UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 QUARTERLY PERIOD ENDED JUNE 30, 1998 Commission File Number 0-2525 HUNTINGTON BANCSHARES INCORPORATED MARYLAND 31-0724920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 41 SOUTH HIGH STREET, COLUMBUS, OHIO 43287 Registrant's telephone number (614) 480-8300 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- There were 211,688,612 shares of Registrant's without par value common stock outstanding on July 31, 1998. 1 PART I. FINANCIAL INFORMATION 1. FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) JUNE 30, December 31, June 30, 1998 1997 1997 ----------- ----------- ----------- ASSETS Cash and due from banks............................................. $ 1,151,784 $ 1,142,450 $ 1,105,343 Interest bearing deposits in banks.................................. 278,400 39,618 1,776 Trading account securities.......................................... 30,244 7,082 6,585 Federal funds sold and securities purchased under resale agreements.............................. 707,377 509,119 20,547 Mortgages held for sale............................................. 305,741 192,948 149,568 Securities available for sale - at fair value....................... 4,467,986 5,709,814 5,152,257 Investment securities - fair value $29,898; $33,383; and $55,535, respectively...................................... 29,637 33,010 54,972 Total loans (1)..................................................... 19,061,839 17,738,248 17,821,299 Less allowance for loan losses................................. 286,864 258,171 247,867 ----------- ----------- ----------- Net loans........................................................... 18,774,975 17,480,077 17,573,432 ----------- ----------- ----------- Premises and equipment.............................................. 496,840 389,481 391,502 Customers' acceptance liability..................................... 25,906 27,818 42,573 Accrued income and other assets..................................... 1,918,329 1,199,123 758,578 ----------- ----------- ----------- TOTAL ASSETS........................................................ $28,187,219 $26,730,540 $25,257,133 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Total deposits (1).................................................. $19,666,248 $17,983,718 $17,637,871 Short-term borrowings............................................... 1,655,244 3,141,671 2,503,275 Bank acceptances outstanding........................................ 25,906 27,818 42,573 Medium-term notes................................................... 3,147,150 2,332,150 1,884,400 Subordinated notes and other long-term debt......................... 749,692 498,889 599,398 Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company..................... 300,000 200,000 200,000 Accrued expenses and other liabilities.............................. 509,130 520,903 459,616 ----------- ----------- ----------- Total Liabilities.............................................. 26,053,370 24,705,149 23,327,133 ----------- ----------- ----------- Shareholders' equity Preferred stock - authorized 6,617,808 shares; none outstanding Common stock - without par value; authorized 500,000,000 shares; issued and outstanding 193,279,797; 193,279,797; and 184,008,147 shares, respectively.......................... 1,528,768 1,528,768 1,292,477 Less 853,882; 1,543,371; and 7,076,546 treasury shares, respectively ............................ (22,832) (36,791) (160,557) Capital surplus................................................ 393,296 404,235 455,641 Accumulated other comprehensive income......................... 15,376 14,800 (25,080) Retained earnings.............................................. 219,241 114,379 367,519 ----------- ----------- ----------- Total Shareholders' Equity..................................... 2,133,849 2,025,391 1,930,000 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $28,187,219 $26,730,540 $25,257,133 =========== =========== ===========
(1) See page 10 for detail of total loans and total deposits. See notes to unaudited consolidated financial statements. 2 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Interest and fee income Loans................................................................. $399,134 $409,740 $799,941 $792,708 Securities............................................................ 84,369 90,385 181,540 180,875 Other................................................................. 7,765 2,893 12,267 5,309 -------- -------- -------- -------- TOTAL INTEREST INCOME....................................... 491,268 503,018 993,748 978,892 -------- -------- -------- -------- Interest expense Deposits.............................................................. 162,153 162,498 324,405 310,871 Short-term borrowings................................................. 24,343 37,421 58,165 78,957 Medium-term notes..................................................... 46,236 27,703 87,676 55,584 Subordinated notes and other long-term debt........................... 11,107 12,438 21,225 22,971 -------- -------- -------- -------- TOTAL INTEREST EXPENSE...................................... 243,839 240,060 491,471 468,383 -------- -------- -------- -------- NET INTEREST INCOME......................................... 247,429 262,958 502,277 510,509 Provision for loan and lease losses........................................ 24,595 30,831 46,776 53,211 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........................ 222,834 232,127 455,501 457,298 -------- -------- -------- -------- Total non-interest income (1).............................................. 121,269 81,501 218,036 158,232 Total non-interest expense (1)............................................. 208,291 185,805 406,081 369,666 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 135,812 127,823 267,456 245,864 Provision for income taxes................................................. 43,503 44,220 85,661 85,082 -------- -------- -------- -------- NET INCOME.................................................. $ 92,309 $ 83,603 $181,795 $160,782 ======== ======== ======== ======== PER COMMON SHARE (2) Net income Basic............................................................ $0.44 $0.40 $0.86 $0.77 Diluted.......................................................... $0.43 $0.39 $0.85 $0.76 Cash dividends declared............................................... $0.18 $0.16 $0.36 $0.32 AVERAGE COMMON SHARES (2) Basic............................................................211,599,836 210,481,123 211,489,136 209,244,218 Diluted..........................................................214,663,829 212,798,232 214,237,089 211,578,857
(1) See page 11 for detail of non-interest income and non-interest expense. (2) Adjusted for the ten percent stock dividend distributed July 1998. See notes to unaudited consolidated financial statements. 3
- -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ACCUMULATED OTHER COMMON COMMON TREASURY TREASURY CAPITAL COMPREHENSIVE RETAINED SHARES STOCK SHARES STOCK SURPLUS INCOME EARNINGS TOTAL - -------------------------------- ------ ------ ------- -------- ------- ------------ -------- ----- Six Months Ended June 30, 1997: Balance, beginning of period 182,265 $1,290,968 (9,285) ($204,634) $401,176 ($13,931) $312,079 $1,785,658 Comprehensive Income: Net income 160,782 160,782 Unrealized net holding losses on securities available for sale arising during the period (11,149) (11,149) -------- Total comprehensive income 149,633 -------- Stock issued for acquisition 2,881 65,220 12,560 77,780 Cash dividends declared (67,614) (67,614) Stock options exercised 105 1,797 (957) 840 Treasury shares purchased (1,430) (37,581) (37,581) Treasury shares sold: Shareholder dividend reinvestment plan 534 11,968 2,345 14,313 Employee benefit plans 118 2,673 672 3,345 Pre-merger transactions of pooled subsidiary 1,743 1,509 39,845 (37,728) 3,626 ------- ----------- ------ --------- -------- -------- ------- ---------- Balance, end of period 184,008 $1,292,477 (7,077) ($160,557) $455,641 ($25,080) $367,519 $1,930,000 ======= ========== ====== ========= ======== ======== ======== ========= SIX MONTHS ENDED JUNE 30, 1998: BALANCE, BEGINNING OF PERIOD 193,279 $1,528,768 (1,543) ($36,791) $404,235 $14,800 $114,379 $2,025,391 COMPREHENSIVE INCOME: NET INCOME 181,795 181,795 UNREALIZED NET HOLDING GAINS ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD 576 576 ---------- TOTAL COMPREHENSIVE INCOME 182,371 ---------- STOCK ISSUED FOR ACQUISITION 160 3,883 (3,815) 68 CASH DIVIDENDS DECLARED (76,933) (76,933) STOCK OPTIONS EXERCISED 510 9,597 (7,328) 2,269 TREASURY SHARES SOLD TO EMPLOYEE BENEFIT PLANS 19 479 204 683 ------ ---------- ---- --------- -------- -------- -------- ---------- BALANCE, END OF PERIOD 193,279 $1,528,768 (854) ($22,832) $393,296 $15,376 $219,241 $2,133,849 ======= ========== ==== ========= ======== ======== ======== ==========
See notes to unaudited consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, ----------------------------------------- (in thousands of dollars) 1998 1997 ----------- ----------- OPERATING ACTIVITIES Net Income............................................................... $ 181,795 $ 160,782 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses............................................ 46,776 53,211 Provision for depreciation and amortization.......................... 34,922 30,663 Deferred income tax expense.......................................... 12,265 17,090 Increase in trading account securities............................... (23,162) (4,712) Increase in mortgages held for sale.................................. (112,793) (28,146) Net gains on sales of securities..................................... (17,405) (5,702) Net gains on sales of loans.......................................... (9,857) (1,116) Decrease in accrued income receivable................................ 16,575 5,685 Net increase in other assets......................................... (68,842) (64,195) (Decrease) increase in accrued expenses.............................. (5,954) 3,386 Net (decrease) increase in other liabilities......................... (37,129) 25,672 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 17,191 192,618 ----------- ----------- INVESTING ACTIVITIES (Increase) decrease in interest bearing deposits in banks................ (238,782) 1,642 Proceeds from: Maturities and calls of investment securities.......................... 3,319 67,831 Maturities and calls of securities available for sale.................. 387,959 419,317 Sales of securities ................................................... 2,606,218 1,203,312 Purchases of: Investment securities.................................................. --- (2,962) Securities available for sale.......................................... (1,611,060) (1,153,899) Proceeds from sales of loans............................................. 132,712 25,667 Net loan originations, excluding sales................................... (53,807) (824,684) Proceeds from disposal of premises and equipment......................... 776 6,152 Purchases of premises and equipment...................................... (66,492) (27,433) Proceeds from sales of other real estate................................. 7,058 10,990 Purchase of Bank Owned Life Insurance.................................... (200,000) --- Net cash received (paid) in purchase acquisitions........................ 344,046 (6,665) ----------- ----------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES............. 1,311,947 (280,732) ----------- ----------- FINANCING ACTIVITIES (Decrease) increase in total deposits.................................... (728,747) 721,222 Decrease in short-term borrowings........................................ (1,486,427) (858,425) Proceeds from issuance of long-term debt................................. 300,000 91,049 Payment of long-term debt................................................ (47,538) (42,298) Proceeds from issuance of medium-term notes.............................. 1,020,000 602,500 Payment of medium-term notes............................................. (205,000) (510,000) Proceeds from issuance of preferred capital securities................... 100,000 200,000 Dividends paid on common stock, including pre-merger dividends of pooled subsidiary................................................... (76,786) (67,053) Repurchase of common stock............................................... --- (37,581) Proceeds from issuance of common stock................................... 2,952 22,163 ----------- ----------- NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES............. (1,121,546) 121,577 ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS.............................. 207,592 33,463 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................. 1,651,569 1,092,427 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD....................... $ 1,859,161 $ 1,125,890 =========== ===========
See notes to unaudited consolidated financial statements. 5 - -------------------------------------------------------------------------------- NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- A. Basis of Presentation The accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The Notes to the Consolidated Financial Statements appearing in Huntington's 1997 Annual Report to Shareholders on Form 10-K should be read in conjunction with these interim financial statements. B. Reclassifications Certain amounts in the prior year's financial statements have been reclassified to conform with the 1998 presentation. These reclassifications had no effect on net income. C. Recent Accounting Pronouncements Pursuant to the Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting Comprehensive Income", the Consolidated Statements of Changes in Shareholders' Equity include a new measure called "Comprehensive Income". Comprehensive Income includes net income as well as certain items that are reported directly within a separate component of stockholders' equity that bypass net income. Currently, Huntington's only component of Other Comprehensive Income is the unrealized gains (losses) on securities available for sale. The related before and after tax amounts are as follows ($ in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Unrealized holding losses arising during the period: Gross $ 22,000 $ 63,515 $ 18,296 $(11,413) Related tax expense/(benefit) 7,729 (25,328) 6,407 (3,971) -------- -------- -------- -------- Net 14,271 38,187 11,889 (7,442) -------- -------- -------- -------- Reclassification adjustment for net gains realized during the period: Gross (14,316) (3,604) (17,405) (5,702) Related tax expense 5,011 1,261 6,092 1,995 -------- -------- -------- -------- Net (9,305) (2,343) (11,313) (3,707) -------- -------- -------- -------- Total Other Comprehensive Income (Loss) $ 4,966 $ 35,844 $ 576 $(11,149) ======== ======== ======== ========
6 In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information". The provisions of this Statement require disclosure of financial and descriptive information about an enterprise's operating segments. The Statement defines an operating segment as a component of an enterprise that engages in business activities that generate revenue and incur expense. A segment is further defined as a component whose operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance, and for which discrete financial information is available. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement is effective for fiscal years beginning after December 15, 1997; however, it is not required to be applied for interim reporting in the initial year of application. Accordingly, no segment information is included in the notes to these unaudited consolidated financial statements. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows gains and losses from derivatives to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions for which hedge accounting is applied. Statement No. 133 is effective for fiscal years beginning after June 15, 1999. It may be implemented earlier provided adoption occurs as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). Statement 133 cannot be applied retroactively. This Statement must be applied to (a) all free-standing derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. Huntington has not yet quantified the impact of adopting Statement No. 133. Based on information available at this time, Huntington does not expect it to be material to the consolidated financial statements. D. Acquisitions On June 26, 1998, Huntington completed the acquisition of sixty former Barnett Banks banking offices in Florida from NationsBank Corporation. The acquisition was accounted for as a purchase, and accordingly, the assets acquired and liabilities assumed were recorded at estimated fair value. The acquisition added approximately $1.3 billion in loans and $2.3 billion in deposits. Intangible assets arising from the acquisition totaled approximately $451.1 million. The acquired branches' results of operations have been included in Huntington's consolidated totals from the date of the acquisition only. On September 30, 1997, Huntington completed the acquisition of First Michigan Bank Corporation (First Michigan), a $3.7 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. First Michigan had total loans and deposits of $2.7 billion and $3.1 billion, respectively, and total equity of $286 million at the date of acquisition. The transaction was accounted for as a pooling of interests; accordingly, all financial information appearing in this report, except dividends per share, has been restated to include the results of First Michigan. 7 The separate results of operations for Huntington and First Michigan, adjusted for the ten percent stock dividend distributed July 31, 1998, were as follows ($ in millions, except per share):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1997 JUNE 30, 1997 ------------------ ---------------- Net Interest Income: Huntington $225.2 $436.7 First Michigan 37.8 73.8 ------ ------ Combined $263.0 $510.5 ====== ====== Net Income: Huntington $ 72.5 $139.0 First Michigan 11.1 21.8 ------ ------ Combined $ 83.6 $160.8 ====== ====== Basic earnings per common share outstanding: Huntington $ .41 $ .80 First Michigan .36 .71 ------ ------ Combined $ .40 $ .77 ====== ====== Diluted earnings per common share outstanding: Huntington $ .41 $ .79 First Michigan .36 .70 ------ ------ Combined $ .39 $ .76 ====== ======
E. Trust Preferred Securities In January 1997, Huntington Capital I ("the Trust"), a Delaware statutory business trust owned by Huntington, issued $200 million of company obligated mandatorily redeemable capital securities. The proceeds from the issuance of the capital securities ($200 million) and common securities ($6.2 million) were used by the Trust to purchase from Huntington $206.2 million of Floating Rate Junior Subordinated Debentures. In June 1998, an additional $100 million of company obligated mandatorily redeemable capital securities were issued by Huntington Capital II ("the Series B Trust"), a statutory business trust also owned by Huntington. The proceeds were used by the Series B Trust to purchase from Huntington $103.1 million of Series B Floating Rate Junior Subordinated Debentures. The subordinated debentures are the sole assets of each trust and Huntington owns all of the common securities of the trusts. Interest payments made on the capital securities are reported as a component of interest expense on long-term debt. The subordinated debentures bear interest and mature as follows: Variable Interest Rate Maturity Date ----------------- ------------- Huntington Capital I LIBOR + .70% February 1, 2027 Huntington Capital II LIBOR + .625% June 15, 2028 8 The net proceeds received by Huntington from the sale of the subordinated debentures were used for general corporate purposes. F. 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 periods ended June 30, is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED (In thousands, except JUNE 30, JUNE 30, per share amounts) ------------------------- ----------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net income $ 92,309 $ 83,603 $181,795 $160,782 ======== ======== ======== ======== Average common shares outstanding 211,600 210,481 211,489 209,244 Dilutive effect of stock options 3,064 2,317 2,748 2,335 ------- ------- ------- ------- Diluted common shares outstanding 214,664 212,798 214,237 211,579 ======= ======= ======= ======= Earnings per share Basic $ .44 $ .40 $ .86 $ .77 Diluted $ .43 $ .39 $ .85 $ .76
Average common shares outstanding and the dilutive effect of stock options have been adjusted for subsequent stock dividends and stock splits, as applicable. 9 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- LOAN PORTFOLIO COMPOSITION - -------------------------------------------------------------------------------- (in thousands of dollars)
JUNE 30, December 31, June 30, 1998 1997 1997 ------------ ------------- ------------- Commercial................................................. $ 5,843,190 $ 5,270,660 $ 5,400,980 Real Estate Construction.......................................... 820,015 863,635 833,251 Commercial............................................ 2,281,330 2,370,652 2,249,034 Residential........................................... 1,536,510 1,228,446 1,605,945 Consumer Loans.................................................. 6,885,693 6,462,716 6,305,315 Leases................................................. 1,695,101 1,542,139 1,426,774 ----------- ----------- ----------- Total Loans........................................... $19,061,839 $17,738,248 $17,821,299 =========== =========== ===========
- -------------------------------------------------------------------------------- DEPOSIT COMPOSITION - -------------------------------------------------------------------------------- (in thousands of dollars)
JUNE 30, December 31, June 30, 1998 1997 1997 ------------ ----------- ----------- Demand deposits Non-interest bearing.................................. $ 2,847,307 $ 2,549,518 $ 2,750,391 Interest bearing...................................... 4,618,674 3,762,862 3,342,631 Savings deposits........................................... 3,456,810 3,133,014 3,214,809 Other domestic time deposits............................... 6,694,770 6,115,534 5,927,501 ----------- ----------- ----------- TOTAL CORE DEPOSITS................................... 17,617,561 15,560,928 15,235,332 ----------- ----------- ----------- Certificates of deposit of $100,000 or more................ 2,008,887 1,903,657 2,011,539 Foreign time deposits...................................... 39,800 519,133 391,000 ----------- ----------- ----------- Total Deposits........................................ $19,666,248 $17,983,718 $17,637,871 =========== =========== ===========
10 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- ANALYSIS OF NON-INTEREST INCOME - -------------------------------------------------------------------------------- (in thousands of dollars)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- PERCENT ------------------------ PERCENT 1998 1997 CHANGE 1998 1997 CHANGE ---------- -------- ------- -------- ------- ------- Service charges on deposit accounts ............... $ 32,042 $ 28,841 11.1% $ 62,879 $ 56,435 11.4% Mortgage banking .................................. 15,191 10,157 49.6 29,348 19,154 53.2 Trust services .................................... 12,745 11,814 7.9 25,328 23,959 5.7 Brokerage and insurance income..................... 8,520 6,254 36.2 16,805 13,338 26.0 Electronic banking fees............................ 7,520 6,192 21.4 13,251 10,556 25.5 Credit card fees................................... 5,414 4,523 19.7 10,273 8,718 17.8 Other.............................................. 25,521 10,116 152.3 42,747 20,370 109.9 -------- -------- --------- -------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS.. 106,953 77,897 37.3 200,631 152,530 31.5 -------- -------- --------- -------- Securities gains................................... 14,316 3,604 N.M. 17,405 5,702 N.M. -------- -------- --------- -------- TOTAL NON-INTEREST INCOME ......................... $121,269 $ 81,501 48.8% $218,036 $158,232 37.8% ======== ======== ========= ========
- --------------------------------------------------- ANALYSIS OF NON-INTEREST EXPENSE - --------------------------------------------------- (in thousands of dollars)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- PERCENT ------------------------ PERCENT 1998 1997 CHANGE 1998 1997 CHANGE --------- -------- ----- --------- --------- ------- Personnel and related costs........................ $108,483 $ 97,000 11.8% $ 213,195 $194,241 9.8% Outside data processing and other services......... 14,441 14,351 0.6 31,027 26,918 15.3 Equipment ......................................... 15,688 14,173 10.7 30,837 27,360 12.7 Net occupancy ..................................... 14,063 11,650 20.7 27,502 24,982 10.1 Marketing.......................................... 8,315 7,785 6.8 15,247 16,750 (9.0) Telecommunications................................. 7,450 5,283 41.0 13,473 10,250 31.4 Legal and other professional services.............. 6,234 5,089 22.5 12,022 10,518 14.3 Printing and supplies.............................. 5,611 5,035 11.4 11,372 9,961 14.2 Franchise and other taxes.......................... 5,526 5,335 3.6 11,026 10,575 4.3 Amortization of intangible assets.................. 3,393 3,406 (0.4) 6,786 6,352 6.8 Other.............................................. 19,087 16,698 14.3 33,594 31,759 5.8 -------- ------- -------- ------- TOTAL NON-INTEREST EXPENSE ........................ $208,291 $185,805 12.1% $406,081 $369,666 9.9% ======== ======== ======== ========
N.M. - Not meaningful. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS INTRODUCTION FORWARD-LOOKING STATEMENTS Congress passed the Private Securities Litigation Report 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's expectations. Huntington Bancshares Incorporated (Huntington) desires to provide its shareholders with sound information about past performance and future trends. Consequently, this Quarterly Report, including 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 differ materially from those contained in or implied by Huntington's statements due to 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 successful integration of acquired businesses; the nature and extent of governmental actions and reforms; and 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. COMPLETION OF FLORIDA BRANCH PURCHASE On June 26, 1998, Huntington completed the acquisition of sixty former Barnett Banks banking offices in Florida from NationsBank Corporation. The acquisition was accounted for as a purchase; accordingly, the assets acquired and liabilities assumed were recorded at estimated fair value. The acquisition added approximately $1.3 billion in loans and $2.3 billion in deposits. Intangible assets arising from the acquisition totaled approximately $451.1 million. The acquired branches' results of operations have been included in Huntington's consolidated totals from the date of the acquisition only. OVERVIEW Huntington reported net income of $92.3 million for the second quarter and $181.8 million for the first six months of 1998, up 10.4% and 13.1%, respectively, from the same periods in 1997. Diluted earnings per share for the second quarter of 1998 was $.47, versus $.43 for the same period in 1997, an increase of 9.3%. For the recent six months, diluted earnings per share was $.93, up 10.7% from the first half of last year. After adjusting for the ten percent stock dividend distributed July 31, 1998, diluted earnings per share for the recent three and six months ended June 30, 1998, was $.43 and $.85, respectively, compared with $.39 and $.76 for the same periods in 1997. On a post-stock dividend basis, diluted earnings per share, exclusive of amortization expense related to goodwill and other intangible assets (referred to as "cash basis" or "tangible" results), was $.45 in the recent quarter, and $.41 for the same period one year ago. 12 For the first six months of 1998 and 1997, the cash basis per share amounts were $.88 and $.79, respectively. The following table presents Huntington's return on average equity (ROE) and return on average assets (ROA) on a reported basis as well as a cash basis.
ROE ROA -------------------------------------- ------------------------------------ 2nd Qtr. YTD 2nd Qtr. YTD ---------------- --------------- ---------------- --------------- 1998 1997 1998 1997 1998 1997 1998 1997 ------ ------- ------- ------- ----- ------ ------ ------ REPORTED 17.70% 18.07% 17.72% 17.75% 1.42% 1.33% 1.40% 1.30% CASH BASIS* 21.17% 21.90% 21.13% 21.24% 1.49% 1.40% 1.47% 1.37%
* Unamortized goodwill and other intangible asset amounts excluded from average total assets and shareholders' equity. Total assets were $28.2 billion at June 30, 1998, up 5.4% from year end and 11.6% from second quarter 1997. During the recent quarter, Huntington began to strategically reposition its balance sheet by decreasing its investment securities by $2.0 billion and exiting its out-of-market credit card operations through the sale of approximately $100 million of outstanding receivables. These initiatives, combined with the issuance of $300 million in subordinated debt and $100 million in trust preferred securities, eliminated the need for the proposed common stock offering. Accordingly, Huntington has withdrawn its registration statement previously filed with the Securities and Exchange Commission in connection with the offering. Average total loans outstanding were up 3.9% in the recent quarter and 5.2% in the first six months of the year versus the same periods one year ago, after adjusting for the impact of single-family residential real estate loans sold in the past several months. Loan volumes improved somewhat in the second quarter but growth remains slower than expected due to competitive pressures and large commercial loan prepayments. An industry-wide increase in residential real estate refinancing negatively impacted loan growth in the consumer portfolio as well, particularly in Huntington's home equity lending products. Huntington believes it is crucial to maintain its pricing discipline in the lending process. Accordingly, should current trends in the marketplace continue, future loan growth may also be suppressed. Average core deposits increased 3.4% and 5.3% in the respective periods, fueled by 7.2% growth in transaction accounts. LINES OF BUSINESS 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. The process 13 is designed around Huntington's organizational and management structure, and accordingly, the results are not necessarily comparable with similar information published by other financial institutions. Results are revised, as applicable, to reflect enhancements to Huntington's profitability reporting system and changes in organizational structure. For a detailed description of the lines of business, please refer to Huntington's Annual Report on Form 10-K for the year ended December 31, 1997. The following summary contains selected financial information by business segment for the three and six months ended June 30, 1998 (in thousands of dollars):
THREE MONTHS ENDED JUNE 30, 1998 -------------------------------------------------------------- Average Average Revenues Net Income Total Assets Total Deposits -------- ---------- ------------ -------------- Retail Banking $200,584 $38,550 $ 7,666,550 $15,216,322 Corporate Banking 78,526 24,532 6,048,646 973,444 Dealer Sales 40,278 10,152 5,131,435 65,855 Private Financial Group 19,914 5,849 588,465 508,807 Treasury / Other 29,396 13,226 6,636,672 689,122 -------- ------- ----------- ------------- Total $368,698 $92,309 $26,071,768 $17,453,550 ======== ======= =========== =============
SIX MONTHS ENDED JUNE 30, 1998 --------------------------------------------------------------- Average Average Revenues Net Income Total Assets Total Deposits -------- ---------- ------------ -------------- Retail Banking $397,635 $ 78,628 $ 8,112,062 $15,184,857 Corporate Banking 144,510 44,318 5,536,848 946,721 Dealer Sales 83,663 21,991 5,075,524 61,353 Private Financial Group 39,793 11,915 589,280 506,073 Treasury / Other 54,712 24,943 6,886,606 768,798 -------- ------- ----------- ----------- Total $720,313 $181,795 $26,200,320 $17,467,802 ======== ======== =========== ===========
RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income for the three and six months ended June 30, 1998, was $247.4 million and $502.3 million, respectively, a decrease of 5.9% and 1.6% when compared with the same periods last year. The decrease was primarily attributable to a decline in earning asset yields, as the highly competitive marketplace continues to erode loan margins across much of the banking industry. The net interest margin, on a fully tax equivalent basis, was 4.23% during the three months just ended compared with 4.54% in the second quarter of 1997. On a year-to-date 14 basis, the net interest margin dropped from 4.47% a year ago to 4.27% for 1998. Management expects margin compression to be a continuing challenge in the ensuing quarters which may continue to depress growth in net interest income. PROVISION FOR LOAN LOSSES The provision for loan losses was $24.6 million in the second quarter of 1998, down from $30.8 million in the same period of 1997. The provision for the first half of the year was $46.8 million, compared with $53.2 million for the first six months of 1997. Annualized net charge-offs as a percentage of average total loans were .41% for the recent three months, compared with .56% in the same period last year and .50% for full year 1997. NON-INTEREST INCOME Excluding securities gains, noninterest income was $107.0 million and $200.6 million, respectively, in the recent three and six month periods. Noninterest income continues to be a growing source of revenue for Huntington, as it represented 28.3% of total (core basis) revenues in the recent three months, versus 22.8% in the comparable period one year ago. When compared with the respective 1997 periods, improvements occurred in all categories, led by mortgage banking, brokerage, and electronic banking income. Mortgage loan originations continued to be strong with volume up 85% from the same quarter a year ago. Year-to-date loan production of $1.2 billion nearly equals the total of all mortgage loans closed in 1997. Income from Bank Owned Life Insurance was $7.2 million and $12.5 million, respectively, in the recent three months and first half of the year. Huntington owned no such policies in the comparable periods of 1997. Also included in the recent quarter's results is a gain of $9.5 million from the aforementioned sale of Huntington's out-of-market credit card portfolio. NON-INTEREST EXPENSE Noninterest expense totaled $208.3 million in the second quarter and $406.1 million for the first six months of 1998, increases of 12.1% and 9.9% respectively, over the same periods in 1997. Much of the increase is attributable to volume-driven expenses such as higher sales commissions related to the growth in fee income and increased telecommunications costs resulting from expansion of Huntington's ATM network. The increase was also due, in part, to "Year 2000" expenses related to professional fees for outside services (primarily programming) as well as internal staff costs that have been incurred to alter programs that have time-sensitive software which may recognize a "00" date as the year 1900 versus 2000. These costs are expensed as they are incurred. 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 also adversely impact Huntington. Consequently, Huntington is communicating with customers, suppliers, and others to identify any potential problems. 15 Huntington's management estimates an additional $8.0 million of Year 2000 costs will be incurred in the future to get Huntington's systems fully compliant. These costs, however, are not expected to materially impact Huntington's results of operations in any one period. 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, and futures and options--as well as numerous trading exchanges. In addition, dealers in over-the-counter financial instruments provide availability of interest rate swaps as needed. Measurement and monitoring of interest rate risk is an ongoing process. A key element in this process is Huntington's estimation of the amount that net interest income will change over a twelve to twenty-four month period given a directional shift in interest rates. The income simulation model used by Huntington captures all assets, liabilities, and off-balance sheet financial instruments, accounting for significant variables that are believed to be affected by interest rates. These include prepayment speeds on mortgages and consumer installment loans, cash flows of loans and deposits, principal amortization on revolving credit instruments, and balance sheet growth assumptions. The model also captures embedded options, for example, 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. Management believes the model provides a reasonably accurate estimate of Huntington's interest rate risk exposure at any point in time, even though these assumptions are inherently uncertain. This information is regularly shared with the Board of Directors. At June 30, 1998, the results of Huntington's interest sensitivity analysis indicated that net interest income would be relatively unchanged by a 100 basis point increase or a 100-200 basis point decrease in the federal funds rate (assuming the change occurs evenly over the next year and that corresponding changes in other market rates occur as forecasted). If interest rates rose 200 basis points, net interest income would be expected to decrease by 1.8%. Active interest rate risk management necessitates the use of various types of off-balance sheet financial instruments, primarily interest rate swaps. Risk 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, 16 interest rate caps and floors, options, and forward rate agreements are used to control financial risk effectively. Off-balance sheet instruments perform identically to similar cash instruments but are often preferable because they require less capital while preserving access to the marketplace. The following table illustrates the approximate market values, estimated maturities, and weighted average rates of the interest rate swaps used by Huntington in its interest rate risk management program at June 30, 1998.
Average Average Rate Notional Maturity Market ------------------ (Dollars in millions) Value (years) Value Receive Pay ------- -------- ------ ------- --- ASSET CONVERSION SWAPS Received fixed $ 625 1.41 $ 1.3 6.19% 5.69% ======= ===== LIABILITY CONVERSION SWAPS Receive fixed $2,580 2.81 $29.1 6.25% 5.72% Receive fixed-amortizing 175 1.34 (0.2) 5.63% 5.66% Pay fixed 400 0.40 0.5 5.75% 5.50% ------ ----- TOTAL LIABILITY CONVERSION SWAPS $3,155 2.42 $29.4 6.16% 5.69% ====== ====== BASIS PROTECTION SWAPS $ 785 0.79 $(0.3) 5.74% 5.79% ======= ======
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. Management made no assumptions regarding future changes in interest rates with respect to the variable rate information and the indexed amortizing swap maturities presented in the table above. The pay rates on Huntington's receive-fixed swaps vary based on movements in the applicable London interbank offered rate (LIBOR). Asset conversion swaps and liability conversion swaps with notional values of $350 million and $450 million, respectively, have embedded written LIBOR-based call options. 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 that provide for both parties to receive interest payments according to different rate indices and are used to protect against changes in spreads between market rates. The receive and pay amounts applicable to Huntington's basis swaps are based predominantly on LIBOR. The contractual interest payments are based on the notional values of the swap portfolio. These notional values do not represent direct credit exposures. At June 30, 1998, Huntington's credit risk from interest rate swaps used for asset/liability management purposes was $98.7 17 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. 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 $325 million at June 30, 1998. 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 Huntington's operations. Accordingly, they have been excluded from the above discussion of off-balance sheet financial instruments and the related table. 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 as well as excessive industry and 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. Huntington continues to compare favorably with its peers in terms of asset quality. 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 $101.7 million at June 30, 1998. Non-performing loans represented .42% of total loans, and non-performing assets as a percentage of total loans and other real estate were only .53%, as of this same date. Loans past due ninety days or more but continuing to accrue interest, including consumer and residential real estate credits were $50.6 million at June 30, 1998. 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 to evaluate 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 historic loss experience, prevailing economic conditions, and other relevant factors. The reserve ratio increased to 1.50% at the recent quarter end versus 1.46% at December 1997 and 1.39% one year ago. At June 30, 1998, the ALL covered non-performing loans 3.6 times. When the ALL is combined with the allowance for other real estate owned, the reserves were 281% of total non-performing assets. 18 CAPITAL Huntington recognizes the importance of managing capital and continually strives to maintain an appropriate balance between capital adequacy and returns to shareholders. 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. Capital is managed at each subsidiary based upon the respective risks and growth opportunities, as well as regulatory requirements. Huntington's ratio of average equity to average assets was 8.02% in the recent quarter compared with 7.35% in the same three months one year ago. For the six month period, the ratio was 7.90%, up from 7.33% in the first half of 1997. At June 30, 1998, Huntington's Tier 1 risk-based capital ratio was 7.22%, its total risk-based capital ratio was 11.05%, and its Tier 1 leverage ratio was 6.76%. Huntington's two bank subsidiaries also had regulatory capital ratios in excess of the levels established for "well-capitalized" institutions. The Board of Directors authorized Huntington, on February 21, 1996, to repurchase up to 13.3 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 benefit plans as well as for other corporate purposes. The repurchase program is currently suspended but Huntington has approximately 2.9 million shares remaining under the authorization. 19 - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- (in thousands, except per share amounts)
- ------------------------------------------------------------- -------------- -------------- ------------- THREE MONTHS ENDED JUNE 30, 1998 1997 % Change - ------------------------------------------------------------- -------------- -------------- ------------- NET INCOME........................................................ $ 92,309 $ 83,603 10.4% PER COMMON SHARE AMOUNTS (1) Net income Basic................................................... $ 0.44 $ 0.40 10.0 Diluted................................................. $ 0.43 $ 0.39 10.3 Cash dividends declared...................................... $ 0.18 $ 0.16 12.5 AVERAGE COMMON SHARES OUTSTANDING (1)............................. 211,600 210,481 0.5 KEY RATIOS Return on: Average total assets......................................... 1.42% 1.33% 6.8 Average shareholders' equity................................. 17.70% 18.07% (2.0) Efficiency ratio.................................................. 58.97% 54.09% 9.0 Average equity/average assets..................................... 8.02% 7.35% 9.1 Net interest margin............................................... 4.23% 4.54% (6.8) TANGIBLE OR "CASH BASIS" RATIOS (2) Per Common Share Amounts (1) Net income Basic................................................... $ 0.45 $ 0.41 9.8 Diluted................................................. $ 0.45 $ 0.41 9.8 Return on: Average total assets......................................... 1.49% 1.40% 6.4 Average shareholders' equity................................. 21.17% 21.90% (3.3) - ------------------------------------------------------------- -------------- -------------- ------------- SIX MONTHS ENDED JUNE 30, 1998 1997 % Change - ------------------------------------------------------------- -------------- -------------- ------------- NET INCOME........................................................ $181,795 $160,782 13.1% PER COMMON SHARE AMOUNTS (1) Net income Basic................................................... $ 0.86 $ 0.77 11.7 Diluted................................................. $ 0.85 $ 0.76 11.8 Cash dividends declared...................................... $ 0.36 $ 0.32 12.5 AVERAGE COMMON SHARES OUTSTANDING (1)............................. 211,489 209,244 1.1 KEY RATIOS Return on: Average total assets......................................... 1.40% 1.30% 7.7 Average shareholders' equity................................. 17.72% 17.75% (0.2) Efficiency ratio.................................................. 57.16% 55.33% 3.3 Average equity/average assets..................................... 7.90% 7.33% 7.7 Net interest margin............................................... 4.27% 4.47% (4.5) TANGIBLE OR "CASH BASIS" RATIOS (2) Per Common Share Amounts (1) Net income Basic................................................... $ 0.89 $ 0.80 11.2 Diluted................................................. $ 0.88 $ 0.79 11.4 Return on: Average total assets......................................... 1.47% 1.37% 7.3 Average shareholders' equity................................. 21.13% 21.24% (0.5) Period-End Shares Outstanding (1)................................. 211,669 210,554 0.5 Shareholders' Equity Per Common Share (1)......................... $ 10.08 $ 9.17 9.9
(1) Adjusted for the ten percent stock dividend distributed July 1998. (2) Tangible or "Cash Basis" net income excludes amortization of goodwill and other intangibles. Related asset amounts excluded from total assets and shareholders' equity. 20 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- INVESTMENT SECURITIES - AMORTIZED COST & FAIR VALUES BY MATURITY AT JUNE 30, 1998 AND DECEMBER 31, 1997 - --------------------------------------------------------------------------------
(in thousands of dollars) JUNE 30, 1998 December 31, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- AMORTIZED COST FAIR VALUE Amortized Cost Fair Value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and Federal Agencies 1-5 years................................. $ 656 $ 656 $ 656 $ 656 ------- ------- ------- ------- Total.................................. 656 656 656 656 ------- ------- ------- ------- States and political subdivisions Under 1 year.............................. 6,266 6,232 6,311 6,310 1-5 years................................. 12,232 12,330 13,592 13,719 6-10 years................................ 8,222 8,380 9,605 9,788 Over 10 years............................. 2,261 2,300 2,846 2,910 ------- ------- ------- ------- Total.................................. 28,981 29,242 32,354 32,727 ------- ------- ------- ------- Total Investment Securities.................... $29,637 $29,898 $33,010 $33,383 ======= ======= ======= =======
21 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE - AMORTIZED COST & FAIR VALUES BY MATURITY AT JUNE 30, 1998 AND DECEMBER 31, 1997 - --------------------------------------------------------------------------------
(in thousands of dollars) JUNE 30, 1998 December 31, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- AMORTIZED COST FAIR VALUE Amortized Cost Fair Value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Under 1 year......................... $ 2,199 $ 2,221 $ 1,001 $ 1,012 1-5 years............................ 7,917 8,064 409,364 407,936 6-10 years........................... 451,750 450,868 320,497 320,726 ---------- ---------- ---------- ---------- Total............................. 461,866 461,153 730,862 729,674 ---------- ---------- ---------- ---------- Federal agencies Mortgage-backed securities Under 1 year......................... 3 3 2,223 2,216 1-5 years............................ 223,520 222,401 169,877 170,177 6-10 years........................... 22,086 22,443 497,496 494,016 Over 10 years........................ 860,067 868,963 698,906 705,031 ---------- ---------- ---------- ---------- Total............................. 1,105,676 1,113,810 1,368,502 1,371,440 ---------- ---------- ---------- ---------- Other agencies Under 1 year......................... 998 996 984 992 1-5 years............................ 1,057,368 1,061,400 1,590,592 1,594,409 6-10 years........................... 551,022 552,064 787,682 792,359 Over 10 years........................ 549,453 551,016 509,713 512,160 ---------- ---------- ---------- ---------- Total............................. 2,158,841 2,165,476 2,888,971 2,899,920 ---------- ---------- ---------- ---------- Other Under 1 year......................... 8,408 8,370 13,940 13,925 1-5 years............................ 215,949 219,427 211,943 214,772 6-10 years........................... 219,042 223,763 199,849 205,771 Over 10 years........................ 266,059 268,420 210,688 213,183 Marketable equity securities......... 8,359 7,567 62,164 61,129 ---------- ---------- ---------- ---------- Total............................. 717,817 727,547 698,584 708,780 ---------- ---------- ---------- ---------- Total Securities Available for Sale....... $4,444,200 $4,467,986 $5,686,919 $5,709,814 ========== ========== ========== ==========
22 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- LOAN LOSS EXPERIENCE - --------------------------------------------------------------------------------
(in thousands of dollars) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- ALLOWANCE FOR LOAN LOSSES, BEGINNING OF PERIOD.............. $258,262 $241,647 $258,171 $230,778 Allowance of assets acquired/other.......................... 22,042 149 22,042 6,177 Loan losses................................................. (28,855) (30,281) (56,421) (53,005) Recoveries of loans previously charged off.................. 10,820 5,521 16,296 10,706 Provision for loan losses................................... 24,595 30,831 46,776 53,211 -------- -------- -------- -------- ALLOWANCE FOR LOAN LOSSES END OF PERIOD..................... $286,864 $247,867 $286,864 $247,867 ======== ======== ======== ======== AS A % OF AVERAGE TOTAL LOANS Net loan losses--annualized............................... 0.41% 0.56% 0.46% 0.49% Provision for loan losses--annualized..................... 0.55% 0.70% 0.53% 0.62% Allowance for loan losses as a % of total loans............. 1.50% 1.39% 1.50% 1.39% Net loan loss coverage (1).................................. 8.89x 6.41x 7.83x 7.07x
(1) Income before taxes and the provision for loan losses to net loan losses. - -------------------------------------------------------------------------------- NON-PERFORMING ASSETS AND PAST DUE LOANS - -------------------------------------------------------------------------------- (Quarter-End) (in thousands of dollars)
1998 1997 ------------------------- ---------------------------------------- IIQ IQ IVQ IIIQ IIQ --------- -------- -------- -------- -------- Non-accrual loans............................. $ 75,367 $79,888 $65,981 $72,385 $61,105 Renegotiated loans............................ 4,770 3,173 5,822 6,069 4,449 -------- ------- ------- ------- ------- TOTAL NON-PERFORMING LOANS.................... 80,137 83,061 71,803 78,454 65,554 Other real estate, net........................ 21,516 12,005 15,343 13,762 14,434 -------- ------- ------- ------- ------- TOTAL NON-PERFORMING ASSETS................... $101,653 $95,066 $87,146 $92,216 $79,988 ======== ======= ======= ======= ======= NON-PERFORMING LOANS AS A % OF TOTAL LOANS............................ 0.42% 0.47% 0.40% 0.44% 0.37% NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND OTHER REAL ESTATE...... 0.53% 0.54% 0.49% 0.52% 0.45% ALLOWANCE FOR LOAN LOSES AS A % OF NON-PERFORMING LOANS........................ 357.97% 310.93% 345.20% 365.65% 378.11% ALLOWANCE FOR LOAN LOSSES AND OTHER REAL ESTATE AS A % OF NON-PERFORMING ASSETS...... 280.64% 270.07% 282.61% 308.33% 306.51% ACCRUING LOANS PAST DUE 90 DAYS OR MORE....... $ 50,614 $64,959 $49,608 $43,120 $40,967 ======== ======= ======= ======= =======
23 - -------------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES (QUARTERLY DATA) - --------------------------------------------------------------------------------
Fully Tax Equivalent Basis (1) 2ND QUARTER 1998 1ST QUARTER 1998 ----------------------- ----------------------- (in millions of dollars) AVERAGE YIELD/ AVERAGE YIELD/ BALANCE RATE BALANCE RATE ----------- ------- ----------- ------- ASSETS Interest bearing deposits in banks..................................... $ 8 5.26% $ 9 5.35% Trading account securities............................................. 12 5.81 8 5.48 Federal funds sold and securities purchased under resale agreements.... 168 5.63 21 6.57 Mortgages held for sale................................................ 282 7.08 219 7.24 Securities: Taxable.......................................................... 5,107 6.34 5,906 6.35 Tax exempt....................................................... 225 9.27 237 9.23 ------- ------- Total Securities............................................ 5,332 6.47 6,143 6.46 ------- ------- Loans: Commercial........................................................ 5,482 8.46 5,306 8.58 Real Estate Construction................................................. 816 8.73 823 8.85 Mortgage..................................................... 3,444 8.62 3,520 8.65 Consumer Loans........................................................ 6,474 8.82 6,428 8.96 Leases....................................................... 1,627 7.15 1,564 7.13 ------- ------- Total Consumer loans......................................... 8,101 8.48 7,992 8.61 ------- ------- Total Loans............................................................ 17,843 8.51 17,641 8.78 ------- ------- Allowance for loan losses/loan fees.................................... 266 265 ------- ------- Net loans.............................................................. 17,577 8.99 17,376 9.20 ------- ------- Total earning assets................................................... 23,645 8.37% 24,041 8.48% ------- ------- Cash and due from banks................................................ 907 917 All other assets....................................................... 1,786 1,637 ------- ------- TOTAL ASSETS........................................................... $26,072 $26,330 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Core deposits Non-interest bearing deposits..................................... $ 3,113 $ 2,979 Interest bearing demand deposits.................................. 3,216 2.72% 3,250 2.68% Savings deposits.................................................. 3,099 3.51 3,028 3.44 Other domestic time deposits...................................... 5,985 5.62 6,093 5.64 ------- ------- Total core deposits.......................................... 15,413 4.33 15,350 4.32 ------- ------- Certificates of deposit of $100,000 or more............................ 1,909 5.74 1,935 5.78 Foreign time deposits.................................................. 132 5.80 198 5.85 ------- ------- Total deposits.................................................... 17,454 4.53 17,483 4.54 ------- ------- Short-term borrowings.................................................. 2,177 4.97 2,656 5.16 Medium-term notes...................................................... 3,222 5.71 2,914 5.77 Subordinated notes and other long-term debt, including preferred capital securities.............................. 624 6.13 691 5.85 ------- ------- Interest bearing liabilities...................................... 20,364 4.80% 20,765 4.83% ------- ------- All other liabilities.................................................. 503 539 Shareholders' equity................................................... 2,092 2,047 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $26,072 $26,330 ======= ======= Net interest rate spread............................................... 3.57% 3.65% Impact of non-interest bearing funds on margin......................... 0.66% 0.65% NET INTEREST MARGIN.................................................... 4.23% 4.30%
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate. 24 --------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES (QUARTERLY DATA) ---------------------------------------------------------------------------
4th Quarter 1997 3rd Quarter 1997 2nd Quarter 1997 -------------------- ---------------------- ---------------------- Average Yield/ Average Yield/ Average Yield/ Balance Rate Balance Rate Balance Rate ------- ------ ------- ------ ------- ------ $ 5 5.37% $ 17 5.51% $ 2 5.68% 12 5.89 8 5.90 11 5.67 20 5.48 75 5.50 39 5.71 177 8.27 146 7.30 115 7.63 5,308 6.37 5,241 6.36 5,422 6.36 246 9.39 255 9.10 275 9.05 ------- ------- ------- 5,554 6.51 5,496 6.49 5,697 6.50 ------- ------- ------- 5,312 8.55 5,264 8.65 5,405 8.65 875 8.93 862 9.10 788 9.17 3,639 8.65 3,865 8.72 3,845 8.74 6,441 9.22 6,366 9.15 6,242 9.24 1,521 7.43 1,465 7.53 1,382 7.63 ------- ------- ------- 7,962 8.88 7,831 8.85 7,624 8.95 ------- ------- ------- 17,788 8.74 17,822 8.77 17,662 8.82 ------- ------- ------- 268 254 250 ------- ------- ------- 17,520 9.14 17,568 9.18 17,412 9.32 ------- ------- ------- 23,556 8.51% 23,564 8.52% 23,526 8.62% ------- ------- ------- 951 905 920 1,190 1,132 1,042 ------- ------- ------- $25,429 $25,347 $25,238 ======= ======= ======= $ 2,954 $ 2,775 $ 2,739 3,257 2.61% 3,193 2.78% 3,239 2.55% 3,017 3.40 3,048 3.19 3,121 3.34 6,089 5.66 5,995 5.65 5,809 5.61 ------- ------- ------- 15,317 4.31 15,011 4.29 14,908 4.21 ------- ------- ------- 2,004 5.79 2,085 5.76 1,940 5.68 248 5.91 379 5.83 501 5.79 ------- ------- ------- 17,569 4.54 17,475 4.54 17,349 4.46 ------- ------- ------- 2,424 5.22 2,692 5.42 2,897 5.24 2,189 5.96 1,915 6.03 1,878 5.98 704 6.23 793 6.23 777 6.42 ------- ------- ------- 19,932 4.81% 20,100 4.83% 20,162 4.77% ------- ------- ------- 570 528 481 1,973 1,944 1,856 ------- ------- ------- $25,429 $25,347 $25,238 ======= ======= ======= 3.70% 3.69% 3.85% 0.74% 0.72% 0.69% 4.44% 4.41% 4.54%
25 - -------------------------------------------------------------------------------- SELECTED QUARTERLY INCOME STATEMENT DATA - --------------------------------------------------------------------------------
1998 1997 -------------------------- ------------------------------------------- (in thousands of dollars, except per share amounts) IIQ IQ IVQ IIIQ IIQ - ---------------------------------------------------- -------- -------- -------- -------- -------- TOTAL INTEREST INCOME.............................. $491,268 $502,480 $499,760 $502,821 $503,018 TOTAL INTEREST EXPENSE............................. 243,839 247,632 240,197 245,663 240,060 -------- -------- -------- -------- -------- NET INTEREST INCOME................................ 247,429 254,848 259,563 257,158 262,958 Provision for loan losses.......................... 24,595 22,181 26,235 28,351 30,831 -------- -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........................ 222,834 232,667 233,328 228,807 232,127 -------- -------- -------- -------- -------- Service charges on deposit accounts ............... 32,042 30,837 31,035 30,382 28,841 Mortgage banking .................................. 15,191 14,157 15,889 20,672 10,157 Trust services .................................... 12,745 12,583 12,019 12,124 11,814 Brokerage and insurance income..................... 8,520 8,285 6,131 7,614 6,254 Electronic banking fees............................ 7,520 5,731 6,153 5,947 6,192 Credit card fees................................... 5,414 4,859 6,583 5,073 4,523 Other.............................................. 25,521 17,226 9,666 13,043 10,116 -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS.. 106,953 93,678 87,476 94,855 77,897 -------- -------- -------- -------- -------- Securities gains................................... 14,316 3,089 1,034 1,242 3,604 -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME ......................... 121,269 96,767 88,510 96,097 81,501 -------- -------- -------- -------- -------- Personnel and related costs........................ 108,483 104,712 97,224 101,323 97,000 Outside data processing and other services......... 14,441 16,586 16,745 14,450 14,351 Equipment ......................................... 15,688 15,149 16,004 14,503 14,173 Net occupancy ..................................... 14,063 13,439 11,755 12,772 11,650 Marketing.......................................... 8,315 6,932 8,187 7,845 7,785 Telecommunications................................. 7,450 6,023 5,636 5,642 5,283 Legal and other professional services.............. 6,234 5,788 8,318 6,095 5,089 Printing and supplies.............................. 5,611 5,761 6,239 5,384 5,035 Franchise and other taxes.......................... 5,526 5,500 4,576 4,685 5,335 Amortization of intangible assets.................. 3,393 3,393 3,285 3,382 3,406 Special charges.................................... --- --- --- 47,163 --- Other.............................................. 19,087 14,507 10,563 21,666 16,698 -------- -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE ....................... 208,291 197,790 188,532 244,910 185,805 -------- -------- -------- --------- -------- INCOME BEFORE INCOME TAXES ....................... 135,812 131,644 133,306 79,994 127,823 PROVISION FOR INCOME TAXES ....................... 43,503 42,158 42,657 38,762 44,220 --------- -------- -------- -------- -------- NET INCOME ....................................... $ 92,309 $ 89,486 $ 90,649 $ 41,232 $ 83,603 ======== ======== ======== ======== ======== PER COMMON SHARE (1) Net income Basic......................................... $ 0.44 $ 0.42 $ 0.43 $ 0.20 $ 0.40 Diluted....................................... $ 0.43 $ 0.42 $ 0.42 $ 0.19 $ 0.39 Cash Dividends Declared........................... $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.16 FULLY TAX EQUIVALENT MARGIN: Net Interest Income ............................... $247,429 $254,848 $259,563 $257,158 $262,958 Tax Equivalent Adjustment (2) ..................... 2,581 2,655 2,754 3,115 2,948 -------- -------- -------- -------- -------- Tax Equivalent Net Interest Income ............... $250,010 $257,503 $262,317 $260,273 $265,906 ======== ======== ======== ======== ========
(1) Adjusted for the ten percent stock dividend distributed July 1998. (2) Calculated assuming a 35% tax rate. 26 - --------------------------------------------------------------- QUARTERLY COMMON STOCK SUMMARY (1)
1998 1997 -------------------------- ------------------------------------ IIQ IQ IVQ IIIQ IIQ - --------------------------------------------- -------- -------- -------- --------- -------- High......................................... $34-1/16 $34 $35-5/16 $34-5/16 $24-3/4 Low.......................................... 29-3/4 29-1/16 28-5/8 24-3/4 21-1/2 Close........................................ 30-7/16 33-1/8 32-3/4 32-13/16 24-5/16 Cash dividends declared..................... $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.16
Note: Stock price quotations were obtained from NASDAQ.
- ---------------------------------------------------------------------------------------------------------------------------------- KEY RATIOS AND STATISTICS 1998 1997 MARGIN ANALYSIS - AS A % ---------------------- ---------------------------------- OF AVERAGE EARNING ASSETS (2) IIQ IQ IVQ IIIQ IIQ - --------------------------------------------------------- ------ ------ ------ ------ ------ Interest Income.................................. 8.37% 8.48% 8.51% 8.52% 8.62% Interest Expense................................. 4.14 4.18 4.07 4.11 4.08 ------ ------ ------ ------ ------ Net Interest Margin......................... 4.23% 4.30% 4.44% 4.41% 4.54% RETURN ON Average total assets............................. 1.42% 1.38% 1.41% 0.65% 1.33% Average total assets - cash basis................ 1.49% 1.44% 1.48% 0.71% 1.40% Average shareholders' equity..................... 17.70% 17.73% 18.23% 8.41% 18.07% Average shareholders' equity - cash basis........ 21.17% 21.09% 21.78% 10.49% 21.90%
- ----------------------------------------------------------------------------------------------------------------------------------- REGULATORY CAPITAL DATA 1998 1997 -------------------------- ------------------------------------ (in millions of dollars) IIQ IQ IVQ IIIQ IIQ - -------------------------------------------------- --------- -------- -------- -------- -------- Total Risk-Adjusted Assets........................ $23,728 $22,554 $22,128 $21,389 $21,130 Tier 1 Risk-Based Capital Ratio................... 7.18% 8.91% 8.83% 8.86% 8.99% Total Risk-Based Capital Ratio.................... 11.01% 11.57% 11.68% 11.95% 12.07% Tier 1 Leverage Ratio............................. 6.72% 7.72% 7.77% 7.54% 7.58%
(1) Adjusted for the ten percent stock dividend distributed July 1998. (2) Presented on a fully tax equivalent basis assuming a 35% tax rate. 27 PART II. OTHER INFORMATION In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable or the information has been previously reported. Item 4. Submission of Matters to a Vote of Security Holders Huntington Bancshares Incorporated held its annual meeting of shareholders on April 23, 1998. At that meeting, shareholders approved the following management proposals:
ABSTAIN/ FOR AGAINST WITHHELD --- ------- -------- 1. Election of directors to serve as Class II Directors until the year 2001 Annual Meeting of Shareholders as follows: Don Conrad 162,579,748 1,896,765 George A. Skestos 162,655,963 1,820,549 Lewis R. Smoot, Sr. 162,987,409 1,489,104 Frank Wobst 162,952,161 1,524,352 2. Proposal to amend Huntington Bancshares' Charter to increase the authorized Common Stock of the Corporation from 300,000,000 to 500,000,000 shares 154,725,282 8,302,510 1,448,721 3. Ratification of Ernst & Young LLP to serve as independent auditors for the Corporation for the year 1998 162,659,260 1,028,866 788,386
Item 5. Other Information Any shareholder proposal submitted outside the processes of Rule 14a-8 under the Securities Exchange Act of 1934 for presentation to the 1999 Huntington Bancshares Incorporated Annual Meeting of Shareholders will be considered untimely for purposes of Rule 14a-4 and 14a-5 if notice of such proposal is received by Huntington Bancshares Incorporated after January 4, 1999. Zuheir Sofia will resign as a Director of the Corporation effective August 20, 1998, to devote full time and attention to his new business, Sofia & Company, Inc. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3. (i)(a) Articles of Restatement of Charter, Articles of Amendment to Articles of Restatement of Charter, prevailed as exhibit 3(i) to form 10-K for the year ended December 31, 1998, and incorporated by reference, and Articles Supplementary -- previously filed as Exhibit 3(i) to Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. (i)(b) Articles of Amendment to Articles of Restatement of Charter -- previously filed as Exhibit 3(i)(b) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, and incorporated herein by reference. (i)(c) Articles of Amendment to Articles of Restatement of Charter -- previously filed as Exhibit 3(i)(c) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference. (ii) Bylaws -- previously filed as Exhibit 3(ii) to Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. 4. Instruments defining the Rights of Security Holders: Reference is made to Articles Fifth, Eighth and Tenth of Articles of Restatement of Charter, previously filed as Exhibit 3(i) to form 10-K for the year ended December 31, 1993 and incorporated by reference, as amended and supplemented and to Amendment to Articles of Restatement of Charter, previously filed as Exhibit 3(i)(c) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference. Also, reference is made to Rights Plan, dated February 22, 1990, previously filed as Exhibit 1 to Registration Statement on Form 8-A, and incorporated herein by reference and to Amendment No. 1 to the Rights Agreement, dated as of August 16, 1995, previously filed as Exhibit 4(b) to Form 8-K filed with the Securities and Exchange Commission on August 28, 1995, and incorporated herein by reference. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request. 27. Financial Data Schedule (b) Reports on Form 8-K 1. A report on Form 8-K, dated April 14, 1998, was filed under report item numbers 5 and 7, concerning Huntington's results of operations for the first quarter of 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Huntington Bancshares Incorporated ---------------------------------- (Registrant) Date: August 14, 1998 /s/ RICHARD A. CHEAP -------------------- Richard A. Cheap General Counsel and Secretary Date: August 14, 1998 /s/ GERALD R. WILLIAMS ---------------------- Gerald R. Williams Executive Vice President and Chief Financial Officer (principal accounting officer)