Exhibit 13 MANAGEMENT'S DISCUSSION and Analysis of Financial Condition and Results of Operations
- ---------------------------------------------------------------------------------------------------------------------------------- Table 1 - ---------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED SELECTED FINANCIAL DATA Year Ended December 31 - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars, except per share amounts) 1997 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Total interest income................. $1,981,473 $1,775,734 $1,709,627 $1,418,610 $1,410,401 $ 1,379,949 Total interest expense................ 954,243 880,648 856,860 546,880 514,812 588,591 Net interest income................... 1,027,230 895,086 852,767 871,730 895,589 791,358 Securities gains...................... 7,978 17,620 9,380 2,297 27,316 36,551 Provision for loan losses............. 107,797 76,371 36,712 21,954 84,682 88,213 Net income............................ 292,663 304,269 281,801 276,320 266,925 187,143 PER COMMON SHARE (1) Net income Basic.............................. 1.53 1.58 1.42 1.40 1.37 .97 Diluted............................ 1.52 1.57 1.41 1.39 1.35 .96 Cash dividends declared............... .76 .68 .62 .56 .46 .40 Book value at year-end................ 10.56 9.46 9.19 8.29 7.79 6.80 BALANCE SHEET HIGHLIGHTS Total assets at year-end.............. 26,730,540 24,371,946 23,495,337 20,688,505 20,214,835 18,653,621 Total long-term debt at year-end...... 2,686,039 1,665,531 2,122,202 1,222,114 772,205 489,741 Average long-term debt................ 2,070,667 1,858,372 1,432,280 937,143 651,255 311,507 Average shareholders' equity.......... 1,893,788 1,776,151 1,742,826 1,621,443 1,415,839 1,254,383 Average total assets ................. $25,150,659 $23,374,490 $22,098,785 $19,498,530 $19,340,577 $17,464,877 - ---------------------------------------------------------------------------------------------------------------------------------- KEY RATIOS AND STATISTICS 1997 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- MARGIN ANALYSIS--AS A % OF AVERAGE EARNING ASSETS (2) Interest income......................... 8.52% 8.26% 8.43% 7.99% 8.02% 8.75% Interest expense........................ 4.08 4.07 4.19 3.04 2.88 3.67 ---- ---- ---- ---- ---- ---- NET INTEREST MARGIN........................ 4.44% 4.19% 4.24% 4.95% 5.14% 5.08% ==== ==== ==== ==== ==== ==== RETURN ON Average total assets.................... 1.16% 1.30% 1.28% 1.42% 1.38% 1.07% Average earning assets.................. 1.25 1.40 1.38 1.54 1.50 1.17 Average shareholders' equity............ 15.44 17.13 16.17 17.04 18.85 14.92 Dividend payout ratio...................... 49.67 42.22 43.82 38.50 32.47 38.99 Average shareholders' equity to average total assets.................... 7.53 7.60 7.89 8.32 7.32 7.18 Tier I risk-based capital ratio............ 8.83 8.11 8.66 9.67 9.78 9.50 Total risk-based capital ratio............. 11.68 11.29 12.01 13.32 13.81 12.39 Tier I leverage ratio...................... 7.77% 6.80% 6.99% 7.95% 7.12% 6.84% - ---------------------------------------------------------------------------------------------------------------------------------- OTHER DATA 1997 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Full-time equivalent employees............. 9,485 9,467 9,083 9,642 9,820 9,437 Banking offices............................ 454 429 406 420 423 416 (1) Adjusted for stock splits and stock dividends, as applicable. (2) Presented on a fully tax equivalent basis assuming a 35% tax rate in years 1993 through 1997 and a 34% tax rate in 1992.
MANAGEMENT'S DISCUSSION and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- INTRODUCTION FORWARD-LOOKING STATEMENTS Congress passed the Private Securities Litigation Reform Act of 1995 to encourage corporations to provide investors with information about the company's 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 expectations. Huntington Bancshares Incorporated (Huntington) desires to provide its shareholders with sound information about past performance and future trends. Consequently, this Annual Report, including the Letter to Shareholders and the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are subject to numerous assumptions, risks, and uncertainties. Actual results could diVer materially from those contained in or implied by The Huntington's statements for a variety of factors including: - - changes in economic conditions - - movements in interest rates - - competitive pressures on product pricing and services - - success and timing of business strategies - - the nature and extent of governmental actions and reforms - - extended disruption of vital infrastructure. The management of Huntington encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. POOLING OF INTERESTS On September 30, 1997, Huntington completed the acquisition of First Michigan Bank Corporation (First Michigan), a $3.6 billion bank holding company headquartered in Holland, Michigan. Huntington issued approximately 32.2 million shares of its common stock in exchange for all of the outstanding common stock of First Michigan in a pooling-of-interests transaction. First Michigan had total loans and deposits
TABLE 2 - ------------------------------------------------------------------------------------------------------------------------------ CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1) - ------------------------------------------------------------------------------------------------------------------------------ 1997 1996 ------------------------------------------------------------------------------------- Increase (Decrease) Increase (Decrease) From Previous From Previous Fully Tax Equivalent Basis (2) Year Due To: Year Due To: ------------------------------------------------------------------------------------- (in millions of dollars) Volume Yield/Rate Total Volume Yield/Rate Total - ------------------------------------------------------------------------------------------------------------------------------ Interest bearing deposits in banks..... $ (0.3) $ 0.0 $ (0.3) $ (0.7) $ (0.1) $(0.8) Trading account securities............. (0.4) 0.1 (0.3) (0.4) (0.3) (0.7) Federal funds sold and securities purchased under resale agreements... (1.3) (0.1) (1.4) (1.5) (0.3) (1.8) Mortgages held for sale................ 1.4 0.0 1.4 (1.5) 0.2 (1.3) Taxable securities..................... 10.0 (3.9) 6.1 33.3 (10.3) 23.0 Tax-exempt securities.................. (2.6) 0.0 (2.6) (4.9) (0.4) (5.3) Total loans............................ 145.6 56.7 202.3 71.3 (20.6) 50.7 ------- ------ ------ ------ ------ ----- TOTAL EARNING ASSETS................ 152.4 52.8 205.2 95.6 (31.8) 63.8 ------- ------ ------ ------ ------ ----- Interest bearing demand deposits....... 3.6 0.6 4.2 6.4 5.2 11.6 Savings deposits....................... 7.0 7.1 14.1 5.1 3.3 8.4 Other domestic time deposits........... 22.2 (2.8) 19.4 4.6 5.4 10.0 Certificates of deposit of $100,000 or more 22.6 1.3 23.9 14.5 (3.8) 10.7 Foreign time deposits.................. 4.5 (0.7) 3.8 2.7 (1.3) 1.4 Short-term borrowings.................. (4.3) (6.6) (10.9) (14.3) (20.0) (34.3) Long-term debt, including capital securities 24.0 (5.0) 19.0 27.5 (11.5) 16.0 ------- ------ ------ ------ ------ ----- TOTAL INTEREST BEARING LIABILITIES.. 79.6 (6.1) 73.5 46.5 (22.7) 23.8 ------- ------ ------ ------ ------ ----- NET INTEREST INCOME. ............... $ 72.8 $ 58.9 $131.7 $ 49.1 $ (9.1) $40.0 ======= ====== ====== ====== ====== ===== (1) The change in interest due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Calculated assuming a 35% tax rate.
- -------------------------------------------------------------------------------- of $2.7 billion and $3.1 billion, respectively, and total equity of $285.8 million at the date of acquisition. In connection with the transaction, Huntington reported a $35.0 million restructuring charge consisting primarily of personnel, facilities, and systems costs and incurred $12.2 million of professional fees and other costs to effect the merger (reported on a combined basis as "Special Charges"). Other one-time costs related to the First Michigan acquisition were an additional loan loss provision of $4.8 million and non-interest expenses of $4.0 million. All financial information appearing in this report, except dividends per share, has been restated for the pooling of interests with First Michigan. "Operating" results, as used below, refers to Huntington's financial performance before the impact of the restructuring and other merger-related charges. OVERVIEW On an operating basis, Huntington's net income was a record $338.9 million in 1997, compared with $304.3 million and $281.8 million in 1996 and 1995, respectively. Basic (operating) earnings per share were $1.78 in 1997, versus $1.58 in 1996 and $1.42 in 1995. Reported net income for the year just ended, including the special charges, was $292.7 million, or $1.53 per share. Per share amounts for all prior periods have been restated to reflect the ten percent stock dividend distributed to shareholders in July 1997.
TABLE 3 - -------------------------------------------------------------------------------- LOAN PORTFOLIO COMPOSITION December 31, - -------------------------------------------------------------------------------- (in millions of dollars) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Commercial............ $ 5,271 $ 5,130 $ 4,869 $ 4,285 $ 4,047 Real Estate Construction....... 864 699 524 414 425 Mortgage........... 3,598 3,623 3,552 3,736 3,334 Consumer Loans.............. 6,463 6,123 5,741 5,214 4,410 Leases............. 1,542 1,183 784 572 411 -------- ------- ------- ------- -------- TOTAL LOANS ..... $ 17,738 $16,758 $15,470 $14,221 $ 12,627 ======== ======= ======= ======= ========
NOTE: There are no loans outstanding which would be considered a concentration of lending in any particular industry or group of industries.
TABLE 4 - -------------------------------------------------------------------------------- MATURITY SCHEDULE OF SELECTED LOANS - -------------------------------------------------------------------------------- (in thousands of dollars) December 31, 1997 - -------------------------------------------------------------------------------- After One Within But Within After One Year Five Years Five Years Total - -------------------------------------------------------------------------------- Commercial................ $3,021,111 $1,551,162 $698,387 $5,270,660 Real estate -- construction 442,124 316,184 105,327 863,635 ---------- ---------- -------- ---------- Total.................. $3,463,235 $1,867,346 $803,714 $6,134,295 ========== ========== ======== ========== Variable interest rates... $1,211,854 $596,453 ========== ======== Fixed interest rates...... $ 655,492 $207,261 ========== ========
Performance ratios were also strong on an operating basis with return on average equity (ROE) at 17.88% for 1997, up from 17.13% and 16.18% in the preceding two years. Return on average assets (ROA) improved to 1.35%, versus 1.30% and 1.28%, respectively, in 1996 and 1995. Total assets were $26.7 billion at December 31, 1997, up 9.7% from year-end 1996. This growth was largely attributable to an increase in loans, as all major categories but residential real estate showed higher outstanding balances at the end of the recent twelve months. The smaller residential mortgage portfolio was primarily the result of sales in 1997 of adjustable-rate loans that were expected to experience significant prepayments. Temporary investments (overnight federal funds sold) and Other assets were also up from last year. Total deposits grew 9.6% from December 31, 1996, fueled by a 7.4% increase in core deposits. Core deposits represent Huntington's most significant source of funding; when combined with other core funding sources, they provide approximately 70% of Huntington's funding needs. Huntington's wholesale liability mix changed somewhat during the recent year, as certain short-term borrowings were replaced upon maturity with floating rate medium term notes having a contractual term greater than one year (a component of long-term debt). Huntington also issued $200 million of capital securities in January 1997 through a special-purpose subsidiary. The capital securities were a cost-effective means of strengthening Huntington's regulatory capital position. Shareholders' equity increased 13.4% from one year ago, primarily because of retained earnings and the common stock issued by Huntington in its acquisition of Citi-Bancshares, Inc., a $548 million one-bank holding company headquartered in Leesburg, Florida. - ------------------------------------------------------------------------------- LINES OF BUSINESS For internal reporting and planning purposes, Huntington segments its operations into five distinct lines of business: Retail Banking, Corporate Banking, Dealer Sales, Private Financial Group and Treasury/Other. 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 identified above. This is a dynamic process that attempts to mirror Huntington's organizational and management structure. Accordingly, the results are not necessarily comparable with similar information published by other financial institutions which may define business segments differently. In addition, methodologies used to assign certain balance sheet, income statement and overhead items may change as Huntington continues to refine the data and its allocation assumptions used to present segment data. A description of each line of business is discussed below: RETAIL BANKING Retail banking provides products and services to retail and community banking business customers. This line of business includes credit cards, equity loans, mortgage loans, installment loans, and deposit products. These products and associated services are offered through Huntington's traditional branches, in-store branches, Access Offices, Direct Bank, and Web Bank. CORPORATE BANKING Customers in this segment represent the small, middle-market, and large corporate banking relationships which use a variety of banking products and services including commercial loans, asset-based financing, international trade services, and cash management services. Huntington's capital markets division also provides alternative financing solutions for larger business clients. These would include private placement debt and syndicated commercial lending. EARNINGS CONTRIBUTION - --------------------- [PIE CHART] Retail banking 50% Corporate banking 22% Dealer sales 16% Private financial group 7% Treasury/Other 5%
DEALER SALES Dealer sales product offerings relate predominantly to the automotive sector and include floor plan financing, indirect loans, and leases. The largest portion of the business associated with this segment comes from customers who finance through the dealership via Huntington's loan and leasing products. 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 personal trust, asset management, investment advisory, and other wealth management services. In conjunction with these services, PFG offers not only Huntington's traditional banking products but also investment and insurance alternatives. Huntington's Private Financial Group provides customers with "one-stop shopping" for all their financial needs. TREASURY/OTHER Huntington uses a match-funded transfer pricing system to allocate interest income and interest expense to its business segments. This approach consolidates Huntington's interest rate risk management into its Treasury operations. As part of its overall interest rate risk and liquidity strategy, the Treasury Group manages a $6 billion investment portfolio. Revenue and expense associated with these activities are reported in this business unit. Additionally, the Treasury/Other group also absorbs unassigned equity which may be used to fund acquisitions or other internal growth initiatives. Costs associated with intangibles that have not been allocated to the major business lines are housed here. EARNINGS CONTRIBUTED BY BUSINESS SEGMENT Retail banking provided 50% of Huntington's operating earnings for 1997. While this group represents only 35% of Huntington's outstanding loan portfolio, it also generates retail deposits which help to fund the total balance sheet. The retail banking group earns a "deposit credit" for generating these favorably priced liabilities. This credit favorably impacts the earnings contribution of the retail banking operation. Corporate banking includes a lending portfolio which represents approximately 29% of Huntington's total loans and was responsible for 22% of operating earnings. Dealer sales contributed 16% to 1997 operating earnings and represents 33% of the loans outstanding. PFG, a very profitable and growing business segment, generated 7% of the annual operating earnings mostly driven by its fee-based services. Treasury/Other includes approximately $8 million of securities gains in 1997 as well as the earnings stream associated with the Huntington's securities portfolio. RESULTS OF OPERATIONS NET INTEREST INCOME Huntington reported net interest income of $1,027.2 million in 1997, compared with $895.1 million and $852.8 million, respectively, in 1996 and 1995. Interest rate swaps and other off-balance sheet financial instruments used for asset/liability management purposes provided a benefit of $6.0 million in the recent year - -------------------------------------------------------------------------------- versus reductions of $52.1 million in 1996 and $55.8 million in 1995. A 10% increase in average loan volumes also contributed to the increase in net interest income. The net interest margin, on a fully tax equivalent basis, was 4.44% during the recent twelve months, versus 4.19% and 4.24% in the two preceding years. The latter percentages were negatively impacted by off-balance sheet interest rate contracts that reduced the margin by 24 basis points and 27 basis points, respectively, a significant component of which was amortization of net losses from closed positions. At December 31, 1997, deferred gains and losses remaining to be amortized were immaterial. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses, including the additional provision of $4.8 million from the First Michigan acquisition, was $107.8 million in 1997, up from $76.4 million in 1996 and $36.7 million in 1995. Net charge-offs as a percent of average total loans were .50% and .44%, respectively, in the two most recent years, compared with .30% in 1995. The higher losses were principally related to the consumer portfolio, indicative of general market trends. The allowance for loan losses (ALL) is maintained at a level considered appropriate by management, based on its estimate of losses inherent in the loan portfolio. The procedures employed by Huntington in evaluating the adequacy of the ALL include an analysis of specific credits that are generally selected for review on the basis of size and relative risk, portfolio trends, current and historical loss experience, prevailing economic conditions, and other relevant factors. For analytical purposes, the ALL has been allocated to various portfolio segments. However, the total ALL is available to absorb losses from any segment of the portfolio. The methods used by Huntington to allocate the ALL are also subject to change; accordingly, the December 31, 1997 allocation is not necessarily indicative of the trend of future loan losses in any particular loan category. At the recent year end, the ALL of $258.2 million represented 1.46% of total loans and covered non-performing loans 3.6 times. When combined with the allowance for other real estate, it was 294% of total non-performing assets. Additional information regarding the ALL and asset quality appears in the section "Credit Risk." NON-INTEREST INCOME Non-interest income was $342.8 million in 1997, versus $314.1 million and $275.1 million, respectively, in 1996 and 1995. Excluding securities transactions, non-interest income increased 13.0% offer last year. Substantially all major categories showed increases, with particularly strong results in mortgage banking, electronic banking, and investment product sales. Included within mortgage banking income is $12.2 million of gains from the aforementioned sale of residential mortgages. Huntington also achieved broad-based growth in non-interest income from 1995 to 1996. The "Other" component of non-interest income was higher in 1995 because of an $8.9 million gain on the sale of Huntington's Pennsylvania bank. NON-INTEREST EXPENSE Non-interest expense totaled $803.1 million in the year just ended. On an operating basis, non-interest expense was $751.9 million, compared with $675.5 million and $662.1 million in the two preceding years. The efficiency ratio for the recent twelve months improved to 54.9%, versus 56.6% in 1996 and 59.2% in 1995. Personnel costs (salaries, commissions, and benefits) were up approximately 8.9% from 1996, which is indicative of more full-time equivalent employees and normal salary adjustments. The increase in the commissions component of personnel costs represents a change in the way in which Huntington compensates employees as a result of its proactive selling emphasis. Advertising and marketing expenses were higher in 1997, as Huntington undertook a major campaign to promote and solidify brand awareness in its markets. Volume driven expenses, acquisitions, and new business initiatives also contributed to an increase in various other components of non-interest expense. Among the other expenses that showed increases during the recent twelve months was contract programming, which rose in connection with Huntington's company-wide commitment to prepare all of its computer systems for the year 2000. The "Year 2000" issue is the result of computer programs being written using two digits rather than four to define the applicable year. Professional fees for outside services (primarily programming) as well as internal staff costs have been, and will continue to be, incurred to alter programs that have time-sensitive software which may recognize a "00" date as the year 1900 versus 2000. Huntington anticipates substantially all reprogramming will be completed by December 31, 1998, allowing the opportunity in 1999 to fully test the systems and make any further refinements that are needed. The failure of certain third parties to adequately address Year 2000 could adversely impact Huntington. Consequently, Huntington is communicating with customers, suppliers, and others to identify any potential problems. During 1997, Huntington expensed as incurred $3.1 million of contract programming costs for the Year 2000 project. An additional $10.0 million of these costs is expected to be incurred in the future to get Huntington's systems fully compliant. However, none of these costs is expected to materially impact Huntington's results of operations in any one period. In 1996, non-interest expense increased only 2.0% when comparing results with the immediately preceding year. Two Florida banks acquired under the purchase method of accounting represented $11.1 million of the overall increase. Excluding this amount, non-interest expense would have been flat between the two periods. FDIC insurance was down significantly, as Huntington benefited from the reduction in assessment rates on bank deposits that occurred in the latter part of 1995. PROVISION FOR INCOME TAXES The provision for income taxes was $166.5 million in 1997, compared with $153.0 million in 1996 and $147.3 million in 1995. Huntington's effective tax rate increased to 36.3%, versus 33.5% and 34.3% in the two preceding years. The higher rate in 1997 was primarily a result of various nondeductible expenses incurred in connection with the First Michigan and other bank acquisitions.
- ------------------------------------------------------------------------------------------------------------------------------------ TABLE 5 - ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF ALLOWANCE FOR LOAN LOSSES AND SELECTED STATISTICS - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands of dollars) 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOAN LOSSES, BEGINNING OF YEAR ...... $ 230,778 $ 222,487 $ 225,225 $ 233,123 $ 173,241 $ 153,038 LOAN LOSSES Commercial ..................................... (23,276) (23,904) (15,947) (11,450) (21,643) (30,165) Real estate Construction ................................ (375) -- (392) (5,957) (432) (14,001) Mortgage .................................... (2,663) (2,768) (5,086) (5,840) (3,642) (8,253) Consumer Loans ....................................... (74,761) (59,843) (39,000) (27,283) (24,036) (29,156) Leases ...................................... (9,648) (4,492) (1,989) (962) (1,084) (872) --------- --------- --------- --------- --------- --------- Total loan losses .............................. (110,723) (91,007) (62,414) (51,492) (50,837) (82,447) --------- --------- --------- --------- --------- --------- RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF Commercial ..................................... 4,373 4,884 3,696 8,204 3,922 4,077 Real estate Construction ................................ 111 556 5 1 6 -- Mortgage .................................... 619 1,402 977 859 407 286 Consumer Loans ....................................... 16,382 13,457 11,156 10,830 10,216 9,339 Leases ...................................... 1,057 721 303 353 245 222 --------- --------- --------- --------- --------- --------- Total recoveries of loans previously charged off 22,542 21,020 16,137 20,247 14,796 13,924 --------- --------- --------- --------- --------- --------- NET LOAN LOSSES ................................... (88,181) (69,987) (46,277) (31,245) (36,041) (68,523) --------- --------- --------- --------- --------- --------- PROVISION FOR LOAN LOSSES ......................... 107,797 76,371 36,712 21,954 84,682 88,213 ALLOWANCE ACQUIRED/OTHER .......................... 7,777 1,907 6,827 1,393 11,241 513 --------- --------- --------- --------- --------- --------- ALLOWANCE FOR LOAN LOSSES, END OF YEAR ............ $ 258,171 $ 230,778 $ 222,487 $ 225,225 $ 233,123 $ 173,241 ========= ========= ========= ========= ========= ========= AS A % OF AVERAGE TOTAL LOANS Net loan losses ................................ 0.50% 0.44% 0.30% 0.23% 0.31% 0.65% Provision for loan losses ...................... 0.61% 0.48% 0.24% 0.16% 0.72% 0.83% Allowance for loan losses as a % of total loans (end of period) ................. 1.46% 1.38% 1.44% 1.58% 1.85% 1.57% Net loan loss coverage (1) ........................ 6.43X 7.62x 10.07x 13.86x 13.52x 5.18x (1) Income before income taxes and the provision for loan losses to net loan losses.
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TABLE 6 - ---------------------------------------------------------------------------------------------------------------------------- ALLOCATION OF ALLOWANCE FOR LOAN LOSSES - ---------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Percent of Percent of Percent of Percent of Percent of Loans to Loans to Loans to Loans to Loans to Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans - ---------------------------------------------------------------------------------------------------------------------------- Commercial............ $ 86,439 29.7% $113,555 30.6% $119,200 31.5% $133,542 30.1% $148,804 32.0% Real estate Construction....... 8,140 4.9 2,033 4.2 2,258 3.4 1,454 2.9 2,059 3.4 Mortgage........... 38,598 20.3 18,987 21.6 18,179 23.0 20,601 26.3 21,128 26.4 Consumer.............. Loans.............. 75,405 36.4 54,564 36.5 43,880 37.1 36,315 36.7 31,905 34.9 Leases............. 6,631 8.7 3,457 7.1 3,651 5.0 2,632 4.0 1,800 3.3 Unallocated........... 42,958 -- 38,182 -- 35,319 -- 30,681 -- 27,427 -- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total................. $258,171 100.0% $230,778 100.0% $222,487 100.0% $225,225 100.0% $233,123 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
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TABLE 7 - ---------------------------------------------------------------------------------- INVESTMENT SECURITIES December 31, - ---------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 - ---------------------------------------------------------------------------------- U.S Treasury and Federal Agencies......... $ 656 $111,559 $ 168,819 States and political subdivisions......... 32,354 233,458 245,482 Other..................................... -- 118 2,530 ------- -------- --------- Total Investment Securities............... $33,010 $345,135 $ 416,831 ======= ======== ========= - ---------------------------------------------------------------------------------- AMORTIZED COST AND FAIR VALUES BY MATURITY AT DECEMBER 31, 1997 (in thousands of dollars) Amortized Cost Fair Value Yield(1) - ---------------------------------------------------------------------------------- U.S Treasury and Federal Agencies 1-5 years.............................. $ 656 $ 656 6.57% ------- -------- Total................................ 656 656 ------- -------- States and political subdivisions Under 1 year........................... 6,311 6,310 9.10 1-5 years.............................. 13,592 13,719 7.89 6-10 years............................. 9,605 9,788 7.91 offer 10 years.......................... 2,846 2,910 9.10 ------- -------- Total................................ 32,354 32,727 ------- -------- Total Investment Securities............... $33,010 $ 33,383 ======= ======== (1) Weighted average yields were calculated on the basis of amortized cost and have been adjusted to a fully tax equivalent basis, assuming a 35% tax rate.
INTEREST RATE RISK AND LIQUIDITY MANAGEMENT INTEREST RATE RISK MANAGEMENT Huntington seeks to achieve consistent growth in net interest income and net income while managing volatility arising from shifts in interest rates. The Asset and Liability Management Committee (ALCO) oversees financial risk management, establishing broad policies and specific operating limits that govern a variety of financial risks inherent in Huntington's operations, including interest rate, liquidity, counterparty settlement, and market risks. On and off-balance sheet strategies and tactics are reviewed and monitored regularly by ALCO to ensure consistency with approved risk tolerances. Interest rate risk management is a dynamic process, encompassing the 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 offer 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 that, at any point in time, the model provides a reasonably accurate estimate of Huntington's interest rate risk exposure. Management reporting of this information is regularly shared with the Board of Directors. At December 31, 1997, the results of Huntington's interest sensitivity analysis indicated that net interest income would be relatively unchanged by a 100 basis points increase or a 100-200 basis points decrease in the federal funds rate (assuming the change occurs evenly offer the next year and that corresponding changes in other market rates occur as forecasted). Net interest income would be expected to decrease 1.6% if rates rose 200 basis points. Active interest rate risk management necessitates the use of various types of off-balance sheet financial instruments, primarily interest rate swaps. Risk that is created by different indices on products, by unequal terms to maturity of assets and liabilities, and by products that are appealing to customers but incompatible with current risk limits can be eliminated or decreased in a cost efficient manner by utilizing interest rate swaps. Often, the swap strategy has enabled Huntington to lower the overall cost of raising wholesale funds. Similarly, financial futures, interest rate caps and floors, options, and forward rate agreements are used to control financial risk effectively. off-balance sheet instruments are often preferable to similar cash instruments because, though performing identically, they require less capital while preserving access to the marketplace. Table 9, on page 22 of the 1997 Annual Report, 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. 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 and the indexed amortizing swap maturities presented in Table 9, management made no assumptions regarding future changes in interest rates. The pay rates on Huntington's receive-fixed swaps vary based on movements in the applicable London interbank offered rate (LIBOR). Receive-fixed asset conversion swaps and receive-fixed liability conversion swaps with notional values of $200 million and $300 million, respectively, have embedded written LIBOR-based call options. Also, receive-fixed liability conversion swaps with a notional value of $150 million have embedded written LIBOR-based caps. The portfolio of amortizing swaps consists primarily of contracts that are indexed to the prepayment experience of a specified pool of mortgage loans. As market interest rates change, the amortization of the notional value of the swap will also change, generally slowing as rates increase and accelerating when rates fall. Basis swaps are contracts which 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 receive and pay amounts applicable to Huntington's basis swaps are based predominantly on LIBOR. The notional values of the swap portfolio represent contractual amounts on which interest payments to be exchanged are based. These notional values do not represent direct credit exposures. At December 31, 1997, Huntington's credit risk from interest rate swaps used for asset/liability management purposes was $66.5 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 $179 million at December 31, 1997. Total credit exposure from such contracts is not material. These separate activities, which are accounted for at fair value, are not a significant part of
TABLE 8 - ------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE December 31, - ------------------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 - ------------------------------------------------------------------------------------------- U.S. Treasury and Federal Agencies ... $5,001,034 $4,714,821 $4,519,310 Other Securities ..................... 708,780 494,572 531,522 ---------- ---------- ---------- Total Securities Available for Sale $5,709,814 $5,209,393 $5,050,832 ========== ========== ========== - ------------------------------------------------------------------------------------------- AMORTIZED COST AND FAIR VALUES BY MATURITY AT DECEMBER 31, 1997 (in thousands of dollars) Amortized Cost Fair Value Yield(1) - ------------------------------------------------------------------------------------------- U.S. Treasury Under 1 year ...................... $ 1,001 $ 1,012 7.13% 1-5 years ......................... 409,364 407,936 5.60 6-10 years ........................ 320,497 320,726 5.77 ---------- ---------- Total ........................... 730,862 729,674 ---------- ---------- Federal Agencies Mortgage-backed securities Under 1 year .................... 2,223 2,216 6.68 1-5 years ....................... 169,877 170,177 6.54 6-10 years ...................... 497,496 494,016 6.28 offer 10 years .................. 698,906 705,031 6.70 ---------- ---------- Total ......................... 1,368,502 1,371,440 ---------- ---------- Other agencies Under 1 year .................... 984 992 8.29 1-5 years ....................... 1,590,592 1,594,409 6.26 6-10 years ...................... 787,682 792,359 6.63 offer 10 years .................. 509,713 512,160 6.67 ---------- ---------- Total ......................... 2,888,971 2,899,920 ---------- ---------- Total U.S. Treasury and Federal Agencies .................. 4,988,335 5,001,034 ---------- ---------- Other Securities Under 1 year ...................... 13,940 13,925 9.78 1-5 years ......................... 211,943 214,772 7.30 6-10 years ........................ 199,849 205,771 8.15 offer 10 years .................... 210,688 213,183 5.53 Marketable equity securities ...... 62,164 61,129 5.61 ---------- ---------- Total ........................... 698,584 708,780 ---------- ---------- Total Securities Available for Sale .. $5,686,919 $5,709,814 ========== ==========
At December 31, 1997, Huntington had no concentrations of securities by a single issuer in excess of 10% of shareholders' equity. (1) Weighted average yields were calculated on the basis of amortized cost. - -------------------------------------------------------------------------------- Huntington's operations. Accordingly, they have been excluded from the above discussion of off-balance sheet financial instruments and the related table. LIQUIDITY MANAGEMENT Liquidity management is also a significant responsibility of ALCO. The objective of ALCO in this regard is to maintain an optimum balance of maturities among Huntington's assets and liabilities such that sufficient cash, or access to cash, is available at all times to meet the needs of borrowers, depositors, and creditors, as well as to fund corporate expansion and other activities. A chief source of Huntington's liquidity is derived from the large retail deposit base accessible by its network of geographically dispersed banking Offices. This core funding is supplemented by Huntington's demonstrated ability to raise funds in capital markets and to access funds nationwide. Huntington's $6.75 billion domestic note and $2 billion European note programs are significant sources of wholesale funding. Under these programs, unsecured senior and subordinated notes are issuable with maturities ranging from one month to thirty years. At year-end 1997, $6.8 billion of notes were available to fund Huntington's future activities. As mentioned previously, Huntington raised $200 million in 1997 through the sale of capital securities by its wholly-owned subsidiary, Huntington Capital I. A $200 million line of credit is also available to support commercial paper borrowings and other short-term working capital needs. While liability sources are many, significant liquidity is also available from Huntington's investment and loan portfolios. ALCO regularly monitors the overall liquidity position of the business and ensures that various alternative strategies exist to coffer unanticipated events. At December 31, 1997, sufficient liquidity was available to meet estimated short-term and long-term funding needs.
TABLE 9 - ----------------------------------------------------------------------------------- INTEREST RATE SWAP PORTFOLIO - ----------------------------------------------------------------------------------- (in millions of dollars) December 31, 1997 - ----------------------------------------------------------------------------------- Average Notional Maturity Market Average Rate Value (years) Value Receive Pay - ----------------------------------------------------------------------------------- ASSET CONVERSION SWAPS Receive fixed................. $ 450 1.60 $(0.3) 6.13% 5.84% Receive fixed-amortizing...... 92 0.25 (0.1) 5.27 5.84 ------ ----- TOTAL ASSET CONVERSION SWAPS.. $ 542 1.37 $(0.4) 5.98% 5.84% ====== ===== LIABILITY CONVERSION SWAPS Receive fixed................. $1,580 2.01 $25.1 6.41% 5.86% Receive fixed-amortizing...... 187 1.50 (0.7) 5.63 5.97 Pay fixed..................... 150 1.64 (0.1) 5.86 5.56 ------ ----- TOTAL LIABILITY CONVERSION SWAPS $1,917 1.93 $24.3 6.29% 5.85% ====== ===== BASIS PROTECTION SWAPS........ $ 735 1.17 $(0.1) 5.89% 5.77% ====== =====
CREDIT RISK Huntington's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize "in-market" lending to established borrowers. Highly leveraged transactions and excessive industry or other concentrations are avoided. The credit administration function also employs extensive monitoring procedures to ensure problem loans are promptly identified and that loans adhere to corporate policy. These procedures provide executive management with the information necessary to implement appropriate change and take corrective action as needed. Asset quality continues to compare favorably with Huntington's peers in the banking industry. Non-performing assets, consisting 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, totaled $87.2 million at the most recent year end. As of this same date, non-performing loans represented .40% of total loans and non-performing assets as a percent of total loans and other real estate were only .49%. Loans past due ninety days or more but continuing to accrue interest (primarily consumer and residential real estate) were $49.6 million. There were also loans outstanding of $54.2 million and $50.7 million, respectively, at December 31, 1997, and 1996, that were current as to principal and interest which Huntington considered to be potential problem credits. These loans are closely monitored for any further deterioration in borrower performance. CAPITAL AND DIVIDENDS Huntington places significant emphasis on the maintenance of strong capital, which promotes investor confidence, provides access to the national markets under favorable terms, and enhances business growth and acquisition opportunities. Huntington also recognizes the importance of managing excess capital and continually strives to maintain an appropriate balance between capital adequacy and returns to shareholders. Capital is managed at each subsidiary based upon the respective risks and growth opportunities, as well as regulatory requirements.
- ---------------------------------------------------------------------------------------------------------------------------- TABLE 10 - ---------------------------------------------------------------------------------------------------------------------------- MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AS OF DECEMBER 31, 1997 - ---------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) - ---------------------------------------------------------------------------------------------------------------------------- Three months or less...................................................................................... $ 932,440 offer three through six months............................................................................. 380,370 offer six through twelve months............................................................................ 438,106 offer twelve months........................................................................................ 152,741 ----------- Total..................................................................................................... $ 1,903,657 ===========
TABLE 11 - ------------------------------------------------------------------------------------------------------------------- SHORT-TERM BORROWINGS DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS Balance at year-end.................................... $3,064,344 $3,309,445 $2,962,252 Weighted average interest rate at year-end............. 5.26% 5.21% 5.06% Maximum amount outstanding at month-end during the year........................... $3,387,690 $3,309,445 $2,968,772 Average amount outstanding during the year............. $2,733,764 $2,766,185 $2,264,330 Weighted average interest rate during the year......... 5.15% 5.16% 5.68%
TABLE 12 - ---------------------------------------------------------------------------------------------------------------------------- NON-PERFORMING ASSETS AND PAST DUE LOANS December 31, - ---------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------- Non-accrual loans........................ $ 65,981 $ 55,040 $ 55,423 $ 47,524 $ 81,310 $ 95,842 Renegotiated loans....................... 5,822 4,422 5,320 3,768 3,080 3,500 --------- -------- -------- ---------- ---------- ---------- TOTAL NON-PERFORMING LOANS............... 71,803 59,462 60,743 51,292 84,390 99,342 --------- -------- -------- ---------- ---------- ---------- Other real estate, net................... 15,343 17,208 23,598 54,153 66,578 75,266 --------- -------- -------- ---------- ---------- ---------- TOTAL NON-PERFORMING ASSETS.............. $ 87,146 $ 76,670 $ 84,341 $ 105,445 $ 150,968 $ 174,608 ========= ======== ======== ========== ========== ========== NON-PERFORMING LOANS AS A % OF TOTAL LOANS 0.40% 0.35% 0.39% 0.36% 0.67% 0.90% NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND OTHER REAL ESTATE................. 0.49% 0.46% 0.54% 0.74% 1.19% 1.58% ALLOWANCE FOR LOAN LOSSES AS A % OF NON-PERFORMING LOANS.................. 359.55% 388.11% 366.28% 439.10% 276.24% 174.39% ALLOWANCE FOR LOAN LOSSES AND OTHER REAL ESTATE AS A % OF NON-PERFORMING ASSETS 294.32% 297.12% 250.06% 199.12% 146.25% 99.35% ACCRUING LOANS PAST DUE 90 DAYS OR MORE.. $ 49,608 $ 39,267 $ 30,937 $ 23,753 $ 28,623 $ 29,567 ========= ======== ======== ========== ========== ========== ACCRUING LOANS PAST DUE 90 DAYS OR MORE TO TOTAL LOANS........................ 0.28% 0.23% 0.20% 0.17% 0.23% 0.27%
NOTE: For 1997, the amount of interest income which would have been recorded under the original terms for total loans classified as non-accrual or renegotiated was $7.8 million. Amounts actually collected and recorded as interest income for these loans totaled $0.8 million. - -------------------------------------------------------------------------------- Huntington's ratio of average equity to average assets offer the last twelve months was 7.53%, compared with 7.60% and 7.88%, respectively, in the two preceding years. Largely as a result of the sale of capital securities by its special-purpose subsidiary, Huntington showed improvement during the recent year in each of the key regulatory capital ratios. In addition, its bank subsidiaries had regulatory capital ratios in excess of the levels established for "well-capitalized" institutions. Cash dividends declared were $.76 per share in 1997, up 11.8% from the corresponding amount in 1996 of $.68 per share. A 10% stock dividend was also distributed to shareholders in the year just ended, marking the twenty-fourth consecutive year in which Huntington has issued a stock split or stock dividend. On February 21, 1996, the Board of Directors authorized Huntington to repurchase up to 12.1 million additional shares of its common stock (as adjusted for subsequent stock dividends) through open market purchases and privately negotiated transactions. The authorization represents a continuation of the common stock repurchase program begun in August 1987 and provides that the shares will be reserved for reissue in connection with Huntington's dividend reinvestment and employee benefit plans as well as for other corporate purposes. Huntington purchased 1.9 million shares in 1997 at an aggregate cost of $56.2 million, leaving 2.6 million shares available for repurchase. Upon announcement of the merger with First Michigan, Huntington suspended its common stock repurchase program. The program was temporarily reactivated for the limited purpose of acquiring shares for reissue in the purchase business combination with The Bank of Winter Park, a $90 million institution headquartered in Winter Park, Florida. With the closing of the Winter Park acquisition in October 1997, the common stock repurchase program was again suspended. FOURTH QUARTER RESULTS Net income for the fourth quarter of 1997 was a record $90.6 million, compared with $79.1 million in the same period last year. Basic earnings per share were $.47, versus $.42 per share one year ago. ROE and ROA for the most recent quarter were 18.23% and 1.41%, respectively, up from 17.69% and 1.32% in the final three months of 1996. Net interest income was $259.6 million in the recent quarter, an increase of 13.3% offer the corresponding period of the prior year. An improved margin, coupled with growth in average earning assets (principally loans), drove the increase. The provision for loan losses was $26.2 million in the last quarter of the year, compared with $25.0 million in the same period of 1996. Net charge-offs (annualized) were .61% of average loans in the recent three months, virtually unchanged from .60% in the final quarter one year ago. Non-interest income, excluding securities gains, was $87.5 million for the three months ended December 31, 1997, an increase of 18.3% from the fourth quarter of the preceding year. Similar to the full year results, improvements occurred across most of the major categories. Non-interest expense totaled $188.5 million in the most recent three months, versus $165.0 million in the final quarter of 1996. The increase was primarily attributable to the same items referred to above in the discussion of annual results. PENDING ACQUISITION In December 1997, Huntington announced that it was the successful bidder for 60 banking Offices in Florida to be sold by NationsBank Corporation in connection with the merger of NationsBank and Barnett Banks Inc. These Offices are in what Huntington believes to be very good markets and complement nicely its existing presence in central and west coast Florida. In addition to its assumption of $2.6 billion of low cost core deposits, Huntington is purchasing approximately $1.6 billion of high quality loans. The deposit premium, which is subject to final determination based on the deposit levels at the closing of the transaction, is projected to be $523 million, using the latest information available from NationsBank. To preserve its strong capital base, Huntington expects to issue $300 million of common stock and another $250 million of capital securities on or before the closing of the branch purchase in mid-1998. The new capital amounts are estimates only and could change based on Huntington's asset growth, the ultimate deposit premium paid, and other developments offer the next few months. Selected ANNUAL INCOME STATEMENT Data - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ (in thousands of dollars, Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------ except per share amounts) 1997 1996 1995 1994 1993 1992 - --------------------------------------- ---------- --------- ---------- ---------- ---------- ---------- TOTAL INTEREST INCOME.................. $1,981,473 $1,775,734 $ 1,709,627 $1,418,610 $1,410,401 $1,379,949 TOTAL INTEREST EXPENSE................. 954,243 880,648 856,860 546,880 514,812 588,591 ---------- ---------- ---------- ---------- ---------- ---------- NET INTEREST INCOME.................... 1,027,230 895,086 852,767 871,730 895,589 791,358 Provision for loan losses.............. 107,797 76,371 36,712 21,954 84,682 88,213 ---------- ---------- ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........... 919,433 818,715 816,055 849,776 810,907 703,145 ---------- ---------- ---------- ---------- ---------- ---------- Service charges on deposit accounts.... 117,852 107,669 97,505 88,457 83,570 73,503 Mortgage banking....................... 55,715 43,942 39,309 47,194 63,964 53,227 Trust services......................... 48,102 42,237 37,627 35,278 33,879 30,269 Electronic banking fees................ 22,656 12,013 6,190 3,405 2,078 1,634 Credit card fees....................... 20,374 23,093 18,757 18,589 18,084 16,587 Investment product sales............... 19,024 13,950 9,704 8,058 10,616 6,420 Securities gains....................... 7,978 17,620 9,380 2,297 27,316 36,551 Other.................................. 51,138 53,539 56,618 41,436 41,693 32,030 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL NON-INTEREST INCOME.............. 342,839 314,063 275,090 244,714 281,200 250,221 ---------- ---------- ---------- ---------- ---------- ---------- Salaries............................... 297,415 273,316 263,552 265,336 262,755 240,321 Commissions............................ 21,398 14,587 10,347 11,463 21,510 18,810 Employee benefits...................... 70,030 69,289 69,059 68,955 65,021 54,966 Equipment.............................. 57,867 50,887 44,646 44,806 43,012 39,396 Net occupancy.......................... 49,509 49,676 47,824 46,304 45,496 41,387 Advertising............................ 24,662 14,947 13,757 17,570 15,141 15,114 Printing and supplies.................. 21,584 19,602 18,103 18,379 18,405 17,489 Credit card and electronic banking..... 14,171 16,355 14,076 13,951 12,170 11,028 Legal and loan collection.............. 13,418 11,106 9,658 9,098 12,378 14,142 Special charges........................ 47,163 -- -- -- -- -- FDIC insurance......................... 2,774 1,261 17,974 30,451 30,042 29,900 Other.................................. 183,117 154,484 153,065 157,207 163,521 204,370 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL NON-INTEREST EXPENSE............. 803,108 675,510 662,061 683,520 689,451 686,923 ---------- ---------- ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES............. 459,164 457,268 429,084 410,970 402,656 266,443 Provision for income taxes............. 166,501 152,999 147,283 134,650 135,731 79,300 ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME............................. $ 292,663 $ 304,269 $ 281,801 $ 276,320 $ 266,925 $ 187,143 ========== ========== ========== ========== ========== ========== PER COMMON SHARE (1) Net income Basic............................... $1.53 $1.58 $1.42 $1.40 $1.37 $ .97 Diluted............................. $1.52 $1.57 $1.41 $1.39 $1.35 $ .96 Cash dividends declared................ $ .76 $ .68 $ .62 $ .56 $ .46 $ .40 FULLY TAX EQUIVALENT MARGIN Net Interest Income.................... $1,027,230 $ 895,086 $ 852,767 $ 871,730 $ 895,589 $ 791,358 Tax Equivalent Adjustment (2) ......... 11,864 12,363 14,602 18,405 21,072 23,376 ---------- --------- ---------- ---------- ---------- ---------- Tax Equivalent Net Interest Income..... $1,039,094 $ 907,449 $ 867,369 $ 890,135 $ 916,661 $ 814,734 ========== ========= ========== ========== ========== ========== (1) Adjusted for stock dividends and stock splits, as applicable. (2) Calculated assuming a 35% tax rate in years 1993 through 1997 and a 34% tax rate in 1992.
Consolidated AVERAGE BALANCES AND INTEREST RATES - --------------------------------------------------------------------------------
1997 1996 --------------------------- --------------------------- INTEREST Interest Fully Tax Equivalent Basis (1) AVERAGE INCOME/ YIELD/ Average Income/ Yield/ (in millions of dollars) BALANCE EXPENSE RATE Balance Expense Rate - --------------------------------------------------------------------------------------------------------------------------- ASSETS Interest bearing deposits in banks........................... $ 9 $ .5 5.47% $ 14 $ .8 5.85% Trading account securities................................... 11 .6 5.70 16 .9 5.66 Federal funds sold and securities purchased under resale agreements................................................. 44 2.4 5.50 67 3.8 6.03 Mortgages held for sale...................................... 131 10.1 7.75 113 8.7 7.74 Securities: Taxable................................................... 5,351 339.8 6.35 5,194 333.7 6.42 Tax exempt................................................ 264 25.3 9.55 291 27.9 9.59 ------- -------- ------- ------- Total Securities....................................... 5,615 365.1 6.50 5,485 361.6 6.59 ------- -------- ------- ------- Loans Commercial................................................ 5,302 456.6 8.61 4,955 396.9 8.01 Real Estate Construction........................................... 813 73.8 8.85 580 50.7 8.75 Mortgage............................................... 3,761 326.9 8.71 3,614 312.3 8.64 Consumer Loans.................................................. 6,299 574.8 9.12 5,880 528.4 8.99 Leases................................................. 1,406 106.7 7.59 950 74.8 7.87 ------- -------- ------- ------- Total Loans............................................ 17,581 1,538.8 8.75 15,979 1,363.1 8.53 Allowance for loan losses/loan fees.................... 253 75.8 231 49.2 ------- -------- ------- -------- Net loans.............................................. 17,328 1,614.6 9.18 15,748 1,412.3 8.84 ------- -------- ------- ------- Total earning assets................................... 23,391 1,993.3 8.52% 21,674 1,788.1 8.26% ------- -------- ------- ------- Cash and due from banks...................................... 910 901 All other assets............................................. 1,103 1,031 ------- ------- TOTAL ASSETS ................................................ $25,151 $23,375 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Non-interest bearing deposits............................... $ 2,774 $ 2,664 Interest bearing demand deposits............................. 3,204 84.4 2.64% 3,068 80.2 2.61% Savings deposits............................................. 3,056 100.4 3.28 2,836 86.3 3.04 Other domestic time deposits................................. 5,857 329.7 5.63 5,463 310.3 5.68 ------- -------- ------- ------- Total core deposits....................................... 14,891 514.5 4.25 14,031 476.8 4.19 ------- -------- ------- ------- Certificates of deposit of $100,000 or more.................. 1,922 109.4 5.70 1,525 85.5 5.61 Foreign time deposits........................................ 382 22.2 5.81 305 18.4 6.03 ------- -------- ------- ------- Total deposits............................................ 17,195 646.1 4.48 15,861 580.7 4.40 ------- -------- ------- ------- Short-term borrowings........................................ 3,294 172.7 5.24 3,375 183.6 5.44 Long-term debt, including capital securities................. 2,254 135.4 6.01 1,858 116.4 6.26 ------- -------- ------- ------- Total interest bearing liabilities........................ 19,969 954.2 4.78% 18,430 880.7 4.78% ------- -------- ------- ------- All other liabilities........................................ 514 505 Shareholders' equity......................................... 1,894 1,776 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $25,151 $23,375 ======= ======= Net interest rate spread..................................... 3.74% 3.48% Impact of non-interest bearing funds on margin............... .70% .71% NET INTEREST INCOME/MARGIN................................... $1,039.1 4.44% $ 907.4 4.19% ======== ======= (1) Fully tax equivalent yields are calculated assuming a 35% tax rate in 1993 through 1997 and a 34% tax rate in 1992. Average loan balances include non-accruing loans. Loan income includes cash received on non-accruing loans.
1995 1994 1993 1992 - ----------------------------- --------------------------- -------------------------- --------------------------- Interest Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate - ----------------------------- --------------------------- -------------------------- --------------------------- $ 26 $ 1.6 5.99% $ 8 $ .5 6.23% $ 30 $ 1.3 4.27% $ 88 $ 4.7 5.29% 23 1.6 7.29 14 .9 6.16 10 .5 5.04 22 1.2 5.43 93 5.6 6.10 134 5.8 4.30 103 3.3 3.22 157 5.9 3.77 133 10.0 7.58 367 25.9 7.06 827 60.2 7.28 681 55.0 8.09 4,679 310.7 6.64 3,713 226.5 6.10 4,703 284.5 6.05 3,965 276.9 6.99 342 33.2 9.73 419 42.0 10.03 464 49.6 10.70 520 50.6 9.73 ------- -------- -------- -------- ------- -------- ------- ------- 5,021 343.9 6.85 4,132 268.5 6.50 5,167 334.1 6.47 4,485 327.5 7.30 ------- -------- -------- -------- ------- -------- ------- ------- 4,703 403.3 8.58 4,140 350.1 8.46 3,823 321.5 8.41 3,602 300.0 8.33 473 41.6 8.79 396 30.6 7.73 445 31.1 6.99 456 30.7 6.73 3,834 328.1 8.56 3,474 278.3 8.01 3,084 253.9 8.24 2,698 241.7 8.96 5,508 494.2 8.97 4,837 401.6 8.31 4,008 364.6 9.10 3,585 381.4 10.64 657 51.0 7.76 485 34.7 7.15 349 27.8 7.97 263 23.3 8.86 ------- -------- -------- -------- ------- -------- ------- ------- 15,175 1,318.2 8.69 13,332 1,095.3 8.21 11,709 998.9 8.53 10,604 977.1 9.22 227 43.4 235 40.1 215 33.2 163 31.7 ------- -------- -------- -------- ------- -------- ------- ------- 14,948 1,361.6 8.97 13,097 1,135.4 8.52 11,494 1,032.1 8.82 10,441 1,008.8 9.51 ------- -------- -------- -------- ------- -------- ------- ------- 20,471 1,724.3 8.43% 17,987 1,437.0 7.99% 17,846 1,431.5 8.02% 16,037 1,403.1 8.75% ------- -------- -------- -------- ------- -------- ------- ------- 883 841 787 723 972 906 923 868 ------- -------- ------- ------- $22,099 $ 19,499 $19,341 $17,465 ======= ======== ======= ======= $ 2,477 $ 2,390 $ 2,384 $ 1,964 2,815 68.6 2.44% 2,984 65.9 2.21% 2,908 70.2 2.41% 2,710 82.9 3.06% 2,666 77.9 2.92 2,935 68.0 2.32 2,863 75.4 2.63 2,351 83.9 3.57 5,382 300.3 5.58 4,383 187.3 4.27 4,376 187.6 4.29 4,846 250.2 5.17 ------- -------- -------- -------- ------- -------- ------- ------- 13,340 446.8 4.11 12,692 321.2 3.12 12,531 333.2 3.28 11,871 417.0 4.21 ------- -------- -------- -------- ------- -------- ------- ------- 1,269 74.8 5.89 914 39.3 4.30 1,049 39.8 3.79 1,463 66.7 4.56 262 17.0 6.50 286 12.2 4.25 455 15.0 3.30 153 5.7 3.73 ------- -------- -------- -------- ------- -------- ------- ------- 14,871 538.6 4.34 13,892 372.7 3.24 14,035 388.0 3.33 13,487 489.4 4.25 ------- -------- -------- -------- ------- -------- ------- ------- 3,622 217.9 6.02 2,763 111.1 4.02 2,943 92.8 3.16 2,166 76.3 3.53 1,432 100.4 7.01 937 63.1 6.74 651 34.0 5.24 312 22.7 7.27 ------- -------- -------- -------- ------- -------- ------- ------- 17,448 856.9 4.91% 15,202 546.9 3.60% 15,245 514.8 3.38% 14,001 588.4 4.21% ------- -------- -------- -------- ------- -------- ------- ------- 432 286 297 246 1,742 1,621 1,415 1,254 ------- -------- ------- ------- $22,099 $ 19,499 $19,341 $17,465 ======= ======== ======= ======= 3.52% 4.39% 4.64% 4.54% .72% .56% .50% .54% $ 867.4 4.24% $ 890.1 4.95% $ 916.7 5.14% $ 814.7 5.08% ======== ======== ======== =======
MARKET PRICES, KEY RATIOS AND STATISTICS, NON-PERFORMING ASSETS (Quarterly Data) - --------------------------------------------------------------------------------
QUARTERLY COMMON STOCK SUMMARY (1) 1997 1996 - ----------------------------------------- ---------------------------------------------------------------------------------------- IVQ IIIQ IIQ IQ IVQ IIIQ IIQ IQ --- ---- --- -- --- ---- --- -- High..................................... $ 38 7/8 $ 37 3/4 $ 27 1/4 $ 28 7/8 $ 26 1/4 $ 21 3/8 $ 20 7/8 $ 20 1/8 Low...................................... 31 1/2 27 1/4 23 5/8 22 3/4 20 13/16 19 5/16 19 9/16 18 5/8 Close.................................... 36 36 1/16 26 3/4 23 7/8 24 20 15/16 19 3/4 19 3/4 Cash dividends declared.................. $.20 $.20 $.18 $.18 $.18 $.18 $.16 $.16 (1) Restated for the ten percent stock dividend distributed July 31, 1997. Note: Stock price quotations were obtained from NASDAQ
- --------------------------------------------------------------------------------
KEY RATIOS AND STATISTICS MARGIN ANALYSIS--AS A % OF AVERAGE EARNING ASSETS (1) 1997 1996 - ------------------------------------------ -------------------------------------- -------------------------------------- IVQ IIIQ IIQ IQ IVQ IIIQ IIQ IQ --- ---- --- -- --- ---- --- -- Interest Income.......................... 8.48% 8.53% 8.61% 8.42% 8.16% 8.25% 8.28% 8.24% Interest Expense......................... 4.04 4.12 4.07 4.03 3.97 4.00 4.04 4.12 ---- ---- ---- ---- ---- ---- ---- ---- Net Interest Margin................... 4.44% 4.41% 4.54% 4.39% 4.19% 4.25% 4.24% 4.12% ==== ==== ==== ==== ==== ==== ==== ==== RETURN ON Average total assets.................. 1.41% 0.65% 1.33% 1.27% 1.32% 1.33% 1.31% 1.26% Average earning assets................ 1.53% 0.69% 1.43% 1.37% 1.42% 1.42% 1.41% 1.36% Average shareholders' equity.......... 18.23% 8.41% 18.07% 17.42% 17.69% 17.75% 17.30% 15.94% (1) Presented on a fully tax equivalent basis assuming a 35% tax rate.
NON-PERFORMING ASSETS (QUARTER-END) (in thousands of dollars) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ IVQ IIIQ IIQ IQ IVQ IIIQ IIQ IQ --------- ------- -------- --------- ------- -------- ------- ------- Non-accrual loans........................... $ 65,981 $72,385 $ 61,105 $ 64,764 $55,040 $ 57,346 $58,311 $63,540 Renegotiated loans.......................... 5,822 6,069 4,449 4,490 4,422 5,725 6,726 6,334 --------- ------- -------- --------- ------- -------- ------- ------- TOTAL NON-PERFORMING LOANS.................. 71,803 78,454 65,554 69,254 59,462 63,071 65,037 69,874 --------- ------- -------- --------- ------- -------- ------- ------- Other real estate, net...................... 15,343 13,762 14,434 20,300 17,208 16,321 23,213 22,219 --------- ------- -------- --------- ------- -------- ------- ------- TOTAL NON-PERFORMING ASSETS................. $ 87,146 $92,216 $ 79,988 $ 89,554 $76,670 $ 79,392 $88,250 $92,093 ========= ======= ======== ========= ======= ======== ======= ======= NON-PERFORMING LOANS AS A % OF TOTAL LOANS.. 0.40% 0.44% 0.37% 0.40% 0.35% 0.39% 0.41% 0.45% NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND OTHER REAL ESTATE... 0.49% 0.52% 0.45% 0.51% 0.46% 0.48% 0.55% 0.59% ALLOWANCE FOR LOAN LOSSES AS A % OF NON-PERFORMING LOANS............... 359.55% 328.71% 378.11% 348.93% 388.11% 366.24% 348.52% 324.34% ALLOWANCE FOR LOAN LOSSES AND OTHER REAL ESTATE AS A % OF NON-PERFORMING ASSETS... 294.32% 277.31% 306.51% 266.89% 297.12% 282.47% 246.01% 234.94% ACCRUING LOANS PAST DUE 90 DAYS OR MORE..... $ 49,608 $43,120 $ 40,967 $ 42,023 $39,267 $ 40,301 $35,094 $30,345 ========= ======= ======== ========= ======= ======== ======= =======
Selected QUARTERLY INCOME STATEMENT Data - --------------------------------------------------------------------------------
(in thousands of dollars, 1997 1996 --------------------------------------- --------------------------------------- except per share amounts) IVQ IIIQ IIQ IQ IVQ IIIQ IIQ IQ - ----------------------------------------- -------- -------- -------- -------- -------- -------- -------- -------- TOTAL INTEREST INCOME ................... $499,760 $502,821 $503,018 $475,874 $452,716 $445,453 $439,514 $438,051 TOTAL INTEREST EXPENSE................... 240,197 245,663 240,060 228,323 223,664 219,217 216,822 220,945 -------- -------- -------- -------- -------- -------- -------- -------- NET INTEREST INCOME...................... 259,563 257,158 262,958 247,551 229,052 226,236 222,692 217,106 -------- -------- -------- -------- -------- -------- -------- -------- Provision for loan losses................ 26,235 28,351 30,831 22,38 25,038 22,978 14,160 14,195 -------- -------- -------- -------- -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............. 233,328 228,807 232,127 225,171 204,014 203,258 208,532 202,911 -------- -------- -------- -------- -------- -------- -------- -------- Service charges on deposit accounts ..... 31,035 30,382 28,841 27,594 27,434 27,262 26,971 26,002 Mortgage banking ........................ 15,889 20,672 10,157 8,997 10,420 11,897 10,684 10,941 Trust services .......................... 12,019 12,124 11,814 12,145 10,724 10,381 10,320 10,812 Electronic banking fees.................. 6,153 5,947 6,192 4,364 3,999 3,452 2,558 2,004 Credit card fees......................... 6,583 5,073 4,523 4,195 5,235 4,255 8,696 4,907 Investment product sales ................ 4,703 4,987 4,315 5,019 3,487 3,054 3,653 3,756 Securities gains......................... 1,034 1,242 3,604 2,098 4,240 6,172 102 7,106 Other ................................... 11,094 15,670 12,055 12,319 12,631 14,911 13,787 12,210 -------- -------- -------- -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME ............... 88,510 96,097 81,501 76,731 78,170 81,384 76,771 77,738 -------- -------- -------- -------- -------- -------- -------- -------- Salaries ................................ 74,390 76,068 74,769 72,188 70,041 69,480 67,287 66,508 Commissions ............................. 6,111 6,139 4,437 4,711 3,581 3,407 3,737 3,862 Employee benefits ....................... 15,286 18,259 16,813 19,672 13,668 17,129 18,042 20,450 Equipment ............................... 16,004 14,503 14,173 13,187 14,152 12,854 12,312 11,569 Net occupancy............................ 11,755 12,772 11,650 13,332 12,002 12,351 12,607 12,716 Advertising.............................. 5,356 6,139 5,830 7,337 3,236 3,495 4,689 3,527 Printing and supplies ................... 6,239 5,384 5,035 4,926 5,216 4,771 5,133 4,482 Credit card and electronic banking....... 3,738 3,581 3,965 2,887 3,875 4,490 4,226 3,764 Legal and loan collection................ 3,975 3,541 3,186 2,716 4,004 2,235 2,714 2,153 Special charges.......................... -- 47,163 -- -- -- -- -- -- Other ................................... 45,678 51,361 45,947 42,905 35,233 38,261 41,270 40,981 -------- -------- -------- -------- -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE .............. 188,532 244,910 185,805 183,861 165,008 168,473 172,017 170,012 -------- -------- -------- -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES .............. 133,306 79,994 127,823 118,041 117,176 116,169 113,286 110,637 Provision for income taxes .............. 42,657 38,762 44,220 40,862 38,044 38,725 37,997 38,233 -------- -------- -------- -------- -------- -------- -------- -------- NET INCOME............................... $ 90,649 $ 41,232 $ 83,603 $ 77,179 $ 79,132 $ 77,444 $ 75,289 $72,404 ======== ======== ======== ======== ======== ======== ======== ======== PER COMMON SHARE (1) Net income Basic................................. $.47 $.22 $.44 $.41 $.42 $.40 $.39 $.37 Diluted............................... $.47 $.21 $.43 $.40 $.41 $.40 $.39 $.37 Cash dividends declared ................. $.20 $.20 $.18 $.18 $.18 $.18 $.16 $.16 FULLY TAX EQUIVALENT MARGIN Net Interest Income...................... $259,563 $257,158 $262,958 $247,551 $229,052 $226,236 $222,692 $217,106 Tax Equivalent Adjustment (2) ........... 2,754 3,115 2,948 3,047 3,018 3,026 3,123 3,196 -------- -------- -------- -------- -------- -------- -------- -------- Tax Equivalent Net Interest Income....... $262,317 $260,273 $265,906 $250,598 $232,070 $229,262 $225,815 $220,302 ======== ======== ======== ======== ======== ======== ======== ======== (1) Adjusted for stock dividends and stock splits, as applicable. (2) Calculated assuming a 35% tax rate.
Report of MANAGEMENT - -------------------------------------------------------------------------------- The integrity of the financial statements and other financial information contained in this Annual Report is the responsibility of the management of Huntington. Such financial information has been prepared in accordance with generally accepted accounting principles, based on the best estimates and judgment of management. Huntington maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are executed and recorded in accordance with management's authorization and that the assets of Huntington are properly safeguarded. This system includes the careful selection and training of staff, the communication of policies and procedures consistent with the highest standards of business conduct, and the maintenance of an internal audit function. The Audit Committee of the Board of Directors is composed entirely of outside directors and it meets periodically with both internal and independent auditors to review the results and recommendations of their audits. This Committee selects the independent auditor with the approval of shareholders. The accounting firm of Ernst & Young LLP has been engaged by Huntington to audit its financial statements, and their report appears below. /s/ Frank Wobst /s/ Gerald R. Williams Frank Wobst Gerald R. Williams Chairman and Executive Vice President Chief Executive Officer and Chief Financial Officer Report of ERNST & YOUNG LLP, INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders Huntington Bancshares Incorporated We have audited the accompanying consolidated balance sheets of Huntington Bancshares Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger of Huntington Bancshares Incorporated and First Michigan Bank Corporation (First Michigan), which has been accounted for using the pooling of interests accounting method as described in Note 2 to the consolidated financial statements. We did not audit the 1996 and 1995 financial statements of First Michigan, which statements reflect total assets constituting 14% for 1996 and net income constituting 14% for 1996 and 13% for 1995 of the related consolidated financial statement totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts for First Michigan, is based solely on the report of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits, and for 1996 and 1995, the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Huntington Bancshares Incorporated and Subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Columbus, Ohio January 14, 1998 Consolidated BALANCE SHEEETS - --------------------------------------------------------------------------------
DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 - ----------------------------------------------------------------------------- ------------- ----------- ASSETS Cash and due from banks....................................................... $ 1,142,450 $ 1,071,361 Interest bearing deposits in banks............................................ 39,618 3,418 Trading account securities.................................................... 7,082 1,873 Federal funds sold and securities purchased under resale agreements........... 509,119 21,066 Mortgages held for sale....................................................... 192,948 121,422 Securities available for sale-- at fair value................................. 5,709,814 5,209,393 Investment securities-- fair value $33,383 and $354,702, respectively......... 33,010 345,135 Total loans................................................................... 17,738,248 16,758,155 Less allowance for loan losses............................................. 258,171 230,778 ------------- ----------- Net loans..................................................................... 17,480,077 16,527,377 ------------- ----------- Premises and equipment........................................................ 389,481 380,460 Customers' acceptance liability............................................... 27,818 56,248 Accrued income and other assets............................................... 1,199,123 634,193 ------------- ----------- TOTAL ASSETS.................................................................. $ 26,730,540 $24,371,946 ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits Non-interest bearing....................................................... $ 2,549,518 $ 2,825,586 Interest bearing........................................................... 3,762,862 3,181,512 Savings deposits.............................................................. 3,133,014 3,040,719 Certificates of deposit of $100,000 or more................................... 1,903,657 1,506,914 Other domestic time deposits.................................................. 6,115,534 5,437,131 Foreign time deposits......................................................... 519,133 410,450 ------------- ----------- Total deposits............................................................. 17,983,718 16,402,312 ------------- ----------- Short-term borrowings......................................................... 3,286,671 4,028,255 Bank acceptances outstanding.................................................. 27,818 56,248 Long-term debt................................................................ 2,686,039 1,665,531 Company-obligated mandatorily redeemable capital securities of Huntington Capital I.................................................... 200,000 -- Accrued expenses and other liabilities........................................ 520,903 433,942 ------------- ----------- Total Liabilities.......................................................... 24,705,149 22,586,288 ------------- ----------- Shareholders' Equity Preferred stock -- authorized 6,617,808 shares; none outstanding Common stock -- without par value; authorized 300,000,000 shares; issued and outstanding-- 193,279,797 and 182,265,457 shares, respectively...... 1,528,768 1,290,968 Less 1,543,371 and 9,284,844 treasury shares, respectively................. (36,791) (204,634) Capital surplus............................................................ 404,235 401,176 Net unrealized gains (losses) on securities available for sale............. 14,800 (13,931) Retained earnings.......................................................... 114,379 312,079 ------------- ----------- Total Shareholders' Equity.................................................... 2,025,391 1,785,658 ------------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................... $26,730,540 $24,371,946 ============= ===========
See notes to consolidated financial statements. Consolidated STATEMEMENTS OF INCOME - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- (in thousands of dollars, except per share amounts) 1997 1996 1995 - ------------------------------------------------------- ---------- ---------- ---------- Interest and fee income Loans............................................... $1,611,541 $1,411,551 $1,357,975 Securities.......................................... 356,388 349,937 332,932 Other............................................... 13,544 14,246 18,720 ---------- ---------- ---------- TOTAL INTEREST INCOME............................ 1,981,473 1,775,734 1,709,627 ---------- ---------- ---------- Interest Expense Deposits............................................ 646,121 580,686 538,668 Short-term borrowings............................... 172,745 183,584 217,818 Long-term debt...................................... 135,377 116,378 100,374 ---------- ---------- ---------- TOTAL INTEREST EXPENSE........................... 954,243 880,648 856,860 ---------- ---------- ---------- NET INTEREST INCOME.............................. 1,027,230 895,086 852,767 ---------- ---------- ---------- Provision for loan losses.............................. 107,797 76,371 36,712 ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.................................. 919,433 818,715 816,055 ---------- ---------- ---------- Total non-interest income ............................. 342,839 314,063 275,090 Total non-interest expense ............................ 803,108 675,510 662,061 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES.......................... 459,164 457,268 429,084 Provision for income taxes....................... 166,501 152,999 147,283 ---------- ---------- ---------- NET INCOME ........................................ $ 292,663 $ 304,269 $ 281,801 ========== ========== ========== PER COMMON SHARE (1) Net income Basic............................................ $1.53 $1.58 $1.42 Diluted.......................................... $1.52 $1.57 $1.41 Cash dividends declared............................. $ .76 $ .68 $ .62 AVERAGE COMMON SHARES OUTSTANDING (1) ................ 190,804,039 192,491,596 198,429,594 (1) Adjusted for stock dividends and stock splits, as applicable.
See notes to consolidated financial statements. Consolidated Statements of CHANGES IN SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
NET UNREALIZED COMMON COMMON TREASURY TREASURY CAPITAL GAINS (LOSSES) RETAINED (in thousands, except per share amounts) SHARES STOCK SHARES STOCK SURPLUS ON SECURITIES EARNINGS TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE-- JANUARY 1, 1995................ 151,720 $930,154 (905) $(16,577) $339,695 $(66,224) $448,223 $ 1,635,271 Stock issued for acquisitions............ 3,510 3,434 20,061 (985) 8,474 30,984 Net income............................... 281,801 281,801 Cash dividends declared ($.62 per share). (106,493) (106,493) 5% stock dividend........................ 6,732 140,146 (45) (140,272) (126) Stock options exercised.................. 231 4,155 7 (2,809) 1,353 Treasury shares purchased................ (9,625) (204,645) (204,645) Treasury shares sold: Shareholder dividend reinvestment plan 1,553 28,609 437 (1,114) 27,932 Employee benefit plans................ 439 7,826 213 (45) 7,994 Conversion of convertible notes.......... 41 311 311 Change in net unrealized gains (losses) on securities available for sale... 105,246 105,246 Pre-merger transactions of pooled subsidiary 1,169 1,012 22,319 4,753 (35,019) (6,935) ------- ---------- ------ -------- -------- ------- --------- ----------- BALANCE-- DECEMBER 31, 1995.............. 163,172 1,075,057 (8,352) (180,632) 382,732 42,790 452,746 1,772,693 ------- ---------- ------ -------- -------- ------- --------- ----------- Stock issued for acquisitions............ 4,733 102,760 5,037 107,797 Net income............................... 304,269 304,269 Cash dividends declared ($.68 per share). (111,120) (111,120) Stock options exercised ................. 284 5,385 (4,318) 1,067 10% stock dividend....................... 10,431 208,110 2,837 78,030 2,444 (288,790) (206) Treasury shares purchased................ (10,419) (246,341) (2,819) (249,160) Treasury shares sold: Shareholder dividend reinvestment plan 1,405 31,189 805 31,994 Employee benefit plans................ 227 4,975 397 5,372 Conversion of convertible notes.......... 50 345 345 Change in net unrealized gains (losses) on securities available for sale... (56,721) (56,721) Pre-merger transactions of pooled subsidiary 8,612 7,456 16,898 (45,026) (20,672) ------- ---------- ------ -------- -------- ------- --------- ----------- BALANCE-- DECEMBER 31, 1996.............. 182,265 1,290,968 (9,285) (204,634) 401,176 (13,931) 312,079 1,785,658 ------- ---------- ------ -------- -------- ------- --------- ----------- Stock issued for acquisitions............ 3,244 73,775 16,463 90,238 Net income............................... 292,663 292,663 Cash dividends declared ($.76 per share). (128,013) (128,013) Stock options exercised.................. 461 7,000 (3,641) 3,359 10% stock dividend....................... 9,181 236,214 5,274 124,920 (51,488) (309,846) (200) Treasury shares purchased................ (1,930) (53,427) (2,748) (56,175) Treasury shares sold: Shareholder dividend reinvestment plan 534 11,968 2,345 14,313 Employee benefit plans................ 159 3,607 1,110 4,717 Change in net unrealized gains (losses) on securities available for sale...... 28,731 28,731 Pre-merger transactions of pooled subsidiary 1,833 1,586 41,018 (52,504) (9,900) ------- ---------- ------ -------- -------- ------- --------- ----------- BALANCE-- DECEMBER 31, 1997.............. 193,279 $1,528,768 (1,543) $(36,791) $404,235 $14,800 $ 114,379 $ 2,025,391 ======= ========== ====== ======== ======== ======= ========= ===========
See notes to consolidated financial statements. Consolidated Statements of CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------- (in thousands of dollars) 1997 1996 1995 - ----------------------------------------------------------------------------------- ------------ ----------- ------------- OPERATING ACTIVITIES Net Income ..................................................................... $ 292,663 $ 304,269 $ 281,801 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses ................................................... 107,797 76,371 36,712 Provision for depreciation and amortization ................................. 63,383 91,903 76,488 Deferred income tax expense ................................................. 47,687 29,703 25,841 (Increase) decrease in trading account securities ........................... (5,209) 11,051 (3,497) (Increase) decrease in mortgages held for sale .............................. (71,526) 46,909 (27,218) Gain on sale of subsidiary .................................................. - - (8,939) Net gains on sales of securities ............................................ (7,978) (17,620) (9,380) Net gains on sales of loans ................................................. (12,200) (1,382) (1,274) (Increase) decrease in accrued income receivable ............................ (7,003) 6,319 (24,849) Net increase in other assets ................................................ (111,259) (53,471) (35,704) Increase (decrease) in accrued expenses ..................................... 15,993 (20,029) 116,927 Net increase in other liabilities ........................................... 11,228 5,111 3,862 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES ................................ 323,576 479,134 430,770 ----------- ----------- ----------- INVESTING ACTIVITIES (Increase) decrease in interest bearing deposits in banks...................... (36,185) 286,537 (282,730) Proceeds from: Maturities and calls of investment securities ............................... 90,287 104,180 213,753 Maturities and calls of securities available for sale ....................... 787,788 477,462 246,839 Sales of securities ......................................................... 2,297,166 2,743,036 2,659,785 Purchases of: Investment securities ....................................................... (2,962) (19,247) (9,111) Securities available for sale ............................................... (2,958,135) (3,111,606) (3,823,767) Proceeds from sales of loans ................................................... 357,396 110,737 306,105 Net loan originations, excluding sales ......................................... (1,209,015) (1,354,362) (1,521,898) Proceeds from disposal of premises and equipment ............................... 8,243 1,664 2,902 Purchases of premises and equipment ............................................ (45,849) (51,617) (44,723) Proceeds from sales of other real estate ....................................... 17,441 18,627 30,133 Purchase of corporate-owned life insurance ..................................... (400,000) - - Net cash (paid) received from purchase of subsidiaries ......................... (2,294) 631 165,803 ----------- ----------- ----------- NET CASH USED FOR INVESTING ACTIVITIES ................................... (1,096,119) (793,958) (2,056,909) ----------- ----------- ----------- FINANCING ACTIVITIES Increase in total deposits ..................................................... 1,025,005 521,255 723,427 (Decrease) increase in short-term borrowings ................................... (751,930) 469,785 581,914 Proceeds from issuance of long-term debt ....................................... 1,742,651 870,698 1,095,220 Payment of long-term debt ...................................................... (722,372) (1,418,421) (208,550) Proceeds from issuance of capital securities ................................... 200,000 - - Dividends paid on common stock, including pre-merger dividends of pooled subsidiary .............................................. (132,760) (125,379) (118,906) Repurchase of common stock ..................................................... (56,175) (258,415) (206,556) Proceeds from issuance of common stock ......................................... 27,266 43,971 41,557 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES ................................ 1,331,685 103,494 1,908,106 ----------- ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS ...................................... 559,142 (211,330) 281,967 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................... 1,092,427 1,303,757 1,021,790 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 1,651,569 $ 1,092,427 $ 1,303,757 =========== =========== ===========
NOTE: Huntington made interest payments of $964,203, $886,020, and $783,275 in 1997, 1996, and 1995, respectively. Federal income tax payments were $114,755 in 1997, $120,645 in 1996, and $112,598 in 1995. See notes to consolidated financial statements. NOTES to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES NATURE OF OPERATIONS: Huntington Bancshares Incorporated (Huntington) is a multi-state bank holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, Huntington conducts a full-service commercial and consumer banking business and provides other financial products and services, principally to domestic customers. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Huntington and its subsidiaries and are presented on the basis of generally accepted accounting principles (GAAP). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current year's presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from those estimates. On January 1, 1997, Huntington adopted Financial Accounting Standards Board (FASB) Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 125). The Statement is effective for transactions occurring after December 31, 1996. However, transactions such as securities lending, repurchase agreements, dollar rolls, and similar secured financing arrangements are not subject to the provisions of FAS 125 until January 1, 1998. The standard provides that, following a transfer of financial assets, an entity is to recognize the financial and servicing assets it controls and the liabilities it has incurred, derecognize financial assets when control has been surrendered, and derecognize liabilities when extinguished. The adoption of FAS 125 did not have a material impact on Huntington's consolidated financial statements. The impact of the delayed provisions is also not expected to be material. In February 1997, the FASB issued Statement No. 128, "Earnings Per Share" (FAS 128). FAS 128 replaced the calculation of primary and fully diluted earnings per share (EPS) with basic and diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive effects of options, warrants, and convertible securities. Diluted EPS is very similar to fully diluted EPS. All EPS amounts presented have been restated, as applicable, to conform with the new requirements. In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" (FAS 130) and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). Each of the new statements is effective for periods beginning after December 15, 1997, and requires that certain additional information be reported in the financial statements and related notes. Huntington will adopt FAS 130 in the first quarter of 1998 and expects to provide the segment disclosures required by FAS 131 in its 1998 Annual Report to Shareholders. SECURITIES: Debt securities that Huntington has both the positive intent and ability to hold to maturity are classified as investments and are carried at amortized cost. Securities purchased with the intention of recognizing short-term profits are placed in the trading account and carried at fair value. Securities not classified as investments or trading are designated available for sale and carried at fair value. Unrealized gains and losses on securities available for sale are carried as a separate component of shareholders' equity. Unrealized gains and losses on securities classified as trading are reported in earnings. The amortized cost of specific securities sold is used to compute realized gains and losses. LOANS: Loans are stated at the principal amount outstanding, net of unearned discount. Interest income on loans is primarily accrued based on principal amounts outstanding. Income from lease financing is recognized on a basis to achieve a constant periodic rate of return on the outstanding investment. The accrual of interest income is discontinued when the collection of principal, interest, or both is doubtful. When interest accruals are suspended, interest income accrued in the current period is generally reversed. Huntington uses the cost recovery method in accounting for cash received on non-accrual loans. Under this method, cash receipts are applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. Net direct loan origination costs/fees, when material, are deferred and amortized over the term of the loan as a yield adjustment. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses reflects management's judgment as to the level considered appropriate to absorb potential losses inherent in the loan portfolio. This judgment is based on a review of individual loans, historical loss experience, economic conditions, portfolio trends, and other factors. The allowance is increased by provisions charged to earnings and reduced by charge-offs, net of recoveries. The portion of the allowance for loan losses related to impaired loans (non-accruing and restructured credits, exclusive of smaller, homogeneous loans) is based on discounted cash flows using the loans' initial effective interest rate or the fair value of the collateral for collateral-dependent loans. OTHER REAL ESTATE: Other real estate, acquired through partial or total satisfaction of loans, is included in other assets and carried at the lower of cost or fair value less estimated costs of disposition. At the date of acquisition, any losses are charged to the allowance for loan losses. Subsequent write-downs are included in non-interest expense. Realized losses from disposition of the property and declines in fair value that are considered permanent are charged to the reserve for other real estate, as applicable. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the related assets. Estimated useful lives employed are on average 30 years for premises and 3 to 10 years for equipment. MORTGAGE BANKING ACTIVITIES: Mortgages held for sale are reported at the lower of cost or aggregate market value primarily as determined by outstanding commitments from investors. Capitalized mortgage servicing rights are evaluated for impairment based on the fair value of those rights, using a disaggregated approach. Mortgage servicing rights are amortized on an accelerated basis over the estimated period of net servicing revenue. 1. ACCOUNTING POLICIES (Continued) PURCHASE BUSINESS COMBINATIONS: Net assets of entities acquired, for which the purchase method of accounting was used by Huntington, were recorded at their estimated fair value at the date of acquisition. The excess of cost over the fair value of net assets acquired (goodwill) is being amortized over periods generally up to 25 years. Core deposits and other identifiable acquired intangible assets are amortized over their estimated useful lives. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Huntington uses certain off-balance sheet financial instruments, principally interest rate swaps, in connection with its asset/liability management activities. Purchased interest rate options (including caps and floors), futures, and forwards are also used to manage interest rate risk. Provided these instruments meet specific criteria, they are considered hedges and accounted for under the accrual or deferral methods, as more fully discussed below. Off-balance sheet financial instruments that do not meet the required criteria are carried on the balance sheet at fair value with realized and unrealized changes in that value recognized in earnings. Similarly, if the hedged item is sold or its outstanding balance otherwise declines below that of the related hedging instrument, the off-balance sheet product (or applicable excess portion thereof) is marked-to-market and the resulting gain or loss is included in earnings. Accrual accounting is used when the cash flows attributable to the hedging instrument satisfy the objectives of the asset/liability management strategy. Huntington uses the accrual method for substantially all of its interest rate swaps as well as for interest rate options. Amounts receivable or payable under these agreements are recognized as an adjustment to the interest income or expense of the hedged item. There is no recognition on the balance sheet for changes in the fair value of the hedging instrument, except for interest rate swaps designated as hedges of securities available for sale, for which changes in fair values are reported in shareholders' equity. Premiums paid for interest rate options are deferred as a component of other assets and amortized to interest income or expense over the contract term. Gains and losses on terminated hedging instruments are also deferred and amortized to interest income or expense generally over the remaining life of the hedged item. Huntington employs deferral accounting when the market value of the hedging instrument meets the objectives of the asset/liability management strategy and the hedged item is reported at other than fair value. In such cases, gains and losses associated with futures and forwards are deferred as an adjustment to the carrying value of the related asset or liability and are recognized in the corresponding interest income or expense accounts over the remaining life of the hedged item. The FASB has issued a draft statement, "Accounting for Derivative and Similar Financial Instruments and for Hedging Activities." A final statement is expected to be issued in the second quarter of 1998, the provisions of which must be adopted by Huntington no later than January 1, 2000. Upon the FASB's issuance of a final standard, Huntington intends to complete its analysis of the financial statement impact of adopting the new rules. STATEMENT OF CASH FLOWS: Cash and cash equivalents are defined as "Cash and due from banks" and "Federal funds sold and securities purchased under resale agreements." 2. MERGERS AND ACQUISITIONS On September 30, 1997, Huntington acquired First Michigan Bank Corporation, a $3.6 billion bank holding company headquartered in Holland, Michigan. Huntington issued approximately 32.2 million shares of its common stock to the shareholders of First Michigan based upon an exchange ratio of 1.155 shares of Huntington common stock for each outstanding share of First Michigan common stock in a transaction accounted for as a pooling of interests. All financial information previously reported by Huntington, except dividends per share, has been restated for the First Michigan acquisition. Separate results of operations for Huntington and First Michigan for periods preceding the merger were as follows:
- -------------------------------------------------------------- NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, (in thousands of dollars) 1997 1996 1995 - -------------------------------------------------------------- Net interest income Huntington ........... $655,364 $758,824 $724,563 First Michigan ....... 112,303 136,262 128,204 -------- -------- -------- Combined ............. $767,667 $895,086 $852,767 ======== ======== ======== Net income (loss) Huntington ........... $214,717 $262,101 $244,489 First Michigan ....... (12,703) 42,168 37,312 -------- -------- -------- Combined ............. $202,014 $304,269 $281,801 ======== ======== ======== Earnings (loss) per share Basic Huntington ......... $1.36 $1.63 $1.47 First Michigan ..... (0.46) 1.52 1.35 Combined ........... $1.06 $1.58 $1.42 Diluted Huntington ......... $1.34 $1.62 $1.46 First Michigan ..... (0.45) 1.51 1.33 Combined ........... $1.04 $1.57 $1.41
In connection with the acquisition of First Michigan, Huntington reported a restructuring charge of $35.0 million consisting primarily of personnel, facilities, and systems costs, and incurred $12.2 million of professional fees and other costs to effect the merger (reported on a combined basis as "Special charges"). Other one-time costs related to the acquisition were an additional loan loss provision of $4.8 million and non-interest expenses of $4.0 million. It is anticipated that the $23.1 million restructuring charge accrual (predominantly consisting of personnel-related costs) remaining at December 31, 1997 will be used during 1998. Also in 1997, Huntington consummated two acquisitions which were accounted for as purchases. On February 28, 1997, Huntington acquired Citi-Bancshares, Inc. (Citi-Bancshares), a $548 million one-bank holding company headquartered in Leesburg, Florida. The purchase price was distributed to Citi-Bancshares shareholders in the form of $47.7 million in cash and 2.9 million shares of Huntington common stock. On October 31, 1997, Huntington acquired The Bank of Winter Park (Winter Park), a $90 million bank headquartered in Winter Park, Florida, for approximately 364 thousand shares of Huntington common stock. Results of operations include these acquired businesses from the date of acquisition only. Pro forma results of operations of Citi-Bancshares and Winter Park have been excluded due to the immaterial impact on Huntington's consolidated earnings. In December 1997, Huntington announced the acquisition of sixty banking offices in Florida to be sold by NationsBank Corporation in connection with the merger of NationsBank and Barnett Banks Inc. The branch acquisition is expected to add $1.6 billion in loans and $2.6 billion in deposits. The deposit premium, which is subject to final determination based on the deposit levels at the closing of the transaction, is projected to be $523 million. Huntington intends to raise $300 million of common equity and will sell an additional $250 million of trust preferred (capital) securities in connection with the transaction. The new capital amounts are estimates only and could change based on Huntington's asset growth, the ultimate deposit premium paid, and other developments over the next few months. The acquisition is expected to close in the second quarter of 1998. - -------------------------------------------------------------------------------- 3. SECURITIES AVAILABLE FOR SALE Amortized cost, unrealized gains and losses, and fair values of securities available for sale as of December 31, 1997, and 1996 were: - --------------------------------------------------------------------------------
UNREALIZED --------------------- AMORTIZED GROSS GROSS FAIR (in thousands of dollars) COST GAINS LOSSES VALUE - --------------------------------------------------------------------------------------- AT DECEMBER 31, 1997 U.S. Treasury ............ $ 730,862 $ 4,501 $ 5,689 $ 729,674 Federal Agencies Mortgage-backed securities .......... 1,368,502 8,031 5,093 1,371,440 Other agencies ........ 2,888,971 16,049 5,100 2,899,920 ---------- ---------- ---------- ---------- Total U.S. Treasury and Federal Agencies .... 4,988,335 28,581 15,882 5,001,034 Other Securities ......... 698,584 11,953 1,757 708,780 ---------- ---------- ---------- ---------- Total securities available for sale .. $5,686,919 $ 40,534 $ 17,639 $5,709,814 ========== ========== ========== ========== AT DECEMBER 31, 1996 U.S. Treasury ............ $ 801,671 $ 2,374 $ 14,618 $ 789,427 Federal Agencies Mortgage-backed securities .......... 1,354,565 4,399 13,161 1,345,803 Other agencies ........ 2,581,768 10,951 13,128 2,579,591 ---------- ---------- ---------- ---------- Total U.S. Treasury and Federal Agencies .... 4,738,004 17,724 40,907 4,714,821 Other Securities ......... 493,322 4,000 2,750 494,572 ---------- ---------- ---------- ---------- Total securities available for sale .. $5,231,326 $ 21,724 $ 43,657 $5,209,393 ========== ========== ========== ==========
Amortized cost and fair values by contractual maturity at December 31, 1997, and 1996 were: - -------------------------------------------------------------------------------- AMORTIZED FAIR (in thousands of dollars) COST VALUE - --------------------------------------------------------------------------------
AT DECEMBER 31, 1997 Under 1 year ........................... $ 18,148 $ 18,145 1-D5 years ............................. 2,381,776 2,387,294 6-D10 years ............................ 1,805,524 1,812,872 Over 10 years .......................... 1,419,307 1,430,374 Marketable equity securities ........... 62,164 61,129 ---------- ---------- Total ............................... $5,686,919 $5,709,814 ========== ========== AT DECEMBER 31, 1996 Under 1 year ........................... $ 254,248 $ 254,758 1-D5 years ............................. 2,725,307 2,723,809 6-D10 years ............................ 1,359,097 1,340,908 Over 10 years .......................... 871,974 870,469 Marketable equity securities ........... 20,700 19,449 ---------- ---------- Total ............................... $5,231,326 $5,209,393 ========== ==========
Gross gains from sales of securities of $12.3 million, $24.7 million, and $12.8 million were realized in 1997, 1996 and 1995, respectively. Gross losses totaled $4.3 million in 1997, $7.1 million in 1996, and $3.5 million in 1995. In 1997, Huntington securitized and transferred to securities available for sale $115.1 million of residential mortgage loans. - -------------------------------------------------------------------------------- 4. INVESTMENT SECURITIES Amortized cost, unrealized gains and losses, and fair values of investment securities as of December 31, 1997, and 1996 were: - --------------------------------------------------------------------------------
UNREALIZED --------------------- AMORTIZED GROSS GROSS FAIR (in thousands of dollars) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------- AT DECEMBER 31, 1997 U.S. Treasury and Federal Agencies ...... $ 656 $ - $ - $ 656 States and political subdivisions .......... 32,354 471 98 32,727 -------- -------- -------- -------- Total investment securities ......... $ 33,010 $ 471 $ 98 $ 33,383 ======== ======== ======== ======== AT DECEMBER 31, 1996 U.S. Treasury ............ $ 27,317 $ 159 $ 64 $ 27,412 Federal Agencies Mortgage-backed securities .......... 62,539 466 177 62,828 Other agencies ........ 21,703 22 46 21,679 -------- -------- -------- -------- Total U.S. Treasury and Federal Agencies .... 111,559 647 287 111,919 States and political subdivisions .......... 233,458 9,932 725 242,665 Other Securities ......... 118 - - 118 -------- -------- -------- -------- Total investment securities .......... $345,135 $ 10,579 $ 1,012 $354,702 ======== ======== ======== ========
- -------------------------------------------------------------------------------- 4. INVESTMENT SECURITIES (Continued) Amortized cost and fair values by contractual maturity at December 31, 1997, and 1996 were:
- ---------------------------------------------------------------- AMORTIZED FAIR (in thousands of dollars) COST VALUE - ---------------------------------------------------------------- AT DECEMBER 31, 1997 Under 1 year ...................... $ 6,311 $ 6,310 1-D5 years ........................ 14,248 14,375 6-D10 years ....................... 9,605 9,788 Over 10 years ..................... 2,846 2,910 -------- -------- Total .......................... $ 33,010 $ 33,383 ======== ======== AT DECEMBER 31, 1996 Under 1 year ...................... $ 96,886 $ 97,336 1-D5 years ........................ 160,128 165,925 6-D10 years ....................... 80,894 84,141 Over 10 years ..................... 7,227 7,300 -------- -------- Total .......................... $345,135 $354,702 ======== ========
The portfolio of investment securities acquired in the First Michigan acquisition was sold and/or transferred to the available for sale category to maintain Huntington's existing interest rate risk position. At the date of sale/transfer, amortized cost and fair value were $225.3 million and $233.5 million, respectively. - -------------------------------------------------------------------------------- 5. LOANS At December 31, 1997, and 1996, loans were comprised of the following:
- ----------------------------------------------------------------- (in thousands of dollars) 1997 1996 - ----------------------------------------------------------------- Commercial ................... $ 5,270,660 $ 5,129,836 Real estate Construction .............. 863,635 699,013 Commercial ................ 2,370,652 2,138,361 Residential ............... 1,228,446 1,485,568 Consumer Loans ..................... 6,462,716 6,122,730 Leases .................... 1,542,139 1,182,647 ----------- ----------- Total loans ............. $17,738,248 $16,758,155 =========== ===========
Huntington's subsidiaries have granted loans to its executive offcers, directors, and their associates. Such loans were made in the ordinary course of business at the banking subsidiaries' normal credit terms, including interest rate and collateralization, and do not represent more than the normal risk of collection. These loans to related parties are summarized as follows:
- ----------------------------------------------------------------- (in thousands of dollars) 1997 1996 - ----------------------------------------------------------------- Balance, beginning of year . $ 173,491 $ 174,435 Loans made .............. 126,503 55,170 Repayments .............. (46,828) (48,312) Changes due to status of executive offcers and directors ......... (46,195) (7,802) --------- --------- Balance, end of year ....... $ 206,971 $ 173,491 ========= =========
6. ALLOWANCE FOR LOAN LOSSES A summary of the transactions in the allowance for loan losses for the three years ended December 31 follows:
- -------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 - -------------------------------------------------------------------------- Balance, beginning of year $ 230,778 $ 222,487 $ 225,225 Allowance acquired/other . 7,777 1,907 6,827 Loan losses .............. (110,723) (91,007) (62,414) Recoveries of loans previously charged off 22,542 21,020 16,137 Provision for loan losses 107,797 76,371 36,712 --------- --------- --------- Balance, end of year ..... $ 258,171 $ 230,778 $ 222,487 ========= ========= =========
Approximately $34.8 million and $29.3 million of non-performing loans presented in Table 12 of Management's Discussion and Analysis are considered impaired (as defined in FASB Statement No. 114) at December 31, 1997, and 1996, respectively. Included in these amounts are $20.6 million and $11.8 million of impaired loans for which the related allowance for loan losses was $6.4 million and $4.8 million at December 31, 1997, and 1996. Principally as a result of write-downs, $14.2 million and $17.5 million of impaired loans do not have an allowance for loan losses. The average recorded investment in impaired loans during the years ended December 31, 1997, and 1996, was approximately $34.0 million and $31.5 million, respectively. - -------------------------------------------------------------------------------- 7. PREMISES AND EQUIPMENT At December 31, 1997, and 1996, premises and equipment stated at cost were comprised of the following:
- -------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 - -------------------------------------------------------------------------- Land ........................................... $ 58,909 $ 56,343 Buildings ...................................... 298,724 291,873 Leasehold improvements ......................... 93,485 86,776 Equipment ...................................... 355,668 331,107 -------- -------- Total premises and equipment ................ 806,786 766,099 Less accumulated depreciation and amortization . 417,305 385,639 -------- -------- Net premises and equipment ..................... $389,481 $380,460 ======== ========
Depreciation and amortization charged to expense and rental income credited to occupancy expense were as follows:
- -------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 - -------------------------------------------------------------------------- Occupancy expense ................. $15,243 $14,491 $13,372 Equipment expense ................. 26,140 25,001 21,620 ------- ------- ------- Total depreciation and amortization $41,383 $39,492 $34,992 ======= ======= ======= Rental income credited to occupancy expense .............. $14,842 $11,966 $11,497 ======= ======= =======
- -------------------------------------------------------------------------------- 8. SHORT-TERM BORROWINGS At December 31, 1997, and 1996, short-term borrowings were comprised of the following:
- -------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 - -------------------------------------------------------------------------- Federal funds purchased and securities sold under agreements to repurchase .... $3,064,344 $3,309,445 Medium-term notes with original maturities less than one year Parent company ......................... 40,000 140,000 Subsidiary bank ........................ 105,000 505,300 Commercial paper .......................... 40,050 37,418 Other ..................................... 37,277 36,092 ---------- ---------- Total short-term borrowings ............... $3,286,671 $4,028,255 ========== ==========
Information concerning securities sold under agreements to repurchase is summarized as follows:
- -------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 - -------------------------------------------------------------------------- Average balance during the year .......... $1,253,724 $1,200,065 Average interest rate during the year ..... 4.58% 4.41% Maximum month-end balance during the year ................ $1,356,785 $1,382,433
Commercial paper is issued by Huntington Bancshares Financial Corporation, a non-bank subsidiary with principal and interest guaranteed by Huntington Bancshares Incorporated (Parent Company). Huntington has the ability to borrow under a line of credit totaling $200 million to support commercial paper borrowings or other short-term working capital needs. Under the terms of the agreement, a quarterly fee must be paid and there are no compensating balances required. The line is cancelable, by Huntington, upon written notice and terminates August 23, 2000. There were no borrowings under the line in 1997 or 1996. Securities pledged to secure public or trust deposits, repurchase agreements, and for other purposes were $2.1 billion and $2.0 billion at December 31, 1997, and 1996, respectively. - -------------------------------------------------------------------------------- 9. CAPITAL SECURITIES In January 1997, Huntington Capital I, a Delaware statutory business trust (the "Trust") owned by Huntington, issued $200 million of company-obligated mandatorily redeemable capital securities (the "Capital Securities"). All of the common securities of Huntington Capital I are owned by Huntington. The proceeds from the issuance of the Capital Securities ($200 million) and common securities ($6.2 million) were used by Huntington Capital I to purchase from Huntington $206.2 million of Floating Rate Junior Subordinated Debentures. The subordinated debentures are the sole assets of the trust, bear interest at a variable annual rate equal to LIBOR plus .70%, and mature on February 1, 2027. Interest payments made on the capital securities are reported as a component of interest expense on long-term debt. Huntington has fully and unconditionally guaranteed, on a subordinated basis (the "Guarantee"), payment of: (i) any accumulated and unpaid distributions required to be paid on the Capital Securities; (ii) the redemption price with respect to any Capital Securities called for redemption by the Trust; or, (iii) amounts due upon the voluntary or involuntary dissolution or liquidation of the Trust, as set forth in the Guarantee. The Guarantee will apply to the payment of distributions only to the extent that the Trust has suffcient funds available to make such payments. - -------------------------------------------------------------------------------- 10. LONG-TERM DEBT At December 31, 1997, and 1996, long-term debt was comprised of the following:
- ------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 - ------------------------------------------------------------------------------- Subordinated notes, 7 5/8%, maturing in 2003, face value $150,000 at December 31, 1997, and 1996, net of discount ................... $ 149,657 $ 149,587 Subordinated notes, 7 7/8%, maturing in 2002, face value $150,000 at December 31, 1997, and 1996, net of discount ................... 149,376 149,249 Subordinated notes, 6 3/4%, maturing in 2003, face value $100,000 at December 31, 1997, and 1996, net of discount ................... 99,819 99,786 Medium-term notes with original maturities greater than one year Parent company (maturing through 2002) ...... 180,000 205,000 Subsidiary bank (maturing through 2007) ..... 2,007,150 935,000 Federal Home Loan Bank notes maturing through 1999 ....................... 95,500 121,668 Other .......................................... 4,537 5,241 ---------- ---------- Total long-term debt ........................... $2,686,039 $1,665,531 ========== ==========
PARENT COMPANY OBLIGATIONS The 77U8% Notes are not redeemable prior to maturity in 2002, and do not provide for any sinking fund. Interest rate swaps were used by Huntington to convert the Notes to a variable interest rate. At December 31, 1997, the effective interest rate on the synthetically altered Notes was 6.37%. The Medium-term notes had weighted average interest rates of 5.99% and 5.92% at December 31, 1997, and 1996, respectively. SUBSIDIARY OBLIGATIONS The 75U8% Notes and the 63U4% Notes were issued by The Huntington National Bank in 1993. Adjusted for the effects of interest rate swaps, the rates were 5.91% and 6.16% at December 31, 1997. These Notes are not redeemable prior to maturity in 2003, and do not provide for any sinking fund. The Medium-term bank notes had weighted average interest rates of 5.98% and 5.57% at December 31, 1997, and 1996, respectively. The stated interest rates on certain notes have also been modified by interest rate swaps. At December 31, 1997, the weighted average effective interest rate on the synthetically altered Medium-term bank notes was 5.83%. The Federal Home Loan Bank notes mature serially from February 1998 through December 1999, and had a weighted average interest rate of 6.12% and 5.84% at December 31, 1997, and 1996, respectively. These advances cannot be prepaid without penalty. - -------------------------------------------------------------------------------- 10. LONG-TERM DEBT (Continued) The terms of Huntington's long-term debt obligations contain various restrictive covenants including limitations on the acquisition of additional debt in excess of specified levels, dividend payments, and the disposition of subsidiaries. As of December 31, 1997, Huntington was in compliance with all such covenants. The following table summarizes the maturities of Huntington's long-term debt:
- -------------------------------------------------------------- YEAR (in thousands of dollars) - -------------------------------------------------------------- 1998.......................... $1,015,500 1999.......................... 590,000 2000.......................... 205,000 2001.......................... 279,536 2002.......................... 242,150 2003 and thereafter........... 355,000 ---------- 2,687,186 Discount...................... (1,147) ---------- Total......................... $2,686,039 ==========
- -------------------------------------------------------------------------------- 11. OPERATING LEASES At December 31, 1997, Huntington and its subsidiaries were obligated under noncancelable leases for land, buildings, and equipment. Many of these leases contain renewal options, and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specified prices. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses, or proportionately adjusted for increases in the consumer or other price indices. The following summary reflects the future minimum rental payments, by year, required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1997.
- ----------------------------------------------------------------- YEAR (in thousands of dollars) - ----------------------------------------------------------------- 1998 .............................. $ 20,115 1999 .............................. 18,354 2000 .............................. 18,684 2001 .............................. 17,750 2002 .............................. 16,359 2003 and thereafter................ 90,969 -------- Total minimum payments ............ $182,231 ========
Total minimum lease payments have not been reduced by minimum sublease rentals of $61.8 million due in the future under noncancelable subleases. The rental expense for all operating leases, except those with terms of a month or less, was $25.2 million for 1997 compared with $23.0 million in 1996 and $23.6 million in 1995. 12. OFF-BALANCE SHEET TRANSACTIONS In the normal course of business, Huntington is party to financial instruments with varying degrees of credit and market risk in excess of the amounts reflected as assets and liabilities in the consolidated balance sheet. Loan commitments and letters of credit are commonly used to meet the financing needs of customers, while interest rate swaps, purchased options, futures, and forwards are an integral part of Huntington's asset/liability management activities. To a much lesser extent, various financial instrument agreements are entered into to assist customers in managing their exposure to interest rate fluctuations. These customer agreements, for which Huntington counters interest rate risk through offsetting third party contracts, are considered trading activities. The credit risk arising from loan commitments and letters of credit, represented by their contract amounts, is essentially the same as that involved in extending loans to customers, and both arrangements are subject to Huntington's standard credit policies and procedures. Collateral is obtained based on management's credit assessment of the customer and, for commercial transactions, may consist of accounts receivable, inventory, income-producing properties, and other assets. Residential properties are the principal form of collateral for consumer commitments. Notional values of interest rate swaps and other off-balance sheet financial instruments significantly exceed the credit risk associated with these instruments and represent contractual balances on which calculations of amounts to be exchanged are based. Credit exposure is limited to the sum of the aggregate fair value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties. Potential credit losses are minimized through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, collateral agreements, and other contract provisions. At December 31, 1997, Huntington's credit risk from these off-balance sheet arrangements, including trading activities, was approximately $73.2 million. The contract or notional amount of financial instruments with off-balance sheet risk at December 31, 1997, and 1996, is presented in the following table:
- ------------------------------------------------------------------ (in millions of dollars) 1997 1996 - ------------------------------------------------------------------ CONTRACT AMOUNT REPRESENTS CREDIT RISK Commitments to extend credit Commercial ........................ $4,058 $3,540 Consumer .......................... 2,992 2,913 Other ............................. 314 334 Standby letters of credit ........... 677 657 Commercial letters of credit ........ 132 92 NOTIONAL AMOUNT EXCEEDS CREDIT RISK Asset/liability management activities Interest rate swaps ............... 3,194 2,868 Purchased interest rate options ... 679 635 Interest rate forwards and futures 267 179 Trading activities Interest rate swaps ............... 126 298 Interest rate options ............. 53 153 Interest rate futures ............. - 50
- -------------------------------------------------------------------------------- Commitments to extend credit generally have short-term, fixed expiration dates, are variable rate, and contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer's credit quality. These arrangements normally require the payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements. The interest rate risk arising from these financial instruments is insignificant as a result of their predominantly short-term, variable rate nature. Standby letters of credit are conditional commitments issued by Huntington to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most of these arrangements mature within two years. Approximately 46% of standby letters of credit are collateralized, and approximately 86% are expected to expire without being drawn upon. Commercial letters of credit represent short-term, self-liquidating instruments which facilitate customer trade transactions and have maturities of no longer than ninety days. These instruments are normally secured by the merchandise or cargo being traded. Interest rate swaps are agreements between two parties to exchange periodic interest payments that are calculated on a notional principal amount. Huntington enters into swaps to synthetically alter the repricing characteristics of designated earning assets and interest bearing liabilities and, on a much more limited basis, as an intermediary for customers. Because only interest payments are exchanged, cash requirements of swaps are significantly less than the notional amounts. Interest rate futures are commitments to either purchase or sell a financial instrument at a future date for a specified price or yield and may be settled in cash or through delivery of the underlying financial instrument. Forward contracts, used primarily by Huntington in connection with its mortgage banking activities, settle in cash at a specified future date based on the differential between agreed interest rates applied to a notional amount. Huntington also purchases interest rate options (e.g. caps and floors) to manage fluctuating interest rates. Premiums paid for interest rate options grant Huntington the right to receive at specified future dates the amount, if any, by which a specified market interest rate exceeds the fixed cap rate or falls below the fixed floor rate, applied to a notional amount. Exposure to loss from interest rate contracts changes as interest rates fluctuate. For more detailed information concerning off-balance sheet transactions, refer to the "Interest Rate Risk Management" section of Management's Discussion and Analysis. - -------------------------------------------------------------------------------- 13. LEGAL CONTINGENCIES In the ordinary course of business, there are various legal proceedings pending against Huntington and its subsidiaries. The aggregate liabilities, if any, arising from such proceedings would not have a material adverse effect on Huntington's consolidated financial position. - -------------------------------------------------------------------------------- 14. EMPLOYEE BENEFIT PLANS Huntington sponsors a non-contributory defined benefit pension plan covering substantially all employees. The plan provides benefits based upon length of service and compensation levels. The funding policy of Huntington is to contribute an annual amount which is at least equal to the minimum funding requirements but not more than that deductible under the Internal Revenue Code. Plan assets, held in trust, primarily consist of mutual funds. The following table reconciles the funded status of the pension plan at the applicable September 30 measurement dates with the amounts recognized in the consolidated balance sheet at December 31, 1997, and 1996.
- ----------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 - ----------------------------------------------------------------------------- ACTUARIAL PRESENT VALUE OF BENEfiT OBLIGATIONS Vested benefit obligation ................. $ 132,605 $ 107,235 ========= ========= Accumulated benefit obligation$ ........... 143,682 $ 114,271 ========= ========= Projected benefit obligation.................. $ 178,325 $ 163,113 Plan assets, at fair value ................... 194,336 158,903 --------- --------- Projected benefit obligation (less) greater than plan assets .................. (16,011) 4,210 Unrecognized transition asset, net of amortization ....................... 1,986 2,459 Unrecognized net gain ........................ 26,920 20,251 Unrecognized prior service cost .............. 14,905 517 --------- --------- Accrued pension cost ...................... $ 27,800 $ 27,437 ========= =========
The following table shows the components of pension cost recognized in 1997, 1996, and 1995, and the assumptions used in determining the benefit liabilities and costs.
- ---------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 - ---------------------------------------------------------------------------------- NET PENSION COST INCLUDED THE FOLLOWING COMPONENTS Service cost-benefits earned during the period ................. $ 10,698 $ 11,243 $ 10,934 Interest cost on projected benefit obligation ................ 12,502 11,731 10,394 Net amortization and deferral ....... 21,021 (3,508) 15,941 Actual return on plan assets ........ (36,313) (9,099) (26,586) -------- -------- -------- Net pension expense ............... $ 7,908 $ 10,367 $ 10,683 ======== ======== ========
- -------------------------------------------------------------------------------- 14. EMPLOYEE BENEFIT PLANS (CONTINUED) The discount rate used for benefit obligations was 7.50% in 1997, 7.75% in 1996, and 7.50% in 1995. The rate of salary increases was 5.0% in each of the three years. The expected long-term rate of return on plan assets was 8.75% for the same periods. Huntington also sponsors an unfunded Supplemental Executive Retirement Plan, a non-qualified plan that provides certain key offcers of Huntington and its subsidiaries with defined pension benefits in excess of limits imposed by federal tax law. At December 31, 1997, and 1996, the accrued pension cost for this plan totaled $10.5 million and $9.4 million, respectively. Pension expense for this plan was $1.3 million in 1997, 1996, and 1995. Huntington's unfunded defined benefit post-retirement plan provides certain health care and life insurance benefits to retired employees who have attained the age of 55 and have at least 10 years of service. For any employee retiring on or after January 1, 1993, Huntington's contribution is based upon the employee's number of months of service and is limited to the actual cost of coverage. The expected cost of providing these post-retirement benefits is recognized in the financial statements during the employees' active service period. Net periodic post-retirement benefit cost included the following components for the years ended December 31:
- --------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 - --------------------------------------------------------------------------- Service cost ....................... $ 959 $ 1,214 $ 986 Interest cost ...................... 2,386 2,832 2,594 Amortization of transition obligation ........... 1,331 1,331 1,331 Net amortization and deferral ...... (64) 506 363 ------- ------- ------- Net periodic post-retirement benefit cost .................... $ 4,612 $ 5,883 $ 5,274 ======= ======= =======
The following table sets forth the status of the post-retirement benefit obligation at December 31:
- ---------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 - ---------------------------------------------------------------------------------- ACCUMULATED POST-RETIREMENT BENEFIT OBLIGATION Retirees ........................................... $ 21,622 $ 19,038 Fully eligible active plan participants ............ 5,796 5,299 Other active plan participants ..................... 11,723 8,992 Total accumulated post-retirement -------- -------- benefit obligation .............................. 39,141 33,329 Unrecognized net gain ........................... 5,281 8,977 Unrecognized prior service cost ................. (6,474) (5,003) Unrecognized transition obligation ............. (19,679) (21,009) Benefits paid in fourth quarter .................... (628) (491) -------- -------- Accrued post-retirement benefit cost .......... $ 17,641 $ 15,803 ======== ========
The weighted average discount rate used in determining the accumulated post-retirement benefit obligations was 7.50% in 1997, 7.75% in 1996, and 7.50% in 1995. The 1998 health care cost trend rate was projected to be 9.25% for pre-65 participants and 8.00% for post-65 participants compared with estimates of 10.00% and 8.50% in 1997. These rates are assumed to decrease gradually until they reach 5.25% in the year 2004 and remain at that level thereafter. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated post-retirement benefit obligation as of December 31, 1997, by $1.2 million and the aggregate of the service and interest components of net periodic post-retirement benefit cost for 1997 by $171,000. Huntington has a contributory employee stock purchase plan available to eligible employees. Employee contributions of up to 6% of eligible compensation are matched 75% by Huntington. Huntington may also make additional matching contributions up to an additional 25% of employee contributions, at the discretion of the Board of Directors. Eligible employees may contribute in excess of 6% up to an additional 10% on an after tax basis. These additional contributions are not matched by Huntington. The cost of providing this plan, together with the defined contribution plan sponsored by First Michigan prior to the acquisition, was $9.7 million in 1997, $9.0 million in 1996, and $7.4 million in 1995. - -------------------------------------------------------------------------------- 15. INCOME TAXES The following is a summary of the provision for income taxes:
- ---------------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 - ---------------------------------------------------------------------------------------- Currently payable Federal................... $ 115,197 $ 114,183 $ 116,415 State..................... 3,617 3,076 4,556 ----------- ----------- --------- Total current .......... 118,814 117,259 120,971 ----------- ----------- --------- Deferred tax expense (benefit) Federal................... 46,088 34,378 26,484 State..................... 1,599 1,362 (172) ----------- ----------- --------- Total deferred.......... 47,687 35,740 26,312 ----------- ----------- --------- Total provision for income taxes $ 166,501 $ 152,999 $ 147,283 =========== =========== =========
Included in the above amounts was tax expense associated with securities transactions totaling $2.9 million in 1997, $6.2 million in 1996, and $3.3 million in 1995. The following is a reconcilement of income tax expense to the amount computed at the statutory rate of 35%.
- --------------------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 - --------------------------------------------------------------------------------- Pre-tax income computed at the statutory rate ........... $ 160,708 $ 160,043 $ 150,179 Increases (decreases): Tax-exempt interest income ...... (7,101) (7,623) (8,909) State income taxes .............. 3,391 2,885 2,849 Other-net ....................... 9,503 (2,306) 3,164 --------- --------- --------- Provision for income taxes ......... $ 166,501 $ 152,999 $ 147,283 ========= ========= =========
- -------------------------------------------------------------------------------- The significant components of deferred tax assets and liabilities at December 31, 1997, and 1996 are as follows:
- ------------------------------------------------------------------ (in thousands of dollars) 1997 1996 - ------------------------------------------------------------------ Deferred tax assets: Allowance for loan losses ......... $ 85,873 $ 72,494 Securities ........................ - 7,499 Pension and other employee benefits 28,131 24,138 Other ............................. 12,535 10,705 -------- -------- Total deferred tax assets ....... 126,539 114,836 -------- -------- Deferred tax liabilities: Financial instruments ............. 3,736 5,359 Leasefinancing .................... 181,987 120,708 Mortgage servicing rights ......... 14,094 8,575 Premises and equipment ............ 12,201 15,148 Revalued liabilities N net ........ 4,774 5,061 Securities ........................ 8,192 - Other ............................. 14,547 11,908 -------- -------- Total deferred tax liabilities .. 239,531 166,759 -------- -------- Net deferred tax liability ...... $112,992 $ 51,923 ======== ========
- -------------------------------------------------------------------------------- 16. EARNINGS PER SHARE Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for stock options and the conversion impact of convertible equity instruments. The calculation of basic and diluted earnings per share for each of the three years ended December 31 is as follows:
- ----------------------------------------------------------------- (in thousands, except per share) 1997 1996 1995 - ----------------------------------------------------------------- Net income ............... $292,663 $304,269 $281,801 Impact of convertible debt - 13 41 -------- -------- -------- Diluted net income .... $292,663 $304,282 $281,842 ======== ======== ======== Average common shares outstanding .... 190,804 192,492 198,430 Dilutive effect of: Stock options ......... 2,330 1,810 1,490 Convertible debt ...... - 30 93 -------- -------- -------- Diluted common shares outstanding 193,134 194,332 200,013 ======== ======== ======== Earnings per share Basic ................. $ 1.53 $ 1.58 $ 1.42 Diluted ............... $ 1.52 $ 1.57 $ 1.41
Average common shares outstanding and the dilutive effect of stock options and convertible debt have been adjusted for subsequent stock dividends and stock splits, as applicable. - -------------------------------------------------------------------------------- 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 1997, and 1996:
- -------------------------------------------------------------------------------- (in thousands of dollars, except per share data) IQ IIQ IIIQ IVQ - -------------------------------------------------------------------------------- 1997 Interest income ......... $475,874 $503,018 $502,821 $499,760 Interest expense ........ 228,323 240,060 245,663 240,197 -------- -------- -------- -------- Net interest income ..... 247,551 262,958 257,158 259,563 -------- -------- -------- -------- Provision for loan losses 22,380 30,831 28,351 26,235 Securities gains ........ 2,098 3,604 1,242 1,034 Non-interest income ..... 74,633 77,897 94,855 87,476 Non-interest expense .... 183,861 185,805 244,910 188,532 -------- -------- -------- -------- Income before income taxes ......... 118,041 127,823 79,994 133,306 Provision for income taxes ......... 40,862 44,220 38,762 42,657 -------- -------- -------- -------- Net income .............. $ 77,179 $ 83,603 $ 41,232 $ 90,649 ======== ======== ======== ======== Net income per common share (1) Basic............. $.41 $.44 $.22 $.47 Diluted........... $.40 $.43 $.21 $.47
- ----------------------------------------------------------------------------------- (in thousands of dollars, except per share data) IQ IIQ IIIQ IVQ - ----------------------------------------------------------------------------------- 1996 Interest income ............... $438,051 $439,514 $445,453 $452,716 Interest expense .............. 220,945 216,822 219,217 223,664 -------- -------- -------- -------- Net interest income ........... 217,106 222,692 226,236 229,052 -------- -------- -------- -------- Provision for loan losses ..... 14,195 14,160 22,978 25,038 Securities gains .............. 7,106 102 6,172 4,240 Non-interest income ........... 70,632 76,669 75,212 73,930 Non-interest expense .......... 170,012 172,017 168,473 165,008 -------- -------- -------- -------- Income before income taxes ............... 110,637 113,286 116,169 117,176 Provision for income taxes ............... 38,233 37,997 38,725 38,044 -------- -------- -------- -------- Net income .................... $ 72,404 $ 75,289 $ 77,444 $ 79,132 ======== ======== ======== ======== Net income per common share (1) Basic ...................... $ .37 $ .39 $ .40 $ .42 Diluted .................... $ .37 $ .39 $ .40 $ .41 (1) Adjusted for stock dividends and stock splits, as applicable.
- -------------------------------------------------------------------------------- 18. NON-INTEREST INCOME A summary of the components of non-interest income for the three years ended December 31 follows:
- ------------------------------------------------------------------ (in thousands of dollars) 1997 1996 1995 - ------------------------------------------------------------------ Service charges on deposit accounts .... $117,852 $107,669 $ 97,505 Mortgage banking ....... 55,715 43,942 39,309 Trust services ......... 48,102 42,237 37,627 Electronic banking fees 22,656 12,013 6,190 Credit card fees ....... 20,374 23,093 18,757 Investment product sales 19,024 13,950 9,704 Securities gains ....... 7,978 17,620 9,380 Other .................. 51,138 53,539 56,618 -------- -------- -------- TOTAL NON-INTEREST INCOME ............ $342,839 $314,063 $275,090 ======== ======== ========
- -------------------------------------------------------------------------------- 19. NON-INTEREST EXPENSE A summary of the components of non-interest expense for the three years ended December 31 follows:
- ------------------------------------------------------------------- (in thousands of dollars) 1997 1996 1995 - ------------------------------------------------------------------- Salaries ................ $297,415 $273,316 $263,552 Commissions ............. 21,398 14,587 10,347 Employee benefits ....... 70,030 69,289 69,059 Equipment ............... 57,867 50,887 44,646 Net occupancy ........... 49,509 49,676 47,824 Special charges ......... 47,163 - N Advertising ............. 24,662 14,947 13,757 Printing and supplies ... 21,584 19,602 18,103 Credit card and electronic banking ... 14,171 16,355 14,076 Legal and loan collection 13,418 11,106 9,658 FDIC insurance .......... 2,774 1,261 17,974 Other ................... 183,117 154,484 153,065 -------- -------- -------- TOTAL NON-INTEREST EXPENSE ............ $803,108 $675,510 $662,061 ======== ======== ========
- -------------------------------------------------------------------------------- 20. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of Huntington's financial instruments are presented below. Certain assets, the most significant being corporate-owned life insurance and premises and equipment, do not meet the definition of a financial instrument and are excluded from this disclosure. Similarly, mortgage servicing rights and deposit base and other customer relationship intangibles are not considered financial instruments and are not discussed below. Accordingly, this fair value information is not intended to, and does not, represent Huntington's underlying value. Many of the assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by management. These estimations necessarily involve the use of judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.
AT DECEMBER 31, 1997 - -------------------------------------------------------------------------- CARRYING FAIR (in thousands of dollars) AMOUNT VALUE - -------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and short-term assets .... $ 1,691,187 $ 1,691,187 Trading account securities .... 7,082 7,082 Mortgages held for sale ....... 192,948 192,948 Securities .................... 5,742,824 5,743,197 Loans ......................... 17,480,077 17,777,451 Customers' acceptance liability 27,818 27,818 Interest rate contracts: Asset/liability management .. 17,557 42,547 Customer accommodation ...... 2,606 2,606 FINANCIAL LIABILITIES: Deposits ...................... (17,983,718) (18,012,315) Short-term borrowings ......... (3,286,671) (3,286,671) Bank acceptances outstanding .. (27,818) (27,818) Long-term debt ................ (2,686,039) (2,713,831) Capital securities ............ (200,000) (192,726) Interest rate contracts: Asset/liability management .. - (2,554) Customer accommodation ...... (1,859) (1,859)
The terms and short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include cash and due from banks, interest bearing deposits in banks, trading account securities, federal funds sold and securities purchased under resale agreements, customers' acceptance liabilities, short-term borrowings, and bank acceptances outstanding. Loan commitments and letters of credit generally have short-term, variable rate features and contain clauses which limit Huntington's exposure to changes in customer credit quality. Accordingly, their carrying values, which are immaterial at the respective balance sheet dates, are reasonable estimates of fair value.
AT DECEMBER 31, 1997 - -------------------------------------------------------------------------- CARRYING FAIR (in thousands of dollars) AMOUNT VALUE - -------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and short-term assets .... $ 1,095,845 $ 1,095,845 Trading account securities .... 1,873 1,873 Mortgages held for sale ....... 121,422 121,422 Securities .................... 5,554,528 5,564,094 Loans ......................... 16,527,377 16,679,749 Customers' acceptance liability 56,248 56,248 Interest rate contracts: Asset/liability management .. 4,898 27,403 Customer accommodation ...... 4,239 4,239 FINANCIAL LIABILITIES: Deposits ...................... (16,402,312) (16,227,820) Short-term borrowings ......... (4,028,255) (4,028,255) Bank acceptances outstanding .. (56,248) (56,248) Long-term debt ................ (1,665,531) (1,678,498) Interest rate contracts: Asset/liability management .. (8) (11,291) Customer accommodation ...... (3,493) (3,493)
- -------------------------------------------------------------------------------- The following methods and assumptions were used by Huntington to estimate the fair value of the remaining classes of financial instruments: Mortgages held for sale are valued at the lower of aggregate cost or market value primarily as determined using outstanding commitments from investors. Fair values of securities available for sale and investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amount and fair value of securities exclude the fair value of asset/liability management interest rate contracts designated as hedges of securities available for sale. For variable rate loans that reprice frequently, fair values are based on carrying amounts, as adjusted for estimated credit losses. The fair values for other loans are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans with similar terms. The rates take into account the position of the yield curve, as well as an adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an estimate of losses inherent in the loan portfolio. Although not considered financial instruments, lease financing receivables have been included in the loan totals at their carrying amounts. The fair values of demand deposits, savings accounts, and money market deposits are, by definition, equal to the amount payable on demand. The fair values of fixed rate time deposits are estimated by discounting cash flows using interest rates currently being offered on certificates with similar maturities. The fair values of Huntington's fixed rate long-term debt are based upon quoted market prices or, in the absence of quoted market prices, discounted cash flows using rates for similar debt with the same maturities. The carrying amount of variable rate notes approximates fair value. The fair values of interest rate swap agreements and other off-balance sheet interest rate contracts are based upon quoted market prices or prices of similar instruments, when available, or calculated with pricing models using current rate assumptions. - -------------------------------------------------------------------------------- 21. STOCK OPTIONS Huntington sponsors non-qualified and incentive stock option plans covering key employees. Approximately 18.0 million shares have been authorized under the plans, 6.9 million of which were available at December 31, 1997, for future grants. All options granted have a maximum term of ten years. Options granted on or after May 18, 1994, vest ratably over four years; all grants preceding this date became fully exercisable after one year. Huntington has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees' (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of Huntington's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Huntington's stock option activity and related information for the three years ended December 31, is summarized below:
1997 1996 1995 -------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE (in thousands, except per share) OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE - ------------------------------------------------------------ ---------- --------- ----------- --------- ----------- Outstanding at beginning of period ........... 4,688 $13.70 4,624 $11.95 4,558 $10.40 Granted ...................................... 1,203 27.65 1,036 19.38 1,035 15.24 Exercised .................................... (810) 14.80 (917) 11.15 (913) 7.66 Forfeited/Expired ............................ (156) 17.26 (55) 16.23 (56) 15.98 ----- ----- ----- Outstanding at end of period ................. 4,925 $16.81 4,688 $13.70 4,624 $11.95 ===== ===== ===== Exercisable at end of period ................. 2,947 $12.77 2,834 $10.96 2,723 $ 9.95 ===== ===== ===== Weighted average fair value of options granted during the year ......................... $ 7.63 $ 5.52 $ 3.94
Exercise prices for options outstanding as of December 31, 1997, ranged from $3.71 to $32.75. The weighted average remaining contractual life of these options is 6.7 years. The fair value of the options presented above was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1997, 1996, and 1995, respectively: risk-free interest rates of 6.44%, 6.78%, and 6.24%; dividend yields of 2.86%, 3.41%, and 4.11%; volatility factors of the expected market price of Huntington's common stock of .262, .280, and .294; and a weighted average expected option life of 6 years. Because the effect of applying the fair value method to Huntington's stock options results in net income and earnings per share that are not materially different from amounts reported in the consolidated statements of income, pro forma information has not been provided. - -------------------------------------------------------------------------------- 22. REGULATORY MATTERS The bank subsidiaries of Huntington are required to maintain reserve balances with the Federal Reserve Bank. During 1997, the average balances were $104.0 million. Payment of dividends to Huntington by its subsidiary banks is subject to various regulatory restrictions. Regulatory approval is required prior to the declaration of any dividends in excess of available retained earnings. For national banks, the amount of dividends that may be declared without regulatory approval is further limited to the sum of net income for that year and retained net income for the preceding two years, less any required transfers to surplus. Huntington's subsidiary banks could, without regulatory approval, declare dividends in 1998 of approximately $48.8 million plus an additional amount equal to their net income through the date of declaration. The subsidiary banks are also restricted as to the amount and type of loans they may make to Huntington. At December 31, 1997, the subsidiary banks could lend to Huntington $172.5 million, subject to the qualifying collateral requirements defined in the regulations. Huntington and its bank subsidiaries are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a material effect on Huntington's and its bank subsidiaries' financial statements. Capital adequacy guidelines require minimum ratios of 4.00% for Tier I risk-based capital, 8.00% for total risk-based capital, and 3.00% for Tier I leverage. To be considered well capitalized under the regulatory framework for prompt corrective action, the ratios are 6.00%, 10.00%, and 5.00%, respectively. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings of assets and certain off-balance sheet items, and other factors. Management believes, as of December 31, 1997, that Huntington met all capital adequacy requirements. In addition, each bank subsidiary had regulatory capital ratios in excess of the levels established for well capitalized institutions. Presented in the table below are the capital ratios of Huntington and its lead subsidiary, The Huntington National Bank as well as a comparison of the period-end capital balances with the related amounts established by the regulators.
CAPITAL AMOUNTS --------------------------------------------------------- (in millions of dollars) RATIOS ACTUAL MINIMUM WELL CAPITALIZED - ------------------------------------------------------------------------------------------------------------------------ AS OF DECEMBER 31, 1997: Tier I Risk-Based Capital Huntington Bancshares Incorporated ........ 8.83% $1,954 $ 885 $1,328 The Huntington National Bank .............. 6.62 1,456 880 1,321 Total Risk-Based Capital Huntington Bancshares Incorporated ........ 11.68 2,584 1,770 2,213 The Huntington National Bank .............. 11.10 2,443 1,761 2,201 Tier I Leverage Huntington Bancshares Incorporated ........ 7.77 1,954 755 1,258 The Huntington National Bank .............. 5.70 1,456 766 1,276 AS OF DECEMBER 31, 1996: Tier I Risk-Based Capital Huntington Bancshares Incorporated ........ 8.11% $1,615 $ 797 $1,195 The Huntington National Bank .............. 7.93 1,546 780 1,170 Total Risk-Based Capital Huntington Bancshares Incorporated ........ 11.29 2,248 1,594 1,992 The Huntington National Bank .............. 11.40 2,223 1,559 1,949 Tier I Leverage Huntington Bancshares Incorporated ........ 6.80 1,615 713 1,188 The Huntington National Bank .............. 6.65 1,546 698 1,163
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23. HUNTINGTON BANCSHARES INCORPORATED (PARENT COMPANY ONLY) FINANCIAL INFORMATION - -------------------------------------------------------------------------------------------------------------------- BALANCE SHEETS (in thousands of dollars) DECEMBER 31, 1997 1996 - -------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents .................................................... $ 285,926 $ 64,129 Securities available for sale ................................................ 7,635 7,229 Due from subsidiaries Bank subsidiaries ......................................................... 600,578 200,000 Non-bank subsidiaries ..................................................... 10,297 286,936 Investment in subsidiaries on the equity method Bank subsidiaries ......................................................... 1,721,789 1,675,982 Non-bank subsidiaries ..................................................... 29,411 44,357 Excess of cost of investment in subsidiaries over net assets acquired ........ 12,155 28,731 Other assets ................................................................. 89,321 91,415 ---------- ---------- TOTAL ASSETS ........................................................... $2,757,112 $2,398,779 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings ........................................................ $ 80,525 $ 140,011 Long-term debt Subsidiary trust .......................................................... 206,186 -- Unaffliated companies ..................................................... 333,914 358,786 Dividends payable ............................................................ 38,591 28,899 Accrued expenses and other liabilities ....................................... 72,505 85,425 ---------- ---------- Total Liabilities ......................................................... 731,721 613,121 Shareholders' Equity ......................................................... 2,025,391 1,785,658 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................ $2,757,112 $2,398,779 ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF INCOME (in thousands of dollars) YEAR ENDED DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- INCOME Dividends from Bank subsidiaries ...................................................... $ 228,892 $ 348,516 $ 234,676 Non-bank subsidiaries .................................................. 2,961 6,385 7,855 Interest from Bank subsidiaries ...................................................... 18,227 3,482 2,879 Non-bank subsidiaries .................................................. 19,032 11,787 7,577 Other ..................................................................... 1,537 813 826 --------- --------- --------- TOTAL INCOME ........................................................ 270,649 370,983 253,813 --------- --------- --------- EXPENSE Interest on debt .......................................................... 36,128 23,716 15,806 Other ..................................................................... 30,020 18,295 19,052 --------- --------- --------- TOTAL EXPENSE ....................................................... 66,148 42,011 34,858 --------- --------- --------- Income before income taxes and equity in undistributed net income of subsidiaries .............................................. 204,501 328,972 218,955 Income tax benefit ........................................................... (8,630) (13,986) (10,161) --------- --------- --------- Income before equity in undistributed net income of subsidiaries ............. 213,131 342,958 229,116 --------- --------- --------- Equity in undistributed net income of Bank subsidiaries ...................................................... 80,523 (48,616) 47,555 Non-bank subsidiaries .................................................. (991) 9,927 5,130 --------- --------- --------- NET INCOME .......................................................... $ 292,663 $ 304,269 $ 281,801 ========= ========= =========
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23. HUNTINGTON BANCSHARES INCORPORATED (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED) - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net Income ..................................................................... $ 292,663 $ 304,269 $ 281,801 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed net income of subsidiaries .......................... (79,532) 38,689 (52,685) Amortization ................................................................ 3,460 5,285 4,085 Increase in other assets .................................................... (4,961) (26,139) (5,888) Decrease in other liabilities ............................................... (13,942) (18,340) (10,357) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES ................................ 197,688 303,764 216,956 --------- --------- --------- INVESTING ACTIVITIES (Advances to) repayments from subsidiaries ..................................... (71,485) (167,289) 16,539 Decrease (increase) in investments in subsidiaries ............................. 197,263 (1,433) (9,697) Other .......................................................................... (15,000) (4,775) (2,801) --------- --------- --------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES...................... 110,778 (173,497) 4,041 --------- --------- --------- FINANCING ACTIVITIES (Decrease) increase in short-term borrowings ................................... (100,000) 75,000 55,000 Proceeds from issuance of long-term debt ....................................... 200,000 85,000 95,000 Payment of long-term debt ...................................................... (25,000) (346) (50,598) Dividends paid on common stock ................................................. (132,760) (125,379) (118,906) Acquisition of treasury stock .................................................. (56,175) (258,415) (206,556) Proceeds from issuance of treasury stock ....................................... 27,266 43,971 41,557 --------- --------- --------- NET CASH USED FOR FINANCING ACTIVITIES ................................... (86,669) (180,169) (184,503) --------- --------- --------- CHANGE IN CASH AND CASH EQUIVALENTS ...................................... 221,797 (49,902) 36,494 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................... 64,129 114,031 77,537 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR ................................. $ 285,926 $ 64,129 $ 114,031 ========= ========= =========