HUNTINGTON BANCSHARES INC/MD
10-Ks and 10-Qs
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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, 2010 | ||
|
or
|
||
|
o
|
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).
þ
Yes
o
No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of 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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act)
o
Yes
þ
No
The aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant as of
June 30, 2010, determined by using a per share closing
price of $5.54, as quoted by NASDAQ on that date, was
$3,857,539,827. As of January 31, 2011, there were
863,338,744 shares of common stock with a par value of
$0.01 outstanding.
Documents
Incorporated By Reference
Part III of this
Form 10-K
incorporates by reference certain information from the
registrant’s definitive Proxy Statement for the 2011 Annual
Shareholders’ Meeting.
HUNTINGTON
BANCSHARES INCORPORATED
INDEX
INDEX
i
Table of Contents
Glossary
of Acronyms and Terms
The following listing provides a comprehensive reference of
common acronyms and terms used throughout the document:
|
ABL
|
Asset Based Lending | |
|
ACL
|
Allowance for Credit Losses | |
|
AFCRE
|
Automobile Finance and Commercial Real Estate | |
|
ALCO
|
Asset-Liability Management Committee | |
|
ALLL
|
Allowance for Loan and Lease Losses | |
|
ARM
|
Adjustable Rate Mortgage | |
|
ARRA
|
American Recovery and Reinvestment Act of 2009 | |
|
ASC
|
Accounting Standards Codification | |
|
ATM
|
Automated Teller Machine | |
|
AULC
|
Allowance for Unfunded Loan Commitments | |
|
AVM
|
Automated Valuation Methodology | |
|
C&I
|
Commercial and Industrial | |
|
CDARS
|
Certificate of Deposit Account Registry Service | |
|
CDO
|
Collateralized Debt Obligations | |
|
CFPB
|
Bureau of Consumer Financial Protection | |
|
CMO
|
Collateralized Mortgage Obligations | |
|
CPP
|
Capital Purchase Program | |
|
CRE
|
Commercial Real Estate | |
|
DDA
|
Demand Deposit Account | |
|
DIF
|
Deposit Insurance Fund | |
|
Dodd-Frank Act
|
Dodd-Frank Wall Street Reform and Consumer Protection Act | |
|
EESA
|
Emergency Economic Stabilization Act of 2008 | |
|
ERISA
|
Employee Retirement Income Security Act | |
|
EVE
|
Economic Value of Equity | |
|
Fannie Mae
|
(see FNMA) | |
|
FASB
|
Financial Accounting Standards Board | |
|
FDIC
|
Federal Deposit Insurance Corporation | |
|
FDICIA
|
Federal Deposit Insurance Corporation Improvement Act of 1991 | |
|
FHA
|
Federal Housing Administration | |
|
FHLB
|
Federal Home Loan Bank | |
|
FHLMC
|
Federal Home Loan Mortgage Corporation | |
|
FICO
|
Fair Isaac Corporation | |
|
FNMA
|
Federal National Mortgage Association | |
|
Franklin
|
Franklin Credit Management Corporation | |
|
Freddie Mac
|
(see FHLMC) | |
|
FSP
|
Financial Stability Plan | |
|
FTE
|
Fully-Taxable Equivalent | |
|
FTP
|
Funds Transfer Pricing | |
|
GAAP
|
Generally Accepted Accounting Principles in the United States of America | |
|
HASP
|
Homeowner Affordability and Stability Plan | |
|
HCER Act
|
Health Care and Education Reconciliation Act of 2010 | |
|
IPO
|
Initial Public Offering |
ii
Table of Contents
|
IRS
|
Internal Revenue Service | |
|
LIBOR
|
London Interbank Offered Rate | |
|
LTV
|
Loan to Value | |
|
MD&A
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
|
MRC
|
Market Risk Committee | |
|
MSR
|
Mortgage Servicing Rights | |
|
NALs
|
Nonaccrual Loans | |
|
NAV
|
Net Asset Value | |
|
NCO
|
Net Charge-off | |
|
NPAs
|
Nonperforming Assets | |
|
NSF / OD
|
Nonsufficient Funds and Overdraft | |
|
OCC
|
Office of the Comptroller of the Currency | |
|
OCI
|
Other Comprehensive Income (Loss) | |
|
OCR
|
Optimal Customer Relationship | |
|
OLEM
|
Other Loans Especially Mentioned | |
|
OREO
|
Other Real Estate Owned | |
|
OTTI
|
Other-Than-Temporary Impairment | |
|
PFG
|
Private Financial, Capital Markets, and Insurance Group | |
|
Reg E
|
Regulation E, of the Electronic Fund Transfer Act | |
|
SAD
|
Special Assets Division | |
|
SEC
|
Securities and Exchange Commission | |
|
Sky Financial
|
Sky Financial Group, Inc. | |
|
Sky Trust
|
Sky Bank and Sky Trust, National Association | |
|
TAGP
|
Transaction Account Guarantee Program | |
|
TARP
|
Troubled Asset Relief Program | |
|
TARP Capital
|
Series B Preferred Stock | |
|
TCE
|
Tangible Common Equity | |
|
TDR
|
Troubled Debt Restructured loan | |
|
TLGP
|
Temporary Liquidity Guarantee Program | |
|
Treasury
|
U.S. Department of the Treasury | |
|
UCS
|
Uniform Classification System | |
|
Unizan
|
Unizan Financial Corp. | |
|
USDA
|
U.S. Department of Agriculture | |
|
VA
|
U.S. Department of Veteran Affairs | |
|
VIE
|
Variable Interest Entity | |
|
WGH
|
Wealth Advisors, Government Finance, and Home Lending |
iii
Table of Contents
Huntington
Bancshares Incorporated
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 regional bank holding company
organized under Maryland law in 1966 and headquartered in
Columbus, Ohio. Through the Bank, we have 145 years of
serving the financial needs of our customers. We provide
full-service commercial, small business, consumer banking
services, mortgage banking services, automobile financing,
equipment leasing, investment management, trust services,
brokerage services, customized insurance programs, and other
financial products and services. The Bank, organized in 1866, is
our only bank subsidiary. At December 31, 2010, the Bank
had 611 branches as follows:
| • | 344 branches in Ohio | |
| • | 119 branches in Michigan | |
| • | 57 branches in Pennsylvania | |
| • | 50 branches in Indiana | |
| • | 28 branches in West Virginia | |
| • | 13 branches in Kentucky |
Select financial services and other activities are also
conducted in various other states. International banking
services are available through the headquarters office in
Columbus, Ohio and a limited purpose office located in the
Cayman Islands, and another limited purpose office located in
Hong Kong. Our foreign banking activities, in total or with any
individual country, are not significant.
In late 2010, we reorganized the way in which we manage our
business. Our segments are based on our internally-aligned
segment leadership structure, which is how we monitor results
and assess performance. For each of our four business segments,
we expect the combination of our business model and exceptional
service to provide a competitive advantage that supports revenue
and earnings growth. Our business model emphasizes the delivery
of a complete set of banking products and services offered by
larger banks, but distinguished by local delivery, customer
service, and pricing of these products.
Beginning in 2010, a key strategic emphasis has been for our
business segments to operate in cooperation to provide products
and services to our customers to build stronger and more
profitable relationships using our Optimal Customer Relationship
(OCR) sales and service process. The objectives of OCR are to:
1. Provide a consultative sales approach to provide
solutions that are specific to each customer.
2. Leverage each business segment in terms of its products
and expertise to benefit the customer.
3. Target prospects who may want to have their full
relationship with us.
Following is a description of our four business segments and
Treasury / Other function:
| • | Retail and Business Banking — This segment provides financial products and services to consumer and small business customers located within our primary banking markets consisting of five areas covering the six states of Ohio, Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky. Its products include individual and small business checking accounts, savings accounts, money market accounts, certificates of deposit, consumer loans, and small business loans and leases. Other financial services available to consumers and small business customers include investments, insurance services, interest rate risk protection products, foreign exchange hedging, and treasury management services. Retail and |
1
Table of Contents
| Business Banking provides these services through a banking network of over 600 traditional branches and convenience branches located in grocery stores and retirement centers. In addition, an array of alternative distribution channels is available to customers including internet and mobile banking, telephone banking, and over 1,300 ATMs. |
| • | Commercial Banking — Our Commercial Banking group provides a wide array of products and services to the middle market and large corporate client base located primarily within our core geographic banking markets. Products and services are delivered through a relationship banking model and include commercial lending, as well as depository and liquidity management products. Dedicated teams collaborate with our primary bankers to deliver complex and customized treasury management solutions, equipment and technology leasing, international services, capital markets services such as interest rate protection, foreign exchange hedging and sales, trading of securities, and employee benefit programs (insurance, 410(k)). The Commercial Banking team specializes in serving a number of industry segments such as government entities, not-for-profit organizations, heath-care entities, and large, publicly traded companies. | |
| • | Automobile Finance and Commercial Real Estate — This segment provides lending and other banking products and services to customers outside of our normal retail or commercial channels. More specifically, we serve automotive dealerships, retail customers who obtain financing at the dealerships, professional real estate developers, REITs, and other customers with lending needs that are secured by commercial properties. Most of our customers are located in our primary banking markets. Our products and services include financing for the purchase of automobiles by customers of automotive dealerships; financing for the purchase of new and used vehicle inventory by automotive dealerships; and financing for land, buildings, and other commercial real estate owned or constructed by real estate developers, automobile dealerships, or other customers with real estate project financing needs. We also provide other banking products and services to our customers as well as their owners or principals. These products and services are delivered through: (1) our relationships with developers in our primary banking markets believed to be experienced, well-managed, and well-capitalized and are capable of operating in all phases of the real estate cycle (top-tier developers), (2) relationships with established automobile dealerships, (3) our leads through community involvement, and (4) referrals from other professionals. | |
| • | Wealth Advisors, Government Finance, and Home Lending — This segment consists primarily of fee-based businesses including home lending, wealth management, and government finance. We originate and service consumer loans to customers who are generally located in our primary banking markets. Consumer lending products are distributed to these customers primarily through the Retail and Business Banking segment and commissioned loan originators. We provide wealth management banking services to high net worth customers in our primary banking markets and in Florida by utilizing a cohesive model that employs a unified sales force to deliver products and services directly and through the other segments. We provide these products and services through a unified sales team, which consists of former private bankers, trust officers, and investment advisors; Huntington Asset Advisors, which provides investment management services; Huntington Asset Services, which offers administrative and operational support to fund complexes; retirement plan services, and the national settlements business. We also provide banking products and services to government entities across our primary banking markets by utilizing a team of relationship managers providing public finance, brokerage, trust, lending, and treasury management services. |
A Treasury / Other function includes our insurance
brokerage business, which specializes in commercial
property/casualty, employee benefits, personal lines, life and
disability and specialty lines. We also provide brokerage and
agency services for residential and commercial title insurance
and excess and surplus product lines. As an agent and broker we
do not assume underwriting risks; instead we provide our
customers with quality, noninvestment insurance contracts. The
Treasury / Other function also includes technology and
operations, other unallocated assets, liabilities, revenue, and
expense.
2
Table of Contents
The financial results for each of these business segments are
included in Note 25 of Notes to Consolidated Financial
Statements and are discussed in the Business Segment Discussion
of our MD&A.
Competition
Although there has been consolidation in the financial services
industry, our markets remain competitive. We compete with other
banks and financial services companies such as savings and
loans, credit unions, and finance and trust companies, as well
as mortgage banking companies, automobile and equipment
financing companies, insurance companies, mutual funds,
investment advisors, and brokerage firms, both within and
outside of our primary market areas. Internet companies are also
providing nontraditional, but increasingly strong, competition
for our borrowers, depositors, and other customers. In addition,
our AFCRE segment faces competition from the financing divisions
of automobile manufacturers.
We compete for loans primarily on the basis of a combination of
value and service by building customer relationships as a result
of addressing our customers’ entire suite of banking needs,
demonstrating expertise, and providing convenience to our
customers. We also consider the competitive pricing pressures in
each of our markets.
We compete for deposits similarly on a basis of a combination of
value and service and by providing convenience through a banking
network of over 600 branches and over 1,300 ATMs within our
markets and our award-winning website at www.huntington.com. We
have also instituted new and more customer friendly practices
under our Fair Play banking philosophy, such as our
24-Hour
Grace
tm
account feature introduced in 2010, which gives customers an
additional business day to cover overdrafts to their consumer
account without being charged overdraft fees.
The table below shows our competitive ranking and market share
based on deposits of FDIC-insured institutions as of
June 30, 2010, in the top 12 metropolitan statistical areas
(MSA) in which we compete:
|
MSA
|
Rank | Deposits | Market Share | |||||||||
| (in millions) | ||||||||||||
|
Columbus, OH
|
1 | $ | 9,124 | 22 | % | |||||||
|
Cleveland, OH
|
5 | 3,941 | 8 | |||||||||
|
Detroit, MI
|
8 | 3,607 | 4 | |||||||||
|
Toledo, OH
|
1 | 2,306 | 23 | |||||||||
|
Pittsburgh, PA
|
7 | 2,270 | 3 | |||||||||
|
Cincinnati, OH
|
5 | 1,999 | 4 | |||||||||
|
Indianapolis, IN
|
4 | 1,902 | 6 | |||||||||
|
Youngstown, OH
|
1 | 1,877 | 20 | |||||||||
|
Canton, OH
|
1 | 1,485 | 27 | |||||||||
|
Grand Rapids, MI
|
3 | 1,280 | 10 | |||||||||
|
Akron, OH
|
5 | 886 | 8 | |||||||||
|
Charleston, WV
|
3 | 604 | 11 | |||||||||
Source: FDIC.gov, based on June 30, 2010 survey.
Many of our nonfinancial institution competitors have fewer
regulatory constraints, broader geographic service areas,
greater capital, and, in some cases, lower cost structures. In
addition, competition for quality customers has intensified as a
result of changes in regulation, advances in technology and
product delivery systems, consolidation among financial service
providers, bank failures, and the conversion of certain former
investment banks to bank holding companies.
3
Table of Contents
Regulatory
Matters
General
We are a bank holding company and are qualified as a financial
holding company with the Federal Reserve. We are subject to
examination and supervision by the Federal Reserve pursuant to
the Bank Holding Company Act. We are required to file reports
and other information regarding our business operations and the
business operations of our subsidiaries with the Federal Reserve.
Because we are a public company, we are also subject to
regulation by the SEC. The SEC has established four categories
of issuers for the purpose of filing periodic and annual
reports. Under these regulations, we are considered to be a
large accelerated filer and, as such, must comply with SEC
accelerated reporting requirements.
The Bank, which is chartered by the OCC, is a national bank, and
our only bank subsidiary. In addition, we have numerous nonbank
subsidiaries. Exhibit 21.1 of this
Form 10-K
lists all of our subsidiaries. The Bank is subject to
examination and supervision by the OCC. Its domestic deposits
are insured by the DIF of the FDIC, which also has certain
regulatory and supervisory authority over it. Our nonbank
subsidiaries are also subject to examination and supervision by
the Federal Reserve or, in the case of nonbank subsidiaries of
the Bank, by the OCC. Our subsidiaries are subject to
examination by other federal and state agencies, including, in
the case of certain securities and investment management
activities, regulation by the SEC and the Financial Industry
Regulatory Authority.
In connection with EESA, we sold TARP Capital and a warrant to
purchase shares of common stock to the Treasury pursuant to the
CPP under TARP. As a result of our participation in TARP, we
were subject to certain restrictions and direct oversight by the
Treasury. Upon our repurchase of the TARP Capital on
December 22, 2010, we are no longer subject to the
TARP-related restrictions on dividends, stock repurchases, or
executive compensation.
Legislative and regulatory reforms continue to have significant
impacts throughout the financial services industry. In July
2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act, which
is complex and broad in scope, establishes the CFPB, which will
have extensive regulatory and enforcement powers over consumer
financial products and services, and the Financial Stability
Oversight Council, which has oversight authority for monitoring
and regulating systemic risk. In addition, the Dodd-Frank Act
alters the authority and duties of the federal banking and
securities regulatory agencies, implements certain corporate
governance requirements for all public companies including
financial institutions with regard to executive compensation,
proxy access by shareholders, and certain whistleblower
provisions, and restricts certain proprietary trading and hedge
fund and private equity activities of banks and their
affiliates. The Dodd-Frank Act also requires the issuance of
many implementing regulations which will take effect over
several years, making it difficult to anticipate the overall
impact to us, our customers, or the financial industry more
generally. While the overall impact cannot be predicted with any
degree of certainty, we believe we are likely to be negatively
impacted by the Dodd-Frank Act primarily in the areas of capital
requirements, restrictions on fees, and other charges to
customers.
In addition to the impact of federal and state regulation, the
Bank and our nonbank subsidiaries are affected significantly by
the actions of the Federal Reserve as it attempts to control the
money supply and credit availability in order to influence the
economy.
As a
bank holding company, we must act as a source of financial and
managerial strength to the Bank and the Bank is subject to
affiliate transaction restrictions.
Under changes made by the Dodd-Frank Act, a bank holding company
must act as a source of financial and managerial strength to
each of its subsidiary banks and to commit resources to support
each such subsidiary bank. Under current federal law, the
Federal Reserve may require a bank holding company to make
capital injections into a troubled subsidiary bank. It may
charge the bank holding company with engaging in unsafe and
unsound practices if the bank holding company fails to commit
resources to such a subsidiary bank or if it undertakes actions
that the Federal Reserve believes might jeopardize the bank
holding company’s ability to commit resources to such
subsidiary bank.
4
Table of Contents
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, an appointed bankruptcy
trustee will assume any commitment by the holding company to a
federal bank regulatory agency to maintain the capital of a
subsidiary bank. Moreover, the bankruptcy law provides that
claims based on any such commitment will be entitled to a
priority of payment over the claims of the institution’s
general unsecured creditors, including the holders of its note
obligations.
Federal law permits the OCC to order the pro-rata assessment of
shareholders of a national bank whose capital stock has become
impaired, by losses or otherwise, to relieve a deficiency in
such national 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 Bank is subject to affiliate transaction restrictions under
federal laws, which limit certain transactions generally
involving the transfer of funds by a subsidiary bank or its
subsidiaries to its parent corporation or any nonbank subsidiary
of its parent corporation, whether in the form of loans,
extensions of credit, investments, or asset purchases, or
otherwise undertaking certain obligations on behalf of such
affiliates. Furthermore, covered transactions which are loans
and extensions of credit must be secured within specified
amounts. In addition, all covered transactions and other
affiliate transactions must be conducted on terms and under
circumstances that are substantially the same as such
transactions with unaffiliated entities.
The Federal Reserve maintains a bank holding company rating
system that emphasizes risk management, introduces a framework
for analyzing and rating financial factors, and provides a
framework for assessing and rating the potential impact of
nondepository entities of a holding company on its subsidiary
depository institution(s). A composite rating is assigned based
on the foregoing three components, but a fourth component is
also rated, reflecting generally the assessment of depository
institution subsidiaries by their principal regulators. The bank
holding company rating system, which became effective in 2005,
applies to us. The composite ratings assigned to us, like those
assigned to other financial institutions, are confidential and
may not be disclosed, except to the extent required by law.
In
2008, we sold TARP Capital and a warrant to purchase shares of
common stock to the Treasury pursuant to the CPP under TARP. We
repurchased the TARP Capital in the 2010 fourth
quarter.
On October 3, 2008, EESA was enacted. EESA includes, among
other provisions, TARP, under which the Secretary of the
Treasury was authorized to purchase, insure, hold, and sell a
wide variety of financial instruments, particularly those that
were based on or related to residential or commercial mortgages
originated or issued on or before March 14, 2008. Under
TARP, the Treasury authorized a voluntary CPP to purchase up to
$250 billion of senior preferred shares of stock from
qualifying financial institutions that elected to participate.
On November 14, 2008, at the request of the Treasury and
other regulators, we participated in the CPP by issuing to the
Treasury, in exchange for $1.4 billion, 1.4 million
shares of Huntington’s fixed-rate cumulative perpetual
preferred stock, Series B, par value $0.01 per share, with
a liquidation preference of $1,000 per share (TARP Capital), and
a ten-year warrant (Warrant), which was immediately exercisable,
to purchase up to 23.6 million shares of Huntington’s
common stock (approximately 3% of common shares outstanding at
December 31, 2010), par value $0.01 per share, at an
exercise price of $8.90 per share. The securities issued to the
Treasury were accounted for as additions to our regulatory
Tier 1 and Total capital. The proceeds were
5
Table of Contents
used by the holding company to provide potential capital support
for the Bank. This helped the Bank to continue its active
lending programs for customers. This is evidenced by the
increase in mortgage originations from $3.8 billion in
2008, to $5.3 billion in 2009, and $5.5 billion in
2010.
In connection with the issuance and sale of the TARP Capital to
the Treasury, we agreed, among other things, to (1) limit
the payment of quarterly dividends on our common stock,
(2) limit our ability to repurchase our common stock or our
outstanding serial preferred stock, (3) grant the holders
of the TARP Capital, the Warrant, and the common stock to be
issued under the Warrant certain registration rights, and
(4) subject ourselves to the executive compensation
limitations contained in EESA. These compensation limitations
included (a) prohibiting “golden parachute”
payments, as defined in EESA, to senior executive officers;
(b) requiring recovery of any compensation paid to senior
executive officers based on criteria that is later proven to be
materially inaccurate; and (c) prohibiting incentive
compensation that encouraged unnecessary and excessive risks
that threaten the value of the financial institution.
On December 19, 2010, we sold $920.0 million of our
common stock and $300.0 million of subordinated debt in
public offerings. On December 22, 2010, these proceeds,
along with other available funds, were used to complete the
repurchase of our $1.4 billion of TARP Capital. On
January 19, 2011, we repurchased the Warrant for our common
stock associated with our participation in the TARP CPP for
$49.1 million, or $2.08 for each of the 23.6 million
common shares to which the Treasury was entitled. Prior to this
repurchase, we were in compliance with all TARP standards,
restrictions, and dividend payment limitations. Because of the
repurchase of our TARP Capital, we are no longer subject to the
TARP-related restrictions on dividends, stock repurchases, or
executive compensation.
We
have participated in certain extraordinary programs of the
FDIC.
EESA temporarily raised the limit on federal deposit insurance
coverage from $100,000 to $250,000 per depositor. This increase
was made permanent in the Dodd-Frank Act. Separate from EESA, in
October 2008, the FDIC also announced the TLGP to guarantee
certain debt issued by FDIC-insured institutions.
On February 3, 2009, the Bank completed the issuance and
sale of $600 million of Floating Rate Senior Bank Notes
with a variable interest rate of three month LIBOR plus
40 basis points, due June 1, 2012 (the Notes). The
Notes are guaranteed by the FDIC under the TLGP and are backed
by the full faith and credit of the United States of America.
The FDIC’s guarantee costs $20 million which is being
amortized over the term of these notes.
Under TAGP, a component of the TLGP, the FDIC temporarily
provided unlimited coverage for noninterest-bearing transaction
deposit accounts. We voluntarily began participating in the TAGP
in October of 2008, but opted out of the TAGP effective
July 1, 2010. Subsequently, both the TLGP and TAGP were
terminated in light of Section 343 of the Dodd-Frank Act,
which amended the Federal Deposit Insurance Act to provide
unlimited deposit insurance coverage for noninterest-bearing
transaction accounts beginning December 31, 2010, for a
two-year period with no opt out provisions.
We are
subject to capital requirements mandated by the Federal Reserve
and these requirements will be changing under the Dodd-Frank
Act.
The Federal Reserve has issued risk-based capital ratio and
leverage ratio guidelines for bank holding companies. Under the
guidelines and related policies, bank holding companies must
maintain capital sufficient to meet both a risk-based asset
ratio test and a leverage ratio test on a consolidated basis.
The risk-based ratio is determined by allocating assets and
specified off-balance sheet commitments into four weighted
categories, with higher weighting assigned to categories
perceived as representing greater risk. The risk-based ratio
represents total capital divided by total risk-weighted assets.
The leverage ratio is core capital divided by total assets
adjusted as specified in the guidelines. The Bank is subject to
substantially similar capital requirements.
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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 nonqualifying 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 MSRs, nonmortgage servicing assets, and
purchased credit card relationships, be deducted from
Tier 1 capital. However, the total amount of these items
included in capital cannot exceed 100% of its Tier 1
capital.
Under the risk-based guidelines to remain
Adequately-capitalized, financial institutions are required to
maintain a total risk-based ratio of 8%, with 4% being
Tier 1 capital. The appropriate regulatory authority may
set higher capital requirements when they believe an
institution’s circumstances warrant.
Under the leverage guidelines, financial institutions are
required to maintain a Tier 1 leverage ratio of at least
3%. The minimum ratio is applicable only to financial
institutions that meet certain specified criteria, including
excellent asset quality, high liquidity, low interest rate risk
exposure, and the highest regulatory rating. Financial
institutions not meeting these criteria are required to maintain
a minimum Tier 1 leverage ratio of 4%.
Failure to meet applicable capital guidelines could subject the
financial institution to a variety of enforcement remedies
available to the federal regulatory authorities. These include
limitations on the ability to pay dividends, the issuance by the
regulatory authority of a directive to increase capital, and the
termination of deposit insurance by the FDIC. In addition, the
financial institution could be subject to the measures described
below under Prompt Corrective Action as applicable to
Under-capitalized institutions.
The risk-based capital standards of the Federal Reserve, the
OCC, and the FDIC specify that evaluations by the banking
agencies of a bank’s capital adequacy will include an
assessment of the exposure to declines in the economic value of
a 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.
FDICIA requires federal banking regulatory authorities to take
Prompt Corrective Action with respect to depository institutions
that do not meet minimum capital requirements. For these
purposes, FDICIA establishes five capital tiers:
Well-capitalized, Adequately-capitalized, Under-capitalized,
Significantly under-capitalized, and Critically
under-capitalized.
Throughout 2010, our regulatory capital ratios and those of the
Bank were in excess of the levels established for
Well-capitalized institutions. An institution is deemed to be
Well-capitalized if it has a total risk-based capital ratio of
10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater, and a Tier 1
7
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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.
|
Well-
|
At December 31, 2010 | |||||||||||||
|
Capitalized
|
Excess
|
|||||||||||||
|
|
Minimums | Actual | Capital(1) | |||||||||||
| (Dollar amounts in billions) | ||||||||||||||
|
Ratios:
|
||||||||||||||
|
Tier 1 leverage ratio
|
Consolidated | 5.00 | % | 9.41 | % | $ | 2.4 | |||||||
| Bank | 5.00 | 6.97 | 1.0 | |||||||||||
|
Tier 1 risk-based capital ratio
|
Consolidated | 6.00 | 11.55 | 2.4 | ||||||||||
| Bank | 6.00 | 8.51 | 1.1 | |||||||||||
|
Total risk-based capital ratio
|
Consolidated | 10.00 | 14.46 | 1.9 | ||||||||||
| Bank | 10.00 | 12.82 | 1.2 | |||||||||||
| (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 become Under-capitalized after such
payment. Under-capitalized institutions are also subject to
growth limitations and are required by the appropriate federal
banking agency to submit a capital restoration plan. If any
depository institution subsidiary of a holding company is
required to submit a capital restoration plan, the holding
company would be required to provide a limited guarantee
regarding compliance with the plan as a condition of approval of
such plan.
Depending upon the severity of the under capitalization, the
Under-capitalized institutions may be subject to a number of
requirements and restrictions, including orders to sell
sufficient voting stock to become Adequately-capitalized,
requirements to reduce total assets, cessation of receipt of
deposits from correspondent banks, and restrictions on making
any payment of principal or interest on their subordinated debt.
Critically Under-capitalized institutions are subject to
appointment of a receiver or conservator within 90 days of
becoming so classified.
Under FDICIA, a depository institution that is not
Well-capitalized is generally prohibited from accepting brokered
deposits and offering interest rates on deposits higher than the
prevailing rate in its market. Since the Bank is
Well-capitalized, the FDICIA brokered deposit rule did not
adversely affect its ability to accept brokered deposits. The
Bank had $1.5 billion of such brokered deposits at
December 31, 2010.
Under the Dodd-Frank Act, important changes will be implemented
concerning the capital requirements for financial institutions.
The “Collins Amendment” provision of the Dodd-Frank
Act imposes increased capital requirements in the future. The
Collins Amendment also requires federal banking regulators to
establish minimum leverage and risk-based capital requirements
to apply to insured depository institutions, bank and thrift
holding companies, and systemically important nonbank financial
companies. These capital requirements must not be less than the
Generally Applicable Risk-based Capital Requirements and the
Generally Applicable Leverage Capital Requirements as of
July 21, 2010, and must not be quantitatively lower than
the requirements that were in effect for insured depository
institution as of July 21, 2010. The Collins Amendment
defines Generally Applicable Risk-based Capital Requirements and
Generally Applicable Leverage Capital Requirements to mean the
risk-based capital requirements and minimum ratios of
Tier 1 capital to average total assets, respectively,
established by the appropriate federal banking agencies to apply
to insured depository institutions under the Prompt Corrective
Action provisions, regardless of total consolidated asset size
or foreign financial exposure. We will be assessing the impact
on us of these new regulations as they are proposed and
implemented.
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There
are restrictions on our ability to pay dividends.
Dividends from the Bank to the parent company are the primary
source of funds for payment of dividends to our shareholders.
However, there are statutory limits on the amount of dividends
that the Bank can pay to us without regulatory approval. The
Bank may not, without prior regulatory approval, pay a dividend
in an amount greater than its undivided profits. In addition,
the prior approval of the OCC is required for the payment of a
dividend by a national bank if the total of all dividends
declared in a calendar year would exceed the total of its net
income for the year combined with its retained net income for
the two preceding years. As a result, for the year ended
December 31, 2010, the Bank did not pay any cash dividends
to us. At December 31, 2010, the Bank could not have
declared and paid any dividends to the parent company without
regulatory approval.
Since the first quarter of 2008, the Bank has requested and
received OCC approval each quarter to pay periodic dividends to
shareholders outside the Bank’s consolidated group on
preferred and common stock of its REIT and capital financing
subsidiaries to the extent necessary to maintain their REIT
status. A wholly-owned nonbank subsidiary of the parent company
owns a portion of the preferred shares of the REIT and capital
financing subsidiaries. Outside of the REIT and capital
financing subsidiary dividends, we do not anticipate that the
Bank will declare dividends during 2011.
If, in the opinion of the applicable regulatory authority, a
bank under its jurisdiction is engaged in, or is about to engage
in, an unsafe or unsound practice, such authority may require,
after notice and hearing, that such bank cease and desist from
such practice. Depending on the financial condition of the Bank,
the applicable regulatory authority might deem us to be engaged
in an unsafe or unsound practice if the Bank were to pay
dividends. The Federal Reserve and the OCC have issued policy
statements that provide that insured banks and bank holding
companies should generally only pay dividends out of current
operating earnings.
The
amount and timing of payments for FDIC Deposit Insurance are
changing.
In late 2008, under the assessment regime that was applicable
prior to the Dodd-Frank Act, the FDIC raised assessment rates
for the first quarter of 2009 by a uniform 7 basis points
of adjusted domestic deposits, resulting in a range between 12
and 50 basis points, depending upon the risk category. At
the same time, the FDIC proposed further changes in the
assessment system beginning in the second quarter of 2009. As
amended in a final rule issued in March 2009, the changes,
commencing April 1, 2009, set a five-year target of 1.15%
for the designated reserve ratio, and set base assessment rates
between 12 and 45 basis points of adjusted domestic
deposits, depending on the risk category. In addition to these
changes in the basic assessment regime, the FDIC, in an interim
rule also issued in March 2009, imposed a 20 basis point
emergency special assessment on deposits of insured institutions
as of June 30, 2009, to be collected on September 30,
2009. In May 2009, the FDIC imposed a further special assessment
on insured institutions of five basis points on their
June 30, 2009 assets minus Tier 1 capital, also
payable September 30, 2009. And in November 2009, the FDIC
required all insured institutions to prepay, on
December 30, 2009, slightly over three years of estimated
insurance assessments.
With the enactment of the Dodd-Frank Act, major changes were
introduced to the FDIC deposit insurance system. Under the
Dodd-Frank Act, the FDIC now has until the end of September 2020
to bring its reserve ratio to the new statutory minimum of
1.35%. New rules amending the deposit insurance assessment
regulations under the requirements of the Dodd-Frank Act have
been adopted, including a final rule designating 2% as the
designated reserve ratio and a final rule extending temporary
unlimited deposit insurance to noninterest bearing transaction
accounts maintained in connection with lawyers’ trust
accounts. On February 7, 2011, the FDIC adopted regulations
effective for the 2011 second quarter assessment and payable in
September 2011, which outline significant changes in the
risk-based premiums approach for banks with over
$10 billion of assets and creates a “Scorecard”
system. The “Scorecard” system uses a performance
score and loss severity score, which aggregate to an initial
base assessment rate. The assessment base also changes from
deposits to an institution’s average total assets minus its
average tangible equity. We are
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currently evaluating the effect of these new regulations, but do
not expect the 2011 FDIC assessment impact on our Consolidated
Financial Statements to be materially higher than the prior
period.
As a
financial holding company, we are subject to additional
regulations.
In order to maintain its status as a financial holding company,
a bank holding 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:
| • | lending, exchanging, transferring, investing for others, or safeguarding money or securities; | |
| • | 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
if additional activities are financial in nature or incidental
to activities that are financial in nature.
In addition, we are required by the Bank Holding Company Act to
obtain Federal Reserve approval prior to acquiring, directly or
indirectly, ownership or control of voting shares of any bank,
if, after such acquisition, we would own or control more than 5%
of its voting stock.
We
also must comply with anti-money laundering, customer privacy,
and consumer protection statutes and regulations as well as
corporate governance, accounting, and reporting
requirements.
The USA Patriot Act of 2001 and its related regulations require
insured depository institutions, broker-dealers, and certain
other financial institutions to have policies, procedures, and
controls to detect, prevent, and report money laundering and
terrorist financing. The statute and its regulations also
provide for information sharing, subject to conditions, between
federal law enforcement agencies and financial institutions, as
well as among financial institutions, for counter-terrorism
purposes. Federal banking regulators are required, when
reviewing bank holding company acquisition and bank merger
applications, to take into account the effectiveness of the
anti-money laundering activities of the applicants.
Pursuant to Title V of the Gramm-Leach-Bliley Act, we, like
all other financial institutions, are required to:
| • | provide notice to our customers regarding privacy policies and practices, | |
| • | inform our customers regarding the conditions under which their nonpublic personal information may be disclosed to nonaffiliated third parties, and | |
| • | give our customers an option to prevent certain disclosure of such information to nonaffiliated third parties. |
Under the Fair and Accurate Credit Transactions Act of 2003, our
customers may also opt-out of certain information sharing
between and among us and our affiliates. We are also subject, in
connection with our
10
Table of Contents
lending and leasing activities, to numerous federal and state
laws aimed at protecting consumers, including the Home Mortgage
Disclosure Act, the Real Estate Settlement Procedures Act, the
Equal Credit Opportunity Act, the Truth in Lending Act, and the
Fair Credit Reporting Act.
The Sarbanes-Oxley Act of 2002 imposed new or revised corporate
governance, accounting, and reporting requirements on us and all
other companies having securities registered with the SEC. In
addition to a requirement that chief executive officers and
chief financial officers certify financial statements in
writing, the statute imposed requirements affecting, among other
matters, the composition and activities of audit committees,
disclosures relating to corporate insiders and insider
transactions, code of ethics, and the effectiveness of internal
controls over financial reporting.
In
2010, we implemented compliance with the Amendment to
Regulation E dealing with overdraft fees.
In November 2009, the Federal Reserve Board amended
Regulation E of the Electronic Fund Transfer Act to
prohibit banks from charging overdraft fees for ATM or
point-of-sale
debit card transactions that overdrew the account unless the
customer opt-in to the discretionary overdraft service and to
require banks to explain the terms of their overdraft services
and their fees for the services (Regulation E Amendment).
Compliance with the Regulation E Amendment was required by
July 1, 2010. Our strategy to comply with the
Regulation E Amendment is to alert our customers that we
can no longer cover such overdrafts unless they opt-in to our
overdraft service while disclosing the terms of our service and
our fees for the service.
| Item 1A: | Risk Factors |
Risk
Governance
We use a multi-faceted approach to risk governance. It begins
with the board of directors defining our risk appetite in
aggregate as
moderate-to-low.
This does not preclude engagement in higher risk activities when
we have the demonstrated expertise and control mechanisms to
selectively manage higher risk. Rather, the definition is
intended to represent a directional average of where we want our
overall risk to be managed.
Two board committees oversee implementation of this desired risk
profile: The Audit Committee and the Risk Oversight Committee.
| • | The Audit Committee is principally involved with overseeing the integrity of financial statements, providing oversight of the internal audit department, and selecting our external auditors. Our chief auditor reports directly to the Audit Committee. | |
| • | The Risk Oversight Committee supervises our risk management processes which primarily cover credit, market, liquidity, operational, and compliance risks. It also approves the charters of executive management committees, sets risk limits on certain risk measures (e.g., economic value of equity), receives results of the risk self-assessment process, and routinely engages management in dialogues pertaining to key risk issues. Our credit review executive reports directly to the Risk Oversight Committee. |
Both committees are comprised of independent directors and
routinely hold executive sessions with our key officers engaged
in accounting and risk management.
On a periodic basis, the two committees meet in joint session to
cover matters relevant to both such as the construct and
adequacy of the ACL, which is reviewed quarterly.
We maintain a philosophy that each colleague is responsible for
risk. This is manifested by the design of a risk management
organization that places emphasis on risk-ownership by
risk-takers. We believe that by placing ownership of risk within
its related business segment, attention to, and accountability
for, risk is heightened.
Further, through its Compensation Committee, the board of
directors seeks to ensure its system of rewards is
risk-sensitive and aligns the interests of management,
creditors, and shareholders. We utilize a variety of
compensation-related tools to induce appropriate behavior,
including equity deferrals, holdbacks, clawback provisions, and
the right to terminate compensation plans at any time when
undesirable outcomes may result.
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Management has introduced a number of steps to help ensure an
aggregate
moderate-to-low
risk appetite is maintained. Foremost is a quarterly,
comprehensive self-assessment process in which each business
segment produces an analysis of its risks and the strength of
its risk controls. The segment analyses are combined with
assessments by our risk management organization of major risk
sectors (e.g., credit, market, operational, reputational,
compliance, etc.) to produce an overall enterprise risk
assessment. Outcomes of the process include a determination of
the quality of the overall control process, the direction of
risk, and our position compared to the defined risk appetite.
Management also utilizes a wide series of metrics (key risk
indicators) to monitor risk positions throughout the Company. In
general, a range for each metric is established that identifies
a
moderate-to-low
position. Deviations from the range will indicate if the risk
being measured is moving into a high position, which may then
necessitate corrective action.
In 2010, we enhanced our process of risk-based capital
attribution. Our economic capital model will be upgraded and
integrated into a more robust system of stress testing in 2011.
We believe this tool will further enhance our ability to manage
to the defined risk appetite. Our board level Capital
Planning Committee will monitor and react to output from the
integrated modeling process.
We also have three other executive level committees to manage
risk: ALCO, Credit Policy and Strategy, and Risk Management.
Each committee focuses on specific categories of risk and is
supported by a series of subcommittees that are tactical in
nature. We believe this structure helps ensure appropriate
elevation of issues and overall communication of strategies.
Huntington utilizes three levels of defense with regard to risk
management: (1) business segments, (2) corporate risk
management, (3) internal audit and credit review. To induce
greater ownership of risk within its business segments, segment
risk officers have been embedded to identify and monitor risk,
elevate and remediate issues, establish controls, perform
self-testing, and oversee the quarterly self-assessment process.
Segment risk officers report directly to the related segment
manager with a dotted line to the Chief Risk Officer. Corporate
Risk Management establishes policies, sets operating limits,
reviews new or modified products/processes, ensures consistency
and quality assurance within the segments, and produces the
enterprise risk assessment. The Chief Risk Officer has
significant input into the design and outcome of incentive
compensation plans as they apply to risk. Internal Audit and
Credit Review provide additional assurance that risk-related
functions are operating as intended.
Huntington believes it has provided a sound risk governance
foundation to support the Bank. Our process will be subject to
continuous improvement and enhancement. Our objective is to have
strong risk management practices and capabilities.
Risk
Overview
We, like other financial companies, are subject to a number of
risks that may adversely affect our financial condition or
results of operation, many of which are outside of our direct
control, though efforts are made to manage those risks while
optimizing returns. Among the risks assumed are: (1)
credit
risk
, which is the risk of loss due to loan and lease
customers or other counterparties not being able to meet their
financial obligations under agreed upon terms, (2)
market
risk
, which is the risk of loss due to changes in the market
value of assets and liabilities due to changes in market
interest rates, foreign exchange rates, equity prices, and
credit spreads, (3)
liquidity risk
, which is the risk of
loss due to the possibility that funds may not be available to
satisfy current or future commitments based on external macro
market issues, investor and customer perception of financial
strength, and events unrelated to us such as war, terrorism, or
financial institution market specific issues, (4)
operational
risk
, which is the risk of loss due to human error,
inadequate or failed internal systems and controls, violations
of, or noncompliance with, laws, rules, regulations, prescribed
practices, or ethical standards, and external influences such as
market conditions, fraudulent activities, disasters, and
security risks, and (5)
compliance risk
, which exposes us
to money penalties, enforcement actions or other sanctions as a
result of nonconformance with laws, rules, and regulations that
apply to the financial services industry.
12
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We also expend considerable effort to contain risk which
emanates from execution of our business strategies and work
relentlessly to protect the Company’s reputation. Strategic
and reputational risks do not easily lend themselves to
traditional methods of measurement. Rather, we closely monitor
them through processes such as new
product / initiative reviews, frequent financial
performance reviews, employee and client surveys, monitoring
market intelligence, periodic discussions between management and
our board, and other such efforts.
In addition to the other information included or incorporated by
reference into this report, readers should carefully consider
that the following important factors, among others, could
negatively impact our business, future results of operations,
and future cash flows materially.
Credit
Risks
:
| 1. | Our ACL may prove inadequate or be negatively affected by credit risk exposures which could materially adversely affect our net income and capital. |
Our business depends on the creditworthiness of our customers.
Our ACL of $1.3 billion at December 31, 2010,
represents Management’s estimate of probable losses
inherent in our loan and lease portfolio as well as our unfunded
loan commitments and letters of credit. We periodically review
our ACL for adequacy. In doing so, we consider economic
conditions and trends, collateral values, and credit quality
indicators, such as past charge-off experience, levels of past
due loans, and nonperforming assets. There is no certainty that
our ACL will be adequate over time to cover losses in the
portfolio because of unanticipated adverse changes in the
economy, market conditions, or events adversely affecting
specific customers, industries, or markets. If the credit
quality of our customer base materially decreases, if the risk
profile of a market, industry, or group of customers changes
materially, or if the ACL is not adequate, our net income and
capital could be materially adversely affected which, in turn,
could have a material negative adverse affect on our financial
condition and results of operations.
In addition, bank regulators periodically review our ACL and may
require us to increase our provision for loan and lease losses
or loan charge-offs. Any increase in our ACL or loan charge-offs
as required by these regulatory authorities could have a
material adverse affect on our financial condition and results
of operations.
| 2. | A sustained weakness or further weakening in economic conditions could materially adversely affect our business. |
Our performance could be negatively affected to the extent that
further weaknesses in business and economic conditions have
direct or indirect material adverse impacts on us, our
customers, and our counterparties. These conditions could result
in one or more of the following:
| • | 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 NPAs, NCOs, provision
for credit losses, and valuation adjustments on loans held for
sale. The markets we serve are dependent on industrial and
manufacturing businesses and thus are particularly vulnerable to
adverse changes in economic conditions affecting these sectors.
| 3. | Further declines in home values or reduced levels of home sales in our markets could result in higher delinquencies, greater charge-offs, and increased losses on the sale of foreclosed real estate in future periods. |
Like all financial institutions, we are subject to the effects
of any economic downturn. There has been a slowdown in the
housing market across our geographic footprint, reflecting
declining prices and excess
13
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inventories of houses to be sold. These developments have had,
and further declines may continue to have, a negative effect on
our financial conditions and results of operations. At
December 31, 2010, we had:
| • | $7.7 billion of home equity loans and lines, representing 20% of total loans and leases. | |
| • | $4.5 billion in residential real estate loans, representing 12% of total loans and leases. | |
| • | $4.7 billion of Federal Agency mortgage-backed securities, $0.1 billion of private label CMOs, and $0.1 billion of Alt-A mortgage-backed securities that could be negatively affected by a decline in home values. | |
| • | $0.3 billion of bank owned life insurance investments primarily in mortgage-backed securities. |
Because of the decline in home values, some of our borrowers
have mortgages greater than the value of their homes. The
decline in home values, coupled with the weakened economy, has
increased short sales and foreclosures. The reduced levels of
home sales have had a materially adverse affect on the prices
achieved on the sale of foreclosed properties. Continued decline
in home values may escalate these problems resulting in higher
delinquencies, greater charge-offs, and increased losses on the
sale of foreclosed real estate in future periods.
Market
Risks
:
| 1. | Changes in interest rates could reduce our net interest income, reduce transactional income, and negatively impact the value of our loans, securities, and other assets. This could have a material adverse impact on our cash flows, financial condition, results of operations, and capital. |
Our results of operations depend substantially on net interest
income, which is the difference between interest earned on
interest earning assets (such as investments and loans) and
interest paid on interest bearing liabilities (such as deposits
and borrowings). Interest rates are highly sensitive to many
factors, including governmental monetary policies and domestic
and international economic and political conditions. Conditions
such as inflation, deflation, recession, unemployment, money
supply, and other factors beyond our control may also affect
interest rates. If our interest earning assets mature or reprice
more quickly than interest bearing liabilities in a declining
interest rate environment, net interest income could be
materially adversely impacted. Likewise, if interest bearing
liabilities mature or reprice more quickly than interest earning
assets in a rising interest rate environment, net interest
income could be adversely impacted.
At December 31, 2010, $2.6 billion, or 13%, of our
commercial loan portfolio, as measured by the aggregate
outstanding principal balances, was fixed-rate loans and the
remainder was adjustable-rate loans. As interest rates rise, the
payment by the borrower rises to the extent permitted by the
terms of the loan, and the increased payment increases the
potential for default. At the same time, the marketability of
the underlying property may be adversely affected by higher
interest rates. In a declining interest rate environment, there
may be an increase in prepayments on the loans underlying our
participation interests as borrowers refinance their mortgages
at lower interest rates.
Changes in interest rates also can affect the value of loans,
securities, and other assets, including mortgage and nonmortgage
servicing rights and assets under management. Examples of
transactional income include trust income, brokerage income, and
gain on sales of loans. This type of income can vary
significantly from
quarter-to-quarter
and
year-to-year
based on a number of different factors, including the interest
rate environment. An increase in interest rates that adversely
affects the ability of borrowers to pay the principal or
interest on loans and leases may lead to an increase in NPAs and
a reduction of income recognized, which could have a material
adverse effect on our results of operations and cash flows. When
we place a loan on nonaccrual status, we reverse any accrued but
unpaid interest receivable, which decreases interest income.
Subsequently, we continue to have a cost to fund the loan, which
is reflected as interest expense, without any interest income to
offset the associated funding expense. Thus, an increase in the
amount of NPAs would have an adverse impact on net interest
income.
Rising interest rates will result in a decline in value of our
fixed-rate debt securities and cash flow hedging derivatives
portfolio. The unrealized losses resulting from holding these
securities and financial
14
Table of Contents
instruments would be recognized in OCI and reduce total
shareholders’ equity. Unrealized losses do not negatively
impact our regulatory capital ratios; however Tangible Common
Equity and the associated ratios would be reduced. If debt
securities in an unrealized loss position are sold, such losses
become realized and will reduce Tier I and Total Risk-based
Capital regulatory ratios. If cash flow hedging derivatives are
terminated, the impact is reflected in earnings over the life of
the instrument and reduces Tier I and Total Risk-based
Capital regulatory ratios. Somewhat offsetting these negative
impacts to OCI in a rising interest rate environment, is a
decrease in pension and other post-retirement obligations.
If short-term interest rates remain at their historically low
levels for a prolonged period, and assuming longer term interest
rates fall further, we could experience net interest margin
compression as our interest earning assets would continue to
reprice downward while our interest bearing liability rates
could fail to decline in tandem. This would have a material
adverse effect on our net interest income and our results of
operations.
| 2. | The value of our Alt-A mortgage-backed, Pooled-Trust-Preferred and Private Label CMO investment securities are volatile and future valuation declines or other-than-temporary impairments could have a materially adverse affect on our future earnings and regulatory capital. |
Continued volatility in the market value for these securities in
our investment securities portfolio, whether caused by changes
in market perceptions of credit risk, as reflected in the
expected market yield of the security, or actual defaults in the
portfolio, could result in significant fluctuations in the value
of these securities. This could have a material adverse impact
on our accumulated OCI and shareholders’ equity depending
on the direction of the fluctuations. Furthermore, future
downgrades or defaults in these securities could result in
future classifications as
other-than-temporarily
impaired and limit our ability to sell these securities at
reasonable prices. This could have a material negative impact on
our future earnings, although the impact on shareholders’
equity would be offset by any amount already included in OCI for
securities where we have recorded temporary impairment. At
December 31, 2010, the fair value of these securities was
$284.6 million.
| 3. | An issuance of additional capital would have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock. |
We and the Bank are highly regulated, and we, as well as our
regulators, continue to regularly perform a variety of capital
analyses, including the preparation of stress case scenarios. As
a result of those assessments, we could determine, or our
regulators could require us, to raise additional capital in the
future. Any such capital raise could include, among other
things, the potential issuance of additional common equity to
the public, or the additional conversions of our existing
Series A Preferred Stock to common equity. There could also
be market perceptions that we need to raise additional capital,
and regardless of the outcome of any stress test or other stress
case analysis, such perceptions could have an adverse effect on
the price of our common stock.
Furthermore, in order to improve our capital ratios above our
already Well-capitalized levels, we can decrease the amount of
our risk-weighted assets, increase capital, or a combination of
both. If it is determined that additional capital is required in
order to improve or maintain our capital ratios, we may
accomplish this through the issuance of additional common stock.
The issuance of any additional shares of common stock or
securities convertible into or exchangeable for common stock or
that represent the right to receive common stock, or the
exercise of such securities, could be substantially dilutive to
existing common shareholders. Shareholders of our common stock
have no preemptive rights that entitle them to purchase their
pro-rata share of any offering of shares of any class or series
and, therefore, such sales or offerings could result in
increased dilution to existing shareholders. The market price of
our common stock could decline as a result of sales of shares of
our common stock or securities convertible into, or exchangeable
for, common stock in anticipation of such sales.
15
Table of Contents
Liquidity
Risks
:
| 1. | If we are unable to borrow funds through access to capital markets, we may not be able to meet the cash flow requirements of our depositors, creditors, and borrowers, or have the operating cash needed to fund corporate expansion and other corporate activities. |
Liquidity is the ability to meet cash flow needs on a timely
basis at a reasonable cost. The liquidity of the Bank is used to
make loans and leases and to repay deposit liabilities as they
become due or are demanded by customers. Liquidity policies and
limits are established by our board of directors, with operating
limits set by Management. Wholesale funding sources include
federal funds purchased, securities sold under repurchase
agreements, noncore deposits, and medium- and long-term debt,
which includes a domestic bank note program and a Euronote
program. The Bank is also a member of the FHLB, which provides
funding through advances to members that are collateralized with
mortgage-related assets.
We maintain a portfolio of securities that can be used as a
secondary source of liquidity. There are other sources of
liquidity available to us should they be needed. These sources
include the sale or securitization of loans, the ability to
acquire additional national market noncore deposits, issuance of
additional collateralized borrowings such as FHLB advances, the
issuance of debt securities, and the issuance of preferred or
common securities in public or private transactions. The Bank
also can borrow from the Federal Reserve’s discount window.
Starting in the middle of 2007, significant turmoil and
volatility in worldwide financial markets increased, though
current volatility has declined. Such disruptions in the
liquidity of financial markets directly impact us to the extent
we need to access capital markets to raise funds to support our
business and overall liquidity position. This situation could
affect the cost of such funds or our ability to raise such
funds. If we were unable to access any of these funding sources
when needed, we might be unable to meet customers’ needs,
which could adversely impact our financial condition, results of
operations, cash flows, and level of regulatory-qualifying
capital. We may, from time to time, consider opportunistically
retiring our outstanding securities in privately negotiated or
open market transactions for cash or common shares. This could
adversely affect our liquidity position.
| 2. | Due to the losses that the Bank incurred in 2008 and 2009, at December 31, 2010, the Bank and its subsidiaries could not declare and pay dividends to the holding company, any subsidiary of the holding company outside the Bank’s consolidated group, or any security holder outside the Bank’s consolidated group, without regulatory approval. |
Dividends from the Bank to the parent company are the primary
source of funds for the payment of dividends to our
shareholders. Under applicable statutes and regulations, a
national bank may not declare and pay dividends in any year in
excess of an amount equal to the sum of the total of the net
income of the bank for that year and the retained net income of
the bank for the preceding two years, minus the sum of any
transfers required by the OCC and any transfers required to be
made to a fund for the retirement of any preferred stock, unless
the OCC approves the declaration and payment of dividends in
excess of such amount. Due to the losses that the Bank incurred
in 2008 and 2009, at December 31, 2010, the Bank and its
subsidiaries could not declare and pay dividends to the parent
company, any subsidiary of the parent company outside the
Bank’s consolidated group, or any security holder outside
the Bank’s consolidated group, without regulatory approval.
Since the first quarter of 2008, the Bank has requested and
received OCC approval each quarter to pay periodic dividends to
shareholders outside the Bank’s consolidated group on the
preferred and common stock of its REIT and capital financing
subsidiaries to the extent necessary to maintain their REIT
status. A wholly-owned nonbank subsidiary of the parent company
owns a portion of the preferred shares of the REIT and capital
financing subsidiaries. Outside of the REIT and capital
financing subsidiary dividends, we do not anticipate that the
Bank will declare dividends during 2011.
16
Table of Contents
Operational
Risks
:
| 1. | The resolution of significant pending litigation, if unfavorable, could have a material adverse affect on our results of operations for a particular period. |
We face legal risks in our businesses, and the volume of claims
and amount of damages and penalties claimed in litigation and
regulatory proceedings against financial institutions remain
high. Substantial legal liability against us could have material
adverse financial effects or cause significant reputational harm
to us, which in turn could seriously harm our business
prospects. As more fully described in Note 22 of the Notes
to Consolidated Financial Statements, certain putative class
actions and shareholder derivative actions were filed against
us, certain affiliated committees,
and/or
certain of our current or former officers and directors. These
cases allege violations of the securities laws, breaches of
fiduciary duty, waste of corporate assets, abuse of control,
gross mismanagement, unjust enrichment, and violations of
Employment Retirement Income Security Act (ERISA) laws in
connection with our acquisition of Sky Financial, the
transactions between Franklin and us, and the financial and
other disclosures related to these transactions. Although no
assurance can be given, based on information currently
available, consultation with counsel, and available insurance
coverage, we believe that the eventual outcome of these claims
against us will not, individually or in the aggregate, have a
material adverse effect on our consolidated financial position
or results of operations. However, it is possible that the
ultimate resolution of these matters, if unfavorable, may be
material to the results of operations for a particular reporting
period.
| 2. | We face significant operational risks which could lead to expensive litigation and loss of confidence by our customers, regulators, and capital markets. |
We are exposed to many types of operational risks, including
reputational risk, legal and compliance risk, the risk of fraud
or theft by employees or outsiders, unauthorized transactions by
employees or outsiders, or operational errors by employees,
including clerical or record-keeping errors or those resulting
from faulty or disabled computer or telecommunications systems.
In addition, today’s threats to customer information and
information systems are complex, more wide spread, continually
emerging, and increasing at a rapid pace. Although we establish
and maintain systems of internal operational controls that
provide us with timely and accurate information about our level
of operational risks, continue to invest in better tools and
processes in all key areas, and monitor threats with increased
rigor and focus, these operational risks could lead to expensive
litigation and loss of confidence by our customers, regulators,
and the capital markets.
Moreover, negative public opinion can result from our actual or
alleged conduct in any number of activities, including lending
practices, corporate governance, and acquisitions and from
actions taken by government regulators and community
organizations in response to those activities. Negative public
opinion can adversely affect our ability to attract and retain
customers and can also expose us to litigation and regulatory
action. Relative to acquisitions, we cannot predict if, or when,
we will be able to identify and attract acquisition candidates
or make acquisitions on favorable terms. We incur risks and
challenges associated with the integration of acquired
institutions in a timely and efficient manner, and we cannot
guarantee that we will be successful in retaining existing
customer relationships or achieving anticipated operating
efficiencies.
| 3. | We are subject to routine on-going tax examinations by the IRS and by various other jurisdictions, including the states of Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia and Illinois. The IRS, Ohio, and Kentucky have proposed various adjustments to our previously filed tax returns. It is possible that the ultimate resolution of all proposed and future adjustments, if unfavorable, may be materially adverse to the results of operations in the period it occurs. |
The calculation of our provision for federal income taxes is
complex and requires the use of estimates and judgments. In the
ordinary course of business, we operate in various taxing
jurisdictions and are subject to income and nonincome taxes. The
effective tax rate is based in part on our interpretation of the
relevant current tax laws. We believe the aggregate liabilities
related to taxes are appropriately reflected in the Consolidated
Financial Statements.
17
Table of Contents
From
time-to-time,
we engage in business transactions that may have an effect on
our tax liabilities. Where appropriate, we have obtained
opinions of outside experts and have assessed the relative
merits and risks of the appropriate tax treatment of business
transactions taking into account statutory, judicial, and
regulatory guidance in the context of the tax position.
We file income tax returns with the IRS and various state, city,
and foreign jurisdictions. Federal income tax audits have been
completed through 2007. In addition, various state and other
jurisdictions remain open to examination, including Ohio,
Kentucky, Indiana, Michigan, Pennsylvania, West Virginia and
Illinois.
The IRS and other taxing jurisdictions, including the states of
Ohio and Kentucky, have proposed adjustments to our previously
filed tax returns. We do not agree with these adjustments and
believe that the tax positions taken by us related to such
proposed adjustments were correct and supported by applicable
statutes, regulations, and judicial authority, and we intend to
vigorously defend our positions. Appropriate tax reserves have
been established in accordance with ASC 740, Income Taxes and
ASC 450, Contingencies. However, it is also possible that
the ultimate resolution of the proposed adjustments, if
unfavorable, may result in penalties and interest. Such
adjustments, including any penalties and interest, may be
material to our results of operations in the period such
adjustments occur and increase our effective tax rate.
Nevertheless, although no assurances can be given, we believe
that the resolution of these examinations will not, individually
or in the aggregate, have a material adverse impact on our
consolidated financial position in future periods. For further
discussion, see Note 17 of the Notes to Consolidated
Financial Statements.
The Franklin restructuring in the 2009 first quarter resulted in
a $159.9 million net deferred tax asset equal to the amount
of income and equity that was included in our operating results
for the 2009 first quarter. During the 2010 first quarter, a
$38.2 million net tax benefit was recognized, primarily
reflecting the increase in the net deferred tax asset relating
to the assets acquired from the March 31, 2009 Franklin
restructuring. In the 2010 fourth quarter, we entered into an
asset monetization transaction that generated a tax benefit of
$63.6 million. While we believe that our positions
regarding the deferred tax asset and related income recognition
is correct, the positions could be subject to challenge.
| 4. | Failure to maintain effective internal controls over financial reporting in the future could impair our ability to accurately and timely report our financial results or prevent fraud, resulting in loss of investor confidence and adversely affecting our business and stock price. |
Effective internal controls over financial reporting are
necessary to provide reliable financial reports and prevent
fraud. As a financial holding company, we are subject to
regulation that focuses on effective internal controls and
procedures. Management continually seeks to improve these
controls and procedures.
We believe that our key internal controls over financial
reporting are currently effective; however, such controls and
procedures will be modified, supplemented, and changed from
time-to-time
as necessitated by our growth and in reaction to external events
and developments. While we will continue to assess our controls
and procedures and take immediate action to remediate any future
perceived gaps, there can be no guarantee of the effectiveness
of these controls and procedures on an on-going basis. Any
failure to maintain, in the future, an effective internal
control environment could impact our ability to report our
financial results on an accurate and timely basis, which could
result in regulatory actions, loss of investor confidence, and
adversely impact our business and stock price.
Compliance
Risks
:
| 1. | If our regulators deem it appropriate, they can take regulatory actions that could materially adversely impact our ability to compete for new business, constrain our ability to fund our liquidity needs or pay dividends, and increase the cost of our services. |
We are subject to the supervision and regulation of various
state and Federal regulators, including the OCC, Federal
Reserve, FDIC, SEC, Financial Industry Regulatory Authority, and
various state regulatory agencies. As such, we are subject to a
wide variety of laws and regulations, many of which are
discussed in the Regulatory Matters section. As part of their
supervisory process, which includes periodic examinations and
18
Table of Contents
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.
| 2. | Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may materially adversely affect us by increasing our costs, adding complexity in doing business, impeding the efficiency of our internal business processes, negatively impacting the recoverability of certain of our recorded assets, requiring us to increase our regulatory capital, limiting our ability to pursue business opportunities, and otherwise materially adversely impacting our financial condition, results of operation, liquidity, or stock price. |
Current economic conditions, particularly in the financial
markets, have resulted in government regulatory agencies and
political bodies placing increased focus on and scrutiny of the
financial services industry. The U.S. Government has
intervened on an unprecedented scale, responding to what has
been commonly referred to as the financial crisis. In addition
to the previously enacted governmental assistance programs
designed to stabilize and stimulate the U.S. economy,
recent economic, political, and market conditions have led to
numerous programs and proposals to reform the financial
regulatory system and prevent future crises.
On July 21, 2010, the Dodd-Frank Act was signed into law.
The Dodd-Frank Act represents a comprehensive overhaul of the
financial services industry within the United States,
establishes the new federal CFPB, and requires the bureau and
other federal agencies to implement many new and significant
rules and regulations. At this time, it is difficult to predict
the extent to which the Dodd-Frank Act or the resulting rules
and regulations will impact our business. Compliance with these
new laws and regulations may result in additional costs, which
could be significant, and may have a material and adverse effect
on our results of operations.
In addition, international banking industry regulators have
largely agreed upon significant changes in the regulation of
capital required to be held by banks and their holding companies
to support their businesses. The new international rules, known
as Basel III, generally increase the capital required to be held
and narrow the types of instruments which will qualify as
providing appropriate capital and impose a new liquidity
measurement. The Basel III requirements are complex and
will be phased in over many years.
The Basel III rules do not apply to U.S. banks or
holding companies automatically. Among other things, the
Dodd-Frank Act requires U.S. regulators to reform the
system under which the safety and soundness of banks and other
financial institutions, individually and systemically, are
regulated. That reform effort will include the regulation of
capital and liquidity. It is not known whether or to what extent
the U.S. regulators will incorporate elements of
Basel III into the reformed U.S. regulatory system,
but it is expected that the U.S. reforms will include an
increase in capital requirements, a narrowing of what qualifies
as appropriate capital, and impose a new liquidity measurement.
One likely effect of a significant tightening of
U.S. capital requirements would be to increase our cost of
capital, among other things. Any permanent significant increase
in our cost of capital could have significant adverse impacts on
the profitability of many of our products, the types of products
we could offer profitably, our overall profitability, and our
overall growth opportunities, among other things. Although most
financial institutions would be affected, these business impacts
could be felt unevenly, depending upon the business and product
mix of each institution. Other potential effects could include
less ability to pay cash dividends and repurchase our common
shares, higher dilution of common shareholders, and a higher
risk that we might fall below regulatory capital thresholds in
an adverse economic cycle.
| Item 1B: | Unresolved Staff Comments |
None.
19
Table of Contents
| 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 33%. The lease term expires in
2030, with six five-year renewal options for up to 30 years
but with no purchase option. The Bank has an indirect minority
equity interest of 18.4% in the building.
Our other major properties consist of the following:
|
Description
|
Location
|
Own | Lease | |||
|
13 story office building, located adjacent to the Huntington
Center
|
Columbus, Ohio | √ | ||||
|
12 story office building, located adjacent to the Huntington
Center
|
Columbus, Ohio | √ | ||||
|
The Crosswoods building
|
Columbus, Ohio | √ | ||||
|
21 story office building, known as the Huntington Building
|
Cleveland, Ohio | √ | ||||
|
12 story office building
|
Youngstown, Ohio | √ | ||||
|
10 story office building
|
Warren, Ohio | √ | ||||
|
18 story office building
|
Charleston, West Virginia | √ | ||||
|
3 story office building
|
Holland, Michigan | √ | ||||
|
office complex
|
Troy, Michigan | √ | ||||
|
data processing and operations center (Easton)
|
Columbus, Ohio | √ | ||||
|
data processing and operations center (Northland)
|
Columbus, Ohio | √ | ||||
|
data processing and operations center (Parma)
|
Cleveland, Ohio | √ | ||||
|
data processing and operations center
|
Indianapolis, Indiana | √ |
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.
| Item 3: | Legal Proceedings |
Information required by this item is set forth in Note 22
of the Notes to Consolidated Financial Statements and
incorporated into this Item by reference.
| Item 4: | Reserved. |
| 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,
2011, we had 38,676 shareholders of record.
Information regarding the high and low sale prices of our common
stock and cash dividends declared on such shares, as required by
this item, is set forth in Table 58 entitled Selected Quarterly
Income Statement Data and incorporated into this Item by
reference. Information regarding restrictions on dividends, as
required by this item, is set forth in Item 1
Business-Regulatory Matters and in Note 23 of the Notes to
Consolidated Financial Statements and incorporated into this
Item by reference.
As a condition to participate in the TARP, Huntington could not
repurchase any additional shares without prior approval from the
Treasury. On February 18, 2009, the board of directors
terminated the previously authorized program for the repurchase
of up to 15 million shares of common stock (the 2006
Repurchase Program). Huntington did not repurchase any common
shares for the year ended December 31, 2010.
20
Table of Contents
The line graph below compares the yearly percentage change in
cumulative total shareholder return on Huntington common stock
and the cumulative total return of the S&P 500 Index and
the KBW Bank Index for the period December 31, 2005,
through December 31, 2010. The KBW Bank Index is a market
capitalization-weighted bank stock index published by Keefe,
Bruyette & Woods. The index is composed of the largest
banking companies and includes all money center banks and
regional banks, including Huntington. An investment of $100 on
December 31, 2005, and the reinvestment of all dividends
are assumed.
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||||||||
HBAN
|
$ | 100 | $ | 104 | $ | 69 | $ | 39 | $ | 19 | $ | 35 | ||||||||||||||||||
S&P 500
|
$ | 100 | $ | 116 | $ | 122 | $ | 77 | $ | 97 | $ | 112 | ||||||||||||||||||
KBW Bank Index
|
$ | 100 | $ | 117 | $ | 91 | $ | 48 | $ | 47 | $ | 58 | ||||||||||||||||||
HBAN
S&P 500
KBW Bank Index
21
Table of Contents
| Item 6: | Selected Financial Data |
Table 1 — Selected Financial Data (1), (9)
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in thousands, except per share amounts) | ||||||||||||||||||||
|
Interest income
|
$ | 2,145,392 | $ | 2,238,142 | $ | 2,798,322 | $ | 2,742,963 | $ | 2,070,519 | ||||||||||
|
Interest expense
|
526,587 | 813,855 | 1,266,631 | 1,441,451 | 1,051,342 | |||||||||||||||
|
Net interest income
|
1,618,805 | 1,424,287 | 1,531,691 | 1,301,512 | 1,019,177 | |||||||||||||||
|
Provision for credit losses
|
634,547 | 2,074,671 | 1,057,463 | 643,628 | 65,191 | |||||||||||||||
|
Net interest income after provision for credit losses
|
984,258 | (650,384 | ) | 474,228 | 657,884 | 953,986 | ||||||||||||||
|
Noninterest income
|
1,041,858 | 1,005,644 | 707,138 | 676,603 | 561,069 | |||||||||||||||
|
Noninterest expense:
|
||||||||||||||||||||
|
Goodwill impairment
|
— | 2,606,944 | — | — | — | |||||||||||||||
|
Other noninterest expense
|
1,673,805 | 1,426,499 | 1,477,374 | 1,311,844 | 1,000,994 | |||||||||||||||
|
Total noninterest expense
|
1,673,805 | 4,033,443 | 1,477,374 | 1,311,844 | 1,000,994 | |||||||||||||||
|
Income (loss) before income taxes
|
352,311 | (3,678,183 | ) | (296,008 | ) | 22,643 | 514,061 | |||||||||||||
|
Provision (benefit) for income taxes
|
39,964 | (584,004 | ) | (182,202 | ) | (52,526 | ) | 52,840 | ||||||||||||
|
Net income (loss)
|
$ | 312,347 | $ | (3,094,179 | ) | $ | (113,806 | ) | $ | 75,169 | $ | 461,221 | ||||||||
|
Dividends on preferred shares
|
172,032 | 174,756 | 46,400 | — | — | |||||||||||||||
|
Net income (loss) applicable to common shares
|
$ | 140,315 | $ | (3,268,935 | ) | $ | (160,206 | ) | $ | 75,169 | $ | 461,221 | ||||||||
|
Net income (loss) per common share — basic
|
$ | 0.19 | $ | (6.14 | ) | $ | (0.44 | ) | $ | 0.25 | $ | 1.95 | ||||||||
|
Net income (loss) per common share — diluted
|
0.19 | (6.14 | ) | (0.44 | ) | 0.25 | 1.92 | |||||||||||||
|
Cash dividends declared per common share
|
0.0400 | 0.0400 | 0.6625 | 1.0600 | 1.0000 | |||||||||||||||
|
Balance sheet highlights
|
||||||||||||||||||||
|
Total assets (period end)
|
$ | 53,819,642 | $ | 51,554,665 | $ | 54,352,859 | $ | 54,697,468 | $ | 35,329,019 | ||||||||||
|
Total long-term debt (period end)(2)
|
3,813,827 | 3,802,670 | 6,870,705 | 6,954,909 | 4,512,618 | |||||||||||||||
|
Total shareholders’ equity (period end)
|
4,980,542 | 5,336,002 | 7,228,906 | 5,951,091 | 3,016,029 | |||||||||||||||
|
Average long-term debt(2)
|
3,953,177 | 5,558,001 | 7,374,681 | 5,714,572 | 4,942,671 | |||||||||||||||
|
Average shareholders’ equity
|
5,482,502 | 5,787,401 | 6,395,690 | 4,633,465 | 2,948,367 | |||||||||||||||
|
Average total assets
|
52,574,231 | 52,440,268 | 54,921,419 | 44,711,676 | 35,111,236 | |||||||||||||||
22
Table of Contents
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in thousands, except per share amounts) | ||||||||||||||||||||
|
Key ratios and statistics
|
||||||||||||||||||||
|
Margin analysis — as a % of average earnings assets
|
||||||||||||||||||||
|
Interest income(3)
|
4.52 | % | 4.88 | % | 5.90 | % | 7.02 | % | 6.63 | % | ||||||||||
|
Interest expense
|
1.08 | 1.77 | 2.65 | 3.66 | 3.34 | |||||||||||||||
|
Net interest margin(3)
|
3.44 | % | 3.11 | % | 3.25 | % | 3.36 | % | 3.29 | % | ||||||||||
|
Return on average total assets
|
0.59 | % | (5.90 | )% | (0.21 | )% | 0.17 | % | 1.31 | % | ||||||||||
|
Return on average common shareholders’ equity
|
3.7 | (80.8 | ) | (2.8 | ) | 1.6 | 15.6 | |||||||||||||
|
Return on average tangible common shareholders’ equity(4)
|
5.6 | (22.4 | ) | (4.4 | ) | 3.9 | 19.5 | |||||||||||||
|
Efficiency ratio(5)
|
60.4 | 55.4 | 57.0 | 62.5 | 59.4 | |||||||||||||||
|
Dividend payout ratio
|
0.21 | N.R. | N.R. | 4.24 | 52.1 | |||||||||||||||
|
Average shareholders’ equity to average assets
|
10.43 | 11.04 | 11.65 | 10.36 | 8.40 | |||||||||||||||
|
Effective tax rate (benefit)
|
11.3 | (15.9 | ) | (61.6 | ) | N.R. | 10.3 | |||||||||||||
|
Tangible common equity to tangible assets (period end)(6),(8)
|
7.56 | 5.92 | 4.04 | 5.09 | 6.93 | |||||||||||||||
|
Tangible equity to tangible assets (period end)(7),(8)
|
8.24 | 9.24 | 7.72 | 5.09 | 6.93 | |||||||||||||||
|
Tier 1 leverage ratio (period end)
|
9.41 | 10.09 | 9.82 | 6.77 | 8.00 | |||||||||||||||
|
Tier 1 risk-based capital ratio (period end)
|
11.55 | 12.50 | 10.72 | 7.51 | 8.93 | |||||||||||||||
|
Total risk-based capital ratio (period end)
|
14.46 | 14.55 | 13.91 | 10.85 | 12.79 | |||||||||||||||
|
Other data
|
||||||||||||||||||||
|
Full-time equivalent employees (period end)
|
11,341 | 10,272 | 10,951 | 11,925 | 8,081 | |||||||||||||||
|
Domestic banking offices (period end)
|
620 | 611 | 613 | 625 | 381 | |||||||||||||||
N.R. — Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
| (1) | Comparisons for presented periods are impacted by a number of factors. Refer to the Significant Items for additional discussion regarding these key factors. | |
| (2) | Includes FHLB advances, subordinated notes, and other long-term debt. | |
| (3) | On an FTE basis assuming a 35% tax rate. | |
| (4) | Net income (loss) less expense excluding amortization of intangibles for the period divided by average tangible shareholders’ equity. Average tangible shareholders’ equity equals average total shareholders’ equity less average intangible assets and goodwill. Expense for amortization of intangibles and average intangible assets are net of deferred tax liability, and calculated assuming a 35% tax rate. | |
| (5) | Noninterest expense less amortization of intangibles divided by the sum of FTE net interest income and noninterest income excluding securities gains. | |
| (6) | Tangible common equity (total common equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate. |
23
Table of Contents
| (7) | Tangible equity (total equity less goodwill and other intangible assets) divided by tangible assets (total assets less goodwill and other intangible assets). Other intangible assets are net of deferred tax, and calculated assuming a 35% tax rate. | |
| (8) | Tangible equity, tangible common equity, and tangible assets are non-GAAP financial measures. Additionally, any ratios utilizing these financial measures are also non-GAAP. These financial measures have been included as they are considered to be critical metrics with which to analyze and evaluate financial condition and capital strength. Other companies may calculate these financial measures differently. | |
| (9) | Comparisons are affected by the Sky Financial acquisition in 2007, and the Unizan acquisition in 2006. |
| Item 7: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
INTRODUCTION
We are a multi-state diversified regional bank holding company
organized under Maryland law in 1966 and headquartered in
Columbus, Ohio. Through the Bank, we have 145 years of
servicing the financial needs of our customers. Through our
subsidiaries, we provide full-service commercial and consumer
banking services, mortgage banking services, automobile
financing, equipment leasing, investment management, trust
services, brokerage services, customized insurance service
programs, and other financial products and services. Our over
600 banking offices are located in Indiana, Kentucky, Michigan,
Ohio, Pennsylvania, and West Virginia. Selected financial
service and other activities are also conducted in various
states throughout the United States. International banking
services are available through the headquarters office in
Columbus, Ohio and a limited purpose office located in the
Cayman Islands and another limited purpose office located in
Hong Kong.
The following MD&A provides information we believe
necessary for understanding our financial condition, changes in
financial condition, results of operations, and cash flows. The
MD&A should be read in conjunction with the Consolidated
Financial Statements, Notes to Consolidated Financial
Statements, and other information contained in this report.
Our discussion is divided into key segments:
| • | Executive Overview — Provides a summary of our current financial performance, and business overview, including our thoughts on the impact of the economy, legislative and regulatory initiatives, and recent industry developments. This section also provides our outlook regarding our 2011 expectations. | |
| • | Discussion of Results of Operations — Reviews financial performance from a consolidated Company perspective. It also includes a Significant Items section that summarizes key issues helpful for understanding performance trends. Key consolidated average balance sheet and income statement trends are also discussed in this section. | |
| • | Risk Management and Capital — Discusses credit, market, liquidity, and operational risks, including how these are managed, as well as performance trends. It also includes a discussion of liquidity policies, how we obtain funding, and related performance. In addition, there is a discussion of guarantees and / or commitments made for items such as standby letters of credit and commitments to sell loans, and a discussion that reviews the adequacy of capital, including regulatory capital requirements. | |
| • | Business Segment Discussion — Provides an overview of financial performance for each of our major business segments and provides additional discussion of trends underlying consolidated financial performance. | |
| • | Results for the Fourth Quarter — Provides a discussion of results for the 2010 fourth quarter compared with the 2009 fourth quarter. |
24
Table of Contents
| • | Additional Disclosures — Provides comments on important matters including forward-looking statements, critical accounting policies and use of significant estimates, recent accounting pronouncements and developments, and acquisitions. |
A reading of each section is important to understand fully the
nature of our financial performance and prospects.
EXECUTIVE
OVERVIEW
2010
Financial Performance Review
In 2010, we reported net income of $312.3 million, or $0.19
per common share (
see Table 1
). The current year included
a nonrecurring reduction of $0.08 per common share for the
deemed dividend resulting from the repurchase of
$1.4 billion in TARP Capital. This compared with a net loss
of $3,094.2 million, or $6.14 per common share, for 2009.
The 2009 loss primarily reflected two items:
$2,606.9 million in noncash goodwill impairment charges and
$2,074.7 million in provision for credit losses. Most of
the $2,606.9 million in goodwill impairment charges related
to the acquisitions of Sky Financial and Unizan. While this
impairment charge reduced reported net income, equity, and total
assets, it had no impact on key regulatory capital ratios. As a
noncash charge, it had no affect on our liquidity. The provision
for credit losses reflected higher net charge-offs as we
addressed issues in our loan portfolio. We also strengthened our
allowance for credit losses because of higher levels of
nonperforming assets.
Fully-taxable equivalent net interest income was
$1.6 billion in 2010, up $0.2 billion, or 14%, from
2009. The increase primarily reflected the favorable impact of
the increase in net interest margin to 3.44% from 3.11% and, to
a lesser degree, a 3% increase in average total earning assets.
A significant portion of the increase in the net interest margin
reflected a shift in our deposit mix from higher-cost time
deposits to lower-cost transaction-based accounts. Additionally,
we grew our average core deposits $3.1 billion, or 9%, from
2009. Although average total earning assets increased only
slightly compared with 2009, this change reflected a
$2.9 billion, or 45%, increase in average total investment
securities, partially offset by a $1.4 billion, or 4%,
decline in average total loans and leases. The change in average
loan balances from the prior year reflected our strategy to
reduce our CRE exposure as average CRE loans declined
$1.9 billion, or 21%, from 2009. Average C&I loans
declined $0.7 billion, or 5%, for the full year. Average
automobile loans and leases increased $1.3 billion, or 38%,
from 2009, reflecting the consolidation of a $0.8 billion
automobile loan securitization on January 1, 2010. These
changes in loan and investment securities balances from the
prior year reflected the execution of our balance sheet
management strategy, and not a change in standards for making
loans or for investing in securities.
Noninterest income was $1.0 billion in 2010, a slight
increase compared with 2009. The increase in noninterest income
was primarily a result of an increase in mortgage banking
income, reflecting an increase in origination and secondary
marketing income as loan originations and loan sales were
substantially higher, and MSR hedging. This was partially offset
by a decline in service charges on deposit accounts, which was
due to a decline in personal NSF / OD service charges.
The decline reflected our implementation of changes to
Regulation E and the introduction of our Fair Play banking
philosophy. As part of this philosophy, we voluntarily reduced
certain NSF / OD fees and implemented our
24-Hour
Grace
tm
overdraft policy. The goal of our Fair Play banking philosophy
is to introduce more customer-friendly fee structures with the
objective of accelerating the acquisition and retention of
customers.
Noninterest expense was $1.7 billion in 2010, a decrease of
$2.4 billion, or 59%, compared with 2009. The decrease in
noninterest expense was primarily due to goodwill impairment in
the year-ago period. The decline also reflected a decrease in
OREO and foreclosure expense from lower OREO losses. Further,
there was a decline in deposit and other insurance expense,
primarily due to a $23.6 million FDIC insurance special
assessment in 2009, partially offset by continued growth in
total deposits and higher FDIC insurance costs in the current
period as premium rates increased. The decline was partially
offset by a 2009 benefit from a gain on the early extinguishment
of debt, and 2010 increases in personnel costs, reflecting a
combination of factors
25
Table of Contents
including higher salaries due to a 10% increase in full-time
equivalent staff in support of strategic initiatives, higher
sales commissions, and retirement fund and 401(k) plan expenses.
Credit quality performance continued to show strong improvement
as our NPAs and NCOs declined and reserve coverage increased.
This improvement reflected the benefits of our focused actions
taken in 2009 to address credit-related issues. Compared with
the prior year, NPAs declined 59%. NCOs were
$874.5 million, or an annualized 2.35% of average total
loans and leases, down from $1,476.6 million, or 3.82%, in
2009. While the ACL as a percentage of loans and leases was
3.39%, down from 4.16% at December 31, 2009, the ACL as a
percentage of total NALs increased to 166% from 80%.
In December 2010, we successfully completed multiple capital
actions, particularly improving our then relatively low level of
common equity. We sold $920.0 million of common stock in a
public offering and issued $300.0 million of subordinated
debt. On December 22, 2010, these proceeds, along with
other available funds, were used to complete the repurchase of
our $1.4 billion of TARP Capital we issued to the Treasury
under its TARP CPP. Subsequently, on January 19, 2011, we
exited our TARP-related relationship with the Treasury by
repurchasing the warrant we had issued to the Treasury as part
of the TARP CPP for $49.1 million. The warrant had entitled
the Treasury to purchase 23.6 million common shares of
stock.
At December 31, 2010, our regulatory Tier 1 and Total
risk-based capital were $2.4 billion and $1.9 billion,
respectively, above the Well-capitalized regulatory thresholds.
Our tangible common equity ratio improved 164 basis points
to 7.56% and our Tier 1 common risk-based capital ratio
improved 253 basis points to 9.29% from December 31,
2009.
Business
Overview
General
Our general business objectives are: (1) grow revenue and
profitability, (2) grow key fee businesses (existing and
new), (3) improve credit quality, including lower NCOs and
NPAs, (4) improve cross-sell and
share-of-wallet
across all business segments, (5) reduce CRE noncore
exposure, and (6) continue to improve our overall
management of risk.
As further described below, our main challenge to accomplishing
our primary objectives results from an economy, that while more
stable than a year ago, remains fragile. This impairs our
ability to grow loans as customers continue to reduce their debt
and / or remain cautious about increasing debt until
they have a higher degree of confidence in a meaningful
sustainable economic recovery. However, growth in our automobile
loan portfolio continued with 2010 originations of
$3.4 billion, an increase of $1.8 billion compared to
2009. Strong growth in originations reflected increases in all
of our markets, as well as the recent expansion of our
automobile lending business into Eastern Pennsylvania and five
New England states. We expect our growth in the newly entered
markets to become more evident over time as we further develop
our dealership base. Although our residential real estate
portfolio declined slightly from 2009, our mortgage originations
increased $214 million, or 4%, from the prior year. Our CRE
portfolio declined throughout the year as a result of our
on-going strategy to reduce our CRE exposure. The decline was
primarily a result of continuing paydowns in the noncore CRE
portfolio.
We face strong competition from other banks and financial
service firms in our markets. As such, we have placed strategic
emphasis on, and continue to develop and expand resources
devoted to, improving cross-sell performance with our core
customer base. One example of this emphasis was our recent
agreement with Giant Eagle supermarkets to be its exclusive
in-store bank in Ohio. During the 2010 fourth quarter, we opened
four such in-store branches. When fully implemented, the
partnership will give us an additional 100 branches, which in
the aggregate will be nearly 500 branches in Ohio, providing us
with the largest branch presence among Ohio banks, based on
current data. In-store branches have a strong record for
checking account acquisition and are expected to increase the
number of households served and drive revenue. Additionally, it
will give customers the convenience of operating seven days per
week and extended hours banking.
26
Table of Contents
Economy
The weak residential real estate market and U.S. economy
has had a significant adverse impact on the financial services
industry as a whole, and specifically on our financial results.
In addition, the U.S. recession during 2008 and 2009 and
continued high Midwest unemployment have hindered any
significant economic recovery. However, some indications of
recovery are beginning to take hold. Following is a discussion
of certain economic trends in our market area, particularly Ohio
and Michigan.
The median home prices in the Midwest market have been
directionally consistent with the nationwide averages. In the
years preceding the economic crisis, home prices in Michigan and
Ohio did not increase as rapidly as the national trend and
became more in line with the national averages during the
crisis. Therefore, when real estate prices began to decline in
2008, the impact in our Midwest markets was reduced because
pre-crisis originations were not based on values that were as
inflated as in other parts of the country. Home prices in the
Midwest are generally expected to follow the national growth
rates over the next two years. Residential real estate sales in
the Midwest have been consistent with national averages. Single
family home building permits are expected to increase both
nationally and in the Midwest through 2013.
Year-over-year
changes in median household income in the Midwest have been
consistent with national averages and directionally similar with
national trends. Both the U.S. and Midwest are expected to
have slight, but positive, income growth over the next two
years. Unemployment in the Midwest has been consistently higher
than the national average for most of the past decade. However,
the relative difference is expected to narrow over the next two
years, with the Midwest unemployment rate converging to the
U.S. average. The exception is Michigan, which has the
second highest unemployment level in the country. From October
2009 through October 2010, Indiana’s employment growth of
1.1% was among the strongest in the country. Over this same time
period, Ohio’s manufacturing employment grew 1.4%, which
was significantly higher than the 0.8% national average.
Cleveland’s overall employment growth of 1.0% exceeded the
national growth rate of 0.6%.
According to the FRB-Cleveland Beige Book in December 2010,
manufacturers in our footprint indicated that new orders and
production were stable or rose slightly during the last two
months of 2010. Inventory levels were balanced with incoming
order demand and capacity utilization trending up for some
manufacturers and steel producers. Overall, manufacturers were
cautiously optimistic and expect at least modest growth during
2011.
Partially resulting from these economic conditions in our
footprint, we experienced higher than historical levels of loan
delinquencies and NCOs during 2009 and 2010. The pronounced
downturn in the residential real estate market that began in
early 2007 resulted in lower residential real estate values and
higher delinquencies and NCOs, not only in consumer mortgage
loans but also in commercial loans to builders and developers of
residential real estate. The value of our investment securities
backed by residential and commercial real estate was also
negatively impacted by a lack of liquidity in the financial
markets and anticipated credit losses. Commercial real estate
loans for retail businesses were also challenged by the
difficult consumer economic conditions over this period.
However, as further discussed in the
Credit Risk
section,
we experienced significant improvement in credit performance
during 2010.
Legislative
and Regulatory
Legislative and regulatory reforms continue to be adopted which
impose additional restrictions on current business practices.
Recent actions affecting us included an amendment to
Regulation E relating to certain overdraft fees for
consumer deposit accounts and the passage of the Dodd-Frank Act.
Effective July 1, 2010, the Federal Reserve Board amended
Regulation E to prohibit charging overdraft fees for ATM or
point-of-sale
debit card transactions that overdraw the customer’s
account unless the customer opts-in to the discretionary
overdraft service. For us, such fees were approximately
$90 million per year prior to the amendment. This change in
Regulation E requires us to alert our consumer customers we
can no longer allow an overdraft unless they opt-in to our
discretionary overdraft service. To date, the number of
customers choosing to opt-in has been higher than our
expectations. Also, during the second half of 2010, we
voluntarily
27
Table of Contents
reduced certain overdraft fees and introduced
24-Hour
Grace
tm
on overdrafts as part of our Fair Play banking philosophy
designed to build on our foundation of service excellence. We
expect our
24-Hour
Grace
tm
service to accelerate acquisition of new checking customers,
while improving retention of existing customers.
The recently passed Dodd-Frank Act is complex and we continue to
assess how this legislation and subsequent rule-making will
affect us. As hundreds of regulations are promulgated, we will
continue to evaluate impacts such as changes in regulatory costs
and fees, modifications to consumer products or disclosures
required by the CFPB, and the requirements of the enhanced
supervision provisions, among others. Two areas where we are
focusing on the financial impact are: interchange fees and the
exclusion of trust-preferred securities from our Tier I
regulatory capital.
Currently, interchange fees are approximately $90 million
per year. In the future, the Dodd-Frank Act gives the Federal
Reserve, and no longer the banks or system owners, the ability
to set the interchange rate charged to merchants for the use of
debit cards. The ultimate impact to us will depend on rules yet
to be issued by the Federal Reserve. Proposed rules were issued
on December 28, 2010, and the Dodd-Frank Act requires final
interchange rules to be issued by April 21, 2011, and
effective no later than July 21, 2011. Based on the Federal
Reserve’s proposed rules, a maximum interchange rate of
$0.07 would reduce our annual interchange fees by approximately
85%. A maximum interchange rate of $0.12 would reduce our annual
interchange fees by approximately 75%.
At December 31, 2010, we had $569.9 million of
outstanding trust-preferred securities that, if disallowed,
would reduce our regulatory Tier 1 risk-based capital ratio
by approximately 130 basis points. Even with this
reduction, our capital ratios would remain above
Well-capitalized levels. There is a three year phase-in period
beginning on January 1, 2013, that we believe will provide
sufficient time to evaluate and address the impacts of this new
legislation on our capital structure. Accordingly, we do not
anticipate this potential change will have a significant impact
to our business.
During the 2010 third quarter, the Basel Committee on Banking
Supervision revised the Capital Accord (Basel III), which
narrows the definition of capital and increases capital
requirements for specific exposures. The new capital
requirements will be phased-in over six years beginning in 2013.
If these revisions were adopted currently, we estimate they
would have a negligible impact on our regulatory capital ratios
based on our current understanding of the revisions to capital
qualification. We await clarification from our banking
regulators on their interpretation of Basel III and any
additional requirements to the stated thresholds. The FDIC has
approved issuance of an interagency proposed rulemaking to
implement certain provisions of Section 171 of the
Dodd-Frank Act (Section 171). Section 171 provides
that the capital requirements generally applicable to insured
banks shall serve as a floor for other capital requirements the
agencies establish. The FDIC noted that the advanced approaches
of Basel III allow for reductions in risk-based capital
requirements below those generally applicable to insured banks
and, accordingly, need to be modified to be consistent with
Section 171.
Recent
Industry Developments
Foreclosure Documentation
— We evaluated our
foreclosure documentation procedures given the recent
announcements made by other financial institutions regarding
problems associated with their foreclosure activities. As a
result of our review, we have determined that we do not have any
significant issues relating to so-called
“robo-signing,” foreclosure affidavits were completed
and signed by employees with personal knowledge of the contents
of the affidavits, and there is no reason to conclude that
foreclosures were filed that should not have been filed.
Additionally, we have identified and are implementing process
and control enhancements to ensure that affidavits continue to
be prepared in compliance with applicable state law. We are
consulting with local foreclosure counsel as necessary with
respect to additional requirements imposed by the courts in
which foreclosure proceedings are pending, which could impact
our foreclosure actions.
Representation and Warranty Reserve
— We
primarily conduct our loan sale and securitization activity with
Fannie Mae and Freddie Mac. In connection with these and other
sale and securitization transactions, we make certain
representations and warranties that the loans meet certain
criteria, such as collateral type and underwriting standards. In
the future, we may be required to repurchase individual loans
and / or indemnify
28
Table of Contents
these organizations against losses due to material breaches of
these representations and warranties. At December 31, 2010,
we have a reserve for such losses of $20.2 million, which
is included in accrued expenses and other liabilities.
2011
Expectations
Borrower and consumer confidence remains a major factor
impacting growth opportunities for 2011. We continue to believe
that the economy will remain relatively stable throughout 2011,
with the potential for improvement in the latter half.
Challenges to earnings growth include (1) revenue headwinds
as a result of regulatory and legislative actions,
(2) anticipated higher interest rates as we enter 2011,
which is expected to reduce mortgage banking income, and
(3) continued investments in growing our businesses.
Reflecting these factors, pre-tax, pre-provision income levels
are expected to remain in line with 2010 second half
performance. Nevertheless, net income growth from the 2010
fourth quarter level is anticipated throughout the year. This
will primarily reflect on-going reductions in credit costs. We
expect the absolute levels of NCOs, NPAs, and Criticized loans
will continue to decline, resulting in lower levels of provision
expense. Given the significant credit-related improvements in
2010, coupled with our expectation for continued improvement,
our return to more normalized levels of credit costs could occur
earlier than previously expected.
The net interest margin is expected to be flat or increase
slightly from the 2010 fourth quarter. We anticipate continued
benefit from lower deposit pricing. In addition, the absolute
growth in loans compared with deposits is anticipated to be more
comparable, thus reducing the absolute growth in lower yield
investment securities.
The automobile loan portfolio is expected to continue its strong
growth, and we anticipate continued growth in C&I loans.
Home equity and residential mortgages are likely to show only
modest growth. CRE loans are expected to continue to decline,
but at a slower rate.
Core deposits are expected to show continued growth. Further, we
expect the shift toward lower-cost demand deposit accounts will
continue.
Fee income, compared with the 2010 fourth quarter, will be
negatively impacted by lower interchange fees due to regulatory
fee change and a decline in mortgage banking revenues due to a
higher interest rate environment as we enter 2011. With regard
to interchange fees, if enacted as recently outlined, the
Federal Reserve’s proposed interchange fee structure will
significantly lower interchange revenue. Other fee categories
are expected to grow, reflecting the impact of our cross-sell
initiatives throughout the Company, as well as the positive
impact from strategic initiatives. Over time, we anticipate more
than offsetting revenue challenges with revenue we expect to
generate by accelerating customer growth and cross-sell results.
Expense levels early in the year should be up modestly from 2010
fourth quarter performance, with increases later in the year due
to continued investments to grow the business.
29
Table of Contents
| Year Ended December 31, | ||||||||||||||||||||||||||||
| Change from 2009 | Change from 2008 | |||||||||||||||||||||||||||
| 2010 | Amount | Percent | 2009 | Amount | Percent | 2008 | ||||||||||||||||||||||
| (Dollar amounts in thousands, except per share amounts) | ||||||||||||||||||||||||||||
|
Interest income
|
$ | 2,145,392 | $ | (92,750 | ) | (4 | )% | $ | 2,238,142 | $ | (560,180 | ) | (20 | )% | $ | 2,798,322 | ||||||||||||
|
Interest expense
|
526,587 | (287,268 | ) | (35 | ) | 813,855 | (452,776 | ) | (36 | ) | 1,266,631 | |||||||||||||||||
|
Net interest income
|
1,618,805 | 194,518 | 14 | 1,424,287 | (107,404 | ) | (7 | ) | 1,531,691 | |||||||||||||||||||
|
Provision for credit losses
|
634,547 | (1,440,124 | ) | (69 | ) | 2,074,671 | 1,017,208 | 96 | 1,057,463 | |||||||||||||||||||
|
Net interest income after provision for credit losses
|
984,258 | 1,634,642 | N.R. | (650,384 | ) | (1,124,612 | ) | N.R. | 474,228 | |||||||||||||||||||
|
Service charges on deposit accounts
|
267,015 | (35,784 | ) | (12 | ) | 302,799 | (5,254 | ) | (2 | ) | 308,053 | |||||||||||||||||
|
Mortgage banking income
|
175,782 | 63,484 | 57 | 112,298 | 103,304 | 1,149 | 8,994 | |||||||||||||||||||||
|
Trust services
|
112,555 | 8,916 | 9 | 103,639 | (22,341 | ) | (18 | ) | 125,980 | |||||||||||||||||||
|
Electronic banking
|
110,234 | 10,083 | 10 | 100,151 | 9,884 | 11 | 90,267 | |||||||||||||||||||||
|
Insurance income
|
76,413 | 3,087 | 4 | 73,326 | 702 | 1 | 72,624 | |||||||||||||||||||||
|
Brokerage income
|
68,855 | 4,012 | 6 | 64,843 | (329 | ) | (1 | ) | 65,172 | |||||||||||||||||||
|
Bank owned life insurance income
|
61,066 | 6,194 | 11 | 54,872 | 96 | — | 54,776 | |||||||||||||||||||||
|
Automobile operating lease income
|
45,964 | (5,846 | ) | (11 | ) | 51,810 | 11,959 | 30 | 39,851 | |||||||||||||||||||
|
Securities losses
|
(274 | ) | 9,975 | (97 | ) | (10,249 | ) | 187,121 | (95 | ) | (197,370 | ) | ||||||||||||||||
|
Other income
|
124,248 | (27,907 | ) | (18 | ) | 152,155 | 13,364 | 10 | 138,791 | |||||||||||||||||||
|
Total noninterest income
|
1,041,858 | 36,214 | 4 | 1,005,644 | 298,506 | 42 | 707,138 | |||||||||||||||||||||
|
Personnel costs
|
798,973 | 98,491 | 14 | 700,482 | (83,064 | ) | (11 | ) | 783,546 | |||||||||||||||||||
|
Outside data processing and other services
|
159,248 | 11,153 | 8 | 148,095 | 17,869 | 14 | 130,226 | |||||||||||||||||||||
|
Net occupancy
|
107,862 | 2,589 | 2 | 105,273 | (3,155 | ) | (3 | ) | 108,428 | |||||||||||||||||||
|
Deposit and other insurance expense
|
97,548 | (16,282 | ) | (14 | ) | 113,830 | 91,393 | 407 | 22,437 | |||||||||||||||||||
|
Professional services
|
88,778 | 12,412 | 16 | 76,366 | 26,753 | 54 | 49,613 | |||||||||||||||||||||
|
Equipment
|
85,920 | 2,803 | 3 | 83,117 | (10,848 | ) | (12 | ) | 93,965 | |||||||||||||||||||
|
Marketing
|
65,924 | 32,875 | 99 | 33,049 | 385 | 1 | 32,664 | |||||||||||||||||||||
|
Amortization of intangibles
|
60,478 | (7,829 | ) | (11 | ) | 68,307 | (8,587 | ) | (11 | ) | 76,894 | |||||||||||||||||
|
OREO and foreclosure expense
|
39,049 | (54,850 | ) | (58 | ) | 93,899 | 60,444 | 181 | 33,455 | |||||||||||||||||||
|
Automobile operating lease expense
|
37,034 | (6,326 | ) | (15 | ) | 43,360 | 12,078 | 39 | 31,282 | |||||||||||||||||||
|
Goodwill impairment
|
— | (2,606,944 | ) | (100 | ) | 2,606,944 | 2,606,944 | — | — | |||||||||||||||||||
|
Gain on early extinguishment of debt
|
— | 147,442 | (100 | ) | (147,442 | ) | (123,900 | ) | 526 | (23,542 | ) | |||||||||||||||||
|
Other expense
|
132,991 | 24,828 | 23 | 108,163 | (30,243 | ) | (22 | ) | 138,406 | |||||||||||||||||||
|
Total noninterest expense
|
1,673,805 | (2,359,638 | ) | (59 | ) | 4,033,443 | 2,556,069 | 173 | 1,477,374 | |||||||||||||||||||
|
Income (loss) before income taxes
|
352,311 | 4,030,494 | N.R. | (3,678,183 | ) | (3,382,175 | ) | 1,143 | (296,008 | ) | ||||||||||||||||||
|
Provision (benefit) for income taxes
|
39,964 | 623,968 | N.R. | (584,004 | ) | (401,802 | ) | 221 | (182,202 | ) | ||||||||||||||||||
|
Net income (loss)
|
312,347 | 3,406,526 | N.R. | (3,094,179 | ) | (2,980,373 | ) | 2,619 | (113,806 | ) | ||||||||||||||||||
|
Dividends on preferred shares
|
172,032 | (2,724 | ) | (2 | ) | 174,756 | 128,356 | 277 | 46,400 | |||||||||||||||||||
|
Net income (loss) applicable to common shares
|
$ | 140,315 | $ | 3,409,250 | N.R. | % | $ | (3,268,935 | ) | $ | (3,108,729 | ) | 1,940 | % | $ | (160,206 | ) | |||||||||||
|
Average common shares — basic
|
726,934 | 194,132 | 36 | % | 532,802 | 166,647 | 46 | % | 366,155 | |||||||||||||||||||
|
Average common shares — diluted(2)
|
729,532 | 196,730 | 37 | 532,802 | 166,647 | 46 | 366,155 | |||||||||||||||||||||
|
Per common share:
|
||||||||||||||||||||||||||||
|
Net income — basic
|
$ | 0.19 | $ | 6.33 | N.R. | % | $ | (6.14 | ) | $ | (5.70 | ) | 1,295 | % | $ | (0.44 | ) | |||||||||||
|
Net income — diluted
|
0.19 | 6.33 | N.R. | (6.14 | ) | (5.70 | ) | 1,295 | (0.44 | ) | ||||||||||||||||||
|
Cash dividends declared
|
0.0400 | — | — | 0.0400 | (0.62 | ) | (94 | ) | 0.6625 | |||||||||||||||||||
|
Revenue — FTE
|
||||||||||||||||||||||||||||
|
Net interest income
|
$ | 1,618,805 | $ | 194,518 | 14 | % | $ | 1,424,287 | $ | (107,404 | ) | (7 | )% | $ | 1,531,691 | |||||||||||||
|
FTE adjustment
|
11,077 | (395 | ) | (3 | ) | 11,472 | (8,746 | ) | (43 | ) | 20,218 | |||||||||||||||||
|
Net interest income(3)
|
1,629,882 | 194,123 | 14 | 1,435,759 | (116,150 | ) | (7 | ) | 1,551,909 | |||||||||||||||||||
|
Noninterest income
|
1,041,858 | 36,214 | 4 | 1,005,644 | 298,506 | 42 | 707,138 | |||||||||||||||||||||
|
Total revenue(3)
|
$ | 2,671,740 | $ | 230,337 | 9 | % | $ | 2,441,403 | $ | 182,356 | 8 | % | $ | 2,259,047 | ||||||||||||||
N.R. — Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
30
Table of Contents
| (1) | Comparisons for presented periods are impacted by a number of factors. Refer to Significant Items for additional discussion regarding these key factors. | |
| (2) | For the years ended December 31, 2009, and December 31, 2008, the impact of the convertible preferred stock issued in April of 2008 was excluded from the diluted share calculation. It was excluded because the result would have been higher than basic earnings per common share (anti-dilutive) for the year. | |
| (3) | On a FTE basis assuming a 35% tax rate. |
DISCUSSION
OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a
consolidated perspective. It also includes a Significant Items
section that summarizes key issues important for a complete
understanding of performance trends. Key consolidated balance
sheet and income statement trends are discussed. All earnings
per share data is reported on a diluted basis. For additional
insight on financial performance, please read this section in
conjunction with the Item 7: Business Segment Discussion.
Significant
Items
Definition
of Significant Items
From
time-to-time,
revenue, expenses, or taxes, are impacted by items judged by us
to be outside of ordinary banking activities and / or
by items that, while they may be associated with ordinary
banking activities, are so unusually large that their outsized
impact is believed by us at that time to be infrequent or
short-term in nature. We refer to such items as Significant
Items. Most often, these Significant Items result from factors
originating outside the Company; e.g., regulatory
actions / assessments, windfall gains, changes in
accounting principles, one-time tax
assessments / refunds, etc. In other cases they may
result from our decisions associated with significant corporate
actions out of the ordinary course of business; e.g.,
merger / restructuring charges, recapitalization
actions, goodwill impairment, etc.
Even though certain revenue and expense items are naturally
subject to more volatility than others due to changes in market
and economic environment conditions, as a general rule
volatility alone does not define a Significant Item. For
example, changes in the provision for credit losses,
gains / losses from investment activities, asset
valuation writedowns, etc., reflect ordinary banking activities
and are, therefore, typically excluded from consideration as a
Significant Item.
We believe the disclosure of Significant Items in results
provides a better understanding of our performance and trends to
ascertain which of such items, if any, to include or exclude
from an analysis of our performance; i.e., within the context of
determining how that performance differed from expectations, as
well as how, if at all, to adjust estimates of future
performance accordingly. To this end, we adopted a practice of
listing Significant Items in our external disclosure documents
(e.g., earnings press releases, investor presentations,
Forms 10-Q
and
10-K).
Significant Items for any particular period are not intended to
be a complete list of items that may materially impact current
or future period performance.
Significant
Items Influencing Financial Performance
Comparisons
Earnings comparisons among the three years ended
December 31, 2010, 2009, and 2008 were impacted by a number
of significant items summarized below.
1.
TARP Capital Purchase Program
Repurchase.
During the 2010 fourth quarter, we
issued $920.0 million of our common stock and
$300.0 million of subordinated debt. The net proceeds,
along with other available funds, were used to repurchase all
$1.4 billion of TARP Capital that we issued to the Treasury
under its TARP Capital Purchase Program in 2008. As part of this
transaction, there was a deemed dividend that did not impact net
income, but resulted in a negative impact of $0.08 per common
share for 2010.
31
Table of Contents
2.
Goodwill Impairment.
The impacts of
goodwill impairment on our reported results were as follows:
| • | During the 2009 first quarter, bank stock prices, including ours, experienced a steep decline. Our stock price declined 78% from $7.66 per share at December 31, 2008, to $1.66 per share at March 31, 2009. Given this significant decline, we conducted an interim test for goodwill impairment. As a result, we recorded a noncash $2,602.7 million ($4.88 per common share) pretax charge. (See Goodwill discussion located within the Critical Accounting Policies and Use of Significant Estimates section for additional information.) | |
| • | During the 2009 second quarter, a pretax goodwill impairment of $4.2 million ($0.01 per common share) was recorded relating to the sale of a small payments-related business in July 2009. |
3.
Franklin Relationship.
Our
relationship with Franklin was acquired in the Sky Financial
acquisition in 2007. Significant events relating to this
relationship, and the impacts of those events on our reported
results, were as follows:
| • | On March 31, 2009, we restructured our relationship with Franklin. As a result of this restructuring, a nonrecurring net tax benefit of $159.9 million ($0.30 per common share) was recorded in the 2009 first quarter. Also, and although earnings were not significantly impacted, commercial NCOs increased $128.3 million as the previously established $130.0 million Franklin-specific ALLL was utilized to writedown the acquired mortgages and OREO collateral to fair value. | |
| • | During the 2010 first quarter, a $38.2 million ($0.05 per common share) net tax benefit was recognized, primarily reflecting the increase in the net deferred tax asset relating to the assets acquired from the March 31, 2009 restructuring. | |
| • | During the 2010 second quarter, the portfolio of Franklin-related loans ($333.0 million of residential mortgages and $64.7 million of home equity loans) was transferred to loans held for sale. At the time of the transfer, the loans were marked to the lower of cost or fair value less costs to sell of $323.4 million, resulting in $75.5 million of charge-offs, and the provision for credit losses commensurately increased $75.5 million ($0.07 per common share). | |
| • | During the 2010 third quarter, the remaining Franklin-related residential mortgage and home equity loans were sold at essentially book value. |
4.
Early Extinguishment of Debt.
The
positive impacts relating to the early extinguishment of debt on
our reported results were: $141.0 million ($0.18 per common
share) in 2009 and $23.5 million ($0.04 per common share)
in 2008. These amounts were recorded to noninterest expense.
5.
Preferred Stock Conversion.
During the
2009 first and second quarters, we converted 114,109 and
92,384 shares, respectively, of Series A 8.50%
Non-cumulative Perpetual Preferred (Series A Preferred
Stock) stock into common stock. As part of these transactions,
there was a deemed dividend that did not impact net income, but
resulted in a negative impact of $0.11 per common share for
2009.
(See Capital discussion located within the Risk
Management and Capital section for additional information.)
6.
Visa
®
.
Prior
to the
Visa
®
IPO occurring in March 2008,
Visa
®
was owned by its member banks, which included the Bank. As a
result of this ownership, we received Class B shares of
Visa
®
stock at the time of the
Visa
®
IPO. In the 2009 second quarter, we sold these
Visa
®
stock shares, resulting in a $31.4 million pretax gain
($.04 per common share). This amount was recorded in noninterest
income.
Table
3 —
Visa
®
impacts
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Earnings | EPS | Earnings | EPS | Earnings | EPS | |||||||||||||||||||
|
(Dollar amounts in millions, except per share
|
||||||||||||||||||||||||
| amounts) | ||||||||||||||||||||||||
|
Gain related to sale of
Visa
®
stock(1)
|
$ | — | $ | — | $ | 31.4 | $ | 0.04 | $ | 25.1 | $ | 0.04 | ||||||||||||
|
Visa
®
indemnification liability(2)
|
— | — | — | — | 17.0 | 0.03 | ||||||||||||||||||
32
Table of Contents
| (1) | Pretax. Recorded to noninterest income, and represented a gain on the sale of ownership interest in Visa ® . As part of the sale of our Visa ® stock in 2009, we released $8.2 million, as of June 30, 2009, of the remaining indemnification liability. Concurrently, we established a swap liability associated with the conversion protection provided to the purchasers of the Visa ® shares. | |
| (2) | Pretax. Recorded to noninterest expense, and represented our pro-rata portion of an indemnification liability provided to Visa ® by its member banks for various litigation filed against Visa ® . Subsequently, in 2008, an escrow account was established by Visa ® using a portion of the proceeds received from the IPO. This action resulted in a reversal of a portion of the liability as the escrow account reduced our potential exposure related to the indemnification. | |
| 7. | Other Significant Items Influencing Earnings Performance Comparisons. In addition to the items discussed separately in this section, a number of other items impacted financial results. These included: |
2009
| • | $23.6 million ($0.03 per common share) negative impact due to a special FDIC insurance premium assessment. This amount was recorded to noninterest expense. | |
| • | $12.8 million ($0.02 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance. |
2008
| • | $20.4 million ($0.06 per common share) benefit to provision for income taxes, representing a reduction to the previously established capital loss carry-forward valuation allowance. | |
| • | $21.8 million ($.04 per common share) negative impact due to the merger with Sky Financial completed on July 1, 2007. |
The following table reflects the earnings impact of the
above-mentioned significant items for periods affected by this
Results of Operations discussion:
Table
4 — Significant Items Influencing Earnings
Performance Comparison (1)
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| After-tax | EPS | After-tax | EPS | After-tax | EPS | |||||||||||||||||||
| (Dollar amounts in thousands, except per share amounts) | ||||||||||||||||||||||||
|
Net income (loss) — GAAP
|
$ | 312,347 | $ | (3,094,179 | ) | $ | (113,806 | ) | ||||||||||||||||
|
Earnings per share, after-tax
|
$ | 0.19 | $ | (6.14 | ) | $ | (0.44 | ) | ||||||||||||||||
|
Change from prior year — $
|
6.33 | (5.70 | ) | (0.69 | ) | |||||||||||||||||||
|
Change from prior year — %
|
N.R. | % | N.R | % | N.R. | % | ||||||||||||||||||
N.R. — Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
33
Table of Contents
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Significant Items — Favorable (Unfavorable) Impact: | Earnings(2) | EPS(3) | Earnings(2) | EPS(3) | Earnings(2) | EPS(3) | ||||||||||||||||||
|
Franklin-related loans transferred to held for sale
|
$ | (75,500 | ) | $ | (0.07 | ) | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Net tax benefit recognized(4)
|
38,222 | 0.05 | — | — | — | — | ||||||||||||||||||
|
Franklin relationship restructuring(4)
|
— | — | 159,895 | 0.30 | — | — | ||||||||||||||||||
|
Net gain on early extinguishment of debt
|
— | — | 141,024 | 0.18 | 23,542 | 0.04 | ||||||||||||||||||
|
Gain related to sale of
Visa
®
stock
|
— | — | 31,362 | 0.04 | 25,087 | 0.04 | ||||||||||||||||||
|
Deferred tax valuation allowance benefit(4)
|
— | — | 12,847 | 0.02 | 20,357 | 0.06 | ||||||||||||||||||
|
Goodwill impairment
|
— | — | (2,606,944 | ) | (4.89 | ) | — | — | ||||||||||||||||
|
FDIC special assessment
|
— | — | (23,555 | ) | (0.03 | ) | — | — | ||||||||||||||||
|
Preferred stock conversion deemed dividend
|
— | (0.08 | ) | — | (0.11 | ) | — | — | ||||||||||||||||
|
Visa
®
indemnification liability
|
— | — | — | — | 16,995 | 0.03 | ||||||||||||||||||
|
Merger/Restructuring costs
|
— | — | — | — | (21,830 | ) | (0.04 | ) | ||||||||||||||||
| (1) | See Significant Factors Influencing Financial Performance discussion. | |
| (2) | Pretax unless otherwise noted. | |
| (3) | Based upon the annual average outstanding diluted common shares. | |
| (4) | After-tax. |
Pretax,
Pre-provision Income Trends
One non-GAAP performance measurement that we believe is useful
in analyzing underlying performance trends, particularly in
times of economic stress, is pretax, pre-provision income. This
is the level of earnings adjusted to exclude the impact of:
(1) provision expense, which is excluded because its
absolute level is elevated and volatile in times of economic
stress, (2) investment securities gains/losses, which are
excluded because securities market valuations may also become
particularly volatile in times of economic stress,
(3) amortization of intangibles expense, which is excluded
because the return on tangible equity common equity is a key
measurement that we use to gauge performance trends, and
(4) certain other items identified by us
(see
Significant Items above)
that we believe may distort our
underlying performance trends.
34
Table of Contents
The following table reflects pretax, pre-provision income for
the three years ended December 31, 2010:
Table
5 — Pretax, Pre-provision Income (1)
| Twelve Months Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Income (Loss) Before Income Taxes
|
$ | 352,311 | $ | (3,678,183 | ) | $ | (296,008 | ) | ||||
|
Add: Provision for credit losses
|
634,547 | 2,074,671 | 1,057,463 | |||||||||
|
Less: Securities gains (losses)
|
(274 | ) | (10,249 | ) | (197,370 | ) | ||||||
|
Add: Amortization of intangibles
|
60,478 | 68,307 | 76,894 | |||||||||
|
Less: Significant Items
|
||||||||||||
|
Gain on early extinguishment of debt
|
— | 141,024 | 23,542 | |||||||||
|
Goodwill impairment
|
— | (2,606,944 | ) | — | ||||||||
|
Gain related to Visa stock
|
— | 31,362 | 25,087 | |||||||||
|
Visa indemnification liability
|
— | — | 16,995 | |||||||||
|
FDIC special assessment
|
— | (23,555 | ) | — | ||||||||
|
Merger/restructuring costs
|
— | — | (21,830 | ) | ||||||||
|
Total pretax, pre-provision income
|
$ | 1,047,610 | $ | 933,157 | $ | 991,925 | ||||||
|
Change in total pretax, pre-provision income:
|
||||||||||||
|
Amount
|
$ | 114,453 | $ | (58,768 | ) | |||||||
|
Percent
|
12 | % | (6 | )% | ||||||||
| (1) | Pretax, pre-provision income is a non-GAAP financial measure. Any ratio utilizing this financial measure is also non-GAAP. This financial measure has been included as it is considered to be an important metric with which to analyze and evaluate our results of operations and financial strength. Other companies may calculate this financial measure differently. |
As discussed in more detail in the sections that follow, the
increase from 2009 primarily reflected improved revenue,
including higher net interest income, partially offset by higher
noninterest expense, including personnel costs and marketing.
Our primary source of revenue is net interest income, which is
the difference between interest income from earning assets
(primarily loans, securities, and direct financing leases), and
interest expense of funding sources (primarily interest-bearing
deposits and borrowings). Earning asset balances and related
funding sources, as well as changes in the levels of interest
rates, impact net interest income. The difference between the
average yield on earning assets and the average rate paid for
interest-bearing liabilities is the net interest spread.
Noninterest-bearing sources of funds, such as demand deposits
and shareholders’ equity, also support earning assets. The
impact of the noninterest-bearing sources of funds, often
referred to as “free” funds, is captured in the net
interest margin, which is calculated as net interest income
divided by average earning assets. Both the net interest margin
and net interest spread are presented on a fully-taxable
equivalent basis, which means that tax-free interest income has
been adjusted to a pretax equivalent income, assuming a 35% tax
rate.
35
Table of Contents
The following table shows changes in fully-taxable equivalent
interest income, interest expense, and net interest income due
to volume and rate variances for major categories of earning
assets and interest-bearing liabilities.
Table
6 — Change in Net Interest Income Due to Changes in
Average Volume and Interest Rates (1)
| 2010 | 2009 | |||||||||||||||||||||||
|
Increase (Decrease) from
|
Increase (Decrease) from
|
|||||||||||||||||||||||
| Previous Year Due to | Previous Year Due to | |||||||||||||||||||||||
|
Yield/
|
Yield/
|
|||||||||||||||||||||||
|
Fully-taxable equivalent basis(2)
|
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||
|
Loans and direct financing leases
|
$ | (71.3 | ) | $ | (9.6 | ) | $ | (80.9 | ) | $ | (130.2 | ) | $ | (371.3 | ) | $ | (501.5 | ) | ||||||
|
Investment securities
|
96.8 | (103.2 | ) | (6.4 | ) | 84.4 | (86.3 | ) | (1.9 | ) | ||||||||||||||
|
Other earning assets
|
(3.8 | ) | (2.2 | ) | (6.0 | ) | (42.1 | ) | (23.4 | ) | (65.5 | ) | ||||||||||||
|
Total interest income from earning assets
|
21.7 | (115.0 | ) | (93.3 | ) | (87.9 | ) | (481.0 | ) | (568.9 | ) | |||||||||||||
|
Deposits
|
10.9 | (246.0 | ) | (235.1 | ) | 16.5 | (274.1 | ) | (257.6 | ) | ||||||||||||||
|
Short-term borrowings
|
1.1 | (0.5 | ) | 0.6 | (16.6 | ) | (23.3 | ) | (39.9 | ) | ||||||||||||||
|
Federal Home Loan Bank advances
|
(15.4 | ) | 5.6 | (9.8 | ) | (45.3 | ) | (49.6 | ) | (94.9 | ) | |||||||||||||
|
Subordinated notes and other long-term debt, including capital
securities
|
(14.3 | ) | (28.8 | ) | (43.1 | ) | 9.8 | (70.1 | ) | (60.3 | ) | |||||||||||||
|
Total interest expense of interest-bearing liabilities
|
(17.7 | ) | (269.7 | ) | (287.4 | ) | (35.6 | ) | (417.1 | ) | (452.7 | ) | ||||||||||||
|
Net interest income
|
$ | 39.4 | $ | 154.7 | $ | 194.1 | $ | (52.3 | ) | $ | (63.9 | ) | $ | (116.2 | ) | |||||||||
| (1) | The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each. | |
| (2) | Calculated assuming a 35% tax rate. |
2010
versus 2009
Fully-taxable equivalent net interest income for 2010 increased
$194.1 million, or 14%, from 2009. This reflected the
favorable impact of a $1.3 billion, or 3%, increase in
average earning assets, due to a $2.9 billion, or 45%,
increase in average total investment securities, which was
partially offset by a $1.4 billion, or 4%, decrease in
average total loans and leases. Also contributing to the
increase in net interest income was a 33 basis point
increase in the fully-taxable net interest margin to 3.44% from
3.11% in 2009.
36
Table of Contents
The following table details the change in our reported loans and
deposits:
Table
7 — Average Loans/Leases and Deposits — 2010
vs. 2009
|
Twelve Months Ended
|
||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2010 | 2009 | Amount | Percent | |||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||
|
Loans/Leases
|
||||||||||||||||
|
Commercial and industrial
|
$ | 12,431 | $ | 13,136 | $ | (705 | ) | (5 | )% | |||||||
|
Commercial real estate
|
7,225 | 9,156 | (1,931 | ) | (21 | ) | ||||||||||
|
Total commercial
|
19,656 | 22,292 | (2,636 | ) | (12 | ) | ||||||||||
|
Automobile loans and leases
|
4,890 | 3,546 | 1,344 | 38 | ||||||||||||
|
Home equity
|
7,590 | 7,590 | — | — | ||||||||||||
|
Residential mortgage
|
4,476 | 4,542 | (66 | ) | (1 | ) | ||||||||||
|
Other consumer
|
661 | 722 | (61 | ) | (8 | ) | ||||||||||
|
Total consumer
|
17,617 | 16,400 | 1,217 | 7 | ||||||||||||
|
Total loans and leases
|
$ | 37,273 | $ | 38,692 | $ | (1,419 | ) | (4 | )% | |||||||
|
Deposits
|
||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 6,859 | $ | 6,057 | $ | 802 | 13 | % | ||||||||
|
Demand deposits — interest-bearing
|
5,579 | 4,816 | 763 | 16 | ||||||||||||
|
Money market deposits
|
11,743 | 7,216 | 4,527 | 63 | ||||||||||||
|
Savings and other domestic deposits
|
4,642 | 4,881 | (239 | ) | (5 | ) | ||||||||||
|
Core certificates of deposit
|
9,188 | 11,944 | (2,756 | ) | (23 | ) | ||||||||||
|
Total core deposits
|
38,011 | 34,914 | 3,097 | 9 | ||||||||||||
|
Other deposits
|
2,727 | 4,475 | (1,748 | ) | (39 | ) | ||||||||||
|
Total deposits
|
$ | 40,738 | $ | 39,389 | $ | 1,349 | 3 | % | ||||||||
The $1.4 billion, or 4%, decrease in average total loans
and leases primarily reflected:
| • | $2.6 billion, or 12%, decline in average total commercial loans. The decline in average CRE loans reflected our planned efforts to shrink this portfolio through payoffs and paydowns, as well as the impact of NCOs. The decline in average C&I loans reflected a general decrease in borrowing as evidenced by a decline in line-of-credit utilization, NCO activity, and the reclassification in the 2010 first quarter of variable rate demand notes to municipal securities. |
Partially offset by:
| • | $1.2 billion, or 7%, increase in average total consumer loans. This growth reflected a $1.3 billion, or 38%, increase in average automobile loans and leases. On January 1, 2010, we adopted the new accounting standard ASC — 810 Consolidation, resulting in the consolidation of an off balance sheet securitization and increasing our automobile loan portfolio by $0.5 billion at December 31, 2010. Underlying growth in automobile loans continued to be strong, reflecting a significant increase in loan originations in 2010 as compared to 2009 in all of our markets. Our recent expansion into Eastern Pennsylvania and the five New England states also began to have a positive impact on our volume. |
Total average investment securities increased $2.9 billion,
or 45%, reflecting the deployment of the cash from core deposit
growth and loan runoff over this period, as well as the proceeds
from 2009 capital actions.
37
Table of Contents
The $1.3 billion, or 3%, increase in average total deposits
reflected:
| • | $3.1 billion, or 9%, growth in total core deposits. The primary driver of this growth was a 63% increase in average money market deposits. Partially offsetting this growth was a 23% decline in average core certificates of deposit. |
Partially offset by:
| • | $1.7 billion, or 39%, decline in average noncore deposits, reflecting a managed decline in public fund deposits as well as planned efforts to reduce our reliance on noncore funding sources. |
2009
versus 2008
Fully-taxable equivalent net interest income for 2009 decreased
$116.2 million, or 7%, from 2008. This reflected the
unfavorable impact of a $1.7 billion, or 4%, decrease in
average earning assets, which included a $2.3 billion
decrease in average loans and leases. Also contributing to the
decline in net interest income was a 14 basis point decline
in the fully-taxable net interest margin to 3.11%, primarily due
to the unfavorable impact of our stronger liquidity position and
an increase in NALs.
The following table details the change in our reported loans and
deposits:
Table
8 — Average Loans/Leases and Deposits — 2009
vs. 2008
|
Twelve Months Ended
|
||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2009 | 2008 | Amount | Percent | |||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||
|
Loans/Leases
|
||||||||||||||||
|
Commercial and industrial
|
$ | 13,136 | $ | 13,588 | $ | (452 | ) | (3 | )% | |||||||
|
Commercial real estate
|
9,156 | 9,732 | (576 | ) | (6 | ) | ||||||||||
|
Total commercial
|
22,292 | 23,320 | (1,028 | ) | (4 | ) | ||||||||||
|
Automobile loans and leases
|
3,546 | 4,527 | (981 | ) | (22 | ) | ||||||||||
|
Home equity
|
7,590 | 7,404 | 186 | 3 | ||||||||||||
|
Residential mortgage
|
4,542 | 5,018 | (476 | ) | (9 | ) | ||||||||||
|
Other consumer
|
722 | 691 | 31 | 4 | ||||||||||||
|
Total consumer
|
16,400 | 17,640 | (1,240 | ) | (7 | ) | ||||||||||
|
Total loans and leases
|
$ | 38,692 | $ | 40,960 | $ | (2,268 | ) | (6 | )% | |||||||
|
Deposits
|
||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 6,057 | $ | 5,095 | $ | 962 | 19 | % | ||||||||
|
Demand deposits — interest-bearing
|
4,816 | 4,003 | 813 | 20 | ||||||||||||
|
Money market deposits
|
7,216 | 6,093 | 1,123 | 18 | ||||||||||||
|
Savings and other domestic deposits
|
4,881 | 5,147 | (266 | ) | (5 | ) | ||||||||||
|
Core certificates of deposit
|
11,944 | 11,637 | 307 | 3 | ||||||||||||
|
Total core deposits
|
34,914 | 31,975 | 2,939 | 9 | ||||||||||||
|
Other deposits
|
4,475 | 5,861 | (1,386 | ) | (24 | ) | ||||||||||
|
Total deposits
|
$ | 39,389 | $ | 37,836 | $ | 1,553 | 4 | % | ||||||||
The $2.3 billion, or 6%, decrease in average total loans
and leases primarily reflected:
| • | $1.0 billion, or 4%, decline in average total commercial loans. The decline in average CRE loans reflected our planned efforts to shrink this portfolio through payoffs and paydowns, as well as the impact of NCOs and the 2009 reclassifications of CRE loans to C&I loans (see Commercial Credit section) . The decline in average C&I loans reflected paydowns, the Franklin restructuring, and a |
38
Table of Contents
| reduction in the line-of-credit utilization in our automobile dealer floorplan exposure, partially offset by the 2009 reclassifications. |
| • | $1.0 billion, or 22%, decline in average automobile loans and leases due to the 2009 securitization of $1.0 billion of automobile loans, as well as the continued runoff of the automobile lease portfolio. | |
| • | $0.5 billion, or 9%, decline in residential mortgages reflecting the impact of loan sales, as well as the continued refinance of portfolio loans. The majority of this refinance activity was fixed-rate loans, which we typically sell in the secondary market. |
Partially offset by:
| • | $0.2 billion, or 3%, increase in average home equity loans reflecting higher utilization of existing lines resulting from higher quality borrowers taking advantage of the current relatively lower interest rate environment, as well as a slowdown in runoff. |
Total average investment securities increased $1.7 billion,
or 38%, as the cash proceeds from core deposit growth and the
capital actions initiated during 2009 were deployed. This
increase was partially offset by a $0.9 billion, or 87%,
decline in trading account securities due to the reduction in
the use of these securities to hedge MSRs.
The $1.6 billion, or 4%, increase in average total deposits
reflected:
| • | $2.9 billion, or 9%, growth in total core deposits, primarily reflecting increased sales efforts and initiatives for deposit accounts. |
Partially offset by:
| • | $1.4 billion, or 24%, decline in average noncore deposits, reflecting a managed decline in public fund deposits as well as planned efforts to reduce our reliance on noncore funding sources. |
39
Table of Contents
Table
9 — Consolidated Average Balance Sheet and Net
Interest Margin Analysis
| Average Balances | ||||||||||||||||||||||||||||
| Change from 2009 | Change from 2008 | |||||||||||||||||||||||||||
|
Fully-taxable equivalent basis(1)
|
2010 | Amount | Percent | 2009 | Amount | Percent | 2008 | |||||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||
|
Interest-bearing deposits in banks
|
$ | 289 | $ | (72 | ) | (20 | )% | $ | 361 | $ | 58 | 19 | % | $ | 303 | |||||||||||||
|
Trading account securities
|
158 | 13 | 9 | 145 | (945 | ) | (87 | ) | 1,090 | |||||||||||||||||||
|
Federal funds sold and securities purchased under resale
agreement
|
— | (10 | ) | (100 | ) | 10 | (425 | ) | (98 | ) | 435 | |||||||||||||||||
|
Loans held for sale
|
529 | (53 | ) | (9 | ) | 582 | 166 | 40 | 416 | |||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||||||
|
Taxable
|
8,760 | 2,659 | 44 | 6,101 | 2,223 | 57 | 3,878 | |||||||||||||||||||||
|
Tax-exempt
|
411 | 197 | 92 | 214 | (491 | ) | (70 | ) | 705 | |||||||||||||||||||
|
Total investment securities
|
9,171 | 2,856 | 45 | 6,315 | 1,732 | 38 | 4,583 | |||||||||||||||||||||
|
Loans and leases:(3)
|
||||||||||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||||||||||
|
Commercial and industrial
|
12,431 | (705 | ) | (5 | ) | 13,136 | (452 | ) | (3 | ) | 13,588 | |||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||||||
|
Construction
|
1,096 | (762 | ) | (41 | ) | 1,858 | (203 | ) | (10 | ) | 2,061 | |||||||||||||||||
|
Commercial
|
6,129 | (1,169 | ) | (16 | ) | 7,298 | (373 | ) | (5 | ) | 7,671 | |||||||||||||||||
|
Commercial real estate
|
7,225 | (1,931 | ) | (21 | ) | 9,156 | (576 | ) | (6 | ) | 9,732 | |||||||||||||||||
|
Total commercial
|
19,656 | (2,636 | ) | (12 | ) | 22,292 | (1,028 | ) | (4 | ) | 23,320 | |||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||||||
|
Automobile loans and leases
|
4,890 | 1,344 | 38 | 3,546 | (981 | ) | (22 | ) | 4,527 | |||||||||||||||||||
|
Home equity
|
7,590 | — | — | 7,590 | 186 | 3 | 7,404 | |||||||||||||||||||||
|
Residential mortgage
|
4,476 | (66 | ) | (1 | ) | 4,542 | (476 | ) | (9 | ) | 5,018 | |||||||||||||||||
|
Other loans
|
661 | (61 | ) | (8 | ) | 722 | 31 | 4 | 691 | |||||||||||||||||||
|
Total consumer
|
17,617 | 1,217 | 7 | 16,400 | (1,240 | ) | (7 | ) | 17,640 | |||||||||||||||||||
|
Total loans and leases
|
37,273 | (1,419 | ) | (4 | ) | 38,692 | (2,268 | ) | (6 | ) | 40,960 | |||||||||||||||||
|
Allowance for loan and lease losses
|
(1,430 | ) | (474 | ) | 50 | (956 | ) | (261 | ) | 38 | (695 | ) | ||||||||||||||||
|
Net loans and leases
|
35,843 | (1,893 | ) | (5 | ) | 37,736 | (2,529 | ) | (6 | ) | 40,265 | |||||||||||||||||
|
Total earning assets
|
47,420 | 1,315 | 3 | 46,105 | (1,682 | ) | (4 | ) | 47,787 | |||||||||||||||||||
|
Cash and due from banks
|
1,518 | (614 | ) | (29 | ) | 2,132 | 1,174 | 123 | 958 | |||||||||||||||||||
|
Intangible assets
|
702 | (700 | ) | (50 | ) | 1,402 | (2,044 | ) | (59 | ) | 3,446 | |||||||||||||||||
|
All other assets
|
4,364 | 825 | 23 | 3,539 | 294 | 9 | 3,245 | |||||||||||||||||||||
|
Total Assets
|
$ | 52,574 | $ | 134 | — | % | $ | 52,440 | $ | (2,481 | ) | (5 | )% | $ | 54,921 | |||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 6,859 | $ | 802 | 13 | % | $ | 6,057 | $ | 962 | 19 | % | $ | 5,095 | ||||||||||||||
|
Demand deposits — interest-bearing
|
5,579 | 763 | 16 | 4,816 | 813 | 20 | 4,003 | |||||||||||||||||||||
|
Money market deposits
|
11,743 | 4,527 | 63 | 7,216 | 1,123 | 18 | 6,093 | |||||||||||||||||||||
|
Savings and other domestic deposits
|
4,642 | (239 | ) | (5 | ) | 4,881 | (266 | ) | (5 | ) | 5,147 | |||||||||||||||||
|
Core certificates of deposit
|
9,188 | (2,756 | ) | (23 | ) | 11,944 | 307 | 3 | 11,637 | |||||||||||||||||||
|
Total core deposits
|
38,011 | 3,097 | 9 | 34,914 | 2,939 | 9 | 31,975 | |||||||||||||||||||||
|
Other domestic time deposits of $250,000 or more
|
697 | (144 | ) | (17 | ) | 841 | (802 | ) | (49 | ) | 1,643 | |||||||||||||||||
|
Brokered time deposits and negotiable CDs
|
1,603 | (1,544 | ) | (49 | ) | 3,147 | (96 | ) | (3 | ) | 3,243 | |||||||||||||||||
|
Deposits in foreign offices
|
427 | (60 | ) | (12 | ) | 487 | (488 | ) | (50 | ) | 975 | |||||||||||||||||
|
Total deposits
|
40,738 | 1,349 | 3 | 39,389 | 1,553 | 4 | 37,836 | |||||||||||||||||||||
|
Short-term borrowings
|
1,446 | 513 | 55 | 933 | (1,441 | ) | (61 | ) | 2,374 | |||||||||||||||||||
|
Federal Home Loan Bank advances
|
173 | (1,063 | ) | (86 | ) | 1,236 | (2,045 | ) | (62 | ) | 3,281 | |||||||||||||||||
|
Subordinated notes and other long-term debt
|
3,780 | (541 | ) | (13 | ) | 4,321 | 227 | 6 | 4,094 | |||||||||||||||||||
|
Total interest-bearing liabilities
|
39,278 | (544 | ) | (1 | ) | 39,822 | (2,668 | ) | (6 | ) | 42,490 | |||||||||||||||||
|
All other liabilities
|
956 | 182 | 24 | 774 | (166 | ) | (18 | ) | 940 | |||||||||||||||||||
|
Shareholders’ equity
|
5,481 | (306 | ) | (5 | ) | 5,787 | (609 | ) | (10 | ) | 6,396 | |||||||||||||||||
|
Total Liabilities and Shareholders’ Equity
|
$ | 52,574 | $ | 134 | — | % | $ | 52,440 | $ | (2,481 | ) | (5 | )% | $ | 54,921 | |||||||||||||
|
Continued
|
||||||||||||||||||||||||||||
40
Table 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)
|
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||
|
Interest-bearing deposits in banks
|
$ | 0.8 | $ | 1.1 | $ | 7.7 | 0.28 | % | 0.32 | % | 2.53 | % | ||||||||||||
|
Trading account securities
|
2.9 | 4.3 | 57.5 | 1.82 | 2.99 | 5.28 | ||||||||||||||||||
|
Federal funds sold and securities purchased under resale
agreement
|
— | 0.1 | 10.7 | — | 0.13 | 2.46 | ||||||||||||||||||
|
Loans held for sale
|
25.7 | 30.0 | 25.0 | 4.85 | 5.15 | 6.01 | ||||||||||||||||||
|
Investment securities:
|
||||||||||||||||||||||||
|
Taxable
|
239.1 | 250.0 | 217.9 | 2.73 | 4.10 | 5.62 | ||||||||||||||||||
|
Tax-exempt
|
18.8 | 14.2 | 48.2 | 4.56 | 6.68 | 6.83 | ||||||||||||||||||
|
Total investment securities
|
257.9 | 264.2 | 266.1 | 2.81 | 4.18 | 5.81 | ||||||||||||||||||
|
Loans and leases:(3)
|
||||||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||||||
|
Commercial and industrial
|
660.6 | 664.6 | 770.2 | 5.31 | 5.06 | 5.67 | ||||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||
|
Construction
|
30.6 | 50.8 | 104.2 | 2.79 | 2.74 | 5.05 | ||||||||||||||||||
|
Commercial
|
234.9 | 262.3 | 430.1 | 3.83 | 3.59 | 5.61 | ||||||||||||||||||
|
Commercial real estate
|
265.5 | 313.1 | 534.3 | 3.67 | 3.42 | 5.49 | ||||||||||||||||||
|
Total commercial
|
926.1 | 977.7 | 1,304.5 | 4.71 | 4.39 | 5.59 | ||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||
|
Automobile loans and leases
|
295.2 | 252.6 | 311.5 | 6.04 | 7.12 | 6.88 | ||||||||||||||||||
|
Home equity
|
383.7 | 426.2 | 475.2 | 5.06 | 5.62 | 6.42 | ||||||||||||||||||
|
Residential mortgage
|
216.8 | 237.4 | 292.4 | 4.84 | 5.23 | 5.83 | ||||||||||||||||||
|
Other loans
|
47.5 | 56.1 | 68.0 | 7.18 | 7.78 | 9.85 | ||||||||||||||||||
|
Total consumer
|
943.2 | 972.3 | 1,147.1 | 5.35 | 5.93 | 6.50 | ||||||||||||||||||
|
Total loans and leases
|
1,869.3 | 1,950.0 | 2,451.6 | 5.02 | 5.04 | 5.99 | ||||||||||||||||||
|
Total earning assets
|
$ | 2,156.6 | $ | 2,249.7 | $ | 2,818.6 | 4.55 | % | 4.88 | % | 5.90 | % | ||||||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | — | $ | — | $ | — | — | % | — | % | — | % | ||||||||||||
|
Demand deposits — interest-bearing
|
10.4 | 9.5 | 22.2 | 0.19 | 0.20 | 0.55 | ||||||||||||||||||
|
Money market deposits
|
103.5 | 83.6 | 117.5 | 0.88 | 1.16 | 1.93 | ||||||||||||||||||
|
Savings and other domestic deposits
|
48.2 | 66.8 | 100.3 | 1.04 | 1.37 | 1.88 | ||||||||||||||||||
|
Core certificates of deposit
|
231.6 | 409.4 | 495.7 | 2.52 | 3.43 | 4.27 | ||||||||||||||||||
|
Total core deposits
|
393.7 | 569.3 | 735.7 | 1.26 | 1.97 | 2.73 | ||||||||||||||||||
|
Other domestic time deposits of $250,000 or more
|
9.3 | 20.8 | 62.1 | 1.32 | 2.48 | 3.76 | ||||||||||||||||||
|
Brokered time deposits and negotiable CDs
|
35.4 | 83.1 | 118.8 | 2.21 | 2.64 | 3.66 | ||||||||||||||||||
|
Deposits in foreign offices
|
0.8 | 0.9 | 15.2 | 0.20 | 0.19 | 1.56 | ||||||||||||||||||
|
Total deposits
|
439.2 | 674.1 | 931.8 | 1.30 | 2.02 | 2.85 | ||||||||||||||||||
|
Short-term borrowings
|
3.0 | 2.4 | 42.3 | 0.21 | 0.25 | 1.78 | ||||||||||||||||||
|
Federal Home Loan Bank advances
|
3.1 | 12.9 | 107.8 | 1.80 | 1.04 | 3.29 | ||||||||||||||||||
|
Subordinated notes and other long-term debt
|
81.4 | 124.5 | 184.8 | 2.15 | 2.88 | 4.51 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
526.7 | 813.9 | 1,266.7 | 1.34 | 2.04 | 2.98 | ||||||||||||||||||
|
Net interest income
|
$ | 1,629.9 | $ | 1,435.8 | $ | 1,551.9 | ||||||||||||||||||
|
Net interest rate spread
|
3.21 | 2.84 | 2.92 | |||||||||||||||||||||
|
Impact of noninterest-bearing funds on margin
|
0.23 | 0.27 | 0.33 | |||||||||||||||||||||
|
Net Interest Margin
|
3.44 | % | 3.11 | % | 3.25 | % | ||||||||||||||||||
| (1) | FTE yields are calculated assuming a 35% tax rate. | |
| (2) | Loan and lease and deposit average rates include impact of applicable derivatives, non-deferrable fees, and amortized fees. | |
| (3) | For purposes of this analysis, nonaccrual loans are reflected in the average balances of loans. |
41
Table of Contents
Provision
for Credit Losses
(This section should be read in conjunction with Significant
Item 3, and the Credit Risk section.)
The provision for credit losses is the expense necessary to
maintain the ALLL and the AULC at levels adequate to absorb our
estimate of probable inherent credit losses in the loan and
lease portfolio and the portfolio of unfunded loan commitments
and letters of credit.
The provision for credit losses in 2010 was $634.5 million,
down $1,440.1 million from 2009. The decrease from 2009
primarily reflected the improved credit quality in our loan
portfolios including lower NCOs, NALs, and NPAs.
The provision for credit losses in 2009 was
$2,074.7 million, up $1,017.2 million from 2008, and
exceeded NCOs by $598.1 million. The increase in 2009 from
2008 primarily reflected the continued economic weakness across
all our regions and all our loan portfolios, although our
commercial loan portfolios were the most affected.
The following table details the Franklin-related impact to the
provision for credit losses for each of the past four years.
Table
10 — Provision for Credit Losses —
Franklin-Related Impact
| 2010 | 2009 | 2007 | 2008 | |||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||
|
Provision for credit losses
|
||||||||||||||||
|
Franklin
|
$ | 87.0 | $ | (14.1 | ) | $ | 438.0 | $ | 410.8 | |||||||
|
Non-Franklin
|
547.5 | 2,088.8 | 619.5 | 232.8 | ||||||||||||
|
Total
|
$ | 634.5 | $ | 2,074.7 | $ | 1,057.5 | $ | 643.6 | ||||||||
|
Total net charge-offs (recoveries)
|
||||||||||||||||
|
Franklin
|
$ | 87.0 | $ | 115.9 | $ | 423.3 | $ | 308.5 | ||||||||
|
Non-Franklin
|
787.5 | 1,360.7 | 334.8 | 169.1 | ||||||||||||
|
Total
|
$ | 874.5 | $ | 1,476.6 | $ | 758.1 | $ | 477.6 | ||||||||
|
Provision for credit losses in excess of net charge-offs
|
||||||||||||||||
|
Franklin
|
$ | — | $ | (130.0 | ) | $ | 14.7 | $ | 102.3 | |||||||
|
Non-Franklin
|
(240.0 | ) | 728.1 | 284.8 | 63.7 | |||||||||||
|
Total
|
$ | (240.0 | ) | $ | 598.1 | $ | 299.4 | $ | 166.0 | |||||||
42
Table of Contents
Noninterest
Income
(This section should be read in conjunction with Significant
Item 6.)
The following table reflects noninterest income for the three
years ended December 31, 2010:
Table
11 — Noninterest Income
| Twelve Months Ended December 31, | ||||||||||||||||||||||||||||
| Change from 2009 | Change from 2008 | |||||||||||||||||||||||||||
| 2010 | Amount | Percent | 2009 | Amount | Percent | 2008 | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
Service charges on deposit accounts
|
$ | 267,015 | $ | (35,784 | ) | (12 | )% | $ | 302,799 | $ | (5,254 | ) | (2 | )% | $ | 308,053 | ||||||||||||
|
Mortgage banking income
|
175,782 | 63,484 | 57 | 112,298 | 103,304 | 1,149 | 8,994 | |||||||||||||||||||||
|
Trust services
|
112,555 | 8,916 | 9 | 103,639 | (22,341 | ) | (18 | ) | 125,980 | |||||||||||||||||||
|
Electronic banking
|
110,234 | 10,083 | 10 | 100,151 | 9,884 | 11 | 90,267 | |||||||||||||||||||||
|
Insurance income
|
76,413 | 3,087 | 4 | 73,326 | 702 | 1 | 72,624 | |||||||||||||||||||||
|
Brokerage income
|
68,855 | 4,012 | 6 | 64,843 | (329 | ) | (1 | ) | 65,172 | |||||||||||||||||||
|
Bank owned life insurance income
|
61,066 | 6,194 | 11 | 54,872 | 96 | — | 54,776 | |||||||||||||||||||||
|
Automobile operating lease income
|
45,964 | (5,846 | ) | (11 | ) | 51,810 | 11,959 | 30 | 39,851 | |||||||||||||||||||
|
Securities losses
|
(274 | ) | 9,975 | (97 | ) | (10,249 | ) | 187,121 | (95 | ) | (197,370 | ) | ||||||||||||||||
|
Other income
|
124,248 | (27,907 | ) | (18 | ) | 152,155 | 13,364 | 10 | 138,791 | |||||||||||||||||||
|
Total noninterest income
|
$ | 1,041,858 | $ | 36,214 | 4 | % | $ | 1,005,644 | $ | 298,506 | 42 | % | $ | 707,138 | ||||||||||||||
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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, 2010:
Table
12 — Mortgage Banking Income
| Twelve Months Ended December 31, | ||||||||||||||||||||||||||||
| Change from 2009 | Change from 2008 | |||||||||||||||||||||||||||
| 2010 | Amount | Percent | 2009 | Amount | Percent | 2008 | ||||||||||||||||||||||
| (Dollar amounts in thousands, unless otherwise noted) | ||||||||||||||||||||||||||||
|
Mortgage Banking Income
|
||||||||||||||||||||||||||||
|
Origination and secondary marketing
|
$ | 117,440 | $ | 22,729 | 24 | % | $ | 94,711 | $ | 57,454 | 154 | % | $ | 37,257 | ||||||||||||||
|
Servicing fees
|
48,123 | (371 | ) | (1 | ) | 48,494 | 2,936 | 6 | 45,558 | |||||||||||||||||||
|
Amortization of capitalized servicing(1)
|
(47,165 | ) | 406 | (1 | ) | (47,571 | ) | (20,937 | ) | 79 | (26,634 | ) | ||||||||||||||||
|
Other mortgage banking income
|
16,629 | (6,731 | ) | (29 | ) | 23,360 | 6,592 | 39 | 16,768 | |||||||||||||||||||
|
Sub-total
|
135,027 | 16,033 | 13 | 118,994 | 46,045 | 63 | 72,949 | |||||||||||||||||||||
|
MSR valuation adjustment(1)
|
(12,721 | ) | (47,026 | ) | (137 | ) | 34,305 | 86,973 | N.R. | (52,668 | ) | |||||||||||||||||
|
Net trading gains (losses) related to MSR hedging
|
53,476 | 94,477 | N.R. | (41,001 | ) | (29,714 | ) | 263 | (11,287 | ) | ||||||||||||||||||
|
Total mortgage banking income
|
$ | 175,782 | $ | 63,484 | 57 | % | $ | 112,298 | $ | 103,304 | 1,149 | % | $ | 8,994 | ||||||||||||||
|
Mortgage originations (in millions)
|
$ | 5,476 | $ | 214 | 4 | % | $ | 5,262 | $ | 1,489 | 39 | % | $ | 3,773 | ||||||||||||||
|
Average trading account securities used to hedge MSRs (in
millions)
|
64 | (6 | ) | (9 | ) | 70 | (961 | ) | (93 | ) | 1,031 | |||||||||||||||||
|
Capitalized MSRs(2)
|
196,194 | (18,398 | ) | (9 | ) | 214,592 | 47,154 | 28 | 167,438 | |||||||||||||||||||
|
Total mortgages serviced for others (in millions)(2)
|
15,933 | (77 | ) | — | 16,010 | 256 | 2 | 15,754 | ||||||||||||||||||||
|
MSR % of investor servicing portfolio
|
1.23 | % | (0.11 | ) | (8 | )% | 1.34 | % | 0.28 | 26 | % | 1.06 | % | |||||||||||||||
|
Net Impact of MSR Hedging
|
||||||||||||||||||||||||||||
|
MSR valuation adjustment(1)
|
$ | (12,721 | ) | $ | (47,026 | ) | N.R. | % | $ | 34,305 | $ | 86,973 | N.R. | % | $ | (52,668 | ) | |||||||||||
|
Net trading gains (losses) related to MSR hedging
|
53,476 | 94,477 | N.R. | (41,001 | ) | (29,714 | ) | 263 | (11,287 | ) | ||||||||||||||||||
|
Net interest income related to MSR hedging
|
972 | (2,027 | ) | (68 | ) | 2,999 | (30,140 | ) | (91 | ) | 33,139 | |||||||||||||||||
|
Net gain (loss) of MSR hedging
|
$ | 41,727 | $ | 45,424 | N.R. | % | $ | (3,697 | ) | $ | 27,119 | N.R. | % | $ | (30,816 | ) | ||||||||||||
N.R. — Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
| (1) | The change in fair value for the period represents the MSR valuation adjustment, net of amortization of capitalized servicing. |
| (2) | At period end. |
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Table of Contents
2010
versus 2009
Noninterest income increased $36.2 million, or 4%, from the
prior year, primarily reflecting:
| • | $63.5 million, or 57%, increase in mortgage banking income. Net MSR hedging-related activities contributed a $45.4 million net increase. We use an independent outside third party to monitor our MSR asset valuation and assumptions. During 2010, interest rates were volatile and generally lower than 2009 rates resulting in higher prepayment speeds and lower MSR valuation, which was economically hedged and offset by hedging gains. However, the negative MSR valuation adjustment was partially offset by model assumption updates. Based on updated market data and trends, the prepayment assumptions were lowered, which increased the value of the MSR. The increase also reflected a $22.7 million increase in origination and secondary marketing income as loan sales and loan originations were substantially higher (see Table 12). (See MSR section located within Market Risk for additional information.) | |
| • | $10.1 million, or 10%, increase in electronic banking, reflecting increased debit card transaction volume. | |
| • | $10.0 million benefit from lower securities losses. | |
| • | $8.9 million, or 9%, increase in trust services income, with 50% of the increase due to increases in asset market values, and the remainder reflecting growth in new business. | |
| • | $6.2 million, or 11%, increase in insurance benefits associated with bank owned life insurance. | |
| • | $4.0 million, or 6%, increase in brokerage income, primarily reflecting an increase in title insurance income due to higher mortgage refinance activity, and to a lesser degree an increase in fixed income product sales, partially offset by lower annuity income. |
Partially offset by:
| • | $35.8 million, or 12%, decrease in service charges on deposit accounts. This decline represented a decrease in personal NSF / OD service charges and reflected a combination of factors. These included the implementation of changes to Regulation E and the introduction of our Fair Play banking philosophy during the 2010 third quarter, as well as the continued underlying decline in activity as customers better manage their account balances. As part of our Fair Play banking philosophy, we voluntary reduced certain NSF / OD fees and implemented our 24-Hour Grace tm overdraft policy. The goal of our Fair Play banking philosophy is to introduce more customer friendly fee structures with the objective of accelerating the acquisition and retention of customers. | |
| • | $27.9 million, or 18%, decline in other income. 2009 included a $31.4 million gain from the sale of Visa ® Class B stock. |
2009
versus 2008
Noninterest income increased $298.5 million, or 42%, from
2008, primarily reflecting:
| • | $103.3 million increase in mortgage banking income, reflecting a $57.5 million increase in origination and secondary marketing income as loans sales and loan originations were substantially higher, and a $27.1 million improvement in MSR hedging (see Table 12) . | |
| • | $187.1 million, or 95%, reduction in securities losses as 2008 included $197.1 million of OTTI adjustments compared with $10.2 million in 2009. | |
| • | $12.0 million, or 30%, increase in automobile operating lease income, reflecting a 21% increase in average operating lease balances as lease originations since the 2007 fourth quarter were recorded as operating leases. However, during the 2008 fourth quarter, we exited the automobile leasing business. |
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Table of Contents
| • | $13.4 million, or 10%, increase in other income, reflecting the net impact of a $22.4 million change in the fair value of derivatives that did not qualify for hedge accounting, partially offset by a $4.7 million decline in mezzanine lending income and a $4.1 million decline in customer derivatives income. | |
| • | $9.9 million, or 11%, increase in electronic banking, reflecting increased transaction volumes and additional third party processing fees. |
Partially offset by:
| • | $22.3 million, or 18%, decline in trust services income, reflecting the impact of reduced market values on asset management revenues, as well as lower yields on proprietary money market funds. |
Noninterest
Expense
(This section should be read in conjunction with Significant
Items 2, 4, and 7.)
The following table reflects noninterest expense for the three
years ended December 31, 2010:
Table
13 — Noninterest Expense
| Twelve Months Ended December 31, | ||||||||||||||||||||||||||||
| Change from 2009 | Change from 2008 | |||||||||||||||||||||||||||
| 2010 | Amount | Percent | 2009 | Amount | Percent | 2008 | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
Personnel costs
|
$ | 798,973 | $ | 98,491 | 14 | % | $ | 700,482 | $ | (83,064 | ) | (11 | )% | $ | 783,546 | |||||||||||||
|
Outside data processing and other services
|
159,248 | 11,153 | 8 | 148,095 | 17,869 | 14 | 130,226 | |||||||||||||||||||||
|
Net occupancy
|
107,862 | 2,589 | 2 | 105,273 | (3,155 | ) | (3 | ) | 108,428 | |||||||||||||||||||
|
Deposit and other insurance expense
|
97,548 | (16,282 | ) | (14 | ) | 113,830 | 91,393 | 407 | 22,437 | |||||||||||||||||||
|
Professional services
|
88,778 | 12,412 | 16 | 76,366 | 26,753 | 54 | 49,613 | |||||||||||||||||||||
|
Equipment
|
85,920 | 2,803 | 3 | 83,117 | (10,848 | ) | (12 | ) | 93,965 | |||||||||||||||||||
|
Marketing
|
65,924 | 32,875 | 99 | 33,049 | 385 | 1 | 32,664 | |||||||||||||||||||||
|
Amortization of intangibles
|
60,478 | (7,829 | ) | (11 | ) | 68,307 | (8,587 | ) | (11 | ) | 76,894 | |||||||||||||||||
|
OREO and foreclosure expense
|
39,049 | (54,850 | ) | (58 | ) | 93,899 | 60,444 | 181 | 33,455 | |||||||||||||||||||
|
Automobile operating lease expense
|
37,034 | (6,326 | ) | (15 | ) | 43,360 | 12,078 | 39 | 31,282 | |||||||||||||||||||
|
Goodwill impairment
|
— | (2,606,944 | ) | (100 | ) | 2,606,944 | 2,606,944 | — | — | |||||||||||||||||||
|
Gain on early extinguishment of debt
|
— | 147,442 | (100 | ) | (147,442 | ) | (123,900 | ) | 526 | (23,542 | ) | |||||||||||||||||
|
Other expense
|
132,991 | 24,828 | 23 | 108,163 | (30,243 | ) | (22 | ) | 138,406 | |||||||||||||||||||
|
Total noninterest expense
|
$ | 1,673,805 | $ | (2,359,638 | ) | (59 | )% | $ | 4,033,443 | $ | 2,556,069 | 173 | % | $ | 1,477,374 | |||||||||||||
2010
versus 2009
As shown in the above table, noninterest expense decreased
$2,359.6 million from the year-ago period. Excluding the
2009 goodwill impairment of $2,606.9 million, noninterest
expense increased $247.3 million and primarily reflected:
| • | The absence of $147.4 million in gains on early extinguishment of debt in 2009. |
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Table of Contents
| • | $98.5 million, or 14%, increase in personnel costs, primarily reflecting a 10% increase in full-time equivalent staff in support of strategic initiatives, as well as higher commissions and other incentive expenses, and the reinstatement of certain employee benefits such as 401(k) plan matching contribution, merit increases, and bonuses. | |
| • | $32.9 million, or 99%, increase in marketing expense, reflecting increases in branding and product advertising activities in support of strategic initiatives. | |
| • | $24.8 million, or 23%, increase in other expense, reflecting $13.1 million increase associated with the provision for repurchase losses related to representations and warranties made on mortgage loans sold, as well as increased travel and miscellaneous fees. |
Partially offset by:
| • | $54.9 million, or 58%, decline in OREO and foreclosure expense. | |
| • | $16.3 million, or 14%, decrease in deposit and other insurance expense. This decrease was comprised of two components: (1) $23.6 million FDIC special assessment during the 2009 second quarter, and (2) increased assessments due to higher levels of deposits. |
2009
versus 2008
Noninterest expense increased $2,556.1 million from 2008,
and primarily reflected:
| • | $2,606.9 million of goodwill impairment recorded in 2009. The majority of the goodwill impairment, $2,602.7 million, was recorded during the 2009 first quarter. The remaining $4.2 million of goodwill impairment was recorded in the 2009 second quarter, and was related to the sale of a small payments-related business in July 2009. (See Goodwill discussion located within the Critical Account Policies and Use of Significant Estimates for additional information). | |
| • | $91.4 million increase in deposit and other insurance expense. This increase was comprised of two components: (1) $23.6 million FDIC special assessment during the 2009 second quarter, and (2) $67.8 million increase related to our 2008 FDIC assessments being significantly reduced by a nonrecurring deposit assessment credit provided by the FDIC that was depleted during the 2008 fourth quarter. This deposit insurance credit offset substantially all of our assessment in 2008. Higher levels of deposits also contributed to the increase. | |
| • | $60.4 million increase in OREO and foreclosure expense, reflecting higher levels of problem assets, as well as loss mitigation activities. | |
| • | $26.8 million, or 54%, increase in professional services, reflecting higher consulting and collection-related expenses. | |
| • | $17.9 million, or 14%, increase in outside data processing and other services, primarily reflecting portfolio servicing fees paid to Franklin resulting from the 2009 first quarter restructuring of this relationship. | |
| • | $12.1 million, or 39%, increase in automobile operating lease expense, primarily reflecting a 21% increase in average operating leases. However, we exited the automobile leasing business during the 2008 fourth quarter. |
Partially offset by:
| • | $123.9 million positive impact related to gains on early extinguishment of debt. | |
| • | $83.1 million, or 11%, decline in personnel expense, reflecting a decline in salaries, and lower benefits and commission expense. Full-time equivalent staff declined 6% from the comparable year-ago period. | |
| • | $30.2 million, or 22%, decline in other noninterest expense primarily reflecting lower automobile lease residual value expense as used vehicle prices improved. |
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Table of Contents
| • | $10.8 million, or 12%, decline in equipment costs, reflecting lower depreciation costs, as well as lower repair and maintenance costs. |
Provision
for Income Taxes
(This section should be read in conjunction with Significant
Items 3 and 7, and Note 17 of the Notes to
Consolidated Financial Statements.)
2010
versus 2009
The provision for income taxes was $40.0 million for 2010
compared with a benefit of $584.0 million in 2009. Both
years included the benefits from tax-exempt income,
tax-advantaged investments, and general business credits. In
2010, we entered into an asset monetization transaction that
generated a tax benefit of $63.6 million. Also, in 2010,
undistributed previously reported earnings of a foreign
subsidiary of $142.3 million were distributed and an
additional $49.8 million of tax expense was recorded. State
tax reserves of $28.8 million ($18.7 million net of
federal benefit) for 2010 were recorded.
The Franklin restructuring in 2009 resulted in a
$159.9 million net deferred tax asset equal to the amount
of income and equity that was included in our operating results
for 2009. During 2010, a $43.6 million net tax benefit was
recognized, primarily reflecting the increase in the net
deferred tax asset relating to the assets acquired from the
March 31, 2009 Franklin restructuring.
The IRS completed the audit of our consolidated federal income
tax returns for tax years through 2007. In addition, various
state and other jurisdictions remain open to examination,
including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West
Virginia and Illinois. Both the IRS and state tax officials,
including Ohio and Kentucky, have proposed adjustments to our
previously filed tax returns. We believe that our tax positions
related to such proposed adjustments are correct and supported
by applicable statutes, regulations, and judicial authority, and
intend to vigorously defend them. It is possible that the
ultimate resolution of the proposed adjustments, if unfavorable,
may be material to the results of operations in the period it
occurs. However, although no assurance can be given, we believe
that the resolution of these examinations will not, individually
or in the aggregate, have a material adverse impact on our
consolidated financial position.
2009
versus 2008
The provision for income taxes was a benefit of
$584.0 million for 2009 compared with a benefit of
$182.2 million in 2008. The tax benefit for both years
included the benefits from tax-exempt income, tax-advantaged
investments, and general business credits. The tax benefit in
2009 was impacted by the pretax loss combined with the favorable
impacts of the Franklin restructuring in 2009 and the reduction
of the capital loss valuation reserve, offset by the
nondeductible portion of the 2009 goodwill impairment.
RISK
MANAGEMENT AND CAPITAL
Risk awareness, identification, reporting, and active management
are key elements in overall risk management. We manage risk to
an aggregate
moderate-to-low
risk profile strategy through a control framework and by
monitoring and responding to potential risks. Controls include,
among others, effective segregation of duties, access,
authorization and reconciliation procedures, as well as staff
education and a disciplined assessment process.
As a strategy, we have identified sources of risks and primary
risks in coordination with each business unit. We utilize Risk
and Control Self-Assessments (RCSA) to identify exposure risks.
Through this RCSA process, we continually assess the
effectiveness of controls associated with the identified risks,
regularly monitor risk profiles and material exposure to losses,
and identify stress events and scenarios to which we may be
exposed. Our chief risk officer is responsible for ensuring that
appropriate systems of controls are in place for managing and
monitoring risk across the Company. Potential risk concerns are
shared with the Risk Management Committee and the board of
directors, as appropriate. Our internal audit department
performs on-going independent reviews of the risk management
process and ensures the adequacy of documentation. The results
of these reviews are reported regularly to the audit committee
of the board of directors.
48
Table of Contents
We believe our primary risk exposures are credit, market,
liquidity, operational, and compliance risk.
Credit risk
is the risk of loss due to adverse changes in our
borrowers’ ability to meet their financial obligations
under agreed upon terms.
Market risk
represents the risk
of loss due to changes in the market value of assets and
liabilities due to changes in interest rates, exchange rates,
and equity prices.
Liquidity risk
arises from the
possibility that funds may not be available to satisfy current
or future obligations resulting from external macro market
issues, investor perception of financial strength, and events
unrelated to us such as war, terrorism, or financial institution
market specific issues.
Operational risk
arises from our
inherent
day-to-day
operations that could result in losses due to human error,
inadequate or failed internal systems and controls, and external
events.
Compliance risk
exposes us to money penalties,
enforcement actions or other sanctions as a result of
nonconformance with laws, rules, and regulations that apply to
the financial services industry.
Some of the more significant processes used to manage and
control credit, market, liquidity, operational, and compliance
risks are described in the following paragraphs.
Credit
Risk
Credit risk is the risk of financial loss if a counterparty is
not able to meet the agreed upon terms of the financial
obligation. The majority of our credit risk is associated with
lending activities, as the acceptance and management of credit
risk is central to profitable lending. We also have significant
credit risk associated with our investment securities portfolio
(see Investment Securities Portfolio discussion)
. While
there is credit risk associated with derivative activity, we
believe this exposure is minimal. The significant change in the
economic conditions and the resulting changes in borrower
behavior over the past several years resulted in our focusing
significant resources to the identification, monitoring, and
managing of our credit risk. In addition to the traditional
credit risk mitigation strategies of credit policies and
processes, market risk management activities, and portfolio
diversification, we added more quantitative measurement
capabilities utilizing external data sources, enhanced use of
modeling technology, and internal stress testing processes.
The maximum level of credit exposure to individual credit
borrowers is limited by policy guidelines based on the perceived
risk of each borrower or related group of borrowers. All
authority to grant commitments is delegated through the
independent credit administration function and is closely
monitored and regularly updated. Concentration risk is managed
through limits on loan type, geography, industry, and loan
quality factors. We continue to focus predominantly on extending
credit to retail and commercial customers with existing or
expandable relationships within our primary banking markets,
although we will consider lending opportunities outside our
primary markets if we believe the associated risks are
acceptable and aligned with strategic initiatives. We continue
to add new borrowers that meet our targeted risk and
profitability profile. Although we offer a broad set of
products, we continue to develop new lending products and
opportunities. Each of these new products and opportunities goes
through a rigorous development and approval process prior to
implementation to ensure our overall objective of maintaining an
aggregate
moderate-to-low
risk portfolio profile.
The checks and balances in the credit process and the
independence of the credit administration and risk management
functions are designed to appropriately assess the level of
credit risk being accepted, facilitate the early recognition of
credit problems when they occur, and to provide for effective
problem asset management and resolution. For example, we do not
extend additional credit to delinquent borrowers except in
certain circumstances that substantially improve our overall
repayment or collateral coverage position.
Asset quality metrics improved significantly in 2010, reflecting
our proactive portfolio management initiatives as well as some
stabilization in a still relatively weak economy. The
improvements in the asset quality metrics, including lower
levels of NPAs, Criticized and Classified assets, and
delinquencies have all been achieved through these policies and
commitments. Our portfolio management policies demonstrate our
commitment to maintaining an aggregate
moderate-to-low
risk profile. To that end, we continue to expand resources in
our risk management areas.
The weak residential real estate market and U.S. economy
continued to have significant impact on the financial services
industry as a whole, and specifically on our financial results.
A pronounced downturn in the residential real estate market that
began in early 2007 has resulted in significantly lower
residential real estate
49
Table of Contents
values and higher delinquencies and NCOs, including loans to
builders and developers of residential real estate. In addition,
continued high unemployment, among other factors, throughout
2010, has slowed any significant recovery from the
U.S. recession during 2008 and 2009. As a result, we
experienced higher than historical levels of delinquencies and
NCOs in our loan portfolios during 2009 and 2010. The value of
our investment securities backed by residential and commercial
real estate was also negatively impacted by a lack of liquidity
in the financial markets and anticipated credit losses.
Loan
and Lease Credit Exposure Mix
At December 31, 2010, our loans and leases totaled
$38.1 billion, representing a 4% increase from
December 31, 2009. The composition of the portfolio has
changed significantly over the past 12 months. From
December 31, 2009, to December 31, 2010, the consumer
loan portfolio increased $2.2 billion, or 13%, primarily
driven by the automobile loan portfolio. In 2010, our indirect
automobile finance business generated significant levels of high
credit-quality loan originations, and we also adopted a new
accounting standard resulting in the consolidation of a
$0.8 billion automobile loan securitization. At
December 31, 2010, these securitized loans had a remaining
balance of $522.7 million. These increases were partially
offset by a $0.9 billion, or 4%, decline in the commercial
loan portfolio, primarily as a result of a planned strategy to
reduce the concentration of our noncore CRE portfolio.
At December 31, 2010, commercial loans totaled
$19.7 billion, and represented 52% of our total credit
exposure. Our commercial loan portfolio is diversified along
product type, size, and geography within our footprint, and is
comprised of the following (
see Commercial Credit
discussion)
:
C&I loans
— C&I loans are made to
commercial customers for use in normal business operations to
finance working capital needs, equipment purchases, or other
projects. The majority of these borrowers are customers doing
business within our geographic regions. C&I loans are
generally underwritten individually and secured with the assets
of the company
and/or
the
personal guarantee of the business owners. The financing of
owner-occupied facilities is considered a C&I loan even
though there is improved real estate as collateral. This
treatment is a function of the credit decision process, which
focuses on cash flow from operations of the business to repay
the debt. The operation, sale, rental, or refinancing of the
real estate is not considered the primary repayment source for
these types of loans. As we look to expand C&I loan growth,
we have further developed our ABL capabilities by adding
experienced ABL professionals to take advantage of market
opportunities resulting in better leveraging of the
manufacturing base in our primary markets. We have also added a
national banking group with sufficient resources to ensure we
appropriately recognize and manage the risks associated with
this type of lending.
CRE loans
— CRE loans consist of loans for
income-producing real estate properties, real estate investment
trusts, and real estate developers. We mitigate our risk on
these loans by requiring collateral values that exceed the loan
amount and underwriting the loan with projected cash flow in
excess of the debt service requirement. These loans are made to
finance properties such as apartment buildings, office and
industrial buildings, and retail shopping centers; and are
repaid through cash flows related to the operation, sale, or
refinance of the property.
Construction CRE loans
— Construction CRE loans
are loans to individuals, companies, or developers used for the
construction of a commercial or residential property for which
repayment will be generated by the sale or permanent financing
of the property. Our construction CRE portfolio primarily
consists of retail, residential (land, single family, and
condominiums), office, and warehouse product types. Generally,
these loans are for construction projects that have been
presold, preleased, or have secured permanent financing, as well
as loans to real estate companies with significant equity
invested in each project. These loans are underwritten and
managed by a specialized real estate lending group that actively
monitors the construction phase and manages the loan
disbursements according to the predetermined construction
schedule.
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Table of Contents
Total consumer loans were $18.4 billion at
December 31, 2010, and represented 48% of our total credit
exposure. The consumer portfolio was diversified among home
equity loans, residential mortgages, and automobile loans and
leases
(see Consumer Credit discussion)
.
Automobile loans/leases
— Automobile
loans/leases are primarily comprised of loans made through
automotive dealerships and includes exposure in selected states
outside of our primary banking markets. In 2009, we exited
several states, including Florida, Arizona, and Nevada. In 2010,
we expanded into eastern Pennsylvania and five New England
states. The recent expansions included hiring experienced
colleagues with existing dealer relationships in those markets.
No state outside of our primary banking market represented more
than 5% of our total automobile loan and lease portfolio at
December 31, 2010. Our automobile lease portfolio
represents an immaterial portion of the total portfolio as we
exited the automobile leasing business during the 2008 fourth
quarter.
Home equity
— Home equity lending includes both
home equity loans and
lines-of-credit.
This type of lending, which is secured by a first- or second-
lien on the borrower’s residence, allows customers to
borrow against the equity in their home. Given the current low
interest rate environment, many borrowers have utilized the
line-of-credit
home equity product as the primary source of financing their
home. As a result, the proportion of first-lien loans has
increased significantly in our portfolio over the past
24 months. Real estate market values at the time of
origination directly affect the amount of credit extended and,
in the event of default, subsequent changes in these values may
impact the severity of losses. We actively manage the amount of
credit extended through
debt-to-income
policies and LTV policy limits.
Residential mortgages
— Residential mortgage
loans represent loans to consumers for the purchase or refinance
of a residence. These loans are generally financed over a 15- to
30- year term, and in most cases, are extended to borrowers to
finance their primary residence. Generally, our practice is to
sell a significant portion of our fixed-rate originations in the
secondary market. As such, the majority of the loans in our
portfolio are ARMs. These ARMs primarily consist of a fixed-rate
of interest for the first 3 to 5 years, and then adjust
annually. These loans comprised approximately 57% of our total
residential mortgage loan portfolio at December 31, 2010.
Other consumer loans/leases
— Primarily
consists of consumer loans not secured by real estate or
automobiles, including personal unsecured loans.
51
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Table
14 — Loan and Lease Portfolio Composition
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||||||||||||||||||
|
Commercial:(1)
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial and industrial
|
$ | 13,063 | 34 | % | $ | 12,888 | 35 | % | $ | 13,541 | 33 | % | $ | 13,126 | 33 | % | $ | 7,850 | 30 | % | ||||||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||||||||||||||||||
|
Construction
|
650 | 2 | 1,469 | 4 | 2,080 | 5 | 1,962 | 5 | 1,229 | 5 | ||||||||||||||||||||||||||||||
|
Commercial
|
6,001 | 16 | 6,220 | 17 | 8,018 | 20 | 7,221 | 18 | 3,275 | 13 | ||||||||||||||||||||||||||||||
|
Total commercial real estate
|
6,651 | 18 | 7,689 | 21 | 10,098 | 25 | 9,183 | 23 | 4,504 | 18 | ||||||||||||||||||||||||||||||
|
Total commercial
|
19,714 | 52 | 20,577 | 56 | 23,639 | 58 | 22,309 | 56 | 12,354 | 48 | ||||||||||||||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||||||||||||||||||
|
Automobile loans and leases(2)
|
5,614 | 15 | 3,390 | 9 | 4,464 | 11 | 4,294 | 11 | 3,895 | 15 | ||||||||||||||||||||||||||||||
|
Home equity
|
7,713 | 20 | 7,563 | 21 | 7,557 | 18 | 7,290 | 18 | 4,927 | 19 | ||||||||||||||||||||||||||||||
|
Residential mortgage
|
4,500 | 12 | 4,510 | 12 | 4,761 | 12 | 5,447 | 14 | 4,549 | 17 | ||||||||||||||||||||||||||||||
|
Other loans
|
566 | 1 | 751 | 2 | 671 | 1 | 715 | 1 | 428 | 1 | ||||||||||||||||||||||||||||||
|
Total consumer
|
18,393 | 48 | 16,214 | 44 | 17,453 | 42 | 17,746 | 44 | 13,799 | 52 | ||||||||||||||||||||||||||||||
|
Total loans and leases
|
$ | 38,107 | 100 | % | $ | 36,791 | 100 | % | $ | 41,092 | 100 | % | $ | 40,055 | 100 | % | $ | 26,153 | 100 | % | ||||||||||||||||||||
| (1) | There were no commercial loans outstanding that would be considered a concentration of lending to a particular industry or group of industries. | |
| (2) | 2010 included an increase of $522.7 million resulting from the adoption of a new accounting standard to consolidate a previously off-balance automobile loan securitization transaction. |
The table below provides our total loan and lease portfolio
segregated by the type of collateral securing the loan or lease:
Table
15 — Total Loan and Lease Portfolio by Collateral Type
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||||||||||||||||||
|
Real estate
|
$ | 22,603 | 59 | % | $ | 23,462 | 64 | % | $ | 25,439 | 62 | % | $ | 25,886 | 65 | % | $ | 15,831 | 60 | % | ||||||||||||||||||||
|
Vehicles
|
7,134 | 19 | 4,600 | 13 | 6,063 | 15 | 5,722 | 14 | 5,003 | 19 | ||||||||||||||||||||||||||||||
|
Receivables/Inventory
|
3,763 | 10 | 3,582 | 10 | 3,915 | 10 | 3,391 | 8 | 2,369 | 9 | ||||||||||||||||||||||||||||||
|
Machinery/Equipment
|
1,766 | 5 | 1,772 | 5 | 1,916 | 5 | 1,715 | 4 | 1,206 | 5 | ||||||||||||||||||||||||||||||
|
Unsecured
|
1,117 | 3 | 1,106 | 3 | 1,666 | 4 | 1,423 | 4 | 982 | 4 | ||||||||||||||||||||||||||||||
|
Securities/Deposits
|
734 | 2 | 1,145 | 3 | 862 | 2 | 788 | 2 | 427 | 2 | ||||||||||||||||||||||||||||||
|
Other
|
990 | 2 | 1,124 | 2 | 1,231 | 2 | 1,130 | 3 | 335 | 1 | ||||||||||||||||||||||||||||||
|
Total loans and leases
|
$ | 38,107 | 100 | % | $ | 36,791 | 100 | % | $ | 41,092 | 100 | % | $ | 40,055 | 100 | % | $ | 26,153 | 100 | % | ||||||||||||||||||||
The majority of our loans secured by real estate are discussed
in detail in later sections.
Commercial
Credit
The primary factors considered in commercial credit approvals
are the financial strength of the borrower, assessment of the
borrower’s management capabilities, cash flows from
operations, industry sector trends, type
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and sufficiency of collateral, 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. For all loans
exceeding $5.0 million, we utilize a centralized senior
loan committee, led by our chief credit officer. For loans less
than $5.0 million, with the exception of small business
loans, credit officers who understand each local region and are
experienced in the industries and loan structures of the
requested credit exposure are involved in all loan decisions and
have the primary credit authority. For small business loans less
than $5.0 million, we utilize a centralized loan approval
process for standard products and structures. In this
centralized decision environment, certain individuals who
understand each local region may make credit-extension decisions
to preserve our commitment to the communities we operate in. In
addition to disciplined and consistent judgmental factors, a
sophisticated credit scoring process is used as a primary
evaluation tool in the determination of approving a loan within
the centralized loan approval process.
In commercial lending, on-going credit management is dependent
on the type and nature of the loan. We monitor all significant
exposures on an on-going basis. All commercial credit extensions
are assigned internal risk ratings reflecting the
borrower’s
probability-of-default
and loss-given-default (severity of loss). This two-dimensional
rating methodology provides granularity in the portfolio
management process. The
probability-of-default
is rated and applied at the borrower level. The
loss-given-default is rated and 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 on-going basis. As an example, the
retail properties class of the CRE portfolio has received more
frequent evaluation at the individual loan level given the weak
environment, portfolio concentration, and stressed performance
trends
(see Retail Properties discussion)
. We continually
review and adjust our risk-rating criteria based on actual
experience, which provides us with the current risk level in the
portfolio and is the basis for determining an appropriate ACL
amount for this portfolio.
In addition to the initial credit analysis initiated during the
approval process, the Credit Review group performs testing to
provide an independent review and assessment of the quality
and / or risk of the new loan production. This group
is part of our Risk Management area, and conducts portfolio
reviews on a risk-based cycle to evaluate individual loans,
validate risk ratings, as well as test the consistency of credit
processes. Similarly, to provide consistent oversight, a
centralized portfolio management team monitors and reports on
the performance of small business banking loans.
The commercial loan ratings described above are categorized as
follows:
Pass:
Commercial loans categorized as Pass are
higher quality loans that do not fit any of the other categories
described below.
OLEM:
Commercial loans categorized as OLEM are
potentially weak. The credit risk may be relatively minor yet
represents a risk given certain specific circumstances. If the
potential weaknesses are not monitored or mitigated, the asset
may weaken or inadequately protect our position in the future.
Substandard:
Commercial loans categorized as
Substandard are inadequately protected by the borrower’s
ability to repay, equity,
and/or
the
collateral pledged to secure the loan. These loans have
identified weaknesses that could hinder normal repayment or
collection of the debt. It is likely that we will sustain some
loss if any identified weaknesses are not mitigated.
Doubtful:
Commercial loans categorized as
Doubtful have all of the weaknesses inherent in those loans
classified as Substandard, with the added elements that the full
collection of the loan is improbable and the possibility of loss
is high.
Commercial loans rated as OLEM, Substandard, or Doubtful are
considered Criticized. Commercial loans rated as Substandard or
Doubtful are considered Classified. Commercial loans may be
designated as Criticized when warranted by individual borrower
performance or by industry and environmental factors. Commercial
Criticized loans are subjected to additional monthly reviews to
adequately assess the borrower’s credit status and develop
appropriate action plans. We re-evaluate the risk-rating of
these Criticized commercial loans as conditions change,
potentially resulting in a further rating adjustment. Changes in
the rating can be impacted by borrower performance, external
factors such as industry and economic changes, as well as
structural
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Table of Contents
changes to the loan arrangements including, but not limited to,
amortization, collateral, guarantees, and covenants.
All Classified commercial loans are managed by our SAD. The SAD
is a specialized credit group that handles the
day-to-day
management of workouts, commercial recoveries, and problem loan
sales. Its responsibilities include developing action plans,
assessing risk ratings, and determining the adequacy of the
reserve, the accrual status, and the ultimate collectability of
the Classified loan portfolio.
Our commercial loan portfolio, including CRE loans, is
diversified by customer size, as well as geographically
throughout our footprint. During 2009, we engaged in a large
number of enhanced portfolio management initiatives, including a
review to ensure the appropriate classification of CRE loans.
The results of this initiative included reclassifications in
2009 totaling $1.4 billion that increased C&I loan
balances, and correspondingly decreased CRE loan balances,
primarily representing owner-occupied properties. We believe the
changes provide improved visibility and clarity to us and our
investors. We have continued this active portfolio management
process throughout 2010, primarily focusing on improving our
ability to identify changing conditions at the borrower level,
which in most cases, significantly improved the outcome. This
process allows us to provide clarity regarding the credit trends
in our portfolios.
Certain segments of our commercial loan portfolio are discussed
in further detail below:
C&I
PORTFOLIO
The C&I portfolio is comprised of loans to businesses where
the source of repayment is associated with the on-going
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 operation, sale,
or refinancing 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 considered an
industry or geographic concentration of lending. Currently,
higher-risk segments of the C&I portfolio include loans to
borrowers supporting the home building industry, contractors,
and automotive suppliers. We manage the risks inherent in this
portfolio through origination policies, concentration limits,
on-going 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 and debt service coverage ratios, as
applicable.
C&I borrowers have been challenged by the weak economy, and
some borrowers may no longer have sufficient capital to
withstand the extended stress. As a result, these borrowers may
not be able to comply with the original terms of their credit
agreements. We continue to focus attention on the portfolio
management process to proactively identify borrowers that may be
facing financial difficulty to assess all potential solutions.
The impact of the economic environment is further evidenced by
the level of
line-of-credit
activity, as borrowers continued to maintain relatively low
utilization percentages over the past 12 months.
As shown in the following table, C&I loans totaled
$13.1 billion at December 31, 2010:
Table
16 — Commercial and Industrial Loans and Leases by
Class
| At December 31, 2010 | ||||||||||||||||
| Commitments | Loans Outstanding | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||
|
Class:
|
||||||||||||||||
|
Owner-occupied
|
$ | 4,320 | 23 | % | $ | 3,823 | 29 | % | ||||||||
|
Other commercial and industrial
|
14,676 | 77 | 9,240 | 71 | ||||||||||||
|
Total
|
$ | 18,996 | 100 | % | $ | 13,063 | 100 | % | ||||||||
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The differences in the composition between the commitments and
loans outstanding results from the owner-occupied class
consisting almost entirely of term loans, while the remainder of
the C&I portfolio contains a significant amount of working
capital
lines-of-credit.
The funding percentage associated with the
lines-of-credit
has been a significant indicator of credit quality, as
businesses have reduced their borrowings. Generally, borrowers
that fully utilize their
line-of-credit
consistently, over time, have a higher risk profile. This
represents one of many credit risk factors we utilize in
assessing the credit risk portfolio of individual borrowers and
the overall portfolio.
CRE
PORTFOLIO
We manage the risks inherent in this portfolio the same as the
C&I portfolio, with the addition of preleasing
requirements, as applicable. Generally, we: (1) limit our
loans to 80% of the appraised value of the commercial real
estate, (2) require net operating cash flows to be 125% of
required interest and principal payments, and (3) if the
commercial real estate is non-owner-occupied, require that at
least 50% of the space of the project be pre-leased.
Dedicated real estate professionals originated the majority of
the portfolio, with the remainder obtained from prior bank
acquisitions. Appraisals are obtained from approved vendors, and
are reviewed by an internal appraisal review group comprised of
certified appraisers to ensure the quality of the valuation used
in the underwriting process. The portfolio is diversified by
project type and loan size, and this diversification represents
a significant portion of the credit risk management strategies
employed for this portfolio. Subsequent to the origination of
the loan, the Credit Review group performs testing to provide an
independent review and assessment of the quality of the
underwriting
and/or
risk
of the new loan production.
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 perform on-going portfolio
level reviews of certain loan classes such as the retail
properties class within the CRE portfolio
(see Retail
Properties discussion)
. These reviews generate action plans
based on occupancy levels or sales volume associated with the
projects being reviewed. The results of these reviews indicate
that some additional stress is likely due to the continued weak
economic conditions. Property values are updated using
appraisals on a regular basis to ensure appropriate decisions
regarding the on-going 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.
We actively monitor the concentrations and performance metrics
of all CRE loan types, with a focus on higher risk classes.
Macro-level stress-test scenarios based on retail sales and
home-price depreciation trends for the classes are embedded in
our performance expectations, and
lease-up
and
absorption scenarios are assessed.
Each CRE loan is classified as either core or noncore. We
separated the CRE portfolio into these categories in order to
provide more clarity around our portfolio management strategies
and to provide additional clarity for us and our investors. We
believe segregating the noncore CRE from core CRE improves our
ability to understand the nature, performance prospects, and
problem resolution opportunities of these segments, thus
allowing us to continue to deal proactively with any emerging
credit issues.
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
with the borrower generating an acceptable return on capital or
demonstrates the prospect of becoming one. The core CRE
portfolio was $4.0 billion at December 31, 2010,
representing 61% of total CRE loans. The performance of the core
portfolio met our expectations based on the consistency of the
asset quality metrics within the portfolio. Based on our
extensive project level assessment process, including
forward-looking collateral valuations, we continue to believe
the credit quality of the core portfolio is stable.
A CRE loan is generally considered noncore based on the lack of
a substantive relationship outside of the loan product, with no
immediate prospects for meeting the core relationship criteria.
The noncore CRE
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portfolio declined from $3.7 billion at December 31,
2009, to $2.6 billion at December 31, 2010, and
represented 39% of total CRE loans. Of the loans in the noncore
portfolio at December 31, 2010, 49% were classified as
Pass, 95% had guarantors, 99% were secured, and 93% were located
within our geographic footprint. However, it is within the
noncore portfolio where most of the credit quality challenges
exist. For example, $0.3 billion, or 13%, of related
outstanding balances, are classified as NALs. SAD administered
$1.4 billion, or 54%, of total noncore CRE loans at
December 31, 2010. We expect to exit the majority of
noncore CRE relationships over time through normal repayments,
possible sales should economically attractive opportunities
arise, or the reclassification to a core CRE relationship if it
expands to meet the core criteria.
The table below provides a segregation of the CRE portfolio as
of December 31, 2010:
Table
17 — Core Commercial Real Estate Loans by Property
Type and Property Location
| At December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||
| Ohio | Michigan | Pennsylvania | Indiana | Kentucky | Florida | West Virginia | Other | Total Amount | % | |||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||||||||||||||||||
|
Core portfolio:
|
||||||||||||||||||||||||||||||||||||||||
|
Retail properties
|
$ | 458 | $ | 90 | $ | 72 | $ | 75 | $ | 8 | $ | 38 | $ | 30 | $ | 364 | $ | 1,135 | 17 | % | ||||||||||||||||||||
|
Office
|
347 | 151 | 83 | 22 | 12 | 1 | 39 | 53 | 708 | 11 | ||||||||||||||||||||||||||||||
|
Multi family
|
277 | 87 | 40 | 33 | 29 | — | 42 | 58 | 566 | 9 | ||||||||||||||||||||||||||||||
|
Industrial and warehouse
|
257 | 81 | 23 | 44 | 3 | 3 | 6 | 82 | 499 | 8 | ||||||||||||||||||||||||||||||
|
Other commercial real estate
|
715 | 138 | 35 | 45 | 8 | 21 | 54 | 118 | 1,134 | 17 | ||||||||||||||||||||||||||||||
|
Total core portfolio
|
2,054 | 547 | 253 | 219 | 60 | 63 | 171 | 675 | 4,042 | 61 | ||||||||||||||||||||||||||||||
|
Total noncore portfolio
|
1,424 | 412 | 168 | 226 | 36 | 110 | 64 | 169 | 2,609 | 39 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 3,478 | $ | 959 | $ | 421 | $ | 445 | $ | 96 | $ | 173 | $ | 235 | $ | 844 | $ | 6,651 | 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
18 — Commercial Real Estate — Core vs.
Noncore portfolios
| December 31, 2010 | ||||||||||||||||||||||||
|
Ending
|
Nonaccrual
|
|||||||||||||||||||||||
| Balance | Prior NCOs | ACL $ | ACL % | Credit Mark(1) | Loans | |||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||
|
Total core
|
$ | 4,042 | $ | 5 | $ | 160 | 3.96 | % | 4.08 | % | $ | 15.7 | ||||||||||||
|
Noncore — SAD(2)
|
1,400 | 379 | 329 | 23.50 | 39.80 | 307.2 | ||||||||||||||||||
|
Noncore — Other
|
1,209 | 5 | 105 | 8.68 | 9.06 | 40.8 | ||||||||||||||||||
|
Total noncore
|
2,609 | 384 | 434 | 16.63 | 27.33 | 348.0 | ||||||||||||||||||
|
Total commercial real estate
|
$ | 6,651 | $ | 389 | $ | 594 | 8.93 | % | 13.96 | % | $ | 363.7 | ||||||||||||
| December 31, 2009 | ||||||||||||||||||||||||
|
Ending
|
Nonaccrual
|
|||||||||||||||||||||||
| Balance | Prior NCOs | ACL $ | ACL % | Credit Mark(1) | Loans | |||||||||||||||||||
|
Total core
|
$ | 4,038 | $ | — | $ | 168 | 4.16 | % | 4.16 | % | $ | 3.8 | ||||||||||||
|
Noncore — SAD(2)
|
1,809 | 511 | 410 | 22.66 | 39.70 | 861.0 | ||||||||||||||||||
|
Noncore — Other
|
1,842 | 26 | 186 | 10.10 | 11.35 | 71.0 | ||||||||||||||||||
|
Total noncore
|
3,651 | 537 | 596 | 16.32 | 27.05 | 932.0 | ||||||||||||||||||
|
Total commercial real estate
|
$ | 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 SAD, the area responsible for managing loans and relationships designated as Classified loans. |
56
Table of Contents
As shown in the above table, the ending balance of the CRE
portfolio at December 31, 2010, declined $1.0 billion
compared with December 31, 2009. This decline was entirely
centered in the noncore segment of the portfolio and was a
result of payoffs and NCOs as we actively focus on the noncore
portfolio to reduce our overall CRE exposure. This reduction
occurred in a very difficult market, and demonstrates our
commitment to maintaining a
moderate-to-low
risk profile. We anticipate further noncore CRE declines in
future periods based on our overall strategy to reduce our
overall CRE exposure.
Also as shown above, substantial reserves for the noncore
portfolio have been established. At December 31, 2010, the
ACL related to the noncore portfolio was 16.63%. The combination
of the existing ACL and prior NCOs represents the total credit
actions taken on each segment of the portfolio. From this data,
we calculate a credit mark that provides a consistent
measurement of the cumulative credit actions taken against a
specific portfolio segment. We believe the combined credit
activity is appropriate for each of the CRE segments.
Within the CRE portfolio, the retail properties and single
family home builder classes continue to be stressed as a result
of the continued decline in the housing markets and general
economic conditions and are discussed below.
Retail
Properties
Our portfolio of CRE loans secured by retail properties totaled
$1.8 billion, or approximately 5% of total loans and
leases, at December 31, 2010. Loans within this portfolio
segment declined $0.4 billion, or 17%, from
$2.1 billion at December 31, 2009. Credit approval in
this portfolio segment is generally dependent on preleasing
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 continued to impact the projects that secure the loans
in this portfolio segment. Lower occupancy rates, reduced rental
rates, and the expectation these levels will remain stressed for
the foreseeable future may adversely affect some of our
borrowers’ ability to repay these loans. We have increased
the level of credit risk management activity on this portfolio
segment, and we analyze our retail property loans in detail by
combining property type, geographic location, and other data, to
assess and manage our credit concentration risks. We review the
majority of this portfolio segment on a monthly basis.
Single
Family Home Builders
At December 31, 2010, we had $0.6 billion of CRE loans
to single family home builders. Such loans represented 1% of
total loans and leases. The $0.6 billion represented a
$0.3 billion, or 35%, decrease compared with
$0.9 billion at December 31, 2009. The decrease
primarily reflected runoff activity as few new loans have been
originated since 2008, property sale activity, and NCOs. Based
on portfolio management processes over the past three years,
including NCO activity, we believe we have substantially
addressed the credit issues in this portfolio. We do not
anticipate any future significant credit impact from this
portfolio segment.
FRANKLIN
RELATIONSHIP
In 2010, we sold our portfolio of Franklin-related loans to
unrelated third parties. Also, we recorded $87.0 million of
Franklin-related NCOs, of which $75.5 million related to
the loan sales. The 2010 provision for credit losses included
$87.0 million related to Franklin, with $75.5 million
related to the loan sales. At December 31, 2010, the only
Franklin-related nonperforming assets remaining were
$9.5 million of OREO properties, which were marked to the
lower of cost or fair value less costs to sell.
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
57
Table of Contents
in a centralized environment utilizing decision models.
Importantly, certain individuals who understand each local
region have the authority to make credit extension decisions to
preserve our focus on the local communities we operate in. 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.
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 on-going 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 as needed 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 consumer loan portfolio, the
collection group is responsible for collection activity on all
sold and securitized consumer loans and leases.
AUTOMOBILE
LOANS AND LEASES PORTFOLIO
The performance of the automobile loan and lease portfolio
improved in 2010, despite the continued economic conditions that
have adversely affected the residential mortgage and home equity
portfolios
(discussed below).
Our strategy in the
automobile loan and lease portfolio continued to focus on high
quality borrowers as measured by both FICO and internal custom
scores, combined with appropriate LTV’s, terms, and a
reasonable level of profitability. This strategy resulted in a
significant improvement in performance metrics in 2010 compared
to 2009, and provides us with substantial confidence for future
performance of this portfolio.
In 2010, we continued to consistently execute our value
proposition and took advantage of market opportunities that
allowed us to grow our automobile loan portfolio. The
significant growth in the portfolio was accomplished while
maintaining high credit quality metrics. As we further execute
our strategies and take advantage of these opportunities, we are
developing alternative plans to address any growth in excess of
our established portfolio concentration limits, including both
securitizations and loan sales. The automobile sales market
expanded in 2010 and by entering into eastern Pennsylvania and
five New England states, we are positioned to take advantage of
a continued expansion in 2011.
Our strategy and operational capabilities allow us to
appropriately manage the origination quality across the entire
portfolio, including our newer markets. Although increased
origination volume and the entering new markets can be
associated with increased risk levels, we believe our strategy
and operational capabilities significantly mitigate these risks.
RESIDENTIAL-SECURED
PORTFOLIOS
The residential mortgage and home equity portfolios are
primarily located throughout our footprint. The continued
slowdown in the housing market negatively impacted the
performance of our residential mortgage and home equity
portfolios. While the degree of price depreciation varied across
our markets, all regions throughout our footprint were affected.
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Table
19 — Selected Home Equity and Residential Mortgage
Portfolio Data
| December 31, 2010 | ||||||||||||
| Home Equity | ||||||||||||
|
Secured
|
Secured
|
|||||||||||
|
by
|
by
|
Residential
|
||||||||||
| first-lien | second-lien | Mortgages(3) | ||||||||||
| (Dollar amounts in millions) | ||||||||||||
|
Ending balance
|
$ | 3,055 | $ | 4,658 | $ | 4,500 | ||||||
|
Portfolio weighted average LTV ratio(1)
|
70 | % | 80 | % | 77 | % | ||||||
|
Portfolio weighted average FICO score(2)
|
745 | 733 | 721 | |||||||||
| Year Ended December 31, 2010 | ||||||||||||
| Home Equity | ||||||||||||
|
Secured
|
Secured
|
|||||||||||
|
by
|
by
|
Residential
|
||||||||||
| first-lien | second-lien | Mortgages(3) | ||||||||||
|
Originations
|
$ | 1,310 | $ | 754 | $ | 1,607 | ||||||
|
Origination weighted average LTV ratio(1)
|
69 | % | 79 | % | 81 | % | ||||||
|
Origination weighted average FICO score(2)
|
767 | 756 | 759 | |||||||||
| (1) | The LTV ratios for home equity loans and home equity lines-of-credit are cumulative and reflect the balance of any senior loans. LTV ratios reflect collateral values at the time of loan origination. | |
| (2) | Portfolio weighted average FICO scores reflect currently updated customer credit scores whereas origination weighted average FICO scores reflect the customer credit scores at the time of loan origination. | |
| (3) | Represents only owned-portfolio originations. |
Home
Equity Portfolio
Our home equity portfolio (loans and
lines-of-credit)
consists of both first- and second- mortgage loans with
underwriting criteria based on minimum credit scores,
debt-to-income
ratios, and LTV ratios. We offer closed-end home equity loans
which are generally fixed-rate with principal and interest
payments, and variable-rate interest-only home equity
lines-of-credit
which do not require payment of principal during the
10-year
revolving period of the
line-of-credit.
At December 31, 2010, approximately 40% of our home equity
portfolio was secured by first-mortgage liens. The credit risk
profile is substantially reduced when we hold a first-mortgage
lien position. During 2010, more than 65% of our home equity
portfolio originations were secured by a first-mortgage lien. We
focus on high-quality borrowers primarily located within our
footprint. The majority of our home equity
line-of-credit
borrowers consistently pay more than the required interest-only
amount. Additionally, since we focus on developing complete
relationships with our customers, many of our home equity
borrowers are utilizing other products and services.
We believe we have underwritten 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 at origination greater than 100%, except for
infrequent situations with high-quality borrowers. However,
continued declines in housing prices have likely decreased the
value of the collateral for this portfolio and it is likely some
loans with an original LTV ratio of less than 100% currently
have an LTV ratio greater than 100%.
For certain home equity loans and
lines-of-credit,
we may utilize an automated valuation model (AVM) or other
model-driven value estimate during the credit underwriting
process. We utilize a series of credit parameters to determine
the appropriate valuation methodology. While we believe an AVM
estimate is an appropriate valuation source for a portion of our
home equity lending activities, we continue to re-evaluate all
of our policies on an on-going basis. 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
59
Table of Contents
transactions. We update values as we believe appropriate, and in
compliance with applicable regulations, for loans identified as
higher risk. Loans are identified as higher risk based on
performance indicators and the updated values are utilized to
facilitate our portfolio management, as well as our workout and
loss mitigation functions.
We continue to make origination policy adjustments based on our
assessment of an appropriate risk profile, as well as industry
actions. In addition to origination policy adjustments, we take
actions, as necessary, to manage the risk profile of this
portfolio.
Residential
Mortgages Portfolio
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 allow the borrower
multiple payment options.
All residential mortgage loans are originated based on a
completed 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 on a regular basis in compliance with applicable
regulations to facilitate our portfolio management, as well as
our workout and loss mitigation functions.
Also, it is important to note the recent issuance of new
regulatory guidelines regarding real estate valuations, the
intent of which is to ensure there is complete independence in
the requesting and review of real estate valuations associated
with loan decisions. We have been committed to appropriate
valuations for all of our real estate lending, and do not
anticipate significant impacts to our loan decision process as a
result of these new guidelines.
Several government actions were enacted that impacted the
residential mortgage portfolio, including various refinance
programs which 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.
Credit
Quality
We believe the most meaningful way to assess overall credit
quality performance for 2010 is through an analysis of credit
quality performance ratios. This approach forms the basis of
most of the discussion in the sections immediately following:
NPAs and NALs, TDRs, ACL, and NCOs. In addition, we utilize
delinquency rates, risk distribution and migration patterns, and
product segmentation in the analysis of our credit quality
performance.
Credit quality performance in 2010 improved significantly
compared with 2009. While NCOs remain elevated compared with
long-term expectations, 2010 continued to show improvement
across the portfolio, and delinquency trends improved as well.
OREO also declined significantly in 2010. We do not believe
there will be a meaningful improvement in property values in the
near term, and believe it prudent to dispose of the OREO
properties instead of incurring the on-going expenses associated
with maintaining the properties. As such, the decrease in the
OREO balances resulted from an active selling strategy, as well
as a lower level of inflows associated with residential
properties due to our active loss mitigation and short-sale
strategies.
The economic environment remained challenging. Yet, reflecting
the benefit of our focused credit actions of 2009 and 2010, we
experienced declines in total NPAs, new NPAs, and commercial
Criticized loans. Our ACL declined $240.2 million to
$1,291.1 million, or 3.39% of period-end loans and leases
from $1,531.4 million, or 4.16% at 2009. Importantly, our
ACL as a percent of period-end NALs increased to 166% from 80%,
and coverage ratios associated with NPAs and Criticized assets
also increased. These improved coverage ratios indicated a
strengthening of our reserve position relative to troubled
assets from the prior year end. These coverage ratios are a key
component of our internal adequacy assessment process and
provide an important consideration in the determination of the
adequacy of the ACL.
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Table of Contents
NPAs,
NALs, AND TDRs
(This
section should be read in conjunction with Significant
Item 3.)
NPAs
AND NALs
NPAs consist of (1) NALs, which represent loans and leases
no longer accruing interest, (2) impaired loans held for
sale, (3) OREO properties, and (4) 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
past due, and a charge-off recorded if it is determined that
insufficient equity exists in the collateral property to support
the entire outstanding loan amount. A home equity loan is placed
on nonaccrual status at
180-days
past due, and a charge-off recorded if it is determined there is
not sufficient equity in the collateral property to cover our
position. For loans secured by residential real estate, the
collateral equity position is determined by a current property
valuation based on an expected marketing time period consistent
with the market. 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. When, in our judgment, the borrower’s ability
to make required interest and principal payments has resumed and
collectability is no longer in doubt, the loan or lease is
returned to accrual status.
Table 20 reflects period-end NALs and NPAs detail for each of
the last five years. Table 21 details the Franklin-related
impacts to NALs and NPAs for each of the last five years. There
were no Franklin-related NALs or NPAs at December 31, 2006.
Table
20 — Nonaccrual Loans and Nonperforming Assets
| At December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
|
Commercial and industrial(1)
|
$ | 346,720 | $ | 578,414 | $ | 932,648 | $ | 87,679 | $ | 58,393 | ||||||||||
|
Commercial real estate
|
363,692 | 935,812 | 445,717 | 148,467 | 37,947 | |||||||||||||||
|
Total residential mortgages(1)
|
45,010 | 362,630 | 98,951 | 59,557 | 32,527 | |||||||||||||||
|
Home equity
|
22,526 | 40,122 | 24,831 | 24,068 | 15,266 | |||||||||||||||
|
Total nonaccrual loans and leases
|
777,948 | 1,916,978 | 1,502,147 | 319,771 | 144,133 | |||||||||||||||
|
Other real estate owned, net
|
||||||||||||||||||||
|
Residential
|
31,649 | 71,427 | 63,058 | 60,804 | 47,898 | |||||||||||||||
|
Commercial
|
35,155 | 68,717 | 59,440 | 14,467 | 1,589 | |||||||||||||||
|
Total other real estate, net
|
66,804 | 140,144 | 122,498 | 75,271 | 49,487 | |||||||||||||||
|
Impaired loans held for sale(2)
|
— | 969 | 12,001 | 73,481 | — | |||||||||||||||
|
Other nonperforming assets(3)
|
— | — | — | 4,379 | — | |||||||||||||||
|
Total nonperforming assets
|
$ | 844,752 | $ | 2,058,091 | $ | 1,636,646 | $ | 472,902 | $ | 193,620 | ||||||||||
|
Nonaccrual loans as a % of total loans and leases
|
2.04 | % | 5.21 | % | 3.66 | % | 0.80 | % | 0.55 | % | ||||||||||
|
Nonperforming assets ratio(4)
|
2.21 | 5.57 | 3.97 | 1.18 | 0.74 | |||||||||||||||
|
Nonperforming Franklin assets(1)
|
||||||||||||||||||||
|
Commercial
|
$ | — | $ | — | $ | 650,225 | $ | — | $ | — | ||||||||||
|
Residential mortgage
|
— | 299,670 | — | — | — | |||||||||||||||
|
Other real estate owned
|
9,477 | 23,826 | — | — | — | |||||||||||||||
|
Home equity
|
— | 15,004 | — | — | — | |||||||||||||||
|
Total Nonperforming Franklin assets
|
$ | 9,477 | $ | 338,500 | $ | 650,225 | $ | — | $ | — | ||||||||||
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Table of Contents
| (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 other real estate owned. | |
| (2) | 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. | |
| (3) | Other nonperforming assets represent certain investment securities backed by mortgage loans to borrowers with lower FICO scores. | |
| (4) | Nonperforming assets divided by the sum of loans and leases, impaired loans held for sale, net other real estate owned, and other nonperforming assets. |
Table
21 — Nonaccrual Loans and Nonperforming
Assets — Franklin-Related Impact
| December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||
|
Nonaccrual loans
|
||||||||||||||||||||
|
Franklin
|
$ | — | $ | 314.7 | $ | 650.2 | $ | — | $ | — | ||||||||||
|
Non-Franklin
|
777.9 | 1,602.3 | 851.9 | 319.8 | 144.1 | |||||||||||||||
|
Total
|
$ | 777.9 | $ | 1,917.0 | $ | 1,502.1 | $ | 319.8 | $ | 144.1 | ||||||||||
|
Total loans and leases
|
||||||||||||||||||||
|
Franklin
|
$ | — | $ | 443.9 | $ | 650.2 | $ | 1,187.0 | $ | — | ||||||||||
|
Non-Franklin
|
38,106.5 | 36,346.8 | 40,441.8 | 38,867.3 | 26,153.4 | |||||||||||||||
|
Total
|
$ | 38,106.5 | $ | 36,790.7 | $ | 41,092.0 | $ | 40,054.3 | $ | 26,153.4 | ||||||||||
|
Nonaccrual loan ratio
|
||||||||||||||||||||
|
Total
|
2.04 | % | 5.21 | % | 3.66 | % | 0.80 | % | 0.55 | % | ||||||||||
|
Non-Franklin
|
2.04 | 4.41 | 2.11 | 0.82 | 0.55 | |||||||||||||||
| December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||
|
Nonperforming assets
|
||||||||||||||||||||
|
Franklin
|
$ | 9.5 | $ | 338.5 | $ | 650.2 | $ | — | $ | — | ||||||||||
|
Non-Franklin
|
835.3 | 1,719.6 | 986.4 | 472.9 | 193.6 | |||||||||||||||
|
Total
|
$ | 844.8 | $ | 2,058.1 | $ | 1,636.6 | $ | 472.9 | $ | 193.6 | ||||||||||
|
Total loans and leases
|
$ | 38,106.5 | $ | 36,790.7 | $ | 41,092.0 | $ | 40,054.3 | $ | 26,153.4 | ||||||||||
|
Total other real estate owned, net
|
66.8 | 140.1 | 122.5 | 75.3 | 49.5 | |||||||||||||||
|
Impaired loans held for sale
|
— | 1.0 | 12.0 | 73.5 | — | |||||||||||||||
|
Other nonperforming assets
|
— | — | — | 4.4 | — | |||||||||||||||
|
Total
|
38,173.3 | 36,931.8 | 41,226.5 | 40,207.5 | 26,202.9 | |||||||||||||||
|
Franklin
|
9.5 | 338.5 | 650.2 | 1,187.0 | — | |||||||||||||||
|
Non-Franklin
|
$ | 38,163.8 | $ | 36,593.3 | $ | 40,576.3 | $ | 39,020.5 | $ | 26,202.9 | ||||||||||
|
Nonperforming assets ratio
|
||||||||||||||||||||
|
Total
|
2.21 | % | 5.57 | % | 3.97 | % | 1.18 | % | 0.74 | % | ||||||||||
|
Non-Franklin
|
2.19 | 4.72 | 2.43 | 1.21 | 0.74 | |||||||||||||||
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Table of Contents
NALs were $777.9 million at December 31, 2010,
compared with $1,917.0 million at December 31, 2009.
The decrease of $1,139.0 million primarily reflected:
| • | $572.1 million decrease in CRE NALs, primarily reflecting both NCO activity and problem loan resolutions including borrower payments and pay-offs. Payments and pay-offs received were substantial and are a direct result of our commitment to the on-going proactive management of these problem loans by our SAD. Also, inflow levels were significantly lower in 2010 compared to 2009. The level of inflows, or migration, is an important indicator of the future trend for this portfolio. | |
| • | $317.6 million decrease in residential mortgage NALs, primarily reflecting the Franklin-related loan sales in 2010. | |
| • | $231.7 million decrease in C&I NALs, primarily reflecting both NCO activity and problem loan resolutions, including pay-offs. The decline was associated with loans throughout our footprint, with no specific geographic or industry concentration. | |
| • | $17.6 million decrease in home equity NALs, primarily reflecting the Franklin-related loans sales in 2010. |
Also, of the $710.4 million of CRE and C&I-related
NALs at December 31, 2010, $183.4 million, or 26%,
represented loans that were less than 30 days past due,
demonstrating our commitment to proactive credit risk management.
NPAs, which include NALs, were $844.8 million at
December 31, 2010, and represented 2.21% of related assets.
This compared with $2,058.1 million, or 5.57%, at
December 31, 2009. The $1,213.3 million decrease
reflected:
| • | $1,139.0 million decrease to NALs, discussed above. | |
| • | $73.3 million decrease to OREO. This reflected a focused effort to reduce our level of OREO properties through active selling strategies during the year, as well as lower levels of new OREO properties resulting from an increase in loss mitigation activity and short sales prior to foreclosure. We do not believe there will be a meaningful improvement in property values in the near term, and believe it prudent to dispose of the property instead of incurring the on-going expenses associated with maintaining the property. |
NPA activity for each of the past five years was as follows:
Table
22 — Nonperforming Asset Activity
| At December 31, | ||||||||||||||||||||
|
(Dollar amounts in thousands)
|
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Nonperforming assets, beginning of year
|
$ | 2,058,091 | $ | 1,636,646 | $ | 472,902 | $ | 193,620 | $ | 117,155 | ||||||||||
|
New nonperforming assets
|
925,699 | 2,767,295 | 1,082,063 | 468,056 | 222,043 | |||||||||||||||
|
Franklin-related impact, net(1)
|
(329,023 | ) | (311,726 | ) | 650,225 | — | — | |||||||||||||
|
Acquired nonperforming assets
|
— | — | — | 144,492 | 33,843 | |||||||||||||||
|
Returns to accruing status
|
(370,798 | ) | (215,336 | ) | (42,161 | ) | (24,952 | ) | (43,999 | ) | ||||||||||
|
Loan and lease losses
|
(639,766 | ) | (1,148,135 | ) | (202,249 | ) | (120,959 | ) | (45,648 | ) | ||||||||||
|
Other real estate owned losses
|
(7,936 | ) | (62,665 | ) | (19,582 | ) | (5,795 | ) | (543 | ) | ||||||||||
|
Payments
|
(650,429 | ) | (497,076 | ) | (194,692 | ) | (86,093 | ) | (59,469 | ) | ||||||||||
|
Sales
|
(141,086 | ) | (110,912 | ) | (109,860 | ) | (95,467 | ) | (29,762 | ) | ||||||||||
|
Nonperforming assets, end of year
|
$ | 844,752 | $ | 2,058,091 | $ | 1,636,646 | $ | 472,902 | $ | 193,620 | ||||||||||
| (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 |
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Table of Contents
| 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 other real estate owned. The 2009 impact primarily reflects loan and lease losses, as well as payments. |
TDR
Loans
TDRs are modified loans in which a concession is provided to a
borrower experiencing financial difficulties. Loan modifications
are considered TDRs when the concession provided is not
available to the borrower through either normal channels or
other sources. However, not all loan modifications are TDRs. Our
standards relating to loan modifications consider, among other
factors, minimum verified income requirements, cash flow
analysis, and collateral valuations. However, each potential
loan modification is reviewed individually and the terms of the
loan are modified to meet a borrower’s specific
circumstances at a point in time. All loan modifications,
including those classified as TDRs, are reviewed and approved.
Our ALLL is largely driven by updated risk ratings to commercial
loans, updated borrower credit scores on consumer loans, and
borrower delinquency history in both the commercial and consumer
loan portfolios. As such, the provision for credit losses is
impacted primarily by changes in borrower payment performance
rather than the TDR classification.
TDRs can be classified as either accrual or nonaccrual loans.
Nonaccrual TDRs are included in NALs whereas accruing TDRs are
excluded because the borrower remains contractually current. The
table below provides a summary of our TDRs (both accrual and
nonaccrual) by loan type at December 31, 2010 and 2009:
Table
23 — Accruing and Nonaccruing Troubled Debt
Restructured Loans
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Restructured loans and leases — accruing:
|
||||||||
|
Mortgage loans
|
$ | 328,411 | $ | 229,470 | ||||
|
Other consumer loans
|
76,586 | 52,871 | ||||||
|
Commercial loans
|
222,632 | 157,049 | ||||||
|
Total restructured loans and leases — accruing
|
627,629 | 439,390 | ||||||
|
Restructured loans and leases — nonaccruing:
|
||||||||
|
Mortgage loans
|
5,789 | 4,988 | ||||||
|
Other consumer loans
|
— | — | ||||||
|
Commercial loans
|
33,462 | 108,458 | ||||||
|
Total restructured loans and leases — nonaccruing
|
39,251 | 113,446 | ||||||
|
Total restructured loans and leases
|
$ | 666,880 | $ | 552,836 | ||||
In the workout of a problem loan, there are many factors
considered when determining the most favorable resolution. For
consumer loans, we evaluate the ability and willingness of the
borrower to make contractual or reduced payments, the value of
the underlying collateral, and the costs associated with the
foreclosure or repossession, and remarketing of the collateral.
For commercial loans, we consider similar criteria and also
evaluate the borrower’s business prospects.
Residential Mortgage loan TDRs
—
Residential mortgage TDRs represent loan modifications
associated with traditional first-lien mortgage loans in which a
concession has been provided to the borrower. Residential
mortgages identified as TDRs involve borrowers who are unable to
refinance their mortgages through our normal mortgage
origination channels or through other independent sources. Some,
but not all, of the loans may be delinquent. Modifications can
include adjustments to rates
and/or
principal. Modified loans identified as TDRs are aggregated into
pools for analysis. Cash flows and weighted average interest
rates are used to calculate impairment at the pooled-loan level.
Once the loans are aggregated into the pool, they continue to be
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Table of Contents
classified as TDRs until contractually repaid or charged-off. No
consideration is given to removing individual loans from the
pools.
Residential mortgage loans not guaranteed by a
U.S. government agency such as the FHA, VA, and the USDA,
including restructured loans, are reported as accrual or
nonaccrual based upon delinquency status. NALs are those that
are greater than 180 days contractually past due. Loans
guaranteed by U.S. government organizations continue to
accrue interest upon delinquency.
Residential mortgage loan TDR classifications resulted in an
impairment adjustment of $6.6 million in 2010. Prior to the
TDR classification, residential mortgage loans individually had
minimal ALLL associated with them because the ALLL is calculated
on a total portfolio pooled basis.
Other Consumer loan TDRs
— Generally,
these are TDRs associated with home equity borrowings and
automobile loans. We make similar interest rate, term, and
principal concessions as with residential mortgage loan TDRs.
The TDR classification for these other consumer loans resulted
in an impairment adjustment of $1.3 million in 2010.
Commercial loan TDRs
— Commercial
accruing TDRs represent loans in which a loan rated as
Classified is current on contractual principal and interest but
undergoes a loan modification. Accruing TDRs often result from
loans rated as Classified receiving an extension on the maturity
of their loan, for example, to allow additional time for the
sale or lease of underlying CRE collateral. Often, it is prudent
to extend the maturity rather than foreclose on a commercial
loan, particularly for borrowers who are generating cash flows
to support contractual interest payments. These borrowers cannot
obtain the modified loan through other independent sources
because of their current financial circumstances, therefore a
concession is provided and the modification is classified as a
TDR. The TDR remains in accruing status as long as the customer
is current on payments and no loss is probable.
Commercial nonaccrual TDRs result from either workouts where an
existing commercial NAL is restructured into multiple new loans,
or from an accruing commercial TDR being placed on nonaccrual
status. At December 31, 2010, approximately
$19.9 million of our commercial nonaccrual TDRs resulted
from such workouts. The remaining $12.0 million represented
the reclassifications of accruing TDRs to NALs.
For certain loan workouts, we create two or more new notes. The
senior note is underwritten based upon our normal underwriting
standards at current market rates and is sized so projected cash
flows are sufficient to repay contractual principal and
interest. The terms on the subordinate note(s) vary by
situation, but often defer interest payments until after the
senior note is repaid. Creating two or more notes often allows
the borrower to continue a project or weather a temporary
economic downturn and allows us to right-size a loan based upon
the current expectations for a project performance. The senior
note is considered for return to accrual status if the borrower
has sustained sufficient cash flows for a six-month period of
time and we believe no loss is probable. This six-month period
could extend before or after the restructure date. Subordinated
notes created in the workout are charged-off immediately. Any
interest or principal payments received on the subordinated
notes are applied to the principal of the senior note first
until the senior note is repaid. Further payments are recorded
as recoveries on the subordinated note.
As the loans are already considered Classified, an adequate ALLL
has been recorded when appropriate. Consequently, a TDR
classification on commercial loans does not usually result in
significant additional reserves. We consider removing the TDR
status on commercial loans if the loan is at a market rate of
interest and after the loan has performed in accordance with the
restructured terms for a sustained period of time, generally one
year.
65
Table of Contents
The following table reflects period-end accruing TDRs and past
due loans and leases detail for each of the last five years:
Table
24 — Accruing Past Due Loans and Leases and Accruing
Troubled Debt Restructured Loans
| At December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
|
Accruing loans and leases past due 90 days or more
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | — | $ | — | $ | 10,889 | $ | 10,474 | $ | 170 | ||||||||||
|
Commercial real estate
|
— | — | 59,425 | 25,064 | 1,711 | |||||||||||||||
|
Residential mortgage (excluding loans guaranteed by the U.S.
government)
|
53,983 | 78,915 | 71,553 | 67,391 | 35,555 | |||||||||||||||
|
Home equity
|
23,497 | 53,343 | 29,039 | 24,086 | 13,423 | |||||||||||||||
|
Other loans and leases
|
10,177 | 13,400 | 18,039 | 13,962 | 6,650 | |||||||||||||||
|
Total, excl. loans guaranteed by the U.S. government
|
87,657 | 145,658 | 188,945 | 140,977 | 57,509 | |||||||||||||||
|
Add: loans guaranteed by the U.S. government
|
98,288 | 101,616 | 82,576 | 51,174 | 31,308 | |||||||||||||||
|
Total accruing loans and leases past due 90 days or
more, including loans guaranteed by the U.S. government
|
$ | 185,945 | $ | 247,274 | $ | 271,521 | $ | 192,151 | $ | 88,817 | ||||||||||
|
Ratios:(1)
|
||||||||||||||||||||
|
Excluding loans guaranteed by the U.S. government, as a percent
of total loans and leases
|
0.23 | % | 0.40 | % | 0.46 | % | 0.35 | % | 0.22 | % | ||||||||||
|
Guaranteed by the U.S. government, as a percent of total loans
and leases
|
0.26 | 0.28 | 0.20 | 0.13 | 0.12 | |||||||||||||||
|
Including loans guaranteed by the U.S. government, as a percent
of total loans and leases
|
0.49 | 0.68 | 0.66 | 0.48 | 0.34 | |||||||||||||||
|
Accruing troubled debt restructured loans
|
||||||||||||||||||||
|
Commercial(2)
|
$ | 222,632 | $ | 157,049 | $ | 185,333 | $ | 1,187,368 | $ | — | ||||||||||
|
Total residential mortgages
|
328,411 | 229,470 | 84,993 | 32,005 | 7,496 | |||||||||||||||
|
Other
|
76,586 | 52,871 | 41,094 | — | — | |||||||||||||||
|
Total accruing troubled debt restructured loans
|
$ | 627,629 | $ | 439,390 | $ | 311,420 | $ | 1,219,373 | $ | 7,496 | ||||||||||
| (1) | Percent of related loans and leases. | |
| (2) | 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 other real estate owned. |
The over
90-day
delinquency ratio for total loans not guaranteed by a
U.S. government agency was 0.23% at December 31, 2010,
representing a 17 basis point decline compared with
December 31, 2009. This decrease primarily reflected
continued improvement in our core performance, as well as the
impact of the sale of certain underperforming loans in 2010.
The increase in accruing TDRs primarily reflects our loss
mitigation efforts to proactively work with borrowers having
difficulty making their payments.
66
Table of Contents
ACL
| (This section should be read in conjunction with Significant Item 3, and Notes 1 and 6 of the Notes to the Consolidated Financial Statements.) |
We maintain two reserves, both of which in our judgment are
adequate to absorb credit losses inherent in our loan and lease
portfolio: the ALLL and the AULC. Combined, these reserves
comprise the total ACL. Our credit administration group is
responsible for developing the methodology assumptions and
estimates used in the calculation, as well as determining the
adequacy of the ACL. The ALLL represents the estimate of
probable losses inherent in the loan portfolio at the reported
date. Additions to the ALLL result from recording provision
expense for loan losses or increased risk levels resulting from
loan risk-rating downgrades, while reductions reflect
charge-offs, recoveries, decreased risk levels resulting from
loan risk-rating upgrades, or the sale of loans. The AULC is
determined by applying the transaction reserve process to the
unfunded portion of the loan exposures adjusted by an applicable
funding expectation.
A provision for credit losses is recorded to adjust the ACL to
the level we have determined to be adequate to absorb credit
losses inherent in our loan and lease portfolio. The provision
for credit losses in 2010 was $634.5 million, compared with
$2,074.7 million in 2009, primarily reflecting
significantly lower NCOs in 2010 compared with 2009, and
improved credit quality metrics. While credit quality metrics
have significantly improved during 2010, provision expense since
2007 has been higher than historical levels, reflecting the
pronounced downturn in the U.S. economy, as well as
significant deterioration in the residential real estate market
that began in early 2007. Declining real estate valuations and
higher levels of delinquencies and NCOs have negatively affected
the quality of our loans secured by real estate. Portions of the
residential portfolio, as well as the single family home builder
and developer loans in the commercial portfolio, experienced the
majority of the credit issues related to the residential real
estate market.
We regularly assess the adequacy of the ACL by performing
on-going evaluations of the loan and lease portfolio, including
such factors as the differing economic risks associated with
each loan category, the financial condition of specific
borrowers, the level of delinquent loans, the value of any
collateral and, where applicable, the existence of any
guarantees or other documented support. We evaluate the impact
of changes in interest rates and overall economic conditions on
the ability of borrowers to meet their financial obligations
when quantifying our exposure to credit losses and assessing the
adequacy of our ACL at each reporting date. In addition to
general economic conditions and the other factors described
above, we also consider the impact of declining residential real
estate values and the diversification of CRE loans, particularly
loans secured by retail properties.
Our ACL assessment process includes the on-going assessment of
credit quality metrics, and a comparison of certain ACL adequacy
benchmarks to current performance. While the total ACL balance
declined in 2010 compared with 2009, all of the relevant
benchmarks improved as a result of the asset quality
improvement. The coverage ratios of NALs, Criticized and
Classified loans all showed significant improvement in 2010
despite the decline in the ACL level.
Table 25 reflects activity in the ALLL and ACL for each of the
last five years. Table 26 displays the Franklin-related impacts
to the ALLL and ACL for each of the last five years. There were
not any Franklin-related impacts to either the ALLL or ACL at
December 31, 2010 or 2006.
67
Table of Contents
Table
25 — Summary of Allowance for Credit Losses and
Related Statistics
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
|
Allowance for loan and lease losses, beginning of year
|
$ | 1,482,479 | $ | 900,227 | $ | 578,442 | $ | 272,068 | $ | 268,347 | ||||||||||
|
Acquired allowance for loan and lease losses
|
— | — | — | 188,128 | 23,785 | |||||||||||||||
|
Loan and lease charge-offs
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Commercial and industrial
|
(316,771 | ) | (525,262 | ) | (538,434 | ) | (359,457 | ) | (33,244 | ) | ||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Construction
|
(116,428 | ) | (196,148 | ) | (6,631 | ) | (11,902 | ) | (4,156 | ) | ||||||||||
|
Commercial
|
(187,567 | ) | (500,534 | ) | (65,565 | ) | (29,152 | ) | (4,393 | ) | ||||||||||
|
Commercial real estate
|
(303,995 | ) | (696,682 | ) | (72,196 | ) | (41,054 | ) | (8,549 | ) | ||||||||||
|
Total commercial
|
(620,766 | ) | (1,221,944 | ) | (610,630 | ) | (400,511 | ) | (41,793 | ) | ||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Automobile loans and leases
|
(46,308 | ) | (76,141 | ) | (72,108 | ) | (41,241 | ) | (33,789 | ) | ||||||||||
|
Home equity
|
(140,831 | ) | (110,400 | ) | (70,457 | ) | (37,221 | ) | (24,950 | ) | ||||||||||
|
Residential mortgage
|
(163,427 | ) | (111,899 | ) | (23,012 | ) | (12,196 | ) | (4,767 | ) | ||||||||||
|
Other loans
|
(32,575 | ) | (40,993 | ) | (30,123 | ) | (26,773 | ) | (14,393 | ) | ||||||||||
|
Total consumer
|
(383,141 | ) | (339,433 | ) | (195,700 | ) | (117,431 | ) | (77,899 | ) | ||||||||||
|
Total charge-offs
|
(1,003,907 | ) | (1,561,378 | ) | (806,330 | ) | (517,942 | ) | (119,692 | ) | ||||||||||
|
Recoveries of loan and lease charge-offs
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Commercial and industrial
|
61,839 | 37,656 | 12,269 | 13,617 | 12,376 | |||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Construction
|
7,420 | 3,442 | 5 | 48 | 602 | |||||||||||||||
|
Commercial
|
21,013 | 10,509 | 3,451 | 1,902 | 1,163 | |||||||||||||||
|
Total commercial real estate
|
28,433 | 13,951 | 3,456 | 1,950 | 1,765 | |||||||||||||||
|
Total commercial
|
90,272 | 51,607 | 15,725 | 15,567 | 14,141 | |||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Automobile loans and leases
|
19,736 | 19,809 | 17,543 | 13,549 | 15,014 | |||||||||||||||
|
Home equity
|
1,458 | 4,224 | 2,901 | 2,795 | 3,096 | |||||||||||||||
|
Residential mortgage
|
10,532 | 1,697 | 1,765 | 825 | 262 | |||||||||||||||
|
Other loans
|
7,435 | 7,454 | 10,329 | 7,575 | 4,803 | |||||||||||||||
|
Total consumer
|
39,161 | 33,184 | 32,538 | 24,744 | 23,175 | |||||||||||||||
|
Total recoveries
|
129,433 | 84,791 | 48,263 | 40,311 | 37,316 | |||||||||||||||
|
Net loan and lease charge-offs
|
(874,474 | ) | (1,476,587 | ) | (758,067 | ) | (477,631 | ) | (82,376 | ) | ||||||||||
|
Provision for loan and lease losses
|
641,299 | 2,069,931 | 1,067,789 | 628,802 | 62,312 | |||||||||||||||
|
Economic reserve transfer
|
— | — | 12,063 | — | — | |||||||||||||||
|
Allowance for assets sold and securitized
|
(296 | ) | (9,188 | ) | — | — | — | |||||||||||||
|
Allowance for loans transferred to held for sale
|
— | (1,904 | ) | — | (32,925 | ) | — | |||||||||||||
|
Allowance for loan and lease losses, end of year
|
1,249,008 | 1,482,479 | 900,227 | 578,442 | 272,068 | |||||||||||||||
|
Allowance for unfunded loan commitments, beginning of year
|
48,879 | 44,139 | 66,528 | 40,161 | 36,957 | |||||||||||||||
|
Acquired allowance for unfunded loan commitments
|
— | — | — | 11,541 | 325 | |||||||||||||||
|
(Reduction in) Provision for unfunded loan commitments and
letters of credit losses
|
(6,752 | ) | 4,740 | (10,326 | ) | 14,826 | 2,879 | |||||||||||||
|
Economic reserve transfer
|
— | — | (12,063 | ) | — | — | ||||||||||||||
|
Allowance for unfunded loan commitments, end of year
|
42,127 | 48,879 | 44,139 | 66,528 | 40,161 | |||||||||||||||
|
Allowance for credit losses, end of year
|
$ | 1,291,135 | $ | 1,531,358 | $ | 944,366 | $ | 644,970 | $ | 312,229 | ||||||||||
|
ALLL as a % of total period end loans and leases
|
3.28 | % | 4.03 | % | 2.19 | % | 1.44 | % | 1.04 | % | ||||||||||
|
AULC as a % of total period end loans and leases
|
0.11 | 0.13 | 0.11 | 0.17 | 0.15 | |||||||||||||||
|
ACL as a % of total period end loans and leases
|
3.39 | % | 4.16 | % | 2.30 | % | 1.61 | % | 1.19 | % | ||||||||||
68
Table of Contents
Table
26 — Allowance for Loan and Lease Losses and Allowance
for Credit Losses — Franklin-Related Impact
| December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||
|
Allowance for loan and lease losses
|
||||||||||||||||||||
|
Franklin
|
$ | — | $ | — | $ | 130.0 | $ | 115.3 | $ | — | ||||||||||
|
Non-Franklin
|
1,249.0 | 1,482.5 | 770.2 | 463.1 | 272.1 | |||||||||||||||
|
Total
|
$ | 1,249.0 | $ | 1,482.5 | $ | 900.2 | $ | 578.4 | $ | 272.1 | ||||||||||
|
Allowance for credit losses
|
||||||||||||||||||||
|
Franklin
|
$ | — | $ | — | $ | 130.0 | $ | 115.3 | $ | — | ||||||||||
|
Non-Franklin
|
1,291.1 | 1,531.4 | 814.4 | 529.7 | 312.2 | |||||||||||||||
|
Total
|
$ | 1,291.1 | $ | 1,531.4 | $ | 944.4 | $ | 645.0 | $ | 312.2 | ||||||||||
|
Total loans and leases
|
||||||||||||||||||||
|
Franklin
|
$ | — | $ | 443.9 | $ | 650.2 | $ | 1,187.0 | $ | — | ||||||||||
|
Non-Franklin
|
38,106.5 | 36,346.8 | 40,441.8 | 38,868.0 | 26,153.4 | |||||||||||||||
|
Total
|
$ | 38,106.5 | $ | 36,790.7 | $ | 41,092.0 | $ | 40,055.0 | $ | 26,153.4 | ||||||||||
|
ALLL as % of total loans and leases
|
||||||||||||||||||||
|
Total
|
3.28 | % | 4.03 | % | 2.19 | % | 1.44 | % | 1.04 | % | ||||||||||
|
Non-Franklin
|
3.28 | 4.08 | 1.90 | 1.19 | 1.04 | |||||||||||||||
|
ACL as % of total loans and leases
|
||||||||||||||||||||
|
Total
|
3.39 | % | 4.16 | % | 2.30 | % | 1.61 | % | 1.19 | % | ||||||||||
|
Non-Franklin
|
3.39 | 4.21 | 2.01 | 1.36 | 1.19 | |||||||||||||||
|
Nonaccrual loans
|
||||||||||||||||||||
|
Franklin
|
$ | — | $ | 314.7 | $ | 650.2 | $ | — | $ | — | ||||||||||
|
Non-Franklin
|
777.9 | 1,602.3 | 851.9 | 319.8 | 144.1 | |||||||||||||||
|
Total
|
$ | 777.9 | $ | 1,917.0 | $ | 1,502.1 | $ | 319.8 | $ | 144.1 | ||||||||||
|
ALLL as % of NALs
|
||||||||||||||||||||
|
Total
|
161 | % | 77 | % | 60 | % | 181 | % | 189 | % | ||||||||||
|
Non-Franklin
|
161 | 93 | 90 | 145 | 189 | |||||||||||||||
|
ACL as % of NALs
|
||||||||||||||||||||
|
Total
|
166 | % | 80 | % | 63 | % | 202 | % | 217 | % | ||||||||||
|
Non-Franklin
|
166 | 96 | 96 | 166 | 217 | |||||||||||||||
The reduction in the ACL, compared with December 31, 2009,
reflected a decline in the commercial portfolio ALLL as a result
of NCOs on loans with specific reserves, and an overall
reduction in the level of commercial Criticized loans.
Commercial Criticized loans are commercial loans rated as OLEM,
Substandard, Doubtful, or Loss
(refer to the Commercial
Credit section for additional information regarding loan risk
ratings).
As shown in the table below, commercial Criticized
loans declined $1.9 billion, or 38%, from December 31,
2009, reflecting upgrade and payment activity.
69
Table of Contents
Table
27 — Criticized Commercial Loan Activity
| At December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
|
Criticized commercial loans, beginning of period
|
$ | 4,971,637 | $ | 3,311,280 | $ | 2,736,166 | $ | 662,425 | $ | 646,925 | ||||||||||
|
New additions/increases
|
1,284,216 | 4,707,518 | 1,688,022 | 2,670,616 | 573,246 | |||||||||||||||
|
Advances
|
298,511 | 390,872 | 292,295 | 282,614 | 177,314 | |||||||||||||||
|
Upgrades to Pass
|
(1,456,132 | ) | (522,150 | ) | (378,027 | ) | (271,394 | ) | (279,413 | ) | ||||||||||
|
Payments
|
(1,465,374 | ) | (1,843,535 | ) | (858,996 | ) | (531,255 | ) | (456,110 | ) | ||||||||||
|
Loan losses
|
(558,377 | ) | (1,072,348 | ) | (168,180 | ) | (76,840 | ) | 463 | |||||||||||
|
Criticized commercial loans, end of period
|
$ | 3,074,481 | $ | 4,971,637 | $ | 3,311,280 | $ | 2,736,166 | $ | 662,425 | ||||||||||
Compared with December 31, 2009, the AULC declined
$6.8 million as a result of a substantive reduction in the
level of unfunded loan commitments in the commercial portfolio.
A concerted effort was made to reduce potential exposure
associated with unfunded lines and to generate an appropriate
level of return on those that remain in place. In addition,
borrowers continued to reassess their borrowing needs and
reduced their desired funding capacity.
The ACL coverage ratio associated with NALs was 166% at
December 31, 2010, representing a significant improvement
compared with 80% at December 31, 2009. This improvement
reflected substantial reductions in C&I and CRE NALs.
Although credit quality asset metrics and trends, including
those mentioned above, improved during 2010, the economic
environment in our markets remained weak and uncertain as
reflected by continued stressed residential values, continued
weakness in industrial employment in northern Ohio and southeast
Michigan, and the significant subjectivity involved in
commercial real estate valuations for properties located in
areas with limited sale or refinance activities. Residential
real estate values continued to be negatively impacted by high
unemployment, increased foreclosure activity, and the
elimination of home-buyer tax credits. In the near-term, we
believe these factors will result in continued stress in our
portfolios secured by residential real estate and an elevated
level of NCOs compared to historic levels. During 2010, the
inflows of both new commercial Criticized loans and new NPAs
declined significantly compared with 2009 levels, however both
have shown volatility during 2010. In the 2010 third quarter,
inflows of both new commercial Criticized loans and NPAs
increased compared to the prior quarter. Although both of these
levels declined in the 2010 fourth quarter from the 2010 third
quarter, we believe this volatility evidences a fragile economic
environment. Further, concerns continue to exist regarding the
economic conditions in both national and international markets,
the state of financial and credit markets, the unemployment
rate, the impact of the Federal Reserve monetary policy, and
continued uncertainty regarding federal, state, and local
government budget deficits. We do not anticipate any meaningful
change in the overall economy in the near-term. All of these
factors are impacting consumer confidence, as well as business
investments and acquisitions. Given the combination of these
factors, we believe that our ACL coverage levels are appropriate.
70
Table of Contents
The table below reflects the allocation of our ACL among our
various loan categories during each of the past five years:
Table
28 — Allocation of Allowances for Credit Losses
(1)
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial and industrial
|
$ | 340,614 | 34 | % | $ | 492,205 | 35 | % | $ | 412,201 | 33 | % | $ | 295,555 | 33 | % | $ | 117,481 | 30 | % | ||||||||||||||||||||
|
Commercial real estate
|
588,251 | 18 | 751,875 | 21 | 322,681 | 25 | 172,998 | 23 | 72,272 | 17 | ||||||||||||||||||||||||||||||
|
Total commercial
|
928,865 | 52 | 1,244,080 | 56 | 734,882 | 58 | 468,553 | 56 | 189,753 | 47 | ||||||||||||||||||||||||||||||
|
Consumer
|
||||||||||||||||||||||||||||||||||||||||
|
Automobile loans and leases
|
49,488 | 15 | 57,951 | 9 | 44,712 | 11 | 28,635 | 11 | 28,400 | 15 | ||||||||||||||||||||||||||||||
|
Home equity
|
150,630 | 20 | 102,039 | 21 | 63,538 | 18 | 45,957 | 18 | 32,572 | 19 | ||||||||||||||||||||||||||||||
|
Residential mortgage
|
93,289 | 12 | 55,903 | 12 | 44,463 | 12 | 20,746 | 14 | 13,349 | 17 | ||||||||||||||||||||||||||||||
|
Other loans
|
26,736 | 1 | 22,506 | 2 | 12,632 | 1 | 14,551 | 1 | 7,994 | 2 | ||||||||||||||||||||||||||||||
|
Total consumer
|
320,143 | 48 | 238,399 | 44 | 165,345 | 42 | 109,889 | 44 | 82,315 | 53 | ||||||||||||||||||||||||||||||
|
Total allowance for loan and lease losses
|
1,249,008 | 100 | % | 1,482,479 | 100 | % | 900,227 | 100 | % | 578,442 | 100 | % | 272,068 | 100 | % | |||||||||||||||||||||||||
|
Allowance for unfunded loan commitments
|
42,127 | 48,879 | 44,139 | 66,528 | 40,161 | |||||||||||||||||||||||||||||||||||
|
Total allowance for credit losses
|
$ | 1,291,135 | $ | 1,531,358 | $ | 944,366 | $ | 644,970 | $ | 312,229 | ||||||||||||||||||||||||||||||
| (1) | Percentages represent the percentage of each loan and lease category to total loans and leases. |
NCOs
| (This section should be read in conjunction with Significant Item 3.) |
Table 29 reflects NCO detail for each of the last five years.
Table 30 displays the Franklin-related impacts for each of the
last five years. There were no Franklin-related NCOs in 2006.
71
Table of Contents
Table
29 — Net Loan and Lease Charge-offs
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
|
Net charge-offs by loan and lease type
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Commercial and industrial
|
$ | 254,932 | $ | 487,606 | $ | 526,165 | $ | 345,840 | $ | 20,868 | ||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Construction
|
109,008 | 192,706 | 6,626 | 11,854 | 3,553 | |||||||||||||||
|
Commercial
|
166,554 | 490,025 | 62,114 | 27,250 | 3,230 | |||||||||||||||
|
Total commercial real estate
|
275,562 | 682,731 | 68,740 | 39,104 | 6,783 | |||||||||||||||
|
Total commercial
|
530,494 | 1,170,337 | 594,905 | 384,944 | 27,651 | |||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Automobile loans and leases
|
26,572 | 56,332 | 54,565 | 27,692 | 18,775 | |||||||||||||||
|
Home equity
|
139,373 | 106,176 | 67,556 | 34,426 | 21,854 | |||||||||||||||
|
Residential mortgage
|
152,895 | 110,202 | 21,247 | 11,371 | 4,505 | |||||||||||||||
|
Other loans
|
25,140 | 33,540 | 19,794 | 19,198 | 9,591 | |||||||||||||||
|
Total consumer
|
343,980 | 306,250 | 163,162 | 92,687 | 54,725 | |||||||||||||||
|
Total net charge-offs
|
$ | 874,474 | $ | 1,476,587 | $ | 758,067 | $ | 477,631 | $ | 82,376 | ||||||||||
|
Net charge-offs ratio:(1)
|
||||||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Commercial and industrial
|
2.05 | % | 3.71 | % | 3.87 | % | 3.25 | % | 0.28 | % | ||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Construction
|
9.95 | 10.37 | 0.32 | 0.77 | 0.28 | |||||||||||||||
|
Commercial
|
2.72 | 6.71 | 0.81 | 0.52 | 0.10 | |||||||||||||||
|
Commercial real estate
|
3.81 | 7.46 | 0.71 | 0.57 | 0.15 | |||||||||||||||
|
Total commercial
|
2.70 | 5.25 | 2.55 | 2.21 | 0.23 | |||||||||||||||
|
Consumer:
|
||||||||||||||||||||
|
Automobile loans and leases
|
0.54 | 1.59 | 1.21 | 0.67 | 0.46 | |||||||||||||||
|
Home equity
|
1.84 | 1.40 | 0.91 | 0.56 | 0.44 | |||||||||||||||
|
Residential mortgage
|
3.42 | 2.43 | 0.42 | 0.23 | 0.10 | |||||||||||||||
|
Other loans
|
3.80 | 4.65 | 2.86 | 3.63 | 2.18 | |||||||||||||||
|
Total consumer
|
1.95 | 1.87 | 0.92 | 0.59 | 0.39 | |||||||||||||||
|
Net charge-offs as a % of average loans
|
2.35 | % | 3.82 | % | 1.85 | % | 1.44 | % | 0.32 | % | ||||||||||
| (1) | Percentage of related average loan balances. |
72
Table of Contents
Table
30 — Net Loan and Lease Charge-offs —
Franklin-Related Impact
| December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||
|
Commercial and industrial net charge-offs (recoveries)
|
||||||||||||||||||||
|
Franklin
|
$ | (5.1 | ) | $ | 114.5 | $ | 423.3 | $ | 308.5 | (1) | $ | — | ||||||||
|
Non-Franklin
|
260.0 | 373.1 | 102.9 | 37.3 | 20.9 | |||||||||||||||
|
Total
|
$ | 254.9 | $ | 487.6 | $ | 526.2 | $ | 345.8 | $ | 20.9 | ||||||||||
|
Commercial and industrial net charge-offs ratio
|
||||||||||||||||||||
|
Total
|
2.05 | % | 3.71 | % | 3.87 | % | 3.25 | % | 0.28 | % | ||||||||||
|
Non-Franklin
|
2.09 | 2.87 | 0.83 | 0.38 | 0.28 | |||||||||||||||
|
Total commercial net charge-offs (recoveries)
|
||||||||||||||||||||
|
Franklin
|
$ | (5.1 | ) | $ | 114.5 | $ | 423.3 | $ | 308.5 | $ | — | |||||||||
|
Non-Franklin
|
535.6 | 1,055.8 | 171.6 | 76.4 | 27.7 | |||||||||||||||
|
Total
|
$ | 530.5 | $ | 1,170.3 | $ | 594.9 | $ | 384.9 | $ | 27.7 | ||||||||||
|
Total commercial loan net charge-offs ratio
|
||||||||||||||||||||
|
Total
|
2.70 | % | 5.25 | % | 2.55 | % | 2.21 | % | 0.23 | % | ||||||||||
|
Non-Franklin
|
2.72 | 4.77 | 0.77 | 0.46 | 0.23 | |||||||||||||||
|
Total home equity net charge-offs (recoveries)
|
||||||||||||||||||||
|
Franklin
|
$ | 20.8 | $ | (0.1 | ) | $ | — | $ | — | $ | — | |||||||||
|
Non-Franklin
|
118.6 | 106.3 | 67.6 | 34.4 | 21.9 | |||||||||||||||
|
Total
|
$ | 139.4 | $ | 106.2 | $ | 67.6 | $ | 34.4 | $ | 21.9 | ||||||||||
|
Total home equity net charge-offs ratio
|
||||||||||||||||||||
|
Total
|
1.84 | % | 1.40 | % | 0.91 | % | 0.56 | % | 0.44 | % | ||||||||||
|
Non-Franklin
|
1.57 | 1.41 | 0.91 | 0.56 | 0.44 | |||||||||||||||
|
Total residential mortgage net charge-offs (recoveries)
|
||||||||||||||||||||
|
Franklin
|
$ | 71.3 | $ | 1.6 | $ | — | $ | — | $ | — | ||||||||||
|
Non-Franklin
|
81.6 | 108.6 | 21.2 | 11.4 | 4.5 | |||||||||||||||
|
Total
|
$ | 152.9 | $ | 110.2 | $ | 21.2 | $ | 11.4 | $ | 4.5 | ||||||||||
|
Total residential mortgage net charge-offs ratio
|
||||||||||||||||||||
|
Total
|
3.42 | % | 2.43 | % | 0.42 | % | 0.23 | % | 0.10 | % | ||||||||||
|
Non-Franklin
|
1.90 | 2.56 | 0.42 | 0.23 | 0.10 | |||||||||||||||
|
Total consumer loan net charge-offs (recoveries)
|
||||||||||||||||||||
|
Franklin
|
$ | 92.1 | $ | 1.4 | $ | — | $ | — | $ | — | ||||||||||
|
Non-Franklin
|
251.9 | 304.9 | 163.2 | 92.7 | 54.7 | |||||||||||||||
|
Total
|
$ | 344.0 | $ | 306.3 | $ | 163.2 | $ | 92.7 | $ | 54.7 | ||||||||||
|
Total consumer loan net charge-offs ratio
|
||||||||||||||||||||
|
Total
|
1.95 | % | 1.87 | % | 0.92 | % | 0.59 | % | 0.39 | % | ||||||||||
|
Non-Franklin
|
1.45 | 1.90 | 0.92 | 0.59 | 0.39 | |||||||||||||||
|
Total net charge-offs (recoveries)
|
||||||||||||||||||||
|
Franklin
|
$ | 87.0 | $ | 115.9 | $ | 423.3 | $ | 308.5 | $ | — | ||||||||||
|
Non-Franklin
|
787.5 | 1,360.7 | 334.8 | 169.1 | 82.4 | |||||||||||||||
|
Total
|
$ | 874.5 | $ | 1,476.6 | $ | 758.1 | $ | 477.6 | $ | 82.4 | ||||||||||
|
Total net charge-offs ratio
|
||||||||||||||||||||
|
Total
|
2.35 | % | 3.82 | % | 1.85 | % | 1.44 | % | 0.32 | % | ||||||||||
|
Non-Franklin
|
2.12 | 3.56 | 0.84 | 0.52 | 0.32 | |||||||||||||||
| (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 totaling $88.5 million, resulting in net charge-offs of $308.5 million. |
In assessing NCO trends, it is helpful to understand the process
of how loans are treated as they deteriorate over time. Reserves
for loans are established at origination consistent with the
level of risk
73
Table of Contents
associated with the original underwriting. If the quality of a
loan subsequently deteriorates, it migrates to a lower quality
risk rating through our on-going portfolio management process,
and a higher reserve amount is assigned. As a part of our
on-going portfolio management process for commercial loans, the
loan is reviewed and reserves are increased or decreased 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 loan, a reduction in the
overall level of the reserve could be recognized. In summary, if
loan quality deteriorates, the typical credit sequence is
periods of reserve building, followed by periods of higher NCOs
as previously established reserves are utilized. Additionally,
increases in reserves either precede or are in conjunction with
increases in NALs. When a loan is classified as NAL, it is
evaluated for specific reserves or charge-off. As a result, an
increase in NALs may not necessarily result in an increase in
reserves or an expectation of higher future NCOs.
The significant $602.1 million decline in total NCOs
reflected a combination of some economic stabilization, as well
as the proactive credit management practices begun in 2009.
These practices continued in 2010, and remain on-going.
The $113.1 million decrease in non-Franklin-related
C&I NCOs reflected improvement in the overall credit
quality of the portfolio compared with 2009.
The $407.2 million decrease in CRE NCOs primarily reflected
our proactive credit management practices begun in 2009. These
practices continued in 2010, and remain on-going.
The $29.8 million decline in automobile loans and leases
reflected our consistent high quality of originations since the
beginning of 2008. The focus on origination quality has been the
primary driver for the improvement in this portfolio compared
with the 2009. We believe the quality of the loans originated in
2010 will result in industry-standard levels of NCOs going
forward as well.
Non-Franklin-related home equity NCOs increased
$12.2 million reflecting the continuing stress to our
borrowers associated with the fragile economy and the
significant reduction of collateral equity since 2006.
Delinquencies continued to be driven by lower income resulting
from job loss or reduced revenues for borrowers that are
self-employed. Frequently, first-lien loans can be refinanced,
however, there are limited financing options for second-lien
loans, particularly in situations when the collateral equity has
lost value. While we charge-off loans in these situations, we
generally do not forgive the debt, resulting in longer-term
opportunities for recoveries. Although 2010 NCOs were higher
compared with 2009, early-stage delinquency levels in the home
equity
line-of-credit
portfolio declined, supporting our longer-term positive view for
the performance of the home equity portfolio. We have been
successful in originating new loans to higher quality borrowers,
as evidenced by our 2010 home equity
line-of-credit
originations were 100% current as of December 31, 2010.
Non-Franklin-related residential mortgage NCOs declined
$27.0 million. This decline reflected a $48.1 million
sale of certain underperforming residential mortgage loans in
2010 that resulted in $16.4 million of NCOs, compared with
a 2009 sale of $44.8 million of similar loans resulting in
$17.6 million of NCOs. The remaining decrease in the
non-Franklin-related residential mortgage NCOs compared with the
prior year primarily reflected a combination of a general
stabilization of home prices, as well as an increase in active
loss mitigation activity. The 2010 loan sale resulted in the
elimination of loans with potential future credit losses and
foreclosure expenses. As we believe there will be no meaningful
improvement in home prices in the foreseeable future, the
selective reduction of underperforming loans is consistent with
our
moderate-to-low
risk profile strategy.
AVAILABLE-FOR-SALE
AND OTHER SECURITIES PORTFOLIO
| (This section should be read in conjunction with the Critical Accounting Policies and Use of Significant Estimates discussion, and Notes 1 and 4 of the Notes to Consolidated Financial Statements.) |
Our
available-for-sale
and other securities portfolio is evaluated under established
asset/liability management objectives. Changing market
conditions could affect the profitability of the portfolio, as
well as the level of interest rate risk exposure.
74
Table of Contents
Our
available-for-sale
and other securities portfolio is comprised of various financial
instruments. At December 31, 2010, our
available-for-sale
and other securities portfolio totaled $9.9 billion, an
increase of $1.3 billion from 2009. The duration of the
portfolio increased by 0.6 years as a result of the
purchase of additional structured mortgage, municipal and
corporate debt securities. Municipal securities comprise 4.5% of
the portfolio and consist primarily of general obligation and
revenue bonds for essential services from 18 different states.
The composition and maturity of the portfolio is presented on
the following two tables.
Table
31 —
Available-for-sale
and Other Securities Portfolio Summary at Fair Value
| At December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
U.S. Government backed agencies
|
$ | 7,048,028 | $ | 6,566,653 | $ | 2,242,978 | ||||||
|
Other
|
2,847,216 | 2,021,261 | 2,141,479 | |||||||||
|
Total
available-for-sale
and other securities
|
$ | 9,895,244 | $ | 8,587,914 | $ | 4,384,457 | ||||||
|
Duration in years(1)
|
3.0 | 2.4 | 5.2 | |||||||||
| (1) | The average duration assumes a market driven pre-payment rate on securities subject to pre-payment. |
Table
32 —
Available-for-sale
and Other Securities Portfolio Composition and
Maturity
| At December 31, 2010 | ||||||||||||
|
Amortized
|
||||||||||||
| Cost | Fair Value | Yield(1) | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
U.S. Treasury
|
||||||||||||
|
Under 1 year
|
$ | — | $ | — | — | % | ||||||
|
1-5 years
|
52,425 | 51,781 | 1.02 | |||||||||
|
6-10 years
|
— | — | — | |||||||||
|
Over 10 years
|
— | — | — | |||||||||
|
Total U.S. Treasury
|
52,425 | 51,781 | 1.02 | |||||||||
|
Federal agencies — mortgage backed securities
|
||||||||||||
|
Under 1 year
|
— | — | — | |||||||||
|
1-5 years
|
— | — | — | |||||||||
|
6-10 years
|
656,176 | 664,793 | 2.72 | |||||||||
|
Over 10 years
|
4,077,655 | 4,089,611 | 3.03 | |||||||||
|
Total Federal agencies — mortgage backed
securities
|
4,733,831 | 4,754,404 | 2.99 | |||||||||
|
TLGP securities
|
||||||||||||
|
Under 1 year
|
156,450 | 157,931 | 1.54 | |||||||||
|
1-5 years
|
25,230 | 25,536 | 1.47 | |||||||||
|
6-10 years
|
— | — | — | |||||||||
|
Over 10 years
|
— | — | — | |||||||||
|
Total TLGP securities
|
181,680 | 183,467 | 1.53 | |||||||||
|
Other agencies
|
||||||||||||
|
Under 1 year
|
158,273 | 159,288 | 1.45 | |||||||||
|
1-5 years
|
1,898,867 | 1,885,230 | 1.27 | |||||||||
|
6-10 years
|
13,082 | 13,359 | 3.08 | |||||||||
|
Over 10 years
|
500 | 499 | 3.06 | |||||||||
|
Total other Federal agencies
|
2,070,722 | 2,058,376 | 1.30 | |||||||||
|
Total U.S. Government backed agencies
|
7,038,658 | 7,048,028 | 2.44 | |||||||||
(Continued)
75
Table of Contents
| At December 31, 2010 | ||||||||||||
|
Amortized
|
||||||||||||
| Cost | Fair Value | Yield(1) | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Municipal securities
|
||||||||||||
|
Under 1 year
|
— | — | — | |||||||||
|
1-5 years
|
149,151 | 148,587 | 2.78 | |||||||||
|
6-10 years
|
124,552 | 125,656 | 4.05 | |||||||||
|
Over 10 years
|
182,341 | 181,472 | 4.89 | |||||||||
|
Total municipal securities
|
456,044 | 455,715 | 3.97 | |||||||||
|
Private label CMO
|
||||||||||||
|
Under 1 year
|
— | — | — | |||||||||
|
1-5 years
|
— | — | — | |||||||||
|
6-10 years
|
10,429 | 10,887 | 6.15 | |||||||||
|
Over 10 years
|
124,080 | 111,038 | 4.86 | |||||||||
|
Total private label CMO
|
134,509 | 121,925 | 4.98 | |||||||||
|
Asset-backed securities
|
||||||||||||
|
Under 1 year
|
19,669 | 19,694 | 1.78 | |||||||||
|
1-5 years
|
697,001 | 700,749 | 1.59 | |||||||||
|
6-10 years
|
323,411 | 323,995 | 1.51 | |||||||||
|
Over 10 years
|
301,326 | 162,684 | 2.10 | |||||||||
|
Total asset-backed securities
|
1,341,407 | 1,207,122 | 1.64 | |||||||||
|
Other
|
||||||||||||
|
Under 1 year
|
800 | 802 | 3.94 | |||||||||
|
1-5 years
|
717,509 | 698,607 | 1.95 | |||||||||
|
6-10 years
|
1,007 | 1,037 | 2.43 | |||||||||
|
Over 10 years
|
— | — | — | |||||||||
|
Nonmarketable equity securities
|
308,722 | 308,722 | 4.38 | |||||||||
|
Marketable equity securities
|
53,944 | 53,286 | 0.16 | |||||||||
|
Total other
|
1,081,982 | 1,062,454 | 2.57 | |||||||||
|
Total
available-for-sale
and other securities
|
$ | 10,052,600 | $ | 9,895,244 | 2.46 | % | ||||||
| (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
and other securities are recorded as temporary impairment,
noncredit OTTI, or credit OTTI adjustments.
Temporary impairment adjustments are recorded when the fair
value of a security declines below its historical cost.
Temporary impairment adjustments are recorded in OCI, and reduce
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 were previously temporarily impaired and results
in an increase to equity.
Because the
available-for-sale
and other securities portfolio is recorded at fair value, the
determination that a security’s decline in value is
other-than-temporary
does not significantly impact equity, as the amount of any of
temporary adjustment has already been reflected in OCI. 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.
During 2010, we recorded $13.7 million of credit OTTI
losses. This amount was comprised of $4.9 million related
to pooled-trust-preferred securities, $7.1 million related
to CMO securities, and $1.6 million related to Alt-A
securities. Given the continued disruption in the housing and
financial markets, we may be required to recognize additional
credit OTTI losses in future periods with respect to our
available-for-sale
and other securities portfolio. The amount and timing of any
additional credit OTTI will depend on the decline in the
76
Table of Contents
underlying cash flows of the securities. If our intent to hold
temporarily impaired securities changes in future periods, we
may be required to recognize noncredit OTTI through income,
which will negatively impact 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 continued to
reflect the stressed 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, 2010:
Table
33 — Credit Ratings of Selected Investment Securities
(1)
|
Amortized
|
Average Credit Rating of Fair Value Amount | |||||||||||||||||||||||||||
| Cost | Fair Value | AAA | AA +/- | A +/- | BBB +/- | <BBB- | ||||||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||||||
|
Private label CMO securities
|
$ | 134.5 | $ | 121.9 | $ | 25.4 | $ | 6.5 | $ | 5.0 | $ | 15.1 | $ | 69.9 | ||||||||||||||
|
Alt-A mortgage-backed securities
|
68.9 | 60.4 | 15.8 | 27.3 | — | — | 17.3 | |||||||||||||||||||||
|
Pooled-trust-preferred securities
|
232.4 | 102.3 | — | — | 24.7 | — | 77.6 | |||||||||||||||||||||
|
Total at December 31, 2010
|
$ | 435.8 | $ | 284.6 | $ | 41.2 | $ | 33.8 | $ | 29.7 | $ | 15.1 | $ | 164.8 | ||||||||||||||
|
Total at December 31, 2009
|
$ | 912.3 | $ | 700.3 | $ | 62.1 | $ | 72.9 | $ | 35.6 | $ | 121.3 | $ | 408.4 | ||||||||||||||
| (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.
77
Table of Contents
The following table summarizes the relevant characteristics of
our pooled-trust-preferred securities portfolio at
December 31, 2010. Each security is part of a pool of
issuers and supports a more senior tranche of securities except
for the I-Pre TSL II, MM Comm II and MM Comm III
securities which are the most senior class.
Table
34 — Trust-preferred Securities Data
December 31, 2010
|
Actual
|
||||||||||||||||||||||||||||||||
|
Deferrals
|
Expected
|
|||||||||||||||||||||||||||||||
|
and
|
Defaults
|
|||||||||||||||||||||||||||||||
|
# of Issuers
|
Defaults
|
as a % of
|
||||||||||||||||||||||||||||||
|
Lowest
|
Currently
|
as a % of
|
Remaining
|
|||||||||||||||||||||||||||||
|
Amortized
|
Fair
|
Unrealized
|
Credit
|
Performing/
|
Original
|
Performing
|
Excess
|
|||||||||||||||||||||||||
|
Deal Name
|
Par Value | Cost | Value | Loss | Rating(2) | Remaining(3) | Collateral | Collateral | Subordination(4) | |||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||||||
|
Alesco II(1)
|
$ | 41,040 | $ | 31,540 | $ | 9,870 | $ | (21,670 | ) | C | 32/43 | 25 | % | 17 | % | — | % | |||||||||||||||
|
Alesco IV(1)
|
20,659 | 10,571 | 2,370 | (8,201 | ) | C | 35/53 | 34 | 21 | — | ||||||||||||||||||||||
|
ICONS
|
20,000 | 20,000 | 12,846 | (7,154 | ) | BB | 28/29 | 3 | 14 | 54 | ||||||||||||||||||||||
|
I-Pre TSL II
|
36,916 | 36,814 | 24,681 | (12,133 | ) | A | 29/29 | — | 15 | 71 | ||||||||||||||||||||||
|
MM Comm II
|
21,085 | 20,150 | 18,675 | (1,475 | ) | BB | 4/7 | 5 | 3 | — | ||||||||||||||||||||||
|
MM Comm III(1)
|
11,150 | 10,653 | 5,450 | (5,203 | ) | CC | 5/11 | 12 | 15 | — | ||||||||||||||||||||||
|
Pre TSL IX(1)
|
5,000 | 4,035 | 1,428 | (2,607 | ) | C | 34/49 | 27 | 21 | — | ||||||||||||||||||||||
|
Pre TSL X(1)
|
17,506 | 9,915 | 3,254 | (6,661 | ) | C | 35/55 | 40 | 30 | — | ||||||||||||||||||||||
|
Pre TSL XI(1)
|
25,119 | 23,038 | 7,609 | (15,429 | ) | C | 47/65 | 27 | 21 | — | ||||||||||||||||||||||
|
Pre TSL XIII(1)
|
27,809 | 23,269 | 6,265 | (17,004 | ) | C | 47/65 | 30 | 25 | — | ||||||||||||||||||||||
|
Reg Diversified(1)
|
25,500 | 7,499 | 472 | (7,027 | ) | D | 24/45 | 46 | 37 | — | ||||||||||||||||||||||
|
Soloso(1)
|
12,500 | 3,906 | 393 | (3,513 | ) | C | 42/69 | 31 | 28 | — | ||||||||||||||||||||||
|
Tropic III
|
31,000 | 31,000 | 8,983 | (22,017 | ) | CC | 26/45 | 36 | 25 | 18 | ||||||||||||||||||||||
|
Total
|
$ | 295,284 | $ | 232,390 | $ | 102,296 | $ | (130,094 | ) | |||||||||||||||||||||||
| (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
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-earning assets and interest-bearing liabilities
(reprice risk), changes in the expected maturities of assets and
liabilities arising from
78
Table of Contents
embedded options, such as borrowers’ ability to prepay
residential mortgage loans at any time and depositors’
ability to redeem certificates of deposit before maturity
(option risk), changes in the shape of the yield curve where
interest rates increase or decrease in a non-parallel fashion
(yield curve risk), and changes in spread relationships between
different yield curves, such as U.S. Treasuries and LIBOR
(basis risk).
Our board of directors establishes broad policy limits with
respect to interest rate risk. ALCO 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 ALCO regularly
monitors the level of interest rate risk sensitivity to ensure
compliance with the 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.
An asset sensitive position refers to a balance sheet position
in which an increase in short-term interest rates 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, thus expanding
our net interest margin. Conversely, a liability sensitive
position refers to a balance sheet position in which an increase
in short-term interest rates 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, thus compressing our net
interest margin.
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 recorded in noninterest
income and noninterest expense, these portfolios are included in
the interest sensitivity analysis because they have attributes
similar to interest-earning assets. EVE analysis is used to
measure the sensitivity of the values of period-end assets and
liabilities to changes in market interest rates. EVE analysis
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,
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 an immediate basis, movements in interest rates that alter
the shape of the yield curve (e.g., flatter or steeper yield
curve), and no changes in current interest rates remaining
unchanged for the 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 points parallel shifts in market interest
rates over the next one-year period beyond the interest rate
change implied by the current yield curve. We assumed market
interest rates would not fall below 0% over the next one-year
period for the scenarios that used the -100 and -200 basis
points parallel shift in
79
Table of Contents
market interest rates. The table below shows the results of the
scenarios as of December 31, 2010, and December 31,
2009. All of the positions were within the board of
directors’ policy limits.
Table
35 — 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, 2010
|
−3.2 | −1.8 | 0.3 | 0.0 | ||||||||||||
|
December 31, 2009
|
−0.3 | 0.2 | −0.1 | −0.4 | ||||||||||||
The net interest income at risk reported as of December 31,
2010 for the +200 basis points scenario shows a change to a
neutral near-term interest rate risk position compared with
December 31, 2009. The primary factors contributing to this
change are the decline in market interest rates over the course
of 2010 along with growth in deposits and net free funds, offset
by increases in fixed-rate loans and securities and updated
model assumptions.
The following table shows the income sensitivity of select
portfolios to changes in market interest rates. A portfolio with
100% sensitivity would indicate that interest income and expense
will change with the same magnitude and direction as interest
rates. A portfolio with 0% sensitivity is insensitive to changes
in interest rates. For the +200 basis points scenario,
total interest sensitive income is 34.6% sensitive to changes in
market interest rates, while total interest sensitive expense is
43.8% sensitive to changes in market interest rates. However,
net interest income at risk for the +200 basis points
scenario has a neutral near-term interest rate risk position
because of the larger base of total interest sensitive income
relative to total interest sensitive expense.
Table
36 — Interest Income/Expense Sensitivity
|
Percent of
|
||||||||||||||||||||
|
Total Earning
|
Percent Change in Interest Income/Expense for a Given Change
in Interest Rates
|
|||||||||||||||||||
| Assets(1) | Over / (Under) Base Case Parallel Ramp | |||||||||||||||||||
|
Basis point change scenario
|
−200 | −100 | +100 | +200 | ||||||||||||||||
|
Total loans
|
78 | % | −19.2 | % | −25.8 | % | 35.8 | % | 37.1 | % | ||||||||||
|
Total investments and other earning assets
|
22 | −24.6 | −33.0 | 41.3 | 28.9 | |||||||||||||||
|
Total interest sensitive income
|
−19.7 | −26.7 | 36.1 | 34.6 | ||||||||||||||||
|
Total interest-bearing deposits
|
72 | −11.3 | −16.5 | 39.8 | 39.8 | |||||||||||||||
|
Total borrowings
|
12 | −20.5 | −38.0 | 65.9 | 67.8 | |||||||||||||||
|
Total interest-sensitive expense
|
−12.6 | −19.6 | 43.5 | 43.8 | ||||||||||||||||
| (1) | At December 31, 2010 |
The primary simulations for EVE at risk assume immediate +/-100
and +/-200 basis points parallel shifts in market interest
rates beyond the interest rate change implied by the current
yield curve. The table below outlines the December 31,
2010, results compared with December 31, 2009. All of the
positions were within the board of directors’ policy limits.
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Table of Contents
Table
37 — 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, 2010
|
−0.5 | 1.3 | −4.0 | −8.9 | ||||||||||||
|
December 31, 2009
|
0.8 | 2.7 | −3.7 | −9.1 | ||||||||||||
The EVE at risk reported as of December 31, 2010 for the
+200 basis points scenario shows a change to a slightly
lower long-term liability sensitive position compared with
December 31, 2009. The primary factors contributing to the
change are the decline in market interest rates over the course
of 2010 along with growth in deposits and net free funds, offset
by increases in fixed-rate loans, securities, and interest rate
swaps used for asset-liability management purposes.
The following table shows the economic value sensitivity of
select portfolios to changes in market interest rates. The
change in economic value for each portfolio is measured as the
percent change from the base economic value for that portfolio.
For the +200 basis points scenario, total net tangible
assets decreased in value 3.4% to changes in market interest
rates, while total net tangible liabilities increased in value
2.5% to changes in market interest rates. EVE at risk for the
+200 basis points scenario is liability sensitive because
of the decrease in economic value of total net tangible assets,
which reduces the EVE, and the increase in economic value of
total net tangible liabilities, which also reduces the EVE.
Table
38 — Economic Value Sensitivity
|
Percent of
|
||||||||||||||||||||
|
Total Net
|
||||||||||||||||||||
|
Tangible
|
Percent Change in Economic Value for a Given Change in
Interest Rates
|
|||||||||||||||||||
| Assets(1) | Over / (Under) Base Case Parallel Shocks | |||||||||||||||||||
|
Basis point change scenario
|
−200 | −100 | +100 | +200 | ||||||||||||||||
|
Total loans
|
71 | % | 1.4 | % | 1.0 | % | −1.4 | % | −2.9 | % | ||||||||||
|
Total investments and other earning assets
|
20 | 3.7 | 2.4 | −2.9 | −5.8 | |||||||||||||||
|
Total net tangible assets(2)
|
1.8 | 1.2 | −1.7 | −3.4 | ||||||||||||||||
|
Total deposits
|
78 | −2.2 | −1.3 | 1.3 | 2.6 | |||||||||||||||
|
Total borrowings
|
11 | −2.0 | −1.1 | 1.0 | 1.9 | |||||||||||||||
|
Total net tangible liabilities(3)
|
−2.2 | −1.2 | 1.3 | 2.5 | ||||||||||||||||
| (1) | At December 31, 2010. | |
| (2) | Tangible assets excluding ALLL. | |
| (3) | Tangible liabilities excluding AULC. |
MSR
| (This section should be read in conjunction with Note 5 of the Notes to the Consolidated Financial Statements.) |
At December 31, 2010, we had a total of $196.2 million
of capitalized MSRs representing the right to service
$15.9 billion in mortgage loans. Of this
$196.2 million, $125.7 million was recorded using the
fair value method, and $70.5 million was recorded using the
amortization method. If we actively engage in hedging, the MSR
asset is carried at fair 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
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Table of Contents
impairment. In addition, we engage a third party to provide
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 a 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
presented in Table 12.
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 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 mortgage-backed securities, and
marketable equity securities held by our insurance subsidiaries.
We have established loss limits on the trading portfolio, the
amount of foreign exchange exposure that can be maintained, and
the amount of marketable equity securities that can be held by
the insurance subsidiaries.
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 us, such as war, terrorism, or financial
institution market specific issues. We manage liquidity risk at
both the Bank and the parent company.
The overall objective of liquidity risk management is to ensure
that we can obtain cost-effective funding to meet current and
future obligations, and can maintain sufficient levels of
on-hand liquidity, under both normal business as usual and
unanticipated stressed circumstances. The ALCO was appointed by
our Board Risk Oversight 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 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 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
the adherence to, and maintenance of, the contingency funding
plans. 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
ALCO and our 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 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
at December 31, 2010, sufficient sources of funds were
available to meet our financial obligations and fund our
operations for 2011. The stress test scenarios include testing
to determine the impact of an interruption to our access to the
national markets for funding, a significant run-off in core
deposits and liquidity triggers inherent
82
Table of Contents
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 were significantly disrupted in mid-2007
through 2009 with an improving trend during 2010. Throughout
2008 and 2009, we strengthened our liquidity position by
significantly reducing noncore funds and wholesale borrowings,
increasing liquid assets, and shifting from a net purchaser of
overnight federal funds to holding an excess reserve position at
the Federal Reserve Bank. The percentage of assets funded with
noncore or wholesale funding declined to 16% by the end of 2010
from 25% at 2008 year-end. During 2010, the economy
continued to stabilize and financial credit spreads tightened,
resulting in a more liquid secondary market for our debt. In
addition, all three major rating agencies upgraded both the
Bank’s and the parent company’s credit ratings and /or
outlook resulting in a significantly lower rate on the
$300.0 million of subordinated debt issued in December of
2010.
Bank
Liquidity and Sources of Liquidity
Our primary sources of funding for the Bank are retail and
commercial core deposits. As of December 31, 2010, these
core deposits funded 73% of total assets. At December 31,
2010, total core deposits represented 93% of total deposits, an
increase from 92% at the prior year-end.
Core deposits are comprised of interest-bearing and
noninterest-bearing demand deposits, money market deposits,
savings and other domestic 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 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. We voluntarily began
participating in the FDIC’s TAGP in October of 2008. Under
this program, all noninterest-bearing and interest-bearing
transaction accounts with a rate of less than 0.50% were fully
guaranteed by the FDIC for a customer’s entire account
balance.
In April of 2010, the FDIC adopted an interim rule extending the
TAGP through December 31, 2010, for financial institutions
that desired to continue participating in the TAGP. On
April 30, 2010, we notified the FDIC of our decision to
opt-out of the TAGP extension effective July 1, 2010.
Demand deposit overdrafts that have been reclassified as loan
balances were $13.1 million and $40.4 million at
December 31, 2010 and 2009, respectively.
Other domestic time deposits of $250,000 or more and brokered
deposits and negotiable CDs totaled $2.2 billion at the end
of 2010 and $2.7 billion at the end of 2009. The
contractual maturities of these deposits at December 31,
2010, were as follows: $0.8 billion in three months or
less, $0.3 billion in three months through six months,
$0.5 billion in six months through twelve months, and
$0.6 billion after twelve months.
83
Table of Contents
The following table reflects deposit composition detail for each
of the past five years.
Table
39 — Deposit Composition
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||||||||||||||||||
|
By Type
|
||||||||||||||||||||||||||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 7,217 | 17 | % | $ | 6,907 | 17 | % | $ | 5,477 | 14 | % | $ | 5,138 | 14 | % | $ | 3,616 | 14 | % | ||||||||||||||||||||
|
Demand deposits — interest-bearing
|
5,469 | 13 | 5,890 | 15 | 4,083 | 11 | 4,049 | 11 | 2,389 | 10 | ||||||||||||||||||||||||||||||
|
Money market deposits
|
13,410 | 32 | 9,485 | 23 | 5,182 | 14 | 6,643 | 18 | 5,362 | 21 | ||||||||||||||||||||||||||||||
|
Savings and other domestic deposits
|
4,643 | 11 | 4,652 | 11 | 4,930 | 13 | 5,282 | 14 | 3,101 | 12 | ||||||||||||||||||||||||||||||
|
Core certificates of deposit
|
8,525 | 20 | 10,453 | 26 | 12,856 | 34 | 10,851 | 29 | 5,430 | 22 | ||||||||||||||||||||||||||||||
|
Total core deposits
|
39,264 | 93 | 37,387 | 92 | 32,528 | 86 | 31,963 | 86 | 19,898 | 79 | ||||||||||||||||||||||||||||||
|
Other domestic deposits of $250,000 or more
|
675 | 2 | 652 | 2 | 1,328 | 3 | 1,676 | 4 | 1,012 | 4 | ||||||||||||||||||||||||||||||
|
Brokered deposits and negotiable CDs
|
1,532 | 4 | 2,098 | 5 | 3,354 | 9 | 3,377 | 9 | 3,346 | 13 | ||||||||||||||||||||||||||||||
|
Deposits in foreign offices
|
383 | 1 | 357 | 1 | 733 | 2 | 727 | 1 | 792 | 4 | ||||||||||||||||||||||||||||||
|
Total deposits
|
$ | 41,854 | 100 | % | $ | 40,494 | 100 | % | $ | 37,943 | 100 | % | $ | 37,743 | 100 | % | $ | 25,048 | 100 | % | ||||||||||||||||||||
|
Total core deposits:
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial
|
$ | 12,476 | 32 | % | $ | 11,368 | 30 | % | $ | 7,971 | 25 | % | $ | 9,018 | 28 | % | $ | 6,063 | 30 | % | ||||||||||||||||||||
|
Personal
|
26,788 | 68 | 26,019 | 70 | 24,557 | 75 | 22,945 | 72 | 13,835 | 70 | ||||||||||||||||||||||||||||||
|
Total core deposits
|
$ | 39,264 | 100 | % | $ | 37,387 | 100 | % | $ | 32,528 | 100 | % | $ | 31,963 | 100 | % | $ | 19,898 | 100 | % | ||||||||||||||||||||
To the extent we are unable to obtain sufficient liquidity
through core deposits, we may meet our liquidity needs through
wholesale funding. These sources include other domestic 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, 2010, total wholesale funding was
$8.4 billion, an increase from $7.8 billion at
December 31, 2009. The $8.4 billion portfolio at
December 31, 2010, had a weighted average maturity of
4.2 years.
The Bank has access to the Federal Reserve Bank’s discount
window. These borrowings are secured by commercial loans and
home equity
lines-of-credit.
The Bank is also a member of the FHLB, 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
84
Table of Contents
to borrow if necessary, and unused borrowing capacity at both
the Federal Reserve Bank and the FHLB is outlined in the
following table:
Table
40 — Federal Reserve Bank and FHLB-Cincinnati
Borrowing Capacity
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in billions) | ||||||||
|
Loans and Securities Pledged:
|
||||||||
|
Federal Reserve Bank
|
$ | 9.7 | $ | 8.5 | ||||
|
FHLB
|
7.8 | 8.0 | ||||||
|
Total loans and securities pledged
|
$ | 17.5 | $ | 16.5 | ||||
|
Total unused borrowing capacity at Federal Reserve Bank and FHLB
|
$ | 8.8 | $ | 7.9 | ||||
We can also obtain funding through other methods including:
(1) purchasing federal funds, (2) selling securities
under repurchase agreements, (3) selling or maturity of
investment securities, (4) selling or securitization of
loans, (5) selling of national market certificates of
deposit, (6) the relatively shorter-term structure of our
commercial loans
(see tables below)
and automobile loans,
and (7) issuing of common and preferred stock.
At December 31, 2010, we believe the Bank had sufficient
liquidity to meet its cash flow obligations for the foreseeable
future.
Table
41 — Maturity Schedule of Commercial Loans
| December 31, 2010 | ||||||||||||||||||||
|
One Year
|
One to
|
After
|
Percent of
|
|||||||||||||||||
| or Less | Five Years | Five Years | Total | total | ||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||
|
Commercial and industrial
|
$ | 4,736 | $ | 6,589 | $ | 1,738 | $ | 13,063 | 67 | % | ||||||||||
|
Commercial real estate — construction
|
418 | 226 | 6 | 650 | 3 | |||||||||||||||
|
Commercial real estate — commercial
|
2,510 | 2,763 | 728 | 6,001 | 30 | |||||||||||||||
|
Total
|
$ | 7,664 | $ | 9,578 | $ | 2,472 | $ | 19,714 | 100 | % | ||||||||||
|
Variable-interest rates
|
$ | 7,223 | $ | 7,818 | $ | 2,043 | $ | 17,084 | 87 | % | ||||||||||
|
Fixed-interest rates
|
441 | 1,760 | 429 | 2,630 | 13 | |||||||||||||||
|
Total
|
$ | 7,664 | $ | 9,578 | $ | 2,472 | $ | 19,714 | 100 | % | ||||||||||
|
Percent of total
|
39 | % | 49 | % | 12 | % | 100 | % | ||||||||||||
At December 31, 2010, the fair value of our portfolio of
investment securities was $9.9 billion, of which
$4.7 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 32.
Parent
Company Liquidity
The parent company’s funding requirements consist primarily
of dividends to shareholders, debt service, income taxes,
operating expenses, funding of nonbank 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.
During the 2010 fourth quarter, we completed a public offering
and sale of 146.0 million shares of common stock at a price
of $6.30 per share, or $920.0 million in aggregate gross
proceeds. Also during the 2010 fourth quarter, we completed the
public offering and sale of $300.0 million aggregate
principal amount
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of 7.00% Subordinated Notes due 2020. We used the net
proceeds from these transactions to repurchase our TARP Capital
(
see Capital section
). On January 19, 2011, we
repurchased the warrant the Company had issued to the Treasury
at an agreed upon purchase price of $49.1 million. The
warrant had entitled the Treasury to purchase 23.6 million
shares of common stock.
During 2010, the parent company contributed $0.4 billion of
capital to the Bank, which increased the Bank’s regulatory
capital levels above its already Well-capitalized levels.
At December 31, 2010, the parent company had
$0.6 billion in cash and cash equivalents, compared with
$1.4 billion at December 31, 2009. The decrease
primarily reflected the net impact of the equity and debt public
offerings, the repurchase of our TARP Capital, additional
capital contributions made by the parent company to the Bank,
and dividend payments on our common and preferred stock.
Appropriate limits and guidelines are in place to ensure the
parent company has sufficient cash to meet operating expenses
and other commitments during 2011 without relying on
subsidiaries or capital markets for funding.
Based on the current dividend of $0.01 per common share, cash
demands required for common stock dividends are estimated to be
approximately $8.6 million per quarter. Based on the
current dividend, cash demands required for Series A
Preferred Stock are estimated to be approximately
$7.7 million per quarter.
Based on a regulatory dividend limitation, the Bank could not
have declared and paid a dividend to the parent company at
December 31, 2010, 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 its 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
$50.0 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.
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, 2010, we had $0.6 billion of standby
letters of credit outstanding, of which 73% 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, our broker-dealer subsidiary.
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 mortgage loans held for sale. At December 31, 2010, and
December 31, 2009, we had commitments to sell residential
real estate loans of $998.7 million and
$662.9 million, respectively. These contracts mature in
less than one year.
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Effective January 1, 2010, we consolidated an automobile
loan securitization that previously had been accounted for as an
off-balance sheet transaction. We elected to account for the
automobile loan receivables and the associated notes payable at
fair value per accounting guidance supplied in
ASC 810 — Consolidation.
(See Note 2 and
Note 5 of the Notes to the Consolidated Financial
Statements.)
We do not believe that off-balance sheet arrangements will have
a material impact on our liquidity or capital resources.
Table
42 — Contractual Obligations(1)
| December 31, 2010 | ||||||||||||||||||||
|
One Year
|
1 to 3
|
3 to 5
|
More than
|
|||||||||||||||||
| or Less | Years | Years | 5 Years | Total | ||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||
|
Deposits without a stated maturity
|
$ | 29,526 | $ | — | $ | — | $ | — | $ | 29,526 | ||||||||||
|
Certificates of deposit and other time deposits
|
6,773 | 4,729 | 562 | 264 | 12,328 | |||||||||||||||
|
FHLB advances
|
155 | 10 | — | 8 | 173 | |||||||||||||||
|
Short-term borrowings
|
2,041 | — | — | — | 2,041 | |||||||||||||||
|
Other long-term debt
|
5 | 1,000 | 108 | 1,031 | 2,144 | |||||||||||||||
|
Subordinated notes
|
— | 114 | 137 | 1,246 | 1,497 | |||||||||||||||
|
Operating lease obligations
|
43 | 80 | 71 | 306 | 500 | |||||||||||||||
|
Purchase commitments
|
87 | 67 | 20 | 14 | 188 | |||||||||||||||
| (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.
To mitigate operational risks, we have established a senior
management Operational Risk Committee and a senior management
Legal, Regulatory, and Compliance Committee. The
responsibilities of these committees, among other duties,
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 ensuring that recommendations are developed to address the
identified issues. Both of these committees report any
significant findings and recommendations to the Risk Management
Committee. Additionally, potential concerns may be escalated to
our Board Risk Oversight Committee, as appropriate.
The goal of this framework is to implement effective operational
risk techniques and strategies, minimize operational and fraud
losses, and enhance our overall performance.
Representation
and Warranty Reserve
We primarily conduct our loan sale and securitization activity
with Fannie Mae and Freddie Mac. In connection with these and
other securitization transactions, we make certain
representations and warranties that the loans meet certain
criteria, such as collateral type and underwriting standards. We
may be required to repurchase individual loans
and / or indemnify these organizations against losses
due to a loan not meeting the established criteria. We have a
reserve for such losses, which is included in accrued expenses
and other liabilities. The reserves were estimated based on
historical and expected repurchase activity, average loss rates,
and current economic trends, including an increase in the amount
of repurchase losses in recent quarters.
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The table below reflects activity in the representations and
warranties reserve for each of the last three years:
Table
43 — Summary of Reserve for Representations and
Warranties on Mortgage Loans Serviced for Others
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Reserve for representations and warranties, beginning of year
|
$ | 5,916 | $ | 5,270 | $ | 2,934 | ||||||
|
Acquired reserve for representations and warranties
|
7,000 | — | — | |||||||||
|
Reserve charges
|
(9,012 | ) | (2,516 | ) | (3,586 | ) | ||||||
|
Provision for representations and warranties
|
16,267 | 3,162 | 5,922 | |||||||||
|
Reserve for representations and warranties, end of year
|
$ | 20,171 | $ | 5,916 | $ | 5,270 | ||||||
Foreclosure
Documentation
In light of recent announcements regarding alleged
irregularities in the mortgage loan foreclosure processes of
certain high volume loan servicers, state law enforcement
authorities, the United States Department of Justice, and other
federal agencies have stated they are investigating mortgage
servicers foreclosure practices, and private litigation over
such practices has begun to appear in the courts. Those
investigations, as well as any other governmental or regulatory
scrutiny of foreclosure processes and private litigation, could
result in fines, penalties, damages, or other equitable remedies
and result in significant legal costs in responding to possible
governmental investigations and litigation.
Compared to the high volume servicers, we service a relatively
low volume of residential mortgage foreclosures, with
approximately 3,100 foreclosure cases as of December 31,
2010, in states that require foreclosures to proceed through the
courts. In response to industry-wide issues involving mortgage
loan foreclosure irregularities, we conducted a review in
October 2010 of our residential foreclosure process, focusing on
the accuracy of completed foreclosure affidavits in pending
foreclosure proceedings and the steps taken by us to ensure this
documentation was properly reviewed and validated prior to
filing the affidavit in the foreclosure proceeding. As a result
of our review, we have determined that we do not have any
significant issues relating to so-called
“robo-signing”, and that foreclosure affidavits were
completed and signed by employees with personal knowledge of the
contents of the affidavits. There is no reason to conclude that
foreclosures were filed that should not have been filed.
Additionally, we have identified and are strengthening processes
and controls to ensure that affidavits are prepared in
compliance with applicable state law. We consult with local
foreclosure counsel, as necessary, with respect to additional
requirements imposed by the courts in which foreclosure
proceedings are pending.
Compliance
Risk
Financial institutions are subject to a myriad of laws, rules
and regulations emanating at both the Federal and State levels.
These mandates cover a broad scope, including but not limited
to, expectations on anti-money laundering, lending limits,
client privacy, fair lending, community reinvestment and other
important areas. Recently, the volume and complexity of
regulatory changes adds to the overall compliance risk. At
Huntington, we take these mandates seriously and have invested
in people, processes and systems to help ensure we meet
expectations. At the corporate level we have a team of
compliance experts and lawyers dedicated to ensuring our
conformance. We provide, and require, training for our
colleagues on a number of broad-based laws and regulations. For
example, all of our employees are expected to take, and pass,
courses on anti-money laundering and customer privacy. Those who
are engaged in lending activities must also take training
related to flood disaster protection, equal credit opportunity,
fair lending and / or a variety of other courses
related to the extension of credit. We set a high standard of
expectation for adherence to compliance management and seek to
continuously enhance our performance in this regard.
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Table of Contents
Capital
(This section should be read in conjunction with Significant
Items 1 and 5, and Notes 12 and 14 of the Notes to the
Consolidated Financial Statements.)
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 $5.0 billion at
December 31, 2010. This represented a $0.4 billion
decrease compared with December 31, 2009, primarily
reflecting the repurchase of all 1.4 million shares of TARP
Capital held by the Treasury as part of our participation in the
TARP CPP
,
offset by the $920.0 million common stock
issuance and 2010 earnings.
We believe our current level of capital is adequate.
TARP
Capital
During 2008, we received $1.4 billion of equity capital by
issuing to the Treasury: (1) 1.4 million shares of
TARP Capital and, (2) 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. Upon receipt
of the TARP Capital in 2008, the proceeds were allocated to the
preferred stock and additional
paid-in-capital.
During the period of time that we held the TARP Capital, the
resulting discount was amortized which resulted in additional
dilution to our earnings per share. The TARP Capital was not a
component of Tier 1 common equity.
In the 2010 fourth quarter, we issued $920.0 million of
common stock and $300.0 million of 7.00% subordinated
notes due in 2020. The net proceeds of these issuances, along
with other funds, were used to repurchase all $1.4 billion
of the TARP Capital. The accretion of the remaining issuance
discount on the TARP Capital was accelerated, and a
corresponding reduction to retained earnings of
$56.3 million was recorded. Subsequently, on
January 19, 2011, we exited our TARP-related relationship
by repurchasing the ten-year warrant we had issued to the
Treasury as part of the TARP CPP for $49.1 million.
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Table of Contents
Capital
Adequacy
The following table presents risk-weighted 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
44 — Capital Adequacy
| December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||
|
Consolidated capital calculations:
|
||||||||||||||||||||
|
Common shareholders’ equity
|
$ | 4,618 | $ | 3,648 | $ | 5,351 | $ | 5,951 | $ | 3,016 | ||||||||||
|
Preferred shareholders’ equity
|
363 | 1,688 | 1,878 | — | — | |||||||||||||||
|
Total shareholders’ equity
|
4,981 | 5,336 | 7,229 | 5,951 | 3,016 | |||||||||||||||
|
Goodwill
|
(444 | ) | (444 | ) | (3,055 | ) | (3,059 | ) | (571 | ) | ||||||||||
|
Intangible assets
|
(229 | ) | (289 | ) | (357 | ) | (428 | ) | (59 | ) | ||||||||||
|
Intangible asset deferred tax liability(1)
|
80 | 101 | 125 | 150 | 21 | |||||||||||||||
|
Total tangible equity(2)
|
4,388 | 4,704 | 3,942 | 2,614 | 2,407 | |||||||||||||||
|
Preferred shareholders’ equity
|
(363 | ) | (1,688 | ) | (1,878 | ) | — | — | ||||||||||||
|
Total tangible common equity(2)
|
$ | 4,025 | $ | 3,016 | $ | 2,064 | $ | 2,614 | $ | 2,407 | ||||||||||
|
Total assets
|
$ | 53,820 | $ | 51,555 | $ | 54,353 | $ | 54,697 | $ | 35,329 | ||||||||||
|
Goodwill
|
(444 | ) | (444 | ) | (3,055 | ) | (3,059 | ) | (571 | ) | ||||||||||
|
Other intangible assets
|
(229 | ) | (289 | ) | (357 | ) | (428 | ) | (59 | ) | ||||||||||
|
Intangible asset deferred tax liability(1)
|
80 | 101 | 125 | 150 | 21 | |||||||||||||||
|
Total tangible assets(2)
|
$ | 53,227 | $ | 50,923 | $ | 51,066 | $ | 51,360 | $ | 34,720 | ||||||||||
|
Tier 1 equity
|
$ | 5,022 | $ | 5,201 | $ | 5,036 | $ | 3,460 | $ | 2,784 | ||||||||||
|
Preferred shareholders’ equity
|
(363 | ) | (1,688 | ) | (1,878 | ) | — | — | ||||||||||||
|
Trust-preferred securities
|
(570 | ) | (570 | ) | (736 | ) | (785 | ) | (320 | ) | ||||||||||
|
REIT preferred stock
|
(50 | ) | (50 | ) | (50 | ) | (50 | ) | (50 | ) | ||||||||||
|
Tier 1 common equity(2)
|
$ | 4,039 | $ | 2,893 | $ | 2,372 | $ | 2,625 | $ | 2,414 | ||||||||||
|
Risk-weighted assets (RWA)
|
$ | 43,471 | $ | 43,248 | $ | 46,994 | $ | 46,044 | $ | 31,155 | ||||||||||
|
Tier 1 common equity / RWA ratio(2)
|
9.29 | % | 6.69 | % | 5.05 | % | 5.70 | % | 7.75 | % | ||||||||||
|
Tangible equity / tangible asset ratio(2)
|
8.24 | 9.24 | 7.72 | 5.09 | 6.93 | |||||||||||||||
|
Tangible common equity / tangible asset ratio(2)
|
7.56 | 5.92 | 4.04 | 5.09 | 6.93 | |||||||||||||||
|
Tangible common equity / RWA ratio(2)
|
9.26 | 6.97 | 4.39 | 5.68 | 7.73 | |||||||||||||||
| (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. |
Our consolidated TCE ratio was 7.56% at December 31, 2010,
an increase from 5.92% at December 31, 2009. The
significant increase from December 31, 2009, primarily
reflected the increased capital resulting from our
$920.0 million common stock issuance during the 2010 fourth
quarter, and to a lesser extent, 2010 earnings.
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Table of Contents
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 our and the Bank’s risk-based
capital ratios at levels at which both would be considered
Well-capitalized by regulators. The Bank is primarily supervised
and regulated by the 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 of our consolidated
Tier 1, Tier 2, and total risk-based capital amounts
during 2010.
Table
45 — Regulatory Capital Activity
|
Common
|
Preferred
|
Disallowed
|
Disallowed
|
|||||||||||||||||||||
|
Shareholders’
|
Shareholders’
|
Qualifying
|
Goodwill &
|
Other
|
Tier 1
|
|||||||||||||||||||
| Equity(1) | Equity | Core Capital(2) | Intangible Assets | Adjustments (net) | Capital | |||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||
|
Balance at December 31, 2009
|
$ | 3,804.9 | $ | 1,687.5 | $ | 620.5 | $ | (632.2 | ) | $ | (279.5 | ) | $ | 5,201.2 | ||||||||||
|
Cumulative effect of accounting changes
|
(1.8 | ) | — | — | — | — | (1.8 | ) | ||||||||||||||||
|
Earnings
|
312.3 | — | — | — | — | 312.3 | ||||||||||||||||||
|
Changes to disallowed adjustments
|
— | — | — | 25.0 | 11.7 | 36.7 | ||||||||||||||||||
|
Cash dividends declared
|
(129.1 | ) | — | — | — | — | (129.1 | ) | ||||||||||||||||
|
Issuance of common stock
|
886.2 | — | — | — | — | 886.2 | ||||||||||||||||||
|
Repurchase of TARP Capital
|
— | (1,398.1 | ) | — | — | — | (1,398.1 | ) | ||||||||||||||||
|
Preferred stock discount accretion and repurchase
|
(73.1 | ) | 73.1 | — | — | — | — | |||||||||||||||||
|
Disallowance of deferred tax assets
|
— | — | — | — | 98.9 | 98.9 | ||||||||||||||||||
|
Change in minority interest
|
— | — | (0.2 | ) | — | — | (0.2 | ) | ||||||||||||||||
|
Other
|
15.7 | — | — | — | — | 15.7 | ||||||||||||||||||
|
Balance at December 31, 2010
|
$ | 4,815.1 | $ | 362.5 | $ | 620.3 | $ | (607.2 | ) | $ | (168.9 | ) | $ | 5,021.8 | ||||||||||
|
Qualifying
|
||||||||||||||||||||
|
Qualifying
|
Subordinated
|
Tier 1 Capital
|
Total Risk-Based
|
|||||||||||||||||
| ACL | Debt | Tier 2 capital | (from above) | Capital | ||||||||||||||||
|
Balance at December 31, 2009
|
$ | 556.3 | $ | 473.2 | $ | 1,029.5 | $ | 5,201.2 | $ | 6,230.7 | ||||||||||
|
Change in qualifying subordinated debt
|
— | 237.3 | 237.3 | — | 237.3 | |||||||||||||||
|
Change in qualifying ACL
|
(4.0 | ) | — | (4.0 | ) | — | (4.0 | ) | ||||||||||||
|
Changes to Tier 1 capital (see above)
|
— | — | — | (179.4 | ) | (179.4 | ) | |||||||||||||
|
Balance at December 31, 2010
|
$ | 552.3 | $ | 710.5 | $ | 1,262.8 | $ | 5,021.8 | $ | 6,284.6 | ||||||||||
| (1) | Excludes OCI and minority interest. | |
| (2) | Includes minority interest. |
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Table of Contents
The following table presents our regulatory capital ratios at
both the consolidated and Bank levels for the past five years:
Table
46 — Regulatory Capital Ratios
| At December 31, | ||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||
|
Total risk-weighted assets
|
Consolidated | $ | 43,471 | $ | 43,248 | $ | 46,994 | $ | 46,044 | $ | 31,155 | |||||||||||
| Bank | 43,281 | 43,149 | 46,477 | 45,731 | 30,779 | |||||||||||||||||
|
Tier 1 leverage ratio
|
Consolidated | 9.41 | % | 10.09 | % | 9.82 | % | 6.77 | % | 8.00 | % | |||||||||||
| Bank | 6.97 | 5.59 | 5.99 | 5.99 | 5.81 | |||||||||||||||||
|
Tier 1 risk-based capital ratio
|
Consolidated | 11.55 | 12.03 | 10.72 | 7.51 | 8.93 | ||||||||||||||||
| Bank | 8.51 | 6.66 | 6.44 | 6.64 | 6.47 | |||||||||||||||||
|
Total risk-based capital ratio
|
Consolidated | 14.46 | 14.41 | 13.91 | 10.85 | 12.79 | ||||||||||||||||
| Bank | 12.82 | 11.08 | 10.71 | 10.17 | 10.44 | |||||||||||||||||
Our consolidated Tier 1 risk-based capital ratios at
December 31, 2010, declined from 2009, primarily reflecting
a reduction in Tier 1 capital. The primary drivers of the
decline in Tier 1 Capital were the $1.4 billion
repurchase of TARP Capital, offset by the $0.9 billion
common stock issuance and $0.3 billion of earnings in 2010.
Our total risk-based capital ratio was little changed as the
decline in Tier 1 capital was offset by an increase in
Tier 2 capital. The change in Tier 2 capital primarily
reflected our $0.3 billion subordinated debt issuance.
The Bank’s Tier 1 risk-based capital ratios improved,
reflecting an increase in Tier 1 capital, primarily due to
an increase in retained earnings (see Parent Company Liquidity
discussion). The repurchase of the TARP Capital did not affect
the Bank’s capital ratios.
At December 31, 2010, our Tier 1 and total risk-based
capital in excess of the minimum level required to be considered
Well-capitalized were $2.4 billion and $1.9 billion,
respectively. The Bank had Tier 1 and Total risk-based
capital in excess of the minimum level required to be considered
Well-capitalized of $1.1 billion and $1.2 billion,
respectively, at December 31, 2010.
Other
Capital Matters
In 2010, shareholders passed a proposal to amend our charter
resulting in an increase of authorized common stock to
1.5 billion shares from 1.0 billion shares. No shares
were repurchased during 2010.
BUSINESS
SEGMENT DISCUSSION
Overview
For detail on each segment’s objectives, strategies, and
priorities, please read this section in conjunction with the
Item 1: Business section. This section reviews financial
performance from a business segment perspective and should be
read in conjunction with the Discussion of Results of
Operations, Note 25 of the Notes to Consolidated Financial
Statements, and other sections for a full understanding of our
consolidated financial performance.
During the 2010 fourth quarter, we reorganized our business
segments to better align certain business unit reporting with
segment executives in order to accelerate cross-sell results and
provide greater focus on the execution of strategic plans. We
have four major business segments: Retail and Business Banking;
Commercial Banking; Automobile Finance and Commercial Real
Estate; and Wealth Advisors, Government Finance, and Home
Lending. A Treasury / Other function includes our
insurance business, and other unallocated assets, liabilities,
revenue, and expense. All periods presented have been
reclassified to conform to the current period classification.
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Table of Contents
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.
Funds
Transfer Pricing
We use an active and centralized FTP methodology to attribute
appropriate net interest income to the business segments. 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 centrally monitored and managed. The
Treasury / Other function 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 capital are charged
(credited) with a four-year moving average FTP rate. The
denominator in the net interest margin calculation has been
modified to add the amount of net funds provided by each
business segment for all periods presented.
Revenue
Sharing
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 allocated relate
to customer derivatives and brokerage services, which are
recorded by WGH 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
The management accounting process that develops the business
segment reporting utilizes 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
related to product origination and servicing. These
activity-based costs are then extended, based on volumes, with
the resulting amount allocated to business segments that own the
related products. The second phase consists of the allocation of
overhead costs to all four business segments from
Treasury / Other. We utilize a full-allocation
methodology, where all Treasury / Other expenses,
except those related to our insurance business, servicing
Franklin-related assets, reported Significant Items (except for
the goodwill impairment), and a small amount of other residual
unallocated expenses, are allocated to the four business
segments.
Treasury
/ Other
The Treasury / Other function includes revenue and
expense related to our insurance business, and assets,
liabilities, and equity not directly assigned or allocated to
one of the four 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 insurance income, miscellaneous fee income not
allocated to other business segments, such as bank owned life
insurance income and any investment security and trading asset
gains or losses. Noninterest expense includes any
insurance-related expenses, as well as certain corporate
administrative, merger, and other miscellaneous expenses not
93
Table of Contents
allocated to other business segments. The provision for income
taxes for the business segments is calculated at a statutory 35%
tax rate, though our overall effective tax rate is lower. As a
result, Treasury / Other reflects a credit for income
taxes representing the difference between the lower actual
effective tax rate and the statutory tax rate used to allocate
income taxes to the business segments.
Net
Income by Business Segment
The segregation of net income by business segment for the past
three years is presented in the following table:
Table
47 — Net Income (Loss) by Business Segment
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Retail and Business Banking
|
$ | 131,036 | $ | (26,479 | ) | $ | 257,844 | |||||
|
Commercial Banking
|
38,462 | (158,736 | ) | 80,313 | ||||||||
|
AFCRE
|
46,492 | (588,154 | ) | (14,158 | ) | |||||||
|
WGH
|
34,801 | 1,743 | 42,994 | |||||||||
|
Treasury / Other
|
61,556 | 251,265 | (480,799 | ) | ||||||||
|
Unallocated goodwill impairment(1)
|
— | (2,573,818 | ) | — | ||||||||
|
Total net income (loss)
|
$ | 312,347 | $ | (3,094,179 | ) | $ | (113,806 | ) | ||||
| (1) | Represents the 2009 first quarter impairment charge, net of tax, associated with the former Regional Banking business segment. See the Goodwill section located in Critical Accounting Policies and Use of Significant Estimates section for additional information. |
94
Table of Contents
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, 2010, is presented in the following table:
Table
48 — Average Loans/Leases and Deposits by Business
Segment
|
Retail and
|
||||||||||||||||||||||||||||
|
Business
|
Commercial
|
Treasury/
|
||||||||||||||||||||||||||
| Banking | Banking | AFCRE | WGH | Other | TOTAL | |||||||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||||||
|
Average Loans/Leases
|
||||||||||||||||||||||||||||
|
Commercial and industrial
|
$ | 2,906 | $ | 7,103 | $ | 1,728 | $ | 694 | $ | — | $ | 12,431 | ||||||||||||||||
|
Commercial real estate
|
527 | 286 | 6,247 | 165 | — | 7,225 | ||||||||||||||||||||||
|
Total commercial
|
3,433 | 7,389 | 7,975 | 859 | — | 19,656 | ||||||||||||||||||||||
|
Automobile loans and leases
|
— | — | 4,890 | — | — | 4,890 | ||||||||||||||||||||||
|
Home equity
|
6,747 | 16 | — | 776 | 51 | 7,590 | ||||||||||||||||||||||
|
Residential mortgage
|
1,160 | 3 | — | 3,151 | 162 | 4,476 | ||||||||||||||||||||||
|
Other consumer
|
328 | 6 | 159 | 43 | 125 | 661 | ||||||||||||||||||||||
|
Total consumer
|
8,235 | 25 | 5,049 | 3,970 | 338 | 17,617 | ||||||||||||||||||||||
|
Total loans
|
$ | 11,668 | $ | 7,414 | $ | 13,024 | $ | 4,829 | $ | 338 | $ | 37,273 | ||||||||||||||||
|
Average Deposits
|
||||||||||||||||||||||||||||
|
Demand deposits — noninterest-bearing
|
$ | 3,303 | $ | 1,834 | $ | 362 | $ | 1,238 | $ | 122 | $ | 6,859 | ||||||||||||||||
|
Demand deposits — interest-bearing
|
4,196 | 123 | 43 | 1,214 | 3 | 5,579 | ||||||||||||||||||||||
|
Money market deposits
|
7,566 | 892 | 242 | 3,043 | — | 11,743 | ||||||||||||||||||||||
|
Savings and other domestic deposits
|
4,483 | 19 | 3 | 137 | — | 4,642 | ||||||||||||||||||||||
|
Core certificates of deposit
|
8,982 | 28 | 2 | 175 | 1 | 9,188 | ||||||||||||||||||||||
|
Total core deposits
|
28,530 | 2,896 | 652 | 5,807 | 126 | 38,011 | ||||||||||||||||||||||
|
Other deposits
|
244 | 278 | 40 | 1,183 | 982 | 2,727 | ||||||||||||||||||||||
|
Total deposits
|
$ | 28,774 | $ | 3,174 | $ | 692 | $ | 6,990 | $ | 1,108 | $ | 40,738 | ||||||||||||||||
95
Table of Contents
Retail
and Business Banking
Table
49 — Key Performance Indicators for Retail and
Business Banking
| Change from 2009 | ||||||||||||||||||||||||
| 2010 | 2009 | Amount | Percent | 2008 | ||||||||||||||||||||
| (Dollar amounts in thousands unless otherwise noted) | ||||||||||||||||||||||||
|
Net interest income
|
$ | 867,069 | $ | 810,658 | $ | 56,411 | 7 | % | $ | 859,477 | ||||||||||||||
|
Provision for credit losses
|
157,994 | 470,152 | (312,158 | ) | (66 | ) | 196,224 | |||||||||||||||||
|
Noninterest income
|
394,705 | 415,471 | (20,766 | ) | (5 | ) | 409,151 | |||||||||||||||||
|
Noninterest expense
|
902,186 | 796,714 | 105,472 | 13 | 675,720 | |||||||||||||||||||
|
Provision (benefit) for income taxes
|
70,558 | (14,258 | ) | 84,816 | N.R. | 138,840 | ||||||||||||||||||
|
Net income (loss)
|
$ | 131,036 | $ | (26,479 | ) | $ | 157,515 | N.R. | % | $ | 257,844 | |||||||||||||
|
Number of employees (full-time equivalent)
|
5,501 | 4,911 | 590 | 12 | % | 5,348 | ||||||||||||||||||
|
Total average assets (in millions)
|
$ | 13,161 | $ | 13,413 | $ | (252 | ) | (2 | ) | $ | 14,084 | |||||||||||||
|
Total average loans/leases (in millions)
|
11,668 | 12,269 | (601 | ) | (5 | ) | 12,850 | |||||||||||||||||
|
Total average deposits (in millions)
|
28,774 | 27,604 | 1,170 | 4 | 25,994 | |||||||||||||||||||
|
Net interest margin
|
3.00 | % | 2.93 | % | 0.07 | % | 2 | 3.32 | % | |||||||||||||||
|
NCOs
|
$ | 287,320 | $ | 325,210 | $ | (37,890 | ) | (12 | ) | $ | 134,094 | |||||||||||||
|
NCOs as a % of average loans and leases
|
2.46 | % | 2.65 | % | (0.19 | )% | (7 | ) | 1.04 | % | ||||||||||||||
|
Return on average common equity
|
9.1 | (2.4 | ) | 11.5 | N.R. | 28.8 | ||||||||||||||||||
|
Retail banking # demand deposit account (DDA) households (eop)
|
982,610 | 921,695 | 60,915 | 7 | 896,412 | |||||||||||||||||||
|
Retail banking
New-to-Bank
DDA relationships
90-day
cross-sell (eop)
|
3.68 | 3.27 | 0.41 | 13 | 2.12 | |||||||||||||||||||
|
Business banking # business DDA relationships (eop)
|
118,843 | 113,009 | 5,834 | 5 | 107,241 | |||||||||||||||||||
|
Business banking
New-to-Bank
DDA relationships
90-day
cross-sell (eop)
|
2.67 | 1.94 | 0.73 | 38 | 2.03 | |||||||||||||||||||
N.R. — Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
eop — End of Period.
2010
versus 2009
Retail and Business Banking reported net income of
$131.0 million in 2010, compared with a net loss of
$26.5 million in 2009. As discussed further below, the
$157.5 million increase included a $312.2 million, or
66%, decline in the provision for credit losses, partially
offset by a $105.5 million, or 13%, increase in noninterest
expense.
Net interest income increased $56.4 million, or 7%,
primarily reflecting a $1.2 billion increase in average
total deposits, a 19 basis point improvement in our deposit
spread, and a 7% increase in the number of DDA households. These
increases were the result of increased marketing initiatives in
2010 and sales efforts throughout 2009 and 2010, particularly in
our checking and money market deposit products.
The $0.6 billion, or 5%, decline in total average loans and
leases primarily reflected small business and consumer loan
sales.
Provision for credit losses declined $312.2 million, or
66%, reflecting lower NCOs, a $0.6 billion decrease in
related average loans and leases, and an improvement in
delinquencies. NCOs declined $37.9 million, or 12%, and
reflected a $102.5 million decline in total small business
NCOs partially offset by
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Table of Contents
a $64.6 million, or 40%, increase in total consumer NCOs.
The decrease in NCOs reflected a lower level of large dollar
NCOs, an improvement in delinquencies, and an improved credit
environment.
Noninterest income decreased $20.8 million, or 5%,
reflecting a $35.7 million decline in deposit service
charges resulting from the amendment to Reg E, the voluntary
reduction or elimination of NSF / OD fees, a decline
in the number of customers overdrafting their accounts, and our
new
24-Hour
Grace
tm
feature, reflecting our Fair Play banking philosophy. The
decrease was partially offset by: (1) $9.9 million
increase in electronic banking income, primarily reflecting an
increased number of deposit accounts and transaction volumes,
(2) $3.2 million increase in mortgage banking income,
and (3) $2.0 million increase in brokerage and
insurance income.
Noninterest expense increased $105.5 million, or 13%. This
increase reflected: (1) $37.2 million of higher
allocated expenses, (2) $31.4 million increase in
marketing expense related to brand and product advertising,
direct mail, and branch refurbishments,
(3) $29.9 million increase in personnel expense,
reflecting a 12% increase in full-time equivalent employees
associated with strategic initiatives, the re-instatement of
certain employee benefits such as a 401(k) plan matching
contribution, merit increases, and bonus compensation, and
(4) $18.8 million increase in deposit and other
insurance expense reflecting increased premiums due to higher
assessment rates and higher deposit balances. These increases
were partially offset by a $9.8 million improvement in OREO
losses.
2009
versus 2008
Retail and Business Banking reported a net loss of
$26.5 million in 2009, compared with net income of
$257.8 million in 2008. The $284.3 million decline
reflected a $273.9 million increase to the provision for
credit losses. This increase reflected a $191.1 million
increase in NCOs due to the impact of the overall weakened
economy across all of our regions. Also contributing to the
decline in net income was: (1) $48.8 million reduction
in net interest income, primarily reflecting a 39 basis
point decline in net interest margin, and
(2) $121.0 million increase in noninterest expense
primarily resulting from an increase in deposit and other
insurance expense, as well as OREO and foreclosure expense.
Commercial
Banking
Table
50 — Key Performance Indicators for Commercial
Banking
| Change from 2009 | ||||||||||||||||||||
| 2010 | 2009 | Amount | Percent | 2008 | ||||||||||||||||
| (Dollar amounts in thousands unless otherwise noted) | ||||||||||||||||||||
|
Net interest income
|
$ | 211,511 | $ | 190,955 | $ | 20,556 | 11 | % | $ | 279,014 | ||||||||||
|
Provision for credit losses
|
104,705 | 393,984 | (289,279 | ) | (73 | ) | 102,587 | |||||||||||||
|
Noninterest income
|
111,237 | 95,705 | 15,532 | 16 | 102,929 | |||||||||||||||
|
Noninterest expense
|
158,871 | 136,885 | 21,986 | 16 | 155,798 | |||||||||||||||
|
Provision (benefit) for income taxes
|
20,710 | (85,473 | ) | 106,183 | N.R. | 43,245 | ||||||||||||||
|
Net income (loss)
|
$ | 38,462 | $ | (158,736 | ) | $ | 197,198 | N.R. | % | $ | 80,313 | |||||||||
|
Number of employees (full-time equivalent)
|
538 | 467 | 71 | 15 | % | 466 | ||||||||||||||
|
Total average assets (in millions)
|
$ | 8,213 | $ | 8,730 | $ | (517 | ) | (6 | ) | $ | 8,648 | |||||||||
|
Total average loans/leases (in millions)
|
7,414 | 8,113 | (699 | ) | (9 | ) | 7,932 | |||||||||||||
|
Total average deposits (in millions)
|
3,174 | 3,030 | 144 | 5 | 3,452 | |||||||||||||||
|
Net interest margin
|
2.85 | % | 2.42 | % | 0.43 | % | 18 | 3.47 | % | |||||||||||
|
NCOs
|
$ | 66,267 | $ | 262,887 | $ | (196,620 | ) | (75 | ) | $ | 75,650 | |||||||||
|
NCOs as a % of average loans and leases
|
0.89 | % | 3.24 | % | (2.35 | )% | (73 | ) | 0.95 | % | ||||||||||
|
Return on average common equity
|
5.8 | (20.7 | ) | 26.5 | N.R. | 10.4 | ||||||||||||||
N.R. — Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
97
Table of Contents
2010
versus 2009
Commercial Banking reported net income of $38.5 million in
2010, compared with a net loss of $158.7 million in 2009.
This $197.2 million improvement reflected a
$289.3 million decline in provision for credit losses. The
increased earnings also reflected significant improvement in our
net interest income and noninterest income due to the successful
execution of our strategic initiatives. This investment is
reflected in higher noninterest expense and an increased number
of employees within the segment.
Net interest income increased $20.6 million, or 11%,
primarily reflecting a 43 basis point increase in the net
interest margin, partially offset by a $0.7 billion, or 9%,
decline in average total loans. This increase in the net
interest margin was almost entirely reflective of the
35 basis point improvement in our commercial loan spread as
a result of strategic pricing decisions.
Average total loans declined $0.7 billion, or 9%, primarily
reflecting paydowns, lower
line-of-credit
utilization. We have experienced higher runoff in our commercial
loan portfolio as many customers have actively reduced their
leverage position. Although this has resulted in a decline in
our average total loans for the year, originations increased in
the 2010 fourth quarter. The increased originations have been
the result of our investments in new markets and in new vertical
strategies (i.e. New England market and equipment finance
verticals).
Total average deposits increased $0.1 billion, or 5%,
reflecting a $0.6 billion increase in core deposits, offset
by a $0.5 billion decline in noncore deposits. The increase
in core deposits primarily reflected (1) $0.2 billion
increase in commercial demand deposits, and
(2) $0.3 billion increase in commercial savings and
money market deposits. These increases were primarily a result
of strategic efforts to improve our sales and servicing
functions, as well as initiatives designed to deepen customer
relationships. The decrease in noncore deposits primarily
reflected a $0.3 billion reduction in brokered and
negotiable deposits due to continued planned portfolio runoff.
Provision for credit losses declined $289.3 million, or
73%, reflecting the lower level of related loan balances, as
well as a $196.6 million decline in NCOs. Expressed as a
percentage of related average balances, NCOs decreased to 0.89%
from 3.24%. The decline in NCOs was primarily driven by
$158.3 million lower C&I NCOs and $38.6 million
lower CRE NCOs. The overall decline in NCOs was the result of
aggressive treatment of the portfolio over the past
18 months, an improved credit environment, and an increase
in recoveries.
Noninterest income increased $15.5 million, or 16%, and
primarily reflected: (1) $5.8 million in trading and
derivative revenue, (2) $4.8 million in foreign
exchange income resulting from strategic investments over the
past year in foreign exchange products and services,
(3) $4.7 million increase in loan commitment fee
income primarily due to our higher originations and execution of
key strategic initiatives, and (4) $2.9 million
increase of loan-related fees relating to the improved
collection of such fees from customers. These increases were
partially offset by a $4.0 million decline in equipment
operating lease income as lease originations were structured as
direct finance leases beginning in the 2009 second quarter.
Noninterest expense increased $22.0 million, or 16%, and
reflected: (1) $20.7 million increase in personnel
expense reflecting a 15% increase in full-time equivalent
employees, due to investments in strategically focused growth
markets, vertical strategies, and product capabilities,
(2) $1.4 million of higher allocated expenses, and
(3) $1.9 million increase in deposit and other
insurance expense reflecting increased premiums due to higher
assessment rates and higher deposit balances. These increases
were partially offset by a $3.2 million decrease in
equipment operating lease expense reflecting the change in
structuring of lease obligations effective with the 2009 second
quarter.
2009
versus 2008
Commercial Banking reported a net loss of $158.7 million in
2009, compared with net income of $80.3 million in 2008.
The decline reflected a $291.4 million increase to the
provision for credit losses. This increase to the provision for
credit losses reflected: (1) the continued economic
weaknesses in our markets, (2) an increase of commercial
reserves resulting from credit actions taken during 2009, and
(3) $187.2 million
98
Table of Contents
increase in NCOs. Also contributing to the decline in net income
was a $88.1 million reduction in net interest income,
primarily reflecting a 105 basis point decline in the net
interest margin.
Automobile
Finance and Commercial Real Estate
Table
51 — Key Performance Indicators for Automobile Finance
and Commercial Real Estate (AFCRE)
| Change from 2009 | ||||||||||||||||||||
| 2010 | 2009 | Amount | Percent | 2008 | ||||||||||||||||
| (Dollar amounts in thousands unless otherwise noted) | ||||||||||||||||||||
|
Net interest income
|
$ | 338,312 | $ | 277,450 | $ | 60,862 | 22 | % | $ | 352,328 | ||||||||||
|
Provision for credit losses
|
184,757 | 1,096,030 | (911,273 | ) | (83 | ) | 284,691 | |||||||||||||
|
Noninterest income
|
73,933 | 63,929 | 10,004 | 16 | 64,114 | |||||||||||||||
|
Noninterest expense
|
155,963 | 150,200 | 5,763 | 4 | 153,533 | |||||||||||||||
|
Provision (benefit) for income taxes
|
25,033 | (316,697 | ) | 341,730 | N.R. | (7,624 | ) | |||||||||||||
|
Net income (loss)
|
$ | 46,492 | $ | (588,154 | ) | $ | 634,646 | N.R. | % | $ | (14,158 | ) | ||||||||
|
Number of employees (full-time equivalent)
|
270 | 219 | 51 | 23 | % | 261 | ||||||||||||||
|
Total average assets (in millions)
|
$ | 12,908 | $ | 13,163 | $ | (255 | ) | (2 | ) | $ | 13,523 | |||||||||
|
Total average loans/leases (in millions)
|
13,024 | 13,076 | (52 | ) | — | 13,760 | ||||||||||||||
|
Total average deposits (in millions)
|
692 | 572 | 120 | 21 | 612 | |||||||||||||||
|
Net interest margin
|
2.54 | % | 2.07 | % | 0.47 | % | 23 | 2.54 | % | |||||||||||
|
NCOs
|
$ | 349,869 | $ | 670,327 | $ | (320,458 | ) | (48 | ) | $ | 103,913 | |||||||||
|
NCOs as a % of average loans and leases
|
2.69 | % | 5.13 | % | (2.44 | )% | (48 | ) | 0.76 | % | ||||||||||
|
Return on average common equity
|
5.5 | (78.3 | ) | 83.8 | N.R. | (2.4 | ) | |||||||||||||
|
Automobile loans production (in millions)
|
$ | 3,427 | $ | 1,589 | $ | 1,838 | 116 | $ | 2,213 | |||||||||||
|
Noninterest Income
|
73,933 | 63,929 | 10,004 | 16 | 64,114 | |||||||||||||||
|
Operating lease income
|
45,963 | 51,811 | (5,848 | ) | (11 | ) | 39,828 | |||||||||||||
|
Noninterest income, excluding operating lease income
|
$ | 27,970 | $ | 12,118 | $ | 15,852 | 131 | % | $ | 24,286 | ||||||||||
|
Noninterest expense
|
$ | 155,963 | $ | 150,200 | $ | 5,763 | 4 | % | $ | 153,533 | ||||||||||
|
Operating lease expense
|
37,034 | 43,360 | (6,326 | ) | (15 | ) | 31,282 | |||||||||||||
|
Noninterest expense, excluding operating lease expense
|
$ | 118,929 | $ | 106,840 | $ | 12,089 | 11 | % | $ | 122,251 | ||||||||||
N.R. — Not relevant, as denominator of calculation is
a loss in prior period compared with income in current period.
2010
vs. 2009
AFCRE reported net income of $46.5 million in 2010,
compared with a net loss of $588.2 million in 2009. Net
income for the automobile finance business was
$76.9 million in 2010 compared to $10.7 million in
2009 while the commercial real estate business incurred a net
loss of $30.4 million in 2010 compared to a net loss of
$598.9 million in 2009. The $634.6 million increase in
net income reflected a $911.3 million decline in the
provision for credit losses, primarily due to a reduction in
reserves as the underlying credit quality of the loan portfolios
continues to improve and / or stabilize. The
comparable year-ago period included higher provisions for credit
losses to increase reserves due to economic and commercial real
estate and automobile-industry-related weaknesses in our
markets. Total NCOs declined $320.5 million, or 48%,
including a $323.1 million decline in CRE loan NCOs and a
$29.5 million decline in automobile loan and lease related
NCOs. This was partially offset by an increase in C&I NCOs
of $33.5 million.
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Table of Contents
Net interest income increased $60.9 million, or 22%,
reflecting a 47 basis point increase in the net interest
margin. Average total loans were essentially unchanged. The net
interest margin increase primarily reflected the implementation
of a risk-based pricing strategy in CRE portfolio lending that
began in early 2009. Average total loans reflected a
$1.6 billion increase in average consumer automobile loans
that resulted from record loan origination levels, as well as
the consolidation of previously unconsolidated automobile loan
trust (see below). These increases were partially offset by a
$1.2 billion decline in average CRE loans resulting from
the aggressive management of this portfolio and our on-going
commitment to reducing our noncore CRE portfolio.
On January 1, 2010, we adopted a new accounting standard to
consolidate a previously off-balance sheet automobile loan
securitization transaction. At the end of the 2009 first
quarter, we transferred $1.0 billion of automobile loans to
a trust in a securitization transaction that was part of a
funding strategy. At the time of the consolidation, the trust
was holding $0.8 billion of loans and we elected to account
for these loans, as well as the underlying debt, at fair value.
At December 31, 2010, these loans had a remaining balance
of $0.5 billion.
Average total deposits increased $0.1 billion, or 21%,
reflecting our commitment to strengthening relationships with
core customers and prospects, as well as new commercial
automobile dealer relationships developed in 2010.
Noninterest income, excluding operating lease income, increased
$15.9 million. Results for 2009 included a
$5.9 million nonrecurring loss from the securitization
transaction and a $0.7 million nonrecurring gain from the
sale of related securities. In addition, results for 2010
included a $4.0 million net gain resulting from valuation
adjustments of the loans and associated notes payable held by
the consolidated trust discussed above, a $5.7 million
improvement in fee income from derivative trading activities,
and a $3.1 million increase in CRE loan fees. Partially
offsetting these increases was a $3.9 million decrease in
servicing income also attributed to the automobile
securitization trust consolidation.
Noninterest expense, excluding operating lease expense,
increased $12.1 million. This increase reflected a
$6.6 million increase in personnel expense, much of which
related to increased loan origination activities, including the
rebuilding of the commercial real estate team, and a
$1.4 million increase in allocated costs primarily related
to higher production and other activity levels. Also, commercial
real estate credit-related expenses (e.g. appraisals, loan
collections, taxes, and OREO expenses) increased
$6.2 million. These increases were partially offset by a
$4.7 million decrease in losses associated with sales of
vehicles returned at the end of their lease terms, as used
vehicle values throughout 2010 have been at higher relative
levels and the number of vehicles being returned has declined
compared to the year-ago period.
Net automobile operating lease income increased
$0.5 million, reflecting lower depreciation expense
attributed to improvement in estimated vehicle residual values.
Net automobile operating lease income is expected to decline in
future periods as a result of the discontinuation of all lease
origination activities in 2008 and the resulting continued
runoff of the automobile operating lease portfolio.
2009
vs. 2008
AFCRE reported a net loss of $588.2 million in 2009,
compared with a net loss of $14.2 million in 2008. The
provision for credit losses increased $811.3 million
reflecting: (1) economic weaknesses in our markets,
(2) an increase in commercial reserves resulting from
credit actions taken during 2009, and (3) a
$566.4 million increase in NCOs, also reflecting the impact
of economic conditions on our borrowers. Net interest income
declined $74.9 million reflecting both a decline in average
loan balances and a 47 basis point decrease in the net
interest margin. The decrease in the net interest margin
resulted from changes in funding cost allocation methodologies
as well as the impact of increased NALs. The decline in loan
balances was primarily due to the 2009 securitization
transaction.
Noninterest income (excluding operating lease income of
$51.8 million during 2009 and $39.8 million in
2008) decreased $12.2 million reflecting a
$5.9 million nonrecurring loss from the 2009 securitization
transaction as well as declines in various other fee generating
activities, much of which was attributed to adverse market
conditions. Noninterest expense (excluding operating lease
expense of $43.4 million in 2009
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and $31.3 million in 2008) decreased
$15.4 million primarily reflecting a $22.4 million
reduction in losses associated with the sale of vehicles
returned at the end of their lease terms. Also, personnel and
various other expenses declined as a result of expense reduction
initiatives. These declines were offset in part by an increase
in allocated corporate and other overhead expenses due to
changes in allocation methodologies.
Wealth
Advisors, Government Finance, and Home Lending
Table
52 — Key Performance Indicators for Wealth Advisors,
Government Finance, and Home Lending
| Change from 2009 | ||||||||||||||||||||
| 2010 | 2009 | Amount | Percent | 2008 | ||||||||||||||||
| (Dollar amounts in thousands unless otherwise noted) | ||||||||||||||||||||
|
Net interest income
|
$ | 169,201 | $ | 164,335 | $ | 4,866 | 3 | % | $ | 189,191 | ||||||||||
|
Provision for credit losses
|
95,586 | 128,551 | (32,965 | ) | (26 | ) | 35,960 | |||||||||||||
|
Noninterest income
|
338,633 | 267,695 | 70,938 | 26 | 186,682 | |||||||||||||||
|
Noninterest expense
|
358,707 | 300,799 | 57,908 | 19 | 273,769 | |||||||||||||||
|
Provision for income taxes
|
18,740 | 937 | 17,803 | 1,900 | 23,150 | |||||||||||||||
|
Net income
|
$ | 34,801 | $ | 1,743 | $ | 33,058 | 1,897 | % | $ | 42,994 | ||||||||||
|
Number of employees (full-time equivalent)
|
2,211 | 1,963 | 248 | 13 | % | 1,907 | ||||||||||||||
|
Total average assets (in millions)
|
$ | 6,317 | $ | 6,164 | $ | 153 | 2 | $ | 6,363 | |||||||||||
|
Total average loans/leases (in millions)
|
4,829 | 4,725 | 104 | 2 | 5,200 | |||||||||||||||
|
Total average deposits (in millions)
|
6,990 | 5,855 | 1,135 | 19 | 4,502 | |||||||||||||||
|
Net interest margin
|
2.23 | % | 2.69 | % | (0.46 | )% | (17 | ) | 3.36 | % | ||||||||||
|
NCOs
|
$ | 79,647 | $ | 102,264 | $ | (22,617 | ) | (22 | ) | $ | 20,864 | |||||||||
|
NCOs as a % of average loans and leases
|
1.65 | % | 2.16 | % | (0.51 | )% | (24 | ) | 0.40 | % | ||||||||||
|
Return on average common equity
|
5.7 | 0.4 | 5.3 | 1,325 | 11.5 | |||||||||||||||
|
Mortgage banking origination volume (in millions)
|
$ | 5,476 | $ | 5,262 | $ | 214 | 4 | $ | 3,773 | |||||||||||
|
Noninterest income shared with other
|
||||||||||||||||||||
|
business segments(1)
|
$ | 43,779 | $ | 39,994 | $ | 3,785 | 9 | $ | 34,954 | |||||||||||
|
Total assets under management (in billions)- eop
|
14.4 | 13.0 | 1.4 | 11 | 13.3 | |||||||||||||||
|
Total trust assets (in billions)- eop
|
60.3 | 49.4 | 10.9 | 22 | 44.0 | |||||||||||||||
eop — End of Period.
| (1) | Amount is not included in noninterest income reported above. |
2010
vs. 2009
WGH reported net income of $34.8 million in 2010, compared
with net income of $1.7 million in 2009. The
$33.1 million improvement reflected a $50.9 million
increase in pretax income, partially offset by a
$17.8 million increase in income taxes. The primary reason
for the increase in pretax income was a $33.0 million lower
provision for credit losses in 2010 driven mostly by
$22.6 million lower NCOs. Mortgage banking income increased
by $57.8 million due to both an improved market for
mortgage loan originations and sales in 2010, and to favorable
results from WGH’s MSR hedging activities. Trust services
and brokerage income increased by $9.4 million and
$5.5 million reflecting higher levels of sales. Increased
noninterest income of $70.9 million was partially offset by
$57.9 million higher noninterest expenses due to
investments in strategic initiatives and a higher level of FDIC
deposit insurance premiums due to higher assessment rates and
higher deposit balances.
Average total deposits increased $1.1 billion, or 19%. A
substantial portion of the deposit growth resulted from the
introduction of three deposit products during 2009 and a fourth
during 2010 designed as alternative options for lower yielding
money market mutual funds. The new deposit products were:
(1) the Huntington
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Conservative Deposit Account, (2) the Huntington Protected
Deposit Account, (3) the Collateral Backed Deposit Account,
and (4) the Bank Deposit Sweep Product. These four deposit
products had balances in excess of $1.2 billion at
December 31, 2010.
2009
vs. 2008
WGH reported net income of $1.7 million in 2009, a
$41.3 million decline compared with 2008. The provision for
credit losses increased by $92.6 million, reflecting an
$81.4 million increase in NCOs, including a
$58.3 million increase in residential mortgage NCOs. Credit
quality was stressed during 2009 consistent with economic
conditions in the Company’s markets. Mortgage banking
income increased $100.5 million due to more favorable
lending conditions in the first half of 2009. Partially
offsetting that increase, trust services declined
$21.4 million, net interest income was $24.9 million
lower, and noninterest expense was $27.0 million higher.
Average total loans decreased $0.5 billion, or 9%,
primarily reflecting residential mortgage sales during 2009.
RESULTS
FOR THE FOURTH QUARTER
Earnings
Discussion
In the 2010 fourth quarter, we reported net income of
$122.9 million, or $0.05 per common share, compared with a
net loss of $369.7 million, or $0.56 per common share, in
the year-ago quarter. Significant items impacting 2010 fourth
quarter performance included
(see table below)
:
Table
53 — Significant Items Influencing Earnings
Performance Comparison
| Impact(1) | ||||||||
| After-tax | EPS(2) | |||||||
| (Dollar amounts in millions, except per share amounts) | ||||||||
|
Three Months Ended:
|
||||||||
|
December 31, 2010 — GAAP income
|
$ | 122.9 | $ | 0.05 | ||||
|
• Preferred stock conversion deemed
dividend
|
— | (0.07 | ) | |||||
|
December 31, 2009 — GAAP loss
|
$ | (369.7 | ) | $ | (0.56 | ) | ||
|
• Gain on the early extinguishment of debt
|
73.6 | 0.07 | ||||||
|
• Deferred tax valuation allowance benefit
|
11.3 | (2) | 0.02 | |||||
| (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 / Average Balance Sheet
FTE net interest income increased $42.4 million, or 11%,
from the year-ago quarter. This reflected the favorable impact
of the significant increase in the net interest margin to 3.37%
from 3.19%. This also reflected the benefit of a
$2.4 billion, or 5%, increase in average total earning
assets due to a $1.4 billion, or 15%, increase in average
total investment securities, and a $0.7 billion, or 2%,
increase in average total loans and leases.
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The following table presents the $0.7 billion, or 2%,
increase in average loans and leases.
Table
54 — Average Loans/Leases — 2010 Fourth
Quarter vs. 2009 Fourth Quarter
| Fourth Quarter | Change | |||||||||||||||
| 2010 | 2009 | Amount | Percent | |||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||
|
Average Loans/Leases
|
||||||||||||||||
|
Commercial and industrial
|
$ | 12,767 | $ | 12,570 | $ | 197 | 2 | % | ||||||||
|
Commercial real estate
|
6,798 | 8,458 | (1,660 | ) | (20 | ) | ||||||||||
|
Total commercial
|
19,565 | 21,028 | (1,463 | ) | (7 | ) | ||||||||||
|
Automobile loans and leases
|
5,520 | 3,326 | 2,194 | 66 | ||||||||||||
|
Home equity
|
7,709 | 7,561 | 148 | 2 | ||||||||||||
|
Residential mortgage
|
4,430 | 4,417 | 13 | — | ||||||||||||
|
Other consumer
|
576 | 757 | (181 | ) | (24 | ) | ||||||||||
|
Total consumer
|
18,235 | 16,061 | 2,174 | 14 | ||||||||||||
|
Total loans/leases
|
$ | 37,800 | $ | 37,089 | $ | 711 | 2 | % | ||||||||
The increase in average total loans and leases reflected:
| • | $2.2 billion, or 66%, increase in average automobile loans and leases. In early 2009, we transferred automobile loans to a trust in a securitization transaction. With the adoption of ASC 810 — Consolidation, that trust was consolidated as of January 1, 2010. At December 31, 2010, these securitized loans had a remaining balance of $0.5 billion. Underlying growth in automobile loans continued to be strong, reflecting a significant increase in loan originations compared to the year-ago period. The growth has come while maintaining our commitment to excellent credit quality and an appropriate return. | |
| • | $0.1 billion, or 2%, increase in average home equity loans, reflecting slightly higher line-of-credit utilization and slower runoff experience, partially offset by lower origination volume. | |
| • | $0.2 billion, or 2%, increase in average C&I loans, reflecting our efforts to expand our portfolio within our primary markets, and to a lesser degree the benefit of the 2009 reclassifications of certain CRE loans, primarily owner occupied properties, to C&I loans. These benefits were partially offset by the reclassification in the 2010 first quarter of variable-rate demand notes to municipal securities. We continue to believe there are opportunities for C&I growth in the coming quarters. |
Partially offset by:
| • | $1.7 billion, or 20%, decrease in average CRE loans reflecting the impact of 2009 reclassifications of certain CRE loans, primarily representing owner occupied properties, to C&I loans, as well as our on-going commitment to lower our overall CRE exposure. We continue to effectively execute our plan to reduce the noncore CRE exposure while maintaining a commitment to our core CRE borrowers. The decrease in average balances is associated with the noncore portfolio, as we have maintained relatively consistent balances with good performance in the core portfolio. |
The $1.4 billion, or 15%, increase in average total
investment securities reflected the redeployment of cash
generated from deposit growth.
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The following table details the $1.5 billion, or 4%,
increase in average total deposits.
Table
55 — Average Deposits — 2010 Fourth Quarter
vs. 2009 Fourth Quarter
| Fourth Quarter | Change | |||||||||||||||
| 2010 | 2009 | Amount | Percent | |||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||
|
Average Deposits
|
||||||||||||||||
|
Demand deposits: noninterest-bearing
|
$ | 7,188 | $ | 6,466 | $ | 722 | 11 | % | ||||||||
|
Demand deposits: interest-bearing
|
5,317 | 5,482 | (165 | ) | (3 | ) | ||||||||||
|
Money market deposits
|
13,158 | 9,271 | 3,887 | 42 | ||||||||||||
|
Savings and other domestic deposits
|
4,640 | 4,686 | (46 | ) | (1 | ) | ||||||||||
|
Core certificates of deposit
|
8,646 | 10,867 | (2,221 | ) | (20 | ) | ||||||||||
|
Total core deposits
|
38,949 | 36,772 | 2,177 | 6 | ||||||||||||
|
Other deposits
|
2,755 | 3,442 | (687 | ) | (20 | ) | ||||||||||
|
Total deposits
|
$ | 41,704 | $ | 40,214 | $ | 1,490 | 4 | % | ||||||||
The increase in average total deposits from the year-ago quarter
reflected:
| • | $2.2 billion, or 6%, growth in average total core deposits. The drivers of this change were a $3.9 billion, or 42%, growth in average money market deposits, and a $0.7 billion, or 11%, growth in average noninterest-bearing demand deposits. These increases were partially offset by a $2.2 billion, or 20%, decline in average core certificates of deposit and a $0.2 billion, or 3%, decrease in average interest-bearing demand deposits. | |
| • | $0.8 billion, or 33%, decline in brokered deposits and negotiable CDs, primarily reflecting a reduction of noncore funding sources. |
Provision
for Credit Losses
The provision for credit losses in the 2010 fourth quarter was
$87.0 million, down $807.0 million, or 90%, from the
year-ago quarter. The 2010 fourth quarter provision for credit
losses was $85.3 million less than total NCOs, reflecting
the resolution of problem loans for which reserves had been
previously established.
Noninterest
Income
Noninterest income increased $19.7 million from the
year-ago quarter.
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Table
56 — Noninterest Income — 2010 Fourth
Quarter vs. 2009 Fourth Quarter
| Fourth Quarter | Change | |||||||||||||||
| 2010 | 2009 | Amount | Percent | |||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
|
Service charges on deposit accounts
|
$ | 55,810 | $ | 76,757 | $ | (20,947 | ) | (27 | )% | |||||||
|
Mortgage banking income
|
53,170 | 24,618 | 28,552 | 116 | ||||||||||||
|
Trust services
|
29,394 | 27,275 | 2,119 | 8 | ||||||||||||
|
Electronic banking
|
28,900 | 25,173 | 3,727 | 15 | ||||||||||||
|
Insurance income
|
19,678 | 16,128 | 3,550 | 22 | ||||||||||||
|
Brokerage income
|
16,953 | 16,045 | 908 | 6 | ||||||||||||
|
Bank owned life insurance income
|
16,113 | 14,055 | 2,058 | 15 | ||||||||||||
|
Automobile operating lease income
|
10,463 | 12,671 | (2,208 | ) | (17 | ) | ||||||||||
|
Securities losses
|
(103 | ) | (2,602 | ) | 2,499 | (96 | ) | |||||||||
|
Other income
|
33,842 | 34,426 | (584 | ) | (2 | ) | ||||||||||
|
Total noninterest income
|
$ | 264,220 | $ | 244,546 | $ | 19,674 | 8 | % | ||||||||
The $19.7 million increase reflected:
| • | $28.6 million, or 116%, increase in mortgage banking income. This reflected a $31.8 million increase in origination and secondary marketing income, as originations increased 62% from the year-ago quarter, partially offset by a $3.2 million increase in amortization of capitalized servicing expense. | |
| • | $3.7 million, or 15%, increase in electronic banking income, reflecting an increase in debit card transaction volume. | |
| • | $3.6 million, or 22%, increase in insurance income, primarily reflecting an increase in title insurance income due to higher mortgage refinance activity. | |
| • | $2.5 million benefit from lower securities losses in the 2010 fourth quarter compared with the year-ago quarter. | |
| • | $2.1 million, or 15%, increase in bank owned life insurance income. | |
| • | $2.1 million, or 8%, increase in trust services income, with 50% of the increase due to increases in asset market values and the remainder reflecting growth in new business. |
Partially offset by:
| • | $20.9 million, or 27%, decline in service charges on deposit accounts, reflecting lower personal service charges due to a combination of factors including the implementation of the amendment to Reg E, our Fair Play banking philosophy, and lower underlying activity levels. | |
| • | $2.2 million, or 17%, decline in automobile operating lease income reflecting the impact of a declining portfolio, having exited that business in 2008. |
Noninterest
Expense
(This
section should be read in conjunction with Significant
Item 4.)
Noninterest expense increased $112.0 million, or 35%, from
the year-ago quarter.
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Table
57 — Noninterest Expense — 2010 Fourth
Quarter vs. 2009 Fourth Quarter
| Fourth Quarter | Change | |||||||||||||||
| 2010 | 2009 | Amount | Percent | |||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
|
Personnel costs
|
$ | 212,184 | $ | 180,663 | $ | 31,521 | 17 | % | ||||||||
|
Outside data processing and other services
|
40,943 | 36,812 | 4,131 | 11 | ||||||||||||
|
Net occupancy
|
26,670 | 26,273 | 397 | 2 | ||||||||||||
|
Deposit and other insurance expense
|
23,320 | 24,420 | (1,100 | ) | (5 | ) | ||||||||||
|
Professional services
|
21,021 | 25,146 | (4,125 | ) | (16 | ) | ||||||||||
|
Equipment
|
22,060 | 20,454 | 1,606 | 8 | ||||||||||||
|
Marketing
|
16,168 | 9,074 | 7,094 | 78 | ||||||||||||
|
Amortization of intangibles
|
15,046 | 17,060 | (2,014 | ) | (12 | ) | ||||||||||
|
OREO and foreclosure expense
|
10,502 | 18,520 | (8,018 | ) | (43 | ) | ||||||||||
|
Automobile operating lease expense
|
8,142 | 10,440 | (2,298 | ) | (22 | ) | ||||||||||
|
Gain on early extinguishment of debt
|
— | (73,615 | ) | 73,615 | (100 | ) | ||||||||||
|
Other expense
|
38,537 | 27,349 | 11,188 | 41 | ||||||||||||
|
Total noninterest expense
|
$ | 434,593 | $ | 322,596 | $ | 111,997 | 35 | % | ||||||||
|
Full-time equivalent employees, at period-end
|
11,341 | 10,272 | 1,069 | 10 | % | |||||||||||
The $112.0 million increase reflected:
| • | $73.6 million gain on early extinguishment of debt that reduced expenses in the year-ago quarter. | |
| • | $31.5 million, or 17%, increase in personnel costs, primarily reflecting a 10% increase in full-time equivalent staff in support of strategic initiatives, as well as higher commissions and other incentive expenses, and the re-instatement of our 401(k) plan matching contribution in 2010. | |
| • | $11.2 million, or 41%, increase in other expense, reflecting $5.9 million associated with increases in repurchase reserves related to representations and warranties made on mortgage loans sold, as well as increased travel and miscellaneous fees. | |
| • | $7.1 million, or 78%, increase in marketing expense, reflecting increases in branding and product advertising activities in support of strategic initiatives. | |
| • | $4.1 million, or 11%, increase in outside data processing and other services, reflecting higher outside programming and other costs associated with the implementation of strategic initiatives, partially offset by lower Franklin-related servicing costs. |
Partially offset by:
| • | $8.0 million, or 43%, decline in OREO and foreclosure expense. | |
| • | $4.1 million, or 16%, decrease in professional services, reflecting lower legal expenses. | |
| • | $2.3 million, or 22%, decline in automobile operating lease expense as that portfolio continued to runoff. | |
| • | $2.0 million, or 12%, decrease in the amortization of intangibles expense. |
Income
Taxes
The provision for income taxes in the 2010 fourth quarter was
$35.0 million and a benefit of $228.3 million in the
fourth quarter 2009. The effective tax rate in the fourth
quarter 2010 was 22.2% compared to a tax benefit of 38.2% in the
fourth quarter 2009. At December 31, 2010 and 2009 we had a
deferred tax asset of $538.3 million and
$480.5 million, respectively. Based on both positive and
negative
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evidence and our level of forecasted future taxable income,
there was no impairment of the deferred tax asset at
December 31, 2010 and 2009. The total disallowed deferred
tax asset for regulatory capital purposes decreased to
$161.3 million at December 31, 2010, from
$260.1 million at December 31, 2009.
Credit
Quality
Credit quality performance in the 2010 fourth quarter continued
to show improvement. Total NCOs declined $272.5 million, or
61%, compared with the year-ago quarter. The decline was largely
centered in the CRE portfolio as CRE NCOs declined
$213.2 million. This decline in the CRE portfolio was
partially offset by an increase in residential mortgage NCOs,
partially reflecting NCOs associated with loans sold during the
current quarter. Other key credit quality measurements also
showed improvement, including significant declines in NPAs and
in the level of Criticized commercial loans. These declines
reflected the positive impact of significant levels of loan
restructures, upgrades, and payment activity. Notably, the level
of new additions during the 2010 fourth quarter was more
comparable to that in the first half of 2010 rather than the
elevated 2010 third quarter level. The economic environment
remains challenging. Yet, reflecting the benefit of our focused
credit actions, we continue to expect declines in total NPAs and
Criticized loans going forward.
Delinquency trends across the entire loan and lease portfolio
continued to improve, with a significant opportunity for further
improvement in the residential and home equity portfolios.
Automobile loan delinquency rates continued to decline. Given
the significant increase in new automobile origination volume,
we use a lagged delinquency measure to ensure that the
underlying portfolio performance is consistent with our
expectations. Based on the lagged analysis and the origination
quality, we remain comfortable with the on-going performance of
our automobile loan portfolio.
The current quarter’s NCOs were primarily related to
reserves established in prior periods. Our ACL declined
$240.2 million to $1,291.1 million, or 3.39% of
period-end total loans and leases at December 31, 2010,
from $1,531.4 million, or 4.16%, at December 31, 2009.
Importantly, our ACL as a percent of period-end NALs increased
to 166% from 80%, along with improved coverage ratios associated
with NPAs and Criticized assets. These improved coverage ratios
indicate a strengthening of our reserves relative to troubled
assets from the end of the prior year-ago quarter.
NCOs
(This
section should be read in conjunction with Significant
Item 3.)
Total NCOs for the 2010 fourth quarter were $172.3 million,
or an annualized 1.82% of average total loans and leases. NCOs
in the year-ago quarter were $444.7 million, or an
annualized 4.80%.
Total C&I NCOs for the 2010 fourth quarter were
$59.1 million, or an annualized 1.85%, down from
$109.8 million, or an annualized 3.49% of related loans, in
the year-ago quarter. The decline reflected improvement in the
overall credit quality of the portfolio.
Current quarter CRE NCOs were $44.9 million, or an
annualized 2.64%, down from $258.1 million, or an
annualized 12.21% in the year-ago quarter. The decline was
consistent with the improving asset quality metrics. NALs and
Criticized loans at December 31, 2010, were at their lowest
levels since 2008, and early stage delinquency continued to
improve. The 2010 fourth quarter CRE NCOs continued to be
centered in retail projects. The retail property portfolio
remains the most susceptible to a continued decline in market
conditions, but we believe that the combination of prior NCOs
and existing reserves positions us well to make effective credit
decisions in the future. While the office portfolio has
experienced stress, we remain comfortable with this exposure.
Total consumer NCOs in the current quarter were
$68.3 million, or an annualized 1.50%, down from
$76.8 million, or an annualized 1.91% of average total
consumer loans in the year-ago quarter. The 2010 fourth quarter
results represented a continuation of our loss mitigation
programs and active loss recognition processes. This included
accounts in all stages of performance, including bankruptcy.
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Table of Contents
Residential mortgage NCOs were $26.8 million, or an
annualized 2.42% of related average balances, an increase
compared with $17.8 million, or an annualized 1.61% in the
year-ago quarter. During the current quarter, we continued to
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 2010 fourth quarter were
$29.2 million, or an annualized 1.51%. This was down from
$35.8 million, or an annualized 1.89%, in the year-ago
quarter. We continued to manage the default rate through focused
delinquency monitoring as virtually all defaults for second-lien
home equity loans incur substantial losses given the reduced
collateral equity. Our strategies focus on loss mitigation
activity through early intervention and restructuring loan terms.
Automobile loan and lease NCOs were $7.0 million, or an
annualized 0.51%, down from $12.9 million, or an annualized
1.55%, 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. During the 2010 fourth quarter, we originated
$795.6 million of loans with an average FICO score of 764
with a continued emphasis on lower LTV ratios.
NPAs
and NALs
Total NALs were $777.9 million at December 31, 2010,
and represented 2.04% of total loans and leases. This was down
$1,139.0 million, or 59%, from $1,917.0 million, or
5.21% ,of total loans and leases at the end of the year ago
period. This decrease primarily reflected problem loan
resolution activity and NCOs. This substantial decline is a
direct result of our commitment to the on-going proactive
management of these loans by our SAD. Also key to this
improvement was the lower level of inflows. The level of
inflows, or migration, is an important indicator of the future
trend for the portfolio.
NPAs, which include NALs, were $844.8 million at
December 31, 2010, and represented 2.21% of total loans and
leases. This was significantly lower than $2,058.1 million,
or 5.57% of related assets at the end of the year-ago period.
The $1,213.3 million decrease in NPAs from the end of the
year-ago period reflected a $1,139.0 million decrease in
NALs.
The over
90-day
delinquent, but still accruing, ratio for total loans not
guaranteed by a U.S. government agency, was 0.23% at
December 31, 2010, representing a 17 basis point
decline compared with December 31, 2009. This decrease
primarily reflected continued improvement in our core
performance, as well as the impact of the sale of certain
underperforming loans in the 2010 fourth quarter.
ACL
(This
section should be in read in conjunction with Note 1 and
Note 6 in the Notes to the Consolidated Financial
Statements).
At December 31, 2010, the ALLL was $1,249.0 million,
down $233.5 million, or 16%, from $1,482.5 million at
December 31, 2009. Expressed as a percent of period-end
loans and leases, the ALLL ratio at December 31, 2010, was
3.28%, a decline from 4.03% at December 31, 2009. The ALLL
as a percent of NALs was 161% at December 31, 2010, a
substantial improvement from 77% at 2009.
At December 31, 2010, the AULC was $42.1 million, down
$6.8 million, or 14%, compared with December 31, 2009.
On a combined basis, the ACL as a percent of total loans and
leases at December 31, 2010, was 3.39%, down from 4.16% at
December 31, 2009. This reduction was centered in the CRE
portfolio as a result of the reduction in the level of problem
loans. The ACL as a percent of NALs was 166% at
December 31, 2010, up from 80% at December 31, 2009,
indicating additional strength in the reserve level relative to
the level of problem loans.
108
Table of Contents
Table
58 — Selected Quarterly Income Statement
Data(1)
| 2010 | ||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||
| (Dollar amounts in thousands, except per share amounts) | ||||||||||||||||
|
Interest income
|
$ | 528,291 | $ | 534,669 | $ | 535,653 | $ | 546,779 | ||||||||
|
Interest expense
|
112,997 | 124,707 | 135,997 | 152,886 | ||||||||||||
|
Net interest income
|
415,294 | 409,962 | 399,656 | 393,893 | ||||||||||||
|
Provision for credit losses
|
86,973 | 119,160 | 193,406 | 235,008 | ||||||||||||
|
Net interest income after provision for credit losses
|
328,321 | 290,802 | 206,250 | 158,885 | ||||||||||||
|
Total noninterest income
|
264,220 | 267,143 | 269,643 | 240,852 | ||||||||||||
|
Total noninterest expense
|
434,593 | 427,309 | 413,810 | 398,093 | ||||||||||||
|
Income before income taxes
|
157,948 | 130,636 | 62,083 | 1,644 | ||||||||||||
|
Provision (benefit) for income taxes
|
35,048 | 29,690 | 13,319 | (38,093 | ) | |||||||||||
|
Net income
|
$ | 122,900 | $ | 100,946 | $ | 48,764 | $ | 39,737 | ||||||||
|
Dividends on preferred shares
|
83,754 | 29,495 | 29,426 | 29,357 | ||||||||||||
|
Net income applicable to common shares
|
$ | 39,146 | $ | 71,451 | $ | 19,338 | $ | 10,380 | ||||||||
|
Common shares outstanding
|
||||||||||||||||
|
Average — basic
|
757,924 | 716,911 | 716,580 | 716,320 | ||||||||||||
|
Average — diluted(2)
|
760,582 | 719,567 | 719,387 | 718,593 | ||||||||||||
|
Ending
|
863,319 | 717,132 | 716,623 | 716,557 | ||||||||||||
|
Book value per common share
|
$ | 5.35 | $ | 5.39 | $ | 5.22 | $ | 5.13 | ||||||||
|
Tangible book value per common share(3)
|
4.66 | 4.55 | 4.37 | 4.26 | ||||||||||||
|
Per common share
|
||||||||||||||||
|
Net income — basic
|
$ | 0.05 | $ | 0.10 | $ | 0.03 | $ | 0.01 | ||||||||
|
Net income — diluted
|
0.05 | 0.10 | 0.03 | 0.01 | ||||||||||||
|
Cash dividends declared
|
0.0100 | 0.0100 | 0.0100 | 0.0100 | ||||||||||||
|
Common stock price, per share
|
||||||||||||||||
|
High(4)
|
$ | 7.00 | $ | 6.45 | $ | 7.40 | $ | 5.81 | ||||||||
|
Low(4)
|
5.43 | 5.04 | 5.26 | 3.65 | ||||||||||||
|
Close
|
6.87 | 5.69 | 5.54 | 5.39 | ||||||||||||
|
Average closing price
|
6.05 | 5.79 | 6.13 | 4.84 | ||||||||||||
|
Return on average total assets
|
0.90 | % | 0.76 | % | 0.38 | % | 0.31 | % | ||||||||
|
Return on average common shareholders’ equity
|
3.8 | 7.4 | 2.1 | 1.1 | ||||||||||||
|
Return on average tangible common shareholders’ equity(5)
|
5.6 | 10.0 | 3.8 | 2.7 | ||||||||||||
|
Efficiency ratio(6)
|
61.4 | 60.6 | 59.4 | 60.1 | ||||||||||||
|
Effective tax rate (benefit)
|
22.2 | 22.7 | 21.5 | N.R. | ||||||||||||
|
Margin analysis-as a % of average earning assets(7)
|
||||||||||||||||
|
Interest income(7)
|
4.29 | % | 4.49 | % | 4.63 | % | 4.82 | % | ||||||||
|
Interest expense
|
0.92 | 1.04 | 1.17 | 1.35 | ||||||||||||
|
Net interest margin(7)
|
3.37 | % | 3.45 | % | 3.46 | % | 3.47 | % | ||||||||
|
Revenue — FTE
|
||||||||||||||||
|
Net interest income
|
$ | 415,294 | $ | 409,962 | $ | 399,656 | $ | 393,893 | ||||||||
|
FTE adjustment
|
3,708 | 2,631 | 2,490 | 2,248 | ||||||||||||
|
Net interest income(7)
|
419,002 | 412,593 | 402,146 | 396,141 | ||||||||||||
|
Noninterest income
|
264,220 | 267,143 | 269,643 | 240,852 | ||||||||||||
|
Total revenue(7)
|
$ | 683,222 | $ | 679,736 | $ | 671,789 | $ | 636,993 | ||||||||
| (1) | N.R. — not relevant. The denominator of the calculation is a positive value and the numerator is a negative value. |
Continued
109
Table of Contents
Table
58 — Selected Quarterly Income Statement, Capital, and
Other Data — Continued(1)
| 2010 | ||||||||||||||||
|
Capital Adequacy
|
December 31, | September 30, | June 30, | March 31, | ||||||||||||
|
Total risk-weighted assets (in millions)
|
$ | 43,471 | $ | 42,759 | $ | 42,486 | $ | 42,418 | ||||||||
|
Tier 1 leverage ratio
|
9.41 | % | 10.54 | % | 10.45 | % | 10.05 | % | ||||||||
|
Tier 1 risk-based capital ratio
|
11.55 | 12.82 | 12.51 | 12.00 | ||||||||||||
|
Total risk-based capital ratio
|
14.46 | 15.08 | 14.79 | 14.31 | ||||||||||||
|
Tangible common equity/asset ratio(8)
|
7.56 | 6.20 | 6.12 | 5.96 | ||||||||||||
|
Tangible equity/asset ratio(9)
|
8.24 | 9.43 | 9.43 | 9.26 | ||||||||||||
|
Tangible common equity/risk-weighted assets ratio
|
9.26 | 7.63 | 7.37 | 7.20 | ||||||||||||
110
Table of Contents
Table
58 — 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 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
|
$ | (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 | ) | ||||
|
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- basic
|
$ | (0.56 | ) | $ | (0.33 | ) | $ | (0.40 | ) | $ | (6.79 | ) | ||||
|
Net loss — diluted
|
(0.56 | ) | (0.33 | ) | (0.40 | ) | (6.79 | ) | ||||||||
|
Cash dividends declared
|
0.0100 | 0.0100 | 0.0100 | 0.0100 | ||||||||||||
|
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 common shareholders’ equity
|
(39.1 | ) | (21.5 | ) | (23.0 | ) | (188.9 | ) | ||||||||
|
Return on average tangible common shareholders’ equity(5)
|
(45.1 | ) | (24.7 | ) | (27.2 | ) | (479.2 | ) | ||||||||
|
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 — 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 | ||||||||
|
Continued
|
||||||||||||||||
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Table of Contents
Table
58 — Selected Quarterly Income Statement, Capital, and
Other Data — Continued(1)
| 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
|
10.09 | % | 11.30 | % | 10.62 | % | 9.67 | % | ||||||||
|
Tier 1 risk-based capital ratio
|
12.03 | 13.04 | 11.85 | 11.14 | ||||||||||||
|
Total risk-based capital ratio
|
14.41 | 16.23 | 14.94 | 14.26 | ||||||||||||
|
Tangible common equity/asset ratio(8)
|
5.92 | 6.46 | 5.68 | 4.65 | ||||||||||||
|
Tangible equity/asset ratio(9)
|
9.24 | 9.71 | 8.99 | 8.12 | ||||||||||||
|
Tangible common equity/risk-weighted assets ratio
|
6.97 | 7.59 | 6.34 | 5.12 | ||||||||||||
| (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 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 FTE basis assuming a 35% tax rate. | |
| (8) | 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. | |
| (9) | 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. |
ADDITIONAL
DISCLOSURES
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, Section 21E
of the Securities Exchange Act of 1934, and the Private
Securities Litigation Reform Act of 1995.
Actual results could differ materially from those contained or
implied by such statements for a variety of factors including:
(1) worsening of credit quality performance 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, impact, and timing of our business strategies,
including market acceptance of any new products or services
introduced to implement our Fair Play banking philosophy;
(6) changes in accounting policies and principles and the
accuracy of our assumptions and estimates used to prepare our
Consolidated Financial Statements; (7) extended disruption
of vital
112
Table of Contents
infrastructure; and (8) the nature, extent, and timing of
governmental actions and reforms, including the Dodd-Frank Act,
as well as future regulations which will be adopted by the
relevant regulatory agencies, including the newly created CFPB,
to implement the Dodd-Frank Act’s provisions.
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
More information on risk is set forth under the heading Risk
Factors included in Item 1A and incorporated by reference
into this MD&A. 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 Consolidated Financial Statements are prepared in accordance
with GAAP. The preparation of financial statements in conformity
with GAAP requires us to establish accounting policies and make
estimates that affect amounts reported in our Consolidated
Financial Statements. Note 1 of the Notes to Consolidated
Financial Statements, which is incorporated by reference into
this MD&A, describes the significant accounting policies we
use in our Consolidated Financial Statements.
An accounting estimate requires assumptions and judgments about
uncertain matters that could have a material effect on the
Consolidated Financial Statements. Estimates are made under
facts and circumstances at a point in time, and changes in those
facts and circumstances could produce results substantially
different from those estimates. The most significant accounting
policies and estimates and their related application are
discussed below.
Total
Allowance for Credit Losses
Our ACL of $1.3 billion at December 31, 2010,
represents our estimate of probable losses inherent in our loan
and lease portfolio and our unfunded loan commitments and
letters of credit. We periodically review our ACL for adequacy.
In doing so, we consider economic conditions and trends,
collateral values, and credit quality indicators, such as past
NCO experience, levels of past due loans, and NPAs. There is no
certainty that our ACL will be adequate over time to cover
losses in the portfolio because of unanticipated adverse changes
in the economy, market conditions, or events adversely affecting
specific customers, industries, or markets. If the credit
quality of our customer base materially deteriorates, the risk
profile of a market, industry, or group of customers changes
materially, or if the ACL is not adequate, our net income and
capital could be materially adversely affected which, in turn,
could have a material negative adverse affect on our financial
condition and results of operations.
In addition, bank regulators periodically review our ACL and may
require us to increase our provision for loan and lease losses
or loan charge-offs. Any increase in our ACL or loan charge-offs
as required by these regulatory authorities could have a
material adverse affect on our financial condition and results
of operations.
Fair
Value Measurements
(This
section should be read in conjunction with Note 19 of the
Notes to Consolidated Financial Statements)
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
113
Table of Contents
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, 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 mortgage loans held for sale,
available-for-sale
and other certain securities, certain securitized automobile
loans, derivatives, certain MSRs, trading account securities,
and certain securitization trust notes payable. At
December 31, 2010, approximately $11.5 billion of our
assets and $0.6 billion of our liabilities were recorded at
fair value. In addition to the above mentioned on-going fair
value measurements, fair value is also the unit of measure for
recording business combinations.
FASB 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 unobservable. |
At the end of each quarter, we assess the valuation hierarchy
for each asset or liability measured. As necessary, 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.
114
Table of Contents
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 19 of the Notes to the Consolidated Financial
Statements.
|
Financial Instrument(1)
|
Hierarchy |
Valuation methodology
|
||
|
Mortgage loans held for sale
|
Level 2 | 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, 2010, mortgage loans held for sale had an aggregate fair value of $754.1 million and an aggregate outstanding principal balance of $750.0 million. Interest income on these loans is recorded in interest and fee income - loans and leases. Included in mortgage banking income were net gains resulting from origination and sale of these loans, including net realized gains of $109.2 million, $90.6 million, and $32.2 million for the years ended December 31, 2010, 2009, and 2008, respectively. Of such gains, the change in fair value while held as loans were $(5.6) million, $(6.3) million and $6.6 million for the years ended December 31, 2010, 2009, and 2008, respectively. | ||
|
Available-for-sale
Securities &
Trading Account Securities(2) |
Level 1 | Consist primarily of U.S. Treasury and money market mutual funds, which generally have quoted prices. | ||
| Level 2 | Consist of U.S. Government and agency mortgage-backed and other federal agency securities, municipal securities, and other 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 certain asset-backed securities, pooled-trust-preferred securities, private-label CMOs, and municipal securities 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. | |||
|
Automobile loans(3)
|
Level 3 | Consists of automobile loan receivables measured at fair value. The key assumptions used to determine the fair value of the automobile loan receivables included projections of expected losses and prepayment of the underlying loans in the portfolio and a market assumption of interest rate spreads. The net gains and losses, before tax, from fair value changes reflected in earnings for the year ended December 31, 2010 was a net loss of $2.3 million which is net of a $3.4 million net gain associated with instrument specific credit risk. Instrument specific credit risk was determined based on estimated credit losses inherent in the January 1, 2010 fair value calculation as compared to actual credit losses incurred in 2010 plus estimated credit losses inherent in the December 31, 2010 fair value calculation. |
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Table of Contents
|
Financial Instrument(1)
|
Hierarchy |
Valuation methodology
|
||
|
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 determined on an income approach model based upon month-end interest rate curve and prepayment assumptions. | ||
|
Derivatives(4)
|
Level 1 | Consist of exchange traded options and forward commitments to deliver mortgage-backed securities which are valued using quoted prices. | ||
| Level 2 | Consist of basic asset and liability conversion swaps and options, and interest rate caps. These derivative positions are valued using a discounted cash flow method that incorporates current market interest rates. | |||
| 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. | |||
|
Securitization trust notes payable(4)
|
Level 2 | Consists of certain securitization trust notes payable related to the automobile loans measured at fair value. The notes payable are valued based on interest rates for similar financial instruments. The change in fair value for the year ended December 31, 2010 was $9.6 million. |
| (1) | Refer to Note 1 of the Notes to Consolidated Financial Statements for additional information. | |
| (2) | Refer to Note 4 of the Notes to Consolidated Financial Statements for additional information. | |
| (3) | Refer to Note 5 of the Notes to Consolidated Financial Statements for additional information. | |
| (4) | Refer to Note 20 of the Notes to Consolidated Financial Statements for additional information. |
INVESTMENT
SECURITIES
(This
section should be read in conjunction with the Investment
Securities Portfolio discussion and Note 1 and Note 4
in the Notes to Consolidated Financial Statements.)
Level 3
Analysis on Certain Securities Portfolios
Our Alt-A, private label 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
private label 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 with analysis from
independent third parties, and are used as a basis for
impairment analysis. These three portfolios, and the results of
our impairment analysis for each portfolio, 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, and 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 housing
price depreciation / appreciation rates that were
based upon macroeconomic forecasts.
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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 was probable that all contractual cash flows would not be
collected. All securities in these portfolios remained current
with respect to interest and principal, except for one security
which experienced a minor interest shortfall at
December 31, 2010.
Our analysis indicated that, as of December 31, 2010, one
Alt-A mortgage-backed security and seven 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 4.2% to 38.5% of their par
value. These losses were projected to occur anywhere from eight
months to as many as 25 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. In
2010, a total of $1.6 million of credit OTTI was recorded
in our Alt-A mortgage- backed securities portfolio, and
$7.1 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 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.
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 were
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 likely experience a loss of principal or
interest on nine securities and, as such, recorded credit OTTI
of $1.5 million for one newly impaired and eight previously
impaired pooled-trust-preferred securities in the 2010 fourth
quarter. In 2010, $4.9 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 Securities discussion and Note 1 and
Note 4 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 an intangible asset representing the difference
between the purchase price of an asset and its fair market value
and is created when a company pays a premium to acquire the
assets of another company. We test goodwill 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
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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.
In 2010, we performed interim evaluations of our goodwill
balances at March 31 and June 30, as well as our annual
goodwill impairment assessment as of October 1. The annual
assessment was based on our reporting units at that time. No
impairment was recorded in 2010. The 2010 interim and annual
assessments were performed in a manner consistent with the 2009
process as described in the next section. All assumptions were
updated to reflect correct market conditions. 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 goodwill impairment losses in future periods, whether
in connection with our next annual impairment testing or prior
to that time, if any changes constitute a triggering event.
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.
2009
First Quarter Impairment Testing
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 during this same period. 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.
The first step (Step 1) of impairment testing required 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, Private Financial Group
(PFG), Insurance, and Automobile Finance and Dealer Services
(AFDS).
Although Insurance was included within PFG for business segment
reporting at that time, it was evaluated as a separate reporting
unit for goodwill impairment testing because it had 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, 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
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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 was 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 during the
valuation period, 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 then
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.
2009
Other Interim and Annual Impairment Testing
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. No other
goodwill impairment was required during the remainder of 2009.
FRANKLIN
LOANS RESTRUCTURING TRANSACTION
(This
section should be read in conjunction with Note 3 of the
Notes to 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-lien and
second-lien loans secured by residential properties. These loans
generally fell outside the underwriting standards of Fannie Mae
or Freddie Mac, and involved 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 commercial loans outstanding to Franklin were
$650.2 million, all of which were placed on nonaccrual
status. Additionally, the
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specific allowance for loan and lease losses for the Franklin
portfolio was $130.0 million, resulting in 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 held all the underlying consumer loans and OREO properties
that were formerly collateral for the Franklin commercial loans.
The equity interests provided to Franklin by the REIT were
pledged by Franklin as collateral for the Franklin commercial
loans.
As a result of the restructuring, on a consolidated basis, the
$650.2 million nonaccrual commercial loan to Franklin at
December 31, 2008, was no longer reported. Instead, the
loans were reported as secured by first-lien and second-lien
mortgages on residential properties and OREO properties both of
which had previously been assets of Franklin or its subsidiaries
and were pledged to secure our loan to Franklin. At the time of
the restructuring, these loans had a fair value of
$493.6 million and the OREO properties had a fair value of
$79.6 million. As a result of the restructuring, we
reported $338.5 million mortgage-related NALs outstanding
related to Franklin, representing first-lien and second-lien
mortgages that were nonaccruing at December 31, 2009. Also,
our specific allowance for loan and lease losses for the
Franklin portfolio of $130.0 million was eliminated.
However, no initial increase to the ALLL relating to the
acquired mortgages was recorded as these assets were recorded at
fair value.
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 of
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.
During the 2010 second quarter, $397.7 million of
Franklin-related loans ($333.0 million of residential
mortgages and $64.7 million of home equity loans) at a
value of $323.4 million were transferred to loans held for
sale. At the time of the transfer to loans held for sale, the
loans were marked to the lower of cost or fair value less
anticipated selling costs. During the 2010 third quarter, the
Franklin-related residential mortgages and home equity loans
were sold at essentially book value. At December 31, 2010,
the only Franklin-related assets remaining were
$9.5 million of OREO properties, which have been marked to
the lower of cost or fair value less costs to sell.
Additionally, the equity interests in the REIT held by Franklin
remain outstanding and pledged as collateral for the Franklin
commercial loans at December 31, 2010.
PENSION
Pension plan assets consist of mutual funds and our 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. Our 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 are both
assumptions. Actual results may be materially different.
(See
Note 18 of the Notes to the Consolidated Financial
Statements).
OTHER
REAL ESTATE OWNED
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 resulting from the sale of OREO are recognized in
noninterest expense on the date of sale. At December 31,
2010, OREO totaled $66.8 million, representing a 52%
decrease compared with $140.1 million at December 31,
2009.
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Income
Taxes and Deferred Tax Assets
INCOME
TAXES
The calculation of our provision for income taxes is complex and
requires the use of estimates and judgments. We have two
accruals for income taxes: (1) our income tax payable
represents the estimated net amount currently due to the
federal, state, and local taxing jurisdictions, net of any
reserve for potential audit issues, and is reported as a
component of accrued expenses and other liabilities in our
consolidated balance sheet; (2) our deferred federal income
tax asset, reported as a component of accrued income and other
assets, 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 affect 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.
(See
Note
17
of the Notes to Consolidated Financial
Statements.)
DEFERRED
TAX ASSETS
At December 31, 2010, we had a net federal deferred tax
asset of $537.5 million and a net state deferred tax asset
of $0.8 million. A valuation allowance is provided when it
is more-likely-than-not that some portion of the deferred tax
asset will not be realized. All available evidence, both
positive and negative, was considered to determine whether,
based on the weight of that evidence, impairment should be
recognized. Our forecast process includes judgmental and
quantitative elements that may be subject to significant change.
If our forecast of taxable income within the carryforward
periods available under applicable law is not sufficient to
cover the amount of net deferred tax assets, such assets may be
impaired. Based on our analysis of both positive and negative
evidence and our ability to offset the net deferred tax assets
against our forecasted future taxable income, there was no
impairment of the deferred tax assets at December 31, 2010.
Recent
Accounting Pronouncements and Developments
Note 2 to Consolidated Financial Statements discusses new
accounting pronouncements adopted during 2010 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
Consolidated Financial Statements.
Acquisitions
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.
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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.
| Item 7A: | Quantitative and Qualitative Disclosures About Market Risk |
Information required by this item is set forth in the Market
Risk section which is incorporated by reference into this item.
| 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, which is incorporated by reference into this item.
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REPORT OF
MANAGEMENT
The Management of Huntington Bancshares Incorporated (Huntington
or 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 2010, 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
Consolidated 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, 2010. 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,
2010, 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, 2010 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, 2010.
Stephen D. Steinour — Chairman, President, and Chief
Executive Officer
Donald R. Kimble — Senior Executive Vice President and
Chief Financial Officer
February 18, 2011
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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, 2010, 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, 2010, 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, 2010 of the Company and our report dated
February 18, 2011 expressed an unqualified opinion on those
financial statements.
Columbus, Ohio
February 18, 2011
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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, 2010 and 2009, 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, 2010. These
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 as of
December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2010, 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, 2010, 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, 2011 expressed
an unqualified opinion on the Company’s internal control
over financial reporting.
Columbus, Ohio
February 18, 2011
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Huntington
Bancshares Incorporated
Consolidated
Balance Sheets
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands, except number of shares) | ||||||||
|
ASSETS
|
||||||||
|
Cash and due from banks
|
$ | 847,888 | $ | 1,521,344 | ||||
|
Interest-bearing deposits in banks
|
135,038 | 319,375 | ||||||
|
Trading account securities
|
185,404 | 83,657 | ||||||
|
Loans held for sale (includes $754,117 and $459,719
respectively, measured at fair value)(1)
|
793,285 | 461,647 | ||||||
|
Available-for-sale
and other securities
|
9,895,244 | 8,587,914 | ||||||
|
Loans and leases (includes $522,717 at December 31, 2010
measured at fair value):(2)
|
||||||||
|
Commercial and industrial loans and leases
|
13,063,293 | 12,888,100 | ||||||
|
Commercial real estate loans
|
6,651,156 | 7,688,827 | ||||||
|
Automobile loans and leases
|
5,614,711 | 3,390,594 | ||||||
|
Home equity loans
|
7,713,154 | 7,562,060 | ||||||
|
Residential mortgage loans
|
4,500,366 | 4,510,347 | ||||||
|
Other consumer loans
|
563,827 | 750,735 | ||||||
|
Loans and leases
|
38,106,507 | 36,790,663 | ||||||
|
Allowance for loan and lease losses
|
(1,249,008 | ) | (1,482,479 | ) | ||||
|
Net loans and leases
|
36,857,499 | 35,308,184 | ||||||
|
Bank owned life insurance
|
1,458,224 | 1,412,333 | ||||||
|
Premises and equipment
|
491,602 | 496,021 | ||||||
|
Goodwill
|
444,268 | 444,268 | ||||||
|
Other intangible assets
|
228,620 | 289,098 | ||||||
|
Accrued income and other assets
|
2,482,570 | 2,630,824 | ||||||
|
Total assets
|
$ | 53,819,642 | $ | 51,554,665 | ||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Liabilities
|
||||||||
|
Deposits in domestic offices
|
||||||||
|
Demand deposits — noninterest-bearing
|
$ | 7,216,751 | $ | 6,907,238 | ||||
|
Interest-bearing
|
34,254,807 | 33,229,726 | ||||||
|
Deposits in foreign offices
|
382,340 | 356,963 | ||||||
|
Deposits
|
41,853,898 | 40,493,927 | ||||||
|
Short-term borrowings
|
2,040,732 | 876,241 | ||||||
|
Federal Home Loan Bank advances
|
172,519 | 168,977 | ||||||
|
Other long-term debt (includes $356,089 at December 31,
2010, measured at fair value)(2)
|
2,144,092 | 2,369,491 | ||||||
|
Subordinated notes
|
1,497,216 | 1,264,202 | ||||||
|
Accrued expenses and other liabilities
|
1,130,643 | 1,045,825 | ||||||
|
Total liabilities
|
48,839,100 | 46,218,663 | ||||||
|
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 | ||||||
|
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 | 362,507 | ||||||
|
Common stock —
|
||||||||
|
Par value of $0.01 and authorized 1,500,000,000 shares
|
8,642 | 7,167 | ||||||
|
Capital surplus
|
7,630,093 | 6,731,796 | ||||||
|
Less treasury shares, at cost
|
(8,771 | ) | (11,465 | ) | ||||
|
Accumulated other comprehensive loss
|
(197,496 | ) | (156,985 | ) | ||||
|
Retained (deficit) earnings
|
(2,814,433 | ) | (2,922,026 | ) | ||||
|
Total shareholders’ equity
|
4,980,542 | 5,336,002 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 53,819,642 | $ | 51,554,665 | ||||
|
Common shares issued
|
864,195,369 | 716,741,249 | ||||||
|
Common shares outstanding
|
863,319,435 | 715,761,672 | ||||||
|
Treasury shares outstanding
|
875,934 | 979,577 | ||||||
|
Preferred shares issued
|
1,967,071 | 1,967,071 | ||||||
|
Preferred shares outstanding
|
362,507 | 1,760,578 | ||||||
| (1) | Amounts represent loans for which Huntington has elected the fair value option. See Note 19. | |
| (2) | Amounts represent certain assets and liabilities of a consolidated VIE for which Huntington has elected the fair value option. See Note 21. |
See Notes to Consolidated Financial Statements
126
Table of Contents
Huntington
Bancshares Incorporated
Consolidated
Statements of Income
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands, except per share amounts) | ||||||||||||
|
Interest and fee income
|
||||||||||||
|
Loans and leases
|
||||||||||||
|
Taxable
|
$ | 1,859,495 | $ | 1,933,639 | $ | 2,447,362 | ||||||
|
Tax-exempt
|
6,353 | 10,630 | 2,748 | |||||||||
|
Available-for-sale
and other securities
|
||||||||||||
|
Taxable
|
239,065 | 249,968 | 217,882 | |||||||||
|
Tax-exempt
|
11,680 | 8,824 | 29,869 | |||||||||
|
Other
|
28,799 | 35,081 | 100,461 | |||||||||
|
Total interest income
|
2,145,392 | 2,238,142 | 2,798,322 | |||||||||
|
Interest expense
|
||||||||||||
|
Deposits
|
439,050 | 674,101 | 931,679 | |||||||||
|
Short-term borrowings
|
3,007 | 2,366 | 42,261 | |||||||||
|
Federal Home Loan Bank advances
|
3,121 | 12,882 | 107,848 | |||||||||
|
Subordinated notes and other long-term debt
|
81,409 | 124,506 | 184,843 | |||||||||
|
Total interest expense
|
526,587 | 813,855 | 1,266,631 | |||||||||
|
Net interest income
|
1,618,805 | 1,424,287 | 1,531,691 | |||||||||
|
Provision for credit losses
|
634,547 | 2,074,671 | 1,057,463 | |||||||||
|
Net interest income after provision for credit losses
|
984,258 | (650,384 | ) | 474,228 | ||||||||
|
Service charges on deposit accounts
|
267,015 | 302,799 | 308,053 | |||||||||
|
Mortgage banking income
|
175,782 | 112,298 | 8,994 | |||||||||
|
Trust services
|
112,555 | 103,639 | 125,980 | |||||||||
|
Electronic banking
|
110,234 | 100,151 | 90,267 | |||||||||
|
Insurance income
|
76,413 | 73,326 | 72,624 | |||||||||
|
Brokerage income
|
68,855 | 64,843 | 65,172 | |||||||||
|
Bank owned life insurance income
|
61,066 | 54,872 | 54,776 | |||||||||
|
Automobile operating lease income
|
45,964 | 51,810 | 39,851 | |||||||||
|
Net gains (losses) on sales of
available-for-sale
and other securities
|
13,448 | 48,815 | (197,370 | ) | ||||||||
|
Impairment losses on
available-for-sale
and other securities:
|
||||||||||||
|
Impairment losses on
available-for-sale
and other securities
|
9,847 | (183,472 | ) | — | ||||||||
|
Noncredit-related losses on securities not expected to be sold
(recognized in other comprehensive income)
|
(23,569 | ) | 124,408 | — | ||||||||
|
Net impairment losses on investment securities
|
(13,722 | ) | (59,064 | ) | — | |||||||
|
Other income
|
124,248 | 152,155 | 138,791 | |||||||||
|
Total noninterest income
|
1,041,858 | 1,005,644 | 707,138 | |||||||||
|
Personnel costs
|
798,973 | 700,482 | 783,546 | |||||||||
|
Outside data processing and other services
|
159,248 | 148,095 | 130,226 | |||||||||
|
Net occupancy
|
107,862 | 105,273 | 108,428 | |||||||||
|
Deposit and other insurance expense
|
97,548 | 113,830 | 22,437 | |||||||||
|
Professional services
|
88,778 | 76,366 | 49,613 | |||||||||
|
Equipment
|
85,920 | 83,117 | 93,965 | |||||||||
|
Marketing
|
65,924 | 33,049 | 32,664 | |||||||||
|
Amortization of intangibles
|
60,478 | 68,307 | 76,894 | |||||||||
|
OREO and foreclosure expense
|
39,049 | 93,899 | 33,455 | |||||||||
|
Automobile operating lease expense
|
37,034 | 43,360 | 31,282 | |||||||||
|
Goodwill impairment
|
— | 2,606,944 | — | |||||||||
|
Gain on early extinguishment of debt
|
— | (147,442 | ) | (23,542 | ) | |||||||
|
Other expense
|
132,991 | 108,163 | 138,406 | |||||||||
|
Total noninterest expense
|
1,673,805 | 4,033,443 | 1,477,374 | |||||||||
|
Income (Loss) before income taxes
|
352,311 | (3,678,183 | ) | (296,008 | ) | |||||||
|
Provision (Benefit) for income taxes
|
39,964 | (584,004 | ) | (182,202 | ) | |||||||
|
Net income (loss)
|
312,347 | (3,094,179 | ) | (113,806 | ) | |||||||
|
Dividends on preferred shares
|
172,032 | 174,756 | 46,400 | |||||||||
|
Net income (loss) applicable to common shares
|
$ | 140,315 | $ | (3,268,935 | ) | $ | (160,206 | ) | ||||
|
Average common shares — basic
|
726,934 | 532,802 | 366,155 | |||||||||
|
Average common shares — diluted
|
729,532 | 532,802 | 366,155 | |||||||||
|
Per common share
|
||||||||||||
|
Net income (loss) — basic
|
$ | 0.19 | $ | (6.14 | ) | $ | (0.44 | ) | ||||
|
Net income (loss) — diluted
|
0.19 | (6.14 | ) | (0.44 | ) | |||||||
|
Cash dividends declared
|
0.0400 | 0.0400 | 0.6625 | |||||||||
See Notes to Consolidated Financial Statements
127
Table of Contents
Huntington
Bancshares Incorporated
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 | |||||||||||||||||||||||||||||||||||||
|
(All amounts in thousands,
|
||||||||||||||||||||||||||||||||||||||||||||||||
| except for per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Year Ended December 31, 2010
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance, beginning 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 | ||||||||||||||||||||||||
|
Cumulative effect of change in accounting principle for
consolidation of variable interest entities, net of tax of $3,097
|
(4,249 | ) | (1,821 | ) | (6,070 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Balance, beginning of year
|
1,398 | 1,325,008 | 363 | 362,507 | 716,741 | 7,167 | 6,731,796 | (980 | ) | (11,465 | ) | (161,234 | ) | (2,923,847 | ) | 5,329,932 | ||||||||||||||||||||||||||||||||
|
Comprehensive Income:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
312,347 | 312,347 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Non-credit-related impairment recoveries (losses) on debt
securities not expected to be sold
|
15,320 | 15,320 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized net gains (losses) on
available-for-sale
and other securities arising during the period, net of
reclassification for net realized gains
|
(9,406 | ) | (9,406 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized gains (losses) on cash flow hedging derivatives
|
(23,155 | ) | (23,155 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Change in accumulated unrealized losses for pension and other
post-retirement obligations
|
(19,021 | ) | (19,021 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Total comprehensive income (loss)
|
276,085 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of common stock
|
146,568 | 1,465 | 884,707 | 886,172 | ||||||||||||||||||||||||||||||||||||||||||||
|
Repurchase of Preferred Series B stock
|
(1,398 | ) | (1,398,071 | ) | (1,398,071 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Preferred Series B stock discount accretion and redemption
|
73,063 | (73,063 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends declared:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Common ($0.04 per share)
|
(30,139 | ) | (30,139 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Series B ($48.75 per share)
|
(68,156 | ) | (68,156 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Series A ($85.00 per share)
|
(30,813 | ) | (30,813 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Recognition of the fair value of share-based compensation
|
4 | 15,449 | 15,453 | |||||||||||||||||||||||||||||||||||||||||||||
|
Other share-based compensation activity
|
886 | 6 | 482 | (535 | ) | (47 | ) | |||||||||||||||||||||||||||||||||||||||||
|
Other
|
(2,341 | ) | 104 | 2,694 | (227 | ) | 126 | |||||||||||||||||||||||||||||||||||||||||
|
Balance, end of year
|
— | $ | — | 363 | $ | 362,507 | 864,195 | $ | 8,642 | $ | 7,630,093 | (876 | ) | $ | (8,771 | ) | $ | (197,496 | ) | $ | (2,814,433 | ) | $ | 4,980,542 | ||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
128
Table of Contents
Huntington
Bancshares Incorporated
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 | |||||||||||||||||||||||||||||||||||||
|
(All amounts in thousands,
|
||||||||||||||||||||||||||||||||||||||||||||||||
| except for per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
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 income (loss)
|
(3,094,179 | ) | (3,094,179 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Cumulative effect of change in
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
accounting principle for other-than-
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
temporarily impaired debt securities
|
(3,541 | ) | 3,541 | — | ||||||||||||||||||||||||||||||||||||||||||||
|
Non-credit-related impairment
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
recoveries (losses) on debt
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
securities not expected to be sold
|
(80,865 | ) | (80,865 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized net gains (losses) on
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
available-for-sale
and other
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
securities arising during the period,
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
net of reclassification for net
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
realized gains (losses)
|
188,780 | 188,780 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized gains (losses) on cash flow hedging derivatives
|
14,227 | 14,227 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Change in accumulated unrealized
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
losses for pension and other post-
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
retirement obligations
|
51,107 | 51,107 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Total comprehensive income (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 | ) | — | ||||||||||||||||||||||||||||||||||||||
|
Preferred Series B Stock discount accretion
|
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
129
Table of Contents
Huntington
Bancshares Incorporated
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 | |||||||||||||||||||||||||||||||||||||
|
(All amounts in thousands,
|
||||||||||||||||||||||||||||||||||||||||||||||||
| except for per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
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 $2,064
|
(3,834 | ) | (3,834 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Cumulative effect of changing measurement date provisions for
pension and post-retirement assets and obligations, net of tax
of $2,260
|
(4,654 | ) | (4,654 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
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 income (loss)
|
(113,806 | ) | (113,806 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized net gains (losses) on
available-for-sale
and other securities arising during the period, net of
reclassification for net realized gains (losses)
|
(197,745 | ) | (197,745 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Unrealized gains (losses) on cash flow hedging derivatives
|
40,085 | 40,085 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Change in accumulated unrealized losses for pension and other
post-retirement obligations
|
(115,588 | ) | (115,588 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
Total comprehensive gain (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 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Series B stock discount accretion
|
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
130
Table of Contents
Huntington
Bancshares Incorporated
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Operating activities
|
||||||||||||
|
Net income (loss)
|
$ | 312,347 | $ | (3,094,179 | ) | $ | (113,806 | ) | ||||
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
||||||||||||
|
Impairment of goodwill
|
— | 2,606,944 | — | |||||||||
|
Provision for credit losses
|
634,547 | 2,074,671 | 1,057,463 | |||||||||
|
Depreciation and amortization
|
286,186 | 228,041 | 244,860 | |||||||||
|
Change in current and deferred income taxes
|
161,367 | (471,592 | ) | (251,827 | ) | |||||||
|
Net sales (purchases) of trading account securities
|
(101,747 | ) | 856,112 | 92,976 | ||||||||
|
Originations of loans held for sale
|
(3,864,273 | ) | (4,786,043 | ) | (3,063,375 | ) | ||||||
|
Principal payments on and proceeds from loans held for sale
|
3,535,550 | 4,667,792 | 3,096,129 | |||||||||
|
Gain on early extinguishment of debt
|
— | (147,442 | ) | (23,542 | ) | |||||||
|
Losses on
available-for-sale
and other securities
|
274 | 10,249 | 197,370 | |||||||||
|
Other, net
|
(123,428 | ) | 21,709 | 1,081 | ||||||||
|
Net cash provided by (used for) operating activities
|
840,823 | 1,966,262 | 1,237,329 | |||||||||
|
Investing activities
|
||||||||||||
|
Decrease (increase) in interest-bearing deposits in banks
|
162,913 | (319,989 | ) | (228,554 | ) | |||||||
|
Proceeds from:
|
||||||||||||
|
Maturities and calls of investment securities
|
3,288,714 | 1,004,293 | 386,232 | |||||||||
|
Sales of investment securities
|
4,280,518 | 3,585,644 | 555,719 | |||||||||
|
Purchases of investment securities
|
(8,769,767 | ) | (8,386,223 | ) | (1,338,274 | ) | ||||||
|
Net proceeds from sales of loans
|
941,615 | 949,398 | 471,362 | |||||||||
|
Net loan and lease activity, excluding sales
|
(2,764,575 | ) | 1,544,524 | (2,358,653 | ) | |||||||
|
Purchases of operating lease assets
|
— | (119 | ) | (226,378 | ) | |||||||
|
Proceeds from sale of operating lease assets
|
34,930 | 11,216 | 25,091 | |||||||||
|
Purchases of premises and equipment
|
(68,200 | ) | (49,223 | ) | (59,945 | ) | ||||||
|
Proceeds from sales of other real estate
|
113,298 | 60,499 | 54,520 | |||||||||
|
Other, net
|
3,770 | 4,619 | 19,172 | |||||||||
|
Net cash provided by (used for) investing activities
|
(2,776,784 | ) | (1,595,361 | ) | (2,699,708 | ) | ||||||
|
Financing activities
|
||||||||||||
|
Increase (decrease) in deposits
|
1,353,227 | 2,559,633 | 195,142 | |||||||||
|
Increase (decrease) in short-term borrowings
|
1,128,887 | (277,215 | ) | (1,316,155 | ) | |||||||
|
Net proceeds from issuance of subordinated notes
|
297,375 | — | — | |||||||||
|
Maturity/redemption of subordinated notes
|
(83,870 | ) | (484,966 | ) | (76,659 | ) | ||||||
|
Proceeds from Federal Home Loan Bank advances
|
450,000 | 207,394 | 1,865,294 | |||||||||
|
Maturity/redemption of Federal Home Loan Bank advances
|
(446,718 | ) | (2,627,786 | ) | (2,360,368 | ) | ||||||
|
Proceeds from issuance of long-term debt
|
60,805 | 598,200 | 887,111 | |||||||||
|
Maturity/redemption of long-term debt
|
(848,756 | ) | (642,644 | ) | (540,266 | ) | ||||||
|
Dividends paid on preferred stock
|
(107,901 | ) | (107,262 | ) | (23,242 | ) | ||||||
|
Dividends paid on common stock
|
(28,598 | ) | (55,026 | ) | (279,608 | ) | ||||||
|
Net proceeds from issuance of preferred stock
|
— | — | 1,947,625 | |||||||||
|
Payment to repurchase preferred stock
|
(1,398,071 | ) | ||||||||||
|
Net proceeds from issuance of common stock
|
886,172 | 1,135,645 | — | |||||||||
|
Other, net
|
(47 | ) | (198 | ) | (1,073 | ) | ||||||
|
Net cash provided by (used for) financing activities
|
1,262,505 | 305,775 | 297,801 | |||||||||
|
Increase (decrease) in cash and cash equivalents
|
(673,456 | ) | 676,676 | (1,164,578 | ) | |||||||
|
Cash and cash equivalents at beginning of period
|
1,521,344 | 844,668 | 2,009,246 | |||||||||
|
Cash and cash equivalents at end of period
|
$ | 847,888 | $ | 1,521,344 | $ | 844,668 | ||||||
|
Supplemental disclosures:
|
||||||||||||
|
Income taxes paid (refunded)
|
$ | (121,401 | ) | $ | (112,412 | ) | $ | 69,625 | ||||
|
Interest paid
|
552,955 | 869,503 | 1,282,877 | |||||||||
|
Non-cash activities
|
||||||||||||
|
Dividends accrued, paid in subsequent quarter
|
23,373 | 23,305 | 60,893 | |||||||||
See Notes to Consolidated Financial Statements.
131
Table of Contents
Huntington
Bancshares Incorporated
Notes to
Consolidated Financial Statements
| 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, small business, 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. Select financial services and other
activities are also conducted in various states. International
banking services are available through the headquarters office
in Columbus and a limited purpose office located in Cayman
Islands and another in 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
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 VIE in which
Huntington has the power to direct the activities of an entity
that most significantly impact the entity’s economic
performance or 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 hold the power to direct the activities
entity that most significantly impact the entity’s economic
performance or absorb the majority of expected losses are not
consolidated. For consolidated entities where Huntington holds
less than a 100% interest, Huntington recognizes minority
interest liability (included in shareholders’ equity) for
the equity held by others and minority interest expense
(included in noninterest expense) 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 nonmarketable
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 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 noninterest
income.
The preparation of financial statements in conformity with GAAP
requires Management to make estimates and assumptions that
significantly affect amounts reported in the Consolidated
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, MSRs,
certain loans and debt carried at fair value, 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.
In preparing these Consolidated 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 SEC. In conjunction
with applicable accounting standards, all material subsequent
events have been either recognized in the Consolidated Financial
Statements or disclosed in the Notes to the Consolidated
Financial Statements.
Certain prior period amounts have been reclassified to conform
to the current year’s presentation.
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Table of Contents
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
noninterest income, except for gains and losses on trading
account securities used to hedge the fair value of MSRs, which
are included in mortgage banking income. All other securities
are classified as investment securities. Investment securities
include
available-for-sale
securities and nonmarketable equity securities. Unrealized gains
or losses on
available-for-sale
securities are reported as a separate component of accumulated
OCI in the Consolidated Statements of Changes in
Shareholders’ Equity. Declines in the value of debt and
marketable equity securities that are considered
other-than-temporary
are recorded in noninterest income as securities losses.
Huntington evaluates its investment securities portfolio on a
quarterly basis for indicators of 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
expected cash flows are not sufficient to recover all
contractually required principal and interest payments.
Furthermore, securities which fail the criteria above (1-3) must
be evaluated to determine what portion of the impairment is
related to credit or noncredit OTTI. 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 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
Consolidated Statements of Income on a gross basis with a
reduction for the amount of OTTI recognized in OCI. Once an OTTI
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 carrying value
plus any related OCI balance 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.
Nonmarketable equity securities include stock acquired for
regulatory purposes, such as Federal Home Loan Bank stock and
Federal Reserve Bank stock. These securities are accounted for
at cost, evaluated for impairment, and included in
available-for-sale
and other 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 Consolidated Balance
Sheets as loans and leases. Except for loans which are subject
to fair value requirements, 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 loans held for sale. Loans held for sale
(excluding loans originated or acquired with the intent to sell,
which are carried at fair value) are carried at the lower of
cost or fair value less cost to sell. 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 noninterest income,
depending on the length of time the loan has been recorded as
loans 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 loans held for sale.
133
Table of Contents
Huntington consolidates an automobile loan securitization in
which the associated $522.7 million loan receivables and
$356.1 million notes payable are held at fair value. The
valuation of the loan receivables and notes payable are
evaluated on a quarterly basis with any market value changes
recorded in noninterest income. The key assumptions used to
determine the fair value of the automobile loans included a
projection of expected losses and prepayment of the underlying
loans in the portfolio and a market assumption of interest rate
spreads. The notes payable are valued based on interest rates
for similar financial assets.
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 noninterest
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 the lease origination, 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.
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.
Sold Loans and Leases
— 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. For
loan or lease sales with servicing retained, a servicing asset
is recorded at fair value for the right to service the loans
sold. To determine the fair value, Huntington uses an 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. 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
noninterest income, respectively.
Accrued Income and 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.
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. Any change in the fair value of MSRs
carried under the fair value method, as well as amortization and
impairment of MSRs under the amortization method, during the
period is recorded in mortgage banking income, which is
reflected in the Consolidated Statements of Income. 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.
ACL
— Huntington maintains two reserves, both
of which reflect Management’s judgment regarding the
adequate level necessary to absorb credit losses inherent in our
loan and lease portfolio: the ALLL and the AULC. Combined, these
reserves comprise the total ACL. The determination of the ACL
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.
134
Table of Contents
The adequacy of the ACL is based on Management’s current
judgments about the credit quality of the loan portfolio. These
judgments consider on-going evaluations of the loan and lease
portfolio, including such factors as the differing economic
risks associated with each loan category, the financial
condition of specific borrowers, the level of delinquent loans,
the value of any collateral and, where applicable, the existence
of any guarantees or other documented support. Further,
Management evaluates the impact of changes in interest rates and
overall economic conditions on the ability of borrowers to meet
their financial obligations when quantifying our exposure to
credit losses and assessing the adequacy of our ACL at each
reporting date. In addition to general economic conditions and
the other factors described above, additional factors also
considered include: the impact of declining residential real
estate values; the diversification of CRE loans, particularly
loans secured by retail properties; and the amount of C&I
loans to businesses in areas of Ohio and Michigan that have
historically experienced less economic growth compared with
other footprint markets. Also, the ACL assessment includes the
on-going assessment of credit quality metrics, and a comparison
of certain ACL adequacy benchmarks to current performance.
Management’s determinations regarding the adequacy of the
ACL are reviewed and approved by the Company’s board of
directors.
The ACL 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 ACL associated with
securitized or sold loans.
The ALLL consists of two components: (1) the transaction
reserve, which includes specific reserves related to loans
considered to be impaired and loans involved in troubled debt
restructurings, and (2) the general reserve. The
transaction reserve component includes both (1) an estimate
of loss based on pools of commercial and consumer loans and
leases with similar characteristics and (2) an estimate of
loss based on an impairment review of each C&I and CRE loan
greater than $1 million. For the C&I and CRE
portfolios, 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. This
loan grading system incorporates a
probability-of-default
(PD) factor and a loss-given-default (LGD) factor. The PD factor
considers on-going reviews of the financial performance of the
specific borrower, including cash flow, debt-service coverage
ratio, earnings power, debt level, and equity position, in
conjunction with an assessment of the borrower’s industry
and future prospects. The LGD factor considers analysis of the
type of collateral and the relative LTV ratio. These reserve
factors are developed based on 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 automobile
loans, home equity loans, and residential mortgage loans, the
determination of the transaction reserve also incorporates PD
and LGD factors, however, the estimate of loss is based on pools
of loans and leases with similar characteristics. The PD factor
considers current credit scores unless the account is
delinquent, in which case a higher PD factor is used. The LGD
factor considers analysis of the type of collateral and the
relative LTV ratio. Credit scores, models, analyses, and other
factors used to determine both the PD and LGD factors 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, and
adjustments to the reserve factors are made as needed.
The general reserve consists of economic reserve and
risk-profile reserve components. The economic reserve component
considers the potential impact of changing market and economic
conditions on portfolio performance. The risk-profile component
considers items unique to our structure, policies, processes,
and portfolio composition, as well as qualitative measurements
and assessments of the loan portfolios including, but not
limited to, management quality, concentrations, portfolio
composition, industry comparisons, and internal review functions.
NALs and Past Due Loans and Leases
— Loans are
considered past due when the contractual amounts due with
respect to principal and interest are not received within
30 days of the contractual due date. With the exception of
loans where the borrower has declared bankruptcy, all classes
within the C&I and CRE portfolios are placed on nonaccrual
status no later than when the loan is
90-days
past
due. The residential mortgage portfolio and both classes of the
home equity portfolio are placed on nonaccrual status at
180 days, with the
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Table of Contents
exception of residential mortgages guaranteed by government
organizations which continue to accrue interest. Automobile and
other consumer loans are not placed on nonaccrual status, but
are charged-off when the loan is
120-days
past due. Any loan in any portfolio may be placed on nonaccrual
status prior to the policies described above when collection of
principal or interest is in doubt. For all classes within all
loan portfolios, when a loan is placed on nonaccrual status, any
accrued interest income is reversed with current year accruals
charged to interest income, and prior year amounts charged-off
as a credit loss.
Classes are generally disaggregations of a portfolio. For ACL
purposes, the Company’s portfolios are: C&I, CRE,
Automobile loans and leases, Residential mortgages, Home equity,
and other consumer loans. The classes within the C&I
portfolio are: owner occupied and nonowner occupied. The classes
within the CRE portfolio are: Retail properties, Multi-family,
Office, Industrial and Warehouse, and Other CRE. The classes
within the home equity portfolio are: first-lien loans and
second-lien loans. The automobile loans and leases, residential
mortgage, and other consumer loan portfolios are not further
segregated into classes.
For all classes within all loan portfolios, cash receipts
received on NALs 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.
Regarding all classes within the C&I and CRE portfolios,
when, in Management’s judgment, the borrower’s ability
to make required principal and interest payments resumes and
collectability is no longer in doubt, and the loan has been
brought current with respect to principal and interest, the loan
or lease is returned to accrual status. Regarding all classes
within all consumer loan portfolios, a NAL is returned to
accrual status when the loan has been brought to less than
180 days past due with respect to principal and interest.
Charge-off of Uncollectible Loans
— C&I
and CRE loans are either charged-off or written down to fair
value at
90-days
past
due. Automobile loans and other consumer loans are charged-off
at
120-days
past due. Residential mortgages are either charged-off or
written down to fair value when the loan has been foreclosed and
the balance exceeds the market value of the collateral. Home
equity loans are either charged-off or written down to fair
value, when it is determined that there is not sufficient equity
in the loan to cover our position. Any loan in any portfolio may
be charged-off prior to the policies described above if a loss
confirming event occurred. Loss confirming events include, but
are not limited to, bankruptcy (unsecured), continued
delinquency, or receipt of an asset valuation indicating a
collateral deficiency and that asset is the sole source of
repayment.
Impaired Loans
— For all classes within the
C&I and CRE portfolios, all loans with an outstanding
balance of $1 million or greater are evaluated on a
quarterly basis for impairment. Generally, consumer loans within
any class are not individually evaluated on a regular basis for
impairment.
Once a loan has been identified for an assessment of impairment,
the loan is considered impaired when, based on current
information and events, it is probable that all amounts due
according to the contractual terms of the loan agreement will
not be collected. This determination requires significant
judgment and use of estimates, and the eventual outcome may
differ significantly from those estimates.
When a loan in any class has been determined to be impaired, 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 original
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. A
specific reserve is established as a component of the ALLL when
a loan has been determined to be impaired. Subsequent to the
initial measurement of impairment, if there is a significant
change to the impaired loan’s expected future cash flows,
or if actual cash flows are significantly different from the
cash flows previously estimated, Huntington recalculates the
impairment and appropriately adjusts the specific reserve.
Similarly, if Huntington measures impairment based on the
observable market price of an impaired loan or the fair value of
the collateral of an impaired collateral-dependent loan,
Huntington will adjust the specific reserve if there is a
significant change in either of those bases.
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When a loan within any class is impaired, interest income is
recognized unless the receipt of principal and interest is in
doubt when contractually due. If receipt of principal and
interest is in doubt when contractually due, interest income is
not recognized. Cash receipts received on nonaccruing impaired
loans within any class are generally 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. Cash receipts received on accruing impaired
loans within any class are applied in the same manner as
accruing loans that are not considered impaired.
OREO
— OREO is comprised principally of
commercial and residential real estate properties obtained in
partial or total satisfaction of loan obligations, and is
carried at the lower of cost or fair value. 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 foreclosure, with any difference
between the fair value of the property and the carrying value of
the loan recorded as a charge-off. Subsequent declines in value
are reported as adjustments to the carrying amount and are
recorded in noninterest expense. Gains or losses resulting from
the sale of OREO are recognized in noninterest expense at the
date of sale.
Resell and Repurchase Agreements —
Securities
purchased under agreements to resell and securities sold under
agreements to repurchase are 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.
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 lease term, 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 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 value of the underlying holdings in the separate
accounts covered by these insurance policies exceeds the cash
surrender value of the policies by approximately
$0.5 million at December 31, 2010.
Derivative Financial Instruments —
A variety of
derivative financial instruments, principally interest rate
swaps, caps, floors, and collars, 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.
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Derivative financial instruments are recorded in the
Consolidated Balance Sheet as either an asset or a liability (in
accrued income and other assets or accrued expenses and 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 MSRs. 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 in OCI 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
in 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 OCI is
recognized immediately in 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 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 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
we do not consider it more likely than not that a deferred tax
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Table of Contents
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 the tax positions
quarterly.
Stock Repurchases —
Acquisitions of Huntington
stock are recorded at cost. The re-issuance of shares 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
business segments are the same as those used in the preparation
of the Consolidated Financial Statements with respect to
activities specifically attributable to each business segment.
However, the preparation of business segment results requires
Management to establish methodologies to allocate funding costs
and benefits, expenses, and other financial elements to each
business segment. 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.
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.
| 2. | ACCOUNTING STANDARDS UPDATE |
FASB Accounting Standards Codification (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 VIE. The guidance is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2009, and
early adoption was prohibited. Huntington previously transferred
automobile loans to a trust in a securitization transaction.
With adoption of the amended guidance, the trust was
consolidated as of January 1, 2010. Huntington elected the
fair value option under ASC 825, Financial Instruments, for
both the auto loans and the related debt obligations. Total
assets increased $621.6 million, total liabilities
increased $629.3 million, and a negative cumulative effect
adjustment to OCI and retained earnings of $6.1 million was
recorded. Based upon the current regulatory requirements, the
consolidation of
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the trust resulted in a slight decrease to risk weighted capital
ratios. (See Note 21 for more information on the
consolidation of the trust).
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 is
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 19).
Accounting Standards Update (ASU)
2010-20 —
Receivables (Topic 310): Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses.
The ASU requires expanded disclosure about the credit
quality of the loan portfolio in the notes to financial
statements, such as aging information and credit quality
indicators. Both new and existing disclosures must be
disaggregated by portfolio segment or class. The disaggregation
of information is based on how Huntington develops its ACL and
how it manages its credit exposure. The disclosures related to
period-end balances are effective for annual or interim
reporting periods ending after December 15, 2010 and the
disclosures of activity that occurs during the reporting period
are effective for annual or interim reporting periods beginning
after December 15, 2010 (See Note 6).
| 3. | LOANS AND LEASES |
Direct
Financing Leases
Huntington’s loan and lease portfolio includes lease
financing receivables consisting of direct financing leases on
equipment, which are included in C&I loans, and on
automobiles. Net investments in lease financing receivables by
category at December 31 were as follows:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Commercial and industrial
|
||||||||
|
Lease payments receivable
|
$ | 748,377 | $ | 934,470 | ||||
|
Estimated residual value of leased assets
|
94,665 | 54,635 | ||||||
|
Gross investment in commercial lease financing receivables
|
843,042 | 989,105 | ||||||
|
Net deferred origination costs
|
2,472 | 3,207 | ||||||
|
Unearned income
|
(109,962 | ) | (109,090 | ) | ||||
|
Total net investment in commercial lease financing
receivables
|
$ | 735,552 | $ | 883,222 | ||||
|
Consumer
|
||||||||
|
Lease payments receivable
|
$ | 22,063 | $ | 91,099 | ||||
|
Estimated residual value of leased assets
|
47,050 | 171,610 | ||||||
|
Gross investment in consumer lease financing receivables
|
69,113 | 262,709 | ||||||
|
Net deferred origination fees
|
(95 | ) | (384 | ) | ||||
|
Unearned income
|
(3,788 | ) | (16,060 | ) | ||||
|
Total net investment in consumer lease financing
receivables
|
$ | 65,230 | $ | 246,265 | ||||
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The future lease rental payments due from customers on direct
financing leases at December 31, 2010, totaled
$0.8 billion and were as follows: $0.3 billion in
2011; $0.2 billion in 2012; $0.1 billion in 2013;
$0.1 billion in 2014; and $0.1 billion in 2015 and
thereafter.
Franklin
relationship
Franklin is a specialty consumer finance company primarily
engaged in servicing residential mortgage loans. On
March 31, 2009, Huntington entered into a transaction with
Franklin whereby a Huntington wholly-owned REIT subsidiary
(REIT) exchanged a noncontrolling 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 held 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
310-30
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 the investor
will be unable to collect all contractually required payments.
The following table presents a rollforward of the accretable
discount from the beginning of the period to the end of the
period:
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Balance at January 1,
|
$ | 35,286 | $ | — | ||||
|
Impact of Franklin restructuring on March 31, 2009
|
— | 39,781 | ||||||
|
Accretion
|
(1,773 | ) | (4,495 | ) | ||||
|
Reclassification to nonaccretable difference(1)
|
(7,460 | ) | — | |||||
|
Transfer to loans held for sale
|
(26,053 | ) | — | |||||
|
Balance at December 31,
|
$ | — | $ | 35,286 | ||||
| (1) | Result of the reclassification of loans to nonaccrual status. |
In 2010, we sold our portfolio of Franklin-related loans to
third parties. During the year-ended December 31, 2010, we
recorded $87.0 million of Franklin-related provision for
credit losses and NCOs, of which $75.5 million related to
the loan sales. At December 31, 2010, the only
nonperforming Franklin-related assets remaining were
$9.5 million of OREO properties, which have been marked to
the lower of cost or fair value less costs to sell. At
December 31, 2009, $338.5 million of nonperforming
Franklin-related assets were outstanding. Additionally, the
equity interests in the REIT held by Franklin remain outstanding
and pledged as collateral for the Franklin commercial loans at
December 31, 2010.
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. On March 31, 2010, the
net deferred tax asset increased by $43.6 million as a
result of the acquired assets no longer being subject to the
limitations of Internal Revenue Code (IRC) Section 382. In
general, the limitations under IRC Section 382 apply to bad
debt deductions, but IRC Section 382 only applies to bad
debt deductions recognized within one
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year of acquisition. Any bad debt deductions recognized after
March 31, 2010, would not be limited by IRC
Section 382.
Pledged
Loans and Leases
At December 31, 2010, $9.7 billion of commercial and
industrial loans and home equity loans were pledged to secure
potential discount window borrowings from the Federal Reserve
Bank, and $7.8 billion of real estate loans were pledged to
secure advances from the Federal Home Loan Bank.
| 4. | AVAILABLE-FOR-SALE AND OTHER SECURITIES |
The following tables provide amortized cost, fair value, and
gross unrealized gains and losses recognized in OCI by
investment category at December 31, 2010 and 2009.
| Unrealized | ||||||||||||||||
|
Amortized
|
Gross
|
Gross
|
Fair
|
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
|
December 31, 2010
|
||||||||||||||||
|
U.S. Treasury
|
$ | 52,425 | $ | — | $ | (644 | ) | $ | 51,781 | |||||||
|
Federal agencies:
|
||||||||||||||||
|
Mortgage-backed securities
|
4,733,831 | 71,901 | (51,328 | ) | 4,754,404 | |||||||||||
|
TLGP securities
|
181,680 | 1,787 | — | 183,467 | ||||||||||||
|
Other agencies
|
2,070,722 | 4,874 | (17,220 | ) | 2,058,376 | |||||||||||
|
Total U.S. government backed securities
|
7,038,658 | 78,562 | (69,192 | ) | 7,048,028 | |||||||||||
|
Municipal securities
|
456,044 | 6,154 | (6,483 | ) | 455,715 | |||||||||||
|
Private-label CMO
|
134,509 | 1,236 | (13,820 | ) | 121,925 | |||||||||||
|
Asset-backed securities(1)
|
1,341,407 | 6,563 | (140,848 | ) | 1,207,122 | |||||||||||
|
Other securities
|
1,081,982 | 388 | (19,916 | ) | 1,062,454 | |||||||||||
|
Total
available-for-sale
and other securities
|
$ | 10,052,600 | $ | 92,903 | $ | (250,259 | ) | $ | 9,895,244 | |||||||
| (1) | Amounts at December 31, 2010 include securities backed by automobile loans with a fair value of $509 million which meet the eligibility requirements for the Term Asset-Backed Securities Loan Facility, administered by the Federal Reserve Bank. |
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| Unrealized | ||||||||||||||||
|
Amortized
|
Gross
|
Gross
|
Fair
|
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (Dollar amounts 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(2)
|
1,128,474 | 7,709 | (155,867 | ) | 980,316 | |||||||||||
|
Other securities
|
439,132 | 296 | (587 | ) | 438,841 | |||||||||||
|
Total
available-for-sale
and other securities
|
$ | 8,748,088 | $ | 67,746 | $ | (227,920 | ) | $ | 8,587,914 | |||||||
| (2) | 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, administered by the Federal Reserve Bank, and securities with a fair value of $161.0 million backed by student loans with a minimum 97% government guarantee. |
Other securities at December 31, 2010 and 2009 include
$165.6 million and $240.6 million, respectively, of
stock issued by the FHLB of Cincinnati, $37.4 million and
$45.7 million, respectively, of stock issued by the FHLB of
Indianapolis, and $105.7 million and $90.4 million, of
Federal Reserve Bank stock, respectively. Other securities also
include corporate debt and marketable equity securities.
Nonmarketable equity securities are valued at amortized cost. At
December 31, 2010 and 2009, Huntington did not have any
material equity positions in FNMA or FHLMC.
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Table of Contents
The following tables provide detail on investment securities
with unrealized losses aggregated by investment category and the
length of time the individual securities have been in a
continuous loss position, at December 31, 2010 and 2009.
| Less than 12 Months | Over 12 Months | Total | ||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||
|
December 31, 2010
|
||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 51,781 | $ | (644 | ) | $ | — | $ | — | $ | 51,781 | $ | (644 | ) | ||||||||||
|
Federal Agencies:
|
||||||||||||||||||||||||
|
Mortgage-backed securities
|
1,424,431 | (51,328 | ) | — | — | 1,424,431 | (51,328 | ) | ||||||||||||||||
|
TLGP securities
|
— | — | — | — | — | — | ||||||||||||||||||
|
Other agencies
|
1,217,074 | (17,134 | ) | 4,771 | (86 | ) | 1,221,845 | (17,220 | ) | |||||||||||||||
|
Total U.S. Government
|
||||||||||||||||||||||||
|
backed securities
|
2,693,286 | (69,106 | ) | 4,771 | (86 | ) | 2,698,057 | (69,192 | ) | |||||||||||||||
|
Municipal securities
|
201,370 | (6,363 | ) | 3,700 | (120 | ) | 205,070 | (6,483 | ) | |||||||||||||||
|
Private label CMO
|
— | — | 85,617 | (13,820 | ) | 85,617 | (13,820 | ) | ||||||||||||||||
|
Asset-backed securities
|
214,983 | (2,129 | ) | 146,866 | (138,719 | ) | 361,849 | (140,848 | ) | |||||||||||||||
|
Other securities
|
655,869 | (19,125 | ) | 41,218 | (791 | ) | 697,087 | (19,916 | ) | |||||||||||||||
|
Total temporarily impaired securities
|
$ | 3,765,508 | $ | (96,723 | ) | $ | 282,172 | $ | (153,536 | ) | $ | 4,047,680 | $ | (250,259 | ) | |||||||||
| Less than 12 Months | Over 12 Months | Total | ||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (Dollar amounts 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 | ) | |||||||||
144
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Contractual maturities of investment securities as of December
31 were:
| 2010 | 2009 | |||||||||||||||
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
| Cost | Value | Cost | Value | |||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
|
Under 1 year
|
$ | 335,192 | $ | 337,715 | $ | 162,238 | $ | 164,768 | ||||||||
|
1 — 5 years
|
3,540,183 | 3,510,490 | 3,278,176 | 3,279,359 | ||||||||||||
|
6 — 10 years
|
1,128,657 | 1,139,727 | 1,013,065 | 1,019,152 | ||||||||||||
|
Over 10 years
|
4,685,902 | 4,545,304 | 3,863,487 | 3,694,008 | ||||||||||||
|
Nonmarketable equity securities
|
308,722 | 308,722 | 376,640 | 376,640 | ||||||||||||
|
Marketable equity securities
|
53,944 | 53,286 | 54,482 | 53,987 | ||||||||||||
|
Total
available-for-sale
and other securities
|
$ | 10,052,600 | $ | 9,895,244 | $ | 8,748,088 | $ | 8,587,914 | ||||||||
At December 31, 2010, 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 $4.7 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, 2010.
The following table is a summary of securities gains and losses
for the years ended December 31, 2010, 2009 and 2008:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Gross gains on sales of securities
|
$ | 28,992 | $ | 59,762 | $ | 9,364 | ||||||
|
Gross (losses) on sales of securities
|
(15,544 | ) | (10,947 | ) | (10 | ) | ||||||
|
Net gain (loss) on sales of securities
|
13,448 | 48,815 | 9,354 | |||||||||
|
OTTI recorded — pre adoption(1)
|
— | (3,937 | ) | (206,724 | ) | |||||||
|
OTTI recorded — post adoption(1)
|
(13,722 | ) | (55,127 | ) | — | |||||||
|
Net OTTI recorded
|
(13,722 | ) | (59,064 | ) | (206,724 | ) | ||||||
|
Total securities gain (loss)
|
$ | (274 | ) | $ | (10,249 | ) | $ | (197,370 | ) | |||
| (1) | Huntington adopted the current OTTI provisions of ASC Topic 320 on April 1, 2009. |
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 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 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 is necessary because there was a lack of
observable transactions in the market and many of the original
sponsors or dealers for these securities are no longer able to
provide a fair value that is compliant with ASC 820.
145
Table of Contents
For the period ended December 31, 2010 and 2009, the
following tables summarize by debt security type, total OTTI
losses, OTTI losses included in OCI, and OTTI recognized in the
Consolidated Statements of Income for securities evaluated for
impairment as described above.
| Year Ended December 31, 2010 | ||||||||||||||||
|
Alt-A
|
Pooled-
|
Private
|
||||||||||||||
| Mortgage-Backed | Trust-Preferred | Label CMO | Total | |||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
|
Total OTTI recoveries (losses) (unrealized and realized)
|
$ | 566 | $ | 1,254 | $ | 8,046 | $ | 9,866 | ||||||||
|
Unrealized OTTI (recoveries) losses recognized in OCI
|
(2,198 | ) | (6,176 | ) | (15,195 | ) | (23,569 | ) | ||||||||
|
Net impairment losses recognized in earnings
|
$ | (1,632 | ) | $ | (4,922 | ) | $ | (7,149 | ) | $ | (13,703 | ) | ||||
| Year Ended December 31, 2009(1) | ||||||||||||||||
|
Alt-A
|
Pooled-
|
Private
|
||||||||||||||
| Mortgage-Backed | Trust-Preferred | Label CMO | Total | |||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
|
Total OTTI (losses) recoveries (unrealized and realized)
|
$ | (16,906 | ) | $ | (131,902 | ) | $ | (30,727 | ) | $ | (179,535 | ) | ||||
|
Unrealized OTTI losses (recoveries) 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 | ) | ||||
| (1) | Huntington adopted the updated OTTI provisions on April 1, 2009. Amounts represent activity from adoption date through December 31, 2009. |
The following table rolls forward the unrealized OTTI recognized
in OCI on debt securities held by Huntington for the years ended
December 31, 2010 and 2009 as follows:
| Year Ended December 31, | ||||||||
| 2010 | 2009(1) | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Balance, beginning of year
|
$ | 124,408 | $ | — | ||||
|
Reductions from sales
|
(12,907 | ) | — | |||||
|
Credit losses not previous recognized
|
30,215 | 128,892 | ||||||
|
Change in expected cash flows
|
(49,802 | ) | (11,201 | ) | ||||
|
Additional credit losses
|
8,924 | 6,717 | ||||||
|
Balance, end of year
|
$ | 100,838 | $ | 124,408 | ||||
| (1) | Huntington adopted the updated OTTI provisions on April 1, 2009. Amounts represent activity from adoption date through December 31, 2009. |
146
Table of Contents
The following table rolls forward the OTTI recognized in
earnings on debt securities held by Huntington for the years
ended December 31, 2010 and 2009 as follows.
| Year Ended December 31, | ||||||||
| 2010 | 2009(1) | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Balance, beginning of year
|
$ | 53,801 | $ | — | ||||
|
Reductions from sales
|
(12,968 | ) | (1,326 | ) | ||||
|
Credit losses not previous recognized
|
2,381 | 55,127 | ||||||
|
Additional credit losses
|
11,322 | — | ||||||
|
Balance, end of year
|
$ | 54,536 | $ | 53,801 | ||||
| (1) | Huntington adopted the updated OTTI provisions on April 1, 2009. Amounts represent activity from adoption date through December 31, 2009. |
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 nonagency
mortgage and asset-backed securities that are collateralized 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, 2010.
As of December 31, 2010, Management has evaluated all other
investment securities with unrealized losses and all
nonmarketable securities for impairment and concluded no
additional OTTI is required.
| 5. | LOAN SALES AND SECURITIZATIONS |
Residential
Mortgage Loans
For the years ended December 31, 2010, 2009, and 2008,
Huntington sold $3.9 billion, $4.3 billion, and
$2.8 billion of residential mortgage loans with servicing
retained, resulting in net pretax gains of $106.5 million,
$87.2 million, and $27.8 million, respectively,
recorded in other noninterest 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 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 or
not Huntington intends to actively hedge the asset. MSR assets
are recorded using the fair value method if the Company will
actively engage in hedging the asset and recorded using the
amortization method if no active hedging will be performed. MSRs
are included in accrued income and other assets. Any increase or
decrease in the fair value of MSRs carried under the fair value
method, as well as amortization or impairment of MSRs recorded
using the amortization method, during the period is recorded as
an increase or decrease in mortgage banking income, which is
reflected in noninterest income in the consolidated statements
of income.
147
Table of Contents
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, 2010 and 2009:
|
Fair Value Method
|
2010 | 2009 | ||||||
| (Dollar amounts in thousands) | ||||||||
|
Fair value, beginning of year
|
$ | 176,427 | $ | 167,438 | ||||
|
New servicing assets created
|
— | 23,074 | ||||||
|
Change in fair value during the period due to:
|
||||||||
|
Time decay(1)
|
(5,359 | ) | (6,798 | ) | ||||
|
Payoffs(2)
|
(32,668 | ) | (38,486 | ) | ||||
|
Changes in valuation inputs or assumptions(3)
|
(12,721 | ) | 34,305 | |||||
|
Other changes
|
— | (3,106 | ) | |||||
|
Fair value, end of year
|
$ | 125,679 | $ | 176,427 | ||||
| (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 and prepayment spreads. |
|
Amortization Method
|
2010 | 2009 | ||||||
| (Dollar amounts in thousands) | ||||||||
|
Carrying value, beginning of year
|
$ | 38,165 | $ | — | ||||
|
New servicing assets created
|
41,489 | 40,452 | ||||||
|
Amortization and other
|
(9,138 | ) | (2,287 | ) | ||||
|
Carrying value, end of year
|
$ | 70,516 | $ | 38,165 | ||||
|
Fair value, end of year
|
$ | 87,461 | $ | 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, 2010 to changes in these assumptions
follows:
| Decline in Fair Value Due to | ||||||||||||
|
10%
|
20%
|
|||||||||||
|
Adverse
|
Adverse
|
|||||||||||
| Actual | Change | Change | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Constant prepayment rate
|
10.74 | % | $ | (7,235 | ) | $ | (13,311 | ) | ||||
|
Spread over forward interest rate swap rates
|
511 bps | (2,791 | ) | (5,583 | ) | |||||||
MSR values are very sensitive to movements in interest rates as
expected future net servicing income depends on the projected
outstanding principal balances of the underlying loans, which
can be greatly impacted by the level of prepayments. The Company
hedges against changes in MSR fair value attributable to changes
in interest rates through a combination of derivative
instruments and trading securities.
Total servicing fees included in mortgage banking income
amounted to $48.1 million, $48.5 million, and
$45.6 million in 2010, 2009, and 2008, respectively. The
unpaid principal balance of residential mortgage
148
Table of Contents
loans serviced for third parties was $15.9 billion,
$16.0 billion, and $15.8 billion at December 31,
2010, 2009, and 2008, respectively.
Automobile
Loans and Leases
With the adoption of amended accounting guidance for the
consolidation of VIEs on January 1, 2010, Huntington
consolidated a trust containing automobile loans. As a result of
this consolidation, total assets increased $621.6 million,
total liabilities increased $629.3 million, and a negative
cumulative effect adjustment to OCI and retained earnings of
$6.1 million was recorded.
(See Note 21 for more
information regarding the consolidation of the 2009 Trust)
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, 2010 and 2009, and
the fair value at the end of each period were as follows:
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Carrying value, beginning of year
|
$ | 12,912 | $ | 1,656 | ||||
|
New servicing assets created
|
— | 19,538 | ||||||
|
Amortization and other
|
(12,815 | ) (1) | (8,282 | ) | ||||
|
Carrying value, end of year
|
$ | 97 | $ | 12,912 | ||||
|
Fair value, end of year
|
$ | 278 | $ | 14,985 | ||||
| (1) | Included a $12.4 million reduction related to the consolidation of the VIE as noted above. |
Servicing income, net of amortization of capitalized servicing
assets, amounted to $2.5 million, $6.4 million and
$6.8 million for the years ended December 31, 2010,
2009 and 2008, respectively. The unpaid principal balance of
automobile loans serviced for third parties was
$0.1 billion, $1.1 billion, and $0.5 billion at
December 31, 2010, 2009 and 2008, respectively.
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Table of Contents
| 6. | ALLOWANCE FOR CREDIT LOSSES |
The Company maintains two reserves, both of which are available
to absorb probable credit losses: the ALLL and the AULC. When
summed together, these reserves constitute the ACL. A summary of
the transactions in the ACL and details regarding impaired loans
and leases follows for the three years ended December 31,
2010, 2009, and 2008:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Allowance for loan and leases losses, beginning of year
(ALLL)
|
$ | 1,482,479 | $ | 900,227 | $ | 578,442 | ||||||
|
Loan charge-offs
|
(1,003,907 | ) | (1,561,378 | ) | (806,330 | ) | ||||||
|
Recoveries of loans previously charged-off
|
129,433 | 84,791 | 48,263 | |||||||||
|
Net loan and lease charge-offs
|
(874,474 | ) | (1,476,587 | ) | (758,067 | ) | ||||||
|
Provision for loan and lease losses
|
641,299 | 2,069,931 | 1,067,789 | |||||||||
|
Economic reserve transfer
|
— | — | 12,063 | |||||||||
|
Allowance for assets sold and securitized
|
(296 | ) | (9,188 | ) | — | |||||||
|
Allowance for loans transferred to loans held for sale
|
— | (1,904 | ) | — | ||||||||
|
Allowance for loan and lease losses, end of year
|
$ | 1,249,008 | $ | 1,482,479 | $ | 900,227 | ||||||
|
Allowance for unfunded loan commitments and letters of
credit, beginning of year (AULC)
|
$ | 48,879 | $ | 44,139 | $ | 66,528 | ||||||
|
(Reduction in) provision for unfunded loan commitments and
letters of credit losses
|
(6,752 | ) | 4,740 | (10,326 | ) | |||||||
|
Economic reserve transfer
|
— | — | (12,063 | ) | ||||||||
|
Allowance for unfunded loan commitments and letters of
credit, end of year
|
$ | 42,127 | $ | 48,879 | $ | 44,139 | ||||||
|
Total allowance for credit losses (ACL)
|
$ | 1,291,135 | $ | 1,531,358 | $ | 944,366 | ||||||
|
Recorded balance of impaired loans, at end of year(1):
|
||||||||||||
|
With specific reserves assigned to the loan and lease balances(2)
|
$ | 825,292 | $ | 873,215 | $ | 1,122,575 | ||||||
|
With no specific reserves assigned to the loan and lease balances
|
94,290 | 221,384 | 75,799 | |||||||||
|
Total
|
$ | 919,582 | $ | 1,094,599 | $ | 1,198,374 | ||||||
|
Average balance of impaired loans for the year(1)
|
$ | 1,064,235 | $ | 1,010,044 | $ | 1,369,857 | ||||||
|
Allowance for loan and lease losses on impaired loans(1)
|
143,860 | 175,442 | 301,457 | |||||||||
| (1) | 2010 and 2009 includes impaired C&I and CRE loans with outstanding balances greater than $1 million. 2008 includes impaired C&I and CRE 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. 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 $0.7 billion are included in impaired loans at the end of 2008. |
150
Table of Contents
The following table presents ALLL activity by portfolio segment
for the year ended December 31, 2010:
|
Commercial
|
Automobile
|
|||||||||||||||||||||||||||
|
and
|
Commercial
|
Loans and
|
Home
|
Residential
|
Other
|
|||||||||||||||||||||||
| Industrial | Real Estate | Leases | Equity(1) | Mortgage(2) | Consumer | Total | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
Allowance for Loan and Lease Losses:
|
||||||||||||||||||||||||||||
|
Balance at January 1, 2010:
|
$ | 492,205 | $ | 751,875 | $ | 57,951 | $ | 102,039 | $ | 55,903 | $ | 22,506 | $ | 1,482,479 | ||||||||||||||
|
Loan charge-offs
|
(316,771 | ) | (303,995 | ) | (46,308 | ) | (140,831 | ) | (163,427 | ) | (32,575 | ) | (1,003,907 | ) | ||||||||||||||
|
Recoveries of loans previously charged-off
|
61,839 | 28,433 | 19,736 | 1,458 | 10,532 | 7,435 | 129,433 | |||||||||||||||||||||
|
Provision for loan and lease losses
|
103,341 | 111,938 | 18,109 | 187,964 | 190,577 | 29,370 | 641,299 | |||||||||||||||||||||
|
Allowance for loans sold or transferred to loans held for sale
|
— | — | — | — | (296 | ) | — | (296 | ) | |||||||||||||||||||
|
Balance at December 31, 2010:
|
$ | 340,614 | $ | 588,251 | $ | 49,488 | $ | 150,630 | $ | 93,289 | $ | 26,736 | $ | 1,249,008 | ||||||||||||||
|
Portion of ending balance:
|
||||||||||||||||||||||||||||
|
Individually evaluated for impairment
|
$ | 63,307 | $ | 65,130 | $ | 1,477 | $ | 1,498 | $ | 11,780 | $ | 668 | $ | 143,860 | ||||||||||||||
|
Collectively evaluated for impairment
|
277,307 | 523,121 | 48,011 | 149,132 | 81,509 | 26,068 | 1,105,148 | |||||||||||||||||||||
|
Total ALLL evaluated for impairment
|
$ | 340,614 | $ | 588,251 | $ | 49,488 | $ | 150,630 | $ | 93,289 | $ | 26,736 | $ | 1,249,008 | ||||||||||||||
|
ALLL associated with portfolio loans acquired with deteriorated
credit quality
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Loans and Leases at December 31, 2010:
|
||||||||||||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||||||
|
Ending balance
|
$ | 13,063 | $ | 6,651 | $ | 5,615 | $ | 7,713 | $ | 4,500 | $ | 564 | $ | 38,106 | ||||||||||||||
|
Portion of ending balance:
|
||||||||||||||||||||||||||||
|
Individually evaluated for impairment
|
198 | 311 | 30 | 37 | 334 | 10 | 920 | |||||||||||||||||||||
|
Collectively evaluated for impairment
|
12,865 | 6,340 | 5,585 | 7,676 | 4,166 | 554 | 37,186 | |||||||||||||||||||||
|
Total loans evaluated for impairment
|
$ | 13,063 | $ | 6,651 | $ | 5,615 | $ | 7,713 | $ | 4,500 | $ | 564 | $ | 38,106 | ||||||||||||||
|
Portfolio loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Portfolio loans purchased (during 2010)
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Portfolio loans with ALLL sold or transferred to loans held for
sale (during 2010)
|
— | — | — | — | 311 | — | 311 | |||||||||||||||||||||
|
Portfolio loans without ALLL sold or transferred to loans held
for sale (during 2010)(3)
|
124 | 137 | — | 48 | 505 | — | 814 | |||||||||||||||||||||
| (1) | Reflects $21 million of Franklin-related net charge-offs. | |
| (2) | Reflects $71 million of Franklin-related net charge-offs. | |
| (3) | Reflects $323 million of Franklin-related loans. |
The credit quality indicator presented for all classes within
the C&I and CRE portfolios is the UCS classification. This
classification is a widely-used and standard system representing
the degree of risk of nonpayment. The categories presented in
the following table are:
Pass
= Commercial loans categorized as Pass are higher
quality loans that do not fit any of the other categories
described below.
151
Table of Contents
OLEM
= Commercial loans categorized as OLEM are
potentially weak. The credit risk may be relatively minor yet
represent a risk given certain specific circumstances. If the
potential weaknesses are not monitored or mitigated, the asset
may weaken or inadequately protect the Company’s position
in the future.
Substandard
= Commercial loans categorized as Substandard
are inadequately protected by the borrower’s ability to
repay, equity,
and/or
the
collateral pledged to secure the loan. These loans have
identified weaknesses that could hinder normal repayment or
collection of the debt. It is likely that the Company will
sustain some loss if any identified weaknesses are not mitigated.
Doubtful
= Commercial loans categorized as Doubtful have
all of the weaknesses inherent in those loans classified as
Substandard, with the added elements of the full collection of
the loan is improbable and that the possibility of loss is high.
Commercial loans categorized as OLEM, Substandard, or Doubtful
are considered Criticized. Commercial loans categorized as
Substandard or Doubtful are considered Classified.
The indicator presented for all classes within the automobile
loan, home equity, residential mortgage, and other consumer loan
portfolios is the FICO credit bureau score. A FICO credit bureau
score is a credit score developed by Fair Isaac Corporation
based on data provided by the credit bureaus. The FICO credit
bureau score is the world’s most used credit score and
represents the standard measure of consumer credit risk used by
lenders, regulators, rating agencies, and consumers. The higher
the FICO credit bureau score, the better the odds of repayment
and therefore, an indicator of lower credit risk.
The following table presents loan and lease balances by credit
quality indicator as of December 31, 2010.
| Credit Risk Profile by UCS classification | ||||||||||||||||||||
| Pass | OLEM | Substandard | Doubtful | Total | ||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
|
December 31, 2010
|
||||||||||||||||||||
|
Commercial and Industrial:
|
||||||||||||||||||||
|
Owner occupied
|
$ | 3,265 | $ | 159 | $ | 393 | $ | 6 | $ | 3,823 | ||||||||||
|
Other commercial and industrial
|
8,435 | 265 | 525 | 15 | 9,240 | |||||||||||||||
|
Total C&I
|
$ | 11,700 | $ | 424 | $ | 918 | $ | 21 | $ | 13,063 | ||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Retail properties
|
$ | 1,284 | $ | 128 | $ | 350 | $ | — | $ | 1,762 | ||||||||||
|
Multi family
|
899 | 79 | 144 | — | 1,122 | |||||||||||||||
|
Office
|
868 | 122 | 133 | — | 1,123 | |||||||||||||||
|
Industrial and warehouse
|
668 | 72 | 113 | — | 853 | |||||||||||||||
|
Other commercial real estate
|
1,221 | 88 | 481 | 1 | 1,791 | |||||||||||||||
|
Total CRE
|
$ | 4,940 | $ | 489 | $ | 1,221 | $ | 1 | $ | 6,651 | ||||||||||
| Credit Risk Profile by FICO score(1) | ||||||||||||||||||||
| 750+ | 650-749 | <650 | Other(2) | Total | ||||||||||||||||
|
Automobile loans and leases
|
$ | 2,516 | $ | 2,267 | $ | 725 | $ | 107 | $ | 5,615 | ||||||||||
|
Home equity loans and
lines-of-credit:
|
||||||||||||||||||||
|
Secured by first-lien
|
1,644 | 1,082 | 314 | 1 | 3,041 | |||||||||||||||
|
Secured by second-lien
|
2,224 | 1,768 | 679 | 1 | 4,672 | |||||||||||||||
|
Residential mortgage
|
1,978 | 1,580 | 796 | 146 | 4,500 | |||||||||||||||
|
Other consumer loans
|
207 | 235 | 102 | 20 | 564 | |||||||||||||||
| (1) | Reflects currently updated customer credit scores. | |
| (2) | Reflects deferred fees and costs, loans in process, loans to legal entities, etc. |
152
Table of Contents
The following table presents loans and leases on nonaccrual
status by loan class at December 31, 2010.
| (Dollar amounts in thousands) | ||||
|
December 31, 2010
|
||||
|
Commercial and Industrial:
|
||||
|
Owner occupied
|
$ | 139 | ||
|
Other commercial and industrial
|
208 | |||
|
Total C&I
|
$ | 347 | ||
|
Commercial real estate:
|
||||
|
Retail properties
|
$ | 97 | ||
|
Multi family
|
45 | |||
|
Office
|
48 | |||
|
Industrial and warehouse
|
40 | |||
|
Other commercial real estate
|
134 | |||
|
Total CRE
|
$ | 364 | ||
|
Automobile loans and leases
|
$ | — | ||
|
Home equity loans and
lines-of-credit:
|
||||
|
Secured by first-lien
|
10 | |||
|
Secured by second-lien
|
12 | |||
|
Residential mortgage
|
45 | |||
|
Other consumer loans
|
— | |||
|
Total nonaccrual loans
|
$ | 778 | ||
153
Table of Contents
The following table presents an aging analysis of loans and
leases as of December 31, 2010:
|
Total
|
90 or More Days
|
|||||||||||||||||||||||||||
| Past Due |
Loans and
|
Past Due and
|
||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 or More Days | Total | Current | Leases | Accruing | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
December 31, 2010
|
||||||||||||||||||||||||||||
|
Commercial and Industrial:
|
||||||||||||||||||||||||||||
|
Owner occupied
|
$ | 16 | $ | 9 | $ | 80 | $ | 105 | $ | 3,718 | $ | 3,823 | $ | — | ||||||||||||||
|
Other commercial and industrial
|
35 | 36 | 110 | 181 | 9,059 | 9,240 | — | |||||||||||||||||||||
|
Total C&I
|
$ | 51 | $ | 45 | $ | 190 | $ | 286 | $ | 12,777 | $ | 13,063 | $ | — | ||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||||||
|
Retail properties
|
$ | 24 | $ | 1 | $ | 73 | $ | 98 | $ | 1,665 | $ | 1,763 | $ | — | ||||||||||||||
|
Multi family
|
9 | 8 | 32 | 49 | 1,073 | 1,122 | — | |||||||||||||||||||||
|
Office
|
21 | 6 | 36 | 63 | 1,060 | 1,123 | — | |||||||||||||||||||||
|
Industrial and warehouse
|
4 | 8 | 13 | 25 | 828 | 853 | — | |||||||||||||||||||||
|
Other commercial real estate
|
47 | 8 | 90 | 145 | 1,645 | 1,790 | — | |||||||||||||||||||||
|
Total CRE
|
$ | 105 | $ | 31 | $ | 244 | $ | 380 | $ | 6,271 | $ | 6,651 | $ | — | ||||||||||||||
|
Automobile loans and leases
|
$ | 48 | 12 | $ | 8 | $ | 68 | $ | 5,547 | $ | 5,615 | $ | 8 | |||||||||||||||
|
Home equity loans and
lines-of-credit:
|
||||||||||||||||||||||||||||
|
Secured by first-lien
|
15 | 8 | 19 | 42 | 2,999 | 3,041 | 8 | |||||||||||||||||||||
|
Secured by second-lien
|
36 | 17 | 27 | 80 | 4,592 | 4,672 | 16 | |||||||||||||||||||||
|
Residential mortgage
|
115 | 58 | 197 | 370 | 4,130 | 4,500 | 152 | |||||||||||||||||||||
|
Other consumer loans
|
7 | 2 | 3 | 12 | 552 | 564 | 2 | |||||||||||||||||||||
154
Table of Contents
The following table presents impaired loan information:
|
Year Ended
|
||||||||||||||||||||
| December 31, 2010 | December 31, 2010 | |||||||||||||||||||
|
Unpaid
|
Interest
|
|||||||||||||||||||
|
Ending
|
Principal
|
Related
|
Average
|
Income
|
||||||||||||||||
| Balance | Balance | Allowance | Balance | Recognized | ||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||
|
With no related allowance recorded:
|
||||||||||||||||||||
|
Commercial and Industrial:
|
||||||||||||||||||||
|
Owner occupied
|
$ | 13.8 | $ | 26.6 | $ | — | $ | 8.5 | $ | — | ||||||||||
|
Other commercial and industrial
|
11.1 | 22.7 | — | 14.0 | 0.1 | |||||||||||||||
|
Total C&I
|
$ | 24.9 | $ | 49.3 | $ | — | $ | 22.5 | $ | 0.1 | ||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Retail properties
|
$ | 32.0 | $ | 67.5 | $ | — | $ | 43.0 | $ | 0.1 | ||||||||||
|
Multi family
|
5.1 | 5.7 | — | 3.5 | 0.1 | |||||||||||||||
|
Office
|
2.3 | 3.6 | — | 6.8 | — | |||||||||||||||
|
Industrial and warehouse
|
3.3 | 6.9 | — | 7.4 | — | |||||||||||||||
|
Other commercial real estate
|
26.7 | 58.9 | — | 38.0 | 0.2 | |||||||||||||||
|
Total CRE
|
$ | 69.4 | $ | 142.6 | $ | — | $ | 98.7 | $ | 0.4 | ||||||||||
|
Automobile loans and leases
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Home equity loans and
lines-of-credit:
|
||||||||||||||||||||
|
Secured by first-lien
|
— | — | — | — | — | |||||||||||||||
|
Secured by second-lien
|
— | — | — | — | — | |||||||||||||||
|
Residential mortgage
|
— | — | — | — | — | |||||||||||||||
|
Other consumer loans
|
— | — | — | — | — | |||||||||||||||
|
With an allowance recorded:
|
||||||||||||||||||||
|
Commercial and Industrial:
|
||||||||||||||||||||
|
Owner occupied
|
$ | 64.0 | $ | 85.3 | $ | 14.3 | $ | 51.6 | $ | 0.1 | ||||||||||
|
Other commercial and industrial
|
109.2 | 154.4 | 49.0 | 156.5 | 0.4 | |||||||||||||||
|
Total C&I
|
$ | 173.2 | $ | 239.7 | $ | 63.3 | $ | 208.1 | $ | 0.5 | ||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Retail properties
|
$ | 74.7 | $ | 120.1 | $ | 14.8 | $ | 114.3 | $ | 0.8 | ||||||||||
|
Multi family
|
38.8 | 39.3 | 7.8 | 55.4 | 0.4 | |||||||||||||||
|
Office
|
26.6 | 31.3 | 9.5 | 30.3 | — | |||||||||||||||
|
Industrial and warehouse
|
34.6 | 44.2 | 10.5 | 59.0 | 0.3 | |||||||||||||||
|
Other commercial real estate
|
66.6 | 104.4 | 22.5 | 113.4 | — | |||||||||||||||
|
Total CRE
|
$ | 241.3 | $ | 339.3 | $ | 65.1 | $ | 372.4 | $ | 1.5 | ||||||||||
|
Automobile loans and leases
|
$ | 29.7 | $ | 29.7 | $ | 1.5 | $ | 26.3 | $ | 2.3 | ||||||||||
|
Home equity loans and
lines-of-credit:
|
||||||||||||||||||||
|
Secured by first-lien
|
20.5 | 20.6 | 0.5 | 16.7 | 0.7 | |||||||||||||||
|
Secured by second-lien
|
16.7 | 17.1 | 1.0 | 17.1 | 0.6 | |||||||||||||||
|
Residential mortgage
|
334.2 | 347.6 | 11.8 | 293.3 | 12.2 | |||||||||||||||
|
Other consumer loans
|
9.7 | 9.7 | 0.7 | 9.2 | 0.8 | |||||||||||||||
155
Table of Contents
| 7. | 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, became 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.
Automobile Finance and Dealer Services (AFDS), Private Financial
Group (PFG), and Treasury / Other remained essentially
unchanged.
In late 2010, Huntington again reorganized its internal
reporting structure. Business segments are based on segment
leadership structure, which reflects how segment performance is
monitored and assessed. The primary changes to the business
segments were: (1) the AFDS and Commercial Real Estate
segments were combined into one segment, (2) the Home
Lending area moved from the Retail and Business Banking segment
to the PFG segment, (3) the PFG segment was renamed Wealth
Advisors, Government Finance, and Home Lending (WGH), and
(4) the insurance business area moved from WGH to
Treasury / Other.
A rollforward of goodwill by business segment for the years
ended December 31, 2010 and 2009, including the
reallocation noted above, was as follows:
|
Retail &
|
Auto Finance
|
|||||||||||||||||||||||||||
|
Regional
|
Business
|
Commercial
|
& Commercial
|
Treasury/
|
Huntington
|
|||||||||||||||||||||||
| Banking | Banking | Banking | Real Estate | WGH | Other | Consolidated | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
Balance, January 1, 2009
|
$ | 2,888,344 | $ | — | $ | — | $ | — | $ | 153,178 | $ | 13,463 | $ | 3,054,985 | ||||||||||||||
|
Impairment, March 31, 2009
|
(2,573,818 | ) | — | — | — | (28,895 | ) | — | (2,602,713 | ) | ||||||||||||||||||
|
Reallocation of goodwill
|
(314,526 | ) | 309,518 | 5,008 | — | — | — | — | ||||||||||||||||||||
|
Balance, April 1, 2009
|
— | 309,518 | 5,008 | — | 124,283 | 13,463 | 452,272 | |||||||||||||||||||||
|
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 | ||||||||||||||
|
Reallocation of goodwill
|
(23,314 | ) | 11,161 | — | (25,332 | ) | 37,485 | — | ||||||||||||||||||||
|
Balance, December 31, 2010
|
$ | — | $ | 286,824 | $ | 16,169 | $ | — | $ | 98,951 | $ | 42,324 | $ | 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. In 2010, we performed interim
evaluations of our goodwill balances at March 31 and
June 30, as well as our annual goodwill impairment
assessment as of October 1. The interim and annual
assessments were based on our reporting units at that time. No
impairment was recorded in 2010.
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 2009 first quarter. An impairment
charge of $4.2 million was recorded in the 2009 second
quarter related to a small payments-related business sold in
July 2009. Huntington concluded that no other goodwill
impairment was required during 2009.
Goodwill acquired during 2009 was the result of
Huntington’s assumption of the deposits and certain assets
of Warren Bank in October 2009. In 2010, Huntington transferred
goodwill between business segments in response to organizational
changes in its internal reporting structure.
156
Table of Contents
At December 31, 2010 and 2009, Huntington’s other
intangible assets consisted of the following:
|
Gross
|
Net
|
|||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
||||||||||
| Amount | Amortization | Value | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
December 31, 2010
|
||||||||||||
|
Core deposit intangible
|
$ | 376,846 | $ | (219,311 | ) | $ | 157,535 | |||||
|
Customer relationship
|
104,574 | (34,751 | ) | 69,823 | ||||||||
|
Other
|
25,164 | (23,902 | ) | 1,262 | ||||||||
|
Total other intangible assets
|
$ | 506,584 | $ | (277,964 | ) | $ | 228,620 | |||||
|
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 | |||||
The estimated amortization expense of other intangible assets
for the next five years is as follows:
|
Amortization
|
||||
| Expense | ||||
| (Dollar amounts in thousands) | ||||
|
2011
|
$ | 53,325 | ||
|
2012
|
46,075 | |||
|
2013
|
40,511 | |||
|
2014
|
35,858 | |||
|
2015
|
19,756 | |||
| 8. | PREMISES AND EQUIPMENT |
Premises and equipment were comprised of the following:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Land and land improvements
|
$ | 120,069 | $ | 118,875 | ||||
|
Buildings
|
367,003 | 355,352 | ||||||
|
Leasehold improvements
|
204,830 | 194,405 | ||||||
|
Equipment
|
613,301 | 571,307 | ||||||
|
Total premises and equipment
|
1,305,203 | 1,239,939 | ||||||
|
Less accumulated depreciation and amortization
|
(813,601 | ) | (743,918 | ) | ||||
|
Net premises and equipment
|
$ | 491,602 | $ | 496,021 | ||||
Depreciation and amortization charged to expense and rental
income credited to net occupancy expense for the three years
ended December 31, 2010, 2009, and 2008 were:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Total depreciation and amortization of premises and equipment
|
$ | 64,934 | $ | 66,089 | $ | 77,956 | ||||||
|
Rental income credited to occupancy expense
|
10,108 | 11,755 | 12,917 | |||||||||
157
Table of Contents
| 9. | SHORT-TERM BORROWINGS |
Short-term borrowings were comprised of the following:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Federal funds purchased and securities sold under agreements to
repurchase
|
$ | 1,965,677 | $ | 851,285 | ||||
|
Commercial paper
|
100 | 700 | ||||||
|
Other borrowings
|
74,955 | 24,256 | ||||||
|
Total short-term borrowings
|
$ | 2,040,732 | $ | 876,241 | ||||
Other borrowings consist of borrowings from the Treasury and
other notes payable.
| 10. | FEDERAL HOME LOAN BANK ADVANCES |
Huntington’s long-term advances from the Federal Home Loan
Bank had weighted average interest rates of 0.56% and 0.88% at
December 31, 2010 and 2009, respectively. These advances,
which predominantly had variable interest rates, were
collateralized by qualifying real estate loans. As of
December 31, 2010 and 2009, Huntington’s maximum
borrowing capacity was $2.3 billion and $3.0 billion,
respectively. The advances outstanding at December 31, 2010
of $172.5 million mature as follows: $154.9 million in
2011; none in 2012; $9.6 million in 2013; none in 2014; and
$8.0 million in 2015 and thereafter.
| 11. |
|
Huntington’s other long-term debt consisted of the
following:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
1.05% The Huntington National Bank medium-term notes due through
2018(1)
|
$ | 638,950 | $ | 788,397 | ||||
|
0.93% Securitization trust notes payable due through 2013(2)
|
877,270 | 1,059,249 | ||||||
|
4.52% Securitization trust note payable due 2014(3)
|
356,089 | — | ||||||
|
5.10% Securitization trust note payable due 2018(4)
|
151,937 | 391,954 | ||||||
|
2.61% Class B preferred securities of subsidiary, no
maturity(5)
|
65,000 | — | ||||||
|
7.88% Class C preferred securities of subsidiary, no
maturity
|
50,000 | 50,000 | ||||||
|
Franklin 2009 Trust liability(6)
|
4,846 | 79,891 | ||||||
|
Total other long-term debt
|
$ | 2,144,092 | $ | 2,369,491 | ||||
| (1) | Bank notes had fixed rates and variable rates with a weighted-average interest rate of 1.05% at December 31, 2010. | |
| (2) | Variable effective rate at December 31, 2010, based on one month LIBOR + 0.67 or 0.93%. | |
| (3) | Combination of fixed rates with a weighted average rate at December 31, 2010 of 4.52%. | |
| (4) | Combination of fixed and variable rates with a weighted average interest rate of 5.10% at December 31, 2010. | |
| (5) | Variable effective rate at December 31, 2010, based on one month LIBOR + 2.35 or 2.61%. | |
| (6) | Franklin 2009 Trust liability was a result of the consolidation of Franklin 2009 Trust on March 31, 2009. |
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 20 for
more information regarding such financial instruments.
158
Table of Contents
In 2010, approximately $92.1 million of municipal
securities, $86.0 million in Huntington Preferred Capital,
Inc. (Real Estate Investment Trust) Class E Preferred Stock
and cash of $6.1 million were transferred to Tower Hill
Securities, Inc., an unconsolidated entity, in exchange for
$184.1 million of Common and Preferred Stock of Tower Hill
Securities, Inc. The municipal securities and the REIT Shares
will be used to satisfy $65.0 million of mandatorily
redeemable securities issued by Tower Hill Securities, Inc. and
are not available to satisfy the general debts and obligations
of Huntington or any consolidated affiliates. The transfer did
not meet the sale requirement of ASC 860 and therefore has
been recorded as a secured financing on the Consolidated Balance
Sheet of Huntington at December 31, 2010.
In the 2009 first quarter, the Bank issued $600 million of
guaranteed debt through the TLGP with the FDIC. The majority of
the resulting proceeds were used to repay unsecured other
long-term debt obligations maturing in 2009.
Other long-term debt maturities for the next five years and
thereafter are as follows:
|
Other Long-Term
|
||||
| Debt Maturities | ||||
| (Dollar amounts in thousands) | ||||
|
2011
|
$ | 4,846 | ||
|
2012
|
661,847 | |||
|
2013
|
328,048 | |||
|
2014
|
108,377 | |||
|
2015
|
— | |||
|
and thereafter
|
1,027,270 | |||
These maturities are based upon the par values of the 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, 2010, Huntington was in compliance with all
such covenants.
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Table of Contents
| 12. | SUBORDINATED NOTES |
At December 31, Huntington’s subordinated notes
consisted of the following:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Parent company:
|
||||||||
|
6.21% subordinated notes due 2013
|
$ | 49,095 | $ | 48,732 | ||||
|
7.00% subordinated notes due 2020
|
308,289 | — | ||||||
|
0.99% junior subordinated debentures due 2027(1)
|
138,816 | 138,816 | ||||||
|
0.93% junior subordinated debentures due 2028(2)
|
60,093 | 60,093 | ||||||
|
8.54% junior subordinated debentures due 2029
|
23,248 | 23,299 | ||||||
|
8.52% junior subordinated debentures due 2030
|
64,474 | 64,971 | ||||||
|
3.52% junior subordinated debentures due 2033(3)
|
30,929 | 30,929 | ||||||
|
3.54% junior subordinated debentures due 2033(4)
|
6,186 | 6,186 | ||||||
|
1.28% junior subordinated debentures due 2036(5)
|
77,481 | 77,809 | ||||||
|
1.27% junior subordinated debentures due 2036(5)
|
77,482 | 77,810 | ||||||
|
6.69% junior subordinated debentures due 2067(6)
|
114,072 | 114,045 | ||||||
|
The Huntington National Bank:
|
||||||||
|
8.18% subordinated notes due 2010
|
— | 84,144 | ||||||
|
6.21% subordinated notes due 2012
|
64,909 | 64,861 | ||||||
|
5.00% subordinated notes due 2014
|
136,639 | 133,930 | ||||||
|
5.59% subordinated notes due 2016
|
112,420 | 112,385 | ||||||
|
6.67% subordinated notes due 2018
|
147,071 | 144,202 | ||||||
|
5.45% subordinated notes due 2019
|
86,012 | 81,990 | ||||||
|
Total subordinated notes
|
$ | 1,497,216 | $ | 1,264,202 | ||||
| (1) | Variable effective rate at December 31, 2010, based on three month LIBOR + 0.70. | |
| (2) | Variable effective rate at December 31, 2010, based on three month LIBOR + 0.625. | |
| (3) | Variable effective rate at December 31, 2010, based on three month LIBOR + 2.95. | |
| (4) | Variable effective rate at December 31, 2010, based on three month LIBOR + 3.25. | |
| (5) | Variable effective rate at December 31, 2010, 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 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 20 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. These transactions have
been recorded as gains on early extinguishment of debt, a
reduction of noninterest expense in the Consolidated Financial
Statements.
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Table of Contents
| 13. | OTHER COMPREHENSIVE INCOME |
The components of Huntington’s OCI in the three years ended
December 31, were as follows:
| 2010 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-Tax | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Cumulative effect of change in accounting principle for
consolidation of variable interest entities
|
$ | (6,365 | ) | $ | 2,116 | $ | (4,249 | ) | ||||
|
Non credit related impairment recoveries (losses) on debt
securities not expected to be sold
|
23,569 | (8,249 | ) | 15,320 | ||||||||
|
Unrealized holding gains (losses) on
available-for-sale
debt securities arising during the period
|
(14,498 | ) | 5,019 | (9,479 | ) | |||||||
|
Less: Reclassification adjustment for net losses (gains)
included in net income
|
274 | (96 | ) | 178 | ||||||||
|
Net change in unrealized holding gains (losses) on
available-for-sale
debt securities
|
9,345 | (3,326 | ) | 6,019 | ||||||||
|
Net change in unrealized holding gains (losses) on
available-for-sale
equity securities
|
(162 | ) | 57 | (105 | ) | |||||||
|
Unrealized gains and losses on derivatives used in cash flow
hedging relationships arising during the period
|
(35,623 | ) | 12,468 | (23,155 | ) | |||||||
|
Change in pension and post-retirement benefit plan assets and
liabilities
|
(29,263 | ) | 10,242 | (19,021 | ) | |||||||
|
Total other comprehensive (loss) income
|
$ | (62,068 | ) | $ | 21,557 | $ | (40,511 | ) | ||||
| 2009 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-Tax | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Cumulative effect of change in accounting principle for OTTI
debt securities
|
$ | (5,448 | ) | $ | 1,907 | $ | (3,541 | ) | ||||
|
Non credit related impairment (losses) recoveries on debt
securities not expected to be sold
|
(124,408 | ) | 43,543 | (80,865 | ) | |||||||
|
Unrealized holding gains (losses) on
available-for-sale
debt securities arising during the period
|
280,789 | (98,678 | ) | 182,111 | ||||||||
|
Less: Reclassification adjustment for net losses (gains)
included in net income
|
10,249 | (3,587 | ) | 6,662 | ||||||||
|
Net change in unrealized holding gains (losses) on
available-for-sale
debt securities
|
166,630 | (58,722 | ) | 107,908 | ||||||||
|
Net change in unrealized holding gains (losses) on
available-for-sale
equity securities
|
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 | |||||
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Table of Contents
| 2008 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-Tax | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Unrealized holding (losses) gains on
available-for-sale
debt securities arising during the period
|
$ | (502,756 | ) | $ | 177,040 | $ | (325,716 | ) | ||||
|
Less: Reclassification adjustment for net losses (gains)
included in net income
|
197,370 | (69,080 | ) | 128,290 | ||||||||
|
Net change in unrealized holding (losses) gains on
available-for-sale
debt securities
|
(305,386 | ) | 107,960 | (197,426 | ) | |||||||
|
Net change in unrealized holding (losses) gains on
available-for-sale
equity securities
|
(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 | ) | ||||
Activity in OCI for the three years ended December 31, were
as follows:
|
Unrealized
|
Unrealized
|
|||||||||||||||||||
|
Gains and
|
Gains (Losses)
|
|||||||||||||||||||
|
Unrealized
|
Unrealized
|
(Losses) on
|
for Pension
|
|||||||||||||||||
|
Gains and
|
Gains and
|
Cash Flow
|
and Other
|
|||||||||||||||||
|
(Losses) on Debt
|
(Losses) on
|
Hedging
|
Post-Retirement
|
|||||||||||||||||
| Securities | Equity securities | Derivatives | Obligations | Total | ||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
|
Balance, January 1, 2008
|
$ | (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, net of tax
|
— | — | — | (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, net of tax
|
(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 | ) | |||||||||||
|
Cumulative effect of change in accounting principle for
consolidation of variable interest entities, net of tax
|
(4,249 | ) | — | — | — | (4,249 | ) | |||||||||||||
|
Period change
|
6,019 | (105 | ) | (23,155 | ) | (19,021 | ) | (36,262 | ) | |||||||||||
|
Balance, December 31, 2010
|
$ | (101,290 | ) | $ | (427 | ) | $ | 35,710 | $ | (131,489 | ) | $ | (197,496 | ) | ||||||
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Table of Contents
| 14. | SHAREHOLDERS’ EQUITY |
Repurchase
of Outstanding TARP Capital and Warrant to Repurchase Common
Stock
In 2008, Huntington received $1.4 billion of equity capital
by issuing to the 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 (TARP Capital), 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
for the warrant based on their relative fair values. The
resulting discount on the preferred stock was amortized against
retained earnings and was recorded in Huntington’s
Consolidated Statements of Income as dividends on preferred
shares, resulting in reduction to Huntington’s net income
applicable to common shares.
As approved by the Federal Reserve Board, the Treasury, and our
other banking regulators, on December 22, 2010, Huntington
repurchased all 1.4 million shares of our TARP Capital held
by the Treasury totaling $1.4 billion. Huntington used the
net proceeds from the issuance of common stock discussed below
and $300 million of 7.00% Subordinated Notes due 2020
and other funds to redeem the TARP Capital. On January 19,
2011, Huntington repurchased the warrant originally issued to
the Treasury for a purchase price of $49.1 million.
In connection with the repurchase of the TARP Capital,
Huntington accelerated the accretion of the remaining issuance
discount on the TARP Capital and recorded a corresponding deemed
dividend on preferred shares of $56.3 million. This
resulted in a one-time, noncash reduction in net income
attributable to common shareholders and related basic and
diluted earnings per share. The total reduction in net income
attributable to common shareholders from the TARP Capital
issuance discount accretion was $73.1 million and
$16.0 million for the years ended December 31, 2010
and 2009, respectively.
For the years ended December 31, 2010 and 2009, Huntington
paid dividends of $77.1 million and $70.1 million,
respectively, to the Treasury. This represents the total
dividends paid to the Treasury while the TARP Capital was
outstanding.
Issuance
of Common Stock
During the past two years, Huntington completed several
transactions to increase capital, in particular, common equity.
During the 2010 fourth quarter, Huntington completed an offering
of 146.0 million shares of common stock at a price of $6.30
per share, or $920.0 million in aggregate gross proceeds.
In 2009, Huntington completed an offering of 109.5 million
shares of its common stock at a price of $4.20 per share, or
$460.1 million in aggregate gross proceeds. Also, during
2009, Huntington completed an offering of 103.5 million
shares of its common stock at a price 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.
Change
in Shares Authorized
During the second quarter of 2010, Huntington amended its
charter to increase the number of authorized shares of common
stock from 1.0 billion shares to 1.5 billion shares.
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Table of Contents
Conversion
of Convertible Preferred Stock
In 2008, Huntington completed the public offering of
569,000 shares of 8.50% Series A Non-Cumulative
Perpetual Convertible Preferred Stock (Series A Preferred
Stock) with a liquidation preference of $1,000 per share,
resulting in an aggregate liquidation preference of
$569 million.
During the 2009 first and second quarters, Huntington entered
into agreements with various institutional investors exchanging
shares of common stock for shares of the Series A Preferred
Stock held by the institutional investors. In aggregate,
0.2 million shares of Series A Preferred Stock were
exchanged for 41.1 million shares of Huntington Common
Stock. A deemed dividend of $56.0 million was recorded for
common shares issued in excess of the stated conversion rate.
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, 2010). 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, any remaining 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.
Share
Repurchase Program
Huntington did not repurchase any shares for the years ended
December 31, 2010 and 2009. As a condition to participate
in the TARP, Huntington could not repurchase any additional
shares without prior approval from the Treasury.
| 15. | EARNINGS (LOSS) PER SHARE |
Basic earnings (loss) per share is the amount of earnings (loss)
(adjusted for dividends declared on preferred stock) available
to each share of common stock outstanding during the reporting
period. Diluted earnings (loss) per share is the amount of
earnings (loss) 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 and awards, distributions
from deferred compensation plans, and the conversion of the
Company’s convertible preferred stock and warrants (See
Note 14). 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 earnings
(loss) per share, net income (loss) 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 income (loss) available to common
shareholders is adjusted by the associated preferred dividends
and deemed dividend. The
164
Table of Contents
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, | ||||||||||||
|
|
2010 | 2009 | 2008 | |||||||||
| (Dollar amounts in thousands, except per share amounts) | ||||||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||
|
Net income (loss)
|
$ | 312,347 | $ | (3,094,179 | ) | $ | (113,806 | ) | ||||
|
Preferred stock dividends, deemed dividends and accretion of
discount
|
(172,032 | ) | (174,756 | ) | (46,400 | ) | ||||||
|
Net income (loss) available to common shareholders
|
$ | 140,315 | $ | (3,268,935 | ) | $ | (160,206 | ) | ||||
|
Average common shares issued and outstanding
|
726,934 | 532,802 | 366,155 | |||||||||
|
Basic earnings (loss) per common share
|
$ | 0.19 | $ | (6.14 | ) | $ | (0.44 | ) | ||||
|
Diluted earnings (loss) per common share
|
||||||||||||
|
Net income (loss) available to common shareholders
|
$ | 140,315 | $ | (3,268,935 | ) | $ | (160,206 | ) | ||||
|
Effect of assumed preferred stock conversion
|
— | — | — | |||||||||
|
Net income (loss) applicable to diluted earnings per share
|
$ | 140,315 | $ | (3,268,935 | ) | $ | (160,206 | ) | ||||
|
Average common shares issued and outstanding
|
726,934 | 532,802 | 366,155 | |||||||||
|
Dilutive potential common shares:
|
||||||||||||
|
Stock options and restricted stock units and awards
|
1,722 | — | — | |||||||||
|
Shares held in deferred compensation plans
|
876 | — | — | |||||||||
|
Conversion of preferred stock
|
— | — | — | |||||||||
|
Dilutive potential common shares:
|
2,598 | — | — | |||||||||
|
Total diluted average common shares issued and outstanding
|
729,532 | 532,802 | 366,155 | |||||||||
|
Diluted earnings (loss) per common share
|
$ | 0.19 | $ | (6.14 | ) | $ | (0.44 | ) | ||||
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 calculation as
including such shares in the calculation would reduce the
reported loss per share. Approximately 18.5 million,
23.7 million, and 26.3 million options to purchase
shares of common stock outstanding at the end of 2010, 2009, and
2008, 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 $18.05 per share, $19.71 per share, and $19.45 per
share at the end of each respective period.
| 16. | 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 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. 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
165
Table of Contents
following table illustrates the weighted average assumptions
used in the option-pricing model for options granted in the
three years ended December 31, 2010, 2009, and 2008.
| 2010 | 2009 | 2008 | ||||||||||
|
Assumptions
|
||||||||||||
|
Risk-free interest rate
|
2.30 | % | 2.70 | % | 3.41 | % | ||||||
|
Expected dividend yield
|
0.68 | 0.96 | 5.28 | |||||||||
|
Expected volatility of Huntington’s common stock
|
38.5 | 51.8 | 34.8 | |||||||||
|
Expected option term (years)
|
6.0 | 6.0 | 6.0 | |||||||||
|
Weighted-average grant date fair value per share
|
$ | 2.20 | $ | 1.95 | $ | 1.54 | ||||||
The following table illustrates total share-based compensation
expense and related tax benefit for the three years ended
December 31, 2010, 2009, and 2008:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Share-based compensation expense
|
$ | 15,453 | $ | 8,492 | $ | 14,142 | ||||||
|
Tax benefit
|
5,408 | 2,972 | 4,950 | |||||||||
During 2009, Huntington updated its forfeiture rate assumption,
as a result of increased employee turnover, and adjusted
share-based compensation expense to account for the higher
forfeiture rate.
Huntington’s stock option activity and related information
for the year ended December 31, 2010, was as follows:
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||||
| Options | Price | Life (Years) | Value | |||||||||||||
| (Amounts in thousands, except years and per share amounts) | ||||||||||||||||
|
Outstanding at January 1, 2010
|
23,722 | $ | 17.21 | |||||||||||||
|
Granted
|
2,694 | 6.00 | ||||||||||||||
|
Exercised
|
(61 | ) | 3.85 | |||||||||||||
|
Forfeited/expired
|
(4,493 | ) | 16.74 | |||||||||||||
|
Outstanding at December 31, 2010
|
21,862 | $ | 15.96 | 3.0 | $ | 9,533 | ||||||||||
|
Vested and expected to vest at December 31, 2010(1)
|
20,367 | $ | 16.73 | 2.8 | $ | 7,392 | ||||||||||
|
Exercisable at December 31, 2010
|
16,829 | $ | 19.11 | 2.1 | $ | 2,110 | ||||||||||
| (1) | The number of options expected to vest includes an estimate of expected forfeitures. |
The aggregate intrinsic value represents the amount by which the
fair value of underlying stock exceeds the
“in-the-money”
option exercise price. For the year ended December 31,
2010, cash received for the exercises of stock options was
$0.2 million. The tax benefit realized for the tax
deductions from option exercises totaled less than
$0.1 million in 2010. There were no exercises of stock
options for the years ended December 31, 2009 and 2008.
Huntington also grants restricted stock units and awards.
Restricted stock units and awards are issued at no cost to the
recipient, and can be settled only in shares at the end of the
vesting period. Restricted stock awards provide the holder with
full voting rights and cash dividends during the vesting period.
Restricted stock units do not provide the holder with voting
rights or cash dividends during the vesting period, but do
accrue a dividend equivalent that is paid upon vesting, 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 the grant.
166
Table of Contents
The following table summarizes the status of Huntington’s
restricted stock units and awards as of December 31, 2010,
and activity for the year ended December 31, 2010:
|
Weighted-
|
Weighted-
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Restricted
|
Grant Date
|
Restricted
|
Grant Date
|
|||||||||||||
|
Stock
|
Fair Value
|
Stock
|
Fair Value
|
|||||||||||||
| Units | per Share | Awards(1) | per Share | |||||||||||||
| (Amounts in thousands, except per share amounts) | ||||||||||||||||
|
Nonvested at January 1, 2010
|
2,717 | $ | 7.50 | 175 | $ | 3.45 | ||||||||||
|
Granted
|
3,420 | 6.19 | 368 | 5.77 | ||||||||||||
|
Vested
|
(448 | ) | 18.90 | (77 | ) | 3.71 | ||||||||||
|
Forfeited
|
(178 | ) | 7.02 | — | — | |||||||||||
|
Nonvested at December 31, 2010
|
5,511 | $ | 5.78 | 466 | $ | 5.24 | ||||||||||
| (1) | Includes restricted stock awards granted under the Amended and Restated 2007 Stock and Long-Term Incentive Plan to certain executives as a portion of their annual base salary. These awards are 100% vested as of the grant date and are not subject to any requirement of future service. However, the shares are subject to restrictions regarding sale, transfer, pledge, or disposition until certain conditions are met. |
The weighted-average grant date fair value of nonvested shares
granted for the years ended December 31, 2010, 2009 and
2008, were $6.15, $3.68, and $7.09, respectively. The total fair
value of awards vested during the years ended December 31,
2010, 2009, and 2008, was $3.0 million, $1.8 million,
and $0.4 million, respectively. As of December 31,
2010, the total unrecognized compensation cost related to
nonvested awards was $20.5 million with a weighted-average
expense recognition period of 1.8 years.
The following table presents additional information regarding
options outstanding as of December 31, 2010:
| Options Outstanding | ||||||||||||||||||||
|
Weighted-
|
Exercisable Options | |||||||||||||||||||
|
Average
|
Weighted-
|
Weighted-
|
||||||||||||||||||
|
Remaining
|
Average
|
Average
|
||||||||||||||||||
|
Range of
|
Contractual
|
Exercise
|
Exercise
|
|||||||||||||||||
|
Exercise Prices
|
Shares | Life (Years) | Price | Shares | Price | |||||||||||||||
| (Amounts in thousands, except years and per share amounts) | ||||||||||||||||||||
|
$1.28 to $6.31
|
5,344 | 5.9 | $ | 5.09 | 783 | $ | 4.18 | |||||||||||||
|
$6.32 to $18.15
|
5,133 | 2.0 | 14.27 | 4,662 | 15.00 | |||||||||||||||
|
$18.16 to $20.41
|
4,897 | 2.3 | 19.99 | 4,898 | 19.99 | |||||||||||||||
|
$20.42 to $25.01
|
6,488 | 1.8 | 23.20 | 6,486 | 23.20 | |||||||||||||||
|
Total
|
21,862 | 3.0 | $ | 15.96 | 16,829 | $ | 19.11 | |||||||||||||
Of the remaining 44.8 million shares of common stock
authorized for issuance at December 31, 2010,
27.9 million were outstanding and 16.9 million were
available for future grants. Huntington issues shares to fulfill
stock option exercises and restricted stock unit and award
vesting from available authorized shares. At December 31,
2010, the Company believes there are adequate authorized shares
to satisfy anticipated stock option exercises and restricted
stock unit and award vesting in 2011.
| 17. | 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 2007. Various state and other jurisdictions
remain open to examination for tax years 2000 and forward.
The IRS and state tax officials from Ohio and Kentucky have
proposed adjustments to the Company’s previously filed tax
returns. Management believes the tax positions taken by the
Company related to such proposed adjustments were correct and
supported by applicable statutes, regulations, and judicial
authority, and
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Table of Contents
intend to vigorously defend them. It is possible 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, Management believes
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,
2010, Huntington had gross unrecognized tax benefits of
$49.5 million in income tax liability related to tax
positions. Due to the complexities of some of these
uncertainties, the ultimate resolution may result in a payment
that is materially different from the current estimate of the
tax liabilities. However, any ultimate settlement is not
expected to be material to the Consolidated Financial Statements
as a whole. Huntington does not anticipate the total amount of
gross unrecognized tax benefits to significantly change within
the next 12 months.
The following table provides a reconciliation of the beginning
and ending amounts of gross unrecognized tax benefits:
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Unrecognized tax benefits at beginning of year
|
$ | 17,214 | $ | — | ||||
|
Gross increases for tax positions taken during prior years
|
32,292 | 10,750 | ||||||
|
Gross increases for tax positions taken during the current years
|
— | 6,464 | ||||||
|
Unrecognized tax benefits at end of year
|
$ | 49,506 | $ | 17,214 | ||||
Any interest and penalties on income tax assessments or income
tax refunds are recognized in the Consolidated Statements of
Income as a component of provision for income taxes. Huntington
recognized $2.2 million of interest for the year ended
December 31, 2010. There were no significant amounts
recognized for interest and penalties for the years ended
December 31, 2009 and 2008. Total interest accrued at
December 31, 2010 amounted to $2.2 million. All of the
gross unrecognized tax benefits would impact the Company’s
effective tax rate if recognized.
The following is a summary of the provision (benefit) for income
taxes:
| Year Ended December 31, | ||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
|
Current tax provision (benefit)
|
||||||||||||||||
|
Federal
|
$ | 40,675 | $ | (326,659 | ) | $ | (30,164 | ) | ||||||||
|
State
|
29,539 | 9,860 | (102 | ) | ||||||||||||
|
Total current tax provision (benefit)
|
70,214 | (316,799 | ) | (30,266 | ) | |||||||||||
|
Deferred tax provision (benefit)
|
||||||||||||||||
|
Federal
|
(30,243 | ) | (267,872 | ) | (152,306 | ) | ||||||||||
|
State
|
(7 | ) | 667 | 370 | ||||||||||||
|
Total deferred tax provision (benefit)
|
(30,250 | ) | (267,205 | ) | (151,936 | ) | ||||||||||
|
Provision (benefit) for income taxes
|
$ | 39,964 | $ | (584,004 | ) | $ | (182,202 | ) | ||||||||
Tax benefits associated with securities transactions included in
the above amounts were $0.1 million in 2010,
$3.6 million in 2009, and $69.1 million in 2008.
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Table of Contents
The following is a reconcilement of provision (benefit) for
income taxes:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Provision (benefit) for income taxes computed at the statutory
rate
|
$ | 123,310 | $ | (1,287,364 | ) | $ | (103,603 | ) | ||||
|
Increases (decreases):
|
||||||||||||
|
Tax-exempt interest income
|
(6,680 | ) | (5,561 | ) | (12,484 | ) | ||||||
|
Tax-exempt bank owned life insurance income
|
(20,595 | ) | (19,205 | ) | (19,172 | ) | ||||||
|
Asset securitization activities
|
46,160 | (3,179 | ) | (14,198 | ) | |||||||
|
Federal tax loss carryforward /carryback
|
— | (12,847 | ) | (12,465 | ) | |||||||
|
General business credits
|
(23,360 | ) | (17,602 | ) | (10,481 | ) | ||||||
|
Reversals of valuation allowance
|
(899 | ) | — | (7,101 | ) | |||||||
|
Capital loss
|
(62,681 | ) | — | — | ||||||||
|
Loan acquisitions
|
(43,650 | ) | (159,895 | ) | — | |||||||
|
Goodwill impairment
|
— | 908,263 | — | |||||||||
|
State income taxes, net
|
19,196 | 6,842 | 289 | |||||||||
|
Other, net
|
9,163 | 6,544 | (2,987 | ) | ||||||||
|
Provision (benefit) for income taxes
|
$ | 39,964 | $ | (584,004 | ) | $ | (182,202 | ) | ||||
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Table of Contents
The significant components of deferred tax assets and
liabilities at December 31, were as follows:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Deferred tax assets:
|
||||||||
|
Allowances for credit losses
|
$ | 457,692 | $ | 555,276 | ||||
|
Loss and other carryforwards
|
262,504 | 19,211 | ||||||
|
Fair value adjustments
|
106,855 | 123,860 | ||||||
|
Accrued expense/prepaid
|
39,685 | 42,478 | ||||||
|
Purchase accounting adjustments
|
11,773 | — | ||||||
|
Pension and other employee benefits
|
5,671 | 1,009 | ||||||
|
Loan acquisitions
|
605 | 159,895 | ||||||
|
Other
|
19,704 | 4,738 | ||||||
|
Total deferred tax assets
|
904,489 | 906,467 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Lease financing
|
87,735 | 154,088 | ||||||
|
Securities adjustments
|
66,090 | 57,700 | ||||||
|
Purchase accounting adjustments
|
65,787 | 70,820 | ||||||
|
Mortgage servicing rights
|
43,541 | 62,867 | ||||||
|
Loan origination costs
|
43,182 | 39,004 | ||||||
|
Operating assets
|
15,161 | 15,163 | ||||||
|
Partnership investments
|
8,429 | 13,563 | ||||||
|
Other
|
4,441 | 11,832 | ||||||
|
Total deferred tax liabilities
|
334,366 | 425,037 | ||||||
|
Net deferred tax asset before valuation allowance
|
570,123 | 481,430 | ||||||
|
Valuation allowance
|
(31,817 | ) | (899 | ) | ||||
|
Net deferred tax asset
|
$ | 538,306 | $ | 480,531 | ||||
At December 31, 2010, Huntington’s deferred tax asset
related to loss and other carryforwards was $262.5 million.
This was comprised of net operating loss carryforward of
$174.6 million, which will begin expiring in 2023, an
alternative minimum tax credit carryforward of
$37.3 million, a general business credit carryover of
$18.8 million which will expire in 2029, and a capital loss
carryforward of $31.8 million, which will expire in 2015.
In 2010, Huntington entered into an asset monetization
transaction that generated a $263.0 million capital loss.
As a result of this transaction, a capital loss carryforward of
$31.8 million was generated, which will expire in 2015. A
valuation allowance of $31.8 million has been established
for the capital loss carryforward because Management believes it
is more likely than not that the realization of this asset will
not occur. The valuation allowance on this asset increased
$30.9 million from 2009. In Management’s opinion, the
results of future operations will generate sufficient taxable
income to realize the net operating loss, alternative minimum
tax credit carryforward, and general business credit
carryforward. Consequently, Huntington determined that a
valuation allowance for these deferred tax assets was not
required as of December 31, 2010.
Health
Care and Education Reconciliation Act of 2010
On March 23, 2010, the HCER Act was signed into law. The
HCER Act includes a provision to repeal the deduction for
employer subsidies for retiree drug coverage under Medicare
Part D. Under prior law, an employer offering retiree
prescription drug coverage that is at least as valuable as
Medicare Part D was entitled to a subsidy. Employers were
able to deduct the entire cost of providing prescription drug
coverage,
170
Table of Contents
even though a portion was offset by the subsidy. For taxable
years beginning after December 31, 2012, the HCER Act
repeals the current rule permitting the deduction of the portion
of the expense that was offset by the Part D subsidy. As a
result of this provision, the deferred tax asset associated with
prescription drug coverage was reduced by $3.6 million.
| 18. | 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
requirements but not more than that deductible under the
Internal Revenue Code. There was no minimum required
contribution to the Plan in 2010.
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 healthcare benefits are
based upon the employee’s number of months of service and
are limited to the actual cost of coverage. Life insurance
benefits are a percentage of the employee’s base salary at
the time of retirement, with a maximum of $50,000 of coverage.
The employer paid portion of the post-retirement health and life
insurance plan was 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 were 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 did not affect the
benefit earned under the Retirement Plan through
December 31, 2009, there was 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
2007, 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 2007 (net of amortization included in net
periodic benefit cost).
171
Table of Contents
The following table shows the weighted-average assumptions used
to determine the benefit obligation at December 31, 2010
and 2009, and the net periodic benefit cost for the years then
ended:
|
Pension
|
Post-Retirement
|
|||||||||||||||
| Benefits | Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Weighted-average assumptions used to determine benefit
obligations
|
||||||||||||||||
|
Discount rate
|
5.35 | % | 5.88 | % | 5.00 | % | 5.54 | % | ||||||||
|
Rate of compensation increase
|
4.50 | 4.50 | N/A | N/A | ||||||||||||
|
Weighted-average assumptions used to determine net periodic
benefit cost
|
||||||||||||||||
|
Discount rate:
|
||||||||||||||||
|
2010
|
5.88 | % | N/A | % | 5.54 | % | N/A | % | ||||||||
|
January 1, 2009 through October 31, 2009
|
N/A | 6.17 | N/A | 6.17 | ||||||||||||
|
November 1, 2009 through December 31, 2009
|
N/A | 5.83 | N/A | 5.46 | ||||||||||||
|
Expected return on plan assets
|
8.00 | 8.00 | N/A | N/A | ||||||||||||
|
Rate of compensation increase
|
4.50 | 4.00 | 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.
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 | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
|
Projected benefit obligation at beginning of measurement
year
|
$ | 504,859 | $ | 469,696 | $ | 33,173 | $ | 60,433 | ||||||||
|
Changes due to:
|
||||||||||||||||
|
Service cost
|
20,205 | 23,692 | — | 1,550 | ||||||||||||
|
Interest cost
|
28,869 | 28,036 | 1,731 | 3,274 | ||||||||||||
|
Benefits paid
|
(11,367 | ) | (9,233 | ) | (5,103 | ) | (5,285 | ) | ||||||||
|
Settlements
|
(20,582 | ) | (12,071 | ) | — | — | ||||||||||
|
Effect of plan combinations
|
896 | 24,411 | — | — | ||||||||||||
|
Plan amendments
|
— | (45,413 | ) | —— | (25,947 | ) | ||||||||||
|
Plan curtailments
|
— | — | — | (527 | ) | |||||||||||
|
Medicare subsidies
|
— | — | 753 | 550 | ||||||||||||
|
Actuarial assumptions and gains and losses
|
54,890 | 25,741 | 3,687 | (875 | ) | |||||||||||
|
Total changes
|
72,911 | 35,163 | 1,068 | (27,260 | ) | |||||||||||
|
Projected benefit obligation at end of measurement year
|
$ | 577,770 | $ | 504,859 | $ | 34,241 | $ | 33,173 | ||||||||
Benefits paid are net of retiree contributions collected by
Huntington. The actual contributions received in 2010 by
Huntington for the retiree medical program were
$3.1 million.
172
Table of Contents
The following table reconciles the beginning and ending balances
of the fair value of Plan assets at the December 31, 2010
and 2009 measurement dates with the amounts recognized in the
consolidated balance sheets:
| Pension Benefits | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Fair value of plan assets at beginning of measurement year
|
$ | 454,114 | $ | 407,079 | ||||
|
Changes due to:
|
||||||||
|
Actual return on plan assets
|
55,583 | 51,202 | ||||||
|
Employer contributions
|
79 | — | ||||||
|
Settlements
|
(20,911 | ) | (12,394 | ) | ||||
|
Plan combinations
|
981 | 17,460 | ||||||
|
Benefits paid
|
(11,367 | ) | (9,233 | ) | ||||
|
Total changes
|
24,365 | 47,035 | ||||||
|
Fair value of plan assets at end of measurement year
|
$ | 478,479 | $ | 454,114 | ||||
Huntington’s accumulated benefit obligation under the Plan
was $575.9 million and $504.6 million at
December 31, 2010 and 2009. As of December 31, 2010,
the accumulated benefit obligation exceeded the fair value of
Huntington’s plan assets by $97.4 million.
The following table shows the components of net periodic benefit
cost recognized in the three years ended December 31, 2010:
| Pension Benefits | Post-Retirement Benefits | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||
|
Service cost
|
$ | 20,205 | $ | 23,692 | $ | 23,680 | $ | — | $ | 1,550 | $ | 1,679 | ||||||||||||
|
Interest cost
|
28,869 | 28,036 | 26,804 | 1,731 | 3,274 | 3,612 | ||||||||||||||||||
|
Expected return on plan assets
|
(42,113 | ) | (41,960 | ) | (39,145 | ) | — | — | — | |||||||||||||||
|
Amortization of transition asset
|
5 | 6 | 5 | — | 920 | 1,104 | ||||||||||||||||||
|
Amortization of prior service cost
|
(5,766 | ) | (553 | ) | 314 | (1,353 | ) | 91 | 379 | |||||||||||||||
|
Amortization of loss
|
14,989 | 8,689 | — | (699 | ) | (888 | ) | (1,095 | ) | |||||||||||||||
|
Curtailments
|
— | — | — | — | (527 | ) | — | |||||||||||||||||
|
Settlements
|
9,694 | 6,213 | 7,099 | — | — | — | ||||||||||||||||||
|
Recognized net actuarial loss
|
— | — | 3,550 | — | — | — | ||||||||||||||||||
|
Benefit cost
|
$ | 25,883 | $ | 24,123 | $ | 22,307 | $ | (321 | ) | $ | 4,420 | $ | 5,679 | |||||||||||
Included in benefit costs are $1.0 million,
$0.7 million, and $0.6 million of plan expenses that
were recognized in the three years ended December 31, 2010,
2009, and 2008. It is Huntington’s policy to recognize
settlement gains and losses as incurred. Assuming no cash
contributions are made to the Plan during 2011, Management
expects net periodic pension cost, excluding any expense of
settlements, to approximate $31.1 million for 2011. 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 credit, and
net actuarial loss for the plans that will be amortized from OCI
into net periodic benefit cost over the next fiscal year is less
than $1.0 million, $6.8 million, and
$22.8 million, respectively.
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Table of Contents
At December 31, 2010 and 2009, 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 | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
|
Cash
|
$ | — | — | % | $ | — | — | % | ||||||||
|
Cash equivalents:
|
||||||||||||||||
|
Huntington funds — money market
|
25 | — | 11,304 | 2 | ||||||||||||
|
Other
|
— | — | 2,777 | 1 | ||||||||||||
|
Fixed income:
|
||||||||||||||||
|
Huntington funds — fixed income funds
|
133,330 | 28 | 125,323 | 28 | ||||||||||||
|
Corporate obligations
|
— | — | 1,315 | — | ||||||||||||
|
U.S. Government Agencies
|
— | — | 497 | — | ||||||||||||
|
Equities:
|
||||||||||||||||
|
Huntington funds
|
318,155 | 66 | 288,074 | 64 | ||||||||||||
|
Other — equity mutual funds
|
— | — | 122 | |||||||||||||
|
Huntington common stock
|
26,969 | 6 | 14,347 | 3 | ||||||||||||
|
Other common stock
|
— | — | 10,355 | 2 | ||||||||||||
|
Fair value of plan assets
|
$ | 478,479 | 100 | % | $ | 454,114 | 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, 2010 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, 2010, Plan assets were
invested 72% in equity investments and 28% in bonds, with an
average duration of 4 years on fixed income 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 70% in equity investments and 30% in bond
investments.
The number of shares of Huntington common stock held by the Plan
at December 31, 2010 and 2009 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 2010 and 2009
were $7.5 million and $8.4 million, respectively.
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Table of Contents
At December 31, 2010, the following table shows when
benefit payments, which include expected future service, as
appropriate, were expected to be paid:
|
Post-
|
||||||||
|
Pension
|
Retirement
|
|||||||
| Benefits | Benefits | |||||||
| (Dollar amounts in thousands) | ||||||||
|
2011
|
$ | 31,319 | $ | 4,577 | ||||
|
2012
|
33,983 | 4,393 | ||||||
|
2013
|
35,462 | 4,221 | ||||||
|
2014
|
37,018 | 4,050 | ||||||
|
2015
|
38,905 | 3,891 | ||||||
|
2016 through 2020
|
214,900 | 17,140 | ||||||
Although not required, Huntington may choose to make a cash
contribution to the Plan up to the maximum deductible limit in
the 2011 plan year. Expected contributions for 2011 to the
post-retirement benefit plan are $3.8 million.
The assumed healthcare 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 less than $1.0 million and $0.2 million,
respectively. A one percentage point decrease would increase
service and interest costs and the post-retirement benefit
obligation by less than $1.0 million and $0.2 million,
respectively.
The 2011 and 2010 healthcare cost trend rate was projected to be
8.5% for pre-65 aged participants and 9.3% for post-65 aged
participants. These rates are assumed to decrease gradually
until they reach 4.5% for both pre-65 aged participants and
post-65 aged participants in the year 2028 and remain at that
level thereafter. Huntington updated the immediate healthcare
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, 2010 and 2009, Huntington has an
accrued pension liability of $23.1 million and
$22.8 million, respectively, associated with these plans.
Pension expense for the plans was $1.8 million,
$2.8 million, and $2.4 million in 2010, 2009, and
2008, respectively.
The following table presents the amounts recognized in the
consolidated balance sheets at December 31, 2010 and 2009
for all of Huntington defined benefit plans:
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Accrued expenses and other liabilities
|
$ | 156,551 | $ | 106,738 | ||||
The following tables present the amounts recognized in OCI as of
December 31, 2010, 2009, and 2008, and the changes in
accumulated OCI for the years ended December 31, 2010,
2009, and 2008:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Net actuarial loss
|
$ | (166,183 | ) | $ | (151,564 | ) | $ | (156,762 | ) | |||
|
Prior service cost
|
34,688 | 39,093 | (4,123 | ) | ||||||||
|
Transition liability
|
6 | 3 | (2,690 | ) | ||||||||
|
Defined benefit pension plans
|
$ | (131,489 | ) | $ | (112,468 | ) | $ | (163,575 | ) | |||
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Table of Contents
| 2010 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-tax | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Balance, beginning of year
|
$ | (173,029 | ) | $ | 60,561 | $ | (112,468 | ) | ||||
|
Net actuarial (loss) gain:
|
||||||||||||
|
Amounts arising during the year
|
(45,804 | ) | 16,031 | (29,773 | ) | |||||||
|
Amortization included in net periodic benefit costs
|
23,313 | (8,159 | ) | 15,154 | ||||||||
|
Prior service cost:
|
||||||||||||
|
Amounts arising during the year
|
— | — | — | |||||||||
|
Amortization included in net periodic benefit costs
|
(6,777 | ) | 2,372 | (4,405 | ) | |||||||
|
Transition obligation:
|
||||||||||||
|
Amounts arising during the year
|
— | — | — | |||||||||
|
Amortization included in net periodic benefit costs
|
5 | (2 | ) | 3 | ||||||||
|
Balance, end of year
|
$ | (202,292 | ) | $ | 70,803 | $ | (131,489 | ) | ||||
| 2009 | ||||||||||||
|
Tax (Expense)
|
||||||||||||
| Pretax | Benefit | After-tax | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Balance, beginning of year
|
$ | (251,655 | ) | $ | 88,080 | $ | (163,575 | ) | ||||
|
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 | ||||||||||
| (Dollar amounts 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 | ) | ||||
176
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. Effective May 1, 2010,
Huntington reinstated the employer matching contribution to the
defined contribution plan. The cost of providing this plan was
$8.8 million in 2010, $3.1 million in 2009, and
$15.0 million in 2008. The number of shares of Huntington
common stock held by this plan was 14,945,498 at
December 31, 2010, and 14,714,170 at December 31,
2009. The market value of these shares was $102.7 million
and $53.7 million at the same respective dates. Dividends
received on shares of Huntington common stock by the plan were
$5.6 million during 2010 and $5.1 million during 2009.
| 19. | FAIR VALUES OF ASSETS AND LIABILITIES |
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. 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 unobservable.
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.
177
Table of Contents
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 | 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, 2010, mortgage loans held for sale had an aggregate fair value of $754.1 million and an aggregate outstanding principal balance of $750.0 million. Interest income on these loans is recorded in interest and fee income - loans and leases. Included in mortgage banking income were net gains resulting from origination and sale of these loans, including net realized gains of $109.2 million, $90.6 million, and $32.2 million for the years ended December 31, 2010, 2009, and 2008, respectively. Of such gains, the change in fair value while held as loans were $(5.6) million, $(6.3) million and $6.6 million for the years ended December 31, 2010, 2009, and 2008, respectively. | ||||
|
Available-for-sale
Securities & Trading Account Securities(2)
|
Level 1 | Consist primarily of U.S. Treasury and money market mutual funds, which generally have quoted prices. | ||||
| Level 2 | Consist of U.S. Government and agency mortgage-backed and other federal agency securities, municipal securities, and other 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 certain asset-backed securities, pooled-trust-preferred securities, private-label CMOs, and municipal securities 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. | |||||
178
Table of Contents
|
Financial Instrument(1)
|
Hierarchy |
Valuation methodology
|
||||
|
Automobile loans(3)
|
Level 3 | Consists of automobile loan receivables measured at fair value. The key assumptions used to determine the fair value of the automobile loan receivables included projections of expected losses and prepayment of the underlying loans in the portfolio and a market assumption of interest rate spreads. The net gains and losses, before tax, from fair value changes reflected in earnings for the year ended December 31, 2010 was a net loss of $2.3 million which is net of a $3.4 million net gain associated with instrument specific credit risk. Instrument specific credit risk was determined based on estimated credit losses inherent in the January 1, 2010 fair value calculation as compared to actual credit losses incurred in 2010 plus estimated credit losses inherent in the December 31, 2010 fair value calculation. | ||||
|
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 determined on an income approach model based upon month-end interest rate curve and prepayment assumptions. | ||||
|
Derivatives(4)
|
Level 1 | Consist of exchange traded options and forward commitments to deliver mortgage-backed securities which are valued using quoted prices. | ||||
| Level 2 | Consist of basic asset and liability conversion swaps and options, and interest rate caps. These derivative positions are valued using a discounted cash flow method that incorporates current market interest rates. | |||||
| 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. | |||||
|
Securitization trust notes payable(4)
|
Level 2 | Consists of certain securitization trust notes payable related to the automobile loans measured at fair value. The notes payable are valued based on interest rates for similar financial instruments. The change in fair value for the year ended December 31, 2010 was $9.6 million. | ||||
| (1) | Refer to Note 1 for additional information. | |
| (2) | Refer to Note 4 for additional information. | |
| (3) | Refer to Note 5 for additional information. | |
| (4) | Refer to Note 20 for additional information. |
179
Table of Contents
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, 2010 and 2009 are summarized below:
|
Balance at
|
||||||||||||||||||||
| Fair Value Measurements at Reporting Date Using |
Netting
|
December 31,
|
||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Adjustments(1) | 2010 | ||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Mortgage loans held for sale
|
$ | — | $ | 754,117 | $ | — | $ | — | $ | 754,117 | ||||||||||
|
Trading account securities:
|
||||||||||||||||||||
|
U.S. Treasury securities
|
47,430 | — | — | — | 47,430 | |||||||||||||||
|
Federal agencies: Mortgage-backed
|
— | 10,860 | — | — | 10,860 | |||||||||||||||
|
Federal agencies: Other agencies
|
— | 24,853 | — | — | 24,853 | |||||||||||||||
|
Municipal securities
|
— | 30,205 | — | — | 30,205 | |||||||||||||||
|
Other securities
|
69,017 | 3,039 | — | — | 72,056 | |||||||||||||||
| 116,447 | 68,957 | — | — | 185,404 | ||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||||||
|
U.S. Treasury securities
|
51,781 | — | — | — | 51,781 | |||||||||||||||
|
Federal agencies: Mortgage-backed
|
— | 4,754,404 | — | — | 4,754,404 | |||||||||||||||
|
TLGP securities
|
— | 183,467 | — | — | 183,467 | |||||||||||||||
|
Federal agencies: Other agencies
|
— | 2,058,376 | — | — | 2,058,376 | |||||||||||||||
|
Municipal securities
|
— | 305,909 | 149,806 | — | 455,715 | |||||||||||||||
|
Private-label CMO
|
— | — | 121,925 | — | 121,925 | |||||||||||||||
|
Asset-backed securities
|
— | 1,044,438 | 162,684 | — | 1,207,122 | |||||||||||||||
|
Other securities
|
53,286 | 700,446 | — | — | 753,732 | |||||||||||||||
| 105,067 | 9,047,040 | 434,415 | — | 9,586,522 | ||||||||||||||||
|
Automobile loans
|
— | — | 522,717 | — | 522,717 | |||||||||||||||
|
MSRs
|
— | — | 125,679 | — | 125,679 | |||||||||||||||
|
Derivative assets
|
23,514 | 390,361 | 2,817 | (70,559 | ) | 346,133 | ||||||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Securitization trust notes payable
|
— | 356,089 | — | — | 356,089 | |||||||||||||||
|
Derivative liabilities
|
3,990 | 233,399 | 1,851 | — | 239,240 | |||||||||||||||
180
Table of Contents
|
Balance at
|
||||||||||||||||||||
| Fair Value Measurements at Reporting Date Using |
Netting
|
December 31,
|
||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Adjustments (1) | 2009 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Mortgage loans held for sale
|
$ | — | $ | 459,719 | $ | — | $ | — | $ | 459,719 | ||||||||||
|
Trading account securities:
|
||||||||||||||||||||
|
U.S. Treasury securities
|
||||||||||||||||||||
|
Federal agencies: Mortgage-backed
|
75 | 18,150 | — | — | 18,225 | |||||||||||||||
|
Municipal securities
|
— | 5,234 | — | — | 5,234 | |||||||||||||||
|
Other securities
|
55,934 | 4,264 | — | — | 60,198 | |||||||||||||||
| 56,009 | 27,648 | — | — | 83,657 | ||||||||||||||||
|
Available-for-sale
securities
|
||||||||||||||||||||
|
U.S. Treasury securities
|
99,154 | — | — | — | 99,154 | |||||||||||||||
|
Federal agencies: Mortgage-backed
|
— | 3,480,108 | — | — | 3,480,108 | |||||||||||||||
|
TLGP securities
|
260,388 | — | — | — | 260,388 | |||||||||||||||
|
Federal agencies: Other agencies
|
2,698,316 | 28,687 | — | — | 2,727,003 | |||||||||||||||
|
Municipal securities
|
— | 113,270 | 11,515 | — | 124,785 | |||||||||||||||
|
Private-label CMO
|
— | — | 477,319 | — | 477,319 | |||||||||||||||
|
Asset-backed securities
|
— | 573,218 | 407,098 | — | 980,316 | |||||||||||||||
|
Other securities
|
53,987 | 8,214 | — | — | 62,201 | |||||||||||||||
| 3,111,845 | 4,203,497 | 895,932 | — | 8,211,274 | ||||||||||||||||
|
MSRs
|
— | — | 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 | |||||||||||||||
| (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. |
181
Table of Contents
The tables below present a rollforward of the balance sheet
amounts for the years ended December 31, 2010, 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.
|
Level 3 Fair Value Measurements
|
||||||||||||||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||||||||||
| Available-for-Sale Securities | ||||||||||||||||||||||||||||
|
Asset-
|
||||||||||||||||||||||||||||
|
Derivative
|
Municipal
|
Private-
|
Backed
|
Automobile
|
Equity
|
|||||||||||||||||||||||
| MSRs | Instruments | Securities | Label CMO | Securities | Loans | Investments | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
Balance, beginning of year
|
$ | 176,427 | $ | (4,236 | ) | $ | 11,515 | $ | 477,319 | $ | 407,098 | $ | — | $ | 25,872 | |||||||||||||
|
Total gains/losses:
|
||||||||||||||||||||||||||||
|
Included in earnings
|
(50,748 | ) | 4,413 | — | (5,117 | ) | (6,160 | ) | (2,267 | ) | — | |||||||||||||||||
|
Included in OCI
|
— | — | — | 44,475 | 16,191 | — | — | |||||||||||||||||||||
|
Purchases
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Sales
|
— | — | (112,322 | ) | (312,460 | ) | (53,806 | ) | — | — | ||||||||||||||||||
|
Repayments
|
— | — | — | — | — | (266,381 | ) | — | ||||||||||||||||||||
|
Issuances
|
— | (1,741 | ) | — | — | — | — | — | ||||||||||||||||||||
|
Settlements
|
— | 2,530 | (73,024 | ) | (82,292 | ) | (16,566 | ) | — | — | ||||||||||||||||||
|
Transfers in/out of Level 3(1)
|
— | — | 323,637 | — | (184,073 | ) | 791,365 | (25,872 | ) | |||||||||||||||||||
|
Balance, end of year
|
$ | 125,679 | $ | 966 | $ | 149,806 | $ | 121,925 | $ | 162,684 | $ | 522,717 | $ | — | ||||||||||||||
|
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
|
$ | (50,748 | ) | $ | 1,715 | $ | — | $ | 5,565 | $ | 15,113 | $ | (2,267 | ) | $ | — | ||||||||||||
| (1) | Transfers in / out of Level 3 include a transfer in of $323.6 million relating to municipal securities, due to lack of observable market data, a transfer out of $184.1 million of securities related to the consolidation of the 2009 Trust (see Notes 2, 5 and 21) and a transfer in of $791.4 million of loans related to the 2009 Trust (see Notes 5 and 21). |
182
Table of Contents
|
Level 3 Fair Value Measurements
|
||||||||||||||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||||||||||||||
| Available-for-Sale Securities | ||||||||||||||||||||||||||||
|
Asset-
|
||||||||||||||||||||||||||||
|
Derivative
|
Municipal
|
Private
|
Backed
|
Automobile
|
Equity
|
|||||||||||||||||||||||
| MSRs | Instruments | Securities | Label CMO | Securities | Loans | Investments | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
Balance, beginning of year
|
$ | 167,438 | $ | 8,132 | $ | — | $ | 523,515 | $ | 464,027 | $ | — | $ | 36,893 | ||||||||||||||
|
Total gains/losses:
|
||||||||||||||||||||||||||||
|
Included in earnings
|
9,707 | (5,976 | ) | — | (3,606 | ) | (40,039 | ) | — | 408 | ||||||||||||||||||
|
Included in OCI
|
— | — | — | 93,934 | 40,385 | — | — | |||||||||||||||||||||
|
Purchases
|
2,388 | (7,100 | ) | — | 5,448 | 211,296 | — | 1,688 | ||||||||||||||||||||
|
Sales
|
— | — | — | — | (295,033 | ) | — | — | ||||||||||||||||||||
|
Repayments
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Issuances
|
— | — | — | — | 47,119 | — | — | |||||||||||||||||||||
|
Settlements
|
(3,106 | ) | 708 | (185 | ) | (141,972 | ) | (20,657 | ) | — | (13,117 | ) | ||||||||||||||||
|
Transfers in/out of Level 3(2)
|
— | — | 11,700 | — | — | — | — | |||||||||||||||||||||
|
Balance, end of year
|
$ | 176,427 | $ | (4,236 | ) | $ | 11,515 | $ | 477,319 | $ | 407,098 | $ | — | $ | 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 | ) | $ | — | $ | 90,328 | $ | (7,406 | ) | $ | — | $ | 408 | ||||||||||||
| (2) | Transferred in to Level 3 as a result of a lack of observable market data due to a decrease in market activity. |
183
Table of Contents
|
Level 3 Fair Value Measurements
|
||||||||||||||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||||||||||
| Available-for-Sale Securities | ||||||||||||||||||||||||||||
|
Asset-
|
||||||||||||||||||||||||||||
|
Derivative
|
Municipal
|
Private
|
Backed
|
Automobile
|
Equity
|
|||||||||||||||||||||||
| MSRs | Instruments | Securities | Label CMO | Securities | Loans | Investments | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
Balance, beginning of year
|
$ | 207,894 | $ | (46 | ) | $ | — | $ | — | $ | 834,489 | $ | — | $ | 41,516 | |||||||||||||
|
Total gains/losses:
|
||||||||||||||||||||||||||||
|
Included in earnings
|
(40,769 | ) | 8,683 | — | (3,435 | ) | (195,377 | ) | — | (9,242 | ) | |||||||||||||||||
|
Included in OCI
|
— | — | — | (149,699 | ) | (153,690 | ) | — | — | |||||||||||||||||||
|
Purchases
|
— | — | — | — | — | — | 4,619 | |||||||||||||||||||||
|
Sales
|
313 | — | — | — | — | — | — | |||||||||||||||||||||
|
Repayments
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Issuances
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Settlements
|
— | (505 | ) | — | (97,126 | ) | (30,667 | ) | — | — | ||||||||||||||||||
|
Transfers in/out of Level 3(2)
|
— | — | — | 773,775 | 9,272 | — | — | |||||||||||||||||||||
|
Balance, end of year
|
$ | 167,438 | $ | 8,132 | $ | — | $ | 523,515 | $ | 464,027 | $ | — | $ | 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 | $ | — | $ | (153,134 | ) | $ | (349,067 | ) | $ | — | $ | (3,469 | ) | ||||||||||
| (2) | Transferred in to Level 3 as a result of a lack of observable market data due to a decrease in market activity. |
The tables below summarize 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, 2010, 2009, and 2008.
|
Level 3 Fair Value Measurements
|
||||||||||||||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||||||||||
| Available-for-Sale Securities | ||||||||||||||||||||||||||||
|
Asset-
|
||||||||||||||||||||||||||||
|
Derivative
|
Municipal
|
Private
|
Backed
|
Automobile
|
Equity
|
|||||||||||||||||||||||
| MSRs | Instruments | Securities | Label CMO | Securities | Loans | Investments | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
Classification of gains and losses in earnings:
|
||||||||||||||||||||||||||||
|
Mortgage banking income (loss)
|
$ | (50,748 | ) | $ | 4,413 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
|
Securities gains (losses)
|
— | — | — | (7,149 | ) | (6,554 | ) | — | — | |||||||||||||||||||
|
Interest and fee income
|
— | — | — | 2,032 | 394 | (11,202 | ) | — | ||||||||||||||||||||
|
Noninterest income
|
— | — | — | — | — | 8,935 | — | |||||||||||||||||||||
|
Total
|
$ | (50,748 | ) | $ | 4,413 | $ | — | $ | (5,117 | ) | $ | (6,160 | ) | $ | (2,267 | ) | $ | — | ||||||||||
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Table of Contents
|
Level 3 Fair Value Measurements
|
||||||||||||||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||||||||||||||
| Available-for-Sale Securities | ||||||||||||||||||||||||||||
|
Asset-
|
||||||||||||||||||||||||||||
|
Derivative
|
Municipal
|
Private
|
Backed
|
Automobile
|
Equity
|
|||||||||||||||||||||||
| MSRs | Instruments | Securities | Label CMO | Securities | Loans | Investments | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
Classification of gains and losses in earnings:
|
||||||||||||||||||||||||||||
|
Mortgage banking income (loss)
|
$ | 9,707 | $ | (5,976 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
|
Securities gains (losses)
|
— | — | — | (5,996 | ) | (53,068 | ) | — | — | |||||||||||||||||||
|
Interest and fee income
|
— | — | — | 2,390 | 13,029 | — | — | |||||||||||||||||||||
|
Noninterest income
|
— | — | — | — | — | — | 408 | |||||||||||||||||||||
|
Total
|
$ | 9,707 | $ | (5,976 | ) | $ | — | $ | (3,606 | ) | $ | (40,039 | ) | $ | — | $ | 408 | |||||||||||
|
Level 3 Fair Value Measurements
|
||||||||||||||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||||||||||
| Available-for-Sale Securities | ||||||||||||||||||||||||||||
|
Asset-
|
||||||||||||||||||||||||||||
|
Derivative
|
Municipal
|
Private
|
backed
|
Automobile
|
Equity
|
|||||||||||||||||||||||
| MSRs | instruments | securities | label CMO | securities | loans | investments | ||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||
|
Classification of gains and losses in earnings:
|
||||||||||||||||||||||||||||
|
Mortgage banking income (loss)
|
$ | (40,769 | ) | $ | 8,683 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
|
Securities gains (losses)
|
— | — | — | (5,728 | ) | (196,893 | ) | — | — | |||||||||||||||||||
|
Interest and fee income
|
— | — | — | 2,293 | 1,516 | — | — | |||||||||||||||||||||
|
Noninterest income
|
— | — | — | — | — | — | (9,242 | ) | ||||||||||||||||||||
|
Total
|
$ | (40,769 | ) | $ | 8,683 | $ | — | $ | (3,435 | ) | $ | (195,377 | ) | $ | — | $ | (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. For the year ended
December 31, 2010, assets measured at fair value on a
nonrecurring basis were as follows:
| Fair Value Measurements Using | ||||||||||||||||||||
|
Quoted Prices
|
Significant
|
Significant
|
||||||||||||||||||
|
In Active
|
Other
|
Other
|
||||||||||||||||||
|
Markets for
|
Observable
|
Unobservable
|
Total
|
|||||||||||||||||
|
Year Ended
|
Identical Assets
|
Inputs
|
Inputs
|
Gains/
|
||||||||||||||||
| December 31, | (Level 1) | (Level 2) | (Level 3) | (Losses) | ||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||
|
2010
|
||||||||||||||||||||
|
Impaired loans
|
$ | 80.4 | $ | — | $ | — | $ | 80.4 | $ | (39.6 | ) | |||||||||
|
Accrued income and other assets
|
66.8 | — | — | 66.8 | $ | (6.9 | ) | |||||||||||||
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. Appraisals are generally obtained to
support the fair value of the collateral and incorporate
measures such as recent sales prices for comparable properties
and cost
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Table of Contents
of construction. In cases where the carrying value exceeds the
fair value of the collateral, an impairment charge is
recognized. During the year ended December 31, 2010,
Huntington identified $80.4 million of impaired loans for
which the fair value is recorded based upon collateral value.
For the year ended December 31, 2010, nonrecurring fair
value losses of $39.6 million were recorded within the
provision for credit losses.
Other real estate owned properties are valued based on
appraisals and third party price opinions, less estimated
selling costs. During the year ended December 31, 2010,
Huntington recorded $66.8 million of OREO assets at fair
value and recognized losses of $6.9 million, recorded
within noninterest expense.
Fair
values of financial instruments
The carrying amounts and estimated fair values of
Huntington’s financial instruments at December 31,
2010 and 2009 are presented in the following table:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||
|
Financial Assets:
|
||||||||||||||||
|
Cash and short-term assets
|
$ | 982,926 | $ | 982,926 | $ | 1,840,719 | $ | 1,840,719 | ||||||||
|
Trading account securities
|
185,404 | 185,404 | 83,657 | 83,657 | ||||||||||||
|
Loans held for sale
|
793,285 | 793,285 | 461,647 | 461,647 | ||||||||||||
|
Investment securities
|
9,895,244 | 9,895,244 | 8,587,914 | 8,587,914 | ||||||||||||
|
Net loans and direct financing leases
|
36,857,499 | 35,403,910 | 35,308,184 | 32,598,423 | ||||||||||||
|
Derivatives
|
346,133 | 346,133 | 287,756 | 287,756 | ||||||||||||
|
Financial Liabilities:
|
||||||||||||||||
|
Deposits
|
(41,853,898 | ) | (41,993,567 | ) | (40,493,927 | ) | (40,753,365 | ) | ||||||||
|
Short-term borrowings
|
(2,040,732 | ) | (1,982,545 | ) | (876,241 | ) | (857,254 | ) | ||||||||
|
Federal Home Loan Bank advances
|
(172,519 | ) | (172,519 | ) | (168,977 | ) | (168,977 | ) | ||||||||
|
Other long term debt
|
(2,144,092 | ) | (2,157,358 | ) | (2,369,491 | ) | (2,332,300 | ) | ||||||||
|
Subordinated notes
|
(1,497,216 | ) | (1,377,851 | ) | (1,264,202 | ) | (989,989 | ) | ||||||||
|
Derivatives
|
(239,240 | ) | (239,240 | ) | (238,947 | ) | (238,947 | ) | ||||||||
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, FHLB 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 Topic 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
nonmortgage 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,
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Table of Contents
including but not limited to, relevancy of market prices of
comparable instruments, expected future cash flows, and
appropriate discount rates.
The following methods and assumptions were used by Huntington to
estimate the fair value of the remaining classes of financial
instruments:
Loans and
Direct Financing Leases
Variable-rate loans that reprice frequently are based on
carrying amounts, as adjusted for estimated credit losses. The
fair values for other loans and leases are estimated using
discounted cash flow analyses and employ interest rates
currently being offered for loans and leases with similar terms.
The rates take into account the position of the yield curve, as
well as an adjustment for prepayment risk, operating costs, and
profit. This value is also reduced by an estimate of probable
losses and the credit risk associated in the loan and lease
portfolio. The valuation of the loan portfolio reflected
discounts that Huntington believed are consistent with
transactions occurring in the market place.
Deposits
Demand deposits, savings accounts, and money market deposits
are, by definition, equal to the amount payable on demand. The
fair values of fixed-rate time deposits are estimated by
discounting cash flows using interest rates currently being
offered on certificates with similar maturities.
Debt
Fixed-rate, long-term debt is based upon quoted market prices,
which are inclusive of Huntington’s credit risk. In the
absence of quoted market prices, discounted cash flows using
market rates for similar debt with the same maturities are used
in the determination of fair value.
| 20. | DERIVATIVE FINANCIAL INSTRUMENTS |
Derivative financial instruments are recorded in the
consolidated balance sheet as either an asset or a liability (in
accrued income and other assets or accrued expenses and 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, cap, floors, and collars, 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 19.
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, 2010 and 2009, aggregate credit risk
associated with these derivatives, net of collateral that has
been pledged by the counterparty, was $39.9 million and
$20.3 million, respectively. The credit risk associated
with derivatives used in asset and liability management
activities is calculated after considering master netting
agreements.
At December 31, 2010, Huntington pledged
$203.4 million of investment securities and cash collateral
to counterparties, while other counterparties pledged
$85.2 million of investment securities and cash collateral
to Huntington to satisfy collateral netting agreements. In the
event of credit downgrades, Huntington could be required to
provide an additional $5.3 million in collateral.
187
Table of Contents
The following table presents the gross notional values of
derivatives used in Huntington’s asset and liability
management activities at December 31, 2010, identified by
the underlying interest rate-sensitive instruments:
|
Fair Value
|
Cash Flow
|
|||||||||||
| Hedges | Hedges | Total | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Instruments associated with:
|
||||||||||||
|
Loans
|
$ | — | $ | 9,235,000 | $ | 9,235,000 | ||||||
|
Deposits
|
1,830,264 | — | 1,830,264 | |||||||||
|
Subordinated notes
|
598,000 | — | 598,000 | |||||||||
|
Other long-term debt
|
35,000 | — | 35,000 | |||||||||
|
Total notional value at December 31, 2010
|
$ | 2,463,264 | $ | 9,235,000 | $ | 11,698,264 | ||||||
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, 2010:
|
Average
|
Weighted-Average
|
|||||||||||||||||||
|
Notional
|
Maturity
|
Fair
|
Rate | |||||||||||||||||
| Value | (Years) | Value | Receive | Pay | ||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
|
Asset conversion swaps — receive fixed —
generic
|
$ | 9,235,000 | 1.8 | $ | 64,596 | 1.50 | % | 0.62 | % | |||||||||||
|
Liability conversion swaps — receive fixed —
generic
|
2,463,264 | 3.2 | 62,750 | 2.02 | 0.32 | |||||||||||||||
|
Total swap portfolio
|
$ | 11,698,264 | 2.1 | $ | 127,346 | 1.61 | % | 0.56 | % | |||||||||||
These derivative financial instruments were entered into for the
purpose of managing the interest rate risk of assets and
liabilities. Consequently, net amounts receivable or payable on
contracts hedging either interest earning assets or interest
bearing liabilities were accrued as an adjustment to either
interest income or interest expense. The net amounts resulted in
an increase to net interest income of $192.2 million,
$167.9 million, and $10.5 million for the years ended
December 31, 2010, 2009, and 2008, respectively.
In connection with securitization activities, Huntington
purchased interest rate caps with a notional value totaling
$1.0 billion. These purchased caps were assigned to the
securitization trust for the benefit of the security holders.
Interest rate caps were also sold totaling $1.0 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 $0.4 million is an estimate of the exposure
liability based upon Huntington’s assessment of the
potential
Visa
®
litigation losses.
188
Table of Contents
The following table presents the fair values at
December 31, 2010 and 2009 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, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Interest rate contracts designated as hedging instruments
|
$ | 127,346 | $ | 85,984 | ||||
|
Interest rate contracts not designated as hedging instruments
|
263,015 | 255,692 | ||||||
|
Foreign exchange contracts not designated as hedging instruments
|
2,845 | — | ||||||
|
Total contracts
|
$ | 393,206 | $ | 341,676 | ||||
Liability
derivatives included in accrued expenses and other
liabilities
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in thousands) | ||||||||
|
Interest rate contracts designated as hedging instruments
|
$ | — | $ | 3,464 | ||||
|
Interest rate contracts not designated as hedging instruments
|
233,805 | 234,026 | ||||||
|
Foreign exchange contracts not designated as hedging instruments
|
3,107 | — | ||||||
|
Total contracts
|
$ | 236,912 | $ | 237,490 | ||||
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 relationship is
effective, recorded through earnings and offset against changes
in the fair value of the hedged item.
The following table presents the change in fair value for
derivatives designated as fair value hedges as well as the
offsetting change in fair value on the hedged item:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
(dollar amounts in thousands)
|
||||||||||||
|
Interest rate contracts
|
||||||||||||
|
Change in fair value of interest rate swaps hedging deposits(1)
|
$ | 6,108 | $ | 1,430 | $ | 4,941 | ||||||
|
Change in fair value of hedged deposits(1)
|
(6,744 | ) | 9,417 | (5,215 | ) | |||||||
|
Change in fair value of interest rate swaps hedging subordinated
notes(2)
|
19,319 | (99,913 | ) | 113,083 | ||||||||
|
Change in fair value of hedged subordinated notes(2)
|
(19,319 | ) | 99,913 | (113,083 | ) | |||||||
|
Change in fair value of interest rate swaps hedging other
long-term debt(2)
|
1,847 | (6,201 | ) | 9,859 | ||||||||
|
Change in fair value of hedged other long-term debt(2)
|
(1,847 | ) | 6,201 | (9,859 | ) | |||||||
| (1) | Effective portion of the hedging relationship is recognized in Interest expense — deposits in the Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Consolidated Statements of Income. | |
| (2) | Effective portion of the hedging relationship is recognized in Interest expense — subordinated notes and other-long-term debt in the Consolidated Statements of Income. Any resulting ineffective portion of the hedging relationship is recognized in noninterest income in the Consolidated Statements of Income. |
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 a fixed-rate
debt. This reduces the
189
Table of Contents
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 OCI in the
Consolidated Statements of 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 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) | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||
|
Interest rate contracts
|
||||||||||||||||||||||||||
|
Loans
|
$ | 51,943 | $ | (68,365 | ) | $ | 54,887 | Interest and fee income — loans and leases | $ | (116,881 | ) | $ | 117,669 | $ | (9,207 | ) | ||||||||||
|
FHLB Advances
|
— | 1,338 | 2,394 | Interest expense — FHLB Advances | 2,580 | 6,890 | (12,490 | ) | ||||||||||||||||||
|
Deposits
|
— | 326 | 2,842 | Interest expense — deposits | — | 4,153 | (4,169 | ) | ||||||||||||||||||
|
Subordinated notes
|
— | 101 | (101 | ) | Interest expense — subordinated notes and other long-term debt | (1,391 | ) | (2,717 | ) | (4,408 | ) | |||||||||||||||
|
Other long-term debt
|
— | — | 239 | Interest expense — subordinated notes and other long-term debt | — | (899 | ) | (865 | ) | |||||||||||||||||
|
Total
|
$ | 51,943 | $ | (66,600 | ) | $ | 60,261 | $ | (115,692 | ) | $ | 125,096 | $ | (31,139 | ) | |||||||||||
During the next twelve months, Huntington expects to reclassify
to earnings $43.4 million after -tax, of unrealized gains
on cash flow hedging derivatives currently in OCI.
The following table presents the gains and (losses) recognized
in noninterest income for the ineffective portion of interest
rate contracts for derivatives designated as cash flow hedges
for the years ending December 31, 2010, 2009, and 2008.
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Derivatives in cash flow hedging relationships Interest rate
contracts
|
||||||||||||
|
Loans
|
947 | 16,638 | 3,821 | |||||||||
|
FHLB Deposits
|
— | (792 | ) | 783 | ||||||||
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Table of Contents
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 accrued income and
other assets or accrued expenses and other liabilities at
December 31, 2010 and 2009, were $46.3 million and
$45.1 million, respectively. The total notional values of
derivative financial instruments used by Huntington on behalf of
customers, including offsetting derivatives, were
$9.8 billion and $9.6 billion at December 31,
2010 and 2009, respectively. Huntington’s credit risks from
interest rate swaps used for trading purposes were
$263.0 million and $255.7 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 MSRs. 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. The following table
summarizes the derivative assets and liabilities used in
mortgage banking activities:
| At December 31, | ||||||||
| (Dollar amounts in thousands) | 2010 | 2009 | ||||||
|
Derivative assets:
|
||||||||
|
Interest rate lock agreements
|
$ | 2,817 | $ | 995 | ||||
|
Forward trades and options
|
20,669 | 7,711 | ||||||
|
Total derivative assets
|
23,486 | 8,706 | ||||||
|
Derivative liabilities:
|
||||||||
|
Interest rate lock agreements
|
(1,445 | ) | (1,338 | ) | ||||
|
Forward trades and options
|
(883 | ) | (119 | ) | ||||
|
Total derivative liabilities
|
(2,328 | ) | (1,457 | ) | ||||
|
Net derivative asset (liability)
|
$ | 21,158 | $ | 7,249 | ||||
The total notional value of these derivative financial
instruments at December 31, 2010 and 2009, was
$2.6 billion and $3.7 billion, respectively. The total
notional amount at December 31, 2010 corresponds to trading
assets with a fair value of $2.7 million and trading
liabilities with a fair value of $16.0 million. Total MSR
hedging gains and (losses) for the years ended December 31,
2010, 2009, and 2008, were $55.0 million,
($37.8) million, and $22.4 million, respectively.
Included in total MSR hedging gains and losses for the years
ended December 31, 2010, 2009, and 2008 were gains and
(losses) related to derivatives instruments of
$64.6 million, ($41.2) million, and
($19.0) million, respectively. These amounts are included
in mortgage banking income in the Consolidated Statements of
Income.
191
Table of Contents
| 21. | VIEs |
Consolidated
VIEs
Consolidated VIEs at December 31, 2010 consist of the
Franklin 2009 Trust (See Note 3) and certain loan
securitization trusts. Loan securitizations include auto loan
and lease securitization trusts formed in 2009, 2008, and 2006.
Huntington has determined the trusts are VIEs. Through
Huntington’s continuing involvement in the trusts
(including ownership of beneficial interests and certain
servicing or collateral management activities), Huntington is
the primary beneficiary.
With the adoption of amended accounting guidance for VIEs,
Huntington consolidated the 2009 Trust containing automobile
loans on January 1, 2010. Huntington elected the fair value
option under ASC 825, Financial Instruments, for both the
automobile loans and the related debt obligations. Upon adoption
of the new accounting standards, total assets increased
$621.6 million, total liabilities increased
$629.3 million, and a negative cumulative effect adjustment
to OCI and retained earnings of $6.1 million was recorded.
The carrying amount and classification of the trusts’
assets and liabilities included in the Consolidated Balance
Sheets are as follows:
| December 31, 2010 | ||||||||||||||||||||
|
Franklin
|
||||||||||||||||||||
| (Dollar amounts in thousands) | 2009 Trust | 2009 Trust | 2008 Trust | 2006 Trust | Total | |||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash
|
$ | — | $ | 24,513 | $ | 19,921 | $ | 64,827 | $ | 109,261 | ||||||||||
|
Loans and leases
|
— | 522,717 | 295,464 | 1,196,024 | 2,014,205 | |||||||||||||||
|
Allowance for loan and lease losses
|
— | — | (2,541 | ) | (10,286 | ) | (12,827 | ) | ||||||||||||
|
Net loans and leases
|
— | 522,717 | 292,923 | 1,185,738 | 2,001,378 | |||||||||||||||
|
Accrued income and other assets
|
20,447 | 2,510 | 1,436 | 5,131 | 29,524 | |||||||||||||||
|
Total assets
|
$ | 20,447 | $ | 549,740 | $ | 314,280 | $ | 1,255,696 | $ | 2,140,163 | ||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Other long-term debt
|
$ | — | $ | 356,089 | $ | 151,937 | $ | 877,270 | $ | 1,385,296 | ||||||||||
|
Accrued interest and other liabilities
|
7,431 | 693 | 308 | 224 | 8,656 | |||||||||||||||
|
Total liabilities
|
$ | 7,431 | $ | 356,782 | $ | 152,245 | $ | 877,494 | $ | 1,393,952 | ||||||||||
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 Consolidated Balance
Sheet as subordinated notes. The trust securities are the
obligations of the trusts and are not consolidated within
Huntington’s
192
Table of Contents
Consolidated Financial Statements. A list of trust-preferred
securities outstanding at December 31, 2010 follows:
|
Principal Amount of
|
Investment in
|
|||||||||||
|
Subordinated Note/
|
Unconsolidated
|
|||||||||||
| (Dollar amounts in thousands) | Rate | Debenture Issued to Trust (1) | Subsidiary (2) | |||||||||
|
Huntington Capital I
|
0.99 | (3) | $ | 138,816 | $ | 6,186 | ||||||
|
Huntington Capital II
|
0.93 | (4) | 60,093 | 3,093 | ||||||||
|
Huntington Capital III
|
6.69 | 114,072 | 10 | |||||||||
|
BancFirst Ohio Trust Preferred
|
8.54 | 23,248 | 619 | |||||||||
|
Sky Financial Capital Trust I
|
8.52 | 64,474 | 1,856 | |||||||||
|
Sky Financial Capital Trust II
|
3.52 | (5) | 30,929 | 929 | ||||||||
|
Sky Financial Capital Trust III
|
1.28 | (6) | 77,481 | 2,320 | ||||||||
|
Sky Financial Capital Trust IV
|
1.27 | (6) | 77,482 | 2,320 | ||||||||
|
Prospect Trust I
|
3.54 | (7) | 6,186 | 186 | ||||||||
|
Total
|
$ | 592,781 | $ | 17,519 | ||||||||
| (1) | Represents the principal amount of debentures issued to each trust, including unamortized original issue discount. | |
| (2) | Huntington’s investment in the unconsolidated trusts represents the only risk of loss. | |
| (3) | Variable effective rate at December 31, 2010, based on three month LIBOR + 0.70. | |
| (4) | Variable effective rate at December 31, 2010, based on three month LIBOR + 0.625. | |
| (5) | Variable effective rate at December 31, 2010, based on three month LIBOR + 2.95. | |
| (6) | Variable effective rate at December 31, 2010, based on three month LIBOR + 1.40. | |
| (7) | Variable effective rate at December 31, 2010, based on three month LIBOR + 3.25. |
Each issue of the junior subordinated debentures has an interest
rate equal to the corresponding trust securities distribution
rate. Huntington has the right to defer payment of interest on
the debentures at any time, or from time to time for a period
not exceeding five years, provided that no extension period may
extend beyond the stated maturity of the related debentures.
During any such extension period, distributions to the trust
securities will also be deferred and Huntington’s ability
to pay dividends on its common stock will be restricted.
Periodic cash payments and payments upon liquidation or
redemption with respect to trust securities are guaranteed by
Huntington to the extent of funds held by the trusts. The
guarantee ranks subordinate and junior in right of payment to
all indebtedness of the Company to the same extent as the junior
subordinated debt. The guarantee does not place a limitation on
the amount of additional indebtedness that may be incurred by
Huntington.
Low
Income Housing Tax Credit Partnerships
Huntington makes certain equity investments in various limited
partnerships that sponsor affordable housing projects utilizing
the Low Income Housing Tax Credit 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 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, 2010 and 2009, Huntington has commitments of
$316.0 million and $285.3 million, respectively, of
which $260.1 million and
193
Table of Contents
$192.7 million, respectively, are funded. The unfunded
portion is included in accrued expenses and other liabilities.
| 22. | 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
Consolidated Financial Statements. The contract amounts of these
financial agreements at December 31, 2010, and
December 31, 2009, were as follows:
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollar amounts in millions) | ||||||||
|
Contract amount represents credit risk
|
||||||||
|
Commitments to extend credit
|
||||||||
|
Commercial
|
$ | 5,933 | $ | 5,834 | ||||
|
Consumer
|
5,406 | 5,028 | ||||||
|
Commercial real estate
|
546 | 1,075 | ||||||
|
Standby letters of credit
|
607 | 577 | ||||||
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 $2.2 million and
$2.8 million at December 31, 2010 and 2009,
respectively.
Through the Company’s credit process, Huntington monitors
the credit risks of outstanding standby letters of credit. When
it is probable that a standby letter of credit will be drawn and
not repaid in full, losses are recognized in the provision for
credit losses. At December 31, 2010, Huntington had
$0.6 billion of standby letters of credit outstanding, of
which 73% 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, the
Company’s broker-dealer subsidiary.
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, 2010, approximately $72.2 million of
the standby letters of credit were rated strong with sufficient
asset quality, liquidity, and good debt capacity and coverage,
approximately $460.2 million were rated average with
acceptable asset quality, liquidity, and modest debt capacity;
and approximately $74.5 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.
194
Table of Contents
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, 2010 and 2009, Huntington had commitments
to sell residential real estate loans of $998.7 million and
$662.9 million, respectively. These contracts mature in
less than one year.
Litigation
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 was 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 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 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. The board of directors
appointed a special independent committee to review and
investigate the allegations made in the letter, and based upon
that investigation, to recommend what actions, if any, should be
taken. The special independent committee has concluded its
review and investigation, has determined that the claims
asserted in the letter and in the three derivative suits are
without merit and that it would not be in the interest of the
Company to pursue any of them, and has recommended to the board
of directors that the claims not be pursued. The board of
directors has accepted the recommendation of the independent
special committee, and determined to refuse the plaintiff’s
demand to initiate litigation. The Court of Common Pleas of
Franklin County, Ohio granted the defendants’ motion to
dismiss the derivative lawsuit pending in that court. On
October 8, 2010, an agreed order to dismiss the derivative
suit was entered in the Court of Common Pleas of Delaware
County, Ohio.
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 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 to settle this
litigation on a classwide basis for $1,450,000, subject to court
approval. Because the settlement has not been approved, it is
not possible for Management to make further comment at this time.
Commitments
Under Capital and Operating Lease Obligations
At December 31, 2010, 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.
195
Table of Contents
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, 2010, were
$43.2 million in 2011, $41.5 million in 2012,
$39.0 million in 2013, $36.5 million in 2014,
$34.7 million in 2015, and $270.9 million thereafter.
At December 31, 2010, total minimum lease payments have not
been reduced by minimum sublease rentals of $25.8 million
due in the future under noncancelable subleases. At
December 31, 2010, the future minimum sublease rental
payments that Huntington expects to receive are
$12.7 million in 2011; $4.4 million in 2012;
$3.7 million in 2013; $2.7 million in 2014;
$1.6 million in 2015; and $0.8 million thereafter. The
rental expense for all operating leases was $50.3 million,
$49.8 million, and $53.4 million for 2010, 2009, and
2008, respectively. Huntington had no material obligations under
capital leases.
| 23. | OTHER REGULATORY MATTERS |
Huntington and its bank subsidiary, The Huntington National Bank
(the 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 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, 2010, Huntington and 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 Risk-Based Capital | Tier 1 Leverage | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||||||||||
|
Huntington Bancshares Incorporated
|
||||||||||||||||||||||||
|
Amount
|
$ | 5,022 | $ | 5,201 | $ | 6,285 | $ | 6,231 | $ | 5,022 | $ | 5,201 | ||||||||||||
|
Ratio
|
11.55 | % | 12.03 | % | 14.46 | % | 14.41 | % | 9.41 | % | 10.09 | % | ||||||||||||
|
The Huntington National Bank
|
||||||||||||||||||||||||
|
Amount
|
$ | 3,683 | $ | 2,873 | $ | 5,549 | $ | 4,780 | $ | 3,683 | $ | 2,873 | ||||||||||||
|
Ratio
|
8.51 | % | 6.66 | % | 12.82 | % | 11.08 | % | 6.97 | % | 5.59 | % | ||||||||||||
Tier 1 Risk-based Capital consists of total equity plus
qualifying capital securities and minority interest, excluding
unrealized gains and losses accumulated in OCI, 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 2010 and 2009, less non-qualifying
intangibles and other adjustments.
Huntington 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 2010 and 2009, the
average balances of these deposits were $0.8 billion and
$1.4 billion, respectively.
196
Table of Contents
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, 2010,
the Bank could lend $554.9 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 the Company. These funds aid the 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 common stock. At December 31, 2010, the Bank
could not have declared and paid additional dividends to the
Company without regulatory approval.
| 24. | PARENT COMPANY FINANCIAL STATEMENTS |
The parent company condensed financial statements, which include
transactions with subsidiaries, are as follows.
| December 31, | ||||||||
|
Balance Sheets
|
2010 | 2009 | ||||||
| (Dollar amounts in thousands) | ||||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents(1)
|
$ | 615,167 | $ | 1,376,539 | ||||
|
Due from The Huntington National Bank(2)
|
954,565 | 955,695 | ||||||
|
Due from non-bank subsidiaries
|
225,560 | 273,317 | ||||||
|
Investment in The Huntington National Bank
|
3,515,597 | 2,821,181 | ||||||
|
Investment in non-bank subsidiaries
|
790,248 | 815,730 | ||||||
|
Accrued interest receivable and other assets
|
110,181 | 112,557 | ||||||
|
Total assets
|
$ | 6,211,318 | $ | 6,355,019 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
|
Short-term borrowings
|
$ | 100 | $ | 1,291 | ||||
|
Long-term borrowings
|
937,434 | 637,434 | ||||||
|
Dividends payable, accrued expenses, and other liabilities
|
293,242 | 380,292 | ||||||
|
Total liabilities
|
1,230,776 | 1,019,017 | ||||||
|
Shareholders’ equity(3)
|
4,980,542 | 5,336,002 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 6,211,318 | $ | 6,355,019 | ||||
| (1) | Includes restricted cash of $125,000 at December 31, 2010 and December 31, 2009. | |
| (2) | Related to subordinated notes described in Note 12. | |
| (3) | See Huntington’s Consolidated Statements of Changes in Shareholders’ Equity. |
197
Table of Contents
| Year Ended December 31, | ||||||||||||
|
Statements of Income
|
2010 | 2009 | 2008 | |||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Income
|
||||||||||||
|
Dividends from
|
||||||||||||
|
The Huntington National Bank
|
$ | — | $ | — | $ | 142,254 | ||||||
|
Non-bank subsidiaries
|
33,000 | 70,600 | 69,645 | |||||||||
|
Interest from
|
||||||||||||
|
The Huntington National Bank
|
82,749 | 51,620 | 19,749 | |||||||||
|
Non-bank subsidiaries
|
12,185 | 14,662 | 12,700 | |||||||||
|
Other
|
2,987 | 68,352 | 108 | |||||||||
|
Total income
|
130,921 | 205,234 | 244,456 | |||||||||
|
Expense
|
||||||||||||
|
Personnel costs
|
30,334 | 21,206 | 24,398 | |||||||||
|
Interest on borrowings
|
23,765 | 29,357 | 44,890 | |||||||||
|
Other
|
49,019 | 28,398 | 240 | |||||||||
|
Total expense
|
103,118 | 78,961 | 69,528 | |||||||||
|
Income before income taxes and equity in undistributed net
income of subsidiaries
|
27,803 | 126,273 | 174,928 | |||||||||
|
Income taxes (benefit)
|
48,505 | 20,675 | (120,371 | ) | ||||||||
|
Income (loss) before equity in undistributed net income of
subsidiaries
|
(20,702 | ) | 105,598 | 295,299 | ||||||||
|
Increase (decrease) in undistributed net income (loss) of:
|
||||||||||||
|
The Huntington National Bank
|
344,961 | (3,130,329 | ) | (98,863 | ) | |||||||
|
Non-bank subsidiaries
|
(11,912 | ) | (69,448 | ) | (310,242 | ) | ||||||
|
Net income (loss)
|
$ | 312,347 | $ | (3,094,179 | ) | $ | (113,806 | ) | ||||
198
Table of Contents
| Year Ended December 31, | ||||||||||||
|
Statements of Cash Flows
|
2010 | 2009 | 2008 | |||||||||
| (Dollar amounts in thousands) | ||||||||||||
|
Operating activities
|
||||||||||||
|
Net income (loss)
|
$ | 312,347 | $ | (3,094,179 | ) | $ | (113,806 | ) | ||||
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
||||||||||||
|
Equity in undistributed net income (loss) of subsidiaries
|
(351,049 | ) | 3,199,777 | 266,851 | ||||||||
|
Depreciation and amortization
|
685 | 3,458 | 2,071 | |||||||||
|
Other, net
|
(74,802 | ) | (103,464 | ) | 65,076 | |||||||
|
Net cash (used for) provided by operating activities
|
(112,819 | ) | 5,592 | 220,192 | ||||||||
|
Investing activities
|
||||||||||||
|
Repayments from subsidiaries
|
129,081 | 393,041 | 540,308 | |||||||||
|
Advances to subsidiaries
|
(425,600 | ) | (1,017,892 | ) | (1,337,165 | ) | ||||||
|
Net cash used for investing activities
|
(296,519 | ) | (624,851 | ) | (796,857 | ) | ||||||
|
Financing activities
|
||||||||||||
|
Proceeds from issuance of long-term borrowings
|
297,375 | — | — | |||||||||
|
Payment of borrowings
|
(1,191 | ) | (99,417 | ) | (98,470 | ) | ||||||
|
Dividends paid on preferred stock
|
— | (107,262 | ) | (23,242 | ) | |||||||
|
Dividends paid on common stock
|
(136,499 | ) | (55,026 | ) | (279,608 | ) | ||||||
|
Proceeds from issuance of preferred stock
|
— | — | 1,947,625 | |||||||||
|
Payment to repurchase preferred stock
|
(1,398,071 | ) | ||||||||||
|
Proceeds from issuance of common stock
|
886,172 | 1,135,645 | — | |||||||||
|
Other, net
|
180 | (198 | ) | (1,073 | ) | |||||||
|
Net cash provided by (used for) financing activities
|
(352,034 | ) | 873,742 | 1,545,232 | ||||||||
|
Change in cash and cash equivalents
|
(761,372 | ) | 254,483 | 968,567 | ||||||||
|
Cash and cash equivalents at beginning of year
|
1,376,539 | 1,122,056 | 153,489 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 615,167 | $ | 1,376,539 | $ | 1,122,056 | ||||||
|
Supplemental disclosure:
|
||||||||||||
|
Interest paid
|
$ | 23,765 | $ | 29,357 | $ | 44,890 | ||||||
|
Dividends in-kind received from The Huntington National Bank
|
— | — | 124,689 | |||||||||
| 25. | SEGMENT REPORTING |
During the 2010 fourth quarter, we reorganized our business
segments to better align certain business unit reporting with
segment executives to accelerate cross-sell results and provide
greater focus on the execution of strategic plans. We have four
major business segments: Retail and Business Banking, Commercial
Banking, Automobile Finance and Commercial Real Estate, and
Wealth Advisors, Government Finance, and Home Lending. A
Treasury / Other function includes other unallocated
assets, liabilities, revenue, and expense. All periods have been
reclassified to conform to the current period classification.
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
199
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 financial products and services to consumer and small
business customers located within our primary banking markets
consisting of five areas covering the six states of Ohio,
Michigan, Pennsylvania, Indiana, West Virginia, and Kentucky.
Its products include individual and small business checking
accounts, savings accounts, money market accounts, certificates
of deposit, consumer loans, and small business loans and leases.
Other financial services available to consumers and small
business customers include investments, insurance services,
interest rate risk protection products, foreign exchange
hedging, and treasury management services. Retail and Business
Banking provides these services through a banking network of
over 600 traditional branches and convenience branches located
in grocery stores and retirement centers. In addition, an array
of alternative distribution channels is available to customers
including internet and mobile banking, telephone banking, and
over 1,300 ATMs.
Commercial Banking:
Our Commercial Banking
group provides a wide array of products and services to the
middle market and large corporate client base located primarily
within our core geographic banking markets. Products and
services are delivered through a relationship banking model and
include commercial lending, as well as depository and liquidity
management products. Dedicated teams collaborate with our
primary bankers to deliver complex and customized treasury
management solutions, equipment and technology leasing,
international services, capital markets services such as
interest rate protection, foreign exchange hedging and sales,
trading of securities, and employee benefit programs (insurance,
410(k)). The Commercial Banking team specializes in serving a
number of industry segments such as government entities,
not-for-profit
organizations, heath-care entities, and large, publicly traded
companies.
Automobile Finance and Commercial Real
Estate:
This segment provides lending and other
banking products and services to customers outside of our normal
retail or commercial channels. More specifically, we serve
automotive dealerships, retail customers who obtain financing at
the dealerships, professional real estate developers, REITs, and
other customers with lending needs that are secured by
commercial properties. Most of our customers are located in our
primary banking markets. Our products and services include
financing for the purchase of automobiles by customers of
automotive dealerships; financing for the purchase of new and
used vehicle inventory by automotive dealerships; and financing
for land, buildings, and other commercial real estate owned or
constructed by real estate developers, automobile dealerships,
or other customers with real estate project financing needs. We
also provide other banking products and services to our
customers as well as their owners or principals. These products
and services are delivered through: (1) our relationships
with developers in our primary banking markets believed to be
experienced, well-managed, and well-capitalized and are capable
of operating in all phases of the real estate cycle (top-tier
developers), (2) relationships with established automobile
dealerships, (3) our leads through community involvement,
and (4) referrals from other professionals.
Wealth Advisors, Government Finance, and Home
Lending:
This segment consists primarily of
fee-based businesses including home lending, wealth management,
and government finance. We originate and service consumer loans
to customers who are generally located in our primary banking
markets. Consumer lending products are distributed to these
customers primarily through the Retail and Business Banking
segment and commissioned loan originators. We provide wealth
management banking services to high net worth customers in our
primary banking markets and in Florida by utilizing a cohesive
model that employs a unified sales force to deliver products and
services directly and through the other segments. We provide
these products and services through a unified sales team, which
consists of former private bankers, trust officers, and
investment advisors; Huntington Asset Advisors, which provides
investment management services; Huntington Asset Services, which
offers administrative and operational support to fund complexes;
retirement plan services, and the national settlements business.
We also provide banking products and services to government
entities across our primary banking markets by utilizing a team
of relationship managers providing public finance, brokerage,
trust, lending, and treasury management services.
In addition to the Company’s four business segments, the
Treasury / Other function includes our insurance
brokerage business, which specializes in commercial
property/casualty, employee benefits, personal lines, life
200
Table of Contents
and disability and specialty lines. We also provide brokerage
and agency services for residential and commercial title
insurance and excess and surplus product lines. As an agent and
broker we do not assume underwriting risks; instead we provide
our customers with quality, non-investment insurance contracts.
It also includes technology and operations, and other
unallocated assets, liabilities, revenue, and expense.
Assets in this group include investment securities and bank
owned life insurance. Net interest income / (expense)
includes the net impact of administering the Company’s
investment securities portfolios as part of overall liquidity
management. An 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. Noninterest 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 noninterest 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 2010 and 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.
Listed below is certain operating basis financial information
reconciled to Huntington’s 2010, 2009, and 2008 reported
results by line of business:
|
Retail &
|
Former
|
|||||||||||||||||||||||||||||
|
Business
|
Regional
|
Treasury/
|
Huntington
|
|||||||||||||||||||||||||||
|
Income Statements
|
Banking | Commercial | Banking | AFCRE | WGH | Other | Consolidated | |||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||||
|
2010
|
||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 867,069 | $ | 211,511 | $ | 1,078,580 | $ | 338,312 | $ | 169,201 | $ | 32,712 | $ | 1,618,805 | ||||||||||||||||
|
Provision for credit losses
|
157,994 | 104,705 | 262,699 | 184,757 | 95,586 | 91,505 | 634,547 | |||||||||||||||||||||||
|
NonInterest income
|
394,705 | 111,237 | 505,942 | 73,933 | 338,633 | 123,350 | 1,041,858 | |||||||||||||||||||||||
|
NonInterest expense
|
902,186 | 158,871 | 1,061,057 | 155,963 | 358,707 | 98,078 | 1,673,805 | |||||||||||||||||||||||
|
Provision (benefit) for income taxes
|
70,558 | 20,710 | 91,268 | 25,033 | 18,740 | (95,077 | ) | 39,964 | ||||||||||||||||||||||
|
Operating/reported net income
|
$ | 131,036 | $ | 38,462 | $ | 169,498 | $ | 46,492 | $ | 34,801 | $ | 61,556 | $ | 312,347 | ||||||||||||||||
|
2009
|
||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 810,658 | $ | 190,955 | $ | 1,001,613 | $ | 277,450 | $ | 164,335 | $ | (19,111 | ) | $ | 1,424,287 | |||||||||||||||
|
Provision for credit losses
|
470,152 | 393,984 | 864,136 | 1,096,030 | 128,551 | (14,046 | ) | 2,074,671 | ||||||||||||||||||||||
|
Noninterest income
|
415,471 | 95,705 | 511,176 | 63,929 | 267,695 | 162,844 | 1,005,644 | |||||||||||||||||||||||
|
Noninterest expense, excluding goodwill impairment
|
796,714 | 136,885 | 933,599 | 150,200 | 300,799 | 41,901 | 1,426,499 | |||||||||||||||||||||||
|
Goodwill impairment
|
2,573,818(1 | ) | 33,126 | 2,606,944 | ||||||||||||||||||||||||||
|
Provision (benefit) for income taxes
|
(14,258 | ) | (85,473 | ) | (99,731 | ) | (316,697 | ) | 937 | (168,513 | ) | (584,004 | ) | |||||||||||||||||
|
Operating/reported net income (loss)
|
$ | (26,479 | ) | $ | (158,736 | ) | $ | (2,759,033 | ) | $ | (588,154 | ) | $ | 1,743 | $ | 251,265 | $ | (3,094,179 | ) | |||||||||||
|
2008
|
||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 859,477 | $ | 279,014 | $ | 1,138,491 | $ | 352,328 | $ | 189,191 | $ | (148,319 | ) | $ | 1,531,691 | |||||||||||||||
|
Provision for credit losses
|
196,224 | 102,587 | 298,811 | 284,691 | 35,960 | 438,001 | 1,057,463 | |||||||||||||||||||||||
|
Noninterest income
|
409,151 | 102,929 | 512,080 | 64,114 | 186,682 | (55,738 | ) | 707,138 | ||||||||||||||||||||||
|
Noninterest expense
|
675,720 | 155,798 | 831,518 | 153,533 | 273,769 | 218,554 | 1,477,374 | |||||||||||||||||||||||
|
Provision (benefit) for income taxes
|
138,840 | 43,245 | 182,085 | (7,624 | ) | 23,150 | (379,813 | ) | (182,202 | ) | ||||||||||||||||||||
|
Operating/reported net income (loss)
|
$ | 257,844 | $ | 80,313 | $ | 338,157 | $ | (14,158 | ) | $ | 42,994 | $ | (480,799 | ) | $ | (113,806 | ) | |||||||||||||
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| (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, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollar amounts in millions) | ||||||||||||||||
|
Retail and Business Banking
|
$ | 13,088 | $ | 12,972 | $ | 29,298 | $ | 28,512 | ||||||||
|
Commercial Banking
|
8,720 | 8,214 | 3,538 | 3,056 | ||||||||||||
|
AFCRE
|
13,233 | 12,361 | 753 | 618 | ||||||||||||
|
WGH
|
6,971 | 6,125 | 7,449 | 6,749 | ||||||||||||
|
Treasury / Other
|
11,808 | 11,883 | 816 | 1,559 | ||||||||||||
|
Total
|
$ | 53,820 | $ | 51,555 | $ | 41,854 | $ | 40,494 | ||||||||
| 26. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) |
The following is a summary of the unaudited quarterly results of
operations, for the years ended December 31, 2010 and 2009:
| 2010 | ||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||
| (Dollar amounts in thousands, except per share data) | ||||||||||||||||
|
Interest income
|
$ | 528,291 | $ | 534,669 | $ | 535,653 | $ | 546,779 | ||||||||
|
Interest expense
|
112,997 | 124,707 | 135,997 | 152,886 | ||||||||||||
|
Net interest income
|
415,294 | 409,962 | 399,656 | 393,893 | ||||||||||||
|
Provision for credit losses
|
86,973 | 119,160 | 193,406 | 235,008 | ||||||||||||
|
Noninterest income
|
264,220 | 267,143 | 269,643 | 240,852 | ||||||||||||
|
Noninterest expense
|
434,593 | 427,309 | 413,810 | 398,093 | ||||||||||||
|
Income before income taxes
|
157,948 | 130,636 | 62,083 | 1,644 | ||||||||||||
|
Provision (benefit) for income taxes
|
35,048 | 29,690 | 13,319 | (38,093 | ) | |||||||||||
|
Net income
|
122,900 | 100,946 | 48,764 | 39,737 | ||||||||||||
|
Dividends on preferred shares
|
83,754 | 29,495 | 29,426 | 29,357 | ||||||||||||
|
Net income applicable to common shares
|
$ | 39,146 | $ | 71,451 | $ | 19,338 | $ | 10,380 | ||||||||
|
Net income per common share — Basic
|
$ | 0.05 | $ | 0.10 | $ | 0.03 | $ | 0.01 | ||||||||
|
Net income per common share — Diluted
|
0.05 | 0.10 | 0.03 | 0.01 | ||||||||||||
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Table of Contents
| 2009 | ||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||
| (Dollar amounts 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 | ||||||||||||
|
Noninterest income
|
244,546 | 256,052 | 265,945 | 239,102 | ||||||||||||
|
Noninterest 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
|
(369,687 | ) | (166,190 | ) | (125,095 | ) | (2,433,207 | ) | ||||||||
|
Dividends declared 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 | ) | ||||||||
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 which is incorporated by reference into this
item.
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, 2010 to which this report relates that have
materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
| Item 9B: | Other Information |
Not applicable.
204
Table of Contents
We refer in Part III of this report to relevant sections of
our 2011 Proxy Statement for the 2011 annual meeting of
shareholders, which will be filed with the SEC pursuant to
Regulation 14A within 120 days of the close of our
2010 fiscal year. Portions of our 2011 Proxy Statement,
including the sections we refer to in this report, are
incorporated by reference into this report.
| Item 10: | Directors, Executive Officers and Corporate Governance |
Information required by this item is set forth under the
captions Election of Directors, Corporate Governance, Our
Executive Officers, Board Meetings and Committee Information,
Report of the Audit Committee, and Section 16(a) Beneficial
Ownership Reporting Compliance of our 2011 Proxy Statement,
which is incorporated by reference into this item.
| Item 11: | Executive Compensation |
Information required by this item is set forth under the
captions Compensation of Executives and Director Compensation of
our 2011 Proxy Statement, which is incorporated by reference
into this item.
| Item 12: | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Equity
Compensation Plan Information
The following table sets forth information about Huntington
common stock authorized for issuance under Huntington’s
existing equity compensation plans as of December 31, 2010.
|
Number of
|
||||||||||||
|
securities
|
||||||||||||
|
Number of
|
remaining available
|
|||||||||||
|
securities to be
|
for future issuance
|
|||||||||||
|
issued upon
|
Weighted-average
|
under equity
|
||||||||||
|
exercise of
|
exercise price of
|
compensation plans
|
||||||||||
|
outstanding
|
outstanding
|
(excluding
|
||||||||||
|
options, warrants,
|
options, warrants,
|
securities reflected
|
||||||||||
|
and rights(2)
|
and rights(3)
|
in column (a))(4)
|
||||||||||
|
Plan Category(1)
|
(a) | (b) | (c) | |||||||||
|
Equity compensation plans approved by security holders
|
22,065,940 | $ | 13.81 | 16,931,746 | ||||||||
|
Equity compensation plans not approved by security holders
|
5,773,453 | 16.21 | — | |||||||||
|
Total
|
27,839,393 | $ | 14.31 | 16,931,746 | ||||||||
| (1) | All equity compensation plan authorizations for shares of common stock provide for the number of shares to be adjusted for stock splits, stock dividends, and other changes in capitalization. The Huntington Investment and Tax Savings Plan, a broad-based plan qualified under Code Section 401(a) which includes Huntington common stock as one of a number of investment options available to participants, is excluded from the table. | |
| (2) | The numbers in this column (a) reflect shares of common stock to be issued upon exercise of outstanding stock options and the vesting of outstanding awards of RSUs and RSAs. The shares of common stock to be issued upon exercise or vesting under equity compensation plans not approved by shareholders include several inducement grants issued outside of the Company’s stock plans, and awards granted under the following plans which are no longer active and for which Huntington has not reserved the right to make subsequent grants or awards: the Employee Stock Incentive Plan, a broad-based stock option plan under which employees have received grants of stock options, and employee and director stock plans of Unizan Financial Corp. and Sky Financial Group, Inc. assumed in the acquisitions of these companies. | |
| (3) | The weighted-average exercise prices in this column are based on outstanding options and do not take into account unvested awards of RSUs and RSAs as these awards do not have an exercise price. |
205
Table of Contents
| (4) | The number of shares in this column (c) reflects the number of shares remaining available for future issuance under Huntington’s Amended 2007 Stock and Long-Term Incentive Plan, excluding shares reflected in column (a). The number of shares in this column (c) does not include shares of common stock to be issued under the following compensation plans: the Executive Deferred Compensation Plan, which provides senior officers designated by the Compensation Committee the opportunity to defer up to 90% of base salary, annual bonus compensation and certain equity awards, and up to 100% of long-term incentive awards; the Supplemental Plan under which voluntary participant contributions made by payroll deduction are used to purchase shares; the Deferred Compensation for Huntington Bancshares Incorporated Directors under which directors my defer their director compensation and such amounts may be invested in shares of common stock; and the Deferred Compensation Plan for directors (now inactive) under which directors of selected subsidiaries may defer their director compensation and such amounts may be invested in shares of Huntington common stock. These plans do not contain a limit on the number of shares that may be issued under them. |
Other
Information
The other information required by this item is set forth under
the caption “Ownership of Voting Stock” of our 2011
Proxy Statement, which is incorporated by reference into this
item.
| Item 13: | Certain Relationships and Related Transactions, and Director Independence |
Information required by this item is set forth under the
captions Indebtedness of Management and Certain other
Transactions of our 2011 Proxy Statement, which is incorporated
by reference into this item.
| Item 14: | Principal Accountant 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 2011 Proxy Statement which is
incorporated by reference into this item.
| Item 15: | Exhibits 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 211 of this report.
(c) See Item 15(a)(2) above.
206
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,
2011.
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, 2011.
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Don M. Casto III *
Don M. Casto III Director |
Jonathan A. Levy *
Jonathan A. Levy Director |
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Ann B. Crane *
Ann B. Crane Director |
Wm. J. Lhota *
Wm. J. Lhota Director |
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Steven G. Elliott *
Steven G. Elliott Director |
Gerard P. Mastroianni *
Gerard P. Mastroianni Director |
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Michael J. Endres *
Michael J. Endres Director |
Richard W. Neu *
Richard W. Neu Director |
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John B. Gerlach, Jr. *
John B. Gerlach, Jr. Director |
David L. Porteous *
David L. Porteous Director |
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D. James Hilliker *
D. James Hilliker Director |
Kathleen H. Ransier *
Kathleen H. Ransier Director |
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David P. Lauer *
David P. Lauer Director |
William R. Robertson *
William R. Robertson Director |
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*
/s/ Donald R. Kimble
Donald R. Kimble Attorney-in-fact for each of the persons indicated |
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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.
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SEC File or
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Exhibit
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Registration
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Exhibit
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Document Description
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Report or Registration Statement
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Number
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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 of Amendment to Articles of Restatement of Charter | Current Report on Form 8-K dated April 27, 2010 | 001-34073 | 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 | 3.1 | |||||
| 3 | .6 | 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 | .7 | 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 | .8 | 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 | .9 | Bylaws of Huntington Bancshares Incorporated, as amended and restated, as of April 22, 2010. | Current Report on Form 8-K dated April 27, 2010. | 001-34073 | 3.2 | |||||
| 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. | Quarterly Report on Form 10-Q for the quarter ended March 30, 2010. | 001-34073 | 10.2 | |||||
| 10 | .2 | 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 | .3 | * 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 | .4 | 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 | .5 | 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 | |||||
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SEC File or
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Exhibit
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Number
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| 10 | .6 | * 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 | .7 | * 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 | .8 | * 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 | .9 | * 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 | .10 | * 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 | .11 | * 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 | .12 | * 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 | .13 | * 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 | .14 | * 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 | .15 | * 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 | .16 | * 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 | .17 | * 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 | .18 | * 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 | .19 | * 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 | .20 | * 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 | .21 | * 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 | .22 | * 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 | .23 | * 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 | .24 | * 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 | .25 | * 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 | .26 | * 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 | .27 | * 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 | .28 | 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 | .29 | 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 | |||||
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Exhibit
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Number
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Reference | ||||||
| 10 | .30 | * 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 | .31 | * Restricted Stock Unit Grant Notice with three year vesting | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.1 | |||||
| 10 | .32 | * Restricted Stock Unit Grant Notice with six month vesting | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.2 | |||||
| 10 | .33 | * Restricted Stock Unit Deferral Agreement | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.3 | |||||
| 10 | .34 | * Director Deferred Stock Award Notice | Current Report on Form 8-K dated July 24, 2006 | 000-02525 | 99.4 | |||||
| 10 | .35 | * Huntington Bancshares Incorporated 2007 Stock and Long-Term Incentive Plan | Definitive Proxy Statement for the 2007 Annual Meeting of Stockholders | 000-02525 | G | |||||
| 10 | .36 | * 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 | .37 | * Second Amendment to the 2007 Stock and Long-Term Incentive Plan | Definitive Proxy Statement for the 2010 Annual Meeting of Shareholders | 001-34073 | A | |||||
| 10 | .38 | * Retention Payment Agreement | Annual Report on Form 10-K for the year ended December 31, 2007 | 000-02525 | 10.43 | |||||
| 10 | .39 | * 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 | .40 | * 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 | .41 | * 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 111(b)(4) of the Emergency Stabilization Act of 2008. | ||||||||
| 99 | .2 | Certification of Chief Financial Officer pursuant to Section 111(b)(4) of the Emergency Stabilization Act of 2008. | ||||||||
| 101 | ** The following material from Huntington’s Form 10-K Report for the year ended December 31, 2010, formatted in XBRL: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Income, (3), Consolidated Statements of Changes in Shareholders’ Equity, (4) Consolidated Statements of Cash Flows, and (5) the Notes to the Consolidated Financial Statements, tagged as blocks of text. | |||||||||
| * | Denotes management contract or compensatory plan or arrangement. | |||||||||
| ** | Furnished, not filed. | |||||||||
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TABLE OF CONTENTS
Part IItem 1: BusinessItem 1A: Risk FactorsItem 1B: Unresolved Staff CommentsItem 2: PropertiesItem 3: Legal ProceedingsItem 4: ReservedPart IIItem 5: Market For Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesItem 6: Selected Financial DataItem 7: Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A: Quantitative and Qualitative Disclosures About Market RiskItem 8: Financial Statements and Supplementary DataItem 9: Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A: Controls and ProceduresItem 9B: Other InformationPart IIIItem 10: Directors, Executive Officers and Corporate GovernanceItem 11: Executive CompensationItem 12: Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13: Certain Relationships and Related Transactions, and Director IndependenceItem 14: Principal Accountant Fees and ServicesPart IVItem 15: Exhibits and Financial Statement Schedules