SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file Number 0-2525 Huntington Bancshares Incorporated ---------------------------------- (Exact name of registrant as specified in its charter) Maryland 31-0724920 --------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Huntington Center, 41 S. High Street, Columbus, OH 43287 -------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (614) 480-8300 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock - Without Par Value -------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of December 31, 1999, was $4,879,362,708. As of January 31, 2000, 227,992,927 shares of common stock without par value were outstanding. Documents Incorporated By Reference - ----------------------------------- Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive Proxy Statement for the 2000 Annual Shareholders' Meeting. HUNTINGTON BANCSHARES INCORPORATED INDEX
Part I. Item 1. Business 2 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 Part II. Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 8 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28 Item 8. Financial Statements and Supplementary Data 28 Report of Management 28 Report of Independent Auditors 28 Consolidated Balance Sheets -- December 31, 1999 and 1998 29 Consolidated Statements of Income -- Year Ended December 31, 1999, 1998 and 1997 30 Consolidated Statements of Changes in Shareholders' Equity -- Year Ended December 31, 1999, 1998 and 1997 31 Consolidated Statements of Cash Flows -- Year Ended December 31, 1999, 1998 and 1997 32 Notes to Consolidated Financial Statements 33-55 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 55 Part III. Item 10. Directors and Executive Officers of the Registrant 56 Item 11. Executive Compensation 56 Item 12. Security Ownership of Certain Beneficial Owners and Management 56 Item 13. Certain Relationships and Related Transactions 56 Part IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 56
1 Huntington Bancshares Incorporated ---------------------------------- Part I ------ ITEM 1: BUSINESS Huntington Bancshares Incorporated (Huntington), incorporated in Maryland in 1966, is a multi-state bank holding company headquartered in Columbus, Ohio. Its subsidiaries conduct a full-service commercial and consumer banking business, engage in mortgage banking, lease financing, trust services, discount brokerage services, underwriting credit life and disability insurance, selling other insurance products, and issuing commercial paper guaranteed by Huntington, and providing other financial products and services. At December 31, 1999, Huntington's subsidiaries had 182 banking offices in Ohio, 125 banking offices in Michigan, 137 banking offices in Florida, 36 banking offices in West Virginia, 23 banking offices in Indiana, 12 banking offices in Kentucky, and one foreign office in the Cayman Islands and Hong Kong, respectively. The Huntington Mortgage Company (a wholly owned subsidiary) has loan origination offices throughout the Midwest and East Coast. Foreign banking activities, in total or with any individual country, are not significant to the operations of Huntington. At December 31, 1999, Huntington and its subsidiaries had 9,516 full-time equivalent employees. A brief discussion of Huntington's lines of business can be found in its Management's Discussion and Analysis on page 11 of this report and the financial statement results can be found in Note 22 of the Notes to Consolidated Financial Statements on page 51. Competition in the form of price and service from other banks and financial companies such as savings and loans, credit unions, finance companies, and brokerage firms 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, actual or potential competition in each of Huntington's markets has been intensified. The same federal legislation permits further competition through interstate branching, subject to certain limitations by individual states. Internet banking, offered both by established traditional institutions and by start-up Internet-only banks, constitutes another significant form of competitive pressure on Huntington's business. Finally, financial services reform legislation enacted in November 1999 (see "Gramm-Leach-Bliley Act of 1999" below) eliminates the long-standing Glass-Steagall Act restrictions on securities activities of bank holding companies and banks. The new legislation permits bank holding companies that elect to become financial holding companies to engage in defined securities and insurance activities as well as to affiliate with securities and insurance firms. The same legislation allows banks to have financial subsidiaries that may engage in certain activities not otherwise permissible for banks. In January 1999, Huntington consummated the merger of The Huntington State Bank, its state bank subsidiary in Ohio, into The Huntington National Bank, an interstate national bank. As a result, The Huntington National Bank is Huntington's sole bank subsidiary. REGULATORY MATTERS GENERAL As a registered bank holding company, Huntington is subject to the supervision of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Huntington is required to file with the Federal Reserve Board reports and other information regarding its business operations and the business operations of its subsidiaries. It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board 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. In addition, pursuant to federal law and regulations promulgated by the Federal Reserve Board, Huntington may only engage in, or own or control companies that engage in, activities deemed by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. Under legislation effective in 1996, Huntington may, in most cases, commence permissible new nonbanking business activities de novo with only subsequent notice to the Federal Reserve Board and may acquire smaller companies that engage in permissible nonbanking activities under an expedited procedure requiring only 12 business days notice to the Federal Reserve Board. Huntington's national bank subsidiary has deposits insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC"). It is subject to supervision, examination, and regulation by the Office of the Comptroller of the Currency ("OCC"). Certain deposits of Huntington's national bank subsidiary were acquired from savings associations and are insured by the Savings Association Insurance Fund ("SAIF") of the FDIC. 2 Huntington's nonbank subsidiaries are also subject to supervision, examination, and regulation by the Federal Reserve Board and examination by applicable federal and state banking agencies. In addition to the impact of federal and state supervision and regulation, the bank and nonbank subsidiaries of Huntington are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. 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. HOLDING COMPANY STRUCTURE Huntington's depository institution 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 subsidiaries 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 in 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. Under applicable regulations, at December 31, 1999, approximately $217.5 million was available for loans to Huntington from its subsidiary bank. The Federal Reserve Board 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 doctrine, the Federal Reserve Board 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. As a result of such legislation, 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 its subsidiary bank are a significant source of funds for payment of dividends to Huntington's shareholders. In the year ended December 31, 1999, Huntington declared cash dividends to its shareholders of approximately $175.8 million. There are, however, statutory limits on the amount of dividends that Huntington's depository institution subsidiary 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 2000 of approximately $317.0 million plus an additional amount equal to its net profits during 2000. 3 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 Federal Reserve Board 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 Under current FDIC practices, Huntington's bank subsidiary will not be required to pay deposit insurance premiums during 2000. However, the bank subsidiary will be required to make payments for the servicing of obligations of the Financing Corporation ("FICO") issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding. CAPITAL REQUIREMENTS The Federal Reserve Board 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 Federal Reserve Board and the other federal banking regulators require that all intangible assets, with certain limited exceptions, be deducted from Tier 1 capital. Under the Federal Reserve Board'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 ("MSRs"), non-mortgage servicing assets ("NMSAs"), and purchased credit card relationships ("PCCRs"), provided that, in the aggregate, the total amount of MSRs, NMSAs, and PCCRs included in capital does not exceed 100% of Tier 1 capital. NMSAs and PCCRs are subject to a separate aggregate sublimit of 25% of Tier 1 capital. The amount of MSRs, NMSAs, and PCCRs that a bank holding company may include in its capital is limited to the lesser of (a) 90% of such assets' fair market value (as determined under the guidelines), or (b) 100% of such assets' book value, each determined quarterly. Identifiable intangible assets (i.e., intangible assets other than goodwill) other than MSRs, NMSAs, and PCCRs, including core deposit intangibles, acquired on or before February 19, 1992 (the date the Federal Reserve Board issued its original proposal for public comment), generally will not be deducted from capital for supervisory purposes, although they will continue to be deducted for purposes of evaluating applications filed by bank holding companies. 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 leverage ratio that exceeds 3% by a cushion of at least 100 to 200 basis points. The guidelines also provide that financial institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory level. Furthermore, the 4 Federal Reserve Board's guidelines indicate that the Federal Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of an institution's Tier 1 capital, less all intangibles, to total assets, less all intangibles. Failure to meet applicable capital guidelines could subject the financial institution to a variety of enforcement remedies available to the federal regulatory authorities, including 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 to the measures described below under "Federal Deposit Insurance Corporation Improvement Act of 1991" as applicable to undercapitalized institutions. As of December 31, 1999, the Tier 1 risk-based capital ratio, total risk-based capital ratio, and Tier 1 leverage ratio for Huntington were as follows:
Requirement Huntington ----------- ---------- Tier 1 Risk-Based Capital Ratio 4.00 % 7.52 % Total Risk-Based Capital Ratio 8.00 % 10.72 % Tier 1 Leverage Ratio 3.00 % 6.72 %
As of December 31, 1999, Huntington's bank subsidiary also had capital in excess of the minimum requirements. The risk-based capital standards of the Federal Reserve Board, 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. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. Among other things, 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, undercapitalized, significantly undercapitalized, and critically undercapitalized. The federal banking regulatory agencies have adopted regulations to implement the prompt corrective action provisions of FDICIA. Among other things, the regulations define the relevant capital measures for the five capital categories. 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 "undercapitalized". 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 undercapitalized". Finally, an institution is deemed to be "critically undercapitalized" 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 undercapitalized. Undercapitalized 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 undercapitalized institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized 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 undercapitalized institutions may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt. In addition, critically undercapitalized institutions are subject to appointment of a receiver or conservator within 90 days of becoming critically undercapitalized. 5 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 subsidiaries to accept brokered deposits. Under the regulatory definition of brokered deposits, Huntington's depository subsidiary had $530.0 million of brokered deposits at December 31, 1999. FDICIA, as amended, directs that each federal banking regulatory agency prescribe standards, by regulation or guideline, for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, asset quality, earnings, and stock valuation. The Federal Reserve Board and other federal banking agencies have adopted a regulation in the form of guidelines covering most of these items. Huntington believes that the regulation and guidelines will not have a material effect on the operations of its depository institution subsidiaries. INTERSTATE BRANCHING AND CONSOLIDATIONS The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal") provides for nationwide interstate banking and branching. Under the law, interstate acquisitions of banks or bank holding companies in any state by bank holding companies in any other state became permissible in 1995, and interstate branching and consolidations of existing bank subsidiaries in different states became permissible in 1997. On June 30, 1997, Huntington availed itself of the interstate branching and consolidation authority by merging into its lead national bank subsidiary all of its other bank subsidiaries, except The Huntington State Bank, which was subsequently merged into Huntington's lead national bank subsidiary on January 29, 1999. As of that date, The Huntington National Bank was Huntington's sole bank subsidiary. Future bank acquisitions, if any, in states where Huntington formerly had a separate bank subsidiary, will not require compliance with Riegle-Neal entry provisions. 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" ("GLBA"), which was signed into law on November 12, 1999. Under GLBA, 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 Federal Reserve Board 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 are effective on and after March 11, 2000. Financial holding company powers relate to "financial activities" that are determined by the Federal Reserve Board, 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 portfolio investing, subject to significant limitations; and any activities previously found by the Federal Reserve Board to be closely related to banking. A company that is predominantly engaged in financial activities but is not a bank holding company may, if it becomes a bank holding company and thereby also a financial holding company, continue to engage in or retain a subsidiary engaging in those nonfinancial activities the company or its subsidiary was lawfully engaged in on September 30, 1999, but it may not expand those grandfathered activities or initiate new nonfinancial activities. Such grandfathering is available for up to fifteen years. National and state banks are permitted under GLBA (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 portfolio investing. Other provisions of GLBA 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. 6 In January, 2000, the Federal Reserve Board and the Office of the Comptroller of the Currency issued, respectively, an interim and a proposed rule governing the application process for becoming a financial holding company or a financial subsidiary. Additional regulations are expected from these agencies during the year 2000 for the implementation of GLBA. GUIDE 3 INFORMATION Information required by Industry Guide 3 relating to statistical disclosure by bank holding companies is set forth in Items 7 and 8. 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 percent. 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; an office building in Lakeland, Florida; an eleven-story office building in Sarasota, Florida; The Huntington Mortgage Company'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. Of these properties, Huntington owns the thirteen-story and twelve-story office buildings. All of the other major properties are held under long-term leases. Additionally, Huntington owns and occupies a 460,000 square foot Business Service Center which serves as Huntington's primary Operations and Data Center. In 1998, Huntington entered into a sale/leaseback agreement that included the sale of 59 properties. 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 Item 8 in Note 15 of Notes to Consolidated Financial Statements on page 46. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 7 Part II ------- 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 January 31, 2000, Huntington had 33,539 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 a table entitled "Market Prices, Key Ratios and Statistics (Quarterly Data)" on page 26 in Item 7. Information regarding restrictions on dividends, as required by this item, is set forth in Item 1 "Business-Regulatory Matters-Dividend Restrictions" above and in Item 8 in Notes 7 and 19 of Notes to Consolidated Financial Statements on pages 39 and 48, respectively. ITEM 6: SELECTED FINANCIAL DATA Information required by this item is set forth in Item 7 in Table 1 on page 9. 8 HUNTINGTON BANCSHARES INCORPORATED - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- TABLE 1 - --------------------------------------------------------------------------------
CONSOLIDATED SELECTED FINANCIAL DATA YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands of dollars, except per share amounts) 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF OPERATIONS Total interest income $ 2,026,002 $ 1,999,364 $ 1,981,473 $ 1,775,734 $ 1,709,627 $ 1,418,610 Total interest expense 984,240 978,271 954,243 880,648 856,860 546,880 Net interest income 1,041,762 1,021,093 1,027,230 895,086 852,767 871,730 Securities gains 12,972 29,793 7,978 17,620 9,380 2,297 Gains on sale of credit card portfolios 108,530 9,530 -- -- -- -- Provision for loan losses 88,447 105,242 107,797 76,371 36,712 21,954 Net income 422,074 301,768 292,663 304,269 281,801 276,320 Operating net income (1) 422,074 362,068 338,897 304,269 281,801 276,320 PER COMMON SHARE (2) Net income Basic 1.83 1.30 1.27 1.31 1.17 1.15 Diluted 1.82 1.29 1.25 1.29 1.16 1.15 Diluted--Operating (1) 1.82 1.54 1.45 1.29 1.16 1.15 Cash dividends declared 0.76 0.68 0.62 0.56 0.51 0.46 Book value at year-end 9.53 9.27 8.73 7.82 7.59 6.85 BALANCE SHEET HIGHLIGHTS Total assets at year-end 29,036,953 28,296,336 26,730,540 24,371,946 23,495,337 20,688,505 Total long-term debt at year-end 697,677 707,359 498,889 550,531 517,202 555,514 Average long-term debt 702,974 620,688 526,379 515,664 529,140 561,872 Average shareholders' equity 2,146,735 2,064,241 1,893,788 1,776,151 1,742,826 1,621,443 Average total assets $28,739,450 $26,891,558 $25,150,659 $23,374,490 $22,098,785 $19,498,530 - ------------------------------------------------------------------------------------------------------------------------------------ KEY RATIOS AND STATISTICS 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ MARGIN ANALYSIS--AS A % OF AVERAGE EARNING ASSETS (3) Interest Income 7.97% 8.33% 8.52% 8.26% 8.43% 7.99% Interest Expense 3.86 4.05 4.08 4.07 4.19 3.04 ----------- ----------- ----------- ----------- ----------- ----------- NET INTEREST MARGIN 4.11% 4.28% 4.44% 4.19% 4.24% 4.95% =========== =========== =========== =========== =========== =========== RETURN ON Average total assets 1.47% 1.12% 1.16% 1.30% 1.28% 1.42% Average total assets--Operating (1) 1.47 1.35 1.35 1.30 1.28 1.42 Average shareholders' equity 19.66 14.62 15.44 17.13 16.17 17.04 Average shareholders' equity--Operating (1) 19.66 17.54 17.88 17.13 16.17 17.04 Dividend payout ratio 41.53 53.15 49.67 42.22 43.82 38.50 Average shareholders' equity to average total assets 7.47 7.68 7.53 7.60 7.89 8.32 Tier I risk-based capital ratio 7.52 7.10 8.83 8.11 8.66 9.67 Total risk-based capital ratio 10.72 10.73 11.68 11.29 12.01 13.32 Tier I leverage ratio 6.72% 6.37% 7.77% 6.80% 6.99% 7.95% - ------------------------------------------------------------------------------------------------------------------------------------ OTHER DATA 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Full-time equivalent employees 9,516 10,159 9,485 9,467 9,083 9,642 Domestic and foreign banking offices 517 531 454 429 406 420
(1) Excludes special charges, including merger costs, and related taxes. (2) Adjusted for stock splits and stock dividends, as applicable. (3) Presented on a fully tax equivalent basis assuming a 35% tax rate. 9 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- INTRODUCTION Huntington Bancshares Incorporated (Huntington) is a multi-state bank holding company headquartered in Columbus, Ohio. Its subsidiaries are engaged in full-service commercial and consumer banking, mortgage banking, lease financing, trust services, discount brokerage services, underwriting credit life and disability insurance, issuing commercial paper guaranteed by Huntington, and selling other insurance and financial products and services. Huntington's subsidiaries operate domestically in offices located in Florida, Georgia, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, South Carolina, and West Virginia. Huntington has foreign offices in the Cayman Islands and Hong Kong. In 1995, Congress passed the Private Securities Litigation Reform Act to encourage corporations to provide investors with information about anticipated future financial performance, goals, and strategies. The Act provides a safe harbor for such disclosure, or in other words, protection from unwarranted litigation if actual results are not the same as management's expectations. This Financial Supplement to the Proxy, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements including certain plans, expectations, goals, and projections that are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained in or implied by Huntington's statements due to a variety of factors including: - changes in economic conditions and movements in interest rates; - competitive pressures on product pricing and services; - success and timing of business strategies and successful integration of acquired businesses; - the nature, extent, and timing of governmental actions and reforms; and, - extended disruption of vital infrastructure. The management of Huntington encourages readers of this Financial Supplement to the Proxy to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. The following discussion and analysis of the financial performance of Huntington for the year should be read in conjunction with the financial statements, notes and other information contained in this document. OVERVIEW Huntington reported net income of $422.1 million for 1999, compared with $301.8 million and $292.7 million for 1998 and 1997, respectively. For the same periods, diluted earnings per share (EPS) were $1.82, $1.29 and $1.25. All of the following financial information is reported on an operating basis, except where indicated. Operating results exclude special charges incurred in 1998 associated with several strategic actions that enhanced profitability and the merger-related expenses incurred in 1997 in connection with the acquisition of First Michigan Bank Corporation (First Michigan). Huntington's operating earnings for 1999 were $422.1 million, compared with $362.1 million in 1998 and $338.9 million in 1997. Diluted EPS was $1.82, compared with $1.54 in 1998 and $1.45 in 1997, an increase of 18.2% and 25.5%, respectively. Per share amounts for all prior periods have been restated to reflect the ten-percent stock dividend distributed to shareholders in July 1999. Return on average equity (ROE) was 19.66% for 1999, versus 17.54% and 17.88% for each of the two preceding years. Return on average assets (ROA) was 1.47% for the current year and 1.35% in each of the two previous years. Cash basis results, presented in the table below, exclude amortization of goodwill and other intangibles (net of income taxes) from net income and related asset amounts from total assets and shareholders' equity: 1999 1998 1997 ---- ---- ---- EPS $ 1.94 $ 1.64 $ 1.15 ROE 30.82% 24.35% 21.36% ROA 1.61% 1.45% 1.41% Total assets were $29.0 billion at December 31, 1999, up from $28.3 billion from year-end 1998. In October of 1999, Huntington completed the sale of its credit card portfolio to The Chase Manhattan Bank (Chase). Approximately $541 million in receivables were sold, resulting in a gain of $108.5 million. This transaction was part of Huntington's strategy to exit specific business lines and reinvest in businesses with higher growth potential. Under the terms of the sale agreement, Huntington will work together with Chase to develop marketing programs, sell the product through its Direct Bank and banking offices, and receive origination fees along with a share of the revenue generated from new receivables. 10 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - --------------------------------------------------------------------------------
TABLE 2 - ----------------------------------------------------------------------------------------------------------------- LOAN PORTFOLIO COMPOSITION DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------- (in millions of dollars) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Commercial $ 6,300 $ 6,027 $ 5,271 $ 5,130 $ 4,869 Real Estate Construction 1,237 919 864 699 524 Mortgage 3,596 3,640 3,598 3,623 3,552 Consumer Loans 6,793 6,958 6,463 6,123 5,741 Lease financing 2,742 1,911 1,542 1,183 784 ------------- ------------- ------------ ------------ ------------- TOTAL LOANS $ 20,668 $19,455 $17,738 $ 16,758 $ 15,470 ============= ============= ============ ============ =============
Note: There are no loans outstanding which would be considered a concentration of lending in any particular industry or group of industries.
TABLE 3 - ------------------------------------------------------------------------------------------------------------------------- MATURITY SCHEDULE OF SELECTED LOANS - ------------------------------------------------------------------------------------------------------------------------- (in millions of dollars) DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------------- After One Within But Within After One Year Five Years Five Years Total ---------- ---------- ---------- ---------- Commercial $ 3,664 $ 1,744 $ 892 $6,300 Real estate - construction 542 502 193 1,237 ---------- ---------- ---------- ---------- TOTAL $ 4,206 $ 2,246 $1,085 $7,537 ========== ========== ========== ========== Variable interest rates $ 1,408 $ 693 ========== ========== Fixed interest rates $ 838 $ 392 ========== ==========
Note: Loan balances above are net of unearned income and there are no loans outstanding which would be a concentration of lending in any particular industry or group of industries. Adjusted for the impact of the credit card sale, average total loans grew 9.5% from 1998. Commercial loans grew by 8.7% while consumer loans grew by 11.4%, led by strong volumes in vehicle leasing and home equity loans. Average loans secured by real estate, which include residential mortgage lending, increased by 6.6% compared to 1998. Core deposits represent Huntington's most significant source of funding. When combined with other core funding sources, core deposits provide approximately 71% of Huntington's funding needs. Core deposits were $16.9 billion, down $.7 billion, or 4.3%, from the prior year-end. This decline was attributable to the runoff of retail certificates of deposit reinvested by customers into alternative investments such as mutual funds and annuities, including those sold by Huntington. Excluding time deposits, average core deposits grew 11.7% with particular strength in savings and transaction account products. Huntington continued to raise short-term wholesale monies and issue unsecured medium-term notes as sources of additional funding. LINES OF BUSINESS Huntington views its operations as five distinct segments. Retail Banking, Corporate Banking, Dealer Sales, and the Private Financial Group are the company's major business lines. The fifth segment includes Huntington's Treasury function and other unallocated assets, liabilities, revenue, and expense. Line of business results are determined based upon Huntington's business profitability reporting system which assigns balance sheet and income statement items to each of the business segments. This process is designed around Huntington's organizational and management structure and, accordingly, the results are not necessarily comparable with similar information published by other financial institutions. Below is a brief description of each line of business and a discussion of the business segment results, which can be found in Note 22 in the Notes to Consolidated Financial Statements. 11 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- RETAIL BANKING Retail Banking provides products and services to retail and business banking customers. This business unit's products include home equity loans, first mortgage loans, installment loans, small business loans, credit cards, deposit products, as well as investment and insurance services. These products and services are offered through Huntington's traditional banking network, in-store branches, Direct Bank, and Web Bank. Retail Banking net income was $177.8 million for 1999 versus $129.5 million for 1998, representing a 37.3% increase. A portion of the growth came from the full year benefit of Huntington's acquisition of 60 banking offices in Florida in June 1998. Excluding this impact, the Retail Banking business line grew 28.5%. Non-interest income for the year increased 15.0% over the prior year with strength in service charges, brokerage and insurance income, and electronic banking income. Mortgage banking revenues were off 6.3% as higher market rates curtailed new loan production. Non-interest expenses were relatively flat for the year as expense containment offset volume-related expense increases. This segment contributed 42% of Huntington's 1999 net income and comprised 31% of its total loan portfolio. CORPORATE BANKING Customers in this segment represent the middle-market and large corporate banking relationships which use a variety of banking products and services including, but not limited to, commercial loans, asset based financing, international trade, and cash management. Huntington's capital markets division also provides alternative financing solutions for larger business clients, including privately placed debt, syndicated commercial lending, and the sale of interest rate protection products. Corporate Banking posted net income of $126.0 million for the year, a 11.6% increase over 1998. The increase was the result of solid loan and deposit growth, despite the impact of certain loan paydowns on significant larger credits during the year, combined with lower charge-offs on portfolio loans. This segment contributed 30% of Huntington's annual earnings and represented 35% of the total loan portfolio. DEALER SALES Dealer Sales product offerings pertain to the automobile lending sector and include floor plan financing, as well as indirect consumer loans and leases. Indirect consumer loans and leases comprise the vast majority of the business and involve the financing of vehicles purchased by individuals through dealerships. Excluding the $37.8 million, net of tax, lease residual valuation adjustment, net income totaled $71.0 million for 1999 and $55.1 million for 1998. Robust vehicle leasing volumes contributed to a 29% increase in net income. Tighter expense control helped to mitigate weakness in non-interest income, which included losses in 1999 realized from the disposition of leased vehicles. This business line totaled 17% of Huntington's net income in the recent twelve months and 31% of its outstanding loans. PRIVATE FINANCIAL GROUP Huntington's Private Financial Group (PFG) provides an array of products and services designed to meet the needs of Huntington's higher wealth banking customers. Revenue is derived through the sale of personal trust, asset management, investment advisory, insurance, and deposit and loan products and services. PFG provides customers with "one-stop shopping" for all their financial needs. PFG achieved net income for the year just ended of $23.5 million, an increase from $22.2 million in 1998. Net interest income for the year declined 8.0% due to lower loan volumes. Non-interest income increased for the same period 10.9% primarily due to a 15.6% increase in service charges, a 6.2% increase in trust revenue, and a 3.6% increase in credit card income. Direct non-interest expenses declined 5.2% over the same period. This segment represented 6% of Huntington's 1999 operating results and 3% of total loans at December 31, 1999. TREASURY/OTHER Huntington uses a match-funded transfer pricing system to allocate interest income and interest expense to its business segments. This approach consolidates the interest rate risk management of Huntington into its Treasury Group. As part of its overall interest rate risk and liquidity management strategy, the Treasury Group administers an investment portfolio of approximately $5 billion. Revenue and expense associated with these activities remain within the Treasury Group. Additionally, the Treasury/Other segment absorbs unassigned assets, liabilities, equity, revenue, and expense that cannot be directly assigned or allocated to one of Huntington's lines of business. Costs associated with intangibles that have not been allocated to the major business lines are also included in Other. This segment reported net income of $61.5 million for the recent year. In comparing annual results for 1999 with 1998, the increase was attributable to higher non-interest income from gains realized from the credit card sale to Chase and lower non-interest expenses in almost all categories (before amortization of intangibles and other non- 12 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- recurring expenses) offset by lower net interest income and securities gains. Amortization of intangibles included a full year's impact from the Florida branch acquisition that occurred in June 1998. RESULTS OF OPERATIONS NET INTEREST INCOME Huntington's net interest income was $1,041.8 million in 1999, versus $1,021.1 million in 1998, and $1,027.2 million in 1997. The net interest margin, on a fully tax equivalent basis, was 4.11% during the recent twelve months, compared with 4.28% and 4.44% in the two preceding years. The margin decline is primarily due to the funding of loan growth through more expensive wholesale funds as loan growth outpaced core deposit growth. Interest rate swaps and other off-balance sheet financial instruments used for asset/liability management purposes provided benefits of $21.6 million (8 basis points), $27.3 million (11 basis points) and $6.0 million (3 basis points) in each of the recent three years. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses reflects management's evaluation of the adequacy of the allowance for loan losses (ALL). The ALL represents management's assessment of possible losses inherent in Huntington's loan portfolio. Huntington allocates the ALL to each loan category based on a detailed credit quality review performed periodically on specific commercial loans based on size and relative risk and other relevant factors such as portfolio performance, internal controls, and impacts from mergers and acquisitions. Loss factors are applied on larger, commercial and industrial and commercial real estate credits and represent management's estimate of
TABLE 4 - ------------------------------------------------------------------------------------------------------------------------------ CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1) - ------------------------------------------------------------------------------------------------------------------------------ 1999 1998 ----------------------------------- ---------------------------------- Increase (Decrease) Increase (Decrease) From Previous From Previous Year Due To: Year Due To: ----------------------------------- ---------------------------------- Fully Tax Equivalent Basis (2) Yield/ Yield/ (in millions of dollars) Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------------------------ Interest bearing deposits in banks $ (0.1) $(0.5) $ (0.6) $ 0.6 $ (0.1) $0.5 Trading account securities 0.1 0.1 0.2 0.0 0.0 0.0 Federal funds sold and securities purchased under resale agreements (11.3) (0.4) (11.7) 10.4 0.1 10.5 Mortgages held for sale (4.0) 0.1 (3.9) 11.1 (1.0) 10.1 Taxable securities (0.7) (11.1) (11.8) (28.7) (2.3) (31.0) Tax-exempt securities 4.1 (2.5) 1.6 (1.6) (1.8) (3.4) Total loans 142.7 (90.8) 51.9 76.9 (47.2) 29.7 ---------- ----------- ---------- ---------- ----------- --------- TOTAL EARNING ASSETS 130.8 (105.1) 25.7 68.7 (52.3) 16.4 ---------- ----------- ---------- ---------- ----------- --------- Interest bearing demand deposits 13.4 (3.3) 10.1 10.2 1.8 12.0 Savings deposits 15.7 (3.7) 12.0 7.5 6.1 13.6 Other domestic time deposits (27.6) (25.1) (52.7) 24.1 (4.7) 19.4 Certificates of deposit of $100,000 or more (7.3) (7.6) (14.9) (3.0) 0.6 (2.4) Foreign time deposits 13.4 (0.7) 12.7 (16.0) (0.3) (16.3) Short-term borrowings 21.0 (4.4) 16.6 (35.8) (12.9) (48.7) Medium-term notes 12.1 (6.7) 5.4 52.3 (3.9) 48.4 Subordinated notes and other long-term debt, including capital securities 6.9 9.8 16.7 7.6 (9.5) (1.9) ---------- ----------- ---------- ---------- ----------- --------- TOTAL INTEREST BEARING LIABILITIES 47.6 (41.7) 5.9 46.9 (22.8) 24.1 ---------- ----------- ---------- ---------- ----------- --------- NET INTEREST INCOME $ 83.2 $(63.4) $ 19.8 $ 21.8 $ (29.5) $(7.7) ========== =========== ========== ========== =========== =========
(1) The change in interest rates due to both rate and volume has been allocated between the factors in proportion of the relationship of the absolute dollar amounts of the change in each. (2) Calculated assuming a 35% tax rate. 13 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- the inherent loss. The portion of the allowance allocated to homogeneous consumer loans is determined by applying projected loss ratios to various segments of the loan portfolio giving consideration to existing economic conditions and trends. Projected loss ratios incorporate factors such as trends in past due and non-accrual amounts, recent loan loss experience, current economic conditions, risk characteristics, and concentrations of various loan categories. Actual loss ratios experienced in the future, however, could vary from those projected because a loan's performance depends not only on economic factors but also other factors unique to each customer. The diversity in size of corporate commercial loans can be significant as well and even if the projected number of loans deteriorate, the dollar exposure could significantly vary from estimated amounts. Additionally, the impact on individual customers from many economic events that have occurred may yet be unknown. Such events include high energy prices, low automobile and home sales in selected markets. To ensure adequacy to a higher degree of confidence, an unallocated allowance is maintained. For analytical purposes, the allocation of the ALL is provided in Table 6. While amounts are allocated to various portfolio segments, the total ALL, less the portion attributable to reserves as prescribed under provisions of Statement of Financial Accounting Standard No. 114, is available to absorb losses from any segment of the portfolio. The provision for loan losses was $88.4 million in 1999, down from $105.2 million in 1998. Two years ago, the provision totaled $107.8 million. The decline in the current year's provision is due in large part to the credit card sale to Chase. Net charge-offs as a percent of average total loans declined to .40% from .51% in 1998 and .50% in 1997. In 1999, commercial and consumer loan losses declined 33.9% and 7.4%, respectively.
TABLE 5 - ---------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF ALLOWANCE FOR LOAN LOSSES AND SELECTED STATISTICS - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES, BEGINNING OF YEAR $ 290,948 $ 258,171 $ 230,778 $ 222,487 $ 225,225 LOAN LOSSES Commercial (16,203) (24,512) (23,276) (23,904) (15,947) Real estate Construction (638) (80) (375) --- (392) Mortgage (3,803) (3,358) (2,663) (2,768) (5,086) Consumer Loans (78,688) (84,961) (74,761) (59,843) (39,000) Leases (12,959) (13,444) (9,648) (4,492) (1,989) -------------- -------------- --------------- -------------- -------------- Total loan losses (112,291) (126,355) (110,723) (91,007) (62,414) -------------- -------------- --------------- -------------- -------------- RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF Commercial 5,303 4,546 4,373 4,884 3,696 Real estate Construction 192 441 111 556 5 Mortgage 1,528 2,167 619 1,402 977 Consumer Loans 22,650 23,140 16,382 13,457 11,156 Leases 2,532 1,554 1,057 721 303 -------------- -------------- --------------- -------------- -------------- Total recoveries 32,205 31,848 22,542 21,020 16,137 -------------- -------------- --------------- -------------- -------------- NET LOAN LOSSES (80,086) (94,507) (88,181) (69,987) (46,277) -------------- -------------- --------------- -------------- -------------- PROVISION FOR LOAN LOSSES 88,447 105,242 107,797 76,371 36,712 ALLOWANCE ACQUIRED/OTHER --- 22,042 7,777 1,907 6,827 -------------- -------------- --------------- -------------- -------------- ALLOWANCE FOR LOAN LOSSES, END OF YEAR $ 299,309 $ 290,948 $ 258,171 $ 230,778 $ 222,487 ============== ============== =============== ============== ============== AS A % OF AVERAGE TOTAL LOANS Net loan losses 0.40% 0.51% 0.50% 0.44% 0.30% Provision for loan losses 0.44% 0.57% 0.61% 0.48% 0.24% Allowance for loan losses as a % of total loans (end of period) 1.45% 1.50% 1.46% 1.38% 1.44% Net loan loss coverage (1) 8.78x 6.72x 7.01x 7.62x 10.07x
(1) Income before income taxes (excluding special charges) and the provision for loan losses to net loan losses. 14 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - --------------------------------------------------------------------------------
TABLE 6 - ------------------------------------------------------------------------------------------------------------------------------- ALLOCATION OF ALLOWANCE FOR LOAN LOSSES - ------------------------------------------------------------------------------------------------------------------------------- Real Estate Consumer --------------------------- -------------------------- (in thousands of dollars) Commercial Construction Mortgage Loans Leases Unallocated Total - ------------------------------------------------------------------------------------------------------------------------------- 1999: AMOUNT $ 94,978 $15,452 $36,877 $ 78,655 $25,378 $47,969 $ 299,309 % OF LOANS TO TOTAL LOANS 30.5% 6.0% 17.4% 32.9% 13.2% --- 100.0% 1998: Amount $ 82,129 $11,112 $40,070 $104,198 $17,823 $35,616 $ 290,948 % of Loans to Total Loans 31.0% 4.7% 18.7% 35.8% 9.8% --- 100.0% 1997: Amount $ 86,439 $ 8,140 $38,598 $ 75,405 $ 6,631 $42,958 $ 258,171 % of Loans to Total Loans 29.7% 4.9% 20.3% 36.4% 8.7% --- 100.0% 1996: Amount $113,555 $ 2,033 $18,987 $ 54,564 $ 3,457 $38,182 $ 230,778 % of Loans to Total Loans 30.6% 4.2% 21.6% 36.5% 7.1% --- 100.0% 1995: Amount $119,200 $ 2,258 $18,179 $ 43,880 $ 3,651 $35,319 $ 222,487 % of Loans to Total Loans 31.5% 3.4% 23.0% 37.1% 5.0% --- 100.0%
At December 31, 1999, the ALL was $299.3 million, representing 1.45% of total loans, down slightly from 1.50% a year ago and 1.46% in 1997. The ALL covered non-performing loans 3.6 times, which approximates the prior year's level. Additional information regarding the ALL and asset quality appears in the "Credit Risk" section. NON-INTEREST INCOME Excluding gains from securities sales and gains from the sale of credit cards, non-interest income totaled $452.1 million in 1999, a 13.3% increase over $398.9 million in 1998. Comparable non-interest income was $334.9 million in 1997. Significant improvements were experienced in several fee-based activities as fee income as a percentage of total revenue increased from 28% in 1998 to 30% in 1999. Service charges on deposit accounts increased 24% in 1999 due to related pricing changes, growth in sales of cash management products, and an overall higher level of transaction deposit accounts. Brokerage and insurance income was up 42% because of higher retail investment and insurance sales through Huntington's growing network of licensed investment and insurance representatives combined with some customer migration from certificates of deposit to investment products. Electronic banking fees grew nearly 28% in 1999 due to increased customer usage of Huntington's check card product and increased Web Bank relationships. Securities transactions netted gains of $13 million in 1999 compared with $29.8 million for the same twelve-month period a year ago. In 1999, Huntington sold a portion of its investment in common stock of S1 Corporation at a gain of $31 million. Substantially offsetting this gain were losses from the sale of fixed-income investments, as Huntington repositioned the portfolio of securities available for sale. NON-INTEREST EXPENSE Excluding special charges and other non-recurring expenses, non-interest expense was $815.3 million, versus $823.9 million and $751.9 million in the two preceding years. Other non-recurring expenses totaled $96.8 million in 1999 and included a $58.2 million valuation adjustment of vehicles underlying certain direct financing leases. In addition, Huntington recorded costs related to the company's "Huntington 2000+" program as well as other one-time expenses, which included amounts paid for management consulting and other professional services as well as $11 million for a special cash award to employees for achievement of the program goals for 1999. "Huntington 2000+" is a collaborative effort among all employees to evaluate processes and procedures and the way Huntington conducts its business with a mission of maximizing efficiency through all aspects of the organization. As a result of the "Huntington 2000+" program, overall non-interest expenses declined, despite a full year of expenses related to the June 1998 Florida branch acquisition. These banking office additions, along with depreciation expense related to Huntington's operations center, which was occupied in the second half of 1999, and Year 2000 system upgrades drove increases in Net occupancy and Equipment expenses. Most other expense categories declined, representing the success of the "Huntington 2000+" program. 15 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- The efficiency ratio represents non-interest expense as a percentage of fees and other income plus tax-equivalent net interest income and is a measure of cost to generate a dollar of revenue. Huntington's efficiency ratio for 1999 improved to 51.76% from 55.80% in 1998. During the fourth quarter of 1998, Huntington recorded a $90 million special charge related to costs for several strategic actions that enhanced profitability, including the sale or closure of underperforming banking offices and the termination of certain business activities. At December 31, 1999, Huntington had substantially completed all of its strategic initiatives, including the sale or closure of identified banking offices, discontinuation of various business activities and the targeted reductions in the workforce. All significant components of the charge were utilized as of December 31, 1999. See Note 17 to the Consolidated Financial Statements for additional information regarding the 1998 Special Charges. In connection with the acquisition of First Michigan in 1997, Huntington incurred a merger-related charge of $51 million consisting primarily of personnel, facilities, and systems costs, as well as $12 million of professional fees and other costs to effect the business combination. All activities related to this charge were completed by December 31, 1998. PROVISION FOR INCOME TAXES The provision for income taxes was $192.7 million in 1999, compared with $138.4 million in 1998 and $166.5 million in 1997. Huntington's effective tax rate approximated 31% in the recent and preceding year versus 36.3% in 1997. The lower effective rate in 1999 and 1998 was due primarily to a higher mix of tax-exempt income. Furthermore, during 1999, Huntington established a private charitable foundation with an initial funding of $15 million. The private foundation was established in order to realize significant federal income tax benefits that are allowed under the Internal Revenue Code. The rate was higher than normal in 1997 as a result of significant non-deductible expenses incurred in connection with the First Michigan and other bank acquisitions. INTEREST RATE RISK AND LIQUIDITY MANAGEMENT INTEREST RATE RISK MANAGEMENT Huntington seeks to achieve consistent growth in net interest income and net income while managing volatility arising from shifts in interest rates. The Asset and Liability Management Committee (ALCO) oversees financial risk management, establishing broad policies and specific operating limits that govern a variety of financial risks inherent in Huntington's operations, including interest rate, liquidity, counterparty, settlement, and market risks. On and off-balance sheet strategies and tactics are reviewed and monitored regularly by ALCO to ensure consistency with approved risk tolerances. Interest rate risk management is a dynamic process, encompassing 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 its overall balance sheet objectives, Huntington regularly accesses a variety of global markets--money, bond, futures, and options--as well as numerous trading exchanges. In addition, dealers in over-the-counter financial instruments provide availability of interest rate swaps as needed. Measurement and monitoring of interest rate risk is an ongoing process. A key element in this process is Huntington's estimation of the amount that net interest income will change over a twelve to twenty-four month period given a directional shift in interest rates. The income simulation model used by Huntington captures all assets, liabilities, and off-balance sheet financial instruments, accounting for significant variables that are believed to be affected by interest rates. These include prepayment speeds on mortgages and consumer installment loans, cash flows of loans and deposits, principal amortization on revolving credit instruments, and
TABLE 7 - ---------------------------------------------------------------------------------------- INVESTMENT SECURITIES DECEMBER 31, - ---------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - ---------------------------------------------------------------------------------------- U.S. Treasury and Federal Agencies $ --- $ 156 $ 656 States and political subdivisions 18,765 24,778 32,354 --------------- ------------- ------------ TOTAL INVESTMENT SECURITIES $ 18,765 $ 24,934 $33,010 =============== ============= ============ AMORTIZED COST AND FAIR VALUES BY MATURITY AT DECEMBER 31, 1999 - ---------------------------------------------------------------------------------------- AMORTIZED FAIR (in thousands of dollars) COST VALUE YIELD - ---------------------------------------------------------------------------------------- States and political subdivisions Under 1 year $ 2,410 $ 2,389 8.44% 1-5 years 12,911 12,855 7.54% 6-10 years 2,872 2,859 8.08% Over 10 years 572 559 8.52% --------------- ------------- Total 18,765 18,662 --------------- ------------- TOTAL INVESTMENT SECURITIES $ 18,765 $ 18,662 =============== =============
Note: Weighted average yields were calculated on the basis of amortized cost and have been adjusted to a fully tax equivalent basis, assuming a 35% tax rate. 16 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- balance sheet growth assumptions. The model also captures embedded options, e.g. interest rate caps/floors or call options, and accounts for changes in rate relationships, as various rate indices lead or lag changes in market rates. While these assumptions are inherently uncertain, management assigns probabilities and, therefore, believes at any point in time that the model provides a reasonably accurate estimate of Huntington's interest rate risk exposure. Management reporting of this information is regularly shared with the Board of Directors. At December 31, 1999, the results of Huntington's interest sensitivity analysis indicated that net interest income would be expected to decrease by approximately 2.2% if rates rose 100 basis points and would drop an estimated 4.7% in the event of a 200 basis point increase. If rates declined 100 and 200 basis points, Huntington would benefit 2.2% and 4.4%, respectively.
TABLE 8 - ---------------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- U.S. Treasury and Federal Agencies $4,165,342 $4,096,134 $ 5,001,034 Other 704,861 685,281 708,780 ---------------- --------------- --------------- TOTAL SECURITIES AVAILABLE FOR SALE $4,870,203 $4,781,415 $ 5,709,814 ================ =============== ===============
AMORTIZED COST AND FAIR VALUES BY MATURITY AT DECEMBER 31, 1999 - ---------------------------------------------------------------------------------------------------------------- AMORTIZED FAIR (in thousands of dollars) COST VALUE YIELD (1) - ---------------------------------------------------------------------------------------------------------------- U.S. Treasury Under 1 year $ 801 $ 801 6.27% 1-5 years 51,371 49,328 5.18% 6-10 years 476,055 446,512 5.35% ---------------- --------------- Total 528,227 496,641 ---------------- --------------- Federal Agencies Mortgage-backed securities 1-5 years 4 4 8.13% 6-10 years 27,360 26,992 6.60% Over 10 years 1,638,047 1,574,336 6.69% ---------------- --------------- Total 1,665,411 1,601,332 ---------------- --------------- Other agencies 1-5 years 789,008 760,251 5.79% 6-10 years 498,790 469,696 5.72% Over 10 years 868,124 837,422 6.33% ---------------- --------------- Total 2,155,922 2,067,369 ---------------- --------------- Total U.S. Treasury and Federal Agencies 4,349,560 4,165,342 ---------------- --------------- Other Under 1 year 20,805 20,832 9.04% 1-5 years 253,363 251,862 7.05% 6-10 years 130,486 125,951 6.54% Over 10 years 251,333 239,975 6.02% Marketable equity securities 10,524 66,241 5.51% ---------------- --------------- Total 666,511 704,861 ---------------- --------------- TOTAL SECURITIES AVAILABLE FOR SALE $5,016,071 $4,870,203 ================ ===============
At December 31, 1999, Huntington had no concentrations of securities by a single issuer in excess of 10% of shareholders' equity. (1)Weighted average yields were calculated on the basis of amortized cost. 17 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- Active interest rate risk management necessitates the use of various types of off-balance sheet financial instruments, primarily interest rate swaps. Risk that is created by different indices on products, by unequal terms to maturity of assets and liabilities, and by products that are appealing to customers but incompatible with current risk limits can be eliminated or decreased in a cost efficient manner by utilizing interest rate swaps. Often, the swap strategy has enabled Huntington to lower the overall cost of raising wholesale funds. Similarly, financial futures, interest rate caps and floors, options, and forward rate agreements are used to control financial risk effectively. Off-balance sheet instruments are often preferable to similar cash instruments because, though performing identically, they require less capital while preserving access to the marketplace. Table 9 below illustrates the approximate market values, estimated maturities and weighted average rates of the interest rate swaps used by Huntington in its interest rate risk management program at December 31, 1999. As is the case with cash securities, the market value of interest rate swaps is largely a function of the financial market's expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of the swaps on net interest income. This will depend, in large part, on the shape of the yield curve as well as interest rate levels. With respect to the variable rate information presented in Table 9, management made no assumptions regarding future changes in interest rates. The pay rates on Huntington's receive-fixed swaps vary based on movements in the applicable London interbank offered rate (LIBOR). Receive-fixed asset conversion swaps and receive-fixed liability conversion swaps with notional values of $850 million and $100 million, respectively, have embedded written LIBOR-based call options. Basis swaps are contracts that provide for both parties to receive interest payments according to different rate indices and are used to protect against changes in spreads between market rates. The contractual amount of interest payments to be exchanged are based on the notional values of the swap portfolio. These notional values do not represent direct credit exposures. At December 31, 1999, Huntington's credit risk from interest rate swaps used for asset/liability management purposes was $55.4 million, which represents the sum of the aggregate fair value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties. In order to minimize the risk that a swap counterparty will not satisfy its interest payment obligation under the terms of the contract, Huntington performs credit reviews on all counterparties, restricts the number of counterparties used to a select group of high quality institutions, obtains collateral, and enters into formal netting arrangements. Huntington has never experienced any past due amounts from a swap counterparty and does not anticipate nonperformance in the future by any such counterparties. The total notional amount of off-balance sheet instruments used by Huntington on behalf of customers (for which the related interest rate risk is offset by third party contracts) was $1 billion at December 31, 1999. The credit exposure from these contracts is not material and furthermore, these separate activities, which are accounted for at fair value, are not a significant part of Huntington's operations. Accordingly, they have been excluded from the above discussion of off-balance sheet financial instruments and the related table.
TABLE 9 - ----------------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAP PORTFOLIO DECEMBER 31, 1999 - ----------------------------------------------------------------------------------------------------------------------- ASSET CONVERSION SWAPS LIABILITY CONVERSION SWAPS ---------------------------------- --------------------------------- BASIS Receive- Pay- Receive- Pay- PROTECTION (in millions of dollars) fixed fixed Total fixed fixed Total SWAPS - ----------------------------------------------------------------------------------------------------------------------- Notional value $ 1,545 $ 200 $ 1,745 $ 1,805 $ 700 $2,505 $ 1,275 Average maturity (years) 3.0 1.7 2.9 3.9 1.6 3.3 0.6 Market value $ (31.7) $ 1.0 $ (30.7) $ (38.8) $ 3.0 $(35.8) $ 0.2 Average rate: Receive 6.06% 6.14% 6.06% 6.18% 6.11% 6.17% 5.91% Pay 6.13% 6.31% 6.16% 6.14% 6.13% 6.14% 5.83%
18 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- LIQUIDITY MANAGEMENT Liquidity management is also a significant responsibility of ALCO. The objective of ALCO in this regard is to maintain an optimum balance of maturities among Huntington's assets and liabilities such that sufficient cash, or access to cash, is available at all times to meet the needs of borrowers, depositors, and creditors, as well as to fund corporate expansion and other activities. A chief source of Huntington's liquidity is derived from the large retail deposit base accessible by its network of geographically dispersed banking offices. This core funding is supplemented by Huntington's demonstrated ability to raise funds in capital markets and to access funds nationwide. The bank subsidiary's $6 billion domestic bank note and $2 billion European bank note programs are significant sources of wholesale funding. Under these programs, unsecured senior and subordinated notes are issuable with maturities ranging from one month to thirty years. A similar $750 million note program exists at the parent holding company, the proceeds from which are used from time to time to fund certain non-banking activities, finance acquisitions, repurchase Huntington's common stock, or for other general corporate purposes. At December 31, 1999, approximately $4 billion of notes were available under these programs to fund Huntington's future activities. Huntington also has $300 million of capital securities outstanding through its subsidiaries, Huntington Capital I and II. A $200 million line of credit is also available to the parent holding company to support commercial paper borrowings and other short-term working capital needs. TABLE 10 - ------------------------------------------------------------- MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AS OF DECEMBER 31, 1999 - ------------------------------------------------------------- (in thousands of dollars) - ------------------------------------------------------------- Three months or less $ 933,846 Over three through six months 505,041 Over six through twelve months 318,860 Over twelve months 272,804 --------------- Total $ 2,030,551 =============== While liability sources are many, significant liquidity is also available from Huntington's investment and loan portfolios. ALCO regularly monitors the overall liquidity position of the business and ensures that various alternative strategies exist to cover unanticipated events. At the end of the recent year, sufficient liquidity was available to meet estimated short-term and long-term funding needs.
TABLE 11 - ---------------------------------------------------------------------------------------------------------------------- SHORT-TERM BORROWINGS YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS Balance at year-end $2,065,192 $ 2,137,374 $3,064,344 Weighted average interest rate at year-end 4.69% 4.05% 5.26% Maximum amount outstanding at month-end during the year $3,033,277 $ 2,897,385 $3,387,690 Average amount outstanding during the year $2,417,032 $ 1,980,648 $2,733,764 Weighted average interest rate during the year 4.50% 4.72% 5.15%
CREDIT RISK Credit risk represents the probability that a customer or counterparty may not perform in accordance with contractual terms. Credit risk is inherent in the financial services business and results from extending credit to customers, purchasing mortgage-backed securities and entering into off-balance sheet financial derivative instruments. Huntington's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize "in-market" lending. Credit personnel are integrally involved in the origination and underwriting process to ensure adherence to risk policies and underwriting standards. Huntington also manages credit risk through avoiding highly leveraged transactions, diversifying to avoid excessive industry or other concentrations, selling participations to third parties, and requiring collateral. The credit administration function employs extensive risk management techniques, including forecasting, to ensure that loans adhere to corporate policy and problem loans are promptly identified. These procedures provide executive management with the information necessary to implement policy adjustments where necessary, and take corrective actions on a proactive basis. Non-performing assets consist of loans that are no longer accruing interest, loans that have been renegotiated based upon financial difficulties of the borrower, and real estate acquired through foreclosure. Generally, 19 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- commercial and real estate loans are placed on non-accrual status and stop accruing interest 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 are not placed on non-accrual status; rather they are charged off in accordance with regulatory statutes, which is generally no more than 120 days. A charge off may be delayed in circumstances when collateral is repossessed and anticipated to sell at a future date. Total non-performing assets were $98.2 million and $96.1 million, respectively, at December 31, 1999, and 1998. As of the same dates, non-performing loans represented .40% of total loans, while non-performing assets as a percent of total loans and other real estate were .47% and .49%, respectively. Loans past due ninety days or more but continuing to accrue interest were $61.3 million at December 31, 1999, versus $51.0 million one year ago. Huntington also actively manages potential problem loans that are current as to principal and interest but require closer monitoring in the event of deterioration in borrower performance. These potential problem credits totaled $63.2 million at December 31, 1999.
TABLE 12 - ---------------------------------------------------------------------------------------------------------------------------------- NON-PERFORMING ASSETS AND PAST DUE LOANS DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Non-accrual loans Commercial $ 42,958 $ 34,586 $36,459 $ 25,621 $ 28,282 $ 22,523 Real Estate Construction 10,785 10,181 5,916 1,741 1,894 4,071 Commercial 16,131 13,243 10,212 14,843 13,276 11,537 Residential 11,866 14,419 13,394 12,835 11,971 9,393 ------------ ----------- ----------- ----------- ----------- ------------ Total Non-accrual Loans 81,740 72,429 65,981 55,040 55,423 47,524 Renegotiated loans 1,330 4,706 5,822 4,422 5,320 3,768 ------------ ----------- ----------- ----------- ----------- ------------ TOTAL NON-PERFORMING LOANS 83,070 77,135 71,803 59,462 60,743 51,292 ------------ ----------- ----------- ----------- ----------- ------------ Other real estate, net 15,171 18,964 15,343 17,208 23,598 54,153 ------------ ----------- ----------- ----------- ----------- ------------ TOTAL NON-PERFORMING ASSETS $ 98,241 $ 96,099 $87,146 $ 76,670 $ 84,341 $105,445 ============ =========== =========== =========== =========== ============ ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 61,287 $ 51,037 $49,608 $ 39,267 $ 30,937 $ 23,753 ============ =========== =========== =========== =========== ============ NON-PERFORMING LOANS AS A % OF TOTAL LOANS 0.40% 0.40% 0.40% 0.35% 0.39% 0.36% NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND OTHER REAL ESTATE 0.47% 0.49% 0.49% 0.46% 0.54% 0.74% ALLOWANCE FOR LOAN LOSSES AS A % OF NON- PERFORMING LOANS 360.31% 377.19% 359.55% 388.11% 366.28% 439.10% ALLOWANCE FOR LOAN LOSSES AND OTHER REAL ESTATE AS A % OF NON-PERFORMING ASSETS 299.85% 301.00% 294.32% 297.12% 250.06% 199.12% ACCRUING LOANS PAST DUE 90 DAYS OR MORE TO TOTAL LOANS 0.30% 0.26% 0.28% 0.23% 0.20% 0.17%
Note: For 1999, the amount of interest income which would have been recorded under the original terms for total loans classified as non-accrual or renegotiated was $6.1 million. Amounts actually collected and recorded as interest income for these loans totaled $3.5 million. CAPITAL AND DIVIDENDS Huntington places significant emphasis on the maintenance of strong capital, which promotes investor confidence, provides access to the national markets under favorable terms, and enhances business growth and acquisition opportunities. Huntington also recognizes the importance of managing excess capital and continually strives to maintain an appropriate balance between capital adequacy and returns to shareholders. Capital is managed at each subsidiary based upon the respective risks and growth opportunities, as well as regulatory requirements. 20 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- Average shareholders' equity was $2.1 billion for the twelve months ended December 31, 1999, and 1998. Huntington's ratio of average equity to average assets in the recent year was 7.47%, compared with 7.68% one year ago. 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 and loan commitments. These guidelines further define "well-capitalized" levels for Tier 1, Total Capital, and Leverage ratio purposes at 6%, 10%, and 5%, respectively. At the recent year end, Huntington's Tier 1 capital ratio was 7.52%, its Total Capital ratio was 10.72%, and its Leverage ratio was 6.72%, each of which exceeds the well-capitalized requirements. Huntington's bank subsidiary also had regulatory capital ratios in excess of the levels established for well-capitalized institutions. Cash dividends declared were $.76 a share in 1999, up 11.8% from 1998. A 10% stock dividend was distributed to shareholders in the year just ended, marking the twenty-sixth consecutive year in which Huntington has issued a stock split or stock dividend. During 1999, Huntington repurchased approximately 3.3 million shares of its common stock through open market and privately negotiated transactions. The 16.5 million-share authorization (after adjusting for the July 1999 ten percent stock dividend) approved by the Board of Directors in the third quarter of 1998 is still in process of completion. As of December 31, 1999, 11.9 million shares remained under the authorization. Repurchased shares are being reserved for reissue in connection with Huntington's dividend reinvestment and employee benefit plans as well as for stock dividends, acquisitions, and other corporate purposes. FOURTH QUARTER RESULTS On an operating basis, earnings for the fourth quarter of 1999 were $114.9 million, or $.50 per share, compared with $91.5 million, or $.39 per share, in the same period last year. ROE for the current and prior year quarter was 21.64% and 17.87%, respectively. ROA was 1.57%, versus 1.31% in last year's final three months. Cash basis ROE was 33.69%, up from 29.44% in the comparable period of 1998. Cash basis ROA was 1.71% versus 1.45% one year ago. Net interest income was $252.7 million in the recent quarter, a decrease of 5.5% over the corresponding period last year. This decrease reflects the decline associated with the credit card sale as well as non-recurring events caused by the uncertainties involving the transition to the year 2000 such as higher short-term LIBOR rates and cash reserve levels. After adjusting for the sale of the credit card portfolio, average total loans grew 12% and average earning assets increased 9% over prior quarter balances as a result of strong volumes in automobile leasing and home equity lending. Core deposits declined 1.4% (annualized), primarily due to slight declines in transaction accounts believed to be related to customer uncertainty surrounding the year 2000. The provision for loan losses, favorably impacted by the credit card sale, was $20.0 million in the last quarter of the year, compared with $34.3 million in the same period of 1998. Annualized net charge-offs declined to .32% from .61% of average loans in the same periods. Securities transactions for the recent quarter included the sale of a portion of Huntington's investment in common stock of S1 Corporation, which netted a gain of $7.3 million. Excluding securities gains and the $108.5 million gain from the sale of Huntington's credit card portfolio as discussed above, non-interest income was up 7.1% to $114.3 million for the recent quarter from $106.7 million a year ago. Growth was negatively impacted by the fourth quarter sale of the credit card portfolio combined with lower mortgage banking income. Significant growth was seen in service charges on deposit accounts related to expanded cash management sales and recent pricing changes. Increased check card and Web Bank fees drove Electronic Banking fees up 25.4% from the same period a year ago. Brokerage and insurance income was up 35.8% from the fourth quarter 1998, led by retail investment sales. Non-interest expense, excluding other non-recurring expenses and special charges, totaled $204.9 million in the most recent three months, versus $208.9 million in the final three months of 1998. The decline is due to Huntington's emphasis on efficiency and cost containment. Decreased personnel and related expenses helped offset higher occupancy and equipment costs associated with strategic spending for new banking offices and the move to Huntington's new operations center. During the fourth quarter of 1999, Huntington recorded $96.8 million in costs related to the company's "Huntington 2000+" program as well as other one-time expenses. Please refer to Huntington's previous discussion under Non-Interest Expense for further details. The provision for income taxes was $46.8 million for the recent quarter, compared with $41.0 million in 1998. Huntington's effective tax rate for the respective quarterly periods was 28.9% and 31.0%, representing the impact of the establishment and contribution of $15 million to the private charitable foundation. 21 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- YEAR 2000 Huntington, in an enterprise-wide effort, completed its preparations in 1999 for the Year 2000 date change. Huntington's Year 2000 Plan (the Plan) addressed all systems, software, hardware, and infrastructure components. The Plan also addressed various third-party vendors and service providers to ensure that continued service was in place for core business activities. Furthermore, the Plan included the update of all of Huntington's contingency plans in the event that problems related to the Year 2000 date change arose. In addition, Huntington placed a freeze on all changes to major business processes and systems beginning on November 1, 1999. The purpose of this freeze was to ensure that new programs would not be introduced to the company's existing processes and systems that already had been validated for Year 2000 readiness. This freeze was lifted earlier than planned on February 1, 2000. Identifiable costs for the Year 2000 project incurred in 1999 approximated $13 million, bringing the total cost of the project to roughly $30 million over a three-year period. These costs incorporated not only incremental third-party expenses but also included the salary and benefit costs of employees redeployed and costs of the call center which handled an increased number of customer inquiries before and after January 1, 2000. A minimal amount of expenses will be incurred in 2000 but is not expected to materially impact the operating results in any one period. Huntington benefited from all of the additional work and expense by improving its systems and processes, increasing its internal controls through the auditing and quality assurance programs, improving relationships among business lines, and updating all of its contingency plans. To date, Huntington has not experienced any business disruptions or corruption of its systems. Huntington will continue to monitor its systems and third party relationships throughout 2000 to address unanticipated problems (which may include problems associated with non-Year 2000 compliant third parties and disruptions to the economy in general) and ensure that all processes continue to function properly. PENDING ACQUISITION On February 7, 2000, Huntington announced that it had entered into a merger agreement with Empire Banc Corporation, a $506 million one-bank holding company headquartered in Traverse City, Michigan. Huntington will issue its common stock at a ratio of 2.0355 shares for each outstanding share of Empire Banc common stock in a transaction that will be accounted for as a purchase. Huntington plans to purchase on the open market and then reissue approximately 6.5 million shares in connection with the transaction. The merger is expected to be completed by the end of the second quarter of 2000. 22 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - --------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS - ------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------- ----------------------------------- ----------------------------------- INTEREST INTEREST Fully Tax Equivalent Basis (1) AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (in millions of dollars) BALANCE EXPENSE RATE BALANCE EXPENSE RATE - ---------------------------------------------- ----------------------------------- ----------------------------------- ASSETS Interest bearing deposits in banks $ 9 $ 0.4 4.04% $ 10 $ 1.0 5.22% Trading account securities 13 0.8 5.89 11 0.6 5.71 Federal funds sold and securities purchased under resale agreements 22 1.2 5.58 229 12.9 5.64 Mortgages held for sale 232 16.3 7.03 289 20.2 6.99 Securities: Taxable 4,885 297.0 6.08 4,896 308.8 6.31 Tax exempt 297 23.5 7.90 247 21.9 8.83 --------- --------- --------- --------- Total Securities 5,182 320.5 6.18 5,143 330.7 6.43 --------- --------- --------- --------- Loans: Commercial 6,128 483.4 7.89 5,629 469.0 8.33 Real Estate Construction 1,064 86.1 8.09 829 71.7 8.65 Mortgage 3,660 288.6 7.88 3,604 304.2 8.44 Consumer Loans 6,938 575.7 8.30 6,679 593.9 8.89 Leases 2,299 154.5 6.72 1,693 120.1 7.09 --------- --------- --------- --------- Total Consumer 9,237 730.2 7.91 8,372 714.0 8.53 --------- --------- --------- --------- Total Loans 20,089 1,588.3 7.91 18,434 1,558.9 8.46 --------- --------- --------- --------- Allowance for loan losses/loan fees 301 107.9 280 85.4 --------- --------- --------- --------- Net loans(2) 19,788 1,696.2 8.44 18,154 1,644.3 8.92 --------- --------- --------- --------- Total earning assets 25,547 2,035.4 7.97% 24,116 2,009.7 8.33% --------- --------- --------- --------- Cash and due from banks 1,039 975 All other assets 2,454 2,081 --------- --------- TOTAL ASSETS $ 28,739 $ 26,892 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Core deposits Non-interest bearing deposits $ 3,497 $ 3,287 Interest bearing demand deposits 4,097 106.5 2.60% 3,585 96.4 2.69% Savings deposits 3,740 126.0 3.37 3,277 114.0 3.48 Other domestic time deposits 5,773 296.4 5.13 6,291 349.1 5.55 --------- --------- --------- --------- Total core deposits 17,107 528.9 3.89 16,440 559.5 4.25 --------- --------- --------- --------- Certificates of deposit of $100,000 or more 1,737 92.1 5.30 1,870 107.0 5.72 Foreign time deposits 363 18.6 5.14 103 5.9 5.66 --------- --------- --------- --------- Total deposits 19,207 639.6 4.07 18,413 672.4 4.44 --------- --------- --------- --------- Short-term borrowings 2,549 114.3 4.48 2,084 97.7 4.83 Medium-term notes 3,122 170.0 5.45 2,903 164.6 5.67 Subordinated notes and other long-term debt, including capital securities 1,003 60.3 6.01 876 43.6 4.98 --------- --------- --------- --------- Total interest bearing liabilities 22,384 984.2 4.40% 20,989 978.3 4.66% --------- --------- --------- --------- All other liabilities 711 552 Shareholders' equity 2,147 2,064 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,739 $ 26,892 ========= ========= Net interest rate spread 3.57% 3.67% Impact of non interest bearing funds on margin 0.54% 0.61% NET INTEREST MARGIN $ 1,051.2 4.11% $ 1,031.4 4.28% ========= =========
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate. (2) Net loan rate includes loan fees, whereas individual loan components above are shown exclusive of fees. Individual components include non-accrual balances and related interest received. 23 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 - ------------------------------- ------------------------------ ------------------------------ -------------------------------- INTEREST INTEREST INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE - ------------------------------- ------------------------------ ------------------------------ -------------------------------- $ 9 $ 0.5 5.47 % $ 14 $ 0.8 5.85 % $ 26 $ 1.6 5.99 % $ 8 $ 0.5 6.23 % 10 0.6 5.70 16 0.9 5.66 23 1.6 7.29 14 0.9 6.16 44 2.4 5.50 67 3.8 6.03 93 5.6 6.10 134 5.8 4.30 131 10.1 7.75 113 8.7 7.74 133 10.0 7.58 367 25.9 7.06 5,351 339.8 6.35 5,194 333.7 6.42 4,679 310.7 6.64 3,713 226.5 6.10 264 25.3 9.55 291 27.9 9.59 342 33.2 9.73 419 42.0 10.03 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 5,615 365.1 6.50 5,485 361.6 6.59 5,021 343.9 6.85 4,132 268.5 6.50 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 5,302 456.6 8.61 4,955 396.9 8.01 4,703 403.3 8.58 4,140 350.1 8.46 813 73.8 8.85 580 50.7 8.75 473 41.6 8.79 396 30.6 7.73 3,761 326.9 8.71 3,614 312.3 8.64 3,834 328.1 8.56 3,474 278.3 8.01 6,299 574.8 9.12 5,880 528.4 8.99 5,508 494.2 8.97 4,837 401.6 8.31 1,406 106.7 7.59 950 74.8 7.87 657 51.0 7.76 485 34.7 7.15 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 7,705 681.5 8.84 6,830 603.2 8.83 6,165 545.2 8.84 5,322 436.3 8.20 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 17,581 1,538.8 8.75 15,979 1,363.1 8.53 15,175 1,318.2 8.69 13,332 1,095.3 8.21 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 253 75.8 231 49.2 227 43.4 235 40.1 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 17,328 1,614.6 9.18 15,748 1,412.3 8.84 14,948 1,361.6 8.97 13,097 1,135.4 8.52 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 23,391 1,993.3 8.52 % 21,674 1,788.1 8.26 % 20,471 1,724.3 8.43 % 17,987 1,437.0 7.99 % - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 910 901 883 841 1,103 1,031 972 906 - ---------- ---------- ---------- ---------- $ 25,151 $ 23,375 $ 22,099 $ 19,499 ========== ========== ========== ========== $ 2,774 $ 2,664 $ 2,477 $ 2,390 3,204 84.4 2.64 % 3,068 80.2 2.61 % 2,815 68.6 2.44 % 2,984 65.9 2.21 % 3,056 100.4 3.28 2,836 86.3 3.04 2,666 77.9 2.92 2,935 68.0 2.32 5,857 329.7 5.63 5,463 310.3 5.68 5,382 300.3 5.58 4,383 187.3 4.27 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 14,891 514.5 4.25 14,031 476.8 4.19 13,340 446.8 4.11 12,692 321.2 3.12 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 1,922 109.4 5.70 1,525 85.5 5.61 1,269 74.8 5.89 914 39.3 4.30 382 22.2 5.81 305 18.4 6.03 262 17.0 6.50 286 12.2 4.25 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 17,195 646.1 4.48 15,861 580.7 4.40 14,871 538.6 4.34 13,892 372.7 3.24 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 2,826 146.4 5.18 2,883 149.1 5.17 2,422 138.1 5.70 1,606 59.2 3.68 1,983 116.2 5.86 1,835 120.2 6.55 2,103 146.4 6.96 1,532 75.2 4.91 739 45.5 6.16 516 30.7 5.96 529 33.8 6.38 562 39.8 7.09 - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 19,969 954.2 4.78 % 18,430 880.7 4.78 % 17,448 856.9 4.91 % 15,202 546.9 3.60 % - ---------- ----------- ---------- ----------- ---------- ----------- ---------- ---------- 514 505 432 286 1,894 1,776 1,742 1,621 - ---------- ---------- ---------- ---------- $ 25,151 $ 23,375 $ 22,099 $ 19,499 ========== ========== ========== ========== 3.74 % 3.48 % 3.52 % 4.39 % 0.70 % 0.71 % 0.72 % 0.56 % $1,039.1 4.44 % $ 907.4 4.19 % $ 867.4 4.24 % $ 890.1 4.95 % =========== =========== =========== ==========
24 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - --------------------------------------------------------------------------------
SELECTED ANNUAL INCOME STATEMENT DATA - ------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, (in thousands of dollars, ---------------------------------------------------------------------- except per share amounts) 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME $2,026,002 $1,999,364 $1,981,473 $1,775,734 $1,709,627 $1,418,610 TOTAL INTEREST EXPENSE 984,240 978,271 954,243 880,648 856,860 546,880 ---------- ---------- ---------- ---------- ---------- ---------- NET INTEREST INCOME 1,041,762 1,021,093 1,027,230 895,086 852,767 871,730 Provision for loan losses 88,447 105,242 107,797 76,371 36,712 21,954 ---------- ---------- ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 953,315 915,851 919,433 818,715 816,055 849,776 ---------- ---------- ---------- ---------- ---------- ---------- Service charges on deposit accounts 156,315 126,403 117,852 107,669 97,505 88,457 Mortgage banking 56,890 60,006 55,715 43,942 39,309 47,194 Brokerage and insurance income 52,076 36,710 27,084 20,856 17,979 14,721 Trust services 52,030 50,754 48,102 42,237 37,627 35,278 Bank Owned Life Insurance income 37,560 28,712 -- -- -- -- Electronic banking fees 37,301 29,202 22,705 12,013 6,190 3,405 Credit card fees 23,314 21,909 20,467 23,086 18,757 18,589 Other 36,587 45,181 42,936 46,640 48,343 34,773 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES AND CREDIT CARD PORTFOLIO SALE GAINS 452,073 398,877 334,861 296,443 265,710 242,417 ---------- ---------- ---------- ---------- ---------- ---------- Securities gains 12,972 29,793 7,978 17,620 9,380 2,297 Gains on sale of credit card portfolios 108,530 9,530 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- TOTAL NON-INTEREST INCOME 573,575 438,200 342,839 314,063 275,090 244,714 ---------- ---------- ---------- ---------- ---------- ---------- Personnel and related costs 419,901 428,539 392,793 360,865 344,905 347,361 Equipment 66,666 62,040 57,867 50,887 44,646 44,806 Outside data processing and other services 62,886 74,795 66,683 58,367 53,582 56,424 Net occupancy 62,169 54,123 49,509 49,676 47,824 46,304 Amortization of intangible assets 37,297 25,689 13,019 10,220 9,471 9,612 Marketing 31,076 32,260 32,782 20,331 17,598 20,074 Telecommunications 28,519 29,429 21,527 16,567 13,946 13,068 Legal and other professional services 21,169 25,160 24,931 20,313 18,656 18,457 Printing and supplies 20,227 23,673 21,584 19,602 18,103 18,379 Franchise and other taxes 14,674 22,103 19,836 20,359 17,083 16,149 Other 50,744 46,118 51,414 48,323 76,247 92,886 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL NON-INTEREST EXPENSE BEFORE SPECIAL CHARGES AND OTHER NON-RECURRING EXPENSES 815,328 823,929 751,945 675,510 662,061 683,520 ---------- ---------- ---------- ---------- ---------- ---------- Special charges, including merger costs -- 90,000 51,163 -- -- -- Other non-recurring expenses 96,791 -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- TOTAL NON-INTEREST EXPENSE 912,119 913,929 803,108 675,510 662,061 683,520 ---------- ---------- ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 614,771 440,122 459,164 457,268 429,084 410,970 Provision for income taxes 192,697 138,354 166,501 152,999 147,283 134,650 ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME $ 422,074 $ 301,768 $ 292,663 $ 304,269 $ 281,801 $ 276,320 ========== ========== ========== ========== ========== ========== PER COMMON SHARE (1) Net income Basic $ 1.83 $ 1.30 $ 1.27 $ 1.31 $ 1.17 $ 1.15 Diluted $ 1.82 $ 1.29 $ 1.25 $ 1.29 $ 1.16 $ 1.15 Cash dividends declared $ 0.76 $ 0.68 $ 0.62 $ 0.56 $ 0.51 $ 0.46 FULLY TAX EQUIVALENT MARGIN: Net Interest Income $1,041,762 $1,021,093 $1,027,230 $ 895,086 $ 852,767 $ 871,730 Tax Equivalent Adjustment (2) 9,423 10,307 11,864 12,363 14,602 18,405 ---------- ---------- ---------- ---------- ---------- ---------- Tax Equivalent Net Interest Income $1,051,185 $1,031,400 $1,039,094 $ 907,449 $ 867,369 $ 890,135 ========== ========== ========== ========== ========== ==========
(1) Adjusted for stock dividends and stock splits, as applicable. (2) Calculated assuming a 35% tax rate. 25 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - -------------------------------------------------------------------------------- MARKET PRICES, KEY RATIOS AND STATISTICS (QUARTERLY DATA)
- ------------------------------------------------------------------------------------------------------------------------------------ QUARTERLY COMMON STOCK SUMMARY (1) - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 --------------------------------------------- -------------------------------------------- IV Q III Q II Q I Q IV Q III Q IIQ IQ --------------------------------------------- -------------------------------------------- High $30 3/4 $33 7/8 $34 $30 7/16 $28 5/8 $30 13/16 $31 7/16 $31 1/8 Low 21 7/16 24 11/16 27 11/16 27 3/16 21 1/2 20 26 7/8 26 7/16 Close 23 7/8 26 9/16 31 13/16 28 1/8 27 5/16 22 13/16 27 11/16 30 1/8 Cash dividends declared $0.20 $0.20 $0.18 $0.18 $0.18 $0.18 $0.16 $0.16 Note: Stock price quotations were obtained from Nasdaq. - ------------------------------------------------------------------------------------------------------------------------------------ KEY RATIOS AND STATISTICS (2) - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 --------------------------------------------- -------------------------------------------- IV Q III Q II Q I Q IV Q III Q IIQ IQ --------------------------------------------- -------------------------------------------- MARGIN ANALYSIS - AS A % OF AVERAGE EARNING ASSETS (3) Interest Income 7.98% 8.07% 7.87% 7.98% 8.17% 8.33% 8.37% 8.48% Interest Expense 4.04% 3.85% 3.73% 3.80% 3.93% 4.15% 4.14% 4.18% -------- -------- -------- -------- -------- -------- -------- -------- Net Interest Margin 3.94% 4.22% 4.14% 4.18% 4.24% 4.18% 4.23% 4.30% ======== ======== ========= ======== ======== ======== ======== ======== RETURN ON Average total assets 1.57% 1.45% 1.47% 1.38% 1.31% 1.28% 1.42% 1.38% Average total assets - cash basis 1.71% 1.59% 1.61% 1.52% 1.45% 1.43% 1.49% 1.44% Average shareholders' equity 21.64% 19.07% 19.48% 18.47% 17.87% 16.43% 17.70% 17.73% Average shareholders' equity - cash basis 33.69% 29.54% 30.61% 29.58% 29.44% 26.59% 21.17% 21.09% Efficiency ratio 52.97% 51.02% 50.93% 52.16% 52.98% 56.46% 58.78% 56.32% - ------------------------------------------------------------------------------------------------------------------------------------ REGULATORY CAPITAL DATA - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 --------------------------------------------- -------------------------------------------- (in millions of dollars) IV Q III Q II Q I Q IV Q III Q IIQ IQ - -------------------------------------------------------------------------------------- -------------------------------------------- Total Risk-Adjusted Assets $ 25,298 $ 25,309 $ 24,829 $ 24,345 $ 24,239 $ 23,695 $ 23,739 $ 22,554 Tier 1 Risk-Based Capital Ratio 7.52% 7.32% 7.29% 7.20% 7.10% 7.35% 7.18% 8.91% Total Risk-Based Capital Ratio 10.72% 10.62% 10.65% 10.70% 10.73% 11.18% 11.01% 11.57% Tier 1 Leverage Ratio 6.72% 6.58% 6.45% 6.32% 6.37% 6.51% 6.72% 7.72%
- ---------------------------------------------------------------------- (1) Adjusted for stock splits and stock dividends, as applicable. (2) Presented on an "operating" basis (excludes 1998 special charges, net of related taxes). (3) Presented on a fully tax equivalent basis assuming a 35% tax rate. 26 HUNTINGTON BANCSHARES INCORPORATED Management's Discussion and Analysis - --------------------------------------------------------------------------------
SELECTED QUARTERLY INCOME STATEMENT DATA - --------------------------------------------------------------------------------------------------------------------------- 1999 1998 (in thousands of dollars, -------------------------------------- -------------------------------------- except per share amounts) IV Q III Q II Q I Q IV Q III Q II Q I Q - --------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME $515,516 $516,294 $498,500 $495,692 $500,395 $505,221 $491,268 $502,480 TOTAL INTEREST EXPENSE 262,854 247,863 237,352 236,171 233,094 253,706 243,839 247,632 -------- -------- -------- -------- -------- -------- -------- -------- NET INTEREST INCOME 252,662 268,431 261,148 259,521 267,301 251,515 247,429 254,848 Provision for loan losses 20,040 22,076 21,026 25,305 34,306 24,160 24,595 22,181 -------- -------- -------- -------- -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 232,622 246,355 240,122 234,216 232,995 227,355 222,834 232,667 -------- -------- -------- -------- -------- -------- -------- -------- Service charges on deposit accounts 42,774 41,700 36,065 35,776 33,992 32,493 30,428 29,490 Brokerage and insurance income 13,373 14,620 12,540 11,543 9,848 10,057 8,520 8,285 Trust services 12,828 12,625 13,143 13,434 12,924 12,502 12,745 12,583 Electronic banking fees 10,082 9,771 9,410 8,038 8,037 7,897 7,520 5,748 Mortgage banking 9,426 14,282 17,224 15,958 15,388 15,270 15,191 14,157 Bank Owned Life Insurance income 9,390 9,390 9,390 9,390 8,098 8,098 7,168 5,348 Credit card fees 5,091 6,626 6,255 5,342 6,367 5,197 5,450 4,895 Other 11,374 6,103 11,029 8,081 12,057 12,512 8,788 11,824 -------- -------- -------- -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES AND CREDIT CARD PORTFOLIO SALE GAINS 114,338 115,117 115,056 107,562 106,711 104,026 95,810 92,330 -------- -------- -------- -------- -------- -------- -------- -------- Securities gains 7,905 537 2,220 2,310 1,773 10,615 14,316 3,089 Gains on sale of credit card portfolios 108,530 -- -- -- -- -- 9,530 -- -------- -------- -------- -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME 230,773 115,654 117,276 109,872 108,484 114,641 119,656 95,419 -------- -------- -------- -------- -------- -------- -------- -------- Personnel and related costs 100,654 104,730 107,263 107,254 103,600 111,744 108,483 104,712 Equipment 18,161 16,059 15,573 16,873 16,202 15,001 15,688 15,149 Net occupancy 17,890 16,799 13,563 13,917 11,602 15,019 14,063 13,439 Outside data processing and other services 15,642 15,929 15,923 15,392 20,915 17,550 16,988 19,342 Marketing 9,154 8,722 6,902 6,298 8,251 8,762 8,315 6,932 Amortization of intangible assets 9,307 9,326 9,336 9,328 9,436 9,467 3,393 3,393 Telecommunications 7,108 7,412 6,935 7,064 8,173 7,793 7,450 6,013 Legal and other professional services 5,868 4,754 5,803 4,744 7,847 5,291 6,234 5,788 Printing and supplies 5,483 5,254 4,734 4,756 6,450 5,851 5,611 5,761 Franchise and other taxes 2,708 3,598 3,981 4,387 5,554 5,523 5,526 5,500 Other 12,920 13,606 12,125 12,093 10,902 9,876 14,927 10,413 -------- -------- -------- -------- -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE BEFORE SPECIAL CHARGES AND OTHER NON-RECURRING EXPENSES 204,895 206,189 202,138 202,106 208,932 211,877 206,678 196,442 -------- -------- -------- -------- -------- -------- -------- -------- Special charges, including merger costs -- -- -- -- 90,000 -- -- -- Other non-recurring expenses 96,791 -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE 301,686 206,189 202,138 202,106 298,932 211,877 206,678 196,442 -------- -------- -------- -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 161,709 155,820 155,260 141,982 42,547 130,119 135,812 131,644 Provision for income taxes 46,769 50,233 50,285 45,410 11,329 41,364 43,503 42,158 -------- -------- -------- -------- -------- -------- -------- -------- NET INCOME $114,940 $105,587 $104,975 $ 96,572 $ 31,218 $ 88,755 $ 92,309 $ 89,486 ======== ======== ======== ======== ======== ======== ======== ======== PER COMMON SHARE (1) Net income--Diluted $ 0.50 $ 0.46 $ 0.45 $ 0.41 $ 0.13 $ 0.38 $ 0.39 $ 0.38 Cash Dividends Declared $ 0.20 $ 0.20 $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.16 $ 0.16 OPERATING RESULTS (2) Net income $114,940 $105,587 $104,975 $ 96,572 $ 91,518 $ 88,755 $ 92,309 $ 89,486 Net income per common share Diluted $ 0.50 $ 0.46 $ 0.45 $ 0.41 $ 0.39 $ 0.38 $ 0.39 $ 0.38 Diluted - Cash Basis (3) $ 0.53 $ 0.49 $ 0.48 $ 0.45 $ 0.43 $ 0.41 $ 0.41 $ 0.39 (1) Adjusted for stock splits and stock dividends, as applicable. (2) Excludes 1998 special charges, net of related taxes. (3) Tangible or "Cash Basis" net income excludes amortization of goodwill and other intangibles.
27 ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information required by this item is set forth in Item 7 on pages 16 through 19 under the caption "Interest Rate Risk and Liquidity Management." ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT The integrity of the financial statements and other financial information contained in this Financial Supplement to the Proxy Statement is the responsibility of the management of Huntington. Such financial information has been prepared in accordance with generally accepted accounting principles, based on the best estimates and judgment of management. Huntington maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are executed and recorded in accordance with management's authorization and that the assets of Huntington are properly safeguarded. This system includes the careful selection and training of staff, the communication of policies and procedures consistent with the highest standards of business conduct, and the maintenance of an internal audit function. The Audit Committee of the Board of Directors is composed entirely of outside directors and it meets periodically with both internal and independent auditors to review the results and recommendations of their audits. This Committee selects the independent auditor with the approval of shareholders. The accounting firm of Ernst & Young LLP has been engaged by Huntington to audit its financial statements, and their report appears below. /s/ Frank Wobst /s/ Anne Creek ----------------------- --------------------------- Frank Wobst Anne Creek Chairman and Executive Vice President, Chief Executive Officer Chief Financial Officer and Treasurer 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young, LLP Columbus, Ohio January 13, 2000 28 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------- DECEMBER 31, ----------------------------------- (in thousands of dollars) 1999 1998 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 1,208,004 $ 1,215,814 Interest bearing deposits in banks 6,558 102,564 Trading account securities 7,975 3,839 Federal funds sold and securities purchased under resale agreements 20,877 135,764 Mortgages held for sale 141,723 466,664 Securities available for sale - at fair value 4,870,203 4,781,415 Investment securities - fair value $18,662 and $25,044, respectively 18,765 24,934 Total loans, net of unearned income 20,668,437 19,454,551 Less allowance for loan losses (299,309) (290,948) ------------- ------------- Net loans 20,369,128 19,163,603 ------------- ------------- Bank owned life insurance 765,399 727,837 Premises and equipment 438,871 447,038 Customers' acceptance liability 17,167 22,591 Accrued income and other assets 1,172,283 1,204,273 ------------- ------------- TOTAL ASSETS $ 29,036,953 $ 28,296,336 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Total deposits $ 19,792,603 $19,722,772 Short-term borrowings 2,121,989 2,216,644 Bank acceptances outstanding 17,167 22,591 Medium-term notes 3,254,150 2,539,900 Subordinated notes and other long-term debt 697,677 707,359 Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company 300,000 300,000 Accrued expenses and other liabilities 671,011 638,275 ------------- ------------- Total Liabilities 26,854,597 26,147,541 ------------- ------------- Shareholders' equity Preferred stock - authorized 6,617,808 shares; none issued or outstanding --- --- Common stock - without par value; authorized 500,000,000 shares; issued 233,844,820 and 212,596,344 shares, respectively; outstanding 228,888,221 and 210,746,337 shares, respectively 2,284,956 2,137,915 Less 4,956,599 and 1,850,007 treasury shares, respectively (137,268) (49,271) Accumulated other comprehensive (loss) income (94,093) 24,693 Retained earnings 128,761 35,458 ------------- ------------- Total Shareholders' Equity 2,182,356 2,148,795 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 29,036,953 $ 28,296,336 ============= =============
See notes to consolidated financial statements. 29 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------- (in thousands of dollars, except per share amounts) 1999 1998 1997 - --------------------------------------------------------------------------------------------- Interest and fee income Loans $ 1,693,379 $ 1,641,081 $ 1,611,541 Securities 314,061 323,595 356,388 Other 18,562 34,688 13,544 ------------ ------------ ------------ TOTAL INTEREST INCOME 2,026,002 1,999,364 1,981,473 ------------ ------------ ------------ Interest expense Deposits 639,605 672,433 646,121 Short-term borrowings 114,289 97,656 146,397 Medium-term notes 170,061 164,590 116,221 Subordinated notes and other long-term debt 60,285 43,592 45,504 ------------ ------------ ------------ TOTAL INTEREST EXPENSE 984,240 978,271 954,243 ------------ ------------ ------------ NET INTEREST INCOME 1,041,762 1,021,093 1,027,230 Provision for loan losses 88,447 105,242 107,797 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 953,315 915,851 919,433 ------------ ------------ ------------ Total non-interest income 573,575 438,200 342,839 Total non-interest expense 912,119 913,929 803,108 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 614,771 440,122 459,164 Provision for income taxes 192,697 138,354 166,501 ------------ ------------ ------------ NET INCOME $ 422,074 $ 301,768 $ 292,663 ============ ============ ============ PER COMMON SHARE Net income Basic $ 1.83 $ 1.30 $ 1.27 Diluted $ 1.82 $ 1.29 $ 1.25 Cash dividends declared $ 0.76 $ 0.68 $ 0.62 AVERAGE COMMON SHARES Basic 230,508,637 232,569,064 230,872,887 Diluted 232,405,927 234,799,637 233,692,401
See notes to consolidated financial statements. 30 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ ACCUMULATED OTHER COMMON TREASURY COMPREHENSIVE ------------------- ----------------- (LOSS) RETAINED (in thousands of dollars, except per share amounts) SHARES STOCK SHARES STOCK INCOME EARNINGS TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE -- JANUARY 1, 1997 182,265 $1,692,144 (9,285) $(204,634) $(13,931) $ 312,079 $1,785,658 Comprehensive Income: Net income 292,663 292,663 Unrealized net holding gains on securities available for sale arising during the period 28,731 28,731 ----------- Total comprehensive income 321,394 ----------- Stock issued for acquisitions 16,463 3,244 73,775 90,238 Cash dividends declared ($0.62 per share) (128,013) (128,013) Stock options exercised (3,641) 461 7,000 3,359 10% stock dividend 9,181 184,726 5,274 124,920 (309,846) (200) Treasury shares purchased (2,748) (1,930) (53,427) (56,175) Treasury shares sold: Shareholder dividend reinvestment plan 2,345 534 11,968 14,313 Employee benefit plans 1,110 159 3,607 4,717 Pre-merger transactions of pooled subsidiary 1,833 42,604 (52,504) (9,900) --------- ----------- ------- ---------- --------- ---------- ----------- BALANCE -- DECEMBER 31, 1997 193,279 1,933,003 (1,543) (36,791) 14,800 114,379 2,025,391 --------- ----------- ------- ---------- --------- ---------- ----------- Comprehensive Income: Net income 301,768 301,768 Unrealized net holding gains on securities available for sale arising during the period 9,893 9,893 ----------- Total comprehensive income 311,661 ----------- Stock issued for acquisition (3,815) 160 3,883 68 Cash dividends declared ($0.68 per share) (161,447) (161,447) Stock options exercised (10,348) 736 14,350 4,002 10% stock dividend 19,317 218,871 (83) (219,242) (371) Treasury shares purchased (1,139) (31,192) (31,192) Treasury shares sold to employee benefit plans 204 19 479 683 --------- ----------- ------- ---------- --------- ---------- ----------- BALANCE -- DECEMBER 31, 1998 212,596 2,137,915 (1,850) (49,271) 24,693 35,458 2,148,795 --------- ----------- ------- ---------- --------- ---------- ----------- COMPREHENSIVE INCOME: NET INCOME 422,074 422,074 UNREALIZED NET HOLDING LOSSES ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD (118,786) (118,786) ----------- TOTAL COMPREHENSIVE INCOME 303,288 ----------- CASH DIVIDENDS DECLARED ($0.76 PER SHARE) (175,836) (175,836) STOCK OPTIONS EXERCISED (5,543) 329 9,251 3,708 10% STOCK DIVIDEND 21,249 152,584 (304) (152,935) (351) TREASURY SHARES PURCHASED (3,156) (97,957) (97,957) TREASURY SHARES SOLD TO EMPLOYEE BENEFIT PLANS 24 709 709 --------- ----------- ------- ---------- --------- ---------- ----------- BALANCE -- DECEMBER 31, 1999 233,845 $2,284,956 (4,957) $(137,268) $(94,093) $ 128,761 $2,182,356 ========= =========== ======= ========== ========= ========== ===========
See notes to consolidated financial statements. 31 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------- (in thousands of dollars) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 422,074 $ 301,768 $ 292,663 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 88,447 105,242 107,797 Provision for depreciation and amortization 112,491 80,956 63,383 Deferred income tax expense 84,748 2,769 47,687 (Increase) decrease in trading account securities (4,136) 3,243 (5,209) Decrease (increase) in mortgages held for sale 324,941 (273,716) (71,526) Net gains on sales of securities available for sale (12,972) (29,793) (7,978) Net gains on sales of loans held for sale (108,623) (9,903) (12,200) (Increase) decrease in accrued income receivable (28,164) 31,663 (7,003) Net increase in other assets (44,353) (79,588) (111,259) (Decrease) increase in accrued expenses (46,610) 65,938 15,993 Net increase (decrease) in other liabilities 48,620 (31,150) 11,228 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 836,463 167,429 323,576 ----------- ----------- ----------- INVESTING ACTIVITIES Decrease (increase) in interest bearing deposits in banks 96,006 (62,946) (36,185) Proceeds from : Maturities and calls of investment securities 6,132 8,348 90,287 Maturities and calls of securities available for sale 651,716 1,356,659 787,788 Sales of securities available for sale 1,771,589 3,782,540 2,297,166 Purchases of : Investment securities -- (355) (2,962) Securities available for sale (2,685,503) (4,043,068) (2,958,135) Proceeds from sales of loans held for sale 686,548 142,801 357,396 Net loan originations, excluding sales (1,853,343) (724,662) (1,209,015) Proceeds from sale of premises and equipment 17,111 176,513 8,243 Purchases of premises and equipment (76,063) (147,045) (45,849) Proceeds from sales of other real estate 12,570 13,856 17,441 Purchases of Bank Owned Life Insurance -- (300,000) (400,000) Net cash received (paid) in purchase acquisitions -- 417,031 (2,294) ----------- ----------- ----------- NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (1,373,237) 619,672 (1,096,119) ----------- ----------- ----------- FINANCING ACTIVITIES Increase (decrease) in total deposits 69,880 (495,638) 1,025,005 Decrease in short-term borrowings (94,655) (925,027) (251,629) Proceeds from issuance of long-term debt -- 300,000 95,500 Payment of long-term debt (10,000) (90,038) (122,372) Proceeds from issuance of medium-term notes 2,332,000 1,395,000 1,792,150 Payment of medium-term notes (1,617,750) (1,187,250) (1,245,300) Proceeds from issuance of capital securities -- 100,000 200,000 Dividends paid on common stock, including pre-merger dividends of pooled subsidiary (171,858) (157,632) (132,760) Repurchases of common stock (97,957) (31,192) (56,175) Proceeds from issuance of common stock 4,417 4,685 27,266 ----------- ----------- ----------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 414,077 (1,087,092) 1,331,685 ----------- ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS (122,697) (299,991) 559,142 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,351,578 1,651,569 1,092,427 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,228,881 $ 1,351,578 $ 1,651,569 =========== =========== ===========
NOTE: Huntington made interest payments of $987,513, $995,625, and $964,203 in 1999, 1998, and 1997, respectively. Federal income tax payments were $80,832 in 1999, $77,407 in 1998, and $114,755 in 1997. See notes to consolidated financial statements. 32 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 1 | ACCOUNTING POLICIES NATURE OF OPERATIONS: Huntington Bancshares Incorporated (Huntington) is a multi-state bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, Huntington is engaged in full-service commercial and consumer banking, mortgage banking, lease financing, trust services, discount brokerage services, underwriting credit life and disability insurance, issuing commercial paper guaranteed by Huntington, and selling other insurance and financial products and services. Huntington's subsidiaries operate domestically in offices located in Florida, Georgia, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, South Carolina, and West Virginia. Huntington also has foreign offices in the Cayman Islands and Hong Kong. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Huntington and its 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. Certain prior period amounts have been reclassified to conform to the current year's presentation. 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. NEW PRONOUNCEMENTS: In September 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement (as amended by Statement No. 137) establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows gains and losses from derivatives to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions for which hedge accounting is applied. Statement No. 133, as amended, is effective for fiscal years beginning after September 15, 2000. It may be implemented earlier provided adoption occurs as of the beginning of any fiscal quarter after issuance. The Statement cannot be applied retroactively. Huntington expects to adopt Statement No. 133, as amended, in the first quarter of 2001. Based on information available, the impact of adoption is not expected to be material to the Consolidated Financial Statements. SECURITIES: Debt securities that Huntington has both the positive intent and ability to hold to maturity are classified as investments and are carried at amortized cost. Securities purchased with the intention of recognizing short-term profits are placed in the trading account and carried at fair value. Securities not classified as investments or trading are designated available for sale and carried at fair value. Unrealized gains and losses on securities available for sale are carried as a separate component of accumulated other comprehensive income in shareholders' equity. Unrealized gains and losses on securities classified as trading are reported in earnings. The amortized cost of specific securities sold is used to compute realized gains and losses. LOANS AND LEASES: Loans and leases are stated at the principal amount outstanding, net of unearned discount. Interest income on loans is primarily accrued based on principal amounts outstanding. Income from lease financing is recognized on a basis to achieve a constant periodic rate of return on the outstanding investment. Commercial and real estate loans are placed on non-accrual status and stop accruing interest when collection of principal or interest is in doubt. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged off as a credit loss. Consumer loans are not placed on non-accrual status; rather they are charged off in accordance with regulatory statutes. Huntington uses the cost recovery method in accounting for cash received on non-accrual loans. Under this method, cash receipts are applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. Net direct loan origination costs/fees, when material, are deferred and amortized over the term of the loan as a yield adjustment. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses reflects management's judgment as to the level considered appropriate to absorb inherent losses in the loan portfolio. This judgment is based on a review of individual loans, historical loss experience, economic conditions, portfolio trends, and other factors. The allowance is increased by provisions charged to earnings and reduced by charge-offs, net of recoveries. The portion of the allowance for loan losses related to impaired loans (non-accruing and restructured credits, exclusive of smaller, homogeneous loans) is based on discounted cash flows using the loans initial effective interest rate or the fair value of the collateral for collateral-dependent loans. 33 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 1 | ACCOUNTING POLICIES (CONTINUED) OTHER REAL ESTATE: Other real estate acquired through partial or total satisfaction of loans, is included in other assets and carried at the lower of cost or fair value less estimated costs of disposition. At the date of acquisition, any losses are charged to the allowance for loan losses. Subsequent write-downs are included in non-interest expense. Realized losses from disposition of the property and declines in fair value that are considered permanent are charged to the reserve for other real estate, as applicable. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the related assets. Estimated useful lives employed are on average 30 years for buildings, 10 to 20 years for building improvements, 10 years for land improvements, 3 to 7 years for equipment, and 10 years for furniture and fixtures. MORTGAGE BANKING ACTIVITIES: Mortgages held for sale are reported at the lower of cost or aggregate market value primarily as determined by outstanding commitments from investors. Capitalized mortgage servicing rights (MSRs) are evaluated for impairment based on the fair value of those rights, using a disaggregated approach. MSRs are amortized on an accelerated basis over the estimated period of net servicing revenue. BUSINESS COMBINATIONS: Net assets of entities acquired, for which the purchase method of accounting was used 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 (goodwill) is being amortized over periods generally up to 25 years. Core deposits and other identifiable acquired intangible assets are amortized over their estimated useful lives. Management reviews intangible assets arising from business combinations for impairment whenever a significant event occurs that adversely affects operations or when changes in circumstances indicate that the carrying value may not be recoverable. Impairment is measured using estimates of the discounted future earnings potential of the entity or assets acquired. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Huntington uses certain off-balance sheet financial instruments, principally interest rate swaps, in connection with its asset/liability management activities. Purchased interest rate options (including caps and floors), futures, and forwards are also used to manage interest rate risk. Provided these instruments meet specific criteria, they are considered hedges and accounted for under the accrual or deferral methods, as more fully discussed below. Off-balance sheet financial instruments that do not meet the required criteria are carried on the balance sheet at fair value with realized and unrealized changes in that value recognized in earnings. Similarly, if the hedged item is sold or its outstanding balance otherwise declines below that of the related hedging instrument, the off-balance sheet product is marked-to-market and the resulting gain or loss is included in earnings. Accrual accounting is used when the cash flows attributable to the hedging instrument satisfy the objectives of the asset/liability management strategy. Huntington uses the accrual method for substantially all of its interest rate swaps as well as for interest rate options. Amounts receivable or payable under these agreements are recognized as an adjustment to the interest income or expense of the hedged item. There is no recognition on the balance sheet for changes in the fair value of the hedging instrument, except for interest rate swaps designated as hedges of securities available for sale, for which changes in fair values are reported in accumulated other comprehensive income. Premiums paid for interest rate options are deferred as a component of other assets and amortized to interest income or expense over the contract term. Gains and losses on terminated hedging instruments are also deferred and amortized to interest income or expense generally over the remaining life of the hedged item. Huntington employs deferral accounting when the market value of the hedging instrument meets the objectives of the asset/liability management strategy and the hedged item is reported at other than fair value. In such cases, gains and losses associated with futures and forwards are deferred as an adjustment to the carrying value of the related asset or liability and are recognized in the corresponding interest income or expense accounts over the remaining life of the hedged item. 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." 34 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 2 | SECURITIES Amortized cost, unrealized gains and losses, and fair values of securities available for sale as of December 31, 1999 and 1998, were:
- ------------------------------------------------------------------------------------------------ UNREALIZED ----------------------- AMORTIZED GROSS GROSS FAIR (in thousands of dollars) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------ AT DECEMBER 31, 1999 U.S. Treasury $ 528,227 $ -- $ 31,586 $ 496,641 Federal Agencies Mortgage-backed securities 1,665,411 5 64,084 1,601,332 Other agencies 2,155,922 55 88,608 2,067,369 ---------- ---------- ---------- ---------- Total U.S. Treasury and Federal Agencies 4,349,560 60 184,278 4,165,342 Other Securities 666,511 58,463 20,113 704,861 ---------- ---------- ---------- ---------- Total securities available for sale $5,016,071 $ 58,523 $ 204,391 $4,870,203 ========== ========== ========== ========== AT DECEMBER 31, 1998 U.S. Treasury $ 234,496 $ 8,820 $ -- $ 243,316 Federal Agencies Mortgage-backed securities 1,444,075 12,098 3,985 1,452,188 Other agencies 2,387,137 21,892 8,399 2,400,630 ---------- ---------- ---------- ---------- Total U.S. Treasury and Federal Agencies 4,065,708 42,810 12,384 4,096,134 Other Securities 677,509 11,689 3,917 685,281 ---------- ---------- ---------- ---------- Total securities available for sale $4,743,217 $ 54,499 $ 16,301 $4,781,415 ========== ========== ========== ==========
Contractual maturities of securities available for sale as of December 31, 1999 and 1998, were: - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- AMORTIZED FAIR AMORTIZED FAIR (in thousands of dollars) COST VALUE COST VALUE - -------------------------------------------------------------------------------- Under 1 year $ 21,606 $ 21,633 $ 8,492 $ 8,485 1 - 5 years 1,093,746 1,061,445 1,220,852 1,231,499 6 - 10 years 1,132,691 1,069,151 1,140,334 1,161,035 Over 10 years 2,757,504 2,651,733 2,365,180 2,373,092 Marketable equity securities 10,524 66,241 8,359 7,304 ---------- ---------- ---------- ---------- Total $5,016,071 $4,870,203 $4,743,217 $4,781,415 ========== ========== ========== ========== Gross gains from sales of securities of $37.0 million, $41.5 million, and $12.3 million were realized in 1999, 1998, and 1997, respectively. Gross losses totaled $24.0 million in 1999, $11.7 million in 1998, and $4.3 million in 1997. Huntington securitized and transferred to securities available for sale $108.7 million of residential mortgage loans in 1998. 35 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 2 | SECURITIES (CONTINUED) Amortized cost, unrealized gains and losses, and fair values of investment securities as of December 31, 1999 and 1998, were:
- ---------------------------------------------------------------------------------------------- UNREALIZED --------------------- AMORTIZED GROSS GROSS FAIR (in thousands of dollars) COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------- AT DECEMBER 31, 1999 U.S. Treasury and Federal Agencies $ -- $ -- $ -- $ -- States and political subdivisions 18,765 78 181 18,662 ------- ------- ------- ------- Total investment securities $18,765 $ 78 $ 181 $18,662 ======= ======= ======= ======= AT DECEMBER 31, 1998 U.S. Treasury and Federal Agencies $ 156 $ -- $ -- $ 156 States and political subdivisions 24,778 154 44 24,888 ------- ------- ------- ------- Total investment securities $24,934 $ 154 $ 44 $25,044 ======= ======= ======= =======
Amortized cost and fair values by contractual maturity at December 31, 1999 and 1998, were:
- --------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------- AMORTIZED FAIR AMORTIZED FAIR (in thousands of dollars) COST VALUE COST VALUE - --------------------------------------------------------------------------------------- Under 1 year $ 2,410 $ 2,389 $ 4,318 $ 3,937 1 - 5 years 12,911 12,855 13,466 13,686 6 - 10 years 2,872 2,859 5,463 5,674 Over 10 years 572 559 1,687 1,747 ------- ------- ------- ------- Total $18,765 $18,662 $24,934 $25,044 ======= ======= ======= =======
NOTE 3 | LOANS At December 31, 1999 and 1998, loans were comprised of the following:
- -------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 - -------------------------------------------------------------------------------------------- Commercial (unearned income of $2,550 and $2,841) $ 6,300,414 $ 6,026,736 Real estate Construction 1,236,776 919,326 Commercial 2,151,673 2,231,786 Residential 1,444,544 1,408,289 Consumer Loans (unearned income of $5,974 and $8,151) 6,793,295 6,957,259 Leases (unearned income of $410,239 and $262,684) 2,741,735 1,911,155 ----------- ----------- TOTAL LOANS $20,668,437 $19,454,551 =========== ===========
During the fourth quarter of 1999, Huntington sold its credit card portfolio of approximately $541 million in receivables, resulting in a net gain of $108.5 million. 36 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 3 | LOANS (CONTINUED) Huntington's subsidiaries have granted loans to their officers, directors, and their associates. Such loans were made in the ordinary course of business under normal credit terms, including interest rate and collateralization, and do not represent more than the normal risk of collection. These loans to related parties are summarized as follows:
- ------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 - ------------------------------------------------------------------------------------------------- Balance, beginning of year $ 132,169 $ 206,971 Loans made 166,064 97,887 Repayments (146,116) (161,945) Changes due to status of executive officers and directors (22,027) (10,744) --------- --------- Balance, end of year $ 130,090 $ 132,169 ========= =========
NOTE 4 | ALLOWANCE FOR LOAN LOSSES A summary of the transactions in the allowance for loan losses and details regarding impaired loans follows for the three years ended December 31:
- -------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF YEAR $ 290,948 $ 258,171 $ 230,778 Allowance of assets acquired/other -- 22,042 7,777 Loan losses (112,291) (126,355) (110,723) Recoveries of loans previously charged off 32,205 31,848 22,542 Provision for loan losses 88,447 105,242 107,797 --------- --------- --------- BALANCE, END OF YEAR $ 299,309 $ 290,948 $ 258,171 ========= ========= ========= RECORDED BALANCE OF IMPAIRED LOANS, AT END OF YEAR: With related allowance for loan losses $ 8,897 $ 13,277 $ 20,593 With no related allowance for loan losses 30,594 18,340 14,166 --------- --------- --------- Total $ 39,491 $ 31,617 $ 34,759 ========= ========= ========= AVERAGE BALANCE OF IMPAIRED LOANS FOR THE YEAR $ 30,663 $ 32,547 $ 33,968 ========= ========= ========= ALLOWANCE FOR LOAN LOSS RELATED TO IMPAIRED LOANS $ 4,523 $ 4,459 $ 6,449 ========= ========= =========
37 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 5 | PREMISES AND EQUIPMENT At December 31, 1999 and 1998, premises and equipment stated at cost were comprised of the following:
- -------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 - -------------------------------------------------------------------------------- Land and land improvements $ 73,989 $ 61,902 Buildings 257,738 257,066 Leasehold improvements 104,631 98,162 Equipment 426,930 439,435 -------- -------- Total premises and equipment 863,288 856,565 Less accumulated depreciation and amortization 424,417 409,527 -------- -------- NET PREMISES AND EQUIPMENT $438,871 $447,038 ======== ========
Depreciation and amortization charged to expense and rental income credited to occupancy expense were:
- ---------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- Total depreciation and amortization of premises and equipment $53,779 $40,489 $41,383 ======= ======= ======= Rental income credited to occupancy expense $12,896 $13,133 $14,842 ======= ======= =======
In 1998, Huntington entered into a sale/leaseback arrangement that included the sale of 59 properties with a book value approximating $110 million. This arrangement included a mix of branch banking offices, regional offices, and operations facilities, which Huntington will continue to operate under a long-term lease. The proceeds of $174.1 million received from the transaction were used to reduce short-term debt. The resulting deferred gain is being amortized as a reduction of occupancy expense over the lease term. NOTE 6 | SHORT-TERM BORROWINGS At December 31, 1999 and 1998, short-term borrowings were comprised of the following:
- -------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 - -------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase $2,065,192 $2,137,374 Commercial paper 10,832 30,133 Other 45,965 49,137 ---------- ---------- TOTAL SHORT-TERM BORROWINGS $2,121,989 $2,216,644 ========== ==========
Information concerning securities sold under agreements to repurchase is summarized as follows:
- --------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 - --------------------------------------------------------------------------------- Average balance during the year $ 1,409,106 $1,304,499 Average interest rate during the year 4.10% 4.48% Maximum month-end balance during the year $ 1,687,186 $1,647,599
Commercial paper is issued by Huntington Bancshares Financial Corporation, a non-bank subsidiary, with principal and interest guaranteed by Huntington Bancshares Incorporated (Parent Company). Huntington has the ability to borrow under a line of credit totaling $200 million to support commercial paper borrowings or other short-term working capital needs. Under the terms of the agreement, a quarterly fee must be paid and there are no compensating balances required. The line is cancelable by Huntington upon written notice and terminates August 23, 2000. There were no borrowings under the line in 1999 or 1998. Securities pledged to secure public or trust deposits, repurchase agreements, and for other purposes were $3.3 billion and $2.0 billion at December 31, 1999 and 1998, respectively. 38 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 7 | DEBT At December 31, 1999 and 1998, Huntington's debt consisted of the following:
- ------------------------------------------------------------------------------------------------------------------------------ (in thousands of dollars) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ MEDIUM-TERM Subsidiary bank (maturing through 2005) $ 3,254,150 $ 2,479,900 Parent company --- 60,000 --------------- -------------- TOTAL MEDIUM-TERM DEBT 3,254,150 2,539,900 --------------- -------------- LONG-TERM Subordinated notes, 7 5/8 % , maturing in 2003, face value $150,000 at December 31, 1999 and 1998, net of discount 149,792 149,724 Subordinated notes, 7 7/8%, maturing in 2002, face value $150,000 at December 31, 1999 and 1998, net of discount 149,633 149,505 Subordinated notes, 6 3/4%, maturing in 2003, face value $100,000 at December 31, 1999 and 1998, net of discount 99,886 99,852 Subordinated notes, 6 3/5%, maturing in 2018, face value $200,000 at December 31, 1999 and 1998, net of discount 198,366 198,278 Subordinated notes, Floating Rate, maturing in 2008, face value $100,000 at December 31, 1999 and 1998, net of discount 100,000 100,000 Federal Home Loan Bank notes matured November 1999 --- 10,000 --------------- -------------- TOTAL SUBORDINATED NOTES AND OTHER LONG-TERM DEBT 697,677 707,359 --------------- -------------- TOTAL DEBT $ 3,951,827 $ 3,247,259 =============== ==============
PARENT COMPANY OBLIGATIONS: The 7 7/8% Notes are not redeemable prior to maturity in 2002, and do not provide for any sinking fund. Interest rate swaps were used by Huntington to convert the Notes to a variable interest rate. At December 31, 1999, the effective interest rate on the swap-adjusted Notes was 6.47%. SUBSIDIARY OBLIGATIONS: The 7 5/8% Notes and the 6 3/4% Notes were both issued by The Huntington National Bank in 1993. Adjusted for the effects of interest rate swaps, the effective rates were 5.67% and 6.31% at December 31, 1999, respectively. These Notes are not redeemable prior to maturity in 2003, and do not provide for any sinking fund. The 6 3/5% Notes and the Floating Rate Notes were issued by The Huntington National Bank in 1998. Adjusted for the effects of interest rate swaps, the interest rates were 6.58% and 6.57% at December 31, 1999, respectively. The Floating Rate Notes are based on the three-month London Interbank Offered Rate (LIBOR). The Medium-term bank notes had weighted average interest rates of 5.83% and 6.31% at December 31, 1999 and 1998, respectively. The stated interest rates on certain of these notes have also been modified by interest rate swaps. At December 31, 1999 and 1998, the weighted average effective interest rate on the swap-adjusted Medium-term bank notes was 5.84% and 5.16%, respectively. The terms of Huntington's medium and long-term debt obligations contain various restrictive covenants including limitations on the acquisition of additional debt in excess of specified levels, dividend payments, and the disposition of subsidiaries. As of December 31, 1999, Huntington was in compliance with all such covenants. The following table summarizes the maturities of Huntington's medium and long-term debt: - ----------------------------------------------------- YEAR (in thousands of dollars) - ----------------------------------------------------- 2000 $ 1,507,000 2001 1,205,000 2002 497,150 2003 305,000 2004 125,000 2005 and thereafter 315,000 ------------- 3,954,150 Discount (2,323) ------------- Total $ 3,951,827 ============= 39 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 8 | CAPITAL SECURITIES The Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company ("Capital Securities") were issued by two business trusts, Huntington Capital I and II ("the Trusts"). Huntington Capital I was formed in January 1997 while Huntington Capital II was formed in June 1998. The proceeds from the issuance of the capital and common securities were used to purchase debentures of the parent company. The Trusts hold solely junior subordinated debentures of the parent company and are the only assets of the Trusts. Both the debentures and related income statement effects are eliminated in Huntington's consolidated financial statements. The parent company has entered into contractual arrangements that, taken collectively and in the aggregate, constitute a full and unconditional guarantee by the parent company of the Trusts' obligations under the capital securities issued. The contractual arrangements guarantee payment of (a) accrued and unpaid distributions required to be paid on the Capital Securities; (b) the redemption price with respect to any capital securities called for redemption by Huntington Capital I or II; and (c) payments due upon voluntary or involuntary liquidation, winding-up, or termination of Huntington Capital I or II. The capital and common securities and related debentures are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------ Interest Rate of Maturity of Principal Securities Capital Capital Common Amount of and Securities and (in thousands of dollars) Securities Securities Debentures Debentures Debentures - ------------------------------------------------------------------------------------------------------------------------------ Huntington Capital I $ 200,000 $6,186 $206,186 LIBOR + .70%(1) 02/01/2027 Huntington Capital II 100,000 3,093 103,093 LIBOR + .625%(2) 06/15/2028 -------------- ------------ --------------- Total $ 300,000 $9,279 $309,279 ============== ============ ===============
(1) Variable effective rate at December 31, 1999 and 1998, of 6.91% and 5.92%, respectively. (2) Variable effective rate at December 31, 1999 and 1998, of 6.75% and 5.85%, respectively. NOTE 9 | OPERATING LEASES At December 31, 1999, Huntington and its subsidiaries were obligated under noncancelable leases for land, buildings, and equipment. Many of these leases contain renewal options, and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specified prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses, or proportionately adjusted for increases in the consumer or other price indices. The following summary reflects the future minimum rental payments, by year, required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1999. - ------------------------------------------------------- YEAR (in thousands of dollars) - ------------------------------------------------------- 2000 $ 47,713 2001 44,000 2002 41,035 2003 38,090 2004 35,032 2005 and thereafter 368,763 ------------- Total $574,633 ============= Total minimum lease payments have not been reduced by minimum sublease rentals of $52.0 million due in the future under noncancelable subleases. The rental expense for all operating leases was $39.1 million for 1999 compared with $31.0 million in 1998 and $29.0 million in 1997. 40 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 10 | BENEFIT PLANS Huntington sponsors a non-contributory defined benefit pension plan covering substantially all employees. The plan provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount which is at least equal to the minimum funding requirements but not more than that deductible under the Internal Revenue Code. Plan assets, held in trust, primarily consist of mutual funds. Huntington's unfunded defined benefit post-retirement plan provides certain health care and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of service. For any employee retiring on or after January 1, 1993, post-retirement healthcare and life insurance benefits are based upon the employee's number of months of service and are limited to the actual cost of coverage. The following table reconciles the funded status of the pension plan and the post-retirement benefit plan at the applicable September 30 measurement dates with the amounts recognized in the consolidated balance sheet at December 31:
- ---------------------------------------------------------------------------------------------------------------------------- PENSION POST-RETIREMENT BENEFITS BENEFITS - ---------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation at beginning of measurement year $ 198,541 $ 178,325 $ 46,451 $ 40,477 Changes due to: Service cost 11,081 11,979 1,494 1,410 Interest cost 13,622 12,897 3,249 3,080 Benefits paid (18,227) (19,217) (3,130) (3,148) Plan amendments 12,049 --- (549) 846 Actuarial assumptions (6,172) 14,557 899 3,786 ------------- ------------ ------------- ------------ Total changes 12,353 20,216 1,963 5,974 ------------- ------------ ------------- ------------ Projected benefit obligation at end of measurement year 210,894 198,541 48,414 46,451 ------------- ------------ ------------- ------------ Fair value of plan assets at beginning of measurement year 179,727 194,336 --- --- Changes due to: Actual return on plan assets 16,194 4,608 --- --- Benefits paid (18,227) (19,217) --- --- ------------- ------------ ------------- ------------ Total changes (2,033) (14,609) --- --- ------------- ------------ ------------- ------------ Fair value of plan assets at end of measurement year 177,694 179,727 --- --- ------------- ------------ ------------- ------------ Projected benefit obligation greater than plan assets (33,200) (18,814) (48,414) (46,451) Unrecognized net actuarial (gain) loss (1,978) 2,145 (575) (1,119) Unrecognized prior service cost (204) (13,578) 7,836 9,078 Unrecognized transition (asset) liability, net of amortization (1,156) (1,545) 16,390 17,649 ------------- ------------ ------------- ------------ Accrued liability at measurement date (36,538) (31,792) (24,763) (20,843) Fourth quarter contribution 40,000 --- --- --- ------------- ------------ ------------- ------------ Prepaid (accrued) liability at end of year $ 3,462 $ (31,792) $(24,763) $ (20,843) ============= ============ ============= ============ Weighted-average assumptions at September 30: Discount rate 7.50% 7.00% 7.50% 7.00% Expected return on plan assets 9.25% 9.25% N/A N/A Rate of compensation increase 5.00% 5.00% N/A N/A
41 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 10 | BENEFIT PLANS (CONTINUED) The following table shows the components of pension cost recognized in 1999, 1998, and 1997:
- ---------------------------------------------------------------------------------------------------------------------------- PENSION BENEFITS POST-RETIREMENT BENEFITS ---------------------------------------- ------------------------------------ (in thousands of dollars) 1999 1998 1997 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Service cost $ 11,081 $ 11,979 $ 10,698 $ 1,494 $ 1,410 $ 959 Interest cost 13,622 12,897 12,502 3,249 3,080 2,386 Expected return on plan assets (16,906) (16,447) (14,197) --- --- --- Amortization of transition asset (389) (442) (473) 1,261 1,261 1,331 Amortization of prior service cost (1,326) (1,326) 1 694 670 259 Recognized net actuarial gain (1,336) (2,669) (3,624) --- (52) (323) ------------ ------------ ------------ ---------- ----------- ---------- Benefit cost $ 4,746 $ 3,992 $ 4,907 $ 6,698 $ 6,369 $ 4,612 ============ ============ ============ ========== =========== ==========
The 2000 health care cost trend rate was projected to be 7.75% for pre-65 participants and 7.00% for post-65 participants compared with estimates of 8.50% and 7.50% in 1999. These rates are assumed to decrease gradually until they reach 4.75% in the year 2006 and remain at that level thereafter. The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage point increase would increase service and interest costs and the post-retirement benefit obligation by $133 thousand and $1.8 million, respectively. A one-percentage point decrease would reduce service and interest costs by $138 thousand and the post-retirement benefit obligation by $1.7 million. Huntington also sponsors an unfunded Supplemental Executive Retirement Plan, a nonqualified plan that provides certain key officers of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. At December 31, 1999 and 1998, the accrued pension liability for this plan totaled $10.7 million and $9.8 million, respectively. Pension expense for the plan was $1.1 million in 1999, $1.2 million in 1998, and $1.3 million in 1997. Huntington has a contributory employee investment and tax savings plan available to eligible employees. The plan was restated from an employee stock purchase plan effective April 1, 1998, and renamed the Huntington Investment and Tax Savings Plan. Matching contributions by Huntington equal 100% on the first 3% and 50% on the next 2% of participant elective deferrals. The cost of providing this plan was $7.5 million in 1999, $8.3 million in 1998, and $9.7 million in 1997. NOTE 11 | STOCK OPTIONS Huntington sponsors non-qualified and incentive stock option plans covering key employees. Approximately 21.7 million shares have been authorized under the plans, 5.3 million of which were available at December 31, 1999 for future grants. All options granted have a maximum term of ten years. Options that were granted in 1999 and 1998 vest ratably over three years while those granted in 1994 through 1997 vest ratably over four years. All grants preceding 1994 became fully exercisable after one year. The fair value of the options granted, as presented below, was estimated at the date of grant using a Black-Scholes option pricing model. The following weighted-average assumptions were used for 1999, 1998, and 1997, respectively: risk-free interest rates of 5.60%, 5.28%, and 6.44%; dividend yields of 2.49%, 2.59%, and 2.86%; volatility factors of the expected market price of Huntington's common stock of 39.7%, 26.2%, and 26.2%; and a weighted-average expected option life of 6 years. 42 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 11 | STOCK OPTIONS (CONTINUED) Huntington's stock option activity and related information for the three years ended December 31 is summarized below:
- ----------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- WEIGHTED Weighted Weighted AVERAGE Average Average OPTIONS EXERCISE Options Exercise Options Exercise (in 000's) PRICE (in 000's) Price (in 000's) Price - ----------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 5,677 $ 18.00 5,959 $ 13.89 5,673 $ 11.32 Granted/Acquired 2,142 30.43 1,368 28.10 1,455 22.85 Exercised (556) 10.52 (1,406) 9.93 (980) 12.23 Forfeited/Expired (245) 26.79 (244) 20.75 (189) 14.26 ----------- ------------ ----------- Outstanding at end of year 7,018 $ 22.08 5,677 $ 18.00 5,959 $ 13.89 =========== ============ =========== Exercisable at end of year 3,068 $ 13.98 3,197 $ 13.20 3,566 $ 10.55 =========== ============ =========== Weighted-average fair value of options granted during the year $ 11.22 $ 7.81 $ 6.31
Exercise prices for options outstanding as of December 31, 1999, ranged from $4.82 to $31.19. The weighted-average remaining contractual life of these options is 7.1 years. Huntington has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123 (FAS 123), "Accounting for Stock-Based Compensation", requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of Huntington's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. As permissible under FAS 123, Huntington is presenting the following pro forma disclosures for net income and earnings per common share as if the fair value method of accounting had been applied in measuring compensation costs for stock options. The Black-Scholes option pricing model assumes that the estimated fair value of the options is amortized over the options' vesting periods and the compensation costs would be included in personnel expense on the income statement. - ------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------- (in millions, except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------------- PRO FORMA Net income $ 414.7 $ 297.8 $290.6 Earnings per common share--diluted $ 1.78 $ 1.27 $ 1.24 43 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 12 | INCOME TAXES The following is a summary of the provision for income taxes: - ------------------------------------------------------------------------------ (in thousands of dollars) 1999 1998 1997 - ------------------------------------------------------------------------------ Currently payable Federal $106,932 $ 133,012 $ 115,197 State 1,017 2,573 3,617 ------------ ------------ ------------ Total current 107,949 135,585 118,814 ------------ ------------ ------------ Deferred tax expense Federal 83,555 1,972 46,088 State 1,193 797 1,599 ------------ ------------ ------------ Total deferred 84,748 2,769 47,687 ------------ ------------ ------------ PROVISION FOR INCOME TAXES $192,697 $ 138,354 $ 166,501 ============ ============ ============ Tax expense associated with securities transactions included in the above amounts were $5.7 million in 1999, $10.8 million in 1998, and $2.9 million in 1997. The following is a reconcilement of income tax expense to the amount computed at the statutory rate of 35%:
- -------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------------------------- Pre-tax income computed at the statutory rate $ 215,170 $ 154,043 $160,708 Increases (decreases): Tax-exempt interest income (18,677) (16,107) (7,101) State income taxes 1,438 2,191 3,391 Other-net (5,234) (1,773) 9,503 ---------------- -------------- ------------- PROVISION FOR INCOME TAXES $ 192,697 $ 138,354 $166,501 ================ ============== =============
The significant components of deferred tax assets and liabilities at December 31, 1999 and 1998, are as follows:
- --------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 - --------------------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 106,831 $ 94,056 Pension and other employee benefits 16,265 29,689 Other 58,338 43,405 ---------------- -------------- Total deferred tax assets 181,434 167,150 ---------------- -------------- Deferred tax liabilities: Lease financing 338,636 235,532 Mortgage servicing rights 18,024 19,126 Other 45,981 50,144 ---------------- -------------- Total deferred tax liabilities 402,641 304,802 ---------------- -------------- Net deferred tax liability excluding unrealized gains (losses) on securities 221,207 137,652 Deferred tax (asset) liability on unrealized gains (losses) on securities (50,666) 13,369 ---------------- -------------- Net deferred tax liability $ 170,541 $ 151,021 ================ ==============
44 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 13 | OFF-BALANCE SHEET TRANSACTIONS The contract or notional amount of financial instruments with off-balance sheet risk at December 31, 1999 and 1998, is presented below: - ----------------------------------------------------------------------- (in millions of dollars) 1999 1998 - ----------------------------------------------------------------------- CONTRACT AMOUNT REPRESENTS CREDIT RISK Commitments to extend credit Commercial $ 3,926 $ 3,833 Consumer 2,320 3,820 Other --- 227 Standby letters of credit 803 758 Commercial letters of credit 169 138 NOTIONAL AMOUNT EXCEEDS CREDIT RISK Asset/liability management activities Interest rate swaps 5,525 4,673 Purchased interest rate options 1,289 965 Interest rate forwards and futures 212 620 Trading activities Interest rate swaps 619 496 Interest rate options 392 68 Commitments to extend credit generally have short-term, fixed expiration dates, are variable rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer's credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable rate nature. Standby letters of credit are conditional commitments issued by Huntington to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. Approximately 70% of standby letters of credit are collateralized, and nearly 85% are expected to expire without being drawn upon. Commercial letters of credit represent short-term, self-liquidating instruments that facilitate customer trade transactions and have maturities of no longer than ninety days. The merchandise or cargo being traded normally secures these instruments. Interest rate swaps are agreements between two parties to exchange periodic interest payments that are calculated on a notional principal amount. Huntington enters into swaps to synthetically alter the repricing characteristics of designated earning assets and interest bearing liabilities and, on a much more limited basis, as an intermediary for customers. Because only interest payments are exchanged, cash requirements of swaps are significantly less than the notional amounts. Interest rate futures are commitments to either purchase or sell a financial instrument at a future date for a specified price or yield and may be settled in cash or through delivery of the underlying financial instrument. Forward contracts, used primarily by Huntington in connection with its mortgage banking activities, settle in cash at a specified future date based on the differential between agreed interest rates applied to a notional amount. Huntington also purchases interest rate options (e.g. caps and floors) to manage fluctuating interest rates. Premiums paid for interest rate options grant Huntington the right to receive at specified future dates the amount, if any, by which a specified market interest rate exceeds the fixed cap rate or falls below the fixed floor rate, applied to a notional amount. Exposure to loss from interest rate contracts changes as interest rates fluctuate. 45 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 13 | OFF-BALANCE SHEET TRANSACTIONS (CONTINUED) In the normal course of business, Huntington is party to financial instruments with varying degrees of credit and market risk in excess of the amounts reflected as assets and liabilities in the consolidated balance sheet. Loan commitments and letters of credit are commonly used to meet the financing needs of customers, while interest rate swaps, purchased options, futures, and forwards are an integral part of Huntington's asset/liability management activities. To a much lesser extent, various financial instrument agreements are entered into to assist customers in managing their exposure to interest rate fluctuations. These customer agreements, for which Huntington counters interest rate risk through offsetting third party contracts, are considered trading activities. The credit risk arising from loan commitments and letters of credit, represented by their contract amounts, is essentially the same as that involved in extending loans to customers, and both arrangements are subject to Huntington's standard credit policies and procedures. Collateral is obtained based on management's credit assessment of the customer and, for commercial transactions, may consist of accounts receivable, inventory, income-producing properties, and other assets. Residential properties are the principal form of collateral for consumer commitments. Notional values of interest rate swaps and other off-balance sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual balances on which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties. Potential credit losses are minimized through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, collateral agreements, and other contract provisions. At December 31, 1999, Huntington's credit risk from these off-balance sheet arrangements, including trading activities, was approximately $75.3 million. NOTE 14 | COMPREHENSIVE INCOME The components of Other Comprehensive Income were as follows in each of the three years ended December 31:
- ----------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Unrealized holding gains (losses) arising during the period: Unrealized net (losses) gains $ (171,093) $ 45,095 $ 52,806 Related tax benefit (expense) 60,738 (15,837) (18,889) -------------- ------------ ------------ Net (110,355) 29,258 33,917 -------------- ------------ ------------ Less: Reclassification adjustment for net gains realized during the period: Realized net gains 12,972 29,793 7,978 Related tax expense (4,541) (10,428) (2,792) -------------- ------------ ------------ Net 8,431 19,365 5,186 -------------- ------------ ------------ TOTAL OTHER COMPREHENSIVE (LOSS) INCOME $ (118,786) $ 9,893 $ 28,731 ============== ============ ============
NOTE 15 | LEGAL CONTINGENCIES In the ordinary course of business, there are various legal proceedings pending against Huntington and its subsidiaries. In the opinion of management, the aggregate liabilities, if any, arising from such proceedings are not expected to have a material adverse effect on Huntington's consolidated financial position. 46 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 16 | EARNINGS PER SHARE Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for stock options. The calculation of basic and diluted earnings per share for each of the three years ended December 31 is as follows:
- -------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1999 1998 1997 - -------------------------------------------------------------------------------------------- Net income $ 422,074 $301,768 $292,663 ============= ============= ============ Average common shares outstanding 230,509 232,569 230,872 Dilutive effect of stock options 1,897 2,231 2,820 ------------- ------------- ------------ Diluted common shares outstanding 232,406 234,800 233,692 ============= ============= ============ Earnings per share Basic $1.83 $1.30 $1.27 Diluted $1.82 $1.29 $1.25
Average common shares outstanding and the dilutive effect of stock options have been adjusted for subsequent stock dividends and stock splits, as applicable. NOTE 17 | 1998 SPECIAL CHARGES Huntington incurred special charges of $90 million in the fourth quarter of 1998 to coincide with the announcement of several initiatives to strengthen financial performance. The special charges included accruals for severance payments to terminated employees ($26 million), consolidation costs (including the termination of associated long-term lease contracts) related to 39 banking offices identified for sale or closure ($20 million), the costs related to the exit of underperforming product lines and delivery channels ($32 million), and costs related to the write-off of abandoned information systems equipment and software ($12 million). At December 31, 1999, Huntington had substantially completed all of its strategic initiatives, including the sale or closure of identified banking offices, discontinuation of various business activities and the targeted reductions in the workforce that spanned the entire organization to improve efficiency in back-room operations such as loan and deposit administration. All significant components of the charges were utilized as of December 31, 1999. NOTE 18 | MERGERS AND ACQUISITIONS In June 1998, Huntington completed the acquisition of sixty former Barnett Banks banking offices in Florida from Bank of America (formerly NationsBank Corporation). The transaction was accounted for as a purchase, and accordingly, the assets acquired and liabilities assumed were recorded at estimated fair value. The purchase added approximately $1.3 billion in loans and $2.3 billion in deposits. Intangible assets arising from the deal totaled approximately $459.3 million. The acquired branches' results of operations have been included in Huntington's consolidated totals from the date of the acquisition only. 47 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 19 | REGULATORY MATTERS One of the major sources of funds for Huntington (parent company) are dividends from its bank subsidiary, The Huntington National Bank (HNB). These funds aid Huntington in the payment of dividends to shareholders, expenses and other obligations. Payment of dividends to Huntington is subject to various regulatory restrictions. Regulatory approval is required prior to the declaration of any dividends in excess of available retained earnings. The amount of dividends that may be declared without regulatory approval is further limited to the sum of net income for the current year and retained net income for the preceding two years, less any required transfers to surplus or common stock. HNB could, without regulatory approval, declare dividends in 2000 of approximately $317.0 million plus an additional amount equal to its net income through the date of declaration in 2000. HNB is also restricted as to the amount and type of loans it may make to Huntington. At December 31, 1999, HNB could lend to Huntington $217.5 million, subject to the qualifying collateral requirements defined in the regulations. HNB must maintain non interest-bearing cash balances with the Federal Reserve Bank. During 1999 and 1998, the average balance of these deposits were $393.8 million and $192.5 million respectively. Huntington and HNB are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a material effect on Huntington's and HNB's financial statements. Capital adequacy guidelines require minimum ratios of 4.00% for Tier 1 Risk-based Capital, 8.00% for Total Risk-based Capital, and 3.00% for Tier 1 Leverage. To be considered well capitalized under the regulatory framework for prompt corrective action, the ratios must be at least 6.00%, 10.00% and 5.00% respectively. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings of assets and certain off-balance sheet items, and other factors. As of December 31, 1999 and 1998, Huntington has met all capital adequacy requirements. In addition, HNB had regulatory capital ratios in excess of the levels established for well-capitalized institutions. Presented in the table below are the capital ratios of Huntington and HNB as well as a comparison of the period-end capital balances with the related amounts established by the regulatory agencies:
- --------------------------------------------------------------------------------------------------- Capital Amounts ---------------------------------------- Well (in millions of dollars) Ratios Actual Capitalized Minimum - --------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 1999: Tier 1 Risk-Based Capital Huntington Bancshares Incorporated 7.52% $ 1,903 $ 1,518 $ 1,012 The Huntington National Bank 6.56 1,654 1,514 1,009 Total Risk-Based Capital Huntington Bancshares Incorporated 10.72 2,712 2,530 2,024 The Huntington National Bank 10.83 2,733 2,523 2,018 Tier 1 Leverage Huntington Bancshares Incorporated 6.72 1,903 1,416 850 The Huntington National Bank 5.87 1,654 1,409 845 AS OF DECEMBER 31, 1998: Tier 1 Risk-Based Capital Huntington Bancshares Incorporated 7.10% $ 1,720 $ 1,454 $ 970 The Huntington National Bank 6.28 1,507 1,440 960 Total Risk-Based Capital Huntington Bancshares Incorporated 10.73 2,601 2,424 1,939 The Huntington National Bank 10.48 2,515 2,400 1,920 Tier 1 Leverage Huntington Bancshares Incorporated 6.37 1,720 1,350 810 The Huntington National Bank 5.61 1,507 1,343 806
48 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 20 | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 1999 and 1998:
- --------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars, except per share data) I Q II Q III Q IV Q - --------------------------------------------------------------------------------------------------------------------------- 1999 Interest income $ 495,692 $ 498,500 $ 516,294 $ 515,516 Interest expense 236,171 237,352 247,863 262,854 ------------- -------------- ------------- ------------- Net interest income 259,521 261,148 268,431 252,662 ------------- -------------- ------------- ------------- Provision for loan losses 25,305 21,026 22,076 20,040 Securities gains 2,310 2,220 537 7,905 Gains on sale of credit card portfolios --- --- --- 108,530 Non-interest income 107,562 115,056 115,117 114,338 Non-interest expense 202,106 202,138 206,189 204,895 Special charges, including merger costs --- --- --- 96,791 ------------- -------------- ------------- ------------- Income before income taxes 141,982 155,260 155,820 161,709 Provision for income taxes 45,410 50,285 50,233 46,769 ------------- -------------- ------------- ------------- Net income $ 96,572 $ 104,975 $ 105,587 $ 114,940 ============= ============== ============= ============= Net income per common share (1) Basic $0.42 $0.45 $0.46 $0.50 Diluted $0.41 $0.45 $0.46 $0.50
- --------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars, except per share data) I Q II Q III Q IV Q - --------------------------------------------------------------------------------------------------------------------------- 1998 Interest income $ 502,480 $ 491,268 $ 505,221 $ 500,395 Interest expense 247,632 243,839 253,706 233,094 ------------- -------------- ------------- ------------- Net interest income 254,848 247,429 251,515 267,301 ------------- -------------- ------------- ------------- Provision for loan losses 22,181 24,595 24,160 34,306 Securities gains 3,089 14,316 10,615 1,773 Gains on sale of credit card portfolios --- 9,530 --- --- Non-interest income 92,330 95,810 104,026 106,711 Non-interest expense 196,442 206,678 211,877 208,932 Special charges, including merger costs --- --- --- 90,000 ------------- -------------- ------------- ------------- Income before income taxes 131,644 135,812 130,119 42,547 Provision for income taxes 42,158 43,503 41,364 11,329 ------------- -------------- ------------- ------------- Net income $ 89,486 $ 92,309 $ 88,755 $ 31,218 ============= ============== ============= ============= Net income per common share (1) Basic $0.38 $0.40 $0.38 $0.13 Diluted $0.38 $0.39 $0.38 $0.13
(1) Adjusted for stock dividends and stock splits, as applicable. 49 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 21 | NON-INTEREST INCOME AND EXPENSE A summary of the components in non-interest income follows for the three years ended December 31:
- --------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Service charges on deposit accounts $ 156,315 $126,403 $117,852 Mortgage banking 56,890 60,006 55,715 Brokerage and insurance income 52,076 36,710 27,084 Trust services 52,030 50,754 48,102 Bank Owned Life Insurance income 37,560 28,712 --- Electronic banking fees 37,301 29,202 22,705 Credit card fees 23,314 21,909 20,467 Other 36,587 45,181 42,936 ---------- --------- --------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS AND AND CREDIT CARD PORTFOLIO SALE GAINS 452,073 398,877 334,861 Securities gains 12,972 29,793 7,978 Gains on sale of credit card portfolios 108,530 9,530 --- ---------- --------- --------- TOTAL NON-INTEREST INCOME $ 573,575 $438,200 $342,839 ========== ========= =========
A summary of the components in non-interest expense follows for the three years ended December 31:
- ------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Personnel and related costs $ 419,901 $ 428,539 $ 392,793 Equipment 66,666 62,040 57,867 Outside data processing and other services 62,886 74,795 66,683 Net occupancy 62,169 54,123 49,509 Amortization of intangible assets 37,297 25,689 13,019 Marketing 31,076 32,260 32,782 Telecommunications 28,519 29,429 21,527 Legal and other professional services 21,169 25,160 24,931 Printing and supplies 20,227 23,673 21,584 Franchise and other taxes 14,674 22,103 19,836 Other 50,744 46,118 51,414 ---------- ---------- ---------- TOTAL NON-INTEREST EXPENSE BEFORE SPECIAL CHARGES 815,328 823,929 751,945 Special charges, including merger costs 96,791 90,000 51,163 ---------- ---------- ---------- TOTAL NON-INTEREST EXPENSE $ 912,119 $ 913,929 $ 803,108 ========== ========== ==========
In the fourth quarter of 1999, Huntington recorded a $58.2 million valuation adjustment related to vehicles underlying certain financing leases, resulting from recent changes in both business dynamics and economic factors. This amount was determined based on assumptions as to used car prices at lease termination and as to the number of vehicles to be returned to Huntington. In addition, Huntington incurred $38.6 million of additional costs, which included $21 million associated with its "Huntington 2000+" program. These program costs included amounts paid for management consulting and other professional services as well as a special cash award to employees upon Huntington achieving certain financial goals during 1999. 50 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 22 | SEGMENT REPORTING Huntington views its operations as five distinct segments. Retail Banking, Corporate Banking, Dealer Sales, and the Private Financial Group are the company's major business lines. The fifth segment includes Huntington's Treasury function and other unallocated assets, liabilities, revenue, and expense. Line of business results are determined based upon Huntington's business profitability reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around Huntington's organizational and management structure and accordingly, the results are not necessarily comparable with similar information published by other financial institutions. Listed below is certain financial information regarding Huntington's 1999 and 1998 results by line of business. For a detailed description of the individual segments, refer to Huntington's Management's Discussion and Analysis.
- --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1999 - --------------------------------------------------------------------------------------------------------------------------- Private INCOME STATEMENT Retail Corporate Dealer Financial Treasury/ Huntington (in thousands of dollars) Banking Banking Sales Group Other Consolidated - --------------------------------------------------------------------------------------------------------------------------- Net Interest Income (FTE) $ 564,033 $ 262,280 $ 195,829 $ 28,948 $ 95 $ 1,051,185 Provision for Loan Losses 31,510 14,457 41,561 919 --- 88,447 Non-Interest income 275,977 66,847 (1,130) 46,586 185,295 573,575 Non-Interest expense 545,292 128,050 106,078 39,823 92,876 912,119 Income Taxes/FTE Adjustment 85,371 60,630 13,841 11,268 31,010 202,120 ------------ ------------ ------------ ------------ ------------ -------------- Net income $ 177,837 $ 125,990 $ 33,219(1) $ 23,524 $ 61,504 $ 422,074 ============ ============ ============ ============ ============ ============== Depreciation and Amortization $ 60,242 $ 8,625 $ 1,130 $ 1,412 $ 41,082 $ 112,491 ============ ============ ============ ============ ============ ============== BALANCE SHEET (in millions of dollars) Average Identifiable Assets $ 6,928 $ 7,287 $ 6,206 $ 588 $ 7,730 $ 28,739 Average Deposits $ 16,885 $ 1,036 $ 63 $ 534 $ 689 $ 19,207 Capital Expenditures $ 17 $ 3 $ 1 $ --- $ 55 $ 76
(1) Includes $37,830 million, net of tax, from lease residual valuation adjustment. Excluding this adjustment, net income was $71,049.
- --------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- Private INCOME STATEMENT Retail Corporate Dealer Financial Treasury/ Huntington (in thousands of dollars) Banking Banking Sales Group Other Consolidated - --------------------------------------------------------------------------------------------------------------------------- Net Interest Income (FTE) $ 541,560 $ 256,963 $ 164,777 $ 31,476 $ 36,624 $ 1,031,400 Provision for Loan Losses 40,408 21,147 42,000 1,687 --- 105,242 Non-Interest income 232,805 72,188 7,993 41,990 83,224 438,200 Non-Interest expense 542,317 140,492 49,078 38,890 143,152 913,929 Income Taxes/FTE Adjustment 62,138 54,632 26,610 10,725 (5,444) 148,661 ------------ ------------ ------------ ------------ ------------ -------------- Net income $ 129,502 $ 112,880 $ 55,082 $ 22,164 $ (17,860) $ 301,768 ============ ============ ============ ============ ============ ============== Depreciation and Amortization $ 48,464 $ 5,024 $ 431 $ 974 $ 26,063 $ 80,956 ============ ============ ============ ============ ============ ============== BALANCE SHEET (in millions of dollars) Average Identifiable Assets $ 7,034 $ 6,699 $ 5,287 $ 621 $ 7,251 $ 26,892 Average Deposits $ 16,375 $ 1,007 $ 62 $ 475 $ 494 $ 18,413 Capital Expenditures $ 48 $ 6 $ --- $ --- $ 93 $ 147
51 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 23 | FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of Huntington's financial instruments at December 31 are presented in the following table:
- --------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1999 AT DECEMBER 31, 1998 - --------------------------------------------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR (in thousands of dollars) AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and short-term assets $ 1,235,439 $ 1,235,439 $ 1,454,142 $ 1,454,142 Trading account securities 7,975 7,975 3,839 3,839 Mortgages held for sale 141,723 141,723 466,664 466,664 Securities 4,888,968 4,888,865 4,806,349 4,806,459 Loans 20,369,128 20,380,713 19,163,603 19,338,129 Customers' acceptance liability 17,167 17,167 22,591 22,591 Interest rate contracts: Asset/liability management 21,491 19,147 19,610 67,507 Customer accommodation 12,950 12,950 9,638 9,638 FINANCIAL LIABILITIES: Deposits 19,792,603 19,803,657 19,722,772 19,788,328 Short-term borrowings 2,121,989 2,121,989 2,216,644 2,216,644 Bank acceptances outstanding 17,167 17,167 22,591 22,591 Medium-term notes 3,254,150 3,272,348 2,539,900 2,560,426 Subordinated notes and other long-term debt 697,677 727,789 707,359 733,083 Capital Securities 300,000 300,652 300,000 299,609 Interest rate contracts: Asset/liability management --- 72,991 --- 11,126 Customer accommodation 10,765 10,765 7,388 7,388
Certain assets, the most significant being Bank Owned Life Insurance and premises and equipment, do not meet the definition of a financial instrument and are excluded from this disclosure. Similarly, mortgage servicing rights and deposit base and other customer relationship intangibles are not considered financial instruments and are not discussed below. Accordingly, this fair value information is not intended to, and does not, represent Huntington's underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by management. These estimations necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates. The terms and short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include cash and due from banks, interest bearing deposits in banks, trading account securities, federal funds sold and securities purchased under resale agreements, customers' acceptance liabilities, short-term borrowings, and bank acceptances outstanding. Loan commitments and letters of credit generally have short-term, variable rate features and contain clauses that limit Huntington's exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value. The following methods and assumptions were used by Huntington to estimate the fair value of the remaining classes of financial instruments: Mortgages held for sale - valued at the lower of aggregate cost or market value primarily as determined using outstanding commitments from investors. Securities available for sale and investment securities - based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amount and fair value of securities exclude the fair value of asset/liability management interest rate contracts designated as hedges of securities available for sale. 52 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 23 | FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Loans and leases - variable rate loans that reprice frequently are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of probable losses in the loan portfolio. Although not considered financial instruments, lease financing receivables have been included in the loan totals at their carrying amounts. Deposits - demand deposits, savings accounts, and money market deposits are, by definition, equal to the amount payable on demand. The fair values of fixed rate time deposits are estimated by discounting cash flows using interest rates currently being offered on certificates with similar maturities. Debt - fixed rate long-term debt, as well as medium-term notes and Capital Securities, are based upon quoted market prices or, in the absence of quoted market prices, discounted cash flows using rates for similar debt with the same maturities. The carrying amount of variable rate obligations approximates fair value. Off-balance sheet derivatives - interest rate swap agreements and other off-balance sheet interest rate contracts are based upon quoted market prices or prices of similar instruments, when available, or calculated with pricing models using current rate assumptions. NOTE 24 | PARENT COMPANY FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------------- BALANCE SHEETS DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 100,804 $ 179,981 Securities available for sale 81,241 22,659 Due from subsidiaries Bank subsidiary 330,487 220,842 Non-bank subsidiaries 33,646 18,859 Investment in subsidiaries on the equity method Bank subsidiary 2,182,420 2,235,414 Non-bank subsidiaries 26,761 24,110 Excess of cost of investment in subsidiaries over net assets acquired 11,016 11,586 Other assets 88,221 86,227 ----------- ----------- TOTAL ASSETS $2,854,596 $2,799,678 =========== =========== LIABILITIES AND EQUITY Short-term borrowings $ 11,327 $ 30,644 Medium-term notes --- 60,000 Subordinated notes Subsidiary trusts 309,279 309,279 Unaffiliated companies 149,633 149,505 Dividends payable 45,826 42,406 Accrued expenses and other liabilities 156,175 59,049 ----------- ----------- TOTAL LIABILITIES 672,240 650,883 ----------- ----------- SHAREHOLDERS' EQUITY 2,182,356 2,148,795 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,854,596 $2,799,678 =========== ===========
53 HUNTINGTON BANCSHARES INCORPORATED Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 24 | PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------- STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- INCOME Dividends from Bank subsidiary $190,255 $ 186,381 $ 228,892 Non-bank subsidiaries 4,000 4,000 2,961 Interest from Bank subsidiary 19,748 41,507 18,227 Non-bank subsidiaries 1,194 329 19,032 Other 31,918 3,094 1,537 ------------- ------------ ------------ TOTAL INCOME 247,115 235,311 270,649 ------------- ------------ ------------ EXPENSE Interest on debt 31,109 27,340 36,128 Other --- 13,722 30,020 ------------- ------------ ------------ TOTAL EXPENSE 31,109 41,062 66,148 ------------- ------------ ------------ Income before income taxes and equity in undistributed net income of subsidiaries 216,006 194,249 204,501 Income tax expense (benefit) 9,271 2,089 (8,630) ------------- ------------ ------------ Income before equity in undistributed net income of subsidiaries 206,735 192,160 213,131 ------------- ------------ ------------ Equity in undistributed net income (loss) of Bank subsidiary 212,613 106,967 80,523 Non-bank subsidiaries 2,726 2,641 (991) ------------- ------------ ------------ NET INCOME $422,074 $ 301,768 $ 292,663 ============= ============ ============
54 NOTE 24 | PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $422,074 $ 301,768 $ 292,663 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (215,339) (109,608) (79,532) Provision for amortization and depreciation 2,987 3,244 3,460 Gains on sales of securities available for sale (30,546) --- --- Increase in other assets (6,538) (14,413) (4,961) Increase (decrease) in other liabilities 104,800 (15,978) (13,942) ------------ ------------ ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 277,438 165,013 197,688 ------------ ------------ ------------- INVESTING ACTIVITIES (Increase) decrease in investments in subsidiaries (5) (386,500) 197,263 (Advances to) repayments from subsidiaries (42,885) 374,140 (71,485) Proceeds from sales of securities available for sale 30,990 --- --- Other --- (41) (15,000) ------------ ------------ ------------- NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (11,900) (12,401) 110,778 ------------ ------------ ------------- FINANCING ACTIVITIES Decrease in short-term borrowings (19,317) (9,881) --- Proceeds from issuance of subordinated notes to subsidiary trusts --- 100,000 200,000 Payment of long-term debt --- (4,537) (25,000) Proceeds from issuance of medium-term notes --- --- 40,000 Payment of medium-term notes (60,000) (160,000) (140,000) Dividends paid on common stock (171,858) (157,632) (132,760) Acquisition of treasury stock (97,957) (31,192) (56,175) Proceeds from issuance of treasury stock 4,417 4,685 27,266 ------------ ------------ ------------- NET CASH USED FOR FINANCING ACTIVITIES (344,715) (258,557) (86,669) ------------ ------------ ------------- CHANGE IN CASH AND CASH EQUIVALENTS (79,177) (105,945) 221,797 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 179,981 285,926 64,129 ------------ ------------ ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $100,804 $ 179,981 $ 285,926 ============ ============ =============
Supplemental data required for this item is set forth in Item 7 on page 27 under the caption "Selected Quarterly Income Statement Data." ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 55 Part III -------- ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item is set forth under the captions "Class I Directors," "Class II Directors," and "Class III Directors" on pages 2 through 5 under the caption "Executive Officers of the Corporation" on pages 20 and 21, and under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 21, of Huntington's 2000 Proxy Statement, and is incorporated herein by reference. ITEM 11: EXECUTIVE COMPENSATION Information required by this item is set forth under the caption "Executive Compensation" on pages 8 through 19, and under the caption "Compensation of Directors" on page 5, of Huntington's 2000 Proxy Statement, and is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is set forth under the caption "Ownership of Voting Stock" on pages 6 and 7, of Huntington's 2000 Proxy Statement, and is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is set forth under the caption "Transactions With Directors and Executive Officers" on pages 7 and 8, and under the caption "Compensation Committee Interlocks and Insider Participation" on page 15 of Huntington's 2000 Proxy Statement, and is incorporated herein by reference. Part IV ------- ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) The report of independent auditors and consolidated financial statements appearing in Item 8. (2) Huntington is not filing separately financial statement schedules because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the notes thereto. (3) The exhibits required by this item are listed in the Exhibit Index on pages 58 through 60 of this Form 10-K. The management contracts and compensation plans or arrangements required to be filed as exhibits to this Form 10-K are listed as Exhibits 10(a) through 10(o) in the Exhibit Index. (b) During the quarter ended December 31, 1999, Huntington filed two Current Reports on Form 8-K. The first report, dated October 13, 1999, was filed under Items 5 and 7, and concerned Huntington's results of operations for the quarter ended September 30, 1999. The second report, dated November 17, 1999, was filed under Item 5 and concerned certain management changes at Huntington. (c) The exhibits to this Form 10-K begin on page 58. (d) See Item 14(a)(2) above. 56 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 22nd day of February, 2000. HUNTINGTON BANCSHARES INCORPORATED (Registrant) By: /s/ Frank Wobst By: /s/ Anne Creek ------------------------------- --------------------------------------- Frank Wobst Anne Creek Director, Chairman, and Executive Vice President, Chief Executive Officer Chief Financial Officer and Treasurer (Principal Executive Officer) (Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 22nd day of February, 2000. /s/ Don M. Casto, III /s/ Robert H. Schottenstein - ------------------------------------ --------------------------- Don M. Casto, III Robert H. Schottenstein Director Director /s/ George A Skestos - ------------------------------------ --------------------------- Don Conrad George A. Skestos Director Director /s/ Peter Geier /s/ Lewis R. Smoot, Sr. - ------------------------------------ --------------------------- Peter Geier Lewis R. Smoot, Sr. Director Director /s/ John B. Gerlach, Jr. /s/ Timothy P. Smucker - ------------------------------------ --------------------------- John B. Gerlach, Jr. Timothy P. Smucker Director Director /s/ Patricia T. Hayot /s/ William J. Williams - ------------------------------------ --------------------------- Patricia T. Hayot William J. Williams Director Director /s/ Wm. J. Lhota - ------------------------------------ Wm. J. Lhota Director 57 EXHIBIT INDEX 3(i)(a). Articles of Restatement of Charter, Articles of Amendment to Articles of Restatement of Charter, and Articles Supplementary -- previously filed as Exhibit 3(i) to Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. (i)(b). Articles of Amendment to Articles of Restatement of Charter -- previously filed as Exhibit 3(i)(b) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, and incorporated herein by reference. (i)(c). Articles of Amendment to Articles of Restatement of Charter -- previously filed as Exhibit 3(i)(c) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference. (ii). Amended and Restated Bylaws -- previously filed as Exhibit 3(ii) to Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. 4(a). Instruments defining the Rights of Security Holders -- reference is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request. (b). Rights Plan, dated February 22, 1990, between Huntington Bancshares Incorporated and The Huntington National Bank (as successor to The Huntington Trust Company, National Association) -- previously filed as Exhibit 1 to Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on February 22, 1990, and incorporated herein by reference. (c). Amendment No. 1 to the Rights Agreement, dated August 16, 1995-- previously filed as Exhibit 4(b) to Form 8-K, dated August 16, 1995, and incorporated herein by reference. 10. Material contracts: (a). * Employment Agreement, dated April 25, 1996, between Huntington Bancshares Incorporated and Frank Wobst -- previously filed as Exhibit 10(a) to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996, and incorporated herein by reference. (b). * Form of Tier I Executive Agreement for certain executive officers -- previously filed as Exhibit 10(b) to Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. (c). * Form of Tier II Executive Agreement for certain executive officers -- previously filed as Exhibit 10(c) to Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. (d). * Schedule identifying material details of Executive Agreements, substantially similar to Exhibits 10(b) and 10(c). (e). * Huntington Bancshares Incorporated Amended and Restated Incentive Compensation Plan, effective for performance cycles beginning on or after January 1, 1999 -- previously filed as Exhibit 10(e) to Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. (f). * Amended and Restated Long-Term Incentive Compensation Plan, effective for performance cycles beginning on or after January 1, 1999 -- previously filed as Exhibit 10(f) to Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. (g)(1). * Supplemental Executive Retirement Plan with First and Second Amendments -- previously filed as Exhibit 10(g) to Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference. 58 (g)(2). * Third Amendment to Supplemental Executive Retirement Plan -- previously filed as Exhibit 10(k)(2) to Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. (g)(3). * Fourth Amendment to Supplemental Executive Retirement Plan. (h). * Deferred Compensation Plan and Trust for Directors -- reference is made to Exhibit 4(a) of Post-Effective Amendment No. 2 to Registration Statement on Form S-8, Registration No. 33-10546, filed with the Securities and Exchange Commission on January 28, 1991, and incorporated herein by reference. (i)(1). * 1983 Stock Option Plan -- reference is made to Exhibit 4A of Registration Statement on Form S-8, Registration No. 2-89672, filed with the Securities and Exchange Commission on February 27, 1984, and incorporated herein by reference. (i)(2). * 1983 Stock Option Plan -- Second Amendment -- previously filed as Exhibit 10(j)(2) to Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference. (i)(3). * 1983 Stock Option Plan -- Third Amendment -- previously filed as Exhibit 10(j)(3) to Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference. (i)(4). * 1983 Stock Option Plan -- Fourth Amendment -- previously filed as Exhibit (m)(4) to Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. (i)(5). * 1983 Stock Option Plan -- Fifth Amendment -- previously filed as Exhibit (m)(5) to Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. (j)(1). * 1990 Stock Option Plan -- reference is made to Exhibit 4(a) of Registration Statement on Form S-8, Registration No. 33-37373, filed with the Securities and Exchange Commission on October 18, 1990, and incorporated herein by reference. (j)(2). * First Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan -- previously filed as Exhibit 10(q)(2) to Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference. (j)(3). * Second Amendment to Huntington Bancshares Incorporated 1990 Stock Option Plan -- previously filed as Exhibit 10(n)(3) to Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. (k)(1). * The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust (as amended and restated as of February 9, 1990) -- previously filed as Exhibit 4(a) to Registration Statement on Form S-8, Registration No. 33-44208, filed with the Securities and Exchange Commission on November 26, 1991, and incorporated herein by reference. (k)(2). * First Amendment to The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust Plan -- previously filed as Exhibit 10(o)(2) to Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. (l). * Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors -- reference is made to Exhibit 4(a) of Registration Statement on Form S-8, Registration No. 33-41774, filed with the Securities and Exchange Commission on July 19, 1991, and incorporated herein by reference. 59 (m). * Huntington Bancshares Incorporated Retirement Plan For Outside Directors -- previously filed as Exhibit 10(t) to Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference. (n). * Restated Huntington Supplemental Retirement Income Plan. (o) * Amended and Restated 1994 Stock Option Plan -- previously filed as Exhibit 10(r) to Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference. 21. Subsidiaries of the Registrant. 23. Consent of Ernst & Young, LLP, Independent Auditors. 27. Financial Data Schedule. 99. Ratio of Earnings to Fixed Charges - ------------- *Denotes management contract or compensatory plan or arrangement. 60