HUNTINGTON BANCSHARES INC/MD
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-K
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2009 | ||
|
or
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||
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number 1-34073
Huntington Bancshares
Incorporated
(Exact name of registrant as
specified in its charter)
|
Maryland
|
31-0724920 | |
|
(State or other jurisdiction
of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
|
| 41 S. High Street, Columbus, Ohio | 43287 | |
|
(Address of principal executive
offices)
|
(Zip Code) |
Registrant’s telephone number, including area code
(614)
480-8300
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of Class
|
Name of Exchange on Which Registered
|
|
|
8.50% Series A non-voting, perpetual convertible preferred
stock
|
NASDAQ | |
|
Common Stock — Par Value $0.01 per
Share
|
NASDAQ |
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Exchange
Act.
þ
Yes
o
No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act.
o
Yes
þ
No
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files).
o
Yes
o
No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
|
Large accelerated
filer
þ
|
Accelerated filer o |
Non-accelerated
filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act)
o
Yes
þ
No
The aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant as of
June 30, 2009, determined by using a per share closing
price of $4.18, as quoted by NASDAQ on that date, was
$2,298,648,203. As of January 31, 2010, there were
716,382,350 shares of common stock with a par value of
$0.01 outstanding.
Documents
Incorporated By Reference
Part III of this
Form 10-K
incorporates by reference certain information from the
registrant’s definitive Proxy Statement for the 2010 Annual
Shareholders’ Meeting
HUNTINGTON
BANCSHARES INCORPORATED
INDEX
INDEX
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Table of Contents
Huntington
Bancshares Incorporated
PART I
When we refer to “we,” “our,” and
“us” in this report, we mean Huntington Bancshares
Incorporated and our consolidated subsidiaries, unless the
context indicates that we refer only to the parent company,
Huntington Bancshares Incorporated. When we refer to the
“Bank” in this report, we mean our only bank
subsidiary The Huntington National Bank, and its subsidiaries.
| Item 1: | Business |
We are a multi-state diversified financial holding company
organized under Maryland law in 1966 and headquartered in
Columbus, Ohio. Through our subsidiaries, we provide
full-service commercial and consumer banking services, mortgage
banking services, automobile financing, equipment leasing,
investment management, trust services, brokerage services,
customized insurance service programs, and other financial
products and services. The Bank, organized in 1866, is our only
bank subsidiary. At December 31, 2009, the Bank had:
| • | 340 banking offices in Ohio | |
| • | 115 banking offices in Michigan | |
| • | 56 banking offices in Pennsylvania | |
| • | 50 banking offices in Indiana | |
| • | 28 banking offices in West Virginia | |
| • | 13 banking offices in Kentucky | |
| • | 9 private banking offices | |
| • | one foreign office in the Cayman Islands | |
| • | one foreign office in Hong Kong |
We conduct certain activities in other states including Arizona,
Florida, Maryland, Massachusetts, Nevada, New Jersey, New York,
Tennessee, Texas, and Virginia. Our foreign banking activities,
in total or with any individual country, are not significant. At
December 31, 2009, we had 10,272 full-time equivalent
employees.
Our business segments are discussed in our Management’s
Discussion and Analysis of Financial Condition and Results of
Operations and the financial statement results for each of our
business segments can be found in Note 27 of the Notes to
Consolidated Financial Statements, both are included in our
Annual Report to shareholders, which is incorporated into this
report by reference.
Competition
Competition is intense in most of our markets. We compete on
price and service with other banks and financial services
companies such as savings and loans, credit unions, finance
companies, mortgage banking companies, insurance companies, and
brokerage firms. Competition could intensify in the future as a
result of industry consolidation, the increasing availability of
products and services from non-banks, greater technological
developments in the industry, and banking reform.
Regulatory
Matters
General
We are a bank holding company and are qualified as a financial
holding company with the Federal Reserve. We are subject to
examination and supervision by the Federal Reserve pursuant to
the Bank Holding Company Act. We are required to file reports
and other information regarding our business operations and the
business operations of our subsidiaries with the Federal Reserve.
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Because we are a public company, we are also subject to
regulation by the Securities and Exchange Commission (SEC). The
SEC has established three categories of issuers for the purpose
of filing periodic and annual reports. Under these regulations,
we are considered to be a “large accelerated filer”
and, as such, must comply with SEC accelerated reporting
requirements.
The Bank is subject to examination and supervision by the Office
of the Comptroller of the Currency (OCC). Its domestic deposits
are insured by the Deposit Insurance Fund (DIF) of the Federal
Deposit Insurance Corporation (FDIC), which also has certain
regulatory and supervisory authority over it. Our non-bank
subsidiaries are also subject to examination and supervision by
the Federal Reserve or, in the case of non-bank subsidiaries of
the Bank, by the OCC. Our subsidiaries are also subject to
examination by other federal and state agencies, including, in
the case of certain securities and investment management
activities, regulation by the SEC and the Financial Industry
Regulatory Authority.
In connection with emergency economic stabilization programs
adopted in late 2008 as described below under “Recent
Regulatory Developments,” we are also subject for the
foreseeable future to certain direct oversight by the
U.S. Treasury Department and to certain non-traditional
oversight by our normal banking regulators.
In addition to the impact of federal and state regulation, the
Bank and our non-bank subsidiaries are affected significantly by
the actions of the Federal Reserve as it attempts to control the
money supply and credit availability in order to influence the
economy.
Holding
Company Structure
We have one national bank subsidiary and numerous non-bank
subsidiaries. Exhibit 21.1 of this report lists all of our
subsidiaries.
The Bank is subject to affiliate transaction restrictions under
federal laws, which limit the transfer of funds by a subsidiary
bank or its subsidiaries to its parent corporation or any
non-bank subsidiary of its parent corporation, whether in the
form of loans, extensions of credit, investments, or asset
purchases. Such transfers by a subsidiary bank are limited to:
| • | 10% of the subsidiary bank’s capital and surplus for transfers to its parent corporation or to any individual non-bank subsidiary of the parent, and | |
| • | An aggregate of 20% of the subsidiary bank’s capital and surplus for transfers to such parent together with all such non-bank subsidiaries of the parent. |
Furthermore, such loans and extensions of credit must be secured
within specified amounts. In addition, all affiliate
transactions must be conducted on terms and under circumstances
that are substantially the same as such transactions with
unaffiliated entities.
As a matter of policy, the Federal Reserve expects a bank
holding company to act as a source of financial and managerial
strength to each of its subsidiary banks and to commit resources
to support each such subsidiary bank. Under this source of
strength doctrine, the Federal Reserve may require a bank
holding company to make capital injections into a troubled
subsidiary bank. They may charge the bank holding company with
engaging in unsafe and unsound practices if it fails to commit
resources to such a subsidiary bank or if it undertakes actions
that the Federal Reserve believes might jeopardize its ability
to commit resources to such subsidiary bank. A capital injection
may be required at times when the holding company does not have
the resources to provide it.
Any loans by a holding company to a subsidiary bank are
subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank
holding company’s bankruptcy, the bankruptcy trustee will
assume any commitment by the holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank.
Moreover, the bankruptcy law provides that claims based on any
such commitment will be entitled to a priority of payment over
the claims of the institution’s general unsecured
creditors, including the holders of its note obligations.
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Federal law permits the OCC to order the pro rata assessment of
shareholders of a national bank whose capital stock has become
impaired, by losses or otherwise, to relieve a deficiency in
such national bank’s capital stock. This statute also
provides for the enforcement of any such pro rata assessment of
shareholders of such national bank to cover such impairment of
capital stock by sale, to the extent necessary, of the capital
stock owned by any assessed shareholder failing to pay the
assessment. As the sole shareholder of the Bank, we are subject
to such provisions.
Moreover, the claims of a receiver of an insured depository
institution for administrative expenses and the claims of
holders of deposit liabilities of such an institution are
accorded priority over the claims of general unsecured creditors
of such an institution, including the holders of the
institution’s note obligations, in the event of liquidation
or other resolution of such institution. Claims of a receiver
for administrative expenses and claims of holders of deposit
liabilities of the Bank, including the FDIC as the insurer of
such holders, would receive priority over the holders of notes
and other senior debt of the Bank in the event of liquidation or
other resolution and over our interests as sole shareholder of
the Bank.
The Federal Reserve maintains a bank holding company rating
system that emphasizes risk management, introduces a framework
for analyzing and rating financial factors, and provides a
framework for assessing and rating the potential impact of
non-depository entities of a holding company on its subsidiary
depository institution(s).
A composite rating is assigned based on the foregoing three
components, but a fourth component is also rated, reflecting
generally the assessment of depository institution subsidiaries
by their principal regulators. Ratings are made on a scale of 1
to 5 (1 highest) and are not made public. The bank holding
company rating system, which became effective in 2005, applies
to us. The composite ratings assigned to us, like those assigned
to other financial institutions, are confidential and may not be
directly disclosed, except to the extent required by law.
Emergency
Economic Stabilization Act of 2008, Federal Deposit Insurance
Corporation, Financial Stability Plan, American Recovery and
Reinvestment Act of 2009, Homeowner Affordability and Stability
Plan, Other Regulatory Developments and Pending
Legislation
Emergency
Economic Stabilization Act of 2008
On October 3, 2008, the Emergency Economic Stabilization
Act of 2008 (EESA) was enacted. EESA enables the federal
government, under terms and conditions developed by the
Secretary of the Treasury, to insure troubled assets, including
mortgage-backed securities, and collect premiums from
participating financial institutions. EESA includes, among other
provisions: (a) the $700 billion Troubled Assets
Relief Program (TARP), under which the Secretary of the Treasury
is authorized to purchase, insure, hold, and sell a wide variety
of financial instruments, particularly those that are based on
or related to residential or commercial mortgages originated or
issued on or before March 14, 2008; and (b) an
increase in the amount of deposit insurance provided by the
Federal Deposit Insurance Corporation (FDIC). Both of these
specific provisions are discussed in the below sections. In
December 2009, the Secretary of the Treasury announced the
extension of the TARP to October 2010, but indicated that not
more than $550 billion of the total authorized would
actually be deployed.
Under the TARP, the Department of Treasury authorized a
voluntary capital purchase program (CPP) to purchase up to
$250 billion of senior preferred shares of qualifying
financial institutions that elected to participate by
November 14, 2008. Participating companies must adopt
certain standards for executive compensation, including
(a) prohibiting “golden parachute” payments as
defined in EESA to senior Executive Officers; (b) requiring
recovery of any compensation paid to senior Executive Officers
based on criteria that is later proven to be materially
inaccurate; and (c) prohibiting incentive compensation that
encourages unnecessary and excessive risks that threaten the
value of the financial institution. The terms of the CPP also
limit certain uses of capital by the issuer, including
repurchases of company stock, and increases in dividends. In
late 2009, the Treasury Department announced that the CPP was
effectively closed, and that certain other emergency programs
under the TARP had been or would be terminated.
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On November 14, 2008, we participated in the CPP and issued
approximately $1.4 billion in capital in the form of
non-voting cumulative preferred stock that pays cash dividends
at the rate of 5% per annum for the first five years, and then
pays cash dividends at the rate of 9% per annum thereafter. In
addition, the Department of Treasury received warrants to
purchase shares of our common stock having an aggregate market
price equal to 15% of the preferred stock amount. The proceeds
of the $1.4 billion have been credited to the preferred
stock and additional
paid-in-capital.
The difference between the par value of the preferred stock and
the amount credited to the preferred stock account is amortized
against retained earnings and is reflected in our income
statement as dividends on preferred shares, resulting in
additional dilution to our common stock. The exercise price for
the warrant of $8.90, and the market price for determining the
number of shares of common stock subject to the warrants, was
determined on the date of the preferred investment (calculated
on a 20-trading day trailing average). The warrants are
immediately exercisable, in whole or in part, over a term of
10 years. The warrants are included in our diluted average
common shares outstanding in periods when the effect of their
inclusion is dilutive to earnings per share.
Federal
Deposit Insurance Corporation (FDIC)
EESA temporarily raised the limit on federal deposit insurance
coverage from $100,000 to $250,000 per depositor. Separate from
EESA, in October 2008, the FDIC also announced the Temporary
Liquidity Guarantee Program (TLGP) to guarantee certain debt
issued by FDIC-insured institutions through October 31,
2009. Under one component of this program, the Transaction
Account Guaranty Program (TAGP), the FDIC temporarily provided
unlimited coverage for noninterest bearing transaction deposit
accounts through December 31, 2009. The $250,000 deposit
insurance coverage limit was scheduled to return to $100,000 on
January 1, 2010, but was extended by congressional action
until December 31, 2013. The TLGP has been extended to
cover debt of FDIC-insured institutions issued through
April 30, 2010, and the TAGP has been extended through
June 30, 2010. We participated in the TAGP since its
beginning, and have elected to continue our participation during
the extension period.
In addition, on February 3, 2009, the Bank completed the
issuance and sale of $600 million of Floating Rate Senior
Bank Notes with a variable rate of three month LIBOR plus
40 basis points, due June 1, 2012 (the Notes). The
Notes are guaranteed by the FDIC under the TLGP and are backed
by the full faith and credit of the United States. The
FDIC’s guarantee cost $20 million which will be
amortized over the term of the notes.
(See “Bank Liquidity” discussion for additional
details regarding the Temporary Liquidity Guarantee Program.)
Financial
Stability Plan
On February 10, 2009, the Financial Stability Plan (FSP)
was announced by the U.S. Treasury Department. The FSP is a
comprehensive set of measures intended to shore up the financial
system. The core elements of the plan include making bank
capital injections, creating a public-private investment fund to
buy troubled assets, establishing guidelines for loan
modification programs and expanding the Federal Reserve lending
program. During the course of 2009, the Treasury Department
announced numerous programs in implementation of the FSP, and
sent various legislative proposals to the Congress for
consideration. Summaries of these programs and legislative
proposals have been posted on a government website,
FinancialStability.gov. We continue to monitor these
developments and assess their potential impact on our business.
American
Recovery and Reinvestment Act of 2009
On February 17, 2009, the American Recovery and
Reinvestment Act of 2009 (ARRA) was enacted. ARRA is intended to
provide a stimulus to the U.S. economy in the wake of the
economic downturn brought about by the subprime mortgage crisis
and the resulting credit crunch. The bill includes federal tax
cuts, expansion of unemployment benefits and other social
welfare provisions, and domestic spending in education,
healthcare, and infrastructure, including the energy structure.
The new law also includes numerous non-economic recovery related
items, including a limitation on executive compensation in
federally aided banks.
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Under ARRA, an institution will be subject to the following
restrictions and standards throughout the period in which any
obligation arising from financial assistance provided under TARP
remains outstanding:
| • | Limits on compensation incentives for risk taking by senior executive officers. | |
| • | Requirement of recovery of any compensation paid based on inaccurate financial information. | |
| • | Prohibition on “Golden Parachute Payments”. | |
| • | Prohibition on compensation plans that would encourage manipulation of reported earnings to enhance the compensation of employees. | |
| • | Publicly registered TARP recipients must establish a board compensation committee comprised entirely of independent directors, for the purpose of reviewing employee compensation plans. | |
| • | Prohibition on bonus, retention award, or incentive compensation, except for payments of long term restricted stock. | |
| • | Limitation on luxury expenditures. | |
| • | TARP recipients are required to permit a separate shareholder vote to approve the compensation of executives, as disclosed pursuant to the SEC’s compensation disclosure rules. | |
| • | The chief executive officer and chief financial officer of each TARP recipient will be required to provide a written certification of compliance with these standards to the SEC. |
The foregoing is a summary of requirements included in standards
established by the Secretary of the Treasury.
Homeowner
Affordability and Stability Plan
On February 18, 2009, the Homeowner Affordability and
Stability Plan (HASP) was announced by the President of the
United States. HASP is intended to support a recovery in the
housing market and ensure that workers can continue to pay off
their mortgages through the following elements:
| • | Provide access to low-cost refinancing for responsible homeowners suffering from falling home prices. | |
| • | A $75 billion homeowner stability initiative to prevent foreclosure and help responsible families stay in their homes. | |
| • | Support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac. |
The Treasury Department has issued extensive guidance on the
scope and mechanics of various components of HASP. We continue
to monitor these developments and assess their potential impact
on our business.
Other
Regulatory Developments
The Basel Committee on Banking Supervision’s “Basel
II” regulatory capital guidelines originally published in
June 2004 and adopted in final form by U.S. regulatory
agencies in November 2007 are designed to promote improved risk
measurement and management processes and better align minimum
capital requirements with risk. The Basel II guidelines
became operational in April 2008, but are mandatory only for
“core banks,” i.e., banks with consolidated total
assets of $250 billion or more. They are thus not
applicable to the Bank, which continues to operate under
U.S. risk-based capital guidelines consistent with
“Basel I” guidelines published in 1988.
Federal regulators issued for public comment in December 2006
proposed rules (designated as “Basel IA” rules)
applicable to non-core banks that would have modified the
existing U.S. Basel I-based capital framework. In July
2008, however, these regulators issued
,
instead of the
Basel 1A proposals
,
new rulemaking involving a
“standardized framework” that would implement some of
the simpler approaches for both credit risk and operational risk
from the more advanced Basel II framework. Non-core
U.S. depository institutions
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would be allowed to opt in to the standardized framework or
elect to remain under the existing Basel 1-based regulatory
capital framework. The new rulemaking remained pending at the
end of 2009.
Pending
Legislation
At the end of 2009, there were numerous legislative proposals,
originating both in Congressional committees and in the Obama
Administration, that would, if enacted, have significant impact
on the banking industry. These proposals include the creation of
a Consumer Financial Protection Agency with rulemaking,
examination, and enforcement powers to oversee consumer lending,
credit card, and other consumer financial activities. The Agency
would take over certain functions now lodged with banking
regulators and other agencies. They also include a broad
financial regulatory reform initiative that would, among other
things, (a) abolish the thrift charter and convert the
Office of Thrift Supervision into a division of the Office of
the Comptroller of the Currency, (b) establish a Financial
Stability Council to oversee systemic risk issues,
(c) extend regulation beyond bank holding companies to
financial sector companies not presently regulated, including
hedge funds, and (d) provide a means for resolving, without
governmental bailouts, entities previously regarded as “too
big to fail.” We will monitor all legislative developments
and assess their potential impact on our business.
Dividend
Restrictions
Dividends from the Bank are the primary source of funds for
payment of dividends to our shareholders. However, there are
statutory limits on the amount of dividends that the Bank can
pay to us without regulatory approval. The Bank may not, without
prior regulatory approval, pay a dividend in an amount greater
than its undivided profits. In addition, the prior approval of
the OCC is required for the payment of a dividend by a national
bank if the total of all dividends declared in a calendar year
would exceed the total of its net income for the year combined
with its retained net income for the two preceding years. As a
result, for the year ended December 31, 2009, the Bank did
not pay any cash dividends to Huntington. At December 31,
2009, the Bank could not have declared and paid any additional
dividends to the parent company without regulatory approval.
If, in the opinion of the applicable regulatory authority, a
bank under its jurisdiction is engaged in or is about to engage
in an unsafe or unsound practice, such authority may require,
after notice and hearing, that such bank cease and desist from
such practice. Depending on the financial condition of the Bank,
the applicable regulatory authority might deem us to be engaged
in an unsafe or unsound practice if the Bank were to pay
dividends. The Federal Reserve and the OCC have issued policy
statements that provide that insured banks and bank holding
companies should generally only pay dividends out of current
operating earnings. As previously described, the CPP limits our
ability to increase dividends to shareholders.
FDIC
Insurance
With the enactment in February 2006 of the Federal Deposit
Insurance Reform Act of 2005 and related legislation, and the
adoption by the FDIC of implementing regulations in November
2006, major changes were introduced in FDIC deposit insurance,
effective January 1, 2007.
Under the reformed deposit insurance regime, the FDIC designates
annually a target reserve ratio for the DIF within the range of
1.15 percent and 1.5 percent, instead of the prior
fixed requirement to manage the DIF so as to maintain a
designated reserve ratio of 1.25 percent.
In addition, the FDIC adopted a new risk-based system for
assessment of deposit insurance premiums on depository
institutions, under which all such institutions would pay at
least a minimum level of premiums. The new system is based on an
institution’s probability of causing a loss to the DIF, and
requires that each depository institution be placed in one of
four risk categories, depending on a combination of its
capitalization and its supervisory ratings. Under the base rate
schedule adopted in late 2006, institutions in Risk Category I
would be assessed between 2 and 4 basis points, while
institutions in Risk Category IV could be assessed a
maximum of 40 basis points.
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The FDIC set 2007 assessment rates at three basis points above
the base schedule rates, i.e., between 5 and 7 basis points
for Risk Category I institutions and up to 43 basis points
for Risk Category IV institutions. To assist the transition
to the new system requiring assessment payments by all insured
institutions, the Bank and other depository institutions that
were in existence on and paid deposit insurance assessments
prior to December 31, 1996, were made eligible for a
one-time assessment credit based on their shares of the
aggregate 1996 assessment base. The Bank’s assessment rate,
like that of other financial institutions, is confidential and
may not be directly disclosed, except to the extent required by
law.
For 2008, the FDIC resolved to maintain the designated reserve
ratio at 1.25 percent, and to leave risk-based assessments
at the same rates as in 2007, that is between 5 and
43 basis points, depending upon an institution’s risk
category.
As a participating FDIC insured bank, we were assessed deposit
insurance premiums totaling $24.1 million during 2008.
However, the one-time assessment credit described above was
fully utilized to substantially offset our 2008 deposit
insurance premium and, therefore, only $7.9 million of
deposit insurance premium expense was recognized during 2008.
In late 2008, the FDIC raised assessment rates for the first
quarter of 2009 by a uniform 7 basis points, resulting in a
range between 12 and 50 basis points, depending upon the
risk category. At the same time, the FDIC proposed further
changes in the assessment system beginning in the second quarter
of 2009. As amended in a final rule issued in March 2009, the
changes commencing April 1, 2009, set a five-year target of
1.15 percent for the designated reserve ratio (which had
fallen sharply during 2008 and early 2009), and set base
assessment rates between 12 and 45 basis points, depending
on the risk category. However, adjustments (relating to
unsecured debt, secured liabilities, and brokered deposits) were
provided for in the case of individual institutions that could
result in assessment rates between 7 and 24 basis points
for institutions in the lowest risk category and 40 to
77.5 basis points for institutions in the highest risk
category. The purpose of the April 1, 2009, changes was to
ensure that riskier institutions bear a greater share of the
increase in assessments, and are subsidized to a lesser degree
by less risky institutions.
In addition to these changes in the basic assessment regime, the
FDIC, in an interim rule also issued in March 2009, imposed a
20 basis point emergency special assessment on deposits of
insured institutions as of June 30, 2009, to be collected
on September 30, 2009. In May 2009, the FDIC imposed a
further special assessment on insured institutions of five basis
points on their June 30, 2009, assets minus Tier 1
capital, also payable September 30, 2009. And in November
2009, the FDIC required all insured institutions to prepay, on
December 30, 2009, slightly over three years of estimated
insurance assessments.
Taking into account both regular and special deposit insurance
assessments, we were required to pay total deposit and other
insurance expense of $113.8 million in 2009. We also
prepaid an estimated insurance assessment of $325 million
on December 30, 2009.
The Bank continues to be required to make payments for the
servicing of obligations of the Financing Corporation (FICO)
that were issued in connection with the resolution of savings
and loan associations, so long as such obligations remain
outstanding.
Capital
Requirements
The Federal Reserve has issued risk-based capital ratio and
leverage ratio guidelines for bank holding companies. The
risk-based capital ratio guidelines establish a systematic
analytical framework that:
| • | makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, | |
| • | takes off-balance sheet exposures into explicit account in assessing capital adequacy, and | |
| • | minimizes disincentives to holding liquid, low-risk assets. |
Under the guidelines and related policies, bank holding
companies must maintain capital sufficient to meet both a
risk-based asset ratio test and a leverage ratio test on a
consolidated basis. The risk-based ratio is
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determined by allocating assets and specified off-balance sheet
commitments into four weighted categories, with higher weighting
assigned to categories perceived as representing greater risk.
The risk-based ratio represents capital divided by total risk
weighted assets. The leverage ratio is core capital divided by
total assets adjusted as specified in the guidelines. The Bank
is subject to substantially similar capital requirements.
Generally, under the applicable guidelines, a financial
institution’s capital is divided into two tiers.
Institutions that must incorporate market risk exposure into
their risk-based capital requirements may also have a third tier
of capital in the form of restricted short-term subordinated
debt. These tiers are:
| • | “Tier 1”, or core capital, includes total equity plus qualifying capital securities and minority interests, excluding unrealized gains and losses accumulated in other comprehensive income, and non-qualifying intangible and servicing assets. | |
| • | “Tier 2”, or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, mandatory convertible securities, qualifying subordinated debt, and the allowance for credit losses, up to 1.25% of risk-weighted assets. | |
| • | “Total capital” is Tier 1 plus Tier 2 capital. |
The Federal Reserve and the other federal banking regulators
require that all intangible assets (net of deferred tax), except
originated or purchased mortgage-servicing rights, non-mortgage
servicing assets, and purchased credit card relationships, be
deducted from Tier 1 capital. However, the total amount of
these items included in capital cannot exceed 100% of its
Tier 1 capital.
Under the risk-based guidelines, financial institutions are
required to maintain a risk-based ratio of 8%, with 4% being
Tier 1 capital. The appropriate regulatory authority may
set higher capital requirements when they believe an
institution’s circumstances warrant.
Under the leverage guidelines, financial institutions are
required to maintain a leverage ratio of at least 3%. The
minimum ratio is applicable only to financial institutions that
meet certain specified criteria, including excellent asset
quality, high liquidity, low interest rate risk exposure, and
the highest regulatory rating. Financial institutions not
meeting these criteria are required to maintain a minimum
Tier 1 leverage ratio of 4%.
Special minimum capital requirements apply to equity investments
in non-financial companies. The requirements consist of a series
of deductions from Tier 1 capital that increase within a
range from 8% to 25% of the adjusted carrying value of the
investment.
Failure to meet applicable capital guidelines could subject the
financial institution to a variety of enforcement remedies
available to the federal regulatory authorities. These include
limitations on the ability to pay dividends, the issuance by the
regulatory authority of a capital directive to increase capital,
and the termination of deposit insurance by the FDIC. In
addition, the financial institution could be subject to the
measures described below under “Prompt Corrective
Action” as applicable to “under-capitalized”
institutions.
The risk-based capital standards of the Federal Reserve, the
OCC, and the FDIC specify that evaluations by the banking
agencies of a bank’s capital adequacy will include an
assessment of the exposure to declines in the economic value of
the bank’s capital due to changes in interest rates. These
banking agencies issued a joint policy statement on interest
rate risk describing prudent methods for monitoring such risk
that rely principally on internal measures of exposure and
active oversight of risk management activities by senior
management.
Prompt
Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of
1991, known as FDICIA, requires federal banking regulatory
authorities to take “prompt corrective action” with
respect to depository institutions that do not meet minimum
capital requirements. For these purposes, FDICIA establishes
five capital tiers: “well-capitalized,”
“adequately-capitalized,”
“under-capitalized,” “significantly
under-capitalized,” and “critically
under-capitalized.”
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An institution is deemed to be:
| • | “well-capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure; | |
| • | “adequately-capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and, generally, a Tier 1 leverage ratio of 4% or greater and the institution does not meet the definition of a “well-capitalized” institution; | |
| • | “under-capitalized” if it does not meet one or more of the “adequately-capitalized” tests; | |
| • | “significantly under-capitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a Tier 1 leverage ratio that is less than 3%; and | |
| • | “critically under-capitalized” if it has a ratio of tangible equity, as defined in the regulations, to total assets that is equal to or less than 2%. |
Throughout 2009, our regulatory capital ratios and those of the
Bank were in excess of the levels established for
“well-capitalized” institutions.
|
At December 31,
|
||||||||||||||
|
“Well-
|
2009 | |||||||||||||
|
Capitalized”
|
Excess
|
|||||||||||||
| Minimums | Actual | Capital(1) | ||||||||||||
| (in billions of dollars) | ||||||||||||||
|
Ratios:
|
||||||||||||||
|
Tier 1 leverage ratio
|
Consolidated | 5.00 | % | 10.09 | % | $ | 2.6 | |||||||
| Bank | 5.00 | 5.59 | 0.3 | |||||||||||
|
Tier 1 risk-based capital ratio
|
Consolidated | 6.00 | 12.03 | 2.6 | ||||||||||
| Bank | 6.00 | 6.66 | 0.3 | |||||||||||
|
Total risk-based capital ratio
|
Consolidated | 10.00 | 14.41 | 1.9 | ||||||||||
| Bank | 10.00 | 11.08 | 0.5 | |||||||||||
| (1) | Amount greater than the “well-capitalized” minimum percentage. |
FDICIA generally prohibits a depository institution from making
any capital distribution, including payment of a cash dividend
or paying any management fee to its holding company, if the
depository institution would be “under-capitalized”
after such payment. “Under-capitalized” institutions
are subject to growth limitations and are required by the
appropriate federal banking agency to submit a capital
restoration plan. If any depository institution subsidiary of a
holding company is required to submit a capital restoration
plan, the holding company would be required to provide a limited
guarantee regarding compliance with the plan as a condition of
approval of such plan.
If an “under-capitalized” institution fails to submit
an acceptable plan, it is treated as if it is
“significantly under-capitalized.” “Significantly
under-capitalized” institutions may be subject to a number
of requirements and restrictions, including orders to sell
sufficient voting stock to become
“adequately-capitalized,” requirements to reduce total
assets, and cessation of receipt of deposits from correspondent
banks.
“Critically under-capitalized” institutions may not,
beginning 60 days after becoming “critically
under-capitalized,” make any payment of principal or
interest on their subordinated debt. In addition,
“critically under-capitalized” institutions are
subject to appointment of a receiver or conservator within
90 days of becoming so classified.
Under FDICIA, a depository institution that is not
“well-capitalized” is generally prohibited from
accepting brokered deposits and offering interest rates on
deposits higher than the prevailing rate in its market. As
previously stated, the Bank is “well-capitalized” and
the FDICIA brokered deposit rule did not adversely affect its
ability to accept brokered deposits. The Bank had
$2.1 billion of such brokered deposits at December 31,
2009.
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Financial
Holding Company Status
In order to maintain its status as a financial holding company,
a bank holding company’s depository subsidiaries must all
be both “well capitalized” and “well
managed,” and must meet their Community Reinvestment Act
obligations.
Financial holding company powers relate to “financial
activities” that are determined by the Federal Reserve, in
coordination with the Secretary of the Treasury, to be financial
in nature, incidental to an activity that is financial in
nature, or complementary to a financial activity, provided that
the complementary activity does not pose a safety and soundness
risk. The Gramm-Leach-Bliley Act designates certain activities
as financial in nature, including:
| • | underwriting insurance or annuities; | |
| • | providing financial or investment advice; | |
| • | underwriting, dealing in, or making markets in securities; | |
| • | merchant banking, subject to significant limitations; | |
| • | insurance company portfolio investing, subject to significant limitations; and | |
| • | any activities previously found by the Federal Reserve to be closely related to banking. |
The Gramm-Leach-Bliley Act also authorizes the Federal Reserve,
in coordination with the Secretary of the Treasury, to determine
that additional activities are financial in nature or incidental
to activities that are financial in nature.
We are required by the Bank Holding Company Act to obtain
Federal Reserve approval prior to acquiring, directly or
indirectly, ownership or control of voting shares of any bank,
if, after such acquisition, we would own or control more than 5%
of its voting stock. However, as a financial holding company, we
may commence any new financial activity, except for the
acquisition of a savings association, with notice to the Federal
Reserve within 30 days after the commencement of the new
financial activity.
USA
Patriot Act
The USA Patriot Act of 2001 and its related regulations require
insured depository institutions, broker-dealers, and certain
other financial institutions to have policies, procedures, and
controls to detect, prevent, and report money laundering and
terrorist financing. The statute and its regulations also
provide for information sharing, subject to conditions, between
federal law enforcement agencies and financial institutions, as
well as among financial institutions, for counter-terrorism
purposes. Federal banking regulators are required, when
reviewing bank holding company acquisition and bank merger
applications, to take into account the effectiveness of the
anti-money laundering activities of the applicants.
Customer
Privacy and Other Consumer Protections
Pursuant to the Gramm-Leach-Bliley Act, we, like all other
financial institutions, are required to:
| • | provide notice to our customers regarding privacy policies and practices, | |
| • | inform our customers regarding the conditions under which their non-public personal information may be disclosed to non-affiliated third parties, and | |
| • | give our customers an option to prevent disclosure of such information to non-affiliated third parties. |
Under the Fair and Accurate Credit Transactions Act of 2003, our
customers may also opt out of information sharing between and
among us and our affiliates. We are also subject, in connection
with our lending and leasing activities, to numerous federal and
state laws aimed at protecting consumers, including the Home
Mortgage Disclosure Act, the Real Estate Settlement Procedures
Act, the Equal Credit Opportunity Act, the Truth in Lending Act,
and the Fair Credit Reporting Act.
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Table of Contents
Sarbanes-Oxley
Act of 2002
The Sarbanes-Oxley Act of 2002 imposed new or revised corporate
governance, accounting, and reporting requirements on us and all
other companies having securities registered with the SEC. In
addition to a requirement that chief executive officers and
chief financial officers certify financial statements in
writing, the statute imposed requirements affecting, among other
matters, the composition and activities of audit committees,
disclosures relating to corporate insiders and insider
transactions, codes of ethics, and the effectiveness of internal
controls over financial reporting.
| Item 1A: | Risk Factors |
We, like other financial companies, are subject to a number of
risks that may adversely affect our financial condition or
results of operation, many of which are outside of our direct
control, though efforts are made to manage those risks while
optimizing returns. Among the risks assumed are: (1)
credit
risk
, which is the risk of loss due to loan and lease
customers or other counterparties not being able to meet their
financial obligations under agreed upon terms, (2)
market
risk
, which is the risk of loss due to changes in the market
value of assets and liabilities due to changes in market
interest rates, foreign exchange rates, equity prices, and
credit spreads, (3)
liquidity risk
, which is the risk of
loss due to the possibility that funds may not be available to
satisfy current or future commitments based on external macro
market issues, investor and customer perception of financial
strength, and events unrelated to the Company such as war,
terrorism, or financial institution market specific issues, and
(4)
operational risk
, which is the risk of loss due to
human error, inadequate or failed internal systems and controls,
violations of, or noncompliance with, laws, rules, regulations,
prescribed practices, or ethical standards, and external
influences such as market conditions, fraudulent activities,
disasters, and security risks.
In addition to the other information included or incorporated by
reference into this report, readers should carefully consider
that the following important factors, among others, could
materially impact our business, future results of operations,
and future cash flows.
| (1) | Credit Risks: |
The
allowance for loan losses may prove inadequate or be negatively
affected by credit risk exposures.
Our business depends on the creditworthiness of our customers.
We periodically review the allowance for loan and lease losses
for adequacy considering economic conditions and trends,
collateral values and credit quality indicators, including past
charge-off experience and levels of past due loans and
nonperforming assets. There is no certainty that the allowance
for loan losses will be adequate over time to cover credit
losses in the portfolio because of unanticipated adverse changes
in the economy, market conditions or events adversely affecting
specific customers, industries or markets. If the credit quality
of the customer base materially decreases, if the risk profile
of a market, industry or group of customers changes materially,
or if the allowance for loan losses is not adequate, our
business, financial condition, liquidity, capital, and results
of operations could be materially adversely affected.
All of
our loan portfolios, particularly our construction and
commercial real estate (CRE) loans, may continue to be affected
by the sustained economic weakness of our Midwest markets and
the impact of higher unemployment rates. This may have a
significantly adverse affect on our business, financial
condition, liquidity, capital, and results of
operation.
As described in the “Credit Risk” discussion, credit
quality performance continued to be under pressure during 2009,
with nonaccrual loans and leases (NALs) and nonperforming assets
(NPAs) both higher at December 31, 2009, compared with
December 31, 2008, and December 31, 2007. It should be
noted that there was a 12% decline in NPA’s in the 2009
fourth quarter. The allowance for credit losses (ACL) of
$1,531.4 million at December 31, 2009, was 4.16% of
period-end loans and leases and 80% of period-end NALs.
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The majority of our credit risk is associated with lending
activities, as the acceptance and management of credit risk is
central to profitable lending. Credit risk is mitigated through
a combination of credit policies and processes, market risk
management activities, and portfolio diversification. However,
adverse changes in our borrowers’ ability to meet their
financial obligations under agreed upon terms and, in some
cases, to the value of the assets securing our loans to them may
increase our credit risk. Our commercial portfolio, as well as
our real estate-related consumer portfolios, have continued to
be negatively affected by the ongoing reduction in real estate
values and reduced levels of sales and leasing activities. Our
ACL reserving methodology uses individual loan portfolio
performance factors based on an analysis of historical
charge-off experience and migration patterns as part of the
determination of ACL adequacy. Such factors are subject to
regular review and may change to reflect updated performance
trends and expectations, particularly in times of severe
economic stress. There is no certainty that the ACL will be
adequate over time to cover credit losses in the portfolio
because of continued adverse changes in the economy, market
conditions, or events adversely affecting specific customers,
industries or markets. If the credit quality of the customer
base materially decreases, if the risk profile of a market,
industry, or group of customers changes materially, or if the
ACL is determined to not be adequate, our business, financial
condition, liquidity, capital, and results of operations could
be materially adversely affected.
Bank regulators periodically review our ACL and may require us
to increase our provision for loan and lease losses or loan
charge-offs. Any increase in our ACL or loan charge-offs as
required by these regulatory authorities could have a material
adverse effect on our results of operations and our financial
condition.
In particular, an increase in our ACL could result in a
reduction in the amount of our tangible common equity (TCE)
and/or
our
Tier 1 common equity. Given the focus on these
measurements, we may be required to raise additional capital
through the issuance of common stock as a result of an increase
in our ACL. The issuance of additional common stock or other
actions could have a dilutive effect on the existing holders of
our common stock, and adversely affect the market price of our
common stock.
A
sustained weakness or weakening in business and economic
conditions generally or specifically in the markets in which we
do business could adversely affect our business and operating
results.
Our business could be adversely affected to the extent that
weaknesses in business and economic conditions have direct or
indirect impacts on us or on our customers and counterparties.
These conditions could lead, for example, to one or more of the
following:
| • | A decrease in the demand for loans and other products and services offered by us; | |
| • | A decrease in customer savings generally and in the demand for savings and investment products offered by us; and | |
| • | An increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations to us. |
An increase in the number of delinquencies, bankruptcies or
defaults could result in a higher level of nonperforming assets,
net charge-offs, provision for credit losses, and valuation
adjustments on loans held for sale. The markets we serve are
dependent on industrial and manufacturing businesses and thus
particularly vulnerable to adverse changes in economic
conditions.
Declines
in home values and reduced levels of home sales in our markets
could continue to adversely affect us.
Like all financial institutions, we are subject to the effects
of any economic downturn. There has been a slowdown in the
housing market across our geographic footprint, reflecting
declining prices and excess inventories of houses to be sold.
These developments have had, and further declines may continue
to have, a negative effect on our financial conditions and
results of operations. At December 31, 2009, we had:
| • | $7.6 billion of home equity loans and lines, representing 21% of total loans and leases. |
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| • | $4.5 billion in residential real estate loans, representing 12% of total loans and leases. Adjustable-rate mortgages, primarily mortgages that have a fixed rate for the first 3 to 5 years and then adjust annually, comprised 56% of this portfolio. | |
| • | $0.9 billion of loans to single family home builders. These loans represented 2% of total loans and leases. | |
| • | $4.9 billion of mortgage-backed securities, including $3.5 billion of Federal Agency mortgage-backed securities, $0.5 billion of private label collateralized mortgage obligations, $0.1 billion of Alt-A mortgage backed securities, and $0.1 billion of pooled trust preferred securities that could be negatively affected by a decline in home values. | |
| • | $0.3 billion of bank owned life insurance (BOLI) investments primarily in mortgage-backed securities. This investment represents 24% of the total BOLI investment portfolio. |
Adverse
economic conditions in the automobile manufacturing and related
service industries may impact our banking business.
Many of the banking markets we serve are connected, directly or
indirectly, to the automobile manufacturing industry. We do not
have any direct credit exposure to automobile manufacturers.
However, we do have a modest exposure to companies that derive
more than 25% of their revenues from contracts with the
automobile manufacturing companies. Also, these automobile
manufacturers or their suppliers employ many of our consumer
customers. The automobile manufacturing industry has experienced
significant economic difficulties over the past five years,
which, in turn, has adversely impacted a number of related
industries that serve the automobile manufacturing industry,
including automobile parts suppliers and other indirect
businesses. We cannot provide assurance that the economic
conditions in the automobile manufacturing and related service
industries will improve at any time in the foreseeable future or
that adverse economic conditions in these industries will not
impact the Bank.
| (2) | Market Risks: |
We may
raise additional capital, which could have a dilutive effect on
the existing holders of our common stock and adversely affect
the market price of our common stock.
During 2009, we issued 346.8 million shares of additional
common stock through two common stock public offerings, three
discretionary equity issuance programs, and conversions of
preferred stock into common stock. The issuance of these
additional shares of common stock resulted in a 95% increase of
outstanding shares of common stock at December 31, 2009,
compared with December 31, 2008, and those additional
shares were significantly dilutive to existing common
shareholders. (See the “Capital” section located
within the “Risk Management and Capital” section for
additional information). As of December 31, 2009, we had
130.2 million of additional authorized common shares
available for issuance, and 4.8 million of additional
authorized preferred shares available for issuance.
We are not restricted from issuing additional authorized shares
of common stock or securities that are convertible into or
exchangeable for, or that represent the right to receive, common
stock. We continually evaluate opportunities to access capital
markets taking into account our regulatory capital ratios,
financial condition, and other relevant considerations, and
subject to market conditions, we may take further capital
actions. Such actions, with regulatory approval when required,
may include opportunistically retiring our outstanding
securities, including our subordinated debt, trust-preferred
securities, and preferred shares, in open market transactions,
privately negotiated transactions, or public offers for cash or
common shares, as well as issuing additional shares of common
stock in public or private transactions in order to increase our
capital levels above our already “well-capitalized”
levels, as defined by the federal bank regulatory agencies, and
other regulatory capital targets.
Both Huntington and the Bank are highly regulated, and we, as
well as our regulators, continue to regularly perform a variety
of capital analyses, including the preparation of stress case
scenarios. As a result of those assessments, we could determine,
or our regulators could require us, to raise additional capital
in the
13
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future. Any such capital raise could include, among other
things, the potential issuance of additional common equity to
the public, the potential issuance of common equity to the
government under the CAP, or the additional conversions of our
existing Series B Preferred Stock to common equity. There
could also be market perceptions that we need to raise
additional capital, and regardless of the outcome of any stress
test or other stress case analysis, such perceptions could have
an adverse effect on the price of our common stock.
Furthermore, in order to improve our capital ratios above our
already “well-capitalized” levels, we can decrease the
amount of our risk-weighted assets, increase capital, or a
combination of both. If it is determined that additional capital
is required in order to improve or maintain our capital ratios,
we may accomplish this through the issuance of additional common
stock.
The issuance of any additional shares of common stock or
securities convertible into or exchangeable for common stock or
that represent the right to receive common stock, or the
exercise of such securities, could be substantially dilutive to
existing common shareholders. Shareholders of our common stock
have no preemptive rights that entitle holders to purchase their
pro rata share of any offering of shares of any class or series
and, therefore, such sales or offerings could result in
increased dilution to existing shareholders. The market price of
our common stock could decline as a result of sales of shares of
our common stock or securities convertible into or exchangeable
for common stock in anticipation of such sales.
The value
of certain investment securities is volatile and future declines
or
other-than-temporary
impairments could have a materially adverse affect on our future
earnings and regulatory capital.
Continued volatility in the market value for certain of our
investment securities, whether caused by changes in market
perceptions of credit risk, as reflected in the expected market
yield of the security, or actual defaults in the portfolio could
result in significant fluctuations in the value of the
securities. This could have a material adverse impact on our
accumulated other comprehensive income and shareholders’
equity depending on the direction of the fluctuations.
Furthermore, future downgrades or defaults in these securities
could result in future classifications as other than temporarily
impaired. This could have a material impact on our future
earnings, although the impact on shareholders’ equity will
be offset by any amount already included in other comprehensive
income for securities where we have recorded temporary
impairment.
Changes
in interest rates could negatively impact our financial
condition and results of operations.
Our results of operations depend substantially on net interest
income, which is the difference between interest earned on
interest-earning assets (such as investments and loans) and
interest paid on interest-bearing liabilities (such as deposits
and borrowings). Interest rates are highly sensitive to many
factors, including governmental monetary policies and domestic
and international economic and political conditions. Conditions
such as inflation, recession, unemployment, money supply, and
other factors beyond our control may also affect interest rates.
If our interest-earning assets mature or reprice more quickly
than interest-bearing liabilities in a declining interest rate
environment, net interest income could be adversely impacted.
Likewise, if interest-bearing liabilities mature or reprice more
quickly than interest-earnings assets in a rising interest rate
environment, net interest income could be adversely impacted.
Changes in interest rates also can affect the value of loans,
securities, and other assets, including retained interests in
securitizations, mortgage and non-mortgage servicing rights and
assets under management. A portion of our earnings results from
transactional income. Examples of transactional income include
trust income, brokerage income, gain on sales of loans and other
real estate owned. This type of income can vary significantly
from
quarter-to-quarter
and
year-to-year
based on a number of different factors, including the interest
rate environment. An increase in interest rates that adversely
affects the ability of borrowers to pay the principal or
interest on loans and leases may lead to an increase in
nonperforming assets and a reduction of income recognized, which
could have a material, adverse effect on our results of
operations and cash flows. When we decide to stop accruing
interest on a loan, we reverse any accrued but unpaid interest
receivable, which decreases interest income. Subsequently, we
continue to have a cost to fund the loan, which is reflected as
interest expense, without any interest income to offset the
associated funding expense. Thus, an increase in the amount of
loans on nonaccrual status could have an adverse impact on net
interest income.
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Although fluctuations in market interest rates are neither
completely predictable nor controllable, our Market Risk
Committee (MRC) meets periodically to monitor our interest rate
sensitivity position and oversee our financial risk management
by establishing policies and operating limits. For further
discussion, see the Market Risk — “Interest Rate
Risk” section in Management’s Discussion and Analysis
of Financial Condition and Results of Operations. If short-term
interest rates remain at their historically low levels for a
prolonged period, and assuming longer-term interest rates fall
further, we could experience net interest margin compression as
our interest-earning assets would continue to reprice downward
while our interest-bearing liability rates, especially customer
deposit rates, could remain at current levels.
| (3) | Liquidity Risks: |
If the
Bank or holding company were unable to borrow funds through
access to capital markets, we may not be able to meet the cash
flow requirements of our depositors, creditors, and borrowers,
or the operating cash needed to fund corporate expansion and
other corporate activities.
Liquidity is the ability to meet cash flow needs on a timely
basis at a reasonable cost. The liquidity of the Bank is used to
make loans and leases and to repay deposit liabilities as they
become due or are demanded by customers. Liquidity policies and
limits are established by the board of directors, with operating
limits set by MRC, based upon the ratio of loans to deposits and
percentage of assets funded with non-core or wholesale funding.
The Bank’s MRC regularly monitors the overall liquidity
position of the Bank and the parent company to ensure that
various alternative strategies exist to cover unanticipated
events that could affect liquidity. MRC also establishes
policies and monitors guidelines to diversify the Bank’s
wholesale funding sources to avoid concentrations in any one
market source. Wholesale funding sources include Federal funds
purchased, securities sold under repurchase agreements, non-core
deposits, and medium- and long-term debt, which includes a
domestic bank note program and a Euronote program. The Bank is
also a member of the Federal Home Loan Bank of Cincinnati, Ohio
(FHLB), which provides funding through advances to members that
are collateralized with mortgage-related assets.
We maintain a portfolio of securities that can be used as a
secondary source of liquidity. There are other sources of
liquidity available to us should they be needed. These sources
include the sale or securitization of loans, the ability to
acquire additional national market, non-core deposits, issuance
of additional collateralized borrowings such as FHLB advances,
the issuance of debt securities, and the issuance of preferred
or common securities in public or private transactions. The Bank
also can borrow from the Federal Reserve’s discount window.
Starting in the middle of 2007, there has been significant
turmoil and volatility in worldwide financial markets which is,
at present, moderating. These conditions have resulted in a
disruption in the liquidity of financial markets, and could
directly impact us to the extent we need to access capital
markets to raise funds to support our business and overall
liquidity position. This situation could affect the cost of such
funds or our ability to raise such funds. If we were unable to
access any of these funding sources when needed, we might be
unable to meet customers’ needs, which could adversely
impact our financial condition, results of operations, cash
flows, and level of regulatory-qualifying capital. We may, from
time to time, consider opportunistically retiring our
outstanding securities, including our subordinated debt, trust
preferred securities and preferred shares in privately
negotiated or open market transactions for cash or common
shares. This could adversely affect our liquidity position. For
further discussion, see the “Liquidity Risk” section.
The OCC
has imposed dividend payment and other restrictions on the Bank,
which could impact our ability to pay dividends to shareholders
or repurchase stock. Due to the losses that the Bank incurred in
2009 and 2008, at December 31, 2009, the Bank could not
declare and pay dividends to the holding company without
regulatory approval.
The OCC is the primary regulatory agency that examines the Bank,
its subsidiaries, and their respective activities. Under certain
circumstances, including any determination that the activities
of the Bank or its subsidiaries constitute an unsafe and unsound
banking practice, the OCC has the authority by statute to
restrict the Bank’s ability to transfer assets, make
shareholder distributions, and redeem preferred securities.
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Under applicable statutes and regulations, dividends by a
national bank may be paid out of current or retained net
profits, but a national bank is prohibited from declaring a cash
dividend on shares of its common stock out of net profits until
the surplus fund equals the amount of capital stock or, if the
surplus fund does not equal the amount of capital stock, until
certain amounts from net profits are transferred to the surplus
fund. Moreover, the prior approval of the OCC is required for
the payment of a dividend if the total of all dividends declared
by a national bank in any calendar year would exceed the total
of its net profits for the year combined with its net profits
for the two preceding years, less any required transfers to
surplus or a fund for the retirement of any preferred securities.
We do not anticipate that the holding company will receive
dividends from the Bank during 2010, as we build the Bank’s
regulatory capital levels above our already
“well-capitalized” level.
Payment of dividends could also be subject to regulatory
limitations if the Bank became “under-capitalized” for
purposes of the OCC “prompt corrective action”
regulations. “Under-capitalized” is currently defined
as having a total risk-based capital ratio of less than 8.0%, a
Tier 1 risk-based capital ratio of less than 4.0%, or a
core capital, or leverage, ratio of less than 4.0%. If the Bank
were unable to pay dividends to the parent company, it could
impact our ability to pay dividends to shareholders or
repurchase stock. Throughout 2009, the Bank was in compliance
with all regulatory capital requirements and considered to be
“well-capitalized.”
For further discussion, see the “Parent Company
Liquidity” section.
| (4) | Operational Risks: |
Legislative
and regulatory actions taken now or in the future to address the
current liquidity and credit crisis in the financial industry
may significantly affect our financial condition, results of
operation, liquidity, or stock price.
Current economic conditions, particularly in the financial
markets, have resulted in government regulatory agencies and
political bodies placing increased focus on and scrutiny of the
financial services industry. The U.S. Government has
intervened on an unprecedented scale, responding to what has
been commonly referred to as the financial crisis. In addition
to the U.S. Treasury Department’s CPP under the TARP
announced in the fall of 2008 and the new Capital Assistance
Program (CAP) announced in spring of 2009, the
U.S. Government has taken steps that include enhancing the
liquidity support available to financial institutions,
establishing a commercial paper funding facility, temporarily
guaranteeing money market funds and certain types of debt
issuances, and increasing insurance on bank deposits. The
U.S. Congress, through the Emergency Economic Stabilization
Act of 2008 and the American Recovery and Reinvestment Act of
2009, has imposed a number of restrictions and limitations on
the operations of financial services firms participating in the
federal programs.
These programs subject us, and other financial institutions that
participate in them, to additional restrictions, oversight, and
costs that may have an adverse impact on our business, financial
condition, results of operations, or the price of our common
stock. In addition, new proposals for legislation continue to be
introduced in the U.S. Congress that could further increase
regulation of the financial services industry and impose
restrictions on the operations and general ability of firms
within the industry to conduct business consistent with
historical practices, including as related to compensation,
interest rates, the impact of bankruptcy proceedings on consumer
real property mortgages, and otherwise. Federal and state
regulatory agencies also frequently adopt changes to their
regulations
and/or
change the manner in which existing regulations are applied. We
cannot predict the substance or impact of pending or future
legislation, regulation, or its application. Compliance with
such current and potential regulation and scrutiny may
significantly increase our costs, impede the efficiency of our
internal business processes, negatively impact the
recoverability of certain of our recorded assets, require us to
increase our regulatory capital, and limit our ability to pursue
business opportunities in an efficient manner.
Recent legislative proposals in Congress could impact how we
assess fees on deposit accounts for items and transactions that
either overdraw an account or that are returned for
nonsufficient funds. It is uncertain
16
Table of Contents
which, if any, of the changes in these proposals will be
adopted. Additionally, on November 12, 2009, the Federal
Reserve Board (the “Board”) issued its final rule
under Regulation E regarding overdraft fees, which becomes
effective for new accounts on July 1, 2010, and for
existing accounts on August 15, 2010. This rule generally
prohibits financial institutions from charging overdraft fees
for ATM and one-time debit card transactions that overdraw
consumer deposit accounts, unless the consumer “opts
in” to having such overdrafts authorized and paid. This
rule may be affected by the legislative proposals in Congress
regarding overdraft fees. Thus, although the Board’s rule
will impact the amount of overdraft fees we will be able to
charge, we cannot currently predict whether either the
Board’s rule or the legislative proposals in Congress will
have a material and adverse effect on our results of operations.
We are
subject to ongoing tax examinations in various jurisdictions.
The Internal Revenue Service and other taxing jurisdictions may
propose various adjustments to our previously filed tax returns.
It is possible that the ultimate resolution of such proposed
adjustments, if unfavorable, may be material to the results of
operations in the period it occurs.
The calculation of our provision for federal income taxes is
complex and requires the use of estimates and judgments. We have
two accruals for income taxes: our income tax receivable
represents the estimated amount currently due from the federal
government, net of any reserve for potential audit issues, and
is reported as a component of “accrued income and other
assets” in our consolidated balance sheet; our deferred
federal income tax asset or liability represents the estimated
impact of temporary differences between how we recognize our
assets and liabilities under GAAP, and how such assets and
liabilities are recognized under federal tax code.
In the ordinary course of business, we operate in various taxing
jurisdictions and are subject to income and nonincome taxes. The
effective tax rate is based in part on our interpretation of the
relevant current tax laws. We believe the aggregate liabilities
related to taxes are appropriately reflected in the consolidated
financial statements. We review the appropriate tax treatment of
all transactions taking into consideration statutory, judicial,
and regulatory guidance in the context of our tax positions. In
addition, we rely on various tax opinions, recent tax audits,
and historical experience.
From time to time, we engage in business transactions that may
have an effect on our tax liabilities. Where appropriate, we
have obtained opinions of outside experts and have assessed the
relative merits and risks of the appropriate tax treatment of
business transactions taking into account statutory, judicial,
and regulatory guidance in the context of the tax position.
However, changes to our estimates of accrued taxes can occur due
to changes in tax rates, implementation of new business
strategies, resolution of issues with taxing authorities
regarding previously taken tax positions and newly enacted
statutory, judicial, and regulatory guidance. Such changes could
affect the amount of our accrued taxes and could be material to
our financial position
and/or
results of operations.
The Company and its subsidiaries file income tax returns in the
U.S. federal jurisdiction and various state, city, and
foreign jurisdictions. Federal income tax audits have been
completed through 2005. In 2009, the IRS began the audit of our
consolidated federal income tax returns for the tax years 2006
and 2007. In addition, various state and other jurisdictions
remain open to examination for tax years 2000 and forward.
The Internal Revenue Service, State of Ohio, and other state tax
officials have proposed adjustments to our previously filed tax
returns. We believe that the tax positions taken by us related
to such proposed adjustments were correct and supported by
applicable statutes, regulations, and judicial authority, and
intend to vigorously defend them. It is possible that the
ultimate resolution of the proposed adjustments, if unfavorable,
may be material to the results of operations in the period it
occurs. However, although no assurances can be given, we believe
that the resolution of these examinations will not, individually
or in the aggregate, have a material adverse impact on our
consolidated financial position.
The Franklin restructuring resulted in a $159.9 million net
deferred tax asset equal to the amount of income and equity that
was included in our operating results for the 2009 first
quarter. While we believe that our position regarding the
deferred tax asset and related income recognition is correct,
that position could be subject to challenge.
17
Table of Contents
If our
regulators deem it appropriate, they can take regulatory actions
that could impact our ability to compete for new business,
constrain our ability to fund our liquidity needs, and increase
the cost of our services.
Huntington and its subsidiaries are subject to the supervision
and regulation of various State and Federal regulators,
including the Office of the Comptroller of the Currency, the
Federal Reserve, the FDIC, SEC, FINRA, and various state
regulatory agencies. As such, Huntington is subject to a wide
variety of laws and regulations, many of which are discussed in
the “Regulatory Matters” section. As part of their
supervisory process, which includes periodic examinations and
continuous monitoring, the regulators have the authority to
impose restrictions or conditions on our activities and the
manner in which we manage the organization. These actions could
impact the organization in a variety of ways, including
subjecting us to monetary fines, restricting our ability to pay
dividends, precluding mergers or acquisitions, limiting our
ability to offer certain products or services, or imposing
additional capital requirements.
The
resolution of significant pending litigation, if unfavorable,
could have a material adverse affect on our results of
operations for a particular period.
Huntington faces legal risks in its businesses, and the volume
of claims and amount of damages and penalties claimed in
litigation and regulatory proceedings against financial
institutions remain high. Substantial legal liability or
significant regulatory action against Huntington could have
material adverse financial effects or cause significant
reputational harm to Huntington, which in turn could seriously
harm Huntington’s business prospects. As more fully
described in Note 24 of the Notes to Consolidated Financial
Statements, certain putative class actions and shareholder
derivative actions were filed against Huntington, certain
affiliated committees, and / or certain of its current
or former officers and directors. At this time, it is not
possible for management to assess the probability of an adverse
outcome, or reasonably estimate the amount of any potential loss
in connection with these lawsuits. Although no assurance can be
given, based on information currently available, consultation
with counsel, and available insurance coverage, management
believes that the eventual outcome of these claims against us
will not, individually or in the aggregate, have a material
adverse effect on our consolidated financial position or results
of operations. However, it is possible that the ultimate
resolution of these matters, if unfavorable, may be material to
the results of operations for a particular period.
Huntington
faces other significant operational risks.
Huntington is exposed to many types of operational risk,
including reputational risk, legal and compliance risk, the risk
of fraud or theft by employees or outsiders, unauthorized
transactions by employees or outsiders, or operational errors by
employees, including clerical or record-keeping errors or those
resulting from faulty or disabled computer or telecommunications
systems. In addition, today’s threats to customer
information and information systems are complex, more wide
spread, continually emerging, and increasing at a rapid pace.
Huntington continues to invest in better tools and processes in
all key security areas, and monitors these threats with
increased rigor and focus.
Negative public opinion can result from Huntington’s actual
or alleged conduct in any number of activities, including
lending practices, corporate governance and acquisitions and
from actions taken by government regulators and community
organizations in response to those activities. Negative public
opinion can adversely affect Huntington’s ability to
attract and keep customers and can expose it to litigation and
regulatory action.
We establish and maintain systems of internal operational
controls that provide us with timely and accurate information
about our level of operational risk. While not foolproof, these
systems have been designed to manage operational risk at
appropriate, cost-effective levels. Procedures exist that are
designed to ensure that policies relating to conduct, ethics,
and business practices are followed. While we continually
monitor and improve the system of internal controls, data
processing systems, and corporate-wide processes and procedures,
there can be no assurance that future losses will not occur.
18
Table of Contents
Failure
to maintain effective internal controls over financial reporting
in the future could impair our ability to accurately and timely
report its financial results or prevent fraud, resulting in loss
of investor confidence and adversely affecting our business and
stock price.
Effective internal controls over financial reporting are
necessary to provide reliable financial reports and prevent
fraud. As a financial holding company, we are subject to
regulation that focuses on effective internal controls and
procedures. Management continually seeks to improve these
controls and procedures.
Management believes that our key internal controls over
financial reporting are currently effective; however, such
controls and procedures will be modified, supplemented, and
changed from time to time as necessitated by our growth and in
reaction to external events and developments. While Management
will continue to assess our controls and procedures and take
immediate action to remediate any future perceived gaps, there
can be no guarantee of the effectiveness of these controls and
procedures on an on-going basis. Any failure to maintain in the
future an effective internal control environment could impact
our ability to report its financial results on an accurate and
timely basis, which could result in regulatory actions, loss of
investor confidence, and adversely impact its business and stock
price.
| Item 1B: | Unresolved Staff Comments |
None.
| Item 2: | Properties |
Our headquarters, as well as the Bank’s, are located in the
Huntington Center, a thirty-seven-story office building located
in Columbus, Ohio. Of the building’s total office space
available, we lease approximately 40%. The lease term expires in
2015, with nine five-year renewal options for up to
45 years but with no purchase option. The Bank has an
indirect minority equity interest of 18.4% in the building.
Our other major properties consist of:
| • | a thirteen-story and a twelve-story office building, both of which are located adjacent to the Huntington Center; | |
| • | a twenty-one story office building, known as the Huntington Building, located in Cleveland, Ohio; | |
| • | an eighteen-story office building in Charleston, West Virginia; | |
| • | a three-story office building located in Holland, Michigan; | |
| • | The Crosswoods building, located in the greater Columbus area; | |
| • | a twelve story office building in Youngstown, Ohio | |
| • | a ten story office building in Warren, Ohio | |
| • | an office complex located in Troy, Michigan; and | |
| • | three data processing and operations centers (Easton, Northland, and Parma) located in Ohio and one in Indianapolis. |
The office buildings above serve as regional administrative
offices occupied predominantly by our Retail and Business
Banking and Private Financial Group business segments. The Auto
Finance and Dealer Services business segment is located in the
Northland operations center.
Of these properties, we own the thirteen-story and twelve-story
office buildings, and the Business Service Center in Columbus
and the twelve-story office building in Youngstown, Ohio. All of
the other major properties are held under long-term leases. In
1998, we entered into a sale/leaseback agreement that included
the sale of 59 of our locations. The transaction included a mix
of branch banking offices, regional offices, and operational
facilities, including certain properties described above, which
we will continue to operate under a long-term lease.
19
Table of Contents
| Item 3: | Legal Proceedings |
Information required by this item is set forth in Note 24
of the Notes to Consolidated Financial Statements.
| Item 4: | Submission of Matters to a Vote of Security Holders |
Not Applicable.
PART II
| Item 5: | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
The common stock of Huntington Bancshares Incorporated is traded
on the NASDAQ Stock Market under the symbol “HBAN”.
The stock is listed as “HuntgBcshr” or
“HuntBanc” in most newspapers. As of January 31,
2010, we had 40,155 shareholders of record.
Information regarding the high and low sale prices of our common
stock and cash dividends declared on such shares, as required by
this item, is set forth in Table 65 entitled “Selected
Quarterly Income Statement Data”. Information regarding
restrictions on dividends, as required by this item, is set
forth in Item 1 “Business-Regulatory Matters-Dividend
Restrictions” and in Note 25 of the Notes to
Consolidated Financial Statements.
As a condition to participate in the TARP, Huntington may not
repurchase any additional shares without prior approval from the
Department of Treasury. Huntington did not repurchase any shares
under the 2006 Repurchase Program for the year ended
December 31, 2009. On February 18, 2009, the board of
directors terminated the previously authorized program for the
repurchase of up to 15 million shares of common stock (the
2006 Repurchase Program).
The line graph below compares the yearly percentage change in
cumulative total shareholder return on Huntington common stock
and the cumulative total return of the S&P 500 Index and
the KBW 50 Bank Index for the period December 31, 2004,
through December 31, 2009. The KBW 50 Bank Index is a
market capitalization-weighted bank stock index published by
Keefe, Bruyette & Woods. The index is composed of the
50 largest banking companies and includes all money-center banks
and most major regional banks. An investment of $100 on
December 31, 2004, and the reinvestment of all dividends
are assumed.
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||||||
HBAN
|
$ | 100 | $ | 99 | $ | 104 | $ | 68 | $ | 38 | $ | 19 | ||||||||||||||||||
S&P 500
|
$ | 100 | $ | 105 | $ | 121 | $ | 128 | $ | 81 | $ | 102 | ||||||||||||||||||
KBW 50 Bank
|
$ | 100 | $ | 103 | $ | 121 | $ | 94 | $ | 50 | $ | 49 | ||||||||||||||||||
HBAN
S&P 500
KBW 50 Bank
20
Table of Contents
| Item 6: | Selected Financial Data |
Table
1 — Selected Financial Data (1), (9)
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
|
Interest income
|
$ | 2,238,142 | $ | 2,798,322 | $ | 2,742,963 | $ | 2,070,519 | $ | 1,641,765 | ||||||||||
|
Interest expense
|
813,855 | 1,266,631 | 1,441,451 | 1,051,342 | 679,354 | |||||||||||||||
|
Net interest income
|
1,424,287 | 1,531,691 | 1,301,512 | 1,019,177 | 962,411 | |||||||||||||||
|
Provision for credit losses
|
2,074,671 | 1,057,463 | 643,628 | 65,191 | 81,299 | |||||||||||||||
|
Net interest income after provision for credit losses
|
(650,384 | ) | 474,228 | 657,884 | 953,986 | 881,112 | ||||||||||||||
|
Service charges on deposit accounts
|
302,799 | 308,053 | 254,193 | 185,713 | 167,834 | |||||||||||||||
|
Automobile operating lease income
|
51,810 | 39,851 | 7,810 | 43,115 | 133,015 | |||||||||||||||
|
Securities (losses) gains
|
(10,249 | ) | (197,370 | ) | (29,738 | ) | (73,191 | ) | (8,055 | ) | ||||||||||
|
Other noninterest income
|
661,284 | 556,604 | 444,338 | 405,432 | 339,488 | |||||||||||||||
|
Total noninterest income
|
1,005,644 | 707,138 | 676,603 | 561,069 | 632,282 | |||||||||||||||
|
Personnel costs
|
700,482 | 783,546 | 686,828 | 541,228 | 481,658 | |||||||||||||||
|
Automobile operating lease expense
|
43,360 | 31,282 | 5,161 | 31,286 | 103,850 | |||||||||||||||
|
Other noninterest expense
|
3,289,601 | 662,546 | 619,855 | 428,480 | 384,312 | |||||||||||||||
|
Total noninterest expense
|
4,033,443 | 1,477,374 | 1,311,844 | 1,000,994 | 969,820 | |||||||||||||||
|
(Loss) Income before income taxes
|
(3,678,183 | ) | (296,008 | ) | 22,643 | 514,061 | 543,574 | |||||||||||||
|
(Benefit) Provision for income taxes
|
(584,004 | ) | (182,202 | ) | (52,526 | ) | 52,840 | 131,483 | ||||||||||||
|
Net (loss) income
|
$ | (3,094,179 | ) | $ | (113,806 | ) | $ | 75,169 | $ | 461,221 | $ | 412,091 | ||||||||
|
Dividends on preferred shares
|
174,756 | 46,400 | — | — | — | |||||||||||||||
|
Net (loss) income applicable to common shares
|
$ | (3,268,935 | ) | $ | (160,206 | ) | $ | 75,169 | $ | 461,221 | $ | 412,091 | ||||||||
|
Net (loss) income per common share — basic
|
$ | (6.14 | ) | $ | (0.44 | ) | $ | 0.25 | $ | 1.95 | $ | 1.79 | ||||||||
|
Net (loss) income per common share — diluted
|
(6.14 | ) | (0.44 | ) | 0.25 | 1.92 | 1.77 | |||||||||||||
|
Cash dividends declared per common share
|
0.0400 | 0.6625 | 1.0600 | 1.0000 | 0.8450 | |||||||||||||||
|
Balance sheet highlights
|
||||||||||||||||||||
|
Total assets (period end)
|
$ | 51,554,665 | $ | 54,352,859 | $ | 54,697,468 | $ | 35,329,019 | $ | 32,764,805 | ||||||||||
|
Total long-term debt (period end)(2)
|
3,802,670 | 6,870,705 | 6,954,909 | 4,512,618 | 4,597,437 | |||||||||||||||
|
Total shareholders’ equity (period end)
|
5,336,002 | 7,228,906 | 5,951,091 | 3,016,029 | 2,560,736 | |||||||||||||||
|
Average long-term debt(2)
|
5,558,001 | 7,374,681 | 5,714,572 | 4,942,671 | 5,168,959 | |||||||||||||||
|
Average shareholders’ equity
|
5,787,401 | 6,395,690 | 4,633,465 | 2,948,367 | 2,645,379 | |||||||||||||||
|
Average total assets
|
52,440,268 | 54,921,419 | 44,711,676 | 35,111,236 | 32,639,011 | |||||||||||||||
21
Table of Contents
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
|
Key ratios and statistics
|
||||||||||||||||||||
|
Margin analysis — as a% of average earnings assets
|
||||||||||||||||||||
|
Interest income(3)
|
4.88 | % | 5.90 | % | 7.02 | % | 6.63 | % | 5.65 | % | ||||||||||
|
Interest expense
|
1.77 | 2.65 | 3.66 | 3.34 | 2.32 | |||||||||||||||
|
Net interest margin(3)
|
3.11 | % | 3.25 | % | 3.36 | % | 3.29 | % | 3.33 | % | ||||||||||
|
Return on average total assets
|
(5.90 | ) % | (0.21 | )% | 0.17 | % | 1.31 | % | 1.26 | % | ||||||||||
|
Return on average total shareholders’ equity
|
(53.5 | ) | (1.8 | ) | 1.6 | 15.6 | 15.6 | |||||||||||||
|
Return on average tangible shareholders’ equity(4)
|
(9.8 | ) | (2.1 | ) | 3.9 | 19.5 | 17.4 | |||||||||||||
|
Efficiency ratio(5)
|
55.4 | 57.0 | 62.5 | 59.4 | 60.0 | |||||||||||||||
|
Dividend payout ratio
|
N.M. | N.M. | N.M. | 52.1 | 47.7 | |||||||||||||||
|
Average shareholders’ equity to average assets
|
11.04 | 11.65 | 10.36 | 8.40 | 8.10 | |||||||||||||||
|
Effective tax rate (benefit)
|
(15.9 | ) | N.M. | N.M. | 10.3 | 24.2 | ||||||||||||||
|
Tangible common equity to tangible assets (period end)(6),(8)
|
5.92 | 4.04 | 5.09 | 6.93 | 7.20 | |||||||||||||||
|
Tangible equity to tangible assets (period end)(7),(8)
|
9.24 | 7.72 | 5.09 | 6.93 | 7.20 | |||||||||||||||
|
Tier 1 leverage ratio (period end)
|
10.09 | 9.82 | 6.77 | 8.00 | 8.34 | |||||||||||||||
|
Tier 1 risk-based capital ratio (period end)
|
12.03 | 10.72 | 7.51 | 8.93 | 9.13 | |||||||||||||||
|
Total risk-based capital ratio (period end)
|
14.41 | 13.91 | 10.85 | 12.79 | 12.42 | |||||||||||||||
|
Other data
|
||||||||||||||||||||
|
Full-time equivalent employees (period end)
|
10,272 | 10,951 | 11,925 | 8,081 | 7,602 | |||||||||||||||
|
Domestic banking offices (period end)
|
611 | 613 | 625 | 381 | 344 | |||||||||||||||
N.M., not a meaningful value.
| (1) | Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” for additional discussion regarding these key factors. | |
| (2) | Includes Federal Home Loan Bank advances, subordinated notes, and other long-term debt. | |
| (3) | On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate. | |
| (4) | Net (loss) income less expense excluding amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate. | |
| (5) | Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains. | |
| (6) | Tangible common equity (total common equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate. | |
| (7) | Tangible equity (total equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate. | |
| (8) | Tangible equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been |
22
Table of Contents
| included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently. | ||
| (9) | Performance comparisons are affected by the Sky Financial Group, Inc. acquisition in 2007, and the Unizan Financial Corp. acquisition in 2006. |
| Item 7: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is multi-state
diversified regional bank holding company headquartered in
Columbus, Ohio. We have more than 144 years of serving the
financial needs of our customers. Through our subsidiaries,
including our banking subsidiary, The Huntington National Bank
(the Bank), we provide full-service commercial and consumer
banking services, mortgage banking services, equipment leasing,
investment management, trust services, brokerage services,
customized insurance service program, and other financial
products and services. Our over 600 banking offices are located
in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and West
Virginia. We also offer retail and commercial financial services
online at huntington.com; through our technologically advanced,
24-hour
telephone bank; and through our network of over 1,300 ATMs. The
Auto Finance and Dealer Services (AFDS) group offers automobile
loans to consumers and commercial loans to automobile dealers
within our six-state banking franchise area. Selected financial
service activities are also conducted in other states including:
Private Financial Group (PFG) offices in Florida, Massachusetts,
and New York, and Mortgage Banking offices in Maryland and New
Jersey. International banking services are available through the
headquarters office in Columbus and a limited purpose office
located in the Cayman Islands and another in Hong Kong.
The following Management’s Discussion and Analysis of
Financial Condition and Results of Operations (MD&A)
provides information we believe necessary for understanding our
financial condition, changes in financial condition, results of
operations, and cash flows. The MD&A should be read in
conjunction with the financial statements, notes, and other
information contained in this report.
Our discussion is divided into key segments:
| • | Introduction — Provides overview comments on important matters including risk factors, acquisitions, and other items. These are essential for understanding our performance and prospects. | |
| • | Discussion of Results of Operations — Reviews financial performance from a consolidated company perspective. It also includes a “Significant Items” section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section. | |
| • | Risk Management and Capital — Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and/or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements. | |
| • | Business Segment Discussion — Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance. | |
| • | Results for the Fourth Quarter — Provides a discussion of results for the 2009 fourth quarter compared with the 2008 fourth quarter. |
A reading of each section is important to understand fully the
nature of our financial performance and prospects.
23
Table of Contents
Forward-Looking
Statements
This report, including MD&A, contains certain
forward-looking statements, including certain plans,
expectations, goals, projections, and statements, which are
subject to numerous assumptions, risks, and uncertainties.
Statements that do not describe historical or current facts,
including statements about beliefs and expectations, are
forward-looking statements. The forward-looking statements are
intended to be subject to the safe harbor provided by
Section 27A of the Securities 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:
(1) deterioration in the loan portfolio could be worse than
expected due to a number of factors such as the underlying value
of the collateral could prove less valuable than otherwise
assumed and assumed cash flows may be worse than expected;
(2) changes in economic conditions; (3) movements in
interest rates; (4) competitive pressures on product
pricing and services; (5) success and timing of other
business strategies; (6) extended disruption of vital
infrastructure; and (7) the nature, extent, and timing of
governmental actions and reforms, including existing and
potential future restrictions and limitations imposed in
connection with the Troubled Asset Relief Program’s
voluntary Capital Purchase Plan or otherwise under the Emergency
Economic Stabilization Act of 2008. All forward-looking
statements included in this release are based on information
available at the time of the release. Huntington assumes no
obligation to update any forward-looking statement.
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, caution should be exercised
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 counterparties not being able to meet their
financial obligations under agreed upon terms, (2)
market
risk
, which is the risk of loss due to changes in the market
value of assets and liabilities due to changes in market
interest rates, foreign exchange rates, equity prices, and
credit spreads, (3)
liquidity risk
, which is the risk of
loss due to the possibility that funds may not be available to
satisfy current or future obligations resulting from external
macro market issues, investor and customer perception of
financial strength, and events unrelated to the company such as
war, terrorism, or financial institution market specific issues,
and (4)
operational risk
, which is the risk of loss due
to human error, inadequate or failed internal systems and
controls, violations of, or noncompliance with, laws, rules,
regulations, prescribed practices, or ethical standards, and
external influences such as market conditions, fraudulent
activities, disasters, and security risks.
More information on risk is set forth under the heading
“Risk Factors” included in Item 1A. Additional
information regarding risk factors can also be found in the
“Risk Management and Capital” discussion.
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 Consolidated Financial
Statements 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
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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.
Estimates are made under facts and circumstances at a point in
time, and changes in those facts and circumstances could produce
results that differ from when those estimates were made. The
most significant accounting estimates and their related
application are discussed below. This analysis is included to
emphasize that estimates are used in connection with the
critical and other accounting policies and to illustrate the
potential effect on the financial statements if the actual
amount were different from the estimated amount.
Total
Allowances for Credit Losses
The ACL is the sum of the ALLL and the allowance for unfunded
loan commitments and letters of credit (AULC), and represents
the estimate of the level of reserves appropriate to absorb
inherent credit losses. The amount of the ACL was determined by
judgments regarding the quality of each individual loan
portfolio and loan commitments. All known relevant internal and
external factors that affected loan collectibility were
considered, including analysis of historical charge-off
experience, migration patterns, changes in economic conditions,
and changes in loan collateral values. Such factors are subject
to regular review and may change to reflect updated performance
trends and expectations, particularly in times of severe stress
such as have been experienced throughout 2009. We believe the
process for determining the ACL considers all of the potential
factors that could result in credit losses. However, the process
includes judgmental and quantitative elements that may be
subject to significant change. There is no certainty that the
ACL will be adequate over time to cover credit losses in the
portfolio because of continued adverse changes in the economy,
market conditions, or events adversely affecting specific
customers, industries or markets. To the extent actual outcomes
differ from our estimates, the credit quality of our customer
base materially decreases, the risk profile of a market,
industry, or group of customers changes materially, or if the
ACL is determined to not be adequate, additional provision for
credit losses could be required, which could adversely affect
our business, financial condition, liquidity, capital, and
results of operations in future periods.
At December 31, 2009, the ACL was $1,531.4 million, or
4.16% of total loans and leases. To illustrate the potential
effect on the financial statements of our estimates of the ACL,
a 10 basis point increase would have required
$36.8 million in additional reserves (funded by additional
provision for credit losses), which would have negatively
impacted 2009 net loss by approximately $23.9 million,
or $0.04 per common share.
Additionally, in 2007, we established a specific reserve of
$115.3 million associated with our loans to Franklin Credit
Management Corporation (Franklin). At December 31, 2008,
our specific ALLL for Franklin loans increased to
$130.0 million. In 2009, as a result of our restructuring
of the Franklin relationship, the specific ALLL for Franklin
loans was eliminated.
Refer to the “Franklin
relationship” section located within the “Risk
Management and Capital” section for additional discussion
regarding the restructuring of the Franklin relationship.
Fair
Value Measurements
The fair value of a financial instrument is defined as the
amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or
liquidation sale. We estimate the fair value of a financial
instrument using a variety of valuation methods. Where financial
instruments are actively traded and have quoted market prices,
quoted market prices are used for fair value. We characterize
active markets as those where transaction volumes are sufficient
to provide objective pricing information, with reasonably narrow
bid/ask spreads, and where received quoted prices do not vary
widely. When the financial instruments are not actively traded,
other observable market inputs, such as quoted prices of
securities with similar characteristics, may be used, if
available, to determine fair value. Inactive markets are
characterized by low transaction volumes, price quotations that
vary substantially among market participants, or in which
minimal information is released publicly. When observable market
prices do not exist,
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we estimate fair value primarily by using cash flow and other
financial modeling methods. Our valuation methods consider
factors such as liquidity and concentration concerns and, for
the derivatives portfolio, counterparty credit risk. Other
factors such as model assumptions, market dislocations, and
unexpected correlations can affect estimates of fair value.
Changes in these underlying factors, assumptions, or estimates
in any of these areas could materially impact the amount of
revenue or loss recorded.
Assets and liabilities carried at fair value inherently result
in a higher degree of financial statement volatility. Assets
measured at fair value include investment securities, loans
held-for-sale, derivatives, mortgage servicing rights (MSRs),
and trading account securities. At December 31, 2009,
approximately $9.2 billion of our assets were recorded at
fair value. In addition to the above mentioned ongoing fair
value measurements, fair value is also the unit of measure for
recording business combinations.
The Financial Accounting Standard Board’s (FASB) Accounting
Standards Codification (ASC) Topic 820, “Fair Value
Measurements”, establishes a framework for measuring the
fair value of financial instruments that considers the
attributes specific to particular assets or liabilities and
establishes a three-level hierarchy for determining fair value
based on the transparency of inputs to each valuation as of the
fair value measurement date. The three levels are defined as
follows:
| • | Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| • | Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |
| • | Level 3 — inputs that are unobservable and significant to the fair value measurement. Financial instruments are considered Level 3 when values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unoberservable. |
At the end of each quarter, we assess the valuation hierarchy
for each asset or liability measured. From time to time, assets
or liabilities may be transferred within hierarchy levels due to
changes in availability of observable market inputs to measure
fair value at the measurement date.
The table below provides a description and the valuation
methodologies used for financial instruments measured at fair
value, as well as the general classification of such instruments
pursuant to the valuation hierarchy. The fair values measured at
each level of the fair value hierarchy, as well as additional
discussion regarding fair value measurements, can be found in
Note 21 of the Notes to the Consolidated Financial
Statements.
Table
2 — Fair Value Measurement of Financial
Instruments
|
Financial Instrument(1)
|
Hierarchy |
Valuation methodology
|
||
|
Mortgage loans held-for-sale
|
Level 2 | Mortgage loans held-for-sale are estimated using security prices for similar product types. | ||
|
Investment Securities & Trading Account
Securities(2)
|
Level 1 | Consist of U.S. Treasury and other federal agency securities, and money market mutual funds which generally have quoted prices. | ||
| Level 2 | Consist of U.S. Government and agency mortgage-backed securities and municipal securities for which an active market is not available. Third-party pricing services provide a fair value estimate based upon trades of similar financial instruments. |
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|
Financial Instrument(1)
|
Hierarchy |
Valuation methodology
|
||
| Level 3 | Consist of asset-backed securities and certain private label CMOs, and residual interest in automobile securitizations, for which fair value is estimated. Assumptions used to determine the fair value of these securities have greater subjectivity due to the lack of observable market transactions. Generally, there are only limited trades of similar instruments and a discounted cash flow approach is used to determine fair value. | |||
|
Mortgage Servicing Rights (MSRs)(3)
|
Level 3 | MSRs do not trade in an active, open market with readily observable prices. Although sales of MSRs do occur, the precise terms and conditions typically are not readily available. Fair value is based upon the final month-end valuation, which utilizes the month-end curve and prepayment assumptions. | ||
|
Derivatives(4)
|
Level 1 | Consist of exchange traded options and forward commitments to deliver mortgage-backed securities which have quoted prices. | ||
| Level 2 | Consist of basic asset and liability conversion swaps and options, and interest rate caps. These derivative positions are valued using internally developed models that use readily observable market parameters. | |||
| Level 3 | Consist primarily of interest rate lock agreements related to mortgage loan commitments. The determinination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. | |||
|
Equity Investments(5)
|
Level 3 | Consist of equity investments via equity funds (holding both private and publicly-traded equity securities), directly in companies as a minority interest investor, and directly in companies in conjunction with our mezzanine lending activities. These investments do not have readily observable prices. Fair value is based upon a variety of factors, including but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies, and changes in market outlook. |
| (1) | Refer to Notes 1 and 21 of the Notes to the Consolidated Financial Statements for additional information. | |
| (2) | Refer to Note 6 of the Notes to the Consolidated Financial Statements for additional information. | |
| (3) | Refer to Note 7 of the Notes to the Consolidated Financial Statements for additional information. | |
| (4) | Refer to Note 22 of the Notes to the Consolidated Financial Statements for additional information. | |
| (5) | Certain equity investments are accounted for under the equity method and, therefore, are not subject to the fair value disclosure requirements. |
INVESTMENT
SECURITIES
(This section should be read in conjunction with the
“Investment Securities Portfolio” discussion and
Note 1 and Note 6 in the Notes to the Consolidated
Financial Statements.)
Level 3
Analysis on Certain Securities Portfolios
Our Alt-A, CMO, and pooled-trust-preferred securities portfolios
are classified as Level 3, and as such, the significant
estimates used to determine the fair value of these securities
have greater subjectivity. The Alt-A and CMO securities
portfolios are subjected to a monthly review of the projected
cash flows, while the cash flows of our pooled-trust-preferred
securities portfolio are reviewed quarterly. These reviews are
supported
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with analysis from independent third parties, and are used as a
basis for impairment analysis. These three segments, and the
results of our impairment analysis for each segment, are
discussed in further detail below:
Alt-A mortgage-backed / Private-label
collateralized mortgage obligation (CMO)
securities
,
represent securities collateralized
by first-lien residential mortgage loans. As the lowest level
input that is significant to the fair value measurement of these
securities in its entirety was a Level 3 input, we
classified all securities within these portfolios as
Level 3 in the fair value hierarchy. The securities were
priced with the assistance of an outside third-party specialist
using a discounted cash flow approach and the independent
third-party’s proprietary pricing model. The model used
inputs such as estimated prepayment speeds, losses, recoveries,
default rates that were implied by the underlying performance of
collateral in the structure or similar structures, discount
rates that were implied by market prices for similar securities,
collateral structure types, and house price
depreciation/appreciation rates that were based upon
macroeconomic forecasts.
We analyzed both our Alt-A mortgage-backed and private-label CMO
securities portfolios to determine if the securities in these
portfolios were other-than-temporarily impaired. We used the
analysis to determine whether we believed it is probable that
all contractual cash flows would not be collected. All
securities in these portfolios remained current with respect to
interest and principal at December 31, 2009.
Our analysis indicated, as of December 31, 2009, a total of
5 Alt-A mortgage-backed securities and 8 private-label CMO
securities could experience a loss of principal in the future.
The future expected losses of principal on these
other-than-temporarily impaired securities ranged from 0.44% to
86.37% of their par value. These losses were projected to occur
beginning anywhere from 7 months to as many as 8 years
in the future. We measured the amount of credit impairment on
these securities using the cash flows discounted at each
security’s effective rate. As a result, during the 2009
fourth quarter, we recorded $2.6 million of credit
other-than-temporary impairment (OTTI) in our Alt-A
mortgage-backed securities portfolio and $3.0 million of
credit OTTI in our private-label CMO securities portfolio. In
2009, a total of $12.2 million of credit OTTI was recorded
in our Alt-A mortgage-backed securities portfolio, and
$6.0 million of credit OTTI was recorded in our private
label-CMO securities portfolio. These OTTI adjustments
negatively impacted our earnings.
Pooled-trust-preferred securities
, represent
collateralized debt obligations (CDOs) backed by a pool of debt
securities issued by financial institutions. As the lowest level
input that is significant to the fair value measurement of these
securities in its entirety was a Level 3 input, we
classified all securities within this portfolio as Level 3
in the fair value hierarchy. The collateral generally consisted
of trust-preferred securities and subordinated debt securities
issued by banks, bank holding companies, and insurance
companies. A full cash flow analysis was used to estimate fair
values and assess impairment for each security within this
portfolio. Impairment was calculated as the difference between
the carrying amount and the amount of cash flows discounted at
each security’s effective rate. We engaged a third party
specialist with direct industry experience in
pooled-trust-preferred securities valuations to provide
assistance in estimating the fair value and expected cash flows
for each security in this portfolio. Relying on cash flows was
necessary because there was a lack of observable transactions in
the market and many of the original sponsors or dealers for
these securities were no longer able to provide a fair value
that was compliant with ASC 820, “Fair Value Measurements
and Disclosures”.
The analysis was completed by evaluating the relevant credit and
structural aspects of each pooled-trust-preferred security in
the portfolio, including collateral performance projections for
each piece of collateral in each security and terms of each
security’s structure. The credit review included analysis
of profitability, credit quality, operating efficiency,
leverage, and liquidity using the most recently available
financial and regulatory information for each underlying
collateral issuer. We also reviewed historical industry default
data and current/near term operating conditions. Using the
results of our analysis, we estimated appropriate default and
recovery probabilities for each piece of collateral and then
estimated the expected cash flows for each security. No
recoveries were assumed on issuers who are in default. The
recovery assumptions on issuers who are deferring interest
ranged from 10% to 55% with a cure assumed after the maximum
deferral period. As a result of this testing, we believe we will
experience a loss of principal or interest on 12 securities; and
as such, recorded credit OTTI of $11.4 million for one
newly impaired and 11 previously impaired pooled-trust-
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preferred securities in the 2009 fourth quarter. In 2009,
$40.8 million of total OTTI was recorded for impairment of
the pooled-trust-preferred securities. These OTTI adjustments
negatively impacted our earnings.
Please refer to the “Investment Securities Portfolio”
discussion and Note 1 and Note 6 of the Notes to the
Consolidated Financial Statements for additional information
regarding OTTI.
Certain other assets and liabilities which are not financial
instruments also involve fair value measurements. A description
of these assets and liabilities, and the methodologies utilized
to determine fair value are discussed below:
GOODWILL
Goodwill is tested for impairment annually, as of
October 1, using a two-step process that begins with an
estimation of the fair value of a reporting unit. Goodwill
impairment exists when a reporting unit’s carrying value of
goodwill exceeds its implied fair value. Goodwill is also tested
for impairment on an interim basis, using the same two-step
process as the annual testing, if an event occurs or
circumstances change between annual tests that would more likely
than not reduce the fair value of the reporting unit below its
carrying amount. For 2009, we performed interim evaluations of
our goodwill balances at each quarter end, as well as our annual
goodwill impairment assessment as of October 1.
During the 2009 first quarter, our stock price declined 78%,
from $7.66 per common share at December 31, 2008, to $1.66
per common share at March 31, 2009. Many peer banks also
experienced similar significant declines in market
capitalization. This decline primarily reflected the continuing
economic slowdown and increased market concern surrounding
financial institutions’ credit risks and capital positions,
as well as uncertainty related to increased regulatory
supervision and intervention. We determined that these changes
would more-likely-than-not reduce the fair value of certain
reporting units below their carrying amounts. Therefore, we
performed an interim goodwill impairment test during the 2009
first quarter. An independent third party was engaged to assist
with the impairment assessment.
Significant judgment is applied when goodwill is assessed for
impairment. This judgment includes developing cash flow
projections, selecting appropriate discount rates, identifying
relevant market comparables, incorporating general economic and
market conditions, and selecting an appropriate control premium.
The selection and weighting of the various fair value techniques
may result in a higher or lower fair value. Judgment is applied
in determining the weightings that are most representative of
fair value. The assumptions used in the goodwill impairment
assessment and the application of these estimates and
assumptions are discussed below.
2009
First Quarter Impairment Testing
The first step (Step 1) of impairment testing requires a
comparison of each reporting unit’s fair value to carrying
value to identify potential impairment. For our impairment
testing conducted during the 2009 first quarter, we identified
four reporting units: Regional Banking, PFG, Insurance, and Auto
Finance and Dealer Services (AFDS).
| • | Although Insurance is included within PFG for business segment reporting, it was evaluated as a separate reporting unit for goodwill impairment testing because it has its own separately allocated goodwill resulting from prior acquisitions. The fair value of PFG (determined using the market approach as described below), excluding Insurance, exceeded its carrying value, and goodwill was determined to not be impaired for this reporting unit. | |
| • | There was no goodwill associated with AFDS and, therefore, it was not subject to impairment testing. |
For Regional Banking, we utilized both the income and market
approaches to determine fair value. The income approach was
based on discounted cash flows derived from assumptions of
balance sheet and income statement activity. An internal
forecast was developed by considering several long-term key
business drivers such as anticipated loan and deposit growth.
The long-term growth rate used in determining the terminal value
was estimated at 2.5%. The discount rate of 14% was estimated
based on the Capital Asset Pricing Model,
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which considered the risk-free interest rate
(20-year
Treasury Bonds), market risk premium, equity risk premium, and a
company-specific risk factor. The company-specific risk factor
was used to address the uncertainty of growth estimates and
earnings projections of management. For the market approach,
revenue, earnings and market capitalization multiples of
comparable public companies were selected and applied to the
Regional Banking unit’s applicable metrics such as book and
tangible book values. A 20% control premium was used in the
market approach. The results of the income and market approaches
were weighted 75% and 25%, respectively, to arrive at the final
calculation of fair value. As market capitalization declined
across the banking industry, we believed that a heavier
weighting on the income approach is more representative of a
market participant’s view. For the Insurance reporting
unit, management utilized a market approach to determine fair
value. The aggregate fair market values were compared with
market capitalization as an assessment of the appropriateness of
the fair value measurements. As our stock price fluctuated
greatly, we used our average stock price for the 30 days
preceding the valuation date to determine market capitalization.
The aggregate fair market values of the reporting units compared
with market capitalization indicated an implied premium of 27%.
A control premium analysis indicated that the implied premium
was within range of overall premiums observed in the market
place. Neither the Regional Banking nor Insurance reporting
units passed Step 1.
The second step (Step 2) of impairment testing is necessary
only if the reporting unit does not pass Step 1. Step 2 compares
the implied fair value of the reporting unit goodwill with the
carrying amount of the goodwill for the reporting unit. The
implied fair value of goodwill is determined in the same manner
as goodwill that is recognized in a business combination.
Significant judgment and estimates are involved in estimating
the fair value of the assets and liabilities of the reporting
unit.
To determine the implied fair value of goodwill, the fair value
of Regional Banking and Insurance (as determined in Step
1) was allocated to all assets and liabilities of the
reporting units including any recognized or unrecognized
intangible assets. The allocation was done as if the reporting
unit was acquired in a business combination, and the fair value
of the reporting unit was the price paid to acquire the
reporting unit. This allocation process is only performed for
purposes of testing goodwill for impairment. The carrying values
of recognized assets or liabilities (other than goodwill, as
appropriate) were not adjusted nor were any new intangible
assets recorded. Key valuations were the assessment of core
deposit intangibles, the mark-to-fair-value of outstanding debt
and deposits, and mark-to-fair-value on the loan portfolio. Core
deposits were valued using a 15% discount rate. The marks on our
outstanding debt and deposits were based upon observable trades
or modeled prices using current yield curves and market spreads.
The valuation of the loan portfolio indicated discounts in the
ranges of 9%-24%, depending upon the loan type. The estimated
fair value of these loan portfolios was based on an exit price,
and the assumptions used were intended to approximate those that
a market participant would have used in valuing the loans in an
orderly transaction, including a market liquidity discount. The
significant market risk premium that is a consequence of the
current distressed market conditions was a significant
contributor to the valuation discounts associated with these
loans. We believed these discounts were consistent with
transactions currently occurring in the marketplace.
Upon completion of Step 2, we determined that the Regional
Banking and Insurance reporting units’ goodwill carrying
values exceeded their implied fair values of goodwill by
$2,573.8 million and $28.9 million, respectively. As a
result, we recorded a noncash pretax impairment charge of
$2,602.7 million in the 2009 first quarter. The impairment
charge was included in noninterest expense and did not affect
our regulatory and tangible capital ratios.
Other
Interim and Annual Impairment Testing
While we recorded an impairment charge of $4.2 million in
the 2009 second quarter related to the sale of a small
payments-related business completed in July 2009, we concluded
that no other goodwill impairment was required during the
remainder of 2009.
Subsequent to the 2009 first quarter impairment testing, we
reorganized our Regional Banking segment to reflect how our
assets and operations are now managed. The Regional Banking
business segment, which through March 31, 2009, had been
managed geographically, is now managed by a product segment
approach.
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Essentially, Regional Banking has been divided into the new
segments of Retail and Business Banking, Commercial Banking, and
Commercial Real Estate.
Each of these three new segments is considered a separate
reporting unit. The remaining Regional Banking goodwill amount
of $314.5 million was reallocated on a relative fair value
basis at the end of the 2009 first quarter to Retail and
Business Banking, Commercial Banking, and Commercial Real Estate
resulting in goodwill balances to those reporting units of
$309.5 million, $5.0 million and $0 respectively.
The Step 1 results of the annual impairment test indicated that
the PFG and Insurance units passed by a substantial margin. The
Retail and Business Banking unit also passed, however, only by a
minimal amount. Through analysis, we were confident that had the
Retail and Business Banking unit failed Step 1 at
October 1, 2009, no additional goodwill impairment would
have been recorded. The assumptions and methodologies utilized
in the annual assessment were consistent with those used in the
first quarter assessment as discussed above. Overall, fair
values for the reporting units improved significantly due to
improvements in market comparables compared with the 2009 first
quarter.
Step 2 was required for only the Commercial Banking reporting
unit as it was determined in Step 1 that its carrying value
exceeded its fair value. Upon completion of Step 2, we
determined that the Commercial Banking goodwill carrying value
exceeded its implied fair value of goodwill; therefore, no
goodwill impairment was recorded for this unit as of
October 1. The most significant Step 2 adjustment was the
20% mark-to-fair-value discount on the loan portfolio.
Due to the current economic environment and other uncertainties,
it is possible that our estimates and assumptions may adversely
change in the future. If our market capitalization decreases or
the liquidity discount on our loan portfolio improves
significantly without a concurrent increase in market
capitalization, we may be required to record additional goodwill
impairment losses in future periods, whether in connection with
our next annual impairment testing in the 2010 third quarter or
prior to that, if any changes constitute a triggering event. It
is not possible at this time to determine if any such future
impairment loss would result, however, any such future
impairment loss would be limited as the remaining goodwill
balance was only $0.4 billion at December 31, 2009.
FRANKLIN
LOANS RESTRUCTURING TRANSACTION
(This section should be read in conjunction with Note 5
of the Notes to the Consolidated Financial Statements).
Franklin is a specialty consumer finance company primarily
engaged in servicing performing, reperforming, and nonperforming
residential mortgage loans. Prior to March 31, 2009,
Franklin owned a portfolio of loans secured by first- and
second-liens on 1-4 family residential properties. These loans
generally fell outside the underwriting standards of the Federal
National Mortgage Association (“FNMA” or “Fannie
Mae”) and the Federal Home Loan Mortgage Corporation
(“FHLMC” or “Freddie Mac”), and involve
elevated credit risk as a result of the nature or absence of
income documentation, limited credit histories, higher levels of
consumer debt,
and/or
past
credit difficulties (“nonprime loans”). At
December 31, 2008, our total loans outstanding to Franklin
were $650.2 million, all of which were placed on nonaccrual
status. Additionally, the specific allowance for loan and lease
losses for the Franklin portfolio was $130.0 million,
resulting in our net exposure to Franklin at December 31,
2008, of $520.2 million.
On March 31, 2009, we entered into a transaction with
Franklin whereby a Huntington wholly-owned REIT subsidiary
(REIT) indirectly acquired an 83% ownership right in a trust
which holds all the underlying consumer loans and other real
estate owned (OREO) properties that were formerly collateral for
the Franklin commercial loans. The equity interests provided to
Franklin by the REIT were pledged by Franklin as collateral for
the Franklin commercial loans.
As a result of the restructuring, on a consolidated basis, the
$650.2 million nonaccrual commercial loan to Franklin at
December 31, 2008, is no longer reported. Instead, we now
report the loans secured by first- and second- mortgages on
residential properties and OREO properties both of which had
previously been assets of Franklin or its subsidiaries and were
pledged to secure our loan to Franklin. At the time of the
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restructuring, these loans had a fair value of
$493.6 million and the OREO properties had a fair value of
$79.6 million. As a result, NALs declined by a net amount
of $284.1 million as there were $650.2 million
commercial NALs outstanding related to Franklin, and
$366.1 million mortgage-related NALs outstanding,
representing first- and second- lien mortgages that were
nonaccruing at March 31, 2009. Also, our specific allowance
for loan and lease losses for the Franklin portfolio of
$130.0 million was eliminated; however, no initial increase
to the allowance for loan and lease losses (ALLL) relating to
the acquired mortgages was recorded as these assets were
recorded at fair value.
In accordance with ASC 805, “Business Combinations”,
we recorded a net deferred tax asset of $159.9 million
related to the difference between the tax basis and the book
basis in the acquired assets. Because the acquisition price,
represented by the equity interests in our wholly-owned
subsidiary, was equal to the fair value of the acquired 83%
ownership right, no goodwill was created from the transaction.
The recording of the net deferred tax asset was a bargain
purchase under ASC 805, and was recorded as a tax benefit in the
2009 first quarter.
PENSION
Pension plan assets consist of mutual funds and Huntington
common stock. Investments are accounted for at cost on the trade
date and are reported at fair value. Mutual funds are valued at
quoted net asset value (NAV). Huntington common stock is traded
on a national securities exchange and is valued at the last
reported sales price.
The discount rate and expected return on plan assets used to
determine the benefit obligation and pension expense for
December 31, 2009, are both assumptions. Any deviation from
these assumptions could cause actual results to change.
OTHER
REAL ESTATE OWNED (OREO)
OREO property obtained in satisfaction of a loan is recorded at
its estimated fair value less anticipated selling costs based
upon the property’s appraised value at the date of
transfer, with any difference between the fair value of the
property and the carrying value of the loan charged to the ALLL.
Subsequent declines in value are reported as adjustments to the
carrying amount, and are charged to noninterest expense. Gains
or losses not previously recognized resulting from the sale of
OREO are recognized in noninterest expense on the date of sale.
At December 31, 2009, OREO totaled $140.1 million,
representing a 14% increase compared with $122.5 million at
December 31, 2008.
Income
Taxes and Deferred Tax Assets
INCOME
TAXES
The calculation of our provision for federal income taxes is
complex and requires the use of estimates and judgments. We have
two accruals for income taxes: Our income tax receivable
represents the estimated amount currently due from the federal
government, net of any reserve for potential audit issues, and
is reported as a component of “accrued income and other
assets” in our consolidated balance sheet; our deferred
federal income tax asset or liability represents the estimated
impact of temporary differences between how we recognize our
assets and liabilities under GAAP, and how such assets and
liabilities are recognized under the federal tax code.
In the ordinary course of business, we operate in various taxing
jurisdictions and are subject to income and nonincome taxes. The
effective tax rate is based in part on our interpretation of the
relevant current tax laws. We believe the aggregate liabilities
related to taxes are appropriately reflected in the consolidated
financial statements. We review the appropriate tax treatment of
all transactions taking into consideration statutory, judicial,
and regulatory guidance in the context of our tax positions. In
addition, we rely on various tax opinions, recent tax audits,
and historical experience.
From time to time, we engage in business transactions that may
have an effect on our tax liabilities. Where appropriate, we
have obtained opinions of outside experts and have assessed the
relative merits and risks of the appropriate tax treatment of
business transactions taking into account statutory, judicial,
and regulatory guidance in the context of the tax position.
However, changes to our estimates of accrued taxes can
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Table of Contents
occur due to changes in tax rates, implementation of new
business strategies, resolution of issues with taxing
authorities regarding previously taken tax positions and newly
enacted statutory, judicial, and regulatory guidance. Such
changes could affect the amount of our accrued taxes and could
be material to our financial position
and/or
results of operations.
(See Note 19 of the Notes to the
Consolidated Financial Statements.)
DEFERRED
TAX ASSETS
At December 31, 2009, we had a net federal deferred tax
asset of $480.5 million, and a net state deferred tax asset
of $0.8 million. Based on our ability to offset the net
deferred tax asset against taxable income in prior carryback
years and the level of our forecast of future taxable income,
there was no impairment of the deferred tax asset at
December 31, 2009. All available evidence, both positive
and negative, was considered to determine whether, based on the
weight of that evidence, impairment should be recognized.
However, our forecast process includes judgmental and
quantitative elements that may be subject to significant change.
If our forecast of taxable income within the
carryback/carryforward periods available under applicable law is
not sufficient to cover the amount of net deferred tax assets,
such assets may be impaired.
Recent
Accounting Pronouncements and Developments
Note 3 to the Consolidated Financial Statements discusses
new accounting pronouncements adopted during 2009 and the
expected impact of accounting pronouncements recently issued but
not yet required to be adopted. To the extent 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
Consolidated Financial Statements.
Acquisitions
Sky
Financial Group, Inc. (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 was included in our consolidated results for the
last six months of 2007. Additionally, in September 2007, Sky
Bank and Sky Trust, National Association (Sky Trust), merged
into the Bank and systems integration was completed. As a
result, performance comparisons between 2008 and 2007 are
affected.
As a result of this acquisition, we have a significant loan
relationship with Franklin. This relationship is discussed in
greater detail in the “Commercial Credit” and
“Critical Accounting Policies and Use of Significant
Estimates” sections of this report.
Unizan
Financial Corp. (Unizan)
The merger with Unizan was completed on March 1, 2006. At
the time of acquisition, Unizan had assets of $2.5 billion,
including $1.6 billion of loans and core deposits of
$1.5 billion. The impact of this acquisition was included
in our consolidated results for the last ten months of 2006.
Impact
Methodology
For both the Sky Financial and Unizan acquisitions, comparisons
of the reported results are impacted as follows:
| • | Increased the absolute level of reported average balance sheet, revenue, expense, and the absolute level of certain credit quality results. | |
| • | Increased the absolute level of reported noninterest expense items because of costs incurred as part of merger integration activities, most notably employee retention bonuses, outside programming services related to systems conversions, occupancy expenses, and marketing expenses related to customer retention initiatives. |
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Table of Contents
Given the significant impact of the mergers on reported results,
we believe that an understanding of the impacts of each merger
is necessary to understand better underlying performance trends.
When comparing post-merger period results to premerger periods,
we use the following terms when discussing financial performance:
| • | “Merger-related” refers to amounts and percentage changes representing the impact attributable to the merger. | |
| • | “Merger costs” represent noninterest expenses primarily associated with merger integration activities, including severance expense for key executive personnel. | |
| • | “Nonmerger-related” refers to performance not attributable to the merger, and includes “merger efficiencies”, which represent noninterest expense reductions realized as a result of the merger. |
After completion of our mergers, we combine the acquired
companies’ operations with ours, and do not monitor the
subsequent individual results of the acquired companies. As a
result, the following methodologies were implemented to estimate
the approximate effect of the mergers used to determine
“merger-related” impacts.
BALANCE
SHEET ITEMS
Sky
Financial
For average loans and leases, as well as total average deposits,
Sky Financial’s 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 2007 average balances, it was assumed that the
June 30, 2007, balances, as adjusted, remained constant
over time.
Unizan
For average loans and leases, as well as core average deposits,
balances as of the acquisition date were pro-rated to the
post-merger period being used in the comparison. For example, to
estimate the impact on 2006 first quarter average balances,
one-third of the closing date balance was used as those balances
were in reported results for only one month of the quarter.
Quarterly estimated impacts for the 2006 second, third, and
fourth quarter results were developed using this same pro-rata
methodology. Full-year 2006 estimated results represent the
annual average of each quarter’s estimate. This methodology
assumed acquired balances remained constant over time.
INCOME
STATEMENT ITEMS
Sky
Financial
Sky Financial’s 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 multiplied by two to estimate an annual impact. This
methodology does not adjust for any market-related changes, or
seasonal factors in Sky Financial’s 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.
Unizan
Unizan’s actual full-year 2005 results were used for
pro-rating the impact on post-merger periods. For example, to
estimate the 2006 first quarter impact of the merger on
personnel costs, one-twelfth of Unizan’s full-year
2005 personnel costs was used. Full quarter and
year-to-date estimated impacts for subsequent periods were
developed using this same pro-rata methodology. This results in
an approximate impact since the methodology does not adjust for
any unusual items or seasonal factors in Unizan’s 2005
reported results, or synergies realized since the merger date.
The one exception to this methodology relates to the
amortization of intangibles expense where the amount is known
and is therefore used.
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.
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Table of Contents
Table
3 — Selected Annual Income Statements (1)
| Year Ended December 31, | ||||||||||||||||||||||||||||
| Change from 2008 | Change from 2007 | |||||||||||||||||||||||||||
| 2009 | Amount | Percent | 2008 | Amount | Percent | 2007 | ||||||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||||||
|
Interest income
|
$ | 2,238,142 | $ | (560,180 | ) | (20 | )% | $ | 2,798,322 | $ | 55,359 | 2 | % | $ | 2,742,963 | |||||||||||||
|
Interest expense
|
813,855 | (452,776 | ) | (36 | ) | 1,266,631 | (174,820 | ) | (12 | ) | 1,441,451 | |||||||||||||||||
|
Net interest income
|
1,424,287 | (107,404 | ) | (7 | ) | 1,531,691 | 230,179 | 18 | 1,301,512 | |||||||||||||||||||
|
Provision for credit losses
|
2,074,671 | 1,017,208 | 96 | 1,057,463 | 413,835 | 64 | 643,628 | |||||||||||||||||||||
|
Net interest income after provision for credit losses
|
(650,384 | ) | (1,124,612 | ) | N.M. | 474,228 | (183,656 | ) | (28 | ) | 657,884 | |||||||||||||||||
|
Service charges on deposit accounts
|
302,799 | (5,254 | ) | (2 | ) | 308,053 | 53,860 | 21 | 254,193 | |||||||||||||||||||
|
Brokerage and insurance income
|
138,169 | 373 | — | 137,796 | 45,421 | 49 | 92,375 | |||||||||||||||||||||
|
Mortgage banking income
|
112,298 | 103,304 | N.M. | 8,994 | (20,810 | ) | (70 | ) | 29,804 | |||||||||||||||||||
|
Trust services
|
103,639 | (22,341 | ) | (18 | ) | 125,980 | 4,562 | 4 | 121,418 | |||||||||||||||||||
|
Electronic banking
|
100,151 | 9,884 | 11 | 90,267 | 19,200 | 27 | 71,067 | |||||||||||||||||||||
|
Bank owned life insurance income
|
54,872 | 96 | — | 54,776 | 4,921 | 10 | 49,855 | |||||||||||||||||||||
|
Automobile operating lease income
|
51,810 | 11,959 | 30 | 39,851 | 32,041 | N.M. | 7,810 | |||||||||||||||||||||
|
Securities (losses) gains
|
(10,249 | ) | 187,121 | (95 | ) | (197,370 | ) | (167,632 | ) | N.M. | (29,738 | ) | ||||||||||||||||
|
Other
|
152,155 | 13,364 | 10 | 138,791 | 58,972 | 74 | 79,819 | |||||||||||||||||||||
|
Total noninterest income
|
1,005,644 | 298,506 | 42 | 707,138 | 30,535 | 5 | 676,603 | |||||||||||||||||||||
|
Personnel costs
|
700,482 | (83,064 | ) | (11 | ) | 783,546 | 96,718 | 14 | 686,828 | |||||||||||||||||||
|
Outside data processing and other services
|
148,095 | 17,869 | 14 | 130,226 | 1,000 | 1 | 129,226 | |||||||||||||||||||||
|
Deposit and other insurance expense
|
113,830 | 91,393 | N.M. | 22,437 | 8,652 | 63 | 13,785 | |||||||||||||||||||||
|
Net occupancy
|
105,273 | (3,155 | ) | (3 | ) | 108,428 | 9,055 | 9 | 99,373 | |||||||||||||||||||
|
OREO and foreclosure expense
|
93,899 | 60,444 | N.M. | 33,455 | 18,270 | N.M. | 15,185 | |||||||||||||||||||||
|
Equipment
|
83,117 | (10,848 | ) | (12 | ) | 93,965 | 12,483 | 15 | 81,482 | |||||||||||||||||||
|
Professional services
|
76,366 | 26,753 | 54 | 49,613 | 12,223 | 33 | 37,390 | |||||||||||||||||||||
|
Amortization of intangibles
|
68,307 | (8,587 | ) | (11 | ) | 76,894 | 31,743 | 70 | 45,151 | |||||||||||||||||||
|
Automobile operating lease expense
|
43,360 | 12,078 | 39 | 31,282 | 26,121 | N.M. | 5,161 | |||||||||||||||||||||
|
Marketing
|
33,049 | 385 | 1 | 32,664 | (13,379 | ) | (29 | ) | 46,043 | |||||||||||||||||||
|
Telecommunications
|
23,979 | (1,029 | ) | (4 | ) | 25,008 | 506 | 2 | 24,502 | |||||||||||||||||||
|
Printing and supplies
|
15,480 | (3,390 | ) | (18 | ) | 18,870 | 619 | 3 | 18,251 | |||||||||||||||||||
|
Goodwill impairment
|
2,606,944 | 2,606,944 | N.M. | — | — | — | — | |||||||||||||||||||||
|
Gain on early extinguishment of debt
|
(147,442 | ) | (123,900 | ) | N.M. | (23,542 | ) | (15,484 | ) | N.M. | (8,058 | ) | ||||||||||||||||
|
Other
|
68,704 | (25,824 | ) | (27 | ) | 94,528 | (22,997 | ) | (20 | ) | 117,525 | |||||||||||||||||
|
Total noninterest expense
|
4,033,443 | 2,556,069 | N.M. | 1,477,374 | 165,530 | 13 | 1,311,844 | |||||||||||||||||||||
|
(Loss) Income before income taxes
|
(3,678,183 | ) | (3,382,175 | ) | N.M. | (296,008 | ) | (318,651 | ) | N.M. | 22,643 | |||||||||||||||||
|
(Benefit) provision for income taxes
|
(584,004 | ) | (401,802 | ) | N.M. | (182,202 | ) | (129,676 | ) | N.M. | (52,526 | ) | ||||||||||||||||
|
Net (Loss) Income
|
(3,094,179 | ) | (2,980,373 | ) | N.M. | (113,806 | ) | (188,975 | ) | N.M. | 75,169 | |||||||||||||||||
|
Dividends on preferred shares
|
174,756 | 128,356 | N.M. | 46,400 | 46,400 | N.M. | — | |||||||||||||||||||||
|
Net (loss) income applicable to common shares
|
$ | (3,268,935 | ) | $ | (3,108,729 | ) | N.M. | % | $ | (160,206 | ) | $ | (235,375 | ) | N.M. | % | $ | 75,169 | ||||||||||
|
Average common shares — basic
|
532,802 | 166,647 | 46 | % | 366,155 | 65,247 | 22 | % | 300,908 | |||||||||||||||||||
|
Average common shares — diluted(2)
|
532,802 | 166,647 | 46 | 366,155 | 62,700 | 21 | 303,455 | |||||||||||||||||||||
|
Per common share:
|
||||||||||||||||||||||||||||
|
Net income — basic
|
$ | (6.14 | ) | $ | (5.70 | ) | N.M. | % | $ | (0.44 | ) | $ | (0.69 | ) | N.M. | % | $ | 0.25 | ||||||||||
|
Net income — diluted
|
(6.14 | ) | (5.70 | ) | N.M. | (0.44 | ) | (0.69 | ) | N.M. | 0.25 | |||||||||||||||||
|
Cash dividends declared
|
0.0400 | (0.62 | ) | (94 | ) | 0.6625 | (0.40 | ) | (38 | ) | 1.0600 | |||||||||||||||||
|
Revenue - fully-taxable equivalent (FTE)
|
||||||||||||||||||||||||||||
|
Net interest income
|
$ | 1,424,287 | $ | (107,404 | ) | (7 | )% | $ | 1,531,691 | $ | 230,179 | 18 | % | $ | 1,301,512 | |||||||||||||
|
FTE adjustment
|
11,472 | (8,746 | ) | (43 | ) | 20,218 | 969 | 5 | 19,249 | |||||||||||||||||||
|
Net interest income(3)
|
1,435,759 | (116,150 | ) | (7 | ) | 1,551,909 | 231,148 | 18 | 1,320,761 | |||||||||||||||||||
|
Noninterest income
|
1,005,644 | 298,506 | 42 | 707,138 | 30,535 | 5 | 676,603 | |||||||||||||||||||||
|
Total revenue(3)
|
$ | 2,441,403 | $ | 182,356 | 8 | % | $ | 2,259,047 | $ | 261,683 | 13 | % | $ | 1,997,364 | ||||||||||||||
N.M., not a meaningful value.
35
Table of Contents
| (1) | Comparisons for presented periods are impacted by a number of factors. Refer to “Significant Factors” for additional discussion regarding these key factors. | |
| (2) | For the years ended December 31, 2009, and December 31, 2008, the impact of the convertible preferred stock issued in April of 2008 was excluded from the diluted share calculation. It was excluded because the result would have been higher than basic earnings per common share (anti-dilutive) for the year. | |
| (3) | On a fully-taxable equivalent (FTE) basis assuming a 35% tax rate. |
DISCUSSION
OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a
consolidated perspective. It also includes a “Significant
Items” section that summarizes key issues important for a
complete understanding of performance trends. Key consolidated
balance sheet and income statement trends are discussed. All
earnings per share data are reported on a diluted basis. For
additional insight on financial performance, please read this
section in conjunction with the “Business Segment
Discussion”.
Summary
2009
versus 2008
We reported a net loss of $3,094.2 million in 2009,
representing a loss per common share of $6.14. These results
compared unfavorably with a net loss of $113.8 million, or
$0.44 per common share in 2008. Comparisons with the prior year
were significantly impacted by $2,606.9 million of goodwill
impairment charges in 2009, the issuance of 346.8 million
new shares of common stock, an increase of $128.4 million
in dividends on preferred shares, as well as other factors.
These factors, including the goodwill impairment, are discussed
later in the “Significant Items” section.
2009 was one of the most challenging years that we, and the
entire banking industry, have faced, as we continued to be
negatively impacted by the sustained economic weakness in our
Midwest markets. The negative impacts were evident in several
credit quality measures including increased nonaccrual loans
(NALs), net charge-offs (NCOs), and provision for credit losses.
Although there have been recent signs that the economic
environment is stabilizing, it remains uncertain.
NCOs and provision levels increased substantially compared with
2008. The ACL as a percentage of total loans and leases
increased to 4.16% at December 31, 2009, compared with
2.30% at December 31, 2008. At the beginning of 2009, a key
objective was to better understand the risks in our credit
portfolio in light of an economic outlook that showed increasing
weakness. The implementation of enhanced portfolio management
processes followed by a series of detailed portfolio reviews
throughout the year as the economic environment continued to
weaken, permitted us to identify and proactively address the
risks in our loan portfolio. In late 2009, because we believed
there would still not be any significant economic recovery in
2010, we reviewed our loan loss reserve assumptions. As a result
of that review, we substantially strengthened our loan loss
reserves during the fourth quarter. Specifically, our fourth
quarter provision for credit losses was 43% of our total 2009
provision for credit losses of $2,074.7 million. Our
provision for credit losses exceeded net charge-offs
($1,476.6 million) by $598.1 million. Going forward,
we expect that the absolute level of the ACL, and the related
provision expense, will decline as existing reserves address the
continuing losses inherent in our portfolio.
NALs also significantly increased to $1,917.0 million,
compared with $1,502.1 million at the prior year-end,
reflecting increased NALs in our commercial real estate (CRE)
portfolios, particularly the single family home builder and
retail properties segments. Commercial and industrial (C&I)
NALs also increased significantly, particularly the segments
related to businesses that support residential development. In
many cases, loans were placed on nonaccrual status even though
the loan was less than 30 days past due for both principal
and interest payments, reflecting our proactive approach in
identifying and classifying emerging problem credits. While
NALs, as well as NCOs, are expected to remain higher than
historical levels during 2010, we expect that the absolute
levels will decline from 2009 levels. There was a 12% decline in
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Table of Contents
nonperforming assets (NPAs) in the 2009 fourth quarter compared
with the prior quarter, providing a basis of expectation for
lower levels of NPAs and NCOs in 2010 compared with 2009.
At the beginning of 2009, we viewed our highest-risk loan
portfolios to be Franklin, as well as the single family home
builder and retail properties segments of our CRE portfolio.
During 2009, we believe that we have substantially addressed the
credit issues within our Franklin portfolio and our single
family home builder portfolio segment, and we do not expect any
additional material credit impact to these portfolios. However,
the CRE portfolio remains stressed, particularly the retail
properties segment. We continue to work with the borrowers in
this segment to resolve the credit issues.
Another key objective for 2009 was to strengthen our capital
position in order to withstand potential future credit losses
should the economic environment continue to deteriorate. During
2009, we raised $1.7 billion of capital, including
$1.3 billion of common equity. This increase in capital
substantially strengthened all of our period-end capital ratios
compared with the year-ago period. Our tangible-to-common equity
(TCE) ratio increased to 5.92% from 4.04%, and our Tier 1
common equity ratio increased to 6.69% from 5.05%.
Our period-end liquidity position strengthened compared with the
end of 2008 as average core deposits grew $2.9 billion, or
9%, thus reducing our reliance on noncore funding. Additionally,
we anticipate continued growth in core deposits for 2010. Also,
period-end total cash and due from banks was $1.5 billion,
compared with $0.8 billion at the end of 2008, and our
period-end unpledged investment securities increased
$4.1 billion compared with the end of last year. We
redeployed a portion of the cash generated from our capital
raising actions and our core deposit growth into our investment
securities portfolio during the current year. Our preference
would be to use this cash to generate higher-margin loans;
however, given the continued economic uncertainty, many of our
customers, especially businesses, are waiting for further signs
of economic recovery before borrowing funds.
Fully-taxable net interest income in 2009 declined
$116.2 million, or 7%, compared with 2008. The decline
primarily reflected a 14 basis point decline in the net
interest margin, as well as a $1.7 billion, or 4%, decline
in average earning assets that reflected a $2.3 billion, or
6%, decline in total average loans. We anticipate that the net
interest margin will improve during 2010, and we anticipate that
loan growth will be flat, or increase slightly, in 2010.
Noninterest income in 2009 increased $298.5 million, or
42%, compared with 2008. This increase consisted of a
$187.1 million improvement in securities losses and a
$57.3 million improvement in MSR valuation adjustments net
of hedging. After adjusting for these items, overall noninterest
income performance was mixed for the year. Electronic banking
income increased $9.9 million, or 11%, including additional
third-party processing fees, however, service charges on deposit
accounts declined $5.3 million, or 2%, reflecting lower
consumer nonsufficient funds and overdraft fees. We expect that
fee income in 2010 will be flat, or decrease slightly, compared
with 2009. Although we expect growth in trust services income,
as well as brokerage and insurance revenue and capital market
fees, that growth could be offset by declines in service charges
on deposit accounts revenue related to lower nonsufficient funds
and overdraft fees.
Noninterest expense in 2009 increased $2,556.1 million
compared with 2008. This increase consisted of 2009 goodwill
impairment charges totaling $2,606.9 million, partially
offset by additional gains of $123.9 million related to the
early extinguishment of debt. After adjusting for these items,
noninterest expense increased $73.1 million. Primary
contributors to the increase were a $91.4 million increase
in deposit and other insurance expense, and a $60.4 million
increase in OREO and foreclosure expense, representing higher
levels of problem assets, as well as loss mitigation activities.
These increases were partially offset by an $83.1 million,
or 11%, decline in personnel costs, reflecting a decline in
salaries, and lower benefits and commission expense. Full-time
equivalent staff declined 6% from the comparable year-ago
period. For 2010, expenses will remain well-controlled, but are
expected to increase, reflecting investments in growth, and the
implementation of key strategic initiatives.
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Table of Contents
2008
versus 2007
We reported a net loss of $113.8 million in 2008,
representing a loss per common share of $0.44. These results
compared unfavorably with net income of $75.2 million, or
$0.25 per common share, in 2007. Comparisons with the prior year
were significantly impacted by a number of factors that are
discussed later in the “Significant Items” section.
During 2008, the primary focus within our industry continued to
be credit quality. The economy deteriorated substantially
throughout the year in our regions, and continued to put stress
on our borrowers.
The largest setback to 2008 performance was the credit quality
deterioration of the Franklin relationship that occurred in the
2008 fourth quarter resulting in a negative impact of
$454.3 million, or $0.81 per common share. The loan
restructuring associated with our relationship with Franklin,
completed during the 2007 fourth quarter, continued to perform
consistent with the terms of the restructuring agreement through
the 2008 third quarter. However, cash flows that we received
deteriorated significantly during the 2008 fourth quarter,
reflecting a more severe than expected deterioration in the
overall economy.
Non-Franklin-related NCOs and provision levels in 2008 increased
substantially compared with 2007. During 2008, the
non-Franklin-related ACL as a percentage of total loans and
leases increased to 2.01% compared with 1.36% at the prior
year-end. Non-Franklin-related NALs also significantly increased
to $851.9 million, compared with $319.8 million at the
prior year-end, reflecting increased NALs in our CRE loans,
particularly the single family home builder and retail
properties segments, and within our C&I portfolio related
to businesses that support residential development.
Our year-end regulatory capital levels were strong. Our tangible
equity ratio improved 264 basis points to 7.72% compared
with the prior year-end, reflecting the benefits of a
$0.6 billion preferred stock issuance in the 2008 second
quarter and a $1.4 billion preferred stock issuance in the
2008 fourth quarter as a result of our participation in the
Troubled Assets Relief Program (TARP) voluntary Capital Purchase
Plan. However, our tangible common equity ratio declined
104 basis points compared with the prior year-end, and we
believed that it was important that we begin rebuilding our
common equity. To that end, we reduced our quarterly common
stock dividend to $0.01 per common share, effective with the
dividend declared on January 22, 2009. Our period-end
liquidity position was sound, as we have conservatively managed
our liquidity position at both the parent company and bank
levels.
Fully-taxable net interest income in 2008 increased
$231.1 million, or 18%, compared with 2007. The prior year
reflected only six months of net interest income attributable to
the acquisition of Sky Financial compared with twelve months for
2008. The Sky Financial acquisition added $13.3 billion of
loans and $12.9 billion of deposits at July 1, 2007.
There was good nonmerger-related growth in total average
commercial loans, partially offset by a decline in total average
residential mortgages reflecting the continued slowdown in the
housing market, as well as loan sales. Fully-taxable net
interest income in 2008 was negatively impacted by an
11 basis point decline in the net interest margin compared
with 2007, primarily due to the interest accrual reversals
resulting from loans being placed on nonaccrual status, as well
as deposit pricing.
Noninterest income in 2008 increased $30.5 million, or 5%,
compared with 2007. Comparisons with the prior year were
affected by a $137.4 million increase resulting from the
Sky Financial acquisition, partially offset by the
$39.2 million net decline in MSR valuation and hedging
activity. Other factors contributing to the increase included
the positive impact of loan sales, and the gain resulting from
the proceeds of the
Visa
®
initial public offering (IPO) in 2008. Performance of the
remaining components of noninterest income was generally
favorable. Automobile operating lease income, brokerage and
insurance income, and electronic banking income increased,
however, trust services income declined reflecting the impact of
lower market values on asset management revenues.
Expenses were well controlled, with our efficiency ratio
improving to 57.0% in 2008 compared with 62.5% in 2007.
Noninterest expense in 2008 increased $165.5 million, or
13%, compared with 2007. Comparisons with the prior year were
affected by $208.1 million increase resulting from the Sky
Financial acquisition, including the impact of restructuring and
merger costs. Other factors contributing to the change in
38
Table of Contents
noninterest expense included positive impacts associated with
the
Visa
®
IPO, early extinguishment of debt, and litigation reserves.
Performance of the remaining components of noninterest expense
was mixed. OREO and foreclosure expense, as well as professional
services expense, increased as the economy continued to weaken.
Automobile operating lease expense and deposit and other
insurance expense also increased. These increases are partially
offset by a decline in personnel expense, as well as other
expense categories, due to merger/restructuring efficiencies.
Significant
Items
Definition
of Significant Items
From time to time, revenue, expenses, or taxes, are impacted by
items judged by us to be outside of ordinary banking activities
and/or
by
items that, while they may be associated with ordinary banking
activities, are so unusually large that their outsized impact is
believed by us at that time to be infrequent or short-term in
nature. We refer to such items as “Significant Items”.
Most often, these Significant Items result from factors
originating outside the company; e.g., regulatory
actions/assessments, windfall gains, changes in accounting
principles, one-time tax assessments/refunds, etc. In other
cases they may result from our decisions associated with
significant corporate actions out of the ordinary course of
business; e.g., merger/restructuring charges, recapitalization
actions, goodwill impairment, etc.
Even though certain revenue and expense items are naturally
subject to more volatility than others due to changes in market
and economic environment conditions, as a general rule
volatility alone does not define a Significant Item. For
example, changes in the provision for credit losses,
gains/losses from investment activities, asset valuation
writedowns, etc., reflect ordinary banking activities and are,
therefore, typically excluded from consideration as a
Significant Item.
We believe the disclosure of “Significant Items” in
current and prior period results aids in better understanding
our performance and trends to ascertain which of such items, if
any, to include or exclude from an analysis of our performance;
i.e., within the context of determining how that performance
differed from expectations, as well as how, if at all, to adjust
estimates of future performance accordingly. To this end, we
adopted a practice of listing “Significant Items” in
our external disclosure documents (e.g., earnings press
releases, investor presentations,
Forms 10-Q
and
10-K).
“Significant Items” for any particular period are not
intended to be a complete list of items that may materially
impact current or future period performance.
Significant
Items Influencing Financial Performance
Comparisons
Earnings comparisons among the three years ended
December 31, 2009, 2008, and 2007 were impacted by a number
of significant items summarized below.
1.
Goodwill Impairment.
The impacts of
goodwill impairment on our reported results were as follows:
| • | During the 2009 first quarter, bank stock prices continued to decline significantly. Our stock price declined 78% from $7.66 per share at December 31, 2008 to $1.66 per share at March 31, 2009. Given this significant decline, we conducted an interim test for goodwill impairment. As a result, we recorded a noncash $2,602.7 million ($4.88 per common share) pretax charge. (See “Goodwill” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section for additional information). | |
| • | During the 2009 second quarter, a pretax goodwill impairment of $4.2 million ($0.01 per common share) was recorded relating to the sale of a small payments-related business in July 2009. |
2.
Sky Financial Acquisition.
The merger
with Sky Financial was completed on July 1, 2007. The
impacts of Sky Financial on the 2008 reported results compared
with the 2007 reported results are as follows:
| • | Increased the absolute level of reported average balance sheet, revenue, expense, and credit quality results (e.g., NCOs). |
39
Table of Contents
| • | Increased reported noninterest 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 costs were $21.8 million ($0.04 per common share) in 2008 and $85.1 million ($0.18 per common share) in 2007. |
3.
Franklin Relationship.
Our
relationship with Franklin was acquired in the Sky Financial
acquisition. On March 31, 2009, we restructured our
relationship with Franklin
(see “Critical Accounting
Policies and Use of Significant Estimates” section).
Performance for 2009 included a nonrecurring net tax benefit
of $159.9 million ($0.30 per common share) related to this
restructuring. Also as a result of the restructuring, although
earnings were not significantly impacted, commercial NCOs
increased $128.3 million as the previously established
$130.0 million Franklin-specific ALLL was utilized to
write-down the acquired mortgages and OREO collateral to fair
value.
4.
Early Extinguishment of Debt.
The
positive impacts relating to the early extinguishment of debt on
our reported results were: $147.4 million ($0.18 per common
share) in 2009, $23.5 million ($0.04 per common share) in
2008, and $8.1 million ($0.02 per common share) in 2008.
These amounts were recorded to noninterest expense.
5.
Preferred Stock Conversion.
During the
2009 first and second quarters, we converted 114,109 and
92,384 shares, respectively, of Series A 8.50%
Non-cumulative Perpetual Preferred (Series A Preferred
Stock) stock into common stock. As part of these transactions,
there was a deemed dividend that did not impact net income, but
resulted in a negative impact of $0.11 per common share for
2009.
(See “Capital” discussion located within the
“Risk Management and Capital” section for additional
information.)
6.
Visa
®
.
Prior
to the
Visa
®
IPO occurring in March 2008,
Visa
®
was owned by its member banks, which included the Bank. In 2009,
we sold our investment in
Visa
®
stock. The impacts related to our
Visa
®
stock ownership, and subsequent sale, for 2009, 2008, and 2007
are presented in the following table:
Table
4 —
Visa
®
impacts
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Earnings | EPS | Earnings | EPS | Earnings | EPS | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
Gain related to sale of
Visa
®
stock(1)
|
$ | 31.4 | $ | 0.04 | $ | 25.1 | $ | 0.04 | $ | — | $ | — | ||||||||||||
|
Visa
®
indemnification liability(2)
|
— | — | 17.0 | 0.03 | (24.9 | ) | (0.05 | ) | ||||||||||||||||
| (1) | Pretax. Recorded to noninterest income, and represented a gain on the sale of ownership interest in Visa ® . As part of the sale of our Visa ® stock in 2009, we released $8.2 million, as of June 30, 2009, of the remaining indemnification liability. Concurrently, we established a swap liability associated with the conversion protection provided to the purchasers of the Visa ® shares. | |
| (2) | Pretax. Recorded to noninterest expense, and represented our pro-rata portion of an indemnification liability provided to Visa ® by its member banks for various litigation filed against Visa ® . Subsequently, in 2008, an escrow account was established by Visa ® using a portion of the proceeds received from the IPO. This action resulted in a reversal of a portion of the liability as the escrow account reduced our potential exposure related to the indemnification. |
7.
Other Significant Items Influencing Earnings
Performance Comparisons.
In addition to the items
discussed separately in this section, a number of other items
impacted financial results. These included:
2009
| • | $23.6 million ($0.03 per common share) negative impact due to a special Federal Deposit Insurance Corporation (FDIC) insurance premium assessment. This amount was recorded to noninterest expense. |
40
Table of Contents
| • | $12.8 million ($0.02 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance. Of this $12.8 million, $2.7 million related to the value of Visa ® shares held. |
2008
| • | $20.4 million ($0.06 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance. Of this $20.4 million, $7.9 million related to the value of Visa ® shares held. |
The following table reflects the earnings impact of the
above-mentioned significant items for periods affected by this
Results of Operations discussion:
Table
5 — Significant Items Influencing Earnings
Performance Comparison (1)
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| After-Tax | EPS | After-Tax | EPS | After-Tax | EPS | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Net income — GAAP
|
$ | (3,094,179 | ) | $ | (113,806 | ) | $ | 75,169 | ||||||||||||||||
|
Earnings per share, after-tax
|
$ | (6.14 | ) | $ | (0.44 | ) | $ | 0.25 | ||||||||||||||||
|
Change from prior year — $
|
(5.70 | ) | (0.69 | ) | (1.67 | ) | ||||||||||||||||||
|
Change from prior year — %
|
N.M. | % | N.M. | % | (87.0 | )% | ||||||||||||||||||
|
Significant Items — Favorable (Unfavorable)
Impact:
|
Earnings(2) | EPS(3) | Earnings(2) | EPS(3) | Earnings(2) | EPS(3) | ||||||||||||||||||
|
Franklin relationship restructuring(4)
|
$ | 159,895 | $ | 0.30 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
Net gain on early extinguishment of debt
|
147,442 | 0.18 | 23,542 | 0.04 | 8,058 | 0.02 | ||||||||||||||||||
|
Gain related to sale of
Visa
®
stock
|
31,362 | 0.04 | 25,087 | 0.04 | — | — | ||||||||||||||||||
|
Deferred tax valuation allowance benefit(4)
|
12,847 | 0.02 | 20,357 | 0.06 | — | — | ||||||||||||||||||
|
Goodwill impairment
|
(2,606,944 | ) | (4.89 | ) | — | — | — | — | ||||||||||||||||
|
FDIC special assessment
|
(23,555 | ) | (0.03 | ) | — | — | — | — | ||||||||||||||||
|
Preferred stock conversion deemed dividend
|
— | (0.11 | ) | — | — | — | — | |||||||||||||||||
|
Visa
®
indemnification liability
|
— | — | 16,995 | 0.03 | (24,870 | ) | (0.05 | ) | ||||||||||||||||
|
Merger/Restructuring costs
|
— | — | (21,830 | ) | (0.04 | ) | (85,084 | ) | (0.18 | ) | ||||||||||||||
See Significant Factors Influencing Financial Performance
| (1) | discussion. | |
| (2) | Pretax unless otherwise noted. | |
| (3) | Based upon the annual average outstanding diluted common shares. | |
| (4) | After-tax. |
Net
Interest Income / Average Balance Sheet
(This section should be read in conjunction with Significant Items 2 and 3.)
(This section should be read in conjunction with Significant Items 2 and 3.)
Our primary source of revenue is net interest income, which is
the difference between interest income from earning assets
(primarily loans, direct financing leases, and securities), and
interest expense of funding sources (primarily interest-bearing
deposits and borrowings). Earning asset balances and related
funding, as well as changes in the levels of interest rates,
impact net interest income. The difference between the average
yield on earning assets and the average rate paid for
interest-bearing liabilities is the net interest spread.
Noninterest-bearing sources of funds, such as demand deposits
and shareholders’ equity, also support earning assets. The
impact of the noninterest-bearing sources of funds, often
referred to as “free” funds, is captured in the net
interest margin, which is calculated as net interest income
divided by average earning assets. Given the
41
Table of Contents
“free” nature of noninterest-bearing sources of funds,
the net interest margin is generally higher than the net
interest spread. Both the net interest spread and net interest
margin are presented on a fully-taxable equivalent basis, which
means that tax-free interest income has been adjusted to a
pretax equivalent income, assuming a 35% tax rate.
The following table shows changes in fully-taxable equivalent
interest income, interest expense, and net interest income due
to volume and rate variances for major categories of earning
assets and interest-bearing liabilities.
Table
6 — Change in Net Interest Income Due to Changes in
Average Volume and Interest Rates (1)
| 2009 | 2008 | |||||||||||||||||||||||
|
Increase (Decrease) from
|
Increase (Decrease) from
|
|||||||||||||||||||||||
| Previous Year Due to | Previous Year Due to | |||||||||||||||||||||||
|
Yield/
|
Yield/
|
|||||||||||||||||||||||
|
Fully-Taxable Equivalent Basis(2)
|
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
Loans and direct financing leases
|
$ | (130.2 | ) | $ | (371.3 | ) | $ | (501.5 | ) | $ | 504.7 | $ | (449.6 | ) | $ | 55.1 | ||||||||
|
Investment securities
|
84.4 | (86.3 | ) | (1.9 | ) | 17.0 | (16.2 | ) | 0.8 | |||||||||||||||
|
Other earning assets
|
(42.1 | ) | (23.4 | ) | (65.5 | ) | 19.1 | (18.7 | ) | 0.4 | ||||||||||||||
|
Total interest income from earning assets
|
(87.9 | ) | (481.0 | ) | (568.9 | ) | 540.8 | (484.5 | ) | 56.3 | ||||||||||||||
|
Deposits
|
16.5 | (274.1 | ) | (257.6 | ) | 206.8 | (301.5 | ) | (94.7 | ) | ||||||||||||||
|
Short-term borrowings
|
(16.6 | ) | (23.3 | ) | (39.9 | ) | 5.1 | (55.6 | ) | (50.5 | ) | |||||||||||||
|
Federal Home Loan Bank advances
|
(45.3 | ) | (49.6 | ) | (94.9 | ) | 49.3 | (44.1 | ) | 5.2 | ||||||||||||||
|
Subordinated notes and other long-term debt, including capital
securities
|
9.8 | (70.1 | ) | (60.3 | ) | 22.3 | (57.1 | ) | (34.8 | ) | ||||||||||||||
|
Total interest expense of interest-bearing liabilities
|
(35.6 | ) | (417.1 | ) | (452.7 | ) | 283.5 | (458.3 | ) | (174.8 | ) | |||||||||||||
|
Net interest income
|
$ | (52.3 | ) | $ | (63.9 | ) | $ | (116.2 | ) | $ | 257.3 | $ | (26.2 | ) | $ | 231.1 | ||||||||
| (1) | The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each. | |
| (2) | Calculated assuming a 35% tax rate. |
2009
versus 2008
Fully-taxable equivalent net interest income for 2009 decreased
$116.2 million, or 7%, from 2008. This reflected the
unfavorable impact of a $1.7 billion, or 4%, decrease in
average earning assets, which included a $2.3 billion
decrease in average loans and leases. Also contributing to the
decline in net interest income was a 14 basis point decline
in the fully-taxable net interest margin to 3.11%, primarily due
to the unfavorable impact of our stronger liquidity position and
an increase in NALs.
42
Table of Contents
The following table details the change in our reported loans and
deposits:
Table
7 — Average Loans/Leases and Deposits — 2009
vs. 2008
|
Twelve Months Ended
|
||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2009 | 2008 | Amount | Percent | |||||||||||||
| (In millions) | ||||||||||||||||
|
Loans/Leases
|
||||||||||||||||
|
Commercial and industrial
|
$ | 13,136 | $ | 13,588 | $ | (452 | ) | (3 | )% | |||||||
|
Commercial real estate
|
9,156 | 9,732 | (576 | ) | (6 | ) | ||||||||||
|
Total commercial
|
22,292 | 23,320 | (1,028 | ) | (4 | ) | ||||||||||
|
Automobile loans and leases
|
3,546 | 4,527 | (981 | ) | (22 | ) | ||||||||||
|
Home equity
|
7,590 | 7,404 | 186 | 3 | ||||||||||||
|
Residential mortgage
|
4,542 | 5,018 | (476 | ) | (9 | ) | ||||||||||
|
Other consumer
|
722 | 691 | 31 | 4 | ||||||||||||
|
Total consumer
|
16,400 | 17,640 | (1,240 | ) | (7 | ) | ||||||||||
|
Total loans
|
$ | 38,692 | $ | 40,960 | $ | (2,268 | ) | (6 | )% | |||||||
|
Deposits
|
||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 6,057 | $ | 5,095 | $ | 962 | 19 | % | ||||||||
|
Demand deposits — interest-bearing
|
4,816 | 4,003 | 813 | 20 | ||||||||||||
|
Money market deposits
|
7,216 | 6,093 | 1,123 | 18 | ||||||||||||
|
Savings and other domestic time deposits
|
4,881 | 5,147 | (266 | ) | (5 | ) | ||||||||||
|
Core certificates of deposit
|
11,944 | 11,637 | 307 | 3 | ||||||||||||
|
Total core deposits
|
34,914 | 31,975 | 2,939 | 9 | ||||||||||||
|
Other deposits
|
4,475 | 5,861 | (1,386 | ) | (24 | ) | ||||||||||
|
Total deposits
|
$ | 39,389 | $ | 37,836 | $ | 1,553 | 4 | % | ||||||||
The $2.3 billion, or 6%, decrease in average total loans
and leases primarily reflected:
| • | $1.0 billion, or 4%, decline in average total commercial loans. The decline in average CRE loans reflected our planned efforts to shrink this portfolio through payoffs and paydowns, as well as the impact of charge-offs and the 2009 reclassifications of CRE loans to C&I loans (see “Commercial Credit” section) . The decline in average C&I loans reflected paydowns, the Franklin restructuring, and a reduction in the line-of-credit utilization in our automobile dealer floorplan exposure; partially offset by the 2009 reclassifications. | |
| • | $1.0 billion, or 22%, decline in average automobile loans and leases due to the 2009 securitization of $1.0 billion of automobile loans, as well as the continued runoff of the automobile lease portfolio. | |
| • | $0.5 billion, or 9%, decline in residential mortgages reflecting the impact of loan sales, as well as the continued refinance of portfolio loans. The majority of this refinance activity was fixed-rate loans, which we typically sell in the secondary market. |
Partially offset by:
| • | $0.2 billion, or 3%, increase in average home equity loans reflecting higher utilization of existing lines resulting from higher quality borrowers taking advantage of the current relatively lower interest rate environment, as well as a slowdown in runoff. |
Total average investment securities increased $1.7 billion,
or 38%, as the cash proceeds from core deposit growth and the
capital actions initiated during 2009 were deployed. This
increase was partially offset by a
43
Table of Contents
$0.9 billion, or 87%, decline in trading account securities
due to the reduction in the use of these securities to hedge
MSRs.
The $1.6 billion, or 4%, increase in average total deposits
reflected:
| • | $2.9 billion, or 9%, growth in total core deposits, primarily reflecting increased sales efforts and initiatives for deposit accounts. |
Partially offset by:
| • | $1.4 billion, or 24%, decline in average noncore deposits, reflecting a managed decline in public fund deposits as well as planned efforts to reduce our reliance on noncore funding sources. |
2008
versus 2007
Fully-taxable equivalent net interest income for 2008 increased
$231.1 million, or 18%, from 2007. This reflected the
favorable impact of a $8.4 billion, or 21%, increase in
average earning assets, of which $7.8 billion represented
an increase in average loans and leases, partially offset by a
decrease in the fully-taxable net interest margin of
11 basis points to 3.25%. The increase to average earning
assets, and to average loans and leases, was primarily
merger-related.
The following table details the estimated merger-related impacts
on our reported loans and deposits:
Table
8 — Average Loans/Leases and Deposits —
Estimated Merger-Related Impacts — 2008 vs.
2007
|
Twelve Months Ended
|
Change Attributable to: | |||||||||||||||||||||||||||
| December 31, | Change |
Merger-
|
Nonmerger-Related | |||||||||||||||||||||||||
| 2008 | 2007 | Amount | Percent | Related | Amount | Percent(1) | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
|
Loans/Leases
|
||||||||||||||||||||||||||||
|
Commercial and industrial
|
$ | 13,588 | $ | 10,636 | $ | 2,952 | 27.8 | % | $ | 2,388 | $ | 564 | 4.3 | % | ||||||||||||||
|
Commercial real estate
|
9,732 | 6,807 | 2,925 | 43.0 | 1,986 | 939 | 10.7 | |||||||||||||||||||||
|
Total commercial
|
23,320 | 17,443 | 5,877 | 33.7 | 4,374 | 1,503 | 6.9 | |||||||||||||||||||||
|
Automobile loans and leases
|
4,527 | 4,118 | 409 | 9.9 | 216 | 193 | 4.5 | |||||||||||||||||||||
|
Home equity
|
7,404 | 6,173 | 1,231 | 19.9 | 1,193 | 38 | 0.5 | |||||||||||||||||||||
|
Residential mortgage
|
5,018 | 4,939 | 79 | 1.6 | 556 | (477 | ) | (8.7 | ) | |||||||||||||||||||
|
Other consumer
|
691 | 529 | 162 | 30.6 | 72 | 90 | 15.0 | |||||||||||||||||||||
|
Total consumer
|
17,640 | 15,759 | 1,881 | 11.9 | 2,037 | (156 | ) | (0.9 | ) | |||||||||||||||||||
|
Total loans
|
$ | 40,960 | $ | 33,202 | $ | 7,758 | 23.4 | % | $ | 6,411 | $ | 1,347 | 3.4 | % | ||||||||||||||
|
Deposits
|
||||||||||||||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 5,095 | $ | 4,438 | $ | 657 | 14.8 | % | $ | 915 | $ | (258 | ) | (4.8 | )% | |||||||||||||
|
Demand deposits — interest-bearing
|
4,003 | 3,129 | 874 | 27.9 | 730 | 144 | 3.7 | |||||||||||||||||||||
|
Money market deposits
|
6,093 | 6,173 | (80 | ) | (1.3 | ) | 498 | (578 | ) | (8.7 | ) | |||||||||||||||||
|
Savings and other domestic time deposits
|
5,147 | 4,242 | 905 | 21.3 | 1,297 | (392 | ) | (7.1 | ) | |||||||||||||||||||
|
Core certificates of deposit
|
11,637 | 8,206 | 3,431 | 41.8 | 2,315 | 1,116 | 10.6 | |||||||||||||||||||||
|
Total core deposits
|
31,975 | 26,188 | 5,787 | 22.1 | 5,755 | 32 | 0.1 | |||||||||||||||||||||
|
Other deposits
|
5,861 | 4,878 | 983 | 20.2 | 672 | 311 | 5.6 | |||||||||||||||||||||
|
Total deposits
|
$ | 37,836 | $ | 31,066 | $ | 6,770 | 21.8 | % | $ | 6,427 | $ | 343 | 0.9 | % | ||||||||||||||
| (1) | Calculated as nonmerger-related / (prior period + merger-related). |
44
Table of Contents
The $1.3 billion, or 3%, nonmerger-related increase in
average total loans and leases primarily reflected:
| • | $1.5 billion, or 7%, growth in average total commercial loans, with growth reflected in both the C&I and CRE portfolios. 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. The growth in C&I loans reflected a combination of draws associated with existing commitments, new loans to existing borrowers, and some originations to new high quality borrowers. |
Partially offset by:
| • | $0.2 billion, or 1%, decline in total average consumer loans reflecting a $0.5 billion, or 9%, decline in residential mortgages due to loan sales, as well as the continued slowdown in the housing markets. This decrease was partially offset by a $0.2 billion, or 4%, increase in average automobile loans and leases reflecting higher automobile loan originations, although automobile loan origination volumes have declined throughout 2008 due to the industry wide decline in sales. Automobile lease origination volumes have also declined throughout 2008. During the 2008 fourth quarter, we exited the automobile leasing business. |
Average other earning assets increased $0.7 billion,
primarily reflecting the increase in average trading account
securities. The increase in these assets reflected a change in
our strategy to use trading account securities to hedge the
change in fair value of our MSRs, however, the practice of
hedging the change in fair value of our MSRs using on-balance
sheet trading assets ceased at the end of 2008.
The $0.3 billion, or 1%, increase in average total deposits
reflected growth in other deposits. These deposits were
primarily other domestic time deposits of $250,000 or more
reflecting increases in commercial and public fund deposits.
Changes from the prior year also reflected customers
transferring funds from lower rate to higher rate accounts such
as certificates of deposit as short-term rates had fallen.
45
Table of Contents
Table
9 — Consolidated Average Balance Sheet and Net
Interest Margin Analysis
| Average Balances | ||||||||||||||||||||||||||||
| Change from 2008 | Change from 2007 | |||||||||||||||||||||||||||
|
Fully-taxable equivalent basis(1)
|
2009 | Amount | Percent | 2008 | Amount | Percent | 2007 | |||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||
|
Interest-bearing deposits in banks
|
$ | 361 | $ | 58 | 19.1 | % | $ | 303 | $ | 43 | 16.5 | % | $ | 260 | ||||||||||||||
|
Trading account securities
|
145 | (945 | ) | (86.7 | ) | 1,090 | 448 | 69.8 | 642 | |||||||||||||||||||
|
Federal funds sold and securities purchased under
|
||||||||||||||||||||||||||||
|
resale agreement
|
10 | (425 | ) | (97.7 | ) | 435 | (156 | ) | (26.4 | ) | 591 | |||||||||||||||||
|
Loans held for sale
|
582 | 166 | 39.9 | 416 | 54 | 14.9 | 362 | |||||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||||||
|
Taxable
|
6,101 | 2,223 | 57.3 | 3,878 | 225 | 6.2 | 3,653 | |||||||||||||||||||||
|
Tax-exempt
|
214 | (491 | ) | (69.6 | ) | 705 | 59 | 9.1 | 646 | |||||||||||||||||||
|
Total investment securities
|
6,315 | 1,732 | 37.8 | 4,583 | 284 | 6.6 | 4,299 | |||||||||||||||||||||
|
Loans and leases:(3)
|
||||||||||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||||||||||
|
Commercial and industrial
|
13,136 | (452 | ) | (3.3 | ) | 13,588 | 2,952 | 27.8 | 10,636 | |||||||||||||||||||
|
Construction
|
1,858 | (203 | ) | (9.8 | ) | 2,061 | 528 | 34.4 | 1,533 | |||||||||||||||||||
|
Commercial
|
7,298 | (373 | ) | (4.9 | ) | 7,671 | 2,397 | 45.4 | 5,274 | |||||||||||||||||||
|
Commercial real estate
|
9,156 | (576 | ) | (5.9 | ) | 9,732 | 2,925 | 43.0 | 6,807 | |||||||||||||||||||
|
Total commercial
|
22,292 | (1,028 | ) | (4.4 | ) | 23,320 | 5,877 | 33.7 | 17,443 | |||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||||||
|
Automobile loans
|
3,157 | (519 | ) | (14.1 | ) | 3,676 | 1,043 | 39.6 | 2,633 | |||||||||||||||||||
|
Automobile leases
|
389 | (462 | ) | (54.3 | ) | 851 | (634 | ) | (42.7 | ) | 1,485 | |||||||||||||||||
|
Automobile loans and leases
|
3,546 | (981 | ) | (21.7 | ) | 4,527 | 409 | 9.9 | 4,118 | |||||||||||||||||||
|
Home equity
|
7,590 | 186 | 2.5 | 7,404 | 1,231 | 19.9 | 6,173 | |||||||||||||||||||||
|
Residential mortgage
|
4,542 | (476 | ) | (9.5 | ) | 5,018 | 79 | 1.6 | 4,939 | |||||||||||||||||||
|
Other loans
|
722 | 31 | 4.5 | 691 | 162 | 30.6 | 529 | |||||||||||||||||||||
|
Total consumer
|
16,400 | (1,240 | ) | (7.0 | ) | 17,640 | 1,881 | 11.9 | 15,759 | |||||||||||||||||||
|
Total loans and leases
|
38,692 | (2,268 | ) | (5.5 | ) | 40,960 | 7,758 | 23.4 | 33,202 | |||||||||||||||||||
|
Allowance for loan and lease losses
|
(956 | ) | (261 | ) | 37.6 | (695 | ) | (313 | ) | 81.9 | (382 | ) | ||||||||||||||||
|
Net loans and leases
|
37,736 | (2,529 | ) | (6.3 | ) | 40,265 | 7,445 | 22.7 | 32,820 | |||||||||||||||||||
|
Total earning assets
|
46,105 | (1,682 | ) | (3.5 | ) | 47,787 | 8,431 | 21.4 | 39,356 | |||||||||||||||||||
|
Automobile operating lease assets
|
218 | 38 | 21.1 | 180 | 163 | N.M. | 17 | |||||||||||||||||||||
|
Cash and due from banks
|
2,132 | 1,174 | N.M. | 958 | 28 | 3.0 | 930 | |||||||||||||||||||||
|
Intangible assets
|
1,402 | (2,044 | ) | (59.3 | ) | 3,446 | 1,427 | 70.7 | 2,019 | |||||||||||||||||||
|
All other assets
|
3,539 | 294 | 9.1 | 3,245 | 473 | 17.1 | 2,772 | |||||||||||||||||||||
|
Total Assets
|
$ | 52,440 | $ | (2,481 | ) | (4.5 | )% | $ | 54,921 | $ | 10,209 | 22.8 | % | $ | 44,712 | |||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 6,057 | $ | 962 | 18.9 | % | $ | 5,095 | $ | 657 | 14.8 | % | $ | 4,438 | ||||||||||||||
|
Demand deposits — interest-bearing
|
4,816 | 813 | 20.3 | 4,003 | 874 | 27.9 | 3,129 | |||||||||||||||||||||
|
Money market deposits
|
7,216 | 1,123 | 18.4 | 6,093 | (80 | ) | (1.3 | ) | 6,173 | |||||||||||||||||||
|
Savings and other domestic time deposits
|
4,881 | (266 | ) | (5.2 | ) | 5,147 | 905 | 21.3 | 4,242 | |||||||||||||||||||
|
Core certificates of deposit
|
11,944 | 307 | 2.6 | 11,637 | 3,431 | 41.8 | 8,206 | |||||||||||||||||||||
|
Total core deposits
|
34,914 | 2,939 | 9.2 | 31,975 | 5,787 | 22.1 | 26,188 | |||||||||||||||||||||
|
Other domestic time deposits of $250,000 or more
|
841 | (802 | ) | (48.8 | ) | 1,643 | 645 | 64.6 | 998 | |||||||||||||||||||
|
Brokered time deposits and negotiable CDs
|
3,147 | (96 | ) | (3.0 | ) | 3,243 | 4 | 0.1 | 3,239 | |||||||||||||||||||
|
Deposits in foreign offices
|
487 | (488 | ) | (50.1 | ) | 975 | 334 | 52.1 | 641 | |||||||||||||||||||
|
Total deposits
|
39,389 | 1,553 | 4.1 | 37,836 | 6,770 | 21.8 | 31,066 | |||||||||||||||||||||
|
Short-term borrowings
|
933 | (1,441 | ) | (60.7 | ) | 2,374 | 129 | 5.7 | 2,245 | |||||||||||||||||||
|
Federal Home Loan Bank advances
|
1,236 | (2,045 | ) | (62.3 | ) | 3,281 | 1,254 | 61.9 | 2,027 | |||||||||||||||||||
|
Subordinated notes and other long-term debt
|
4,321 | 227 | 5.5 | 4,094 | 406 | 11.0 | 3,688 | |||||||||||||||||||||
|
Total interest-bearing liabilities
|
39,822 | (2,668 | ) | (6.3 | ) | 42,490 | 7,902 | 22.8 | 34,588 | |||||||||||||||||||
|
All other liabilities
|
6,831 | 796 | 13 | 6,035 | 544 | 10 | 5,491 | |||||||||||||||||||||
|
Shareholders’ equity
|
5,787 | (609 | ) | (9.5 | ) | 6,396 | 1,763 | 38.1 | 4,633 | |||||||||||||||||||
|
Total Liabilities and Shareholders’ Equity
|
$ | 52,440 | $ | (2,481 | ) | (4.5 | )% | $ | 54,921 | $ | 10,209 | 22.8 | % | $ | 44,712 | |||||||||||||
|
Continued
|
||||||||||||||||||||||||||||
46
Table of Contents
Table
9 — Consolidated Average Balance Sheet and Net
Interest Margin Analysis Continued
| Interest Income / Expense | Average Rate(2) | |||||||||||||||||||||||
|
Fully-taxable equivalent basis(1)
|
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Interest-bearing deposits in banks
|
$ | 1.1 | $ | 7.7 | $ | 12.5 | 0.32 | % | 2.53 | % | 4.80 | % | ||||||||||||
|
Trading account securities
|
4.3 | 57.5 | 37.5 | 2.99 | 5.28 | 5.84 | ||||||||||||||||||
|
Federal funds sold and securities purchased under
|
||||||||||||||||||||||||
|
resale agreement
|
0.1 | 10.7 | 29.9 | 0.13 | 2.46 | 5.05 | ||||||||||||||||||
|
Loans held for sale
|
30.0 | 25.0 | 20.6 | 5.15 | 6.01 | 5.69 | ||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||
|
Taxable
|
250.0 | 217.9 | 221.9 | 4.10 | 5.62 | 6.07 | ||||||||||||||||||
|
Tax-exempt
|
14.2 | 48.2 | 43.4 | 6.68 | 6.83 | 6.72 | ||||||||||||||||||
|
Total investment securities
|
264.2 | 266.1 | 265.3 | 4.18 | 5.81 | 6.17 | ||||||||||||||||||
|
Loans and leases:(3)
|
||||||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||||||
|
Commercial and industrial
|
664.6 | 770.2 | 791.0 | 5.06 | 5.67 | 7.44 | ||||||||||||||||||
|
Commercial real estate
|
||||||||||||||||||||||||
|
Construction
|
50.8 | 104.2 | 119.4 | 2.74 | 5.05 | 7.80 | ||||||||||||||||||
|
Commercial
|
262.3 | 430.1 | 395.8 | 3.59 | 5.61 | 7.50 | ||||||||||||||||||
|
Commercial real estate
|
313.1 | 534.3 | 515.2 | 3.42 | 5.49 | 7.57 | ||||||||||||||||||
|
Total commercial
|
977.7 | 1,304.5 | 1,306.2 | 4.39 | 5.59 | 7.49 | ||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||
|
Automobile loans
|
228.5 | 263.4 | 188.7 | 7.24 | 7.17 | 7.17 | ||||||||||||||||||
|
Automobile leases
|
24.1 | 48.1 | 80.3 | 6.18 | 5.65 | 5.41 | ||||||||||||||||||
|
Automobile loans and leases
|
252.6 | 311.5 | 269.0 | 7.12 | 6.88 | 6.53 | ||||||||||||||||||
|
Home equity
|
426.2 | 475.2 | 479.8 | 5.62 | 6.42 | 7.77 | ||||||||||||||||||
|
Residential mortgage
|
237.4 | 292.4 | 285.9 | 5.23 | 5.83 | 5.79 | ||||||||||||||||||
|
Other loans
|
56.1 | 68.0 | 55.5 | 7.78 | 9.85 | 10.51 | ||||||||||||||||||
|
Total consumer
|
972.3 | 1,147.1 | 1,090.2 | 5.93 | 6.50 | 6.92 | ||||||||||||||||||
|
Total loans and leases
|
1,950.0 | 2,451.6 | 2,396.4 | 5.04 | 5.99 | 7.22 | ||||||||||||||||||
|
Total earning assets
|
$ | 2,249.7 | $ | 2,818.6 | $ | 2,762.2 | 4.88 | % | 5.90 | % | 7.02 | % | ||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | — | $ | — | $ | — | — | % | — | % | — | % | ||||||||||||
|
Demand deposits — interest-bearing
|
9.5 | 22.2 | 40.3 | 0.20 | 0.55 | 1.29 | ||||||||||||||||||
|
Money market deposits
|
83.6 | 117.5 | 232.5 | 1.16 | 1.93 | 3.77 | ||||||||||||||||||
|
Savings and other domestic time deposits
|
66.8 | 100.3 | 109.0 | 1.37 | 1.88 | 2.40 | ||||||||||||||||||
|
Core certificates of deposit
|
409.4 | 495.7 | 397.7 | 3.43 | 4.27 | 4.85 | ||||||||||||||||||
|
Total core deposits
|
569.3 | 735.7 | 779.5 | 1.97 | 2.73 | 3.55 | ||||||||||||||||||
|
Other domestic time deposits of $250,000 or more
|
20.8 | 62.1 | 51.0 | 2.48 | 3.76 | 5.08 | ||||||||||||||||||
|
Brokered time deposits and negotiable CDs
|
83.1 | 118.8 | 175.4 | 2.64 | 3.66 | 5.41 | ||||||||||||||||||
|
Deposits in foreign offices
|
0.9 | 15.2 | 20.5 | 0.19 | 1.56 | 3.19 | ||||||||||||||||||
|
Total deposits
|
674.1 | 931.8 | 1,026.4 | 2.02 | 2.85 | 3.85 | ||||||||||||||||||
|
Short-term borrowings
|
2.4 | 42.3 | 92.8 | 0.25 | 1.78 | 4.13 | ||||||||||||||||||
|
Federal Home Loan Bank advances
|
12.9 | 107.8 | 102.6 | 1.04 | 3.29 | 5.06 | ||||||||||||||||||
|
Subordinated notes and other long-term debt
|
124.5 | 184.8 | 219.6 | 2.88 | 4.51 | 5.96 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
813.9 | 1,266.7 | 1,441.4 | 2.04 | 2.98 | 4.17 | ||||||||||||||||||
|
Net interest income
|
$ | 1,435.8 | $ | 1,551.9 | $ | 1,320.8 | ||||||||||||||||||
|
Net interest rate spread
|
2.84 | 2.92 | 2.85 | |||||||||||||||||||||
|
Impact of noninterest-bearing funds on margin
|
0.27 | 0.33 | 0.51 | |||||||||||||||||||||
|
Net Interest Margin
|
3.11 | % | 3.25 | % | 3.36 | % | ||||||||||||||||||
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, nonaccrual loans are reflected in the average balances of loans. |
47
Table of Contents
Provision
for Credit Losses
(This section should be read in conjunction with Significant Items 2 and 3 and the Credit Risk section.)
(This section should be read in conjunction with Significant Items 2 and 3 and the Credit Risk section.)
The provision for credit losses is the expense necessary to
maintain the ALLL and the AULC at levels adequate to absorb our
estimate of probable inherent credit losses in the loan and
lease portfolio and the portfolio of unfunded loan commitments
and letters of credit.
The provision for credit losses in 2009 was
$2,074.7 million, up $1,017.2 million from 2008, and
exceeded NCOs by $598.1 million. The increase in 2009 from
2008 primarily reflected the continued economic weakness across
all our regions and all our loan portfolios, although our
commercial loan portfolios were the most affected.
The provision for credit losses in 2008 was
$1,057.5 million, up from $643.6 million in 2007, and
reflected $27.2 million of higher provision related to
Franklin ($438.0 million in 2008 compared with
$410.8 million in 2007). The remaining increase in 2008
from 2007 primarily reflected the continued economic weakness
across all our regions and within the single family home builder
segment of our CRE portfolio.
The following table details the Franklin-related impact to the
provision for credit losses for each of the past three years.
Table
10 — Provision for Credit Losses —
Franklin-Related Impact
| 2009 | 2008 | 2007 | ||||||||||
| (In millions) | ||||||||||||
|
Provision for credit losses
|
||||||||||||
|
Franklin
|
$ | (14.1 | ) | $ | 438.0 | $ | 410.8 | |||||
|
Non-Franklin
|
2,088.8 | 619.5 | 232.8 | |||||||||
|
Total
|
$ | 2,074.7 | $ | 1,057.5 | $ | 643.6 | ||||||
|
Total net charge-offs (recoveries)
|
||||||||||||
|
Franklin
|
$ | 115.9 | $ | 423.3 | $ | 308.5 | ||||||
|
Non-Franklin
|
1,360.7 | 334.8 | 169.1 | |||||||||
|
Total
|
$ | 1,476.6 | $ | 758.1 | $ | 477.6 | ||||||
|
Provision for credit losses in excess of net charge-offs
|
||||||||||||
|
Franklin
|
$ | (130.0 | ) | $ | 14.7 | $ | 102.3 | |||||
|
Non-Franklin
|
728.1 | 284.8 | 63.7 | |||||||||
|
Total
|
$ | 598.1 | $ | 299.4 | $ | 166.0 | ||||||
48
Table of Contents
Noninterest
Income
(This section should be read in conjunction with Significant Items 2 and 6.)
(This section should be read in conjunction with Significant Items 2 and 6.)
The following table reflects noninterest income for the three
years ended December 31, 2009:
Table
11 — Noninterest Income
| Twelve Months Ended December 31, | ||||||||||||||||||||||||||||
| Change from 2008 | Change from 2007 | |||||||||||||||||||||||||||
| 2009 | Amount | Percent | 2008 | Amount | Percent | 2007 | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
|
Service charges on deposit accounts
|
$ | 302,799 | $ | (5,254 | ) | (2 | )% | $ | 308,053 | $ | 53,860 | 21 | % | $ | 254,193 | |||||||||||||
|
Brokerage and insurance income
|
138,169 | 373 | — | 137,796 | 45,421 | 49 | 92,375 | |||||||||||||||||||||
|
Mortgage banking income
|
112,298 | 103,304 | N.M. | 8,994 | (20,810 | ) | (70 | ) | 29,804 | |||||||||||||||||||
|
Trust services
|
103,639 | (22,341 | ) | (18 | ) | 125,980 | 4,562 | 4 | 121,418 | |||||||||||||||||||
|
Electronic banking
|
100,151 | 9,884 | 11 | 90,267 | 19,200 | 27 | 71,067 | |||||||||||||||||||||
|
Bank owned life insurance income
|
54,872 | 96 | — | 54,776 | 4,921 | 10 | 49,855 | |||||||||||||||||||||
|
Automobile operating lease income
|
51,810 | 11,959 | 30 | 39,851 | 32,041 | N.M. | 7,810 | |||||||||||||||||||||
|
Securities losses
|
(10,249 | ) | 187,121 | (95 | ) | (197,370 | ) | (167,632 | ) | N.M. | (29,738 | ) | ||||||||||||||||
|
Other income
|
152,155 | 13,364 | 10 | 138,791 | 58,972 | 74 | 79,819 | |||||||||||||||||||||
|
Total noninterest income
|
$ | 1,005,644 | $ | 298,506 | 42 | % | $ | 707,138 | $ | 30,535 | 5 | % | $ | 676,603 | ||||||||||||||
N.M., not a meaningful value.
49
Table of Contents
The following table details mortgage banking income and the net
impact of MSR hedging activity for the three years ended
December 31, 2009:
Table
12 — Mortgage Banking Income
| Twelve Months Ended December 31, | ||||||||||||||||||||||||||||
| Change from 2008 | Change from 2007 | |||||||||||||||||||||||||||
| 2009 | Amount | Percent | 2008 | Amount | Percent | 2007 | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
|
Mortgage Banking Income
|
||||||||||||||||||||||||||||
|
Origination and secondary marketing
|
$ | 94,711 | $ | 57,454 | N.M. | % | $ | 37,257 | $ | 11,292 | 44 | % | $ | 25,965 | ||||||||||||||
|
Servicing fees
|
48,494 | 2,936 | 6 | 45,558 | 9,546 | 27 | 36,012 | |||||||||||||||||||||
|
Amortization of capitalized servicing(1)
|
(47,571 | ) | (20,937 | ) | 79 | (26,634 | ) | (6,047 | ) | 29 | (20,587 | ) | ||||||||||||||||
|
Other mortgage banking income
|
23,360 | 6,592 | 39 | 16,768 | 3,570 | 27 | 13,198 | |||||||||||||||||||||
|
Sub-total
|
118,994 | 46,045 | 63 | 72,949 | 18,361 | 34 | 54,588 | |||||||||||||||||||||
|
MSR valuation adjustment(1)
|
34,305 | 86,973 | N.M. | (52,668 | ) | (36,537 | ) | N.M. | (16,131 | ) | ||||||||||||||||||
|
Net trading losses related to MSR hedging
|
(41,001 | ) | (29,714 | ) | N.M. | (11,287 | ) | (2,634 | ) | 30 | (8,653 | ) | ||||||||||||||||
|
Total mortgage banking income
|
$ | 112,298 | $ | 103,304 | N.M. | % | $ | 8,994 | $ | (20,810 | ) | (70 | )% | $ | 29,804 | |||||||||||||
|
Mortgage originations
|
$ | 5,262 | $ | 1,489 | 39 | % | $ | 3,773 | $ | 280 | 8 | % | $ | 3,493 | ||||||||||||||
|
Average trading account securities used to hedge MSRs (in
millions)
|
70 | (961 | ) | (93 | ) | 1,031 | 437 | 74 | 594 | |||||||||||||||||||
|
Capitalized mortgage servicing rights(2)
|
214,592 | 47,154 | 28 | 167,438 | (40,456 | ) | (20 | ) | 207,894 | |||||||||||||||||||
|
Total mortgages serviced for others (in millions)(2)
|
16,010 | 256 | 2 | 15,754 | 666 | 4 | 15,088 | |||||||||||||||||||||
|
MSR% of investor servicing portfolio
|
1.34 | % | 0.28 | 26 | % | 1.06 | % | (0.32 | ) | (23 | )% | 1.38 | % | |||||||||||||||
|
Net Impact of MSR Hedging
|
||||||||||||||||||||||||||||
|
MSR valuation adjustment(1)
|
$ | 34,305 | $ | 86,973 | N.M. | % | $ | (52,668 | ) | $ | (36,537 | ) | N.M. | % | $ | (16,131 | ) | |||||||||||
|
Net trading losses related to MSR hedging
|
(41,001 | ) | (29,714 | ) | N.M. | (11,287 | ) | (2,634 | ) | 30 | (8,653 | ) | ||||||||||||||||
|
Net interest income related to MSR hedging
|
2,999 | (30,140 | ) | (91 | ) | 33,139 | 27,342 | N.M. | 5,797 | |||||||||||||||||||
|
Net impact of MSR hedging
|
$ | (3,697 | ) | $ | 27,119 | (88 | )% | $ | (30,816 | ) | $ | (11,829 | ) | 62 | % | $ | (18,987 | ) | ||||||||||
N.M., not a meaningful value.
| (1) | The change in fair value for the period represents the MSR valuation adjustment, net of amortization of capitalized servicing. | |
| (2) | At period end. |
50
Table of Contents
2009
versus 2008
As shown in Table 11, noninterest income increased
$298.5 million, or 42%, from the year-ago period, primarily
reflecting:
| • | $103.3 million increase in mortgage banking income, reflecting a $57.5 million increase in origination and secondary marketing income as loans sales and loan originations were substantially higher, and a $57.3 million improvement in MSR hedging (see Table 12) . | |
| • | $187.1 million, or 95%, improvement in securities losses as 2008 included $197.1 million of OTTI adjustments compared with $59.0 million in 2009. | |
| • | $12.0 million, or 30%, increase in automobile operating lease income, reflecting a 21% increase in average operating lease balances as lease originations since the 2007 fourth quarter were recorded as operating leases. However, during the 2008 fourth quarter, we exited the automobile leasing business. | |
| • | $13.4 million, or 10%, increase in other income, reflecting the net impact of a $22.4 million change in the fair value of derivatives that did not qualify for hedge accounting, partially offset by a $4.7 million decline in mezzanine lending income and a $4.1 million decline in customer derivatives income. | |
| • | $9.9 million, or 11%, increase in electronic banking, reflecting increased transaction volumes and additional third-party processing fees. |
Partially offset by:
| • | $22.3 million, or 18%, decline in trust services income, reflecting the impact of reduced market values on asset management revenues, as well as lower yields on proprietary money market funds. |
2008
versus 2007
Noninterest income increased $30.5 million, or 5%, from the
year-ago period.
Table
13 — Noninterest Income — Estimated
Merger-Related Impact — 2008 vs. 2007
|
Tweleve Months Ended
|
Change attributable to: | |||||||||||||||||||||||||||||||
| December 31, | Change | Other | ||||||||||||||||||||||||||||||
| 2008 | 2007 | Amount | Percent | Merger-Related | Amount | Percent(1) | ||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
|
Service charges on deposit accounts
|
$ | 308,053 | $ | 254,193 | $ | 53,860 | 21 | % | $ | 48,220 | $ | 5,640 | 2 | % | ||||||||||||||||||
|
Brokerage and insurance income
|
137,796 | 92,375 | 45,421 | 49 | 34,122 | 11,299 | 9 | |||||||||||||||||||||||||
|
Mortgage banking income
|
8,994 | 29,804 | (20,810 | ) | (70 | ) | 12,512 | (33,322 | ) | (79 | ) | |||||||||||||||||||||
|
Trust services
|
125,980 | 121,418 | 4,562 | 4 | 14,018 | (9,456 | ) | (7 | ) | |||||||||||||||||||||||
|
Electronic banking
|
90,267 | 71,067 | 19,200 | 27 | 11,600 | 7,600 | 9 | |||||||||||||||||||||||||
|
Bank owned life insurance income
|
54,776 | 49,855 | 4,921 | 10 | 3,614 | 1,307 | 2 | |||||||||||||||||||||||||
|
Automobile operating lease income
|
39,851 | 7,810 | 32,041 | 410 | — | 32,041 | N.M. | |||||||||||||||||||||||||
|
Securities losses
|
(197,370 | ) | (29,738 | ) | (167,632 | ) | 564 | 566 | (168,198 | ) | N.M. | |||||||||||||||||||||
|
Other income
|
138,791 | 79,819 | 58,972 | 74 | 12,780 | 46,192 | 50 | |||||||||||||||||||||||||
|
Total noninterest income
|
$ | 707,138 | $ | 676,603 | $ | 30,535 | 5 | % | $ | 137,432 | $ | (106,897 | ) | (13 | )% | |||||||||||||||||
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Table of Contents
| (1) | Calculated as other / (prior period + merger-related) |
The $30.5 million, or 5%, increase from 2007 reflected
$137.4 million of merger-related impacts. Nonmerger-related
noninterest income declined $106.9 million, reflecting:
| • | $168.2 million negative impact relating to securities losses, primarily reflecting OTTI adjustments in 2008 of $197.1 million, compared with $43.1 million of OTTI adjustments in 2007. | |
| • | $33.3 million, or 79%, decline in mortgage banking income primarily reflecting the negative impact in MSR valuation, net of hedging. | |
| • | $9.5 million, or 7%, decline in trust services income reflecting the impact of lower market values on asset management revenues. |
Partially offset by:
| • | $46.2 million, or 50%, increase in other noninterest income, primarily reflecting: (a) $26.8 million positive impact on losses on loan sales, (b) $25.1 million gain in 2008 resulting from the proceeds of the Visa ® IPO, and (c) $14.1 million improvement in equity investment losses. These positive impacts were partially offset by: (a) $7.3 million of interest rate swap losses in 2008, (b) $7.1 million decline in customer derivatives revenue, and (c) $5.9 million venture capital loss in 2008. | |
| • | $32.0 million increase in automobile operating lease income as all leases originated since the 2007 fourth quarter were recorded as operating leases. During the 2008 fourth quarter, we exited the automobile leasing business. | |
| • | $11.3 million, or 9%, increase in brokerage and insurance income reflecting growth in annuity sales and the 2007 fourth quarter acquisition of an insurance company. | |
| • | $7.6 million, or 9%, increase in electronic banking income reflecting increased debit card transaction volumes. |
52
Table of Contents
Noninterest
Expense
(This section should be read in conjunction with Significant Items 1, 2, 3, 4, 6, and 7.)
(This section should be read in conjunction with Significant Items 1, 2, 3, 4, 6, and 7.)
The following table reflects noninterest expense for the three
years ended December 31, 2009:
Table
14 — Noninterest Expense
| Twelve Months Ended December 31, | ||||||||||||||||||||||||||||
| Change from 2008 | Change from 2007 | |||||||||||||||||||||||||||
| 2009 | Amount | Percent | 2008 | Amount | Percent | 2007 | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
|
Personnel costs
|
$ | 700,482 | $ | (83,064 | ) | (11 | )% | $ | 783,546 | $ | 96,718 | 14 | % | $ | 686,828 | |||||||||||||
|
Outside data processing and other services
|
148,095 | 17,869 | 14 | 130,226 | 1,000 | 1 | 129,226 | |||||||||||||||||||||
|
Deposit and other insurance expense
|
113,830 | 91,393 | N.M. | 22,437 | 8,652 | 63 | 13,785 | |||||||||||||||||||||
|
Net occupancy
|
105,273 | (3,155 | ) | (3 | ) | 108,428 | 9,055 | 9 | 99,373 | |||||||||||||||||||
|
OREO and foreclosure expense
|
93,899 | 60,444 | N.M. | 33,455 | 18,270 | N.M. | 15,185 | |||||||||||||||||||||
|
Equipment
|
83,117 | (10,848 | ) | (12 | ) | 93,965 | 12,483 | 15 | 81,482 | |||||||||||||||||||
|
Professional services
|
76,366 | 26,753 | 54 | 49,613 | 12,223 | 33 | 37,390 | |||||||||||||||||||||
|
Amortization of intangibles
|
68,307 | (8,587 | ) | (11 | ) | 76,894 | 31,743 | 70 | 45,151 | |||||||||||||||||||
|
Automobile operating lease expense
|
43,360 | 12,078 | 39 | 31,282 | 26,121 | N.M. | 5,161 | |||||||||||||||||||||
|
Marketing
|
33,049 | 385 | 1 | 32,664 | (13,379 | ) | (29 | ) | 46,043 | |||||||||||||||||||
|
Telecommunications
|
23,979 | (1,029 | ) | (4 | ) | 25,008 | 506 | 2 | 24,502 | |||||||||||||||||||
|
Printing and supplies
|
15,480 | (3,390 | ) | (18 | ) | 18,870 | 619 | 3 | 18,251 | |||||||||||||||||||
|
Goodwill impairment
|
2,606,944 | 2,606,944 | N.M. | — | — | — | — | |||||||||||||||||||||
|
Gain on early extinguishment of debt
|
(147,442 | ) | (123,900 | ) | N.M. | (23,542 | ) | (15,484 | ) | N.M. | (8,058 | ) | ||||||||||||||||
|
Other
|
68,704 | (25,824 | ) | (27 | ) | 94,528 | (22,997 | ) | (20 | ) | 117,525 | |||||||||||||||||
|
Total noninterest expense
|
$ | 4,033,443 | $ | 2,556,069 | N.M. | % | $ | 1,477,374 | $ | 165,530 | 13 | % | $ | 1,311,844 | ||||||||||||||
N.M., not a meaningful value.
2009
versus 2008
As shown in the above table, noninterest expense increased
$2,556.1 million from the year-ago period, and primarily
reflected:
| • | $2,606.9 million of goodwill impairment recorded in 2009. The majority of the goodwill impairment, $2,602.7 million, was recorded during the 2009 first quarter. The remaining $4.2 million of goodwill impairment was recorded in the 2009 second quarter, and was related to the sale of a small payments-related business in July 2009. (See “Goodwill” discussion located within the Critical Account Policies and Use of Significant Estimates” for additional information). | |
| • | $91.4 million increase in deposit and other insurance expense. This increase was comprised of two components: (a) $23.6 million FDIC special assessment during the 2009 second quarter, and (b) $67.8 million increase related to our 2008 FDIC assessments being significantly reduced by a nonrecurring deposit assessment credit provided by the FDIC that was depleted during the 2008 fourth |
53
Table of Contents
| quarter. This deposit insurance credit offset substantially all of our assessment in 2008. Higher levels of deposits also contributed to the increase. |
| • | $60.4 million increase in OREO and foreclosure expense, reflecting higher levels of problem assets, as well as loss mitigation activities. | |
| • | $26.8 million, or 54%, increase in professional services, reflecting higher consulting and collection-related expenses. | |
| • | $17.9 million, or 14%, increase in outside data processing and other services, primarily reflecting portfolio servicing fees paid to Franklin resulting from the 2009 first quarter restructuring of this relationship. | |
| • | $12.1 million, or 39%, increase in automobile operating lease expense, primarily reflecting a 21% increase in average operating leases. However, as previously discussed, we exited the automobile leasing business during the 2008 fourth quarter. |
Partially offset by:
| • | $123.9 million positive impact related to gains on early extinguishment of debt. | |
| • | $83.1 million, or 11%, decline in personnel expense, reflecting a decline in salaries, and lower benefits and commission expense. Full-time equivalent staff declined 6% from the comparable year-ago period. | |
| • | $25.8 million, or 27%, decline in other noninterest expense primarily reflecting lower automobile lease residual value expense as used vehicle prices improved. | |
| • | $10.8 million, or 12%, decline in equipment costs, reflecting lower depreciation costs, as well as lower repair and maintenance costs. |
2008
versus 2007
Noninterest expense increased $165.5 million, or 13%, from
2007.
Table
15 — Noninterest Expense — Estimated
Merger-Related Impact — 2008 vs. 2007
|
Tweleve Months Ended
|
Change attributable to: | |||||||||||||||||||||||||||||||
| December 31, | Change |
Merger-
|
Merger
|
Other | ||||||||||||||||||||||||||||
| 2008 | 2007 | Amount | Percent | Related | Restructuring | $ | %(1) | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
|
Personnel costs
|
$ | 783,546 | $ | 686,828 | $ | 96,718 | 14 | % | $ | 136,500 | $ | (17,633 | ) | $ | (22,149 | ) | (3 | )% | ||||||||||||||
|
Outside data processing and other services
|
130,226 | 129,226 | 1,000 | 1 | 24,524 | (16,017 | ) | (7,507 | ) | (5 | ) | |||||||||||||||||||||
|
Deposit and other insurance expense
|
22,437 | 13,785 | 8,652 | 63 | 808 | — | 7,844 | 54 | ||||||||||||||||||||||||
|
Net occupancy
|
108,428 | 99,373 | 9,055 | 9 | 20,368 | (6,487 | ) | (4,826 | ) | (4 | ) | |||||||||||||||||||||
|
OREO and foreclosure expense
|
33,455 | 15,185 | 18,270 | N.M. | 2,592 | — | 15,678 | 88 | ||||||||||||||||||||||||
|
Equipment
|
93,965 | 81,482 | 12,483 | 15 | 9,598 | 942 | 1,943 | 2 | ||||||||||||||||||||||||
|
Professional services
|
49,613 | 37,390 | 12,223 | 33 | 5,414 | (6,399 | ) | 13,208 | 36 | |||||||||||||||||||||||
|
Amortization of intangibles
|
76,894 | 45,151 | 31,743 | 70 | 32,962 | — | (1,219 | ) | (2 | ) | ||||||||||||||||||||||
|
Automobile operating lease expense
|
31,282 | 5,161 | 26,121 | N.M. | — | — | 26,121 | N.M. | ||||||||||||||||||||||||
|
Marketing
|
32,664 | 46,043 | (13,379 | ) | (29 | ) | 8,722 | (13,410 | ) | (8,691 | ) | (21 | ) | |||||||||||||||||||
|
Telecommunications
|
25,008 | 24,502 | 506 | 2 | 4,448 | (550 | ) | (3,392 | ) | (12 | ) | |||||||||||||||||||||
|
Printing and supplies
|
18,870 | 18,251 | 619 | 3 | 2,748 | (1,433 | ) | (696 | ) | (4 | ) | |||||||||||||||||||||
|
Gain on early extinguishment of debt
|
(23,542 | ) | (8,058 | ) | (15,484 | ) | N.M. | — | — | (15,484 | ) | N.M. | ||||||||||||||||||||
|
Other expense
|
94,528 | 117,525 | (22,997 | ) | (20 | ) | 22,696 | (2,267 | ) | (43,426 | ) | (31 | ) | |||||||||||||||||||
|
Total noninterest expense
|
$ | 1,477,374 | $ | 1,311,844 | $ | 165,530 | 13 | % | $ | 271,380 | $ | (63,254 | ) | $ | (42,596 | ) | (3 | )% | ||||||||||||||
| (1) | Calculated as other / (prior period + merger-related) |
54
Table of Contents
As shown in the table above, $271.4 million of the
$165.5 million increase in noninterest expense pertained to
merger-related expenses, partially offset by $63.3 million
of lower merger/restructuring costs. After adjusting for these
merger-related impacts, noninterest expense declined
$42.6 million, reflecting:
| • | $43.4 million decline in other noninterest expense, primarily reflecting: (a) $41.9 million positive impact related to the recording of an indemnification liability in 2007, and partial reversal in 2008, regarding various litigations filed against Visa ® , (b) the positive impact of no material increases to litigation reserves in 2008, compared with $10.8 million of such increases in 2007. These positive impacts were partially offset by a $4.0 million charge-off of a receivable in 2008. | |
| • | $22.1 million, or 3%, decline in personnel expense reflecting the benefit of merger and restructuring efficiencies. | |
| • | $15.5 million positive impact relating to gains on early extinguishment of debt. | |
| • | $8.7 million, or 21%, decline in marketing expense. | |
| • | $7.6 million, or 6%, decline in outside data processing and other services reflecting merger efficiencies. |
Partially offset by:
| • | $26.1 million increase in automobile operating lease expense as all leases originated since the 2007 fourth quarter were recorded as operating leases. During the 2008 fourth quarter, we exited the automobile leasing business. | |
| • | $15.7 million increase in OREO and foreclosure expense, reflecting higher levels of problem assets. | |
| • | $13.2 million, or 36%, increase in professional services, reflecting increased legal and collection costs. |
Provision
for Income Taxes
(This section should be read in conjunction with Significant Items 1, 2, 3 and 7.)
(This section should be read in conjunction with Significant Items 1, 2, 3 and 7.)
The provision for income taxes was a benefit of
$584.0 million for 2009 compared with a benefit of
$182.2 million in 2008 and a benefit of $52.5 million
in 2007. The tax benefit in all years includes the benefits from
tax-exempt income, tax-advantaged investments and general
business credits. The tax benefit in 2009 was impacted by the
pretax loss combined with the favorable impacts of the Franklin
restructuring
(see “Franklin Loans Restructuring
Transaction” discussion located within the “Critical
Accounting Policies and Use of Significant Estimates” for
additional information)
and the reduction of the capital
loss valuation reserve, offset by the nondeductible portion of
the goodwill impairment
(see “Goodwill” discussion
located within the “Critical Accounting Policies and Use of
Significant Estimates” for additional information and
Note 19 to the Notes to the Financial Statements).
During 2008, the Internal Revenue Service (IRS) completed the
audit of our consolidated federal income tax returns for tax
years 2004 and 2005. In 2009, the IRS began the audit of our
consolidated federal income tax returns for tax years 2006 and
2007. In addition, we are subject to ongoing tax examinations in
various state and local jurisdictions. Both the IRS and state
tax officials have proposed adjustments to our previously filed
tax returns. We believe that our tax positions related to such
proposed adjustments are correct and supported by applicable
statutes, regulations, and judicial authority, and intend to
vigorously defend them. It is possible that the ultimate
resolution of the proposed adjustments, if unfavorable, may be
material to the results of operations in the period it occurs.
However, although no assurance can be given, we believe that the
resolution of these examinations will not, individually or in
the aggregate, have a material adverse impact on our
consolidated financial position.
55
Table of Contents
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.
Credit
risk
is the risk of loss due to adverse changes in the
borrower’s ability to meet its financial obligations under
agreed upon terms.
Market risk
represents the risk of
loss due to changes in the market value of assets and
liabilities due to changes in interest rates, exchange rates,
and equity prices.
Liquidity risk
arises from the
possibility that funds may not be available to satisfy current
or future obligations resulting from external macro market
issues, investor perception of financial strength, and events
unrelated to the company such as war, terrorism, or financial
institution market specific issues.
Operational risk
arises from the inherent
day-to-day
operations of the company that could result in losses due to
human error, inadequate or failed internal systems and controls,
and external events.
We follow a formal policy to identify, measure, and document the
key risks facing the company. The policy outlines how those
identified risks can be controlled or mitigated and how we
monitor the controls to ensure that they are effective. Our
chief risk officer is responsible for ensuring that appropriate
systems of controls are in place for managing and monitoring
risk across the company. Potential risk concerns are shared with
the board of directors, as appropriate. Our internal audit
department performs ongoing independent reviews of the risk
management process and ensures the adequacy of documentation.
The results of these reviews are reported regularly to the audit
committee of the board of directors.
Some of the more significant processes used to manage and
control credit, market, liquidity, and operational risks are
described in the following paragraphs.
Credit
Risk
Credit risk is the risk of loss due to our counterparties not
being able to meet their financial obligations under agreed upon
terms. We are subject to credit risk in our lending, trading,
and investment activities. The nature and degree of credit risk
is a function of the types of transactions, the structure of
those transactions, and the parties involved. The majority of
our credit risk is associated with lending activities, as the
acceptance and management of credit risk is central to
profitable lending. We also have credit risk associated with our
investment and derivatives activities. Credit risk is incidental
to trading activities and represents a significant risk that is
associated with our investment securities portfolio
(see
“Investment Securities Portfolio” discussion)
.
Credit risk is mitigated through a combination of credit
policies and processes, market risk management activities, and
portfolio diversification.
The maximum level of credit exposure to individual commercial
borrowers is limited by policy guidelines based on each borrower
or related group of borrowers. All authority to grant
commitments is delegated through the independent credit
administration function and is monitored and regularly updated.
Concentration risk is managed via limits on loan type,
geography, industry, and loan quality factors. We continue to
focus predominantly on extending credit to retail and commercial
customers with existing or expandable relationships within our
primary banking markets. We continue to add new borrowers that
meet our targeted risk and profitability profile.
The checks and balances in the credit process and the
independence of the credit administration and risk management
functions are designed to appropriately assess the level of
credit risk being accepted, facilitate the early recognition of
credit problems when they do occur, and to provide for effective
problem asset management and resolution.
Credit
Exposure Mix
As shown in the following table, at December 31, 2009,
commercial loans totaled $20.6 billion, and represented 56%
of our total credit exposure. Our commercial loan portfolio is
diversified along product type,
56
Table of Contents
size, and geography within our footprint, and is comprised of
the following
(see “Commercial Credit”
discussion)
:
Commercial and Industrial (C&I) loans
—
C&I loans represent loans to commercial customers for use
in normal business operations to finance working capital needs,
equipment purchases, or other projects. The vast majority of
these borrowers are commercial customers doing business within
our geographic regions. C&I loans are generally
underwritten individually and usually secured with the assets of
the company
and/or
the
personal guarantee of the business owners. The financing of
owner-occupied facilities is considered a C&I loan even
though there is improved real estate as collateral. This
treatment is a function of the underwriting process, which
focuses on cash flow from operations to repay the debt. The sale
of the real estate is not considered either a primary or
secondary repayment source for the loan.
Commercial real estate (CRE) loans
— CRE loans
consist of loans for income producing real estate properties and
real estate developers. We mitigate our risk on these loans by
requiring collateral values that exceed the loan amount and
underwriting the loan with cash flow substantially in excess of
the debt service requirement. These loans are made to finance
properties such as apartment buildings, office and industrial
buildings, and retail shopping centers; and are repaid through
cash flows related to the operation, sale, or refinance of the
property.
Construction CRE loans
— Construction CRE loans
are loans to individuals, companies, or developers used for the
construction of a commercial or residential property for which
repayment will be generated by the sale or permanent financing
of the property. Our construction CRE portfolio primarily
consists of retail, residential (land, single family,
condominiums), office, and warehouse product types. Generally,
these loans are for construction projects that have been
presold, preleased, or otherwise have secured permanent
financing, as well as loans to real estate companies that have
significant equity invested in each project. These loans are
generally underwritten and managed by a specialized real estate
group that actively monitors the construction phase and manages
the loan disbursements according to the predetermined
construction schedule.
Total consumer loans were $16.2 billion at
December 31, 2009, and represented 44% 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)
.
Home equity
— Home equity lending includes both
home equity loans and
lines-of-credit.
This type of lending, which is secured by a first- or second-
mortgage on the borrower’s residence, allows customers to
borrow against the equity in their home. Real estate market
values as of the time the loan or line is granted directly
affect the amount of credit extended and, in addition, changes
in these values impact the severity of losses.
Residential mortgages
— Residential mortgage
loans represent loans to consumers for the purchase or refinance
of a residence. These loans are generally financed over a 15- to
30- year term, and in most cases, are extended to borrowers to
finance their primary residence. In some cases, government
agencies or private mortgage insurers guarantee the loan.
Generally speaking, our practice is to sell a significant
majority of our fixed-rate originations in the secondary market.
Automobile loans/leases
— Automobile
loans/leases is primarily comprised of loans made through
automotive dealerships, and includes exposure in several
out-of-market
states. However, no
out-of-market
state represented more than 10% of our total automobile loan and
lease portfolio, and we expect to see relatively rapid
reductions in these exposures as we ceased automobile loan
originations in
out-of-market
states during the 2009 first quarter. Our automobile lease
portfolio will continue to decline as we exited the automobile
leasing business during the 2008 fourth quarter.
57
Table of Contents
Table
16 — Loan and Lease Portfolio Composition
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||
|
Commercial(1)
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial and industrial
|
$ | 12,888 | 35 | % | $ | 12,891 | 31 | % | $ | 11,939 | 30 | % | $ | 7,850 | 30 | % | $ | 6,809 | 28 | % | ||||||||||||||||||||
|
Franklin
|
— | — | 650 | 2 | 1,187 | 3 | — | — | — | — | ||||||||||||||||||||||||||||||
|
Construction
|
1,469 | 4 | 2,080 | 5 | 1,962 | 5 | 1,229 | 5 | 1,538 | 6 | ||||||||||||||||||||||||||||||
|
Commercial
|
6,220 | 17 | 8,018 | 19 | 7,221 | 18 | 3,275 | 13 | 2,498 | 10 | ||||||||||||||||||||||||||||||
|
Total commercial real estate
|
7,689 | 21 | 10,098 | 24 | 9,183 | 23 | 4,504 | 18 | 4,036 | 16 | ||||||||||||||||||||||||||||||
|
Total commercial
|
20,577 | 56 | 23,639 | 57 | 22,309 | 56 | 12,354 | 48 | 10,845 | 44 | ||||||||||||||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||||||||||||||||||
|
Automobile loans
|
3,144 | 9 | 3,901 | 9 | 3,114 | 8 | 2,126 | 8 | 1,985 | 8 | ||||||||||||||||||||||||||||||
|
Automobile leases
|
246 | 1 | 563 | 1 | 1,180 | 3 | 1,769 | 7 | 2,289 | 9 | ||||||||||||||||||||||||||||||
|
Home equity
|
7,563 | 20 | 7,557 | 18 | 7,290 | 18 | 4,927 | 19 | 4,763 | 19 | ||||||||||||||||||||||||||||||
|
Residential mortgage
|
4,510 | 12 | 4,761 | 12 | 5,447 | 14 | 4,549 | 17 | 4,193 | 17 | ||||||||||||||||||||||||||||||
|
Other loans
|
751 | 1 | 671 | 2 | 715 | 1 | 428 | 1 | 397 | 2 | ||||||||||||||||||||||||||||||
|
Total consumer
|
16,214 | 43 | 17,453 | 42 | 17,746 | 44 | 13,799 | 52 | 13,627 | 55 | ||||||||||||||||||||||||||||||
|
Total loans and direct financing leases
|
36,791 | 99 | 41,092 | 99 | 40,055 | 100 | 26,153 | 100 | 24,472 | 99 | ||||||||||||||||||||||||||||||
|
Automobile operating lease assets
|
193 | 1 | 243 | 1 | 68 | — | 28 | — | 189 | 1 | ||||||||||||||||||||||||||||||
|
Total credit exposure
|
$ | 36,984 | 100 | % | $ | 41,335 | 100 | % | $ | 40,123 | 100 | % | $ | 26,181 | 100 | % | $ | 24,661 | 100 | % | ||||||||||||||||||||
|
Total automobile exposure(2)
|
$ | 3,583 | 10 | % | $ | 4,707 | 11 | % | $ | 4,362 | 11 | % | $ | 3,923 | 15 | % | $ | 4,463 | 18 | % | ||||||||||||||||||||
| (1) | There were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries. | |
| (2) | Total automobile loans and leases, operating lease assets, and securitized loans. |
Commercial
Credit
2009
COMMERCIAL LOAN PORTFOLIO REVIEWS AND ACTIONS
In the 2009 first quarter, we restructured our commercial loan
relationship with Franklin by taking control of the underlying
mortgage loan collateral, and transferring the exposure to the
consumer loan portfolio as first- and second- lien loans to
individuals secured by residential real estate properties.
(See “Franklin Loans Restructuring Transaction”
located within the “Critical Accounting Policies and Use of
Significant Estimates” section).
We also proactively
completed a concentrated review of our single family home
builder and retail CRE loan portfolio segments, our CRE
portfolio’s two highest risk segments. We initiated a
review of the “criticized” portion of these portfolios
on a monthly basis. The increased review activity resulted in
more pro-active decisions on nonaccrual status, reserve levels,
and charge-offs throughout the remainder of 2009. This
heightened level of portfolio monitoring is ongoing.
During the 2009 second quarter, we updated our evaluation of
every “noncriticized” commercial relationship with an
aggregate exposure of over $500,000. This review included
C&I, CRE, and business banking loans and encompassed
$13.2 billion of total commercial loans, and
$18.8 billion in related
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commitments. This was a detailed, labor-intensive process
designed to enhance our understanding of each borrower’s
financial position, and to ensure that this understanding was
accurately reflected in our internal risk rating system. Our
objective was to identify current and potential credit risks
across the portfolio consistent with our expectation that the
economy in our markets will not improve for the foreseeable
future.
Our activity in the 2009 third quarter represented a
continuation of the portfolio management processes established
in the first two quarters of 2009. We continue to fully assess
our criticized loans over $500,000 on a monthly basis, and have
maintained the discipline associated with the ongoing
“noncriticized” review process established in the 2009
second quarter. In many cases, we directly contacted the
borrower and obtained the most recent financial information
available, including interim financial results. In addition, we
discussed the impact of the economic environment on the future
direction of their company, industry prospects, collateral
values, and other borrower-specific information.
In the 2009 fourth quarter, we finalized an initiative to
segregate our CRE portfolio into core and noncore components.
This distinction is based on borrower characteristics,
relationship profitability, and location of the projects. Those
designated as core relationships will be supported and grown in
the coming years. Those borrowers designated as noncore will be
managed effectively, with a goal of significantly reducing the
exposure. Opportunities to expand some of these noncore
relationships to a level of profitability may arise, resulting
in a reclassification to a core designation. Additional
information regarding the designation can be found in the
“Core and Noncore Portfolios” section located within
the “Commercial Real Estate” section.
Also, during the 2009 fourth quarter, we conducted a review of
our ACL practices and methodologies. We experienced increasing
charge-offs throughout 2009, and continued to see increases in
criticized and classified loans, although increases in the
second half of 2009 were at a slower rate compared with the
first half of 2009. The level of criticized loans, one indicator
of possible future losses, reached its highest point in the 2009
fourth quarter. Even though there were declines in both the
inflow and absolute level of NALs, the inflow of
$495 million remained significant. Based on these asset
quality trends, along with the unstable and fragile economy
particularly in our Midwest markets, as well as continued
elevated quarterly charge-offs, the ACL was substantially
increased. Much of our concern relates to our CRE portfolio and,
to a lesser degree, our C&I portfolio. Regarding our CRE
portfolio, higher vacancy rates, lower rents, and falling
property values are of significant concern. Loss in the event of
default on many classes of CRE properties has increased
substantially throughout 2009 and is expected to continue into
2010. C&I borrowers have been suffering from the weak
economy for several consecutive years, and many borrowers no
longer have sufficient capital to withstand protracted stress
and, as a result, may not be able to comply with the original
terms of their credit agreements.
Lastly, with respect to our commercial loan exposure to
automobile dealers, we have had an ongoing review process in
place for some time now. Our automobile dealer commercial loan
portfolio is predominantly comprised of larger,
“well-capitalized”, multi-franchised dealer groups
underwritten to conservative credit standards. These dealer
groups have largely remained profitable on a consolidated basis
due to franchise diversity and a shift of sales emphasis to
higher-margin, used vehicles, as well as a focus on the service
department. Additionally, our portfolio is closely monitored
through receipt and review of monthly dealer financial
statements and ongoing floor plan inventory audits, which allow
for rapid response to weakening trends. As a result, we have not
experienced any significant deterioration in the credit quality
of our automobile dealer commercial loan portfolio and remain
comfortable with our expectation of no material losses, even
given the substantial stress associated with our dealership
closings announced by Chrysler and General Motors. The more
recent announcement regarding the Saturn dealerships also has
had no impact on our view of the portfolio.
(See
“Automobile Industry” section located within the
“Commercial and Industrial Portfolio” section for
additional information.)
In summary, we have established an ongoing portfolio management
process involving each business segment, providing an improved
view of emerging risk issues at a borrower level, enhanced
ongoing monitoring capabilities, and strengthened actions and
timeliness to mitigate emerging loan risks. Given our stated
view of continued economic weakness for the foreseeable future,
we anticipate some level of additional negative credit
migration. While we can give no assurances given market
uncertainties, we believe that as a
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Table of Contents
result of our increased portfolio management actions, a
portfolio management process involving each business segment, an
improved view of emerging risk issues at the borrower level,
enhanced ongoing monitoring capabilities, and strengthened
borrower-level loan structures, any future migration will be
manageable.
Our commercial loan portfolio is diversified by C&I and CRE
loans as shown in the following table:
Table
17 — Commercial & Industrial and Commercial
Real Estate Loan and Lease Detail
| At December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
Commercial and industrial loans
|
$ | 11,326 | $ | 10,902 | $ | 10,249 | $ | 6,632 | $ | 5,723 | ||||||||||
|
Franklin
|
— | 650 | 1,187 | — | — | |||||||||||||||
|
Dealer floor plan loans
|
679 | 960 | 795 | 631 | 615 | |||||||||||||||
|
Equipment direct financing leases
|
883 | 1,029 | 895 | 587 | 471 | |||||||||||||||
|
Commercial and industrial loans and leases
|
12,888 | 13,541 | 13,126 | 7,850 | 6,809 | |||||||||||||||
|
Commercial real estate loans
|
7,689 | 10,098 | 9,183 | 4,504 | 4,036 | |||||||||||||||
|
Total commercial loans and leases
|
$ | 20,577 | $ | 23,639 | $ | 22,309 | $ | 12,354 | $ | 10,845 | ||||||||||
The primary factors considered in commercial credit approvals
are the financial strength of the borrower, assessment of the
borrower’s management capabilities, industry sector trends,
type of exposure, transaction structure, and the general
economic outlook. While these are the primary factors
considered, there are a number of other factors that may be
considered in the decision process. There are two processes for
approving credit risk exposures. The first, and more prevalent
approach, involves individual approval of exposures. Credit
officers that understand each local region and are experienced
in the industries and loan structures of the requested credit
exposure, make credit extension decisions. All credit exposures
greater than $5 million are approved by a senior loan
committee, led by our chief credit officer. The second involves
a centralized loan approval process for the standard products
and structures utilized in small business banking. In this
centralized decision environment, where the above primary
factors are the basis for approval, certain individuals who
understand each local region make credit-extension decisions to
preserve our local decision-making focus. In addition to
disciplined, consistent, and judgmental factors, a sophisticated
credit scoring process is used as a primary evaluation tool in
the determination of approving an exposure.
In commercial lending, ongoing credit management is dependent on
the type and nature of the loan. We monitor all significant
exposures on a periodic basis. All commercial credit extensions
are assigned internal risk ratings reflecting the
borrower’s
probability-of-default
and loss-given-default. This two-dimensional rating methodology,
which results in 192 individual loan grades, provides
granularity in the portfolio management process. The
probability-of-default
is rated on a scale of 1-12 and is applied at the borrower
level. The loss-given-default is rated on a 1-16 scale and is
applied based on the type of credit extension and the underlying
collateral. The internal risk ratings are assessed and updated
with each periodic monitoring event. There is also extensive
macro portfolio management analysis on an ongoing basis. The
single family home builder portfolio and retail projects are
examples of segments of the portfolio that have received more
frequent evaluation at the loan level as a result of the
economic environment and performance trends (see “Single
Family Home Builder” and “Retail Properties”
discussions). We continually review and adjust our risk rating
criteria based on actual experience. The continuous analysis and
review process results in a determination of an appropriate ALLL
amount for our commercial loan portfolio.
In addition to the initial credit analysis initiated during the
approval process, the credit review group performs analyses to
provide an independent review and assessment of the quality
and/or
exposure of the loan. This group is part of our Risk Management
area, and reviews individual loans and credit processes and
conducts a portfolio review for each of the regions on a
15-month
cycle. The loan review group validates the internal risk ratings
on approximately 60% of the portfolio exposure each calendar
year. Similarly, to provide consistent oversight, a centralized
portfolio management team monitors and reports on the
performance of the small business banking loans.
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Table of Contents
Credit exposures may be designated as monitored credits when
warranted by individual borrower performance, or by industry and
environmental factors. Monitored credits are subjected to
additional monthly reviews in order to adequately assess the
borrower’s credit status and to take appropriate action.
The Special Assets Division (SAD) is a specialized credit group
that handles workouts, commercial recoveries, and problem loan
sales. This group is involved in the day-to- day management of
relationships rated substandard or lower. Its responsibilities
include developing an action plan, assessing the risk rating,
and determining the adequacy of the reserve, the accrual status,
and the ultimate collectibility of the managed monitored credits.
Our commercial loan portfolio, including CRE loans, is
diversified by customer size, as well as throughout our
geographic footprint. Certain segments of our commercial loan
portfolio are discussed in further detail below:
COMMERCIAL
REAL ESTATE (CRE) PORTFOLIO
As shown in the following table, CRE loans totaled
$7.7 billion and represented 21% of our total loan exposure
at December 31, 2009.
Table
18 — Commercial Real Estate Loans by Property Type and
Property Location
| At December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||
|
West
|
Total
|
|||||||||||||||||||||||||||||||||||||||
| Ohio | Michigan | Pennsylvania | Indiana | Kentucky | Florida | Virginia | Other | Amount | % | |||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||
|
Retail properties
|
$ | 866 | $ | 208 | $ | 161 | $ | 213 | $ | 8 | $ | 69 | $ | 48 | $ | 542 | $ | 2,115 | 28 | % | ||||||||||||||||||||
|
Multi family
|
810 | 132 | 97 | 77 | 37 | 6 | 75 | 135 | 1,369 | 18 | ||||||||||||||||||||||||||||||
|
Office
|
576 | 197 | 113 | 55 | 24 | 23 | 59 | 69 | 1,116 | 14 | ||||||||||||||||||||||||||||||
|
Industrial and warehouse
|
431 | 199 | 35 | 93 | 14 | 41 | 9 | 110 | 932 | 12 | ||||||||||||||||||||||||||||||
|
Single family home builders
|
528 | 78 | 48 | 24 | 22 | 84 | 19 | 54 | 857 | 11 | ||||||||||||||||||||||||||||||
|
Lines to real estate companies
|
487 | 69 | 36 | 28 | 5 | 1 | 9 | 3 | 638 | 8 | ||||||||||||||||||||||||||||||
|
Hotel
|
146 | 56 | 23 | 31 | — | — | 42 | 75 | 373 | 5 | ||||||||||||||||||||||||||||||
|
Health care
|
49 | 56 | 14 | — | — | — | — | — | 119 | 2 | ||||||||||||||||||||||||||||||
|
Raw land and other land uses
|
50 | 27 | 5 | 6 | 6 | 5 | 2 | 32 | 133 | 2 | ||||||||||||||||||||||||||||||
|
Other
|
28 | 4 | 2 | 1 | 1 | — | — | 1 | 37 | — | ||||||||||||||||||||||||||||||
|
Total
|
$ | 3,971 | $ | 1,026 | $ | 534 | $ | 528 | $ | 117 | $ | 229 | $ | 263 | $ | 1,021 | $ | 7,689 | 100 | % | ||||||||||||||||||||
|
% of total portfolio
|
52 | % | 13 | % | 7 | % | 7 | % | 2 | % | 3 | % | 3 | % | 13 | % | 100 | % | ||||||||||||||||||||||
|
Net charge-offs
|
$ | 320.6 | $ | 129.5 | $ | 7.1 | $ | 24.0 | $ | 5.5 | $ | 79.1 | $ | 8.1 | $ | 108.8 | $ | 682.7 | ||||||||||||||||||||||
|
Net charge-offs — annualized %
|
6.78 | % | 10.60 | % | 1.12 | % | 3.82 | % | 3.98 | % | 28.98 | % | 2.58 | % | 8.95 | % | 7.46 | % | ||||||||||||||||||||||
|
Nonaccrual loans
|
$ | 463.0 | $ | 123.8 | $ | 42.8 | $ | 37.5 | $ | 12.1 | $ | 45.5 | $ | 18.2 | $ | 192.9 | $ | 935.8 | ||||||||||||||||||||||
|
% of portfolio
|
12 | % | 12 | % | 8 | % | 7 | % | 10 | % | 20 | % | 7 | % | 19 | % | 12 | % | ||||||||||||||||||||||
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CRE loan credit quality data regarding NCOs, NALs, and accruing
loans past due 90 days or more by industry classification
code for 2009 and 2008 are presented in the following table:
Table
19 — Commercial Real Estate Loans Credit Quality Data
by Property Type
| Year Ended December 31, | At December 31, | |||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
| Net Charge-Offs | Nonaccrual Loans | |||||||||||||||||||||||
| Amount | Percentage | Amount | Percentage | Amount | ||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
Retail properties
|
$ | 250.3 | 10.51 | % | $ | 7.0 | 0.38 | % | $ | 253.6 | $ | 78.3 | ||||||||||||
|
Single family home builder
|
212.3 | 18.71 | 35.0 | 2.87 | 262.4 | 200.4 | ||||||||||||||||||
|
Office
|
29.9 | 2.49 | 1.7 | 0.15 | 87.3 | 19.9 | ||||||||||||||||||
|
Multi family
|
77.1 | 5.15 | 9.5 | 0.84 | 129.0 | 42.9 | ||||||||||||||||||
|
Industrial and warehouse
|
53.9 | 4.93 | 2.3 | 0.24 | 120.8 | 20.4 | ||||||||||||||||||
|
Lines to real estate companies
|
43.2 | 4.68 | 4.6 | 0.46 | 22.7 | 26.3 | ||||||||||||||||||
|
Raw land and other land uses
|
12.6 | 5.38 | 5.1 | 0.34 | 42.4 | 33.5 | ||||||||||||||||||
|
Health care
|
— | — | 1.0 | 0.27 | 0.7 | 6.2 | ||||||||||||||||||
|
Hotel
|
2.7 | 0.71 | — | — | 10.9 | 0.8 | ||||||||||||||||||
|
Other
|
0.8 | 1.68 | 2.5 | 0.97 | 6.1 | 17.0 | ||||||||||||||||||
|
Total
|
$ | 682.7 | 7.46 | % | $ | 68.7 | 0.71 | % | $ | 935.8 | $ | 445.7 | ||||||||||||
We manage the risks inherent in this portfolio through
origination policies, concentration limits, ongoing loan level
reviews, recourse requirements, and continuous portfolio risk
management activities. Our origination policies for this
portfolio include loan product-type specific policies such as
LTV, debt service coverage ratios, and pre-leasing requirements,
as applicable. Generally, we: (a) limit our loans to 80% of
the appraised value of the commercial real estate,
(b) require net operating cash flows to be 125% of required
interest and principal payments, and (c) if the commercial
real estate is non-owner occupied, require that at least 50% of
the space of the project be pre-leased. We may require more
conservative loan terms, depending on the project.
Dedicated real estate professionals within our Commercial Real
Estate segment team originated the majority of the portfolio,
with the remainder obtained from prior acquisitions. Appraisals
from approved vendors are reviewed by an internal appraisal
review group to ensure the quality of the valuation used in the
underwriting process. The portfolio is diversified by project
type and loan size, and represents a significant piece of the
credit risk management strategies employed for this portfolio.
Our loan review staff provides an assessment of the quality of
the underwriting and structure and validates the risk rating
assigned to the loan.
Appraisal values are obtained in conjunction with all
originations and renewals, and on an as needed basis, in
compliance with regulatory requirements. Given the stressed
environment for some loan types, we have initiated ongoing
portfolio level reviews of segments such as single family home
builders and retail properties
(see “Single Family Home
Builders” and “Retail Properties”
discussions)
. These reviews generate action plans based on
occupancy levels or sales volume associated with the projects
being reviewed. The results of these actions indicated that
additional stress is likely due to the current economic
conditions. Property values are updated using appraisals on a
regular basis to ensure that appropriate decisions regarding the
ongoing management of the portfolio reflect the changing market
conditions. This highly individualized process requires working
closely with all of our borrowers as well as an in-depth
knowledge of CRE project lending and the market environment.
At the portfolio level, we actively monitor the concentrations
and performance metrics of all loan types, with a focus on
higher risk segments. Macro-level stress-test scenarios based on
retail sales and home-price depreciation trends for the segments
are embedded in our performance expectations, and
lease-up
and
absorption scenarios are assessed. We anticipate the current
stress within this portfolio will continue for the foreseeable
future, resulting in elevated charge-offs, NALs, and ALLL levels.
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Table of Contents
During 2009, portfolio reviews resulted in reclassifications of
certain CRE loans to C&I loans. These net reclassifications
totaled $1.4 billion, and were primarily associated with:
(a) loans to businesses secured by the real estate and
buildings that house their operations as these owner-occupied
loans secured by real estate were underwritten based on the cash
flow of the business, and (b) healthcare entities and
colleges and universities. We believe that loans underwritten
based on cash flow from operations should be considered as
commercial loans secured by real estate, rather than the CRE
portfolio which is real estate project oriented.
Within the CRE portfolio, the single family home builder and
retail properties segments continued to be stressed throughout
2009 as a result of the continued decline in the housing markets
and general economic conditions. As previously mentioned above,
these segments were considered to be the highest risk segments
in 2009 within our CRE portfolio, and are discussed further
below.
Single
Family Home Builders
At December 31, 2009 we had $857 million of CRE loans
to single family home builders. Such loans represented 2% of
total loans and leases. Of this portfolio segment, 67% were to
finance projects currently under construction, 15% to finance
land under development, and 18% to finance land held for
development. The $857 million represented a
$732 million, or 46%, decrease compared with
$1,589 million at December 31, 2008. The decrease
primarily reflected the reclassification of loans secured by 1-4
family residential real estate rental properties to C&I
loans, consistent with industry practices in the definition of
this segment. Other factors contributing to the decrease in
exposure include no new originations in this portfolio segment
in 2009, increased property sale activity, and substantial
charge-offs. The increased sale activity was evident throughout
2009. Based on the portfolio management processes, including
charge-off activity, over the past 30 months, we believe
that we have substantially addressed the credit issues in this
portfolio. We do not expect any future significant credit impact
from this portfolio segment.
Retail
Properties
Our portfolio of CRE loans secured by retail properties totaled
$2,115 million, or approximately 6% of total loans and
leases, at December 31, 2009. Loans within this portfolio
segment declined $150 million, or 7%, from
December 31, 2008. Credit approval in this portfolio
segment is generally dependent on pre-leasing requirements, and
net operating income from the project must cover debt service by
specified percentages when the loan is fully funded.
The weakness of the economic environment in our geographic
regions significantly impacted the projects that secure the
loans in this portfolio segment. Lower occupancy rates, reduced
rental rates, increased unemployment levels compared with recent
years, and the expectation that these levels will continue to
increase for the foreseeable future are expected to adversely
affect our borrowers’ ability to repay these loans. We have
increased the level of credit risk management activity to this
portfolio segment, and we analyze our retail property loans in
detail by combining property type, geographic location, tenants,
and other data, to assess and manage our credit concentration
risks.
Core
and Noncore portfolios
Each CRE loan is classified as either core or noncore. We
segmented the CRE portfolio into these designations in order to
provide more clarity around our portfolio management strategies
and to provide additional clarity for our investors. A CRE loan
is generally considered core when the borrower is an
experienced, well-capitalized developer in our Midwest
footprint, and has either an established meaningful relationship
or the prospective of establishing one, that generates an
acceptable return on capital. The core CRE portfolio was
$4.0 billion at December 31, 2009, representing 52% of
total CRE loans. Personal guarantees support approximately 95%
of this portfolio. Based on the extensive project level
assessment process, including forward-looking collateral
valuations, we are comfortable with the credit quality of the
core portfolio at this time.
A CRE loan is generally considered noncore based on a lack of a
substantive relationship outside of the credit product, with no
immediate prospects for improvement. The noncore CRE portfolio
totaled $3.7 billion
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Table of Contents
at December 31, 2009, representing 48% of total CRE loans.
Personal guarantees support approximately 96% of this portfolio,
with over 99% representing secured debt. This segment has only
approximately $155 million of future funding requirements.
Nevertheless, it is within the noncore segment where most of the
credit quality challenges exist. For example,
$932.0 million, or 26%, of related outstandings, are
classified as NALs. The Special Assets Division (SAD)
administers $1.8 billion, or 50%, of total noncore CRE
loans. It is expected that we will exit the majority of noncore
CRE relationships over time. This would reflect normal
repayments, possible sales should economically attractive
opportunities arise, or the reclassification as a core CRE
relationship if it expands to meet the core requirements.
The table below provides the segregation of the CRE portfolio
into core and noncore segments as of December 31, 2009.
Table
20 — Core Commercial Real Estate Loans by Property
Type and Property Location
| At December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||
|
West
|
Total
|
|||||||||||||||||||||||||||||||||||||||
| Ohio | Michigan | Pennsylvania | Indiana | Kentucky | Florida | Virginia | Other | Amount | % | |||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||
|
Core portfolio:
|
||||||||||||||||||||||||||||||||||||||||
|
Retail properties
|
$ | 488 | $ | 95 | $ | 90 | $ | 91 | $ | 3 | $ | 42 | $ | 40 | $ | 369 | $ | 1,218 | 16 | % | ||||||||||||||||||||
|
Multi family
|
265 | 87 | 52 | 31 | 8 | — | 42 | 65 | 550 | 7 | ||||||||||||||||||||||||||||||
|
Office
|
342 | 102 | 74 | 33 | 12 | 8 | 40 | 43 | 654 | 8 | ||||||||||||||||||||||||||||||
|
Industrial and warehouse
|
280 | 65 | 17 | 48 | 3 | 3 | 8 | 90 | 514 | 7 | ||||||||||||||||||||||||||||||
|
Single family home builders
|
125 | 37 | 9 | 5 | — | 36 | 9 | 4 | 225 | 3 | ||||||||||||||||||||||||||||||
|
Lines to real estate companies
|
358 | 57 | 25 | 22 | 4 | 1 | 7 | 1 | 475 | 6 | ||||||||||||||||||||||||||||||
|
Hotel
|
78 | 36 | 13 | 21 | — | — | 35 | 70 | 253 | 3 | ||||||||||||||||||||||||||||||
|
Health care
|
28 | 33 | 13 | — | — | — | — | — | 74 | 1 | ||||||||||||||||||||||||||||||
|
Raw land and other land uses
|
17 | 23 | 3 | 1 | 1 | 2 | 2 | 7 | 56 | 1 | ||||||||||||||||||||||||||||||
|
Other
|
12 | 3 | 2 | 1 | 1 | — | — | — | 19 | — | ||||||||||||||||||||||||||||||
|
Total core portfolio
|
1,993 | 538 | 298 | 253 | 32 | 92 | 183 | 649 | 4,038 | 52 | ||||||||||||||||||||||||||||||
|
Total noncore portfolio
|
1,978 | 488 | 236 | 275 | 85 | 137 | 80 | 372 | 3,651 | 48 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 3,971 | $ | 1,026 | $ | 534 | $ | 528 | $ | 117 | $ | 229 | $ | 263 | $ | 1,021 | $ | 7,689 | 100 | % | ||||||||||||||||||||
Credit quality data regarding the ACL and NALs, segregated by
core CRE loans and noncore CRE loans, is presented in the
following table.
Table
21 — Commercial Real Estate — Core vs.
Noncore portfolios
| At December 31, 2009 | ||||||||||||||||||||||||
|
Ending
|
Prior
|
Credit
|
Nonaccrual
|
|||||||||||||||||||||
| Balance | NCOs | ACL $ | ACL % | Mark(1) | Loans | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
Core Total
|
$ | 4,038 | $ | — | $ | 168 | 4.16 | % | 4.16 | % | $ | 3.8 | ||||||||||||
|
Noncore — Special Assets Division(2)
|
1,809 | 511 | 410 | 22.66 | 39.70 | 861.0 | ||||||||||||||||||
|
Noncore — Other
|
1,842 | 26 | 186 | 10.10 | 11.35 | 71.0 | ||||||||||||||||||
|
Noncore Total
|
3,651 | 537 | 596 | 16.32 | 27.05 | 932.0 | ||||||||||||||||||
|
Commercial Real Estate Total
|
$ | 7,689 | $ | 537 | $ | 764 | 9.94 | % | 15.82 | % | $ | 935.8 | ||||||||||||
| (1) | Calculated as (Prior NCOs + ACL $)/(Ending Balance + Prior NCOs) | |
| (2) | Noncore loans managed by our Special Assets Division, the area responsible for managing loans and relationships designated as monitored credits. |
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As shown in the above table, substantial reserves for the
noncore portfolio have been established. At December 31,
2009, the ACL of related total loans and leases for the noncore
portfolio was 16.32%. We believe segregating the noncore CRE
from core CRE improves our ability to understanding the nature,
performance prospects, and problem resolution opportunities of
this segment, thus allowing us to continue to deal proactively
with future credit issues.
The combination of prior NCOs and the existing ACL represents
the total credit actions taken on each segment of the portfolio.
From this data, we calculate a measurement, called a
“Credit Mark”, that provides a consistent measurement
of the cumulative credit actions taken against a specific
portfolio segment. We believe that the combined credit activity
is appropriate for each of the CRE segments.
COMMERCIAL
AND INDUSTRIAL (C&I) PORTFOLIO
The C&I portfolio is comprised of loans to businesses where
the source of repayment is associated with the ongoing
operations of the business. Generally, the loans are secured
with the financing of the borrower’s assets, such as
equipment, accounts receivable, or inventory. In many cases, the
loans are secured by real estate, although the sale of the real
estate is not a primary source of repayment for the loan. For
loans secured by real estate, appropriate appraisals are
obtained at origination, and updated on an as needed basis, in
compliance with regulatory requirements.
There were no outstanding commercial loans that would be
considered a concentration of lending to a particular industry
or within a geographic standpoint. Currently, higher-risk
segments of the C&I portfolio include loans to borrowers
supporting the home building industry, contractors, and
automotive suppliers. However, the combined total of these
segments represent less than 10% of the total C&I
portfolio. We manage the risks inherent in this portfolio
through origination policies, concentration limits, ongoing loan
level reviews, recourse requirements, and continuous portfolio
risk management activities. Our origination policies for this
portfolio include loan product-type specific policies such as
loan-to-value
(LTV), and debt service coverage ratios, as applicable.
C&I borrowers have been challenged by the weak economy for
consecutive years, and some borrowers may no longer have
sufficient capital to withstand the protracted stress and, as a
result, may not be able to comply with the original terms of
their credit agreements. We continue to focus ongoing attention
on the portfolio management process to proactively identify
borrowers that may be facing financial difficulty.
To the extent C&I loans are secured by real estate
collateral, appropriate appraisals are obtained at origination,
and updated on an as needed basis, in compliance with regulatory
requirements.
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As shown in the following table, C&I loans totaled
$12.9 billion at December 31, 2009.
Table
22 — Commercial and Industrial Loans and Leases by
Industry Classification
| At December 31, 2009 | ||||||||||||||||
| Commitments | Loans Outstanding | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| (In millions of dollars) | ||||||||||||||||
|
Industry Classification:
|
||||||||||||||||
|
Services
|
$ | 5,152 | 28 | % | $ | 3,899 | 30 | % | ||||||||
|
Manufacturing
|
3,411 | 18 | 2,202 | 17 | ||||||||||||
|
Finance, insurance, and real estate
|
2,814 | 15 | 2,353 | 18 | ||||||||||||
|
Retail trade — auto dealers
|
1,566 | 8 | 900 | 7 | ||||||||||||
|
Retail trade — other than auto dealers
|
1,365 | 7 | 917 | 7 | ||||||||||||
|
Contractors and construction
|
942 | 5 | 463 | 4 | ||||||||||||
|
Transportation, communications, and utilities
|
1,229 | 7 | 749 | 6 | ||||||||||||
|
Wholesale trade
|
1,271 | 7 | 689 | 5 | ||||||||||||
|
Agriculture and forestry
|
263 | 1 | 192 | 2 | ||||||||||||
|
Energy
|
589 | 3 | 409 | 3 | ||||||||||||
|
Public administration
|
90 | 1 | 87 | 1 | ||||||||||||
|
Other
|
30 | — | 28 | — | ||||||||||||
|
Total
|
$ | 18,722 | 100 | % | $ | 12,888 | 100 | % | ||||||||
C&I loan credit quality data regarding NCOs and NALs by
industry classification for 2009 and 2008 are presented in the
table below:
Table
23 — Commercial and Industrial Credit Quality Data by
Industry Classification
| Year Ended December 31, | At December 31, | |||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
| Net Charge-Offs | Nonaccrual Loans | |||||||||||||||||||||||
| Amount | Percentage | Amount | Percentage | Amount | ||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
Industry Classification:
|
||||||||||||||||||||||||
|
Services
|
$ | 95.1 | 2.49 | % | $ | 18.6 | 0.57 | % | $ | 163.9 | $ | 73.9 | ||||||||||||
|
Finance, insurance, and real estate
|
46.6 | 2.02 | 13.5 | 0.75 | 98.0 | 46.6 | ||||||||||||||||||
|
Manufacturing
|
99.8 | 4.62 | 16.4 | 0.73 | 136.8 | 67.5 | ||||||||||||||||||
|
Retail trade — auto dealers
|
1.4 | 0.16 | 2.2 | 0.20 | 3.0 | 6.2 | ||||||||||||||||||
|
Retail trade — other than auto dealers
|
49.7 | 5.53 | 23.1 | 2.66 | 58.5 | 28.6 | ||||||||||||||||||
|
Contractors and construction
|
20.2 | 4.47 | 10.7 | 1.87 | 41.6 | 13.5 | ||||||||||||||||||
|
Transportation, communications, and utilities
|
19.8 | 2.69 | 4.5 | 0.67 | 30.6 | 11.4 | ||||||||||||||||||
|
Wholesale trade
|
32.3 | 4.78 | 12.3 | 1.24 | 29.5 | 19.6 | ||||||||||||||||||
|
Agriculture and forestry
|
1.4 | 0.74 | 0.7 | 0.32 | 5.1 | 2.3 | ||||||||||||||||||
|
Franklin
|
114.5 | 22.85 | 423.3 | 39.01 | — | 650.2 | ||||||||||||||||||
|
Energy
|
5.0 | 1.25 | 0.1 | 0.02 | 10.7 | 9.6 | ||||||||||||||||||
|
Public administration
|
1.5 | 1.75 | 0.5 | 0.42 | 0.1 | 0.6 | ||||||||||||||||||
|
Other
|
0.2 | 0.83 | 0.3 | 0.06 | 0.6 | 2.7 | ||||||||||||||||||
|
Total
|
$ | 487.6 | 3.71 | % | $ | 526.2 | 3.87 | % | $ | 578.4 | $ | 932.6 | ||||||||||||
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Within the C&I portfolio, the automotive industry segment
continued to be stressed and is discussed below.
Automotive
Industry
The following table provides a summary of loans and total
exposure including both loans and unused commitments and standby
letters of credit to companies related to the automotive
industry since December 31, 2009. The automobile industry
supplier exposure is embedded primarily in our C&I
portfolio within the Commercial Banking segment, while the
dealer exposure is originated and managed within the AFDS
business segment.
Table
24 — Automotive Industry Exposure (1)
| December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
|
Loans
|
% of Total
|
Total
|
Loans
|
% of Total
|
Total
|
|||||||||||||||||||
| Outstanding | Loans | Exposure | Outstanding | Loans | Exposure | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
Suppliers:
|
||||||||||||||||||||||||
|
Domestic
|
$ | 163.3 | $ | 260.7 | $ | 182.4 | $ | 330.9 | ||||||||||||||||
|
Foreign
|
23.9 | 71.8 | 32.7 | 45.7 | ||||||||||||||||||||
|
Total suppliers
|
187.2 | 0.51 | % | 332.5 | 215.1 | 0.52 | % | 376.6 | ||||||||||||||||
|
Dealer:
|
||||||||||||||||||||||||
|
Floor plan — domestic
|
388.0 | 692.1 | 552.6 | 746.8 | ||||||||||||||||||||
|
Floor plan — foreign
|
283.0 | 554.6 | 408.1 | 544.1 | ||||||||||||||||||||
|
Other
|
373.0 | 530.0 | 345.7 | 464.0 | ||||||||||||||||||||
|
Total dealer
|
1,044.0 | 2.84 | 1,776.7 | 1,306.4 | 3.18 | 1,754.9 | ||||||||||||||||||
|
Total automotive
|
$ | 1,231.2 | 3.35 | % | $ | 2,109.2 | $ | 1,521.5 | 3.70 | % | $ | 2,131.5 | ||||||||||||
| (1) | Companies with > 25% of revenue derived from the automotive industry. |
Although we do not have direct exposure to the automobile
manufacturing companies, we do have limited exposure to
automobile industry suppliers, and automobile dealer-related
exposures. While we continue to believe that this industry
represents a high degree of risk, the primary impact to
automobile industry suppliers has likely already occurred, given
the substantial adjustments to production in 2008 and 2009. As a
result of our geographic locations and the above referenced
exposure, we have closely monitored the entire automobile
industry, particularly the recent events associated with General
Motors and Chrysler, including bankruptcy filings, plant
closings, production suspension, and model eliminations. We have
anticipated the significant reductions in production across the
industry that will result in additional economic distress in
some of our markets. Our eastern Michigan and northern Ohio
markets are particularly exposed to these reductions, although
all our markets are affected. We anticipate the impact will
result in additional stress throughout our commercial and
consumer loan portfolios, as secondary and tertiary businesses
are affected by the actions of the manufacturers. However, as
these actions were anticipated, many of the potential impacts
have been mitigated through changes in underwriting criteria and
regionally focused policies and procedures. Within the AFDS
portfolio, our dealer selection criteria and focus is on
multiple brand dealership groups, as we have immaterial exposure
to single-brand dealerships.
As shown in the table above, at December 31, 2009, our
total direct exposure to the automotive supplier segment was
$332.5 million, of which $187.2 million represented
loans outstanding. We included companies that derive more than
25% of their revenues from contracts with automobile
manufacturing companies. This low level of exposure is
reflective of our industry-level risk-limits approach.
While the entire automotive industry is under significant
pressure as evidenced by a significant reduction in new car
sales and the resulting production declines, we believe that our
floorplan exposure will not be
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materially affected. Our floorplan exposure is centered in
large, multi-dealership entities, and we have focused on client
selection and conservative underwriting standards. We anticipate
that the economic environment will affect our dealerships in the
near-term, but we believe the majority of our portfolio will
perform favorably relative to the industry in the increasingly
stressed environment. The decline in floorplan loans outstanding
at December 31, 2009, compared with December 31, 2008,
reflected reduced dealership inventory, in part as a result of
the successful 2009 “Cash for Clunkers” program.
While the specific impacts associated with the ongoing changes
in the industry are unknown, we believe that we have taken
appropriate steps to limit our exposure. When we have chosen to
extend credit, our client selection process has focused us on
the most diversified and strongest dealership groups. We do not
anticipate any material dealer-related losses in the portfolio
despite numerous dealership closings during 2009. Our dealer
selection criteria, with a focus on multi-dealership groups has
proven itself in this environment.
FRANKLIN
RELATIONSHIP
| (This section should be read in conjunction with Significant Item 3 and the “Franklin Loans Restructuring Transaction” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section.) |
As a result of the March 31, 2009, restructuring, on a
consolidated basis, the $650.2 million nonaccrual
commercial loan to Franklin at December 31, 2008, was no
longer reported. Instead, we reported the loans secured by
first- and second- mortgages on residential properties and OREO
properties, both of which had previously been assets of Franklin
or its subsidiaries, and were pledged to secure our commercial
loan to Franklin. At the time of the restructuring, the loans
had a fair value of $493.6 million and the OREO properties
had a fair value of $79.6 million. As of December 31,
2009, the balances had reduced to $443.9 million and
$23.8 million, respectively. There is not a specific ALLL
for the Franklin portfolio.
The following table summarizes the Franklin-related balances for
accruing loans, NALs, and OREO since the restructuring:
Table
25 — Franklin-related Loan and OREO Balances
| 2009 | ||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | |||||||||||||
| (In millions) | ||||||||||||||||
|
Total accruing loans
|
$ | 129.2 | $ | 126.7 | $ | 127.4 | $ | 127.5 | ||||||||
|
Total nonaccrual loans
|
314.7 | 338.5 | 344.6 | 366.1 | ||||||||||||
|
Total Loans
|
443.9 | 465.2 | 472.0 | 493.6 | ||||||||||||
|
OREO
|
23.8 | 31.0 | 43.6 | 79.6 | ||||||||||||
|
Total Franklin loans and OREO
|
$ | 467.7 | $ | 496.2 | $ | 515.6 | $ | 573.2 | ||||||||
The changes in the Franklin-related balances since the
restructuring have been consistent with our expectations based
on the restructuring agreement. Collection strategies were
designed to generate cash flow with the intention of reducing
our exposure associated with these loans.
Consumer
Credit
Consumer credit approvals are based on, among other factors, the
financial strength and payment history of the borrower, type of
exposure, and the transaction structure. Consumer credit
decisions are generally made in a centralized environment
utilizing decision models. However, certain individuals who
understand each local region have the authority to make credit
extension decisions to preserve our local decision-making focus.
Each credit extension is assigned a specific
probability-of-default
and loss-given-default. The
probability-of-default
is generally based on the borrower’s most recent credit
bureau score (FICO), which we update quarterly, while the
loss-given-default is related to the type of collateral and the
LTV ratio associated with the credit extension.
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In consumer lending, credit risk is managed from a loan type and
vintage performance analysis. All portfolio segments are
continuously monitored for changes in delinquency trends and
other asset quality indicators. We make extensive use of
portfolio assessment models to continuously monitor the quality
of the portfolio, which may result in changes to future
origination strategies. The continuous analysis and review
process results in a determination of an appropriate ALLL amount
for our consumer loan portfolio. The independent risk management
group has a consumer process review component to ensure the
effectiveness and efficiency of the consumer credit processes.
Collection action is initiated on an “as needed” basis
through a centrally managed collection and recovery function.
The collection group employs a series of collection
methodologies designed to maintain a high level of effectiveness
while maximizing efficiency. In addition to the retained
consumer loan portfolio, the collection group is responsible for
collection activity on all sold and securitized consumer loans
and leases.
Please refer to the “Nonperforming
Assets” discussion for further information regarding the
placement of consumer loans on nonaccrual status and the
charging off of balances to the ALLL.
The residential mortgage and home equity portfolios are
primarily located throughout our geographic footprint. The
general slowdown in the housing market has impacted the
performance of our residential mortgage and home equity
portfolios over the past year. While the degree of price
depreciation varies across our markets, all regions throughout
our footprint have been affected. Given the continued economic
weaknesses in our markets, the home equity and residential
mortgage portfolios are particularly noteworthy, and are
discussed in greater detail below:
Table
26 — Selected Home Equity and Residential Mortgage
Portfolio Data
|
Home Equity
|
Residential
|
|||||||||||||||||||||||||
| Home Equity Loans | Lines-of-Credit | Mortgages | ||||||||||||||||||||||||
| 12/31/09 | 12/31/08 | 12/31/09 | 12/31/08 | 12/31/09 | 12/31/08 | |||||||||||||||||||||
|
Ending balance (in millions)
|
$ | 2,616 | $ | 3,116 | $ | 4,946 | $ | 4,440 | $ | 4,510 | $ | 4,761 | ||||||||||||||
|
Portfolio weighted average LTV ratio(1)
|
71 | % | 70 | % | 77 | % | 78 | % | 76 | % | 76 | % | ||||||||||||||
|
Portfolio weighted average FICO(2)
|
716 | 725 | 723 | 720 | 698 | 707 | ||||||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||
|
Home
|
Home Equity
|
Residential
|
||||||||||||
| Equity Loans | Lines-of-Credit | Mortgages | ||||||||||||
|
Originations (in millions)
|
$ | 201 | $ | 1,498 | $ | 520 | ||||||||
|
Origination weighted average LTV ratio(1)
|
61 | % | 74 | % | 79 | % | ||||||||
|
Origination weighted average FICO(2)
|
754 | 765 | 745 | |||||||||||
| (1) | 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. | |
| (2) | Portfolio weighted average FICO reflects currently updated customer credit scores whereas origination weighted average FICO reflects the customer credit scores at the time of loan origination. |
HOME
EQUITY PORTFOLIO
Our home equity portfolio (loans and
lines-of-credit)
consists of both first and second mortgage loans with
underwriting criteria based on minimum credit scores,
debt-to-income
ratios, and LTV ratios. We offer closed-end home equity loans
with a fixed interest rate and level monthly payments and a
variable-rate, interest-only home equity
line-of-credit.
Home equity loans are generally fixed-rate with periodic
principal and interest payments. Home equity
lines-of-credit
are generally variable-rate and do not require payment of
principal during the
10-year
revolving period of the line.
We believe we have granted credit conservatively within this
portfolio. We have not originated stated income home equity
loans or
lines-of-credit
that allow negative amortization. Also, we have not originated
home equity loans or
lines-of-credit
with an LTV ratio at origination greater than 100%, except for
infrequent situations with high quality borrowers. However,
recent declines in housing prices have likely eliminated a
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portion of the collateral for this portfolio as some loans with
an original LTV ratio of less than 100% currently have an LTV
ratio above 100%. At December 31, 2009, 43% of our home
equity loan portfolio, and 27% of our home equity
line-of-credit
portfolio were secured by a first-mortgage lien on the property.
The risk profile is substantially improved when we hold a
first-mortgage lien position. In 2009, over 40% of our home
equity portfolio originations (both loans and
lines-of-credit)
were loans where the loan was secured by a first-mortgage lien.
For certain home equity loans and
lines-of-credit,
we may utilize Automated Valuation Methodology (AVM) or other
model driven value estimates during the credit underwriting
process. Regardless of the estimate methodology, we supplement
our underwriting with a third party fraud detection system to
limit our exposure to “flipping”, and outright
fraudulent transactions. We update values, as we believe
appropriate, and in compliance with applicable regulations, for
loans identified as higher risk, based on performance indicators
to facilitate our workout and loss mitigation functions.
We continue to make appropriate origination policy adjustments
based on our assessment of an appropriate risk profile as well
as industry actions. As an example, the significant changes made
in 2009 and 2008 by Fannie Mae and Freddie Mac resulted in the
reduction of our maximum LTV ratio on second-mortgage loans,
even for customers with high credit scores. In addition to
origination policy adjustments, we take appropriate actions, as
necessary, to manage the risk profile of this portfolio. We
focus production primarily within our banking footprint or to
existing customers.
RESIDENTIAL
MORTGAGES
We focus on higher quality borrowers, and underwrite all
applications centrally, often through the use of an automated
underwriting system. We do not originate residential mortgage
loans that allow negative amortization or are “payment
option adjustable-rate mortgages.”
All residential mortgage loans are originated based on a full
appraisal during the credit underwriting process. Additionally,
we supplement our underwriting with a third party fraud
detection system to limit our exposure to “flipping”,
and outright fraudulent transactions. We update values, as we
believe appropriate, and in compliance with applicable
regulations, for loans identified as higher risk, based on
performance indicators to facilitate our workout and loss
mitigation functions.
During 2009, we sold $44.8 million of underperforming
mortgage loans, resulting in a reduction in residential mortgage
NALs. We will continue to evaluate this type of transaction in
future periods based on market conditions.
A majority of the loans in our loan portfolio have adjustable
rates. Our adjustable-rate mortgages (ARMs) are primarily
residential mortgages that have a fixed-rate for the first 3 to
5 years and then adjust annually. These loans comprised
approximately 56% of our total residential mortgage loan
portfolio at December 31, 2009. At December 31, 2009,
ARM loans that were expected to have rates reset totaled
$888.5 million for 2010, and $477.7 million for 2011.
Given the quality of our borrowers and the relatively low
current interest rates, we believe that we have a relatively
limited exposure to ARM reset risk. Nonetheless, we have taken
actions to mitigate our risk exposure. We initiate borrower
contact at least six months prior to the interest rate
resetting, and have been successful in converting many ARMs to
fixed-rate loans through this process. Additionally, where
borrowers are experiencing payment difficulties, loans may be
reunderwritten based on the borrower’s ability to repay the
loan.
We had $363.3 million of Alt-A mortgage loans in the
residential mortgage loan portfolio at December 31, 2009,
compared with $445.4 million at December 31, 2008.
These loans have a higher risk profile than the rest of the
portfolio as a result of origination policies for this limited
segment including reliance on stated income, stated assets, or
higher acceptable LTV ratios. At December 31, 2009,
borrowers for Alt-A mortgages had an average current FICO score
of 662 and the loans had an average LTV ratio of 87%, compared
with 671 and 88%, respectively, at December 31, 2008. Total
Alt-A NCOs were $21.3 million, or an annualized 5.25%, in
2009, compared with $9.4 million, or an annualized 1.91%,
in 2008. As with the entire residential mortgage portfolio, the
increase in NCOs reflected, among other actions, a more
conservative position on the
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timing of loss recognition and the sale of underperforming
mortgage loans in 2009. At December 31, 2009,
$17.7 million of the ALLL was allocated to the Alt-A
mortgage portfolio, representing 4.87% of period-end related
loans and leases. Our exposure related to this product will
continue to decline in the future as we stopped originating
these loans in 2007.
Interest-only loans comprised $576.7 million of residential
real estate loans at December 31, 2009, compared with
$691.9 million at December 31, 2008. Interest-only
loans are underwritten to specific standards including minimum
credit scores, stressed
debt-to-income
ratios, and extensive collateral evaluation. At
December 31, 2009, borrowers for interest-only loans had an
average current FICO score of 718 and the loans had an average
LTV ratio of 77%, compared with 724 and 78%, respectively, at
December 31, 2008. Total interest-only NCOs were
$11.3 million, or an annualized 1.79% in 2009, compared
with $1.6 million, or an annualized 0.21%, in 2008. As with
the entire residential mortgage portfolio, the increase in NCOs
reflected, among other actions, a more conservative position on
the timing of loss recognition, and the sale of underperforming
mortgage loans in 2009. At December 31, 2009,
$7.5 million of the ALLL was allocated to the interest-only
loan portfolio, representing 1.30% of period-end related loans
and leases.
Several recent government actions have been enacted that have
affected the residential mortgage portfolio and MSRs in
particular. Various refinance programs positively affected the
availability of credit for the industry. We are utilizing these
programs to enhance our existing strategies of working closely
with our customers.
AUTOMOTIVE
INDUSTRY IMPACTS ON CONSUMER LOAN PORTFOLIO
The issues affecting the automotive industry
(see
“Automotive Industry” discussion located within the
“Commercial Credit” section)
also have an impact
on the performance of the consumer loan portfolio. While there
is a direct correlation between the industry situation and our
exposure to the automotive suppliers and automobile dealers in
our commercial portfolio, the loss of jobs and reduction in
wages may have a negative impact on our consumer portfolio. We
continue to monitor the potential impact on our geographic
regions in the event of significant production changes or plant
closings in our markets and, we believe that we have made a
number of positive decisions regarding the quality of our
consumer portfolio given the current environment. In the
indirect automobile portfolio, we have consistently focused on
borrowers with high credit scores and lower LTVs, as reflected
by the performance of the portfolio given the economic
conditions. In the residential and home equity loan portfolios,
we have been operating in a relatively high unemployment
situation for an extended period of time, yet have been able to
maintain our performance metrics reflecting our focus on strong
underwriting. In summary, while we anticipate our performance
results may be negatively impacted, we believe the impact will
be manageable.
Counterparty
Risk
In the normal course of business, we engage with other financial
counterparties for a variety of purposes including investing,
asset and liability management, mortgage banking, and for
trading activities. As a result, we are exposed to credit risk,
or the risk of loss if the counterparty fails to perform
according to the terms of our contract or agreement.
We minimize counterparty risk through credit approvals, actively
setting adjusting exposure limits, implementing monitoring
procedures similar to those used for our commercial portfolio
(see “Commercial Credit” discussion)
, generally
entering into transactions only with counterparties that carry
high quality ratings, and requiring collateral when appropriate.
The majority of the financial institutions with whom we are
exposed to counterparty risk are large commercial banks. The
potential amount of loss, which would have been recognized at
December 31, 2009, if a counterparty defaulted, did not
exceed $17 million for any individual counterparty.
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Credit
Quality
We believe the most meaningful way to assess overall credit
quality performance for 2009 is through an analysis of credit
quality performance ratios. This approach forms the basis of
most of the discussion in the three sections immediately
following: NALs and NPAs, ACL, and NCOs.
Credit quality performance in 2009 was negatively impacted by
the sustained economic weakness in our Midwest markets, although
there were signs of stabilization late in the year. In addition,
we initiated certain actions in 2009 with regard to loss
recognition on our residential mortgage portfolio that we
believe will increase the flexibility in working the loans
toward a more timely resolution. We anticipate a challenging
full-year in 2010 with regards to credit quality, but believe
that 2009 was the peak in terms of NPA levels, as well as for
credit losses and the related increase in the ACL.
NONACCRUAL
LOANS (NALs) AND NONPERFORMING ASSETS (NPAs)
| (This section should be read in conjunction with Significant Items 2 and 3 and the “Franklin Loans Restructuring Transaction” discussion located with the “Critical Accounting Policies and Use of Significant Estimates” section.) |
NPAs consist of (a) NALs, which represent loans and leases
that are no longer accruing interest, (b) impaired
held-for-sale
loans, (c) OREO, and (d) other NPAs. A C&I or CRE
loan is generally placed on nonaccrual status when collection of
principal or interest is in doubt or when the loan is
90-days
past
due. Residential mortgage loans are placed on nonaccrual status
at 180 days, and a charge-off is recorded when the loan has
been foreclosed and the loan balance exceeds the fair value of
the collateral. A home equity loan is placed on nonaccrual
status at 120 days, and a charge-off is recorded when it is
determined that there is not sufficient equity in the loan to
cover our position. When interest accruals are suspended,
accrued interest income is reversed with current year accruals
charged to earnings and prior-year amounts generally charged-off
as a credit loss.
Accruing restructured loans (ARLs) consists of accruing loans
that have been reunderwritten, modified, or restructured when
borrowers are experiencing payment difficulties. Generally,
prior to restructuring, these loans have not reached a status to
be considered as NALs. These loan restructurings are one
component of the loss mitigation process, and are made to
increase the likelihood of the borrower’s ability to repay
the loan. Modifications to these loans include, but are not
limited to, changes to any of the following: interest rate,
maturity, principal, payment amount, or a combination of each.
Table 27 reflects period-end NALs and NPAs detail for each of
the last five years, and Table 28 reflects period-end ARLs and
past due loans and leases detail for each of the last five
years. Table 29 details the Franklin-related impacts to NALs and
NPAs for 2009 and 2008. Prior to 2008, there were no
Franklin-related NALs or NPAs.
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Table
27 — Nonaccrual Loans (NALs) and Nonperforming Assets
(NPAs)
| At December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Nonaccrual loans and leases (NALs)
|
||||||||||||||||||||
|
Commercial and industrial(1)
|
$ | 578,414 | $ | 932,648 | $ | 87,679 | $ | 58,393 | $ | 55,273 | ||||||||||
|
Commercial real estate
|
935,812 | 445,717 | 148,467 | 37,947 | 18,309 | |||||||||||||||
|
Alt-A mortgages
|
11,362 | 21,286 | 15,478 | 10,830 | 6,924 | |||||||||||||||
|
Interest-only mortgages
|
7,445 | 12,221 | 3,167 | 2,207 | 239 | |||||||||||||||
|
Franklin residential mortgages
|
299,670 | — | — | — | — | |||||||||||||||
|
Other residential mortgages
|
44,153 | 65,444 | 40,912 | 19,490 | 10,450 | |||||||||||||||
|
Total residential mortgages(1)
|
362,630 | 98,951 | 59,557 | 32,527 | 17,613 | |||||||||||||||
|
Home equity
|
40,122 | 24,831 | 24,068 | 15,266 | 10,720 | |||||||||||||||
|
Total nonaccrual loans and leases
|
1,916,978 | 1,502,147 | 319,771 | 144,133 | 101,915 | |||||||||||||||
|
Other real estate owned (OREO), net
|
||||||||||||||||||||
|
Residential(2)
|
71,427 | 63,058 | 60,804 | 47,898 | 14,214 | |||||||||||||||
|
Commercial
|
68,717 | 59,440 | 14,467 | 1,589 | 1,026 | |||||||||||||||
|
Total other real estate, net
|
140,144 | 122,498 | 75,271 | 49,487 | 15,240 | |||||||||||||||
|
Impaired loans held for sale(3)
|
969 | 12,001 | 73,481 | — | — | |||||||||||||||
|
Other NPAs(4)
|
— | — | 4,379 | — | — | |||||||||||||||
|
Total nonperforming assets (NPAs)
|
$ | 2,058,091 | $ | 1,636,646 | $ | 472,902 | $ | 193,620 | $ | 117,155 | ||||||||||
|
NALs as a % of total loans and leases
|
5.21 | % | 3.66 | % | 0.80 | % | 0.55 | % | 0.42 | % | ||||||||||
|
NPA ratio(5)
|
5.57 | 3.97 | 1.18 | 0.74 | 0.48 | |||||||||||||||
|
Nonperforming Franklin loans(1)
|
||||||||||||||||||||
|
Commercial
|
$ | — | $ | 650,225 | $ | — | $ | — | $ | — | ||||||||||
|
Residential mortgage
|
299,670 | — | — | — | — | |||||||||||||||
|
OREO
|
23,826 | — | — | — | — | |||||||||||||||
|
Home equity
|
15,004 | — | — | — | — | |||||||||||||||
|
Total Nonperforming Franklin loans
|
$ | 338,500 | $ | 650,225 | $ | — | $ | — | $ | — | ||||||||||
| (1) | Franklin loans were reported as commercial accruing restructured loans at December 31, 2007. At December 31, 2008, Franklin loans were reported as nonaccrual commercial and industrial loans. At December 31, 2009, nonaccrual Franklin loans were reported as residential mortgage loans, home equity loans, and OREO, reflecting the 2009 first quarter restructuring. | |
| (2) | Beginning in 2006, OREO includes balances of loans in foreclosure that are serviced for others and, which are fully guaranteed by the U.S. Government, that were reported in 90 day past due loans and leases in prior periods. | |
| (3) | Represents impaired loans obtained from the Sky Financial acquisition. Held for sale loans are carried at the lower of cost or fair value less costs to sell. | |
| (4) | Other NPAs represent certain investment securities backed by mortgage loans to borrowers with lower FICO scores. | |
| (5) | NPAs divided by the sum of loans and leases, impaired loans held-for-sale, net other real estate, and other NPAs. |
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Table of Contents
Table
28 — Accruing Past Due Loans and Leases and Accruing
Restructured Loans
| At December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Accruing loans and leases past due 90 days or more
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | — | $ | 10,889 | $ | 10,474 | $ | 170 | $ | 3,322 | ||||||||||
|
Commercial real estate
|
— | 59,425 | 25,064 | 1,711 | — | |||||||||||||||
|
Residential mortgage (excluding loans guaranteed by the U.S.
government
|
78,915 | 71,553 | 67,391 | 35,555 | 33,738 | |||||||||||||||
|
Home equity
|
53,343 | 29,039 | 24,086 | 13,423 | 8,297 | |||||||||||||||
|
Other loans and leases
|
13,400 | 18,039 | 13,962 | 6,650 | 10,407 | |||||||||||||||
|
Total, excl. loans guaranteed by the U.S. government
|
145,658 | 188,945 | 140,977 | 57,509 | 55,764 | |||||||||||||||
|
Add: loans guaranteed by the U.S. government
|
101,616 | 82,576 | 51,174 | 31,308 | 32,689 | |||||||||||||||
|
Total accruing loans and leases past due 90 days or
more, including loans guaranteed by the U.S. government
|
$ | 247,274 | $ | 271,521 | $ | 192,151 | $ | 88,817 | $ | 88,453 | ||||||||||
|
Excluding loans guaranteed by the U.S. government, as a percent
of total loans and leases
|
0.40 | % | 0.46 | % | 0.35 | % | 0.22 | % | 0.23 | % | ||||||||||
|
Guaranteed by the U.S. government, as a percent of total loans
and leases
|
0.28 | 0.20 | 0.13 | 0.12 | 0.13 | |||||||||||||||
|
Including loans guaranteed by the U.S. government, as a percent
of total loans and leases
|
0.68 | 0.66 | 0.48 | 0.34 | 0.36 | |||||||||||||||
|
Accruing restructured loans
|
||||||||||||||||||||
|
Commercial(1)
|
$ | 157,049 | $ | 185,333 | $ | 1,187,368 | $ | — | $ | — | ||||||||||
|
Alt-A mortgages
|
57,278 | 32,336 | 10,085 | 579 | — | |||||||||||||||
|
Interest-only mortgages
|
7,890 | 7,183 | 110 | — | — | |||||||||||||||
|
Other residential mortgages
|
154,471 | 43,338 | 21,810 | 6,917 | — | |||||||||||||||
|
Total residential mortgages
|
219,639 | 82,857 | 32,005 | 7,496 | — | |||||||||||||||
|
Other
|
52,871 | 41,094 | — | — | — | |||||||||||||||
|
Total accruing restructured loans
|
$ | 429,559 | $ | 309,284 | $ | 1,219,373 | $ | 7,496 | $ | — | ||||||||||
| (1) | Franklin loans were reported as commercial accruing restructured loans at December 31, 2007. At December 31, 2008, Franklin loans were reported as nonaccrual commercial and industrial loans. At December 31, 2009, nonaccrual Franklin loans were reported as residential mortgage loans, home equity loans, and OREO; reflecting the 2009 first quarter restructuring. |
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Table of Contents
Table
29 — NALs/NPAs — Franklin-Related
Impact
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In millions) | ||||||||
|
Nonaccrual loans
|
||||||||
|
Franklin
|
$ | 314.7 | $ | 650.2 | ||||
|
Non-Franklin
|
1,602.3 | 851.9 | ||||||
|
Total
|
$ | 1,917.0 | $ | 1,502.1 | ||||
|
Total loans and leases
|
||||||||
|
Franklin
|
$ | 443.9 | $ | 650.2 | ||||
|
Non-Franklin
|
36,346.8 | 40,441.8 | ||||||
|
Total
|
$ | 36,790.7 | $ | 41,092.0 | ||||
|
NAL ratio
|
||||||||
|
Total
|
5.21 | % | 3.66 | % | ||||
|
Non-Franklin
|
4.41 | 2.11 | ||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In millions) | ||||||||
|
Nonperforming assets
|
||||||||
|
Franklin
|
$ | 338.5 | $ | 650.2 | ||||
|
Non-Franklin
|
1,719.6 | 986.4 | ||||||
|
Total
|
$ | 2,058.1 | $ | 1,636.6 | ||||
|
Total loans and leases
|
$ | 36,790.7 | $ | 41,092.0 | ||||
|
Total other real estate, net
|
140.1 | 122.5 | ||||||
|
Impaired loans held for sale
|
1.0 | 12.0 | ||||||
|
Total
|
36,931.8 | 41,226.5 | ||||||
|
Franklin
|
338.5 | 650.2 | ||||||
|
Non-Franklin
|
$ | 36,593.3 | $ | 40,576.3 | ||||
|
NPA ratio
|
||||||||
|
Total
|
5.57 | % | 3.97 | % | ||||
|
Non-Franklin
|
4.72 | 2.43 | ||||||
During 2009, and because we believe that there will be no
meaningful economic recovery for the foreseeable future, we took
a more conservative approach in identifying and classifying
emerging problem credits. In many cases, commercial loans were
placed on nonaccrual status even though the loan was less than
30 days past due for both principal and interest payments.
Of the $1,514.2 million of CRE and C&I-related NALs at
December 31, 2009, $530.1 million, or 35%, represented
loans that were less than 30 days past due. We believe the
decisions increase our options for working these loans toward
timelier resolution. It is important to note that although there
was an increase in NALs from December 31, 2008, to
December 31, 2009, there was a substantial decline in the
2009 fourth quarter.
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Table of Contents
NPAs, which include NALs, were $2,058.1 million at
December 31, 2009, and represented 5.57% of related assets.
This compared with $1,636.6 million, or 3.97%, at
December 31, 2008. The $421.4 million increase
reflected:
| • | $414.8 million increase to NALs, discussed below. | |
| • | $17.6 million increase to OREO. This reflected an increase of $79.6 million in OREO assets recorded as part of the 2009 first quarter Franklin restructuring. Subsequently, Franklin-related OREO assets declined $55.8 million, reflecting the active marketing and selling of Franklin-related OREO properties during 2009. The non-Franklin-related decline also reflected the same active marketing and selling of our OREO properties. |
Partially offset by:
| • | $11.0 million decrease in impaired loans held-for-sale, primarily reflecting loan sales and payments. |
NALs were $1,917.0 million at December 31, 2009,
compared with $1,502.1 million at December 31, 2008.
The increase of $414.8 million primarily reflected:
| • | $490.1 million increase in CRE NALs, reflecting the continued decline in the housing market and stress on retail sales, as the majority of the increase was associated with the retail and single family home builder segments. The stress of the lower retail sales and downward pressure on rents given the economic conditions, have adversely affected retail projects. | |
| • | $263.7 million increase in residential mortgage NALs. This reflected a net increase of $299.7 million related to the 2009 first quarter Franklin restructuring, partially offset by declines due to the more conservative position regarding the timing of loss recognition, active loss mitigation, as well as the sale of residential mortgage NALs during 2009. Our efforts to proactively address existing issues with loss mitigation and loan modification transactions have helped to reduce the inflow of new residential mortgage NALs. All residential mortgage NALs have been written down to current value less selling costs. | |
| • | $15.3 million increase in home equity NALs, primarily reflecting the loans recorded as part of the 2009 first quarter Franklin restructuring. As with residential mortgages, all home equity NALs have been written down to current value less selling costs. |
Partially offset by:
| • | $354.2 million decrease in C&I NALs. This reflected a reduction of $650.2 million related to the 2009 first quarter Franklin restructuring, partially offset by an increase of $296.0 million in non-Franklin related NALs, reflecting the economic conditions of our markets. In general, the C&I loans experiencing the most stress are those supporting the housing and construction segments, and to a lesser degree, the automobile suppliers and restaurant segments. |
The over
90-day
delinquent, but still accruing, ratio excluding loans guaranteed
by the U.S. Government, was 0.40% at December 31,
2009, representing a 6 basis points decrease compared with
December 31, 2008. On this same basis, the over
90-day
delinquency ratio for total consumer loans was 0.90% at
December 31, 2009, representing a 22 basis point
increase compared with December 31, 2008.
As part of our loss mitigation process, we reunderwrite, modify,
or restructure loans when borrowers are experiencing payment
difficulties, and these loan restructurings are based on the
borrower’s ability to repay the loan.
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Table of Contents
NPA activity for each of the past five years was as follows:
Table
30 — Nonperforming Asset Activity
| At December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Nonperforming assets, beginning of year
|
$ | 1,636,646 | $ | 472,902 | $ | 193,620 | $ | 117,155 | $ | 108,568 | ||||||||||
|
New nonperforming assets
|
2,767,295 | 1,082,063 | 468,056 | 222,043 | 171,150 | |||||||||||||||
|
Franklin impact, net(1)
|
(311,726 | ) | 650,225 | — | — | — | ||||||||||||||
|
Acquired nonperforming assets
|
— | — | 144,492 | 33,843 | — | |||||||||||||||
|
Returns to accruing status
|
(215,336 | ) | (42,161 | ) | (24,952 | ) | (43,999 | ) | (7,547 | ) | ||||||||||
|
Loan and lease losses
|
(1,148,135 | ) | (202,249 | ) | (120,959 | ) | (45,648 | ) | (38,198 | ) | ||||||||||
|
OREO losses
|
(62,665 | ) | (19,582 | ) | (5,795 | ) | (543 | ) | (621 | ) | ||||||||||
|
Payments
|
(497,076 | ) | (194,692 | ) | (86,093 | ) | (59,469 | ) | (64,861 | ) | ||||||||||
|
Sales
|
(110,912 | ) | (109,860 | ) | (95,467 | ) | (29,762 | ) | (51,336 | ) | ||||||||||
|
Nonperforming assets, end of year
|
$ | 2,058,091 | $ | 1,636,646 | $ | 472,902 | $ | 193,620 | $ | 117,155 | ||||||||||
| (1) | The activity above excludes the 2007 impact of the placement of the loans to Franklin on nonaccrual status and their return to accrual status upon the restructuring of these loans. At 2007 year-end, the loans to Franklin were not included in the nonperforming assets total. At 2008 year-end, the loans to Franklin were reported as nonaccrual commercial and industrial loans. At 2009 year-end, nonaccrual Franklin loans were reported as residential mortgage loans, home equity loans, and OREO. The 2009 impact primarily reflects loan and lease losses, as well as payments. |
ALLOWANCES
FOR CREDIT LOSSES (ACL)
| (This section should be read in conjunction with Significant Item 3, “Critical Accounting Policies and Use of Significant Estimates”, and Note 1 of the Notes to the Consolidated Financial Statements.) |
We maintain two reserves, both of which are available to absorb
credit losses: the ALLL and the AULC. When summed together,
these reserves comprise the total ACL. Our credit administration
group is responsible for developing methodology assumptions and
estimates, as well as determining the adequacy of the ACL. The
ALLL represents the estimate of probable losses inherent in the
loan portfolio at the balance sheet date. Additions to the ALLL
result from recording provision expense for loan losses or
recoveries, while reductions reflect charge-offs, net of
recoveries, or the sale of loans. The AULC is determined by
applying the transaction reserve process, which is described in
Note 1 of the Notes to the Consolidated Financial
Statements, to the unfunded portion of the portfolio adjusted by
an applicable funding expectation.
As shown in the following tables below, the ALLL increased to
$1,482.5 million at December 31, 2009, compared with
$900.2 million at December 31, 2008. Expressed as a
percent of period-end loans and leases, the ALLL ratio increased
to 4.03% at December 31, 2009, compared with 2.19% at
December 31, 2008.
The $582.3 million increase in the ALLL primarily
reflected an increase in specific reserves associated with
impaired loans, and an increase associated with risk-grade
migration, predominantly in the commercial portfolio. The
increase is also a result of a change in estimate resulting from
the 2009 fourth quarter review of our ACL practices and
assumptions, consisting of:
| • | Approximately $200 million increase in the judgmental component. | |
| • | Approximately $200 million allocated primarily to the CRE portfolio addressing the severity of CRE loss-given-default percentages and a longer term view of the loss emergence time period. | |
| • | Approximately $50 million from updating the consumer reserve factors to include the current delinquency status. |
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Table of Contents
Partially offset by:
| • | $130 million of previously established Franklin specific reserves utilized to absorb related NCOs due to the 2009 first quarter Franklin restructuring ( see “Franklin Loan Restructuring Transaction” discussion located within the “Critical Accounting Policies and Use of Significant Estimates” section) . |
On a combined basis, the ACL as a percent of total loans and
leases at December 31, 2009, was 4.16% compared with 2.30%
at December 31, 2008. Like the ALLL, the Franklin
restructuring impacted the change in the ACL from
December 31, 2008.
The table below reflects how our ACL was allocated among our
various loan categories during the past five years:
Table
31 — Allocation of Allowances for Credit Losses
(1)
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial and industrial
|
$ | 492,205 | 35 | % | $ | 412,201 | 33 | % | $ | 295,555 | 33 | % | $ | 117,481 | 30 | % | $ | 116,016 | 28 | % | ||||||||||||||||||||
|
Commercial real estate
|
751,875 | 21 | 322,681 | 25 | 172,998 | 23 | 72,272 | 17 | 67,670 | 17 | ||||||||||||||||||||||||||||||
|
Total commercial
|
1,244,080 | 56 | 734,882 | 58 | 468,553 | 56 | 189,753 | 47 | 183,686 | 44 | ||||||||||||||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||||||||||||||||||
|
Automobile loans and leases
|
57,951 | 9 | 44,712 | 11 | 28,635 | 11 | 28,400 | 15 | 33,870 | 18 | ||||||||||||||||||||||||||||||
|
Home equity
|
102,039 | 21 | 63,538 | 18 | 45,957 | 18 | 32,572 | 19 | 30,245 | 20 | ||||||||||||||||||||||||||||||
|
Residential mortgage
|
55,903 | 12 | 44,463 | 12 | 20,746 | 14 | 13,349 | 17 | 13,172 | 17 | ||||||||||||||||||||||||||||||
|
Other loans
|
22,506 | 2 | 12,632 | 1 | 14,551 | 1 | 7,994 | 2 | 7,374 | 1 | ||||||||||||||||||||||||||||||
|
Total consumer
|
238,399 | 44 | 165,345 | 42 | 109,889 | 44 | 82,315 | 53 | 84,661 | 56 | ||||||||||||||||||||||||||||||
|
Total ALLL
|
1,482,479 | 100 | % | 900,227 | 100 | % | 578,442 | 100 | % | 272,068 | 100 | % | 268,347 | 100 | % | |||||||||||||||||||||||||
|
AULC
|
48,879 | 44,139 | 66,528 | 40,161 | 36,957 | |||||||||||||||||||||||||||||||||||
|
Total ACL
|
$ | 1,531,358 | $ | 944,366 | $ | 644,970 | $ | 312,229 | $ | 305,304 | ||||||||||||||||||||||||||||||
| (1) | Percentages represent the percentage of each loan and lease category to total loans and leases. |
Table 32 reflects activity in the ALLL and ACL for each of the
last five years. Table 33 displays the Franklin-related impacts
to the ALLL and ACL for 2009, 2008, and 2007. Prior to 2007,
there were not any Franklin-related impacts to either the ALLL
or ACL.
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Table of Contents
Table
32 — Summary of ACL and Related Statistics
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Allowance for loan and lease losses, beginning of year
|
$ | 900,227 | $ | 578,442 | $ | 272,068 | $ | 268,347 | $ | 271,211 | ||||||||||
|
Acquired allowance for loan and lease losses
|
— | — | 188,128 | 23,785 | — | |||||||||||||||
|
Loan and lease charge-offs
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Franklin
|
(114,465 | ) | (423,269 | ) | (308,496 | ) | — | — | ||||||||||||
|
Other commercial and industrial
|
(410,797 | ) | (115,165 | ) | (50,961 | ) | (33,244 | ) | (37,731 | ) | ||||||||||
|
Commercial and industrial
|
(525,262 | ) | (538,434 | ) | (359,457 | ) | (33,244 | ) | (37,731 | ) | ||||||||||
|
Construction
|
(196,148 | ) | (6,631 | ) | (11,902 | ) | (4,156 | ) | (534 | ) | ||||||||||
|
Commercial
|
(500,534 | ) | (65,565 | ) | (29,152 | ) | (4,393 | ) | (5,534 | ) | ||||||||||
|
Commercial real estate
|
(696,682 | ) | (72,196 | ) | (41,054 | ) | (8,549 | ) | (6,068 | ) | ||||||||||
|
Total commercial
|
(1,221,944 | ) | (610,630 | ) | (400,511 | ) | (41,793 | ) | (43,799 | ) | ||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Automobile loans
|
(64,742 | ) | (56,217 | ) | (28,607 | ) | (20,262 | ) | (25,780 | ) | ||||||||||
|
Automobile leases
|
(11,399 | ) | (15,891 | ) | (12,634 | ) | (13,527 | ) | (12,966 | ) | ||||||||||
|
Automobile loans and leases
|
(76,141 | ) | (72,108 | ) | (41,241 | ) | (33,789 | ) | (38,746 | ) | ||||||||||
|
Home equity
|
(110,400 | ) | (70,457 | ) | (37,221 | ) | (24,950 | ) | (20,129 | ) | ||||||||||
|
Residential mortgage
|
(111,899 | ) | (23,012 | ) | (12,196 | ) | (4,767 | ) | (2,561 | ) | ||||||||||
|
Other loans
|
(40,993 | ) | (30,123 | ) | (26,773 | ) | (14,393 | ) | (10,613 | ) | ||||||||||
|
Total consumer
|
(339,433 | ) | (195,700 | ) | (117,431 | ) | (77,899 | ) | (72,049 | ) | ||||||||||
|
Total charge-offs
|
(1,561,378 | ) | (806,330 | ) | (517,942 | ) | (119,692 | ) | (115,848 | ) | ||||||||||
|
Recoveries of loan and lease charge-offs
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Other commercial and industrial
|
37,656 | 12,269 | 13,617 | 12,376 | 12,731 | |||||||||||||||
|
Commercial and industrial
|
37,656 | 12,269 | 13,617 | 12,376 | 12,731 | |||||||||||||||
|
Construction
|
3,442 | 5 | 48 | 602 | 399 | |||||||||||||||
|
Commercial
|
10,509 | 3,451 | 1,902 | 1,163 | 1,095 | |||||||||||||||
|
Commercial real estate
|
13,951 | 3,456 | 1,950 | 1,765 | 1,494 | |||||||||||||||
|
Total commercial
|
51,607 | 15,725 | 15,567 | 14,141 | 14,225 | |||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Automobile loans
|
17,030 | 14,989 | 11,422 | 11,932 | 13,792 | |||||||||||||||
|
Automobile leases
|
2,779 | 2,554 | 2,127 | 3,082 | 1,302 | |||||||||||||||
|
Automobile loans and leases
|
19,809 | 17,543 | 13,549 | 15,014 | 15,094 | |||||||||||||||
|
Home equity
|
4,224 | 2,901 | 2,795 | 3,096 | 2,510 | |||||||||||||||
|
Residential mortgage
|
1,697 | 1,765 | 825 | 262 | 229 | |||||||||||||||
|
Other loans
|
7,454 | 10,329 | 7,575 | 4,803 | 3,733 | |||||||||||||||
|
Total consumer
|
33,184 | 32,538 | 24,744 | 23,175 | 21,566 | |||||||||||||||
|
Total recoveries
|
84,791 | 48,263 | 40,311 | 37,316 | 35,791 | |||||||||||||||
79
Table of Contents
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net loan and lease charge-offs
|
(1,476,587 | ) | (758,067 | ) | (477,631 | ) | (82,376 | ) | (80,057 | ) | ||||||||||
|
Provision for loan and lease losses
|
2,069,931 | 1,067,789 | 628,802 | 62,312 | 83,782 | |||||||||||||||
|
Economic reserve transfer
|
— | 12,063 | — | — | (6,253 | ) | ||||||||||||||
|
Allowance for assets sold and securitized
|
(9,188 | ) | — | — | — | (336 | ) | |||||||||||||
|
Allowance for loans transferred to held for sale
|
(1,904 | ) | — | (32,925 | ) | — | — | |||||||||||||
|
Allowance for loan and lease losses, end of year
|
1,482,479 | 900,227 | 578,442 | 272,068 | 268,347 | |||||||||||||||
|
AULC, beginning of year
|
44,139 | 66,528 | 40,161 | 36,957 | 33,187 | |||||||||||||||
|
Acquired AULC
|
— | — | 11,541 | 325 | — | |||||||||||||||
|
Provision for (Reduction in) unfunded loan commitments and
letters of credit losses
|
4,740 | (10,326 | ) | 14,826 | 2,879 | (2,483 | ) | |||||||||||||
|
Economic reserve transfer
|
— | (12,063 | ) | — | — | 6,253 | ||||||||||||||
|
AULC, end of year
|
48,879 | 44,139 | 66,528 | 40,161 | 36,957 | |||||||||||||||
|
Allowance for credit losses, end of year
|
$ | 1,531,358 | $ | 944,366 | $ | 644,970 | $ | 312,229 | $ | 305,304 | ||||||||||
|
ALLL as a % of total period end loans and leases
|
4.03 | % | 2.19 | % | 1.44 | % | 1.04 | % | 1.10 | % | ||||||||||
|
AULC as a % of total period end loans and leases
|
0.13 | 0.11 | 0.17 | 0.15 | 0.15 | |||||||||||||||
|
ACL as a % of total period end loans and leases
|
4.16 | % | 2.30 | % | 1.61 | % | 1.19 | % | 1.25 | % | ||||||||||
Table
33 — ALLL/ACL — Franklin-Related
Impact
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In millions) | ||||||||||||
|
Allowance for loan and lease losses
|
||||||||||||
|
Franklin
|
$ | — | $ | 130.0 | $ | 115.3 | ||||||
|
Non-Franklin
|
1,482.5 | 770.2 | 463.1 | |||||||||
|
Total
|
$ | 1,482.5 | $ | 900.2 | $ | 578.4 | ||||||
|
Allowance for credit losses
|
||||||||||||
|
Franklin
|
$ | — | $ | 130.0 | $ | 115.3 | ||||||
|
Non-Franklin
|
1,531.4 | 814.4 | 529.7 | |||||||||
|
Total
|
$ | 1,531.4 | $ | 944.4 | $ | 645.0 | ||||||
|
Total loans and leases
|
||||||||||||
|
Franklin
|
$ | 443.9 | $ | 650.2 | $ | 1,187.0 | ||||||
|
Non-Franklin
|
36,346.8 | 40,441.8 | 38,868.0 | |||||||||
|
Total
|
$ | 36,790.7 | $ | 41,092.0 | $ | 40,055.0 | ||||||
80
Table of Contents
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In millions) | ||||||||||||
|
ALLL as % of total loans and leases
|
||||||||||||
|
Franklin
|
— | % | 19.99 | % | 9.71 | % | ||||||
|
Non-Franklin
|
4.08 | 1.90 | 1.19 | |||||||||
|
ACL as % of total loans and leases
|
||||||||||||
|
Total
|
4.16 | % | 2.30 | % | 1.61 | % | ||||||
|
Non-Franklin
|
4.21 | 2.01 | 1.36 | |||||||||
|
Nonaccrual loans
|
||||||||||||
|
Franklin
|
$ | 314.7 | $ | 650.2 | $ | — | ||||||
|
Non-Franklin
|
1,602.3 | 851.9 | 319.8 | |||||||||
|
Total
|
$ | 1,917.0 | $ | 1,502.1 | $ | 319.8 | ||||||
|
ALLL as % of NALs
|
||||||||||||
|
Total
|
77 | % | 60 | % | 181 | % | ||||||
|
Non-Franklin
|
93 | 90 | 145 | |||||||||
|
ACL as % of NALs
|
||||||||||||
|
Total
|
80 | % | 63 | % | 202 | % | ||||||
|
Non-Franklin
|
96 | 96 | 166 | |||||||||
The following table provides additional detail regarding the ACL
coverage ratio for NALs.
Table
34 — ACL/NAL Coverage Ratios Analysis
| At December 31, 2009 | ||||||||||||
| Franklin | Other | Total | ||||||||||
| (In thousands) | ||||||||||||
|
Nonaccrual Loans (NALs)
|
$ | 314,674 | $ | 1,602,304 | $ | 1,916,978 | ||||||
|
Allowance for Credit Losses (ACL)
|
NA | (1) | 1,531,358 | 1,531,358 | ||||||||
|
ACL as a % of NALs (coverage ratio)
|
96 | % | 80 | % | ||||||||
| (1) | Not applicable. Franklin loans were acquired at fair value on March 31, 2009. Under guidance provided by the FASB regarding acquired impaired loans, a nonaccretable discount was recorded to reduce the carrying value of the loans to the amount of future cash flows we expect to receive. |
We believe that the total ACL/NAL coverage ratio of 80% at
December 31, 2009, represented an appropriate level of
reserves for the remaining risk in the portfolio. The Franklin
NAL balance of $314.7 million does not have reserves
assigned as those loans were written down to fair value as a
part of the restructuring agreement on March 31, 2009, and
we do not expect any significant additional charge-offs.
(See
“Franklin Loan Restructuring Transaction” discussion
located within the “Critical Accounting Policies and Use of
Significant Estimates” section.)
As we believe that the coverage ratios are used to gauge
coverage of potential future losses, not including these
balances provides a more accurate measure of our ACL level
relative to NALs. After adjusting for the Franklin portfolio,
our December 31, 2009, ACL/NAL ratio was 96%.
NET
CHARGE-OFFS
(This
section should be read in conjunction with Significant
Items 2 and 3.)
Table 35 reflects NCO detail for each of the last five years.
Table 36 displays the Franklin-related impacts for 2009, 2008,
and 2007. Prior to 2007, there were not any Franklin-related NCO
impacts.
81
Table of Contents
Table 35 —
Net Loan and Lease Charge-offs
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net charge-offs by loan and lease type
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | 487,606 | $ | 526,165 | $ | 345,840 | $ | 20,868 | $ | 25,000 | ||||||||||
|
Construction
|
192,706 | 6,626 | 11,854 | 3,553 | 135 | |||||||||||||||
|
Commercial
|
490,025 | 62,114 | 27,250 | 3,230 | 4,439 | |||||||||||||||
|
Commercial real estate
|
682,731 | 68,740 | 39,104 | 6,783 | 4,574 | |||||||||||||||
|
Total commercial
|
1,170,337 | 594,905 | 384,944 | 27,651 | 29,574 | |||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Automobile loans
|
47,712 | 41,228 | 17,185 | 8,330 | 11,988 | |||||||||||||||
|
Automobile leases
|
8,620 | 13,337 | 10,507 | 10,445 | 11,664 | |||||||||||||||
|
Automobile loans and leases
|
56,332 | 54,565 | 27,692 | 18,775 | 23,652 | |||||||||||||||
|
Home equity
|
106,176 | 67,556 | 34,426 | 21,854 | 17,619 | |||||||||||||||
|
Residential mortgage
|
110,202 | 21,247 | 11,371 | 4,505 | 2,332 | |||||||||||||||
|
Other loans
|
33,540 | 19,794 | 19,198 | 9,591 | 6,880 | |||||||||||||||
|
Total consumer
|
306,250 | 163,162 | 92,687 | 54,725 | 50,483 | |||||||||||||||
|
Total net charge-offs
|
$ | 1,476,587 | $ | 758,067 | $ | 477,631 | $ | 82,376 | $ | 80,057 | ||||||||||
|
Net charge-offs — annualized percentages
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Commercial and industrial
|
3.71 | % | 3.87 | % | 3.25 | % | 0.28 | % | 0.41 | % | ||||||||||
|
Construction
|
10.37 | 0.32 | 0.77 | 0.28 | 0.01 | |||||||||||||||
|
Commercial
|
6.71 | 0.81 | 0.52 | 0.10 | 0.16 | |||||||||||||||
|
Commercial real estate
|
7.46 | 0.71 | 0.57 | 0.15 | 0.10 | |||||||||||||||
|
Total commercial
|
5.25 | 2.55 | 2.21 | 0.23 | 0.28 | |||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Automobile loans
|
1.51 | 1.12 | 0.65 | 0.40 | 0.59 | |||||||||||||||
|
Automobile leases
|
2.22 | 1.57 | 0.71 | 0.51 | 0.48 | |||||||||||||||
|
Automobile loans and leases
|
1.59 | 1.21 | 0.67 | 0.46 | 0.53 | |||||||||||||||
|
Home equity
|
1.40 | 0.91 | 0.56 | 0.44 | 0.37 | |||||||||||||||
|
Residential mortgage
|
2.43 | 0.42 | 0.23 | 0.10 | 0.06 | |||||||||||||||
|
Other loans
|
4.65 | 2.86 | 3.63 | 2.18 | 1.79 | |||||||||||||||
|
Total consumer
|
1.87 | 0.92 | 0.59 | 0.39 | 0.37 | |||||||||||||||
|
Net charge-offs as a % of average loans
|
3.82 | % | 1.85 | % | 1.44 | % | 0.32 | % | 0.33 | % | ||||||||||
| (1) | 2007 includes charge-offs totaling $397.0 million associated with the Franklin restructuring. These charge-offs were reduced by the unamortized discount associated with the loans, and by other amounts received by Franklin totalling $88.5 million, resulting in net charge-offs totaling $308.5 million. |
82
Table of Contents
Table
36 — NCOs — Franklin-Related
Impact
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In millions) | ||||||||||||
|
Commercial and industrial net charge-offs (recoveries)
|
||||||||||||
|
Franklin
|
$ | 114.5 | $ | 423.3 | $ | 308.5 | ||||||
|
Non-Franklin
|
373.1 | 102.9 | 37.3 | |||||||||
|
Total
|
$ | 487.6 | $ | 526.2 | $ | 345.8 | ||||||
|
Commercial and industrial average loan balances
|
||||||||||||
|
Franklin
|
$ | 157.1 | $ | 1,127.0 | $ | 760.5 | ||||||
|
Non-Franklin
|
12,978.7 | 12,461.0 | 9,875.5 | |||||||||
|
Total
|
$ | 13,135.8 | $ | 13,588.0 | $ | 10,636.0 | ||||||
|
Commercial and industrial net charge-offs —
annualized percentages
|
||||||||||||
|
Total
|
3.71 | % | 3.87 | % | 3.25 | % | ||||||
|
Non-Franklin
|
2.87 | 0.83 | 0.38 | |||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In millions) | ||||||||||||
|
Total net charge-offs (recoveries)
|
||||||||||||
|
Franklin
|
$ | 115.9 | $ | 423.3 | $ | 308.5 | ||||||
|
Non-Franklin
|
1,360.7 | 334.8 | 169.1 | |||||||||
|
Total
|
$ | 1,476.6 | $ | 758.1 | $ | 477.6 | ||||||
|
Total average loan balances
|
||||||||||||
|
Franklin
|
$ | 510.8 | $ | 1,127.0 | $ | 760.5 | ||||||
|
Non-Franklin
|
38,180.8 | 39,832.8 | 32,441.5 | |||||||||
|
Total
|
$ | 38,691.6 | $ | 40,959.8 | $ | 33,202.0 | ||||||
|
Total net charge-offs — annualized percentages
|
||||||||||||
|
Total
|
3.82 | % | 1.85 | % | 1.44 | % | ||||||
|
Non-Franklin
|
3.56 | 0.84 | 0.52 | |||||||||
Total NCOs during 2009 were $1,476.6 million, or an
annualized 3.82% of average related balances compared with
$758.1 million, or annualized 1.85% of average related
balances in 2008. After adjusting for NCOs relating to the
Franklin relationship of $115.9 million in 2009, and
$423.3 million in 2008, total NCOs during 2009 were
$1,360.7 million and $334.8 million in 2008. We
anticipate a challenging full-year in 2010 with regards to
credit quality, resulting in elevated NCOs across all of our
loan and lease portfolios compared with normalized levels. We
believe that 2009 represented the peak for credit losses in this
cycle.
Total commercial NCOs during 2009 were $1,170.3 million, or
an annualized 5.25% of average related balances, compared with
$594.9 million, or an annualized 2.55% in 2008. 2009
included Franklin relationship-related NCOs of
$114.5 million, and 2008 included Franklin
relationship-related NCOs of $423.3 million.
Non-Franklin-related commercial NCOs in 2009 were
$1,055.9 million and $171.6 million in 2008.
The non-Franklin-related increase of $270.2 million in
C&I NCOs reflected the continued economic weakness in our
regions and our focused proactive approach to loss recognition
in 2009. The increase was spread across our footprint, with no
industry concentrations that were inconsistent with our industry
exposure levels.
83
Table of Contents
The $614.0 million increase in CRE NCOs was primarily
centered in the single family home builder and the retail
portfolios. These two segments of the CRE portfolio were the
primary drivers of the overall portfolio performance in 2009.
The impact was spread across our footprint, and included
significant charge-offs associated with our relatively small
out-of-market
portfolio. We continued our ongoing portfolio management
efforts, including obtaining updated appraisals on properties
and assessing a project status within the context of market
environment expectations. Historically, the single family
homebuilder portfolio and retail portfolios have been the
highest risk segments. Based on our portfolio management
processes, including charge-off activity over the past two and
one half years, we believe the credit issues in the single
family homebuilder portfolio have been addressed. The retail
property portfolio remains more susceptible to the ongoing
market disruption, but we also believe that the combination of
prior charge-offs and existing reserve balances positions us
well to make effective credit decisions in the future.
In assessing commercial NCOs trends, it is helpful to understand
the process of how these loans are treated as they deteriorate
over time. Reserves for loans are established at origination
consistent with the level of risk associated with the original
underwriting. If the quality of a commercial loan deteriorates,
it migrates to a lower quality risk rating as a result of our
normal portfolio management process, and a higher reserve amount
is assigned. As a part of our normal portfolio management
process, the loan is reviewed and reserves are increased as
warranted. Charge-offs, if necessary, are generally recognized
in a period after the reserves were established. If the
previously established reserves exceed that needed to
satisfactorily resolve the problem credit, a reduction in the
overall level of the reserve could be recognized. In summary, if
loan quality deteriorates, the typical credit sequence for
commercial loans are periods of reserve building, followed by
periods of higher NCOs as previously established reserves are
utilized. Additionally, it is helpful to understand that
increases in reserves either precede or are in conjunction with
increases in NALs. When a credit is classified as NAL, it is
evaluated for specific reserves or charge-off. As a result, an
increase in NALs does not necessarily result in an increase in
reserves or an expectation of higher future NCOs.
Total consumer NCOs during 2009 were $306.3 million, or an
annualized 1.87%, compared with $163.2 million, or an
annualized 0.92%, in 2008. The increases were spread across all
consumer loan portfolios, but particularly in the residential
mortgage portfolio.
Automobile loan and lease NCOs in 2009 increased
$1.8 million, or 3%, compared with 2008. The performance of
the portfolio relative to NCOs reflected the positive impact of
increasing used-vehicle prices, offset by the continued economic
weakness in our markets. Performance of this portfolio on both
an absolute and relative basis continued to be consistent with
our views regarding the underlying quality of the portfolio. The
2009 level of delinquencies have improved compared with 2008
levels, further supporting our view of
flat-to-improved
performance going forward.
The NCO performance of our home equity portfolio continued to be
impacted by lower housing prices, and the general weak market
conditions. While 2009 NCOs were higher compared with prior
years, there continued to be a declining trend throughout 2009
in the early-stage delinquency level in the home equity
line-of-credit
portfolio, supporting our longer-term positive view for home
equity portfolio performance. Also contributing to the NCO
performance of our home equity portfolio was a significant
increase in loss mitigation activity and short sales. We
continue to believe that our more proactive loss mitigation
strategies are in our best interest, as well as that of our
customers. Although NCOs have increased over the course of 2009,
given the market conditions, performance remained within
expectations.
The increase in our residential mortgage NCOs compared with the
prior year, reflected the continued negative impacts resulting
from the general weak economic conditions and housing-related
pressures. The increased NCOs were a direct result of our
continued emphasis on loss mitigation strategies, an increased
number of short sales, and a more conservative position
regarding the timing of loss recognition. Specifically, in 2009,
we sold $44.8 million of underperforming loans that
resulted in $17.6 million of NCOs, and we adjusted the
timing of loss recognition that resulted in an additional
$32.0 million of NCOs. We continued to see some positive
trends in early-stage delinquencies, indicating that even with
the economic stress on our borrowers, losses are expected to
remain manageable.
84
Table of Contents
INVESTMENT
SECURITIES PORTFOLIO
| (This section should be read in conjunction with the “Critical Accounting Policies and Use of Significant Estimates” discussion, and Notes 1 and 6 of the Notes to the Consolidated Financial Statements.) |
We routinely review our investment securities portfolio, and
recognize impairment write-downs based primarily on fair value,
issuer-specific factors and results, and our intent to hold such
investments. Our investment securities 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 to
which we are exposed.
Our investment securities portfolio is comprised of various
financial instruments. At December 31, 2009, our investment
securities portfolio totaled $8.6 billion. The composition
and maturity of the portfolio is presented on the following two
tables.
Table
37 — Investment Securities Portfolio Summary at Fair
Value
| At December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
U.S. Treasury
|
$ | 99,154 | $ | 11,157 | $ | 556 | ||||||
|
Federal agencies
|
6,467,499 | 2,231,821 | 1,744,216 | |||||||||
|
Other
|
2,021,261 | 2,141,479 | 2,755,399 | |||||||||
|
Total investment securities
|
$ | 8,587,914 | $ | 4,384,457 | $ | 4,500,171 | ||||||
|
Duration in years(1)
|
2.4 | 5.2 | 3.2 | |||||||||
| (1) | The average duration assumes a market driven pre-payment rate on securities subject to pre-payment. |
Table 38 —
Investment Securities Portfolio Composition and
Maturity
| At December 31, 2009 | ||||||||||||
|
Amortized
|
||||||||||||
| Cost | Fair Value | Yield(1) | ||||||||||
| (amounts in thousands) | ||||||||||||
|
U.S. Treasury
|
||||||||||||
|
Under 1 year
|
$ | — | $ | — | — | % | ||||||
|
1-5 years
|
99,735 | 99,154 | 1.15 | |||||||||
|
6-10 years
|
— | — | — | |||||||||
|
Over 10 years
|
— | — | — | |||||||||
|
Total U.S. Treasury
|
99,735 | 99,154 | 1.15 | |||||||||
|
Federal agencies — mortgage backed securities
|
||||||||||||
|
Mortgage backed securities
|
||||||||||||
|
Under 1 year
|
— | — | — | |||||||||
|
1-5 years
|
— | — | — | |||||||||
|
6-10 years
|
692,119 | 688,420 | 3.94 | |||||||||
|
Over 10 years
|
2,752,317 | 2,791,688 | 3.65 | |||||||||
|
Total mortgage-backed Federal agencies
|
3,444,436 | 3,480,108 | 3.70 | |||||||||
85
Table of Contents
| At December 31, 2009 | ||||||||||||
|
Amortized
|
||||||||||||
| Cost | Fair Value | Yield(1) | ||||||||||
| (amounts in thousands) | ||||||||||||
|
Temporary Liquidity Guarantee Program (TLGP) securities
|
||||||||||||
|
Under 1 year
|
— | — | — | |||||||||
|
1-5 years
|
258,672 | 260,388 | 1.61 | |||||||||
|
6-10 years
|
— | — | — | |||||||||
|
Over 10 years
|
— | — | — | |||||||||
|
Total TLGP securities
|
258,672 | 260,388 | 1.61 | |||||||||
|
Other agencies
|
||||||||||||
|
Under 1 year
|
159,988 | 162,518 | 1.74 | |||||||||
|
1-5 years
|
2,556,213 | 2,555,782 | 1.70 | |||||||||
|
6-10 years
|
8,614 | 8,703 | 3.87 | |||||||||
|
Over 10 years
|
— | — | — | |||||||||
|
Total other Federal agencies
|
2,724,815 | 2,727,003 | 1.71 | |||||||||
|
Total U.S. Government backed agencies
|
6,427,923 | 6,467,499 | 2.78 | |||||||||
|
Municipal securities
|
||||||||||||
|
Under 1 year
|
— | — | — | |||||||||
|
1-5 years
|
6,050 | 6,123 | 6.53 | |||||||||
|
6-10 years
|
54,445 | 58,037 | 5.82 | |||||||||
|
Over 10 years
|
57,952 | 60,625 | 7.69 | |||||||||
|
Total municipal securities
|
118,447 | 124,785 | 6.76 | |||||||||
|
Private label CMO
|
||||||||||||
|
Under 1 year
|
— | — | — | |||||||||
|
1-5 years
|
— | — | — | |||||||||
|
6-10 years
|
— | — | — | |||||||||
|
Over 10 years
|
534,377 | 477,319 | 5.34 | |||||||||
|
Total private label CMO
|
534,377 | 477,319 | 5.34 | |||||||||
|
Asset backed securities
|
||||||||||||
|
Under 1 year
|
— | — | — | |||||||||
|
1-5 years
|
352,850 | 353,114 | 1.77 | |||||||||
|
6-10 years
|
256,783 | 262,826 | 4.98 | |||||||||
|
Over 10 years
|
518,841 | 364,376 | 2.46 | |||||||||
|
Total asset-backed securities
|
1,128,474 | 980,316 | 2.78 | |||||||||
|
Other
|
||||||||||||
|
Under 1 year
|
2,250 | 2,250 | 3.50 | |||||||||
|
1-5 years
|
4,656 | 4,798 | 3.52 | |||||||||
|
6-10 years
|
1,104 | 1,166 | 10.81 | |||||||||
|
Non-marketable equity securities
|
376,640 | 376,640 | 4.80 | |||||||||
|
Marketable equity securities
|
54,482 | 53,987 | 3.70 | |||||||||
|
Total other
|
439,132 | 438,841 | 5.24 | |||||||||
|
Total investment securities
|
$ | 8,748,088 | $ | 8,587,914 | 3.10 | % | ||||||
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| (1) | Weighted average yields were calculated using amortized cost on a fully-taxable equivalent basis, assuming a 35% tax rate. |
Declines in the fair value of available for sale investment
securities are recorded as temporary impairment, noncredit OTTI,
or credit OTTI adjustments.
Temporary impairment adjustments are recorded when the fair
value of a security fluctuates from its historical cost.
Temporary impairment adjustments are recorded in accumulated
OCI, and therefore, reduces equity. Temporary impairment
adjustments do not impact net income or risk-based capital. A
recovery of available for sale security prices also is recorded
as an adjustment to OCI for securities that are temporarily
impaired, and results in an increase to equity.
Because the available for sale securities portfolio is recorded
at fair value, the conclusion as to whether an investment
decline is
other-than-temporarily
impaired, does not significantly impact our equity position as
the amount of temporary adjustment has already been reflected in
accumulated other comprehensive income/loss. A recovery in the
value of an
other-than-temporarily
impaired security is recorded as additional interest income over
the remaining life of the security.
Given the continued disruption in the financial markets, we may
be required to recognize additional credit OTTI losses in future
periods with respect to our available for sale investment
securities portfolio. The amount and timing of any additional
credit OTTI will depend on the decline in the underlying cash
flows of the securities. If our intent regarding the decision to
hold temporarily impaired securities changes in future periods,
we may be required to record noncredit OTTI, which will
negatively impact our earnings.
Alt-A,
Pooled-Trust-Preferred, and Private-Label CMO
Securities
Our three highest risk segments of our investment portfolio are
the Alt-A mortgage backed, pooled-trust-preferred, and
private-label CMO portfolios. The Alt-A mortgage backed
securities and pooled-trust-preferred securities are located
within the asset-backed securities portfolio. The performance of
the underlying securities in each of these segments continues to
reflect the economic environment. Each of these securities in
these three segments is subjected to a rigorous review of their
projected cash flows. These reviews are supported with analysis
from independent third parties.
(See the “Investment
Securities” section located within the “Critical
Accounting Policies and Use of Significant Estimates”
section for additional information).
The following table presents the credit ratings for our Alt-A,
pooled-trust-preferred, and private label CMO securities as of
December 31, 2009:
Table 39 —
Credit Ratings of Selected Investment Securities (1)
|
Amortized
|
Average Credit Rating of Fair Value Amount | |||||||||||||||||||||||||||
| Cost | Fair Value | AAA | AA +/− | A +/− | BBB +/− | <BBB− | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
|
Private label CMO securities
|
$ | 534.4 | $ | 477.3 | $ | 39.0 | $ | 21.6 | $ | 35.6 | $ | 92.1 | $ | 289.0 | ||||||||||||||
|
Alt-A mortgage-backed securities
|
136.1 | 116.9 | 23.1 | 26.9 | — | — | 66.9 | |||||||||||||||||||||
|
Pooled-trust-preferred securities
|
241.8 | 106.1 | — | 24.4 | — | 29.2 | 52.5 | |||||||||||||||||||||
|
Total at December 31, 2009
|
$ | 912.3 | $ | 700.3 | $ | 62.1 | $ | 72.9 | $ | 35.6 | $ | 121.3 | $ | 408.4 | ||||||||||||||
|
Total at December 31, 2008
|
$ | 1,327.4 | $ | 987.5 | $ | 390.6 | $ | 84.4 | $ | 174.1 | $ | 49.7 | $ | 288.7 | ||||||||||||||
| (1) | Credit ratings reflect the lowest current rating assigned by a nationally recognized credit rating agency. |
Negative changes to the above credit ratings would generally
result in an increase of our risk-weighted assets, which could
result in a reduction to our regulatory capital ratios.
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Table of Contents
In an effort to lower the risk profile of the Alt-A portfolio,
we sold $214.9 million (book value) of our Alt-A securities
during 2009, resulting in a net securities gain of
$3.4 million. These sold securities were some of the lower
rated securities that we owned.
The following table summarizes the relevant characteristics of
our pooled-trust-preferred securities portfolio. Each of the
securities is part of a pool of issuers and each support a more
senior tranche of securities except for the I-Pre TSL II
security that is the most senior class.
Table 40 —
Trust Preferred Securities Data
December 31,
2009
|
Actual
|
||||||||||||||||||||||||||||||||||
|
Deferrals
|
Expected
|
|||||||||||||||||||||||||||||||||
|
and
|
Defaults
|
|||||||||||||||||||||||||||||||||
|
# of Issuers
|
Defaults
|
as a% of
|
||||||||||||||||||||||||||||||||
|
Lowest
|
Currently
|
as a % of
|
Remaining
|
|||||||||||||||||||||||||||||||
|
Book
|
Fair
|
Unrealized
|
Credit
|
Performing/
|
Original
|
Performing
|
Excess
|
|||||||||||||||||||||||||||
|
Deal Name
|
Par Value | Value | Value | Gain/(Loss) | Rating(2) | Remaining(3) | Collateral | Collateral | Subordination(4) | |||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||
|
Alesco II(1)
|
$ | 40,219 | $ | 31,580 | $ | 9,838 | $ | (21,742 | ) | CC | 33/43 | 23 | % | 19 | % | — | % | |||||||||||||||||
|
Alesco IV(1)
|
20,246 | 11,899 | 2,962 | (8,937 | ) | CC | 38/53 | 29 | 29 | — | ||||||||||||||||||||||||
|
ICONS
|
20,000 | 20,000 | 11,980 | (8,020 | ) | BBB | 29/30 | 3 | 13 | 56 | ||||||||||||||||||||||||
|
I-Pre TSL II
|
36,916 | 36,811 | 24,474 | (12,337 | ) | AA | 29/29 | — | 15 | 72 | ||||||||||||||||||||||||
|
MM Comm II(1)
|
24,544 | 23,457 | 17,171 | (6,286 | ) | BBB | 5/8 | 5 | 8 | — | ||||||||||||||||||||||||
|
MM Comm III(1)
|
11,930 | 11,398 | 5,769 | (5,629 | ) | B | 8/12 | 5 | 42 | — | ||||||||||||||||||||||||
|
Pre TSL IX(1)
|
5,000 | 4,194 | 1,625 | (2,569 | ) | CC | 37/49 | 25 | 26 | — | ||||||||||||||||||||||||
|
Pre TSL X(1)
|
17,150 | 11,648 | 3,358 | (8,290 | ) | CC | 39/57 | 36 | 33 | — | ||||||||||||||||||||||||
|
Pre TSL XI(1)
|
25,000 | 24,155 | 9,820 | (14,335 | ) | CC | 51/65 | 20 | 22 | — | ||||||||||||||||||||||||
|
Pre TSL XIII(1)
|
27,530 | 23,623 | 8,688 | (14,935 | ) | CC | 55/65 | 17 | 24 | — | ||||||||||||||||||||||||
|
Reg Diversified(1)
|
25,500 | 7,499 | 589 | (6,910 | ) | D | 32/45 | 30 | 29 | — | ||||||||||||||||||||||||
|
Soloso(1)
|
12,500 | 4,486 | 628 | (3,858 | ) | C | 52/70 | 18 | 27 | — | ||||||||||||||||||||||||
|
Tropic III
|
31,000 | 31,000 | 9,188 | (21,812 | ) | CCC- | 31/45 | 28 | 27 | 19 | ||||||||||||||||||||||||
|
Total
|
$ | 297,535 | $ | 241,750 | $ | 106,091 | $ | (135,660 | ) | |||||||||||||||||||||||||
| (1) | Security was determined to have other-than-temporary impairment. As such, the book value is net of recorded credit impairment. | |
| (2) | For purposes of comparability, the lowest credit rating expressed is equivalent to Fitch ratings even where lowest rating is based on another nationally recognized credit rating agency. | |
| (3) | Includes both banks and/or insurance companies. | |
| (4) | Excess subordination percentage represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages. |
Market
Risk
Market risk represents the risk of loss due to changes in market
values of assets and liabilities. We incur market risk in the
normal course of business through exposures to market interest
rates, foreign exchange rates, equity prices, credit spreads,
and expected lease residual values. We have identified two
primary sources of market risk: interest rate risk and price
risk. Interest rate risk is our primary market risk.
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Table of Contents
Interest
Rate Risk
OVERVIEW
Interest rate risk is the risk to earnings and value arising
from changes in market interest rates. Interest rate risk arises
from timing differences in the repricings and maturities of
interest-bearing assets and liabilities (reprice risk), changes
in the expected maturities of assets and liabilities arising
from embedded options, such as borrowers’ ability to prepay
residential mortgage loans at any time and depositors’
ability to terminate certificates of deposit before maturity
(option risk), changes in the shape of the yield curve whereby
interest rates increase or decrease in a non-parallel fashion
(yield curve risk), and changes in spread relationships between
different yield curves, such as U.S. Treasuries and London
Interbank Offered Rate (LIBOR) (basis risk.)
Our board of directors establishes broad policy limits with
respect to interest rate risk. Our Market Risk Committee (MRC),
formerly the Management Risk Committee, establishes specific
operating guidelines within the parameters of the board of
directors’ policies. In general, we seek to minimize the
impact of changing interest rates on net interest income and the
economic values of assets and liabilities. Our MRC regularly
monitors the level of interest rate risk sensitivity to ensure
compliance with board of directors approved risk limits.
Interest rate risk management is an active process that
encompasses monitoring loan and deposit flows complemented by
investment and funding activities. Effective management of
interest rate risk begins with understanding the dynamic
characteristics of assets and liabilities and determining the
appropriate interest rate risk posture given business segment
forecasts, management objectives, market expectations, and
policy constraints.
“Asset sensitive position”
refers to an
increase in short-term interest rates that is expected to
generate higher net interest income as rates earned on our
interest-earning assets would reprice upward more quickly than
rates paid on our interest-bearing liabilities. Conversely,
“liability sensitive position” refers to an increase
in short-term interest rates that is expected to generate lower
net interest income as rates paid on our interest-bearing
liabilities would reprice upward more quickly than rates earned
on our interest-earning assets.
INCOME
SIMULATION AND ECONOMIC VALUE ANALYSIS
Interest rate risk measurement is performed monthly. Two broad
approaches to modeling interest rate risk are employed: income
simulation and economic value analysis. An income simulation
analysis is used to measure the sensitivity of forecasted net
interest income to changes in market rates over a one-year time
period. Although bank owned life insurance, automobile operating
lease assets, and excess cash balances held at the Federal
Reserve Bank are classified as noninterest earning assets, and
the net revenue from these assets is in noninterest income and
noninterest expense, these portfolios are included in the
interest sensitivity analysis because they have attributes
similar to interest earning assets. Economic value of equity
(EVE) analysis is used to measure the sensitivity of the values
of period-end assets and liabilities to changes in market
interest rates. EVE serves as a complement to income simulation
modeling as it provides risk exposure estimates for time periods
beyond the one-year simulation period.
The models used for these measurements take into account
prepayment speeds on mortgage loans, mortgage-backed securities,
and consumer installment loans, as well as cash flows of other
assets and liabilities. Balance sheet growth assumptions are
also considered in the income simulation model. The models
include the effects of derivatives, such as interest rate swaps,
interest rate caps, floors, and other types of interest rate
options.
The baseline scenario for income simulation analysis, with which
all other scenarios are compared, is based on market interest
rates implied by the prevailing yield curve as of the period
end. Alternative interest rate scenarios are then compared with
the baseline scenario. These alternative interest rate scenarios
include parallel rate shifts on both a gradual and immediate
basis, movements in interest rates that alter the shape of the
yield curve (e.g., flatter or steeper yield curve), and current
interest rates remaining unchanged for the
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Table of Contents
entire measurement period. Scenarios are also developed to
measure short-term repricing risks, such as the impact of
LIBOR-based interest rates rising or falling faster than the
prime rate.
The simulations for evaluating short-term interest rate risk
exposure are scenarios that model gradual
“+/−100” and “+/−200” basis
point parallel shifts in market interest rates over the next
12-month
period beyond the interest rate change implied by the current
yield curve. We assumed that market interest rates would not
fall below 0% over the next
12-month
period for the scenarios that used the “-100” and
“-200” basis point parallel shift in market interest
rates. The table below shows the results of the scenarios as of
December 31, 2009, and December 31, 2008. All of the
positions were within the board of directors’ policy limits.
Table
41 — 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 | % | ||||||||
|
December 31, 2009
|
−0.3 | % | +0.2 | % | −0.1 | % | −0.4 | % | ||||||||
|
December 31, 2008
|
−0.3 | % | −0.9 | % | +0.6 | % | +1.1 | % | ||||||||
The net interest income at risk reported as of December 31,
2009 for the “+200” basis points scenario shows a
change to a slight near-term liability sensitive position
compared with December 31, 2008. Net interest income at
risk reflects actions taken by management to improve the
liquidity position of the balance sheet and improvements made in
modeling assumptions regarding deposit pricing. The primary
factors contributing to the change include:
| • | 3.1% incremental liability sensitivity reflecting the net impact of the execution of $7.0 billion receive fixed interest rates swaps during 2009, partially offset by $2.9 billion receive fixed interest rates swap maturities and early terminations, to offset the impact of actual and anticipated reductions in fixed-rate assets. | |
| • | 1.7% incremental asset sensitivity reflecting the decrease in floating rate debt and an increase in deposits and net free funds. | |
| • | 1.2% incremental liability sensitivity reflecting the purchase of securities to maintain a higher liquidity position. | |
| • | 1.3% incremental asset sensitivity reflecting the sale of municipal securities, the securitization and sale of automobile loans, and the sale of residential mortgage loans, slightly offset by an increase in other securities. | |
| • | 0.9% incremental liability sensitivity reflecting an update to deposit pricing models. | |
| • | 0.7% incremental asset sensitivity reflecting the anticipated slow down in fixed-rate loan originations due to customer preferences for variable-rate loans. |
The primary simulations for EVE at risk assume immediate
“+/−100” and “+/−200” basis
point parallel shifts in market interest rates beyond the
interest rate change implied by the current yield curve. The
table below outlines the December 31, 2009, results
compared with December 31, 2008. All of the positions were
within the board of directors’ policy limits.
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Table of Contents
Table
42 — 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 | % | ||||||||
|
December 31, 2009
|
+0.8 | % | +2.7 | % | −3.7 | % | −9.1 | % | ||||||||
|
December 31, 2008
|
−3.4 | % | −1.0 | % | −2.6 | % | −7.2 | % | ||||||||
The EVE at risk reported as of December 31, 2009 for the
“+200” basis points scenario shows a change to a
higher long-term liability sensitive position compared with
December 31, 2008, reflecting actions taken by management
to improve the capital and liquidity position of the balance
sheet, and improvements made in modeling assumptions regarding
deposit pricing and mortgage asset prepayments. The primary
factors contributing to the change include:
| • | 2.7% incremental liability sensitivity reflecting the purchase of securities to maintain a higher liquidity position. | |
| • | 2.8% incremental liability sensitivity reflecting the execution of $7.0 billion receive fixed interest rates swaps during 2009, partially offset by $2.9 billion receive fixed interest rates swap maturities and early terminations, to offset the impact of actual and anticipated reductions in fixed-rate assets. | |
| • | 2.5% incremental asset sensitivity reflecting the sale of municipal securities, the securitization of indirect auto loans, and the sale of residential mortgage loans, slightly offset by an increase in other securities. | |
| • | 1.2% incremental asset sensitivity reflecting the improvements made in modeling assumptions regarding deposit pricing, mortgage asset prepayments, and implied forward yield curves. |
The remainder of the change in EVE at risk for the
“+200” basis points scenario was primarily related to
a change in market rates throughout the year as longer-term
interest rates implied by the current yield curve increased
resulting in incremental liability sensitivity.
MORTGAGE
SERVICING RIGHTS (MSRs)
| (This section should be read in conjunction with Note 7 of the Notes to the Consolidated Financial Statements.) |
At December 31, 2009, we had a total of $214.6 million
of capitalized MSRs representing the right to service
$16.0 billion in mortgage loans. Of this
$214.6 million, $176.4 million was recorded using the
fair value method, and $38.2 million was recorded using the
amortization method. If we actively engage in hedging, the MSR
asset is carried at fair value. If we do not actively engage in
hedging, the MSR asset is adjusted using the amortization
method, and is carried at the lower of cost or market value.
MSR fair values are very sensitive to movements in interest
rates as expected future net servicing income depends on the
projected outstanding principal balances of the underlying
loans, which can be greatly reduced by prepayments. Prepayments
usually increase when mortgage interest rates decline and
decrease when mortgage interest rates rise. We have employed
strategies to reduce the risk of MSR fair value changes or
impairment. In addition, we engage a third party to provide
improved valuation tools and assistance with our strategies with
the objective to decrease the volatility from MSR fair value
changes. However, volatile changes in interest rates can
diminish the effectiveness of these hedges. We typically report
MSR fair value adjustments net of hedge-related trading activity
in the mortgage banking income category of noninterest income.
Changes in fair value between reporting dates are recorded as an
increase or decrease in mortgage banking income.
MSRs recorded using the amortization method generally relate to
loans originated with historically low interest rates, resulting
in a lower probability of prepayments and, ultimately,
impairment. MSR assets are included in other assets, and are
presented in Table 12.
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Table of Contents
Price
Risk
Price risk represents the risk of loss arising from adverse
movements in the prices of financial instruments that are
carried at fair value and are subject to fair value accounting.
We have price risk from trading securities, securities owned by
our broker-dealer subsidiaries, foreign exchange positions,
equity investments, investments in securities backed by mortgage
loans, and marketable equity securities held by our insurance
subsidiaries. We have established loss limits on the trading
portfolio, on the amount of foreign exchange exposure that can
be maintained, and on the amount of marketable equity securities
that can be held by the insurance subsidiaries.
EQUITY
INVESTMENT PORTFOLIOS
In reviewing our equity investment portfolio, we consider
general economic and market conditions, including industries in
which private equity merchant banking and community development
investments are made, and adverse changes affecting the
availability of capital. We determine any impairment based on
all of the information available at the time of the assessment.
New information or economic developments in the future could
result in the recognition of additional impairment.
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.
From time to time, we invest in various investments with equity
risk. Such investments include investment funds that buy and
sell publicly traded securities, investment funds that hold
securities of private companies, direct equity or venture
capital investments in companies (public and private), and
direct equity or venture capital interests in private companies
in connection with our mezzanine lending activities. These
investments are included in “accrued income and other
assets” on our consolidated balance sheet. At
December 31, 2009, we had a total of $34.5 million of
such investments, down from $44.7 million at
December 31, 2008. Net gains related to these equity
investments totaled $0.7 million in 2009, compared with net
losses of $9.0 million in 2008. The 2008 losses reflected a
$5.9 million venture capital loss, and $4.5 million of
losses on public equity funds that bought and sold primarily
publicly traded securities. These investments were primarily in
funds that focused on the financial services sector that, during
2008, performed worse than the broad equity market. In 2009, we
sold these public equity fund investments.
Liquidity
Risk
Liquidity risk is the risk of loss due to the possibility that
funds may not be available to satisfy current or future
commitments resulting from external macro market issues,
investor and customer perception of financial strength, and
events unrelated to the company such as war, terrorism, or
financial institution market specific issues. We manage
liquidity risk at both the Bank and at the parent company,
Huntington Bancshares Incorporated (HBI).
The overall objective of liquidity risk management is to ensure
that we can obtain cost-effective funding to meet current and
future obligations, as well as maintain sufficient levels of
on-hand liquidity, under both normal “business as
usual” and unanticipated, stressed circumstances. The Risk
Management Committee was appointed by the HBI Board Risk
Committee to oversee liquidity risk management and establish
policies and limits, based upon analyses of the ratio of loans
to deposits, liquid asset coverage ratios, the percentage of
assets funded with noncore or wholesale funding, net cash
capital, liquid assets, and emergency borrowing capacity. In
addition, operating guidelines are established to ensure that
bank loans included in the Retail and Business Banking,
Commercial Banking, Commercial Real Estate, and PFG business
segments are funded with core deposits. These operating
guidelines also ensure diversification of noncore funding by
type, source, and maturity and provide sufficient liquidity to
cover 100% of wholesale funds maturing within a six-month
period. A contingency funding plan is in place, which includes
forecasted sources and uses of funds under various scenarios in
order to prepare for unexpected liquidity shortages, including
the implications of any credit rating changes
and/or
other
trigger events related to financial ratios, deposit
fluctuations, debt issuance capacity, stock performance, or
negative news related to us or the banking industry. Liquidity
risk is reviewed
92
Table of Contents
monthly for the Bank and the parent company, as well as its
subsidiaries. In addition, liquidity working groups meet
regularly to identify and monitor liquidity positions, provide
policy guidance, review funding strategies, and oversee
adherence to, and the maintenance of, the contingency funding
plan(s). A Contingency Funding Working Group monitors daily cash
flow trends, branch activity, unfunded commitments, significant
transactions, and parent company subsidiary sources and uses of
funds in order to identify areas of concern, and establish
specific funding strategies. This group works closely with the
Risk Management Committee and the HBI Communication Team in
order to identify issues that may require a more proactive
communication plan to shareholders, employees, and customers
regarding specific events or issues that could have an impact on
our liquidity position.
In the normal course of business, in order to better manage
liquidity risk, we perform stress tests to determine the effect
that a potential downgrade in our credit ratings or other market
disruptions could have on liquidity over various time periods.
These credit ratings, which are presented in Table 47, have a
direct impact on our cost of funds and ability to raise funds
under normal, as well as adverse, circumstances. The results of
these stress tests indicate that sufficient sources of funds are
available to meet our financial obligations and fund our
operations for a
12-month
period. The stress test scenarios include testing to determine
the impact of an interruption to our access to the national
markets for funding, significant run-off in core deposits and
liquidity triggers inherent in other financial agreements. To
compensate for the effect of these assumed liquidity pressures,
we consider alternative sources of liquidity over different time
periods to project how funding needs would be managed. The
specific alternatives for enhancing liquidity include generating
client deposits, securitizing or selling loans, selling or
maturing of securities, and extending the level or maturity of
wholesale borrowings.
Most credit markets in which we participate and rely upon as
sources of funding have been significantly disrupted and highly
volatile since mid-2007. Reflecting concern about the stability
of the financial markets generally, many lenders reduced, and in
some cases, ceased unsecured funding to borrowers, including
other financial institutions. Since that time, as a means of
maintaining adequate liquidity, we, like many other financial
institutions, have relied more heavily on the liquidity and
stability present in the secured credit markets since access to
unsecured term debt has been restricted. Throughout this period,
we continued to extend maturities ensuring that we maintained
adequate liquidity in the event the crisis became prolonged. In
addition to managing our maturities, we strengthened our overall
liquidity position by significantly reducing our noncore funds
and wholesale borrowings, and increasing our overall level of
liquid assets. Shifting from the net purchasing of overnight
federal funds to an excess reserve position at the end of the
2009 first quarter, as well as significantly increasing the
level of free securities, has significantly improved our on-hand
liquidity. However, we are part of a financial system, and a
systemic lack of available credit, a lack of confidence in the
financial sector, and increased volatility in the financial
markets could materially and adversely affect our liquidity
position.
Bank
Liquidity and Sources of Liquidity
Our primary sources of funding for the Bank are retail and
commercial core deposits. As of December 31, 2009, these
core deposits, of which our Retail and Business Banking business
segment provided 77%, funded 73% of total assets. At
December 31, 2009, total core deposits represented 92% of
total deposits, an increase from 86% at the prior year-end.
Core deposits are comprised of interest bearing and noninterest
bearing demand deposits, money market deposits, savings and
other domestic time deposits, consumer certificates of deposit
both over and under $250,000, and nonconsumer certificates of
deposit less than $250,000. Noncore deposits consist of brokered
money market deposits and certificates of deposit, foreign time
deposits, and other domestic time deposits of $250,000 or more
comprised primarily of public fund certificates of deposit more
than $250,000.
Core deposits may increase our need for liquidity as
certificates of deposit mature or are withdrawn before maturity
and as nonmaturity deposits, such as checking and savings
account balances, are withdrawn. Specifically, if the FDIC
permits the Transaction Account Guarantee Program
(“TAGP”) to expire as scheduled on June 30, 2010,
customers may elect to reduce their deposits with us in an
effort to maintain deposit
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insurance coverage. The TAGP is a voluntary program provided by
the FDIC as part of its TLGP. Under the program, all
noninterest-bearing transaction accounts are fully guaranteed by
the FDIC for the customer’s entire account balance. This
program provides our customers with additional deposit insurance
coverage, and is in addition to and separate from the $250,000
coverage available under the FDIC’s general deposit
insurance rules. At December 31, 2009, noninterest-bearing
transaction account balances exceeding $250,000 totaled
$2.5 billion, and represented the amount of
noninterest-bearing transaction customer deposits that would not
have been FDIC insured without the additional coverage provided
by the TAGP.
As referenced in the above paragraph, the FDIC establishes a
coverage limit, generally $250,000 currently, for
interest-bearing deposit balances. To provide our customers
deposit insurance above the established $250,000, we have joined
the Certificate of Deposit Account Registry Service (CDARS), a
program that allows customers to invest up to $50 million
in certificates of deposit through one participating financial
institution, with the entire amount covered by FDIC insurance.
At December 31, 2009, we had $529.4 million of CDARS
deposit balances.
Demand deposit overdrafts that have been reclassified as loan
balances were $40.4 million and $17.1 million at
December 31, 2009 and 2008, respectively.
Domestic time deposits of $250,000 or more, brokered deposits
and negotiable CDs totaled $2.7 billion at the end of 2009
and $4.7 billion at the end of 2008. The contractual
maturities of these deposits at December 31, 2009 were as
follows: $1.0 billion in three months or less,
$0.5 billion in three months through six months,
$0.8 billion in six months through twelve months, and
$0.4 billion after twelve months.
The following table reflects deposit composition detail for each
of the past five years.
Table 43 —
Deposit Composition
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||||||||
|
By Type
|
||||||||||||||||||||||||||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 6,907 | 17 | % | $ | 5,477 | 14 | % | $ | 5,138 | 14 | % | $ | 3,616 | 14 | % | $ | 3,390 | 15 | % | ||||||||||||||||||||
|
Demand deposits — interest-bearing
|
5,890 | 15 | 4,083 | 11 | 4,049 | 11 | 2,389 | 10 | 2,016 | 9 | ||||||||||||||||||||||||||||||
|
Money market deposits
|
9,485 | 23 | 5,182 | 14 | 6,643 | 18 | 5,362 | 21 | 5,364 | 24 | ||||||||||||||||||||||||||||||
|
Savings and other domestic time deposits
|
4,652 | 11 | 4,930 | 13 | 5,282 | 14 | 3,101 | 12 | 3,178 | 14 | ||||||||||||||||||||||||||||||
|
Core certificates of deposit
|
10,453 | 26 | 12,856 | 34 | 10,851 | 29 | 5,430 | 22 | 4,024 | 18 | ||||||||||||||||||||||||||||||
|
Total core deposits
|
37,387 | 92 | 32,528 | 86 | 31,963 | 86 | 19,898 | 79 | 17,972 | 80 | ||||||||||||||||||||||||||||||
|
Other domestic time deposits of $250,000 or more
|
652 | 2 | 1,328 | 3 | 1,676 | 4 | 1,012 | 4 | 767 | 3 | ||||||||||||||||||||||||||||||
|
Brokered deposits and negotiable CDs
|
2,098 | 5 | 3,354 | 9 | 3,377 | 9 | 3,346 | 13 | 3,200 | 14 | ||||||||||||||||||||||||||||||
|
Deposits in foreign offices
|
357 | 1 | 733 | 2 | 727 | 1 | 792 | 4 | 471 | 3 | ||||||||||||||||||||||||||||||
|
Total deposits
|
$ | 40,494 | 100 | % | $ | 37,943 | 100 | % | $ | 37,743 | 100 | % | $ | 25,048 | 100 | % | $ | 22,410 | 100 | % | ||||||||||||||||||||
|
Total core deposits:
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial
|
$ | 11,368 | 30 | % | $ | 7,971 | 25 | % | $ | 9,018 | 28 | % | $ | 6,063 | 30 | % | $ | 5,352 | 30 | % | ||||||||||||||||||||
|
Personal
|
26,019 | 70 | 24,557 | 75 | 22,945 | 72 | 13,835 | 70 | 12,620 | 70 | ||||||||||||||||||||||||||||||
|
Total core deposits
|
$ | 37,387 | 100 | % | $ | 32,528 | 100 | % | $ | 31,963 | 100 | % | $ | 19,898 | 100 | % | $ | 17,972 | 100 | % | ||||||||||||||||||||
In 2009, we reduced our dependence on noncore funds (total
average liabilities less average core deposits and average
accrued expenses and other liabilities) to 21% of total average
assets, down from 28% in 2008. However, to the extent that we
are unable to obtain sufficient liquidity through core deposits,
we may meet
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Table of Contents
our liquidity needs through sources of wholesale funding. These
sources include other domestic time deposits of $250,000 or
more, brokered deposits and negotiable CDs, deposits in foreign
offices, short-term borrowings, FHLB advances, other long-term
debt, and subordinated notes. At December 31, 2009, total
wholesale funding was $7.8 billion, a decrease from
$13.8 billion at December 31, 2008. The
$7.8 billion portfolio at December 31, 2009, had a
weighted average maturity of 4.5 years. Various strategies
(described below)
, as well as growth in core deposits,
reduced our reliance on wholesale borrowings.
During 2009, we initiated various strategies with the intent of
further strengthening our liquidity position, as well as
reducing the size of our balance sheet to, among other
objectives, provide additional support to our TCE ratio
(see
“Capital” discussion).
Our actions taken during
2009 resulted in: (a) $4.1 billion increase in our
unpledged investment securities, (b) $0.7 billion
increase in available cash and due from banks,
(c) $1.0 billion automobile loan securitization,
(d) $0.6 billion sale of municipal securities,
(e) $0.6 billion debt issuance as part of the TLGP,
and (f) $0.2 billion mortgage loan sale. Any proceeds
from these actions were used primarily to pay down wholesale
borrowings.
In addition to these actions, core deposits grew
$4.9 billion during 2009. This increase reduced our
reliance upon noncore funding sources. In addition, our
loan-to-deposit
ratio improved to 91% at December 31, 2009, compared with
108% at December 31, 2008.
In late 2009, we redeemed $370.8 million aggregate
principle amount of certain subordinated notes issued previously
by the Bank. This capital at the Bank was replaced with an
intercompany subordinated note from the parent company in the
amount of $400 million with a term of 15 years. A
pretax gain of $73.6 million was recorded reflecting the
difference between the carrying value of the notes and the
purchase price of the debt, net of expenses and associated
interest rate swaps. This transaction increased the quantity and
quality of the Bank’s capital, and did not have a material
impact on our liquidity position.
The Bank has access to the Federal Reserve’s discount
window and Term Auction Facility (TAF). These borrowings are
secured by commercial loans and home equity
lines-of-credit.
The Bank is also a member of the Federal Home Loan Bank
(FHLB)-Cincinnati, and as such, has access to advances from this
facility. These advances are generally secured by residential
mortgages, other mortgage-related loans, and
available-for-sale
securities. Information regarding amounts pledged, for the
ability to borrow if necessary, and unused borrowing capacity at
both the Federal Reserve and the FHLB-Cincinnati, are outlined
in the following table:
Table
44 — Federal Reserve and FHLB-Cincinnati Borrowing
Capacity
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In billions) | ||||||||
|
Loans and Securities Pledged:
|
||||||||
|
Federal Reserve Bank
|
$ | 8.5 | $ | 8.4 | ||||
|
FHLB-Cincinnati
|
8.0 | 9.2 | ||||||
|
Total loans and securities pledged
|
$ | 16.5 | $ | 17.6 | ||||
|
Total unused borrowing capacity at Federal Reserve Bank and
FHLB-Cincinnati
|
$ | 7.9 | $ | 8.7 | ||||
As part of a periodic review conducted by the Federal Reserve,
our discount window and TAF borrowing capacity was reduced
during 2009. The reduction was based on the lowering of the
specific percentages of pledged amounts available for borrowing.
We can also obtain funding through other methods including:
(a) purchasing federal funds
(see Table 45 below)
,
(b) selling securities under repurchase agreements
(see
Table 45 below)
, (c) the sale or maturity of investment
securities, (d) the sale or securitization of loans,
(e) the sale of national market certificates of deposit,
(f) the relatively shorter-term structure of our commercial
loans
(see Table 46 below)
and automobile loans, and
(g) the issuance of common and preferred stock.
At December 31, 2009, we believe that the Bank had
sufficient liquidity to meet its cash flow obligations for the
foreseeable future.
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Table
45 — Federal Funds Purchased and Repurchase Agreements
| At December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
Balance at year-end
|
$ | 851 | $ | 1,389 | $ | 2,706 | $ | 1,632 | $ | 1,820 | ||||||||||
|
Weighted average interest rate at year-end
|
0.20 | % | 0.44 | % | 3.54 | % | 4.25 | % | 3.46 | % | ||||||||||
|
Maximum amount outstanding at month-end during the year
|
$ | 1,395 | $ | 3,607 | $ | 2,961 | $ | 2,366 | $ | 1,820 | ||||||||||
|
Average amount outstanding during the year
|
945 | 2,485 | 2,295 | 1,822 | 1,319 | |||||||||||||||
|
Weighted average interest rate during the year
|
0.21 | % | 1.75 | % | 4.14 | % | 4.02 | % | 2.41 | % | ||||||||||
Table
46 — Maturity Schedule of Commercial Loans
| December 31, 2009 | ||||||||||||||||||||
|
One Year
|
One to
|
After
|
Percent of
|
|||||||||||||||||
| or Less | Five Years | Five Years | Total | Total | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
Commercial and industrial
|
$ | 4,729 | $ | 6,053 | $ | 2,106 | $ | 12,888 | 63 | % | ||||||||||
|
Commercial real estate — construction
|
850 | 597 | 22 | 1,469 | 7 | |||||||||||||||
|
Commercial real estate — commercial
|
2,390 | 2,827 | 1,003 | 6,220 | 30 | |||||||||||||||
|
Total
|
$ | 7,969 | $ | 9,477 | $ | 3,131 | $ | 20,577 | 100 | % | ||||||||||
|
Variable interest rates
|
$ | 7,528 | $ | 7,701 | $ | 2,685 | $ | 17,914 | 87 | % | ||||||||||
|
Fixed interest rates
|
441 | 1,776 | 446 | 2,663 | 13 | |||||||||||||||
|
Total
|
$ | 7,969 | $ | 9,477 | $ | 3,131 | $ | 20,577 | 100 | % | ||||||||||
|
Percent of total
|
39 | % | 46 | % | 15 | % | 100 | % | ||||||||||||
At December 31, 2009, the fair value of our portfolio of
investment securities totaled $8.6 billion, of which
$2.8 billion was pledged to secure public and trust
deposits, interest rate swap agreements, U.S. Treasury
demand notes, and securities sold under repurchase agreements.
The composition and maturity of these securities were presented
in Table 38.
Parent
Company Liquidity
The parent company’s funding requirements consist primarily
of dividends to shareholders, debt service, income taxes,
operating expenses, funding of non-bank subsidiaries,
repurchases of our stock, and acquisitions. The parent company
obtains funding to meet obligations from dividends received from
direct subsidiaries, net taxes collected from subsidiaries
included in the federal consolidated tax return, fees for
services provided to subsidiaries, and the issuance of debt
securities.
At December 31, 2009, the parent company had
$1.4 billion in cash or cash equivalents, compared with
$1.1 billion at December 31, 2008. The following
actions taken during 2009 affected the parent company’s
liquidity position: (a) the issuance of 213.0 million
shares of new common stock through two common stock offerings
resulting in aggregate gross proceeds of $796.8 million;
(b) the completion of three separate “discretionary
equity issuance” programs, which allowed us to take
advantage of market opportunities to issue an additional
92.7 million shares of common stock worth
$338.9 million; (c) two contributions of
$250.0 million and one contribution of $400.0 million,
or $900.0 million total, of additional capital made by the
parent company to the Bank, which increased the Bank’s
regulatory capital levels above its already
“well-capitalized” levels; and (d) the redemption
of a portion of our junior subordinated debt at a total cost of
$96.2 million. A portion of the cash proceeds received from
the common stock issuances were used to purchase investment
securities.
Based on the current dividend of $0.01 per common share, cash
demands required for common stock dividends are estimated to be
approximately $7.2 million per quarter. We recognize the
importance of the
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Table of Contents
dividend to our shareholders. While our overall capital and
liquidity positions are strong, extreme economic market
deterioration and the changing regulatory environment drove the
difficult but prudent decision to reduce the dividend during the
2009 first quarter to $0.01 per common share. This proactive
measure contributed to growth in capital and the strengthening
of our balance sheet. Table 65 provides additional detail
regarding quarterly dividends declared per common share.
During 2008, we issued an aggregate $569 million of
Series A Non-cumulative Perpetual Convertible Preferred
Stock. The Series A Preferred Stock will pay, as declared
by our board of directors, dividends in cash at a rate of 8.50%
per annum, payable quarterly
(see Note 16 of the Notes
to Consolidated Financial Statements).
During the 2009 first
and second quarters, we entered into agreements with various
institutional investors exchanging shares of our common stock
for shares of the Series A Preferred Stock held by them
(see “Capital/Capital Adequacy” discussion)
. In
the aggregate, these exchanges are anticipated to reduce our
total dividend cash requirements (common, Series A
Preferred Stock, and Series B Preferred Stock) by an
estimated $4.0 million per quarter. Considering these
exchanges and the current dividend, cash demands required for
Series A Preferred Stock are estimated to be approximately
$7.7 million per quarter.
Also during 2008, we received $1.4 billion of equity
capital by issuing 1.4 million shares of Series B
Preferred Stock to the U.S. Department of Treasury as a
result of our participation in the TARP voluntary CPP. The
Series B Preferred Stock will pay cumulative dividends at a
rate of 5% per year for the first five years and 9% per year
thereafter, resulting in quarterly cash demands of approximately
$18 million through 2012, and $32 million thereafter
(see Note 16 of the Notes to the Consolidated Financial
Statements for additional information regarding the
Series B Preferred Stock issuance).
Based on a regulatory dividend limitation, the Bank could not
have declared and paid a dividend to the parent company at
December 31, 2009, without regulatory approval. We do not
anticipate that the Bank will request regulatory approval to pay
dividends in the near future as we continue to build Bank
regulatory capital above our already
“well-capitalized” level. To help meet any additional
liquidity needs, we have an open-ended, automatic shelf
registration statement filed and effective with the SEC, which
permits us to issue an unspecified amount of debt or equity
securities.
With the exception of the common and preferred dividends
previously discussed, the parent company does not have any
significant cash demands. There are no maturities of parent
company obligations until 2013, when a debt maturity of
$50 million is payable.
Considering the factors discussed above, and other analyses that
we have performed, we believe the parent company has sufficient
liquidity to meet its cash flow obligations for the foreseeable
future.
Credit
Ratings
Credit ratings provided by the three major credit rating
agencies are an important component of our liquidity profile.
Among other factors, the credit ratings are based on financial
strength, credit quality and concentrations in the loan
portfolio, the level and volatility of earnings, capital
adequacy, the quality of management, the liquidity of the
balance sheet, the availability of a significant base of core
deposits, and our ability to access a broad array of wholesale
funding sources. Adverse changes in these factors could result
in a negative change in credit ratings and impact our ability to
raise funds at a reasonable cost in the capital markets. In
addition, certain financial on- and off-balance sheet
arrangements contain credit rating triggers that could increase
funding needs if a negative rating change occurs. Other
arrangements that could be impacted by credit rating changes
include, but are not limited to, letter of credit commitments
for marketable securities, interest rate swap collateral
agreements, and certain asset securitization transactions
contain credit rating provisions or could otherwise be impacted
by credit rating changes.
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Table of Contents
The most recent credit ratings for the parent company and the
Bank are as follows:
Table
47 — Credit Ratings
| December 31, 2009 | ||||||||||||||||
|
Senior Unsecured
|
Subordinated
|
|||||||||||||||
| Notes | Notes | Short-Term | Outlook | |||||||||||||
|
Huntington Bancshares Incorporated
|
||||||||||||||||
|
Moody’s Investor Service
|
Baa2 | Baa3 | P-2 | Negative | ||||||||||||
|
Standard and Poor’s
|
BB+ | BB | B | Negative | ||||||||||||
|
Fitch Ratings
|
BBB | BBB- | F2 | Negative | ||||||||||||
|
The Huntington National Bank
|
||||||||||||||||
|
Moody’s Investor Service
|
Baa1 | Baa2 | P-2 | Negative | ||||||||||||
|
Standard and Poor’s
|
BBB- | BB+ | A-3 | Negative | ||||||||||||
|
Fitch Ratings
|
BBB+ | BBB | F2 | Negative | ||||||||||||
During 2009, all three rating agencies lowered their credit
ratings for both the parent company and the Bank. The credit
ratings to senior unsecured notes, subordinated notes, and
short-term debt were changed. The above table reflects these
changes. During the 2009 third quarter, Fitch Ratings reaffirmed
the ratings given to both the parent company and the Bank. The
FHLB uses the Bank’s credit rating in its calculation of
borrowing capacity. As a result of these credit rating changes,
the FHLB reduced our borrowing capacity by $370 million
during the 2009 first quarter.
A security rating is not a recommendation to buy, sell, or hold
securities, is subject to revision or withdrawal at any time by
the assigning rating organization, and should be evaluated
independently of any other rating.
Off-Balance
Sheet Arrangements
In the normal course of business, we enter into various
off-balance sheet arrangements. These arrangements include
financial guarantees contained in standby letters of credit
issued by the Bank and commitments by the Bank to sell mortgage
loans.
Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond
financing, and similar transactions. Most of these arrangements
mature within two years, and are expected to expire without
being drawn upon. Standby letters of credit are included in the
determination of the amount of risk-based capital that the
parent company, and the Bank, are required to hold.
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
December 31, 2009, we had $0.6 billion of standby
letters of credit outstanding, of which 60% were collateralized.
Included in this $0.6 billion total are letters of credit
issued by the Bank that support securities that were issued by
our customers and remarketed by The Huntington Investment
Company (HIC), our broker-dealer subsidiary. Due to the credit
rating changes in 2009 noted above, and pursuant to the letters
of credit issued by the Bank, the Bank repurchased substantially
all of these securities, net of payments and maturities, during
2009. As a result of these repurchases, only $32.3 million
of these standby letters of credit remained outstanding at
December 31, 2009.
We enter into forward contracts relating to the mortgage banking
business to hedge the exposures we have from commitments to
extend new residential mortgage loans to our customers and from
our
held-for-sale
mortgage loans. At December 31, 2009 and
December 31, 2008, we had commitments to sell residential
real estate loans of $662.9 million and
$759.4 million, respectively. These contracts mature in
less than one year.
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Table of Contents
During the 2009 first quarter, we transferred $1.0 billion
automobile loans and leases to a trust in a securitization
transaction. The securitization qualified for sale accounting
under ASC 860. We retained $210.9 million of the related
securities and recorded a $47.1 million retained residual
interest as a result of the transaction. Subsequent to the
transaction, we sold $78.4 million of these securities in
the 2009 second quarter. These amounts were recorded as
investment securities on our balance sheet. We also recorded a
$5.9 million loss in other noninterest income on our income
statement and recorded a $19.5 million servicing asset in
accrued income and other assets associated with this
transaction. In 2009, amended guidance was issued by FASB with
respect to this type of transaction. With our adoption of this
amended guidance in 2009, the trust was consolidated on
January 1, 2010
. (See Note 3 of the Notes to the
Financial Statements for additional details.)
We do not believe that off-balance sheet arrangements will have
a material impact on our liquidity or capital resources.
Table
48 — Contractual Obligations(1)
| December 31, 2009 | ||||||||||||||||||||
|
One Year
|
1 to 3
|
3 to 5
|
More Than
|
|||||||||||||||||
| or Less | Years | Years | 5 Years | Total | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
Deposits without a stated maturity
|
$ | 25,603 | $ | — | $ | — | $ | — | $ | 25,603 | ||||||||||
|
Certificates of deposit and other time deposits
|
11,131 | 3,441 | 274 | 45 | 14,891 | |||||||||||||||
|
Federal Home Loan Bank advances
|
142 | 5 | 14 | 8 | 169 | |||||||||||||||
|
Short-term borrowings
|
876 | — | — | — | 876 | |||||||||||||||
|
Other long-term debt
|
231 | 902 | 91 | 1,145 | 2,369 | |||||||||||||||
|
Subordinated notes
|
84 | 65 | 183 | 932 | 1,264 | |||||||||||||||
|
Operating lease obligations
|
45 | 84 | 73 | 156 | 358 | |||||||||||||||
|
Purchase commitments
|
101 | 78 | 24 | 11 | 214 | |||||||||||||||
| (1) | Amounts do not include associated interest payments. |
Operational
Risk
As with all companies, we are subject to operational risk.
Operational risk is the risk of loss due to human error,
inadequate or failed internal systems and controls, violations
of, or noncompliance with, laws, rules, regulations, prescribed
practices, or ethical standards, and external influences such as
market conditions, fraudulent activities, disasters, and
security risks. We continuously strive to strengthen our system
of internal controls to ensure compliance with laws, rules, and
regulations, and to improve the oversight of our operational
risk.
Risk Management manages the risk for the company through
processes that assess the overall level of risk on a regular
basis and identifies specific risks and the steps being taken to
mitigate them. To mitigate operational and compliance risks, we
have established a senior management level Operational Risk
Committee, headed by the chief operational risk officer, and a
senior management level Legal, Regulatory, and Compliance
Committee, headed by the director of corporate compliance. The
responsibilities of these committees, among other things,
include establishing and maintaining management information
systems to monitor material risks and to identify potential
concerns, risks, or trends that may have a significant impact
and develop recommendations to address the identified issues.
Both of these committees report any significant findings and
recommendations to the executive level Risk Management
Committee, headed by the chief risk officer. Additionally,
potential concerns may be escalated to the Risk Committee of the
board of directors, as appropriate.
The goal of this framework is to implement effective operational
risk techniques and strategies, minimize operational losses, and
strengthen our overall performance.
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Table of Contents
Capital/Capital
Adequacy
(This
section should be read in conjunction with Significant
Items 1 and 5.)
Capital is managed both at the Bank and on a consolidated basis.
Capital levels are maintained based on regulatory capital
requirements and the economic capital required to support
credit, market, liquidity, and operational risks inherent in our
business, and to provide the flexibility needed for future
growth and new business opportunities. Shareholders’ equity
totaled $5.3 billion at December 31, 2009. This
represented a decrease compared with $7.2 billion at
December 31, 2008, primarily reflecting the negative impact
of the $2.6 billion goodwill impairment charge, partially
offset by the issuance of 305.7 million new shares of
common stock, through two common stock offerings and three
“discretionary equity issuance” programs, worth
$1.1 billion, and the exchange of a portion of our
Series A Preferred Stock for 41.1 million shares of
our common stock worth $0.2 billion
(see
“Tier 1 Common Equity” section below)
.
Tier 1
Common Equity
During 2009, a key priority was to strengthen our capital
position in order to withstand potential future credit losses
should the economic environment continue to deteriorate. During
the 2009 second quarter, the Federal Reserve conducted a
Supervisory Capital Assessment Program (SCAP) on the
country’s 19 largest bank holding companies to determine
the amount of capital required to absorb losses that could arise
under “baseline” and “more adverse” economic
scenarios. The SCAP results determined that a Tier 1 common
capital risk based ratio of at least 4.0% would be needed. A
total of 10 of the 19 bank holding companies were directed to
increase their capital levels to meet this 4.0% threshold.
While we were not one of these 19 institutions required by the
Federal Reserve to conduct a forward-looking capital assessment,
or “stress test”, we believed it important that we
have an equivalent relative amount of capital to meet the
official SCAP threshold of a 4% Tier 1 common capital
risk-based ratio. As such, in May of 2009, we conducted an
internal analysis designed to emulate the SCAP “more
adverse” economic scenario based on December 31, 2008,
portfolio balances as modeled by the Federal Reserve. As a
result of that analysis, we disclosed on May 20, 2009, that
we estimated $675 million of Tier 1 common equity was
needed in addition to that already obtained through that date.
By June 30, 2009, substantially all of that capital had
been obtained. On September 17, 2009, we announced the
completion of a third discretionary equity issuance program that
raised a net $146.9 million of common equity, thus
exceeding the remaining capital needed indicated by our internal
SCAP analysis.
On that same date (September 17, 2009), we announced a new
$350 million common stock offering as favorable market
conditions and investor interest presented an opportunity to
continue to build common equity efficiently to the long-term
benefit of our shareholders. On September 19, 2009, we
announced the completion of this common stock offering, which
resulted in a net $440.4 million issuance of common equity.
This capital, over and above that indicated by our internal SCAP
analysis, increases our flexibility to repurchase debt and
improve our overall funding. Further, it provides additional
capacity to pursue growth of our core businesses, which includes
supporting organic asset and deposit growth. This capital also
provides us with sufficient capital to withstand a stressed
economic scenario, allows us to take advantage of initiatives
identified through our strategic planning effort currently
underway, and significantly enhances our ability to eventually
repay our $1.4 billion of TARP capital.
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The following table summarizes the primary activity during 2009
to increase Tier 1 common equity:
Table
49 — Tier 1 Common Equity Activity
|
Other
|
||||||||||||||||
| Common Stock |
Retained
|
|||||||||||||||
| Shares | Amount | Earnings | Total | |||||||||||||
| (In millions) | ||||||||||||||||
|
Franklin restructuring
|
— | $ | — | $ | 159.9 | $ | 159.9 | |||||||||
|
Conversion of preferred stock
|
24.6 | 114.1 | — | 114.1 | ||||||||||||
|
Other(1)
|
— | — | 47.1 | 47.1 | ||||||||||||
|
Total 2009 First Quarter
|
24.6 | 114.1 | 207.0 | 321.1 | ||||||||||||
|
Discretionary equity issuance #1
|
38.5 | 117.6 | — | 117.6 | ||||||||||||
|
Discretionary equity issuance #2
|
18.5 | 74.4 | — | 74.4 | ||||||||||||
|
Conversion of preferred stock
|
16.5 | 92.3 | — | 92.3 | ||||||||||||
|
Common stock offering
|
103.5 | 356.4 | 356.4 | |||||||||||||
|
Gain on cash tender offer of certain trust preferred securities
|
— | — | 43.8 | 43.8 | ||||||||||||
|
Gain related to Visa stock
|
— | — | 20.4 | 20.4 | ||||||||||||
|
Total 2009 Second Quarter
|
177.0 | 640.7 | 64.2 | 704.9 | ||||||||||||
|
Discretionary equity issuance #3
|
35.7 | 146.9 | — | 146.9 | ||||||||||||
|
Common stock offering
|
109.5 | 440.4 | — | 440.4 | ||||||||||||
|
Total 2009 Third Quarter
|
145.2 | 587.3 | — | 587.3 | ||||||||||||
|
Gain on early extinguishment of debt
|
— | — | 47.9 | 47.9 | ||||||||||||
|
Total 2009 Fourth Quarter
|
— | — | 47.9 | 47.9 | ||||||||||||
|
Total 2009
|
346.8 | $ | 1,342.1 | $ | 319.1 | $ | 1,661.2 | |||||||||
| (1) | Primarily represents improvement in other comprehensive income. |
As shown in the table above, these actions increased our
Tier 1 common equity by $1.7 billion during 2009.
While we may continue to seek opportunities to further
strengthen our capital position, we believe that we have
sufficient capital to withstand a severe economic scenario
similar to that used by the Federal Reserve in its modeling of
capital adequacy for the 19 large bank holding companies where
“stress tests” were conducted.
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The following table presents risk-weighed assets and other
financial data necessary to calculate certain financial ratios,
including the Tier 1 common equity ratio, which we use to
measure capital adequacy:
Table 50 —
Capital Adequacy
| December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
|
Consolidated capital calculations:
|
||||||||||||||||||||
|
Shareholders’ common equity
|
$ | 3,648 | $ | 5,351 | $ | 5,951 | $ | 3,016 | $ | 2,561 | ||||||||||
|
Shareholders’ preferred equity
|
1,688 | 1,878 | — | — | — | |||||||||||||||
|
Total shareholders’ equity
|
5,336 | 7,229 | 5,951 | 3,016 | 2,561 | |||||||||||||||
|
Goodwill
|
(444 | ) | (3,055 | ) | (3,059 | ) | (571 | ) | (213 | ) | ||||||||||
|
Intangible assets
|
(289 | ) | (357 | ) | (428 | ) | (59 | ) | (5 | ) | ||||||||||
|
Intangible asset deferred tax liability(1)
|
101 | 125 | 150 | 21 | 2 | |||||||||||||||
|
Total tangible equity(2)
|
4,704 | 3,942 | 2,614 | 2,407 | 2,345 | |||||||||||||||
|
Shareholders’ preferred equity
|
(1,688 | ) | (1,878 | ) | — | — | — | |||||||||||||
|
Total tangible common equity(2)
|
$ | 3,016 | $ | 2,064 | $ | 2,614 | $ | 2,407 | $ | 2,345 | ||||||||||
|
Total assets
|
$ | 51,555 | $ | 54,353 | $ | 54,697 | $ | 35,329 | $ | 32,765 | ||||||||||
|
Goodwill
|
(444 | ) | (3,055 | ) | (3,059 | ) | (571 | ) | (213 | ) | ||||||||||
|
Other intangible assets
|
(289 | ) | (357 | ) | (428 | ) | (59 | ) | (5 | ) | ||||||||||
|
Intangible asset deferred tax liability(1)
|
101 | 125 | 150 | 21 | 2 | |||||||||||||||
|
Total tangible assets(2)
|
$ | 50,923 | $ | 51,066 | $ | 51,360 | $ | 34,720 | $ | 32,549 | ||||||||||
|
Tier 1 equity
|
$ | 5,201 | $ | 5,036 | $ | 3,460 | $ | 2,784 | $ | 2,701 | ||||||||||
|
Shareholders’ preferred equity
|
(1,688 | ) | (1,878 | ) | — | — | — | |||||||||||||
|
Trust preferred securities
|
(570 | ) | (736 | ) | (785 | ) | (320 | ) | (300 | ) | ||||||||||
|
REIT preferred stock
|
(50 | ) | (50 | ) | (50 | ) | (50 | ) | (50 | ) | ||||||||||
|
Tier 1 common equity(2)
|
$ | 2,893 | $ | 2,372 | $ | 2,625 | $ | 2,414 | $ | 2,351 | ||||||||||
|
Risk-weighted assets
(RWA) Consolidated
|
$ | 43,248 | $ | 46,994 | $ | 46,044 | $ | 31,155 | $ | 29,599 | ||||||||||
|
Bank
|
43,149 | 46,477 | 45,731 | 30,779 | 29,243 | |||||||||||||||
|
Tier 1 common equity/RWA ratio(2),(3)
|
6.69 | % | 5.05 | % | 5.70 | % | 7.75 | % | 7.94 | % | ||||||||||
|
Tangible equity/tangible asset ratio(2)
|
9.24 | 7.72 | 5.09 | 6.93 | 7.20 | |||||||||||||||
|
Tangible common equity/tangible asset ratio(2)
|
5.92 | 4.04 | 5.09 | 6.93 | 7.20 | |||||||||||||||
| (1) | Intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate. | |
| (2) | Tangible equity, Tier 1 common equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently. | |
| (3) | Based on an interim decision by the banking agencies on December 14, 2006, we have excluded the impact of adopting ASC Topic 715, “Compensation — Retirement Benefits”, from the regulatory capital calculations. |
As shown in the above table, our consolidated TCE ratio was
5.92% at December 31, 2009, an increase from 4.04% at
December 31, 2008. The 188 basis point increase from
December 31, 2008, primarily reflected the
$796.8 million aggregate of new common stock offering
issuances, the $206.4 million conversion of
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Table of Contents
Series A Preferred Stock to common stock, as well as the
reducing of our balance sheet through the securitizing of
automobile loans, and the selling of a portion of our municipal
securities portfolio, as well as mortgage loans.
Regulatory
Capital
Regulatory capital ratios are the primary metrics used by
regulators in assessing the “safety and soundness” of
banks. We intend to maintain both the company’s and the
Bank’s risk-based capital ratios at levels at which each
would be considered “well-capitalized” by regulators.
The Bank is primarily supervised and regulated by the Office of
the Comptroller of the Currency (OCC), which establishes
regulatory capital guidelines for banks similar to those
established for bank holding companies by the Federal Reserve
Board.
Regulatory capital primarily consists of Tier 1 capital and
Tier 2 capital. The sum of Tier 1 capital and
Tier 2 capital equals our total risk-based capital. The
following table reflects changes and activity to the various
components utilized in the calculation our consolidated
Tier 1, Tier 2, and total risk-based capital amounts
during 2009.
Table
51 — Regulatory Capital Activity
|
Shareholder
|
Disallowed
|
Disallowed
|
||||||||||||||||||||||
|
Common
|
Preferred
|
Qualifying
|
Goodwill &
|
Other
|
Tier 1
|
|||||||||||||||||||
| Equity(1) | Equity | Core Capital(2) | Intangible Assets | Adjustments (net) | Capital | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
Balance at December 31, 2008
|
$ | 5,676.2 | $ | 1,877.7 | $ | 787.9 | $ | (3,286.8 | ) | $ | (19.4 | ) | $ | 5,035.6 | ||||||||||
|
Cumulative effect accounting changes
|
3.5 | — | — | — | — | 3.5 | ||||||||||||||||||
|
Earnings
|
(3,094.2 | ) | — | — | — | — | (3,094.2 | ) | ||||||||||||||||
|
Changes to disallowed adjustments
|
— | — | — | 2,654.6 | — | 2,654.6 | ||||||||||||||||||
|
Dividends
|
(124.7 | ) | — | — | — | — | (124.7 | ) | ||||||||||||||||
|
Issuance of common stock
|
1,145.8 | — | — | — | — | 1,145.8 | ||||||||||||||||||
|
Conversion of preferred stock
|
206.4 | (206.4 | ) | — | — | — | — | |||||||||||||||||
|
Amortization of preferred discount
|
(16.0 | ) | 16.0 | — | — | — | — | |||||||||||||||||
|
Redemption of junior subordinated debt
|
— | — | (166.3 | ) | — | — | (166.3 | ) | ||||||||||||||||
|
Disallowance of deferred tax assets
|
— | — | — | — | (260.1 | ) | (260.1 | ) | ||||||||||||||||
|
Change in minority interest
|
— | — | (1.1 | ) | — | — | (1.1 | ) | ||||||||||||||||
|
Other
|
7.9 | 0.2 | — | — | — | 8.1 | ||||||||||||||||||
|
Balance at December 31, 2009
|
$ | 3,804.9 | $ | 1,687.5 | $ | 620.5 | $ | (632.2 | ) | $ | (279.5 | ) | $ | 5,201.2 | ||||||||||
|
Qualifying
|
||||||||||||||||||||
|
Qualifying
|
Subordinated
|
Tier 1 Capital
|
Total Risk-Based
|
|||||||||||||||||
| ACL | Debt | Tier 2 Capital | (from above) | Capital | ||||||||||||||||
|
Balance at December 31, 2008
|
$ | 591.8 | $ | 907.2 | $ | 1,499.0 | $ | 5,035.6 | $ | 6,534.6 | ||||||||||
|
Change in qualifying subordinated debt
|
— | (434.0 | ) | (434.0 | ) | — | (434.0 | ) | ||||||||||||
|
Change in qualifying ACL
|
(35.5 | ) | — | (35.5 | ) | — | (35.5 | ) | ||||||||||||
|
Changes to Tier 1 Capital (see above)
|
— | — | — | 165.6 | 165.6 | |||||||||||||||
|
Balance at December 31, 2009
|
$ | 556.3 | $ | 473.2 | $ | 1,029.5 | $ | 5,201.2 | $ | 6,230.7 | ||||||||||
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Table of Contents
| (1) | Excludes other comprehensive income (OCI) and minority interest. | |
| (2) | Includes minority interest. |
The following table presents our regulatory capital ratios at
both the consolidated and Bank levels for the past five years:
Table 52 —
Regulatory Capital Ratios
| At December 31, | ||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||
|
Total risk-weighted assets
|
Consolidated | $ | 43,248 | $ | 46,994 | $ | 46,044 | $ | 31,155 | $ | 29,599 | |||||||||||
|
(in millions)
|
Bank | 43,149 | 46,477 | 45,731 | 30,779 | 29,243 | ||||||||||||||||
|
Tier 1 leverage ratio(1)
|
Consolidated | 10.09 | % | 9.82 | % | 6.77 | % | 8.00 | % | 8.34 | % | |||||||||||
| Bank | 5.59 | 5.99 | 5.99 | 5.81 | 6.21 | |||||||||||||||||
|
Tier 1 risk-based capital ratio(1)
|
Consolidated | 12.03 | 10.72 | 7.51 | 8.93 | 9.13 | ||||||||||||||||
| Bank | 6.66 | 6.44 | 6.64 | 6.47 | 6.82 | |||||||||||||||||
|
Total risk-based capital ratio(1)
|
Consolidated | 14.41 | 13.91 | 10.85 | 12.79 | 12.42 | ||||||||||||||||
| Bank | 11.08 | 10.71 | 10.17 | 10.44 | 10.56 | |||||||||||||||||
| (1) | Based on an interim decision by the banking agencies on December 14, 2006, we have excluded the impact of adopting ASC Topic 715, “Compensation — Retirement Benefits”, from the regulatory capital calculations. |
At December 31, 2009, the parent company had Tier 1
and Total risk-based capital in excess of the minimum level
required to be considered “well-capitalized” of
$2.6 billion and $1.9 billion, respectively.
Our risk-weighted capital ratios improved during 2009 compared
with the prior year. The primary driver of these improvements
was the $1.3 billion of net proceeds from the three
discretionary equity issuance programs, conversions from
preferred stock to common stock, and the common stock public
offering completed in 2009. Additionally, risk-weighted assets
declined during the 2009, as both loans outstanding and unfunded
loan commitments decreased. These improvements were slightly
offset by an increase in the amount of our net deferred tax
asset that was disallowed for regulatory capital purposes.
Regulations require that we deduct from our Tier 1 capital
any amount that we cannot demonstrate the ability to recover
within the next 12 months. This adjustment to regulatory
capital has no impact on our assessment of the realizability of
our net deferred tax asset.
In late 2009, we redeemed $370.8 million aggregate
principal amount of certain subordinated notes issued previously
by the Bank. This capital at the Bank was replaced with an
intercompany subordinated note from the parent company in the
amount of $400 million with a term of 15 years. A
pretax gain of $73.6 million was recorded reflecting the
difference between the carrying value of the notes and the
purchase price of the debt, net of expenses and associated
interest rate swaps. On a consolidated basis, this transaction
reduced our Tier 2 capital by $354.9 million and
increased our Tier 1 capital by $47.9 million, which
included gain on the extinguishment of debt net of fees and
associated interest rate swaps.
The Bank’s risk-weighted assets declined compared with
December 31, 2008, as both loans outstanding and unfunded
loan commitments decreased. At December 31, 2009, the Bank
had Tier 1 and Total risk-based capital in excess of the
minimum level required to be considered
“well-capitalized” of $0.3 billion and
$0.5 billion, respectively.
Preferred
Stock/TARP
In 2008, we issued an aggregate $569 million of
Series A Preferred Stock. The Series A Preferred Stock
is nonvoting and may be convertible at any time, at the option
of the holder, into 83.668 shares of our common stock.
Shares of Series A Preferred Stock held by investors is not
a component of Tier 1 common equity. As previously
discussed
(see “Tier 1 Common Equity”
section)
, we entered into agreements with
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Table of Contents
various institutional investors exchanging 41.1 million
shares of our common stock for 0.2 million shares of the
Series A Preferred Stock held by them during 2009. These
transactions increased common equity by $206.4 million,
while preferred equity decreased by the same amount.
During 2008, we received $1.4 billion of equity capital by
issuing 1.4 million shares of Series B Preferred Stock
to the U.S. Department of Treasury, and a ten-year warrant
to purchase up to 23.6 million shares of our common stock,
par value $0.01 per share, at an exercise price of $8.90 per
share. The proceeds received were allocated to the preferred
stock and additional
paid-in-capital.
The resulting discount on the preferred stock will be amortized,
resulting in additional dilution to our earnings per share. The
Series B Preferred Stock is not a component of Tier 1
common equity.
(See Note 16 of the Notes to the
Consolidated Financial Statements for additional information
regarding the Series B Preferred Stock issuance).
Other
Capital Matters
To accelerate the building of capital, we reduced our quarterly
common stock dividend to $0.01 per common share, effective with
the dividend paid April 1, 2009.
On February 18, 2009, our 2006 Repurchase Program was
terminated. Additionally, as a condition to participate in the
TARP, we may not repurchase any shares without prior approval
from the Department of Treasury. No shares were repurchased
during 2009.
As shown in the Table 65, our book value per share declined to
$5.10 per share at December 31, 2009, from $14.62 per share
at December 31, 2008. This decline reflected the net loss
applicable to common shares in 2009, which included a
$2.6 billion impairment of our goodwill
(see the
“Goodwill” discussion located within the
“Critical Accounting Policies and Use of Significant
Estimates” section)
. Our tangible book value per share,
which excludes goodwill and other intangible assets from equity,
declined to $4.21 per share at December 31, 2009, from
$5.64 at December 31, 2008. This decline was significantly
less, on both an absolute and relative basis, compared with the
decline in book value per share, as the size of the net loss
applicable to common shares reflected the goodwill impairment in
2009 and had no impact to tangible equity. Tangible book value
per share also declined as a result of the issuance of
305.7 million common shares in 2009, through two common
stock offerings and three discretionary equity issuance
programs, at an average net proceeds of $3.71 per share.
BUSINESS
SEGMENT DISCUSSION
Overview
This section reviews financial performance from a business
segment perspective and should be read in conjunction with the
Discussion of Results of Operations, Note 27 of the Notes
to Consolidated Financial Statements, and other sections for a
full understanding of our consolidated financial performance.
We have five major business segments: Retail and Business
Banking, Commercial Banking, Commercial Real Estate, Auto
Finance and Dealer Services (AFDS), and the Private Financial
Group (PFG). A Treasury/Other function includes other
unallocated assets, liabilities, revenue, and expense. For each
of our business segments, we expect the combination of our
business model and exceptional service to provide a competitive
advantage that supports revenue and earnings growth. Our
business model emphasizes the delivery of a complete set of
banking products and services offered by larger banks, but
distinguished by local decision-making regarding the pricing and
offering of these products.
Funds
Transfer Pricing
We use a centralized funds transfer pricing (FTP) methodology to
attribute appropriate net interest income to the business
segments. The Treasury/Other business segment charges (credits)
an internal cost of funds for assets held in (or pays for
funding provided by) each business segment. The FTP rate is
based on prevailing market interest rates for comparable
duration assets (or liabilities), and includes an estimate for
the cost of liquidity (“liquidity premium”). Deposits
of an indeterminate maturity receive an FTP credit based on a
combination of vintage-based average lives and replicating
portfolio pool rates. Other assets, liabilities, and
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Table of Contents
capital are charged (credited) with a four-year moving average
FTP rate. The intent of the FTP methodology is to eliminate all
interest rate risk from the business segments by providing
matched duration funding of assets and liabilities. The result
is to centralize the financial impact, management, and reporting
of interest rate and liquidity risk in the Treasury/Other
function where it can be monitored and managed. The denominator
in net interest margin calculation has been modified to add the
amount of net funds provided by each business segment for all
periods presented.
In 2009, a comprehensive review of our FTP methodology resulted
in changes to various assumptions, including liquidity premiums.
FTP rates charged to business segments holding commercial loans,
and credited to segments holding indeterminate maturity and time
deposits, were impacted most. Business segment financial
performance for 2009 reflect the methodology changes, however,
financial performance for 2008 was not restated to reflect these
changes as the changes for that year were not material. The
impact of this methodology change to 2009 financial performance
was a $291.1 million increase in the net interest margin
for Treasury/Other compared with results under the previous
methodology, and an aggregate decrease to the net interest
margin of the other five business segments by the same amount.
As a result of this change, business segment performance for net
interest income comparisons between 2009 and 2008 are affected.
Fee
Sharing
Our business segments operate in cooperation to provide products
and services to our customers. Revenue is recorded in the
business segment responsible for the related product or service.
Fee sharing is recorded to allocate portions of such revenue to
other business segments involved in selling to or providing
service to customers. The most significant revenues for which
fee sharing is recorded relate to customer derivatives and
brokerage services, which are recorded by PFG and shared
primarily with Retail and Business Banking and Commercial
Banking. Results of operations for the business segments reflect
these fee sharing allocations.
Expense
Allocation
Business segment results are determined based upon our
management reporting system, which assigns balance sheet and
income statement items to each of the business segments. The
process is designed around our organizational and management
structure and, accordingly, the results derived are not
necessarily comparable with similar information published by
other financial institutions.
The management accounting process used to develop the business
segment reporting utilized various estimates and allocation
methodologies to measure the performance of the business
segments. Expenses are allocated to business segments using a
two-phase approach. The first phase consists of measuring and
assigning unit costs (activity-based costs) to activities
incident to product origination and servicing. These
activity-based costs are then extended, based on volumes, with
the resulting amount allocated to business segments which own
the related products. The second phase consists of the
allocation of overhead costs to all five business segments from
Treasury/Other. During 2009, we implemented a full-allocation
methodology, where all Treasury/Other expenses, except those
related to servicing Franklin assets, reported “Significant
Items” (excluding the goodwill impairment), and a small
residual of other unallocated expenses, are allocated to the
other five business segments. Prior to this implementation, only
certain expenses were allocated to the five business segments.
Business segment financial performance for 2009 reflect the
implementation, however, financial performance for 2008 was not
restated due to impracticability. As a result of this change,
business segment performance comparisons for noninterest expense
between 2009 and 2008 are affected.
Treasury/Other
The Treasury/Other function includes revenue and expense related
to assets, liabilities, and equity not directly assigned or
allocated to one of the five business segments. Assets include
investment securities, bank owned life insurance, and the loans
and OREO properties acquired through the 2009 first quarter
Franklin restructuring. The financial impact associated with our
FTP methodology, as described above, is also included.
Net interest income includes the impact of administering our
investment securities portfolios and the net impact of
derivatives used to hedge interest rate sensitivity. Noninterest
income includes miscellaneous fee
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Table of Contents
income not allocated to other business segments such as bank
owned life insurance income, and any investment securities and
trading assets gains or losses. Noninterest expense includes
certain corporate administrative, merger, and other
miscellaneous expenses not allocated to other business segments.
The provision for income taxes for the business segments is
calculated at a statutory 35% tax rate, though our overall
effective tax rate is lower. As a result, Treasury/Other
reflects a credit for income taxes representing the difference
between the lower actual effective tax rate and the statutory
tax rate used to allocate income taxes to the business segments.
Net
Income by Business Segment
We reported a net loss of $3,094.2 million during 2009.
This compared with a net loss of $113.8 million during
2008. The segregation of net income by business segment for 2009
and 2008 is presented in the following table:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Retail and Business Banking
|
$ | (22,871 | ) | $ | 226,917 | $ | 215,039 | |||||
|
Commercial Banking
|
(130,189 | ) | 104,362 | 129,521 | ||||||||
|
Commercial Real Estate
|
(618,220 | ) | (20,561 | ) | (6,427 | ) | ||||||
|
AFDS
|
(955 | ) | 10,681 | 46,930 | ||||||||
|
PFG
|
(5,485 | ) | 46,236 | 33,862 | ||||||||
|
Treasury/Other
|
257,359 | (481,441 | ) | (343,756 | ) | |||||||
|
Unallocated goodwill impairment(1)
|
(2,573,818 | ) | — | — | ||||||||
|
Total net (loss) income
|
$ | (3,094,179 | ) | $ | (113,806 | ) | $ | 75,169 | ||||
| (1) | Represents the 2009 first quarter impairment charge, net of tax, associated with the former Regional Banking business segment. The allocation of this charge to the newly created business segments is not practical. See the “Goodwill” section located in “Critical Accounting Policies and Use of Significant Estimates” section for additional information. |
Average
Loans/Leases and Deposits by Business Segment
The segregation of total average loans and leases and total
average deposits by business segment for the year ended
December 31, 2009, is presented in the following table:
|
Regional and
|
||||||||||||||||||||||||||||
|
Business
|
Commercial
|
Commercial
|
Treasury/
|
|||||||||||||||||||||||||
| Banking | Banking | Real Estate | AFDS | PFG | Other | TOTAL | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
|
Average Loans/Leases
|
||||||||||||||||||||||||||||
|
Commercial and industrial
|
$ | 3,059 | $ | 7,094 | $ | 770 | $ | 1,096 | $ | 963 | $ | 154 | $ | 13,136 | ||||||||||||||
|
Commercial real estate
|
751 | 756 | 7,460 | 34 | 155 | — | 9,156 | |||||||||||||||||||||
|
Total commercial
|
3,810 | 7,850 | 8,230 | 1,130 | 1,118 | 154 | 22,292 | |||||||||||||||||||||
|
Automobile loans and leases
|
1 | — | — | 3,545 | — | — | 3,546 | |||||||||||||||||||||
|
Home equity
|
6,829 | 48 | — | — | 663 | 50 | 7,590 | |||||||||||||||||||||
|
Residential mortgage
|
3,601 | 3 | 2 | 1 | 630 | 305 | 4,542 | |||||||||||||||||||||
|
Other consumer
|
507 | 7 | — | 177 | 31 | — | 722 | |||||||||||||||||||||
|
Total consumer
|
10,938 | 58 | 2 | 3,723 | 1,324 | 355 | 16,400 | |||||||||||||||||||||
|
Total loans
|
$ | 14,748 | $ | 7,908 | $ | 8,232 | $ | 4,853 | $ | 2,442 | $ | 509 | $ | 38,692 | ||||||||||||||
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|
Regional and
|
||||||||||||||||||||||||||||
|
Business
|
Commercial
|
Commercial
|
Treasury/
|
|||||||||||||||||||||||||
| Banking | Banking | Real Estate | AFDS | PFG | Other | TOTAL | ||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||
|
Average Deposits
|
||||||||||||||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 3,361 | $ | 1,975 | $ | 241 | $ | 69 | $ | 324 | $ | 87 | $ | 6,057 | ||||||||||||||
|
Demand deposits — interest-bearing
|
3,604 | 733 | 37 | — | 441 | 1 | 4,816 | |||||||||||||||||||||
|
Money market deposits
|
4,455 | 1,345 | 175 | 5 | 1,235 | 1 | 7,216 | |||||||||||||||||||||
|
Savings and other domestic time deposits
|
4,597 | 217 | 1 | — | 66 | — | 4,881 | |||||||||||||||||||||
|
Core certificates of deposit
|
11,550 | 49 | 6 | — | 339 | — | 11,944 | |||||||||||||||||||||
|
Total core deposits
|
27,567 | 4,319 | 460 | 74 | 2,405 | 89 | 34,914 | |||||||||||||||||||||
|
Other deposits
|
360 | 1,717 | 34 | 7 | 115 | 2,242 | 4,475 | |||||||||||||||||||||
|
Total deposits
|
$ | 27,927 | $ | 6,036 | $ | 494 | $ | 81 | $ | 2,520 | $ | 2,331 | $ | 39,389 | ||||||||||||||
Retail
and Business Banking
(This section should be read in conjunction with Significant
Items 1 and 2.)
Objectives,
Strategies, and Priorities
Our Retail and Business Banking segment provides traditional
banking products and services to consumer and small business
customers located in our 11 operating regions within the six
states of Ohio, Michigan, Pennsylvania, Indiana, West Virginia,
and Kentucky. It provides these services through a banking
network of over 600 branches, and approximately 1,300 ATMs,
along with internet and telephone banking channels. It also
provides certain services on a limited basis outside of these
six states, such as mortgage banking. 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, treasury
management products, as well as sales of investment and
insurance services. At December 31, 2009, Retail and
Business Banking accounted for 39% and 71% of consolidated loans
and leases and deposits, respectively.
The Retail and Business Banking strategy is to focus on building
a deeper relationship with our customers by providing an
exceptional service experience. This focus on service involves
continued investments in
state-of-the-art
platform technology in our branches, award-winning retail and
business websites for our customers, extensive development of
employees, and internal processes that empower our local bankers
to serve our customers.
108
Table of Contents
Table
55 — Key Performance Indicators for Retail and
Business Banking
| Change from 2008 | ||||||||||||||||||||
| 2009 | 2008 | Amount | Percent | 2007 | ||||||||||||||||
| (In thousands unless otherwise noted) | ||||||||||||||||||||
|
Net interest income
|
$ | 882,026 | $ | 941,807 | $ | (59,781 | ) | (6 | )% | $ | 710,154 | |||||||||
|
Provision for credit losses
|
526,399 | 219,348 | 307,051 | N.M. | 48,373 | |||||||||||||||
|
Noninterest income
|
511,298 | 405,654 | 105,644 | 26 | 363,990 | |||||||||||||||
|
Noninterest expense
|
902,111 | 779,010 | 123,101 | 16 | 694,942 | |||||||||||||||
|
(Benefit) Provision for income taxes
|
(12,315 | ) | 122,186 | (134,501 | ) | N.M. | 115,790 | |||||||||||||
|
Net (loss) income
|
$ | (22,871 | ) | $ | 226,917 | $ | (249,788 | ) | N.M. | % | $ | 215,039 | ||||||||
|
Total average assets (in millions)
|
$ | 16,901 | $ | 17,645 | $ | (744 | ) | (4 | )% | $ | 15,112 | |||||||||
|
Total average loans/leases (in millions)
|
14,748 | 15,713 | (965 | ) | (6 | ) | 13,581 | |||||||||||||
|
Total average deposits (in millions)
|
27,927 | 26,268 | 1,659 | 6 | 20,284 | |||||||||||||||
|
Net interest margin
|
3.15 | % | 3.61 | % | (0.46 | )% | (13 | ) | 3.39 | |||||||||||
|
Net charge-offs (NCOs)
|
$ | 389,840 | $ | 145,788 | $ | 244,052 | N.M. | $ | 87,829 | |||||||||||
|
NCOs as a% of average loans and leases
|
2.64 | % | 0.93 | % | 1.71 | % | N.M. | 0.65 | ||||||||||||
|
Return on average equity
|
(1.8 | ) | 21.9 | (23.7 | ) | N.M. | 27.9 | |||||||||||||
|
Retail banking # DDA households (eop)
|
921,695 | 896,412 | 25,283 | 3 | 896,567 | |||||||||||||||
|
Retail banking # new relationships
90-day
cross-sell (eop)
|
3.05 | 2.20 | 0.85 | 39 | 2.57 | |||||||||||||||
|
Business banking # business DDA relationships (eop)
|
113,009 | 107,241 | 5,768 | 5 | 103,765 | |||||||||||||||
|
Business banking # new relationships
90-day
cross-sell (eop)
|
1.90 | 2.03 | (0.13 | ) | (6 | ) | 2.27 | |||||||||||||
|
Mortgage banking closed loan volume (in millions)
|
$ | 5,262 | $ | 3,773 | $ | 1,489 | 39 | % | $ | 3,493 | ||||||||||
eop — End of Period.
N.M., not a meaningful value.
2009
versus 2008
Retail and Business Banking reported a net loss of
$22.9 million in 2009, compared with net income of
$226.9 million in 2008.
The most notable factor contributing to this $249.8 million
decrease was a $307.1 million increase to the provision for
credit losses, reflecting: (a) the continued economic
weaknesses in our markets, (b) an increase of commercial
reserves resulting from credit actions taken during 2009
(see
“2009 Commercial Loan Portfolio Review and Actions”
section located within the “Commercial Credit” section
for additional information),
and (c) a
$244.1 million increase in NCOs. Our consumer loan NCOs
increased $123.9 million, primarily reflecting:
(a) the sale of underperforming mortgage loans that were
written down to their fair value prior to sale, (b) a more
conservative position regarding the timing of loss recognition
in our residential mortgage portfolio, and (c) the higher
unemployment rate, particularly in our Michigan and northern
Ohio markets. The overall economic slowdown also impacted our
commercial loan portfolio NCO performance as NCOs increased
$120.2 million. The impact to net income resulting from the
increase in the provision for credit losses was partially offset
by a $134.5 million reduction in provision for income taxes
expense reflecting the net loss during 2009.
Net interest income decreased $59.8 million, or 6%,
primarily reflecting a 46 basis point decline in net
interest margin. The net interest margin decline primarily
reflected the previously discussed FTP methodology
109
Table of Contents
change. Other factors contributing to the decline in net
interest margin included a reduction in loan net interest
income, resulting from significant declines in interest rates,
and a $30.1 million reduction related to MSR hedging.
Partially offsetting these decreases were: (a) lower market
interest rates, (b) $1.6 billion increase in average
consumer deposit balances, (c) decreases in our funding
costs for nonearning assets, and (d) an increase in
allocated equity, resulting in a higher funding credit.
The $1.0 billion decline in total average loans and leases
reflected $0.7 billion decrease in average residential
mortgages, resulting from the impact of loan sales. Although
mortgage originations increased 39%, the majority of our
fixed-rate originations were sold in the secondary market, as is
our practice. The $0.4 billion decrease in average
commercial loans, primarily reflected: (a) substantially
higher commercial loan NCOs, and (b) lower loan origination
production when compared with 2008, particularly in our CRE
portfolio reflecting our planned efforts to shrink this
portfolio.
Average total deposits increased $1.7 billion, or 6%,
primarily reflecting increased sales efforts throughout 2009,
particularly in our money market deposit products, as deposit
growth has been a strategic priority for us for the year.
Additionally, the number of DDA households increased 3%,
primarily reflecting the same sales efforts. Period-end balances
for total core deposits increased in 10 of our 11 regions.
Noninterest income increased $105.6 million, or 26%,
primarily reflecting a $102.5 million increase in mortgage
banking income. The increase to mortgage banking income
primarily reflected a $57.5 million increase in origination
and secondary marketing fees as a result of a 39% increase in
mortgage originations, as well as a $57.3 million
improvement of MSR valuation, net of hedging. Additionally,
electronic banking income increased $9.8 million, primarily
reflecting an increased number of deposit accounts and
transaction volumes, as well as additional third-party
processing fees. These increases were partially offset by an
$11.1 million decline in service charges on deposit
accounts, primarily reflecting lower consumer nonsufficient
funds and overdraft fees, partially offset by higher commercial
service charges. During the current economic environment,
customers have improved the management of their deposit
balances, thus resulting in fewer overdraft instances.
Noninterest expense increased $123.1 million. This increase
reflected a $41.7 million increase in deposit and other
insurance expense as the comparable year-ago period’s
expense was substantially offset by an FDIC insurance assessment
credit that has since been fully utilized, and a
$19.3 million increase in OREO and foreclosure expense, as
a result of higher levels of problem assets, as well as loss
mitigation activities. Additionally, indirect allocated expenses
increased $92.4 million as a result of the previously
discussed changes in our process for allocating corporate
overhead. These increases were partially offset by a
$26.2 million decrease in personnel expense resulting from
a 7% reduction average full-time equivalent employees, as well
as a reduction in, or elimination of, incentive plan payouts.
Also, several other expense categories, such as printing and
supplies expense and travel expense, declined as a result of the
implementation of expense reduction initiatives.
2008
vs. 2007
Retail and Business Banking reported net income of
$226.9 million in 2008, compared with net income of
$215.0 million in 2007. The $11.9 million increase was
driven by the net positive impact of the Sky Financial
acquisition on July 1, 2007. The acquisition increased net
interest income, noninterest income, noninterest expense,
average total loans and average total deposits from the prior
year. The positive impact of the Sky Financial acquisition was
partially offset by a $171.0 million increase in provision
for credit losses. This increase was largely due to a
$58.0 million increase in NCOs, and a $129 million
increase in NALs compared with the prior year-end. The increase
in both NCOs and NALs reflected the impact of the overall
weakened economy across all of our regions.
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Table of Contents
Commercial
Banking
Objectives,
Strategies, and Priorities
The Commercial Banking segment provides a variety of banking
products and services to customers within our primary banking
markets that generally have larger credit exposures and sales
revenues compared with our Retail and Business Banking
customers. Commercial Banking products include commercial loans,
international trade, cash management, leasing, interest rate
protection products, capital market alternatives, 401(k) plans,
and mezzanine investment capabilities. Our Commercial Banking
team also serves customers that specialize in equipment leasing,
as well as serving the commercial banking needs of government
entities,
not-for-profit
organizations, and large corporations. Commercial bankers
personally deliver these products and services by developing
leads through community involvement, referrals from other
professionals, and targeted prospect calling.
The Commercial Banking strategy is to focus on building a deeper
relationship with our customers by providing an exceptional
service experience. This focus on service requires continued
investments in technology for our product offerings, websites
for our customers, extensive development of employees, and
internal processes that empower our local bankers to serve our
customers better.
Table
56 — Key Performance Indicators for Commercial
Banking
| Change from 2008 | ||||||||||||||||||||
| 2009 | 2008 | Amount | Percent | 2007 | ||||||||||||||||
| (In thousands unless otherwise noted) | ||||||||||||||||||||
|
Net interest income
|
$ | 209,376 | $ | 313,353 | $ | (103,977 | ) | (33 | )% | $ | 245,690 | |||||||||
|
Provision for credit losses
|
359,233 | 102,143 | 257,090 | N.M. | (5,352 | ) | ||||||||||||||
|
Noninterest income
|
92,986 | 96,676 | (3,690 | ) | (4 | ) | 81,873 | |||||||||||||
|
Noninterest expense
|
143,420 | 147,329 | (3,909 | ) | (3 | ) | 133,652 | |||||||||||||
|
(Benefit) Provision for income taxes
|
(70,102 | ) | 56,195 | (126,297 | ) | N.M. | 69,742 | |||||||||||||
|
Net (loss) income
|
$ | (130,189 | ) | $ | 104,362 | $ | (234,551 | ) | N.M. | % | $ | 129,521 | ||||||||
|
Total average assets (in millions)
|
$ | 8,273 | $ | 8,595 | $ | (322 | ) | (4 | )% | $ | 7,355 | |||||||||
|
Total average loans/leases (in millions)
|
7,908 | 8,089 | (181 | ) | (2 | ) | 6,846 | |||||||||||||
|
Total average deposits (in millions)
|
6,036 | 6,124 | (88 | ) | (1 | ) | 5,362 | |||||||||||||
|
Net interest margin
|
2.66 | % | 3.79 | % | (1.13 | )% | (30 | ) | 3.49 | % | ||||||||||
|
Net charge-offs (NCOs)
|
$ | 262,850 | $ | 76,629 | $ | 186,221 | N.M. | $ | 9,648 | |||||||||||
|
NCOs as a % of average loans and leases
|
3.32 | % | 0.95 | % | 2.37 | % | N.M. | 0.14 | % | |||||||||||
|
Return on average equity
|
(16.7 | ) | 13.6 | (30.3 | ) | N.M. | 23.5 | |||||||||||||
N.M., not a meaningful value.
2009
vs. 2008
Commercial Banking reported a net loss of $130.2 million in
2009, compared with net income of $104.4 million in 2008.
The decline reflected a $257.1 million increase to the
provision for credit losses. This increase to the provision for
credit losses reflected: (a) the continued economic
weaknesses in our markets, (b) an increase of commercial
reserves resulting from credit actions taken during 2009
(see
“2009 Commercial Loan Portfolio Review and Actions”
section located within the “Commercial Credit” section
for additional information),
and
(c) $186.2 million increase in NCOs, again reflecting
the continued impact of the economic conditions on our
commercial borrowers. As NALs have continued to grow, we built
our loan loss reserves. NALs increased $150 million,
reflecting our more conservative approach in identifying and
classifying emerging problem credits. In many cases, commercial
loans were placed on nonaccrual status even though the loan was
less than 30 days past due for both principal and interest
payments. The impact to net income resulting from the increase
in the provision for credit losses was partially offset by a
$126.3 million reduction
111
Table of Contents
in provision for income taxes expense reflecting the net loss
during 2009. Although we expect our commercial portfolio will
remain under pressure, we believe that the risks in our loan
portfolios are manageable.
Net interest income decreased $104.0 million, or 33%,
primarily reflecting a 113 basis point decline in net
interest margin, and a $0.2 billion decline in average
earning assets, partially offset by a $0.9 billion decline
in average interest-bearing liabilities. The net interest margin
decline primarily reflected the previously discussed FTP
methodology change. Other factors contributing to the decline in
net interest margin included a reduction in loan net interest
income, resulting from significant declines in interest rates
and lower average total loans, as well as a $150 million
increase in NALs.
The decline in average earning assets primarily reflected a
$0.2 billion decline in total average loans and leases, and
included a $0.5 billion decrease in average CRE loans,
partially offset by a $0.3 billion increase in total
average C&I loans. These changes reflected the impact of
reclassifications in 2009 of CRE loans to C&I loans, as
well as the impact of substantially higher charge-offs in 2009,
the Franklin restructuring, and lower loan origination
production compared with 2008 reflecting, in part, our planned
efforts to shrink the CRE portfolio.
Total average interest-bearing liabilities declined
$0.9 billion, and included a $1.0 billion decline in
noncore deposits and other sweep product balances. This decline
reflected a $0.5 billion decline in public fund deposit
balances resulting from a managed decline in this product. Also,
throughout 2009, a migration of money-market account, time
deposit, and other sweep product balances into demand deposit
accounts occurred due to lower market rates and the increased
FDIC insurance coverage provided to demand deposit accounts.
Noninterest income decreased $3.7 million, or 4%, primarily
reflecting: (a) $5.7 million decrease in derivative
income due to a decline in demand for interest rate swap
products, (b) $1.6 million decrease in derivative
trading income, (c) $1.3 million decrease in
international and foreign exchange income,
(d) $1.2 million decrease in loan syndication fee
income, (e) $1.1 million decrease in mezzanine income,
and (f) $2.7 million decline in operating lease income
as lease originations were recorded as direct finance leases
rather than operating leases effective with the 2009 second
quarter. These decreases were partially offset by:
(a) $5.5 million increase in loan commitment fee
income reflecting higher unfunded commitment loan fees, and
(b) $4.2 million increase in service charges on
deposit accounts, reflecting pricing initiatives implemented
during the first half of 2009.
Noninterest expense declined $3.9 million, and reflected:
(a) $9.4 million decrease in personnel expense
resulting from a reduction in average full-time equivalent
employees, as well as significantly reduced incentive payouts,
partially offset by a decrease in deferred salary expense due to
decreased loan production; (b) $3.2 million decrease
in overhead allocation as a result of the previously discussed
changes in our process for allocating corporate overhead;
(c) $3.2 million reduction in travel, business
development and marketing as a result of the implementation of
several expense reduction initiatives; and
(d) $2.5 million decrease in operating lease expense
reflecting the change in accounting for lease originations
effective with the 2009 second quarter as described above. These
decreases were partially offset by a $8.3 million increase
in deposit and other insurance expense as a result of the
comparable year-ago period’s expense was offset by an FDIC
insurance assessment credit that has since been fully utilized,
and a $4.8 million increase in OREO and foreclosure
expense, as a result of higher levels of problem assets, as well
as loss mitigation activities.
2008
vs. 2007
Commercial Banking reported net income of $104.4 million in
2008, compared with net income of $129.5 million in 2007.
The $25.2 million decline included a $107.5 million
increase in provision for credit losses. This increase was
largely due to a $67.0 million increase in NCOs, and a
$115 million increase in NALs compared with the prior
year-end. The increase in both NCOs and NALs reflected the
overall economic weakness across our regions. The increase to
provision for credit losses was partially offset by the net
positive impact of the Sky Financial acquisition on July 1,
2007. The acquisition increased net interest income, noninterest
income, noninterest expense, average total loans and average
total deposits from the prior year.
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Table of Contents
Commercial
Real Estate
Objectives,
Strategies, and Priorities
Our Commercial Real Estate segment serves professional real
estate developers or other customers with real estate project
financing needs within our primary banking markets. Commercial
Real Estate products and services include CRE loans, cash
management, interest rate protection products, and capital
market alternatives. Commercial Real Estate bankers personally
deliver these products and services by relationships with
developers in our footprint who are recognized as the most
experienced, well-managed and well-capitalized, and are capable
of operating in all phases of the real estate cycle
(“top-tier developers”); leading through community
involvement; and referrals from other professionals.
The Commercial Real Estate strategy is to focus on building a
deeper relationship with top-tier developers within our
geographic footprint. Our local expertise of the customers,
market, and products, gives us a competitive advantage and
supports revenue growth in our footprint. Our strategy is to
continue to expand the relationships of our current customer
base and to attract new, profitable business with top-tier
developers in our footprint.
Table
57 — Key Performance Indicators for Commercial Real
Estate
| Change from 2008 | ||||||||||||||||||||
| 2009 | 2008 | Amount | Percent | 2007 | ||||||||||||||||
| (In thousands unless otherwise noted) | ||||||||||||||||||||
|
Net interest income
|
$ | 134,190 | $ | 202,178 | $ | (67,988 | ) | (34 | )% | $ | 147,884 | |||||||||
|
Provision for credit losses
|
1,050,554 | 215,548 | 835,006 | N.M. | 145,134 | |||||||||||||||
|
Noninterest income
|
1,613 | 13,288 | (11,675 | ) | (88 | ) | 11,675 | |||||||||||||
|
Noninterest expense
|
36,357 | 31,550 | 4,807 | 15 | 24,313 | |||||||||||||||
|
(Benefit) Provision for income taxes
|
(332,888 | ) | (11,071 | ) | (321,817 | ) | N.M. | (3,461 | ) | |||||||||||
|
Net (loss) income
|
$ | (618,220 | ) | $ | (20,561 | ) | $ | (597,659 | ) | N.M. | % | $ | (6,427 | ) | ||||||
|
Total average assets (in millions)
|
$ | 8,103 | $ | 7,880 | $ | 223 | 3 | % | $ | 4,944 | ||||||||||
|
Total average loans/leases (in millions)
|
8,232 | 7,899 | 333 | 4 | 4,890 | |||||||||||||||
|
Total average deposits (in millions)
|
494 | 550 | (56 | ) | (10 | ) | 541 | |||||||||||||
|
Net interest margin
|
1.63 | % | 2.57 | % | (0.94 | )% | (37 | ) | 3.03 | % | ||||||||||
|
Net charge-offs (NCOs)
|
$ | 610,752 | $ | 46,884 | $ | 563,868 | N.M. | $ | 40,881 | |||||||||||
|
NCOs as a % of average loans and leases
|
7.42 | % | 0.59 | % | 6.83 | % | N.M. | 0.84 | % | |||||||||||
|
Return on average equity
|
N.M. | (4.7 | ) | — | — | (2.2 | ) | |||||||||||||
N.M., not a meaningful value.
2009
vs. 2008
Commercial Real Estate reported a net loss of
$618.2 million in 2009, compared with a net loss of
$20.6 million in 2008. The decline primarily reflected a
$835.0 million increase to the provision for credit losses
reflecting: (a) the continued economic weaknesses in our
markets, (b) an increase of commercial reserves resulting
from credit actions taken during 2009
(see “2009
Commercial Loan Portfolio Review and Actions” section
located within the “Commercial Credit” section for
additional information),
and (c) a $563.9 million
increase in NCOs, again reflecting the continued impact of the
economic conditions on our commercial borrowers. As NALs
continued to grow, we built our loan loss reserves. NALs
increased $583 million, reflecting our more conservative
approach in identifying and classifying emerging problem
credits. In many cases, commercial loans were placed on
nonaccrual status even though the loan was less than
30 days past due for both principal and interest payments.
The impact to net income resulting from the increase in the
provision for credit losses was partially offset by a
$321.8 million reduction in provision for
113
Table of Contents
income taxes expense reflecting the net loss during 2009.
Although we expect our CRE portfolio will remain under pressure,
we believe that the risks in our loan portfolios are manageable.
Net interest income decreased $68.0 million, or 34%,
reflecting a 94 basis point decrease in net interest
margin, partially offset by a $0.3 billion, or 4%, increase
in average earning assets. The net interest margin decline
primarily reflected the previously discussed FTP methodology
change. Other factors contributing to the decline in net
interest margin included a reduction in loan net interest
income, resulting from significant declines in interest rates,
as well as a significant increase in NALs, which increased to
$994.2 million at December 31, 2009.
The $0.3 billion increase in total average earning assets
reflected a $0.3 billion increase in total average
commercial loans reflecting significant growth in this portfolio
throughout 2008 as quarterly average balances grew
$1.2 billion, or 16%, between the 2008 first quarter and
the 2009 first quarter. However, since the 2009 first quarter,
average balances have decreased $0.5 billion, or 6%,
reflecting our planned efforts to shrink the CRE portfolio.
Noninterest income decreased $11.7 million, or 88%,
primarily reflecting: (a) $5.1 million decrease in
derivative income due to a decline in demand for interest rate
swap products, (b) $4.3 million decrease in mezzanine
lending income, resulting from lower participation gains, and
(c) $2.3 million increase in interest rate swap losses.
Noninterest expense increased $4.8 million, or 15%,
reflecting: (a) $5.0 million increase in allocated
overhead as a result of the previously discussed changes in our
process for allocating corporate overhead, and
(b) $4.8 million increase in OREO and foreclosure
expense, as a result of higher levels of problem assets, as well
as loss mitigation activities. These increases were partially
offset by: (a) $2.5 million decrease in personnel
expense resulting from a 6% reduction in full-time equivalent
employees, and (b) $2.4 million decrease in fees and
commissions related to the reduced mezzanine lending activity
mentioned above. In addition, various other expense categories
declined as a result of the implementation of several expense
reduction initiatives, specifically travel and business
development expenses.
2008
vs. 2007
Commercial Real Estate Banking reported a net loss of
$20.6 million in 2008, compared with a net loss of
$6.4 million in 2007. The $14.2 million decline
included a $70.4 million increase in provision for credit
losses reflecting a $6.0 million increase in NCOs, and a
$280 million increase in NALs compared with the prior
year-end. The increase in NCOs and NALs reflected the overall
economic weakness across our regions, and was centered in the
single family home builder industry. The increase to provision
for credit losses was partially offset by the net positive
impact of the Sky Financial acquisition on July 1, 2007.
The acquisition increased net interest income, noninterest
income, noninterest expense, average total loans and average
total deposits from the prior year.
Auto
Finance and Dealer Services (AFDS)
(This section should be read in conjunction with the
“Automotive Industry” discussion located within the
“Commercial Credit” section.)
Objectives,
Strategies, and Priorities
Our AFDS business segment provides a variety of banking products
and services to approximately 2,200 automotive dealerships
within our primary banking markets. During the first quarter of
2009, AFDS discontinued lending activities in Arizona, Florida,
Tennessee, Texas, and Virginia. Also, all lease origination
activities were discontinued during the 2008 fourth quarter.
AFDS finances the purchase of automobiles by customers at the
automotive dealerships; finances dealerships’ new and used
vehicle inventories, land, buildings, and other real estate
owned by the dealership; finances dealership working capital
needs; and provides other banking services to the automotive
dealerships and their owners. Competition from the financing
divisions of automobile manufacturers and from other financial
institutions is intense. AFDS’
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Table of Contents
production opportunities are directly impacted by the general
automotive sales business, including programs initiated by
manufacturers to enhance and increase sales directly. We have
been in this line of business for over 50 years.
The AFDS strategy focuses on developing relationships with the
dealership through its finance department, general manager, and
owner. An underwriter who understands each local region makes
loan decisions, though we prioritize maintaining pricing
discipline over market share.
Table
58 — Key Performance Indicators for Auto Finance and
Dealer Services (AFDS)
| Change from 2008 | ||||||||||||||||||||
| 2009 | 2008 | Amount | Percent | 2007 | ||||||||||||||||
| (In thousands unless otherwise noted) | ||||||||||||||||||||
|
Net interest income
|
$ | 141,989 | $ | 149,236 | $ | (7,247 | ) | (5 | )% | $ | 138,786 | |||||||||
|
Provision for credit losses
|
91,342 | 69,143 | 22,199 | 32 | 30,745 | |||||||||||||||
|
Noninterest income
|
61,003 | 59,497 | 1,506 | 3 | 41,594 | |||||||||||||||
|
Noninterest expense
|
113,119 | 123,158 | (10,039 | ) | (8 | ) | 77,435 | |||||||||||||
|
(Benefit) Provision for income taxes
|
(514 | ) | 5,751 | (6,265 | ) | N.M. | 25,270 | |||||||||||||
|
Net (loss) income
|
$ | (955 | ) | $ | 10,681 | $ | (11,636 | ) | N.M. | % | $ | 46,930 | ||||||||
|
Total average assets (in millions)
|
$ | 5,217 | $ | 5,731 | $ | (514 | ) | (9 | )% | $ | 5,132 | |||||||||
|
Total average loans/leases (in millions)
|
4,853 | 5,871 | (1,018 | ) | (17 | ) | 5,209 | |||||||||||||
|
Net interest margin
|
2.73 | % | 2.49 | % | 0.24 | % | 10 | 2.61 | % | |||||||||||
|
Net charge-offs (NCOs)
|
$ | 59,497 | $ | 57,398 | $ | 2,099 | 4 | $ | 29,282 | |||||||||||
|
NCOs as a % of average loans and leases
|
1.23 | % | 0.98 | % | 0.25 | % | 26 | 0.56 | % | |||||||||||
|
Return on average equity
|
(0.4 | ) | 5.1 | (5.5 | ) | N.M. | 25.9 | |||||||||||||
|
Automobile loans production (in millions)
|
$ | 1,590 | $ | 2,213 | $ | (623 | ) | (28 | ) | $ | 1,911 | |||||||||
2009
vs. 2008
AFDS reported a net loss of $1.0 million in 2009, compared
with net income of $10.7 million in 2008. This
$11.6 million decline reflected a $22.2 million
increase to the provision for credit losses due to reserve
building necessary due to the continued economic and automobile
industry-related weaknesses, as well as a $2.1 million
increase in NCOs that also reflected the continued economic
weaknesses in our markets. Although total NCOs increased from
the comparable year-ago period, automobile loan and lease NCOs
in the second-half of 2009 declined 26%, compared with the
first-half of 2009. Also, delinquency levels have improved from
the year-ago period. At December 31, 2009, the ALLL as a
percentage of total loans and leases increased to 1.77% compared
with 0.84% at December 31, 2008. Performance of this
portfolio on both an absolute and relative basis continues to be
consistent with our views regarding the underlying quality of
the portfolio and we expect
flat-to-improved
performance going forward.
Net interest income decreased $7.2 million, or 5%, to
$142.0 million, reflecting a $1.0 billion decrease in
average loans and leases. The decrease in average loans and
leases reflected: (a) the sale of $1.0 billion of
automobile loans at the end of March 2009; (b) continued
run-off in the automobile lease portfolio; and (c) lower
loan originations, primarily from exited markets. Total loan
originations were $1.6 billion in 2009 ($1.5 billion
from our primary banking markets) compared with
$2.2 billion in 2008 ($1.4 billion from our primary banking
markets). Partially offsetting the impact of these declining
balances was a 24 basis point improvement in the net
interest margin to 2.73% from 2.49%. Effective January 1,
2010, loan balances will reflect the inclusion of approximately
$0.8 billion of automobile loans previously transferred to
a trust in a securitization transaction.
(See “a”
above and Note 7 of the Notes to the Consolidated Financial
Statements).
Noninterest income (excluding operating lease income of
$51.8 million in 2009, and $39.8 million in
2008) declined $10.5 million, and included a
$5.9 million nonrecurring loss from the previously
mentioned $1.0 billion sale of loans in 2009. In addition,
fee income from the sale of Huntington Plus loans declined
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Table of Contents
$2.9 million as this program was discontinued in the 2008
fourth quarter, servicing income decreased $0.4 million due
to declines in underlying serviced loan portfolios, and fees
associated with customers exercising their purchase option on
leased vehicles declined $0.3 million. Servicing income is
expected to decline in 2010 as a result of the consolidation on
January 1, 2010, of the automobile sale transaction,
previously mentioned.
(See Note 7 of the Notes to the
Consolidated Financial Statements).
Noninterest expense (excluding operating lease expense of
$43.4 million in 2009, and $31.3 million in
2008) decreased $22.1 million. This decline reflected:
(a) $22.4 million reduction in losses associated with
sales of vehicles returned at the end of their lease terms due
to an improvement in used vehicle values combined with a decline
in the number of vehicles being returned, (b) a
$2.1 million decline in residual value insurance costs as
all residual value insurance policies were terminated in the
2008 fourth quarter, and (c) a $2.8 million decline in
personnel costs. Personnel costs, as well as various other
expenses, have declined primarily as a result of expense
reduction initiatives that began in the second half of 2008 and
continued into 2009. A majority of these reduction initiatives
involved discontinuing lending activities outside of our primary
banking markets. Partially offsetting these declines was an
$8.5 million increase in corporate and other overhead
expenses as a result of the previously discussed changes in our
process for allocating corporate overhead.
Net automobile operating lease income decreased
$0.1 million and consisted of a $12.0 million increase
in noninterest income, offset by a $12.1 million increase
in noninterest expense. These increases primarily reflected the
increase in average operating lease balances, which resulted
from all automobile lease originations since the 2007 fourth
quarter being recorded as operating leases. However, the
automobile operating lease portfolio and related income will
decline in the future as all lease origination activities were
discontinued during the 2008 fourth quarter.
2008
vs. 2007
AFDS reported net income of $10.7 million during 2008,
compared with net income of $46.9 million in 2007. This
decline primarily reflected a $38.4 million increase to the
provision for credit losses resulting from the continuing
economic and automobile industry related weaknesses in our
regions, as well as declines in values of used vehicles, which
have resulted in lower recovery rates on sales of repossessed
vehicles.
Private
Financial Group (PFG)
(This section should be read in conjunction with Significant
Items 1, 7, and the “Goodwill” discussion located
within the “Critical Accounting Policies and Use of
Significant Estimates” section.)
Objectives,
Strategies, and Priorities
PFG provides products and services designed to meet the needs of
higher net worth customers. Revenue results from the sale of
trust, asset management, investment advisory, brokerage,
insurance, and private banking products and services including
credit and lending activities. PFG also focuses on financial
solutions for corporate and institutional customers that include
investment banking, sales and trading of securities, and
interest rate risk management products. To serve high net worth
customers, we use a unique distribution model that employs a
single, unified sales force to deliver products and services
mainly through the Bank’s distribution channels. PFG
provides investment management and custodial services to the
Huntington Funds, which consists of 36 proprietary mutual funds,
including 12 variable annuity funds. Huntington Funds assets
represented 25% of the approximately $13.0 billion total
assets under management at December 31, 2009. The
Huntington Investment Company (HIC) offers brokerage and
investment advisory services to both the Bank’s and
PFG’s customers, through a combination of licensed
investment sales representatives and licensed personal bankers.
PFG’s Insurance group provides a complete array of
insurance products including individual life insurance products
ranging from basic term-life insurance to estate planning, group
life and health insurance, property and casualty insurance,
mortgage title insurance, and reinsurance for payment protection
products.
PFG’s primary goals are to consistently increase assets
under management by offering innovative products and services
that are responsive to our clients’ changing financial
needs, and to grow deposits through
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Table of Contents
increased focus and improved cross-selling efforts. To grow
managed assets, the HIC sales team has been utilized as the
primary distribution source for trust and investment management.
Table
59 — Key Performance Indicators for Private Financial
Group (PFG)
| Change | ||||||||||||||||||||
| 2009 | 2008 | Amount | Percent | 2007 | ||||||||||||||||
| (In thousands unless otherwise noted) | ||||||||||||||||||||
|
Net interest income
|
$ | 77,390 | $ | 74,651 | $ | 2,739 | 4 | % | $ | 57,985 | ||||||||||
|
Provision for credit losses
|
57,450 | 13,279 | 44,171 | N.M. | 961 | |||||||||||||||
|
Noninterest income
|
244,255 | 258,300 | (14,045 | ) | (5 | ) | 197,436 | |||||||||||||
|
Noninterest expense excluding goodwill impairment
|
243,738 | 248,540 | (4,802 | ) | (2 | ) | 202,364 | |||||||||||||
|
Goodwill impairment
|
28,895 | — | 28,895 | — | — | |||||||||||||||
|
(Benefit) Provision for income taxes
|
(2,953 | ) | 24,896 | (27,849 | ) | N.M. | 18,234 | |||||||||||||
|
Net (loss) income
|
$ | (5,485 | ) | $ | 46,236 | $ | (51,721 | ) | N.M. | % | $ | 33,862 | ||||||||
|
Total average assets (in millions)
|
$ | 3,340 | $ | 2,977 | $ | 363 | 12 | % | $ | 2,372 | ||||||||||
|
Total average loans/leases (in millions)
|
2,442 | 2,261 | 181 | 8 | 1,909 | |||||||||||||||
|
Net interest margin
|
3.03 | % | 3.19 | % | (0.16 | )% | (5 | ) | 2.95 | % | ||||||||||
|
Net charge-offs (NCOs)
|
$ | 37,844 | $ | 8,199 | $ | 29,645 | N.M. | $ | 1,491 | |||||||||||
|
NCOs as a% of average loans and leases
|
1.55 | % | 0.36 | % | 1.19 | % | N.M. | 0.08 | % | |||||||||||
|
Return on average equity
|
(2.3 | ) | 20.6 | (22.9 | ) | N.M. | 21.0 | |||||||||||||
|
Noninterest income shared with other
|
||||||||||||||||||||
|
business segments(1)
|
$ | 35,470 | $ | 46,773 | $ | (11,303 | ) | (24 | ) | $ | 36,121 | |||||||||
|
Total assets under management (in billions)- eop
|
13.0 | 13.3 | (0.3 | ) | (2 | ) | 16.3 | |||||||||||||
|
Total trust assets (in billions)- eop
|
49.4 | 44.0 | 5.4 | 12 | % | 60.1 | ||||||||||||||
eop — End of Period
N.M., not a meaningful value
| (1) | Amount is not included in noninterest income reported above. |
2009
vs. 2008
PFG reported a net loss of $5.5 million in 2009, compared
with net income of $46.2 million in 2008. The decline
reflected the negative impact of several items outside of normal
business activities. These items included:
(a) $28.9 million goodwill impairment charge recorded
during 2009
(see “Goodwill” discussion located
within the “Critical Accounting Policies and Use of
Significant Estimates” for additional information;
(b) $20.1 million reduction in net interest income
resulting from the methodology change discussed earlier, and
(c) $7.4 million increase in noninterest expense as a
result of the previously discussed overhead allocation
methodology change. After adjusting for the goodwill impairment
charge, and the related tax impact, PFG’s net income
decreased $15.1 million.
Net interest income increased $2.7 million, or 4%,
primarily as a result of the 62% growth in average deposits. A
substantial portion of the deposit growth resulted from the
introduction of three deposit products during 2009 designed as
alternative options for lower yielding money market mutual
funds. The new deposit products are: (a) the Huntington
Conservative Deposit Account (HCDA), (b) the Huntington
Protected Deposit Account (HPDA), and (c) the Bank Deposit
Sweep Product (BDSP). These three accounts had balances in
excess of $1.2 billion at December 31, 2009.
Provision for credit losses increased $44.2 million
reflecting: (a) the continued economic weaknesses in our
markets, particularly relating to the commercial portfolio,
(b) an increase of commercial loan loss reserves
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Table of Contents
resulting from credit actions taken during 2009
(see
“Commercial Loan Portfolio Review and Actions” section
located within the “Commercial Credit” section for
additional information),
and (c) a 119 basis point
increase in total NCOs. The increase in NCOs included a
significant increase in residential mortgage charge-offs, as a
result of, among other actions, a more conservative position
regarding the timing of loss recognition.
Noninterest income decreased $14.0 million, or 5%,
primarily reflecting a $21.4 million decline in trust
services revenue. The trust revenue decline reflected:
(a) a market-driven $1.8 billion decline in average
total assets under management, (b) reduced proprietary
mutual fund fees due to the migration of proprietary
money-market mutual fund balances to the new deposit products
noted above, and (c) the impact of reduced money market
yields. Also contributing to the reduction in noninterest income
was a $3.9 million decline in derivatives income primarily
as a result of reduced commercial loan originations. These
decreases were partially offset by a $10.4 million
improvement in equity investment portfolio valuation adjustments
from a loss of $8.7 million in 2008 to a $1.7 million
gain in 2009.
Noninterest expense increased $24.1 million, or 10%.
Performance for 2009 was unfavorably impacted by the
$28.9 million goodwill impairment charge and a
$7.4 million increase in corporate and other overhead
expenses as a result of the previously discussed changes in our
process for allocating corporate overhead. After adjusting for
the overhead allocation change and the goodwill impairment,
noninterest expense declined $12.2 million. This net
decline reflected reduced personnel expense of
$16.8 million largely as a result of the implementation of
several expense reduction initiatives, partially offset by an
increase of $3.8 million in deposit and other insurance
expense, as well as increased OREO losses.
2008
vs. 2007
PFG reported net income of $46.2 million in 2008, compared
with $33.9 million in 2007. This increase primarily
reflected the impact of the Sky Financial acquisition on
July 1, 2007, and a $14.1 million improvement in the
market value adjustments to the equity funds portfolio. These
benefits were partially offset by: (a) $12.3 million
increase in provision for credit losses resulting from a
$6.7 million increase in NCOs primarily reflecting
increased charge-offs in the home equity portfolio, and
(b) a decrease in total period-end assets under management
to $13.3 billion from $16.3 billion reflecting the
impact of lower market values associated with the decline in the
general economic and market conditions.
RESULTS
FOR THE FOURTH QUARTER
Earnings
Discussion
2009 fourth quarter results were a net loss of
$369.7 million, or $0.56 per common share, compared with a
net loss of $417.3 million, or $1.20 per common share, in
the year-ago quarter. Significant items impacting 2009 fourth
quarter performance included
(see table below)
:
| • | $73.6 million pretax gain ($0.07 per common share) on the tender of $370.8 million of subordinated bank notes reflected in other noninterest expense. | |
| • | $11.3 million ($0.02 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance. |
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Table
60 — Significant Items Impacting Performance
Comparisons
| Impact(1) | ||||||||
| Pretax | EPS(2) | |||||||
| (In millions, except per share amounts) | ||||||||
|
Three Months Ended:
|
||||||||
|
December 31, 2009 — GAAP loss
|
$ | (369.7 | )(2) | $ | (0.56 | ) | ||
|
• Gain on the early extinguishment of debt
|
73.6 | 0.07 | ||||||
|
• Deferred tax valuation benefit
|
11.3 | (2) | 0.02 | |||||
|
December 31, 2008 — GAAP loss
|
$ | (417.3 | )(2) | $ | (1.20 | ) | ||
|
• Visa
®
anti-trust indemnification
|
4.6 | 0.01 | ||||||
|
• Visa
®
deferred tax valuation allowance provision
|
(2.9 | )(2) | (0.01 | ) | ||||
| (1) | Favorable (unfavorable) impact on GAAP earnings; pretax unless otherwise noted. | |
| (2) | After-tax. EPS is reflected on a fully diluted basis. |
Net
Interest Income, Net Interest Margin, Loans and Average Balance
Sheet
Fully-taxable equivalent net interest income decreased
$3.4 million, or 1%, from the year-ago quarter. This
reflected the unfavorable impact of a $0.7 billion, or 2%,
decline in total average earning assets, partially offset by the
favorable impact of a slight increase in the net interest margin
to 3.19% from 3.18%. The decline in total average earning assets
primarily reflected a $4.3 billion, or 10%, decline in
average total loans and leases and a $0.8 billion, or 88%,
decline in average trading assets, partially offset by a
$4.4 billion, or 97%, increase in investment securities.
The following table details the $4.3 billion, or 10%,
decrease in average loans and leases.
Table
61 — Average Loans/Leases — 2009 Fourth
Quarter vs. 2008 Fourth Quarter
| Fourth Quarter | Change | |||||||||||||||
| 2009 | 2008 | Amount | Percent | |||||||||||||
| (In millions) | ||||||||||||||||
|
Average Loans/Leases
|
||||||||||||||||
|
Commercial and industrial
|
$ | 12,570 | $ | 13,746 | $ | (1,176 | ) | (9 | )% | |||||||
|
Commercial real estate
|
8,458 | 10,218 | (1,760 | ) | (17 | ) | ||||||||||
|
Total commercial
|
21,028 | 23,964 | (2,936 | ) | (12 | ) | ||||||||||
|
Automobile loans and leases
|
3,326 | 4,535 | (1,209 | ) | (27 | ) | ||||||||||
|
Home equity
|
7,561 | 7,523 | 38 | 1 | ||||||||||||
|
Residential mortgage
|
4,417 | 4,737 | (320 | ) | (7 | ) | ||||||||||
|
Other consumer
|
757 | 678 | 79 | 12 | ||||||||||||
|
Total consumer
|
16,061 | 17,473 | (1,412 | ) | (8 | ) | ||||||||||
|
Total loans/leases
|
$ | 37,089 | $ | 41,437 | $ | (4,348 | ) | (10 | )% | |||||||
The decrease in average total loans and leases reflected:
| • | $2.9 billion, or 12%, decrease in average total commercial loans. The $1.2 billion, or 9%, decline in average C&I loans reflected a general decline in borrowing as reflected in a decline in line-of-credit utilization, including significant reductions in line-of-credit utilization in our automobile dealer floorplan exposure, charge-off activity, and the 2009 first quarter Franklin restructuring, partially offset by the impact of the 2009 reclassifications. The $1.8 billion, or 17%, decrease in average CRE loans reflected a combination of factors, including our planned efforts to shrink this portfolio through payoffs and paydowns, as well as the impact of charge-offs and the 2009 reclassifications. |
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| • | $1.4 billion, or 8%, decrease in average total consumer loans. This primarily reflected a $1.2 billion, or 27%, decline in average automobile loans and leases due to the 2009 first quarter securitization of $1.0 billion of automobile loans, as well as the continued runoff of the automobile lease portfolio. The $0.3 billion, or 7%, decline in average residential mortgages reflected the impact of loan sales, as well as the continued refinance of portfolio loans and the related increased sale of fixed-rate originations, partially offset by additions related to the 2009 first quarter Franklin restructuring. Average home equity loans were little changed as lower origination volume was offset by slower runoff experience and slightly higher line utilization. The increased line usage continued to be associated with higher quality customers taking advantage of the low interest rate environment. |
Average total investment securities increased $4.4 billion,
or 97%, reflecting the deployment of the cash from core deposit
growth and the proceeds from capital actions.
(See
“Capital / Capital Adequacy” section)
.
Average trading account securities declined $0.8 billion,
or 88%, from the year-ago quarter, due to the reduction in the
use of securities to hedge MSRs.
The following table details the $2.6 billion, or 7%,
increase in average total deposits.
Table
62 — Average Deposits — 2009 Fourth Quarter
vs. 2008 Fourth Quarter
| Fourth Quarter | Change | |||||||||||||||
|
|
2009 | 2008 | Amount | Percent | ||||||||||||
| (In millions) | ||||||||||||||||
|
Average Deposits
|
||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 6,466 | $ | 5,205 | $ | 1,261 | 24 | % | ||||||||
|
Demand deposits — interest-bearing
|
5,482 | 3,988 | 1,494 | 37 | ||||||||||||
|
Money market deposits
|
9,271 | 5,500 | 3,771 | 69 | ||||||||||||
|
Savings and other domestic time deposits
|
4,686 | 5,034 | (348 | ) | (7 | ) | ||||||||||
|
Core certificates of deposit
|
10,867 | 12,588 | (1,721 | ) | (14 | ) | ||||||||||
|
Total core deposits
|
36,772 | 32,315 | 4,457 | 14 | ||||||||||||
|
Other deposits
|
3,442 | 5,268 | (1,826 | ) | (35 | ) | ||||||||||
|
Total deposits
|
$ | 40,214 | $ | 37,583 | $ | 2,631 | 7 | % | ||||||||
The increase in average total deposits from the year-ago quarter
reflected:
| • | $4.5 billion, or 14%, growth in average total core deposits, primarily reflecting increased sales efforts and initiatives for deposit accounts. |
Partially offset by:
| • | A $0.7 billion, or 51%, decrease in average other domestic deposits of $250,000 or more and a $0.7 billion, or 23%, decline in brokered deposits and negotiable CDs, primarily reflecting the reduction of noncore funding sources. |
Provision
for Credit Losses
The provision for credit losses in the 2009 fourth quarter was
$894.0 million, up $171.4 million from the year-ago
quarter. The current quarter’s provision for credit losses
exceeded NCOs by $449.2 million.
(See “Franklin
Relationship” located within the “Credit Risk”
section and “Significant Items” located within the
“Discussion of Results of Operations” section for
additional details).
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Table of Contents
Noninterest
Income
Noninterest income increased $177.4 million from the
year-ago quarter.
Table
63 — Noninterest Income — 2009 Fourth
Quarter vs. 2008 Fourth Quarter
| Fourth Quarter | Change | |||||||||||||||||||
| 2009 | 2008 | Amount | Percent | |||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Service charges on deposit accounts
|
$ | 76,757 | $ | 75,247 | $ | 1,510 | 2 | % | ||||||||||||
|
Brokerage and insurance income
|
32,173 | 31,233 | 940 | 3 | ||||||||||||||||
|
Mortgage banking income
|
24,618 | (6,747 | ) | 31,365 | N.M. | |||||||||||||||
|
Trust services
|
27,275 | 27,811 | (536 | ) | (2 | ) | ||||||||||||||
|
Electronic banking
|
25,173 | 22,838 | 2,335 | 10 | ||||||||||||||||
|
Bank owned life insurance income
|
14,055 | 13,577 | 478 | 4 | ||||||||||||||||
|
Automobile operating lease income
|
12,671 | 13,170 | (499 | ) | (4 | ) | ||||||||||||||
|
Securities (losses) gains
|
(2,602 | ) | (127,082 | ) | 124,480 | (98 | ) | |||||||||||||
|
Other income
|
34,426 | 17,052 | 17,374 | N.M. | ||||||||||||||||
|
Total noninterest income
|
$ | 244,546 | $ | 67,099 | $ | 177,447 | N.M. | % | ||||||||||||
N.M., not a meaningful value.
The $177.4 million increase in total noninterest income
reflected:
| • | $124.5 million reduction in securities losses as the current quarter reflected a $2.6 million loss compared with a $127.1 million loss in the year-ago quarter due to OTTI adjustments on certain investment securities. | |
| • | $31.4 million increase in mortgage banking income, reflecting a $24.3 million net improvement in MSR valuation and hedging activity, as well as a $9.3 million increase in origination and secondary marketing income as originations in the current quarter were 56% higher. | |
| • | $17.4 million increase in other income, reflecting $12.8 million increase in swap derivatives trading income due primarily to $7.3 million of losses recorded in the prior year quarter, as well as improvements in equity gains and higher gains on SBA loan sales. | |
| • | $2.3 million, or 10%, increase in electronic banking income. |
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Noninterest
Expense
(This
section should be read in conjunction with Significant
Item 4.)
Noninterest expense decreased $67.5 million, or 17%, from
the year-ago quarter.
Table
64 — Noninterest Expense — 2009 Fourth
Quarter vs. 2008 Fourth Quarter
| Fourth Quarter | Change | |||||||||||||||||||
| 2009 | 2008 | Amount | Percent | |||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Personnel costs
|
$ | 180,663 | $ | 196,785 | $ | (16,122 | ) | (8 | )% | |||||||||||
|
Outside data processing and other services
|
36,812 | 31,609 | 5,203 | 16 | ||||||||||||||||
|
Deposit and other insurance expense
|
24,420 | 9,395 | 15,025 | N.M. | ||||||||||||||||
|
Net occupancy
|
26,273 | 22,999 | 3,274 | 14 | ||||||||||||||||
|
OREO and foreclosure expense
|
18,520 | 8,171 | 10,349 | N.M. | ||||||||||||||||
|
Equipment
|
20,454 | 22,329 | (1,875 | ) | (8 | ) | ||||||||||||||
|
Professional services
|
25,146 | 16,430 | 8,716 | 53 | ||||||||||||||||
|
Amortization of intangibles
|
17,060 | 19,187 | (2,127 | ) | (11 | ) | ||||||||||||||
|
Automobile operating lease expense
|
10,440 | 10,483 | (43 | ) | (0 | ) | ||||||||||||||
|
Marketing
|
9,074 | 9,357 | (283 | ) | (3 | ) | ||||||||||||||
|
Telecommunications
|
6,099 | 5,892 | 207 | 4 | ||||||||||||||||
|
Printing and supplies
|
3,807 | 4,175 | (368 | ) | (9 | ) | ||||||||||||||
|
Gain on early extinguishment of debt
|
(73,615 | ) | — | (73,615 | ) | N.M. | ||||||||||||||
|
Other expense
|
17,443 | 33,282 | (15,839 | ) | (48 | ) | ||||||||||||||
|
Total noninterest expense
|
$ | 322,596 | $ | 390,094 | $ | (67,498 | ) | (17 | )% | |||||||||||
|
Full-time equivalent employees, at period-end
|
10,272 | 10,951 | (679 | ) | (6 | )% | ||||||||||||||
N.M., not a meaningful value.
The $67.5 million decline reflected:
| • | $73.6 million gain on the early extinguishment of debt in the current quarter. | |
| • | $16.1 million, or 8%, decline in personnel costs, reflecting a decline in salaries and lower benefits and commission expense. Full-time equivalent staff declined 6% from the year-ago period. | |
| • | $15.8 million, or 48%, decline in other expense primarily due to $12.5 million lower automobile lease residual losses as used vehicle prices improved, as well as $4.1 million lower franchise and other taxes. |
Partially offset by:
| • | $15.0 million increase in deposit and other insurance expense primarily due to higher FDIC insurance costs as premiums rates increased and the level of deposits grew. | |
| • | $10.3 million increase in OREO and foreclosure expense, reflecting higher levels of problem assets, as well as loss mitigation activities. | |
| • | $8.7 million, or 53%, increase in professional services, reflecting higher consulting and collection-related expenses. | |
| • | $5.2 million, or 16%, increase in outside data processing and other services, primarily reflecting portfolio servicing fees now paid to Franklin resulting from the first quarter restructuring of this relationship. | |
| • | $3.3 million, or 14%, increase in net occupancy expenses, as the year-ago quarter reflected property asset valuation gains. |
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Income
Taxes
(This
section should be read in conjunction with Significant
Item 7.)
The provision for income taxes in the 2009 fourth quarter was a
benefit of $228.3 million. The effective tax rate for the
2009 fourth quarter was a tax benefit of 38.2%. At
December 31, 2009, we had a net federal deferred tax asset
of $480.5 million, and a net state deferred tax asset of
$0.8 million. Based on our ability to offset a portion of
the net deferred tax asset against taxable income in prior years
and level of our forecast of future taxable income, there was no
impairment of the deferred tax asset at December 31, 2009.
Credit
Quality
Credit quality performance in the 2009 fourth quarter continued
to be negatively impacted by the sustained economic weakness in
our Midwest markets, but there were signs of stabilization. As
an example, there was an overall decline of $286.0 million,
or 12%, in NPAs. Furthermore, the level of criticized and
classified loans increased at a much lower rate than prior
quarters.
NET
CHARGE-OFFS (NCOs)
(This
section should be read in conjunction with Significant
Item 3.)
Total NCOs for the 2009 fourth quarter were $444.7 million,
or an annualized 4.80% of average total loans and leases. NCOs
in the year-ago quarter were $560.6 million, or an
annualized 5.41%, including $423.3 million related to
Franklin. Total non-Franklin-related commercial NCOs increased
$279.3 million from the year-ago quarter. Total consumer
NCOs increased $28.0 million.
Total C&I NCOs for the 2009 fourth quarter were
$109.8 million, or an annualized 3.49%, down from
$473.4 million, or an annualized 13.78% of related loans,
in the year-ago quarter. C&I NCOs in the year-ago quarter
included $423.3 million related to Franklin.
Non-Franklin-related C&I NCOs increased $59.7 million
compared with the year-ago quarter. Fourth quarter results were
substantially impacted by individual charge-offs in excess of
$5 million, as there was $39.5 million associated with
the activity on five relationships. The specific circumstances
of each occurrence were distinct to the relationship in
question, but the impact of the economic conditions was the
proximate cause for each. Primarily as a result of these larger
individual charge-offs, there was a regional concentration of
losses in our Northeast and Central Ohio regions. While there
continues to be concern regarding the impact of the economic
conditions on our commercial customers, the lower inflow of new
nonaccruals and the significant decline in early stage
delinquencies, compared with earlier 2009 levels, supports our
outlook for improved performance in 2010.
Current quarter CRE NCOs were $258.1 million, or an
annualized 12.21%, up from $38.4 million, or an annualized
1.50% in the year-ago quarter. Retail projects and single family
homebuilders continued to represent a significant portion, or
73%, of the losses. Included in the retail portfolio results
were $47.5 million of charge-offs associated with three
projects. We continued our ongoing portfolio management efforts
including obtaining updated appraisals on properties and
assessing a project status within the context of market
environment expectations. Historically we have thought of the
single family homebuilder portfolio and retail portfolios as the
highest risk segments, in that order. Based on the portfolio
management processes, including charge-off activity over the
past two and one half years, the credit issues in the single
family homebuilder portfolio have been substantially addressed.
The retail property portfolio remains more susceptible to the
ongoing market disruption, but we also believe that the
combination of prior charge-offs and existing reserve balances
positions us well to make effective credit decisions in the
future.
Total consumer NCOs in the current quarter were
$76.8 million, or an annualized 1.91%, up from
$48.8 million, or an annualized 1.12% of average total
consumer loans in the year-ago quarter. The fourth quarter
results represented a continuation of our loss mitigation
programs and active loss recognition processes. This includes
accounts in all stages of performance, including bankruptcy.
Residential mortgage NCOs were $17.8 million, or an
annualized 1.61% of related average balances, up from
$7.3 million, or an annualized 0.62% in the year-ago
quarter. During the current quarter, we continued to
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see positive trends in early-stage delinquencies, indicating
that even with the economic stress on our customers, losses are
expected to remain manageable.
Home equity NCOs in the 2009 fourth quarter were
$35.8 million, or an annualized 1.89%. This was up from
$19.2 million, or an annualized 1.02%, in the year-ago
quarter. Although NCOs were higher compared with prior quarters,
there continued to be a declining trend in the early-stage
delinquency level in the home equity
line-of-credit
portfolio, supporting our longer-term positive view for home
equity portfolio performance. The higher losses resulted from a
significant increase in loss mitigation activity and short
sales. We continue to believe that our more proactive loss
mitigation strategies are in the best interest of both the
company and our customers. While there has been a clear increase
in the losses over the course of 2009, given the market
conditions, performance remained within expectations.
Automobile loan and lease NCOs were $12.9 million, or an
annualized 1.55%, down from $18.6 million, or an annualized
1.64%, in the year-ago quarter. Performance of this portfolio on
both an absolute and relative basis continued to be consistent
with our views regarding the underlying quality of the
portfolio. The level of delinquencies have improved compared
with the year-ago period, supporting our view of
flat-to-improved
performance going forward.
NONACCRUAL
LOANS (NAL) AND NONPERFORMING ASSETS (NPA)
Total NALs were $1,917.0 million at December 31, 2009,
and represented 5.21% of total loans and leases. This was up
$414.8 million, or 28%, from $1,502.1 million, or
3.66% compared with December 31, 2008. The increase from
the year-ago quarter primarily reflected increases in CRE and
non-Franklin-related C&I NALs. These increases reflected
the sustained economic weakness in our markets, particularly in
our single family home builder and retail properties portfolio
segments.
NPAs, which include NALs, were $2,058.1 million at
December 31, 2009, and represented 5.57% of related assets.
This was significantly higher than $1,636.6 million, or
3.97% of related assets at the end of the year-ago period. The
$421.4 million increase in NPAs from the end of the
year-ago period reflected the $414.8 million increase in
NALs.
The over
90-day
delinquent, but still accruing, ratio excluding loans guaranteed
by the U.S. Government, was 0.40% at December 31,
2009, down 6 basis points from a year-ago. On this same
basis, the over
90-day
delinquency ratio for total consumer loans was 0.90% at
December 31, 2009, up from 0.68% a year-ago.
ALLOWANCE
FOR CREDIT LOSSES (ACL)
(This
section should be in read in conjunction with Notes 1 and 8
in the Notes to the Consolidated Financial
Statements).
In the 2009 fourth quarter we conducted a review of our ACL
practices. Based on recent asset quality trends, coupled with a
fragile economic outlook, the ACL was significantly increased,
reflecting a 2009 fourth quarter provision for credit losses of
$894.0 million, which was more than double the level of the
2009 fourth quarter charge-offs. We experienced an increasing
trend in charge-offs throughout 2009. The level of criticized
loans, an indicator of possible losses, continued to increase
through the fourth quarter, although the increases in the second
half of 2009 were at a slower rate compared with the first half
of 2009. While we did show a decline in the level of NPAs at
December 31, 2009, the inflow of $494.6 million
remained substantially higher than would be the case in a stable
credit environment. Nevertheless, this was the lowest level of
new NALs in five quarters. Based on these asset quality trends,
in conjunction with a fragile economy particularly in our
Midwest markets, the ACL was increased.
Much of the increase related to our CRE retail portfolio where
higher vacancy rates, lower rents, and falling property values
are of significant concern. Loss in the event of default on many
classes of CRE properties has increased substantially throughout
2009 and this is expected to continue into 2010.
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Table of Contents
Additionally, C&I customers have been suffering from the
weak economy for several consecutive years and some of these
customers no longer have the capital base to withstand
protracted stress and, therefore, may not be able to comply with
the original terms of their credit agreements.
In the 2009 fourth quarter, the provision for credit losses
exceeded net charge-offs by $449.2 million, or 101%.
Table
65 — Selected Quarterly Income Statement Data
(1)
| 2009 | ||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||
| (Dollar amounts in thousands, except per share amounts) | ||||||||||||||||
|
Interest income
|
$ | 551,335 | $ | 553,846 | $ | 563,004 | $ | 569,957 | ||||||||
|
Interest expense
|
177,271 | 191,027 | 213,105 | 232,452 | ||||||||||||
|
Net interest income
|
374,064 | 362,819 | 349,899 | 337,505 | ||||||||||||
|
Provision for credit losses
|
893,991 | 475,136 | 413,707 | 291,837 | ||||||||||||
|
Net interest (loss) income after provision for credit losses
|
(519,927 | ) | (112,317 | ) | (63,808 | ) | 45,668 | |||||||||
|
Total noninterest income
|
244,546 | 256,052 | 265,945 | 239,102 | ||||||||||||
|
Total noninterest expense
|
322,596 | 401,097 | 339,982 | 2,969,769 | ||||||||||||
|
(Loss) Income before income taxes
|
(597,977 | ) | (257,362 | ) | (137,845 | ) | (2,684,999 | ) | ||||||||
|
(Benefit) Provision for income taxes
|
(228,290 | ) | (91,172 | ) | (12,750 | ) | (251,792 | ) | ||||||||
|
Net (loss) income
|
$ | (369,687 | ) | $ | (166,190 | ) | $ | (125,095 | ) | $ | (2,433,207 | ) | ||||
|
Dividends on preferred shares
|
29,289 | 29,223 | 57,451 | 58,793 | ||||||||||||
|
Net (loss) income applicable to common shares
|
$ | (398,976 | ) | $ | (195,413 | ) | $ | (182,546 | ) | $ | (2,492,000 | ) | ||||
|
Common shares outstanding
|
||||||||||||||||
|
Average — basic
|
715,336 | 589,708 | 459,246 | 366,919 | ||||||||||||
|
Average — diluted(2)
|
715,336 | 589,708 | 459,246 | 366,919 | ||||||||||||
|
Ending
|
715,762 | 714,469 | 568,741 | 390,682 | ||||||||||||
|
Book value per share
|
$ | 5.10 | $ | 5.59 | $ | 6.23 | $ | 7.80 | ||||||||
|
Tangible book value per share(3)
|
4.21 | 4.69 | 5.07 | 6.08 | ||||||||||||
|
Per common share
|
||||||||||||||||
|
Net (loss) income — basic
|
$ | (0.56 | ) | $ | (0.33 | ) | $ | (0.40 | ) | $ | (6.79 | ) | ||||
|
Net (loss) income — diluted
|
(0.56 | ) | (0.33 | ) | (0.40 | ) | (6.79 | ) | ||||||||
|
Cash dividends declared
|
0.0100 | 0.0100 | 0.0100 | 0.0100 | ||||||||||||
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Table of Contents
| 2009 | ||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||
| (Dollar amounts in thousands, except per share amounts) | ||||||||||||||||
|
Common stock price, per share
|
||||||||||||||||
|
High(4)
|
$ | 4.770 | $ | 4.970 | $ | 6.180 | $ | 8.000 | ||||||||
|
Low(4)
|
3.500 | 3.260 | 1.550 | 1.000 | ||||||||||||
|
Close
|
3.650 | 4.710 | 4.180 | 1.660 | ||||||||||||
|
Average closing price
|
3.970 | 4.209 | 3.727 | 2.733 | ||||||||||||
|
Return on average total assets
|
(2.80 | )% | (1.28 | )% | (0.97 | )% | (18.22 | )% | ||||||||
|
Return on average total shareholders’ equity
|
(25.6 | ) | (12.5 | ) | (10.2 | ) | N.M. | |||||||||
|
Return on average tangible shareholders’ equity(5)
|
(27.9 | ) | (13.3 | ) | (10.3 | ) | 18.4 | |||||||||
|
Efficiency ratio(6)
|
49.0 | 61.4 | 51.0 | 60.5 | ||||||||||||
|
Effective tax rate (benefit)
|
(38.2 | ) | (35.4 | ) | (9.2 | ) | (9.4 | ) | ||||||||
|
Margin analysis-as a % of average earning assets(7)
|
||||||||||||||||
|
Interest income(7)
|
4.70 | % | 4.86 | % | 4.99 | % | 4.99 | % | ||||||||
|
Interest expense
|
1.51 | 1.66 | 1.89 | 2.02 | ||||||||||||
|
Net interest margin(7)
|
3.19 | % | 3.20 | % | 3.10 | % | 2.97 | % | ||||||||
|
Revenue — fully-taxable equivalent (FTE)
|
||||||||||||||||
|
Net interest income
|
$ | 374,064 | $ | 362,819 | $ | 349,899 | $ | 337,505 | ||||||||
|
FTE adjustment
|
2,497 | 4,177 | 1,216 | 3,582 | ||||||||||||
|
Net interest income(7)
|
376,561 | 366,996 | 351,115 | 341,087 | ||||||||||||
|
Noninterest income
|
244,546 | 256,052 | 265,945 | 239,102 | ||||||||||||
|
Total revenue(7)
|
$ | 621,107 | $ | 623,048 | $ | 617,060 | $ | 580,189 | ||||||||
| 2009 | ||||||||||||||||
|
Capital Adequacy
|
December 31, | September 30, | June 30, | March 31, | ||||||||||||
|
Total risk-weighted assets (in millions)
|
$ | 43,248 | $ | 44,142 | $ | 45,463 | $ | 46,383 | ||||||||
|
Tier 1 leverage ratio(8)
|
10.09 | % | 11.30 | % | 10.62 | % | 9.67 | % | ||||||||
|
Tier 1 risk-based capital ratio(8)
|
12.03 | 13.04 | 11.85 | 11.14 | ||||||||||||
|
Total risk-based capital ratio(8)
|
14.41 | 16.23 | 14.94 | 14.26 | ||||||||||||
|
Tangible common equity/asset ratio(9)
|
5.92 | 6.46 | 5.68 | 4.65 | ||||||||||||
|
Tangible equity/asset ratio(10)
|
9.24 | 9.71 | 8.99 | 8.12 | ||||||||||||
|
Tangible equity/risk-weighted assets ratio
|
10.88 | 11.41 | 10.04 | 8.94 | ||||||||||||
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Table of Contents
| 2008 | ||||||||||||||||
| (Dollar amounts in thousands, except per share amounts) | Fourth | Third | Second | First | ||||||||||||
|
Interest income
|
$ | 662,508 | $ | 685,728 | $ | 696,675 | $ | 753,411 | ||||||||
|
Interest expense
|
286,143 | 297,092 | 306,809 | 376,587 | ||||||||||||
|
Net interest income
|
376,365 | 388,636 | 389,866 | 376,824 | ||||||||||||
|
Provision for credit losses
|
722,608 | 125,392 | 120,813 | 88,650 | ||||||||||||
|
Net interest (loss) income after provision for credit losses
|
(346,243 | ) | 263,244 | 269,053 | 288,174 | |||||||||||
|
Total noninterest income
|
67,099 | 167,857 | 236,430 | 235,752 | ||||||||||||
|
Total noninterest expense
|
390,094 | 338,996 | 377,803 | 370,481 | ||||||||||||
|
(Loss) Income before income taxes
|
(669,238 | ) | 92,105 | 127,680 | 153,445 | |||||||||||
|
(Benefit) Provision for income taxes
|
(251,949 | ) | 17,042 | 26,328 | 26,377 | |||||||||||
|
Net (loss) income
|
$ | (417,289 | ) | $ | 75,063 | $ | 101,352 | $ | 127,068 | |||||||
|
Dividends on preferred shares
|
23,158 | 12,091 | 11,151 | — | ||||||||||||
|
Net (loss) income applicable to common shares
|
$ | (440,447 | ) | $ | 62,972 | $ | 90,201 | $ | 127,068 | |||||||
|
Common shares outstanding
|
||||||||||||||||
|
Average — basic
|
366,054 | 366,124 | 366,206 | 366,235 | ||||||||||||
|
Average — diluted(2)
|
366,054 | 367,361 | 367,234 | 367,208 | ||||||||||||
|
Ending
|
366,058 | 366,069 | 366,197 | 366,226 | ||||||||||||
|
Book value per share
|
$ | 14.62 | $ | 15.86 | $ | 15.88 | $ | 16.13 | ||||||||
|
Tangible book value per share(3)
|
5.64 | 6.85 | 6.83 | 7.09 | ||||||||||||
|
Per common share
|
||||||||||||||||
|
Net (loss) income — basic
|
$ | (1.20 | ) | $ | 0.17 | $ | 0.25 | $ | 0.35 | |||||||
|
Net (loss) income — diluted
|
(1.20 | ) | 0.17 | 0.25 | 0.35 | |||||||||||
|
Cash dividends declared
|
0.1325 | 0.1325 | 0.1325 | 0.2650 | ||||||||||||
|
Common stock price, per share
|
||||||||||||||||
|
High(4)
|
$ | 11.65 | $ | 13.500 | $ | 11.750 | $ | 14.870 | ||||||||
|
Low(4)
|
5.260 | 4.370 | 4.940 | 9.640 | ||||||||||||
|
Close
|
7.660 | 7.990 | 5.770 | 10.750 | ||||||||||||
|
Average closing price
|
8.276 | 7.510 | 8.783 | 12.268 | ||||||||||||
|
Return on average total assets
|
(3.04 | )% | 0.55 | % | 0.73 | % | 0.93 | % | ||||||||
|
Return on average total shareholders’ equity
|
(23.7 | ) | 4.7 | 6.4 | 8.7 | |||||||||||
|
Return on average tangible shareholders’ equity(5)
|
(43.2 | ) | 11.6 | 15.0 | 22.0 | |||||||||||
|
Efficiency ratio(6)
|
64.6 | 50.3 | 56.9 | 57.0 | ||||||||||||
|
Effective tax rate (benefit)
|
(37.6 | ) | 18.5 | 20.6 | 17.2 | |||||||||||
|
Margin analysis-as a % of average earning assets:(7)
|
||||||||||||||||
|
Interest income(7)
|
5.57 | % | 5.77 | % | 5.85 | % | 6.40 | % | ||||||||
|
Interest expense
|
2.39 | 2.48 | 2.56 | 3.17 | ||||||||||||
|
Net interest margin(7)
|
3.18 | % | 3.29 | % | 3.29 | % | 3.23 | % | ||||||||
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| 2008 | ||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||
|
Revenue — fully-taxable equivalent (FTE)
|
||||||||||||||||
|
Net interest income
|
$ | 376,365 | $ | 388,636 | $ | 389,866 | $ | 376,824 | ||||||||
|
FTE adjustment
|
3,641 | 5,451 | 5,624 | 5,502 | ||||||||||||
|
Net interest income(7)
|
380,006 | 394,087 | 395,490 | 382,326 | ||||||||||||
|
Noninterest income
|
67,099 | 167,857 | 236,430 | 235,752 | ||||||||||||
|
Total revenue(7)
|
$ | 447,105 | $ | 561,944 | $ | 631,920 | $ | 618,078 | ||||||||
| 2008 | ||||||||||||||||
|
Capital Adequacy
|
December 31, | September 30, | June 30, | March 31, | ||||||||||||
|
Total risk-weighted assets (in millions)
|
$ | 46,994 | $ | 46,608 | $ | 46,602 | $ | 46,546 | ||||||||
|
Tier 1 leverage ratio(8)
|
9.82 | % | 7.99 | % | 7.88 | % | 6.83 | % | ||||||||
|
Tier 1 risk-based capital ratio(8)
|
10.72 | 8.80 | 8.82 | 7.56 | ||||||||||||
|
Total risk-based capital ratio(8)
|
13.91 | 12.03 | 12.05 | 10.87 | ||||||||||||
|
Tangible common equity/asset ratio(9)
|
4.04 | 4.88 | 4.81 | 4.92 | ||||||||||||
|
Tangible equity/asset ratio(10)
|
7.72 | 5.99 | 5.90 | 4.92 | ||||||||||||
|
Tangible equity/risk-weighted assets ratio
|
8.39 | 6.60 | 6.59 | 5.58 | ||||||||||||
| (1) | Comparisons for presented periods are impacted by a number of factors. Refer to the “Significant Items” section for additional discussion regarding these items. | |
| (2) | For all affected quarterly periods presented above, the impact of the convertible preferred stock issued in April of 2008 was excluded from the diluted share calculation because the result would have been higher than basic earnings per common share (anti-dilutive) for the periods. | |
| (3) | Deferred tax liability related to other intangible assets is calculated assuming a 35% tax rate. | |
| (4) | High and low stock prices are intra-day quotes obtained from NASDAQ. | |
| (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) | Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities (losses) gains. | |
| (7) | Presented on a fully-taxable equivalent (FTE) basis assuming a 35% tax rate. | |
| (8) | Based on an interim decision by the banking agencies on December 14, 2006, Huntington has excluded the impact of adopting ASC Topic 715, “Compensation — Retirement Benefits”, from the regulatory capital calculations. | |
| (9) | Tangible common equity (total common equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate. | |
| (10) | Tangible equity (total equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate. |
| Item 7A: | Quantitative and Qualitative Disclosures About Market Risk |
Information required by this item is set forth in the
“Market Risk” section.
| Item 8: | Financial Statements and Supplementary Data |
Information required by this item is set forth in the Report of
Independent Registered Public Accounting Firm, Consolidated
Financial Statements and Notes, and Selected Quarterly Income
Statements.
128
Table of Contents
REPORT OF
MANAGEMENT
The management of Huntington (the Company) is responsible for
the financial information and representations contained in the
consolidated financial statements and other sections of this
report. The consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in
the United States. In all material respects, they reflect the
substance of transactions that should be included based on
informed judgments, estimates, and currently available
information. Management maintains a system of internal
accounting controls, which includes the careful selection and
training of qualified personnel, appropriate segregation of
responsibilities, communication of written policies and
procedures, and a broad program of internal audits. The costs of
the controls are balanced against the expected benefits. During
2009, the audit committee of the board of directors met
regularly with Management, Huntington’s internal auditors,
and the independent registered public accounting firm,
Deloitte & Touche LLP, to review the scope of the
audits and to discuss the evaluation of internal accounting
controls and financial reporting matters. The independent
registered public accounting firm and the internal auditors have
free access to, and meet confidentially with, the audit
committee to discuss appropriate matters. Also, Huntington
maintains a disclosure review committee. This committee’s
purpose is to design and maintain disclosure controls and
procedures to ensure that material information relating to the
financial and operating condition of Huntington is properly
reported to its chief executive officer, chief financial
officer, internal auditors, and the audit committee of the board
of directors in connection with the preparation and filing of
periodic reports and the certification of those reports by the
chief executive officer and the chief financial officer.
REPORT OF
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER
FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company, including accounting and other internal control systems
that, in the opinion of Management, provide reasonable assurance
that (1) transactions are properly authorized, (2) the
assets are properly safeguarded, and (3) transactions are
properly recorded and reported to permit the preparation of the
financial statements in conformity with accounting principles
generally accepted in the United States. Huntington’s
management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2009. In making this assessment, Management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal
Control — Integrated Framework
. Based on that
assessment, Management believes that, as of December 31,
2009, the Company’s internal control over financial
reporting is effective based on those criteria. The
Company’s internal control over financial reporting as of
December 31, 2009 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as
stated in their report appearing on the next page, which
expresses an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2009.
Stephen D. Steinour — Chairman, President, and Chief
Executive Officer
Donald R. Kimble — Senior Executive Vice President and
Chief Financial Officer
February 18, 2010
129
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Huntington Bancshares Incorporated
Columbus, Ohio
We have audited the internal control over financial reporting of
Huntington Bancshares Incorporated and subsidiaries (the
“Company”) as of December 31, 2009, based on
criteria established in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Report of Management’s
Assessment of Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2009 of the Company and our report dated
February 18, 2010 expressed an unqualified opinion on those
financial statements.
Columbus, Ohio
February 18, 2010
130
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Huntington Bancshares Incorporated
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of
Huntington Bancshares Incorporated and subsidiaries (the
“Company”) as of December 31, 2009 and 2008, and
the related consolidated statements of income, changes in
shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2009. These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Huntington Bancshares Incorporated and subsidiaries at
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 18, 2010 expressed
an unqualified opinion on the Company’s internal control
over financial reporting.
Columbus, Ohio
February 18, 2010
131
Table of Contents
Consolidated
Balance Sheets
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands, except number of shares) | ||||||||
|
ASSETS
|
||||||||
|
Cash and due from banks
|
$ | 1,521,344 | $ | 806,693 | ||||
|
Federal funds sold and securities purchased under resale
agreements
|
— | 37,975 | ||||||
|
Interest bearing deposits in banks
|
319,375 | 292,561 | ||||||
|
Trading account securities
|
83,657 | 88,677 | ||||||
|
Loans held for sale
|
461,647 | 390,438 | ||||||
|
Investment securities
|
8,587,914 | 4,384,457 | ||||||
|
Loans and leases:
|
||||||||
|
Commercial and industrial loans and leases
|
12,888,100 | 13,540,841 | ||||||
|
Commercial real estate loans
|
7,688,827 | 10,098,210 | ||||||
|
Automobile loans
|
3,144,329 | 3,900,893 | ||||||
|
Automobile leases
|
246,265 | 563,417 | ||||||
|
Home equity loans
|
7,562,060 | 7,556,428 | ||||||
|
Residential mortgage loans
|
4,510,347 | 4,761,384 | ||||||
|
Other consumer loans
|
750,735 | 670,992 | ||||||
|
Loans and leases
|
36,790,663 | 41,092,165 | ||||||
|
Allowance for loan and lease losses
|
(1,482,479 | ) | (900,227 | ) | ||||
|
Net loans and leases
|
35,308,184 | 40,191,938 | ||||||
|
Bank owned life insurance
|
1,412,333 | 1,364,466 | ||||||
|
Premises and equipment
|
496,021 | 519,500 | ||||||
|
Goodwill
|
444,268 | 3,054,985 | ||||||
|
Other intangible assets
|
289,098 | 356,703 | ||||||
|
Accrued income and other assets
|
2,630,824 | 2,864,466 | ||||||
|
Total assets
|
$ | 51,554,665 | $ | 54,352,859 | ||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Liabilities
|
||||||||
|
Deposits in domestic offices
|
||||||||
|
Demand deposits — non-interest bearing
|
$ | 6,907,238 | $ | 5,477,439 | ||||
|
Interest bearing
|
33,229,726 | 31,732,842 | ||||||
|
Deposits in foreign offices
|
356,963 | 733,005 | ||||||
|
Deposits
|
40,493,927 | 37,943,286 | ||||||
|
Short-term borrowings
|
876,241 | 1,309,157 | ||||||
|
Federal Home Loan Bank advances
|
168,977 | 2,588,976 | ||||||
|
Other long-term debt
|
2,369,491 | 2,331,632 | ||||||
|
Subordinated notes
|
1,264,202 | 1,950,097 | ||||||
|
Accrued expenses and other liabilities
|
1,045,825 | 1,000,805 | ||||||
|
Total liabilities
|
46,218,663 | 47,123,953 | ||||||
|
Shareholders’ equity
|
||||||||
|
Preferred stock — authorized 6,617,808 shares;
|
||||||||
|
5.00% Series B Non-voting, Cumulative Preferred Stock, par
value of $0.01 and liquidation value per share of $1,000
|
1,325,008 | 1,308,667 | ||||||
|
8.50% Series A Non-cumulative Perpetual Convertible
Preferred Stock, par value of $0.01 and liquidation value per
share of $1,000
|
362,507 | 569,000 | ||||||
|
Common stock —
|
||||||||
|
Par value of $0.01 and authorized 1,000,000,000 shares
|
7,167 | 3,670 | ||||||
|
Capital surplus
|
6,731,796 | 5,322,428 | ||||||
|
Less treasury shares, at cost
|
(11,465 | ) | (15,530 | ) | ||||
|
Accumulated other comprehensive loss
|
(156,985 | ) | (326,693 | ) | ||||
|
Retained (deficit) earnings
|
(2,922,026 | ) | 367,364 | |||||
|
Total shareholders’ equity
|
5,336,002 | 7,228,906 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 51,554,665 | $ | 54,352,859 | ||||
|
Common shares issued
|
716,741,249 | 366,972,250 | ||||||
|
Common shares outstanding
|
715,761,672 | 366,057,669 | ||||||
|
Treasury shares outstanding
|
979,577 | 914,581 | ||||||
|
Preferred shares issued
|
1,967,071 | 1,967,071 | ||||||
|
Preferred shares outstanding
|
1,760,578 | 1,967,071 | ||||||
See Notes to Consolidated Financial Statements
132
Table of Contents
Consolidated
Statements of Income
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Interest and fee income
|
||||||||||||
|
Loans and leases
|
||||||||||||
|
Taxable
|
$ | 1,933,639 | $ | 2,447,362 | $ | 2,388,799 | ||||||
|
Tax-exempt
|
10,630 | 2,748 | 5,213 | |||||||||
|
Investment securities
|
||||||||||||
|
Taxable
|
249,968 | 217,882 | 221,877 | |||||||||
|
Tax-exempt
|
8,824 | 29,869 | 26,920 | |||||||||
|
Other
|
35,081 | 100,461 | 100,154 | |||||||||
|
Total interest income
|
2,238,142 | 2,798,322 | 2,742,963 | |||||||||
|
Interest expense
|
||||||||||||
|
Deposits
|
674,101 | 931,679 | 1,026,388 | |||||||||
|
Short-term borrowings
|
2,366 | 42,261 | 92,810 | |||||||||
|
Federal Home Loan Bank advances
|
12,882 | 107,848 | 102,646 | |||||||||
|
Subordinated notes and other long-term debt
|
124,506 | 184,843 | 219,607 | |||||||||
|
Total interest expense
|
813,855 | 1,266,631 | 1,441,451 | |||||||||
|
Net interest income
|
1,424,287 | 1,531,691 | 1,301,512 | |||||||||
|
Provision for credit losses
|
2,074,671 | 1,057,463 | 643,628 | |||||||||
|
Net interest income after provision for credit losses
|
(650,384 | ) | 474,228 | 657,884 | ||||||||
|
Service charges on deposit accounts
|
302,799 | 308,053 | 254,193 | |||||||||
|
Brokerage and insurance income
|
138,169 | 137,796 | 92,375 | |||||||||
|
Mortgage banking income
|
112,298 | 8,994 | 29,804 | |||||||||
|
Trust services
|
103,639 | 125,980 | 121,418 | |||||||||
|
Electronic banking
|
100,151 | 90,267 | 71,067 | |||||||||
|
Bank owned life insurance income
|
54,872 | 54,776 | 49,855 | |||||||||
|
Automobile operating lease income
|
51,810 | 39,851 | 7,810 | |||||||||
|
Net (losses) gains on sales of investment securities
|
48,815 | (197,370 | ) | (29,738 | ) | |||||||
|
Impairment losses on investment securities:
|
||||||||||||
|
Impairment losses on investment securities
|
(183,472 | ) | — | — | ||||||||
|
Noncredit-related losses on securities not expected to be sold
(recognized in other comprehensive income)
|
124,408 | — | — | |||||||||
|
Net impairment losses on investment securities
|
(59,064 | ) | — | — | ||||||||
|
Other income
|
152,155 | 138,791 | 79,819 | |||||||||
|
Total non-interest income
|
1,005,644 | 707,138 | 676,603 | |||||||||
|
Personnel costs
|
700,482 | 783,546 | 686,828 | |||||||||
|
Outside data processing and other services
|
148,095 | 130,226 | 129,226 | |||||||||
|
Deposit and other insurance expense
|
113,830 | 22,437 | 13,785 | |||||||||
|
Net occupancy
|
105,273 | 108,428 | 99,373 | |||||||||
|
OREO and foreclosure expense
|
93,899 | 33,455 | 15,185 | |||||||||
|
Equipment
|
83,117 | 93,965 | 81,482 | |||||||||
|
Professional services
|
76,366 | 49,613 | 37,390 | |||||||||
|
Amortization of intangibles
|
68,307 | 76,894 | 45,151 | |||||||||
|
Automobile operating lease expense
|
43,360 | 31,282 | 5,161 | |||||||||
|
Marketing
|
33,049 | 32,664 | 46,043 | |||||||||
|
Telecommunications
|
23,979 | 25,008 | 24,502 | |||||||||
|
Printing and supplies
|
15,480 | 18,870 | 18,251 | |||||||||
|
Goodwill impairment
|
2,606,944 | — | — | |||||||||
|
Gain on early extinguishment of debt
|
(147,442 | ) | (23,542 | ) | (8,058 | ) | ||||||
|
Other expense
|
68,704 | 94,528 | 117,525 | |||||||||
|
Total non-interest expense
|
4,033,443 | 1,477,374 | 1,311,844 | |||||||||
|
(Loss) income before income taxes
|
(3,678,183 | ) | (296,008 | ) | 22,643 | |||||||
|
Benefit for income taxes
|
(584,004 | ) | (182,202 | ) | (52,526 | ) | ||||||
|
Net (loss) income
|
$ | (3,094,179 | ) | $ | (113,806 | ) | $ | 75,169 | ||||
|
Dividends on preferred shares
|
174,756 | 46,400 | — | |||||||||
|
Net (loss) income applicable to common shares
|
$ | (3,268,935 | ) | $ | (160,206 | ) | $ | 75,169 | ||||
|
Average common shares — basic
|
532,802 | 366,155 | 300,908 | |||||||||
|
Average common shares — diluted
|
532,802 | 366,155 | 303,455 | |||||||||
|
Per common share
|
||||||||||||
|
Net (loss) income — basic
|
$ | (6.14 | ) | $ | (0.44 | ) | $ | 0.25 | ||||
|
Net (loss) income — diluted
|
(6.14 | ) | (0.44 | ) | 0.25 | |||||||
|
Cash dividends declared
|
0.0400 | 0.6625 | 1.0600 | |||||||||
See Notes to Consolidated Financial Statements
133
Table of Contents
Consolidated
Statements of Changes in Shareholders’ Equity
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock |
Other
|
Retained
|
||||||||||||||||||||||||||||||||||||||||||||||
| Series B | Series A | Common Stock |
Capital
|
Treasury Stock |
Comprehensive
|
Earnings
|
||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Surplus | Shares | Amount | Loss | (Deficit) | Total | |||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Year Ended December 31, 2009
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance, beginning of year
|
1,398 | $ | 1,308,667 | 569 | $ | 569,000 | 366,972 | $ | 3,670 | $ | 5,322,428 | (915 | ) | $ | (15,530 | ) | $ | (326,693 | ) | $ | 367,364 | $ | 7,228,906 | |||||||||||||||||||||||||
|
Comprehensive Income:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Net loss
|
(3,094,179 | ) | (3,094,179 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Cumulative effect of change in accounting principle for
other-than-temporarily impaired debt securities, net of tax of
$1,907
|
(3,541 | ) | 3,541 | — | ||||||||||||||||||||||||||||||||||||||||||||
|
Non-credit-related impairment losses on debt securities not
expected to be sold, net of tax of ($43,543)
|
(80,865 | ) | (80,865 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized net gains on investment securities arising during the
period, net of reclassification for net realized gains, net of
tax of ($102,268)
|
188,780 | 188,780 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized gains on cash flow hedging derivatives, net of tax of
($7,661)
|
14,227 | 14,227 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Change in accumulated unrealized losses for pension and other
post-retirement obligations, net of tax of $27,519
|
51,107 | 51,107 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Total comprehensive loss
|
(2,920,930 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of common stock
|
308,226 | 3,081 | 1,142,670 | 1,145,751 | ||||||||||||||||||||||||||||||||||||||||||||
|
Conversion of Preferred Series A stock
|
(206 | ) | (206,493 | ) | 41,072 | 411 | 262,117 | (56,035 | ) | — | ||||||||||||||||||||||||||||||||||||||
|
Amortization of discount
|
16,041 | (16,041 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends declared:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Common ($0.04 per share)
|
(22,020 | ) | (22,020 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Series B ($50.00 per share)
|
(69,904 | ) | (69,904 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Series A ($85.00 per share)
|
(32,776 | ) | (32,776 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Recognition of the fair value of share-based compensation
|
8,547 | 8,547 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Other share-based compensation activity
|
471 | 5 | 635 | (838 | ) | (198 | ) | |||||||||||||||||||||||||||||||||||||||||
|
Other
|
300 | (4,601 | ) | (65 | ) | 4,065 | (1,138 | ) | (1,374 | ) | ||||||||||||||||||||||||||||||||||||||
|
Balance, end of year
|
1,398 | $ | 1,325,008 | 363 | $ | 362,507 | 716,741 | $ | 7,167 | $ | 6,731,796 | (980 | ) | $ | (11,465 | ) | $ | (156,985 | ) | $ | (2,922,026 | ) | $ | 5,336,002 | ||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
134
Table of Contents
Consolidated
Statements of Changes in Shareholders’ Equity
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock |
Other
|
|||||||||||||||||||||||||||||||||||||||||||||||
| Series B | Series A | Common Stock |
Capital
|
Treasury Stock |
Comprehensive
|
Retained
|
||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Surplus | Shares | Amount | Loss | Earnings | Total | |||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Year Ended December 31, 2008
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance, beginning of year
|
— | $ | — | — | $ | — | 367,002 | $ | 3,670 | $ | 5,237,783 | (740 | ) | $ | (14,391 | ) | $ | (49,611 | ) | $ | 773,639 | $ | 5,951,090 | |||||||||||||||||||||||||
|
Cumulative effect of change in accounting principle for fair
value of assets and liabilities, net of tax of ($803)
|
1,491 | 1,491 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Cumulative effect of changing measurement date provisions for
pension and post-retirement assets and obligations, net of tax
of $4,324
|
(3,834 | ) | (4,654 | ) | (8,488 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Balance, beginning of year — as adjusted
|
— | — | — | — | 367,002 | 3,670 | 5,237,783 | (740 | ) | (14,391 | ) | (53,445 | ) | 770,476 | 5,944,093 | |||||||||||||||||||||||||||||||||
|
Comprehensive Loss:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Net (loss) income
|
(113,806 | ) | (113,806 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized net losses on investment securities arising during
the period, net of reclassification for net realized gains, net
of tax of $108,131
|
(197,745 | ) | (197,745 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized gains on cash flow hedging derivatives, net of tax of
($21,584)
|
40,085 | 40,085 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Change in accumulated unrealized losses for pension and other
post-retirement obligations, net of tax of $62,240
|
(115,588 | ) | (115,588 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Total comprehensive loss
|
(387,054 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of Preferred Class B Stock
|
1,398 | 1,306,726 | 1,306,726 | |||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of Preferred Class A Stock
|
569 | 569,000 | (18,866 | ) | 550,134 | |||||||||||||||||||||||||||||||||||||||||||
|
Issuance of warrants convertible to common stock
|
90,765 | 90,765 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Amortization of discount
|
1,941 | (1,941 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends declared:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Common ($0.6625 per share)
|
(242,522 | ) | (242,522 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Class B ($6.528 per share)
|
(9,126 | ) | (9,126 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Series A ($62.097 per share)
|
(35,333 | ) | (35,333 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Recognition of the fair value of share-based compensation
|
14,091 | 14,091 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Other share-based compensation activity
|
(30 | ) | — | (874 | ) | (199 | ) | (1,073 | ) | |||||||||||||||||||||||||||||||||||||||
|
Other
|
(471 | ) | (175 | ) | (1,139 | ) | (185 | ) | (1,795 | ) | ||||||||||||||||||||||||||||||||||||||
|
Balance, end of year
|
1,398 | $ | 1,308,667 | 569 | $ | 569,000 | 366,972 | $ | 3,670 | $ | 5,322,428 | (915 | ) | $ | (15,530 | ) | $ | (326,693 | ) | $ | 367,364 | $ | 7,228,906 | |||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
135
Table of Contents
Consolidated
Statements of Changes in Shareholders’ Equity
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock |
Other
|
|||||||||||||||||||||||||||||||||||||||||||||||
| Series B | Series A | Common Stock |
Capital
|
Treasury Stock |
Comprehensive
|
Retained
|
||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Surplus | Shares | Amount | Loss | Earnings | Total | |||||||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Year Ended December 31, 2007
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance, beginning of year
|
— | $ | — | — | $ | — | 236,064 | $ | 2,064,764 | $ | — | (590 | ) | $ | (11,141 | ) | $ | (55,066 | ) | 1,015,769 | $ | 3,014,326 | ||||||||||||||||||||||||||
|
Cumulative effect of change in accounting principle for
noncontrolling interests
|
1,706 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Balance, beginning of year — as adjusted
|
— | — | — | — | 236,064 | 2,064,764 | — | (590 | ) | (11,141 | ) | (55,066 | ) | 1,017,475 | 3,016,032 | |||||||||||||||||||||||||||||||||
|
Comprehensive Loss:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income
|
75,169 | 75,169 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized net losses on investment securities arising during
the period, net of reclassification for net realized losses, net
of tax of $13,245
|
(24,265 | ) | (24,265 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized losses on cash flow hedging derivatives, net of tax
of $6,707
|
(12,455 | ) | (12,455 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Change in accumulated unrealized losses for pension and other
post-retirement obligations, net of tax of ($22,710)
|
42,175 | 42,175 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
80,624 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Assignment of $0.01 par value per share for each share of
Common Stock
|
(2,062,403 | ) | 2,062,403 | — | ||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends declared ($1.06 per share)
|
(319,249 | ) | (319,249 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Shares issued pursuant to acquisition
|
129,827 | 1,298 | 3,135,239 | 3,136,537 | ||||||||||||||||||||||||||||||||||||||||||||
|
Recognition of the fair value of share-based compensation
|
21,836 | 21,836 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Other share-based compensation activity
|
1,111 | 11 | 15,943 | 15,954 | ||||||||||||||||||||||||||||||||||||||||||||
|
Other
|
2,362 | (150 | ) | (3,250 | ) | 244 | (644 | ) | ||||||||||||||||||||||||||||||||||||||||
|
Balance, end of year
|
— | $ | — | — | $ | — | 367,002 | $ | 3,670 | $ | 5,237,783 | (740 | ) | $ | (14,391 | ) | $ | (49,611 | ) | $ | 773,639 | $ | 5,951,090 | |||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
136
Table of Contents
Consolidated
Statements of Cash Flows
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Operating activities
|
||||||||||||
|
Net (loss) income
|
$ | (3,094,179 | ) | $ | (113,806 | ) | $ | 75,169 | ||||
|
Adjustments to reconcile net (loss) income to net cash provided
by (used for) operating activities:
|
||||||||||||
|
Impairment of goodwill
|
2,606,944 | — | — | |||||||||
|
Provision for credit losses
|
2,074,671 | 1,057,463 | 643,628 | |||||||||
|
Losses on investment securities
|
10,249 | 197,370 | 29,738 | |||||||||
|
Depreciation and amortization
|
228,041 | 244,860 | 127,261 | |||||||||
|
Change in current and deferred income taxes
|
(471,592 | ) | (251,827 | ) | (157,169 | ) | ||||||
|
Net sales (purchases) of trading account securities
|
856,112 | 92,976 | (996,689 | ) | ||||||||
|
Originations of loans held for sale
|
(4,786,043 | ) | (3,063,375 | ) | (2,815,854 | ) | ||||||
|
Principal payments on and proceeds from loans held for sale
|
4,667,792 | 3,096,129 | 2,693,132 | |||||||||
|
Gain on early extinguishment of debt
|
(147,442 | ) | (23,541 | ) | (8,058 | ) | ||||||
|
Other, net
|
21,709 | 1,080 | 66,063 | |||||||||
|
Net cash provided by (used for) operating activities
|
1,966,262 | 1,237,329 | (342,779 | ) | ||||||||
|
Investing activities
|
||||||||||||
|
Increase in interest bearing deposits in banks
|
(319,989 | ) | (228,554 | ) | (188,971 | ) | ||||||
|
Net cash paid in acquisitions
|
— | — | (80,060 | ) | ||||||||
|
Proceeds from:
|
||||||||||||
|
Maturities and calls of investment securities
|
1,004,293 | 386,232 | 405,482 | |||||||||
|
Sales of investment securities
|
3,585,644 | 555,719 | 1,528,480 | |||||||||
|
Purchases of investment securities
|
(8,386,223 | ) | (1,338,274 | ) | (1,317,630 | ) | ||||||
|
Net proceeds from sales of loans
|
949,398 | 471,362 | 108,588 | |||||||||
|
Net loan and lease activity, excluding sales
|
1,544,524 | (2,358,653 | ) | (1,746,814 | ) | |||||||
|
Purchases of operating lease assets
|
(119 | ) | (226,378 | ) | (76,940 | ) | ||||||
|
Proceeds from sale of operating lease assets
|
11,216 | 25,091 | 27,591 | |||||||||
|
Purchases of premises and equipment
|
(49,223 | ) | (59,945 | ) | (109,450 | ) | ||||||
|
Proceeds from sales of other real estate
|
60,499 | 54,520 | 35,883 | |||||||||
|
Other, net
|
4,619 | 19,172 | 8,471 | |||||||||
|
Net cash used for investing activities
|
(1,595,361 | ) | (2,699,708 | ) | (1,405,370 | ) | ||||||
|
Financing activities
|
||||||||||||
|
Increase (decrease) in deposits
|
2,559,633 | 195,142 | (165,625 | ) | ||||||||
|
Decrease in short-term borrowings
|
(277,215 | ) | (1,316,155 | ) | 1,464,542 | |||||||
|
Proceeds from issuance of subordinated notes
|
— | — | 250,010 | |||||||||
|
Maturity/redemption of subordinated notes
|
(484,966 | ) | (76,659 | ) | (46,660 | ) | ||||||
|
Proceeds from Federal Home Loan Bank advances
|
207,394 | 1,865,294 | 2,853,120 | |||||||||
|
Maturity/redemption of Federal Home Loan Bank advances
|
(2,627,786 | ) | (2,360,368 | ) | (1,492,899 | ) | ||||||
|
Proceeds from issuance of long-term debt
|
598,200 | 887,111 | — | |||||||||
|
Maturity/redemption of long-term debt
|
(642,644 | ) | (540,266 | ) | (353,079 | ) | ||||||
|
Dividends paid on preferred stock
|
(107,262 | ) | (23,242 | ) | — | |||||||
|
Dividends paid on common stock
|
(55,026 | ) | (279,608 | ) | (289,758 | ) | ||||||
|
Net proceeds from issuance of preferred stock
|
— | 1,947,625 | — | |||||||||
|
Net proceeds from issuance of common stock
|
1,135,645 | — | — | |||||||||
|
Other, net
|
(198 | ) | (1,073 | ) | 16,997 | |||||||
|
Net cash provided by financing activities
|
305,775 | 297,801 | 2,236,648 | |||||||||
|
Increase (decrease) in cash and cash equivalents
|
676,676 | (1,164,578 | ) | 488,499 | ||||||||
|
Cash and cash equivalents at beginning of year
|
844,668 | 2,009,246 | 1,520,747 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 1,521,344 | $ | 844,668 | $ | 2,009,246 | ||||||
|
Supplemental disclosures:
|
||||||||||||
|
Income taxes (refunded) paid
|
$ | (112,412 | ) | $ | 69,625 | $ | 104,645 | |||||
|
Interest paid
|
869,503 | 1,282,877 | 1,434,007 | |||||||||
|
Non-cash activities
|
||||||||||||
|
Common stock dividends accrued, paid in subsequent quarter
|
6,670 | 39,675 | 76,762 | |||||||||
|
Preferred stock dividends accrued, paid in subsequent quarter
|
16,635 | 21,218 | — | |||||||||
|
Common stock and stock options issued for purchase acquisitions
|
— | — | 3,136,537 | |||||||||
See Notes to Consolidated Financial Statements.
137
Table of Contents
| 1. | SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations
— Huntington Bancshares
Incorporated (Huntington or the Company) is a multi-state
diversified financial holding company organized under Maryland
law in 1966 and headquartered in Columbus, Ohio. Through its
subsidiaries, including its bank subsidiary, The Huntington
National Bank (the Bank), Huntington is engaged in providing
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. Huntington’s banking offices are
located in Ohio, Michigan, Pennsylvania, Indiana, West Virginia,
and Kentucky. Selected financial service activities are also
conducted in other states including: Auto Finance and Dealer
Services offices in Nevada, New Jersey, and New York; 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, Michigan, Indiana, and West Virginia.
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.
Basis of Presentation
— The consolidated
financial statements include the accounts of Huntington and its
majority-owned subsidiaries and are presented in accordance with
accounting principles generally accepted in the United States
(GAAP). All intercompany transactions and balances have been
eliminated in consolidation. Companies in which Huntington holds
more than a 50% voting equity interest or are a variable
interest entity (VIE) in which Huntington absorbs the majority
of expected losses are consolidated. Huntington evaluates VIEs
in which it holds a beneficial interest for consolidation. VIEs
are legal entities with insubstantial equity, whose equity
investors lack the ability to make decisions about the
entity’s activities, or whose equity investors do not have
the right to receive the residual returns of the entity if they
occur. VIEs in which Huntington does not absorb the majority of
expected losses are not consolidated. For consolidated entities
where Huntington holds less than a 100% interest, Huntington
recognizes a minority interest liability (included in accrued
expenses and other liabilities) for the equity held by others
and minority interest expense (included in other long-term debt)
for the portion of the entity’s earnings attributable to
minority interests. Investments in companies that are not
consolidated are accounted for using the equity method when
Huntington has the ability to exert significant influence. Those
investments in non-marketable securities for which Huntington
does not have the ability to exert significant influence are
generally accounted for using the cost method and are
periodically evaluated for impairment. Investments in private
investment partnerships are carried at fair value. Investments
in private investment partnerships and investments that are
accounted for under the equity method or the cost method are
included in accrued income and other assets and
Huntington’s proportional interest in the equity
investments’ earnings are included in other non-interest
income.
The preparation of financial statements in conformity with GAAP
requires Management to make estimates and assumptions that
significantly affect amounts reported in the financial
statements. Huntington uses significant estimates and employs
the judgments of management in determining the amount of its
allowance for credit losses and income tax accruals and
deferrals, in its fair value measurements of investment
securities, derivatives, mortgage loans held for sale, mortgage
servicing rights and in the evaluation of impairment of loans,
goodwill, investment securities, and fixed assets. As with any
estimate, actual results could differ from those estimates.
Significant estimates are further discussed in the critical
accounting policies included in Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Certain prior period amounts have been reclassified to conform
to the current year’s presentation.
Securities
— Securities purchased with the
intention of recognizing short-term profits or which are
actively bought and sold are classified as trading account
securities and reported at fair value. The unrealized gains or
losses on trading account securities are recorded in other
non-interest income, except for gains and losses on trading
account securities used to hedge the fair value of mortgage
servicing rights, which are included in mortgage banking income.
All other securities are classified as investment securities.
Investment securities include securities designated as available
for sale and non-marketable equity securities. Unrealized gains
or losses on investment securities designated as available for
sale are reported as a separate component of accumulated other
comprehensive loss in the consolidated statement of changes in
shareholders’ equity.
138
Table of Contents
Declines in the value of debt and marketable equity securities
that are considered
other-than-temporary
are recorded in non-interest income as securities losses.
Huntington evaluates its investment securities portfolio on a
quarterly basis for indicators of
other-than-temporary
impairment (OTTI). This determination requires significant
judgment. Huntington assesses whether OTTI has occurred when the
fair value of a debt security is less than the amortized cost
basis at the balance sheet date. Under these circumstances, OTTI
is considered to have occurred (1) if Huntington intends to
sell the security; (2) if it is more likely than not
Huntington will be required to sell the security before recovery
of its amortized cost basis; or (3) the present value of
the expected cash flows is not sufficient to recover the entire
amortized cost basis. For securities that Huntington does not
expect to sell or it is not more likely than not to be required
to sell, the OTTI is separated into credit and noncredit
components. The credit-related OTTI, represented by the expected
loss in principal, is recognized in noninterest income, while
noncredit-related OTTI is recognized in other comprehensive
income (loss) (OCI). Noncredit-related OTTI results from other
factors, including increased liquidity spreads and extension of
the security. For securities which Huntington does expect to
sell, all OTTI is recognized in earnings. Presentation of OTTI
is made in the income statement on a gross basis with a
reduction for the amount of OTTI recognized in OCI. Once an
other-than-temporary
impairment is recorded, when future cash flows can be reasonably
estimated, future cash flows are re-allocated between interest
and principal cash flows to provide for a level-yield on the
security.
Securities transactions are recognized on the trade date (the
date the order to buy or sell is executed). The amortized cost
of sold securities is used to compute realized gains and losses.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts using the effective interest
method over the period to maturity, are included in interest
income.
Non-marketable equity securities include stock acquired for
regulatory purposes, such as Federal Home Loan Bank stock and
Federal Reserve Bank stock. These securities are generally
accounted for at cost and are included in investment securities.
Loans and Leases —
Loans and direct financing
leases for which Huntington has the intent and ability to hold
for the foreseeable future (at least 12 months), or until
maturity or payoff, are classified in the balance sheet as loans
and leases. Loans and leases are carried at the principal amount
outstanding, net of unamortized deferred loan origination fees
and costs and net of unearned income. Direct financing leases
are reported at the aggregate of lease payments receivable and
estimated residual values, net of unearned and deferred income.
Interest income is accrued as earned using the interest method
based on unpaid principal balances. Huntington defers the fees
it receives from the origination of loans and leases, as well as
the direct costs of those activities. Huntington also acquires
loans at a premium and at a discount to their contractual
values. Huntington amortizes loan discounts, loan premiums and
net loan origination fees and costs on a level-yield basis over
the estimated lives of the related loans.
Loans that Huntington has the intent to sell or securitize are
classified as held for sale. Loans held for sale (excluding
loans originated or acquired with the intent to sale) are
carried at the lower of cost or fair value. The fair value
option was elected for mortgage loans held for sale to
facilitate hedging of the loans. Fair value is determined based
on collateral value and prevailing market prices for loans with
similar characteristics. Subsequent declines in fair value are
recognized either as a charge-off or as non-interest income,
depending on the length of time the loan has been recorded as
held for sale. When a decision is made to sell a loan that was
not originated or initially acquired with the intent to sell,
the loan is reclassified into held for sale.
Residual values on leased automobiles and equipment are
evaluated quarterly for impairment. Impairment of the residual
values of direct financing leases is recognized by writing the
leases down to fair value with a charge to other non-interest
expense. Residual value losses arise if the expected fair value
at the end of the lease term is less than the residual value
recorded at original lease, net of estimated amounts
reimbursable by the lessee. Future declines in the expected
residual value of the leased equipment would result in expected
losses of the leased equipment.
139
Table of Contents
For leased equipment, the residual component of a direct
financing lease represents the estimated fair value of the
leased equipment at the end of the lease term. Huntington uses
industry data, historical experience, and independent appraisals
to establish these residual value estimates. Additional
information regarding product life cycle, product upgrades, as
well as insight into competing products are obtained through
relationships with industry contacts and are factored into
residual value estimates where applicable.
Commercial and industrial loans and commercial real estate loans
are generally placed on non-accrual status and stop accruing
interest when principal or interest payments are 90 days or
more past due or the borrower’s creditworthiness is in
doubt or other reasons. A loan may remain in accruing status if
it is sufficiently collateralized, which means the collateral
covers the full repayment of principal and interest, and is in
the process of active collection.
Management evaluates direct financing leases individually for
impairment. Commercial loans are evaluated periodically for
impairment. An allowance is established as a component of the
allowance for loan and lease losses when, based upon current
information and events, it is probable that all amounts due
according to the contractual terms of the loan or lease will not
be collected. The amount of the impairment is measured using the
present value of expected future cash flows discounted at the
loan’s or lease’s effective interest rate or, as a
practical expedient, the observable market price of the loan or
lease, or, the fair value of the collateral if the loan or lease
is collateral dependent. When the present value of expected
future cash flows is used, the effective interest rate is the
contractual interest rate of the loan adjusted for any premium
or discount. When the contractual interest rate is variable, the
effective interest rate of the loan changes over time. Interest
income is recognized on impaired loans using a cost recovery
method unless the receipt of principal and interest as they
become contractually due is not in doubt, such as in a troubled
debt restructuring (TDR). TDRs of impaired loans that continue
to perform under the restructured terms continue to accrue
interest. Huntington does not have significant commitments to
lend additional funds to borrowers whose loans have been
modified as a TDR.
Consumer loans and leases are subject to mandatory charge-off
based on specific criteria and are not classified as
non-performing prior to being charged off. Huntington recently
adjusted the timing of the loss recognition to ensure a
conservative view of the value of the underlining real estate
collateral. A charge-off on a residential mortgage loan is
recorded when the loan has been foreclosed and the loan balance
exceeds the fair value of the collateral.
(See Note 5
for further information.)
A home equity charge-off occurs
when it is determined that there is not sufficient equity in the
loan to cover Huntington’s position. A write down in value
occurs as determined by Huntington’s internal processes,
with subsequent losses incurred upon final disposition. In the
event the first mortgage is purchased to protect
Huntington’s interests, the charge-off process is the same
as residential mortgage loans described above.
For non-performing loans and leases, cash receipts are applied
entirely against principal until the loan or lease has been
collected in full, after which time any additional cash receipts
are recognized as interest income. When, in management’s
judgment, the borrower’s ability to make required interest
and principal payments resumes and collectability is no longer
in doubt, the loan or lease is returned to accrual status. 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.
Included within loans are $323 million of amounts due from
borrowers which are in the form of lower floater bonds. The
bonds are a long-term loan with a short-term adjustable interest
rate, supported by a letter of credit from a Huntington. The
bonds were obtained in 2009 in satisfaction of existing letter
of credit draws to the same borrowers. Because the letters of
credit on the bonds are with Huntington and Huntington can at
anytime put the bonds back to the issuer and thereby convert the
bond to a loan, the company classifies these instruments as
loans.
Sold Loans and Leases
— For loan or lease sales
with servicing retained, an asset is recorded for the right to
service the loans sold, based on the fair value of the servicing
rights.
Gains and losses on the loans and leases sold and servicing
rights associated with loan and lease sales are determined when
the related loans or leases are sold to either a securitization
trust or third party. Fair values of the servicing rights are
based on the present value of expected future cash flows from
servicing the underlying loans, net of adequate compensation to
service the loans. The present value of expected future cash
140
Table of Contents
flows is determined using assumptions for market interest rates,
ancillary fees, and prepayment rates. The servicing rights are
recorded in accrued income and other assets in the consolidated
balance sheets. Servicing revenues on mortgage and automobile
loans are included in mortgage banking income and other
non-interest income, respectively.
Allowance for Credit Losses
— The allowance for
credit losses (ACL) reflects Management’s judgment as to
the level of the ACL considered appropriate to absorb probable
inherent credit losses. This judgment is based on the size and
current risk characteristics of the portfolio, a review of
individual loans and leases, historical and anticipated loss
experience, and a review of individual relationships where
applicable. External influences such as general economic
conditions, economic conditions in the relevant geographic areas
and specific industries, regulatory guidelines, and other
factors are also assessed in determining the level of the
allowance.
The determination of the allowance requires significant
estimates, including the timing and amounts of expected future
cash flows on impaired loans and leases, consideration of
current economic conditions, and historical loss experience
pertaining to pools of homogeneous loans and leases, all of
which may be susceptible to change. The allowance is increased
through a provision for credit losses that is charged to
earnings, based on Management’s quarterly evaluation of the
factors previously mentioned, and is reduced by charge-offs, net
of recoveries, and the allowance associated with securitized or
sold loans.
The ACL consists of two components, the transaction reserve,
which includes specific reserves related to loans considered to
be impaired and loans involved in troubled debt restructurings,
and the economic reserve. The two components are more fully
described below.
The transaction reserve component of the ACL includes both
(a) an estimate of loss based on pools of commercial and
consumer loans and leases with similar characteristics and
(b) an estimate of loss based on an impairment review of
each loan greater than $1 million. For commercial loans,
the estimate of loss based on pools of loans and leases with
similar characteristics is made through the use of a
standardized loan grading system that is applied on an
individual loan level and updated on a continuous basis. The
reserve factors applied to these portfolios were developed based
on internal credit migration models that track historical
movements of loans between loan ratings over time and a
combination of long-term average loss experience of our own
portfolio and external industry data. In the case of more
homogeneous portfolios, such as consumer loans and leases, the
determination of the transaction reserve is based on reserve
factors that include the use of forecasting models to measure
inherent loss in these portfolios. Models and analyses are
updated frequently to capture the recent behavioral
characteristics of the subject portfolios, as well as any
changes in loss mitigation or credit origination strategies.
Adjustments to the reserve factors are made as needed based on
observed results of the portfolio analytics.
The reserve incorporates our determination of the impact of
risks associated with the general economic environment on the
portfolio. During the 2009 fourth quarter, Management performed
a review of our ACL practices. The review included an analysis
of the adequacy of the ACL in light of current economic
conditions, as well as expected future performance. Based on the
results of the review, Huntington made the following
enhancements:
| • | Current market conditions, such as higher vacancy rates and lower rents, have driven commercial real estate values lower and caused loss given default (LGD) experience to rise significantly over the past year. Management believes that factors driving the higher losses will continue to be evident for at least the next 18 to 24 months, making it necessary to develop cyclical LGD factors that are collateral specific and based in part on market projections. | |
| • | Probability of Default (PD) factors have recently migrated higher for commercial and commercial real estate loans. Based on this change in market conditions, Management has increased the loss emergence time frame to 24 months from 12 months. | |
| • | Management has redefined the general reserve in broader terms to incorporate: (a) current and likely market conditions along with an assessment of the potential impact of those conditions,(b) uncertainty |
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| in the risk rating process, and (c) the impact of portfolio performance, portfolio composition, origination channels, and other factors. |
| • | PD factors were updated to include current delinquency status across all consumer portfolios. |
Other Real Estate Owned
— Other real estate
owned (OREO) is comprised principally of commercial and
residential real estate properties obtained in partial or total
satisfaction of loan obligations. OREO also includes government
insured loans in the process of foreclosure. OREO obtained in
satisfaction of a loan is recorded at the estimated fair value
less anticipated selling costs based upon the property’s
appraised value at the date of transfer, with any difference
between the fair value of the property and the carrying value of
the loan charged to the allowance for loan losses. Subsequent
changes in value are reported as adjustments to the carrying
amount, not to exceed the initial carrying value of the assets
at the time of transfer. Changes in value subsequent to transfer
are recorded in non-interest expense. Gains or losses not
previously recognized resulting from the sale of OREO are
recognized in non-interest expense on the date of sale.
Resell and Repurchase Agreements
— Securities
purchased under agreements to resell and securities sold under
agreements to repurchase are generally treated as collateralized
financing transactions and are recorded at the amounts at which
the securities were acquired or sold plus accrued interest. The
fair value of collateral either received from or provided to a
third party is continually monitored and additional collateral
is obtained or is requested to be returned to Huntington as in
accordance with the agreement.
Goodwill and Other Intangible Assets
— Under
the acquisition method of accounting, the net assets of entities
acquired by Huntington are recorded at their estimated fair
value at the date of acquisition. The excess cost of the
acquisition over the fair value of net assets acquired is
recorded as goodwill. Other intangible assets are amortized
either on an accelerated or straight-line basis over their
estimated useful lives. Goodwill is evaluated for impairment on
an annual basis at October 1st of each year or
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Other intangible assets
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may
not be recoverable.
Mortgage Banking Activities
— Huntington
recognizes the rights to service mortgage loans as separate
assets, which are included in other assets in the consolidated
balance sheets, only when purchased or when servicing is
contractually separated from the underlying mortgage loans by
sale or securitization of the loans with servicing rights
retained. Servicing rights are initially recorded at fair value.
All mortgage loan servicing rights (MSRs) are subsequently
carried at either fair value or amortized cost, and are included
in other assets.
To determine the fair value of MSRs, Huntington uses a option
adjusted spread cash flow analysis incorporating market implied
forward interest rates to estimate the future direction of
mortgage and market interest rates. The forward rates utilized
are derived from the current yield curve for U.S. dollar
interest rate swaps and are consistent with pricing of capital
markets instruments. The current and projected mortgage interest
rate influences the prepayment rate; and therefore, the timing
and magnitude of the cash flows associated with the MSR.
Expected mortgage loan prepayment assumptions are derived from a
third party model. Management believes these prepayment
assumptions are consistent with assumptions used by other market
participants valuing similar MSRs.
Huntington hedges the value of MSRs using derivative instruments
and trading account securities. Changes in fair value of these
derivatives and trading account securities are reported as a
component of mortgage banking income.
Premises and Equipment
— Premises and equipment
are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the
related assets. Buildings and building improvements are
depreciated over an average of 30 to 40 years and 10 to
20 years, respectively. Land improvements and furniture and
fixtures are depreciated over 10 years, while equipment is
depreciated over a range of three to seven years. Leasehold
improvements are amortized over the lesser of the asset’s
useful life or the term of the related leases, including any
renewal periods for which renewal is reasonably assured.
Maintenance and repairs are charged to expense as incurred,
while improvements that extend the useful life of an asset are
capitalized and depreciated over the remaining useful
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life. Premises and equipment is evaluated for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable.
Bank Owned Life Insurance
— Huntington’s
bank owned life insurance policies are carried at their cash
surrender value. Huntington recognizes tax-exempt income from
the periodic increases in the cash surrender value of these
policies and from death benefits. A portion of cash surrender
value is supported by holdings in separate accounts. Huntington
has also purchased insurance for these policies to provide
protection of the value of the holdings within these separate
accounts. The cash surrender value of the policies exceeds the
value of the underlying holdings in the separate accounts
covered by these insurance policies by approximately
$9.1 million at December 31, 2009.
Derivative Financial Instruments
— A variety of
derivative financial instruments, principally interest rate
swaps, are used in asset and liability management activities to
protect against the risk of adverse price or interest rate
movements. These instruments provide flexibility in adjusting
Huntington’s sensitivity to changes in interest rates
without exposure to loss of principal and higher funding
requirements.
Derivative financial instruments are recorded in the
consolidated balance sheet as either an asset or a liability (in
other assets or other liabilities, respectively) and measured at
fair value, with changes to fair value recorded through earnings
unless specific criteria are met to account for the derivative
using hedge accounting.
Huntington also uses derivatives, principally loan sale
commitments, in hedging its mortgage loan interest rate lock
commitments and its mortgage loans held for sale. Mortgage loan
sale commitments and the related interest rate lock commitments
are carried at fair value on the consolidated balance sheet with
changes in fair value reflected in mortgage banking revenue.
Huntington also uses certain derivative financial instruments to
offset changes in value of its residential mortgage loan
servicing assets. These derivatives consist primarily of forward
interest rate agreements, and forward mortgage securities. The
derivative instruments used are not designated as hedges.
Accordingly, such derivatives are recorded at fair value with
changes in fair value reflected in mortgage banking income.
For those derivatives to which hedge accounting is applied,
Huntington formally documents the hedging relationship and the
risk management objective and strategy for undertaking the
hedge. This documentation identifies the hedging instrument, the
hedged item or transaction, the nature of the risk being hedged,
and, unless the hedge meets all of the criteria to assume there
is no ineffectiveness, the method that will be used to assess
the effectiveness of the hedging instrument and how
ineffectiveness will be measured. The methods utilized to assess
retrospective hedge effectiveness, as well as the frequency of
testing, vary based on the type of item being hedged and the
designated hedge period. For specifically designated fair value
hedges of certain fixed-rate debt, Huntington utilizes the
short-cut method when certain criteria are met. For other fair
value hedges of fixed-rate debt, including certificates of
deposit, Huntington utilizes the regression method to evaluate
hedge effectiveness on a quarterly basis. For fair value hedges
of portfolio loans, the regression method is used to evaluate
effectiveness on a daily basis. For cash flow hedges, the
regression method is applied on a quarterly basis. For hedging
relationships that are designated as fair value hedges, changes
in the fair value of the derivative are, to the extent that the
hedging relationship is effective, recorded through earnings and
offset against changes in the fair value of the hedged item. For
cash flow hedges, changes in the fair value of the derivative
are, to the extent that the hedging relationship is effective,
recorded as other comprehensive income and subsequently
recognized in earnings at the same time that the hedged item is
recognized in earnings. Any portion of a hedge that is
ineffective is recognized immediately as other noninterest
income. When a cash flow hedge is discontinued because the
originally forecasted transaction is not probable of occurring,
any net gain or loss in other comprehensive income is recognized
immediately as other noninterest income.
Like other financial instruments, derivatives contain an element
of credit risk, which is the possibility that Huntington will
incur a loss because a counterparty fails to meet its
contractual obligations. Notional values of interest rate swaps
and other off-balance sheet financial instruments significantly
exceed the credit risk associated with these instruments and
represent contractual balances on which calculations of amounts
to be exchanged are based. Credit exposure is limited to the sum
of the aggregate fair value of positions that have become
favorable to Huntington, including any accrued interest
receivable due from counterparties. Potential
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credit losses are mitigated through careful evaluation of
counterparty credit standing, selection of counterparties from a
limited group of high quality institutions, collateral
agreements, and other contract provisions. Huntington considers
the value of collateral held and collateral provided in
determining the net carrying value of it derivatives.
Advertising Costs
— Advertising costs are
expensed as incurred and recorded as a marketing expense, a
component of noninterest expense.
Income Taxes
— Income taxes are accounted for
under the asset and liability method. Accordingly, deferred tax
assets and liabilities are recognized for the future book and
tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are determined using enacted tax rates expected
to apply in the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income at the time of enactment of such change in tax rates. Any
interest or penalties due for payment of income taxes are
included in the provision for income taxes. To the extent that
Huntington does not consider it more likely than not that a
deferred tax asset will be recovered, a valuation allowance is
recorded. All positive and negative evidence is reviewed when
determining how much of a valuation allowance is recognized on a
quarterly basis. In determining the requirements for a valuation
allowance, sources of possible taxable income are evaluated
including future reversals of existing taxable temporary
differences, future taxable income exclusive of reversing
temporary differences and carryforwards, taxable income in
appropriate carryback years, and tax-planning strategies.
Huntington applies a more likely than not recognition threshold
for all tax uncertainties. Huntington reviews its tax positions
quarterly.
Treasury Stock
— Acquisitions of treasury stock
are recorded at cost. The reissuance of shares in treasury is
recorded at weighted-average cost.
Share-Based Compensation
— Huntington uses the
fair value recognition concept relating to its share-based
compensation plans. Compensation expense is recognized based on
the fair value of unvested stock options and awards over the
requisite service period.
Segment Results
— Accounting policies for the
lines of business are the same as those used in the preparation
of the consolidated financial statements with respect to
activities specifically attributable to each business line.
However, the preparation of business line results requires
management to establish methodologies to allocate funding costs
and benefits, expenses, and other financial elements to each
line of business. Changes are made in these methodologies
utilized for certain balance sheet and income statement
allocations performed by Huntington’s management reporting
system, as appropriate.
Statement of Cash Flows
— Cash and cash
equivalents are defined as “Cash and due from banks”
which includes amounts on deposit with the Federal Reserve and
“Federal funds sold and securities purchased under resale
agreements.”
Fair Value Measurements
— The Company records
certain of its assets and liabilities at fair value. Fair value
is defined as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the
measurement date. Fair value measurements are classified within
one of three levels in a valuation hierarchy based upon the
transparency of inputs to the valuation of an asset or liability
as of the measurement date. The three levels are defined as
follows:
Level 1
— inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2
— inputs to the valuation
methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
Level 3
— inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.
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A financial instrument’s categorization within the
valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement.
See Note 21 for more information regarding fair value
measurements.
| 2. | SUBSEQUENT EVENTS |
In preparing these financial statements, subsequent events were
evaluated through the time the financial statements were issued.
Financial statements are considered issued when they are widely
distributed to all shareholders and other financial statement
users, or filed with the Securities and Exchange Commission. In
conjunction with applicable accounting standards, all material
subsequent events have been either recognized in the financial
statements or disclosed in the notes to the financial statements.
| 3. | ACCOUNTING STANDARDS UPDATE |
FASB Accounting Standards Codification (ASC) Topic
105 — Generally Accepted Accounting Principles
(Statement No. 168,
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles
—
a replacement of FASB
Statement No. 162) (ASC 105).
This accounting
guidance was originally issued in June 2009 and is now included
in ASC 105. The guidance identifies the FASB Accounting
Standards Codification (Codification) as the single source of
authoritative U.S. Generally Accepted Accounting Principles
(GAAP) recognized by the FASB to be applied by nongovernmental
entities. The Codification reorganizes all previous GAAP
pronouncements into roughly 90 accounting topics and displays
all topics using a consistent structure. All existing standards
that were used to create the Codification have been superseded,
replacing the previous references to specific Statements of
Financial Accounting Standards (SFAS) with numbers used in the
Codification’s structural organization. The guidance is
effective for interim and annual periods ending after
September 15, 2009. After September 15, only one level
of authoritative GAAP exists, other than guidance issued by the
Securities and Exchange Commission (SEC). All other accounting
literature excluded from the Codification is considered
non-authoritative. The adoption of the Codification does not
have a material impact on the Company’s consolidated
financial statements.
ASC Topic 810 — Consolidation (Statement
No. 160,
Noncontrolling Interests in Consolidated
Financial Statement
s —
an amendment of ARB
No. 51) (ASC 810).
This accounting guidance was
originally issued in December 2007 and is now included in ASC
810. The guidance requires that noncontrolling interests in
subsidiaries be initially measured at fair value and classified
as a separate component of equity. The guidance is effective for
fiscal years beginning on or after December 15, 2008. The
adoption of this guidance did not have a material impact on
Huntington’s consolidated financial statements.
ASC Topic 805 — Business Combinations (Statement
No. 141 (Revised 2008), Business Combinations)
(ASC 805).
This accounting guidance was originally
issued in December 2007 and is now included in ASC 805. The
guidance requires an acquirer to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions. The guidance requires
prospective application for business combinations consummated in
fiscal years beginning on or after December 15, 2008. The
Franklin restructuring transaction described in Note 5 and
the Warren Bank transaction described in Note 4 was
accounted for under this guidance.
ASC Topic 944 — Financial Services —
Insurance (Statement No. 163,
Accounting for Financial
Guarantee Insurance Contracts
—
an
interpretation of FASB Statement No. 60) (ASC 944).
This accounting guidance was originally issued in May 2008 and
is now included in ASC 944. This guidance requires that an
insurance enterprise recognize a claim liability prior to an
event of default (insured event) when there is evidence that
credit deterioration has occurred in an insured financial
obligation. The guidance also clarifies the recognition and
measurement criteria to be used to account for premium revenue
and claim liabilities in financial guarantee insurance
contracts. The guidance also requires expanded disclosures about
financial guarantee insurance contracts. The guidance is
effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008. The
adoption of this guidance did not have a material impact on the
Huntington’s consolidated financial statements.
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ASC Topic 320 — Investments — Debt and
Equity Securities (FSP
FAS 115-2
and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments) (ASC 320).
This accounting guidance was
originally issued in April 2009 and is now included in ASC 320.
The guidance amends the previous
other-than-temporary
impairment (OTTI) guidance for debt securities and included
additional presentation and disclosure requirements for both
debt and equity securities. The guidance is effective for
interim reporting periods ending after June 15, 2009. The
adoption of this guidance requires an adjustment to retained
earnings and other comprehensive income (OCI) in the period of
adoption to reclassify non-credit related impairment to OCI for
securities that the Company does not intend to sell (and will
not more likely than not be required to sell). The adoption
resulted in the reclassification of $3.5 million (net of
tax) from retained earnings to OCI. (See Consolidated Statements
of Changes in Shareholders’ Equity and Note 15).
ASC Topic 820 — Fair Value Measurements and
Disclosures (Staff Position (FSP)
FAS 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly) (ASC
820).
This accounting guidance was originally issued in
April 2009 and is now included in ASC 820. The guidance
reaffirms the exit price fair value measurement concept and also
provides additional guidance for estimating fair value when the
volume and level of activity for the asset or liability have
significantly decreased. The guidance was effective for interim
reporting periods ending after June 15, 2009. The adoption
of this guidance did not have a material impact on the
Huntington’s consolidated financial statements.
ASC Topic 825 — Financial Instruments (FSP
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments) (ASC 825).
This accounting guidance was
originally issued in April 2009 and is now included in ASC 825.
The guidance requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This
guidance was adopted for interim reporting periods ending after
June 15, 2009 (See Note 21).
ASC Topic 855 — Subsequent Events (Statement
No. 165,
Subsequent Events) (ASC 855).
This
accounting guidance was originally issued in May 2009 and is now
included in ASC 855. The guidance establishes general standards
of accounting for and disclosure of subsequent events.
Subsequent events are events that occur after the balance sheet
date but before financial statements are issued or are available
to be issued. The guidance is effective for interim or annual
periods ending after June 15, 2009. The adoption of this
guidance was not material to Huntington’s consolidated
financial statements.
ASC Topic 810 — Consolidation (Statement
No. 167,
Amendments to FASB Interpretation No. 46R)
(ASC 810)
This accounting guidance was originally
issued in June 2009 and is now included in ASC 810. The guidance
amends the consolidation guidance applicable for variable
interest entities (VIE). The guidance is effective for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2009, and early adoption is prohibited.
Huntington previously transferred automobile loans and leases to
a trust in a securitization transaction. With adoption of the
amended guidance, the trust will be consolidated as of
January 1, 2010. Total net assets are anticipated to
increase by approximately $600 million. Based upon the
current regulatory requirements, Huntington anticipates the
impact of adopting will result in a slight decrease to risk
weighted capital ratios.
ASC Topic 860 — Transfers and Servicing (Statement
No. 166,
Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140)
(ASC 860).
This accounting guidance was originally
issued in June 2009 and is now included in ASC 860. The guidance
removes the concept of a qualifying special purpose entity and
changes the requirements for derecognizing financial assets.
Many types of transferred financial assets that would have been
derecognized previously are no longer eligible for
derecognition. The guidance is effective for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2009, and early adoption is prohibited.
The guidance applies prospectively to transfers of financial
assets occurring on or after the effective date. The guidance
will impact structuring of securitizations and other transfers
of financial assets in order to meet the amended sale treatment
criteria.
ASC Topic 715 — Compensation — Retirement
Benefits (FSP
FAS 132R-1,
Employers’ Disclosures about Postretirement Benefit Plan
Assets) (ASC 715).
This accounting guidance was
originally issued in December 2008 and is now included in ASC
715. The guidance requires additional disclosures about plan
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assets in an employer’s defined benefit pension and other
postretirement plans. The required disclosures have been
included in Note 20.
Accounting Standards Update (ASU)
2010-6 —
Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements.
The ASU amends
Subtopic
820-10
with
new disclosure requirements and clarification of existing
disclosure requirements. New disclosures required include the
amount of significant transfers in and out of levels 1 and
2 fair value measurements and the reasons for the transfers. In
addition, the reconciliation for level 3 activity will be
required on a gross rather than net basis. The ASU provides
additional guidance related to the level of disaggregation in
determining classes of assets and liabilities and disclosures
about inputs and valuation techniques. The amendments are
effective for annual or interim reporting periods beginning
after December 15, 2009, except for the requirement to
provide the reconciliation for level 3 activity on a gross
basis which will be effective for fiscal years beginning after
December 15, 2010. (See Note 21).
| 4. | ACQUISITIONS |
On October 2, 2009, Huntington assumed the deposits and
certain assets of Warren Bank located in Macomb County, Michigan
from the Federal Deposit Insurance Corporation (FDIC). Under the
agreement, approximately $410.0 million of deposits and
$66.2 million of other assets (primarily cash and due from
banks and investment securities) were transferred to Huntington
for consideration including a premium for the deposits of
$0.9 million. The FDIC transferred cash to Huntington for
the difference between the assets purchased and the liabilities
assumed net of the premium. Goodwill of $0.6 million was
established related to this transaction.
| 5. | LOANS AND LEASES |
At December 31, 2009, $8.5 billion of commercial and
industrial loans and home equity loans were pledged to secure
potential discount window borrowings from the Federal Reserve
Bank, and $8.0 billion of real estate loans were pledged to
secure advances from the Federal Home Loan Bank.
Huntington’s loan and lease portfolio includes lease
financing receivables consisting of direct financing leases on
equipment, which are included in commercial and industrial
loans, and on automobiles. Net investments in lease financing
receivables by category at December 31 were as follows:
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Commercial and industrial
|
||||||||
|
Lease payments receivable
|
$ | 934,470 | $ | 1,119,487 | ||||
|
Estimated residual value of leased assets
|
54,635 | 56,705 | ||||||
|
Gross investment in commercial lease financing receivables
|
989,105 | 1,176,192 | ||||||
|
Net deferred origination costs
|
3,207 | 3,946 | ||||||
|
Unearned income
|
(109,090 | ) | (151,296 | ) | ||||
|
Total net investment in commercial lease financing
receivables
|
$ | 883,222 | $ | 1,028,842 | ||||
|
Consumer
|
||||||||
|
Lease payments receivable
|
$ | 91,099 | $ | 246,919 | ||||
|
Estimated residual value of leased assets
|
171,610 | 362,512 | ||||||
|
Gross investment in consumer lease financing receivables
|
262,709 | 609,431 | ||||||
|
Net deferred origination fees
|
(384 | ) | (840 | ) | ||||
|
Unearned income
|
(16,060 | ) | (45,174 | ) | ||||
|
Total net investment in consumer lease financing
receivables
|
$ | 246,265 | $ | 563,417 | ||||
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The future lease rental payments due from customers on direct
financing leases at December 31, 2009, totaled
$1.0 billion and were as follows: $0.4 billion in
2010; $0.3 billion in 2011; $0.2 billion in 2012;
$0.1 billion in 2013; and less than $0.1 billion in
2014 and thereafter.
Other than the credit risk concentrations described below, there
were no other economic, industry, or geographic concentrations
of credit risk greater than 10% of total loans in the loan and
lease portfolio at December 31, 2009.
Franklin
Credit Management relationship
Franklin Credit Management Corporation (Franklin) is a specialty
consumer finance company primarily engaged in servicing
residential mortgage loans. At December 31, 2008,
Huntington’s total loans outstanding to Franklin were
$650.2 million, all of which were on nonaccrual status.
Additionally, the specific ALLL for the Franklin portfolio was
$130.0 million, resulting in a net exposure to Franklin at
December 31, 2008 of $520.2 million. The collateral to
Huntington’s loans was a Franklin owned portfolio of loans
secured by first and second liens on 1-4 family residential
properties.
On March 31, 2009, Huntington entered into a transaction
with Franklin whereby a Huntington wholly-owned REIT subsidiary
(REIT) exchanged a non controlling amount of certain equity
interests for a 100% interest in Franklin Asset Merger Sub, LLC
(Merger Sub), a wholly owned subsidiary of Franklin. This was
accomplished by merging Merger Sub into a wholly-owned
subsidiary of REIT. Merger Sub’s sole assets were two trust
participation certificates evidencing 83% ownership rights in a
newly created trust, Franklin Mortgage Asset
Trust 2009-A
(Franklin 2009 Trust) which holds all the underlying consumer
loans and OREO that were formerly collateral for the Franklin
commercial loans. The equity interests provided to Franklin by
REIT were pledged by Franklin as collateral for the Franklin
commercial loans.
Franklin 2009 Trust is a variable interest entity and, as a
result of Huntington’s 83% participation certificates,
Franklin 2009 Trust was consolidated into Huntington’s
financial results. The consolidation was recorded as a business
combination with the fair value of the equity interests issued
to Franklin representing the acquisition price.
ASC 310 (formerly
SOP 03-3)
provides guidance for accounting for acquired loans, such as
these, that have experienced a deterioration of credit quality
at the time of acquisition for which it is probable that the
investor will be unable to collect all contractually required
payments.
The excess of cash flows expected at acquisition over the
estimated fair value is referred to as the accretable discount
and is recognized in interest income over the remaining life of
the loan, or pool of loans, in situations where there is a
reasonable expectation about the timing and amount of cash flows
expected to be collected. The difference between the
contractually required payments at acquisition and the cash
flows expected to be collected at acquisition, considering the
impact of prepayments, is referred to as the nonaccretable
discount. Subsequent decreases to the expected cash flows will
generally result in an increase to the allowance for loan and
lease losses. Subsequent increases in cash flows result in
reversal of any nonaccretable discount (or allowance for loan
and lease losses to the extent any has been recorded) with a
positive impact on interest income. The measurement of
undiscounted cash flows involves assumptions and judgments for
credit risk, interest rate risk, prepayment risk, default rates,
loss severity, payment speeds, and collateral values. All of
these factors are inherently subjective and significant changes
in the cash flow estimates over the life of the loan can result.
At December 31, 2009, there were no additional credit
losses recorded on the portfolio and no adjustment to the
accretable yield or nonaccretable yield was required.
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The following table reflects the contractually required payments
receivable, cash flows expected to be collected, and fair value
of the loans at the acquisition date on March 31, 2009:
| Loans | OREO | Total | ||||||||||
| (In thousands) | ||||||||||||
|
Contractually required payments including interest
|
$ | 1,612,695 | $ | 113,732 | $ | 1,726,427 | ||||||
|
Less: nonaccretable difference
|
(1,079,362 | ) | (34,136 | ) | (1,113,498 | ) | ||||||
|
Cash flows expected to be collected
|
533,333 | 79,596 | 612,929 | |||||||||
|
Less: accretable yield
|
(39,781 | ) | — | (39,781 | ) | |||||||
|
Fair value of loans acquired
|
$ | 493,552 | $ | 79,596 | $ | 573,148 | ||||||
The fair values of the acquired mortgage loans and OREO assets
were based upon a market participant model. Under this market
participant model, expected cash flows for first-lien mortgages
were calculated based upon the net expected foreclosure proceeds
of the collateral underlying each mortgage loan. Appraisals or
other indicators of value provided the basis for estimating cash
flows. Sales proceeds from the underlying collateral were
estimated to be received over a one to three year period,
depending on the delinquency status of the loan. Expected
proceeds were reduced assuming housing price depreciation of
18%, 12%, and 0% over each year of the next three years of
expected collections, respectively. Principal and interest cash
flows were estimated to be received for a limited time for non
delinquent loans. Limited value was assigned to all second-lien
mortgages because, after considering the house price
depreciation rates above, little if any proceeds would be
realized. The resulting cash flows were discounted at an 18%
rate of return.
The following table presents a rollforward of the accretable
yield from the beginning of the period to the end of the period:
|
Accretable
|
||||
| Yield | ||||
| (In thousands) | ||||
|
Balance at December 31, 2008
|
$ | — | ||
|
Impact of Franklin transaction on March 31, 2009
|
39,781 | |||
|
Additions
|
— | |||
|
Accretion
|
(4,495 | ) | ||
|
Reclassification from (to) nonaccretable difference
|
— | |||
|
Balance at December 31, 2009
|
$ | 35,286 | ||
The following table reflects the outstanding balance of all
contractually required payments and carrying amounts of the
acquired loans at December 31, 2009:
|
Carrying
|
Outstanding
|
|||||||
| Value | Balance | |||||||
| (In thousands) | ||||||||
|
Residential mortgage
|
$ | 373,117 | $ | 680,068 | ||||
|
Home equity
|
70,737 | 810,139 | ||||||
|
Total
|
$ | 443,854 | $ | 1,490,207 | ||||
At December 31, 2009, $129.2 million of the loans
accrue interest while $314.7 million were on nonaccrual.
Management has concluded that it cannot reliably estimate the
timing of collection of cash flows for delinquent first and
second lien mortgages, because the majority of the expected cash
flows for the delinquent portfolio will result from the
foreclosure and subsequent disposition of the underlying
collateral supporting the loans.
The consolidation of Franklin 2009 Trust at March 31, 2009
resulted in the recording of a $95.8 million liability,
representing the 17% of Franklin 2009 Trust certificates not
acquired by Huntington. At December 31, 2009, the balance
of the liability was $79.9 million. These certificates were
retained by Franklin.
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In accordance with ASC 805, at March 31, 2009 Huntington
has recorded a net deferred tax asset of $159.9 million
related to the difference between the tax basis and the book
basis in the acquired assets. Because the acquisition price,
represented by the equity interests in the Huntington
wholly-owned subsidiary, was equal to the fair value of the 83%
interest in the Franklin 2009 Trust participant certificate, no
goodwill was created from the transaction. The recording of the
net deferred tax asset resulted in a bargain purchase under ASC
805, and, therefore, was recorded as tax benefit in the 2009
first quarter.
Single
Family Home Builders
At December 31, 2009, Huntington had $857.4 million of
loans to single family homebuilders, including loans made to
both middle market and small business homebuilders. Such loans
represented 2% of total loans and leases. Of this portfolio, 67%
were to finance projects currently under construction, 15% to
finance land under development, and 18% to finance land held for
development. The decline from December 31, 2008 was
primarily the result of a reclassification of loans from
commercial real estate to commercial and industrial. Other
factors contributing to the decrease in exposure include no new
originations in this portfolio segment in 2009, increased
property sale activity, and substantial charge-offs.
The housing market across Huntington’s geographic footprint
remained stressed, reflecting relatively lower sales activity,
declining prices, and excess inventories of houses to be sold,
particularly impacting borrowers in our eastern Michigan and
northern Ohio regions. Further, a portion of the loans extended
to borrowers located within Huntington’s geographic regions
was to finance projects outside of our geographic regions.
Retail
properties
Huntington’s portfolio of commercial real estate loans
secured by retail properties totaled $2.1 billion, or
approximately 6% of total loans and leases, at December 31,
2009. Loans to this borrower segment decreased by
$0.2 billion from $2.3 billion at December 31,
2008. Credit approval in this loan segment is generally
dependant on pre-leasing requirements, and net operating income
from the project must cover interest expense when the loan is
fully funded.
The weakness of the economic environment in the Company’s
geographic regions significantly impacted the projects that
secure the loans in this portfolio segment. Increased
unemployment levels compared with recent years, and the
expectation that these levels will continue to increase for the
foreseeable future, are expected to adversely affect our
borrowers’ ability to repay these loans.
Home
Equity and Residential Mortgage Loans (excluding loans in
Franklin 2009 Trust)
There is a potential for loan products to contain contractual
terms that give rise to a concentration of credit risk that may
increase a lending institution’s exposure to risk of
nonpayment or realization. Examples of these contractual terms
include loans that permit negative amortization, a
loan-to-value
of greater than 100%, and option adjustable-rate mortgages.
Huntington does not originate mortgage loan products that
contain these terms. Recent declines in housing prices have
likely eliminated a portion of the collateral for the home
equity portfolio, such that some loans originally underwritten
at an LTV of less than 100% are currently at higher than 100%.
Home equity loans totaled $7.6 billion at both
December 31, 2009 and 2008, or 21% and 18% of total loans
at the end of each respective period. At December 31, 2009,
84% of the home equity loans had a loan to value ratio at
origination of less than 90%.
As part of the Company’s loss mitigation process,
Huntington increased its efforts in 2008 and 2009 to
re-underwrite, modify, or restructure loans when borrowers are
experiencing payment difficulties, and these loan restructurings
are based on the borrower’s ability to repay the loan.
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Related
Party Transactions
Huntington has made loans to its officers, directors, and their
associates. These loans were made in the ordinary course of
business under normal credit terms, including interest rate and
collateralization, and do not represent more than the normal
risk of collection. These loans to related parties for the year
ended December 31 are summarized as follows:
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Balance, beginning of year
|
$ | 90,787 | $ | 96,393 | ||||
|
Loans made
|
28,608 | 121,417 | ||||||
|
Repayments
|
(45,831 | ) | (127,023 | ) | ||||
|
Balance, end of year
|
$ | 73,564 | $ | 90,787 | ||||
| 6. | INVESTMENT SECURITIES |
The following tables provide amortized cost, fair value, and
gross unrealized gains and losses recognized in accumulated
other comprehensive income by investment category at
December 31, 2009 and 2008.
| Unrealized | ||||||||||||||||
|
Amortized
|
Gross
|
Gross
|
Fair
|
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
U.S. Treasury
|
$ | 99,735 | $ | — | $ | (581 | ) | $ | 99,154 | |||||||
|
Federal Agencies
|
||||||||||||||||
|
Mortgage-backed securities
|
3,444,436 | 44,835 | (9,163 | ) | 3,480,108 | |||||||||||
|
TLGP securities
|
258,672 | 2,037 | (321 | ) | 260,388 | |||||||||||
|
Other agencies
|
2,724,815 | 6,346 | (4,158 | ) | 2,727,003 | |||||||||||
|
Total U.S. Government backed securities
|
6,527,658 | 53,218 | (14,223 | ) | 6,566,653 | |||||||||||
|
Municipal securities
|
118,447 | 6,424 | (86 | ) | 124,785 | |||||||||||
|
Private label CMO
|
534,377 | 99 | (57,157 | ) | 477,319 | |||||||||||
|
Asset backed securities(1)
|
1,128,474 | 7,709 | (155,867 | ) | 980,316 | |||||||||||
|
Other securities
|
439,132 | 296 | (587 | ) | 438,841 | |||||||||||
|
Total investment securities
|
$ | 8,748,088 | $ | 67,746 | $ | (227,920 | ) | $ | 8,587,914 | |||||||
| (1) | Amounts at December 31, 2009 include securities backed by automobile loans with a fair value of $309.4 million which meet the eligibility requirements for the Term Asset-Backed Securities Loan Facility, or “TALF,” administered by the Federal Reserve Bank of New York, and securities with a fair value of $161.0 million backed by student loans with a minimum 97% government guarantee. |
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| Unrealized | ||||||||||||||||
|
Amortized
|
Gross
|
Gross
|
Fair
|
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
December 31, 2008
|
||||||||||||||||
|
U.S. Treasury
|
$ | 11,141 | $ | 16 | $ | — | $ | 11,157 | ||||||||
|
Federal Agencies
|
||||||||||||||||
|
Mortgage-backed securities
|
1,625,656 | 18,822 | (16,897 | ) | 1,627,581 | |||||||||||
|
TLGP securities
|
— | — | — | — | ||||||||||||
|
Other agencies
|
587,500 | 16,748 | (8 | ) | 604,240 | |||||||||||
|
Total U.S. Government backed securities
|
2,224,297 | 35,586 | (16,905 | ) | 2,242,978 | |||||||||||
|
Municipal securities
|
710,148 | 13,897 | (13,699 | ) | 710,346 | |||||||||||
|
Private label CMO
|
674,506 | — | (150,991 | ) | 523,515 | |||||||||||
|
Asset backed securities
|
652,881 | — | (188,854 | ) | 464,027 | |||||||||||
|
Other securities
|
443,991 | 114 | (514 | ) | 443,591 | |||||||||||
|
Total investment securities
|
$ | 4,705,823 | $ | 49,597 | $ | (370,963 | ) | $ | 4,384,457 | |||||||
The following tables provide detail on investment securities
with unrealized losses aggregated by investment category and
length of time the individual securities have been in a
continuous loss position, at December 31, 2009 and 2008.
| Less than 12 Months | Over 12 Months | Total | ||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
December 31, 2009
|
||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 99,154 | $ | (581 | ) | $ | — | $ | — | $ | 99,154 | $ | (581 | ) | ||||||||||
|
Federal Agencies
|
||||||||||||||||||||||||
|
Mortgage-backed securities
|
1,324,960 | (9,163 | ) | — | — | 1,324,960 | (9,163 | ) | ||||||||||||||||
|
TLGP securities
|
49,675 | (321 | ) | — | — | 49,675 | (321 | ) | ||||||||||||||||
|
Other agencies
|
1,443,309 | (4,081 | ) | 6,475 | (77 | ) | 1,449,784 | (4,158 | ) | |||||||||||||||
|
Total U.S. Government backed securities
|
2,917,098 | (14,146 | ) | 6,475 | (77 | ) | 2,923,573 | (14,223 | ) | |||||||||||||||
|
Municipal securities
|
3,993 | (7 | ) | 3,741 | (79 | ) | 7,734 | (86 | ) | |||||||||||||||
|
Private label CMO
|
15,280 | (3,831 | ) | 452,439 | (53,326 | ) | 467,719 | (57,157 | ) | |||||||||||||||
|
Asset backed securities
|
236,451 | (8,822 | ) | 207,581 | (147,045 | ) | 444,032 | (155,867 | ) | |||||||||||||||
|
Other securities
|
39,413 | (372 | ) | 410 | (215 | ) | 39,823 | (587 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
$ | 3,212,235 | $ | (27,178 | ) | $ | 670,646 | $ | (200,742 | ) | $ | 3,882,881 | $ | (227,920 | ) | |||||||||
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| Less than 12 Months | Over 12 Months | Total | ||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands ) | ||||||||||||||||||||||||
|
December 31, 2008
|
||||||||||||||||||||||||
|
U.S. Treasury
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
Federal Agencies
|
||||||||||||||||||||||||
|
Mortgage-backed securities
|
417,988 | (16,897 | ) | — | — | 417,988 | (16,897 | ) | ||||||||||||||||
|
TLGP securities
|
— | — | — | — | — | — | ||||||||||||||||||
|
Other agencies
|
— | — | 2,028 | (8 | ) | 2,028 | (8 | ) | ||||||||||||||||
|
Total U.S. Government backed securities
|
417,988 | (16,897 | ) | 2,028 | (8 | ) | 420,016 | (16,905 | ) | |||||||||||||||
|
Municipal securities
|
276,990 | (6,951 | ) | 40,913 | (6,748 | ) | 317,903 | (13,699 | ) | |||||||||||||||
|
Private label CMO
|
449,494 | (130,914 | ) | 57,024 | (20,077 | ) | 506,518 | (150,991 | ) | |||||||||||||||
|
Asset backed securities
|
61,304 | (24,220 | ) | 164,074 | (164,634 | ) | 225,378 | (188,854 | ) | |||||||||||||||
|
Other securities
|
1,132 | (323 | ) | 1,149 | (191 | ) | 2,281 | (514 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
$ | 1,206,908 | $ | (179,305 | ) | $ | 265,188 | $ | (191,658 | ) | $ | 1,472,096 | $ | (370,963 | ) | |||||||||
Other securities at December 31, 2009 and 2008 include
$240.6 million of stock issued by the Federal Home Loan
Bank of Cincinnati, $45.7 million of stock issued by the
Federal Home Loan Bank of Indianapolis, and $90.4 million
and $141.7 million, respectively, of Federal Reserve Bank
stock. Other securities also include corporate debt and
marketable equity securities. At December 31, 2009 and
2008, Huntington did not have any material equity positions in
Federal National Mortgage Association (FNMA or Fannie Mae) and
the Federal Home Loan Mortgage Corporation (FHLMC or Freddie
Mac).
During the first quarter of 2010, Federal Home Loan Bank of
Cincinnati redeemed $75.0 million of stock held by
Huntington.
Contractual maturities of investment securities as of December
31 were:
| 2009 | 2008 | |||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Under 1 year
|
$ | 162,238 | $ | 164,768 | $ | 11,690 | $ | 11,709 | ||||||||
|
1 — 5 years
|
3,278,176 | 3,279,359 | 637,982 | 656,659 | ||||||||||||
|
6 — 10 years
|
1,013,065 | 1,019,152 | 225,186 | 231,226 | ||||||||||||
|
Over 10 years
|
3,863,487 | 3,694,008 | 3,394,931 | 3,049,334 | ||||||||||||
|
Non-marketable equity securities
|
376,640 | 376,640 | 427,973 | 427,973 | ||||||||||||
|
Marketable equity securities
|
54,482 | 53,987 | 8,061 | 7,556 | ||||||||||||
|
Total investment securities
|
$ | 8,748,088 | $ | 8,587,914 | $ | 4,705,823 | $ | 4,384,457 | ||||||||
Non-marketable equity securities are valued at amortized cost.
At December 31, 2009, the carrying value of investment
securities pledged to secure public and trust deposits, trading
account liabilities, U.S. Treasury demand notes, and
security repurchase agreements totaled $2.8 billion. There
were no securities of a single issuer, which are not
governmental or government-sponsored, that exceeded 10% of
shareholders’ equity at December 31, 2009.
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Table of Contents
The following table is a summary of securities gains and losses
for the years ended December 31, 2009, 2008 and 2007:
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Gross gains on sales of securities
|
$ | 59,762 | $ | 9,364 | 15,216 | |||||||
|
Gross (losses) on sales of securities
|
(10,947 | ) | (10 | ) | (1,680 | ) | ||||||
|
Net gain (loss) on sales of securities
|
48,815 | 9,354 | 13,536 | |||||||||
|
Net
other-than-temporary
impairment recorded
|
(59,064 | ) | (206,724 | ) | (43,274 | ) | ||||||
|
Total securities gain (loss)
|
$ | (10,249 | ) | $ | (197,370 | ) | (29,738 | ) | ||||
Huntington applied the related OTTI guidance as further
described in Note 1 on the debt security types listed below.
Alt-A mortgage-backed and private-label collateralized
mortgage obligation (CMO) securities
represent
securities collateralized by first-lien residential mortgage
loans. The securities are valued by a third party specialist
using a discounted cash flow approach and proprietary pricing
model. The model used inputs such as estimated prepayment
speeds, losses, recoveries, default rates that were implied by
the underlying performance of collateral in the structure or
similar structures, discount rates that were implied by market
prices for similar securities, collateral structure types, and
house price depreciation/appreciation rates that were based upon
macroeconomic forecasts.
Pooled-trust-preferred securities
represent
collateralized debt obligations (CDOs) backed by a pool of debt
securities issued by financial institutions. The collateral
generally consisted of trust-preferred securities and
subordinated debt securities issued by banks, bank holding
companies, and insurance companies. A full cash flow analysis
was used to estimate fair values and assess impairment for each
security within this portfolio. We engaged a third party
specialist with direct industry experience in pooled trust
preferred securities valuations to provide assistance in
estimating the fair value and expected cash flows for each
security in this portfolio.
Relying on cash flows was necessary because there was a lack of
observable transactions in the market and many of the original
sponsors or dealers for these securities were no longer able to
provide a fair value that was compliant with ASC 820.
For the period ended December 31, 2009, the following
tables summarizes by debt security type, total OTTI losses, OTTI
losses included in OCI, and OTTI recognized in the income
statement for securities evaluated for impairment as described
above
|
Alt-A
|
Pooled
|
Private
|
||||||||||||||
| Mortgage-Backed | Trust-Preferred | Label CMO | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Total OTTI losses (unrealized and realized)
|
$ | (16,906 | ) | $ | (131,902 | ) | $ | (30,727 | ) | $ | (179,535 | ) | ||||
|
Unrealized OTTI recognized in OCI
|
6,186 | 93,491 | 24,731 | 124,408 | ||||||||||||
|
Net impairment losses recognized in earnings
|
$ | (10,720 | ) | $ | (38,411 | ) | $ | (5,996 | ) | $ | (55,127 | ) | ||||
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The following table rolls forward the unrealized OTTI recognized
in OCI on debt securities held by Huntington for the year ended
December 31, 2009 as follows:
|
Alt-A
|
Pooled
|
Private
|
||||||||||||||
| Mortgage-Backed | Trust-Preferred | Label CMO | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Balance, beginning of year
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Credit losses not previous recognized
|
6,186 | 94,522 | 28,184 | 128,892 | ||||||||||||
|
Change in expected cash flows
|
— | (7,748 | ) | (3,453 | ) | (11,201 | ) | |||||||||
|
Additional credit losses
|
— | 6,717 | — | 6,717 | ||||||||||||
|
Balance, end of year
|
$ | 6,186 | $ | 93,491 | $ | 24,731 | $ | 124,408 | ||||||||
The fair values of these assets have been impacted by various
market conditions. The unrealized losses were primarily the
result of wider liquidity spreads on asset-backed securities
and, additionally, increased market volatility on non-agency
mortgage and asset-backed securities that are backed by certain
mortgage loans. In addition, the expected average lives of the
asset-backed securities backed by trust preferred securities
have been extended, due to changes in the expectations of when
the underlying securities would be repaid. The contractual terms
and/or
cash
flows of the investments do not permit the issuer to settle the
securities at a price less than the amortized cost. Huntington
does not intend to sell, nor does it believe it will be required
to sell these securities until the fair value is recovered,
which may be maturity and, therefore, does not consider them to
be
other-than-temporarily
impaired at December 31, 2009.
The following table displays the cumulative credit component of
OTTI recognized in earnings on debt securities held by
Huntington for the year ended December 31, 2009 is as
follows:
| 2009 | ||||
| (In thousands) | ||||
|
Balance, beginning of year
|
$ | — | ||
|
Credit component of OTTI not reclassified to OCI in conjunction
with the cumulative effect transition adjustment
|
24 | |||
|
Additions for the credit component on debt securities in which
OTTI was not previously recognized
|
55,127 | |||
|
Balance, end of year
|
$ | 55,151 | ||
As of December 31, 2009, management has evaluated all other
investment securities with unrealized losses and all
non-marketable securities for impairment and concluded no
additional
other-than-temporary
impairment is required.
| 7. | LOAN SALES AND SECURITIZATIONS |
Residential
Mortgage Loans
For the years ended December 31, 2009, 2008, and 2007,
Huntington sold $4.3 billion, $2.8 billion and
$1.9 billion of residential mortgage loans with servicing
retained, resulting in net pre-tax gains of $87.2 million,
$27.8 million and $23.9 million, respectively,
recorded in other non-interest income.
A MSR is established only when the servicing is contractually
separated from the underlying mortgage loans by sale or
securitization of the loans with servicing rights retained.
At initial recognition, the MSR asset is established at its fair
value using assumptions that are consistent with assumptions
used to estimate the fair value of existing MSRs carried at fair
value in the portfolio. At the time of initial capitalization,
MSRs are grouped into one of two categories depending on whether
Huntington intends to actively hedge the asset. MSR assets are
recorded using the fair value method if the Company will engage
in actively hedging the asset or recorded using the amortization
method if no active hedging will be performed. MSRs are included
in accrued income and other assets in the Company’s
consolidated balance
155
Table of Contents
sheet. Any increase or decrease in the fair value or amortized
cost of MSRs carried under the fair value method during the
period is recorded as an increase or decrease in mortgage
banking income, which is reflected in non-interest income in the
consolidated statements of income.
The following tables summarize the changes in MSRs recorded
using either the fair value method or the amortization method
for the years ended December 31, 2009 and 2008:
|
Fair Value Method
|
2009 | 2008 | ||||||
| (In thousands) | ||||||||
|
Fair value, beginning of year
|
$ | 167,438 | $ | 207,894 | ||||
|
New servicing assets created
|
23,074 | 38,846 | ||||||
|
Change in fair value during the period due to:
|
||||||||
|
Time decay(1)
|
(6,798 | ) | (7,842 | ) | ||||
|
Payoffs(2)
|
(38,486 | ) | (18,792 | ) | ||||
|
Changes in valuation inputs or assumptions(3)
|
34,305 | (52,668 | ) | |||||
|
Other changes
|
(3,106 | ) | — | |||||
|
Fair value, end of year
|
$ | 176,427 | $ | 167,438 | ||||
| (1) | Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns. | |
| (2) | Represents decrease in value associated with loans that paid off during the period. | |
| (3) | Represents change in value resulting primarily from market-driven changes in interest rates. |
|
Amortization Method
|
2009 | 2008 | ||||||
| (In thousands) | ||||||||
|
Carrying value, beginning of year
|
$ | — | $ | — | ||||
|
New servicing assets created
|
40,452 | — | ||||||
|
Amortization and other
|
(2,287 | ) | — | |||||
|
Carrying value, end of year
|
$ | 38,165 | $ | — | ||||
|
Fair value, end of year
|
$ | 43,769 | $ | — | ||||
MSRs do not trade in an active, open market with readily
observable prices. While sales of MSRs occur, the precise terms
and conditions are typically not readily available. Therefore,
the fair value of MSRs is estimated using a discounted future
cash flow model. The model considers portfolio characteristics,
contractually specified servicing fees and assumptions related
to prepayments, delinquency rates, late charges, other ancillary
revenues, costs to service, and other economic factors. Changes
in the assumptions used may have a significant impact on the
valuation of MSRs.
A summary of key assumptions and the sensitivity of the MSR
value at December 31, 2009 to changes in these assumptions
follows:
| Decline in Fair Value Due to | ||||||||||||
|
10%
|
20%
|
|||||||||||
|
Adverse
|
Adverse
|
|||||||||||
| Actual | Change | Change | ||||||||||
| (In thousands) | ||||||||||||
|
Constant pre-payment rate
|
10.26 | % | $ | (11,811 | ) | $ | (21,133 | ) | ||||
|
Spread over forward interest rate swap rates
|
483 | bps | (3,656 | ) | (7,312 | ) | ||||||
MSR values are very sensitive to movements in interest rates as
expected future net servicing income depends on the projected
outstanding principal balances of the underlying loans, which
can be greatly impacted by the level of prepayments. The Company
hedges against changes in MSR fair value attributable to changes
in interest rates through a combination of derivative
instruments and trading securities.
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Total servicing fees included in mortgage banking income
amounted to $48.5 million, $45.6 million, and
$36.0 million in 2009, 2008, and 2007, respectively. The
unpaid principal balance of residential mortgage loans serviced
for third parties was $16.0 billion, $15.8 billion,
and $15.1 billion at December 31, 2009, 2008, and
2007, respectively.
Automobile
Loans and Leases
During the first quarter of 2009, Huntington transferred
$1.0 billion automobile loans and leases to a trust in a
securitization transaction. The securitization qualified for
sale accounting under ASC 860. Huntington retained a portion of
the related securities, with par values totaling
$210.9 million and recorded a $47.1 million retained
residual interest as a result of the transaction. Subsequent to
the transaction, in the second quarter of 2009, Huntington sold
a portion of these securities with par values totaling
$78.4 million. These amounts were recorded as investment
securities on Huntington’s consolidated balance sheet.
Huntington also recorded a $5.9 million loss in other
noninterest income on the consolidated statement of income and
recorded a $19.5 million servicing asset in accrued income
and other assets associated with this transaction.
Automobile loan servicing rights are accounted for under the
amortization method. A servicing asset is established at fair
value at the time of the sale using the following assumptions:
actual servicing income of 0.55% — 1.00%, adequate
compensation for servicing of 0.50% — 0.65%, other
ancillary fees of approximately 0.37% — 0.50%, a
discount rate of 2% — 10% and an estimated return on
payments prior to remittance to investors. The servicing asset
is then amortized against servicing income. Impairment, if any,
is recognized when carrying value exceeds the fair value as
determined by calculating the present value of expected net
future cash flows. The primary risk characteristic for measuring
servicing assets is payoff rates of the underlying loan pools.
Valuation calculations rely on the predicted payoff assumption
and, if actual payoff is quicker than expected, then future
value would be impaired.
Changes in the carrying value of automobile loan servicing
rights for the years ended December 31, 2009 and 2008, and
the fair value at the end of each period were as follows:
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Carrying value, beginning of year
|
$ | 1,656 | $ | 4,099 | ||||
|
New servicing assets created
|
19,538 | — | ||||||
|
Amortization and other
|
(8,282 | ) | (2,443 | ) | ||||
|
Carrying value, end of year
|
$ | 12,912 | $ | 1,656 | ||||
|
Fair value, end of year
|
$ | 14,985 | $ | 1,926 | ||||
Huntington has retained servicing responsibilities on sold
automobile loans and receives annual servicing fees and other
ancillary fees on the outstanding loan balances. Servicing
income, net of amortization of capitalized servicing assets,
amounted to $6.4 million, $6.8 million and
$11.9 million for the years ended December 31, 2009,
2008 and 2007, respectively. The unpaid principal balance of
automobile loans serviced for third parties was
$1.1 billion, $0.5 billion , and $1.0 billion at
December 31, 2009, 2008 and 2007, respectively.
At December 31, 2009, retained interests in automobile
securitizations totaled $45.9 million. Quoted market prices
are generally not available for retained interests in automobile
securitizations. At December 31,
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Table of Contents
2009, the key economic assumptions used to measure the fair
value of retained interests and the sensitivity of such fair
value to immediate 10% and 20% adverse changes in those
assumptions were as follows:
| Decline in Fair Value Due to | ||||||||||||
|
10%
|
20%
|
|||||||||||
|
Adverse
|
Adverse
|
|||||||||||
| Actual | Change | Change | ||||||||||
| (In thousands) | ||||||||||||
|
Monthly prepayment rate (ABS curve)
|
1.3 | $ | (361 | ) | $ | (642 | ) | |||||
|
Expected cumulative credit losses
|
3.0 | % | (2,919 | ) | (5,756 | ) | ||||||
|
Discount rate
|
11.0 | (1,697 | ) | (3,325 | ) | |||||||
|
Certain cash flows received from the securitization trusts
during 2009 were:
|
||||||||||||
|
Servicing fees received
|
$ | 6,838 | ||||||||||
|
Other cash flows on retained interest
|
6,934 | |||||||||||
| 8. | ALLOWANCES FOR CREDIT LOSSES (ACL) |
The Company maintains two reserves, both of which are available
to absorb possible credit losses: an allowance for loan and
lease losses (ALLL) and an allowance for unfunded loan
commitments and letters of credit (AULC). When summed together,
these reserves constitute the total allowances for credit losses
(ACL). A summary of the transactions in the allowances for
credit losses and details regarding impaired loans and leases
follows for the three years ended December 31, 2009, 2008
and 2007:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Allowance for loan and leases losses, beginning of year
(ALLL)
|
$ | 900,227 | $ | 578,442 | $ | 272,068 | ||||||
|
Acquired allowance for loan and lease losses
|
— | — | 188,128 | |||||||||
|
Loan and lease losses
|
(1,561,378 | ) | (806,329 | ) | (517,943 | ) | ||||||
|
Recoveries of loans previously charged off
|
84,791 | 48,262 | 40,312 | |||||||||
|
Net loan and lease losses
|
(1,476,587 | ) | (758,067 | ) | (477,631 | ) | ||||||
|
Provision for loan and lease losses
|
2,069,931 | 1,067,789 | 628,802 | |||||||||
|
Economic reserve transfer
|
— | 12,063 | — | |||||||||
|
Allowance for assets sold and securitized
|
(9,188 | ) | — | — | ||||||||
|
Allowance for loans transferred to
held-for-sale
|
(1,904 | ) | — | (32,925 | ) | |||||||
|
Allowance for loan and lease losses, end of year
|
$ | 1,482,479 | $ | 900,227 | $ | 578,442 | ||||||
|
Allowance for unfunded loan commitments and letters of
credit, beginning of year (AULC)
|
$ | 44,139 | $ | 66,528 | $ | 40,161 | ||||||
|
Acquired AULC
|
— | — | 11,541 | |||||||||
|
Provision for (reduction in) unfunded loan commitments and
letters of credit losses
|
4,740 | (10,326 | ) | 14,826 | ||||||||
|
Economic reserve transfer
|
— | (12,063 | ) | — | ||||||||
|
Allowance for unfunded loan commitments and letters of
credit, end of year
|
$ | 48,879 | $ | 44,139 | $ | 66,528 | ||||||
|
Total allowances for credit losses (ACL)
|
$ | 1,531,358 | $ | 944,366 | $ | 644,970 | ||||||
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| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Recorded balance of impaired loans, at end of year(1):
|
||||||||||||
|
With specific reserves assigned to the loan and lease balances(2)
|
$ | 873,215 | $ | 1,122,575 | $ | 1,318,518 | ||||||
|
With no specific reserves assigned to the loan and lease balances
|
221,384 | 75,799 | 33,062 | |||||||||
|
Total
|
$ | 1,094,599 | $ | 1,198,374 | $ | 1,351,580 | ||||||
|
Average balance of impaired loans for the year(1)
|
$ | 1,010,044 | $ | 1,369,857 | $ | 424,797 | ||||||
|
Allowance for loan and lease losses on impaired loans(1)
|
175,442 | 301,457 | 142,058 | |||||||||
| (1) | 2009 includes impaired commercial and industrial loans and commercial real estate loans with outstanding balances greater than $1 million. 2008 and prior periods includes impaired commercial and industrial loans and commercial real estate loans with outstanding balances greater than $1 million for business-banking loans, and $500,000 for all other loans. A loan is impaired when it is probable that Huntington will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are included in non-performing assets. The amount of interest recognized in 2009, 2008 and 2007 on impaired loans while they were considered impaired was $0.1 million, $55.8 million, and $0.9 million, respectively. The recovery of the investment in impaired loans with no specific reserves generally is expected from the sale of collateral, net of costs to sell that collateral. | |
| (2) | As a result of the troubled debt restructuring , the loans to Franklin of $1.2 billion and $0.7 billion are included in impaired loans at the end of 2007 and 2008, respectively. |
As shown in the table above, in 2008, the economic reserve
component of the AULC was reclassified to the economic reserve
component of the ALLL, resulting in the entire economic reserve
component of the ACL residing in the ALLL.
The $582.3 million increase in the ALLL primarily reflected
an increase in specific reserves associated with impaired loans
and an increase associated with risk-grade migration,
predominantly in the commercial portfolio. The increase is also
the result of a change in estimate resulting from the 2009
fourth quarter review of our ACL practices and assumptions,
consisting of:
| • | Approximately $200 million increase in the judgmental component. | |
| • | Approximately $200 million allocated primarily to the commercial real estate (CRE) portfolio addressing the severity of CRE loss-given-default percentages and a longer term view of the loss emergence time period. | |
| • | Approximately $50 million from updating the consumer reserve factors to include the current delinquency status. |
Partially offset by:
| • | $130 million of previously established Franklin specific reserves utilized to absorb related net charge-offs due to the 2009 first quarter Franklin restructuring. |
| 9. | GOODWILL AND OTHER INTANGIBLE ASSETS |
During the second quarter of 2009, Huntington reorganized its
internal reporting structure. The Regional Banking reporting
unit, which through March 31, 2009 had been managed
geographically, is now managed on a product segment approach.
Regional Banking was divided into Retail and Business Banking,
Commercial Banking, and Commercial Real Estate segments.
Regional Banking goodwill was assigned to the new reporting
units affected using a relative fair value allocation. Auto
Finance and Dealer Services (AFDS), Private Financial Group
(PFG), and Treasury / Other remained essentially
unchanged. A rollforward of goodwill by
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Table of Contents
line of business for the years ended December 31, 2009 and
2008, including the reallocation noted above, was as follows:
|
Retail &
|
||||||||||||||||||||||||||||
|
Regional
|
Business
|
Commercial
|
Commercial
|
Treasury/
|
Huntington
|
|||||||||||||||||||||||
| Banking | Banking | Banking | Real Estate | PFG | Other | Consolidated | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
|
Balance, January 1, 2008
|
$ | 2,906,155 | $ | — | $ | — | $ | — | $ | 87,517 | $ | 65,661 | $ | 3,059,333 | ||||||||||||||
|
Adjustments
|
(17,811 | ) | — | — | — | 65,661 | (52,198 | ) | (4,348 | ) | ||||||||||||||||||
|
Balance, December 31, 2008
|
2,888,344 | — | — | — | 153,178 | 13,463 | 3,054,985 | |||||||||||||||||||||
|
Impairment, March 31, 2009
|
(2,573,818 | ) | — | — | — | (28,895 | ) | — | (2,602,713 | ) | ||||||||||||||||||
|
Reallocation of goodwill
|
(314,526 | ) | 309,518 | 5,008 | — | — | — | — | ||||||||||||||||||||
|
Balance, April 1, 2009
|
— | 309,518 | 5,008 | — | 124,283 | 13,463 | 452,272 | |||||||||||||||||||||
|
Goodwill acquired
|
||||||||||||||||||||||||||||
|
during the period
|
— | 620 | — | — | — | — | 620 | |||||||||||||||||||||
|
Impairment
|
— | — | — | — | — | (4,231 | ) | (4,231 | ) | |||||||||||||||||||
|
Other adjustments
|
— | — | — | — | — | (4,393 | ) | (4,393 | ) | |||||||||||||||||||
|
Balance, December 31, 2009
|
$ | — | $ | 310,138 | $ | 5,008 | $ | — | $ | 124,283 | $ | 4,839 | $ | 444,268 | ||||||||||||||
Goodwill is not amortized but is evaluated for impairment on an
annual basis at October 1st of each year or whenever
events or changes in circumstances indicate that the carrying
value may not be recoverable. During the first quarter of 2009,
Huntington experienced a sustained decline in its stock price,
which was primarily attributable to the continuing economic
slowdown and increased market concern surrounding financial
institutions’ credit risks and capital positions as well as
uncertainty related to increased regulatory supervision and
intervention. Huntington determined that these changes would
more likely than not reduce the fair value of certain reporting
units below their carrying amounts. Therefore, Huntington
performed a goodwill impairment test, which resulted in a
goodwill impairment charge of $2.6 billion in the first
quarter of 2009. An impairment charge of $4.2 million was
recorded in the second quarter related to the sale of a small
payments-related business completed in July 2009. Huntington
concluded that no other goodwill impairment was required during
2009.
Goodwill acquired during the period was the result of
Huntington’s assumption of the deposits and certain assets
of Warren Bank in October 2009.
There were no goodwill impairment charges recorded prior to
December 31, 2008. The change in consolidated goodwill for
the year ended December 31, 2008, primarily related to
final purchase accounting adjustments of acquired bank branches,
operating facilities, and other contingent obligations primarily
from an acquisition made on July 1, 2007. Huntington also
transferred goodwill between businesses in response to other
organizational changes. Huntington does not expect a material
amount of goodwill from mergers in 2009 or 2007 to be deductible
for tax purposes.
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Table of Contents
At December 31, 2009 and 2008, Huntington’s other
intangible assets consisted of the following:
|
Gross
|
Net
|
|||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
||||||||||
| Amount | Amortization | Value | ||||||||||
| (In thousands) | ||||||||||||
|
December 31, 2009
|
||||||||||||
|
Core deposit intangible
|
$ | 376,846 | $ | (168,651 | ) | $ | 208,195 | |||||
|
Customer relationship
|
104,574 | (26,000 | ) | 78,574 | ||||||||
|
Other
|
26,465 | (24,136 | ) | 2,329 | ||||||||
|
Total other intangible assets
|
$ | 507,885 | $ | (218,787 | ) | $ | 289,098 | |||||
|
December 31, 2008
|
||||||||||||
|
Core deposit intangible
|
$ | 373,300 | $ | (111,163 | ) | $ | 262,137 | |||||
|
Customer relationship
|
104,574 | (16,776 | ) | 87,798 | ||||||||
|
Other
|
29,327 | (22,559 | ) | 6,768 | ||||||||
|
Total other intangible assets
|
$ | 507,201 | $ | (150,498 | ) | $ | 356,703 | |||||
The estimated amortization expense of other intangible assets
for the next five years is as follows:
|
Amortization
|
||||
| Expense | ||||
| (In thousands) | ||||
|
2010
|
$ | 60,455 | ||
|
2011
|
53,342 | |||
|
2012
|
46,130 | |||
|
2013
|
40,525 | |||
|
2014
|
35,843 | |||
| 10. | PREMISES AND EQUIPMENT |
At December 31, premises and equipment were comprised of
the following:
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Land and land improvements
|
$ | 118,875 | $ | 119,042 | ||||
|
Buildings
|
355,352 | 352,294 | ||||||
|
Leasehold improvements
|
194,405 | 185,278 | ||||||
|
Equipment
|
571,307 | 557,653 | ||||||
|
Total premises and equipment
|
1,239,939 | 1,214,267 | ||||||
|
Less accumulated depreciation and amortization
|
(743,918 | ) | (694,767 | ) | ||||
|
Net premises and equipment
|
$ | 496,021 | $ | 519,500 | ||||
Depreciation and amortization charged to expense and rental
income credited to net occupancy expense for the three years
ended December 31, 2009, 2008 and 2007 were:
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Total depreciation and amortization of premises and equipment
|
$ | 66,089 | $ | 77,956 | $ | 64,052 | ||||||
|
Rental income credited to occupancy expense
|
11,755 | 12,917 | 12,808 | |||||||||
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Table of Contents
| 11. | SHORT-TERM BORROWINGS |
At December 31, short-term borrowings were comprised of the
following:
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Federal funds purchased
|
$ | 800 | $ | 50,643 | ||||
|
Securities sold under agreements to repurchase
|
850,485 | 1,238,484 | ||||||
|
Other borrowings
|
24,956 | 20,030 | ||||||
|
Total short-term borrowings
|
$ | 876,241 | $ | 1,309,157 | ||||
Other borrowings consist of borrowings from the
U.S. Treasury and other notes payable.
| 12. | FEDERAL HOME LOAN BANK ADVANCES |
Huntington’s long-term advances from the Federal Home Loan
Bank had weighted average interest rates of 0.88% and 1.23% at
December 31, 2009 and 2008, respectively. These advances,
which predominantly had variable interest rates, were
collateralized by qualifying real estate loans. As of
December 31, 2009 and 2008, Huntington’s maximum
borrowing capacity was $3.0 billion and $4.6 billion,
respectively. The advances outstanding at December 31, 2009
of $169.0 million mature as follows: $142.0 million in
2010; $4.9 million in 2011; none in 2012;
$13.9 million in 2013; and $8.2 million in 2014 and
thereafter.
| 13. | OTHER LONG-TERM DEBT |
At December 31, Huntington’s other long-term debt
consisted of the following:
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
1.66% The Huntington National Bank medium-term notes due through
2018(1)
|
$ | 788,397 | $ | 505,177 | ||||
|
1.34% Securitization trust notes payable due through 2012
|
— | 4,005 | ||||||
|
0.90% Securitization trust notes payable due through 2013(2)
|
1,059,249 | 721,555 | ||||||
|
4.62% Securitization trust note payable due 2018(3)
|
391,954 | 1,050,895 | ||||||
|
7.88% Class C preferred securities of REIT subsidiary, no
maturity
|
50,000 | 50,000 | ||||||
|
Franklin 2009 Trust liability(4)
|
79,891 | — | ||||||
|
Total other long-term debt
|
$ | 2,369,491 | $ | 2,331,632 | ||||
| (1) | Bank notes had fixed rates with a weighted-average interest rate of 1.66% at December 31, 2009. | |
| (2) | Variable effective rate at December 31, 2009, based on one month LIBOR + 0.67 or 0.90%. | |
| (3) | Combination of fixed and variable rates with a weighted average interest rate of 4.62% at December 31, 2009. | |
| (4) | Franklin 2009 Trust liability was a result of the consolidation of Franklin 2009 Trust on March 31, 2009. |
See Note 5 for more information regarding the Franklin
relationship.
Amounts above are net of unamortized discounts and adjustments
related to hedging with derivative financial instruments. The
derivative instruments, principally interest rate swaps, are
used to hedge the fair values of certain fixed-rate debt by
converting the debt to a variable rate. See Note 22 for
more information regarding such financial instruments.
In the 2009 first quarter, the Bank issued $600 million of
guaranteed debt through the Temporary Liquidity Guarantee
Program (TLGP) with the FDIC. The majority of the resulting
proceeds were used to satisfy unsecured other long-term debt
obligations maturing in 2009.
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Table of Contents
Other long-term debt maturities for the next five years are as
follows: $0.2 billion in 2010; none in 2011,
$0.9 billion in 2012; $0.1 billion in 2013, none in
2014 and $1.2 billion thereafter. These maturities are
based upon the par values of long-term debt.
The terms of the other long-term debt obligations contain
various restrictive covenants including limitations on the
acquisition of additional debt in excess of specified levels,
dividend payments, and the disposition of subsidiaries. As of
December 31, 2009, Huntington was in compliance with all
such covenants.
| 14. | SUBORDINATED NOTES |
At December 31, Huntington’s subordinated notes
consisted of the following:
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Parent company:
|
||||||||
|
6.21% subordinated notes due 2013
|
$ | 48,732 | $ | 48,391 | ||||
|
0.98% junior subordinated debentures due 2027(1)
|
138,816 | 158,366 | ||||||
|
0.88% junior subordinated debentures due 2028(2)
|
60,093 | 71,093 | ||||||
|
8.54% junior subordinated debentures due 2029
|
23,299 | 23,347 | ||||||
|
7.33% junior subordinated debentures due 2030
|
64,971 | 65,910 | ||||||
|
3.45% junior subordinated debentures due 2033(3)
|
30,929 | 30,929 | ||||||
|
3.76% junior subordinated debentures due 2033(4)
|
6,186 | 6,186 | ||||||
|
1.23% junior subordinated debentures due 2036(5)
|
77,809 | 78,136 | ||||||
|
1.27% junior subordinated debentures due 2036(5)
|
77,810 | 78,137 | ||||||
|
6.69% junior subordinated debentures due 2067(6)
|
114,045 | 249,408 | ||||||
|
The Huntington National Bank:
|
||||||||
|
8.18% subordinated notes due 2010
|
84,144 | 143,261 | ||||||
|
6.21% subordinated notes due 2012
|
64,861 | 64,816 | ||||||
|
5.00% subordinated notes due 2014
|
133,930 | 221,727 | ||||||
|
5.59% subordinated notes due 2016
|
112,385 | 284,048 | ||||||
|
5.67% subordinated notes due 2018
|
144,202 | 244,769 | ||||||
|
5.45% subordinated notes due 2019
|
81,990 | 181,573 | ||||||
|
Total subordinated notes
|
$ | 1,264,202 | $ | 1,950,097 | ||||
| (1) | Variable effective rate at December 31, 2009, based on three month LIBOR + 0.70. | |
| (2) | Variable effective rate at December 31, 2009, based on three month LIBOR + 0.625. | |
| (3) | Variable effective rate at December 31, 2009, based on three month LIBOR + 2.95. | |
| (4) | Variable effective rate at December 31, 2009, based on three month LIBOR + 3.25. | |
| (5) | Variable effective rate at December 31, 2009, based on three month LIBOR + 1.40. | |
| (6) | The junior subordinated debentures due 2067 are subordinate to all other junior subordinated debentures. |
Amounts above are reported net of unamortized discounts and
adjustments related to hedging with derivative financial
instruments. The derivative instruments, principally interest
rate swaps, are used to match the funding rates on certain
assets to hedge the interest rate values of certain fixed-rate
debt by converting the debt to a variable rate. See Note 22
for more information regarding such financial instruments. All
principal is due upon maturity of the note as described in the
table above.
During 2009, Huntington repurchased $702.4 million of
junior subordinated debentures, bank subordinated notes and
medium-term notes resulting in net pre-tax gains of
$147.4 million. In 2008, $48.5 million of the junior
subordinated debentures were repurchased resulting in net
pre-tax gains of $23.5 million.
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These transactions have been recorded as gains on early
extinguishment of debt, a reduction of noninterest expense in
the consolidated financial statements.
| 15. | OTHER COMPREHENSIVE INCOME |
The components of Huntington’s other comprehensive income
in the three years ended December 31, were as follows:
| 2009 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-Tax | ||||||||||
| (In thousands) | ||||||||||||
|
Cumulative effect of change in accounting principle for OTTI
debt securities
|
$ | (5,448 | ) | $ | 1,907 | $ | (3,541 | ) | ||||
|
Non-credit-related impairment losses on debt securities not
expected to be sold
|
(124,408 | ) | 43,543 | (80,865 | ) | |||||||
|
Unrealized holding gains (losses) on debt securities available
for sale arising during the period
|
280,789 | (98,678 | ) | 182,111 | ||||||||
|
Less: Reclassification adjustment for net losses (gains) losses
included in net income
|
10,249 | (3,587 | ) | 6,662 | ||||||||
|
Net change in unrealized holding gains (losses) on debt
securities available for sale
|
166,630 | (58,722 | ) | 107,908 | ||||||||
|
Unrealized holding gains (losses) on equity securities available
for sale arising during the period
|
10 | (3 | ) | 7 | ||||||||
|
Less: Reclassification adjustment for net losses (gains) losses
included in net income
|
— | — | — | |||||||||
|
Net change in unrealized holding gains (losses) on equity
securities available for sale
|
10 | (3 | ) | 7 | ||||||||
|
Unrealized gains and losses on derivatives used in cash flow
hedging relationships arising during the period
|
21,888 | (7,661 | ) | 14,227 | ||||||||
|
Change in pension and post-retirement benefit plan assets and
liabilities
|
78,626 | (27,519 | ) | 51,107 | ||||||||
|
Total other comprehensive income (loss)
|
$ | 261,706 | $ | (91,998 | ) | $ | 169,708 | |||||
164
Table of Contents
| 2008 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-Tax | ||||||||||
| (In thousands) | ||||||||||||
|
Unrealized holding (losses) gains on debt securities available
for sale arising during the period
|
$ | (502,756 | ) | $ | 177,040 | $ | (325,716 | ) | ||||
|
Less: Reclassification adjustment for net losses (gains) losses
included in net income
|
197,370 | (69,080 | ) | 128,290 | ||||||||
|
Net change in unrealized holding (losses) gains on debt
securities available for sale
|
(305,386 | ) | 107,960 | (197,426 | ) | |||||||
|
Unrealized holding (losses) gains on equity securities available
for sale arising during the period
|
(490 | ) | 171 | (319 | ) | |||||||
|
Less: Reclassification adjustment for net losses (gains) losses
included in net income
|
— | — | — | |||||||||
|
Net change in unrealized holding (losses) gains on equity
securities available for sale
|
(490 | ) | 171 | (319 | ) | |||||||
|
Unrealized gains and losses on derivatives used in cash flow
hedging relationships arising during the period
|
61,669 | (21,584 | ) | 40,085 | ||||||||
|
Cumulative effect of changing measurement date provisions for
pension and post-retirement assets and obligations
|
(5,898 | ) | 2,064 | (3,834 | ) | |||||||
|
Change in pension and post-retirement benefit plan assets and
liabilities
|
(177,828 | ) | 62,240 | (115,588 | ) | |||||||
|
Total other comprehensive (loss) income
|
$ | (427,933 | ) | $ | 150,851 | $ | (277,082 | ) | ||||
| 2007 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-tax | ||||||||||
| (In thousands) | ||||||||||||
|
Unrealized holding (losses) gains on debt securities available
for sale arising during the period
|
$ | (66,676 | ) | $ | 23,454 | $ | (43,222 | ) | ||||
|
Less: Reclassification adjustment for net losses (gains) losses
included in net income
|
29,738 | (10,408 | ) | 19,330 | ||||||||
|
Net change in unrealized holding (losses) gains on debt
securities available for sale
|
(36,938 | ) | 13,046 | (23,892 | ) | |||||||
|
Unrealized holding (losses) gains on equity securities available
for sale arising during the period
|
(573 | ) | 200 | (373 | ) | |||||||
|
Less: Reclassification adjustment for net losses (gains) losses
included in net income
|
— | — | — | |||||||||
|
Net change in unrealized holding (losses) gains on equity
securities available for sale
|
(573 | ) | 200 | (373 | ) | |||||||
|
Unrealized gains and losses on derivatives used in cash flow
hedging relationships arising during the period
|
(19,162 | ) | 6,707 | (12,455 | ) | |||||||
|
Change in pension and post-retirement benefit plan assets and
liabilities
|
64,885 | (22,710 | ) | 42,175 | ||||||||
|
Total other comprehensive income (loss)
|
$ | 8,212 | $ | (2,757 | ) | $ | 5,455 | |||||
165
Table of Contents
Activity in accumulated other comprehensive income for the three
years ended December 31, were as follows:
|
Unrealized
|
Accumulated
|
|||||||||||||||||||
|
Gains and
|
Unrealized
|
|||||||||||||||||||
|
Unrealized
|
Unrealized
|
Losses on
|
Losses for Pension
|
|||||||||||||||||
|
Gains and
|
Gains and
|
Cash Flow
|
and Other
|
|||||||||||||||||
|
Losses on Debt
|
Losses on
|
Hedging
|
Post-Retirement
|
|||||||||||||||||
| Securities | Equity securities | Derivatives | Obligations | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Balance, January 1, 2007
|
$ | 13,891 | $ | 363 | $ | 17,008 | $ | (86,328 | ) | $ | (55,066 | ) | ||||||||
|
Period change
|
(23,892 | ) | (373 | ) | (12,455 | ) | 42,175 | 5,455 | ||||||||||||
|
Balance, December 31, 2007
|
(10,001 | ) | (10 | ) | 4,553 | (44,153 | ) | (49,611 | ) | |||||||||||
|
Cumulative effect of change in measurement date provisions for
pension and post-retirement assets and obligations
|
— | — | — | (3,834 | ) | (3,834 | ) | |||||||||||||
|
Period change
|
(197,426 | ) | (319 | ) | 40,085 | (115,588 | ) | (273,248 | ) | |||||||||||
|
Balance, December 31, 2008
|
(207,427 | ) | (329 | ) | 44,638 | (163,575 | ) | (326,693 | ) | |||||||||||
|
Cumulative effect of change in accounting principle for OTTI
debt securities
|
(3,541 | ) | — | — | — | (3,541 | ) | |||||||||||||
|
Period change
|
107,908 | 7 | 14,227 | 51,107 | 173,249 | |||||||||||||||
|
Balance, December 31, 2009
|
$ | (103,060 | ) | $ | (322 | ) | $ | 58,865 | $ | (112,468 | ) | $ | (156,985 | ) | ||||||
| 16. | SHAREHOLDERS’ EQUITY |
Issuance
of Common Stock
During 2009, Huntington completed several transactions to
increase capital, in particular, common equity.
In the 2009 third quarter, Huntington completed an offering of
109.5 million shares of its common stock at a price to the
public of $4.20 per share, or $460.1 million in aggregate
gross proceeds. In the 2009 second quarter, Huntington completed
an offering of 103.5 million shares of its common stock at
a price to the public of $3.60 per share, or $372.6 million
in aggregate gross proceeds.
Also, during 2009, Huntington completed three separate
discretionary equity issuance programs. These programs allowed
the Company to take advantage of market opportunities to issue a
total of 92.7 million new shares of common stock worth a
total of $345.8 million. Sales of the common shares were
made through ordinary brokers’ transactions on the NASDAQ
Global Select Market or otherwise at the prevailing market
prices.
Conversion
of Convertible Preferred Stock
In 2008, Huntington completed the public offering of
569,000 shares of 8.50% Series A Non-Cumulative
Perpetual Convertible Preferred Stock (Series A Preferred
Stock) with a liquidation preference of $1,000 per share,
resulting in an aggregate liquidation preference of
$569 million.
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Table of Contents
During the 2009 first and second quarters, Huntington entered
into agreements with various institutional investors exchanging
shares of common stock for shares of the Series A Preferred
Stock held by the institutional investors. The table below
provides details of the aggregate activities:
|
First
|
Second
|
|||||||||||
| Quarter 2009 | Quarter 2009 | Total | ||||||||||
| (In thousands) | ||||||||||||
|
Preferred shares exchanged
|
114 | 92 | 206 | |||||||||
|
Common shares issued:
|
||||||||||||
|
At stated convertible option
|
9,547 | 7,730 | 17,277 | |||||||||
|
As deemed dividend
|
15,044 | 8,751 | 23,795 | |||||||||
|
Total common shares issued:
|
24,591 | 16,481 | 41,072 | |||||||||
|
Deemed dividend
|
$ | 27,742 | $ | 28,293 | $ | 56,035 | ||||||
Each share of the Series A Preferred Stock is non-voting
and may be converted at any time, at the option of the holder,
into 83.668 shares of common stock of Huntington, which
represents an approximate initial conversion price of $11.95 per
share of common stock (for a total of approximately
30.3 million shares at December 31, 2009). The
conversion rate and conversion price will be subject to
adjustments in certain circumstances. On or after April 15,
2013, at the option of Huntington, the Series A Preferred
Stock will be subject to mandatory conversion into
Huntington’s common stock at the prevailing conversion
rate, if the closing price of Huntington’s common stock
exceeds 130% of the conversion price for 20 trading days during
any 30 consecutive trading day period.
Troubled
Asset Relief Program (TARP)
In 2008, Huntington received $1.4 billion of equity capital
by issuing to the U.S. Department of Treasury
1.4 million shares of Huntington’s 5.00% Series B
Non-voting Cumulative Preferred Stock, par value $0.01 per share
with a liquidation preference of $1,000 per share, and a
ten-year warrant to purchase up to 23.6 million shares of
Huntington’s common stock, par value $0.01 per share, at an
exercise price of $8.90 per share. The proceeds received were
allocated to the preferred stock and additional
paid-in-capital
based on their relative fair values. The resulting discount on
the preferred stock is amortized against retained earnings and
is reflected in Huntington’s consolidated statement of
income as “Dividends on preferred shares”, resulting
in additional dilution to Huntington’s earnings per share.
The warrants are immediately exercisable, in whole or in part,
over a term of 10 years. The warrants are included in
Huntington’s diluted average common shares outstanding
using the treasury stock method. Both the preferred securities
and warrants were accounted for as additions to
Huntington’s regulatory Tier 1 and Total capital.
The Series B Preferred Stock is not mandatorily redeemable
and will pay cumulative dividends at a rate of 5% per year for
the first five years and 9% per year thereafter. With regulatory
approval, Huntington may redeem the Series B Preferred
Stock at par with any unamortized discount recognized as a
deemed dividend in the period of redemption. The Series B
Preferred Stock rank on equal priority with Huntington’s
existing 8.50% Series A Non-Cumulative Perpetual
Convertible Preferred Stock.
A company that participates in the TARP must adopt certain
standards for executive compensation, including
(a) prohibiting “golden parachute” payments as
defined in the Emergency Economic Stabilization Act of 2008
(EESA) to senior executive officers; (b) requiring recovery
of any compensation paid to senior executive officers based on
criteria that is later proven to be materially inaccurate;
(c) prohibiting incentive compensation that encourages
unnecessary and excessive risks that threaten the value of the
financial institution, and (d) accepting restrictions on
the payment of dividends and the repurchase of common stock. As
of December 31, 2009, Huntington is in compliance with all
TARP standards and restrictions.
Share
Repurchase Program
As a condition to participate in the TARP, Huntington may not
repurchase any additional shares without prior approval from the
Department of Treasury. Huntington did not repurchase any shares
under the 2006
167
Table of Contents
Repurchase Program for the year ended December 31, 2009. On
February 18, 2009, the board of directors terminated the
previously authorized program for the repurchase of up to
15 million shares of common stock (the 2006 Repurchase
Program).
| 17. | (LOSS) EARNINGS PER SHARE |
Basic (loss) earnings per share is the amount of (loss) earnings
(adjusted for dividends declared on preferred stock) available
to each share of common stock outstanding during the reporting
period. Diluted (loss) earnings per share is the amount of
(loss) earnings available to each share of common stock
outstanding during the reporting period adjusted to include the
effect of potentially dilutive common shares. Potentially
dilutive common shares include incremental shares issued for
stock options, restricted stock units, distributions from
deferred compensation plans, and the conversion of the
Company’s convertible preferred stock and warrants (See
Note 16). Potentially dilutive common shares are excluded
from the computation of diluted earnings per share in periods in
which the effect would be antidilutive. For diluted (loss)
earnings per share, net (loss) income available to common shares
can be affected by the conversion of the Company’s
convertible preferred stock. Where the effect of this conversion
would be dilutive, net (loss) income available to common
shareholders is adjusted by the associated preferred dividends.
The calculation of basic and diluted (loss) earnings per share
for each of the three years ended December 31 was as follows:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Basic (loss) earnings per common share
|
||||||||||||
|
Net (loss) income
|
$ | (3,094,179 | ) | $ | (113,806 | ) | $ | 75,169 | ||||
|
Preferred stock dividends and amortization of discount
|
(174,756 | ) | (46,400 | ) | — | |||||||
|
Net (loss) income available to common shareholders
|
$ | (3,268,935 | ) | $ | (160,206 | ) | $ | 75,169 | ||||
|
Average common shares issued and outstanding
|
532,802 | 366,155 | 300,908 | |||||||||
|
Basic (loss) earnings per common share
|
$ | (6.14 | ) | $ | (0.44 | ) | $ | 0.25 | ||||
|
Diluted (loss) earnings per common share
|
||||||||||||
|
Net (loss) income available to common shareholders
|
$ | (3,268,935 | ) | $ | (160,206 | ) | $ | 75,169 | ||||
|
Net (loss) income applicable to diluted earnings per share
|
$ | (3,268,935 | ) | $ | (160,206 | ) | $ | 75,169 | ||||
|
Average common shares issued and outstanding
|
532,802 | 366,155 | 300,908 | |||||||||
|
Dilutive potential common shares:
|
||||||||||||
|
Stock options and restricted stock units
|
— | — | 1,887 | |||||||||
|
Shares held in deferred compensation plans
|
— | — | 660 | |||||||||
|
Dilutive potential common shares:
|
— | — | 2,547 | |||||||||
|
Total diluted average common shares issued and outstanding
|
532,802 | 366,155 | 303,455 | |||||||||
|
Diluted (loss) earnings per common share
|
$ | (6.14 | ) | $ | (0.44 | ) | $ | 0.25 | ||||
Due to the loss attributable to common shareholders for the
years ended December 31, 2009 and 2008, no potentially
dilutive shares are included in loss per share calculations for
those years as including such shares in the calculation would
reduce the reported loss per share. Approximately
23.7 million, 26.3 million and 14.9 million
options to purchase shares of common stock outstanding at the
end of 2009, 2008, and 2007, respectively, were not included in
the computation of diluted earnings per share because the effect
would be antidilutive. The weighted average exercise price for
these options was $19.71 per share, $19.45 per share, and $23.20
per share at the end of each respective period.
168
Table of Contents
| 18. | SHARE-BASED COMPENSATION |
Huntington sponsors nonqualified and incentive share-based
compensation plans. These plans provide for the granting of
stock options and other awards to officers, directors, and other
employees. Compensation costs are included in personnel costs on
the condensed consolidated statements of income. Stock options
are granted at the closing market price on the date of the
grant. Options granted typically vest ratably over three years
or when other conditions are met. Options granted prior to May
2004 have a term of ten years. All options granted after May
2004 have a term of seven years.
Huntington uses the Black-Scholes option-pricing model to value
share-based compensation expense. This model assumes that the
estimated fair value of options is amortized over the
options’ vesting periods. Forfeitures are estimated at the
date of grant based on historical rates and reduce the
compensation expense recognized. The risk-free interest rate is
based on the U.S. Treasury yield curve in effect at the
date of grant. Expected volatility is based on the estimated
volatility of Huntington’s stock over the expected term of
the option. The expected dividend yield is based on the dividend
rate and stock price at the date of the grant. The following
table illustrates the weighted-average assumptions used in the
option-pricing model for options granted in the three years
ended December 31, 2009, 2008 and 2007.
| 2009 | 2008 | 2007 | ||||||||||
|
Assumptions
|
||||||||||||
|
Risk-free interest rate
|
2.70 | % | 3.41 | % | 4.74 | % | ||||||
|
Expected dividend yield
|
0.96 | 5.28 | 5.26 | |||||||||
|
Expected volatility of Huntington’s common stock
|
51.8 | 34.8 | 21.1 | |||||||||
|
Expected option term (years)
|
6.0 | 6.0 | 6.0 | |||||||||
|
Weighted-average grant date fair value per share
|
$ | 1.95 | $ | 1.54 | $ | 2.80 | ||||||
As a result of increased employee turnover, during the 2009
second quarter Huntington updated its forfeiture rate assumption
and adjusted share-based compensation expense to account for the
higher forfeiture rate. The following table illustrates total
share-based compensation expense and related tax benefit for the
three years ended December 31, 2009, 2008 and 2007:
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Share-based compensation expense
|
$ | 8,492 | $ | 14,142 | $ | 21,836 | ||||||
|
Tax benefit
|
2,972 | 4,950 | 7,643 | |||||||||
Huntington established an additional paid-in capital pool (APIC
Pool) on January 1, 2006. With the continued decline in
Huntington’s stock price, the tax deductions have been less
than the recorded compensation expense, resulting in the related
APIC Pool to be reduced to zero. As a result, Huntington is
required to record tax expense to remove the related deferred
tax asset in periods in which options are exercised or expire
unexercised.
169
Table of Contents
Huntington’s stock option activity and related information
for the year ended December 31, 2009, was as follows:
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||||
| Options | Price | Life (Years) | Value | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
Outstanding at January 1, 2009
|
26,289 | $ | 19.45 | |||||||||||||
|
Granted
|
3,106 | 4.24 | ||||||||||||||
|
Exercised
|
— | — | ||||||||||||||
|
Forfeited/expired
|
(5,673 | ) | 20.49 | |||||||||||||
|
Outstanding at December 31, 2009
|
23,722 | $ | 17.21 | 3.4 | $ | 34 | ||||||||||
|
Exercisable at December 31, 2009
|
19,218 | $ | 19.71 | 2.8 | $ | — | ||||||||||
The aggregate intrinsic value represents the amount by which the
fair value of underlying stock exceeds the
“in-the-money”
option exercise price. There were no exercises of stock options
for the years ended December 31, 2009 or 2008. The total
intrinsic value of stock options exercised during 2007 was
$4.3 million.
Huntington also grants restricted stock units and awards.
Restricted stock units and awards are issued at no cost to the
recipient, and can be settled only in shares at the end of the
vesting period. Restricted stock awards provide the holder with
full voting rights and cash dividends during the vesting period.
Restricted stock units do not provide the holder with voting
rights or cash dividends during the vesting period and are
subject to certain service restrictions. The fair value of the
restricted stock units and awards is the closing market price of
the Company’s common stock on the date of award.
The following table summarizes the status of Huntington’s
restricted stock units and restricted stock awards as of
December 31, 2009, and activity for the year ended
December 31, 2009:
|
Weighted-
|
Weighted-
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Restricted
|
Grant Date
|
Restricted
|
Grant Date
|
|||||||||||||
|
Stock
|
Fair Value
|
Stock
|
Fair Value
|
|||||||||||||
| Units | per Share | Awards | per Share | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
Nonvested at January 1, 2009
|
1,823 | $ | 14.64 | — | $ | — | ||||||||||
|
Granted
|
1,543 | 3.81 | 274 | 2.93 | ||||||||||||
|
Vested
|
(413 | ) | 21.61 | (100 | ) | 2.02 | ||||||||||
|
Forfeited
|
(236 | ) | 13.90 | — | — | |||||||||||
|
Nonvested at December 31, 2009
|
2,717 | $ | 7.50 | 174 | $ | 3.45 | ||||||||||
The weighted-average grant date fair value of nonvested shares
granted for the years ended December 31, 2009, 2008 and
2007, were $3.68, $7.09 and $20.67, respectively. The total fair
value of awards vested during the years ended December 31,
2009, 2008 and 2007, was $1.8 million, $0.4 million,
and $3.5 million, respectively. As of December 31,
2009, the total unrecognized compensation cost related to
nonvested awards was $9.6 million with a weighted-average
expense recognition period of 1.8 years.
170
Table of Contents
The following table presents additional information regarding
options outstanding as of December 31, 2009.
| Options Outstanding | Exercisable Options | |||||||||||||||||||
|
Weighted-
|
||||||||||||||||||||
|
Average
|
Weighted-
|
Weighted-
|
||||||||||||||||||
|
Remaining
|
Average
|
Average
|
||||||||||||||||||
|
Range of
|
Contractual
|
Exercise
|
Exercise
|
|||||||||||||||||
|
Exercise Prices
|
Shares | Life (Years) | Price | Shares | Price | |||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
|
$1.28 to $10.00
|
4,495 | 6.1 | $ | 5.12 | 485 | $ | 7.00 | |||||||||||||
|
$10.01 to $15.00
|
1,551 | 1.1 | 13.90 | 1,543 | 13.90 | |||||||||||||||
|
$15.01 to $20.00
|
6,543 | 2.1 | 17.77 | 6,540 | 17.77 | |||||||||||||||
|
$20.01 to $25.01
|
11,133 | 3.4 | 22.22 | 10,650 | 22.32 | |||||||||||||||
|
Total
|
23,722 | 3.4 | $ | 17.21 | 19,218 | $ | 19.71 | |||||||||||||
Of the remaining 31.7 million shares of common stock
authorized for issuance at December 31, 2009,
26.6 million were outstanding and 5.1 million were
available for future grants. Huntington issues shares to fulfill
stock option exercises and restricted stock units from available
authorized shares. At December 31, 2009, the Company
believes there are adequate authorized shares to satisfy
anticipated stock option exercises in 2010.
On January 14, 2009, Huntington announced that Stephen D.
Steinour, has been elected Chairman, President and Chief
Executive Officer. In connection with his employment agreement,
Huntington awarded Mr. Steinour an inducement option to
purchase 1,000,000 shares of Huntington’s common
stock, with a per share exercise price equal to $4.95, the
closing price of Huntington’s common stock on
January 14, 2009. The option vests in equal increments on
each of the first five anniversaries of the date of grant, and
expires on the seventh anniversary.
| 19. | INCOME TAXES |
The Company and its subsidiaries file income tax returns in the
U.S. federal jurisdiction and various state, city and
foreign jurisdictions. Federal income tax audits have been
completed through 2005. In 2009, the IRS began the audit of
our consolidated federal income tax returns for tax years 2006
and 2007. In addition, various state and other jurisdictions
remain open to examination for tax years 2000 and forward.
The Internal Revenue Service, State of Ohio and other state tax
officials have proposed adjustments to the Company’s
previously filed tax returns. Management believes that the tax
positions taken by the Company related to such proposed
adjustments were correct and supported by applicable statutes,
regulations, and judicial authority, and intends to vigorously
defend them. It is possible that the ultimate resolution of the
proposed adjustments, if unfavorable, may be material to the
results of operations in the period it occurs. However, although
no assurance can be given, we believe that the resolution of
these examinations will not, individually or in the aggregate,
have a material adverse impact on our consolidated financial
position.
Huntington accounts for uncertainties in income taxes in
accordance with ASC 740, Income Taxes. At December 31,
2009, Huntington had a net unrecognized tax benefit of
$13.5 million in income tax liability related to tax
positions. Huntington does not anticipate the total amount of
unrecognized tax benefits to significantly change within the
next 12 months.
171
Table of Contents
The following table provides a reconciliation of the beginning
and ending amounts of unrecognized tax benefits.
| 2009 | ||||
| (In thousands) | ||||
|
Unrecognized tax benefits at beginning of year
|
$ | — | ||
|
Gross increases for tax positions taken during prior years
|
10,750 | |||
|
Gross increases for tax positions taken during the current year
|
6,464 | |||
|
Unrecognized tax benefits at end of year
|
17,214 | |||
|
Federal benefit for state and local positions
|
(3,763 | ) | ||
|
Net deferred tax asset (liability)
|
$ | 13,451 | ||
The company recognizes interest and penalties on income tax
assessments or income tax refunds if any, in the financial
statements as a component of its provision for income taxes.
There were no significant amounts recognized for interest and
penalties for the years ended December 31, 2009, 2008, and
2007 and no significant amounts accrued at December 31,
2009 and 2008.
The following is a summary of the provision for income taxes
(benefit):
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Current tax (benefit) provision
|
||||||||||||
|
Federal
|
$ | (326,659 | ) | $ | (30,164 | ) | $ | 135,196 | ||||
|
State
|
9,860 | (102 | ) | 288 | ||||||||
|
Total current tax (benefit) provision
|
(316,799 | ) | (30,266 | ) | 135,484 | |||||||
|
Deferred tax (benefit) provision
|
||||||||||||
|
Federal
|
(267,872 | ) | (152,306 | ) | (188,518 | ) | ||||||
|
State
|
667 | 370 | 508 | |||||||||
|
Total deferred tax (benefit) provision
|
(267,205 | ) | (151,936 | ) | (188,010 | ) | ||||||
|
(Benefit) provision for income taxes
|
$ | (584,004 | ) | $ | (182,202 | ) | $ | (52,526 | ) | |||
Tax benefit associated with securities transactions included in
the above amounts were $3.6 million in 2009,
$69.1 million in 2008, and $10.4 million in 2007.
The following is a reconcilement of (benefit) provision for
income taxes:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
(Benefit) provision for income taxes computed at the statutory
rate
|
$ | (1,287,364 | ) | $ | (103,603 | ) | $ | 7,925 | ||||
|
Increases (decreases):
|
||||||||||||
|
Tax-exempt interest income
|
(5,561 | ) | (12,484 | ) | (13,161 | ) | ||||||
|
Tax-exempt bank owned life insurance income
|
(19,205 | ) | (19,172 | ) | (17,449 | ) | ||||||
|
Asset securitization activities
|
(3,179 | ) | (14,198 | ) | (18,627 | ) | ||||||
|
Federal tax loss carryforward /carryback
|
(12,847 | ) | (12,465 | ) | — | |||||||
|
General business credits
|
(17,602 | ) | (10,481 | ) | (8,884 | ) | ||||||
|
Reversal of valuation allowance
|
— | (7,101 | ) | — | ||||||||
|
Loan acquisitions
|
(159,895 | ) | — | — | ||||||||
|
Goodwill impairment
|
908,263 | — | — | |||||||||
|
Other, net
|
13,386 | (2,698 | ) | (2,330 | ) | |||||||
|
Benefit for income taxes
|
$ | (584,004 | ) | $ | (182,202 | ) | $ | (52,526 | ) | |||
172
Table of Contents
The significant components of deferred tax assets and
liabilities at December 31, were as follows:
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Deferred tax assets:
|
||||||||
|
Allowances for credit losses
|
$ | 555,276 | $ | 220,450 | ||||
|
Loan acquisitions
|
159,895 | — | ||||||
|
Loss and other carryforwards
|
19,211 | 16,868 | ||||||
|
Fair value adjustments
|
123,860 | 170,360 | ||||||
|
Securities adjustments
|
— | 44,380 | ||||||
|
Partnerships investments
|
— | 7,402 | ||||||
|
Pension and other employee benefits
|
1,009 | — | ||||||
|
Accrued expense/prepaid
|
42,478 | 42,153 | ||||||
|
Purchase accounting adjustments
|
— | 3,289 | ||||||
|
Other
|
4,738 | 14,014 | ||||||
|
Total deferred tax assets
|
906,467 | 518,916 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Lease financing
|
154,088 | 283,438 | ||||||
|
Pension and other employee benefits
|
— | 33,687 | ||||||
|
Purchase accounting adjustments
|
70,820 | — | ||||||
|
Mortgage servicing rights
|
62,867 | 31,921 | ||||||
|
Operating assets
|
15,163 | 5,358 | ||||||
|
Loan origination costs
|
39,004 | 34,698 | ||||||
|
Securities adjustments
|
57,700 | — | ||||||
|
Partnership investments
|
13,563 | — | ||||||
|
Other
|
11,832 | 13,929 | ||||||
|
Total deferred tax liability
|
425,037 | 403,031 | ||||||
|
Net deferred tax asset before valuation allowance
|
$ | 481,430 | $ | 115,885 | ||||
|
Valuation allowance
|
(899 | ) | (14,536 | ) | ||||
|
Net deferred tax asset
|
$ | 480,531 | $ | 101,349 | ||||
At December 31, 2009, Huntington’s deferred tax asset
related to loss and other carry-forwards was $19.2 million.
This was comprised of net operating loss carry-forward of
$1.8 million, which will begin expiring in 2023, an
alternative minimum tax credit carry-forward of
$0.6 million, a general business credit carryover of
$15.2 million which will expire in 2029, a charitable
contribution carry-forward of $0.7 million which will
expire in 2014 , and a capital loss carry-forward of
$0.9 million, which will expire in 2010. A valuation
allowance in the amount of $0.9 million has been
established for the capital loss carry-forward because
management believes it is more likely than not that the
realization of these assets will not occur. The valuation
allowance on this asset decreased $12.8 million from 2008.
In Management’s opinion the results of future operations
will generate sufficient taxable income to realize the net
operating loss and alternative minimum tax credit carry-forward.
Consequently, management has determined that a valuation
allowance for deferred tax assets was not required as of
December 31, 2009 or 2008 relating to these carry-forwards.
At December 31, 2009 federal income taxes had not been
provided on $139.8 million of undistributed earnings of
foreign subsidiaries that have been reinvested for an indefinite
period of time. If the earnings had been distributed, an
additional $48.9 million of tax expense would have resulted
in 2009.
| 20. | BENEFIT PLANS |
Huntington sponsors the Huntington Bancshares Retirement Plan
(the Plan or Retirement Plan), a non-contributory defined
benefit pension plan covering substantially all employees hired
or rehired prior to January 1, 2010. The Plan provides
benefits based upon length of service and compensation levels.
The funding policy of Huntington is to contribute an annual
amount that is at least equal to the minimum funding
173
Table of Contents
requirements but not more than that deductible under the
Internal Revenue Code. There was no minimum required
contribution to the Plan in 2009.
In addition, Huntington has an unfunded defined benefit
post-retirement plan that provides certain health care and life
insurance benefits to retired employees who have attained the
age of 55 and have at least 10 years of vesting service
under this plan. For any employee retiring on or after
January 1, 1993, post-retirement health-care benefits are
based upon the employee’s number of months of service and
are limited to the actual cost of coverage. Life insurance
benefits are a percentage of the employee’s base salary at
the time of retirement, with a maximum of $50,000 of coverage.
The employer paid portion of the post-retirement health and life
insurance plan will be eliminated for employees retiring on and
after March 1, 2010. Eligible employees retiring on and
after March 1, 2010, who elect retiree medical coverage
will pay the full cost of this coverage. The company will not
provide any employer paid life insurance to employees retiring
on and after March 1, 2010. Eligible employees will be able
to convert or port their existing life insurance at their own
expense under the same terms that are available to all
terminated employees.
Beginning January 1, 2010, there will be changes to the way
the future early and normal retirement benefit is calculated
under the Retirement Plan for service on and after
January 1, 2010. While these changes will not affect the
benefit earned under the Retirement Plan through
December 31, 2009, there will be a reduction in future
benefits. In addition, employees hired or rehired on and after
January 1, 2010 are not eligible to participate in the
Retirement Plan.
On January 1, 2008, Huntington transitioned to fiscal
year-end measurement date of plan assets and benefit
obligations. As a result, Huntington recognized a charge to
beginning retained earnings of $4.7 million, representing
the net periodic benefit costs for the last three months of
2008, and a charge to the opening balance of accumulated other
comprehensive loss of $3.8 million, representing the change
in fair value of plan assets and benefit obligations for the
last three months of 2008 (net of amortization included in net
periodic benefit cost).
The following table shows the weighted-average assumptions used
to determine the benefit obligation at December 31, 2009
and 2008, and the net periodic benefit cost for the years then
ended.
|
Pension
|
Post-Retirement
|
|||||||||||||||
| Benefits | Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Weighted-average assumptions used to determine benefit
obligations
|
||||||||||||||||
|
Discount rate
|
5.88 | % | 6.17 | % | 5.54 | % | 6.17 | % | ||||||||
|
Rate of compensation increase
|
4.50 | 4.00 | N/A | N/A | ||||||||||||
|
Weighted-average assumptions used to determine net periodic
benefit cost
|
||||||||||||||||
|
Discount rate:
|
||||||||||||||||
|
January 1, 2009 through October 31, 2009
|
6.17 | % | N/A | 6.17 | % | N/A | ||||||||||
|
November 1, 2009 through December 31, 2009
|
5.83 | N/A | 5.46 | N/A | ||||||||||||
|
2008
|
N/A | 6.47 | % | N/A | 6.47 | % | ||||||||||
|
Expected return on plan assets
|
8.00 | 8.00 | N/A | N/A | ||||||||||||
|
Rate of compensation increase
|
4.00 | 5.00 | N/A | N/A | ||||||||||||
N/A, Not Applicable
The expected long-term rate of return on plan assets is an
assumption reflecting the average rate of earnings expected on
the funds invested or to be invested to provide for the benefits
included in the projected benefit obligation. The expected
long-term rate of return is established at the beginning of the
plan year based upon historical returns and projected returns on
the underlying mix of invested assets.
174
Table of Contents
The following table reconciles the beginning and ending balances
of the benefit obligation of the Plan and the post-retirement
benefit plan with the amounts recognized in the consolidated
balance sheets at December 31:
|
Post-Retirement
|
||||||||||||||||
| Pension Benefits | Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Projected benefit obligation at beginning of measurement
year
|
$ | 469,696 | $ | 427,828 | $ | 60,433 | $ | 59,008 | ||||||||
|
Impact of change in measurement date
|
— | (1,956 | ) | — | (804 | ) | ||||||||||
|
Changes due to:
|
||||||||||||||||
|
Service cost
|
23,692 | 23,680 | 1,550 | 1,679 | ||||||||||||
|
Interest cost
|
28,036 | 26,804 | 3,274 | 3,612 | ||||||||||||
|
Benefits paid
|
(9,233 | ) | (8,630 | ) | (5,285 | ) | (3,552 | ) | ||||||||
|
Settlements
|
(12,071 | ) | (12,459 | ) | — | — | ||||||||||
|
Effect of plan combinations
|
24,411 | — | — | — | ||||||||||||
|
Plan amendments
|
(45,413 | ) | — | (25,947 | ) | — | ||||||||||
|
Plan curtailments
|
— | — | (527 | ) | — | |||||||||||
|
Medicare subsidies
|
— | — | 550 | — | ||||||||||||
|
Actuarial assumptions and gains and losses
|
25,741 | 14,429 | (875 | ) | 490 | |||||||||||
|
Total changes
|
35,163 | 43,824 | (27,260 | ) | 2,229 | |||||||||||
|
Projected benefit obligation at end of measurement year
|
$ | 504,859 | $ | 469,696 | $ | 33,173 | $ | 60,433 | ||||||||
Benefits paid are net of retiree contributions collected by
Huntington. The actual contributions received in 2009 by
Huntington for the retiree medical program were
$3.1 million.
The following table reconciles the beginning and ending balances
of the fair value of Plan assets at the December 31, 2009
and 2008 measurement dates with the amounts recognized in the
consolidated balance sheets.
| Pension Benefits | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Fair value of plan assets at beginning of measurement year
|
$ | 407,079 | $ | 516,893 | ||||
|
Impact of change in measurement date
|
— | (10,347 | ) | |||||
|
Changes due to:
|
||||||||
|
Actual (loss) return on plan assets
|
51,202 | (127,354 | ) | |||||
|
Employer contributions
|
— | 50,000 | ||||||
|
Settlements
|
(12,394 | ) | (13,482 | ) | ||||
|
Plan combinations
|
17,460 | — | ||||||
|
Benefits paid
|
(9,233 | ) | (8,631 | ) | ||||
|
Total changes
|
47,035 | (99,467 | ) | |||||
|
Fair value of plan assets at end of measurement year
|
$ | 454,114 | $ | 407,079 | ||||
Huntington’s accumulated benefit obligation under the Plan
was $504.6 million and $433 million at
December 31, 2009 and 2008. As of December 31, 2009,
the accumulated benefit obligation exceeded the fair value of
Huntington’s plan assets by $50.5 million.
175
Table of Contents
The following table shows the components of net periodic benefit
cost recognized in the three years ended December 31, 2009:
| Pension Benefits | Post-Retirement Benefits | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Service cost
|
$ | 23,692 | $ | 23,680 | $ | 19,087 | $ | 1,550 | $ | 1,679 | $ | 1,608 | ||||||||||||
|
Interest cost
|
28,036 | 26,804 | 24,408 | 3,274 | 3,612 | 2,989 | ||||||||||||||||||
|
Expected return on plan assets
|
(41,960 | ) | (39,145 | ) | (37,056 | ) | — | — | — | |||||||||||||||
|
Amortization of transition asset
|
6 | 5 | 4 | 920 | 1,104 | 1,104 | ||||||||||||||||||
|
Amortization of prior service cost
|
(553 | ) | 314 | 1 | 91 | 379 | 379 | |||||||||||||||||
|
Amortization of gain
|
8,689 | — | — | (888 | ) | (1,095 | ) | (368 | ) | |||||||||||||||
|
Curtailments
|
— | — | — | (527 | ) | — | — | |||||||||||||||||
|
Settlements
|
6,213 | 7,099 | 2,218 | — | — | — | ||||||||||||||||||
|
Recognized net actuarial loss
|
— | 3,550 | 11,076 | — | — | — | ||||||||||||||||||
|
Benefit cost
|
$ | 24,123 | $ | 22,307 | $ | 19,738 | $ | 4,420 | $ | 5,679 | $ | 5,712 | ||||||||||||
Included in benefit costs are $0.7 million,
$0.6 million and $0.4 million of plan expenses that
were recognized in the three years ended December 31, 2009,
2008 and 2007. It is Huntington’s policy to recognize
settlement gains and losses as incurred. Management expects net
periodic pension cost, excluding any expense of settlements, to
approximate $16.2 million for 2010. There will be no net
periodic post-retirement benefits costs in 2010, as the
postretirement medical and life subsidy was eliminated for
anyone that retires on or after March 1, 2010.
The estimated transition obligation, prior service cost (credit)
and net actuarial loss for the plans that will be amortized from
accumulated other comprehensive loss into net periodic benefit
cost over the next fiscal year is less than $1 million,
$(6.8) million and $13.9 million, respectively.
Under the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, Huntington has registered for the
Medicare subsidy and a resulting $15.5 million reduction in
the post-retirement obligation is being recognized over a
10-year
period beginning October 1, 2005.
176
Table of Contents
At December 31, 2009 and 2008, The Huntington National
Bank, as trustee, held all Plan assets. The Plan assets
consisted of investments in a variety of Huntington mutual funds
and Huntington common stock as follows:
| Fair Value | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| (In thousands) | ||||||||||||||||
|
Cash
|
$ | — | — | % | $ | 50,000 | 12 | % | ||||||||
|
Cash equivalents:
|
||||||||||||||||
|
Huntington funds — money market
|
11,304 | 2 | 295 | — | ||||||||||||
|
Other
|
2,777 | 1 | — | — | ||||||||||||
|
Fixed income:
|
||||||||||||||||
|
Huntington funds — fixed income funds
|
125,323 | 28 | 128,655 | 32 | ||||||||||||
|
Corporate obligations
|
1,315 | — | — | — | ||||||||||||
|
U.S. Government Agencies
|
497 | — | — | — | ||||||||||||
|
Equities:
|
||||||||||||||||
|
Huntington funds — equity funds
|
256,222 | 57 | 197,583 | 48 | ||||||||||||
|
Huntington funds — equity mutual funds
|
31,852 | 7 | — | — | ||||||||||||
|
Other — equity mutual funds
|
122 | — | — | |||||||||||||
|
Huntington common stock
|
14,347 | 3 | 30,546 | 8 | ||||||||||||
|
Other common stock
|
10,355 | 2 | — | — | ||||||||||||
|
Fair value of plan assets
|
$ | 454,114 | 100 | % | $ | 407,079 | 100 | % | ||||||||
Investments of the Plan are accounted for at cost on the trade
date and are reported at fair value. All of the Plan’s
investments at December 31, 2009 are classified as
Level 1 within the fair value hierarchy. In general,
investments of the Plan are exposed to various risks, such as
interest rate risk, credit risk, and overall market volatility.
Due to the level of risk associated with certain investments, it
is reasonably possible that changes in the values of investments
will occur in the near term and that such changes could
materially affect the amounts reported in the Plan assets.
The investment objective of the Plan is to maximize the return
on Plan assets over a long time horizon, while meeting the Plan
obligations. At December 31, 2009, Plan assets were
invested 69% in equity investments and 31% in bonds, with an
average duration of 4 years on bond investments. The
estimated life of benefit obligations was 11 years.
Management believes that this mix is appropriate for the current
economic environment. Although it may fluctuate with market
conditions, management has targeted a long-term allocation of
Plan assets of 69% in equity investments and 31% in bond
investments.
The number of shares of Huntington common stock held by the Plan
at December 31, 2009 and 2008 was 3,919,986 for both years.
The Plan has acquired and held Huntington common stock in
compliance at all times with Section 407 of the Employee
Retirement Income Security Act of 1978.
Dividends and interest received by the Plan during 2009 and 2008
were $8.4 million and $21.0 million, respectively.
177
Table of Contents
At December 31, 2009, the following table shows when
benefit payments, which include expected future service, as
appropriate, were expected to be paid:
|
Post-
|
||||||||
|
Pension
|
Retirement
|
|||||||
| Benefits | Benefits | |||||||
| (In thousands) | ||||||||
|
2010
|
$ | 27,775 | $ | 5,319 | ||||
|
2011
|
29,968 | 5,273 | ||||||
|
2012
|
32,782 | 5,173 | ||||||
|
2013
|
34,346 | 5,107 | ||||||
|
2014
|
35,379 | 5,015 | ||||||
|
2014 through 2018
|
196,938 | 23,666 | ||||||
There is no expected minimum contribution for 2010 to the Plan.
However, Huntington may choose to make a contribution to the
Plan up to the maximum deductible limit in the 2010 plan year.
Expected contributions for 2010 to the post-retirement benefit
plan are $3.8 million.
The assumed health-care cost trend rate has an effect on the
amounts reported. A one percentage point increase would decrease
service and interest costs and the post-retirement benefit
obligation by $0.1 million and $0.4 million,
respectively. A one-percentage point decrease would increase
service and interest costs and the post-retirement benefit
obligation by $0.1 million, and $0.4 million
respectively. The 2010 health-care cost trend rate was projected
to be 8.5% for pre-65 participants and 9.3% for post-65
participants compared with an estimate of 8.8% for pre-65
participants and 9.8% for post-65 participants in 2009. These
rates are assumed to decrease gradually until they reach 4.5%
for both pre-65 participants and post-65 participants in the
year 2028 and remain at that level thereafter. Huntington
updated the immediate health-care cost trend rate assumption
based on current market data and Huntington’s claims
experience. This trend rate is expected to decline over time to
a trend level consistent with medical inflation and long-term
economic assumptions.
Huntington also sponsors other retirement plans, the most
significant being the Supplemental Executive Retirement Plan and
the Supplemental Retirement Income Plan. These plans are
nonqualified plans that provide certain current and former
officers and directors of Huntington and its subsidiaries with
defined pension benefits in excess of limits imposed by federal
tax law. At December 31, 2009 and 2008, Huntington has an
accrued pension liability of $22.8 million and
$38.5 million, respectively associated with these plans.
Pension expense for the plans was $2.8 million,
$2.4 million, and $2.5 million in 2009, 2008, and
2007, respectively.
The following table presents the amounts recognized in the
consolidated balance sheets at December 31, 2009 and 2008
for all of Huntington defined benefit plans:
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Accrued income and other assets
|
$ | — | $ | — | ||||
|
Accrued expenses and other liabilities
|
106,738 | 161,585 | ||||||
The following tables present the amounts recognized in
accumulated other comprehensive loss (net of tax) as of
December 31, 2009 and 2008 and the changes in accumulated
other comprehensive income for the years ended December 31,
2009, 2008, and 2007.
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Net actuarial loss
|
$ | (151,564 | ) | $ | (156,762 | ) | $ | (36,301 | ) | |||
|
Prior service cost
|
39,093 | (4,123 | ) | (4,914 | ) | |||||||
|
Transition liability
|
3 | (2,690 | ) | (2,938 | ) | |||||||
|
Defined benefit pension plans
|
$ | (112,468 | ) | $ | (163,575 | ) | (44,153 | ) | ||||
178
Table of Contents
| 2009 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-tax | ||||||||||
| (In thousands) | ||||||||||||
|
Balance, beginning of year
|
$ | (251,655 | ) | $ | 88,080 | $ | (163,575 | ) | ||||
|
Impact of change in measurement date
|
— | — | — | |||||||||
|
Net actuarial (loss) gain:
|
||||||||||||
|
Amounts arising during the year
|
(6,155 | ) | 2,154 | (4,001 | ) | |||||||
|
Amortization included in net periodic benefit costs
|
14,153 | (4,954 | ) | 9,199 | ||||||||
|
Prior service cost:
|
||||||||||||
|
Amounts arising during the year
|
69,986 | (24,494 | ) | 45,492 | ||||||||
|
Amortization included in net periodic benefit costs
|
(283 | ) | 99 | (184 | ) | |||||||
|
Transition obligation:
|
||||||||||||
|
Amounts arising during the year
|
— | — | — | |||||||||
|
Amortization included in net periodic benefit costs
|
925 | (324 | ) | 601 | ||||||||
|
Balance, end of year
|
$ | (173,029 | ) | $ | 60,561 | $ | (112,468 | ) | ||||
| 2008 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-tax | ||||||||||
| (In thousands) | ||||||||||||
|
Balance, beginning of year
|
$ | (67,928 | ) | $ | 23,775 | $ | (44,153 | ) | ||||
|
Impact of change in measurement date
|
(1,485 | ) | 520 | (965 | ) | |||||||
|
Net actuarial (loss) gain:
|
||||||||||||
|
Amounts arising during the year
|
(186,922 | ) | 65,423 | (121,499 | ) | |||||||
|
Amortization included in net periodic benefit costs
|
2,608 | (913 | ) | 1,695 | ||||||||
|
Prior service cost:
|
||||||||||||
|
Amortization included in net periodic benefit costs
|
964 | (337 | ) | 627 | ||||||||
|
Transition obligation:
|
||||||||||||
|
Amounts arising during the year
|
(1 | ) | — | (1 | ) | |||||||
|
Amortization included in net periodic benefit costs
|
1,109 | (388 | ) | 721 | ||||||||
|
Balance, end of year
|
$ | (251,655 | ) | $ | 88,080 | $ | (163,575 | ) | ||||
| 2007 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-tax | ||||||||||
| (In thousands) | ||||||||||||
|
Balance, beginning of year
|
$ | (132,813 | ) | $ | 46,485 | $ | (86,328 | ) | ||||
|
Net actuarial (loss) gain:
|
||||||||||||
|
Amounts arising during the year
|
53,312 | (18,659 | ) | 34,653 | ||||||||
|
Amortization included in net periodic benefit costs
|
12,169 | (4,260 | ) | 7,909 | ||||||||
|
Prior service cost:
|
||||||||||||
|
Amounts arising during the year
|
(2,318 | ) | 811 | (1,507 | ) | |||||||
|
Amortization included in net periodic benefit costs
|
615 | (215 | ) | 400 | ||||||||
|
Transition obligation:
|
||||||||||||
|
Amortization included in net periodic benefit costs
|
1,107 | (387 | ) | 720 | ||||||||
|
Balance, end of year
|
$ | (67,928 | ) | $ | 23,775 | $ | (44,153 | ) | ||||
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Table of Contents
Huntington has a defined contribution plan that is available to
eligible employees. In the first quarter of 2009, the Plan was
amended to eliminate employer matching contributions effective
on or after March 15, 2009. Prior to March 15, 2009,
Huntington matched participant contributions, up to the first 3%
of base pay contributed to the plan. Half of the employee
contribution was matched on the 4th and 5th percent of
base pay contributed to the plan. The cost of providing this
plan was $3.1 million in 2009, $15.0 million in 2008,
and $12.9 million in 2007. The number of shares of
Huntington common stock held by this plan was 14,714,170 at
December 31, 2009, and 8,055,336 at December 31, 2008.
The market value of these shares was $53.7 million and
$61.7 million at the same respective dates. Dividends
received by the plan were $5.1 million during 2009 and
$14.3 million during 2008.
| 21. | FAIR VALUES OF ASSETS AND LIABILITIES |
Huntington follows the fair value accounting guidance under ASC
820 and ASC 825.
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. A three-level valuation
hierarchy was established for disclosure of fair value
measurements. The valuation hierarchy is based upon the
transparency of inputs to the valuation of an asset or liability
as of the measurement date. The three levels are defined as
follows:
Level 1
— inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2
— inputs to the valuation
methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument.
Level 3
— inputs to the valuation
methodology are unobservable and significant to the fair value
measurement.
A financial instrument’s categorization within the
valuation hierarchy is based upon the lowest level of input that
is significant to the fair value measurement.
Following is a description of the valuation methodologies used
for instruments measured at fair value, as well as the general
classification of such instruments pursuant to the valuation
hierarchy.
|
Financial Instrument(1)
|
Hierarchy |
Valuation methodology
|
||||
|
Mortgage loans
held-for-sale
|
Level 2 | As of January 1, 2008, Huntington elected to apply the fair value option for mortgage loans originated with the intent to sell which are included in loans held for sale. Mortgage loans held-for-sale are estimated using security prices for similar product types. At December 31, 2009, mortgage loans held for sale had an aggregate fair value of $459.7 million and an aggregate outstanding principal balance of $453.9 million. Interest income on these loans is recorded in interest and fees on loans and leases. Included in mortgage banking income were net gains resulting from changes in fair value of these loans, including net realized gains of $90.6 million and $32.2 million for the year ended December 31, 2009 and 2008, respectively. | ||||
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Table of Contents
|
Financial Instrument(1)
|
Hierarchy |
Valuation methodology
|
||||
|
Investment Securities & Trading Account
Securities(2)
|
Level 1 | Consist of U.S. Treasury and other federal agency securities, and money market mutual funds which generally have quoted prices. | ||||
| Level 2 | Consist of U.S. Government and agency mortgage-backed securities and municipal securities for which an active market is not available. Third-party pricing services provide a fair value estimate based upon trades of similar financial instruments. | |||||
| Level 3 | Consist of asset-backed securities, pooled trust-preferred securities, certain private label CMOs, and residual interest in auto securitizations for which fair value is estimated. Assumptions used to determine the fair value of these securities have greater subjectivity due to the lack of observable market transactions. Generally, there are only limited trades of similar instruments and a discounted cash flow approach is used to determine fair value. | |||||
|
Mortgage Servicing Rights (MSRs)(3)
|
Level 3 | MSRs do not trade in an active, open market with readily observable prices. Although sales of MSRs do occur, the precise terms and conditions typically are not readily available. Fair value is based upon the final month-end valuation, which utilizes the month-end curve and prepayment assumptions. | ||||
|
Derivatives(4)
|
Level 1 | Consist of exchange traded options and forward commitments to deliver mortgage-backed securities which have quoted prices. | ||||
| Level 2 | Consist of basic asset and liability conversion swaps and options, and interest rate caps. These derivative positions are valued using internally developed models that use readily observable market parameters. | |||||
| Level 3 | Consist primarily of interest rate lock agreements related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. | |||||
|
Equity Investments(5)
|
Level 3 | Consist of equity investments via equity funds (holding both private and publicly-traded equity securities), directly in companies as a minority interest investor, and directly in companies in conjunction with our mezzanine lending activities. These investments do not have readily observable prices. Fair value is based upon a variety of factors, including but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies, and changes in market outlook. | ||||
181
Table of Contents
| (1) | Refer to Notes 1 and 20 for additional information. | |
| (2) | Refer to Note 6 for additional information. | |
| (3) | Refer to Note 7 for additional information. | |
| (4) | Refer to Note 21 for additional information. | |
| (5) | Certain equity investments are accounted for under the equity method and, therefore, are not subject to the fair value disclosure requirements. |
Assets
and Liabilities measured at fair value on a recurring
basis
Assets and liabilities measured at fair value on a recurring
basis at December 31, 2009 and 2008 are summarized below:
| Fair Value Measurements at Reporting Date Using |
Netting
|
Total
|
||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Adjustments(1) | 2009 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Mortgage loans held for sale
|
$ | — | $ | 459,719 | $ | — | $ | — | $ | 459,719 | ||||||||||
|
Trading account securities
|
56,009 | 27,648 | — | — | 83,657 | |||||||||||||||
|
Investment securities
|
3,111,845 | 4,203,497 | 895,932 | — | 8,211,274 | |||||||||||||||
|
Mortgage servicing rights
|
— | — | 176,427 | — | 176,427 | |||||||||||||||
|
Derivative assets
|
7,711 | 341,676 | 995 | (62,626 | ) | 287,756 | ||||||||||||||
|
Equity investments
|
— | — | 25,872 | — | 25,872 | |||||||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Derivative liabilities
|
119 | 233,597 | 5,231 | — | 238,947 | |||||||||||||||
| Fair Value Measurements at Reporting Date Using |
Netting
|
Total
|
||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Adjustments(1) | 2008 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Mortgage loans held for sale
|
$ | — | $ | 378,437 | $ | — | $ | — | $ | 378,437 | ||||||||||
|
Trading account securities
|
51,888 | 36,789 | — | — | 88,677 | |||||||||||||||
|
Investment securities
|
626,130 | 2,342,812 | 987,542 | — | 3,956,484 | |||||||||||||||
|
Mortgage servicing rights
|
— | — | 167,438 | — | 167,438 | |||||||||||||||
|
Derivative assets
|
233 | 668,906 | 8,182 | (218,326 | ) | 458,995 | ||||||||||||||
|
Equity investments
|
— | — | 36,893 | — | 36,893 | |||||||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Derivative liabilities
|
11,588 | 377,248 | 50 | (305,519 | ) | 83,367 | ||||||||||||||
| (1) | Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions and cash collateral held or placed with the same counterparties. |
The tables below present a rollforward of the balance sheet
amounts for the years ended December 31, 2009 and 2008, for
financial instruments measured on a recurring basis and
classified as Level 3. The classification of an item as
Level 3 is based on the significance of the unobservable
inputs to the overall fair value measurement. However,
Level 3 measurements may also include observable components
of value that can be validated externally. Accordingly, the
gains and losses in the table below include changes in fair
value due in part to observable factors that are part of the
valuation methodology. Transfers in and out of Level 3 are
presented in the tables below at fair value at the beginning of
the reporting period.
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Table of Contents
|
Level 3 Fair Value Measurements
|
||||||||||||||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||||||||||||||
| Investment Securities | ||||||||||||||||||||||||||||
|
Mortgage
|
Alt-A
|
Pooled
|
||||||||||||||||||||||||||
|
Servicing
|
Derivative
|
Mortgage-
|
Trust-
|
Private
|
Equity
|
|||||||||||||||||||||||
| Rights | Instruments | Backed | Preferred | Label CMO | Other | Investments | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
|
Balance, beginning of year
|
$ | 167,438 | $ | 8,132 | $ | 322,421 | $ | 141,606 | $ | 523,515 | $ | — | $ | 36,893 | ||||||||||||||
|
Total gains/losses:
|
||||||||||||||||||||||||||||
|
Included in earnings
|
9,707 | (5,976 | ) | 2,264 | (40,272 | ) | (3,606 | ) | (2,031 | ) | 408 | |||||||||||||||||
|
Included in OCI
|
— | — | 27,332 | 6,688 | 93,934 | 6,365 | — | |||||||||||||||||||||
|
Purchases
|
2,388 | (7,100 | ) | — | — | 5,448 | 211,296 | 1,688 | ||||||||||||||||||||
|
Sales
|
— | — | (216,357 | ) | — | — | (78,676 | ) | — | |||||||||||||||||||
|
Repayments
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Issuances
|
— | — | — | — | — | 47,119 | — | |||||||||||||||||||||
|
Settlements
|
(3,106 | ) | 708 | (18,726 | ) | (1,931 | ) | (141,972 | ) | (185 | ) | (13,117 | ) | |||||||||||||||
|
Transfers in/out of Level 3
|
— | — | — | — | — | 11,700 | — | |||||||||||||||||||||
|
Balance, end of year
|
$ | 176,427 | $ | (4,236 | ) | $ | 116,934 | $ | 106,091 | $ | 477,319 | $ | 195,588 | $ | 25,872 | |||||||||||||
|
The amount of total gains or losses for the period included in
earnings (or OCI) attributable to the change in unrealized gains
or losses relating to assets still held at reporting date
|
$ | 9,707 | $ | (8,475 | ) | $ | 19,858 | $ | (33,584 | ) | 90,328 | $ | 6,320 | $ | 408 | |||||||||||||
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Table of Contents
|
Level 3 Fair Value Measurements
|
||||||||||||||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||||||||||
| Investment Securities | ||||||||||||||||||||||||||||
|
Mortgage
|
Alt-A
|
Pooled
|
||||||||||||||||||||||||||
|
Servicing
|
Derivative
|
Mortgage-
|
Trust-
|
Private
|
Equity
|
|||||||||||||||||||||||
| Rights | Instruments | Backed | Preferred | Label CMO | Other | Investments | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
|
Balance, beginning of year
|
$ | 207,894 | $ | (46 | ) | $ | 547,358 | $ | 279,175 | $ | — | $ | 7,956 | $ | 41,516 | |||||||||||||
|
Total gains/losses:
|
||||||||||||||||||||||||||||
|
Included in earnings
|
(40,769 | ) | 8,683 | (174,591 | ) | (14,528 | ) | (3,435 | ) | (6,258 | ) | (9,242 | ) | |||||||||||||||
|
Included in OCI
|
— | — | (33,211 | ) | (120,292 | ) | (149,699 | ) | (187 | ) | — | |||||||||||||||||
|
Purchases
|
— | — | — | — | — | — | 4,619 | |||||||||||||||||||||
|
Sales
|
313 | — | — | — | — | — | — | |||||||||||||||||||||
|
Repayments
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Issuances
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Settlements
|
— | (505 | ) | (26,407 | ) | (2,749 | ) | (97,126 | ) | (1,511 | ) | — | ||||||||||||||||
|
Transfers in/out of Level 3
|
— | — | 9,272 | — | 773,775 | — | — | |||||||||||||||||||||
|
Balance, end of year
|
$ | 167,438 | $ | 8,132 | $ | 322,421 | $ | 141,606 | $ | 523,515 | $ | — | $ | 36,893 | ||||||||||||||
|
The amount of total gains or losses for the period included in
earnings (or OCI) attributable to the change in unrealized gains
or losses relating to assets still held at reporting date
|
$ | (40,769 | ) | $ | 8,179 | $ | (207,802 | ) | $ | (134,820 | ) | $ | (153,134 | ) | $ | (6,445 | ) | $ | (3,469 | ) | ||||||||
The table below summarizes the classification of gains and
losses due to changes in fair value, recorded in earnings for
Level 3 assets and liabilities for the years ended
December 31, 2009 and 2008.
|
Level 3 Fair Value Measurements
|
||||||||||||||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||||||||||||||
| Investment Securities | ||||||||||||||||||||||||||||
|
Mortgage
|
Alt-A
|
Pooled
|
||||||||||||||||||||||||||
|
Servicing
|
Derivative
|
Mortgage-
|
Trust-
|
Private
|
Equity
|
|||||||||||||||||||||||
| Rights | Instruments | Backed | Preferred | Label CMO | Other | Investments | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
|
Classification of gains and losses in earnings:
|
||||||||||||||||||||||||||||
|
Mortgage banking income (loss)
|
$ | 9,707 | $ | (5,976 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
|
Securities gains (losses)
|
— | — | (12,225 | ) | (40,843 | ) | (5,996 | ) | — | — | ||||||||||||||||||
|
Interest and fee income
|
— | — | 14,489 | 571 | 2,390 | (2,031 | ) | — | ||||||||||||||||||||
|
Noninterest income
|
— | — | — | — | — | — | 408 | |||||||||||||||||||||
|
Total
|
$ | 9,707 | $ | (5,976 | ) | $ | 2,264 | $ | (40,272 | ) | $ | (3,606 | ) | $ | (2,031 | ) | $ | 408 | ||||||||||
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Table of Contents
|
Level 3 Fair Value Measurements
|
||||||||||||||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||||||||||
| Investment Securities | ||||||||||||||||||||||||||||
|
Mortgage
|
Alt-A
|
Pooled
|
||||||||||||||||||||||||||
|
Servicing
|
Derivative
|
Mortgage-
|
Trust-
|
Private
|
Equity
|
|||||||||||||||||||||||
| Rights | Instruments | Backed | Preferred | Label CMO | Other | Investments | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
|
Classification of gains and losses in earnings:
|
||||||||||||||||||||||||||||
|
Mortgage banking income (loss)
|
$ | (40,769 | ) | $ | 8,683 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
|
Securities gains (losses)
|
— | — | (176,928 | ) | (14,508 | ) | (5,728 | ) | (5,457 | ) | — | |||||||||||||||||
|
Interest and fee income
|
— | — | 2,337 | (20 | ) | 2,293 | (801 | ) | — | |||||||||||||||||||
|
Noninterest income
|
— | — | — | — | — | — | (9,242 | ) | ||||||||||||||||||||
|
Total
|
$ | (40,769 | ) | $ | 8,683 | $ | (174,591 | ) | $ | (14,528 | ) | $ | (3,435 | ) | $ | (6,258 | ) | $ | (9,242 | ) | ||||||||
Assets
and Liabilities measured at fair value on a nonrecurring
basis
Certain assets and liabilities may be required to be measured at
fair value on a nonrecurring basis in periods subsequent to
their initial recognition. These assets and liabilities are not
measured at fair value on an ongoing basis; however, they are
subject to fair value adjustments in certain circumstances, such
as when there is evidence of impairment.
Periodically, Huntington records nonrecurring adjustments of
collateral-dependent loans measured for impairment when
establishing the allowance for credit losses. Such amounts are
generally based on the fair value of the underlying collateral
supporting the loan. In cases where the carrying value exceeds
the fair value of the collateral, an impairment charge is
recognized. During the years ended 2009 and 2008, Huntington
identified $898.0 million, and $307.9 million,
respectively, of impaired loans for which the fair value is
recorded based upon collateral value, a Level 3 input in
the valuation hierarchy. For the years ended December 31,
2009 and 2008, nonrecurring fair value losses of
$305.4 million and $103.3 million, respectively, were
recorded within the provision for credit losses.
Other real estate owned properties are valued based on
appraisals and third party price opinions, less estimated
selling costs. During 2009 and 2008, Huntington recorded
$140.1 million and $122.5 million, respectively of
OREO assets at fair value. Losses of $93.9 million and
$33.5 million were recorded within noninterest expense.
Goodwill at March 31, 2009 with a carrying amount of
$3.0 billion was written down to its implied fair value of
$351.3 million. Also during the 2009 second quarter,
goodwill related to the sale of a small payments-related
business completed in July 2009,with a carrying amount of
$8.5 million was written down to its implied fair value of
$4.2 million.
185
Table of Contents
Fair
values of financial instruments
The carrying amounts and estimated fair values of
Huntington’s financial instruments at December 31,
2009 and 2008 are presented in the following table:
| December 31, 2009 | December 31, 2008 | |||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Financial Assets:
|
||||||||||||||||
|
Cash and short-term assets
|
$ | 1,840,719 | $ | 1,840,719 | $ | 1,137,229 | $ | 1,137,229 | ||||||||
|
Trading account securities
|
83,657 | 83,657 | 88,677 | 88,677 | ||||||||||||
|
Loans held for sale
|
461,647 | 461,647 | 390,438 | 390,438 | ||||||||||||
|
Investment securities
|
8,587,914 | 8,587,914 | 4,384,457 | 4,384,457 | ||||||||||||
|
Net loans and direct financing leases
|
35,308,184 | 32,598,423 | 40,191,938 | 33,856,153 | ||||||||||||
|
Derivatives
|
287,756 | 287,756 | 458,995 | 458,995 | ||||||||||||
|
Financial Liabilities:
|
||||||||||||||||
|
Deposits
|
(40,493,927 | ) | (40,753,365 | ) | (37,943,286 | ) | (38,363,248 | ) | ||||||||
|
Short-term borrowings
|
(876,241 | ) | (857,254 | ) | (1,309,157 | ) | (1,252,861 | ) | ||||||||
|
Federal Home Loan Bank advances
|
(168,977 | ) | (168,977 | ) | (2,588,976 | ) | (2,588,445 | ) | ||||||||
|
Other long term debt
|
(2,369,491 | ) | (2,332,300 | ) | (2,331,632 | ) | (1,979,441 | ) | ||||||||
|
Subordinated notes
|
(1,264,202 | ) | (989,989 | ) | (1,950,097 | ) | (1,287,150 | ) | ||||||||
|
Derivatives
|
(238,947 | ) | (238,947 | ) | (83,367 | ) | (83,367 | ) | ||||||||
The short-term nature of certain assets and liabilities result
in their carrying value approximating fair value. These include
trading account securities, customers’ acceptance
liabilities, short-term borrowings, bank acceptances
outstanding, Federal Home Loan Bank Advances and cash and
short-term assets, which include cash and due from banks,
interest-bearing deposits in banks, and federal funds sold and
securities purchased under resale agreements. Loan commitments
and letters of credit generally have short-term, variable-rate
features and contain clauses that limit Huntington’s
exposure to changes in customer credit quality. Accordingly,
their carrying values, which are immaterial at the respective
balance sheet dates, are reasonable estimates of fair value. Not
all the financial instruments listed in the table above are
subject to the disclosure provisions of ASC 820.
Certain assets, the most significant being operating lease
assets, bank owned life insurance, and premises and equipment,
do not meet the definition of a financial instrument and are
excluded from this disclosure. Similarly, mortgage and
non-mortgage servicing rights, deposit base, and other customer
relationship intangibles are not considered financial
instruments and are not included above. Accordingly, this fair
value information is not intended to, and does not, represent
Huntington’s underlying value. Many of the assets and
liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by
management. These estimations necessarily involve the use of
judgment about a wide variety of factors, including but not
limited to, relevancy of market prices of comparable
instruments, expected future cash flows, and appropriate
discount rates.
The following methods and assumptions were used by Huntington to
estimate the fair value of the remaining classes of financial
instruments:
Loans and
Direct Financing Leases
Variable-rate loans that reprice frequently are based on
carrying amounts, as adjusted for estimated credit losses. The
fair values for other loans and leases are estimated using
discounted cash flow analyses and employ interest rates
currently being offered for loans and leases with similar terms.
The rates take into account the position of the yield curve, as
well as an adjustment for prepayment risk, operating costs, and
186
Table of Contents
profit. This value is also reduced by an estimate of probable
losses and the credit risk associated in the loan and lease
portfolio. The valuation of the loan portfolio reflected
discounts that Huntington believed are consistent with
transactions occurring in the market place.
Deposits
Demand deposits, savings accounts, and money market deposits
are, by definition, equal to the amount payable on demand. The
fair values of fixed-rate time deposits are estimated by
discounting cash flows using interest rates currently being
offered on certificates with similar maturities.
Debt
Fixed-rate, long-term debt is based upon quoted market prices,
which are inclusive of Huntington’s credit risk. In the
absence of quoted market prices, discounted cash flows using
market rates for similar debt with the same maturities are used
in the determination of fair value.
| 22. | DERIVATIVE FINANCIAL INSTRUMENTS |
Derivative financial instruments are recorded in the
consolidated balance sheet as either an asset or a liability (in
other assets or other liabilities, respectively) and measured at
fair value.
Derivatives
used in Asset and Liability Management Activities
A variety of derivative financial instruments, principally
interest rate swaps, are used in asset and liability management
activities to protect against the risk of adverse price or
interest rate movements. These instruments provide flexibility
in adjusting Huntington’s sensitivity to changes in
interest rates without exposure to loss of principal and higher
funding requirements. Huntington records derivatives at fair
value, as further described in Note 21. Collateral
agreements are regularly entered into as part of the underlying
derivative agreements with Huntington’s counterparties to
mitigate counter party credit risk. At December 31, 2009
and 2008, aggregate credit risk associated with these
derivatives, net of collateral that has been pledged by the
counterparty, was $20.3 million and $40.7 million,
respectively. The credit risk associated with interest rate
swaps is calculated after considering master netting agreements.
At December 31, 2009, Huntington pledged
$230.7 million investment security and cash collateral to
various counterparties, while various other counterparties
pledged $74.5 million investment security and cash
collateral to Huntington to satisfy collateral netting
agreements. In the event of credit downgrades, Huntington could
be required to provide an additional $1.8 million in
collateral.
The following table presents the gross notional values of
derivatives used in Huntington’s asset and liability
management activities at December 31, 2009, identified by
the underlying interest rate-sensitive instruments:
|
Fair Value
|
Cash Flow
|
|||||||||||
| Hedges | Hedges | Total | ||||||||||
| (In thousands) | ||||||||||||
|
Instruments associated with:
|
||||||||||||
|
Loans
|
$ | — | $ | 8,685,000 | $ | 8,685,000 | ||||||
|
Deposits
|
801,525 | — | 801,525 | |||||||||
|
Subordinated notes
|
298,000 | — | 298,000 | |||||||||
|
Other long-term debt
|
35,000 | — | 35,000 | |||||||||
|
Total notional value at December 31, 2009
|
$ | 1,134,525 | $ | 8,685,000 | $ | 9,819,525 | ||||||
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The following table presents additional information about the
interest rate swaps and caps used in Huntington’s asset and
liability management activities at December 31, 2009:
|
Average
|
Weighted-Average
|
|||||||||||||||||||
|
Notional
|
Maturity
|
Fair
|
Rate | |||||||||||||||||
| Value | (Years) | Value | Receive | Pay | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Asset conversion swaps — receive fixed —
generic
|
$ | 8,685,000 | 1.8 | $ | 47,044 | 1.91 | % | 0.49 | % | |||||||||||
|
Liability conversion swaps — receive fixed —
generic
|
1,134,525 | 3.1 | 35,476 | 2.38 | 0.33 | |||||||||||||||
|
Total swap portfolio
|
$ | 9,819,525 | 2.0 | $ | 82,520 | 1.96 | % | 0.47 | % | |||||||||||
These derivative financial instruments were entered into for the
purpose of managing the interest rate risk of assets and
liabilities. Consequently, net amounts receivable or payable on
contracts hedging either interest earning assets or interest
bearing liabilities were accrued as an adjustment to either
interest income or interest expense. The net amounts resulted in
an increase/(decrease) to net interest income of
$167.9 million, $10.5 million, and $(3.0) million
for the years ended December 31, 2009, 2008 and 2007,
respectively.
In connection with securitization activities, Huntington
purchased interest rate caps with a notional value totaling
$1.1 billion. These purchased caps were assigned to the
securitization trust for the benefit of the security holders.
Interest rate caps were also sold totaling $1.1 billion
outside the securitization structure. Both the purchased and
sold caps are marked to market through income.
In connection with the sale of Huntington’s class B
Visa shares, Huntington entered into a swap agreement with the
purchaser of the shares. The swap agreement adjusts for dilution
in the conversion ratio of class B shares resulting from
the Visa litigation. At December 31, the fair value of the
swap liability of $3.9 million is an estimate of the
exposure liability based upon Huntington’s assessment of
the probability-weighted potential Visa litigation losses.
The following table presents the fair values at
December 31, 2009 and 2008 of Huntington’s derivatives
that are designated and not designated as hedging instruments.
Amounts in the table below are presented gross without the
impact of any net collateral arrangements.
Asset
derivatives included in accrued income and other
assets
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Interest rate contracts designated as hedging instruments
|
$ | 85,984 | $ | 230,601 | ||||
|
Interest rate contracts not designated as hedging instruments
|
255,692 | 436,131 | ||||||
|
Total contracts
|
$ | 341,676 | $ | 666,732 | ||||
Liability
derivatives included in accrued expenses and other
liabilities
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Interest rate contracts designated as hedging instruments
|
$ | 3,464 | $ | — | ||||
|
Interest rate contracts not designated as hedging instruments
|
234,026 | 377,249 | ||||||
|
Total contracts
|
$ | 237,490 | $ | 377,249 | ||||
Fair value hedges are purchased to convert deposits and
subordinated and other long term debt from fixed rate
obligations to floating rate. The changes in fair value of the
derivative are, to the extent that the hedging
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relationship is effective, recorded through earnings and offset
against changes in the fair value of the hedged item.
The following table presents the increase or (decrease) to
interest expense for derivatives designated as fair value hedges:
|
Increase (decrease) to
|
||||||||||||||
|
Derivatives in Fair
|
Location of Change in Fair Value Recognized in
|
interest expense | ||||||||||||
|
Value Hedging Relationships
|
Earnings on Derivative | 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||||
|
Interest Rate Contracts
|
||||||||||||||
|
Deposits
|
Interest expense — deposits | $ | (3,648 | ) | $ | (2,322 | ) | $ | 4,120 | |||||
|
Subordinated notes
|
Interest expense — subordinated notes and other long term debt | (27,576 | ) | (15,349 | ) | 260 | ||||||||
|
Other long term debt
|
Interest expense — subordinated notes and other long term debt | 378 | 3,810 | 6,598 | ||||||||||
|
Total
|
$ | (30,846 | ) | $ | (13,861 | ) | $ | 10,978 | ||||||
For cash flow hedges, interest rate swap contracts were entered
into that pay fixed-rate interest in exchange for the receipt of
variable-rate interest without the exchange of the
contract’s underlying notional amount, which effectively
converts a portion of its floating-rate debt to fixed-rate. This
reduces the potentially adverse impact of increases in interest
rates on future interest expense. Other LIBOR-based commercial
and industrial loans were effectively converted to fixed-rate by
entering into contracts that swap certain variable-rate interest
payments for fixed-rate interest payments at designated times.
To the extent these derivatives are effective in offsetting the
variability of the hedged cash flows, changes in the
derivatives’ fair value will not be included in current
earnings but are reported as a component of accumulated other
comprehensive income in shareholders’ equity. These changes
in fair value will be included in earnings of future periods
when earnings are also affected by the changes in the hedged
cash flows. To the extent these derivatives are not effective,
changes in their fair values are immediately included in
interest income.
The following table presents the gains and (losses) recognized
in other comprehensive income (OCI) and the location in the
consolidated statements of income of gains and (losses)
reclassified from OCI into earnings for derivatives designated
as effective cash flow hedges:
|
Amount of
|
Amount of Gain
|
|||||||||||||||||||||||||
|
Gain or (Loss)
|
Location of Gain or (Loss)
|
or (Loss) Reclassified
|
||||||||||||||||||||||||
|
Derivatives in Cash
|
Recognized in
|
Reclassified from Accumulated
|
from Accumulated
|
|||||||||||||||||||||||
|
Flow Hedging
|
OCI on Derivatives
|
OCI into Earnings
|
OCI into Earnings
|
|||||||||||||||||||||||
|
Relationships
|
(Effective Portion) | (Effective Portion) | (Effective Portion) | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
|
Interest rate contracts
|
||||||||||||||||||||||||||
|
Loans
|
$ | (68,365 | ) | $ | 54,887 | $ | — | Interest and fee income — loans and leases | $ | 117,669 | $ | (9,207 | ) | $ | 10,257 | |||||||||||
|
FHLB Advances
|
1,338 | 2,394 | (4,186 | ) | Interest expense — FHLB Advances | 6,890 | (12,490 | ) | (13,034 | ) | ||||||||||||||||
|
Deposits
|
326 | 2,842 | (1,946 | ) | Interest expense — deposits | 4,153 | (4,169 | ) | (360 | ) | ||||||||||||||||
|
Subordinated notes
|
101 | (101 | ) | — | Interest expense — subordinated notes and other long term debt | (2,717 | ) | (4,408 | ) | (5,512 | ) | |||||||||||||||
|
Other long term debt
|
— | 239 | (125 | ) | Interest expense — subordinated notes and other long term debt | (899 | ) | (865 | ) | (886 | ) | |||||||||||||||
|
Total
|
$ | (66,600 | ) | $ | 60,261 | $ | (6,257 | ) | $ | 125,096 | $ | (31,139 | ) | $ | (9,535 | ) | ||||||||||
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The following table details the gains and (losses) recognized in
noninterest income on the ineffective portion on interest rate
contracts for derivatives designated as fair value and cash flow
hedges for the years ending December 31, 2009, 2008 and
2007.
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
|
Derivatives in fair value hedging relationships
Interest rate contracts
|
||||||||||||
|
Deposits
|
$ | 10,847 | $ | (274 | ) | $ | (1,134 | ) | ||||
|
Derivatives in cash flow hedging relationships
|
||||||||||||
|
Interest rate contracts
|
||||||||||||
|
Loans
|
16,638 | 3,821 | — | |||||||||
|
FHLB Deposits
|
(792 | ) | 783 | 9 | ||||||||
Derivatives
used in trading activities
Various derivative financial instruments are offered to enable
customers to meet their financing and investing objectives and
for their risk management purposes. Derivative financial
instruments used in trading activities consisted predominantly
of interest rate swaps, but also included interest rate caps,
floors, and futures, as well as foreign exchange options.
Interest rate options grant the option holder the right to buy
or sell an underlying financial instrument for a predetermined
price before the contract expires. Interest rate futures are
commitments to either purchase or sell a financial instrument at
a future date for a specified price or yield and may be settled
in cash or through delivery of the underlying financial
instrument. Interest rate caps and floors are option-based
contracts that entitle the buyer to receive cash payments based
on the difference between a designated reference rate and a
strike price, applied to a notional amount. Written options,
primarily caps, expose Huntington to market risk but not credit
risk. Purchased options contain both credit and market risk. The
interest rate risk of these customer derivatives is mitigated by
entering into similar derivatives having offsetting terms with
other counterparties. The credit risk to these customers is
evaluated and included in the calculation of fair value.
The net fair values of these derivative financial instruments,
for which the gross amounts are included in other assets or
other liabilities at December 31, 2009 and 2008 were
$45.1 million and $41.9 million, respectively. Changes
in fair value of $10.2 million, $27.0 million, and
$17.8 million for the years ended December 31, 2009,
2008 and 2007, respectively, were reflected in other noninterest
income. The total notional values of derivative financial
instruments used by Huntington on behalf of customers, including
offsetting derivatives, were $9.6 billion and
$10.9 billion at December 31, 2009 and 2008,
respectively. Huntington’s credit risks from interest rate
swaps used for trading purposes were $255.7 million and
$429.9 million at the same dates, respectively.
Derivatives
used in mortgage banking activities
Huntington also uses certain derivative financial instruments to
offset changes in value of its residential mortgage servicing
assets. These derivatives consist primarily of forward interest
rate agreements and forward mortgage securities. The derivative
instruments used are not designated as hedges. Accordingly, such
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derivatives are recorded at fair value with changes in fair
value reflected in mortgage banking income. The following table
summarizes the derivative assets and liabilities used in
mortgage banking activities:
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
|
Derivative assets:
|
||||||||
|
Interest rate lock agreements
|
$ | 995 | $ | 8,182 | ||||
|
Forward trades and options
|
7,711 | 233 | ||||||
|
Total derivative assets
|
8,706 | 8,415 | ||||||
|
Derivative liabilities:
|
||||||||
|
Interest rate lock agreements
|
(1,338 | ) | (50 | ) | ||||
|
Forward trades and options
|
(119 | ) | (11,588 | ) | ||||
|
Total derivative liabilities
|
(1,457 | ) | (11,638 | ) | ||||
|
Net derivative liability
|
$ | 7,249 | $ | (3,223 | ) | |||
The total notional value of these derivative financial
instruments at December 31, 2009 and 2008, was
$3.7 billion, $2.2 billion, respectively. The total
notional amount at December 31, 2009 corresponds to trading
assets with a fair value of $3.2 million and trading
liabilities with a fair value of $15.5 million. The gains
and (losses) related to derivative instruments included in
mortgage banking income for the years ended December 31,
2009, 2008 and 2007 were ($41.2) million,
($19.0) million and ($25.5) million, respectively.
Total MSR hedging gains and (losses) for the years ended
December 31, 2009, 2008, and 2007, were
($37.8) million, $22.4 million and
($1.7) million, respectively, and were also included in
mortgage banking income.
| 23. | VARIABLE INTEREST ENTITIES |
Consolidated
Variable Interest Entities
Consolidated variable interest entities at December 31,
2009 consist of the Franklin 2009 Trust (See
Note 5) and certain loan securitization trusts. Loan
securitizations include auto loan and lease securitization
trusts formed in 2008, 2006, and 2000. Huntington has determined
that the trusts are not qualified special purpose entities and,
therefore, are variable interest entities (VIEs) based upon
equity guidelines established in ASC 810. Huntington owns 100%
of the trusts and is the primary beneficiary of the VIEs,
therefore, the trusts are consolidated. The carrying amount and
classification of the trusts’ assets and liabilities
included in the consolidated balance sheet are as follows:
| December 31, 2009 | ||||||||||||||||||||
|
Franklin
|
||||||||||||||||||||
| 2009 Trust | 2008 Trust | 2006 Trust | 2000 Trust | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash
|
$ | — | $ | 26,286 | $ | 215,655 | $ | 44,134 | $ | 286,075 | ||||||||||
|
Loans and leases
|
443,854 | 535,337 | 1,241,671 | 31,594 | 2,252,456 | |||||||||||||||
|
Allowance for loan and lease losses
|
— | (8,940 | ) | (20,736 | ) | (527 | ) | (30,203 | ) | |||||||||||
|
Net loans and leases
|
443,854 | 526,397 | 1,220,935 | 31,067 | 2,222,253 | |||||||||||||||
|
Accrued income and other assets
|
29,857 | 3,234 | 6,375 | 138 | 39,604 | |||||||||||||||
|
Total assets
|
$ | 473,711 | $ | 555,917 | $ | 1,442,965 | $ | 75,339 | $ | 2,547,932 | ||||||||||
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| December 31, 2009 | ||||||||||||||||||||
|
Franklin
|
||||||||||||||||||||
| 2009 Trust | 2008 Trust | 2006 Trust | 2000 Trust | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Other long-term debt
|
$ | 79,891 | $ | 391,954 | $ | 1,059,249 | $ | — | $ | 1,531,094 | ||||||||||
|
Accrued interest and other liabilities
|
3,093 | 743 | 12,402 | — | 16,238 | |||||||||||||||
|
Total liabilities
|
$ | 82,984 | $ | 392,697 | $ | 1,071,651 | $ | — | $ | 1,547,332 | ||||||||||
The auto loans and leases were designated to repay the
securitized notes. Huntington services the loans and leases and
uses the proceeds from principal and interest payments to pay
the securitized notes during the amortization period. Huntington
has not provided financial or other support that was not
previously contractually required.
Trust Preferred
Securities
Huntington has certain wholly-owned trusts that are not
consolidated. The trusts have been formed for the sole purpose
of issuing trust preferred securities, from which the proceeds
are then invested in Huntington junior subordinated debentures,
which are reflected in Huntington’s condensed consolidated
balance sheet as subordinated notes. The trust securities are
the obligations of the trusts and are not consolidated within
Huntington’s balance sheet. A list of trust preferred
securities outstanding at December 31, 2009 follows:
|
Principal Amount of
|
Investment in
|
|||||||
|
Subordinated Note/
|
Unconsolidated
|
|||||||
| Debenture Issued to Trust (1) | Subsidiary | |||||||
| (In thousands) | ||||||||
|
Huntington Capital I
|
$ | 138,816 | $ | 6,186 | ||||
|
Huntington Capital II
|
60,093 | 3,093 | ||||||
|
Huntington Capital III
|
114,045 | 10 | ||||||
|
BancFirst Ohio Trust Preferred
|
23,299 | 619 | ||||||
|
Sky Financial Capital Trust I
|
64,971 | 1,856 | ||||||
|
Sky Financial Capital Trust II
|
30,929 | 929 | ||||||
|
Sky Financial Capital Trust III
|
77,809 | 2,320 | ||||||
|
Sky Financial Capital Trust IV
|
77,810 | 2,320 | ||||||
|
Prospect Trust I
|
6,186 | 186 | ||||||
|
Total
|
$ | 593,958 | $ | 17,519 | ||||
| (1) | Represents the principal amount of debentures issued to each trust, including unamortized original issue discount. |
Huntington’s investment in the unconsolidated trusts
represents the only risk of loss.
As mentioned in Note 14, during 2009, Huntington
repurchased $702.4 million of junior subordinated
debentures, bank subordinated notes and medium-term notes
resulting in net pre-tax gains of $147.4 million. In 2008,
$48.5 million of the junior subordinated debentures were
repurchased resulting in net pre-tax gains of $23.5 million.
These transactions have been recorded as gains on early
extinguishment of debt, a reduction of noninterest expense in
the consolidated financial statements.
Each issue of the junior subordinated debentures has an interest
rate equal to the corresponding trust securities distribution
rate. Huntington has the right to defer payment of interest on
the debentures at any time, or from time to time for a period
not exceeding five years, provided that no extension period may
extend beyond the stated maturity of the related debentures.
During any such extension period, distributions to the
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Table of Contents
trust securities will also be deferred and Huntington’s
ability to pay dividends on its common stock will be restricted.
Periodic cash payments and payments upon liquidation or
redemption with respect to trust securities are guaranteed by
Huntington to the extent of funds held by the trusts. The
guarantee ranks subordinate and junior in right of payment to
all indebtedness of the company to the same extent as the junior
subordinated debt. The guarantee does not place a limitation on
the amount of additional indebtedness that may be incurred by
Huntington.
Low
Income Housing Tax Credit Partnerships
Huntington makes certain equity investments in various limited
partnerships that sponsor affordable housing projects utilizing
the Low Income Housing Tax Credit (LIHTC) pursuant to
Section 42 of the Internal Revenue Code. The purpose of
these investments is to achieve a satisfactory return on
capital, to facilitate the sale of additional affordable housing
product offerings and to assist us in achieving goals associated
with the Community Reinvestment Act. The primary activities of
the limited partnerships include the identification,
development, and operation of multi-family housing that is
leased to qualifying residential tenants. Generally, these types
of investments are funded through a combination of debt and
equity.
Huntington does not own a majority of the limited partnership
interests in these entities and is not the primary beneficiary.
Huntington uses the equity method to account for the majority of
its investments in these entities. These investments are
included in accrued income and other assets. At
December 31, 2009 and 2008, Huntington has commitments of
$285.3 million and $216.2 million, respectively of
which $192.7 million and $166.4 million, respectively
are funded. The unfunded portion is included in accrued expenses
and other liabilities.
| 24. | COMMITMENTS AND CONTINGENT LIABILITIES |
Commitments
to extend credit
In the ordinary course of business, Huntington makes various
commitments to extend credit that are not reflected in the
financial statements. The contract amounts of these financial
agreements at December 31, 2009 and December 31, 2008,
were as follows:
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In millions) | ||||||||
|
Contract amount represents credit risk
|
||||||||
|
Commitments to extend credit
|
||||||||
|
Commercial
|
$ | 5,834 | $ | 6,494 | ||||
|
Consumer
|
5,028 | 4,964 | ||||||
|
Commercial real estate
|
1,075 | 1,951 | ||||||
|
Standby letters of credit
|
577 | 1,272 | ||||||
Commitments to extend credit generally have fixed expiration
dates, are variable-rate, and contain clauses that permit
Huntington to terminate or otherwise renegotiate the contracts
in the event of a significant deterioration in the
customer’s credit quality. These arrangements normally
require the payment of a fee by the customer, the pricing of
which is based on prevailing market conditions, credit quality,
probability of funding, and other relevant factors. Since many
of these commitments are expected to expire without being drawn
upon, the contract amounts are not necessarily indicative of
future cash requirements. The interest rate risk arising from
these financial instruments is insignificant as a result of
their predominantly short-term, variable-rate nature.
Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond
financing, and similar transactions. Most of these arrangements
mature within two years. The carrying amount of deferred revenue
associated with these guarantees was $2.8 million and
$4.5 million at December 31, 2009 and 2008,
respectively.
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Through the Company’s credit process, Huntington monitors
the credit risks of outstanding standby letters of credit. When
it is probable that a standby letter of credit will be drawn and
not repaid in full, losses are recognized in the provision for
credit losses. At December 31, 2009, Huntington had
$0.6 billion of standby letters of credit outstanding, of
which 60% were collateralized. Included in this
$0.6 billion total are letters of credit issued by the Bank
that support securities that were issued by customers and
remarketed by The Huntington Investment Company (HIC), the
Company’s broker-dealer subsidiary. As a result of a change
in credit ratings and pursuant to the letters of credit issued
by the Bank, the Bank repurchased substantially all of these
securities, net of payments and maturities, during 2009.
Huntington uses an internal loan grading system to assess an
estimate of loss on its loan and lease portfolio. The same loan
grading system is used to help monitor credit risk associated
with standby letters of credit. Under this risk rating system as
of December 31, 2009, approximately $83.7 million of
the standby letters of credit were rated strong with sufficient
asset quality, liquidity, and good debt capacity and coverage,
approximately $440.3 million were rated average with
acceptable asset quality, liquidity, and modest debt capacity;
and approximately $68.8 million were rated substandard with
negative financial trends, structural weaknesses, operating
difficulties, and higher leverage.
Commercial letters of credit represent short-term,
self-liquidating instruments that facilitate customer trade
transactions and generally have maturities of no longer than
90 days. The goods or cargo being traded normally secures
these instruments.
Commitments
to sell loans
Huntington enters into forward contracts relating to its
mortgage banking business to hedge the exposures from
commitments to make new residential mortgage loans with existing
customers and from mortgage loans classified as held for sale.
At December 31, 2009 and 2008, Huntington had commitments
to sell residential real estate loans of $662.9 million and
$759.4 million, respectively. These contracts mature in
less than one year.
Litigation
Between December 19, 2007 and February 1, 2008, two
putative class actions were filed in the United States
District Court for the Southern District of Ohio, Eastern
Division, against Huntington and certain of its current or
former officers and directors purportedly on behalf of
purchasers of Huntington securities during the periods
July 20, 2007 to November 16, 2007, or July 20,
2007 to January 10, 2008. On June 5, 2008, the two
cases were consolidated into a single action. On August 22,
2008, a consolidated complaint was filed asserting a class
period of July 19, 2007 through November 16, 2007,
alleging that the defendants violated Section 10(b) of the
Securities Exchange Act of 1934, as amended (the Exchange Act),
and
Rule 10b-5
promulgated thereunder, and Section 20(a) of the Exchange
Act by issuing a series of allegedly false
and/or
misleading statements concerning Huntington’s financial
results, prospects, and condition, relating, in particular, to
its transactions with Franklin. The action was dismissed with
prejudice on December 4, 2009, and the plaintiffs
thereafter filed a Notice of Appeal to the United States Court
of Appeals for the Sixth Circuit. Because the case is currently
being appealed, it is not possible for management to assess the
probability of an adverse outcome, or reasonably estimate the
amount of any potential loss.
Three putative derivative lawsuits were filed in the Court of
Common Pleas of Delaware County, Ohio, the United States
District Court for the Southern District of Ohio, Eastern
Division, and the Court of Common Pleas of Franklin County,
Ohio, between January 16, 2008, and April 17, 2008,
against certain of Huntington’s current or former officers
and directors variously seeking to allege breaches of fiduciary
duty, waste of corporate assets, abuse of control, gross
mismanagement, and unjust enrichment, all in connection with
Huntington’s acquisition of Sky Financial, certain
transactions between Huntington and Franklin, and the financial
disclosures relating to such transactions. Huntington is named
as a nominal defendant in each of these actions. The derivative
action filed in the United States District Court for the
Southern District of Ohio was dismissed with prejudice on
September 23, 2009. The plaintiff in that action thereafter
filed a Notice of Appeal to the United States Court of Appeals
for the Sixth Circuit, but the appeal was dismissed at the
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plaintiff’s request on January 12, 2010. That
plaintiff subsequently sent a letter to Huntington’s Board
of Directors demanding that it initiate certain litigation,
which letter has been taken under advisement. Motions to dismiss
the other two actions were filed on March 10, 2008, and
January 26, 2009, and currently are pending. At this stage
of the proceedings, it is not possible for management to assess
the probability of an adverse outcome, or reasonably estimate
the amount of any potential loss.
Between February 20, 2008 and February 29, 2008, three
putative class action lawsuits were filed in the United States
District Court for the Southern District of Ohio, Eastern
Division, against Huntington, the Huntington Bancshares
Incorporated Pension Review Committee, the Huntington Investment
and Tax Savings Plan (the Plan) Administrative Committee, and
certain of the Company’s officers and directors purportedly
on behalf of participants in or beneficiaries of the Plan
between either July 1, 2007 or July 20, 2007 and the
present. On May 14, 2008, the three cases were consolidated
into a single action. On August 4, 2008, a consolidated
complaint was filed asserting a class period of July 1,
2007 through the present, alleging breaches of fiduciary duties
in violation of the Employee Retirement Income Security Act
(ERISA) relating to Huntington stock being offered as an
investment alternative for participants in the Plan and seeking
money damages and equitable relief. On February 9, 2009,
the court entered an order dismissing with prejudice the
consolidated lawsuit in its entirety, and the plaintiffs
thereafter filed a Notice of Appeal to the United States Court
of Appeals for the Sixth Circuit. During the pendency of the
appeal, the parties to the appeal commenced settlement
discussions and have reached an agreement in principle to settle
this litigation on a classwide basis for $1,450,000, subject to
the drafting of definitive settlement documentation and court
approval. Because the settlement has not been finalized or
approved, it is not possible for management to make further
comment at this time.
On May 7, 2008, a putative class action lawsuit was filed
in the United States District Court for the Southern District of
Ohio, Eastern Division, against Huntington (as successor in
interest to Sky Financial), and certain of Sky Financial’s
former officers on behalf of all persons who purchased or
acquired Sky Financial common stock in connection with and as a
result of Sky Financial’s October 2006 acquisition of
Waterfield Mortgage Company. The complaint alleged that the
defendants violated Sections 11, 12, and 15 of the
Securities Act of 1933 in connection with the issuance of
allegedly false and misleading registration and proxy statements
leading up to the Waterfield acquisition and their disclosures
about the nature and extent of Sky Financial’s lending
relationship with Franklin. On May 1, 2009, the plaintiff
filed a stipulation dismissing the lawsuit with prejudice. The
dismissal entry was approved by the Court on May 5, 2009,
and the case is now terminated.
Commitments
Under Capital and Operating Lease Obligations
At December 31, 2009, Huntington and its subsidiaries were
obligated under noncancelable leases for land, buildings, and
equipment. Many of these leases contain renewal options and
certain leases provide options to purchase the leased property
during or at the expiration of the lease period at specified
prices. Some leases contain escalation clauses calling for
rentals to be adjusted for increased real estate taxes and other
operating expenses or proportionately adjusted for increases in
the consumer or other price indices.
The future minimum rental payments required under operating
leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 2009, were
$44.8 million in 2010, $42.7 million in 2011,
$41.2 million in 2012, $38.5 million in 2013,
$35.3 million in 2014, and $155.2 million thereafter.
At December 31, 2009, total minimum lease payments have not
been reduced by minimum sublease rentals of $36.7 million
due in the future under noncancelable subleases. At
December 31, 2009, the future minimum sublease rental
payments that Huntington expects to receive are
$14.5 million in 2010; $11.5 million in 2011;
$3.7 million in 2012; $3.2 million in 2013;
$2.4 million in 2014; and $1.4 million thereafter. The
rental expense for all operating leases was $49.8 million,
$53.4 million, and $51.3 million for 2009, 2008, and
2007, respectively. Huntington had no material obligations under
capital leases.
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| 25. | OTHER REGULATORY MATTERS |
Huntington and its bank subsidiary, The Huntington National
Bank, are subject to various regulatory capital requirements
administered by federal and state banking agencies. These
requirements involve qualitative judgments and quantitative
measures of assets, liabilities, capital amounts, and certain
off-balance sheet items as calculated under regulatory
accounting practices. Failure to meet minimum capital
requirements can initiate certain actions by regulators that, if
undertaken, could have a material adverse effect on
Huntington’s and The Huntington National Bank’s
financial statements. Applicable capital adequacy guidelines
require minimum ratios of 4.00% for Tier 1 Risk-based
Capital, 8.00% for Total Risk-based Capital, and 4.00% for
Tier 1 Leverage Capital. To be considered
“well-capitalized” under the regulatory framework for
prompt corrective action, the ratios must be at least 6.00%,
10.00%, and 5.00%, respectively.
As of December 31, 2009, Huntington and The Huntington
National Bank (the Bank) met all capital adequacy requirements
and had regulatory capital ratios in excess of the levels
established for
“well-capitalized”
institutions. The period-end capital amounts and capital ratios
of Huntington and the Bank are as follows:
| Tier 1 | Total Capital | Tier 1 Leverage | ||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||
|
Huntington Bancshares Incorporated
|
||||||||||||||||||||||||
|
Amount
|
$ | 5,201 | $ | 5,036 | $ | 6,231 | $ | 6,535 | $ | 5,201 | $ | 5,036 | ||||||||||||
|
Ratio
|
12.03 | % | 10.72 | % | 14.41 | % | 13.91 | % | 10.09 | % | 9.82 | % | ||||||||||||
|
The Huntington National Bank
|
||||||||||||||||||||||||
|
Amount
|
$ | 2,873 | $ | 2,995 | $ | 4,780 | $ | 4,978 | $ | 2,873 | $ | 2,995 | ||||||||||||
|
Ratio
|
6.66 | % | 6.44 | % | 11.08 | % | 10.71 | % | 5.59 | % | 5.99 | % | ||||||||||||
Tier 1 Risk-based Capital consists of total equity plus
qualifying capital securities and minority interest, excluding
unrealized gains and losses accumulated in other comprehensive
income, and non-qualifying intangible and servicing assets.
Total Risk-based Capital is Tier 1 Risk-based Capital plus
qualifying subordinated notes and allowable allowances for
credit losses (limited to 1.25% of total risk-weighted assets).
Tier 1 Leverage Capital is equal to Tier 1 Capital.
Both Tier 1 Capital and Total Capital ratios are derived by
dividing the respective capital amounts by net risk-weighted
assets, which are calculated as prescribed by regulatory
agencies. Tier 1 Leverage Capital ratio is calculated by
dividing the Tier 1 capital amount by average total assets
for the fourth quarter of 2009 and 2008, less non-qualifying
intangibles and other adjustments.
The parent company has the ability to provide additional capital
to the Bank to maintain the Bank’s risk-based capital
ratios at levels at which would be considered
“well-capitalized.”
Huntington and its subsidiaries are also subject to various
regulatory requirements that impose restrictions on cash, debt,
and dividends. The Bank is required to maintain cash reserves
based on the level of certain of its deposits. This reserve
requirement may be met by holding cash in banking offices or on
deposit at the Federal Reserve Bank. During 2009 and 2008, the
average balance of these deposits were $1.4 billion and
$44.8 million, respectively.
Under current Federal Reserve regulations, the Bank is limited
as to the amount and type of loans it may make to the parent
company and non-bank subsidiaries. At December 31, 2009,
the Bank could lend $478.0 million to a single affiliate,
subject to the qualifying collateral requirements defined in the
regulations.
Dividends from the Bank are one of the major sources of funds
for Huntington. These funds aid the parent company in the
payment of dividends to shareholders, expenses, and other
obligations. Payment of dividends to the parent company is
subject to various legal and regulatory limitations. Regulatory
approval is required prior to the declaration of any dividends
in excess of available retained earnings. The amount of
dividends that may be declared without regulatory approval is
further limited to the sum of net income for the current year
and retained net income for the preceding two years, less any
required transfers to surplus or
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common stock. At December 31, 2009, the bank could not have
declared and paid additional dividends to the parent company
without regulatory approval.
| 26. | PARENT COMPANY FINANCIAL STATEMENTS |
The parent company condensed financial statements, which include
transactions with subsidiaries, are as follows.
| December 31, | ||||||||
|
Balance Sheets
|
2009 | 2008 | ||||||
| (In thousands) | ||||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents(1)
|
$ | 1,376,539 | $ | 1,122,056 | ||||
|
Due from The Huntington National Bank(2)
|
955,695 | 532,746 | ||||||
|
Due from non-bank subsidiaries
|
273,317 | 338,675 | ||||||
|
Investment in The Huntington National Bank
|
2,821,181 | 5,274,261 | ||||||
|
Investment in non-bank subsidiaries
|
815,730 | 854,575 | ||||||
|
Accrued interest receivable and other assets
|
112,557 | 146,167 | ||||||
|
Total assets
|
$ | 6,355,019 | $ | 8,268,480 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
|
Short-term borrowings
|
$ | 1,291 | $ | 1,852 | ||||
|
Long-term borrowings
|
637,434 | 803,699 | ||||||
|
Dividends payable, accrued expenses, and other liabilities
|
380,292 | 234,023 | ||||||
|
Total liabilities
|
1,019,017 | 1,039,574 | ||||||
|
Shareholders’ equity(3)
|
5,336,002 | 7,228,906 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 6,355,019 | $ | 8,268,480 | ||||
| (1) | Includes restricted cash of $125,000 at December 31, 2009. | |
| (2) | Related to subordinated notes described in Note 14. | |
| (3) | See Huntington’s Consolidated Statements of Changes in Shareholders’ Equity. |
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Table of Contents
| Year Ended December 31, | ||||||||||||
|
Statements of Income
|
2009 | 2008 | 2007 | |||||||||
| (In thousands) | ||||||||||||
|
Income
|
||||||||||||
|
Dividends from
|
||||||||||||
|
The Huntington National Bank
|
$ | — | 142,254 | $ | 239,000 | |||||||
|
Non-bank subsidiaries
|
70,600 | 69,645 | 41,784 | |||||||||
|
Interest from
|
||||||||||||
|
The Huntington National Bank
|
51,620 | 19,749 | 18,622 | |||||||||
|
Non-bank subsidiaries
|
14,662 | 12,700 | 12,180 | |||||||||
|
Management fees from subsidiaries
|
— | — | 3,882 | |||||||||
|
Other
|
68,352 | 108 | 1,180 | |||||||||
|
Total income
|
205,234 | 244,456 | 316,648 | |||||||||
|
Expense
|
||||||||||||
|
Personnel costs
|
21,206 | 24,398 | 24,818 | |||||||||
|
Interest on borrowings
|
29,357 | 44,890 | 41,189 | |||||||||
|
Other
|
28,398 | 240 | 14,667 | |||||||||
|
Total expense
|
78,961 | 69,528 | 80,674 | |||||||||
|
Income before income taxes and equity in undistributed net
income of subsidiaries
|
126,273 | 174,928 | 235,974 | |||||||||
|
Income taxes
|
20,675 | (120,371 | ) | (39,509 | ) | |||||||
|
Income before equity in undistributed net income of subsidiaries
|
105,598 | 295,299 | 275,483 | |||||||||
|
Increase (decrease) in undistributed net income of:
|
||||||||||||
|
The Huntington National Bank
|
(3,130,329 | ) | (98,863 | ) | (176,083 | ) | ||||||
|
Non-bank subsidiaries
|
(69,448 | ) | (310,242 | ) | (24,231 | ) | ||||||
|
Net (loss) income
|
$ | (3,094,179 | ) | (113,806 | ) | $ | 75,169 | |||||
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Table of Contents
| Year Ended December 31, | ||||||||||||
|
Statements of Cash Flows
|
2009 | 2008 | 2007 | |||||||||
| (In thousands) | ||||||||||||
|
Operating activities
|
||||||||||||
|
Net (loss) income
|
$ | (3,094,179 | ) | $ | (113,806 | ) | $ | 75,169 | ||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Equity in undistributed net income of subsidiaries
|
3,199,777 | 266,851 | 200,315 | |||||||||
|
Depreciation and amortization
|
3,458 | 2,071 | 4,367 | |||||||||
|
Other, net
|
(103,464 | ) | 65,076 | (51,283 | ) | |||||||
|
Net cash (used for) provided by operating activities
|
5,592 | 220,192 | 228,568 | |||||||||
|
Investing activities
|
||||||||||||
|
Net cash paid for acquisition
|
— | — | (313,311 | ) | ||||||||
|
Repayments from subsidiaries
|
393,041 | 540,308 | 333,469 | |||||||||
|
Advances to subsidiaries
|
(1,017,892 | ) | (1,337,165 | ) | (442,418 | ) | ||||||
|
Net cash used for investing activities
|
(624,851 | ) | (796,857 | ) | (422,260 | ) | ||||||
|
Financing activities
|
||||||||||||
|
Proceeds from issuance of long-term borrowings
|
— | — | 250,010 | |||||||||
|
Payment of borrowings
|
(99,417 | ) | (98,470 | ) | (42,577 | ) | ||||||
|
Dividends paid on preferred stock
|
(107,262 | ) | (23,242 | ) | — | |||||||
|
Dividends paid on common stock
|
(55,026 | ) | (279,608 | ) | (289,758 | ) | ||||||
|
Proceeds from issuance of preferred stock
|
— | 1,947,625 | — | |||||||||
|
Proceeds from issuance of common stock
|
1,135,645 | — | — | |||||||||
|
Other, net
|
(198 | ) | (1,073 | ) | 16,782 | |||||||
|
Net cash provided by (used for) financing activities
|
873,742 | 1,545,232 | (65,543 | ) | ||||||||
|
Change in cash and cash equivalents
|
254,483 | 968,567 | (259,235 | ) | ||||||||
|
Cash and cash equivalents at beginning of year
|
1,122,056 | 153,489 | 412,724 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 1,376,539 | $ | 1,122,056 | $ | 153,489 | ||||||
|
Supplemental disclosure:
|
||||||||||||
|
Interest paid
|
$ | 29,357 | $ | 44,890 | $ | 41,189 | ||||||
|
Dividends in-kind received from The Huntington National Bank
|
— | 124,689 | — | |||||||||
| 27. | SEGMENT REPORTING |
In the second quarter of 2009, Huntington reorganized its
Regional Banking segment to reflect how its assets and
operations are now managed. The Regional Banking line of
business, which through March 31, 2009, had been managed
geographically, is now managed on a product segment approach.
The five distinct segments are: Retail and Business Banking,
Commercial Banking, Commercial Real Estate, Auto Finance and
Dealer Services (AFDS), and the Private Financial Group (PFG). A
sixth group includes the Treasury function and other unallocated
assets, liabilities, revenue, and expense. All periods have been
reclassified to conform to the current period presentation.
Segment results are determined based upon the Company’s
management reporting system, which assigns balance sheet and
income statement items to each of the business segments. The
process is designed around the Company’s organizational and
management structure and, accordingly, the results derived are
not
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Table of Contents
necessarily comparable with similar information published by
other financial institutions. An overview of this system is
provided below, along with a description of each segment and
discussion of financial results.
Retail and Business Banking:
This segment
provides traditional banking products and services to consumer
and small business customers located in its 11 operating regions
within the six states of Ohio, Michigan, Pennsylvania, Indiana,
West Virginia, and Kentucky. It provides these services through
a banking network of over 600 branches, and over 1,300 ATMs,
along with internet and telephone banking channels. It also
provides certain services on a limited basis outside of these
six states, including mortgage banking and small business
administration (SBA) lending. Retail products and services
include home equity loans and lines of credit, first mortgage
loans, direct installment loans, small business loans, personal
and business deposit products, treasury management products, as
well as sales of investment and insurance services. At
December 31, 2009, Retail and Business Banking
accounted for 39% and 71% of consolidated loans and leases and
deposits, respectively.
Commercial Banking:
This segment provides a
variety of banking products and services to customers within the
Company’s primary banking markets who generally have larger
credit exposures and sales revenues compared with its Retail and
Business Banking customers. Commercial Banking products include
commercial loans, international trade, cash management, leasing,
interest rate protection products, capital market alternatives,
401(k) plans, and mezzanine investment capabilities. The
Commercial Banking team also serves customers that specialize in
equipment leasing, as well as serves the commercial banking
needs of government entities,
not-for-profit
organizations, and large corporations. Commercial bankers
personally deliver these products and services by developing
leads through community involvement, referrals from other
professionals, and targeted prospect calling.
Commercial Real Estate:
This segment serves
professional real estate developers or other customers with real
estate project financing needs within the Company’s primary
banking markets. Commercial Real Estate products and services
include CRE loans, cash management, interest rate protection
products, and capital market alternatives. Commercial real
estate bankers personally deliver these products and services
by: (a) relationships with developers in the Company’s
footprint who are recognized as the most experienced,
well-managed, and well-capitalized, and are capable of operating
in all phases of the real estate cycle
(“top-tier
developers”), (b) leads through community involvement,
and (c) referrals from other professionals.
Auto Finance and Dealer Services (AFDS):
This
segment provides a variety of banking products and services to
approximately 2,200 automotive dealerships within the
Company’s primary banking markets. During the first quarter
of 2009, AFDS discontinued lending activities in Arizona,
Florida, Tennessee, Texas, and Virginia. Also, all lease
origination activities were discontinued during the 2008 fourth
quarter. AFDS finances the purchase of automobiles by customers
at the automotive dealerships; finances dealerships’ new
and used vehicle inventories, land, buildings, and other real
estate owned by the dealership; finances dealership working
capital needs; and provides other banking services to the
automotive dealerships and their owners. Competition from the
financing divisions of automobile manufacturers and from other
financial institutions is intense. AFDS’ production
opportunities are directly impacted by the general automotive
sales business, including programs initiated by manufacturers to
enhance and increase sales directly. Huntington has been in this
line of business for over 50 years.
Private Financial Group (PFG):
This segment
provides products and services designed to meet the needs of
higher net worth customers. Revenue results from the sale of
trust, asset management, investment advisory, brokerage,
insurance, and private banking products and services including
credit and lending activities. PFG also focuses on financial
solutions for corporate and institutional customers that include
investment banking, sales and trading of securities, and
interest rate risk management products. To serve high net worth
customers, we use a unique distribution model that employs a
single, unified sales force to deliver products and services
mainly through Retail and Business Banking distribution channels.
In addition to the Company’s five business segments, the
Treasury/Other group includes revenue and expense related to
assets, liabilities, and equity that are not directly assigned
or allocated to one of the five business segments. Assets in
this group include investment securities and bank owned life
insurance. Net interest income/(expense) includes the net impact
of administering the Company’s investment securities
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Table of Contents
portfolios as part of overall liquidity management. A
match-funded transfer pricing (FTP) system is used to attribute
appropriate funding interest income and interest expense to
other business segments. As such, net interest income includes
the net impact of any over or under allocations arising from
centralized management of interest rate risk. Furthermore, net
interest income includes the net impact of derivatives used to
hedge interest rate sensitivity. Non-interest income includes
miscellaneous fee income not allocated to other business
segments, including bank owned life insurance income. Fee income
also includes asset revaluations not allocated to business
segments, as well as any investment securities and trading
assets gains or losses. The non-interest expense includes
certain corporate administrative, merger costs, and other
miscellaneous expenses not allocated to business segments. This
group also includes any difference between the actual effective
tax rate of Huntington and the statutory tax rate used to
allocate income taxes to the other segments.
In 2009, a comprehensive review of the FTP methodology resulted
in changes to various assumptions, including liquidity premiums.
Business segment financial performance for 2009 reflect the
methodology changes, however, financial performance for 2008 was
not restated to reflect these changes, as the changes for that
year were not material. As a result of this change, business
segment performance for net interest income comparisons between
2009 and 2008 are affected.
The management accounting process used to develop the business
segment reporting utilized various estimates and allocation
methodologies to measure the performance of the business
segments. During 2009, Huntington implemented a full-allocation
methodology, where all Treasury/Other expenses, except those
related to servicing Franklin assets, reported “Significant
Items” (excluding the goodwill impairment), and a small
residual of other unallocated expenses, are allocated to the
other five business segments. Prior to this implementation, only
certain expenses were allocated to the five business segments.
Business segment financial performance for 2009 reflect the
implementation, however, financial performance for 2008 was not
restated to reflect these changes, as the methodology in place
at that time was appropriate. As a result of this change,
business segment performance comparisons for noninterest expense
between 2009 and 2008 are affected.
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Table of Contents
Listed below is certain operating basis financial information
reconciled to Huntington’s 2009, 2008, and 2007 reported
results by line of business:
|
Retail &
|
Former
|
|||||||||||||||||||||||||||||||||
|
Business
|
Commercial
|
Regional
|
Treasury/
|
Huntington
|
||||||||||||||||||||||||||||||
|
Income Statements
|
Banking | Commercial | Real Estate | Banking | AFDS | PFG | Other | Consolidated | ||||||||||||||||||||||||||
| (In thousands ) | ||||||||||||||||||||||||||||||||||
|
2009
|
||||||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 882,026 | $ | 209,376 | $ | 134,190 | $ | 1,225,592 | $ | 141,989 | $ | 77,390 | $ | (20,684 | ) | $ | 1,424,287 | |||||||||||||||||
|
Provision for credit losses
|
(526,399 | ) | (359,233 | ) | (1,050,554 | ) | (1,936,186 | ) | (91,342 | ) | (57,450 | ) | 10,307 | (2,074,671 | ) | |||||||||||||||||||
|
Non-Interest income
|
511,298 | 92,986 | 1,613 | 605,897 | 61,003 | 244,255 | 94,489 | 1,005,644 | ||||||||||||||||||||||||||
|
Non-Interest expense,
|
||||||||||||||||||||||||||||||||||
|
excluding goodwill impairment
|
(902,111 | ) | (143,420 | ) | (36,357 | ) | (1,081,888 | ) | (113,119 | ) | (243,738 | ) | 12,246 | (1,426,499 | ) | |||||||||||||||||||
|
Goodwill impairment
|
— | — | — | (2,573,818 | )(1) | (28,895 | ) | (4,231 | ) | (2,606,944 | ) | |||||||||||||||||||||||
|
Income taxes
|
12,315 | 70,102 | 332,888 | 415,305 | 514 | 2,953 | 165,232 | 584,004 | ||||||||||||||||||||||||||
|
Operating/reported net income
|
$ | (22,871 | ) | $ | (130,189 | ) | $ | (618,220 | ) | $ | (3,345,098 | ) | $ | (955 | ) | $ | (5,485 | ) | $ | 257,359 | $ | (3,094,179 | ) | |||||||||||
|
2008
|
||||||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 941,807 | $ | 313,353 | $ | 202,178 | $ | 1,457,338 | $ | 149,236 | $ | 74,651 | $ | (149,534 | ) | $ | 1,531,691 | |||||||||||||||||
|
Provision for credit losses
|
(219,348 | ) | (102,143 | ) | (215,548 | ) | (537,039 | ) | (69,143 | ) | (13,279 | ) | (438,002 | ) | (1,057,463 | ) | ||||||||||||||||||
|
Non interest income
|
405,654 | 96,676 | 13,288 | 515,618 | 59,497 | 258,300 | (126,277 | ) | 707,138 | |||||||||||||||||||||||||
|
Non interest expense
|
(779,010 | ) | (147,329 | ) | (31,550 | ) | (957,889 | ) | (123,158 | ) | (248,540 | ) | (147,787 | ) | (1,477,374 | ) | ||||||||||||||||||
|
Income taxes
|
(122,186 | ) | (56,195 | ) | 11,071 | (167,310 | ) | (5,751 | ) | (24,896 | ) | 380,159 | 182,202 | |||||||||||||||||||||
|
Operating/reported net income
|
$ | 226,917 | $ | 104,362 | $ | (20,561 | ) | $ | 310,718 | $ | 10,681 | $ | 46,236 | $ | (481,441 | ) | $ | (113,806 | ) | |||||||||||||||
|
2007
|
||||||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 710,154 | $ | 245,690 | $ | 147,884 | $ | 1,103,728 | $ | 138,786 | $ | 57,985 | $ | 1,013 | $ | 1,301,512 | ||||||||||||||||||
|
Provision for credit losses
|
(48,373 | ) | 5,352 | (145,134 | ) | (188,155 | ) | (30,745 | ) | (961 | ) | (423,767 | ) | (643,628 | ) | |||||||||||||||||||
|
Non interest income
|
363,990 | 81,873 | 11,675 | 457,538 | 41,594 | 197,436 | (19,965 | ) | 676,603 | |||||||||||||||||||||||||
|
Non interest expense
|
(694,942 | ) | (133,652 | ) | (24,313 | ) | (852,907 | ) | (77,435 | ) | (202,364 | ) | (179,138 | ) | (1,311,844 | ) | ||||||||||||||||||
|
Income taxes
|
(115,790 | ) | (69,742 | ) | 3,461 | (182,071 | ) | (25,270 | ) | (18,234 | ) | 278,101 | 52,526 | |||||||||||||||||||||
|
Operating/reported net income
|
$ | 215,039 | $ | 129,521 | $ | (6,427 | ) | $ | 338,133 | $ | 46,930 | $ | 33,862 | $ | (343,756 | ) | $ | 75,169 | ||||||||||||||||
| (1) | Represents the 2009 first quarter goodwill impairment charge associated with the former Regional Banking segment. The allocation of this amount to the new business segments was not practical. |
|
Assets at
|
Deposits at
|
|||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (In millions) | ||||||||||||||||
|
Retail & Business Banking
|
$ | 16,565 | $ | 17,232 | $ | 28,877 | $ | 27,350 | ||||||||
|
Commercial Banking
|
7,767 | 8,685 | 6,031 | 5,769 | ||||||||||||
|
Commercial Real Estate
|
7,426 | 8,360 | 535 | 487 | ||||||||||||
|
AFDS
|
5,142 | 6,373 | 83 | 70 | ||||||||||||
|
PFG
|
3,254 | 3,210 | 3,409 | 1,728 | ||||||||||||
|
Treasury/Other
|
11,401 | 7,605 | 1,559 | 2,539 | ||||||||||||
|
Unallocated goodwill(1)
|
— | 2,888 | — | — | ||||||||||||
|
Total
|
$ | 51,555 | $ | 54,353 | $ | 40,494 | $ | 37,943 | ||||||||
| (1) | Represents the balance of goodwill associated with the former Regional Banking business segment. The allocation of these amounts to the new business segments is not practical. |
202
Table of Contents
| 28. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) |
The following is a summary of the unaudited quarterly results of
operations, for the years ended December 31, 2009 and 2008:
| 2009 | ||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
|
Interest income
|
$ | 551,335 | $ | 553,846 | $ | 563,004 | $ | 569,957 | ||||||||
|
Interest expense
|
(177,271 | ) | (191,027 | ) | (213,105 | ) | (232,452 | ) | ||||||||
|
Net interest income
|
374,064 | 362,819 | 349,899 | 337,505 | ||||||||||||
|
Provision for credit losses
|
(893,991 | ) | (475,136 | ) | (413,707 | ) | (291,837 | ) | ||||||||
|
Non-interest income
|
244,546 | 256,052 | 265,945 | 239,102 | ||||||||||||
|
Non-interest expense
|
(322,596 | ) | (401,097 | ) | (339,982 | ) | (2,969,769 | ) | ||||||||
|
Loss before income taxes
|
(597,977 | ) | (257,362 | ) | (137,845 | ) | (2,684,999 | ) | ||||||||
|
Benefit for income taxes
|
228,290 | 91,172 | 12,750 | 251,792 | ||||||||||||
|
Net loss income
|
(369,687 | ) | (166,190 | ) | (125,095 | ) | (2,433,207 | ) | ||||||||
|
Dividends on preferred shares
|
(29,289 | ) | (29,223 | ) | (57,451 | ) | (58,793 | ) | ||||||||
|
Net loss applicable to common shares
|
$ | (398,976 | ) | $ | (195,413 | ) | $ | (182,546 | ) | $ | (2,492,000 | ) | ||||
|
Net loss per common share — Basic
|
$ | (0.56 | ) | (0.33 | ) | (0.40 | ) | (6.79 | ) | |||||||
|
Net loss per common share — Diluted
|
(0.56 | ) | (0.33 | ) | (0.40 | ) | (6.79 | ) | ||||||||
| 2008 | ||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
|
Interest income
|
$ | 662,508 | $ | 685,728 | $ | 696,675 | $ | 753,411 | ||||||||
|
Interest expense
|
(286,143 | ) | (297,092 | ) | (306,809 | ) | (376,587 | ) | ||||||||
|
Net interest income
|
376,365 | 388,636 | 389,866 | 376,824 | ||||||||||||
|
Provision for credit losses
|
(722,608 | ) | (125,392 | ) | (120,813 | ) | (88,650 | ) | ||||||||
|
Non-interest income
|
67,099 | 167,857 | 236,430 | 235,752 | ||||||||||||
|
Non-interest expense
|
(390,094 | ) | (338,996 | ) | (377,803 | ) | (370,481 | ) | ||||||||
|
(Loss) income before income taxes
|
(669,238 | ) | 92,105 | 127,680 | 153,445 | |||||||||||
|
Benefit (provision) for income taxes
|
251,949 | (17,042 | ) | (26,328 | ) | (26,377 | ) | |||||||||
|
Net (loss) income
|
(417,289 | ) | 75,063 | 101,352 | 127,068 | |||||||||||
|
Dividends declared on preferred shares
|
(23,158 | ) | (12,091 | ) | (11,151 | ) | — | |||||||||
|
Net (loss) income applicable to common shares
|
$ | (440,447 | ) | $ | 62,972 | $ | 90,201 | $ | 127,068 | |||||||
|
Net (loss) income per common share — Basic
|
$ | (1.20 | ) | $ | 0.17 | $ | 0.25 | $ | 0.35 | |||||||
|
Net (loss) income per common share — Diluted
|
(1.20 | ) | 0.17 | 0.25 | 0.35 | |||||||||||
203
Table of Contents
| Item 9: | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
| Item 9A: | Controls and Procedures |
Disclosure
Controls and Procedures
Huntington maintains disclosure controls and procedures designed
to ensure that the information required to be disclosed in the
reports that it files or submits under the Securities Exchange
Act of 1934, as amended, are recorded, processed, summarized,
and reported within the time periods specified in the
Commission’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Act
is accumulated and communicated to the issuer’s management,
including its principal executive and principal financial
officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure. Huntington’s Management, with the participation
of its Chief Executive Officer and the Chief Financial Officer,
evaluated the effectiveness of Huntington’s disclosure
controls and procedures (as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of the end of the period covered by
this report. Based upon such evaluation, Huntington’s Chief
Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, Huntington’s disclosure
controls and procedures were effective.
There have not been any significant changes in Huntington’s
internal control over financial reporting (as such term is
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the fiscal quarter to which this
report relates that have materially affected, or are reasonably
likely to materially affect, Huntington’s internal control
over financial reporting.
Internal
Control Over Financial Reporting
Information required by this item is set forth in “Report
of Management” and “Report of Independent Registered
Public Accounting Firm”.
Changes
in Internal Control Over Financial Reporting
There have not been any changes in our internal control over
financial reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the quarter ended
December 31, 2009 to which this report relates that have
materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
| Item 9A(T): | Controls and Procedures |
Not applicable.
| Item 9B: | Other Information |
Not applicable.
204
Table of Contents
PART III
We refer in Part III of this report to relevant sections of
our 2010 Proxy Statement for the 2010 annual meeting of
shareholders, which will be filed with the SEC pursuant to
Regulation 14A within 120 days of the close of our
2009 fiscal year. Portions of our 2010 Proxy Statement,
including the sections we refer to in this report, are
incorporated by reference into this report.
| Item 10: | Directors and Executive Officers and Corporate Governance |
Information required by this item is set forth under the
captions “Election of Directors”, “Corporate
Governance”, “Executive Officers of Huntington”,
“Board Committees”, “Report of the Audit
Committee”, “Involvement in Certain Legal
Proceedings” and “Section 16(a) Beneficial
Ownership Reporting Compliance” of our 2010 Proxy Statement.
| Item 11: | Executive Compensation |
Information required by this item is set forth under the
captions “Executive Compensation” and “Director
Compensation” of our 2010 Proxy Statement.
| Item 12: | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information required by this item is set forth under the caption
“Proposal to Approve Huntington’s Second Amended and
Restated 2007 Stock and Long Term Incentive Plan” and in a
table entitled “Equity Compensation Plans Information”
of our 2010 Proxy Statement.
| Item 13: | Certain Relationships and Related Transactions, and Director Independence |
Information required by this item is set forth under the caption
“Transactions With Directors and Executive Officers”
of our 2010 Proxy Statement.
| Item 14: | Principal Accounting Fees and Services |
Information required by this item is set forth under the caption
“Proposal to Ratify the Appointment of Independent
Registered Public Accounting Firm” of our 2010 Proxy
Statement.
PART IV
| Item 15: | Exhibit and Financial Statement Schedules |
(a) The following documents are filed as part of this
report:
(1) The report of independent registered public accounting
firm and consolidated financial statements appearing in
Item 8.
(2) Huntington is not filing separately financial statement
schedules because of the absence of conditions under which they
are required or because the required information is included in
the consolidated financial statements or the notes thereto.
(3) The exhibits required by this item are listed in the
Exhibit Index of this
Form 10-K.
The management contracts and compensation plans or arrangements
required to be filed as exhibits to this
Form 10-K
are listed as Exhibits 10.1 through 10.23 in the
Exhibit Index.
(b) The exhibits to this
Form 10-K
begin on page 207 of this report.
(c) See Item 15(a)(2) above.
205
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 18th day of February,
2010.
HUNTINGTON
BANCSHARES INCORPORATED
(Registrant)
(Registrant)
|
By:
|
/s/ Stephen
D. Steinour
Chairman, President, Chief Executive Officer, and Director (Principal Executive Officer) |
By: |
/s/ Donald
R. Kimble
Senior Executive Vice President Chief Financial Officer (Principal Financial Officer) |
|||
| By: |
/s/ David
S. Anderson
Executive Vice President Controller (Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on
the 18th day of February, 2010.
|
Don M. Casto III *
Don M. Casto III Director |
Wm. J. Lhota *
Wm. J. Lhota Director |
|
|
Michael J. Endres *
Michael J. Endres Director |
Gene E. Little *
Gene E. Little Director |
|
|
Marylouise Fennell *
Marylouise Fennell Director |
Gerard P. Mastroianni *
Gerard P. Mastroianni Director |
|
|
John B. Gerlach, Jr. *
John B. Gerlach, Jr. Director |
Richard W. Neu *
Richard W. Neu Director |
|
|
D. James Hilliker *
D. James Hilliker Director |
David L. Porteous *
David L. Porteous Director |
|
|
David P. Lauer *
David P. Lauer Director |
Kathleen H. Ransier *
Kathleen H. Ransier Director |
|
|
Jonathan A. Levy *
Jonathan A. Levy Director |
William R. Robertson *
William R. Robertson Director |
|
|
*
/s/ Donald R. Kimble
Donald R. Kimble Attorney-in-fact for each of the persons indicated |
206
Table of Contents
Exhibit Index
This report incorporates by reference the documents listed below
that we have previously filed with the SEC. The SEC allows us to
incorporate by reference information in this document. The
information incorporated by reference is considered to be a part
of this document, except for any information that is superseded
by information that is included directly in this document.
This information may be read and copied at the Public Reference
Room of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. The SEC also maintains an Internet
web site that contains reports, proxy statements, and other
information about issuers, like us, who file electronically with
the SEC. The address of the site is
http://www.sec.gov
.
The reports and other information filed by us with the SEC are
also available at our Internet web site. The address of the site
is
http://www.huntington.com
.
Except as specifically incorporated by reference into this
Annual Report on
Form 10-K,
information on those web sites is not part of this report. You
also should be able to inspect reports, proxy statements, and
other information about us at the offices of the NASDAQ National
Market at 33 Whitehall Street, New York, New York.
|
SEC File or
|
||||||||||
|
Exhibit
|
Registration
|
Exhibit
|
||||||||
|
Number
|
Document Description
|
Report or Registration Statement
|
Number
|
Reference
|
||||||
| 2 | .1 | Agreement and Plan of Merger, dated December 20, 2006 by and among Huntington Bancshares Incorporated, Penguin Acquisition, LLC and Sky Financial Group, Inc. | Current Report on Form 8-K dated December 22, 2006. | 000-02525 | 2.1 | |||||
| 3 | .1 | Articles of Restatement of Charter. | Annual Report on Form 10-K for the year ended December 31, 1993. | 000-02525 | 3(i) | |||||
| 3 | .2 | Articles of Amendment to Articles of Restatement of Charter. | Current Report on Form 8-K dated May 31, 2007 | 000-02525 | 3.1 | |||||
| 3 | .3 | Articles of Amendment to Articles of Restatement of Charter | Current Report on Form 8-K dated May 7, 2008 | 000-02525 | 3.1 | |||||
| 3 | .4 | Articles Supplementary of Huntington Bancshares Incorporated, as of April 22, 2008. | Current Report on Form 8-K dated April 22, 2008 | 000-02525 | 3.1 | |||||
| 3 | .5 | Articles Supplementary of Huntington Bancshares Incorporated, as of April 22. 2008. | Current Report on Form 8-K dated April 22, 2008 | 000-02525 | 3.2 | |||||
| 3 | .6 | Articles Supplementary of Huntington Bancshares Incorporated, as of November 12, 2008. | Current Report on Form 8-K dated November 12, 2008 | 001-34073 | 3.1 | |||||
| 3 | .7 | Articles Supplementary of Huntington Bancshares Incorporated, as of December 31, 2006. | Annual Report on Form 10-K for the year ended December 31, 2006 | 000-02525 | 3.4 | |||||
| 3 | .8 | Bylaws of Huntington Bancshares Incorporated, as amended and restated, as of January 21, 2009. | Current Report on Form 8-K dated January 23, 2009. | 001-34073 | 3.1 | |||||
| 4 | .1 | Instruments defining the Rights of Security Holders — reference is made to Articles Fifth, Eighth, and Tenth of Articles of Restatement of Charter, as amended and supplemented. Instruments defining the rights of holders of long-term debt will be furnished to the Securities and Exchange Commission upon request. | ||||||||
| 10 | .1 | * Form of Executive Agreement for certain executive officers. | Current Report on Form 8-K dated November 21, 2005. | 000-02525 | 99.1 | |||||
| 10 | .2 | * Form of Executive Agreement for certain executive officers. | Current Report on Form 8-K dated November 21, 2005. | 000-02525 | 99.2 | |||||
| 10 | .3 | * Form of Executive Agreement for certain executive officers. | Current Report on Form 8-K dated November 21, 2005. | 000-02525 | 99.3 | |||||
| 10 | .4 | Amendment to the Huntington Bancshares Incorporated Executive Agreements. | Quarterly Report on Form 10-Q for the quarter ended September 30, 2009. | 001-34073 | 10.4 | |||||
| 10 | .5 | * Huntington Bancshares Incorporated Management Incentive Plan, as amended and restated effective for plan years beginning on or after January 1, 2004. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. | 000-02525 | 10(a) | |||||
| 10 | .6 | First Amendment to the Huntington Bancshares Incorporated 2004 Management Incentive Plan | Definitive Proxy Statement for the 2007 Annual Meeting of Stockholders | 000-02525 | H | |||||
| 10 | .7 | Second Amendment to the Huntington Bancshares Incorporated 2004 Management Incentive Plan | Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. | 001-34073 | 10.2 | |||||
207
Table of Contents
|
SEC File or
|
||||||||||
|
Exhibit
|
Registration
|
Exhibit
|
||||||||
|
Number
|
Document Description
|
Report or Registration Statement
|
Number
|
Reference
|
||||||
| 10 | .8 | * Huntington Supplemental Retirement Income Plan, amended and restated, effective October 15, 2008. | Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 | 001-34073 | 10.3 | |||||
| 10 | .9 | * Deferred Compensation Plan and Trust for Directors | Post-Effective Amendment No. 2 to Registration Statement on Form S-8 filed on January 28, 1991. | 33-10546 | 4(a) | |||||
| 10 | .10 | * Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors | Registration Statement on Form S-8 filed on July 19, 1991. | 33-41774 | 4(a) | |||||
| 10 | .11 | * First Amendment to Huntington Bancshares Incorporated Deferred Compensation Plan and Trust for Huntington Bancshares Incorporated Directors | Quarterly Report 10-Q for the quarter ended March 31, 2001 | 000-02525 | 10(q) | |||||
| 10 | .12 | * Executive Deferred Compensation Plan, as amended and restated on October 15, 2008. | Quarterly Report on Form 10-Q for the quarter ended September 30, 2008. | 001-34073 | 10.4 | |||||
| 10 | .13 | * The Huntington Supplemental Stock Purchase and Tax Savings Plan and Trust, amended and restated, effective January 1, 2005 | Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 | 000-02525 | 10.5 | |||||
| 10 | .14 | * Amended and Restated 1994 Stock Option Plan | Annual Report on Form 10-K for the year ended December 31, 1996 | 000-02525 | 10(r) | |||||
| 10 | .15 | * First Amendment to Huntington Bancshares Incorporated 1994 Stock Option Plan | Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 | 000-02525 | 10(a) | |||||
| 10 | .16 | * First Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan | Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 | 000-02525 | 10(c) | |||||
| 10 | .17 | * Second Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan | Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 | 000-02525 | 10(d) | |||||
| 10 | .18 | * Third Amendment to Huntington Bancshares Incorporated Amended and Restated 1994 Stock Option Plan | Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 | 000-02525 | 10(e) | |||||
| 10 | .19 | * Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan | Quarterly Report 10-Q for the quarter ended March 31, 2001 | 000-02525 | 10(r) | |||||
| 10 | .20 | * First Amendment to the Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan | Quarterly Report 10-Q for the quarter ended March 31, 2002 | 000-02525 | 10(h) | |||||
| 10 | .21 | * Second Amendment to the Huntington Bancshares Incorporated 2001 Stock and Long-Term Incentive Plan | Quarterly Report 10-Q for the quarter ended March 31, 2002 | 000-02525 | 10(i) | |||||
| 10 | .22 | * Huntington Bancshares Incorporated 2004 Stock and Long-Term Incentive Plan | Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 | 000-02525 | 10(b) | |||||
| 10 | .23 | * First Amendment to the 2004 Stock and Long-Term Incentive Plan | Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 | 000-02525 | 10(e) | |||||
| 10 | .24 | * Huntington Bancshares Incorporated Employee Stock Incentive Plan (incorporating changes made by first amendment to Plan) | Registration Statement on Form S-8 filed on December 13, 2001. | 333-75032 | 4(a) | |||||
| 10 | .25 | * Second Amendment to Huntington Bancshares Incorporated Employee Stock Incentive Plan | Annual Report on Form 10-K for the year ended December 31, 2002 | 000-02525 | 10(s) | |||||
| 10 | .26 | * Employment Agreement, dated January 14, 2009, between Huntington Bancshares Incorporated and Stephen D. Steinour. | Current Report on Form 8-K dated January 16, 2009. | 001-34073 | 10.1 | |||||
| 10 | .27 | * Executive Agreement, dated January 14, 2009, between Huntington Bancshares Incorporated and Stephen D. Steinour. | Current Report on Form 8-K dated January 16, 2009. | 001-34073 | 10.2 | |||||
| 10 | .28 | * Employment Agreement, dated December 20, 2006, between Huntington Bancshares Incorporated and Thomas E. Hoaglin | Registration Statement on Form S-4 filed February 26, 2007 | 333-140897 | 10.1 | |||||
| 10 | .29 | * Letter Agreement between Huntington Bancshares Incorporated and Raymond J. Biggs, acknowledged and agreed to by Mr. Biggs on May 1, 2005 | Annual Report on Form 10-K for the year ended December 31, 2005 | 000-02525 | 10(t) | |||||
| 10 | .30 | Schedule identifying material details of Executive Agreements | Quarterly Report on Form 10-Q for the quarter ended September 30, 2009. | 001-34073 | 10.1 | |||||
| 10 | .31 | Letter Agreement including Securities Purchase Agreement — Standard Terms, dated November 14, 2008, between Huntington Bancshares Incorporated and the United States Department of the Treasury. | Current Report on Form 8-K dated November 14, 2008. | 001-34073 | 10.1 | |||||
208
Table of Contents
|
SEC File or
|
||||||||||
|
Exhibit
|
Registration
|
Exhibit
|
||||||||
|
Number
|
Document Description
|
Report or Registration Statement
|
Number
|
Reference
|
||||||
| 10 | .32 | * Performance criteria and potential awards for executive officers for fiscal year 2006 under the Management Incentive Plan and for a long-term incentive award cycle beginning on January 1, 2006 and ending on December 31, 2008 under the 2004 Stock and Long-Term Incentive Plan | Current Report on Form 8-K dated February 21, 2006 | 000-02525 | 99.1 | |||||
| 10 | .33 | * Restricted Stock Unit Grant Notice with three year vesting | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.1 | |||||
| 10 | .34 | * Restricted Stock Unit Grant Notice with six month vesting | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.2 | |||||
| 10 | .35 | * Restricted Stock Unit Deferral Agreement | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.3 | |||||
| 10 | .36 | * Director Deferred Stock Award Notice | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.4 | |||||
| 10 | .37 | * Huntington Bancshares Incorporated 2007 Stock and Long-Term Incentive Plan | Definitive Proxy Statement for the 2007 Annual Meeting of Stockholders | 000-02525 | G | |||||
| 10 | .38 | * First Amendment to the 2007 Stock and Long-Term Incentive Plan | Quarterly report on Form 10-Q for the quarter ended September 30, 2007 | 000-02525 | 10.7 | |||||
| 10 | .39 | * Retention Payment Agreement | Annual Report on Form 10-K for the year ended December 31, 2007 | 000-02525 | 10.43 | |||||
| 10 | .40 | * 2009 Stock Option Grant Notice to Stephen D. Steinour. | Quarterly Report on Form 10-Q for the quarter ended March 31, 2009. | 001-34073 | 10.1 | |||||
| 10 | .41 | * Relocation assistance reimbursement agreement with Mark E. Thompson dated May 7, 2009. | Quarterly Report on Form 10-Q for the quarter ended June 30, 2009. | 001-34073 | 10.3 | |||||
| 10 | .42 | * Form of Salary Restricted Stock Award Grant Notice | ||||||||
| 12 | .1 | Ratio of Earnings to Fixed Charges. | ||||||||
| 12 | .2 | Ratio of Earnings to Fixed Charges and Preferred Dividends. | ||||||||
| 14 | .1 | Code of Business Conduct and Ethics dated January 14, 2003 and revised on February 14, 2006 and Financial Code of Ethics for Chief Executive Officer and Senior Financial Officers, adopted January 18, 2003 and revised on October 21, 2009, are available on our website at http://www.investquest.com/iq/h/hban/main/cg/cg.htm | ||||||||
| 21 | .1 | Subsidiaries of the Registrant | ||||||||
| 23 | .1 | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. | ||||||||
| 24 | .1 | Power of Attorney | ||||||||
| 31 | .1 | Rule 13a-14(a) Certification — Chief Executive Officer. | ||||||||
| 31 | .2 | Rule 13a-14(a) Certification — Chief Financial Officer. | ||||||||
| 32 | .1 | Section 1350 Certification — Chief Executive Officer. | ||||||||
| 32 | .2 | Section 1350 Certification — Chief Financial Officer. | ||||||||
| 99 | .1 | Certification of Chief Executive Officer Pursuant to Section III(b)(4) of the Emergency Stabilization Act of 2008. | ||||||||
| 99 | .2 | Certification of Chief Financial Officer Pursuant to Section III(b)(4) of the Emergency Stabilization Act of 2008. | ||||||||
209
TABLE OF CONTENTS
Part IprintItem 1: BusinessprintItem 1A: Risk FactorsprintItem 1B: Unresolved Staff CommentsprintItem 2: PropertiesprintItem 3: Legal ProceedingsprintItem 4: Submission Of Matters To A Vote Of Security HoldersprintPart IIprintItem 5: Market For Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6: Selected Financial DataprintItem 7: Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A: Quantitative and Qualitative Disclosures About Market RiskprintItem 8: Financial Statements and Supplementary DataprintItem 9: Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A: Controls and ProceduresprintItem 9a(t): Controls and ProceduresprintItem 9a(t):printItem 9B: Other InformationprintPart IIIprintItem 10: Directors and Executive Officers and Corporate GovernanceprintItem 11: Executive CompensationprintItem 12: Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13: Certain Relationships and Related Transactions, and Director IndependenceprintItem 14: Principal Accounting Fees and ServicesprintPart IVprintItem 15: Exhibit and Financial Statement Schedulesprint