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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, 2000
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
(Exact name of registrant as specified in its charter)
MARYLAND 31-0724920
(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, 2000, was $3,623,508,095. As of February 21, 2001,
250,993,499 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 2001 Annual
Shareholders' Meeting.
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HUNTINGTON BANCSHARES INCORPORATED
INDEX
Part I.
Item 1. Business 2
Item 2. Properties 6
Item 3. Legal Proceedings 6
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 7
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Report of Management 27
Report of Independent Auditors 27
Consolidated Balance Sheets --
December 31, 2000 and 1999 28
Consolidated Statements of Income --
Twelve Months Ended December 31, 2000, 1999 and 1998 29
Consolidated Statements of Changes in Shareholders' Equity --
Twelve Months Ended December 31, 2000, 1999 and 1998 30
Consolidated Statements of Cash Flows --
Twelve Months Ended December 31, 2000, 1999 and 1998 31
Notes to Consolidated Financial Statements 32
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 that also qualified (in March
2000) as a financial holding company. Huntington is 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. At December 31, 2000, Huntington's subsidiaries had 175
banking offices in Ohio, 139 banking offices in Florida, 127 banking offices in
Michigan, 32 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, 2000, Huntington
and its subsidiaries had 9,693 full-time equivalent employees.
A brief discussion of Huntington's lines of business can be found in its
Management's Discussion and Analysis beginning on page 11 of this report. The
financial statement results of these lines of business can be found in Note 22
of the Notes to Consolidated Financial Statements beginning 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, and for banks to establish interstate branches
(subject to certain limitations by individual states), actual or potential
competition in each of Huntington's markets has been intensified. 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 a broad range of financial activities, including defined securities
and insurance activities, and to affiliate with securities and insurance firms.
Correspondingly, it permits securities and insurance firms to engage in banking
activities under specified conditions. The same legislation allows banks to have
financial subsidiaries that may engage in certain activities not otherwise
permissible for banks.
In June 2000, Huntington consummated a merger with Empire Banc Corporation,
Traverse City, Michigan. In August 2000, Huntington consummated a merger with J.
Rolfe Davis Insurance Agency, Inc., Maitland, Florida. Additional information
about these acquisitions can be found in Note 23 in the Notes to Consolidated
Financial Statements on page 53.
REGULATORY MATTERS
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.
GENERAL
As a financial holding company, Huntington is subject to examination and
supervision by 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 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. Pursuant
to the Gramm-Leach-Bliley Act (the "GLB Act"), however, Huntington may engage
in, or own or control companies that engage in, any activities determined by the
Federal Reserve Board to be financial in nature or incidental to activities
financial in nature, or complementary to financial activities, provided that
such complementary activities do not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The GLB
Act designated various lending, advisory, insurance underwriting, securities
underwriting, dealing and market-making, and merchant banking activities (as
well as those
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activities previously approved for bank holding companies by the Federal Reserve
Board) as financial in nature, and authorized the Federal Reserve Board, in
coordination with the Comptroller of the Currency, to determine that additional
activities are financial in nature or incidental to activities that are
financial in nature. Except for the acquisition of a savings association,
Huntington may commence any new financial activity with only subsequent 30-day
notice to the Federal Reserve Board.
Huntington's national bank subsidiary is subject to examination and
supervision by the Office of the Comptroller of the Currency ("OCC"). Its
deposits are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation ("FDIC") although certain deposits were acquired from
savings associations and are insured by the Savings Association Insurance Fund
("SAIF") of the FDIC. Huntington's nonbank subsidiaries are also subject to
examination and supervision by the Federal Reserve Board (or, in the case of
nonbank subsidiaries of the national bank subsidiary, by OCC), and examination
by other federal and state agencies, including, in the case of certain
securities activities, regulation by the Securities and Exchange Commission.
In addition to the impact of federal and state 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.
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, 2000,
approximately $285.8 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. 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, 2000, Huntington declared cash dividends to its shareholders of
approximately $189.2 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
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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 2001 of approximately $278.9 million plus an additional amount
equal to its net profits during 2001.
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 2001.
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, non-mortgage servicing assets, and
purchased credit card relationships, provided that, in the aggregate, the total
amount of these items included in capital does not exceed 100% of Tier 1
capital.
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.
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.
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As of December 31, 2000, the Tier 1 risk-based capital ratio, total
risk-based capital ratio, and Tier 1 leverage ratio for Huntington were as
follows:
Actual
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Tier 1 7.19%
Total Risk-Based 10.46%
Tier 1 Leverage 6.93%
As of December 31, 2000, 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.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
("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.
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.
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 subsidiary to accept brokered deposits.
Under the regulatory definition of brokered deposits, Huntington's depository
subsidiary had $256.1 million of brokered deposits at December 31, 2000.
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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 became effective on 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 company portfolio investing, subject to significant
limitations; and any activities previously found by the Federal Reserve Board to
be closely related to banking.
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 company 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. Federal bank regulatory agencies issued a
variety of proposed, interim, and final rules 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, a 470,000 square foot Business Service
Center which serves as Huntington's primary operations and data center; 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, and the Business Service Center. All of the
other major properties are held under long-term leases.
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.
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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 44.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
Part II
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ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of Huntington Bancshares Incorporated is traded on the
NASDAQ Stock National Market System under the symbol "HBAN". The stock is listed
as "HuntgBcshr" or "HuntBanc" in most newspapers. As of January 31, 2001,
Huntington had 32,374 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 25 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 9 and 17 of Notes to
Consolidated Financial Statements on pages 39 and 46, 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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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Huntington Bancshares Incorporated (Huntington) is a multi-state financial
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 Ohio, Michigan, Florida,
West Virginia, Indiana, and Kentucky. Huntington has foreign offices in the
Cayman Islands and Hong Kong.
FORWARD-LOOKING STATEMENTS
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements about
Huntington, including descriptions of products or services, plans or objectives
of its management for future operations, and forecasts of its revenues,
earnings, or other measures of economic performance. Forward-looking statements
can be identified by the fact that they do not relate strictly to historical or
current facts.
By their nature, forward-looking statements are subject to numerous
assumptions, risks, and uncertainties. A number of factors--many of which are
beyond Huntington's control--could cause actual conditions, events, or results
to differ significantly from those described in the forward-looking statements.
These factors include, but are not limited to, changes in business and economic
conditions; movements in interest rates; competitive pressures on product
pricing and services; success and timing of business strategies; successful
integration of acquired businesses; the nature, extent, and timing of
governmental actions and reforms; and extended disruption of vital
infrastructure.
Forward-looking statements speak only as of the date they are made.
Huntington does not update forward-looking statements to reflect circumstances
or events that occur after the date this report is filed with the Securities and
Exchange Commission.
The management of Huntington encourages readers of this report to
understand forward-looking statements to be strategic objectives rather than
absolute targets of future performance. The following discussion and analysis of
the financial performance of Huntington should be read in conjunction with the
financial statements, notes, and other information contained in this document.
ACQUISITIONS
Huntington acquired Empire Banc Corporation (Empire), a $506 million
one-bank holding company headquartered in Traverse City, Michigan, on June 23,
2000. Huntington reissued approximately 6.5 million shares of common stock, all
of which were purchased on the open market during the first quarter of 2000, in
exchange for all of the common stock of Empire. Total loans and deposits
increased $395 million and $435 million, respectively, at the date of the
merger. Additionally, Huntington acquired J. Rolfe Davis Insurance Agency, Inc.
(JRD), headquartered in Maitland, Florida, on August 31, 2000. Huntington paid
$8.2 million in cash and issued approximately 695,000 shares of common stock for
all of the common stock of JRD. Both transactions were accounted for as
purchases; accordingly, the results of Empire and JRD have been included in
Huntington's consolidated financial statements from the respective dates of
acquisition.
OVERVIEW
Huntington reported net income of $328.4 million, or $1.32 per share, in
2000, compared with $422.1 million, or $1.65 per share, in 1999, and $301.8
million, or $1.17 per share, in 1998. These results included after-tax special
charges of $32.5 million, $62.9 million, and $60.3 million, respectively.
Excluding these items and a $70.6 million after-tax gain in 1999 on the sale of
Huntington's credit card portfolio, operating earnings for 2000 were $360.9
million, or $1.45 per share versus $414.4 million, or $1.62 per share, and
$362.1 million, or $1.40 per share, in 1999 and 1998, respectively. Per share
amounts for all prior periods have been restated to reflect the ten-percent
stock dividend distributed to shareholders in July 2000. On an operating basis,
return on average assets (ROA) was 1.26% in 2000, 1.44% in 1999 and 1.35% in
1998. Return on average equity (ROE) totaled 15.84% for the recent twelve
months, compared with 19.31% and 17.54% in the two preceding years.
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- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 1 CONSOLIDATED SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
(in thousands of dollars, except per
share amounts) 2000 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Total interest income $ 2,108,505 $ 2,026,002 $ 1,999,364 $ 1,981,473 $ 1,775,734 $ 1,709,627
Total interest expense 1,166,073 984,240 978,271 954,243 880,648 856,860
Net interest income 942,432 1,041,762 1,021,093 1,027,230 895,086 852,767
Securities gains 37,101 12,972 29,793 7,978 17,620 9,380
Gains on sale of credit card portfolios -- 108,530 9,530 -- -- --
Provision for loan losses 90,479 88,447 105,242 107,797 76,371 36,712
Net income 328,446 422,074 301,768 292,663 304,269 281,801
Operating net income (1) 360,946 414,444 362,068 338,897 304,269 281,801
PER COMMON SHARE (2)
Net income
Basic 1.32 1.66 1.18 1.15 1.19 1.07
Diluted 1.32 1.65 1.17 1.14 1.18 1.06
Diluted--Operating (1) 1.45 1.62 1.40 1.32 1.18 1.06
Cash dividends declared 0.76 0.68 0.62 0.56 0.51 0.46
Book value at year-end 9.43 8.67 8.43 7.94 7.11 6.90
BALANCE SHEET HIGHLIGHTS
Total assets at year-end 28,599,377 29,036,953 28,296,336 26,730,540 24,371,946 23,495,337
Total long-term debt at year-end 870,976 697,677 707,359 498,889 550,531 517,202
Average long-term debt 823,555 702,974 620,688 526,379 515,664 529,140
Average shareholders' equity 2,279,230 2,146,735 2,064,241 1,893,788 1,776,151 1,742,826
Average total assets $28,720,508 $28,739,450 $26,891,558 $25,150,659 $23,374,490 $22,098,785
- ------------------------------------------------------------------------------------------------------------------------------------
KEY RATIOS AND STATISTICS 2000 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
MARGIN ANALYSIS--AS A%
OF AVERAGE EARNING ASSETS (3)
Interest Income 8.31% 7.97% 8.33% 8.52% 8.26% 8.43%
Interest Expense 4.58 3.86 4.05 4.08 4.07 4.19
----- ----- ----- ----- ----- -----
NET INTEREST MARGIN 3.73% 4.11% 4.28% 4.44% 4.19% 4.24%
===== ===== ===== ===== ===== =====
RETURN ON
Average total assets 1.14% 1.47% 1.12% 1.16% 1.30% 1.28%
Average total assets--Operating (1) 1.26 1.44 1.35 1.35 1.30 1.28
Average shareholders' equity 14.41 19.66 14.62 15.44 17.13 16.17
Average shareholders' equity--Operating (1) 15.84 19.31 17.54 17.88 17.13 16.17
Dividend payout ratio 57.55 41.53 53.15 49.67 42.22 43.82
Average shareholders' equity to
average total assets 7.94 7.47 7.68 7.53 7.60 7.89
Tier I risk-based capital ratio 7.19 7.52 7.10 8.83 8.11 8.66
Total risk-based capital ratio 10.46 10.72 10.73 11.68 11.29 12.01
Tier I leverage ratio 6.93% 6.72% 6.37% 7.77% 6.80% 6.99%
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA 2000 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Full-time equivalent employees 9,693 9,516 10,159 9,485 9,467 9,083
Banking offices 510 517 531 454 429 406
(1) Excludes special charges and 1999 gain from the sale of Huntington's credit card portfolio, net of 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
Cash basis operating earnings (which exclude the effect of amortization of
goodwill and other intangibles) were $1.57 per share for 2000 versus $1.74 per
share and $1.49 per share for 1999 and 1998, respectively. Cash basis ROA and
ROE, which are computed using cash basis operating earnings as a percentage of
average tangible assets and average tangible equity, were 1.40% and 24.97% in
2000. On this same basis, ROA was 1.58% and 1.45%, respectively, in 1999 and
1998 and ROE was 30.30% and 24.35%.
Total assets were $28.6 billion at December 31, 2000, down from $29.0
billion at the end of last year. Assets were lower, as Huntington repositioned
its balance sheet in 2000. These actions included automobile loan
securitizations of $1.4 billion and the sale of approximately $1.7 billion of
lower-yielding fixed-income securities from Huntington's investment portfolio.
Managed total loans, which include securitized loans, increased 9% from
last year, after adjusting for the impact of the Empire acquisition and the
fourth quarter 1999 sale of Huntington's credit card portfolio. Managed consumer
loans grew 13%, driven by automobile financing and home equity lending, which
grew 17% and 21%, respectively. Commercial loans increased 4% from a year ago.
Core deposits totaled $18.6 billion during 2000 and were essentially
unchanged from the levels reported last year. When combined with other core
funding sources, core deposits provide 79% of Huntington's funding needs.
Short and medium-term borrowings declined from a year ago due to the
balance sheet efficiency program referenced above. Long-term debt increased over
last year as Huntington issued $150 million of regulatory capital qualifying
subordinated notes in the first quarter of 2000 through its bank subsidiary.
- --------------------------------------------------------------------------------
TABLE 2 LOAN PORTFOLIO COMPOSITION
DECEMBER 31,
-----------------------------------------------
(in millions of dollars) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------
Commercial $ 6,634 $ 6,300 $ 6,027 $ 5,271 $ 5,130
Real Estate
Construction 1,319 1,237 919 864 699
Commercial 2,253 2,151 2,232 2,237 2,137
Consumer
Loans 6,388 6,793 6,958 6,463 6,123
Lease financing 3,069 2,742 1,911 1,542 1,183
Residential Mortgage 947 1,445 1,408 1,361 1,486
------- ------- ------- ------- -------
TOTAL LOANS $20,610 $20,668 $19,455 $17,738 $16,758
======= ======= ======= ======= =======
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, 2000
- --------------------------------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
---------- ---------- ---------- ----------
Commercial $3,783 $1,956 $ 895 $6,634
Real estate - construction 690 426 203 1,319
------ ------ ------ ------
TOTAL $4,473 $2,382 $1,098 $7,953
====== ====== ====== ======
Variable interest rates $1,447 $ 731
Fixed interest rates 935 367
------ ------
TOTAL $2,382 $1,098
====== ======
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.
10
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LINES OF BUSINESS
Retail Banking, Corporate Banking, Dealer Sales, and the Private Financial
Group are the company's major business lines. A fifth segment includes the
impact of 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 to the Consolidated Financial Statements.
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, business loans, personal and business
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 totaled $164.6 million in 2000 compared with
$170.8 million in 1999 and $168.9 million in 1998. Excluding the revenue and
expenses related to the credit card portfolio that was sold in last year's
fourth quarter, the 1999 and 1998 earnings were $155.5 million and $153.0
million, respectively. On this basis, Retail's net income increased 6% from
1999. This increase was achieved despite a decline in net interest income due to
higher deposit costs and a $3.3 million increase in the provision for loan
losses. Non-interest income for the year was relatively unchanged versus 1999,
as a 3% increase in service charges and a 17% increase in electronic banking
fees was offset by a significant decline in mortgage banking revenue. Mortgage
loan originations were adversely impacted by higher market interest rates
throughout much of 2000. Non-interest expense improved 2% from last year. The
Retail segment contributed 46% of Huntington's 2000 operating earnings and
comprised 30% of its total loan portfolio and 84% of its total core deposits.
CORPORATE BANKING
This segment represents the middle-market and large corporate banking
customers, which use a variety of 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 reported net income of $136.1 million for 2000 versus
$131.6 million and $115.3 million for the previous two years. Net interest
income increased 5% in 2000 driven by loan growth. The 6% increase in
non-interest income was due in large part to increases in service charges.
Non-interest expenses increased 13% in 2000 due to investments in personnel and
technology to support revenue growth initiatives. Corporate Banking contributed
38% of Huntington's 2000 operating earnings, and represented 36% of the total
loan portfolio and 12% of its total core deposits.
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. The
consumer activities comprise the vast majority of the business and involve the
financing of vehicles purchased or leased by individuals through dealerships.
Net income for this segment totaled $50.4 million, $38.6 million, and $53.5
million in each of the last three years. Dealer Sales' results reflect the
impact of after-tax charges of $32.5 million in 2000 and $37.8 million in 1999
to write-down vehicle lease residual values. Excluding these charges, net income
was $82.9 million for 2000, compared with $76.6 million for 1999, and $53.5
million for 1998. Net-interest income was relatively unchanged due to $1.4
billion of loan securitization activity in the recent year. The increase from
1999 in the provision for loan losses of $10.1 million reflects higher net
charge-offs of .72%, versus .59% in 1999 and .82% in 1998. Non-interest income
improved $21.8 million including $17.1 million of revenue from the
securitizations completed in 2000. Dealer Sales comprised 23% of Huntington's
operating earnings in 2000 and 30% of its outstanding loans.
PRIVATE FINANCIAL GROUP
Huntington's Private Financial Group (PFG) provides an array of products
and services including personal trust, asset management, investment advisory,
insurance, and deposit and loan products. The PFG business line is designed to
provide higher wealth customers with "one-stop shopping" for all their financial
needs.
11
13
PFG reported net income of $26.0 million, $25.8 million, and $13.8 million
in 2000, 1999, and 1998, respectively. Non-interest income increased in the
recent twelve months due to higher trust and brokerage and insurance income
aided in part by the acquisition of JRD. Related increases in sales commissions
contributed to higher non-interest expense and reflect the impact of JRD as
well. This segment represented 7% of Huntington's 2000 operating earnings and 3%
of total loans.
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 $4.1
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. Amortization
expense of intangible assets is a significant component of Treasury/Other.
Treasury/Other segment results include special charges of $38.6 million in
1999 and $90.0 million in 1998. The 1999 results also include the gain from the
credit card sale of $108.5 million. On an operating basis, this segment reported
a loss of $48.7 million for 2000, versus net income of $9.6 million in 1999, and
$10.5 million in 1998. The decline relates to lower net interest income
resulting from rising market interest rates and the balance sheet efficiency
program mentioned earlier. As more fully discussed later, the sensitivity of net
interest income to changing interest rates is down from previous years,
consistent with Huntington's goal of a more stable revenue base. Non-interest
income includes securities gains realized in 2000 from the sale of equity
investments, offset by losses recognized from the sale of lower-yielding
investment securities and the first quarter 2000 automobile loan securitization.
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 4 CHANGE IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1)
2000 1999
-------------------------------------------- ---------------------------------
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) $ --- $ (0.1) $ (0.1) $ (0.5) $ (0.6)
Trading account securities 0.1 0.2 0.3 0.1 0.1 0.2
Federal funds sold and securities purchased
under resale agreements 4.1 0.2 4.3 (11.3) (0.4) (11.7)
Mortgages held for sale (9.6) 2.0 (7.6) (4.0) 0.1 (3.9)
Taxable securities (35.4) 7.9 (27.5) (0.7) (11.1) (11.8)
Tax-exempt securities (1.9) (0.8) (2.7) 4.1 (2.5) 1.6
Total loans 49.8 64.9 114.7 142.7 (90.8) 51.9
------------ --------------- -------------- ---------- ----------- ---------
TOTAL EARNING ASSETS 7.0 74.4 81.4 130.8 (105.1) 25.7
------------ --------------- -------------- ---------- ----------- ---------
Interest bearing demand deposits 5.2 32.3 37.5 13.4 (3.3) 10.1
Savings deposits (6.2) 26.6 20.4 15.7 (3.7) 12.0
Certificates of deposit 5.3 44.8 50.1 (38.0) (31.9) (69.9)
Other domestic time deposits 16.4 2.7 19.1 3.1 (0.8) 2.3
Foreign time deposits 10.4 5.0 15.4 13.4 (0.7) 12.7
Short-term borrowings (29.4) 28.2 (1.2) 21.0 (4.4) 16.6
Medium-term notes (13.1) 32.4 19.3 12.1 (6.7) 5.4
Subordinated notes and other long-term debt,
including capital securities 7.8 13.5 21.3 6.9 9.8 16.7
------------ --------------- -------------- ---------- ----------- ---------
TOTAL INTEREST BEARING LIABILITIES (3.6) 185.5 181.9 47.6 (41.7) 5.9
------------ --------------- -------------- ---------- ----------- ---------
NET INTEREST INCOME $ 10.6 $ (111.1) $ (100.5) $ 83.2 $ (63.4) $ 19.8
============ =============== ============== ========== =========== =========
(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.
12
14
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $942.4 million in 2000, versus $1,041.8 million in
1999, and $1,021.1 million in 1998. The net interest margin, on a fully tax
equivalent basis, was 3.73% during the recent year, compared with 4.11% and
4.28% during each of the last two years. Higher funding costs due to rising
interest rates and changes in the mix of Huntington's core deposit base were the
primary driver of these declines. Funding costs increased 84 basis points from
1999 while the yield on earning assets was up only 34 basis points. Core deposit
costs increased 67 basis points, as the mix shifted to higher-rate accounts
during the year. This migration accelerated in 2000 following the introduction
of new products designed to improve customer retention in the intensely
competitive market for retail deposits. To a lesser degree, the reduction in net
interest income and the margin also reflects the impact of the fourth quarter
1999 credit card sale and the automobile loan securitizations in 2000.
Huntington's interest rate risk position is further discussed in the "Interest
Rate Risk Management" section of this report.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is the charge to pre-tax earnings necessary
to maintain the allowance for loan losses (ALL) at a level adequate to absorb
management's estimate of inherent losses in the loan portfolio. The provision
for loan losses was $90.5 million in 2000 versus $88.4 million and $105.2
million in the past two years.
- ------------------------------------------------------------------------------------------------------------------
TABLE 5 SUMMARY OF ALLOWANCE FOR LOAN LOSSES AND SELECTED STATISTICS
(in thousands of dollars) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES, BEGINNING OF YEAR $ 299,309 $ 290,948 $ 258,171 $ 230,778 $ 222,487
LOAN LOSSES
Commercial (18,013) (16,203) (24,512) (23,276) (23,904)
Real estate
Construction (238) (638) (80) (375) --
Commercial (1,522) (2,399) (2,115) (728) (1,476)
Consumer
Loans (65,211) (78,688) (84,961) (74,761) (59,843)
Leases (24,721) (12,959) (13,444) (9,648) (4,492)
Residential Mortgage (1,140) (1,404) (1,243) (1,935) (1,292)
--------- --------- --------- --------- ---------
Total loan losses (110,845) (112,291) (126,355) (110,723) (91,007)
--------- --------- --------- --------- ---------
RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF
Commercial 4,201 5,303 4,546 4,373 4,884
Real estate
Construction 165 192 441 111 556
Commercial 268 1,260 1,800 315 1,124
Consumer
Loans 19,486 22,650 23,140 16,382 13,457
Leases 3,503 2,532 1,554 1,057 721
Residential Mortgage 133 268 367 304 278
--------- --------- --------- --------- ---------
Total recoveries 27,756 32,205 31,848 22,542 21,020
--------- --------- --------- --------- ---------
NET LOAN LOSSES (83,089) (80,086) (94,507) (88,181) (69,987)
--------- --------- --------- --------- ---------
ALLOWANCE OF SECURITIZED LOANS (16,719) -- -- -- --
PROVISION FOR LOAN LOSSES 90,479 88,447 105,242 107,797 76,371
ALLOWANCE ACQUIRED/OTHER 7,900 -- 22,042 7,777 1,907
--------- --------- --------- --------- ---------
ALLOWANCE FOR LOAN LOSSES, END OF YEAR $ 297,880 $ 299,309 $ 290,948 $ 258,171 $ 230,778
========= ========= ========= ========= =========
AS A % OF AVERAGE TOTAL LOANS
Net loan losses 0.40% 0.40% 0.51% 0.50% 0.44%
Provision for loan losses 0.44% 0.44% 0.57% 0.61% 0.48%
Allowance for loan losses as a %
of total loans (end of period) 1.45% 1.45% 1.50% 1.46% 1.38%
Net loan loss coverage (1) 7.23x 8.63x 6.72x 7.01x 7.62x
(1) Income before income taxes (excluding special charges and gains from sale
of credit card portfolios) and the provision for loan losses to net loan
losses.
13
15
Net charge-offs as a percent of average loans totaled .40% for both 2000
and 1999 and were .51% in 1998. Consistent with broader industry trends,
Huntington's charge-offs increased in the second half of 2000 and were .50% in
the fourth quarter. Net change offs are expected to be above these recent levels
in 2001.
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 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
deteriorates, the dollar exposure could significantly vary from estimated
amounts. Additionally, the impact on individual customers from recent economic
events may yet be known. To ensure adequacy to a higher degree of confidence, a
portion of the ALL is considered unallocated. For analytical purposes, the
allocation of the ALL is provided in Table 6. While amounts are allocated to
various portfolio segments, the total ALL, excluding impairment reserves
prescribed under provisions of Statement of Financial Accounting Standard No.
114, is available to absorb losses from any segment of the portfolio.
The ALL was $297.9 million at December 31, 2000, and $299.3 million at
year-end 1999, representing 1.45% of total loans at both dates. Non-performing
loans were covered by the ALL 3.2 times versus 3.6 times at the end of last
year. Additional information regarding the ALL and asset quality appears in the
"Credit Risk" section.
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 6 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Consumer
Real Estate ------------------------------------
---------------------- Residential
(in thousands of dollars) Comm'l Const. Comm'l Loans Leases Mortgage Unalloc. Total
- ------------------------------------------------------------------------------------------------------------------------------------
2000:
AMOUNT $ 104,968 $ 13,442 $ 33,909 $ 70,639 $ 32,951 $ 3,575 $ 38,396 $ 297,880
% OF LOANS TO TOTAL LOANS 32.2% 6.4% 10.9% 31.0% 14.9% 4.6% -- 100.0%
1999:
Amount $ 94,978 $ 15,452 $ 32,073 $ 78,655 $ 25,378 $ 4,804 $ 47,969 $ 299,309
% of Loans to Total Loans 30.5% 6.0% 10.4% 32.9% 13.3% 6.9% -- 100.0%
1998:
Amount $ 82,129 $ 11,112 $ 35,206 $ 104,198 $ 17,823 $ 4,864 $ 35,616 $ 290,948
% of Loans to Total Loans 31.0% 4.7% 11.5% 35.8% 9.8% 7.2% -- 100.0%
1997:
Amount $ 86,439 $ 8,140 $ 35,051 $ 75,405 $ 6,631 $ 3,547 $ 42,958 $ 258,171
% of Loans to Total Loans 29.7% 4.9% 12.6% 36.4% 8.7% 7.7% -- 100.0%
1996:
Amount $ 113,555 $ 2,033 $ 14,698 $ 54,564 $ 3,457 $ 4,289 $ 38,182 $ 230,778
% of Loans to Total Loans 30.6% 4.2% 12.8% 36.5% 7.1% 8.8% -- 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Non-interest income, excluding gains from investment security and loan
sales, was $456.5 million during the recent twelve months, compared with $452.1
million in 1999 and $398.9 million in 1998. Improvements in several key
non-interest income categories offset the impact of lower mortgage banking
income and the reduced level of credit card fees following the portfolio sale
last year. Brokerage and insurance income grew 19% during 2000 due to strong
mutual fund and annuity sales, primarily during the first half of the year, and
the JRD acquisition. Electronic banking fees grew 18% as a result of higher
customer usage of Huntington's check card product and the expansion of
Huntington's ATM network. The "Other" component of non-interest revenue includes
$6.9 million of income from the automobile loan securitization transactions
completed in 2000.
Investment security gains totaled $37.1 million for 2000, compared with
$13.0 million a year ago and $29.8 million in 1998. Sales by Huntington of
certain equity investments generated gross gains of $66.5 million in 2000
14
16
and $31.0 million last year. Substantially offsetting these gains in both years
were losses from the sale of lower yielding, fixed-income investment securities.
NON-INTEREST EXPENSE
Non-interest expense, before special charges, was $835.6 million in 2000,
compared with $815.3 million and $823.9 million in 1999 and 1998, respectively.
Higher facility and equipment costs related to the new operations center, which
opened in the fall of 1999, and other expansion-related activities contributed
to the growth in expenses in the recent year. Additionally, expenses were higher
in the second half of 2000, as Huntington made investments in technology and
personnel and acquired Empire and JRD to improve its competitive position and to
support revenue growth. Because of the above-mentioned factors, management
expects that non-interest expense in 2001 will increase from the 4th quarter
level.
SPECIAL CHARGES
Huntington recorded special charges totaling $50.0 million in the recent
year, $96.8 million in 1999, and $90.0 million in 1998. The $50.0 million charge
in 2000 and $58.2 million of the 1999 charge represent write-downs of residual
values related to Huntington's $3.0 billion vehicle lease portfolio. Of the
$108.2 million total charge, $71.4 million remained available at December 31,
2000, to cover estimated losses inherent in the portfolio. Based on management's
projections, the remaining amount is adequate to absorb the estimated impairment
losses in the portfolio at December 31, 2000. Additionally, Huntington has taken
actions, including no longer capitalizing the value of customer-added options,
that are expected to mitigate residual value exposure on new business.
The 1999 charge also included $38.6 million 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+" was 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. The 1998 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.
PROVISION FOR INCOME TAXES
The provision for income taxes was $131.4 million, $192.7 million, and
$138.4 million in each of the last three years. Huntington's effective tax rate
was 28.6% in 2000 versus approximately 31% in 1999 and 1998. Based on
information currently available, Huntington expects its 2001 effective tax rate
to remain under 30%.
- ------------------------------------------------------------------------------------------------------
TABLE 7 INVESTMENT SECURITIES
DECEMBER 31,
------------------------------------
(in thousands of dollars) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
U.S. Treasury and Federal Agencies $ -- $ -- $ 156
States and political subdivisions 16,336 18,765 24,778
---------- ---------- ----------
TOTAL INVESTMENT SECURITIES $ 16,336 $ 18,765 $ 24,934
========== ========== ==========
AMORTIZED COST AND FAIR VALUES BY MATURITY AT DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------------------
AMORTIZED FAIR
(in thousands of dollars) COST VALUE YIELD
- ------------------------------------------------------------------------------------------------------
States and political subdivisions
Under 1 year $ 3,139 $ 3,115 7.95%
1-5 years 10,536 10,578 7.66%
6-10 years 2,193 2,234 8.34%
Over 10 years 468 487 8.28%
---------- ----------
Total 16,336 16,414
---------- ----------
TOTAL INVESTMENT SECURITIES $ 16,336 $ 16,414
========== ==========
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.
15
17
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
- -----------------------------------------------------------------------------------------
TABLE 8 SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
---------------------------------------------
(in thousands of dollars) 2000 1999 1998
- ----------------------------------------------------------------------------------------
U.S. Treasury and Federal Agencies $3,284,031 $4,165,342 $4,096,134
Other 806,494 704,861 685,281
---------- ---------- ----------
TOTAL SECURITIES AVAILABLE FOR SALE $4,090,525 $4,870,203 $4,781,415
========== ========== ==========
AMORTIZED COST AND FAIR VALUES BY MATURITY AT DECEMBER 31, 2000
- --------------------------------------------------------------------------------------
AMORTIZED FAIR
(in thousands of dollars) COST VALUE YIELD(1)
- --------------------------------------------------------------------------------------
U.S. Treasury
Under 1 year $ 1,455 $ 1,466 6.17%
1-5 years 2,007 2,110 7.00%
6-10 years 6,407 6,706 5.73%
Over 10 years 413 446 6.25%
---------- ----------
Total 10,282 10,728
---------- ----------
Federal Agencies
Mortgage-backed securities
6-10 years 22,757 22,987 6.51%
Over 10 years 1,515,883 1,508,914 6.56%
---------- ----------
Total 1,538,640 1,531,901
---------- ----------
Other agencies
Under 1 year 20,000 19,913 6.62%
1-5 years 1,029,073 1,017,230 5.58%
6-10 years 146,376 144,313 6.53%
Over 10 years 566,760 559,946 6.23%
---------- ----------
Total 1,762,209 1,741,402
---------- ----------
Total U.S. Treasury and Federal Agencies 3,311,131 3,284,031
---------- ----------
Other
Under 1 year 21,098 20,826 8.77%
1-5 years 215,978 217,453 9.57%
6-10 years 88,872 87,415 8.13%
Over 10 years 403,730 388,731 6.55%
Marketable equity securities 87,674 92,069
---------- ----------
Total 817,352 806,494
---------- ----------
TOTAL SECURITIES AVAILABLE FOR SALE $4,128,483 $4,090,525
========== ==========
At December 31, 2000, 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.
Marketable equity securities are excluded.
16
18
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-month period given a gradual and
directional shift in interest rates. The income simulation model used by
Huntington captures all assets, liabilities, and off-balance sheet financial
instruments, accounting for significant variables that are believed to be
affected by interest rates. These include prepayment speeds on mortgages and
consumer installment loans, cash flows of loans and deposits, principal
amortization on revolving credit instruments, and balance sheet growth
assumptions.
The model also captures embedded options, e.g. interest rate caps/floors or
call options, and accounts for changes in rate relationships, as various rate
indices lead or lag changes in market rates. While these assumptions are
inherently uncertain, management assigns probabilities and, therefore, believes
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, 2000, the results of Huntington's sensitivity analysis
indicated that net interest income would be expected to decline by approximately
1.4%, if rates rose 100 basis points and would drop an estimated 3.0%, in the
event of a gradual 200 basis point increase. If rates declined 100 and 200 basis
points, Huntington's net interest income would benefit 1.3% or 2.5%,
respectively. Huntington's recent analysis shows a meaningful reduction in
sensitivity to changing interest rates compared with year-end 1999, in which the
risk to net interest income of a 200 basis point increase was 4.7%. This
reduction is indicative of the balance sheet efficiency efforts described
previously.
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 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, 2000. 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
- ----------------------------------------------------------------------------------------------------------------------------
TABLE 9 INTEREST RATE SWAP PORTFOLIO AT DECEMBER 31, 2000
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 $ 1,275 $ 200 $1,475 $1,410 $ 3,410 $ 4,820 $ 200
Average maturity (years) 1.7 0.7 1.6 5.0 0.6 1.9 0.7
Market value $ (2.0) $ (0.3) $ (2.3) $ 22.3 $ (14.5) $ 7.8 $ 0.6
Average rate:
Receive 6.02% 6.65% 6.11% 6.51% 6.71% 6.65% 6.55%
Pay 6.72% 6.31% 6.67% 6.81% 6.71% 6.74% 6.60%
- ----------------------------------------------------------------------------------------------------------------------------
17
19
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 with notional values of $155 million 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 amounts 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, 2000, Huntington's credit
risk from interest rate swaps used for asset/liability management purposes was
$41.7 million, which represents the sum of the aggregate fair value of positions
that have become favorable to Huntington, including any accrued interest
receivable due from counterparties. In order to minimize the risk that a swap
counterparty will not satisfy its interest payment obligation under the terms of
the contract, Huntington performs credit reviews on all counterparties,
restricts the number of counterparties used to a select group of high quality
institutions, obtains collateral, and enters into formal netting arrangements.
Huntington has never experienced any past due amounts from a swap counterparty
and does not anticipate nonperformance in the future by any such counterparties.
At December 31, 2000, 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 $1.1 billion. 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.
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 along with a similar $750 million note program at the parent company
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. The proceeds from the parent's note program 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, 2000, approximately $3.6 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 $140 million line of credit is also available to the parent
holding company to support commercial paper borrowings and other short-term
working capital needs.
While liability sources are many, significant liquidity is also available
from Huntington's investment and loan portfolios. ALCO regularly monitors the
overall liquidity position of the business and ensures that various alternative
strategies exist to cover unanticipated events. At the end of the recent year,
management believes sufficient liquidity was available to meet estimated
short-term and long-term funding needs.
TABLE 10 MATURITY OF DOMESTIC CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
- -------------------------------------------------------------------------
(in thousands of dollars) December 31, 2000
- -------------------------------------------------------------------------
Three months or less $ 697,551
Over three through six months 284,293
Over six through twelve months 360,035
Over twelve months 434,774
----------
Total $1,776,653
==========
18
20
- ---------------------------------------------------------------------------------------------------------------------
TABLE 11 SHORT-TERM BORROWINGS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
(in thousands of dollars) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
Balance at year-end $ 1,822,480 $ 2,065,192 $ 2,137,374
Weighted average interest rate at year-end 5.91% 4.69% 4.05%
Maximum amount outstanding at month-end during the year $ 2,093,546 $ 3,033,277 $ 2,897,385
Average amount outstanding during the year $ 1,831,228 $ 2,417,032 $ 1,980,648
Weighted average interest rate during the year 5.68% 4.50% 4.72%
- ---------------------------------------------------------------------------------------------------------------------
CREDIT RISK
Huntington's exposure to credit risk is managed through the use of
consistent underwriting standards that emphasize "in-market" lending while
avoiding highly leveraged transactions as well as excessive industry and other
concentrations. 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 (NPAs) consist of loans that are no longer accruing
interest, loans that have been renegotiated based upon financial difficulties of
the borrower, and real estate acquired through foreclosure. Commercial and real
estate loans are placed on non-accrual status and stop accruing interest when
collection of principal or interest is in doubt or generally when the loan is 90
days past due. When interest accruals are suspended, accrued interest income is
reversed with current year accruals charged to earnings and prior year amounts
generally charged off as a credit loss. Consumer loans are not placed on
non-accrual status; rather they are charged off in accordance with regulatory
statutes, which is generally no more than 120 days. A charge-off may be delayed
in circumstances when collateral is repossessed and anticipated to be sold at a
future date.
Total NPAs were $105.4 million at December 31, 2000, compared with $98.2
million at year-end 1999. As of the same dates, NPAs as a percent of total loans
and other real estate were .51% and .47%. Total NPAs are expected to increase
further in 2001 as deteriorating economic conditions adversely impact corporate
borrowers. Loans past due ninety days or more but continuing to accrue interest
increased to $80.3 million at December 31, 2000, versus $61.3 million last year.
This increase was approximately evenly distributed between commercial and
consumer lending.
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 capital and
continually strives to maintain an appropriate balance between capital adequacy
and returns to shareholders. Capital is managed at each subsidiary based upon
the respective risks and growth opportunities, as well as regulatory
requirements.
Average shareholders' equity was $2.3 billion for the year ended December
31, 2000, compared with $2.1 billion last year. Huntington's ratio of average
equity to average assets in the recent year was 7.94% versus 7.47% one year ago.
On a period-end basis, the ratios were 8.27% and 7.52%. Excluding the unrealized
losses on securities available for sale, tangible equity to assets was 5.87% and
5.64% at the two recent year-ends.
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, loan commitments, and securitizations. These
guidelines further define "well-capitalized" levels for Tier 1, Total Capital,
and Leverage ratio purposes at 6%, 10%, and 5%, respectively. At December 31,
2000, Huntington's Tier 1 risk-based capital ratio was 7.19%, total risk-based
capital ratio was 10.46%, and the leverage ratio was 6.93%. Huntington's bank
subsidiary also had regulatory capital ratios in excess of the levels
established for well-capitalized institutions.
19
21
- -----------------------------------------------------------------------------------------------------
TABLE 12 NON-PERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31,
--------------------------------------------------------
(in thousands of dollars) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
Non-accrual loans
Commercial $ 55,804 $ 42,958 $ 34,586 $ 36,459 $ 25,621
Real Estate
Construction 8,687 10,785 10,181 5,916 1,741
Commercial 18,015 16,131 13,243 10,212 14,843
Residential 10,174 11,866 14,419 13,394 12,835
-------- -------- -------- -------- --------
Total Non-accrual Loans 92,680 81,740 72,429 65,981 55,040
Renegotiated loans 1,304 1,330 4,706 5,822 4,422
-------- -------- -------- -------- --------
TOTAL NON-PERFORMING LOANS 93,984 83,070 77,135 71,803 59,462
-------- -------- -------- -------- --------
Other real estate, net 11,413 15,171 18,964 15,343 17,208
-------- -------- -------- -------- --------
TOTAL NON-PERFORMING ASSETS $105,397 $ 98,241 $ 96,099 $ 87,146 $ 76,670
======== ======== ======== ======== ========
ACCRUING LOANS PAST DUE 90 DAYS OR MORE $ 80,306 $ 61,287 $ 51,037 $ 49,608 $ 39,267
======== ======== ======== ======== ========
NON-PERFORMING LOANS AS A % OF TOTAL LOANS 0.46% 0.40% 0.40% 0.40% 0.35%
NON-PERFORMING ASSETS AS A % OF TOTAL
LOANS AND OTHER REAL ESTATE 0.51% 0.47% 0.49% 0.49% 0.46%
ALLOWANCE FOR LOAN LOSSES AS A % OF NON-
PERFORMING LOANS 316.95% 360.31% 377.19% 359.55% 388.11%
ALLOWANCE FOR LOAN LOSSES AND OTHER REAL
ESTATE AS A % OF NON-PERFORMING ASSETS 279.16% 299.85% 301.00% 294.32% 297.12%
ACCRUING LOANS PAST DUE 90 DAYS OR MORE TO
TOTAL LOANS 0.39% 0.30% 0.26% 0.28% 0.23%
Note: For 2000, the amount of interest income which would have been recorded
under the original terms for total loans classified as non-accrual or
renegotiated was $6.5 million. Amounts actually collected and recorded as
interest income for these loans totaled $3.9 million.
- --------------------------------------------------------------------------------
A 10% stock dividend was distributed to shareholders in the year just
ended. Cash dividends declared, as restated for the impact of the stock
dividend, were $.76 a share in 2000, up 12% from 1999.
During the second quarter of 2000, Huntington's Board of Directors
authorized the purchase of an additional 11 million shares under Huntington's
common stock repurchase program. The shares will be repurchased in the open
market and in privately negotiated transactions. 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. During 2000, Huntington repurchased approximately 8.8
million shares of its common stock through open market and privately negotiated
transactions. Approximately 7.2 million of these shares were reissued in
connection with the acquisitions of Empire and JRD. As of December 31, 2000,
approximately 15.3 million shares remained available under the authorization.
Huntington has not repurchased any shares since September 30, 2000, as
management continues to review its capital management strategy, including future
share repurchases.
20
22
RESULTS FOR THE FOURTH QUARTER
Operating earnings for the fourth quarter of 2000 were $76.2 million, or
$.30 per share, compared with $107.3 million, or $.42 per share, for the last
three months of 1999. The 1999 results exclude the impact of the $70.6 million
after-tax gain on the sale of Huntington's credit card portfolio and the $62.9
million after-tax special charge. Related ROE was 12.89% and 20.20% for these
periods and ROA was 1.06% and 1.47%, respectively.
Net interest income was $233.1 million in the recent quarter, an 8% decline
from the comparable period last year. The net interest margin was 3.70% versus
3.94% in the fourth quarter of 1999. These declines reflect the impact of higher
short-term interest rates and, as previously mentioned, the changing mix of
Huntington's core deposit base to more expensive products throughout the year.
After adjusting for the impact of acquisitions, securitization activity,
and asset sales, average total loans grew 9% over the fourth quarter last year.
Growth in the consumer portfolio was particularly strong at 14%, with the
largest increases in home equity lending at 24% and indirect automobile
financing at 14%. Commercial loans and commercial real estate loans grew 3% and
4%, respectively. Core deposits were at the same level as last year's fourth
quarter.
The provision for loan losses increased $12.5 million over last year, $9.2
million of which was due to higher net charge-offs and $3.3 million related to
loan growth. Annualized net charge-offs increased to .50% of average loans
during the last quarter of 2000 versus .32% in the same period a year ago.
Though higher than the comparable period last year, charge-offs were in line
with management's expectations, and reflect broader industry trends as economic
conditions deteriorated in the latter part of 2000.
Excluding securities gains and the gain from the 1999 sale of credit card
receivables, non-interest income for the fourth quarter of 2000 was $129.7
million, up 13% from $114.3 million one year ago. Increases in most major
categories offset the decline in service charges on deposit accounts and the
reduction in credit card fees following the portfolio sale. The largest
increases were in brokerage and insurance income, which grew nearly 28% as a
result of the JRD acquisition, and the "Other" component of non-interest
revenue, which included $10.0 million of income from the automobile loan
securitizations. Electronic banking fees were also up 15% from continued
increases in check card fees.
Non-interest expense, excluding special charges, was $223.9 million in the
recent three months, compared with $204.9 million in the same period a year ago.
Approximately $7 million of expenses related to acquisitions and unusually high
operational losses drove the increase. Several other categories were also up
during the period.
SUBSEQUENT EVENT
On March 7, 2001, Huntington National Bank, Huntington's subsidiary bank,
announced that the Huntington Money Market Fund had sold commercial paper and
realized a $4.2 million loss. The loss will be reimbursed by Huntington and will
not affect the Huntington Fund's shareholders or share price. The $4.2 million
pre-tax loss will be reflected in Huntington's first quarter 2001 financial
results.
21
23
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------ -----------------------------------------
INTEREST INTEREST
Fully Tax Equivalent Basis (1) AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(in millions of dollars) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ----------------------------------------------- ------------------------------------------ -----------------------------------------
ASSETS
Interest bearing deposits in banks $ 6 $ 0.3 5.03 % $ 9 $ 0.4 4.04 %
Trading account securities 15 1.1 7.11 13 0.8 5.89
Federal funds sold and securities purchased
under resale agreements 87 5.5 6.33 22 1.2 5.58
Mortgages held for sale 109 8.7 7.96 232 16.3 7.03
Securities:
Taxable 4,316 269.5 6.24 4,885 297.0 6.08
Tax exempt 273 20.8 7.61 297 23.5 7.90
-------------- ------------ ------------ -------------
Total Securities 4,589 290.3 6.33 5,182 320.5 6.18
-------------- ------------ ------------ -------------
Loans:
Commercial 6,446 553.2 8.58 6,128 483.4 7.89
Real Estate
Construction 1,270 110.7 8.72 1,064 86.1 8.09
Commercial 2,187 185.7 8.49 2,235 181.6 8.13
Consumer
Loans 6,546 562.4 8.59 6,938 575.7 8.30
Leases 2,924 197.9 6.77 2,299 154.5 6.72
Residential Mortgage 1,296 99.6 7.69 1,425 107.0 7.51
-------------- ------------ ------------ -------------
Total Consumer 10,766 859.9 7.97 10,662 837.2 7.85
-------------- ------------ ------------ -------------
Total Loans 20,669 1,709.5 8.27 20,089 1,588.3 7.91
-------------- ------------ ------------ -------------
Allowance for loan losses/loan fees 303 101.4 301 107.9
-------------- ------------ ------------ -------------
Net loans (2) 20,366 1,810.9 8.76 19,788 1,696.2 8.44
-------------- ------------ ------------ -------------
Total earning assets 25,475 2,116.8 8.31 % 25,547 2,035.4 7.97 %
-------------- ------------ ------------ -------------
Cash and due from banks 1,008 1,039
All other assets 2,541 2,454
-------------- ------------
TOTAL ASSETS $ 28,721 $ 28,739
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Core deposits
Non-interest bearing deposits $ 3,421 $ 3,497
Interest bearing demand deposits 4,291 144.0 3.36 % 4,097 106.5 2.60 %
Savings deposits 3,563 146.4 4.11 3,740 126.0 3.37
Certificates of deposit 7,374 425.8 5.78 7,272 375.7 5.17
-------------- ------------ ------------ -------------
Total core deposits 18,649 716.2 4.70 18,606 608.2 4.03
-------------- ------------ ------------ -------------
Other domestic time deposits 502 31.9 6.35 238 12.8 5.40
Foreign time deposits 539 34.0 6.31 363 18.6 5.14
-------------- ------------ ------------ -------------
Total deposits 19,690 782.1 4.81 19,207 639.6 4.07
-------------- ------------ ------------ -------------
Short-term borrowings 1,966 113.1 5.75 2,549 114.3 4.48
Medium-term notes 2,894 189.3 6.54 3,122 170.0 5.45
Subordinated notes and other long-term debt,
including capital securities 1,124 81.6 7.26 1,003 60.3 6.01
-------------- ------------ ------------ -------------
Total interest bearing liabilities 22,253 1,166.1 5.24 % 22,384 984.2 4.40 %
-------------- ------------ ------------ -------------
All other liabilities 768 711
Shareholders' equity 2,279 2,147
-------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 28,721 $ 28,739
============== ============
Net interest rate spread 3.07 % 3.57 %
Impact of non-interest bearing funds on margin 0.66 % 0.54 %
NET INTEREST MARGIN $ 950.7 3.73 % $ 1,051.2 4.11 %
============ =============
(1) Fully tax equivalent yields are calculated assuming a 35% tax rate.
(2) Net loan rate includes loan fees, whereas individual loan components above
are shown exclusive of fees. Individual components include non-accrual loan
balances and related interest received.
22
24
------------------------------------------------------------------------------------
1998 1997
----------------------------------------- ------------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
----------------------------------------- ------------------------------------------
$ 10 $ 1.0 5.22 % $ 9 $ 0.5 5.47 %
11 0.6 5.71 10 0.6 5.70
229 12.9 5.64 44 2.4 5.50
289 20.2 6.99 131 10.1 7.75
4,896 308.8 6.31 5,351 339.8 6.35
247 21.9 8.83 264 25.3 9.55
-------------- ------------- ------------- -------------
5,143 330.7 6.43 5,615 365.1 6.50
-------------- ------------- ------------- -------------
5,629 469.0 8.33 5,302 456.6 8.61
829 71.7 8.65 813 73.8 8.85
2,304 199.6 8.66 2,251 200.6 8.91
6,679 593.9 8.89 6,299 574.8 9.12
1,693 120.1 7.09 1,406 106.7 7.59
1,300 104.6 8.04 1,510 126.3 8.28
-------------- ------------- ------------- -------------
9,672 818.6 8.46 9,215 807.8 8.77
-------------- ------------- ------------- -------------
18,434 1,558.9 8.46 17,581 1,538.8 8.75
-------------- ------------- ------------- -------------
280 85.4 252 75.8
-------------- ------------- ------------- -------------
18,154 1,644.3 8.92 17,329 1,614.6 9.18
-------------- ------------- ------------- -------------
24,116 2,009.7 8.33 % 23,390 1,993.3 8.52 %
-------------- -