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 September 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):
| Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o
(Do not check if a smaller reporting company) |
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 715,049,729 shares of Registrant’s common stock ($0.01 par value) outstanding on October
31, 2009.
Huntington Bancshares Incorporated
INDEX
2
PART 1. 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’s (TARP) voluntary
Capital Purchase Plan 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 nine-month period of 2009, with nonaccrual loans and leases (NALs) and
nonperforming assets (NPAs) both increasing at September 30, 2009, compared with December 31, 2008,
and September 30, 2008. The allowance for credit losses (ACL) of $1,082.1 million at September 30,
2009, was 2.90% of period-end loans and leases and 50% 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 regularly review the ACL
for adequacy considering changes in economic conditions and trends, as well as loan collateral
values. Our ACL reserving methodology uses individual loan portfolio performance factors based on
an analysis of historical charge-off experience and migration patterns as part of the determination
of ACL adequacy. Such factors are subject to regular review and may change to reflect updated
performance trends and expectations, particularly in times of severe stress. 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 determined to not be 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.
Recent
legislative proposals in Congress and regulatory proposals at
the Federal Reserve could impact how we assess fees on deposit
accounts for items and transactions that either overdraw an account
or that are returned for nonsufficient funds. These proposals are in
the discussion phase and remain subject to significant modification
and revision prior to becoming final, and it is uncertain what
changes, if any, will be adopted. As such, we cannot predict the
impact of these proposals to us, or whether they could have a
material and adverse effect on our results of operations.
If the Federal Deposit Insurance Corporation (FDIC) permits the Transaction Account Guarantee
Program (TAGP) to expire as scheduled on June 30, 2010, our customers may choose to reduce their
deposits with us. This could reduce our retail and commercial deposits, our primary source of
funding for the Bank.
We have elected to participate in the TAGP, a voluntary program provided by the FDIC as part
of its Temporary Liquidity Guarantee Program (TLGP), that is currently scheduled to expire on June
30, 2010. Under the program, all noninterest bearing transaction deposit accounts are fully
guaranteed by the FDIC for the entire amount in the account providing our customers with extra
deposit insurance coverage. The coverage under the TAGP is in addition to and separate from the
$250,000 coverage available under the FDIC’s general deposit insurance rules. If the FDIC permits
the program to expire as scheduled, our customers may choose to reduce their deposits with us in an
effort to maintain deposit insurance coverage. This could reduce our retail and commercial core
deposits, our primary source of funding for the Bank.
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At September 30, 2009, noninterest bearing transaction account balances exceeding $250,000
totaled $2.0 billion. This $2.0 billion represents the amount of noninterest bearing transaction
customer deposits that would not have been FDIC insured without the additional coverage provided by
the TAGP.
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.
During the first nine-month period of 2009, we issued 346.8 million shares of additional
common stock through two common stock public offerings, three discretionary equity issuance
programs, and conversions of preferred stock into common stock. The issuance of these additional
shares of common stock resulted in a 95% increase of outstanding shares of common stock at
September 30, 2009, compared with December 31, 2008, and those additional shares were significantly
dilutive to existing common shareholders. (See the “Capital” section located within the “Risk
Management and Capital” section for additional information). As of September 30, 2009, we had
128.2 million of additional authorized common shares available for issuance, and 4.7 million of
additional authorized preferred shares available for issuance.
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. On October 22, 2009, we
announced an offer to purchase certain subordinated notes issued previously by the Bank. The offer
established the cash prices that we would pay for each of the subordinated note issuances, and
established a maximum amount that we would purchase of $400 million of principal outstanding (see
“Bank Liquidity and Other Sources of Liquidity” discussion located within the “Risk Management and
Capital” section).
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.
Furthermore, in order to improve our capital ratios above our already “well-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.
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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 Credit Management Corporation
(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.
Recent Accounting Pronouncements and Developments
Note 3 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.
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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 with regard to our ACL, deferred tax assets, investment securities portfolio,
goodwill, Franklin loans, our commercial loan portfolio, and other real estate owned (OREO).
Total Allowances for Credit Losses (ACL)
The ACL is the sum of the ALLL and the allowance for unfunded loan commitments and letters of
credit (AULC), and represents the estimate of the level of reserves appropriate to absorb inherent
credit losses. The amount of the ACL was determined by judgments regarding the quality of each
individual loan portfolio and loan commitments. All known relevant internal and external factors
that affected loan collectibility were considered, including analysis of historical charge-off
experience, migration patterns, changes in economic conditions, and changes in loan collateral
values. Such factors are subject to regular review and may change to reflect updated performance
trends and expectations, particularly in times of severe stress. We believe the process for
determining the ACL considers all of the potential factors that could result in credit losses.
However, the process includes judgmental and quantitative elements that may be subject to
significant change. 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. To the extent actual
outcomes differ from our estimates, the credit quality of our customer base materially decreases,
the risk profile of a market, industry, or group of customers changes materially, or if the ACL is
determined to not be adequate, additional provision for credit losses could be required, which
could adversely affect our business, financial condition, liquidity, capital, and results of
operations in future periods.
The ACL of $1,082.1 million at September 30, 2009, was 2.90% of period-end loans and leases.
To illustrate the potential effect on the financial statements of our estimates of the ACL, a 10
basis point, or 3%, increase would have required $37.0 million in additional reserves (funded by
additional provision for credit losses), which would have negatively impacted the net income of the
first nine-month period of 2009 by approximately $24.1 million, or $0.05 per common share. The ACL
of $1,082.1 million at September 30, 2009, represented a 15% increase from $944.4 million at
December 31, 2008.
Deferred Tax Assets
At September 30, 2009, we had a net deferred tax asset of $297.1 million. Based on our
ability to offset approximately two-thirds of the net deferred tax asset against taxable income in
prior carryback years and level of our forecast of future taxable income, there was no impairment
of the deferred tax asset at September 30, 2009. All available evidence, both positive and
negative, was considered to determine whether, based on the weight of that evidence, impairment
should be recognized. However, our forecast process includes judgmental and quantitative elements
that may be subject to significant change. If our forecast of taxable income within the
carryback/carryforward periods available under applicable law is not sufficient to cover the amount
of net deferred tax assets, such assets may be impaired.
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 new guidance from the Financial Accounting
Standards Board (FASB) that impacts estimates and assumptions utilized by us in determining the
fair values of securities. FASB’s update to Accounting Standards Codification (ASC) 820, “Fair
Value Measurements”, reaffirms the exit price fair value measurement guidance and also provides
additional guidance for estimating fair value when the volume and level of activity for the asset
or liability have significantly decreased. FASB’s changes to ASC 320, “Investments — Debt and
Equity Securities”, 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 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.
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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 new guidance required an after-tax adjustment at the beginning of the 2009 second quarter
of $3.5 million to increase retained earnings, with an equal and offsetting adjustment to OCI, that
was recorded 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.
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 weakened economic environment. The Alt-A and CMO securities
portfolios are subjected to a monthly review of the projected cash flows, while the cash flows of
our pooled-trust-preferred securities portfolio are reviewed quarterly in support of our impairment
analysis. These reviews are supported with analysis from independent third parties. 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
specialist 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 is probable that all contractual cash flows would not
be collected. All securities in these portfolios remained current with respect to interest and
principal at September 30, 2009.
Our analysis indicated, as of September 30, 2009, a total of 8 Alt-A mortgage-backed
securities and 6 private-label CMO securities could experience a loss of principal in the future.
The future expected losses of principal on these other-than-temporarily impaired securities ranged
from 0.06% to 83.23% of their par value. These losses were projected to occur beginning anywhere
from 5 months to as many as 17 years in the future. We measured the amount of credit impairment on
these securities using the cash flows discounted at each security’s effective rate. As a result,
in the 2009 third quarter, we recorded $2.3 million of credit OTTI in our Alt-A mortgage-backed
securities portfolio and $1.7 million of credit OTTI in our private-label CMO securities portfolio.
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 security’s 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 ASC-820, “Fair Value Measurements and Disclosures”.
9
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. No recoveries were assumed on issuers who are in default. The recovery assumptions
on issuers who are deferring interest ranged from 10% to 55% with a cure assumed after the maximum
deferral period. As a result of this testing, we believe we will experience a loss of principal or
interest on 11 securities; and as such, recorded credit OTTI of $14.6 million for 3 newly impaired
and 8 previously impaired pooled-trust-preferred securities in the 2009 third quarter.
Please refer to the “Investment Securities Portfolio” discussion for additional information
regarding OTTI.
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. Many peer
banks also experienced similar significant 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).
| |
• |
|
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. |
| |
| |
• |
|
There was no goodwill associated with AFDS and, therefore, it was not subject to
impairment testing. |
10
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.
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 AND 2009 THIRD QUARTER IMPAIRMENT TESTING
While we recorded an impairment charge of $4.2 million in the 2009 second quarter related to
the sale of a small payments-related business completed in July 2009, we concluded that no other
goodwill impairment was required during either the 2009 second quarter or the 2009 third 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.
11
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
as the remaining goodwill balance was only $0.4 billion at September 30, 2009.
Franklin Loans Restructuring Transaction
(This section should be read in conjunction with Note 4 of the Notes to the Unaudited
Condensed Consolidated Financial Statements).
Franklin is a specialty consumer finance company primarily engaged in servicing performing,
reperforming, and nonperforming 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.
These loans generally fell outside the underwriting standards of the Federal National Mortgage
Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or
“Freddie Mac”), and involve elevated credit risk as a result of the nature or absence of income
documentation, limited credit histories, higher levels of consumer debt, and/or past credit
difficulties (“nonprime loans”). 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 83% ownership right in a trust which
holds all the underlying consumer loans and 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, these 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 ASC 805, “Business Combinations”, 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 83% 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.
Commercial Loans
Commercial loans, including CRE loans, are evaluated periodically for impairment. Impairment
guidance in ASC 310-10-35, “Receivables — Subsequent Measurement”, requires an allowance to be
established as a component of the ALLL when, based upon current information and events, it is
probable that all amounts due according to the contractual terms of the loan or lease will not be
collected. The amount of the impairment is measured using the present value of expected future cash
flows discounted at the loan’s or lease’s effective interest rate, or, as a practical expedient,
the observable market price of the loan or lease, or, the fair value of the collateral if the loan
or lease is collateral dependent. When the present value of expected future cash flows is used,
the effective interest rate is the contractual interest rate of the loan adjusted for any premium
or discount. When the contractual interest rate is variable, the effective interest rate of the
loan changes over time. Interest income is recognized on impaired loans using a cost recovery
method unless the receipt of principal and interest as they become contractually due is not in
doubt, such as in a troubled debt restructuring (TDR). TDRs of impaired loans that continue to
perform under the restructured terms continue to accrue interest. This process of determining
impairment includes judgmental and quantitative elements that may be subject to significant change.
To the extent actual outcomes differ from our estimates, additional provision for credit losses
could be required in order to increase the ALLL, which could adversely affect earnings or financial
performance in future periods. At September 30, 2009,
$1.4 billion, or 7%, of
our $21.3 billion commercial loan portfolio was considered impaired. Additionally, at
September 30, 2009, $818.6 million, or 79%, of our ALLL was allocated to our commercial loan
portfolio, compared with 82% at December 31, 2008.
12
Other Real Estate Owned (OREO)
OREO obtained in satisfaction of a loan is recorded at its estimated fair value less
anticipated selling costs based upon the property’s appraised value at the date of transfer, with
any difference between the fair value of the property and the carrying value of the loan charged to
the ALLL. Subsequent declines in value are reported as adjustments to the carrying amount, and are
charged to noninterest expense. Gains or losses not previously recognized resulting from the sale
of OREO are recognized in noninterest expense on the date of sale. At September 30, 2009, OREO
totaled $142.6 million, representing a 16% increase compared with $122.5 million at December 31,
2008.
13
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 $166.2 million in the 2009 third quarter, representing a loss per
common share of $0.33. This compared with the prior quarter’s net loss of $125.1 million, or $0.40
per common share. The loss per common share was impacted in both the current and prior quarters by
the issuance of additional shares in both periods (see “Capital” discussion). Comparisons with
the prior quarter were also impacted by other factors that are discussed later in the “Significant
Items” section (see “Significant Items” discussion).
The largest contributor to our 2009 third quarter net loss was provision for credit losses of
$475.1 million, representing a $61.4 million, or 15%, increase from the prior quarter. This
increase resulted from necessary reserve building due to the continued stress on our loan
portfolios, especially our commercial real estate (CRE) portfolio, as well as credit actions taken
by us during the current quarter that are discussed in the following two paragraphs.
During the 2009 third quarter, we continued to be proactive in our approach in identifying and
classifying emerging problem credits. In many cases, commercial loans were placed on nonaccrual
status even though the loan was less than 30 days past due for both principal and interest
payments. This significantly impacted the inflow of commercial loan NALs for the quarter. Of the
commercial loans placed on nonaccrual status in the current quarter, over 55% were less than 30
days past due. Of the period end $1,746.4 million of commercial and industrial (C&I) and CRE
- -related NALs, approximately 36% were less than 30 days past due. We believe these decisions
increase our options for working these loans toward timelier resolutions.
Also during the current quarter, we took specific credit actions related to our residential
mortgage portfolio. These actions included taking a more conservative position regarding the
timing of loss recognition, continued active loss mitigation and troubled debt restructuring
efforts, as well as the sale of some underperforming loans. These actions resulted in
significantly higher residential mortgage charge-offs during the current quarter. The timing of
loss recognition was a change made to better align our portfolio management strategies with the
market dynamics in our regions. We believed that the economics surrounding the portfolio sale of
the underperforming loans were favorable for us. We will continue to evaluate this type of
transaction in future periods based on market conditions.
Credit quality performance in the 2009 third quarter continued to be negatively impacted by
the sustained economic weaknesses in our Midwest markets. The continued trend of higher
unemployment rates in our markets negatively impacted consumer loan credit quality. Net
charge-offs (NCOs) totaled $355.9 million, and were partially impacted by the residential mortgage
credit actions discussed previously. C&I NCOs improved substantially compared with the prior
quarter; however, there continued to be concern regarding the impact of the economic conditions on
our commercial borrowers. CRE NCOs declined slightly, yet that loan portfolio segment remained the
most stressed portfolio. The majority of the CRE NCOs were experienced in the single family home
builder and retail projects portfolios. These two portfolios continue to be our highest risk
segments, and we continued to work with these borrowers in resolving challenging credit issues.
NPAs also increased, primarily within the commercial loan portfolio, reflecting the impact of the
weak economic conditions in our markets as well as the impact of the credit actions previously
discussed. For the remainder of 2009, 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.
However, all consumer loan portfolios showed improved early stage delinquency levels compared with
the prior quarter.
As we have done throughout 2009, we took additional proactive steps during the current quarter
to increase our capital position as we executed total additions of $587.3 million to Tier 1 common
equity. This capital raising was accomplished through a discretionary equity issuance and a common
stock offering. These actions strengthened all of our period-end
capital ratios. Our TCE ratio increased to 6.46% from 5.68%, and our Tier 1 common equity
ratio increased to 7.82% from 6.80%. We believe that we have sufficient capital to withstand a
stressed economic scenario.
14
Our period-end liquidity position remained strong as average core deposits grew at a 10%
annualized rate, thus reducing our reliance on noncore funding. As of September 30, 2009, our
total cash and due from banks totaled $1.9 billion. Also, our unpledged investment securities
increased $2.2 billion from the end of the prior quarter.
Fully-taxable equivalent net interest income in the 2009 third quarter increased $15.9
million, or 5%, compared with the prior quarter. The increase reflected a 10 basis point
improvement in our net interest margin. The margin improvement reflected the favorable impacts of
our improved loan pricing and deposit mix, 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
for the 2009 fourth quarter will be flat or improve slightly from the 2009 third quarter level. We
expect that average total loans will continue to decline modestly, reflecting the impacts of our
efforts to reduce our CRE exposure, the weak economy, and charge-offs. As previously mentioned,
average core deposits grew at an annualized 10% rate, despite the competitive market. Deposit
growth continues to be a strategic priority for us. Also, on October 2, 2009, we acquired
approximately $400 million of deposits from Warren Bank in an FDIC-related transaction.
Noninterest income in the 2009 third quarter declined $9.9 million compared with the 2009
second quarter. The following table reflects the impacts of “Significant Items” to noninterest
income (see “Significant Items”).
Table 1 — Noninterest Income — Significant Items Impact — 2009 Third Quarter vs. 2009 Second Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third |
|
|
Second |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2009 |
|
|
Change |
|
Total noninterest income |
|
$ |
256,052 |
|
|
$ |
265,945 |
|
|
$ |
(9,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain related to Visa® stock |
|
|
— |
|
|
|
31,362 |
|
|
|
(31,362 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income, excluding
Significant Items |
|
$ |
256,052 |
|
|
$ |
234,583 |
|
|
$ |
21,469 |
|
|
|
|
|
|
|
|
|
|
|
As shown in the table above, after adjusting for “Significant Items”, noninterest income
increased $21.5 million. This increase primarily reflected a $22.8 million gain in the current
quarter representing the change in fair value of our derivatives that did not qualify for hedge
accounting. Overall, noninterest income performance was mixed for the quarter. Service charges
on deposit accounts and electronic banking income showed strong increases, while mortgage banking
income declined. Services charges on deposits accounts increased $5.5 million, or 7%, reflecting
the growth in demand deposits, and electronic banking income increased $3.5 million, or 14%,
including additional third-party processing fees. Mortgage banking income declined $9.4 million,
or 30%, largely reflecting a 37% decline in loan originations. We expect that fee income will
likely continue to be mixed for the remainder of 2009.
The following table reflects the impacts of “Significant Items” to noninterest expense (see
“Significant Items”).
Table 2 — Noninterest Expense — Significant Items Impact — 2009 Third Quarter vs. 2009 Second Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third |
|
|
Second |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
|
|
| (in thousands) |
|
2009 |
|
|
2009 |
|
|
Change |
|
Total noninterest expense |
|
$ |
401,097 |
|
|
$ |
339,982 |
|
|
$ |
61,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Items: |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
— |
|
|
|
4,231 |
|
|
|
(4,231 |
) |
FDIC special assessment |
|
|
— |
|
|
|
23,555 |
|
|
|
(23,555 |
) |
Gain on redemption of
junior subordinated
debt |
|
|
— |
|
|
|
(67,409 |
) |
|
|
67,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense, excluding
Significant Items |
|
$ |
401,097 |
|
|
$ |
379,605 |
|
|
$ |
21,492 |
|
|
|
|
|
|
|
|
|
|
|
15
As shown in the table above, after adjusting for “Significant Items” (see “Significant
Items”), noninterest expense increased $21.5 million. This increase included a $12.4 million
increase in OREO and foreclosure expense, representing higher levels of problem assets, as well as
loss mitigation activities. We expect expenses to be well controlled for the remainder of 2009.
16
Table 3 — Selected Quarterly Income Statement Data(1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands, except per share amounts) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
Interest income |
|
$ |
553,846 |
|
|
$ |
563,004 |
|
|
$ |
569,957 |
|
|
$ |
662,508 |
|
|
$ |
685,728 |
|
Interest expense |
|
|
191,027 |
|
|
|
213,105 |
|
|
|
232,452 |
|
|
|
286,143 |
|
|
|
297,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
362,819 |
|
|
|
349,899 |
|
|
|
337,505 |
|
|
|
376,365 |
|
|
|
388,636 |
|
Provision for credit losses |
|
|
475,136 |
|
|
|
413,707 |
|
|
|
291,837 |
|
|
|
722,608 |
|
|
|
125,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for credit losses |
|
|
(112,317 |
) |
|
|
(63,808 |
) |
|
|
45,668 |
|
|
|
(346,243 |
) |
|
|
263,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
80,811 |
|
|
|
75,353 |
|
|
|
69,878 |
|
|
|
75,247 |
|
|
|
80,508 |
|
Brokerage and insurance income |
|
|
33,996 |
|
|
|
32,052 |
|
|
|
39,948 |
|
|
|
31,233 |
|
|
|
34,309 |
|
Trust services |
|
|
25,832 |
|
|
|
25,722 |
|
|
|
24,810 |
|
|
|
27,811 |
|
|
|
30,952 |
|
Electronic banking |
|
|
28,017 |
|
|
|
24,479 |
|
|
|
22,482 |
|
|
|
22,838 |
|
|
|
23,446 |
|
Bank owned life insurance income |
|
|
13,639 |
|
|
|
14,266 |
|
|
|
12,912 |
|
|
|
13,577 |
|
|
|
13,318 |
|
Automobile operating lease income |
|
|
12,795 |
|
|
|
13,116 |
|
|
|
13,228 |
|
|
|
13,170 |
|
|
|
11,492 |
|
Mortgage banking income (loss) |
|
|
21,435 |
|
|
|
30,827 |
|
|
|
35,418 |
|
|
|
(6,747 |
) |
|
|
10,302 |
|
Securities (losses) gains |
|
|
(2,374 |
) |
|
|
(7,340 |
) |
|
|
2,067 |
|
|
|
(127,082 |
) |
|
|
(73,790 |
) |
Other income |
|
|
41,901 |
|
|
|
57,470 |
|
|
|
18,359 |
|
|
|
17,052 |
|
|
|
37,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
256,052 |
|
|
|
265,945 |
|
|
|
239,102 |
|
|
|
67,099 |
|
|
|
167,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
172,152 |
|
|
|
171,735 |
|
|
|
175,932 |
|
|
|
196,785 |
|
|
|
184,827 |
|
Outside data processing and other services |
|
|
37,999 |
|
|
|
39,266 |
|
|
|
32,432 |
|
|
|
31,230 |
|
|
|
32,386 |
|
Net occupancy |
|
|
25,382 |
|
|
|
24,430 |
|
|
|
29,188 |
|
|
|
22,999 |
|
|
|
25,215 |
|
OREO and foreclosure expense |
|
|
38,968 |
|
|
|
26,524 |
|
|
|
9,887 |
|
|
|
8,171 |
|
|
|
9,113 |
|
Equipment |
|
|
20,967 |
|
|
|
21,286 |
|
|
|
20,410 |
|
|
|
22,329 |
|
|
|
22,102 |
|
Amortization of intangibles |
|
|
16,995 |
|
|
|
17,117 |
|
|
|
17,135 |
|
|
|
19,187 |
|
|
|
19,463 |
|
Professional services |
|
|
18,108 |
|
|
|
16,658 |
|
|
|
16,454 |
|
|
|
16,430 |
|
|
|
12,234 |
|
Marketing |
|
|
8,259 |
|
|
|
7,491 |
|
|
|
8,225 |
|
|
|
9,357 |
|
|
|
7,049 |
|
Automobile operating lease expense |
|
|
10,589 |
|
|
|
11,400 |
|
|
|
10,931 |
|
|
|
10,483 |
|
|
|
9,093 |
|
Telecommunications |
|
|
5,902 |
|
|
|
6,088 |
|
|
|
5,890 |
|
|
|
5,892 |
|
|
|
6,007 |
|
Printing and supplies |
|
|
3,950 |
|
|
|
4,151 |
|
|
|
3,572 |
|
|
|
4,175 |
|
|
|
4,316 |
|
Goodwill impairment |
|
|
— |
|
|
|
4,231 |
|
|
|
2,602,713 |
|
|
|
— |
|
|
|
— |
|
Other expense |
|
|
41,826 |
|
|
|
(10,395 |
) |
|
|
37,000 |
|
|
|
43,056 |
|
|
|
7,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
401,097 |
|
|
|
339,982 |
|
|
|
2,969,769 |
|
|
|
390,094 |
|
|
|
338,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income taxes |
|
|
(257,362 |
) |
|
|
(137,845 |
) |
|
|
(2,684,999 |
) |
|
|
(669,238 |
) |
|
|
92,105 |
|
(Benefit) Provision for income taxes |
|
|
(91,172 |
) |
|
|
(12,750 |
) |
|
|
(251,792 |
) |
|
|
(251,949 |
) |
|
|
17,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(166,190 |
) |
|
$ |
(125,095 |
) |
|
$ |
(2,433,207 |
) |
|
$ |
(417,289 |
) |
|
$ |
75,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred shares |
|
|
29,223 |
|
|
|
57,451 |
|
|
|
58,793 |
|
|
|
23,158 |
|
|
|
12,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common shares |
|
$ |
(195,413 |
) |
|
$ |
(182,546 |
) |
|
$ |
(2,492,000 |
) |
|
$ |
(440,447 |
) |
|
$ |
62,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares — basic |
|
|
589,708 |
|
|
|
459,246 |
|
|
|
366,919 |
|
|
|
366,054 |
|
|
|
366,124 |
|
Average common shares — diluted (2) |
|
|
589,708 |
|
|
|
459,246 |
|
|
|
366,919 |
|
|
|
366,054 |
|
|
|
367,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net (loss) income — basic |
|
$ |
(0.33 |
) |
|
$ |
(0.40 |
) |
|
$ |
(6.79 |
) |
|
$ |
(1.20 |
) |
|
$ |
0.17 |
|
Net (loss) income — diluted |
|
|
(0.33 |
) |
|
$ |
(0.40 |
) |
|
$ |
(6.79 |
) |
|
$ |
(1.20 |
) |
|
$ |
0.17 |
|
Cash dividends declared |
|
|
0.0100 |
|
|
|
0.0100 |
|
|
|
0.0100 |
|
|
|
0.1325 |
|
|
|
0.1325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
(1.28 |
)% |
|
|
(0.97 |
)% |
|
|
(18.22 |
) |
|
|
(3.04 |
)% |
|
|
0.55 |
% |
Return on average total shareholders’ equity |
|
|
(12.5 |
) |
|
|
(10.2 |
) |
|
|
N.M. |
|
|
|
(23.6 |
) |
|
|
4.7 |
|
Return on average tangible shareholders’ equity (3) |
|
|
(13.3 |
) |
|
|
(10.3 |
) |
|
|
18.4 |
|
|
|
(43.2 |
) |
|
|
11.6 |
|
Net interest margin (4) |
|
|
3.20 |
|
|
|
3.10 |
|
|
|
2.97 |
|
|
|
3.18 |
|
|
|
3.29 |
|
Efficiency ratio (5) |
|
|
61.4 |
|
|
|
51.0 |
|
|
|
60.5 |
|
|
|
64.6 |
|
|
|
50.3 |
|
Effective tax rate (benefit) |
|
|
(35.4 |
) |
|
|
(9.2 |
) |
|
|
(9.4 |
) |
|
|
(37.6 |
) |
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue — fully taxable equivalent (FTE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
362,819 |
|
|
$ |
349,899 |
|
|
$ |
337,505 |
|
|
$ |
376,365 |
|
|
$ |
388,636 |
|
FTE adjustment |
|
|
4,177 |
|
|
|
1,216 |
|
|
|
3,582 |
|
|
|
3,641 |
|
|
|
5,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (4) |
|
|
366,996 |
|
|
|
351,115 |
|
|
|
341,087 |
|
|
|
380,006 |
|
|
|
394,087 |
|
Noninterest income |
|
|
256,052 |
|
|
|
265,945 |
|
|
|
239,102 |
|
|
|
67,099 |
|
|
|
167,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue (4) |
|
$ |
623,048 |
|
|
$ |
617,060 |
|
|
$ |
580,189 |
|
|
$ |
447,105 |
|
|
$ |
561,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss) 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). |
17
Table 4 — Selected Year to Date Income Statement Data (1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, |
|
|
Change |
|
| (in thousands, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Interest income |
|
$ |
1,686,807 |
|
|
$ |
2,135,814 |
|
|
$ |
(449,007 |
) |
|
|
(21 |
)% |
Interest expense |
|
|
636,584 |
|
|
|
980,488 |
|
|
|
(343,904 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
1,050,223 |
|
|
|
1,155,326 |
|
|
|
(105,103 |
) |
|
|
(9 |
) |
Provision for credit losses |
|
|
1,180,680 |
|
|
|
334,855 |
|
|
|
845,825 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for credit losses |
|
|
(130,457 |
) |
|
|
820,471 |
|
|
|
(950,928 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
226,042 |
|
|
|
232,806 |
|
|
|
(6,764 |
) |
|
|
(3 |
) |
Brokerage and insurance income |
|
|
105,996 |
|
|
|
106,563 |
|
|
|
(567 |
) |
|
|
(1 |
) |
Trust services |
|
|
76,364 |
|
|
|
98,169 |
|
|
|
(21,805 |
) |
|
|
(22 |
) |
Electronic Banking |
|
|
74,978 |
|
|
|
67,429 |
|
|
|
7,549 |
|
|
|
11 |
|
Bank owned life insurance income |
|
|
40,817 |
|
|
|
41,199 |
|
|
|
(382 |
) |
|
|
(1 |
) |
Automobile operating lease income |
|
|
39,139 |
|
|
|
26,681 |
|
|
|
12,458 |
|
|
|
47 |
|
Mortgage banking income |
|
|
87,680 |
|
|
|
15,741 |
|
|
|
71,939 |
|
|
|
N.M. |
|
Securities (losses) gains |
|
|
(7,647 |
) |
|
|
(70,288 |
) |
|
|
62,641 |
|
|
|
(89 |
) |
Other income |
|
|
117,730 |
|
|
|
121,739 |
|
|
|
(4,009 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
761,099 |
|
|
|
640,039 |
|
|
|
121,060 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
519,819 |
|
|
|
586,761 |
|
|
|
(66,942 |
) |
|
|
(11 |
) |
Outside data processing and other services |
|
|
109,697 |
|
|
|
96,933 |
|
|
|
12,764 |
|
|
|
13 |
|
Net occupancy |
|
|
79,000 |
|
|
|
85,429 |
|
|
|
(6,429 |
) |
|
|
(8 |
) |
OREO and foreclosure expense |
|
|
75,379 |
|
|
|
25,284 |
|
|
|
50,095 |
|
|
|
N.M. |
|
Equipment |
|
|
62,663 |
|
|
|
71,636 |
|
|
|
(8,973 |
) |
|
|
(13 |
) |
Amortization of intangibles |
|
|
51,247 |
|
|
|
57,707 |
|
|
|
(6,460 |
) |
|
|
(11 |
) |
Professional services |
|
|
51,220 |
|
|
|
33,183 |
|
|
|
18,037 |
|
|
|
54 |
|
Marketing |
|
|
23,975 |
|
|
|
23,307 |
|
|
|
668 |
|
|
|
3 |
|
Automobile operating lease expense |
|
|
32,920 |
|
|
|
20,799 |
|
|
|
12,121 |
|
|
|
58 |
|
Telecommunications |
|
|
17,880 |
|
|
|
19,116 |
|
|
|
(1,236 |
) |
|
|
(6 |
) |
Printing and supplies |
|
|
11,673 |
|
|
|
14,695 |
|
|
|
(3,022 |
) |
|
|
(21 |
) |
Goodwill impairment |
|
|
2,606,944 |
|
|
|
— |
|
|
|
2,606,944 |
|
|
|
— |
|
Other expense |
|
|
68,431 |
|
|
|
52,430 |
|
|
|
16,001 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
3,710,848 |
|
|
|
1,087,280 |
|
|
|
2,623,568 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before income taxes |
|
|
(3,080,206 |
) |
|
|
373,230 |
|
|
|
(3,453,436 |
) |
|
|
N.M. |
|
(Benefit) Provision for income taxes |
|
|
(355,714 |
) |
|
|
69,747 |
|
|
|
(425,461 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(2,724,492 |
) |
|
$ |
303,483 |
|
|
$ |
(3,027,975 |
) |
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on preferred shares |
|
|
145,467 |
|
|
|
23,242 |
|
|
|
122,225 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common shares |
|
$ |
(2,869,959 |
) |
|
$ |
280,241 |
|
|
$ |
(3,150,200 |
) |
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares — basic |
|
|
471,958 |
|
|
|
366,188 |
|
|
|
105,770 |
|
|
|
29 |
% |
Average common shares — diluted (2) |
|
|
471,958 |
|
|
|
367,268 |
|
|
|
104,690 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share — basic |
|
$ |
(6.08 |
) |
|
$ |
0.77 |
|
|
$ |
(6.85 |
) |
|
|
N.M. |
% |
Net income (loss) per common share — diluted |
|
|
(6.08 |
) |
|
|
0.76 |
|
|
|
(6.84 |
) |
|
|
N.M. |
|
Cash dividends declared |
|
|
0.030 |
|
|
|
0.530 |
|
|
|
(0.500 |
) |
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
(6.95 |
)% |
|
|
0.74 |
% |
|
|
(7.69 |
) |
|
|
N.M. |
% |
Return on average total shareholders’ equity |
|
|
(62.7 |
) |
|
|
6.6 |
|
|
|
(69.3 |
) |
|
|
N.M. |
|
Return on average tangible shareholders’ equity (3) |
|
|
(83.8 |
) |
|
|
15.9 |
|
|
|
(99.7 |
) |
|
|
N.M. |
|
Net interest margin (4) |
|
|
3.09 |
|
|
|
3.27 |
|
|
|
(0.18 |
) |
|
|
(6 |
) |
Efficiency ratio (5) |
|
|
57.6 |
|
|
|
54.7 |
|
|
|
2.9 |
|
|
|
5 |
|
Effective tax rate (benefit) |
|
|
(11.5 |
) |
|
|
18.7 |
|
|
|
(30.2 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue — fully taxable equivalent (FTE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
1,050,223 |
|
|
$ |
1,155,326 |
|
|
$ |
(105,103 |
) |
|
|
(9 |
)% |
FTE adjustment |
|
|
8,975 |
|
|
|
16,577 |
|
|
|
(7,602 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
1,059,198 |
|
|
|
1,171,903 |
|
|
|
(112,705 |
) |
|
|
(10 |
) |
Noninterest income |
|
|
761,099 |
|
|
|
640,038 |
|
|
|
121,061 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,820,297 |
|
|
$ |
1,811,941 |
|
|
$ |
8,356 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 all 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 was more than basic earnings per common share (anti-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. |
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 write downs 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.
19
Table 5 — Significant Items Influencing Earnings Performance Comparison
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
September 30, 2009 |
|
|
June 30, 2009 |
|
|
September 30, 2008 |
|
| (in millions) |
|
After-tax |
|
|
EPS |
|
|
After-tax |
|
|
EPS |
|
|
After-tax |
|
|
EPS |
|
Net income — reported earnings |
|
$ |
(166.2 |
) |
|
|
|
|
|
$ |
(125.1 |
) |
|
|
|
|
|
$ |
75.1 |
|
|
|
|
|
Earnings per share, after tax |
|
|
|
|
|
$ |
(0.33 |
) |
|
|
|
|
|
$ |
(0.40 |
) |
|
|
|
|
|
$ |
0.17 |
|
Change from prior quarter — $ |
|
|
|
|
|
|
0.07 |
|
|
|
|
|
|
|
6.39 |
|
|
|
|
|
|
|
(0.08 |
) |
Change from prior quarter — % |
|
|
|
|
|
|
(17.5 |
)% |
|
|
|
|
|
|
94.1 |
% |
|
|
|
|
|
|
(32.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from a year-ago — $ |
|
|
|
|
|
$ |
(0.50 |
) |
|
|
|
|
|
$ |
(0.65 |
) |
|
|
|
|
|
$ |
(0.21 |
) |
Change from a year-ago — % |
|
|
|
|
|
|
N.M. |
% |
|
|
|
|
|
|
N.M. |
% |
|
|
|
|
|
|
(55.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
) |
|
|
— |
|
|
|
— |
|
Preferred stock conversion deemed dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.06 |
) |
|
|
— |
|
|
|
— |
|
Gain on extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21.4 |
|
|
|
0.04 |
|
Deferred tax valuation allowance (provision)
benefit (2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3.7 |
) |
|
|
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
| |
|
September 30, 2009 |
|
|
September 30, 2008 |
|
| (in millions) |
|
After-tax |
|
|
EPS |
|
|
After-tax |
|
|
EPS |
|
Net income — reported earnings |
|
$ |
(2,724.5 |
) |
|
|
|
|
|
$ |
303.5 |
|
|
|
|
|
Earnings per share, after tax |
|
|
|
|
|
$ |
(6.08) |
(3) |
|
|
|
|
|
$ |
0.76 |
|
Change from a year-ago — $ |
|
|
|
|
|
|
(6.84 |
) |
|
|
|
|
|
|
(0.36 |
) |
Change from a year-ago — % |
|
|
|
|
|
|
N.M. |
% |
|
|
|
|
|
|
(32.1 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Significant items — favorable (unfavorable) impact: |
|
Earnings(1) |
|
|
EPS |
|
|
Earnings (1) |
|
|
EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin relationship restructuring (2) |
|
$ |
159.9 |
|
|
$ |
0.34 |
|
|
$ |
— |
|
|
$ |
— |
|
Gain on redemption of junior subordinated debt |
|
|
67.4 |
|
|
|
0.09 |
|
|
|
— |
|
|
|
— |
|
Gain related to Visa® stock |
|
|
31.4 |
|
|
|
0.04 |
|
|
|
25.1 |
|
|
|
0.04 |
|
Goodwill impairment |
|
|
(2,606.9 |
) |
|
|
(5.52 |
) |
|
|
— |
|
|
|
— |
|
FDIC special assessment |
|
|
(23.6 |
) |
|
|
(0.03 |
) |
|
|
— |
|
|
|
— |
|
Preferred stock conversion deemed dividend |
|
|
— |
|
|
|
(0.12 |
) |
|
|
— |
|
|
|
— |
|
Gain on extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
23.5 |
|
|
|
0.04 |
|
Visa® indemnification liability |
|
|
— |
|
|
|
— |
|
|
|
12.4 |
|
|
|
0.02 |
|
Deferred tax valuation allowance benefit (2) |
|
|
— |
|
|
|
— |
|
|
|
10.8 |
|
|
|
0.03 |
|
Merger and restructuring costs |
|
|
— |
|
|
|
— |
|
|
|
(21.8 |
) |
|
|
(0.04 |
) |
Asset impairment |
|
|
— |
|
|
|
— |
|
|
|
(12.4 |
) |
|
|
(0.02 |
) |
| |
|
|
| (1) |
|
Pretax unless otherwise noted. |
| |
| (2) |
|
After-tax. |
| |
| (3) |
|
Reflects the impact of the 346.8 million additional shares of common stock issued
during the period through two common stock public offerings, three discretionary equity issuance
programs, and conversions of preferred stock into common stock. Of these shares, 24.6 million were
issued late in the 2009 first quarter, 177.0 million were issued during the 2009 second quarter,
and the remaining 145.2 million were issued during the 2009 third quarter. |
20
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.) |
| |
| |
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 nine-month
periods of 2009 and 2008 are presented in the following table: |
21
Table 6 — Visa® impacts — First Nine-Month Periods of 2009 and 2008
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Third Quarter |
|
|
Second Quarter |
|
|
First Quarter |
|
|
Third Quarter |
|
|
Second Quarter |
|
|
First Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain related to Visa® stock sale(1) |
|
$ |
— |
|
|
$ |
31.4 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
25.1 |
|
Visa® indemnification liability (2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12.4 |
|
Deferred tax valuation allowance benefit
(3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3.7 |
) |
|
|
3.4 |
|
|
|
11.1 |
|
| |
|
|
| (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 $8.2 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 FDIC
insurance premium assessment. |
2008 — Third Quarter
| |
• |
|
$21.4 million ($0.04 per common share) gain related to the extinguishment of debt. |
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. |
| |
| |
• |
|
$2.2 million gain related to the extinguishment of debt. |
| |
| |
• |
|
$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. |
22
Net Interest Income / Average Balance Sheet
2009 Third Quarter versus 2008 Third Quarter
Fully-taxable equivalent net interest income decreased $27.1 million, or 7%, from the year-ago
quarter. This reflected the unfavorable impact of a $2.1 billion, or 4%, decline in total average
earning assets, as well as a 9 basis point decline in the net interest margin to 3.20% from 3.29%.
The decline in total average earning assets reflected a $3.1 billion, or 8%, decline in average
total loans and leases, partially offset by a $1.0 billion, or 16%, increase in other earning
assets, primarily investment securities.
The following table details the changes in our average loans and leases and average deposits:
Table 7 — Average Loans/Leases and Deposits — 2009 Third Quarter vs. 2008 Third Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third Quarter |
|
|
Change |
|
| (in millions) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Average Loans/Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
12,922 |
|
|
$ |
13,629 |
|
|
$ |
(707 |
) |
|
|
(5 |
)% |
Commercial real estate |
|
|
8,879 |
|
|
|
9,816 |
|
|
|
(937 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
21,801 |
|
|
|
23,445 |
|
|
|
(1,644 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,230 |
|
|
|
4,624 |
|
|
|
(1,394 |
) |
|
|
(30 |
) |
Home equity |
|
|
7,581 |
|
|
|
7,453 |
|
|
|
128 |
|
|
|
2 |
|
Residential mortgage |
|
|
4,487 |
|
|
|
4,812 |
|
|
|
(325 |
) |
|
|
(7 |
) |
Other consumer |
|
|
756 |
|
|
|
670 |
|
|
|
86 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,054 |
|
|
|
17,559 |
|
|
|
(1,505 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
37,855 |
|
|
$ |
41,004 |
|
|
$ |
(3,149 |
) |
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
$ |
6,186 |
|
|
$ |
5,080 |
|
|
$ |
1,106 |
|
|
|
22 |
% |
Demand deposits — interest bearing |
|
|
5,140 |
|
|
|
4,005 |
|
|
|
1,135 |
|
|
|
28 |
|
Money market deposits |
|
|
7,601 |
|
|
|
5,860 |
|
|
|
1,741 |
|
|
|
30 |
|
Savings and other domestic time deposits |
|
|
4,771 |
|
|
|
5,100 |
|
|
|
(329 |
) |
|
|
(6 |
) |
Core certificates of deposit |
|
|
11,646 |
|
|
|
11,993 |
|
|
|
(347 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
35,344 |
|
|
|
32,038 |
|
|
|
3,306 |
|
|
|
10 |
|
Other deposits |
|
|
4,249 |
|
|
|
5,765 |
|
|
|
(1,516 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
39,593 |
|
|
$ |
37,803 |
|
|
$ |
1,790 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $3.1 billion, or 8%, decrease in average total loans and leases reflected:
| |
• |
|
$1.6 billion, or 7%, decrease in average total commercial loans. The $0.9 billion,
or 10%, decrease in average CRE loans reflected a combination of factors, including our
planned efforts to shrink this portfolio through payoffs and paydowns, as well as the
impact of charge-offs and the 2009 first quarter reclassification of CRE loans to C&I
loans. The decline in average C&I loans reflected the impact of the reclassification
project, offset by paydowns, automobile dealer floorplan reductions, and the Franklin
restructuring and related 2008 fourth quarter and 2009 first quarter charge-offs. |
| |
| |
• |
|
$1.5 billion, or 9%, decrease in average total consumer loans. This primarily
reflected a $1.4 billion, or 30%,
decline in average automobile loans and leases due to the 2009 first quarter
securitization of $1.0 billion of automobile loans, as well as the continued runoff of
the automobile lease portfolio. The $0.3 billion, or 7%, decline in average residential
mortgages reflected the impact of loan sales, as well as the continued refinance of
portfolio loans and the related increased sale of fixed-rate originations, partially
offset by additions related to the 2009 first quarter Franklin restructuring. Average
home equity loans increased 2%, due primarily to increased line usage and slower runoff
experience. The increased line usage continued to be associated with higher quality
borrowers taking advantage of the low interest rate environment. |
23
The $1.0 billion, or 16%, increase in other earning assets reflected a $2.0 billion, or 42%,
increase in average total investment securities as the cash proceeds from capital actions during
the second and third quarters were deployed (See the “Capital / Capital Adequacy” section located
within the “Risk Management and Capital” section for a full discussion). Average trading account
securities declined $0.9 billion, or 89%, from the year-ago quarter, due to the reduction in the
use of trading securities to hedge mortgage servicing rights (MSRs).
Average total deposits increased $1.8 billion, or 5%, from the year-ago quarter and reflected:
| |
• |
|
$3.3 billion, or 10%, growth in average total core deposits, primarily reflecting
increased sales efforts and initiatives for deposit accounts. |
Partially offset by:
| |
• |
|
A $1.5 billion, or 26%, decrease in average other deposits, primarily reflecting
our deployment of excess liquidity in reducing noncore funding sources. |
2009 Third Quarter versus 2009 Second Quarter
Compared with the 2009 second quarter, fully-taxable equivalent net interest income increased
$15.9 million, or 5%. This primarily reflected a 10 basis point increase in the net interest
margin to 3.20% from 3.10%, as average total earning assets were essentially unchanged. The
increase in the net interest margin reflected a combination of factors including favorable impacts
from strong core deposit growth and the benefit of lower deposit pricing, partially offset by the
negative impact of maintaining a higher liquidity position. Average total earning assets were
essentially unchanged as a $1.2 billion, or 18%, increase in other earning assets, primarily
investment securities, was offset by a $1.2 billion, or 3%, decline in average total loans and
leases.
The following table details the changes in our average loans and leases and average deposits:
Table 8 — Average Loans/Leases and Deposits — 2009 Third Quarter vs. 2009 Second Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2009 |
|
|
Change |
|
| (in millions) |
|
Third Quarter |
|
|
Second Quarter |
|
|
Amount |
|
|
Percent |
|
Average Loans/Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
12,922 |
|
|
$ |
13,523 |
|
|
$ |
(601 |
) |
|
|
(4 |
)% |
Commercial real estate |
|
|
8,879 |
|
|
|
9,199 |
|
|
|
(320 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
21,801 |
|
|
|
22,722 |
|
|
|
(921 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,230 |
|
|
|
3,290 |
|
|
|
(60 |
) |
|
|
(2 |
) |
Home equity |
|
|
7,581 |
|
|
|
7,640 |
|
|
|
(59 |
) |
|
|
(1 |
) |
Residential mortgage |
|
|
4,487 |
|
|
|
4,657 |
|
|
|
(170 |
) |
|
|
(4 |
) |
Other consumer |
|
|
756 |
|
|
|
698 |
|
|
|
58 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,054 |
|
|
|
16,285 |
|
|
|
(231 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
37,855 |
|
|
$ |
39,007 |
|
|
$ |
(1,152 |
) |
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
$ |
6,186 |
|
|
$ |
6,021 |
|
|
$ |
165 |
|
|
|
3 |
% |
Demand deposits — interest bearing |
|
|
5,140 |
|
|
|
4,547 |
|
|
|
593 |
|
|
|
13 |
|
Money market deposits |
|
|
7,601 |
|
|
|
6,355 |
|
|
|
1,246 |
|
|
|
20 |
|
Savings and other domestic time deposits |
|
4,771 |
|
|
5,031 |
|
|
|
(260 |
) |
|
|
(5 |
) |
Core certificates of deposit |
|
|
11,646 |
|
|
|
12,501 |
|
|
|
(855 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
35,344 |
|
|
|
34,455 |
|
|
|
889 |
|
|
|
3 |
|
Other deposits |
|
|
4,249 |
|
|
|
5,079 |
|
|
|
(830 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
39,593 |
|
|
$ |
39,534 |
|
|
$ |
59 |
|
|
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Average total loans and leases declined $1.2 billion, or 3%, reflecting:
| |
• |
|
$0.9 billion, or 4%, decline in average total commercial loans. Average C&I loans
were lower based, in part on lower line utilization across the portfolio, particularly
in automobile dealer floorplan loans. The lower floorplan balances were consistent
with the lower level of dealer car inventories resulting from the “cash for clunkers”
program and lower manufacturer production levels. We continue to expect no material
credit impact from dealership closings. The planned decline in average CRE loans
primarily reflected payoffs, balance reductions, and charge-offs. |
| |
| |
• |
|
$0.2 billion, or 1%, decline in average total consumer loans. The decline was
spread evenly across the portfolio segments. The decline in average automobile loans
and leases was consistent with our expectations given market conditions along with the
continued run-off of the automobile lease portfolio. Demand for home equity loans
remained weak, reflecting the impact of the economic environment and depressed home
values. The decline in residential mortgages reflected the impact of lower market
interest rates, the related increase in fixed-rate refinancing activity, and our
practice of selling virtually all of our longer-term fixed-rate production. It also
reflected the more conservative position on loss recognition, active loss mitigation
and troubled debt restructuring efforts, as well as the transfer to held for sale, and
subsequent sale in the 2009 fourth quarter, of some underperforming loans. |
The $1.2 billion, or 18%, increase in other earning assets reflected a $1.3 billion, or 25%,
increase in average total investment securities as the cash proceeds from capital actions during
the second and third quarters were deployed. (See the “Capital / Capital Adequacy” section located
within the “Risk Management and Capital” section for a full discussion). The increase primarily
represented the purchase of agency debt with an average 2-year maturity and agency CMOs with an
average 3-year maturity.
Average total deposits increased slightly from the prior quarter and reflected:
| |
• |
|
$0.9 billion, or 3%, growth in average total core deposits, primarily reflecting
increased sales efforts and initiatives for deposit accounts. |
Partially offset by:
| |
• |
|
$0.8 billion, or 16%, decline in other deposits, reflecting our deployment of excess
liquidity in reducing noncore funding sources. |
Tables 9 and 10 reflect quarterly average balance sheets and rates earned and paid on
interest-earning assets and interest-bearing liabilities.
25
Table 9 — Consolidated Quarterly Average Balance Sheets
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Average Balances |
|
|
Change |
|
| Fully-taxable equivalent basis |
|
2009 |
|
|
2008 |
|
|
3Q09 vs 3Q08 |
|
| (in millions) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Amount |
|
|
Percent |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
$ |
393 |
|
|
$ |
369 |
|
|
$ |
355 |
|
|
$ |
343 |
|
|
$ |
321 |
|
|
$ |
72 |
|
|
|
22 |
% |
Trading account securities |
|
|
107 |
|
|
|
88 |
|
|
|
278 |
|
|
|
940 |
|
|
|
992 |
|
|
|
(885 |
) |
|
|
(89 |
) |
Federal funds sold and securities purchased
under resale agreements |
|
|
7 |
|
|
|
— |
|
|
|
19 |
|
|
|
48 |
|
|
|
363 |
|
|
|
(356 |
) |
|
|
(98 |
) |
Loans held for sale |
|
|
524 |
|
|
|
709 |
|
|
|
627 |
|
|
|
329 |
|
|
|
274 |
|
|
|
250 |
|
|
|
91 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
6,510 |
|
|
|
5,181 |
|
|
|
3,961 |
|
|
|
3,789 |
|
|
|
3,975 |
|
|
|
2,535 |
|
|
|
64 |
|
Tax-exempt |
|
|
129 |
|
|
|
126 |
|
|
|
465 |
|
|
|
689 |
|
|
|
712 |
|
|
|
(583 |
) |
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
6,639 |
|
|
|
5,307 |
|
|
|
4,426 |
|
|
|
4,478 |
|
|
|
4,687 |
|
|
|
1,952 |
|
|
|
42 |
|
Loans and leases: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
12,922 |
|
|
|
13,523 |
|
|
|
13,541 |
|
|
|
13,746 |
|
|
|
13,629 |
|
|
|
(707 |
) |
|
|
(5 |
) |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,808 |
|
|
|
1,946 |
|
|
|
2,033 |
|
|
|
2,103 |
|
|
|
2,090 |
|
|
|
(282 |
) |
|
|
(13 |
) |
Commercial |
|
|
7,071 |
|
|
|
7,253 |
|
|
|
8,079 |
|
|
|
8,115 |
|
|
|
7,726 |
|
|
|
(655 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
8,879 |
|
|
|
9,199 |
|
|
|
10,112 |
|
|
|
10,218 |
|
|
|
9,816 |
|
|
|
(937 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
21,801 |
|
|
|
22,722 |
|
|
|
23,653 |
|
|
|
23,964 |
|
|
|
23,445 |
|
|
|
(1,644 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
2,886 |
|
|
|
2,867 |
|
|
|
3,837 |
|
|
|
3,899 |
|
|
|
3,856 |
|
|
|
(970 |
) |
|
|
(25 |
) |
Automobile leases |
|
|
344 |
|
|
|
423 |
|
|
|
517 |
|
|
|
636 |
|
|
|
768 |
|
|
|
(424 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,230 |
|
|
|
3,290 |
|
|
|
4,354 |
|
|
|
4,535 |
|
|
|
4,624 |
|
|
|
(1,394 |
) |
|
|
(30 |
) |
Home equity |
|
|
7,581 |
|
|
|
7,640 |
|
|
|
7,577 |
|
|
|
7,523 |
|
|
|
7,453 |
|
|
|
128 |
|
|
|
2 |
|
Residential mortgage |
|
|
4,487 |
|
|
|
4,657 |
|
|
|
4,611 |
|
|
|
4,737 |
|
|
|
4,812 |
|
|
|
(325 |
) |
|
|
(7 |
) |
Other loans |
|
|
756 |
|
|
|
698 |
|
|
|
671 |
|
|
|
678 |
|
|
|
670 |
|
|
|
86 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,054 |
|
|
|
16,285 |
|
|
|
17,213 |
|
|
|
17,473 |
|
|
|
17,559 |
|
|
|
(1,505 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
37,855 |
|
|
|
39,007 |
|
|
|
40,866 |
|
|
|
41,437 |
|
|
|
41,004 |
|
|
|
(3,149 |
) |
|
|
(8 |
) |
Allowance for loan and lease losses |
|
|
(950 |
) |
|
|
(930 |
) |
|
|
(913 |
) |
|
|
(764 |
) |
|
|
(731 |
) |
|
|
(219 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
36,905 |
|
|
|
38,077 |
|
|
|
39,953 |
|
|
|
40,673 |
|
|
|
40,273 |
|
|
|
(3,368 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
45,525 |
|
|
|
45,480 |
|
|
|
46,571 |
|
|
|
47,575 |
|
|
|
47,641 |
|
|
|
(2,116 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
2,553 |
|
|
|
2,466 |
|
|
|
1,553 |
|
|
|
928 |
|
|
|
925 |
|
|
|
1,628 |
|
|
|
N.M. |
|
Intangible assets |
|
|
755 |
|
|
|
780 |
|
|
|
3,371 |
|
|
|
3,421 |
|
|
|
3,441 |
|
|
|
(2,686 |
) |
|
|
(78 |
) |
All other assets |
|
|
3,797 |
|
|
|
3,701 |
|
|
|
3,571 |
|
|
|
3,447 |
|
|
|
3,384 |
|
|
|
413 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
51,680 |
|
|
$ |
51,497 |
|
|
$ |
54,153 |
|
|
$ |
54,607 |
|
|
$ |
54,660 |
|
|
$ |
(2,980 |
) |
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
$ |
6,186 |
|
|
$ |
6,021 |
|
|
$ |
5,544 |
|
|
$ |
5,205 |
|
|
$ |
5,080 |
|
|
$ |
1,106 |
|
|
|
22 |
% |
Demand deposits — interest bearing |
|
|
5,140 |
|
|
|
4,547 |
|
|
|
4,076 |
|
|
|
3,988 |
|
|
|
4,005 |
|
|
|
1,135 |
|
|
|
28 |
|
Money market deposits |
|
|
7,601 |
|
|
|
6,355 |
|
|
|
5,593 |
|
|
|
5,500 |
|
|
|
5,860 |
|
|
|
1,741 |
|
|
|
30 |
|
Savings and other domestic deposits |
|
|
4,771 |
|
|
|
5,031 |
|
|
|
5,041 |
|
|
|
5,034 |
|
|
|
5,100 |
|
|
|
(329 |
) |
|
|
(6 |
) |
Core certificates of deposit |
|
|
11,646 |
|
|
|
12,501 |
|
|
|
12,784 |
|
|
|
12,588 |
|
|
|
11,993 |
|
|
|
(347 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
35,344 |
|
|
|
34,455 |
|
|
|
33,038 |
|
|
|
32,315 |
|
|
|
32,038 |
|
|
|
3,306 |
|
|
|
10 |
|
Other domestic deposits of $250,000 or more |
|
|
747 |
|
|
|
886 |
|
|
|
1,069 |
|
|
|
1,365 |
|
|
|
1,692 |
|
|
|
(945 |
) |
|
|
(56 |
) |
Brokered deposits and negotiable CDs |
|
|
3,058 |
|
|
|
3,740 |
|
|
|
3,449 |
|
|
|
3,049 |
|
|
|
3,025 |
|
|
|
33 |
|
|
|
1 |
|
Deposits in foreign offices |
|
|
444 |
|
|
|
453 |
|
|
|
633 |
|
|
|
854 |
|
|
|
1,048 |
|
|
|
(604 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
39,593 |
|
|
|
39,534 |
|
|
|
38,189 |
|
|
|
37,583 |
|
|
|
37,803 |
|
|
|
1,790 |
|
|
|
5 |
|
Short-term borrowings |
|
|
879 |
|
|
|
879 |
|
|
|
1,099 |
|
|
|
1,748 |
|
|
|
2,131 |
|
|
|
(1,252 |
) |
|
|
(59 |
) |
Federal Home Loan Bank advances |
|
|
924 |
|
|
|
947 |
|
|
|
2,414 |
|
|
|
3,188 |
|
|
|
3,139 |
|
|
|
(2,215 |
) |
|
|
(71 |
) |
Subordinated notes and other long-term debt |
|
|
4,136 |
|
|
|
4,640 |
|
|
|
4,612 |
|
|
|
4,252 |
|
|
|
4,382 |
|
|
|
(246 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
39,346 |
|
|
|
39,979 |
|
|
|
40,770 |
|
|
|
41,566 |
|
|
|
42,375 |
|
|
|
(3,029 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other liabilities |
|
|
863 |
|
|
|
569 |
|
|
|
614 |
|
|
|
817 |
|
|
|
882 |
|
|
|
(19 |
) |
|
|
(2 |
) |
Shareholders’ equity |
|
|
5,285 |
|
|
|
4,928 |
|
|
|
7,225 |
|
|
|
7,019 |
|
|
|
6,323 |
|
|
|
(1,038 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity |
|
$ |
51,680 |
|
|
$ |
51,497 |
|
|
$ |
54,153 |
|
|
$ |
54,607 |
|
|
$ |
54,660 |
|
|
$ |
(2,980 |
) |
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
| |
|
|
| (1) |
|
For purposes of this analysis, non-accrual loans are
reflected in the average balances of loans. |
26
Table 10 — Consolidated Quarterly Net Interest Margin Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Average Rates (2) |
|
| |
|
2009 |
|
|
2008 |
|
| Fully-taxable equivalent basis (1) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
|
0.28 |
% |
|
|
0.37 |
% |
|
|
0.45 |
% |
|
|
1.44 |
% |
|
|
2.17 |
% |
Trading account securities |
|
|
1.96 |
|
|
|
2.22 |
|
|
|
4.04 |
|
|
|
5.32 |
|
|
|
5.45 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
0.14 |
|
|
|
0.82 |
|
|
|
0.20 |
|
|
|
0.24 |
|
|
|
2.02 |
|
Loans held for sale |
|
|
5.20 |
|
|
|
5.19 |
|
|
|
5.04 |
|
|
|
6.58 |
|
|
|
6.54 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
3.99 |
|
|
|
4.63 |
|
|
|
5.60 |
|
|
|
5.74 |
|
|
|
5.54 |
|
Tax-exempt |
|
|
6.77 |
|
|
|
6.83 |
|
|
|
6.61 |
|
|
|
7.02 |
|
|
|
6.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
4.04 |
|
|
|
4.69 |
|
|
|
5.71 |
|
|
|
5.94 |
|
|
|
5.73 |
|
Loans and leases: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
5.19 |
|
|
|
5.00 |
|
|
|
4.60 |
|
|
|
5.01 |
|
|
|
5.46 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
2.61 |
|
|
|
2.78 |
|
|
|
2.76 |
|
|
|
4.55 |
|
|
|
4.69 |
|
Commercial |
|
|
3.43 |
|
|
|
3.56 |
|
|
|
3.76 |
|
|
|
5.07 |
|
|
|
5.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
3.26 |
|
|
|
3.39 |
|
|
|
3.55 |
|
|
|
4.96 |
|
|
|
5.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
4.40 |
|
|
|
4.35 |
|
|
|
4.15 |
|
|
|
4.99 |
|
|
|
5.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
7.34 |
|
|
|
7.28 |
|
|
|
7.20 |
|
|
|
7.17 |
|
|
|
7.13 |
|
Automobile leases |
|
|
6.25 |
|
|
|
6.12 |
|
|
|
6.03 |
|
|
|
5.82 |
|
|
|
5.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
7.22 |
|
|
|
7.13 |
|
|
|
7.06 |
|
|
|
6.98 |
|
|
|
6.89 |
|
Home equity |
|
|
5.75 |
|
|
|
5.75 |
|
|
|
5.13 |
|
|
|
5.87 |
|
|
|
6.19 |
|
Residential mortgage |
|
|
5.03 |
|
|
|
5.12 |
|
|
|
5.71 |
|
|
|
5.84 |
|
|
|
5.83 |
|
Other loans |
|
|
7.21 |
|
|
|
8.22 |
|
|
|
8.97 |
|
|
|
9.25 |
|
|
|
9.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
5.91 |
|
|
|
5.95 |
|
|
|
5.92 |
|
|
|
6.28 |
|
|
|
6.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
5.04 |
|
|
|
5.02 |
|
|
|
4.90 |
|
|
|
5.53 |
|
|
|
5.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
4.86 |
% |
|
|
4.99 |
% |
|
|
4.99 |
% |
|
|
5.57 |
% |
|
|
5.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — noninterest bearing |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
|
|
— |
% |
Demand deposits — interest bearing |
|
|
0.22 |
|
|
|
0.18 |
|
|
|
0.14 |
|
|
|
0.34 |
|
|
|
0.51 |
|
Money market deposits |
|
|
1.20 |
|
|
|
1.14 |
|
|
|
1.02 |
|
|
|
1.31 |
|
|
|
1.66 |
|
Savings and other domestic deposits |
|
|
1.33 |
|
|
|
1.37 |
|
|
|
1.50 |
|
|
|
1.72 |
|
|
|
1.79 |
|
Core certificates of deposit |
|
|
3.27 |
|
|
|
3.50 |
|
|
|
3.81 |
|
|
|
4.02 |
|
|
|
4.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
1.88 |
|
|
|
2.06 |
|
|
|
2.28 |
|
|
|
2.50 |
|
|
|
2.58 |
|
Other domestic deposits of $250,000 or more |
|
|
2.24 |
|
|
|
2.61 |
|
|
|
2.92 |
|
|
|
3.39 |
|
|
|
3.50 |
|
Brokered deposits and negotiable CDs |
|
|
2.49 |
|
|
|
2.54 |
|
|
|
2.97 |
|
|
|
3.39 |
|
|
|
3.37 |
|
Deposits in foreign offices |
|
|
0.20 |
|
|
|
0.20 |
|
|
|
0.17 |
|
|
|
0.90 |
|
|
|
1.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
1.92 |
|
|
|
2.11 |
|
|
|
2.33 |
|
|
|
2.58 |
|
|
|
2.66 |
|
Short-term borrowings |
|
|
0.25 |
|
|
|
0.26 |
|
|
|
0.25 |
|
|
|
0.85 |
|
|
|
1.42 |
|
Federal Home Loan Bank advances |
|
|
0.92 |
|
|
|
1.13 |
|
|
|
1.03 |
|
|
|
3.04 |
|
|
|
2.92 |
|
Subordinated notes and other long-term debt |
|
|
2.58 |
|
|
|
2.91 |
|
|
|
3.29 |
|
|
|
4.49 |
|
|
|
4.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
1.93 |
% |
|
|
2.14 |
% |
|
|
2.31 |
% |
|
|
2.74 |
% |
|
|
2.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
2.93 |
% |
|
|
2.85 |
% |
|
|
2.68 |
% |
|
|
2.83 |
% |
|
|
2.98 |
% |
Impact of noninterest bearing funds on margin |
|
|
0.27 |
|
|
|
0.25 |
|
|
|
0.29 |
|
|
|
0.35 |
|
|
|
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
3.20 |
% |
|
|
3.10 |
% |
|
|
2.97 |
% |
|
|
3.18 |
% |
|
|
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. |
27
2009 First Nine Months versus 2008 First Nine Months
Fully-taxable equivalent net interest income for the first nine-month period of 2009 declined
$112.7 million, or 10%, from the comparable year-ago period. This decline primarily reflected an 18
basis point decline in the net interest margin, a 4% decline in average earning assets, the
unfavorable impact of maintaining a higher liquidity position, and an increase in NALs. These
factors were partially offset by managed reductions of our balance sheet and other capital
management initiatives.
The following table details the changes in our average loans and leases and average deposits:
| |
Table 11 — Average Loans/Leases and Deposits — First Nine Months 2009 vs. First Nine Months 2008 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
|
|
|
| |
|
September 30, |
|
|
Change |
|
| (in millions) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Average Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
13,327 |
|
|
$ |
13,535 |
|
|
$ |
(208 |
) |
|
|
(2 |
)% |
Commercial real estate |
|
|
9,392 |
|
|
|
9,568 |
|
|
|
(176 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
22,719 |
|
|
|
23,103 |
|
|
|
(384 |
) |
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,620 |
|
|
|
4,525 |
|
|
|
(905 |
) |
|
|
(20 |
)% |
Home equity |
|
|
7,600 |
|
|
|
7,364 |
|
|
|
236 |
|
|
|
3 |
|
Residential mortgage |
|
|
4,584 |
|
|
|
5,113 |
|
|
|
(529 |
) |
|
|
(10 |
) |
Other consumer |
|
|
709 |
|
|
|
695 |
|
|
|
14 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,513 |
|
|
|
17,697 |
|
|
|
(1,184 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
39,232 |
|
|
$ |
40,800 |
|
|
$ |
(1,568 |
) |
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — non-interest bearing |
|
$ |
5,919 |
|
|
$ |
5,058 |
|
|
$ |
861 |
|
|
|
17 |
% |
Demand deposits — interest bearing |
|
|
4,591 |
|
|
|
4,008 |
|
|
|
583 |
|
|
|
15 |
|
Money market deposits |
|
|
6,524 |
|
|
|
6,292 |
|
|
|
232 |
|
|
|
4 |
|
Savings and other domestic time deposits |
|
|
4,946 |
|
|
|
5,185 |
|
|
|
(239 |
) |
|
|
(5 |
) |
Core certificates of deposit |
|
|
12,308 |
|
|
|
11,317 |
|
|
|
991 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
34,288 |
|
|
|
31,860 |
|
|
|
2,428 |
|
|
|
8 |
|
Other deposits |
|
|
4,822 |
|
|
|
6,061 |
|
|
|
(1,239 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
39,110 |
|
|
$ |
37,921 |
|
|
$ |
1,189 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $1.6 billion, or 4%, decrease in average total loans and leases primarily reflected:
| |
• |
|
$0.9 billion, or 20%, decline in average automobile loans and leases due to the 2009
first quarter securitization of $1.0 billion of automobile loans, as well as the
continued runoff of the automobile lease portfolio. |
| |
| |
• |
|
$0.5 billion, or 10%, decline in residential mortgages reflecting the impact of loan
sales, as well as the continued refinance of portfolio loans. The majority of this
refinance activity was fixed-rate loans, which we typically sell in the secondary
market. |
| |
| |
• |
|
$0.4 billion, or 2%, decline in average total commercial loans. The decline in
average CRE loans reflected our planned efforts to shrink this portfolio through
payoffs and paydowns, as well as the impact of charge-offs and the 2009 first quarter
reclassification of CRE loans to C&I loans. The decline in average C&I loans reflected
paydowns and the Franklin restructuring; partially offset by the 2009 first quarter
reclassification project. |
28
Partially offset by:
| |
• |
|
$0.2 billion, or 3%, 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. |
Other average earning assets declined $0.4 million, reflecting a decline in trading account
securities due to the reduction in the use of these securities to hedge MSRs, partially offset by
an increase in total investment securities as the cash proceeds from capital actions during the
first nine-month period of 2009 were deployed.
The $1.2 billion, or 3%, increase in average total deposits reflected:
| |
• |
|
$2.4 billion, or 8%, growth in total core deposits, primarily reflecting increased
sales efforts and initiatives for deposit accounts. |
Partially offset by:
| |
• |
|
$1.2 billion, or 20%, decline in average noncore deposits, reflecting a managed
decline in public fund deposits as well as planned efforts to reduce our reliance on
noncore funding sources. |
29
Table 12 — Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
YTD Average Balances |
|
|
YTD Average Rates (2) |
|
| Fully taxable equivalent basis (1) |
|
Nine Months Ending September 30, |
|
|
Change |
|
|
Nine Months Ending September 30, |
|
| (in millions of dollars) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
$ |
372 |
|
|
$ |
290 |
|
|
$ |
82 |
|
|
|
28 |
% |
|
|
0.36 |
% |
|
|
2.96 |
% |
Trading account securities |
|
|
157 |
|
|
|
1,139 |
|
|
|
(982 |
) |
|
|
(86 |
) |
|
|
3.24 |
|
|
|
5.26 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
8 |
|
|
|
565 |
|
|
|
(557 |
) |
|
|
(99 |
) |
|
|
0.19 |
|
|
|
2.52 |
|
Loans held for sale |
|
|
620 |
|
|
|
446 |
|
|
|
174 |
|
|
|
39 |
|
|
|
5.15 |
|
|
|
5.86 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
5,227 |
|
|
|
3,908 |
|
|
|
1,319 |
|
|
|
34 |
|
|
|
4.60 |
|
|
|
5.58 |
|
Tax-exempt |
|
|
239 |
|
|
|
711 |
|
|
|
(472 |
) |
|
|
(66 |
) |
|
|
6.72 |
|
|
|
6.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
5,466 |
|
|
|
4,619 |
|
|
|
847 |
|
|
|
18 |
|
|
|
4.70 |
|
|
|
5.76 |
|
Loans and leases: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
13,327 |
|
|
|
13,535 |
|
|
|
(208 |
) |
|
|
(2 |
) |
|
|
4.92 |
|
|
|
5.79 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,928 |
|
|
|
2,047 |
|
|
|
(119 |
) |
|
|
(6 |
) |
|
|
2.72 |
|
|
|
5.14 |
|
Commercial |
|
|
7,464 |
|
|
|
7,521 |
|
|
|
(57 |
) |
|
|
(1 |
) |
|
|
3.59 |
|
|
|
5.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
9,392 |
|
|
|
9,568 |
|
|
|
(176 |
) |
|
|
(2 |
) |
|
|
3.41 |
|
|
|
5.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
22,719 |
|
|
|
23,103 |
|
|
|
(384 |
) |
|
|
(2 |
) |
|
|
4.30 |
|
|
|
5.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
3,193 |
|
|
|
3,601 |
|
|
|
(408 |
) |
|
|
(11 |
) |
|
|
7.26 |
|
|
|
7.16 |
|
Automobile leases |
|
|
427 |
|
|
|
924 |
|
|
|
(497 |
) |
|
|
(54 |
) |
|
|
6.13 |
|
|
|
5.60 |
|
Automobile loans and leases |
|
|
3,620 |
|
|
|
4,525 |
|
|
|
(905 |
) |
|
|
(20 |
) |
|
|
7.13 |
|
|
|
6.85 |
|
Home equity |
|
|
7,600 |
|
|
|
7,364 |
|
|
|
236 |
|
|
|
3 |
|
|
|
5.55 |
|
|
|
6.60 |
|
Residential mortgage |
|
|
4,584 |
|
|
|
5,113 |
|
|
|
(529 |
) |
|
|
(10 |
) |
|
|
5.29 |
|
|
|
5.83 |
|
Other loans |
|
|
709 |
|
|
|
695 |
|
|
|
14 |
|
|
|
2 |
|
|
|
8.09 |
|
|
|
10.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,513 |
|
|
|
17,697 |
|
|
|
(1,184 |
) |
|
|
(7 |
) |
|
|
5.93 |
|
|
|
6.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
39,232 |
|
|
|
40,800 |
|
|
|
(1,568 |
) |
|
|
(4 |
) |
|
|
4.99 |
|
|
|
6.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
|
(931 |
) |
|
|
(672 |
) |
|
|
(259 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
38,301 |
|
|
|
40,128 |
|
|
|
(1,827 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
45,855 |
|
|
|
47,859 |
|
|
|
(2,004 |
) |
|
|
(4 |
) |
|
|
4.94 |
% |
|
|
6.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
2,195 |
|
|
|
968 |
|
|
|
1,227 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
1,626 |
|
|
|
3,454 |
|
|
|
(1,828 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
All other assets |
|
|
3,689 |
|
|
|
3,419 |
|
|
|
270 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
52,434 |
|
|
$ |
55,028 |
|
|
$ |
(2,594 |
) |
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits — non-interest bearing |
|
$ |
5,919 |
|
|
$ |
5,058 |
|
|
$ |
861 |
|
|
|
17 |
% |
|
|
— |
% |
|
|
— |
% |
Demand deposits — interest bearing |
|
|
4,591 |
|
|
|
4,008 |
|
|
|
583 |
|
|
|
15 |
|
|
|
0.19 |
|
|
|
0.62 |
|
Money market deposits |
|
|
6,524 |
|
|
|
6,292 |
|
|
|
232 |
|
|
|
4 |
|
|
|
1.13 |
|
|
|
2.11 |
|
Savings and other domestic time deposits |
|
|
4,946 |
|
|
|
5,185 |
|
|
|
(239 |
) |
|
|
(5 |
) |
|
|
1.40 |
|
|
|
1.95 |
|
Core certificates of deposit |
|
|
12,308 |
|
|
|
11,317 |
|
|
|
991 |
|
|
|
9 |
|
|
|
3.53 |
|
|
|
4.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
34,288 |
|
|
|
31,860 |
|
|
|
2,428 |
|
|
|
8 |
|
|
|
2.07 |
|
|
|
2.80 |
|
Other domestic time deposits of $250,000 or more |
|
|
899 |
|
|
|
1,737 |
|
|
|
(838 |
) |
|
|
(48 |
) |
|
|
2.63 |
|
|
|
3.87 |
|
Brokered deposits and negotiable CDs |
|
|
3,414 |
|
|
|
3,309 |
|
|
|
105 |
|
|
|
3 |
|
|
|
2.67 |
|
|
|
3.75 |
|
Deposits in foreign offices |
|
|
509 |
|
|
|
1,015 |
|
|
|
(506 |
) |
|
|
(50 |
) |
|
|
0.19 |
|
|
|
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
39,110 |
|
|
|
37,921 |
|
|
|
1,189 |
|
|
|
3 |
|
|
|
2.12 |
|
|
|
2.93 |
|
Short-term borrowings |
|
|
951 |
|
|
|
2,584 |
|
|
|
(1,633 |
) |
|
|
(63 |
) |
|
|
0.26 |
|
|
|
1.99 |
|
Federal Home Loan Bank advances |
|
|
1,423 |
|
|
|
3,312 |
|
|
|
(1,889 |
) |
|
|
(57 |
) |
|
|
1.03 |
|
|
|
3.30 |
|
Subordinated notes and other long-term debt |
|
|
4,461 |
|
|
|
4,043 |
|
|
|
418 |
|
|
|
10 |
|
|
|
2.94 |
|
|
|
4.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
40,026 |
|
|
|
42,802 |
|
|
|
(2,776 |
) |
|
|
(6 |
) |
|
|
2.12 |
|
|
|
3.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other liabilities |
|
|
684 |
|
|
|
982 |
|
|
|
(298 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
5,805 |
|
|
|
6,186 |
|
|
|
(381 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Equity |
|
$ |
52,434 |
|
|
$ |
55,028 |
|
|
$ |
(2,594 |
) |
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.82 |
|
|
|
2.96 |
|
Impact of non-interest bearing funds on margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.27 |
|
|
|
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.09 |
% |
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| N.M., not a meaningful value. |
| |
| (1) |
|
Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. See Table 4 for the FTE adjustment. |
| |
| (2) |
|
Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees. |
| |
| (3) |
|
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans. |
30
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 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) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
(3.5 |
) |
|
$ |
(10.1 |
) |
|
$ |
— |
|
|
$ |
438.0 |
|
|
$ |
— |
|
Non-Franklin |
|
|
478.6 |
|
|
|
423.8 |
|
|
|
291.8 |
|
|
|
284.6 |
|
|
|
125.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
475.1 |
|
|
$ |
413.7 |
|
|
$ |
291.8 |
|
|
$ |
722.6 |
|
|
$ |
125.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs (recoveries) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
(3.5 |
) |
|
$ |
(10.1 |
) |
|
$ |
128.3 |
|
|
$ |
423.3 |
|
|
$ |
— |
|
Non-Franklin |
|
|
359.4 |
|
|
|
344.5 |
|
|
|
213.2 |
|
|
|
137.3 |
|
|
|
83.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
355.9 |
|
|
$ |
334.4 |
|
|
$ |
341.5 |
|
|
$ |
560.6 |
|
|
$ |
83.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses in excess of net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(128.3 |
) |
|
$ |
14.7 |
|
|
$ |
— |
|
Non-Franklin |
|
|
119.2 |
|
|
|
79.3 |
|
|
|
78.6 |
|
|
|
147.3 |
|
|
|
41.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
119.2 |
|
|
$ |
79.3 |
|
|
$ |
(49.7 |
) |
|
$ |
162.0 |
|
|
$ |
41.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for credit losses in the first nine-month period of 2009 was $1,180.7 million,
up $845.8 million from the comparable year-ago period of $334.9 million. The reported provision for
credit losses for the first nine-month period of 2009 of $1,180.7 million exceeded total NCOs by
$148.8 million (see the “Credit Quality” section located within the “Risk Management and Capital”
section for a full discussion).
31
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) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
Service charges on deposit
accounts |
|
$ |
80,811 |
|
|
$ |
75,353 |
|
|
$ |
69,878 |
|
|
$ |
75,247 |
|
|
$ |
80,508 |
|
Brokerage and insurance income |
|
|
33,996 |
|
|
|
32,052 |
|
|
|
39,948 |
|
|
|
31,233 |
|
|
|
34,309 |
|
Trust services |
|
|
25,832 |
|
|
|
25,722 |
|
|
|
24,810 |
|
|
|
27,811 |
|
|
|
30,952 |
|
Electronic banking |
|
|
28,017 |
|
|
|
24,479 |
|
|
|
22,482 |
|
|
|
22,838 |
|
|
|
23,446 |
|
Bank owned life insurance income |
|
|
13,639 |
|
|
|
14,266 |
|
|
|
12,912 |
|
|
|
13,577 |
|
|
|
13,318 |
|
Automobile operating lease income |
|
|
12,795 |
|
|
|
13,116 |
|
|
|
13,228 |
|
|
|
13,170 |
|
|
|
11,492 |
|
Mortgage banking income (loss) |
|
|
21,435 |
|
|
|
30,827 |
|
|
|
35,418 |
|
|
|
(6,747 |
) |
|
|
10,302 |
|
Securities (losses) gains |
|
|
(2,374 |
) |
|
|
(7,340 |
) |
|
|
2,067 |
|
|
|
(127,082 |
) |
|
|
(73,790 |
) |
Other income |
|
|
41,901 |
|
|
|
57,470 |
|
|
|
18,359 |
|
|
|
17,052 |
|
|
|
37,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
$ |
256,052 |
|
|
$ |
265,945 |
|
|
$ |
239,102 |
|
|
$ |
67,099 |
|
|
$ |
167,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details mortgage banking income and the net impact of 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) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
Mortgage Banking Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and secondary marketing |
|
$ |
16,491 |
|
|
$ |
31,782 |
|
|
$ |
29,965 |
|
|
$ |
7,180 |
|
|
$ |
7,647 |
|
Servicing fees |
|
|
12,320 |
|
|
|
12,045 |
|
|
|
11,840 |
|
|
|
11,660 |
|
|
|
11,838 |
|
Amortization of capitalized servicing (1) |
|
|
(10,050 |
) |
|
|
(14,445 |
) |
|
|
(12,285 |
) |
|
|
(6,462 |
) |
|
|
(6,234 |
) |
Other mortgage banking income |
|
|
4,109 |
|
|
|
5,381 |
|
|
|
9,404 |
|
|
|
2,959 |
|
|
|
3,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
22,870 |
|
|
|
34,763 |
|
|
|
38,924 |
|
|
|
15,337 |
|
|
|
16,770 |
|
MSR valuation adjustment (1) |
|
|
(17,348 |
) |
|
|
46,551 |
|
|
|
(10,389 |
) |
|
|
(63,355 |
) |
|
|
(10,251 |
) |
Net trading gains (losses) related to MSR hedging |
|
|
15,913 |
|
|
|
(50,487 |
) |
|
|
6,883 |
|
|
|
41,271 |
|
|
|
3,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking income (loss) |
|
$ |
21,435 |
|
|
$ |
30,827 |
|
|
$ |
35,418 |
|
|
$ |
(6,747 |
) |
|
$ |
10,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage originations (in millions) |
|
$ |
998 |
|
|
$ |
1,587 |
|
|
$ |
1,546 |
|
|
$ |
724 |
|
|
$ |
680 |
|
Average trading account securites used to hedge
MSRs (in millions) |
|
|
19 |
|
|
|
20 |
|
|
|
223 |
|
|
|
857 |
|
|
|
941 |
|
Capitalized mortgage servicing rights (2) |
|
|
200,969 |
|
|
|
219,282 |
|
|
|
167,838 |
|
|
|
167,438 |
|
|
|
230,398 |
|
Total mortgages serviced for others
(in millions)(2) |
|
|
16,145 |
|
|
|
16,246 |
|
|
|
16,315 |
|
|
|
15,754 |
|
|
|
15,741 |
|
MSR % of investor servicing portfolio |
|
|
1.24 |
% |
|
|
1.35 |
% |
|
|
1.03 |
% |
|
|
1.06 |
% |
|
|
1.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Impact of MSR Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment (1) |
|
$ |
(17,348 |
) |
|
$ |
46,551 |
|
|
$ |
(10,389 |
) |
|
$ |
(63,355 |
) |
|
$ |
(10,251 |
) |
Net trading gains (losses) related to MSR hedging |
|
|
15,913 |
|
|
|
(50,487 |
) |
|
|
6,883 |
|
|
|
41,271 |
|
|
|
3,783 |
|
Net interest income related to MSR hedging |
|
|
191 |
|
|
|
199 |
|
|
|
2,441 |
|
|
|
9,473 |
|
|
|
8,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of MSR hedging |
|
$ |
(1,244 |
) |
|
$ |
(3,737 |
) |
|
$ |
(1,065 |
) |
|
$ |
(12,611 |
) |
|
$ |
1,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
The change in fair value for the period represents the MSR valuation adjustment, excluding amortization of capitalized servicing. |
| |
| (2) |
|
At period end. |
32
2009 Third Quarter versus 2008 Third Quarter
Noninterest income increased $88.2 million, or 53%, from the year-ago quarter.
Table 16 — Noninterest Income — 2009 Third Quarter vs. 2008 Third Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third Quarter |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Service charges on deposit accounts |
|
$ |
80,811 |
|
|
$ |
80,508 |
|
|
$ |
303 |
|
|
|
— |
% |
Brokerage and insurance income |
|
|
33,996 |
|
|
|
34,309 |
|
|
|
(313 |
) |
|
|
(1 |
) |
Trust services |
|
|
25,832 |
|
|
|
30,952 |
|
|
|
(5,120 |
) |
|
|
(17 |
) |
Electronic banking |
|
|
28,017 |
|
|
|
23,446 |
|
|
|
4,571 |
|
|
|
19 |
|
Bank owned life insurance income |
|
|
13,639 |
|
|
|
13,318 |
|
|
|
321 |
|
|
|
2 |
|
Automobile operating lease income |
|
|
12,795 |
|
|
|
11,492 |
|
|
|
1,303 |
|
|
|
11 |
|
Mortgage banking income |
|
|
21,435 |
|
|
|
10,302 |
|
|
|
11,133 |
|
|
|
N.M. |
|
Securities (losses) gains |
|
|
(2,374 |
) |
|
|
(73,790 |
) |
|
|
71,416 |
|
|
|
(97 |
) |
Other income |
|
|
41,901 |
|
|
|
37,320 |
|
|
|
4,581 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
256,052 |
|
|
$ |
167,857 |
|
|
$ |
88,195 |
|
|
|
53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
The $88.2 million increase in total noninterest income reflected:
| |
• |
|
$71.4 million improvement in securities losses as the current quarter reflected a
$2.4 million loss compared with a $73.8 million loss in the year-ago quarter as that
period included a $76.6 million OTTI adjustment in the Alt-A mortgage loan-backed
securities portfolio. |
| |
| |
• |
|
$11.1 million increase in mortgage banking income, reflecting an $8.8 million
increase in origination and secondary marketing income as originations in the
current quarter were 47% higher, as well as a $5.0 million net improvement in MSR
valuation and hedging activity (see Table 15). |
| |
| |
• |
|
$4.6 million, or 19%, increase in electronic banking income including additional
third-party processing fees. |
| |
| |
• |
|
$4.6 million, or 12%, increase in other income, reflecting the current quarter’s
net impact of a $22.8 million change in fair value of our derivatives that did not
qualify for hedge accounting, partially offset by a $7.5 million loss on sale of
loans held for sale, as well as lower mezzanine lending income, equity investment
gains, and derivatives income. |
Partially offset by:
| |
• |
|
$5.1 million, or 17%, decline in trust services income, reflecting the impact of
lower market values on asset management revenues and reduced yields on money market
funds. |
2009 Third Quarter versus 2009 Second Quarter
Noninterest income decreased $9.9 million, or 4%, from the 2009 second quarter.
33
Table 17 — Noninterest Income — 2009 Third Quarter vs. 2009 Second Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third |
|
|
Second |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2009 |
|
|
Amount |
|
|
Percent |
|
Service charges on deposit
accounts |
|
$ |
80,811 |
|
|
$ |
75,353 |
|
|
$ |
5,458 |
|
|
|
7 |
% |
Brokerage and insurance income |
|
|
33,996 |
|
|
|
32,052 |
|
|
|
1,944 |
|
|
|
6 |
|
Trust services |
|
|
25,832 |
|
|
|
25,722 |
|
|
|
110 |
|
|
|
— |
|
Electronic banking |
|
|
28,017 |
|
|
|
24,479 |
|
|
|
3,538 |
|
|
|
14 |
|
Bank owned life insurance income |
|
|
13,639 |
|
|
|
14,266 |
|
|
|
(627 |
) |
|
|
(4 |
) |
Automobile operating lease
income |
|
|
12,795 |
|
|
|
13,116 |
|
|
|
(321 |
) |
|
|
(2 |
) |
Mortgage banking income |
|
|
21,435 |
|
|
|
30,827 |
|
|
|
(9,392 |
) |
|
|
(30 |
) |
Securities (losses) gains |
|
|
(2,374 |
) |
|
|
(7,340 |
) |
|
|
4,966 |
|
|
|
(68 |
) |
Other income |
|
|
41,901 |
|
|
|
57,470 |
|
|
|
(15,569 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
256,052 |
|
|
$ |
265,945 |
|
|
$ |
(9,893 |
) |
|
|
(4) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $9.9 million decrease in total noninterest income reflected:
| |
• |
|
$15.6 million, or 27%, decline in other income, as the prior quarter included a
$31.4 million gain on the sale of Visa® stock. The current quarter
reflected a $22.8 million benefit representing the change in fair value of our
derivatives that did not qualify for hedge accounting. This benefit was partially
offset by a $7.5 million loss on commercial loans held for sale as well as other
equity investment losses. |
| |
| |
• |
|
$9.4 million, or 30%, decline in mortgage banking income, primarily reflecting a
$15.3 million decline in origination and secondary marketing income as loan
originations declined 37% from the prior quarter. This was partially offset by a
$2.5 million net improvement in MSR valuation and hedging from the prior quarter
(see Table 15). |
Partially offset by:
| |
• |
|
$5.5 million, or 7%, increase in service charges on deposit accounts, primarily
reflecting seasonally higher personal service charges, mostly nonsufficient funds
and overdraft related, as well as account growth. |
| |
| |
• |
|
$5.0 million decline in securities losses as the current quarter reflected a $2.4
million loss compared with a $7.3 million loss in the prior quarter. |
| |
| |
• |
|
$3.5 million, or 14%, increase in electronic banking income including additional
third-party processing fees. |
34
2009 First Nine Months versus 2008 First Nine Months
The following table reflects noninterest income for the first nine-month periods of 2009 and
2008:
Table 18 — Noninterest Income — 2009 First Nine Months vs. 2008 First Nine Months
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
|
|
|
| |
|
September 30, |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Service charges on deposit accounts |
|
$ |
226,042 |
|
|
$ |
232,806 |
|
|
$ |
(6,764 |
) |
|
|
(3) |
% |
Brokerage and insurance income |
|
|
105,996 |
|
|
|
106,563 |
|
|
|
(567 |
) |
|
|
(1 |
) |
Trust services |
|
|
76,364 |
|
|
|
98,169 |
|
|
|
(21,805 |
) |
|
|
(22 |
) |
Electronic banking |
|
|
74,978 |
|
|
|
67,429 |
|
|
|
7,549 |
|
|
|
11 |
|
Bank owned life insurance income |
|
|
40,817 |
|
|
|
41,199 |
|
|
|
(382 |
) |
|
|
(1 |
) |
Automobile operating lease income |
|
|
39,139 |
|
|
|
26,681 |
|
|
|
12,458 |
|
|
|
47 |
|
Mortgage banking income |
|
|
87,680 |
|
|
|
15,741 |
|
|
|
71,939 |
|
|
|
N.M. |
|
Securities (losses) gains |
|
|
(7,647 |
) |
|
|
(70,288 |
) |
|
|
62,641 |
|
|
|
N.M. |
|
Other income |
|
|
117,730 |
|
|
|
121,739 |
|
|
|
(4,009 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
761,099 |
|
|
$ |
640,039 |
|
|
$ |
121,060 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value.
35
The following table details mortgage banking income and the net impact of MSR hedging activity
for the first nine-month periods of 2009 and 2008:
Table 19 — Mortgage Banking Income and Net Impact of MSR Hedging
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
|
|
|
| |
|
September 30, |
|
|
YTD 2009 vs 2008 |
|
| (in thousands, except as noted) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Mortgage Banking Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and secondary marketing |
|
$ |
78,238 |
|
|
$ |
30,077 |
|
|
$ |
48,161 |
|
|
|
N.M. |
% |
Servicing fees |
|
|
36,205 |
|
|
|
33,898 |
|
|
|
2,307 |
|
|
|
7 |
|
Amortization of capitalized servicing (1) |
|
|
(36,780 |
) |
|
|
(20,172 |
) |
|
|
(16,608 |
) |
|
|
(82 |
) |
Other mortgage banking income |
|
|
18,894 |
|
|
|
13,809 |
|
|
|
5,085 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
96,557 |
|
|
|
57,612 |
|
|
|
38,945 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment (1) |
|
|
18,814 |
|
|
|
10,687 |
|
|
|
8,127 |
|
|
|
76 |
|
Net trading losses related to MSR hedging |
|
|
(27,691 |
) |
|
|
(52,558 |
) |
|
|
24,867 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking income |
|
$ |
87,680 |
|
|
$ |
15,741 |
|
|
$ |
71,939 |
|
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage originations (in millions) |
|
$ |
4,131 |
|
|
|
3,049 |
|
|
$ |
1,082 |
|
|
|
35 |
% |
Average trading account securites used to hedge
MSRs (in millions) |
|
|
87 |
|
|
|
1,089 |
|
|
|
(1,002 |
) |
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized mortgage servicing rights (2) |
|
$ |
200,969 |
|
|
$ |
230,398 |
|
|
|
(29,429 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgages serviced for others (2) (in
millions) |
|
|
16,145 |
|
|
|
15,741 |
|
|
|
404 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR % of investor servicing portfolio |
|
|
1.24 |
% |
|
|
1.46 |
% |
|
|
(0.22) |
% |
|
|
(15) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Impact of MSR Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment (1) |
|
$ |
18,814 |
|
|
$ |
10,687 |
|
|
$ |
8,127 |
|
|
|
76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net trading losses related to MSR hedging |
|
|
(27,691 |
) |
|
|
(52,558 |
) |
|
|
24,867 |
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income related to MSR hedging |
|
|
2,831 |
|
|
|
23,666 |
|
|
|
(20,835 |
) |
|
|
(88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of MSR hedging |
|
$ |
(6,046 |
) |
|
$ |
(18,205 |
) |
|
$ |
12,159 |
|
|
|
(67) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
The $121.1 million, or 19%, increase in total noninterest income reflected:
| |
• |
|
$71.9 million increase in mortgage banking income, reflecting a $48.2 million
increase in origination and secondary marketing income as loans sales and loan
originations were substantially higher, and a $33.0 million improvement in MSR hedging
(see Table 19). |
| |
| |
• |
|
$62.6 million improvement in securities losses as the first nine-month period of
2008 included $76.6 million of OTTI adjustments compared with $42.1 million of OTTI
adjustments during the 2009 first nine-month
period. |
| |
| |
• |
|
$12.5 million increase in automobile operating lease income, reflecting a 40%
increase in average operating lease balances as lease originations since the 2007
fourth quarter were recorded as operating leases. All automobile lease originations
were discontinued in the 2008 fourth quarter. |
| |
| |
• |
|
$7.5 million increase in electronic banking, reflecting increased transaction
volumes and additional third-party processing fees. |
Partially offset by:
| |
• |
|
$6.8 million decline in service charges on deposit account, reflecting lower
consumer NSF and overdraft fees, partially offset by higher commercial service charges. |
36
| |
• |
|
$4.0 million decline in other income, reflecting a $25.1 million gain in the first
nine-month period of 2008 reflecting the sale of a portion of our Visa®
stock, a $16.9 million decline customer derivatives revenue from the comparable
year-ago period, and a $7.5 million loss on sale of loans held-for-sale during the
first nine-month period of 2009. These unfavorable impacts were partially offset by a
$31.4 million gain in the first nine-month period of 2009 reflecting the sale of our
remaining Visa® stock, and the net impact of a $22.8 million change in fair
value of derivatives that did not qualify for hedge accounting. |
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) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
Personnel costs |
|
|
172,152 |
|
|
$ |
171,735 |
|
|
$ |
175,932 |
|
|
$ |
196,785 |
|
|
$ |
184,827 |
|
Outside data processing and other services |
|
|
37,999 |
|
|
|
39,266 |
|
|
|
32,432 |
|
|
|
31,230 |
|
|
|
32,386 |
|
Net occupancy |
|
|
25,382 |
|
|
|
24,430 |
|
|
|
29,188 |
|
|
|
22,999 |
|
|
|
25,215 |
|
OREO and foreclosure expense |
|
|
38,968 |
|
|
|
26,524 |
|
|
|
9,887 |
|
|
|
8,171 |
|
|
|
9,113 |
|
Equipment |
|
|
20,967 |
|
|
|
21,286 |
|
|
|
20,410 |
|
|
|
22,329 |
|
|
|
22,102 |
|
Amortization of intangibles |
|
|
16,995 |
|
|
|
17,117 |
|
|
|
17,135 |
|
|
|
19,187 |
|
|
|
19,463 |
|
Professional services |
|
|
18,108 |
|
|
|
16,658 |
|
|
|
16,454 |
|
|
|
16,430 |
|
|
|
12,234 |
|
Marketing |
|
|
8,259 |
|
|
|
7,491 |
|
|
|
8,225 |
|
|
|
9,357 |
|
|
|
7,049 |
|
Automobile operating lease expense |
|
|
10,589 |
|
|
|
11,400 |
|
|
|
10,931 |
|
|
|
10,483 |
|
|
|
9,093 |
|
Telecommunications |
|
|
5,902 |
|
|
|
6,088 |
|
|
|
5,890 |
|
|
|
5,892 |
|
|
|
6,007 |
|
Printing and supplies |
|
|
3,950 |
|
|
|
4,151 |
|
|
|
3,572 |
|
|
|
4,175 |
|
|
|
4,316 |
|
Goodwill impairment |
|
|
— |
|
|
|
4,231 |
|
|
|
2,602,713 |
|
|
|
— |
|
|
|
— |
|
Other expense |
|
|
41,826 |
|
|
|
(10,395 |
) |
|
|
37,000 |
|
|
|
43,056 |
|
|
|
7,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
401,097 |
|
|
$ |
339,982 |
|
|
$ |
2,969,769 |
|
|
$ |
390,094 |
|
|
$ |
338,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees (full-time equivalent),
at period-end |
|
|
10,194 |
|
|
|
10,342 |
|
|
|
10,540 |
|
|
|
10,951 |
|
|
|
10,901 |
|
37
2009 Third Quarter versus 2008 Third Quarter
Noninterest expense increased $62.1 million, or 18%, from the year-ago quarter.
Table 21 — Noninterest Expense — 2009 Third Quarter vs. 2008 Third Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third |
|
|
Third |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Personnel costs |
|
$ |
172,152 |
|
|
$ |
184,827 |
|
|
$ |
(12,675 |
) |
|
|
(7) |
% |
Outside data processing and other services |
|
|
37,999 |
|
|
|
32,386 |
|
|
|
5,613 |
|
|
|
17 |
|
Net occupancy |
|
|
25,382 |
|
|
|
25,215 |
|
|
|
167 |
|
|
|
1 |
|
OREO and foreclosure expense |
|
|
38,968 |
|
|
|
9,113 |
|
|
|
29,855 |
|
|
|
N.M. |
|
Equipment |
|
|
20,967 |
|
|
|
22,102 |
|
|
|
(1,135 |
) |
|
|
(5 |
) |
Amortization of intangibles |
|
|
16,995 |
|
|
|
19,463 |
|
|
|
(2,468 |
) |
|
|
(13 |
) |
Professional services |
|
|
18,108 |
|
|
|
12,234 |
|
|
|
5,874 |
|
|
|
48 |
|
Marketing |
|
|
8,259 |
|
|
|
7,049 |
|
|
|
1,210 |
|
|
|
17 |
|
Automobile operating lease expense |
|
|
10,589 |
|
|
|
9,093 |
|
|
|
1,496 |
|
|
|
16 |
|
Telecommunications |
|
|
5,902 |
|
|
|
6,007 |
|
|
|
(105 |
) |
|
|
(2 |
) |
Printing and supplies |
|
|
3,950 |
|
|
|
4,316 |
|
|
|
(366 |
) |
|
|
(8 |
) |
Other expense |
|
|
41,826 |
|
|
|
7,191 |
|
|
|
34,635 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
401,097 |
|
|
$ |
338,996 |
|
|
$ |
62,101 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-time equivalent employees, at
period-end |
|
|
10,194 |
|
|
|
10,901 |
|
|
|
(707 |
) |
|
|
(6) |
% |
N.M., not a meaningful value.
The $62.1 million increase reflected:
| |
• |
|
$34.6 million increase in other expense, reflecting a $19.8 million increase in
FDIC insurance expenses as the prior period’s assessment expense was offset by an
assessment credit that has since been fully utilized. In addition, the year-ago
quarter included a $21.4 million reduction to expense as a result of a gain on the
debt extinguishment. |
| |
| |
• |
|
$29.9 million increase in OREO and foreclosure expense, reflecting higher levels
of problem assets, as well as loss mitigation activities. |
| |
| |
• |
|
$5.9 million, or 48%, increase in professional services, reflecting higher
consulting and collection-related expenses. |
| |
| |
• |
|
$5.6 million, or 17%, increase in outside data processing and other services,
primarily reflecting portfolio servicing fees now paid to Franklin resulting from
the 2009 first quarter restructuring of this relationship. |
Partially offset by:
| |
• |
|
$12.7 million, or 7%, decline in personnel costs, reflecting a decline in
salaries and lower benefits and commission expense. Full-time equivalent staff
declined 6% from the year-ago period. |
| |
| |
• |
|
$2.5 million, or 13%, decline in amortization of intangibles expense. |
38
2009 Third Quarter versus 2009 Second Quarter
Noninterest expense increased $61.1 million, or 18%, from the 2009 second quarter.
Table 22 — Noninterest Expense — 2009 Third Quarter vs. 2009 Second Quarter
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third |
|
|
Second |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2009 |
|
|
Amount |
|
|
Percent |
|
Personnel costs |
|
$ |
172,152 |
|
|
$ |
171,735 |
|
|
$ |
417 |
|
|
|
— |
% |
Outside data processing and other services |
|
|
37,999 |
|
|
|
39,266 |
|
|
|
(1,267 |
) |
|
|
(3 |
) |
Net occupancy |
|
|
25,382 |
|
|
|
24,430 |
|
|
|
952 |
|
|
|
4 |
|
OREO and foreclosure expense |
|
|
38,968 |
|
|
|
26,524 |
|
|
|
12,444 |
|
|
|
47 |
|
Equipment |
|
|
20,967 |
|
|
|
21,286 |
|
|
|
(319 |
) |
|
|
(1 |
) |
Amortization of intangibles |
|
|
16,995 |
|
|
|
17,117 |
|
|
|
(122 |
) |
|
|
(1 |
) |
Professional services |
|
|
18,108 |
|
|
|
16,658 |
|
|
|
1,450 |
|
|
|
9 |
|
Marketing |
|
|
8,259 |
|
|
|
7,491 |
|
|
|
768 |
|
|
|
10 |
|
Automobile operating lease expense |
|
|
10,589 |
|
|
|
11,400 |
|
|
|
(811 |
) |
|
|
(7 |
) |
Telecommunications |
|
|
5,902 |
|
|
|
6,088 |
|
|
|
(186 |
) |
|
|
(3 |
) |
Printing and supplies |
|
|
3,950 |
|
|
|
4,151 |
|
|
|
(201 |
) |
|
|
(5 |
) |
Goodwill impairment |
|
|
— |
|
|
|
4,231 |
|
|
|
(4,231 |
) |
|
|
— |
|
Other expense |
|
|
41,826 |
|
|
|
(10,395 |
) |
|
|
52,221 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
401,097 |
|
|
$ |
339,982 |
|
|
$ |
61,115 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-time equivalent employees, at
period-end |
|
|
10,194 |
|
|
|
10,342 |
|
|
|
(148 |
) |
|
|
(1) |
% |
N.M., not a meaningful value.
The $61.1 million increase in noninterest expense reflected:
| |
• |
|
$52.2 million increase in other expense, reflecting the reduction of the prior
quarter’s expense by a $67.4 gain on the redemption of a portion of our junior
subordinated debt, partially offset by a reduction in FDIC insurance expense as the
prior quarter included a $23.6 million special assessment. |
| |
| |
• |
|
$12.4 million, or 47%, increase in OREO and foreclosure expense, reflecting
higher levels of problem assets, as well as loss mitigation activities. The current
quarter included a $14.3 million charge related to one CRE retail OREO property. |
39
2009 First Nine Months versus 2008 First Nine Months
Noninterest expense for the first nine-month period of 2009 increased $2.6 billion from the
comparable year-ago period.
Table 23 — Noninterest Expense — 2009 First Nine Months vs. 2008 First Nine Months
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
|
|
|
| |
|
September 30, |
|
|
Change |
|
| (in thousands) |
|
2009 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
Personnel costs |
|
$ |
519,819 |
|
|
$ |
586,761 |
|
|
$ |
(66,942 |
) |
|
|
(11 |
)% |
Outside data processing and other services |
|
|
109,697 |
|
|
|
96,933 |
|
|
|
12,764 |
|
|
|
13 |
|
Net occupancy |
|
|
79,000 |
|
|
|
85,429 |
|
|
|
(6,429 |
) |
|
|
(8 |
) |
OREO and foreclosure expense |
|
|
75,379 |
|
|
|
25,284 |
|
|
|
50,095 |
|
|
|
N.M. |
|
Equipment |
|
|
62,663 |
|
|
|
71,636 |
|
|
|
(8,973 |
) |
|
|
(13 |
) |
Amortization of intangibles |
|
|
51,247 |
|
|
|
57,707 |
|
|
|
(6,460 |
) |
|
|
(11 |
) |
Professional services |
|
|
51,220 |
|
|
|
33,183 |
|
|
|
18,037 |
|
|
|
54 |
|
Marketing |
|
|
23,975 |
|
|
|
23,307 |
|
|
|
668 |
|
|
|
3 |
|
Automobile operating lease expense |
|
|
32,920 |
|
|
|
20,799 |
|
|
|
12,121 |
|
|
|
58 |
|
Telecommunications |
|
|
17,880 |
|
|
|
19,116 |
|
|
|
(1,236 |
) |
|
|
(6 |
) |
Printing and supplies |
|
|
11,673 |
|
|
|
14,695 |
|
|
|
(3,022 |
) |
|
|
(21 |
) |
Goodwill impairment |
|
|
2,606,944 |
|
|
|
— |
|
|
|
2,606,944 |
|
|
|
— |
|
Other expense |
|
|
68,431 |
|
|
|
52,430 |
|
|
|
16,001 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
3,710,848 |
|
|
$ |
1,087,280 |
|
|
$ |
2,623,568 |
|
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees
(full-time equivalent),
at period-end |
|
|
10,194 |
|
|
|
10,901 |
|
|
|
(707 |
) |
|
|
(6 |
) |
N.M., not a meaningful value
The $2,623.6 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). |
| |
| |
• |
|
$50.1 million increase in OREO and foreclosure expense, reflecting higher levels of
problem assets, as well as loss mitigation activities. |
| |
| |
• |
|
$18.0 million increase in professional services, reflecting higher consulting and
collection-related expenses. |
| |
| |
• |
|
$16.0 million, or 31%, increase in other expense. The primary factors contributing
to the increase are shown below: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
|
|
|
| |
|
September 30, |
|
|
|
|
| (in millions) |
|
2009 |
|
|
2008 |
|
|
Change |
|
Total other noninterest expense |
|
$ |
68.4 |
|
|
$ |
52.4 |
|
|
$ |
16.0 |
|
Primary factors contributing to increase: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on redemption of junior subordinated debt |
|
|
(67.4 |
) |
|
|
— |
|
|
|
(67.4 |
) |
Decline in non-deposit insurance expense |
|
|
(10.0 |
) |
|
|
— |
|
|
|
(10.0 |
) |
Increase in deposit insurance expense |
|
|
76.2 |
|
|
|
— |
|
|
|
76.2 |
|
Gain on extinguishment of debt |
|
|
— |
|
|
|
(21.4 |
) |
|
|
21.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other noninterest expense, after adjusting for
primary factors contributing to increase |
|
$ |
69.6 |
|
|
$ |
73.8 |
|
|
$ |
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
The increase of $76.2 million in deposit insurance expense was comprised of two
components: (a) $23.6 million FDIC special assessment during the 2009 second quarter,
and (b) $52.6 million increase primarily related to our 2008 FDIC assessments being
significantly reduced by a nonrecurring deposit 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 nine-month period of 2008. |
40
| |
|
|
Also, several other expense categories, such as travel expense, declined as a result of
the implementation of expense reduction initiatives. |
| |
| |
• |
|
$12.8 million increase in outside data processing and other services, primarily
reflecting portfolio servicing fees paid to Franklin resulting from the 2009 first
quarter restructuring of this relationship. |
| |
| |
• |
|
$12.1 million increase in automobile operating lease expense, primarily reflecting
the 40% increase in average operating leases discussed previously. |
Partially offset by:
| |
• |
|
$66.9 million decline in personnel expense, reflecting a decline in salaries, and
lower benefits and commission expense. Full-time equivalent staff declined 6% from the
comparable year-ago period. |
| |
| |
• |
|
$9.0 million decline in equipment costs, reflecting lower depreciation costs, as
well as lower repair and maintenance costs. |
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 third quarter was a benefit of $91.2 million,
resulting in an effective tax rate benefit of 35.4%. This compared with a tax benefit of $12.7
million in the 2009 second quarter and a tax expense of $17.0 million in the 2008 third quarter.
The effective tax rates in the prior quarter and year-ago quarters were a benefit of 9.2% and an
expense of 18.5 %, respectively. The effective tax rate for the first nine-month period of 2009 was
a benefit of 11.5% compared with an expense of 18.7% for the first nine-month period of 2008. As of
September 30, 2009, a net deferred tax asset of $297.1 million was recorded. There was no
impairment to the deferred tax asset as a result of carryback capacity and projected taxable
income.
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 ASC 740, “Income Taxes”. At
September 30, 2009 we had a gross unrecognized tax benefit of $10.8 million in income tax liability
related to tax positions taken in prior periods. This balance includes $7.0 million of unrecognized
tax benefits that would impact the effective tax rate, if recognized. 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.
41
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. We hold capital
proportionately against these risks. 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 September 30, 2009, commercial loans totaled $21.3 billion, and
represented 57% of our total credit exposure. This portfolio was diversified between C&I and CRE
loans (see “Commercial Credit” discussion).
Total consumer loans were $16.0 billion at September 30, 2009, and represented 43% 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).
42
Table 24 — Loans and Leases Composition
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial (2) |
|
$ |
12,547 |
|
|
|
34 |
% |
|
$ |
13,320 |
|
|
|
35 |
% |
|
$ |
13,768 |
|
|
|
35 |
% |
|
$ |
13,541 |
|
|
|
33 |
% |
|
$ |
13,638 |
|
|
|
33 |
% |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,815 |
|
|
|
5 |
|
|
|
1,857 |
|
|
|
5 |
|
|
|
2,074 |
|
|
|
5 |
|
|
|
2,080 |
|
|
|
5 |
|
|
|
2,111 |
|
|
|
5 |
|
Commercial (2) |
|
|
6,900 |
|
|
|
19 |
|
|
|
7,089 |
|
|
|
18 |
|
|
|
7,187 |
|
|
|
18 |
|
|
|
8,018 |
|
|
|
20 |
|
|
|
7,796 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
8,715 |
|
|
|
23 |
|
|
|
8,946 |
|
|
|
23 |
|
|
|
9,261 |
|
|
|
23 |
|
|
|
10,098 |
|
|
|
25 |
|
|
|
9,907 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
21,262 |
|
|
|
57 |
|
|
|
22,266 |
|
|
|
58 |
|
|
|
23,029 |
|
|
|
58 |
|
|
|
23,639 |
|
|
|
58 |
|
|
|
23,545 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans (3) |
|
|
2,939 |
|
|
|
8 |
|
|
|
2,855 |
|
|
|
7 |
|
|
|
2,894 |
|
|
|
7 |
|
|
|
3,901 |
|
|
|
10 |
|
|
|
3,918 |
|
|
|
10 |
|
Automobile leases |
|
|
309 |
|
|
|
1 |
|
|
|
383 |
|
|
|
1 |
|
|
|
468 |
|
|
|
1 |
|
|
|
563 |
|
|
|
1 |
|
|
|
698 |
|
|
|
2 |
|
Home equity |
|
|
7,576 |
|
|
|
20 |
|
|
|
7,631 |
|
|
|
20 |
|
|
|
7,663 |
|
|
|
19 |
|
|
|
7,556 |
|
|
|
18 |
|
|
|
7,497 |
|
|
|
18 |
|
Residential mortgage |
|
|
4,468 |
|
|
|
12 |
|
|
|
4,646 |
|
|
|
12 |
|
|
|
4,837 |
|
|
|
12 |
|
|
|
4,761 |
|
|
|
12 |
|
|
|
4,854 |
|
|
|
12 |
|
Other loans |
|
|
750 |
|
|
|
2 |
|
|
|
714 |
|
|
|
2 |
|
|
|
657 |
|
|
|
2 |
|
|
|
672 |
|
|
|
2 |
|
|
|
680 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
16,042 |
|
|
|
43 |
|
|
|
16,229 |
|
|
|
42 |
|
|
|
16,519 |
|
|
|
42 |
|
|
|
17,453 |
|
|
|
42 |
|
|
|
17,647 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
37,304 |
|
|
|
100 |
% |
|
$ |
38,495 |
|
|
|
100 |
% |
|
$ |
39,548 |
|
|
|
100 |
% |
|
$ |
41,092 |
|
|
|
100 |
|
|
$ |
41,192 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (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. |
43
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 March 31, 2009, 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 ALLL
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, NALs, and
OREO since the restructuring:
Table 25 — Franklin-related Loan and OREO Balances
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
| (in millions) |
|
September 30 |
|
|
June 30 |
|
|
March 31 |
|
Total accruing loans |
|
|
126.7 |
|
|
|
127.4 |
|
|
|
127.4 |
|
Total nonaccruing loans |
|
|
338.5 |
|
|
|
344.6 |
|
|
|
366.1 |
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
465.2 |
|
|
|
472.0 |
|
|
|
493.5 |
|
OREO |
|
|
31.0 |
|
|
|
43.6 |
|
|
|
79.6 |
|
|
|
|
|
|
|
|
|
|
|
Total Franklin Loans and OREO |
|
$ |
496.2 |
|
|
$ |
515.6 |
|
|
$ |
573.1 |
|
|
|
|
|
|
|
|
|
|
|
The changes in the Franklin-related balances since the restructuring have been a result of the
collection strategies utilized, and have been consistent with our expectations based on the
restructuring agreement. The reduction in the June 30, 2009, balances, compared with March 31,
2009, balances, was significantly impacted by refinance activity. Refinance activity slowed during
the 2009 third quarter, and did not have as significant of an impact in reducing the balances. The
principal and interest collections associated with the loans remained consistent with expectations.
The OREO balances have declined significantly as a direct result of a focused effort to sell the
properties.
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 regular basis. Internal risk ratings are assigned
at the time of each loan approval, and are assessed and updated with each 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” and “Retail Properties”
discussions). We continually review and adjust our risk rating criteria and rating determination
process based on actual experience. This 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 borrowers are commercial customers doing business within our
geographic regions. C&I loans are generally underwritten
44
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.
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 portfolio segments, 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 in the 2009 second and third quarters. 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 $13.2 billion of total commercial loans, and $18.8 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 activity in the 2009 third quarter represented a continuation of the portfolio management
processes established in the first two quarters of 2009. We continue to fully assess our criticized
loans over $500,000
on a monthly basis, and have maintained the discipline associated with the ongoing
“noncriticized” review process established in the 2009 second quarter. In many cases, we have
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.
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. The more
recent announcement regarding the Saturn dealerships also has had no impact on our view of the
portfolio. (See “Automobile Industry” section located within the “Commercial and Industrial
Portfolio” section for additional information.)
45
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 for the foreseeable future, we
anticipate some level of additional negative credit migration. 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. Certain segments of our commercial loan portfolio are
discussed in further detail below:
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. For these loans that are secured by real estate, appropriate
appraisals are obtained at origination, and updated on an as needed basis, in compliance with
regulatory requirements.
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.
To the extent C&I loans are secured by real estate collateral, appropriate appraisals are
obtained at origination, and updated on an as needed basis, in compliance with regulatory
requirements.
As shown in the following table, C&I loans totaled $12.5 billion at September 30, 2009.
Table 26 — Commercial and Industrial Loans and Leases by Industry Classification
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At September 30, 2009 |
|
| |
|
Commitments |
|
|
Loans Outstanding |
|
| (in millions of dollars) |
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Industry Classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
5,076 |
|
|
|
27 |
% |
|
$ |
3,893 |
|
|
|
31 |
% |
Manufacturing |
|
|
3,499 |
|
|
|
19 |
|
|
|
2,169 |
|
|
|
17 |
|
Finance, insurance, and real estate |
|
|
2,574 |
|
|
|
14 |
|
|
|
2,124 |
|
|
|
17 |
|
Retail trade — Other than Auto Dealers |
|
|
1,682 |
|
|
|
9 |
|
|
|
966 |
|
|
|
8 |
|
Retail trade — Auto Dealers |
|
|
1,324 |
|
|
|
7 |
|
|
|
754 |
|
|
|
6 |
|
Wholesale trade |
|
|
1,357 |
|
|
|
7 |
|
|
|
753 |
|
|
|
6 |
|
Transportation, communications, and
utilities |
|
|
1,164 |
|
|
|
6 |
|
|
|
700 |
|
|
|
6 |
|
Contractors and construction |
|
|
925 |
|
|
|
5 |
|
|
|
462 |
|
|
|
4 |
|
Energy |
|
|
567 |
|
|
|
3 |
|
|
|
388 |
|
|
|
3 |
|
Agriculture and forestry |
|
|
274 |
|
|
|
2 |
|
|
|
189 |
|
|
|
2 |
|
Public administration |
|
|
131 |
|
|
|
1 |
|
|
|
123 |
|
|
|
1 |
|
Other |
|
|
29 |
|
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,602 |
|
|
|
100 |
% |
|
$ |
12,547 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
46
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 September 30, 2009 |
|
|
At September 30, 2009 |
|
| |
|
Net Charge-offs |
|
|
Nonaccrual Loans |
|
| (in millions) |
|
Amount |
|
|
Annualized % |
|
|
Percent |
|
|
Amount |
|
|
%
of Related
Outstandings |
|
Industry Classification: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
$ |
16.6 |
|
|
|
2.97 |
% |
|
|
24 |
% |
|
$ |
166.4 |
|
|
|
8 |
% |
Services |
|
|
14.1 |
|
|
|
1.41 |
|
|
|
20 |
|
|
|
171.2 |
|
|
|
4 |
|
Transportation, communications, and utilities |
|
|
10.4 |
|
|
|
5.85 |
|
|
|
15 |
|
|
|
21.1 |
|
|
|
3 |
|
Finance, insurance, and real estate |
|
|
10.3 |
|
|
|
1.90 |
|
|
|
15 |
|
|
|
95.3 |
|
|
|
4 |
|
Retail trade — Other than Auto Dealers |
|
|
6.5 |
|
|
|
2.61 |
|
|
|
9 |
|
|
|
66.0 |
|
|
|
7 |
|
Wholesale trade |
|
|
5.3 |
|
|
|
2.71 |
|
|
|
8 |
|
|
|
37.5 |
|
|
|
5 |
|
Contractors and construction |
|
|
4.8 |
|
|
|
3.92 |
|
|
|
7 |
|
|
|
33.3 |
|
|
|
7 |
|
Energy |
|
|
0.5 |
|
|
|
0.48 |
|
|
|
1 |
|
|
|
14.3 |
|
|
|
4 |
|
Agriculture and forestry |
|
|
0.2 |
|
|
|
0.50 |
|
|
|
1 |
|
|
|
4.8 |
|
|
|
3 |
|
Other |
|
|
0.1 |
|
|
|
1.22 |
|
|
|
— |
|
|
|
0.8 |
|
|
|
3 |
|
Retail trade — Auto Dealers |
|
|
0.0 |
|
|
|
0.02 |
|
|
|
— |
|
|
|
1.6 |
|
|
|
— |
|
Public administration |
|
|
0.0 |
|
|
|
0.05 |
|
|
|
— |
|
|
|
0.4 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68.8 |
|
|
|
2.13 |
% |
|
|
100 |
% |
|
$ |
612.7 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
since December 31, 2008.
Table
28 — Automotive Industry Exposure(1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 30, 2009 |
|
|
December 31, 2008 |
|
| |
|
|
|
|
|
% of Total |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
| (in millions) |
|
Loans Outstanding |
|
|
Loans |
|
|
Total Exposure |
|
|
Loans Outstanding |
|
|
Loans |
|
|
Total Exposure |
|
Suppliers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
183.6 |
|
|
|
|
|
|
$ |
307.8 |
|
|
$ |
182.4 |
|
|
|
|
|
|
$ |
330.9 |
|
Foreign |
|
|
31.0 |
|
|
|
|
|
|
|
41.3 |
|
|
|
32.7 |
|
|
|
|
|
|
|
45.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Suppliers |
|
|
214.6 |
|
|
|
0.58 |
% |
|
|
349.1 |
|
|
|
215.1 |
|
|
|
0.52 |
% |
|
|
376.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floorplan —
domestic |
|
|
298.0 |
|
|
|
|
|
|
|
790.7 |
|
|
|
552.6 |
|
|
|
|
|
|
|
746.8 |
|
Floorplan — foreign |
|
|
251.6 |
|
|
|
|
|
|
|
562.0 |
|
|
|
408.1 |
|
|
|
|
|
|
|
544.1 |
|
Other |
|
|
351.0 |
|
|
|
|
|
|
|
428.6 |
|
|
|
345.6 |
|
|
|
|
|
|
|
463.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Dealer |
|
|
900.6 |
|
|
|
2.41 |
|
|
|
1,781.3 |
|
|
|
1,306.4 |
|
|
|
3.18 |
|
|
|
1,754.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Automotive |
|
$ |
1,115.2 |
|
|
|
2.99 |
|
|
$ |
2,130.4 |
|
|
$ |
1,521.4 |
|
|
|
3.70 |
|
|
$ |
2,131.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Companies with > 25% of revenue derived from the automotive industry. |
47
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, and 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 $349.1
million, of which $214.6 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 $1.4 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 September 30, 2009, compared with December 31, 2008, reflected reduced dealership
inventory, in part as a result of the successful “Cash for Clunkers” program.
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. We do not anticipate any material dealer-related losses in the portfolio
despite numerous dealership closings during 2009. Our dealer selection criteria, with a focus on
multi-dealership groups has proven itself in this environment.
COMMERCIAL REAL ESTATE (CRE) PORTFOLIO
As shown in the following table, CRE loans totaled $8.7 billion and represented 23% of total
loans and leases at September 30, 2009.
48
Table 29 — Commercial Real Estate Loans by Property Type and Property Location
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At September 30, 2009 |
|
| (in millions) |
|
Ohio |
|
|
Michigan |
|
|
Pennsylvania |
|
|
Indiana |
|
|
Kentucky |
|
|
Florida |
|
|
West Virginia |
|
|
Other |
|
|
Total
Amount |
|
|
Percent |
|
Retail properties |
|
$ |
901 |
|
|
$ |
240 |
|
|
$ |
157 |
|
|
$ |
210 |
|
|
$ |
10 |
|
|
$ |
81 |
|
|
$ |
47 |
|
|
$ |
591 |
|
|
$ |
2,237 |
|
|
|
26 |
% |
Multi family |
|
|
828 |
|
|
|
138 |
|
|
|
94 |
|
|
|
78 |
|
|
|
41 |
|
|
|
7 |
|
|
|
80 |
|
|
|
135 |
|
|
|
1,401 |
|
|
|
16 |
|
Office |
|
|
581 |
|
|
|
204 |
|
|
|
114 |
|
|
|
57 |
|
|
|
24 |
|
|
|
22 |
|
|
|
61 |
|
|
|
65 |
|
|
|
1,128 |
|
|
|
13 |
|
Industrial and warehouse |
|
|
498 |
|
|
|
226 |
|
|
|
35 |
|
|
|
86 |
|
|
|
14 |
|
|
|
43 |
|
|
|
21 |
|
|
|
118 |
|
|
|
1,041 |
|
|
|
12 |
|
Single family home builders |
|
|
628 |
|
|
|
93 |
|
|
|
57 |
|
|
|
35 |
|
|
|
23 |
|
|
|
116 |
|
|
|
20 |
|
|
|
67 |
|
|
|
1,039 |
|
|
|
12 |
|
Lines to real estate companies |
|
|
688 |
|
|
|
120 |
|
|
|
89 |
|
|
|
49 |
|
|
|
4 |
|
|
|
1 |
|
|
|
54 |
|
|
|
17 |
|
|
|
1,022 |
|
|
|
12 |
|
Hotel |
|
|
152 |
|
|
|
85 |
|
|
|
23 |
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
|
70 |
|
|
|
366 |
|
|
|
4 |
|
Health care |
|
|
172 |
|
|
|
77 |
|
|
|
24 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
32 |
|
|
|
310 |
|
|
|
4 |
|
Raw land and other land uses |
|
|
55 |
|
|
|
27 |
|
|
|
3 |
|
|
|
8 |
|
|
|
6 |
|
|
|
3 |
|
|
|
2 |
|
|
|
15 |
|
|
|
119 |
|
|
|
1 |
|
Other |
|
|
32 |
|
|
|
9 |
|
|
|
6 |
|
|
|
1 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
52 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,535 |
|
|
$ |
1,219 |
|
|
$ |
602 |
|
|
$ |
550 |
|
|
$ |
125 |
|
|
$ |
273 |
|
|
$ |
300 |
|
|
$ |
1,111 |
|
|
$ |
8,715 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total portfolio |
|
|
52 |
% |
|
|
14 |
% |
|
|
7 |
% |
|
|
6 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
13 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (three months ended
Sept. 30, 2009) |
|
$ |
86.9 |
|
|
$ |
37.5 |
|
|
$ |
2.0 |
|
|
$ |
8.9 |
|
|
$ |
0.6 |
|
|
$ |
16.5 |
|
|
$ |
— |
|
|
$ |
16.8 |
|
|
$ |
169.2 |
|
|
|
|
|
Net charge-offs — annualized percentage |
|
|
7.52 |
% |
|
|
12.09 |
% |
|
|
1.32 |
% |
|
|
6.35 |
% |
|
|
1.78 |
% |
|
|
23.84 |
% |
|
|
0.00 |
% |
|
|
5.94 |
% |
|
|
7.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
$ |
523.9 |
|
|
$ |
192.4 |
|
|
$ |
41.9 |
|
|
$ |
47.6 |
|
|
$ |
10.8 |
|
|
$ |
89.7 |
|
|
$ |
1.2 |
|
|
$ |
226.2 |
|
|
$ |
1,133.7 |
|
|
|
|
|
% of portfolio |
|
|
12 |
% |
|
|
16 |
% |
|
|
7 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
33 |
% |
|
|
0 |
% |
|
|
20 |
% |
|
|
13 |
% |
|
|
|
|
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 September 30,2009 |
|
|
|
At September 30, 2009 |
|
| |
|
Net charge-offs |
|
|
Nonaccrual Loans |
|
| |
|
|
|
|
|
|
|
|
% of Related |
|
| (in millions) |
|
Amount |
|
|
Annualized % |
|
|
Percent |
|
|
Amount |
|
|
Outstandings |
|
Single family home builders |
|
$ |
62.0 |
|
|
|
22.67 |
% |
|
|
37 |
% |
|
$ |
340.0 |
|
|
|
33 |
% |
Retail properties |
|
|
52.5 |
|
|
|
9.22 |
|
|
|
31 |
|
|
|
331.1 |
|
|
|
15 |
|
Multi family |
|
|
27.3 |
|
|
|
7.67 |
|
|
|
16 |
|
|
|
98.8 |
|
|
|
7 |
|
Industrial and warehouse |
|
|
18.6 |
|
|
|
7.03 |
|
|
|
11 |
|
|
|
138.7 |
|
|
|
13 |
|
Lines to real estate companies |
|
|
3.3 |
|
|
|
1.26 |
|
|
|
2 |
|
|
|
64.6 |
|
|
|
6 |
|
Office |
|
|
2.5 |
|
|
|
0.86 |
|
|
|
1 |
|
|
|
110.3 |
|
|
|
10 |
|
Raw land and other land uses |
|
|
2.4 |
|
|
|
8.09 |
|
|
|
1 |
|
|
|
27.6 |
|
|
|
23 |
|
Hotel |
|
|
0.6 |
|
|
|
0.64 |
|
|
|
— |
|
|
|
14.7 |
|
|
|
4 |
|
Other |
|
|
0.1 |
|
|
|
1.05 |
|
|
|
— |
|
|
|
6.8 |
|
|
|
13 |
|
Health care |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.9 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
169.2 |
|
|
|
7.62 |
% |
|
|
100 |
% |
|
$ |
1,133.7 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
49
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 obtained in conjunction with all originations and renewals, and on an as
needed basis, 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 these actions indicated that
additional stress is likely due to the current economic conditions. Property values are updated
using appraisals 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
retail sales and home-price depreciation trends for the segments are embedded in our performance
expectations, and lease-up and absorption scenarios are assessed. We anticipate the current stress
within this portfolio will continue for the foreseeable future, 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 September 30, 2009, we had $1,039 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, 15% to finance land under development, and 16% to
finance land held for development. The $1,039 million represented a $550 million, or 35%, 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 no new originations in this portfolio segment in
2009, increased property sale activity, and substantial charge-offs. The increased sale activity
was evident in the 2009 second and third quarters; however, we anticipate a seasonal decline in the
2009 fourth quarter.
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 for the
foreseeable future. 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.
50
Retail Properties
Our
portfolio of CRE loans secured by retail properties totaled $2,237 million, or
approximately 6% of total loans and leases, at September 30, 2009. Loans within this portfolio
segment declined 1% from December 31, 2008. Credit approval in this portfolio segment is generally
dependent 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.
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:
51
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) |
|
9/30/09 |
|
|
12/31/08 |
|
|
9/30/09 |
|
|
12/31/08 |
|
|
9/30/09 |
|
|
12/31/08 |
|
Ending Balance |
|
$ |
2,670 |
|
|
$ |
3,116 |
|
|
$ |
4,906 |
|
|
$ |
4,440 |
|
|
$ |
4,468 |
|
|
$ |
4,761 |
|
Portfolio Weighted Average LTV ratio (2) |
|
|
71 |
% |
|
|
70 |
% |
|
|
78 |
% |
|
|
78 |
% |
|
|
77 |
% |
|
|
76 |
% |
Portfolio Weighted Average FICO (3) |
|
|
718 |
|
|
|
725 |
|
|
|
724 |
|
|
|
720 |
|
|
|
699 |
|
|
|
707 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three-Month Period Ended September 30, 2009 |
|
| |
|
Home Equity Loans |
|
|
Home Equity Lines of Credit |
|
|
Residential Mortgages (4) |
|
Originations |
|
$ |
54 |
|
|
$ |
338 |
|
|
$ |
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination Weighted Average LTV ratio (2) |
|
|
63 |
% |
|
|
73 |
% |
|
|
84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination Weighted Average FICO (3) |
|
|
753 |
|
|
|
766 |
|
|
|
749 |
|
| |
|
|
| (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. 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. However, recent declines in
housing prices have likely eliminated a portion of the collateral for this portfolio as some loans
with an original LTV ratio of less than 100% currently have an LTV ratio of greater than 100%.
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.
For certain home equity loans and lines of credit, we may utilize Automated Valuation
Methodology (AVM) or other model driven value estimates during the credit underwriting process.
Regardless of the estimate methodology, we supplement our underwriting with a third party fraud
detection system to limit our exposure to “flipping”, and outright fraudulent transactions. We
update values, as we believe appropriate, and in compliance with applicable regulations, for loans
identified as higher risk, based on performance indicators to facilitate our workout and loss
mitigation functions.
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 Fannie Mae and 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.
52
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.”
All residential mortgage loans are originated based on a full appraisal during the credit
underwriting process. Additionally, we supplement our underwriting with a third party fraud
detection system to limit our exposure to “flipping”, and outright fraudulent transactions. We
update values, as we believe appropriate, and in compliance with applicable regulations, for loans
identified as higher risk, based on performance indicators to facilitate our workout and loss
mitigation functions.
During the 2009 third quarter, we transferred to held for sale, and subsequently sold in the
2009 fourth quarter, $44.8 million of underperforming mortgage loans, resulting in a reduction in
residential mortgage NALs. We will continue to evaluate this type of transaction in future periods
based on market conditions.
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 September 30, 2009. At September 30, 2009, ARM loans that were
expected to have rates reset totaled $159.4 million for the remainder of 2009, and $891.4 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 $385.0 million of Alt-A mortgage loans in the residential mortgage loan portfolio at
September 30, 2009, 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
September 30, 2009, borrowers for Alt-A mortgages had an average current FICO score of 664 and the
loans had an average LTV ratio of 87%, compared with 671 and 88%, respectively, at December 31,
2008. Total Alt-A NCOs were $18.8 million, or an annualized 6.03%, for the first nine-month period
of 2009, compared with $7.1 million, or an annualized 1.87%, for the first nine-month period of
2008. As with the entire residential mortgage portfolio, the increase in NCOs reflected, among
other actions, a more conservative position on the timing of loss recognition and the transfer to
held for sale, and subsequent sale in the 2009 fourth quarter, of underperforming mortgage loans.
The ALLL expressed as a percentage of total related loans was 4.83% at September 30, 2009. 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 $602.8 million of residential real estate loans at September 30,
2009, compared with $691.9 million 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 September 30, 2009, borrowers for interest-only loans had an average
current FICO score of 718 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 $10.3 million, or an annualized
2.13% for the first nine-month period of 2009, compared with $1.3 million, or an annualized 0.22%,
for the first nine-month period of 2009. As with the entire residential mortgage portfolio, the
increase in NCOs reflected, among other actions, a more conservative position on the timing of loss
recognition and the transfer to held for sale, and subsequent sale in the 2009 fourth quarter, of
underperforming mortgage loans. The ALLL expressed as a percentage of total related loans was
1.03% at September 30, 2009.
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.
53
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. We continue to monitor
the potential 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
September 30, 2009, if a counterparty defaulted, did not exceed $16 million for any individual
counterparty.
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 third quarter continued to be negatively impacted by
the sustained economic weakness in our Midwest markets. In addition, we initiated certain actions
with regard to loss recognition on our residential mortgage portfolio that we believe will increase
the flexibility in working the loans toward timelier resolution.
NONACCRUAL 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, and are written down to realizable value at no later
than 180 days past due. When interest accruals are suspended, accrued interest income is reversed
with current year accruals charged to earnings and prior-year amounts generally charged-off as a
credit loss.
Accruing restructured loans (ARLs) consists of accruing loans that have been re-underwritten,
modified, or restructured when borrowers are experiencing payment difficulties. Generally, prior
to restructuring, these loans have not reached a status to be considered as NALs. These loan
restructurings are one component of the loss mitigation process, and are made to increase the
likelihood of the borrower’s ability to repay the loan. Modifications to these loans include, but
are not limited to, changes to any of the following: interest rate, maturity, principal, payment
amount, or a combination of each. The decline in the commercial ARL balance at September 30, 2009,
compared with June 30, 2009, represented the migration of a significant amount of commercial ARLs
to NAL status. The increase in the residential mortgage ARLs represented our continued efforts in
working with stressed borrowers.
54
Table 32 reflects period-end NALs, NPAs, 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.
55
Table 32 — Nonaccruing Loans (NALs), Nonperforming Assets (NPAs), and Past Due Loans and Leases
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands) |
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
Nonaccrual loans and leases (NALs): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial (1) |
|
$ |
612,701 |
|
|
$ |
456,734 |
|
|
$ |
398,286 |
|
|
$ |
932,648 |
|
|
$ |
174,207 |
|
Commercial real estate |
|
|
1,133,661 |
|
|
|
850,846 |
|
|
|
629,886 |
|
|
|
445,717 |
|
|
|
298,844 |
|
Alt-A mortgages |
|
|
9,810 |
|
|
|
25,861 |
|
|
|
25,175 |
|
|
|
21,286 |
|
|
|
18,559 |
|
Interest-only mortgages |
|
|
8,336 |
|
|
|
17,428 |
|
|
|
20,580 |
|
|
|
12,221 |
|
|
|
8,492 |
|
Franklin residential mortgages |
|
|
322,796 |
|
|
|
342,207 |
|
|
|
360,106 |
|
|
|
— |
|
|
|
— |
|
Other residential mortgages |
|
|
49,579 |
|
|
|
89,992 |
|
|
|
81,094 |
|
|
|
65,444 |
|
|
|
58,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage (1) |
|
|
390,521 |
|
|
|
475,488 |
|
|
|
486,955 |
|
|
|
98,951 |
|
|
|
85,163 |
|
Home equity (1) |
|
|
44,182 |
|
|
|
35,299 |
|
|
|
37,967 |
|
|
|
24,831 |
|
|
|
27,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NALs |
|
|
2,181,065 |
|
|
|
1,818,367 |
|
|
|
1,553,094 |
|
|
|
1,502,147 |
|
|
|
585,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential (1) |
|
|
81,807 |
|
|
|
107,954 |
|
|
|
143,856 |
|
|
|
63,058 |
|
|
|
59,302 |
|
Commercial |
|
|
60,784 |
|
|
|
64,976 |
|
|
|
66,906 |
|
|
|
59,440 |
|
|
|
14,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other real estate |
|
|
142,591 |
|
|
|
172,930 |
|
|
|
210,762 |
|
|
|
122,498 |
|
|
|
73,478 |
|
Impaired loans held for sale (2) |
|
|
20,386 |
|
|
|
11,287 |
|
|
|
11,887 |
|
|
|
12,001 |
|
|
|
13,503 |
|
Other NPAs (3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NPAs |
|
$ |
2,344,042 |
|
|
$ |
2,002,584 |
|
|
$ |
1,775,743 |
|
|
$ |
1,636,646 |
|
|
$ |
675,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming Franklin loans (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
650,225 |
|
|
$ |
— |
|
Residential mortgage |
|
|
322,796 |
|
|
|
342,207 |
|
|
|
360,106 |
|
|
|
— |
|
|
|
— |
|
OREO |
|
|
30,996 |
|
|
|
43,623 |
|
|
|
79,596 |
|
|
|
— |
|
|
|
— |
|
Home Equity |
|
|
15,704 |
|
|
|
2,437 |
|
|
|
6,000 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming Franklin loans |
|
$ |
369,496 |
|
|
$ |
388,267 |
|
|
$ |
445,702 |
|
|
$ |
650,225 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NALs as a % of total loans and leases |
|
|
5.85 |
% |
|
|
4.72 |
% |
|
|
3.93 |
% |
|
|
3.66 |
% |
|
|
1.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPA ratio (4) |
|
|
6.26 |
|
|
|
5.18 |
|
|
|
4.46 |
|
|
|
3.97 |
|
|
|
1.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases past due 90 days or more: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10,889 |
|
|
$ |
24,407 |
|
Commercial real estate |
|
|
2,546 |
|
|
|
— |
|
|
|
— |
|
|
|
59,425 |
|
|
|
58,867 |
|
Residential mortgage (excluding loans guaranteed by
the U.S. government) |
|
|
46,592 |
|
|
|
97,937 |
|
|
|
88,381 |
|
|
|
71,553 |
|
|
|
58,280 |
|
Home equity |
|
|
45,334 |
|
|
|
35,328 |
|
|
|
35,717 |
|
|
|
29,039 |
|
|
|
23,224 |
|
Other loans and leases |
|
|
14,175 |
|
|
|
13,474 |
|
|
|
15,611 |
|
|
|
18,039 |
|
|
|
14,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, excl. loans guaranteed by the U.S. government |
|
$ |
108,647 |
|
|
$ |
146,739 |
|
|
$ |
139,709 |
|
|
$ |
188,945 |
|
|
$ |
179,358 |
|
Add: loans guaranteed by U.S. government |
|
|
122,019 |
|
|
|
99,379 |
|
|
|
88,551 |
|
|
|
82,576 |
|
|
|
68,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans and leases past due 90 days
or more, including loans guaranteed by the U.S.
government |
|
$ |
230,666 |
|
|
$ |
246,118 |
|
|
$ |
228,260 |
|
|
$ |
271,521 |
|
|
$ |
248,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding loans guaranteed by the U.S. government,
as a percent of total loans and leases |
|
|
0.29 |
% |
|
|
0.38 |
% |
|
|
0.35 |
% |
|
|
0.46 |
% |
|
|
0.44 |
% |
Guaranteed by U.S. government, as a percent of
total loans and leases |
|
|
0.33 |
% |
|
|
0.26 |
% |
|
|
0.22 |
% |
|
|
0.20 |
% |
|
|
0.17 |
% |
Including loans guaranteed by the U.S. government,
as a percent of total loans and leases |
|
|
0.62 |
% |
|
|
0.64 |
% |
|
|
0.58 |
% |
|
|
0.66 |
% |
|
|
0.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing restructured loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial (1) |
|
$ |
153,010 |
|
|
$ |
267,975 |
|
|
$ |
201,508 |
|
|
$ |
185,333 |
|
|
$ |
364,939 |
|
Alt-A mortgages |
|
|
58,367 |
|
|
|
46,657 |
|
|
|
36,642 |
|
|
|
32,336 |
|
|
|
28,740 |
|
Interest-only mortgages |
|
|
10,072 |
|
|
|
12,147 |
|
|
|
8,500 |
|
|
|
7,183 |
|
|
|
5,094 |
|
Other residential mortgages |
|
|
136,024 |
|
|
|
99,764 |
|
|
|
62,869 |
|
|
|
43,338 |
|
|
|
37,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage |
|
|
204,463 |
|
|
|
158,568 |
|
|
|
108,011 |
|
|
|
82,857 |
|
|
|
71,512 |
|
Other |
|
|
42,406 |
|
|
|
35,720 |
|
|
|
27,014 |
|
|
|
41,094 |
|
|
|
40,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing restructured loans |
|
$ |
399,879 |
|
|
$ |
462,263 |
|
|
$ |
336,533 |
|
|
$ |
309,284 |
|
|
$ |
476,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Franklin loans were reported as accruing restructured commercial loans for the three-month period ended
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, June 30, 2009,
and September 30, 2009, nonaccruing Franklin loans were reported as residential mortgage loans, home equity
loans, and OREO; reflecting the 2009 first quarter restructuring. |
| |
| (2) |
|
The September 30, 2009, figure primarily represent impaired residential mortgage loans held for sale. All
other presented figures 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. |
Table 33 — NALs/NPAs — Franklin-Related Impact
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
Nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
338.5 |
|
|
$ |
344.6 |
|
|
$ |
366.1 |
|
|
$ |
650.2 |
|
|
$ |
— |
|
Non-Franklin |
|
|
1,842.6 |
|
|
|
1,473.8 |
|
|
|
1,187.0 |
|
|
|
851.9 |
|
|
|
585.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,181.1 |
|
|
$ |
1,818.4 |
|
|
$ |
1,553.1 |
|
|
$ |
1,502.1 |
|
|
$ |
585.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
465.2 |
|
|
$ |
472.0 |
|
|
$ |
494.0 |
|
|
$ |
650.2 |
|
|
$ |
1,095.0 |
|
Non-Franklin |
|
|
36,838.9 |
|
|
|
38,023.0 |
|
|
|
39,054.0 |
|
|
|
40,441.8 |
|
|
|
40,097.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,304.1 |
|
|
$ |
38,495.0 |
|
|
$ |
39,548.0 |
|
|
$ |
41,092.0 |
|
|
$ |
41,192.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NAL ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5.85 |
% |
|
|
4.72 |
% |
|
|
3.93 |
% |
|
|
3.66 |
% |
|
|
1.42 |
% |
Non-Franklin |
|
|
5.00 |
|
|
|
3.88 |
|
|
|
3.04 |
|
|
|
2.11 |
|
|
|
1.46 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
Nonperforming assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
369.5 |
|
|
$ |
388.3 |
|
|
$ |
445.7 |
|
|
$ |
650.2 |
|
|
$ |
— |
|
Non-Franklin |
|
|
1,974.5 |
|
|
|
1,614.3 |
|
|
|
1,330.0 |
|
|
|
986.4 |
|
|
|
675.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,344.0 |
|
|
$ |
2,002.6 |
|
|
$ |
1,775.7 |
|
|
$ |
1,636.6 |
|
|
$ |
675.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
37,304.1 |
|
|
$ |
38,495.0 |
|
|
$ |
39,548.0 |
|
|
$ |
41,092.0 |
|
|
$ |
41,192.0 |
|
Total other real estate, net |
|
|
142.6 |
|
|
|
172.9 |
|
|
|
210.8 |
|
|
|
122.5 |
|
|
|
73.5 |
|
Impaired loans held for sale |
|
|
20.4 |
|
|
|
11.3 |
|
|
|
11.9 |
|
|
|
12.0 |
|
|
|
13.5 |
|
Other NPAs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
37,467.1 |
|
|
|
38,679.2 |
|
|
|
39,770.7 |
|
|
|
41,226.5 |
|
|
|
41,281.4 |
|
Franklin |
|
|
369.5 |
|
|
|
388.3 |
|
|
|
445.7 |
|
|
|
650.2 |
|
|
|
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Franklin |
|
$ |
37,097.6 |
|
|
$ |
38,290.9 |
|
|
$ |
39,325.0 |
|
|
$ |
40,576.3 |
|
|
$ |
40,186.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPA ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6.26 |
% |
|
|
5.18 |
% |
|
|
4.46 |
% |
|
|
3.97 |
% |
|
|
1.64 |
% |
Non-Franklin |
|
|
5.34 |
|
|
|
4.23 |
|
|
|
3.39 |
|
|
|
2.43 |
|
|
|
1.68 |
|
The $362.7 million increase in NALs from the prior quarter primarily reflected increases in
CRE and C&I-related NALs.
During the 2009 third quarter, and because we believe that there will be no meaningful
economic recovery for the foreseeable future, we took a more conservative approach in identifying
and classifying emerging problem credits. In many cases, commercial loans were placed on
nonaccrual status even though the loan was less than 30 days past due for both principal and
interest payments. This significantly impacted the inflow of commercial loan NALs for the quarter.
Of the commercial loans placed on nonaccrual status in the current quarter, over 55% were less
than 30 days past due. Of the period end $1,746.4 million of CRE and C&I-related NALs,
approximately 36% represented loans that were less than 30 days past due. We believe the decisions
increase our options for working these loans toward timelier resolution.
C&I NALs increased $156.0 million, or 34%, from the end of the prior quarter. The increase
was associated with loans throughout our regions, with no specific geographic concentration, and
industry segments. In general, C&I loans that support the home building industry, contractors, and
automotive suppliers experienced the most stress, however, less than 10% of the C&I portfolio is
associated with these segments. The manufacturing-related segment also showed some deterioration,
but we believe this to be more borrower-specific than industry-specific.
CRE NALs increased $282.8 million, or 33%, from the end of the prior quarter. This increase
reflected the continued decline in the housing market, stress on retail sales, and the general
decline in the economy. The increase was not concentrated in any specific project type, although
the single family home builder and retail segments remain the most stressed.
57
Residential mortgage NALs declined $85.0 million, or 18%, reflecting the impact of the more
conservative position on the timing of loss recognition, active loss mitigation and troubled debt
restructuring efforts, as well as the sale of loans. Our efforts to proactively address existing
issues with loss mitigation and loan modification transactions have helped to minimize the inflow
of new NALs.
Home equity NALs increased $8.9 million, or 25%, reflecting loans migrating into the more
serious delinquency stage. However, this does not indicate higher future losses, as all loans have
been written down to expected proceeds.
NPAs, which include NALs, increased $341.5 million, or 17%, the end of the prior quarter.
This increase in NPAs was less than the increase in NALs as OREO assets declined $30.3 million, or
18%, reflecting a continuation of our focused efforts to sell OREO properties.
Compared with December 31, 2008, NPAs, which include NALs, increased $707.4 million, or 43%,
reflecting:
| |
• |
|
$687.9 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, have adversely affected retail
projects. |
| |
| |
• |
|
$291.6 million increase in residential mortgage NALs. This reflected an increase of
$322.8 million related to the Franklin restructuring, partially offset by the impact of the
more conservative position regarding the timing of loss recognition, active loss
mitigation, as well as the sale of loans. Our efforts to proactively address existing
issues with loss mitigation and loan modification transactions have helped to reduce the
inflow of new NALs. |
| |
| |
• |
|
$20.1 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 $48.6 million, reflecting the active marketing and selling of
Franklin-related OREO properties over the past nine months. The non-Franklin-related
decline also reflects the same active marketing and selling of our OREO properties. |
Partially offset by:
| |
• |
|
$319.9 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
$330.3 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 0.29% at September 30, 2009, down from 0.38% at the end of second quarter, and 15
basis points lower than a year-ago. On this same basis, the delinquency ratio for total consumer
loans was 0.66% at September 30, 2009, down from 0.90% at the end of the prior quarter, and up from
0.54% a year-ago.
58
NPA activity for each of the past five quarters was as follows:
Table 34 — Nonperforming Assets (NPAs) Activity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
NPAs, beginning of period |
|
$ |
2,002,584 |
|
|
$ |
1,775,743 |
|
|
$ |
1,636,646 |
|
|
$ |
675,319 |
|
|
$ |
624,736 |
|
New NPAs |
|
|
899,855 |
|
|
|
750,318 |
|
|
|
622,515 |
|
|
|
509,320 |
|
|
|
175,345 |
|
Franklin impact, net (1) |
|
|
(18,771 |
) |
|
|
(57,436 |
) |
|
|
(204,523 |
) |
|
|
650,225 |
|
|
|
— |
|
Returns to accruing status |
|
|
(52,498 |
) |
|
|
(40,915 |
) |
|
|
(36,056 |
) |
|
|
(13,756 |
) |
|
|
(9,104 |
) |
Loan and lease losses |
|
|
(305,405 |
) |
|
|
(282,713 |
) |
|
|
(168,382 |
) |
|
|
(95,687 |
) |
|
|
(47,288 |
) |
OREO losses |
|
|
(30,623 |
) |
|
|
(20,614 |
) |
|
|
(4,034 |
) |
|
|
(4,648 |
) |
|
|
(5,504 |
) |
Payments |
|
|
(117,710 |
) |
|
|
(95,124 |
) |
|
|
(61,452 |
) |
|
|
(66,536 |
) |
|
|
(43,319 |
) |
Sales |
|
|
(33,390 |
) |
|
|
(26,675 |
) |
|
|
(8,971 |
) |
|
|
(17,591 |
) |
|
|
(19,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPAs, end of period |
|
$ |
2,344,042 |
|
|
$ |
2,002,584 |
|
|
$ |
1,775,743 |
|
|
$ |
1,636,646 |
|
|
$ |
675,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (1) |
|
Franklin loans were reported as accruing restructured
commercial loans for the three-month period ended 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, June 30, 2009, and September
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 ratings to
lower, and vice versa. This movement across the credit scale is called migration.
We continued to update our probability-of-default and loss-given-default factors based on the
actual performance and the expected performance of our portfolios. The updates to these factors
made during the first nine-month period of 2009 were primarily associated with the consumer and
business banking portfolios.
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.
59
Table 35 — Quarterly Credit Reserves Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
Allowance for loan and lease losses,
beginning of period |
|
$ |
917,680 |
|
|
$ |
838,549 |
|
|
$ |
900,227 |
|
|
$ |
720,738 |
|
|
$ |
679,403 |
|
Loan and lease losses |
|
|
(377,443 |
) |
|
|
(359,444 |
) |
|
|
(353,005 |
) |
|
|
(571,053 |
) |
|
|
(96,388 |
) |
Recoveries of loans previously charged off |
|
|
21,501 |
|
|
|
25,037 |
|
|
|
11,514 |
|
|
|
10,433 |
|
|
|
12,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan and lease losses |
|
|
(355,942 |
) |
|
|
(334,407 |
) |
|
|
(341,491 |
) |
|
|
(560,620 |
) |
|
|
(83,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
472,137 |
|
|
|
413,538 |
|
|
|
289,001 |
|
|
|
728,046 |
|
|
|
125,086 |
|
Allowance for loans transferred to held-for-sale |
|
|
(1,904 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Economic reserve transfer |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12,063 |
|
|
|
— |
|
Allowance of assets sold |
|
|
— |
|
|
|
— |
|
|
|
(9,188 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses, end of period |
|
$ |
1,031,971 |
|
|
$ |
917,680 |
|
|
$ |
838,549 |
|
|
$ |
900,227 |
|
|
$ |
720,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, beginning of period |
|
$ |
47,144 |
|
|
$ |
46,975 |
|
|
$ |
44,139 |
|
|
$ |
61,640 |
|
|
$ |
61,334 |
|
Provision for (reduction in) unfunded loan
commitments and letters of credit losses |
|
|
2,999 |
|
|
|
169 |
|
|
|
2,836 |
|
|
|
(5,438 |
) |
|
|
306 |
|
Economic reserve transfer |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12,063 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, end of period |
|
$ |
50,143 |
|
|
$ |
47,144 |
|
|
$ |
46,975 |
|
|
$ |
44,139 |
|
|
$ |
61,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses |
|
$ |
1,082,114 |
|
|
$ |
964,824 |
|
|
$ |
885,524 |
|
|
$ |
944,366 |
|
|
$ |
782,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses (ALLL) as % of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
2.77 |
% |
|
|
2.38 |
% |
|
|
2.12 |
% |
|
|
2.19 |
% |
|
|
1.75 |
% |
Nonaccrual loans and leases (NALs) |
|
|
47 |
|
|
|
50 |
|
|
|
54 |
|
|
|
60 |
|
|
|
123 |
|
Nonperforming assets (NPAs) |
|
|
44 |
|
|
|
46 |
|
|
|
47 |
|
|
|
55 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses (ACL) as % of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
2.90 |
% |
|
|
2.51 |
% |
|
|
2.24 |
% |
|
|
2.30 |
% |
|
|
1.90 |
% |
NALs |
|
|
50 |
|
|
|
53 |
|
|
|
57 |
|
|
|
63 |
|
|
|
134 |
|
NPAs |
|
|
46 |
|
|
|
48 |
|
|
|
50 |
|
|
|
58 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
| |
Table 36 — ALLL/ACL — Franklin-Related Impact |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in millions) |
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
Allowance for loan and lease losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
130.0 |
|
|
$ |
115.3 |
|
Non-Franklin |
|
|
1,032.0 |
|
|
|
917.7 |
|
|
|
838.5 |
|
|
|
770.2 |
|
|
|
605.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,032.0 |
|
|
$ |
917.7 |
|
|
$ |
838.5 |
|
|
$ |
900.2 |
|
|
$ |
720.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
130.0 |
|
|
$ |
115.3 |
|
Non-Franklin |
|
|
1,082.1 |
|
|
|
964.8 |
|
|
|
885.5 |
|
|
|
814.4 |
|
|
|
667.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,082.1 |
|
|
$ |
964.8 |
|
|
$ |
885.5 |
|
|
$ |
944.4 |
|
|
$ |
782.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
465.2 |
|
|
$ |
472.0 |
|
|
$ |
494.0 |
|
|
$ |
650.2 |
|
|
$ |
1,095.0 |
|
Non-Franklin |
|
|
36,838.9 |
|
|
|
38,023.0 |
|
|
|
39,054.0 |
|
|
|
40,441.8 |
|
|
|
40,097.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,304.1 |
|
|
$ |
38,495.0 |
|
|
$ |
39,548.0 |
|
|
$ |
41,092.0 |
|
|
$ |
41,192.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL as % of total loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2.77 |
% |
|
|
2.38 |
% |
|
|
2.12 |
% |
|
|
2.19 |
% |
|
|
1.75 |
% |
Non-Franklin |
|
|
2.80 |
|
|
|
2.41 |
|
|
|
2.15 |
|
|
|
1.90 |
|
|
|
1.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL as % of total loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2.90 |
% |
|
|
2.51 |
% |
|
|
2.24 |
% |
|
|
2.30 |
% |
|
|
1.90 |
% |
Non-Franklin |
|
|
2.94 |
|
|
|
2.54 |
|
|
|
2.27 |
|
|
|
2.01 |
|
|
|
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin |
|
$ |
338.5 |
|
|
$ |
344.6 |
|
|
$ |
366.1 |
|
|
$ |
650.2 |
|
|
$ |
— |
|
Non-Franklin |
|
|
1,842.6 |
|
|
|
1,473.8 |
|
|
|
1,187.0 |
|
|
|
851.9 |
|
|
|
586.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,181.1 |
|
|
$ |
1,818.4 |
|
|
$ |
1,553.1 |
|
|
$ |
1,502.1 |
|
|
$ |
586.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL as % of NALs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
47 |
% |
|
|
50 |
% |
|
|
54 |
% |
|
|
60 |
% |
|
|
123 |
% |
Non-Franklin |
|
|
56 |
|
|
|
62 |
|
|
|
71 |
|
|
|
90 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL as % of NALs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
50 |
% |
|
|
53 |
% |
|
|
57 |
% |
|
|
63 |
% |
|
|
134 |
% |
Non-Franklin |
|
|
59 |
|
|
|
65 |
|
|
|
75 |
|
|
|
96 |
|
|
|
114 |
|
As shown in the above table, the ALLL increased to $1,032.0 million at September 30, 2009,
compared with $917.7 million at June 30, 2009, and $900.2 million at December 31, 2008. Expressed
as a percent of period-end loans and leases, the ALLL ratio increased to 2.77% at September 30,
2009, compared with 2.38% at June 30, 2009, and 2.19% at December 31, 2008. The increase of $114.3
million compared with June 30, 2009 primarily reflected the necessary building of reserves due to
the continued economic weaknesses in our markets. As loans were assigned to higher risk ratings,
our calculated reserve increased accordingly, consistent with our reserving methodology. The
increase of $131.7 million compared with December 31, 2008, also reflected the continued economic
weaknesses in our markets as well as an increase of reserves resulting from the 2009 second quarter
portfolio review process (See “Commercial Loan Portfolio Review and Actions” section located within
the “Commercial Credit” section for additional information), 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).
On a combined basis, the ACL as a percent of total loans and leases at September 30, 2009, was
2.90% compared with 2.51% at June 30, 2009, and 2.30% at December 31, 2008. Like the ALLL, the
Franklin restructuring impacted the change in the ACL from December 31, 2008.
61
The table below reflects how our ACL is allocated among our various loan categories:
| |
Table 37 — Allocation of Allowances for Credit
Losses (1) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2009 |
|
|
2008 |
|
| (in thousands) |
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
381,912 |
|
|
|
34 |
% |
|
$ |
347,339 |
|
|
|
35 |
% |
|
$ |
309,465 |
|
|
|
35 |
% |
|
$ |
412,201 |
|
|
|
33 |
% |
|
$ |
344,074 |
|
|
|
33 |
% |
Commercial real estate |
|
|
436,661 |
|
|
|
23 |
|
|
|
368,464 |
|
|
|
23 |
|
|
|
349,750 |
|
|
|
23 |
|
|
|
322,681 |
|
|
|
25 |
|
|
|
241,419 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
818,573 |
|
|
|
57 |
|
|
|
715,803 |
|
|
|
58 |
|
|
|
659,215 |
|
|
|
58 |
|
|
|
734,882 |
|
|
|
58 |
|
|
|
585,493 |
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
59,134 |
|
|
|
9 |
|
|
|
60,995 |
|
|
|
8 |
|
|
|
51,235 |
|
|
|
9 |
|
|
|
44,712 |
|
|
|
11 |
|
|
|
41,144 |
|
|
|
11 |
|
Home equity |
|
|
86,989 |
|
|
|
20 |
|
|
|
76,653 |
|
|
|
20 |
|
|
|
67,510 |
|
|
|
19 |
|
|
|
63,538 |
|
|
|
18 |
|
|
|
61,926 |
|
|
|
18 |
|
Residential mortgage |
|
|
50,177 |
|
|
|
12 |
|
|
|
48,093 |
|
|
|
12 |
|
|
|
45,138 |
|
|
|
12 |
|
|
|
44,463 |
|
|
|
12 |
|
|
|
19,848 |
|
|
|
12 |
|
Other loans |
|
|
17,098 |
|
|
|
2 |
|
|
|
16,136 |
|
|
|
2 |
|
|
|
15,451 |
|
|
|
2 |
|
|
|
12,632 |
|
|
|
2 |
|
|
|
12,327 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
213,398 |
|
|
|
43 |
|
|
|
201,877 |
|
|
|
42 |
|
|
|
179,334 |
|
|
|
42 |
|
|
|
165,345 |
|
|
|
42 |
|
|
|
135,245 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan and lease losses |
|
$ |
1,031,971 |
|
|
|
100 |
% |
|
$ |
917,680 |
|
|
|
100 |
% |
|
$ |
838,549 |
|
|
|
100 |
% |
|
$ |
900,227 |
|
|
|
100 |
% |
|
<