UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-34073
Huntington Bancshares
Incorporated
(Exact name of registrant as
specified in its charter)
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Maryland
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31-0724920
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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41 S. High Street, Columbus, Ohio
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43287
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(Address of principal executive
offices)
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(Zip Code)
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Registrants telephone number, including area code
(614) 480-8300
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Class
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Name of Exchange on Which Registered
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8.50% Series A non-voting, perpetual convertible preferred
stock
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NASDAQ
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Common Stock Par Value $0.01 per
Share
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NASDAQ
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Exchange
Act. þ Yes o
No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. o Yes þ No
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. 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). þ Yes o
No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act) o Yes þ No
The aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant as of
June 30, 2010, determined by using a per share closing
price of $5.54, as quoted by NASDAQ on that date, was
$3,857,539,827. As of January 31, 2011, there were
863,338,744 shares of common stock with a par value of
$0.01 outstanding.
Documents
Incorporated By Reference
Part III of this
Form 10-K
incorporates by reference certain information from the
registrants definitive Proxy Statement for the 2011 Annual
Shareholders Meeting.
HUNTINGTON
BANCSHARES INCORPORATED
INDEX
i
Glossary
of Acronyms and Terms
The following listing provides a comprehensive reference of
common acronyms and terms used throughout the document:
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ABL
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Asset Based Lending
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ACL
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Allowance for Credit Losses
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AFCRE
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Automobile Finance and Commercial Real Estate
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ALCO
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Asset-Liability Management Committee
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ALLL
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Allowance for Loan and Lease Losses
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ARM
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Adjustable Rate Mortgage
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ARRA
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American Recovery and Reinvestment Act of 2009
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ASC
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Accounting Standards Codification
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ATM
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Automated Teller Machine
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AULC
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Allowance for Unfunded Loan Commitments
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AVM
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Automated Valuation Methodology
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C&I
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Commercial and Industrial
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CDARS
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Certificate of Deposit Account Registry Service
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CDO
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Collateralized Debt Obligations
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CFPB
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Bureau of Consumer Financial Protection
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CMO
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Collateralized Mortgage Obligations
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CPP
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Capital Purchase Program
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CRE
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Commercial Real Estate
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DDA
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Demand Deposit Account
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DIF
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Deposit Insurance Fund
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Dodd-Frank Act
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Dodd-Frank Wall Street Reform and Consumer Protection Act
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EESA
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Emergency Economic Stabilization Act of 2008
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ERISA
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Employee Retirement Income Security Act
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EVE
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Economic Value of Equity
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Fannie Mae
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(see FNMA)
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FASB
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Financial Accounting Standards Board
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FDIC
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Federal Deposit Insurance Corporation
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FDICIA
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Federal Deposit Insurance Corporation Improvement Act of 1991
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FHA
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Federal Housing Administration
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FHLB
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Federal Home Loan Bank
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FHLMC
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Federal Home Loan Mortgage Corporation
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FICO
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Fair Isaac Corporation
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FNMA
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Federal National Mortgage Association
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Franklin
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Franklin Credit Management Corporation
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Freddie Mac
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(see FHLMC)
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FSP
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Financial Stability Plan
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FTE
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Fully-Taxable Equivalent
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FTP
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Funds Transfer Pricing
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GAAP
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Generally Accepted Accounting Principles in the United States of
America
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HASP
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Homeowner Affordability and Stability Plan
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HCER Act
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Health Care and Education Reconciliation Act of 2010
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IPO
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Initial Public Offering
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ii
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IRS
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Internal Revenue Service
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LIBOR
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London Interbank Offered Rate
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LTV
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Loan to Value
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MD&A
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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MRC
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Market Risk Committee
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MSR
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Mortgage Servicing Rights
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NALs
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Nonaccrual Loans
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NAV
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Net Asset Value
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NCO
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Net Charge-off
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NPAs
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Nonperforming Assets
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NSF / OD
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Nonsufficient Funds and Overdraft
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OCC
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Office of the Comptroller of the Currency
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OCI
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Other Comprehensive Income (Loss)
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OCR
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Optimal Customer Relationship
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OLEM
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Other Loans Especially Mentioned
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OREO
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Other Real Estate Owned
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OTTI
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Other-Than-Temporary
Impairment
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PFG
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Private Financial, Capital Markets, and Insurance Group
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Reg E
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Regulation E, of the Electronic Fund Transfer Act
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SAD
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Special Assets Division
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SEC
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Securities and Exchange Commission
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Sky Financial
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Sky Financial Group, Inc.
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Sky Trust
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Sky Bank and Sky Trust, National Association
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TAGP
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Transaction Account Guarantee Program
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TARP
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Troubled Asset Relief Program
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TARP Capital
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Series B Preferred Stock
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TCE
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Tangible Common Equity
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TDR
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Troubled Debt Restructured loan
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TLGP
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Temporary Liquidity Guarantee Program
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Treasury
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U.S. Department of the Treasury
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UCS
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Uniform Classification System
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Unizan
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Unizan Financial Corp.
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USDA
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U.S. Department of Agriculture
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VA
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U.S. Department of Veteran Affairs
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VIE
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Variable Interest Entity
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WGH
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Wealth Advisors, Government Finance, and Home Lending
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iii
Huntington
Bancshares Incorporated
PART I
When we refer to we, our, and
us in this report, we mean Huntington Bancshares
Incorporated and our consolidated subsidiaries, unless the
context indicates that we refer only to the parent company,
Huntington Bancshares Incorporated. When we refer to the
Bank in this report, we mean our only bank
subsidiary, The Huntington National Bank, and its subsidiaries.
We are a multi-state diversified regional bank holding company
organized under Maryland law in 1966 and headquartered in
Columbus, Ohio. Through the Bank, we have 145 years of
serving the financial needs of our customers. We provide
full-service commercial, small business, consumer banking
services, mortgage banking services, automobile financing,
equipment leasing, investment management, trust services,
brokerage services, customized insurance programs, and other
financial products and services. The Bank, organized in 1866, is
our only bank subsidiary. At December 31, 2010, the Bank
had 611 branches as follows:
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344 branches in Ohio
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119 branches in Michigan
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57 branches in Pennsylvania
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50 branches in Indiana
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28 branches in West Virginia
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13 branches in Kentucky
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Select financial services and other activities are also
conducted in various other states. International banking
services are available through the headquarters office in
Columbus, Ohio and a limited purpose office located in the
Cayman Islands, and another limited purpose office located in
Hong Kong. Our foreign banking activities, in total or with any
individual country, are not significant.
In late 2010, we reorganized the way in which we manage our
business. Our segments are based on our internally-aligned
segment leadership structure, which is how we monitor results
and assess performance. For each of our four business segments,
we expect the combination of our business model and exceptional
service to provide a competitive advantage that supports revenue
and earnings growth. Our business model emphasizes the delivery
of a complete set of banking products and services offered by
larger banks, but distinguished by local delivery, customer
service, and pricing of these products.
Beginning in 2010, a key strategic emphasis has been for our
business segments to operate in cooperation to provide products
and services to our customers to build stronger and more
profitable relationships using our Optimal Customer Relationship
(OCR) sales and service process. The objectives of OCR are to:
1. Provide a consultative sales approach to provide
solutions that are specific to each customer.
2. Leverage each business segment in terms of its products
and expertise to benefit the customer.
3. Target prospects who may want to have their full
relationship with us.
Following is a description of our four business segments and
Treasury / Other function:
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Retail and Business Banking This segment provides
financial products and services to consumer and small business
customers located within our primary banking markets consisting
of five areas covering the six states of Ohio, Michigan,
Pennsylvania, Indiana, West Virginia, and Kentucky. Its products
include individual and small business checking accounts, savings
accounts, money market accounts, certificates of deposit,
consumer loans, and small business loans and leases. Other
financial services available to consumers and small business
customers include investments, insurance services, interest rate
risk protection products, foreign exchange hedging, and treasury
management services. Retail and
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1
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Business Banking provides these services through a banking
network of over 600 traditional branches and convenience
branches located in grocery stores and retirement centers. In
addition, an array of alternative distribution channels is
available to customers including internet and mobile banking,
telephone banking, and over 1,300 ATMs.
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Commercial Banking Our Commercial Banking group
provides a wide array of products and services to the middle
market and large corporate client base located primarily within
our core geographic banking markets. Products and services are
delivered through a relationship banking model and include
commercial lending, as well as depository and liquidity
management products. Dedicated teams collaborate with our
primary bankers to deliver complex and customized treasury
management solutions, equipment and technology leasing,
international services, capital markets services such as
interest rate protection, foreign exchange hedging and sales,
trading of securities, and employee benefit programs (insurance,
410(k)). The Commercial Banking team specializes in serving a
number of industry segments such as government entities,
not-for-profit
organizations, heath-care entities, and large, publicly traded
companies.
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Automobile Finance and Commercial Real Estate This
segment provides lending and other banking products and services
to customers outside of our normal retail or commercial
channels. More specifically, we serve automotive dealerships,
retail customers who obtain financing at the dealerships,
professional real estate developers, REITs, and other customers
with lending needs that are secured by commercial properties.
Most of our customers are located in our primary banking
markets. Our products and services include financing for the
purchase of automobiles by customers of automotive dealerships;
financing for the purchase of new and used vehicle inventory by
automotive dealerships; and financing for land, buildings, and
other commercial real estate owned or constructed by real estate
developers, automobile dealerships, or other customers with real
estate project financing needs. We also provide other banking
products and services to our customers as well as their owners
or principals. These products and services are delivered
through: (1) our relationships with developers in our
primary banking markets believed to be experienced,
well-managed, and well-capitalized and are capable of operating
in all phases of the real estate cycle (top-tier developers),
(2) relationships with established automobile dealerships,
(3) our leads through community involvement, and
(4) referrals from other professionals.
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Wealth Advisors, Government Finance, and Home
Lending This segment consists primarily of fee-based
businesses including home lending, wealth management, and
government finance. We originate and service consumer loans to
customers who are generally located in our primary banking
markets. Consumer lending products are distributed to these
customers primarily through the Retail and Business Banking
segment and commissioned loan originators. We provide wealth
management banking services to high net worth customers in our
primary banking markets and in Florida by utilizing a cohesive
model that employs a unified sales force to deliver products and
services directly and through the other segments. We provide
these products and services through a unified sales team, which
consists of former private bankers, trust officers, and
investment advisors; Huntington Asset Advisors, which provides
investment management services; Huntington Asset Services, which
offers administrative and operational support to fund complexes;
retirement plan services, and the national settlements business.
We also provide banking products and services to government
entities across our primary banking markets by utilizing a team
of relationship managers providing public finance, brokerage,
trust, lending, and treasury management services.
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A Treasury / Other function includes our insurance
brokerage business, which specializes in commercial
property/casualty, employee benefits, personal lines, life and
disability and specialty lines. We also provide brokerage and
agency services for residential and commercial title insurance
and excess and surplus product lines. As an agent and broker we
do not assume underwriting risks; instead we provide our
customers with quality, noninvestment insurance contracts. The
Treasury / Other function also includes technology and
operations, other unallocated assets, liabilities, revenue, and
expense.
2
The financial results for each of these business segments are
included in Note 25 of Notes to Consolidated Financial
Statements and are discussed in the Business Segment Discussion
of our MD&A.
Competition
Although there has been consolidation in the financial services
industry, our markets remain competitive. We compete with other
banks and financial services companies such as savings and
loans, credit unions, and finance and trust companies, as well
as mortgage banking companies, automobile and equipment
financing companies, insurance companies, mutual funds,
investment advisors, and brokerage firms, both within and
outside of our primary market areas. Internet companies are also
providing nontraditional, but increasingly strong, competition
for our borrowers, depositors, and other customers. In addition,
our AFCRE segment faces competition from the financing divisions
of automobile manufacturers.
We compete for loans primarily on the basis of a combination of
value and service by building customer relationships as a result
of addressing our customers entire suite of banking needs,
demonstrating expertise, and providing convenience to our
customers. We also consider the competitive pricing pressures in
each of our markets.
We compete for deposits similarly on a basis of a combination of
value and service and by providing convenience through a banking
network of over 600 branches and over 1,300 ATMs within our
markets and our award-winning website at www.huntington.com. We
have also instituted new and more customer friendly practices
under our Fair Play banking philosophy, such as our
24-Hour
Gracetm
account feature introduced in 2010, which gives customers an
additional business day to cover overdrafts to their consumer
account without being charged overdraft fees.
The table below shows our competitive ranking and market share
based on deposits of FDIC-insured institutions as of
June 30, 2010, in the top 12 metropolitan statistical areas
(MSA) in which we compete:
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MSA
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Rank
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Deposits
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Market Share
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(in millions)
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Columbus, OH
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1
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$
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9,124
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22
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%
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Cleveland, OH
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5
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3,941
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8
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Detroit, MI
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8
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3,607
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4
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Toledo, OH
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1
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2,306
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23
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Pittsburgh, PA
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7
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2,270
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3
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Cincinnati, OH
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5
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1,999
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4
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Indianapolis, IN
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4
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1,902
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6
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Youngstown, OH
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1
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1,877
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20
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Canton, OH
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1
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1,485
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27
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Grand Rapids, MI
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3
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1,280
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10
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Akron, OH
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5
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886
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8
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Charleston, WV
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3
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604
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11
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Source: FDIC.gov, based on June 30, 2010 survey.
Many of our nonfinancial institution competitors have fewer
regulatory constraints, broader geographic service areas,
greater capital, and, in some cases, lower cost structures. In
addition, competition for quality customers has intensified as a
result of changes in regulation, advances in technology and
product delivery systems, consolidation among financial service
providers, bank failures, and the conversion of certain former
investment banks to bank holding companies.
3
Regulatory
Matters
General
We are a bank holding company and are qualified as a financial
holding company with the Federal Reserve. We are subject to
examination and supervision by the Federal Reserve pursuant to
the Bank Holding Company Act. We are required to file reports
and other information regarding our business operations and the
business operations of our subsidiaries with the Federal Reserve.
Because we are a public company, we are also subject to
regulation by the SEC. The SEC has established four categories
of issuers for the purpose of filing periodic and annual
reports. Under these regulations, we are considered to be a
large accelerated filer and, as such, must comply with SEC
accelerated reporting requirements.
The Bank, which is chartered by the OCC, is a national bank, and
our only bank subsidiary. In addition, we have numerous nonbank
subsidiaries. Exhibit 21.1 of this
Form 10-K
lists all of our subsidiaries. The Bank is subject to
examination and supervision by the OCC. Its domestic deposits
are insured by the DIF of the FDIC, which also has certain
regulatory and supervisory authority over it. Our nonbank
subsidiaries are also subject to examination and supervision by
the Federal Reserve or, in the case of nonbank subsidiaries of
the Bank, by the OCC. Our subsidiaries are subject to
examination by other federal and state agencies, including, in
the case of certain securities and investment management
activities, regulation by the SEC and the Financial Industry
Regulatory Authority.
In connection with EESA, we sold TARP Capital and a warrant to
purchase shares of common stock to the Treasury pursuant to the
CPP under TARP. As a result of our participation in TARP, we
were subject to certain restrictions and direct oversight by the
Treasury. Upon our repurchase of the TARP Capital on
December 22, 2010, we are no longer subject to the
TARP-related restrictions on dividends, stock repurchases, or
executive compensation.
Legislative and regulatory reforms continue to have significant
impacts throughout the financial services industry. In July
2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act, which
is complex and broad in scope, establishes the CFPB, which will
have extensive regulatory and enforcement powers over consumer
financial products and services, and the Financial Stability
Oversight Council, which has oversight authority for monitoring
and regulating systemic risk. In addition, the Dodd-Frank Act
alters the authority and duties of the federal banking and
securities regulatory agencies, implements certain corporate
governance requirements for all public companies including
financial institutions with regard to executive compensation,
proxy access by shareholders, and certain whistleblower
provisions, and restricts certain proprietary trading and hedge
fund and private equity activities of banks and their
affiliates. The Dodd-Frank Act also requires the issuance of
many implementing regulations which will take effect over
several years, making it difficult to anticipate the overall
impact to us, our customers, or the financial industry more
generally. While the overall impact cannot be predicted with any
degree of certainty, we believe we are likely to be negatively
impacted by the Dodd-Frank Act primarily in the areas of capital
requirements, restrictions on fees, and other charges to
customers.
In addition to the impact of federal and state regulation, the
Bank and our nonbank subsidiaries are affected significantly by
the actions of the Federal Reserve as it attempts to control the
money supply and credit availability in order to influence the
economy.
As a
bank holding company, we must act as a source of financial and
managerial strength to the Bank and the Bank is subject to
affiliate transaction restrictions.
Under changes made by the Dodd-Frank Act, a bank holding company
must act as a source of financial and managerial strength to
each of its subsidiary banks and to commit resources to support
each such subsidiary bank. Under current federal law, the
Federal Reserve may require a bank holding company to make
capital injections into a troubled subsidiary bank. It may
charge the bank holding company with engaging in unsafe and
unsound practices if the bank holding company fails to commit
resources to such a subsidiary bank or if it undertakes actions
that the Federal Reserve believes might jeopardize the bank
holding companys ability to commit resources to such
subsidiary bank.
4
Any loans by a holding company to a subsidiary bank are
subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank
holding companys bankruptcy, an appointed bankruptcy
trustee will assume any commitment by the holding company to a
federal bank regulatory agency to maintain the capital of a
subsidiary bank. Moreover, the bankruptcy law provides that
claims based on any such commitment will be entitled to a
priority of payment over the claims of the institutions
general unsecured creditors, including the holders of its note
obligations.
Federal law permits the OCC to order the pro-rata assessment of
shareholders of a national bank whose capital stock has become
impaired, by losses or otherwise, to relieve a deficiency in
such national banks capital stock. This statute also
provides for the enforcement of any such pro-rata assessment of
shareholders of such national bank to cover such impairment of
capital stock by sale, to the extent necessary, of the capital
stock owned by any assessed shareholder failing to pay the
assessment. As the sole shareholder of the Bank, we are subject
to such provisions.
Moreover, the claims of a receiver of an insured depository
institution for administrative expenses and the claims of
holders of deposit liabilities of such an institution are
accorded priority over the claims of general unsecured creditors
of such an institution, including the holders of the
institutions note obligations, in the event of liquidation
or other resolution of such institution. Claims of a receiver
for administrative expenses and claims of holders of deposit
liabilities of the Bank, including the FDIC as the insurer of
such holders, would receive priority over the holders of notes
and other senior debt of the Bank in the event of liquidation or
other resolution and over our interests as sole shareholder of
the Bank.
The Bank is subject to affiliate transaction restrictions under
federal laws, which limit certain transactions generally
involving the transfer of funds by a subsidiary bank or its
subsidiaries to its parent corporation or any nonbank subsidiary
of its parent corporation, whether in the form of loans,
extensions of credit, investments, or asset purchases, or
otherwise undertaking certain obligations on behalf of such
affiliates. Furthermore, covered transactions which are loans
and extensions of credit must be secured within specified
amounts. In addition, all covered transactions and other
affiliate transactions must be conducted on terms and under
circumstances that are substantially the same as such
transactions with unaffiliated entities.
The Federal Reserve maintains a bank holding company rating
system that emphasizes risk management, introduces a framework
for analyzing and rating financial factors, and provides a
framework for assessing and rating the potential impact of
nondepository entities of a holding company on its subsidiary
depository institution(s). A composite rating is assigned based
on the foregoing three components, but a fourth component is
also rated, reflecting generally the assessment of depository
institution subsidiaries by their principal regulators. The bank
holding company rating system, which became effective in 2005,
applies to us. The composite ratings assigned to us, like those
assigned to other financial institutions, are confidential and
may not be disclosed, except to the extent required by law.
In
2008, we sold TARP Capital and a warrant to purchase shares of
common stock to the Treasury pursuant to the CPP under TARP. We
repurchased the TARP Capital in the 2010 fourth
quarter.
On October 3, 2008, EESA was enacted. EESA includes, among
other provisions, TARP, under which the Secretary of the
Treasury was authorized to purchase, insure, hold, and sell a
wide variety of financial instruments, particularly those that
were based on or related to residential or commercial mortgages
originated or issued on or before March 14, 2008. Under
TARP, the Treasury authorized a voluntary CPP to purchase up to
$250 billion of senior preferred shares of stock from
qualifying financial institutions that elected to participate.
On November 14, 2008, at the request of the Treasury and
other regulators, we participated in the CPP by issuing to the
Treasury, in exchange for $1.4 billion, 1.4 million
shares of Huntingtons fixed-rate cumulative perpetual
preferred stock, Series B, par value $0.01 per share, with
a liquidation preference of $1,000 per share (TARP Capital), and
a ten-year warrant (Warrant), which was immediately exercisable,
to purchase up to 23.6 million shares of Huntingtons
common stock (approximately 3% of common shares outstanding at
December 31, 2010), par value $0.01 per share, at an
exercise price of $8.90 per share. The securities issued to the
Treasury were accounted for as additions to our regulatory
Tier 1 and Total capital. The proceeds were
5
used by the holding company to provide potential capital support
for the Bank. This helped the Bank to continue its active
lending programs for customers. This is evidenced by the
increase in mortgage originations from $3.8 billion in
2008, to $5.3 billion in 2009, and $5.5 billion in
2010.
In connection with the issuance and sale of the TARP Capital to
the Treasury, we agreed, among other things, to (1) limit
the payment of quarterly dividends on our common stock,
(2) limit our ability to repurchase our common stock or our
outstanding serial preferred stock, (3) grant the holders
of the TARP Capital, the Warrant, and the common stock to be
issued under the Warrant certain registration rights, and
(4) subject ourselves to the executive compensation
limitations contained in EESA. These compensation limitations
included (a) prohibiting golden parachute
payments, as defined in EESA, to senior executive officers;
(b) requiring recovery of any compensation paid to senior
executive officers based on criteria that is later proven to be
materially inaccurate; and (c) prohibiting incentive
compensation that encouraged unnecessary and excessive risks
that threaten the value of the financial institution.
On December 19, 2010, we sold $920.0 million of our
common stock and $300.0 million of subordinated debt in
public offerings. On December 22, 2010, these proceeds,
along with other available funds, were used to complete the
repurchase of our $1.4 billion of TARP Capital. On
January 19, 2011, we repurchased the Warrant for our common
stock associated with our participation in the TARP CPP for
$49.1 million, or $2.08 for each of the 23.6 million
common shares to which the Treasury was entitled. Prior to this
repurchase, we were in compliance with all TARP standards,
restrictions, and dividend payment limitations. Because of the
repurchase of our TARP Capital, we are no longer subject to the
TARP-related restrictions on dividends, stock repurchases, or
executive compensation.
We
have participated in certain extraordinary programs of the
FDIC.
EESA temporarily raised the limit on federal deposit insurance
coverage from $100,000 to $250,000 per depositor. This increase
was made permanent in the Dodd-Frank Act. Separate from EESA, in
October 2008, the FDIC also announced the TLGP to guarantee
certain debt issued by FDIC-insured institutions.
On February 3, 2009, the Bank completed the issuance and
sale of $600 million of Floating Rate Senior Bank Notes
with a variable interest rate of three month LIBOR plus
40 basis points, due June 1, 2012 (the Notes). The
Notes are guaranteed by the FDIC under the TLGP and are backed
by the full faith and credit of the United States of America.
The FDICs guarantee costs $20 million which is being
amortized over the term of these notes.
Under TAGP, a component of the TLGP, the FDIC temporarily
provided unlimited coverage for noninterest-bearing transaction
deposit accounts. We voluntarily began participating in the TAGP
in October of 2008, but opted out of the TAGP effective
July 1, 2010. Subsequently, both the TLGP and TAGP were
terminated in light of Section 343 of the Dodd-Frank Act,
which amended the Federal Deposit Insurance Act to provide
unlimited deposit insurance coverage for noninterest-bearing
transaction accounts beginning December 31, 2010, for a
two-year period with no opt out provisions.
We are
subject to capital requirements mandated by the Federal Reserve
and these requirements will be changing under the Dodd-Frank
Act.
The Federal Reserve has issued risk-based capital ratio and
leverage ratio guidelines for bank holding companies. Under the
guidelines and related policies, bank holding companies must
maintain capital sufficient to meet both a risk-based asset
ratio test and a leverage ratio test on a consolidated basis.
The risk-based ratio is determined by allocating assets and
specified off-balance sheet commitments into four weighted
categories, with higher weighting assigned to categories
perceived as representing greater risk. The risk-based ratio
represents total capital divided by total risk-weighted assets.
The leverage ratio is core capital divided by total assets
adjusted as specified in the guidelines. The Bank is subject to
substantially similar capital requirements.
6
Generally, under the applicable guidelines, a financial
institutions capital is divided into two tiers.
Institutions that must incorporate market risk exposure into
their risk-based capital requirements may also have a third tier
of capital in the form of restricted short-term subordinated
debt. These tiers are:
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Tier 1, or core capital, includes total equity plus
qualifying capital securities and minority interests, excluding
unrealized gains and losses accumulated in other comprehensive
income, and nonqualifying intangible and servicing assets.
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Tier 2, or supplementary capital, includes, among other
things, cumulative and limited-life preferred stock, mandatory
convertible securities, qualifying subordinated debt, and the
allowance for credit losses, up to 1.25% of risk-weighted assets.
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Total Capital is Tier 1 plus Tier 2 capital.
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The Federal Reserve and the other federal banking regulators
require that all intangible assets (net of deferred tax), except
originated or purchased MSRs, nonmortgage servicing assets, and
purchased credit card relationships, be deducted from
Tier 1 capital. However, the total amount of these items
included in capital cannot exceed 100% of its Tier 1
capital.
Under the risk-based guidelines to remain
Adequately-capitalized, financial institutions are required to
maintain a total risk-based ratio of 8%, with 4% being
Tier 1 capital. The appropriate regulatory authority may
set higher capital requirements when they believe an
institutions circumstances warrant.
Under the leverage guidelines, financial institutions are
required to maintain a Tier 1 leverage ratio of at least
3%. The minimum ratio is applicable only to financial
institutions that meet certain specified criteria, including
excellent asset quality, high liquidity, low interest rate risk
exposure, and the highest regulatory rating. Financial
institutions not meeting these criteria are required to maintain
a minimum Tier 1 leverage ratio of 4%.
Failure to meet applicable capital guidelines could subject the
financial institution to a variety of enforcement remedies
available to the federal regulatory authorities. These include
limitations on the ability to pay dividends, the issuance by the
regulatory authority of a directive to increase capital, and the
termination of deposit insurance by the FDIC. In addition, the
financial institution could be subject to the measures described
below under Prompt Corrective Action as applicable to
Under-capitalized institutions.
The risk-based capital standards of the Federal Reserve, the
OCC, and the FDIC specify that evaluations by the banking
agencies of a banks capital adequacy will include an
assessment of the exposure to declines in the economic value of
a banks capital due to changes in interest rates. These
banking agencies issued a joint policy statement on interest
rate risk describing prudent methods for monitoring such risk
that rely principally on internal measures of exposure and
active oversight of risk management activities by senior
management.
FDICIA requires federal banking regulatory authorities to take
Prompt Corrective Action with respect to depository institutions
that do not meet minimum capital requirements. For these
purposes, FDICIA establishes five capital tiers:
Well-capitalized, Adequately-capitalized, Under-capitalized,
Significantly under-capitalized, and Critically
under-capitalized.
Throughout 2010, our regulatory capital ratios and those of the
Bank were in excess of the levels established for
Well-capitalized institutions. An institution is deemed to be
Well-capitalized if it has a total risk-based capital ratio of
10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater, and a Tier 1
7
leverage ratio of 5% or greater and is not subject to a
regulatory order, agreement, or directive to meet and maintain a
specific capital level for any capital measure.
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Well-
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At December 31, 2010
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Capitalized
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Excess
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Minimums
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Actual
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Capital(1)
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(Dollar amounts in billions)
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Ratios:
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Tier 1 leverage ratio
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Consolidated
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5.00
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%
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9.41
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%
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$
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2.4
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Bank
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5.00
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6.97
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1.0
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Tier 1 risk-based capital ratio
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Consolidated
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6.00
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11.55
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2.4
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Bank
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6.00
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8.51
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1.1
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Total risk-based capital ratio
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Consolidated
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10.00
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14.46
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1.9
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Bank
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10.00
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12.82
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1.2
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(1) |
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Amount greater than the Well-capitalized minimum percentage. |
FDICIA generally prohibits a depository institution from making
any capital distribution, including payment of a cash dividend
or paying any management fee to its holding company, if the
depository institution would become Under-capitalized after such
payment. Under-capitalized institutions are also subject to
growth limitations and are required by the appropriate federal
banking agency to submit a capital restoration plan. If any
depository institution subsidiary of a holding company is
required to submit a capital restoration plan, the holding
company would be required to provide a limited guarantee
regarding compliance with the plan as a condition of approval of
such plan.
Depending upon the severity of the under capitalization, the
Under-capitalized institutions may be subject to a number of
requirements and restrictions, including orders to sell
sufficient voting stock to become Adequately-capitalized,
requirements to reduce total assets, cessation of receipt of
deposits from correspondent banks, and restrictions on making
any payment of principal or interest on their subordinated debt.
Critically Under-capitalized institutions are subject to
appointment of a receiver or conservator within 90 days of
becoming so classified.
Under FDICIA, a depository institution that is not
Well-capitalized is generally prohibited from accepting brokered
deposits and offering interest rates on deposits higher than the
prevailing rate in its market. Since the Bank is
Well-capitalized, the FDICIA brokered deposit rule did not
adversely affect its ability to accept brokered deposits. The
Bank had $1.5 billion of such brokered deposits at
December 31, 2010.
Under the Dodd-Frank Act, important changes will be implemented
concerning the capital requirements for financial institutions.
The Collins Amendment provision of the Dodd-Frank
Act imposes increased capital requirements in the future. The
Collins Amendment also requires federal banking regulators to
establish minimum leverage and risk-based capital requirements
to apply to insured depository institutions, bank and thrift
holding companies, and systemically important nonbank financial
companies. These capital requirements must not be less than the
Generally Applicable Risk-based Capital Requirements and the
Generally Applicable Leverage Capital Requirements as of
July 21, 2010, and must not be quantitatively lower than
the requirements that were in effect for insured depository
institution as of July 21, 2010. The Collins Amendment
defines Generally Applicable Risk-based Capital Requirements and
Generally Applicable Leverage Capital Requirements to mean the
risk-based capital requirements and minimum ratios of
Tier 1 capital to average total assets, respectively,
established by the appropriate federal banking agencies to apply
to insured depository institutions under the Prompt Corrective
Action provisions, regardless of total consolidated asset size
or foreign financial exposure. We will be assessing the impact
on us of these new regulations as they are proposed and
implemented.
8
There
are restrictions on our ability to pay dividends.
Dividends from the Bank to the parent company are the primary
source of funds for payment of dividends to our shareholders.
However, there are statutory limits on the amount of dividends
that the Bank can pay to us without regulatory approval. The
Bank may not, without prior regulatory approval, pay a dividend
in an amount greater than its undivided profits. In addition,
the prior approval of the OCC is required for the payment of a
dividend by a national bank if the total of all dividends
declared in a calendar year would exceed the total of its net
income for the year combined with its retained net income for
the two preceding years. As a result, for the year ended
December 31, 2010, the Bank did not pay any cash dividends
to us. At December 31, 2010, the Bank could not have
declared and paid any dividends to the parent company without
regulatory approval.
Since the first quarter of 2008, the Bank has requested and
received OCC approval each quarter to pay periodic dividends to
shareholders outside the Banks consolidated group on
preferred and common stock of its REIT and capital financing
subsidiaries to the extent necessary to maintain their REIT
status. A wholly-owned nonbank subsidiary of the parent company
owns a portion of the preferred shares of the REIT and capital
financing subsidiaries. Outside of the REIT and capital
financing subsidiary dividends, we do not anticipate that the
Bank will declare dividends during 2011.
If, in the opinion of the applicable regulatory authority, a
bank under its jurisdiction is engaged in, or is about to engage
in, an unsafe or unsound practice, such authority may require,
after notice and hearing, that such bank cease and desist from
such practice. Depending on the financial condition of the Bank,
the applicable regulatory authority might deem us to be engaged
in an unsafe or unsound practice if the Bank were to pay
dividends. The Federal Reserve and the OCC have issued policy
statements that provide that insured banks and bank holding
companies should generally only pay dividends out of current
operating earnings.
The
amount and timing of payments for FDIC Deposit Insurance are
changing.
In late 2008, under the assessment regime that was applicable
prior to the Dodd-Frank Act, the FDIC raised assessment rates
for the first quarter of 2009 by a uniform 7 basis points
of adjusted domestic deposits, resulting in a range between 12
and 50 basis points, depending upon the risk category. At
the same time, the FDIC proposed further changes in the
assessment system beginning in the second quarter of 2009. As
amended in a final rule issued in March 2009, the changes,
commencing April 1, 2009, set a five-year target of 1.15%
for the designated reserve ratio, and set base assessment rates
between 12 and 45 basis points of adjusted domestic
deposits, depending on the risk category. In addition to these
changes in the basic assessment regime, the FDIC, in an interim
rule also issued in March 2009, imposed a 20 basis point
emergency special assessment on deposits of insured institutions
as of June 30, 2009, to be collected on September 30,
2009. In May 2009, the FDIC imposed a further special assessment
on insured institutions of five basis points on their
June 30, 2009 assets minus Tier 1 capital, also
payable September 30, 2009. And in November 2009, the FDIC
required all insured institutions to prepay, on
December 30, 2009, slightly over three years of estimated
insurance assessments.
With the enactment of the Dodd-Frank Act, major changes were
introduced to the FDIC deposit insurance system. Under the
Dodd-Frank Act, the FDIC now has until the end of September 2020
to bring its reserve ratio to the new statutory minimum of
1.35%. New rules amending the deposit insurance assessment
regulations under the requirements of the Dodd-Frank Act have
been adopted, including a final rule designating 2% as the
designated reserve ratio and a final rule extending temporary
unlimited deposit insurance to noninterest bearing transaction
accounts maintained in connection with lawyers trust
accounts. On February 7, 2011, the FDIC adopted regulations
effective for the 2011 second quarter assessment and payable in
September 2011, which outline significant changes in the
risk-based premiums approach for banks with over
$10 billion of assets and creates a Scorecard
system. The Scorecard system uses a performance
score and loss severity score, which aggregate to an initial
base assessment rate. The assessment base also changes from
deposits to an institutions average total assets minus its
average tangible equity. We are
9
currently evaluating the effect of these new regulations, but do
not expect the 2011 FDIC assessment impact on our Consolidated
Financial Statements to be materially higher than the prior
period.
As a
financial holding company, we are subject to additional
regulations.
In order to maintain its status as a financial holding company,
a bank holding companys depository subsidiaries must all
be both Well-capitalized and well-managed, and must meet their
Community Reinvestment Act obligations.
Financial holding company powers relate to financial activities
that are determined by the Federal Reserve, in coordination with
the Secretary of the Treasury, to be financial in nature,
incidental to an activity that is financial in nature, or
complementary to a financial activity, provided that the
complementary activity does not pose a safety and soundness
risk. The Gramm-Leach-Bliley Act designates certain activities
as financial in nature, including:
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lending, exchanging, transferring, investing for others, or
safeguarding money or securities;
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underwriting insurance or annuities;
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providing financial or investment advice;
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underwriting, dealing in, or making markets in securities;
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merchant banking, subject to significant limitations;
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insurance company portfolio investing, subject to significant
limitations; and
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any activities previously found by the Federal Reserve to be
closely related to banking.
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The Gramm-Leach-Bliley Act also authorizes the Federal Reserve,
in coordination with the Secretary of the Treasury, to determine
if additional activities are financial in nature or incidental
to activities that are financial in nature.
In addition, we are required by the Bank Holding Company Act to
obtain Federal Reserve approval prior to acquiring, directly or
indirectly, ownership or control of voting shares of any bank,
if, after such acquisition, we would own or control more than 5%
of its voting stock.
We
also must comply with anti-money laundering, customer privacy,
and consumer protection statutes and regulations as well as
corporate governance, accounting, and reporting
requirements.
The USA Patriot Act of 2001 and its related regulations require
insured depository institutions, broker-dealers, and certain
other financial institutions to have policies, procedures, and
controls to detect, prevent, and report money laundering and
terrorist financing. The statute and its regulations also
provide for information sharing, subject to conditions, between
federal law enforcement agencies and financial institutions, as
well as among financial institutions, for counter-terrorism
purposes. Federal banking regulators are required, when
reviewing bank holding company acquisition and bank merger
applications, to take into account the effectiveness of the
anti-money laundering activities of the applicants.
Pursuant to Title V of the Gramm-Leach-Bliley Act, we, like
all other financial institutions, are required to:
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provide notice to our customers regarding privacy policies and
practices,
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inform our customers regarding the conditions under which their
nonpublic personal information may be disclosed to nonaffiliated
third parties, and
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give our customers an option to prevent certain disclosure of
such information to nonaffiliated third parties.
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Under the Fair and Accurate Credit Transactions Act of 2003, our
customers may also opt-out of certain information sharing
between and among us and our affiliates. We are also subject, in
connection with our
10
lending and leasing activities, to numerous federal and state
laws aimed at protecting consumers, including the Home Mortgage
Disclosure Act, the Real Estate Settlement Procedures Act, the
Equal Credit Opportunity Act, the Truth in Lending Act, and the
Fair Credit Reporting Act.
The Sarbanes-Oxley Act of 2002 imposed new or revised corporate
governance, accounting, and reporting requirements on us and all
other companies having securities registered with the SEC. In
addition to a requirement that chief executive officers and
chief financial officers certify financial statements in
writing, the statute imposed requirements affecting, among other
matters, the composition and activities of audit committees,
disclosures relating to corporate insiders and insider
transactions, code of ethics, and the effectiveness of internal
controls over financial reporting.
In
2010, we implemented compliance with the Amendment to
Regulation E dealing with overdraft fees.
In November 2009, the Federal Reserve Board amended
Regulation E of the Electronic Fund Transfer Act to
prohibit banks from charging overdraft fees for ATM or
point-of-sale
debit card transactions that overdrew the account unless the
customer opt-in to the discretionary overdraft service and to
require banks to explain the terms of their overdraft services
and their fees for the services (Regulation E Amendment).
Compliance with the Regulation E Amendment was required by
July 1, 2010. Our strategy to comply with the
Regulation E Amendment is to alert our customers that we
can no longer cover such overdrafts unless they opt-in to our
overdraft service while disclosing the terms of our service and
our fees for the service.
Risk
Governance
We use a multi-faceted approach to risk governance. It begins
with the board of directors defining our risk appetite in
aggregate as
moderate-to-low.
This does not preclude engagement in higher risk activities when
we have the demonstrated expertise and control mechanisms to
selectively manage higher risk. Rather, the definition is
intended to represent a directional average of where we want our
overall risk to be managed.
Two board committees oversee implementation of this desired risk
profile: The Audit Committee and the Risk Oversight Committee.
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The Audit Committee is principally involved with overseeing the
integrity of financial statements, providing oversight of the
internal audit department, and selecting our external auditors.
Our chief auditor reports directly to the Audit Committee.
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The Risk Oversight Committee supervises our risk management
processes which primarily cover credit, market, liquidity,
operational, and compliance risks. It also approves the charters
of executive management committees, sets risk limits on certain
risk measures (e.g., economic value of equity), receives results
of the risk self-assessment process, and routinely engages
management in dialogues pertaining to key risk issues. Our
credit review executive reports directly to the Risk Oversight
Committee.
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Both committees are comprised of independent directors and
routinely hold executive sessions with our key officers engaged
in accounting and risk management.
On a periodic basis, the two committees meet in joint session to
cover matters relevant to both such as the construct and
adequacy of the ACL, which is reviewed quarterly.
We maintain a philosophy that each colleague is responsible for
risk. This is manifested by the design of a risk management
organization that places emphasis on risk-ownership by
risk-takers. We believe that by placing ownership of risk within
its related business segment, attention to, and accountability
for, risk is heightened.
Further, through its Compensation Committee, the board of
directors seeks to ensure its system of rewards is
risk-sensitive and aligns the interests of management,
creditors, and shareholders. We utilize a variety of
compensation-related tools to induce appropriate behavior,
including equity deferrals, holdbacks, clawback provisions, and
the right to terminate compensation plans at any time when
undesirable outcomes may result.
11
Management has introduced a number of steps to help ensure an
aggregate
moderate-to-low
risk appetite is maintained. Foremost is a quarterly,
comprehensive self-assessment process in which each business
segment produces an analysis of its risks and the strength of
its risk controls. The segment analyses are combined with
assessments by our risk management organization of major risk
sectors (e.g., credit, market, operational, reputational,
compliance, etc.) to produce an overall enterprise risk
assessment. Outcomes of the process include a determination of
the quality of the overall control process, the direction of
risk, and our position compared to the defined risk appetite.
Management also utilizes a wide series of metrics (key risk
indicators) to monitor risk positions throughout the Company. In
general, a range for each metric is established that identifies
a
moderate-to-low
position. Deviations from the range will indicate if the risk
being measured is moving into a high position, which may then
necessitate corrective action.
In 2010, we enhanced our process of risk-based capital
attribution. Our economic capital model will be upgraded and
integrated into a more robust system of stress testing in 2011.
We believe this tool will further enhance our ability to manage
to the defined risk appetite. Our board level Capital
Planning Committee will monitor and react to output from the
integrated modeling process.
We also have three other executive level committees to manage
risk: ALCO, Credit Policy and Strategy, and Risk Management.
Each committee focuses on specific categories of risk and is
supported by a series of subcommittees that are tactical in
nature. We believe this structure helps ensure appropriate
elevation of issues and overall communication of strategies.
Huntington utilizes three levels of defense with regard to risk
management: (1) business segments, (2) corporate risk
management, (3) internal audit and credit review. To induce
greater ownership of risk within its business segments, segment
risk officers have been embedded to identify and monitor risk,
elevate and remediate issues, establish controls, perform
self-testing, and oversee the quarterly self-assessment process.
Segment risk officers report directly to the related segment
manager with a dotted line to the Chief Risk Officer. Corporate
Risk Management establishes policies, sets operating limits,
reviews new or modified products/processes, ensures consistency
and quality assurance within the segments, and produces the
enterprise risk assessment. The Chief Risk Officer has
significant input into the design and outcome of incentive
compensation plans as they apply to risk. Internal Audit and
Credit Review provide additional assurance that risk-related
functions are operating as intended.
Huntington believes it has provided a sound risk governance
foundation to support the Bank. Our process will be subject to
continuous improvement and enhancement. Our objective is to have
strong risk management practices and capabilities.
Risk
Overview
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 commitments based on external macro
market issues, investor and customer perception of financial
strength, and events unrelated to us such as war, terrorism, or
financial institution market specific issues, (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, and (5) compliance risk, which exposes us
to money penalties, enforcement actions or other sanctions as a
result of nonconformance with laws, rules, and regulations that
apply to the financial services industry.
12
We also expend considerable effort to contain risk which
emanates from execution of our business strategies and work
relentlessly to protect the Companys reputation. Strategic
and reputational risks do not easily lend themselves to
traditional methods of measurement. Rather, we closely monitor
them through processes such as new
product / initiative reviews, frequent financial
performance reviews, employee and client surveys, monitoring
market intelligence, periodic discussions between management and
our board, and other such efforts.
In addition to the other information included or incorporated by
reference into this report, readers should carefully consider
that the following important factors, among others, could
negatively impact our business, future results of operations,
and future cash flows materially.
Credit
Risks:
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1.
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Our ACL
may prove inadequate or be negatively affected by credit risk
exposures which could materially adversely affect our net income
and capital.
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Our business depends on the creditworthiness of our customers.
Our ACL of $1.3 billion at December 31, 2010,
represents Managements estimate of probable losses
inherent in our loan and lease portfolio as well as our unfunded
loan commitments and letters of credit. We periodically review
our ACL for adequacy. In doing so, we consider economic
conditions and trends, collateral values, and credit quality
indicators, such as past charge-off experience, levels of past
due loans, and nonperforming assets. There is no certainty that
our ACL will be adequate over time to cover losses in the
portfolio because of unanticipated adverse changes in the
economy, market conditions, or events adversely affecting
specific customers, industries, or markets. If the credit
quality of our customer base materially decreases, if the risk
profile of a market, industry, or group of customers changes
materially, or if the ACL is not adequate, our net income and
capital could be materially adversely affected which, in turn,
could have a material negative adverse affect on our financial
condition and results of operations.
In addition, 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 affect on our financial condition and results
of operations.
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2.
|
A
sustained weakness or further weakening in economic conditions
could materially adversely affect our business.
|
Our performance could be negatively affected to the extent that
further weaknesses in business and economic conditions have
direct or indirect material adverse impacts on us, our
customers, and our counterparties. These conditions could result
in one or more of the following:
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A decrease in the demand for loans and other products and
services offered by us;
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A decrease in customer savings generally and in the demand for
savings and investment products offered by us; and
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An increase in the number of customers and counterparties who
become delinquent, file for protection under bankruptcy laws, or
default on their loans or other obligations to us.
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An increase in the number of delinquencies, bankruptcies, or
defaults could result in a higher level of NPAs, NCOs, provision
for credit losses, and valuation adjustments on loans held for
sale. The markets we serve are dependent on industrial and
manufacturing businesses and thus are particularly vulnerable to
adverse changes in economic conditions affecting these sectors.
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3.
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Further
declines in home values or reduced levels of home sales in our
markets could result in higher delinquencies, greater
charge-offs, and increased losses on the sale of foreclosed real
estate in future periods.
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Like all financial institutions, we are subject to the effects
of any economic downturn. There has been a slowdown in the
housing market across our geographic footprint, reflecting
declining prices and excess
13
inventories of houses to be sold. These developments have had,
and further declines may continue to have, a negative effect on
our financial conditions and results of operations. At
December 31, 2010, we had:
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$7.7 billion of home equity loans and lines, representing
20% of total loans and leases.
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$4.5 billion in residential real estate loans, representing
12% of total loans and leases.
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$4.7 billion of Federal Agency mortgage-backed securities,
$0.1 billion of private label CMOs, and $0.1 billion
of Alt-A mortgage-backed securities that could be negatively
affected by a decline in home values.
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$0.3 billion of bank owned life insurance investments
primarily in mortgage-backed securities.
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Because of the decline in home values, some of our borrowers
have mortgages greater than the value of their homes. The
decline in home values, coupled with the weakened economy, has
increased short sales and foreclosures. The reduced levels of
home sales have had a materially adverse affect on the prices
achieved on the sale of foreclosed properties. Continued decline
in home values may escalate these problems resulting in higher
delinquencies, greater charge-offs, and increased losses on the
sale of foreclosed real estate in future periods.
Market
Risks:
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1.
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Changes
in interest rates could reduce our net interest income, reduce
transactional income, and negatively impact the value of our
loans, securities, and other assets. This could have a material
adverse impact on our cash flows, financial condition, results
of operations, and capital.
|
Our results of operations depend substantially on net interest
income, which is the difference between interest earned on
interest earning assets (such as investments and loans) and
interest paid on interest bearing liabilities (such as deposits
and borrowings). Interest rates are highly sensitive to many
factors, including governmental monetary policies and domestic
and international economic and political conditions. Conditions
such as inflation, deflation, recession, unemployment, money
supply, and other factors beyond our control may also affect
interest rates. If our interest earning assets mature or reprice
more quickly than interest bearing liabilities in a declining
interest rate environment, net interest income could be
materially adversely impacted. Likewise, if interest bearing
liabilities mature or reprice more quickly than interest earning
assets in a rising interest rate environment, net interest
income could be adversely impacted.
At December 31, 2010, $2.6 billion, or 13%, of our
commercial loan portfolio, as measured by the aggregate
outstanding principal balances, was fixed-rate loans and the
remainder was adjustable-rate loans. As interest rates rise, the
payment by the borrower rises to the extent permitted by the
terms of the loan, and the increased payment increases the
potential for default. At the same time, the marketability of
the underlying property may be adversely affected by higher
interest rates. In a declining interest rate environment, there
may be an increase in prepayments on the loans underlying our
participation interests as borrowers refinance their mortgages
at lower interest rates.
Changes in interest rates also can affect the value of loans,
securities, and other assets, including mortgage and nonmortgage
servicing rights and assets under management. Examples of
transactional income include trust income, brokerage income, and
gain on sales of loans. This type of income can vary
significantly from
quarter-to-quarter
and
year-to-year
based on a number of different factors, including the interest
rate environment. An increase in interest rates that adversely
affects the ability of borrowers to pay the principal or
interest on loans and leases may lead to an increase in NPAs and
a reduction of income recognized, which could have a material
adverse effect on our results of operations and cash flows. When
we place a loan on nonaccrual status, we reverse any accrued but
unpaid interest receivable, which decreases interest income.
Subsequently, we continue to have a cost to fund the loan, which
is reflected as interest expense, without any interest income to
offset the associated funding expense. Thus, an increase in the
amount of NPAs would have an adverse impact on net interest
income.
Rising interest rates will result in a decline in value of our
fixed-rate debt securities and cash flow hedging derivatives
portfolio. The unrealized losses resulting from holding these
securities and financial
14
instruments would be recognized in OCI and reduce total
shareholders equity. Unrealized losses do not negatively
impact our regulatory capital ratios; however Tangible Common
Equity and the associated ratios would be reduced. If debt
securities in an unrealized loss position are sold, such losses
become realized and will reduce Tier I and Total Risk-based
Capital regulatory ratios. If cash flow hedging derivatives are
terminated, the impact is reflected in earnings over the life of
the instrument and reduces Tier I and Total Risk-based
Capital regulatory ratios. Somewhat offsetting these negative
impacts to OCI in a rising interest rate environment, is a
decrease in pension and other post-retirement obligations.
If short-term interest rates remain at their historically low
levels for a prolonged period, and assuming longer term interest
rates fall further, we could experience net interest margin
compression as our interest earning assets would continue to
reprice downward while our interest bearing liability rates
could fail to decline in tandem. This would have a material
adverse effect on our net interest income and our results of
operations.
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2.
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The value
of our Alt-A mortgage-backed, Pooled-Trust-Preferred and Private
Label CMO investment securities are volatile and future
valuation declines or
other-than-temporary
impairments could have a materially adverse affect on our future
earnings and regulatory capital.
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Continued volatility in the market value for these securities in
our investment securities portfolio, whether caused by changes
in market perceptions of credit risk, as reflected in the
expected market yield of the security, or actual defaults in the
portfolio, could result in significant fluctuations in the value
of these securities. This could have a material adverse impact
on our accumulated OCI and shareholders equity depending
on the direction of the fluctuations. Furthermore, future
downgrades or defaults in these securities could result in
future classifications as
other-than-temporarily
impaired and limit our ability to sell these securities at
reasonable prices. This could have a material negative impact on
our future earnings, although the impact on shareholders
equity would be offset by any amount already included in OCI for
securities where we have recorded temporary impairment. At
December 31, 2010, the fair value of these securities was
$284.6 million.
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3.
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An
issuance of additional capital would 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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We 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, or the additional conversions of our existing
Series A 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 them 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.
15
Liquidity
Risks:
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1.
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If we are
unable to borrow funds through access to capital markets, we may
not be able to meet the cash flow requirements of our
depositors, creditors, and borrowers, or have the operating cash
needed to fund corporate expansion and other corporate
activities.
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Liquidity is the ability to meet cash flow needs on a timely
basis at a reasonable cost. The liquidity of the Bank is used to
make loans and leases and to repay deposit liabilities as they
become due or are demanded by customers. Liquidity policies and
limits are established by our board of directors, with operating
limits set by Management. Wholesale funding sources include
federal funds purchased, securities sold under repurchase
agreements, noncore deposits, and medium- and long-term debt,
which includes a domestic bank note program and a Euronote
program. The Bank is also a member of the FHLB, which provides
funding through advances to members that are collateralized with
mortgage-related assets.
We maintain a portfolio of securities that can be used as a
secondary source of liquidity. There are other sources of
liquidity available to us should they be needed. These sources
include the sale or securitization of loans, the ability to
acquire additional national market noncore deposits, issuance of
additional collateralized borrowings such as FHLB advances, the
issuance of debt securities, and the issuance of preferred or
common securities in public or private transactions. The Bank
also can borrow from the Federal Reserves discount window.
Starting in the middle of 2007, significant turmoil and
volatility in worldwide financial markets increased, though
current volatility has declined. Such disruptions in the
liquidity of financial markets directly impact us to the extent
we need to access capital markets to raise funds to support our
business and overall liquidity position. This situation could
affect the cost of such funds or our ability to raise such
funds. If we were unable to access any of these funding sources
when needed, we might be unable to meet customers needs,
which could adversely impact our financial condition, results of
operations, cash flows, and level of regulatory-qualifying
capital. We may, from time to time, consider opportunistically
retiring our outstanding securities in privately negotiated or
open market transactions for cash or common shares. This could
adversely affect our liquidity position.
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2.
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Due to
the losses that the Bank incurred in 2008 and 2009, at
December 31, 2010, the Bank and its subsidiaries could not
declare and pay dividends to the holding company, any subsidiary
of the holding company outside the Banks consolidated
group, or any security holder outside the Banks
consolidated group, without regulatory approval.
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Dividends from the Bank to the parent company are the primary
source of funds for the payment of dividends to our
shareholders. Under applicable statutes and regulations, a
national bank may not declare and pay dividends in any year in
excess of an amount equal to the sum of the total of the net
income of the bank for that year and the retained net income of
the bank for the preceding two years, minus the sum of any
transfers required by the OCC and any transfers required to be
made to a fund for the retirement of any preferred stock, unless
the OCC approves the declaration and payment of dividends in
excess of such amount. Due to the losses that the Bank incurred
in 2008 and 2009, at December 31, 2010, the Bank and its
subsidiaries could not declare and pay dividends to the parent
company, any subsidiary of the parent company outside the
Banks consolidated group, or any security holder outside
the Banks consolidated group, without regulatory approval.
Since the first quarter of 2008, the Bank has requested and
received OCC approval each quarter to pay periodic dividends to
shareholders outside the Banks consolidated group on the
preferred and common stock of its REIT and capital financing
subsidiaries to the extent necessary to maintain their REIT
status. A wholly-owned nonbank subsidiary of the parent company
owns a portion of the preferred shares of the REIT and capital
financing subsidiaries. Outside of the REIT and capital
financing subsidiary dividends, we do not anticipate that the
Bank will declare dividends during 2011.
16
Operational
Risks:
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1.
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The
resolution of significant pending litigation, if unfavorable,
could have a material adverse affect on our results of
operations for a particular period.
|
We face legal risks in our businesses, and the volume of claims
and amount of damages and penalties claimed in litigation and
regulatory proceedings against financial institutions remain
high. Substantial legal liability against us could have material
adverse financial effects or cause significant reputational harm
to us, which in turn could seriously harm our business
prospects. As more fully described in Note 22 of the Notes
to Consolidated Financial Statements, certain putative class
actions and shareholder derivative actions were filed against
us, certain affiliated committees,
and/or
certain of our current or former officers and directors. These
cases allege violations of the securities laws, breaches of
fiduciary duty, waste of corporate assets, abuse of control,
gross mismanagement, unjust enrichment, and violations of
Employment Retirement Income Security Act (ERISA) laws in
connection with our acquisition of Sky Financial, the
transactions between Franklin and us, and the financial and
other disclosures related to these transactions. Although no
assurance can be given, based on information currently
available, consultation with counsel, and available insurance
coverage, we believe that the eventual outcome of these claims
against us will not, individually or in the aggregate, have a
material adverse effect on our consolidated financial position
or results of operations. However, it is possible that the
ultimate resolution of these matters, if unfavorable, may be
material to the results of operations for a particular reporting
period.
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2.
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We face
significant operational risks which could lead to expensive
litigation and loss of confidence by our customers, regulators,
and capital markets.
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We are exposed to many types of operational risks, including
reputational risk, legal and compliance risk, the risk of fraud
or theft by employees or outsiders, unauthorized transactions by
employees or outsiders, or operational errors by employees,
including clerical or record-keeping errors or those resulting
from faulty or disabled computer or telecommunications systems.
In addition, todays threats to customer information and
information systems are complex, more wide spread, continually
emerging, and increasing at a rapid pace. Although we establish
and maintain systems of internal operational controls that
provide us with timely and accurate information about our level
of operational risks, continue to invest in better tools and
processes in all key areas, and monitor threats with increased
rigor and focus, these operational risks could lead to expensive
litigation and loss of confidence by our customers, regulators,
and the capital markets.
Moreover, negative public opinion can result from our actual or
alleged conduct in any number of activities, including lending
practices, corporate governance, and acquisitions and from
actions taken by government regulators and community
organizations in response to those activities. Negative public
opinion can adversely affect our ability to attract and retain
customers and can also expose us to litigation and regulatory
action. Relative to acquisitions, we cannot predict if, or when,
we will be able to identify and attract acquisition candidates
or make acquisitions on favorable terms. We incur risks and
challenges associated with the integration of acquired
institutions in a timely and efficient manner, and we cannot
guarantee that we will be successful in retaining existing
customer relationships or achieving anticipated operating
efficiencies.
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3.
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We are
subject to routine on-going tax examinations by the IRS and by
various other jurisdictions, including the states of Ohio,
Kentucky, Indiana, Michigan, Pennsylvania, West Virginia and
Illinois. The IRS, Ohio, and Kentucky have proposed various
adjustments to our previously filed tax returns. It is possible
that the ultimate resolution of all proposed and future
adjustments, if unfavorable, may be materially adverse to the
results of operations in the period it occurs.
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The calculation of our provision for federal income taxes is
complex and requires the use of estimates and judgments. 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.
17
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.
We file income tax returns with the IRS and various state, city,
and foreign jurisdictions. Federal income tax audits have been
completed through 2007. In addition, various state and other
jurisdictions remain open to examination, including Ohio,
Kentucky, Indiana, Michigan, Pennsylvania, West Virginia and
Illinois.
The IRS and other taxing jurisdictions, including the states of
Ohio and Kentucky, have proposed adjustments to our previously
filed tax returns. We do not agree with these adjustments and
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 we intend to
vigorously defend our positions. Appropriate tax reserves have
been established in accordance with ASC 740, Income Taxes and
ASC 450, Contingencies. However, it is also possible that
the ultimate resolution of the proposed adjustments, if
unfavorable, may result in penalties and interest. Such
adjustments, including any penalties and interest, may be
material to our results of operations in the period such
adjustments occur and increase our effective tax rate.
Nevertheless, 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 in future periods. For further
discussion, see Note 17 of the Notes to Consolidated
Financial Statements.
The Franklin restructuring in the 2009 first quarter 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. During the 2010 first quarter, a
$38.2 million net tax benefit was recognized, primarily
reflecting the increase in the net deferred tax asset relating
to the assets acquired from the March 31, 2009 Franklin
restructuring. In the 2010 fourth quarter, we entered into an
asset monetization transaction that generated a tax benefit of
$63.6 million. While we believe that our positions
regarding the deferred tax asset and related income recognition
is correct, the positions could be subject to challenge.
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4.
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Failure
to maintain effective internal controls over financial reporting
in the future could impair our ability to accurately and timely
report our financial results or prevent fraud, resulting in loss
of investor confidence and adversely affecting our business and
stock price.
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Effective internal controls over financial reporting are
necessary to provide reliable financial reports and prevent
fraud. As a financial holding company, we are subject to
regulation that focuses on effective internal controls and
procedures. Management continually seeks to improve these
controls and procedures.
We believe that our key internal controls over financial
reporting are currently effective; however, such controls and
procedures will be modified, supplemented, and changed from
time-to-time
as necessitated by our growth and in reaction to external events
and developments. While we will continue to assess our controls
and procedures and take immediate action to remediate any future
perceived gaps, there can be no guarantee of the effectiveness
of these controls and procedures on an on-going basis. Any
failure to maintain, in the future, an effective internal
control environment could impact our ability to report our
financial results on an accurate and timely basis, which could
result in regulatory actions, loss of investor confidence, and
adversely impact our business and stock price.
Compliance
Risks:
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1.
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If our
regulators deem it appropriate, they can take regulatory actions
that could materially adversely impact our ability to compete
for new business, constrain our ability to fund our liquidity
needs or pay dividends, and increase the cost of our
services.
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We are subject to the supervision and regulation of various
state and Federal regulators, including the OCC, Federal
Reserve, FDIC, SEC, Financial Industry Regulatory Authority, and
various state regulatory agencies. As such, we are subject to a
wide variety of laws and regulations, many of which are
discussed in the Regulatory Matters section. As part of their
supervisory process, which includes periodic examinations and
18
continuous monitoring, the regulators have the authority to
impose restrictions or conditions on our activities and the
manner in which we manage the organization. These actions could
impact the organization in a variety of ways, including
subjecting us to monetary fines, restricting our ability to pay
dividends, precluding mergers or acquisitions, limiting our
ability to offer certain products or services, or imposing
additional capital requirements.
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2.
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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 materially adversely affect us by increasing our costs,
adding complexity in doing business, impeding the efficiency of
our internal business processes, negatively impacting the
recoverability of certain of our recorded assets, requiring us
to increase our regulatory capital, limiting our ability to
pursue business opportunities, and otherwise materially
adversely impacting our financial condition, results of
operation, liquidity, or stock price.
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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 previously enacted governmental assistance programs
designed to stabilize and stimulate the U.S. economy,
recent economic, political, and market conditions have led to
numerous programs and proposals to reform the financial
regulatory system and prevent future crises.
On July 21, 2010, the Dodd-Frank Act was signed into law.
The Dodd-Frank Act represents a comprehensive overhaul of the
financial services industry within the United States,
establishes the new federal CFPB, and requires the bureau and
other federal agencies to implement many new and significant
rules and regulations. At this time, it is difficult to predict
the extent to which the Dodd-Frank Act or the resulting rules
and regulations will impact our business. Compliance with these
new laws and regulations may result in additional costs, which
could be significant, and may have a material and adverse effect
on our results of operations.
In addition, international banking industry regulators have
largely agreed upon significant changes in the regulation of
capital required to be held by banks and their holding companies
to support their businesses. The new international rules, known
as Basel III, generally increase the capital required to be held
and narrow the types of instruments which will qualify as
providing appropriate capital and impose a new liquidity
measurement. The Basel III requirements are complex and
will be phased in over many years.
The Basel III rules do not apply to U.S. banks or
holding companies automatically. Among other things, the
Dodd-Frank Act requires U.S. regulators to reform the
system under which the safety and soundness of banks and other
financial institutions, individually and systemically, are
regulated. That reform effort will include the regulation of
capital and liquidity. It is not known whether or to what extent
the U.S. regulators will incorporate elements of
Basel III into the reformed U.S. regulatory system,
but it is expected that the U.S. reforms will include an
increase in capital requirements, a narrowing of what qualifies
as appropriate capital, and impose a new liquidity measurement.
One likely effect of a significant tightening of
U.S. capital requirements would be to increase our cost of
capital, among other things. Any permanent significant increase
in our cost of capital could have significant adverse impacts on
the profitability of many of our products, the types of products
we could offer profitably, our overall profitability, and our
overall growth opportunities, among other things. Although most
financial institutions would be affected, these business impacts
could be felt unevenly, depending upon the business and product
mix of each institution. Other potential effects could include
less ability to pay cash dividends and repurchase our common
shares, higher dilution of common shareholders, and a higher
risk that we might fall below regulatory capital thresholds in
an adverse economic cycle.
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Item 1B:
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Unresolved
Staff Comments
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None.
19
Our headquarters, as well as the Banks, are located in the
Huntington Center, a thirty-seven-story office building located
in Columbus, Ohio. Of the buildings total office space
available, we lease approximately 33%. The lease term expires in
2030, with six five-year renewal options for up to 30 years
but with no purchase option. The Bank has an indirect minority
equity interest of 18.4% in the building.
Our other major properties consist of the following:
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Description
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Location
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Own
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Lease
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13 story office building, located adjacent to the Huntington
Center
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Columbus, Ohio
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√
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12 story office building, located adjacent to the Huntington
Center
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Columbus, Ohio
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√
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The Crosswoods building
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Columbus, Ohio
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√
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21 story office building, known as the Huntington Building
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Cleveland, Ohio
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√
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12 story office building
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Youngstown, Ohio
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√
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10 story office building
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Warren, Ohio
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√
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18 story office building
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Charleston, West Virginia
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√
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3 story office building
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Holland, Michigan
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|
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√
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office complex
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Troy, Michigan
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√
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data processing and operations center (Easton)
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Columbus, Ohio
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|
√
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data processing and operations center (Northland)
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Columbus, Ohio
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√
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data processing and operations center (Parma)
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Cleveland, Ohio
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√
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data processing and operations center
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Indianapolis, Indiana
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√
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In 1998, we entered into a sale/leaseback agreement that
included the sale of 59 of our locations. The transaction
included a mix of branch banking offices, regional offices, and
operational facilities, including certain properties described
above, which we will continue to operate under a long-term lease.
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Item 3:
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Legal
Proceedings
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Information required by this item is set forth in Note 22
of the Notes to Consolidated Financial Statements and
incorporated into this Item by reference.
PART II
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Item 5:
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Market
for Registrants Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
|
The common stock of Huntington Bancshares Incorporated is traded
on the NASDAQ Stock Market under the symbol HBAN.
The stock is listed as HuntgBcshr or
HuntBanc in most newspapers. As of January 31,
2011, we had 38,676 shareholders of record.
Information regarding the high and low sale prices of our common
stock and cash dividends declared on such shares, as required by
this item, is set forth in Table 58 entitled Selected Quarterly
Income Statement Data and incorporated into this Item by
reference. Information regarding restrictions on dividends, as
required by this item, is set forth in Item 1
Business-Regulatory Matters and in Note 23 of the Notes to
Consolidated Financial Statements and incorporated into this
Item by reference.
As a condition to participate in the TARP, Huntington could not
repurchase any additional shares without prior approval from the
Treasury. On February 18, 2009, the board of directors
terminated the previously authorized program for the repurchase
of up to 15 million shares of common stock (the 2006
Repurchase Program). Huntington did not repurchase any common
shares for the year ended December 31, 2010.
20
The line graph below compares the yearly percentage change in
cumulative total shareholder return on Huntington common stock
and the cumulative total return of the S&P 500 Index and
the KBW Bank Index for the period December 31, 2005,
through December 31, 2010. The KBW Bank Index is a market
capitalization-weighted bank stock index published by Keefe,
Bruyette & Woods. The index is composed of the largest
banking companies and includes all money center banks and
regional banks, including Huntington. An investment of $100 on
December 31, 2005, and the reinvestment of all dividends
are assumed.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2010
|
|
HBAN
|
|
|
$
|
100
|
|
|
|
$
|
104
|
|
|
|
$
|
69
|
|
|
|
$
|
39
|
|
|
|
$
|
19
|
|
|
|
$
|
35
|
|
S&P 500
|
|
|
$
|
100
|
|
|
|
$
|
116
|
|
|
|
$
|
122
|
|
|
|
$
|
77
|
|
|
|
$
|
97
|
|
|
|
$
|
112
|
|
KBW Bank Index
|
|
|
$
|
100
|
|
|
|
$
|
117
|
|
|
|
$
|
91
|
|
|
|
$
|
48
|
|
|
|
$
|
47
|
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HBAN
S&P 500
KBW Bank Index
21
|
|
Item 6:
|
Selected
Financial Data
|
Table 1 Selected Financial Data (1), (9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollar amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,145,392
|
|
|
$
|
2,238,142
|
|
|
$
|
2,798,322
|
|
|
$
|
2,742,963
|
|
|
$
|
2,070,519
|
|
Interest expense
|
|
|
526,587
|
|
|
|
813,855
|
|
|
|
1,266,631
|
|
|
|
1,441,451
|
|
|
|
1,051,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,618,805
|
|
|
|
1,424,287
|
|
|
|
1,531,691
|
|
|
|
1,301,512
|
|
|
|
1,019,177
|
|
Provision for credit losses
|
|
|
634,547
|
|
|
|
2,074,671
|
|
|
|
1,057,463
|
|
|
|
643,628
|
|
|
|
65,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses
|
|
|
984,258
|
|
|
|
(650,384
|
)
|
|
|
474,228
|
|
|
|
657,884
|
|
|
|
953,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
|
|
1,041,858
|
|
|
|
1,005,644
|
|
|
|
707,138
|
|
|
|
676,603
|
|
|
|
561,069
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
2,606,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noninterest expense
|
|
|
1,673,805
|
|
|
|
1,426,499
|
|
|
|
1,477,374
|
|
|
|
1,311,844
|
|
|
|
1,000,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
1,673,805
|
|
|
|
4,033,443
|
|
|
|
1,477,374
|
|
|
|
1,311,844
|
|
|
|
1,000,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
352,311
|
|
|
|
(3,678,183
|
)
|
|
|
(296,008
|
)
|
|
|
22,643
|
|
|
|
514,061
|
|
Provision (benefit) for income taxes
|
|
|
39,964
|
|
|
|
(584,004
|
)
|
|
|
(182,202
|
)
|
|
|
(52,526
|
)
|
|
|
52,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
312,347
|
|
|
$
|
(3,094,179
|
)
|
|
$
|
(113,806
|
)
|
|
$
|
75,169
|
|
|
$
|
461,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred shares
|
|
|
172,032
|
|
|
|
174,756
|
|
|
|
46,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares
|
|
$
|
140,315
|
|
|
$
|
(3,268,935
|
)
|
|
$
|
(160,206
|
)
|
|
$
|
75,169
|
|
|
$
|
461,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic
|
|
$
|
0.19
|
|
|
$
|
(6.14
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
0.25
|
|
|
$
|
1.95
|
|
Net income (loss) per common share diluted
|
|
|
0.19
|
|
|
|
(6.14
|
)
|
|
|
(0.44
|
)
|
|
|
0.25
|
|
|
|
1.92
|
|
Cash dividends declared per common share
|
|
|
0.0400
|
|
|
|
0.0400
|
|
|
|
0.6625
|
|
|
|
1.0600
|
|
|
|
1.0000
|
|
Balance sheet highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (period end)
|
|
$
|
53,819,642
|
|
|
$
|
51,554,665
|
|
|
$
|
54,352,859
|
|
|
$
|
54,697,468
|
|
|
$
|
35,329,019
|
|
Total long-term debt (period end)(2)
|
|
|
3,813,827
|
|
|
|
3,802,670
|
|
|
|
6,870,705
|
|
|
|
6,954,909
|
|
|
|
4,512,618
|
|
Total shareholders equity (period end)
|
|
|
4,980,542
|
|
|
|
5,336,002
|
|
|
|
7,228,906
|
|
|
|
5,951,091
|
|
|
|
3,016,029
|
|
Average long-term debt(2)
|
|
|
3,953,177
|
|
|
|
5,558,001
|
|
|
|
7,374,681
|
|
|
|
5,714,572
|
|
|
|
4,942,671
|
|
Average shareholders equity
|
|
|
5,482,502
|
|
|
|
5,787,401
|
|
|
|
6,395,690
|
|
|
|
4,633,465
|
|
|
|
2,948,367
|
|
Average total assets
|
|
|
52,574,231
|
|
|
|
52,440,268
|
|
|
|
54,921,419
|
|
|
|
44,711,676
|
|
|
|
35,111,236
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollar amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key ratios and statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin analysis as a % of average earnings assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income(3)
|
|
|
4.52
|
%
|
|
|
4.88
|
%
|
|
|
5.90
|
%
|
|
|
7.02
|
%
|
|
|
6.63
|
%
|
Interest expense
|
|
|
1.08
|
|
|
|
1.77
|
|
|
|
2.65
|
|
|
|
3.66
|
|
|
|
3.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
3.44
|
%
|
|
|
3.11
|
%
|
|
|
3.25
|
%
|
|
|
3.36
|
%
|
|
|
3.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets
|
|
|
0.59
|
%
|
|
|
(5.90
|
)%
|
|
|
(0.21
|
)%
|
|
|
0.17
|
%
|
|
|
1.31
|
%
|
Return on average common shareholders equity
|
|
|
3.7
|
|
|
|
(80.8
|
)
|
|
|
(2.8
|
)
|
|
|
1.6
|
|
|
|
15.6
|
|
Return on average tangible common shareholders equity(4)
|
|
|
5.6
|
|
|
|
(22.4
|
)
|
|
|
(4.4
|
)
|
|
|
3.9
|
|
|
|
19.5
|
|
Efficiency ratio(5)
|
|
|
60.4
|
|
|
|
55.4
|
|
|
|
57.0
|
|
|
|
62.5
|
|
|
|
59.4
|
|
Dividend payout ratio
|
|
|
0.21
|
|
|
|
N.R.
|
|
|
|
N.R.
|
|
|
|
4.24
|
|
|
|
52.1
|
|
Average shareholders equity to average assets
|
|
|
10.43
|
|
|
|
11.04
|
|
|
|
11.65
|
|
|
|
10.36
|
|
|
|
8.40
|
|
Effective tax rate (benefit)
|
|
|
11.3
|
|
|
|
(15.9
|
)
|
|
|
(61.6
|
)
|
|
|
N.R.
|
|
|
|
10.3
|
|
Tangible common equity to tangible assets (period end)(6),(8)
|
|
|
7.56
|
|
|
|
5.92
|
|
|
|
4.04
|
|
|
|
5.09
|
|
|
|
6.93
|
|
Tangible equity to tangible assets (period end)(7),(8)
|
|
|
8.24
|
|
|
|
9.24
|
|
|
|
7.72
|
|
|
|
5.09
|
|
|
|
6.93
|
|
Tier 1 leverage ratio (period end)
|
|
|
9.41
|
|
|
|
10.09
|
|
|
|
9.82
|
|
|
|
6.77
|
|
|
|
8.00
|
|
Tier 1 risk-based capital ratio (period end)
|
|
|
11.55
|
|
|
|
12.50
|
|
|
|
10.72
|
|
|
|
7.51
|
|
|
|
8.93
|
|
Total risk-based capital ratio (period end)
|
|
|
14.46
|
|
|
|
14.55
|
|
|
|
13.91
|
|
|
|
10.85
|
|
|
|
12.79
|
|
Other data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-time equivalent employees (period end)
|
|
|
11,341
|
|
|
|
10,272
|
|
|
|
10,951
|
|
|
|
11,925
|
|
|
|
8,081
|
|
Domestic banking offices (period end)
|
|
|
620
|
|
|
|
611
|
|
|
|
613
|
|
|
|
625
|
|
|
|
381
|
|
N.R. Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
|
|
|
(1) |
|
Comparisons for presented periods are impacted by a number of
factors. Refer to the Significant Items for additional
discussion regarding these key factors. |
|
(2) |
|
Includes FHLB advances, subordinated notes, and other long-term
debt. |
|
(3) |
|
On an FTE basis assuming a 35% tax rate. |
|
(4) |
|
Net income (loss) less expense excluding 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. |
|
(5) |
|
Noninterest expense less amortization of intangibles divided by
the sum of FTE net interest income and noninterest income
excluding securities gains. |
|
(6) |
|
Tangible common equity (total common equity less goodwill and
other intangible assets) divided by tangible assets (total
assets less goodwill and other intangible assets). Other
intangible assets are net of deferred tax, and calculated
assuming a 35% tax rate. |
23
|
|
|
(7) |
|
Tangible equity (total equity less goodwill and other intangible
assets) divided by tangible assets (total assets less goodwill
and other intangible assets). Other intangible assets are net of
deferred tax, and calculated assuming a 35% tax rate. |
|
(8) |
|
Tangible equity, tangible common equity, and tangible assets are
non-GAAP financial measures. Additionally, any ratios utilizing
these financial measures are also non-GAAP. These financial
measures have been included as they are considered to be
critical metrics with which to analyze and evaluate financial
condition and capital strength. Other companies may calculate
these financial measures differently. |
|
(9) |
|
Comparisons are affected by the Sky Financial acquisition in
2007, and the Unizan acquisition in 2006. |
|
|
Item 7:
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
INTRODUCTION
We are a multi-state diversified regional bank holding company
organized under Maryland law in 1966 and headquartered in
Columbus, Ohio. Through the Bank, we have 145 years of
servicing the financial needs of our customers. Through our
subsidiaries, 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 over
600 banking offices are located in Indiana, Kentucky, Michigan,
Ohio, Pennsylvania, and West Virginia. Selected financial
service and other activities are also conducted in various
states throughout the United States. International banking
services are available through the headquarters office in
Columbus, Ohio and a limited purpose office located in the
Cayman Islands and another limited purpose office located in
Hong Kong.
The following MD&A provides information we believe
necessary for understanding our financial condition, changes in
financial condition, results of operations, and cash flows. The
MD&A should be read in conjunction with the Consolidated
Financial Statements, Notes to Consolidated Financial
Statements, and other information contained in this report.
Our discussion is divided into key segments:
|
|
|
|
|
Executive Overview Provides a summary of
our current financial performance, and business overview,
including our thoughts on the impact of the economy, legislative
and regulatory initiatives, and recent industry developments.
This section also provides our outlook regarding our 2011
expectations.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
Results for the Fourth Quarter Provides
a discussion of results for the 2010 fourth quarter compared
with the 2009 fourth quarter.
|
24
|
|
|
|
|
Additional Disclosures Provides comments
on important matters including forward-looking statements,
critical accounting policies and use of significant estimates,
recent accounting pronouncements and developments, and
acquisitions.
|
A reading of each section is important to understand fully the
nature of our financial performance and prospects.
EXECUTIVE
OVERVIEW
2010
Financial Performance Review
In 2010, we reported net income of $312.3 million, or $0.19
per common share (see Table 1). The current year included
a nonrecurring reduction of $0.08 per common share for the
deemed dividend resulting from the repurchase of
$1.4 billion in TARP Capital. This compared with a net loss
of $3,094.2 million, or $6.14 per common share, for 2009.
The 2009 loss primarily reflected two items:
$2,606.9 million in noncash goodwill impairment charges and
$2,074.7 million in provision for credit losses. Most of
the $2,606.9 million in goodwill impairment charges related
to the acquisitions of Sky Financial and Unizan. While this
impairment charge reduced reported net income, equity, and total
assets, it had no impact on key regulatory capital ratios. As a
noncash charge, it had no affect on our liquidity. The provision
for credit losses reflected higher net charge-offs as we
addressed issues in our loan portfolio. We also strengthened our
allowance for credit losses because of higher levels of
nonperforming assets.
Fully-taxable equivalent net interest income was
$1.6 billion in 2010, up $0.2 billion, or 14%, from
2009. The increase primarily reflected the favorable impact of
the increase in net interest margin to 3.44% from 3.11% and, to
a lesser degree, a 3% increase in average total earning assets.
A significant portion of the increase in the net interest margin
reflected a shift in our deposit mix from higher-cost time
deposits to lower-cost transaction-based accounts. Additionally,
we grew our average core deposits $3.1 billion, or 9%, from
2009. Although average total earning assets increased only
slightly compared with 2009, this change reflected a
$2.9 billion, or 45%, increase in average total investment
securities, partially offset by a $1.4 billion, or 4%,
decline in average total loans and leases. The change in average
loan balances from the prior year reflected our strategy to
reduce our CRE exposure as average CRE loans declined
$1.9 billion, or 21%, from 2009. Average C&I loans
declined $0.7 billion, or 5%, for the full year. Average
automobile loans and leases increased $1.3 billion, or 38%,
from 2009, reflecting the consolidation of a $0.8 billion
automobile loan securitization on January 1, 2010. These
changes in loan and investment securities balances from the
prior year reflected the execution of our balance sheet
management strategy, and not a change in standards for making
loans or for investing in securities.
Noninterest income was $1.0 billion in 2010, a slight
increase compared with 2009. The increase in noninterest income
was primarily a result of an increase in mortgage banking
income, reflecting an increase in origination and secondary
marketing income as loan originations and loan sales were
substantially higher, and MSR hedging. This was partially offset
by a decline in service charges on deposit accounts, which was
due to a decline in personal NSF / OD service charges.
The decline reflected our implementation of changes to
Regulation E and the introduction of our Fair Play banking
philosophy. As part of this philosophy, we voluntarily reduced
certain NSF / OD fees and implemented our
24-Hour
Gracetm
overdraft policy. The goal of our Fair Play banking philosophy
is to introduce more customer-friendly fee structures with the
objective of accelerating the acquisition and retention of
customers.
Noninterest expense was $1.7 billion in 2010, a decrease of
$2.4 billion, or 59%, compared with 2009. The decrease in
noninterest expense was primarily due to goodwill impairment in
the year-ago period. The decline also reflected a decrease in
OREO and foreclosure expense from lower OREO losses. Further,
there was a decline in deposit and other insurance expense,
primarily due to a $23.6 million FDIC insurance special
assessment in 2009, partially offset by continued growth in
total deposits and higher FDIC insurance costs in the current
period as premium rates increased. The decline was partially
offset by a 2009 benefit from a gain on the early extinguishment
of debt, and 2010 increases in personnel costs, reflecting a
combination of factors
25
including higher salaries due to a 10% increase in full-time
equivalent staff in support of strategic initiatives, higher
sales commissions, and retirement fund and 401(k) plan expenses.
Credit quality performance continued to show strong improvement
as our NPAs and NCOs declined and reserve coverage increased.
This improvement reflected the benefits of our focused actions
taken in 2009 to address credit-related issues. Compared with
the prior year, NPAs declined 59%. NCOs were
$874.5 million, or an annualized 2.35% of average total
loans and leases, down from $1,476.6 million, or 3.82%, in
2009. While the ACL as a percentage of loans and leases was
3.39%, down from 4.16% at December 31, 2009, the ACL as a
percentage of total NALs increased to 166% from 80%.
In December 2010, we successfully completed multiple capital
actions, particularly improving our then relatively low level of
common equity. We sold $920.0 million of common stock in a
public offering and issued $300.0 million of subordinated
debt. On December 22, 2010, these proceeds, along with
other available funds, were used to complete the repurchase of
our $1.4 billion of TARP Capital we issued to the Treasury
under its TARP CPP. Subsequently, on January 19, 2011, we
exited our TARP-related relationship with the Treasury by
repurchasing the warrant we had issued to the Treasury as part
of the TARP CPP for $49.1 million. The warrant had entitled
the Treasury to purchase 23.6 million common shares of
stock.
At December 31, 2010, our regulatory Tier 1 and Total
risk-based capital were $2.4 billion and $1.9 billion,
respectively, above the Well-capitalized regulatory thresholds.
Our tangible common equity ratio improved 164 basis points
to 7.56% and our Tier 1 common risk-based capital ratio
improved 253 basis points to 9.29% from December 31,
2009.
Business
Overview
General
Our general business objectives are: (1) grow revenue and
profitability, (2) grow key fee businesses (existing and
new), (3) improve credit quality, including lower NCOs and
NPAs, (4) improve cross-sell and
share-of-wallet
across all business segments, (5) reduce CRE noncore
exposure, and (6) continue to improve our overall
management of risk.
As further described below, our main challenge to accomplishing
our primary objectives results from an economy, that while more
stable than a year ago, remains fragile. This impairs our
ability to grow loans as customers continue to reduce their debt
and / or remain cautious about increasing debt until
they have a higher degree of confidence in a meaningful
sustainable economic recovery. However, growth in our automobile
loan portfolio continued with 2010 originations of
$3.4 billion, an increase of $1.8 billion compared to
2009. Strong growth in originations reflected increases in all
of our markets, as well as the recent expansion of our
automobile lending business into Eastern Pennsylvania and five
New England states. We expect our growth in the newly entered
markets to become more evident over time as we further develop
our dealership base. Although our residential real estate
portfolio declined slightly from 2009, our mortgage originations
increased $214 million, or 4%, from the prior year. Our CRE
portfolio declined throughout the year as a result of our
on-going strategy to reduce our CRE exposure. The decline was
primarily a result of continuing paydowns in the noncore CRE
portfolio.
We face strong competition from other banks and financial
service firms in our markets. As such, we have placed strategic
emphasis on, and continue to develop and expand resources
devoted to, improving cross-sell performance with our core
customer base. One example of this emphasis was our recent
agreement with Giant Eagle supermarkets to be its exclusive
in-store bank in Ohio. During the 2010 fourth quarter, we opened
four such in-store branches. When fully implemented, the
partnership will give us an additional 100 branches, which in
the aggregate will be nearly 500 branches in Ohio, providing us
with the largest branch presence among Ohio banks, based on
current data. In-store branches have a strong record for
checking account acquisition and are expected to increase the
number of households served and drive revenue. Additionally, it
will give customers the convenience of operating seven days per
week and extended hours banking.
26
Economy
The weak residential real estate market and U.S. economy
has had a significant adverse impact on the financial services
industry as a whole, and specifically on our financial results.
In addition, the U.S. recession during 2008 and 2009 and
continued high Midwest unemployment have hindered any
significant economic recovery. However, some indications of
recovery are beginning to take hold. Following is a discussion
of certain economic trends in our market area, particularly Ohio
and Michigan.
The median home prices in the Midwest market have been
directionally consistent with the nationwide averages. In the
years preceding the economic crisis, home prices in Michigan and
Ohio did not increase as rapidly as the national trend and
became more in line with the national averages during the
crisis. Therefore, when real estate prices began to decline in
2008, the impact in our Midwest markets was reduced because
pre-crisis originations were not based on values that were as
inflated as in other parts of the country. Home prices in the
Midwest are generally expected to follow the national growth
rates over the next two years. Residential real estate sales in
the Midwest have been consistent with national averages. Single
family home building permits are expected to increase both
nationally and in the Midwest through 2013.
Year-over-year
changes in median household income in the Midwest have been
consistent with national averages and directionally similar with
national trends. Both the U.S. and Midwest are expected to
have slight, but positive, income growth over the next two
years. Unemployment in the Midwest has been consistently higher
than the national average for most of the past decade. However,
the relative difference is expected to narrow over the next two
years, with the Midwest unemployment rate converging to the
U.S. average. The exception is Michigan, which has the
second highest unemployment level in the country. From October
2009 through October 2010, Indianas employment growth of
1.1% was among the strongest in the country. Over this same time
period, Ohios manufacturing employment grew 1.4%, which
was significantly higher than the 0.8% national average.
Clevelands overall employment growth of 1.0% exceeded the
national growth rate of 0.6%.
According to the FRB-Cleveland Beige Book in December 2010,
manufacturers in our footprint indicated that new orders and
production were stable or rose slightly during the last two
months of 2010. Inventory levels were balanced with incoming
order demand and capacity utilization trending up for some
manufacturers and steel producers. Overall, manufacturers were
cautiously optimistic and expect at least modest growth during
2011.
Partially resulting from these economic conditions in our
footprint, we experienced higher than historical levels of loan
delinquencies and NCOs during 2009 and 2010. The pronounced
downturn in the residential real estate market that began in
early 2007 resulted in lower residential real estate values and
higher delinquencies and NCOs, not only in consumer mortgage
loans but also in commercial loans to builders and developers of
residential real estate. The value of our investment securities
backed by residential and commercial real estate was also
negatively impacted by a lack of liquidity in the financial
markets and anticipated credit losses. Commercial real estate
loans for retail businesses were also challenged by the
difficult consumer economic conditions over this period.
However, as further discussed in the Credit Risk section,
we experienced significant improvement in credit performance
during 2010.
Legislative
and Regulatory
Legislative and regulatory reforms continue to be adopted which
impose additional restrictions on current business practices.
Recent actions affecting us included an amendment to
Regulation E relating to certain overdraft fees for
consumer deposit accounts and the passage of the Dodd-Frank Act.
Effective July 1, 2010, the Federal Reserve Board amended
Regulation E to prohibit charging overdraft fees for ATM or
point-of-sale
debit card transactions that overdraw the customers
account unless the customer opts-in to the discretionary
overdraft service. For us, such fees were approximately
$90 million per year prior to the amendment. This change in
Regulation E requires us to alert our consumer customers we
can no longer allow an overdraft unless they opt-in to our
discretionary overdraft service. To date, the number of
customers choosing to opt-in has been higher than our
expectations. Also, during the second half of 2010, we
voluntarily
27
reduced certain overdraft fees and introduced
24-Hour
Gracetm
on overdrafts as part of our Fair Play banking philosophy
designed to build on our foundation of service excellence. We
expect our
24-Hour
Gracetm
service to accelerate acquisition of new checking customers,
while improving retention of existing customers.
The recently passed Dodd-Frank Act is complex and we continue to
assess how this legislation and subsequent rule-making will
affect us. As hundreds of regulations are promulgated, we will
continue to evaluate impacts such as changes in regulatory costs
and fees, modifications to consumer products or disclosures
required by the CFPB, and the requirements of the enhanced
supervision provisions, among others. Two areas where we are
focusing on the financial impact are: interchange fees and the
exclusion of trust-preferred securities from our Tier I
regulatory capital.
Currently, interchange fees are approximately $90 million
per year. In the future, the Dodd-Frank Act gives the Federal
Reserve, and no longer the banks or system owners, the ability
to set the interchange rate charged to merchants for the use of
debit cards. The ultimate impact to us will depend on rules yet
to be issued by the Federal Reserve. Proposed rules were issued
on December 28, 2010, and the Dodd-Frank Act requires final
interchange rules to be issued by April 21, 2011, and
effective no later than July 21, 2011. Based on the Federal
Reserves proposed rules, a maximum interchange rate of
$0.07 would reduce our annual interchange fees by approximately
85%. A maximum interchange rate of $0.12 would reduce our annual
interchange fees by approximately 75%.
At December 31, 2010, we had $569.9 million of
outstanding trust-preferred securities that, if disallowed,
would reduce our regulatory Tier 1 risk-based capital ratio
by approximately 130 basis points. Even with this
reduction, our capital ratios would remain above
Well-capitalized levels. There is a three year phase-in period
beginning on January 1, 2013, that we believe will provide
sufficient time to evaluate and address the impacts of this new
legislation on our capital structure. Accordingly, we do not
anticipate this potential change will have a significant impact
to our business.
During the 2010 third quarter, the Basel Committee on Banking
Supervision revised the Capital Accord (Basel III), which
narrows the definition of capital and increases capital
requirements for specific exposures. The new capital
requirements will be phased-in over six years beginning in 2013.
If these revisions were adopted currently, we estimate they
would have a negligible impact on our regulatory capital ratios
based on our current understanding of the revisions to capital
qualification. We await clarification from our banking
regulators on their interpretation of Basel III and any
additional requirements to the stated thresholds. The FDIC has
approved issuance of an interagency proposed rulemaking to
implement certain provisions of Section 171 of the
Dodd-Frank Act (Section 171). Section 171 provides
that the capital requirements generally applicable to insured
banks shall serve as a floor for other capital requirements the
agencies establish. The FDIC noted that the advanced approaches
of Basel III allow for reductions in risk-based capital
requirements below those generally applicable to insured banks
and, accordingly, need to be modified to be consistent with
Section 171.
Recent
Industry Developments
Foreclosure Documentation We evaluated our
foreclosure documentation procedures given the recent
announcements made by other financial institutions regarding
problems associated with their foreclosure activities. As a
result of our review, we have determined that we do not have any
significant issues relating to so-called
robo-signing, foreclosure affidavits were completed
and signed by employees with personal knowledge of the contents
of the affidavits, and there is no reason to conclude that
foreclosures were filed that should not have been filed.
Additionally, we have identified and are implementing process
and control enhancements to ensure that affidavits continue to
be prepared in compliance with applicable state law. We are
consulting with local foreclosure counsel as necessary with
respect to additional requirements imposed by the courts in
which foreclosure proceedings are pending, which could impact
our foreclosure actions.
Representation and Warranty Reserve We
primarily conduct our loan sale and securitization activity with
Fannie Mae and Freddie Mac. In connection with these and other
sale and securitization transactions, we make certain
representations and warranties that the loans meet certain
criteria, such as collateral type and underwriting standards. In
the future, we may be required to repurchase individual loans
and / or indemnify
28
these organizations against losses due to material breaches of
these representations and warranties. At December 31, 2010,
we have a reserve for such losses of $20.2 million, which
is included in accrued expenses and other liabilities.
2011
Expectations
Borrower and consumer confidence remains a major factor
impacting growth opportunities for 2011. We continue to believe
that the economy will remain relatively stable throughout 2011,
with the potential for improvement in the latter half.
Challenges to earnings growth include (1) revenue headwinds
as a result of regulatory and legislative actions,
(2) anticipated higher interest rates as we enter 2011,
which is expected to reduce mortgage banking income, and
(3) continued investments in growing our businesses.
Reflecting these factors, pre-tax, pre-provision income levels
are expected to remain in line with 2010 second half
performance. Nevertheless, net income growth from the 2010
fourth quarter level is anticipated throughout the year. This
will primarily reflect on-going reductions in credit costs. We
expect the absolute levels of NCOs, NPAs, and Criticized loans
will continue to decline, resulting in lower levels of provision
expense. Given the significant credit-related improvements in
2010, coupled with our expectation for continued improvement,
our return to more normalized levels of credit costs could occur
earlier than previously expected.
The net interest margin is expected to be flat or increase
slightly from the 2010 fourth quarter. We anticipate continued
benefit from lower deposit pricing. In addition, the absolute
growth in loans compared with deposits is anticipated to be more
comparable, thus reducing the absolute growth in lower yield
investment securities.
The automobile loan portfolio is expected to continue its strong
growth, and we anticipate continued growth in C&I loans.
Home equity and residential mortgages are likely to show only
modest growth. CRE loans are expected to continue to decline,
but at a slower rate.
Core deposits are expected to show continued growth. Further, we
expect the shift toward lower-cost demand deposit accounts will
continue.
Fee income, compared with the 2010 fourth quarter, will be
negatively impacted by lower interchange fees due to regulatory
fee change and a decline in mortgage banking revenues due to a
higher interest rate environment as we enter 2011. With regard
to interchange fees, if enacted as recently outlined, the
Federal Reserves proposed interchange fee structure will
significantly lower interchange revenue. Other fee categories
are expected to grow, reflecting the impact of our cross-sell
initiatives throughout the Company, as well as the positive
impact from strategic initiatives. Over time, we anticipate more
than offsetting revenue challenges with revenue we expect to
generate by accelerating customer growth and cross-sell results.
Expense levels early in the year should be up modestly from 2010
fourth quarter performance, with increases later in the year due
to continued investments to grow the business.
29
Table
2 Selected Annual Income Statements (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Change from 2009
|
|
|
|
|
|
Change from 2008
|
|
|
|
|
|
|
2010
|
|
|
Amount
|
|
|
Percent
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
2008
|
|
(Dollar amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,145,392
|
|
|
$
|
(92,750
|
)
|
|
|
(4
|
)%
|
|
$
|
2,238,142
|
|
|
$
|
(560,180
|
)
|
|
|
(20
|
)%
|
|
$
|
2,798,322
|
|
Interest expense
|
|
|
526,587
|
|
|
|
(287,268
|
)
|
|
|
(35
|
)
|
|
|
813,855
|
|
|
|
(452,776
|
)
|
|
|
(36
|
)
|
|
|
1,266,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,618,805
|
|
|
|
194,518
|
|
|
|
14
|
|
|
|
1,424,287
|
|
|
|
(107,404
|
)
|
|
|
(7
|
)
|
|
|
1,531,691
|
|
Provision for credit losses
|
|
|
634,547
|
|
|
|
(1,440,124
|
)
|
|
|
(69
|
)
|
|
|
2,074,671
|
|
|
|
1,017,208
|
|
|
|
96
|
|
|
|
1,057,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses
|
|
|
984,258
|
|
|
|
1,634,642
|
|
|
|
N.R.
|
|
|
|
(650,384
|
)
|
|
|
(1,124,612
|
)
|
|
|
N.R.
|
|
|
|
474,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
267,015
|
|
|
|
(35,784
|
)
|
|
|
(12
|
)
|
|
|
302,799
|
|
|
|
(5,254
|
)
|
|
|
(2
|
)
|
|
|
308,053
|
|
Mortgage banking income
|
|
|
175,782
|
|
|
|
63,484
|
|
|
|
57
|
|
|
|
112,298
|
|
|
|
103,304
|
|
|
|
1,149
|
|
|
|
8,994
|
|
Trust services
|
|
|
112,555
|
|
|
|
8,916
|
|
|
|
9
|
|
|
|
103,639
|
|
|
|
(22,341
|
)
|
|
|
(18
|
)
|
|
|
125,980
|
|
Electronic banking
|
|
|
110,234
|
|
|
|
10,083
|
|
|
|
10
|
|
|
|
100,151
|
|
|
|
9,884
|
|
|
|
11
|
|
|
|
90,267
|
|
Insurance income
|
|
|
76,413
|
|
|
|
3,087
|
|
|
|
4
|
|
|
|
73,326
|
|
|
|
702
|
|
|
|
1
|
|
|
|
72,624
|
|
Brokerage income
|
|
|
68,855
|
|
|
|
4,012
|
|
|
|
6
|
|
|
|
64,843
|
|
|
|
(329
|
)
|
|
|
(1
|
)
|
|
|
65,172
|
|
Bank owned life insurance income
|
|
|
61,066
|
|
|
|
6,194
|
|
|
|
11
|
|
|
|
54,872
|
|
|
|
96
|
|
|
|
|
|
|
|
54,776
|
|
Automobile operating lease income
|
|
|
45,964
|
|
|
|
(5,846
|
)
|
|
|
(11
|
)
|
|
|
51,810
|
|
|
|
11,959
|
|
|
|
30
|
|
|
|
39,851
|
|
Securities losses
|
|
|
(274
|
)
|
|
|
9,975
|
|
|
|
(97
|
)
|
|
|
(10,249
|
)
|
|
|
187,121
|
|
|
|
(95
|
)
|
|
|
(197,370
|
)
|
Other income
|
|
|
124,248
|
|
|
|
(27,907
|
)
|
|
|
(18
|
)
|
|
|
152,155
|
|
|
|
13,364
|
|
|
|
10
|
|
|
|
138,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
1,041,858
|
|
|
|
36,214
|
|
|
|
4
|
|
|
|
1,005,644
|
|
|
|
298,506
|
|
|
|
42
|
|
|
|
707,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
798,973
|
|
|
|
98,491
|
|
|
|
14
|
|
|
|
700,482
|
|
|
|
(83,064
|
)
|
|
|
(11
|
)
|
|
|
783,546
|
|
Outside data processing and other services
|
|
|
159,248
|
|
|
|
11,153
|
|
|
|
8
|
|
|
|
148,095
|
|
|
|
17,869
|
|
|
|
14
|
|
|
|
130,226
|
|
Net occupancy
|
|
|
107,862
|
|
|
|
2,589
|
|
|
|
2
|
|
|
|
105,273
|
|
|
|
(3,155
|
)
|
|
|
(3
|
)
|
|
|
108,428
|
|
Deposit and other insurance expense
|
|
|
97,548
|
|
|
|
(16,282
|
)
|
|
|
(14
|
)
|
|
|
113,830
|
|
|
|
91,393
|
|
|
|
407
|
|
|
|
22,437
|
|
Professional services
|
|
|
88,778
|
|
|
|
12,412
|
|
|
|
16
|
|
|
|
76,366
|
|
|
|
26,753
|
|
|
|
54
|
|
|
|
49,613
|
|
Equipment
|
|
|
85,920
|
|
|
|
2,803
|
|
|
|
3
|
|
|
|
83,117
|
|
|
|
(10,848
|
)
|
|
|
(12
|
)
|
|
|
93,965
|
|
Marketing
|
|
|
65,924
|
|
|
|
32,875
|
|
|
|
99
|
|
|
|
33,049
|
|
|
|
385
|
|
|
|
1
|
|
|
|
32,664
|
|
Amortization of intangibles
|
|
|
60,478
|
|
|
|
(7,829
|
)
|
|
|
(11
|
)
|
|
|
68,307
|
|
|
|
(8,587
|
)
|
|
|
(11
|
)
|
|
|
76,894
|
|
OREO and foreclosure expense
|
|
|
39,049
|
|
|
|
(54,850
|
)
|
|
|
(58
|
)
|
|
|
93,899
|
|
|
|
60,444
|
|
|
|
181
|
|
|
|
33,455
|
|
Automobile operating lease expense
|
|
|
37,034
|
|
|
|
(6,326
|
)
|
|
|
(15
|
)
|
|
|
43,360
|
|
|
|
12,078
|
|
|
|
39
|
|
|
|
31,282
|
|
Goodwill impairment
|
|
|
|
|
|
|
(2,606,944
|
)
|
|
|
(100
|
)
|
|
|
2,606,944
|
|
|
|
2,606,944
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
147,442
|
|
|
|
(100
|
)
|
|
|
(147,442
|
)
|
|
|
(123,900
|
)
|
|
|
526
|
|
|
|
(23,542
|
)
|
Other expense
|
|
|
132,991
|
|
|
|
24,828
|
|
|
|
23
|
|
|
|
108,163
|
|
|
|
(30,243
|
)
|
|
|
(22
|
)
|
|
|
138,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
1,673,805
|
|
|
|
(2,359,638
|
)
|
|
|
(59
|
)
|
|
|
4,033,443
|
|
|
|
2,556,069
|
|
|
|
173
|
|
|
|
1,477,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
352,311
|
|
|
|
4,030,494
|
|
|
|
N.R.
|
|
|
|
(3,678,183
|
)
|
|
|
(3,382,175
|
)
|
|
|
1,143
|
|
|
|
(296,008
|
)
|
Provision (benefit) for income taxes
|
|
|
39,964
|
|
|
|
623,968
|
|
|
|
N.R.
|
|
|
|
(584,004
|
)
|
|
|
(401,802
|
)
|
|
|
221
|
|
|
|
(182,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
312,347
|
|
|
|
3,406,526
|
|
|
|
N.R.
|
|
|
|
(3,094,179
|
)
|
|
|
(2,980,373
|
)
|
|
|
2,619
|
|
|
|
(113,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred shares
|
|
|
172,032
|
|
|
|
(2,724
|
)
|
|
|
(2
|
)
|
|
|
174,756
|
|
|
|
128,356
|
|
|
|
277
|
|
|
|
46,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares
|
|
$
|
140,315
|
|
|
$
|
3,409,250
|
|
|
|
N.R.
|
%
|
|
$
|
(3,268,935
|
)
|
|
$
|
(3,108,729
|
)
|
|
|
1,940
|
%
|
|
$
|
(160,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares basic
|
|
|
726,934
|
|
|
|
194,132
|
|
|
|
36
|
%
|
|
|
532,802
|
|
|
|
166,647
|
|
|
|
46
|
%
|
|
|
366,155
|
|
Average common shares diluted(2)
|
|
|
729,532
|
|
|
|
196,730
|
|
|
|
37
|
|
|
|
532,802
|
|
|
|
166,647
|
|
|
|
46
|
|
|
|
366,155
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic
|
|
$
|
0.19
|
|
|
$
|
6.33
|
|
|
|
N.R.
|
%
|
|
$
|
(6.14
|
)
|
|
$
|
(5.70
|
)
|
|
|
1,295
|
%
|
|
$
|
(0.44
|
)
|
Net income diluted
|
|
|
0.19
|
|
|
|
6.33
|
|
|
|
N.R.
|
|
|
|
(6.14
|
)
|
|
|
(5.70
|
)
|
|
|
1,295
|
|
|
|
(0.44
|
)
|
Cash dividends declared
|
|
|
0.0400
|
|
|
|
|
|
|
|
|
|
|
|
0.0400
|
|
|
|
(0.62
|
)
|
|
|
(94
|
)
|
|
|
0.6625
|
|
Revenue FTE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,618,805
|
|
|
$
|
194,518
|
|
|
|
14
|
%
|
|
$
|
1,424,287
|
|
|
$
|
(107,404
|
)
|
|
|
(7
|
)%
|
|
$
|
1,531,691
|
|
FTE adjustment
|
|
|
11,077
|
|
|
|
(395
|
)
|
|
|
(3
|
)
|
|
|
11,472
|
|
|
|
(8,746
|
)
|
|
|
(43
|
)
|
|
|
20,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(3)
|
|
|
1,629,882
|
|
|
|
194,123
|
|
|
|
14
|
|
|
|
1,435,759
|
|
|
|
(116,150
|
)
|
|
|
(7
|
)
|
|
|
1,551,909
|
|
Noninterest income
|
|
|
1,041,858
|
|
|
|
36,214
|
|
|
|
4
|
|
|
|
1,005,644
|
|
|
|
298,506
|
|
|
|
42
|
|
|
|
707,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue(3)
|
|
$
|
2,671,740
|
|
|
$
|
230,337
|
|
|
|
9
|
%
|
|
$
|
2,441,403
|
|
|
$
|
182,356
|
|
|
|
8
|
%
|
|
$
|
2,259,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.R. Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
30
|
|
|
(1) |
|
Comparisons for presented periods are impacted by a number of
factors. Refer to Significant Items for additional discussion
regarding these key factors. |
|
(2) |
|
For the years ended December 31, 2009, and
December 31, 2008, the impact of the convertible preferred
stock issued in April of 2008 was excluded from the diluted
share calculation. It was excluded because the result would have
been higher than basic earnings per common share (anti-dilutive)
for the year. |
|
(3) |
|
On a FTE basis assuming a 35% tax rate. |
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 is reported on a diluted basis. For additional
insight on financial performance, please read this section in
conjunction with the Item 7: Business Segment Discussion.
Significant
Items
Definition
of Significant Items
From
time-to-time,
revenue, expenses, or taxes, are impacted by items judged by us
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 their outsized
impact is believed by us at that time to be infrequent 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; e.g., regulatory
actions / assessments, windfall gains, changes in
accounting principles, one-time tax
assessments / refunds, etc. In other cases they may
result from our decisions associated with significant corporate
actions out of the ordinary course of business; e.g.,
merger / restructuring charges, recapitalization
actions, goodwill impairment, etc.
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, asset
valuation writedowns, etc., reflect ordinary banking activities
and are, therefore, typically excluded from consideration as a
Significant Item.
We believe the disclosure of Significant Items in results
provides a better understanding of our performance and trends to
ascertain which of such items, if any, to include or exclude
from an analysis of our performance; i.e., 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. To this end, we adopted a practice of
listing Significant Items in our external disclosure documents
(e.g., earnings press releases, investor presentations,
Forms 10-Q
and 10-K).
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.
Significant
Items Influencing Financial Performance
Comparisons
Earnings comparisons among the three years ended
December 31, 2010, 2009, and 2008 were impacted by a number
of significant items summarized below.
1. TARP Capital Purchase Program
Repurchase. During the 2010 fourth quarter, we
issued $920.0 million of our common stock and
$300.0 million of subordinated debt. The net proceeds,
along with other available funds, were used to repurchase all
$1.4 billion of TARP Capital that we issued to the Treasury
under its TARP Capital Purchase Program in 2008. As part of this
transaction, there was a deemed dividend that did not impact net
income, but resulted in a negative impact of $0.08 per common
share for 2010.
31
2. Goodwill Impairment. The impacts of
goodwill impairment on our reported results were as follows:
|
|
|
|
|
During the 2009 first quarter, bank stock prices, including
ours, experienced a steep decline. 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 ($4.88 per common
share) pretax 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.
|
3. Franklin Relationship. Our
relationship with Franklin was acquired in the Sky Financial
acquisition in 2007. Significant events relating to this
relationship, and the impacts of those events on our reported
results, were as follows:
|
|
|
|
|
On March 31, 2009, we restructured our relationship with
Franklin. As a result of this restructuring, a nonrecurring net
tax benefit of $159.9 million ($0.30 per common share) was
recorded in the 2009 first quarter. Also, and 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
writedown the acquired mortgages and OREO collateral to fair
value.
|
|
|
|
During the 2010 first quarter, a $38.2 million ($0.05 per
common share) net tax benefit was recognized, primarily
reflecting the increase in the net deferred tax asset relating
to the assets acquired from the March 31, 2009
restructuring.
|
|
|
|
During the 2010 second quarter, the portfolio of
Franklin-related loans ($333.0 million of residential
mortgages and $64.7 million of home equity loans) was
transferred to loans held for sale. At the time of the transfer,
the loans were marked to the lower of cost or fair value less
costs to sell of $323.4 million, resulting in
$75.5 million of charge-offs, and the provision for credit
losses commensurately increased $75.5 million ($0.07 per
common share).
|
|
|
|
During the 2010 third quarter, the remaining Franklin-related
residential mortgage and home equity loans were sold at
essentially book value.
|
4. Early Extinguishment of Debt. The
positive impacts relating to the early extinguishment of debt on
our reported results were: $141.0 million ($0.18 per common
share) in 2009 and $23.5 million ($0.04 per common share)
in 2008. These amounts were recorded to noninterest expense.
5. 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 a negative impact of $0.11 per common share for
2009. (See Capital discussion located within the Risk
Management and Capital section for additional information.)
6. Visa®. Prior
to the
Visa®
IPO occurring in March 2008,
Visa®
was owned by its member banks, which included the Bank. As a
result of this ownership, we received Class B shares of
Visa®
stock at the time of the
Visa®
IPO. In the 2009 second quarter, we sold these
Visa®
stock shares, resulting in a $31.4 million pretax gain
($.04 per common share). This amount was recorded in noninterest
income.
Table
3
Visa®
impacts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Earnings
|
|
EPS
|
|
Earnings
|
|
EPS
|
|
Earnings
|
|
EPS
|
(Dollar amounts in millions, except per share
|
|
|
|
|
|
|
|
|
|
|
|
|
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain related to sale of
Visa®
stock(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31.4
|
|
|
$
|
0.04
|
|
|
$
|
25.1
|
|
|
$
|
0.04
|
|
Visa®
indemnification liability(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.0
|
|
|
|
0.03
|
|
32
|
|
|
(1) |
|
Pretax. Recorded to noninterest income, and
represented a gain on the sale of ownership interest in
Visa®.
As part of the sale of our
Visa®
stock in 2009, we released $8.2 million, as of
June 30, 2009, of the remaining indemnification liability.
Concurrently, we established a swap liability associated with
the conversion protection provided to the purchasers of the
Visa®
shares. |
|
(2) |
|
Pretax. Recorded to noninterest expense, and
represented our pro-rata portion of an indemnification liability
provided to
Visa®
by its member banks for various litigation filed against
Visa®.
Subsequently, in 2008, an escrow account was established by
Visa®
using a portion of the proceeds received from the IPO. This
action resulted in a reversal of a portion of the liability as
the escrow account reduced our potential exposure related to the
indemnification. |
|
7. |
|
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
|
|
|
|
|
$23.6 million ($0.03 per common share) negative impact due
to a special FDIC insurance premium assessment. This amount was
recorded to noninterest expense.
|
|
|
|
$12.8 million ($0.02 per common share) benefit to provision
for income taxes, representing a reduction to the previously
established capital loss carry-forward valuation allowance.
|
2008
|
|
|
|
|
$20.4 million ($0.06 per common share) benefit to provision
for income taxes, representing a reduction to the previously
established capital loss carry-forward valuation allowance.
|
|
|
|
$21.8 million ($.04 per common share) negative impact due
to the merger with Sky Financial completed on July 1, 2007.
|
The following table reflects the earnings impact of the
above-mentioned significant items for periods affected by this
Results of Operations discussion:
Table
4 Significant Items Influencing Earnings
Performance Comparison (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
After-tax
|
|
|
EPS
|
|
|
After-tax
|
|
|
EPS
|
|
|
After-tax
|
|
|
EPS
|
|
(Dollar amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) GAAP
|
|
$
|
312,347
|
|
|
|
|
|
|
$
|
(3,094,179
|
)
|
|
|
|
|
|
$
|
(113,806
|
)
|
|
|
|
|
Earnings per share, after-tax
|
|
|
|
|
|
$
|
0.19
|
|
|
|
|
|
|
$
|
(6.14
|
)
|
|
|
|
|
|
$
|
(0.44
|
)
|
Change from prior year $
|
|
|
|
|
|
|
6.33
|
|
|
|
|
|
|
|
(5.70
|
)
|
|
|
|
|
|
|
(0.69
|
)
|
Change from prior year %
|
|
|
|
|
|
|
N.R.
|
%
|
|
|
|
|
|
|
N.R
|
%
|
|
|
|
|
|
|
N.R.
|
%
|
N.R. Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Significant Items Favorable (Unfavorable)
Impact:
|
|
Earnings(2)
|
|
|
EPS(3)
|
|
|
Earnings(2)
|
|
|
EPS(3)
|
|
|
Earnings(2)
|
|
|
EPS(3)
|
|
|
Franklin-related loans transferred to held for sale
|
|
$
|
(75,500
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net tax benefit recognized(4)
|
|
|
38,222
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin relationship restructuring(4)
|
|
|
|
|
|
|
|
|
|
|
159,895
|
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
Net gain on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
141,024
|
|
|
|
0.18
|
|
|
|
23,542
|
|
|
|
0.04
|
|
Gain related to sale of
Visa®
stock
|
|
|
|
|
|
|
|
|
|
|
31,362
|
|
|
|
0.04
|
|
|
|
25,087
|
|
|
|
0.04
|
|
Deferred tax valuation allowance benefit(4)
|
|
|
|
|
|
|
|
|
|
|
12,847
|
|
|
|
0.02
|
|
|
|
20,357
|
|
|
|
0.06
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
(2,606,944
|
)
|
|
|
(4.89
|
)
|
|
|
|
|
|
|
|
|
FDIC special assessment
|
|
|
|
|
|
|
|
|
|
|
(23,555
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
Preferred stock conversion deemed dividend
|
|
|
|
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
Visa®
indemnification liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,995
|
|
|
|
0.03
|
|
Merger/Restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,830
|
)
|
|
|
(0.04
|
)
|
|
|
|
(1) |
|
See Significant Factors Influencing Financial Performance
discussion. |
|
(2) |
|
Pretax unless otherwise noted. |
|
(3) |
|
Based upon the annual average outstanding diluted common shares. |
|
(4) |
|
After-tax. |
Pretax,
Pre-provision Income Trends
One non-GAAP performance measurement that we believe is useful
in analyzing underlying performance trends, particularly in
times of economic stress, is pretax, pre-provision income. This
is the level of earnings adjusted to exclude the impact of:
(1) provision expense, which is excluded because its
absolute level is elevated and volatile in times of economic
stress, (2) investment securities gains/losses, which are
excluded because securities market valuations may also become
particularly volatile in times of economic stress,
(3) amortization of intangibles expense, which is excluded
because the return on tangible equity common equity is a key
measurement that we use to gauge performance trends, and
(4) certain other items identified by us (see
Significant Items above) that we believe may distort our
underlying performance trends.
34
The following table reflects pretax, pre-provision income for
the three years ended December 31, 2010:
Table
5 Pretax, Pre-provision Income (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
$
|
352,311
|
|
|
$
|
(3,678,183
|
)
|
|
$
|
(296,008
|
)
|
Add: Provision for credit losses
|
|
|
634,547
|
|
|
|
2,074,671
|
|
|
|
1,057,463
|
|
Less: Securities gains (losses)
|
|
|
(274
|
)
|
|
|
(10,249
|
)
|
|
|
(197,370
|
)
|
Add: Amortization of intangibles
|
|
|
60,478
|
|
|
|
68,307
|
|
|
|
76,894
|
|
Less: Significant Items
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
141,024
|
|
|
|
23,542
|
|
Goodwill impairment
|
|
|
|
|
|
|
(2,606,944
|
)
|
|
|
|
|
Gain related to Visa stock
|
|
|
|
|
|
|
31,362
|
|
|
|
25,087
|
|
Visa indemnification liability
|
|
|
|
|
|
|
|
|
|
|
16,995
|
|
FDIC special assessment
|
|
|
|
|
|
|
(23,555
|
)
|
|
|
|
|
Merger/restructuring costs
|
|
|
|
|
|
|
|
|
|
|
(21,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax, pre-provision income
|
|
$
|
1,047,610
|
|
|
$
|
933,157
|
|
|
$
|
991,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in total pretax, pre-provision income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
$
|
114,453
|
|
|
$
|
(58,768
|
)
|
|
|
|
|
Percent
|
|
|
12
|
%
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
(1) |
|
Pretax, pre-provision income is a non-GAAP financial measure.
Any ratio utilizing this financial measure is also non-GAAP.
This financial measure has been included as it is considered to
be an important metric with which to analyze and evaluate our
results of operations and financial strength. Other companies
may calculate this financial measure differently. |
As discussed in more detail in the sections that follow, the
increase from 2009 primarily reflected improved revenue,
including higher net interest income, partially offset by higher
noninterest expense, including personnel costs and marketing.
Net
Interest Income / Average Balance Sheet
Our primary source of revenue is net interest income, which is
the difference between interest income from earning assets
(primarily loans, securities, and direct financing leases), and
interest expense of funding sources (primarily interest-bearing
deposits and borrowings). Earning asset balances and related
funding sources, as well as changes in the levels of interest
rates, impact net interest income. The difference between the
average yield on earning assets and the average rate paid for
interest-bearing liabilities is the net interest spread.
Noninterest-bearing sources of funds, such as demand deposits
and shareholders equity, also support earning assets. The
impact of the noninterest-bearing sources of funds, often
referred to as free funds, is captured in the net
interest margin, which is calculated as net interest income
divided by average earning assets. Both the net interest margin
and net interest spread are presented on a fully-taxable
equivalent basis, which means that tax-free interest income has
been adjusted to a pretax equivalent income, assuming a 35% tax
rate.
35
The following table shows changes in fully-taxable equivalent
interest income, interest expense, and net interest income due
to volume and rate variances for major categories of earning
assets and interest-bearing liabilities.
Table
6 Change in Net Interest Income Due to Changes in
Average Volume and Interest Rates (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Increase (Decrease) from
|
|
|
Increase (Decrease) from
|
|
|
|
Previous Year Due to
|
|
|
Previous Year Due to
|
|
|
|
|
|
|
Yield/
|
|
|
|
|
|
|
|
|
Yield/
|
|
|
|
|
Fully-taxable equivalent basis(2)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and direct financing leases
|
|
$
|
(71.3
|
)
|
|
$
|
(9.6
|
)
|
|
$
|
(80.9
|
)
|
|
$
|
(130.2
|
)
|
|
$
|
(371.3
|
)
|
|
$
|
(501.5
|
)
|
Investment securities
|
|
|
96.8
|
|
|
|
(103.2
|
)
|
|
|
(6.4
|
)
|
|
|
84.4
|
|
|
|
(86.3
|
)
|
|
|
(1.9
|
)
|
Other earning assets
|
|
|
(3.8
|
)
|
|
|
(2.2
|
)
|
|
|
(6.0
|
)
|
|
|
(42.1
|
)
|
|
|
(23.4
|
)
|
|
|
(65.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income from earning assets
|
|
|
21.7
|
|
|
|
(115.0
|
)
|
|
|
(93.3
|
)
|
|
|
(87.9
|
)
|
|
|
(481.0
|
)
|
|
|
(568.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10.9
|
|
|
|
(246.0
|
)
|
|
|
(235.1
|
)
|
|
|
16.5
|
|
|
|
(274.1
|
)
|
|
|
(257.6
|
)
|
Short-term borrowings
|
|
|
1.1
|
|
|
|
(0.5
|
)
|
|
|
0.6
|
|
|
|
(16.6
|
)
|
|
|
(23.3
|
)
|
|
|
(39.9
|
)
|
Federal Home Loan Bank advances
|
|
|
(15.4
|
)
|
|
|
5.6
|
|
|
|
(9.8
|
)
|
|
|
(45.3
|
)
|
|
|
(49.6
|
)
|
|
|
(94.9
|
)
|
Subordinated notes and other long-term debt, including capital
securities
|
|
|
(14.3
|
)
|
|
|
(28.8
|
)
|
|
|
(43.1
|
)
|
|
|
9.8
|
|
|
|
(70.1
|
)
|
|
|
(60.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense of interest-bearing liabilities
|
|
|
(17.7
|
)
|
|
|
(269.7
|
)
|
|
|
(287.4
|
)
|
|
|
(35.6
|
)
|
|
|
(417.1
|
)
|
|
|
(452.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
39.4
|
|
|
$
|
154.7
|
|
|
$
|
194.1
|
|
|
$
|
(52.3
|
)
|
|
$
|
(63.9
|
)
|
|
$
|
(116.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The change in interest rates due to both rate and volume has
been allocated between the factors in proportion to the
relationship of the absolute dollar amounts of the change in
each. |
|
(2) |
|
Calculated assuming a 35% tax rate. |
2010
versus 2009
Fully-taxable equivalent net interest income for 2010 increased
$194.1 million, or 14%, from 2009. This reflected the
favorable impact of a $1.3 billion, or 3%, increase in
average earning assets, due to a $2.9 billion, or 45%,
increase in average total investment securities, which was
partially offset by a $1.4 billion, or 4%, decrease in
average total loans and leases. Also contributing to the
increase in net interest income was a 33 basis point
increase in the fully-taxable net interest margin to 3.44% from
3.11% in 2009.
36
The following table details the change in our reported loans and
deposits:
Table
7 Average Loans/Leases and Deposits 2010
vs. 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans/Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
12,431
|
|
|
$
|
13,136
|
|
|
$
|
(705
|
)
|
|
|
(5
|
)%
|
Commercial real estate
|
|
|
7,225
|
|
|
|
9,156
|
|
|
|
(1,931
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
19,656
|
|
|
|
22,292
|
|
|
|
(2,636
|
)
|
|
|
(12
|
)
|
Automobile loans and leases
|
|
|
4,890
|
|
|
|
3,546
|
|
|
|
1,344
|
|
|
|
38
|
|
Home equity
|
|
|
7,590
|
|
|
|
7,590
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
4,476
|
|
|
|
4,542
|
|
|
|
(66
|
)
|
|
|
(1
|
)
|
Other consumer
|
|
|
661
|
|
|
|
722
|
|
|
|
(61
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
17,617
|
|
|
|
16,400
|
|
|
|
1,217
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
|
|
$
|
37,273
|
|
|
$
|
38,692
|
|
|
$
|
(1,419
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits noninterest-bearing
|
|
$
|
6,859
|
|
|
$
|
6,057
|
|
|
$
|
802
|
|
|
|
13
|
%
|
Demand deposits interest-bearing
|
|
|
5,579
|
|
|
|
4,816
|
|
|
|
763
|
|
|
|
16
|
|
Money market deposits
|
|
|
11,743
|
|
|
|
7,216
|
|
|
|
4,527
|
|
|
|
63
|
|
Savings and other domestic deposits
|
|
|
4,642
|
|
|
|
4,881
|
|
|
|
(239
|
)
|
|
|
(5
|
)
|
Core certificates of deposit
|
|
|
9,188
|
|
|
|
11,944
|
|
|
|
(2,756
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits
|
|
|
38,011
|
|
|
|
34,914
|
|
|
|
3,097
|
|
|
|
9
|
|
Other deposits
|
|
|
2,727
|
|
|
|
4,475
|
|
|
|
(1,748
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
40,738
|
|
|
$
|
39,389
|
|
|
$
|
1,349
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $1.4 billion, or 4%, decrease in average total loans
and leases primarily reflected:
|
|
|
|
|
$2.6 billion, or 12%, 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 NCOs. The decline in average C&I
loans reflected a general decrease in borrowing as evidenced by
a decline in
line-of-credit
utilization, NCO activity, and the reclassification in the 2010
first quarter of variable rate demand notes to municipal
securities.
|
Partially offset by:
|
|
|
|
|
$1.2 billion, or 7%, increase in average total consumer
loans. This growth reflected a $1.3 billion, or 38%,
increase in average automobile loans and leases. On
January 1, 2010, we adopted the new accounting standard
ASC 810 Consolidation, resulting in the
consolidation of an off balance sheet securitization and
increasing our automobile loan portfolio by $0.5 billion at
December 31, 2010. Underlying growth in automobile loans
continued to be strong, reflecting a significant increase in
loan originations in 2010 as compared to 2009 in all of our
markets. Our recent expansion into Eastern Pennsylvania and the
five New England states also began to have a positive impact on
our volume.
|
Total average investment securities increased $2.9 billion,
or 45%, reflecting the deployment of the cash from core deposit
growth and loan runoff over this period, as well as the proceeds
from 2009 capital actions.
37
The $1.3 billion, or 3%, increase in average total deposits
reflected:
|
|
|
|
|
$3.1 billion, or 9%, growth in total core deposits. The
primary driver of this growth was a 63% increase in average
money market deposits. Partially offsetting this growth was a
23% decline in average core certificates of deposit.
|
Partially offset by:
|
|
|
|
|
$1.7 billion, or 39%, 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.
|
2009
versus 2008
Fully-taxable equivalent net interest income for 2009 decreased
$116.2 million, or 7%, from 2008. This reflected the
unfavorable impact of a $1.7 billion, or 4%, decrease in
average earning assets, which included a $2.3 billion
decrease in average loans and leases. Also contributing to the
decline in net interest income was a 14 basis point decline
in the fully-taxable net interest margin to 3.11%, primarily due
to the unfavorable impact of our stronger liquidity position and
an increase in NALs.
The following table details the change in our reported loans and
deposits:
Table
8 Average Loans/Leases and Deposits 2009
vs. 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
Percent
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans/Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
13,136
|
|
|
$
|
13,588
|
|
|
$
|
(452
|
)
|
|
|
(3
|
)%
|
Commercial real estate
|
|
|
9,156
|
|
|
|
9,732
|
|
|
|
(576
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
22,292
|
|
|
|
23,320
|
|
|
|
(1,028
|
)
|
|
|
(4
|
)
|
Automobile loans and leases
|
|
|
3,546
|
|
|
|
4,527
|
|
|
|
(981
|
)
|
|
|
(22
|
)
|
Home equity
|
|
|
7,590
|
|
|
|
7,404
|
|
|
|
186
|
|
|
|
3
|
|
Residential mortgage
|
|
|
4,542
|
|
|
|
5,018
|
|
|
|
(476
|
)
|
|
|
(9
|
)
|
Other consumer
|
|
|
722
|
|
|
|
691
|
|
|
|
31
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
16,400
|
|
|
|
17,640
|
|
|
|
(1,240
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
|
|
$
|
38,692
|
|
|
$
|
40,960
|
|
|
$
|
(2,268
|
)
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits noninterest-bearing
|
|
$
|
6,057
|
|
|
$
|
5,095
|
|
|
$
|
962
|
|
|
|
19
|
%
|
Demand deposits interest-bearing
|
|
|
4,816
|
|
|
|
4,003
|
|
|
|
813
|
|
|
|
20
|
|
Money market deposits
|
|
|
7,216
|
|
|
|
6,093
|
|
|
|
1,123
|
|
|
|
18
|
|
Savings and other domestic deposits
|
|
|
4,881
|
|
|
|
5,147
|
|
|
|
(266
|
)
|
|
|
(5
|
)
|
Core certificates of deposit
|
|
|
11,944
|
|
|
|
11,637
|
|
|
|
307
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits
|
|
|
34,914
|
|
|
|
31,975
|
|
|
|
2,939
|
|
|
|
9
|
|
Other deposits
|
|
|
4,475
|
|
|
|
5,861
|
|
|
|
(1,386
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
39,389
|
|
|
$
|
37,836
|
|
|
$
|
1,553
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $2.3 billion, or 6%, decrease in average total loans
and leases primarily reflected:
|
|
|
|
|
$1.0 billion, or 4%, 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 NCOs and the 2009 reclassifications of
CRE loans to C&I loans (see Commercial Credit
section). The decline in average C&I loans reflected
paydowns, the Franklin restructuring, and a
|
38
|
|
|
|
|
reduction in the
line-of-credit
utilization in our automobile dealer floorplan exposure,
partially offset by the 2009 reclassifications.
|
|
|
|
|
|
$1.0 billion, or 22%, decline in average automobile loans
and leases due to the 2009 securitization of $1.0 billion
of automobile loans, as well as the continued runoff of the
automobile lease portfolio.
|
|
|
|
$0.5 billion, or 9%, 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.
|
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.
|
Total average investment securities increased $1.7 billion,
or 38%, as the cash proceeds from core deposit growth and the
capital actions initiated during 2009 were deployed. This
increase was partially offset by a $0.9 billion, or 87%,
decline in trading account securities due to the reduction in
the use of these securities to hedge MSRs.
The $1.6 billion, or 4%, increase in average total deposits
reflected:
|
|
|
|
|
$2.9 billion, or 9%, growth in total core deposits,
primarily reflecting increased sales efforts and initiatives for
deposit accounts.
|
Partially offset by:
|
|
|
|
|
$1.4 billion, or 24%, 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.
|
39
Table
9 Consolidated Average Balance Sheet and Net
Interest Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
|
|
|
|
Change from 2009
|
|
|
|
|
|
Change from 2008
|
|
|
|
|
Fully-taxable equivalent basis(1)
|
|
2010
|
|
|
Amount
|
|
|
Percent
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
2008
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
Interest-bearing deposits in banks
|
|
$
|
289
|
|
|
$
|
(72
|
)
|
|
|
(20
|
)%
|
|
$
|
361
|
|
|
$
|
58
|
|
|
|
19
|
%
|
|
$
|
303
|
|
Trading account securities
|
|
|
158
|
|
|
|
13
|
|
|
|
9
|
|
|
|
145
|
|
|
|
(945
|
)
|
|
|
(87
|
)
|
|
|
1,090
|
|
Federal funds sold and securities purchased under resale
agreement
|
|
|
|
|
|
|
(10
|
)
|
|
|
(100
|
)
|
|
|
10
|
|
|
|
(425
|
)
|
|
|
(98
|
)
|
|
|
435
|
|
Loans held for sale
|
|
|
529
|
|
|
|
(53
|
)
|
|
|
(9
|
)
|
|
|
582
|
|
|
|
166
|
|
|
|
40
|
|
|
|
416
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
8,760
|
|
|
|
2,659
|
|
|
|
44
|
|
|
|
6,101
|
|
|
|
2,223
|
|
|
|
57
|
|
|
|
3,878
|
|
Tax-exempt
|
|
|
411
|
|
|
|
197
|
|
|
|
92
|
|
|
|
214
|
|
|
|
(491
|
)
|
|
|
(70
|
)
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
9,171
|
|
|
|
2,856
|
|
|
|
45
|
|
|
|
6,315
|
|
|
|
1,732
|
|
|
|
38
|
|
|
|
4,583
|
|
Loans and leases:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
12,431
|
|
|
|
(705
|
)
|
|
|
(5
|
)
|
|
|
13,136
|
|
|
|
(452
|
)
|
|
|
(3
|
)
|
|
|
13,588
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
1,096
|
|
|
|
(762
|
)
|
|
|
(41
|
)
|
|
|
1,858
|
|
|
|
(203
|
)
|
|
|
(10
|
)
|
|
|
2,061
|
|
Commercial
|
|
|
6,129
|
|
|
|
(1,169
|
)
|
|
|
(16
|
)
|
|
|
7,298
|
|
|
|
(373
|
)
|
|
|
(5
|
)
|
|
|
7,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
7,225
|
|
|
|
(1,931
|
)
|
|
|
(21
|
)
|
|
|
9,156
|
|
|
|
(576
|
)
|
|
|
(6
|
)
|
|
|
9,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
19,656
|
|
|
|
(2,636
|
)
|
|
|
(12
|
)
|
|
|
22,292
|
|
|
|
(1,028
|
)
|
|
|
(4
|
)
|
|
|
23,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases
|
|
|
4,890
|
|
|
|
1,344
|
|
|
|
38
|
|
|
|
3,546
|
|
|
|
(981
|
)
|
|
|
(22
|
)
|
|
|
4,527
|
|
Home equity
|
|
|
7,590
|
|
|
|
|
|
|
|
|
|
|
|
7,590
|
|
|
|
186
|
|
|
|
3
|
|
|
|
7,404
|
|
Residential mortgage
|
|
|
4,476
|
|
|
|
(66
|
)
|
|
|
(1
|
)
|
|
|
4,542
|
|
|
|
(476
|
)
|
|
|
(9
|
)
|
|
|
5,018
|
|
Other loans
|
|
|
661
|
|
|
|
(61
|
)
|
|
|
(8
|
)
|
|
|
722
|
|
|
|
31
|
|
|
|
4
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
17,617
|
|
|
|
1,217
|
|
|
|
7
|
|
|
|
16,400
|
|
|
|
(1,240
|
)
|
|
|
(7
|
)
|
|
|
17,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
|
|
|
37,273
|
|
|
|
(1,419
|
)
|
|
|
(4
|
)
|
|
|
38,692
|
|
|
|
(2,268
|
)
|
|
|
(6
|
)
|
|
|
40,960
|
|
Allowance for loan and lease losses
|
|
|
(1,430
|
)
|
|
|
(474
|
)
|
|
|
50
|
|
|
|
(956
|
)
|
|
|
(261
|
)
|
|
|
38
|
|
|
|
(695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases
|
|
|
35,843
|
|
|
|
(1,893
|
)
|
|
|
(5
|
)
|
|
|
37,736
|
|
|
|
(2,529
|
)
|
|
|
(6
|
)
|
|
|
40,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
47,420
|
|
|
|
1,315
|
|
|
|
3
|
|
|
|
46,105
|
|
|
|
(1,682
|
)
|
|
|
(4
|
)
|
|
|
47,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
1,518
|
|
|
|
(614
|
)
|
|
|
(29
|
)
|
|
|
2,132
|
|
|
|
1,174
|
|
|
|
123
|
|
|
|
958
|
|
Intangible assets
|
|
|
702
|
|
|
|
(700
|
)
|
|
|
(50
|
)
|
|
|
1,402
|
|
|
|
(2,044
|
)
|
|
|
(59
|
)
|
|
|
3,446
|
|
All other assets
|
|
|
4,364
|
|
|
|
825
|
|
|
|
23
|
|
|
|
3,539
|
|
|
|
294
|
|
|
|
9
|
|
|
|
3,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
52,574
|
|
|
$
|
134
|
|
|
|
|
%
|
|
$
|
52,440
|
|
|
$
|
(2,481
|
)
|
|
|
(5
|
)%
|
|
$
|
54,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits noninterest-bearing
|
|
$
|
6,859
|
|
|
$
|
802
|
|
|
|
13
|
%
|
|
$
|
6,057
|
|
|
$
|
962
|
|
|
|
19
|
%
|
|
$
|
5,095
|
|
Demand deposits interest-bearing
|
|
|
5,579
|
|
|
|
763
|
|
|
|
16
|
|
|
|
4,816
|
|
|
|
813
|
|
|
|
20
|
|
|
|
4,003
|
|
Money market deposits
|
|
|
11,743
|
|
|
|
4,527
|
|
|
|
63
|
|
|
|
7,216
|
|
|
|
1,123
|
|
|
|
18
|
|
|
|
6,093
|
|
Savings and other domestic deposits
|
|
|
4,642
|
|
|
|
(239
|
)
|
|
|
(5
|
)
|
|
|
4,881
|
|
|
|
(266
|
)
|
|
|
(5
|
)
|
|
|
5,147
|
|
Core certificates of deposit
|
|
|
9,188
|
|
|
|
(2,756
|
)
|
|
|
(23
|
)
|
|
|
11,944
|
|
|
|
307
|
|
|
|
3
|
|
|
|
11,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits
|
|
|
38,011
|
|
|
|
3,097
|
|
|
|
9
|
|
|
|
34,914
|
|
|
|
2,939
|
|
|
|
9
|
|
|
|
31,975
|
|
Other domestic time deposits of $250,000 or more
|
|
|
697
|
|
|
|
(144
|
)
|
|
|
(17
|
)
|
|
|
841
|
|
|
|
(802
|
)
|
|
|
(49
|
)
|
|
|
1,643
|
|
Brokered time deposits and negotiable CDs
|
|
|
1,603
|
|
|
|
(1,544
|
)
|
|
|
(49
|
)
|
|
|
3,147
|
|
|
|
(96
|
)
|
|
|
(3
|
)
|
|
|
3,243
|
|
Deposits in foreign offices
|
|
|
427
|
|
|
|
(60
|
)
|
|
|
(12
|
)
|
|
|
487
|
|
|
|
(488
|
)
|
|
|
(50
|
)
|
|
|
975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
40,738
|
|
|
|
1,349
|
|
|
|
3
|
|
|
|
39,389
|
|
|
|
1,553
|
|
|
|
4
|
|
|
|
37,836
|
|
Short-term borrowings
|
|
|
1,446
|
|
|
|
513
|
|
|
|
55
|
|
|
|
933
|
|
|
|
(1,441
|
)
|
|
|
(61
|
)
|
|
|
2,374
|
|
Federal Home Loan Bank advances
|
|
|
173
|
|
|
|
(1,063
|
)
|
|
|
(86
|
)
|
|
|
1,236
|
|
|
|
(2,045
|
)
|
|
|
(62
|
)
|
|
|
3,281
|
|
Subordinated notes and other long-term debt
|
|
|
3,780
|
|
|
|
(541
|
)
|
|
|
(13
|
)
|
|
|
4,321
|
|
|
|
227
|
|
|
|
6
|
|
|
|
4,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
39,278
|
|
|
|
(544
|
)
|
|
|
(1
|
)
|
|
|
39,822
|
|
|
|
(2,668
|
)
|
|
|
(6
|
)
|
|
|
42,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other liabilities
|
|
|
956
|
|
|
|
182
|
|
|
|
24
|
|
|
|
774
|
|
|
|
(166
|
)
|
|
|
(18
|
)
|
|
|
940
|
|
Shareholders equity
|
|
|
5,481
|
|
|
|
(306
|
)
|
|
|
(5
|
)
|
|
|
5,787
|
|
|
|
(609
|
)
|
|
|
(10
|
)
|
|
|
6,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
52,574
|
|
|
$
|
134
|
|
|
|
|
%
|
|
$
|
52,440
|
|
|
$
|
(2,481
|
)
|
|
|
(5
|
)%
|
|
$
|
54,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Table
9 Consolidated Average Balance Sheet and Net
Interest Margin Analysis (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income / Expense
|
|
|
Average Rate(2)
|
|
Fully-taxable equivalent basis(1)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
Interest-bearing deposits in banks
|
|
$
|
0.8
|
|
|
$
|
1.1
|
|
|
$
|
7.7
|
|
|
|
0.28
|
%
|
|
|
0.32
|
%
|
|
|
2.53
|
%
|
Trading account securities
|
|
|
2.9
|
|
|
|
4.3
|
|
|
|
57.5
|
|
|
|
1.82
|
|
|
|
2.99
|
|
|
|
5.28
|
|
Federal funds sold and securities purchased under resale
agreement
|
|
|
|
|
|
|
0.1
|
|
|
|
10.7
|
|
|
|
|
|
|
|
0.13
|
|
|
|
2.46
|
|
Loans held for sale
|
|
|
25.7
|
|
|
|
30.0
|
|
|
|
25.0
|
|
|
|
4.85
|
|
|
|
5.15
|
|
|
|
6.01
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
239.1
|
|
|
|
250.0
|
|
|
|
217.9
|
|
|
|
2.73
|
|
|
|
4.10
|
|
|
|
5.62
|
|
Tax-exempt
|
|
|
18.8
|
|
|
|
14.2
|
|
|
|
48.2
|
|
|
|
4.56
|
|
|
|
6.68
|
|
|
|
6.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
257.9
|
|
|
|
264.2
|
|
|
|
266.1
|
|
|
|
2.81
|
|
|
|
4.18
|
|
|
|
5.81
|
|
Loans and leases:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
660.6
|
|
|
|
664.6
|
|
|
|
770.2
|
|
|
|
5.31
|
|
|
|
5.06
|
|
|
|
5.67
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
30.6
|
|
|
|
50.8
|
|
|
|
104.2
|
|
|
|
2.79
|
|
|
|
2.74
|
|
|
|
5.05
|
|
Commercial
|
|
|
234.9
|
|
|
|
262.3
|
|
|
|
430.1
|
|
|
|
3.83
|
|
|
|
3.59
|
|
|
|
5.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
265.5
|
|
|
|
313.1
|
|
|
|
534.3
|
|
|
|
3.67
|
|
|
|
3.42
|
|
|
|
5.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
926.1
|
|
|
|
977.7
|
|
|
|
1,304.5
|
|
|
|
4.71
|
|
|
|
4.39
|
|
|
|
5.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases
|
|
|
295.2
|
|
|
|
252.6
|
|
|
|
311.5
|
|
|
|
6.04
|
|
|
|
7.12
|
|
|
|
6.88
|
|
Home equity
|
|
|
383.7
|
|
|
|
426.2
|
|
|
|
475.2
|
|
|
|
5.06
|
|
|
|
5.62
|
|
|
|
6.42
|
|
Residential mortgage
|
|
|
216.8
|
|
|
|
237.4
|
|
|
|
292.4
|
|
|
|
4.84
|
|
|
|
5.23
|
|
|
|
5.83
|
|
Other loans
|
|
|
47.5
|
|
|
|
56.1
|
|
|
|
68.0
|
|
|
|
7.18
|
|
|
|
7.78
|
|
|
|
9.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
943.2
|
|
|
|
972.3
|
|
|
|
1,147.1
|
|
|
|
5.35
|
|
|
|
5.93
|
|
|
|
6.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
|
|
|
1,869.3
|
|
|
|
1,950.0
|
|
|
|
2,451.6
|
|
|
|
5.02
|
|
|
|
5.04
|
|
|
|
5.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
$
|
2,156.6
|
|
|
$
|
2,249.7
|
|
|
$
|
2,818.6
|
|
|
|
4.55
|
%
|
|
|
4.88
|
%
|
|
|
5.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits noninterest-bearing
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Demand deposits interest-bearing
|
|
|
10.4
|
|
|
|
9.5
|
|
|
|
22.2
|
|
|
|
0.19
|
|
|
|
0.20
|
|
|
|
0.55
|
|
Money market deposits
|
|
|
103.5
|
|
|
|
83.6
|
|
|
|
117.5
|
|
|
|
0.88
|
|
|
|
1.16
|
|
|
|
1.93
|
|
Savings and other domestic deposits
|
|
|
48.2
|
|
|
|
66.8
|
|
|
|
100.3
|
|
|
|
1.04
|
|
|
|
1.37
|
|
|
|
1.88
|
|
Core certificates of deposit
|
|
|
231.6
|
|
|
|
409.4
|
|
|
|
495.7
|
|
|
|
2.52
|
|
|
|
3.43
|
|
|
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits
|
|
|
393.7
|
|
|
|
569.3
|
|
|
|
735.7
|
|
|
|
1.26
|
|
|
|
1.97
|
|
|
|
2.73
|
|
Other domestic time deposits of $250,000 or more
|
|
|
9.3
|
|
|
|
20.8
|
|
|
|
62.1
|
|
|
|
1.32
|
|
|
|
2.48
|
|
|
|
3.76
|
|
Brokered time deposits and negotiable CDs
|
|
|
35.4
|
|
|
|
83.1
|
|
|
|
118.8
|
|
|
|
2.21
|
|
|
|
2.64
|
|
|
|
3.66
|
|
Deposits in foreign offices
|
|
|
0.8
|
|
|
|
0.9
|
|
|
|
15.2
|
|
|
|
0.20
|
|
|
|
0.19
|
|
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
439.2
|
|
|
|
674.1
|
|
|
|
931.8
|
|
|
|
1.30
|
|
|
|
2.02
|
|
|
|
2.85
|
|
Short-term borrowings
|
|
|
3.0
|
|
|
|
2.4
|
|
|
|
42.3
|
|
|
|
0.21
|
|
|
|
0.25
|
|
|
|
1.78
|
|
Federal Home Loan Bank advances
|
|
|
3.1
|
|
|
|
12.9
|
|
|
|
107.8
|
|
|
|
1.80
|
|
|
|
1.04
|
|
|
|
3.29
|
|
Subordinated notes and other long-term debt
|
|
|
81.4
|
|
|
|
124.5
|
|
|
|
184.8
|
|
|
|
2.15
|
|
|
|
2.88
|
|
|
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
526.7
|
|
|
|
813.9
|
|
|
|
1,266.7
|
|
|
|
1.34
|
|
|
|
2.04
|
|
|
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,629.9
|
|
|
$
|
1,435.8
|
|
|
$
|
1,551.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.21
|
|
|
|
2.84
|
|
|
|
2.92
|
|
Impact of noninterest-bearing funds on margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.23
|
|
|
|
0.27
|
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.44
|
%
|
|
|
3.11
|
%
|
|
|
3.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
FTE yields are calculated assuming a 35% tax rate. |
|
(2) |
|
Loan and lease and deposit average rates include impact of
applicable derivatives, non-deferrable fees, and amortized fees. |
|
(3) |
|
For purposes of this analysis, nonaccrual loans are reflected in
the average balances of loans. |
41
Provision
for Credit Losses
(This section should be read in conjunction with Significant
Item 3, 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 provision for credit losses in 2010 was $634.5 million,
down $1,440.1 million from 2009. The decrease from 2009
primarily reflected the improved credit quality in our loan
portfolios including lower NCOs, NALs, and NPAs.
The provision for credit losses in 2009 was
$2,074.7 million, up $1,017.2 million from 2008, and
exceeded NCOs by $598.1 million. The increase in 2009 from
2008 primarily reflected the continued economic weakness across
all our regions and all our loan portfolios, although our
commercial loan portfolios were the most affected.
The following table details the Franklin-related impact to the
provision for credit losses for each of the past four years.
Table
10 Provision for Credit Losses
Franklin-Related Impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2007
|
|
|
2008
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
|
|
$
|
87.0
|
|
|
$
|
(14.1
|
)
|
|
$
|
438.0
|
|
|
$
|
410.8
|
|
Non-Franklin
|
|
|
547.5
|
|
|
|
2,088.8
|
|
|
|
619.5
|
|
|
|
232.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
634.5
|
|
|
$
|
2,074.7
|
|
|
$
|
1,057.5
|
|
|
$
|
643.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs (recoveries)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
|
|
$
|
87.0
|
|
|
$
|
115.9
|
|
|
$
|
423.3
|
|
|
$
|
308.5
|
|
Non-Franklin
|
|
|
787.5
|
|
|
|
1,360.7
|
|
|
|
334.8
|
|
|
|
169.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
874.5
|
|
|
$
|
1,476.6
|
|
|
$
|
758.1
|
|
|
$
|
477.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses in excess of net charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin
|
|
$
|
|
|
|
$
|
(130.0
|
)
|
|
$
|
14.7
|
|
|
$
|
102.3
|
|
Non-Franklin
|
|
|
(240.0
|
)
|
|
|
728.1
|
|
|
|
284.8
|
|
|
|
63.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(240.0
|
)
|
|
$
|
598.1
|
|
|
$
|
299.4
|
|
|
$
|
166.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Noninterest
Income
(This section should be read in conjunction with Significant
Item 6.)
The following table reflects noninterest income for the three
years ended December 31, 2010:
Table
11 Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
Change from 2009
|
|
|
|
|
|
Change from 2008
|
|
|
|
|
|
|
2010
|
|
|
Amount
|
|
|
Percent
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
2008
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
267,015
|
|
|
$
|
(35,784
|
)
|
|
|
(12
|
)%
|
|
$
|
302,799
|
|
|
$
|
(5,254
|
)
|
|
|
(2
|
)%
|
|
$
|
308,053
|
|
Mortgage banking income
|
|
|
175,782
|
|
|
|
63,484
|
|
|
|
57
|
|
|
|
112,298
|
|
|
|
103,304
|
|
|
|
1,149
|
|
|
|
8,994
|
|
Trust services
|
|
|
112,555
|
|
|
|
8,916
|
|
|
|
9
|
|
|
|
103,639
|
|
|
|
(22,341
|
)
|
|
|
(18
|
)
|
|
|
125,980
|
|
Electronic banking
|
|
|
110,234
|
|
|
|
10,083
|
|
|
|
10
|
|
|
|
100,151
|
|
|
|
9,884
|
|
|
|
11
|
|
|
|
90,267
|
|
Insurance income
|
|
|
76,413
|
|
|
|
3,087
|
|
|
|
4
|
|
|
|
73,326
|
|
|
|
702
|
|
|
|
1
|
|
|
|
72,624
|
|
Brokerage income
|
|
|
68,855
|
|
|
|
4,012
|
|
|
|
6
|
|
|
|
64,843
|
|
|
|
(329
|
)
|
|
|
(1
|
)
|
|
|
65,172
|
|
Bank owned life insurance income
|
|
|
61,066
|
|
|
|
6,194
|
|
|
|
11
|
|
|
|
54,872
|
|
|
|
96
|
|
|
|
|
|
|
|
54,776
|
|
Automobile operating lease income
|
|
|
45,964
|
|
|
|
(5,846
|
)
|
|
|
(11
|
)
|
|
|
51,810
|
|
|
|
11,959
|
|
|
|
30
|
|
|
|
39,851
|
|
Securities losses
|
|
|
(274
|
)
|
|
|
9,975
|
|
|
|
(97
|
)
|
|
|
(10,249
|
)
|
|
|
187,121
|
|
|
|
(95
|
)
|
|
|
(197,370
|
)
|
Other income
|
|
|
124,248
|
|
|
|
(27,907
|
)
|
|
|
(18
|
)
|
|
|
152,155
|
|
|
|
13,364
|
|
|
|
10
|
|
|
|
138,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
1,041,858
|
|
|
$
|
36,214
|
|
|
|
4
|
%
|
|
$
|
1,005,644
|
|
|
$
|
298,506
|
|
|
|
42
|
%
|
|
$
|
707,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
The following table details mortgage banking income and the net
impact of MSR hedging activity for the three years ended
December 31, 2010:
Table
12 Mortgage Banking Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
Change from 2009
|
|
|
|
|
|
Change from 2008
|
|
|
|
|
|
|
2010
|
|
|
Amount
|
|
|
Percent
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
2008
|
|
(Dollar amounts in thousands, unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Banking Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and secondary marketing
|
|
$
|
117,440
|
|
|
$
|
22,729
|
|
|
|
24
|
%
|
|
$
|
94,711
|
|
|
$
|
57,454
|
|
|
|
154
|
%
|
|
$
|
37,257
|
|
Servicing fees
|
|
|
48,123
|
|
|
|
(371
|
)
|
|
|
(1
|
)
|
|
|
48,494
|
|
|
|
2,936
|
|
|
|
6
|
|
|
|
45,558
|
|
Amortization of capitalized servicing(1)
|
|
|
(47,165
|
)
|
|
|
406
|
|
|
|
(1
|
)
|
|
|
(47,571
|
)
|
|
|
(20,937
|
)
|
|
|
79
|
|
|
|
(26,634
|
)
|
Other mortgage banking income
|
|
|
16,629
|
|
|
|
(6,731
|
)
|
|
|
(29
|
)
|
|
|
23,360
|
|
|
|
6,592
|
|
|
|
39
|
|
|
|
16,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
135,027
|
|
|
|
16,033
|
|
|
|
13
|
|
|
|
118,994
|
|
|
|
46,045
|
|
|
|
63
|
|
|
|
72,949
|
|
MSR valuation adjustment(1)
|
|
|
(12,721
|
)
|
|
|
(47,026
|
)
|
|
|
(137
|
)
|
|
|
34,305
|
|
|
|
86,973
|
|
|
|
N.R.
|
|
|
|
(52,668
|
)
|
Net trading gains (losses) related to MSR hedging
|
|
|
53,476
|
|
|
|
94,477
|
|
|
|
N.R.
|
|
|
|
(41,001
|
)
|
|
|
(29,714
|
)
|
|
|
263
|
|
|
|
(11,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage banking income
|
|
$
|
175,782
|
|
|
$
|
63,484
|
|
|
|
57
|
%
|
|
$
|
112,298
|
|
|
$
|
103,304
|
|
|
|
1,149
|
%
|
|
$
|
8,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage originations (in millions)
|
|
$
|
5,476
|
|
|
$
|
214
|
|
|
|
4
|
%
|
|
$
|
5,262
|
|
|
$
|
1,489
|
|
|
|
39
|
%
|
|
$
|
3,773
|
|
Average trading account securities used to hedge MSRs (in
millions)
|
|
|
64
|
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
70
|
|
|
|
(961
|
)
|
|
|
(93
|
)
|
|
|
1,031
|
|
Capitalized MSRs(2)
|
|
|
196,194
|
|
|
|
(18,398
|
)
|
|
|
(9
|
)
|
|
|
214,592
|
|
|
|
47,154
|
|
|
|
28
|
|
|
|
167,438
|
|
Total mortgages serviced for others (in millions)(2)
|
|
|
15,933
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
16,010
|
|
|
|
256
|
|
|
|
2
|
|
|
|
15,754
|
|
MSR % of investor servicing portfolio
|
|
|
1.23
|
%
|
|
|
(0.11
|
)
|
|
|
(8
|
)%
|
|
|
1.34
|
%
|
|
|
0.28
|
|
|
|
26
|
%
|
|
|
1.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Impact of MSR Hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment(1)
|
|
$
|
(12,721
|
)
|
|
$
|
(47,026
|
)
|
|
|
N.R.
|
%
|
|
$
|
34,305
|
|
|
$
|
86,973
|
|
|
|
N.R.
|
%
|
|
$
|
(52,668
|
)
|
Net trading gains (losses) related to MSR hedging
|
|
|
53,476
|
|
|
|
94,477
|
|
|
|
N.R.
|
|
|
|
(41,001
|
)
|
|
|
(29,714
|
)
|
|
|
263
|
|
|
|
(11,287
|
)
|
Net interest income related to MSR hedging
|
|
|
972
|
|
|
|
(2,027
|
)
|
|
|
(68
|
)
|
|
|
2,999
|
|
|
|
(30,140
|
)
|
|
|
(91
|
)
|
|
|
33,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) of MSR hedging
|
|
$
|
41,727
|
|
|
$
|
45,424
|
|
|
|
N.R.
|
%
|
|
$
|
(3,697
|
)
|
|
$
|
27,119
|
|
|
|
N.R.
|
%
|
|
$
|
(30,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.R. Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
|
|
|
(1) |
|
The change in fair value for the period represents the MSR
valuation adjustment, net of amortization of capitalized
servicing. |
44
2010
versus 2009
Noninterest income increased $36.2 million, or 4%, from the
prior year, primarily reflecting:
|
|
|
|
|
$63.5 million, or 57%, increase in mortgage banking income.
Net MSR hedging-related activities contributed a
$45.4 million net increase. We use an independent outside
third party to monitor our MSR asset valuation and assumptions.
During 2010, interest rates were volatile and generally lower
than 2009 rates resulting in higher prepayment speeds and lower
MSR valuation, which was economically hedged and offset by
hedging gains. However, the negative MSR valuation adjustment
was partially offset by model assumption updates. Based on
updated market data and trends, the prepayment assumptions were
lowered, which increased the value of the MSR. The increase also
reflected a $22.7 million increase in origination and
secondary marketing income as loan sales and loan originations
were substantially higher (see Table 12). (See MSR section
located within Market Risk for additional information.)
|
|
|
|
$10.1 million, or 10%, increase in electronic banking,
reflecting increased debit card transaction volume.
|
|
|
|
$10.0 million benefit from lower securities losses.
|
|
|
|
$8.9 million, or 9%, increase in trust services income,
with 50% of the increase due to increases in asset market
values, and the remainder reflecting growth in new business.
|
|
|
|
$6.2 million, or 11%, increase in insurance benefits
associated with bank owned life insurance.
|
|
|
|
$4.0 million, or 6%, increase in brokerage income,
primarily reflecting an increase in title insurance income due
to higher mortgage refinance activity, and to a lesser degree an
increase in fixed income product sales, partially offset by
lower annuity income.
|
Partially offset by:
|
|
|
|
|
$35.8 million, or 12%, decrease in service charges on
deposit accounts. This decline represented a decrease in
personal NSF / OD service charges and reflected a
combination of factors. These included the implementation of
changes to Regulation E and the introduction of our Fair Play
banking philosophy during the 2010 third quarter, as well as the
continued underlying decline in activity as customers better
manage their account balances. As part of our Fair Play banking
philosophy, we voluntary reduced certain NSF / OD fees
and implemented our
24-Hour
Gracetm
overdraft policy. The goal of our Fair Play banking philosophy
is to introduce more customer friendly fee structures with the
objective of accelerating the acquisition and retention of
customers.
|
|
|
|
$27.9 million, or 18%, decline in other income. 2009
included a $31.4 million gain from the sale of
Visa®
Class B stock.
|
2009
versus 2008
Noninterest income increased $298.5 million, or 42%, from
2008, primarily reflecting:
|
|
|
|
|
$103.3 million increase in mortgage banking income,
reflecting a $57.5 million increase in origination and
secondary marketing income as loans sales and loan originations
were substantially higher, and a $27.1 million improvement
in MSR hedging (see Table 12).
|
|
|
|
$187.1 million, or 95%, reduction in securities losses as
2008 included $197.1 million of OTTI adjustments compared
with $10.2 million in 2009.
|
|
|
|
$12.0 million, or 30%, increase in automobile operating
lease income, reflecting a 21% increase in average operating
lease balances as lease originations since the 2007 fourth
quarter were recorded as operating leases. However, during the
2008 fourth quarter, we exited the automobile leasing business.
|
45
|
|
|
|
|
$13.4 million, or 10%, increase in other income, reflecting
the net impact of a $22.4 million change in the fair value
of derivatives that did not qualify for hedge accounting,
partially offset by a $4.7 million decline in mezzanine
lending income and a $4.1 million decline in customer
derivatives income.
|
|
|
|
$9.9 million, or 11%, increase in electronic banking,
reflecting increased transaction volumes and additional third
party processing fees.
|
Partially offset by:
|
|
|
|
|
$22.3 million, or 18%, decline in trust services income,
reflecting the impact of reduced market values on asset
management revenues, as well as lower yields on proprietary
money market funds.
|
Noninterest
Expense
(This section should be read in conjunction with Significant
Items 2, 4, and 7.)
The following table reflects noninterest expense for the three
years ended December 31, 2010:
Table
13 Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
Change from 2009
|
|
|
|
|
|
Change from 2008
|
|
|
|
|
|
|
2010
|
|
|
Amount
|
|
|
Percent
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
2008
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
$
|
798,973
|
|
|
$
|
98,491
|
|
|
|
14
|
%
|
|
$
|
700,482
|
|
|
$
|
(83,064
|
)
|
|
|
(11
|
)%
|
|
$
|
783,546
|
|
Outside data processing and other services
|
|
|
159,248
|
|
|
|
11,153
|
|
|
|
8
|
|
|
|
148,095
|
|
|
|
17,869
|
|
|
|
14
|
|
|
|
130,226
|
|
Net occupancy
|
|
|
107,862
|
|
|
|
2,589
|
|
|
|
2
|
|
|
|
105,273
|
|
|
|
(3,155
|
)
|
|
|
(3
|
)
|
|
|
108,428
|
|
Deposit and other insurance expense
|
|
|
97,548
|
|
|
|
(16,282
|
)
|
|
|
(14
|
)
|
|
|
113,830
|
|
|
|
91,393
|
|
|
|
407
|
|
|
|
22,437
|
|
Professional services
|
|
|
88,778
|
|
|
|
12,412
|
|
|
|
16
|
|
|
|
76,366
|
|
|
|
26,753
|
|
|
|
54
|
|
|
|
49,613
|
|
Equipment
|
|
|
85,920
|
|
|
|
2,803
|
|
|
|
3
|
|
|
|
83,117
|
|
|
|
(10,848
|
)
|
|
|
(12
|
)
|
|
|
93,965
|
|
Marketing
|
|
|
65,924
|
|
|
|
32,875
|
|
|
|
99
|
|
|
|
33,049
|
|
|
|
385
|
|
|
|
1
|
|
|
|
32,664
|
|
Amortization of intangibles
|
|
|
60,478
|
|
|
|
(7,829
|
)
|
|
|
(11
|
)
|
|
|
68,307
|
|
|
|
(8,587
|
)
|
|
|
(11
|
)
|
|
|
76,894
|
|
OREO and foreclosure expense
|
|
|
39,049
|
|
|
|
(54,850
|
)
|
|
|
(58
|
)
|
|
|
93,899
|
|
|
|
60,444
|
|
|
|
181
|
|
|
|
33,455
|
|
Automobile operating lease expense
|
|
|
37,034
|
|
|
|
(6,326
|
)
|
|
|
(15
|
)
|
|
|
43,360
|
|
|
|
12,078
|
|
|
|
39
|
|
|
|
31,282
|
|
Goodwill impairment
|
|
|
|
|
|
|
(2,606,944
|
)
|
|
|
(100
|
)
|
|
|
2,606,944
|
|
|
|
2,606,944
|
|
|
|
|
|
|
|
|
|
Gain on early extinguishment of debt
|
|
|
|
|
|
|
147,442
|
|
|
|
(100
|
)
|
|
|
(147,442
|
)
|
|
|
(123,900
|
)
|
|
|
526
|
|
|
|
(23,542
|
)
|
Other expense
|
|
|
132,991
|
|
|
|
24,828
|
|
|
|
23
|
|
|
|
108,163
|
|
|
|
(30,243
|
)
|
|
|
(22
|
)
|
|
|
138,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
1,673,805
|
|
|
$
|
(2,359,638
|
)
|
|
|
(59
|
)%
|
|
$
|
4,033,443
|
|
|
$
|
2,556,069
|
|
|
|
173
|
%
|
|
$
|
1,477,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
versus 2009
As shown in the above table, noninterest expense decreased
$2,359.6 million from the year-ago period. Excluding the
2009 goodwill impairment of $2,606.9 million, noninterest
expense increased $247.3 million and primarily reflected:
|
|
|
|
|
The absence of $147.4 million in gains on early
extinguishment of debt in 2009.
|
46
|
|
|
|
|
$98.5 million, or 14%, increase in personnel costs,
primarily reflecting a 10% increase in full-time equivalent
staff in support of strategic initiatives, as well as higher
commissions and other incentive expenses, and the reinstatement
of certain employee benefits such as 401(k) plan matching
contribution, merit increases, and bonuses.
|
|
|
|
$32.9 million, or 99%, increase in marketing expense,
reflecting increases in branding and product advertising
activities in support of strategic initiatives.
|
|
|
|
$24.8 million, or 23%, increase in other expense,
reflecting $13.1 million increase associated with the
provision for repurchase losses related to representations and
warranties made on mortgage loans sold, as well as increased
travel and miscellaneous fees.
|
Partially offset by:
|
|
|
|
|
$54.9 million, or 58%, decline in OREO and foreclosure
expense.
|
|
|
|
$16.3 million, or 14%, decrease in deposit and other
insurance expense. This decrease was comprised of two
components: (1) $23.6 million FDIC special assessment
during the 2009 second quarter, and (2) increased
assessments due to higher levels of deposits.
|
2009
versus 2008
Noninterest expense increased $2,556.1 million from 2008,
and primarily 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).
|
|
|
|
$91.4 million increase in deposit and other insurance
expense. This increase was comprised of two components: (1)
$23.6 million FDIC special assessment during the 2009
second quarter, and (2) $67.8 million increase 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
2008. Higher levels of deposits also contributed to the increase.
|
|
|
|
$60.4 million increase in OREO and foreclosure expense,
reflecting higher levels of problem assets, as well as loss
mitigation activities.
|
|
|
|
$26.8 million, or 54%, increase in professional services,
reflecting higher consulting and collection-related expenses.
|
|
|
|
$17.9 million, or 14%, 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, or 39%, increase in automobile operating
lease expense, primarily reflecting a 21% increase in average
operating leases. However, we exited the automobile leasing
business during the 2008 fourth quarter.
|
Partially offset by:
|
|
|
|
|
$123.9 million positive impact related to gains on early
extinguishment of debt.
|
|
|
|
$83.1 million, or 11%, 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.
|
|
|
|
$30.2 million, or 22%, decline in other noninterest expense
primarily reflecting lower automobile lease residual value
expense as used vehicle prices improved.
|
47
|
|
|
|
|
$10.8 million, or 12%, 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 3 and 7, and Note 17 of the Notes to
Consolidated Financial Statements.)
2010
versus 2009
The provision for income taxes was $40.0 million for 2010
compared with a benefit of $584.0 million in 2009. Both
years included the benefits from tax-exempt income,
tax-advantaged investments, and general business credits. In
2010, we entered into an asset monetization transaction that
generated a tax benefit of $63.6 million. Also, in 2010,
undistributed previously reported earnings of a foreign
subsidiary of $142.3 million were distributed and an
additional $49.8 million of tax expense was recorded. State
tax reserves of $28.8 million ($18.7 million net of
federal benefit) for 2010 were recorded.
The Franklin restructuring in 2009 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 2009. During 2010, a $43.6 million net tax benefit was
recognized, primarily reflecting the increase in the net
deferred tax asset relating to the assets acquired from the
March 31, 2009 Franklin restructuring.
The IRS completed the audit of our consolidated federal income
tax returns for tax years through 2007. In addition, various
state and other jurisdictions remain open to examination,
including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West
Virginia and Illinois. Both the IRS and state tax officials,
including Ohio and Kentucky, have proposed adjustments to our
previously filed tax returns. We believe that our tax positions
related to such proposed adjustments are 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 assurance can be given, we believe
that the resolution of these examinations will not, individually
or in the aggregate, have a material adverse impact on our
consolidated financial position.
2009
versus 2008
The provision for income taxes was a benefit of
$584.0 million for 2009 compared with a benefit of
$182.2 million in 2008. The tax benefit for both years
included the benefits from tax-exempt income, tax-advantaged
investments, and general business credits. The tax benefit in
2009 was impacted by the pretax loss combined with the favorable
impacts of the Franklin restructuring in 2009 and the reduction
of the capital loss valuation reserve, offset by the
nondeductible portion of the 2009 goodwill impairment.
RISK
MANAGEMENT AND CAPITAL
Risk awareness, identification, reporting, and active management
are key elements in overall risk management. We manage risk to
an aggregate
moderate-to-low
risk profile strategy through a control framework and by
monitoring and responding to potential risks. Controls include,
among others, effective segregation of duties, access,
authorization and reconciliation procedures, as well as staff
education and a disciplined assessment process.
As a strategy, we have identified sources of risks and primary
risks in coordination with each business unit. We utilize Risk
and Control Self-Assessments (RCSA) to identify exposure risks.
Through this RCSA process, we continually assess the
effectiveness of controls associated with the identified risks,
regularly monitor risk profiles and material exposure to losses,
and identify stress events and scenarios to which we may be
exposed. Our chief risk officer is responsible for ensuring that
appropriate systems of controls are in place for managing and
monitoring risk across the Company. Potential risk concerns are
shared with the Risk Management Committee and the board of
directors, as appropriate. Our internal audit department
performs on-going independent reviews of the risk management
process and ensures the adequacy of documentation. The results
of these reviews are reported regularly to the audit committee
of the board of directors.
48
We believe our primary risk exposures are credit, market,
liquidity, operational, and compliance risk. Credit risk
is the risk of loss due to adverse changes in our
borrowers ability to meet their financial obligations
under agreed upon terms. Market risk represents the risk
of loss due to changes in the market value of assets and
liabilities due to changes in interest rates, exchange rates,
and equity prices. Liquidity risk arises from the
possibility that funds may not be available to satisfy current
or future obligations resulting from external macro market
issues, investor perception of financial strength, and events
unrelated to us such as war, terrorism, or financial institution
market specific issues. Operational risk arises from our
inherent
day-to-day
operations that could result in losses due to human error,
inadequate or failed internal systems and controls, and external
events. Compliance risk exposes us to money penalties,
enforcement actions or other sanctions as a result of
nonconformance with laws, rules, and regulations that apply to
the financial services industry.
Some of the more significant processes used to manage and
control credit, market, liquidity, operational, and compliance
risks are described in the following paragraphs.
Credit
Risk
Credit risk is the risk of financial loss if a counterparty is
not able to meet the agreed upon terms of the financial
obligation. 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 significant
credit risk associated with our investment securities portfolio
(see Investment Securities Portfolio discussion). While
there is credit risk associated with derivative activity, we
believe this exposure is minimal. The significant change in the
economic conditions and the resulting changes in borrower
behavior over the past several years resulted in our focusing
significant resources to the identification, monitoring, and
managing of our credit risk. In addition to the traditional
credit risk mitigation strategies of credit policies and
processes, market risk management activities, and portfolio
diversification, we added more quantitative measurement
capabilities utilizing external data sources, enhanced use of
modeling technology, and internal stress testing processes.
The maximum level of credit exposure to individual credit
borrowers is limited by policy guidelines based on the perceived
risk of each borrower or related group of borrowers. All
authority to grant commitments is delegated through the
independent credit administration function and is closely
monitored and regularly updated. Concentration risk is managed
through limits on loan type, geography, industry, and loan
quality factors. We continue to focus predominantly on extending
credit to retail and commercial customers with existing or
expandable relationships within our primary banking markets,
although we will consider lending opportunities outside our
primary markets if we believe the associated risks are
acceptable and aligned with strategic initiatives. We continue
to add new borrowers that meet our targeted risk and
profitability profile. Although we offer a broad set of
products, we continue to develop new lending products and
opportunities. Each of these new products and opportunities goes
through a rigorous development and approval process prior to
implementation to ensure our overall objective of maintaining an
aggregate
moderate-to-low
risk portfolio profile.
The checks and balances in the credit process and the
independence of the credit administration and risk management
functions are designed to appropriately assess the level of
credit risk being accepted, facilitate the early recognition of
credit problems when they occur, and to provide for effective
problem asset management and resolution. For example, we do not
extend additional credit to delinquent borrowers except in
certain circumstances that substantially improve our overall
repayment or collateral coverage position.
Asset quality metrics improved significantly in 2010, reflecting
our proactive portfolio management initiatives as well as some
stabilization in a still relatively weak economy. The
improvements in the asset quality metrics, including lower
levels of NPAs, Criticized and Classified assets, and
delinquencies have all been achieved through these policies and
commitments. Our portfolio management policies demonstrate our
commitment to maintaining an aggregate
moderate-to-low
risk profile. To that end, we continue to expand resources in
our risk management areas.
The weak residential real estate market and U.S. economy
continued to have significant impact on the financial services
industry as a whole, and specifically on our financial results.
A pronounced downturn in the residential real estate market that
began in early 2007 has resulted in significantly lower
residential real estate
49
values and higher delinquencies and NCOs, including loans to
builders and developers of residential real estate. In addition,
continued high unemployment, among other factors, throughout
2010, has slowed any significant recovery from the
U.S. recession during 2008 and 2009. As a result, we
experienced higher than historical levels of delinquencies and
NCOs in our loan portfolios during 2009 and 2010. The value of
our investment securities backed by residential and commercial
real estate was also negatively impacted by a lack of liquidity
in the financial markets and anticipated credit losses.
Loan
and Lease Credit Exposure Mix
At December 31, 2010, our loans and leases totaled
$38.1 billion, representing a 4% increase from
December 31, 2009. The composition of the portfolio has
changed significantly over the past 12 months. From
December 31, 2009, to December 31, 2010, the consumer
loan portfolio increased $2.2 billion, or 13%, primarily
driven by the automobile loan portfolio. In 2010, our indirect
automobile finance business generated significant levels of high
credit-quality loan originations, and we also adopted a new
accounting standard resulting in the consolidation of a
$0.8 billion automobile loan securitization. At
December 31, 2010, these securitized loans had a remaining
balance of $522.7 million. These increases were partially
offset by a $0.9 billion, or 4%, decline in the commercial
loan portfolio, primarily as a result of a planned strategy to
reduce the concentration of our noncore CRE portfolio.
At December 31, 2010, commercial loans totaled
$19.7 billion, and represented 52% of our total credit
exposure. Our commercial loan portfolio is diversified along
product type, size, and geography within our footprint, and is
comprised of the following (see Commercial Credit
discussion):
C&I loans C&I loans are made to
commercial customers for use in normal business operations to
finance working capital needs, equipment purchases, or other
projects. The majority of these borrowers are customers doing
business within our geographic regions. C&I loans are
generally underwritten individually and 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 credit decision process, which
focuses on cash flow from operations of the business to repay
the debt. The operation, sale, rental, or refinancing of the
real estate is not considered the primary repayment source for
these types of loans. As we look to expand C&I loan growth,
we have further developed our ABL capabilities by adding
experienced ABL professionals to take advantage of market
opportunities resulting in better leveraging of the
manufacturing base in our primary markets. We have also added a
national banking group with sufficient resources to ensure we
appropriately recognize and manage the risks associated with
this type of lending.
CRE loans CRE loans consist of loans for
income-producing real estate properties, real estate investment
trusts, and real estate developers. We mitigate our risk on
these loans by requiring collateral values that exceed the loan
amount and underwriting the loan with projected cash flow 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 or residential property for which
repayment will be generated by the sale or permanent financing
of the property. Our construction CRE portfolio primarily
consists of retail, residential (land, single family, and
condominiums), office, and warehouse product types. Generally,
these loans are for construction projects that have been
presold, preleased, or have secured permanent financing, as well
as loans to real estate companies with significant equity
invested in each project. These loans are underwritten and
managed by a specialized real estate lending group that actively
monitors the construction phase and manages the loan
disbursements according to the predetermined construction
schedule.
50
Total consumer loans were $18.4 billion at
December 31, 2010, and represented 48% of our total credit
exposure. The consumer portfolio was diversified among home
equity loans, residential mortgages, and automobile loans and
leases (see Consumer Credit discussion).
Automobile loans/leases Automobile
loans/leases are primarily comprised of loans made through
automotive dealerships and includes exposure in selected states
outside of our primary banking markets. In 2009, we exited
several states, including Florida, Arizona, and Nevada. In 2010,
we expanded into eastern Pennsylvania and five New England
states. The recent expansions included hiring experienced
colleagues with existing dealer relationships in those markets.
No state outside of our primary banking market represented more
than 5% of our total automobile loan and lease portfolio at
December 31, 2010. Our automobile lease portfolio
represents an immaterial portion of the total portfolio as we
exited the automobile leasing business during the 2008 fourth
quarter.
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-
lien on the borrowers residence, allows customers to
borrow against the equity in their home. Given the current low
interest rate environment, many borrowers have utilized the
line-of-credit
home equity product as the primary source of financing their
home. As a result, the proportion of first-lien loans has
increased significantly in our portfolio over the past
24 months. Real estate market values at the time of
origination directly affect the amount of credit extended and,
in the event of default, subsequent changes in these values may
impact the severity of losses. We actively manage the amount of
credit extended through
debt-to-income
policies and LTV policy limits.
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. Generally, our practice is to
sell a significant portion of our fixed-rate originations in the
secondary market. As such, the majority of the loans in our
portfolio are ARMs. These ARMs primarily consist of a fixed-rate
of interest for the first 3 to 5 years, and then adjust
annually. These loans comprised approximately 57% of our total
residential mortgage loan portfolio at December 31, 2010.
Other consumer loans/leases Primarily
consists of consumer loans not secured by real estate or
automobiles, including personal unsecured loans.
51
Table
14 Loan and Lease Portfolio Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollar amounts in millions)
|
|
|
Commercial:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
13,063
|
|
|
|
34
|
%
|
|
$
|
12,888
|
|
|
|
35
|
%
|
|
$
|
13,541
|
|
|
|
33
|
%
|
|
$
|
13,126
|
|
|
|
33
|
%
|
|
$
|
7,850
|
|
|
|
30
|
%
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
650
|
|
|
|
2
|
|
|
|
1,469
|
|
|
|
4
|
|
|
|
2,080
|
|
|
|
5
|
|
|
|
1,962
|
|
|
|
5
|
|
|
|
1,229
|
|
|
|
5
|
|
Commercial
|
|
|
6,001
|
|
|
|
16
|
|
|
|
6,220
|
|
|
|
17
|
|
|
|
8,018
|
|
|
|
20
|
|
|
|
7,221
|
|
|
|
18
|
|
|
|
3,275
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
6,651
|
|
|
|
18
|
|
|
|
7,689
|
|
|
|
21
|
|
|
|
10,098
|
|
|
|
25
|
|
|
|
9,183
|
|
|
|
23
|
|
|
|
4,504
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
19,714
|
|
|
|
52
|
|
|
|
20,577
|
|
|
|
56
|
|
|
|
23,639
|
|
|
|
58
|
|
|
|
22,309
|
|
|
|
56
|
|
|
|
12,354
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases(2)
|
|
|
5,614
|
|
|
|
15
|
|
|
|
3,390
|
|
|
|
9
|
|
|
|
4,464
|
|
|
|
11
|
|
|
|
4,294
|
|
|
|
11
|
|
|
|
3,895
|
|
|
|
15
|
|
Home equity
|
|
|
7,713
|
|
|
|
20
|
|
|
|
7,563
|
|
|
|
21
|
|
|
|
7,557
|
|
|
|
18
|
|
|
|
7,290
|
|
|
|
18
|
|
|
|
4,927
|
|
|
|
19
|
|
Residential mortgage
|
|
|
4,500
|
|
|
|
12
|
|
|
|
4,510
|
|
|
|
12
|
|
|
|
4,761
|
|
|
|
12
|
|
|
|
5,447
|
|
|
|
14
|
|
|
|
4,549
|
|
|
|
17
|
|
Other loans
|
|
|
566
|
|
|
|
1
|
|
|
|
751
|
|
|
|
2
|
|
|
|
671
|
|
|
|
1
|
|
|
|
715
|
|
|
|
1
|
|
|
|
428
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
18,393
|
|
|
|
48
|
|
|
|
16,214
|
|
|
|
44
|
|
|
|
17,453
|
|
|
|
42
|
|
|
|
17,746
|
|
|
|
44
|
|
|
|
13,799
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
|
|
$
|
38,107
|
|
|
|
100
|
%
|
|
$
|
36,791
|
|
|
|
100
|
%
|
|
$
|
41,092
|
|
|
|
100
|
%
|
|
$
|
40,055
|
|
|
|
100
|
%
|
|
$
|
26,153
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
There were no commercial loans outstanding that would be
considered a concentration of lending to a particular industry
or group of industries. |
|
(2) |
|
2010 included an increase of $522.7 million resulting from
the adoption of a new accounting standard to consolidate a
previously off-balance automobile loan securitization
transaction. |
The table below provides our total loan and lease portfolio
segregated by the type of collateral securing the loan or lease:
Table
15 Total Loan and Lease Portfolio by Collateral Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollar amounts in millions)
|
|
|
Real estate
|
|
$
|
22,603
|
|
|
|
59
|
%
|
|
$
|
23,462
|
|
|
|
64
|
%
|
|
$
|
25,439
|
|
|
|
62
|
%
|
|
$
|
25,886
|
|
|
|
65
|
%
|
|
$
|
15,831
|
|
|
|
60
|
%
|
Vehicles
|
|
|
7,134
|
|
|
|
19
|
|
|
|
4,600
|
|
|
|
13
|
|
|
|
6,063
|
|
|
|
15
|
|
|
|
5,722
|
|
|
|
14
|
|
|
|
5,003
|
|
|
|
19
|
|
Receivables/Inventory
|
  |