UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 QUARTERLY PERIOD ENDED March 31, 2000 Commission File Number 0-2525 HUNTINGTON BANCSHARES INCORPORATED MARYLAND 31-0724920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 41 SOUTH HIGH STREET, COLUMBUS, OHIO 43287 Registrant's telephone number (614) 480-8300 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No === === There were 221,991,163 shares of Registrant's without par value common stock outstanding on April 28, 2000. HUNTINGTON BANCSHARES INCORPORATED INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2000 and 1999 and December 31, 1999 3 Consolidated Statements of Income - For the three months ended March 31, 2000 and 1999 4 Consolidated Statements of Changes in Shareholders' Equity - For the three months ended March 31, 2000 and 1999 5 Consolidated Statements of Cash Flows - For the three months ended March 31, 2000 and 1999 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 PART II. OTHER INFORMATION Item 2. Changes in securities and use of proceeds 28 Item 6. Exhibits and Reports on Form 8-K 28-29
2 PART I. FINANCIAL INFORMATION 1. FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, MARCH 31, (in thousands of dollars) 2000 1999 1999 - ------------------------------------------------------- --------------- --------------- --------------- ASSETS Cash and due from banks................................ $ 1,036,442 $1,208,004 $ 971,446 Interest bearing deposits in banks..................... 6,241 6,558 8,143 Trading account securities............................. 18,333 7,975 27,755 Federal funds sold and securities purchased under resale agreements................. 16,527 20,877 11,238 Loans held for sale.................................... 99,354 141,723 279,794 Securities available for sale - at fair value.......... 4,495,873 4,870,203 5,367,871 Investment securities - fair value $18,121; $18,662; and $23,415, respectively......................... 18,266 18,765 23,044 Total Loans (1) ....................................... 20,531,039 20,668,437 19,731,593 Less allowance for loan losses.................... 296,743 299,309 291,066 ----------- ----------- ----------- Net loans.............................................. 20,234,296 20,369,128 19,440,527 ----------- ----------- ----------- Bank owned life insurance ............................. 774,584 765,399 400,000 Premises and equipment................................. 429,793 438,871 441,426 Customers' acceptance liability........................ 18,676 17,167 19,402 Accrued income and other assets........................ 1,259,594 1,172,283 1,587,262 ----------- ----------- ----------- TOTAL ASSETS........................................... $28,407,979 $29,036,953 $28,577,908 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Total Deposits (1) .................................... $19,779,364 $19,792,603 $19,046,901 Short-term borrowings.................................. 1,576,745 2,121,989 2,884,722 Bank acceptances outstanding........................... 18,676 17,167 19,402 Medium-term notes...................................... 3,139,150 3,254,150 2,864,900 Subordinated notes and other long-term debt............ 845,623 697,677 707,438 Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely junior subordinated debentures of the Parent Company...................................... 300,000 300,000 300,000 Accrued expenses and other liabilities................. 649,598 671,011 616,488 ----------- ----------- ----------- Total Liabilities 26,309,156 26,854,597 26,439,851 ----------- ----------- ----------- 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, 233,844,820, and 212,596,344 shares, respectively; outstanding 221,982,428, 228,888,221, and 210,170,853 shares, respectively ............ 2,284,616 2,284,956 2,134,818 Less 11,862,392, 4,956,599, and 2,425,491 treasury shares, respectively................ (283,762) (137,268) (68,535) Accumulated other comprehensive income............ (90,559) (94,093) (18,220) Retained earnings................................. 188,528 128,761 89,994 ----------- ----------- ----------- Total Shareholders' Equity........................ 2,098,823 2,182,356 2,138,057 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $28,407,979 $29,036,953 $28,577,908 =========== =========== ===========
(1) See page 11 for detail of total loans and total deposits. See notes to unaudited consolidated financial statements. 3 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, ---------------------------------- (in thousands of dollars, except per share amounts) 2000 1999 - -------------------------------------------------------------------------- --------------- -------------- Interest and fee income Loans............................................................... $ 439,646 $ 410,181 Securities.......................................................... 73,151 78,852 Other............................................................... 2,760 6,659 ------------ ------------ TOTAL INTEREST INCOME..................................... 515,557 495,692 ------------ ------------ Interest expense Deposits............................................................ 182,649 156,305 Short-term borrowings............................................... 24,764 30,475 Medium-term notes................................................... 50,358 34,754 Subordinated notes and other long-term debt......................... 17,095 14,637 ------------ ------------ TOTAL INTEREST EXPENSE.................................... 274,866 236,171 ------------ ------------ NET INTEREST INCOME....................................... 240,691 259,521 Provision for loan losses................................................ 15,701 25,305 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...................... 224,990 234,216 ------------ ------------ Total non-interest income (1)............................................ 125,694 109,872 Total non-interest expense (1)........................................... 200,106 202,106 ------------ ------------ INCOME BEFORE INCOME TAXES................................ 150,578 141,982 Provision for income taxes............................................... 46,405 45,410 ------------ ------------ NET INCOME................................................ $ 104,173 $ 96,572 ============ ============ PER COMMON SHARE (2) Net income Basic.......................................................... $0.46 $0.42 Diluted........................................................ $0.46 $0.41 Cash dividends declared............................................. $0.20 $0.18 AVERAGE COMMON SHARES (2) Basic.......................................................... 225,431,136 231,459,010 Diluted........................................................ 226,489,959 233,405,712
(1) See page 12 for detail of non-interest income and non-interest expense. (2) Adjusted for stock dividends and stock splits, as applicable. See notes to unaudited consolidated financial statements. 4 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) ACCUMULATED COMMON STOCK TREASURY STOCK OTHER ------------------------ --------------------- COMPREHENSIVE RETAINED SHARES AMOUNT SHARES AMOUNT INCOME (LOSS) EARNINGS TOTAL - ------------------------------------------- --------- ------------- --------- ---------- ------------- -------- ----------- Three Months Ended March 31, 1999: Balance, beginning of period 212,596 $2,137,915 (1,850) ($49,271) $24,693 $35,458 $2,148,795 Comprehensive Income: Net income 96,572 96,572 Unrealized net holding losses on securities available for sale arising during the period (42,913) (42,913) ---------- Total comprehensive income 53,659 ---------- Cash Dividends declared (42,036) (42,036) Stock options exercised (3,097) 153 4,384 1,287 Treasury shares purchased (751) (24,349) (24,349) Treasury shares sold to employee benefit plans 23 701 701 ------- ---------- ------- --------- -------- -------- ---------- Balance, end of period 212,596 $2,134,818 (2,425) ($68,535) ($18,220) $89,994 $2,138,057 ======= ========== ======= ========= ======== ======== ========== THREE MONTHS ENDED MARCH 31, 2000: BALANCE, BEGINNING OF PERIOD 233,845 $2,284,956 (4,957) ($137,268) ($94,093) $128,761 $2,182,356 Comprehensive Income: Net income 104,173 104,173 Unrealized net holding gains on securities available for sale arising during the period 3,534 3,534 ----------- Total comprehensive income 107,707 ----------- Cash dividends declared (44,406) (44,406) Stock options exercised (340) 17 509 169 Treasury shares purchased (6,952) (147,702) (147,702) Treasury shares sold to employee benefit plans 30 699 699 ------- ---------- ------- --------- -------- -------- ---------- Balance, end of period 233,845 $2,284,616 (11,862) ($283,762) ($90,559) $188,528 $2,098,823 ======= ========== ======= ========= ======== ======== ==========
See notes to unaudited consolidated financial statements. 5 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ------------------------------------ (in thousands of dollars) 2000 1999 - ------------------------------------------------------------------------------ --------------- -------------- OPERATING ACTIVITIES Net Income $ 104,173 $ 96,572 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 15,701 25,305 Provision for depreciation and amortization 27,466 29,572 Deferred income tax expense 29,511 18,970 Increase in trading account securities (10,358) (23,916) Decrease in mortgages held for sale 42,369 186,870 Securities gains and securitization losses, net (14,555) (2,310) Increase in accrued income receivable (13,579) (2,781) Net increase in other assets (74,973) (75,130) Increase (decrease) in accrued expenses 2,648 (1,861) Net (decrease) increase in other liabilities (11,798) 695 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 96,605 251,986 ----------- ----------- INVESTING ACTIVITIES Decrease in interest bearing deposits in banks 317 94,421 Proceeds from: Maturities and calls of investment securities 490 1,883 Maturities and calls of securities available for sale 50,476 245,678 Sales of securities available for sale 353,777 322,062 Purchases of securities available for sale -- (1,219,206) Proceeds from sales of loans 484,041 1,348 Net loan originations, excluding sales (445,251) (304,343) Proceeds from sale of premises and equipment 1,223 -- Purchases of premises and equipment (4,291) (18,220) Proceeds from sales of other real estate 2,919 2,794 ----------- ----------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 443,701 (873,583) ----------- ----------- FINANCING ACTIVITIES Decrease in total deposits (13,236) (675,856) (Decrease) increase in short-term borrowings (545,244) 668,078 Proceeds from issuance of long-term debt 150,000 -- Proceeds from issuance of medium-term notes 250,000 1,085,000 Payment of medium-term notes (365,000) (760,000) Dividends paid on common stock (45,904) (42,158) Repurchases of common stock (147,702) (24,349) Proceeds from issuance of common stock 868 1,988 ----------- ----------- NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (716,218) 252,703 ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS (175,912) (368,894) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,228,881 1,351,578 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,052,969 $ 982,684 =========== ===========
See notes to unaudited consolidated financial statements. 6 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS A. Basis of Presentation The accompanying unaudited consolidated financial statements reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The Notes to the Consolidated Financial Statements appearing in Huntington Bancshares Incorporated's (Huntington) 1999 Annual Report on Form 10-K should be read in conjunction with these interim financial statements. B. Reclassifications Certain amounts in the prior year's financial statements have been reclassified to conform to the 2000 presentation. These reclassifications had no effect on net income. C. Comprehensive Income Comprehensive Income includes net income as well as certain items that are reported directly within a separate component of stockholders' equity that bypass net income. Currently, Huntington's only component of Other Comprehensive Income is the unrealized gains (losses) on securities available for sale. The related before and after tax amounts are as follows:
THREE MONTHS ENDED MARCH 31, -------------------------- (in thousands) 2000 1999 -------- --------- Unrealized holding gains (losses) arising during the period: Unrealized net gains (losses) $ 30,118 $(64,066) Related tax (expense) benefit (10,487) 22,654 -------- -------- Net 19,631 (41,412) -------- -------- Less: Reclassification adjustment for net gains realized during the period: Realized net gains 24,763 2,310 Related tax expense (8,666) (809) -------- -------- Net 16,097 1,501 -------- -------- Total Other Comprehensive Income (Loss) $ 3,534 $(42,913) ======== ========
7 D. Earnings per Share Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for stock options. The calculation of basic and diluted earnings per share for each of the periods ended March 31, is as follows:
THREE MONTHS ENDED MARCH 31, ------------------------ (in thousands, except per share amounts) 2000 1999 -------- -------- Net Income $104,173 $ 96,572 ======== ======== Average common shares outstanding 225,431 231,459 Dilutive effect of stock options 1,059 1,947 -------- -------- Diluted common shares outstanding 226,490 233,406 ======== ======== Earnings per share Basic $0.46 $0.42 Diluted $0.46 $0.41
Average common shares outstanding and the dilutive effect of stock options have been adjusted for subsequent stock dividends and stock splits, as applicable. E. Securities Gains and Securitization Losses Securities sales and a $500 million automobile loan securitization during the first quarter of 2000 netted gains of $14.6 million compared to securities gains of $2.3 million for the same period a year ago. Sales of a portion of Huntington's investment in S1 Corporation common stock generated gains of $32.2 million. Substantially offsetting these gains were net losses of $7.4 million related to the strategic sale of lower yielding securities and a $10.2 million loss recognized on the loan securitization. The low yielding securities sales and the securitization were completed as part of Huntington's balance sheet repositioning strategy to divest of lower yielding assets, reduce reliance on wholesale funding sources and mitigate the impact of future interest rate increases. F. Acquisition During February 2000, Huntington signed a definitive agreement to acquire 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. Approximately 6.5 million shares, all which were purchased on the open market in the first quarter 2000, will be reissued in connection with the transaction. The merger is expected to be completed by the end of the second quarter of 2000. 8 G. New Accounting Pronouncement In June 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 June 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. H. Lines of Business Listed below is certain financial information regarding Huntington's 2000 and 1999 results by line of business. For a detailed description of the individual segments, refer to Huntington's Management's Discussion and Analysis.
- --------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2000 - --------------------------------------------------------------------------------------------------------------------------------- Private INCOME STATEMENT Retail Corporate Dealer Financial Treasury/ Huntington (in thousands of dollars) Banking Banking Sales Group Other Consolidated - ---------------------------------------------------------------------------------------------------------------------------------- Net Interest Income (FTE) $129,992 $62,270 $46,959 $ 7,768 $(4,141) $242,848 Provision for Loan Losses 4,212 2,950 8,369 170 -- 15,701 Non-Interest income 67,378 15,764 3,236 14,742 24,574 125,694 Non-Interest expense 136,972 27,608 12,709 13,720 9,097 200,106 Income Taxes/FTE Adjustment 17,877 15,107 9,291 2,742 3,545 48,562 -------- ------- ------- ------- ------- -------- Net income $ 38,309 $32,369 $19,826 $ 5,878 $ 7,791 $104,173 ======== ======= ======= ======= ======= ======== Depreciation and Amortization $ 9,766 $ 585 $ 324 $ 246 $16,545 $ 27,466 ======== ======= ======= ======= ======= ======== BALANCE SHEET (in millions of dollars) Average Identifiable Assets $ 6,884 $ 6,854 $ 7,026 $ 605 $ 7,584 $ 28,953 Average Deposits $ 16,520 $ 1,192 $ 66 $ 642 $ 1,371 $ 19,791 Capital Expenditures $ 4 $ -- $ -- $ -- $ -- $ 4
9
- ---------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 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) $136,903 $61,664 $44,860 $ 8,437 $10,161 $262,025 Provision for Loan Losses 11,486 2,958 10,679 182 -- 25,305 Non-Interest income 66,693 13,780 426 13,840 15,133 109,872 Non-Interest expense 137,448 28,327 12,055 11,615 12,661 202,106 Income Taxes/FTE Adjustment 18,148 14,661 7,487 3,480 4,138 47,914 -------- ------- ------- ------- ------- -------- Net income $ 36,514 $29,498 $15,065 $ 7,000 $ 8,495 $ 96,572 ======== ======= ======= ======= ======= ======== Depreciation and Amortization $ 13,116 $ 532 $ 175 $ 359 $15,390 $ 29,572 ======== ======= ======= ======= ======= ======== BALANCE SHEET (in millions of dollars) Average Identifiable Assets $ 7,566 $ 6,568 $ 5,851 $ 605 $ 7,832 $ 28,422 Average Deposits $ 17,198 $ 906 $ 62 $ 613 $ 352 $ 19,131 Capital Expenditures $ 5 $ 1 $ -- $ -- $ 12 $ 18
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. 10 - -------------------------------------------------------------------------------- FINANCIAL REVIEW
- ----------------------------------------------------------------------------------------------------------------------------------- LOAN PORTFOLIO COMPOSITION - ----------------------------------------------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in thousands of dollars) 2000 1999 1999 - --------------------------------------------------------------- ---------------- ---------------- --------------- Commercial (unearned income $2,221; $2,550; $2,390)............ $ 6,452,675 $ 6,300,414 $ 6,150,490 Real Estate Construction............................................... 1,242,882 1,236,776 996,267 Commercial................................................. 2,149,523 2,151,673 2,242,700 Consumer Loans (unearned income $5,305; $5,974; $7,714)............. 6,373,627 6,793,295 6,812,242 Leases (unearned income $450,198; $410,239; $291,256)...... 2,856,468 2,741,735 2,103,439 Residential Mortgage....................................... 1,455,864 1,444,544 1,426,455 ----------- ----------- ----------- TOTAL LOANS............................................... $20,531,039 $20,668,437 $19,731,593 =========== =========== ===========
- ----------------------------------------------------------------------------------------------------------------------------------- DEPOSIT COMPOSITION - ----------------------------------------------------------------------------------------------------------------------------------- MARCH 31, December 31, March 31, (in thousands of dollars) 2000 1999 1999 - --------------------------------------------------------------- ---------------- ---------------- --------------- Demand deposits Non-interest bearing...................................... $ 3,441,780 $ 3,418,100 $ 3,352,748 Interest bearing.......................................... 4,143,771 4,046,472 4,043,650 Savings deposits............................................... 3,748,170 3,793,423 3,924,658 Other domestic time deposits................................... 5,709,132 5,637,842 5,876,672 ----------- ----------- ----------- TOTAL CORE DEPOSITS....................................... 17,042,853 16,895,837 17,197,728 ----------- ----------- ----------- Certificates of deposit of $100,000 or more.................... 2,346,558 2,030,551 1,757,303 Foreign time deposits.......................................... 389,953 866,215 91,870 ----------- ----------- ----------- TOTAL DEPOSITS............................................ $19,779,364 $19,792,603 $19,046,901 =========== =========== ===========
11 - -------------------------------------------------------------------------------- Financial Review
- --------------------------------------------------------------------------------------------------------- ANALYSIS OF NON-INTEREST INCOME - --------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ---------------------------- PERCENT (in thousands of dollars) 2000 1999 CHANGE - -------------------------------------------------------- ----------- ----------- ----------- Service charges on deposit accounts .................... $ 41,660 $ 35,776 16.4 % Brokerage and insurance................................. 15,284 11,543 32.4 Trust services ......................................... 12,863 13,434 (4.3) Electronic banking fees................................. 9,849 8,038 22.5 Bank Owned Life Insurance income........................ 9,186 9,390 (2.2) Mortgage banking ....................................... 8,515 15,958 (46.6) Credit card fees........................................ 1,793 5,342 (66.4) Other................................................... 11,989 8,081 48.4 -------- -------- TOTAL NON-INTEREST INCOME BEFORE NET SECURITIES GAINS AND SECURITIZATION LOSSES............................ 111,139 107,562 3.3 -------- -------- Securities gains and securitization losses, net......... 14,555 2,310 N.M -------- -------- TOTAL NON-INTEREST INCOME .............................. $125,694 $109,872 14.4 % ======== ========
- --------------------------------------------------------------------------------------------------------- ANALYSIS OF NON-INTEREST EXPENSE - --------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ---------------------------- PERCENT (in thousands of dollars) 2000 1999 CHANGE - -------------------------------------------------------- ----------- ----------- ----------- Personnel and related costs............................ $102,344 $107,254 (4.6)% Equipment ............................................. 19,412 16,873 15.1 Net occupancy ......................................... 19,135 13,917 37.5 Outside data processing and other services............. 15,002 15,392 (2.5) Amortization of intangible assets...................... 9,196 9,328 (1.4) Marketing.............................................. 7,993 6,496 23.0 Telecommunications..................................... 6,749 7,064 (4.5) Printing and supplies.................................. 4,617 4,756 (2.9) Legal and other professional services.................. 4,500 4,744 (5.1) Franchise and other taxes.............................. 2,438 4,387 (44.4) Other.................................................. 8,720 11,895 (26.7) -------- -------- TOTAL NON-INTEREST EXPENSE ............................ $200,106 $202,106 (1.0)% ======== ========
N.M. - Not Meaningful 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Huntington is a multi-state financial holding company headquartered in Columbus, Ohio. Its subsidiaries are engaged in full-service commercial and consumer banking, mortgage banking, lease financing, trust services, discount brokerage services, underwriting credit life and disability insurance, issuing commercial paper guaranteed by Huntington, and selling other insurance and financial products and services. Huntington's subsidiaries operate domestically in offices located in Ohio, Michigan, Florida, West Virginia, Indiana, and Kentucky. 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 Form 10-Q, 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: o changes in economic conditions and movements in interest rates; o competitive pressures on product pricing and services; o success and timing of business strategies and successful integration of acquired businesses; o the nature, extent and timing of governmental actions and reforms; and, o extended disruption of vital infrastructure. The management of Huntington encourages readers of this Form 10-Q 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 first quarter of 2000 should be read in conjunction with the financial statements, notes and other information contained herein. OVERVIEW Huntington reported net income of $104.2 million for the first quarter of 2000 compared with $96.6 million for the same period last year. Diluted earnings per share grew 12% to $.46 compared to $.41 per share for the first three months of 1999. Return on average assets (ROA) improved to 1.45% from 1.38% a year ago while return on average equity (ROE) increased to 18.99%, versus 18.47% in the first quarter last year. Huntington's "cash basis" diluted earnings per share, which excludes the effect of goodwill amortization and amortization of other intangibles, reached $.49, compared with $.45 per share in the same period last year. Cash basis ROA and ROE, which are computed using cash basis earnings as a percentage of average tangible assets and average tangible equity, for the first quarter of 2000, were 1.58% and 29.01%, respectively. Huntington's efficiency ratio for the first quarter of 2000 was 53.93%. Total assets at March 31, 2000 were $28.4 billion reflecting $830 million of asset sales completed during the first quarter of 2000. These sales included a $500 million automobile loan securitization and the sale of approximately $330 million of lower-yielding securities from Huntington's investment portfolio. These transactions are part of Huntington's balance sheet repositioning strategy to divest of lower yielding assets, reduce reliance on wholesale funding 13 sources and mitigate the impact of future interest rate increases. Proceeds from the sales were used to reduce wholesale borrowings. Excluding the impact of sales, average earning assets grew at an annualized rate of 6% from the fourth quarter of 1999. Average consumer loans grew at an annualized rate of 10%, led by automobile loans and leases and home equity loans at 9% and 21%, respectively. Commercial loans grew 10% on an annualized basis as well. Core deposits at period end of $17.0 billion were relatively flat compared to both a year ago and year-end 1999. Short-term borrowings decreased $545 million from December 31, 1999 as proceeds from the asset sales were used to reduce Huntington's reliance on wholesale funding. Long-term debt increased from year-end 1999 as Huntington issued $150 million in regulatory capital qualifying subordinated notes during the recent quarter through its bank subsidiary. 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 H to the unaudited consolidated financial statements. 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, 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 $38.3 million reflecting the full impact of the fourth quarter 1999 sale of Huntington's credit card portfolio previously recorded in this business unit. Adjusting for the impact of the credit card sale, Retail Banking earnings increased 21% compared to the first quarter of 1999 despite a higher cost of core deposits. Despite softening in mortgage banking origination and the impact of the credit card sale, non-interest income grew 7% compared with the same period last year. The increases were driven by record retail investment sales, service charge income and electronic banking fees. Non-interest expense decreased from a year ago as expense controls continued to be favorable, offset somewhat this quarter by promotional expenses related to the introduction of new deposit products into the marketplace. The effect of the credit card sale and lower charge-offs in other loan categories drove the reduction in provision expense compared to a year ago. This segment contributed 37% of Huntington's net income and comprised 31% of the organization's 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 grew 10% from the same period last year driven by a 14% increase in non-interest income. Continued strength was seen in fees related to cash management services and ancillary credit products. This segment contributed 31% of Huntington's net income and comprised 33% of the organization's loan portfolio. 14 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. Net income was $19.8 million for the first quarter of 2000 compared to $15.1 million for last year's first quarter. Strong loan and lease originations drove net interest income higher. Additionally, the first quarter auto loan securitization provided provision benefit in the quarter. This business line constituted 19% of Huntington's net income for the quarter and 32% of its outstanding loans at the end of the period. 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. Private Financial Group net income for the first quarter was $5.9 million compared to $7.0 million for the same period a year ago. This decline was due to higher interest cost on deposits and volume-related compensation expenses while non-interest income grew primarily through brokerage services revenue. This segment represented 6% of Huntington's total net income and 3% of total loans. 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 $4.5 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 had net income of $7.8 million compared to $8.5 million in the first quarter of 1999. The decline is related to lower net interest income as wholesale funding continued to become more costly. Balancing out this trend was a significant increase in non-interest income driven by securities gains of $32.2 million related to the sale of a portion of Huntington's investment in S1 Corporation common stock, offset by the loss realized from the sale of lower-yielding investment securities of $7.4 million and the $10.2 million loss on the automobile loan securitization. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income of $240.7 million for the quarter reflects a full quarter decline in revenue related to Huntington's credit card portfolio, which was sold in the fourth quarter of 1999. Adjusting for the impact of this sale, net interest income declined $9.8 million or 4% from the same period last year. This decline relates to the effect of asset sales and a higher level of wholesale funding used to fund Huntington's asset growth. Recent Federal Reserve interest rate increases have significantly affected Huntington's funding costs, which increased 58 basis points compared with the same period last year resulting in spread compression between earning assets and interest bearing liabilities. The asset sales are part of Huntington's previously mentioned balance sheet repositioning strategy that, in addition to certain first quarter off-balance sheet transactions described in the INTEREST RATE RISK MANAGEMENT section of this report, mitigate Huntington's exposure to future interest rate increases. Huntington's net interest margin fell to 3.78% in the first three months of 2000 compared to 4.03% (adjusted for the impact of the credit card sale) in the first quarter of 15 1999. As previously mentioned, Huntington has taken steps to reposition its balance sheet to reduce its reliance on wholesale funding and lower its sensitivity to future interest rate increases. PROVISION FOR LOAN LOSSES The provision for loan losses is the charge to pre-tax earnings that management estimates to be necessary to maintain the allowance for loan losses at a level adequate to absorb inherent losses in the loan and lease portfolios. The provision for loan losses was $15.7 million in the first quarter of 2000, essentially covering the net charge-offs for the quarter. This represents a decline from the same period last year as Huntington's overall charge-offs declined reflecting the benefit from the sale of the credit card portfolio and the impact of the first quarter $500 million automobile loan securitization. Annualized net charge-offs, as a percentage of average total loans were .35% for the recent three months, declining significantly from .52% one year ago. Improvement in net charge-offs, adjusted for the impact of the credit card sale, was 8 basis points, seen across all loan categories. NON-INTEREST INCOME Non-interest income, excluding net securities gains and securitization losses, was $111.1 million for the first quarter of 2000, compared with $107.6 million for the first three months of 1999. Adjusting for the credit card sale, non-interest income grew 8% from the same period last year. Service charges were $41.7 million representing a 16.4% increase from last year's first quarter. Huntington's strategic investments in technology continue to benefit earnings as electronic banking fees improved 23% to $9.8 million compared to the first quarter of 1999. In addition, momentum in investment product and insurance sales continued during first quarter as Huntington achieved a record level of quarterly brokerage and insurance income of $15.3 million, up 32% from the first three months of 1999. Quarterly mortgage banking income, on the other hand, declined $7.4 million from 1999 because of a decrease in loan refinancing combined with a strategic reduction in the mortgage servicing portfolio as Huntington continues to focus on core businesses. Securities sales and the loan securitization during the first quarter of 2000 netted gains of $14.6 million compared to securities gains of $2.3 million for the same period a year ago. Sales of a portion of Huntington's investment in S1 Corporation common stock generated gains of $32.2 million. Substantially offsetting these gains were net losses of $7.4 million related to the strategic sale of lower yielding securities and a $10.2 million loss recognized on the loan securitization. NON-INTEREST EXPENSE Non-interest expense for the first quarter of 2000 was $200.1 million, versus $202.1 million one year ago representing the lowest level of expense since the first quarter of 1998. Expense levels for personnel and related costs, outside services, printing and supplies, telecommunications and legal and other professional services continue to benefit from the corporate-wide restructuring plan implemented in 1999 to improve operating efficiencies. Increased occupancy and equipment expense reflect technology improvements, banking office improvements and expansion, particularly in Florida, and the impact of the new operations center in Columbus. 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 16 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 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 March 31, 2000, the results of Huntington's sensitivity analysis indicated that net interest income would be expected to decrease by approximately 1.0% if rates rose 100 basis points and would drop an estimated 2.2% in the event of a 200 basis point increase. If rates declined 100 and 200 basis points, Huntington would benefit 0.9% and 1.8%, respectively. Huntington's recent analysis shows a significant reduction in sensitivity to rising interest rates compared to year-end 1999. This reflects the impact of the first quarter sale/securitization of fixed-rate assets and related reduction in wholesale borrowings. In addition, Huntington entered into derivative contacts with a total notional amount of $2.7 billion, consisting of pay-fixed interest rate swap contracts and purchased interest rate caps, which also reduced the company's sensitivity to rising rates. 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. 17 The following table 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 March 31, 2000.
Average Average Rate Notional Maturity Market ----------------------- (Dollars in millions) Value (years) Value Receive Pay - ------------------------------------------- -------- -------- ------ ------- ------- ASSET CONVERSION SWAPS Receive fixed $1,545 2.7 $(39.1) 6.06% 6.11% Pay fixed 200 1.4 1.7 6.14% 6.31% ------ ------ TOTAL ASSET CONVERSION SWAPS $1,745 2.6 $(37.4) 6.06% 6.13% ====== ====== LIABILITY CONVERSION SWAPS Receive fixed $1,730 4.0 $(42.7) 6.35% 6.18% Pay fixed 2,800 1.2 7.6 6.12% 6.61% ------ ------ TOTAL LIABILITY CONVERSION SWAPS $4,530 2.3 $(35.1) 6.21% 6.44% ====== ====== BASIS PROTECTION SWAPS $1,100 0.5 $ -- 6.07% 6.12% ====== ======
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 the table above, 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 with notional values of $485 million 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 is based on the notional values of the swap portfolio. These notional values do not represent direct credit exposures. At March 31, 2000, Huntington's credit risk from interest rate swaps used for asset/liability management purposes was $52.8 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 $978 million at March 31, 2000. The credit exposure from these contracts is not material. 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. 18 CREDIT RISK Huntington's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize "in-market" lending. Highly leveraged transactions as well as excessive industry and other concentrations are avoided. 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, 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 generally when the loan is 90 days past due. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged off as a credit loss. Consumer loans are not placed on non-accrual status; 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 $92.2 million at March 31, 2000, down $2.5 million from last year. As of the same dates, non-performing loans represented .38% and .39% of total loans, while non-performing assets as a percent of total loans and other real estate were .45% and .48%, respectively. Loans past due ninety days or more but continuing to accrue interest were $60.2 million at March 31, 2000, up from $51.0 million one year ago. The allowance for loan losses (ALL) is maintained at a level considered appropriate by management, based on its estimate of possible losses inherent in the loan portfolio. The procedures employed by Huntington to evaluate the adequacy of the ALL include an analysis of specific credits and the application of relevant reserve factors that represent relative risk (based on portfolio trends, current and historic loss experience, and prevailing economic conditions) to specific portfolio segments. Specific reserves are established on larger, impaired commercial and industrial and commercial real estate credits and are based on discounted cash flow models using the loan's initial effective rate or the fair value of the collateral for collateral-dependent loans. Allocated reserves include management's assessment of portfolio performance, internal controls, impacts from mergers and acquisitions, and other pertinent risk factors. For analytical purposes, the ALL has been allocated to various portfolio segments. However, the total ALL, less the portion attributable to reserves as prescribed under provisions of SFAS No. 114, is available to absorb losses from any segment of the portfolio. Unallocated reserves are based on levels of criticized/classified assets, delinquencies in the accruing loan portfolios, and the level of nonperforming loans. Total unallocated reserves were 19% at the recent quarter end versus 11% one year ago. This increase is due primarily to the sale of Huntington's credit card portfolio in the fourth quarter of 1999. The ALL reserve ratio was 1.45% at the recent quarter end compared with 1.48% at the end of last year's first quarter. As of March 31, 2000, the ALL covered non-performing loans approximately 3.8 times and when combined with the allowance for other real estate owned, was 316% of total nonperforming assets. CAPITAL Huntington places significant emphasis on the maintenance of strong capital, which promotes investor confidence, provides access to the national markets under favorable terms, and 19 enhances business growth and acquisition opportunities. Huntington also recognizes the importance of managing 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. Huntington's ratio of average equity to average assets was 7.62% in the recent quarter, up from 7.46% in the same three months of last year. 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 quarter-end, Huntington's Tier 1 risk-based capital ratio was 7.22%, total risk-based capital ratio was 10.89%, and the leverage ratio was 6.45%, each of which improved from the same period-end a year ago and each 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. During the first quarter of 2000, Huntington repurchased approximately 6.9 million shares of its common stock through open market and privately negotiated transactions. Huntington expects to reissue approximately 6.5 million shares in connection with the purchase acquisition of Empire Banc Corporation by the end of the second quarter of 2000. The 16.5 million-share authorization approved by the Board of Directors in the third quarter of 1998 is still in process of completion. As of March 31, 2000, approximately 5 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. PENDING ACQUISITION During the first quarter of 2000, Huntington signed a definitive agreement to acquire 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. Approximately 6.5 million shares, all of which were purchased on the open market in the first quarter of 2000, will be reissued in connection with this transaction. Huntington expects to complete the merger by the end of the second quarter of 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures for the current period as well as changes in market risk exposures from disclosures presented in Huntington's Annual Report on Form 10-K for the year ended December 31, 1999 are found on pages 16 through 18. 20 - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL HIGHLIGHTS (in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999 % Change - ------------------------------------------------------- ---------- --------- ----------- NET INCOME............................................. $104,173 $ 96,572 7.9 % PER COMMON SHARE AMOUNTS(1) Net income Basic......................................... $0.46 $0.42 9.5 Diluted....................................... $0.46 $0.41 12.2 Cash dividends declared............................ $0.20 $0.18 11.1 AVERAGE COMMON SHARES OUTSTANDING-DILUTED(1)............ 226,490 233,406 (3.0) KEY RATIOS Return on: Average total assets............................... 1.45% 1.38% 5.1 Average shareholders' equity....................... 18.99% 18.47% 2.8 Efficiency ratio........................................ 53.93% 52.16% 3.4 Average equity/average assets........................... 7.62% 7.46% 2.1 Net interest margin..................................... 3.78% 4.18% (9.6) TANGIBLE OR "CASH BASIS" RATIOS(2) Net Income Per Common Share -- Diluted(1)............... $0.49 $0.45 8.9 Return on: Average total assets............................... 1.58% 1.52% 3.9 Average shareholders' equity....................... 29.01% 29.58% (1.9)
(1) Adjusted for stock dividends and stock splits, as applicable. (2) Tangible or "Cash Basis" net income excludes amortization of goodwill and other intangibles. Related asset amounts excluded from total assets and shareholders' equity. 21 - -------------------------------------------------------------------------------- FINANCIAL REVIEW SECURITIES AVAILABLE FOR SALE - AMORTIZED COST & FAIR VALUES BY MATURITY AT MARCH 31, 2000 AND DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) MARCH 31, 2000 December 31, 1999 - ---------------------------------------------------------------------------------------------------------------------------- AMORTIZED Amortized COST FAIR VALUE Cost Fair Value - ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Under 1 year.......................... $ 800 $ 800 $ 801 $ 801 1-5 years............................. 51,405 49,249 51,371 49,328 6-10 years............................ 477,187 453,043 476,055 446,512 Over 10 years......................... 413 423 -- -- ---------- ---------- ---------- ---------- Total.............................. 529,805 503,515 528,227 496,641 ---------- ---------- ---------- ---------- Federal agencies Mortgage-backed securities 1-5 years............................. 3 3 4 4 6-10 years............................ 26,175 25,379 27,360 26,992 Over 10 years......................... 1,610,049 1,534,103 1,638,047 1,574,336 ---------- ---------- ---------- ---------- Total.............................. 1,636,227 1,559,485 1,665,411 1,601,332 ---------- ---------- ---------- ---------- Other agencies 1-5 years............................. 789,003 754,799 789,008 760,251 6-10 years............................ 497,781 465,048 498,790 469,696 Over 10 years......................... 853,695 818,661 868,124 837,422 ---------- ---------- ---------- ---------- Total.............................. 2,140,479 2,038,508 2,155,922 2,067,369 ---------- ---------- ---------- ---------- Other Under 1 year.......................... 19,610 19,560 20,805 20,832 1-5 years............................. 79,329 79,575 253,363 251,862 6-10 years............................ 83,071 80,802 130,486 125,951 Over 10 years......................... 137,610 128,001 251,333 239,975 Marketable equity securities.......... 10,254 86,427 10,524 66,241 ---------- ---------- ---------- ---------- Total.............................. 329,874 394,365 666,511 704,861 ---------- ---------- ---------- ---------- Total Securities Available for Sale........ $4,636,385 $4,495,873 $5,016,071 $4,870,203 ========== ========== ========== ==========
22 - -------------------------------------------------------------------------------- Financial Review
- ------------------------------------------------------------------------------------------------------------------------------------ LOAN LOSS EXPERIENCE - ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 -------- ------------------------------------------------------- (in thousands of dollars) I Q IV Q III Q II Q I Q - -------------------------------------------------------- -------- ---------- --------- --------- ---------- ALLOWANCE FOR LOAN LOSSES, BEGINNING OF PERIOD.......... $299,309 $295,612 $293,274 $291,066 $290,948 Loan losses............................................. (25,607) (24,855) (27,782) (27,123) (32,531) Recoveries of loans previously charged off.............. 7,340 8,512 8,044 8,305 7,344 Provision for loan losses............................... 15,701 20,040 22,076 21,026 25,305 -------- -------- -------- -------- -------- ALLOWANCE FOR LOAN LOSSES END OF PERIOD................. $296,743 $299,309 $295,612 $293,274 $291,066 ======== ======== ======== ======== ======== AS A % OF AVERAGE TOTAL LOANS Net loan losses--annualized........................... 0.35% 0.32% 0.39% 0.38% 0.52% Provision for loan losses--annualized................. 0.30% 0.39% 0.43% 0.42% 0.52% Allowance for loan losses as a % of total loans......... 1.45% 1.45% 1.48% 1.46% 1.48% Net loan loss coverage(1)............................... 9.10X 11.12x 9.01x 9.37x 6.64x
(1) Income before taxes and the provision for loan losses to net loan losses.
- ------------------------------------------------------------------------------------------------------------------------------------ NON-PERFORMING ASSETS AND PAST DUE LOANS - ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 -------- ------------------------------------------------------- (in thousands of dollars) I Q IV Q III Q II Q I Q - -------------------------------------------------------- -------- ---------- --------- --------- ---------- Non-accrual loans: Commercial........................................... $44,404 $42,958 $41,374 $37,840 $37,594 Real Estate Construction...................................... 7,696 10,785 6,154 7,877 7,540 Commercial........................................ 13,991 16,131 15,751 13,028 14,133 Residential Mortgage................................. 10,892 11,866 13,094 15,192 14,849 ------- ------- ------- ------- ------- Total Nonaccrual Loans......................... 76,983 81,740 76,373 73,937 74,116 Renegotiated loans...................................... 1,324 1,330 1,877 2,827 2,764 ------- ------- ------- ------- ------- TOTAL NON-PERFORMING LOANS.............................. 78,307 83,070 78,250 76,764 76,880 Other real estate, net.................................. 13,904 15,171 15,072 16,839 17,853 ------- ------- ------- ------- ------- TOTAL NON-PERFORMING ASSETS............................. $92,211 $98,241 $93,322 $93,603 $94,733 ======= ======= ======= ======= ======= NON-PERFORMING LOANS AS A % OF TOTAL LOANS...................................... 0.38% 0.40% 0.39% 0.38% 0.39% NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND OTHER REAL ESTATE................ 0.45% 0.47% 0.47% 0.46% 0.48% ALLOWANCE FOR LOAN LOSES AS A % OF NON-PERFORMING LOANS.................................. 378.95% 360.31% 377.78% 382.05% 378.60% ALLOWANCE FOR LOAN LOSSES AND OTHER REAL ESTATE AS A % OF NON-PERFORMING ASSETS................ 316.30% 299.85% 315.82% 311.32% 305.33% ACCRUING LOANS PAST DUE 90 DAYS OR MORE................. $60,156 $61,287 $64,788 $54,305 $51,039 ======= ======= ======= ======= =======
23 - -------------------------------------------------------------------------------- Consolidated Average Balances and Interest Rates (Quarterly Data) Fully Tax Equivalent Basis(1) 1ST QUARTER 2000 4th Quarter 1999 ------------------- ------------------- AVERAGE YIELD/ Average Yield/ (in millions of dollars) BALANCE RATE Balance Rate - ------------------------------------ ----------- ------ -------- ------- ASSETS Interest bearing deposits in banks.. $ 6 3.69 % $ 13 3.94 % Trading account securities.......... 14 6.26 14 6.35 Federal funds sold and securities purchased under resale agreements................... 23 6.11 31 6.10 Loans held for sale................. 109 7.59 135 7.45 Securities: Taxable....................... 4,515 6.14 4,854 6.15 Tax exempt.................... 282 7.68 288 7.73 ------- ------- Total Securities......... 4,797 6.23 5,142 6.23 ------- ------- Loans: Commercial..................... 6,345 8.31 6,194 8.06 Real Estate Construction.............. 1,238 8.38 1,182 8.19 Commercial................ 2,156 8.35 2,185 8.18 Consumer Loans.................... 6,837 8.29 6,876 8.27 Leases................... 2,773 6.65 2,633 6.55 Residential Mortgage..... 1,449 7.54 1,443 7.45 ------- ------- Total Consumer........... 11,059 7.78 10,952 7.75 ------- ------- Total Loans......................... 20,798 8.04 20,513 7.91 ------- ------- Allowance for loan losses........... 306 309 ------- ------- Net loans (2)....................... 20,492 8.52 20,204 8.43 ------- ------- Total earning assets................ 25,747 8.08 % 25,848 7.98 % ------- ------- Cash and due from banks............. 1,058 1,024 All other assets.................... 2,454 2,434 ------- ------- TOTAL ASSETS........................ $28,953 $28,997 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Core deposits Non-interest bearing deposits.. $ 3,466 $ 3,460 Interest bearing demand deposits.................... 4,053 2.97 % 4,077 2.76 % Savings deposits............... 3,645 3.80 3,768 3.61 Other domestic time deposits... 5,720 5.37 5,708 5.16 ------- ------- Total core deposits....... 16,884 4.22 17,013 4.01 ------- ------- Certificates of deposit of $100,000 or more.......................... 2,258 5.83 1,893 5.60 Foreign time deposits............... 649 5.65 517 5.40 ------- ------- Total deposits................. 19,791 4.50 19,423 4.24 ------- ------- Short-term borrowings............... 1,954 5.10 2,226 4.74 Medium-term notes................... 3,283 6.18 3,347 5.88 Subordinated notes and other long- term debt, including preferred capital securities............... 1,004 6.82 1,000 6.51 ------- ------- Total interest bearing liabilities................. 22,566 4.90 % 22,536 4.64 % ------- ------- All other liabilities............... 715 893 Shareholders' equity................ 2,206 2,108 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................. $28,953 $28,997 ======= ======= Net interest rate spread............ 3.18 % 3.34 % Impact of non-interest bearing funds on margin.................. 0.60 % 0.60 % NET INTEREST MARGIN................. 3.78 % 3.94 % - -------------------------------------------------------------------------------- (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. 24 - -------------------------------------------------------------------------------- Consolidated Average Balances and Interest Rates (Quarterly Data) 3rd Quarter 1999 2nd Quarter 1999 1st Quarter 1999 ---------------------- -------------------- --------------------- Average Yield/ Average Yield/ Average Yield/ Balance Rate Balance Rate Balance Rate ---------- --------- --------- --------- --------- --------- $ 8 3.64 % $ 8 3.75 % $ 8 4.93 % 7 5.64 15 5.41 18 5.20 20 5.39 19 4.86 18 5.64 169 7.27 269 6.96 359 6.75 4,846 6.14 4,914 5.99 4,926 6.05 295 7.76 303 7.90 304 8.17 ------- ------- ------- 5,141 6.24 5,217 6.10 5,230 6.17 ------- ------- ------- 6,066 7.90 6,182 7.73 6,067 7.90 1,103 8.13 1,012 7.92 957 8.14 2,215 8.14 2,306 8.15 2,236 8.21 7,093 8.29 6,907 8.25 6,873 8.38 2,365 6.75 2,175 6.72 2,015 6.94 1,421 7.47 1,420 7.54 1,415 7.58 ------- ------- ------- 10,879 7.85 10,502 7.84 10,303 7.99 ------- ------- ------- 20,263 7.91 20,002 7.84 19,563 7.99 ------- ------- ------- 301 297 299 ------- ------- ------- 19,962 8.54 19,705 8.35 19,264 8.49 ------- ------- ------- 25,608 8.07 % 25,530 7.87 % 25,196 7.98 % ------- ------- ------- 1,026 1,044 1,064 2,468 2,454 2,461 ------- ------- ------- $28,801 $28,731 $28,422 ======= ======= ======= $ 3,509 $ 3,511 $ 3,505 4,139 2.66 % 4,109 2.50 % 4,061 2.46 % 3,792 3.43 3,769 3.25 3,627 3.17 5,631 5.04 5,715 5.07 6,047 5.27 ------- ------- ------- 17,071 3.86 17,104 3.79 17,240 3.88 ------- ------- ------- 1,663 5.12 1,662 5.08 1,730 5.35 465 5.17 307 4.82 161 4.80 ------- ------- ------- 19,199 4.03 19,073 3.95 19,131 4.06 ------- ------- ------- 2,331 4.54 2,793 4.38 2,853 4.33 3,415 5.44 3,047 5.19 2,666 5.29 1,001 6.03 1,004 5.70 1,007 5.81 ------- ------- ------- 22,437 4.39 % 22,406 4.25 % 22,152 4.32 % ------- ------- ------- 658 653 644 2,197 2,161 2,121 ------- ------- ------- $28,801 $28,731 $28,422 ======= ======= ======= 3.68 % 3.62 % 3.66 % 0.54 % 0.52 % 0.52 % 4.22 % 4.14 % 4.18 % 25 - -------------------------------------------------------------------------------- SELECTED QUARTERLY INCOME STATEMENT DATA
2000 1999 ----------- --------------------------------------------------------- (in thousands of dollars, except per share amounts) I Q IV Q III Q II Q I Q - ------------------------------------------------------ ----------- ----------- ----------- ----------- ---------- TOTAL INTEREST INCOME................................. $515,557 $515,516 $ 516,294 $498,500 $495,692 TOTAL INTEREST EXPENSE................................ 274,866 262,854 247,863 237,352 236,171 -------- -------- --------- -------- -------- NET INTEREST INCOME................................... 240,691 252,662 268,431 261,148 259,521 Provision for loan losses............................. 15,701 20,040 22,076 21,026 25,305 -------- -------- --------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........................... 224,990 232,622 246,355 240,122 234,216 -------- -------- --------- -------- -------- Service charges on deposit accounts .................. 41,660 42,774 41,700 36,065 35,776 Brokerage and insurance income........................ 15,284 13,373 14,620 12,540 11,543 Trust services ....................................... 12,863 12,828 12,625 13,143 13,434 Electronic banking fees............................... 9,849 10,082 9,771 9,410 8,038 Bank Owned Life Insurance income...................... 9,186 9,390 9,390 9,390 9,390 Mortgage banking ..................................... 8,515 9,426 14,282 17,224 15,958 Credit card fees...................................... 1,793 5,091 6,626 6,255 5,342 Other................................................. 11,989 11,374 6,103 11,029 8,081 -------- -------- --------- -------- -------- TOTAL NON-INTEREST INCOME BEFORE NET SECURITIES GAINS AND SECURITIZATION LOSSES................... 111,139 114,338 115,117 115,056 107,562 -------- -------- --------- -------- -------- Securities gains and securitization losses, net....... 14,555 7,905 537 2,220 2,310 Gains on sale of credit card portfolios............... -- 108,530 -- -- -- -------- -------- --------- -------- -------- TOTAL NON-INTEREST INCOME ............................ 125,694 230,773 115,654 117,276 109,872 -------- -------- --------- -------- -------- Personnel and related costs........................... 102,344 100,654 104,730 107,263 107,254 Equipment ............................................ 19,412 18,161 16,059 15,573 16,873 Net occupancy ........................................ 19,135 17,890 16,799 13,563 13,917 Outside data processing and other services............ 15,002 15,642 15,929 15,923 15,392 Amortization of intangible assets..................... 9,196 9,307 9,326 9,336 9,328 Marketing............................................. 7,993 9,642 9,049 7,319 6,496 Telecommunications.................................... 6,749 7,108 7,412 6,935 7,064 Printing and supplies................................. 4,617 5,483 5,254 4,734 4,756 Legal and other professional services................. 4,500 5,868 4,754 5,803 4,744 Franchise and other taxes............................. 2,438 2,708 3,598 3,981 4,387 Other................................................. 8,720 12,432 13,279 11,708 11,895 -------- -------- --------- -------- -------- TOTAL NON-INTEREST EXPENSE BEFORE OTHER NON-RECURRING EXPENSES ............................ 200,106 204,895 206,189 202,138 202,106 -------- -------- --------- -------- -------- Other non-recurring expenses.......................... -- 96,791 -- -- -- -------- -------- --------- -------- -------- TOTAL NON-INTEREST EXPENSE............................ 200,106 301,686 206,189 202,138 202,106 -------- -------- --------- -------- -------- INCOME BEFORE INCOME TAXES ........................... 150,578 161,709 155,820 155,260 141,982 Provision for income taxes ........................... 46,405 46,769 50,233 50,285 45,410 -------- -------- --------- -------- -------- NET INCOME ........................................... $104,173 $114,940 $ 105,587 $104,975 $ 96,572 ======== ======== ========= ======== ======== PER COMMON SHARE(1) Net income Diluted.......................................... $0.46 $0.50 $0.46 $0.45 $0.41 Diluted - Cash Basis............................. $0.49 $0.53 $0.49 $0.48 $0.45 Cash Dividends Declared.............................. $0.20 $0.20 $0.20 $0.18 $0.18 FULLY TAX EQUIVALENT MARGIN: Net Interest Income .................................. $240,691 $252,662 $ 268,431 $261,148 $259,521 Tax Equivalent Adjustment(2) ......................... 2,157 2,249 2,280 2,390 2,504 -------- -------- --------- -------- -------- Tax Equivalent Net Interest Income ................... $242,848 $254,911 $ 270,711 $263,538 $262,025 ======== ======== ========= ======== ========
(1) Adjusted for stock dividends and stock splits, as applicable. (2) Calculated assuming a 35% tax rate. 26 - -------------------------------------------------------------------------------- STOCK SUMMARY, KEY RATIOS AND STATISTICS, AND REGULATORY CAPITAL DATA - -------------------------------------------------------------------------------- QUARTERLY COMMON STOCK SUMMARY(1) - --------------------------------------------------------------------------------
2000 1999 ---------- -------------------------------------------------- I Q IV Q III Q II Q I Q ---------- ---------- --------- ---------- --------- High.................................... $24 $30 3/4 $33 7/8 $34 $30 7/16 Low..................................... 17 3/4 21 7/16 24 11/16 27 11/16 27 3/16 Close................................... 22 3/8 23 7/8 26 9/16 31 13/16 28 1/8 Cash dividends declared................. $0.20 $0.20 $0.20 $0.18 $0.18
Note: Stock price quotations were obtained from Nasdaq. - -------------------------------------------------------------------------------- KEY RATIOS AND STATISTICS - --------------------------------------------------------------------------------
2000 1999 MARGIN ANALYSIS - AS A % ---------- -------------------------------------------------- OF AVERAGE EARNING ASSETS(2) I Q IV Q III Q II Q I Q - ----------------------------------------------- ---------- ---------- --------- ---------- --------- Interest Income................................ 8.08% 7.98% 8.07% 7.87% 7.98% Interest Expense............................... 4.30% 4.04% 3.85% 3.73% 3.80% ----- ----- ----- ----- ----- Net Interest Margin....................... 3.78% 3.94% 4.22% 4.14% 4.18% ===== ===== ===== ===== ===== RETURN ON - ----------------------------------------------- Average total assets........................... 1.45% 1.57% 1.45% 1.47% 1.38% Average total assets - cash basis.............. 1.58% 1.71% 1.59% 1.61% 1.52% Average shareholders' equity................... 18.99% 21.64% 19.07% 19.48% 18.47% Average shareholders' equity - cash basis...... 29.01% 33.69% 29.54% 30.61% 29.58% Efficiency Ratio............................... 53.93% 52.97% 51.02% 50.93% 52.16%
- -------------------------------------------------------------------------------- REGULATORY CAPITAL DATA - --------------------------------------------------------------------------------
2000 1999 ---------- -------------------------------------------------- (in millions of dollars) I Q IV Q III Q II Q I Q - ---------------------------------------------- ---------- ---------- --------- ---------- --------- Total Risk-Adjusted Assets.................... $25,251 $25,298 $25,309 $24,829 $24,345 Tier 1 Risk-Based Capital Ratio............... 7.23% 7.52% 7.32% 7.29% 7.20% Total Risk-Based Capital Ratio................ 10.90% 10.72% 10.62% 10.65% 10.70% Tier 1 Leverage Ratio......................... 6.45% 6.72% 6.58% 6.45% 6.32%
(1) Adjusted for stock dividends and stock splits, as applicable. (2) Presented on a fully tax equivalent basis assuming a 35% tax rate. 27 PART II. OTHER INFORMATION In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable or the information has been previously reported. Item 2. Changes in securities and use of proceeds (c) Unregistered shares In conjunction with Deferred Compensation Agreements associated with the January 6, 1998, acquisition by Huntington of Pollock and Pollock, an insurance agency headquartered in Cleveland, Ohio ("Pollock"), Huntington issued 28,531 unregistered shares of Huntington common stock, without par value, to five shareholders of Pollock and Pollock on February 22, 2000. This is in addition to the shares of common stock previously issued to these shareholders in prior periods in connection with the acquisition. The issuance of shares in this transaction was deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) since this was a transaction by an issuer not involving a public offering. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 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. 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. 28 Also, reference is made to Rights Plan, dated February 22, 1990, previously filed as Exhibit 1 to Registration Statement on Form 8-A, and incorporated herein by reference and to Amendment No. 1 to the Rights Agreement, dated as of August 16, 1995, previously filed as Exhibit 4(b) to Form 8-K filed with the Securities and Exchange Commission on August 28, 1995, and incorporated herein by reference. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request. 27. Financial Data Schedule 99. Earnings to Fixed Charges (b) Reports on Form 8-K 1. A report on Form 8-K, dated January 13, 2000, was filed under report item numbers 5 and 7, concerning Huntington's results of operations for the fourth quarter and year ended December 31, 1999. 2. A report on Form 8-K, dated March 3, 2000, was filed under report item numbers 5 and 7, involving the announcement that Judith D. Fisher, Vice Chairman, elected to leave Huntington. 3. A report on Form 8-K, dated March 13, 2000, was filed under report item number 5, concerning Huntington's election to become a financial holding company under the provisions of Title I of the Gramm-Leach-Bliley Act. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Huntington Bancshares Incorporated ---------------------------------- (Registrant) Date: May 12, 2000 /s/ Richard A. Cheap -------------------- Richard A. Cheap General Counsel and Secretary Date: May 12, 2000 /s/ Anne W. Creek ----------------- Anne W. Creek Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)