UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED June 30, 2008
Commission File Number 1-34073
Huntington Bancshares Incorporated
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Maryland
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31-0724920 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
41 South High Street, Columbus, Ohio 43287
Registrants telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
There were 366,150,435 shares of Registrants common stock ($0.01 par value) outstanding on July
31, 2008.
Huntington Bancshares Incorporated
INDEX
2
Part 1. Financial Information
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding
company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our
subsidiaries, including our bank subsidiary, The Huntington National Bank (the Bank), organized in
1866, we provide full-service commercial and consumer banking services, mortgage banking services,
automobile financing, equipment leasing, investment management, trust services, brokerage services,
customized insurance service programs, and other financial products and services. Our banking
offices are located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky.
Selected financial service activities are also conducted in other states including: Dealer Sales
offices in Arizona, Florida, Nevada, New Jersey, New York, Tennessee, and Texas; Private Financial
and Capital Markets Group offices in Florida; and Mortgage Banking offices in Maryland and New
Jersey. Huntington Insurance offers retail and commercial insurance agency services in Ohio,
Pennsylvania, and Indiana. International banking services are available through the headquarters
office in Columbus and a limited purpose office located in both the Cayman Islands and Hong Kong.
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) provides you with information we believe necessary for understanding our
financial condition, changes in financial condition, results of operations, and cash flows and
should be read in conjunction with the financial statements, notes, and other information contained
in this report. This discussion and analysis provides updates to the MD&A appearing in our 2007
Annual Report on Form 10-K (2007 Form 10-K), and should be read in conjunction with this discussion
and analysis.
Our discussion is divided into key segments:
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Introduction - Provides overview comments on important matters including risk factors,
acquisitions, and other items. These are essential for understanding our performance and
prospects. |
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Discussion of Results of Operations - Reviews financial performance from a consolidated
company perspective. It also includes a Significant Items Influencing Financial
Performance Comparisons section that summarizes key issues helpful for understanding
performance trends, including our acquisition of Sky Financial Group, Inc. (Sky Financial)
and our relationship with Franklin Credit Management Corporation (Franklin). Key
consolidated balance sheet and income statement trends are also discussed in this section. |
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Risk Management and Capital - Discusses credit, market, liquidity, and operational
risks, including how these are managed, as well as performance trends. It also includes a
discussion of liquidity policies, how we obtain funding, and related performance. In
addition, there is a discussion of guarantees and/or commitments made for items such as
standby letters of credit and commitments to sell loans, and a discussion that reviews the
adequacy of capital, including regulatory capital requirements. |
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Lines of Business Discussion - Provides an overview of financial performance for each of
our major lines of business and provides additional discussion of trends underlying
consolidated financial performance. |
A reading of each section is important to understand fully the nature of our financial
performance and prospects.
Forward-Looking Statements
This report, including MD&A, contains certain forward-looking statements, including certain
plans, expectations, goals, and projections, and including statements about the benefits of our
merger with Sky Financial, which are subject to numerous assumptions, risks, and uncertainties.
Statements that do not describe historical or current facts, including statements about beliefs and
expectations, are forward-looking statements. The forward-looking statements are intended to be
subject to the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934.
Actual results could differ materially from those contained or implied by such statements for
a variety of factors including: (a) deterioration in the loan portfolio could be worse than
expected due to a number of factors such as the
underlying value of the collateral could prove less valuable than otherwise assumed and
assumed cash flows may be worse
3
than expected; (b) merger revenue synergies may not be fully
realized and/or within the expected timeframes; (c) changes in economic conditions; (d) movements
in interest rates and spreads; (e) competitive pressures on product pricing and services; (f)
success and timing of other business strategies; (g) the nature, extent, and timing of governmental
actions and reforms; and (h) extended disruption of vital infrastructure. Additional factors that
could cause results to differ materially from those described above can be found in Huntingtons
2007 Form 10-K, and documents subsequently filed by Huntington with the Securities and Exchange
Commission (SEC).
All forward-looking statements speak only as of the date they are made and are based on
information available at that time. We assume no obligation to update forward-looking statements to
reflect circumstances or events that occur after the date the forward-looking statements were made
or to reflect the occurrence of unanticipated events except as required by federal securities laws.
As forward-looking statements involve significant risks and uncertainties, readers of this
document are cautioned against placing undue reliance on such statements.
Risk Factors
We, like other financial companies, are subject to a number of risks that may adversely affect
our financial condition or results of operation, many of which are outside of our direct control,
though efforts are made to manage those risks while optimizing returns. Among the risks assumed
are: (1) credit risk, which is the risk of loss due to loan and lease customers or other
counter parties 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 perception of financial strength, and events unrelated to the company such as war,
terrorism, or financial institution market specific issues, and (4) operational risk, which
is the risk of loss due to human error, inadequate or failed internal systems and controls,
violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical
standards, and external influences such as market conditions, fraudulent activities, disasters, and
security risks. Please refer to the Risk Management and Capital section for additional
information regarding risk factors. Additionally, more information on risk is set forth under the
heading Risk Factors included in Item 1A of our 2007 Annual Report on Form 10-K for the year
ended December 31, 2007, and subsequent filings with the SEC.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with accounting principles generally
accepted in the United States (GAAP). The preparation of financial statements in conformity with
GAAP requires us to establish critical accounting policies and make accounting estimates,
assumptions, and judgments that affect amounts recorded and reported in our financial statements.
Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements included in our 2007
Annual Report on Form 10-K as supplemented by this report lists significant accounting policies we
use in the development and presentation of our financial statements. This discussion and analysis,
the significant accounting policies, and other financial statement disclosures identify and address
key variables and other qualitative and quantitative factors necessary for an understanding and
evaluation of our company, financial position, results of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material
effect on the financial statements if a different amount within a range of estimates were used or
if estimates changed from period to period. Readers of this report should understand that estimates
are made under facts and circumstances at a point in time, and changes in those facts and
circumstances could produce actual results that differ from when those estimates were made. The
most significant accounting estimates and their related application are discussed in our 2007 Form
10-K. The following discussion provides an update of our accounting estimates related to goodwill.
Huntington accounts for goodwill in accordance with FASB Statement No. 142, Goodwill and Other
Intangible Assets. The reporting units are tested for impairment annually as of October 1, to
determine whether any goodwill impairment exists. Goodwill is also tested for impairment on an
interim basis if an event occurs or circumstances change between annual tests that would more
likely than not reduce the fair value of the reporting unit below its carrying amount. Impairment
losses, if any, would be reflected in non-interest expense.
Huntington uses judgment in assessing goodwill for impairment. Estimates of fair value are
based primarily on the market capitalization of Huntington, adjusted for a control premium. Also
considered are projections of cash flows
considering historical and anticipated future results, and general economic and market
conditions. Changes in market
4
capitalization, certain judgments, and projections could result in a
significantly different estimate of the fair value of the reporting units and could result in an
impairment of goodwill.
As a result of the continued economic weakness across our Midwest markets, our stock price
declined significantly during the first six-month period of 2008. Therefore, we performed an
impairment test of our goodwill as of June 30, 2008. Based upon the results of the test, no
impairment to goodwill was required.
Recent Accounting Pronouncements and Developments
Note 2 to the Unaudited Condensed Consolidated Financial Statements discusses new accounting
policies adopted during 2008 and the expected impact of accounting policies recently issued but not
yet required to be adopted. To the extent the adoption of new accounting standards materially
affect financial condition, results of operations, or liquidity, the impacts are discussed in the
applicable section of this MD&A and the Notes to the Unaudited Condensed Consolidated Financial
Statements.
Acquisition of Sky Financial
The merger with Sky Financial was completed on July 1, 2007. At the time of acquisition, Sky
Financial had assets of $16.8 billion, including $13.3 billion of loans, and total deposits of
$12.9 billion. The impact of this acquisition has been included in our consolidated results since
July 1, 2007. As a result of this acquisition, we have a significant loan relationship with
Franklin. This relationship is discussed in greater detail in the Significant Items and
Commercial Credit sections of this report.
Given the significant impact of the merger on reported results, we believe that an
understanding of the impacts of the merger and certain post-merger restructuring activities is
necessary to better understand the underlying performance trends. When comparing post-merger period
results to premerger periods, we use the following terms when discussing financial performance:
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Merger-related refers to amounts and percentage changes representing the impact
attributable to the merger. |
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Merger and restructuring costs represent non-interest expenses primarily associated
with merger integration activities, including severance expense for key executive
personnel. |
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Non-merger-related refers to performance not attributable to the merger, and
includes merger efficiencies, which represent non-interest expense reductions
realized as a result of the merger. |
After completion of the merger, we combined Sky Financials operations with ours, and as such,
we could no longer separately monitor the subsequent individual results of Sky Financial. As a
result, the following methodologies were implemented to estimate the approximate effect of the Sky
Financial merger used to determine merger-related impacts. Certain tables and comments contained
within our discussion and analysis provide detail of changes to reported results to quantify the
estimated impact of the Sky Financial merger using this methodology.
Balance Sheet Items
For average loans and leases, as well as average deposits, Sky Financials balances as of
June 30, 2007, adjusted for purchase accounting adjustments, and transfers of loans to loans
held-for-sale, were used in the comparison. To estimate the impact on 2008 average
balances, it was assumed that the June 30, 2007 balances, as adjusted, remained constant
over time.
Income Statement Items
Sky Financials actual results for the first six months of 2007, adjusted for the impact of
unusual items and purchase accounting adjustments, were determined. This six-month adjusted
amount was divided by two to estimate a quarterly impact. This methodology does not adjust
for any market related changes, or seasonal factors in Sky Financials 2007 six-month
results. Nor does it consider any revenue or expense synergies realized since
the merger date. The one exception to this methodology of holding the estimated annual
impact constant relates to the amortization of intangibles expense where the amount is known
and is therefore used.
5
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It
also includes a Significant Items Influencing Financial Performance Comparisons section that
summarizes key issues important for a complete understanding of performance trends. Key
consolidated balance sheet and income statement trends are discussed in this section. All earnings
per share data are reported on a diluted basis. For additional insight on financial performance,
please read this section in conjunction with the Lines of Business discussion.
Summary
We reported 2008 second quarter net income of $101.4 million or earnings per common share of
$0.25. These results compared with net income of $127.1 million, or $0.35 per common share in the
2008 first quarter. Current quarter earnings per common share reflected a dilutive impact of $0.03
per common share, related to the convertible preferred stock issuance in April 2008. Comparisons
with the prior quarter were also significantly impacted by a number of other factors that are
discussed later in the Significant Items Influencing Financial Performance Comparisons section.
During the 2008 second quarter, the primary focus within our industry continued to be credit
quality. The economy remained weak in our markets and continued to put stress on our borrowers.
Our expectation is that the economy will remain under stress, and that no improvement will be seen
until well into 2009. We do not anticipate that the economic environment will deteriorate
materially, but neither do we expect any relief in the near term.
Given the current economic conditions discussed in the above paragraph, credit quality
performance during the current quarter was consistent with our expectations. During the 2008
second quarter, the allowance for credit losses (ACL) increased 13 basis points to 1.80% compared
with the prior quarter, and the net charge-off ratio increased 16 basis points to 0.64% compared
with the prior quarter. We anticipate a 10-20 basis point increase in our ACL by year-end, and we
have increased our expected full-year net charge-off ratio to 0.65%-0.70%. Nonaccrual loans (NALs)
increased $157.7 million, or 42%. Our expectation is that NALs will continue to rise for the
foreseeable future. We anticipate that the expected increases in NALs will be manageable, and will
continue to be centered in our commercial real estate (CRE) loans to single-family homebuilders,
and within our commercial and industrial (C&I) portfolio related to businesses that support
residential development.
Capital also continued to be a major focus for us. We took several actions during the current
quarter to strengthen our capital position and balance sheet, including: (a) the raising of $569
million of capital in the form of 8.50% Series A Non-Cumulative Perpetual Convertible Preferred
Stock, (b) the on-balance sheet securitization of $887 million in automobile loans, (c) the sale of
$473 million of mortgage loans, and (d) managing down our balances of non-relationship
collateralized public fund deposits and related collateral securities.
The loan restructuring associated with our relationship with Franklin, completed during the
2007 fourth quarter, continued to perform consistent with our expectations. Cash flows exceeded
the required debt payments, the loans continued to perform with interest accruing, and there were
no net charge-offs or related provision for credit losses during the quarter. Based on the
performance during the first six-month period of 2008, and continued expected cash flow performance
and priority of cash flows, we removed $762 million, or 67%, of our total Franklin exposure from
nonperforming asset status during the current quarter. Additionally, the total exposure to
Franklin decreased $27 million, or 2%, compared with the prior quarter.
Fully taxable net interest income in the 2008 second quarter increased $13.2 million, or 3%,
compared with the prior quarter. Our net interest margin increased 6 basis points resulting
primarily from improved pricing on our core deposits. Average total loans and leases increased,
particularly in our commercial loan portfolio, as loans grew in 10 of our 13 regions.
Non-interest income in the 2008 second quarter increased $0.7 million compared with the prior
quarter. Significant items (see Significant Items) resulted in a net positive impact of $11.6
million in the current quarter compared with the prior quarter. Considering the impact of these
items, fee income performance was strong for the current quarter. Service charges on deposit
accounts increased 10%, and other service charges increased 12%, both reflecting continued
underlying
growth in deposits as well as a return to more seasonally adjusted levels. Core mortgage
banking activities increased 20%, reflecting higher loan sale volumes and improved gains on
mortgage loan sales.
6
Non-interest expense in the 2008 second quarter increased $7.3 million, or 2%, compared with
the prior quarter. Significant items (see Significant Items) resulted in a net negative impact
of $12.6 million in the current quarter compared with the prior quarter. Considering the impact of
these items, the remaining components of non-interest expense decreased, reflecting our continued
focus on improving expense efficiencies.
7
Table 1 Selected Quarterly Income Statement Data (1), (2)
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2008 |
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2007 |
(in thousands, except per share amounts) |
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Second |
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First |
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Fourth |
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Third |
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Second |
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Interest income |
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$ |
696,675 |
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$ |
753,411 |
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$ |
814,398 |
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$ |
851,155 |
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$ |
542,461 |
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Interest expense |
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|
306,809 |
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|
376,587 |
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|
431,465 |
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|
441,522 |
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|
289,070 |
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Net interest income |
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389,866 |
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|
376,824 |
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|
382,933 |
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|
409,633 |
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|
253,391 |
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Provision for credit losses |
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|
120,813 |
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|
88,650 |
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512,082 |
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|
42,007 |
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60,133 |
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Net interest income (loss) after provision for credit losses |
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269,053 |
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288,174 |
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(129,149 |
) |
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367,626 |
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193,258 |
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Service charges on deposit accounts |
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79,630 |
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72,668 |
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81,276 |
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78,107 |
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50,017 |
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Trust services |
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33,089 |
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34,128 |
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35,198 |
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33,562 |
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|
26,764 |
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Brokerage and insurance income |
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35,694 |
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|
36,560 |
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30,288 |
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28,806 |
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17,199 |
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Other service charges and fees |
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23,242 |
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20,741 |
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21,891 |
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21,045 |
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14,923 |
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Bank owned life insurance income |
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14,131 |
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|
13,750 |
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13,253 |
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14,847 |
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10,904 |
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Mortgage banking income (loss) |
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12,502 |
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(7,063 |
) |
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3,702 |
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9,629 |
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|
7,122 |
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Securities gains (losses) |
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2,073 |
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|
1,429 |
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(11,551 |
) |
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(13,152 |
) |
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(5,139 |
) |
Other income (loss) (3) |
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36,069 |
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63,539 |
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(3,500 |
) |
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31,830 |
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34,403 |
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Total non-interest income |
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236,430 |
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235,752 |
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170,557 |
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204,674 |
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156,193 |
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Personnel costs |
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199,991 |
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201,943 |
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214,850 |
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202,148 |
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|
135,191 |
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Outside data processing and other services |
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30,186 |
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34,361 |
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39,130 |
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40,600 |
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25,701 |
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Net occupancy |
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26,971 |
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33,243 |
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26,714 |
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33,334 |
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19,417 |
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Equipment |
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25,740 |
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23,794 |
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22,816 |
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23,290 |
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|
17,157 |
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Amortization of intangibles |
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19,327 |
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18,917 |
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20,163 |
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19,949 |
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2,519 |
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Marketing |
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7,339 |
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8,919 |
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16,175 |
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|
13,186 |
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|
|
8,986 |
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Professional services |
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13,752 |
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|
9,090 |
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|
14,464 |
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|
11,273 |
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|
8,101 |
|
Telecommunications |
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6,864 |
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|
6,245 |
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|
8,513 |
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7,286 |
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|
4,577 |
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Printing and supplies |
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|
4,757 |
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|
5,622 |
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|
6,594 |
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|
4,743 |
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|
3,672 |
|
Other expense (3) |
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|
42,876 |
|
|
|
28,347 |
|
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|
70,133 |
|
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|
29,754 |
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|
19,334 |
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Total non-interest expense |
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|
377,803 |
|
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|
370,481 |
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|
439,552 |
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|
385,563 |
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|
244,655 |
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Income (loss) before income taxes |
|
|
127,680 |
|
|
|
153,445 |
|
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(398,144 |
) |
|
|
186,737 |
|
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|
104,796 |
|
Provision (benefit) for income taxes |
|
|
26,328 |
|
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|
26,377 |
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(158,864 |
) |
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|
48,535 |
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|
24,275 |
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Net income (loss) |
|
$ |
101,352 |
|
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$ |
127,068 |
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$ |
(239,280 |
) |
|
$ |
138,202 |
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$ |
80,521 |
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Dividends declared on preferred shares |
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|
11,151 |
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Net income (loss) applicable to common shares |
|
$ |
90,201 |
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$ |
127,068 |
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$ |
(239,280 |
) |
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$ |
138,202 |
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$ |
80,521 |
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Average common shares basic |
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366,206 |
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|
366,235 |
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|
366,119 |
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365,895 |
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|
236,032 |
|
Average common shares diluted (4) |
|
|
367,234 |
|
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|
367,208 |
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|
366,119 |
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|
368,280 |
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|
239,008 |
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Per common share |
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Net income (loss) basic |
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$ |
0.25 |
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$ |
0.35 |
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$ |
(0.65 |
) |
|
$ |
0.38 |
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$ |
0.34 |
|
Net income (loss) diluted |
|
|
0.25 |
|
|
|
0.35 |
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|
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(0.65 |
) |
|
|
0.38 |
|
|
|
0.34 |
|
Cash dividends declared |
|
|
0.1325 |
|
|
|
0.2650 |
|
|
|
0.2650 |
|
|
|
0.2650 |
|
|
|
0.2650 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
0.73 |
% |
|
|
0.93 |
% |
|
|
(1.74 |
)% |
|
|
1.02 |
% |
|
|
0.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total shareholders equity |
|
|
6.4 |
|
|
|
8.7 |
|
|
|
(15.3 |
) |
|
|
8.8 |
|
|
|
10.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average tangible shareholders equity (5) |
|
|
15.0 |
|
|
|
22.0 |
|
|
|
(30.7 |
) |
|
|
19.7 |
|
|
|
13.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (6) |
|
|
3.29 |
|
|
|
3.23 |
|
|
|
3.26 |
|
|
|
3.52 |
|
|
|
3.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio (7) |
|
|
56.9 |
|
|
|
57.0 |
|
|
|
73.5 |
|
|
|
57.7 |
|
|
|
57.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate (benefit) |
|
|
20.6 |
|
|
|
17.2 |
|
|
|
(39.9 |
) |
|
|
26.0 |
|
|
|
23.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue fully taxable equivalent (FTE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
389,866 |
|
|
$ |
376,824 |
|
|
$ |
382,933 |
|
|
$ |
409,633 |
|
|
$ |
253,391 |
|
FTE adjustment |
|
|
5,624 |
|
|
|
5,502 |
|
|
|
5,363 |
|
|
|
5,712 |
|
|
|
4,127 |
|
|
|
|
Net interest income (6) |
|
|
395,490 |
|
|
|
382,326 |
|
|
|
388,296 |
|
|
|
415,345 |
|
|
|
257,518 |
|
Non-interest income |
|
|
236,430 |
|
|
|
235,752 |
|
|
|
170,557 |
|
|
|
204,674 |
|
|
|
156,193 |
|
|
|
|
Total revenue (6) |
|
$ |
631,920 |
|
|
$ |
618,078 |
|
|
$ |
558,853 |
|
|
$ |
620,019 |
|
|
$ |
413,711 |
|
|
|
|
|
|
|
(1) |
|
Comparisons for presented periods are impacted by a number of factors. Refer to the Significant Items Influencing Financial Performance Comparisons for additional discussion regarding these key
factors. |
|
(2) |
|
On July 1, 2007, Huntington acquired Sky Financial Group, Inc. Accordingly, the balances presented include the impact of the acquisition from that date. |
|
(3) |
|
Automobile operating lease income and expense is included in Other Income and Other Expense, respectively. |
|
(4) |
|
For the three months ended June 30, 2008, the impact of convertible preferred stock issued in April of 2008 totaling 39.8 million shares 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 period. |
|
(5) |
|
Net income excluding expense for amortization of intangibles for the period divided by average tangible shareholders equity. Average tangible shareholders equity equals average total stockholders
equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate. |
|
(6) |
|
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate. |
|
(7) |
|
Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains (losses). |
8
Table 2 Selected Year to Date Income Statement Data (1), (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
Change |
(in thousands, except per share amounts) |
|
2008 |
|
2007 |
|
Amount |
|
Percent |
|
|
|
Interest income |
|
$ |
1,450,086 |
|
|
$ |
1,077,410 |
|
|
$ |
372,676 |
|
|
|
34.6 |
% |
Interest expense |
|
|
683,396 |
|
|
|
568,464 |
|
|
|
114,932 |
|
|
|
20.2 |
|
|
|
|
Net interest income |
|
|
766,690 |
|
|
|
508,946 |
|
|
|
257,744 |
|
|
|
50.6 |
|
Provision for credit losses |
|
|
209,463 |
|
|
|
89,539 |
|
|
|
119,924 |
|
|
|
N.M. |
|
|
|
|
Net interest income after provision for credit losses |
|
|
557,227 |
|
|
|
419,407 |
|
|
|
137,820 |
|
|
|
32.9 |
|
|
|
|
Service charges on deposit accounts |
|
|
152,298 |
|
|
|
94,810 |
|
|
|
57,488 |
|
|
|
60.6 |
|
Trust services |
|
|
67,217 |
|
|
|
52,658 |
|
|
|
14,559 |
|
|
|
27.6 |
|
Brokerage and insurance income |
|
|
72,254 |
|
|
|
33,281 |
|
|
|
38,973 |
|
|
|
N.M. |
|
Other service charges and fees |
|
|
43,983 |
|
|
|
28,131 |
|
|
|
15,852 |
|
|
|
56.4 |
|
Bank owned life insurance income |
|
|
27,881 |
|
|
|
21,755 |
|
|
|
6,126 |
|
|
|
28.2 |
|
Mortgage banking income |
|
|
5,439 |
|
|
|
16,473 |
|
|
|
(11,034 |
) |
|
|
(67.0 |
) |
Securities gains (losses) |
|
|
3,502 |
|
|
|
(5,035 |
) |
|
|
8,537 |
|
|
|
N.M. |
|
Other income |
|
|
99,608 |
|
|
|
59,297 |
|
|
|
40,311 |
|
|
|
68.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
472,182 |
|
|
|
301,370 |
|
|
|
170,812 |
|
|
|
56.7 |
|
|
|
|
Personnel costs |
|
|
401,934 |
|
|
|
269,830 |
|
|
|
132,104 |
|
|
|
49.0 |
|
Outside data processing and other services |
|
|
64,547 |
|
|
|
47,515 |
|
|
|
17,032 |
|
|
|
35.8 |
|
Net occupancy |
|
|
60,214 |
|
|
|
39,325 |
|
|
|
20,889 |
|
|
|
53.1 |
|
Equipment |
|
|
49,534 |
|
|
|
35,376 |
|
|
|
14,158 |
|
|
|
40.0 |
|
Amortization of intangibles |
|
|
38,244 |
|
|
|
5,039 |
|
|
|
33,205 |
|
|
|
N.M. |
|
Marketing |
|
|
16,258 |
|
|
|
16,682 |
|
|
|
(424 |
) |
|
|
(2.5 |
) |
Professional services |
|
|
22,842 |
|
|
|
14,583 |
|
|
|
8,259 |
|
|
|
56.6 |
|
Telecommunications |
|
|
13,109 |
|
|
|
8,703 |
|
|
|
4,406 |
|
|
|
50.6 |
|
Printing and supplies |
|
|
10,379 |
|
|
|
6,914 |
|
|
|
3,465 |
|
|
|
50.1 |
|
Other expense |
|
|
71,223 |
|
|
|
42,760 |
|
|
|
28,463 |
|
|
|
66.6 |
|
|
|
|
Total non-interest expense |
|
|
748,284 |
|
|
|
486,727 |
|
|
|
261,557 |
|
|
|
53.7 |
|
|
|
|
Income before income taxes |
|
|
281,125 |
|
|
|
234,050 |
|
|
|
47,075 |
|
|
|
20.1 |
|
Provision for income taxes |
|
|
52,705 |
|
|
|
57,803 |
|
|
|
(5,098 |
) |
|
|
(8.8 |
) |
|
|
|
Net income |
|
$ |
228,420 |
|
|
$ |
176,247 |
|
|
$ |
52,173 |
|
|
|
29.6 |
% |
|
|
|
Dividends declared on preferred shares |
|
|
11,151 |
|
|
|
|
|
|
|
11,151 |
|
|
|
|
|
|
|
|
Net income applicable to common shares |
|
$ |
217,269 |
|
|
$ |
176,247 |
|
|
$ |
41,022 |
|
|
|
23.3 |
|
|
|
|
Average common shares basic |
|
|
366,221 |
|
|
|
235,809 |
|
|
|
130,412 |
|
|
|
55.3 |
% |
Average common shares diluted (3) |
|
|
387,322 |
|
|
|
238,881 |
|
|
|
148,441 |
|
|
|
62.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic |
|
$ |
0.59 |
|
|
$ |
0.75 |
|
|
$ |
(0.16 |
) |
|
|
(21.3 |
) |
Net income per common share diluted |
|
|
0.59 |
|
|
|
0.74 |
|
|
|
(0.15 |
) |
|
|
(20.3 |
)% |
Cash dividends declared |
|
|
0.3975 |
|
|
|
0.5300 |
|
|
|
(0.1325 |
) |
|
|
(25.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
0.83 |
% |
|
|
1.01 |
% |
|
|
(0.18 |
)% |
|
|
(17.8 |
)% |
Return on average total shareholders equity |
|
|
7.5 |
|
|
|
11.7 |
|
|
|
(4.2 |
) |
|
|
(35.9 |
) |
Return on average tangible shareholders equity (4) |
|
|
18.2 |
|
|
|
14.9 |
|
|
|
3.3 |
|
|
|
22.1 |
|
Net interest margin (5) |
|
|
3.26 |
|
|
|
3.31 |
|
|
|
(0.05 |
) |
|
|
(1.5 |
) |
Efficiency ratio (6) |
|
|
57.0 |
|
|
|
58.5 |
|
|
|
(1.5 |
) |
|
|
(2.6 |
) |
Effective tax rate (5) |
|
|
18.7 |
|
|
|
24.7 |
|
|
|
(6.0 |
) |
|
|
(24.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue fully taxable equivalent (FTE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
766,690 |
|
|
$ |
508,946 |
|
|
$ |
257,744 |
|
|
|
50.6 |
% |
FTE adjustment (5) |
|
|
11,126 |
|
|
|
8,174 |
|
|
|
2,952 |
|
|
|
36.1 |
|
|
|
|
Net interest income |
|
|
777,816 |
|
|
|
517,120 |
|
|
|
260,696 |
|
|
|
50.4 |
|
Non-interest income |
|
|
472,182 |
|
|
|
301,370 |
|
|
|
170,812 |
|
|
|
56.7 |
|
|
|
|
Total revenue |
|
$ |
1,249,998 |
|
|
$ |
818,490 |
|
|
$ |
431,508 |
|
|
|
52.7 |
% |
|
|
|
|
|
|
N.M., |
|
not a meaningful value. |
|
(1) |
|
Comparisons for presented periods are impacted by a number of factors. Refer to the Significant Items Influencing Financial Performance Comparisons for additional
discussion regarding these key factors. |
|
(2) |
|
On July 1, 2007, Huntington acquired Sky Financial Group, Inc. Accordingly, the balances presented include the impact of the acquisition from that date. |
|
(3) |
|
For the six months ended June 30, 2008, the impact of the convertible preferred stock issued in April of 2008 totaling 20.1 millon shares was included in the diluted share
calculation. It was included because the result was less than basic earnings per share (dilutive) on a year-to-date basis. |
|
(4) |
|
Net income excluding expense of amortization of intangibles (net of tax) for the period divided by average tangible common shareholders equity. Average tangible common
shareholders equity equals average total common 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) |
|
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate. |
|
(6) |
|
Non-interest expense less amortization of intangibles divided by the sum of FTE net interest income and non-interest income excluding securities gains/(losses). |
9
Significant Items
Definition of Significant Items
Certain components of the income statement are naturally subject to more volatility than
others. As a result, readers of this report may view such items differently in their assessment of
underlying or core earnings performance compared with their expectations and/or any
implications resulting from them on their assessment of future performance trends.
Therefore, we believe the disclosure of certain Significant Items affecting current and
prior period results aids readers of this report in better understanding corporate performance so
that they can ascertain for themselves what, if any, items they may wish to include or exclude from
their analysis of performance, within the context of determining how that performance differed from
their expectations, as well as how, if at all, to adjust their estimates of future performance
accordingly.
To this end, we have adopted a practice of listing as Significant Items in our external
disclosure documents, including earnings press releases, investor presentations, reports on Forms
10-Q and 10-K, individual and/or particularly volatile items that impact the current period results
by $0.01 per share or more. Such Significant Items generally fall within the categories
discussed below:
Timing Differences
Parts of our regular business activities are naturally volatile, including capital markets
income and sales of loans. While such items may generally be expected to occur within a full-year
reporting period, they may vary significantly from period to period. Such items are also typically
a component of an income statement line item and not, therefore, readily discernable. By
specifically disclosing such items, analysts/investors can better assess how, if at all, to adjust
their estimates of future performance.
Other Items
From time to time, an event or transaction might significantly impact revenues or expenses in
a particular reporting period that is judged to be one-time, short-term in nature, and/or
materially outside typically expected performance. Examples would be (a) merger costs as they
typically impact expenses for only a few quarters during the period of transition; e.g.,
restructuring charges, asset valuation adjustments, etc.; (b) changes in an accounting principle;
(c) large tax assessments/refunds; (d) a large gain/loss on the sale of an asset; and (e) outsized
commercial loan net charge-offs related to fraud; and similar events that could occur. In
addition, for the periods covered by this report, the impact of the Franklin restructuring is
deemed to be a significant item due to its unusually large size and because it was acquired in the
Sky Financial merger and thus it is not representative of our typical underwriting criteria. By
disclosing such items, readers of this report can better assess how, if at all, to adjust their
estimates of future performance.
Provision for Credit Losses
While the provision for credit losses may vary significantly among periods, and often exceeds
$0.01 per share, we typically exclude it from the list of Significant Items unless, in our view,
there is a significant, specific credit (or multiple significant, specific credits) affecting
comparability among periods. In determining whether any portion of the provision for credit losses
should be included as a significant item, we consider, among other things, that the provision is a
major income statement caption rather than a component of another caption and, therefore, the
period-to-period variance can be readily determined. We also consider the additional historical
volatility of the provision for credit losses.
Other Exclusions
Significant Items for any particular period are not intended to be a complete list of items
that may significantly impact future periods. A number of factors, including those described in
Huntingtons 2007 Annual Report on Form 10-K and other factors described from time to time in
Huntingtons other filings with the SEC, could also significantly impact future periods.
10
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons from the beginning of 2007 through the 2008 second quarter were impacted
by a number of significant items summarized below.
|
1. |
|
Sky Financial Acquisition. The merger with Sky Financial was completed on July 1,
2007. The impacts of the quarterly reported results compared with premerger reporting
periods are as follows: |
|
|
|
Increased the absolute level of reported average balance sheet, revenue, expense,
and credit quality results (e.g., net charge-offs). |
|
|
|
|
Increased reported non-interest expense items as a result of costs incurred as part
of merger integration and post-merger restructuring activities, most notably employee
retention bonuses, outside programming services related to systems conversions, and
marketing expenses related to customer retention initiatives. These net merger and
restructuring costs were $14.6 million in the 2008 second quarter, $7.3 million in the
2008 first quarter, $44.4 million in the 2007 fourth quarter, $32.3 million in the 2007
third quarter, $7.6 million in the 2007 second quarter, and $0.8 million in the 2007
first quarter. |
|
2. |
|
Franklin Relationship Restructuring. Performance for the 2007 fourth quarter included
a $423.6 million ($0.75 per common share based upon the quarterly average outstanding
diluted common shares) negative impact related to our Franklin relationship acquired in the
Sky Financial acquisition. On December 28, 2007, the loans associated with Franklin were
restructured, resulting in a $405.8 million provision for credit losses and a $17.9 million
reduction of net interest income. The net interest income reduction reflected the
placement of the Franklin loans on nonaccrual status from November 16, 2007, until December
28, 2007. |
|
|
3. |
|
Visaâ Initial Public Offering (IPO). Performance for the 2008 first quarter
included the positive impact of $37.5 million ($0.07 per common share) related to the
Visa® IPO occurring in March of 2008. This impact was comprised of two
components: (a) $25.1 million gain, recorded in other non-interest income, resulting from
the proceeds of the IPO, and (b) $12.4 million partial reversal of the 2007 fourth quarter
accrual of $24.9 million ($0.04 per common share) for indemnification charges against
Visa®, recorded in other non-interest expense. |
|
|
4. |
|
Mortgage Servicing Rights (MSRs) and Related Hedging. Included in total net
market-related losses are net losses or gains from our MSRs and the related hedging.
Additional information regarding MSRs is located under the Market Risk heading of the
Risk Management and Capital section. Net income included the following net impact of MSR
hedging activity (see Table 10): |
(in thousands, except per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest |
|
Non-interest |
|
Pretax |
|
Net |
|
Per common |
Period |
|
income |
|
income |
|
income |
|
income |
|
share |
1Q07 |
|
$ |
|
|
|
$ |
(2,018 |
) |
|
$ |
(2,018 |
) |
|
$ |
(1,312 |
) |
|
$ |
(0.01 |
) |
2Q07 |
|
|
248 |
|
|
|
(4,998 |
) |
|
|
(4,750 |
) |
|
|
(3,088 |
) |
|
|
(0.01 |
) |
3Q07 |
|
|
2,357 |
|
|
|
(6,002 |
) |
|
|
(3,645 |
) |
|
|
(2,369 |
) |
|
|
(0.01 |
) |
4Q07 |
|
|
3,192 |
|
|
|
(11,766 |
) |
|
|
(8,574 |
) |
|
|
(5,573 |
) |
|
|
(0.02 |
) |
|
|
|
2007 |
|
$ |
5,797 |
|
|
$ |
(24,784 |
) |
|
$ |
(18,987 |
) |
|
$ |
(12,342 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q08 |
|
$ |
5,934 |
|
|
$ |
(24,706 |
) |
|
$ |
(18,772 |
) |
|
$ |
(12,202 |
) |
|
$ |
(0.03 |
) |
2Q08 |
|
|
9,364 |
|
|
|
(10,697 |
) |
|
|
(1,333 |
) |
|
|
(866 |
) |
|
|
|
|
|
|
|
2008 |
|
$ |
15,298 |
|
|
$ |
(35,403 |
) |
|
$ |
(20,105 |
) |
|
$ |
(13,068 |
) |
|
$ |
(0.03 |
) |
|
|
|
During the 2008 second quarter, we engaged an independent party to provide improved
analytical tools and insight to enhance our strategies with the objective to decrease the
volatility from MSR fair value changes. This change is reflected in the improvement in our
net impact of MSR hedging during the current quarter. |
11
|
5. |
|
Other Net Market-Related Gains or Losses. Other net market-related gains or losses
included gains and losses related to the following market-driven activities: gains and
losses from public equity investing included in other non-interest income, net securities
gains and losses, net gains and losses from the sale of loans, and the impact from the
extinguishment of debt. Total net market-related losses also include the net impact of
MSRs and related hedging (see item 4 above). Net income included the following impact
from other net market-related losses: |
(in thousands, except per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
Net |
|
Debt |
|
|
|
|
|
|
|
|
gains/ |
|
Equity Fund |
|
Gain / (loss) |
|
extinguish- |
|
Pretax |
|
Net |
|
Per common |
Period |
|
(losses) |
|
investments |
|
on loans sold |
|
ment |
|
income |
|
income |
|
share |
1Q07 |
|
$ |
104 |
|
|
$ |
(8,530 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(8,426 |
) |
|
$ |
(5,477 |
) |
|
$ |
(0.02 |
) |
2Q07 |
|
|
(5,139 |
) |
|
|
2,301 |
|
|
|
|
|
|
|
4,090 |
|
|
|
1,252 |
|
|
|
814 |
|
|
|
|
|
3Q07 |
|
|
(13,900 |
) |
|
|
(4,387 |
) |
|
|
|
|
|
|
3,968 |
|
|
|
(14,319 |
) |
|
|
(9,307 |
) |
|
|
(0.03 |
) |
4Q07 |
|
|
(11,551 |
) |
|
|
(9,393 |
) |
|
|
(34,003 |
) |
|
|
|
|
|
|
(54,947 |
) |
|
|
(35,716 |
) |
|
|
(0.09 |
) |
|
|
|
2007 |
|
$ |
(30,486 |
) |
|
$ |
(20,009 |
) |
|
$ |
(34,003 |
) |
|
$ |
8,058 |
|
|
$ |
(76,440 |
) |
|
$ |
(49,686 |
) |
|
$ |
(0.16 |
) |
|
1Q08 |
|
$ |
1,429 |
|
|
$ |
(2,668 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,239 |
) |
|
$ |
(805 |
) |
|
$ |
|
|
2Q08 |
|
|
2,073 |
|
|
|
(4,609 |
) |
|
|
(5,131 |
) |
|
|
2,177 |
|
|
|
(5,490 |
) |
|
|
(3,569 |
) |
|
|
(0.01 |
) |
|
|
|
2008 |
|
$ |
3,502 |
|
|
$ |
(7,277 |
) |
|
$ |
(5,131 |
) |
|
$ |
2,177 |
|
|
$ |
(6,729 |
) |
|
$ |
(4,374 |
) |
|
$ |
|
|
6. |
|
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: |
|
|
|
2008- Second Quarter |
|
|
|
$3.4 million ($0.01 per common share) benefit to provision for income taxes,
representing a reduction to the previously established capital loss carry-forward
valuation allowance related to the value of Visa®shares held. |
|
|
|
$11.1 million ($0.03 per common share) benefit to provision for income taxes,
representing a reduction to the previously established capital loss carry-forward
valuation allowance as a result of the 2008 first quarter Visa® IPO. |
|
|
|
|
$11.0 million ($0.02 per common share) of asset impairment, including (a) $5.9
million venture capital loss, (b) $2.6 million charge off of a receivable, and (c) $2.5
million write-down of leasehold improvements in our Cleveland main office. |
|
|
|
$8.9 million ($0.02 per common share) negative impact primarily due to increases to
litigation reserves on existing cases. |
|
|
|
$1.9 million ($0.01 per common share) negative impact primarily due to increases to
litigation reserves on existing cases. |
Table 3 reflects the earnings impact of the above-mentioned significant items for periods affected
by this Results of Operations discussion:
12
Table 3 Significant Items Influencing Earnings Performance Comparison (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30,2008 |
|
March 31,2008 |
|
June 30,2007 |
(in millions) |
|
After-tax |
|
EPS |
|
After-tax |
|
EPS |
|
After-tax |
|
EPS |
|
Net income reported earnings |
|
$ |
101.4 |
|
|
|
|
|
|
$ |
127.1 |
|
|
|
|
|
|
$ |
80.5 |
|
|
|
|
|
Earnings per share, after tax |
|
|
|
|
|
$ |
0.25 |
|
|
|
|
|
|
$ |
0.35 |
|
|
|
|
|
|
$ |
0.34 |
|
Change from prior quarter $ |
|
|
|
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
1.00 |
|
|
|
|
|
|
|
(0.06 |
) |
Change from prior quarter % |
|
|
|
|
|
|
(28.6 |
)% |
|
|
|
|
|
|
N.M. |
% |
|
|
|
|
|
|
(15.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from a year-ago $ |
|
|
|
|
|
$ |
(0.09 |
) |
|
|
|
|
|
$ |
(0.05 |
) |
|
|
|
|
|
$ |
(0.12 |
) |
Change from a year-ago % |
|
|
|
|
|
|
(26.5 |
)% |
|
|
|
|
|
|
(12.5) |
% |
|
|
|
|
|
|
(26.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant items - favorable (unfavorable) impact: |
|
Earnings(2) |
|
EPS |
|
Earnings (2) |
|
EPS |
|
Earnings (2) |
|
EPS |
|
Deferred tax valuation allowance benefit (3) |
|
$ |
3.4 |
|
|
$ |
0.01 |
|
|
$ |
11.1 |
|
|
$ |
0.02 |
|
|
$ |
|
|
|
$ |
|
|
Merger and restructuring costs |
|
|
(14.6 |
) |
|
|
(0.03 |
) |
|
|
(7.3 |
) |
|
|
(0.01 |
) |
|
|
(7.6 |
) |
|
|
(0.02 |
) |
Net market-related losses |
|
|
(6.8 |
) |
|
|
(0.01 |
) |
|
|
(20.0 |
) |
|
|
(0.04 |
) |
|
|
(3.5 |
) |
|
|
(0.01 |
) |
Aggregate impact of Visa® IPO |
|
|
|
|
|
|
|
|
|
|
37.5 |
|
|
|
0.07 |
|
|
|
|
|
|
|
|
|
Asset impairment |
|
|
|
|
|
|
|
|
|
|
(11.0 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30,2008 |
|
June 30,2007 |
(in millions) |
|
After-tax |
|
EPS |
|
After-tax |
|
EPS |
|
Net income reported earnings |
|
$ |
228.4 |
|
|
|
|
|
|
$ |
176.2 |
|
|
|
|
|
Earnings per share, after tax |
|
|
|
|
|
$ |
0.59 |
|
|
|
|
|
|
$ |
0.74 |
|
Change from a year-ago $ |
|
|
|
|
|
|
(0.15 |
) |
|
|
|
|
|
|
(0.16 |
) |
Change from a year-ago % |
|
|
|
|
|
|
(20.3 |
)% |
|
|
|
|
|
|
(17.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant items - favorable (unfavorable) impact: |
|
Earnings(2) |
|
EPS |
|
Earnings (2) |
|
EPS |
|
Aggregate impact of Visa® IPO |
|
$ |
37.5 |
|
|
|
0.06 |
|
|
$ |
|
|
|
|
|
|
Deferred tax valuation allowance benefit (3) |
|
|
14.5 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
Net market-related losses |
|
|
(26.9 |
) |
|
|
(0.05 |
) |
|
|
(13.9 |
) |
|
|
(0.04 |
) |
Merger and restructuring costs |
|
|
(21.9 |
) |
|
|
(0.04 |
) |
|
|
(8.4 |
) |
|
|
(0.02 |
) |
Asset impairment |
|
|
(11.0 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
Litigation losses |
|
|
|
|
|
|
|
|
|
|
(1.9 |
) |
|
|
(0.01 |
) |
|
|
|
N.M., not a meaningful value. |
|
(1) |
|
Refer to the Significant Items Influencing Financial
Performance Comparisons section for additional discussion regarding these items. |
|
(2) |
|
Pre-tax unless otherwise noted. |
|
(3) |
|
After-tax. |
13
Net Interest Income / Average Balance Sheet
(This section should be read in conjunction with Significant Items 1, 2, and 4.)
2008 Second Quarter versus 2007 Second Quarter
Fully taxable equivalent net interest income increased $138.0 million, or 54%, compared with
the year-ago quarter. This reflected the favorable impact of a $16.6 billion, or 52%, increase in
average earning assets, with $14.6 billion
representing an increase in average loans and leases, and a 3 basis point increase in the net
interest margin to 3.29%. The increase in average earning assets, including loans and leases, was
primarily Sky Financial merger-related. Table 4 details the $14.6 billion reported increase in
average loans and leases.
Table 4 Average Loans/Leases and Deposits Estimated Merger Related Impacts 2Q08 vs. 2Q07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
Change |
|
|
Merger |
|
|
Non-merger Related |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
Related |
|
|
Amount |
|
|
% (1) |
|
Net interest income - FTE |
|
$ 395,490 |
|
|
$ 257,518 |
|
|
$ 137,972 |
|
|
53.6 % |
|
|
$ 151,592 |
|
|
$ (13,620) |
|
|
(3.3) % |
|
Average Loans and Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans/Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
13,631 |
|
|
$ |
8,167 |
|
|
$ |
5,464 |
|
|
|
66.9 |
% |
|
$ |
4,775 |
|
|
$ |
689 |
|
|
|
5.3 |
% |
Commercial real estate |
|
|
9,601 |
|
|
|
4,651 |
|
|
|
4,950 |
|
|
|
N.M. |
|
|
|
3,971 |
|
|
|
979 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
Total commercial |
|
$ |
23,232 |
|
|
$ |
12,818 |
|
|
$ |
10,414 |
|
|
|
81.2 |
% |
|
$ |
8,746 |
|
|
$ |
1,668 |
|
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
$ |
4,551 |
|
|
$ |
3,873 |
|
|
$ |
678 |
|
|
|
17.5 |
% |
|
$ |
432 |
|
|
$ |
246 |
|
|
|
5.7 |
% |
Home equity |
|
|
7,365 |
|
|
|
4,973 |
|
|
|
2,392 |
|
|
|
48.1 |
|
|
|
2,385 |
|
|
|
7 |
|
|
|
0.1 |
|
Residential mortgage |
|
|
5,178 |
|
|
|
4,351 |
|
|
|
827 |
|
|
|
19.0 |
|
|
|
1,112 |
|
|
|
(285 |
) |
|
|
(5.2 |
) |
Other consumer |
|
|
699 |
|
|
|
424 |
|
|
|
275 |
|
|
|
64.9 |
|
|
|
143 |
|
|
|
132 |
|
|
|
23.3 |
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
17,793 |
|
|
|
13,621 |
|
|
|
4,172 |
|
|
|
30.6 |
|
|
|
4,072 |
|
|
|
100 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
41,025 |
|
|
$ |
26,439 |
|
|
$ |
14,586 |
|
|
|
55.2 |
% |
|
$ |
12,818 |
|
|
$ |
1,768 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
5,061 |
|
|
$ |
3,591 |
|
|
$ |
1,470 |
|
|
|
40.9 |
% |
|
$ |
1,829 |
|
|
$ |
(359 |
) |
|
|
(6.6 |
)% |
Demand deposits interest bearing |
|
|
4,086 |
|
|
|
2,404 |
|
|
|
1,682 |
|
|
|
70.0 |
|
|
|
1,460 |
|
|
|
222 |
|
|
|
5.7 |
|
Money market deposits |
|
|
6,267 |
|
|
|
5,466 |
|
|
|
801 |
|
|
|
14.7 |
|
|
|
996 |
|
|
|
(195 |
) |
|
|
(3.0 |
) |
Savings and other domestic time deposits |
|
|
5,047 |
|
|
|
2,931 |
|
|
|
2,116 |
|
|
|
72.2 |
|
|
|
2,594 |
|
|
|
(478 |
) |
|
|
(8.7 |
) |
Core certificates of deposit |
|
|
10,952 |
|
|
|
5,591 |
|
|
|
5,361 |
|
|
|
95.9 |
|
|
|
4,630 |
|
|
|
731 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
31,413 |
|
|
|
19,983 |
|
|
|
11,430 |
|
|
|
57.2 |
|
|
|
11,509 |
|
|
|
(79 |
) |
|
|
(0.3 |
) |
Other deposits |
|
|
6,614 |
|
|
|
4,290 |
|
|
|
2,324 |
|
|
|
54.2 |
|
|
|
1,342 |
|
|
|
982 |
|
|
|
17.4 |
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
38,027 |
|
|
$ |
24,273 |
|
|
$ |
13,754 |
|
|
|
56.7 |
% |
|
$ |
12,851 |
|
|
$ |
903 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value. |
|
(1) |
|
Calculated as non-merger related / (prior period + merger-related) |
The $1.8 billion, or 5%, non-merger-related increase in average total loans and leases
primarily reflected:
|
|
|
$1.7 billion, or 8%, increase in average total commercial loans, with growth
reflected in both C&I and CRE loans. The growth in CRE was primarily to existing
borrowers with a focus on traditional income producing property types and was not
related to the single family home builder segment. |
|
|
|
|
$0.1 billion, or 1%, increase in average total consumer loans. This reflected
growth in automobile loans and leases and other consumer loans, partially offset by a
decline in residential mortgages due to loan sales in the current and year-ago
quarters. Average home equity loans were little changed. |
Regarding average total deposits, most of the increase was merger-related. The $0.9 billion
non-merger-related increase reflected:
|
|
|
$1.0 billion, or 17%, growth in other deposits, primarily other domestic deposits
over $100,000, reflecting increases in commercial and public funds deposits. |
14
Partially offset by:
|
|
|
$0.1 billion decrease in average total core deposits. This reflected a decline in
non-interest bearing demand deposits, a planned reduction in non-relationship
collateralized public fund deposits, as well as a decline in average savings and other
domestic deposits and money market deposits, as customers continued to transfer
funds from lower rate to higher rate accounts like certificates of deposits. Offsetting
these declines was continued growth in core certificates of deposit, as well as in
interest bearing demand deposits. |
2008 Second Quarter versus 2008 First Quarter
Compared with the 2008 first quarter, fully taxable equivalent net interest income increased
$13.2 million, or 3%. This reflected the positive impact of a higher net interest margin and an
increase in average earning assets, primarily loans. The net interest margin was 3.29% in the
current quarter, up 6 basis points. The 6 basis point increase reflected:
|
|
|
5 basis points positive impact primarily due to improved pricing of core deposits. |
|
|
|
|
2 basis points increase related to the funding provided by the convertible preferred
capital issuance. |
Partially offset by:
|
|
|
1 basis point decrease related to earning asset mix. |
The $0.7 billion, or 2%, increase in average total loans and leases reflected 3% growth in
average total commercial loans. The 2008 second quarter growth was comprised primarily of new or
increased loan facilities to existing borrowers. This growth was not related to the single family
home builder segment or funding interest coverage on existing construction loans. Average total
consumer loans increased slightly, led by growth in automobile loans and leases and modest growth
in home equity, partially offset by declines in residential mortgages and other consumer loans.
During the current quarter, $473 million residential mortgage loans were sold to improve our
interest rate risk position and overall balance sheet.
Average total deposits were $38.0 billion, up slightly compared with the prior quarter. There
were changes between the various deposit account categories consisting of:
|
|
|
$0.2 billion, or 3%, increase in other deposits. |
Partially offset by:
|
|
|
$0.1 billion decline in average total core deposits. The primary driver of the
change was a planned reduction in non-relationship collateralized public fund deposits. |
Tables 5 and 6 reflect quarterly average balance sheets and rates earned and paid on
interest-earning assets and interest-bearing liabilities.
15
Table 5 Consolidated Quarterly Average Balance Sheets
Fully taxable equivalent basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances |
|
|
|
Change |
|
|
|
2008 |
|
|
2007 |
|
|
|
2Q08 vs 2Q07 |
|
(in millions) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
|
Amount |
|
|
Percent |
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
$ |
256 |
|
|
$ |
293 |
|
|
$ |
324 |
|
|
$ |
292 |
|
|
$ |
259 |
|
|
|
$ |
(3 |
) |
|
|
(1.2) |
% |
Trading account securities |
|
|
1,243 |
|
|
|
1,186 |
|
|
|
1,122 |
|
|
|
1,149 |
|
|
|
230 |
|
|
|
|
1,013 |
|
|
|
N.M. |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
566 |
|
|
|
769 |
|
|
|
730 |
|
|
|
557 |
|
|
|
574 |
|
|
|
|
(8 |
) |
|
|
(1.4 |
) |
Loans held for sale |
|
|
501 |
|
|
|
565 |
|
|
|
493 |
|
|
|
419 |
|
|
|
291 |
|
|
|
|
210 |
|
|
|
72.2 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
3,971 |
|
|
|
3,774 |
|
|
|
3,807 |
|
|
|
3,951 |
|
|
|
3,253 |
|
|
|
|
718 |
|
|
|
22.1 |
|
Tax-exempt |
|
|
717 |
|
|
|
703 |
|
|
|
689 |
|
|
|
675 |
|
|
|
629 |
|
|
|
|
88 |
|
|
|
14.0 |
|
|
|
|
|
|
|
|
Total investment securities |
|
|
4,688 |
|
|
|
4,477 |
|
|
|
4,496 |
|
|
|
4,626 |
|
|
|
3,882 |
|
|
|
|
806 |
|
|
|
20.8 |
|
Loans and leases:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
13,631 |
|
|
|
13,343 |
|
|
|
13,270 |
|
|
|
13,036 |
|
|
|
8,167 |
|
|
|
|
5,464 |
|
|
|
66.9 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
2,038 |
|
|
|
2,014 |
|
|
|
1,892 |
|
|
|
1,815 |
|
|
|
1,258 |
|
|
|
|
780 |
|
|
|
62.0 |
|
Commercial |
|
|
7,563 |
|
|
|
7,273 |
|
|
|
7,161 |
|
|
|
7,165 |
|
|
|
3,393 |
|
|
|
|
4,170 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
9,601 |
|
|
|
9,287 |
|
|
|
9,053 |
|
|
|
8,980 |
|
|
|
4,651 |
|
|
|
|
4,950 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
Total commercial |
|
|
23,232 |
|
|
|
22,630 |
|
|
|
22,323 |
|
|
|
22,016 |
|
|
|
12,818 |
|
|
|
|
10,414 |
|
|
|
81.2 |
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
3,636 |
|
|
|
3,309 |
|
|
|
3,052 |
|
|
|
2,931 |
|
|
|
2,322 |
|
|
|
|
1,314 |
|
|
|
56.6 |
|
Automobile leases |
|
|
915 |
|
|
|
1,090 |
|
|
|
1,272 |
|
|
|
1,423 |
|
|
|
1,551 |
|
|
|
|
(636 |
) |
|
|
(41.0 |
) |
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
4,551 |
|
|
|
4,399 |
|
|
|
4,324 |
|
|
|
4,354 |
|
|
|
3,873 |
|
|
|
|
678 |
|
|
|
17.5 |
|
Home equity |
|
|
7,365 |
|
|
|
7,274 |
|
|
|
7,297 |
|
|
|
7,468 |
|
|
|
4,973 |
|
|
|
|
2,392 |
|
|
|
48.1 |
|
Residential mortgage |
|
|
5,178 |
|
|
|
5,351 |
|
|
|
5,437 |
|
|
|
5,456 |
|
|
|
4,351 |
|
|
|
|
827 |
|
|
|
19.0 |
|
Other loans |
|
|
699 |
|
|
|
713 |
|
|
|
728 |
|
|
|
534 |
|
|
|
424 |
|
|
|
|
275 |
|
|
|
64.9 |
|
|
|
|
|
|
|
|
Total consumer |
|
|
17,793 |
|
|
|
17,737 |
|
|
|
17,786 |
|
|
|
17,812 |
|
|
|
13,621 |
|
|
|
|
4,172 |
|
|
|
30.6 |
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
41,025 |
|
|
|
40,367 |
|
|
|
40,109 |
|
|
|
39,828 |
|
|
|
26,439 |
|
|
|
|
14,586 |
|
|
|
55.2 |
|
Allowance for loan and lease losses |
|
|
(654 |
) |
|
|
(630 |
) |
|
|
(474 |
) |
|
|
(475 |
) |
|
|
(297 |
) |
|
|
|
(357 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
40,371 |
|
|
|
39,737 |
|
|
|
39,635 |
|
|
|
39,353 |
|
|
|
26,142 |
|
|
|
|
14,229 |
|
|
|
54.4 |
|
|
|
|
|
|
|
|
Total earning assets |
|
|
48,279 |
|
|
|
47,657 |
|
|
|
47,274 |
|
|
|
46,871 |
|
|
|
31,675 |
|
|
|
|
16,604 |
|
|
|
52.4 |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
943 |
|
|
|
1,036 |
|
|
|
1,098 |
|
|
|
1,111 |
|
|
|
748 |
|
|
|
|
195 |
|
|
|
26.1 |
|
Intangible assets |
|
|
3,449 |
|
|
|
3,472 |
|
|
|
3,440 |
|
|
|
3,337 |
|
|
|
626 |
|
|
|
|
2,823 |
|
|
|
N.M. |
|
All other assets |
|
|
3,522 |
|
|
|
3,350 |
|
|
|
3,142 |
|
|
|
3,124 |
|
|
|
2,398 |
|
|
|
|
1,124 |
|
|
|
46.9 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
55,539 |
|
|
$ |
54,885 |
|
|
$ |
54,480 |
|
|
$ |
53,968 |
|
|
$ |
35,150 |
|
|
|
$ |
20,389 |
|
|
|
58.0 |
% |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
5,061 |
|
|
$ |
5,034 |
|
|
$ |
5,218 |
|
|
$ |
5,384 |
|
|
$ |
3,591 |
|
|
|
$ |
1,470 |
|
|
|
40.9 |
% |
Demand deposits interest bearing |
|
|
4,086 |
|
|
|
3,934 |
|
|
|
3,929 |
|
|
|
3,808 |
|
|
|
2,404 |
|
|
|
|
1,682 |
|
|
|
70.0 |
|
Money market deposits |
|
|
6,267 |
|
|
|
6,753 |
|
|
|
6,845 |
|
|
|
6,869 |
|
|
|
5,466 |
|
|
|
|
801 |
|
|
|
14.7 |
|
Savings and other domestic deposits |
|
|
5,047 |
|
|
|
5,004 |
|
|
|
5,012 |
|
|
|
5,127 |
|
|
|
2,931 |
|
|
|
|
2,116 |
|
|
|
72.2 |
|
Core certificates of deposit |
|
|
10,952 |
|
|
|
10,796 |
|
|
|
10,674 |
|
|
|
10,425 |
|
|
|
5,591 |
|
|
|
|
5,361 |
|
|
|
95.9 |
|
|
|
|
|
|
|
|
Total core deposits |
|
|
31,413 |
|
|
|
31,521 |
|
|
|
31,678 |
|
|
|
31,613 |
|
|
|
19,983 |
|
|
|
|
11,430 |
|
|
|
57.2 |
|
Other domestic deposits of $100,000 or more |
|
|
2,143 |
|
|
|
1,983 |
|
|
|
1,731 |
|
|
|
1,610 |
|
|
|
1,056 |
|
|
|
|
1,087 |
|
|
|
N.M. |
|
Brokered deposits and negotiable CDs |
|
|
3,361 |
|
|
|
3,542 |
|
|
|
3,518 |
|
|
|
3,728 |
|
|
|
2,682 |
|
|
|
|
679 |
|
|
|
25.3 |
|
Deposits in foreign offices |
|
|
1,110 |
|
|
|
885 |
|
|
|
748 |
|
|
|
701 |
|
|
|
552 |
|
|
|
|
558 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
Total deposits |
|
|
38,027 |
|
|
|
37,931 |
|
|
|
37,675 |
|
|
|
37,652 |
|
|
|
24,273 |
|
|
|
|
13,754 |
|
|
|
56.7 |
|
Short-term borrowings |
|
|
2,854 |
|
|
|
2,772 |
|
|
|
2,489 |
|
|
|
2,542 |
|
|
|
2,075 |
|
|
|
|
779 |
|
|
|
37.5 |
|
Federal Home Loan Bank advances |
|
|
3,412 |
|
|
|
3,389 |
|
|
|
3,070 |
|
|
|
2,553 |
|
|
|
1,329 |
|
|
|
|
2,083 |
|
|
|
N.M. |
|
Subordinated notes and other long-term debt |
|
|
3,928 |
|
|
|
3,814 |
|
|
|
3,875 |
|
|
|
3,912 |
|
|
|
3,470 |
|
|
|
|
458 |
|
|
|
13.2 |
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
43,160 |
|
|
|
42,872 |
|
|
|
41,891 |
|
|
|
41,275 |
|
|
|
27,556 |
|
|
|
|
15,604 |
|
|
|
56.6 |
|
|
|
|
|
|
|
|
All other liabilities |
|
|
963 |
|
|
|
1,104 |
|
|
|
1,160 |
|
|
|
1,103 |
|
|
|
960 |
|
|
|
|
3 |
|
|
|
0.3 |
|
Shareholders equity |
|
|
6,355 |
|
|
|
5,875 |
|
|
|
6,211 |
|
|
|
6,206 |
|
|
|
3,043 |
|
|
|
|
3,312 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
55,539 |
|
|
$ |
54,885 |
|
|
$ |
54,480 |
|
|
$ |
53,968 |
|
|
$ |
35,150 |
|
|
|
$ |
20,389 |
|
|
|
58.0 |
% |
|
|
|
|
|
|
- |
|
|
|
|
|
N.M., not a meaningful value. |
|
(1) |
|
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans. |
16
Table 6 Consolidated Quarterly Net Interest Margin Analysis
Fully taxable equivalent basis (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Rates (2) |
|
|
|
2008 |
|
|
2007 |
|
Fully taxable equivalent basis (1) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
|
2.77 |
% |
|
|
3.97 |
% |
|
|
4.30 |
% |
|
|
4.69 |
% |
|
|
6.47 |
% |
Trading account securities |
|
|
5.13 |
|
|
|
5.27 |
|
|
|
5.72 |
|
|
|
6.01 |
|
|
|
5.74 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
2.08 |
|
|
|
3.07 |
|
|
|
4.59 |
|
|
|
5.26 |
|
|
|
5.28 |
|
Loans held for sale |
|
|
5.98 |
|
|
|
5.41 |
|
|
|
5.86 |
|
|
|
5.13 |
|
|
|
5.79 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
5.50 |
|
|
|
5.71 |
|
|
|
5.98 |
|
|
|
6.09 |
|
|
|
6.11 |
|
Tax-exempt |
|
|
6.77 |
|
|
|
6.75 |
|
|
|
6.74 |
|
|
|
6.78 |
|
|
|
6.69 |
|
|
|
|
|
Total investment securities |
|
|
5.69 |
|
|
|
5.88 |
|
|
|
6.10 |
|
|
|
6.19 |
|
|
|
6.20 |
|
Loans and leases: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
5.53 |
|
|
|
6.32 |
|
|
|
6.92 |
|
|
|
7.70 |
|
|
|
7.36 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
4.81 |
|
|
|
5.86 |
|
|
|
7.24 |
|
|
|
7.70 |
|
|
|
7.63 |
|
Commercial |
|
|
5.47 |
|
|
|
6.27 |
|
|
|
7.09 |
|
|
|
7.63 |
|
|
|
7.35 |
|
|
|
|
|
Commercial real estate |
|
|
5.32 |
|
|
|
6.18 |
|
|
|
7.12 |
|
|
|
7.65 |
|
|
|
7.42 |
|
|
|
|
|
Total commercial |
|
|
5.45 |
|
|
|
6.27 |
|
|
|
7.00 |
|
|
|
7.68 |
|
|
|
7.38 |
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
7.12 |
|
|
|
7.25 |
|
|
|
7.31 |
|
|
|
7.25 |
|
|
|
7.10 |
|
Automobile leases |
|
|
5.59 |
|
|
|
5.53 |
|
|
|
5.52 |
|
|
|
5.56 |
|
|
|
5.34 |
|
|
|
|
|
Automobile loans and leases |
|
|
6.81 |
|
|
|
6.82 |
|
|
|
6.78 |
|
|
|
6.70 |
|
|
|
6.39 |
|
Home equity |
|
|
6.43 |
|
|
|
7.21 |
|
|
|
7.81 |
|
|
|
7.94 |
|
|
|
7.63 |
|
Residential mortgage |
|
|
5.78 |
|
|
|
5.86 |
|
|
|
5.88 |
|
|
|
6.06 |
|
|
|
5.61 |
|
Other loans |
|
|
9.98 |
|
|
|
10.43 |
|
|
|
10.91 |
|
|
|
11.48 |
|
|
|
9.57 |
|
|
|
|
|
Total consumer |
|
|
6.48 |
|
|
|
6.84 |
|
|
|
7.10 |
|
|
|
7.17 |
|
|
|
6.69 |
|
|
|
|
|
Total loans and leases |
|
|
5.89 |
|
|
|
6.51 |
|
|
|
7.05 |
|
|
|
7.45 |
|
|
|
7.03 |
|
|
|
|
|
Total earning assets |
|
|
5.85 |
% |
|
|
6.40 |
% |
|
|
6.88 |
% |
|
|
7.25 |
% |
|
|
6.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Demand deposits interest bearing |
|
|
0.55 |
|
|
|
0.82 |
|
|
|
1.14 |
|
|
|
1.53 |
|
|
|
1.22 |
|
Money market deposits |
|
|
1.76 |
|
|
|
2.83 |
|
|
|
3.67 |
|
|
|
3.78 |
|
|
|
3.85 |
|
Savings and other domestic deposits |
|
|
1.83 |
|
|
|
2.27 |
|
|
|
2.54 |
|
|
|
2.54 |
|
|
|
2.23 |
|
Core certificates of deposit |
|
|
4.37 |
|
|
|
4.68 |
|
|
|
4.83 |
|
|
|
4.99 |
|
|
|
4.79 |
|
|
|
|
|
Total core deposits |
|
|
2.67 |
|
|
|
3.18 |
|
|
|
3.55 |
|
|
|
3.69 |
|
|
|
3.50 |
|
Other domestic deposits of $100,000 or more |
|
|
3.77 |
|
|
|
4.39 |
|
|
|
4.99 |
|
|
|
4.79 |
|
|
|
5.31 |
|
Brokered deposits and negotiable CDs |
|
|
3.38 |
|
|
|
4.43 |
|
|
|
5.24 |
|
|
|
5.42 |
|
|
|
5.53 |
|
Deposits in foreign offices |
|
|
1.66 |
|
|
|
2.16 |
|
|
|
3.27 |
|
|
|
3.29 |
|
|
|
3.16 |
|
|
|
|
|
Total deposits |
|
|
2.78 |
|
|
|
3.36 |
|
|
|
3.80 |
|
|
|
3.94 |
|
|
|
3.84 |
|
Short-term borrowings |
|
|
1.66 |
|
|
|
2.78 |
|
|
|
3.74 |
|
|
|
4.10 |
|
|
|
4.50 |
|
Federal Home Loan Bank advances |
|
|
3.01 |
|
|
|
3.94 |
|
|
|
5.03 |
|
|
|
5.31 |
|
|
|
4.76 |
|
Subordinated notes and other long-term debt |
|
|
4.21 |
|
|
|
5.12 |
|
|
|
5.93 |
|
|
|
6.15 |
|
|
|
5.96 |
|
|
|
|
|
Total interest bearing liabilities |
|
|
2.85 |
% |
|
|
3.53 |
% |
|
|
4.09 |
% |
|
|
4.24 |
% |
|
|
4.20 |
% |
|
|
|
|
Net interest rate spread |
|
|
3.00 |
% |
|
|
2.87 |
% |
|
|
2.79 |
% |
|
|
3.01 |
% |
|
|
2.72 |
% |
Impact of non-interest bearing funds on margin |
|
|
0.29 |
|
|
|
0.36 |
|
|
|
0.47 |
|
|
|
0.51 |
|
|
|
0.54 |
|
|
|
|
|
Net interest margin |
|
|
3.29 |
% |
|
|
3.23 |
% |
|
|
3.26 |
% |
|
|
3.52 |
% |
|
|
3.26 |
% |
|
|
|
- |
|
|
|
(1) |
|
Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. See Table 1 for the FTE adjustment. |
|
(2) |
|
Loan, lease, and deposit average rates include impact of applicable derivatives and non-deferrable fees. |
|
(3) |
|
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans. |
17
2008 First Six Months versus 2007 First Six Months
Fully taxable equivalent net interest income for the first six-month period of 2008 increased
$260.7 million, or 50%, compared with the comparable year-ago period. This reflected the favorable
impact of a $16.5 billion, or 52%, increase in average earning assets, with $14.4 billion
representing an increase in average loans and leases, partially offset by a 5 basis point decrease
in the net interest margin to 3.26%. The increase in average earning assets, including loans and
leases, was primarily Sky Financial merger-related.
The following table details the estimated merger related impacts on our reported loans and
deposits:
Table 7 Average Loans/Leases and Deposits Estimated Merger Related Impacts Six Months 2008 vs. Six Months 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
Change |
|
|
Merger |
|
|
Non-merger Related |
|
(in millions) |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
Related |
|
|
Amount |
|
|
% (1) |
|
Net interest income FTE |
|
$ |
777,816 |
|
|
$ |
517,120 |
|
|
$ |
260,696 |
|
|
|
50.4 |
% |
|
$ |
303,184 |
|
|
$ |
(42,488 |
) |
|
|
(5.2) |
% |
|
|
|
|
|
|
|
|
|
Average Loans and Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
13,487 |
|
|
$ |
8,077 |
|
|
$ |
5,410 |
|
|
|
67.0 |
% |
|
$ |
4,775 |
|
|
$ |
635 |
|
|
|
4.9 |
% |
Commercial real estate |
|
|
9,444 |
|
|
|
4,563 |
|
|
|
4,881 |
|
|
|
N.M. |
|
|
|
3,971 |
|
|
|
910 |
|
|
|
10.7 |
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
$ |
22,931 |
|
|
$ |
12,640 |
|
|
$ |
10,291 |
|
|
|
81.4 |
% |
|
$ |
8,746 |
|
|
$ |
1,545 |
|
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
$ |
4,475 |
|
|
$ |
3,893 |
|
|
$ |
582 |
|
|
|
14.9 |
% |
|
$ |
432 |
|
|
$ |
150 |
|
|
|
3.5 |
% |
Home equity |
|
|
7,271 |
|
|
|
4,943 |
|
|
|
2,328 |
|
|
|
47.1 |
|
|
|
2,385 |
|
|
|
(57 |
) |
|
|
(0.8 |
) |
Residential mortgage |
|
|
5,264 |
|
|
|
4,423 |
|
|
|
841 |
|
|
|
19.0 |
|
|
|
1,112 |
|
|
|
(271 |
) |
|
|
(4.9 |
) |
Other consumer |
|
|
755 |
|
|
|
423 |
|
|
|
332 |
|
|
|
78.5 |
|
|
|
143 |
|
|
|
189 |
|
|
|
33.4 |
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
17,765 |
|
|
|
13,682 |
|
|
|
4,083 |
|
|
|
29.8 |
|
|
|
4,072 |
|
|
|
11 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
40,696 |
|
|
$ |
26,322 |
|
|
$ |
14,374 |
|
|
|
54.6 |
% |
|
$ |
12,818 |
|
|
$ |
1,556 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
5,047 |
|
|
$ |
3,561 |
|
|
$ |
1,486 |
|
|
|
41.7 |
% |
|
$ |
1,829 |
|
|
$ |
(343 |
) |
|
|
(6.4) |
% |
Demand deposits interest bearing |
|
|
4,010 |
|
|
|
2,377 |
|
|
|
1,633 |
|
|
|
68.7 |
|
|
|
1,460 |
|
|
|
173 |
|
|
|
4.5 |
|
Money market deposits |
|
|
6,510 |
|
|
|
5,477 |
|
|
|
1,033 |
|
|
|
18.9 |
|
|
|
996 |
|
|
|
37 |
|
|
|
0.6 |
|
Savings and other domestic time deposits |
|
|
5,026 |
|
|
|
2,915 |
|
|
|
2,111 |
|
|
|
72.4 |
|
|
|
2,594 |
|
|
|
(483 |
) |
|
|
(8.8 |
) |
Core certificates of deposit |
|
|
10,874 |
|
|
|
5,523 |
|
|
|
5,351 |
|
|
|
96.9 |
|
|
|
4,630 |
|
|
|
721 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
31,467 |
|
|
|
19,853 |
|
|
|
11,614 |
|
|
|
58.5 |
|
|
|
11,509 |
|
|
|
105 |
|
|
|
0.3 |
|
Other deposits |
|
|
6,512 |
|
|
|
4,508 |
|
|
|
2,004 |
|
|
|
44.5 |
|
|
|
1,342 |
|
|
|
662 |
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
37,979 |
|
|
$ |
24,361 |
|
|
$ |
13,618 |
|
|
|
55.9 |
% |
|
$ |
12,851 |
|
|
$ |
767 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value. |
|
(1) |
|
Calculated as non-merger related / (prior period + merger-related) |
The $1.6 billion, or 4%, non-merger-related increase in average total loans and leases
primarily reflected an increase in average total commercial loans, with growth reflected in both
C&I and CRE loans. The growth in CRE loans was primarily to existing borrowers with a focus on
traditional income producing property types and was not related to the single family home builder
segment.
Average total consumer loans were little changed. This reflected a decline in average
residential mortgages due to loan sales in the first six-month period of 2007, partially offset by
modest growth in total average automobile loans and leases. Average home equity loans were down
slightly, reflecting the continued weakness in the housing sector and a softer economy.
Regarding average total deposits, most of the increase was merger-related. The $0.8 billion
non-merger-related increase reflected:
|
|
|
$0.7 billion, or 11%, growth in other deposits, primarily other domestic deposits
over $100,000, reflecting increases in commercial and public funds deposits. |
18
|
|
|
$0.1 billion increase in average total core deposits. This reflected continued
strong growth in core certificates of deposit and interest bearing demand deposits.
Offsetting these increases were a decline in non-interest bearing demand deposits, a
planned reduction in non-relationship collateralized public fund deposits, as well as a
decline in average savings and other domestic deposits and money market deposits, as
customers continued to transfer funds from lower rate to higher rate accounts like
certificates of deposits. |
19
Table 8 Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
Fully taxable equivalent basis (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD Average Balances |
|
|
YTD Average Rates (2) |
|
|
|
Six Months Ending June 30, |
|
|
Change |
|
|
Six Months Ending June 30, |
|
(in millions of dollars) |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
$ |
274 |
|
|
$ |
212 |
|
|
$ |
62 |
|
|
|
29.2 |
% |
|
|
3.43 |
% |
|
|
5.09 |
% |
Trading account securities |
|
|
1,214 |
|
|
|
139 |
|
|
|
1,075 |
|
|
|
N.M. |
|
|
|
5.18 |
|
|
|
5.66 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
668 |
|
|
|
538 |
|
|
|
130 |
|
|
|
24.2 |
|
|
|
2.65 |
|
|
|
5.26 |
|
Loans held for sale |
|
|
533 |
|
|
|
266 |
|
|
|
267 |
|
|
|
N.M. |
|
|
|
5.68 |
|
|
|
6.01 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
3,873 |
|
|
|
3,423 |
|
|
|
450 |
|
|
|
13.1 |
|
|
|
5.60 |
|
|
|
6.12 |
|
Tax-exempt |
|
|
710 |
|
|
|
610 |
|
|
|
100 |
|
|
|
16.4 |
|
|
|
6.76 |
|
|
|
6.67 |
|
|
|
|
|
|
Total investment securities |
|
|
4,583 |
|
|
|
4,033 |
|
|
|
550 |
|
|
|
13.6 |
|
|
|
5.78 |
|
|
|
6.21 |
|
Loans and leases: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
13,487 |
|
|
|
8,077 |
|
|
|
5,410 |
|
|
|
67.0 |
|
|
|
5.92 |
|
|
|
7.38 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
2,026 |
|
|
|
1,208 |
|
|
|
818 |
|
|
|
67.7 |
|
|
|
5.34 |
|
|
|
8.02 |
|
Commercial |
|
|
7,418 |
|
|
|
3,355 |
|
|
|
4,063 |
|
|
|
N.M. |
|
|
|
5.86 |
|
|
|
7.49 |
|
|
|
|
|
|
Commercial real estate |
|
|
9,444 |
|
|
|
4,563 |
|
|
|
4,881 |
|
|
|
N.M. |
|
|
|
5.75 |
|
|
|
7.63 |
|
|
|
|
|
|
Total commercial |
|
|
22,931 |
|
|
|
12,640 |
|
|
|
10,291 |
|
|
|
81.4 |
|
|
|
5.85 |
|
|
|
7.47 |
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
3,472 |
|
|
|
2,269 |
|
|
|
1,203 |
|
|
|
53.0 |
|
|
|
7.18 |
|
|
|
7.01 |
|
Automobile leases |
|
|
1,003 |
|
|
|
1,624 |
|
|
|
(621 |
) |
|
|
(38.2 |
) |
|
|
5.56 |
|
|
|
5.29 |
|
|
|
|
|
|
Automobile loans and leases |
|
|
4,475 |
|
|
|
3,893 |
|
|
|
582 |
|
|
|
14.9 |
|
|
|
6.82 |
|
|
|
6.29 |
|
Home equity |
|
|
7,320 |
|
|
|
4,943 |
|
|
|
2,377 |
|
|
|
48.1 |
|
|
|
6.82 |
|
|
|
7.65 |
|
Residential mortgage |
|
|
5,264 |
|
|
|
4,423 |
|
|
|
841 |
|
|
|
19.0 |
|
|
|
5.82 |
|
|
|
5.58 |
|
Other loans |
|
|
706 |
|
|
|
423 |
|
|
|
283 |
|
|
|
66.9 |
|
|
|
10.21 |
|
|
|
9.55 |
|
|
|
|
|
|
Total consumer |
|
|
17,765 |
|
|
|
13,682 |
|
|
|
4,083 |
|
|
|
29.8 |
|
|
|
6.66 |
|
|
|
6.65 |
|
|
|
|
|
|
Total loans and leases |
|
|
40,696 |
|
|
|
26,322 |
|
|
|
14,374 |
|
|
|
54.6 |
|
|
|
6.20 |
|
|
|
7.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
|
(642 |
) |
|
|
(288 |
) |
|
|
(354 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
40,054 |
|
|
|
26,034 |
|
|
|
14,020 |
|
|
|
53.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
47,968 |
|
|
|
31,510 |
|
|
|
16,458 |
|
|
|
52.2 |
|
|
|
6.13 |
% |
|
|
6.95 |
% |
|
|
|
|
|
Cash and due from banks |
|
|
990 |
|
|
|
752 |
|
|
|
238 |
|
|
|
31.6 |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
3,460 |
|
|
|
626 |
|
|
|
2,834 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
All other assets |
|
|
3,436 |
|
|
|
2,441 |
|
|
|
995 |
|
|
|
40.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
55,212 |
|
|
$ |
35,041 |
|
|
$ |
20,171 |
|
|
|
57.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
5,047 |
|
|
$ |
3,561 |
|
|
$ |
1,486 |
|
|
|
41.7 |
% |
|
|
|
% |
|
|
|
% |
Demand deposits interest bearing |
|
|
4,010 |
|
|
|
2,377 |
|
|
|
1,633 |
|
|
|
68.7 |
|
|
|
0.68 |
|
|
|
1.21 |
|
Money market deposits |
|
|
6,510 |
|
|
|
5,477 |
|
|
|
1,033 |
|
|
|
18.9 |
|
|
|
2.31 |
|
|
|
3.81 |
|
Savings and other domestic time deposits |
|
|
5,026 |
|
|
|
2,915 |
|
|
|
2,111 |
|
|
|
72.4 |
|
|
|
2.05 |
|
|
|
2.16 |
|
Core certificates of deposit |
|
|
10,874 |
|
|
|
5,523 |
|
|
|
5,351 |
|
|
|
96.9 |
|
|
|
4.52 |
|
|
|
4.76 |
|
|
|
|
|
|
|
|
Total core deposits |
|
|
31,467 |
|
|
|
19,853 |
|
|
|
11,614 |
|
|
|
58.5 |
|
|
|
2.93 |
|
|
|
3.46 |
|
Other domestic time deposits of $100,000 or more |
|
|
2,063 |
|
|
|
1,101 |
|
|
|
962 |
|
|
|
87.4 |
|
|
|
4.07 |
|
|
|
5.32 |
|
Brokered deposits and negotiable CDs |
|
|
3,451 |
|
|
|
2,850 |
|
|
|
601 |
|
|
|
21.1 |
|
|
|
3.92 |
|
|
|
5.51 |
|
Deposits in foreign offices |
|
|
998 |
|
|
|
557 |
|
|
|
441 |
|
|
|
79.2 |
|
|
|
1.88 |
|
|
|
3.07 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
37,979 |
|
|
|
24,361 |
|
|
|
13,618 |
|
|
|
55.9 |
|
|
|
3.07 |
|
|
|
3.83 |
|
Short-term borrowings |
|
|
2,813 |
|
|
|
1,970 |
|
|
|
843 |
|
|
|
42.8 |
|
|
|
2.21 |
|
|
|
4.41 |
|
Federal Home Loan Bank advances |
|
|
3,399 |
|
|
|
1,229 |
|
|
|
2,170 |
|
|
|
N.M. |
|
|
|
3.47 |
|
|
|
4.61 |
|
Subordinated notes and other long-term debt |
|
|
3,872 |
|
|
|
3,478 |
|
|
|
394 |
|
|
|
11.3 |
|
|
|
4.66 |
|
|
|
5.87 |
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
43,016 |
|
|
|
27,477 |
|
|
|
15,539 |
|
|
|
56.6 |
|
|
|
3.19 |
|
|
|
4.16 |
|
|
|
|
|
|
|
|
All other liabilities |
|
|
1,034 |
|
|
|
974 |
|
|
|
60 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
6,115 |
|
|
|
3,029 |
|
|
|
3,086 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
55,212 |
|
|
$ |
35,041 |
|
|
$ |
20,171 |
|
|
|
57.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.94 |
|
|
|
2.79 |
|
Impact of non-interest bearing funds on margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.32 |
|
|
|
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.26 |
% |
|
|
3.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value. |
|
(1) |
|
Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. |
|
(2) |
|
Loan and lease and deposit average rates include impact of applicable derivatives and non-deferrable fees. |
|
(3) |
|
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans. |
20
Provision for Credit Losses
(This section should be read in conjunction with Significant Items 1 and 2, and the Credit Risk section.)
The provision for credit losses is the expense necessary to maintain the allowance for loan
and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of credit
(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 the 2008 second quarter was $120.8 million, up $60.7
million compared with the year-ago quarter, and up $32.2 million compared with the prior quarter.
The reported 2008 second quarter provision for credit losses exceeded net charge-offs by $55.6
million. The provision for credit losses in the first six-month period of 2008 was $209.5 million,
up $119.9 million compared with $89.5 million in the first six-month period of 2007. The reported
provision for credit losses for the first six-month period of 2008 exceeded net charge-offs by
$95.8 million. (See Credit Quality Discussion).
Non-Interest Income
(This section should be read in conjunction with Significant Items 1, 3, 4, 5, and 6.)
Table 9 reflects non-interest income for each of the past five quarters:
Table 9 Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
2Q08 vs 2Q07 |
|
(in thousands) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
|
Amount |
|
|
Percent |
|
|
|
|
|
|
|
|
- |
Service charges on deposit accounts |
|
$ |
79,630 |
|
|
$ |
72,668 |
|
|
$ |
81,276 |
|
|
$ |
78,107 |
|
|
$ |
50,017 |
|
|
|
$ |
29,613 |
|
|
|
59.2 |
% |
Trust services |
|
|
33,089 |
|
|
|
34,128 |
|
|
|
35,198 |
|
|
|
33,562 |
|
|
|
26,764 |
|
|
|
|
6,325 |
|
|
|
23.6 |
|
Brokerage and insurance income |
|
|
35,694 |
|
|
|
36,560 |
|
|
|
30,288 |
|
|
|
28,806 |
|
|
|
17,199 |
|
|
|
|
18,495 |
|
|
|
N.M. |
|
Other service charges and fees |
|
|
23,242 |
|
|
|
20,741 |
|
|
|
21,891 |
|
|
|
21,045 |
|
|
|
14,923 |
|
|
|
|
8,319 |
|
|
|
55.7 |
|
Bank owned life insurance income |
|
|
14,131 |
|
|
|
13,750 |
|
|
|
13,253 |
|
|
|
14,847 |
|
|
|
10,904 |
|
|
|
|
3,227 |
|
|
|
29.6 |
|
Mortgage banking income (loss) |
|
|
12,502 |
|
|
|
(7,063 |
) |
|
|
3,702 |
|
|
|
9,629 |
|
|
|
7,122 |
|
|
|
|
5,380 |
|
|
|
75.5 |
|
Securities gains (losses) |
|
|
2,073 |
|
|
|
1,429 |
|
|
|
(11,551 |
) |
|
|
(13,152 |
) |
|
|
(5,139 |
) |
|
|
|
7,212 |
|
|
|
N.M. |
|
Other income |
|
|
36,069 |
|
|
|
63,539 |
|
|
|
(3,500 |
) |
|
|
31,830 |
|
|
|
34,403 |
|
|
|
|
1,666 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
- |
Total non-interest income |
|
$ |
236,430 |
|
|
$ |
235,752 |
|
|
$ |
170,557 |
|
|
$ |
204,674 |
|
|
$ |
156,193 |
|
|
|
$ |
80,237 |
|
|
|
51.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
YTD 2008 vs 2007 |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
152,298 |
|
|
$ |
94,810 |
|
|
$ |
57,488 |
|
|
|
60.6 |
% |
Trust services |
|
|
67,217 |
|
|
|
52,658 |
|
|
|
14,559 |
|
|
|
27.6 |
|
Brokerage and insurance income |
|
|
72,254 |
|
|
|
33,281 |
|
|
|
38,973 |
|
|
|
N.M. |
|
Other service charges and fees |
|
|
43,983 |
|
|
|
28,131 |
|
|
|
15,852 |
|
|
|
56.4 |
|
Bank owned life insurance income |
|
|
27,881 |
|
|
|
21,755 |
|
|
|
6,126 |
|
|
|
28.2 |
|
Mortgage banking income |
|
|
5,439 |
|
|
|
16,473 |
|
|
|
(11,034 |
) |
|
|
(67.0 |
) |
Securities gains (losses) |
|
|
3,502 |
|
|
|
(5,035 |
) |
|
|
8,537 |
|
|
|
N.M. |
|
Other income |
|
|
99,608 |
|
|
|
59,297 |
|
|
|
40,311 |
|
|
|
68.0 |
|
|
|
|
|
|
Total non-interest income |
|
$ |
472,182 |
|
|
$ |
301,370 |
|
|
$ |
170,812 |
|
|
|
56.7 |
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value. |
Table 10 details mortgage banking income and the net impact of MSR hedging activity for each
of the past five quarters:
21
Table 10 Mortgage Banking Income and Net Impact of MSR Hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2Q08 vs 2Q07 |
|
(in thousands, except as noted) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
Amount |
|
|
Percent |
|
|
|
|
|
|
Mortgage Banking Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and secondary marketing |
|
$ |
13,098 |
|
|
$ |
9,332 |
|
|
|
5,879 |
|
|
$ |
8,375 |
|
|
$ |
6,771 |
|
|
$ |
6,327 |
|
|
|
93.4 |
% |
Servicing fees |
|
|
11,166 |
|
|
|
10,894 |
|
|
|
11,405 |
|
|
|
10,811 |
|
|
|
6,976 |
|
|
|
4,190 |
|
|
|
60.1 |
|
Amortization of capitalized servicing (1) |
|
|
(7,024 |
) |
|
|
(6,914 |
) |
|
|
(5,929 |
) |
|
|
(6,571 |
) |
|
|
(4,449 |
) |
|
|
(2,575 |
) |
|
|
(57.9 |
) |
Other mortgage banking income |
|
|
5,959 |
|
|
|
4,331 |
|
|
|
4,113 |
|
|
|
3,016 |
|
|
|
2,822 |
|
|
|
3,137 |
|
|
|
N.M. |
|
|
|
|
|
|
Sub-total |
|
|
23,199 |
|
|
|
17,643 |
|
|
|
15,468 |
|
|
|
15,631 |
|
|
|
12,120 |
|
|
|
11,079 |
|
|
|
91.4 |
|
|
MSR valuation adjustment (1) |
|
|
39,031 |
|
|
|
(18,093 |
) |
|
|
(21,245 |
) |
|
|
(9,863 |
) |
|
|
16,034 |
|
|
|
22,997 |
|
|
|
N.M. |
|
Net trading (losses) gains related to MSR hedging |
|
|
(49,728 |
) |
|
|
(6,613 |
) |
|
|
9,479 |
|
|
|
3,861 |
|
|
|
(21,032 |
) |
|
|
(28,696 |
) |
|
|
N.M. |
|
|
|
|
|
|
Total mortgage banking income (loss) |
|
$ |
12,502 |
|
|
$ |
(7,063 |
) |
|
$ |
3,702 |
|
|
$ |
9,629 |
|
|
$ |
7,122 |
|
|
$ |
5,380 |
|
|
|
75.5 |
% |
|
|
|
|
|
|
Capitalized mortgage servicing rights (2) |
|
$ |
240,024 |
|
|
$ |
191,806 |
|
|
$ |
207,894 |
|
|
$ |
228,933 |
|
|
$ |
155,420 |
|
|
$ |
84,604 |
|
|
|
54.4 |
% |
Total mortgages serviced for others (in millions) (2) |
|
|
15,770 |
|
|
|
15,138 |
|
|
|
15,088 |
|
|
|
15,073 |
|
|
|
8,693 |
|
|
|
7,077 |
|
|
|
81.4 |
|
MSR % of investor servicing portfolio |
|
|
1.52 |
% |
|
|
1.27 |
% |
|
|
1.38 |
% |
|
|
1.52 |
% |
|
|
1.79 |
% |
|
|
(0.27 |
)% |
|
|
(14.9 |
) |
|
|
|
|
Net Impact of MSR Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment (1) |
|
$ |
39,031 |
|
|
$ |
(18,093 |
) |
|
$ |
(21,245 |
) |
|
$ |
(9,863 |
) |
|
$ |
16,034 |
|
|
$ |
22,997 |
|
|
|
N.M. |
% |
Net trading (losses) gains related to MSR hedging |
|
|
(49,728 |
) |
|
|
(6,613 |
) |
|
|
9,479 |
|
|
|
3,861 |
|
|
|
(21,032 |
) |
|
|
(28,696 |
) |
|
|
N.M. |
|
Net interest income related to MSR hedging |
|
|
9,364 |
|
|
|
5,934 |
|
|
|
3,192 |
|
|
|
2,357 |
|
|
|
248 |
|
|
|
9,116 |
|
|
|
N.M. |
|
|
|
|
Net impact of MSR hedging |
|
$ |
(1,333 |
) |
|
$ |
(18,772 |
) |
|
$ |
(8,574 |
) |
|
$ |
(3,645 |
) |
|
$ |
(4,750 |
) |
|
$ |
3,417 |
|
|
|
(71.9) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
YTD 2008 vs 2007 |
|
(in thousands, except as noted) |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
|
|
Mortgage Banking Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and secondary marketing |
|
$ |
22,430 |
|
|
|
11,711 |
|
|
|
10,719 |
|
|
|
91.5 |
% |
Servicing fees |
|
|
22,060 |
|
|
|
13,796 |
|
|
|
8,264 |
|
|
|
59.9 |
|
Amortization of capitalized servicing (1) |
|
|
(13,938 |
) |
|
|
(8,087 |
) |
|
|
(5,851 |
) |
|
|
72.4 |
|
Other mortgage banking income |
|
|
10,290 |
|
|
|
6,069 |
|
|
|
4,221 |
|
|
|
69.6 |
|
|
|
|
Sub-total |
|
|
40,842 |
|
|
|
23,489 |
|
|
|
17,353 |
|
|
|
73.9 |
|
|
MSR valuation adjustment (1) |
|
|
20,938 |
|
|
|
14,977 |
|
|
|
5,961 |
|
|
|
39.8 |
|
Net trading losses related to MSR hedging |
|
|
(56,341 |
) |
|
|
(21,993 |
) |
|
|
(34,348 |
) |
|
|
N.M. |
|
|
|
|
Total mortgage banking income |
|
$ |
5,439 |
|
|
$ |
16,473 |
|
|
$ |
(11,034 |
) |
|
|
(67.0) |
% |
|
|
|
|
Capitalized mortgage servicing rights (2) |
|
$ |
240,024 |
|
|
$ |
155,420 |
|
|
|
84,604 |
|
|
|
54.4 |
% |
Total mortgages serviced for others (2) |
|
|
15,770 |
|
|
|
8,693 |
|
|
|
7,077 |
|
|
|
81.4 |
|
MSR % of investor servicing portfolio (in millions) |
|
|
1.52 |
% |
|
|
1.79 |
% |
|
|
(0.27 |
) |
|
|
(14.9 |
) |
|
Net Impact of MSR Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment (1) |
|
$ |
20,938 |
|
|
$ |
14,977 |
|
|
|
5,961 |
|
|
|
39.8 |
% |
Net trading losses related to MSR hedging |
|
|
(56,341 |
) |
|
|
(21,993 |
) |
|
|
(34,348 |
) |
|
|
N.M. |
|
Net interest income related to MSR hedging |
|
|
15,298 |
|
|
|
248 |
|
|
|
15,050 |
|
|
|
N.M. |
|
|
|
|
Net impact of MSR hedging |
|
$ |
(20,105 |
) |
|
$ |
(6,768 |
) |
|
|
(13,337 |
) |
|
|
N.M. |
% |
|
|
|
|
|
|
N.M., not a meaningful value. |
|
(1) |
|
The change in fair value for the period represents the MSR valuation adjustment, excluding amortization of capitalized servicing. |
|
(2) |
|
At period end. |
22
2008 Second Quarter versus 2007 Second Quarter
Non-interest income increased $80.2 million compared with the year-ago quarter. The $68.7
million of merger-related non-interest income drove most of the increase. Table 11 details the
$80.2 million increase in reported total non-interest income.
Table 11 Non-Interest Income Estimated Merger-Related Impacts 2Q08 vs. 2Q07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
Change |
|
|
Merger |
|
|
Non-merger Related |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
|
Related |
|
|
Amount |
|
|
% (1) |
|
|
|
- |
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
79,630 |
|
|
$ |
50,017 |
|
|
$ |
29,613 |
|
|
|
59.2 |
% |
|
$ |
24,110 |
|
|
$ |
5,503 |
|
|
|
7.4 |
% |
Trust services |
|
|
33,089 |
|
|
|
26,764 |
|
|
|
6,325 |
|
|
|
23.6 |
|
|
|
7,009 |
|
|
|
(684 |
) |
|
|
(2.0 |
) |
Brokerage and insurance income |
|
|
35,694 |
|
|
|
17,199 |
|
|
|
18,495 |
|
|
|
N.M. |
|
|
|
17,061 |
|
|
|
1,434 |
|
|
|
4.2 |
|
Other service charges and fees |
|
|
23,242 |
|
|
|
14,923 |
|
|
|
8,319 |
|
|
|
55.7 |
|
|
|
5,800 |
|
|
|
2,519 |
|
|
|
12.2 |
|
Bank owned life insurance income |
|
|
14,131 |
|
|
|
10,904 |
|
|
|
3,227 |
|
|
|
29.6 |
|
|
|
1,807 |
|
|
|
1,420 |
|
|
|
11.2 |
|
Mortgage banking income |
|
|
12,502 |
|
|
|
7,122 |
|
|
|
5,380 |
|
|
|
75.5 |
|
|
|
6,256 |
|
|
|
(876 |
) |
|
|
(6.5 |
) |
Securities gains (losses) |
|
|
2,073 |
|
|
|
(5,139 |
) |
|
|
7,212 |
|
|
|
N.M. |
|
|
|
283 |
|
|
|
6,929 |
|
|
|
N.M. |
|
Other income |
|
|
36,069 |
|
|
|
34,403 |
|
|
|
1,666 |
|
|
|
4.8 |
|
|
|
6,390 |
|
|
|
(4,724 |
) |
|
|
(11.6 |
) |
|
|
- |
|
|
|
|
|
Total non-interest income |
|
$ |
236,430 |
|
|
$ |
156,193 |
|
|
$ |
80,237 |
|
|
|
51.4 |
% |
|
$ |
68,716 |
|
|
$ |
11,521 |
|
|
|
5.1 |
% |
|
|
- |
|
|
|
|
|
|
|
|
N.M., not a meaningful value. |
|
(1) |
|
Calculated as non-merger related / (prior period + merger-related) |
The $11.5 million, or 5%, non-merger-related increase reflected:
|
|
|
$6.9 million increase in securities gains, reflecting the current quarters gain
compared with a loss in the year-ago quarter. |
|
|
|
|
$5.5 million, or 7%, increase in service charges on deposit accounts, primarily
reflecting strong growth in personal service charge income. |
|
|
|
|
$2.5 million, or 12%, increase in other service charges, reflecting higher debit
card volume. |
Partially offset by:
|
|
|
$4.7 million, or 12%, decrease in other income. The current quarter included:
(a) $7.2 million loss on the sale of certain held-for-sale loans and (b) $6.9
million of higher equity investment losses ($4.6 million loss in the current quarter
vs. $2.3 million gain in the year-ago quarter). These decreases were partially
offset by $7.8 million of higher automobile operating lease income ($9.4 million in
the current quarter and $1.6 million in the year-ago quarter). |
2008 Second Quarter versus 2008 First Quarter
Non-interest income increased $0.7 million compared with the 2008 first quarter, as shown in
the following table:
23
Table 12 Non-Interest Income 2Q08 vs. 1Q08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
|
First |
|
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
Change |
|
(in thousands) |
|
2008 |
|
|
2008 |
|
|
Amount |
|
|
% |
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
79,630 |
|
|
$ |
72,668 |
|
|
$ |
6,962 |
|
|
|
9.6 |
% |
Trust services |
|
|
33,089 |
|
|
|
34,128 |
|
|
|
(1,039 |
) |
|
|
(3.0 |
) |
Brokerage and insurance income |
|
|
35,694 |
|
|
|
36,560 |
|
|
|
(866 |
) |
|
|
(2.4 |
) |
Other service charges and fees |
|
|
23,242 |
|
|
|
20,741 |
|
|
|
2,501 |
|
|
|
12.1 |
|
Bank owned life insurance income |
|
|
14,131 |
|
|
|
13,750 |
|
|
|
381 |
|
|
|
2.8 |
|
Mortgage banking income (loss) |
|
|
12,502 |
|
|
|
(7,063 |
) |
|
|
19,565 |
|
|
|
N.M. |
|
Securities gains |
|
|
2,073 |
|
|
|
1,429 |
|
|
|
644 |
|
|
|
45.1 |
|
Other income |
|
|
36,069 |
|
|
|
63,539 |
|
|
|
(27,470 |
) |
|
|
(43.2 |
) |
|
|
|
|
Total non-interest income |
|
$ |
236,430 |
|
|
$ |
235,752 |
|
|
$ |
678 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
N.M., not a meaningful value. |
This $0.7 million increase reflected:
|
|
|
$19.6 million increase in mortgage banking income. This reflected: (a) $3.5
million, or 20%, increase in core mortgage banking activities, primarily secondary
marketing and servicing fees, (b) $2.1 million gain on the sale of mortgage loans,
and (c) $14.0 million lower negative MSR valuation impact reflecting the current
quarters $10.7 million net negative MSR valuation impact, compared with a $24.7
million net negative MSR valuation impact in the prior quarter. These negative MSR
valuation impacts are partially offset by a net interest income benefit from the
hedging assets. |
|
|
|
|
$7.0 million, or 10%, increase in service charges on deposit accounts, primarily
reflecting a seasonal increase in personal service charges. |
|
|
|
|
$2.5 million, or 12%, increase in other service charges and fees, reflecting a
seasonal increase in debit card fees. |
Partially offset by:
|
|
|
$27.5 million, or 43%, decrease in other income. The first quarter included: (a)
$25.1 million gain related to the Visa® IPO and (b) $5.9 million venture
capital loss. The second quarter included: (a) $7.2 million loss on the sale of
certain loans held-for-sale, (b) $1.9 million decline in equity investment income
($4.6 million loss in the current quarter and $2.7 million loss in the prior
quarter), (c) $3.3 million decline in derivatives income, and (d) $3.5 million
increase in automobile operating lease income ($9.4 million in the current quarter
and $5.8 in the prior quarter). |
2008 First Six Months versus 2007 First Six Months
Non-interest income for the first six-month period of 2008 increased $170.8 million, or 57%,
compared with the year-ago period, of which $137.4 million was merger related. The following table
details the estimated merger related impact on our non-interest income.
24
Table 13 Non-Interest Income Estimated Merger Related Impact Six Months 2008 vs. Six Months 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Change |
|
|
Merger |
|
|
Non-merger Related |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
% |
|
|
Related |
|
|
Amount |
|
|
% (1) |
|
|
|
|
- |
|
|
|
|
- |
Service charges on deposit accounts |
|
$ |
152,298 |
|
|
$ |
94,810 |
|
|
$ |
57,488 |
|
|
|
60.6 |
% |
|
$ |
48,220 |
|
|
$ |
9,268 |
|
|
|
6.5 |
% |
Trust services |
|
|
67,217 |
|
|
|
52,658 |
|
|
|
14,559 |
|
|
|
27.6 |
|
|
|
14,018 |
|
|
|
541 |
|
|
|
0.8 |
|
Brokerage and insurance income |
|
|
72,254 |
|
|
|
33,281 |
|
|
|
38,973 |
|
|
|
N.M. |
|
|
|
34,122 |
|
|
|
4,851 |
|
|
|
7.2 |
|
Other service charges and fees |
|
|
43,983 |
|
|
|
28,131 |
|
|
|
15,852 |
|
|
|
56.4 |
|
|
|
11,600 |
|
|
|
4,252 |
|
|
|
10.7 |
|
Bank owned life insurance income |
|
|
27,881 |
|
|
|
21,755 |
|
|
|
6,126 |
|
|
|
28.2 |
|
|
|
3,614 |
|
|
|
2,512 |
|
|
|
9.9 |
|
Mortgage banking income |
|
|
5,439 |
|
|
|
16,473 |
|
|
|
(11,034 |
) |
|
|
(67.0 |
) |
|
|
12,512 |
|
|
|
(23,546 |
) |
|
|
(81.2 |
) |
Securities gains (losses) |
|
|
3,502 |
|
|
|
(5,035 |
) |
|
|
8,537 |
|
|
|
N.M. |
|
|
|
566 |
|
|
|
7,971 |
|
|
|
N.M. |
|
Other income |
|
|
99,608 |
|
|
|
59,297 |
|
|
|
40,311 |
|
|
|
68.0 |
|
|
|
12,780 |
|
|
|
27,531 |
|
|
|
38.2 |
|
|
|
|
- |
|
|
|
|
- |
Total non-interest income |
|
$ |
472,182 |
|
|
$ |
301,370 |
|
|
$ |
170,812 |
|
|
|
56.7 |
% |
|
$ |
137,432 |
|
|
$ |
33,380 |
|
|
|
7.6 |
% |
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value. |
|
(1) Calculated as non-merger related / (prior period + merger-related) |
The $33.4 million, or 8%, non-merger related increase primarily reflected:
|
|
|
$9.3 million, or 6%, increase in service charges on deposit accounts, primarily
reflecting strong growth in personal service charge income. |
|
|
|
|
$8.0 million increase in securities gains, reflecting the gain from the first
six-month period of 2008 compared with a loss in the first six-month period of 2007. |
|
|
|
|
$27.5 million, or 38%, increase in other income. This increase included: (a) the
2008 first quarter gain of $25.1 million related to Visa® IPO, (b) $13.0
million of increased derivative revenue, and (c) $10.7 million of increased
operating lease income ($15.2 million in the first six-month period of 2008, and
$4.5 million in the comparable year-ago period). These increases were partially
offset by a venture capital loss of $5.9 million in the 2008 first quarter. |
Partially offset by:
|
|
|
$23.5 million, or 81%, decrease in mortgage banking income. This decline
primarily reflected the $35.4 million net negative MSR valuation impact in the 2008
first six-month period, compared with a $7.0 million net negative MSR valuation
impact in the first six-month period of 2007. These negative MSR valuation impacts
were partially offset by a net interest income benefit from the hedging assets. |
Non-Interest Expense
(This section should be read in conjunction with Significant Items 1, 3, 5, and 6.)
Table 14 reflects non-interest expense for each of the past five quarters:
25
Table 14 Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2Q08 vs 2Q07 |
|
(in thousands) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
Amount |
|
|
Percent |
|
|
|
|
|
|
- |
Salaries |
|
$ |
163,595 |
|
|
$ |
159,946 |
|
|
$ |
178,855 |
|
|
$ |
166,719 |
|
|
$ |
106,768 |
|
|
$ |
56,827 |
|
|
|
53.2 |
% |
Benefits |
|
|
36,396 |
|
|
|
41,997 |
|
|
|
35,995 |
|
|
|
35,429 |
|
|
|
28,423 |
|
|
|
7,973 |
|
|
|
28.1 |
|
|
|
|
|
- |
Personnel costs |
|
|
199,991 |
|
|
|
201,943 |
|
|
|
214,850 |
|
|
|
202,148 |
|
|
|
135,191 |
|
|
|
64,800 |
|
|
|
47.9 |
% |
Outside data processing and other services |
|
|
30,186 |
|
|
|
34,361 |
|
|
|
39,130 |
|
|
|
40,600 |
|
|
|
25,701 |
|
|
|
4,485 |
|
|
|
17.5 |
|
Net occupancy |
|
|
26,971 |
|
|
|
33,243 |
|
|
|
26,714 |
|
|
|
33,334 |
|
|
|
19,417 |
|
|
|
7,554 |
|
|
|
38.9 |
|
Equipment |
|
|
25,740 |
|
|
|
23,794 |
|
|
|
22,816 |
|
|
|
23,290 |
|
|
|
17,157 |
|
|
|
8,583 |
|
|
|
50.0 |
|
Amortization of intangibles |
|
|
19,327 |
|
|
|
18,917 |
|
|
|
20,163 |
|
|
|
19,949 |
|
|
|
2,519 |
|
|
|
16,808 |
|
|
|
N.M. |
|
Marketing |
|
|
7,339 |
|
|
|
8,919 |
|
|
|
16,175 |
|
|
|
13,186 |
|
|
|
8,986 |
|
|
|
(1,647 |
) |
|
|
(18.3 |
) |
Professional services |
|
|
13,752 |
|
|
|
9,090 |
|
|
|
14,464 |
|
|
|
11,273 |
|
|
|
8,101 |
|
|
|
5,651 |
|
|
|
69.8 |
|
Telecommunications |
|
|
6,864 |
|
|
|
6,245 |
|
|
|
8,513 |
|
|
|
7,286 |
|
|
|
4,577 |
|
|
|
2,287 |
|
|
|
50.0 |
|
Printing and supplies |
|
|
4,757 |
|
|
|
5,622 |
|
|
|
6,594 |
|
|
|
4,743 |
|
|
|
3,672 |
|
|
|
1,085 |
|
|
|
29.5 |
|
Other expense |
|
|
42,876 |
|
|
|
28,347 |
|
|
|
70,133 |
|
|
|
29,754 |
|
|
|
19,334 |
|
|
|
23,542 |
|
|
|
N.M. |
|
|
|
|
|
- |
Total non-interest expense |
|
$ |
377,803 |
|
|
$ |
370,481 |
|
|
$ |
439,552 |
|
|
$ |
385,563 |
|
|
$ |
244,655 |
|
|
$ |
133,148 |
|
|
|
54.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
YTD 2008 vs 2007 |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
|
|
Salaries |
|
$ |
323,541 |
|
|
$ |
211,680 |
|
|
$ |
111,861 |
|
|
|
52.8 |
% |
Benefits |
|
|
78,393 |
|
|
|
58,150 |
|
|
|
20,243 |
|
|
|
34.8 |
|
|
|
|
Personnel costs |
|
|
401,934 |
|
|
|
269,830 |
|
|
|
132,104 |
|
|
|
49.0 |
|
Outside data processing and other services |
|
|
64,547 |
|
|
|
47,515 |
|
|
|
17,032 |
|
|
|
35.8 |
|
Net occupancy |
|
|
60,214 |
|
|
|
39,325 |
|
|
|
20,889 |
|
|
|
53.1 |
|
Equipment |
|
|
49,534 |
|
|
|
35,376 |
|
|
|
14,158 |
|
|
|
40.0 |
|
Amortization of intangibles |
|
|
38,244 |
|
|
|
5,039 |
|
|
|
33,205 |
|
|
|
N.M. |
|
Marketing |
|
|
16,258 |
|
|
|
16,682 |
|
|
|
(424 |
) |
|
|
(2.5 |
) |
Professional Services |
|
|
22,842 |
|
|
|
14,583 |
|
|
|
8,259 |
|
|
|
56.6 |
|
Telecommunication |
|
|
13,109 |
|
|
|
8,703 |
|
|
|
4,406 |
|
|
|
50.6 |
|
Printing and supplies |
|
|
10,379 |
|
|
|
6,914 |
|
|
|
3,465 |
|
|
|
50.1 |
|
Other expense |
|
|
71,223 |
|
|
|
42,760 |
|
|
|
28,463 |
|
|
|
66.6 |
|
|
|
|
Total non-interest expense |
|
$ |
748,284 |
|
|
$ |
486,727 |
|
|
$ |
261,557 |
|
|
|
53.7 |
% |
|
|
|
|
N.M., not a meaningful value. |
2008 Second Quarter versus 2007 Second Quarter
Non-interest expense increased $133.1 million, or 54%, compared with the year-ago quarter.
The $135.7 million of merger-related expenses and $7.0 million of higher merger/restructuring costs
drove the increase, as non-merger-related expenses declined $9.5 million, or 2%. Table 15 details
the $133.1 million increase in reported total non-interest expense.
26
Table 15 Non-Interest Expense Estimated Merger/Restructuring-Related Impacts 2Q08 vs. 2Q07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
Change |
|
|
|
|
|
|
|
Restructuring/ |
|
|
Non-restructuring/merger Related |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
Merger Related |
|
|
|
Merger Costs |
|
|
Amount |
|
|
% (1) |
|
|
|
- |
|
|
|
- |
Personnel costs |
|
$ |
199,991 |
|
|
$ |
135,191 |
|
|
$ |
64,800 |
|
|
|
47.9 |
% |
|
$ |
68,250 |
|
|
|
$ |
10,019 |
|
|
$ |
(13,469 |
) |
|
|
(6.3) |
% |
Outside data processing and other services |
|
|
30,186 |
|
|
|
25,701 |
|
|
|
4,485 |
|
|
|
17.5 |
|
|
|
12,262 |
|
|
|
|
(4,969 |
) |
|
|
(2,808 |
) |
|
|
(8.5 |
) |
Net occupancy |
|
|
26,971 |
|
|
|
19,417 |
|
|
|
7,554 |
|
|
|
38.9 |
|
|
|
10,184 |
|
|
|
|
1,702 |
|
|
|
(4,332 |
) |
|
|
(13.8 |
) |
Equipment |
|
|
25,740 |
|
|
|
17,157 |
|
|
|
8,583 |
|
|
|
50.0 |
|
|
|
4,799 |
|
|
|
|
2,799 |
|
|
|
985 |
|
|
|
4.0 |
|
Amortization of intangibles |
|
|
19,327 |
|
|
|
2,519 |
|
|
|
16,808 |
|
|
|
N.M. |
|
|
|
16,481 |
|
|
|
|
|
|
|
|
327 |
|
|
|
1.7 |
|
Marketing |
|
|
7,339 |
|
|
|
8,986 |
|
|
|
(1,647 |
) |
|
|
(18.3 |
) |
|
|
4,361 |
|
|
|
|
(1,551 |
) |
|
|
(4,457 |
) |
|
|
(37.8 |
) |
Professional services |
|
|
13,752 |
|
|
|
8,101 |
|
|
|
5,651 |
|
|
|
69.8 |
|
|
|
2,707 |
|
|
|
|
(995 |
) |
|
|
3,939 |
|
|
|
40.1 |
|
Telecommunications |
|
|
6,864 |
|
|
|
4,577 |
|
|
|
2,287 |
|
|
|
50.0 |
|
|
|
2,224 |
|
|
|
|
3 |
|
|
|
60 |
|
|
|
0.9 |
|
Printing and supplies |
|
|
4,757 |
|
|
|
3,672 |
|
|
|
1,085 |
|
|
|
29.5 |
|
|
|
1,374 |
|
|
|
|
19 |
|
|
|
(308 |
) |
|
|
(6.1 |
) |
Other expense |
|
|
42,876 |
|
|
|
19,334 |
|
|
|
23,542 |
|
|
|
N.M. |
|
|
|
13,048 |
|
|
|
|
(52 |
) |
|
|
10,546 |
|
|
|
32.6 |
|
|
|
- |
|
|
|
- |
Total non-interest expense |
|
$ |
377,803 |
|
|
$ |
244,655 |
|
|
$ |
133,148 |
|
|
|
54.4 |
% |
|
$ |
135,690 |
|
|
|
$ |
6,975 |
|
|
$ |
(9,517 |
) |
|
|
(2.5) |
% |
|
|
- |
|
|
|
- |
|
|
|
N.M., not a meaningful value. |
|
(1) |
|
Calculated as non-merger related / (prior period + merger-related + merger-costs) |
The $9.5 million, or 2%, non-merger-related decline reflected:
|
|
|
$13.5 million, or 6%, decline in personnel expense, reflecting the benefit of
merger efficiencies, including the impact of a reduction of 667, or 6%, full-time
equivalent staff from December 31, 2007. |
|
|
|
|
$4.5 million, or 38%, decline in marketing expense. |
|
|
|
|
$4.3 million, or 14%, decline in net occupancy expense, reflecting merger
efficiencies. |
|
|
|
|
$2.8 million, or 9%, decline in outside data processing and other services,
reflecting merger efficiencies. |
Partially offset by:
|
|
|
$10.5 million, or 33%, increase in other expense. This increase primarily
reflected a $6.3 million increase in automobile operating lease expense ($7.2
million in the current quarter, and $0.9 in the comparable year-ago period), and a
$6.0 million increase in other real estate owned (OREO), that is real estate
acquired through foreclosure, expenses. |
|
|
|
|
$3.9 million, or 40%, increase in professional services expense, reflecting
increased collection costs. |
2008 Second Quarter versus 2008 First Quarter
Non-interest expense increased $7.3 million, or 2%, compared with the 2008 first quarter,
reflecting increased merger/restructuring costs. Table 16 details the $7.3 million increase in
reported total non-interest expense.
Table 16 Non-Interest Expense Estimated Merger/Restructuring-Related Impacts 2Q08 vs. 1Q08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
First Quarter |
|
|
Change |
|
|
Restructuring/ |
|
|
Non-restructuring/merger Related |
|
(in thousands) |
|
2008 |
|
|
2008 |
|
|
Amount |
|
|
Percent |
|
|
Merger Costs |
|
|
Amount |
|
|
% (1) |
|
|
|
- |
|
|
|
|
- |
Personnel costs |
|
$ |
199,991 |
|
|
$ |
201,943 |
|
|
$ |
(1,952 |
) |
|
|
(1.0) |
% |
|
$ |
7,775 |
|
|
$ |
(9,727 |
) |
|
|
(4.6) |
% |
Outside data processing and other services |
|
|
30,186 |
|
|
|
34,361 |
|
|
|
(4,175 |
) |
|
|
(12.2 |
) |
|
|
(4,305 |
) |
|
|
130 |
|
|
|
0.4 |
|
Net occupancy |
|
|
26,971 |
|
|
|
33,243 |
|
|
|
(6,272 |
) |
|
|
(18.9 |
) |
|
|
1,359 |
|
|
|
(7,631 |
) |
|
|
(22.1 |
) |
Equipment |
|
|
25,740 |
|
|
|
23,794 |
|
|
|
1,946 |
|
|
|
8.2 |
|
|
|
2,703 |
|
|
|
(757 |
) |
|
|
(2.9 |
) |
Amortization of intangibles |
|
|
19,327 |
|
|
|
18,917 |
|
|
|
410 |
|
|
|
2.2 |
|
|
|
|
|
|
|
410 |
|
|
|
2.2 |
|
Marketing |
|
|
7,339 |
|
|
|
8,919 |
|
|
|
(1,580 |
) |
|
|
(17.7 |
) |
|
|
(67 |
) |
|
|
(1,513 |
) |
|
|
(17.1 |
) |
Professional services |
|
|
13,752 |
|
|
|
9,090 |
|
|
|
4,662 |
|
|
|
51.3 |
|
|
|
399 |
|
|
|
4,263 |
|
|
|
44.9 |
|
Telecommunications |
|
|
6,864 |
|
|
|
6,245 |
|
|
|
619 |
|
|
|
9.9 |
|
|
|
(591 |
) |
|
|
1,210 |
|
|
|
21.4 |
|
Printing and supplies |
|
|
4,757 |
|
|
|
5,622 |
|
|
|
(865 |
) |
|
|
(15.4 |
) |
|
|
(27 |
) |
|
|
(838 |
) |
|
|
(15.0 |
) |
Other expense |
|
|
42,876 |
|
|
|
28,347 |
|
|
|
14,529 |
|
|
|
51.3 |
|
|
|
28 |
|
|
|
14,501 |
|
|
|
51.1 |
|
|
|
- |
|
|
|
|
- |
Total non-interest expense |
|
$ |
377,803 |
|
|
$ |
370,481 |
|
|
$ |
7,322 |
|
|
|
2.0 |
% |
|
$ |
7,274 |
|
|
|
48 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Calculated as non-merger related / (prior period + merger-related + merger-costs) |
27
Non-merger-related expenses were flat, and reflected:
|
|
|
$14.5 million, or 51%, increase in other expense. The first quarter included a
$12.4 million Visa® indemnification reversal and a $2.6 million asset
impairment expense. The second quarter included a $2.7 million increase in
automobile operating lease expense ($7.2 million in the current quarter, and $4.5
million in the prior quarter) and a $2.7 million increase in OREO expenses,
partially offset by a $2.2 million gain from debt extinguishment. |
|
|
|
|
$4.3 million, or 45%, increase in professional services reflecting increased
collection costs. |
Partially offset by:
|
|
|
$9.7 million, or 5%, decrease in personnel costs, reflecting seasonally lower
payroll taxes and lower full-time equivalent staff. |
|
|
|
|
$7.6 million, or 22%, decrease in net occupancy expense, reflecting higher
seasonal expenses in the prior quarter, and the prior quarters $2.5 million
impairment of leasehold improvements in our Cleveland main office. |
2008 First Six Months versus 2007 First Six Months
Non-interest expense for the first six-month period of 2008 increased $261.6 million compared
with the first six-month period of 2007. This included $271.4 million of merger-related expenses,
as well as $13.4 million of higher merger/restructuring costs. The following table details the
$261.6 million increase in reported non-interest expense:
Table 17 Non-Interest Expense Estimated Merger/Restructuring-Related Impacts Six Months 2008 vs. Six Months 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
Change |
|
|
|
|
|
|
|
Restructuring/ |
|
|
Non-restructuring/merger Related |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
Amount |
|
|
Percent |
|
|
Merger Related |
|
|
|
Merger Costs |
|
|
Amount |
|
|
% (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
$ |
401,934 |
|
|
$ |
269,830 |
|
|
$ |
132,104 |
|
|
|
49.0 |
% |
|
$ |
136,500 |
|
|
|
$ |
12,897 |
|
|
$ |
(17,293 |
) |
|
|
(4.3 |
)% |
Outside data processing and other services |
|
|
64,547 |
|
|
|
47,515 |
|
|
|
17,032 |
|
|
|
35.8 |
|
|
|
24,524 |
|
|
|
|
(2,158 |
) |
|
|
(5,334 |
) |
|
|
(7.4 |
) |
Net occupancy |
|
|
60,214 |
|
|
|
39,325 |
|
|
|
20,889 |
|
|
|
53.1 |
|
|
|
20,368 |
|
|
|
|
2,156 |
|
|
|
(1,635 |
) |
|
|
(2.7 |
) |
Equipment |
|
|
49,534 |
|
|
|
35,376 |
|
|
|
14,158 |
|
|
|
40.0 |
|
|
|
9,598 |
|
|
|
|
2,909 |
|
|
|
1,651 |
|
|
|
3.7 |
|
Amortization of intangibles |
|
|
38,244 |
|
|
|
5,039 |
|
|
|
33,205 |
|
|
|
N.M. |
|
|
|
32,962 |
|
|
|
|
|
|
|
|
243 |
|
|
|
0.6 |
|
Marketing |
|
|
16,258 |
|
|
|
16,682 |
|
|
|
(424 |
) |
|
|
(2.5 |
) |
|
|
8,722 |
|
|
|
|
(1,529 |
) |
|
|
(7,617 |
) |
|
|
(30.0 |
) |
Professional services |
|
|
22,842 |
|
|
|
14,583 |
|
|
|
8,259 |
|
|
|
56.6 |
|
|
|
5,414 |
|
|
|
|
(1,397 |
) |
|
|
4,242 |
|
|
|
21.2 |
|
Telecommunications |
|
|
13,109 |
|
|
|
8,703 |
|
|
|
4,406 |
|
|
|
50.6 |
|
|
|
4,448 |
|
|
|
|
597 |
|
|
|
(639 |
) |
|
|
(4.9 |
) |
Printing and supplies |
|
|
10,379 |
|
|
|
6,914 |
|
|
|
3,465 |
|
|
|
50.1 |
|
|
|
2,748 |
|
|
|
|
66 |
|
|
|
651 |
|
|
|
6.7 |
|
Other expense |
|
|
71,223 |
|
|
|
42,760 |
|
|
|
28,463 |
|
|
|
66.6 |
|
|
|
26,096 |
|
|
|
|
(119 |
) |
|
|
2,486 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
$ |
748,284 |
|
|
$ |
486,727 |
|
|
$ |
261,557 |
|
|
|
53.7 |
% |
|
$ |
271,380 |
|
|
|
$ |
13,422 |
|
|
$ |
(23,245 |
) |
|
|
(3.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value. |
|
(1) |
|
Calculated as non-merger related / (prior period + merger-related) |
Non-merger related non-interest expense actually declined $23.2 million, reflecting:
|
|
|
$17.3 million, or 4%, decline in personnel expense, reflecting the benefit of
merger efficiencies. |
|
|
|
|
$7.6 million, or 30%, decline in marketing expense. |
|
|
|
|
$5.3 million, or 7%, decline in outside data processing and other services,
reflecting merger efficiencies. |
Partially offset by:
|
|
|
$4.2 million, or 21%, increase in professional services expense, reflecting
increased collection costs. |
28
Provision for Income Taxes
(This section should be read in conjunction with Significant Items 1, 3, and 6.)
The provision for income taxes in the 2008 second quarter was $26.3 million and represented an
effective tax rate on income before taxes of 20.6%. The effective tax rates in the year-ago quarter
and prior quarter were 23.2% and 17.2%, respectively. In the 2008 second quarter, a $3.4 million
benefit to provision for income taxes, representing a reduction to the previously established
capital loss carry-forward valuation allowance related to the value of Visa® shares
held, was recorded. The comparable tax benefit in the 2008 first quarter was $11.1 million. The
effective tax rate for the second half of 2008 is expected to be in the range of 24%-26%.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject
to income and non-income taxes. Our effective tax rate is based, in part, on our interpretation of
the relevant current tax laws. We believe the aggregate liabilities related to taxes are
appropriately reflected in the consolidated financial statements. We review the appropriate tax
treatment of all transactions taking into consideration statutory, judicial, and regulatory
guidance in the context of our tax positions. In addition, we rely on various tax opinions, recent
tax audits, and historical experience.
The Internal Revenue Service is currently examining our federal tax returns for the years
ended 2004 and 2005. In addition, we are subject to ongoing tax examinations in various
jurisdictions. We believe that the resolution of these examinations will not have a significant
adverse impact on our consolidated financial position or results of operations.
29
RISK MANAGEMENT AND CAPITAL
Risk identification and monitoring are key elements in overall risk management. We believe our
primary risk exposures are credit, market, liquidity, and operational risk. More information on
risk is set forth under the heading Risk Factors included in Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2007. Additionally, the MD&A appearing in our 2007 Form 10-K
should be read in conjunction with this discussion and analysis as this report provides only
material updates to the 2007 Form 10-K. Our definition, philosophy, and approach to risk
management are unchanged from the discussion presented in that document.
Credit Risk
Credit risk is the risk of loss due to loan and lease customers or other counter parties not
being able to meet their financial obligations under agreed upon terms. The majority of our credit
risk is associated with lending activities, as the acceptance and management of credit risk is
central to profitable lending. Credit risk is mitigated through a combination of credit policies
and processes and portfolio diversification.
Credit Exposure Mix
(This section should be read in conjunction with Significant Items 1 and 2.)
As shown in Table 18, at June 30, 2008, commercial loans totaled $23.4 billion, and
represented 57% of our total credit exposure. This portfolio was diversified between C&I and CRE
loans (see Commercial Credit discussion below).
Total consumer loans were $17.6 billion at June 30, 2008, and represented 43% 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 below). Our home
equity and residential mortgages portfolios represented $12.3 billion, or 30%, of our total loans
and leases. These portfolios are discussed in greater detail below in the Consumer Credit
section of this report.
30
Table 18 Loans and Leases Composition (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
(in thousands) |
|
June 30, |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
|
|
By Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
13,745,515 |
|
|
|
33.5 |
% |
|
$ |
13,645,890 |
|
|
|
33.3 |
% |
|
$ |
13,125,565 |
|
|
|
32.8 |
% |
|
$ |
13,125,158 |
|
|
|
32.8 |
% |
|
$ |
8,185,451 |
|
|
|
30.5 |
% |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
2,135,979 |
|
|
|
5.2 |
|
|
|
2,058,105 |
|
|
|
5.0 |
|
|
|
1,961,839 |
|
|
|
4.9 |
|
|
|
1,876,075 |
|
|
|
4.7 |
|
|
|
1,382,533 |
|
|
|
5.2 |
|
Commercial |
|
|
7,565,486 |
|
|
|
18.4 |
|
|
|
7,457,744 |
|
|
|
18.2 |
|
|
|
7,221,213 |
|
|
|
18.0 |
|
|
|
7,097,465 |
|
|
|
17.7 |
|
|
|
3,484,039 |
|
|
|
13.0 |
|
|
|
|
Commercial real estate |
|
|
9,701,465 |
|
|
|
23.6 |
|
|
|
9,515,849 |
|
|
|
23.2 |
|
|
|
9,183,052 |
|
|
|
22.9 |
|
|
|
8,973,540 |
|
|
|
22.4 |
|
|
|
4,866,572 |
|
|
|
18.2 |
|
|
|
|
Total commercial |
|
|
23,446,980 |
|
|
|
57.1 |
|
|
|
23,161,739 |
|
|
|
56.5 |
|
|
|
22,308,617 |
|
|
|
55.7 |
|
|
|
22,098,698 |
|
|
|
55.2 |
|
|
|
13,052,023 |
|
|
|
48.7 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
3,758,715 |
|
|
|
9.2 |
|
|
|
3,491,369 |
|
|
|
8.5 |
|
|
|
3,114,029 |
|
|
|
7.8 |
|
|
|
2,959,913 |
|
|
|
7.4 |
|
|
|
2,424,105 |
|
|
|
9.0 |
|
Automobile leases |
|
|
834,777 |
|
|
|
2.0 |
|
|
|
999,629 |
|
|
|
2.4 |
|
|
|
1,179,505 |
|
|
|
2.9 |
|
|
|
1,365,805 |
|
|
|
3.4 |
|
|
|
1,488,903 |
|
|
|
5.6 |
|
Home equity |
|
|
7,410,393 |
|
|
|
18.1 |
|
|
|
7,296,448 |
|
|
|
17.8 |
|
|
|
7,290,063 |
|
|
|
18.2 |
|
|
|
7,317,545 |
|
|
|
18.3 |
|
|
|
5,015,506 |
|
|
|
18.7 |
|
Residential mortgage |
|
|
4,901,420 |
|
|
|
11.9 |
|
|
|
5,366,414 |
|
|
|
13.1 |
|
|
|
5,447,126 |
|
|
|
13.6 |
|
|
|
5,505,340 |
|
|
|
13.8 |
|
|
|
4,398,720 |
|
|
|
16.4 |
|
Other loans |
|
|
694,855 |
|
|
|
1.7 |
|
|
|
698,620 |
|
|
|
1.7 |
|
|
|
714,998 |
|
|
|
1.8 |
|
|
|
739,939 |
|
|
|
1.9 |
|
|
|
432,256 |
|
|
|
1.6 |
|
|
|
|
Total consumer |
|
|
17,600,160 |
|
|
|
42.9 |
|
|
|
17,852,480 |
|
|
|
43.5 |
|
|
|
17,745,721 |
|
|
|
44.3 |
|
|
|
17,888,542 |
|
|
|
44.8 |
|
|
|
13,759,490 |
|
|
|
51.3 |
|
|
|
|
Total loans and leases |
|
$ |
41,047,140 |
|
|
|
100.0 |
% |
|
$ |
41,014,219 |
|
|
|
100.0 |
% |
|
$ |
40,054,338 |
|
|
|
100.0 |
|
|
$ |
39,987,240 |
|
|
|
100.0 |
% |
|
$ |
26,811,513 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Business Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Ohio |
|
$ |
5,226,741 |
|
|
|
12.7 |
% |
|
$ |
5,229,075 |
|
|
|
12.7 |
% |
|
$ |
5,110,270 |
|
|
|
12.8 |
% |
|
$ |
4,993,373 |
|
|
|
12.5 |
% |
|
$ |
3,701,459 |
|
|
|
13.8 |
% |
Northwest Ohio |
|
|
2,238,454 |
|
|
|
5.5 |
|
|
|
2,280,255 |
|
|
|
5.6 |
|
|
|
2,284,141 |
|
|
|
5.7 |
|
|
|
2,342,088 |
|
|
|
5.9 |
|
|
|
449,232 |
|
|
|
1.7 |
|
Greater Cleveland |
|
|
3,262,379 |
|
|
|
7.9 |
|
|
|
3,194,533 |
|
|
|
7.8 |
|
|
|
3,097,120 |
|
|
|
7.7 |
|
|
|
3,057,757 |
|
|
|
7.6 |
|
|
|
2,099,941 |
|
|
|
7.8 |
|
Greater Akron/Canton |
|
|
2,088,189 |
|
|
|
5.1 |
|
|
|
2,058,031 |
|
|
|
5.0 |
|
|
|
2,020,447 |
|
|
|
5.0 |
|
|
|
2,078,588 |
|
|
|
5.2 |
|
|
|
1,330,102 |
|
|
|
5.0 |
|
Southern Ohio/Kentucky |
|
|
2,966,035 |
|
|
|
7.2 |
|
|
|
2,900,259 |
|
|
|
7.1 |
|
|
|
2,659,870 |
|
|
|
6.6 |
|
|
|
2,547,800 |
|
|
|
6.4 |
|
|
|
2,275,224 |
|
|
|
8.5 |
|
Mahoning Valley |
|
|
865,226 |
|
|
|
2.1 |
|
|
|
893,317 |
|
|
|
2.2 |
|
|
|
927,918 |
|
|
|
2.3 |
|
|
|
939,739 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
Ohio Valley |
|
|
867,682 |
|
|
|
2.1 |
|
|
|
870,833 |
|
|
|
2.1 |
|
|
|
870,276 |
|
|
|
2.2 |
|
|
|
869,139 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
West Michigan |
|
|
2,600,512 |
|
|
|
6.3 |
|
|
|
2,535,359 |
|
|
|
6.2 |
|
|
|
2,477,617 |
|
|
|
6.2 |
|
|
|
2,520,325 |
|
|
|
6.3 |
|
|
|
2,439,517 |
|
|
|
9.1 |
|
East Michigan |
|
|
1,809,680 |
|
|
|
4.4 |
|
|
|
1,766,750 |
|
|
|
4.3 |
|
|
|
1,750,171 |
|
|
|
4.4 |
|
|
|
1,760,158 |
|
|
|
4.4 |
|
|
|
1,654,934 |
|
|
|
6.2 |
|
Western Pennsylvania |
|
|
1,013,470 |
|
|
|
2.5 |
|
|
|
1,031,319 |
|
|
|
2.5 |
|
|
|
1,053,685 |
|
|
|
2.6 |
|
|
|
1,106,068 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
Pittsburgh |
|
|
969,307 |
|
|
|
2.4 |
|
|
|
926,487 |
|
|
|
2.3 |
|
|
|
900,789 |
|
|
|
2.2 |
|
|
|
888,848 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
Central Indiana |
|
|
1,527,627 |
|
|
|
3.7 |
|
|
|
1,507,934 |
|
|
|
3.7 |
|
|
|
1,421,116 |
|
|
|
3.5 |
|
|
|
1,419,693 |
|
|
|
3.6 |
|
|
|
1,004,934 |
|
|
|
3.7 |
|
West Virginia |
|
|
1,213,033 |
|
|
|
3.0 |
|
|
|
1,158,915 |
|
|
|
2.8 |
|
|
|
1,155,719 |
|
|
|
2.9 |
|
|
|
1,125,628 |
|
|
|
2.8 |
|
|
|
1,148,573 |
|
|
|
4.3 |
|
Other Regional |
|
|
5,828,043 |
|
|
|
14.2 |
|
|
|
6,251,173 |
|
|
|
15.3 |
|
|
|
6,176,485 |
|
|
|
15.6 |
|
|
|
6,409,470 |
|
|
|
15.9 |
|
|
|
3,832,953 |
|
|
|
14.3 |
|
|
|
|
Regional Banking |
|
|
32,476,378 |
|
|
|
79.1 |
|
|
|
32,604,240 |
|
|
|
79.5 |
|
|
|
31,905,624 |
|
|
|
79.7 |
|
|
|
32,058,674 |
|
|
|
80.2 |
|
|
|
19,936,869 |
|
|
|
74.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealer Sales |
|
|
5,958,599 |
|
|
|
14.5 |
|
|
|
5,862,116 |
|
|
|
14.3 |
|
|
|
5,563,415 |
|
|
|
13.9 |
|
|
|
5,449,580 |
|
|
|
13.6 |
|
|
|
4,944,386 |
|
|
|
18.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Financial and Capital Markets Group |
|
|
2,612,163 |
|
|
|
6.4 |
|
|
|
2,547,863 |
|
|
|
6.2 |
|
|
|
2,585,299 |
|
|
|
6.4 |
|
|
|
2,478,986 |
|
|
|
6.2 |
|
|
|
1,930,258 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury / Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
41,047,140 |
|
|
|
100.0 |
% |
|
$ |
41,014,219 |
|
|
|
100.0 |
% |
|
$ |
40,054,338 |
|
|
|
100.0 |
% |
|
$ |
39,987,240 |
|
|
|
100.0 |
% |
|
$ |
26,811,513 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
(1) |
|
Reflects post-Sky Financial merger organizational structure effective on July 1, 2007.
Accordingly, balances presented for prior periods do not include the impact of the acquisition. |
31
Commercial Credit
(This section should be read in conjunction with Significant Items 1 and 2.)
Commercial credit approvals are based on, among other factors, the financial strength of the
borrower, assessment of the borrowers management capabilities, industry sector trends, type of
exposure, transaction structure, and the general economic outlook.
In commercial lending, ongoing credit management is dependent on the type and nature of the
loan. In general, quarterly monitoring is normal for all significant exposures. The internal risk
ratings are revised and updated with each periodic monitoring event. There is also extensive macro
portfolio management analysis on an ongoing basis. We continually review and adjust our risk
rating criteria based on actual experience, which may result in further changes to such criteria,
in future periods.
Our commercial loan portfolio is diversified by customer size, as well as throughout our
geographic footprint. However, the following segments are noteworthy:
Franklin relationship
(This section should be read in conjunction with Significant Items 1 and 2.)
Franklin is a specialty consumer finance company primarily engaged in the servicing and
resolution of performing, reperforming, and nonperforming residential mortgage loans. Franklins
portfolio consists of loans secured by 1-4 family residential real estate that generally fall
outside the underwriting standards of the Federal National Mortgage Association (FNMA or Fannie
Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) and involve elevated
credit risk as a result of the nature or absence of income documentation, limited credit histories,
and higher levels of consumer debt or past credit difficulties. Franklin purchased these loan
portfolios at a discount to the unpaid principal balance and originated loans with interest rates
and fees calculated to provide a rate of return adjusted to reflect the elevated credit risk
inherent in these types of loans. Franklin originated nonprime loans through its wholly owned
subsidiary, Tribeca Lending Corp., and has generally held for investment the loans acquired and a
significant portion of the loans originated.
Loans to Franklin are funded by a bank group, of which we are the lead bank and largest
participant. The loans participated to other banks have no recourse to Huntington. The term debt
exposure is secured by over 30,000 individual first- and second-priority lien residential
mortgages. In addition, pursuant to an exclusive lockbox arrangement, we receive all payments made
to Franklin on these individual mortgages.
At June 30, 2008, bank group loans totaled $1.512 billion, down $73 million compared with
$1.585 billion at December 31, 2007 (see Table 19). This reduction reflected loan payments of $116
million, partially offset by an increase of $43 million as another institution entered into the
restructuring agreement. The loans participated to other banks commensurately increased $43
million reflecting this institutions participation in the restructuring during the 2008 first
quarter. The monthly cash flow has been consistently above the required debt service, allowing for
additional principal paydowns of $46.7 million of the total bank group debt during the first
six-month period of 2008.
At June 30, 2008, our exposure to Franklin net of charge-offs was $1.130 billion, down $58
million, or 5%, compared with $1.188 billion exposure at December 31, 2007 (see Table 19). In the
second half of 2008, we expect our proportion of payments received to increase to our pro-rata
participation level, following satisfaction of certain terms of the restructuring agreement that
provided for a more rapid amortization on a certain participants portion of the debt.
At June 30, 2008, our specific ALLL for Franklin loans was $115.3 million, unchanged compared
with December 31, 2007, and there were no charge-offs or provision for credit losses in either the
current quarter or the prior quarter. This relationship continued to perform with interest being
accrued. The cash flow generated by the underlying collateral in the current quarter exceeded the
required payments per terms of the restructuring agreement. As a result, we moved the $762 million
Tranche A portion of our Franklin exposure out of the troubled debt restructuring nonperforming
asset classification based on the performance during the first six-month period of 2008, and the
continued expected cash flow performance and priority of cash flows.
The following table details our loan relationship with Franklin as of June 30, 2008, and
changes from December 31, 2007:
32
Table 19 Commercial Loans to Franklin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Participated |
|
|
|
|
(in thousands of dollars) |
|
Franklin |
|
|
Tribeca |
|
|
Subtotal |
|
|
to others |
|
|
Total |
|
Variable rate, term loan (Facility A) |
|
$ |
541,521 |
|
|
$ |
386,069 |
|
|
$ |
927,590 |
|
|
$ |
(166,409 |
) |
|
$ |
761,181 |
|
Variable rate, subordinated term loan (Facility B) |
|
|
318,764 |
|
|
|
97,949 |
|
|
|
416,713 |
|
|
|
(69,300 |
) |
|
|
347,413 |
|
Fixed rate, junior subordinated term loan
(Facility C) |
|
|
125,000 |
|
|
|
|
|
|
|
125,000 |
|
|
|
(8,224 |
) |
|
|
|
|
Line of credit facility |
|
|
853 |
|
|
|
|
|
|
|
853 |
|
|
|
|
|
|
|
853 |
|
Other variable rate term loans |
|
|
41,929 |
|
|
|
|
|
|
|
41,929 |
|
|
|
(20,964 |
) |
|
|
20,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
1,028,067 |
|
|
|
484,018 |
|
|
|
1,512,085 |
|
|
$ |
(264,897 |
) |
|
$ |
1,130,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Participated to others |
|
|
(166,496 |
) |
|
|
(98,401 |
) |
|
|
(264,897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal owed to Huntington |
|
|
861,571 |
|
|
|
385,617 |
|
|
|
1,247,188 |
|
|
|
|
|
|
|
|
|
Previously charged off |
|
|
(116,776 |
) |
|
|
|
|
|
|
(116,776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total book value of loans |
|
$ |
744,795 |
|
|
$ |
385,617 |
|
|
$ |
1,130,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Group |
|
|
Huntington |
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Participated |
|
|
|
|
|
|
Cumulative Net |
|
|
|
|
(in thousands of dollars) |
|
Total Loans |
|
|
to Others |
|
|
Total Loans |
|
|
Charge-offs |
|
|
Net Loans |
|
Commercial loans, at December 31,
2007 |
|
$ |
1,584,967 |
|
|
$ |
(279,790 |
) |
|
$ |
1,305,177 |
|
|
$ |
(116,776 |
) |
|
$ |
1,188,401 |
|
New institution enters restructuring |
|
|
43,295 |
|
|
|
(43,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Payments received |
|
|
(56,699 |
) |
|
|
25,659 |
|
|
|
(31,040 |
) |
|
|
|
|
|
|
(31,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans, at March 31, 2008 |
|
$ |
1,571,563 |
|
|
$ |
(297,426 |
) |
|
$ |
1,274,137 |
|
|
$ |
(116,776 |
) |
|
$ |
1,157,361 |
|
Payments received |
|
|
(59,478 |
) |
|
|
32,529 |
|
|
|
(26,949 |
) |
|
|
|
|
|
|
(26,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans, at June 30, 2008 |
|
$ |
1,512,085 |
|
|
$ |
(264,897 |
) |
|
$ |
1,247,188 |
|
|
$ |
(116,776 |
) |
|
$ |
1,130,412 |
|
|
|
|
|
|
Single Family Home Builders
At June 30, 2008, we had $1.6 billion of loans to single family home builders. Such loans
represented 4% of total loans and leases. Of this portfolio, 69% were to finance projects
currently under construction, 17% to finance land under development, and 14% to finance land held for development. The $1.6 billion represented a
$0.1 billion decrease compared with the 2008 first quarter. We did not originate any new loans in
this portfolio during the current quarter.
The housing market across our geographic footprint remains stressed, reflecting relatively
lower sales activity, declining prices, and excess inventories of houses to be sold, particularly
impacting borrowers in our eastern Michigan and northern Ohio regions. We anticipate the
residential developer market will continue to be depressed, and anticipate continued pressure on
the single family home builder segment in the coming months. We have taken the following steps to
mitigate the risk arising from this exposure: (a) all loans within the portfolio have been
reviewed continuously over the past 18 months and will continue to be closely monitored, (b) credit
valuation adjustments have been made when appropriate based on the current condition of each
relationship, and (c) reserves have been increased based on proactive risk identification and
thorough borrower analysis.
Consumer Credit
(This section should be read in conjunction with Significant Item 1.)
Consumer credit approvals are based on, among other factors, the financial strength and
payment history of the borrower, type of exposure, and the transaction structure.
33
Our consumer loan portfolio is primarily comprised of traditional residential mortgages, home
equity loans and lines of credit and automobile loans and leases. The residential mortgage and
home equity portfolios are diversified throughout our geographic footprint. Our automobile loan
and lease portfolio is predominantly diversified throughout our banking footprint, with no
out-of-footprint state representing more than 10% of our originations, except Florida, representing
13% of our automobile loan and lease originations during the first six-month period of 2008.
The general slowdown in the housing market has impacted the performance of our residential
mortgage and home equity portfolios over the past year. While the degree of price depreciation
varies across our markets, all regions throughout our footprint have been affected.
Given the market conditions in our markets as described above in the single family home
builder section, the home equity and residential mortgage portfolios are particularly noteworthy,
and are discussed below:
Table 20 Selected Home Equity and Residential Mortgage Portfolio Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
2008 Second Quarter |
|
|
|
|
|
|
% of Total |
|
Portfolio |
|
Portfolio |
|
|
|
|
|
Origination |
|
Origination |
|
|
Ending Balance |
|
Loans and Leases |
|
Average LTV ratio* |
|
Average FICO |
|
Originations |
|
Average LTV ratio* |
|
Average FICO |
Home equity loans |
|
$3.3 billion |
|
|
8 |
% |
|
|
70 |
% |
|
|
732 |
|
|
$159 million |
|
|
65 |
% |
|
|
744 |
|
Home equity lines of
credit |
|
4.1 billion |
|
|
10 |
% |
|
|
78 |
% |
|
|
729 |
|
|
647 million |
|
|
74 |
% |
|
|
755 |
|
Residential mortgages |
|
4.9 billion |
|
|
12 |
% |
|
|
76 |
% |
|
|
699 |
|
|
240 million |
|
|
77 |
% |
|
|
738 |
|
|
|
|
* |
|
= The loan-to-value (LTV) ratios for home equity loans and home equity lines of credit are cumulative LTVs reflecting the balance of any senior loans. |
Home Equity Portfolio
Our home equity portfolio (loans and lines of credit) consists of both first and second
mortgage loans with underwriting criteria based on minimum FICO credit scores, debt-to-income
ratios, and loan-to-value (LTV) ratios. Included in our home equity loan portfolio are $1.4
billion of loans where we have the first-mortgage lien on the property. We offer closed-end home
equity loans with a fixed interest rate and level monthly payments and a variable-rate,
interest-only home equity line of credit. The weighted average cumulative LTV ratio at origination
of our home equity portfolio was 75% at June 30, 2008.
We believe we have granted credit conservatively within this portfolio. We do not originate
home equity loans or lines of credit that allow negative amortization, or which have cumulative LTV
ratios (including any first-mortgage loans) at origination greater than 100%. Home equity loans
are generally fixed rate with periodic principal and interest payments. Home equity lines of credit
generally have variable rates of interest and do not require payment of principal during the
10-year revolving period of the line.
We have addressed the risk profile of this portfolio. We stopped originating new production
through brokers in 2007, a continuation of our strategy begun in early 2005 to reduce our exposure
to the broker channel. Reducing our reliance on brokers also addresses the risk profile as this
channel typically included a higher-risk borrower profile, as well as the risks associated with a
third party sourcing arrangement. Production is focused within our banking footprint. Regarding
origination policies, we continued to make appropriate adjustments based on our own assessment of
an appropriate risk profile as well as industry actions. As an example, the significant changes
made by Fannie Mae and Freddie Mac resulted in the reduction of our maximum LTV on second-mortgage
loans, even for customers with high FICO scores. While it is still too early to make any
declarative statements regarding the impact of these actions, our more recent originations have
shown consistent or lower levels of cumulative risk during the first twelve months of the loan or
line of credit term compared with earlier originations.
Residential Mortgages
We focus on higher quality borrowers, and underwrite all applications centrally, or through
the use of an automated underwriting system. We do not originate residential mortgage loans that
(a) allow negative amortization, (b) have a LTV ratio at origination greater than 100%, or (c) are
payment option adjustable-rate mortgages.
34
A majority of the loans in our loan portfolio have adjustable rates. Our adjustable-rate
mortgages (ARMs) are primarily residential mortgages that have a fixed rate for the first 3 to 5
years and then adjust annually. These loans comprised approximately 60% of our total residential
mortgage loan portfolio at June 30, 2008. At June 30, 2008, ARM loans that were expected to have
rates reset, in 2008 and 2009 respectively, totaled $309 million and $708 million. Given the
quality of our borrowers, and the decline in interest rates during the first six-month period of
2008, we believe that we have a relatively limited exposure to ARM reset risk. Nonetheless, we have
taken actions to mitigate our risk exposure. We initiate borrower contact at least six months
prior to the interest rate resetting, and have been successful in converting many ARMs to
fixed-rate loans through this process. Additionally, where borrowers are experiencing payment
difficulties, loans may be re-underwritten or restructured based on the borrowers ability to repay
the loan.
We had $0.5 billion of Alt-A mortgages in the residential mortgage loan portfolio at June 30,
2008. These loans have a higher risk profile than the rest of the portfolio as a result of
origination policies including stated income, stated assets, and higher acceptable LTV ratios. Our
exposure related to this product will decline in the future as we stopped originating these loans
in 2007.
Interest-only loans comprised $0.7 billion, or 14%, of residential real estate loans at June
30, 2008. Interest-only loans are underwritten to specific standards including minimum FICO credit
scores, stressed debt-to-income ratios, and extensive collateral evaluation. At June 30, 2008,
borrowers for interest-only loans had an average current FICO score of 714 and the loans had an
average LTV ratio of 81%. We continue to believe that we have mitigated the risk of such loans by
matching this product with appropriate borrowers.
Credit Quality
We believe the most meaningful way to assess overall credit quality performance for the 2008
second quarter is through an analysis of credit quality performance ratios. This approach forms
the basis of most of the discussion in the three sections immediately following: Nonaccruing Loans
and Nonperforming Assets, Allowance for Credit Losses, and Net Charge-offs.
The ALLL increase reflected the impact of the continued economic weakness across our Midwest
markets. These economic factors influenced the performance of net charge-offs (NCOs) and NALs. To
maintain the adequacy of our reserves, there was a commensurate significant increase in the
provision for credit losses (see Provision for Credit Losses discussion) in order to increase the
absolute and relative levels of our ACL.
Nonaccruing Loans (NAL/NALs) and Nonperforming Assets (NPA/NPAs)
(This section should be read in conjunction with Significant Items 1 and 2.)
Nonperforming assets (NPAs) consist of (a) NALs, which represent loans and leases that are no
longer accruing interest and/or have been renegotiated to below market rates based upon financial
difficulties of the borrower, (b) troubled-debt restructured loans, (c) NALs held-for-sale, (d)
OREO, and (e) other NPAs. C&I and CRE loans are generally placed on nonaccrual status when
collection of principal or interest is in doubt or when the loan is 90-days past due. When interest
accruals are suspended, accrued interest income is reversed with current year accruals charged to
earnings and prior-year amounts generally charged-off as a credit loss.
35
Table 21 reflects period-end NALs, NPAs, and past due loans and leases detail for each of the
last five quarters.
Table 21 Nonaccruing Loans (NALs), Nonperforming Assets (NPAs) and Past Due Loans and Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
(in thousands) |
|
June 30, |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
Non-accrual loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
161,345 |
|
|
$ |
101,842 |
|
|
$ |
87,679 |
|
|
$ |
82,960 |
|
|
$ |
65,846 |
|
Commercial real estate |
|
|
261,739 |
|
|
|
183,000 |
|
|
|
148,467 |
|
|
|
95,587 |
|
|
|
88,965 |
|
Residential mortgage |
|
|
82,882 |
|
|
|
66,466 |
|
|
|
59,557 |
|
|
|
47,738 |
|
|
|
39,868 |
|
Home equity |
|
|
29,076 |
|
|
|
26,053 |
|
|
|
24,068 |
|
|
|
23,111 |
|
|
|
16,837 |
|
|
|
|
Total NALs |
|
|
535,042 |
|
|
|
377,361 |
|
|
|
319,771 |
|
|
|
249,396 |
|
|
|
211,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans (1) |
|
|
368,379 |
|
|
|
1,157,361 |
|
|
|
1,187,368 |
|
|
|
|
|
|
|
|
|
Other real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
59,119 |
|
|
|
63,675 |
|
|
|
60,804 |
|
|
|
49,555 |
|
|
|
47,590 |
|
Commercial |
|
|
13,259 |
|
|
|
10,181 |
|
|
|
14,467 |
|
|
|
19,310 |
|
|
|
2,079 |
|
|
|
|
Total other real estate |
|
|
72,378 |
|
|
|
73,856 |
|
|
|
75,271 |
|
|
|
68,865 |
|
|
|
49,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans held for sale (2) |
|
|
14,759 |
|
|
|
66,353 |
|
|
|
73,481 |
|
|
|
100,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other NPAs (3) |
|
|
2,557 |
|
|
|
2,836 |
|
|
|
4,379 |
|
|
|
16,296 |
|
|
|
|
|
|
Total NPAs |
|
$ |
993,115 |
|
|
$ |
1,677,767 |
|
|
$ |
1,660,270 |
|
|
$ |
435,042 |
|
|
$ |
261,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NALs as a % of total loans and leases |
|
|
1.30 |
% |
|
|
0.92 |
% |
|
|
0.80 |
% |
|
|
0.62 |
% |
|
|
0.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPA ratio (4) |
|
|
2.41 |
|
|
|
4.08 |
|
|
|
4.13 |
|
|
|
1.08 |
|
|
|
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases past due 90
days or more |
|
$ |
136,914 |
|
|
$ |
152,897 |
|
|
$ |
140,977 |
|
|
$ |
115,607 |
|
|
$ |
67,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases past due 90 days or
more as a percent of total loans and leases |
|
|
0.33 |
% |
|
|
0.37 |
% |
|
|
0.35 |
% |
|
|
0.29 |
% |
|
|
0.25 |
% |
|
|
|
(1) |
|
Restructured loans represent loans to Franklin Credit Management Corporation (Franklin) that were restructured during the 2007
fourth quarter, and the subsequent removal of the Franklin Tranche A loans from nonperforming status during the 2008 second quarter. |
|
(2) |
|
Impaired loans held for sale represent impaired loans obtained from the Sky Financial acquisition that are intended to be sold. Impaired
loans held for sale are carried at the lower of cost or fair value less costs to sell. The decline from March 31, 2008 to June 30, 2008 was
primarily due to the sale of these loans. |
|
(3) |
|
Other NPAs represent certain investment securities backed by mortgage loans to borrowers with lower FICO scores. |
|
(4) |
|
Nonperforming assets divided by the sum of loans and leases, impaired loans held for sale, other real estate, and other NPAs. |
Compared with the prior quarter, NALs increased $157.7 million, or 42%, primarily reflecting
the overall weakness in our markets. The majority of the increase occurred in our C&I and CRE
portfolios.
|
|
|
C&I NALs increased $59.5 million, or 58%. The increase was spread across all regions,
but was more concentrated in the central Ohio and southeastern Michigan areas. The
increase was a result of number of small relationships, as only one loan exceeded $10
million. |
|
|
|
|
CRE NALs increased $78.7 million, or 43%. The increase included one $30 million
relationship secured by a retail property, with the remainder of the increase spread across
all regions and consisting of smaller dollar relationships. |
36
The $684.7 million, or 41%, decrease in NPAs, which include NALs, from the end of the prior
quarter reflected:
|
|
|
$789.0 million, or 68%, reduction in restructured Franklin loans, primarily reflecting
the removal of the Tranche A portion of the total Franklin loans based on the performance
during the first six-month period of 2008, and the
continued expected cash flow performance and priority of cash flows. |
|
|
|
|
$51.6 million, or 78%, reduction in impaired loans held-for-sale, primarily reflecting
loan sales and payments. |
|
|
|
|
$1.5 million decline in OREO. |
Partially offset by:
|
|
|
$157.7 million, or 42%, increase in NALs (discussed above). |
Compared with December 31, 2007, NPAs, which include NALs, decreased $667.2 million, or 40%,
reflecting:
|
|
|
$819.0 million, or 69%, reduction in restructured Franklin loans, primarily reflecting
the removal of the Tranche A portion of the total Franklin loans during the 2008 second
quarter based on the performance during the first six-month period of 2008, and the
continued expected cash flow performance and priority of cash flows. |
|
|
|
|
$58.7 million, or 80%, reduction in impaired loans held-for-sale, primarily reflecting
loan sales and payments. |
|
|
|
|
$2.9 million decline in OREO. |
Partially offset by:
|
|
|
$215.3 million, or 67%, increase in NALs primarily reflecting the overall economic
weakness in our markets. These increases are primarily in our C&I and CRE portfolios,
reflecting the continued softness in the residential real estate development markets. |
From time to time, as part of our loss mitigation process, loans may be renegotiated when we
determine that we will ultimately receive greater economic value under the new terms than through
foreclosure, liquidation, or bankruptcy. We may consider the borrowers payment status and history,
borrowers ability to pay upon a rate reset on an adjustable rate mortgage, size of the payment
increase upon a rate reset, period of time remaining prior to the rate reset and other relevant
factors in determining whether a borrower is experiencing financial difficulty. These
restructurings generally occur within the residential mortgage and home equity loan portfolios and
are not material in any period presented.
37
NPA activity for each of the past five quarters was as follows:
Table 22 Non-Performing Assets (NPAs) Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
(in thousands) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
|
NPAs, beginning of period |
|
$ |
1,677,767 |
|
|
$ |
1,660,270 |
|
|
$ |
435,042 |
|
|
$ |
261,185 |
|
|
$ |
206,678 |
|
New NPAs |
|
|
256,308 |
|
|
|
141,090 |
|
|
|
211,134 |
|
|
|
92,986 |
|
|
|
112,348 |
|
Restructured loans (1) |
|
|
(762,033 |
) |
|
|
|
|
|
|
1,187,368 |
|
|
|
|
|
|
|
|
|
Acquired NPAs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,492 |
|
|
|
|
|
Returns to accruing status |
|
|
(5,817 |
) |
|
|
(13,484 |
) |
|
|
(5,273 |
) |
|
|
(8,829 |
) |
|
|
(4,674 |
) |
Loan and lease losses |
|
|
(40,808 |
) |
|
|
(27,896 |
) |
|
|
(62,502 |
) |
|
|
(28,031 |
) |
|
|
(27,149 |
) |
Payments |
|
|
(73,040 |
) |
|
|
(68,753 |
) |
|
|
(30,756 |
) |
|
|
(17,589 |
) |
|
|
(19,662 |
) |
Sales |
|
|
(59,262 |
) |
|
|
(13,460 |
) |
|
|
(74,743 |
) |
|
|
(9,172 |
) |
|
|
(6,356 |
) |
|
|
|
NPAs, end of period |
|
$ |
993,115 |
|
|
$ |
1,677,767 |
|
|
$ |
1,660,270 |
|
|
$ |
435,042 |
|
|
$ |
261,185 |
|
|
|
|
|
|
|
(1) |
|
Restructured loans represent loans to Franklin Credit Management Corporation (Franklin) that were restructured during the
2007 fourth quarter, and the subsequent removal of the Franklin Tranche A loans from nonperforming status during the 2008
second quarter. |
Allowances for Credit Losses (ACL)
(This section should be read in conjunction with Significant Items 1 and 2.)
We maintain two reserves, both of which are available to absorb credit losses: the ALLL and
the AULC. When summed together, these reserves constitute the total ACL. Our credit administration
group is responsible for developing the methodology and determining the adequacy of the ACL.
38
Table 23 reflects activity in the ALLL and AULC for each of the last five quarters.
Table 23 Quarterly Credit Reserves Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
(in thousands) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
|
Allowance for loan and lease losses,
beginning of period |
|
$ |
627,615 |
|
|
$ |
578,442 |
|
|
$ |
454,784 |
|
|
$ |
307,519 |
|
|
$ |
282,976 |
|
Acquired allowance for loan and lease losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,128 |
|
|
|
|
|
Loan and lease losses |
|
|
(78,084 |
) |
|
|
(60,804 |
) |
|
|
(388,506 |
) |
|
|
(57,466 |
) |
|
|
(44,158 |
) |
Recoveries of loans previously charged off |
|
|
12,837 |
|
|
|
12,355 |
|
|
|
10,599 |
|
|
|
10,360 |
|
|
|
9,658 |
|
|
|
|
Net loan and lease losses |
|
|
(65,247 |
) |
|
|
(48,449 |
) |
|
|
(377,907 |
) |
|
|
(47,106 |
) |
|
|
(34,500 |
) |
|
|
|
Provision for loan and lease losses |
|
|
117,035 |
|
|
|
97,622 |
|
|
|
503,781 |
|
|
|
36,952 |
|
|
|
59,043 |
|
Allowance for loans transferred to held-for-sale |
|
|
|
|
|
|
|
|
|
|
(2,216 |
) |
|
|
(30,709 |
) |
|
|
|
|
|
|
|
Allowance for loan and lease losses, end of period |
|
$ |
679,403 |
|
|
$ |
627,615 |
|
|
$ |
578,442 |
|
|
$ |
454,784 |
|
|
$ |
307,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, beginning of period |
|
$ |
57,556 |
|
|
$ |
66,528 |
|
|
$ |
58,227 |
|
|
$ |
41,631 |
|
|
$ |
40,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired AULC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,541 |
|
|
|
|
|
(Reduction in) provision for unfunded loan
commitments and letters of credit losses |
|
|
3,778 |
|
|
|
(8,972 |
) |
|
|
8,301 |
|
|
|
5,055 |
|
|
|
1,090 |
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, end of period |
|
$ |
61,334 |
|
|
$ |
57,556 |
|
|
$ |
66,528 |
|
|
$ |
58,227 |
|
|
$ |
41,631 |
|
|
|
|
Total allowances for credit losses |
|
$ |
740,737 |
|
|
$ |
685,171 |
|
|
$ |
644,970 |
|
|
$ |
513,011 |
|
|
$ |
349,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses (ALLL) as % of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction reserve |
|
|
1.45 |
% |
|
|
1.34 |
% |
|
|
1.27 |
% |
|
|
0.97 |
% |
|
|
0.94 |
% |
Economic reserve |
|
|
0.21 |
|
|
|
0.19 |
|
|
|
0.17 |
|
|
|
0.17 |
|
|
|
0.21 |
|
|
|
|
Total loans and leases |
|
|
1.66 |
% |
|
|
1.53 |
% |
|
|
1.44 |
% |
|
|
1.14 |
% |
|
|
1.15 |
% |
|
|
|
Nonaccrual loans and leases (NALs) |
|
|
127 |
|
|
|
166 |
|
|
|
181 |
|
|
|
182 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses (ACL) as % of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
1.80 |
% |
|
|
1.67 |
% |
|
|
1.61 |
% |
|
|
1.28 |
% |
|
|
1.30 |
% |
NALs |
|
|
138 |
|
|
|
182 |
|
|
|
202 |
|
|
|
206 |
|
|
|
165 |
|
|
|
|
39
Table 24 reflects activity in the ALLL and AULC for the first six-month periods of 2008 and
2007.
Table 24 Year to Date Credit Reserves Analysis
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Allowance for loan and lease losses,
beginning of period |
|
$ |
578,442 |
|
|
$ |
272,068 |
|
Loan and lease losses |
|
|
(138,888 |
) |
|
|
(71,971 |
) |
Recoveries of loans previously charged off |
|
|
25,192 |
|
|
|
19,353 |
|
|
Net loan and lease losses |
|
|
(113,696 |
) |
|
|
(52,618 |
) |
Provision for loan and lease losses |
|
|
214,657 |
|
|
|
88,069 |
|
|
Allowance for loan and lease losses, end of period |
|
$ |
679,403 |
|
|
$ |
307,519 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, beginning of period |
|
$ |
66,528 |
|
|
$ |
40,161 |
|
(Reduction in) provision for unfunded loan commitments
and letters of credit losses |
|
|
(5,194 |
) |
|
|
1,470 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, end of period |
|
$ |
61,334 |
|
|
$ |
41,631 |
|
|
Total allowances for credit losses |
|
$ |
740,737 |
|
|
$ |
349,150 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses (ALLL) as % of: |
|
|
|
|
|
|
|
|
Transaction reserve |
|
|
1.45 |
% |
|
|
0.94 |
% |
Economic reserve |
|
|
0.21 |
|
|
|
0.21 |
|
|
Total loans and leases |
|
|
1.66 |
% |
|
|
1.15 |
% |
|
Nonaccrual loans and leases (NALs) |
|
|
127 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses (ACL) as % of: |
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
1.80 |
% |
|
|
1.30 |
% |
NALs |
|
|
138 |
|
|
|
165 |
|
|
The increases to the ALLL of $51.8 million and $101.0 million compared with March 31, 2008,
and December 31, 2007, respectively, primarily reflected the impact of the continued economic
weakness across our Midwest markets. Our loan loss reserve methodology indicates the need for
higher reserves in response to changes in underlying portfolio characteristics as reflected in the
transaction reserve component, and changes in the economy as reflected in the economic reserve
component. At June 30, 2008, the specific ALLL related to Franklin was $115.3 million, unchanged
compared with December 31, 2007.
The estimated loss factors assigned to credit exposures across the portfolio are updated from
time to time based on changes in actual performance. During the 2008 first quarter, we updated the
expected loss factors used to estimate the AULC. The lower expected loss factors were based on our
observations of how unfunded loan commitments have historically become funded loans. Additionally,
we also made other adjustments that affected the level of the ALLL during the first six-month
period of 2008. In the aggregate, these changes did not have a significant impact to the provision
for credit losses for the first six-month period of 2008.
40
Net Charge-offs (NCOs)
(This section should be read in conjunction with Significant Items 1 and 2.)
Table 25 reflects net loan and lease charge-off detail for each of the last five quarters.
Table 25 Quarterly Net Charge-Off Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
(in thousands) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
|
Net charge-offs by loan and lease type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
12,361 |
|
|
$ |
10,732 |
|
|
$ |
323,905 |
|
|
$ |
12,641 |
|
|
$ |
7,251 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
575 |
|
|
|
122 |
|
|
|
6,800 |
|
|
|
2,157 |
|
|
|
2,888 |
|
Commercial |
|
|
14,524 |
|
|
|
4,153 |
|
|
|
13,936 |
|
|
|
2,506 |
|
|
|
10,396 |
|
|
|
|
Commercial real estate |
|
|
15,099 |
|
|
|
4,275 |
|
|
|
20,736 |
|
|
|
4,663 |
|
|
|
13,284 |
|
|
|
|
Total commercial |
|
|
27,460 |
|
|
|
15,007 |
|
|
|
344,641 |
|
|
|
17,304 |
|
|
|
20,535 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
8,522 |
|
|
|
8,008 |
|
|
|
7,347 |
|
|
|
5,354 |
|
|
|
1,631 |
|
Automobile leases |
|
|
2,928 |
|
|
|
3,211 |
|
|
|
3,046 |
|
|
|
2,561 |
|
|
|
2,699 |
|
|
|
|
Automobile loans and leases |
|
|
11,450 |
|
|
|
11,219 |
|
|
|
10,393 |
|
|
|
7,915 |
|
|
|
4,330 |
|
Home equity |
|
|
13,984 |
|
|
|
14,515 |
|
|
|
12,212 |
|
|
|
10,841 |
|
|
|
5,405 |
|
Residential mortgage |
|
|
4,286 |
|
|
|
2,927 |
|
|
|
3,340 |
|
|
|
4,405 |
|
|
|
1,695 |
|
Other loans |
|
|
8,067 |
|
|
|
4,781 |
|
|
|
7,321 |
|
|
|
6,641 |
|
|
|
2,535 |
|
|
|
|
Total consumer |
|
|
37,787 |
|
|
|
33,442 |
|
|
|
33,266 |
|
|
|
29,802 |
|
|
|
13,965 |
|
|
|
|
Total net charge-offs |
|
$ |
65,247 |
|
|
$ |
48,449 |
|
|
$ |
377,907 |
|
|
$ |
47,106 |
|
|
$ |
34,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs annualized percentages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
0.36 |
% |
|
|
0.32 |
% |
|
|
9.76 |
% |
|
|
0.39 |
% |
|
|
0.36 |
% |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
0.11 |
|
|
|
0.02 |
|
|
|
1.44 |
|
|
|
0.48 |
|
|
|
0.92 |
|
Commercial |
|
|
0.77 |
|
|
|
0.23 |
|
|
|
0.78 |
|
|
|
0.14 |
|
|
|
1.23 |
|
|
|
|
Commercial real estate |
|
|
0.63 |
|
|
|
0.18 |
|
|
|
0.92 |
|
|
|
0.21 |
|
|
|
1.14 |
|
|
|
|
Total commercial |
|
|
0.47 |
|
|
|
0.27 |
|
|
|
6.18 |
|
|
|
0.31 |
|
|
|
0.64 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
0.94 |
|
|
|
0.97 |
|
|
|
0.96 |
|
|
|
0.73 |
|
|
|
0.28 |
|
Automobile leases |
|
|
1.28 |
|
|
|
1.18 |
|
|
|
0.96 |
|
|
|
0.72 |
|
|
|
0.70 |
|
|
|
|
Automobile loans and leases |
|
|
1.01 |
|
|
|
1.02 |
|
|
|
0.96 |
|
|
|
0.73 |
|
|
|
0.45 |
|
Home equity |
|
|
0.76 |
|
|
|
0.80 |
|
|
|
0.67 |
|
|
|
0.58 |
|
|
|
0.43 |
|
Residential mortgage |
|
|
0.33 |
|
|
|
0.22 |
|
|
|
0.25 |
|
|
|
0.32 |
|
|
|
0.16 |
|
Other loans |
|
|
4.62 |
|
|
|
2.68 |
|
|
|
4.02 |
|
|
|
4.97 |
|
|
|
2.39 |
|
|
|
|
Total consumer |
|
|
0.85 |
|
|
|
0.75 |
|
|
|
0.75 |
|
|
|
0.67 |
|
|
|
0.41 |
|
|
|
|
Net charge-offs as a % of average loans |
|
|
0.64 |
% |
|
|
0.48 |
% |
|
|
3.77 |
% |
|
|
0.47 |
% |
|
|
0.52 |
% |
|
|
|
Second quarter performance was generally in line with the full-year net charge-off expectation
we provided at the end of the 2008 first quarter of 0.60%-.65%. Reflecting the expectation for
continued economic weakness into 2009, we have raised our 2008 full-year net charge-off expectation
to 0.65%-0.70%.
The $16.8 million increase in total NCOs compared with the prior quarter was driven primarily
by a $12.5 million increase in total commercial NCOs to $27.5 million, or an annualized 0.47% of
related balances. This increase primarily reflected higher CRE NCOs, particularly within the
single family home builder segment. Commercial NCOs typically
41
display more variance between
quarters as such charge-offs are generally of larger relative amount compared with consumer loans
where the average charge-off amount is smaller.
In reviewing commercial NCOs trends, it is helpful to understand that reserves for such loans
are usually established in periods prior to that in which any related NCOs are typically
recognized. As the quality of a commercial credit deteriorates, it migrates from a higher quality
loan classification to a lower quality classification. As a part of our normal process, the credit
is reviewed and reserves are established or increased as warranted. It is usually not until a
later period that the credit is resolved and a NCO is recognized. If the previously established
reserves exceed that needed to satisfactorily resolve the problem credit, a recovery would be
recognized; if not, a final NCO is recorded. Increases in reserves precede increases in NALs.
Once a credit is classified as NAL, it is evaluated for specific reserves. As a result, an
increase in NALs does not necessarily result in an increase in reserves. In sum, the typical
sequence are periods of building reserve levels, followed by periods of higher NCOs that are
applied against these previously established reserves.
Automobile loan and lease NCOs were $11.5 million, or an annualized 1.01%, in the current
quarter. This level reflected a slightly lower level of annualized automobile loan NCOs compared
with the prior quarter, but an increase in annualized automobile lease NCOs. The declining balances
of automobile direct financing leases, resulting from no new automobile direct financing leases
being originated, increases the potential for volatility in reported automobile direct financing
lease NCOs. Both the automobile loan and lease NCOs were also negatively impacted by the lack of
recovery in used car prices. It is our expectation that the automobile loan and lease NCO ratio
for the second six-month period of 2008 will be consistent with the first six-month period of 2008.
Home equity NCOs in the 2008 second quarter were $14.0 million, or an annualized 0.76%. This
portfolio continues
to be impacted by the general housing market slowdown, and the resulting losses were evident
across our banking footprint. Our expectation is that second six-month period of 2008 performance
will be consistent with the first six-month period of 2008, as the small broker-originated
portfolio continues to decline, and our enhanced loss mitigation programs positively impact
performance. We continue to believe our home equity NCO experience will compare very favorably to
the industry.
Residential mortgage NCOs were $4.3 million, or an annualized 0.33% of related average
balances. We expect residential mortgage NCOs will remain under only modest upward pressure from
the first six-month period of 2008 level for the remainder of 2008, given our limited exposure to
non-traditional mortgages.
42
Table 26 reflects net loan and lease charge-off detail for the first six-month periods of 2008
and 2007.
Table 26 Year To Date Net Charge-Off Analysis
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(in thousands) |
|
2008 |
|
2007 |
|
Net charge-offs by loan and lease type: |
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
$ |
23,093 |
|
|
$ |
9,294 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
Construction |
|
|
697 |
|
|
|
2,897 |
|
Commercial |
|
|
18,677 |
|
|
|
10,808 |
|
|
Commercial real estate |
|
|
19,374 |
|
|
|
13,705 |
|
|
Total commercial |
|
|
42,467 |
|
|
|
22,999 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
Automobile loans |
|
|
16,530 |
|
|
|
4,484 |
|
Automobile leases |
|
|
6,139 |
|
|
|
4,900 |
|
|
Automobile loans and leases |
|
|
22,669 |
|
|
|
9,384 |
|
Home equity |
|
|
28,499 |
|
|
|
11,373 |
|
Residential mortgage |
|
|
7,213 |
|
|
|
3,626 |
|
Other loans |
|
|
12,848 |
|
|
|
5,236 |
|
|
Total consumer |
|
|
71,229 |
|
|
|
29,619 |
|
|
Total net charge-offs |
|
$ |
113,696 |
|
|
$ |
52,618 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs annualized percentages: |
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
0.34 |
% |
|
|
0.23 |
% |
Commercial real estate: |
|
|
|
|
|
|
|
|
Construction |
|
|
0.07 |
|
|
|
0.48 |
|
Commercial |
|
|
0.50 |
|
|
|
0.64 |
|
|
Commercial real estate |
|
|
0.41 |
|
|
|
0.60 |
|
|
Total commercial |
|
|
0.37 |
|
|
|
0.36 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
Automobile loans |
|
|
0.95 |
|
|
|
0.40 |
|
Automobile leases |
|
|
1.22 |
|
|
|
0.60 |
|
|
Automobile loans and leases |
|
|
1.01 |
|
|
|
0.48 |
|
Home equity |
|
|
0.78 |
|
|
|
0.46 |
|
Residential mortgage |
|
|
0.27 |
|
|
|
0.16 |
|
Other loans |
|
|
3.64 |
|
|
|
2.48 |
|
|
Total consumer |
|
|
0.80 |
|
|
|
0.43 |
|
|
Net charge-offs as a % of average loans |
|
|
0.56 |
% |
|
|
0.40 |
% |
|
Investment Portfolio
(This section should be read in conjunction with Significant Item 5.)
We routinely review our available-for-sale portfolio, and recognize impairment write-downs
based primarily on fair value, issuer-specific factors and results, and our intent to hold such
investments.
43
Available-for-sale portfolio
Our available-for-sale portfolio is evaluated in light of established asset/liability
management objectives, and changing market conditions that could affect the profitability of the
portfolio, as well as the level of interest rate risk we are exposed to.
Within our securities available-for-sale portfolio are asset-backed securities. At June 30,
2008, the securities in this portfolio had a fair value that was $173.7 million less than their
book value, resulting from increased liquidity spreads and higher long-term rates during the first
six-month period of 2008, as well as the expected extended duration of the securities. We have
reviewed our asset-backed securities portfolio with an independent party, and we do not believe
that there has been an adverse change in the estimated cash flows that we expect to receive from
these securities. Therefore, we believe the $173.7 million of impairment to be temporary. Table
27 details our asset-backed securities exposure.
Table 27 Asset Backed Securities Exposure
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Average |
Collateral Type |
|
Book value |
|
Fair value |
|
Credit Rating |
|
Book value |
|
Fair value |
|
Credit Rating |
Alt-A mortgage loans |
|
$ |
545,322 |
|
|
$ |
458,437 |
|
|
AAA |
|
$ |
560,654 |
|
|
$ |
547,358 |
|
|
AAA |
Trust preferred securities |
|
|
299,564 |
|
|
|
212,745 |
|
|
|
A+ |
|
|
|
301,231 |
|
|
|
279,175 |
|
|
|
A |
|
Other securities(1) |
|
|
2,557 |
|
|
|
2,557 |
|
|
|
B- |
|
|
|
7,769 |
|
|
|
7,956 |
|
|
BB- |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
847,443 |
|
|
$ |
673,739 |
|
|
|
|
|
|
$ |
869,654 |
|
|
$ |
834,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other securities represent certain investment securities backed by mortgage loans to borrowers with lower FICO scores. |
At June 30, 2008, we held in our investment securities portfolio $123.1 million of Fannie Mae
debt securities with a weight average maturity of 1.9 years, and $225.9 million of Freddie Mac debt
securities with a weighted average maturity of 2.5 years. Combined equity holdings in these
companies was immaterial.
Market Risk
Market risk 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.
Interest rate risk and price risk are our two primary sources of market risk.
Interest Rate Risk
Interest rate risk is the risk to earnings and value arising from changes in market interest
rates. Interest rate risk arises from timing differences in the repricings and maturities of
interest bearing assets and liabilities (reprice risk), changes in the expected maturities of
assets and liabilities arising from embedded options, such as borrowers ability to prepay
residential mortgage loans at any time and depositors ability to terminate certificates of deposit
before maturity (option risk), changes in the shape of the yield curve whereby market interest
rates increase or decrease in a non-parallel fashion (yield curve risk), and changes in spread
relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).
The simulations for evaluating short-term interest rate risk exposure are scenarios that model
gradual 100 and 200 basis point increasing and decreasing parallel shifts in market interest rates
over the next 12-month period beyond the interest rate change implied by the current yield curve.
As of June 30, 2008, the scenario that used the -200 basis point parallel shift in market
interest rates over the next 12-month period indicated that market interest rates could fall below
historical levels. Accordingly, management instituted an assumption that market interest rates
would not fall below 0.50% over the next 12-month period. The table below shows the results of the
scenarios as of June 30, 2008, and December 31, 2007. All of the positions were well within the
board of directors policy limits.
44
Table 28 Net Interest Income at Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income at Risk (%) |
|
Basis point change scenario |
|
|
-200 |
|
|
|
-100 |
|
|
|
+100 |
|
|
|
+200 |
|
|
Board policy limits |
|
|
-4.0 |
% |
|
|
-2.0 |
% |
|
|
-2.0 |
% |
|
|
-4.0 |
% |
|
June 30, 2008 |
|
|
-0.3 |
% |
|
|
+0.0 |
|
|
|
-0.3 |
% |
|
|
-0.6 |
% |
December 31, 2007 |
|
|
-3.0 |
% |
|
|
-1.3 |
% |
|
|
+1.4 |
% |
|
|
+2.2 |
% |
The change in net interest
income at risk reported as of June 30, 2008 compared with December
31, 2007 reflected actions taken by management to reduce net interest income at risk. During the
first quarter of 2008, $2.5 billion of receive fixed rate, pay variable rate interest rate swaps
were executed, and $0.2 billion of pay fixed rate, receive variable rate interest rate swaps were
terminated. The combined impact of these actions decreased net interest income at risk to market
interest rates +200 basis points 1.9%. The remainder of the change in net interest income at
risk to market interest rates +200 basis points was primarily related to the impact of slower
prepayments on mortgage assets resulting from expectations for higher longer-term market interest
rates over the simulation horizon.
The primary simulations for EVE at risk assume immediate 100 and 200 basis point increasing
and decreasing parallel shifts in market interest rates beyond the interest rate change implied by
the current yield curve. The table below outlines the June 30, 2008, results compared with
December 31, 2007.
Table 29 Economic Value of Equity at Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Value of Equity at Risk (%) |
|
Basis point change scenario |
|
|
-200 |
|
|
|
-100 |
|
|
|
+100 |
|
|
|
+200 |
|
|
Board policy limits |
|
|
-12.0 |
% |
|
|
-5.0 |
% |
|
|
-5.0 |
% |
|
|
-12.0 |
% |
|
June 30, 2008 |
|
|
+1.6 |
% |
|
|
+3.5 |
% |
|
|
-5.5 |
% |
|
|
-11.7 |
% |
December 31, 2007 |
|
|
-0.3 |
% |
|
|
+1.1 |
% |
|
|
-4.4 |
% |
|
|
-10.8 |
% |
The change to EVE at risk reported as of June 30, 2008 compared with December 31, 2007
reflected the impact of slower prepayments on mortgage assets resulting from expectations for
higher longer-term market interest rates. The +100 basis point scenario was slightly outside the
board of directors policy limits. However, the Market Risk Committee (MRC) recommended in April
2008, and the Risk Committee of the board of directors approved, a temporary exception to the
policy limits for the purpose of minimizing the amount of net interest income at risk as noted
above. EVE at risk is expected to be within the board of directors policy limits by December 31,
2008.
Mortgage Servicing Rights (MSRs)
(This section should be read in conjunction with Significant Item 4.)
MSR fair values are very sensitive to movements in interest rates as expected future net
servicing income depends on the projected outstanding principal balances of the underlying loans,
which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest
rates decline and decrease when mortgage interest rates rise. We have employed strategies to
reduce the risk of MSR fair value changes. In addition, a third party has been engaged to provide
improved analytical tools and insight to enhance our strategies with the objective to decrease the
volatility from MSR fair value changes. However, volatile changes in interest rates can diminish
the effectiveness of these hedges. We typically
report MSR fair value adjustments net of hedge-related trading activity in the mortgage
banking income category of non-interest income.
At June 30, 2008, we had a total of $240.0 million of MSRs representing the right to service
$15.8 billion in mortgage loans. For additional information regarding MSRs, please refer to Note 5
of the Notes to the Unaudited Condensed Consolidated Financial Statements.
45
Price Risk
(This section should be read in conjunction with Significant Item 5.)
Price risk represents the risk of loss arising from adverse movements in the prices of
financial instruments that are carried at fair value and are subject to fair value accounting. We
have price risk from trading securities, which includes instruments to hedge MSRs. We also have
price risk from securities owned by our broker-dealer subsidiaries, foreign exchange positions,
equity investments, investments in securities backed by mortgage loans, and marketable equity
securities held by our insurance subsidiaries. We have established loss limits on the trading
portfolio, on the amount of foreign exchange exposure that can be maintained, and on the amount of
marketable equity securities that can be held by the insurance subsidiaries.
Equity Investment Portfolios
In reviewing our equity investment portfolio, we consider general economic and market
conditions, including industries in which private equity merchant banking and community development
investments are made, and adverse changes affecting the availability of capital. We determine any
impairment based on all of the information available at the time of the assessment. New
information or economic developments in the future could result in recognition of additional
impairment.
From time to time, we invest in various investments with equity risk. Such investments
include investment funds that buy and sell publicly traded securities, investment funds that hold
securities of private companies, direct equity or venture capital investments in companies (public
and private), and direct equity or venture capital interests in private companies in connection
with our mezzanine lending activities. These investments are reported as a component of accrued
income and other assets on our consolidated balance sheet. At June 30, 2008, we had a total of
$39.5 million of such investments, down from $48.7 million at December 31, 2007. The following
table details the components of this change during the first six-month period of 2008.
Table 30 Equity Investment Activity
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
New |
|
Returns of |
|
|
|
|
|
Balance at |
|
|
December 31, 2007 |
|
Investments |
|
Capital |
|
Gain / (Loss) |
|
June 30, 2008 |
Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public equity |
|
$ |
16,583 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(6,053 |
) |
|
$ |
10,530 |
|
Private equity |
|
|
20,202 |
|
|
|
3,071 |
|
|
|
(391 |
) |
|
|
(1,224 |
) |
|
|
21,658 |
|
Direct investment |
|
|
11,962 |
|
|
|
1,893 |
|
|
|
(473 |
) |
|
|
(6,115 |
) |
|
|
7,267 |
|
|
Total |
|
$ |
48,747 |
|
|
$ |
4,964 |
|
|
$ |
(864 |
) |
|
$ |
(13,392 |
) |
|
$ |
39,455 |
|
|
The majority of the equity investment losses in the first six-month period of 2008 was
attributable to: (a) $5.9 million venture capital loss, and (b) $7.3 million losses on public
equity investment funds that buy and sell publicly traded securities and private equity
investments. These investments were in funds that focus on the financial services sector that,
during the first six months of 2008, performed worse than the broad equity market.
Investment decisions that incorporate credit risk require the approval of the independent
credit administration function. The degree of initial due diligence and subsequent review is a
function of the type, size, and collateral of the investment. Performance is monitored on a regular
basis, and reported to the MRC and the Risk Committee of the board of directors.
Liquidity Risk
Liquidity risk is the risk of loss due to the possibility that funds may not be available to
satisfy current or future commitments based on external macro market issues, investor perception of
financial strength, and events unrelated to the company such as war, terrorism, or financial
institution market specific issues. We manage liquidity risk at both the Bank and at the parent
company, Huntington Bancshares Incorporated.
46
Liquidity policies and limits are established by our board of directors, with operating limits
set by the MRC, based upon analyses of the ratio of loans to deposits, the percentage of assets
funded with non-core or wholesale funding, and the amount of liquid assets available to cover
non-core funds maturities. In addition, guidelines are established to ensure diversification of
wholesale funding by type, source, and maturity and provide sufficient balance sheet liquidity to
cover 100% of wholesale funds maturing within a six-month period. A contingency funding plan is in
place, which includes forecasted sources and uses of funds under various scenarios in order to
prepare for unexpected liquidity shortages, including the implications of any rating changes. The
MRC meets monthly to identify and monitor liquidity issues, provide policy guidance, and oversee
adherence to, and the maintenance of, the contingency funding plan.
Bank Liquidity
Conditions in the capital markets remained volatile throughout the first six-month period of
2008 resulting from the disruptions caused by the Bear Stearns liquidity crisis and subsequent
forced portfolio liquidations from a variety of mortgage related hedge funds. As a result,
liquidity premiums and credit spreads widened and many investors remained invested in lower risk
investments such as US Treasuries. Many banks relying on short term funding structures, such as
commercial paper, alternative collateral repurchase agreements, or other short term funding
vehicles, have had limited access to these funding markets. We, however, have maintained a
diversified wholesale funding structure with an emphasis on reducing the risk from maturing
borrowings resulting in minimizing our reliance on the short term funding markets. We do not have
an active commercial paper funding program and, while historically we have used the securitization
markets (primarily indirect auto loans and leases) to provide funding, we do not rely heavily on
these sources of funding. In addition, we do not provide liquidity facilities for conduits,
structured investment vehicles, or other off-balance sheet financing structures. As expected,
indicative credit spreads have widened in the secondary market for our debt. We expect these
spreads to remain wider than in prior periods for the foreseeable future.
Our primary source of funding for the Bank is retail and commercial core deposits. Core
deposits are comprised of interest bearing and non-interest bearing demand deposits, money market
deposits, savings and other domestic time deposits, consumer certificates of deposit both over and
under $100,000, and non-consumer certificates of deposit less than $100,000. Non-core deposits are
comprised of brokered money market deposits and certificates of deposit, foreign time deposits, and
other domestic time deposits of $100,000 or more comprised primarily of public fund certificates of
deposit greater than $100,000.
Table 31, presented on the next page, reflects deposit composition detail for each of the past
five quarters.
47
Table 31 Deposit Composition (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
(in thousands) |
|
June 30, |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
5,253,156 |
|
|
|
13.8 |
% |
|
$ |
5,160,068 |
|
|
|
13.5 |
% |
|
$ |
5,371,747 |
|
|
|
14.2 |
% |
|
$ |
4,984,663 |
|
|
|
13.0 |
% |
|
$ |
3,625,540 |
|
|
|
14.7 |
% |
Demand deposits interest bearing |
|
|
4,074,202 |
|
|
|
10.7 |
|
|
|
4,040,747 |
|
|
|
10.6 |
|
|
|
4,048,873 |
|
|
|
10.7 |
|
|
|
3,982,102 |
|
|
|
10.4 |
|
|
|
2,496,250 |
|
|
|
10.1 |
|
Money market deposits |
|
|
6,170,640 |
|
|
|
16.2 |
|
|
|
6,681,412 |
|
|
|
17.5 |
|
|
|
6,643,242 |
|
|
|
17.6 |
|
|
|
6,721,963 |
|
|
|
17.5 |
|
|
|
5,323,707 |
|
|
|
21.6 |
|
Savings and other domestic deposits |
|
|
5,008,855 |
|
|
|
13.1 |
|
|
|
5,083,046 |
|
|
|
13.3 |
|
|
|
4,968,615 |
|
|
|
13.2 |
|
|
|
5,081,856 |
|
|
|
13.2 |
|
|
|
2,914,078 |
|
|
|
11.8 |
|
Core certificates of deposit |
|
|
11,273,807 |
|
|
|
29.6 |
|
|
|
10,582,394 |
|
|
|
27.8 |
|
|
|
10,736,146 |
|
|
|
28.4 |
|
|
|
10,611,821 |
|
|
|
27.6 |
|
|
|
5,738,598 |
|
|
|
23.3 |
|
|
|
|
Total core deposits |
|
|
31,780,660 |
|
|
|
83.4 |
|
|
|
31,547,667 |
|
|
|
82.7 |
|
|
|
31,768,623 |
|
|
|
84.1 |
|
|
|
31,382,405 |
|
|
|
81.7 |
|
|
|
20,098,173 |
|
|
|
81.5 |
|
Other domestic deposits of $100,000 or more |
|
|
2,138,692 |
|
|
|
5.6 |
|
|
|
2,160,339 |
|
|
|
5.7 |
|
|
|
1,870,730 |
|
|
|
5.0 |
|
|
|
1,710,037 |
|
|
|
4.5 |
|
|
|
984,412 |
|
|
|
4.0 |
|
Brokered deposits and negotiable CDs |
|
|
3,100,955 |
|
|
|
8.1 |
|
|
|
3,361,957 |
|
|
|
8.8 |
|
|
|
3,376,854 |
|
|
|
8.9 |
|
|
|
3,701,726 |
|
|
|
9.6 |
|
|
|
2,920,726 |
|
|
|
11.9 |
|
Deposits in foreign offices |
|
|
1,104,119 |
|
|
|
2.9 |
|
|
|
1,046,378 |
|
|
|
2.8 |
|
|
|
726,714 |
|
|
|
2.0 |
|
|
|
1,610,197 |
|
|
|
4.2 |
|
|
|
596,601 |
|
|
|
2.6 |
|
|
|
|
Total deposits |
|
$ |
38,124,426 |
|
|
|
100.0 |
% |
|
$ |
38,116,341 |
|
|
|
100.0 |
% |
|
$ |
37,742,921 |
|
|
|
100.0 |
% |
|
$ |
38,404,365 |
|
|
|
100.0 |
% |
|
$ |
24,599,912 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
8,471,809 |
|
|
|
26.7 |
% |
|
$ |
8,715,690 |
|
|
|
27.6 |
% |
|
$ |
9,017,852 |
|
|
|
28.4 |
% |
|
$ |
9,017,474 |
|
|
|
28.7 |
% |
|
$ |
6,267,644 |
|
|
|
31.2 |
% |
Personal |
|
|
23,308,851 |
|
|
|
73.3 |
|
|
|
22,831,977 |
|
|
|
72.4 |
|
|
|
22,750,771 |
|
|
|
71.6 |
|
|
|
22,364,931 |
|
|
|
71.3 |
|
|
|
13,830,529 |
|
|
|
68.8 |
|
|
|
|
Total core deposits |
|
$ |
31,780,660 |
|
|
|
100.0 |
% |
|
$ |
31,547,667 |
|
|
|
100.0 |
% |
|
$ |
31,768,623 |
|
|
|
100.0 |
% |
|
$ |
31,382,405 |
|
|
|
100.0 |
% |
|
$ |
20,098,173 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Business Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Ohio |
|
$ |
6,618,913 |
|
|
|
17.4 |
% |
|
$ |
6,665,031 |
|
|
|
17.5 |
% |
|
$ |
6,332,143 |
|
|
|
16.8 |
% |
|
$ |
5,931,926 |
|
|
|
15.4 |
% |
|
$ |
5,016,401 |
|
|
|
20.4 |
% |
Northwest Ohio |
|
|
2,775,959 |
|
|
|
7.3 |
|
|
|
2,798,377 |
|
|
|
7.3 |
|
|
|
2,837,735 |
|
|
|
7.5 |
|
|
|
2,841,442 |
|
|
|
7.4 |
|
|
|
1,097,765 |
|
|
|
4.5 |
|
Greater Cleveland |
|
|
3,334,461 |
|
|
|
8.7 |
|
|
|
3,263,713 |
|
|
|
8.6 |
|
|
|
3,194,780 |
|
|
|
8.5 |
|
|
|
3,071,014 |
|
|
|
8.0 |
|
|
|
2,025,824 |
|
|
|
8.2 |
|
Greater Akron/Canton |
|
|
2,631,229 |
|
|
|
6.9 |
|
|
|
2,660,216 |
|
|
|
7.0 |
|
|
|
2,636,564 |
|
|
|
7.0 |
|
|
|
2,629,397 |
|
|
|
6.8 |
|
|
|
1,883,329 |
|
|
|
7.7 |
|
Southern Ohio / Kentucky |
|
|
2,655,612 |
|
|
|
7.0 |
|
|
|
2,676,381 |
|
|
|
7.0 |
|
|
|
2,628,766 |
|
|
|
7.0 |
|
|
|
2,626,166 |
|
|
|
6.8 |
|
|
|
2,353,087 |
|
|
|
9.6 |
|
Mahoning Valley |
|
|
1,498,004 |
|
|
|
3.9 |
|
|
|
1,583,723 |
|
|
|
4.2 |
|
|
|
1,550,676 |
|
|
|
4.1 |
|
|
|
1,540,095 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
Ohio Valley |
|
|
1,280,188 |
|
|
|
3.4 |
|
|
|
1,291,747 |
|
|
|
3.4 |
|
|
|
1,289,027 |
|
|
|
3.4 |
|
|
|
1,374,947 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
West Michigan |
|
|
2,946,401 |
|
|
|
7.7 |
|
|
|
2,937,318 |
|
|
|
7.7 |
|
|
|
2,919,926 |
|
|
|
7.7 |
|
|
|
2,966,558 |
|
|
|
7.7 |
|
|
|
2,820,076 |
|
|
|
11.5 |
|
East Michigan |
|
|
2,513,804 |
|
|
|
6.6 |
|
|
|
2,445,148 |
|
|
|
6.4 |
|
|
|
2,442,354 |
|
|
|
6.5 |
|
|
|
2,420,169 |
|
|
|
6.3 |
|
|
|
2,357,108 |
|
|
|
9.6 |
|
Western Pennsylvania |
|
|
1,629,258 |
|
|
|
4.3 |
|
|
|
1,630,114 |
|
|
|
4.3 |
|
|
|
1,643,483 |
|
|
|
4.4 |
|
|
|
1,663,174 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
Pittsburgh |
|
|
935,180 |
|
|
|
2.5 |
|
|
|
956,254 |
|
|
|
2.5 |
|
|
|
948,451 |
|
|
|
2.5 |
|
|
|
933,468 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
Central Indiana |
|
|
1,973,110 |
|
|
|
5.2 |
|
|
|
1,881,781 |
|
|
|
4.9 |
|
|
|
1,896,433 |
|
|
|
5.0 |
|
|
|
1,910,530 |
|
|
|
5.0 |
|
|
|
851,839 |
|
|
|
3.5 |
|
West Virginia |
|
|
1,658,034 |
|
|
|
4.3 |
|
|
|
1,584,233 |
|
|
|
4.2 |
|
|
|
1,589,903 |
|
|
|
4.2 |
|
|
|
1,559,864 |
|
|
|
4.1 |
|
|
|
1,586,407 |
|
|
|
6.4 |
|
Other Regional |
|
|
849,501 |
|
|
|
2.2 |
|
|
|
781,967 |
|
|
|
2.1 |
|
|
|
771,261 |
|
|
|
2.0 |
|
|
|
612,620 |
|
|
|
1.6 |
|
|
|
526,035 |
|
|
|
2.1 |
|
|
|
|
Regional Banking |
|
|
33,299,654 |
|
|
|
87.3 |
|
|
|
33,156,003 |
|
|
|
87.0 |
|
|
|
32,681,502 |
|
|
|
86.6 |
|
|
|
32,081,370 |
|
|
|
83.5 |
|
|
|
20,517,871 |
|
|
|
83.4 |
|
Dealer Sales |
|
|
56,517 |
|
|
|
0.1 |
|
|
|
55,557 |
|
|
|
0.1 |
|
|
|
58,196 |
|
|
|
0.2 |
|
|
|
63,399 |
|
|
|
0.2 |
|
|
|
57,554 |
|
|
|
0.2 |
|
Private Financial and Capital Markets Group |
|
|
1,666,608 |
|
|
|
4.4 |
|
|
|
1,542,631 |
|
|
|
4.0 |
|
|
|
1,626,043 |
|
|
|
4.3 |
|
|
|
1,630,675 |
|
|
|
4.2 |
|
|
|
1,106,329 |
|
|
|
4.5 |
|
Treasury / Other(2) |
|
|
3,101,647 |
|
|
|
8.2 |
|
|
|
3,362,150 |
|
|
|
8.9 |
|
|
|
3,377,180 |
|
|
|
8.9 |
|
|
|
4,628,921 |
|
|
|
12.1 |
|
|
|
2,918,158 |
|
|
|
11.9 |
|
|
|
|
Total deposits |
|
$ |
38,124,426 |
|
|
|
100.0 |
% |
|
$ |
38,116,341 |
|
|
|
100.0 |
% |
|
$ |
37,742,921 |
|
|
|
100.0 |
% |
|
$ |
38,404,365 |
|
|
|
100.0 |
% |
|
$ |
24,599,912 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
(1) |
|
Reflects post-Sky Financial merger organizational structure
effective on July 1, 2007. Accordingly, balances presented
for prior periods do not include the impact of the
acquisition. |
|
(2) |
|
Comprised largely of national market deposits. |
48
Core deposits can also increase our need for liquidity as certificates of deposit mature or
are withdrawn early and as non-maturity deposits, such as checking and savings account balances,
are withdrawn.
To the extent that we are unable to obtain sufficient liquidity through core deposits, we can
meet our liquidity needs through short-term borrowings by purchasing federal funds or by selling
securities under repurchase agreements. The Bank also has access to the Federal Reserves discount
window and term auction facility. As of June 30, 2008, a total of $8.3 billion of commercial loans
and home equity lines of credit were pledged to these facilities. As of June 30, 2008, borrowings
under the term auction facility totaled $0.3 billion, with a $6.1 billion of borrowing capacity
available from both facilities. Additionally, the Bank has a $4.4 billion borrowing capacity at
the Federal Home Loan Bank of Cincinnati, of which $1.3 billion remained unused at June 30, 2008.
Other sources of liquidity exist within our securities available-for-sale, and the relatively
shorter-term structure of our commercial loans and automobile loans.
During the quarter, we reduced our dependency on overnight funding through: (a) an on-balance
sheet securitization transaction, which raised $887 million of longer-term funding, (b) the net
proceeds of our convertible preferred stock issuance, (c) the sale of $473 million of residential
real estate loans, and (d) managing down of certain non-relationship collateralized public funds
deposits and related collateral securities.
At June 30, 2008, we believe that the Bank had sufficient liquidity to meet its cash flow
obligations for the foreseeable future.
Parent Company Liquidity
At June 30, 2008, the parent company had $665.1 million in cash or cash equivalents, compared
with $153.5 million at December 31, 2007. This increase primarily reflected net proceeds from the
current quarters issuance of preferred stock (see below paragraph) and the decision to reduce the
quarterly cash dividend on our common stock. On April 15, 2008, we declared a quarterly cash
dividend on our common stock of $0.1325 per common share, payable July 1, 2008, to shareholders of
record on June 13, 2008. Also, on July 16, 2008, we declared a quarterly cash dividend on our
common stock of $0.1325 per common share, payable October 1, 2008, to shareholders of record on
September 12, 2008.
During the 2008 second quarter, we issued an aggregate $569 million of Series A Preferred
Stock. The Series A Preferred Stock will pay, as declared by our board of directors, dividends in
cash at a rate of 8.50% per annum, payable quarterly, commencing July 15, 2008. (Please refer to
Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional
information.) On May 27, 2008, the board of directors declared a quarterly cash dividend on the
Series A Preferred Stock of $19.597 per share. This amount was pro-rated over the initial dividend
period as further set forth in the Articles Supplementary classifying the preferred stock. The
dividend was payable July 15, 2008, to shareholders of record on July 1, 2008. On July 16, 2008,
the board of directors declared a quarterly cash dividend on the Preferred Stock of $21.25 per
share. The dividend is payable October 15, 2008, to shareholders of record on October 1, 2008.
Based on the regulatory dividend limitation, the Bank could not have declared and paid a
dividend to the parent company at June 30, 2008, without regulatory approval. We do not
anticipate that the parent company will receive dividends from the Bank until later in 2008. To
help meet any additional liquidity needs, we have an open-ended, automatic shelf registration
statement filed and effective with the SEC, which permits us to issue an unspecified amount of debt
or equity securities. We also have a $50.0 million committed line of credit that expires in 2009.
This credit facility contains financial covenants that require us to maintain certain levels on
return on average assets ratio, nonperforming assets, capital ratios, and double leverage ratio. As
of June 30, 2008, the entire borrowing capacity was available for use.
Considering anticipated earnings and the capital raised from the 2008 second quarter
preferred-stock issuance (discussed above), we believe the parent company has sufficient liquidity
to meet its cash flow obligations for the foreseeable future.
Credit Ratings
Credit ratings by the three major credit rating agencies are an important component of our
liquidity profile. Among other factors, the credit ratings are based on financial strength, credit
quality and concentrations in the loan portfolio, the level and volatility of earnings, capital
adequacy, the quality of management, the liquidity of the balance sheet, the availability of a
significant base of core retail and commercial deposits, and our ability to access a broad array of
wholesale
49
funding sources. Adverse changes in these factors could result in a negative change in credit
ratings and impact not only the ability to raise funds in the capital markets, but also the cost of
these funds. In addition, certain financial on- and off-balance sheet arrangements contain credit
rating triggers that could increase funding needs if a negative rating change occurs. Letter of
credit commitments for marketable securities, interest rate swap collateral agreements, and certain
asset securitization transactions contain credit rating provisions. (See the Liquidity Risks
section in Part 1 of the 2007 Annual Report on Form 10-K for additional discussion.)
On February 22, 2008, Moodys Investor Service affirmed the ratings of the parent company and
the Bank. Moodys Investor Service and Fitch Ratings upgraded the ratings outlook comment to
stable from negative on May 13, 2008, and June 27, 2008, respectively.
Credit ratings as of June 30, 2008, for the parent company and the Bank were:
Table 32 Credit Ratings
|
|
|
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|
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|
|
|
|
|
|
June 30, 2008 |
|
|
|
Senior Unsecured |
|
|
Subordinated |
|
|
|
|
|
|
|
|
|
Notes |
|
|
Notes |
|
|
Short-Term |
|
|
Outlook |
|
Huntington Bancshares Incorporated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moodys Investor Service |
|
|
A3 |
|
|
Baal |
|
|
|
P-2 |
|
|
Stable |
|
Standard and Poors |
|
BBB+ |
|
|
BBB |
|
|
|
A-2 |
|
|
Negative |
|
Fitch Ratings |
|
|
A- |
|
|
BBB+ |
|
|
|
F1 |
|
|
Stable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Huntington National Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moodys Investor Service |
|
|
A2 |
|
|
|
A3 |
|
|
|
P-1 |
|
|
Stable |
|
Standard and Poors |
|
|
A- |
|
|
BBB+ |
|
|
|
A-2 |
|
|
Negative |
|
Fitch Ratings |
|
|
A- |
|
|
BBB+ |
|
|
|
F1 |
|
|
Stable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As an
investor, you should be aware that a security rating is not a
recommendation to buy, sell, or hold securities, that it may be
subject to revision or withdrawal at any time by the assigning rating
organization, and that each rating should be evaluated independently
of any other rating.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various off-balance sheet arrangements. These
arrangements include financial guarantees contained in standby letters of credit issued by the Bank
and commitments by the Bank to sell mortgage loans.
Through our credit process, we monitor the credit risks of outstanding standby letters of
credit. When it is probable that a standby letter of credit will be drawn and not repaid in full,
losses are recognized in the provision for credit losses. At June 30, 2008, we had $1.6 billion of
standby letters of credit outstanding, of which 42% were collateralized. Included in these letters
of credit are letters of credit issued by the Bank that support $0.9 billion of notes and bonds
that have been issued by our customers and sold by The Huntington Investment Company, our
broker-dealer subsidiary. If the Banks short-term credit ratings were downgraded, the Bank could
be required to purchase all of these bonds pursuant to its letters of credit, requiring the Bank to
obtain funding for the amount of notes and bonds purchased.
We enter into forward contracts relating to the mortgage banking business to hedge the
exposures we have from commitments to extend new residential mortgage loans to our customers and
from our held-for-sale mortgage loans. At June 30, 2008, December 31, 2007, and June 30, 2007, we
had commitments to sell residential real estate loans of $577.0 million, $555.9 million, and $484.5
million, respectively. These contracts mature in less than one year.
We do not believe that off-balance sheet arrangements will have a material impact on our
liquidity or capital resources.
Operational Risk
Operational risk is the risk of loss due to human error, inadequate or failed internal systems
and controls, violations of, or noncompliance with, laws, rules, regulations, prescribed practices,
or ethical standards, and external influences such as market conditions, fraudulent activities,
disasters, and security risks. We continuously strive to strengthen our system of internal controls
to ensure compliance with laws, rules and regulations, and to improve the oversight of our
operational risk.
50
Capital
Capital is managed both at the Bank and on a consolidated basis. Capital levels are maintained
based on regulatory capital requirements and the economic capital required to support credit,
market, liquidity, and operational risks inherent in our business, and to provide the flexibility
needed for future growth and new business opportunities.
Shareholders equity totaled $6.4 billion at June 30, 2008. This balance was an increase
compared with $5.9 billion at December 31, 2007, primarily reflecting the current quarters
issuance of preferred stock (see below paragraph).
During the 2008 second quarter, we issued an aggregate $569 million of Series A Preferred
Stock. The Series A Preferred Stock will pay, when declared by our board of directors, dividends
in cash at a rate of 8.50% per annum, payable quarterly, commencing July 15, 2008. Each share of
the Series A Preferred Stock is non-voting and may be convertible at any time, at the option of the
holder, into 83.668 shares of common stock of Huntington.
Additionally, to accelerate the building of capital and to lower the cost of issuing the
aforementioned securities, we reduced our quarterly common stock dividend to $0.1325 per common
share, effective with the dividend payable July 1, 2008.
No shares were repurchased during the quarter. Although there are currently 3.9 million
shares remaining available under the current authorization announced April 20, 2006, no future
share repurchases are contemplated.
As shown in the table below, our tangible equity to assets ratio was 5.90% at June 30, 2008,
up compared with 5.08% at December 31, 2007, and 4.92% at March 31, 2008. The 98 basis point
increase from March 31, 2008, primarily reflected the benefit of the issuance of the $569 million
of convertible preferred stock, as well as retained earnings.
Table 33 Consolidated Capital Adequacy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well- |
|
|
|
|
|
|
Capitalized |
|
2008 |
|
2007 |
(in millions) |
|
Minimums |
|
June 30, |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
Total risk-weighted assets (1) |
|
|
|
|
|
$ |
46,602 |
|
|
$ |
46,546 |
|
|
$ |
46,044 |
|
|
$ |
45,931 |
|
|
$ |
32,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio (1) |
|
|
5.00 |
% |
|
|
7.88 |
% |
|
|
6.83 |
% |
|
|
6.77 |
% |
|
|
7.57 |
% |
|
|
9.07 |
% |
Tier 1 risk-based capital ratio (1) |
|
|
6.00 |
|
|
|
8.82 |
|
|
|
7.56 |
|
|
|
7.51 |
|
|
|
8.35 |
|
|
|
9.74 |
|
Total risk-based capital ratio (1) |
|
|
10.00 |
|
|
|
12.05 |
|
|
|
10.87 |
|
|
|
10.85 |
|
|
|
11.58 |
|
|
|
13.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity / asset ratio |
|
|
|
|
|
|
5.90 |
|
|
|
4.92 |
|
|
|
5.08 |
|
|
|
5.70 |
|
|
|
6.87 |
|
Tangible common equity / asset ratio |
|
|
|
|
|
|
4.80 |
|
|
|
4.92 |
|
|
|
5.08 |
|
|
|
5.70 |
|
|
|
6.87 |
|
Tangible equity / risk-weighted assets ratio
(1) |
|
|
|
|
|
|
6.58 |
|
|
|
5.57 |
|
|
|
5.67 |
|
|
|
6.46 |
|
|
|
7.66 |
|
Average equity / average assets |
|
|
|
|
|
|
11.44 |
|
|
|
10.70 |
|
|
|
11.40 |
|
|
|
11.50 |
|
|
|
8.66 |
|
|
|
|
(1) |
|
June 30, 2008 figures are estimated. Based on an interim
decision by the banking agencies on December 14, 2006,
Huntington has excluded the impact of adopting Statement
158 from the regulatory capital calculations. |
The Bank is primarily supervised and regulated by the Office of the Comptroller of the
Currency, which establishes regulatory capital guidelines for banks similar to those established
for bank holding companies by the Federal Reserve
Board. We intend to maintain both the parent companys and the Banks risk-based capital
ratios at levels at which each would be considered well capitalized by regulators. At June 30,
2008, the Bank had Tier 1 and Total risk-based capital in excess of the minimum level required to
be considered well capitalized of $512.0 million and $148.8 million, respectively; and the
parent company had Tier 1 and Total risk-based capital in excess of the minimum level required to
be considered well capitalized of $1.3 billion and $1.0 billion, respectively.
51
Table 34 Quarterly Common Stock Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
(in thousands, except per share amounts) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
Common stock price, per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High (1) |
|
$ |
11.750 |
|
|
$ |
14.870 |
|
|
$ |
18.390 |
|
|
$ |
22.930 |
|
|
$ |
22.960 |
|
Low (1) |
|
|
4.940 |
|
|
|
9.640 |
|
|
|
13.500 |
|
|
|
16.050 |
|
|
|
21.300 |
|
Close |
|
|
5.770 |
|
|
|
10.750 |
|
|
|
14.760 |
|
|
|
16.980 |
|
|
|
22.740 |
|
Average closing price |
|
|
8.783 |
|
|
|
12.268 |
|
|
|
16.125 |
|
|
|
18.671 |
|
|
|
22.231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends, per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.1325 |
|
|
$ |
0.2650 |
|
|
$ |
0.2650 |
|
|
$ |
0.2650 |
|
|
$ |
0.2650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic |
|
|
366,206 |
|
|
|
366,235 |
|
|
|
366,119 |
|
|
|
365,895 |
|
|
|
236,032 |
|
Average diluted |
|
|
367,234 |
|
|
|
367,208 |
|
|
|
366,119 |
|
|
|
368,280 |
|
|
|
239,008 |
|
Ending |
|
|
366,197 |
|
|
|
366,226 |
|
|
|
366,262 |
|
|
|
365,898 |
|
|
|
236,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share |
|
$ |
15.87 |
|
|
$ |
16.13 |
|
|
$ |
16.24 |
|
|
$ |
17.08 |
|
|
$ |
12.97 |
|
Tangible book value per share |
|
|
6.82 |
|
|
|
7.08 |
|
|
|
7.13 |
|
|
|
8.10 |
|
|
|
10.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
High and low stock prices are intra-day quotes obtained from NASDAQ. |
52
LINES OF BUSINESS DISCUSSION
This section reviews financial performance from a line of business perspective and should be
read in conjunction with the Discussion of Results of Operations, Note 14 of the Notes to Unaudited
Condensed Consolidated Financial Statements, and other sections for a full understanding of
consolidated financial performance.
We have three distinct lines of business: Regional Banking, Dealer Sales, and the Private
Financial and Capital Markets Group (PFCMG). A fourth segment includes our Treasury function and
other unallocated assets, liabilities, revenue, and expense. Lines of business results are
determined based upon our management reporting system, which assigns balance sheet and income
statement items to each of the business segments. The process is designed around our
organizational and management structure and, accordingly, the results derived are not necessarily
comparable with similar information published by other financial institutions. An overview of this
system is provided below, along with a description of each segment and discussion of financial
results.
Acquisition of Sky Financial
The businesses acquired in the Sky Financial merger were fully integrated into each of the
corresponding Huntington lines of business as of July 1, 2007. The Sky Financial merger had the
largest impact to Regional Banking, but also impacted PFCMG and Treasury/Other. For Regional
Banking, the merger added four new banking regions and strengthened our presence in five regions
where Huntington previously operated. The merger did not significantly impact Dealer Sales.
After completion of the Sky Financial acquisition, we combined Sky Financials operations with
ours. Methodologies were implemented to estimate the approximate effect of the acquisition for the
entire company; however, these methodologies were not designed to estimate the approximate effect
of the acquisition to individual lines of business. As a result, the effect of the acquisition to
the individual lines of business is not quantifiable. In the following individual line of business
discussions, 2008 second quarter results are compared with 2008 first quarter results. We believe
that this comparison provides the most meaningful analysis because: (a) the impacts of the Sky
Financial acquisition are included in both periods, (b) the comparisons of 2008 second quarter
results to 2007 second quarter results are distorted as a result of the non-quantifiable impact of
the Sky Financial acquisition to the individual lines of business, and (c) the comparisons of the
first six-month period of 2008 to the first six-month period of 2007 are distorted as a result of
the non-quantifiable impact of the Sky Financial acquisition to the individual lines of business.
Funds Transfer Pricing
We use a centralized funds transfer pricing (FTP) methodology to attribute appropriate net
interest income to the business segments. The Treasury/Other business segment charges (credits) an
internal cost of funds for assets held in (or pays for funding provided by) each line of business.
The FTP rate is based on prevailing market interest rates for comparable duration assets (or
liabilities). Deposits of an indeterminate maturity receive an FTP credit based on vintage-based
pool rates. Other assets, liabilities, and capital are charged (credited) with a four-year moving
average FTP rate. The
53
intent of the FTP methodology is to eliminate all interest rate risk from
the lines of business by providing matched duration funding of assets and liabilities. The result
is to centralize the financial impact, management, and reporting of interest rate and liquidity
risk in Treasury/Other where it can be monitored and managed.
Treasury/Other
The Treasury function includes revenue and expense related to assets, liabilities, and equity
not directly assigned or allocated to one of the other three business segments. Assets in this
segment include insurance, investment securities, and bank owned life insurance. The financial
impact associated with our FTP methodology, as described above, is also included in this segment.
Net interest income includes the impact of administering our investment securities portfolios
and the net impact of derivatives used to hedge interest rate sensitivity. Non-interest income
includes miscellaneous fee income not allocated to other business segments such as bank owned life
insurance income, insurance revenue, and any investment securities and trading assets gains or
losses. Non-interest expense includes certain corporate administrative, merger, and other
miscellaneous expenses not allocated to other business segments. The provision for income
taxes for the other business segments is calculated at a statutory 35% tax rate, though our overall
effective tax rate is lower. As a result, Treasury/Other reflects a credit for income taxes
representing the difference between the lower actual effective tax rate and the statutory tax rate
used to allocate income taxes to the other segments.
The 2008 second quarter increase in the net interest margin compared with the 2008 first
quarter primarily reflected the impact of improved pricing of our funding costs, particularly as
related to deposits. As this factor is primarily related to interest rate risk, and our FTP
methodology is constructed so as to eliminate interest rate risk from the lines of business, this
increase in our net interest margin is reflected in our Treasury/Other segment.
Net Income by Business Segment
The company reported net income of $101.4 million in the 2008 second quarter. This compared
with a net income of $127.1 million in the 2008 first quarter, a decline of $25.7 million. The
breakdown of net income for the 2008 second quarter by business segment is as follows:
|
§ |
|
Regional Banking: $117.5 million ($5.5 million increase compared with 2008 first
quarter) |
|
|
§ |
|
Dealer Sales: $7.9 million ($4.2 million increase compared with 2008 first quarter) |
|
|
§ |
|
PFCMG: $9.5 million ($3.2 million decrease compared with 2008 first quarter) |
|
|
§ |
|
Treasury/Other: $33.5 million loss ($32.2 million decrease compared with 2008 first
quarter) |
54
Regional Banking
(This section should be read in conjunction with Significant Items 1, 2, and 4.)
Objectives, Strategies, and Priorities
Our Regional Banking line of business provides traditional banking products and services to
consumer, small business, and commercial customers located in its 13 operating regions within the
six states of Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. It provides
these services through a banking network of over 600 branches, and over 1,400 ATMs, along with
Internet and telephone banking channels. It also provides certain services on a limited basis
outside of these six states, including mortgage banking and equipment leasing. Each region is
further divided into retail and commercial banking units. Retail products and services include home
equity loans and lines of credit, first mortgage loans, direct installment loans, small business
loans, personal and business deposit products, as well as sales of investment and insurance
services. At June 30, 2008, Retail Banking accounted for 52% and 80% of total Regional Banking
loans and deposits, respectively. Commercial Banking serves middle market commercial banking
relationships, which use a variety of banking products and services including, but not limited to,
commercial loans, international trade, cash management, leasing, interest rate protection products,
capital market alternatives, 401(k) plans, and mezzanine investment capabilities.
We have a business model that emphasizes the delivery of a complete set of banking products
and services offered by larger banks, but distinguished by local decision-making about the pricing
and the offering of these products. Our strategy is to focus on building a deeper relationship
with our customers by providing a Simply the Best service experience. This focus on service
requires continued investments in state-of-the-art platform technology in our branches,
award-winning retail and business websites for our customers, extensive development of associates,
and internal processes that empower our local bankers to serve our customers better. We expect the
combination of local decision-making and Simply the Best service provides a competitive advantage
and supports revenue and earnings growth.
2008 Second Quarter versus 2008 First Quarter
Table 35 Key Performance Indicators for Regional Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
June 30, |
|
March 31, |
|
Change |
(in thousands unless otherwise noted) |
|
2008 |
|
2008 |
|
Amount |
|
Percent |
|
Net income operating |
|
$ |
117,506 |
|
|
$ |
111,971 |
|
|
$ |
5,535 |
|
|
|
4.9 |
% |
Total average assets (in millions) |
|
|
34,570 |
|
|
|
34,240 |
|
|
|
330 |
|
|
|
1.0 |
|
Total average deposits (in millions) |
|
|
33,095 |
|
|
|
32,750 |
|
|
|
345 |
|
|
|
1.1 |
|
Return on average equity |
|
|
20.4 |
% |
|
|
19.2 |
% |
|
|
1.2 |
% |
|
|
6.3 |
|
Retail banking # DDA households (eop) |
|
|
897,023 |
|
|
|
895,340 |
|
|
|
1,683 |
|
|
|
0.2 |
|
Retail banking # new relationships 90-day cross-sell (average) |
|
|
2.54 |
|
|
|
2.38 |
|
|
|
0.16 |
|
|
|
6.7 |
|
Small business # business DDA relationships (eop) |
|
|
105,337 |
|
|
|
104,493 |
|
|
|
844 |
|
|
|
0.8 |
|
Small business # new relationships 90-day cross-sell (average) |
|
|
2.11 |
|
|
|
2.03 |
|
|
|
0.08 |
|
|
|
3.9 |
|
Mortgage banking closed loan volume (in millions) |
|
$ |
1,127 |
|
|
$ |
1,242 |
|
|
$ |
(115 |
) |
|
|
(9.3 |
) |
Regional Banking contributed $117.5 million of the companys net income in the 2008 second
quarter. This compared with net income of $112.0 million in the 2008 first quarter, and
represented an increase of $5.5 million.
Fully taxable equivalent net interest income increased $7.2 million, or 2%, reflecting a $0.4
billion, or 1%, increase in total average earning assets, primarily in commercial loans, and a 3
basis point increase in the net interest margin to 4.46% compared with 4.43%. Also contributing to
the increase was a combined increase of $0.3 billion, or 3%, in consumer deposit transaction
accounts and consumer certificates-of-deposit under $100,000, as well as improved spreads in our
consumer savings and consumer money-market products.
55
Total average loans and leases increased $459 million, or 1%, compared with the prior quarter
primarily reflecting growth in our C&I and CRE portfolios. C&I loans increased $263 million, or
2%, and CRE loans grew $306 million, or 3%. The Southern Ohio/KY, Central Ohio, and Cleveland
regions accounted for most of Regional Bankings commercial loan growth. These increases were
partially offset by a $0.1 billion, or 1%, decrease in consumer loans, primarily in residential
mortgages, reflecting loan sales during the quarter.
Average deposits grew $345 million, or 1%, compared with the prior quarter. This growth was
driven primarily by a $0.6 billion, or 4%, increase in time deposits. Additionally, consumer
interest checking deposits increased $114 million, or 4%, due partly to an increase in retail
banking DDA households. This favorable growth was partially offset by a $374 million, or 12%,
decrease in commercial non-time deposits and was the result of a planned reduction in
non-relationship collateralized public fund deposits.
The provision for credit losses increased to $104.7 million in the current quarter compared
with $69.7 million in the prior quarter reflecting higher NCOs during the quarter, as well as
increases in total loans at the end of the period, especially within the commercial loan portfolio.
NCOs totaled $51.3 million, or an annualized 0.63% of average loans and leases, in the 2008 second
quarter compared with $34.8 million, or an annualized 0.44% of average loans and leases, in the
2008 first quarter. This increase reflected the impact of the continued economic weakness across
our Midwest markets, most notably in portfolios related to the residential housing sector, both
commercial and consumer.
Non-interest income increased $30.7 million, or 26%, primarily reflecting: (a) $19.5 million
increase in mortgage banking income primarily due to lower losses of $14.0 million related to the
net hedging impact of MSRs, and (b) $9.8 million increase in service charges on deposit accounts
and other service charges and fees primarily due to seasonal increases.
Non-interest expense decreased $5.6 million, or 2%, primarily reflecting a $4.6 million
decrease in personnel expense resulting from the impact of an average reduction of 260, or 4%,
full-time equivalent staff reflecting the benefit of merger efficiencies and restructuring.
56
Dealer Sales
(This section should be read in conjunction with Significant Item 1.)
Objectives, Strategies, and Priorities
Our Dealer Sales line of business provides a variety of banking products and services to more
than 3,800 automotive dealerships within our primary banking markets, as well as in Arizona,
Florida, Nevada, New Jersey, New York, Tennessee, and Texas. Dealer Sales finances the purchase of
automobiles by customers at the automotive dealerships; purchases automobiles from dealers and
simultaneously leases the automobiles to consumers under long-term leases; finances dealerships
new and used vehicle inventories, land, buildings, and other real estate owned by the dealership,
and their working capital needs; and provides other banking services to the automotive dealerships
and their owners. Competition from the financing divisions of automobile manufacturers and from
other financial institutions is intense. Dealer Sales production opportunities are directly
impacted by the general automotive sales business, including programs initiated by manufacturers to
enhance and increase sales directly. We have been in this line of business for over 50 years.
The Dealer Sales strategy has been to focus on developing relationships with the dealership
through its finance department, general manager, and owner. An underwriter who understands each
local market makes loan decisions, though we prioritize maintaining pricing discipline over market
share.
2008 Second Quarter versus 2008 First Quarter
Table 36 Key Performance Indicators for Dealer Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
June 30, |
|
March 31, |
|
Change |
(in thousands unless otherwise noted) |
|
2008 |
|
2008 |
|
Amount |
|
Percent |
|
Net income operating |
|
$ |
7,906 |
|
|
$ |
3,718 |
|
|
$ |
4,188 |
|
|
|
N.M. |
% |
Total average assets (in millions) |
|
|
5,791 |
|
|
|
5,549 |
|
|
|
242 |
|
|
|
4.4 |
|
Return on average equity |
|
|
16.3 |
% |
|
|
7.7 |
% |
|
|
8.6 |
% |
|
|
N.M. |
|
Automobile loans production (in
millions) |
|
$ |
672.7 |
|
|
$ |
678.9 |
|
|
$ |
(6.2 |
) |
|
|
(0.9 |
) |
Automobile leases production (in
millions) |
|
|
74.3 |
|
|
|
67.9 |
|
|
|
6.4 |
|
|
|
9.4 |
|
|
N.M., not
a meaningful value.
Dealer Sales contributed $7.9 million, or 8%, of the companys net income in the 2008 second
quarter. This compared with $3.7 million in the 2008 first quarter, and represented an increase of
$4.2 million.
The most notable factor contributing to the $4.2 million increase in net income was a $10.2
million decrease in provision for credit losses to $6.9 million in the current quarter compared
with $17.1 million in the prior quarter. This decrease reflected a reduction of approximately $7.0
million in the ALLL maintained for commercial loans during the 2008 second quarter due to the
improved credit quality of this portfolio combined with an increase of approximately $3.0 million
in the ALLL maintained for consumer loans during the 2008 first quarter due to the deteriorating
quality of this portfolio associated with the continuing economic weakness in our markets.
Fully taxable equivalent net interest income decreased $0.8 million, or 2%, reflecting a 12
basis point decline in net interest margin to 2.37% in the current quarter compared with 2.49% in
the prior quarter primarily due to increased interest costs related to operating lease assets as
that portfolio continues to grow (see below for associated increases in other non interest income
and expense). These decreases were partially offset by a $0.2 billion, or 3%, increase in average
total consumer loans (see next paragraph).
Total average automobile loans increased $0.3 billion reflecting a continuation of strong
origination volumes, which totaled $673 million for the 2008 second quarter and $679 million for
the 2008 first quarter, both significantly above 2007 levels. The increase in automobile loan
production reflected the consistent execution of our commitment to service quality to our dealers,
as well as market dynamics that have resulted in some competitors reducing their automobile lending
activities. The increase in total average automobile loans was partially offset by $0.1 billion,
or 9%, decline in average
57
lease balances (operating and direct leases, combined), reflecting
consistent declines in automobile lease production volumes since the 2007 second quarter as
automobile lease production continues to be challenged by special programs offered by automobile
manufacturers captive finance companies.
Non-interest expense (excluding operating lease expense) increased $2.4 million, or 11%,
reflecting a $1.9 million increase in losses resulting from sales of vehicles returned at the end
of their lease terms as values of many used vehicles have continued to decline, as well as higher
collection related costs. Additionally, non-interest income (excluding operating lease income)
decreased $1.4 million, or 20%, primarily reflecting a $1.0 million reduction in fee income from
Huntington Plus loans as production levels of this product have declined.
Automobile operating lease income increased $0.8 million, or 63%, reflecting a 70% increase in
operating lease assets. This increase consisted of a $3.5 million increase in non-interest income,
offset by a $2.7 million increase in non-interest expense. As discussed previously, all automobile
lease originations since the 2007 fourth quarter were recorded as operating leases.
NCOs totaled $12.4 million, or an annualized 0.85% of average related loans and leases
compared with $11.7 million, or an annualized 0.82% of average related loans and leases in the 2008
first quarter. This increase reflected the continued economic weakness in our markets along with
declines in values of certain used vehicles, which have resulted in lower recovery rates on sales
of repossessed vehicles.
58
Private Financial and Capital Markets Group (PFCMG)
(This section should be read in conjunction with Significant Items 1, 5, and 6.)
Objectives, Strategies, and Priorities
The PFCMG provides products and services designed to meet the needs of higher net worth
customers. Revenue results from the sale of trust, asset management, investment advisory,
brokerage, and private banking products and services. PFCMG also focuses on financial solutions
for corporate and institutional customers that include investment banking, sales and trading of
securities, mezzanine capital financing, and interest rate risk management products. To serve
higher net worth customers, a unique distribution model is used that employs a single, unified
sales force to deliver products and services mainly through Regional Banking distribution channels.
PFCMG provides investment management and custodial services to our Huntington Funds, which
consists of 32 proprietary mutual funds, including 11 variable annuity funds. Huntington Funds
assets represented 29% of the approximately $14.6 billion total assets under management at June 30,
2008. The Huntington Investment Company offers brokerage and investment advisory services to both
Regional Banking and PFCMG customers through a combination of licensed investment sales
representatives and licensed personal bankers.
PFCMGs primary goals are to consistently increase assets under management by offering
innovative products and services that are responsive to our clients changing financial needs and
to grow the balance sheet mainly through increased loan volume achieved through improved
cross-selling efforts. To grow managed assets, the Huntington Investment Company sales team has
been utilized as the distribution source for trust and investment management.
2008 Second Quarter versus 2008 First Quarter
Table 37 Key Performance Indicators for Private Financial and Capital Markets Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
June 30, |
|
March 31, |
|
Change |
(in thousands unless otherwise noted) |
|
2008 |
|
2008 |
|
Amount |
|
Percent |
|
Net income operating |
|
$ |
9,471 |
|
|
$ |
12,700 |
|
|
$ |
(3,229 |
) |
|
|
(25.4) |
% |
Total average assets (in millions) |
|
|
3,030 |
|
|
|
2,994 |
|
|
|
36 |
|
|
|
1.2 |
|
Return on average equity |
|
|
18.2 |
% |
|
|
25.7 |
% |
|
|
(7.5 |
)% |
|
|
(29.2 |
) |
Total brokerage and insurance income |
|
$ |
17,414 |
|
|
$ |
16,882 |
|
|
$ |
532 |
|
|
|
3.2 |
|
Total assets under management (in
billions) |
|
|
14.6 |
|
|
|
15.4 |
|
|
|
(0.8 |
) |
|
|
(5.2 |
) |
Total trust assets (in billions) |
|
|
52.7 |
|
|
|
55.1 |
|
|
|
(2.4 |
) |
|
|
(4.4 |
) |
|
PFCMG contributed $9.5 million, or 9%, of the companys net income in the 2008 second quarter.
This compared with $12.7 million in the 2008 first quarter, and represented a decrease of $3.2
million.
Factors negatively impacting the 2008 second quarter performance included: (a) $7.5 million
increase in provision for credit losses related to the current quarters rise in C&I NALs to $23
million compared with $7 million in the 2008 first quarter; and (b) $0.1 million decrease in fully
taxable equivalent net interest income reflecting a 8 basis point decline in net interest margin to
3.75% in the current quarter compared with 3.83% in the prior quarter.
Partially offsetting the above negative impacts was a $2.6 million, or 5%, decrease in
non-interest expense, primarily reflecting a $1.8 million, or 6%, decrease in personnel expense
resulting from the impact of a reduction of 50, or 5%, full-time equivalent staff during the
quarter. Reduced losses accounted for most of the remaining expense decrease.
Total non-interest income for the current quarter was flat compared with the prior quarter.
After considering equity investment losses ($8.6 million in the current quarter and $4.2 in the
prior quarter), non-interest income declined $4.4 million, reflecting: (a) $1.1 million, or 3%,
decrease in trust services income, representing a 4% decline in total trust assets, which was
primarily market value driven, and (b) $3.3 million, or 28%, decrease in revenue associated with
customer loan swap transactions. Such revenue, although down from the prior quarter, was
significantly higher than 2007 levels reflecting lower interest rates and increased sales to former
Sky Financial customers. These impacts were partially offset by a $0.5 million, or 3%, increase in
brokerage and insurance income reflecting a 9% increase in annuity sales volume. Although net
income excluding equity investment losses declined from the current quarter compared to the prior
quarter, net income
59
excluding equity investment losses ($12.8 million in the first six-month period
of 2008 and $6.2 million in the first six-month period of 2007) increased 26% from the first
six-month period of 2008 compared to the first six-month period of 2007 reflecting the increase in
revenue from commercial loan swaps combined with the impact of the Sky Financial acquisition.
60
Item 1. Financial Statements
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
(in thousands, except number of shares) |
|
June 30, |
|
December 31, |
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
1,159,819 |
|
|
$ |
1,416,597 |
|
|
$ |
818,877 |
|
Federal funds sold and securities
purchased under resale agreements |
|
|
198,333 |
|
|
|
592,649 |
|
|
|
857,080 |
|
Interest bearing deposits in banks |
|
|
313,855 |
|
|
|
340,090 |
|
|
|
271,133 |
|
Trading account securities |
|
|
1,096,239 |
|
|
|
1,032,745 |
|
|
|
619,836 |
|
Loans held for sale |
|
|
365,063 |
|
|
|
494,379 |
|
|
|
348,272 |
|
Investment securities |
|
|
4,788,275 |
|
|
|
4,500,171 |
|
|
|
3,863,182 |
|
Loans and leases |
|
|
41,047,140 |
|
|
|
40,054,338 |
|
|
|
26,811,513 |
|
Allowance for loan and lease losses |
|
|
(679,403 |
) |
|
|
(578,442 |
) |
|
|
(307,519 |
) |
|
|
|
Net loans and leases |
|
|
40,367,737 |
|
|
|
39,475,896 |
|
|
|
26,503,994 |
|
|
|
|
Bank owned life insurance |
|
|
1,341,162 |
|
|
|
1,313,281 |
|
|
|
1,107,042 |
|
Premises and equipment |
|
|
533,789 |
|
|
|
557,565 |
|
|
|
398,436 |
|
Goodwill |
|
|
3,056,691 |
|
|
|
3,059,333 |
|
|
|
569,738 |
|
Other intangible assets |
|
|
395,250 |
|
|
|
427,970 |
|
|
|
54,646 |
|
Accrued income and other assets |
|
|
1,717,628 |
|
|
|
1,486,792 |
|
|
|
1,008,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
55,333,841 |
|
|
$ |
54,697,468 |
|
|
$ |
36,420,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
38,124,426 |
|
|
$ |
37,742,921 |
|
|
$ |
24,599,912 |
|
Short-term borrowings |
|
|
2,313,190 |
|
|
|
2,843,638 |
|
|
|
2,860,939 |
|
Federal Home Loan Bank advances |
|
|
3,058,163 |
|
|
|
3,083,555 |
|
|
|
1,397,398 |
|
Other long-term debt |
|
|
2,608,092 |
|
|
|
1,937,078 |
|
|
|
2,016,199 |
|
Subordinated notes |
|
|
1,879,900 |
|
|
|
1,934,276 |
|
|
|
1,494,197 |
|
Accrued expenses and other liabilities |
|
|
968,805 |
|
|
|
1,206,860 |
|
|
|
987,900 |
|
|
|
|
Total Liabilities |
|
|
48,952,576 |
|
|
|
48,748,328 |
|
|
|
33,356,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock authorized 6,617,808 shares - |
|
|
|
|
|
|
|
|
|
|
|
|
8.50% Series A Non-cumulative Perpetual Convertible Preferred
Stock, Par value of $1,000, 569,000 shares issued and outstanding |
|
|
569,000 |
|
|
|
|
|
|
|
|
|
Common stock - |
|
|
|
|
|
|
|
|
|
|
|
|
Par value of $0.01 and authorized 1,000,000,000 shares;
issued 367,019,713; 367,000,815 and 236,944,611
shares respectively; outstanding 366,196,767; 366,261,676, and
236,244,063 shares, respectively |
|
|
3,670 |
|
|
|
3,670 |
|
|
|
2,369 |
|
Capital surplus |
|
|
5,226,326 |
|
|
|
5,237,783 |
|
|
|
2,089,516 |
|
Less 822,946; 739,139 and 700,548
treasury shares at cost, respectively |
|
|
(15,224 |
) |
|
|
(14,391 |
) |
|
|
(13,754 |
) |
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) on investment securities |
|
|
(146,307 |
) |
|
|
(10,011 |
) |
|
|
(17,243 |
) |
Unrealized (losses) gains on cash flow hedging derivatives |
|
|
(50,544 |
) |
|
|
4,553 |
|
|
|
18,158 |
|
Pension and other postretirement benefit adjustments |
|
|
(46,271 |
) |
|
|
(44,153 |
) |
|
|
(81,705 |
) |
Retained earnings |
|
|
840,615 |
|
|
|
771,689 |
|
|
|
1,066,800 |
|
|
|
|
Total Shareholders Equity |
|
|
6,381,265 |
|
|
|
5,949,140 |
|
|
|
3,064,141 |
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
55,333,841 |
|
|
$ |
54,697,468 |
|
|
$ |
36,420,686 |
|
|
|
|
See notes to unaudited condensed consolidated financial statements
61
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(in thousands, except per share amounts) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Interest and fee income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
604,746 |
|
|
$ |
466,904 |
|
|
$ |
1,263,216 |
|
|
$ |
928,045 |
|
Tax-exempt |
|
|
1,775 |
|
|
|
114 |
|
|
|
3,511 |
|
|
|
585 |
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
54,563 |
|
|
|
49,684 |
|
|
|
108,458 |
|
|
|
104,799 |
|
Tax-exempt |
|
|
7,524 |
|
|
|
6,528 |
|
|
|
14,878 |
|
|
|
12,621 |
|
Other |
|
|
28,067 |
|
|
|
19,231 |
|
|
|
60,023 |
|
|
|
31,360 |
|
|
Total interest income |
|
|
696,675 |
|
|
|
542,461 |
|
|
|
1,450,086 |
|
|
|
1,077,410 |
|
|
Interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
227,765 |
|
|
|
198,108 |
|
|
|
502,648 |
|
|
|
394,831 |
|
Short-term borrowings |
|
|
11,785 |
|
|
|
23,271 |
|
|
|
30,941 |
|
|
|
43,108 |
|
Federal Home Loan Bank advances |
|
|
25,925 |
|
|
|
16,009 |
|
|
|
59,645 |
|
|
|
28,519 |
|
Subordinated notes and other long-term debt |
|
|
41,334 |
|
|
|
51,682 |
|
|
|
90,162 |
|
|
|
102,006 |
|
|
Total interest expense |
|
|
306,809 |
|
|
|
289,070 |
|
|
|
683,396 |
|
|
|
568,464 |
|
|
Net interest income |
|
|
389,866 |
|
|
|
253,391 |
|
|
|
766,690 |
|
|
|
508,946 |
|
Provision for credit losses |
|
|
120,813 |
|
|
|
60,133 |
|
|
|
209,463 |
|
|
|
89,539 |
|
|
Net interest income after provision for credit losses |
|
|
269,053 |
|
|
|
193,258 |
|
|
|
557,227 |
|
|
|
419,407 |
|
|
Service charges on deposit accounts |
|
|
79,630 |
|
|
|
50,017 |
|
|
|
152,298 |
|
|
|
94,810 |
|
Trust services |
|
|
33,089 |
|
|
|
26,764 |
|
|
|
67,217 |
|
|
|
52,658 |
|
Brokerage and insurance income |
|
|
35,694 |
|
|
|
17,199 |
|
|
|
72,254 |
|
|
|
33,281 |
|
Other service charges and fees |
|
|
23,242 |
|
|
|
14,923 |
|
|
|
43,983 |
|
|
|
28,131 |
|
Bank owned life insurance income |
|
|
14,131 |
|
|
|
10,904 |
|
|
|
27,881 |
|
|
|
21,755 |
|
Mortgage banking income |
|
|
12,502 |
|
|
|
7,122 |
|
|
|
5,439 |
|
|
|
16,473 |
|
Securities gains (losses) |
|
|
2,073 |
|
|
|
(5,139 |
) |
|
|
3,502 |
|
|
|
(5,035 |
) |
Other income |
|
|
36,069 |
|
|
|
34,403 |
|
|
|
99,608 |
|
|
|
59,297 |
|
|
Total non-interest income |
|
|
236,430 |
|
|
|
156,193 |
|
|
|
472,182 |
|
|
|
301,370 |
|
|
Personnel costs |
|
|
199,991 |
|
|
|
135,191 |
|
|
|
401,934 |
|
|
|
269,830 |
|
Outside data processing and other services |
|
|
30,186 |
|
|
|
25,701 |
|
|
|
64,547 |
|
|
|
47,515 |
|
Net occupancy |
|
|
26,971 |
|
|
|
19,417 |
|
|
|
60,214 |
|
|
|
39,325 |
|
Equipment |
|
|
25,740 |
|
|
|
17,157 |
|
|
|
49,534 |
|
|
|
35,376 |
|
Amortization of intangibles |
|
|
19,327 |
|
|
|
2,519 |
|
|
|
38,244 |
|
|
|
5,039 |
|
Marketing |
|
|
7,339 |
|
|
|
8,986 |
|
|
|
16,258 |
|
|
|
16,682 |
|
Professional services |
|
|
13,752 |
|
|
|
8,101 |
|
|
|
22,842 |
|
|
|
14,583 |
|
Telecommunications |
|
|
6,864 |
|
|
|
4,577 |
|
|
|
13,109 |
|
|
|
8,703 |
|
Printing and supplies |
|
|
4,757 |
|
|
|
3,672 |
|
|
|
10,379 |
|
|
|
6,914 |
|
Other expense |
|
|
42,876 |
|
|
|
19,334 |
|
|
|
71,223 |
|
|
|
42,760 |
|
|
Total non-interest expense |
|
|
377,803 |
|
|
|
244,655 |
|
|
|
748,284 |
|
|
|
486,727 |
|
|
Income before income taxes |
|
|
127,680 |
|
|
|
104,796 |
|
|
|
281,125 |
|
|
|
234,050 |
|
Provision for income taxes |
|
|
26,328 |
|
|
|
24,275 |
|
|
|
52,705 |
|
|
|
57,803 |
|
|
Net income |
|
$ |
101,352 |
|
|
$ |
80,521 |
|
|
$ |
228,420 |
|
|
$ |
176,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on preferred shares |
|
|
11,151 |
|
|
|
|
|
|
|
11,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares |
|
$ |
90,201 |
|
|
$ |
80,521 |
|
|
$ |
217,269 |
|
|
$ |
176,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares basic |
|
|
366,206 |
|
|
|
236,032 |
|
|
|
366,221 |
|
|
|
235,809 |
|
Average common shares diluted |
|
|
367,234 |
|
|
|
239,008 |
|
|
|
387,322 |
|
|
|
238,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic |
|
$ |
0.25 |
|
|
$ |
0.34 |
|
|
$ |
0.59 |
|
|
$ |
0.75 |
|
Net income diluted |
|
|
0.25 |
|
|
|
0.34 |
|
|
|
0.59 |
|
|
|
0.74 |
|
Cash dividends declared |
|
|
0.1325 |
|
|
|
0.2650 |
|
|
|
0.3975 |
|
|
|
0.5300 |
|
See notes to unaudited condensed consolidated financial statements
62
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
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|
|
|
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|
|
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|
|
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|
Accumulated |
|
|
|
|
|
|
|
|
|
Convertible |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
< |