UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED June 30, 2009
Commission File Number 1-34073
Huntington Bancshares Incorporated
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| Maryland
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31-0724920 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
41 South High Street, Columbus, Ohio 43287
Registrant’s telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “ accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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| Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
There were 569,017,481 shares of Registrant’s common stock ($0.01 par value) outstanding on July
31, 2009.
Huntington Bancshares Incorporated
INDEX
2
PART I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding
company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our
subsidiaries, including our bank subsidiary, The Huntington National Bank (the Bank), organized in
1866, we provide full-service commercial and consumer banking services, mortgage banking services,
automobile financing, equipment leasing, investment management, trust services, brokerage services,
customized insurance service programs, and other financial products and services. Our banking
offices are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky.
Selected financial service activities are also conducted in other states including Private
Financial Group (PFG) offices in Florida, and Mortgage Banking offices in Maryland and New Jersey.
International banking services are available through the headquarters office in Columbus and a
limited purpose office located in both the Cayman Islands and Hong Kong.
The following Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) provides information we believe necessary for understanding our financial
condition, changes in financial condition, results of operations, and cash flows. This MD&A
provides updates to the discussion and analysis included in our Annual Report on Form 10-K for the
year ended December 31, 2008 (2008 Form 10-K). This MD&A should be read in conjunction with our
2008 Form 10-K as well as the financial statements, notes, and other information contained in this
report.
Our discussion is divided into key segments:
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Introduction — Provides overview comments on important matters including risk factors,
acquisitions, and other items. These are essential for understanding our performance and
prospects. |
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Discussion of Results of Operations — Reviews financial performance from a consolidated
company perspective. It also includes a “Significant Items” section that summarizes key
issues helpful for understanding performance trends. Key consolidated average balance sheet
and income statement trends are also discussed in this section. |
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Risk Management and Capital — Discusses credit, market, liquidity, and operational
risks, including how these are managed, as well as performance trends. It also includes a
discussion of liquidity policies, how we obtain funding, and related performance. In
addition, there is a discussion of guarantees and/or commitments made for items such as
standby letters of credit and commitments to sell loans, and a discussion that reviews the
adequacy of capital, including regulatory capital requirements. |
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Business Segment Discussion — Provides an overview of financial performance for each of
our major business segments and provides additional discussion of trends underlying
consolidated financial performance. |
A reading of each section is important to understand fully the nature of our financial
performance and prospects.
Forward-Looking Statements
This report, including this MD&A, contains certain forward-looking statements, including
certain plans, expectations, goals, projections, and statements, which are subject to numerous
assumptions, risks, and uncertainties. Statements that do not describe historical or current
facts, including statements about beliefs and expectations, are forward-looking statements. The
forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of
the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act.
Actual results could differ materially from those contained or implied by such statements for
a variety of factors including: (1) deterioration in the loan portfolio could be worse than
expected due to a number of factors such as the underlying value of the collateral could prove less
valuable than otherwise assumed and assumed cash flows may be worse than expected; (2) changes in
economic conditions; (3) movements in interest rates; (4) competitive pressures on product pricing
and services; (5) success and timing of other business strategies; (6) the nature, extent, and
timing of governmental actions and reforms, including existing and potential future restrictions
and limitations imposed in connection with the Troubled Asset Relief Program (TARP) voluntary
Capital Purchase Plan (CPP) or otherwise under the Emergency Economic Stabilization Act of 2008;
and (7) extended disruption of vital infrastructure.
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Additional factors that could cause results to differ materially from those described above
can be found in our 2008 Form 10-K, and documents subsequently filed by us with the Securities and
Exchange Commission (SEC). All forward-looking statements included in this filing are based on
information available at the time of the filing. We assume no obligation to update any
forward-looking statement.
Risk Factors
We, like other financial companies, are subject to a number of risks that may adversely affect
our financial condition or results of operation, many of which are outside of our direct control,
though efforts are made to manage those risks while optimizing returns. Among the risks assumed
are: (1) credit risk, which is the risk of loss due to loan and lease customers or other
counterparties not being able to meet their financial obligations under agreed upon terms, (2)
market risk, which is the risk of loss due to changes in the market value of assets and
liabilities due to changes in market interest rates, foreign exchange rates, equity prices, and
credit spreads, (3) liquidity risk, which is the risk of loss due to the possibility that
funds may not be available to satisfy current or future obligations resulting from external macro
market issues, investor and customer perception of financial strength, and events unrelated to the
company such as war, terrorism, or financial institution market specific issues, and (4)
operational risk, which is the risk of loss due to human error, inadequate or failed
internal systems and controls, violations of, or noncompliance with, laws, rules, regulations,
prescribed practices, or ethical standards, and external influences such as market conditions,
fraudulent activities, disasters, and security risks.
More information on risk is set forth under the heading “Risk Factors” included in Item 1A of
our 2008 Form 10-K. Additional information regarding risk factors can also be found in the “Risk
Management and Capital” discussion.
Update to Risk Factors
All of our loan portfolios, particularly our construction and commercial real estate (CRE) loans,
may continue to be affected by the sustained economic weakness of our Midwest markets and the
impact of higher unemployment rates. This may significantly adversely affect our business,
financial condition, liquidity, capital, and results of operation.
As described in the “Credit Risk” discussion, credit quality performance continued to be under
pressure during the first six-month period of 2009, with nonaccrual loans and leases (NALs) and
nonperforming assets (NPAs) both increasing at June 30, 2009, compared with December 31, 2008, and
June 30, 2008. The allowance for credit losses (ACL) of $964.8 million at June 30, 2009, was 2.51%
of period-end loans and leases and 53% of period-end NALs.
The majority of our credit risk is associated with lending activities, as the acceptance and
management of credit risk is central to profitable lending. Credit risk is mitigated through a
combination of credit policies and processes, market risk management activities, and portfolio
diversification. However, adverse changes in our borrowers ability to meet their financial
obligations under agreed upon terms and, in some cases, to the value of the assets securing our
loans to them may increase our credit risk. Our commercial portfolio, as well as our real
estate-related portfolios, have continued to be negatively affected by the ongoing reduction in
real estate values and reduced levels of sales and leasing activities. We periodically review the
ACL for adequacy considering economic conditions and trends, collateral values, and credit quality
indicators, including past charge-off experience and levels of past due loans and NPAs. There is
no certainty that the ACL will be adequate over time to cover credit losses in the portfolio
because of continued adverse changes in the economy, market conditions, or events adversely
affecting specific customers, industries or markets. If the credit quality of the customer base
materially decreases, if the risk profile of a market, industry, or group of customers changes
materially, or if the ACL is not adequate, our business, financial condition, liquidity, capital,
and results of operations could be materially adversely affected.
Bank regulators periodically review our ACL and may require us to increase our provision for
loan and lease losses or loan charge-offs. Any increase in our ACL or loan charge-offs as required
by these regulatory authorities could have a material adverse effect on our results of operations
and our financial condition.
In particular, an increase in our ACL could result in a reduction in the amount of our
tangible common equity (TCE) and/or our Tier 1 common equity. Given the focus on these
measurements, we may be required to raise additional capital through the issuance of common stock
as a result of an increase in our ACL. The issuance of additional common stock or other actions
could have a dilutive effect on the existing holders of our common stock, and adversely affect the
market price of our common stock.
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Legislative and regulatory actions taken now or in the future to address the current liquidity and
credit crisis in the financial industry may significantly affect our financial condition, results
of operation, liquidity, or stock price.
Current economic conditions, particularly in the financial markets, have resulted in
government regulatory agencies and political bodies placing increased focus on and scrutiny of the
financial services industry. The U.S. Government has intervened on an unprecedented scale,
responding to what has been commonly referred to as the financial crisis. In addition to the U.S.
Treasury Department’s CPP under the TARP announced in the fall of 2008 and the new Capital
Assistance Program (CAP) announced in spring of 2009, the U.S. Government has taken steps that
include enhancing the liquidity support available to financial institutions, establishing a
commercial paper funding facility, temporarily guaranteeing money market funds and certain types of
debt issuances, and increasing insurance on bank deposits. The U.S. Congress, through the
Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of
2009, has imposed a number of restrictions and limitations on the operations of financial services
firms participating in the federal programs.
These programs subject us and other financial institutions that participate in them to
additional restrictions, oversight, and costs that may have an adverse impact on our business,
financial condition, results of operations, or the price of our common stock. In addition, new
proposals for legislation continue to be introduced in the U.S. Congress that could further
increase regulation of the financial services industry and impose restrictions on the operations
and general ability of firms within the industry to conduct business consistent with historical
practices, including as related to compensation, interest rates, the impact of bankruptcy
proceedings on consumer real property mortgages, and otherwise. Federal and state regulatory
agencies also frequently adopt changes to their regulations and/or change the manner in which
existing regulations are applied. We cannot predict the substance or impact of pending or future
legislation, regulation, or its application. Compliance with such current and potential regulation
and scrutiny may significantly increase our costs, impede the efficiency of our internal business
processes, negatively impact the recoverability of certain of our recorded assets, require us to
increase our regulatory capital, and limit our ability to pursue business opportunities in an
efficient manner.
We may raise additional capital, which could have a dilutive effect on the existing holders of our
common stock and adversely affect the market price of our common stock.
We are not restricted from issuing additional authorized shares of common stock or securities
that are convertible into or exchangeable for, or that represent the right to receive, common
stock. We continually evaluate opportunities to access capital markets taking into account our
regulatory capital ratios, financial condition, and other relevant considerations, and anticipate
that, subject to market conditions, we are likely to take further capital actions. Such actions,
with regulatory approval when required, may include opportunistically retiring our outstanding
securities, including our subordinated debt, trust-preferred securities, and preferred shares, in
open market transactions, privately negotiated transactions, or public offers for cash or common
shares, as well as issuing additional shares of common stock in public or private transactions in
order to increase our capital levels above our already “well-capitalized” levels, as defined by the
federal bank regulatory agencies, and other regulatory capital targets.
During the 2009 second quarter, the Federal Reserve conducted a Supervisory Capital Assessment
Program (SCAP) on the country’s 19 largest bank holding companies to determine the amount of
capital required to absorb losses that could arise under “baseline” and “more adverse” economic
scenarios. While we were not one of these 19 institutions required to conduct a forward-looking
capital assessment, or “stress test”, we voluntarily conducted our own analysis and recognized a
need to raise additional capital to improve certain capital ratios, including our Tier 1 common
equity risk based ratio. During the first six-month period of 2009, we issued an additional 201.6
million shares of common stock. The issuance of these additional shares of common stock was
dilutive to existing common shareholders. (See the “Capital” section located within the “Risk
Management and Capital” section for additional information).
Both Huntington and the Bank are highly regulated, and we, as well as our regulators, continue
to regularly perform a variety of capital analyses, including the preparation of stress case
scenarios. As a result of those assessments, we could determine, or our regulators could require
us, to raise additional capital in the future. Any such capital raise could include, among other
things, the potential issuance of additional common equity to the public, the potential issuance of
common equity to the government under the CAP, or the additional conversions of our existing Series
B Preferred Stock to common equity. There could also be market perceptions that we need to raise
additional capital, and regardless of the outcome of any stress test or other stress case analysis,
such perceptions could have an adverse effect on the price of our common stock.
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Furthermore, in order to improve our capital ratios above our already adequately capitalized
levels, we can decrease the amount of our risk-weighted assets, increase capital, or a combination
of both. If it is determined that additional capital is required in order to improve or maintain
our capital ratios, we may accomplish this through the issuance of additional common stock.
The issuance of any additional shares of common stock or securities convertible into or
exchangeable for common stock or that represent the right to receive common stock, or the exercise
of such securities, could be substantially dilutive to existing common shareholders. Shareholders
of our common stock have no preemptive rights that entitle holders to purchase their pro rata share
of any offering of shares of any class or series and, therefore, such sales or offerings could
result in increased dilution to existing shareholders. The market price of our common stock could
decline as a result of sales of shares of our common stock or securities convertible into or
exchangeable for common stock in anticipation of such sales.
We are subject to ongoing tax examinations in various jurisdictions. The Internal Revenue
Service and other taxing jurisdictions may propose various adjustments to our previously filed tax
returns. It is possible that the ultimate resolution of such proposed adjustments, if unfavorable,
may be material to the results of operations in the period it occurs.
The calculation of our provision for federal and state and local income taxes is complex and
requires the use of estimates and judgments. We have two accruals for
income taxes: our federal
income tax receivable represents the estimated amount currently due from the federal government,
net of any reserve for potential audit issues, and is reported as a component of “accrued income
and other assets” and state and local tax reserves for potential audit issues are reported as a
component of “other liabilities” in our consolidated balance sheet; our deferred federal and state
and local income tax asset or liability represents the estimated impact of temporary differences
between how we recognize our assets and liabilities under GAAP, and how such assets and liabilities
are recognized under federal and state and local tax law.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject
to income and nonincome taxes. The effective tax rate is based in part on our interpretation of
the relevant current tax laws. We believe the aggregate liabilities related to taxes are
appropriately reflected in the consolidated financial statements. We review the appropriate tax
treatment of all transactions taking into consideration statutory, judicial, and regulatory
guidance in the context of our tax positions. In addition, we rely on various tax opinions, recent
tax audits, and historical experience.
From time to time, we engage in business transactions that may have an effect on our tax
liabilities. Where appropriate, we have obtained opinions of outside experts and have assessed the
relative merits and risks of the appropriate tax treatment of business transactions taking into
account statutory, judicial, and regulatory guidance in the context of the tax position. However,
changes to our estimates of accrued taxes can occur due to changes in tax rates, implementation of
new business strategies, resolution of issues with taxing authorities regarding previously taken
tax positions and newly enacted statutory, judicial, and regulatory guidance. Such changes could
affect the amount of our accrued taxes and could be material to our financial position and/or
results of operations.
During the 2009 second quarter, the State of Ohio completed the audit of our 2001, 2002, and
2003 corporate franchise tax returns. During 2008, the Internal Revenue Service (IRS) completed the
audit of our consolidated federal income tax returns for tax years 2004 and 2005. In addition, we
are subject to ongoing tax examinations in various other state and local jurisdictions. Both the
IRS and various state tax officials have proposed adjustments to our previously filed tax returns.
We believe that the tax positions taken by us related to such proposed adjustments were correct and
supported by applicable statutes, regulations, and judicial authority, and intend to vigorously
defend them. It is possible that the ultimate resolution of the proposed adjustments, if
unfavorable, may be material to the results of operations in the period it occurs. However,
although no assurances can be given, we believe that the resolution of these examinations will not,
individually or in the aggregate, have a material adverse impact on our consolidated financial
position.
Furthermore, we still face risk relating to the Franklin relationship not withstanding the
restructuring announced on March 31, 2009. The Franklin restructuring resulted in a $159.9 million
net deferred tax asset equal to the amount of income and equity that was included in our operating
results for the 2009 first quarter. While we believe that our position regarding the deferred tax
asset and related income recognition is correct, that position could be subject to challenge.
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Recent Accounting Pronouncements and Developments
Note 2 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting
pronouncements adopted during 2009 and the expected impact of accounting pronouncements recently
issued but not yet required to be adopted. To the extent that we believe the adoption of new
accounting standards will materially affect our financial condition, results of operations, or
liquidity, the impacts or potential impacts are discussed in the applicable section of this MD&A
and the Notes to the Unaudited Condensed Consolidated Financial Statements.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with generally accepted accounting
principles in the United States (GAAP). The preparation of financial statements in conformity with
GAAP requires us to establish critical accounting policies and make accounting estimates,
assumptions, and judgments that affect amounts recorded and reported in our financial statements.
Note 1 of the Notes to Consolidated Financial Statements included in our 2008 Form 10-K as
supplemented by this report lists significant accounting policies we use in the development and
presentation of our financial statements. This MD&A, the significant accounting policies, and other
financial statement disclosures identify and address key variables and other qualitative and
quantitative factors necessary to understand and evaluate our company, financial position, results
of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material
effect on the financial statements if a different amount within a range of estimates were used or
if estimates changed from period to period. Estimates are made under facts and circumstances at a
point in time, and changes in those facts and circumstances could produce results that differ from
when those estimates were made. The most significant accounting estimates and their related
application are discussed in our 2008 Form 10-K.
The following discussion provides updates of our accounting estimates related to the fair
value measurements of certain portfolios within our investment securities portfolio, goodwill, and
Franklin loans.
Securities and Other-Than-Temporary Impairment (OTTI)
(This section should be read in conjunction with the “Investment Securities Portfolio” discussion.)
Effective with the 2009 second quarter, we adopted two FASB Staff Positions (FSPs) that impact
estimates and assumptions utilized by us in determining the fair values of securities. The first,
FSP Financial Accounting Standard (FAS) 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly,” reaffirms the exit price fair value measurement guidance in Statement No. 157,
“Fair Value Measurements,” and also provides additional guidance for estimating fair value in
accordance with Statement No. 157 when the volume and level of activity for the asset or liability
have significantly decreased. The second, FSP FAS 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments,” amended the other-than-temporary impairment
(OTTI) guidance in GAAP for debt securities.
We recognize OTTI through earnings on those debt securities that: (a) have a fair value less
than its book value, and (b) we intend to sell (or we cannot assert that it is more likely than
not that we will not have to sell before recovery). The amount of OTTI recognized is the
difference between the fair value and book value of the securities.
If we do not intend to sell a debt security, but it is probable that we will not collect all
amounts due according to the debt’s contractual terms, we separate the impairment into credit and
noncredit components. The credit component of the impairment, measured as the difference between
amortized cost and the present value of expected cash flows discounted at the security’s effective
interest rate, is recognized in earnings. The noncredit component is recognized in other
comprehensive income (OCI), separately from other unrealized gains and losses on available-for-sale
securities.
The adoption of FSP FAS 115-2 and FAS 124-2 required an after-tax adjustment of $3.5 million
to increase retained earnings, with an equal and offsetting adjustment to OCI, that was recorded at
the beginning of the 2009 second quarter to reclassify noncredit related impairment to OCI for
previously impaired securities. The adjustment was applicable only to noncredit OTTI relating to
the debt securities that we do not have the intent to sell. Noncredit OTTI losses related to debt
securities that we intend to sell (or for which we cannot assert that it is more likely than not
that we will not have to sell the securities before recovery) were not reclassified.
7
OTTI ANALYSIS ON CERTAIN SECURITIES PORTFOLIOS
Our three highest risk segments of our investment portfolio are the Alt-A mortgage backed,
pooled-trust-preferred, and private-label collateralized mortgage obligation (CMO) portfolios. The
Alt-A mortgage backed securities and pooled-trust-preferred securities are located within the
asset-backed securities portfolio. The performance of the underlying securities in each of these
segments continued to reflect the economic environment. Each of these securities in these three
segments is subjected to a monthly review of the projected cash flows, supporting our impairment
analysis. These reviews are supported with analysis from independent third parties. (See the
“Securities and Other-Than-Temporary Impairment” section located within the “Critical Accounting
Policies and Use of Significant Estimates” section for additional information.) These three
segments, and the results of our impairment analysis for each segment, are discussed in further
detail below:
Alt-A mortgage-backed and private-label collateralized mortgage obligation (CMO)
securities represent securities collateralized by first-lien residential mortgage loans. As
the lowest level input that is significant to the fair value measurement of these securities in its
entirety was a Level 3 input, we classified all securities within these portfolios as Level 3 in
the fair value hierarchy. The securities were priced with the assistance of an outside third-party
consultant using a discounted cash flow approach and the independent third-party’s proprietary
pricing model. The model used inputs such as estimated prepayment speeds, losses, recoveries,
default rates that were implied by the underlying performance of collateral in the structure or
similar structures, discount rates that were implied by market prices for similar securities,
collateral structure types, and house price depreciation/appreciation rates that were based upon
macroeconomic forecasts.
We analyzed both our Alt-A mortgage-backed and private-label CMO securities portfolios to
determine if the securities in these portfolios were other-than-temporarily-impaired. We used the
analysis to determine whether we believed it probable that all contractual cash flows would not be
collected. All securities in these portfolios remained current with respect to interest and
principal at June 30, 2009.
Our analysis indicated, as of June 30, 2009, a total of 14 Alt-A mortgage-backed securities
and 4 private-label CMO securities could experience loss of principal in the future. The future
expected losses of principal on these other-than-temporarily impaired securities ranged from 0.1%
to 89.1% of their par value. The average amount of future principal loss was 3.9% of their par
value. These losses were projected to occur beginning anywhere from 6 months to as many as 18
years in the future. We measured the amount of credit impairment on these securities using the
cash flows discounted at each securities effective rate. As a result, in the 2009 second quarter,
we recorded $5.9 million of credit OTTI in our Alt-A mortgage-backed securities portfolio
representing additional impairment on four previously impaired securities and one security that was
previously not impaired. Credit OTTI of $1.3 million was recorded for three newly impaired and one
previously impaired private-label CMO securities in the 2009 second quarter.
Pooled-trust-preferred securities represent collateralized debt obligations (CDOs)
backed by a pool of debt securities issued by financial institutions. As the lowest level input
that is significant to the fair value measurement of these securities in its entirety was a Level 3
input, we classified all securities within this portfolio as Level 3 in the fair value hierarchy.
The collateral generally consisted of trust-preferred securities and subordinated debt securities
issued by banks, bank holding companies, and insurance companies. A full cash flow analysis was
used to estimate fair values and assess impairment for each security within this portfolio.
Impairment was calculated as the difference between the carrying amount and the amount of cash
flows discounted at each securities effective rate. We engaged a third party specialist with
direct industry experience in pooled trust preferred securities valuations to provide assistance in
estimating the fair value and expected cash flows for each security in this portfolio. Relying on
cash flows was necessary because there was a lack of observable transactions in the market and many
of the original sponsors or dealers for these securities were no longer able to provide a fair
value that was compliant with FASB Statement No. 157, Fair Value Measurements.
The analysis was completed by evaluating the relevant credit and structural aspects of each
pooled trust preferred security in the portfolio, including collateral performance projections for
each piece of collateral in each security and terms of each security’s structure. The credit
review included analysis of profitability, credit quality, operating efficiency, leverage, and
liquidity using the most recently available financial and regulatory information for each
underlying collateral issuer. We also reviewed historical industry default data and current/near
term operating conditions. Using the results of our analysis, we estimated appropriate default and
recovery probabilities for each piece of collateral and then estimated the expected cash flows for
each security. All deferrals were considered to be defaults and a recovery assumption of 10% on
bank issuers and 15% on insurance issuers one year after the actual or projected default occurs was
used. As a result of this testing, we believe we will experience a loss of principal on seven
securities; and as such, recorded credit OTTI of
$12.5 million for five newly impaired and two previously impaired pooled-trust-preferred
securities in the 2009 second quarter.
Please refer to the “Investment Securities Portfolio” discussion for additional information
regarding OTTI.
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Goodwill
Goodwill is tested for impairment annually, as of October 1, using a two-step process that
begins with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a
reporting unit’s carrying value of goodwill exceeds its implied fair value. Goodwill is also tested
for impairment on an interim basis, using the same two-step process as the annual testing, if an
event occurs or circumstances change between annual tests that would more likely than not reduce
the fair value of the reporting unit below its carrying amount. We had previously performed
goodwill impairment tests at June 30, October 1, and December 31, 2008, and concluded no impairment
existed at those dates. During the 2009 first quarter, our stock price declined 78%, from $7.66
per common share at December 31, 2008, to $1.66 per common share at March 31, 2009. Peer banks also
experienced declines in market capitalization. This decline primarily reflected the continuing
economic slowdown and increased market concern surrounding financial institutions’ credit risks and
capital positions, as well as uncertainty related to increased regulatory supervision and
intervention. We determined that these changes would more-likely-than-not reduce the fair value of
certain reporting units below their carrying amounts. Therefore, we performed an interim goodwill
impairment test during the 2009 first quarter. An independent third party was engaged to assist
with the impairment assessment.
Significant judgment is applied when goodwill is assessed for impairment. This judgment
includes developing cash flow projections, selecting appropriate discount rates, identifying
relevant market comparables, incorporating general economic and market conditions, and selecting an
appropriate control premium. The selection and weighting of the various fair value techniques may
result in a higher or lower fair value. Judgment is applied in determining the weightings that are
most representative of fair value. The assumptions used in the goodwill impairment assessment and
the application of these estimates and assumptions are discussed below.
2009 FIRST QUARTER IMPAIRMENT TESTING
The first step (Step 1) of impairment testing requires a comparison of each reporting unit’s
fair value to carrying value to identify potential impairment. For our impairment testing
conducted during the 2009 first quarter, we identified four reporting units: Regional
Banking, PFG, Insurance, and Auto Finance and Dealer Services (AFDS).
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Although Insurance is included within PFG for business segment reporting, it was
evaluated as a separate reporting unit for goodwill impairment testing because it has
its own separately allocated goodwill resulting from prior acquisitions. The fair
value of PFG (determined using the market approach as described below), excluding
Insurance, exceeded its carrying value, and goodwill was determined to not be impaired
for this reporting unit. |
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There was no goodwill associated with AFDS and, therefore, it was not subject to
impairment testing. |
For Regional Banking, we utilized both the income and market approaches to determine fair
value. The income approach was based on discounted cash flows derived from assumptions of balance
sheet and income statement activity. An internal forecast was developed by considering several
long-term key business drivers such as anticipated loan and deposit growth. The long-term growth
rate used in determining the terminal value was estimated at 2.5%. The discount rate of 14% was
estimated based on the Capital Asset Pricing Model, which considered the risk-free interest rate
(20-year Treasury Bonds), market risk premium, equity risk premium, and a company-specific risk
factor. The company-specific risk factor was used to address the uncertainty of growth estimates
and earnings projections of management. For the market approach, revenue, earnings and market
capitalization multiples of comparable public companies were selected and applied to the Regional
Banking unit’s applicable metrics such as book and tangible book values. A 20% control premium was
used in the market approach. The results of the income and market approaches were weighted 75% and
25%, respectively, to arrive at the final calculation of fair value. As market capitalization
declined across the banking industry, we believed that a heavier weighting on the income approach
is more representative of a market participant’s view. For the Insurance reporting unit, management
utilized a market approach to determine fair value. The aggregate fair market values were compared
with market capitalization as an assessment of the appropriateness of the fair value measurements.
As our stock price fluctuated greatly, we used our average stock price for the 30 days preceding
the valuation date to determine market capitalization.
The aggregate fair market values of the reporting units compared with market capitalization
indicated an implied premium of 27%. A control premium analysis indicated that the implied premium
was within range of overall premiums observed in the market place. Neither the Regional Banking
nor Insurance reporting units passed Step 1.
9
The second step (Step 2) of impairment testing is necessary only if the reporting unit does
not pass Step 1. Step 2 compares the implied fair value of the reporting unit goodwill with the
carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is
determined in the same manner as goodwill that is recognized in a business combination. Significant
judgment and estimates are involved in estimating the fair value of the assets and liabilities of
the reporting unit.
To determine the implied fair value of goodwill, the fair value of Regional Banking and
Insurance (as determined in Step 1) was allocated to all assets and liabilities of the reporting
units including any recognized or unrecognized intangible assets. The allocation was done as if
the reporting unit was acquired in a business combination, and the fair value of the reporting unit
was the price paid to acquire the reporting unit. This allocation process is only performed for
purposes of testing goodwill for impairment. The carrying values of recognized assets or
liabilities (other than goodwill, as appropriate) were not adjusted nor were any new intangible
assets recorded. Key valuations were the assessment of core deposit intangibles, the
mark-to-fair-value of outstanding debt and deposits, and mark-to-fair-value on the loan portfolio.
Core deposits were valued using a 15% discount rate. The marks on our outstanding debt and
deposits were based upon observable trades or modeled prices using current yield curves and market
spreads. The valuation of the loan portfolio indicated discounts in the ranges of 9%-24%,
depending upon the loan type. For every 100 basis point change in the valuation of our overall
loan portfolio, implied goodwill would be impacted by approximately $325 million. The estimated
fair value of these loan portfolios was based on an exit price, and the assumptions used were
intended to approximate those that a market participant would have used in valuing the loans in an
orderly transaction, including a market liquidity discount. The significant market risk premium
that is a consequence of the current distressed market conditions was a significant contributor to
the valuation discounts associated with these loans. We believed these discounts were consistent
with transactions currently occurring in the marketplace.
Upon completion of Step 2, we determined that the Regional Banking and Insurance reporting
units’ goodwill carrying values exceeded their implied fair values of goodwill by $2,573.8 million
and $28.9 million, respectively. As a result, we recorded a noncash pretax impairment charge of
$2,602.7 million, or $7.09 per common share, in the 2009 first quarter. The impairment charge was
included in noninterest expense and did not affect our regulatory and tangible capital ratios.
2009 SECOND QUARTER IMPAIRMENT TESTING
While we recorded an impairment charge of
$4.2 million related to the sale of a small payments-related business completed in July 2009, we
concluded that no other goodwill impairment was required during the 2009 second quarter.
Subsequent to the 2009 first quarter impairment testing, we reorganized our Regional Banking
segment to reflect how our assets and operations are now managed. The Regional Banking business
segment, which through March 31, 2009, had been managed geographically, is now managed by a product
segment approach. Essentially, Regional Banking has been divided into the new segments of Retail
and Business Banking, Commercial Banking, and Commercial Real Estate.
Primarily as a result of the 2009 first and second quarter impairment charges, our goodwill
totaled $0.4 billion at June 30, 2009. Of this amount, $0.3 billion was allocated to the Retail
and Business Banking segment.
Due to the current economic environment and other uncertainties, it is possible that our
estimates and assumptions may adversely change in the future. If our market capitalization
decreases or the liquidity discount on our loan portfolio improves significantly without a
concurrent increase in market capitalization, we may be required to record additional goodwill
impairment losses in future periods, whether in connection with our next annual impairment testing
in the 2009 third quarter or prior to that, if any changes constitute a triggering event. It is
not possible at this time to determine if any such future impairment loss would result or, if it
does, whether such charge would be material. However, any such future impairment loss would be
limited to the remaining goodwill balance of $0.4 billion at June 30, 2009.
10
Franklin Loans Restructuring Transaction
(This section should be read in conjunction with Note 3 of the Notes to the Unaudited
Condensed Consolidated Financial Statements).
Franklin is a specialty consumer finance company primarily engaged in servicing residential
mortgage loans. Prior to March 31, 2009, Franklin owned a portfolio of loans secured by first- and
second- liens on 1-4 family residential properties. At December 31, 2008, our total loans
outstanding to Franklin were $650.2 million, all of which were placed on nonaccrual status.
Additionally, the specific allowance for loan and lease losses for the Franklin portfolio was
$130.0 million, resulting in our net exposure to Franklin at December 31, 2008, of $520.2 million.
On March 31, 2009, we entered into a transaction with Franklin whereby a Huntington
wholly-owned REIT subsidiary (REIT) indirectly acquired an 84% ownership right in a trust which
holds all the underlying consumer loans and other real estate owned (OREO) properties that were
formerly collateral for the Franklin commercial loans. The equity interests provided to Franklin
by the REIT were pledged by Franklin as collateral for the Franklin commercial loans.
As a result of the restructuring, on a consolidated basis, the $650.2 million nonaccrual
commercial loan to Franklin at December 31, 2008, is no longer reported. Instead, we now report
the loans secured by first- and second- mortgages on residential properties and OREO properties
both of which had previously been assets of Franklin or its subsidiaries and were pledged to secure
our loan to Franklin. At the time of the restructuring, the loans had a fair value of $493.6
million and the OREO properties had a fair value of $79.6 million. As a result, NALs declined by a
net amount of $284.1 million as there were $650.2 million commercial NALs outstanding related to
Franklin, and $366.1 million mortgage-related NALs outstanding, representing first- and second-
lien mortgages that were nonaccruing at March 31, 2009. Also, our specific allowance for loan and
lease losses for the Franklin portfolio of $130.0 million was eliminated; however, no initial
increase to the allowance for loan and lease losses (ALLL) relating to the acquired mortgages was
recorded as these assets were recorded at fair value.
In accordance with Statement No. 141R, we recorded a net deferred tax asset of $159.9 million
related to the difference between the tax basis and the book basis in the acquired assets. Because
the acquisition price, represented by the equity interests in our wholly-owned subsidiary, was
equal to the fair value of the acquired 84% ownership right, no goodwill was created from the
transaction. The recording of the net deferred tax asset was a bargain purchase under Statement
No. 141R, and was recorded as a tax benefit in the 2009 first quarter.
11
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It
also includes a “Significant Items” section that summarizes key issues important for a complete
understanding of performance trends. Key consolidated balance sheet and income statement trends are
discussed. All earnings per share data are reported on a diluted basis. For additional insight on
financial performance, please read this section in conjunction with the “Business Segment”
discussion.
The below summary provides an update of key events and trends during the current quarter.
Comparisons are made with the prior quarter, as we believe this comparison provides the most
meaningful measurement relative to analyzing trends.
Summary
We reported a net loss of $125.1 million in the 2009 second quarter, representing a loss per
common share of $0.40. This compared favorably with the prior quarter’s net loss of $2,433.2
million, or $6.79 per common share, as the prior quarter was significantly impacted by a $2,602.7
million ($7.09 per common share) goodwill impairment charge, partially offset by a $159.9 million
($0.44 per common share) nonrecurring tax benefit associated with the prior quarter’s Franklin
restructuring. In addition to these items, comparisons with the prior quarter were significantly
impacted by other factors that are discussed later in the “Significant Items” section (see
“Significant Items” discussion).
The largest contributor to our 2009 second quarter net loss was a $121.9 million, or 42%,
increase in our provision for credit losses to $413.7 million. This increase resulted from our
decision to continue to build reserves based primarily from our review of every “noncriticized”
commercial relationship with an aggregate exposure of over $500,000. The review encompassed $13
billion of outstanding balances consisting of commercial and industrial (C&I), CRE, and business
banking loans. (See “Commercial Loan Portfolio Review And Actions” section located within the
“Commercial Credit” section for additional information.) While we continue to believe our
commercial portfolio will remain under pressure, we believe that the risks in our portfolio are
manageable.
Credit quality performance in the 2009 second quarter continued to be negatively impacted by
the sustained economic weaknesses in our Midwest markets. The continued trend of higher
unemployment rates and declining home values in our markets negatively impacted consumer loan
credit quality. Non-Franklin net charge-offs (NCOs) totaled $344.5 million, compared with $213.2
million in the prior quarter. The increase was largely within the commercial loan portfolio, as
the single family home builder and retail project segments continued to be stressed. NPAs also
increased, primarily within the commercial loan portfolio, reflecting the continued decline in the
housing markets, and stress on retail sales. Our outlook is that the economy will remain under
stress, and that no improvement will be seen through the end of 2009. As a result, we expect that
the overall level of NPAs and NCOs will remain elevated, especially as related to continued
softness in our C&I and CRE portfolios.
During the current quarter, we took proactive steps to increase our capital position as we
executed total additions of $704.9 million to Tier 1 common equity. This capital raising was
accomplished through several actions including discretionary equity issuances, a common stock
offering, conversion of preferred stock, and a gain on the redemption of a portion of our junior
subordinated debt. These actions strengthened all of our period-end capital ratios. Our TCE ratio
increased to 5.68% from 4.65%, and our Tier 1 common equity ratio increased to 6.80% from 5.64%.
Our period-end liquidity position remained strong as average core deposits grew at a 17%
annualized rate, thus reducing our reliance on noncore funding. As of June 30, 2009, we had $8.0
billion of unused Federal Home Loan Bank (FHLB) and Federal Reserve borrowing capacity, $3.2
billion in unpledged investment securities, and our available cash totaled $2.1 billion.
Fully-taxable equivalent net interest income in the 2009 second quarter increased $10.0
million, or 3%, compared with the prior quarter. The increase reflected a 13 basis point
improvement in our net interest margin, partially offset by a 5% decline in average total loans and
leases. The margin improvement reflected the impact of strong core deposit growth, the benefits of
a more disciplined focus on deposit and loan pricing, and the benefits of our Franklin
restructuring during the 2009 first quarter; partially offset by the negative impact of maintaining
a higher liquidity position and the higher levels of NPAs. We expect that the net interest margin
will be flat or improve slightly from the 2009 second quarter level. We expect that average total
loans will decline modestly, reflecting the impacts of our efforts to reduce our CRE exposure and
the weak economy, as well as charge-offs. As previously mentioned, average core deposits grew
at an annualized 17% rate, despite the competitive market. Deposit growth is a strategic priority
for us through the end of 2009.
12
Noninterest income in the 2009 second quarter increased $26.8 million compared with the 2009
first quarter. The following table reflects the impacts of “Significant Items” to noninterest
income (see “Significant Items”).
Table 1 — Noninterest Income — Significant Items Impact — 2009 Second Quarter vs. 2009 First
Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Second |
|
|
First |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2009 |
|
|
Change |
|
Total noninterest income, excluding
Significant Items |
|
$ |
234,583 |
|
|
$ |
239,102 |
|
|
$ |
(4,519 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain related to
Visa® stock |
|
|
31,362 |
|
|
|
— |
|
|
|
31,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
265,945 |
|
|
$ |
239,102 |
|
|
$ |
26,843 |
|
|
|
|
|
|
|
|
|
|
|
As shown in the table above, after adjusting for “Significant Items”, noninterest income
decreased $4.5 million. This decrease reflected a decline in brokerage and insurance income as a
result of lower annuity sales and stronger seasonal insurance income in the prior quarter. The
prior quarter also represented a record level of investment sales. This decrease was partially
offset by stronger growth in service charges on deposits and electronic banking income as a result
of normal season increases.
The following table reflects the impacts of “Significant Items” to noninterest expense (see
“Significant Items”).
Table 2 — Noninterest Expense — Significant Items Impact — 2009 Second Quarter vs. 2009 First Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Second |
|
|
First |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2009 |
|
|
Change |
|
Total noninterest expense, excluding
Significant Items |
|
$ |
379,605 |
|
|
$ |
367,056 |
|
|
$ |
12,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
4,231 |
|
|
|
2,602,713 |
|
|
|
(2,598,482 |
) |
FDIC special assessment |
|
|
23,555 |
|
|
|
— |
|
|
|
23,555 |
|
Gain on redemption of junior subordinated debt |
|
|
(67,409 |
) |
|
|
— |
|
|
|
(67,409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
339,982 |
|
|
$ |
2,969,769 |
|
|
$ |
(2,629,787 |
) |
|
|
|
|
|
|
|
|
|
|
As shown in the table above, after adjusting for “Significant Items” (see “Significant
Items”), noninterest expense increased $12.5 million. This increase primarily reflected a $16.6
million increase in OREO expenses, partially offset by a $4.2 million decline in personnel
expenses. The decrease in personnel expenses reflected the implementation of our $100 million
expense reduction initiatives. We expect to exceed the targeted $100 million of expense savings
during 2010.
13
Table 3 — Selected Quarterly Income Statement Data (1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands, except per share amounts) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Interest income |
|
$ |
563,004 |
|
|
$ |
569,957 |
|
|
$ |
662,508 |
|
|
$ |
685,728 |
|
|
$ |
696,675 |
|
Interest expense |
|
|
213,105 |
|
|
|
232,452 |
|
|
|
286,143 |
|
|
|
297,092 |
|
|
|
306,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
349,899 |
|
|
|
337,505 |
|
|
|
376,365 |
|
|
|
388,636 |
|
|
|
389,866 |
|
Provision for credit losses |
|
|
413,707 |
|
|
|
291,837 |
|
|
|
722,608 |
|
|
|
125,392 |
|
|
|
120,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for credit losses |
|
|
(63,808 |
) |
|
|
45,668 |
|
|
|
(346,243 |
) |
|
|
263,244 |
|
|
|
269,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
75,353 |
|
|
|
69,878 |
|
|
|
75,247 |
|
|
|
80,508 |
|
|
|
79,630 |
|
Brokerage and insurance income |
|
|
32,052 |
|
|
|
39,948 |
|
|
|
31,233 |
|
|
|
34,309 |
|
|
|
35,694 |
|
Trust services |
|
|
25,722 |
|
|
|
24,810 |
|
|
|
27,811 |
|
|
|
30,952 |
|
|
|
33,089 |
|
Electronic banking |
|
|
24,479 |
|
|
|
22,482 |
|
|
|
22,838 |
|
|
|
23,446 |
|
|
|
23,242 |
|
Bank owned life insurance income |
|
|
14,266 |
|
|
|
12,912 |
|
|
|
13,577 |
|
|
|
13,318 |
|
|
|
14,131 |
|
Automobile operating lease income |
|
|
13,116 |
|
|
|
13,228 |
|
|
|
13,170 |
|
|
|
11,492 |
|
|
|
9,357 |
|
Mortgage banking income (loss) |
|
|
30,827 |
|
|
|
35,418 |
|
|
|
(6,747 |
) |
|
|
10,302 |
|
|
|
12,502 |
|
Securities gains (losses) |
|
|
(7,340 |
) |
|
|
2,067 |
|
|
|
(127,082 |
) |
|
|
(73,790 |
) |
|
|
2,073 |
|
Other income |
|
|
57,470 |
|
|
|
18,359 |
|
|
|
17,052 |
|
|
|
37,320 |
|
|
|
26,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
265,945 |
|
|
|
239,102 |
|
|
|
67,099 |
|
|
|
167,857 |
|
|
|
236,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
171,735 |
|
|
|
175,932 |
|
|
|
196,785 |
|
|
|
184,827 |
|
|
|
199,991 |
|
Outside data processing and other services |
|
|
39,266 |
|
|
|
32,432 |
|
|
|
31,230 |
|
|
|
32,386 |
|
|
|
30,186 |
|
Net occupancy |
|
|
24,430 |
|
|
|
29,188 |
|
|
|
22,999 |
|
|
|
25,215 |
|
|
|
26,971 |
|
Equipment |
|
|
21,286 |
|
|
|
20,410 |
|
|
|
22,329 |
|
|
|
22,102 |
|
|
|
25,740 |
|
Amortization of intangibles |
|
|
17,117 |
|
|
|
17,135 |
|
|
|
19,187 |
|
|
|
19,463 |
|
|
|
19,327 |
|
Professional services |
|
|
18,789 |
|
|
|
18,253 |
|
|
|
17,420 |
|
|
|
13,405 |
|
|
|
13,752 |
|
Marketing |
|
|
7,491 |
|
|
|
8,225 |
|
|
|
9,357 |
|
|
|
7,049 |
|
|
|
7,339 |
|
Automobile operating lease expense |
|
|
11,400 |
|
|
|
10,931 |
|
|
|
10,483 |
|
|
|
9,093 |
|
|
|
7,200 |
|
Telecommunications |
|
|
6,088 |
|
|
|
5,890 |
|
|
|
5,892 |
|
|
|
6,007 |
|
|
|
6,864 |
|
Printing and supplies |
|
|
4,151 |
|
|
|
3,572 |
|
|
|
4,175 |
|
|
|
4,316 |
|
|
|
4,757 |
|
Goodwill impairment |
|
|
4,231 |
|
|
|
2,602,713 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other expense |
|
|
13,998 |
|
|
|
45,088 |
|
|
|
50,237 |
|
|
|
15,133 |
|
|
|
35,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
339,982 |
|
|
|
2,969,769 |
|
|
|
390,094 |
|
|
|
338,996 |
|
|
|
377,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income taxes |
|
|
(137,845 |
) |
|
|
(2,684,999 |
) |
|
|
(669,238 |
) |
|
|
92,105 |
|
|
|
127,680 |
|
(Benefit) Provision for income taxes |
|
|
(12,750 |
) |
|
|
(251,792 |
) |
|
|
(251,949 |
) |
|
|
17,042 |
|
|
|
26,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(125,095 |
) |
|
$ |
(2,433,207 |
) |
|
$ |
(417,289 |
) |
|
$ |
75,063 |
|
|
$ |
101,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred shares |
|
|
57,451 |
|
|
|
58,793 |
|
|
|
23,158 |
|
|
|
12,091 |
|
|
|
11,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common shares |
|
$ |
(182,546 |
) |
|
$ |
(2,492,000 |
) |
|
$ |
(440,447 |
) |
|
$ |
62,972 |
|
|
$ |
90,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares — basic |
|
|
459,246 |
|
|
|
366,919 |
|
|
|
366,054 |
|
|
|
366,124 |
|
|
|
366,206 |
|
Average common shares — diluted (2) |
|
|
459,246 |
|
|
|
366,919 |
|
|
|
366,054 |
|
|
|
367,361 |
|
|
|
367,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income — diluted |
|
|
(0.40 |
) |
|
|
(6.79 |
) |
|
|
(1.20 |
) |
|
|
0.17 |
|
|
|
0.25 |
|
Cash dividends declared |
|
|
0.0100 |
|
|
|
0.0100 |
|
|
|
0.1325 |
|
|
|
0.1325 |
|
|
|
0.1325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
0.97 |
% |
|
|
(18.22 |
) |
|
|
(3.04) |
% |
|
|
0.55 |
% |
|
|
0.73 |
% |
Return on average total shareholders’ equity |
|
|
(10.2 |
) |
|
|
N.M. |
|
|
|
(23.6 |
) |
|
|
4.7 |
|
|
|
6.4 |
|
Return on average tangible shareholders’ equity (3) |
|
|
(10.3 |
) |
|
|
18.4 |
|
|
|
(43.2 |
) |
|
|
11.6 |
|
|
|
15.0 |
|
Net interest margin (4) |
|
|
3.10 |
|
|
|
2.97 |
|
|
|
3.18 |
|
|
|
3.29 |
|
|
|
3.29 |
|
Efficiency ratio (5) |
|
|
51.0 |
|
|
|
60.5 |
|
|
|
64.6 |
|
|
|
50.3 |
|
|
|
56.9 |
|
Effective tax rate (benefit) |
|
|
(9.2 |
) |
|
|
(9.4 |
) |
|
|
(37.6 |
) |
|
|
18.5 |
|
|
|
20.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue — fully taxable equivalent (FTE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
349,899 |
|
|
$ |
337,505 |
|
|
$ |
376,365 |
|
|
$ |
388,636 |
|
|
$ |
389,866 |
|
FTE adjustment |
|
|
1,216 |
|
|
|
3,582 |
|
|
|
3,641 |
|
|
|
5,451 |
|
|
|
5,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (4) |
|
|
351,115 |
|
|
|
341,087 |
|
|
|
380,006 |
|
|
|
394,087 |
|
|
|
395,490 |
|
Noninterest income |
|
|
265,945 |
|
|
|
239,102 |
|
|
|
67,099 |
|
|
|
167,857 |
|
|
|
236,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue (4) |
|
$ |
617,060 |
|
|
$ |
580,189 |
|
|
$ |
447,105 |
|
|
$ |
561,944 |
|
|
$ |
631,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
| |
|
|
| (1) |
|
Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items”. |
| |
| (2) |
|
For all the quarterly periods presented above, the impact of the convertible preferred stock issued in April of 2008 was excluded from the diluted share calculation because the result
would have been higher than basic earnings per common share (anti-dilutive) for the periods. |
| |
| (3) |
|
Net income excluding expense for amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total
stockholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and
calculated assuming a 35% tax rate. |
| |
| (4) |
|
On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate. |
| |
| (5) |
|
Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains (losses). |
14
Table 4 — Selected Year to Date Income Statement Data (1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
|
Change |
|
| (in thousands, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Interest income |
|
$ |
1,132,961 |
|
|
$ |
1,450,086 |
|
|
$ |
(317,125 |
) |
|
|
(21.9) |
% |
Interest expense |
|
|
445,557 |
|
|
|
683,396 |
|
|
|
(237,839 |
) |
|
|
(34.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
687,404 |
|
|
|
766,690 |
|
|
|
(79,286 |
) |
|
|
(10.3 |
) |
Provision for credit losses |
|
|
705,544 |
|
|
|
209,463 |
|
|
|
496,081 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for credit losses |
|
|
(18,140 |
) |
|
|
557,227 |
|
|
|
(575,367 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
145,231 |
|
|
|
152,298 |
|
|
|
(7,067 |
) |
|
|
(4.6 |
) |
Brokerage and insurance income |
|
|
72,000 |
|
|
|
72,254 |
|
|
|
(254 |
) |
|
|
(0.4 |
) |
Trust services |
|
|
50,532 |
|
|
|
67,217 |
|
|
|
(16,685 |
) |
|
|
(24.8 |
) |
Electronic Banking |
|
|
46,961 |
|
|
|
43,983 |
|
|
|
2,978 |
|
|
|
6.8 |
|
Bank owned life insurance income |
|
|
27,178 |
|
|
|
27,881 |
|
|
|
(703 |
) |
|
|
(2.5 |
) |
Automobile operating lease income |
|
|
26,344 |
|
|
|
15,189 |
|
|
|
11,155 |
|
|
|
73.4 |
|
Mortgage banking income |
|
|
66,245 |
|
|
|
5,439 |
|
|
|
60,806 |
|
|
|
N.M. |
|
Securities
(losses) gains |
|
|
(5,273 |
) |
|
|
3,502 |
|
|
|
(8,775 |
) |
|
|
N.M. |
|
Other income |
|
|
75,829 |
|
|
|
84,419 |
|
|
|
(8,590 |
) |
|
|
(10.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
505,047 |
|
|
|
472,182 |
|
|
|
32,865 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
347,667 |
|
|
|
401,934 |
|
|
|
(54,267 |
) |
|
|
(13.5 |
) |
Outside data processing and other services |
|
|
71,698 |
|
|
|
64,547 |
|
|
|
7,151 |
|
|
|
11.1 |
|
Net occupancy |
|
|
53,618 |
|
|
|
60,214 |
|
|
|
(6,596 |
) |
|
|
(11.0 |
) |
Equipment |
|
|
41,696 |
|
|
|
49,534 |
|
|
|
(7,838 |
) |
|
|
(15.8 |
) |
Amortization of intangibles |
|
|
34,252 |
|
|
|
38,244 |
|
|
|
(3,992 |
) |
|
|
(10.4 |
) |
Professional services |
|
|
37,042 |
|
|
|
22,842 |
|
|
|
14,200 |
|
|
|
62.2 |
|
Marketing |
|
|
15,716 |
|
|
|
16,258 |
|
|
|
(542 |
) |
|
|
(3.3 |
) |
Automobile operating lease expense |
|
|
22,331 |
|
|
|
11,706 |
|
|
|
10,625 |
|
|
|
90.8 |
|
Telecommunications |
|
|
11,978 |
|
|
|
13,109 |
|
|
|
(1,131 |
) |
|
|
(8.6 |
) |
Printing and supplies |
|
|
7,723 |
|
|
|
10,379 |
|
|
|
(2,656 |
) |
|
|
(25.6 |
) |
Goodwill impairment |
|
|
2,606,944 |
|
|
|
— |
|
|
|
2,606,944 |
|
|
|
— |
|
Other expense |
|
|
59,086 |
|
|
|
59,517 |
|
|
|
(431 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
3,309,751 |
|
|
|
748,284 |
|
|
|
2,561,467 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income taxes |
|
|
(2,822,844 |
) |
|
|
281,125 |
|
|
|
(3,103,969 |
) |
|
|
N.M. |
|
(Benefit) Provision for income taxes |
|
|
(264,542 |
) |
|
|
52,705 |
|
|
|
(317,247 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income |
|
$ |
(2,558,302 |
) |
|
$ |
228,420 |
|
|
$ |
(2,786,722 |
) |
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on preferred shares |
|
|
116,244 |
|
|
|
11,151 |
|
|
|
105,093 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income applicable to common shares |
|
$ |
(2,674,546 |
) |
|
$ |
217,269 |
|
|
$ |
(2,891,815 |
) |
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares — basic |
|
|
413,083 |
|
|
|
366,221 |
|
|
|
46,862 |
|
|
|
12.8 |
% |
Average common shares — diluted (2) |
|
|
413,083 |
|
|
|
387,322 |
|
|
|
25,761 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share — diluted |
|
$ |
(6.47 |
) |
|
$ |
0.59 |
|
|
$ |
(7.06 |
) |
|
|
N.M. |
|
Cash dividends declared |
|
|
0.0200 |
|
|
|
0.3975 |
|
|
|
(0.3775 |
) |
|
|
(95.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
(9.77) |
% |
|
|
0.83 |
% |
|
|
(10.60) |
% |
|
|
N.M. |
% |
Return on average total shareholders’ equity |
|
|
(85.0 |
) |
|
|
7.6 |
|
|
|
(92.6 |
) |
|
|
N.M. |
|
Return on average tangible shareholders’ equity (3) |
|
|
(124.2 |
) |
|
|
18.2 |
|
|
|
(142.4 |
) |
|
|
N.M. |
|
Net interest margin (4) |
|
|
3.03 |
|
|
|
3.26 |
|
|
|
(0.23 |
) |
|
|
(7.1 |
) |
Efficiency ratio (5) |
|
|
55.6 |
|
|
|
57.0 |
|
|
|
(1.4 |
) |
|
|
(2.5 |
) |
(Benefit) Effective tax rate |
|
|
(9.4 |
) |
|
|
18.7 |
|
|
|
(28.1 |
) |
|
|
N.M |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue — fully taxable equivalent (FTE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
687,404 |
|
|
$ |
766,690 |
|
|
$ |
(79,286 |
) |
|
|
(10.3) |
% |
FTE adjustment |
|
|
4,798 |
|
|
|
11,126 |
|
|
|
(6,328 |
) |
|
|
(56.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
692,202 |
|
|
|
777,816 |
|
|
|
(85,614 |
) |
|
|
(11.0 |
) |
Non-interest income |
|
|
505,047 |
|
|
|
472,182 |
|
|
|
32,865 |
|
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,197,249 |
|
|
$ |
1,249,998 |
|
|
$ |
(52,749 |
) |
|
|
(4.2) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
| |
|
|
| (1) |
|
Comparisons for presented periods are impacted by a number of factors. Refer to the ‘Significant Items” discussion. |
| |
| (2) |
|
For the six months ended June 30, 2009, the impact of the convertible preferred stock issued in April of 2008 was excluded from the diluted share calculation
because the result was more than basic earnings per common share (anti-dilutive) for the period. For the six months ended June 30, 2008, the impact of the
convertible preferred stock issued in April of 2008 was included from the diluted share calculation because the result was less than basic earnings per
common share (dilutive) for the period. |
| |
| (3) |
|
Net income excluding expense for amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’
equity equals average total shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible
assets are net of deferred tax liability, and calculated assuming a 35% tax rate. |
| |
| (4) |
|
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate. |
| |
| (5) |
|
Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities (losses) gains. |
15
Significant Items
Definition of Significant Items
From time to time, revenue, expenses, or taxes, are impacted by items we believe to be outside
of ordinary banking activities and/or by items that, while they may be associated with ordinary
banking activities, are so unusually large that we believe the outsized impact at that time to be
one-time or short-term in nature. We refer to such items as “Significant Items”. Most often, these
significant items result from factors originating outside the company: regulatory
actions/assessments, windfall gains, changes in accounting principles, one-time tax
assessments/refunds, and other similar items. In other cases they may result from our decisions
associated with significant corporation actions out of the ordinary course of business:
merger/restructuring charges, recapitalization actions, goodwill impairment, and other similar
items.
Even though certain revenue and expense items are naturally subject to more volatility than
others due to changes in market and economic environment conditions, as a general rule, volatility
alone does not define a significant item. For example, changes in the provision for credit losses,
gains/losses from investment activities, and asset valuation writedowns reflect ordinary banking
activities and are, therefore, typically excluded from consideration as a significant item.
We believe the disclosure of “Significant Items” in current and prior period results aids in
better understanding our performance and trends so readers can ascertain which of such items, if
any, they may wish to include or exclude from an analysis of our performance within the context of
determining how that performance differed from expectations, as well as how, if at all, to adjust
estimates of future performance accordingly.
“Significant Items” for any particular period are not intended to be a complete list of items
that may materially impact current or future period performance. A number of items could materially
impact these periods, including those described in our 2008 Annual Report on Form 10-K and other
factors described from time to time in our other filings with the SEC.
The above description of “Significant Items” represents a change in definition from that
provided in our 2008 Annual Report. Certain components listed within the “Timing Differences”
section found within the “Significant Items” section on our 2008 Annual Report are no longer
considered within the scope of our definition of “Significant Items”. Although these items are
subject to more volatility than other items due to changes in market and economic environment
conditions, they reflect ordinary banking activities.
16
Table 5 — Significant Items Influencing Earnings Performance Comparison
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
June 30, 2009 |
|
|
March 31, 2009 |
|
|
June 30, 2008 |
|
| (in millions) |
|
After-tax |
|
|
EPS |
|
|
After-tax |
|
|
EPS |
|
|
After-tax |
|
|
EPS |
|
Net income — reported earnings |
|
$ |
(125.1 |
) |
|
|
|
|
|
$ |
(2,433.2 |
) |
|
|
|
|
|
$ |
101.4 |
|
|
|
|
|
Earnings per share, after tax |
|
|
|
|
|
$ |
(0.40 |
) |
|
|
|
|
|
$ |
(6.79 |
) |
|
|
|
|
|
$ |
0.25 |
|
Change from prior quarter — $ |
|
|
|
|
|
|
6.39 |
|
|
|
|
|
|
|
(5.59 |
) |
|
|
|
|
|
|
(0.10 |
) |
Change from prior quarter — % |
|
|
|
|
|
|
(94.1 |
)% |
|
|
|
|
|
|
N.M. |
% |
|
|
|
|
|
|
28.6 |
% |
| |
Change from a year-ago — $ |
|
|
|
|
|
$ |
(0.65 |
) |
|
|
|
|
|
$ |
(7.14 |
) |
|
|
|
|
|
$ |
(0.09 |
) |
Change from a year-ago — % |
|
|
|
|
|
|
N.M. |
% |
|
|
|
|
|
|
N.M. |
% |
|
|
|
|
|
|
(26.5 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Significant items — favorable (unfavorable) impact: |
|
Earnings (1) |
|
|
EPS |
|
|
Earnings (1) |
|
|
EPS |
|
|
Earnings (1) |
|
|
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on redemption of junior subordinated debt |
|
$ |
67.4 |
|
|
$ |
0.10 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Gain related to Visa® stock |
|
|
31.4 |
|
|
|
0.04 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
FDIC special assessment |
|
|
(23.6 |
) |
|
|
(0.03 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Goodwill impairment |
|
|
(4.2 |
) |
|
|
(0.01 |
) |
|
|
(2,602.7 |
) |
|
|
(7.09 |
) |
|
|
— |
|
|
|
— |
|
Preferred stock conversion deemed dividend |
|
|
— |
|
|
|
(0.06 |
) |
|
|
— |
|
|
|
(0.08 |
) |
|
|
— |
|
|
|
— |
|
Franklin relationship restructuring (2) |
|
|
— |
|
|
|
— |
|
|
|
159.9 |
|
|
|
0.44 |
|
|
|
— |
|
|
|
— |
|
Deferred tax valuation allowance benefit (2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3.4 |
|
|
|
0.01 |
|
Merger and restructuring costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14.6 |
) |
|
|
(0.03 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| |
|
June 30, 2009 |
|
|
June 30, 2008 |
|
| (in millions) |
|
After-tax |
|
|
EPS |
|
|
After-tax |
|
|
EPS |
|
Net income — reported earnings |
|
$ |
(2,558.3 |
) |
|
|
|
|
|
$ |
228.4 |
|
|
|
|
|
Earnings per share, after tax |
|
|
|
|
|
$ |
(6.47 |
)(3) |
|
|
|
|
|
$ |
0.59 |
|
Change from a year-ago — $ |
|
|
|
|
|
|
(7.06 |
) |
|
|
|
|
|
|
(0.15 |
) |
Change from a year-ago — % |
|
|
|
|
|
|
N.M. |
% |
|
|
|
|
|
|
(20.3 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Significant items — favorable (unfavorable) impact: |
|
Earnings (1) |
|
|
EPS |
|
|
Earnings (1) |
|
|
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin relationship restructuring (2) |
|
$ |
159.9 |
|
|
$ |
0.39 |
|
|
$ |
— |
|
|
$ |
— |
|
Gain on redemption of junior subordinated debt |
|
|
67.4 |
|
|
|
0.11 |
|
|
|
— |
|
|
|
— |
|
Gain related to Visa® stock |
|
|
31.4 |
|
|
|
0.05 |
|
|
|
25.1 |
|
|
|
0.04 |
|
Goodwill impairment |
|
|
(2,606.9 |
) |
|
|
(6.31 |
) |
|
|
— |
|
|
|
— |
|
FDIC special assessment |
|
|
(23.6 |
) |
|
|
(0.04 |
) |
|
|
— |
|
|
|
— |
|
Preferred stock conversion deemed dividend |
|
|
— |
|
|
|
(0.14 |
) |
|
|
— |
|
|
|
— |
|
Deferred tax valuation allowance benefit (2) |
|
|
— |
|
|
|
— |
|
|
|
14.5 |
|
|
|
0.04 |
|
Visa® indemnification liability |
|
|
— |
|
|
|
— |
|
|
|
12.4 |
|
|
|
0.02 |
|
Merger and restructuring costs |
|
|
— |
|
|
|
— |
|
|
|
(21.9 |
) |
|
|
(0.04 |
) |
Asset impairment |
|
|
— |
|
|
|
— |
|
|
|
(12.4 |
) |
|
|
(0.02 |
) |
N.M., not a meaningful value.
| |
|
|
| (1) |
|
Pretax unless otherwise noted. |
| |
| (2) |
|
After-tax. |
| |
| (3) |
|
Reflects the impact of the 201.6 million additional shares
of common stock issued during the period. Of these shares,
24.6 million were issued late in the 2009 first quarter
and the remaining 177.0 million shares were issued during
the 2009 second quarter. |
17
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons were impacted by a number of significant items summarized below.
| |
1. |
|
Goodwill Impairment. The impacts of goodwill impairment on our reported results were
as follows: |
| |
• |
|
During the 2009 first quarter, bank stock prices continued to decline significantly.
Our stock price declined 78% from $7.66 per share at December 31, 2008 to $1.66 per
share at March 31, 2009. Given this significant decline, we conducted an interim test
for goodwill impairment. As a result, we recorded a noncash $2,602.7 million pretax
($7.09 per common share) charge. (See “Goodwill” discussion located within the
“Critical Accounting Policies and Use of Significant Estimates” section for additional
information). |
| |
• |
|
During the 2009 second quarter, a pretax goodwill impairment of $4.2 million ($0.01
per common share) was recorded relating to the sale of a small payments-related
business in July 2009. |
| |
2. |
|
Franklin Relationship Restructuring. The impacts of the Franklin relationship on our
reported results were as follows (see “Franklin Relationship” discussion located within the
“Risk Management and Capital” section and the “Franklin Loans” discussion located within
the “Critical Accounting Policies and Use of Significant Estimates” discussion for
additional information.): |
| |
• |
|
Performance for the 2009 first quarter included a nonrecurring net tax benefit of
$159.9 million ($0.44 per common share) related to the restructuring with Franklin.
Also as a result of the restructuring, although earnings were not significantly
impacted, commercial NCOs increased $128.3 million as the previously established $130.0
million Franklin-specific ALLL was utilized to write-down the acquired mortgages and
OREO collateral to fair value. |
| |
• |
|
The restructuring affects the comparability of our 2009 second quarter income
statement with prior periods. In the 2009 second quarter, we recorded interest income
from the loans that we now own as a result of the restructuring. Interest income was
earned through interest payments on accruing loans, from the payoff of loans that were
recorded at a discount, and through the accretion of the accretable discount recorded
at the time the loans were acquired. Noninterest expense was also impacted as,
effective with the 2009 second quarter, we pay Franklin to service the loans, and
record the expense of holding foreclosed homes, including any declines in the fair
value of these homes below their carrying value. |
| |
3. |
|
Preferred Stock Conversion. During the 2009 first and second quarters, we converted
114,109 and 92,384 shares, respectively, of Series A 8.50% Non-cumulative Perpetual
Preferred (Series A Preferred Stock) stock into common stock. As part of these
transactions, there was a deemed dividend that did not impact net income, but resulted in
negative impacts of $0.08 per common share for the 2009 first quarter and $0.06 per common
share for the 2009 second quarter. (See “Capital” discussion located within the “Risk
Management and Capital” section for additional information.) |
18
| |
4. |
|
Visa®. Prior to the Visa® initial public offering (IPO)
occurring in March 2008, Visa® was owned by its member banks, which included
the Bank. The impacts related to the Visa® IPO for the first six-month periods
of 2009 and 2008 are presented in the following table: |
Table 6 — Visa® impacts — First Six Months of 2009 and 2008
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Second Quarter |
|
|
First Quarter |
|
|
Second Quarter |
|
|
First Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain related to Visa® stock (1) |
|
$ |
31.4 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
25.1 |
|
Visa® indemnification liability (2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12.4 |
|
Deferred tax valuation allowance benefit
(3) |
|
|
— |
|
|
|
— |
|
|
|
11.1 |
|
|
|
3.4 |
|
| |
|
|
| (1) |
|
Pretax. Recorded to noninterest income, and represents a gain on the sale of
ownership interest in Visa®. As part of the 2009 second quarter sale, we released $7.1 million, as
of June 30, 2009, of the remaining indemnification liability. Concurrently, we established a $7.1
million swap liability associated with the conversion protection provided to the purchasers of the
Visa® shares. |
| |
| (2) |
|
Pretax. Recorded to noninterest expense, and represents a reversal of our
pro-rata portion of an indemnification charge provided to Visa® by its member banks for various
litigation filed against Visa®, as an escrow account was established by Visa® using a portion of
the proceeds received from the IPO. |
| |
| (3) |
|
After-tax. Recorded to provision for income taxes, and represents a reduction to
the previously established capital loss carry-forward valuation allowance related to the value of
Visa® shares held. |
| |
5. |
|
Other Significant Items Influencing Earnings Performance Comparisons. In addition to the
items discussed separately in this section, a number of other items impacted financial
results. These included: |
2009 — Second Quarter
| |
• |
|
$67.4 million pretax gain ($0.10 per common share) related to the redemption of a
portion of our junior subordinated debt. |
| |
• |
|
$23.6 million ($0.03 per common share) negative impact due to a special Federal
Deposit Insurance Corporation (FDIC) insurance premium assessment. |
2008 — Second Quarter
| |
• |
|
$14.6 million ($0.03 per common share) of merger and restructuring costs related to
the Sky Financial Group, Inc. acquisition in 2007. |
| |
• |
|
$1.4 million of asset impairment, included in other noninterest expense, relating to
the charge-off of a receivable. |
2008 — First Quarter
| |
• |
|
$11.0 million ($0.02 per common share) of asset impairment, including (a) $5.9
million venture capital loss included in other noninterest income, (b) $2.6 million
charge-off of a receivable included in other noninterest expense, and (c) $2.5 million
write-down of leasehold improvements in our Cleveland main office included net
occupancy expense. |
| |
• |
|
$7.3 million ($0.01 per common share) of merger and restructuring costs related to
the Sky Financial Group, Inc. acquisition in 2007. |
19
Net Interest Income / Average Balance Sheet
2009 Second Quarter versus 2008 Second Quarter
Fully-taxable equivalent net interest income decreased $44.4 million, or 11%, from the
year-ago quarter primarily reflecting a 19 basis point decline in the net interest margin to 3.10%
from 3.29%. This decline primarily reflected the unfavorable impact of maintaining a higher
liquidity position partially offset by managed reductions of our balance sheet and other capital
management initiatives. Declining market interest rates as well as the impact of increased NALs
also contributed to the decline in net interest margin. Average earning assets also decreased $2.8
billion, or 6%, primarily reflecting a $2.0 billion, or 5%, decline in average total loans and
leases.
The following table details the changes in our average loans and leases and average deposits:
Table 7 — Average Loans/Leases and Deposits — 2009 Second Quarter vs. 2008 Second Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Second Quarter |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Net interest income — FTE |
|
$ |
351,115 |
|
|
$ |
395,490 |
|
|
$ |
(44,375 |
) |
|
|
(11.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loans/Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
13,523 |
|
|
$ |
13,631 |
|
|
$ |
(108 |
) |
|
|
(0.8 |
)% |
Commercial real estate |
|
|
9,199 |
|
|
|
9,601 |
|
|
|
(402 |
) |
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
22,722 |
|
|
|
23,232 |
|
|
|
(510 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,290 |
|
|
|
4,551 |
|
|
|
(1,261 |
) |
|
|
(27.7 |
) |
Home equity |
|
|
7,640 |
|
|
|
7,365 |
|
|
|
275 |
|
|
|
3.7 |
|
Residential mortgage |
|
|
4,657 |
|
|
|
5,178 |
|
|
|
(521 |
) |
|
|
(10.1 |
) |
Other consumer |
|
|
698 |
|
|
|
699 |
|
|
|
(1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,285 |
|
|
|
17,793 |
|
|
|
(1,508 |
) |
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
39,007 |
|
|
$ |
41,025 |
|
|
$ |
(2,018 |
) |
|
|
(4.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
$ |
6,021 |
|
|
$ |
5,061 |
|
|
$ |
960 |
|
|
|
19.0 |
% |
Demand deposits — interest bearing |
|
|
4,547 |
|
|
|
4,086 |
|
|
|
461 |
|
|
|
11.3 |
|
Money market deposits |
|
|
6,355 |
|
|
|
6,267 |
|
|
|
88 |
|
|
|
1.4 |
|
Savings and other domestic time deposits |
|
|
5,031 |
|
|
|
5,242 |
|
|
|
(211 |
) |
|
|
(4.0 |
) |
Core certificates of deposit |
|
|
12,501 |
|
|
|
11,058 |
|
|
|
1,443 |
|
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
34,455 |
|
|
|
31,714 |
|
|
|
2,741 |
|
|
|
8.6 |
|
Other deposits |
|
|
5,079 |
|
|
|
6,313 |
|
|
|
(1,234 |
) |
|
|
(19.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
39,534 |
|
|
$ |
38,027 |
|
|
$ |
1,507 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $2.0 billion, or 5%, decrease in average total loans and leases reflected:
| |
• |
|
$1.5 billion, or 8%, decrease in average total consumer loans. This primarily
reflected a $1.3 billion, or 28%, decline in average automobile loans and leases due to
the 2009 first quarter securitization of $1.0 billion of automobile loans and continued
runoff of the automobile lease portfolio. The $0.5 billion, or 10%, decline in average
residential mortgages reflected the impact of loan sales, as well as the continued
refinance of portfolio loans. The majority of this refinance activity
has been fixed-rate loans, which we typically sell to the secondary
market. Average home equity
loans increased 4%, due primarily to higher utilization of existing lines and slower
runoff experience. The increased line usage was a result of higher quality borrowers
taking advantage of the low interest rate environment. |
| |
• |
|
$0.5 billion, or 2%, decrease in average total commercial loans, with most of the
decline reflected in CRE loans. The decline in CRE loans primarily reflected the
reclassification process of CRE loans to C&I loans completed late in the 2009 first
quarter. The reclassification was primarily associated with loans to businesses
secured by the real estate and buildings that house their operations. These
owner-occupied loans secured by real estate were underwritten based on the cash flow of
the business and are more appropriately classified as C&I loans. Also contributing to
the decline were payoffs and pay downs, as well as the impact of NCOs. The decline in
average C&I loans reflected pay downs, the impact of the 2009 first quarter
reclassification project, and the Franklin restructuring. Also contributing to the
decline were payoffs, balance reductions, and charge-offs. |
20
Average total deposits increased $1.5 billion, or 4%, from the year-ago quarter and reflected:
| |
• |
|
$2.7 billion, or 9%, growth in average total core deposits, primarily reflecting
increased marketing efforts and initiatives for deposit accounts. |
Partially offset by:
| |
• |
|
$1.2 billion, or 20%, decrease in average other deposits, primarily reflecting a
managed decline in public fund and foreign time deposits. |
2009 Second Quarter versus 2009 First Quarter
Compared with the 2009 first quarter, fully-taxable equivalent net interest income increased
$10.0 million, or 3%. This reflected a 13 basis point increase in the net interest margin to 3.10%
from 2.97%. The increase in the net interest margin reflected a combination of factors including
favorable impacts from strong core deposit growth, the benefit of lower deposit pricing, and the
recognition of purchase accounting discounts from the payoff of Franklin loans partially offset by
the negative impact of maintaining a higher liquidity position. Fully-taxable equivalent net
interest income increased despite a $1.1 billion, or 2%, decline in average earning assets with
average total loans and leases decreasing 5% and other earning assets, which includes investment
securities, increasing 13%.
The following table details the changes in our average loans and leases and average deposits:
Table 8 — Average Loans/Leases and Deposits — 2009 Second Quarter vs. 2009 First Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2009 |
|
|
|
|
| |
|
Second |
|
|
First |
|
|
Change |
|
| (in thousands) |
|
Quarter |
|
|
Quarter |
|
|
Amount |
|
|
Percent |
|
Net interest income — FTE |
|
$ |
351,115 |
|
|
$ |
341,087 |
|
|
$ |
10,028 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loans/Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
13,523 |
|
|
$ |
13,541 |
|
|
$ |
(18 |
) |
|
|
(0.1 |
)% |
Commercial real estate |
|
|
9,199 |
|
|
|
10,112 |
|
|
|
(913 |
) |
|
|
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
22,722 |
|
|
|
23,653 |
|
|
|
(931 |
) |
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,290 |
|
|
|
4,354 |
|
|
|
(1,064 |
) |
|
|
(24.4 |
) |
Home equity |
|
|
7,640 |
|
|
|
7,577 |
|
|
|
63 |
|
|
|
0.8 |
|
Residential mortgage |
|
|
4,657 |
|
|
|
4,611 |
|
|
|
46 |
|
|
|
1.0 |
|
Other consumer |
|
|
698 |
|
|
|
671 |
|
|
|
27 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,285 |
|
|
|
17,213 |
|
|
|
(928 |
) |
|
|
(5.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
39,007 |
|
|
$ |
40,866 |
|
|
$ |
(1,859 |
) |
|
|
(4.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
$ |
6,021 |
|
|
$ |
5,544 |
|
|
$ |
477 |
|
|
|
8.6 |
% |
Demand deposits — interest bearing |
|
|
4,547 |
|
|
|
4,076 |
|
|
|
471 |
|
|
|
11.6 |
|
Money market deposits |
|
|
6,355 |
|
|
|
5,593 |
|
|
|
762 |
|
|
|
13.6 |
|
Savings and other domestic time deposits |
|
|
5,031 |
|
|
|
5,041 |
|
|
|
(10 |
) |
|
|
(0.2 |
) |
Core certificates of deposit |
|
|
12,501 |
|
|
|
12,784 |
|
|
|
(283 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
34,455 |
|
|
|
33,038 |
|
|
|
1,417 |
|
|
|
4.3 |
|
Other deposits |
|
|
5,079 |
|
|
|
5,151 |
|
|
|
(72 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
39,534 |
|
|
$ |
38,189 |
|
|
$ |
1,345 |
|
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Average total loans and leases declined $1.9 billion, or 5%, primarily reflecting declines in
total CRE and automobile loans and leases.
Average total commercial loans decreased $0.9 billion, or 4%. The decline in average CRE
loans primarily reflected the reclassification process of CRE loans to C&I loans noted earlier.
Also contributing to the decline were payoffs, balance reductions, and charge-offs. Average C&I
loans were essentially unchanged, reflecting the benefit of the first quarter’s CRE
reclassification and new loan originations, offset almost entirely by payoffs and line reductions
as well as the first quarter restructuring of the Franklin relationship which had the effect of
reducing C&I loans and increasing residential mortgages and home equity loans.
Average total consumer loans declined $0.9 billion, or 5%. This decline was entirely
attributable to the $1.1 billion, or 24%, decrease in average total automobile loans and leases.
Average automobile loans declined $1.0 billion, reflecting the impact of a $1.0 billion automobile
loan securitization at the end of the 2009 first quarter. Average automobile leases declined $0.1
billion, reflecting the continued runoff of the lease portfolio.
Average residential mortgages and home equity loans were essentially unchanged. The increase
due to the 2009 first quarter reclassification of Franklin loans to these categories from C&I loans
offset the negative impact of the sale of mortgage loans at the end of the 2009 first quarter.
Though mortgage loan originations remained strong, as is our practice, we sold virtually all of our
fixed-rate production in the secondary market. Demand for home equity loans remained weak,
reflecting the impact of the economic environment and home values.
The 13% increase in average other earning assets reflected redeployment of the cash proceeds
from the 2009 first quarter automobile loan securitization into investment securities, as well as
the retention of a portion of the resulting securities. Average investment securities increased
$0.9 billion, or 20%, from the prior quarter.
Average total deposits increased $1.3 billion, or 4% (14% annualized), from the prior quarter
and reflected:
| |
• |
|
$1.4 billion, or 4%, growth in average total core deposits, primarily reflecting
increased marketing efforts and initiatives for deposit accounts. |
Tables 9 and 10 reflect quarterly average balance sheets and rates earned and paid on
interest-earning assets and interest-bearing liabilities.
22
Table 9 — Consolidated Quarterly Average Balance Sheets
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
| Fully-taxable equivalent basis |
|
2009 |
|
|
2008 |
|
|
2Q09 vs 2Q08 |
|
| (in millions) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
Amount |
|
|
Percent |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
$ |
369 |
|
|
$ |
355 |
|
|
$ |
343 |
|
|
$ |
321 |
|
|
$ |
256 |
|
|
$ |
113 |
|
|
|
44.1 |
% |
Trading account securities |
|
|
88 |
|
|
|
278 |
|
|
|
940 |
|
|
|
992 |
|
|
|
1,243 |
|
|
|
(1,155 |
) |
|
|
(92.9 |
) |
Federal funds sold and securities purchased
under resale agreements |
|
|
— |
|
|
|
19 |
|
|
|
48 |
|
|
|
363 |
|
|
|
566 |
|
|
|
(566 |
) |
|
|
(100.0 |
) |
Loans held for sale |
|
|
709 |
|
|
|
627 |
|
|
|
329 |
|
|
|
274 |
|
|
|
501 |
|
|
|
208 |
|
|
|
41.5 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
5,181 |
|
|
|
3,961 |
|
|
|
3,789 |
|
|
|
3,975 |
|
|
|
3,971 |
|
|
|
1,210 |
|
|
|
30.5 |
|
Tax-exempt |
|
|
126 |
|
|
|
465 |
|
|
|
689 |
|
|
|
712 |
|
|
|
717 |
|
|
|
(591 |
) |
|
|
(82.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
5,307 |
|
|
|
4,426 |
|
|
|
4,478 |
|
|
|
4,687 |
|
|
|
4,688 |
|
|
|
619 |
|
|
|
13.2 |
|
Loans and leases: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
13,523 |
|
|
|
13,541 |
|
|
|
13,746 |
|
|
|
13,629 |
|
|
|
13,631 |
|
|
|
(108 |
) |
|
|
(0.8 |
) |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,946 |
|
|
|
2,033 |
|
|
|
2,103 |
|
|
|
2,090 |
|
|
|
2,038 |
|
|
|
(92 |
) |
|
|
(4.5 |
) |
Commercial |
|
|
7,253 |
|
|
|
8,079 |
|
|
|
8,115 |
|
|
|
7,726 |
|
|
|
7,563 |
|
|
|
(310 |
) |
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
9,199 |
|
|
|
10,112 |
|
|
|
10,218 |
|
|
|
9,816 |
|
|
|
9,601 |
|
|
|
(402 |
) |
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
22,722 |
|
|
|
23,653 |
|
|
|
23,964 |
|
|
|
23,445 |
|
|
|
23,232 |
|
|
|
(510 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
2,867 |
|
|
|
3,837 |
|
|
|
3,899 |
|
|
|
3,856 |
|
|
|
3,636 |
|
|
|
(769 |
) |
|
|
(21.1 |
) |
Automobile leases |
|
|
423 |
|
|
|
517 |
|
|
|
636 |
|
|
|
768 |
|
|
|
915 |
|
|
|
(492 |
) |
|
|
(53.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,290 |
|
|
|
4,354 |
|
|
|
4,535 |
|
|
|
4,624 |
|
|
|
4,551 |
|
|
|
(1,261 |
) |
|
|
(27.7 |
) |
Home equity |
|
|
7,640 |
|
|
|
7,577 |
|
|
|
7,523 |
|
|
|
7,453 |
|
|
|
7,365 |
|
|
|
275 |
|
|
|
3.7 |
|
Residential mortgage |
|
|
4,657 |
|
|
|
4,611 |
|
|
|
4,737 |
|
|
|
4,812 |
|
|
|
5,178 |
|
|
|
(521 |
) |
|
|
(10.1 |
) |
Other loans |
|
|
698 |
|
|
|
671 |
|
|
|
678 |
|
|
|
670 |
|
|
|
699 |
|
|
|
(1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,285 |
|
|
|
17,213 |
|
|
|
17,473 |
|
|
|
17,559 |
|
|
|
17,793 |
|
|
|
(1,508 |
) |
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
39,007 |
|
|
|
40,866 |
|
|
|
41,437 |
|
|
|
41,004 |
|
|
|
41,025 |
|
|
|
(2,018 |
) |
|
|
(4.9 |
) |
Allowance for loan and lease losses |
|
|
(930 |
) |
|
|
(913 |
) |
|
|
(764 |
) |
|
|
(731 |
) |
|
|
(654 |
) |
|
|
(276 |
) |
|
|
42.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
38,077 |
|
|
|
39,953 |
|
|
|
40,673 |
|
|
|
40,273 |
|
|
|
40,371 |
|
|
|
(2,294 |
) |
|
|
(5.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
45,480 |
|
|
|
46,571 |
|
|
|
47,575 |
|
|
|
47,641 |
|
|
|
48,279 |
|
|
|
(2,799 |
) |
|
|
(5.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
2,466 |
|
|
|
1,553 |
|
|
|
928 |
|
|
|
925 |
|
|
|
943 |
|
|
|
1,523 |
|
|
|
N.M. |
|
Intangible assets |
|
|
780 |
|
|
|
3,371 |
|
|
|
3,421 |
|
|
|
3,441 |
|
|
|
3,449 |
|
|
|
(2,669 |
) |
|
|
(77.4 |
) |
All other assets |
|
|
3,701 |
|
|
|
3,571 |
|
|
|
3,447 |
|
|
|
3,384 |
|
|
|
3,522 |
|
|
|
179 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
51,497 |
|
|
$ |
54,153 |
|
|
$ |
54,607 |
|
|
$ |
54,660 |
|
|
$ |
55,539 |
|
|
$ |
(4,042 |
) |
|
|
(7.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
$ |
6,021 |
|
|
$ |
5,544 |
|
|
$ |
5,205 |
|
|
$ |
5,080 |
|
|
$ |
5,061 |
|
|
$ |
960 |
|
|
|
19.0 |
% |
Demand deposits — interest bearing |
|
|
4,547 |
|
|
|
4,076 |
|
|
|
3,988 |
|
|
|
4,005 |
|
|
|
4,086 |
|
|
|
461 |
|
|
|
11.3 |
|
Money market deposits |
|
|
6,355 |
|
|
|
5,593 |
|
|
|
5,500 |
|
|
|
5,860 |
|
|
|
6,267 |
|
|
|
88 |
|
|
|
1.4 |
|
Savings and other domestic deposits |
|
|
5,031 |
|
|
|
5,041 |
|
|
|
5,034 |
|
|
|
5,100 |
|
|
|
5,242 |
|
|
|
(211 |
) |
|
|
(4.0 |
) |
Core certificates of deposit |
|
|
12,501 |
|
|
|
12,784 |
|
|
|
12,588 |
|
|
|
11,993 |
|
|
|
11,058 |
|
|
|
1,443 |
|
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
34,455 |
|
|
|
33,038 |
|
|
|
32,315 |
|
|
|
32,038 |
|
|
|
31,714 |
|
|
|
2,741 |
|
|
|
8.6 |
|
Other domestic deposits of $250,000 or more |
|
|
886 |
|
|
|
1,069 |
|
|
|
1,365 |
|
|
|
1,692 |
|
|
|
1,842 |
|
|
|
(956 |
) |
|
|
(51.9 |
) |
Brokered deposits and negotiable CDs |
|
|
3,740 |
|
|
|
3,449 |
|
|
|
3,049 |
|
|
|
3,025 |
|
|
|
3,361 |
|
|
|
379 |
|
|
|
11.3 |
|
Deposits in foreign offices |
|
|
453 |
|
|
|
633 |
|
|
|
854 |
|
|
|
1,048 |
|
|
|
1,110 |
|
|
|
(657 |
) |
|
|
(59.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
39,534 |
|
|
|
38,189 |
|
|
|
37,583 |
|
|
|
37,803 |
|
|
|
38,027 |
|
|
|
1,507 |
|
|
|
4.0 |
|
Short-term borrowings |
|
|
879 |
|
|
|
1,099 |
|
|
|
1,748 |
|
|
|
2,131 |
|
|
|
2,854 |
|
|
|
(1,975 |
) |
|
|
(69.2 |
) |
Federal Home Loan Bank advances |
|
|
947 |
|
|
|
2,414 |
|
|
|
3,188 |
|
|
|
3,139 |
|
|
|
3,412 |
|
|
|
(2,465 |
) |
|
|
(72.2 |
) |
Subordinated notes and other long-term debt |
|
|
4,640 |
|
|
|
4,612 |
|
|
|
4,252 |
|
|
|
4,382 |
|
|
|
3,928 |
|
|
|
712 |
|
|
|
18.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
39,979 |
|
|
|
40,770 |
|
|
|
41,566 |
|
|
|
42,375 |
|
|
|
43,160 |
|
|
|
(3,181 |
) |
|
|
(7.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other liabilities |
|
|
569 |
|
|
|
614 |
|
|
|
817 |
|
|
|
882 |
|
|
|
961 |
|
|
|
(392 |
) |
|
|
(40.8 |
) |
Shareholders’ equity |
|
|
4,928 |
|
|
|
7,225 |
|
|
|
7,019 |
|
|
|
6,323 |
|
|
|
6,357 |
|
|
|
(1,429 |
) |
|
|
(22.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity |
|
$ |
51,497 |
|
|
$ |
54,153 |
|
|
$ |
54,607 |
|
|
$ |
54,660 |
|
|
$ |
55,539 |
|
|
$ |
(4,042 |
) |
|
|
(7.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
| N.M., not a meaningful value. |
| |
| (1)
|
|
For purposes of this analysis, non-accrual loans are reflected in the average
balances of loans. |
23
Table 10 — Consolidated Quarterly Net Interest Margin Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Average
Rates (2) |
|
| |
|
2009 |
|
|
2008 |
|
| Fully-taxable equivalent basis (1) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
|
0.37 |
% |
|
|
0.45 |
% |
|
|
1.44 |
% |
|
|
2.17 |
% |
|
|
2.77 |
% |
Trading account securities |
|
|
2.22 |
|
|
|
4.04 |
|
|
|
5.32 |
|
|
|
5.45 |
|
|
|
5.13 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
0.82 |
|
|
|
0.20 |
|
|
|
0.24 |
|
|
|
2.02 |
|
|
|
2.08 |
|
Loans held for sale |
|
|
5.19 |
|
|
|
5.04 |
|
|
|
6.58 |
|
|
|
6.54 |
|
|
|
5.98 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
4.63 |
|
|
|
5.60 |
|
|
|
5.74 |
|
|
|
5.54 |
|
|
|
5.50 |
|
Tax-exempt |
|
|
6.83 |
|
|
|
6.61 |
|
|
|
7.02 |
|
|
|
6.80 |
|
|
|
6.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
4.69 |
|
|
|
5.71 |
|
|
|
5.94 |
|
|
|
5.73 |
|
|
|
5.69 |
|
Loans and leases: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
5.00 |
|
|
|
4.60 |
|
|
|
5.01 |
|
|
|
5.46 |
|
|
|
5.53 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
2.78 |
|
|
|
2.76 |
|
|
|
4.55 |
|
|
|
4.69 |
|
|
|
4.81 |
|
Commercial |
|
|
3.56 |
|
|
|
3.76 |
|
|
|
5.07 |
|
|
|
5.33 |
|
|
|
5.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
3.39 |
|
|
|
3.55 |
|
|
|
4.96 |
|
|
|
5.19 |
|
|
|
5.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
4.35 |
|
|
|
4.15 |
|
|
|
4.99 |
|
|
|
5.35 |
|
|
|
5.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
7.28 |
|
|
|
7.20 |
|
|
|
7.17 |
|
|
|
7.13 |
|
|
|
7.12 |
|
Automobile leases |
|
|
6.12 |
|
|
|
6.03 |
|
|
|
5.82 |
|
|
|
5.70 |
|
|
|
5.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
7.13 |
|
|
|
7.06 |
|
|
|
6.98 |
|
|
|
6.89 |
|
|
|
6.81 |
|
Home equity |
|
|
5.75 |
|
|
|
5.13 |
|
|
|
5.87 |
|
|
|
6.19 |
|
|
|
6.43 |
|
Residential mortgage |
|
|
5.12 |
|
|
|
5.71 |
|
|
|
5.84 |
|
|
|
5.83 |
|
|
|
5.78 |
|
Other loans |
|
|
8.22 |
|
|
|
8.97 |
|
|
|
9.25 |
|
|
|
9.71 |
|
|
|
9.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
5.95 |
|
|
|
5.92 |
|
|
|
6.28 |
|
|
|
6.41 |
|
|
|
6.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
5.02 |
|
|
|
4.90 |
|
|
|
5.53 |
|
|
|
5.80 |
|
|
|
5.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
4.99 |
% |
|
|
4.99 |
% |
|
|
5.57 |
% |
|
|
5.77 |
% |
|
|
5.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
Demand deposits — interest bearing |
|
|
0.18 |
|
|
|
0.14 |
|
|
|
0.34 |
|
|
|
0.51 |
|
|
|
0.55 |
|
Money market deposits |
|
|
1.14 |
|
|
|
1.02 |
|
|
|
1.31 |
|
|
|
1.66 |
|
|
|
1.76 |
|
Savings and other domestic deposits |
|
|
1.37 |
|
|
|
1.50 |
|
|
|
1.72 |
|
|
|
1.79 |
|
|
|
1.91 |
|
Core certificates of deposit |
|
|
3.50 |
|
|
|
3.81 |
|
|
|
4.02 |
|
|
|
4.05 |
|
|
|
4.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
2.06 |
|
|
|
2.28 |
|
|
|
2.50 |
|
|
|
2.58 |
|
|
|
2.68 |
|
Other domestic deposits of $250,000 or more |
|
|
2.61 |
|
|
|
2.92 |
|
|
|
3.39 |
|
|
|
3.50 |
|
|
|
3.76 |
|
Brokered deposits and negotiable CDs |
|
|
2.54 |
|
|
|
2.97 |
|
|
|
3.39 |
|
|
|
3.37 |
|
|
|
3.38 |
|
Deposits in foreign offices |
|
|
0.20 |
|
|
|
0.17 |
|
|
|
0.90 |
|
|
|
1.49 |
|
|
|
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
2.11 |
|
|
|
2.33 |
|
|
|
2.58 |
|
|
|
2.66 |
|
|
|
2.78 |
|
Short-term borrowings |
|
|
0.26 |
|
|
|
0.25 |
|
|
|
0.85 |
|
|
|
1.42 |
|
|
|
1.66 |
|
Federal Home Loan Bank advances |
|
|
1.13 |
|
|
|
1.03 |
|
|
|
3.04 |
|
|
|
2.92 |
|
|
|
3.01 |
|
Subordinated notes and other long-term debt |
|
|
2.91 |
|
|
|
3.29 |
|
|
|
4.49 |
|
|
|
4.29 |
|
|
|
4.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
2.14 |
% |
|
|
2.31 |
% |
|
|
2.74 |
% |
|
|
2.79 |
% |
|
|
2.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
2.85 |
% |
|
|
2.68 |
% |
|
|
2.83 |
% |
|
|
2.98 |
% |
|
|
3.00 |
% |
Impact of noninterest bearing funds on margin |
|
|
0.25 |
|
|
|
0.29 |
|
|
|
0.35 |
|
|
|
0.31 |
|
|
|
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
3.10 |
% |
|
|
2.97 |
% |
|
|
3.18 |
% |
|
|
3.29 |
% |
|
|
3.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Fully taxable equivalent (FTE) yields are calculated
assuming a 35% tax rate. See Table 3 for the FTE adjustment. |
| |
| (2) |
|
Loan, lease, and deposit average rates include impact of applicable derivatives and non-deferrable fees. |
| |
| (3) |
|
For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans. |
24
2009 First Six Months versus 2008 First Six Months
Fully-taxable equivalent net interest income for the first six-month period of 2009 declined
$85.6 million, or 11%, from the comparable year-ago period primarily reflecting a 23 basis point
decline in the net interest margin. This decline primarily reflected the unfavorable impact of
maintaining a higher liquidity position partially offset by managed reductions of our balance sheet
and other capital management initiatives. Declining market interest rates as well as the impact of
increased NALs also contributed to the decline in net interest margin. Average earning assets also
declined $1.9 billion, or 4%, primarily reflecting a $1.0 billion decline in trading account
securities, as well as a $0.8 billion, or 2%, decline in average total loans and leases.
The following table details the changes in our average loans and leases and average deposits:
Table 11 — Average Loans/Leases and Deposits — 2009 First Six Months vs. 2008 First Six Months
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Net interest income — FTE |
|
$ |
692,202 |
|
|
$ |
777,816 |
|
|
$ |
(85,614 |
) |
|
|
(11.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loans/Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
13,532 |
|
|
$ |
13,487 |
|
|
$ |
45 |
|
|
|
0.3 |
% |
Commercial real estate |
|
|
9,653 |
|
|
|
9,444 |
|
|
|
209 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
23,185 |
|
|
|
22,931 |
|
|
|
254 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,820 |
|
|
|
4,475 |
|
|
|
(655 |
) |
|
|
(14.6 |
) |
Home equity |
|
|
7,609 |
|
|
|
7,320 |
|
|
|
289 |
|
|
|
3.9 |
|
Residential mortgage |
|
|
4,634 |
|
|
|
5,264 |
|
|
|
(630 |
) |
|
|
(12.0 |
) |
Other consumer |
|
|
683 |
|
|
|
706 |
|
|
|
(23 |
) |
|
|
(3.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,746 |
|
|
|
17,765 |
|
|
|
(1,019 |
) |
|
|
(5.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
39,931 |
|
|
$ |
40,696 |
|
|
$ |
(765 |
) |
|
|
(1.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
$ |
5,784 |
|
|
$ |
5,047 |
|
|
$ |
737 |
|
|
|
14.6 |
% |
Demand deposits — interest bearing |
|
|
4,312 |
|
|
|
4,010 |
|
|
|
302 |
|
|
|
7.5 |
|
Money market deposits |
|
|
5,975 |
|
|
|
6,510 |
|
|
|
(535 |
) |
|
|
(8.2 |
) |
Savings and other domestic time deposits |
|
|
5,036 |
|
|
|
5,228 |
|
|
|
(192 |
) |
|
|
(3.7 |
) |
Core certificates of deposit |
|
|
12,643 |
|
|
|
10,975 |
|
|
|
1,668 |
|
|
|
15.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
33,750 |
|
|
|
31,770 |
|
|
|
1,980 |
|
|
|
6.2 |
|
Other deposits |
|
|
5,115 |
|
|
|
6,209 |
|
|
|
(1,094 |
) |
|
|
(17.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
38,865 |
|
|
$ |
37,979 |
|
|
$ |
886 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $0.8 billion, or 2%, decrease in average total loans and leases primarily reflected:
| |
• |
|
$0.7 billion, or 15%, decline in average automobile loans and leases, primarily
reflecting the 2009 securitization of $1.0 billion of automobile loans, and the
continued runoff of the automobile lease portfolio. |
| |
• |
|
$0.6 billion, or 12%, decline in residential mortgages, reflecting the impact of
loan sales, as well as the continued refinance of portfolio loans.
The majority of this re-finance activity has been fixed-rate loans,
which we typically sell to the secondary market. |
25
Partially offset by:
| |
• |
|
$0.3 billion, or 4%, increase in average home equity loans, reflecting higher
utilization of existing lines resulting from higher quality borrowers taking advantage
of the current relatively lower interest rate environment, as well as a slowdown in
runoff. |
| |
• |
|
$0.2 billion, or 2%, increase in average CRE loans, reflecting draws on existing
performing projects and new originations to existing CRE borrowers. These increases
were partially offset by our 2009 second quarter efforts to shrink this portfolio
through payoffs and pay downs, as well as the impact of NCOs and the impact of the 2009
first quarter reclassification for CRE loans into C&I loans noted earlier. |
The $0.9 billion, or 2%, increase/decrease in average total deposits reflected:
| |
• |
|
$2.0 billion, or 6%, growth in total core deposits, primarily reflecting increased
marketing efforts and initiatives for deposit accounts. |
Partially offset by:
| |
• |
|
$1.1 billion, or 18%, decline in average other deposits, primarily reflecting a
managed decline in public fund and foreign time deposits. |
26
Table 12 — Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
YTD Average Balances |
|
|
YTD Average Rates (1) |
|
| Fully taxable equivalent basis |
|
Six Months Ending June 30, |
|
|
Change |
|
|
Six Months Ending June 30, |
|
| (in millions of dollars) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
$ |
362 |
|
|
$ |
274 |
|
|
$ |
88 |
|
|
|
32.1 |
% |
|
|
0.41 |
% |
|
|
3.43 |
% |
Trading account securities |
|
|
182 |
|
|
|
1,214 |
|
|
|
(1,032 |
) |
|
|
(85.0 |
) |
|
|
3.61 |
|
|
|
5.18 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
9 |
|
|
|
668 |
|
|
|
(659 |
) |
|
|
(98.7 |
) |
|
|
0.21 |
|
|
|
2.65 |
|
Loans held for sale |
|
|
668 |
|
|
|
533 |
|
|
|
135 |
|
|
|
25.3 |
|
|
|
5.12 |
|
|
|
5.68 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
4,575 |
|
|
|
3,873 |
|
|
|
702 |
|
|
|
18.1 |
|
|
|
5.05 |
|
|
|
5.60 |
|
Tax-exempt |
|
|
295 |
|
|
|
710 |
|
|
|
(415 |
) |
|
|
(58.5 |
) |
|
|
6.68 |
|
|
|
6.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
4,870 |
|
|
|
4,583 |
|
|
|
287 |
|
|
|
6.3 |
|
|
|
5.15 |
|
|
|
5.78 |
|
Loans and leases: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
13,532 |
|
|
|
13,487 |
|
|
|
45 |
|
|
|
0.3 |
|
|
|
4.80 |
|
|
|
5.92 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,989 |
|
|
|
2,026 |
|
|
|
(37 |
) |
|
|
(1.8 |
) |
|
|
2.77 |
|
|
|
5.34 |
|
Commercial |
|
|
7,664 |
|
|
|
7,418 |
|
|
|
246 |
|
|
|
3.3 |
|
|
|
3.66 |
|
|
|
5.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
9,653 |
|
|
|
9,444 |
|
|
|
209 |
|
|
|
2.2 |
|
|
|
3.48 |
|
|
|
5.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
23,185 |
|
|
|
22,931 |
|
|
|
254 |
|
|
|
1.1 |
|
|
|
4.25 |
|
|
|
5.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
3,350 |
|
|
|
3,472 |
|
|
|
(122 |
) |
|
|
(3.5 |
) |
|
|
7.23 |
|
|
|
7.18 |
|
Automobile leases |
|
|
470 |
|
|
|
1,003 |
|
|
|
(533 |
) |
|
|
(53.1 |
) |
|
|
6.07 |
|
|
|
5.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,820 |
|
|
|
4,475 |
|
|
|
(655 |
) |
|
|
(14.6 |
) |
|
|
7.09 |
|
|
|
6.82 |
|
Home equity |
|
|
7,609 |
|
|
|
7,320 |
|
|
|
289 |
|
|
|
3.9 |
|
|
|
5.44 |
|
|
|
6.82 |
|
Residential mortgage |
|
|
4,634 |
|
|
|
5,264 |
|
|
|
(630 |
) |
|
|
(12.0 |
) |
|
|
5.41 |
|
|
|
5.82 |
|
Other loans |
|
|
683 |
|
|
|
706 |
|
|
|
(23 |
) |
|
|
(3.3 |
) |
|
|
8.58 |
|
|
|
10.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,746 |
|
|
|
17,765 |
|
|
|
(1,019 |
) |
|
|
(5.7 |
) |
|
|
5.94 |
|
|
|
6.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
39,931 |
|
|
|
40,696 |
|
|
|
(765 |
) |
|
|
(1.9 |
) |
|
|
4.96 |
|
|
|
6.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
|
(922 |
) |
|
|
(642 |
) |
|
|
(280 |
) |
|
|
(43.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
39,009 |
|
|
|
40,054 |
|
|
|
(1,045 |
) |
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
46,022 |
|
|
|
47,968 |
|
|
|
(1,946 |
) |
|
|
(4.1 |
) |
|
|
5.00 |
% |
|
|
6.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
2,012 |
|
|
|
990 |
|
|
|
1,022 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
2,069 |
|
|
|
3,460 |
|
|
|
(1,391 |
) |
|
|
(40.2 |
) |
|
|
|
|
|
|
|
|
All other assets |
|
|
3,637 |
|
|
|
3,436 |
|
|
|
201 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
52,818 |
|
|
$ |
55,212 |
|
|
$ |
(2,394 |
) |
|
|
(4.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — non-interest bearing |
|
$ |
5,784 |
|
|
$ |
5,047 |
|
|
$ |
737 |
|
|
|
14.6 |
% |
|
|
— |
% |
|
|
— |
% |
Demand deposits — interest bearing |
|
|
4,312 |
|
|
|
4,010 |
|
|
|
302 |
|
|
|
7.5 |
|
|
|
0.16 |
|
|
|
0.68 |
|
Money market deposits |
|
|
5,975 |
|
|
|
6,510 |
|
|
|
(535 |
) |
|
|
(8.2 |
) |
|
|
1.09 |
|
|
|
2.31 |
|
Savings and other domestic time deposits |
|
|
5,036 |
|
|
|
5,228 |
|
|
|
(192 |
) |
|
|
(3.7 |
) |
|
|
1.43 |
|
|
|
2.13 |
|
Core certificates of deposit |
|
|
12,643 |
|
|
|
10,975 |
|
|
|
1,668 |
|
|
|
15.2 |
|
|
|
3.66 |
|
|
|
4.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
33,750 |
|
|
|
31,770 |
|
|
|
1,980 |
|
|
|
6.2 |
|
|
|
2.17 |
|
|
|
2.94 |
|
Other domestic time deposits of $250,000 or more |
|
|
977 |
|
|
|
1,760 |
|
|
|
(783 |
) |
|
|
(44.5 |
) |
|
|
2.78 |
|
|
|
4.05 |
|
Brokered deposits and negotiable CDs |
|
|
3,596 |
|
|
|
3,451 |
|
|
|
145 |
|
|
|
4.2 |
|
|
|
2.74 |
|
|
|
3.92 |
|
Deposits in foreign offices |
|
|
542 |
|
|
|
998 |
|
|
|
(456 |
) |
|
|
(45.7 |
) |
|
|
0.18 |
|
|
|
1.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
38,865 |
|
|
|
37,979 |
|
|
|
886 |
|
|
|
2.3 |
|
|
|
2.22 |
|
|
|
3.07 |
|
Short-term borrowings |
|
|
988 |
|
|
|
2,813 |
|
|
|
(1,825 |
) |
|
|
(64.9 |
) |
|
|
0.26 |
|
|
|
2.21 |
|
Federal Home Loan Bank advances |
|
|
1,677 |
|
|
|
3,399 |
|
|
|
(1,722 |
) |
|
|
(50.7 |
) |
|
|
1.06 |
|
|
|
3.47 |
|
Subordinated notes and other long-term debt |
|
|
4,627 |
|
|
|
3,872 |
|
|
|
755 |
|
|
|
19.5 |
|
|
|
3.10 |
|
|
|
4.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
40,373 |
|
|
|
43,016 |
|
|
|
(2,643 |
) |
|
|
(6.1 |
) |
|
|
2.22 |
|
|
|
3.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other liabilities |
|
|
591 |
|
|
|
1,032 |
|
|
|
(441 |
) |
|
|
(42.7 |
) |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
6,070 |
|
|
|
6,117 |
|
|
|
(47 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity |
|
$ |
52,818 |
|
|
$ |
55,212 |
|
|
$ |
(2,394 |
) |
|
|
(4.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.78 |
|
|
|
2.94 |
|
Impact of non-interest bearing funds on margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.25 |
|
|
|
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.03 |
% |
|
|
3.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
| |
|
|
| (1) |
|
Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees. |
| |
| (2) |
|
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans. |
27
Provision for Credit Losses
(This section should be read in conjunction with Significant Item 2 and the Credit Risk section.)
The provision for credit losses is the expense necessary to maintain the ALLL and the
allowance for unfunded loan commitments (AULC) at levels adequate to absorb our estimate of
probable inherent credit losses in the loan and lease portfolio and the portfolio of unfunded loan
commitments and letters of credit.
The following table details the Franklin-related impact to the provision for credit losses for
each of the past five quarters:
Table 13 — Provision for Credit Losses — Franklin-Related Impact
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
(10.1 |
) |
|
$ |
(1.7 |
) |
|
$ |
438.0 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-Franklin |
|
|
423.8 |
|
|
|
293.5 |
|
|
|
284.6 |
|
|
|
125.4 |
|
|
|
120.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
413.7 |
|
|
$ |
291.8 |
|
|
$ |
722.6 |
|
|
$ |
125.4 |
|
|
$ |
120.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs (recoveries) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
(10.1 |
) |
|
$ |
128.3 |
|
|
$ |
423.3 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-Franklin |
|
|
344.5 |
|
|
|
213.2 |
|
|
|
137.3 |
|
|
|
83.8 |
|
|
|
65.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
334.4 |
|
|
$ |
341.5 |
|
|
$ |
560.6 |
|
|
$ |
83.8 |
|
|
$ |
65.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses in
excess of
net charge-offs |
|
$ |
(344.5 |
) |
|
$ |
(213.2 |
) |
|
$ |
(137.3 |
) |
|
$ |
(83.8 |
) |
|
$ |
(65.2 |
) |
Franklin |
|
|
— |
|
|
|
(130.0 |
) |
|
|
14.7 |
|
|
|
— |
|
|
|
— |
|
Non-Franklin |
|
|
79.3 |
|
|
|
80.3 |
|
|
|
147.3 |
|
|
|
41.6 |
|
|
|
55.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
79.3 |
|
|
$ |
(49.7 |
) |
|
$ |
162.0 |
|
|
$ |
41.6 |
|
|
$ |
55.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for credit losses in the first six-month period of 2009 was $705.5 million, up
$496.1 million compared with $209.5 million in 2008. The reported provision for credit losses for
the first six-month period of 2009 of $705.5 million exceeded total NCOs by $29.6 million. (See
“Credit Quality” discussion).
Noninterest Income
(This section should be read in conjunction with Significant Items 4 and 5.)
The following table reflects noninterest income for each of the past five quarters:
Table 14 — Noninterest Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Service charges on deposit accounts |
|
$ |
75,353 |
|
|
$ |
69,878 |
|
|
$ |
75,247 |
|
|
$ |
80,508 |
|
|
$ |
79,630 |
|
Brokerage and insurance income |
|
|
32,052 |
|
|
|
39,948 |
|
|
|
31,233 |
|
|
|
34,309 |
|
|
|
35,694 |
|
Trust services |
|
|
25,722 |
|
|
|
24,810 |
|
|
|
27,811 |
|
|
|
30,952 |
|
|
|
33,089 |
|
Electronic banking |
|
|
24,479 |
|
|
|
22,482 |
|
|
|
22,838 |
|
|
|
23,446 |
|
|
|
23,242 |
|
Bank owned life insurance income |
|
|
14,266 |
|
|
|
12,912 |
|
|
|
13,577 |
|
|
|
13,318 |
|
|
|
14,131 |
|
Automobile operating lease income |
|
|
13,116 |
|
|
|
13,228 |
|
|
|
13,170 |
|
|
|
11,492 |
|
|
|
9,357 |
|
Mortgage banking income (loss) |
|
|
30,827 |
|
|
|
35,418 |
|
|
|
(6,747 |
) |
|
|
10,302 |
|
|
|
12,502 |
|
Securities (losses) gains |
|
|
(7,340 |
) |
|
|
2,067 |
|
|
|
(127,082 |
) |
|
|
(73,790 |
) |
|
|
2,073 |
|
Other income |
|
|
57,470 |
|
|
|
18,359 |
|
|
|
17,052 |
|
|
|
37,320 |
|
|
|
26,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
$ |
265,945 |
|
|
$ |
239,102 |
|
|
$ |
67,099 |
|
|
$ |
167,857 |
|
|
$ |
236,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
The following table details mortgage banking income and the net impact of mortgage servicing
rights (MSR) hedging activity for each of the past five quarters:
Table 15 — Mortgage Banking Income and Net Impact of MSR Hedging
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands, except as noted) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Mortgage Banking Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and secondary marketing |
|
$ |
31,782 |
|
|
$ |
29,965 |
|
|
$ |
7,180 |
|
|
$ |
7,647 |
|
|
$ |
13,098 |
|
Servicing fees |
|
|
12,045 |
|
|
|
11,840 |
|
|
|
11,660 |
|
|
|
11,838 |
|
|
|
11,166 |
|
Amortization of capitalized servicing (1) |
|
|
(14,445 |
) |
|
|
(12,285 |
) |
|
|
(6,462 |
) |
|
|
(6,234 |
) |
|
|
(7,024 |
) |
Other mortgage banking income |
|
|
5,381 |
|
|
|
9,404 |
|
|
|
2,959 |
|
|
|
3,519 |
|
|
|
5,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
34,763 |
|
|
|
38,924 |
|
|
|
15,337 |
|
|
|
16,770 |
|
|
|
23,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment (1) |
|
|
46,551 |
|
|
|
(10,389 |
) |
|
|
(63,355 |
) |
|
|
(10,251 |
) |
|
|
39,031 |
|
Net trading (losses) gains related to MSR hedging |
|
|
(50,487 |
) |
|
|
6,883 |
|
|
|
41,271 |
|
|
|
3,783 |
|
|
|
(49,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking income (loss) |
|
$ |
30,827 |
|
|
$ |
35,418 |
|
|
$ |
(6,747 |
) |
|
$ |
10,302 |
|
|
$ |
12,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage originations (in millions) |
|
$ |
1,587 |
|
|
$ |
1,546 |
|
|
$ |
724 |
|
|
$ |
680 |
|
|
$ |
1,127 |
|
Average trading account securities used to hedge
MSRs (in millions) |
|
|
20 |
|
|
|
223 |
|
|
|
857 |
|
|
|
941 |
|
|
|
1,190 |
|
Capitalized mortgage servicing rights (2) |
|
|
219,282 |
|
|
|
167,838 |
|
|
|
167,438 |
|
|
|
230,398 |
|
|
|
240,024 |
|
Total mortgages serviced for others (in millions) (2) |
|
|
16,246 |
|
|
|
16,315 |
|
|
|
15,754 |
|
|
|
15,741 |
|
|
|
15,770 |
|
MSR % of investor servicing portfolio |
|
|
1.35 |
% |
|
|
1.03 |
% |
|
|
1.06 |
% |
|
|
1.46 |
% |
|
|
1.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Impact of MSR Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment (1) |
|
$ |
46,551 |
|
|
$ |
(10,389 |
) |
|
$ |
(63,355 |
) |
|
$ |
(10,251 |
) |
|
$ |
39,031 |
|
Net trading (losses) gains related to MSR hedging |
|
|
(50,487 |
) |
|
|
6,883 |
|
|
|
41,271 |
|
|
|
3,783 |
|
|
|
(49,728 |
) |
Net interest income related to MSR hedging |
|
|
199 |
|
|
|
2,441 |
|
|
|
9,473 |
|
|
|
8,368 |
|
|
|
9,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of MSR hedging |
|
$ |
(3,737 |
) |
|
$ |
(1,065 |
) |
|
$ |
(12,611 |
) |
|
$ |
1,900 |
|
|
$ |
(1,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
The change in fair value for the period represents the MSR valuation adjustment, excluding amortization of capitalized servicing. |
| |
| (2) |
|
At period end. |
29
2009 Second Quarter versus 2008 Second Quarter
Noninterest income increased $29.5 million, or 12%, from the year-ago quarter.
Table 16 — Noninterest Income — 2009 Second Quarter vs. 2008 Second Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Second Quarter |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Service charges on deposit accounts |
|
$ |
75,353 |
|
|
$ |
79,630 |
|
|
$ |
(4,277 |
) |
|
|
(5.4 |
)% |
Brokerage and insurance income |
|
|
32,052 |
|
|
|
35,694 |
|
|
|
(3,642 |
) |
|
|
(10.2 |
) |
Trust services |
|
|
25,722 |
|
|
|
33,089 |
|
|
|
(7,367 |
) |
|
|
(22.3 |
) |
Electronic banking |
|
|
24,479 |
|
|
|
23,242 |
|
|
|
1,237 |
|
|
|
5.3 |
|
Bank owned life insurance income |
|
|
14,266 |
|
|
|
14,131 |
|
|
|
135 |
|
|
|
1.0 |
|
Automobile operating lease income |
|
|
13,116 |
|
|
|
9,357 |
|
|
|
3,759 |
|
|
|
40.2 |
|
Mortgage banking income |
|
|
30,827 |
|
|
|
12,502 |
|
|
|
18,325 |
|
|
|
N.M. |
|
Securities (losses) gains |
|
|
(7,340 |
) |
|
|
2,073 |
|
|
|
(9,413 |
) |
|
|
N.M. |
|
Other income |
|
|
57,470 |
|
|
|
26,712 |
|
|
|
30,758 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
265,945 |
|
|
$ |
236,430 |
|
|
$ |
29,515 |
|
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
The $29.5 million increase in total noninterest income reflected:
| |
• |
|
$30.8 million increase in other income, primarily reflecting a $31.4 million gain
on the sale of Visa ® stock. |
| |
• |
|
$18.3 million increase in mortgage banking income, primarily reflecting an $18.7
million increase in origination and secondary marketing income as current quarter
loan sales increased 59% from the year-ago quarter and loan originations that were
41% higher than in the year-ago quarter (see Table 15). |
| |
• |
|
$3.8 million, or 40%, increase in automobile operating lease income, reflecting a
34% increase in average operating lease balances, as lease originations since the
2007 fourth quarter were recorded as operating leases. Separately, all automobile
lease origination activities were discontinued in the 2008 fourth quarter. |
Partially offset by:
| |
• |
|
$9.4 million decline in securities gains (losses) as the current quarter
reflected a $7.3 million loss compared with a $2.1 million gain in the year-ago
quarter. |
| |
• |
|
$7.4 million, or 22%, decline in trust services income, reflecting the impact of
reduced market values on asset management revenues and lower yields on proprietary
money market funds. |
| |
• |
|
$4.3 million, or 5%, decline in service charges on deposit accounts primarily
reflecting lower consumer NSF and overdraft fees, partially offset by higher
commercial service charges. |
| |
• |
|
$3.6 million, or 10%, decrease in brokerage and insurance income reflecting lower
mutual fund and annuity sales, as well as reduced commercial property and casualty
agency commissions. |
30
2009 Second Quarter versus 2009 First Quarter
Noninterest income increased $26.8 million, or 11%, from the 2009 first quarter.
Table 17 — Noninterest Income — 2009 Second Quarter vs. 2009 First Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Second |
|
|
First |
|
|
|
|
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2009 |
|
|
Amount |
|
|
Percent |
|
Service charges on deposit accounts |
|
$ |
75,353 |
|
|
$ |
69,878 |
|
|
$ |
5,475 |
|
|
|
7.8 |
% |
Brokerage and insurance income |
|
|
32,052 |
|
|
|
39,948 |
|
|
|
(7,896 |
) |
|
|
(19.8 |
) |
Trust services |
|
|
25,722 |
|
|
|
24,810 |
|
|
|
912 |
|
|
|
3.7 |
|
Electronic banking |
|
|
24,479 |
|
|
|
22,482 |
|
|
|
1,997 |
|
|
|
8.9 |
|
Bank owned life insurance income |
|
|
14,266 |
|
|
|
12,912 |
|
|
|
1,354 |
|
|
|
10.5 |
|
Automobile operating lease income |
|
|
13,116 |
|
|
|
13,228 |
|
|
|
(112 |
) |
|
|
(0.8 |
) |
Mortgage banking income |
|
|
30,827 |
|
|
|
35,418 |
|
|
|
(4,591 |
) |
|
|
(13.0 |
) |
Securities (losses) gains |
|
|
(7,340 |
) |
|
|
2,067 |
|
|
|
(9,407 |
) |
|
|
N.M. |
|
Other income |
|
|
57,470 |
|
|
|
18,359 |
|
|
|
39,111 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
265,945 |
|
|
$ |
239,102 |
|
|
$ |
26,843 |
|
|
|
11.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
The $26.8 million increase in total noninterest income reflected:
| |
• |
|
$39.1 million increase in other income, primarily reflecting a $31.4 million gain
on the sale of our Visa ® stock and, to a lesser degree, a $6.2 million
improvement in loan sale gains as the prior quarter included a $5.9 million loss
associated with the automobile loan securitization at the end of the 2009 first
quarter. Also contributing to the increase in other income from the prior quarter
were higher equity investment gains and derivatives revenue. |
| |
• |
|
$5.5 million, or 8%, increase in service charges on deposit accounts, reflecting
seasonally higher personal service charges, primarily NSF charges. |
| |
• |
|
$2.0 million, or 9%, seasonal increase in electronic banking income. |
Partially offset by:
| |
• |
|
$9.4 million decline in securities gains (losses) as the current quarter
reflected a $7.3 million loss compared with a $2.1 million gain in the prior
quarter. |
| |
• |
|
$7.9 million, or 20%, decline in brokerage and insurance income, reflecting lower
annuity sales and first quarter seasonal insurance income. The 2009 first quarter
also represented a record level of investment sales. |
| |
• |
|
$4.6 million, or 13%, decline in mortgage banking income as 2009 first quarter
results included a $4.3 million portfolio loan sale gain. |
31
2009 First Six Months versus 2008 First Six Months
The following table reflects noninterest income for the first six-month periods of 2009 and
2008:
Table 18 — Noninterest Income — 2009 First Six Months vs. 2008 First Six Months
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Service charges on deposit accounts |
|
$ |
145,231 |
|
|
$ |
152,298 |
|
|
$ |
(7,067 |
) |
|
|
(4.6 |
)% |
Brokerage and insurance income |
|
|
72,000 |
|
|
|
72,254 |
|
|
|
(254 |
) |
|
|
(0.4 |
) |
Trust services |
|
|
50,532 |
|
|
|
67,217 |
|
|
|
(16,685 |
) |
|
|
(24.8 |
) |
Electronic banking |
|
|
46,961 |
|
|
|
43,983 |
|
|
|
2,978 |
|
|
|
6.8 |
|
Bank owned life insurance income |
|
|
27,178 |
|
|
|
27,881 |
|
|
|
(703 |
) |
|
|
(2.5 |
) |
Automobile operating lease income |
|
|
26,344 |
|
|
|
15,189 |
|
|
|
11,155 |
|
|
|
73.4 |
|
Mortgage banking income |
|
|
66,245 |
|
|
|
5,439 |
|
|
|
60,806 |
|
|
|
N.M. |
|
Securities (losses) gains |
|
|
(5,273 |
) |
|
|
3,502 |
|
|
|
(8,775 |
) |
|
|
N.M. |
|
Other income |
|
|
75,829 |
|
|
|
84,419 |
|
|
|
(8,590 |
) |
|
|
(10.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
505,047 |
|
|
$ |
472,182 |
|
|
$ |
32,865 |
|
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
The following table details mortgage banking income and the net impact of MSR hedging activity
for the first six-month periods of 2009 and 2008:
Table 19 — Mortgage Banking Income and Net Impact of MSR Hedging
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
|
YTD 2009 vs 2008 |
|
| (in thousands, except as noted) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Mortgage Banking Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and secondary marketing |
|
$ |
61,747 |
|
|
$ |
22,430 |
|
|
$ |
39,317 |
|
|
|
N.M. |
% |
Servicing fees |
|
|
23,885 |
|
|
|
22,060 |
|
|
|
1,825 |
|
|
|
8.3 |
|
Amortization of capitalized servicing (1) |
|
|
(26,730 |
) |
|
|
(13,938 |
) |
|
|
(12,792 |
) |
|
|
(91.8 |
) |
Other mortgage banking income |
|
|
14,785 |
|
|
|
10,290 |
|
|
|
4,495 |
|
|
|
43.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
73,687 |
|
|
|
40,842 |
|
|
|
32,845 |
|
|
|
80.4 |
|
| |
MSR valuation adjustment (1) |
|
|
36,162 |
|
|
|
20,938 |
|
|
|
15,224 |
|
|
|
72.7 |
|
Net trading losses related to MSR hedging |
|
|
(43,604 |
) |
|
|
(56,341 |
) |
|
|
12,737 |
|
|
|
22.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking income |
|
$ |
66,245 |
|
|
$ |
5,439 |
|
|
$ |
60,806 |
|
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage originations (in millions) |
|
$ |
3,133 |
|
|
$ |
2,369 |
|
|
$ |
764 |
|
|
|
32.2 |
% |
Average trading account securities used to hedge
MSRs (in millions) |
|
|
121 |
|
|
|
1,164 |
|
|
|
(1,043 |
) |
|
|
(89.6 |
) |
Capitalized mortgage servicing rights (2) |
|
|
219,282 |
|
|
|
240,024 |
|
|
|
(20,742 |
) |
|
|
(8.6 |
) |
Total mortgages serviced for others (2) (in millions) |
|
|
16,246 |
|
|
|
15,770 |
|
|
|
476 |
|
|
|
3.0 |
|
MSR % of investor servicing portfolio |
|
|
1.35 |
% |
|
|
1.52 |
% |
|
|
(0.17 |
)% |
|
|
(11.2) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Impact of MSR Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment (1) |
|
$ |
36,162 |
|
|
$ |
20,938 |
|
|
$ |
15,224 |
|
|
|
72.7 |
% |
Net trading losses related to MSR hedging |
|
|
(43,604 |
) |
|
|
(56,341 |
) |
|
|
12,737 |
|
|
|
(22.6 |
) |
Net interest income related to MSR hedging |
|
|
2,640 |
|
|
|
15,298 |
|
|
|
(12,658 |
) |
|
|
(82.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of MSR hedging |
|
$ |
(4,802 |
) |
|
$ |
(20,105 |
) |
|
$ |
15,303 |
|
|
|
(76.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
| |
|
|
| (1) |
|
The change in fair value for the period represents the MSR
valuation adjustment, excluding amortization of
capitalized servicing. |
| |
| (2) |
|
At period end. |
32
The $32.9 million, or 7%, increase in total noninterest income reflected:
| |
• |
|
$60.8 million increase in mortgage banking income reflecting: (a) $39.3 million
increase in origination and secondary marketing income as loan sales and loan
originations increased substantially in the first six-month period of 2009 compared
with the first six-month period of 2008, and (b) $28.0 million improvement in MSR
hedging (see Table 19). |
| |
• |
|
$11.2 million, or 73%, increase in automobile operating lease income, reflecting a
73% increase in average operating lease balances, as lease originations since the 2007
fourth quarter were recorded as operating leases. Separately, all automobile lease
origination activities were discontinued in the 2008 fourth quarter. |
Partially offset by:
| |
• |
|
$16.7 million, or 25%, decrease in trust services income, reflecting the impact of
reduced market values on asset management revenues, as well as lower yields on
proprietary money market funds. |
| |
• |
|
$8.8 million decline in securities gains (losses). |
| |
• |
|
$8.6 million decline in other income, primarily reflecting a $25.1 million gain in
the first six-month period of 2008 reflecting the sale of a portion of our
Visa® stock, and a $14.0 million decline in customer derivatives income from
the comparable year-ago period, partially offset by a $31.4 million gain in the first
six-month period of 2009 reflecting the sale of our remaining Visa® stock
(see “Significant Items” discussion). |
| |
• |
|
$7.1 million, or 5%, decline in service charges on deposit accounts, primarily
reflecting lower consumer NSF and overdraft fees, partially offset by higher commercial
service charges. |
Noninterest Expense
(This section should be read in conjunction with Significant Items 1, 4, and 5.)
The following table reflects noninterest expense for each of the past five quarters:
Table 20 — Noninterest Expense
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Personnel costs |
|
$ |
171,735 |
|
|
$ |
175,932 |
|
|
$ |
196,785 |
|
|
$ |
184,827 |
|
|
$ |
199,991 |
|
Outside data processing and other services |
|
|
39,266 |
|
|
|
32,432 |
|
|
|
31,230 |
|
|
|
32,386 |
|
|
|
30,186 |
|
Net occupancy |
|
|
24,430 |
|
|
|
29,188 |
|
|
|
22,999 |
|
|
|
25,215 |
|
|
|
26,971 |
|
Equipment |
|
|
21,286 |
|
|
|
20,410 |
|
|
|
22,329 |
|
|
|
22,102 |
|
|
|
25,740 |
|
Amortization of intangibles |
|
|
17,117 |
|
|
|
17,135 |
|
|
|
19,187 |
|
|
|
19,463 |
|
|
|
19,327 |
|
Professional services |
|
|
18,789 |
|
|
|
18,253 |
|
|
|
17,420 |
|
|
|
13,405 |
|
|
|
13,752 |
|
Marketing |
|
|
7,491 |
|
|
|
8,225 |
|
|
|
9,357 |
|
|
|
7,049 |
|
|
|
7,339 |
|
Automobile operating lease expense |
|
|
11,400 |
|
|
|
10,931 |
|
|
|
10,483 |
|
|
|
9,093 |
|
|
|
7,200 |
|
Telecommunications |
|
|
6,088 |
|
|
|
5,890 |
|
|
|
5,892 |
|
|
|
6,007 |
|
|
|
6,864 |
|
Printing and supplies |
|
|
4,151 |
|
|
|
3,572 |
|
|
|
4,175 |
|
|
|
4,316 |
|
|
|
4,757 |
|
Goodwill impairment |
|
|
4,231 |
|
|
|
2,602,713 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other expense |
|
|
13,998 |
|
|
|
45,088 |
|
|
|
50,237 |
|
|
|
15,133 |
|
|
|
35,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
339,982 |
|
|
$ |
2,969,769 |
|
|
$ |
390,094 |
|
|
$ |
338,996 |
|
|
$ |
377,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-time equivalent employees, at period end |
|
|
10,252 |
|
|
|
10,540 |
|
|
|
10,951 |
|
|
|
10,901 |
|
|
|
11,251 |
|
33
2009 Second Quarter versus 2008 Second Quarter
Noninterest expense decreased $37.8 million, or 10%, from the year-ago quarter.
Table 21 — Noninterest Expense — 2009 Second Quarter vs. 2008 Second Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Second |
|
|
Second |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Personnel costs |
|
$ |
171,735 |
|
|
$ |
199,991 |
|
|
$ |
(28,256 |
) |
|
|
(14.1 |
)% |
Outside data processing and other services |
|
|
39,266 |
|
|
|
30,186 |
|
|
|
9,080 |
|
|
|
30.1 |
|
Net occupancy |
|
|
24,430 |
|
|
|
26,971 |
|
|
|
(2,541 |
) |
|
|
(9.4 |
) |
Equipment |
|
|
21,286 |
|
|
|
25,740 |
|
|
|
(4,454 |
) |
|
|
(17.3 |
) |
Amortization of intangibles |
|
|
17,117 |
|
|
|
19,327 |
|
|
|
(2,210 |
) |
|
|
(11.4 |
) |
Professional services |
|
|
18,789 |
|
|
|
13,752 |
|
|
|
5,037 |
|
|
|
36.6 |
|
Marketing |
|
|
7,491 |
|
|
|
7,339 |
|
|
|
152 |
|
|
|
2.1 |
|
Automobile operating lease expense |
|
|
11,400 |
|
|
|
7,200 |
|
|
|
4,200 |
|
|
|
58.3 |
|
Telecommunications |
|
|
6,088 |
|
|
|
6,864 |
|
|
|
(776 |
) |
|
|
(11.3 |
) |
Printing and supplies |
|
|
4,151 |
|
|
|
4,757 |
|
|
|
(606 |
) |
|
|
(12.7 |
) |
Goodwill impairment |
|
|
4,231 |
|
|
|
— |
|
|
|
4,231 |
|
|
|
— |
|
Other expense |
|
|
13,998 |
|
|
|
35,676 |
|
|
|
(21,678 |
) |
|
|
(60.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
339,982 |
|
|
$ |
377,803 |
|
|
$ |
(37,821 |
) |
|
|
(10.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-time equivalent employees, at period-end |
|
|
10,252 |
|
|
|
11,251 |
|
|
|
(999 |
) |
|
|
(8.9 |
)% |
The $37.8 million decline reflected:
| |
• |
|
$28.3 million, or 14%, decline in personnel costs, primarily reflecting a $16.4
million decline in salaries, an $8.0 million decline in severance costs, and lower
benefits expenses. Full-time equivalent staff declined 9% from the year-ago period. |
| |
• |
|
$21.7 million, or 61%, decrease in other expense reflecting the benefit in the
2009 second quarter of a $67.4 million gain on the redemption of a portion of our
junior subordinated debt, a $3.5 million net comparative benefit related to gains
resulting from debt extinguishment, and a $6.8 million decline in franchise
tax-related expense. Partially offsetting these favorable items was a $43.5 million
increase in deposit insurance. This increase was comprised of two components: (a)
$23.6 million FDIC special assessment during the current quarter, and (b) $19.9
million increase primarily related to our 2008 FDIC assessments being reduced by a
nonrecurring deposit insurance assessment credit provided by the FDIC that was
depleted during the 2008 fourth quarter. This deposit insurance credit offset
substantially all of our assessment in the 2008 second quarter. Also contributing
to the increase in other expense was a $14.6 million increase in OREO expense. |
| |
• |
|
$4.5 million, or 17%, decline in equipment costs, reflecting lower depreciation
costs from the year-ago period. |
| |
• |
|
$2.5 million, or 9%, decline in net occupancy expenses, reflecting lower rental
costs. |
| |
• |
|
$2.2 million, or 11%, decline in amortization of intangibles expense. |
Partially offset by:
| |
• |
|
$9.1 million, or 30%, increase in outside data processing and other services,
primarily reflecting portfolio servicing fees now paid to Franklin as a result of
the 2009 first quarter restructuring of this relationship, as well as higher outside
appraisal costs. |
| |
• |
|
$5.0 million, or 37%, increase in professional services, reflecting higher legal
and collection-related expenses. |
| |
• |
|
$4.2 million goodwill impairment charge related to the sale of a small
payments-related business completed in July 2009. |
| |
• |
|
$4.2 million, or 58%, increase in automobile operating lease expense, primarily
reflecting the 34% increase in average operating leases discussed above. |
34
2009 Second Quarter versus 2009 First Quarter
Noninterest expense decreased $2,629.8 million, or 89%, from the 2009 first quarter.
Table 22 — Noninterest Expense — 2009 Second Quarter vs. 2009 First Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Second |
|
|
First |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2009 |
|
|
Amount |
|
|
Percent |
|
Personnel costs |
|
$ |
171,735 |
|
|
$ |
175,932 |
|
|
$ |
(4,197 |
) |
|
|
(2.4 |
)% |
Outside data processing and other services |
|
|
39,266 |
|
|
|
32,432 |
|
|
|
6,834 |
|
|
|
21.1 |
|
Net occupancy |
|
|
24,430 |
|
|
|
29,188 |
|
|
|
(4,758 |
) |
|
|
(16.3 |
) |
Equipment |
|
|
21,286 |
|
|
|
20,410 |
|
|
|
876 |
|
|
|
4.3 |
|
Amortization of intangibles |
|
|
17,117 |
|
|
|
17,135 |
|
|
|
(18 |
) |
|
|
(0.1 |
) |
Professional services |
|
|
18,789 |
|
|
|
18,253 |
|
|
|
536 |
|
|
|
2.9 |
|
Marketing |
|
|
7,491 |
|
|
|
8,225 |
|
|
|
(734 |
) |
|
|
(8.9 |
) |
Automobile operating lease expense |
|
|
11,400 |
|
|
|
10,931 |
|
|
|
469 |
|
|
|
4.3 |
|
Telecommunications |
|
|
6,088 |
|
|
|
5,890 |
|
|
|
198 |
|
|
|
3.4 |
|
Printing and supplies |
|
|
4,151 |
|
|
|
3,572 |
|
|
|
579 |
|
|
|
16.2 |
|
Goodwill impairment |
|
|
4,231 |
|
|
|
2,602,713 |
|
|
|
(2,598,482 |
) |
|
|
(99.8 |
) |
Other expense |
|
|
13,998 |
|
|
|
45,088 |
|
|
|
(31,090 |
) |
|
|
(69.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
339,982 |
|
|
$ |
2,969,769 |
|
|
$ |
(2,629,787 |
) |
|
|
(88.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-time equivalent employees, at period-end |
|
|
10,252 |
|
|
|
10,540 |
|
|
|
(288 |
) |
|
|
(2.7 |
)% |
The $2,629.8 million decrease in noninterest expense reflected:
| |
• |
|
$2,598.5 million decline in goodwill impairment. The prior quarter included a
goodwill noncash impairment charge of $2,602.7 million. The current quarter’s
goodwill noncash impairment charge of $4.2 million was related to the sale of a
small payments-related business completed in July 2009. (See “Goodwill” discussion
located within the Critical Account Policies and Use of Significant Estimates” for
additional information). |
| |
• |
|
$31.1 million, or 69%, decline in other expense, reflecting the benefit of a
$67.4 million gain on the redemption of a portion of our junior subordinated debt, a
$5.6 million gain resulting from other debt extinguishment, and a $6.9 million
decline in franchise tax-related expense. Partially offsetting these favorable
items were this quarter’s $23.6 million FDIC special assessment and a $16.6 million
increase in OREO expense. |
| |
• |
|
$4.8 million, or 16%, decrease in net occupancy expense, reflecting lower
seasonal expenses, as well as lower rental costs. |
| |
• |
|
$4.2 million, or 2%, decline in personnel costs, reflecting a decline in
severance and other benefits and incentive-based expense, partially offset by higher
commissions. Full-time equivalent staff declined 3% from the prior period. |
Partially offset by:
| |
• |
|
$6.8 million, or 21%, increase in outside data processing and other services,
primarily reflecting portfolio servicing fees paid to Franklin for servicing the
related residential mortgage and home equity portfolios and outside appraisal costs,
partially offset by lower software maintenance expense. |
35
2009 First Six Months versus 2008 First Six Months
Noninterest expense for the first six-month period of 2009 increased $2,561.5 million from the
comparable year-ago period.
Table 23 — Noninterest Expense — 2009 First Six Months vs. 2008 First Six Months
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Personnel costs |
|
$ |
347,667 |
|
|
$ |
401,934 |
|
|
$ |
(54,267 |
) |
|
|
(13.5 |
)% |
Outside data processing and other services |
|
|
71,698 |
|
|
|
64,547 |
|
|
|
7,151 |
|
|
|
11.1 |
|
Net occupancy |
|
|
53,618 |
|
|
|
60,214 |
|
|
|
(6,596 |
) |
|
|
(11.0 |
) |
Equipment |
|
|
41,696 |
|
|
|
49,534 |
|
|
|
(7,838 |
) |
|
|
(15.8 |
) |
Amortization of intangibles |
|
|
34,252 |
|
|
|
38,244 |
|
|
|
(3,992 |
) |
|
|
(10.4 |
) |
Professional services |
|
|
37,042 |
|
|
|
22,842 |
|
|
|
14,200 |
|
|
|
62.2 |
|
Marketing |
|
|
15,716 |
|
|
|
16,258 |
|
|
|
(542 |
) |
|
|
(3.3 |
) |
Automobile operating lease expense |
|
|
22,331 |
|
|
|
11,706 |
|
|
|
10,625 |
|
|
|
90.8 |
|
Telecommunications |
|
|
11,978 |
|
|
|
13,109 |
|
|
|
(1,131 |
) |
|
|
(8.6 |
) |
Printing and supplies |
|
|
7,723 |
|
|
|
10,379 |
|
|
|
(2,656 |
) |
|
|
(25.6 |
) |
Goodwill impairment |
|
|
2,606,944 |
|
|
|
— |
|
|
|
2,606,944 |
|
|
|
— |
|
Other expense |
|
|
59,086 |
|
|
|
59,517 |
|
|
|
(431 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
3,309,751 |
|
|
$ |
748,284 |
|
|
$ |
2,561,467 |
|
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Full-time equivalent employees, at period-end |
|
|
10,252 |
|
|
|
11,251 |
|
|
|
(999 |
) |
|
|
(8.9 |
) |
N.M., not a
meaningful value.
The $2,561.5 million increase in total noninterest expense reflected:
| |
• |
|
$2,606.9 million of goodwill impairment recorded in 2009. The majority of the
goodwill impairment, $2,602.7 million, was recorded during the 2009 first quarter. The
remaining $4.2 million of goodwill impairment was recorded in the 2009 second quarter,
and was related to the sale of a small payments-related business in July 2009. (See
“Goodwill” discussion located within the Critical Account Policies and Use of
Significant Estimates” for additional information). |
| |
• |
|
$14.2 million, or 62%, increase in professional services, reflecting higher legal
and collection-related expenses. |
| |
• |
|
$10.6 million, or 91%, increase in automobile operating lease expense, primarily
reflecting the 73% increase in average operating lease assets discussed above. |
| |
• |
|
$7.2 million, or 11%, increase in outside data processing and other services,
primarily reflecting portfolio servicing fees now paid to Franklin resulting from the
restructuring of the relationship at the end of the 2009 first quarter, as well as
higher outside appraisal costs. |
Partially offset by:
| |
• |
|
$54.3 million, or 14%, decline in personnel costs reflecting a 9% reduction in
full-time equivalent staff from the comparable year-ago period. |
| |
• |
|
$7.8 million, or 16%, decline in equipment costs, reflecting lower depreciation
costs, as well as lower repair and maintenance costs. |
| |
• |
|
$6.6 million, or 11%, decline in net occupancy, reflecting lower rental costs and
lower seasonal expenses. |
| |
• |
|
$0.4 million, or 1%, decrease in other expense, reflecting the benefit in the 2009
second quarter of a $67.4 million gain on the redemption of a portion of our junior
subordinated debt, and a $5.3 million decline in franchise tax-related expense.
Partially offsetting these favorable items was a $56.4 million increase in deposit
insurance. This increase was comprised of two components: (a) $23.6 million FDIC
special assessment during the current quarter, and (b) $32.8 million increase primarily
related to our 2008 FDIC assessments being significantly reduced by a nonrecurring
deposit insurance assessment credit provided by the FDIC that was depleted during the
2008 fourth quarter. This deposit insurance credit offset substantially all of our
assessment in the first six-month period of 2008. Also contributing to the increase in
other expense was a $15.2 million increase in OREO expense. |
36
Provision for Income Taxes
(This section should be read in conjunction with Significant Items 2 and 4.)
The provision for income taxes in the 2009 second quarter was a benefit of $12.7 million,
resulting in an effective tax rate benefit of 9.2%. This compared with a tax benefit of $251.8
million in the 2009 first quarter and a tax expense of $26.3 million in the 2008 second quarter.
The effective tax rates in the prior quarter and the year-ago quarter were a benefit of 9.4% and an
expense of 20.6%, respectively. During the 2009 first quarter, the effective tax rate included a
$159.9 million nonrecurring tax benefit from the Franklin restructuring and the nondeductibility of
$2,595.0 million of the total $2,602.7 million of goodwill impairment. The effective tax rate for
the first six-month period of 2009 was a benefit of 9.4% compared with an expense of 18.7% for the
first six-month period of 2008. The effective tax rate for the 2009 second quarter and for the
first six-month period of 2009 were both impacted by the goodwill impairment and the Franklin
restructuring benefit.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject to
income and nonincome taxes. Also, we are subject to ongoing tax examinations in various
jurisdictions. During the 2009 second quarter, the State of Ohio completed the audit of our 2001,
2002, and 2003 corporate franchise tax returns. During 2008, the IRS completed the audit of our
consolidated federal income tax returns for tax years 2004 and 2005. In addition, we are subject
to ongoing tax examinations in various other state and local jurisdictions. Both the IRS and
various state tax officials have proposed adjustments to our previously filed tax returns. We
believe that the tax positions taken by us related to such proposed adjustments were correct and
supported by applicable statutes, regulations, and judicial authority, and intend to vigorously
defend them. It is possible that the ultimate resolution of the proposed adjustments, if
unfavorable, may be material to the results of operations in the period it occurs. However,
although no assurances can be given, we believe that the resolution of these examinations will not,
individually or in the aggregate, have a material adverse impact on our consolidated financial
position.
We account for uncertainties in income taxes in accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). At June 30, 2009 we had a gross unrecognized
tax benefit of $10.4 million in income tax liability related to tax positions taken in prior
periods. This balance includes $6.8 million of unrecognized tax benefits that would impact the
effective tax rate, if recognized. Prior to June 30, 2009, we had recorded no significant
unrecognized tax benefits. Due to the complexity of some of these uncertainties, the ultimate
resolution may result in a payment that is materially different from our current estimate of the
tax liabilities. However, any ultimate settlement is not expected to be material to the financial
statements as a whole. Our policy is to recognize interest and penalties, if any, related to
unrecognized tax benefits in the provision for income taxes. Accrued interest and penalties are
included within the related tax liability line in the consolidated balance sheet. It is possible
that the amount of the liability for unrecognized tax benefits under examination could change
during the next 12 months. An estimate of the range of the possible change cannot be made at this
time.
37
RISK MANAGEMENT AND CAPITAL
Risk identification and monitoring are key elements in overall risk management. We believe our
primary risk exposures are credit, market, liquidity, and operational risk. More information on
risk can be found under the heading “Risk Factors” included in Item 1A of our 2008 Form 10-K, and
subsequent filings with the SEC. Additionally, the MD&A, included as an exhibit to our 2008 Form
10-K, should be read in conjunction with this MD&A as this report provides only material updates to
the 2008 Form 10-K. Our definition, philosophy, and approach to risk management are unchanged from
the discussion presented in the 2008 Form 10-K.
Credit Risk
Credit risk is the risk of loss due to our counterparties not being able to meet their
financial obligations under agreed upon terms. The majority of our credit risk is associated with
lending activities, as the acceptance and management of credit risk is central to profitable
lending. We also have credit risk associated with our investment and derivatives activities.
Credit risk is incidental to trading activities and represents a significant risk that is
associated with our investment securities portfolio (see “Investment Securities Portfolio”
discussion). Credit risk is mitigated through a combination of credit policies and processes,
market risk management activities, and portfolio diversification.
Credit Exposure Mix
As shown in Table 24, at June 30, 2009, commercial loans totaled $22.3 billion, and
represented 58% of our total credit exposure. This portfolio was diversified between C&I and CRE
loans (see “Commercial Credit” discussion).
Total consumer loans were $16.2 billion at June 30, 2009, and represented 42% of our total
credit exposure. The consumer portfolio included home equity loans and lines of credit,
residential mortgages, and automobile loans and leases (see “Consumer Credit” discussion).
38
Table 24 — Loans and Leases Composition
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2008 |
|
| (in millions) |
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial (2) |
|
$ |
13,320 |
|
|
|
34.6 |
% |
|
$ |
13,768 |
|
|
|
34.8 |
% |
|
$ |
13,541 |
|
|
|
33.0 |
% |
|
$ |
13,638 |
|
|
|
33.1 |
% |
|
$ |
13,746 |
|
|
|
33.5 |
% |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,857 |
|
|
|
4.8 |
|
|
|
2,074 |
|
|
|
5.2 |
|
|
|
2,080 |
|
|
|
5.1 |
|
|
|
2,111 |
|
|
|
5.1 |
|
|
|
2,136 |
|
|
|
5.2 |
|
Commercial (2) |
|
|
7,089 |
|
|
|
18.4 |
|
|
|
7,187 |
|
|
|
18.2 |
|
|
|
8,018 |
|
|
|
19.5 |
|
|
|
7,796 |
|
|
|
18.9 |
|
|
|
7,565 |
|
|
|
18.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
8,946 |
|
|
|
23.2 |
|
|
|
9,261 |
|
|
|
23.4 |
|
|
|
10,098 |
|
|
|
24.6 |
|
|
|
9,907 |
|
|
|
24.0 |
|
|
|
9,701 |
|
|
|
23.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
22,266 |
|
|
|
57.8 |
|
|
|
23,029 |
|
|
|
58.2 |
|
|
|
23,639 |
|
|
|
57.6 |
|
|
|
23,545 |
|
|
|
57.1 |
|
|
|
23,447 |
|
|
|
57.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans (3) |
|
|
2,855 |
|
|
|
7.4 |
|
|
|
2,894 |
|
|
|
7.3 |
|
|
|
3,901 |
|
|
|
9.5 |
|
|
|
3,918 |
|
|
|
9.5 |
|
|
|
3,759 |
|
|
|
9.2 |
|
Automobile leases |
|
|
383 |
|
|
|
1.0 |
|
|
|
468 |
|
|
|
1.2 |
|
|
|
563 |
|
|
|
1.4 |
|
|
|
698 |
|
|
|
1.7 |
|
|
|
835 |
|
|
|
2.0 |
|
Home equity |
|
|
7,631 |
|
|
|
19.8 |
|
|
|
7,663 |
|
|
|
19.4 |
|
|
|
7,556 |
|
|
|
18.4 |
|
|
|
7,497 |
|
|
|
18.2 |
|
|
|
7,410 |
|
|
|
18.1 |
|
Residential mortgage |
|
|
4,646 |
|
|
|
12.1 |
|
|
|
4,837 |
|
|
|
12.2 |
|
|
|
4,761 |
|
|
|
11.6 |
|
|
|
4,854 |
|
|
|
11.8 |
|
|
|
4,901 |
|
|
|
11.9 |
|
Other loans |
|
|
714 |
|
|
|
1.9 |
|
|
|
657 |
|
|
|
1.7 |
|
|
|
672 |
|
|
|
1.5 |
|
|
|
680 |
|
|
|
1.7 |
|
|
|
695 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,229 |
|
|
|
42.2 |
|
|
|
16,519 |
|
|
|
41.8 |
|
|
|
17,453 |
|
|
|
42.4 |
|
|
|
17,647 |
|
|
|
42.9 |
|
|
|
17,600 |
|
|
|
42.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
38,495 |
|
|
|
100.0 |
% |
|
$ |
39,548 |
|
|
|
100.0 |
% |
|
$ |
41,092 |
|
|
|
100.0 |
|
|
$ |
41,192 |
|
|
|
100.0 |
% |
|
$ |
41,047 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
There were no commercial loans outstanding that would be considered a concentration of lending to a particular group of industries. |
| |
| (2) |
|
The 2009 first quarter reflected a net reclassification of $782.2 million from commercial real estate to commercial and industrial. |
| |
| (3) |
|
The decrease from December 31, 2008, to March 31, 2009, reflected a $1.0 billion automobile loan sale during the 2009 first quarter. |
39
Franklin relationship
(This section should be read in conjunction with Significant Item 2 and the “Franklin Loans
Restructuring Transaction” discussion located within the “Critical Accounting Policies and Use of
Significant Estimates” section.)
As a result of the restructuring, on a consolidated basis, the $650.2 million nonaccrual
commercial loan to Franklin at December 31, 2008, is no longer reported. Instead, we now report
the loans secured by first- and second- mortgages on residential properties and OREO properties
both of which had previously been assets of Franklin or its subsidiaries and were pledged to secure
our loan to Franklin. At the time of the restructuring, the loans had a fair value of $493.6
million and the OREO properties had a fair value of $79.6 million. As a result, NALs declined by a
net amount of $284.1 million as there were $650.2 million commercial NALs outstanding related to
Franklin, and $366.1 million mortgage-related NALs outstanding, representing first- and second-
lien mortgages that were nonaccruing at March 31, 2009. Also, our specific allowance for loan and
lease losses for the Franklin portfolio of $130.0 million was eliminated; however, no initial
increase to the ALLL relating to the acquired mortgages was recorded as these assets were recorded
at fair value.
The following table summarizes the Franklin-related balances for accruing loans, nonaccruing
loans, and OREO:
Table 25 — Franklin-related loan and OREO balances
| |
|
|
|
|
|
|
|
|
| |
|
2009 |
|
| (in millions) |
|
June 30, |
|
|
March 31, |
|
Accruing loans |
|
$ |
127.4 |
|
|
$ |
127.4 |
|
Nonaccruing loans |
|
|
344.6 |
|
|
|
366.1 |
|
|
|
|
|
|
|
|
Total loans |
|
|
472.0 |
|
|
|
493.5 |
|
OREO |
|
|
43.6 |
|
|
|
79.6 |
|
|
|
|
|
|
|
|
Total Franklin loans and OREO |
|
$ |
515.6 |
|
|
$ |
573.1 |
|
An objective of the Franklin restructuring was to improve ultimate collections and recoveries.
As shown in the above table, Franklin-related loans declined 4%, reflecting a 13% increase in cash
collections in the 2009 second quarter compared with the 2009 first quarter. Also,
Franklin-related OREO properties declined 45% reflecting accelerated sales of Franklin-related OREO
properties during the 2009 second quarter. This action is consistent with our assessment of the
value of the properties, as well as the current and anticipated future market conditions.
Commercial Credit
The primary factors considered in commercial credit approvals are the financial strength of
the borrower, assessment of the borrower’s management capabilities, industry sector trends, type of
exposure, transaction structure, and the general economic outlook.
In commercial lending, ongoing credit management is dependent upon the type and nature of the
loan. We monitor all significant exposures on a periodic basis. Internal risk ratings are assigned
at the time of each loan approval, and are assessed and updated with each periodic monitoring
event. The frequency of the monitoring event is dependent upon the size and complexity of the
individual credit, but in no case less frequently than every 12 months. There is also extensive
macro portfolio management analysis conducted to identify performance trends or specific portions
of the overall portfolio that may need additional monitoring activity. The single family home
builder portfolio and retail projects are examples of segments of the portfolio that have received
more frequent evaluation at the loan level as a result of the economic environment and performance
trends (see “Single Family Home Builder” discussion). We continually review and adjust our risk
rating criteria and rating determination process based on actual experience. This continuous
review and analysis process results in a determination of an appropriate ALLL amount for our
commercial loan portfolio.
Our commercial loan portfolio is primarily comprised of the following:
Commercial and Industrial (C&I) loans — C&I loans represent loans to commercial customers for
use in normal business operations to finance working capital needs, equipment purchases, or other
projects. The vast majority of these loans are to commercial customers doing business within our
geographic regions. C&I loans are generally underwritten individually and usually secured with the
assets of the company and/or the personal guarantee of the business owners. The
financing of owner-occupied facilities is considered a C&I loan even though there is improved
real estate as collateral. This treatment is a function of the underwriting process, which focuses
on cash flow from operations to repay the debt. The operation or sale of the real estate is not
considered a repayment source for the loan.
40
Commercial real estate (CRE) loans — CRE loans consist of loans for income producing real
estate properties. We mitigate our risk on these loans by requiring collateral values that exceed
the loan amount and underwriting the loan with cash flow substantially in excess of the debt
service requirement. These loans are made to finance properties such as apartment buildings,
office and industrial buildings, and retail shopping centers; and are repaid through cash flows
related to the operation, sale, or refinance of the property.
Construction CRE loans — Construction CRE loans are loans to individuals, companies, or
developers used for the construction of a commercial property for which repayment will be generated
by the sale or permanent financing of the property. A significant portion of our construction CRE
portfolio consists of residential product types (land, single family, and condominium loans) within
our regions, and to a lesser degree, retail and multi-family projects. Generally, these loans are
for construction projects that have been presold, preleased, or otherwise have secured permanent
financing, as well as loans to real estate companies that have significant equity invested in each
project. These loans are generally underwritten and managed by a specialized real estate group
that actively monitors the construction phase and manages the loan disbursements according to the
predetermined construction schedule.
COMMERCIAL LOAN PORTFOLIO REVIEWS AND ACTIONS
In the 2009 first quarter, we restructured our commercial loan relationship with Franklin by
taking control of the underlying mortgage loan collateral, and transferring the exposure to the
consumer loan portfolio as first- and second- lien loans to individuals secured by residential real
estate properties. (See “Franklin Loans Restructuring Transaction” located within the “Critical
Accounting Policies and Use of Significant Estimates” section). We also proactively completed a
concentrated review of our single family home builder and retail CRE loan portfolios, our CRE
portfolio’s two highest risk segments. We now review the “criticized” portion of these portfolios
on a monthly basis. The increased review activity resulted in more pro-active decisions on
nonaccrual status, reserve levels, and charge-offs. This heightened level of portfolio monitoring
is ongoing.
During the 2009 second quarter, we updated our evaluation of every “noncriticized” commercial
relationship with an aggregate exposure of over $500,000. This review included C&I, CRE, and
business banking loans and encompassed 5,460 loans representing $13.2 billion, or about 59%, of
total commercial loans, and $17.1 billion in related commitments.
This was a detailed, labor-intensive process designed to enhance our understanding of each
borrower’s financial position, and to ensure that this understanding was accurately reflected in
our internal risk rating system. Our objective was to identify current and potential credit risks
across the portfolio consistent with our expectation that the economy in our markets will not
improve before the end of this year.
Our business segment teams conducted the reviews within their respective portfolios. Each
team had a hierarchy of assessment and oversight review activity defined for each borrowing
relationship. In many cases, we directly contacted the borrower and obtained the most recent
financial information available, including interim financial results. In addition, we discussed
the impact of the economic environment on the future direction of their company, industry
prospects, collateral values, and other borrower-specific information. We then made an appropriate
assessment of the current risk for each borrower.
The work of each business segment team was under the direction and oversight of a central
credit review committee, which also assessed the overall results. This level of review is an
ongoing activity with each team accountable for identifying specific follow up portfolio management
actions. We further enhanced system capabilities to provide better credit related management
information that will facilitate our ongoing portfolio management actions. Taken together, these
actions will ensure that our view of the portfolio remains current.
In addition, with respect to our commercial loan exposure to automobile dealers, we have had
an ongoing review process in place for some time now. Our automobile dealer commercial loan
portfolio is predominantly comprised of larger, “well-capitalized”, multi-franchised dealer groups
underwritten to conservative credit standards. These dealer groups have largely remained
profitable on a consolidated basis due to franchise diversity and a shift of sales emphasis to
higher-margin, used vehicles, as well as a focus on the service department. Additionally, our
portfolio is closely monitored through receipt and review of monthly dealer financial statements
and ongoing floor plan inventory audits, which allow for rapid response to weakening trends. As a
result, we have not experienced any significant deterioration in the credit quality of our
automobile dealer commercial loan portfolio and remain comfortable with our expectation of no
material losses, even
given the substantial stress associated with our dealership closings announced by Chrysler and
GM. (See “Automobile Industry” section located within the “Commercial and Industrial Portfolio”
section for additional information.)
41
In summary, we have established an ongoing portfolio management process involving each
business segment, providing an improved view of emerging risk issues at a borrower level, enhanced
ongoing monitoring capabilities, and strengthened actions and timeliness to mitigate emerging loan
risks. Given our stated view of continued economic weakness through 2009, we anticipate some level
of additional negative credit migration in the second half of this year. While we can give no
assurances given market uncertainties, we believe that as a result of our increased portfolio
management actions, a portfolio management process involving each business segment, an improved
view of emerging risk issues at the borrower level, enhanced ongoing monitoring capabilities, and
strengthened borrower-level loan structures, any future migration will be manageable.
Our commercial loan portfolio, including CRE loans, is diversified by customer size, as well
as throughout our geographic footprint. However, the following segments are noteworthy:
COMMERCIAL AND INDUSTRIAL (C&I) PORTFOLIO
The C&I portfolio is comprised of loans to businesses where the source of repayment is
associated with the ongoing operations of the business. Generally, the loans are secured with the
financing of the borrower’s assets, such as equipment, accounts receivable, or inventory. In many
cases, the loans are secured by real estate, although the sale of the real estate is not a primary
source of repayment for the loan. There were no outstanding commercial loans that would be
considered a concentration of lending to a particular industry or within a geographic standpoint.
Currently, higher-risk segments of the C&I portfolio include loans to borrowers supporting the home
building industry, contractors, and automotive suppliers. However, the combined total of these
segments represent less than 10% of the total C&I portfolio. We manage the risks inherent in this
portfolio through origination policies, concentration limits, ongoing loan level reviews, recourse
requirements, and continuous portfolio risk management activities. Our origination policies for
this portfolio include loan product-type specific policies such as loan-to-value (LTV), and debt
service coverage ratios, as applicable.
As shown in the following table, C&I loans totaled $13.3 billion at June 30, 2009.
Table 26 — Commercial and Industrial Loans and Leases by Industry Classification
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At June 30, 2009 |
|
| |
|
Commitments |
|
|
Loans Outstanding |
|
| (in millions of dollars) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
| |
Industry Classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
5,207 |
|
|
|
26.6 |
% |
|
$ |
3,928 |
|
|
|
29.5 |
% |
Manufacturing |
|
|
3,789 |
|
|
|
19.4 |
|
|
|
2,355 |
|
|
|
17.7 |
|
Finance, insurance, and real estate |
|
|
2,770 |
|
|
|
14.2 |
|
|
|
2,189 |
|
|
|
16.4 |
|
Retail trade — Auto Dealers |
|
|
1,373 |
|
|
|
7.0 |
|
|
|
893 |
|
|
|
6.7 |
|
Retail trade — Other than Auto Dealers |
|
|
1,752 |
|
|
|
9.0 |
|
|
|
1,145 |
|
|
|
8.6 |
|
Contractors and construction |
|
|
1,467 |
|
|
|
7.5 |
|
|
|
835 |
|
|
|
6.3 |
|
Transportation, communications, and utilities |
|
|
1,172 |
|
|
|
6.0 |
|
|
|
716 |
|
|
|
5.4 |
|
Wholesale trade |
|
|
990 |
|
|
|
5.1 |
|
|
|
500 |
|
|
|
3.8 |
|
Agriculture and forestry |
|
|
592 |
|
|
|
3.0 |
|
|
|
412 |
|
|
|
3.1 |
|
Energy |
|
|
277 |
|
|
|
1.4 |
|
|
|
199 |
|
|
|
1.5 |
|
Public administration |
|
|
131 |
|
|
|
0.7 |
|
|
|
121 |
|
|
|
0.9 |
|
Other |
|
|
32 |
|
|
|
0.1 |
|
|
|
27 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,552 |
|
|
|
100.0 |
% |
|
$ |
13,320 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Credit quality information regarding NCOs and NALs for our C&I loan portfolio is presented in
the following table.
Table 27 — Commercial and Industrial Credit Quality Data by Industry Classification
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended June 30, 2009 |
|
|
At June 30, 2009 |
|
| |
|
Net Charge-offs |
|
|
Nonaccrual Loans |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
| (in millions) |
|
Amount |
|
|
Annualized % |
|
|
Percent |
|
|
Amount |
|
|
Loans |
|
| |
Industry Classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
19.8 |
|
|
|
1.99 |
% |
|
|
20.1 |
% |
|
$ |
113.5 |
|
|
|
2.8 |
% |
Finance, insurance, and real estate |
|
|
15.1 |
|
|
|
2.71 |
|
|
|
15.4 |
|
|
|
74.8 |
|
|
|
3.4 |
|
Manufacturing |
|
|
39.6 |
|
|
|
6.67 |
|
|
|
40.3 |
|
|
|
109.6 |
|
|
|
4.6 |
|
Retail trade — Auto Dealers |
|
|
0.2 |
|
|
|
0.08 |
|
|
|
0.2 |
|
|
|
3.1 |
|
|
|
0.3 |
|
Retail trade — Other than Auto Dealers |
|
|
12.4 |
|
|
|
5.45 |
|
|
|
12.6 |
|
|
|
68.8 |
|
|
|
7.6 |
|
Contractors and construction |
|
|
2.6 |
|
|
|
2.04 |
|
|
|
2.6 |
|
|
|
26.2 |
|
|
|
5.1 |
|
Transportation, communications, and utilities |
|
|
2.0 |
|
|
|
1.09 |
|
|
|
2.0 |
|
|
|
11.9 |
|
|
|
1.6 |
|
Wholesale trade |
|
|
6.3 |
|
|
|
3.00 |
|
|
|
6.4 |
|
|
|
30.9 |
|
|
|
3.7 |
|
Agriculture and forestry |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3.9 |
|
|
|
1.9 |
|
Energy |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12.7 |
|
|
|
3.0 |
|
Public administration |
|
|
0.3 |
|
|
|
0.80 |
|
|
|
0.3 |
|
|
|
1.6 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
98.3 |
|
|
|
2.91 |
% |
|
|
100.00 |
% |
|
$ |
456.7 |
|
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within the C&I portfolio, the automotive industry segment continued to be stressed and is
discussed below.
Automotive Industry
The following table provides a summary of loans and total exposure including both loans and
unused commitments and standby letters of credit to companies related to the automotive industry.
Table 28 — Automotive Industry Exposure (1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2009 |
|
|
December 31, 2008 |
|
| |
|
Loans |
|
|
% of Total |
|
|
|
|
|
|
Loans |
|
|
% of Total |
|
|
|
|
| (in millions) |
|
Outstanding |
|
|
Loans |
|
|
Total Exposure |
|
|
Outstanding |
|
|
Loans |
|
|
Total Exposure |
|
Suppliers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
196 |
|
|
|
|
|
|
$ |
327 |
|
|
$ |
182 |
|
|
|
|
|
|
$ |
331 |
|
Foreign |
|
|
33 |
|
|
|
|
|
|
|
46 |
|
|
|
33 |
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Suppliers |
|
|
228 |
|
|
|
0.59 |
% |
|
|
373 |
|
|
|
215 |
|
|
|
0.52 |
% |
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floorplan — domestic |
|
|
444 |
|
|
|
|
|
|
|
787 |
|
|
|
553 |
|
|
|
|
|
|
|
747 |
|
Floorplan — foreign |
|
|
339 |
|
|
|
|
|
|
|
561 |
|
|
|
408 |
|
|
|
|
|
|
|
544 |
|
Other |
|
|
354 |
|
|
|
|
|
|
|
426 |
|
|
|
346 |
|
|
|
|
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Dealer |
|
|
1,138 |
|
|
|
2.96 |
|
|
|
1,773 |
|
|
|
1,306 |
|
|
|
3.18 |
|
|
|
1,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Automotive |
|
$ |
1,366 |
|
|
|
3.55 |
|
|
$ |
2,146 |
|
|
$ |
1,521 |
|
|
|
3.70 |
|
|
$ |
2,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Companies with > 25% of revenue derived from the automotive industry. |
43
Although we do not have direct exposure to the automobile manufacturing companies, we do have
limited exposure to automobile industry suppliers, and automobile dealer-related exposures. The
automobile industry supplier exposure is embedded primarily in our C&I portfolio within the
Commercial Banking segment, while the dealer exposure is originated and managed within the AFDS
business segment. As a result of our geographic locations and the above referenced exposure, we
have closely monitored the entire automobile industry; particularly the recent events associated
with General Motors and Chrysler, including bankruptcy filings, plant closings, production
suspension, and model eliminations. We have anticipated the significant reductions in production
across the industry that will result in additional economic distress in some of our markets. Our
eastern Michigan and northern Ohio markets are particularly exposed to these reductions, but all
our markets are affected. We anticipate the impact will result in additional stress throughout our
commercial and consumer loan portfolios, as secondary and tertiary businesses are affected by the
actions of the manufacturers. However, as these actions were anticipated, many of the potential
impacts have been mitigated through changes in underwriting criteria and regionally focused
policies and procedures. Within the AFDS portfolio, our dealer selection criteria and focus is on
multiple brand dealership groups, as we have immaterial exposure to single-brand dealerships.
As shown in Table 28, our total direct exposure to the automotive supplier segment is $373
million, of which $228 million represented loans outstanding. We included companies that derive
more than 25% of their revenues from contracts with automobile manufacturing companies. This low
level of exposure is reflective of our industry-level risk-limits approach.
While the entire automotive industry is under significant pressure as evidenced by a
significant reduction in new car sales and the resulting production declines, we believe that our
floorplan exposure of $1.3 billion will not be materially affected. Our floorplan exposure is
centered in large, multi-dealership entities, and we have focused on client selection, and
conservative underwriting standards. We anticipate that the economic environment will affect our
dealerships in the near-term, but we believe the majority of our portfolio will perform favorably
relative to the industry in the increasingly stressed environment. The decline in floorplan loans
outstanding at June 30, 2009, compared with December 31, 2008, reflected reduced dealership
inventory as the market continued to contract.
While the specific impacts associated with the ongoing changes in the industry are unknown, we
believe that we have taken appropriate steps to limit our exposure. When we have chosen to extend
credit, our client selection process has focused us on the most diversified and strongest
dealership groups.
44
COMMERCIAL REAL ESTATE (CRE) PORTFOLIO
As shown in the following table, CRE loans totaled $8.9 billion and represented 23% of total
loans and leases at June 30, 2009.
Table 29 — Commercial Real Estate Loans by Property Type and Property Location
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At June 30, 2009 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
| (in millions) |
|
Ohio |
|
|
Michigan |
|
|
Pennsylvania |
|
|
Indiana |
|
|
West Virginia |
|
|
Florida |
|
|
Kentucky |
|
|
Other |
|
|
Amount |
|
|
Percent |
|
Retail properties |
|
$ |
921 |
|
|
$ |
265 |
|
|
$ |
161 |
|
|
$ |
217 |
|
|
$ |
48 |
|
|
$ |
86 |
|
|
$ |
11 |
|
|
$ |
592 |
|
|
$ |
2,301 |
|
|
|
25.7 |
% |
Multi family |
|
|
836 |
|
|
|
142 |
|
|
|
103 |
|
|
|
76 |
|
|
|
79 |
|
|
|
7 |
|
|
|
40 |
|
|
|
130 |
|
|
|
1,413 |
|
|
|
15.8 |
|
Single family home builders |
|
|
684 |
|
|
|
122 |
|
|
|
63 |
|
|
|
37 |
|
|
|
20 |
|
|
|
135 |
|
|
|
26 |
|
|
|
75 |
|
|
|
1,162 |
|
|
|
13.0 |
|
Office |
|
|
588 |
|
|
|
204 |
|
|
|
114 |
|
|
|
55 |
|
|
|
62 |
|
|
|
21 |
|
|
|
28 |
|
|
|
68 |
|
|
|
1,140 |
|
|
|
12.7 |
|
Industrial and warehouse |
|
|
516 |
|
|
|
235 |
|
|
|
30 |
|
|
|
82 |
|
|
|
20 |
|
|
|
41 |
|
|
|
14 |
|
|
|
125 |
|
|
|
1,063 |
|
|
|
11.9 |
|
Lines to real estate companies |
|
|
703 |
|
|
|
118 |
|
|
|
58 |
|
|
|
43 |
|
|
|
53 |
|
|
|
1 |
|
|
|
2 |
|
|
|
14 |
|
|
|
992 |
|
|
|
11.1 |
|
Hotel |
|
|
143 |
|
|
|
86 |
|
|
|
24 |
|
|
|
21 |
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
67 |
|
|
|
351 |
|
|
|
3.9 |
|
Health care |
|
|
174 |
|
|
|
67 |
|
|
|
19 |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
32 |
|
|
|
296 |
|
|
|
3.3 |
|
Raw land and other land uses |
|
|
79 |
|
|
|
30 |
|
|
|
11 |
|
|
|
13 |
|
|
|
6 |
|
|
|
7 |
|
|
|
9 |
|
|
|
20 |
|
|
|
175 |
|
|
|
2.0 |
|
Other |
|
|
31 |
|
|
|
8 |
|
|
|
7 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
1 |
|
|
|
53 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,675 |
|
|
$ |
1,277 |
|
|
$ |
590 |
|
|
$ |
546 |
|
|
$ |
302 |
|
|
$ |
298 |
|
|
$ |
134 |
|
|
$ |
1,124 |
|
|
$ |
8,946 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total portfolio |
|
|
52.3 |
% |
|
|
14.3 |
% |
|
|
6.6 |
% |
|
|
6.1 |
% |
|
|
3.4 |
% |
|
|
3.3 |
% |
|
|
1.5 |
% |
|
|
12.6 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
82.7 |
|
|
$ |
31.1 |
|
|
$ |
— |
|
|
$ |
2.8 |
|
|
$ |
1.2 |
|
|
$ |
29.9 |
|
|
$ |
2.9 |
|
|
$ |
22.0 |
|
|
$ |
172.6 |
|
|
|
|
|
Net charge-offs — annualized percentage |
|
|
6.86 |
% |
|
|
9.46 |
% |
|
|
0.13 |
% |
|
|
1.97 |
% |
|
|
1.56 |
% |
|
|
39.22 |
% |
|
|
8.63 |
% |
|
|
7.63 |
% |
|
|
7.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
$ |
432.8 |
|
|
$ |
143.8 |
|
|
$ |
10.7 |
|
|
$ |
31.4 |
|
|
$ |
1.4 |
|
|
$ |
105.4 |
|
|
$ |
9.3 |
|
|
$ |
116.0 |
|
|
$ |
850.8 |
|
|
|
|
|
% of portfolio |
|
|
9.26 |
% |
|
|
11.26 |
% |
|
|
1.81 |
% |
|
|
5.75 |
% |
|
|
0.46 |
% |
|
|
35.37 |
% |
|
|
6.94 |
% |
|
|
10.32 |
% |
|
|
9.51 |
% |
|
|
|
|
Credit quality data regarding NCOs and NALs for our CRE portfolio is presented in the
following table.
Table 30 — Commercial Real Estate Loans Credit Quality Data by Property Type
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended June 30,2009 |
|
|
At June 30, 2009 |
|
| |
|
Net charge-offs |
|
|
Nonaccrual Loans |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
| (in thousands) |
|
Amount |
|
|
Annualized % |
|
|
Percent |
|
|
Amount |
|
|
Loans |
|
| |
Retail properties |
|
$ |
53,792 |
|
|
|
9.35 |
% |
|
|
31.2 |
% |
|
$ |
263,934 |
|
|
|
11.5 |
% |
Single family home builders |
|
|
52,208 |
|
|
|
17.98 |
|
|
|
30.2 |
|
|
|
289,991 |
|
|
|
25.0 |
|
Lines to real estate companies |
|
|
24,132 |
|
|
|
9.28 |
|
|
|
14.0 |
|
|
|
29,898 |
|
|
|
3.0 |
|
Multi family |
|
|
17,440 |
|
|
|
4.72 |
|
|
|
10.1 |
|
|
|
104,493 |
|
|
|
7.4 |
|
Industrial and warehouse |
|
|
14,020 |
|
|
|
5.04 |
|
|
|
8.1 |
|
|
|
75,988 |
|
|
|
7.1 |
|
Office |
|
|
6,528 |
|
|
|
2.19 |
|
|
|
3.8 |
|
|
|
53,300 |
|
|
|
4.7 |
|
Raw land and other land uses |
|
|
4,454 |
|
|
|
9.82 |
|
|
|
2.6 |
|
|
|
20,206 |
|
|
|
11.7 |
|
Hotel |
|
|
48 |
|
|
|
0.00 |
|
|
|
0.0 |
|
|
|
6,292 |
|
|
|
1.8 |
|
Health care |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
716 |
|
|
|
0.2 |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,027 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
172,621 |
|
|
|
7.51 |
% |
|
|
100.0 |
% |
|
$ |
850,846 |
|
|
|
9.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
We manage the risks inherent in this portfolio through origination policies, concentration
limits, ongoing loan level reviews, recourse requirements, and continuous portfolio risk management
activities. Our origination policies for this portfolio include loan product-type specific
policies such as LTV, debt service coverage ratios, and pre-leasing requirements, as applicable.
Generally, we: (a) limit our loans to 80% of the appraised value of the commercial real estate,
(b) require net operating cash flows to be 125% of required interest and principal payments, and
(c) if the commercial real estate is non-owner occupied, require that at least 50% of the space of
the project be pre-leased. We may require more conservative loan terms, depending on the project.
Dedicated real estate professionals within our Commercial Real Estate segment team originated
the majority of the portfolio, with the remainder obtained from prior acquisitions. Appraisals
from approved vendors are reviewed by an internal appraisal review group to ensure the quality of
the valuation used in the underwriting process. The portfolio is diversified by project type and
loan size, and represents a significant piece of the credit risk management strategies employed for
this portfolio. Our loan review staff provides an assessment of the quality of the underwriting
and structure and validates the risk rating assigned to the loan.
Appraisal values are updated as needed, in compliance with regulatory requirements. Given the
stressed environment for some loan types, we have initiated ongoing portfolio level reviews of
segments such as single family home builders and retail properties (see “Single Family Home
Builders” and “Retail Properties” discussions). These reviews generate action plans based on
occupancy levels or sales volume associated with the projects being reviewed. The results of the
2009 first six-month period reviews of these two portfolio segments indicated that additional
stress was likely due to the current economic conditions. Appraisals are updated on a regular
basis to ensure that appropriate decisions regarding the ongoing management of the portfolio
reflect the changing market conditions. This highly individualized process requires working
closely with all of our borrowers as well as an in-depth knowledge of CRE project lending and the
market environment.
At the portfolio level, we actively monitor the concentrations and performance metrics of all
loan types, with a focus on higher risk segments. Macro-level stress-test scenarios based on
home-price depreciation trends for the segments are embedded in our performance expectations, and
lease-up and absorption is assessed. We anticipate the current stress within this portfolio will
continue throughout the remainder of 2009, resulting in elevated charge-offs, NALs, and ALLL
levels.
During the 2009 first quarter, a portfolio review resulted in a reclassification of certain
CRE loans to C&I loans at the end of the period. This net reclassification of $782 million was
primarily associated with loans to businesses secured by the real estate and buildings that house
their operations. These owner-occupied loans secured by real estate were underwritten based on the
cash flow of the business and are more appropriately classified as C&I loans.
Within the CRE portfolio, the single family home builder and retail properties segments
continued to be stressed as a result of the continued decline in the housing markets and general
economic conditions. As previously mentioned above, these segments continue to be the highest risk
segments within our CRE portfolio, and are discussed further below.
Single Family Home Builders
At June 30, 2009, we had $1,162 million of CRE loans to single family home builders. Such
loans represented 3% of total loans and leases. Of this portfolio segment, 69% were to finance
projects currently under construction, 16% to finance land under development, and 15% to finance
land held for development. The $1,162 million represented a $427 million, or 27%, decrease
compared with $1,589 million at December 31, 2008. The decrease primarily reflected the
reclassification of loans secured by 1-4 family residential real estate rental properties to C&I
loans, consistent with industry practices in the definition of this segment. Other factors
contributing to the decrease in exposure include essentially no new originations in 2009 and
substantial charge-offs.
The housing market across our geographic footprint remained stressed, reflecting relatively
lower sales activity, declining prices, and excess inventories of houses to be sold, particularly
impacting borrowers in our eastern Michigan and northern Ohio markets. Further, a portion of the
loans extended to borrowers located within our geographic regions was to finance projects outside
of our geographic regions. We anticipate the residential developer market will continue to be
depressed, and anticipate continued pressure on the single family home builder segment throughout
2009. As previously mentioned, all significant exposures are monitored on a periodic basis. For
this portfolio segment, the periodic monitoring has included: (a) all loans greater than $50
thousand have been reviewed continuously over the past 18 months and continue to be monitored, (b)
credit valuation adjustments have been made when appropriate based on the current condition of each
relationship, and (c) reserves have been increased based on proactive risk identification and
thorough borrower analysis.
46
Retail properties
Our portfolio of CRE loans secured by retail properties totaled $2.3 billion, or approximately
6% of total loans and leases, at June 30, 2009. Loans within this portfolio segment increased 2%
from December 31, 2008, primarily reflecting construction draws. Credit approval in this portfolio
segment is generally dependant on pre-leasing requirements, and net operating income from the
project must cover debt service by specified percentages when the loan is fully funded.
The weakness of the economic environment in our geographic regions significantly impacted the
projects that secure the loans in this portfolio segment. Increased unemployment levels compared
with recent years, and the expectation that these levels will continue to increase for the
foreseeable future, are expected to adversely affect our borrowers’ ability to repay these loans.
We have increased the level of credit risk management activity to this portfolio segment, and we
analyze our retail property loans in detail by combining property type, geographic location,
tenants, and other data, to assess and manage our credit concentration risks.
Consumer Credit
Consumer credit approvals are based on, among other factors, the financial strength and
payment history of the borrower, type of exposure, and the transaction structure. We make
extensive use of portfolio assessment models to continuously monitor the quality of the portfolio,
which may result in changes to future origination strategies. The continuous analysis and review
process results in a determination of an appropriate ALLL amount for our consumer loan portfolio.
Our consumer loan portfolio is primarily comprised of home equity loans, traditional
residential mortgages, and automobile loans and leases.
Home equity — Home equity lending includes both home equity loans and lines of credit. This
type of lending, which is secured by a first- or second- mortgage on the borrower’s residence,
allows customers to borrow against the equity in their home. Real estate market values as of the
time the loan or line is granted directly affect the amount of credit extended and, in addition,
changes in these values impact the severity of losses.
Residential mortgages — Residential mortgage loans represent loans to consumers for the
purchase or refinance of a residence. These loans are generally financed over a 15- to 30- year
term, and in most cases, are extended to borrowers to finance their primary residence. In some
cases, government agencies or private mortgage insurers guarantee the loan. Generally speaking,
our practice is to sell a significant majority of our fixed-rate originations in the secondary
market.
Automobile loans/leases — Automobile loans/leases is primarily comprised of loans made through
automotive dealerships, and includes exposure in several out-of-market states. However, no
out-of-market state represented more than 10% of our total automobile loan portfolio, and we expect
to see relatively rapid reductions in these exposures as we ceased automobile loan originations in
out-of-market states during the 2009 first quarter. Our automobile lease portfolio will continue
to decline as we ceased new originations of all automobile leases during the 2008 fourth quarter.
47
The residential mortgage and home equity portfolios are primarily located throughout our
geographic footprint. The general slowdown in the housing market has impacted the performance of
our residential mortgage and home equity portfolios over the past year. While the degree of price
depreciation varies across our markets, all regions throughout our footprint have been affected.
Given the conditions in our markets as described above in the single family home builder section,
the home equity and residential mortgage portfolios are particularly noteworthy, and are discussed
in greater detail below:
Table 31 — Selected Home Equity and Residential Mortgage Portfolio Data(1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Home Equity Loans |
|
|
Home Equity Lines of Credit |
|
|
Residential Mortgages |
|
| (dollar amounts in millions) |
|
6/30/09 |
|
|
12/31/08 |
|
|
6/30/09 |
|
|
12/31/08 |
|
|
6/30/09 |
|
|
12/31/08 |
|
Ending Balance |
|
$ |
2,830 |
|
|
$ |
3,116 |
|
|
$ |
4,802 |
|
|
$ |
4,440 |
|
|
$ |
4,646 |
|
|
$ |
4,761 |
|
Portfolio
Weighted Average LTV ratio (2) |
|
|
71 |
% |
|
|
70 |
% |
|
|
78 |
% |
|
|
78 |
% |
|
|
77 |
% |
|
|
76 |
% |
Portfolio
Weighted Average FICO (3) |
|
|
720 |
|
|
|
725 |
|
|
|
723 |
|
|
|
720 |
|
|
|
700 |
|
|
|
707 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three-Month Period Ended June 30, 2009 |
|
| |
|
Home Equity Loans |
|
|
Home Equity Lines of Credit |
|
|
Residential Mortgages (4) |
|
Originations |
|
$ |
28 |
|
|
$ |
357 |
|
|
$ |
94 |
|
Origination
Weighted Average LTV ratio (2) |
|
|
61 |
% |
|
|
74 |
% |
|
|
92 |
% |
Origination
Weighted Average FICO (3) |
|
|
749 |
|
|
|
766 |
|
|
|
717 |
|
| |
|
|
| (1) |
|
Excludes Franklin loans.
|
| |
| (2) |
|
The loan-to-value (LTV) ratios for home equity loans and home
equity lines of credit are cumulative LTVs reflecting the balance of any senior
loans. |
| |
| (3) |
|
Portfolio Weighted Average FICO reflects currently updated
customer credit scores whereas Origination Weighted Average FICO reflects the
customer credit scores at the time of loan origination. |
| |
| (4) |
|
Represents only owned-portfolio originations. |
HOME EQUITY PORTFOLIO
Our home equity portfolio (loans and lines of credit) consists of both first and second
mortgage loans with underwriting criteria based on minimum credit scores, debt-to-income ratios,
and LTV ratios. Included in our home equity loan portfolio are $1.4 billion of loans where the
loan is secured by a first-mortgage lien on the property. We offer closed-end home equity loans
with a fixed interest rate and level monthly payments and a variable-rate, interest-only home
equity line of credit.
We believe we have granted credit conservatively within this portfolio. We have not
originated home equity loans or lines of credit that allow negative amortization. Also, we have
not originated home equity loans or lines of credit with an LTV ratio at origination greater than
100%, except for infrequent situations with high quality borrowers. Home equity loans are
generally fixed-rate with periodic principal and interest payments. Home equity lines of credit are
generally variable-rate and do not require payment of principal during the 10-year revolving period
of the line.
We continue to make appropriate origination policy adjustments based on our assessment of an
appropriate risk profile as well as industry actions. As an example, the significant changes made
in 2008 by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac) resulted in the reduction of our maximum LTV ratio on
second-mortgage loans, even for customers with high credit scores. In addition to origination
policy adjustments, we take appropriate actions, as necessary, to mitigate the risk profile of this
portfolio. We focus production primarily within our banking footprint or to existing customers.
RESIDENTIAL MORTGAGES
We focus on higher quality borrowers, and underwrite all applications centrally, often through
the use of an automated underwriting system. We do not originate residential mortgage loans that
allow negative amortization or are “payment option adjustable-rate mortgages.”
48
A majority of the loans in our loan portfolio have adjustable rates. Our adjustable-rate
mortgages (ARMs) are primarily residential mortgages that have a fixed rate for the first 3 to 5
years and then adjust annually. These loans comprised approximately 58% of our total residential
mortgage loan portfolio at June 30, 2009. At June 30, 2009, ARM loans that were expected to have
rates reset totaled $391.2 million for the remainder of 2009, and $753.0 million for 2010. Given
the quality of our borrowers and the relatively low current interest rates, we believe that we have
a relatively limited exposure to ARM reset risk. Nonetheless, we have taken actions to mitigate our
risk exposure. We initiate borrower contact at least six months prior to the interest rate
resetting, and have been successful in converting many ARMs to fixed-rate loans through this
process. Additionally, where borrowers are experiencing payment difficulties, loans may be
re-underwritten based on the borrower’s ability to repay the loan.
We had $410.4 million of Alt-A mortgage loans in the residential mortgage loan portfolio at
June 30, 2009, representing an 8% decline, compared with $445.4 million at December 31, 2008.
These loans have a higher risk profile than the rest of the portfolio as a result of origination
policies for this limited segment including reliance on stated income, stated assets, or higher
acceptable LTV ratios. At June 30, 2009, borrowers for Alt-A mortgages had an average current FICO
score of 665 and the loans had an average LTV ratio of 88%, compared with 671 and 88%,
respectively, at December 31, 2008. Total Alt-A NCOs were an annualized 3.27% for the 2009 second
quarter, compared with an annualized 2.03% for the 2008 fourth quarter. Our exposure related to
this product will continue to decline in the future as we stopped originating these loans in 2007.
Interest-only loans comprised $624.6 million, or 13%, of residential real estate loans at June
30, 2009, representing a 10% decline, compared with $691.9 million, or 15%, at December 31, 2008.
Interest-only loans are underwritten to specific standards including minimum credit scores,
stressed debt-to-income ratios, and extensive collateral evaluation. At June 30, 2009, borrowers
for interest-only loans had an average current FICO score of 720 and the loans had an average LTV
ratio of 78%, compared with 724 and 78%, respectively, at December 31, 2008. Total interest-only
NCOs were an annualized 2.74% for the 2009 second quarter, compared with an annualized 0.20% for
the 2008 fourth quarter.
Several recent government actions have been enacted that have affected the residential
mortgage portfolio and MSRs in particular. Various refinance programs positively affected the
availability of credit for the industry. We are utilizing these programs to enhance our existing
strategies of working closely with our customers.
AUTOMOTIVE INDUSTRY IMPACTS ON CONSUMER LOAN PORTFOLIO
The issues affecting the automotive industry (see “Automotive Industry” discussion located
within the “Commercial Credit” section) also have an impact on the performance of the consumer loan
portfolio. While there is a direct correlation between the industry situation and our exposure to
the automotive suppliers and automobile dealers in our commercial portfolio, the loss of jobs and
reduction in wages may have a negative impact on our consumer portfolio. In 2008, we initiated a
project to assess the impact on our geographic regions in the event of significant production
changes or plant closings in our markets. This project included assessing the downstream impact on
automotive suppliers, related small businesses, and consumers. As a result of this project, we
believe that we have made a number of positive decisions regarding the quality of our consumer
portfolio given the current environment. In the indirect automobile portfolio, we have focused on
borrowers with high credit scores for many years, as reflected by the performance of the portfolio
given the economic conditions. In the residential and home equity loan portfolios, we have been
operating in a relatively high unemployment situation for an extended period of time, yet have been
able to maintain our performance metrics reflecting our focus on strong underwriting. In summary,
while we anticipate our performance results may be negatively impacted, we believe the impact will
be manageable.
Counterparty Risk
In the normal course of business, we engage with other financial counterparties for a variety
of purposes including investing, asset and liability management, mortgage banking, and for trading
activities. As a result, we are exposed to credit risk, or the risk of loss if the counterparty
fails to perform according to the terms of our contract or agreement.
We minimize counterparty risk through credit approvals, actively setting adjusting exposure
limits, implementing monitoring procedures similar to those used for our commercial portfolio (see
“Commercial Credit” discussion), generally entering into transactions only with counterparties that
carry high quality ratings, and requiring collateral when appropriate.
The majority of the financial institutions with whom we are exposed to counterparty risk are
large commercial banks. The potential amount of loss, which would have been recognized at June 30,
2009, if a counterparty defaulted, did not exceed $14 million for any individual counterparty.
49
Credit Quality
We believe the most meaningful way to assess overall credit quality performance is through an
analysis of credit quality performance ratios. This approach forms the basis of most of the
discussion in the three sections immediately following: NALs and NPAs, ACL, and NCOs.
Credit quality performance in the 2009 second quarter continued to be negatively impacted by
the sustained economic weakness in our Midwest markets. In addition, the negative trends in credit
quality metrics for commercial loans were also influenced by the results of the in-depth review of
our commercial loan portfolio, which resulted in higher provision for credit losses. The continued
trend of higher unemployment rates and declining home values in our markets negatively impacted
consumer loan credit quality.
NONACCRUING LOANS (NAL/NALs) AND NONPERFORMING ASSETS (NPA/NPAs)
(This section should be read in conjunction with the “Franklin Relationship” discussion.)
NPAs consist of (a) NALs, which represent loans and leases that are no longer accruing
interest, (b) impaired held-for-sale loans, (c) OREO, and (d) other NPAs. A C&I or CRE loan is
generally placed on nonaccrual status when collection of principal or interest is in doubt or when
the loan is 90-days past due. Home equity and residential mortgage loans are placed on nonaccrual
status at 120 days and 180 days, respectively. 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.
Table 32 reflects period-end NALs, NPAs, accruing restructured loans (ARLs), and past due
loans and leases detail for each of the last five quarters. Due to the impact of the NALs and NPAs
related to Franklin, we believe it is helpful to analyze trends in our portfolio with those
Franklin-related NALs and NPAs removed. Table 33 details the Franklin-related impacts to NALs and
NPAs for each of the last five quarters.
50
Table 32 — Nonaccruing Loans (NALs), Nonperforming Assets (NPAs), and Past Due Loans and Leases
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands) |
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans and leases (NALs): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial (1) |
|
$ |
456,734 |
|
|
$ |
398,286 |
|
|
$ |
932,648 |
|
|
$ |
174,207 |
|
|
$ |
161,345 |
|
Commercial real estate |
|
|
850,846 |
|
|
|
629,886 |
|
|
|
445,717 |
|
|
|
298,844 |
|
|
|
261,739 |
|
Residential mortgage (1) |
|
|
475,488 |
|
|
|
486,955 |
|
|
|
98,951 |
|
|
|
85,163 |
|
|
|
82,882 |
|
Home equity (1) |
|
|
35,299 |
|
|
|
37,967 |
|
|
|
24,831 |
|
|
|
27,727 |
|
|
|
29,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NALs |
|
|
1,818,367 |
|
|
|
1,553,094 |
|
|
|
1,502,147 |
|
|
|
585,941 |
|
|
|
535,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1) |
|
|
107,954 |
|
|
|
143,856 |
|
|
|
63,058 |
|
|
|
59,302 |
|
|
|
59,119 |
|
Commercial |
|
|
64,976 |
|
|
|
66,906 |
|
|
|
59,440 |
|
|
|
14,176 |
|
|
|
13,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other real estate |
|
|
172,930 |
|
|
|
210,762 |
|
|
|
122,498 |
|
|
|
73,478 |
|
|
|
72,378 |
|
Impaired loans held for sale (2) |
|
|
11,287 |
|
|
|
11,887 |
|
|
|
12,001 |
|
|
|
13,503 |
|
|
|
14,759 |
|
Other NPAs (3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,397 |
|
|
|
2,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NPAs |
|
$ |
2,002,584 |
|
|
$ |
1,775,743 |
|
|
$ |
1,636,646 |
|
|
$ |
675,319 |
|
|
$ |
624,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Franklin loans (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
650,225 |
|
|
$ |
— |
|
|
$ |
— |
|
Residential mortgage |
|
|
342,207 |
|
|
|
360,106 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
OREO |
|
|
43,623 |
|
|
|
79,596 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Home Equity |
|
|
2,437 |
|
|
|
6,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming Franklin loans |
|
$ |
388,267 |
|
|
$ |
445,702 |
|
|
$ |
650,225 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NALs as a % of total loans and leases |
|
|
4.72 |
% |
|
|
3.93 |
% |
|
|
3.66 |
% |
|
|
1.42 |
% |
|
|
1.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPA ratio (4) |
|
|
5.18 |
|
|
|
4.46 |
|
|
|
3.97 |
|
|
|
1.64 |
|
|
|
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases past due 90 days or more: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10,889 |
|
|
$ |
24,407 |
|
|
$ |
9,805 |
|
Commercial real estate |
|
|
— |
|
|
|
— |
|
|
|
59,425 |
|
|
|
58,867 |
|
|
|
24,052 |
|
Residential mortgage (excluding loans guaranteed by
the U.S. government) |
|
|
97,937 |
|
|
|
88,381 |
|
|
|
71,553 |
|
|
|
58,280 |
|
|
|
52,006 |
|
Home equity |
|
|
35,328 |
|
|
|
35,717 |
|
|
|
29,039 |
|
|
|
23,224 |
|
|
|
26,464 |
|
Other loans and leases |
|
|
13,474 |
|
|
|
15,611 |
|
|
|
18,039 |
|
|
|
14,580 |
|
|
|
13,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, excl. loans guaranteed by the U.S. government |
|
$ |
146,739 |
|
|
$ |
139,709 |
|
|
$ |
188,945 |
|
|
$ |
179,358 |
|
|
$ |
125,902 |
|
Add: loans guaranteed by U.S. government |
|
|
99,379 |
|
|
|
88,551 |
|
|
|
82,576 |
|
|
|
68,729 |
|
|
|
65,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans and leases past due 90 days
or more, including loans guaranteed by the U.S.
government |
|
$ |
246,118 |
|
|
$ |
228,260 |
|
|
$ |
271,521 |
|
|
$ |
248,087 |
|
|
$ |
190,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding loans guaranteed by the U.S. government,
as a percent of total loans and leases |
|
|
0.38 |
% |
|
|
0.35 |
% |
|
|
0.46 |
% |
|
|
0.44 |
% |
|
|
0.31 |
% |
Guaranteed by U.S. government, as a percent of
total loans and leases |
|
|
0.26 |
% |
|
|
0.22 |
% |
|
|
0.20 |
% |
|
|
0.17 |
% |
|
|
0.16 |
% |
Including loans guaranteed by the U.S. government,
as a percent of total loans and leases |
|
|
0.64 |
% |
|
|
0.58 |
% |
|
|
0.66 |
% |
|
|
0.60 |
% |
|
|
0.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing restructured loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial (1) |
|
$ |
267,975 |
|
|
$ |
201,508 |
|
|
$ |
185,333 |
|
|
$ |
364,939 |
|
|
$ |
368,379 |
|
Residential mortgage |
|
|
158,568 |
|
|
|
108,011 |
|
|
|
82,857 |
|
|
|
71,512 |
|
|
|
57,802 |
|
Other |
|
|
35,720 |
|
|
|
27,014 |
|
|
|
41,094 |
|
|
|
40,414 |
|
|
|
34,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing restructured loans |
|
$ |
462,263 |
|
|
$ |
336,533 |
|
|
$ |
309,284 |
|
|
$ |
476,865 |
|
|
$ |
460,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Franklin loans were reported as accruing restructured
commercial loans for the three-month periods ended June 30,
2008, and September 30, 2008. For the three-month period
ended December 31, 2008, Franklin loans were reported as
nonaccruing commercial and industrial loans. For the
three-month periods ended March 31, 2009, and June 30,
2009, nonaccruing Franklin loans were reported as
residential mortgage loans, home equity loans, and OREO;
reflecting the 2009 first quarter restructuring. |
| |
| (2) |
|
Represent impaired loans obtained from the Sky Financial
acquisition. Held for sale loans are carried at the lower
of cost or fair value less costs to sell. |
| |
| (3) |
|
Other NPAs represent certain investment securities backed
by mortgage loans to borrowers with lower FICO scores. |
| |
| (4) |
|
Nonperforming assets divided by the sum of loans and
leases, impaired loans held for sale, net other real
estate, and other NPAs. |
51
Table 33 — NALs/NPAs — Franklin-Related Impact
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
344.6 |
|
|
$ |
366.1 |
|
|
$ |
650.2 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-Franklin |
|
|
1,473.8 |
|
|
|
1,187.0 |
|
|
|
851.9 |
|
|
|
585.9 |
|
|
|
535.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,818.4 |
|
|
$ |
1,553.1 |
|
|
$ |
1,502.1 |
|
|
$ |
585.9 |
|
|
$ |
535.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
472.0 |
|
|
$ |
494.0 |
|
|
$ |
650.2 |
|
|
$ |
1,095.0 |
|
|
$ |
1,130.0 |
|
Non-Franklin |
|
|
38,023.0 |
|
|
|
39,054.0 |
|
|
|
40,441.8 |
|
|
|
40,097.0 |
|
|
|
39,917.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
38,495.0 |
|
|
$ |
39,548.0 |
|
|
$ |
41,092.0 |
|
|
$ |
41,192.0 |
|
|
$ |
41,047.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAL ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4.72 |
% |
|
|
3.93 |
% |
|
|
3.66 |
% |
|
|
1.42 |
% |
|
|
1.30 |
% |
Non-Franklin |
|
|
3.88 |
|
|
|
3.04 |
|
|
|
2.11 |
|
|
|
1.46 |
|
|
|
1.34 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Nonperforming assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
388.3 |
|
|
$ |
445.7 |
|
|
$ |
650.2 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-Franklin |
|
|
1,614.3 |
|
|
|
1,330.0 |
|
|
|
986.4 |
|
|
|
675.3 |
|
|
|
624.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,002.6 |
|
|
$ |
1,775.7 |
|
|
$ |
1,636.6 |
|
|
$ |
675.3 |
|
|
$ |
624.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
38,495.0 |
|
|
$ |
39,548.0 |
|
|
$ |
41,092.0 |
|
|
$ |
41,192.0 |
|
|
$ |
41,047.0 |
|
Total other real estate, net |
|
|
172.9 |
|
|
|
210.8 |
|
|
|
122.5 |
|
|
|
73.5 |
|
|
|
72.4 |
|
Impaired loans held for sale |
|
|
11.3 |
|
|
|
11.9 |
|
|
|
12.0 |
|
|
|
13.5 |
|
|
|
14.8 |
|
Other NPAs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.4 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
38,679.2 |
|
|
|
39,770.7 |
|
|
|
41,226.5 |
|
|
|
41,281.4 |
|
|
|
41,136.8 |
|
Franklin |
|
|
388.3 |
|
|
|
445.7 |
|
|
|
650.2 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Franklin |
|
$ |
39,067.5 |
|
|
$ |
40,216.4 |
|
|
$ |
41,876.7 |
|
|
$ |
41,281.4 |
|
|
$ |
41,136.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPA ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5.18 |
% |
|
|
4.46 |
% |
|
|
3.97 |
% |
|
|
1.64 |
% |
|
|
1.52 |
% |
Non-Franklin |
|
|
4.15 |
|
|
|
3.32 |
|
|
|
2.36 |
|
|
|
1.68 |
|
|
|
1.56 |
|
NPAs, which include NALs (discussed below), were $2,002.6 million at June 30, 2009, and
represented 5.18% of related assets. This compared with $1,775.7 million, or 4.46%, at March 31,
2009. The $226.9 million, or 13%, increase reflected:
| |
• |
|
$265.3 million increase in NALs (discussed below) |
Partially offset by:
| |
• |
|
$37.8 million, or 18%, decline in OREO assets, reflecting a $36.0 million, or 45%,
decline in Franklin-related OREO assets. We implemented a strategy whereby Franklin
accelerated the sale of OREO properties over the past three months. This action is
consistent with our assessment of the value of the properties and the current and future
market conditions. We also made a significant advancement in the sales of existing OREO
properties as a result of our increased focus on vendor performance. |
NALs were $1,818.4 million at June 30, 2009, compared with $1,553.1 million at March 31, 2009.
The increase of $265.3 million, or 17%, primarily reflected:
| |
• |
|
$221.0 million, or 35% increase in CRE NALs was primarily associated with retail
projects, which accounted for over 70% of the increase. The stress of lower retail sales
and downward pressure on rents given the economic conditions, continued to adversely affect
retail projects. Multi-family projects accounted for most of the remaining increase,
principally reflected in one relationship. Of note, single family home builder portfolio
NALs were essentially unchanged. |
| |
• |
|
$58.4 million, or 15%, increase in C&I NALs reflected continued stress in the higher
risk segments of the portfolio, including loans to borrowers supporting the home building
industry, contractors, and automotive suppliers. While these higher risk segments account
for less than 10% of the total C&I portfolio, they accounted for approximately 50% of the
NAL increase. Those areas with a heavier manufacturing concentration, such as northern
Ohio, were responsible for a higher percentage of the increase. |
52
Residential mortgage and home equity NALs declined, reflecting a concentrated effort to
minimize the inflow of new NALs and address existing issues through loss mitigation and loan
modification transactions.
Compared with December 31, 2008, NPAs, which include NALs, increased $365.9 million, or 22%,
reflecting:
| |
• |
|
$405.1 million increase in CRE NALs, reflecting the continued decline in the housing
market and stress on retail sales, as the majority of the increase was associated with the
retail and the single family home builder segments. The stress of lower retail sales and
downward pressure on rents given the economic conditions, continued to adversely affect
retail projects. |
| |
• |
|
$376.5 million increase in residential mortgage NALs. This reflected an increase of
$342.2 million related to the Franklin restructuring. |
| |
• |
|
$50.4 million increase in OREO. This reflected an increase of $79.6 million in OREO
assets recorded as part of the Franklin restructuring. Subsequently, Franklin-related OREO
assets declined $36.0 million, reflecting the accelerated sale of Franklin-related OREO
properties over the past six months. The non-Franklin-related decline reflects significant
advancement in the sales of existing OREO properties as a result of our increased focus on
vendor performance. |
Partially offset by:
| |
• |
|
$475.9 million decrease in C&I NALs. This reflected a reduction of $650.2 million
related to the 2009 first quarter Franklin relationship, partially offset by an increase on
$174.3 million in non-Franklin related NALs reflecting the economic conditions in our
markets. In general, the C&I loans experiencing the most stress are those supporting the
housing and construction segments, and to a lesser degree, the automobile suppliers and
restaurant segments. |
The over 90-day delinquent, but still accruing, ratio excluding loans guaranteed by the U.S.
Government, was 0.38% at June 30, 2009. The guaranteed loans represent loans currently in
Government National Mortgage Association (GNMA) pools that have met the eligibility requirements
for voluntary repurchase. Because there is insignificant loss potential in these loans, as they
remain supported by a guarantee from the Federal Housing Administration (FHA) or the Department of
Veteran Affairs (VA), we believe the ratio excluding loans guaranteed by the U.S. Government
represents a better leading indicator of loss potential and also aligns better with our regulatory
reporting.
As part of our loss mitigation process, we may re-underwrite, modify, or restructure loans
when borrowers are experiencing payment difficulties, and these loan restructurings are based on
the borrower’s ability to repay the loan.
53
NPA activity for each of the past five quarters was as follows:
Table 34 — Nonperforming Assets (NPAs) Activity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPAs, beginning of period |
|
$ |
1,775,743 |
|
|
$ |
1,636,646 |
|
|
$ |
675,319 |
|
|
$ |
624,736 |
|
|
$ |
520,406 |
|
New NPAs |
|
|
750,318 |
|
|
|
622,515 |
|
|
|
509,320 |
|
|
|
175,345 |
|
|
|
256,308 |
|
Franklin impact, net (1) |
|
|
(57,436 |
) |
|
|
(204,523 |
) |
|
|
650,225 |
|
|
|
— |
|
|
|
— |
|
Returns to accruing status |
|
|
(40,915 |
) |
|
|
(36,056 |
) |
|
|
(13,756 |
) |
|
|
(9,104 |
) |
|
|
(5,817 |
) |
Loan and lease losses |
|
|
(303,327 |
) |
|
|
(172,416 |
) |
|
|
(100,335 |
) |
|
|
(52,792 |
) |
|
|
(40,808 |
) |
Payments |
|
|
(95,124 |
) |
|
|
(61,452 |
) |
|
|
(66,536 |
) |
|
|
(43,319 |
) |
|
|
(46,091 |
) |
Sales |
|
|
(26,675 |
) |
|
|
(8,971 |
) |
|
|
(17,591 |
) |
|
|
(19,547 |
) |
|
|
(59,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPAs, end of period |
|
$ |
2,002,584 |
|
|
$ |
1,775,743 |
|
|
$ |
1,636,646 |
|
|
$ |
675,319 |
|
|
$ |
624,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Franklin loans were reported as accruing restructured
commercial loans for the three-month periods ended June 30,
2008, and September 30, 2008. For the three-month period
ended December 31, 2008, Franklin loans were reported as
nonaccruing commercial and industrial loans. For the
three-month periods ended March 31, 2009, and June 30,
2009, nonaccruing Franklin loans were reported as
residential mortgage loans, home equity loans, and OREO;
reflecting the 2009 first quarter restructuring. |
ALLOWANCE FOR CREDIT LOSSES (ACL)
(This section should be read in conjunction with Significant Item 2.)
We maintain two reserves, both of which are available to absorb inherent credit losses: the
ALLL and the AULC. When summed together, these reserves comprise the total ACL. Our credit
administration group is responsible for developing the methodology and determining the adequacy of
the ACL.
We have an established monthly process to determine the adequacy of the ACL that relies on a
number of analytical tools and benchmarks. No single statistic or measurement, in itself,
determines the adequacy of the ACL. Changes to the ACL are impacted by changes in the estimated
credit losses inherent in our loan portfolios. For example, our process requires increasingly
higher level of reserves as a loan’s internal classification moves from higher quality rankings to
lower, and vice versa. This movement across the credit scale is called migration.
In the first six-month period of 2009, we have not substantively changed any material aspect
of our overall approach in the determination of the ALLL, and there have not been any material
changes in assumptions or estimation techniques.
Table 35 reflects activity in the ALLL and ACL for each of the last five quarters. Due to the
Franklin-related impact to the ALLL and ACL, we believe it is helpful to analyze trends in the ALLL
and ACL with the Franklin-related impact removed. Table 36 displays the Franklin-related impacts
to the ALLL and ACL for each of the last five quarters.
54
Table 35 — Quarterly Credit Reserves Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Allowance for loan and lease losses,
beginning of period |
|
$ |
838,549 |
|
|
$ |
900,227 |
|
|
$ |
720,738 |
|
|
$ |
679,403 |
|
|
$ |
627,615 |
|
Loan and lease losses |
|
|
(359,444 |
) |
|
|
(353,005 |
) |
|
|
(571,053 |
) |
|
|
(96,388 |
) |
|
|
(78,084 |
) |
Recoveries of loans previously charged off |
|
|
25,037 |
|
|
|
11,514 |
|
|
|
10,433 |
|
|
|
12,637 |
|
|
|
12,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan and lease losses |
|
|
(334,407 |
) |
|
|
(341,491 |
) |
|
|
(560,620 |
) |
|
|
(83,751 |
) |
|
|
(65,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
413,538 |
|
|
|
289,001 |
|
|
|
728,046 |
|
|
|
125,086 |
|
|
|
117,035 |
|
Economic reserve transfer |
|
|
— |
|
|
|
— |
|
|
|
12,063 |
|
|
|
— |
|
|
|
— |
|
Allowance of assets sold |
|
|
— |
|
|
|
(9,188 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses, end of period |
|
$ |
917,680 |
|
|
$ |
838,549 |
|
|
$ |
900,227 |
|
|
$ |
720,738 |
|
|
$ |
679,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, beginning of period |
|
$ |
46,975 |
|
|
$ |
44,139 |
|
|
$ |
61,640 |
|
|
$ |
61,334 |
|
|
$ |
57,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (reduction in) unfunded loan
commitments and letters of credit losses |
|
|
169 |
|
|
|
2,836 |
|
|
|
(5,438 |
) |
|
|
306 |
|
|
|
3,778 |
|
Economic reserve transfer |
|
|
— |
|
|
|
— |
|
|
|
(12,063 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, end of period |
|
$ |
47,144 |
|
|
$ |
46,975 |
|
|
$ |
44,139 |
|
|
$ |
61,640 |
|
|
$ |
61,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses |
|
$ |
964,824 |
|
|
$ |
885,524 |
|
|
$ |
944,366 |
|
|
$ |
782,378 |
|
|
$ |
740,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses (ALLL) as % of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
2.38 |
% |
|
|
2.12 |
% |
|
|
2.19 |
% |
|
|
1.75 |
% |
|
|
1.66 |
% |
Nonaccrual loans and leases (NALs) |
|
|
50 |
|
|
|
54 |
|
|
|
60 |
|
|
|
123 |
|
|
|
127 |
|
Nonperforming assets (NPAs) |
|
|
46 |
|
|
|
47 |
|
|
|
55 |
|
|
|
107 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses (ACL) as % of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
2.51 |
% |
|
|
2.24 |
% |
|
|
2.30 |
% |
|
|
1.90 |
% |
|
|
1.80 |
% |
NALs |
|
|
53 |
|
|
|
57 |
|
|
|
63 |
|
|
|
134 |
|
|
|
138 |
|
NPAs |
|
|
48 |
|
|
|
50 |
|
|
|
58 |
|
|
|
116 |
|
|
|
119 |
|
55
Table 36 — ALLL/ACL — Franklin-Related Impact
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Allowance for loan and lease losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
130.0 |
|
|
$ |
115.3 |
|
|
$ |
115.3 |
|
Non-Franklin |
|
|
917.7 |
|
|
|
838.5 |
|
|
|
770.2 |
|
|
|
605.4 |
|
|
|
564.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
917.7 |
|
|
$ |
838.5 |
|
|
$ |
900.2 |
|
|
$ |
720.7 |
|
|
$ |
679.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
130.0 |
|
|
$ |
115.3 |
|
|
$ |
115.3 |
|
Non-Franklin |
|
|
964.8 |
|
|
|
885.5 |
|
|
|
814.4 |
|
|
|
667.1 |
|
|
|
625.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
964.8 |
|
|
$ |
885.5 |
|
|
$ |
944.4 |
|
|
$ |
782.4 |
|
|
$ |
740.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
472.0 |
|
|
$ |
494.0 |
|
|
$ |
650.2 |
|
|
$ |
1,095.0 |
|
|
$ |
1,130.0 |
|
Non-Franklin |
|
|
38,023.0 |
|
|
|
39,054.0 |
|
|
|
40,441.8 |
|
|
|
40,097.0 |
|
|
|
39,917.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
38,495.0 |
|
|
$ |
39,548.0 |
|
|
$ |
41,092.0 |
|
|
$ |
41,192.0 |
|
|
$ |
41,047.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
ALLL as % of total loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2.38 |
% |
|
|
2.12 |
% |
|
|
2.19 |
% |
|
|
1.75 |
% |
|
|
1.66 |
% |
Non-Franklin |
|
|
2.41 |
|
|
|
2.15 |
|
|
|
1.90 |
|
|
|
1.51 |
|
|
|
1.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL as % of total loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2.51 |
|
|
|
2.24 |
|
|
|
2.30 |
|
|
|
1.90 |
|
|
|
1.80 |
|
Non-Franklin |
|
|
2.54 |
|
|
|
2.27 |
|
|
|
2.01 |
|
|
|
1.66 |
|
|
|
1.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
344.6 |
|
|
$ |
366.1 |
|
|
$ |
650.2 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-Franklin |
|
|
1,473.8 |
|
|
|
1,187.0 |
|
|
|
851.9 |
|
|
|
586.0 |
|
|
|
535.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,818.4 |
|
|
$ |
1,553.1 |
|
|
$ |
1,502.1 |
|
|
$ |
586.0 |
|
|
$ |
535.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
ALLL as % of NALs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
50 |
% |
|
|
54 |
% |
|
|
60 |
% |
|
|
123 |
% |
|
|
127 |
% |
Non-Franklin |
|
|
62 |
|
|
|
71 |
|
|
|
90 |
|
|
|
103 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL as % of NALs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
53 |
|
|
|
57 |
|
|
|
63 |
|
|
|
134 |
|
|
|
138 |
|
Non-Franklin |
|
|
65 |
|
|
|
75 |
|
|
|
96 |
|
|
|
114 |
|
|
|
117 |
|
56
The table below reflects activity in the ALLL and AULC for the first six-month periods of 2009
and 2008.
Table 37 — Year to Date Credit Reserves Analysis
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
Allowance for loan and lease losses,
beginning of period |
|
$ |
900,227 |
|
|
$ |
578,442 |
|
Loan and lease losses |
|
|
(712,449 |
) |
|
|
(138,888 |
) |
Recoveries of loans previously charged off |
|
|
36,551 |
|
|
|
25,192 |
|
|
|
|
|
|
|
|
Net loan and lease losses |
|
|
(675,898 |
) |
|
|
(113,696 |
) |
Provision for loan and lease losses |
|
|
702,539 |
|
|
|
214,657 |
|
Allowance of assets sold and securitized |
|
|
(9,188 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Allowance for loan and lease losses, end of period |
|
$ |
917,680 |
|
|
$ |
679,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, beginning of period |
|
$ |
44,139 |
|
|
$ |
66,528 |
|
Provision for (reduction in) unfunded loan commitments
and letters of credit losses |
|
|
3,005 |
|
|
|
(5,194 |
) |
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, end of period |
|
$ |
47,144 |
|
|
$ |
61,334 |
|
|
|
|
|
|
|
|
Total allowances for credit losses |
|
$ |
964,824 |
|
|
$ |
740,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses (ALLL) as % of: |
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
2.38 |
% |
|
|
1.66 |
% |
Nonaccrual loans and leases (NALs) |
|
|
50 |
|
|
|
127 |
|
Non-performing assets (NPAs) |
|
|
46 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses (ACL) as % of: |
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
2.51 |
% |
|
|
1.80 |
% |
NALs |
|
|
53 |
|
|
|
138 |
|
NPAs |
|
|
48 |
|
|
|
119 |
|
As shown in the above table, the ALLL increased to $917.7 million at June 30, 2009, compared
with $838.5 million at March 31, 2009, and $900.2 million at December 31, 2008. Expressed as a
percent of period-end loans and leases, the ALLL ratio increased to 2.38% at June 30, 2009,
compared with 2.12% at March 31, 2009, and 2.19% at December 31, 2008. The increases of $79.1
million and $17.5 million compared with March 31, 2009 and December 31, 2008, respectively,
primarily reflected the building of reserves associated with our portfolio review process discussed
previously. (See “Commercial Loan Portfolio Review and Actions” section located within the
“Commercial Credit” section for additional information) As loans were assigned to higher risk
ratings, our calculated reserve increased accordingly, consistent with our reserving methodology.
The increase of $17.5 million compared with December 31, 2008, also reflected the increase of
reserves resulting from the portfolio review process just noted, partially offset by the impact of
using the previously established $130.0 million Franklin specific reserve to absorb related NCOs
due to the 2009 first quarter Franklin restructuring (see “Franklin Loan” discussion located within
the “Critical Accounting Policies and Use of Significant Estimates” section).
57
On a combined basis, the ACL as a percent of total loans and leases at June 30, 2009, was
2.51% compared with
2.24% at March 31, 2009, and 2.30% at December 31, 2008. Like the ALLL, the Franklin
restructuring impacted the change in the ACL from December 31, 2008.
The following table provides additional detail regarding the ACL coverage ratios for NALs.
Table 38 — ACL/NAL Coverage Ratios Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At June 30, 2009 |
|
Commercial |
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
Impaired |
|
|
Franklin |
|
|
Other |
|
|
Total |
|
Nonaccrual loans (NALs) |
|
$ |
410,162 |
|
|
$ |
344,644 |
|
|
$ |
1,063,561 |
|
|
$ |
1,818,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses |
|
NA |
(1) |
|
NA |
(2) |
|
|
964,824 |
|
|
|
964,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL as a % of NALs
(coverage ratio) |
|
|
|
|
|
|
|
|
|
|
91 |
% |
|
|
53 |
% |
| |
|
|
| (1) |
|
Not applicable. These assets are considered impaired, and
therefore valuations are subject to continous impairment
analysis. Amounts shown are written down to assessed
values as of June 30, 2009. |
| |
| (2) |
|
Not applicable. Franklin loans were acquired at fair value
on March 31, 2009. Under AICPA Statement of Position 03-3,
Accounting for Certain Loans or Debt Securities Acquired in
a Transfer (SOP 03-3), a nonaccretable discount was
recorded to reduce the carrying value of the loans to the
amount of future cash flows we expect to receive. |
Although the ACL/NAL coverage ratio has declined compared with prior quarters (see Table 37),
we believe it represents an appropriate level of reserves for the remaining risk in the portfolio.
A total of $754.8 million of the $1,818.4 million of NALs do not have reserves assigned as those
loans have already been written down to recoverable value.
As shown in the table above, the two components of the NAL balance that do not have reserves
assigned are the commercial impaired segment and the Franklin segment. The commercial impaired
segment is subject to quarterly impairment testing. The $410.2 million balance represents the net
recoverable balance based on our most recent test date of June 30, 2009. Based on the impairment
designation and valuation, no reserves are assigned. The Franklin NAL balance was written down to
fair value as a part of the restructuring agreement on March 31, 2009, and we do not expect any
additional charge-offs. (See “Franklin Loan Restructuring Transaction” discussion located within
the “Critical Accounting Policies and Use of Significant Estimates” section.)
As we believe that the coverage ratios are used to gauge coverage of potential future losses, not
including these balances provides a more accurate measure of our ACL level relative to NALs. After
adjusting for such loans, our June 30, 2009, ACL/NAL ratio was 91%.
NET CHARGE-OFFS (NCOs)
(This section should be read in conjunction with Significant Item 2.)
Table 39 reflects NCO detail for each of the last five quarters. Due to the size of the NCOs
related to our loans to Franklin, we believe it is helpful to analyze trends in our portfolio with
those Franklin-related NCOs, and the related loans, removed. Table 40 displays the
Franklin-related impacts for each of the last five quarters.
58
Table 39 — Quarterly Net Charge-Off Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Net charge-offs by loan and lease type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
98,300 |
(1) |
|
$ |
210,648 |
(2) |
|
$ |
473,426 |
(3) |
|
$ |
29,646 |
|
|
$ |
12,361 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
31,360 |
|
|
|
25,642 |
|
|
|
2,390 |
|
|
|
3,539 |
|
|
|
575 |
|
Commercial |
|
|
141,261 |
|
|
|
57,139 |
|
|
|
35,991 |
|
|
|
7,446 |
|
|
|
14,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
172,621 |
|
|
|
82,781 |
|
|
|
38,381 |
|
|
|
10,985 |
|
|
|
15,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
270,921 |
|
|
|
293,429 |
|
|
|
511,807 |
|
|
|
40,631 |
|
|
|
27,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
12,379 |
|
|
|
14,971 |
|
|
|
14,885 |
|
|
|
9,813 |
|
|
|
8,522 |
|
Automobile leases |
|
|
2,227 |
|
|
|
3,086 |
|
|
|
3,666 |
|
|
|
3,532 |
|
|
|
2,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
14,606 |
|
|
|
18,057 |
|
|
|
18,551 |
|
|
|
13,345 |
|
|
|
11,450 |
|
Home equity |
|
|
24,687 |
|
|
|
17,680 |
|
|
|
19,168 |
|
|
|
15,828 |
|
|
|
17,345 |
|
Residential mortgage |
|
|
17,160 |
|
|
|
6,298 |
|
|
|
7,328 |
|
|
|
6,706 |
|
|
|
4,286 |
|
Other loans |
|
|
7,033 |
|
|
|
6,027 |
|
|
|
3,766 |
|
|
|
7,241 |
|
|
|
4,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
63,486 |
|
|
|
48,062 |
|
|
|
48,813 |
|
|
|
43,120 |
|
|
|
37,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs |
|
$ |
334,407 |
|
|
$ |
341,491 |
|
|
$ |
560,620 |
|
|
$ |
83,751 |
|
|
$ |
65,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs — annualized percentages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial
(1), (2), (3) |
|
|
2.91 |
% |
|
|
6.22 |
% |
|
|
13.78 |
% |
|
|
0.87 |
% |
|
|
0.36 |
% |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
6.45 |
|
|
|
5.05 |
|
|
|
0.45 |
|
|
|
0.68 |
|
|
|
0.11 |
|
Commercial |
|
|
7.79 |
|
|
|
2.83 |
|
|
|
1.77 |
|
|
|
0.39 |
|
|
|
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
7.51 |
|
|
|
3.27 |
|
|
|
1.50 |
|
|
|
0.45 |
|
|
|
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
4.77 |
|
|
|
4.96 |
|
|
|
8.54 |
|
|
|
0.69 |
|
|
|
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
1.73 |
|
|
|
1.56 |
|
|
|
1.53 |
|
|
|
1.02 |
|
|
|
0.94 |
|
Automobile leases |
|
|
2.11 |
|
|
|
2.39 |
|
|
|
2.31 |
|
|
|
1.84 |
|
|
|
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
1.78 |
|
|
|
1.66 |
|
|
|
1.64 |
|
|
|
1.15 |
|
|
|
1.01 |
|
Home equity |
|
|
1.29 |
|
|
|
0.93 |
|
|
|
1.02 |
|
|
|
0.85 |
|
|
|
0.94 |
|
Residential mortgage |
|
|
1.47 |
|
|
|
0.55 |
|
|
|
0.62 |
|
|
|
0.56 |
|
|
|
0.33 |
|
Other loans |
|
|
4.03 |
|
|
|
3.59 |
|
|
|
2.22 |
|
|
|
4.32 |
|
|
|
2.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
1.56 |
|
|
|
1.12 |
|
|
|
1.12 |
|
|
|
0.98 |
|
|
|
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a % of average loans |
|
|
3.43 |
% |
|
|
3.34 |
% |
|
|
5.41 |
% |
|
|
0.82 |
% |
|
|
0.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
The 2009 second quarter included net recoveries totaling $9,884 thousand associated with the Franklin relationship. |
| |
| (2) |
|
The 2009 first quarter included net charge-offs totaling $128,338 thousand associated with the Franklin
restructuring. |
| |
| (3) |
|
The 2008 fourth quarter included net charge-offs totaling $423,269 thousand associated with the Franklin
relationship. |
59
Table 40 — NCOs — Franklin-Related Impact
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Commercial and industrial net charge-offs (recoveries) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
(9.9 |
) |
|
$ |
128.3 |
|
|
$ |
423.3 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-Franklin |
|
|
108.2 |
|
|
|
82.3 |
|
|
|
50.1 |
|
|
|
29.6 |
|
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
98.3 |
|
|
$ |
210.6 |
|
|
$ |
473.4 |
|
|
$ |
29.6 |
|
|
$ |
12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial and industrial average loan balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
— |
|
|
$ |
628.0 |
|
|
$ |
1,085.0 |
|
|
$ |
1,114.0 |
|
|
$ |
1,143.0 |
|
Non-Franklin |
|
|
13,523.0 |
|
|
|
12,913.0 |
|
|
|
12,661.0 |
|
|
|
12,515.0 |
|
|
|
12,488.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,523.0 |
|
|
$ |
13,541.0 |
|
|
$ |
13,746.0 |
|
|
$ |
13,629.0 |
|
|
$ |
13,631.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial net
charge-offs — annualized percentages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2.91 |
% |
|
|
6.22 |
% |
|
|
13.78 |
% |
|
|
0.87 |
% |
|
|
0.36 |
% |
Non-Franklin |
|
|
3.20 |
|
|
|
2.55 |
|
|
|
1.58 |
|
|
|
0.95 |
|
|
|
0.40 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
Total net charge-offs (recoveries) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
(10.1 |
) |
|
$ |
128.3 |
|
|
$ |
423.3 |
|
|
$ |
— |
|
|
$ |
— |
|
Non-Franklin |
|
|
344.5 |
|
|
|
213.2 |
|
|
|
137.3 |
|
|
|
83.8 |
|
|
|
65.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
334.4 |
|
|
$ |
341.5 |
|
|
$ |
560.6 |
|
|
$ |
83.8 |
|
|
$ |
65.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average loan balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
489.0 |
|
|
$ |
630.0 |
|
|
$ |
1,085.0 |
|
|
$ |
1,114.0 |
|
|
$ |
1,143.0 |
|
Non-Franklin |
|
|
38,518.0 |
|
|
|
40,236.0 |
|
|
|
40,352.0 |
|
|
|
39,890.0 |
|
|
|
39,882.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
39,007.0 |
|
|
$ |
40,866.0 |
|
|
$ |
41,437.0 |
|
|
$ |
41,004.0 |
|
|
$ |
41,025.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs — annualized percentages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3.43 |
% |
|
|
3.34 |
% |
|
|
5.41 |
% |
|
|
0.82 |
% |
|
|
0.64 |
% |
Non-Franklin |
|
|
3.58 |
|
|
|
2.12 |
|
|
|
1.36 |
|
|
|
0.84 |
|
|
|
0.65 |
|
C&I NCOs for the 2009 second quarter were $98.3 million. We recorded $9.9 million of net C&I
loan loss recoveries during the 2009 second quarter related to a Franklin-related litigation
recovery that was received. Excluding this $9.9 million, second quarter non-Franklin related C&I
NCOs were $108.2 million, or an annualized 3.20%. This was up from $82.3 million, or an annualized
2.55%, of related average non-Franklin C&I loans in the 2009 first quarter. C&I NCOs in the second
quarter were impacted by four relationships, each with a charge-off greater than $5 million. The
remaining charge-offs were concentrated in smaller loans, distributed across our geographic
markets. From an industry perspective, manufacturing represented the most significant level of
losses, including three of the four relationships just noted.
CRE NCOs for the 2009 second quarter were $172.6 million. The single family home builder and
retail projects continued to represent a significant portion of the losses, consistent with our
views of the higher risk nature of these project types and developers. There were five charge-offs
in excess of $5 million, with the remaining losses spread across multiple borrowers and throughout
our footprint.
The larger losses mentioned above were previously identified problem credits with appropriate
reserves previously established via our FAS 114 process. As a result, there was a net decrease in
our specific reserves associated with impaired loans. This is a positive change in that impaired
loans with previously established reserves typically represent the majority of future losses.
60
In assessing commercial NCOs trends, it is helpful to understand the process of how these
loans are treated as they deteriorate over time. Reserves for loans are established at origination
consistent with the level of risk associated with the transaction. If the quality of a commercial
loan deteriorates, it migrates to a lower quality risk rating as a result of our normal portfolio
management process, and a higher reserve amount is assigned. As a part of our normal portfolio
management process, the loan is reviewed and reserves are increased as warranted. Charge-offs, if
necessary, are generally recognized in a period after the reserves were established. If the
previously established reserves exceed that needed to satisfactorily resolve the problem credit, a
reduction in the overall level of the reserve could be recognized. In summary, if loan quality
deteriorates, the typical credit sequence for commercial loans are periods of reserve building,
followed by periods of higher NCOs. Additionally, it is helpful to understand that increases in
reserves either precede or are in conjunction with increases in NALs. When a credit is classified
as NAL, it is evaluated for specific reserves or charge-off. As a result, an increase in NALs does
not necessarily result in an increase in reserves or an expectation of higher future NCOs.
Automobile loans and leases NCOs for the 2009 second quarter were $14.6 million. The increase
in the NCO ratio from the prior quarter reflected a reduction in 2009 second quarter average
balances due to the impact of the 2009 first quarter’s automobile loan securitization. Performance
of this portfolio on both an absolute and relative basis continued to be consistent with our views
regarding the underlying quality of the portfolio. The level of delinquencies dropped for the
second quarter in a row, further substantiating our longer-term view of flat to improved
performance of this portfolio through 2009.
Home equity NCOs in the 2009 second quarter were $24.7 million. While NCOs were higher than
in prior quarters, there was a significant decline in the early-stage delinquency level in the home
equity line of credit portfolio, supporting our positive longer-term view regarding the performance
of this portfolio. The higher losses resulted from a combination of a small number of larger
dollar losses, and our continued commitment to the loss mitigation and short sale process. We
continue to believe that our more proactive loss mitigation strategies are in the best interest of
both our customers and us. Given the current market conditions, we remain comfortable with the
performance of this portfolio.
Residential mortgage NCOs in the 2009 second quarter were $17.2 million. The higher loss
levels compared with prior quarters were a direct result of our continued emphasis on loss
mitigation strategies, as well as an increased number of short sales. While the delinquency rates
continued to increase, indicating the economic stress on our borrowers, our losses have remained
manageable.
61
Table
41 — Year To Date Net Charge-Off Analysis
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
Net charge-offs by loan and lease type: |
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
308,948 |
(1) |
|
$ |
23,093 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
Construction |
|
|
57,002 |
|
|
|
697 |
|
Commercial |
|
|
198,400 |
|
|
|
18,677 |
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
255,402 |
|
|
|
19,374 |
|
|
|
|
|
|
|
|
Total commercial |
|
|
564,350 |
|
|
|
42,467 |
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Automobile loans |
|
|
27,350 |
|
|
|
16,530 |
|
Automobile leases |
|
|
5,313 |
|
|
|
6,139 |
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
32,663 |
|
|
|
22,669 |
|
Home equity |
|
|
42,367 |
|
|
|
28,499 |
|
Residential mortgage |
|
|
23,458 |
|
|
|
7,213 |
|
Other loans |
|
|
13,060 |
|
|
|
12,848 |
|
|
|
|
|
|
|
|
Total consumer |
|
|
111,548 |
|
|
|
71,229 |
|
|
|
|
|
|
|
|
Total net charge-offs |
|
$ |
675,898 |
|
|
$ |
113,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs — annualized percentages: |
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial (1) |
|
|
4.57 |
% |
|
|
0.34 |
% |
Commercial real estate: |
|
|
|
|
|
|
|
|
Construction |
|
|
5.73 |
|
|
|
0.07 |
|
Commercial |
|
|
5.18 |
|
|
|
0.50 |
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
5.29 |
|
|
|
0.41 |
|
|
|
|
|
|
|
|
Total commercial |
|
|
4.87 |
|
|
|
0.37 |
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
Automobile loans |
|
|
1.63 |
|
|
|
0.95 |
|
Automobile leases |
|
|
2.26 |
|
|
|
1.22 |
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
1.71 |
|
|
|
1.01 |
|
Home equity |
|
|
1.11 |
|
|
|
0.89 |
|
Residential mortgage |
|
|
1.01 |
|
|
|
0.27 |
|
Other loans |
|
|
3.82 |
|
|
|
2.49 |
|
|
|
|
|
|
|
|
Total consumer |
|
|
1.33 |
|
|
|
0.80 |
|
|
|
|
|
|
|
|
Net charge-offs as a % of average loans |
|
|
3.39 |
% |
|
|
0.56 |
% |
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
The 2009 first six-month period included net charge-offs totaling $118,454 thousand associated with the Franklin restructuring. |
62
INVESTMENT SECURITIES PORTFOLIO
(This section should be read in conjunction with the “Securities and Other-Than-Temporary
Impairment” discussion located within the “Critical Accounting Policies and Use of Significant
Estimates” section.)
We routinely review our available for sale investment securities portfolio, and recognize
impairment based on fair value, issuer-specific factors and results, and our intent to hold such
investments. Our available for sale investment securities portfolio is evaluated taking into
consideration established asset/liability management objectives, and changing market conditions
that could affect the profitability of the portfolio, as well as the level of interest rate risk to
which we are exposed.
Our available for sale investment securities portfolio is comprised of various financial
instruments. At June 30, 2009, our available for sale investment securities portfolio totaled $5.9
billion.
Declines in the fair value of available for sale investment securities are recorded as
temporary impairment, noncredit OTTI, or credit OTTI adjustments.
Temporary impairment adjustments are recorded when the fair value of a security fluctuates
from its historical cost. Temporary impairment adjustments are recorded in accumulated OCI, and
therefore, reduces equity. Temporary impairment adjustments do not impact net income or risk-based
capital. A recovery of available for sale security prices also is recorded as an adjustment to
OCI for securities that are temporarily impaired, and results in an increase to equity.
OTTI is recorded when the fair value of an available for sale security is less than historical
cost, and it is probable that all contractual cash flows will not be collected. If we do not
intend to sell a debt security, but it is probable that we will not collect all amounts due
according to the debt’s contractual terms, the OTTI is separated into noncredit and credit
components. The noncredit component is recognized in OCI, separately from any temporary
impairment. As with temporary impairment, noncredit OTTI does not impact net income or risk-based
capital. Any recovery of noncredit OTTI is also recorded to OCI, and results in an increase to
equity.
The credit component of OTTI, measured as the difference between amortized cost and the
present value of expected cash flows discounted at the security’s effective interest rate, is
recognized in noninterest income and, therefore, reduces net income, as well as our regulatory
capital ratios.
Because the available for sale securities portfolio is recorded at fair value, the conclusion
as to whether an investment decline is other-than-temporarily impaired, does not significantly
impact our equity position as the amount of temporary adjustment has already been reflected in
accumulated other comprehensive income/loss. A recovery in the value of an other-than-temporarily
impaired security is recorded as additional interest income over the remaining life of the
security.
Given the continued disruption in the financial markets, we may be required to recognize
additional credit OTTI losses in future periods with respect to our available for sale investment
securities portfolio. The amount and timing of any additional credit OTTI will depend on the
decline in the underlying cash flows of the securities.
63
The following table presents the credit ratings for certain available for sale investment
securities as of June 30, 2009:
Table 42 — Credit Ratings of Selected Investment Securities (1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortized |
|
|
|
|
|
|
Average Credit Rating of Fair Value Amount at June 30, 2009 |
|
| (in millions) |
|
Cost |
|
|
Fair Value |
|
|
AAA |
|
|
AA +/- |
|
|
A +/- |
|
|
BBB +/- |
|
|
<BBB- |
|
|
Not Rated |
|
Municipal securities |
|
$ |
119.6 |
|
|
$ |
124.5 |
|
|
$ |
50.0 |
|
|
$ |
61.6 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
12.9 |
|
Private label CMO securities |
|
|
603.1 |
|
|
|
510.5 |
|
|
|
66.4 |
|
|
|
29.1 |
|
|
|
67.5 |
|
|
|
96.5 |
|
|
|
251.0 |
|
|
|
— |
|
Alt-A mortgage-backed securities |
|
|
286.4 |
|
|
|
274.1 |
|
|
|
20.8 |
|
|
|
26.3 |
|
|
|
15.6 |
|
|
|
16.5 |
|
|
|
194.9 |
|
|
|
— |
|
Auto trust securities portfolio |
|
|
132.2 |
|
|
|
134.3 |
|
|
|
— |
|
|
|
41.2 |
|
|
|
45.1 |
|
|
|
48.0 |
|
|
|
— |
|
|
|
— |
|
Pooled-trust-preferred securities |
|
|
267.6 |
|
|
|
128.9 |
|
|
|
— |
|
|
|
23.9 |
|
|
|
— |
|
|
|
29.5 |
|
|
|
75.4 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at June 30, 2009 |
|
$ |
1,408.9 |
|
|
$ |
1,172.2 |
|
|
$ |
137.2 |
|
|
$ |
182.1 |
|
|
$ |
128.2 |
|
|
$ |
190.5 |
|
|
$ |
521.3 |
|
|
$ |
12.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2008 |
|
$ |
2,037.5 |
|
|
$ |
1,697.9 |
|
|
$ |
486.9 |
|
|
$ |
556.5 |
|
|
$ |
291.7 |
|
|
$ |
61.1 |
|
|
$ |
288.7 |
|
|
$ |
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency. |
Negative changes to the above credit ratings would generally result in an increase of our
risk-weighted assets, which could result in a reduction to our regulatory capital ratios.
Alt-A, Pooled-Trust-Preferred, and Private-Label CMO Securities
Our three highest risk segments of our investment portfolio are the Alt-A mortgage backed,
pooled-trust-preferred, and private-label CMO portfolios. The Alt-A mortgage backed securities and
pooled-trust-preferred securities are located within the asset-backed securities portfolio. The
performance of the underlying securities in each of these segments continues to reflect the
economic environment. Each of these securities in these three segments is subjected to a rigorous
review of their projected cash flows. These reviews are supported with analysis from independent
third parties. (See the “Securities and Other-Than-Temporary Impairment” section located within
the “Critical Accounting Policies and Use of Significant Estimates” section for additional
information).
Table 43 details our Alt-A, pooled-trust-preferred, and private-label CMO securities exposure
at June 30, 2009:
Table 43 — Alt-A, Pooled-Trust-Preferred, and Private-Label CMO Securities Selected Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
| At June 30, 2009 |
|
mortgage-backed |
|
|
Private Label |
|
|
Pooled-Trust-Preferred |
|
|
|
|
| (in millions) |
|
securities |
|
|
CMO securities |
|
|
securities |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value |
|
$ |
420.7 |
|
|
$ |
611.2 |
|
|
$ |
297.3 |
|
|
$ |
1,330.2 |
|
Unamortized premium (discount) |
|
|
4.2 |
|
|
|
(6.6 |
) |
|
|
(0.3 |
) |
|
|
(2.7 |
) |
Credit OTTI |
|
|
(35.2 |
) |
|
|
(1.3 |
) |
|
|
(29.4 |
) |
|
|
(65.9 |
) |
Other OTTI (1) |
|
|
(103.3 |
) |
|
|
(0.2 |
) |
|
|
— |
|
|
|
(103.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
OTTI recognized through
earnings |
|
|
(138.5 |
) |
|
|
(1.5 |
) |
|
|
(29.4 |
) |
|
|
(169.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value / amortized cost |
|
|
286.4 |
|
|
|
603.1 |
|
|
|
267.6 |
|
|
|
1,157.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment recognized through |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
(2) |
|
|
(12.3 |
) |
|
|
(92.6 |
) |
|
|
(138.7 |
) |
|
|
(243.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
274.1 |
|
|
$ |
510.5 |
|
|
$ |
128.9 |
|
|
$ |
913.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Other OTTI represents noncredit related impairment recorded through earnings. |
| |
| (2) |
|
Includes both noncredit OTTI and temporary impairment. |
64
As shown in the above table, the securities in the Alt-A, pooled-trust-preferred, and
private-label CMO securities portfolios had a fair value that was $243.7 million less than their
book value (net of impairment) at June 30, 2009, resulting from increased liquidity spreads and
extended duration. We consider the $243.7 million of impairment to be temporary, as we believe that
it is probable that all contractual cash flows will be collected on the related securities and we
intend to hold these securities until recovery. The subsequent recovery on this temporary
impairment will be recorded in OCI. In addition, we recorded $103.5 million of noncredit related
impairment on securities through earnings. These are securities for which we don’t have the
intent to hold until recovery. The subsequent recovery of this OTTI will be recorded to interest
income over the remaining life of the securities. During the first six-month period of 2009, we
recognized OTTI of $7.4 million within the Alt-A securities portfolio, $14.9 million within the
pooled-trust-preferred securities portfolio, and $1.3 million within the private-label CMO
securities. (See “Critical Accounting Policies and Use of Significant Estimates” for additional
information).
The following table summarizes the relevant characteristics of our pooled-trust-preferred
securities portfolio. Each of the securities is part of a pool of issuers and each support a more
senior tranche of securities except for the I-Pre TSL II security that is the most senior class.
(See “Critical Accounting Policies and Use of Significant Estimates” for additional information
regarding our pooled-trust-preferred securities portfolio).
Table 44 — Trust Preferred Securities Data
(in thousands, as of June 30, 2009)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferrals |
|
|
Expected |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
Defaults |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of |
|
|
Defaults |
|
|
as a % of |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lowest |
|
Issuers Currently |
|
|
as a % of |
|
|
Remaining |
|
|
|
|
| |
|
Book |
|
|
Fair |
|
|
Unrealized |
|
|
Credit |
|
Performing/ |
|
|
Original |
|
|
Performing |
|
|
Excess |
|
| Deal Name |
|
Value |
|
|
Value |
|
|
Gain/(Loss) |
|
|
Rating(2) |
|
Remaining(3) |
|
|
Collateral |
|
|
Collateral |
|
|
Subordination(4) |
|
Alesco II(1) |
|
$ |
37,320 |
|
|
$ |
12,236 |
|
|
$ |
(25,084 |
) |
|
CC |
|
|
36/44 |
|
|
|
18.8 |
% |
|
|
19.4 |
% |
|
|
— |
% |
Alesco IV(1) |
|
|
14,696 |
|
|
|
4,000 |
|
|
|
(10,696 |
) |
|
CC |
|
|
44/54 |
|
|
|
23.6 |
|
|
|
25.6 |
|
|
|
— |
|
ICONS |
|
|
20,000 |
|
|
|
11,444 |
|
|
|
(8,556 |
) |
|
BBB |
|
|
29/30 |
|
|
|
3.0 |
|
|
|
14.1 |
|
|
|
54.9 |
|
I-Pre TSL II |
|
|
36,863 |
|
|
|
23,917 |
|
|
|
(12,946 |
) |
|
AA |
|
|
29/29 |
|
|
|
— |
|
|
|
13.8 |
|
|
|
73.2 |
|
MM Comm II |
|
|
24,773 |
|
|
|
18,084 |
|
|
|
(6,689 |
) |
|
BBB |
|
|
6/8 |
|
|
|
3.9 |
|
|
|
10.9 |
|
|
|
8.8 |
|
MM Comm III |
|
|
12,045 |
|
|
|
6,116 |
|
|
|
(5,928 |
) |
|
B |
|
|
12/12 |
|
|
|
1.9 |
|
|
|
36.3 |
|
|
|
1.3 |
|
Pre TSL IX(1) |
|
|
4,533 |
|
|
|
1,635 |
|
|
|
(2,898 |
) |
|
CC |
|
|
41/49 |
|
|
|
17.1 |
|
|
|
20.9 |
|
|
|
— |
|
Pre TSL X(1) |
|
|
14,919 |
|
|
|
5,381 |
|
|
|
(9,539 |
) |
|
CC |
|
|
44/58 |
|
|
|
23.0 |
|
|
|
15.2 |
|
|
|
— |
|
Pre TSL XI |
|
|
25,000 |
|
|
|
10,170 |
|
|
|
(14,830 |
) |
|
CC |
|
|
57/65 |
|
|
|
13.6 |
|
|
|
18.0 |
|
|
|
6.8 |
|
Pre TSL XIII |
|
|
27,530 |
|
|
|
11,100 |
|
|
|
(16,430 |
) |
|
CC |
|
|
57/65 |
|
|
|
14.8 |
|
|
|
18.5 |
|
|
|
0.3 |
|
Reg Diversified(1) |
|
|
7,487 |
|
|
|
7,487 |
|
|
|
— |
|
|
CC |
|
|
34/45 |
|
|
|
24.3 |
|
|
|
24.1 |
|
|
|
— |
|
Soloso(1) |
|
|
11,436 |
|
|
|
3,452 |
|
|
|
(7,984 |
) |
|
CC |
|
|
61/71 |
|
|
|
11.2 |
|
|
|
24.0 |
|
|
|
— |
|
Tropic III |
|
|
31,000 |
|
|
|
13,842 |
|
|
|
(17,159 |
) |
|
B |
|
|
38/46 |
|
|
|
17.5 |
|
|
|
20.0 |
|
|
|
27.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
267,602 |
|
|
$ |
128,864 |
|
|
$ |
(138,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Security was determined to have other-than-temporary impairment.
The book value is net of recorded credit impairment. |
| |
| (2) |
|
For purposes of comparability, the lowest credit rating
expressed is equivalent to Fitch ratings even where lowest rating is based on another
nationally recognized credit rating agency. |
| |
| (3) |
|
Includes both banks and/or insurance companies. |
| |
| (4) |
|
Excess subordination percentage represents the additional
defaults in excess of both current and projected defaults that the CDO can
absorb before the bond experiences credit impairment. Excess subordinated
percentage is calculated by (a) determining what percentage of defaults a deal
can experience before the bond has credit impairment, and (b) subtracting
from this default breakage percentage both total current and expected future
default percentages. |
65
Market Risk
Market risk represents the risk of loss due to changes in market values of assets and
liabilities. We incur market risk in the normal course of business through exposures to market
interest rates, foreign exchange rates, equity prices, credit spreads, and expected lease residual
values. We have identified two primary sources of market risk: interest rate risk and price risk.
Interest rate risk is our primary market risk.
Interest Rate Risk
Interest rate risk is the risk to earnings and value arising from changes in market interest
rates. Interest rate risk arises from timing differences in the repricings and maturities of
interest bearing assets and liabilities (reprice risk), changes in the expected maturities of
assets and liabilities arising from embedded options, such as borrowers’ ability to prepay
residential mortgage loans at any time and depositors’ ability to terminate certificates of deposit
before maturity (option risk), changes in the shape of the yield curve whereby interest rates
increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread
relationships between different yield curves, such as U.S. Treasuries and London Interbank Offered
Rate (LIBOR) (basis risk).
“Asset sensitive position” refers to an increase in short-term interest rates that is expected
to generate higher net interest income, as rates earned on our interest-earning assets would
reprice upward more quickly than rates paid on our interest-bearing liabilities. Conversely,
“liability sensitive position” refers to an increase in short-term interest rates that is expected
to generate lower net interest income, as rates paid on our interest-bearing liabilities would
reprice upward more quickly than rates earned on our interest-earning assets.
INCOME SIMULATION AND ECONOMIC VALUE OF EQUITY ANALYSIS
Interest rate risk measurement is performed monthly. Two broad approaches to modeling
interest rate risk are used: income simulation and economic value analysis. An income simulation
analysis is used to measure the sensitivity of forecasted net interest income to changes in market
rates over a one-year time period. Although bank owned life insurance and automobile operating
lease assets are classified as noninterest earning assets, and the income from these assets is in
noninterest income, these portfolios are included in the interest sensitivity analysis because both
have attributes similar to fixed-rate interest earning assets. Economic value of equity (EVE)
analysis is used to measure the sensitivity of the values of period-end assets and liabilities to
changes in market interest rates. EVE serves as a complement to income simulation modeling as it
provides risk exposure estimates for time periods beyond the one-year time period simulation.
The simulations for evaluating short-term interest rate risk exposure are scenarios that model
gradual “+/-100” and “+/-200” basis point parallel shifts in market interest rates over the next
12-month period beyond the interest rate change implied by the current yield curve. We assumed
that market interest rates would not fall below 0% over the next 12-month period for the scenarios
that used the “-100” and “-200” basis point parallel shift in market interest rates. The following
table shows the results of the scenarios as of June 30, 2009, and December 31, 2008. All of the
positions were within the board of directors’ policy limits.
Table 45 — Net Interest Income at Risk
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Interest Income at Risk (%) |
|
Basis point change scenario |
|
|
-200 |
|
|
|
-100 |
|
|
|
+100 |
|
|
|
+200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Board policy limits |
|
|
-4.0 |
% |
|
|
-2.0 |
% |
|
|
-2.0 |
% |
|
|
-4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
-1.5 |
% |
|
|
-1.2 |
% |
|
|
+0.8 |
% |
|
|
+1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
-0.3 |
% |
|
|
-0.9 |
% |
|
|
+0.6 |
% |
|
|
+1.1 |
% |
66
The net interest income at risk reported as of June 30, 2009, for the “+200” basis points
scenario shows a change to a higher near-term asset sensitive position compared with December 31,
2008, reflecting actions taken by us to improve our liquidity position. The primary factors
contributing to the change include:
| |
• |
|
2.9% incremental liability sensitivity reflecting the execution of $4.3 billion receive
fixed interest rates swaps during the first six-month period of 2009 primarily to offset
the impact of actual and anticipated reductions in fixed rate assets. |
| |
• |
|
1.7% incremental asset sensitivity reflecting the decrease in floating rate debt and an
increase in net free funds. |
| |
• |
|
1.3% incremental asset sensitivity reflecting the sale of municipal securities, the
securitization and sale of automobile loans, and the sale of residential mortgage loans,
slightly offset by an increase in other securities. |
| |
• |
|
1.1% incremental asset sensitivity reflecting the anticipated slow down in fixed-rate
loan originations due to customer preferences for variable-rate loans. |
| |
• |
|
0.6% incremental liability sensitivity reflecting the purchase of securities to maintain
a higher liquidity position. |
The primary simulations for EVE at risk assume immediate “+/-100” and “+/-200” basis point
parallel shifts in market interest rates beyond the interest rate change implied by the current
yield curve. The following table outlines the June 30, 2009, results compared with December 31,
2008. All of the positions were within the board of directors’ policy limits.
Table 46 — Economic Value of Equity at Risk
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Economic Value of Equity at Risk (%) |
|
Basis point change scenario |
|
|
-200 |
|
|
|
-100 |
|
|
|
+100 |
|
|
|
+200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Board policy limits |
|
|
-12.0 |
% |
|
|
-5.0 |
% |
|
|
-5.0 |
% |
|
|
-12.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
+0.6 |
% |
|
|
+0.6 |
% |
|
|
-1.8 |
% |
|
|
-4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
-3.4 |
% |
|
|
-1.0 |
% |
|
|
-2.6 |
% |
|
|
-7.2 |
% |
The EVE at risk reported as of June 30, 2009, for the “+200” basis points scenario shows a
change to a lower long-term liability sensitive position compared with December 31, 2008,
reflecting actions taken by us to improve our liquidity position and improvements made in modeling
assumptions around deposit pricing and mortgage asset prepayments. The primary factors
contributing to the change include:
| |
• |
|
3.3% incremental asset sensitivity reflecting the improvements made in modeling
assumptions regarding deposit pricing and mortgage asset prepayments. |
| |
• |
|
2.2% incremental asset sensitivity reflecting the sale of municipal securities, the
securitization of indirect auto loans, and the sale of residential mortgage loans, slightly
offset by an increase in other securities. |
| |
• |
|
2.0% incremental liability sensitivity reflecting the execution of $4.3 billion receive
fixed interest rates swaps during the first six-month period of 2009 primarily to offset
the impact of actual and anticipated reductions in fixed rate assets. |
| |
• |
|
0.8% incremental liability sensitivity reflecting the purchase of securities to maintain
a higher liquidity position. |
MORTGAGE SERVICING RIGHTS (MSRs)
At June 30, 2009, we had a total of $219.3 million of capitalized MSRs representing the right
to service $16.2 billion in mortgage loans. Of this $219.3 million, $196.9 million was recorded
using the fair value method, and $22.4 million was recorded using the amortization method. If we
actively engage in hedging, the MSR asset is adjusted using the fair value method. If we do not
actively engage in hedging, the MSR asset is adjusted using the amortization method.
MSR fair values are very sensitive to movements in interest rates as expected future net
servicing income depends on the projected outstanding principal balances of the underlying loans,
which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest
rates decline and decrease when mortgage interest rates rise. We have employed strategies to
reduce the risk of MSR fair value changes or impairment. In addition, we engage a third party to
provide improved valuation tools and assistance with our strategies with the objective to decrease
the volatility from MSR fair value changes. However, volatile changes in interest rates can
diminish the effectiveness of these hedges. We typically report MSR fair value adjustments net of
hedge-related trading activity in the mortgage banking income category of noninterest income.
Changes in fair value between reporting dates are recorded as an increase or decrease in mortgage
banking income.
67
MSRs recorded using the amortization method generally relate to loans originated with
historically low interest rates, resulting in a lower probability of prepayments and, ultimately,
impairment. MSR assets are included in other assets, and are presented in Table 15 and Table 19.
(See Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements).
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of
financial instruments that are carried at fair value and are subject to fair value accounting. We
have price risk from trading securities, securities owned by our broker-dealer subsidiaries,
foreign exchange positions, equity investments, investments in securities backed by mortgage loans,
and marketable equity securities held by our insurance subsidiaries. We have established loss
limits on the trading portfolio, on the amount of foreign exchange exposure that can be maintained,
and on the amount of marketable equity securities that can be held by the insurance subsidiaries.
EQUITY INVESTMENT PORTFOLIOS
In reviewing our equity investment portfolio, we consider general economic and market
conditions, including industries in which private equity merchant banking and community development
investments are made, and adverse changes affecting the availability of capital. We determine any
impairment based on all of the information available at the time of the assessment. New
information or economic developments in the future could result in the recognition of additional
impairment.
From time to time, we invest in various investments with equity risk. Such investments
include investment funds that buy and sell publicly traded securities, investment funds that hold
securities of private companies, direct equity or venture capital investments in companies (public
and private), and direct equity or venture capital interests in private companies in connection
with our mezzanine lending activities. These investments are included in “accrued income and
other assets” on our consolidated balance sheet. At June 30, 2009, we had a total of $36.4 million
of such investments, down from $44.7 million at December 31, 2008. The following table details the
components of this change during 2009:
Table 47 — Equity Investment Activity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
New |
|
|
Returns of |
|
|
|
|
|
|
Balance at |
|
| (in thousands) |
|
December 31, 2008 |
|
|
Investments |
|
|
Capital |
|
|
Gain / (Loss) |
|
|
June 30, 2009 |
|
Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public equity |
|
$ |
12,129 |
|
|
$ |
— |
|
|
$ |
(8,507 |
) |
|
$ |
2,038 |
|
|
$ |
5,660 |
|
Private equity |
|
|
25,951 |
|
|
|
2,146 |
|
|
|
(2,198 |
) |
|
|
(1,386 |
) |
|
|
24,513 |
|
Direct investment |
|
|
6,576 |
|
|
|
— |
|
|
|
— |
|
|
|
(319 |
) |
|
|
6,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
44,656 |
|
|
$ |
2,146 |
|
|
$ |
(10,705 |
) |
|
$ |
333 |
|
|
$ |
36,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment decisions that incorporate credit risk require the approval of the independent
credit administration function. The degree of initial due diligence and subsequent review is a
function of the type, size, and collateral of the investment. Performance is monitored on a regular
basis, and reported to the Market Risk Committee.
Liquidity Risk
Liquidity risk is the risk of loss due to the possibility that funds may not be available to
satisfy current or future commitments resulting from external macro market issues, investor and
customer perception of financial strength, and events unrelated to the company such as war,
terrorism, or financial institution market specific issues. We manage liquidity risk at both the
Bank and at the parent company, Huntington Bancshares Incorporated (HBI).
68
The overall objective of liquidity risk management is to ensure that we can obtain
cost-effective funding to meet current and future obligations under both normal “business as usual”
and unanticipated, stressed circumstances. The Risk Management Committee was appointed by the HBI
Board Risk Committee to oversee liquidity risk management and establish policies and limits, based
upon analyses of the ratio of loans to deposits, the percentage of assets funded with noncore or
wholesale funding, net cash capital, liquid assets, and contingency borrowing capacity. In
addition, operating guidelines are established to ensure diversification of noncore funding by
type, source, and maturity and provide sufficient liquidity to cover 100% of wholesale funds
maturing within a six-month period. A contingency funding plan is in place, which includes
forecasted sources and uses of funds under various scenarios in order to prepare for unexpected
liquidity shortages, including the implications of any credit rating changes and/or other trigger
events related to financial ratios, deposit fluctuations, debt issuance capacity, stock
performance, or negative news related to us or the banking industry. Liquidity risk is reviewed
monthly for the Bank and the parent company, as well as its subsidiaries. In addition, two
liquidity subcommittees meet regularly to identify and monitor liquidity positions, provide policy
guidance, review funding strategies, and oversee adherence to, and the maintenance of, the
contingency funding plan(s). A Contingency Funding Working Group monitors daily cash flow trends,
branch activity, unfunded commitments, significant transactions, and parent company subsidiary
sources and uses of funds in order to identify areas of concern, and establish specific funding
strategies. This group works closely with the Risk Management Committee and the HBI Communication
Team in order to identify issues that may require a more proactive communication plan to
shareholders, associates, and customers regarding specific events or issues that could have an
impact on our liquidity position.
In the normal course of business, in order to better manage liquidity risk, we perform stress
tests to determine the effect that a potential downgrade in our credit ratings or other market
disruptions could have on liquidity over various time periods. These credit ratings, which are
presented in Table 49, have a direct impact on our cost of funds and ability to raise funds under
normal, as well as adverse, circumstances. The results of these stress tests indicate that
sufficient sources of funds are available to meet our financial obligations and fund our operations
for a 12-month period. The stress test scenarios include testing to determine the impact of an
interruption to our access to the national markets for funding, significant run-off in core
deposits and liquidity triggers inherent in other financial agreements. To compensate for the
effect of these assumed liquidity pressures, we consider alternative sources of liquidity over
different time periods to project how funding needs would be managed. The specific alternatives
for enhancing liquidity include generating client deposits, securitizing or selling loans, selling
or maturing of securities, and extending the level or maturity of wholesale borrowings.
Most credit markets in which we participate and rely upon as sources of funding have been
significantly disrupted and highly volatile since mid-2007. Reflecting concern about the stability
of the financial markets generally, many lenders reduced, and in some cases, ceased unsecured
funding to borrowers, including other financial institutions. Since that time, as a means of
maintaining adequate liquidity, we, like many other financial institutions, have relied more
heavily on the liquidity and stability present in the secured credit markets since access to
unsecured term debt has been restricted. Throughout this period, we continued to extend maturities
ensuring that we maintained adequate liquidity in the event the crisis became prolonged. In
addition to managing our maturities, we strengthened our overall liquidity position by
significantly reducing our noncore funds and wholesale borrowings, and increasing our overall level
of liquid assets. Shifting from the net purchasing of overnight federal funds to an excess reserve
position at the end of the 2009 first quarter, as well as increasing our level of free securities,
has significantly improved our on-hand liquidity. However, we are part of a financial system, and
a systemic lack of available credit, a lack of confidence in the financial sector, and increased
volatility in the financial markets could materially and adversely affect our liquidity position.
Bank Liquidity and Sources of Liquidity
Our primary sources of funding for the Bank are retail and commercial core deposits. Core
deposits are comprised of interest bearing and noninterest bearing demand deposits, money market
deposits, savings and other domestic time deposits, consumer certificates of deposit both over and
under $250,000, and nonconsumer certificates of deposit less than $250,000. Noncore deposits
consist of brokered money market deposits and certificates of deposit, foreign time deposits, and
other domestic time deposits of $250,000 or more comprised primarily of public fund certificates of
deposit more than $250,000.
Core deposits may increase our need for liquidity as certificates of deposit mature or are
withdrawn before maturity and as nonmaturity deposits, such as checking and savings account
balances, are withdrawn. Additionally, we are exposed to the risk that customers with large
deposit balances will withdraw all or a portion of such deposits as the FDIC establishes certain
limits on the amount of insurance coverage provided to depositors (see “Risk Factors” included in
Item 1A of our 2008 Form 10-K). To mitigate our uninsured deposit risk, we have joined the
Certificate of Deposit Account Registry
Service (CDARS), a program that allows customers to invest up to $50 million in certificates
of deposit through one participating financial institution, with the entire amount being covered by
FDIC insurance.
69
Table 48 reflects deposit composition detail for each of the past five quarters.
Table 48 — Deposit Composition
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
$ |
6,169 |
|
|
|
15.8 |
% |
|
$ |
5,887 |
|
|
|
15.1 |
% |
|
$ |
5,477 |
|
|
|
14.4 |
% |
|
$ |
5,135 |
|
|
|
13.7 |
% |
|
$ |
5,253 |
|
|
|
13.8 |
% |
Demand deposits — interest bearing |
|
|
4,842 |
|
|
|
12.4 |
|
|
|
4,306 |
|
|
|
11.0 |
|
|
|
4,083 |
|
|
|
10.8 |
|
|
|
4,052 |
|
|
|
10.8 |
|
|
|
4,074 |
|
|
|
10.7 |
|
Money market deposits |
|
|
6,622 |
|
|
|
16.9 |
|
|
|
5,857 |
|
|
|
15.0 |
|
|
|
5,182 |
|
|
|
13.7 |
|
|
|
5,565 |
|
|
|
14.8 |
|
|
|
6,171 |
|
|
|
16.2 |
|
Savings and other domestic deposits |
|
|
4,859 |
|
|
|
12.4 |
|
|
|
5,007 |
|
|
|
12.8 |
|
|
|
4,930 |
|
|
|
13.0 |
|
|
|
4,903 |
|
|
|
13.1 |
|
|
|
5,090 |
|
|
|
13.4 |
|
Core certificates of deposit |
|
|
12,197 |
|
|
|
31.1 |
|
|
|
12,616 |
|
|
|
32.3 |
|
|
|
12,856 |
|
|
|
33.9 |
|
|
|
12,270 |
|
|
|
32.7 |
|
|
|
11,389 |
|
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
34,689 |
|
|
|
88.6 |
|
|
|
33,673 |
|
|
|
86.2 |
|
|
|
32,528 |
|
|
|
85.8 |
|
|
|
31,925 |
|
|
|
85.1 |
|
|
|
31,977 |
|
|
|
84.0 |
|
Other domestic deposits of $250,000 or more |
|
|
846 |
|
|
|
2.2 |
|
|
|
1,041 |
|
|
|
2.7 |
|
|
|
1,328 |
|
|
|
3.5 |
|
|
|
1,749 |
|
|
|
4.7 |
|
|
|
1,943 |
|
|
|
5.1 |
|
Brokered deposits and negotiable CDs |
|
|
3,229 |
|
|
|
8.2 |
|
|
|
3,848 |
|
|
|
9.8 |
|
|
|
3,355 |
|
|
|
8.8 |
|
|
|
2,925 |
|
|
|
7.8 |
|
|
|
3,101 |
|
|
|
8.1 |
|
Deposits in foreign offices |
|
|
401 |
|
|
|
1.0 |
|
|
|
508 |
|
|
|
1.3 |
|
|
|
732 |
|
|
|
1.9 |
|
|
|
970 |
|
|
|
2.4 |
|
|
|
1,103 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
39,165 |
|
|
|
100.0 |
% |
|
$ |
39,070 |
|
|
|
100.0 |
% |
|
$ |
37,943 |
|
|
|
100.0 |
% |
|
$ |
37,569 |
|
|
|
100.0 |
% |
|
$ |
38,124 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
9,738 |
|
|
|
28.1 |
% |
|
$ |
8,934 |
|
|
|
26.5 |
% |
|
$ |
7,971 |
|
|
|
24.5 |
% |
|
$ |
8,208 |
|
|
|
25.7 |
% |
|
$ |
8,668 |
|
|
|
27.1 |
% |
Personal |
|
|
24,951 |
|
|
|
71.9 |
|
|
|
24,739 |
|
|
|
73.5 |
|
|
|
24,557 |
|
|
|
75.5 |
|
|
|
23,717 |
|
|
|
74.3 |
|
|
|
23,309 |
|
|
|
72.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
$ |
34,689 |
|
|
|
100.0 |
% |
|
$ |
33,673 |
|
|
|
100.0 |
% |
|
$ |
32,528 |
|
|
|
100.0 |
% |
|
$ |
31,925 |
|
|
|
100.0 |
% |
|
$ |
31,977 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
During the first six-month period of 2009, we strengthened our liquidity position as our
available cash increased $1.3 billion, and our unpledged investment securities increased $1.8
billion. Further, as shown in the table on the previous page, core deposits have increased $2.2
billion from December 31, 2008, resulting in reduced reliance upon our funding lines. In addition,
our loan-to-deposit ratio improved to 98% at June 30, 2009, compared with 108% at December 31,
2008.
The Bank has access to the Federal Reserve’s discount window and Term Auction Facility (TAF).
These borrowings are secured by commercial loans and home equity lines of credit. The Bank is also
a member of the Federal Home Loan Bank (FHLB)-Cincinnati, and as such, has access to advances from
this facility. These advances are generally secured by residential mortgages, other
mortgage-related loans, and available-for-sale securities. Information regarding amounts pledged,
for the ability to borrow if necessary, and unused borrowing capacity at both the Federal Reserve
and the FHLB-Cincinnati, are outlined in the following table:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
| (in billions) |
|
2009 |
|
|
2008 |
|
Loans and Securities Pledged |
|
|
|
|
|
|
|
|
Federal Reserve Bank |
|
$ |
8.3 |
|
|
$ |
8.4 |
|
FHLB-Cincinnati |
|
|
9.3 |
|
|
|
9.2 |
|
|
|
|
|
|
|
|
Total loans and securities pledged |
|
$ |
17.6 |
|
|
$ |
17.6 |
|
|
|
|
|
|
|
|
|
|
Total unused borrowing capacity at Federal
Reserve Bank and FHLB-Cincinnati |
|
$ |
8.0 |
|
|
$ |
9.3 |
|
As part of a periodic review conducted by the Federal Reserve, our discount window and TAF
borrowing capacity was reduced. The reduction was based on the lowering of the specific
percentages of pledged amounts available for borrowing.
We can also obtain funding through other methods including: (a) purchasing federal funds, (b)
selling securities under repurchase agreements, (c) the sale or maturity of investment securities,
(d) the sale or securitization of loans, (e) the sale of national market certificates of deposit,
(f) the relatively shorter-term structure of our commercial loans and automobile loans, and (g) the
issuance of common and preferred stock.
During the first six-month period of 2009, we initiated various strategies with the intent of
further strengthening our liquidity position, as well as reducing the size of our balance sheet to,
among other objectives, provide additional support to our TCE ratio (see “Capital” discussion).
Our actions taken during the first six-month period of 2009 included: (a) $2.2 billion core
deposit growth, (b) $1.0 billion automobile loan securitization, (c) $0.6 billion sale of municipal
securities, (d) $0.6 billion debt issuance as part of the TLGP, and (e) $0.2 billion mortgage loan
sale. The proceeds from these actions were used primarily to pay down wholesale borrowings.
At June 30, 2009, we believe that the Bank had sufficient liquidity to meet its cash flow
obligations for the foreseeable future.
Parent Company Liquidity
The parent company’s funding requirements consist primarily of dividends to shareholders, debt
service, income taxes, operating expenses, funding of non-bank subsidiaries, repurchases of our
stock, and acquisitions. The parent company obtains funding to meet obligations from dividends
received from direct subsidiaries, net taxes collected from subsidiaries included in the federal
consolidated tax return, fees for services provided to subsidiaries, and the issuance of debt
securities.
At June 30, 2009, the parent company had $1.5 billion in cash or cash equivalents, compared
with $1.1 billion at December 31, 2008. During the first six-month period of 2009, the following
actions taken during the first six-month period of 2009 affected the parent company’s liquidity
position: (a) the issuance of 103.5 million shares of new common stock resulting in aggregate
gross proceeds of $372.6 million; (b) the completion of two separate “discretionary equity
issuance” programs, which allowed us to take advantage of market opportunities to issue an
additional 56.9 million shares of common stock worth $195.9 million; (c) a contribution of $250
million of additional capital made by the parent
company to the Bank, which increased the Bank’s regulatory capital levels above its already
“well-capitalized” levels; and (d) the redemption of a portion of our junior subordinated debt at a
total cost of $92.3 million.
71
Based on the current dividend of $0.01 per common share, cash demands required for common
stock dividends are estimated to be approximately $6 million per quarter. We recognize the
importance of the dividend to our shareholders. While our overall capital and liquidity positions
are strong, extreme and economic market deterioration and the changing regulatory environment drove
the difficult but prudent decision to reduce the dividend during the 2009 first quarter to $0.01
per common share. This proactive measure will enable us to build capital and strengthen our
balance sheet. Table 54 provides additional detail regarding quarterly dividends declared per
common share.
During 2008, we issued an aggregate $569 million of Series A Non-cumulative Perpetual
Convertible Preferred Stock. The Series A Preferred Stock will pay, as declared by our board of
directors, dividends in cash at a rate of 8.50% per annum, payable quarterly (see Note 8 of the
Notes to Unaudited Condensed Consolidated Financial Statements). During the first six-month period
of 2009, we entered into agreements with various institutional investors exchanging shares of our
common stock for shares of the Series A Preferred Stock held by them (see “Capital” discussion).
In the aggregate, these exchanges are anticipated to reduce our total dividend cash requirements
(common, Series A Preferred Stock, and Series B Preferred Stock) by an estimated $4.0 million per
quarter. Considering these exchanges and the current dividend, cash demands required for Series A
Preferred Stock are estimated to be approximately $7.7 million per quarter.
Also during 2008, we received $1.4 billion of equity capital by issuing 1.4 million shares of
Series B Preferred Stock to the U.S. Department of Treasury as a result of our participation in the
TARP voluntary CPP. The Series B Preferred Stock will pay cumulative dividends at a rate of 5% per
year for the first five years and 9% per year thereafter, resulting in quarterly cash demands of
approximately $18 million through 2012, and $32 million thereafter (see Note 8 of the Notes to the
Unaudited Condensed Consolidated Financial Statements for additional information regarding the
Series B Preferred Stock issuance).
Based on a regulatory dividend limitation, the Bank could not have declared and paid a
dividend to the parent company at June 30, 2009, without regulatory approval. We do not anticipate
that the Bank will request regulatory approval to pay dividends in the near future as we continue
to build Bank regulatory capital above our already “well-capitalized” level. To help meet any
additional liquidity needs, we have an open-ended, automatic shelf registration statement filed and
effective with the SEC, which permits us to issue an unspecified amount of debt or equity
securities.
With the exception of the common and preferred dividends previously discussed, the parent
company does not have any significant cash demands. There are no maturities of parent company
obligations until 2013, when a debt maturity of $50 million is payable.
Considering the factors discussed above, and other analyses that we have performed, we believe
the parent company has sufficient liquidity to meet its cash flow obligations for the foreseeable
future.
Credit Ratings
Credit ratings provided by the three major credit rating agencies are an important component
of our liquidity profile. Among other factors, the credit ratings are based on financial strength,
credit quality and concentrations in the loan portfolio, the level and volatility of earnings,
capital adequacy, the quality of management, the liquidity of the balance sheet, the availability
of a significant base of core deposits, and our ability to access a broad array of wholesale
funding sources. Adverse changes in these factors could result in a negative change in credit
ratings and impact our ability to raise funds at a reasonable cost in the capital markets. In
addition, certain financial on- and off-balance sheet arrangements contain credit rating triggers
that could increase funding needs if a negative rating change occurs. Other arrangements that
could be impacted by credit rating changes include, but are not limited to, letter of credit
commitments for marketable securities, interest rate swap collateral agreements, and certain asset
securitization transactions contain credit rating provisions or could otherwise be impacted by
credit rating changes.
72
The most recent credit ratings for the parent company and the Bank are as follows:
Table 49 — Credit Ratings
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2009 |
| |
|
Senior Unsecured |
|
|
Subordinated |
|
|
|
|
|
|
| |
|
Notes |
|
Notes |
|
|
Short-term |
|
|
Outlook |
Huntington Bancshares Incorporated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s Investor Service |
|
Baa2 |
|
Baa3 |
|
|
P-2 |
|
|
Negative |
Standard and Poor’s |
|
BB+ |
|
BB |
|
|
B |
|
|
Negative |
Fitch Ratings |
|
BBB |
|
BBB- |
|
|
F2 |
|
|
Negative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Huntington National Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody’s Investor Service |
|
Baa1 |
|
Baa2 |
|
|
P-2 |
|
|
Negative |
Standard and Poor’s |
|
BBB- |
|
BB+ |
|
|
A-3 |
|
|
Negative |
Fitch Ratings |
|
BBB+ |
|
BBB |
|
|
F2 |
|
|
Negative |
During the 2009 first and second quarters, all three rating agencies lowered their credit
ratings for both the parent company and the Bank. The credit ratings to senior unsecured notes,
subordinated notes, and short-term debt were changed. The above table reflects these changes. The
FHLB uses the Bank’s credit rating in its calculation of borrowing capacity. As a result of these
credit rating changes, the FHLB reduced our borrowing capacity by $370 million (see “Risk Factors”
included in Item 1A of our 2008 Form 10-K).
A security rating is not a recommendation to buy, sell, or hold securities, is subject to
revision or withdrawal at any time by the assigning rating organization, and should be evaluated
independently of any other rating.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various off-balance sheet arrangements. These
arrangements include financial guarantees contained in standby letters of credit issued by the Bank
and commitments by the Bank to sell mortgage loans.
Through our credit process, we monitor the credit risks of outstanding standby letters of
credit. When it is probable that a standby letter of credit will be drawn and not repaid in full,
losses are recognized in the provision for credit losses. At June 30, 2009, we had $0.7 billion of
standby letters of credit outstanding, of which 52% were collateralized. Included in this $0.7
billion total are letters of credit issued by the Bank that support $0.1 billion of securities that
were issued by our customers and remarketed by The Huntington Investment Company (HIC), our
broker-dealer subsidiary. As a result of the credit rating changes noted above, and pursuant to the
letters of credit issued by the Bank, the Bank repurchased substantially all of these securities,
net of payments and maturities, during the first six months of 2009.
We enter into forward contracts relating to the mortgage banking business to hedge the
exposures we have from commitments to extend new residential mortgage loans to our customers and
from our held-for-sale mortgage loans. At June 30, 2009, December 31, 2008, and June 30, 2008, we
had commitments to sell residential real estate loans of $828.9 million, $759.4 million, and $577.0
million, respectively. These contracts mature in less than one year.
We do not believe that off-balance sheet arrangements will have a material impact on our
liquidity or capital resources.
Operational Risk
As with all companies, we are subject to operational risk. Operational risk is the risk of
loss due to human error, inadequate or failed internal systems and controls, violations of, or
noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards, and
external influences such as market conditions, fraudulent activities, disasters, and security
risks. We continuously strive to strengthen our system of internal controls to ensure compliance
with laws, rules, and regulations, and to improve the oversight of our operational risk.
73
The goal of this framework is to implement effective operational risk techniques and
strategies, minimize operational losses, and strengthen our overall performance.
Capital / Capital Adequacy
(This section should be read in conjunction with Significant Item 3.)
Capital is managed both at the Bank and on a consolidated basis. Capital levels are maintained
based on regulatory capital requirements and the economic capital required to support credit,
market, liquidity, and operational risks inherent in our business, and to provide the flexibility
needed for future growth and new business opportunities. Shareholders’ equity totaled $5.2
billion at June 30, 2009. This represented a decrease compared with $7.2 billion at December 31,
2008, primarily reflecting the negative impact of the $2.6 billion goodwill impairment charge,
partially offset by the issuance of 160.5 million new shares of common stock worth $0.5 billion and
the exchange of a portion of our Series A Preferred Stock for 41.1 million shares of our common
stock worth $0.2 billion (see ”Tier 1 Common Equity” section below).
Tier 1 Common Equity
During the first six-month period of 2009, a key priority was to strengthen our capital
position in order to withstand potential future credit losses should the economic environment
continue to deteriorate. During the 2009 second quarter, the Federal Reserve conducted a
Supervisory Capital Assessment Program (SCAP) on the country’s 19 largest bank holding companies to
determine the amount of capital required to absorb losses that could arise under “baseline” and
“more adverse” economic scenarios. The SCAP results determined that a Tier 1 common capital risk
based ratio of at least 4.0% would be needed. A total of 10 of the 19 bank holding companies were
directed to increase their capital levels to meet this 4.0% threshold.
While we were not one of these 19 institutions required to conduct a forward-looking capital
assessment, or “stress test”, we believed it important that we have an equivalent relative amount
of capital to meet a 4% Tier 1 common capital risk based ratio. We conducted an internal analysis
designed to emulate the SCAP “more adverse” economic scenario modeled by the Federal Reserve, and
based on that analysis, estimated that additional Tier 1 common equity was needed.
The following table summarizes the primary activity during the first six-month period of 2009
to increase Tier 1 common equity:
Table 50 — Tier 1 Common Equity Activity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
| |
|
Common Stock |
|
|
Retained |
|
|
|
|
| (all figures in millions) |
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
Total |
|
First Quarter — 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin restructuring |
|
|
— |
|
|
$ |
— |
|
|
$ |
159.9 |
|
|
$ |
159.9 |
|
Conversion of preferred stock |
|
|
24.6 |
|
|
|
114.1 |
|
|
|
— |
|
|
|
114.1 |
|
Other (1) |
|
|
— |
|
|
|
— |
|
|
|
47.1 |
|
|
|
47.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2009 First Quarter |
|
|
24.6 |
|
|
|
114.1 |
|
|
|
207.0 |
|
|
|
321.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discretionary equity issuance #1 |
|
|
38.5 |
|
|
|
117.6 |
|
|
|
— |
|
|
|
117.6 |
|
Discretionary equity issuance #2 |
|
|
18.5 |
|
|
|
74.4 |
|
|
|
— |
|
|
|
74.4 |
|
Conversion of preferred stock |
|
|
16.5 |
|
|
|
92.3 |
|
|
|
— |
|
|
|
92.3 |
|
Common stock offering |
|
|
103.5 |
|
|
|
356.4 |
|
|
|
|
|
|
|
356.4 |
|
Gain on cash tender offer of certain trust
preferred securities |
|
|
— |
|
|
|
— |
|
|
|
43.8 |
|
|
|
43.8 |
|
Gain related to Visa stock |
|
|
— |
|
|
|
— |
|
|
|
20.4 |
|
|
|
20.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2009 Second Quarter |
|
|
177.0 |
|
|
|
640.7 |
|
|
|
64.2 |
|
|
|
704.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2009 year-to-date |
|
|
201.6 |
|
|
$ |
754.8 |
|
|
$ |
271.2 |
|
|
$ |
1,026.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Primarily represents improvement in other comprehensive income. |
74
As shown in the table above, these actions increased our Tier 1 common equity by $1.0 billion
during the first six-month period of 2009. While we may continue to seek opportunities to further
strengthen our capital position, we believe that we have sufficient capital to withstand a severe
economic scenario similar to that used by the Federal Reserve in its modeling of capital adequacy
for the 19 large bank holding companies where “stress tests” were conducted.
The following table presents risk-weighed assets and other financial data necessary to
calculate certain financial ratios, including the Tier 1 common equity ratio, which we use to
measure capital adequacy:
Table 51 — Capital Adequacy
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated capital calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ common equity |
|
$ |
3,541 |
|
|
$ |
3,047 |
|
|
$ |
5,351 |
|
|
$ |
5,807 |
|
|
$ |
5,814 |
|
Shareholders’ preferred equity |
|
|
1,679 |
|
|
|
1,768 |
|
|
|
1,878 |
|
|
|
569 |
|
|
|
569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
5,221 |
|
|
|
4,815 |
|
|
|
7,229 |
|
|
|
6,376 |
|
|
|
6,383 |
|
Goodwill |
|
|
(448 |
) |
|
|
(452 |
) |
|
|
(3,055 |
) |
|
|
(3,056 |
) |
|
|
(3,057 |
) |
Intangible assets |
|
|
(322 |
) |
|
|
(340 |
) |
|
|
(357 |
) |
|
|
(376 |
) |
|
|
(395 |
) |
Intangible asset deferred tax liability (1) |
|
|
113 |
|
|
|
119 |
|
|
|
125 |
|
|
|
132 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tangible equity (2) |
|
|
4,563 |
|
|
|
4,142 |
|
|
|
3,942 |
|
|
|
3,076 |
|
|
|
3,069 |
|
Shareholders’ preferred equity |
|
|
(1,679 |
) |
|
|
(1,768 |
) |
|
|
(1,878 |
) |
|
|
(569 |
) |
|
|
(569 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tangible common equity (2) |
|
$ |
2,884 |
|
|
$ |
2,374 |
|
|
$ |
2,064 |
|
|
$ |
2,507 |
|
|
$ |
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total assets |
|
$ |
51,397 |
|
|
$ |
51,702 |
|
|
$ |
54,353 |
|
|
$ |
54,681 |
|
|
$ |
55,350 |
|
Goodwill |
|
|
(448 |
) |
|
|
(452 |
) |
|
|
(3,055 |
) |
|
|
(3,056 |
) |
|
|
(3,057 |
) |
Other intangible assets |
|
|
(322 |
) |
|
|
(340 |
) |
|
|
(357 |
) |
|
|
(376 |
) |
|
|
(395 |
) |
Intangible asset deferred tax liability (1) |
|
|
113 |
|
|
|
119 |
|
|
|
125 |
|
|
|
132 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tangible assets (2) |
|
$ |
50,740 |
|
|
$ |
51,029 |
|
|
$ |
51,066 |
|
|
$ |
51,381 |
|
|
$ |
52,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 equity |
|
$ |
5,390 |
|
|
$ |
5,167 |
|
|
$ |
5,036 |
|
|
|
4,101 |
|
|
|
4,110 |
|
Shareholders’ preferred equity |
|
|
(1,679 |
) |
|
|
(1,768 |
) |
|
|
(1,878 |
) |
|
|
(569 |
) |
|
|
(569 |
) |
Trust preferred securities |
|
|
(570 |
) |
|
|
(736 |
) |
|
|
(736 |
) |
|
|
(736 |
) |
|
|
(785 |
) |
REIT preferred stock |
|
|
(50 |
) |
|
|
(50 |
) |
|
|
(50 |
) |
|
|
(50 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 common equity (2) |
|
$ |
3,091 |
|
|
$ |
2,613 |
|
|
$ |
2,372 |
|
|
$ |
2,746 |
|
|
$ |
2,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets (RWA) |
|
$ |
45,454 |
|
|
$ |
46,313 |
|
|
$ |
46,994 |
|
|
$ |
46,608 |
|
|
$ |
46,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 common equity / RWA ratio (2), (3) |
|
|
6.80 |
% |
|
|
5.64 |
% |
|
|
5.05 |
% |
|
|
5.89 |
% |
|
|
5.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity / tangible asset ratio (2) |
|
|
8.99 |
|
|
|
8.12 |
|
|
|
7.72 |
|
|
|
5.99 |
|
|
|
5.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity / tangible asset ratio (2) |
|
|
5.68 |
|
|
|
4.65 |
|
|
|
4.04 |
|
|
|
4.88 |
|
|
|
4.81 |
|
| |
|
|
| (1) |
|
Intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate. |
| |
| (2) |
|
Tangible equity, Tier 1 common equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these
financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate
financial condition and capital strength. Other companies may calculate these financial measures differently. |
| |
| (3) |
|
Based on an interim decision by the banking agencies on December 14, 2006, Huntington has excluded the impact of adopting Statement 158 from the regulatory capital
calculations. |
As shown in the above table, our consolidated “tangible common equity / tangible asset” ratio
was 5.68% at June 30, 2009, an increase from 4.04% at December 31, 2008. The 164 basis point
increase from December 31, 2008, primarily reflected the $548.4 million aggregate issuances of new
common stock, the $206.5 million conversion of Series A Preferred Stock to common stock, as well as
the reducing of our balance sheet through the securitizing of automobile loans, and the selling of
a portion of our municipal securities portfolio, as well as mortgage loans.
75
Regulatory Capital
Regulatory capital ratios are the primary metrics used by regulators in assessing the “safety
and soundness” of banks. We intend to maintain both the parent company’s and the Bank’s risk-based
capital ratios at levels at which each would be considered “well-capitalized” by regulators. The
Bank is primarily supervised and regulated by the Office of the Comptroller of the Currency (OCC),
which establishes regulatory capital guidelines for banks similar to those established for bank
holding companies by the Federal Reserve Board.
Regulatory capital primarily consists of Tier 1 capital and Tier 2 capital. The sum of Tier 1
capital and Tier 2 capital equals total risk-based capital. The following table reflects changes
and activity to the various components utilized in the calculation our consolidated Tier 1, Tier 2,
and total risk-based capital amounts during 2009.
Table 52 — Regulatory Capital Activity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shareholder |
|
|
|
|
|
|
|
|
|
|
Disallowed |
|
|
Disallowed |
|
|
|
|
| |
|
Common |
|
|
Preferred |
|
|
Qualifying |
|
|
Goodwill & |
|
|
Other |
|
|
Tier 1 |
|
| (in millions) |
|
Equity
(1) |
|
|
Equity |
|
|
Core
Capital
(2) |
|
|
Intangible assets |
|
|
Adjustments (net) |
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 12/31/08 |
|
$ |
5,676.1 |
|
|
$ |
1,877.7 |
|
|
$ |
788.0 |
|
|
$ |
(3,286.8 |
) |
|
$ |
(19.4 |
) |
|
$ |
5,035.6 |
|
Cumulative effect accounting changes |
|
|
3.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3.5 |
|
Earnings |
|
|
(2,558.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
2,558.3 |
|
|
|
— |
|
|
|
— |
|
Changes to disallowed adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
71.1 |
|
|
|
(4.9 |
) |
|
|
66.2 |
|
Dividends |
|
|
(61.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(61.5 |
) |
Issuance of common stock |
|
|
552.5 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
552.5 |
|
Conversion of preferred stock |
|
|
206.5 |
|
|
|
(206.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization of preferred discount |
|
|
(7.9 |
) |
|
|
7.9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Redemption of junior subordinated
debt |
|
|
— |
|
|
|
— |
|
|
|
(166.3 |
) |
|
|
— |
|
|
|
— |
|
|
|
(166.3 |
) |
Disallowance of deferred tax assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42.5 |
) |
|
|
(42.5 |
) |
Change in minority interest |
|
|
— |
|
|
|
— |
|
|
|
(0.5 |
) |
|
|
— |
|
|
|
— |
|
|
|
(0.5 |
) |
Other |
|
|
2.4 |
|
|
|
0.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 06/30/09 |
|
$ |
3,813.3 |
|
|
$ |
1,679.4 |
|
|
$ |
621.2 |
|
|
$ |
(657.4 |
) |
|
$ |
(66.8 |
) |
|
$ |
5,389.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Qualifying |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subordinated |
|
|
|
|
|
|
Tier 1 Capital |
|
|
Total risk-based |
|
| |
|
Qualifying ACL |
|
|
Debt |
|
|
Tier 2 Capital |
|
|
(from above) |
|
|
capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 12/31/08 |
|
$ |
591.8 |
|
|
$ |
907.2 |
|
|
$ |
1,499.0 |
|
|
$ |
5,035.6 |
|
|
$ |
6,534.6 |
|
Change in qualifying subordinated
debt |
|
|
— |
|
|
|
(78.2 |
) |
|
|
(78.2 |
) |
|
|
— |
|
|
|
(78.2 |
) |
Change in qualifying ACL |
|
|
(14.6 |
) |
|
|
— |
|
|
|
(14.6 |
) |
|
|
— |
|
|
|
(14.6 |
) |
Changes to Tier 1 Capital (see above) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
354.1 |
|
|
|
354.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 06/30/09 |
|
$ |
577.2 |
|
|
$ |
829.0 |
|
|
$ |
1,406.2 |
|
|
$ |
5,389.7 |
|
|
$ |
6,795.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Excludes Other Comprehensive Income (OCI) and Minority Interest. |
| |
| (2) |
|
Includes Minority Interest. |
76
The following table presents our regulatory capital ratios at both the consolidated and
Bank levels for the past five quarters:
Table 53 — Regulatory Capital Ratios
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
2009 |
|
|
2008 |
|
| |
|
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
| |
Risk-weighted assets (RWA) (in millions) |
|
Consolidated |
|
$ |
45,454 |
|
|
$ |
46,313 |
|
|
$ |
46,994 |
|
|
$ |
46,608 |
|
|
$ |
46,602 |
|
|
|
Bank |
|
|
45,137 |
|
|
|
45,951 |
|
|
|
46,477 |
|
|
|
45,883 |
|
|
|
46,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio (1) |
|
Consolidated |
|
|
10.62 |
% |
|
|
9.67 |
% |
|
|
9.82 |
% |
|
|
7.99 |
% |
|
|
7.88 |
% |
|
|
Bank |
|
|
6.46 |
|
|
|
5.95 |
|
|
|
5.99 |
|
|
|
6.36 |
|
|
|
6.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital / RWA ratio (1) |
|
Consolidated |
|
|
11.86 |
|
|
|
11.16 |
|
|
|
10.72 |
|
|
|
8.80 |
|
|
|
8.82 |
|
|
|
Bank |
|
|
7.14 |
|
|
|
6.79 |
|
|
|
6.44 |
|
|
|
7.01 |
|
|
|
7.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital / RWA ratio (1) |
|
Consolidated |
|
|
14.95 |
|
|
|
14.28 |
|
|
|
13.91 |
|
|
|
12.03 |
|
|
|
12.05 |
|
|
|
Bank |
|
|
11.35 |
|
|
|
11.00 |
|
|
|
10.71 |
|
|
|
10.25 |
|
|
|
10.32 |
|
| |
|
|
| (1) |
|
Based on an interim decision by the banking agencies on December 14, 2006,
Huntington has excluded the impact of adopting Statement 158 from the regulatory capital
calculations. |
Both consolidated and bank risk-weighted assets declined compared with March 31, 2009,
primarily reflecting a decline in period-ending total loan balances.
At June 30, 2009, the parent company had Tier 1 and Total risk-based capital in excess of the
minimum level required to be considered “well-capitalized” of $2.7 billion and $2.3 billion,
respectively. During the 2009 second quarter, the parent company contributed $250 million of
additional capital to the Bank. The contribution increased the Bank’s regulatory capital levels
above its already “well-capitalized” levels.
At June 30, 2009, the Bank had Tier 1 and Total risk-based capital in excess of the minimum
level required to be considered “well-capitalized” of $0.5 billion and $0.6 billion, respectively.
Preferred Stock / TARP
In 2008, we issued an aggregate $569 million of Series A Preferred Stock. The Series A
Preferred Stock is nonvoting and may be convertible at any time, at the option of the holder, into
83.668 shares of our common stock. Shares of Series A Preferred Stock held by investors is not a
component of Tier 1 common equity. As previously mentioned (see “Tier 1 Common Equity” section),
we entered into agreements with various institutional investors exchanging 41.1 million shares of
our common stock for 0.2 million shares of the Series A Preferred Stock held by them during the
first six-month period of 2009. These transactions increased common equity by $206.5 million,
while preferred equity decreased by the same amount.
During 2008, we received $1.4 billion of equity capital by issuing 1.4 million shares of
Series B Preferred Stock to the U.S. Department of Treasury, and a ten-year warrant to purchase up
to 23.6 million shares of our common stock, par value $0.01 per share, at an exercise price of
$8.90 per share. The proceeds received were allocated to the preferred stock and additional
paid-in-capital. The resulting discount on the preferred stock will be amortized, resulting in
additional dilution to our earnings per share. The Series B Preferred Stock is not a component of
Tier 1 common equity. (See Note 8 of the Notes to the Unaudited Condensed Consolidated Financial
Statements for additional information regarding the Series B Preferred Stock issuance).
77
Other Capital Matters
To accelerate the building of capital, we reduced our quarterly common stock dividend to $0.01
per common share, effective with the dividend paid April 1, 2009.
On February 18, 2009, our 2006 Repurchase Program was terminated. Additionally, as a
condition to participate in the TARP, we may not repurchase any shares without prior approval from
the Department of Treasury. No shares were repurchased during the first six months of 2009.
Table 54 — Quarterly Common Stock Summary
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands, except per share amounts) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock price, per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High (1) |
|
$ |
6.180 |
|
|
$ |
8.000 |
|
|
$ |
11.650 |
|
|
$ |
13.500 |
|
|
$ |
11.750 |
|
Low (1) |
|
|
1.550 |
|
|
|
1.000 |
|
|
|
5.260 |
|
|
|
4.370 |
|
|
|
4.940 |
|
Close |
|
|
4.180 |
|
|
|
1.660 |
|
|
|
7.660 |
|
|
|
7.990 |
|
|
|
5.770 |
|
Average closing price |
|
|
3.727 |
|
|
|
2.733 |
|
|
|
8.276 |
|
|
|
7.510 |
|
|
|
8.783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends, per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.0100 |
|
|
$ |
0.0100 |
|
|
$ |
0.1325 |
|
|
$ |
0.1325 |
|
|
$ |
0.1325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average — basic |
|
|
459,246 |
|
|
|
366,919 |
|
|
|
366,054 |
|
|
|
366,124 |
|
|
|
366,206 |
|
Average — diluted (2) |
|
|
459,246 |
|
|
|
366,919 |
|
|
|
366,054 |
|
|
|
367,361 |
|
|
|
367,234 |
|
Ending |
|
|
568,741 |
|
|
|
390,682 |
|
|
|
366,057 |
|
|
|
366,069 |
|
|
|
366,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share |
|
$ |
6.23 |
|
|
$ |
7.80 |
|
|
$ |
14.62 |
|
|
$ |
15.86 |
|
|
$ |
15.88 |
|
Tangible book value per share |
|
|
5.07 |
|
|
|
6.08 |
|
|
|
5.64 |
|
|
|
6.85 |
|
|
|
6.83 |
|
| |
|
|
| (1) |
|
High and low stock prices are intra-day quotes obtained from NASDAQ. |
| |
| (2) |
|
For all periods presented, the impact of the convertible preferred stock issued in
April of 2008 was excluded from the diluted share calculations. They were excluded because the
results would have been higher than basic earnings per common share (anti-dilutive) for the
periods. |
78
BUSINESS SEGMENT DISCUSSION
This section reviews financial performance from a business segment perspective and should be
read in conjunction with the Discussion of Results of Operations, Note 17 of the Notes to
Consolidated Financial Statements, and other sections for a full understanding of our consolidated
financial performance.
We have five major business segments: Retail and Business Banking, Commercial Banking, Commercial
Real Estate, Auto Finance and Dealer Services (AFDS), and the Private Financial Group (PFG). A
Treasury/Other function includes other unallocated assets, liabilities, revenue, and expense. For
each of our business segments, we expect the combination of our business model and exceptional
service to provide a competitive advantage that supports revenue and earnings growth. Our business
model emphasizes the delivery of a complete set of banking products and services offered by larger
banks, but distinguished by local decision-making regarding the pricing and offering of these
products.
Periodically, organizational changes result in the transfer of specific components from one
business segment to another business segment. During the first six-month period of 2009, the
Mezzanine Lending component was transferred to the Commercial Real Estate business segment from the
PFG business segment.
Funds Transfer Pricing
We use a centralized funds transfer pricing (FTP) methodology to attribute appropriate net
interest income to the business segments. The Treasury/Other business segment charges (credits) an
internal cost of funds for assets held in (or pays for funding provided by) each business segment.
The FTP rate is based on prevailing market interest rates for comparable duration assets (or
liabilities). Deposits of an indeterminate maturity receive an FTP credit based on vintage-based
pool rates. Other assets, liabilities, and capital are charged (credited) with a four-year moving
average FTP rate. The intent of the FTP methodology is to eliminate all interest rate risk from
the business segments by providing matched duration funding of assets and liabilities. The result
is to centralize the financial impact, management, and reporting of interest rate and liquidity
risk in the Treasury/Other function where it can be monitored and managed. The denominator in net
interest margin calculation has been modified to add the amount of net funds provided by each
business segment for all periods presented.
Fee Sharing
Our business segments operate in cooperation to provide products and services to our
customers. Revenue is recorded in the business segment responsible for the related product or
service. Fee sharing is recorded to allocate portions of such revenue to other business segments
involved in selling to or providing service to customers. The most significant revenues for which
fee sharing is recorded relate to customer derivatives and brokerage services, which are recorded
by PFG and shared primarily with Retail and Business Banking and Commercial Banking. Results of
operations for the business segments reflect these fee sharing allocations.
Expense Allocation
Business segment results are determined based upon our management reporting system, which
assigns balance sheet and income statement items to each of the business segments. The process is
designed around our organizational and management structure and, accordingly, the results derived
are not necessarily comparable with similar information published by other financial institutions.
For comparability purposes, the amounts in all periods were based on business segments and
methodologies in effect at June 30, 2009.
The management accounting process used to develop the business segment reporting utilized
various estimates and allocation methodologies to measure the performance of the business segments.
To determine the financial performance for each business segment, we allocated a portion of the
provision for credit losses and certain noninterest expenses related to shared services and
corporate overhead. The provision for credit losses was allocated based on the level of each
business segment’s respective ACL. Noninterest expenses were allocated based on various
methodologies, including volume of activity and the number of full-time equivalent employees.
79
Treasury/Other
The Treasury / Other function includes revenue and expense related to assets, liabilities, and
equity not directly assigned or allocated to one of the five business segments. Assets include
investment securities, bank owned life insurance, and the loans and OREO properties acquired
through the 2009 first quarter Franklin restructuring. The financial impact associated with our
FTP methodology, as described above, is also included.
Net interest income includes the impact of administering our investment securities portfolios
and the net impact of derivatives used to hedge interest rate sensitivity. Noninterest income
includes miscellaneous fee income not allocated to other business segments such as bank owned life
insurance income, and any investment securities and trading assets gains or losses. Noninterest
expense includes certain corporate administrative, merger, and other miscellaneous expenses not
allocated to other business segments. The provision for income taxes for the business segments is
calculated at a statutory 35% tax rate, though our overall effective tax rate is lower. As a
result, Treasury/Other reflects a credit for income taxes representing the difference between the
lower actual effective tax rate and the statutory tax rate used to allocate income taxes to the
business segments.
Net Income by Business Segment
The company reported net loss of $2,558.3 million in the first six-month period of 2009. This
compared with net income of $228.4 million in the first six-month period of 2008. The breakdown of
net income by business segment for the first six-month periods of 2009 and 2008 is presented in the
following table:
Table 55 — Net Income (Loss) by Business Segment — 2009 First Six Months vs. 2008 First Six Months
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
Retail and Business Banking |
|
$ |
90,046 |
|
|
$ |
122,288 |
|
|
$ |
(32,242 |
) |
Commercial Banking |
|
|
(19,723 |
) |
|
|
67,362 |
|
|
|
(87,085 |
) |
Commercial Real Estate |
|
|
(119,856 |
) |
|
|
12,704 |
|
|
|
(132,559 |
) |
AFDS |
|
|
(9,510 |
) |
|
|
14,350 |
|
|
|
(23,860 |
) |
PFG |
|
|
4,059 |
|
|
|
25,666 |
|
|
|
(21,607 |
) |
Treasury/Other |
|
|
70,500 |
|
|
|
(13,950 |
) |
|
|
84,450 |
|
Unallocated goodwill impairment (1) |
|
|
(2,573,818 |
) |
|
|
— |
|
|
|
(2,573,818 |
) |
|
|
|
|
|
|
|
|
|
|
Total net (loss) income |
|
$ |
(2,558,302 |
) |
|
$ |
228,420 |
|
|
$ |
(2,786,722 |
) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Represents the 2009 first quarter impairment charge, net of
tax, associated with the former Regional Banking business
segment. The allocation of this charge to the newly
created business segments is not practical. See the
“Goodwill” section located within the “Critical Accounting
Polices and Use of Significant Estimates” section for
additional information. |
80
Average Loans/Leases and Deposits by Business Segment
The breakdown of total average loans and leases and total average deposits by business segment
for the first six-month period of 2009 is presented in the following table:
Table 56 — Average Loans/Leases and Deposits by Business Segment — 2009 First Six Months
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Regional and |
|
|
Commercial |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
Treasury / |
|
|
|
|
| (in millions) |
|
Business Banking |
|
|
Banking |
|
|
Real Estate |
|
|
AFDS |
|
|
PFG |
|
|
Other |
|
|
TOTAL |
|
Average Loans/Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
3,368 |
|
|
$ |
7,230 |
|
|
$ |
524 |
|
|
$ |
1,195 |
|
|
$ |
903 |
|
|
$ |
312 |
|
|
$ |
13,532 |
|
Commercial real estate |
|
|
1,677 |
|
|
|
1,059 |
|
|
|
6,663 |
|
|
|
63 |
|
|
|
191 |
|
|
|
— |
|
|
|
9,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
5,045 |
|
|
|
8,289 |
|
|
|
7,187 |
|
|
|
1,258 |
|
|
|
1,094 |
|
|
|
312 |
|
|
|
23,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,820 |
|
|
|
— |
|
|
|
— |
|
|
|
3,820 |
|
Home equity |
|
|
6,874 |
|
|
|
43 |
|
|
|
— |
|
|
|
— |
|
|
|
660 |
|
|
|
32 |
|
|
|
7,609 |
|
Residential mortgage |
|
|
3,758 |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
658 |
|
|
|
214 |
|
|
|
4,634 |
|
Other consumer |
|
|
458 |
|
|
|
7 |
|
|
|
— |
|
|
|
184 |
|
|
|
34 |
|
|
|
— |
|
|
|
683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
11,090 |
|
|
|
51 |
|
|
|
1 |
|
|
|
4,006 |
|
|
|
1,352 |
|
|
|
246 |
|
|
|
16,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
16,135 |
|
|
$ |
8,340 |
|
|
$ |
7,188 |
|
|
$ |
5,264 |
|
|
$ |
2,446 |
|
|
$ |
558 |
|
|
$ |
39,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
$ |
3,298 |
|
|
$ |
1,840 |
|
|
$ |
178 |
|
|
$ |
60 |
|
|
$ |
333 |
|
|
$ |
75 |
|
|
$ |
5,784 |
|
Demand deposits — interest bearing |
|
|
3,371 |
|
|
|
658 |
|
|
|
28 |
|
|
|
— |
|
|
|
252 |
|
|
|
3 |
|
|
|
4,312 |
|
Money market deposits |
|
|
3,549 |
|
|
|
1,185 |
|
|
|
154 |
|
|
|
3 |
|
|
|
1,085 |
|
|
|
(1 |
) |
|
|
5,975 |
|
Savings and other domestic time deposits |
|
|
4,656 |
|
|
|
319 |
|
|
|
(2 |
) |
|
|
— |
|
|
|
63 |
|
|
|
— |
|
|
|
5,036 |
|
Core certificates of deposit |
|
|
12,188 |
|
|
|
67 |
|
|
|
9 |
|
|
|
— |
|
|
|
379 |
|
|
|
— |
|
|
|
12,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
27,062 |
|
|
|
4,069 |
|
|
|
367 |
|
|
|
63 |
|
|
|
2,112 |
|
|
|
77 |
|
|
|
33,750 |
|
Other deposits |
|
|
447 |
|
|
|
1,415 |
|
|
|
41 |
|
|
|
5 |
|
|
|
133 |
|
|
|
3,074 |
|
|
|
5,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
27,509 |
|
|
$ |
5,484 |
|
|
$ |
408 |
|
|
$ |
68 |
|
|
$ |
2,245 |
|
|
$ |
3,151 |
|
|
$ |
38,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
Retail and Business Banking
(This section should be read in conjunction with Significant Items 1, 4, 5 and the “Goodwill”
discussion located within the “Critical Accounting Policies and Use of Significant Estimates”
section.)
Objectives, Strategies, and Priorities
Our Retail and Business Banking segment provides traditional banking products and services to
consumer and small business customers located in our 11 operating regions within the six states of
Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. It provides these services
through a banking network of over 600 branches, and almost 1,400 ATMs, along with internet and
telephone banking channels. It also provides certain services on a limited basis outside of these
six states, including mortgage banking and small business administration (SBA) lending. Retail
products and services include home equity loans and lines of credit, first mortgage loans, direct
installment loans, small business loans, personal and business deposit products, as well as sales
of investment and insurance services. At June 30, 2009, Retail and Business Banking accounted for
41% and 73% of consolidated loans and leases and deposits, respectively.
The Retail and Business Banking strategy is to focus on building a deeper relationship with
our customers by providing an exceptional service experience. This focus on service involves
continued investments in state-of-the-art platform technology in our branches, award-winning retail
and business websites for our customers, extensive development of associates, and internal
processes that empower our local bankers to serve our customers better.
2009 First Six Months versus 2008 First Six Months
Table 57 — Key Performance Indicators for Retail and Business Banking
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
|
|
|
| |
|
June 30, |
|
|
Change — YTD 2009 vs 2008 |
|
| (in thousands unless otherwise noted) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Net interest income |
|
$ |
510,682 |
|
|
$ |
477,709 |
|
|
$ |
32,973 |
|
|
|
6.9 |
% |
Provision for credit losses |
|
|
219,076 |
|
|
|
93,691 |
|
|
|
125,385 |
|
|
|
N.M. |
|
Noninterest income |
|
|
253,998 |
|
|
|
204,062 |
|
|
|
49,936 |
|
|
|
24.5 |
|
Noninterest expense |
|
|
407,072 |
|
|
|
399,945 |
|
|
|
7,127 |
|
|
|
1.8 |
|
(Benefit) Provision for income taxes |
|
|
48,486 |
|
|
|
65,847 |
|
|
|
(17,361 |
) |
|
|
(26.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
90,046 |
|
|
$ |
122,288 |
|
|
$ |
(32,242 |
) |
|
|
(26.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets (in millions) |
|
$ |
18,185 |
|
|
$ |
19,052 |
|
|
$ |
(867 |
) |
|
|
(4.6 |
)% |
Total average loans/leases (in millions) |
|
|
16,135 |
|
|
|
16,999 |
|
|
|
(864 |
) |
|
|
(5.1 |
) |
Total average deposits (in millions) |
|
|
27,509 |
|
|
|
25,810 |
|
|
|
1,699 |
|
|
|
6.6 |
|
Net interest margin |
|
|
3.71 |
% |
|
|
3.72 |
% |
|
|
(0.01 |
)% |
|
|
(0.3 |
) |
Net charge-offs (NCOs) |
|
$ |
165,095 |
|
|
$ |
59,172 |
|
|
$ |
105,923 |
|
|
|
N.M. |
|
NCOs as a % of average loans and leases |
|
|
2.05 |
% |
|
|
0.70 |
% |
|
|
1.4 |
% |
|
|
N.M. |
|
Return on average equity |
|
|
14.0 |
|
|
|
25.4 |
|
|
|
(11.4 |
) |
|
|
(44.9 |
) |
Retail banking # DDA households (eop) |
|
|
905,314 |
|
|
|
897,023 |
|
|
|
8,291 |
|
|
|
0.9 |
|
Retail banking # new relationships 90-day cross-sell (average) |
|
|
2.51 |
|
|
|
2.46 |
|
|
|
0.05 |
|
|
|
2.0 |
|
Business banking # business DDA relationships (eop) |
|
|
109,598 |
|
|
|
105,337 |
|
|
|
4,261 |
|
|
|
4.0 |
|
Business banking # new relationships 90-day cross-sell
(average) |
|
|
2.16 |
|
|
|
2.08 |
|
|
|
0.08 |
|
|
|
3.8 |
|
Mortgage banking closed loan volume (in millions) |
|
$ |
3,133 |
|
|
$ |
2,369 |
|
|
$ |
764 |
|
|
|
32.2 |
% |
eop — End of Period.
N.M., not a meaningful value.
82
Retail and Business Banking reported a net income of $90.0 million in the first six-month
period of 2009, compared with net income of $122.3 million in the first six-month period of 2008.
The most notable factors contributing to this $32.2 million decrease was a $125.4 million
increase to the provision for credit losses reflecting a $105.9 million increase in NCOs, as well
as reserve building necessary due to the continued economic weaknesses in our markets. The overall
economic slowdown impacted our commercial loan portfolio as reflected in the increases in
commercial NCOs and NALs. Of the increase in NCOs, 76% was within our commercial loan portfolio,
and the majority of these NCOs were associated with smaller projects. NALs increased $228 million,
and as with NCOs, were largely driven by commercial NALs. Our consumer loan portfolio NCOs and
NALs increased $25 million and $48 million, respectively. This increase was driven primarily by
the higher unemployment rate, particularly in our Michigan and northern Ohio markets.
Net interest income increased $33.0 million, or 7%, reflecting (a) the reduction in market
interest rates over the last 12 months, as well as a $1.9 billion increase in average consumer
deposit balances, (b) decreases in our funding costs for nonearning assets, and (c) an increase in
allocated equity, resulting in a higher funding credit. Partially offsetting these increases were
(a) a $19.4 million reduction in loan net interest income reflecting significant declines in both
the LIBOR and prime interest rates, (b) a 134 basis point decline in the commercial deposit net
interest margin, a result of the significant decline in the 30 day LIBOR rate, and (c) a $12.7
million reduction related to MSR hedging.
The $864 million decline in total average loans and leases primarily reflected a $791 million
decrease in average residential mortgages, resulting from the impact of loan sales. During the
first six-month period of 2009, mortgage originations increased 24%, compared with the first
six-month period of 2008. We expect production levels for the remainder of the year to stabilize
or be slightly lower than the first six-month period of 2009. However, as is our practice, the
expectation is that the majority of our fixed-rate originations will be sold in the secondary
market.
Average total deposits increased $1.7 billion, or 7%, compared with the first six-month period
of 2008. Consumer deposits increased $1.9 million, or 9%, primarily reflecting increased marketing
efforts for consumer time deposit accounts in the 2008 fourth quarter. Additionally, the number of
DDA households increased 1% from the first six-month period of 2008, primarily reflecting new sales
and marketing initiatives for DDA deposit accounts. We anticipate continued consumer deposit
growth for the remainder of 2009, specifically in our consumer DDA and non-maturity deposits.
Noninterest income increased $49.9 million, or 25%, primarily reflecting a $60.4 million
increase in mortgage banking income. The increase to mortgage banking income primarily reflected a
$39.3 million increase in origination and secondary marketing fees, as well as a $28.0 million
improvement in the net hedging impact of MSRs. This increase was partially offset by an $11.0
million decline in service charges on deposit accounts compared with the first six-month period of
2008, primarily reflecting lower consumer nonsufficient funds and overdraft fees, partially offset
by higher commercial service charges. During the current economic environment, customers have
improved the management of their deposit balances, thus resulting in fewer overdraft instances.
Noninterest expense increased $7.1 million. This increase reflected a $21.2 million increase
in FDIC insurance expense, and a $6.6 million increase in credit quality related expenses, such as
legal and collection costs. We expect that collection costs will remain at higher levels
throughout 2009 due to the current economic weaknesses. The increase was partially offset by a
$16.7 million decrease in personnel expense resulting from a 5% reduction in full-time equivalent
employees; as well as a reduction in, or elimination of, incentive plan payouts. Also, several
other expense categories, such as travel expense and marketing expense, declined as a result of
several expense reduction initiatives implemented since the 2008 first quarter.
83
Commercial Banking
Objectives, Strategies, and Priorities
The Commercial Banking segment provides a variety of banking products and services to
customers within our primary banking markets who generally have larger credit exposures and sales
revenues compared with our Retail and Business Banking customers. Commercial Banking products
include commercial loans, international trade, cash management, leasing, interest rate protection
products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities. Our
Commercial Banking team also serves customers that specialize in equipment leasing, as well as
serving the commercial banking needs of government entities, not-for-profit organizations, and
large corporations. Commercial bankers personally deliver these products and services by
developing leads through community involvement, referrals from other professionals, and targeted
prospect calling.
The Commercial Banking strategy is to focus on building a deeper relationship with our
customers by providing an exceptional service experience. This focus on service requires continued
investments in technology for our product offerings, websites for our customers, extensive
development of associates, and internal processes that empower our local bankers to serve our
customers better.
2009 First Six Months versus 2008 First Six Months
Table 58 — Key Performance Indicators for Commercial Banking
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
|
|
|
| |
|
June 30, |
|
|
Change — YTD 2009 vs 2008 |
|
| (in thousands unless otherwise noted) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Net interest income |
|
$ |
153,725 |
|
|
$ |
159,716 |
|
|
$ |
(5,991 |
) |
|
|
(3.8 |
)% |
Provision for credit losses |
|
|
158,781 |
|
|
|
25,401 |
|
|
|
133,380 |
|
|
|
N.M. |
|
Noninterest income |
|
|
44,849 |
|
|
|
48,936 |
|
|
|
(4,087 |
) |
|
|
(8.4 |
) |
Noninterest expense |
|
|
70,136 |
|
|
|
79,617 |
|
|
|
(9,481 |
) |
|
|
(11.9 |
) |
(Benefit) Provision for income taxes |
|
|
(10,620 |
) |
|
|
36,272 |
|
|
|
(46,892 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(19,723 |
) |
|
$ |
67,362 |
|
|
$ |
(87,085 |
) |
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets (in millions) |
|
$ |
8,664 |
|
|
$ |
8,682 |
|
|
$ |
(18 |
) |
|
|
(0.2 |
)% |
Total average loans/leases (in millions) |
|
|
8,340 |
|
|
|
8,143 |
|
|
|
197 |
|
|
|
2.4 |
|
Total average deposits (in millions) |
|
|
5,484 |
|
|
|
6,412 |
|
|
|
(928 |
) |
|
|
(14.5 |
) |
Net interest margin |
|
|
3.74 |
% |
|
|
3.90 |
% |
|
|
(0.16 |
)% |
|
|
(4.1 |
) |
Net charge-offs (NCOs) |
|
$ |
131,914 |
|
|
$ |
15,556 |
|
|
$ |
116,358 |
|
|
|
N.M. |
|
NCOs as a % of average loans and leases |
|
|
3.16 |
% |
|
|
0.38 |
% |
|
|
2.8 |
% |
|
|
N.M. |
|
Return on average equity |
|
|
(4.9 |
) |
|
|
17.4 |
|
|
|
(22.3 |
) |
|
|
N.M. |
|
N.M., not a meaningful value.
Commercial Banking reported a net loss of $19.7 million in the first six-month period of
2009, compared with net income of $67.4 million in the first six-month period of 2008. The
decline was primarily due to a $133.4 million increase to the provision for credit losses,
reflecting a $116.4 million increase in NCOs as well as reserve building necessary due to the
continued economic weaknesses in our markets. This increase was partially offset by a $46.9
million reduction in provision for income taxes expense, reflecting the net loss during the first
six-month period of 2009. As NALs continued to grow, we continued to build our loan loss reserves.
Additionally, during the 2009 second quarter, we reviewed every “noncriticized” commercial
relationship with an aggregate exposure of over $500,000. (See “Commercial Loan Portfolio Reviews
and Actions” section located within the “Commercial Credit” section for additional information).
This loan level review will allow us to proactively mitigate risk going forward. Although we
expect our commercial portfolio will remain under pressure, we believe that the risks in our loan
portfolios are manageable.
84
Net interest income decreased $6.0 million, or 4%, reflecting a 16 basis point decline in net
interest margin, and a $1.6 billion decline in average interest bearing liabilities. The net
interest margin decline primarily reflected a 23 basis point reduction in loan net interest margin,
resulting from a significant decline in the LIBOR rate, as well as a $108 million, or 80%, increase
in nonaccrual loans. The decline in average interest bearing liabilities primarily reflected lower
money-market account and automated funds investment balances. Partially offsetting these declines
was a $141 million increase in average earning assets, and a $454 million increase in demand
deposit average balances.
The $179 million increase in total average commercial loans and leases primarily reflected
higher utilization of existing lines and lower payoffs in our existing portfolio.
Average total deposits declined $928 million, or 15%, compared with the first six-month period
of 2008. The decline was driven by balance decreases on deposit products that had customer rates
directly linked to overall market interest rates that decreased quickly and significantly in the
2008 fourth quarter. Also, customers withdrew balances due to concern over FDIC insurance
coverage.
Noninterest income decreased $4.1 million, or 8%, primarily reflecting (a) a $4.5 million
decrease in derivative income due to a decline in demand for interest rate swap products, (b) a
$0.6 million decrease in mezzanine income, and (c) a $1.3 million decline in operating lease
income, as effective with the 2009 second quarter, lease originations were recorded as direct
finance leases rather than operating leases. These decreases were partially offset by a $2.4
million increase in service charges on deposit accounts, reflecting pricing initiatives implemented
during the 2009 first six-month period.
Noninterest expense declined $9.5 million, reflecting a decrease in personnel expense
resulting from a 21% reduction in full-time equivalent employees; as well as a decrease in various
other expense categories as a result of several expense reduction initiatives implemented since the
2008 first quarter. These decreases were partially offset by a $3.5 million increase in FDIC
insurance expense, and a $2.9 million increase in credit quality related expenses, such as legal
and collection costs. We expect that collection costs will remain at higher levels throughout 2009
due to the current economic weaknesses.
85
Commercial Real Estate
Objectives, Strategies, and Priorities
Our Commercial Real Estate segment serves professional real estate developers or other
customers with real estate project financing needs within our primary banking markets. Commercial
Real Estate products and services include CRE loans, cash management, interest rate protection
products, and capital market alternatives. Commercial real estate bankers personally deliver these
products and services by: (a) relationships with developers in our footprint who are
recognized as the most experienced, well-managed and well-capitalized, and are capable of operating
in all phases of the real estate cycle (“top-tier developers”), (b) leads through community
involvement, and (c) referrals from other professionals.
The Commercial Real Estate strategy is to focus on building a deeper relationship with
top-tier developers within our geographic footprint. Our local expertise of the customers, market,
and products, gives us a competitive advantage and supports revenue growth in our footprint. Our
strategy is to continue to expand the relationships of our current customer base and to attract
new, profitable business with top-tier developers in our footprint.
2009 First Six Months versus 2008 First Six Months
Table 59 — Key Performance Indicators for Commercial Real Estate
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
|
|
|
| |
|
June 30, |
|
|
Change — YTD 2009 vs 2008 |
|
| (in thousands unless otherwise noted) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Net interest income |
|
$ |
90,126 |
|
|
$ |
86,368 |
|
|
$ |
3,758 |
|
|
|
4.4 |
% |
Provision for credit losses |
|
|
262,932 |
|
|
|
60,911 |
|
|
|
202,021 |
|
|
|
N.M. |
|
Noninterest income |
|
|
1,105 |
|
|
|
8,265 |
|
|
|
(7,160 |
) |
|
|
(86.6 |
) |
Noninterest expense |
|
|
12,693 |
|
|
|
14,178 |
|
|
|
(1,485 |
) |
|
|
(10.5 |
) |
(Benefit) Provision for income taxes |
|
|
(64,538 |
) |
|
|
6,840 |
|
|
|
(71,378 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(119,856 |
) |
|
$ |
12,704 |
|
|
$ |
(132,560 |
) |
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets (in millions) |
|
$ |
7,114 |
|
|
$ |
6,349 |
|
|
$ |
765 |
|
|
|
12.0 |
% |
Total average loans/leases (in millions) |
|
|
7,188 |
|
|
|
6,322 |
|
|
|
866 |
|
|
|
13.7 |
|
Total average deposits (in millions) |
|
|
408 |
|
|
|
553 |
|
|
|
(145 |
) |
|
|
(26.2 |
) |
Net interest margin |
|
|
2.54 |
% |
|
|
2.75 |
% |
|
|
(0.21 |
)% |
|
|
(7.6 |
) |
Net charge-offs (NCOs) |
|
$ |
212,978 |
|
|
$ |
11,064 |
|
|
$ |
201,914 |
|
|
|
N.M. |
|
NCOs as a % of average loans and leases |
|
|
5.93 |
% |
|
|
0.35 |
% |
|
|
5.6 |
% |
|
|
N.M. |
|
Return on average equity |
|
|
(47.5 |
) |
|
|
6.0 |
|
|
|
(53.5 |
) |
|
|
N.M. |
|
N.M., not a meaningful value.
86
Commercial Real Estate reported a net loss of $119.9 million in the first six-month
period of 2009, compared with net income of $12.7 million in the first six-month period of 2008.
The decline primarily reflected a $202.0 million increase to the provision for credit losses
reflecting a $201.9 million increase in NCOs, as well as continued reserve building necessary due
to the continued economic weaknesses in our markets. Commercial NCOs for first six-month period of
2009 included a $15 million loss associated with a CRE retail project located in our Cleveland
market. The impact to net income resulting from the increase in the provision for credit losses
was partially offset by a $71.4 million reduction in provision for income taxes expense reflecting
the net loss during the first six-month period of 2009. Additionally, during the second quarter,
we reviewed every “noncriticized” commercial relationship with an aggregate exposure of over
$500,000. (See “Commercial Loan Portfolio Reviews and Actions” section located within the
“Commercial Credit” section for additional information). This loan level review allows us to
proactively mitigate risk going forward. Although we expect our CRE portfolio will remain under pressure, we believe
that the risks in our loan portfolios are manageable.
Net interest income increased $3.8 million, or 4%, reflecting a $0.9 billion, or 14%, increase
in average earning assets, partially offset by a 21 basis point decrease in net interest margin.
The decrease in net interest margin was driven primarily by a 24 basis point reduction in loan net
interest income, reflecting a significant decline in the LIBOR rate, as well as a significant
increase in NALs, which increased to $747 million at June 30, 2009. Also contributing to the
decrease, deposit net interest income declined $1.2 million primarily reflecting the significant
decline in the 30 day LIBOR rate. Partially offsetting the decline in the net interest margin on
CRE loans was an increase in ALLL and allocated equity, resulting in an increase in our funding
credit on these noninterest bearing items.
The $865 million increase in total average commercial loans and leases reflected higher
utilization of existing lines and lower payoffs due to the lack of permanent financing in the
secondary market.
Noninterest income decreased $7.2 million, or 87%, primarily reflecting (a) $3.9 million of
interest rate swap losses associated with our Cleveland region due to a deterioration in the
underlying credit, and (b) a $3.7 million decrease in derivative income due to a decline in demand
for interest rate swap products.
Noninterest expense decreased $1.5 million, or 10%, primarily reflecting a decrease in
personnel expense resulting from a 16% reduction in full-time equivalent employees. Also, various
other expense categories declined as a result of several expense reduction initiatives implemented
since the 2008 first quarter, specifically travel and business development expenses.
87
Auto Finance and Dealer Services (AFDS)
(This section should be read in conjunction with the “Automotive Industry” discussion located
within the “Commercial Credit” section.)
Objectives, Strategies, and Priorities
Our AFDS business segment provides a variety of banking products and services to more than
2,000 automotive dealerships within our primary banking markets. During the first quarter of 2009,
AFDS discontinued lending activities in Arizona, Florida, Tennessee, Texas, and Virginia. Also,
all lease origination activities were discontinued during the 2008 fourth quarter. AFDS finances
the purchase of automobiles by customers at the automotive dealerships; finances dealerships’ new
and used vehicle inventories, land, buildings, and other real estate owned by the dealership;
finances dealership working capital needs; and provides other banking services to the automotive
dealerships and their owners. Competition from the financing divisions of automobile manufacturers
and from other financial institutions is intense. AFDS’ production opportunities are directly
impacted by the general automotive sales business, including programs initiated by manufacturers to
enhance and increase sales directly. We have been in this line of business for over 50 years.
The AFDS strategy focuses on developing relationships with the dealership through its finance
department, general manager, and owner. An underwriter who understands each local region makes
loan decisions, though we prioritize maintaining pricing discipline over market share.
2009 First Six Months versus 2008 First Six Months
Table 60 — Key Performance Indicators for Auto Finance and Dealer Services (AFDS)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
|
|
|
| |
|
June 30, |
|
|
Change — YTD 2009 vs 2008 |
|
| (in thousands unless otherwise noted) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Net interest income |
|
$ |
71,153 |
|
|
$ |
74,888 |
|
|
$ |
(3,735 |
) |
|
|
(5.0 |
)% |
Provision for credit losses |
|
|
57,105 |
|
|
|
24,417 |
|
|
|
32,688 |
|
|
|
N.M. |
|
Noninterest income |
|
|
27,065 |
|
|
|
27,476 |
|
|
|
(411 |
) |
|
|
(1.5 |
) |
Noninterest expense |
|
|
55,744 |
|
|
|
55,870 |
|
|
|
(126 |
) |
|
|
(0.2 |
) |
(Benefit) Provision for income taxes |
|
|
(5,121 |
) |
|
|
7,727 |
|
|
|
(12,848 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(9,510 |
) |
|
$ |
14,350 |
|
|
$ |
(23,860 |
) |
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets (in millions) |
|
$ |
5,406 |
|
|
$ |
5,668 |
|
|
$ |
(262 |
) |
|
|
(4.6 |
)% |
Total average loans/leases (in millions) |
|
|
5,264 |
|
|
|
5,801 |
|
|
|
(537 |
) |
|
|
(9.3 |
) |
Net interest margin |
|
|
2.58 |
% |
|
|
2.55 |
% |
|
|
0.03 |
% |
|
|
1.2 |
|
Net charge-offs (NCOs) |
|
$ |
34,236 |
|
|
$ |
24,083 |
|
|
$ |
10,153 |
|
|
|
42.2 |
|
NCOs as a % of average loans and leases |
|
|
1.30 |
% |
|
|
0.83 |
% |
|
|
0.47 |
% |
|
|
56.6 |
|
Return on average equity |
|
|
(7.6 |
) |
|
|
14.9 |
|
|
|
(22.5 |
) |
|
|
N.M. |
|
Automobile loans production (in millions) |
|
$ |
679 |
|
|
$ |
1,352 |
|
|
$ |
(672 |
) |
|
|
(49.7 |
) |
N.M., not a meaningful value.
AFDS reported a net loss of $9.5 million in the first six-month period of 2009, compared
with net income of $14.4 million in the first six-month period of 2008. This $23.9 million decline
primarily resulted from a $32.7 million increase to the provision for credit losses reflecting
elevated NCOs during the 2009 period, as well as reserve building necessary due to continued
economic and automobile industry related weaknesses. At June 30, 2009, the ALLL as a percentage of
total loans and leases increased to 1.36% compared with 0.61% at June 30, 2008. Total NCOs as a
percentage of loans increased to 1.30% for the first six-month period of 2009 compared with 0.83%
for the first six-month period of 2008
and, on an absolute basis, automobile loan and lease charge-offs were $32.6 million compared
with $22.7 million in the comparable year-ago period. Although total NCOs increased from the
comparable year-ago period, automobile loan and lease NCOs in the 2009 second quarter declined $3.5
million, or 19%, compared with the 2009 first quarter. Also, delinquency levels declined for the
second quarter in a row. Performance of this portfolio on both an absolute and relative basis
continues to be consistent with our views regarding the underlying quality of the portfolio and we
continue to expect flat to improved performance through the rest of 2009.
88
Net interest income decreased $3.7 million, or 5%, to $71.2 million reflecting a $0.5 billion
decrease in average loans and leases. The decline in average loans and leases was primarily due to
the run-off in the automobile lease portfolio. Average commercial loans increased $0.1 billion, or
14%, while average automobile loans decreased $0.1 billion. We remain committed to providing
commercial lending to our retail dealer customers, as well as pursuing new business development
opportunities that have resulted from the tightened credit markets. The decline in average
automobile loan balances reflected lower originations, primarily due to the significant decline in
industry-wide new and used vehicle sales, and the sale of $1.0 billion of loans at the end of March
2009. Originations totaled $679 million for the first six-month period of 2009 ($551 million from
our primary banking markets) compared with $1,352 million for the first six-month period of 2008
($892 million from our primary banking markets).
Noninterest income (excluding operating lease income of $26.3 million in the first six-month
period of 2009, and $15.2 million in the first six-month period of 2008) declined $11.6 million,
and included a $5.9 million nonrecurring loss from the previously mentioned $1.0 billion sale of
loans in the first six-month period of 2009. In addition, fee income from the sale of Huntington
Plus loans declined as this program was discontinued in the 2008 fourth quarter while fees
associated with customers exercising their purchase option on leased vehicles and servicing income
were also down due to declines in the underlying lease and loan portfolios.
Noninterest expense (excluding operating lease expense of $22.3 million in the first six-month
period of 2009, and $11.7 million in the first six-month period of 2008) decreased $10.8 million.
This decline reflected: (a) $5.4 million in losses from sales of vehicles returned at the end of
their lease terms due to an improvement in used vehicle values along with a decline in the number
of vehicles being returned, (b) $1.3 million decline in residual value insurance costs as all
residual value insurance policies were terminated in the 2008 fourth quarter, (c) $1.5 million
decline in personnel costs. The declines in personnel costs, as well as other expense categories,
reflected various expense reduction initiatives that began in the second half of 2008 and continued
into 2009. A majority of these reduction initiatives involved discontinuing lending activities
outside of our primary banking markets.
Net automobile operating lease income increased $0.5 million and consisted of an $11.2 million
increase in noninterest income, offset by a $10.6 million increase in noninterest expense. These
increases primarily reflected the increase in average operating lease balances from $133 million
for the first six-month period of 2008 to $231 million for the first six-month period of 2009,
which resulted from all automobile lease originations since the 2007 fourth quarter being recorded
as operating leases. However, the automobile operating lease portfolio and related income will
decline in the future as all lease origination activities were discontinued during the 2008 fourth
quarter.
89
Private Financial Group (PFG)
(This section should be read in conjunction with Significant Items 1, 5, and the “Goodwill”
discussion located within the “Critical Accounting Policies and Use of Significant Estimates”
section.)
Objectives, Strategies, and Priorities
PFG provides products and services designed to meet the needs of higher net worth customers.
Revenue results from the sale of trust, asset management, investment advisory, brokerage,
insurance, and private banking products and services including credit and lending activities. PFG
also focuses on financial solutions for corporate and institutional customers that include
investment banking, sales and trading of securities, and interest rate risk management products.
To serve high net worth customers, we use a unique distribution model that employs a single,
unified sales force to deliver products and services mainly through Retail and Business Banking
distribution channels. PFG provides investment management and custodial services to the Huntington
Funds, which consists of 32 proprietary mutual funds, including 12 variable annuity funds.
Huntington Funds assets represented 25% of the approximately $12.3 billion total assets under
management at June 30, 2009. The Huntington Investment Company (HIC) offers brokerage and
investment advisory services to both Regional Banking and PFG customers through a combination of
licensed investment sales representatives and licensed personal bankers. PFG’s Insurance group
provides a complete array of insurance products including individual life insurance products
ranging from basic term-life insurance to estate planning, group life and health insurance,
property and casualty insurance, mortgage title insurance, and reinsurance for payment protection
products.
PFG’s primary goals are to consistently increase assets under management by offering
innovative products and services that are responsive to our clients’ changing financial needs, and
to grow deposits through increased focus and improved cross-selling efforts. To grow managed
assets, the HIC sales team has been utilized as the primary distribution source for trust and
investment management.
2009 First Six Months versus 2008 First Six Months
Table 61 — Key Performance Indicators for Private Financial Group (PFG)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
|
|
|
| |
|
June 30, |
|
|
Change — YTD 2009 vs 2008 |
|
| (in thousands unless otherwise noted) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Net interest income |
|
$ |
48,373 |
|
|
$ |
39,405 |
|
|
$ |
8,968 |
|
|
|
22.8 |
% |
Provision for credit losses |
|
|
19,396 |
|
|
|
5,043 |
|
|
|
14,353 |
|
|
|
N.M. |
|
Noninterest income |
|
|
125,498 |
|
|
|
131,748 |
|
|
|
(6,250 |
) |
|
|
(4.7 |
) |
Noninterest expense excluding goodwill
impairment |
|
|
119,336 |
|
|
|
126,624 |
|
|
|
(7,288 |
) |
|
|
(5.8 |
) |
Goodwill impairment |
|
|
28,895 |
|
|
|
— |
|
|
|
28,895 |
|
|
|
— |
|
Provision for income taxes |
|
|
2,185 |
|
|
|
13,820 |
|
|
|
(11,635 |
) |
|
|
(84.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,059 |
|
|
$ |
25,666 |
|
|
$ |
(21,607 |
) |
|
|
(84.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets (in millions) |
|
$ |
3,351 |
|
|
$ |
2,976 |
|
|
$ |
375 |
|
|
|
12.6 |
% |
Total average loans/leases (in millions) |
|
|
2,446 |
|
|
|
2,277 |
|
|
|
169 |
|
|
|
7.4 |
|
Net interest margin |
|
|
3.79 |
% |
|
|
3.37 |
% |
|
|
0.42 |
% |
|
|
12.5 |
|
Net charge-offs (NCOs) |
|
$ |
13,420 |
|
|
$ |
3,821 |
|
|
$ |
9,599 |
|
|
|
N.M. |
|
NCOs as a % of average loans and leases |
|
|
1.10 |
% |
|
|
0.34 |
% |
|
|
0.76 |
% |
|
|
N.M. |
|
Return on average equity |
|
|
3.3 |
|
|
|
24.5 |
|
|
|
(21.2 |
) |
|
|
(86.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income shared with other
business segments (1) |
|
$ |
19.6 |
|
|
$ |
28.8 |
|
|
$ |
(9.2 |
) |
|
|
(31.9 |
) |
Total assets under management (in billions)- eop |
|
|
12.3 |
|
|
|
14.6 |
|
|
|
(2.3 |
) |
|
|
(15.8 |
) |
Total trust assets (in billions)- eop |
|
|
44.9 |
|
|
|
52.7 |
|
|
|
(7.8 |
) |
|
|
(14.8 |
)% |
eop — End of Period.
N.M., not a meaningful value.
| |
|
|
| (1) |
|
Amount is not included in noninterest income reported above. |
90
PFG reported net income of $4.1 million in the first six-month period of 2009, compared with
net income of $25.7 million in the first six-month period of 2008. The decline reflected the $28.9
million goodwill impairment charge recorded during the first six-month period of 2009 (see
“Goodwill” discussion located within the “Critical Accounting Policies and Use of Significant
Estimates” for additional information). After adjusting for the goodwill impairment charge, and
the related tax impact, PFG’s net income decreased $2.9 million.
Net interest income increased $9.0 million, or 23%, primarily as a result of a 42 basis point
improvement in the net interest margin. The improvement in the net interest margin primarily
reflected a 42% increase in average deposits relative to the much smaller loan growth of 7%. A
substantial portion of the deposit growth resulted from the introduction of three deposit products
during the first six-month period of 2009 that were designed as alternative options for lower
yielding money market mutual funds. The new deposit products are: (a) the Huntington
Conservative Deposit Account (HCDA), (b) the Huntington Protected Deposit Account (HPDA), and (c)
the Bank Deposit Sweep Product (BDSP). These three accounts had balances in excess of $950 million
at June 30, 2009.
Provision for credit losses increased $14.4 million reflecting a 76 basis point increase in
total NCOs, as well as reserve building resulting from our decision to continue to build reserves
as a result of the review of every “noncriticized” commercial relationship with an aggregate
exposure of over $500,000. (See “Commercial Loan Portfolio Review and Actions” section located
within the “Commercial Credit” section for additional information.)
Noninterest income decreased $6.3 million, or 5%, primarily reflecting a $16.3 million decline
in trust services revenue. The trust revenue decline resulted from a market-driven $2.3 billion
decline in total assets under management as well as reduced proprietary mutual fund fees due to the
migration of proprietary money-market mutual fund balances to the HCDA, HPDA, and other deposit
products. Another factor contributing to the trust revenue decline was the impact of reduced
money market yields. Also contributing to the reduction in noninterest income was a $4.6 million
decline in derivatives income primarily as a result of less demand for CRE loan hedging
transactions. These decreases were partially offset by a $13.9 million improvement in equity
investment portfolio valuation adjustments from a loss of $12.9 million in the first six-month
period of 2008 to a $1.0 million gain in the first six-month period of 2009.
Noninterest expense increased $21.6 million, or 17%, primarily reflecting the goodwill
impairment charge of $28.9 million recorded during the first six-month period of 2009, partially
offset by $10.6 million of reduced personnel expense as a result of several expense reduction
initiatives implemented since the 2008 first quarter.
91
Item 1. Financial Statements
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands, except number of shares) |
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
2,092,604 |
|
|
$ |
806,693 |
|
|
$ |
1,159,819 |
|
Federal funds sold and securities
purchased under resale agreements |
|
|
— |
|
|
|
37,975 |
|
|
|
198,333 |
|
Interest bearing deposits in banks |
|
|
383,082 |
|
|
|
292,561 |
|
|
|
313,855 |
|
Trading account securities |
|
|
95,920 |
|
|
|
88,677 |
|
|
|
1,096,239 |
|
Loans held for sale |
|
|
559,017 |
|
|
|
390,438 |
|
|
|
365,063 |
|
Investment securities |
|
|
5,934,704 |
|
|
|
4,384,457 |
|
|
|
4,788,275 |
|
Loans and leases |
|
|
38,494,889 |
|
|
|
41,092,165 |
|
|
|
41,047,140 |
|
Allowance for loan and lease losses |
|
|
(917,680 |
) |
|
|
(900,227 |
) |
|
|
(679,403 |
) |
|
|
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
37,577,209 |
|
|
|
40,191,938 |
|
|
|
40,367,737 |
|
|
|
|
|
|
|
|
|
|
|
Bank owned life insurance |
|
|
1,391,045 |
|
|
|
1,364,466 |
|
|
|
1,341,162 |
|
Premises and equipment |
|
|
503,877 |
|
|
|
519,500 |
|
|
|
533,789 |
|
Goodwill |
|
|
447,879 |
|
|
|
3,054,985 |
|
|
|
3,056,691 |
|
Other intangible assets |
|
|
322,467 |
|
|
|
356,703 |
|
|
|
395,250 |
|
Accrued income and other assets |
|
|
2,089,448 |
|
|
|
2,864,466 |
|
|
|
1,717,628 |
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
51,397,252 |
|
|
$ |
54,352,859 |
|
|
$ |
55,333,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
39,165,132 |
|
|
$ |
37,943,286 |
|
|
$ |
38,124,426 |
|
Short-term borrowings |
|
|
862,056 |
|
|
|
1,309,157 |
|
|
|
2,313,190 |
|
Federal Home Loan Bank advances |
|
|
926,937 |
|
|
|
2,588,976 |
|
|
|
3,058,163 |
|
Other long-term debt |
|
|
2,508,144 |
|
|
|
2,331,632 |
|
|
|
2,608,092 |
|
Subordinated notes |
|
|
1,672,887 |
|
|
|
1,950,097 |
|
|
|
1,879,900 |
|
Accrued expenses and other liabilities |
|
|
1,041,574 |
|
|
|
1,000,805 |
|
|
|
966,857 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
46,176,730 |
|
|
|
47,123,953 |
|
|
|
48,950,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock — authorized 6,617,808 shares — |
|
|
|
|
|
|
|
|
|
|
|
|
5.00% Series B Non-voting, Cumulative Preferred Stock, par
value
of $0.01 and liquidation value per share of $1,000 |
|
|
1,316,854 |
|
|
|
1,308,667 |
|
|
|
— |
|
8.50% Series A Non-cumulative Perpetual Convertible Preferred
Stock, par value and liquidiation value per share of $1,000 |
|
|
362,507 |
|
|
|
569,000 |
|
|
|
569,000 |
|
Common stock — |
|
|
|
|
|
|
|
|
|
|
|
|
Par value of $0.01 and authorized 1,000,000,000 shares |
|
|
5,696 |
|
|
|
3,670 |
|
|
|
3,670 |
|
Capital surplus |
|
|
6,134,590 |
|
|
|
5,322,428 |
|
|
|
5,226,326 |
|
Less treasury shares at cost |
|
|
(12,223 |
) |
|
|
(15,530 |
) |
|
|
(15,224 |
) |
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on investment securities |
|
|
(127,124 |
) |
|
|
(207,756 |
) |
|
|
(146,307 |
) |
Unrealized gains on cash flow hedging derivatives |
|
|
14,220 |
|
|
|
44,638 |
|
|
|
(50,544 |
) |
Pension and other postretirement benefit adjustments |
|
|
(160,621 |
) |
|
|
(163,575 |
) |
|
|
(46,271 |
) |
Retained (deficit) earnings |
|
|
(2,313,377 |
) |
|
|
367,364 |
|
|
|
842,563 |
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders’ Equity |
|
|
5,220,522 |
|
|
|
7,228,906 |
|
|
|
6,383,213 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity |
|
$ |
51,397,252 |
|
|
$ |
54,352,859 |
|
|
$ |
55,333,841 |
|
|
|
|
|
|
|
|
|
|
|
Common shares issued |
|
|
569,646,682 |
|
|
|
366,972,250 |
|
|
|
367,019,713 |
|
Common shares outstanding |
|
|
568,741,245 |
|
|
|
366,057,669 |
|
|
|
366,196,767 |
|
Preferred shares issued |
|
|
1,967,071 |
|
|
|
1,967,071 |
|
|
|
569,000 |
|
Preferred shares outstanding |
|
|
1,760,578 |
|
|
|
1,967,071 |
|
|
|
569,000 |
|
See notes to unaudited condensed consolidated financial statements.
92
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in thousands, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest and fee income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
491,082 |
|
|
$ |
604,746 |
|
|
$ |
988,670 |
|
|
$ |
1,263,216 |
|
Tax-exempt |
|
|
604 |
|
|
|
1,775 |
|
|
|
1,702 |
|
|
|
3,511 |
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
60,029 |
|
|
|
54,563 |
|
|
|
115,490 |
|
|
|
108,458 |
|
Tax-exempt |
|
|
1,343 |
|
|
|
7,524 |
|
|
|
6,098 |
|
|
|
14,878 |
|
Other |
|
|
9,946 |
|
|
|
28,067 |
|
|
|
21,001 |
|
|
|
60,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
563,004 |
|
|
|
696,675 |
|
|
|
1,132,961 |
|
|
|
1,450,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
176,081 |
|
|
|
227,765 |
|
|
|
363,650 |
|
|
|
502,648 |
|
Short-term borrowings |
|
|
580 |
|
|
|
11,785 |
|
|
|
1,261 |
|
|
|
30,941 |
|
Federal Home Loan Bank advances |
|
|
2,714 |
|
|
|
25,925 |
|
|
|
8,948 |
|
|
|
59,645 |
|
Subordinated notes and other long-term debt |
|
|
33,730 |
|
|
|
41,334 |
|
|
|
71,698 |
|
|
|
90,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
213,105 |
|
|
|
306,809 |
|
|
|
445,557 |
|
|
|
683,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
349,899 |
|
|
|
389,866 |
|
|
|
687,404 |
|
|
|
766,690 |
|
Provision for credit losses |
|
|
413,707 |
|
|
|
120,813 |
|
|
|
705,544 |
|
|
|
209,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for credit losses |
|
|
(63,808 |
) |
|
|
269,053 |
|
|
|
(18,140 |
) |
|
|
557,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
75,353 |
|
|
|
79,630 |
|
|
|
145,231 |
|
|
|
152,298 |
|
Brokerage and insurance income |
|
|
32,052 |
|
|
|
35,694 |
|
|
|
72,000 |
|
|
|
72,254 |
|
Trust services |
|
|
25,722 |
|
|
|
33,089 |
|
|
|
50,532 |
|
|
|
67,217 |
|
Electronic banking |
|
|
24,479 |
|
|
|
23,242 |
|
|
|
46,961 |
|
|
|
43,983 |
|
Bank owned life insurance income |
|
|
14,266 |
|
|
|
14,131 |
|
|
|
27,178 |
|
|
|
27,881 |
|
Automobile operating lease income |
|
|
13,116 |
|
|
|
9,357 |
|
|
|
26,344 |
|
|
|
15,189 |
|
Mortgage banking income (loss) |
|
|
30,827 |
|
|
|
12,502 |
|
|
|
66,245 |
|
|
|
5,439 |
|
Net (losses) gains on sales of investment securities |
|
|
12,246 |
|
|
|
2,073 |
|
|
|
18,235 |
|
|
|
6,606 |
|
Impairment losses on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses on investment securities |
|
|
(88,114 |
) |
|
|
— |
|
|
|
(92,036 |
) |
|
|
(3,104 |
) |
Noncredit-related losses on securities not expected
to be sold (recognized in other comprehensive income) |
|
|
68,528 |
|
|
|
— |
|
|
|
68,528 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses on investment securities |
|
|
(19,586 |
) |
|
|
— |
|
|
|
(23,508 |
) |
|
|
(3,104 |
) |
Other income |
|
|
57,470 |
|
|
|
26,712 |
|
|
|
75,829 |
|
|
|
84,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
265,945 |
|
|
|
236,430 |
|
|
|
505,047 |
|
|
|
472,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
171,735 |
|
|
|
199,991 |
|
|
|
347,667 |
|
|
|
401,934 |
|
Outside data processing and other services |
|
|
39,266 |
|
|
|
30,186 |
|
|
|
71,698 |
|
|
|
64,547 |
|
Net occupancy |
|
|
24,430 |
|
|
|
26,971 |
|
|
|
53,618 |
|
|
|
60,214 |
|
Equipment |
|
|
21,286 |
|
|
|
25,740 |
|
|
|
41,696 |
|
|
|
49,534 |
|
Amortization of intangibles |
|
|
17,117 |
|
|
|
19,327 |
|
|
|
34,252 |
|
|
|
38,244 |
|
Professional services |
|
|
18,789 |
|
|
|
13,752 |
|
|
|
37,042 |
|
|
|
22,842 |
|
Marketing |
|
|
7,491 |
|
|
|
7,339 |
|
|
|
15,716 |
|
|
|
16,258 |
|
Automobile operating lease expense |
|
|
11,400 |
|
|
|
7,200 |
|
|
|
22,331 |
|
|
|
11,706 |
|
Telecommunications |
|
|
6,088 |
|
|
|
6,864 |
|
|
|
11,978 |
|
|
|
13,109 |
|
Printing and supplies |
|
|
4,151 |
|
|
|
4,757 |
|
|
|
7,723 |
|
|
|
10,379 |
|
Goodwill impairment |
|
|
4,231 |
|
|
|
— |
|
|
|
2,606,944 |
|
|
|
— |
|
Other expense |
|
|
13,998 |
|
|
|
35,676 |
|
|
|
59,086 |
|
|
|
59,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
|
339,982 |
|
|
|
377,803 |
|
|
|
3,309,751 |
|
|
|
748,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(137,845 |
) |
|
|
127,680 |
|
|
|
(2,822,844 |
) |
|
|
281,125 |
|
(Benefit) provision for income taxes |
|
|
(12,750 |
) |
|
|
26,328 |
|
|
|
(264,542 |
) |
|
|
52,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(125,095 |
) |
|
$ |
101,352 |
|
|
$ |
(2,558,302 |
) |
|
$ |
228,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on preferred shares |
|
|
57,451 |
|
|
|
11,151 |
|
|
|
116,244 |
|
|
|
11,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common shares |
|
$ |
(182,546 |
) |
|
$ |
90,201 |
|
|
$ |
(2,674,546 |
) |
|
$ |
217,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares — basic |
|
|
459,246 |
|
|
|
366,206 |
|
|
|
413,083 |
|
|
|
366,221 |
|
Average common shares — diluted |
|
|
459,246 |
|
|
|
367,234 |
|
|
|
413,083 |
|
|
|
387,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income — basic |
|
$ |
(0.40 |
) |
|
$ |
0.25 |
|
|
$ |
(6.47 |
) |
|
$ |
0.59 |
|
Net (loss) income — diluted |
|
|
(0.40 |
) |
|
|
0.25 |
|
|
|
(6.47 |
) |
|
|
0.59 |
|
Cash dividends declared |
|
|
0.0100 |
|
|
|
0.1325 |
|
|
|
0.0200 |
|
|
|
0.3975 |
|
See notes to unaudited condensed consolidated financial statements.
93
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
| |
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
| |
|
Series B |
|
|
Series A |
|
|
Common Stock |
|
|
Capital |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
| (in thousands) |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Surplus |
|
|
Shares |
|
|
Amount |
|
|
Loss |
|
|
Earnings |
|
|
Total |
|
| |
Six Months Ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
367,001 |
|
|
$ |
3,670 |
|
|
$ |
5,237,783 |
|
|
|
(739 |
) |
|
$ |
(14,391 |
) |
|
$ |
(49,611 |
) |
|
$ |
771,689 |
|
|
$ |
5,949,140 |
|
Cumulative effect of change in accounting principle
for fair value of assets and libilities, net of tax of ($803) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,491 |
|
|
|
1,491 |
|
Cumulative effect of changing measurement date
provisions for pension and post-retirement assets
and obligations, net of tax of $4,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,834 |
) |
|
|
(4,195 |
) |
|
|
(8,029 |
) |
Cumulative effect of change in accounting
principle for noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,950 |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period — as adjusted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
367,001 |
|
|
|
3,670 |
|
|
|
5,237,783 |
|
|
|
(739 |
) |
|
|
(14,391 |
) |
|
|
(53,445 |
) |
|
|
770,935 |
|
|
|
5,944,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228,420 |
|
|
|
228,420 |
|
Unrealized net losses on investment securities
arising during the period, net of reclassification
for net realized gains, net of tax of $74,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136,296 |
) |
|
|
|
|
|
|
(136,296 |
) |
Unrealized losses on cash flow hedging derivatives,
net of tax of $29,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,097 |
) |
|
|
|
|
|
|
(55,097 |
) |
Amortization included in net periodic benefit costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss, net of tax of ($562) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,043 |
|
|
|
|
|
|
|
1,043 |
|
Prior service costs, net of tax of ($169) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313 |
|
|
|
|
|
|
|
313 |
|
Transition obligation, net of tax of ($194) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock |
|
|
|
|
|
|
|
|
|
|
569 |
|
|
|
569,000 |
|
|
|
|
|
|
|
|
|
|
|
(18,151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
550,849 |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($0.3975 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(145,485 |
) |
|
|
(145,485 |
) |
Preferred Series A ($19.597 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,151 |
) |
|
|
(11,151 |
) |
Recognition of the fair value of
share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,194 |
|
Other share-based compensation activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
— |
|
|
|
(279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154 |
) |
|
|
(433 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(221 |
) |
|
|
(84 |
) |
|
|
(833 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
(1,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
— |
|
|
$ |
— |
|
|
|
569 |
|
|
$ |
569,000 |
|
|
|
367,020 |
|
|
$ |
3,670 |
|
|
$ |
5,226,326 |
|
|
|
(823 |
) |
|
$ |
(15,224 |
) |
|
$ |
(243,122 |
) |
|
$ |
842,563 |
|
|
$ |
6,383,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
1,398 |
|
|
$ |
1,308,667 |
|
|
|
569 |
|
|
$ |
569,000 |
|
|
|
366,972 |
|
|
$ |
3,670 |
|
|
$ |
5,322,428 |
|
|
|
(915 |
) |
|
$ |
(15,530 |
) |
|
$ |
(326,693 |
) |
|
$ |
365,599 |
|
|
$ |
7,227,141 |
|
Cumulative effect of change in accounting
principle for noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,765 |
|
|
|
1,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period — as adjusted |
|
|
1,398 |
|
|
|
1,308,667 |
|
|
|
569 |
|
|
|
569,000 |
|
|
|
366,972 |
|
|
|
3,670 |
|
|
|
5,322,428 |
|
|
|
(915 |
) |
|
|
(15,530 |
) |
|
|
(326,693 |
) |
|
|
367,364 |
|
|
|
7,228,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,558,302 |
) |
|
|
(2,558,302 |
) |
Cumulative effect of change in accounting
principle for other-than-temporarily
impaired debt securities, net of tax of $1,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,541 |
) |
|
|
3,541 |
|
|
|
— |
|
Non-credit-related impairment losses on debt
securities not expected to be sold, net of tax of
$23,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,543 |
) |
|
|
|
|
|
|
(44,543 |
) |
Unrealized net gains on investment securities
arising during the period, net of reclassification
for net realized gains, net of tax of ($69,827) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,716 |
|
|
|
|
|
|
|
128,716 |
|
Unrealized losses on cash flow hedging derivatives,
net of tax of $16,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,419 |
) |
|
|
|
|
|
|
(30,419 |
) |
Amortization included in net periodic benefit costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss, net of tax of ($1,221) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,267 |
|
|
|
|
|
|
|
2,267 |
|
Prior service costs, net of tax of ($177) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328 |
|
|
|
|
|
|
|
328 |
|
Transition obligation, net of tax of ($194) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,501,593 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,549 |
|
|
|
1,614 |
|
|
|
550,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552,464 |
|
Conversion of Preferred Series A stock |
|
|
|
|
|
|
|
|
|
|
(206 |
) |
|
|
(206,493 |
) |
|
|
41,072 |
|
|
|
411 |
|
|
|
262,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,035 |
) |
|
|
— |
|
Amortization of discount |
|
|
|
|
|
|
7,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,887 |
) |
|
|
— |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($0.02 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,167 |
) |
|
|
(9,167 |
) |
Preferred Series B ($25.00 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,952 |
) |
|
|
(34,952 |
) |
Preferred Series A ($42.50 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,370 |
) |
|
|
(17,370 |
) |
Recognition of the fair value of
share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,640 |
|
Other share-based compensation activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54 |
|
|
|
1 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(108 |
) |
|
|
(72 |
) |
Other |
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,480 |
) |
|
|
10 |
|
|
|
3,307 |
|
|
|
|
|
|
|
(461 |
) |
|
|
(334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
1,398 |
|
|
$ |
1,316,854 |
|
|
|
363 |
|
|
|
362,507 |
|
|
|
569,647 |
|
|
$ |
5,696 |
|
|
$ |
6,134,590 |
|
|
|
(905 |
) |
|
$ |
(12,223 |
) |
|
$ |
(273,525 |
) |
|
$ |
(2,313,377 |
) |
|
$ |
5,220,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
94
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| |
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
| |
Operating activities |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(2,558,302 |
) |
|
$ |
228,420 |
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Impairment of goodwill |
|
|
2,606,944 |
|
|
|
— |
|
Provision for credit losses |
|
|
705,544 |
|
|
|
209,463 |
|
Depreciation and amortization |
|
|
105,608 |
|
|
|
119,243 |
|
Change in current and deferred income taxes |
|
|
(153,958 |
) |
|
|
(7,176 |
) |
Net sales (purchases) of trading account securities |
|
|
843,849 |
|
|
|
(263,494 |
) |
Originations of loans held for sale |
|
|
(3,036,331 |
) |
|
|
(1,835,956 |
) |
Principal payments on and proceeds from loans held for sale |
|
|
2,830,066 |
|
|
|
1,911,111 |
|
Other, net |
|
|
205,147 |
|
|
|
(81,667 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,548,567 |
|
|
|
279,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Increase in interest bearing deposits in banks |
|
|
(232,753 |
) |
|
|
(10,743 |
) |
Proceeds from: |
|
|
|
|
|
|
|
|
Maturities and calls of investment securities |
|
|
293,663 |
|
|
|
242,465 |
|
Sales of investment securities |
|
|
1,614,172 |
|
|
|
341,988 |
|
Purchases of investment securities |
|
|
(3,068,943 |
) |
|
|
(1,087,439 |
) |
Net proceeds from sales of loans |
|
|
949,398 |
|
|
|
471,362 |
|
Net loan and lease activity, excluding sales |
|
|
722,076 |
|
|
|
(1,569,943 |
) |
Purchases of operating lease assets |
|
|
(119 |
) |
|
|
(149,963 |
) |
Proceeds from sale of operating lease assets |
|
|
4,599 |
|
|
|
15,791 |
|
Purchases of premises and equipment |
|
|
(21,096 |
) |
|
|
(31,122 |
) |
Proceeds from sales of other real estate |
|
|
21,312 |
|
|
|
28,084 |
|
Other, net |
|
|
2,700 |
|
|
|
11,377 |
|
|
|
|
|
|
|
|
Net cash provided by (used for) investing activities |
|
|
285,009 |
|
|
|
(1,738,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Increase in deposits |
|
|
1,232,510 |
|
|
|
378,758 |
|
Decrease in short-term borrowings |
|
|
(549,727 |
) |
|
|
(513,090 |
) |
Maturity/redemption of subordinated notes |
|
|
(136,942 |
) |
|
|
(50,000 |
) |
Proceeds from Federal Home Loan Bank advances |
|
|
201,083 |
|
|
|
953,894 |
|
Maturity/redemption of Federal Home Loan Bank advances |
|
|
(1,863,345 |
) |
|
|
(979,539 |
) |
Proceeds from issuance of long-term debt |
|
|
598,200 |
|
|
|
887,111 |
|
Maturity/redemption of long-term debt |
|
|
(514,989 |
) |
|
|
(236,824 |
) |
Dividends paid on preferred stock |
|
|
(56,905 |
) |
|
|
— |
|
Dividends paid on common stock |
|
|
(43,780 |
) |
|
|
(183,621 |
) |
Net proceeds from issuance of preferred stock |
|
|
— |
|
|
|
550,849 |
|
Net proceeds from issuance of common stock |
|
|
548,327 |
|
|
|
— |
|
Other, net |
|
|
(72 |
) |
|
|
(433 |
) |
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities |
|
|
(585,640 |
) |
|
|
807,105 |
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
1,247,936 |
|
|
|
(651,094 |
) |
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
844,668 |
|
|
|
2,009,246 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,092,604 |
|
|
$ |
1,358,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Income taxes refunded |
|
$ |
110,584 |
|
|
$ |
59,881 |
|
Interest paid |
|
|
485,439 |
|
|
|
702,140 |
|
Non-cash activities |
|
|
|
|
|
|
|
|
Common stock dividends accrued, paid in subsequent quarter |
|
|
5,062 |
|
|
|
38,626 |
|
Preferred stock dividends accrued, paid in subsequent quarter |
|
|
16,635 |
|
|
|
11,151 |
|
See notes to unaudited condensed consolidated financial statements.
95
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Huntington
Bancshares Incorporated (Huntington or the Company) reflect all adjustments consisting of normal
recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of
the consolidated financial position, the results of operations, and cash flows for the periods
presented. These unaudited condensed consolidated financial statements have been prepared
according to the rules and regulations of the Securities and Exchange Commission (SEC) and,
therefore, certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States (GAAP)
have been omitted. The Notes to Consolidated Financial Statements appearing in Huntington’s 2008
Annual Report on Form 10-K (2008 Form 10-K), which include descriptions of significant accounting
policies, as updated by the information contained in this report, should be read in conjunction
with these interim financial statements.
Certain amounts in the prior-period financial statements have been reclassified to conform to
the current period presentation.
For statement of cash flows purposes, cash and cash equivalents are defined as the sum of
“Cash and due from banks” and “Federal funds sold and securities purchased under resale
agreements.”
Note 2 – New Accounting Pronouncements
FASB Statement No. 141 (Revised 2008), Business Combinations (Statement No. 141R) – Statement No.
141R was issued in December 2007. The revised statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited exceptions specified
in the Statement. Statement No. 141R required prospective application for business combinations
consummated in fiscal years beginning on or after December 15, 2008. The Franklin restructuring
transaction described in Note 3 was accounted for under this standard.
FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an
amendment of ARB No. 51 (Statement No. 160) – Statement No. 160 was issued in December 2007. The
Statement requires that noncontrolling interests in subsidiaries be initially measured at fair
value and classified as a separate component of equity. The Statement is effective for fiscal years
beginning on or after December 15, 2008. The adoption of this new Statement did not have a material
impact on Huntington’s condensed consolidated financial statements.
FASB Statement No. 163, Accounting for Financial Guarantee Insurance Contracts – an interpretation
of FASB Statement No. 60 (Statement No. 163) – Statement No. 163 requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured event) when there is
evidence that credit deterioration has occurred in an insured financial obligation. This Statement
also clarifies how Statement No. 60 applies to financial guarantee insurance contracts, including
the recognition and measurement to be used to account for premium revenue and claim liabilities.
This Statement requires expanded disclosures about financial guarantee insurance contracts. This
Statement is effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. The adoption of this Statement did not have a material impact
on the Huntington’s condensed consolidated financial statements.
FASB Staff Position (FSP) FAS 157-4, Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly (FSP FAS 157-4). FSP FAS 157-4 was issued in April 2009. The FSP reaffirms the exit price
fair value measurement guidance in Statement No. 157 and also provides additional guidance for
estimating fair value in accordance with Statement No. 157 when the volume and level of activity
for the asset or liability have significantly decreased. This FSP is effective for interim
reporting periods ending after June 15, 2009. The adoption of this Statement did not have a
material impact on the Huntington’s condensed consolidated financial statements.
96
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP
FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 was issued in April 2009. This FSP amends
the other-than-temporary impairment (OTTI) guidance in GAAP for debt securities and includes
additional presentation and disclosure requirements for both debt and equity securities. This FSP
is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP FAS
115-2 and FAS 124-2 requires an adjustment to retained earnings and other comprehensive income
(OCI) in the period of adoption to reclassify non-credit related impairment to OCI for securities
that the Company does not intend to sell (and will not more likely than not be required to sell).
The adoption of this Statement resulted in the reclassification of $3.5 million (net of tax) from
retained earnings to OCI. (See Condensed Consolidated Statements of Shareholders’ Equity and Note
7).
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS
107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 was issued in April 2009. The FSP requires
disclosures about fair value of financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. This FSP was effective for interim
reporting periods ending after June 15, 2009 (See Note 11).
FSP FAS 132R-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132R-1.)
FSP FAS 132R-1 was issued in December 2008. This FSP requires additional disclosures about plan
assets in an employer’s defined benefit pension and other postretirement plans. This FSP is
effective for fiscal years ending after December 15, 2009.
FASB Statement No. 165, Subsequent Events (Statement No. 165) – Statement No. 165 establishes
general standards of accounting for and disclosure of subsequent events. Subsequent events are
events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. The Statement is effective for interim or annual periods ending after June
15, 2009. The impact of this new Statement was not material to Huntington’s consolidated financial
statements. Huntington has evaluated its subsequent events through August 10, 2009.
FASB Statement No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB
Statement No. 140 (Statement No. 166) – Statement 140 is the primary source of accounting guidance
for transfers of financial assets and securitization transactions. Statement No. 166 removes the
concept of a qualifying special purpose entity from Statement 140 and removes the exception from
applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities, to qualifying special-purpose entities. Many types of transferred financial assets that
would have been derecognized previously are no longer eligible for derecognition. This Statement
is effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2009, and early adoption is prohibited. The amendments apply prospectively to
transfers of financial assets occurring on or after the effective date. Management is currently
evaluating the impact that the Statement could have on the Company’s consolidated financial
statements.
FASB Statement No. 167, Amendments to FASB Interpretation No. 46R (Statement No. 167) – Statement
No. 167 amends the consolidation guidance applicable for variable interest entities (VIE).
Huntington will need to reconsider its previous Interpretation 46R conclusions including whether an
entity is a VIE, and whether Huntington is the VIE’s primary beneficiary. It is possible that
application of this revised guidance will change Huntington’s assessment of which entities with
which it is involved are VIEs and consolidation will be required. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2009,
and early adoption is prohibited. Management is currently evaluating the impact that the Statement
could have on the Company’s consolidated financial statements. However, based upon the current
regulatory requirements, Huntington anticipates the impact of adopting will decrease risk weighted
capital ratios between five and ten basis points.
FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles – a replacement of FASB Statement No. 162 – Statement No. 168
replaces the guidance in FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting
Principles (Statement No. 162), and identifies the FASB Accounting Standards Codification
(Codification) as the single source of authoritative U.S. Generally Accepted Accounting Principles
(GAAP) recognized by the FASB to be applied by nongovernmental entities. The Codification
reorganizes all previous GAAP pronouncements into roughly 90 accounting topics and displays all
topics using a consistent structure. All existing standards that were used to create the
Codification will be superseded, replacing the previous references to specific Statements of
Financial Accounting Standards (SFAS) with numbers used in the Codification’s structural
organization. Statement No. 168 is effective for interim and annual periods ending after September
15, 2009. After September 15, only one level of authoritative GAAP will exist, other than guidance
issued by
the Securities and Exchange Commission (SEC). All other accounting literature excluded from the
Codification will be considered non-authoritative. The adoption of the Codification does not have
a material impact on the Company’s condensed consolidated financial statements.
97
Note 3 – Loans and Leases
Franklin Credit Management relationship
Franklin Credit Management Corporation (Franklin) is a specialty consumer finance company
primarily engaged in servicing residential mortgage loans. Prior to March 31, 2009, Franklin owned
a portfolio of loans secured by first and second liens on 1-4 family residential properties. At
December 31, 2008, Huntington’s total loans outstanding to Franklin were $650.2 million, all of
which were on nonaccrual status. Additionally, the specific ALLL for the Franklin portfolio was
$130.0 million, resulting in a net exposure to Franklin at December 31, 2008 of $520.2 million.
On March 31, 2009, Huntington entered into a transaction with Franklin whereby a Huntington
wholly-owned REIT subsidiary (REIT) exchanged a non controlling amount of certain equity interests
for a 100% interest in Franklin Asset Merger Sub, LLC (Merger Sub), a wholly owned subsidiary of
Franklin. This was accomplished by merging Merger Sub into a wholly-owned subsidiary of REIT.
Merger Sub’s sole assets were two trust participation certificates evidencing 84% ownership rights
in a trust (New Trust) which holds all the underlying consumer loans and OREO that were formerly
collateral for the Franklin commercial loans. The equity interests provided to Franklin by REIT
were pledged by Franklin as collateral for the Franklin commercial loans.
New Trust is a variable interest entity under FASB Interpretation No 46R, Consolidation of
Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51 (FIN 46R),
and, as a result of Huntington’s 84% participation certificates, New Trust was consolidated into
Huntington’s financial results. As required by FIN 46R, the consolidation is treated as a business
combination under Statement No. 141R with the fair value of the equity interests issued to Franklin
representing the acquisition price. AICPA Statement of Position 03-3, Accounting for Certain Loans
or Debt Securities Acquired in a Transfer (SOP 03-3), provides guidance for accounting for acquired
loans, such as these, that have experienced a deterioration of credit quality at the time of
acquisition for which it is probable that the investor will be unable to collect all contractually
required payments.
Under SOP 03-3, the excess of cash flows expected at acquisition over the estimated fair value
is referred to as the accretable discount and is recognized in interest income over the remaining
life of the loan, or pool of loans, in situations where there is a reasonable expectation about the
timing and amount of cash flows expected to be collected. The difference between the contractually
required payments at acquisition and the cash flows expected to be collected at acquisition,
considering the impact of prepayments, is referred to as the nonaccretable discount. Subsequent
decreases to the expected cash flows will generally result in a charge to the provision for credit
losses and an increase to the allowance for loan and lease losses. Subsequent increases in cash
flows result in reversal of any nonaccretable discount (or allowance for loan and lease losses to
the extent any has been recorded) with a positive impact on interest income. The measurement of
undiscounted cash flows involves assumptions and judgments for credit risk, interest rate risk,
prepayment risk, default rates, loss severity, payment speeds, and collateral values. All of these
factors are inherently subjective and significant changes in the cash flow estimates over the life
of the loan can result.
At June 30, 2009, there were no additional credit losses recorded on the portfolio and no
adjustment to the accretable yield or nonaccretable yield was required.
The following table reflects the contractually required payments receivable, cash flows
expected to be collected, and fair value of the loans at the acquisition date:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
Loans |
|
|
OREO |
|
|
Total |
|
Contractually required payments including interest |
|
$ |
1,612,695 |
|
|
$ |
113,732 |
|
|
$ |
1,726,427 |
|
Less: nonaccretable difference |
|
|
(1,079,362 |
) |
|
|
(34,136 |
) |
|
|
(1,113,498 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows expected to be collected |
|
|
533,333 |
|
|
|
79,596 |
|
|
|
612,929 |
|
Less: accretable yield |
|
|
(39,781 |
) |
|
|
— |
|
|
|
(39,781 |
) |
|
|
|
|
|
|
|
|
|
|
Fair value of loans acquired |
|
$ |
493,552 |
|
|
$ |
79,596 |
|
|
$ |
573,148 |
|
|
|
|
|
|
|
|
|
|
|
98
The fair values of the acquired mortgage loans and OREO assets were based upon a market
participant model and calculated in accordance with FASB Statement No. 157, Fair Value Measurements
(Statement No. 157). Under this market participant model, expected cash flows for first-lien
mortgages were calculated based upon the net expected foreclosure proceeds of the collateral
underlying each mortgage loan. Updated appraisals or other indicators of value provided the basis
for estimating cash flows. Sales proceeds from the underlying collateral were estimated to be
received over a one to three year period, depending on the delinquency status of the loan.
Expected proceeds were reduced assuming housing price depreciation of 18%, 12%, and 0% over each
year of the next three years of expected collections, respectively. Interest cash flows were
estimated to be received for a limited time on each portfolio. The resulting cash flows were
discounted at an 18% rate of return. Limited value was assigned to all second-lien mortgages
because, after considering the house price depreciation rates above, little if any proceeds would
be realized.
The following table presents a rollforward of the accretable yield from the beginning of the
period to the end of the period:
| |
|
|
|
|
| |
|
Accretable |
|
| (in thousands) |
|
Yield |
|
Balance at December 31, 2008 |
|
$ |
— |
|
Impact of Franklin transaction on March 31, 2009 |
|
|
39,781 |
|
Additions |
|
|
— |
|
Accretion |
|
|
(750 |
) |
Reclassification from (to) nonaccretable difference |
|
|
— |
|
|
|
|
|
Balance at June 30, 2009 |
|
$ |
39,031 |
|
|
|
|
|
The following table reflects the outstanding balance of all contractually required
payments and carrying amounts of the acquired loans accounted for under SOP 03-3 at June 30, 2009:
| |
|
|
|
|
|
|
|
|
| |
|
June 30, 2009 |
|
| (in thousands) |
|
Carrying Value |
|
|
Outstanding Balance |
|
Residential mortgage |
|
$ |
415,029 |
|
|
$ |
740,850 |
|
Home equity |
|
|
56,944 |
|
|
|
829,994 |
|
|
|
|
|
|
|
|
Total |
|
$ |
471,973 |
|
|
$ |
1,570,844 |
|
|
|
|
|
|
|
|
At June 30, 2009, $127.4 million of the acquired current mortgage loans accrue interest while
$344.6 million were on nonaccrual. Management has concluded that it cannot reliably estimate the
timing of collection of cash flows for delinquent first and second lien mortgages, because the
majority of the expected cash flows for the delinquent portfolio will result from the foreclosure
and subsequent disposition of the underlying collateral supporting the loans.
The consolidation of New Trust at March 31, 2009 resulted in the recording of a $95.8 million
liability, representing the 16% of New Trust certificates not acquired by Huntington. These
certificates were retained by Franklin.
In accordance with Statement No. 141R, at March 31, 2009 Huntington has recorded a net
deferred tax asset of $159.9 million related to the difference between the tax basis and the book
basis in the acquired assets. Because the acquisition price, represented by the equity interests in
the Huntington wholly-owned subsidiary, was equal to the fair value of the 84% interest in the New
Trust participant certificate, no goodwill was created from the transaction. The recording of the
net deferred tax asset was a bargain purchase under Statement No. 141R, and was recorded as tax
benefit in the current period.
99
Single Family Home Builders
At June 30, 2009, December 31, 2008, and June 30, 2008, Huntington had $1.2 billion, $1.6
billion and $1.6 billion of commercial real estate loans to single family homebuilders, including
loans made to both middle market and small business homebuilders. The decline from December 31,
2008 was primarily the result of a reclassification of loans from commercial real estate to
commercial and industrial. Such loans represented 3%, 4%, and 4% of total loans and leases at June
30, 2009, December 31, 2008, and June 30, 2008 respectively. Of this portfolio at June 30, 2009,
69% were to finance projects currently under construction, 16% to finance land under development,
and 15% to finance land held for development.
The housing market across Huntington’s geographic footprint remained stressed, reflecting
relatively lower sales activity, declining prices, and excess inventories of houses to be sold,
particularly impacting borrowers in our eastern Michigan and northern Ohio regions. Further, a
portion of the loans extended to borrowers located within Huntington’s geographic regions was to
finance projects outside of our geographic regions.
Retail properties
Huntington’s portfolio of commercial real estate loans secured by retail properties totaled
$2.3 billion, $2.3 billion and $2.1 billion at June 30, 2009, December 31, 2008 and June 30, 2008
or approximately 6%, 6% and 5%of total loans and leases, at each respective date. Credit approval
in this loan segment is generally dependant on pre-leasing requirements, and net operating income
from the project must cover interest expense when the loan is fully funded.
The weakness of the economic environment in the Company’s geographic regions significantly
impacted the projects that secure the loans in this portfolio segment. Increased unemployment
levels compared with recent years, and the expectation that these levels will continue to increase
for the foreseeable future, are expected to adversely affect our borrowers’ ability to repay these
loans.
Home Equity and Residential Mortgage Loans (excluding loans in New Trust)
There is a potential for loan products to contain contractual terms that give rise to a
concentration of credit risk that may increase a lending institution’s exposure to risk of
nonpayment or realization. Examples of these contractual terms include loans that permit negative
amortization, a loan-to-value of greater than 100%, and option adjustable-rate mortgages.
Huntington does not offer mortgage loan products that contain these terms. Recent declines in
housing prices have likely eliminated a portion of the collateral for the home equity portfolio,
such that some loans originally underwritten at a LTV of less than 100% are currently at higher
than 100%. Home equity loans totaled $7.6 billion at June 30, 2009, $7.6 billion at December 31,
2008, and $7.4 billion at June 30, 2008, or 20%, 18%, and 18% of total loans at the end of each
respective period.
As part of the Company’s loss mitigation process, Huntington increased its efforts in 2008 and
2009 to re-underwrite, modify, or restructure loans when borrowers are experiencing payment
difficulties, and these loan restructurings are based on the borrower’s ability to repay the loan.
100
Note 4 – Investment Securities
Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years, and over 10
years) of investment securities at June 30, 2009, December 31, 2008, and June 30, 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
June 30, 2008 |
|
| |
|
Amortized |
|
|
|
|
|
|
Amortized |
|
|
|
|
|
|
Amortized |
|
|
|
|
| (in thousands of dollars) |
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
U.S. Treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
$ |
50,480 |
|
|
$ |
50,497 |
|
|
$ |
11,141 |
|
|
$ |
11,157 |
|
|
$ |
349 |
|
|
$ |
355 |
|
1-5 years |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
6-10 years |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Over 10 years |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Treasury |
|
|
50,480 |
|
|
|
50,497 |
|
|
|
11,141 |
|
|
|
11,157 |
|
|
|
349 |
|
|
|
355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
600 |
|
|
|
604 |
|
1-5 years |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,948 |
|
|
|
14,096 |
|
6-10 years |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
9,812 |
|
|
|
9,784 |
|
Over 10 years |
|
|
1,845,469 |
|
|
|
1,870,855 |
|
|
|
1,625,655 |
|
|
|
1,627,580 |
|
|
|
1,907,774 |
|
|
|
1,906,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed Federal agencies |
|
|
1,845,470 |
|
|
|
1,870,856 |
|
|
|
1,625,656 |
|
|
|
1,627,581 |
|
|
|
1,932,134 |
|
|
|
1,931,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary Liquidity Guarantee Program (TLGP) securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
1-5 years |
|
|
319,737 |
|
|
|
320,021 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
6-10 years |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Over 10 years |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TLGP securities |
|
|
319,737 |
|
|
|
320,021 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
2,206 |
|
|
|
2,271 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
1-5 years |
|
|
1,965,647 |
|
|
|
1,979,813 |
|
|
|
579,546 |
|
|
|
595,912 |
|
|
|
352,425 |
|
|
|
348,964 |
|
6-10 years |
|
|
7,018 |
|
|
|
7,189 |
|
|
|
7,954 |
|
|
|
8,328 |
|
|
|
— |
|
|
|
— |
|
Over 10 years |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other Federal agencies |
|
|
1,974,871 |
|
|
|
1,989,273 |
|
|
|
587,500 |
|
|
|
604,240 |
|
|
|
352,425 |
|
|
|
348,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. government backed
securities |
|
|
4,190,558 |
|
|
|
4,230,647 |
|
|
|
2,224,297 |
|
|
|
2,242,978 |
|
|
|
2,284,908 |
|
|
|
2,280,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
16 |
|
1-5 years |
|
|
1,165 |
|
|
|
1,191 |
|
|
|
51,890 |
|
|
|
54,184 |
|
|
|
18,903 |
|
|
|
19,187 |
|
6-10 years |
|
|
53,148 |
|
|
|
56,223 |
|
|
|
216,433 |
|
|
|
222,086 |
|
|
|
219,369 |
|
|
|
218,709 |
|
Over 10 years |
|
|
65,254 |
|
|
|
67,106 |
|
|
|
441,825 |
|
|
|
434,076 |
|
|
|
475,112 |
|
|
|
470,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total municipal securities |
|
|
119,567 |
|
|
|
124,520 |
|
|
|
710,148 |
|
|
|
710,346 |
|
|
|
713,400 |
|
|
|
708,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label CMO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
1-5 years |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
6-10 years |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Over 10 years |
|
|
603,099 |
|
|
|
510,503 |
|
|
|
674,506 |
|
|
|
523,515 |
|
|
|
725,896 |
|
|
|
686,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label CMO |
|
|
603,099 |
|
|
|
510,503 |
|
|
|
674,506 |
|
|
|
523,515 |
|
|
|
725,896 |
|
|
|
686,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
1-5 years |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
6-10 years |
|
|
132,205 |
|
|
|
134,270 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Over 10 years |
|
|
554,032 |
|
|
|
402,928 |
|
|
|
652,881 |
|
|
|
464,027 |
|
|
|
847,443 |
|
|
|
673,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset backed securities |
|
|
686,237 |
|
|
|
537,198 |
|
|
|
652,881 |
|
|
|
464,027 |
|
|
|
847,443 |
|
|
|
673,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
2,350 |
|
|
|
2,350 |
|
|
|
549 |
|
|
|
552 |
|
|
|
1,700 |
|
|
|
1,703 |
|
1-5 years |
|
|
4,451 |
|
|
|
4,513 |
|
|
|
6,546 |
|
|
|
6,563 |
|
|
|
6,200 |
|
|
|
6,145 |
|
6-10 years |
|
|
50,038 |
|
|
|
50,336 |
|
|
|
798 |
|
|
|
811 |
|
|
|
698 |
|
|
|
686 |
|
Over 10 years |
|
|
63 |
|
|
|
137 |
|
|
|
64 |
|
|
|
136 |
|
|
|
164 |
|
|
|
214 |
|
Non-marketable equity securities |
|
|
427,772 |
|
|
|
427,772 |
|
|
|
427,973 |
|
|
|
427,973 |
|
|
|
424,271 |
|
|
|
424,271 |
|
Marketable equity securities |
|
|
47,369 |
|
|
|
46,728 |
|
|
|
8,061 |
|
|
|
7,556 |
|
|
|
9,860 |
|
|
|
6,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other |
|
|
532,043 |
|
|
|
531,836 |
|
|
|
443,991 |
|
|
|
443,591 |
|
|
|
442,893 |
|
|
|
439,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
6,131,504 |
|
|
$ |
5,934,704 |
|
|
$ |
4,705,823 |
|
|
$ |
4,384,457 |
|
|
$ |
5,014,540 |
|
|
$ |
4,788,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
Other securities include $240.6 million of stock issued by the Federal Home Loan Bank of
Cincinnati, $45.7 million of stock issued by the Federal Home Loan Bank of Indianapolis, and $141.5
million of Federal Reserve Bank stock. Other securities also include corporate debt and marketable
equity securities. Huntington does not have any material equity positions in Federal National
Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or
Freddie Mac).
The following table provides gross unrealized gains and losses recognized in accumulated other
comprehensive income by investment category at June 30, 2009 and December 31, 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
|
|
| |
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Fair |
|
| (in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
$ |
50,480 |
|
|
$ |
17 |
|
|
$ |
— |
|
|
$ |
50,497 |
|
Federal Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
1,845,470 |
|
|
|
34,269 |
|
|
|
(8,883 |
) |
|
|
1,870,856 |
|
TLGP securities |
|
|
319,737 |
|
|
|
1,084 |
|
|
|
(800 |
) |
|
|
320,021 |
|
Other agencies |
|
|
1,974,871 |
|
|
|
15,666 |
|
|
|
(1,264 |
) |
|
|
1,989,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal agencies and
U.S. Government backed securities |
|
|
4,190,558 |
|
|
|
51,036 |
|
|
|
(10,947 |
) |
|
|
4,230,647 |
|
Municipal securities |
|
|
119,567 |
|
|
|
5,442 |
|
|
|
(489 |
) |
|
|
124,520 |
|
Private label CMO |
|
|
603,099 |
|
|
|
— |
|
|
|
(92,596 |
) |
|
|
510,503 |
|
Asset backed securities |
|
|
686,237 |
|
|
|
16,195 |
|
|
|
(165,234 |
) |
|
|
537,198 |
|
Other securities |
|
|
532,043 |
|
|
|
442 |
|
|
|
(649 |
) |
|
|
531,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
6,131,504 |
|
|
$ |
73,115 |
|
|
$ |
(269,915 |
) |
|
$ |
5,934,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
|
|
| |
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Fair |
|
| (in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
$ |
11,141 |
|
|
$ |
16 |
|
|
$ |
— |
|
|
$ |
11,157 |
|
Federal Agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
1,625,656 |
|
|
|
18,822 |
|
|
|
(16,897 |
) |
|
|
1,627,581 |
|
TLGP securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other agencies |
|
|
587,500 |
|
|
|
16,748 |
|
|
|
(8 |
) |
|
|
604,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal agencies and
U.S. Government backed securities |
|
|
2,224,297 |
|
|
|
35,586 |
|
|
|
(16,905 |
) |
|
|
2,242,978 |
|
Municipal securities |
|
|
710,148 |
|
|
|
13,897 |
|
|
|
(13,699 |
) |
|
|
710,346 |
|
Private label CMO |
|
|
674,506 |
|
|
|
— |
|
|
|
(150,991 |
) |
|
|
523,515 |
|
Asset backed securities |
|
|
652,881 |
|
|
|
— |
|
|
|
(188,854 |
) |
|
|
464,027 |
|
Other securities |
|
|
443,991 |
|
|
|
114 |
|
|
|
(514 |
) |
|
|
443,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
4,705,823 |
|
|
$ |
49,597 |
|
|
$ |
(370,963 |
) |
|
$ |
4,384,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
The following table provides detail on investment securities with unrealized losses aggregated
by investment category and length of time the individual securities have been in a continuous loss
position, at June 30, 2009 and December 31, 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 Months |
|
|
Over 12 Months |
|
|
Total |
|
| |
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
| (in thousands ) |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Federal agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
518,356 |
|
|
|
(8,883 |
) |
|
|
— |
|
|
|
— |
|
|
|
518,356 |
|
|
|
(8,883 |
) |
TLGP securities |
|
|
132,758 |
|
|
|
(800 |
) |
|
|
— |
|
|
|
— |
|
|
|
132,758 |
|
|
|
(800 |
) |
Other agencies |
|
|
551,296 |
|
|
|
(1,218 |
) |
|
|
6,830 |
|
|
|
(46 |
) |
|
|
558,126 |
|
|
|
(1,264 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal agencies and
US Government backed securities |
|
|
1,202,410 |
|
|
|
(10,901 |
) |
|
|
6,830 |
|
|
|
(46 |
) |
|
|
1,209,240 |
|
|
|
(10,947 |
) |
Municipal securities |
|
|
8,893 |
|
|
|
(103 |
) |
|
|
10,949 |
|
|
|
(386 |
) |
|
|
19,842 |
|
|
|
(489 |
) |
Private label CMO |
|
|
17,889 |
|
|
|
(2,536 |
) |
|
|
492,599 |
|
|
|
(90,060 |
) |
|
|
510,488 |
|
|
|
(92,596 |
) |
Asset backed securities |
|
|
17,561 |
|
|
|
(99 |
) |
|
|
217,425 |
|
|
|
(165,135 |
) |
|
|
234,986 |
|
|
|
(165,234 |
) |
Other securities |
|
|
38,913 |
|
|
|
(240 |
) |
|
|
2,541 |
|
|
|
(409 |
) |
|
|
41,454 |
|
|
|
(649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities |
|
$ |
1,285,666 |
|
|
$ |
(13,879 |
) |
|
$ |
730,344 |
|
|
$ |
(256,036 |
) |
|
$ |
2,016,010 |
|
|
$ |
(269,915 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 Months |
|
|
Over 12 Months |
|
|
Total |
|
| |
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
| (in thousands ) |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Federal agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
417,988 |
|
|
|
(16,897 |
) |
|
|
— |
|
|
|
— |
|
|
|
417,988 |
|
|
|
(16,897 |
) |
TLGP securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other agencies |
|
|
— |
|
|
|
— |
|
|
|
2,028 |
|
|
|
(8 |
) |
|
|
2,028 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal agencies and
US Government backed securities |
|
|
417,988 |
|
|
|
(16,897 |
) |
|
|
2,028 |
|
|
|
(8 |
) |
|
|
420,016 |
|
|
|
(16,905 |
) |
Municipal securities |
|
|
276,990 |
|
|
|
(6,951 |
) |
|
|
40,913 |
|
|
|
(6,748 |
) |
|
|
317,903 |
|
|
|
(13,699 |
) |
Private label CMO |
|
|
449,494 |
|
|
|
(130,914 |
) |
|
|
57,024 |
|
|
|
(20,077 |
) |
|
|
506,518 |
|
|
|
(150,991 |
) |
Asset backed securities |
|
|
61,304 |
|
|
|
(24,220 |
) |
|
|
164,074 |
|
|
|
(164,634 |
) |
|
|
225,378 |
|
|
|
(188,854 |
) |
Other securities |
|
|
1,132 |
|
|
|
(323 |
) |
|
|
1,149 |
|
|
|
(191 |
) |
|
|
2,281 |
|
|
|
(514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
securities |
|
$ |
1,206,908 |
|
|
$ |
(179,305 |
) |
|
$ |
265,188 |
|
|
$ |
(191,658 |
) |
|
$ |
1,472,096 |
|
|
$ |
(370,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities transactions are recognized on the trade date (the date the order to buy or sell is
executed). The amortized cost of sold securities is used to compute realized gains and losses.
Interest and dividends on securities, including amortization of premiums and accretion of discounts
using the effective interest method over the period to maturity, are included in interest income.
103
The following table is a summary of securities gains and losses for the three and six months
ended June 30, 2009 and 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Gross gains on sales of securities |
|
$ |
15,697 |
|
|
$ |
2,074 |
|
|
$ |
28,491 |
|
|
$ |
6,607 |
|
Gross (losses) on sales of securities |
|
|
(3,451 |
) |
|
|
(1 |
) |
|
|
(10,256 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on sales of securities |
|
|
12,246 |
|
|
|
2,073 |
|
|
|
18,235 |
|
|
|
6,606 |
|
Net other-than-temporary impairment recorded |
|
|
(19,586 |
) |
|
|
— |
|
|
|
(23,508 |
) |
|
|
(3,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities gain (loss) |
|
$ |
(7,340 |
) |
|
$ |
2,073 |
|
|
$ |
(5,273 |
) |
|
$ |
3,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huntington evaluates its investment securities portfolio on a quarterly basis for
other-than-temporary impairment (OTTI). For the 2009 second quarter, Huntington adopted FSP FAS
115-2 and FAS 124-2. Huntington assesses whether OTTI has occurred when the fair value of a debt
security is less than the amortized cost basis at the balance sheet date. Under these
circumstances, as required by the new FSP, OTTI is considered to have occurred (1) if Huntington
intends to sell the security; (2) if it is more likely than not Huntington will be required to sell
the security before recovery of its amortized cost basis; or (3) the present value of the expected
cash flows is not sufficient to recover the entire amortized cost basis.
For securities that Huntington does not expect to sell or it is not more likely than not to be
required to sell, credit-related OTTI, represented by the expected loss in principal, is recognized
in earnings, while noncredit-related OTTI is recognized in other comprehensive income (OCI). For
securities which Huntington does expect to sell, all OTTI is recognized in earnings.
Noncredit-related OTTI results from other factors, including increased liquidity spreads and
extension of the security. Presentation of OTTI is made in the income statement on a gross basis
with a reduction for the amount of OTTI recognized in OCI. Noncredit-related OTTI recognized in
earnings prior to April 1, 2009 of $3.5 million (net of tax) was reclassified from retained
earnings to accumulated OCI as a cumulative effect adjustment.
For the security types discussed below, we applied the criteria of FSP FAS 115-2 and 124-2.
Alt-A mortgage-backed and private-label collateralized mortgage obligation (CMO)
securities represent securities collateralized by first-lien residential mortgage loans. The
securities were priced with the assistance of an outside third-party consultant using a discounted
cash flow approach and the independent third-party’s proprietary pricing model. The model used
inputs such as estimated prepayment speeds, losses, recoveries, default rates that were implied by
the underlying performance of collateral in the structure or similar structures, discount rates
that were implied by market prices for similar securities, collateral structure types, and house
price depreciation/appreciation rates that were based upon macroeconomic forecasts.
Pooled-trust-preferred securities represent collateralized debt obligations (CDOs)
backed by a pool of debt securities issued by financial institutions. The collateral generally
consisted of trust-preferred securities and subordinated debt securities issued by banks, bank
holding companies, and insurance companies. A full cash flow analysis was used to estimate fair
values and assess impairment for each security within this portfolio. We engaged a third party
specialist with direct industry experience in pooled trust preferred securities valuations to
provide assistance in estimating the fair value and expected cash flows for each security in this
portfolio. Relying on cash flows was necessary because there was a lack of observable transactions
in the market and many of the original sponsors or dealers for these securities were no longer able
to provide a fair value that was compliant with FASB Statement No. 157, Fair Value Measurements.
104
For the three months ended June 30, 2009, the following table summarizes by debt security
type, total OTTI losses, OTTI losses included in OCI, and OTTI recognized in the income statement.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Alt-A |
|
|
Pooled- |
|
|
Private |
|
|
|
|
| (in thousands) |
|
Mortgage-backed |
|
|
Trust-Preferred |
|
|
Label CMO |
|
|
Total |
|
Total OTTI losses (unrealized and realized) |
|
$ |
(5,980 |
) |
|
$ |
(13,479 |
) |
|
$ |
(68,655 |
) |
|
$ |
(88,114 |
) |
Unrealized OTTI recognized in OCI |
|
|
99 |
|
|
|
12,228 |
|
|
|
56,201 |
|
|
|
68,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings |
|
$ |
(5,881 |
) |
|
$ |
(1,251 |
) |
|
$ |
(12,454 |
) |
|
$ |
(19,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table displays the cumulative credit component of OTTI recognized in earnings on
debt securities held by Huntington for the three months ended June 30, 2009 is as follows:
| |
|
|
|
|
| (in thousands) |
|
Total |
|
Balance, March 31, 2009 |
|
$ |
— |
|
Credit component of other-than-temporary
impairment not reclassified to other
comprehensive income in conjunction with the
cumulative effect transition adjustment |
|
|
25 |
|
Additions for the credit component on debt
securities in which other-than-temporary
impairment was not previously recognized |
|
|
19,586 |
|
|
|
|
|
Balance, June 30, 2009 |
|
$ |
19,611 |
|
|
|
|
|
As of June 30, 2009, management has evaluated all other investment securities with unrealized
losses and all non-marketable securities for impairment. The unrealized losses were primarily the
result of wider liquidity spreads on asset-backed securities and, additionally, increased market
volatility on non-agency mortgage and asset-backed securities that are backed by certain mortgage
loans. The fair values of these assets have been impacted by various market conditions. In
addition, the expected average lives of the asset-backed securities backed by trust preferred
securities have been extended, due to changes in the expectations of when the underlying securities
would be repaid. The contractual terms and/or cash flows of the investments do not permit the
issuer to settle the securities at a price less than the amortized cost. Huntington has reviewed
its asset-backed portfolio with independent third parties and does not believe there is additional
OTTI from these securities other than what has already been recorded. Huntington does not intend to
sell, nor does it believe it will be required to sell these securities until the fair value is
recovered, which may be maturity and, therefore, does not consider them to be
other-than-temporarily impaired at June 30, 2009.
Note 5 – Loan Sales and Securitizations
Residential Mortgage Loans
For each of the three months ended June 30, 2009 and 2008, Huntington sold $1.2 billion of
residential mortgage loans with servicing retained, resulting in net pre-tax gains of $27.1 million
and $12.3 million, respectively, recorded in mortgage banking income. During the first six months
of 2009 and 2008, sales of residential mortgage loans with servicing retained totaled $2.7 billion
and $1.9 billion, respectively, resulting in net pre-tax gains of $55.5 million and $16.0 million,
respectively.
A mortgage servicing right (MSR) is established only when the servicing is contractually
separated from the underlying mortgage loans by sale or securitization of the loans with servicing
rights retained.
At initial recognition, the MSR asset is established at its fair value using assumptions that
are consistent with assumptions used to estimate the fair value of the total MSR portfolio.
Subsequent to initial capitalization, MSR assets are adjusted using the fair value method if the
Company will engage in actively hedging the asset or adjusted using the amortization method if no
active hedging will be performed. MSRs are included in accrued income and other assets in the
Company’s condensed consolidated balance sheet. Any increase or decrease in the fair value or
amortized cost of MSRs carried under the fair value method during the period is recorded as an
increase or decrease in mortgage banking income, which is reflected in non-interest income in the
consolidated statements of income.
105
The following tables summarize the changes in MSRs recorded using either the fair value method
or the amortization method during the three months and six months ended June 30, 2009 and 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
MSRs recorded using the fair value method |
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Fair value, beginning of period |
|
$ |
167,838 |
|
|
$ |
191,806 |
|
|
$ |
167,438 |
|
|
$ |
207,894 |
|
New servicing assets created |
|
|
— |
|
|
|
16,211 |
|
|
|
23,074 |
|
|
|
25,130 |
|
Change in fair value during the period due to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time decay (1) |
|
|
(1,705 |
) |
|
|
(1,936 |
) |
|
|
(3,328 |
) |
|
|
(3,601 |
) |
Payoffs (2) |
|
|
(12,646 |
) |
|
|
(5,088 |
) |
|
|
(23,308 |
) |
|
|
(10,337 |
) |
Changes in valuation inputs or assumptions (3) |
|
|
46,551 |
|
|
|
39,031 |
|
|
|
36,162 |
|
|
|
20,938 |
|
Other changes |
|
|
(3,106 |
) |
|
|
— |
|
|
|
(3,106 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
196,932 |
|
|
$ |
240,024 |
|
|
$ |
196,932 |
|
|
$ |
240,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Represents decrease in value due to passage of time, including the impact
from both regularly scheduled loan principal payments and partial loan paydowns. |
| |
| (2) |
|
Represents decrease in value associated with loans that paid off during the
period. |
| |
| (3) |
|
Represents change in value resulting primarily from market-driven changes
in interest rates. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
MSRs recorded using the amortization method |
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Carrying value, beginning of period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
New servicing assets created |
|
|
22,444 |
|
|
|
— |
|
|
|
22,444 |
|
|
|
— |
|
Amortization |
|
|
(94 |
) |
|
|
— |
|
|
|
(94 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value, end of period |
|
$ |
22,350 |
|
|
$ |
— |
|
|
$ |
22,350 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSRs do not trade in an active, open market with readily observable prices. While sales of
MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the
fair value of MSRs is estimated using a discounted future cash flow model. The model considers
portfolio characteristics, contractually specified servicing fees and assumptions related to
prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other
economic factors. Changes in the assumptions used may have a significant impact on the valuation
of MSRs.
A summary of key assumptions and the sensitivity of the MSR value at June 30, 2009 to changes
in these assumptions follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Decline in fair value |
|
| |
|
|
|
|
|
due to |
|
| |
|
|
|
|
|
10% |
|
|
20% |
|
| |
|
|
|
|
|
adverse |
|
|
adverse |
|
| (in thousands) |
|
Actual |
|
|
change |
|
|
change |
|
Constant pre-payment rate |
|
|
17.60 |
% |
|
$ |
(7,788 |
) |
|
$ |
(14,894 |
) |
Spread over forward interest rate swap rates |
|
446 |
bps |
|
|
(3,901 |
) |
|
|
(7,803 |
) |
MSR values are very sensitive to movements in interest rates as expected future net servicing
income depends on the projected outstanding principal balances of the underlying loans, which can
be greatly impacted by the level of prepayments. The Company hedges against changes in MSR fair
value attributable to changes in interest rates through a combination of derivative instruments and
trading securities.
Total servicing fees included in mortgage banking income amounted to $12.0 million and $11.2
million for the three months ended June 30, 2009 and 2008, respectively. For the six months ended
June 30, 2009 and 2008, servicing fees totaled $23.9 million and $22.1 million, respectively.
106
Automobile Loans and Leases
During the first quarter of 2009, Huntington transferred $1.0 billion automobile loans and
leases to a trust in a securitization transaction. The securitization qualified for sale
accounting under Statement No. 140. Huntington retained $210.9 million of the related securities
and recorded a $47.1 million retained residual interest as a result of the transaction. Subsequent
to the transaction, Huntington sold $78.4 million of these securities in the second quarter of
2009. These amounts were recorded as investment securities on Huntington’s condensed consolidated
balance sheet. Huntington also recorded a $5.9 million loss in other noninterest income on the
condensed consolidated statement of income and recorded a $19.5 million servicing asset in accrued
income and other assets associated with this transaction.
Automobile loan servicing rights are accounted for under the amortization method. A servicing
asset is established at fair value at the time of the sale. The servicing asset is then amortized
against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair
value as determined by calculating the present value of expected net future cash flows. The
primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan
pools. Valuation calculations rely on the predicted payoff assumption and, if actual payoff is
quicker than expected, then future value would be impaired.
Changes in the carrying value of automobile loan servicing rights for the three months and six
months ended June 30, 2009 and 2008, and the fair value at the end of each period were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Carrying value, beginning of period |
|
$ |
20,051 |
|
|
$ |
3,248 |
|
|
$ |
1,656 |
|
|
$ |
4,099 |
|
New servicing assets |
|
|
— |
|
|
|
— |
|
|
|
19,538 |
|
|
|
— |
|
Amortization |
|
|
(2,628 |
) |
|
|
(604 |
) |
|
|
(3,771 |
) |
|
|
(1,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value, end of period |
|
$ |
17,423 |
|
|
$ |
2,644 |
|
|
$ |
17,423 |
|
|
$ |
2,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
18,401 |
|
|
$ |
3,626 |
|
|
$ |
18,401 |
|
|
$ |
3,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huntington has retained servicing responsibilities on sold automobile loans and receives
annual servicing fees from 0.55% to 1.00% and other ancillary fees of approximately 0.40% to 0.50%
of the outstanding loan balances. Servicing income, net of amortization of capitalized servicing
assets, amounted to $1.6 million and $1.9 million for the three months ended June 30, 2009 and
2008, respectively. For the six months ended June 30, 2009 and 2008, servicing income, net of
amortization of capitalized servicing assets, was $2.8 million and $4.0 million, respectively.
Note 6 – Goodwill and Other Intangible Assets
During the second quarter of 2009, Huntington reorganized its internal reporting structure.
The Regional Banking reporting unit, which through March 31, 2009 had been managed geographically,
is now managed on a product segment approach. Regional Banking was divided into Commercial
Banking, Retail and Business Banking, and Commercial Real Estate segments. Regional Banking
goodwill was assigned to the new reporting units affected using a relative fair value allocation.
Auto Finance and Dealer Services (AFDS), Private Financial Group (PFG), and Treasury / Other
remained essentially unchanged. A rollforward of goodwill including the reallocation noted above,
was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Retail & |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Regional |
|
|
Business |
|
|
Commercial |
|
|
Commercial |
|
|
|
|
|
|
Treasury/ |
|
|
Huntington |
|
| (in thousands) |
|
Banking |
|
|
Banking |
|
|
Banking |
|
|
Real Estate |
|
|
PFG |
|
|
Other |
|
|
Consolidated |
|
Balance, January 1, 2009 |
|
$ |
2,888,344 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
153,178 |
|
|
$ |
13,463 |
|
|
$ |
3,054,985 |
|
Impairment, March 31, 2009 |
|
|
(2,573,818 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(28,895 |
) |
|
|
— |
|
|
|
(2,602,713 |
) |
Reallocation of goodwill |
|
|
(314,526 |
) |
|
|
309,518 |
|
|
|
5,008 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 1, 2009 |
|
|
— |
|
|
|
309,518 |
|
|
|
5,008 |
|
|
|
— |
|
|
|
124,283 |
|
|
|
13,463 |
|
|
|
452,272 |
|
Impairment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,231 |
) |
|
|
(4,231 |
) |
Other adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(162 |
) |
|
|
(162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009 |
|
$ |
— |
|
|
$ |
309,518 |
|
|
$ |
5,008 |
|
|
$ |
— |
|
|
$ |
124,283 |
|
|
$ |
9,070 |
|
|
$ |
447,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
In accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets (Statement No.
142), goodwill is not amortized but is evaluated for impairment on an annual basis at October 1st
of each year or whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. During the first quarter of 2009, Huntington experienced a sustained decline
in its stock price, which was primarily attributable to the continuing economic slowdown and
increased market concern surrounding financial institutions’ credit risks and capital positions as
well as uncertainty related to increased regulatory supervision and intervention. Huntington
determined that these changes would more likely than not reduce the fair value of certain reporting
units below their carrying amounts. Therefore, Huntington performed a goodwill impairment test,
which resulted in a goodwill impairment charge of $2,603 million in the first quarter of 2009.
An impairment
charge of $4.3 million was recorded related to the sale of a small payments-related business
completed in July 2009. Huntington concluded that no other goodwill impairment was required during
the 2009 second quarter.
At June 30, 2009, December 31, 2008, and June 30, 2008, Huntington’s other intangible assets
consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
| (in thousands) |
|
Carrying Amount |
|
|
Amortization |
|
|
Carrying Value |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible |
|
$ |
373,300 |
|
|
$ |
(139,826 |
) |
|
$ |
233,474 |
|
Customer relationship |
|
|
104,574 |
|
|
|
(21,399 |
) |
|
|
83,175 |
|
Other |
|
|
29,327 |
|
|
|
(23,509 |
) |
|
|
5,818 |
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets |
|
$ |
507,201 |
|
|
$ |
(184,734 |
) |
|
$ |
322,467 |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible |
|
$ |
373,300 |
|
|
$ |
(111,163 |
) |
|
$ |
262,137 |
|
Customer relationship |
|
|
104,574 |
|
|
|
(16,776 |
) |
|
|
87,798 |
|
Other |
|
|
29,327 |
|
|
|
(22,559 |
) |
|
|
6,768 |
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets |
|
$ |
507,201 |
|
|
$ |
(150,498 |
) |
|
$ |
356,703 |
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible |
|
$ |
373,300 |
|
|
$ |
(78,610 |
) |
|
$ |
294,690 |
|
Customer relationship |
|
|
104,574 |
|
|
|
(11,926 |
) |
|
|
92,648 |
|
Other |
|
|
29,177 |
|
|
|
(21,265 |
) |
|
|
7,912 |
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets |
|
$ |
507,051 |
|
|
$ |
(111,801 |
) |
|
$ |
395,250 |
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization expense of other intangible assets for the remainder of 2009 and the
next five years are as follows:
| |
|
|
|
|
| |
|
Amortization |
|
| (in thousands) |
|
Expense |
|
| 2009 |
|
$ |
34,157 |
|
2010 |
|
|
60,455 |
|
2011 |
|
|
53,310 |
|
2012 |
|
|
46,066 |
|
2013 |
|
|
40,429 |
|
2014 |
|
|
35,744 |
|
108
Note 7 – Other Comprehensive Income
The components of Huntington’s other comprehensive income in the three and six months ended
June 30, 2009 and 2008, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Cumulative effect of change in accounting principle for other-than-temporarily
impaired debt securities |
|
$ |
(5,448 |
) |
|
$ |
— |
|
|
$ |
(5,448 |
) |
|
$ |
— |
|
Related tax benefit |
|
|
1,907 |
|
|
|
— |
|
|
|
1,907 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
(3,541 |
) |
|
|
— |
|
|
|
(3,541 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-credit-related impairment losses on debt securities not expected to be sold |
|
|
(68,528 |
) |
|
|
— |
|
|
|
(68,528 |
) |
|
|
— |
|
Related tax benefit (expense) |
|
|
23,985 |
|
|
|
— |
|
|
|
23,985 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
(44,543 |
) |
|
|
— |
|
|
|
(44,543 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (losses) gains on debt securities available for sale
arising during the period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net (losses) gains |
|
|
118,702 |
|
|
|
(97,886 |
) |
|
|
193,405 |
|
|
|
(203,997 |
) |
Related tax benefit (expense) |
|
|
(41,642 |
) |
|
|
34,597 |
|
|
|
(68,029 |
) |
|
|
72,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
77,060 |
|
|
|
(63,289 |
) |
|
|
125,376 |
|
|
|
(131,891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for net losses (gains) losses included in net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized net gains (losses) |
|
|
7,340 |
|
|
|
(2,073 |
) |
|
|
5,273 |
|
|
|
(3,502 |
) |
Related tax (expense) benefit |
|
|
(2,569 |
) |
|
|
726 |
|
|
|
(1,846 |
) |
|
|
1,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
4,771 |
|
|
|
(1,347 |
) |
|
|
3,427 |
|
|
|
(2,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized holding (losses) gains on debt securities available for sale
arising during the period, net of reclassification adjustment for net (losses) gains
included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
37,288 |
|
|
|
(64,636 |
) |
|
|
84,260 |
|
|
|
(134,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (losses) gains on equity securities available for sale
arising during the period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net (losses) gains |
|
|
309 |
|
|
|
(3,502 |
) |
|
|
(135 |
) |
|
|
(3,276 |
) |
Related tax benefit (expense) |
|
|
(108 |
) |
|
|
1,226 |
|
|
|
48 |
|
|
|
1,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
201 |
|
|
|
(2,276 |
) |
|
|
(87 |
) |
|
|
(2,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for net losses (gains) losses included in net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized net gains (losses) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Related tax (expense) benefit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized holding (losses) gains on equity securities available for sale
arising during the period, net of reclassification adjustment for net gains included
in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
201 |
|
|
|
(2,276 |
) |
|
|
(87 |
) |
|
|
(2,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses on derivatives used in cash flow hedging relationships
arising during the period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net losses |
|
|
(45,173 |
) |
|
|
(84,386 |
) |
|
|
(46,799 |
) |
|
|
(84,765 |
) |
Related tax benefit |
|
|
15,811 |
|
|
|
29,535 |
|
|
|
16,380 |
|
|
|
29,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
(29,362 |
) |
|
|
(54,851 |
) |
|
|
(30,419 |
) |
|
|
(55,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of changing measurement date provisions for pension and
post-retirement assets and obligations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,898 |
) |
Related tax benefit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization included in net periodic benefit costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
|
1,744 |
|
|
|
802 |
|
|
|
3,488 |
|
|
|
1,605 |
|
Prior service cost |
|
|
252 |
|
|
|
241 |
|
|
|
505 |
|
|
|
482 |
|
Transition obligation |
|
|
277 |
|
|
|
277 |
|
|
|
554 |
|
|
|
554 |
|
Related tax benefit (expense) |
|
|
(795 |
) |
|
|
(462 |
) |
|
|
(1,592 |
) |
|
|
(925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
1,478 |
|
|
|
858 |
|
|
|
2,955 |
|
|
|
1,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
$ |
6,064 |
|
|
$ |
(120,905 |
) |
|
$ |
53,168 |
|
|
$ |
(193,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
109
Activity in accumulated other comprehensive income for each of the six month periods
ended June 30, 2009 and 2008, was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Unrealized gains |
|
|
Amortization |
|
|
|
|
| |
|
Unrealized gains |
|
|
Unrealized gains |
|
|
and losses on cash |
|
|
included |
|
|
|
|
| |
|
and losses on debt |
|
|
and losses on |
|
|
flow hedging |
|
|
in net periodic |
|
|
|
|
| (in thousands) |
|
securities |
|
|
equity securities |
|
|
derivatives |
|
|
benefit costs |
|
|
Total |
|
Balance, December 31, 2007 |
|
$ |
(10,001 |
) |
|
$ |
(10 |
) |
|
$ |
4,553 |
|
|
$ |
(44,153 |
) |
|
$ |
(49,611 |
) |
Cumulative effect of change in measurement
date provisions for pension and
post-retirement assets and obligations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,834 |
) |
|
|
(3,834 |
) |
Period change |
|
|
(134,167 |
) |
|
|
(2,129 |
) |
|
|
(55,097 |
) |
|
|
1,716 |
|
|
|
(189,677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
$ |
(144,168 |
) |
|
$ |
(2,139 |
) |
|
$ |
(50,544 |
) |
|
$ |
(46,271 |
) |
|
$ |
(243,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
(207,427 |
) |
|
$ |
(329 |
) |
|
$ |
44,638 |
|
|
$ |
(163,575 |
) |
|
$ |
(326,693 |
) |
Cumulative effect of change in accounting
principle for other-than-temporarily
impaired debt securities |
|
|
(3,541 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,541 |
) |
Period change |
|
|
84,260 |
(1) |
|
|
(87 |
) |
|
|
(30,419 |
) |
|
|
2,955 |
|
|
|
56,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009 |
|
$ |
(126,708 |
) |
|
$ |
(416 |
) |
|
$ |
14,219 |
|
|
$ |
(160,620 |
) |
|
$ |
(273,525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
includes $68.5 million of unrealized losses in which other-than temporary impairment
has been recognized. |
Note 8 – Shareholders’ Equity
Issuance of Common Stock
During the 2009 second quarter, Huntington completed an offering of 103.5 million shares of
its common stock at a price to the public of $3.60 per share, or $372.6 million in aggregate gross
proceeds.
Also, during the 2009 second quarter, Huntington completed two separate “discretionary equity
issuance” programs. These programs allowed the Company to take advantage of market opportunities
to issue a total of 56.9 million new shares of common stock worth a total of $195.9 million. Sales
of the common shares were made through ordinary brokers’ transactions on the NASDAQ Global Select
Market or otherwise at the prevailing market prices.
Conversion of Convertible Preferred Stock
In 2008, Huntington completed the public offering of 569,000 shares of 8.50% Series A
Non-Cumulative Perpetual Convertible Preferred Stock (Series A Preferred Stock) with a liquidation
preference of $1,000 per share, resulting in an aggregate liquidation preference of $569 million.
During the 2009 first and second quarters, Huntington entered into agreements with various
institutional investors exchanging shares of common stock for shares of the Series A Preferred
Stock held by the institutional investors. The table below provides details of the aggregate
activities:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First |
|
|
Second |
|
|
|
|
| (in thousands) |
|
Quarter 2009 |
|
|
Quarter 2009 |
|
|
Total |
|
Preferred shares exchanged |
|
|
114 |
|
|
|
92 |
|
|
|
206 |
|
Common shares issued: |
|
|
|
|
|
|
|
|
|
|
|
|
At stated convertible option |
|
|
9,547 |
|
|
|
7,730 |
|
|
|
17,277 |
|
As deemed
dividend |
|
|
15,044 |
|
|
|
8,751 |
|
|
|
23,795 |
|
|
|
|
|
|
|
|
|
|
|
Total common shares issued: |
|
|
24,591 |
|
|
|
16,481 |
|
|
|
41,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend |
|
$ |
27,742 |
|
|
$ |
28,293 |
|
|
$ |
56,035 |
|
110
Each share of the Series A Preferred Stock is non-voting and may be converted at any
time, at the option of the holder, into 83.668 shares of common stock of Huntington, which
represents an approximate initial conversion price of $11.95 per share of common stock (for a total
of approximately 30.3 million shares at June 30, 2009). The conversion rate and conversion price
will be subject to adjustments in certain circumstances. On or after April 15, 2013, at the option
of Huntington, the Series A Preferred Stock will be subject to mandatory conversion into
Huntington’s common stock at the prevailing conversion rate, if the closing price of Huntington’s
common stock exceeds 130% of the conversion price for 20 trading days during any 30 consecutive
trading day period.
Troubled Asset Relief Program (TARP)
In 2008, Huntington received $1.4 billion of equity capital by issuing to the U.S. Department
of Treasury 1.4 million shares of Huntington’s 5.00% Series B Non-voting Cumulative Preferred
Stock, par value $0.01 per share with a liquidation preference of $1,000 per share, and a ten-year
warrant to purchase up to 23.6 million shares of Huntington’s common stock, par value $0.01 per
share, at an exercise price of $8.90 per share. The proceeds received were allocated to the
preferred stock and additional paid-in-capital based on their relative fair values. The resulting
discount on the preferred stock is amortized against retained earnings and is reflected in
Huntington’s consolidated statement of income as “Dividends on preferred shares”, resulting in
additional dilution to Huntington’s earnings per share. The warrants are immediately exercisable,
in whole or in part, over a term of 10 years. The warrants are included in Huntington’s diluted
average common shares outstanding using the treasury stock method. Both the preferred securities
and warrants were accounted for as additions to Huntington’s regulatory Tier 1 and Total capital.
The Series B Preferred Stock is not mandatorily redeemable and will pay cumulative dividends
at a rate of 5% per year for the first five years and 9% per year thereafter. Huntington cannot
redeem the preferred securities during the first three years after issuance except with the
proceeds from a “qualified equity offering.” Any redemption requires Federal Reserve approval. The
Series B Preferred Stock rank on equal priority with Huntington’s existing 8.50% Series A
Non-Cumulative Perpetual Convertible Preferred Stock.
A company that participates in the TARP must adopt certain standards for executive compensation,
including (a) prohibiting “golden parachute” payments as defined in the Emergency Economic
Stabilization Act of 2008 (EESA) to senior executive officers; (b) requiring recovery of any
compensation paid to senior executive officers based on criteria that is later proven to be
materially inaccurate; (c) prohibiting incentive compensation that encourages unnecessary and
excessive risks that threaten the value of the financial institution, and (d) accepting
restrictions on the payment of dividends and the repurchase of common stock. As of June 30, 2009,
Huntington is in compliance with all TARP standards and restrictions.
111
Note 9 – (Loss) Earnings per Share
Basic loss or earnings per share is the amount of (loss) earnings (adjusted for dividends
declared on preferred stock) available to each share of common stock outstanding during the
reporting period. Diluted (loss) earnings per share is the amount of loss or earnings available to
each share of common stock outstanding during the reporting period adjusted to include the effect
of potentially dilutive common shares. Potentially dilutive common shares include incremental
shares issued for stock options, restricted stock units, distributions from deferred compensation
plans, and the conversion of the Company’s convertible preferred stock and warrants (See Note 8).
Potentially dilutive common shares are excluded from the computation of diluted earnings per share
in periods in which the effect would be antidilutive. For diluted (loss) earnings per share, net
(loss) income available to common shares can be affected by the conversion of the Company’s
convertible preferred stock. Where the effect of this conversion would be dilutive, net (loss)
income available to common shareholders is adjusted by the associated preferred dividends. The
calculation of basic and diluted (loss) earnings per share for the three months and six months
ended June 30, 2009 and 2008, was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in thousands, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Basic (loss) earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(125,095 |
) |
|
$ |
101,352 |
|
|
$ |
(2,558,302 |
) |
|
$ |
228,420 |
|
Preferred Class B and Class A stock dividends |
|
|
(25,179 |
) |
|
|
(11,151 |
) |
|
|
(52,322 |
) |
|
$ |
(11,151 |
) |
Amortization of discount on issuance of Preferred Class B stock |
|
|
(3,979 |
) |
|
|
— |
|
|
|
(7,887 |
) |
|
|
|
|
Deemed dividend on conversion of Preferred Class A stock |
|
|
(28,293 |
) |
|
|
— |
|
|
|
(56,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders |
|
$ |
(182,546 |
) |
|
$ |
90,201 |
|
|
$ |
(2,674,546 |
) |
|
$ |
217,269 |
|
Average common shares issued and outstanding |
|
|
459,246 |
|
|
|
366,206 |
|
|
|
413,083 |
|
|
|
366,221 |
|
Basic (loss) earnings per common share |
|
$ |
(0.40 |
) |
|
$ |
0.25 |
|
|
$ |
(6.47 |
) |
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders |
|
$ |
(182,546 |
) |
|
$ |
90,201 |
|
|
$ |
(2,674,546 |
) |
|
$ |
217,280 |
|
Effect of assumed preferred stock conversion |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
11,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to diluted earnings per share |
|
$ |
(182,546 |
) |
|
$ |
90,201 |
|
|
$ |
(2,674,546 |
) |
|
$ |
228,431 |
|
Average common shares issued and outstanding |
|
|
459,246 |
|
|
|
366,206 |
|
|
|
413,083 |
|
|
|
366,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock units |
|
|
— |
|
|
|
221 |
|
|
|
— |
|
|
|
212 |
|
Shares held in deferred compensation plans |
|
|
— |
|
|
|
807 |
|
|
|
— |
|
|
|
788 |
|
Conversion of preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares: |
|
|
— |
|
|
|
1,028 |
|
|
|
— |
|
|
|
21,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted average common shares issued and outstanding |
|
|
459,246 |
|
|
|
367,234 |
|
|
|
413,083 |
|
|
|
387,322 |
|
Diluted (loss) earnings per common share |
|
$ |
(0.40 |
) |
|
$ |
0.25 |
|
|
$ |
(6.47 |
) |
|
$ |
0.59 |
|
Options to purchase 23.3 million and 26.4 million shares during the three months and six
months ended June 30, 2008, respectively, were outstanding but were not included in the computation
of diluted earnings per share because the effect would have been antidilutive. The weighted average
exercise price for these options was $18.62 per share for the three months and six months ended
June 30, 2009, and $20.35 per share for the three months and six months ended June 30, 2008. Due to
the loss attributable to common shareholders for the three months and six months ended June 30,
2009, no additional potentially dilutive shares were included in loss per share calculation as
including such shares in the calculation would have reduced the reported loss per share.
112
Note 10 – Share-based Compensation
Huntington sponsors nonqualified and incentive share-based compensation plans. These plans
provide for the granting of stock options and other awards to officers, directors, and other
employees. Compensation costs are included in personnel costs on the condensed consolidated
statements of income. Stock options are granted at the closing market price on the date of the
grant. Options granted typically vest ratably over three years or when other conditions are met.
Options granted prior to May 2004 have a term of ten years. All options granted after May 2004 have
a term of seven years.
Huntington uses the Black-Scholes option-pricing model to value share-based compensation
expense. This model assumes that the estimated fair value of options is amortized over the options’
vesting periods. Forfeitures are estimated at the date of grant based on historical rates and
reduce the compensation expense recognized. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the date of grant. Expected volatility is based on the estimated
volatility of Huntington’s stock over the expected term of the option. The expected dividend yield
is based on the dividend rate and stock price at the date of the grant. The following table
illustrates the weighted-average assumptions used in the option-pricing model for options granted
in each of the periods presented.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
2.63 |
% |
|
|
2.98 |
% |
|
|
2.03 |
% |
|
|
3.12 |
% |
Expected dividend yield |
|
|
1.20 |
|
|
|
5.11 |
|
|
|
0.84 |
|
|
|
6.82 |
|
Expected volatility of Huntington’s common stock |
|
|
35.0 |
|
|
|
27.5 |
|
|
|
35.0 |
|
|
|
23.7 |
|
Expected option term (years) |
|
|
6.0 |
|
|
|
6.0 |
|
|
|
6.0 |
|
|
|
6.0 |
|
Weighted-average grant date fair value per share |
|
$ |
1.18 |
|
|
$ |
1.71 |
|
|
$ |
1.66 |
|
|
$ |
1.21 |
|
As a result of increased employee turnover, during the 2009 second quarter Huntington updated
its forfeiture rate assumption and adjusted share-based compensation expense to account for the
higher forfeiture rate. This resulted in a reduction to share-based compensation expense of $2.8
million. The following table illustrates total share-based compensation expense for the three
months ended June 30, 2009 and 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Share-based compensation expense |
|
$ |
(183 |
) |
|
$ |
3,540 |
|
|
$ |
2,640 |
|
|
$ |
7,194 |
|
Tax (expense) benefit |
|
|
(64 |
) |
|
|
1,239 |
|
|
|
924 |
|
|
|
2,518 |
|
Upon adoption of Financial Accounting Standards Board Statement No. 123 (revised 2004),
Share-Based Payment on January 1, 2006, Huntington established an additional paid-in capital pool
(APIC Pool). With the continued decline in Huntington’s stock price, the tax deductions have been
less than the compensation expense recorded for book purposes, causing the related APIC Pool to be
reduced to zero. As a result, Huntington will be required to take a tax expense equal to any short
fall in future periods.
113
Huntington’s stock option activity and related information for the six months ended June 30,
2009, was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
| (in thousands, except per share amounts) |
|
Options |
|
|
Price |
|
|
Life (Years) |
|
|
Value |
|
Outstanding at January 1, 2009 |
|
|
26,289 |
|
|
$ |
19.45 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,025 |
|
|
|
4.89 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Forfeited/expired |
|
|
(4,024 |
) |
|
|
20.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
23,290 |
|
|
$ |
18.62 |
|
|
|
3.5 |
|
|
$ |
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009 |
|
|
19,433 |
|
|
$ |
20.10 |
|
|
|
3.1 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value represents the amount by which the fair value of underlying
stock exceeds the “in-the-money” option exercise price. There were no exercises of stock options in
the first six months of 2009 or 2008.
Huntington also grants restricted stock units and awards. Restricted stock units and awards
are issued at no cost to the recipient, and can be settled only in shares at the end of the vesting
period. Restricted stock awards provide the holder with full voting rights and cash dividends
during the vesting period. Restricted stock units do not provide the holder with voting rights or
cash dividends during the vesting period and are subject to certain service restrictions. The fair
value of the restricted stock units and awards is the closing market price of the Company’s common
stock on the date of award.
The following table summarizes the status of Huntington’s restricted stock units and
restricted stock awards as of June 30, 2009, and activity for the six months ended June 30, 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
| |
|
Restricted |
|
|
Grant Date |
|
|
Restricted |
|
|
Grant Date |
|
| |
|
Stock |
|
|
Fair Value |
|
|
Stock |
|
|
Fair Value |
|
| (in thousands, except per share amounts) |
|
Units |
|
|
Per Share |
|
|
Awards |
|
|
Per Share |
|
Nonvested at January 1, 2009 |
|
|
1,823 |
|
|
$ |
14.64 |
|
|
|
— |
|
|
$ |
— |
|
Granted |
|
|
114 |
|
|
|
3.07 |
|
|
|
74 |
|
|
|
1.66 |
|
Vested |
|
|
(68 |
) |
|
|
16.08 |
|
|
|
— |
|
|
|
— |
|
Forfeited |
|
|
(186 |
) |
|
|
15.18 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2009 |
|
|
1,683 |
|
|
$ |
13.73 |
|
|
|
74 |
|
|
$ |
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of nonvested shares granted for the six months
ended June 30, 2009 and 2008, were $2.52 and $11.99, respectively. The total fair value of awards
vested during the six months ended June 30, 2009 and 2008, was $0.2 million and $0.1 million,
respectively. As of June 30, 2009, the total unrecognized compensation cost related to nonvested
awards was $7.2 million with a weighted-average remaining expense recognition period of 1.6 years.
Of the 32.4 million shares of common stock authorized for issuance under the plans at June 30,
2009, 23.9 million were outstanding and 8.5 million were available for future grants. Huntington
issues shares to fulfill stock option exercises and restricted stock units from available
authorized shares. At June 30, 2009, the Company believes there are adequate authorized shares to
satisfy anticipated stock option exercises in 2009.
114
Note
11 – Fair Values of Assets and Liabilities
Huntington adopted FASB Statement No. 157, Fair Value Measurements (Statement No. 157) and
FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(Statement No. 159) effective January 1, 2008. Huntington elected to apply the provisions of
Statement No. 159, the fair value option, for mortgage loans originated with the intent to sell
which are included in loans held for sale.
At June 30, 2009, mortgage loans held for sale had an aggregate fair value of $545.1 million
and an aggregate outstanding principal balance of $540.9 million. Interest income on these loans
is recorded in interest and fees on loans and leases. Included in mortgage banking income were net
gains resulting from changes in fair value of these loans, including net realized gains of $55.4
million and $17.8 million for the six months ended June 30, 2009 and 2008, respectively.
Statement No. 157 defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the measurement
date. Statement No. 157 also establishes a three-level valuation hierarchy for disclosure of fair
value measurements. The valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date. The three levels are defined as
follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement.
Following is a description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant to the valuation
hierarchy.
Securities
Where quoted prices are available in an active market, securities are classified within Level 1 of
the valuation hierarchy. Level 1 securities include US Treasury and other federal agency
securities, and money market mutual funds. If quoted market prices are not available, then fair
values are estimated by using pricing models, quoted prices of securities with similar
characteristics, or discounted cash flows. Level 2 securities include US Government and agency
mortgage-backed securities and municipal securities. In certain cases where there is limited
activity or less transparency around inputs to the valuation, securities are classified within
Level 3 of the valuation hierarchy. Securities classified within Level 3 include asset backed
securities and private label CMOs, for which Huntington obtains third party pricing. With the
current market conditions, the assumptions used to determine the fair value of many Level 3
securities have greater subjectivity due to the lack of observable market transactions.
Mortgage loans held for sale
Mortgage loans held for sale are estimated using security prices for similar product types and,
therefore, are classified in Level 2.
Mortgage servicing rights
MSRs do not trade in an active, open market with readily observable prices. For example, sales of
MSRs do occur, but the precise terms and conditions typically are not readily available.
Accordingly, MSRs are classified in Level 3.
Equity Investments
Equity investments are valued initially based upon transaction price. The carrying values are then
adjusted from the transaction price to reflect expected exit values as evidenced by financing and
sale transactions with third parties, or when determination of a valuation adjustment is considered
necessary based upon a variety of factors including, but not limited
to, current operating performance and future expectations of the particular investment, industry
valuations of comparable public companies, and changes in market outlook. Due to the absence of
quoted market prices and inherent lack of liquidity and the long-term nature of such assets, these
equity investments are included in Level 3. Certain equity investments are accounted for under the
equity method and, therefore, are not subject to the fair value disclosure requirements.
115
Derivatives
Huntington uses derivatives for a variety of purposes including asset and liability management,
mortgage banking, and for trading activities. Level 1 derivatives consist of exchange traded
options and forward commitments to deliver mortgage backed securities which have quoted prices.
Level 2 derivatives include basic asset and liability conversion swaps and options, and interest
rate caps. Derivative instruments offered to customers are adjusted for credit considerations
related to the customer based upon individual credit considerations. These derivative positions
are valued using internally developed models that use readily observable market parameters.
Derivatives in Level 3 consist primarily of interest rate lock agreements related to mortgage loan
commitments. The valuation includes assumptions related to the likelihood that a commitment will
ultimately result in a closed loan, which is a significant unobservable assumption.
Assets and Liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at June 30, 2009 and 2008
are summarized below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurements at Reporting Date Using |
|
|
Netting |
|
|
Balance at |
|
| (in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Adjustments (1) |
|
|
June 30, 2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account securities |
|
$ |
58,763 |
|
|
$ |
37,157 |
|
|
|
|
|
|
|
|
|
|
$ |
95,920 |
|
Investment securities |
|
|
2,377,767 |
|
|
|
2,032,372 |
|
|
$ |
1,096,793 |
|
|
|
|
|
|
|
5,556,024 |
|
Mortgage loans held for sale |
|
|
|
|
|
|
545,119 |
|
|
|
|
|
|
|
|
|
|
|
545,119 |
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
196,932 |
|
|
|
|
|
|
|
196,932 |
|
Derivative assets |
|
|
7,920 |
|
|
|
337,491 |
|
|
|
3,180 |
|
|
$ |
(115,701 |
) |
|
|
232,890 |
|
Equity investments |
|
|
|
|
|
|
|
|
|
|
28,462 |
|
|
|
|
|
|
|
28,462 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
1,744 |
|
|
|
236,069 |
|
|
|
7,717 |
|
|
|
(87,887 |
) |
|
|
157,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurements at Reporting Date Using |
|
|
Netting |
|
|
Balance at |
|
| (in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Adjustments (1) |
|
|
June 30, 2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account securities |
|
$ |
43,200 |
|
|
$ |
1,053,039 |
|
|
|
|
|
|
|
|
|
|
$ |
1,096,239 |
|
Investment securities |
|
|
358,681 |
|
|
|
3,331,584 |
|
|
$ |
673,739 |
|
|
|
|
|
|
|
4,364,004 |
|
Mortgage loans held for sale |
|
|
|
|
|
|
350,304 |
|
|
|
|
|
|
|
|
|
|
|
350,304 |
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
240,024 |
|
|
|
|
|
|
|
240,024 |
|
Derivative assets |
|
|
3,473 |
|
|
|
140,126 |
|
|
|
2,708 |
|
|
$ |
(17,358 |
) |
|
|
128,949 |
|
Equity investments |
|
|
|
|
|
|
|
|
|
|
32,200 |
|
|
|
|
|
|
|
32,200 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
1,626 |
|
|
|
153,662 |
|
|
|
703 |
|
|
|
(50,978 |
) |
|
|
105,013 |
|
| |
|
|
| (1) |
|
Amounts represent the impact of legally enforceable master netting agreements that
allow the Company to settle positive and negative positions and cash collateral held or placed with
the same counterparties. |
116
The tables below present a rollforward of the balance sheet amounts for the three months and
six months ended June 30, 2009 and 2008, for financial instruments measured on a recurring basis
and classified as Level 3. The classification of an item as Level 3 is based on the significance of
the unobservable inputs to the overall fair value measurement. However, Level 3 measurements may
also include observable components of value that can be validated externally. Accordingly, the
gains and losses in the table below included changes in fair value due in part to observable
factors that are part of the valuation methodology. Transfers in and out of Level 3 are presented
in the tables below at fair value at the beginning of the reporting period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Level 3 Fair Value Measurements
Three months ended June 30, 2009
|
|
| |
|
Mortgage |
|
|
Net |
|
|
Investment Securities |
|
|
|
|
| |
|
Servicing |
|
|
Interest |
|
|
Alt-A |
|
|
Pooled |
|
|
Private |
|
|
|
|
|
|
Equity |
|
| (in thousands) |
|
Rights |
|
|
Rate Locks |
|
|
Mortgage-backed |
|
|
Trust-Preferred |
|
|
Label CMO |
|
|
Other |
|
|
investments |
|
Balance, March 31, 2009 |
|
$ |
167,838 |
|
|
$ |
9,515 |
|
|
$ |
355,729 |
|
|
$ |
130,497 |
|
|
$ |
511,949 |
|
|
$ |
257,586 |
|
|
$ |
32,480 |
|
Total gains/losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
32,200 |
|
|
|
(5,843 |
) |
|
|
(974 |
) |
|
|
(12,422 |
) |
|
|
(622 |
) |
|
|
1,298 |
|
|
|
1,389 |
|
Included in OCI |
|
|
|
|
|
|
|
|
|
|
(2,727 |
) |
|
|
12,296 |
|
|
|
45,077 |
|
|
|
3,152 |
|
|
|
|
|
Purchases, sales, repayments,
issuances, and settlements |
|
|
(3,106 |
) |
|
|
(1,109 |
) |
|
|
(77,963 |
) |
|
|
(1,507 |
) |
|
|
(45,901 |
) |
|
|
(78,675 |
) |
|
|
(5,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009 |
|
$ |
196,932 |
|
|
$ |
2,563 |
|
|
$ |
274,065 |
|
|
$ |
128,864 |
|
|
$ |
510,503 |
|
|
$ |
183,361 |
|
|
$ |
28,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
The amount of total gains
or losses for the period
included in earnings
(or OCI) attributable
to the
change in unrealized gains or
losses relating to assets still
held at reporting date |
|
$ |
32,200 |
|
|
$ |
(6,952 |
) |
|
$ |
(3,701 |
) |
|
$ |
126 |
|
|
$ |
44,455 |
|
|
$ |
4,450 |
|
|
$ |
1,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Level 3 Fair Value Measurements
Three months ended June 30, 2008
|
|
| |
|
Mortgage |
|
|
Net |
|
|
Investment Securities |
|
|
|
|
| |
|
Servicing |
|
|
Interest |
|
|
Alt-A |
|
|
Pooled |
|
|
Private |
|
|
|
|
|
|
Equity |
|
| (in thousands) |
|
Rights |
|
|
Rate Locks |
|
|
Mortgage-backed |
|
|
Trust-Preferred |
|
|
Label CMO |
|
|
Other |
|
|
investments |
|
Balance, March 31, 2008 |
|
$ |
191,806 |
|
|
$ |
2,948 |
|
|
$ |
502,072 |
|
|
$ |
245,787 |
|
|
$ |
— |
|
|
$ |
2,836 |
|
|
$ |
35,345 |
|
Total gains/losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
48,674 |
|
|
|
(736 |
) |
|
|
206 |
|
|
|
(6 |
) |
|
|
— |
|
|
|
(236 |
) |
|
|
(4,512 |
) |
Included in OCI |
|
|
|
|
|
|
|
|
|
|
(36,139 |
) |
|
|
(31,383 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
Purchases, sales, repayments,
issuances, and settlements |
|
|
(456 |
) |
|
|
(207 |
) |
|
|
(7,702 |
) |
|
|
(1,653 |
) |
|
|
— |
|
|
|
(43 |
) |
|
|
1,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
$ |
240,024 |
|
|
$ |
2,005 |
|
|
$ |
458,437 |
|
|
$ |
212,745 |
|
|
$ |
— |
|
|
$ |
2,557 |
|
|
$ |
32,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
The amount of total gains
or losses for the period
included in earnings
(or OCI) attributable to the
change in unrealized gains or
losses relating to assets still
held at reporting date |
|
$ |
(48,674 |
) |
|
$ |
(943 |
) |
|
$ |
(35,933 |
) |
|
$ |
(31,389 |
) |
|
$ |
— |
|
|
$ |
(236 |
) |
|
$ |
(4,639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Level 3 Fair Value Measurements
Six months ended June 30, 2009
|
|
| |
|
Mortgage |
|
|
Net |
|
|
Investment Securities |
|
|
|
|
| |
|
Servicing |
|
|
Interest |
|
|
Alt-A |
|
|
Pooled |
|
|
Private |
|
|
|
|
|
|
Equity |
|
| (in thousands) |
|
Rights |
|
|
Rate Locks |
|
|
Mortgage-backed |
|
|
Trust-Preferred |
|
|
Label CMO |
|
|
Other |
|
|
investments |
|
Balance, December 31, 2008 |
|
$ |
167,438 |
|
|
$ |
8,132 |
|
|
$ |
322,421 |
|
|
$ |
141,606 |
|
|
$ |
523,515 |
|
|
$ |
— |
|
|
$ |
36,893 |
|
Total gains/losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
30,212 |
|
|
|
(3,875 |
) |
|
|
1,992 |
|
|
|
(14,816 |
) |
|
|
103 |
|
|
|
1,298 |
|
|
|
69 |
|
Included in OCI |
|
|
|
|
|
|
|
|
|
|
34,141 |
|
|
|
3,610 |
|
|
|
58,396 |
|
|
|
2,323 |
|
|
|
|
|
Purchases, sales, repayments,
issuances, and settlements |
|
|
(718 |
) |
|
|
(1,694 |
) |
|
|
(84,489 |
) |
|
|
(1,536 |
) |
|
|
(71,511 |
) |
|
|
179,740 |
|
|
|
(8,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009 |
|
$ |
196,932 |
|
|
$ |
2,563 |
|
|
$ |
274,065 |
|
|
$ |
128,864 |
|
|
$ |
510,503 |
|
|
$ |
183,361 |
|
|
$ |
28,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
The amount of total gains
or losses for the period
included in earnings
(or OCI) attributable to the
change in unrealized gains or
losses relating to assets still
held at reporting date |
|
$ |
30,212 |
|
|
$ |
(5,843 |
) |
|
$ |
36,133 |
|
|
$ |
(11,206 |
) |
|
$ |
58,499 |
|
|
$ |
3,621 |
|
|
$ |
1,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Level 3 Fair Value Measurements
Six months ended June 30, 2008
|
|
| |
|
Mortgage |
|
|
Net |
|
|
Investment Securities |
|
|
|
|
| |
|
Servicing |
|
|
Interest |
|
|
Alt-A |
|
|
Pooled |
|
|
Private |
|
|
|
|
|
|
Equity |
|
| (in thousands) |
|
Rights |
|
|
Rate Locks |
|
|
Mortgage-backed |
|
|
Trust-Preferred |
|
|
Label CMO |
|
|
Other |
|
|
investments |
|
Balance, January 1, 2008 |
|
$ |
207,894 |
|
|
$ |
(46 |
) |
|
$ |
547,358 |
|
|
$ |
279,175 |
|
|
$ |
— |
|
|
$ |
7,956 |
|
|
$ |
41,516 |
|
Total gains/losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
31,937 |
|
|
|
2,253 |
|
|
|
412 |
|
|
|
(12 |
) |
|
|
— |
|
|
|
(3,753 |
) |
|
|
(13,289 |
) |
Included in OCI |
|
|
|
|
|
|
|
|
|
|
(73,588 |
) |
|
|
(64,764 |
) |
|
|
— |
|
|
|
(187 |
) |
|
|
|
|
Purchases, sales, repayments,
issuances, and settlements |
|
|
193 |
|
|
|
(202 |
) |
|
|
(15,745 |
) |
|
|
(1,654 |
) |
|
|
— |
|
|
|
(1,459 |
) |
|
|
3,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
$ |
240,024 |
|
|
$ |
2,005 |
|
|
$ |
458,437 |
|
|
$ |
212,745 |
|
|
$ |
— |
|
|
$ |
2,557 |
|
|
$ |
32,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
The amount of total gains
or losses for the period
included in earnings
(or OCI) attributable to the
change in unrealized gains or
losses relating to assets still
held at reporting date |
|
$ |
31,937 |
|
|
$ |
2,051 |
|
|
$ |
(73,176 |
) |
|
|
(64,776 |
) |
|
|
— |
|
|
$ |
(3,940 |
) |
|
$ |
(7,516 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
The table below summarizes the classification of gains and losses due to changes in fair value,
recorded in earnings for Level 3 assets and liabilities for the three months and six months ended
June 30, 2009 and 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Level 3 Fair Value Measurements
Three months ended June 30, 2009
|
|
| |
|
Mortgage |
|
|
Net |
|
|
Investment Securities |
|
|
|
|
| |
|
Servicing |
|
|
Interest |
|
|
Alt-A |
|
|
Pooled |
|
|
Private |
|
|
|
|
|
|
Equity |
|
| (in thousands) |
|
Rights |
|
|
Rate Locks |
|
|
Mortgage-backed |
|
|
Trust-Preferred |
|
|
Label CMO |
|
|
Other |
|
|
investments |
|
Classification of gains and
losses in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income (loss) |
|
$ |
32,200 |
|
|
$ |
(5,843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains (losses) |
|
|
|
|
|
|
|
|
|
$ |
(5,881 |
) |
|
$ |
(12,455 |
) |
|
$ |
(1,251 |
) |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
|
|
|
|
|
|
|
|
4,907 |
|
|
|
33 |
|
|
|
629 |
|
|
$ |
1,298 |
|
|
|
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32,200 |
|
|
$ |
(5,843 |
) |
|
$ |
(974 |
) |
|
$ |
(12,422 |
) |
|
$ |
(622 |
) |
|
$ |
1,298 |
|
|
$ |
1,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Level 3 Fair Value Measurements
Three months ended June 30, 2008
|
|
| |
|
Mortgage |
|
|
Net |
|
|
Investment Securities |
|
|
|
|
| |
|
Servicing |
|
|
Interest |
|
|
Alt-A |
|
|
Pooled |
|
|
Private |
|
|
|
|
|
|
Equity |
|
| (in thousands) |
|
Rights |
|
|
Rate Locks |
|
|
Mortgage-backed |
|
|
Trust-Preferred |
|
|
Label CMO |
|
|
Other |
|
|
investments |
|
Classification of gains and
losses in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income (loss) |
|
$ |
(48,674 |
) |
|
$ |
(736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
|
|
|
|
|
|
|
$ |
206 |
|
|
$ |
(6 |
) |
|
|
|
|
|
$ |
(36 |
) |
|
|
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(48,674 |
) |
|
$ |
(736 |
) |
|
$ |
206 |
|
|
$ |
(6 |
) |
|
$ |
— |
|
|
$ |
(36 |
) |
|
$ |
(4,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Level 3 Fair Value Measurements
Six months ended June 30, 2009
|
|
| |
|
Mortgage |
|
|
Net |
|
|
Investment Securities |
|
|
|
|
| |
|
Servicing |
|
|
Interest |
|
|
Alt-A |
|
|
Pooled |
|
|
Private |
|
|
|
|
|
|
Equity |
|
| (in thousands) |
|
Rights |
|
|
Rate Locks |
|
|
Mortgage-backed |
|
|
Trust-Preferred |
|
|
Label CMO |
|
|
Other |
|
|
investments |
|
Classification of gains and
losses in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income (loss) |
|
$ |
30,212 |
|
|
$ |
(3,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains (losses) |
|
|
|
|
|
|
|
|
|
$ |
(7,386 |
) |
|
$ |
(14,887 |
) |
|
$ |
(1,251 |
) |
|
|
|
|
|
|
|
|
Interest and fee income |
|
|
|
|
|
|
|
|
|
|
9,378 |
|
|
|
71 |
|
|
|
1,354 |
|
|
$ |
1,298 |
|
|
|
|
|
Noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,212 |
|
|
$ |
(3,875 |
) |
|
$ |
1,992 |
|
|
$ |
(14,816 |
) |
|
$ |
103 |
|
|
$ |
1,298 |
|
|
$ |
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Level 3 Fair Value Measurements
Six months ended June 30, 2008
|
|
| |
|
Mortgage |
|
|
Net |
|
|
Investment Securities |
|
|
|
|
| |
|
Servicing |
|
|
Interest |
|
|
Alt-A |
|
|
Pooled |
|
|
Private |
|
|
|
|
|
|
Equity |
|
| (in thousands) |
|
Rights |
|
|
Rate Locks |
|
|
Mortgage-backed |
|
|
Trust-Preferred |
|
|
Label CMO |
|
|
Other |
|
|
investments |
|
Classification of gains and
losses in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income (loss) |
|
$ |
31,937 |
|
|
$ |
2,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,143 |
) |
|
|
|
|
Interest and fee income |
|
|
|
|
|
|
|
|
|
$ |
412 |
|
|
$ |
(12 |
) |
|
|
|
|
|
|
(610 |
) |
|
|
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(13,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31,937 |
|
|
$ |
2,253 |
|
|
$ |
412 |
|
|
$ |
(12 |
) |
|
$ |
— |
|
|
$ |
(3,753 |
) |
|
$ |
(13,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
Assets and Liabilities measured at fair value on a nonrecurring basis
Certain assets and liabilities may be required to be measured at fair value on a nonrecurring
basis in periods subsequent to their initial recognition. These assets and liabilities are not
measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in
certain circumstances, such as when there is evidence of impairment.
Periodically, Huntington records nonrecurring adjustments of collateral-dependent loans
measured for impairment in accordance with FASB Statement No. 114, “Accounting by Creditors for
Impairment of a Loan,” when establishing the allowance for credit losses. Such amounts are
generally based on the fair value of the underlying collateral supporting the loan. In cases where
the carrying value exceeds the fair value of the collateral, an impairment charge is recognized.
During the six months of 2009 and 2008, Huntington identified
$198.1 million, and $97.5 million,
respectively, of impaired loans for which the fair value is recorded based upon collateral value, a
Level 3 input in the valuation hierarchy. For the six months ended June 30, 2009 and 2008,
nonrecurring fair value losses of $93.7 million and $51.5 million, respectively, were recorded within
the provision for credit losses.
Other real estate owned properties are valued based on appraisals and third party price
opinions, less estimated selling costs. During the second quarter, Huntington recorded $172.9
million of OREO assets at fair value. Losses of $28.2 were recorded within noninterest expense.
During the 2009 second quarter, new mortgage servicing assets were created and recorded at
fair value of $22.4 million (See Note 5).
Also during the 2009 second quarter, goodwill related to the sale of a small payments-related
business completed in July 2009,with a carrying amount of $8.4 million was written down to its
implied fair value of $4.2 million.
Fair values of financial instruments
The carrying amounts and estimated fair values of Huntington’s financial instruments at June
30, 2009 and December 31, 2008 are presented in the following table:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2009 |
|
|
December 31, 2008 |
|
| |
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
| (in thousands) |
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term assets |
|
$ |
2,475,686 |
|
|
$ |
2,475,686 |
|
|
$ |
1,137,229 |
|
|
$ |
1,137,229 |
|
Trading account securities |
|
|
95,920 |
|
|
|
95,920 |
|
|
|
88,677 |
|
|
|
88,677 |
|
Loans held for sale |
|
|
559,017 |
|
|
|
559,017 |
|
|
|
390,438 |
|
|
|
390,438 |
|
Investment securities |
|
|
5,934,704 |
|
|
|
5,934,704 |
|
|
|
4,384,457 |
|
|
|
4,384,457 |
|
Net loans and direct financing leases |
|
|
37,577,209 |
|
|
|
32,524,867 |
|
|
|
40,191,938 |
|
|
|
33,856,153 |
|
Derivatives |
|
|
232,764 |
|
|
|
232,764 |
|
|
|
458,995 |
|
|
|
458,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(39,165,132 |
) |
|
|
(39,513,808 |
) |
|
|
(37,943,286 |
) |
|
|
(38,363,248 |
) |
Short-term borrowings |
|
|
(862,056 |
) |
|
|
(838,324 |
) |
|
|
(1,309,157 |
) |
|
|
(1,252,861 |
) |
Federal Home Loan Bank advances |
|
|
(926,937 |
) |
|
|
(926,937 |
) |
|
|
(2,588,976 |
) |
|
|
(2,588,445 |
) |
Other long term debt |
|
|
(2,508,144 |
) |
|
|
(2,380,252 |
) |
|
|
(2,331,632 |
) |
|
|
(1,979,441 |
) |
Subordinated notes |
|
|
(1,672,887 |
) |
|
|
(1,222,059 |
) |
|
|
(1,950,097 |
) |
|
|
(1,287,150 |
) |
Derivatives |
|
|
(160,202 |
) |
|
|
(160,202 |
) |
|
|
(83,367 |
) |
|
|
(83,367 |
) |
The short-term nature of certain assets and liabilities result in their carrying value
approximating fair value. These include trading account securities, customers’ acceptance
liabilities, short-term borrowings, bank acceptances
outstanding, Federal Home Loan Bank Advances and cash and short-term assets, which include
cash and due from banks, interest-bearing deposits in banks, and federal funds sold and securities
purchased under resale agreements. Loan commitments and letters of credit generally have
short-term, variable-rate features and contain clauses that limit Huntington’s exposure to changes
in customer credit quality. Accordingly, their carrying values, which are immaterial at the
respective balance sheet dates, are reasonable estimates of fair value. Not all the financial
instruments listed in the table above are subject to the disclosure provisions of Statement No.
157.
120
Certain assets, the most significant being operating lease assets, bank owned life insurance,
and premises and equipment, do not meet the definition of a financial instrument and are excluded
from this disclosure. Similarly, mortgage and non-mortgage servicing rights, deposit base, and
other customer relationship intangibles are not considered financial instruments and are not
discussed below. Accordingly, this fair value information is not intended to, and does not,
represent Huntington’s underlying value. Many of the assets and liabilities subject to the
disclosure requirements are not actively traded, requiring fair values to be estimated by
management. These estimations necessarily involve the use of judgment about a wide variety of
factors, including but not limited to, relevancy of market prices of comparable instruments,
expected future cash flows, and appropriate discount rates.
The following methods and assumptions were used by Huntington to estimate the fair value of
the remaining classes of financial instruments:
Loans and Direct Financing Leases
Variable-rate loans that reprice frequently are based on carrying amounts, as adjusted for
estimated credit losses. The fair values for other loans and leases are estimated using discounted
cash flow analyses and employ interest rates currently being offered for loans and leases with
similar terms. The rates take into account the position of the yield curve, as well as an
adjustment for prepayment risk, operating costs, and profit. This value is also reduced by an
estimate of probable losses and the credit risk associated in the loan and lease portfolio. The
valuation of the loan portfolio reflected discounts that Huntington believed are consistent with
transactions occurring in the market place.
Deposits
Demand deposits, savings accounts, and money market deposits are, by definition, equal to the
amount payable on demand. The fair values of fixed-rate time deposits are estimated by discounting
cash flows using interest rates currently being offered on certificates with similar maturities.
Debt
Fixed-rate, long-term debt is based upon quoted market prices, which are inclusive of Huntington’s
credit risk. In the absence of quoted market prices, discounted cash flows using market rates for
similar debt with the same maturities are used in the determination of fair value.
Note 12 – Benefit Plans
Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan), a non-contributory
defined benefit pension plan covering substantially all employees. The Plan provides benefits based
upon length of service and compensation levels. The funding policy of Huntington is to contribute
an annual amount that is at least equal to the minimum funding requirements but not more than that
deductible under the Internal Revenue Code.
In addition, Huntington has an unfunded, defined benefit post-retirement plan (Post-Retirement
Benefit Plan) that provides certain healthcare and life insurance benefits to retired employees who
have attained the age of 55 and have at least 10 years of vesting service under this plan. For any
employee retiring on or after January 1, 1993, post-retirement healthcare benefits are based upon
the employee’s number of months of service and are limited to the actual cost of coverage. Life
insurance benefits are a percentage of the employee’s base salary at the time of retirement, with a
maximum of $50,000 of coverage.
On January 1, 2008, Huntington transitioned to fiscal year-end measurement date of plan assets
and benefit obligations as required by FASB Statement No. 158, Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans — An amendment of FASB Statements No. 87, 88, 106,
and 132R (Statement No. 158). As a result, Huntington recognized a charge to beginning retained
earnings of $4.2 million, representing the net periodic benefit costs for the last three months of
2008, and a charge to the opening balance of accumulated other comprehensive loss of $3.8
million, representing the change in fair value of plan assets and benefit obligations for the
last three months of 2008 (net of amortization included in net periodic benefit cost).
121
The following table shows the components of net periodic benefit expense of the Plan and the
Post-Retirement Benefit Plan:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
|
Post Retirement Benefits |
|
| |
|
Three Months Ended |
|
|
Three Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
6,154 |
|
|
$ |
5,954 |
|
|
$ |
465 |
|
|
$ |
420 |
|
Interest cost |
|
|
7,056 |
|
|
|
6,761 |
|
|
|
896 |
|
|
|
903 |
|
Expected return on plan assets |
|
|
(10,551 |
) |
|
|
(9,786 |
) |
|
|
— |
|
|
|
— |
|
Amortization of transition asset |
|
|
1 |
|
|
|
1 |
|
|
|
276 |
|
|
|
276 |
|
Amortization of prior service cost |
|
|
120 |
|
|
|
79 |
|
|
|
94 |
|
|
|
95 |
|
Settlements |
|
|
1,725 |
|
|
|
450 |
|
|
|
— |
|
|
|
— |
|
Recognized net actuarial loss (gain) |
|
|
1,874 |
|
|
|
1,038 |
|
|
|
(231 |
) |
|
|
(274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit expense |
|
$ |
6,379 |
|
|
$ |
4,497 |
|
|
$ |
1,500 |
|
|
$ |
1,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
|
Post Retirement Benefits |
|
| |
|
Six Months Ended |
|
|
Six Months Ended |
|
| |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
12,309 |
|
|
$ |
11,908 |
|
|
$ |
930 |
|
|
$ |
840 |
|
Interest cost |
|
|
14,111 |
|
|
|
13,522 |
|
|
|
1,791 |
|
|
|
1,806 |
|
Expected return on plan assets |
|
|
(21,102 |
) |
|
|
(19,572 |
) |
|
|
— |
|
|
|
— |
|
Amortization of transition asset |
|
|
2 |
|
|
|
2 |
|
|
|
552 |
|
|
|
552 |
|
Amortization of prior service cost |
|
|
241 |
|
|
|
158 |
|
|
|
189 |
|
|
|
190 |
|
Settlements |
|
|
3,450 |
|
|
|
900 |
|
|
|
— |
|
|
|
— |
|
Recognized net actuarial loss (gain) |
|
|
3,748 |
|
|
|
2,076 |
|
|
|
(462 |
) |
|
|
(548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit expense |
|
$ |
12,759 |
|
|
$ |
8,994 |
|
|
$ |
3,000 |
|
|
$ |
2,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There is no required minimum contribution for 2009 to the Plan.
Huntington also sponsors other retirement plans, the most significant being the Supplemental
Executive Retirement Plan and the Supplemental Retirement Income Plan. These plans are nonqualified
plans that provide certain former officers and directors of Huntington and its subsidiaries with
defined pension benefits in excess of limits imposed by federal tax law. The cost of providing
these plans was $1.0 million and $0.8 million for the three-month periods ended June 30, 2009 and
2008, respectively. For the respective six-month periods, the cost was $1.8 million and $1.7
million.
Huntington has a defined contribution plan that is available to eligible employees. Huntington
matches participant contributions, up to the first 3% of base pay contributed to the plan. Half of
the employee contribution is matched on the 4th and 5th percent of base pay contributed to the
plan. In the first quarter of 2009, the Plan was amended to eliminate employer matching
contributions effective on or after March 15, 2009. For the six months ended June 30, 2009 and
2008, the cost of providing the plan was $3.1 million and $7.7 million.
122
Note 13 – Derivative Financial Instruments
A variety of derivative financial instruments, principally interest rate swaps, are used in
asset and liability management activities to protect against the risk of adverse price or interest
rate movements. These instruments provide flexibility in adjusting Huntington’s sensitivity to
changes in interest rates without exposure to loss of principal and higher funding requirements.
Huntington records derivatives at fair value, as further described in Note 11. Collateral
agreements are regularly entered into as part of the underlying derivative agreements with
Huntington’s counterparties to mitigate counter party credit risk. At June 30, 2009, December 31, 2008, and June 30, 2008,
aggregate credit risk associated with these derivatives, net of collateral that has been pledged by
the counterparty, was $42.4 million, $40.7 million, and $33.3 million, respectively. The credit
risk associated with interest rate swaps is calculated after considering master netting agreements.
At June 30, 2009, Huntington pledged $220.4 million cash collateral to various counterparties,
while various other counterparties pledged $127.8 million to Huntington to satisfy collateral
netting agreements. In the event of credit downgrades, Huntington could be required to provide an
additional $1.0 million in collateral.
Derivatives used in Asset and Liability Management Activities
The following table presents the gross notional values of derivatives used in Huntington’s
Asset and Liability Management activities at June 30, 2009, identified by the underlying interest
rate-sensitive instruments:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value |
|
|
Cash Flow |
|
|
|
|
| (in thousands ) |
|
Hedges |
|
|
Hedges |
|
|
Total |
|
Instruments associated with: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
— |
|
|
$ |
8,805,000 |
|
|
$ |
8,805,000 |
|
Deposits |
|
|
801,525 |
|
|
|
— |
|
|
|
801,525 |
|
Subordinated notes |
|
|
675,000 |
|
|
|
— |
|
|
|
675,000 |
|
Other long-term debt |
|
|
35,000 |
|
|
|
— |
|
|
|
35,000 |
|
|
|
|
|
|
|
|
|
|
|
Total notional value at June 30, 2009 |
|
$ |
1,511,525 |
|
|
$ |
8,805,000 |
|
|
$ |
10,316,525 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents additional information about the interest rate swaps and caps
used in Huntington’s Asset and Liability Management activities at June 30, 2009:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted-Average |
|
| |
|
Notional |
|
|
Maturity |
|
|
Fair |
|
|
Rate |
|
| (in thousands ) |
|
Value |
|
|
(years) |
|
|
Value |
|
|
Receive |
|
|
Pay |
|
Asset conversion swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed — generic |
|
$ |
8,805,000 |
|
|
|
1.6 |
|
|
$ |
22,314 |
|
|
|
2.28 |
% |
|
|
0.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset conversion swaps |
|
|
8,805,000 |
|
|
|
1.6 |
|
|
|
22,314 |
|
|
|
2.28 |
|
|
|
0.57 |
|
Liability conversion swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed — generic |
|
|
1,511,525 |
|
|
|
4.5 |
|
|
|
56,044 |
|
|
|
3.12 |
|
|
|
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liability conversion swaps |
|
|
1,511,525 |
|
|
|
4.5 |
|
|
|
56,044 |
|
|
|
3.12 |
|
|
|
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total swap portfolio |
|
|
10,316,525 |
|
|
|
2.1 |
|
|
|
78,358 |
|
|
|
2.40 |
% |
|
|
0.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Strike Rate |
|
Purchased caps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
|
200,000 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
5.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchased caps |
|
$ |
200,000 |
|
|
|
0.1 |
|
|
$ |
— |
|
|
|
5.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
These derivative financial instruments were entered into for the purpose of managing the
interest rate risk of assets and liabilities. Consequently, net amounts receivable or payable on
contracts hedging either interest earning assets or interest bearing liabilities were accrued as an
adjustment to either interest income or interest expense. The net amounts resulted in an increase
to net interest income of $42.2 million and $3.0 million for the three months ended June 30, 2009
and 2008, respectively. For the six months ended June 30, 2009 and 2008, the net amounts resulted
in an increase to net interest income of $73.4 million and $2.1 million, respectively.
123
The following table presents the fair values at June 30, 2009, December 31, 2008, and June 30,
2008 of Huntington’s derivatives that are designated and not designated as hedging instruments
under Statement No. 133. Amounts in the table below are presented without the impact of any net
collateral arrangements.
Asset derivatives included in accrued income and other assets
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
Interest rate contracts designated as hedging instruments |
|
$ |
87,069 |
|
|
$ |
230,601 |
|
|
$ |
14,282 |
|
Interest rate contracts not designated as hedging instruments |
|
|
284,902 |
|
|
|
436,131 |
|
|
|
124,490 |
|
|
|
|
|
|
|
|
|
|
|
Total contracts |
|
$ |
371,971 |
|
|
$ |
666,732 |
|
|
$ |
138,772 |
|
|
|
|
|
|
|
|
|
|
|
Liability derivatives included in accrued expenses and other liabilities
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
Interest rate contracts designated as hedging instruments |
|
$ |
8,711 |
|
|
$ |
— |
|
|
$ |
82,736 |
|
Interest rate contracts not designated as hedging instruments |
|
|
268,939 |
|
|
|
377,249 |
|
|
|
69,642 |
|
|
|
|
|
|
|
|
|
|
|
Total contracts |
|
$ |
277,650 |
|
|
$ |
377,249 |
|
|
$ |
152,378 |
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges effectively convert deposits and subordinated and other long term debt from
fixed rate obligations to floating rate. The changes in fair value of the derivative are, to the
extent that the hedging relationship is effective, recorded through earnings and offset against
changes in the fair value of the hedged item.
The following table presents the increase or (decrease) to interest expense for the three
months and six months ending June 30, 2009 and 2008, for derivatives designated as fair value
hedges under Statement No 133:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives in fair |
|
|
|
Increase (decrease) to interest expense |
|
| value hedging |
|
|
|
Three months ended |
|
|
Six months ended |
|
| relationships |
|
Location of change in fair value recognized in earnings on |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
derivative |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest Rate
Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
Interest expense — deposits |
|
$ |
(757 |
) |
|
$ |
(1,112 |
) |
|
$ |
(1,103 |
) |
|
$ |
(1,539 |
) |
Subordinated notes |
|
Interest expense — subordinated notes and other long term debt |
|
|
(7,305 |
) |
|
|
(4,729 |
) |
|
|
(13,651 |
) |
|
|
(6,742 |
) |
Other long term debt |
|
Interest expense — subordinated notes and other long term debt |
|
|
350 |
|
|
|
1,092 |
|
|
|
836 |
|
|
|
2,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
(7,712 |
) |
|
$ |
(4,749 |
) |
|
$ |
(13,918 |
) |
|
$ |
(5,615 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For cash flow hedges, interest rate swap contracts were entered into that pay fixed-rate
interest in exchange for the receipt of variable-rate interest without the exchange of the
contract’s underlying notional amount, which effectively converts a portion of its floating-rate
debt to fixed-rate. This reduces the potentially adverse impact of increases in interest rates on
future interest expense. In like fashion, certain LIBOR-based commercial and industrial loans were
effectively converted to fixed-rate by entering into contracts that swap certain variable-rate
interest payments for fixed-rate interest payments at designated times.
To the extent these derivatives are effective in offsetting the variability of the hedged cash
flows, changes in the derivatives’ fair value will not be included in current earnings but are
reported as a component of accumulated other comprehensive income in shareholders’ equity. These
changes in fair value will be included in earnings of future periods when earnings are also
affected by the changes in the hedged cash flows. To the extent these derivatives are not
effective, changes in their fair values are immediately included in earnings.
124
The following table presents the gains and losses recognized in other comprehensive loss (OCL)
and the location in the consolidated statements of income of gains and losses reclassified from OCL
into earnings for the six months ending June 30, 2009 and 2008 for derivatives designated as
effective cash flow hedges under Statement No 133:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain or |
|
| |
|
Amount of gain or |
|
|
|
|
|
|
(loss) reclassified |
|
| Derivatives in cash |
|
(loss) recognized in |
|
|
|
|
|
|
from accumulated |
|
| flow hedging |
|
OCL on derivatives |
|
|
|
|
|
|
OCL into earnings |
|
| relationships |
|
(effective portion) |
|
|
Location of gain or (loss) reclassified from accumulated |
|
(effective portion) |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
OCL into earnings (effective portion) |
|
2009 |
|
|
2008 |
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
(41,450 |
) |
|
$ |
(47,913 |
) |
|
Interest and fee income — loans and leases |
|
$ |
9,512 |
|
|
$ |
(641 |
) |
FHLB Advances |
|
|
1,338 |
|
|
|
(232 |
) |
|
Interest expense — FHLB Advances |
|
|
3,744 |
|
|
|
(3,020 |
) |
Deposits |
|
|
253 |
|
|
|
1,699 |
|
|
Interest expense — deposits |
|
|
3,139 |
|
|
|
(7,481 |
) |
Subordinated notes |
|
|
92 |
|
|
|
— |
|
|
Interest expense — subordinated notes and other long term debt |
|
|
(1,550 |
) |
|
|
(1,792 |
) |
Other long term debt |
|
|
— |
|
|
|
68 |
|
|
Interest expense — subordinated notes and other long term debt |
|
|
(247 |
) |
|
|
(479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(39,767 |
) |
|
$ |
(46,378 |
) |
|
|
|
|
|
$ |
14,598 |
|
|
$ |
(13,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the gains recognized in noninterest income on the ineffective
portion on interest rate contracts for derivatives designated as cash flow hedges for the three
months and six months ending June 30, 2009 and 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Six months ended |
|
| Derivatives in cash flow hedging relationships |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
(2,670 |
) |
|
$ |
(443 |
) |
|
$ |
1,642 |
|
|
$ |
153 |
|
Derivatives Used in Trading Activities
Various derivative financial instruments are offered to enable customers to meet their
financing and investing objectives and for their risk management purposes. Derivative financial
instruments used in trading activities consisted predominantly of interest rate swaps, but also
included interest rate caps, floors, and futures, as well as foreign exchange options. Interest
rate options grant the option holder the right to buy or sell an underlying financial instrument
for a predetermined price before the contract expires. Interest rate futures are commitments to
either purchase or sell a financial instrument at a future date for a specified price or yield and
may be settled in cash or through delivery of the underlying financial instrument. Interest rate
caps and floors are option-based contracts that entitle the buyer to receive cash payments based on
the difference between a designated reference rate and a strike price, applied to a notional
amount. Written options, primarily caps, expose Huntington to market risk but not credit risk.
Purchased options contain both credit and market risk. The interest rate risk of these customer
derivatives is mitigated by entering into similar derivatives having offsetting terms with other
counterparties. The credit risk to these customers is evaluated and included in the calculation of
fair value.
The net fair values of these derivative financial instruments, for which the gross amounts are
included in other assets or other liabilities, were $50.4 million, $41.9 million, and $47.3 million
at June 30, 2009, December 31, 2008, and June 30, 2008. Changes in fair value of $2.6 million and
$8.3 million for the three months ended June 30, 2009 and 2008 and $6.4 million and $20.0 million
for the six months ended June 30, 2009 and 2008, respectively, were reflected in other
noninterest income. The total notional values of derivative financial instruments used by
Huntington on behalf of customers, including offsetting derivatives, were $9.8 billion, $10.9
billion, and $10.3 billion at June 30, 2009, December 31, 2008, and June 30, 2008, respectively.
Huntington’s credit risks from interest rate swaps used for trading purposes were $284.9 million,
$429.9 million, and $145.4 million at the same dates, respectively.
Huntington also uses certain derivative financial instruments to offset changes in value of
its residential mortgage servicing assets. These derivatives consist primarily of forward interest
rate agreements and forward mortgage securities. The derivative instruments used are not
designated as hedges under Statement No. 133. Accordingly, such derivatives are recorded at fair
value with changes in fair value reflected in mortgage banking income. The total notional value of
these derivative financial instruments at June 30, 2009, December 31, 2008, and June 30, 2008, was
$4.8 billion, $2.2 billion, and $1.6 billion, respectively. The total notional amount at June 30,
2009 corresponds to trading assets with a fair value of $8.1 million and trading liabilities with a
fair value of $26.5 million. The losses related to derivative instruments included in mortgage
banking income for the three months ended June 30, 2009 and 2008 were $50.4 million and $21.0
million, respectively and for the six months ended June 30, 2009 and 2008 were $43.7 million and
$36.9 million, respectively. Total MSR hedging losses for the three months ended June 30, 2009 and
2008, were $50.2 million and $40.3 million, respectively, and for the six months ended June 30,
2009 and 2008 were $40.9 million and $40.6 million and were also included in mortgage banking
income.
125
In connection with securitization activities, Huntington purchased interest rate caps with a
notional value totaling $1.2 billion. These purchased caps were assigned to the securitization
trust for the benefit of the security holders. Interest rate caps were also sold totaling $1.2
billion outside the securitization structure. Both the purchased and sold caps are marked to market
through income.
In connection with the sale of Huntington’s remaining class B Visa shares, Huntington entered
into a swap agreement with the purchaser of the shares. The swap agreement adjusts for dilution in
the conversion ratio of class B shares resulting from the Visa litigation. At June 30, the fair value
of the swap liability of $7.1 million is an estimate of the exposure liability based upon
probability-weighted potential Visa litigation losses.
Note 14 – Variable Interest Entities
Consolidated Variable Interest Entities
Consolidated variable interest entities at June 30, 2009 consist of New Trust (See Note 4) and
loan securitizations. Loan securitizations include auto loan and lease securitization trusts
formed in 2008, 2006, and 2000. Huntington has determined that the trusts are not qualified
special purpose entities and, therefore, are variable interest entities (VIEs) based upon equity
guidelines established in FIN 46R. Huntington owns 100% of the trusts and is the primary
beneficiary of the VIEs, therefore, the trusts are consolidated. The carrying amount and
classification of the trusts’ assets and liabilities included in the consolidated balance sheet are
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2009 |
|
| (in thousands) |
|
New Trust |
|
|
2008 Trust |
|
|
2006 Trust |
|
|
2000 Trust |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
— |
|
|
$ |
30,420 |
|
|
$ |
290,033 |
|
|
$ |
22,447 |
|
|
$ |
342,900 |
|
Loans and leases |
|
|
471,973 |
|
|
|
671,624 |
|
|
|
1,159,685 |
|
|
|
58,442 |
|
|
|
2,361,724 |
|
Allowance for loan and lease losses |
|
|
— |
|
|
|
(12,383 |
) |
|
|
(21,537 |
) |
|
|
(1,078 |
) |
|
|
(34,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
471,973 |
|
|
|
659,241 |
|
|
|
1,138,148 |
|
|
|
57,364 |
|
|
|
2,326,726 |
|
Accrued income and other assets |
|
|
51,655 |
|
|
|
4,267 |
|
|
|
6,196 |
|
|
|
226 |
|
|
|
62,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
523,628 |
|
|
$ |
693,928 |
|
|
$ |
1,434,377 |
|
|
$ |
80,037 |
|
|
$ |
2,389,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term debt |
|
$ |
87,024 |
|
|
$ |
528,418 |
|
|
$ |
1,055,443 |
|
|
$ |
— |
|
|
$ |
1,670,885 |
|
Accrued interest and other liabilities |
|
|
10,008 |
|
|
|
789 |
|
|
|
11,761 |
|
|
|
— |
|
|
|
22,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
97,032 |
|
|
$ |
529,207 |
|
|
$ |
1,067,204 |
|
|
$ |
— |
|
|
$ |
1,693,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The auto loans and leases were designated to repay the securitized notes. Huntington services
the loans and leases and uses the proceeds from principal and interest payments to pay the
securitized notes during the amortization period. Huntington has not provided financial or other
support that was not previously contractually required.
126
Trust Preferred Securities
Under FIN 46R, certain wholly-owned trusts are not consolidated. The trusts have been formed
for the sole purpose of issuing trust preferred securities, from which the proceeds are then
invested in Huntington junior subordinated debentures, which are reflected in Huntington’s
condensed consolidated balance sheet as subordinated notes. The trust securities are the
obligations of the trusts and are not consolidated within Huntington’s balance sheet. A list of
trust preferred securities outstanding at June 30, 2009 follows:
| |
|
|
|
|
|
|
|
|
| |
|
Principal amount of |
|
|
Investment in |
|
| |
|
subordinated note/ |
|
|
unconsolidated |
|
| (in thousands) |
|
debenture issued to trust(1) |
|
|
subsidiary |
|
Huntington Capital I |
|
$ |
138,816 |
|
|
$ |
6,186 |
|
Huntington Capital II |
|
|
60,093 |
|
|
|
3,093 |
|
Huntington Capital III |
|
|
114,032 |
|
|
|
10 |
|
BankFirst Ohio Trust Preferred |
|
|
23,323 |
|
|
|
619 |
|
Sky Financial Capital Trust I |
|
|
65,440 |
|
|
|
1,856 |
|
Sky Financial Capital Trust II |
|
|
30,929 |
|
|
|
929 |
|
Sky Financial Capital Trust III |
|
|
77,974 |
|
|
|
2,320 |
|
Sky Financial Capital Trust IV |
|
|
77,975 |
|
|
|
2,320 |
|
Prospect Trust I |
|
|
6,186 |
|
|
|
186 |
|
|
|
|
|
|
|
|
Total |
|
$ |
594,768 |
|
|
$ |
17,519 |
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Represents the principal amount of debentures issued to each trust, including
unamortized original issue discount. |
Huntington’s investment in the unconsolidated trusts represents the only risk of loss.
During the second quarter of 2009, Huntington redeemed a portion of the junior subordinated
debt associated with the outstanding trust preferred securities of Huntington Capital I, Huntington
Capital II, and Huntington Capital III, for an aggregate of $96.2 million, resulting in a net pre
tax gain of $67.4 million. This was reflected as a debt extinguishment in the condensed
consolidated financial statements.
Each issue of the junior subordinated debentures has an interest rate equal to the
corresponding trust securities distribution rate. Huntington has the right to defer payment of
interest on the debentures at any time, or from time to time for a period not exceeding five years,
provided that no extension period may extend beyond the stated maturity of the related debentures.
During any such extension period, distributions to the trust securities will also be deferred and
Huntington’s ability to pay dividends on its common stock will be restricted. Periodic cash
payments and payments upon liquidation or redemption with respect to trust securities are
guaranteed by Huntington to the extent of funds held by the trusts. The guarantee ranks
subordinate and junior in right of payment to all indebtedness of the company to the same extent as
the junior subordinated debt. The guarantee does not place a limitation on the amount of
additional indebtedness that may be incurred by Huntington.
Low Income Housing Tax Credit Partnerships
Huntington makes certain equity investments in various limited partnerships that sponsor
affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section
42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory
return on capital, to facilitate the sale of additional affordable housing product offerings and to
assist us in achieving goals associated with the Community Reinvestment Act. The primary
activities of the limited partnerships include the identification, development, and operation of
multi-family housing that is leased to qualifying residential tenants. Generally, these types of
investments are funded through a combination of debt and equity.
Huntington does not own a majority of the limited partnership interests in these entities and
is not the primary beneficiary. Huntington uses the equity method to account for the majority of
its investments in these entities. These
investments are included in accrued income and other assets. At June 30, 2009, we have
commitments of $231.5 million of which $169.8 million are funded. The unfunded portion is included
in accrued expenses and other liabilities.
127
Note 15 – Commitments and Contingent Liabilities
Commitments to extend credit
In the ordinary course of business, Huntington makes various commitments to extend credit that
are not reflected in the financial statements. The contract amounts of these financial agreements
at June 30, 2009, December 31, 2008, and June 30, 2008, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
| (in millions) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
Contract amount represents credit risk |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
6,232 |
|
|
$ |
6,494 |
|
|
$ |
6,233 |
|
Consumer |
|
|
4,952 |
|
|
|
4,964 |
|
|
|
4,896 |
|
Commercial real estate |
|
|
1,395 |
|
|
|
1,951 |
|
|
|
2,566 |
|
Standby letters of credit |
|
|
703 |
|
|
|
1,272 |
|
|
|
1,644 |
|
Commitments to extend credit generally have fixed expiration dates, are variable-rate, and
contain clauses that permit Huntington to terminate or otherwise renegotiate the contracts in the
event of a significant deterioration in the customer’s credit quality. These arrangements normally
require the payment of a fee by the customer, the pricing of which is based on prevailing market
conditions, credit quality, probability of funding, and other relevant factors. Since many of these
commitments are expected to expire without being drawn upon, the contract amounts are not
necessarily indicative of future cash requirements. The interest rate risk arising from these
financial instruments is insignificant as a result of their predominantly short-term, variable-rate
nature.
Standby letters of credit are conditional commitments issued to guarantee the performance of a
customer to a third party. These guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most
of these arrangements mature within two years. The carrying amount of deferred revenue associated
with these guarantees was $2.8 million, $4.5 million, and $4.3 million at June 30, 2009, December
31, 2008, and June 30, 2008, respectively.
Through the Company’s credit process, Huntington monitors the credit risks of outstanding
standby letters of credit. When it is probable that a standby letter of credit will be drawn and
not repaid in full, losses are recognized in the provision for credit losses. At June 30, 2009,
Huntington had $0.7 billion of standby letters of credit outstanding, of which 52% were
collateralized. Included in this $0.7 billion total are letters of credit issued by the Bank that
support $0.1 billion of securities that were issued by customers and remarketed by The Huntington
Investment Company (HIC), the Company’s broker-dealer subsidiary. As a result of a change in
credit ratings and pursuant to the letters of credit issued by the Bank, the Bank repurchased
substantially all of these securities, net of payments and maturities, during the first six
months of 2009.
Huntington uses an internal loan grading system to assess an estimate of loss on its loan and
lease portfolio. The same loan grading system is used to help monitor credit risk associated with
standby letters of credit. Under this risk rating system as of June 30, 2009, approximately $98.5
million of the standby letters of credit were rated strong with sufficient asset quality,
liquidity, and good debt capacity and coverage.; approximately $560.7 million were rated average
with acceptable asset quality, liquidity, and modest debt capacity; and approximately $43.7 million
were rated substandard with negative financial trends, structural weaknesses, operating
difficulties, and higher leverage.
Commercial letters of credit represent short-term, self-liquidating instruments that
facilitate customer trade transactions and generally have maturities of no longer than 90 days. The
goods or cargo being traded normally secures these instruments.
Commitments to sell loans
Huntington enters into forward contracts relating to its mortgage banking business to hedge
the exposures from commitments to make new residential mortgage loans with existing customers and
from mortgage loans classified as held for sale. At June 30, 2009, December 31, 2008, and June 30,
2008, Huntington had commitments to sell residential real
estate loans of $828.9 million, $759.4 million, and $577.0 million, respectively. These
contracts mature in less than one year.
128
Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and
various state, city and foreign jurisdictions. Federal income tax audits have been completed
through 2005. Various state and other jurisdictions remain open to examination for tax years 2000
and forward.
The Internal Revenue Service, State of Ohio and state tax officials have proposed adjustments
to the Company’s previously filed tax returns. Management believes that the tax positions taken by
the Company related to such proposed adjustments were correct and supported by applicable statutes,
regulations, and judicial authority, and intends to vigorously defend them. It is possible that
the ultimate resolution of the proposed adjustments, if unfavorable, may be material to the results
of operations in the period it occurs. However, although no assurance can be given, we believe
that the resolution of these examinations will not, individually or in the aggregate, have a
material adverse impact on our consolidated financial position.
Litigation
Between December 19, 2007 and February 1, 2008, two putative class actions were filed in the
United States District Court for the Southern District of Ohio, Eastern Division, against
Huntington and certain of its current or former officers and directors purportedly on behalf of
purchasers of Huntington securities during the periods July 20, 2007 to November 16, 2007, or
July 20, 2007 to January 10, 2008. These complaints seek to allege that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5
promulgated thereunder, and Section 20(a) of the Exchange Act by issuing a series of allegedly
false and/or misleading statements concerning Huntington’s financial results, prospects, and
condition, relating, in particular, to its transactions with Franklin. On June 5, 2008, the two
cases were consolidated into a single action. On August 22, 2008, a consolidated complaint was
filed asserting a class period of July 19, 2007 through November 16, 2007. At this stage, it is not
possible for management to assess the probability of an adverse outcome, or reasonably estimate the
amount of any potential loss.
Three putative derivative class action lawsuits were filed in the Court of Common Pleas of
Delaware County, Ohio, the United States District Court for the Southern District of Ohio, Eastern
Division, and the Court of Common Pleas of Franklin County, Ohio, between January 16, 2008, and
April 17, 2008, against certain of Huntington’s current or former officers and directors variously
seeking to allege breaches of fiduciary duty, waste of corporate assets, abuse of control, gross
mismanagement, and unjust enrichment, all in connection with Huntington’s acquisition of Sky
Financial, certain transactions between Huntington and Franklin, and the financial disclosures
relating to such transactions. Huntington is named as a nominal defendant in each of these actions.
At this stage of the lawsuits, it is not possible for management to assess the probability of an
adverse outcome, or reasonably estimate the amount of any potential loss.
Between February 20, 2008 and February 29, 2008, three putative class action lawsuits were
filed in the United States District Court for the Southern District of Ohio, Eastern Division,
against Huntington, the Huntington Bancshares Incorporated Pension Review Committee, the Huntington
Investment and Tax Savings Plan (the Plan) Administrative Committee, and certain of the Company’s
officers and directors purportedly on behalf of participants in or beneficiaries of the Plan
between either July 1, 2007 or July 20, 2007 and the present. The complaints seek to allege
breaches of fiduciary duties in violation of the Employee Retirement Income Security Act
(ERISA) relating to Huntington stock being offered as an investment alternative for participants in
the Plan. The complaints sought money damages and equitable relief. On May 13, 2008, the three
cases were consolidated into a single action. On August 4, 2008, a consolidated complaint was filed
asserting a class period of July 1, 2007 through the present. On February 9, 2009, the court
entered an order dismissing with prejudice the consolidated lawsuit
in its entirety. Because the case is currently being appealed, it is not possible for management to assess the probability of an
eventual material adverse outcome, or reasonably estimate the amount of any potential loss at this
time.
On May 7, 2008, a putative class action lawsuit was filed in the United States District Court
for the Southern District of Ohio, Eastern Division, against Huntington (as successor in interest
to Sky Financial), and certain of Sky Financial’s former officers on behalf of all persons who
purchased or acquired Sky Financial common stock in connection with and as a result of Sky
Financial’s October 2006 acquisition of Waterfield Mortgage Company. The complaint seeks to allege
that the defendants violated Sections 11, 12, and 15 of the Securities Act of 1933 in connection
with the issuance of allegedly false and misleading registration and proxy statements leading up to the
Waterfield acquisition and their disclosures about the nature and extent of Sky Financial’s lending
relationship with Franklin. On May 1, 2009, Plaintiff filed a stipulation dismissing the lawsuit
with prejudice. The dismissal entry was approved by the Court on May 5, 2009, and the case is now
terminated.
129
Note 16 – Parent Company Financial Statements
The parent company condensed financial statements, which include transactions with
subsidiaries, are as follows.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance Sheets |
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1) |
|
$ |
1,463,068 |
|
|
$ |
1,122,056 |
|
|
$ |
665,135 |
|
Due from The Huntington National Bank |
|
|
552,481 |
|
|
|
532,746 |
|
|
|
31,481 |
|
Due from non-bank subsidiaries |
|
|
289,443 |
|
|
|
338,675 |
|
|
|
331,627 |
|
Investment in The Huntington National Bank |
|
|
3,012,016 |
|
|
|
5,274,261 |
|
|
|
5,664,014 |
|
Investment in non-bank subsidiaries |
|
|
865,154 |
|
|
|
854,575 |
|
|
|
900,910 |
|
Accrued interest receivable and other assets |
|
|
138,980 |
|
|
|
146,167 |
|
|
|
192,797 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
6,321,142 |
|
|
$ |
8,268,480 |
|
|
$ |
7,785,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
1,388 |
|
|
$ |
1,852 |
|
|
$ |
1,951 |
|
Long-term borrowings |
|
|
637,434 |
|
|
|
803,699 |
|
|
|
852,169 |
|
Dividends payable, accrued expenses, and other liabilities |
|
|
461,798 |
|
|
|
234,023 |
|
|
|
548,631 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,100,620 |
|
|
|
1,039,574 |
|
|
|
1,402,751 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity (2) |
|
|
5,220,522 |
|
|
|
7,228,906 |
|
|
|
6,383,213 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
6,321,142 |
|
|
$ |
8,268,480 |
|
|
$ |
7,785,964 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Includes restricted cash of $125,000 at June 30, 2009 and December 31, 2008. |
| |
| (2) |
|
See page 94 for Huntington’s Condensed Consolidated Statements of Changes in
Shareholders’ Equity. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Six months ended |
|
| Statements of Income |
|
June 30, |
|
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-bank subsidiaries |
|
$ |
— |
|
|
$ |
3,000 |
|
|
|
9,250 |
|
|
|
16,845 |
|
Interest from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Huntington National Bank |
|
|
11,636 |
|
|
|
7,387 |
|
|
|
22,987 |
|
|
|
10,431 |
|
Non-bank subsidiaries |
|
|
3,860 |
|
|
|
3,282 |
|
|
|
8,291 |
|
|
|
6,932 |
|
Other |
|
|
67,749 |
|
|
|
65 |
|
|
|
67,569 |
|
|
|
598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income |
|
|
83,245 |
|
|
|
13,734 |
|
|
|
108,097 |
|
|
|
34,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
628 |
|
|
|
5,363 |
|
|
|
2,715 |
|
|
|
10,989 |
|
Interest on borrowings |
|
|
8,527 |
|
|
|
10,686 |
|
|
|
17,917 |
|
|
|
23,241 |
|
Other |
|
|
6,053 |
|
|
|
4,676 |
|
|
|
12,527 |
|
|
|
8,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
|
15,208 |
|
|
|
20,725 |
|
|
|
33,159 |
|
|
|
42,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries |
|
|
68,037 |
|
|
|
(6,991 |
) |
|
|
74,938 |
|
|
|
(7,471 |
) |
Income taxes |
|
|
70,829 |
|
|
|
(3,698 |
) |
|
|
19,202 |
|
|
|
(13,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed net income
of subsidiaries |
|
|
(2,792 |
) |
|
|
(3,293 |
) |
|
|
55,736 |
|
|
|
5,719 |
|
Increase (decrease) in undistributed net income of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Huntington National Bank |
|
|
(133,061 |
) |
|
|
101,961 |
|
|
|
(2,593,366 |
) |
|
|
232,920 |
|
Non-bank subsidiaries |
|
|
10,758 |
|
|
|
2,684 |
|
|
|
(20,672 |
) |
|
|
(10,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
(125,095 |
) |
|
$ |
101,352 |
|
|
$ |
(2,558,302 |
) |
|
$ |
228,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
| |
|
|
|
|
|
|
|
|
| |
|
Six months ended |
|
| Statements of Cash Flows |
|
June 30, |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(2,558,302 |
) |
|
$ |
228,420 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Equity in undistributed net income of subsidiaries |
|
|
2,614,038 |
|
|
|
(222,701 |
) |
Depreciation and amortization |
|
|
2,950 |
|
|
|
680 |
|
Change in other, net |
|
|
188,997 |
|
|
|
138 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
247,683 |
|
|
|
6,537 |
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Repayments from subsidiaries |
|
|
78,527 |
|
|
|
349,898 |
|
Advances to subsidiaries |
|
|
(333,448 |
) |
|
|
(161,584 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(254,921 |
) |
|
|
188,314 |
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Payment of borrowings |
|
|
(99,320 |
) |
|
|
(50,000 |
) |
Dividends paid on preferred stock |
|
|
(56,905 |
) |
|
|
--- |
|
Dividends paid on common stock |
|
|
(43,780 |
) |
|
|
(183,621 |
) |
Proceeds from issuance of preferred stock |
|
|
— |
|
|
|
550,849 |
|
Proceeds from issuance of common stock |
|
|
548,255 |
|
|
|
(433 |
) |
|
|
|
|
|
|
|
Net cash used for financing activities |
|
|
348,250 |
|
|
|
316,795 |
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
341,012 |
|
|
|
511,646 |
|
Cash and cash equivalents at beginning of year |
|
|
1,122,056 |
|
|
|
153,489 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
1,463,068 |
|
|
$ |
665,135 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
17,917 |
|
|
$ |
23,241 |
|
131
Note 17 – Segment Reporting
In the second quarter of 2009, Huntington reorganized its Regional Banking segment to reflect
how its assets and operations are now managed. The Regional Banking line of business, which
through March 31, 2009, had been managed geographically, is now managed on a product segment
approach. The five distinct segments are: Retail and Business Banking, Commercial Banking,
Commercial Real Estate, Auto Finance and Dealer Services (AFDS), and the Private Financial Group
(PFG). A sixth group includes the Treasury function and other unallocated assets, liabilities,
revenue, and expense. All periods have been reclassified to conform to
the current period presentation.
Segment results are determined based upon the Company’s management reporting system, which
assigns balance sheet and income statement items to each of the business segments. The process is
designed around the Company’s organizational and management structure and, accordingly, the results
derived are not necessarily comparable with similar information published by other financial
institutions. An overview of this system is provided below, along with a description of each
segment and discussion of financial results.
Retail and Business Banking: This segment provides traditional banking products and services to
consumer and small business customers located in its 11 operating regions within the six states of
Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. It provides these services
through a banking network of over 600 branches, and almost 1,400 ATMs, along with internet and
telephone banking channels. It also provides certain services on a limited basis outside of these
six states, including mortgage banking and small business administration (SBA) lending. Retail
products and services include home equity loans and lines of credit, first mortgage loans, direct
installment loans, small business loans, personal and business deposit products, as well as sales
of investment and insurance services. At June 30, 2009, Retail and Business Banking accounted for
41% and 73% of consolidated loans and leases and deposits, respectively.
Commercial Banking: This segment provides a variety of banking products and services to customers
within the Company’s primary banking markets who generally have larger credit exposures and sales
revenues compared with its Retail and Business Banking customers. Commercial Banking products
include commercial loans, international trade, cash management, leasing, interest rate protection
products, capital market alternatives, 401(k) plans, and mezzanine investment capabilities. The
Commercial Banking team also serves customers that specialize in equipment leasing, as well as
serves the commercial banking needs of government entities, not-for-profit organizations, and large
corporations. Commercial bankers personally deliver these products and services by developing
leads through community involvement, referrals from other professionals, and targeted prospect
calling.
Commercial Real Estate: This segment serves professional real estate developers or other customers
with real estate project financing needs within the Company’s primary banking markets. Commercial
Real Estate products and services include CRE loans, cash management, interest rate protection
products, and capital market alternatives. Commercial real estate bankers personally deliver these
products and services by: (a) relationships with developers in the Company’s footprint who
are recognized as the most experienced, well-managed, and well-capitalized, and are capable of
operating in all phases of the real estate cycle (“top-tier developers”), (b) leads through
community involvement, and (c) referrals from other professionals.
Auto Finance and Dealer Services (AFDS): This segment provides a variety of banking products and
services to more than 2,000 automotive dealerships within the Company’s primary banking markets.
During the first quarter of 2009, AFDS discontinued lending activities in Arizona, Florida,
Tennessee, Texas, and Virginia. Also, all lease origination activities were discontinued during
the 2008 fourth quarter. AFDS finances the purchase of automobiles by customers at the automotive
dealerships; finances dealerships’ new and used vehicle inventories, land, buildings, and other
real estate owned by the dealership; finances dealership working capital needs; and provides other
banking services to the automotive dealerships and their owners. Competition from the financing
divisions of automobile manufacturers and from other financial institutions is intense. AFDS’
production opportunities are directly impacted by the general automotive sales business, including
programs initiated by manufacturers to enhance and increase sales directly. Huntington has been in
this line of business for over 50 years.
132
Private Financial Group (PFG): This segment provides products and services designed to meet the
needs of higher net worth customers. Revenue results from the sale of trust, asset management,
investment advisory, brokerage, insurance, and private banking products and services including
credit and lending activities. PFG also focuses on financial solutions for corporate and
institutional customers that include investment banking, sales and trading of securities, and
interest rate risk management products. To serve high net worth customers, we use a unique distribution model
that employs a single, unified sales force to deliver products and services mainly through Retail
and Business Banking distribution channels.
In addition to the Company’s five business segments, the Treasury / Other group includes revenue
and expense related to assets, liabilities, and equity that are not directly assigned or allocated
to one of the five business segments. Assets in this group include investment securities and bank
owned life insurance. Net interest income/(expense) includes the net impact of administering the
Company’s investment securities portfolios as part of overall liquidity management. A match-funded
transfer pricing system is used to attribute appropriate funding interest income and interest
expense to other business segments. As such, net interest income includes the net impact of any
over or under allocations arising from centralized management of interest rate risk. Furthermore,
net interest income includes the net impact of derivatives used to hedge interest rate sensitivity.
Non-interest income includes miscellaneous fee income not allocated to other business segments,
including bank owned life insurance income. Fee income also includes asset revaluations not
allocated to business segments, as well as any investment securities and trading assets gains or
losses. The non-interest expense includes certain corporate administrative, merger costs, and other
miscellaneous expenses not allocated to business segments. This group also includes any difference
between the actual effective tax rate of Huntington and the statutory tax rate used to allocate
income taxes to the other segments.
133
Listed below are certain financial results by line of business. For the three months and six
months ended June 30, 2009 and 2008, operating earnings were the same as reported earnings.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended June 30, |
|
| |
|
Retail & |
|
|
|
|
|
|
|
|
|
|
|
Former |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income Statements |
|
Business |
|
|
|
|
|
|
Commercial |
|
|
|
Regional |
|
|
|
|
|
|
|
|
|
|
Treasury/ |
|
|
|
Huntington |
|
| (in thousands ) |
|
Banking |
|
|
Commercial |
|
|
Real Estate |
|
|
|
Banking |
|
|
AFDS |
|
|
PFG |
|
|
Other |
|
|
|
Consolidated |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
258,833 |
|
|
$ |
77,630 |
|
|
$ |
45,856 |
|
|
|
$ |
382,319 |
|
|
$ |
32,063 |
|
|
$ |
26,199 |
|
|
$ |
(90,682 |
) |
|
|
$ |
349,899 |
|
Provision for credit losses |
|
|
(127,983 |
) |
|
|
(107,378 |
) |
|
|
(165,525 |
) |
|
|
|
(400,886 |
) |
|
|
(13,097 |
) |
|
|
(9,807 |
) |
|
|
10,083 |
|
|
|
|
(413,707 |
) |
Non interest income |
|
|
128,465 |
|
|
|
20,546 |
|
|
|
166 |
|
|
|
|
149,177 |
|
|
|
17,151 |
|
|
|
61,597 |
|
|
|
38,020 |
|
|
|
|
265,945 |
|
Non interest expense |
|
|
(206,993 |
) |
|
|
(37,552 |
) |
|
|
(6,128 |
) |
|
|
|
(250,673 |
) |
|
|
(26,150 |
) |
|
|
(58,612 |
) |
|
|
(4,547 |
) |
|
|
|
(339,982 |
) |
Income taxes |
|
|
(18,313 |
) |
|
|
16,364 |
|
|
|
43,971 |
|
|
|
|
42,022 |
|
|
|
(3,488 |
) |
|
|
(6,782 |
) |
|
|
(19,002 |
) |
|
|
|
12,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating / reported net income |
|
$ |
34,009 |
|
|
$ |
(30,390 |
) |
|
$ |
(81,660 |
) |
|
|
$ |
(78,041 |
) |
|
$ |
6,479 |
|
|
$ |
12,595 |
|
|
$ |
(66,128 |
) |
|
|
$ |
(125,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
243,711 |
|
|
$ |
79,125 |
|
|
$ |
42,736 |
|
|
|
$ |
365,572 |
|
|
$ |
36,976 |
|
|
$ |
19,717 |
|
|
$ |
(32,399 |
) |
|
|
$ |
389,866 |
|
Provision for credit losses |
|
|
(53,038 |
) |
|
|
(26,953 |
) |
|
|
(30,522 |
) |
|
|
|
(110,513 |
) |
|
|
(7,152 |
) |
|
|
(3,148 |
) |
|
|
— |
|
|
|
|
(120,813 |
) |
Non interest income |
|
|
118,070 |
|
|
|
23,669 |
|
|
|
4,367 |
|
|
|
|
146,106 |
|
|
|
14,795 |
|
|
|
64,309 |
|
|
|
11,220 |
|
|
|
|
236,430 |
|
Non interest expense |
|
|
(196,345 |
) |
|
|
(40,110 |
) |
|
|
(6,986 |
) |
|
|
|
(243,441 |
) |
|
|
(30,318 |
) |
|
|
(61,461 |
) |
|
|
(42,583 |
) |
|
|
|
(377,803 |
) |
Income taxes |
|
|
(39,339 |
) |
|
|
(12,506 |
) |
|
|
(3,358 |
) |
|
|
|
(55,203 |
) |
|
|
(5,005 |
) |
|
|
(6,796 |
) |
|
|
40,676 |
|
|
|
|
(26,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating / reported net income |
|
$ |
73,059 |
|
|
$ |
23,225 |
|
|
$ |
6,237 |
|
|
|
$ |
102,521 |
|
|
$ |
9,296 |
|
|
$ |
12,621 |
|
|
$ |
(23,086 |
) |
|
|
$ |
101,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, |
|
| |
|
Retail & |
|
|
|
|
|
|
|
|
|
|
|
Former |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income Statements |
|
Business |
|
|
|
|
|
|
Commercial |
|
|
|
Regional |
|
|
|
|
|
|
|
|
|
|
Treasury/ |
|
|
|
Huntington |
|
| (in thousands of dollars) |
|
Banking |
|
|
Commercial |
|
|
Real Estate |
|
|
|
Banking |
|
|
AFDS |
|
|
PFG |
|
|
Other |
|
|
|
Consolidated |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
510,682 |
|
|
$ |
153,725 |
|
|
$ |
90,126 |
|
|
|
$ |
754,533 |
|
|
$ |
71,153 |
|
|
$ |
48,373 |
|
|
$ |
(186,655 |
) |
|
|
$ |
687,404 |
|
Provision for credit losses |
|
|
(219,076 |
) |
|
|
(158,781 |
) |
|
|
(262,932 |
) |
|
|
|
(640,789 |
) |
|
|
(57,105 |
) |
|
|
(19,396 |
) |
|
|
11,746 |
|
|
|
|
(705,544 |
) |
Non-Interest income |
|
|
253,998 |
|
|
|
44,849 |
|
|
|
1,105 |
|
|
|
|
299,952 |
|
|
|
27,065 |
|
|
|
125,498 |
|
|
|
52,532 |
|
|
|
|
505,047 |
|
Non-Interest expense,
excluding goodwill impairment |
|
|
(407,072 |
) |
|
|
(70,136 |
) |
|
|
(12,693 |
) |
|
|
|
(489,901 |
) |
|
|
(55,744 |
) |
|
|
(119,336 |
) |
|
|
(37,826 |
) |
|
|
|
(702,807 |
) |
Goodwill impairment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
(2,573,818 |
)(1) |
|
|
— |
|
|
|
(28,895 |
) |
|
|
(4,231 |
) |
|
|
|
(2,606,944 |
) |
Income taxes |
|
|
(48,486 |
) |
|
|
10,620 |
|
|
|
64,538 |
|
|
|
|
26,672 |
|
|
|
5,121 |
|
|
|
(2,185 |
) |
|
|
234,934 |
|
|
|
|
264,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating / reported net income |
|
$ |
90,046 |
|
|
$ |
(19,723 |
) |
|
$ |
(119,856 |
) |
|
|
$ |
(2,623,351 |
) |
|
$ |
(9,510 |
) |
|
$ |
4,059 |
|
|
$ |
70,500 |
|
|
|
$ |
(2,558,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
477,709 |
|
|
$ |
159,716 |
|
|
$ |
86,368 |
|
|
|
$ |
723,793 |
|
|
$ |
74,888 |
|
|
$ |
39,405 |
|
|
$ |
(71,396 |
) |
|
|
$ |
766,690 |
|
Provision for credit losses |
|
|
(93,691 |
) |
|
|
(25,401 |
) |
|
|
(60,911 |
) |
|
|
|
(180,003 |
) |
|
|
(24,417 |
) |
|
|
(5,043 |
) |
|
|
— |
|
|
|
|
(209,463 |
) |
Non-Interest income |
|
|
204,062 |
|
|
|
48,936 |
|
|
|
8,265 |
|
|
|
|
261,263 |
|
|
|
27,476 |
|
|
|
131,748 |
|
|
|
51,695 |
|
|
|
|
472,182 |
|
Non-Interest expense |
|
|
(399,945 |
) |
|
|
(79,617 |
) |
|
|
(14,178 |
) |
|
|
|
(493,740 |
) |
|
|
(55,870 |
) |
|
|
(126,624 |
) |
|
|
(72,050 |
) |
|
|
|
(748,284 |
) |
Income taxes |
|
|
(65,847 |
) |
|
|
(36,272 |
) |
|
|
(6,840 |
) |
|
|
|
(108,959 |
) |
|
|
(7,727 |
) |
|
|
(13,820 |
) |
|
|
77,801 |
|
|
|
|
(52,705 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating / reported net income |
|
$ |
122,288 |
|
|
$ |
67,362 |
|
|
$ |
12,704 |
|
|
|
$ |
202,354 |
|
|
$ |
14,350 |
|
|
$ |
25,666 |
|
|
$ |
(13,950 |
) |
|
|
$ |
228,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Represents the 2009 first quarter goodwill impairment charge associated with the
former Regional Banking segment. The allocation of this amount to the new business segments was not
practical. |
134
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Assets at |
|
|
Deposits at |
|
| |
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
| (in millions) |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
| |
Retail & Business Banking |
|
$ |
18,318 |
|
|
$ |
18,230 |
|
|
$ |
18,573 |
|
|
$ |
27,852 |
|
|
$ |
27,314 |
|
|
$ |
26,238 |
|
Commercial Banking |
|
|
8,448 |
|
|
|
8,883 |
|
|
|
8,741 |
|
|
|
5,614 |
|
|
|
5,180 |
|
|
|
6,495 |
|
Commercial Real Estate |
|
|
6,906 |
|
|
|
7,116 |
|
|
|
6,693 |
|
|
|
404 |
|
|
|
433 |
|
|
|
495 |
|
AFDS |
|
|
5,182 |
|
|
|
6,376 |
|
|
|
6,413 |
|
|
|
84 |
|
|
|
68 |
|
|
|
59 |
|
PFG |
|
|
3,389 |
|
|
|
3,242 |
|
|
|
2,963 |
|
|
|
2,728 |
|
|
|
1,777 |
|
|
|
1,695 |
|
Treasury / Other |
|
|
9,154 |
|
|
|
7,618 |
|
|
|
9,061 |
|
|
|
2,483 |
|
|
|
3,171 |
|
|
|
3,142 |
|
Unallocated goodwill (1) |
|
|
— |
|
|
|
2,888 |
|
|
|
2,890 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,397 |
|
|
$ |
54,353 |
|
|
$ |
55,334 |
|
|
$ |
39,165 |
|
|
$ |
37,943 |
|
|
$ |
38,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Represents the balance of goodwill associated with the former Regional Banking
business segment. The allocation of these amounts to the new business segments is not practical. |
135
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures for the current period can be found in the Market
Risk section of this report, which includes changes in market risk exposures from disclosures
presented in Huntington’s 2008 Form 10-K.
Item 4. Controls and Procedures
Huntington maintains disclosure controls and procedures designed to ensure that the
information required to be disclosed in the reports that it files or submits under the Securities
Exchange Act of 1934, as amended, are recorded, processed, summarized, and reported within the time
periods specified in the Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the Act is accumulated and
communicated to the issuer’s management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. Huntington’s Management, with the participation of its Chief
Executive Officer and the Chief Financial Officer, evaluated the effectiveness of Huntington’s
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation,
Huntington’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, Huntington’s disclosure controls and procedures were effective.
There have not been any changes in Huntington’s internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or are reasonably likely to
materially affect, Huntington’s internal control over financial reporting.
Item 4T. Controls and Procedures
Not applicable
PART II. OTHER INFORMATION
In accordance with the instructions to Part II, the other specified items in this part have
been omitted because they are not applicable or the information has been previously reported.
Item 1. Legal Proceedings
Information required by this item is set forth in Note 15 of Notes to Unaudited Condensed
Consolidated Financial Statements included in Item 1 of this report and incorporated herein by
reference.
Item 1A. Risk Factors
Information required by this item is set forth in Part 1 Item 2.- Management’s Discussion and
Analysis of Financial Condition and Results of Operations of this report and incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
Huntington held its annual meeting of shareholders on April 22, 2009. At this meeting, the
shareholders approved the following management proposals:
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Abstain/ |
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For |
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Against |
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Withheld |
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Non-Votes |
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1. Election of four
directors to serve as
Class I Directors until
the 2011 Annual Meeting
of Shareholders and
until their successors
are elected and
qualified as follows: |
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John B. Gerlach, Jr. |
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221,616,912 |
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60,977,345 |
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D. James Hilliker |
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222,321,562 |
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60,272,695 |
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Jonathan A. Levy |
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255,344,947 |
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27,249,310 |
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Gene E. Little |
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254,915,637 |
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27,678,619 |
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2. Approve the Amended and
Restated 2007 Stock and
Long-Term Incentive
Plan |
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166,384,643 |
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26,918,007 |
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2,812,205 |
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86,479,401 |
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3. Ratification of
Deloitte & Touche LLP
as independent auditors
for Huntington for the
year 2009. |
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275,427,560 |
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6,000,177 |
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1,166,519 |
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4. Non-binding advisory
vote on the
compensation of
executives as disclosed
in the 2009 annual
proxy statement. |
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211,722,744 |
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65,985,162 |
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4,886,351 |
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136
Item 6. Exhibits
This report incorporates by reference the documents listed below that we have previously filed with
the SEC. The SEC allows us to incorporate by reference information in this document. The
information incorporated by reference is considered to be a part of this document, except for any
information that is superseded by information that is included directly in this document.
This information may be read and copied at the Public Reference Room of the SEC at 100 F Street,
N.E., Washington, D.C. 20549. The SEC also maintains an Internet web site that contains reports,
proxy statements, and other information about issuers, like us, who file electronically with the
SEC. The address of the site is http://www.sec.gov. The reports and other information filed by us
with the SEC are also available at our Internet web site. The address of the site is
http://www.huntington.com. Except as specifically incorporated by reference into this Quarterly
Report on Form 10-Q, information on those web sites is not part of this report. You also should be
able to inspect reports, proxy statements, and other information about us at the offices of the
NASDAQ National Market at 33 Whitehall Street, New York, New York.
(a) Exhibits
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Incorporated from |
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SEC File or |
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| Exhibit |
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|
Report or Registration |
|
Registration |
|
Exhibit |
| Number |
|
Document Description |
|
Statement |
|
Number |
|
Reference |
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3.1 |
|
|
Articles of Restatement of Charter
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|
Annual Report on Form
10-K for the year
ended December 31,
1993.
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000-02525
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3 |
(i) |
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3.2 |
|
|
Articles of Amendment to Articles of Restatement of
Charter.
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|
Current Report on
Form 8-K dated May
31, 2007
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000-02525
|
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|
3.1 |
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3.3 |
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|
Articles of Amendment to Articles of Restatement of
Charter
|
|
Current Report on
Form 8-K dated May 7,
2008
|
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000-02525
|
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|
3.1 |
|
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3.4 |
|
|
Articles Supplementary of Huntington Bancshares
Incorporated, as of April 22, 2008.
|
|
Current Report on
Form 8-K dated April
22, 2008
|
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000-02525
|
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|
3.1 |
|
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3.5 |
|
|
Articles Supplementary of Huntington Bancshares
Incorporated, as of April 22. 2008.
|
|
Current Report on
Form 8-K dated April
22, 2008
|
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000-02525
|
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|
3.2 |
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3.6 |
|
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Articles Supplementary of Huntington Bancshares
Incorporated, as of November 12, 2008.
|
|
Current Report on
Form 8-K dated
November 12, 2008
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001-34073
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3.1 |
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3.7 |
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Articles Supplementary of Huntington Bancshares
Incorporated, as of December 31, 2006.
|
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Annual Report on Form
10-K for the year
ended December 31,
2006
|
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000-02525
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3.4 |
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3.8 |
|
|
Bylaws of Huntington Bancshares Incorporated, as
amended and restated, as of January 21, 2009.
|
|
Current Report on
Form 8-K dated
January 23, 2009.
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001-34073
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3.1 |
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4.1 |
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Instruments defining the Rights of Security Holders
— reference is made to Articles Fifth, Eighth, and
Tenth of Articles of Restatement of Charter, as
amended and supplemented. Instruments defining the
rights of holders of long-term debt will be
furnished to the Securities and Exchange Commission
upon request. |
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10.1 |
* |
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2009 Stock Option Grant Notice to Stephen D.
Steinour.
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Quarterly Report on
Form 10-Q for the
quarter ended March
31, 2009.
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001-34073
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10.1 |
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10.2 |
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Schedule identifying material details of Executive
Agreements. |
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10.3 |
* |
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Relocation assistance and reimbursement agreement
with Mark E. Thompson dated May 7, 2009. |
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12.1 |
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Ratio of Earnings to Fixed Charges. |
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12.2 |
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Ratio of Earnings to Fixed Charges and Preferred
Dividends. |
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31.1 |
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Rule 13a-14(a) Certification — Chief Executive
Officer. |
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31.2 |
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Rule 13a-14(a) Certification — Chief Financial
Officer. |
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32.1 |
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Section 1350 Certification — Chief Executive Officer. |
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32.2 |
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Section 1350 Certification — Chief Financial Officer. |
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| * |
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Denotes management contract or compensatory plan or arrangement. |
137
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Huntington Bancshares Incorporated
(Registrant)
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| Date: August 10, 2009 |
/s/ Stephen D. Steinour
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Stephen D. Steinour |
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Chairman, Chief Executive Officer and
President |
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| Date: August 10, 2009 |
/s/ Donald R. Kimble
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Donald R. Kimble |
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Sr. Executive Vice President and Chief Financial Officer |
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138
EXHIBIT INDEX
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Incorporated from |
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SEC File or |
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| Exhibit |
|
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|
Report or Registration |
|
Registration |
|
Exhibit |
| Number |
|
Document Description |
|
Statement |
|
Number |
|
Reference |
| |
3.1 |
|
|
Articles of Restatement of Charter
|
|
Annual Report on Form
10-K for the year
ended December 31,
1993.
|
|
000-02525
|
|
|
3 |
(i) |
| |
3.2 |
|
|
Articles of Amendment to Articles of Restatement of
Charter.
|
|
Current Report on
Form 8-K dated May
31, 2007
|
|
000-02525
|
|
|
3.1 |
|
| |
3.3 |
|
|
Articles of Amendment to Articles of Restatement of
Charter
|
|
Current Report on
Form 8-K dated May 7,
2008
|
|
000-02525
|
|
|
3.1 |
|
| |
3.4 |
|
|
Articles Supplementary of Huntington Bancshares
Incorporated, as of April 22, 2008.
|
|
Current Report on
Form 8-K dated April
22, 2008
|
|
000-02525
|
|
|
3.1 |
|
| |
3.5 |
|
|
Articles Supplementary of Huntington Bancshares
Incorporated, as of April 22. 2008.
|
|
Current Report on
Form 8-K dated April
22, 2008
|
|
000-02525
|
|
|
3.2 |
|
| |
3.6 |
|
|
Articles Supplementary of Huntington Bancshares
Incorporated, as of November 12, 2008.
|
|
Current Report on
Form 8-K dated
November 12, 2008
|
|
001-34073
|
|
|
3.1 |
|
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3.7 |
|
|
Articles Supplementary of Huntington Bancshares
Incorporated, as of December 31, 2006.
|
|
Annual Report on Form
10-K for the year
ended December 31,
2006
|
|
000-02525
|
|
|
3.4 |
|
| |
3.8 |
|
|
Bylaws of Huntington Bancshares Incorporated, as
amended and restated, as of January 21, 2009.
|
|
Current Report on
Form 8-K dated
January 23, 2009.
|
|
001-34073
|
|
|
3.1 |
|
| |
4.1 |
|
|
Instruments defining the Rights of Security Holders
— reference is made to Articles Fifth, Eighth, and
Tenth of Articles of Restatement of Charter, as
amended and supplemented. Instruments defining the
rights of holders of long-term debt will be
furnished to the Securities and Exchange Commission
upon request. |
|
|
|
|
|
|
|
|
| |
10.1 |
* |
|
2009 Stock Option Grant Notice to Stephen D.
Steinour.
|
|
Quarterly Report on
Form 10-Q for the
quarter ended March
31, 2009.
|
|
001-34073
|
|
|
10.1 |
|
| |
10.2 |
|
|
Schedule identifying material details of Executive
Agreements. |
|
|
|
|
|
|
|
|
| |
10.3 |
* |
|
Relocation assistance and reimbursement agreement
with Mark E. Thompson dated May 7, 2009. |
|
|
|
|
|
|
|
|
| |
12.1 |
|
|
Ratio of Earnings to Fixed Charges. |
|
|
|
|
|
|
|
|
| |
12.2 |
|
|
Ratio of Earnings to Fixed Charges and Preferred
Dividends. |
|
|
|
|
|
|
|
|
| |
31.1 |
|
|
Rule 13a-14(a) Certification — Chief Executive
Officer. |
|
|
|
|
|
|
|
|
| |
31.2 |
|
|
Rule 13a-14(a) Certification — Chief Financial
Officer. |
|
|
|
|
|
|
|
|
| |
32.1 |
|
|
Section 1350 Certification — Chief Executive Officer. |
|
|
|
|
|
|
|
|
| |
32.2 |
|
|
Section 1350 Certification — Chief Financial Officer. |
|
|
|
|
|
|
|
|
| |
|
|
| * |
|
Denotes management contract or compensatory plan or arrangement. |