UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 QUARTERLY PERIOD ENDED June 30, 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 230,313,894 shares of Registrant's without par value common stock outstanding on July 30, 1999. PART I. FINANCIAL INFORMATION 1. FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, JUNE 30, (in thousands of dollars) 1999 1998 1998 - ---------------------------------------------------------------------------- ----------- ------------ ----------- ASSETS Cash and due from banks .................................................... $ 996,065 $ 1,215,814 $ 1,151,784 Interest bearing deposits in banks ......................................... 7,978 102,564 278,400 Trading account securities ................................................. 12,058 3,839 30,244 Federal funds sold and securities purchased under resale agreements ..................................... 10,233 135,764 707,377 Mortgages held for sale .................................................... 236,260 466,664 305,741 Securities available for sale - at fair value .............................. 4,573,160 4,781,415 4,467,986 Investment securities - fair value $21,350; $25,044; and $29,898, respectively ............................................. 21,307 24,934 29,637 Total loans (1) ............................................................ 20,152,698 19,454,551 19,061,839 Less allowance for loan losses ........................................ 293,274 290,948 286,864 ----------- ----------- ----------- Net loans .................................................................. 19,859,424 19,163,603 18,774,975 ----------- ----------- ----------- Bank owned life insurance .................................................. 746,618 727,837 612,516 Premises and equipment ..................................................... 443,485 447,038 496,840 Customers' acceptance liability ............................................ 14,948 22,591 25,906 Accrued income and other assets ............................................ 1,239,544 1,204,273 1,305,813 ----------- ----------- ----------- TOTAL ASSETS ............................................................... $28,161,080 $28,296,336 $28,187,219 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Total deposits (1) ......................................................... $18,933,161 $19,722,772 $19,666,248 Short-term borrowings ...................................................... 2,275,980 2,216,644 1,655,244 Bank acceptances outstanding ............................................... 14,948 22,591 25,906 Medium-term notes .......................................................... 3,199,900 2,539,900 3,147,150 Subordinated notes and other long-term debt ................................ 700,518 707,359 749,692 Company obligated mandatorily redeemable preferred capital securities of subsidiary trusts holding solely junior subordinated debentures of the Parent Company .................... 300,000 300,000 300,000 Accrued expenses and other liabilities ..................................... 590,371 638,275 509,130 ----------- ----------- ----------- Total Liabilities ..................................................... 26,014,878 26,147,541 26,053,370 ----------- ----------- ----------- Shareholders' equity Preferred stock - authorized 6,617,808 shares; none outstanding Common stock - without par value; authorized 500,000,000 shares; issued 212,596,344, 212,596,344, and 193,279,797 shares, respectively; outstanding 209,710,432, 210,746,337, and 192,425,915 shares, respectively ................................. 2,152,076 2,152,076 1,528,768 Treasury stock ........................................................ (85,202) (49,271) (22,832) Capital surplus ....................................................... (18,043) (14,161) 393,296 Accumulated other comprehensive income ................................ (55,564) 24,693 15,376 Retained earnings ..................................................... 152,935 35,458 219,241 ----------- ----------- ----------- Total Shareholders' Equity ............................................ 2,146,202 2,148,795 2,133,849 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................. $28,161,080 $28,296,336 $28,187,219 =========== =========== ===========
(1) See page 12 for detail of total loans and total deposits. See notes to unaudited financial statements. 2 CONSOLIDATED STATEMENTS OF INCOME - -----------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED (in thousands of dollars, except per share amounts) JUNE 30, JUNE 30, - ----------------------------------------------------- ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Interest and fee income Loans .......................................... $ 415,451 $ 399,134 $ 825,632 $ 799,941 Securities ..................................... 77,879 84,369 156,731 181,540 Other .......................................... 5,170 7,765 11,829 12,267 ------------ ------------ ------------ ------------ TOTAL INTEREST INCOME ................ 498,500 491,268 994,192 993,748 ------------ ------------ ------------ ------------ Interest expense Deposits ....................................... 153,168 162,153 309,473 324,405 Short-term borrowings .......................... 30,528 24,343 61,003 58,165 Medium-term notes .............................. 39,353 46,236 74,107 87,676 Subordinated notes and other long-term debt .... 14,303 11,107 28,940 21,225 ------------ ------------ ------------ ------------ TOTAL INTEREST EXPENSE ............... 237,352 243,839 473,523 491,471 ------------ ------------ ------------ ------------ NET INTEREST INCOME .................. 261,148 247,429 520,669 502,277 Provision for loan losses ........................... 21,026 24,595 46,331 46,776 ------------ ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.. 240,122 222,834 474,338 455,501 ------------ ------------ ------------ ------------ Total non-interest income (1) ....................... 117,276 119,656 227,148 215,075 Total non-interest expense (1) ...................... 202,138 206,678 404,244 403,120 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES ........... 155,260 135,812 297,242 267,456 Provision for income taxes .......................... 50,285 43,503 95,695 85,661 ------------ ------------ ------------ ------------ NET INCOME ........................... $ 104,975 $ 92,309 $ 201,547 $ 181,795 ============ ============ ============ ============ PER COMMON SHARE (2) Net income Basic ..................................... $ 0.45 $ 0.40 $ 0.87 $ 0.78 Diluted ................................... $ 0.45 $ 0.39 $ 0.86 $ 0.77 Cash dividends declared ........................ $ 0.18 $ 0.16 $ 0.36 $ 0.32 AVERAGE COMMON SHARES (2) Basic ..................................... 230,975,889 232,759,820 231,217,450 232,638,050 Diluted ................................... 233,154,045 236,130,212 233,278,544 235,660,798
(1) See page 13 for detail of non-interest income and non-interest expense. (2) Adjusted for the ten percent stock dividend distributed July 1999. See notes to unaudited consolidated financial statements. 3 - ------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ACCUMULATED OTHER COMMON COMMON TREASURY TREASURY CAPITAL COMPREHENSIVE RETAINED SHARES STOCK SHARES STOCK SURPLUS INCOME EARNINGS TOTAL - ------------------------------------- ------- ---------- -------- -------- -------- ------------- -------- ---------- Six Months Ended June 30, 1998: Balance, beginning of period 193,279 $1,528,768 (1,543) $(36,791) $404,235 $ 14,800 $114,379 $2,025,391 Comprehensive Income: Net income 181,795 181,795 Unrealized net holding gains on securities available for sale arising during the period 576 576 ---------- Total comprehensive income 182,371 ---------- Cash dividends declared (76,933) (76,933) Stock issued for acquisition 160 3,883 (3,815) 68 Stock options exercised 510 9,597 (7,328) 2,269 Treasury shares sold to employee benefit plans 19 479 204 683 ------- ---------- ------ -------- -------- -------- -------- ---------- Balance, end of period 193,279 $1,528,768 (854) $(22,832) $393,296 $ 15,376 $219,241 $2,133,849 ======= ========== ====== ======== ======== ======== ======== ========== SIX MONTHS ENDED JUNE 30, 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 201,547 201,547 UNREALIZED NET HOLDING LOSSES ON SECURITIES AVAILABLE FOR SALE ARISING DURING THE PERIOD (80,257) (80,257) ---------- TOTAL COMPREHENSIVE INCOME 121,290 ---------- CASH DIVIDENDS DECLARED (84,070) (84,070) STOCK OPTIONS EXERCISED 227 6,221 (3,882) 2,339 TREASURY SHARES PURCHASED (1,287) (42,861) (42,861) TREASURY SHARES SOLD TO EMPLOYEE BENEFIT PLANS 24 709 709 ------- ---------- ------ -------- -------- -------- -------- ---------- BALANCE, END OF PERIOD 212,596 $2,152,076 (2,886) $(85,202) $(18,043) $(55,564) $152,935 $2,146,202 ======= ========== ====== ======== ======== ======== ======== ==========
See notes to unaudited consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS - -----------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, ---------------------------- (in thousands of dollars) 1999 1998 ----------- ----------- OPERATING ACTIVITIES Net Income ................................................................. $ 201,547 $ 181,795 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses ........................................ 46,331 46,776 Provision for depreciation and amortization ...................... 59,294 34,922 Deferred income tax expense ...................................... 20,432 12,265 Increase in trading account securities ........................... (8,219) (23,162) Decrease (increase) in mortgages held for sale ................... 230,404 (112,793) Net gains on sales of securities available for sale .............. (4,530) (17,405) Net gains on sales of loans ...................................... -- (9,857) (Increase) decrease in accrued income receivable ................. (12,849) 4,059 Net increase in other assets ..................................... (81,392) (56,326) Decrease in accrued expenses ..................................... (23,459) (5,954) Net increase (decrease) in other liabilities ..................... 15,531 (37,129) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 443,090 17,191 ----------- ----------- INVESTING ACTIVITIES Decrease (increase) in interest bearing deposits in banks .................. 94,586 (238,782) Proceeds from : Maturities and calls of investment securities .......................... 3,610 3,319 Maturities and calls of securities available for sale .................. 425,168 387,959 Sales of securities available for sale ................................. 1,537,067 2,606,218 Purchases of securities available for sale ................................. (1,875,651) (1,611,060) Proceeds from sales of loans ............................................... 2,853 132,712 Net loan originations, excluding sales ..................................... (745,835) (53,807) Proceeds from disposal of premises and equipment ........................... 2,783 776 Purchases of premises and equipment ........................................ (37,704) (66,492) Proceeds from sales of other real estate ................................... 5,727 7,058 Purchase of Bank Owned Life Insurance ...................................... -- (200,000) Net cash received in purchase acquisitions ................................. -- 344,046 ----------- ----------- NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES...... (587,396) 1,311,947 ----------- ----------- FINANCING ACTIVITIES Decrease in total deposits ................................................. (789,583) (728,747) Increase (decrease) in short-term borrowings ............................... 59,336 (1,486,427) Proceeds from issuance of long-term debt ................................... -- 300,000 Maturity of long-term debt ................................................. (7,000) (47,538) Proceeds from issuance of medium-term notes ................................ 1,675,000 1,020,000 Payment of medium-term notes ............................................... (1,015,000) (205,000) Proceeds from issuance of capital securities ............................... -- 100,000 Dividends paid on common stock ............................................. (83,914) (76,786) Repurchase of common stock ................................................. (42,861) -- Proceeds from issuance of common stock ..................................... 3,048 2,952 ----------- ----------- NET CASH USED FOR FINANCING ACTIVITIES ................... (200,974) (1,121,546) ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS ...................... (345,280) 207,592 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......... 1,351,578 1,651,569 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 1,006,298 $ 1,859,161 =========== ===========
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 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 SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------------- ----------------------- 1999 1998 1999 1998 -------- -------- --------- -------- Unrealized holding gains (losses) arising during the period: Unrealized net (losses) gains $(55,749) $ 22,000 $(119,815) $ 18,296 Related tax benefit (expense) 19,848 (7,729) 42,502 (6,407) -------- -------- --------- -------- Net (35,901) 14,271 (77,313) 11,889 -------- -------- --------- -------- Reclassification adjustment for net gains realized during the period Realized net gains (2,220) (14,316) (4,530) (17,405) Related tax expense 777 5,011 1,586 6,092 -------- -------- --------- -------- Net (1,443) (9,305) (2,944) (11,313) ======== ======== ========= ======== Total Other Comprehensive Income $(37,344) $ 4,966 $ (80,257) $ 576 ======== ======== ========= ========
6 D. New Accounting Pronouncements In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement (as amended by Statement No. 137) establishes accounting and reporting standards requiring that every derivative instrument (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, as amended, is effective for fiscal years beginning after June 15, 2000. It may be implemented earlier provided adoption occurs as of the beginning of any fiscal quarter after issuance. The Statement cannot be applied retroactively. 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 Statement 133, as amended, in the first quarter of 2001. Based on information available, the impact of adoption is not expected to be material to the Consolidated Financial Statements. 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 June 30, 1999. Huntington expects that the remaining reserve of $31 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 --- ---- --- --- ---- Utilization (2) -- (1) (7) (10) --- ---- --- --- ---- Balance as of June 30, 1999 $12 $ -- $10 $ 9 $ 31 === ==== === === ====
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 June 30, is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------- --------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net Income $104,975 $ 92,309 $201,547 $181,795 Average common shares outstanding 230,976 232,760 231,217 232,638 Dilutive effect of stock options 2,178 3,370 2,062 3,023 -------- -------- -------- -------- Diluted common shares outstanding 233,154 236,130 233,279 235,661 ======== ======== ======== ======== Earnings per share Basic $ .45 $ .40 $ .87 $ .78 Diluted $ .45 $ .39 $ .86 $ .77
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 JUNE 30, 1999 - ----------------------------------------------------------------------------------------------------------- Private Retail Corporate Dealer Financial Treasury/ Huntington Banking Banking Sales Group Other Consolidated -------- --------- ------- --------- --------- ------------ INCOME STATEMENT (IN THOUSANDS OF DOLLARS) - ------------------------- Net Interest Income (FTE) $139,501 $65,033 $46,343 $ 6,908 $ 5,753 $263,538 Provision for Loan Losses 8,143 2,834 9,764 285 -- 21,026 Non-Interest Income 74,100 16,824 550 12,001 13,801 117,276 Non-Interest Expense 133,287 32,217 12,034 10,139 14,461 202,138 Income Taxes and FTE Adjustment 24,115 15,640 8,385 2,835 1,700 52,675 -------- ------- ------- ------- ------- -------- Net Income $ 48,056 $31,166 $16,710 $ 5,650 $ 3,393 $104,975 ======== ======= ======= ======= ======= ======== Depreciation & Amortization $ 16,421 $ 2,235 $ 292 $ 374 $10,400 $ 29,722 ======== ======= ======= ======= ======= ======== OTHER FINANCIAL DATA (IN MILLIONS OF DOLLARS) - ------------------------ Identifiable Assets (avg.) $ 7,089 $ 7,280 $ 6,026 $ 578 $ 7,758 $ 28,731 Total Deposits (avg.) 16,897 1,006 64 516 590 19,073 Capital Expenditures 3 1 -- -- 16 20 THREE MONTHS ENDED JUNE 30, 1998 - ----------------------------------------------------------------------------------------------------------- Private Retail Corporate Dealer Financial Treasury/ Huntington Banking Banking Sales Group Other Consolidated -------- --------- ------- --------- --------- ------------ INCOME STATEMENT (IN THOUSANDS OF DOLLARS) - ------------------------- Net Interest Income (FTE) $131,001 $63,600 $38,580 $ 7,869 $ 8,960 $250,010 Provision for Loan Losses 7,955 3,332 12,927 381 -- 24,595 Non-Interest Income 58,951 17,299 1,699 10,243 31,464 119,656 Non-Interest Expense 134,336 36,448 12,515 9,960 13,419 206,678 Income Taxes and FTE Adjustment 15,870 13,692 4,941 2,588 8,993 46,084 -------- ------- ------- ------- ------- -------- Net Income $ 31,791 $27,427 $ 9,896 $ 5,183 $18,012 $ 92,309 ======== ======= ======= ======= ======= ======== Depreciation & Amortization $ 12,972 $ 1,507 $ 148 $ 296 $ 2,231 $ 17,154 ======== ======= ======= ======= ======= ======== OTHER FINANCIAL DATA (IN MILLIONS OF DOLLARS) - ------------------------ Identifiable Assets (avg.) $ 6,997 $ 6,249 $ 5,141 $ 616 $ 7,069 $ 26,072 Total Deposits (avg.) 15,336 978 66 473 601 17,454 Capital Expenditures 7 1 -- -- 36 44
10
SIX MONTHS ENDED JUNE 30, 1999 - ----------------------------------------------------------------------------------------------------------- Private Retail Corporate Dealer Financial Treasury/ Huntington Banking Banking Sales Group Other Consolidated -------- --------- ------- --------- --------- ------------ INCOME STATEMENT (IN THOUSANDS OF DOLLARS) - ------------------------- Net Interest Income (FTE) $273,097 $131,758 $91,992 $14,404 $14,312 $525,563 Provision for Loan Losses 17,966 7,245 20,715 405 -- 46,331 Non-Interest Income 139,362 32,683 941 23,495 30,667 227,148 Non-Interest Expense 267,943 62,432 23,540 19,739 30,590 404,244 Income Taxes and FTE Adjustment 42,132 31,550 16,206 5,911 4,790 100,589 -------- -------- ------- ------- ------- -------- Net Income $ 84,418 $ 63,214 $32,472 $11,844 $ 9,599 $201,547 ======== ======== ======= ======= ======= ======== Depreciation & Amortization $ 32,961 $ 4,228 $ 558 $ 747 $20,800 $ 59,294 ======== ======== ======= ======= ======= ======== OTHER FINANCIAL DATA (IN MILLIONS OF DOLLARS) - ------------------------ Identifiable Assets (avg.) $ 7,052 $ 7,235 $ 5,915 $ 591 $ 7,784 $ 28,577 Total Deposits (avg.) 17,028 1,004 62 522 486 19,102 Capital Expenditures 8 2 -- -- 28 38 SIX MONTHS ENDED JUNE 30, 1998 - ----------------------------------------------------------------------------------------------------------- Private Retail Corporate Dealer Financial Treasury/ Huntington Banking Banking Sales Group Other Consolidated -------- --------- ------- --------- --------- ------------ INCOME STATEMENT (IN THOUSANDS OF DOLLARS) - ------------------------- Net Interest Income (FTE) $264,960 $121,783 $80,291 $15,725 $24,754 $507,513 Provision for Loan Losses 21,448 5,557 19,041 730 -- 46,776 Non-Interest Income 113,614 34,092 3,375 20,692 43,302 215,075 Non-Interest Expense 263,324 69,385 24,883 19,542 25,986 403,120 Income Taxes and FTE Adjustment 31,228 26,945 13,231 5,375 14,118 90,897 -------- -------- ------- ------- ------- -------- Net Income $ 62,574 $ 53,988 $26,511 $10,770 $27,952 $181,795 ======== ======== ======= ======= ======= ======== Depreciation & Amortization $ 24,915 $ 2,962 $ 310 $ 587 $ 6,148 $ 34,922 ======== ======== ======= ======= ======= ======== OTHER FINANCIAL DATA (IN MILLIONS OF DOLLARS) - ------------------------ Identifiable Assets (avg.) $ 6,857 $ 6,371 $ 5,085 $ 613 $ 7,274 $ 26,200 Total Deposits (avg.) 15,289 951 61 469 698 17,468 Capital Expenditures 14 2 -- -- 50 66
11 - ---------------------------------------------------------------------------------------------------- FINANCIAL REVIEW
- ---------------------------------------------------------------------------------------------------- LOAN PORTFOLIO COMPOSITION - ---------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in thousands of dollars) 1999 1998 1998 - ---------------------------------------------------- ----------- ------------ ----------- Commercial ......................................... $ 6,185,228 $ 6,026,736 $ 5,843,190 Real Estate Construction .................................. 1,040,861 919,326 820,015 Commercial .................................... 2,255,103 2,231,786 2,281,330 Residential ................................... 1,418,090 1,408,289 1,536,510 Consumer Loans .......................................... 6,995,922 6,958,054 6,886,107 Leases ......................................... 2,257,692 1,910,642 1,695,101 ----------- ----------- ----------- 20,152,896 19,454,833 19,062,253 Unearned Income on Loans ........................... (198) (282) (414) ----------- ----------- ----------- TOTAL LOANS ................................... $20,152,698 $19,454,551 $19,061,839 =========== =========== =========== - ---------------------------------------------------------------------------------------------------- DEPOSIT COMPOSITION - ---------------------------------------------------------------------------------------------------- JUNE 30, December 31, June 30, (in thousands of dollars) 1999 1998 1998 - ---------------------------------------------------- ----------- ------------ ----------- Demand deposits Non-interest bearing ......................... $ 2,864,898 $ 3,129,199 $ 2,847,307 Interest bearing ............................. 4,683,698 4,642,147 4,618,674 Savings deposits .................................. 3,979,230 3,690,040 3,456,810 Other domestic time deposits ...................... 5,374,687 6,186,985 6,694,770 ----------- ----------- ----------- TOTAL CORE DEPOSITS .......................... 16,902,513 17,648,371 17,617,561 ----------- ----------- ----------- Certificates of deposit of $100,000 or more........ 1,634,203 1,699,261 2,008,887 Foreign time deposits ............................. 396,445 375,140 39,800 ----------- ----------- ----------- TOTAL DEPOSITS ............................... $18,933,161 $19,722,772 $19,666,248 =========== =========== ===========
12 - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL REVIEW
- ---------------------------------------------------------------------------------------------------------------------------------- ANALYSIS OF NON-INTEREST INCOME - ---------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED (in thousands of dollars) JUNE 30, JUNE 30, - ------------------------------------------------------- --------------------- PERCENT --------------------- PERCENT 1999 1998 CHANGE 1999 1998 CHANGE -------- -------- ------- -------- -------- ------- Service charges on deposit accounts ................... $ 36,065 $ 30,428 18.53% $ 71,841 $ 59,918 19.90% Mortgage banking ...................................... 17,224 15,191 13.38 33,182 29,348 13.06 Trust services ........................................ 13,143 12,745 3.12 26,577 25,328 4.93 Brokerage and insurance income ........................ 12,540 8,520 47.18 24,083 16,805 43.31 Electronic banking fees ............................... 9,410 7,520 25.13 17,448 13,268 31.50 Bank Owned Life Insurance income ...................... 9,390 7,168 31.00 18,780 12,516 50.05 Credit card fees ...................................... 6,255 5,450 14.77 11,597 10,345 12.10 Other ................................................. 11,029 18,318 (39.79) 19,110 30,142 (36.60) -------- -------- -------- -------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS...... 115,056 105,340 9.22 222,618 197,670 12.62 -------- -------- -------- -------- Securities gains ...................................... 2,220 14,316 (84.49) 4,530 17,405 (73.97) -------- -------- -------- -------- TOTAL NON-INTEREST INCOME ............................. $117,276 $119,656 (1.99)% $227,148 $215,075 5.61% ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------------------- ANALYSIS OF NON-INTEREST EXPENSE - ---------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED (in thousands of dollars) JUNE 30, JUNE 30, - ------------------------------------------------------- --------------------- PERCENT --------------------- PERCENT 1999 1998 CHANGE 1999 1998 CHANGE -------- -------- ------- -------- -------- ------- Personnel and related costs ........................... $107,263 $108,483 (1.12)% $214,517 $213,195 0.62% Outside data processing and other services............. 15,923 16,988 (6.27) 31,315 36,330 (13.80) Equipment ............................................. 15,573 15,688 (0.73) 32,446 30,837 5.22 Net occupancy ......................................... 13,563 14,063 (3.56) 27,480 27,502 (0.08) Amortization of intangible assets ..................... 9,336 3,393 175.15 18,664 6,786 175.04 Telecommunications .................................... 6,935 7,450 (6.91) 13,999 13,463 3.98 Marketing ............................................. 6,902 8,315 (16.99) 13,200 15,247 (13.43) Legal and other professional services ................. 5,803 6,234 (6.91) 10,547 12,022 (12.27) Printing and supplies ................................. 4,734 5,611 (15.63) 9,490 11,372 (16.55) Franchise and other taxes ............................. 3,981 5,526 (27.96) 8,368 11,026 (24.11) Other ................................................. 12,125 14,927 (18.77) 24,218 25,340 (4.43) -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE ............................ $202,138 $206,678 (2.20)% $404,244 $403,120 0.28% ======== ======== ======== ========
13 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: o changes in economic conditions; o movements in interest rates; o competitive pressures on product pricing and services; o success and timing of business strategies; o successful integration of acquired businesses; o the nature, extent, and timing of governmental actions and reforms; o risks of Year 2000 disruption; and, o extended disruption of vital infrastructure. The management of Huntington encourages readers of this Form 10-Q to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. OVERVIEW Huntington reported net income of $105.0 million for the second quarter of 1999 versus $92.3 million one year ago. In these same periods, diluted earnings per share increased 16.3%, from $.43 to $.50. For the first six months of the year, net income was $201.5 million, compared with $181.8 million in the same period last year. Diluted earnings per share for the six month periods was $.95 and $.85, respectively, an increase of 11.8%. After adjusting for the ten percent stock dividend distributed July 30, 1999, diluted earnings per share for the three and six months ended June 30, 1999, was $.45 and $.86, respectively, compared with $.39 and $.77 for the same periods in 1998. In the recent three months, Huntington's "cash basis" diluted earnings per share, which excludes the effect of amortization of goodwill and other intangibles rose to $.48 on a post-stock dividend basis, compared with $.41 per share in the same period last year. Cash basis ROA and ROE, which are computed using cash basis earnings as a percentage of average tangible assets and average tangible equity, respectively, were 1.61% and 30.61%, respectively. Under this same basis for the first six months of 1999, ROA was 1.57% and ROE was 30.12%. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - -------------------------------------------------------------------------------- Huntington's efficiency ratio showed improvement for the fourth consecutive quarter, and at 50.93% is fast approaching Huntington's goal of being under 50% by December 31, 1999. Total assets were $28.2 billion at June 30, 1999, in line with the December 31, 1998, and June 30, 1998, amounts. Huntington's asset composition changed over these periods as investment securities declined and total loans increased. These changes are indicative of the strategic repositioning of the balance sheet that began last year for the purpose of driving higher equity returns. Commercial loan growth, including real estate lending, was strong in the recent quarter with average balances up approximately 8.4% versus one year ago. In this same period, consumer loans, after adjusting for the out-of-market credit card sale in the prior year, grew nearly 7.2%. This was driven by significant increases in vehicle lease volumes and home equity lending. Core deposits totaled $17.0 billion at June 30, 1999. Average core deposits declined 2.5% versus the second quarter of last year (after adjusting for the Florida branch acquisition that occurred late in the second quarter of 1998). This reduction was attributable, in large part, to maturities of more expensive certificates of deposit. 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 and six months ended June 30, 1999 and 1998. Retail Banking - Retail Banking net income was $48.1 million and $84.4 million for the second quarter and the first six months of 1999, respectively. This represents a 51% and 35% increase, respectively, over 1998. Excluding the impact of the Florida branch acquisition in 1998, net income increased 34% and 19%, respectively. The increase was attained despite continued net interest margin pressures, as non-interest income continued to show strong growth in service charges, brokerage and insurance income, and electronic banking income. This segment contributed 42% of Huntington's 1999 year-to-date net income and comprised 31% of its total loan portfolio. Corporate Banking - Corporate Banking continued to post strong results as net income of $31.2 million for the second quarter represented a 14% increase over 1998. For the first six months, net income was $63.2 million versus $54.0 million one year ago. Robust loan and deposit growth fueled the higher earnings. This segment contributed 30% of Huntington's second quarter earnings and represented 35% of the total loan portfolio. Dealer Sales - Net income totaled $16.7 million and $32.5 million for the recent quarter and year-to-date periods, respectively, up 69% and 22% over 1998. Significant loan growth, particularly the vehicle lease product, drove net interest income higher. This business line 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - -------------------------------------------------------------------------------- totaled 16% of Huntington's net income in the recent three months and 30% of its outstanding loans. Private Financial Group - The Private Financial Group achieved net income of $5.7 million for the quarter just ended, and $11.8 million for the first six months, increases of 9% and 10% over the same periods one year ago. This segment represented 5% of Huntington's second quarter 1999 operating results and 3% of total loans at June 30, 1999. Treasury/Other - This segment reported net income of $3.4 million and $9.6 million, respectively, in the recent quarter and six months. Huntington's smaller investment portfolio, reduced securities gains, and increased amortization of intangibles, subsequent to the acquisition of sixty branches in Florida in June 1998, drove net income lower versus last year. RESULTS OF OPERATIONS Net Interest Income - ------------------- Net interest income for the three and six months ended June 30, 1999, was $261.1 million and $520.7 million, increases of 5.5% and 3.7%, respectively, when compared with the same periods last year. The aforementioned loan growth primarily drove this improvement. The net interest margin, on a fully tax equivalent basis, was 4.14% during the three months just ended compared with 4.23% in the second quarter of 1998. On a year-to-date basis, the net interest margin dropped from 4.27% a year ago to 4.16% for 1999. Margin compression continues in terms of loan pricing pressures and accelerating competition for core deposits, which has driven more expensive funding. Provision For Loan Losses - ------------------------- The provision for loan losses was $21.0 million in the second quarter of 1999, down from $24.6 million in the same period of 1998. The provision for the first half of the year was $46.3 million, in line with the first six months of 1998. The lower provision in the quarter was consistent with improvements in actual loan losses as annualized net charge-offs as a percentage of average total loans were .38% for the recent three months, versus .41% in the same period last year. Non-Interest Income - ------------------- Non-interest income was $117.3 million for the recent three months and $227.1 million for the first six months of 1999. Growth over the same quarter a year ago was experienced in all categories. Brokerage and insurance income increased 47% primarily due to an expanded sales force of licensed investment representatives as well as higher sales of a proprietary annuity product. Electronic banking income was up 25% as a result of increased ATM/check card revenue and Web Bank fees from a growing on-line banking customer base. An increase in fees generated by cash management products as well as expanded banking presence in the state of Florida fueled an 18% improvement in service charges on deposits. Mortgage banking revenue increased over 13% despite a slowing of refinancing activity. Income from Bank Owned Life Insurance was $9.4 million and $18.8 million, respectively, in the three months and six months 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - -------------------------------------------------------------------------------- ended June 30, 1999, compared with $7.5 million and $12.5 million for the same periods a year ago. Included within other non-interest income for the recent quarter is $2.5 million of gains from the sale of branch banking offices in Michigan. Included in this category in the year ago quarter is a gain of $9.5 million from the sale of Huntington's out-of-market credit card portfolio. Securities transactions for the quarter just ended include a $23 million gain from the sale by Huntington of a portion of its common stock investment in Security First Technologies Corporation. Substantially offsetting this gain were losses from the sale of fixed-income investments, as Huntington repositioned the portfolio of securities available for sale to improve future returns. Non-Interest Expense - -------------------- Non-interest expense totaled $202.1 million in the second quarter--a decrease of 2.2% from one year ago--and $404.2 million for the first six months of 1999--a slight increase of .3% over the same period in 1998. Excluding the impact of last year's Florida branch acquisition, non-interest expense declined approximately 10% and 7%, respectively, over the same periods. Personnel costs were down 7% as Huntington has substantially completed its planned staffing reductions. Corporate-wide purchasing and related efficiency initiatives also resulted in reductions in outside services, printing and supplies, telecommunications, and legal and other professional fees. Huntington announced several strategic actions in 1998 that have directly impacted the current year's results, including the closing/sale of approximately 39 underperforming banking offices. During the first six months of 1999, Huntington closed 26 and sold 3 of these offices; the remainder are expected to be sold or closed during the second half of the year. Huntington also exited certain business activities, as discussed in the 1998 Annual Report on Form 10-K. 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 systems have been tested and adjusted for the Year 2000 date change. Today all Huntington systems are performing under stringent Year 2000 scenarios. Huntington met the Year 2000 readiness goals and timetables established by the Federal Financial Institutions Examination Council (FFIEC). Huntington, in an enterprise-wide effort, has carefully adhered to its Year 2000 Plan (the Plan), which addresses all systems, software, hardware, and infrastructure components. In connection therewith, business processes were assessed and validated throughout the organization. The Plan identified and addressed "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. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - -------------------------------------------------------------------------------- Huntington's progress towards completing the Plan's goals for both IT and Non-IT systems, followed a five phase approach recommended by federal bank regulators, 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 100% 06/30/1999 100% 06/30/1999 Testing/Validation 100% 06/30/1999 100% 06/30/1999 Implementation 100% 06/30/1999 98% 09/09/1999
As indicated in the table above, implementation is pending only for a small portion of Non-mission Critical systems that are Year 2000 ready but for which system delivery and installation extends into early September. 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 and performed "due diligence" on approximately 350 vendors, with a focus on twenty-one vendors 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, and assess each party's ability to be prepared for the Year 2000. Over forty full-time staff members have been dedicated to the Year 2000 effort and, on a part-time basis, multitudes of internal personnel from various disciplines throughout the Huntington organization have also actively worked on this project. Furthermore, Huntington engaged an independent consultant to establish a Year 2000 Program Management Office (PMO). The PMO organized Huntington's Year 2000 project management activities beyond the technical information services group into all business units. The PMO helped create the methodology that is used in every business unit and also afforded a quality assurance process with respect to the actions taken to remedy the Year 2000 problem. Identifiable costs for the Year 2000 project incurred in the second quarter and first six months of 1999 were $3.5 million and $8.1 million, respectively. Management estimates it will cost up to an additional $7 million to keep its systems and business processes in compliance and to implement elements of its contingency plan, if necessary. 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 command center, regional command posts, and a call center to handle anticipated customer inquiries before and after January 1, 2000. In addition, the estimated costs also include 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - -------------------------------------------------------------------------------- due diligence expenses related to monitoring its vendors' and service providers' readiness. 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, increased non-performing loans and credit losses in the event that borrowers fail to properly respond to the problem, and other factors outside of Huntington's control. These risks, along with unforeseen, and therefore unidentified circumstances involving Huntington's systems, 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 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, 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - -------------------------------------------------------------------------------- floors, or call options, and accounts for changes in rate relationships, as various rate indices lead 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 June 30, 1999, the results of Huntington's interest sensitivity analysis indicated that net interest income would increase by approximately 2% given a 100 basis point decrease and 3% given a 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 2% if rates rose 100 basis points and would drop 4% 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 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 June 30, 1999:
Average Average Rate Notional Maturity Market ----------------- (Dollars in millions) Value (years) Value Receive Pay - -------------------------- -------- -------- ------- ------- ----- ASSET CONVERSION SWAPS Received fixed $1,245 2.88 $(12.0) 6.00% 5.07% ====== ====== LIABILITY CONVERSION SWAPS Receive fixed $1,850 4.03 $(11.3) 6.17% 5.10% Receive fixed-amortizing 131 0.41 (0.1) 5.63% 5.09% Pay fixed 875 0.72 (0.5) 5.01% 5.23% ------ ------ TOTAL LIABILITY CONVERSION SWAPS $2,856 2.85 $(11.9) 5.79% 5.14% ====== ====== BASIS PROTECTION SWAPS $1,375 1.08 $ .1 5.01% 4.99% ====== ======
20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - -------------------------------------------------------------------------------- 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 $950 million and $550 million, respectively, have embedded written LIBOR-based call options. The portfolio of amortizing swaps consists primarily of contracts that are indexed to the prepayment experience of a specified pool of mortgage loans. As market interest rates change, the amortization of the notional value of the swap will also change, generally slowing as rates increase and accelerating when rates fall. Basis swaps are contracts that provide for both parties to receive interest payments according to different rate indices and are used to protect against changes in spreads between market rates. The receive and pay amounts applicable to Huntington's basis swaps are based predominantly on LIBOR. The contractual interest payments are based on the notional values of the swap portfolio. These notional values do not represent direct credit exposures. At June 30, 1999, Huntington's credit risk from interest rate swaps used for asset/liability management purposes was $58.7 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 $822 million at June 30, 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. Highly leveraged transactions as well as excessive industry and other concentrations are avoided. The credit administration function employs extensive risk management techniques, including forecasting, to ensure that loans adhere to corporate policy and problem loans are promptly identified. These procedures provide executive management with the information necessary to implement policy adjustments where necessary, and take corrective actions on a proactive basis. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - -------------------------------------------------------------------------------- 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. Commercial and real estate loans are placed on non-accrual status and stop accruing interest when collection of principal or interest is in doubt or generally when the loan is 90 days past due. When interest accruals are suspended, accrued interest income is reversed with current year accruals charged to earnings and prior year amounts generally charged off as a credit loss. Consumer loans are not placed on non-accrual status; rather they are charged off in accordance with regulatory statutes, which is generally no more than 120 days. A charge off may be delayed in circumstances when collateral is repossessed and anticipated to sell at a future date. Total non-performing assets were $93.6 million and $101.7 million, respectively, at June 30, 1999, and 1998. As of the recent quarter end, non-performing loans represented .38% of total loans versus .42% a year ago. Non-performing assets as a percent of total loans and other real estate were .46% and .53% for the comparable periods. Loans past due ninety days or more but continuing to accrue interest were $54.3 million at June 30, 1999, up slightly from $50.6 million one year ago and $51.0 from March 31, 1999. The allowance for loan losses (ALL) is maintained at a level considered appropriate by management, based on its estimate of probable losses inherent in the loan portfolio. The procedures employed by Huntington to evaluate the adequacy of the ALL include an analysis of specific credits and the application of relevant reserve factors that represent relative risk (based on portfolio trends, current and historic loss experience, and prevailing economic conditions) to specific portfolio segments. Specific reserves are established on larger, commercial and industrial and commercial real estate credits and are based on discounted cash flow models using the loan's initial effective rate or the fair value of the collateral for collateral-dependent loans. Allocated reserves include management's assessment of portfolio performance, internal controls, and other pertinent risk factors. For analytical purposes, the ALL has been allocated to various portfolio segments. However, the total ALL less the portion attributable to reserves as prescribed under provisions of SFAS No. 114, is available to absorb losses from any segment of the portfolio. Unallocated reserves are based on levels of criticized/classified assets, delinquencies present in the accruing loan portfolios, and the level of nonperforming loans. Total unallocated reserves were 12% at the recent quarter end versus 13% one year ago. The reserve ratio was 1.46% at the recent quarter end versus 1.50% at June 30, 1998. The ALL covered non-performing loans nearly 3.8 times and when combined with the allowance for other real estate owned, was 311% of total nonperforming assets. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - -------------------------------------------------------------------------------- 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 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 7.52% in the recent quarter compared with 8.02% in the same three months of last year. For the six month period, the ratio was 7.49%, versus 7.90% in the first half of 1998. 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 7.29%, its total risk-based capital ratio was 10.65%, and its leverage ratio was 6.45%, 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 (before adjusting for the aforementioned ten percent stock dividend), 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. In the first half of the year, Huntington repurchased approximately 1.3 million shares. Adjusted for the recently issued stock dividend, approximately 13.8 million shares remain available for repurchase under the program. 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. 23 - ------------------------------------------------------------------------------------------------------ CONSOLIDATED FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED JUNE 30, 1999 1998 % Change - ------------------------------------------------------- -------- -------- -------- NET INCOME ............................................ $104,975 $ 92,309 13.7% PER COMMON SHARE AMOUNTS (1) Net income Basic ...................................... $ 0.45 $ 0.40 12.5 Diluted .................................... $ 0.45 $ 0.39 15.4 Cash dividends declared ......................... $ 0.18 $ 0.16 12.5 AVERAGE COMMON SHARES OUTSTANDING-DILUTED (1) ......... 233,154 236,130 (1.3) KEY RATIOS Return on: Average total assets ................................ 1.47% 1.42% 3.5 Average shareholders' equity ........................ 19.48% 17.70% 10.1 Efficiency ratio ...................................... 50.93% 58.78% (13.4) Average equity/average assets ......................... 7.52% 8.02% (6.2) Net interest margin ................................... 4.14% 4.23% (2.1) TANGIBLE OR "CASH BASIS" RATIOS (2) Net Income Per Common Share -- Diluted (1) ............ $ 0.48 $ 0.41 17.1 Return on: Average total assets ................................ 1.61% 1.49% 8.1 Average shareholders' equity ........................ 30.61% 21.17% 44.6 FOR THE SIX MONTHS ENDED JUNE 30, 1999 1998 % Change - ------------------------------------------------------- -------- -------- -------- NET INCOME ............................................ $201,547 $181,795 10.9% PER COMMON SHARE AMOUNTS (1) Net income Basic ....................................... $ 0.87 $ 0.78 11.5 Diluted ..................................... $ 0.86 $ 0.77 11.7 Cash dividends declared .......................... $ 0.36 $ 0.32 12.5 AVERAGE COMMON SHARES OUTSTANDING-DILUTED (1) ......... 233,278 235,661 (1.0) KEY RATIOS Return on: Average total assets ................................ 1.42% 1.40% 1.4 Average shareholders' equity ........................ 18.98% 17.72% 7.1 Efficiency ratio ...................................... 51.54% 56.97% (9.5) Average equity/average assets ......................... 7.49% 7.90% (5.1) Net interest margin ................................... 4.16% 4.27% (2.6) TANGIBLE OR "CASH BASIS" RATIOS (2) Net Income Per Common Share -- Diluted (1) ............ $ 0.93 $ 0.80 16.3 Return on: Average total assets ................................ 1.57% 1.47% 6.8 Average shareholders' equity ........................ 30.12% 21.13% 42.5
(1) Adjusted for the ten percent stock dividend distributed July 1999. (2) Tangible or "Cash Basis" net income excludes amortization of goodwill and other intangibles. Related asset amounts excluded from total assets and shareholders' equity. 24 - ----------------------------------------------------------------------------------------------------- FINANCIAL REVIEW
- ----------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE- AMORTIZED COST & FAIR VALUES BY MATURITY AT JUNE 30, 1999 AND DECEMBER 31, 1998 - ----------------------------------------------------------------------------------------------------- (in thousands of dollars) JUNE 30, 1999 December 31, 1998 - ----------------------------------------------------------------------------------------------------- AMORTIZED COST FAIR VALUE Amortized Cost Fair Value - ----------------------------------------------------------------------------------------------------- U.S. Treasury Under 1 year ...................... $ 803 $ 807 $ 1,000 $ 1,007 1-5 years ......................... 77,126 76,025 63,537 65,364 6-10 years ........................ 431,252 414,748 169,959 176,945 ---------- ---------- ---------- ---------- Total .......................... 509,181 491,580 234,496 243,316 ---------- ---------- ---------- ---------- Federal agencies Mortgage-backed securities 1-5 years ......................... 8 8 11 11 6-10 years ........................ 41,151 41,282 87,342 89,162 Over 10 years ..................... 1,187,768 1,151,168 1,356,722 1,363,015 ---------- ---------- ---------- ---------- Total .......................... 1,228,927 1,192,458 1,444,075 1,452,188 ---------- ---------- ---------- ---------- Other agencies 1-5 years ......................... 812,028 791,741 968,753 975,253 6-10 years ........................ 503,376 485,791 678,245 684,230 Over 10 years ..................... 903,074 884,689 740,139 741,147 ---------- ---------- ---------- ---------- Total .......................... 2,218,478 2,162,221 2,387,137 2,400,630 ---------- ---------- ---------- ---------- Other Under 1 year ...................... 20,641 20,714 7,492 7,478 1-5 years ......................... 247,960 248,553 188,551 190,871 6-10 years ........................ 146,882 144,674 204,788 210,698 Over 10 years ..................... 276,593 268,225 268,319 268,930 Marketable equity securities ...... 10,645 44,735 8,359 7,304 ---------- ---------- ---------- ---------- Total .......................... 702,721 726,901 677,509 685,281 ---------- ---------- ---------- ---------- Total Securities Available for Sale .... $4,659,307 $4,573,160 $4,743,217 $4,781,415 ========== ========== ========== ==========
25 - ---------------------------------------------------------------------------------------------------------------- FINANCIAL REVIEW
- ---------------------------------------------------------------------------------------------------------------- LOAN LOSS EXPERIENCE - ---------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- ALLOWANCE FOR LOAN LOSSES, BEGINNING OF PERIOD ....... $291,066 $258,262 $290,948 $258,171 Allowance acquired/other ............................. -- 22,042 -- 22,042 Loan losses .......................................... (27,123) (28,855) (59,654) (56,421) Recoveries of loans previously charged off ........... 8,305 10,820 15,649 16,296 Provision for loan losses ............................ 21,026 24,595 46,331 46,776 -------- -------- -------- -------- ALLOWANCE FOR LOAN LOSSES END OF PERIOD .............. $293,274 $286,864 $293,274 $286,864 ======== ======== ======== ======== AS A % OF AVERAGE TOTAL LOANS Net loan losses--annualized ........................ 0.38% 0.41% 0.45% 0.46% Provision for loan losses--annualized .............. 0.42% 0.55% 0.47% 0.53% Allowance for loan losses as a % of total loans ...... 1.46% 1.50% 1.46% 1.50% Net loan loss coverage (1) ........................... 9.37X 8.89x 7.81X 7.83x
(1) Income before taxes and the provision for loan losses to net loan losses.
- ----------------------------------------------------------------------------------------------------------------- NON-PERFORMING ASSETS AND PAST DUE LOANS - ----------------------------------------------------------------------------------------------------------------- 1999 1998 -------------------- ---------------------------------- II Q I Q IV Q III Q II Q ------- ------- ------- ------- -------- Non-accrual loans: Commercial .................................. $37,840 $37,594 $34,586 $38,020 $ 39,940 Real Estate Construction ............................. 7,877 7,540 10,181 6,948 8,929 Commercial ............................... 13,028 14,133 13,243 10,427 10,953 Residential .............................. 15,192 14,849 14,419 14,815 15,545 ------- ------- ------- ------- -------- Total Nonaccrual Loans ................ 73,937 74,116 72,429 70,210 75,367 Renegotiated loans ............................. 2,827 2,764 4,706 4,798 4,770 ------- ------- ------- ------- -------- TOTAL NON-PERFORMING LOANS ..................... 76,764 76,880 77,135 75,008 80,137 Other real estate, net ......................... 16,839 17,853 18,964 20,812 21,516 ------- ------- ------- ------- -------- TOTAL NON-PERFORMING ASSETS .................... $93,603 $94,733 $96,099 $95,820 $101,653 ======= ======= ======= ======= ======== NON-PERFORMING LOANS AS A % OF TOTAL LOANS ............................. 0.38% 0.39% 0.40% 0.39% 0.42% NON-PERFORMING ASSETS AS A % OF TOTAL LOANS AND OTHER REAL ESTATE ....... 0.46% 0.48% 0.49% 0.50% 0.53% ALLOWANCE FOR LOAN LOSES AS A % OF NON-PERFORMING LOANS ......................... 382.05% 378.60% 377.19% 381.46% 357.97% ALLOWANCE FOR LOAN LOSSES AND OTHER REAL ESTATE AS A % OF NON-PERFORMING ASSETS ....... 311.32% 305.33% 301.00% 296.69% 280.64% ACCRUING LOANS PAST DUE 90 DAYS OR MORE ........ $54,305 $51,039 $51,037 $63,998 $ 50,614 ======= ======= ======= ======= ========
26 - ---------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES (QUARTERLY DATA)
Fully Tax Equivalent Basis (1) 2ND QUARTER 1999 1ST QUARTER 1999 --------------------- --------------------- (in millions of dollars) AVERAGE YIELD/ AVERAGE YIELD/ - -------------------------------------------------------------------------- BALANCE RATE BALANCE RATE ------- ------ ------- ------ ASSETS Interest bearing deposits in banks ....................................... $ 8 3.75% $ 8 4.93% Trading account securities ............................................... 15 5.41 18 5.20 Federal funds sold and securities purchased under resale agreements ...... 19 4.86 18 5.64 Mortgages held for sale .................................................. 269 6.96 359 6.75 Securities: Taxable ............................................................ 4,914 5.99 4,926 6.05 Tax exempt ......................................................... 303 7.90 304 8.17 ------- ------- Total Securities .............................................. 5,217 6.10 5,230 6.17 ------- ------- Loans: Commercial .......................................................... 6,182 7.73 6,067 7.90 Real Estate Construction ................................................... 1,012 7.92 957 8.14 Mortgage ....................................................... 3,726 7.92 3,651 7.97 Consumer Loans ......................................................... 6,907 8.25 6,873 8.38 Leases ........................................................ 2,175 6.72 2,015 6.94 ------- ------- Total Consumer ................................................ 9,082 7.88 8,888 8.05 ------- ------- Total Loans .............................................................. 20,002 7.84 19,563 7.99 ------- ------- Allowance for loan losses ................................................ 297 299 ------- ------- Net loans (3) ............................................................ 19,705 8.35 19,264 8.49 ------- ------- Total earning assets ..................................................... 25,530 7.87% 25,196 7.98% ------- ------- Cash and due from banks .................................................. 1,044 1,064 All other assets ......................................................... 2,454 2,461 ------- ------- TOTAL ASSETS ............................................................. $28,731 $28,422 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Core deposits Non-interest bearing deposits ....................................... $ 3,511 $ 3,505 Interest bearing demand deposits .................................... 4,109 2.50% 4,061 2.46% Savings deposits .................................................... 3,769 3.25 3,627 3.17 Other domestic time deposits ........................................ 5,715 5.07 6,047 5.27 ------- ------- Total core deposits ............................................ 17,104 3.79 17,240 3.88 ------- ------- Certificates of deposit of $100,000 or more .............................. 1,662 5.08 1,730 5.35 Foreign time deposits .................................................... 307 4.82 161 4.80 ------- ------- Total deposits ...................................................... 19,073 3.95 19,131 4.06 ------- ------- Short-term borrowings .................................................... 2,793 4.38 2,853 4.33 Medium-term notes ........................................................ 3,047 5.19 2,666 5.29 Subordinated notes and other long-term debt, including preferred capital securities ................................ 1,004 5.70 1,007 5.81 ------- ------- Interest bearing liabilities ........................................ 22,406 4.25% 22,152 4.32% ------- ------- All other liabilities .................................................... 653 644 Shareholders' equity ..................................................... 2,161 2,121 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,731 $28,422 ======= ======= Net interest rate spread ................................................. 3.62% 3.66% Impact of non-interest bearing funds on margin ........................... 0.52% 0.52% NET INTEREST MARGIN ...................................................... 4.14% 4.18% - --------------------------------------------------------------------------
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate. (2) Excludes nonrecurring swap adjustment of $9.2 million. (3) Net loan rate includes loan fees, whereas individual loan components above are shown exclusive of fees. 27 - ----------------------------------------------------------------------------------------------- CONSOLIDATED AVERAGE BALANCES AND INTEREST RATES (QUARTERLY DATA)
4th Quarter 1998 3rd Quarter 1998 2nd Quarter 1998 --------------------- --------------------- --------------------- Average Yield/ Average Yield/ Average Yield/ Balance Rate Balance Rate Balance Rate ------- ------ ------- ------ ------- ------ $ 4 5.00% $ 31 5.20% $ 8 5.26% 12 5.62 11 5.87 12 5.81 34 5.48 689 5.62 168 5.63 377 6.73 275 7.10 282 7.08 4,518 6.16 4,077 6.34 5,107 6.34 292 8.16 234 8.86 225 9.27 ------- ------- ------- 4,810 6.28 4,311 6.47 5,332 6.47 ------- ------- ------- 5,954 7.99 5,763 8.36 5,482 8.46 864 8.24 811 8.83 816 8.73 3,689 8.21 3,760 8.43 3,444 8.62 6,912 8.62 6,896 8.77 6,474 8.82 1,850 7.00 1,728 7.11 1,627 7.15 ------- ------- ------- 8,762 8.28 8,624 8.44 8,101 8.48 ------- ------- ------- 19,269 8.17 18,958 8.43 17,843 8.51 ------- ------- ------- 296 293 266 ------- ------- ------- 18,973 8.68 18,665 8.87 17,577 8.99 ------- ------- ------- 24,506 8.17% 24,275 8.33% 23,645 8.37% ------- ------- ------- 1,056 1,017 907 2,448 2,516 1,786 ------- ------- ------- $27,714 $27,515 $26,072 ======= ======= ======= $ 3,577 $ 3,466 $ 3,113 3,967 2.60% 3,898 2.77% 3,216 2.72% 3,546 3.38 3,428 3.56 3,099 3.51 6,459 5.43 6,619 5.53 5,985 5.62 ------- ------- ------- 17,549 4.10 17,411 4.27 15,413 4.33 ------- ------- ------- 1,755 5.65 1,884 5.71 1,909 5.74 56 4.86 30 5.39 132 5.80 ------- ------- ------- 19,360 4.27 19,325 4.45 17,454 4.53 ------- ------- ------- 2,123 4.36 1,515 4.75 2,044 4.97 2,526 5.48 2,952 5.70 3,222 5.71 1,020 5.88(2) 1,041 6.37 757 6.13 ------- ------- ------- 21,452 4.49% 21,367 4.72% 20,364 4.80% ------- ------- ------- 653 539 503 2,032 2,143 2,092 ------- ------- ------- $27,714 $27,515 $26,072 ======= ======= ======= 3.68% 3.61% 3.57% 0.56% 0.57% 0.66% 4.24%(2) 4.18% 4.23%
28 - ----------------------------------------------------------------------------------------------------------------------- SELECTED QUARTERLY INCOME STATEMENT DATA
1999 1998 --------------------- ---------------------------------- (in thousands of dollars, except per share amounts) II Q I Q IV Q III Q II Q - ------------------------------------------------------ -------- -------- -------- -------- -------- TOTAL INTEREST INCOME ................................ $498,500 $495,692 $500,395 $505,221 $491,268 TOTAL INTEREST EXPENSE ............................... 237,352 236,171 233,094 253,706 243,839 -------- -------- -------- -------- -------- NET INTEREST INCOME .................................. 261,148 259,521 267,301 251,515 247,429 Provision for loan losses ............................ 21,026 25,305 34,306 24,160 24,595 -------- -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES .......................... 240,122 234,216 232,995 227,355 222,834 -------- -------- -------- -------- -------- Service charges on deposit accounts .................. 36,065 35,776 33,992 32,493 30,428 Mortgage banking ..................................... 17,224 15,958 15,388 15,270 15,191 Trust services ....................................... 13,143 13,434 12,924 12,502 12,745 Brokerage and insurance income ....................... 12,540 11,543 9,848 10,057 8,520 Electronic banking fees .............................. 9,410 8,038 8,037 7,897 7,520 Bank Owned Life Insurance income ..................... 9,390 9,390 8,098 8,098 7,168 Credit card fees ..................................... 6,255 5,342 6,367 5,197 5,450 Other ................................................ 11,029 8,081 12,057 12,512 18,318 -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME BEFORE SECURITIES GAINS .... 115,056 107,562 106,711 104,026 105,340 -------- -------- -------- -------- -------- Securities gains ..................................... 2,220 2,310 1,773 10,615 14,316 -------- -------- -------- -------- -------- TOTAL NON-INTEREST INCOME ............................ 117,276 109,872 108,484 114,641 119,656 -------- -------- -------- -------- -------- Personnel and related costs .......................... 107,263 107,254 103,600 111,744 108,483 Outside data processing and other services ........... 15,923 15,392 20,915 17,550 16,988 Equipment ............................................ 15,573 16,873 16,202 15,001 15,688 Net occupancy ........................................ 13,563 13,917 11,602 15,019 14,063 Amortization of intangible assets .................... 9,336 9,328 9,436 9,467 3,393 Telecommunications ................................... 6,935 7,064 8,173 7,793 7,450 Marketing ............................................ 6,902 6,298 8,251 8,762 8,315 Legal and other professional services ................ 5,803 4,744 7,847 5,291 6,234 Printing and supplies ................................ 4,734 4,756 6,450 5,851 5,611 Franchise and other taxes ............................ 3,981 4,387 5,554 5,523 5,526 Special charges ...................................... -- -- 90,000 -- -- Other ................................................ 12,125 12,093 10,902 9,876 14,927 -------- -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE ........................... 202,138 202,106 298,932 211,877 206,678 -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES ........................... 155,260 141,982 42,547 130,119 135,812 Provision for income taxes ........................... 50,285 45,410 11,329 41,364 43,503 -------- -------- -------- -------- -------- NET INCOME ........................................... $104,975 $ 96,572 $ 31,218 $ 88,755 $ 92,309 ======== ======== ======== ======== ======== PER COMMON SHARE (1) Net income Diluted ......................................... $ 0.45 $ 0.41 $ 0.14 $ 0.38 $ 0.39 Diluted - Cash Basis ............................ $ 0.48 $ 0.45 $ 0.16 $ 0.41 $ 0.41 Cash Dividends Declared ............................. $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.16 FULLY TAX EQUIVALENT MARGIN: Net Interest Income .................................. $261,148 $259,521 $267,301 $251,515 $247,429 Tax Equivalent Adjustment (2) ........................ 2,390 2,504 2,504 2,567 2,581 -------- -------- -------- -------- -------- Tax Equivalent Net Interest Income ................... $263,538 $262,025 $269,805 $254,082 $250,010 ======== ======== ======== ======== ========
(1) Adjusted for the ten percent stock dividend distributed July 1999. (2) Calculated assuming a 35% tax rate. 29 STOCK SUMMARY, KEY RATIOS AND STATISTICS - --------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------- QUARTERLY COMMON STOCK SUMMARY (1) - -------------------------------------------------------------------------------------------------------------------- 1999 1998 ------------------------ ------------------------------------- II Q I Q IV Q III Q II Q ------- ------- ------- ------- ------- High ....................................... $34 $30 7/16 $28 5/8 $30 13/16 $31 7/16 Low ........................................ 27 11/16 27 3/16 21 1/2 20 26 7/8 Close ...................................... 31 13/16 28 1/8 27 5/16 22 13/16 27 13/16 Cash dividends declared .................... $0.18 $0.18 $0.18 $0.18 $0.16
Note: Stock price quotations were obtained from NASDAQ. - -------------------------------------------------------------------------------------------------------------------- KEY RATIOS AND STATISTICS - --------------------------------------------------------------------------------------------------------------------
1999 1998 MARGIN ANALYSIS - AS A % ---------------------- ------------------------------------- OF AVERAGE EARNING ASSETS (2) II Q I Q IV Q III Q II Q - -------------------------------------------- ------- ------- ------- ------- ------- Interest Income ............................ 7.87% 7.98% 8.17% 8.33% 8.37% Interest Expense ........................... 3.73% 3.80% 3.93% 4.15% 4.14% ------- ------- ------- ------- ------- Net Interest Margin ................... 4.14% 4.18% 4.24% 4.18% 4.23% ======= ======= ======= ======= ======= RETURN ON - -------------------------------------------- Average total assets ....................... 1.47% 1.38% 1.31% 1.28% 1.42% Average total assets - cash basis .......... 1.61% 1.52% 1.45% 1.43% 1.49% Average shareholders' equity ............... 19.48% 18.47% 17.87% 16.43% 17.70% Average shareholders' equity - cash basis... 30.61% 29.58% 29.44% 26.59% 21.17% Efficiency Ratio ........................... 50.93% 52.16% 52.98% 56.46% 58.78% - -------------------------------------------------------------------------------------------------------------------- REGULATORY CAPITAL DATA - -------------------------------------------------------------------------------------------------------------------- 1999 1998 ---------------------- ------------------------------------- (in millions of dollars) II Q I Q IV Q III Q II Q - -------------------------------------------- ------- ------- ------- ------- ------- Total Risk-Adjusted Assets ................. 24,829 24,345 24,239 23,695 23,728 Tier I Risk-Based Capital Ratio ............ 7.29% 7.20% 7.10% 7.35% 7.18% Total Risk Based Capital Ratio ............. 10.65% 10.70% 10.73% 11.18% 11.01% Tier I Leverage Ratio ...................... 6.45% 6.32% 6.37% 6.51% 6.72%
- -------------------------------------------- (1) Adjusted for the ten percent stock dividend distributed July 1999. (2) Presented on a fully tax equivalent basis assuming a 35% tax rate. 30 PART II. OTHER INFORMATION In accordance with the instructions to Part II, the other specified items in this part have been omitted because they are not applicable or the information has been previously reported. Item 4. Submission of Matters to a Vote of Security Holders Huntington Bancshares Incorporated held its annual meeting of shareholders on April 22, 1999. At that meeting, shareholders approved the following management proposals:
ABSTAIN/ BROKER FOR AGAINST WITHHELD NON VOTES --- ------- -------- --------- 1. Election of directors to serve as Class III Directors until the year 2002 Annual Meeting of Shareholders as follows: Don M. Casto III 174,931,961 1,651,364 Patricia T. Hayot 174,772,811 1,810,514 William J. Lhota 174,899,359 1,683,966 Timothy P. Smucker 174,988,700 1,594,625
31 2. Election of director to serve until the year 2000 Annual Meeting of Shareholders is as follows: John B. Gerlach, Jr. 174,960,230 1,623,095 3. Proposal to approve the Corporation's amended and restated Incentive Compensation Plan 157,189,951 14,378,785 3,044,642 1,969,947 4. Proposal to approve the Corporation's amended and restated Long-term Incentive Compensation Plan 156,619,757 14,818,904 3,149,940 1,969,950 5. Ratification of Ernst & Young LLP to serve as independent auditors for the Corporation for the year 1999 174,469,372 1,193,027 896,454
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. 32 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 April 14, 1999, was filed under report item numbers 5 and 7, concerning Huntington's results of operations for the first quarter 1999. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Huntington Bancshares Incorporated has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Huntington Bancshares Incorporated ---------------------------------- (Registrant) Date: August 16, 1999 /s/ Judith D. Fisher --------------------------------- Judith D. Fisher Executive Vice President and Chief Financial Officer Date: August 16, 1999 /s/ Anne W. Creek --------------------------------- Anne W. Creek Principal Accounting Officer 34