection.
Commercial and commercial real estate loans are evaluated for impairment in accordance with the provisions of Statement of Financial Accounting Standards (Statement) No. 114, Accounting by Creditors for Impairment of a Loan. This Statement requires an allowance to be established as a component of the allowance for loan and lease losses when it is probable that all amounts due pursuant to the contractual terms of the loan or lease will not be collected and the recorded investment in the loan or lease exceeds its fair value. Fair value is measured using either the present value of expected future cash flows discounted at the loan's or lease's effective interest rate, the observable market price of the loan or lease, or the fair value of the collateral if the loan or lease is collateral dependent. All loans and leases considered impaired are included in non-performing assets.
Consumer loans and leases, excluding residential mortgage loans, are subject to mandatory charge-off at a specified delinquency date and are not classified as non-performing prior to being charged off. These loans and leases are generally charged off in full no later than when the loan or lease becomes 120 days past due. Residential mortgage loans are placed on non-accrual status when principal payments are 180 days past due or interest payments are 210 days past due. A charge-off on a residential mortgage loan is recorded when the loan has been foreclosed and the loan balance exceeds the fair value of the collateral. The fair value of the collateral is then recorded as real estate owned and is reflected in other assets in the consolidated statement of financial condition.
Huntington uses the cost recovery method in accounting for cash received on non-performing loans and leases. Under this method, cash receipts are applied entirely against principal until the loan or lease has been collected in full, after which time any additional cash receipts are recognized as interest income. When, in management's judgment, the borrower's ability to make periodic interest and principal payments resumes and collectibility is no longer in doubt, the loan or lease is returned to accrual status. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged off as a credit loss.
SECURITIZED LOANS: Securitized loans are accounted for in accordance with Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which was fully adopted by Huntington in 2001. Asset securitization involves the sale of a pool of loan receivables, generally to a trust, in exchange for funding collaterized by these loans. The trust then sells undivided interests in the trust to investors, while Huntington retains the remaining undivided interests, referred to as retained interest. While the loans are removed from the balance sheet at the time of sale, this retained interest is recorded as an asset based on its estimated fair value. An asset is also established for the servicing of the loans sold, which is retained at the time of sale, based on the fair value of the servicing rights. Gains and losses on the loans sold, retained interest, and servicing rights associated with loan securitizations are determined when the related loans are sold to the trust. Fair values of the retained interests and servicing rights are based on the present value of expected future cash flows from the underlying loans, net of interest payments to security holders. The present value of expected future cash flows is determined using assumptions for market interest rates, loan losses, servicing costs, and prepayment rates. Management also uses these assumptions to periodically assess the retained interests and servicing rights for impairment. The retained interest is included in securities available for sale and the servicing rights are recorded in other assets in the consolidated balance sheets.
The allowance is determined subjectively, requiring significant estimates, including the timing and amounts of expected future cash flows on impaired loans and leases, consideration of current economic conditions and historical loss experience pertaining to pools of homogeneous loans and leases, all of which may be susceptible to change. The allowance is increased through a provision that is charged to earnings, based on management's periodic evaluation of the factors previously mentioned and is reduced by charge-offs, net of recoveries, and the allowance associated with securitized or sold loans.
The allowance consists of an allocated portion and a small, unallocated portion. The components of the allowance represent estimates developed pursuant to Statement No. 5, Accounting for Contingencies, and Statement No. 114. The allocated portion of the allowance reflects expected losses resulting from quantitative analyses developed through historical loss experience and specific credit allocations at the individual loan and lease level for commercial loans and commercial real estate loans. The specific credit allocations are based on a continuous analysis of all loans and leases by internal credit rating. The historical loss element is determined using a loss migration analysis that examines both the probability of default and the loss in the event of default by loan and lease category and internal credit rating. The loss migration analysis is performed periodically and loss factors are updated regularly based on actual experience. The portion of the allowance allocated to homogeneous consumer loans and leases is also determined by applying specific probability of default and loss in the event of default factors to various segments of the loan and lease portfolio. Management's determination of the amounts necessary for concentrations and changes in portfolio mix are also included in the allocated component of the allowance. The unallocated portion of the allowance is determined based on management's assessment of general economic conditions, as well as specific economic conditions in the individual markets in which Huntington operates. This determination inherently involves a higher degree of subjectivity and considers current risk factors that may not have yet manifested themselves in Huntington's historical loss factors used to determine the allocated portion of the allowance.
RESELL AND REPURCHASE AGREEMENTS: Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally treated as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third party is continually monitored and additional collateral is obtained or is requested to be returned to Huntington as deemed appropriate.
GOODWILL AND OTHER INTANGIBLE ASSETS: Under the purchase method of accounting, the net assets of entities acquired by Huntington were recorded at their estimated fair value at the date of acquisition. The excess of cost over the fair value of net assets acquired is recorded as goodwill. Prior to 2002, goodwill was amortized over periods generally up to 25 years. Effective January 1, 2002, in accordance with Statement No. 142, goodwill is no longer amortized but is reviewed by management, along with other intangible assets arising from business combinations, for impairment quarterly or whenever a significant event occurs that adversely affects operations or when changes in circumstances indicate that the carrying value may not be recoverable. Other intangible assets are amortized over their estimated useful lives.
MORTGAGE BANKING ACTIVITIES: Loans held for sale are primarily composed of performing 1-to-4-family residential mortgage loans originated for resale and are carried at the lower of cost (net of purchase discounts or premiums and effects of hedge accounting) or fair value as determined on an aggregate basis. Fair value is determined using available secondary market prices for loans with similar coupons, maturities, and credit quality.
Huntington recognizes the rights to service mortgage loans as separate assets, which are included in other assets in the consolidated balance sheets, only when purchased or when servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. The carrying value of loans sold or securitized is allocated between loans and servicing rights based on the relative fair values of each. Purchased mortgage servicing rights are initially recorded at cost. All servicing rights are subsequently carried at the lower of the initial carrying value, adjusted for amortization, or fair value. Servicing rights are evaluated for impairment quarterly based on the fair value of those rights, using a disaggregated approach. The fair value of the servicing rights is determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs, and other economic factors. Servicing rights are amortized over the period of and in proportion to the estimated future net servicing revenue. Amortization is recorded as a reduction of servicing income, which is reflected in non-interest income in Huntington's income statement. As of December 31, 2002 and 2001, mortgage servicing assets, net of valuation reserves, were $29.3 million and $35.3 million, respectively. At December 31, 2002 and 2001, valuation reserves representing the adjustment to fair value were $21.1 million and $7.0 million, respectively. Impairment charges, which are reflected in mortgage banking income, were $14.1 million in 2002, $6.3 million in 2001, and $0.7 million in 2000.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight-line method over the estimated useful lives of the related assets. Buildings and building improvements are depreciated over an average of 30 to 40 years and 10 to 20 years, respectively. Land improvements and furniture and fixtures are depreciated over 10 years while equipment is depreciated over a range of 3 to 7 years. Leasehold improvements are amortized over the lesser of the asset life or term of the related leases. Maintenance and repairs are charged to expense as incurred, while improvements that extend the useful life of an asset are capitalized and depreciated over the remaining useful life.
OPERATING LEASE ASSETS: Operating lease assets consist of automobiles leased to customers, which are reported at cost, including net deferred origination costs, less accumulated depreciation. Net deferred origination costs include the referral payments Huntington makes to automobile dealers, which are deferred and amortized on a straight-line basis over the life of the lease.
Lease payments are recorded as rental income, a component of Operating lease income in the Non-interest income section of the Consolidated Income Statements. Huntington records the fees it receives from the origination of operating leases, and the costs of its origination efforts, in the period in which the fees are received and the costs are incurred. Origination fees are recorded as Operating lease income. Depreciation expense is recorded on a straight-line basis over the term of the lease from the cost of the automobile at the inception of the lease to the estimated residual value at the end of the lease term. Depreciation expense is included in Operating lease expense in the Non-interest expense section of the Consolidated Income Statement. Depreciation expense is adjusted prospectively at any time during the lease term when the estimated market value of the automobile at the end of the lease term changes. Upon disposition, a gain or loss is recorded for any difference between the net book value of the lease and the proceeds from the disposition of the automobile.
Credit losses occur when a lease is terminated early because the lessee cannot make the required lease payments. These credit-generated terminations result in Huntington taking possession of the automobile earlier than expected. When this occurs, the market value of the automobile may be less than Huntington's book value, resulting in a loss upon sale or write down to market value while the vehicle is in inventory pending sale. Rental income payments accrued, but not received, are written off when they reach 120 days past due and at that time the asset is evaluated for impairment.
DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments, primarily interest rate swaps, are accounted for in accordance with Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This Statement requires every derivative instrument to be recorded in the consolidated statement of condition as either an asset or liability measured at its fair value and Huntington to formally document, designate, and assess the effectiveness of transactions for which hedge accounting is applied. Depending on the nature of the hedge and the extent to which it is effective, the changes in fair value of the derivative recorded through earnings will either be offset against the change in the fair value of the hedged item in earnings or recorded in comprehensive income and subsequently recognized in earnings in the period the hedged item affects earnings. The portion of a hedge that is ineffective and all changes in the fair value of derivatives not designated as hedges, referred to as trading instruments, are recognized immediately in earnings. Trading instruments are carried at fair value with changes in fair value included in other Non-interest income. Trading instruments are executed primarily with Huntington's customers to fulfill their needs. Derivative instruments used for trading purposes include interest rate swaps, including callable swaps, interest rate caps and floors, and interest rate and foreign exchange futures, forwards and options.
Upon adoption in 2001 of Statement No. 133, as amended, Huntington designated its portfolio of derivative financial instruments used for risk management purposes into fair value or cash flow hedges. Derivatives used to hedge changes in fair value of assets and liabilities due to changes in interest rates or other factors were designated as fair value hedges and those used to hedge changes in forecasted cash flows, due generally to interest rate risk, were designated as cash flow hedges. The after-tax transition adjustment of adopting Statement No. 133, as amended, was immaterial to net income and reduced other comprehensive income (OCI) $9.1 million in 2001.
INCOME TAXES: Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future book and tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined using enacted tax rates expected to apply in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income at the time of enactment of such change in tax rates.
TREASURY STOCK: Acquisitions of treasury stock are recorded at cost. Reissuance of shares in treasury for acquisitions, stock option exercises, or for other corporate purposes, is recorded at their weighted-average cost.
STOCK-BASED COMPENSATION: Huntington's stock-based compensation plans are accounted for based on the intrinsic value method promulgated by Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant. See Note 20 regarding pro forma disclosures for net income and earnings per diluted common share is presented as if Huntington had applied the fair value method of accounting of Statement No. 123, Accounting for Stock-Based Compensation, in measuring compensation costs for stock options.
Huntington expects to adopt the fair value method of recording stock options under the transitional guidance of Statement No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure. Huntington is currently evaluating which of the three methods under transitional guidance it will adopt in 2003. See Note 2 for more information regarding this new standard.
SEGMENT RESULTS: Accounting policies for the lines of business are the same as those used in the preparation of the consolidated financial statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses, and other financial elements to each line of business. Changes are made in these methodologies utilized for certain balance sheet and income statement allocations performed by Huntington's management reporting system, as appropriate. Prior periods are not restated for these changes.
STATEMENT OF CASH FLOWS: Cash and cash equivalents are defined as "Cash and due from banks" and "Federal funds sold and securities purchased under resale agreements."
2. NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds Statement No. 44, Accounting for Intangible Assets of Motor Carriers. Statement No. 145 amends Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. In addition, Statement No. 145 requires lease modifications to be accounted for in the same manner as sale-leaseback transactions. The provisions of this Statement were effective for financial statements issued on or after May 15, 2002.
In September 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Statement No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized using fair value when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002.
In October 2002, the FASB issued Statement No. 147, Acquisition of Certain Financial Institutions. This Statement provides guidance on the accounting for the acquisition of a financial institution, which had previously been addressed in FASB Statement No. 72, Accounting for Certain Acquisitions of Banking and Thrift Institutions. Statement No. 147 requires the excess of the fair value of liabilities assumed over the fair value of the tangible and identifiable assets acquired in a business combination to be recognized as an unidentifiable intangible asset in accordance with Statement No. 141 and No. 142. In addition, any long-term customer-relationship intangible assets, such as depositor-relationship, borrower-relationship, and credit cardholder intangible assets, will be required to be tested for impairment in accordance with Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, as amended. The provisions of Statement No. 147 became effective October 1, 2002.
The adoption of Statements No. 145, No. 146, and No. 147 and Interpretation No. 45 are not expected to have a material impact on Huntington's results of operations or financial condition.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure. This Statement amends Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to Statement No. 123's fair value method of accounting for stock-based employee compensation. Statement No. 148 also amends the disclosure provisions of Statement 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While Statement No. 148 does not amend Statement No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of Statement No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of Statement No. 123 or the intrinsic value method of APB Opinion No. 25, which is the method currently used by Huntington.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation of Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial Statements, addresses consolidation by business enterprises where ownership interests in an entity may vary over time or, in many cases, of special-purpose entities (SPEs). To be consolidated for financial reporting, these entities must have certain characteristics. ARB 51 requires that an enterprise's consolidated financial statements include subsidiaries in which the enterprise has a controlling financial interest. This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. An enterprise that holds significant variable interests in such an entity, but is not the primary beneficiary, is required to disclose certain information regarding its interests in that entity. This Interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds an interest that it acquired before February 1, 2003. It also applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. This Interpretation may be applied (1) prospectively with a cumulative-effect adjustment as of the date on which it is first applied, or (2) by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated.
Huntington is reviewing the implications of Interpretation No. 46 and is considering the adoption methods permitted. Management believes that the most significant impact of adoption will be the consolidation of one of the securitization trusts formed in 2000. The consolidation of that securitization trust will involve the recognition of the trust's net assets, which, at December 31, 2002, included $1,020 million of indirect automobile loans, $100 million of cash, and $1,000 million of secured debt obligations with an interest rate based on commercial paper rates. Adoption will also eliminate the retained interest in the securitization trust and its servicing asset related to the loans in the trust, with carrying values at the end of 2002 of $152 million and $12 million, respectively. The impact to Huntington's equity and results of operations will depend on the method of transition adopted under this new interpretation. Huntington will adopt this new standard no later than the end of the third quarter of 2003.
Huntington restated its financial results to reclassify certain automobile leases from the direct financing lease method to the operating lease method of accounting. The appropriate classification of automobile leases as operating leases or direct financing leases under Statement of Financial Accounting Standards (Statement) No. 13, Accounting for Leases, can be impacted by residual value insurance coverage. Since October 2000, Huntington has had residual value insurance coverage on its entire automobile lease portfolio to protect it from the risk of loss resulting from declines in used car prices. Such losses arise if the market value of the automobile at the end of the lease term is less than the residual value embedded in the original lease contract. Management believes these policies effectively protect Huntington from the risk of declining used car prices. In April 2003, management determined that, due to provisions in certain of its residual value insurance policies, the leases covered by these policies would not qualify as direct financing leases.
For leases originated prior to May 2002, the residual value insurance policies contain aggregate loss caps. The residuals insured under these policies are not considered guaranteed, and, accordingly, the related leases fail to qualify as direct financing leases under Statement No. 13. As a result, leases originated prior to May 2002 have been reclassified as operating leases for all periods presented. As of December 31, 2002, $2.3 billion of such leases, net of accumulated depreciation, are reflected in the Consolidated Balance Sheets as operating lease assets. All leases originated since April 2002 are covered under a new residual value insurance policy (the "New Policy") which insures the full residual value of each vehicle and includes no aggregate loss cap. Leases with residual gains are netted with leases with residual losses when claims are settled. The netting provision of the New Policy precluded Huntington from determining the amount of the guaranteed residual of any individual leased asset within the portfolio at lease inception. Thus, the related leases failed to qualify as direct financing leases. Huntington has amended the New Policy, retroactive to April 2002, by adding an endorsement that adds a level of insurance sufficient to meet the criteria as a residual value guarantee pursuant to Statement No. 13, on an individual lease-by-lease basis, with no netting provisions. In addition, Huntington continues to maintain insurance coverage that insures the full value of the leased residuals. Accordingly, and in reliance on guidance furnished by the Securities and Exchange Commission in its announcement at the Financial Accounting Standards Board Emerging Issues Task Force meeting on May 15, 2003, all leases covered under the New Policy, as amended, are now appropriately classified as direct financing leases in the accompanying financial statements. As of December 31, 2002, $893 million of such leases were included in loans and leases in the Consolidated Balance Sheets. It is management's intention to insure the residuals associated with future originations under the New Policy, as amended, and to classify such new originations as direct financing leases.
The results of the restatement are reflected in the consolidated financial statements, these notes to the consolidated financial statements, and management's discussion and analysis for all current and prior periods reported in this Form 10-K/A. The following tables reflect the previously reported amounts and the restated results by financial statement line in Huntington's balance sheets at December 31, 2002 and December 31, 2001, and income statements for the years and all quarters in 2002 and 2001, and for the year 2000:
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DECEMBER 31, 2002 DECEMBER 31, 2001
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PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED
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BALANCE SHEET:
Total loans and leases $20,955,925 $18,645,189 $21,601,873 $18,500,800
Allowance for loan and lease losses 368,395 336,648 410,572 369,332
Net loans and leases 20,587,530 18,308,541 21,191,301 18,131,468
Operating lease assets -- 2,252,445 -- 3,072,432
Accrued income and other assets 532,690 537,775 536,390 554,978
Total Assets 27,578,710 27,557,251 28,500,159 28,531,346
Accrued expenses and other
liabilities 1,070,991 1,062,868 887,487 901,848
Total liabilities 25,274,879 25,266,756 26,083,719 26,098,080
Retained earnings 232,509 219,173 24,077 40,903
Total shareholders' equity 2,303,831 2,290,495 2,416,440 2,433,266
Total Liabilities and
Shareholders' Equity $27,578,710 $27,557,251 $28,500,159 $28,531,346
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TWELVE MONTHS ENDED DECEMBER 31,
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2002 2001 2000
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INCOME STATEMENT: PREVIOUSLY PREVIOUSLY PREVIOUSLY
(in thousands of dollars) REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
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