UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 QUARTERLY PERIOD ENDED March 31, 1999 Commission File Number 0-2525 HUNTINGTON BANCSHARES INCORPORATED MARYLAND 31-0724920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 41 SOUTH HIGH STREET, COLUMBUS, OHIO 43287 Registrant's telephone number (614) 480-8300 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ===== ===== There were 210,018,446 shares of Registrant's without par value common stock outstanding on April 30, 1999. PART I. FINANCIAL INFORMATION 1. FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, MARCH 31, (in thousands of dollars) 1999 1998 1998 - ---------------------------------------------------------------- ----------- ------------ ----------- ASSETS Cash and due from banks ........................................ $ 971,446 $ 1,215,814 $ 1,023,138 Interest bearing deposits in banks ............................. 8,143 102,564 2,378 Trading account securities ..................................... 27,755 3,839 19,489 Federal funds sold and securities purchased under resale agreements ......................... 11,238 135,764 8,573 Mortgages held for sale ........................................ 279,794 466,664 314,034 Securities available for sale - at fair value .................. 5,367,871 4,781,415 6,345,104 Investment securities - fair value $23,415; $25,044; and $33,631, respectively ..................................... 23,044 24,934 31,631 Total loans (1) ................................................ 19,731,593 19,454,551 17,748,389 Less allowance for loan losses ............................ 291,066 290,948 258,262 ----------- ----------- ----------- Net loans ...................................................... 19,440,527 19,163,603 17,490,127 ----------- ----------- ----------- Premises and equipment ......................................... 441,426 447,038 400,331 Customers' acceptance liability ................................ 19,402 22,591 26,518 Accrued income and other assets ................................ 1,987,262 1,932,110 1,147,156 ----------- ----------- ----------- TOTAL ASSETS ................................................... $28,577,908 $28,296,336 $26,808,479 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Total deposits (1) ............................................. $19,046,901 $19,722,772 $17,700,544 Short-term borrowings .......................................... 2,884,722 2,216,644 2,671,383 Bank acceptances outstanding ................................... 19,402 22,591 26,518 Medium-term notes .............................................. 2,864,900 2,539,900 3,147,150 Subordinated notes and other long-term debt .................... 707,438 707,359 483,854 Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely the junior subordinated debentures of the parent company..... 300,000 300,000 200,000 Accrued expenses and other liabilities ......................... 616,488 638,275 504,936 ----------- ----------- ----------- Total Liabilities ......................................... 26,439,851 26,147,541 24,734,385 ----------- ----------- ----------- 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; 212,596,344; and 193,279,797 shares, respectively ......................................... 2,152,076 2,152,076 1,528,768 Less 2,425,491; 1,850,007; and 961,290 treasury shares, respectively ................................. (68,535) (49,271) (25,218) Capital surplus ........................................... (17,258) (14,161) 394,715 Accumulated other comprehensive income .................... (18,220) 24,693 10,410 Retained earnings ......................................... 89,994 35,458 165,419 ----------- ----------- ----------- Total Shareholders' Equity ................................ 2,138,057 2,148,795 2,074,094 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $28,577,908 $28,296,336 $26,808,479 =========== =========== ===========
(1) See page 11 for detail of total loans and total deposits. See notes to unaudited consolidated financial statements. 2 CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ----------------------------- (in thousands of dollars, except per share amounts) 1999 1998 - ---------------------------------------------------------- ------------ ------------ Interest and fee income Loans ............................................... $ 410,181 $ 400,807 Securities .......................................... 78,852 97,171 Other ............................................... 6,659 4,502 ------------ ------------ TOTAL INTEREST INCOME ..................... 495,692 502,480 ------------ ------------ Interest expense Deposits ............................................ 156,305 162,252 Short-term borrowings ............................... 30,475 33,822 Medium-term notes ................................... 34,754 41,440 Subordinated notes and other long-term debt ......... 14,637 10,118 ------------ ------------ TOTAL INTEREST EXPENSE .................... 236,171 247,632 ------------ ------------ NET INTEREST INCOME ....................... 259,521 254,848 Provision for loan losses ................................ 25,305 22,181 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....... 234,216 232,667 ------------ ------------ Total non-interest income (1) ............................ 109,872 95,419 Total non-interest expense (1) ........................... 202,106 196,442 ------------ ------------ INCOME BEFORE INCOME TAXES ................ 141,982 131,644 Provision for income taxes ............................... 45,410 42,158 ------------ ------------ NET INCOME ................................ $ 96,572 $ 89,486 ============ ============ PER COMMON SHARE (2) Net income Basic .......................................... $ 0.46 $ 0.42 Diluted ........................................ $ 0.46 $ 0.42 Cash dividends declared ............................. $ 0.20 $ 0.18 AVERAGE COMMON SHARES OUTSTANDING (2) Basic .......................................... 210,417,282 211,377,206 Diluted ........................................ 212,187,011 213,809,119
(1) See page 12 for detail of non-interest income and non-interest expense. (2) Adjusted for stock splits and stock dividends, as applicable. See notes to unaudited consolidated financial statements. 3 - ------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ACCUMULATED OTHER COMMON COMMON TREASURY TREASURY CAPITAL COMPREHENSIVE RETAINED SHARES STOCK SHARES STOCK SURPLUS INCOME EARNINGS TOTAL - ---------------------------------------- ------- ---------- -------- -------- -------- ------------- ---------- ---------- Three Months Ended March 31, 1998: Balance, beginning of period 193,279 $1,528,768 (1,543) $(36,791) $404,235 $ 14,800 $114,379 $2,025,391 Comprehensive Income: Net income 89,486 89,486 Unrealized net holding losses on securities available for sale arising during the period (4,390) (4,390) ---------- Total comprehensive income 85,096 ---------- Cash dividends declared (38,446) (38,446) Stock issued for acquisition 160 3,883 (3,815) 68 Stock options exercised 403 7,218 (5,907) 1,311 Treasury shares sold to employee benefit plans 19 472 202 674 ------- ---------- ------ -------- -------- -------- -------- ---------- Balance, end of period 193,279 $1,528,768 (961) $(25,218) $394,715 $ 10,410 $165,419 $2,074,094 ======= ========== ====== ======== ======== ======== ======== ========== THREE MONTHS ENDED MARCH 31, 1999: BALANCE, BEGINNING OF PERIOD 212,596 $2,152,076 (1,850) $(49,271) $(14,161) $ 24,693 $ 35,458 $2,148,795 COMPREHENSIVE INCOME: NET INCOME 96,572 96,572 UNREALIZED NET HOLDING LOSSES ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD (42,913) (42,913) ---------- TOTAL COMPREHENSIVE INCOME 53,659 ---------- CASH DIVIDENDS DECLARED (42,036) (42,036) STOCK OPTIONS EXERCISED 153 4,384 (3,097) 1,287 TREASURY SHARES PURCHASED (751) (24,349) (24,349) TREASURY SHARES SOLD TO EMPLOYEE BENEFIT PLANS 23 701 701 ------- ---------- ------ -------- -------- -------- -------- ---------- BALANCE, END OF PERIOD 212,596 $2,152,076 (2,425) $(68,535) $(17,258) $(18,220) $ 89,994 $2,138,057 ======= ========== ====== ======== ======== ======== ======== ==========
See notes to unaudited consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS - -----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ---------------------------- (in thousands of dollars) 1999 1998 ----------- ----------- OPERATING ACTIVITIES Net Income ................................................................. $ 96,572 $ 89,486 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses ........................................ 25,305 22,181 Provision for depreciation and amortization ...................... 29,572 17,768 Deferred income tax expense ...................................... 18,970 5,358 Increase in trading account securities ........................... (23,916) (12,407) Decrease (increase) in mortgages held for sale ................... 186,870 (121,086) Net gains on sales of securities ................................. (2,310) (3,089) (Increase) decrease in accrued income receivable ................. (12,172) 4,758 Net (increase) decrease in other assets .......................... (65,739) 22,500 (Decrease) increase in accrued expenses .......................... (1,861) 11,907 Net increase (decrease) in other liabilities ..................... 695 (30,835) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 251,986 6,541 ----------- ----------- INVESTING ACTIVITIES Decrease in interest bearing deposits in banks ............................. 94,421 37,240 Proceeds from: Maturities and calls of investment securities .......................... 1,883 1,348 Maturities and calls of securities available for sale .................. 245,678 191,087 Sales of securities .................................................... 322,062 485,158 Purchases of securities available for sale ................................. (1,219,206) (1,300,626) Proceeds from sales of loans ............................................... 1,348 24,548 Net loan originations, excluding sales ..................................... (304,343) (56,882) Purchases of premises and equipment ........................................ (18,220) (21,788) Proceeds from sales of other real estate ................................... 2,794 4,802 ----------- ----------- NET CASH USED FOR INVESTING ACTIVITIES ................... (873,583) (635,113) ----------- ----------- FINANCING ACTIVITIES Decrease in total deposits ................................................. (675,856) (284,643) Increase in short-term borrowings .......................................... 668,078 99,712 Payment of long-term debt .................................................. -- (15,000) Proceeds from issuance of medium-term notes ................................ 1,085,000 325,000 Payment of medium-term notes ............................................... (760,000) (80,000) Dividends paid on common stock ............................................. (42,158) (38,339) Repurchase of common stock ................................................. (24,349) -- Proceeds from issuance of common stock ..................................... 1,988 1,984 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES ................ 252,703 8,714 ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS ...................... (368,894) (619,858) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......... 1,351,578 1,651,569 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 982,684 $ 1,031,711 =========== ===========
See notes to unaudited consolidated financial statements. 5 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS A. Basis of Presentation The accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, the results of operations, and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The Notes to the Consolidated Financial Statements appearing in Huntington's 1998 Annual Report on Form 10-K should be read in conjunction with these interim financial statements. B. Reclassifications Certain amounts in the prior year's financial statements have been reclassified to conform with the 1999 presentation. These reclassifications had no effect on net income. C. Comprehensive Income Comprehensive Income includes net income as well as certain items that are reported directly within a separate component of stockholders' equity that bypass net income. Currently, Huntington's only component of Other Comprehensive Income is the unrealized gains (losses) on securities available for sale. The related before and after tax amounts are as follows:
(in thousands) THREE MONTHS ENDED MARCH 31 ------------------- 1999 1998 -------- ------- Unrealized holding losses Arising during the period: Unrealized net losses $(64,066) $(3,704) Related tax benefit 22,654 1,322 -------- ------- Net (41,412) (2,382) -------- ------- Reclassification adjustment for net Losses realized during the period Realized net losses (2,310) (3,089) Related tax benefit 809 1,081 -------- ------- Net (1,501) (2,008) -------- ------- Total Other Comprehensive Income $(42,913) $(4,390) ======== =======
6 D. New Accounting Pronouncements In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows gains and losses from derivatives to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions for which hedge accounting is applied. Statement No. 133 is effective for fiscal years beginning after June 15, 1999. It may be implemented earlier provided adoption occurs as of the beginning of any fiscal quarter after issuance. Statement 133 cannot be applied retroactively. This Statement must be applied to (a) all free-standing derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. Huntington 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. E. Trust Preferred Securities In January 1997, Huntington Capital I ("the Trust"), a Delaware statutory business trust owned by Huntington, issued $200 million of company obligated mandatorily redeemable capital securities. The proceeds from the issuance of the capital securities ($200 million) and common securities ($6.2 million) were used by the Trust to purchase from Huntington $206.2 million of Floating Rate Junior Subordinated Debentures. In June 1998, an additional $100 million of company obligated mandatorily redeemable capital securities were issued by Huntington Capital II ("the Series B Trust"), a statutory business trust also owned by Huntington. The proceeds, including $3.1 million of common securities purchased by Huntington, were used by the Series B Trust to purchase from Huntington $103.1 million of Series B Floating Rate Junior Subordinated Debentures. The subordinated debentures are the sole assets of each trust and Huntington owns all of the common securities of the trusts. Interest payments made on the capital securities are reported as a component of interest expense on long-term debt. The capital securities bear interest and mature as follows:
Variable Interest Rate Maturity Date ----------------- ------------- Huntington Capital I LIBOR + .70% February 1, 2027 Huntington Capital II LIBOR + .625% June 15, 2028
7 The net proceeds received by Huntington from the sale of the capital securities were used for general corporate purposes. F. 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 1998. Refer to Note 2 in the Notes to the Consolidated Financial Statements appearing in Huntington's 1998 Annual Report on Form 10-K for further information. The table below summarizes the major components of the special charge, as well as the related amounts applied against the reserve through March 31, 1999. Huntington expects that the remaining reserve of $41 million, which represents estimated future cash outlays, will be substantially utilized by the end of 1999.
- -------------------------------------------------------------------------------------------- EMPLOYEE OPERATIONS 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 --- ---- --- --- ---- Utilization (4) -- (4) (5) (13) --- ---- --- --- ---- Balance as of March 31, 1999 $14 -- $11 $16 $ 41 === ==== === === ====
G. Earnings per Share Basic earnings per share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for stock options and the conversion impact of convertible equity instruments. 8 The calculation of basic and diluted earnings per share for each of the periods ended March 31, is as follows:
(In thousands, except per share amounts) THREE MONTHS ENDED MARCH 31 --------------------- 1999 1998 -------- -------- Net Income $ 96,572 $ 89,486 ======== ======== Average common shares outstanding 210,417 211,377 Dilutive effect of stock options 1,770 2,432 -------- -------- Diluted common shares outstanding 212,187 213,809 ======== ======== Earnings per share Basic $ .46 $ .42 Diluted $ .46 $ .42
Average common shares outstanding and the dilutive effect of stock options have been adjusted for subsequent stock dividends and stock splits, as applicable. H. 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. Results are revised periodically to reflect enhancements to Huntington's profitability reporting system and changes in its organizational structure. For a detailed description of the individual segments, refer to Huntington's Management Discussion and Analysis. 9
THREE MONTHS ENDED MARCH 31, 1999 - ------------------------------------------------------------------------------------------------------------------------- Private Retail Corporate Dealer Financial Treasury/ Huntington Banking Banking Sales Group Other Consolidated ------- ------- ----- ----- ----- ------------ INCOME STATEMENT (IN THOUSANDS OF DOLLARS) - ------------------------- Net Interest Income (FTE) $137,017 $62,586 $45,632 $ 7,626 $ 9,164 $262,025 Provision for Loan Losses 11,582 2,275 11,373 75 -- 25,305 Non-Interest Income 66,329 15,571 391 11,512 16,069 109,872 Non-Interest Expense 135,952 29,831 11,568 9,768 14,987 202,106 Income Taxes and FTE 19,382 15,932 7,978 3,217 1,405 47,914 Adjustment -------- ------- ------- ------- ------- -------- Net Income $ 36,430 $30,119 $15,104 6,078 8,841 $ 96,572 ======== ======= ======= ======= ======= ======== Depreciation & Amortization $ 16,764 $ 2,036 $ 348 $ 421 $10,003 $ 29,572 ======== ======= ======= ======= ======= ======== OTHER FINANCIAL DATA (IN MILLIONS OF DOLLARS) - ------------------------ Average Identifiable Assets $ 7,814 $ 6,676 $ 5,778 $ 579 $ 7,575 $ 28,422 Average Total Deposits 17,116 1,008 60 570 377 19,131 Capital Expenditures 5 1 -- -- 12 18 THREE MONTHS ENDED MARCH 31, 1998 - ------------------------------------------------------------------------------------------------------------------------- Private Retail Corporate Dealer Financial Treasury/ Huntington Banking Banking Sales Group Other Consolidated ------- ------- ----- ----- ----- ------------ INCOME STATEMENT (IN THOUSANDS OF DOLLARS) - ------------------------- Net Interest Income (FTE) $141,972 $50,048 $41,710 $ 8,022 $15,751 $257,503 Provision for Loan Losses 7,180 3,771 10,930 300 -- 22,181 Non-Interest Income 54,687 16,785 1,676 10,457 11,814 95,419 Non-Interest Expense 136,137 29,344 12,566 9,872 8,523 196,442 Income Taxes and FTE 18,067 11,417 6,735 2,813 5,781 44,813 Adjustment -------- ------- ------- ------- ------- -------- Net Income $ 35,275 $22,301 $13,155 $ 5,494 $13,261 $ 89,486 ======== ======= ======= ======= ======= ======== Depreciation & Amortization $ 11,887 $ 1,407 $ 269 $ 286 $ 3,919 $ 17,768 ======== ======= ======= ======= ======= ======== OTHER FINANCIAL DATA (IN MILLIONS OF DOLLARS) - ------------------------ Average Identifiable Assets $ 8,126 $ 5,056 $ 5,019 $ 592 $ 7,537 $ 26,330 Average Total Deposits 15,199 923 57 510 794 17,483 Capital Expenditures 7 1 -- -- 14 22
10 - ----------------------------------------------------------------------------------------------------------- FINANCIAL REVIEW
- ----------------------------------------------------------------------------------------------------------- LOAN PORTFOLIO COMPOSITION - ----------------------------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, MARCH 31, (in thousands of dollars) 1999 1998 1998 - ------------------------------------------------ ----------- ----------- ----------- Commercial ..................................... $ 6,150,490 $ 6,026,736 $ 5,441,107 Real Estate Construction............................... 996,267 919,326 846,715 Commercial ................................ 2,242,700 2,231,786 2,367,823 Residential ............................... 1,426,455 1,408,289 1,083,566 Consumer Loans ...................................... 6,812,242 6,957,772 6,423,582 Leases ..................................... 2,103,439 1,910,642 1,585,596 ----------- ----------- ----------- TOTAL LOANS ............................... $19,731,593 $19,454,551 $17,748,389 =========== =========== =========== - ----------------------------------------------------------------------------------------------------------- DEPOSIT COMPOSITION - ----------------------------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, MARCH 31, (in thousands of dollars) 1999 1998 1998 - ------------------------------------------------ ----------- ----------- ----------- Demand deposits Non-interest bearing ...................... $ 2,881,991 $ 3,129,199 $ 2,516,765 Interest bearing .......................... 4,514,407 4,642,147 3,785,550 Savings deposits ............................... 3,924,658 3,690,040 3,229,359 Other domestic time deposits ................... 5,876,672 6,186,985 6,012,135 ----------- ----------- ----------- TOTAL CORE DEPOSITS ....................... 17,197,728 17,648,371 15,543,809 ----------- ----------- ----------- Certificates of deposit of $100,000 or more..... 1,757,303 1,699,261 2,018,818 Foreign time deposits .......................... 91,870 375,140 137,917 ----------- ----------- ----------- TOTAL DEPOSITS ............................ $19,046,901 $19,722,772 $17,700,544 =========== =========== ===========
11 - --------------------------------------------------------------------------------------------------------- FINANCIAL REVIEW
- --------------------------------------------------------------------------------------------------------- ANALYSIS OF NON-INTEREST INCOME - --------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, --------------------------------------- PERCENT (in thousands of dollars) 1999 1998 CHANGE - ---------------------------------------------------------- -------- ------- ------- Service charges on deposit accounts ...................... $ 35,776 $29,490 21.3% Mortgage banking ......................................... 15,958 14,157 12.7 Trust services ........................................... 13,434 12,583 6.8 Brokerage and insurance income ........................... 11,543 8,285 39.3 Bank Owned Life Insurance income ......................... 9,390 5,348 75.6 Electronic banking fees .................................. 8,038 5,748 39.8 Credit card fees ......................................... 5,342 4,895 9.1 Other .................................................... 8,081 11,824 (31.7) -------- ------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS......... 107,562 92,330 16.5 -------- ------- Securities gains ......................................... 2,310 3,089 (25.2) -------- ------- TOTAL NON-INTEREST INCOME ................................ $109,872 $95,419 15.1% ======== ======= - --------------------------------------------------------------------------------------------------------- ANALYSIS OF NON-INTEREST EXPENSE - --------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, --------------------------------------- PERCENT (in thousands of dollars) 1999 1998 CHANGE - ---------------------------------------------------------- -------- ------- ------- Personnel and related costs .............................. $107,254 $104,712 2.4% Equipment ................................................ 16,873 15,149 11.4 Outside data processing and other services................ 15,392 19,342 (20.4) Net occupancy ............................................ 13,917 13,439 3.6 Amortization of intangible assets ........................ 9,328 3,393 174.9 Telecommunications ....................................... 7,064 6,013 17.5 Marketing ................................................ 6,298 6,932 (9.1) Printing and supplies .................................... 4,756 5,761 (17.4) Legal and other professional services .................... 4,744 5,788 (18.0) Franchise and other taxes ................................ 4,387 5,500 (20.2) Other .................................................... 12,093 10,413 16.1 -------- -------- TOTAL NON-INTEREST EXPENSE ............................... $202,106 $196,442 2.9% ======== ========
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION FORWARD-LOOKING STATEMENTS - -------------------------- Congress passed the Private Securities Litigation Reform Act of 1995 to encourage corporations to provide investors with information about the company's anticipated future financial performance, goals, and strategies. The act provides a safe harbor for such disclosure, or in other words, protection from unwarranted litigation if actual results are not the same as management's expectations. Huntington Bancshares Incorporated (Huntington) desires to provide its shareholders with sound information about past performance and future trends. Consequently, this Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements including certain plans, expectations, goals, and projections--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-Q to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. OVERVIEW Huntington reported earnings of $96.6 million for the first quarter of 1999, compared with $89.5 million for the same period last year. Earnings per share were $.46 on a diluted basis, an increase of 9.5% from $.42 per share for the first three months of 1998. Huntington's return on average assets (ROA) was 1.38% for the first quarter of both 1999 and 1998 while return on average equity (ROE) increased to 18.47%, versus 17.73% in the first quarter a year ago. Huntington's "cash basis" diluted earnings per share, which excludes the effect of amortization of goodwill and other intangibles rose to $.49, compared with $.43 per share in the same period last year. Cash basis ROA and ROE for the first quarter of 1999 were 1.52% and 29.58%, respectively. Huntington's efficiency ratio of 52.16% showed improvement for the third consecutive quarter. Total assets were $28.6 billion at March 31, 1999, an increase of 6.7% from one year ago. Much of the growth was attributable to the purchase of sixty former Barnett Banks banking offices in Florida in June 1998, which added approximately $1.3 billion in loans. Asset growth was also complemented by new loan production. After adjusting for the impact of the banking office acquisition, average total loans outstanding for the recent quarter grew 4.4% over the same period last year, despite the continued softness in residential mortgage lending. The decrease in the investment securities portfolio from a year ago is the result of a strategic repositioning of the balance sheet that began in the first half of 1998 and has driven higher equity returns. Core deposits of $17.2 billion declined slightly from March 31, 1998, after adjusting for the aforementioned banking office acquisition in Florida. Average core deposits declined 1.4%, versus the first quarter of last year. This decline was primarily due to runoff in the retail certificate of deposit portfolio, fueled by customer reinvestment at maturity into alternative 13 investments such as mutual funds and annuities, including those sold by Huntington. Excluding retail certification of deposit, deposits grew 4% over this same period. Huntington's wholesale liability position changed from the prior year as $300 million of subordinated notes were issued in the second quarter 1998 as well as an additional $100 million of capital securities through Huntington Capital II, a special-purpose subsidiary. 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 to similar information published by other financial institutions. Below is a discussion of the results, which can be found in the notes to the unaudited consolidated financial statements, for the three months ended March 31, 1999 and 1998. Retail Banking - Retail Banking net income was $36.4 million, a 3.2% increase over 1998. The increase was attained despite compression in the net interest margin, as non-interest income showed strong growth in service charges, brokerage and insurance income, and electronic banking income. This segment contributes 38% of Huntington's net income and comprises 34% of the organization's loan portfolio. Corporate Banking - Corporate Banking continued to post strong results. Net income of $30.1 million represented a 35% increase over 1998. Loan and deposit growth of 34.2% and 9.2%, respectively, fueled the higher earnings. This segment contributes 31% of Huntington's net income and comprises 33% of the organization's loan portfolio. Dealer Sales - Net income totaled $15.1 million for the quarter, up 14.8% over 1998. Loan growth of 14.8% drove net interest income higher. This business line constitutes 16% of Huntington's net income and 30% of its outstanding loans. Private Financial Group - Private Financial Group achieved net income of $6.1 million for the recent quarter, 10.6% increase over the same period a year ago. This was due in large part to non-interest income growth in mortgage banking and brokerage services. This segment represents 6% of Huntington's total net income and 2% of total loans. Treasury/Other - This segment reported a $4.4 million decrease in net income over the first quarter of 1998. Included in this segment is Huntington's amortization of intangibles, which increased subsequent to the acquisition of sixty branches in Florida in June 1998. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income for the quarter was $259.5 million, up $4.7 million, or 1.8%, from the same period a year ago. The increase in net interest income was the result of an increase in earning assets as well as a shift in asset mix towards loans versus lower-yielding investment securities. Net interest rate spread for the current quarter was relatively flat when compared to the same period last year. Huntington's net interest margin dropped from 4.30% in the first three months of 1998 to 4.18% in the quarter just ended due to the lower contribution of non-interest 14 bearing funds, in large part the result of intangible assets added in the acquisition of the banking offices in Florida. PROVISION FOR LOAN LOSSES The provision for loan losses was $25.3 million in the first quarter of 1999, up from $22.2 million in the same period last year. Annualized net charge-offs, as a percentage of average total loans were .52% for the recent three months, roughly flat with one year ago. NON-INTEREST INCOME Non-interest income, excluding securities gains, was $107.6 million for the first quarter of 1999, compared with $92.3 million for the first three months of 1998. The 16.5% increase is attributable to a 21.3% growth in service charges on deposit accounts driven by increased volume in new business banking checking accounts as well as the Florida expansion. Mortgage banking income continued to be strong, as were brokerage and insurance and electronic banking income. Brokerage income increased primarily because of higher sales of a proprietary annuity product. The electronic banking increase resulted from the institution of competitive fee pricing on Huntington's alternative delivery systems. Additional investments in Bank Owned Life Insurance helped drive the growth in Non-Interest Income. NON-INTEREST EXPENSE Despite the significant expansion in Florida, non-interest expense increased only 2.9%, or $5.7 million, from one year ago. After adjusting for the acquired offices in Florida, personnel and related costs declined 3.5%. Corporate-wide purchasing and related efficiency initiatives also resulted in reductions in outside services, printing and supplies, and legal and other professional fees. Huntington announced several strategic actions in 1998, including the closing of approximately 39 underperforming banking offices. During the first quarter of 1999, Huntington closed 19 of these offices; the remainder are expected to be sold or closed by the end of the second quarter. Huntington also exited certain business activities, as discussed in the 1998 Annual Report on Form 10-K. 15 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:
MISSION CRITICAL NON-MISSION CRITICAL ----------------------- ----------------------- Percent Completion Percent Completion Phase Complete Date Complete Date - ---------------------- -------- ---------- -------- ---------- Awareness 100% 06/30/1998 100% 06/30/1998 Assessment 100% 09/30/1998 100% 12/31/1998 Renovation 95% 06/30/1999 95% 06/30/1999 Testing/Validation 95% 06/30/1999 75% 06/30/1999 Implementation 90% 06/30/1999 67% 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. 16 Identifiable costs for the Year 2000 project incurred in the first quarter of 1999 were $4.8 million. Management estimates it will cost up to an additional $12 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 MANAGEMENT Huntington seeks to achieve consistent growth in net interest income and net income while managing volatility arising from shifts in interest rates. The Asset and Liability Management Committee (ALCO) oversees financial risk management, establishing broad policies and specific operating limits that govern a variety of financial risks inherent in Huntington's operations, including interest rate, liquidity, counterparty settlement, and market risks. On and off-balance sheet strategies and tactics are reviewed and monitored regularly by ALCO to ensure consistency with approved risk tolerances. Interest rate risk management is a dynamic process, encompassing the business flows onto the balance sheet, wholesale investment and funding, and the changing market and business environment. Effective management of interest rate risk begins with appropriately diversified investments and funding sources. To accomplish its overall balance sheet objectives, Huntington regularly accesses a variety of global markets--money, bond, and futures and options--as well as numerous trading exchanges. In addition, dealers in over-the-counter financial instruments provide availability of interest rate swaps as needed. Measurement and monitoring of interest rate risk is an ongoing process. A key element in this process is Huntington's estimation of the amount that net interest income will change over a twelve to twenty-four month period given a directional shift in interest rates. The income simulation model used by Huntington captures all assets, liabilities, and off-balance sheet financial instruments, accounting for significant variables that may be affected by interest rates. These include prepayment speeds on mortgages and consumer installment loans, cash flows of loans and deposits, principal amortization on revolving credit instruments, and balance sheet growth assumptions. The model also captures embedded options, for example, interest rate caps, floors or call options, and accounts for changes in rate relationships, as various rate indices lead 17 or lag changes in market rates. Management believes, at any point in time, the model provides a reasonably accurate estimate of Huntington's interest rate risk exposure even though these assumptions are inherently uncertain. This information is regularly shared with the Board of Directors. At March 31, 1999, the results of Huntington's interest sensitivity analysis indicated that net interest income would benefit by approximately 3% given a 200 basis point reduction in the federal funds rate (assuming the change occurs evenly over the next year and that corresponding changes in other market rates occur as forecasted). If interest rates rose 200 basis points, net interest income would be expected to decrease by approximately 4%. Active interest rate risk management necessitates the use of various types of off-balance sheet financial instruments, primarily interest rate swaps. Risk created by different indices on products, by unequal terms to maturity of assets and liabilities, and by products that are appealing to customers but incompatible with current risk limits can be eliminated or decreased in a cost efficient manner by utilizing interest rate swaps. Often, the swap strategy has enabled Huntington to lower the overall cost of raising wholesale funds. Similarly, financial futures, interest rate caps and floors, options, and forward rate agreements are used to control financial risk effectively. Off-balance sheet instruments perform identically to similar cash instruments but are often preferable because they require less capital while preserving access to the marketplace. The following table illustrates the approximate market values, estimated maturities and weighted average rates of the interest rate swaps used by Huntington in its interest rate risk management program at March 31, 1999:
Average Average Rate Notional Maturity Market ------------------ (Dollars in millions) Value (years) Value Receive Pay - ------------------------------ ----- ------- ----- ------- --- ASSET CONVERSION SWAPS Received fixed $1,241 3.37 $ .9 6.01% 5.01% ====== ===== LIABILITY CONVERSION SWAPS Receive fixed $1,770 3.83 $17.9 6.13% 5.08% Receive fixed-amortizing 141 0.65 .1 5.63% 4.94% Pay fixed 1,025 2.30 (3.9) 5.00% 5.14% ------ ----- TOTAL LIABILITY CONVERSION SWAPS $2,936 3.14 $14.1 5.72% 5.09% ====== ===== BASIS PROTECTION SWAPS $ 825 1.36 $ (.1) 4.97% 4.99% ====== =====
As is the case with cash securities, the market value of interest rate swaps is largely a function of the financial market's expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of the swaps on net interest income. This will depend, in large part, on the shape of the yield curve as well as interest rate levels. Management made no assumptions regarding future changes in interest rates with respect to the variable rate information and the indexed amortizing swap maturities presented in the table above. The pay rates on Huntington's receive-fixed swaps vary based on movements in the applicable London interbank offered rate (LIBOR). Receive-fixed asset conversion swaps and pay-fixed liability conversion swaps with notional values of $1 billion 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 18 when rates fall. Basis swaps are contracts that provide for both parties to receive interest payments according to different rate indices and are used to protect against changes in spreads between market rates. The receive and pay amounts applicable to Huntington's basis swaps are based predominantly on LIBOR. The contractual interest payments are based on the notional values of the swap portfolio. These notional values do not represent direct credit exposures. At March 31, 1999, Huntington's credit risk from interest rate swaps used for asset/liability management purposes was $71.1 million, which represents the sum of the aggregate fair value of positions that have become favorable to Huntington, including any accrued interest receivable due from counterparties. In order to minimize the risk that a swap counterparty will not satisfy its interest payment obligation under the terms of the contract, Huntington performs credit reviews on all counterparties, restricts the number of counterparties used to a select group of high quality institutions, obtains collateral, and enters into formal netting arrangements. Huntington has never experienced any past due amounts from a swap counterparty. The total notional amount of off-balance sheet instruments used by Huntington on behalf of customers (for which the related interest rate risk is offset by third party contracts) was $637 million at March 31, 1999. Total credit exposure from such contracts is not material. These separate activities, which are accounted for at fair value, are not a significant part of Huntington's operations. Accordingly, they have been excluded from the above discussion of off-balance sheet financial instruments and the related table. CREDIT RISK Huntington's exposure to credit risk is managed through the use of consistent underwriting standards that emphasize "in-market" lending to established borrowers. Highly leveraged transactions as well as excessive industry and other concentrations are avoided. The credit administration function also employs extensive monitoring procedures to ensure problem loans are promptly identified and that loans adhere to corporate policy. These procedures provide executive management with the information necessary to implement appropriate change and take corrective action as needed. 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 $94.7 million and $95.1 million, respectively, at March 31, 1999 and 1998. As of the recent quarter, non-performing loans represented .39% of total loans, and non-performing assets as a percent of total loans and other real estate were .48%. Loans past due ninety days or more but continuing to accrue interest were $51.0 million at March 1999, down from $65.0 million one year ago. The allowance for loan losses (ALL) is maintained at a level considered appropriate by management, based on its estimate of losses inherent in the loan portfolio. The procedures employed by Huntington to evaluate the adequacy of the ALL include an analysis of specific credits that are generally selected for review on the basis of size and relative risk, portfolio trends, current and historic loss experience, prevailing economic conditions, and other relevant factors. The reserve ratio was 1.48% at the recent quarter end versus 1.46% at March 1998. The ALL covered non-performing loans nearly 3.8 times and when combined with the allowance for other real estate owned, was 305% of total nonperforming assets. CAPITAL Huntington places significant emphasis on the maintenance of strong capital, which promotes investor confidence, provides access to the national markets under favorable terms, and enhances business growth and acquisition opportunities. Huntington also recognizes the 19 importance of managing capital and continually strives to maintain an appropriate balance between capital adequacy and returns to shareholders. Capital is managed at each subsidiary based upon the respective risks and growth opportunities, as well as regulatory requirements. Huntington's ratio of average equity to average assets was 7.46% in the recent quarter compared with 7.77% in the same three months of last year. Risk-based capital guidelines established by the Federal Reserve Board set minimum capital requirements and require institutions to calculate risk-based capital ratios by assigning risk weightings to assets and off-balance sheet items, such as interest rate swaps and loan commitments. These guidelines further define "well-capitalized" levels for Tier 1, Total Capital and Leverage ratio purposes at 6%, 10%, and 5%, respectively. At the recent quarter-end, Huntington's Tier 1 risk-based capital ratio was 7.20%, its total risk-based capital ratio was 10.70%, and its leverage ratio was 6.32%, each of which exceeds the well-capitalized requirements. Huntington's bank subsidiary also had regulatory capital ratios in excess of the levels established for well-capitalized institutions. In the third quarter of 1998, the Board of Directors authorized the reactivation of Huntington's common stock repurchase program. 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 are to be purchased through open market 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. Through March 31, 1999, Huntington repurchased approximately 2.0 million shares. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in Huntington's Annual Report on Form 10-K for the year ended December 31, 1998. Quantitative and qualitative disclosures for the current period are found on pages 18 through 21. 20 - ---------------------------------------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL HIGHLIGHTS
THREE MONTHS ENDED MARCH 31, ------------------------------------------------ (in thousands, except per share amounts) 1999 1998 % Change - -------------------------------------------------------- ------- ------- -------- NET INCOME ............................................. $96,572 $89,486 7.9% PER COMMON SHARE AMOUNTS (1) Net income Basic ........................................ $ 0.46 $ 0.42 9.5 Diluted ...................................... $ 0.46 $ 0.42 9.5 Cash dividends declared ........................... $ 0.20 $ 0.18 11.1 AVERAGE COMMON SHARES OUTSTANDING-DILUTED (1)........... 212,187 213,809 (0.8) KEY RATIOS Return on: Average total assets .............................. 1.38% 1.38% -- Average shareholders' equity ...................... 18.47% 17.73% 4.2 Efficiency ratio ....................................... 52.16% 56.32% (7.4) Average equity/average assets .......................... 7.46% 7.77% (4.0) Net interest margin .................................... 4.18% 4.30% (2.8) TANGIBLE OR "CASH BASIS" RESULTS (2) Per Common Share Amounts (1) Net income -- Diluted ............................. $ 0.49 $ 0.43 14.0 Return on: Average total assets .............................. 1.52% 1.44% 5.6 Average shareholders' equity ...................... 29.58% 21.09% 40.3
(1) Adjusted for stock splits and stock dividends, as applicable. (2) Tangible or "Cash Basis" net income excludes amortization of goodwill and other intangibles. Related asset amounts also excluded from total assets and shareholders' equity. 21 - --------------------------------------------------------------------------------------------------------------------- FINANCIAL REVIEW
- --------------------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE - AMORTIZED COST & FAIR VALUES BY MATURITY AT MARCH 31, 1999 AND DECEMBER 31, 1998 - --------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) MARCH 31, 1999 December 31, 1998 - --------------------------------------------------------------------------------------------------------------------- AMORTIZED COST FAIR VALUE Amortized Cost Fair Value - --------------------------------------------------------------------------------------------------------------------- U.S. Treasury Under 1 year ............................ $ 1,000 $ 1,000 $ 1,000 $ 1,007 1-5 years ............................... 264,458 262,661 63,537 65,364 6-10 years .............................. 489,669 483,251 169,959 176,945 ---------- ---------- ---------- ---------- Total ................................ 755,127 746,912 234,496 243,316 ---------- ---------- ---------- ---------- Federal agencies Mortgage-backed securities 1-5 years ............................... 9 9 11 11 6-10 years .............................. 89,280 90,988 87,342 89,162 Over 10 years ........................... 1,490,254 1,480,587 1,356,722 1,363,015 ---------- ---------- ---------- ---------- Total ................................ 1,579,543 1,571,584 1,444,075 1,452,188 ---------- ---------- ---------- ---------- Other agencies 1-5 years ............................... 1,012,247 1,006,438 968,753 975,253 6-10 years .............................. 596,845 591,884 678,245 684,230 Over 10 years ........................... 782,449 780,079 740,139 741,147 ---------- ---------- ---------- ---------- Total ................................ 2,391,541 2,378,401 2,387,137 2,400,630 ---------- ---------- ---------- ---------- Other Under 1 year ............................ 7,921 7,894 7,492 7,478 1-5 years ............................... 200,820 203,290 188,551 190,871 6-10 years .............................. 176,703 179,705 204,788 210,698 Over 10 years ........................... 275,681 272,492 268,319 268,930 Marketable equity securities ............ 8,714 7,593 8,359 7,304 ---------- ---------- ---------- ---------- Total ................................ 669,839 670,974 677,509 685,281 ---------- ---------- ---------- ---------- Total Securities Available for Sale........... $5,396,050 $5,367,871 $4,743,217 4,781,415 ========== ========== ========== ==========
22 - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL REVIEW
- ------------------------------------------------------------------------------------------------------------------------- LOAN LOSS EXPERIENCE - ------------------------------------------------------------------------------------------------------------------------- 1999 1998 -------- --------------------------------------------- (in thousands of dollars) I Q IV Q III Q II Q I Q - ---------------------------------------------------------- -------- -------- -------- -------- -------- ALLOWANCE FOR LOAN LOSSES, BEGINNING OF PERIOD ........... $290,948 $286,122 $286,864 $258,262 $258,171 Allowance of assets acquired/other ....................... -- -- -- 22,042 -- Loan losses .............................................. (32,531) (36,839) (33,095) (28,855) (27,566) Recoveries of loans previously charged off ............... 7,344 7,359 8,193 10,820 5,476 Provision for loan losses ................................ 25,305 34,306 24,160 24,595 22,181 -------- -------- -------- -------- -------- ALLOWANCE FOR LOAN LOSSES END OF PERIOD .................. $291,066 $290,948 $286,122 $286,864 $258,262 ======== ======== ======== ======== ======== AS A % OF AVERAGE TOTAL LOANS Net loan losses--annualized ............................ 0.52% 0.61% 0.52% 0.41% 0.51% Provision for loan losses--annualized .................. 0.52% 0.71% 0.51% 0.55% 0.51% Allowance for loan losses as a % of total loans........... 1.48% 1.50% 1.50% 1.50% 1.46% Net loan loss coverage (1) ............................... 6.64x 5.66x 6.20x 8.89x 6.96x
(1) Income before taxes (excluding special charges) and the provision for loan losses to net loan losses.
- --------------------------------------------------------------------------------------------------------------------------- NON-PERFORMING ASSETS AND PAST DUE LOANS - --------------------------------------------------------------------------------------------------------------------------- (Quarter-End) 1999 1998 ------- ----------------------------------------------- (in thousands of dollars) I Q IV Q III Q II Q I Q - ---------------------------------------------------------- ------- ------- ------- -------- ------- Non-accrual loans ........................................ $74,116 $72,429 $70,210 $ 75,367 $79,888 Renegotiated loans ....................................... 2,764 4,706 4,798 4,770 3,173 ------- ------- ------- -------- ------- TOTAL NON-PERFORMING LOANS ............................... 76,880 77,135 75,008 80,137 83,061 Other real estate, net ................................... 17,853 18,964 20,812 21,516 12,005 ------- ------- ------- -------- ------- TOTAL NON-PERFORMING ASSETS .............................. $94,733 $96,099 $95,820 $101,653 $95,066 ======= ======= ======= ======== ======= NON-PERFORMING LOANS AS A % OF TOTAL LOANS ....................................... 0.39% 0.40% 0.39% 0.42% 0.47% NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND OTHER REAL ESTATE ................. 0.48% 0.49% 0.50% 0.53% 0.54% ALLOWANCE FOR LOAN LOSSES AS A % OF NON-PERFORMING LOANS ................................... 378.60% 377.19% 381.46% 357.97% 310.93% ALLOWANCE FOR LOAN LOSSES AND OTHER REAL ESTATE AS A % OF NON-PERFORMING ASSETS ................. 305.33% 301.00% 296.69% 280.64% 270.07% ACCRUING LOANS PAST DUE 90 DAYS OR MORE................... $51,039 $51,037 $63,998 $ 50,614 $64,959 ======= ======= ======= ======== =======
23 - ------------------------------------------------------------------------------------------------------ CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES (QUARTERLY DATA)
- ------------------------------------------------------------------------------------------------------ Fully Tax Equivalent Basis (1) 1ST QUARTER 1999 4th Quarter 1998 ----------------- ----------------- AVERAGE YIELD/ Average Yield/ (in millions of dollars) BALANCE RATE Balance Rate - ------------------------------------------------------- ------- ------ ------- ------ ASSETS Interest bearing deposits in banks..................... $ 8 4.93% $ 4 5.00% Trading account securities............................. 18 5.20 12 5.62 Federal funds sold and securities purchased under resale agreements............................. 18 5.64 34 5.48 Mortgages held for sale................................ 359 6.75 377 6.73 Securities: Taxable.......................................... 4,926 6.05 4,518 6.16 Tax exempt....................................... 304 8.17 292 8.16 ------- ------- Total Securities............................ 5,230 6.17 4,810 6.28 ------- ------- Loans: Commercial........................................ 6,067 7.90 5,954 7.99 Real Estate Construction................................. 957 8.14 864 8.24 Mortgage..................................... 3,651 7.97 3,689 8.21 Consumer Loans....................................... 6,873 8.38 6,912 8.62 Leases...................................... 2,015 6.94 1,850 7.00 ------- ------- Total Consumer loans........................ 8,888 8.05 8,762 8.28 ------- ------- Total Loans............................................ 19,563 7.99 19,269 8.17 ------- ------- Allowance for loan losses/loan fees.................... 299 296 ------- ------- Net loans.............................................. 19,264 8.49 18,973 8.68 ------- ------- Total earning assets................................... 25,196 7.98% 24,506 8.17% ------- ------- Cash and due from banks................................ 1,064 1,056 All other assets....................................... 2,461 2,448 ------- ------- TOTAL ASSETS........................................... $28,422 $27,714 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Core deposits Non-interest bearing deposits..................... $ 3,505 $ 3,577 Interest bearing demand deposits.................. 4,061 2.46% 3,967 2.60% Savings deposits.................................. 3,627 3.17 3,546 3.38 Other domestic time deposits...................... 6,047 5.27 6,459 5.43 ------- ------- Total core deposits.......................... 17,240 3.88 17,549 4.10 ------- ------- Certificates of deposit of $100,000 or more............ 1,730 5.35 1,755 5.65 Foreign time deposits.................................. 161 4.80 56 4.86 ------- ------- Total deposits.................................... 19,131 4.06 19,360 4.27 ------- ------- Short-term borrowings.................................. 3,647 4.33 2,123 4.36 Medium-term notes...................................... 1,872 5.29 2,526 5.48 Subordinated notes and other long-term debt, including capital securities........................ 1,007 5.81 1,020 5.88(2) ------- ------- Interest bearing liabilities...................... 22,152 4.32% 21,452 4.49% ------- ------- All other liabilities.................................. 644 653 Shareholders' equity................................... 2,121 2,032 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $28,422 $27,714 ======= ======= Net interest rate spread............................... 3.66% 3.68% Impact of non-interest bearing funds on margin......... 0.52% 0.56% NET INTEREST MARGIN.................................... 4.18% 4.24%(2)
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate. (2) Excludes nonrecurring interest rate swap adjustment of $9.2 million. 24 ------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES (QUARTERLY DATA)
------------------------------------------------------------------- 3rd Quarter 1998 2nd Quarter 1998 1st Quarter 1998 ----------------- ----------------- ----------------- Average Yield/ Average Yield/ Average Yield/ Balance Rate Balance Rate Balance Rate ------- ------ ------- ------ ------- ------ $ 31 5.20% $ 8 5.26% $ 9 5.35% 11 5.87 12 5.81 8 5.48 689 5.62 168 5.63 21 6.57 275 7.10 282 7.08 219 7.24 4,077 6.34 5,107 6.34 5,906 6.35 234 8.86 225 9.27 237 9.23 ------- ------- ------- 4,311 6.47 5,332 6.47 6,143 6.46 ------- ------- ------- 5,763 8.36 5,482 8.46 5,306 8.58 811 8.83 816 8.73 823 8.85 3,760 8.43 3,444 8.62 3,520 8.65 6,896 8.77 6,474 8.82 6,428 8.96 1,728 7.11 1,627 7.15 1,564 7.13 ------- ------- ------- 8,624 8.44 8,101 8.48 7,992 8.61 ------- ------- ------- 18,958 8.43 17,843 8.51 17,641 8.78 ------- ------- ------- 293 266 265 ------- ------- ------- 18,665 8.87 17,577 8.99 17,376 9.20 ------- ------- ------- 24,275 8.33% 23,645 8.37% 24,041 8.48% ------- ------- ------- 1,017 907 917 2,516 1,786 1,637 ------- ------- ------- $27,515 $26,072 $26,330 ======= ======= ======= $ 3,466 $ 3,113 $ 2,979 3,898 2.77% 3,216 2.72% 3,250 2.68% 3,428 3.56 3,099 3.51 3,028 3.44 6,619 5.53 5,985 5.62 6,093 5.64 ------- ------- ------- 17,411 4.27 15,413 4.33 15,350 4.32 ------- ------- ------- 1,884 5.71 1,909 5.74 1,935 5.78 30 5.39 132 5.80 198 5.85 ------- ------- ------- 19,325 4.45 17,454 4.53 17,483 4.54 ------- ------- ------- 1,515 4.75 2,044 4.97 2,656 5.16 2,952 5.70 3,222 5.71 2,914 5.77 1,041 6.37 757 6.13 691 5.85 ------- ------- ------- 21,367 4.72% 20,364 4.80% 20,765 4.83% ------- ------- ------- 539 503 539 2,143 2,092 2,047 ------- ------- ------- $27,515 $26,072 $26,330 ======= ======= ======= 3.61% 3.57% 3.65% 0.57% 0.66% 0.65% 4.18% 4.23% 4.30%
25 - ------------------------------------------------------------------------------------------------------------------------------ SELECTED QUARTERLY INCOME STATEMENT DATA
- ------------------------------------------------------------------------------------------------------------------------------ 1999 1998 -------- ----------------------------------------------- (in thousands of dollars, except per share amounts) I Q IV Q III Q II Q I Q - ------------------------------------------------------------- -------- -------- -------- -------- -------- TOTAL INTEREST INCOME ....................................... $495,692 $500,395 $505,221 $491,268 $502,480 TOTAL INTEREST EXPENSE ...................................... 236,171 233,094 253,706 243,839 247,632 -------- -------- -------- -------- -------- NET INTEREST INCOME ......................................... 259,521 267,301 251,515 247,429 254,848 Provision for loan losses ................................... 25,305 34,306 24,160 24,595 22,181 -------- -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ................................. 234,216 232,995 227,355 222,834 232,667 -------- -------- -------- -------- -------- Service charges on deposit accounts ......................... 35,776 33,992 32,493 30,428 29,490 Mortgage banking ............................................ 15,958 15,388 15,270 15,191 14,157 Trust services .............................................. 13,434 12,924 12,502 12,745 12,583 Brokerage and insurance income .............................. 11,543 9,848 10,057 8,520 8,285 Bank Owned Life Insurance income ............................ 9,390 8,098 8,098 7,168 5,348 Electronic banking fees ..................................... 8,038 8,037 7,897 7,520 5,748 Credit card fees ............................................ 5,342 6,367 5,197 5,450 4,895 Other ....................................................... 8,081 12,057 12,512 18,318 11,824 -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS............ 107,562 106,711 104,026 105,340 92,330 -------- -------- -------- -------- -------- Securities gains ............................................ 2,310 1,773 10,615 14,316 3,089 -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME ................................... 109,872 108,484 114,641 119,656 95,419 -------- -------- -------- -------- -------- Personnel and related costs ................................. 107,254 103,600 111,744 108,483 104,712 Equipment ................................................... 16,873 16,202 15,001 15,688 15,149 Outside data processing and other services .................. 15,392 20,915 17,550 16,988 19,342 Net occupancy ............................................... 13,917 11,602 15,019 14,063 13,439 Amortization of intangible assets ........................... 9,328 9,436 9,467 3,393 3,393 Telecommunications .......................................... 7,064 8,173 7,793 7,450 6,013 Marketing ................................................... 6,298 8,251 8,762 8,315 6,932 Printing and supplies ....................................... 4,756 6,450 5,851 5,611 5,761 Legal and other professional services ....................... 4,744 7,847 5,291 6,234 5,788 Franchise and other taxes ................................... 4,387 5,554 5,523 5,526 5,500 Other ....................................................... 12,093 10,902 9,876 14,927 10,413 -------- -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE BEFORE SPECIAL CHARGES ........... 202,106 208,932 211,877 206,678 196,442 -------- -------- -------- -------- -------- Special charges ............................................. -- 90,000 -- -- -- -------- -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE .................................. 202,106 298,932 211,877 206,678 196,442 -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES .................................. 141,982 42,547 130,119 135,812 131,644 Provision for income taxes .................................. 45,410 11,329 41,364 43,503 42,158 -------- -------- -------- -------- -------- NET INCOME .................................................. $ 96,572 $ 31,218 $ 88,755 $ 92,309 $ 89,486 ======== ======== ======== ======== ======== PER COMMON SHARE (1) Net income - Diluted ....................................... $ 0.46 $ 0.15 $ 0.42 $ 0.43 $ 0.42 Net income - Diluted--Cash Basis ........................... $ 0.49 $ 0.18 $ 0.45 $ 0.45 $ 0.43 Cash Dividends Declared .................................... $ 0.20 $ 0.20 $ 0.20 $ 0.18 $ 0.18 FULLY TAX EQUIVALENT MARGIN: Net Interest Income ......................................... $259,521 $267,301 $251,515 $247,429 $254,848 Tax Equivalent Adjustment (2) ............................... 2,504 2,504 2,567 2,581 2,655 -------- -------- -------- -------- -------- Tax Equivalent Net Interest Income .......................... $262,025 $269,805 $254,082 $250,010 $257,503 ======== ======== ======== ======== ========
(1) Adjusted for stock splits and stock dividends, as applicable. (2) Calculated assuming a 35% tax rate. 26 HUNTINGTON BANCSHARES INCORPORATED - --------------------------------------------------------------------------------------------------------------------- QUARTERLY COMMON STOCK SUMMARY (1)
1999 1998 --------- ---------------------------------------------- I Q IV Q III Q II Q I Q - ------------------------------------------------------ --------- -------- ------- -------- -------- High ................................................. $33 1/2 $31 1/2 $33 7/8 $34 9/16 $34 7/32 Low .................................................. 29 7/8 23 5/8 22 29 9/16 29 1/16 Close ................................................ 30 15/16 30 1/16 25 1/8 30 9/16 33 1/8 Cash dividends declared............................... $0.20 $0.20 $0.20 $0.18 $0.18
Note: Stock price quotations were obtained from NASDAQ. - --------------------------------------------------------------------------------------------------------------------- KEY RATIOS AND STATISTICS
1999 1998 ------- --------------------------------------------- I Q IV Q III Q II Q I Q - ------------------------------------------------------ ------- ------- ------- ------- ------- MARGIN ANALYSIS - AS A % OF AVERAGE EARNING ASSETS (2) Interest Income ...................................... 7.98% 8.17% 8.33% 8.37% 8.48% Interest Expense ..................................... 3.80 3.93 4.15 4.14 4.18 ------- ------- ------- ------- ------- Net Interest Margin ............................. 4.18% 4.24% 4.18% 4.23% 4.30% ======= ======= ======= ======= ======= RETURN ON Average total assets ................................. 1.38% 1.31% 1.28% 1.42% 1.38% Average total assets-cash basis ...................... 1.52% 1.45% 1.43% 1.49% 1.44% Average shareholders' equity ......................... 18.47% 17.87% 16.43% 17.70% 17.73% Average shareholders' equity-cash basis............... 29.58% 29.44% 26.59% 21.17% 21.09%
- --------------------------------------------------------------------------------------------------------------------- REGULATORY CAPITAL DATA 1999 1998 ------- --------------------------------------------- (in millions of dollars) I Q IV Q III Q II Q I Q - ------------------------------------------------------ ------- ------- ------- ------- ------- Total Risk-Adjusted Assets............................ $24,345 $24,239 $23,695 $23,728 $22,554 Tier 1 Risk-Based Capital Ratio....................... 7.20% 7.10% 7.35% 7.18% 8.91% Total Risk-Based Capital Ratio........................ 10.70% 10.73% 11.18% 11.01% 11.57% Tier 1 Leverage Ratio................................. 6.32% 6.37% 6.51% 6.72% 7.72%
(1) Adjusted for stock splits and stock dividends, as applicable. (2) Presented on a fully tax equivalent basis assuming a 35% tax rate. 27 PART II. OTHER INFORMATION In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable or the information has been previously reported. Item 2. Changes in securities and use of proceeds (c) Unregistered shares In conjunction with Deferred Compensation Agreements associated with the January 6, 1998, acquisition by Huntington of Pollock and Pollock, an insurance agency headquartered in Cleveland, Ohio ("Pollock"), Huntington issued 22,714 unregistered shares of Huntington common stock, without par value, to five shareholders of Pollock and Pollock on February 24, 1999. This is in addition to the shares of common stock previously issued to these shareholders in prior periods in connection with the acquisition. The issuance of shares in this transaction was deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) since this was a transaction by an issuer not involving a public offering. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3. ( i )( a ) Articles of Restatement of Charter, Articles of Amendment to Articles of Restatement of Charter, and Articles Supplementary previously filed as Exhibit 3(i) to Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference. ( i )( b ) Articles of Amendment to Articles of Restatement of Charter --previously filed as Exhibit 3(i)(b) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, and incorporated herein by reference. ( i )( c ) Articles of Amendment to Articles of Restatement of Charter --previously filed as Exhibit 3(i)(c) to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference. ( ii ) Amended and Restated Bylaws -- previously filed as Exhibit 3(ii) to Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. 4. Instruments defining the Rights of Security Holders: Reference is made to Articles Fifth, Eighth and Tenth of Articles of Restatement of Charter, previously filed as Exhibit 3(i) to Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference, as amended and supplemented by 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. Also, reference is made to Rights Plan, dated February 22, 1990, previously filed as Exhibit 1 to Registration Statement on Form 8-A, and incorporated herein by reference and to Amendment No. 1 to the Rights Agreement, dated as of August 16, 1995, previously filed as Exhibit 4(b) to Form 8-K filed with the Securities and Exchange Commission on August 28, 1995, and incorporated herein by reference. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request. 27. Financial Data Schedule 99. Earnings to Fixed Charges (b) Reports on Form 8-K 1. A report on Form 8-K, dated January 13, 1999, was filed under report item numbers 5 and 7, concerning Huntington's results of operations for the fourth quarter and year ended December 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Huntington Bancshares Incorporated ---------------------------------- (Registrant) Date: May 14, 1999 /s/ Richard A. Cheap ---------------------------------- Richard A. Cheap General Counsel and Secretary Date: May 14, 1999 /s/ Anne W. Creek ---------------------------------- Anne W. Creek Principal Accounting Officer