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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file Number 0-2525
Huntington Bancshares Incorporated
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(Exact name of registrant as specified in its charter)
Maryland 31-0724920
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Huntington Center, 41 S. High Street, Columbus, OH 43287
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 480-8300
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Without Par Value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of December 31, 1999, was $4,879,362,708. As of January 31, 2000,
227,992,927 shares of common stock without par value were outstanding.
Documents Incorporated By Reference
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Part III of this Form 10-K incorporates by reference certain information
from the registrant's definitive Proxy Statement for the 2000 Annual
Shareholders' Meeting.
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HUNTINGTON BANCSHARES INCORPORATED
INDEX
Part I.
Item 1. Business 2
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Report of Management 28
Report of Independent Auditors 28
Consolidated Balance Sheets --
December 31, 1999 and 1998 29
Consolidated Statements of Income --
Year Ended December 31, 1999, 1998 and 1997 30
Consolidated Statements of Changes in Shareholders' Equity --
Year Ended December 31, 1999, 1998 and 1997 31
Consolidated Statements of Cash Flows --
Year Ended December 31, 1999, 1998 and 1997 32
Notes to Consolidated Financial Statements 33-55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 55
Part III.
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial Owners and Management 56
Item 13. Certain Relationships and Related Transactions 56
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 56
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Huntington Bancshares Incorporated
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Part I
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ITEM 1: BUSINESS
Huntington Bancshares Incorporated (Huntington), incorporated in Maryland
in 1966, is a multi-state bank holding company headquartered in Columbus, Ohio.
Its subsidiaries conduct a full-service commercial and consumer banking
business, engage in mortgage banking, lease financing, trust services, discount
brokerage services, underwriting credit life and disability insurance, selling
other insurance products, and issuing commercial paper guaranteed by Huntington,
and providing other financial products and services. At December 31, 1999,
Huntington's subsidiaries had 182 banking offices in Ohio, 125 banking offices
in Michigan, 137 banking offices in Florida, 36 banking offices in West
Virginia, 23 banking offices in Indiana, 12 banking offices in Kentucky, and one
foreign office in the Cayman Islands and Hong Kong, respectively. The Huntington
Mortgage Company (a wholly owned subsidiary) has loan origination offices
throughout the Midwest and East Coast. Foreign banking activities, in total or
with any individual country, are not significant to the operations of
Huntington. At December 31, 1999, Huntington and its subsidiaries had 9,516
full-time equivalent employees.
A brief discussion of Huntington's lines of business can be found in its
Management's Discussion and Analysis on page 11 of this report and the financial
statement results can be found in Note 22 of the Notes to Consolidated Financial
Statements on page 51.
Competition in the form of price and service from other banks and financial
companies such as savings and loans, credit unions, finance companies, and
brokerage firms is intense in most of the markets served by Huntington and its
subsidiaries. Mergers between and the expansion of financial institutions both
within and outside Ohio have provided significant competitive pressure in major
markets. Since 1995, when federal interstate banking legislation became
effective that made it permissible for bank holding companies in any state to
acquire banks in any other state, actual or potential competition in each of
Huntington's markets has been intensified. The same federal legislation permits
further competition through interstate branching, subject to certain limitations
by individual states. Internet banking, offered both by established traditional
institutions and by start-up Internet-only banks, constitutes another
significant form of competitive pressure on Huntington's business. Finally,
financial services reform legislation enacted in November 1999 (see
"Gramm-Leach-Bliley Act of 1999" below) eliminates the long-standing
Glass-Steagall Act restrictions on securities activities of bank holding
companies and banks. The new legislation permits bank holding companies that
elect to become financial holding companies to engage in defined securities and
insurance activities as well as to affiliate with securities and insurance
firms. The same legislation allows banks to have financial subsidiaries that may
engage in certain activities not otherwise permissible for banks.
In January 1999, Huntington consummated the merger of The Huntington State
Bank, its state bank subsidiary in Ohio, into The Huntington National Bank, an
interstate national bank. As a result, The Huntington National Bank is
Huntington's sole bank subsidiary.
REGULATORY MATTERS
GENERAL
As a registered bank holding company, Huntington is subject to the
supervision of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). Huntington is required to file with the Federal
Reserve Board reports and other information regarding its business operations
and the business operations of its subsidiaries. It is also subject to
examination by the Federal Reserve Board and is required to obtain Federal
Reserve Board approval prior to acquiring, directly or indirectly, ownership or
control of voting shares of any bank, if, after such acquisition, it would own
or control more than 5% of the voting stock of such bank. In addition, pursuant
to federal law and regulations promulgated by the Federal Reserve Board,
Huntington may only engage in, or own or control companies that engage in,
activities deemed by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto. Under legislation effective in 1996,
Huntington may, in most cases, commence permissible new nonbanking business
activities de novo with only subsequent notice to the Federal Reserve Board and
may acquire smaller companies that engage in permissible nonbanking activities
under an expedited procedure requiring only 12 business days notice to the
Federal Reserve Board.
Huntington's national bank subsidiary has deposits insured by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC"). It
is subject to supervision, examination, and regulation by the Office of the
Comptroller of the Currency ("OCC"). Certain deposits of Huntington's national
bank subsidiary were acquired from savings associations and are insured by the
Savings Association Insurance Fund ("SAIF") of the FDIC.
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Huntington's nonbank subsidiaries are also subject to supervision, examination,
and regulation by the Federal Reserve Board and examination by applicable
federal and state banking agencies. In addition to the impact of federal and
state supervision and regulation, the bank and nonbank subsidiaries of
Huntington are affected significantly by the actions of the Federal Reserve
Board as it attempts to control the money supply and credit availability in
order to influence the economy.
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to such
statutory or regulatory provisions.
HOLDING COMPANY STRUCTURE
Huntington's depository institution subsidiary is subject to affiliate
transaction restrictions under federal law which limit the transfer of funds by
the subsidiary bank to the parent and any nonbank subsidiaries of the parent,
whether in the form of loans, extensions of credit, investments, or asset
purchases. Such transfers by a subsidiary bank to its parent corporation or to
any individual nonbank subsidiary of the parent are limited in amount to 10% of
the subsidiary bank's capital and surplus and, with respect to such parent
together with all such nonbank subsidiaries of the parent, to an aggregate of
20% of the subsidiary bank's capital and surplus. Furthermore, such loans and
extensions of credit are required to be secured in specified amounts. In
addition, all affiliate transactions must be conducted on terms and under
circumstances that are substantially the same as such transactions with
unaffiliated entities. Under applicable regulations, at December 31, 1999,
approximately $217.5 million was available for loans to Huntington from its
subsidiary bank.
The Federal Reserve Board has a policy to the effect that a bank holding
company is expected to act as a source of financial and managerial strength to
each of its subsidiary banks and to commit resources to support each such
subsidiary bank. Under the source of strength doctrine, the Federal Reserve
Board may require a bank holding company to make capital injections into a
troubled subsidiary bank, and may charge the bank holding company with engaging
in unsafe and unsound practices for failure to commit resources to such a
subsidiary bank. This capital injection may be required at times when Huntington
may not have the resources to provide it. Any loans by a holding company to its
subsidiary banks are subordinate in right of payment to deposits and to certain
other indebtedness of such subsidiary bank. Moreover, in the event of a bank
holding company's bankruptcy, any commitment by such holding company to a
federal bank regulatory agency to maintain the capital of a subsidiary bank will
be assumed by the bankruptcy trustee and entitled to a priority of payment.
Federal law permits the OCC to order the pro rata assessment of
shareholders of a national bank whose capital stock has become impaired, by
losses or otherwise, to relieve a deficiency in such national bank's capital
stock. This statute also provides for the enforcement of any such pro rata
assessment of shareholders of such national bank to cover such impairment of
capital stock by sale, to the extent necessary, of the capital stock of any
assessed shareholder failing to pay the assessment. Huntington, as the sole
shareholder of its subsidiary bank, is subject to such provisions. Moreover, the
claims of a receiver of an insured depository institution for administrative
expenses and the claims of holders of deposit liabilities of such an institution
are accorded priority over the claims of general unsecured creditors of such an
institution, including the holders of the institution's note obligations, in the
event of a liquidation or other resolution of such institution. As a result of
such legislation, claims of a receiver for administrative expenses and claims of
holders of deposit liabilities of Huntington's depository subsidiary (including
the FDIC, as the subrogee of such holders) would receive priority over the
holders of notes and other senior debt of such subsidiary in the event of a
liquidation or other resolution and over the interests of Huntington as sole
shareholder of its subsidiary.
DIVIDEND RESTRICTIONS
Dividends from its subsidiary bank are a significant source of funds for
payment of dividends to Huntington's shareholders. In the year ended December
31, 1999, Huntington declared cash dividends to its shareholders of
approximately $175.8 million. There are, however, statutory limits on the amount
of dividends that Huntington's depository institution subsidiary can pay to
Huntington without regulatory approval.
Huntington's subsidiary bank may not, without prior regulatory approval,
pay a dividend in an amount greater than such bank's undivided profits. In
addition, the prior approval of the OCC is required for the payment of a
dividend by a national bank if the total of all dividends declared by the bank
in a calendar year would exceed the total of its net income for the year
combined with its retained net income for the two preceding years. Under these
provisions and in accordance with the above-described formula, Huntington's
subsidiary bank could, without regulatory approval, declare dividends to
Huntington in 2000 of approximately $317.0 million plus an additional amount
equal to its net profits during 2000.
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If, in the opinion of the applicable regulatory authority, a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), such authority may require, after notice and hearing,
that such bank cease and desist from such practice. The Federal Reserve Board
and the OCC have issued policy statements that provide that insured banks and
bank holding companies should generally only pay dividends out of current
operating earnings.
FDIC INSURANCE
Under current FDIC practices, Huntington's bank subsidiary will not be
required to pay deposit insurance premiums during 2000. However, the bank
subsidiary will be required to make payments for the servicing of obligations of
the Financing Corporation ("FICO") issued in connection with the resolution of
savings and loan associations, so long as such obligations remain outstanding.
CAPITAL REQUIREMENTS
The Federal Reserve Board has issued risk-based capital ratio and leverage
ratio guidelines for bank holding companies such as Huntington. The risk-based
capital ratio guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations, takes off-balance sheet exposures into explicit
account in assessing capital adequacy, and minimizes disincentives to holding
liquid, low-risk assets. Under the guidelines and related policies, bank holding
companies must maintain capital sufficient to meet both a risk-based asset ratio
test and a leverage ratio test on a consolidated basis. The risk-based ratio is
determined by allocating assets and specified off-balance sheet commitments into
four weighted categories, with higher weighting being assigned to categories
perceived as representing greater risk. A bank holding company's capital (as
described below) is then divided by total risk weighted assets to yield the
risk-based ratio. The leverage ratio is determined by relating core capital (as
described below) to total assets adjusted as specified in the guidelines.
Huntington's subsidiary bank is subject to substantially similar capital
requirements.
Generally, under the applicable guidelines, a financial institution's
capital is divided into two tiers. Institutions that must incorporate market
risk exposure into their risk-based capital requirements may also have a third
tier of capital in the form of restricted short-term subordinated debt. "Tier
1", or core capital, includes common equity, noncumulative perpetual preferred
stock (excluding auction rate issues), and minority interests in equity accounts
of consolidated subsidiaries, less goodwill and, with certain limited
exceptions, all other intangible assets. Bank holding companies, however, may
include cumulative preferred stock in their Tier 1 capital, up to a limit of 25%
of such Tier 1 capital. "Tier 2", or supplementary capital, includes, among
other things, cumulative and limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan and lease losses, subject to certain limitations. "Total
capital" is the sum of Tier 1 and Tier 2 capital.
The Federal Reserve Board and the other federal banking regulators require
that all intangible assets, with certain limited exceptions, be deducted from
Tier 1 capital. Under the Federal Reserve Board's rules the only types of
intangible assets that may be included in (i.e., not deducted from) a bank
holding company's capital are originated or purchased mortgage servicing rights
("MSRs"), non-mortgage servicing assets ("NMSAs"), and purchased credit card
relationships ("PCCRs"), provided that, in the aggregate, the total amount of
MSRs, NMSAs, and PCCRs included in capital does not exceed 100% of Tier 1
capital. NMSAs and PCCRs are subject to a separate aggregate sublimit of 25% of
Tier 1 capital. The amount of MSRs, NMSAs, and PCCRs that a bank holding company
may include in its capital is limited to the lesser of (a) 90% of such assets'
fair market value (as determined under the guidelines), or (b) 100% of such
assets' book value, each determined quarterly. Identifiable intangible assets
(i.e., intangible assets other than goodwill) other than MSRs, NMSAs, and PCCRs,
including core deposit intangibles, acquired on or before February 19, 1992 (the
date the Federal Reserve Board issued its original proposal for public comment),
generally will not be deducted from capital for supervisory purposes, although
they will continue to be deducted for purposes of evaluating applications filed
by bank holding companies.
Under the risk-based guidelines, financial institutions are required to
maintain a risk-based ratio (total capital to risk-weighted assets) of 8%, of
which 4% must be Tier 1 capital. The appropriate regulatory authority may set
higher capital requirements when an institution's circumstances warrant.
Under the leverage guidelines, financial institutions are required to
maintain a leverage ratio (Tier 1 capital to adjusted total assets, as specified
in the guidelines) of at least 3%. The 3% minimum ratio is applicable only to
financial institutions that meet certain specified criteria, including excellent
asset quality, high liquidity, low interest rate exposure, and the highest
regulatory rating. Financial institutions not meeting these criteria are
required to maintain a leverage ratio that exceeds 3% by a cushion of at least
100 to 200 basis points.
The guidelines also provide that financial institutions experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory level.
Furthermore, the
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Federal Reserve Board's guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier 1 leverage ratio" in evaluating proposals
for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio
of an institution's Tier 1 capital, less all intangibles, to total assets, less
all intangibles.
Failure to meet applicable capital guidelines could subject the financial
institution to a variety of enforcement remedies available to the federal
regulatory authorities, including limitations on the ability to pay dividends,
the issuance by the regulatory authority of a capital directive to increase
capital, and the termination of deposit insurance by the FDIC, as well as to the
measures described below under "Federal Deposit Insurance Corporation
Improvement Act of 1991" as applicable to undercapitalized institutions.
As of December 31, 1999, the Tier 1 risk-based capital ratio, total
risk-based capital ratio, and Tier 1 leverage ratio for Huntington were as
follows:
Requirement Huntington
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Tier 1 Risk-Based Capital Ratio 4.00 % 7.52 %
Total Risk-Based Capital Ratio 8.00 % 10.72 %
Tier 1 Leverage Ratio 3.00 % 6.72 %
As of December 31, 1999, Huntington's bank subsidiary also had capital in
excess of the minimum requirements. The risk-based capital standards of the
Federal Reserve Board, the OCC, and the FDIC specify that evaluations by the
banking agencies of a bank's capital adequacy will include an assessment of the
exposure to declines in the economic value of the bank's capital due to changes
in interest rates. These banking agencies issued a joint policy statement on
interest rate risk describing prudent methods for monitoring such risk that rely
principally on internal measures of exposure and active oversight of risk
management activities by senior management.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") substantially revised the bank regulatory and funding provisions of
the Federal Deposit Insurance Act and made revisions to several other federal
banking statutes. Among other things, FDICIA requires federal banking regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. For these purposes,
FDICIA establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
The federal banking regulatory agencies have adopted regulations to
implement the prompt corrective action provisions of FDICIA. Among other things,
the regulations define the relevant capital measures for the five capital
categories. An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of
6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject
to a regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure. An institution is deemed to be
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, a Tier 1 risk-based capital ratio of 4% or greater, and, generally, a
Tier 1 leverage ratio of 4% or greater and the institution does not meet the
definition of a "well capitalized" institution. An institution that does not
meet one or more of the "adequately capitalized" tests is deemed to be
"undercapitalized". If the institution has a total risk-based capital ratio that
is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a
Tier 1 leverage ratio that is less than 3%, it is deemed to be "significantly
undercapitalized". Finally, an institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management fee
to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized institutions are subject to growth
limitations and are required to submit a capital restoration plan. If any
depository institution subsidiary of a holding company is required to submit a
capital restoration plan, the holding company would be required to provide a
limited guarantee regarding compliance with the plan as a condition of approval
of such plan by the appropriate federal banking agency. If an undercapitalized
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized. Significantly undercapitalized institutions may
be subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock to become adequately capitalized, requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. Critically undercapitalized institutions may not, beginning 60 days after
becoming critically undercapitalized, make any payment of principal or interest
on their subordinated debt. In addition, critically undercapitalized
institutions are subject to appointment of a receiver or conservator within 90
days of becoming critically undercapitalized.
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Under FDICIA, a depository institution that is not well capitalized is
generally prohibited from accepting brokered deposits and offering interest
rates on deposits higher than the prevailing rate in its market. Huntington
expects that the FDIC's brokered deposit rule will not adversely affect the
ability of its depository institution subsidiaries to accept brokered deposits.
Under the regulatory definition of brokered deposits, Huntington's depository
subsidiary had $530.0 million of brokered deposits at December 31, 1999.
FDICIA, as amended, directs that each federal banking regulatory agency
prescribe standards, by regulation or guideline, for depository institutions
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, asset quality, earnings, and stock valuation. The Federal Reserve
Board and other federal banking agencies have adopted a regulation in the form
of guidelines covering most of these items. Huntington believes that the
regulation and guidelines will not have a material effect on the operations of
its depository institution subsidiaries.
INTERSTATE BRANCHING AND CONSOLIDATIONS
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal") provides for nationwide interstate banking and branching. Under
the law, interstate acquisitions of banks or bank holding companies in any state
by bank holding companies in any other state became permissible in 1995, and
interstate branching and consolidations of existing bank subsidiaries in
different states became permissible in 1997. On June 30, 1997, Huntington
availed itself of the interstate branching and consolidation authority by
merging into its lead national bank subsidiary all of its other bank
subsidiaries, except The Huntington State Bank, which was subsequently merged
into Huntington's lead national bank subsidiary on January 29, 1999. As of that
date, The Huntington National Bank was Huntington's sole bank subsidiary. Future
bank acquisitions, if any, in states where Huntington formerly had a separate
bank subsidiary, will not require compliance with Riegle-Neal entry provisions.
GRAMM-LEACH-BLILEY ACT OF 1999
The United States Congress in 1999 enacted major financial services
modernization legislation, known as the "Gramm-Leach-Bliley Act of 1999"
("GLBA"), which was signed into law on November 12, 1999. Under GLBA, banks are
no longer prohibited by the Glass-Steagall Act from associating with, or having
management interlocks with, a business organization engaged principally in
securities activities. By qualifying as a new entity known as a "financial
holding company", a bank holding company may acquire new powers not otherwise
available to it. In order to qualify, a bank holding company's depository
subsidiaries must all be both well capitalized and well managed, and must be
meeting their Community Reinvestment Act obligations. The bank holding company
must also declare its intention to become a financial holding company to the
Federal Reserve Board and certify that its depository subsidiaries meet the
capitalization and management requirements. The repeal of the Glass-Steagall Act
and the availability of new powers both are effective on and after March 11,
2000.
Financial holding company powers relate to "financial activities" that are
determined by the Federal Reserve Board, in coordination with the Secretary of
the Treasury, to be financial in nature, incidental to an activity that is
financial in nature, or complementary to a financial activity (provided that the
complementary activity does not pose a safety and soundness risk). The statute
itself defines certain activities as financial in nature, including but not
limited to underwriting insurance or annuities; providing financial or
investment advice; underwriting, dealing in, or making markets in securities;
merchant banking, subject to significant limitations; insurance portfolio
investing, subject to significant limitations; and any activities previously
found by the Federal Reserve Board to be closely related to banking. A company
that is predominantly engaged in financial activities but is not a bank holding
company may, if it becomes a bank holding company and thereby also a financial
holding company, continue to engage in or retain a subsidiary engaging in those
nonfinancial activities the company or its subsidiary was lawfully engaged in on
September 30, 1999, but it may not expand those grandfathered activities or
initiate new nonfinancial activities. Such grandfathering is available for up to
fifteen years.
National and state banks are permitted under GLBA (subject to capital,
management, size, debt rating, and Community Reinvestment Act qualification
factors) to have "financial subsidiaries" that are permitted to engage in
financial activities not otherwise permissible. However, unlike financial
holding companies, financial subsidiaries may not engage in insurance or annuity
underwriting; developing or investing in real estate; merchant banking (for at
least five years); or insurance portfolio investing.
Other provisions of GLBA establish a system of functional regulation for
financial holding companies and banks involving the Securities and Exchange
Commission, the Commodity Futures Trading Commission, and state securities and
insurance regulators; deal with bank insurance sales and title insurance
activities in relation to state insurance regulation; prescribe consumer
protection standards for insurance sales; and establish minimum federal
standards of privacy to protect the confidentiality of the personal financial
information of consumers and regulate its use by financial institutions.
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In January, 2000, the Federal Reserve Board and the Office of the
Comptroller of the Currency issued, respectively, an interim and a proposed rule
governing the application process for becoming a financial holding company or a
financial subsidiary. Additional regulations are expected from these agencies
during the year 2000 for the implementation of GLBA.
GUIDE 3 INFORMATION
Information required by Industry Guide 3 relating to statistical
disclosure by bank holding companies is set forth in Items 7 and 8.
ITEM 2: PROPERTIES
The headquarters of Huntington and its lead subsidiary, The Huntington
National Bank, are located in the Huntington Center, a thirty-seven story office
building located in Columbus, Ohio. Of the building's total office space
available, Huntington leases approximately 39 percent. The lease term expires in
2015, with nine five-year renewal options for up to 45 years but with no
purchase option. The Huntington National Bank has an equity interest in the
entity that owns the building. Huntington's other major properties consist of a
thirteen-story and a twelve-story office building, both of which are located
adjacent to the Huntington Center; a twenty-one story office building, known as
the Huntington Building, located in Cleveland, Ohio; an eighteen-story office
building in Charleston, West Virginia; a three-story office building located in
Holland, Michigan; an office building in Lakeland, Florida; an eleven-story
office building in Sarasota, Florida; The Huntington Mortgage Company's
building, located in the greater Columbus area; an office complex located in
Troy, Michigan; and two data processing and operations centers located in Ohio.
Of these properties, Huntington owns the thirteen-story and twelve-story office
buildings. All of the other major properties are held under long-term leases.
Additionally, Huntington owns and occupies a 460,000 square foot Business
Service Center which serves as Huntington's primary Operations and Data Center.
In 1998, Huntington entered into a sale/leaseback agreement that included
the sale of 59 properties. The transaction included a mix of branch banking
offices, regional offices, and operational facilities, including certain
properties described above, which Huntington will continue to operate under a
long-term lease.
ITEM 3: LEGAL PROCEEDINGS
Information required by this item is set forth in Item 8 in Note 15 of
Notes to Consolidated Financial Statements on page 46.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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Part II
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ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of Huntington Bancshares Incorporated is traded on the
Nasdaq Stock Market under the symbol "HBAN". The stock is listed as "HuntgBcshr"
or "HuntBanc" in most newspapers. As of January 31, 2000, Huntington had 33,539
shareholders of record.
Information regarding the high and low sale prices of Huntington Common
Stock and cash dividends declared on such shares, as required by this item, is
set forth in a table entitled "Market Prices, Key Ratios and Statistics
(Quarterly Data)" on page 26 in Item 7. Information regarding restrictions on
dividends, as required by this item, is set forth in Item 1 "Business-Regulatory
Matters-Dividend Restrictions" above and in Item 8 in Notes 7 and 19 of Notes to
Consolidated Financial Statements on pages 39 and 48, respectively.
ITEM 6: SELECTED FINANCIAL DATA
Information required by this item is set forth in Item 7 in Table 1 on page
9.
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HUNTINGTON BANCSHARES INCORPORATED
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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TABLE 1
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CONSOLIDATED SELECTED FINANCIAL DATA YEAR ENDED DECEMBER 31,
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(in thousands of dollars, except per
share amounts) 1999 1998 1997 1996 1995 1994
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SUMMARY OF OPERATIONS
Total interest income $ 2,026,002 $ 1,999,364 $ 1,981,473 $ 1,775,734 $ 1,709,627 $ 1,418,610
Total interest expense 984,240 978,271 954,243 880,648 856,860 546,880
Net interest income 1,041,762 1,021,093 1,027,230 895,086 852,767 871,730
Securities gains 12,972 29,793 7,978 17,620 9,380 2,297
Gains on sale of credit card portfolios 108,530 9,530 -- -- -- --
Provision for loan losses 88,447 105,242 107,797 76,371 36,712 21,954
Net income 422,074 301,768 292,663 304,269 281,801 276,320
Operating net income (1) 422,074 362,068 338,897 304,269 281,801 276,320
PER COMMON SHARE (2)
Net income
Basic 1.83 1.30 1.27 1.31 1.17 1.15
Diluted 1.82 1.29 1.25 1.29 1.16 1.15
Diluted--Operating (1) 1.82 1.54 1.45 1.29 1.16 1.15
Cash dividends declared 0.76 0.68 0.62 0.56 0.51 0.46
Book value at year-end 9.53 9.27 8.73 7.82 7.59 6.85
BALANCE SHEET HIGHLIGHTS
Total assets at year-end 29,036,953 28,296,336 26,730,540 24,371,946 23,495,337 20,688,505
Total long-term debt at year-end 697,677 707,359 498,889 550,531 517,202 555,514
Average long-term debt 702,974 620,688 526,379 515,664 529,140 561,872
Average shareholders' equity 2,146,735 2,064,241 1,893,788 1,776,151 1,742,826 1,621,443
Average total assets $28,739,450 $26,891,558 $25,150,659 $23,374,490 $22,098,785 $19,498,530
- ------------------------------------------------------------------------------------------------------------------------------------
KEY RATIOS AND STATISTICS 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
MARGIN ANALYSIS--AS A %
OF AVERAGE EARNING ASSETS (3)
Interest Income 7.97% 8.33% 8.52% 8.26% 8.43% 7.99%
Interest Expense 3.86 4.05 4.08 4.07 4.19 3.04
----------- ----------- ----------- ----------- ----------- -----------
NET INTEREST MARGIN 4.11% 4.28% 4.44% 4.19% 4.24% 4.95%
=========== =========== =========== =========== =========== ===========
RETURN ON
Average total assets 1.47% 1.12% 1.16% 1.30% 1.28% 1.42%
Average total assets--Operating (1) 1.47 1.35 1.35 1.30 1.28 1.42
Average shareholders' equity 19.66 14.62 15.44 17.13 16.17 17.04
Average shareholders' equity--Operating (1) 19.66 17.54 17.88 17.13 16.17 17.04
Dividend payout ratio 41.53 53.15 49.67 42.22 43.82 38.50
Average shareholders' equity to
average total assets 7.47 7.68 7.53 7.60 7.89 8.32
Tier I risk-based capital ratio 7.52 7.10 8.83 8.11 8.66 9.67
Total risk-based capital ratio 10.72 10.73 11.68 11.29 12.01 13.32
Tier I leverage ratio 6.72% 6.37% 7.77% 6.80% 6.99% 7.95%
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Full-time equivalent employees 9,516 10,159 9,485 9,467 9,083 9,642
Domestic and foreign banking offices 517 531 454 429 406 420
(1) Excludes special charges, including merger costs, and related taxes.
(2) Adjusted for stock splits and stock dividends, as applicable.
(3) Presented on a fully tax equivalent basis assuming a 35% tax rate.
9
11
HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
INTRODUCTION
Huntington Bancshares Incorporated (Huntington) is a multi-state bank
holding company headquartered in Columbus, Ohio. Its subsidiaries are engaged in
full-service commercial and consumer banking, mortgage banking, lease financing,
trust services, discount brokerage services, underwriting credit life and
disability insurance, issuing commercial paper guaranteed by Huntington, and
selling other insurance and financial products and services. Huntington's
subsidiaries operate domestically in offices located in Florida, Georgia,
Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, South
Carolina, and West Virginia. Huntington has foreign offices in the Cayman
Islands and Hong Kong.
In 1995, Congress passed the Private Securities Litigation Reform Act to
encourage corporations to provide investors with information about 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. This
Financial Supplement to the Proxy, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements including certain plans, expectations, goals, and
projections that are subject to numerous assumptions, risks, and uncertainties.
Actual results could differ materially from those contained in or implied by
Huntington's statements due to a variety of factors including:
- changes in economic conditions and movements in interest rates;
- competitive pressures on product pricing and services;
- success and timing of business strategies and successful integration
of acquired businesses;
- the nature, extent, and timing of governmental actions and reforms;
and,
- extended disruption of vital infrastructure.
The management of Huntington encourages readers of this Financial
Supplement to the Proxy to understand forward-looking statements to be strategic
objectives rather than absolute targets of future performance. The following
discussion and analysis of the financial performance of Huntington for the year
should be read in conjunction with the financial statements, notes and other
information contained in this document.
OVERVIEW
Huntington reported net income of $422.1 million for 1999, compared with
$301.8 million and $292.7 million for 1998 and 1997, respectively. For the same
periods, diluted earnings per share (EPS) were $1.82, $1.29 and $1.25. All of
the following financial information is reported on an operating basis, except
where indicated. Operating results exclude special charges incurred in 1998
associated with several strategic actions that enhanced profitability and the
merger-related expenses incurred in 1997 in connection with the acquisition of
First Michigan Bank Corporation (First Michigan). Huntington's operating
earnings for 1999 were $422.1 million, compared with $362.1 million in 1998 and
$338.9 million in 1997. Diluted EPS was $1.82, compared with $1.54 in 1998 and
$1.45 in 1997, an increase of 18.2% and 25.5%, respectively. Per share amounts
for all prior periods have been restated to reflect the ten-percent stock
dividend distributed to shareholders in July 1999.
Return on average equity (ROE) was 19.66% for 1999, versus 17.54% and
17.88% for each of the two preceding years. Return on average assets (ROA) was
1.47% for the current year and 1.35% in each of the two previous years. Cash
basis results, presented in the table below, exclude amortization of goodwill
and other intangibles (net of income taxes) from net income and related asset
amounts from total assets and shareholders' equity:
1999 1998 1997
---- ---- ----
EPS $ 1.94 $ 1.64 $ 1.15
ROE 30.82% 24.35% 21.36%
ROA 1.61% 1.45% 1.41%
Total assets were $29.0 billion at December 31, 1999, up from $28.3 billion
from year-end 1998. In October of 1999, Huntington completed the sale of its
credit card portfolio to The Chase Manhattan Bank (Chase). Approximately $541
million in receivables were sold, resulting in a gain of $108.5 million. This
transaction was part of Huntington's strategy to exit specific business lines
and reinvest in businesses with higher growth potential. Under the terms of the
sale agreement, Huntington will work together with Chase to develop marketing
programs, sell the product through its Direct Bank and banking offices, and
receive origination fees along with a share of the revenue generated from new
receivables.
10
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HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
TABLE 2
- -----------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------
(in millions of dollars) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Commercial $ 6,300 $ 6,027 $ 5,271 $ 5,130 $ 4,869
Real Estate
Construction 1,237 919 864 699 524
Mortgage 3,596 3,640 3,598 3,623 3,552
Consumer
Loans 6,793 6,958 6,463 6,123 5,741
Lease financing 2,742 1,911 1,542 1,183 784
------------- ------------- ------------ ------------ -------------
TOTAL LOANS $ 20,668 $19,455 $17,738 $ 16,758 $ 15,470
============= ============= ============ ============ =============
Note: There are no loans outstanding which would be considered a concentration
of lending in any particular industry or group of industries.
TABLE 3
- -------------------------------------------------------------------------------------------------------------------------
MATURITY SCHEDULE OF SELECTED LOANS
- -------------------------------------------------------------------------------------------------------------------------
(in millions of dollars) DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
---------- ---------- ---------- ----------
Commercial $ 3,664 $ 1,744 $ 892 $6,300
Real estate - construction 542 502 193 1,237
---------- ---------- ---------- ----------
TOTAL $ 4,206 $ 2,246 $1,085 $7,537
========== ========== ========== ==========
Variable interest rates $ 1,408 $ 693
========== ==========
Fixed interest rates $ 838 $ 392
========== ==========
Note: Loan balances above are net of unearned income and there are no loans
outstanding which would be a concentration of lending in any particular
industry or group of industries.
Adjusted for the impact of the credit card sale, average total loans grew
9.5% from 1998. Commercial loans grew by 8.7% while consumer loans grew by
11.4%, led by strong volumes in vehicle leasing and home equity loans. Average
loans secured by real estate, which include residential mortgage lending,
increased by 6.6% compared to 1998.
Core deposits represent Huntington's most significant source of funding.
When combined with other core funding sources, core deposits provide
approximately 71% of Huntington's funding needs. Core deposits were $16.9
billion, down $.7 billion, or 4.3%, from the prior year-end. This decline was
attributable to the runoff of retail certificates of deposit reinvested by
customers into alternative investments such as mutual funds and annuities,
including those sold by Huntington. Excluding time deposits, average core
deposits grew 11.7% with particular strength in savings and transaction account
products. Huntington continued to raise short-term wholesale monies and issue
unsecured medium-term notes as sources of additional funding.
LINES OF BUSINESS
Huntington views its operations as five distinct segments. Retail Banking,
Corporate Banking, Dealer Sales, and the Private Financial Group are the
company's major business lines. The fifth segment includes Huntington's Treasury
function and other unallocated assets, liabilities, revenue, and expense. 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. This 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. Below is a brief description of each line of
business and a discussion of the business segment results, which can be found in
Note 22 in the Notes to Consolidated Financial Statements.
11
13
HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
RETAIL BANKING
Retail Banking provides products and services to retail and business
banking customers. This business unit's products include home equity loans,
first mortgage loans, installment loans, small business loans, credit cards,
deposit products, as well as investment and insurance services. These products
and services are offered through Huntington's traditional banking network,
in-store branches, Direct Bank, and Web Bank.
Retail Banking net income was $177.8 million for 1999 versus $129.5 million
for 1998, representing a 37.3% increase. A portion of the growth came from the
full year benefit of Huntington's acquisition of 60 banking offices in Florida
in June 1998. Excluding this impact, the Retail Banking business line grew
28.5%. Non-interest income for the year increased 15.0% over the prior year with
strength in service charges, brokerage and insurance income, and electronic
banking income. Mortgage banking revenues were off 6.3% as higher market rates
curtailed new loan production. Non-interest expenses were relatively flat for
the year as expense containment offset volume-related expense increases. This
segment contributed 42% of Huntington's 1999 net income and comprised 31% of its
total loan portfolio.
CORPORATE BANKING
Customers in this segment represent the middle-market and large corporate
banking relationships which use a variety of banking products and services
including, but not limited to, commercial loans, asset based financing,
international trade, and cash management. Huntington's capital markets division
also provides alternative financing solutions for larger business clients,
including privately placed debt, syndicated commercial lending, and the sale of
interest rate protection products.
Corporate Banking posted net income of $126.0 million for the year, a 11.6%
increase over 1998. The increase was the result of solid loan and deposit
growth, despite the impact of certain loan paydowns on significant larger
credits during the year, combined with lower charge-offs on portfolio loans.
This segment contributed 30% of Huntington's annual earnings and represented 35%
of the total loan portfolio.
DEALER SALES
Dealer Sales product offerings pertain to the automobile lending sector and
include floor plan financing, as well as indirect consumer loans and leases.
Indirect consumer loans and leases comprise the vast majority of the business
and involve the financing of vehicles purchased by individuals through
dealerships.
Excluding the $37.8 million, net of tax, lease residual valuation
adjustment, net income totaled $71.0 million for 1999 and $55.1 million for
1998. Robust vehicle leasing volumes contributed to a 29% increase in net
income. Tighter expense control helped to mitigate weakness in non-interest
income, which included losses in 1999 realized from the disposition of leased
vehicles. This business line totaled 17% of Huntington's net income in the
recent twelve months and 31% of its outstanding loans.
PRIVATE FINANCIAL GROUP
Huntington's Private Financial Group (PFG) provides an array of products
and services designed to meet the needs of Huntington's higher wealth banking
customers. Revenue is derived through the sale of personal trust, asset
management, investment advisory, insurance, and deposit and loan products and
services. PFG provides customers with "one-stop shopping" for all their
financial needs.
PFG achieved net income for the year just ended of $23.5 million, an
increase from $22.2 million in 1998. Net interest income for the year declined
8.0% due to lower loan volumes. Non-interest income increased for the same
period 10.9% primarily due to a 15.6% increase in service charges, a 6.2%
increase in trust revenue, and a 3.6% increase in credit card income. Direct
non-interest expenses declined 5.2% over the same period. This segment
represented 6% of Huntington's 1999 operating results and 3% of total loans at
December 31, 1999.
TREASURY/OTHER
Huntington uses a match-funded transfer pricing system to allocate interest
income and interest expense to its business segments. This approach consolidates
the interest rate risk management of Huntington into its Treasury Group. As part
of its overall interest rate risk and liquidity management strategy, the
Treasury Group administers an investment portfolio of approximately $5 billion.
Revenue and expense associated with these activities remain within the Treasury
Group. Additionally, the Treasury/Other segment absorbs unassigned assets,
liabilities, equity, revenue, and expense that cannot be directly assigned or
allocated to one of Huntington's lines of business. Costs associated with
intangibles that have not been allocated to the major business lines are also
included in Other.
This segment reported net income of $61.5 million for the recent year. In
comparing annual results for 1999 with 1998, the increase was attributable to
higher non-interest income from gains realized from the credit card sale to
Chase and lower non-interest expenses in almost all categories (before
amortization of intangibles and other non-
12
14
HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
recurring expenses) offset by lower net interest income and securities gains.
Amortization of intangibles included a full year's impact from the Florida
branch acquisition that occurred in June 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Huntington's net interest income was $1,041.8 million in 1999, versus
$1,021.1 million in 1998, and $1,027.2 million in 1997. The net interest margin,
on a fully tax equivalent basis, was 4.11% during the recent twelve months,
compared with 4.28% and 4.44% in the two preceding years. The margin decline is
primarily due to the funding of loan growth through more expensive wholesale
funds as loan growth outpaced core deposit growth. Interest rate swaps and other
off-balance sheet financial instruments used for asset/liability management
purposes provided benefits of $21.6 million (8 basis points), $27.3 million (11
basis points) and $6.0 million (3 basis points) in each of the recent three
years.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses reflects management's evaluation of the
adequacy of the allowance for loan losses (ALL). The ALL represents management's
assessment of possible losses inherent in Huntington's loan portfolio.
Huntington allocates the ALL to each loan category based on a detailed credit
quality review performed periodically on specific commercial loans based on size
and relative risk and other relevant factors such as portfolio performance,
internal controls, and impacts from mergers and acquisitions. Loss factors are
applied on larger, commercial and industrial and commercial real estate credits
and represent management's estimate of
TABLE 4
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1)
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998
----------------------------------- ----------------------------------
Increase (Decrease) Increase (Decrease)
From Previous From Previous
Year Due To: Year Due To:
----------------------------------- ----------------------------------
Fully Tax Equivalent Basis (2) Yield/ Yield/
(in millions of dollars) Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits in banks $ (0.1) $(0.5) $ (0.6) $ 0.6 $ (0.1) $0.5
Trading account securities 0.1 0.1 0.2 0.0 0.0 0.0
Federal funds sold and securities purchased
under resale agreements (11.3) (0.4) (11.7) 10.4 0.1 10.5
Mortgages held for sale (4.0) 0.1 (3.9) 11.1 (1.0) 10.1
Taxable securities (0.7) (11.1) (11.8) (28.7) (2.3) (31.0)
Tax-exempt securities 4.1 (2.5) 1.6 (1.6) (1.8) (3.4)
Total loans 142.7 (90.8) 51.9 76.9 (47.2) 29.7
---------- ----------- ---------- ---------- ----------- ---------
TOTAL EARNING ASSETS 130.8 (105.1) 25.7 68.7 (52.3) 16.4
---------- ----------- ---------- ---------- ----------- ---------
Interest bearing demand deposits 13.4 (3.3) 10.1 10.2 1.8 12.0
Savings deposits 15.7 (3.7) 12.0 7.5 6.1 13.6
Other domestic time deposits (27.6) (25.1) (52.7) 24.1 (4.7) 19.4
Certificates of deposit of $100,000 or more (7.3) (7.6) (14.9) (3.0) 0.6 (2.4)
Foreign time deposits 13.4 (0.7) 12.7 (16.0) (0.3) (16.3)
Short-term borrowings 21.0 (4.4) 16.6 (35.8) (12.9) (48.7)
Medium-term notes 12.1 (6.7) 5.4 52.3 (3.9) 48.4
Subordinated notes and other long-term debt,
including capital securities 6.9 9.8 16.7 7.6 (9.5) (1.9)
---------- ----------- ---------- ---------- ----------- ---------
TOTAL INTEREST BEARING LIABILITIES 47.6 (41.7) 5.9 46.9 (22.8) 24.1
---------- ----------- ---------- ---------- ----------- ---------
NET INTEREST INCOME $ 83.2 $(63.4) $ 19.8 $ 21.8 $ (29.5) $(7.7)
========== =========== ========== ========== =========== =========
(1) The change in interest rates due to both rate and volume has been allocated
between the factors in proportion of the relationship of the absolute
dollar amounts of the change in each.
(2) Calculated assuming a 35% tax rate.
13
15
HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
the inherent loss. The portion of the allowance allocated to homogeneous
consumer loans is determined by applying projected loss ratios to various
segments of the loan portfolio giving consideration to existing economic
conditions and trends.
Projected loss ratios incorporate factors such as trends in past due and
non-accrual amounts, recent loan loss experience, current economic conditions,
risk characteristics, and concentrations of various loan categories. Actual loss
ratios experienced in the future, however, could vary from those projected
because a loan's performance depends not only on economic factors but also other
factors unique to each customer. The diversity in size of corporate commercial
loans can be significant as well and even if the projected number of loans
deteriorate, the dollar exposure could significantly vary from estimated
amounts. Additionally, the impact on individual customers from many economic
events that have occurred may yet be unknown. Such events include high energy
prices, low automobile and home sales in selected markets. To ensure adequacy to
a higher degree of confidence, an unallocated allowance is maintained. For
analytical purposes, the allocation of the ALL is provided in Table 6. While
amounts are allocated to various portfolio segments, the total ALL, less the
portion attributable to reserves as prescribed under provisions of Statement of
Financial Accounting Standard No. 114, is available to absorb losses from any
segment of the portfolio.
The provision for loan losses was $88.4 million in 1999, down from $105.2
million in 1998. Two years ago, the provision totaled $107.8 million. The
decline in the current year's provision is due in large part to the credit card
sale to Chase. Net charge-offs as a percent of average total loans declined to
.40% from .51% in 1998 and .50% in 1997. In 1999, commercial and consumer loan
losses declined 33.9% and 7.4%, respectively.
TABLE 5
- ----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF ALLOWANCE FOR LOAN LOSSES AND SELECTED STATISTICS
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES, BEGINNING OF YEAR $ 290,948 $ 258,171 $ 230,778 $ 222,487 $ 225,225
LOAN LOSSES
Commercial (16,203) (24,512) (23,276) (23,904) (15,947)
Real estate
Construction (638) (80) (375) --- (392)
Mortgage (3,803) (3,358) (2,663) (2,768) (5,086)
Consumer
Loans (78,688) (84,961) (74,761) (59,843) (39,000)
Leases (12,959) (13,444) (9,648) (4,492) (1,989)
-------------- -------------- --------------- -------------- --------------
Total loan losses (112,291) (126,355) (110,723) (91,007) (62,414)
-------------- -------------- --------------- -------------- --------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF
Commercial 5,303 4,546 4,373 4,884 3,696
Real estate
Construction 192 441 111 556 5
Mortgage 1,528 2,167 619 1,402 977
Consumer
Loans 22,650 23,140 16,382 13,457 11,156
Leases 2,532 1,554 1,057 721 303
-------------- -------------- --------------- -------------- --------------
Total recoveries 32,205 31,848 22,542 21,020 16,137
-------------- -------------- --------------- -------------- --------------
NET LOAN LOSSES (80,086) (94,507) (88,181) (69,987) (46,277)
-------------- -------------- --------------- -------------- --------------
PROVISION FOR LOAN LOSSES 88,447 105,242 107,797 76,371 36,712
ALLOWANCE ACQUIRED/OTHER --- 22,042 7,777 1,907 6,827
-------------- -------------- --------------- -------------- --------------
ALLOWANCE FOR LOAN LOSSES, END OF YEAR $ 299,309 $ 290,948 $ 258,171 $ 230,778 $ 222,487
============== ============== =============== ============== ==============
AS A % OF AVERAGE TOTAL LOANS
Net loan losses 0.40% 0.51% 0.50% 0.44% 0.30%
Provision for loan losses 0.44% 0.57% 0.61% 0.48% 0.24%
Allowance for loan losses as a %
of total loans (end of period) 1.45% 1.50% 1.46% 1.38% 1.44%
Net loan loss coverage (1) 8.78x 6.72x 7.01x 7.62x 10.07x
(1) Income before income taxes (excluding special charges) and the provision for
loan losses to net loan losses.
14
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HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
TABLE 6
- -------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------------------------
Real Estate Consumer
--------------------------- --------------------------
(in thousands of dollars) Commercial Construction Mortgage Loans Leases Unallocated Total
- -------------------------------------------------------------------------------------------------------------------------------
1999:
AMOUNT $ 94,978 $15,452 $36,877 $ 78,655 $25,378 $47,969 $ 299,309
% OF LOANS TO TOTAL LOANS 30.5% 6.0% 17.4% 32.9% 13.2% --- 100.0%
1998:
Amount $ 82,129 $11,112 $40,070 $104,198 $17,823 $35,616 $ 290,948
% of Loans to Total Loans 31.0% 4.7% 18.7% 35.8% 9.8% --- 100.0%
1997:
Amount $ 86,439 $ 8,140 $38,598 $ 75,405 $ 6,631 $42,958 $ 258,171
% of Loans to Total Loans 29.7% 4.9% 20.3% 36.4% 8.7% --- 100.0%
1996:
Amount $113,555 $ 2,033 $18,987 $ 54,564 $ 3,457 $38,182 $ 230,778
% of Loans to Total Loans 30.6% 4.2% 21.6% 36.5% 7.1% --- 100.0%
1995:
Amount $119,200 $ 2,258 $18,179 $ 43,880 $ 3,651 $35,319 $ 222,487
% of Loans to Total Loans 31.5% 3.4% 23.0% 37.1% 5.0% --- 100.0%
At December 31, 1999, the ALL was $299.3 million, representing 1.45% of
total loans, down slightly from 1.50% a year ago and 1.46% in 1997. The ALL
covered non-performing loans 3.6 times, which approximates the prior year's
level. Additional information regarding the ALL and asset quality appears in the
"Credit Risk" section.
NON-INTEREST INCOME
Excluding gains from securities sales and gains from the sale of credit
cards, non-interest income totaled $452.1 million in 1999, a 13.3% increase over
$398.9 million in 1998. Comparable non-interest income was $334.9 million in
1997. Significant improvements were experienced in several fee-based activities
as fee income as a percentage of total revenue increased from 28% in 1998 to 30%
in 1999. Service charges on deposit accounts increased 24% in 1999 due to
related pricing changes, growth in sales of cash management products, and an
overall higher level of transaction deposit accounts. Brokerage and insurance
income was up 42% because of higher retail investment and insurance sales
through Huntington's growing network of licensed investment and insurance
representatives combined with some customer migration from certificates of
deposit to investment products. Electronic banking fees grew nearly 28% in 1999
due to increased customer usage of Huntington's check card product and increased
Web Bank relationships.
Securities transactions netted gains of $13 million in 1999 compared with
$29.8 million for the same twelve-month period a year ago. In 1999, Huntington
sold a portion of its investment in common stock of S1 Corporation at a gain of
$31 million. Substantially offsetting this gain were losses from the sale of
fixed-income investments, as Huntington repositioned the portfolio of securities
available for sale.
NON-INTEREST EXPENSE
Excluding special charges and other non-recurring expenses, non-interest
expense was $815.3 million, versus $823.9 million and $751.9 million in the two
preceding years. Other non-recurring expenses totaled $96.8 million in 1999 and
included a $58.2 million valuation adjustment of vehicles underlying certain
direct financing leases. In addition, Huntington recorded costs related to the
company's "Huntington 2000+" program as well as other one-time expenses, which
included amounts paid for management consulting and other professional services
as well as $11 million for a special cash award to employees for achievement of
the program goals for 1999. "Huntington 2000+" is a collaborative effort among
all employees to evaluate processes and procedures and the way Huntington
conducts its business with a mission of maximizing efficiency through all
aspects of the organization.
As a result of the "Huntington 2000+" program, overall non-interest
expenses declined, despite a full year of expenses related to the June 1998
Florida branch acquisition. These banking office additions, along with
depreciation expense related to Huntington's operations center, which was
occupied in the second half of 1999, and Year 2000 system upgrades drove
increases in Net occupancy and Equipment expenses. Most other expense categories
declined, representing the success of the "Huntington 2000+" program.
15
17
HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
The efficiency ratio represents non-interest expense as a percentage of
fees and other income plus tax-equivalent net interest income and is a measure
of cost to generate a dollar of revenue. Huntington's efficiency ratio for 1999
improved to 51.76% from 55.80% in 1998.
During the fourth quarter of 1998, Huntington recorded a $90 million
special charge related to costs for several strategic actions that enhanced
profitability, including the sale or closure of underperforming banking offices
and the termination of certain business activities. At December 31, 1999,
Huntington had substantially completed all of its strategic initiatives,
including the sale or closure of identified banking offices, discontinuation of
various business activities and the targeted reductions in the workforce. All
significant components of the charge were utilized as of December 31, 1999. See
Note 17 to the Consolidated Financial Statements for additional information
regarding the 1998 Special Charges.
In connection with the acquisition of First Michigan in 1997, Huntington
incurred a merger-related charge of $51 million consisting primarily of
personnel, facilities, and systems costs, as well as $12 million of professional
fees and other costs to effect the business combination. All activities related
to this charge were completed by December 31, 1998.
PROVISION FOR INCOME TAXES
The provision for income taxes was $192.7 million in 1999, compared with
$138.4 million in 1998 and $166.5 million in 1997. Huntington's effective tax
rate approximated 31% in the recent and preceding year versus 36.3% in 1997. The
lower effective rate in 1999 and 1998 was due primarily to a higher mix of
tax-exempt income. Furthermore, during 1999, Huntington established a private
charitable foundation with an initial funding of $15 million. The private
foundation was established in order to realize significant federal income tax
benefits that are allowed under the Internal Revenue Code. The rate was higher
than normal in 1997 as a result of significant non-deductible expenses incurred
in connection with the First Michigan and other bank acquisitions.
INTEREST RATE RISK AND LIQUIDITY MANAGEMENT
INTEREST RATE RISK MANAGEMENT
Huntington seeks to achieve consistent growth in net interest income and
net income while managing volatility arising from shifts in interest rates. The
Asset and Liability Management Committee (ALCO) oversees financial risk
management, establishing broad policies and specific operating limits that
govern a variety of financial risks inherent in Huntington's operations,
including interest rate, liquidity, counterparty, settlement, and market risks.
On and off-balance sheet strategies and tactics are reviewed and monitored
regularly by ALCO to ensure consistency with approved risk tolerances.
Interest rate risk management is a dynamic process, encompassing business
flows onto the balance sheet, wholesale investment and funding, and the changing
market and business environment. Effective management of interest rate risk
begins with appropriately diversified investments and funding sources. To
accomplish its overall balance sheet objectives, Huntington regularly accesses a
variety of global markets--money, bond, futures, and options--as well as
numerous trading exchanges. In addition, dealers in over-the-counter financial
instruments provide availability of interest rate swaps as needed.
Measurement and monitoring of interest rate risk is an ongoing process. A
key element in this process is Huntington's estimation of the amount that net
interest income will change over a twelve to twenty-four month period given a
directional shift in interest rates. The income simulation model used by
Huntington captures all assets, liabilities, and off-balance sheet financial
instruments, accounting for significant variables that are believed to be
affected by interest rates. These include prepayment speeds on mortgages and
consumer installment loans, cash flows of loans and deposits, principal
amortization on revolving credit instruments, and
TABLE 7
- ----------------------------------------------------------------------------------------
INVESTMENT SECURITIES DECEMBER 31,
- ----------------------------------------------------------------------------------------
(in thousands of dollars) 1999 1998 1997
- ----------------------------------------------------------------------------------------
U.S. Treasury and Federal Agencies $ --- $ 156 $ 656
States and political subdivisions 18,765 24,778 32,354
--------------- ------------- ------------
TOTAL INVESTMENT SECURITIES $ 18,765 $ 24,934 $33,010
=============== ============= ============
AMORTIZED COST AND FAIR VALUES BY MATURITY AT DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------
AMORTIZED FAIR
(in thousands of dollars) COST VALUE YIELD
- ----------------------------------------------------------------------------------------
States and political subdivisions
Under 1 year $ 2,410 $ 2,389 8.44%
1-5 years 12,911 12,855 7.54%
6-10 years 2,872 2,859 8.08%
Over 10 years 572 559 8.52%
--------------- -------------
Total 18,765 18,662
--------------- -------------
TOTAL INVESTMENT SECURITIES $ 18,765 $ 18,662
=============== =============
Note: Weighted average yields were calculated on the basis of amortized cost and
have been adjusted to a fully tax equivalent basis, assuming a 35% tax rate.
16
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HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
balance sheet growth assumptions. The model also captures embedded options, e.g.
interest rate caps/floors or call options, and accounts for changes in rate
relationships, as various rate indices lead or lag changes in market rates.
While these assumptions are inherently uncertain, management assigns
probabilities and, therefore, believes at any point in time that the model
provides a reasonably accurate estimate of Huntington's interest rate risk
exposure. Management reporting of this information is regularly shared with the
Board of Directors.
At December 31, 1999, the results of Huntington's interest sensitivity
analysis indicated that net interest income would be expected to decrease by
approximately 2.2% if rates rose 100 basis points and would drop an estimated
4.7% in the event of a 200 basis point increase. If rates declined 100 and 200
basis points, Huntington would benefit 2.2% and 4.4%, respectively.
TABLE 8
- ----------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury and Federal Agencies $4,165,342 $4,096,134 $ 5,001,034
Other 704,861 685,281 708,780
---------------- --------------- ---------------
TOTAL SECURITIES AVAILABLE FOR SALE $4,870,203 $4,781,415 $ 5,709,814
================ =============== ===============
AMORTIZED COST AND FAIR VALUES BY MATURITY AT DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------------------
AMORTIZED FAIR
(in thousands of dollars) COST VALUE YIELD (1)
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury
Under 1 year $ 801 $ 801 6.27%
1-5 years 51,371 49,328 5.18%
6-10 years 476,055 446,512 5.35%
---------------- ---------------
Total 528,227 496,641
---------------- ---------------
Federal Agencies
Mortgage-backed securities
1-5 years 4 4 8.13%
6-10 years 27,360 26,992 6.60%
Over 10 years 1,638,047 1,574,336 6.69%
---------------- ---------------
Total 1,665,411 1,601,332
---------------- ---------------
Other agencies
1-5 years 789,008 760,251 5.79%
6-10 years 498,790 469,696 5.72%
Over 10 years 868,124 837,422 6.33%
---------------- ---------------
Total 2,155,922 2,067,369
---------------- ---------------
Total U.S. Treasury and Federal Agencies 4,349,560 4,165,342
---------------- ---------------
Other
Under 1 year 20,805 20,832 9.04%
1-5 years 253,363 251,862 7.05%
6-10 years 130,486 125,951 6.54%
Over 10 years 251,333 239,975 6.02%
Marketable equity securities 10,524 66,241 5.51%
---------------- ---------------
Total 666,511 704,861
---------------- ---------------
TOTAL SECURITIES AVAILABLE FOR SALE $5,016,071 $4,870,203
================ ===============
At December 31, 1999, Huntington had no concentrations of securities by a single
issuer in excess of 10% of shareholders' equity.
(1)Weighted average yields were calculated on the basis of amortized cost.
17
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HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Active interest rate risk management necessitates the use of various types
of off-balance sheet financial instruments, primarily interest rate swaps. Risk
that is created by different indices on products, by unequal terms to maturity
of assets and liabilities, and by products that are appealing to customers but
incompatible with current risk limits can be eliminated or decreased in a cost
efficient manner by utilizing interest rate swaps. Often, the swap strategy has
enabled Huntington to lower the overall cost of raising wholesale funds.
Similarly, financial futures, interest rate caps and floors, options, and
forward rate agreements are used to control financial risk effectively.
Off-balance sheet instruments are often preferable to similar cash instruments
because, though performing identically, they require less capital while
preserving access to the marketplace.
Table 9 below illustrates the approximate market values, estimated
maturities and weighted average rates of the interest rate swaps used by
Huntington in its interest rate risk management program at December 31, 1999. As
is the case with cash securities, the market value of interest rate swaps is
largely a function of the financial market's expectations regarding the future
direction of interest rates. Accordingly, current market values are not
necessarily indicative of the future impact of the swaps on net interest income.
This will depend, in large part, on the shape of the yield curve as well as
interest rate levels. With respect to the variable rate information presented in
Table 9, management made no assumptions regarding future changes in interest
rates.
The pay rates on Huntington's receive-fixed swaps vary based on movements
in the applicable London interbank offered rate (LIBOR). Receive-fixed asset
conversion swaps and receive-fixed liability conversion swaps with notional
values of $850 million and $100 million, respectively, have embedded written
LIBOR-based call options. 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 contractual amount of interest payments to be exchanged are based on
the notional values of the swap portfolio. These notional values do not
represent direct credit exposures. At December 31, 1999, Huntington's credit
risk from interest rate swaps used for asset/liability management purposes was
$55.4 million, which represents the sum of the aggregate fair value of positions
that have become favorable to Huntington, including any accrued interest
receivable due from counterparties. In order to minimize the risk that a swap
counterparty will not satisfy its interest payment obligation under the terms of
the contract, Huntington performs credit reviews on all counterparties,
restricts the number of counterparties used to a select group of high quality
institutions, obtains collateral, and enters into formal netting arrangements.
Huntington has never experienced any past due amounts from a swap counterparty
and does not anticipate nonperformance in the future by any such counterparties.
The total notional amount of off-balance sheet instruments used by
Huntington on behalf of customers (for which the related interest rate risk is
offset by third party contracts) was $1 billion at December 31, 1999. The credit
exposure from these contracts is not material and furthermore, 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.
TABLE 9
- -----------------------------------------------------------------------------------------------------------------------
INTEREST RATE SWAP PORTFOLIO DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------------
ASSET CONVERSION SWAPS LIABILITY CONVERSION SWAPS
---------------------------------- --------------------------------- BASIS
Receive- Pay- Receive- Pay- PROTECTION
(in millions of dollars) fixed fixed Total fixed fixed Total SWAPS
- -----------------------------------------------------------------------------------------------------------------------
Notional value $ 1,545 $ 200 $ 1,745 $ 1,805 $ 700 $2,505 $ 1,275
Average maturity (years) 3.0 1.7 2.9 3.9 1.6 3.3 0.6
Market value $ (31.7) $ 1.0 $ (30.7) $ (38.8) $ 3.0 $(35.8) $ 0.2
Average rate:
Receive 6.06% 6.14% 6.06% 6.18% 6.11% 6.17% 5.91%
Pay 6.13% 6.31% 6.16% 6.14% 6.13% 6.14% 5.83%
18
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HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
Liquidity management is also a significant responsibility of ALCO. The
objective of ALCO in this regard is to maintain an optimum balance of maturities
among Huntington's assets and liabilities such that sufficient cash, or access
to cash, is available at all times to meet the needs of borrowers, depositors,
and creditors, as well as to fund corporate expansion and other activities.
A chief source of Huntington's liquidity is derived from the large retail
deposit base accessible by its network of geographically dispersed banking
offices. This core funding is supplemented by Huntington's demonstrated ability
to raise funds in capital markets and to access funds nationwide. The bank
subsidiary's $6 billion domestic bank note and $2 billion European bank note
programs are significant sources of wholesale funding. Under these programs,
unsecured senior and subordinated notes are issuable with maturities ranging
from one month to thirty years. A similar $750 million note program exists at
the parent holding company, the proceeds from which are used from time to time
to fund certain non-banking activities, finance acquisitions, repurchase
Huntington's common stock, or for other general corporate purposes. At December
31, 1999, approximately $4 billion of notes were available under these programs
to fund Huntington's future activities. Huntington also has $300 million of
capital securities outstanding through its subsidiaries, Huntington Capital I
and II. A $200 million line of credit is also available to the parent holding
company to support commercial paper borrowings and other short-term working
capital needs.
TABLE 10
- -------------------------------------------------------------
MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT OF
$100,000 OR MORE AS OF DECEMBER 31, 1999
- -------------------------------------------------------------
(in thousands of dollars)
- -------------------------------------------------------------
Three months or less $ 933,846
Over three through six months 505,041
Over six through twelve months 318,860
Over twelve months 272,804
---------------
Total $ 2,030,551
===============
While liability sources are many, significant liquidity is also available
from Huntington's investment and loan portfolios. ALCO regularly monitors the
overall liquidity position of the business and ensures that various alternative
strategies exist to cover unanticipated events. At the end of the recent year,
sufficient liquidity was available to meet estimated short-term and long-term
funding needs.
TABLE 11
- ----------------------------------------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
Balance at year-end $2,065,192 $ 2,137,374 $3,064,344
Weighted average interest rate at year-end 4.69% 4.05% 5.26%
Maximum amount outstanding at month-end during the year $3,033,277 $ 2,897,385 $3,387,690
Average amount outstanding during the year $2,417,032 $ 1,980,648 $2,733,764
Weighted average interest rate during the year 4.50% 4.72% 5.15%
CREDIT RISK
Credit risk represents the probability that a customer or counterparty may
not perform in accordance with contractual terms. Credit risk is inherent in the
financial services business and results from extending credit to customers,
purchasing mortgage-backed securities and entering into off-balance sheet
financial derivative instruments.
Huntington's exposure to credit risk is managed through the use of
consistent underwriting standards that emphasize "in-market" lending. Credit
personnel are integrally involved in the origination and underwriting process to
ensure adherence to risk policies and underwriting standards. Huntington also
manages credit risk through avoiding highly leveraged transactions, diversifying
to avoid excessive industry or other concentrations, selling participations to
third parties, and requiring collateral. 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.
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. Generally,
19
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HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
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 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 $98.2 million and $96.1 million,
respectively, at December 31, 1999, and 1998. As of the same dates,
non-performing loans represented .40% of total loans, while non-performing
assets as a percent of total loans and other real estate were .47% and .49%,
respectively. Loans past due ninety days or more but continuing to accrue
interest were $61.3 million at December 31, 1999, versus $51.0 million one year
ago.
Huntington also actively manages potential problem loans that are current
as to principal and interest but require closer monitoring in the event of
deterioration in borrower performance. These potential problem credits totaled
$63.2 million at December 31, 1999.
TABLE 12
- ----------------------------------------------------------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND PAST DUE LOANS DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans
Commercial $ 42,958 $ 34,586 $36,459 $ 25,621 $ 28,282 $ 22,523
Real Estate
Construction 10,785 10,181 5,916 1,741 1,894 4,071
Commercial 16,131 13,243 10,212 14,843 13,276 11,537
Residential 11,866 14,419 13,394 12,835 11,971 9,393
------------ ----------- ----------- ----------- ----------- ------------
Total Non-accrual Loans 81,740 72,429 65,981 55,040 55,423 47,524
Renegotiated loans 1,330 4,706 5,822 4,422 5,320 3,768
------------ ----------- ----------- ----------- ----------- ------------
TOTAL NON-PERFORMING LOANS 83,070 77,135 71,803 59,462 60,743 51,292
------------ ----------- ----------- ----------- ----------- ------------
Other real estate, net 15,171 18,964 15,343 17,208 23,598 54,153
------------ ----------- ----------- ----------- ----------- ------------
TOTAL NON-PERFORMING ASSETS $ 98,241 $ 96,099 $87,146 $ 76,670 $ 84,341 $105,445
============ =========== =========== =========== =========== ============
ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 61,287 $ 51,037 $49,608 $ 39,267 $ 30,937 $ 23,753
============ =========== =========== =========== =========== ============
NON-PERFORMING LOANS AS A % OF TOTAL LOANS 0.40% 0.40% 0.40% 0.35% 0.39% 0.36%
NON-PERFORMING ASSETS AS A % OF TOTAL
LOANS AND OTHER REAL ESTATE 0.47% 0.49% 0.49% 0.46% 0.54% 0.74%
ALLOWANCE FOR LOAN LOSSES AS A % OF NON-
PERFORMING LOANS 360.31% 377.19% 359.55% 388.11% 366.28% 439.10%
ALLOWANCE FOR LOAN LOSSES AND OTHER REAL
ESTATE AS A % OF NON-PERFORMING ASSETS 299.85% 301.00% 294.32% 297.12% 250.06% 199.12%
ACCRUING LOANS PAST DUE 90 DAYS OR MORE TO
TOTAL LOANS 0.30% 0.26% 0.28% 0.23% 0.20% 0.17%
Note: For 1999, the amount of interest income which would have been recorded
under the original terms for total loans classified as non-accrual or
renegotiated was $6.1 million. Amounts actually collected and recorded as
interest income for these loans totaled $3.5 million.
CAPITAL AND DIVIDENDS
Huntington places significant emphasis on the maintenance of strong
capital, which promotes investor confidence, provides access to the national
markets under favorable terms, and enhances business growth and acquisition
opportunities. Huntington also recognizes the importance of managing excess
capital and continually strives to maintain an appropriate balance between
capital adequacy and returns to shareholders. Capital is managed at each
subsidiary based upon the respective risks and growth opportunities, as well as
regulatory requirements.
20
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HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Average shareholders' equity was $2.1 billion for the twelve months ended
December 31, 1999, and 1998. Huntington's ratio of average equity to average
assets in the recent year was 7.47%, compared with 7.68% one year ago.
Risk-based capital guidelines established by the Federal Reserve Board set
minimum capital requirements and require institutions to calculate risk-based
capital ratios by assigning risk weightings to assets and off-balance sheet
items, such as interest rate swaps and loan commitments. These guidelines
further define "well-capitalized" levels for Tier 1, Total Capital, and Leverage
ratio purposes at 6%, 10%, and 5%, respectively. At the recent year end,
Huntington's Tier 1 capital ratio was 7.52%, its Total Capital ratio was 10.72%,
and its Leverage ratio was 6.72%, 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.
Cash dividends declared were $.76 a share in 1999, up 11.8% from 1998. A
10% stock dividend was distributed to shareholders in the year just ended,
marking the twenty-sixth consecutive year in which Huntington has issued a stock
split or stock dividend.
During 1999, Huntington repurchased approximately 3.3 million shares of its
common stock through open market and privately negotiated transactions. The 16.5
million-share authorization (after adjusting for the July 1999 ten percent stock
dividend) approved by the Board of Directors in the third quarter of 1998 is
still in process of completion. As of December 31, 1999, 11.9 million shares
remained under the authorization. Repurchased shares are being reserved for
reissue in connection with Huntington's dividend reinvestment and employee
benefit plans as well as for stock dividends, acquisitions, and other corporate
purposes.
FOURTH QUARTER RESULTS
On an operating basis, earnings for the fourth quarter of 1999 were $114.9
million, or $.50 per share, compared with $91.5 million, or $.39 per share, in
the same period last year. ROE for the current and prior year quarter was 21.64%
and 17.87%, respectively. ROA was 1.57%, versus 1.31% in last year's final three
months. Cash basis ROE was 33.69%, up from 29.44% in the comparable period of
1998. Cash basis ROA was 1.71% versus 1.45% one year ago.
Net interest income was $252.7 million in the recent quarter, a decrease of
5.5% over the corresponding period last year. This decrease reflects the decline
associated with the credit card sale as well as non-recurring events caused by
the uncertainties involving the transition to the year 2000 such as higher
short-term LIBOR rates and cash reserve levels. After adjusting for the sale of
the credit card portfolio, average total loans grew 12% and average earning
assets increased 9% over prior quarter balances as a result of strong volumes in
automobile leasing and home equity lending. Core deposits declined 1.4%
(annualized), primarily due to slight declines in transaction accounts believed
to be related to customer uncertainty surrounding the year 2000.
The provision for loan losses, favorably impacted by the credit card sale,
was $20.0 million in the last quarter of the year, compared with $34.3 million
in the same period of 1998. Annualized net charge-offs declined to .32% from
.61% of average loans in the same periods.
Securities transactions for the recent quarter included the sale of a
portion of Huntington's investment in common stock of S1 Corporation, which
netted a gain of $7.3 million. Excluding securities gains and the $108.5 million
gain from the sale of Huntington's credit card portfolio as discussed above,
non-interest income was up 7.1% to $114.3 million for the recent quarter from
$106.7 million a year ago. Growth was negatively impacted by the fourth quarter
sale of the credit card portfolio combined with lower mortgage banking income.
Significant growth was seen in service charges on deposit accounts related to
expanded cash management sales and recent pricing changes. Increased check card
and Web Bank fees drove Electronic Banking fees up 25.4% from the same period a
year ago. Brokerage and insurance income was up 35.8% from the fourth quarter
1998, led by retail investment sales.
Non-interest expense, excluding other non-recurring expenses and special
charges, totaled $204.9 million in the most recent three months, versus $208.9
million in the final three months of 1998. The decline is due to Huntington's
emphasis on efficiency and cost containment. Decreased personnel and related
expenses helped offset higher occupancy and equipment costs associated with
strategic spending for new banking offices and the move to Huntington's new
operations center. During the fourth quarter of 1999, Huntington recorded $96.8
million in costs related to the company's "Huntington 2000+" program as well as
other one-time expenses. Please refer to Huntington's previous discussion under
Non-Interest Expense for further details.
The provision for income taxes was $46.8 million for the recent quarter,
compared with $41.0 million in 1998. Huntington's effective tax rate for the
respective quarterly periods was 28.9% and 31.0%, representing the impact of the
establishment and contribution of $15 million to the private charitable
foundation.
21
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HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
YEAR 2000
Huntington, in an enterprise-wide effort, completed its preparations in
1999 for the Year 2000 date change. Huntington's Year 2000 Plan (the Plan)
addressed all systems, software, hardware, and infrastructure components. The
Plan also addressed various third-party vendors and service providers to ensure
that continued service was in place for core business activities. Furthermore,
the Plan included the update of all of Huntington's contingency plans in the
event that problems related to the Year 2000 date change arose. In addition,
Huntington placed a freeze on all changes to major business processes and
systems beginning on November 1, 1999. The purpose of this freeze was to ensure
that new programs would not be introduced to the company's existing processes
and systems that already had been validated for Year 2000 readiness. This freeze
was lifted earlier than planned on February 1, 2000.
Identifiable costs for the Year 2000 project incurred in 1999 approximated
$13 million, bringing the total cost of the project to roughly $30 million over
a three-year period. These costs incorporated not only incremental third-party
expenses but also included the salary and benefit costs of employees redeployed
and costs of the call center which handled an increased number of customer
inquiries before and after January 1, 2000. A minimal amount of expenses will be
incurred in 2000 but is not expected to materially impact the operating results
in any one period.
Huntington benefited from all of the additional work and expense by
improving its systems and processes, increasing its internal controls through
the auditing and quality assurance programs, improving relationships among
business lines, and updating all of its contingency plans. To date, Huntington
has not experienced any business disruptions or corruption of its systems.
Huntington will continue to monitor its systems and third party relationships
throughout 2000 to address unanticipated problems (which may include problems
associated with non-Year 2000 compliant third parties and disruptions to the
economy in general) and ensure that all processes continue to function properly.
PENDING ACQUISITION
On February 7, 2000, Huntington announced that it had entered into a merger
agreement with Empire Banc Corporation, a $506 million one-bank holding company
headquartered in Traverse City, Michigan. Huntington will issue its common stock
at a ratio of 2.0355 shares for each outstanding share of Empire Banc common
stock in a transaction that will be accounted for as a purchase. Huntington
plans to purchase on the open market and then reissue approximately 6.5 million
shares in connection with the transaction. The merger is expected to be
completed by the end of the second quarter of 2000.
22
24
HUNTINGTON BANCSHARES INCORPORATED
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
- -------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------- ----------------------------------- -----------------------------------