SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file Number 0-2525
Huntington Bancshares Incorporated
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(Exact name of registrant as specified in its charter)
Maryland 31-0724920
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Huntington Center, 41 S. High Street, Columbus, OH 43287
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 480-8300
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Without Par Value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of December 31, 1998, was $5,598,777,206. As of January 31, 1999,
210,481,413 shares of common stock without par value were outstanding.
Documents Incorporated By Reference
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Part III of this Form 10-K incorporates by reference certain information
from the registrant's definitive Proxy Statement for the 1999 Annual
Shareholders' Meeting.
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Huntington Bancshares Incorporated
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Part I
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ITEM 1: BUSINESS
Huntington Bancshares Incorporated (Huntington), incorporated in
Maryland in 1966, is a multi-state bank holding company headquartered in
Columbus, Ohio. Its subsidiaries conduct a full-service commercial and consumer
banking business, engage in mortgage banking, lease financing, trust services,
discount brokerage services, underwriting credit life and disability insurance,
selling other insurance products, and issuing commercial paper guaranteed by
Huntington, and provide other financial products and services. At December 31,
1998, Huntington's subsidiaries had 187 banking offices in Ohio, 135 banking
offices in Michigan, 126 banking offices in Florida, 44 banking offices in West
Virginia, 24 banking offices in Indiana, 13 banking offices in Kentucky, and one
foreign office in the Cayman Islands and Hong Kong, respectively. The Huntington
Mortgage Company (a wholly-owned subsidiary) has loan origination offices
throughout the Midwest and East Coast. Foreign banking activities, in total or
with any individual country, are not significant to the operations of
Huntington. At December 31, 1998, Huntington and its subsidiaries had 10,159
full-time equivalent employees.
Competition in the form of price and service from other banks and
financial companies such as savings and loans, credit unions, finance companies,
and brokerage firms is intense in most of the markets served by Huntington and
its subsidiaries. Mergers between and the expansion of financial institutions
both within and outside Ohio have provided significant competitive pressure in
major markets. Since 1995, when federal interstate banking legislation became
effective that made it permissible for bank holding companies in any state to
acquire banks in any other state, actual or potential competition in each of
Huntington's markets has been intensified. The same federal legislation permits
further competition through interstate branching, subject to certain limitations
by individual states.
On June 26, 1998, Huntington completed the acquisition of sixty former
Barnett Banks banking offices in Florida from NationsBank Corporation (the
Branch Purchase). The transaction was accounted for as a purchase; accordingly,
the assets acquired and liabilities assumed were recorded at estimated fair
value. The Branch Purchase added approximately $1.3 billion in loans and $2.3
billion in deposits. Intangible assets arising from the transaction totaled
approximately $460 million. The acquired branches' results of operations have
been included in Huntington's consolidated totals from the date of the
acquisition only.
On October 31, 1997, Huntington acquired The Bank of Winter Park
(Winter Park), a $90 million bank headquartered in Winter Park, Florida, for
approximately 364,000 shares of Huntington common stock. On February 28, 1997,
Huntington acquired Citi-Bancshares, Inc. (Citi-Bancshares), a $548 million
one-bank holding company headquartered in Leesburg, Florida, for $47.7 million
in cash and 2.9 million shares of Huntington common stock. These transactions
were accounted for as purchases; accordingly, the results of Citi-Bancshares and
Winter Park have been included in the consolidated financial statements from the
date of acquisition.
On September 30, 1997, Huntington completed its acquisition of First
Michigan Bank Corporation (First Michigan), a $3.6 billion bank holding company
headquartered in Holland,
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Michigan, in a transaction accounted for as a pooling of interests. Huntington
issued approximately 32.2 million shares of common stock to the shareholders of
First Michigan. All financial information reported by Huntington, except
dividends per share, was restated for the First Michigan acquisition.
In December 1998, Huntington applied for regulatory approval for the
merger of The Huntington State Bank, its state bank subsidiary in Ohio, into The
Huntington National Bank, an interstate national bank. The merger was
consummated in January 1999. As a result, The Huntington National Bank is
Huntington's sole bank subsidiary.
REGULATORY MATTERS
GENERAL
As a registered bank holding company, Huntington is subject to the
supervision of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). Huntington is required to file with the Federal
Reserve Board reports and other information regarding its business operations
and the business operations of its subsidiaries. It is also subject to
examination by the Federal Reserve Board and is required to obtain Federal
Reserve Board approval prior to acquiring, directly or indirectly, ownership or
control of voting shares of any bank, if, after such acquisition, it would own
or control more than 5% of the voting stock of such bank. In addition, pursuant
to federal law and regulations promulgated by the Federal Reserve Board,
Huntington may only engage in, or own or control companies that engage in,
activities deemed by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto. Under legislation effective in 1996,
Huntington may, in most cases, commence permissible new nonbanking business
activities de novo with only subsequent notice to the Federal Reserve Board and
may acquire smaller companies that engage in permissible nonbanking activities
under an expedited procedure requiring only 12 business days notice to the
Federal Reserve Board.
Huntington's national bank subsidiary has deposits insured by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC"). It
is subject to supervision, examination, and regulation by the Office of the
Comptroller of the Currency ("OCC"). Certain deposits of Huntington's national
bank subsidiary were acquired from savings associations and are insured by the
Savings Association Insurance Fund ("SAIF") of the FDIC. Huntington's nonbank
subsidiaries are also subject to supervision, examination, and regulation by the
Federal Reserve Board and examination by applicable federal and state banking
agencies. In addition to the impact of federal and state supervision and
regulation, the bank and nonbank subsidiaries of Huntington are affected
significantly by the actions of the Federal Reserve Board as it attempts to
control the money supply and credit availability in order to influence the
economy.
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to such
statutory or regulatory provisions.
HOLDING COMPANY STRUCTURE
Huntington's depository institution subsidiary is subject to affiliate
transaction restrictions under federal law which limit the transfer of funds by
the subsidiary bank to the parent and any nonbank subsidiaries of the parent,
whether in the form of loans, extensions of credit, investments, or asset
purchases. Such transfers by a subsidiary bank to its parent corporation or to
any individual nonbank subsidiary of the parent are limited in amount to 10% of
the subsidiary
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bank's capital and surplus and, with respect to such parent together with all
such nonbank subsidiaries of the parent, to an aggregate of 20% of the
subsidiary bank's capital and surplus. Furthermore, such loans and extensions of
credit are required to be secured in specified amounts. In addition, all
affiliate transactions must be conducted on terms and under circumstances that
are substantially the same as such transactions with unaffiliated entities.
Under applicable regulations, at December 31, 1998, approximately $222.7 million
was available for loans to Huntington from its subsidiary bank.
The Federal Reserve Board has a policy to the effect that a bank
holding company is expected to act as a source of financial and managerial
strength to each of its subsidiary banks and to commit resources to support each
such subsidiary bank. Under the source of strength doctrine, the Federal Reserve
Board may require a bank holding company to make capital injections into a
troubled subsidiary bank, and may charge the bank holding company with engaging
in unsafe and unsound practices for failure to commit resources to such a
subsidiary bank. This capital injection may be required at times when Huntington
may not have the resources to provide it. Any loans by a holding company to its
subsidiary banks are subordinate in right of payment to deposits and to certain
other indebtedness of such subsidiary bank. Moreover, in the event of a bank
holding company's bankruptcy, any commitment by such holding company to a
federal bank regulatory agency to maintain the capital of a subsidiary bank will
be assumed by the bankruptcy trustee and entitled to a priority of payment.
Federal law permits the OCC to order the pro rata assessment of
shareholders of a national bank whose capital stock has become impaired, by
losses or otherwise, to relieve a deficiency in such national bank's capital
stock. This statute also provides for the enforcement of any such pro rata
assessment of shareholders of such national bank to cover such impairment of
capital stock by sale, to the extent necessary, of the capital stock of any
assessed shareholder failing to pay the assessment. Huntington, as the sole
shareholder of its subsidiary bank, is subject to such provisions. Moreover, the
claims of a receiver of an insured depository institution for administrative
expenses and the claims of holders of deposit liabilities of such an institution
are accorded priority over the claims of general unsecured creditors of such an
institution, including the holders of the institution's note obligations, in the
event of a liquidation or other resolution of such institution. As a result of
such legislation, claims of a receiver for administrative expenses and claims of
holders of deposit liabilities of Huntington's depository subsidiary (including
the FDIC, as the subrogee of such holders) would receive priority over the
holders of notes and other senior debt of such subsidiary in the event of a
liquidation or other resolution and over the interests of Huntington as sole
shareholder of its subsidiary.
DIVIDEND RESTRICTIONS
Dividends from its subsidiary bank are a significant source of funds
for payment of dividends to Huntington's shareholders. In the year ended
December 31, 1998, Huntington declared cash dividends to its shareholders of
approximately $161.4 million. There are, however, statutory limits on the amount
of dividends that Huntington's depository institution subsidiary can pay to
Huntington without regulatory approval.
Huntington's subsidiary bank may not, without prior regulatory
approval, pay a dividend in an amount greater than such bank's undivided
profits. In addition, the prior approval of the OCC is required for the payment
of a dividend by a national bank if the total of all dividends declared by the
bank in a calendar year would exceed the total of its net income for the year
combined with its retained net income for the two preceding years. Under these
provisions and in accordance with the above-described formula, Huntington's
subsidiary bank could, without regulatory approval, declare dividends to
Huntington in 1999 of approximately $153.0 million plus an additional amount
equal to its net profits during 1999.
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If, in the opinion of the applicable regulatory authority, a bank under
its jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), such authority may require, after notice and hearing,
that such bank cease and desist from such practice. The Federal Reserve Board
and the OCC have issued policy statements that provide that insured banks and
bank holding companies should generally only pay dividends out of current
operating earnings.
FDIC INSURANCE
Under current FDIC practices, Huntington's bank subsidiary will not be
required to pay deposit insurance premiums during 1999. However, the bank
subsidiary will be required to make payments for the servicing of obligations of
the Financing Corporation ("FICO") issued in connection with the resolution of
savings and loan associations, so long as such obligations remain outstanding.
CAPITAL REQUIREMENTS
The Federal Reserve Board has issued risk-based capital ratio and
leverage ratio guidelines for bank holding companies such as Huntington. The
risk-based capital ratio guidelines establish a systematic analytical framework
that makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
explicit account in assessing capital adequacy, and minimizes disincentives to
holding liquid, low-risk assets. Under the guidelines and related policies, bank
holding companies must maintain capital sufficient to meet both a risk-based
asset ratio test and a leverage ratio test on a consolidated basis. The
risk-based ratio is determined by allocating assets and specified off-balance
sheet commitments into four weighted categories, with higher weighting being
assigned to categories perceived as representing greater risk. A bank holding
company's capital (as described below) is then divided by total risk weighted
assets to yield the risk-based ratio. The leverage ratio is determined by
relating core capital (as described below) to total assets adjusted as specified
in the guidelines. Huntington's subsidiary bank is subject to substantially
similar capital requirements.
Generally, under the applicable guidelines, a financial institution's
capital is divided into two tiers. Institutions that must incorporate market
risk exposure into their risk-based capital requirements may also have a third
tier of capital in the form of restricted short-term subordinated debt. "Tier
1", or core capital, includes common equity, noncumulative perpetual preferred
stock (excluding auction rate issues), and minority interests in equity accounts
of consolidated subsidiaries, less goodwill and, with certain limited
exceptions, all other intangible assets. Bank holding companies, however, may
include cumulative preferred stock in their Tier 1 capital, up to a limit of 25%
of such Tier 1 capital. "Tier 2", or supplementary capital, includes, among
other things, cumulative and limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan and lease losses, subject to certain limitations. "Total
capital" is the sum of Tier 1 and Tier 2 capital.
The Federal Reserve Board and the other federal banking regulators
require that all intangible assets, with certain limited exceptions, be deducted
from Tier 1 capital. Under the Federal Reserve Board's rules, as amended on
August 10, 1998, the only types of intangible assets that may be included in
(i.e., not deducted from) a bank holding company's capital are originated or
purchased mortgage servicing rights ("MSRs"), nonmortgage servicing assets
("NMSAs"), and purchased credit card relationships ("PCCRs"), provided that, in
the aggregate, the total amount of MSRs, NMSAs, and PCCRs included in capital
does not exceed 100% of
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Tier 1 capital. NMSAs and PCCRs are subject to a separate aggregate sublimit of
25% of Tier 1 capital. The amount of MSRs, NMSAs, and PCCRs that a bank holding
company may include in its capital is limited to the lesser of (i) 90% of such
assets' fair market value (as determined under the guidelines), or (ii) 100% of
such assets' book value, each determined quarterly. Identifiable intangible
assets (i.e., intangible assets other than goodwill) other than MSRs, NMSAs, and
PCCRs, including core deposit intangibles, acquired on or before February 19,
1992 (the date the Federal Reserve Board issued its original proposal for public
comment), generally will not be deducted from capital for supervisory purposes,
although they will continue to be deducted for purposes of evaluating
applications filed by bank holding companies.
Under the risk-based guidelines, financial institutions are required to
maintain a risk-based ratio (total capital to risk-weighted assets) of 8%, of
which 4% must be Tier 1 capital. The appropriate regulatory authority may set
higher capital requirements when an institution's circumstances warrant.
Under the leverage guidelines, financial institutions are required to
maintain a leverage ratio (Tier 1 capital to adjusted total assets, as specified
in the guidelines) of at least 3%. The 3% minimum ratio is applicable only to
financial institutions that meet certain specified criteria, including excellent
asset quality, high liquidity, low interest rate exposure, and the highest
regulatory rating. Financial institutions not meeting these criteria are
required to maintain a leverage ratio that exceeds 3% by a cushion of at least
100 to 200 basis points.
The guidelines also provide that financial institutions experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory level.
Furthermore, the Federal Reserve Board's guidelines indicate that the Federal
Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" in
evaluating proposals for expansion or new activities. The tangible Tier 1
leverage ratio is the ratio of an institution's Tier 1 capital, less all
intangibles, to total assets, less all intangibles.
Failure to meet applicable capital guidelines could subject the
financial institution to a variety of enforcement remedies available to the
federal regulatory authorities, including limitations on the ability to pay
dividends, the issuance by the regulatory authority of a capital directive to
increase capital, and the termination of deposit insurance by the FDIC, as well
as to the measures described below under "Federal Deposit Insurance Corporation
Improvement Act of 1991" as applicable to undercapitalized institutions.
As of December 31, 1998, the Tier 1 risk-based capital ratio, total
risk-based capital ratio, and Tier I leverage ratio for Huntington were as
follows:
Requirement Huntington
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Tier 1 Risk-Based Capital Ratio 4.00% 7.10%
Total Risk-Based Capital Ratio 8.00% 10.73%
Tier I Leverage Ratio 3.00% 6.37%
As of December 31, 1998, Huntington's bank subsidiary also had capital in
excess of the minimum requirements.
The risk-based capital standards of the Federal Reserve Board, the OCC,
and the FDIC specify that evaluations by the banking agencies of a bank's
capital adequacy will include an assessment of the exposure to declines in the
economic value of the bank's capital due to changes in interest rates. These
banking agencies issued a joint policy statement on interest rate risk
describing prudent methods for monitoring such risk that rely principally on
internal measures of exposure and active oversight of risk management activities
by senior management.
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FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") substantially revised the bank regulatory and funding provisions of
the Federal Deposit Insurance Act and made revisions to several other federal
banking statutes. Among other things, FDICIA requires federal banking regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. For these purposes,
FDICIA establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
The federal banking regulatory agencies have adopted regulations to
implement the prompt corrective action provisions of FDICIA. Among other things,
the regulations define the relevant capital measures for the five capital
categories. An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of
6% or greater, and a Tier I leverage ratio of 5% or greater and is not subject
to a regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure. An institution is deemed to be
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, a Tier 1 risk-based capital ratio of 4% or greater, and, generally, a
Tier I leverage ratio of 4% or greater and the institution does not meet the
definition of a "well capitalized" institution. An institution that does not
meet one or more of the "adequately capitalized" tests is deemed to be
"undercapitalized". If the institution has a total risk-based capital ratio that
is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a
Tier I leverage ratio that is less than 3%, it is deemed to be "significantly
undercapitalized". Finally, an institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a cash dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized institutions are subject to
growth limitations and are required to submit a capital restoration plan. If any
depository institution subsidiary of a holding company is required to submit a
capital restoration plan, the holding company would be required to provide a
limited guarantee regarding compliance with the plan as a condition of approval
of such plan by the appropriate federal banking agency. If an undercapitalized
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized. Significantly undercapitalized institutions may
be subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock to become adequately capitalized, requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. Critically undercapitalized institutions may not, beginning 60 days after
becoming critically undercapitalized, make any payment of principal or interest
on their subordinated debt. In addition, critically undercapitalized
institutions are subject to appointment of a receiver or conservator within 90
days of becoming critically undercapitalized.
Under FDICIA, a depository institution that is not well capitalized is
generally prohibited from accepting brokered deposits and offering interest
rates on deposits higher than the prevailing rate in its market. Huntington
expects that the FDIC's brokered deposit rule will not adversely affect the
ability of its depository institution subsidiaries to accept brokered deposits.
Under the regulatory definition of brokered deposits, Huntington's depository
subsidiary had $4.3 million of brokered deposits at December 31, 1998.
FDICIA, as amended, directs that each federal banking regulatory agency
prescribe standards, by regulation or guideline, for depository institutions
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, asset quality, earnings, and stock valuation. The
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Federal Reserve Board and other federal banking agencies have adopted a
regulation in the form of guidelines covering most of these items. Huntington
believes that the regulation and guidelines will not have a material effect on
the operations of its depository institution subsidiaries.
INTERSTATE BRANCHING AND CONSOLIDATIONS
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal") provides for nationwide interstate banking and branching. Under
the law, interstate acquisitions of banks or bank holding companies in any state
by bank holding companies in any other state became permissible as of September
29, 1995, and interstate branching and consolidations of existing bank
subsidiaries in different states became permissible as of June 1, 1997. On June
30, 1997, Huntington availed itself of the interstate branching and
consolidation authority by merging into its lead national bank subsidiary all of
its other bank subsidiaries, except The Huntington State Bank, which was
subsequently merged into Huntington's lead national bank subsidiary on January
29, 1999. As of that date, The Huntington National Bank was Huntington's sole
bank subsidiary. Future bank acquisitions, if any, in states where Huntington
formerly had a separate bank subsidiary, will not require compliance with
Riegle-Neal entry provisions.
OTHER DEVELOPMENTS
The United States Congress considered but did not adopt comprehensive
financial sector reform legislation during 1998. Such legislation, if adopted,
would have allowed, inter alia, affiliations between banking organizations and
insurance companies, and permitted activities currently prohibited by the
Glass-Steagall Act. Similar legislation is expected to be considered by the
United States Congress during 1999.
GUIDE 3 INFORMATION
Information required by Industry Guide 3 relating to statistical
disclosure by bank holding companies is set forth in Items 7 and 8.
ITEM 2: PROPERTIES
The headquarters of Huntington and its lead subsidiary, The Huntington
National Bank, are located in the Huntington Center, a thirty-seven story office
building located in Columbus, Ohio. Of the building's total office space
available, Huntington occupies approximately 39 percent. The lease term expires
in 2009, with renewal options for up to 50 years but with no purchase option.
The Huntington National Bank has an equity interest in the entity that owns the
building. Huntington's other major properties consist of a thirteen-story and a
twelve-story office building, both of which are located adjacent to the
Huntington Center; a twenty-one story office building, known as the Huntington
Building, located in Cleveland, Ohio; an eighteen-story office building in
Charleston, West Virginia; a three-story office building located in Holland,
Michigan; an office building in Lakeland, Florida; an eleven-story office
building in Sarasota, Florida; The Huntington Mortgage Company's building,
located in the greater Columbus area; an office complex located in Troy,
Michigan; and two data processing and operations centers located in Ohio. Of
these properties, Huntington owns the thirteen-story and twelve-story office
buildings. All of the other major properties are held under long-term leases.
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In 1998, Huntington entered into a sale/leaseback agreement that
included the sale of 59 properties. The transaction included a mix of branch
banking offices, regional offices, and operational facilities, including certain
properties described above, which Huntington will continue to operate under
long-term leases with terms expiring through the year 2020.
During the first half of 1999, Huntington expects to occupy its newly
constructed Business Service Center. This 460,000 square foot facility will
serve as Huntington's primary Operations and Data Center and will house
approximately 1,800 employees.
ITEM 3: LEGAL PROCEEDINGS
Information required by this item is set forth in Item 8 in Note 16 of
Notes to Consolidated Financial Statements on page 45.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
Part II
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ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of Huntington Bancshares Incorporated is traded on the
NASDAQ Stock Market under the symbol "HBAN". The stock is listed as "HuntgBcshr"
or "HuntBanc" in most newspapers. As of January 31, 1999, Huntington had 35,182
shareholders of record.
Information regarding the high and low sale prices of Huntington Common
Stock and cash dividends declared on such shares, as required by this item, is
set forth in a table entitled "Market Prices, Key Ratios and Statistics
(Quarterly Data)" on page 27 in Item 7. Information regarding restrictions on
dividends, as required by this item, is set forth in Item 1 under the caption
"Business-Regulatory Matters-Dividend Restrictions" on pages 4 and 5 above and
in Item 8 in Notes 11 and 14 of Notes to Consolidated Financial Statements on
pages 41 and 44, respectively.
On January 6, 1998, Huntington acquired Pollock and Pollock, an insurance agency
headquartered in Cleveland, Ohio ("Pollock"). In connection with this
acquisition, Huntington issued 159,730 unregistered shares of Huntington common
stock, without par value, to five shareholders of Pollock in exchange for all of
the issued and outstanding Pollock capital stock. The issuance of shares in this
transaction was deemed to be exempt from registration under the Securities Act
of 1933, as amended, in reliance on Section 4(2) since this was a transaction by
an issuer not involving a public offering.
ITEM 6: SELECTED FINANCIAL DATA
Information required by this item is set forth in Item 7 in Table 1 on
page 10.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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TABLE 1
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CONSOLIDATED SELECTED FINANCIAL DATA Year Ended December 31,
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(in thousands of dollars, except per
share amounts) 1998 1997 1996 1995 1994 1993
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SUMMARY OF OPERATIONS
Total interest income $ 1,999,364 $ 1,981,473 $ 1,775,734 $ 1,709,627 $ 1,418,610 $ 1,410,401
Total interest expense 978,271 954,243 880,648 856,860 546,880 514,812
Net interest income 1,021,093 1,027,230 895,086 852,767 871,730 895,589
Securities gains 29,793 7,978 17,620 9,380 2,297 27,316
Provision for loan losses 105,242 107,797 76,371 36,712 21,954 84,682
Net income 301,768 292,663 304,269 281,801 276,320 266,925
Operating earnings (1) 362,068 338,897 304,269 281,801 276,320 266,925
PER COMMON SHARE (2)
Net income
Basic 1.43 1.39 1.44 1.29 1.27 1.25
Diluted 1.41 1.38 1.42 1.28 1.26 1.23
Diluted--Operating (1) 1.70 1.60 1.42 1.28 1.26 1.23
Cash dividends declared 0.76 0.68 0.62 0.56 0.51 0.42
Book value at year-end 10.20 9.60 8.60 8.35 7.54 7.08
BALANCE SHEET HIGHLIGHTS
Total assets at year-end 28,296,336 26,730,540 24,371,946 23,495,337 20,688,505 20,214,835
Total long-term debt at year-end 707,359 498,889 550,531 517,202 555,514 580,605
Average long-term debt 620,688 526,379 515,664 529,140 561,872 612,617
Average shareholders' equity 2,064,241 1,893,788 1,776,151 1,742,826 1,621,443 1,415,839
Average total assets $ 26,891,558 $ 25,150,659 $ 23,374,490 $ 22,098,785 $ 19,498,530 $ 19,340,577
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KEY RATIOS AND STATISTICS 1998 1997 1996 1995 1994 1993
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MARGIN ANALYSIS--AS A %
OF AVERAGE EARNING ASSETS (3)
Interest income 8.33% 8.52% 8.26% 8.43% 7.99% 8.02%
Interest expense 4.05 4.08 4.07 4.19 3.04 2.88
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NET INTEREST MARGIN 4.28% 4.44% 4.19% 4.24% 4.95% 5.14%
============ ============ ============ ============ ============ ============
RETURN ON
Average total assets 1.12% 1.16% 1.30% 1.28% 1.42% 1.38%
Average total
assets--Operating (1) 1.35 1.35 1.30 1.28 1.42 1.38
Average shareholders' equity 14.62 15.44 17.13 16.17 17.04 18.85
Average shareholders'
equity--Operating (1) 17.54 17.88 17.13 16.17 17.04 18.85
Dividend payout ratio 53.15 49.67 42.22 43.82 38.50 32.47
Average shareholders' equity to
average total assets 7.68 7.53 7.60 7.89 8.32 7.32
Tier I risk-based capital ratio 7.10 8.83 8.11 8.66 9.67 9.78
Total risk-based capital ratio 10.73 11.68 11.29 12.01 13.32 13.81
Tier I leverage ratio 6.37% 7.77% 6.80% 6.99% 7.95% 7.12%
- --------------------------------------------------------------------------------------------------------------------------------
OTHER DATA 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Full-time equivalent employees 10,159 9,485 9,467 9,083 9,642 9,820
Banking offices 531 454 429 406 420 423
(1) Reported net income, adjusted to exclude special charges and related taxes.
(2) Adjusted for stock splits and stock dividends, as applicable.
(3) Presented on a fully tax equivalent basis assuming a 35% tax rate.
10
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's
expectations.
Huntington Bancshares Incorporated (Huntington) desires to provide its
shareholders with sound information about past performance and future trends.
Consequently, this Form 10-K, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements including certain plans, expectations, goals, and
projections--including without limitation those relating to Huntington's Year
2000 readiness--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,
extent, and timing of governmental actions and reforms; the risks of Year 2000
disruption; and extended disruption of vital infrastructure. The management of
Huntington encourages readers of this Form 10-K to understand forward-looking
statements to be strategic objectives rather than absolute targets of future
performance.
ACQUISITIONS AND OTHER STRATEGIC INITIATIVES
- --------------------------------------------
In June 1998, Huntington completed the acquisition of sixty former Barnett
Banks banking offices in Florida from NationsBank Corporation (the Branch
Purchase). The transaction was accounted for as a purchase; accordingly, the
assets acquired and liabilities assumed were recorded at estimated fair
TABLE 2
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1)
- -------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------ --------------------------------
Increase (Decrease) Increase (Decrease)
From Previous From Previous
Year Due To: Year Due To:
------------------------------ --------------------------------
Fully Tax Equivalent Basis (2) Volume Yield/ Total Volume Yield/ Total
(in millions of dollars) Rate Rate
- -------------------------------------------------------------------------------------------------------------------
Interest bearing deposits in banks $ 0.6 $ (0.1) $ 0.5 $ (0.3) $ -- $ (0.3)
Trading account securities -- -- -- (0.4) 0.1 (0.3)
Federal funds sold and securities purchased
under resale agreements 10.4 0.1 10.5 (1.3) (0.1) (1.4)
Mortgages held for sale 11.1 (1.0) 10.1 1.4 -- 1.4
Taxable securities (28.7) (2.3) (31.0) 10.0 (3.9) 6.1
Tax-exempt securities (1.6) (1.8) (3.4) (2.6) -- (2.6)
Total loans 76.9 (47.2) 29.7 145.6 56.7 202.3
-------- -------- -------- -------- -------- --------
TOTAL EARNING ASSETS 68.7 (52.3) 16.4 152.4 52.8 205.2
-------- -------- -------- -------- -------- --------
Interest bearing demand deposits 10.2 1.8 12.0 3.6 0.6 4.2
Savings deposits 7.5 6.1 13.6 7.0 7.1 14.1
Other domestic time deposits 24.1 (4.7) 19.4 22.2 (2.8) 19.4
Certificates of deposit of $100,000 or more (3.0) 0.6 (2.4) 22.6 1.3 23.9
Foreign time deposits (16.0) (0.3) (16.3) 4.5 (0.7) 3.8
Short-term borrowings (35.8) (12.9) (48.7) (3.3) 0.6 (2.7)
Medium-term notes 52.3 (3.9) 48.4 9.3 (13.3) (4.0)
Subordinated notes and other long-term debt,
including capital securities 7.6 (9.5) (1.9) 13.7 1.1 14.8
-------- -------- -------- -------- -------- --------
TOTAL INTEREST BEARING LIABILITIES 46.9 (22.8) 24.1 79.6 (6.1) 73.5
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ 21.8 $ (29.5) $ (7.7) $ 72.8 $ 58.9 $ 131.7
======== ======== ======== ======== ======== ========
(1) The change in interest rates 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.
11
value. The Branch Purchase added approximately $1.3 billion in loans and $2.3
billion in deposits. Intangible assets arising from the transaction totaled
approximately $460 million. The acquired branches' results of operations have
been included in Huntington's consolidated totals from the date of the
acquisition only.
In October 1998, Huntington announced several initiatives to strengthen the
company's financial performance. These included the realignment of the banking
network; the exit of under-performing product lines and delivery channels;
implementation of numerous cost savings measures, including the reduction of
approximately 10% of workforce positions; and a repositioning of the balance
sheet to maximize returns on equity. When fully implemented, management
anticipates that these actions will result in an estimated $125 million in
sustainable pretax annual profit improvements. In connection with these
initiatives, Huntington incurred one-time, pre-tax expenses of $90 million in
the fourth quarter of 1998. This special charge included $32 million related to
exit activities, $26 million for severance and other personnel-related items,
$20 million from the closure of banking offices, and $12 million of fixed asset
write-offs.
"Operating" results, as used below, refers to Huntington's financial
performance before the impact of the fourth quarter 1998 special charges and the
merger-related expenses incurred in connection with the acquisition in 1997 of
First Michigan Bank Corporation, a $3.6 billion bank holding company
headquartered in Holland, Michigan (First Michigan).
OVERVIEW
Huntington's operating earnings totaled $362.1 million in 1998, up from
$338.9 million in the preceding year, and $304.3 million in 1996. On a diluted
per share basis, operating earnings were $1.70 in the recent year, versus $1.60
and $1.42, respectively, in 1997 and 1996. Reported net income for 1998,
including special charges, was $301.8 million, or $1.41 per share. Per share
amounts for all prior periods have been restated to reflect the ten percent
stock dividend distributed to shareholders in July 1998.
TABLE 3
- --------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION DECEMBER 31,
- --------------------------------------------------------------------------------
(in millions of dollars) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Commercial $ 6,027 $ 5,271 $ 5,130 $ 4,869 $ 4,285
Real Estate
Construction 919 864 699 524 414
Mortgage 3,640 3,598 3,623 3,552 3,736
Consumer
Loans 6,958 6,463 6,123 5,741 5,214
Lease financing 1,911 1,542 1,183 784 572
------- ------- ------- ------- -------
TOTAL LOANS $19,455 $17,738 $16,758 $15,470 $14,221
======= ======= ======= ======= =======
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 millions of dollars) DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
------------ ------------ ------------ ------------
Commercial $ 1,371 $ 3,815 $ 841 $ 6,027
Real estate - construction 381 402 136 919
------------ ------------ ------------ ------------
TOTAL $ 1,752 $ 4,217 $ 977 $ 6,946
============ ============ ============ ============
Variable interest rates $ 2,451 $ 649
============ ============
Fixed interest rates $ 1,766 $ 328
============ ============
12
On an operating basis, return on average equity (ROE) was 17.54% in 1998
and return on average assets (ROA) was 1.35%. In the two preceding years, ROE
was 17.88% and 17.13%, respectively, and ROA was 1.35% and 1.30%. Adjusted for
the impact of intangible assets and related amortization expense, "cash" basis
ROE improved to 24.35% for 1998, compared with 21.36% for 1997 and 19.88% in
1996. Cash basis ROA was 1.45% in the recent twelve months versus 1.41% and
1.36% in 1997 and 1996, respectively.
Total assets were $28.3 billion at December 31, 1998, up nearly 6% from
year-end 1997. The Branch Purchase drove much of the asset growth, complemented
by new loan production, including a significant increase in mortgages held for
sale. A strategic repositioning of the balance sheet, designed to improve equity
returns, resulted in other portions of the balance sheet showing reductions from
1997. These initiatives included the sale of $3.4 billion of securities
available for sale, the exit of out-of-market credit card operations through the
sale of approximately $90 million of loans outstanding, and the closure of the
Pittsburgh indirect loan production office. Huntington also sold 59 properties
with a book value approximating $110 million, that included a mix of branch
banking offices, regional offices, and operations facilities, which the company
will continue to operate under long-term leases.
Adjusted for the impact of the Branch Purchase and loan
sales/securitizations, average total loans outstanding were up 4.2% from 1997.
Both commercial and consumer loans grew more than 5%. Residential mortgage
refinancing activity, coupled with the impact of the General Motors strike on
automobile dealer floor plan lending, softened overall loan growth.
Core deposits, adjusted for the Branch Purchase, increased 3.1% with
particular strength in transaction accounts and savings products--up 5.5% and
3.2%, respectively. Core deposits represent Huntington's most significant source
of funding; when combined with other core funding sources, they provide
approximately 76% of Huntington's funding needs.
In terms of wholesale liabilities, Huntington issued $300 million of
subordinated notes in 1998 as well as an additional $100 million of capital
securities through Huntington Capital II, a special-purpose subsidiary.
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
mirrors Huntington's organizational and management structure. Accordingly, the
results are not necessarily comparable with similar information published by
other financial institutions that 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 information.
A description of each line of business and its operating earnings
contribution is discussed below:
RETAIL BANKING
Retail Banking provides products and services to retail and small
community banking business customers. This business unit's products include home
equity loans, first mortgage loans, installment loans, credit cards, deposit
products, as well as investment and insurance services. These products and
services are offered through Huntington's traditional banking network, in-store
branches, Direct Bank, and Web Bank.
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, but not limited to, commercial loans, asset based financing,
international trade, and cash management. Huntington's capital markets division
also provides alternative financing solutions for larger business clients,
including privately placed debt and syndicated commercial lending.
DEALER SALES
Dealer Sales product offerings pertain to the automobile lending sector
and include floor plan financing, as well as indirect consumer loans and leases.
Indirect consumer lending comprises the vast majority of the business and
involves dealerships selling Huntington's products to individuals purchasing or
leasing vehicles.
13
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. 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 the interest rate risk management of the company into its Treasury
Group. As part of its overall interest rate risk and liquidity management
strategy, Treasury administers an investment portfolio of approximately $5
billion. Revenue and expense associated with these activities remain within
Treasury. Additionally, the Treasury/Other group absorbs unassigned equity that
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 also included in the Other category.
EARNINGS CONTRIBUTION BY BUSINESS SEGMENT
- -----------------------------------------
Retail banking provided 43% of Huntington's operating earnings for 1998.
This segment represents 36% of Huntington's outstanding loan portfolio, and
generates retail deposits, the key source of funding for Huntington. Retail
Banking is allocated from Treasury a "deposit credit" based on the cost of
deposits gathered versus rates available on wholesale funds of similar duration.
The Corporate Banking lending portfolio represents approximately 31% of
Huntington's total loan book and was responsible for 29% of 1998 operating
earnings. Dealer Sales represented 29% of the loans outstanding and provided a
14% earnings contribution in the recent year. Private Financial Group, a very
profitable and growing business segment, generated 6% of the annual operating
earnings, mostly driven by its fee-based services. Treasury/Other includes
approximately $30 million of securities gains in 1998.
[PIE GRAPH]
14
RESULTS OF OPERATIONS
NET INTEREST INCOME
- -------------------
Huntington's net interest income was $1,021.1 million in 1998, compared
with $1,027.2 million and $895.1 million, respectively, in 1997 and 1996. The
net interest margin, on a fully tax equivalent basis, was 4.28% during the
recent twelve months, versus 4.44% and 4.19% in the two preceding years. The
margin decline is primarily due to the drop in earning asset yields, as the
highly competitive marketplace continues to erode loan spreads across much of
the banking industry. Interest rate swaps and other off-balance sheet financial
instruments used for asset/liability management purposes provided benefits of
$27.3 million and $6.0 million in the recent two years versus a reduction of
$52.1 million in 1996.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------
The provision for loan losses was $105.2 million in 1998, down slightly
from $107.8 million one year ago. In 1996, the provision totaled $76.4 million.
Net charge-offs as a percent of average total loans were .51% in the year just
ended versus .50% in 1997 and .44% in 1996. Consumer losses were up 10.1% from
1997, while commercial charge-offs increased 5.6%.
The allowance for loan losses (ALL) is maintained at a level considered
appropriate by management, based on its estimate of probable losses 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, recent 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.
At December 31, 1998, the ALL was $290.9 million and represented 1.50% of
total loans, up modestly from 1.46% a year ago. The ALL covered non-performing
loans more than three times, consistent with the prior year's level. Additional
information regarding the ALL and asset quality appears in the section "Credit
Risk".
NON-INTEREST INCOME
- -------------------
Non-interest income totaled $438.2 million in 1998, versus $342.8 million
and $314.1 million, respectively, in 1997 and 1996. Excluding securities gains,
non-interest income increased 22% over last year. Fee income continues to be a
growing source of revenue for Huntington, as it represented 28.6% of total
revenues in the recent year, versus 24.6% in 1997. Improvements were evident in
all non-interest income categories, led by brokerage and insurance services,
electronic banking, and mortgage banking. Huntington also generated $28.7
million of income from Bank Owned Life Insurance policies in 1998. Included in
"Other" non-interest income is a gain of $9.5 million from the sale of
Huntington's out-of-market credit card portfolio.
NON-INTEREST EXPENSE
- --------------------
On an operating basis, non-interest expense was $823.9 million, compared
with $751.9 million and $675.5 million in the two preceding years. Fueling the
expenses were higher sales commissions related to growth in fee-based
businesses; additional telecommunication costs resulting from continued
expansion of Huntington's ATM network; contract programming for Year 2000
remediation; systems conversions and other costs of consolidating operations;
and intangible asset amortization attributable to the Branch Purchase.
Huntington believes it is well positioned to achieve significant
efficiencies in the future. The movement to a common operating platform is
substantially completed, banking activities are provided under a single
interstate charter, and the number of operations and processing centers has been
significantly reduced. Moreover, the company recently announced several
additional strategic actions that are expected to enhance profitability,
including its plans to close approximately 39 underperforming banking offices
and terminate certain business activities including employee benefit plan
administrative services. In connection with the initiatives, Huntington expects
to eliminate approximately 1,000 positions, or roughly 10% of its work force.
During the fourth quarter of 1998, Huntington recorded a $90 million
(approximately $60 million net of taxes, or $.28 per share) special charge as a
result of the above-mentioned strategic actions. It is anticipated that the exit
activities and the closure of banking offices will be completed by the end of
1999. At the recent year end, approximately $54 million of the reserves remained
from the special charge. See note 2 to the Consolidated Financial Statements for
additional information regarding the 1998 Special Charge.
15
TABLE 5
SUMMARY OF ALLOWANCE FOR LOAN LOSSES AND SELECTED STATISTICS
- -----------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES, BEGINNING OF $ 258,171 $ 230,778 $ 222,487 $ 225,225 $ 233,123
YEAR
LOAN LOSSES
Commercial (24,512) (23,276) (23,904) (15,947) (11,450)
Real estate
Construction (80) (375) -- (392) (5,957)
Mortgage (3,358) (2,663) (2,768) (5,086) (5,840)
Consumer
Loans (84,961) (74,761) (59,843) (39,000) (27,283)
Leases (13,444) (9,648) (4,492) (1,989) (962)
--------- --------- --------- --------- ---------
Total loan losses (126,355) (110,723) (91,007) (62,414) (51,492)
--------- --------- --------- --------- ---------
RECOVERIES OF LOANS PREVIOUSLY CHARGED
OFF
Commercial 4,546 4,373 4,884 3,696 8,204
Real estate
Construction 441 111 556 5 1
Mortgage 2,167 619 1,402 977 859
Consumer
Loans 23,140 16,382 13,457 11,156 10,830
Leases 1,554 1,057 721 303 353
--------- --------- --------- --------- ---------
Total recoveries of loans
previously charged off 31,848 22,542 21,020 16,137 20,247
--------- --------- --------- --------- ---------
NET LOAN LOSSES (94,507) (88,181) (69,987) (46,277) (31,245)
--------- --------- --------- --------- ---------
PROVISION FOR LOAN LOSSES 105,242 107,797 76,371 36,712 21,954
ALLOWANCE ACQUIRED/OTHER 22,042 7,777 1,907 6,827 1,393
--------- --------- --------- --------- ---------
ALLOWANCE FOR LOAN LOSSES, END OF YEAR $ 290,948 $ 258,171 $ 230,778 $ 222,487 $ 225,225
========= ========= ========= ========= =========
AS A % OF AVERAGE TOTAL LOANS
Net loan losses 0.51% 0.50% 0.44% 0.30% 0.23%
Provision for loan losses 0.57% 0.61% 0.48% 0.24% 0.16%
Allowance for loan losses as a %
of total loans (end of period) 1.50% 1.46% 1.38% 1.44% 1.58%
Net loan loss coverage (1) 6.72x 7.01x 7.62x 10.07x 13.86x
(1) Income before income taxes (excluding special charges) and the provision for
loan losses to net loan losses.
- ------------------------------------------------------------------------------------------------------------------------
TABLE 6
- ------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
(in thousands of dollars) Loans Loans Loans Loans Loans
- ------------------------------------------------------------------------------------------------------------------------
Commercial $ 82,129 31.0% $ 86,439 29.7% $113,555 30.6% $119,200 31.5% $133,542 30.1%
Real estate
Construction 11,112 4.7 8,140 4.9 2,033 4.2 2,258 3.4 1,454 2.9
Mortgage 40,070 18.7 38,598 20.3 18,987 21.6 18,179 23.0 20,601 26.3
Consumer
Loans 104,198 35.8 75,405 36.4 54,564 36.5 43,880 37.1 36,315 36.7
Leases 17,823 9.8 6,631 8.7 3,457 7.1 3,651 5.0 2,632 4.0
Unallocated 35,616 -- 42,958 -- 38,182 -- 35,319 -- 30,681 --
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total $290,948 100.0% $258,171 100.0% $230,778 100.0% $222,487 100.0% $225,225 100.0%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
16
In connection with the acquisition of First Michigan in 1997,
Huntington incurred a merger-related charge of $51 million consisting
primarily of personnel, facilities, and systems costs, as well as $12 million of
professional fees and other costs to effect the business combination. At
December 31, 1998, the merger-related reserve had been fully used.
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes was $138.4 million in 1998, down from
$166.5 million in 1997, and $153.0 million in 1996. Huntington's effective tax
rate decreased to 31.4% in the recent year versus 36.3% in 1997. The lower rate
is due primarily to a higher mix of tax-exempt income. In addition, the 1997
rate was higher than normal as a result of significant nondeductible expenses
incurred in connection with the First Michigan and other bank acquisitions.
YEAR 2000
The Year 2000 problem is the result of many existing computer programs
using only the last two-digits, as opposed to four digits, to indicate the year.
Such computer systems may be unable to recognize a year that begins with "20"
instead of "19". If not corrected, many computer programs could cause systems to
fail or other computer errors, leading to possible disruptions in operations or
creation of erroneous results.
Huntington, in an enterprise-wide effort, is taking steps to ensure that
its internal systems are secure from such failure and that its current products
will perform. The company's Year 2000 Plan (the Plan) addresses all systems,
software, hardware, and infrastructure components. In addition, business
processes are being assessed and validated throughout the organization.
The Plan identifies and addresses "Mission Critical" and "Non-mission
Critical" components for Information Technology (IT) systems, Non-information
Technology (Non-IT) systems, and business processes. IT includes, for example,
systems that service loan and deposit customers. Non-IT systems include, among
other things, security systems, elevators, utilities, and voice/data
communications. An application, system, or process is Mission Critical if it is
vital to the successful continuance of a core business activity.
Huntington's progress towards meeting the Plan's goals for both IT and
Non-IT systems, which follows a five phase approach recommended by federal bank
regulators, is as follows:
Percent Completion
Phase Complete Date
- ------------------------ ------------- -------------
MISSION CRITICAL
Awareness 100% 06/30/1998
Assessment 100% 09/30/1998
Renovation 95% 06/30/1999
Testing/Validation 95% 06/30/1999
Implementation 73% 06/30/1999
NON-MISSION CRITICAL
Awareness 100% 06/30/1998
Assessment 100% 12/31/1998
Renovation 90% 06/30/1999
Testing/Validation 63% 06/30/1999
Implementation 58% 10/31/1999
Huntington depends on various third-party vendors, suppliers, and service
providers. The activities undertaken by these third parties can vary from
processing and settlement of automated teller transactions to mortgage loan
processing. Huntington will be dependent on the continued service by its
vendors, suppliers, service providers, and ultimately its customers' continued
operations in order to avoid business interruptions. Any interruption in a third
party's ability to provide goods and services, such as issues with
telecommunication links, power, and transportation, could present problems.
Huntington has identified approximately ten material third-party relationships
with a focus on those considered "Mission Critical." Huntington is presently
working with each of these parties to test transactions and/or interfaces
between its processors, obtain appropriate information from each party, or
assess each party's ability to be prepared for the Year 2000.
Over forty full-time staff members are dedicated to the Year 2000 effort
and, on a part-time basis, multitudes of internal personnel from various
disciplines throughout the Huntington organization are also working on this
project. Furthermore, Huntington has engaged an independent consultant to
establish a Year 2000 Program Management Office (PMO). The PMO organizes
Huntington's Year 2000 project management activities beyond the technical
information services group into all business units. The PMO creates the
methodology that is used in every business unit and also brings a quality
assurance process that reviews the thoroughness of the actions taken to remedy
the Year 2000 problem.
17
Identifiable costs for the Year 2000 project incurred in 1998 were $13.1
million. Management estimates it will cost an additional $16 million to bring
its systems and business processes into compliance and to implement elements of
its contingency plan. However, these expenses are not expected to materially
impact operating results in any one period. These estimated costs incorporate
not only incremental third-party expenses but also include salary and benefit
costs of employees redeployed and full implementation of a call center to handle
increased customer inquiries before and after January 1, 2000.
Major business risks associated with the Year 2000 problem include, but are
not limited to, infrastructure failures, disruptions to the economy in general,
excessive cash withdrawal activity, closure of government offices, foreign
banks, and clearing houses, and increased problem loans and credit losses in the
event that borrowers fail to properly respond to the problem. These risks, along
with the risk of Huntington failing to adequately complete the remaining phases
of its project work and the resulting possible inability to properly process
core business transactions and meet contractual servicing agreements, could
expose Huntington to loss of revenues, litigation, and asset quality
deterioration.
The Year 2000 problem is unique in that it has never previously occurred;
thus, it is not possible to completely foresee or quantify the overall or any
specific financial or operational impacts to Huntington or to third parties
which provide Mission Critical services to the company. Huntington has, however,
implemented several proactive processes to identify and mitigate risk involving
systems and processes over which it has control, including strengthening its
Business Resumption Plan for the Year 2000 by adding alternatives for systems
and networks in support of critical applications. The modifications to
Huntington's contingency plan are now complete and have been tested and
validated for all core business processes. Huntington's senior management
believes successful modifications to existing systems and conversions to new
systems will substantially reduce the risk of Year 2000 disruption.
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
TABLE 7
- -----------------------------------------------------------
INVESTMENT SECURITIES DECEMBER 31,
- -----------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- -----------------------------------------------------------
U.S. Treasury and $ 156 $ 656 $111,559
Federal Agencies
States and political 24,778 32,354 233,458
subdivisions
Other Securities -- -- 118
-------- -------- --------
TOTAL INVESTMENT
SECURITIES $ 24,934 $ 33,010 $345,135
======== ======== ========
- -----------------------------------------------------------
AMORTIZED COST AND FAIR VALUES BY MATURITY
AT DECEMBER 31, 1998
- -----------------------------------------------------------
AMORTIZED FAIR
(in thousands of dollars) COST VALUE YIELD
- -----------------------------------------------------------
U.S. Treasury and
Federal Agencies
1-5 years $ 156 $ 156 6.57%
------- -------
Total 156 156
------- -------
States and political
subdivisions
Under 1 year 4,318 3,937 8.45%
1-5 years 13,310 13,530 7.59%
6-10 years 5,463 5,674 8.44%
Over 10 years 1,687 1,747 8.70%
------- -------
Total 24,778 24,888
------- -------
TOTAL INVESTMENT
SECURITIES $24,934 $25,044
======= =======
Note: Weighted average yields were calculated on the basis of amortized cost and
have been adjusted to a fully tax equivalent basis, assuming a 35% tax
rate.
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.
18
Measurement and monitoring of interest rate risk is an ongoing process. A
key element in this process is Huntington's estimation of the amount that net
interest income will change over a twelve to twenty-four month period given a
directional shift in interest rates. The income simulation model used by
Huntington captures all assets, liabilities, and off-balance sheet financial
instruments, accounting for significant variables that are believed to be
affected by interest rates. These include prepayment speeds on mortgages and
consumer installment loans, cash flows of loans and deposits, principal
amortization on revolving credit instruments, and balance sheet growth
assumptions. The model also captures embedded options, e.g. interest rate
caps/floors or call options, and accounts for changes in rate relationships, as
various rate indices lead or lag changes in market rates. While these
assumptions are inherently uncertain, management assigns probabilities and,
therefore, believes 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, 1998, the results of Huntington's interest sensitivity
analysis indicated that net interest income would increase by approximately 1%
given a 100 to 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). Net interest income would be expected to
decrease by approximately 1% if rates rose 100 basis points and would drop 2% in
the event of a 200 basis point increase.
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 8
- -----------------------------------------------------------
SECURITIES AVAILABLE FOR SALE December 31,
- -----------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------
U.S. Treasury and
Federal Agencies $4,096,134 $5,001,034 $4,714,821
Other 685,281 708,780 494,572
---------- ---------- ----------
TOTAL SECURITIES
AVAILABLE FOR SALE $4,781,415 $5,709,814 $5,209,393
========== ========== ==========
AMORTIZED COST AND FAIR VALUES BY MATURITY
AT DECEMBER 31, 1998
- -----------------------------------------------------------
AMORTIZED FAIR
(in thousands of dollars) COST VALUE YIELD(1)
- ----------------------------------------------------------
U.S. Treasury
Under 1 year $ 1,000 $ 1,007 7.00%
1-5 years 63,537 65,364 5.50%
6-10 years 169,959 176,945 5.52%
---------- ----------
Total 234,496 243,316
---------- ----------
Federal Agencies
Mortgage-backed
securities
1-5 years 11 11 8.13%
6-10 years 87,342 89,162 6.79%
Over 10 years 1,356,722 1,363,015 6.40%
---------- ----------
Total 1,444,075 1,452,188
---------- ----------
Other agencies
1-5 years 968,753 975,253 6.00%
6-10 years 678,245 684,230 5.71%
Over 10 years 740,139 741,147 6.39%
---------- ----------
Total 2,387,137 2,400,630
---------- ----------
Total U.S. Treasury and
Federal Agencies 4,065,708 4,096,134
---------- ----------
Other
Under 1 year 7,492 7,478 8.33%
1-5 years 188,551 190,871 7.48%
6-10 years 204,788 210,698 7.36%
Over 10 years 268,319 268,930 6.05%
Marketable equity
securities 8,359 7,304 5.52%
---------- ----------
Total 677,509 685,281
---------- ----------
TOTAL SECURITIES
AVAILABLE FOR SALE $4,743,217 $4,781,415
========== ==========
At December 31, 1998, 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.
19
TABLE 9
- -----------------------------------------------------------------------------------------------------
INTEREST RATE SWAP PORTFOLIO DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------
LIABILITY CONVERSION SWAPS
-------------------------------------------------------------
ASSET Receive BASIS
CONVERSION Receive fixed- Pay PROTECTION
(in millions of dollars) SWAPS Fixed amortizing fixed Total SWAPS
- ------------------------------------------------------------------------------------------------------
(1)
Notional value $ 941 $ 1,620 $ 152 $ 975 $ 2,747 $ 985
Average maturity (years) 3.60 3.88 0.90 2.57 3.25 1.27
Market value $ 7.0 $ 41.2 $ 0.3 $ (9.8) $ 31.7 $ (0.1)
Average rate:
Receive 6.22% 6.33% 5.63% 5.35% 5.94% 5.23%
Pay 5.29 5.43 5.62 5.25 5.38 5.14
(1) Receive fixed only at December 31, 1998.
Table 9 above illustrates the approximate market values, estimated
maturities and weighted average rates of the interest rate swaps used by
Huntington in its interest rate risk management program at December 31, 1998.
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 $600 million and $800 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 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, 1998, Huntington's credit
risk from interest rate swaps used for asset/liability management purposes was
$103.4 million, which represents the sum of the aggregate fair value of
positions that have become favorable to Huntington, including any accrued
interest receivable due from counterparties. In order to minimize the risk that
a swap counterparty will not satisfy its interest payment obligation under the
terms of the contract, Huntington performs credit reviews on all counterparties,
restricts the number of counterparties used to a select group of high quality
institutions, obtains collateral, and enters into formal netting arrangements.
Huntington has never experienced any past due amounts from a swap counterparty
and does not anticipate nonperformance in the future by any such counterparties.
The total notional amount of off-balance sheet instruments used by
Huntington on behalf of customers (for which the related interest rate risk is
offset by third party contracts) was $564 million at December 31, 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.
20
TABLE 10
- ---------------------------------------------------
MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT OF
$100,000 OR MORE AS OF DECEMBER 31, 1998
- ---------------------------------------------------
(in thousands of dollars)
- ---------------------------------------------------
Three months or less $ 900,764
Over three through six months 390,580
Over six through twelve months 265,308
Over twelve months 142,609
-----------
Total $ 1,699,261
===========
LIQUIDITY MANAGEMENT
- --------------------
Liquidity management is also a significant responsibility of ALCO. The
objective of ALCO in this regard is to maintain an optimum balance of
maturities among Huntington's assets and liabilities such that sufficient cash,
or access to cash, is available at all times to meet the needs of borrowers,
depositors, and creditors, as well as to fund corporate expansion and other
activities.
A chief source of Huntington's liquidity is derived from the large retail
deposit base accessible by its network of geographically dispersed banking
offices. This core funding is supplemented by Huntington's demonstrated ability
to raise funds in capital markets and to access funds nationwide. The company's
$6 billion domestic bank note and $2 billion European bank note programs are
significant sources of wholesale funding. Under these programs, unsecured
senior and subordinated notes are issuable with maturities ranging from one
month to thirty years. A similar $750 million note program exists at the parent
holding company, the proceeds from which are used from time to time to fund
certain non-banking activities, finance acquisitions, repurchase Huntington's
common stock, or for other general corporate purposes. At December 31, 1998,
approximately $5.2 billion of notes were available under these programs to fund
Huntington's future activities. Huntington also has $300 million of capital
securities outstanding through its wholly-owned subsidiaries, Huntington
Capital I and II. A $200 million line of credit is also available to the parent
holding company to support commercial paper borrowings and other short-term
working capital needs.
While liability sources are many, significant liquidity is also available
from Huntington's investment and loan portfolios. ALCO regularly monitors the
overall liquidity position of the business and ensures that various alternative
strategies exist to cover unanticipated events. At the end of the recent year,
sufficient liquidity was available to meet estimated short-term and long-term
funding needs.
TABLE 11
- ------------------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS Year Ended December 31,
- ------------------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
Balance at year-end $2,137,374 $3,064,344 $3,309,445
Weighted average interest rate at year-end 4.05% 5.26% 5.21%
Maximum amount outstanding at month-end during the year $2,897,385 $3,387,690 $3,309,445
Average amount outstanding during the year $1,980,648 $2,733,764 $2,766,185
Weighted average interest rate during the year 4.72% 5.15% 5.16%
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.
Non-performing assets consist of loans that are no longer accruing
interest, loans that have been renegotiated based upon financial difficulties of
the borrower, and real estate acquired through foreclosure. Total non-performing
assets were $96.1 million and $87.1 million, respectively, at December 31, 1998
and 1997. As of these same dates, non-performing loans represented .40% of total
loans, and non-performing assets as a percent of total loans and other real
estate were .49%. Loans past due ninety days or more but continuing to accrue
interest were $51.0 million at the end of the recent year, up only slightly from
$49.7 million in 1997.
Huntington also actively manages potential problem loans that are current
as to principal and interest but require closer monitoring in the event of
deterioration in borrower performance. These potential problem credits totaled
$27.1 million and $54.2 million, respectively, at December 31, 1998, and 1997.
21
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.
Average shareholders' equity for the twelve months ended December 31,
1998, and 1997 was $2.1 billion and $1.9 billion, respectively. Huntington's
ratio of average equity to average assets in the recent twelve months was 7.68%,
compared with 7.53% one year ago.
Risk-based capital guidelines established by the Federal Reserve Board
set minimum capital requirements and require institutions to calculate
risk-based capital ratios by assigning risk weightings to assets and
off-balance sheet items, such as interest rate swaps and loan commitments.
These guidelines further define "well-capitalized" levels for Tier 1, Total
Capital, and Leverage ratio purposes at 6%, 10%, and 5%, respectively. At the
recent year end, Huntington's Tier 1 risk-based capital ratio was 7.10%, its
total risk-based capital ratio was 10.73%, and its leverage ratio was 6.37%,
each of which exceeds the "well-capitalized" requirements.
Cash dividends declared were $.76 a share in 1998, up 11.8% from 1997. A
10% stock dividend was also distributed to shareholders in the year just ended,
marking the twenty-fifth consecutive year in which Huntington has issued a stock
split or stock dividend.
In September 1998, the Board of Directors authorized the reactivation of
Huntington's common stock repurchase program, which was previously suspended in
May 1997 due to the First Michigan pooling-of-interests merger transaction. In
connection with the reinstatement of the program, the Board of Directors also
increased the number of shares authorized for repurchase to 15 million, up from
approximately 3 million shares remaining when the
TABLE 12
- ----------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND PAST DUE LOANS DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 72,429 $ 65,981 $ 55,040 $ 55,423 $ 47,524 $ 81,310
Renegotiated loans 4,706 5,822 4,422 5,320 3,768 3,080
-------- -------- -------- -------- -------- --------
TOTAL NON-PERFORMING LOANS 77,135 71,803 59,462 60,743 51,292 84,390
-------- -------- -------- -------- -------- --------
Other real estate, net 18,964 15,343 17,208 23,598 54,153 66,578
-------- -------- -------- -------- -------- --------
TOTAL NON-PERFORMING ASSETS $ 96,099 $ 87,146 $ 76,670 $ 84,341 $105,445 $150,968
======== ======== ======== ======== ======== ========
ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 51,037 $ 49,608 $ 39,267 $ 30,937 $ 23,753 $ 28,623
======== ======== ======== ======== ======== ========
NON-PERFORMING LOANS AS A % OF TOTAL
LOANS 0.40% 0.40% 0.35% 0.39% 0.36% 0.67%
NON-PERFORMING ASSETS AS A % OF TOTAL
LOANS AND OTHER REAL ESTATE 0.49% 0.49% 0.46% 0.54% 0.74% 1.19%
ALLOWANCE FOR LOAN LOSSES AS A % OF
NON-PERFORMING LOANS 377.19% 359.55% 388.11% 366.28% 439.10% 276.24%
ALLOWANCE FOR LOAN LOSSES AND OTHER REAL
ESTATE AS A % OF NON-PERFORMING ASSETS 301.00% 294.32% 297.12% 250.06% 199.12% 146.25%
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
TO TOTAL LOANS 0.26% 0.28% 0.23% 0.20% 0.17% 0.23%
Note: For 1998, the amount of interest income which would have been recorded
under the original terms for total loans classified as non-accrual or
renegotiated was $6.4 million. Amounts actually collected and recorded as
interest income for these loans totaled $2.9 million.
22
plan was suspended. The shares will be purchased through open market purchases
and privately negotiated transactions. Repurchased shares will be reserved for
reissue in connection with Huntington's dividend reinvestment, stock option, and
other benefit plans as well as for stock dividends and other corporate purposes.
In 1998, Huntington repurchased approximately 1.1 million shares.
FOURTH QUARTER RESULTS
On an operating basis, earnings for the fourth quarter of 1998 were $91.5
million, compared with $90.6 million in the same period last year. On a diluted
per share basis, operating earnings were $.43, versus $.42 per share in 1997.
ROE for the most recent quarter was 17.87%, compared with 18.23% for the same
period a year ago. ROA was 1.31%, versus 1.41% in last year's final three
months. Cash basis ROE was 29.44% in the recent quarter compared with 21.78% in
the comparable period of 1997. Cash basis ROA was 1.45% versus 1.48% one year
ago. Reported net income for the fourth quarter of 1998, including special
charges, was $31.2 million, or $.15 per share. ROE was 6.10% and ROA was .45%.
Net interest income was $267.3 million in the recent quarter, an increase
of 3% over the corresponding period last year. This increase was driven by
growth in, and a favorable mix of, earning assets as well as a less expensive
liability structure. Compression in loan spreads and higher non-earning assets
mitigated these benefits and caused a narrowing of the margin percentage.
Commercial loans, indirect automobile financing, credit card, and home equity
lending each posted double-digit growth in the recent three months. As a result,
total loans increased 6.6% (annualized) from the prior quarter, despite softness
in real estate portfolio lending. Core deposits grew 3.2%, primarily due to
increases in transaction accounts of 2.4% and savings deposits of 13.8%.
The provision for loan losses was $34.3 million in the last quarter of the
year, compared with $26.2 million in the same period of 1997. Annualized net
charge-offs were .61% of average loans in both the fourth quarters of 1998 and
1997.
Non-interest income, excluding securities gains, was $106.7 million for the
recent quarter, up from $87.5 million for the three months ended December 31,
1997, or an increase of 22%. Improvements were broad-based with substantial
increases in brokerage and insurance and electronic banking. Non-interest
expense, excluding special charges, totaled $208.9 million in the most recent
three months, versus $188.5 million in the final three months of 1997. The
recently announced expense reduction initiatives have already contributed to a
7.3% decrease in personnel and related costs versus the prior quarter and helped
reduce the fourth quarter efficiency ratio to 52.98%.
23
CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES
- -----------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
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 $ 10 $ 1.0 5.22% $ 9 $ 0.5 5.47%
Trading account securities 11 0.6 5.71 10 0.6 5.70
Federal funds sold and securities purchased
under resale agreements 229 12.9 5.64 44 2.4 5.50
Mortgages held for sale 289 20.2 6.99 131 10.1 7.75
Securities:
Taxable 4,896 308.8 6.31 5,351 339.8 6.35
Tax exempt 247 21.9 8.83 264 25.3 9.55
------- -------- ------- --------
Total Securities 5,143 330.7 6.43 5,615 365.1 6.50
------- -------- ------- --------
Loans:
Commercial 5,629 469.0 8.33 5,302 456.6 8.61
Real Estate
Construction 829 71.7 8.65 813 73.8 8.85
Mortgage 3,604 304.2 8.44 3,761 326.9 8.71
Consumer
Loans 6,679 593.9 8.89 6,299 574.8 9.12
Leases 1,693 120.1 7.09 1,406 106.7 7.59
------- -------- ------- --------
Total Consumer loans 8,372 714.0 8.53 7,705 681.5 8.84
------- -------- ------- --------
Total Loans 18,434 1,558.9 8.46 17,581 1,538.8 8.75
------- -------- ------- --------
Allowance for loan losses/loan fees 280 85.4 253 75.8
------- -------- ------- --------
Net loans 18,154 1,644.3 8.92 17,328 1,614.6 9.18
------- -------- ------- --------
Total earning assets 24,116 2,009.7 8.33% 23,391 1,993.3 8.52%
------- -------- ------- --------
Cash and due from banks 975 910
All other assets 2,081 1,103
------- -------
TOTAL ASSETS $26,892 $25,151
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 3,287 $ 2,774
Interest bearing demand deposits 3,585 96.4 2.69% 3,204 84.4 2.64%
Savings deposits 3,277 114.0 3.46 3,056 100.4 3.28
Other domestic time deposits 6,291 349.1 5.55 5,857 329.7 5.63
------- -------- ------- --------
Total core deposits 16,440 559.5 4.25 14,891 514.5 4.25
------- -------- ------- --------
Certificates of deposit of $100,000 or more 1,870 107.0 5.72 1,922 109.4 5.70
Foreign time deposits 103 5.9 5.66 382 22.2 5.81
------- -------- ------- --------
Total deposits 18,413 672.4 4.44 17,195 646.1 4.48
------- -------- ------- --------
Short-term borrowings 2,084 97.7 4.83 2,826 146.4 5.18
Medium-term notes 2,903 164.6 5.67 1,983 116.2 5.86
Subordinated notes and other long-term debt,
including capital securities 876 43.6 4.98 739 45.5 6.16
------- -------- ------- --------
Total interest bearing liabilities 20,989 978.3 4.66% 19,969 954.2 4.78%
------- -------- ------- --------
All other liabilities 552 514
Shareholders' equity 2,064 1,894
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,892 $25,151
======= =======
Net interest rate spread 3.67% 3.74%
Impact of non-interest bearing funds on margin 0.61% 0.70%
NET INTEREST MARGIN $1,031.4 4.28% $1,039.1 4.44%
======== ========
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate.
Average loan balances include non-accruing loans. Interest income includes
cash on non-accruing loans.
24
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
- ----------------------------- ----------------------------- ---------------------------- -------------------------------
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
- ----------------------------- ----------------------------- ---------------------------- -------------------------------
$ 14 $ 0.8 5.85% $ 26 $ 1.6 5.99% $ 8 $ 0.5 6.23% $ 30 $ 1.3 4.27%
16 0.9 5.66 23 1.6 7.29 14 0.9 6.16 10 0.5 5.04
67 3.8 6.03 93 5.6 6.10 134 5.8 4.30 103 3.3 3.22
113 8.7 7.74 133 10.0 7.58 367 25.9 7.06 827 60.2 7.28
5,194 333.7 6.42 4,679 310.7 6.64 3,713 226.5 6.10 4,703 284.5 6.05
291 27.9 9.59 342 33.2 9.73 419 42.0 10.03 464 49.6 10.70
------- ------- ------- -------- ------- -------- ------- --------
5,485 361.6 6.59 5,021 343.9 6.85 4,132 268.5 6.50 5,167 334.1 6.47
------- ------- ------- -------- ------- -------- ------- --------
4,955 396.9 8.01 4,703 403.3 8.58 4,140 350.1 8.46 3,823 321.5 8.41
580 50.7 8.75 473 41.6 8.79 396 30.6 7.73 445 31.1 6.99
3,614 312.3 8.64 3,834 328.1 8.56 3,474 278.3 8.01 3,084 253.9 8.24
5,880 528.4 8.99 5,508 494.2 8.97 4,837 401.6 8.31 4,008 364.6 9.10
950 74.8 7.87 657 51.0 7.76 485 34.7 7.15 349 27.8 7.97
------- ------- ------- -------- ------- -------- ------- --------
6,830 603.2 8.83 6,165 545.2 8.84 5,322 436.3 8.20 4,357 392.4 9.01
------- ------- ------- -------- ------- -------- ------- --------
15,979 1363.1 8.53 15,175 1,318.2 8.69 13,332 1,095.3 8.21 11,709 998.9 8.53
------- ------- ------- -------- ------- -------- ------- --------
231 49.2 227 43.4 235 40.1 215 33.2
------- ------- ------- -------- ------- -------- ------- --------
15,748 1412.3 8.84 14,948 1,361.6 8.97 13,097 1,135.4 8.52 11,494 1,032.1 8.82
------- ------- ------- -------- ------- -------- ------- --------
21,674 1788.1 8.26% 20,471 1,724.3 8.43% 17,987 1,437.0 7.99% 17,846 1,431.5 8.02%
------- ------- ------- -------- ------- -------- ------- --------
901 883 841 787
1,031 972 906 923
------- ------- ------- -------
$23,375 $22,099 $19,499 $19,341
======= ======= ======= =======
$ 2,664 $ 2,477 $ 2,390 $ 2,384
3,068 80.2 2.61% 2,815 68.6 2.44% 2,984 65.9 2.21% 2,908 70.2 2.41%
2,836 86.3 3.04 2,666 77.9 2.92 2,935 68.0 2.32 2,863 75.4 2.63
5,463 310.3 5.68 5,382 300.3 5.58 4,383 187.3 4.27 4,376 187.6 4.29
------- ------- ------- -------- ------- -------- ------- --------
14,031 476.8 4.19 13,340 446.8 4.11 12,692 321.2 3.12 12,531 333.2 3.28
------- ------- ------- -------- ------- -------- ------- --------
1,525 85.5 5.61 1,269 74.8 5.89 914 39.3 4.30 1,049 39.8 3.79
305 18.4 6.03 262 17.0 6.50 286 12.2 4.25 455 15.0 3.30
------- ------- ------- -------- ------- -------- ------- --------
15,861 580.7 4.40 14,871 538.6 4.34 13,892 372.7 3.24 14,035 388.0 3.33
------- ------- ------- -------- ------- -------- ------- --------
2,883 149.1 5.17 2,422 138.1 5.70 1,606 59.2 3.68 2,503 73.8 2.95
1,835 120.2 6.55 2,103 146.4 6.96 1,532 75.2 4.91 478 20.3 4.23
516 30.7 5.96 529 33.8 6.38 562 39.8 7.09 613 32.7 5.35
------- ------- ------- -------- ------- -------- ------- --------
18,430 880.7 4.78% 17,448 856.9 4.91% 15,202 546.9 3.60 15,244 514.8 3.38%
------- ------- ------- -------- ------- -------- ------- --------
505 432 3.48% 286 298 4.39%
1,776 1,742 0.71% 1,621 1,415 0.56%
------- ------- ------- -------
$23,375 $22,099 4.19% $19,499 $19,341 4.95%
======= ======= ======= =======
3.52% 4.64%
0.72% 0.50%
$ 907.4 $ 867.4 4.24% $ 890.1 $ 916.7 5.14%
======= ======== ======== ========
25
SELECTED ANNUAL INCOME STATEMENT DATA
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(in thousands of dollars, ---------------------------------------------------------------------------------------
except per share amounts) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 1,999,364 $ 1,981,473 $ 1,775,734 $ 1,709,627 $ 1,418,610 $ 1,410,401
TOTAL INTEREST EXPENSE 978,271 954,243 880,648 856,860 546,880 514,812
------------ ------------ ------------ ------------ ------------ ------------
NET INTEREST INCOME 1,021,093 1,027,230 895,086 852,767 871,730 895,589
Provision for loan losses 105,242 107,797 76,371 36,712 21,954 84,682
------------ ------------ ------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 915,851 919,433 818,715 816,055 849,776 810,907
------------ ------------ ------------ ------------ ------------ ------------
Service charges on deposit accounts 126,403 117,852 107,669 97,505 88,457 83,570
Mortgage banking 60,006 55,715 43,942 39,309 47,194 63,964
Trust services 50,754 48,102 42,237 37,627 35,278 33,879
Brokerage and insurance income 36,710 27,084 20,856 17,979 14,721 16,342
Electronic banking fees 29,202 22,705 12,013 6,190 3,405 2,078
Bank Owned Life Insurance income 28,712 -- -- -- -- --
Credit card fees 21,909 20,467 23,086 18,757 18,589 18,084
Other 54,711 42,936 46,640 48,343 34,773 35,967
------------ ------------ ------------ ------------ ------------ ------------
TOTAL NON-INTEREST INCOME BEFORE
SECURITY GAINS 408,407 334,861 296,443 265,710 242,417 253,884
------------ ------------ ------------ ------------ ------------ ------------
Securities gains 29,793 7,978 17,620 9,380 2,297 27,316
------------ ------------ ------------ ------------ ------------ ------------
TOTAL NON-INTEREST INCOME 438,200 342,839 314,063 275,090 244,714 281,200
------------ ------------ ------------ ------------ ------------ ------------
Personnel and related costs 428,539 392,793 360,865 344,905 347,361 350,615
Outside data processing and other services 74,795 66,683 58,367 53,582 56,424 49,924
Equipment 62,040 57,867 50,887 44,646 44,806 43,012
Net occupancy 54,123 49,509 49,676 47,824 46,304 45,496
Marketing 32,260 32,782 20,331 17,598 20,074 18,163
Telecommunications 29,429 21,527 16,567 13,946 13,068 11,454
Amortization of intangible assets 25,689 13,019 10,220 9,471 9,612 6,671
Legal and other professional services 25,160 24,931 20,313 18,656 18,457 21,060
Printing and supplies 23,673 21,584 19,602 18,103 18,379 18,405
Franchise and other taxes 22,103 19,836 20,359 17,083 16,149 15,920
Other 46,118 51,414 48,323 76,247 92,886 108,731
------------ ------------ ------------ ------------ ------------ ------------
TOTAL NON-INTEREST EXPENSE BEFORE
SPECIAL CHARGES 823,929 751,945 675,510 662,061 683,520 689,451
Special charges, including merger costs 90,000 51,163 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
TOTAL NON-INTEREST EXPENSE 913,929 803,108 675,510 662,061 683,520 689,451
------------ ------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 440,122 459,164 457,268 429,084 410,970 402,656
Provision for income taxes 138,354 166,501 152,999 147,283 134,650 135,731
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME $ 301,768 $ 292,663 $ 304,269 $ 281,801 $ 276,320 $ 266,925
============ ============ ============ ============ ============ ============
PER COMMON SHARE(1)
Net income
Basic $ 1.43 $ 1.39 $ 1.44 $ 1.29 $ 1.27 $ 1.25
Diluted $ 1.41 $ 1.38 $ 1.42 $ 1.28 $ 1.26 $ 1.23
Cash dividends declared $ 0.76 $ 0.68 $ 0.62 $ 0.56 $ 0.51 $ 0.42
FULLY TAX EQUIVALENT MARGIN:
Net Interest Income $ 1,021,093 $ 1,027,230 $ 895,086 $ 852,767 $ 871,730 $ 895,589
Tax Equivalent Adjustment(2) 10,307 11,864 12,363 14,602 18,405 21,072
------------ ------------ ------------ ------------ ------------ ------------
Tax Equivalent Net Interest Income $ 1,031,400 $ 1,039,094 $ 907,449 $ 867,369 $ 890,135 $ 916,661
============ ============ ============ ============ ============ ============
(1) Adjusted for stock dividends and stock splits, as applicable.
(2) Calculated assuming a 35% tax rate.
26
MARKET PRICES, KEY RATIOS
AND STATISTICS (QUARTERLY DATA)
- --------------------------------------------------------------------------------
QUARTERLY COMMON STOCK SUMMARY (1) 1998
- ---------------------------------- -------------------------------------------------
IV Q III Q II Q I Q
---------- ---------- --------- ----------
High $31 1/2 $33 7/8 $34 9/16 $34 7/32
Low 23 5/8 22 29 9/16 29 1/16
Close 30 1/16 25 1/8 30 9/16 33 1/8
Cash dividends declared $0.20 $0.20 $0.18 $0.18
1997
--------------------------------------------------
IV Q III Q II Q I Q
---------- ---------- --------- ----------
High $35 5/16 $34 5/16 $25 1/16 $26 1/4
Low 28 5/8 24 1/16 21 5/16 20 11/16
Close 32 3/4 32 3/4 24 3/4 21 11/16
Cash dividends declared $0.18 $0.18 $0.16 $0.16
(1) Adjusted for stock splits and stock dividends, as applicable.
Note: Stock price quotations were obtained from NASDAQ.
- --------------------------------------------------------------------------------
KEY RATIOS AND STATISTICS(1) 1998
----------------------------------------------------
IV Q III Q II Q I Q
- ------------------------------------------- ---------- ---------- ---------- ----------
MARGIN ANALYSIS - AS A %
OF AVERAGE EARNING ASSETS(2)
Interest Income 8.17% 8.33% 8.37% 8.48%
Interest Expense 3.93 4.15 4.14 4.18
---------- ---------- ---------- ----------
Net Interest Margin 4.24% 4.18% 4.23% 4.30%
========== ========== ========== ==========
RETURN ON
Average total assets 1.31% 1.28% 1.42% 1.38%
Average total assets- cash basis 1.45% 1.43% 1.49% 1.44%
Average shareholders' equity 17.87% 16.43% 17.70% 17.73%
Average shareholders' equity-cash basis 29.44% 26.59% 21.17% 21.09%
1997
----------------------------------------------------
IV Q III Q II Q I Q
---------- ---------- ---------- ----------
MARGIN ANALYSIS - AS A %
OF AVERAGE EARNING ASSETS(2)
Interest Income 8.51% 8.52% 8.62% 8.43%
Interest Expense 4.07 4.11 4.08 4.04
---------- ---------- ---------- ----------
Net Interest Margin 4.44% 4.41% 4.54% 4.39%
========== ========== ========== ==========
RETURN ON
Average total assets 1.41% 1.37% 1.33% 1.27%
Average total assets- cash basis 1.48% 1.44% 1.40% 1.33%
Average shareholders' equity 18.23% 17.85% 18.07% 17.42%
Average shareholders' equity- cash basis 21.78% 21.37% 21.90% 20.59%
(1) Presented on an "operating" basis (excludes special charges and related
taxes).
(2) Presented on a fully tax equivalent basis assuming a 35% tax rate.
27
SELECTED QUARTERLY INCOME STATEMENT DATA
- --------------------------------------------------------------------------------
1998 1997
(in thousands of dollars, ----------------------------------------- -----------------------------------------
except per share amounts) IVQ IIIQ IIQ IQ IVQ IIIQ IIQ IQ
- ----------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL INTEREST INCOME $500,395 $505,221 $491,268 $502,480 $499,760 $502,821 $503,018 $475,874
TOTAL INTEREST EXPENSE 233,094 253,706 243,839 247,632 240,197 245,663 240,060 228,323
-------- -------- -------- -------- -------- -------- -------- --------
NET INTEREST INCOME 267,301 251,515 247,429 254,848 259,563 257,158 262,958 247,551
Provision for loan losses 34,306 24,160 24,595 22,181 26,235 28,351 30,831 22,380
-------- -------- -------- -------- -------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 232,995 227,355 222,834 232,667 233,328 228,807 232,127 225,171
-------- -------- -------- -------- -------- -------- -------- --------
Service charges on deposit accounts 33,992 32,493 30,428 29,490 31,035 30,382 28,841 27,594
Mortgage banking 15,388 15,270 15,191 14,157 15,889 20,672 10,157 8,997
Trust services 12,924 12,502 12,745 12,583 12,019 12,124 11,814 12,145
Brokerage and insurance income 9,848 10,057 8,520 8,285 6,131 7,614 6,254 7,085
Electronic banking fees 8,037 7,897 7,520 5,748 6,175 5,965 6,200 4,365
Bank Owned Life Insurance income 8,098 8,098 7,168 5,348 -- -- -- --
Credit card fees 6,367 5,197 5,450 4,895 6,634 5,112 4,787 3,934
Other 12,057 12,512 18,318 11,824 9,593 12,986 9,844 10,513
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL NON-INTEREST INCOME BEFORE
SECURITY GAINS 106,711 104,026 105,340 92,330 87,476 94,855 77,897 74,633
-------- -------- -------- -------- -------- -------- -------- --------
Securities gains 1,773 10,615 14,316 3,089 1,034 1,242 3,604 2,098
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL NON-INTEREST INCOME 108,484 114,641 119,656 95,419 88,510 96,097 81,501 76,731
-------- -------- -------- -------- -------- -------- -------- --------
Personnel and related costs 103,600 111,744 108,483 104,712 97,217 101,334 96,994 97,248
Outside data processing and other services 20,915 17,550 16,988 19,342 19,067 16,665 16,454 14,497
Equipment 16,202 15,001 15,688 15,149 16,004 14,503 14,173 13,187
Net occupancy 11,602 15,019 14,063 13,439 11,755 12,772 11,650 13,332
Amortization of intangible assets 9,436 9,467 3,393 3,393 3,285 3,382 3,406 2,946
Marketing 8,251 8,762 8,315 6,932 8,187 7,845 7,785 8,965
Telecommunications 8,173 7,793 7,450 6,013 5,636 5,639 5,285 4,967
Legal and other professional services 7,847 5,291 6,234 5,788 8,318 6,095 5,089 5,429
Printing and supplies 6,450 5,851 5,611 5,761 6,239 5,384 5,035 4,926
Franchise and other taxes 5,554 5,523 5,526 5,500 4,576 4,685 5,335 5,240
Other 10,902 9,876 14,927 10,413 8,248 15,443 14,599 13,124
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE BEFORE
SPECIAL CHARGES 208,932 211,877 206,678 196,442 188,532 193,747 185,805 183,861
Special charges, including merger costs 90,000 -- -- -- -- 51,163 -- --
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE 298,932 211,877 206,678 196,442 188,532 244,910 185,805 183,861
-------- -------- -------- -------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES 42,547 130,119 135,812 131,644 133,306 79,994 127,823 118,041
Provision for income taxes 11,329 41,364 43,503 42,158 42,657 38,762 44,220 40,862
-------- -------- -------- -------- -------- -------- -------- --------
NET INCOME $ 31,218 $ 88,755 $ 92,309 $ 89,486 $ 90,649 $ 41,232 $ 83,603 $ 77,179
======== ======== ======== ======== ======== ======== ======== ========
PER COMMON SHARE(1)
Net income--Diluted $ 0.15 $ 0.42 $ 0.43 $ 0.42 $ 0.42 $ 0.20 $ 0.39 $ 0.37
Cash dividends declared $ 0.20 $ 0.20 $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.16 $ 0.16
OPERATING RESULTS(2)
Net income $ 91,518 $ 88,755 $ 92,309 $ 89,486 $ 90,649 $ 87,466 $ 83,603 $ 77,179
Net income per common share
Diluted $ 0.43 $ 0.42 $ 0.43 $ 0.42 $ 0.42 $ 0.41 $ 0.39 $ 0.37
Diluted--cash basis(3) $ 0.47 $ 0.45 $ 0.45 $ 0.43 $ 0.44 $ 0.43 $ 0.41 $ 0.38
(1) Adjusted for stock dividends and stock splits, as applicable.
(2) Presented on an "operating basis" (excludes special charges and related
taxes).
(3) Tangible or "Cash Basis" net income excludes amortization of goodwill and
other intangibles.
28
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this item is set forth in Item 7 on pages 18
through 21 under the caption "Interest Rate Risk and Liquidity Management."
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
The integrity of the financial statements and other financial information
contained in this Form 10-K 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 to the right.
/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, 1998 and 1997, 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,
1998. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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, 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Columbus, Ohio
January 13, 1999
29
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------
(in thousands of dollars) 1998 1997
- ---------------------------------------------------------------------------- ------------ ------------
ASSETS
Cash and due from banks $ 1,215,814 $ 1,142,450
Interest bearing deposits in banks 102,564 39,618
Trading account securities 3,839 7,082
Federal funds sold and securities purchased under resale agreements 135,764 509,119
Mortgages held for sale 466,664 192,948
Securities available for sale - at fair value 4,781,415 5,709,814
Investment securities - fair value $25,044 and $33,383, respectively 24,934 33,010
Total loans 19,454,551 17,738,248
Less allowance for loan losses 290,948 258,171
------------ ------------
Net loans 19,163,603 17,480,077
------------ ------------
Bank owned life insurance 727,837 400,000
Premises and equipment 447,038 389,481
Customers' acceptance liability 22,591 27,818
Accrued income and other assets 1,204,273 799,123
------------ ------------
TOTAL ASSETS $ 28,296,336 $ 26,730,540
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits
Non-interest bearing $ 3,129,199 $ 2,549,518
Interest bearing 4,642,147 3,762,862
Savings deposits 3,690,040 3,133,014
Other domestic time deposits 6,186,985 6,115,534
------------ ------------
Total Core Deposits 17,648,371 15,560,928
------------ ------------
Certificates of deposit of $100,000 or more 1,699,261 1,903,657
Foreign time deposits 375,140 519,133
------------ ------------
Total Deposits 19,722,772 17,983,718
------------ ------------
Short-term borrowings 2,216,644 3,141,671
Bank acceptances outstanding 22,591 27,818
Medium-term notes 2,539,900 2,332,150
Subordinated notes and other long-term debt 707,359 498,889
Company obligated mandatorily redeemable preferred capital securities of
subsidiary trusts holding solely the junior subordinated debentures
of the parent company 300,000 200,000
Accrued expenses and other liabilities 638,275 520,903
------------ ------------
Total Liabilities 26,147,541 24,705,149
------------ ------------
Shareholders' equity
Preferred stock - authorized 6,617,808 shares; none outstanding
Common stock - without par value; authorized 500,000,000
shares; issued and outstanding 212,596,344 and 193,279,797
shares, respectively 2,152,076 1,528,768
Less 1,850,007 and 1,543,371 treasury shares, respectively (49,271) (36,791)
Capital surplus (14,161) 404,235
Accumulated other comprehensive income 24,693 14,800
Retained earnings 35,458 114,379
------------ ------------
Total Shareholders' Equity 2,148,795 2,025,391
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,296,336 $ 26,730,540
============ ============
See notes to consolidated financial statements.
30
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------
(in thousands of dollars, except per share amounts) 1998 1997 1996
- --------------------------------------------------- ------------ ------------ ------------
Interest and fee income
Loans $ 1,641,081 $ 1,611,541 $ 1,411,551
Securities 323,595 356,388 349,937
Other 34,688 13,544 14,246
------------ ------------ ------------
TOTAL INTEREST INCOME 1,999,364 1,981,473 1,775,734
------------ ------------ ------------
Interest expense
Deposits 672,433 646,121 580,685
Short-term borrowings 97,656 146,397 149,088
Medium-term notes 164,590 116,221 120,147
Subordinated notes and other long-term debt 43,592 45,504 30,728
------------ ------------ ------------
TOTAL INTEREST EXPENSE 978,271 954,243 880,648
------------ ------------ ------------
NET INTEREST INCOME 1,021,093 1,027,230 895,086
Provision for loan losses 105,242 107,797 76,371
------------ ------------ ------------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES 915,851 919,433 818,715
------------ ------------ ------------
Total non-interest income 438,200 342,839 314,063
Total non-interest expense 913,929 803,108 675,510
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 440,122 459,164 457,268
Provision for income taxes 138,354 166,501 152,999
------------ ------------ ------------
NET INCOME $ 301,768 $ 292,663 $ 304,269
============ ============ ============
PER COMMON SHARE(1)
Net income
Basic $ 1.43 $ 1.39 $ 1.44
Diluted $ 1.41 $ 1.38 $ 1.42
Cash dividends declared $ 0.76 $ 0.68 $ 0.62
AVERAGE COMMON SHARES(1)
Basic 211,426,422 209,884,443 211,740,756
Diluted 213,454,215 212,447,637 213,764,495
(1) Adjusted for stock dividends and stock splits, as applicable.
See notes to consolidated financial statements.
31
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON COMMON TREASURY TREASURY CAPITAL COMPREHENSIVE RETAINED
(in thousands, except per share amounts) SHARES STOCK SHARES STOCK SURPLUS INCOME EARNINGS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE -- JANUARY 1, 1996 163,172 $1,075,057 (8,352) $(180,632) $ 382,732 $ 42,790 $ 452,746 $1,772,693
Comprehensive Income:
Net income 304,269 304,269
Unrealized net holding losses on
securities available for sale arising
during the period (56,721) (56,721)
----------
Total comprehensive income 247,548
----------
Stock issued for acquisitions 4,733 102,760 5,037 107,797
Cash dividends declared ($0.62 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
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
-------- ---------- ------- --------- --------- -------- --------- ----------
Comprehensive Income:
Net income 292,663 292,663
Unrealized net holding gains on
securities available for sale arising
during the period 28,731 28,731
---------
Total comprehensive income 321,394
----------
Stock issued for acquisitions 3,244 73,775 16,463 90,238
Cash dividends declared ($0.68 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
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
-------- ---------- ------- --------- --------- -------- --------- ----------
Comprehensive Income:
Net income 301,768 301,768
Unrealized net holding gains on
securities available for sale arising
during the period 9,893 9,893
----------
Total comprehensive income 311,661
----------
Stock issued for acquisition 160 3,883 (3,815) 68
Cash dividends declared ($0.76 per share) (161,447) (161,447)
Stock options exercised 736 14,350 (10,348) 4,002
10% stock dividend 19,317 623,308 (83) (404,437) (219,242) (371)
Treasury shares purchased (1,139) (31,192) (31,192)
Treasury shares sold to
employee benefit plans 19 479 204 683
-------- ---------- ------- --------- --------- -------- --------- ----------
BALANCE -- DECEMBER 31, 1998 212,596 $2,152,076 (1,850) $ (49,271) $ (14,161) $ 24,693 $ 35,458 $2,148,795
======== ========== ======= ========= ========= ======== ========= ==========
See notes to consolidated financial statements.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------
(in thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------- ----------- ----------- -----------
OPERATING ACTIVITIES
Net Income $ 301,768 $ 292,663 $ 304,269
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 105,242 107,797 76,371
Provision for depreciation and amortization 80,956 63,383 91,903
Deferred income tax expense 2,769 47,687 35,740
Decrease (increase) in trading account securities 3,243 (5,209) 11,051
(Increase) decrease in mortgages held for sale (273,716) (71,526) 46,909
Net gains on sales of securities (29,793) (7,978) (17,620)
Net gains on sales of loans (9,903) (12,200) (1,382)
Decrease (increase) in accrued income receivable 31,663 (7,003) 6,319
Net increase in other assets (79,588) (111,259) (53,471)
Decrease in accrued expenses 65,938 15,993 (26,066)
Net (decrease) increase in other liabilities (31,150) 11,228 5,111
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 167,429 323,576 479,134
----------- ----------- -----------
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in banks (62,946) (36,185) 286,537
Proceeds from :
Maturities and calls of investment securities 8,348 90,287 104,180
Maturities and calls of securities available for sale 1,356,659 787,788 477,462
Sales of securities 3,782,540 2,297,166 2,743,036
Purchases of:
Investment securities (355) (2,962) (19,247)
Securities available for sale (4,043,068) (2,958,135) (3,111,606)
Proceeds from sales of loans 142,801 357,396 110,737
Net loan originations, excluding sales (724,662) (1,209,015) (1,354,362)
Proceeds from sale of premises and equipment 176,513 8,243 1,664
Purchases of premises and equipment (147,045) (45,849) (51,617)
Proceeds from sales of other real estate 13,856 17,441 18,627
Purchases of Bank Owned Life Insurance (300,000) (400,000) --
Net cash received (paid) in purchase acquisitions 417,031 (2,294) 631
----------- ----------- -----------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 619,672 (1,096,119) (793,958)
----------- ----------- -----------
FINANCING ACTIVITIES
(Decrease) increase in total deposits (495,638) 1,025,005 521,255
(Decrease) increase in short-term borrowings (925,027) (251,629) 307,317
Proceeds from issuance of long-term debt 300,000 95,500 66,866
Payment of long-term debt (90,038) (122,372) (58,421)
Proceeds from issuance of medium-term notes 1,395,000 1,792,150 1,540,300
Payment of medium-term notes (1,187,250) (1,245,300) (1,934,000)
Proceeds from issuance of capital securities 100,000 200,000 --
Dividends paid on common stock, including pre-merger dividends
of pooled subsidiary (157,632) (132,760) (125,379)
Repurchases of common stock (31,192) (56,175) (258,415)
Proceeds from issuance of common stock 4,685 27,266 43,971
----------- ----------- -----------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (1,087,092) 1,331,685 103,494
----------- ----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS (299,991) 559,142 (211,330)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,651,569 1,092,427 1,303,757
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,351,578 $ 1,651,569 $ 1,092,427
=========== =========== ===========
NOTE: Huntington made interest payments of $995,625, $964,203, and $886,020 in
1998, 1997, and 1996, respectively. Federal income tax payments were
$77,407 in 1998, $114,755 in 1997, and $120,645 in 1996.
See notes to consolidated financial statements.
33
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 to the current year's
presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect amounts reported in the
financial statements. Actual results could differ from those estimates.
NEW PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement No. 130, "Reporting Comprehensive Income." Pursuant to
this rule, the Consolidated Statements of Changes in Shareholders' Equity now
include a new measure called "Comprehensive Income," which includes net income
as well as certain items that are reported within a separate component of
shareholders' equity that bypass net income. Currently, Huntington's only
component of Other Comprehensive Income is its unrealized gains (losses) on
securities available for sale.
The FASB also issued Statement No. 131, "Disclosure about Segments of an
Enterprise and Related Information" in June 1997. 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.
Note 15 to the Consolidated Financial Statements includes the segment
information required by the new standard.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). 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.
FAS 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. FAS 133 cannot be applied retroactively.
Huntington expects to adopt FAS 133 in the first quarter of 2000. Based on
information available, the impact of adoption is not expected to be material to
the Consolidated Financial Statements.
SECURITIES: Debt securities that Huntington has both the positive intent
and ability to hold to maturity are classified as investments and are carried at
amortized cost. Securities purchased with the intention of recognizing
short-term profits are placed in the trading account and carried at fair value.
Securities not classified as investments or trading are designated available for
sale and carried at fair value. Unrealized gains and losses on securities
available for sale are carried as a separate component of accumulated other
comprehensive income in shareholders' equity. Unrealized gains and losses on
securities classified as trading are reported in earnings. The amortized cost of
specific securities sold is used to compute realized gains and losses.
LOANS: 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 on loans and leases 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
34
1. ACCOUNTING POLICIES (CONTINUED)
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 probable
losses in the loan portfolio. This judgment is based on a review of individual
loans, historical loss experience, economic conditions, portfolio trends, and
other factors. The allowance is increased by provisions charged to earnings and
reduced by charge-offs, net of recoveries.
The portion of the allowance for loan losses related to impaired loans
(non-accruing and restructured credits, exclusive of smaller, homogeneous loans)
is based on discounted cash flows using the loans initial effective interest
rate or the fair value of the collateral for collateral-dependent loans.
OTHER REAL ESTATE: Other real estate acquired through partial or total
satisfaction of loans, is included in other assets and carried at the lower of
cost or fair value less estimated costs of disposition. At the date of
acquisition, any losses are charged to the allowance for loan losses. Subsequent
write-downs are included in non-interest expense. Realized losses from
disposition of the property and declines in fair value that are considered
permanent are charged to the reserve for other real estate, as applicable.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the related assets.
Estimated useful lives employed are on average 30 years for buildings, 10 to 20
years for building improvements, 10 years for land improvements, 3 to 7 years
for equipment, and 10 years for furniture and fixtures.
MORTGAGE BANKING ACTIVITIES: Mortgages held for sale are reported at the
lower of cost or aggregate market value primarily as determined by outstanding
commitments from investors.
Capitalized mortgage servicing rights (MSRs) are evaluated for impairment
based on the fair value of those rights, using a disaggregated approach. MSRs
are amortized on an accelerated basis over the estimated period of net servicing
revenue.
BUSINESS COMBINATIONS: Net assets of entities acquired, for which the
purchase method of accounting was used by Huntington, were recorded at their
estimated fair value at the date of acquisition. The excess of cost over the
fair value of net assets acquired (goodwill) is being amortized over periods
generally up to 25 years. Core deposits and other identifiable acquired
intangible assets are amortized over their estimated useful lives.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Huntington uses certain
off-balance sheet financial instruments, principally interest rate swaps, in
connection with its asset/liability management activities. Purchased interest
rate options (including caps and floors), futures, and forwards are also used to
manage interest rate risk. Provided these instruments meet specific criteria,
they are considered hedges and accounted for under the accrual or deferral
methods, as more fully discussed below. Off-balance sheet financial instruments
that do not meet the required criteria are carried on the balance sheet at fair
value with realized and unrealized changes in that value recognized in earnings.
Similarly, if the hedged item is sold or its outstanding balance otherwise
declines below that of the related hedging instrument, the off-balance sheet
product is marked-to-market and the resulting gain or loss is included in
earnings. Accrual accounting is used when the cash flows attributable to the
hedging instrument satisfy the objectives of the asset/liability management
strategy. Huntington uses the accrual method for substantially all of its
interest rate swaps as well as for interest rate options. Amounts receivable or
payable under these agreements are recognized as an adjustment to the interest
income or expense of the hedged item. There is no recognition on the balance
sheet for changes in the fair value of the hedging instrument, except for
interest rate swaps designated as hedges of securities available for sale, for
which changes in fair values are reported in accumulated other comprehensive
income. Premiums paid for interest rate options are deferred as a component of
other assets and amortized to interest income or expense over the contract term.
Gains and losses on terminated hedging instruments are also deferred and
amortized to interest income or expense generally over the remaining life of the
hedged item.
35
1. ACCOUNTING POLICIES (CONTINUED)
Huntington employs deferral accounting when the market value of the hedging
instrument meets the objectives of the asset/liability management strategy and
the hedged item is reported at other than fair value. In such cases, gains and
losses associated with futures and forwards are deferred as an adjustment to the
carrying value of the related asset or liability and are recognized in the
corresponding interest income or expense accounts over the remaining life of the
hedged item.
STATEMENT OF CASH FLOWS: Cash and cash equivalents are defined as `Cash and
due from banks' and "Federal funds sold and securities purchased under resale
agreements."
2. 1998 SPECIAL CHARGE
In October 1998, Huntington announced several initiatives to strengthen its
financial performance. These initiatives included the realignment of the banking
network; the exit of underperforming product lines and delivery channels; the
reduction of 1,000 work force positions, or approximately 10% of the total
employee base; and other cost savings measures. As a result of the above
initiatives, Huntington incurred a special charge of $90 million in the fourth
quarter of the year. Included in the one-time expenses were severance costs for
terminated employees, the non-cash write-off of information systems equipment
and software that were abandoned in the fourth quarter of the year, the
write-down to fair value of retail banking offices to be closed, the costs to
terminate certain long-term lease contracts related to retail banking offices to
be closed, and the estimated amounts to be written off or paid to complete the
exit activities, as more fully described below, that were begun in 1998.
Management expects that the actions discussed below will be substantially
complete by the fourth quarter of 1999.
The work force reduction spans the entire organization and is in large part
attributable to continued internal consolidation efforts by Huntington that
resulted in the formation of a single interstate banking charter, as well as
continued efficiency opportunities in back room operations such as loan and
deposit administration. Through December 31, 1998, 409 employees had been
terminated.
Operational equipment charges relate to the write-off of $4 million in
computer equipment that was abandoned and replaced in the fourth quarter of
1998. In addition, Huntington abandoned certain customized software projects
with a book value of $8 million that were determined not to be economically
viable and had no alternative use within the organization.
The retail banking office costs stem from Huntington's announcement that it
will close 39 underperforming banking offices, substantially all of which will
be closed by the end of the second quarter of 1999. Non-cash charges relate to
the write-down to fair value (estimated selling price) of 20 branches that are
to be closed and held for disposal. These branches have a remaining carrying
value of approximately $4 million. Other non-cash charges relate to the
write-off of leasehold improvements in 19 branches that are to be closed. The
cash portion of the charge relates to amounts to be paid to terminate lease and
other contracts on the branches that are to be closed.
Non-cash exit costs relate to unrecoverable assets associated with
discontinued business activities such as returned check processing, commercial
equipment leasing, out of geographic market credit card lending, and the
indirect lending operation in Pittsburgh. Cash exit costs relate principally to
the decision to terminate the employee benefit plan administrative services
business. Such business was exited in the fourth quarter of 1998. The costs
primarily are composed of cash payments to third party vendors to be incurred to
fulfill Huntington's contractual obligations with regard to benefit plan
customers prior to the transfer of the administrative service to another vendor.
Revenues and operating income of activities exited and retail banking
offices to be closed are not significant to Huntington's operating results.
The table below summarizes the major components of the special charge, as
well as the related amounts applied against the reserve in 1998. Huntington
expects that the remaining reserve of $54 million, which represents estimated
future cash outlays, will be substantially utilized during 1999.
- -------------------------------------------------------------------------------------------------------------------
EMPLOYEE OPERATION RETAIL EXIT
(in millions of dollars) COSTS EQUIPMENT BANK OFFICES COSTS TOTAL
- -------------------------------------------------------------------------------------------------------------------
Special Charge $ 26 $ 12 $ 20 $ 32 $ 90
Utilization:
Cash (8) --- --- (7) (15)
Non-cash --- (12) (5) (4) (21)
------ ------ ------ ----- ------
Balance as of December 31, 1998 $ 18 $ --- $ 15 $ 21 $ 54
====== ====== ===== ===== ======
36
3. MERGERS AND ACQUISITIONS
On June 26, 1998, Huntington completed the acquisition of sixty former
Barnett Banks banking offices in Florida from NationsBank Corporation. The
transaction was accounted for as a purchase, and accordingly, the assets
acquired and liabilities assumed were recorded at estimated fair value. The
transaction added approximately $1.3 billion in loans and $2.3 billion in
deposits. Intangible assets arising from the acquisition totaled approximately
$460 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 its acquisition of First
Michigan, a $3.6 billion bank holding company headquartered in Holland,
Michigan. Huntington issued approximately 32.2 million shares of common stock to
the shareholders of First Michigan in a transaction accounted for as a pooling
of interests. In connection with the acquisition, Huntington incurred a merger-
related charge of $51 million consisting primarily of personnel, facilities, and
systems costs, as well as $12 million of professional fees and other costs to
effect the business combination. At December 31, 1998, the merger-related
reserve had been fully used.
4. SECURITIES AVAILABLE FOR SALE
Amortized cost, unrealized gains and losses, and fair values of securities
available for sale as of December 31, 1998 and 1997, were:
- --------------------------------------------------------------------------------
UNREALIZED
----------------------
AMORTIZED GROSS GROSS FAIR
(in thousands of dollars) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------
AT DECEMBER 31, 1998
U.S. Treasury $ 234,496 $ 8,820 $ -- $ 243,316
Federal Agencies
Mortgage-backed securities 1,444,075 12,098 3,985 1,452,188
Other agencies 2,387,137 21,892 8,399 2,400,630
---------- ---------- ---------- ----------
Total U.S. Treasury and Federal
Agencies 4,065,708 42,810 12,384 4,096,134
Other Securities 677,509 11,689 3,917 685,281
---------- ---------- ---------- ----------
Total securities available for sale $4,743,217 $ 54,499 $ 16,301 $4,781,415
========== ========== ========== ==========
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
========== ========== ========== ==========
Contractual maturities of securities available for sale as of December 31, 1998
and 1997, were:
- ---------------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
(in thousands of dollars) COST VALUE (in thousands of dollars) COST VALUE
- -------------------------------------------------------- ------------------------------------------------------
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
Under 1 year $ 8,492 $ 8,485 Under 1 year $ 18,148 $ 18,145
1 - 5 years 1,220,852 1,231,499 1 - 5 years 2,381,776 2,387,294
6 - 10 years 1,140,334 1,161,035 6 - 10 years 1,805,524 1,812,872
Over 10 years 2,365,180 2,373,092 Over 10 years 1,419,307 1,430,374
Marketable equity Marketable equity
securities 8,359 7,304 securities 62,164 61,129
----------- ----------- ----------- -----------
Total $ 4,743,217 $ 4,781,415 Total $ 5,686,919 $ 5,709,814
============ ============ =========== ===========
37
4. SECURITIES AVAILABLE FOR SALE (CONTINUED)
Gross gains from sales of securities of $41.5. million, $12.3 million, and
$24.7 million were realized in 1998, 1997, and 1996, respectively. Gross losses
totaled $11.7 million in 1998, $4.3 million in 1997, and $7.1 million in 1996.
Huntington securitized and transferred to securities available for sale $108.7
million and $115.1 million of residential mortgage loans in 1998 and 1997,
respectively.
5. INVESTMENT SECURITIES
Amortized cost, unrealized gains and losses, and fair values of investment
securities as of December 31, 1998 and 1997, were:
- ----------------------------------------------------------------------
UNREALIZED
--------------
AMORTIZED GROSS GROSS FAIR
(in thousands of dollars) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------
AT DECEMBER 31, 1998
U.S. Treasury and
Federal Agencies $ 156 $ -- $ -- $ 156
States and
political Subdivisions 24,778 154 44 24,888
------- ------- ------- -------
Total investment
Securities $24,934 $ 154 $ 44 $25,044
======= ======= ======= =======
AT DECEMBER 31, 1997
U.S. Treasury and
Federal Agencies $ 656 $ -- $ -- $ 656
States and political
Subdivisions 32,354 471 98 32,727
------- ------- ------- -------
Total investment $33,010 $ 471 $ 98 $33,383
Securities ======= ======= ======= =======
Amortized cost and fair values by contractual maturity at December 31, 1998
and 1997, were:
- ---------------------------------------------------------------------
AMORTIZED FAIR
(in thousands of dollars) COST VALUE
- ---------------------------------------------------------------------
AT DECEMBER 31, 1998
Under 1 year $ 4,318 $ 3,937
1 - 5 years 13,466 13,686
6 - 10 years 5,463 5,674
Over 10 years 1,687 1,747
---------- ----------
Total $ 24,934 $ 25,044
========== ==========
AT DECEMBER 31, 1997
Under 1 year $ 6,311 $ 6,310
1 - 5 years 14,248 14,375
6 - 10 years 9,605 9,788
Over 10 years 2,846 2,910
---------- ----------
Total $ 33,010 $ 33,383
========== ==========
The portfolio of investment securities acquired in the September 1997
First Michigan merger 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.
6. LOANS
At December 31, 1998 and 1997, loans were comprised of the following:
- --------------------------------------------------------------------
(in thousands of dollars) 1998 1997
- --------------------------------------------------------------------
Commercial $ 6,026,736 $ 5,270,660
Real estate
Construction 919,326 863,635
Commercial 2,231,786 2,370,652
Residential 1,408,289 1,228,446
Consumer
Loans 6,957,772 6,462,716
Leases 1,910,642 1,542,139
----------- -----------
Total loans $19,454,551 $17,738,248
=========== ===========
Huntington's subsidiaries have granted loans to their officers, directors,
and related associates. Such loans were made in the ordinary course of business
under normal credit terms, including interest rate and collateralization, and do
not represent more than the normal risk of collection. These loans to related
parties are summarized as follows:
- --------------------------------------------------------------------
(in thousands of dollars) 1998 1997
- --------------------------------------------------------------------
Balance, beginning of year $ 206,971 $ 173,491
Loans made 97,887 126,503
Repayments (161,945) (46,828)
Changes due to status
of executive officers
and directors (10,744) (46,195)
--------- ---------
Balance, end of year $ 132,169 $ 206,971
========= =========
38
7. ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the allowance for loan losses and details
regarding impaired loans follows for the three years ended December 31:
- -----------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- -----------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 258,171 $ 230,778 $ 222,487
Allowance related to acquisitions/other 22,042 7,777 1,907
Loan losses (126,355) (110,723) (91,007)
Recoveries of loans previously charged off 31,848 22,542 21,020
Provision for loan losses 105,242 107,797 76,371
--------- --------- ---------
BALANCE, END OF YEAR $ 290,948 $ 258,171 $ 230,778
========= ========= =========
RECORDED BALANCE OF IMPAIRED LOANS, AT END OF YEAR:
With related allowance for loan losses $ 13,277 $ 20,593 $ 11,770
With no related allowance for loan losses 18,340 14,166 17,503
--------- --------- ---------
Total $ 31,617 $ 34,759 $ 29,273
========= ========= =========
AVERAGE BALANCE OF IMPAIRED LOANS FOR THE YEAR $ 32,547 $ 33,968 $ 31,519
========= ========= =========
ALLOWANCE FOR LOAN LOSSES RELATED TO IMPAIRED LOANS $ 4,459 $ 6,449 $ 4,785
========= ========= =========
8. PREMISES AND EQUIPMENT
At December 31, 1998 and 1997, premises and equipment stated at cost were
comprised of the following:
- -----------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997
- -----------------------------------------------------------------------------------------
Land and land improvements $ 61,902 $ 71,313
Buildings 257,066 286,320
Leasehold improvements 98,162 93,485
Equipment 439,435 355,668
-------- --------
Total premises and equipment 856,565 806,786
Less accumulated depreciation and amortization
409,527 417,305
Net premises and equipment -------- --------
$447,038 $389,481
======== ========
Depreciation and amortization charged and rental income credited to expense
were as follows:
- -----------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- -----------------------------------------------------------------------------------------
Total depreciation and amortization $ 40,489 $ 41,383 $ 39,492
========= ========= =========
Rental income credited to occupancy expense $ 13,133 $ 14,842 $ 11,966
========= ========= =========
In 1998, Huntington entered into a sale/leaseback agreement that included
the sale of 59 properties with a book value approximating $110 million. The
transaction included a mix of branch banking offices, regional offices, and
operations facilities, which Huntington will continue to operate under a
long-term lease. Proceeds of $174.1 million received from the sale were used to
reduce short-term debt. The resulting deferred gain is being amortized as a
reduction of occupancy expense over the lease term.
39
9. SHORT-TERM BORROWINGS
At December 31, 1998 and 1997, short-term borrowings were comprised of
the following:
- --------------------------------------------------------
(in thousands of dollars) 1998 1997
- --------------------------------------------------------
Federal funds purchased
and securities sold
under agreements to
repurchase $2,137,374 $3,064,344
Commercial paper 30,133 40,050
Other 49,137 37,277
---------- ----------
Total short-term borrowings $2,216,644 $3,141,671
========== ==========
Information concerning securities sold under agreements to repurchase is
summarized as follows:
- ---------------------------------------------------------
(in thousands of dollars) 1998 1997
- ---------------------------------------------------------
Average balance during
the year $1,304,499 $1,253,724
Average interest rate
during the year 4.48% 4.58%
Maximum month-end
balance during the year $1,647,599 $1,356,785
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 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 1998 or
1997.
Securities pledged to secure public or trust deposits, repurchase
agreements, and for other purposes were $2.0 billion and $2.1 billion at
December 31, 1998 and 1997, respectively.
10. CAPITAL SECURITIES
The Company obligated mandatorily redeemable preferred capital securities
of subsidiary trusts holding solely the junior subordinated debentures of the
parent company ("Capital Securities") were issued by two wholly-owned business
trusts, Huntington Capital I and II ("the Trusts"). Huntington Capital I was
formed in January 1997 while Huntington Capital II was formed in June 1998. The
Trusts used the proceeds from the issuance of the Capital Securities, together
with Huntington's investment in the common stock of the Trusts, to purchase
debentures of the parent company. The junior subordinated debentures of the
parent company are the only assets of the Trusts. The debentures and their
related income statement effects are eliminated in Huntington's consolidated
financial statements.
The parent company has entered into contractual arrangements that, taken
collectively and in the aggregate, constitute a full and unconditional
guarantee by the parent company of the Trusts' obligations under the Capital
Securities. The contractual arrangements guarantee payment of (a) accrued and
unpaid distributions required to be paid on the Capital Securities; (b) the
redemption price with respect to any Capital Securities called for redemption
by the Trusts; and (c) payments due upon voluntary or involuntary liquidation,
winding-up, or termination of the Trusts, as set forth in the Guarantee. The
Capital Securities, and common stock, and related debentures are summarized as
follows:
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
Interest
Rate of
Principal Securities Maturity of
Capital Common Amount of and Securities and
(in thousands of dollars) Securities Stock Debentures Debentures Debentures
- ---------------------------------------------------------------------------------------------------------------------
Huntington Capital I $ 200,000 $ 6,186 $ 206,186 LIBOR + .70% (1) 02/01/2027
Huntington Capital II 100,000 3,093 103,093 LIBOR + .625%(2) 06/15/2028
--------- ------- ---------
Total $ 300,000 $ 9,279 $ 309,279
========= ======= =========
(1) Variable effective rate at December 31, 1998 and 1997, of 5.92% and 6.48%,
respectively.
(2) Variable effective rate at December 31, 1998, of 5.85%.
40
11. DEBT
At December 31, 1998 and 1997, Huntington's debt consisted of the
following:
- -----------------------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997
- -----------------------------------------------------------------------------------------------------
MEDIUM-TERM
Parent company (maturing through 1999) $ 60,000 $ 220,000
Subsidiary bank (maturing through 2007) 2,479,900 2,112,150
---------- ----------
TOTAL MEDIUM-TERM DEBT 2,539,900 2,332,150
---------- ----------
LONG-TERM
Subordinated notes, 7 5/8 % , maturing in 2003, face value $150,000 at
December 31, 1998 and 1997, net of discount 149,724 149,657
Subordinated notes, 7 7/8%, maturing in 2002, face value $150,000 at
December 31, 1998 and 1997, net of discount 149,505 149,376
Subordinated notes, 6 3/4%, maturing in 2003, face value $100,000 at
December 31, 1998 and 1997, net of discount 99,852 99,819
Subordinated notes, 6 3/5%, maturing in 2018, face value $200,000 at
December 31, 1998, net of discount 198,278 --
Subordinated notes, Floating Rate, maturing in 2008, face value $100,000
at December 31, 1998, net of discount 100,000 --
Federal Home Loan Bank notes maturing through 1999 10,000 95,500
Other -- 4,537
---------- ----------
TOTAL SUBORDINATED NOTES AND OTHER LONG-TERM DEBT 707,359 498,889
---------- ----------
TOTAL DEBT $3,247,259 $2,831,039
========== ==========
PARENT COMPANY OBLIGATIONS:
The 7 7/8% Notes are not redeemable prior to maturity in 2002, and do not
provide for any sinking fund. Interest rate swaps were used by Huntington to
convert the Notes to a variable interest rate. At December 31, 1998, the
effective interest rate on the swap-adjusted Notes was 5.96%.
The Medium-term notes had weighted average interest rates of 6.12% and
5.99% at December 31, 1998 and 1997, respectively.
SUBSIDIARY OBLIGATIONS:
The 7 5/8% Notes and the 6 3/4% Notes were both issued by The Huntington
National Bank in 1993. Adjusted for the effects of interest rate swaps, the
effective rates were 5.82% and 5.26%, respectively, at December 31, 1998. These
Notes are not redeemable prior to maturity in 2003, and do not provide for any
sinking fund. The 6 3/5% Notes and the Floating Rate Notes were issued by The
Huntington National Bank in 1998. Adjusted for the effects of interest rate
swaps, the interest rates were 5.68% and 5.73% at December 31, 1998. The
Floating Rate Notes are based on the three-month London Interbank Offered Rate
(LIBOR).
The Medium-term bank notes had weighted average interest rates of 5.57% and
5.98% at December 31, 1998 and 1997, respectively. The stated interest rates on
certain of these notes have also been modified by interest rate swaps. At
December 31, 1998, the weighted average effective interest rate on the
swap-adjusted Medium-term bank notes was 5.16%.
The Federal Home Loan Bank notes mature serially from February 1999 through
December 1999, and had a weighted average interest rate of 6.15% and 5.84% at
December 31, 1998 and 1997, respectively. These advances cannot be prepaid
without penalty.
The terms of Huntington's medium and long-term debt obligations contain
various restrictive covenants including limitations on the acquisition of
additional debt in excess of specified levels, dividend payments, and the
disposition of subsidiaries. As of December 31, 1998, Huntington was in
compliance with all such covenants.
41
11. DEBT (CONTINUED)
- ------------------------------------------------------
YEAR (in thousands of dollars)
- ------------------------------------------------------
1999 $ 1,537,750
2000 340,000
2001 475,000
2002 242,150
2003 305,000
2004 and thereafter 350,000
-----------
3,249,900
Discount (2,641)
-----------
Total $ 3,247,259
===========
12. OPERATING LEASES
At December 31, 1998, Huntington and its subsidiaries were obligated under
noncancelable operating 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, as of December 31, 1998, have initial or
remaining noncancelable lease terms in excess of one year.
Excluded from the following amounts are minimum sublease rentals of $50.3
million due in the future under noncancelable subleases. The rental expense for
all operating leases was $23.3 million for 1998, compared with $25.2 million in
1997 and $23.0 million in 1996.
- ------------------------------------------------------
YEAR (in thousands of dollars)
- ------------------------------------------------------
1999 $ 41,206
2000 38,458
2001 36,515
2002 34,406
2003 32,164
2004 and thereafter 429,918
----------
Total Minimum Payments $ 612,667
==========
13. 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, 1998, Huntington's credit risk from these off-balance sheet arrangements,
including trading activities, was approximately $131.3 million.
42
13. OFF-BALANCE SHEET TRANSACTIONS (CONTINUED)
The contract or notional amount of financial instruments with off-balance
sheet risk at December 31, 1998 and 1997, is presented in the following table:
- -----------------------------------------------------------
(in millions of dollars) 1998 1997
- -----------------------------------------------------------
CONTRACT AMOUNT REPRESENTS CREDIT RISK
Commitments to extend credit
Commercial $3,833 $4,058
Consumer 3,820 2,992
Other 227 314
Standby letters of credit 758 677
Commercial letters of credit 138 132
NOTIONAL AMOUNT EXCEEDS CREDIT RISK
Asset/liability management activities
Interest rate swaps 4,673 3,194
Purchased interest rate options 965 679
Interest rate forwards and futures 620 267
Trading activities
Interest rate swaps 496 126
Interest rate options 68 53
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 38% of standby letters
of credit are collateralized, and nearly 90% are expected to expire without
being drawn upon.
Commercial letters of credit represent short-term, self-liquidating
instruments that facilitate customer trade transactions and have maturities of
no longer than ninety days. 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.
43
14. REGULATORY MATTERS
The bank subsidiary of Huntington is required to maintain reserve balances
with the Federal Reserve Bank. During 1998, the average balance of these
deposits was $192.5 million.
Payment of dividends to Huntington by its subsidiary bank is subject to
various regulatory restrictions. Regulatory approval is required prior to the
declaration of any dividends in excess of available retained earnings. The
amount of dividends that may be declared without regulatory approval is further
limited to the sum of net income for that year and retained net income for the
preceding two years, less any required transfers to surplus. Huntington's
subsidiary bank could, without regulatory approval, declare dividends in 1999 of
approximately $153.0 million plus an additional amount equal to its net income
through the date of declaration.
The subsidiary bank is also restricted as to the amount and type of loans
it may make to Huntington. At December 31, 1998, the subsidiary bank could lend
to Huntington $222.7 million, subject to the qualifying collateral requirements
defined in the regulations.
Huntington and its bank subsidiary 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
subsidiary's 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 must be at
least 6.00%, 10.00%, and 5.00%, respectively.
Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk-weightings of assets and
certain off-balance sheet items, and other factors. As of December 31, 1998 and
1997, Huntington has met all capital adequacy requirements. In addition, its
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
bank subsidiary, The Huntington National Bank, as well as a comparison of the
period-end capital balances with the related amounts established by the
regulatory agencies.
Capital Amounts
--------------------------------
Well
(in millions of dollars) Ratios Actual Minimum Capitalized
- ----------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998:
Tier I Risk-Based Capital
Huntington Bancshares Incorporated 7.10% $ 1,720 $ 970 $ 1,454
The Huntington National Bank 6.28 1,507 960 1,440
Total Risk-Based Capital
Huntington Bancshares Incorporated 10.73 2,601 1,939 2,424
The Huntington National Bank 10.48 2,515 1,920 2,400
Tier I Leverage
Huntington Bancshares Incorporated 6.37 1,720 810 1,350
The Huntington National Bank 5.61 1,507 806 1,343
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
44
15. 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
is designed around Huntington's organizational and management structure and
accordingly, the results are not necessarily comparable with similar information
published by other financial institutions. Listed below is certain financial
information regarding Huntington's 1998 results by line of business. For a
detailed description of the individual segments, refer to pages 13 and 14 of
this Form 10-K.
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------------------------
Private
INCOME STATEMENT Retail Corporate Dealer Financial Treasury/ Huntington
(IN THOUSANDS OF DOLLARS) Banking Banking Sales Group Other Consolidated
- -------------------------------------------------------------------------------------------------------------
Net interest income (FTE) $ 576,211 $ 235,041 $ 164,774 $ 31,585 $ 23,789 $1,031,400
Provision for Loan Losses 39,934 14,631 49,655 1,022 -- 105,242
Non-Interest Income 242,152 70,381 7,992 43,978 73,697 438,200
Non-Interest Expense 543,969 134,697 49,074 39,989 146,200 913,929
Income Taxes/FTE Adjustment 79,704 52,982 25,119 11,727 (20,871) 148,661
---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 154,756 $ 103,112 $ 48,918 $ 22,825 $ (27,843) $ 301,768
========== ========== ========== ========== ========== ==========
Depreciation and Amortization $ 43,438 $ 7,408 $ 1,412 $ 1,370 $ 27,328 $ 80,956
========== ========== ========== ========== ========== ==========
BALANCE SHEET
(IN MILLIONS OF DOLLARS)
- ----------------------------
Identifiable Assets (avg) $ 7,652 $ 6,003 $ 5,268 $ 597 $ 7,372 $ 26,892
Total Deposits (avg) $ 16,392 $ 997 $ 62 $ 475 $ 487 $ 18,413
Capital Expenditures $ 37 $ 6 $ -- $ -- $ 104 $ 147
16. LEGAL CONTINGENCIES
In the ordinary course of business, there are various legal proceedings
pending against Huntington and its subsidiaries. In the opinion of management,
the aggregate liabilities, if any, arising from such proceedings are not
expected to have a material adverse effect on Huntington's consolidated
financial position.
17. 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.
Huntington's unfunded defined benefit post-retirement plan provides certain
health care and life insurance benefits to retired employees who have attained
the age of 55 and have at least 10 years of service. For any employee retiring
on or after January 1, 1993, post-retirement healthcare and life insurance
benefits are based upon the employee's number of months of service and are
limited to the actual cost of coverage.
45
17. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table reconciles the funded status of the pension plan and
the post-retirement benefit plan at the applicable September 30 measurement
dates with the amounts recognized in the consolidated balance sheet at December
31:
- ---------------------------------------------------------------------------------------------------
PENSION POST-RETIREMENT
BENEFITS BENEFITS
- ---------------------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
Projected benefit obligation at
beginning of year $ 178,325 $ 163,113 $ 40,477 $ 32,203
Changes due to:
Service cost 11,979 10,698 1,410 959
Interest cost 12,897 12,502 3,080 2,386
Benefits paid (16,619) (11,701) (3,148) (2,694)
Plan amendments -- -- 846 4,139
Actuarial assumptions 11,959 3,713 3,786 3,484
--------- --------- --------- ---------
Total changes 20,216 15,212 5,974 8,274
--------- --------- --------- ---------
Projected benefit obligation at end of year 198,541 178,325 46,451 40,477
--------- --------- --------- ---------
Fair value of plan assets at
beginning of year 194,336 158,903 -- --
Changes due to:
Actual return on plan assets 4,608 47,943 -- --
Benefits paid (19,217) (12,510) -- --
--------- --------- --------- ---------
Total changes (14,609) 35,433 -- --
--------- --------- --------- ---------
Fair value of plan assets at end of year 179,727 194,336 -- --
--------- --------- --------- ---------
Projected benefit obligation less
(greater) than plan assets (18,814) 16,011 (46,451) (40,477)
Unrecognized net actuarial loss (gain) 2,145 (26,920) (1,119) (4,653)
Unrecognized prior service cost (13,578) (14,905) 9,078 6,474
Unrecognized transition (asset)/
liability, net of amortization (1,545) (1,986) 17,649 19,679
--------- --------- --------- ---------
Accrued liability $ (31,792) $ (27,800) $ (20,843) $ (18,977)
========= ========= ========= =========
Weighted-average assumptions at September 30:
Discount rate 7.00% 7.50% 7.00% 7.50%
Expected return on plan assets 9.25% 8.75% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
The following table shows the components of pension cost recognized in
1998, 1997, and 1996:.
- ------------------------------------------------------------------------------------------------------------
PENSION BENEFITS POST-RETIREMENT BENEFITS
--------------------------------- --------------------------------
(in thousands of dollars) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Service cost $ 11,979 $ 10,698 $ 11,243 $ 1,410 $ 959 $ 1,214
Interest cost 12,897 12,502 11,731 3,080 2,386 2,832
Expected return on plan assets (16,447) (14,197) (12,404) -- -- --
Amortization of transition asset (319) (341) (367) 1,261 1,331 1,331
Amortization of prior service cost (1,326) 1 140 670 259 500
Recognized net actuarial (gain) loss (620) (755) 24 (52) (323) 6
-------- -------- -------- -------- -------- --------
Benefit cost $ 6,164 $ 7,908 $ 10,367 $ 6,369 $ 4,612 $ 5,883
======== ======== ======== ======== ======== ========
The 1999 health care cost trend rate was projected to be 8.50% for pre-65
participants and 7.50% for post-65 participants compared with estimates of 9.25%
and 8.00% in 1998. These rates are assumed to decrease gradually until they
reach 4.75% in the year 2005 and remain at that level thereafter.
46
17. EMPLOYEE BENEFIT PLANS (CONTINUED)
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one-percentage point increase would increase service and
interest costs and post-retirement benefit obligation by $103 thousand and $1.1
million, respectively. A one-percentage point decrease would reduce service and
interest costs by $124 thousand and post-retirement benefit obligation by $1.3
million.
Huntington also sponsors an unfunded Supplemental Executive Retirement
Plan, a nonqualified plan that provides certain key officers of Huntington and
its subsidiaries with defined pension benefits in excess of limits imposed by
federal tax law. At December 31, 1998 and 1997, the accrued pension cost for
this plan totaled $9.8 million and $10.5 million, respectively. Pension expense
for the plan was $1.2 million in 1998, and $1.3 million in both 1997, and 1996.
Huntington has a contributory employee investment and tax savings plan
available to eligible employees. The plan was restated from an employee stock
purchase plan effective April 1, 1998, and renamed the Huntington Investment and
Tax Savings Plan. Matching contributions by Huntington equal 100% on the first
3% and 50% on the next 2% of participant elective deferrals. The cost of
providing this plan was $8.3 million in 1998, $9.7 million in 1997 and $9.0
million in 1996.
18. STOCK OPTIONS
Huntington sponsors non-qualified and incentive stock option plans covering
key employees. Approximately 19.8 million shares have been authorized under the
plans, 6.6 million of which were available at December 31, 1998 for future
grants. All options granted have a maximum term of ten years. Options granted on
or after May 18, 1994, vest ratably over prescribed periods; 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. All such data has been restated, as
applicable, for subsequent stock splits and stock dividends.
1998 1997 1996
----------------------- ---------------------- ----------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
OPTIONS EXERCISE Options Exercise Options Exercise
(in thousands, except per share) (IN 000'S) PRICE (in 000's) Price (in 000's) Price
- --------------------------------- ---------- ----------- --------- ---------- --------- ----------
Outstanding at beginning of period 5,417 $ 15.28 5,157 $ 12.45 5,087 $ 10.86
Granted 1,244 30.91 1,323 25.14 1,140 17.62
Exercised (1,278) 10.92 (891) 13.45 (1,009) 10.14
Forfeited/Expired (222) 22.82 (172) 15.69 (61) 14.75
--------- -------- --------
Outstanding at end of period 5,161 $ 19.80 5,417 $ 15.28 5,157 $ 12.45
========= ======== ========
Exercisable at end of period 2,906 $ 14.52 3,242 $ 11.61 3,117 $ 9.96
========= ======== ========
Weighted-average fair value of
options granted during the year $ 8.59 $ 6.94 $ 5.02
Exercise prices for options outstanding as of December 31, 1998, ranged
from $5.30 to $32.27. The weighted-average remaining contractual life of these
options is 6.9 years.
The fair value of the options presented above was estimated at the date of
grant using a Black-Scholes option pricing model. The following weighted-average
assumptions were used for 1998, 1997, and 1996, respectively: risk-free interest
rates of 5.28%, 6.44%, and 6.78%; dividend yields of 2.59%, 2.86%, and 3.41%;
volatility factors of the expected market price of Huntington's common stock of
.262, .262, and .280; and a weighted average expected option life of 6 years.
47
18. STOCK OPTIONS (CONTINUED)
The following pro forma disclosures present Huntington's net income and
earnings per common share under the fair value method of accounting for stock
options:
- -------------------------------------------------------
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------
(in millions, except per
share amounts) 1998 1997 1996
- -------------------------------------------------------
PRO FORMA
Net income $ 297.8 $ 290.6 $ 303.2
Earnings per common
share--diluted $1.40 $1.37 $1.42
- -------------------------------------------------------
19. EARNINGS PER SHARE AND COMMON STOCK
REPURCHASE PROGRAM
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 follows for each of the three years ended December 31:
- --------------------------------------------------------
(in thousands, except 1998 1997 1996
per share amounts)
- --------------------------------------------------------
Net income $301,768 $292,663 $304,269
Impact of
convertible
debt -- -- 13
-------- -------- --------
Diluted net income $301,768 $292,663 $304,282
======== ======== ========
Average common
shares outstanding 211,426 209,884 211,741
Dilutive effect of:
Stock options 2,028 2,564 1,991
Convertible debt -- -- 33
-------- -------- --------
Diluted common
shares
outstanding 213,454 212,448 213,765
======== ======== ========
Earnings per share
Basic $ 1.43 $ 1.39 $ 1.44
Diluted $ 1.41 $ 1.38 $ 1.42
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.
In September 1998, the Board of Directors authorized the reactivation of
Huntington's common stock repurchase program, which was previously suspended in
May 1997 due to the First Michigan pooling-of-interests merger transaction. In
connection with the reinstatement of the program, the Board of Directors also
increased the number of shares authorized for repurchase to 15 million, up from
approximately 3 million shares remaining when the plan was suspended. The shares
will be purchased through open market purchases and privately negotiated
transactions.
Repurchased shares will be reserved for reissue in connection with
Huntington's dividend reinvestment, stock option, and other benefit plans as
well as for stock dividends and other corporate purposes. In 1998, Huntington
repurchased approximately 1.1 million shares.
20. INCOME TAXES
The following is a summary of the provision for income taxes:
- ----------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------
Currently payable
Federal $133,012 $115,197 $114,183
State 2,573 3,617 3,076
-------- -------- --------
Total current 135,585 118,814 117,259
-------- -------- --------
Deferred tax expense
Federal 1,972 46,088 34,378
State 797 1,599 1,362
-------- -------- --------
Total deferred 2,769 47,687 35,740
-------- -------- --------
Total provision for
income taxes $138,354 $166,501 $152,999
======== ======== ========
Tax expense associated with securities transactions included in the above
amounts were $10.8 million in 1998, $2.9 million in 1997, and $6.2 million in
1996.
The following is a reconcilement of income tax expense to the amount
computed at the statutory rate of 35%:
- ---------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------
Pre-tax income
computed at the
statutory rate $ 154,043 $160,708 $160,043
Increases
(decreases):
Tax-exempt income (16,107) (7,101) (7,623)
State income taxes 2,191 3,391 2,885
Other-net (1,773) 9,503 (2,306)
-------- -------- --------
Provision for income
Taxes $138,354 $166,501 $152,999
======== ======== ========
The significant components of deferred tax assets and liabilities at
December 31, 1998 and 1997, are as follows:
- -----------------------------------------------------
(in thousands of dollars) 1998 1997
- -----------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 87,642 $ 85,873
Pension and other
employee benefits 29,214 28,131
Premises and equipment 7,641 --
Revalued liabilities - net 6,991 --
Other 36,322 12,535
-------- --------
Total deferred tax assets 167,810 126,539
-------- --------
Deferred tax liabilities:
Lease financing 225,883 181,987
Mortgage servicing rights 18,964 14,094
Premises and equipment -- 12,201
Securities 13,369 8,192
Other 27,637 23,057
-------- --------
Total deferred tax liabilities 285,853 239,531
-------- --------
Net deferred tax liability $118,043 $112,992
======== ========
48
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 1998 and 1997:
- ---------------------------------------------------------------------------
(in thousands of dollars,
except per share data) I Q II Q III Q IV Q
- ---------------------------------------------------------------------------
1998
Interest income $502,480 $491,268 $505,221 $500,395
Interest expense 247,632 243,839 253,706 233,094
-------- -------- -------- --------
Net interest income 254,848 247,429 251,515 267,301
-------- -------- -------- --------
Provision for loan losses 22,181 24,595 24,160 34,306
Securities gains 3,089 14,316 10,615 1,773
Non-interest income 92,330 105,340 104,026 106,711
Non-interest expense 196,442 206,678 211,877 208,932
Special charges -- -- -- 90,000
-------- -------- -------- --------
Income before income taxes 131,644 135,812 130,119 42,547
Provision for income taxes 42,158 43,503 41,364 11,329
-------- -------- -------- --------
Net income $ 89,486 $ 92,309 $ 88,755 $ 31,218
======== ======== ======== ========
Net income per common share (1)
Basic $ 0.42 $ 0.44 $ 0.42 $ 0.15
Diluted $ 0.42 $ 0.43 $ 0.42 $ 0.15
- ---------------------------------------------------------------------------
(in thousands of dollars,
except per share data) I Q II Q III Q IV Q
- ---------------------------------------------------------------------------
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 183,861 185,805 193,747 188,532
Special charges -- -- 51,163 --
-------- -------- -------- --------
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 $ 0.37 $ 0.40 $ 0.20 $ 0.43
Diluted $ 0.37 $ 0.39 $ 0.20 $ 0.42
- ---------------------------------------------------------------------------
(1) Adjusted for stock dividends and stock splits, as applicable.
49
22. NON-INTEREST INCOME
A summary of the components in non-interest income follows for the three
years ended December 31:
- ------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------
Service charges on deposit accounts $126,403 $117,852 $107,669
Mortgage banking 60,006 55,715 43,942
Trust services 50,754 48,102 42,237
Brokerage and insurance income 36,710 27,084 20,856
Electronic banking fees 29,202 22,705 12,013
Bank Owned Life Insurance income 28,712 -- --
Credit card fees 21,909 20,467 23,086
Other 54,711 42,936 46,640
-------- -------- --------
TOTAL NON-INTEREST INCOME BEFORE SECURITIES
GAINS 408,407 334,861 296,443
-------- -------- --------
Securities gains 29,793 7,978 17,620
-------- -------- --------
TOTAL NON-INTEREST INCOME $438,200 $342,839 $314,063
======== ======== ========
23. NON-INTEREST EXPENSE
A summary of the components in non-interest expense follows for the three
years ended December 31:
- ----------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------------------
Personnel and related costs $428,539 $392,793 $360,865
Outside data processing and other services 74,795 66,683 58,367
Equipment 62,040 57,867 50,887
Net occupancy 54,123 49,509 49,676
Marketing 32,260 32,782 20,331
Telecommunications 29,429 21,527 16,567
Amortization of intangible assets 25,689 13,019 10,220
Legal and other professional services 25,160 24,931 20,313
Printing and supplies 23,673 21,584 19,602
Franchise and other taxes 22,103 19,836 20,359
Other 46,118 51,414 48,323
-------- -------- --------
TOTAL NON-INTEREST EXPENSE BEFORE SPECIAL
CHARGES 823,929 751,945 675,510
-------- -------- --------
Special charges, including merger costs 90,000 51,163 --
-------- -------- --------
TOTAL NON-INTEREST EXPENSE $913,929 $803,108 $675,510
======== ======== ========
24. COMPREHENSIVE INCOME
The components of Other Comprehensive Income were as follows in each of the
three years ended December 31:
- ----------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- ----------------------------------------------------------------------------
Unrealized holding gains (losses)
arising during the period:
Unrealized net gains (losses) $ 45,095 $ 52,806 $(70,164)
Related tax (expense) benefit (15,837) (18,889) 24,896
-------- -------- --------
Net 29,258 33,917 (45,268)
-------- -------- --------
Less: Reclassification adjustment
for net gains realized during the period:
Realized net gains 29,793 7,978 17,620
Related tax expense (10,428) (2,792) (6,167)
-------- -------- --------
Net 19,365 5,186 11,453
-------- -------- --------
Total Other Comprehensive Income $ 9,893 $ 28,731 $(56,721)
======== ======== ========
50
25. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of Huntington's financial
instruments are presented in the table on the next page. Certain assets, the
most significant being Bank Owned Life Insurance and premises and equipment, do
not meet the definition of a financial instrument and are excluded from this
disclosure. Similarly, mortgage servicing rights and deposit base and other
customer relationship intangibles are not considered financial instruments and
are not discussed below. Accordingly, this fair value information is not
intended to, and does not, represent Huntington's underlying value. Many of the
assets and liabilities subject to the disclosure requirements are not actively
traded, requiring fair values to be estimated by management. These estimations
necessarily involve the use of judgment about a wide variety of factors,
including but not limited to, relevancy of market prices of comparable
instruments, expected future cash flows, and appropriate discount rates.
The terms and short-term nature of certain assets and liabilities result in
their carrying value approximating fair value. These include cash and due from
banks, interest bearing deposits in banks, trading account securities, federal
funds sold and securities purchased under resale agreements, customers'
acceptance liabilities, short-term borrowings, and bank acceptances outstanding.
Loan commitments and letters of credit generally have short-term, variable rate
features and contain clauses that limit Huntington's exposure to changes in
customer credit quality. Accordingly, their carrying values, which are
immaterial at the respective balance sheet dates, are reasonable estimates of
fair value.
The following methods and assumptions were used by Huntington to estimate
the fair value of the remaining classes of financial instruments:
Mortgages held for sale 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 probable losses in the loan portfolio. Although not considered
financial instruments, lease financing receivables have been included in the
loan totals at their carrying amounts.
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, as well as
medium-term notes and Capital Securities, are based upon quoted market prices
or, in the absence of quoted market prices, discounted cash flows using rates
for similar debt with the same maturities. The carrying amount of variable rate
obligations approximates fair value.
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.
51
25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(in thousands of dollars) AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and short-term assets $ 1,454,142 $ 1,454,142 $ 1,691,187 $ 1,691,187
Trading account securities 3,839 3,839 7,082 7,082
Mortgages held for sale 466,664 466,664 192,948 192,948
Securities 4,806,349 4,806,459 5,742,824 5,743,197
Loans 19,163,603 19,338,129 17,480,077 17,777,451
Customers' acceptance liability 22,591 22,591 27,818 27,818
Interest rate contracts:
Asset/liability management 19,610 67,507 17,557 42,547
Customer accommodation 9,638 9,638 2,606 2,606
FINANCIAL LIABILITIES:
Deposits (19,722,772) (19,788,328) (17,983,718) (18,012,315)
Short-term borrowings (2,216,644) (2,216,644) (3,141,671) (3,141,671)
Bank acceptances outstanding (22,591) (22,591) (27,818) (27,818)
Medium-term notes (2,539,900) (2,560,426) (2,332,150) (2,341,040)
Subordinated notes and other long-term debt (707,359) (733,083) (498,889) (517,791)
Capital Securities (300,000) (299,609) (200,000) (192,726)
Interest rate contracts:
Asset/liability management -- (11,126) -- (2,554)
Customer accommodation (7,388) (7,388) (1,859) (1,859)
52
26. HUNTINGTON BANCSHARES INCORPORATED (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------
BALANCE SHEETS DECEMBER 31,
- -----------------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997
- -----------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 179,981 $ 285,926
Securities available for sale 22,659 7,635
Due from subsidiaries
Bank subsidiary 220,842 600,578
Non-bank subsidiaries 18,859 10,297
Investment in subsidiaries on the equity method
Bank subsidiary 2,235,414 1,721,789
Non-bank subsidiaries 24,110 29,411
Excess of cost of investment in subsidiaries over net assets acquired 11,586 12,155
Other assets 86,227 89,321
---------- ----------
TOTAL ASSETS $2,799,678 $2,757,112
========== ==========
LIABILITIES
Short-term borrowings $ 30,644 $ 40,525
Medium-term notes 60,000 220,000
Subordinated notes
Subsidiary trusts 309,279 206,187
Unaffiliated companies 149,505 153,913
Dividends payable 42,406 38,591
Accrued expenses and other liablities 59,049 72,505
---------- ----------
TOTAL LIABILITIES 650,883 731,721
---------- ----------
SHAREHOLDERS' EQUITY 2,148,795 2,025,391
---------- ----------
TOTAL LIABLITIES AND SHAREHOLDERS' EQUITY $2,799,678 $2,757,112
========== ==========
- ------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
INCOME
Dividends from
Bank subsidiary $ 186,381 $ 228,892 $ 348,516
Non-bank subsidiaries 4,000 2,961 6,385
Interest from
Bank subsidiary 41,507 18,227 3,482
Non-bank subsidiaries 329 19,032 11,787
Other 3,094 1,537 813
--------- --------- ---------
TOTAL INCOME 235,311 270,649 370,983
--------- --------- ---------
EXPENSE
Interest on debt 27,340 36,128 23,716
Other 13,722 30,020 18,295
--------- --------- ---------
TOTAL EXPENSE 41,062 66,148 42,011
--------- --------- ---------
Income before income taxes and equity in
undistributed net income of subsidiaries 194,249 204,501 328,972
Income tax expense (benefit) 2,089 (8,630) (13,986)
--------- --------- ---------
Income before equity in undistributed
net income of subsidiaries 192,160 213,131 342,958
--------- --------- ---------
Equity in undistributed net income of
Bank subsidiary 106,967 80,523 (48,616)
Non-bank subsidiaries 2,641 (991) 9,927
--------- --------- ---------
NET INCOME $ 301,768 $ 292,663 $ 304,269
========= ========= =========
53
26. HUNTINGTON BANCSHARES INCORPORATED (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (CONTINUED)
- ---------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 301,768 $ 292,663 $ 304,269
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries (109,608) (79,532) 38,689
Provision for amortization and depreciation 3,244 3,460 5,285
Increase in other assets (14,413) (4,961) (26,139)
Decrease in other liabilities (15,978) (13,942) (18,340)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 165,013 197,688 303,764
--------- --------- ---------
INVESTING ACTIVITIES
(Increase) decrease in investments in subsidiaries (386,500) 197,263 (1,433)
Repayments from (advances to) subsidiaries 374,140 (71,485) (167,289)
Other (41) (15,000) (4,775)
--------- --------- ---------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (12,401) 110,778 (173,497)
--------- --------- ---------
FINANCING ACTIVITIES
(Decrease) increase in short-term borrowings (9,881) -- 15,000
Proceeds from issuance of subordinated notes to subsidiary trusts 100,000 200,000 --
Payment of long-term debt (4,537) (25,000) (346)
Proceeds from issuance of medium-term notes -- 40,000 225,000
Payment of medium-term notes (160,000) (140,000) (80,000)
Dividends paid on common stock (157,632) (132,760) (125,379)
Acquisition of treasury stock (31,192) (56,175) (258,415)
Proceeds from issuance of treasury stock 4,685 27,266 43,971
--------- --------- ---------
NET CASH USED FOR FINANCING ACTIVITIES (258,557) (86,669) (180,169)
--------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS (105,945) 221,797 (49,902)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 285,926 64,129 114,031
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 179,981 $ 285,926 $ 64,129
========= ========= =========
Supplemental data required for this item is set forth in Item 7 on page 28
under the caption "Selected Quarterly Income Statement Data."
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
54
Part III
--------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is set forth under the captions
"Class I Directors," "Class II Directors," and "Class III Directors" on pages 2
through 4, under the caption "Executive Officers of the Corporation" on
pages 18 and 19 and under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" on page 23 of Huntington's 1999 Proxy Statement, and is
incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
Information required by this item is set forth under the caption
"Executive Compensation" on pages 7 through 14, and under the caption
"Compensation of Directors" on pages 4 and 5, of Huntington's 1999 Proxy
Statement, and is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth under the caption
"Ownership of Voting Stock" on pages 5 and 6, of Huntington's 1999 Proxy
Statement, and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under the caption
"Transactions With Directors and Executive Officers" on pages 6 and 7, and under
the caption "Compensation Committee Interlocks and Insider Participation" on
page 14 of Huntington's 1999 Proxy Statement, and is incorporated herein by
reference.
Part IV
-------
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) The report of independent auditors and consolidated financial
statements appearing in Item 8.
(2) Huntington is not filing separately financial statement schedules
because of the absence of conditions under which they are required or because
the required information is included in the consolidated financial statements or
the notes thereto.
(3) The exhibits required by this item are listed in the Exhibit Index
on pages 58 through 60 of this Form 10-K. The management contracts and
compensation plans or arrangements required to be filed as exhibits to this Form
10-K are listed as Exhibits 10(a) through 10(n) in the Exhibit Index.
55
(b) During the quarter ended December 31, 1998, Huntington filed one Current
Report on Form 8-K. The report, dated October 14, 1998, was filed under Item 7,
and concerned Huntington's results of operations for the quarter ended September
30, 1998.
(c) The exhibits to this Form 10-K begin on page 58.
(d) See Item 14(a)(2) above.
56
Signatures
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 19th day of
February, 1999.
HUNTINGTON BANCSHARES INCORPORATED
----------------------------------
(Registrant)
By: /s/Frank Wobst By: /s/Gerald R. Williams
-------------------------------- -----------------------------------
Frank Wobst Gerald R. Williams
Director, Chairman and Executive Vice President and
Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 19th day of February, 1999.
/s/Don M. Casto, III /s/George A. Skestos
- ------------------------------- ---------------------------------------
Don M. Casto, III George A. Skestos
Director Director
/s/Don Conrad /s/Lewis R. Smoot, Sr.
- ------------------------------- ---------------------------------------
Don Conrad Lewis R. Smoot, Sr.
Director Director
/s/Patricia T. Hayot /s/Timothy P. Smucker
- ------------------------------- ---------------------------------------
Patricia T. Hayot Timothy P. Smucker
Director Director
/s/Wm. J. Lhota /s/William J. Williams
- ------------------------------- ---------------------------------------
Wm. J. Lhota William J. Williams
Director Director
/s/Robert H. Schottenstein
- -------------------------------
Robert H. Schottenstein
Director
57
Exhibit Index
- -------------
3(i)(a). Articles of Restatement of Charter, Articles of Amendment to
Articles of Restatement of Charter, and Articles Supplementary
-- previously filed as Exhibit 3(i) to Annual Report on Form
10-K for the year ended December 31, 1993, and incorporated
herein by reference.
(i)(b). Articles of Amendment to Articles of Restatement of Charter --
previously filed as Exhibit 3(i)(b) to Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996, and
incorporated herein by reference.
(i)(c). Articles of Amendment to Articles of Restatement of Charter --
previously filed as Exhibit 3(i)(c) to Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, and
incorporated herein by reference.
(ii). Amended and Restated Bylaws.
4(a). Instruments defining the Rights of Security Holders -- reference
is made to Articles Fifth, Eighth, and Tenth of Articles of
Restatement of Charter, as amended and supplemented.
Instruments defining the rights of holders of long-term debt
will be furnished to the Securities and Exchange Commission
upon request.
(b). Rights Plan, dated February 22, 1990, between Huntington
Bancshares Incorporated and The Huntington National Bank (as
successor to The Huntington Trust Company, National
Association) -- previously filed as Exhibit 1 to Registration
Statement on Form 8-A, filed with the Securities and Exchange
Commission on February 22, 1990, and incorporated herein by
reference.
(c). Amendment No. 1 to the Rights Agreement, dated August 16, 1995,
previously filed as Exhibit 4(b) to Form 8-K, dated August 16,
1995, and incorporated herein by reference.
10. Material contracts:
(a). Employment Agreement, dated April 25, 1996, between Huntington
Bancshares Incorporated and Frank Wobst -- previously filed as
Exhibit 10(a) to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein
by reference.
(b). Form of Tier I Executive Agreement for certain executive
officers.
(c). Form of Tier II Executive Agreement for certain executive
officers.
(d). Schedule identifying material details of Executive Agreements,
substantially similar to Exhibits 10(b) and 10(c).
58
(e). Huntington Bancshares Incorporated Amended and Restated
Incentive Compensation Plan -- previously filed as
Exhibit 10(i) to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1995, and incorporated
herein by reference.
(f). Amended and Restated Long-Term Incentive Compensation Plan, as
amended and effective for performance cycles beginning on or
after January 1, 1996 -- previously filed as Exhibit 10(j)(2)
to Annual Report on Form 10-K for the year ended December 31,
1996, and incorporated herein by reference.
(g)(1). Supplemental Executive Retirement Plan with First and Second
Amendments -- previously filed as Exhibit 10(g) to Annual
Report on Form 10-K for the year ended December 31, 1987, and
incorporated herein by reference.
(g)(2). Third Amendment to Supplemental Executive Retirement Plan --
previously filed as Exhibit 10(k)(2) to Annual Report on Form
10-K for the year ended December 31, 1997, and incorporated
herein by reference.
(h). Deferred Compensation Plan and Trust for Directors -- reference
is made to Exhibit 4(a) of Post-Effective Amendment No. 2 to
Registration Statement on Form S-8, Registration No. 33-10546,
filed with the Securities and Exchange Commission on January
28, 1991, and incorporated herein by reference.
(i)(1). 1983 Stock Option Plan -- reference is made to Exhibit 4A of
Registration Statement on Form S-8, Registration No. 2-89672,
filed with the Securities and Exchange Commission on February
27, 1984, and incorporated herein by reference.
(i)(2). 1983 Stock Option Plan -- Second Amendment -- previously filed as
Exhibit 10(j)(2) to Annual Report on Form 10-K for the year
ended December 31, 1987, and incorporated herein by
reference.
(i)(3). 1983 Stock Option Plan -- Third Amendment -- previously filed as
Exhibit 10(j)(3) to Annual Report on Form 10-K for the year
ended December 31, 1987, and incorporated herein by
reference.
(i)(4). 1983 Stock Option Plan -- Fourth Amendment -- previously filed as
Exhibit (m)(4) to Annual Report on Form 10-K for the year
ended December 31, 1993, and incorporated herein by
reference.
(i)(5). 1983 Stock Option Plan -- Fifth Amendment -- previously filed as
Exhibit (m)(5) to Annual Report on Form 10-K for the year
ended December 31, 1996, and incorporated herein by
reference.
(j)(1). 1990 Stock Option Plan -- reference is made to Exhibit 4(a) of
Registration Statement on Form S-8, Registration No.
33-37373, filed with the Securities and Exchange Commission
on October 18, 1990, and incorporated herein by reference.
(j)(2). First Amendment to Huntington Bancshares Incorporated 1990 Stock
Option Plan -- previously filed as Exhibit 10(q)(2) to Annual
Report on Form 10-K for the year ended December 31, 1991, and
incorporated herein by reference.
59
(j)(3). Second Amendment to Huntington Bancshares Incorporated 1990 Stock
Option Plan -- previously filed as Exhibit 10(n)(3) to Annual
Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference.
(j)(4). Amended and Restated 1994 Stock Option Plan -- previously filed
as Exhibit 10(r) to Annual Report on Form 10-K for the year
ended December 31, 1996, and incorporated herein by reference.
(k)(1). The Huntington Supplemental Stock Purchase and Tax Savings Plan
and Trust (as amended and restated as of February 9, 1990) --
previously filed as Exhibit 4(a) to Registration Statement on
Form S-8, Registration No. 33-44208, filed with the Securities
and Exchange Commission on November 26, 1991, and incorporated
herein by reference.
(k)(2). First Amendment to The Huntington Supplemental Stock Purchase and
Tax Savings Plan and Trust Plan -- previously filed as Exhibit
10(o)(2) to Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference.
(l). Deferred Compensation Plan and Trust for Huntington Bancshares
Incorporated Directors -- reference is made to Exhibit 4(a) of
Registration Statement on Form S-8, Registration No. 33-41774,
filed with the Securities and Exchange Commission on July 19,
1991, and incorporated herein by reference.
(m). Huntington Bancshares Incorporated Retirement Plan For Outside
Directors, previously filed as Exhibit 10(t) to Annual Report
on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
(n). Huntington Supplemental Retirement Income Plan -- previously
filed as Exhibit 10(s) to Annual Report on Form 10-K for the
year ended December 31, 1994, and incorporated herein by
reference.
21. Subsidiaries of the Registrant.
23(a). Consent of Ernst & Young, LLP, Independent Auditors.
27. Financial Data Schedule.
60