10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 12, 2000
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
2
PART I. FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS (UNAUDITED)
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CONSOLIDATED BALANCE SHEETS
(1) See page 11 for detail of total loans and total deposits.
See notes to unaudited consolidated financial statements.
3
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CONSOLIDATED STATEMENTS OF INCOME
(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
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
See notes to unaudited consolidated financial statements.
5
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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:
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:
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.
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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.
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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
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FINANCIAL REVIEW
11
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Financial Review
N.M. - Not Meaningful
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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
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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.
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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
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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.
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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.
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.
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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
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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)
(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
22
- --------------------------------------------------------------------------------
Financial Review
(1) Income before taxes and the provision for loan losses to net loan losses.
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
(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)
- --------------------------------------------------------------------------------
Note: Stock price quotations were obtained from Nasdaq.
- --------------------------------------------------------------------------------
KEY RATIOS AND STATISTICS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REGULATORY CAPITAL DATA
- --------------------------------------------------------------------------------
(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)