Huntington Bancshares Incorporated 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY PERIOD ENDED June 30, 2007
Commission File Number 0-2525
Huntington Bancshares Incorporated
|
|
|
Maryland
|
|
31-0724920 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
41 South High Street, Columbus, Ohio 43287
Registrants telephone number (614) 480-8300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). oYes þ No
There were
365,924,668 shares of Registrants common stock ($0.01 par value) outstanding on July 31,
2007.
Huntington Bancshares Incorporated
INDEX
2
Part 1. Financial Information
Item 1. Financial Statements
Huntington Bancshares Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands, except number of shares) |
|
June 30, |
|
December 31, |
|
June 30, |
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
818,877 |
|
|
$ |
1,080,163 |
|
|
$ |
876,121 |
|
Federal funds sold and securities
purchased under resale agreements |
|
|
857,080 |
|
|
|
440,584 |
|
|
|
365,592 |
|
Interest bearing deposits in banks |
|
|
271,133 |
|
|
|
74,168 |
|
|
|
37,576 |
|
Trading account securities |
|
|
619,836 |
|
|
|
36,056 |
|
|
|
113,376 |
|
Loans held for sale |
|
|
348,272 |
|
|
|
270,422 |
|
|
|
298,871 |
|
Investment securities |
|
|
3,863,182 |
|
|
|
4,362,924 |
|
|
|
5,124,682 |
|
Loans and leases |
|
|
26,811,513 |
|
|
|
26,153,425 |
|
|
|
26,354,581 |
|
Allowance for loan and lease losses |
|
|
(307,519 |
) |
|
|
(272,068 |
) |
|
|
(287,517 |
) |
|
|
|
Net loans and leases |
|
|
26,503,994 |
|
|
|
25,881,357 |
|
|
|
26,067,064 |
|
|
|
|
Bank owned life insurance |
|
|
1,107,042 |
|
|
|
1,089,028 |
|
|
|
1,070,909 |
|
Premises and equipment |
|
|
398,436 |
|
|
|
372,772 |
|
|
|
365,763 |
|
Goodwill |
|
|
569,738 |
|
|
|
570,876 |
|
|
|
571,697 |
|
Other intangible assets |
|
|
54,646 |
|
|
|
59,487 |
|
|
|
64,141 |
|
Accrued income and other assets |
|
|
1,008,450 |
|
|
|
1,091,182 |
|
|
|
1,309,985 |
|
|
|
|
Total Assets |
|
$ |
36,420,686 |
|
|
$ |
35,329,019 |
|
|
$ |
36,265,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
24,599,912 |
|
|
$ |
25,047,770 |
|
|
$ |
24,592,932 |
|
Short-term borrowings |
|
|
2,860,939 |
|
|
|
1,676,189 |
|
|
|
2,125,932 |
|
Federal Home Loan Bank advances |
|
|
1,397,398 |
|
|
|
996,821 |
|
|
|
1,271,678 |
|
Other long-term debt |
|
|
2,016,199 |
|
|
|
2,229,140 |
|
|
|
2,716,784 |
|
Subordinated notes |
|
|
1,494,197 |
|
|
|
1,286,657 |
|
|
|
1,255,278 |
|
Accrued expenses and other liabilities |
|
|
987,900 |
|
|
|
1,078,116 |
|
|
|
1,364,017 |
|
|
|
|
Total Liabilities |
|
|
33,356,545 |
|
|
|
32,314,693 |
|
|
|
33,326,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock authorized 6,617,808 shares;
none outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
No par value and authorized 500,000,000 shares;
issued 257,866,255 shares; outstanding 235,474,366 and
237,361,333 shares, respectively. |
|
|
|
|
|
|
2,560,569 |
|
|
|
2,552,094 |
|
Par value of $0.01 and authorized 1,000,000,000 shares at
June 30, 2007; issued 257,866,255 shares; outstanding
236,244,063 shares |
|
|
2,579 |
|
|
|
|
|
|
|
|
|
Capital surplus |
|
|
2,565,185 |
|
|
|
|
|
|
|
|
|
Treasury shares at cost, 21,622,192; 22,391,889 and
20,504,922, respectively |
|
|
(489,633 |
) |
|
|
(506,946 |
) |
|
|
(457,758 |
) |
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on investment securities |
|
|
(17,243 |
) |
|
|
14,254 |
|
|
|
(69,723 |
) |
Unrealized gains on cash flow hedging derivatives |
|
|
18,158 |
|
|
|
17,008 |
|
|
|
28,915 |
|
Pension and other postretirement benefit adjustments |
|
|
(81,705 |
) |
|
|
(86,328 |
) |
|
|
(3,283 |
) |
Retained earnings |
|
|
1,066,800 |
|
|
|
1,015,769 |
|
|
|
888,911 |
|
|
|
|
Total Shareholders Equity |
|
|
3,064,141 |
|
|
|
3,014,326 |
|
|
|
2,939,156 |
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
36,420,686 |
|
|
$ |
35,329,019 |
|
|
$ |
36,265,777 |
|
|
|
|
See notes to unaudited condensed consolidated financial statements
3
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(in thousands, except per share amounts) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Interest and fee income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
466,904 |
|
|
$ |
445,924 |
|
|
$ |
928,045 |
|
|
$ |
845,270 |
|
Tax-exempt |
|
|
114 |
|
|
|
520 |
|
|
|
585 |
|
|
|
1,029 |
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
49,684 |
|
|
|
60,852 |
|
|
|
104,799 |
|
|
|
112,960 |
|
Tax-exempt |
|
|
6,528 |
|
|
|
5,894 |
|
|
|
12,621 |
|
|
|
11,606 |
|
Other |
|
|
19,231 |
|
|
|
8,713 |
|
|
|
31,360 |
|
|
|
15,825 |
|
|
Total interest income |
|
|
542,461 |
|
|
|
521,903 |
|
|
|
1,077,410 |
|
|
|
986,690 |
|
|
Interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
198,108 |
|
|
|
173,032 |
|
|
|
394,831 |
|
|
|
321,346 |
|
Short-term borrowings |
|
|
23,271 |
|
|
|
20,969 |
|
|
|
43,108 |
|
|
|
35,634 |
|
Federal Home Loan Bank advances |
|
|
16,009 |
|
|
|
17,077 |
|
|
|
28,519 |
|
|
|
31,565 |
|
Subordinated notes and other long-term debt |
|
|
51,682 |
|
|
|
48,630 |
|
|
|
102,006 |
|
|
|
92,270 |
|
|
Total interest expense |
|
|
289,070 |
|
|
|
259,708 |
|
|
|
568,464 |
|
|
|
480,815 |
|
|
Net interest income |
|
|
253,391 |
|
|
|
262,195 |
|
|
|
508,946 |
|
|
|
505,875 |
|
Provision for credit losses |
|
|
60,133 |
|
|
|
15,745 |
|
|
|
89,539 |
|
|
|
35,285 |
|
|
Net interest income after provision for credit losses |
|
|
193,258 |
|
|
|
246,450 |
|
|
|
419,407 |
|
|
|
470,590 |
|
|
Service charges on deposit accounts |
|
|
50,017 |
|
|
|
47,225 |
|
|
|
94,810 |
|
|
|
88,447 |
|
Trust services |
|
|
26,764 |
|
|
|
22,676 |
|
|
|
52,658 |
|
|
|
43,954 |
|
Brokerage and insurance income |
|
|
17,199 |
|
|
|
14,345 |
|
|
|
33,281 |
|
|
|
29,538 |
|
Other service charges and fees |
|
|
14,923 |
|
|
|
13,072 |
|
|
|
28,131 |
|
|
|
24,581 |
|
Bank owned life insurance income |
|
|
10,904 |
|
|
|
10,604 |
|
|
|
21,755 |
|
|
|
20,846 |
|
Mortgage banking income |
|
|
7,122 |
|
|
|
13,616 |
|
|
|
16,473 |
|
|
|
26,810 |
|
Securities losses |
|
|
(5,139 |
) |
|
|
(35 |
) |
|
|
(5,035 |
) |
|
|
(55 |
) |
Other income |
|
|
34,403 |
|
|
|
41,516 |
|
|
|
59,297 |
|
|
|
88,432 |
|
|
Total non-interest income |
|
|
156,193 |
|
|
|
163,019 |
|
|
|
301,370 |
|
|
|
322,553 |
|
|
Personnel costs |
|
|
135,191 |
|
|
|
137,904 |
|
|
|
269,830 |
|
|
|
269,461 |
|
Outside data processing and other services |
|
|
25,701 |
|
|
|
19,569 |
|
|
|
47,515 |
|
|
|
39,420 |
|
Net occupancy |
|
|
19,417 |
|
|
|
17,927 |
|
|
|
39,325 |
|
|
|
35,893 |
|
Equipment |
|
|
17,157 |
|
|
|
18,009 |
|
|
|
35,376 |
|
|
|
34,512 |
|
Marketing |
|
|
8,986 |
|
|
|
10,374 |
|
|
|
16,682 |
|
|
|
17,675 |
|
Professional services |
|
|
8,101 |
|
|
|
6,292 |
|
|
|
14,583 |
|
|
|
11,657 |
|
Telecommunications |
|
|
4,577 |
|
|
|
4,990 |
|
|
|
8,703 |
|
|
|
9,815 |
|
Printing and supplies |
|
|
3,672 |
|
|
|
3,764 |
|
|
|
6,914 |
|
|
|
6,838 |
|
Amortization of intangibles |
|
|
2,519 |
|
|
|
2,992 |
|
|
|
5,039 |
|
|
|
4,067 |
|
Other expense |
|
|
19,334 |
|
|
|
30,538 |
|
|
|
42,760 |
|
|
|
61,436 |
|
|
Total non-interest expense |
|
|
244,655 |
|
|
|
252,359 |
|
|
|
486,727 |
|
|
|
490,774 |
|
|
Income before income taxes |
|
|
104,796 |
|
|
|
157,110 |
|
|
|
234,050 |
|
|
|
302,369 |
|
Provision for income taxes |
|
|
24,275 |
|
|
|
45,506 |
|
|
|
57,803 |
|
|
|
86,309 |
|
|
Net income |
|
$ |
80,521 |
|
|
$ |
111,604 |
|
|
$ |
176,247 |
|
|
$ |
216,060 |
|
|
|
Average common shares basic |
|
|
236,032 |
|
|
|
241,729 |
|
|
|
235,809 |
|
|
|
236,349 |
|
Average common shares diluted |
|
|
239,008 |
|
|
|
244,538 |
|
|
|
238,881 |
|
|
|
239,451 |
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic |
|
$ |
0.34 |
|
|
$ |
0.46 |
|
|
$ |
0.75 |
|
|
$ |
0.91 |
|
Net income diluted |
|
|
0.34 |
|
|
|
0.46 |
|
|
|
0.74 |
|
|
|
0.90 |
|
Cash dividends declared |
|
|
0.265 |
|
|
|
0.250 |
|
|
|
0.530 |
|
|
|
0.500 |
|
See notes to unaudited condensed consolidated financial statements
4
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
Preferred Stock |
|
Common Stock |
|
Capital |
|
|
Treasury Stock |
|
Comprehensive |
|
|
Retained |
|
|
|
(in thousands) |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Surplus |
|
|
Shares |
|
|
Amount |
|
|
Loss |
|
|
Earnings |
|
|
Total |
|
Six Months Ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
|
|
|
$ |
|
|
|
|
257,866 |
|
|
$ |
2,491,326 |
|
|
$ |
|
|
|
|
(33,760 |
) |
|
$ |
(693,576 |
) |
|
$ |
(22,093 |
) |
|
$ |
781,844 |
|
|
$ |
2,557,501 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,060 |
|
|
|
216,060 |
|
Unrealized net losses on investment securities
arising during the period, net of reclassification (1)
for net realized losses, net of tax of ($19,461). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,707 |
) |
|
|
|
|
|
|
(35,707 |
) |
Unrealized gains on cash flow hedging derivatives,
net of tax of $7,382. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,709 |
|
|
|
|
|
|
|
13,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle
for servicing financial assets, net of tax of $6,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,110 |
|
|
|
12,110 |
|
Cash dividends declared ($0.50 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121,103 |
) |
|
|
(121,103 |
) |
Shares issued pursuant to acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,366 |
|
|
|
|
|
|
|
25,350 |
|
|
|
522,390 |
|
|
|
|
|
|
|
|
|
|
|
575,756 |
|
Recognition of the fair value of share-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,547 |
|
Treasury shares purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,931 |
) |
|
|
(303,943 |
) |
|
|
|
|
|
|
|
|
|
|
(303,943 |
) |
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,196 |
) |
|
|
|
|
|
|
880 |
|
|
|
18,445 |
|
|
|
|
|
|
|
|
|
|
|
17,249 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
(44 |
) |
|
|
(1,074 |
) |
|
|
|
|
|
|
|
|
|
|
(1,023 |
) |
|
|
Balance, end of period |
|
|
|
|
|
|
|
|
|
|
257,866 |
|
|
|
2,552,094 |
|
|
|
|
|
|
|
(20,505 |
) |
|
|
(457,758 |
) |
|
|
(44,091 |
) |
|
|
888,911 |
|
|
|
2,939,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
|
|
|
|
|
|
|
|
257,866 |
|
|
|
2,560,569 |
|
|
|
|
|
|
|
(22,392 |
) |
|
|
(506,946 |
) |
|
|
(55,066 |
) |
|
|
1,015,769 |
|
|
|
3,014,326 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,247 |
|
|
|
176,247 |
|
Unrealized net losses on investment securities
arising during the period, net of reclassification (1)
for net realized gains, net of tax of ($30,423) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,497 |
) |
|
|
|
|
|
|
(31,497 |
) |
Unrealized gains on cash flow hedging derivatives,
net of tax of $619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,150 |
|
|
|
|
|
|
|
1,150 |
|
Amortization included in net periodic benefit costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss, net of tax of ($2,188) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,063 |
|
|
|
|
|
|
|
4,063 |
|
Prior service costs, net of tax of ($108) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
200 |
|
Transition obligation, net of tax of ($194) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assignment of $0.01 par value per share for each
share of Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,557,990 |
) |
|
|
2,557,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.53 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,216 |
) |
|
|
(125,216 |
) |
Recognition of the fair value of share-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,816 |
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,851 |
) |
|
|
881 |
|
|
|
19,911 |
|
|
|
|
|
|
|
|
|
|
|
17,060 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,230 |
|
|
|
(111 |
) |
|
|
(2,598 |
) |
|
|
|
|
|
|
|
|
|
|
(368 |
) |
|
|
Balance, end of period |
|
|
|
|
|
$ |
|
|
|
|
257,866 |
|
|
$ |
2,579 |
|
|
$ |
2,565,185 |
|
|
|
(21,622 |
) |
|
$ |
(489,633 |
) |
|
$ |
(80,790 |
) |
|
$ |
1,066,800 |
|
|
$ |
3,064,141 |
|
|
|
|
|
(1) |
|
Reclassification adjustments represent net unrealized gains or losses as of
December 31 of the prior year on investment securities that were
sold during the current year. For the six months ended June 30, 2007 and 2006, the reclassification adjustments were $5,035,
net of tax of ($1,762), and $55, net of tax of ($19), respectively. |
See notes to unaudited condensed consolidated financial statements.
5
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
(in thousands) |
|
2007 |
|
2006 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
176,247 |
|
|
$ |
216,060 |
|
Adjustments to reconcile net income to net cash provided by operating activites: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
89,539 |
|
|
|
35,285 |
|
Depreciation and amortization |
|
|
41,280 |
|
|
|
61,345 |
|
Increase in accrued income taxes |
|
|
51,460 |
|
|
|
9,085 |
|
Deferred income tax benefit |
|
|
(111,297 |
) |
|
|
(123,830 |
) |
Net increase in trading account securities |
|
|
(583,780 |
) |
|
|
(27,290 |
) |
Pension contribution |
|
|
|
|
|
|
(29,800 |
) |
Originations of loans held for sale |
|
|
(1,280,343 |
) |
|
|
(1,318,453 |
) |
Principal payments on and proceeds from loans held for sale |
|
|
1,185,067 |
|
|
|
1,313,926 |
|
Other, net |
|
|
(51,260 |
) |
|
|
(233,826 |
) |
|
Net cash provided by operating activities |
|
|
(483,087 |
) |
|
|
(97,498 |
) |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Increase in interest bearing deposits in banks |
|
|
(123,345 |
) |
|
|
(12,089 |
) |
Net cash received in acquisitions |
|
|
|
|
|
|
66,507 |
|
Proceeds from: |
|
|
|
|
|
|
|
|
Maturities and calls of investment securities |
|
|
242,945 |
|
|
|
241,871 |
|
Sales of investment securities |
|
|
550,070 |
|
|
|
376,263 |
|
Purchases of investment securities |
|
|
(340,837 |
) |
|
|
(1,024,048 |
) |
Proceeds from sales of loans |
|
|
108,588 |
|
|
|
|
|
Net loan and lease originations, excluding sales |
|
|
(817,197 |
) |
|
|
(246,265 |
) |
Proceeds from sale of operating lease assets |
|
|
23,031 |
|
|
|
82,139 |
|
Purchases of premises and equipment |
|
|
(53,029 |
) |
|
|
(12,645 |
) |
Other, net |
|
|
6,989 |
|
|
|
(67 |
) |
|
Net cash used for investing activities |
|
|
(402,785 |
) |
|
|
(528,334 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
(Decrease) increase in deposits |
|
|
(442,428 |
) |
|
|
495,827 |
|
Increase in short-term borrowings |
|
|
1,184,750 |
|
|
|
157,532 |
|
Proceeds from issuance of subordinated notes |
|
|
250,010 |
|
|
|
250,000 |
|
Proceeds from Federal Home Loan Bank advances |
|
|
850,600 |
|
|
|
2,162,050 |
|
Maturity/redemption of Federal Home Loan Bank advances |
|
|
(450,023 |
) |
|
|
(2,148,969 |
) |
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
935,000 |
|
Maturity of long-term debt |
|
|
(240,099 |
) |
|
|
(635,549 |
) |
Dividends paid on common stock |
|
|
(124,003 |
) |
|
|
(103,096 |
) |
Repurchases of common stock |
|
|
|
|
|
|
(303,943 |
) |
Other, net |
|
|
12,275 |
|
|
|
17,917 |
|
|
Net cash provided by financing activities |
|
|
1,041,082 |
|
|
|
826,769 |
|
|
Increase in cash and cash equivalents |
|
|
155,210 |
|
|
|
200,937 |
|
Cash and cash equivalents at beginning of period |
|
|
1,520,747 |
|
|
|
1,040,776 |
|
|
Cash and cash equivalents at end of period |
|
$ |
1,675,957 |
|
|
$ |
1,241,713 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
169,822 |
|
|
$ |
194,505 |
|
Interest paid |
|
|
580,982 |
|
|
|
463,979 |
|
Non-cash activities |
|
|
|
|
|
|
|
|
Common stock dividends accrued, paid in subsequent quarter |
|
|
48,484 |
|
|
|
46,884 |
|
Common stock and stock options issued for purchase acquisition |
|
|
|
|
|
|
575,756 |
|
See notes to unaudited condensed consolidated financial statements.
6
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Huntington
Bancshares Incorporated (Huntington or the Company) reflect all adjustments consisting of normal
recurring accruals, which are, in the opinion of Management, necessary for a fair presentation of
the consolidated financial position, the results of operations, and cash flows for the periods
presented. These unaudited condensed consolidated financial statements have been prepared
according to the rules and regulations of the Securities and Exchange Commission (SEC) and,
therefore, certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States (GAAP)
have been omitted. The Notes to Consolidated Financial Statements appearing in Huntingtons 2006
Annual Report on Form 10-K, (2006 Form 10-K), which include descriptions of significant accounting
policies, as updated by the information contained in this report, should be read in conjunction
with these interim financial statements.
On July 1, 2007, Huntington acquired Sky Financial Group, Inc. Accordingly, the balances
presented do not include the impact of the acquisition. See Note 3 for information regarding the
acquisition.
Certain amounts in the prior-years financial statements have been reclassified to conform to
the 2007 presentation.
For statement of cash flows purposes, cash and cash equivalents are defined as the sum of
Cash and due from banks and Federal funds sold and securities purchased under resale
agreements.
Note 2 New Accounting Pronouncements
Financial Accounting Standards Board (FASB) Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106,
and 132R (Statement No. 158) In September 2006, the FASB issued Statement No. 158, as an
amendment to FASB Statements No. 87, 88, 106, and 132R. Statement No. 158 requires an employer to
recognize in its statement of financial position the funded status of its defined benefit plans and
to recognize as a component of other comprehensive income, net of tax, any unrecognized transition
obligations and assets, the actuarial gains and losses, and prior service costs and credits that
arise during the period. The recognition provisions of Statement No. 158 are to be applied
prospectively and were effective for fiscal years ending after December 15, 2006. In addition,
Statement No. 158 requires a fiscal year end measurement of plan assets and benefit obligations,
eliminating the use of earlier measurement dates currently permissible. However, the new
measurement date requirement will not be effective until fiscal years ended after December 15,
2008. Currently, Huntington utilizes a measurement date of September 30th. The adoption of
Statement No. 158 as of December 31, 2006 resulted in a write-down of its pension asset by $125.1
million, and decreased accumulated other comprehensive income by $83.0 million, net of taxes.
FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes In July 2006, the
FASB issued FIN 48, Accounting for Uncertainty in Income Taxes. This Interpretation of FASB
Statement No. 109, Accounting for Income Taxes, contains guidance on the recognition and
measurement of uncertain tax positions. Huntington adopted FIN 48 on January 1, 2007. Huntington
recognizes the impact of a tax position if it is more likely than not that it will be sustained
upon examination, based upon the technical merits of the position. The impact of this new
pronouncement was not material to Huntingtons financial statements (See Note 9).
FASB Statement No. 157, Fair Value Measurements (Statement No. 157) In September 2006, the FASB
issued Statement No. 157. This Statement establishes a common definition for fair value to be
applied to GAAP guidance requiring use of fair value, establishes a framework for measuring fair
value, and expands disclosure about such fair value measurements. Statement No. 157 is effective
for fiscal years beginning after November 15, 2007. Management is currently assessing the impact
this Statement will have on its consolidated financial statements.
7
FASB
Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(Statement No. 159) In February 2007, the FASB issued Statement No. 159. This Statement permits
entities to choose to measure financial instruments and certain other financial assets and
financial liabilities at fair value. This Statement is effective for fiscal years beginning after
November 15, 2007. Management is currently assessing the impact this Statement will have on its
consolidated financial statements.
Note 3 Acquisition of Sky Financial Group, Inc.
On July 1, 2007, Huntington completed its merger with Sky Financial Group, Inc. (Sky
Financial) in a stock and cash transaction valued at $3.5 billion. Sky Financial operated over 330
banking offices and over 400 ATMs and served communities in Ohio, Pennsylvania, Indiana, Michigan,
and West Virginia.
Under the terms of the merger agreement, Sky Financial shareholders received 1.098 shares of
Huntington common stock, on a tax-free basis, and a cash payment of $3.023 for each share of Sky
Financial common stock. The assets and liabilities of the acquired entity were recorded on the
Companys balance sheet at their fair values as of the acquisition date.
The following table shows the excess purchase price over carrying value of net assets
acquired, preliminary purchase price allocation, and resulting goodwill:
|
|
|
|
|
(in thousands) |
|
July 1, 2007 |
|
Purchase price |
|
$ |
3,519,213 |
|
Carrying value of net assets acquired |
|
|
(1,111,393 |
) |
|
Excess of purchase price over carrying value of net assets acquired |
|
|
2,407,820 |
|
|
|
|
|
|
Purchase accounting adjustments: |
|
|
|
|
Loans and leases |
|
|
120,245 |
|
Accrued income and other assets |
|
|
(33,789 |
) |
Deposits |
|
|
(13,057 |
) |
Other borrowings |
|
|
4,267 |
|
Deferred federal income tax liability |
|
|
89,987 |
|
Accrued expenses and other liabilities |
|
|
73,819 |
|
|
Goodwill and other intangible assets |
|
|
2,649,292 |
|
Less other intangible assets: |
|
|
|
|
Core deposit intangible |
|
|
(357,000 |
) |
Other identifiable intangible assets |
|
|
(115,000 |
) |
|
Other intangible assets |
|
|
(472,000 |
) |
|
Goodwill |
|
$ |
2,177,292 |
|
|
Of the $2.6 billion of acquired intangible assets, $0.4 billion was assigned to core deposit
intangible, and $0.1 billion was assigned to customer relationship intangibles. The core deposit
and other identifiable intangible assets have useful lives ranging from 10 to 15 years.
The cost to acquire Sky Financial has been allocated to the identifiable tangible and
intangible assets acquired and liabilities assumed based on preliminary estimated fair values. The
allocation of the purchase price is subject to changes in the estimated fair values of assets
acquired and liabilities assumed as additional information becomes available and plans are
finalized. As such, it is not currently possible to report goodwill by segment.
8
The following table summarizes the estimated fair value of the net assets acquired on July 1,
2007 related to the acquisition of Sky Financial:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
July 1, 2007 |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Loans held for sale |
|
$ |
81,188 |
|
|
|
|
|
Securities and other earning assets |
|
|
852,209 |
|
|
|
|
|
Loans and leases |
|
|
13,049,217 |
|
|
|
|
|
Goodwill and other intangible assets |
|
|
2,649,292 |
|
|
|
|
|
Accrued income and other assets |
|
|
822,247 |
|
|
|
|
|
|
Total assets |
|
|
17,454,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
|
12,850,629 |
|
|
|
|
|
Borrowings |
|
|
866,175 |
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
218,136 |
|
|
|
|
|
|
Total liabilities |
|
|
13,934,940 |
|
|
|
|
|
|
Purchase price |
|
$ |
3,519,213 |
|
|
|
|
|
|
Note 4 Goodwill and Other Intangible Assets
Goodwill by line of business as of June 30, 2007, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional |
|
Dealer |
|
|
|
|
|
Treasury/ |
|
Huntington |
(in thousands) |
|
Banking |
|
Sales |
|
PFCMG |
|
Other |
|
Consolidated |
|
Balance, January 1, 2007 |
|
$ |
535,855 |
|
|
$ |
|
|
|
$ |
35,021 |
|
|
$ |
|
|
|
$ |
570,876 |
|
Adjustments |
|
|
209 |
|
|
|
|
|
|
|
(1,347 |
) |
|
|
|
|
|
|
(1,138 |
) |
|
Balance, June 30, 2007 |
|
$ |
536,064 |
|
|
$ |
|
|
|
$ |
33,674 |
|
|
$ |
|
|
|
$ |
569,738 |
|
|
The change in goodwill for the six month period ended June 30, 2007, primarily related to
purchase accounting adjustments from the December 31, 2006 acquisition of Unified Fund Services,
Inc. and Unified Financial Securities, Inc. In accordance with FASB Statement No. 142, Goodwill
and Other Intangible Assets, goodwill is not amortized, but is evaluated for impairment on an
annual basis at September 30th of each year or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
9
At June 30, 2007, December 31, 2006 and June 30, 2006, Huntingtons other intangible assets
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Accumulated |
|
Net |
(in thousands) |
|
Carrying Amount |
|
Amortization |
|
Carrying Value |
June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold purchased |
|
$ |
23,655 |
|
|
$ |
(20,038 |
) |
|
$ |
3,617 |
|
Core deposit intangible |
|
|
45,000 |
|
|
|
(11,230 |
) |
|
|
33,770 |
|
Borrower relationship |
|
|
6,570 |
|
|
|
(730 |
) |
|
|
5,840 |
|
Trust customers |
|
|
11,430 |
|
|
|
(1,317 |
) |
|
|
10,113 |
|
Other |
|
|
1,437 |
|
|
|
(131 |
) |
|
|
1,306 |
|
|
|
|
Total other intangible assets |
|
$ |
88,092 |
|
|
$ |
(33,446 |
) |
|
$ |
54,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold purchased |
|
$ |
23,655 |
|
|
$ |
(19,631 |
) |
|
$ |
4,024 |
|
Core deposit intangible |
|
|
45,000 |
|
|
|
(7,525 |
) |
|
|
37,475 |
|
Borrower relationship |
|
|
6,570 |
|
|
|
(456 |
) |
|
|
6,114 |
|
Trust customers |
|
|
11,430 |
|
|
|
(796 |
) |
|
|
10,634 |
|
Other |
|
|
1,622 |
|
|
|
(382 |
) |
|
|
1,240 |
|
|
|
|
Total other intangible assets |
|
$ |
88,277 |
|
|
$ |
(28,790 |
) |
|
$ |
59,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold purchased |
|
$ |
23,655 |
|
|
$ |
(19,224 |
) |
|
$ |
4,431 |
|
Core deposit intangible |
|
|
45,000 |
|
|
|
(3,010 |
) |
|
|
41,990 |
|
Borrower relationship |
|
|
6,570 |
|
|
|
(182 |
) |
|
|
6,388 |
|
Trust customers |
|
|
11,430 |
|
|
|
(327 |
) |
|
|
11,103 |
|
Other |
|
|
382 |
|
|
|
(153 |
) |
|
|
229 |
|
|
|
|
Total other intangible assets |
|
$ |
87,037 |
|
|
$ |
(22,896 |
) |
|
$ |
64,141 |
|
|
Amortization expense of other intangible assets for the three month periods ended June 30,
2007 and 2006, was $2.5 million and $3.0 million, respectively. Amortization expense of other
intangible assets for the six month periods ended June 30, 2007 and 2006 was $5.0 million and $4.0
million, respectively
Excluding the estimated amount that will be acquired with the acquisition of Sky Financial,
the estimated amortization expense of other intangible assets for the remainder of 2007 and the
next five annual years are as follows:
|
|
|
|
|
|
|
Amortization |
(in thousands) |
|
Expense |
|
Fiscal year: |
|
|
|
|
2007 |
|
$ |
5,038 |
|
2008 |
|
|
8,888 |
|
2009 |
|
|
7,957 |
|
2010 |
|
|
7,132 |
|
2011 |
|
|
6,333 |
|
2012 |
|
|
4,982 |
|
10
Note 5 Loan Sales and Securitizations
Automobile loans
Huntington sold $117.9 million and $218.4 million of automobile loans in the second quarter of
2007 and 2006, respectively, resulting in pre-tax gains of $0.9 million and $0.5 million, respectively. For the
six month periods ended June 30, 2007 and 2006, sales of automobile loans totaled $259.2 million
and $388.2 million, respectively, resulting in pre-tax gains of $2.1 million and $1.0 million, respectively.
Automobile loan servicing rights are acccounted for under the amortization provision of FASB
Statement No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement
No. 140. A servicing asset is established at fair value at the time of the sale. 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 the payoff rate 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 become impaired.
Changes in the carrying value of automobile loan servicing rights for the three and six month
periods ended June 30, 2007 and 2006, and the fair value at the end of each period were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(in thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Carrying value, beginning of period |
|
$ |
7,186 |
|
|
$ |
9,610 |
|
|
$ |
7,916 |
|
|
$ |
10,805 |
|
New servicing assets |
|
|
874 |
|
|
|
1,364 |
|
|
|
1,900 |
|
|
|
2,362 |
|
Amortization |
|
|
(1,781 |
) |
|
|
(1,989 |
) |
|
|
(3,537 |
) |
|
|
(4,182 |
) |
|
|
|
Carrying value, end of period |
|
$ |
6,279 |
|
|
$ |
8,985 |
|
|
$ |
6,279 |
|
|
$ |
8,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
7,205 |
|
|
$ |
10,486 |
|
|
$ |
7,205 |
|
|
$ |
10,486 |
|
|
|
|
Huntington has retained servicing responsibilities on sold automobile loans and receives
annual servicing fees from 0.55% to 1.00% and other ancillary fees of approximately 0.40% to 0.45%
of the outstanding loan balances. Servicing income, net of amortization of capitalized servicing
assets, amounted to $3.3 million and $3.4 million for the three month periods ended June 30, 2007
and 2006, respectively. For the six month periods ended June 30, 2007 and 2006, servicing income
was $6.4 million and $6.8 million, respectively.
Residential Mortgage Loans
During the first quarter of 2007, Huntington sold $109.5 million of residential mortgage loans
held for investment, resulting in a net pre-tax gain of $0.5 million. There were no sales of
residential mortgage loans held for investment in the second quarter of 2007 or the first six
months of 2006.
11
The following table is a summary of the changes in mortgage servicing right (MSR) fair value
during the three and six month periods ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(in thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Fair value, beginning of period |
|
$ |
134,845 |
|
|
|
123,257 |
|
|
|
131,104 |
|
|
|
109,890 |
|
New servicing assets created |
|
|
8,990 |
|
|
|
7,434 |
|
|
|
17,426 |
|
|
|
13,211 |
|
Servicing assets acquired |
|
|
|
|
|
|
565 |
|
|
|
|
|
|
|
2,474 |
|
Change in fair value during the period due to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time decay (1) |
|
|
(1,123 |
) |
|
|
(1,062 |
) |
|
|
(2,199 |
) |
|
|
(1,985 |
) |
Payoffs (2) |
|
|
(3,326 |
) |
|
|
(2,231 |
) |
|
|
(5,888 |
) |
|
|
(4,840 |
) |
Changes in valuation inputs or assumptions (3) |
|
|
16,034 |
|
|
|
8,281 |
|
|
|
14,977 |
|
|
|
17,494 |
|
|
|
|
Fair value, end of period |
|
$ |
155,420 |
|
|
$ |
136,244 |
|
|
$ |
155,420 |
|
|
$ |
136,244 |
|
|
|
|
|
|
|
(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. |
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 June 30, 2007 to changes
in these assumptions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decline in fair value |
|
|
|
|
|
|
due to |
|
|
|
|
|
|
10% |
|
20% |
|
|
|
|
|
|
adverse |
|
adverse |
(in thousands) |
|
Actual |
|
change |
|
change |
Constant pre-payment rate |
|
|
10.95 |
% |
|
$ |
(6,383 |
) |
|
$ |
(12,292 |
) |
Discount rate |
|
|
9.39 |
|
|
|
(6,074 |
) |
|
|
(11,700 |
) |
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.
Below is a summary of servicing fee income, a component of mortgage banking income, earned
during the three and six month periods ended June 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(in thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
Servicing fees |
|
$ |
6,976 |
|
|
$ |
5,995 |
|
|
$ |
13,796 |
|
|
$ |
11,920 |
|
Late fees |
|
|
640 |
|
|
|
551 |
|
|
|
1,348 |
|
|
|
1,161 |
|
Ancillary fees |
|
|
273 |
|
|
|
89 |
|
|
|
528 |
|
|
|
341 |
|
|
|
|
Total fee income |
|
$ |
7,889 |
|
|
$ |
6,635 |
|
|
$ |
15,672 |
|
|
$ |
13,422 |
|
|
|
|
12
Note 6 Investment Securities
Listed below are the contractual maturities (under 1 year, 1-5 years, 6-10 years and over 10
years) of investment
securities at June 30, 2007, December 31, 2006, and June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
December 31, 2006 |
|
June 30, 2006 |
|
|
Amortized |
|
|
|
|
|
Amortized |
|
|
|
|
|
Amortized |
|
|
(in thousands) |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
U.S. Treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
$ |
200 |
|
|
$ |
201 |
|
|
$ |
800 |
|
|
$ |
800 |
|
|
$ |
699 |
|
|
$ |
704 |
|
1-5 years |
|
|
548 |
|
|
|
546 |
|
|
|
1,046 |
|
|
|
1,056 |
|
|
|
21,924 |
|
|
|
21,083 |
|
6-10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
504 |
|
|
|
522 |
|
Over 10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Treasury |
|
|
748 |
|
|
|
747 |
|
|
|
1,846 |
|
|
|
1,856 |
|
|
|
23,127 |
|
|
|
22,309 |
|
|
Federal agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
2,896 |
|
|
|
2,888 |
|
|
|
1,848 |
|
|
|
1,847 |
|
|
|
350 |
|
|
|
347 |
|
1-5 years |
|
|
11,110 |
|
|
|
11,105 |
|
|
|
9,560 |
|
|
|
9,608 |
|
|
|
32,033 |
|
|
|
30,619 |
|
6-10 years |
|
|
3,501 |
|
|
|
3,476 |
|
|
|
4,353 |
|
|
|
4,355 |
|
|
|
549 |
|
|
|
519 |
|
Over 10 years |
|
|
1,181,589 |
|
|
|
1,176,050 |
|
|
|
1,261,423 |
|
|
|
1,265,651 |
|
|
|
1,252,384 |
|
|
|
1,194,850 |
|
|
Total mortgage-backed Federal agencies |
|
|
1,199,096 |
|
|
|
1,193,519 |
|
|
|
1,277,184 |
|
|
|
1,281,461 |
|
|
|
1,285,316 |
|
|
|
1,226,335 |
|
|
Other agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
99,751 |
|
|
|
99,531 |
|
|
|
|
|
|
|
|
|
|
|
45,000 |
|
|
|
44,284 |
|
1-5 years |
|
|
49,668 |
|
|
|
49,357 |
|
|
|
149,819 |
|
|
|
149,853 |
|
|
|
249,604 |
|
|
|
237,742 |
|
6-10 years |
|
|
|
|
|
|
|
|
|
|
98 |
|
|
|
96 |
|
|
|
50,000 |
|
|
|
45,922 |
|
Over 10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other Federal agencies |
|
|
149,419 |
|
|
|
148,888 |
|
|
|
149,917 |
|
|
|
149,949 |
|
|
|
344,604 |
|
|
|
327,948 |
|
|
Total Federal agencies |
|
|
1,348,515 |
|
|
|
1,342,407 |
|
|
|
1,427,101 |
|
|
|
1,431,410 |
|
|
|
1,629,920 |
|
|
|
1,554,283 |
|
|
Municipal securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
45 |
|
|
|
45 |
|
|
|
42 |
|
|
|
42 |
|
|
|
42 |
|
|
|
42 |
|
1-5 years |
|
|
9,650 |
|
|
|
9,541 |
|
|
|
10,553 |
|
|
|
10,588 |
|
|
|
103 |
|
|
|
103 |
|
6-10 years |
|
|
168,481 |
|
|
|
165,195 |
|
|
|
165,624 |
|
|
|
165,229 |
|
|
|
154,360 |
|
|
|
150,215 |
|
Over 10 years |
|
|
503,199 |
|
|
|
496,378 |
|
|
|
410,248 |
|
|
|
415,564 |
|
|
|
430,118 |
|
|
|
421,243 |
|
|
Total municipal securities |
|
|
681,375 |
|
|
|
671,159 |
|
|
|
586,467 |
|
|
|
591,423 |
|
|
|
584,623 |
|
|
|
571,603 |
|
|
Private label CMO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6-10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 10 years |
|
|
727,026 |
|
|
|
723,515 |
|
|
|
586,088 |
|
|
|
590,062 |
|
|
|
749,019 |
|
|
|
731,031 |
|
|
Total private label CMO |
|
|
727,026 |
|
|
|
723,515 |
|
|
|
586,088 |
|
|
|
590,062 |
|
|
|
749,019 |
|
|
|
731,031 |
|
|
Asset backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 years |
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,056 |
|
|
|
30,000 |
|
|
|
30,000 |
|
6-10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 10 years |
|
|
933,778 |
|
|
|
926,599 |
|
|
|
1,544,572 |
|
|
|
1,552,748 |
|
|
|
1,949,008 |
|
|
|
1,948,538 |
|
|
Total asset backed securities |
|
|
963,778 |
|
|
|
956,599 |
|
|
|
1,574,572 |
|
|
|
1,582,804 |
|
|
|
1,979,008 |
|
|
|
1,978,538 |
|
|
Other
Under 1 year |
|
|
5,600 |
|
|
|
5,594 |
|
|
|
4,800 |
|
|
|
4,784 |
|
|
|
1,900 |
|
|
|
1,900 |
|
1-5 years |
|
|
2,747 |
|
|
|
2,736 |
|
|
|
2,750 |
|
|
|
2,706 |
|
|
|
8,795 |
|
|
|
8,780 |
|
6-10 years |
|
|
844 |
|
|
|
833 |
|
|
|
|
|
|
|
|
|
|
|
1,050 |
|
|
|
985 |
|
Over 10 years |
|
|
44 |
|
|
|
86 |
|
|
|
44 |
|
|
|
86 |
|
|
|
44 |
|
|
|
43 |
|
Non-marketable equity securities |
|
|
152,071 |
|
|
|
152,071 |
|
|
|
150,754 |
|
|
|
150,754 |
|
|
|
146,957 |
|
|
|
146,957 |
|
Marketable equity securities |
|
|
7,053 |
|
|
|
7,435 |
|
|
|
6,481 |
|
|
|
7,039 |
|
|
|
108,025 |
|
|
|
108,253 |
|
|
Total other |
|
|
168,359 |
|
|
|
168,755 |
|
|
|
164,829 |
|
|
|
165,369 |
|
|
|
266,771 |
|
|
|
266,918 |
|
|
Total investment securities |
|
$ |
3,889,801 |
|
|
$ |
3,863,182 |
|
|
$ |
4,340,903 |
|
|
$ |
4,362,924 |
|
|
$ |
5,232,468 |
|
|
$ |
5,124,682 |
|
|
Duration in years (1) |
|
|
|
|
|
|
3.8 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
3.0 |
|
|
|
|
|
(1) |
|
The average duration assumes a market driven pre-payment rate on securities subject
to pre-payment. |
13
At June 30, 2007, non-marketable equity securities includes $123.0 million of stock of
the Federal Home Loan Bank of Cincinnati and $29.1 million of stock of the Federal Reserve Bank.
Gross losses on securities totaled $5.1 million for the three months ended June 30, 2007. For
the six months ended June 30, 2007, gross gains on securities totaled $5.0 million and gross losses
totaled $10.0 million. Gross losses for the six months ended June 30, 2007 included $8.4 million
of impairment losses on certain securities backed by mortgage loans to borrowers with low FICO
scores. Including impairment recognized since the fourth quarter of 2006, at June 30, 2007, these
securities had a carrying value of $9.3 million. Gross gains and losses from the sales of
securities were not material for the three or six month periods ended June 30, 2006.
As of June 30, 2007, Management has evaluated all other investment securities with unrealized
losses and all non-marketable securities for impairment. The unrealized losses were caused by
interest rate increases and other market related conditions. 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 has the intent and ability to hold these investment securities until the
fair value is recovered, which may be maturity, and therefore, does not consider them to be
other-than-temporarily impaired at June 30, 2007.
Note 7 Earnings per Share
Basic earnings per share is the amount of earnings available to each share of common stock
outstanding during the reporting period. Diluted earnings per share is the amount of earnings
available to each share of common stock outstanding during the reporting period adjusted to include
the effect of potentially dilutive common shares. Potentially dilutive common shares include
incremental shares issued upon exercise of outstanding stock options, the vesting of restricted
stock units, and the distribution of shares from deferred compensation plans. The calculation of
basic and diluted earnings per share for the three and six month periods ended June 30, 2007 and
2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(in thousands, except per share amounts) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Net income |
|
$ |
80,521 |
|
|
$ |
111,604 |
|
|
$ |
176,247 |
|
|
$ |
216,060 |
|
Average common shares outstanding |
|
|
236,032 |
|
|
|
241,729 |
|
|
|
235,809 |
|
|
|
236,349 |
|
Dilutive potential common shares |
|
|
2,976 |
|
|
|
2,809 |
|
|
|
3,072 |
|
|
|
3,102 |
|
|
|
|
Diluted average common shares outstanding |
|
|
239,008 |
|
|
|
244,538 |
|
|
|
238,881 |
|
|
|
239,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
$ |
0.46 |
|
|
$ |
0.75 |
|
|
$ |
0.91 |
|
Diluted |
|
|
0.34 |
|
|
|
0.46 |
|
|
|
0.74 |
|
|
|
0.90 |
|
Options to purchase 9.4 million shares during the three month and six month periods ended
June 30, 2007 and 5.6 million shares during the three month and six month periods ended June 30,
2006, respectively, were outstanding but 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 $24.60 and $24.61 per share and $25.68 and $25.67 per share for the three and six month
periods ended June 30, 2007 and 2006, respectively.
Note 8 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. Stock options are granted at the market price on the date of the grant. Options vest
ratably over three years or when other conditions are met. Options granted prior to May 2004 have a
maximum term of ten years. All options granted beginning in May 2004 have a maximum term of seven
years.
Beginning in 2006, Huntington began granting restricted stock units under the 2004 Stock and
Long-Term Incentive Plan. Restricted stock units are issued at no cost to the recipient, and can
be settled only in shares at the end of
the vesting period, subject to certain service restrictions. The fair value of the restricted
stock unit awards was based on the closing market price of the Companys common stock on the date
of award.
14
Huntingtons board of directors has approved all of the plans. Shareholders have approved each
of the plans, except for the broad-based Employee Stock Incentive Plan. Of the 28.8 million shares
of common stock authorized for issuance under the plans at June 30, 2007, 19.8 million were
outstanding and 9.0 million were available for future grants.
Huntington uses the Black-Scholes option-pricing model to value share-based compensation
expense. This model assumes that the estimated fair value of options is amortized over the options
vesting periods. Compensation costs are included in personnel costs on the consolidated statements
of income. 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 historical volatility of
Huntingtons stock. The expected term of options granted is derived from historical data on
employee exercises. The expected dividend yield is based on the dividend rate and stock price on
the date of the grant. The following table illustrates the weighted-average assumptions used in
the option-pricing model for options granted in each of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2007 |
|
2006 |
|
|
|
Assumptions |
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.57 |
% |
|
|
4.58 |
% |
Expected dividend yield |
|
|
4.45 |
|
|
|
4.20 |
|
Expected volatility of Huntingtons common stock |
|
|
21.1 |
|
|
|
22.2 |
|
Expected option term (years) |
|
|
6.0 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value per share |
|
$ |
3.75 |
|
|
$ |
4.23 |
|
Huntingtons stock option activity and related information for the six month period ended June
30, 2007, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
(in thousands, except per share amounts) |
|
Options |
|
|
Price |
|
|
Life (Years) |
|
|
Value |
|
|
Outstanding at January 1, 2007 |
|
|
20,573 |
|
|
$ |
21.36 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
18 |
|
|
|
23.71 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(947 |
) |
|
|
18.33 |
|
|
|
|
|
|
|
|
|
Forfeited/expired |
|
|
(342 |
) |
|
|
23.40 |
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
19,302 |
|
|
$ |
21.47 |
|
|
|
4.4 |
|
|
$ |
42,049 |
|
|
Exercisable at June 30, 2007 |
|
|
13,648 |
|
|
$ |
20.86 |
|
|
|
4.1 |
|
|
$ |
38,331 |
|
|
The aggregate intrinsic value represents the amount by which the fair value of underlying
stock exceeds the option exercise price. The total intrinsic value of stock options exercised
during the six month periods ended June 30, 2007 and 2006, was $4.1 million and $5.9 million,
respectively.
Total share-based compensation expense was $3.9 million and $4.3 million for the three month
periods ended June 30, 2007 and 2006, respectively. For the six month periods ended June 30, 2007
and 2006, share-based compensation expense was $7.8 million and $8.5 million, respectively.
Huntington also recognized $1.4 million and $1.5 million in tax benefits for the three months ended
June 30, 2007 and 2006, respectively, related to share-based compensation. The tax benefits
recognized related to share-based compensation for the six month periods ended June 30, 2007 and
2006 were $2.7 million and $3.0 million, respectively.
Cash received from the exercise of options for the three month periods ended June 30, 2007 and
2006 was $10.7 million and $5.8 million, respectively. For the six month periods ended June 30,
2007 and 2006, cash received from option exercises were $14.6 million and $15.2 million,
respectively. The tax benefit realized for the tax deductions from option exercises totaled $0.9
million for both the three month periods ended June 30, 2007 and 2006. For both of the six month
periods ended June 30, 2007 and 2006, the tax benefit realized for the tax deductions from option
exercises totaled $1.8 million.
15
Huntington issues shares to fulfill stock option exercises and restricted stock units from
available shares held in treasury. At June 30, 2007, the Company believes there are adequate
shares in treasury to satisfy anticipated stock option exercises in 2007.
The following table summarizes the status of Huntingtons restricted stock units as of and for
the six months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Restricted |
|
|
Grant Date |
|
|
|
Stock |
|
|
Fair Value |
|
(in thousands, except per share amounts) |
|
Units |
|
|
Per Share |
|
|
Nonvested at January 1, 2007 |
|
|
468 |
|
|
$ |
23.37 |
|
Granted |
|
|
5 |
|
|
|
23.62 |
|
Vested |
|
|
(6 |
) |
|
|
23.34 |
|
Forfeited |
|
|
(13 |
) |
|
|
23.34 |
|
|
Nonvested at June 30, 2007 |
|
|
454 |
|
|
$ |
23.38 |
|
|
As of June 30, 2007, the total compensation cost related to restricted stock units not yet
recognized was $7.0 million with a weighted-average expense recognition period of 2.1 years. The
total fair value of restricted stock units vested during the six months ended June 30, 2007, was
$0.1 million.
As a result of the acquisition of Sky Financial, the outstanding stock options to purchase
Sky Financials common stock were converted into 7.4 million options to purchase shares of
Huntington common stock with a weighted average exercise price of $18.40.
Note 9 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 resolved
through 2003. Various state and city jurisdictions remain open to examination for tax years 2000
and forward.
The Company adopted the provisions of FIN 48 on January 1, 2007. The implementation of FIN 48
did not impact the Companys financial statements. As of June 30, 2007, there were no unrecognized
tax benefits.
The Company recognizes interest and penalties on income tax assessments or income tax refunds
in the financial statements as a component of its provision for income taxes.
Note 10 Benefit Plans
Huntington sponsors the Huntington Bancshares Retirement Plan (the Plan), a non-contributory
defined benefit pension plan covering substantially all employees. 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.
In addition, Huntington has an unfunded, defined benefit post-retirement plan (Post-Retirement
Benefit Plan) that provides certain healthcare 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 employees number of months of service and are limited to the actual cost of coverage. Life
insurance benefits are a percentage of the employees base salary at the time of retirement, with a
maximum of $50,000 of coverage.
16
The following table shows the components of net periodic benefit expense of the Plan and the
Post-Retirement Benefit Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Post Retirement Benefits |
|
|
Three Months Ended |
|
Three Months Ended |
|
|
June 30, |
|
June 30, |
(in thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Service cost |
|
$ |
4,445 |
|
|
$ |
4,414 |
|
|
$ |
375 |
|
|
$ |
383 |
|
Interest cost |
|
|
5,966 |
|
|
|
5,539 |
|
|
|
667 |
|
|
|
565 |
|
Expected return on plan assets |
|
|
(9,120 |
) |
|
|
(8,319 |
) |
|
|
|
|
|
|
|
|
Amortization of transition asset |
|
|
2 |
|
|
|
|
|
|
|
276 |
|
|
|
276 |
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
95 |
|
Settlements |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss (gain) |
|
|
3,116 |
|
|
|
4,377 |
|
|
|
(122 |
) |
|
|
(181 |
) |
|
|
|
Benefit expense |
|
$ |
5,409 |
|
|
$ |
7,011 |
|
|
$ |
1,243 |
|
|
$ |
1,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Post Retirement Benefits |
|
|
Six Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(in thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Service cost |
|
$ |
8,890 |
|
|
$ |
8,723 |
|
|
$ |
749 |
|
|
$ |
720 |
|
Interest cost |
|
|
11,933 |
|
|
|
11,078 |
|
|
|
1,334 |
|
|
|
1,130 |
|
Expected return on plan assets |
|
|
(18,240 |
) |
|
|
(16,539 |
) |
|
|
|
|
|
|
|
|
Amortization of transition asset |
|
|
3 |
|
|
|
|
|
|
|
552 |
|
|
|
552 |
|
Amortization of prior service cost |
|
|
1 |
|
|
|
1 |
|
|
|
189 |
|
|
|
190 |
|
Settlements |
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss (gain) |
|
|
6,231 |
|
|
|
8,754 |
|
|
|
(203 |
) |
|
|
(362 |
) |
|
|
|
Benefit expense |
|
$ |
10,818 |
|
|
$ |
14,017 |
|
|
$ |
2,621 |
|
|
$ |
2,230 |
|
|
|
|
There is no required minimum contribution for 2007 to the Plan.
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 former officers and directors of Huntington and its subsidiaries with
defined pension benefits in excess of limits imposed by federal tax law. The cost of providing
these plans was $0.6 million for each of the three month periods ended June 30, 2007 and 2006,
respectively. For the respective six-month periods, the cost was $1.4 million and $1.3 million.
Huntington has a defined contribution plan that is available to eligible employees. Huntington
matches participant contributions dollar for dollar, up to the first 3% of base pay contributed to
the plan. The match is 50 cents for each dollar on the 4th and 5th percent of base pay contributed
to the plan. The cost of providing this plan was $2.7 million and $2.6 million for the three month
periods ended June 30, 2007 and 2006, respectively. For the respective six month periods, the cost
was $5.4 million and $5.1 million.
As a result of the acquisition of Sky Financial, Huntington will remeasure its pension and
post retirement plan assets and liabilities as of July 1, 2007.
17
Note 11 Commitments and Contingent Liabilities
Commitments to extend credit:
In the ordinary course of business, Huntington makes various commitments to extend credit that
are not reflected in the financial statements. The contract amounts of these financial agreements
at June 30, 2007, December 31, 2006, and June 30, 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(in millions) |
|
2007 |
|
2006 |
|
2006 |
|
Contract amount represents credit risk |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
4,602 |
|
|
$ |
4,416 |
|
|
$ |
4,021 |
|
Consumer |
|
|
3,491 |
|
|
|
3,374 |
|
|
|
3,595 |
|
Commercial real estate |
|
|
1,559 |
|
|
|
1,645 |
|
|
|
1,764 |
|
Standby letters of credit |
|
|
1,230 |
|
|
|
1,156 |
|
|
|
1,121 |
|
Commercial letters of credit |
|
|
48 |
|
|
|
54 |
|
|
|
54 |
|
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 customers 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 $3.8 million, $4.3 million, and $3.6 million at June 30, 2007, December
31, 2006, and June 30, 2006, respectively.
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
merchandise or cargo being traded normally secures these instruments.
Commitments to sell loans:
Huntington enters into forward contracts relating to its mortgage banking business. At June
30, 2007, December 31, 2006, and June 30, 2006, Huntington had commitments to sell residential real
estate loans of $484.5 million, $319.9 million, and $341.5 million, respectively. These contracts
mature in less than one year.
Litigation:
In the ordinary course of business, there are various legal proceedings pending against
Huntington and its subsidiaries. In the opinion of Management, the aggregate liabilities, if any,
arising from such proceedings are not expected to have a material adverse effect on Huntingtons
consolidated financial position.
18
Note 12 Derivative Financial Instruments
Derivatives used in Asset and Liability Management Activities
The following table presents the gross notional values of derivatives used in Huntingtons
Asset and Liability Management activities at June 30, 2007, identified by the underlying interest
rate-sensitive instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Cash Flow |
|
|
(in thousands ) |
|
Hedges |
|
Hedges |
|
Total |
|
Instruments associated with: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
615,000 |
|
|
$ |
315,000 |
|
|
|
930,000 |
|
Federal Home Loan Bank advances |
|
|
|
|
|
|
525,000 |
|
|
|
525,000 |
|
Subordinated notes |
|
|
750,000 |
|
|
|
|
|
|
|
750,000 |
|
Other long-term debt |
|
|
50,000 |
|
|
|
|
|
|
|
50,000 |
|
|
Total notional value at June 30, 2007 |
|
$ |
1,415,000 |
|
|
$ |
840,000 |
|
|
$ |
2,255,000 |
|
|
The following table presents additional information about the interest rate swaps used in
Huntingtons Asset and Liability Management activities at June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Weighted-Average |
|
|
Notional |
|
Maturity |
|
Fair |
|
Rate |
(in thousands ) |
|
Value |
|
(years) |
|
Value |
|
Receive |
|
Pay |
|
Liability conversion swaps
Receive fixed generic |
|
$ |
810,000 |
|
|
|
9.1 |
|
|
$ |
(34,481 |
) |
|
|
5.29 |
% |
|
|
5.57 |
% |
Receive fixed callable |
|
|
605,000 |
|
|
|
6.1 |
|
|
|
(18,942 |
) |
|
|
4.67 |
|
|
|
5.26 |
|
Pay fixed generic |
|
|
840,000 |
|
|
|
2.0 |
|
|
|
6,485 |
|
|
|
5.34 |
|
|
|
4.98 |
|
|
Total liability conversion swaps |
|
$ |
2,255,000 |
|
|
|
5.7 |
|
|
$ |
(46,938 |
) |
|
|
5.14 |
% |
|
|
5.27 |
% |
|
Interest rate caps used in Huntingtons Asset and Liability Management activities at June 30,
2007, are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Notional |
|
Maturity |
|
Fair |
|
Weighted-Average |
(in thousands ) |
|
Value |
|
(years) |
|
Value |
|
Strike Rate |
|
Interest rate caps purchased |
|
$ |
500,000 |
|
|
|
1.6 |
|
|
$ |
1,900 |
|
|
|
5.50 |
% |
|
These derivative financial instruments were entered into for the purpose of altering 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 amount resulted in a decrease to
net interest income of $0.5 million and $0.8 million for the three month periods ended June 30,
2007 and 2006, respectively. For the six month periods ended June 30, 2007 and 2006, the impact to
net interest income was a decrease of $0.2 million and $0.2 million, respectively.
Collateral agreements are regularly entered into as part of the underlying derivative
agreements with Huntingtons counterparties to mitigate the credit risk associated with
derivatives. At June 30, 2007, December 31, 2006
and June 30, 2006, aggregate credit risk associated with these derivatives, net of collateral
that has been pledged by the counterparty, was $17.2 million, $42.6 million and $31.1 million,
respectively. The credit risk associated with interest rate swaps is calculated after considering
master netting agreements.
During 2006, Huntington terminated certain interest rate swaps used to hedge the future expected
cash flows of certain FHLB advances and deferred these gains in accumulated other comprehensive
income. The deferred swap gains were being amortized into interest expense over the remaining
terms of the outstanding advances. During the second quarter of 2007, Huntington prepaid the FHLB
advances, and recognized a gain of $4.1 million, which represented the remaining unamortized
portion of the terminated swap gains.
19
Derivatives Used in Mortgage Banking Activities
The following is a summary of the derivative assets and liabilities that Huntington used in
its mortgage banking activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(in thousands) |
|
2007 |
|
2006 |
|
2006 |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock agreements |
|
$ |
354 |
|
|
$ |
236 |
|
|
$ |
232 |
|
Forward trades and options |
|
|
6,441 |
|
|
|
1,176 |
|
|
|
3,029 |
|
|
Total derivative assets |
|
|
6,795 |
|
|
|
1,412 |
|
|
|
3,261 |
|
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock agreements |
|
|
(818 |
) |
|
|
(838 |
) |
|
|
(1,222 |
) |
Forward trades and options |
|
|
(417 |
) |
|
|
(699 |
) |
|
|
(35 |
) |
|
Total derivative liabilities |
|
|
(1,235 |
) |
|
|
(1,537 |
) |
|
|
(1,257 |
) |
|
Net derivative (liability) asset |
|
$ |
5,560 |
|
|
$ |
(125 |
) |
|
$ |
2,004 |
|
|
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.
Supplying these derivatives to customers results in non-interest income. These instruments
are carried at fair value in other assets with gains and losses reflected in other non-interest
income. Total trading revenue for customer accommodation was $3.4 million and $2.2 million for the
three month periods ended June 30, 2007 and 2006, respectively.
For the six month periods ended June 30, 2007
and 2006, total trading revenue for customer accommodation was $6.8 million and $5.2 million,
respectively. The total notional value of derivative financial instruments used by Huntington on
behalf of customers, including offsetting derivatives was $5.2 billion, $4.6 billion, and $4.6
billion at June 30, 2007, December 31, 2006, and June 30, 2006, respectively. Huntingtons credit
risk from interest rate swaps used for trading purposes was $53.3 million, $40.0 million, and $64.4
million at the same dates.
Huntington also uses certain derivative financial instruments to offset changes in value of
its residential mortgage servicing assets. These derivatives consist primarily of forward interest
rate agreements, and forward mortgage securities. The derivative instruments used are not
designated as hedges under Statement No. 133. Accordingly, such derivatives are recorded at fair
value with changes in fair value reflected in mortgage banking income. The total notional value of
these derivative financial instruments at June 30, 2007, was $475.0 million. The total notional
amount corresponds to trading assets with a fair value of $0.3 million. Total losses for the three
month periods ended June 30, 2007 and 2006 were $12.3 million and $5.8 million, respectively. Total
losses for the six month periods ended June 30, 2007 and 2006 were $12.8 million and $9.3 million,
respectively.
In connection with securitization activities, Huntington purchased interest rate caps with a
notional value totaling $1.5 billion. These purchased caps were assigned to the securitization
trust for the benefit of the security holders. Interest rate caps were also sold totaling $1.5
billion outside the securitization structure. Both the purchased and sold caps are marked to market
through income.
20
Note 13 Shareholders Equity
Change in par value and shares authorized:
During
the second quarter, Huntington amended its charter to, among other
things,
assign a par value of $0.01 to each share of common
stock. Shares of common stock previously had no assigned par value. Huntington also amended its
charter to increase the number of authorized shares of common stock from 500 million shares to 1.0
billion shares.
Share Repurchase Program:
On April 20, 2006, the Company announced that its board of directors authorized a new program
for the repurchase of up to 15 million shares of common stock (the 2006 Repurchase Program). The 2006 Repurchase
Program does not have an expiration date. The 2006 Repurchase Program cancelled and replaced the
prior share repurchase program, authorized by the board of directors in 2005. The Company announced
its expectation to repurchase the shares from time to time in the open market or through privately
negotiated transactions depending on market conditions.
Huntington did not repurchase any shares under the 2006 Repurchase Program for the three month
period ended June 30, 2007. At the end of the period, 3,850,000 shares may be purchased under the
2006 Repurchase Program.
Note 14 Segment Reporting
Huntington has three distinct lines of business: Regional Banking, Dealer Sales, and the
Private Financial and Capital Markets Group (PFCMG). A fourth segment includes the Treasury
function and other unallocated assets, liabilities, revenue, and expense. Lines of business
results are determined based upon the Companys management reporting system, which assigns balance
sheet and income statement items to each of the business segments. The process is designed around
the Companys organizational and management structure and, accordingly, the results derived are not
necessarily comparable with similar information published by other financial institutions. An
overview of this system is provided below, along with a description of each segment and discussion
of financial results.
The following provides a brief description of the four operating segments of Huntington:
Regional Banking: This segment provides traditional banking products and services to consumer,
small business, and, commercial customers. As of June 30 2007, and excluding the impact of the Sky
Financial acquisition, it operated in eight regions within the five states of Ohio, Michigan, West
Virginia, Indiana, and Kentucky. It provided these services through a banking network of 375
branches, over 1,000 ATMs, along with Internet and telephone banking channels. It also provided
certain services outside of these five states, including mortgage banking and equipment leasing.
Each region is further divided into retail and commercial banking units. Retail products and
services include home equity loans and lines of credit, first mortgage loans, direct installment
loans, small business loans, personal and business deposit products, as well as sales of investment
and insurance services. Retail Banking accounts for 56% and 77% of total Regional Banking loans and
deposits, respectively. Commercial Banking serves middle market commercial banking relationships,
which use a variety of banking products and services including, but not limited to, commercial
loans, international trade, cash management, leasing, interest rate protection products, capital
market alternatives, 401(k) plans, and mezzanine investment capabilities.
Dealer Sales: This segment provides a variety of banking products and services to more than 3,500
automotive dealerships within the Companys primary banking markets, as well as in Arizona,
Florida, Georgia, Nevada, New Jersey, North Carolina, New York, Pennsylvania, South Carolina, and
Tennessee. Dealer Sales finances the purchase of automobiles by customers at the automotive
dealerships, purchases automobiles from dealers and simultaneously leases the automobiles to
consumers under long-term leases, finances the dealerships new and used vehicle inventories, land,
buildings, and other real estate owned by the dealerships, or dealer working capital needs, and
provides other banking services to the automotive dealerships and their owners. Competition from
the financing divisions of automobile manufacturers and from other financial institutions is
intense. Dealer Sales production opportunities are directly impacted by the general automotive
sales business, including programs initiated by manufacturers to enhance and increase sales
directly. Huntington has been in this line of business for over 50 years.
21
Private Financial and Capital Markets Group (PFCMG): This segment provides products and services
designed to meet the needs of higher net worth customers. Revenue is derived through the sale of
trust, asset management, investment advisory, brokerage, insurance, and private banking products
and services. It also focuses on financial solutions for corporate and institutional customers
that include investment banking, sales and trading of securities, mezzanine capital financing, and
risk management products. To serve high net worth customers, a unique distribution model is used
that employs a single, unified sales force to deliver products and services mainly through Regional
Banking distribution channels.
Treasury / Other: This segment includes revenue and expense related to assets, liabilities, and
equity that are not directly assigned or allocated to one of the other three business segments.
Assets in this segment include investment securities and bank owned life insurance. The net
interest income/(expense) of this segment includes the net impact of administering our investment
securities portfolios as part of overall liquidity management. A match-funded transfer pricing
system is used to attribute appropriate funding interest income and interest expense to other
business segments. As such, net interest income includes the net impact of any over or under
allocations arising from centralized management of interest rate risk. Furthermore, net interest
income includes the net impact of derivatives used to hedge interest rate sensitivity.
Non-interest income includes miscellaneous fee income not allocated to other business segments,
including bank owned life insurance income. Fee income also includes asset revaluations not
allocated to other business segments, as well as any investment securities and trading assets gains
or losses. The non-interest expense includes certain corporate administrative and other
miscellaneous expenses not allocated to other business segments. This segment 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.
22
Listed below are certain financial results by line of business. For the three and six
month periods ended June 30, 2007 and 2006, operating earnings were the same as reported earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
Income Statements |
|
Regional |
|
Dealer |
|
|
|
|
|
Treasury/ |
|
Huntington |
(in thousands ) |
|
Banking |
|
Sales |
|
PFCMG |
|
Other |
|
Consolidated |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
213,589 |
|
|
$ |
32,333 |
|
|
$ |
18,199 |
|
|
$ |
(10,730 |
) |
|
$ |
253,391 |
|
Provision for credit losses |
|
|
(54,873 |
) |
|
|
(303 |
) |
|
|
(4,957 |
) |
|
|
|
|
|
|
(60,133 |
) |
Non-interest income |
|
|
96,657 |
|
|
|
10,984 |
|
|
|
45,964 |
|
|
|
2,588 |
|
|
|
156,193 |
|
Non-interest expense |
|
|
(166,469 |
) |
|
|
(18,618 |
) |
|
|
(41,063 |
) |
|
|
(18,505 |
) |
|
|
(244,655 |
) |
Income taxes |
|
|
(31,116 |
) |
|
|
(8,539 |
) |
|
|
(6,350 |
) |
|
|
21,730 |
|
|
|
(24,275 |
) |
|
Operating / reported net income |
|
$ |
57,788 |
|
|
$ |
15,857 |
|
|
$ |
11,793 |
|
|
$ |
(4,917 |
) |
|
$ |
80,521 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
227,473 |
|
|
$ |
34,784 |
|
|
$ |
18,037 |
|
|
$ |
(18,099 |
) |
|
$ |
262,195 |
|
Provision for credit losses |
|
|
(14,844 |
) |
|
|
949 |
|
|
|
(1,850 |
) |
|
|
|
|
|
|
(15,745 |
) |
Non-interest income |
|
|
92,759 |
|
|
|
21,516 |
|
|
|
39,139 |
|
|
|
9,605 |
|
|
|
163,019 |
|
Non-interest expense |
|
|
(177,245 |
) |
|
|
(28,103 |
) |
|
|
(38,116 |
) |
|
|
(8,895 |
) |
|
|
(252,359 |
) |
Income taxes |
|
|
(44,850 |
) |
|
|
(10,201 |
) |
|
|
(6,024 |
) |
|
|
15,569 |
|
|
|
(45,506 |
) |
|
Operating / reported net income |
|
$ |
83,293 |
|
|
$ |
18,945 |
|
|
$ |
11,186 |
|
|
$ |
(1,820 |
) |
|
$ |
111,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
Income Statements |
|
Regional |
|
Dealer |
|
|
|
|
|
Treasury/ |
|
Huntington |
(in thousands of dollars) |
|
Banking |
|
Sales |
|
PFCMG |
|
Other |
|
Consolidated |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
428,589 |
|
|
$ |
63,974 |
|
|
$ |
37,376 |
|
|
$ |
(20,993 |
) |
|
$ |
508,946 |
|
Provision for credit losses |
|
|
(77,329 |
) |
|
|
(8,048 |
) |
|
|
(4,162 |
) |
|
|
|
|
|
|
(89,539 |
) |
Non-Interest income |
|
|
186,200 |
|
|
|
24,165 |
|
|
|
79,615 |
|
|
|
11,390 |
|
|
|
301,370 |
|
Non-Interest expense |
|
|
(329,370 |
) |
|
|
(38,205 |
) |
|
|
(81,295 |
) |
|
|
(37,857 |
) |
|
|
(486,727 |
) |
Income taxes |
|
|
(72,831 |
) |
|
|
(14,661 |
) |
|
|
(11,037 |
) |
|
|
40,726 |
|
|
|
(57,803 |
) |
|
Operating / reported net income |
|
$ |
135,259 |
|
|
$ |
27,225 |
|
|
$ |
20,497 |
|
|
$ |
(6,734 |
) |
|
$ |
176,247 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
435,553 |
|
|
$ |
69,615 |
|
|
$ |
35,606 |
|
|
$ |
(34,899 |
) |
|
$ |
505,875 |
|
Provision for credit losses |
|
|
(25,234 |
) |
|
|
(6,813 |
) |
|
|
(3,238 |
) |
|
|
|
|
|
|
(35,285 |
) |
Non-Interest income |
|
|
170,551 |
|
|
|
48,508 |
|
|
|
80,033 |
|
|
|
23,461 |
|
|
|
322,553 |
|
Non-Interest expense |
|
|
(319,393 |
) |
|
|
(59,883 |
) |
|
|
(68,827 |
) |
|
|
(42,671 |
) |
|
|
(490,774 |
) |
Income taxes |
|
|
(91,517 |
) |
|
|
(17,999 |
) |
|
|
(15,251 |
) |
|
|
38,458 |
|
|
|
(86,309 |
) |
|
Operating / reported net income |
|
$ |
169,960 |
|
|
$ |
33,428 |
|
|
$ |
28,323 |
|
|
$ |
(15,651 |
) |
|
$ |
216,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at |
|
Deposits at |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
June 30, |
|
December 31, |
|
June 30, |
(in millions) |
|
2007 |
|
2006 |
|
2006 |
|
2007 |
|
2006 |
|
2006 |
|
|
|
|
|
Regional Banking |
|
$ |
21,681 |
|
|
$ |
20,933 |
|
|
$ |
21,035 |
|
|
$ |
20,482 |
|
|
$ |
20,231 |
|
|
$ |
19,839 |
|
Dealer Sales |
|
|
5,146 |
|
|
|
5,003 |
|
|
|
5,417 |
|
|
|
58 |
|
|
|
59 |
|
|
|
61 |
|
PFCMG |
|
|
2,296 |
|
|
|
2,153 |
|
|
|
2,179 |
|
|
|
1,104 |
|
|
|
1,162 |
|
|
|
1,218 |
|
Treasury / Other |
|
|
7,298 |
|
|
|
7,240 |
|
|
|
7,635 |
|
|
|
2,956 |
|
|
|
3,596 |
|
|
|
3,475 |
|
|
|
|
|
|
Total |
|
$ |
36,421 |
|
|
$ |
35,329 |
|
|
$ |
36,266 |
|
|
$ |
24,600 |
|
|
$ |
25,048 |
|
|
$ |
24,593 |
|
|
|
|
|
|
23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding
company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our bank
subsidiaries, The Huntington National Bank and Sky Bank, we provide full-service commercial and
consumer banking services, mortgage banking services, automobile financing, equipment leasing,
investment management, trust services, brokerage services, reinsurance of private mortgage
insurance; reinsurance of credit life and disability insurance; and other insurance and financial
products and services. Our banking offices are located in Ohio, Michigan, Pennsylvania, West
Virginia, Indiana, and Kentucky. Sky Insurance offers retail and commercial insurance agency
services, through offices in Ohio, Pennsylvania, Michigan, Indiana, and West Virginia. Certain
activities are also conducted in Arizona, Florida, Georgia, Maryland, Nevada, New Jersey, New York,
North Carolina, Pennsylvania, South Carolina, Tennessee, and Vermont. International banking
services are made available through our headquarters office in Columbus, a limited purpose office
located in the Cayman Islands, and another located in Hong Kong. The Huntington National Bank (the
Bank) was organized in 1866.
The following discussion and analysis provides you with information we believe necessary for
understanding our financial condition, changes in financial condition, results of operations, and
cash flows and should be read in conjunction with the financial statements, notes, and other
information contained in this report. The Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) appearing in our 2006 Annual Report on Form 10-K (2006
Form 10-K), as updated by the information contained in this report, should be read in conjunction
with this discussion and analysis.
You should note the following discussion is divided into key segments:
|
|
|
Introduction - Provides overview comments on important matters including risk factors
and other items. These are essential for understanding our performance and prospects. |
|
|
|
|
Discussion of Results of Operations - Reviews financial performance from a consolidated
company perspective. It also includes a Significant Items Influencing Financial
Performance Comparisons section that summarizes key issues helpful for understanding
performance trends. Key consolidated 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 fund ourselves, 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. |
|
|
|
|
Lines of Business Discussion - Provides an overview of financial performance for each of
our major lines of business and provides additional discussion of trends underlying
consolidated financial performance. |
Forward-Looking Statements
This report, including Managements Discussion and Analysis of Financial Condition and Results
of Operations, contains forward-looking statements. These include descriptions of products or
services, plans or objectives for future operations, including statements about the benefits of any
proposed or completed acquisitions, and forecasts of revenues, earnings, cash flows, or other
measures of economic performance. Forward-looking statements can be identified by the fact that
they do not relate strictly to historical or current facts.
By their nature, forward-looking statements are subject to numerous assumptions, risks, and
uncertainties. A number of factors could cause actual conditions, events, or results to differ
significantly from those described in the forward-looking statements. These factors include, but
are not limited to, the businesses of Huntington and that of any pending or completed acquisition
may not be integrated successfully or such integration may take longer to accomplish than expected;
the expected cost savings and any revenue synergies from any acquisition may not be fully realized
within the expected timeframes; disruption from any acquisition may make it more difficult to
maintain relationships with clients, associates, or suppliers; the required governmental approvals
of the acquisition may not be obtained on the
proposed terms and schedule; if required by the acquisition, Huntington and/or the
stockholders of the company of any pending or approved acquisition
24
may not approve the merger;
changes in economic conditions; movements in interest rates; competitive pressures on product
pricing and services; success and timing of other business strategies; the nature, extent, and
timing of governmental actions and reforms; and extended disruption of vital infrastructure; and
other factors described in Item 1A of Huntingtons 2006 Annual Report on Form 10-K, the
corresponding annual report on Form 10-K of any pending or approved acquisition, and other factors
described from time to time in Huntingtons, or any pending or approved acquisitions, other
filings with the Securities and Exchange Commission (SEC).
You should understand forward-looking statements to be strategic objectives and not absolute
forecasts of future performance. Forward-looking statements speak only as of the date they are
made. 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.
Risk Factors
We, like other financial companies, are subject to a number of risks, 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 that loan and lease
customers or other counter parties will be unable to perform their contractual obligations, (2)
market risk, which is the risk that changes in market rates and prices will adversely affect our
financial condition or results of operation, (3) liquidity risk, which is the risk that we, or the
Bank, will have insufficient cash or access to cash to meet operating needs, and (4) operational
risk, which is the risk of loss resulting from inadequate or failed internal processes, people and
systems, or from external events. Refer to the Risk Management and Capital section for
additional information regarding risk factors. Additionally, more information on risk is set forth
under the heading Risk Factors included in Item 1A of our Annual Report on Form 10-K for the year
ended December 31, 2006, and subsequent filings with the SEC.
Critical Accounting Policies and Use of Significant Estimates
Our financial statements are prepared in accordance with accounting principles generally
accepted in the United States (GAAP). The preparation of financial statements in conformity with
GAAP requires us to establish critical accounting policies and make accounting estimates,
assumptions, and judgments that affect amounts recorded and reported in our financial statements.
Note 1 of the Notes to Consolidated Financial Statements included in our 2006 Form 10-K as
supplemented by this report lists significant accounting policies we use in the development and
presentation of our financial statements. This discussion and analysis, the significant accounting
policies, and other financial statement disclosures identify and address key variables and other
qualitative and quantitative factors necessary for an understanding and evaluation of our company,
financial position, results of operations, and cash flows.
An accounting estimate requires assumptions about uncertain matters that could have a material
effect on the financial statements if a different amount within a range of estimates were used or
if estimates changed from period to period. Readers of this report should understand that estimates
are made under facts and circumstances at a point in time, and changes in those facts and
circumstances could produce actual results that differ from when those estimates were made.
Acquisition of Sky Financial
On July 1, 2007, we acquired Sky Financial Group, Inc. (Sky Financial) in a stock and cash
transaction valued at approximately $3.5 billion. As of June 30, 2007, Sky Financial was a $16.7
billion diversified financial holding company with over 330 financial centers and over 400 ATMs.
Sky Financial served communities in Ohio, Pennsylvania, Indiana, Michigan, and West Virginia. Sky
Financials financial service affiliates included: Sky Bank, commercial and retail banking; Sky
Trust, asset management services; and Sky Insurance, retail and commercial insurance agency
services.
Sky Financial results will be reflected in consolidated results beginning in the 2007 third
quarter and, therefore, had no direct impact on balance sheet comparisons. Refer to the
Significant Items Influencing Financial Comparisons section for additional information regarding
the impact of the acquisition costs on period to period earnings comparisons.
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It
also includes a Significant Items Influencing Financial Performance Comparisons section that
summarizes key issues important for a complete understanding of performance trends. Key
consolidated balance sheet and income statement trends are discussed in this
25
section. All earnings
per share data are reported on a diluted basis. For additional insight on financial performance,
this section should be read in conjunction with the Lines of Business Discussion.
Significant Items
Certain components of the Income Statement are naturally subject to more volatility than
others. As a result, analysts/investors may view such items differently in their assessment of
performance compared with their expectations and/or any implications resulting from them on their
assessment of future performance trends. It is a general practice of analysts/investors to try and
determine their perception of what underlying or core earnings performance is in any given
reporting period, as this typically forms the basis for their estimation of performance in future
periods.
Therefore, we believe the disclosure of certain Significant Items in current and prior
period results aids analysts/investors in better understanding corporate performance so that they
can ascertain for themselves what, if any, items they may wish to include/exclude from their
analysis of performance; i.e., within the context of determining how that performance differed from
their expectations, as well as how, if at all, to adjust their estimates of future performance
accordingly.
To this end, we have adopted a practice of listing as Significant Items in our external
disclosure documents (e.g., earnings press releases, investor presentations, Forms 10-Q and 10-K)
individual and/or particularly volatile items that impact the current period results by $0.01 per
share or more. Such Significant Items generally fall within one of two categories: timing
differences and other items.
Timing Differences
Part of our regular business activities are by their nature volatile; e.g., capital markets
income, gains and losses on the sale of loans, etc. While such items may generally be expected to
occur within a full year reporting period, they may vary significantly from period to period. Such
items are also typically a component of an Income Statement line item and not, therefore, readily
discernable. By specifically disclosing such items, analysts/investors can better assess how, if
at all, to adjust their estimates of future performance.
Other Items
From time to time an event or transaction might significantly impact revenues, expenses or
taxes in a particular reporting period that are judged to be one-time, short-term in nature, and/or
materially outside typically expected performance. Examples would be (1) merger costs as they
typically impact expenses for only a few quarters during the period of transition; e.g.,
restructuring charges, asset valuation adjustments, etc.; (2) changes in an accounting principle;
(3) one-time tax assessments/refunds; (4) a large gain/loss on the sale of an asset; (5) outsized
commercial loan net charge-offs; and other items deemed significant. By disclosing such items,
analysts/investors can better assess how, if at all, to adjust their estimates of future
performance.
Provision for Credit Losses
While the provision for credit losses may vary significantly between periods, we typically
exclude it from the list of Significant Items, unless in our view, there is a significant
specific credit(s) that is causing distortion in the period.
Provision expense is always an assumption in analyst/investor expectations of earnings, and
we believe there is apparent agreement among them that provision expense is included in their definition of
underlying or core earnings, unlike timing differences or other items. In addition,
provision expense is an individual Income Statement line item so its value is easily known and,
except in very rare situations, the amount in any reporting period always exceeds $0.01 per share.
Also, the factors influencing the level of provision expense receive detailed additional disclosure
and analysis so that analysts/investors have information readily available to understand the
underlying factors that result in the reported provision expense amount.
In addition, provision expense trends usually increase/decrease in a somewhat orderly pattern
in conjunction with credit quality cycle changes; i.e., as credit quality improves provision
expense generally declines and vice versa. While they may have differing views regarding magnitude
and/or trends in provision expense, we believe every analyst and most investors incorporate a provision
expense estimate in their financial performance estimates.
26
Other Exclusions
Significant Items for any particular period are not intended to be a complete list of items
that may significantly impact future periods. A number of factors, including those described in
Huntingtons 2006 Annual Report on Form 10-K and other factors described from time to time in
Huntingtons other filings with the Securities and Exchange Commission, could also significantly
impact future periods.
Summary
Earnings comparisons of 2007 second quarter performance with that of the 2007 first and 2006
second quarters were impacted by a number of factors, some related to changes in the economic and
competitive environment, while others reflected specific strategies, changes in accounting
practices, the impact of mergers, or other significant items. Understanding the nature and
implications of these factors on financial results is important in understanding our income
statement, balance sheet, and credit quality trends and the comparison of the current quarter
performance with that of previous quarters. The key factors impacting the current reporting period
comparisons are more fully described in the Significant Items Influencing Financial Performance
Comparisons section, which follows this summary discussion of results.
2007 Second Quarter versus 2006 Second Quarter
Net income for the second quarter of 2007 was $80.5 million, or $0.34 per common share,
compared with $111.6 million, or $0.46 per common share, in the comparable year-ago quarter. This
$31.1 million decrease in net income primarily reflected the negative impacts of:
|
|
|
$44.4 million increase in provision for credit losses, reflecting a higher allowance for
credit losses (ACL) on both an absolute basis and as a percentage of total loans and
leases. This was due to significant deterioration in commercial credit quality, primarily
in the eastern Michigan single-family homebuilder sector. Three credit relationships, two
in the single-family home builder sector, and one northern Ohio commercial credit to an
auto industry-related manufacturing company, accounted for $24.8 million ($16.1 million
after tax, or $0.07 per common share) of the increase in provision for credit losses.
These three credits, along with increases in other monitored credits, accounted for a significant portion of the increase in non-performing
loans (NPLs) and the ACL. The residential real estate market in eastern Michigan continued
to deteriorate during the quarter, reflecting a significant downturn in home sales
activity. The spring and early-summer selling season is extremely important for
homebuilders, and softness was expected. However, in the case of eastern Michigan, the
impact turned out to be far worse than anticipated, particularly for the two noted
relationships. (See Provision for Credit Losses and the Credit Risk discussions for
details.) |
|
|
|
|
$8.8 million, or 3%, decline in net interest income. This reflected the unfavorable
impact of a $0.3 billion, or 1%, decrease in average earning assets and a decrease in the
fully taxable equivalent net interest margin of 8 basis points to 3.26%. The decline in
average earning assets was due to a decline in average investment securities as part of our
overall interest rate risk management strategy. This negative impact was partially offset
by an increase in average total loans and leases, which increased $0.2 billion, or 1%,
primarily reflecting growth in commercial loans, partially offset by declines in total
consumer loans. (See Net Interest Income discussion for details.) |
|
|
|
|
$6.8 million, or 4%, decline in total non-interest income. This reflected the negative
impacts of a decline in other income due to the continued decline in automobile operating
lease income, investment securities losses due to impairment of certain investment
securities, and a negative mortgage servicing rights (MSR) fair value adjustment, net of
hedge-related trading activity. Partially offsetting these negative impacts was growth in
trust services, brokerage and insurance income, service charges on deposit accounts, and
other service charges and fees. (See Non-interest Income discussion for details.) |
Partially offset by:
|
|
|
$21.2 million reduction in federal income tax expense, primarily due to the decrease in
pre-tax income. (See Provision for Income Taxes discussion for details.) |
|
|
|
|
$7.7 million, or 3%, decline in total non-interest expense. This reflected a decrease
in other expense due to the continued decline in automobile operating lease expense and the
recognition of a $4.1 million gain on the repayment of FHLB debt. Personnel and marketing
expenses also declined. Partially offsetting these declines were increases in outside data
processing and other services expense, as well as professional services expense, due |
27
|
|
|
primarily to Sky Financial merger costs. (See Non-interest Expense discussion for
details.) |
The return on average assets (ROA) and return on average equity (ROE) in the 2007 second
quarter were 0.92% and 10.6%, respectively, compared with 1.25% and 14.9%, respectively, in the
year-ago quarter. The return on average tangible shareholders equity (ROTE) in the 2007 second
quarter was 13.6%, compared with 19.3% in the year-ago quarter (see Table 1).
2007 Second Quarter versus 2007 First Quarter
Net income for the second quarter of 2007 was $80.5 million, or $0.34 per common share,
compared with $95.7 million, or $0.40 per common share, in the prior quarter. This $15.2 million
decrease in net income primarily reflected the negative impacts of:
|
|
|
$30.7 million increase in the provision for credit losses. This reflected a higher ACL
on both an absolute basis and as a percentage of total loans and leases, due to significant
deterioration in commercial credit quality, primarily in the eastern Michigan single-family
homebuilder sector. (See Provision for Credit Losses and the Credit Risk discussions for
details.) |
|
|
|
|
$2.6 million, or 1%, increase in total non-interest expense. This reflected increases
in outside data processing and other services, professional services and marketing
expenses, primarily reflecting Sky Financial merger costs. (See Non-interest Expense
discussion for details.) |
|
|
|
|
$2.2 million, or 1%, decline in net interest income. This reflected the unfavorable
impact of a 10 basis point decline in the net interest margin, due primarily to the negative
impact of higher non-accrual loans, including accrued interest reversals. Average total
earning assets increased 1%, reflecting growth in average total loans and leases, as well
as other earning assets, mostly trading account assets and interest bearing deposits in
banks. (See Net Interest Income discussion for details.) |
Partially offset by:
|
|
|
$9.3 million reduction in federal income tax expense, primarily due to the decrease in
pre-tax income. (See Provision for Income Taxes discussion for details) |
|
|
|
|
$11.0 million increase in total non-interest income. This reflected the benefit of an
increase in other income due to equity investment gains in the current quarter compared
with such losses in the prior quarter, and growth in service charges on deposit accounts,
other service charges and fees, and brokerage and insurance income. These benefits were
partially offset by investment securities impairment losses in the current period, and a
decline in mortgage banking income due to a net loss on MSR fair value adjustments, net of
hedge-related trading activity. (See Non-interest Income discussion for details.) |
The ROA and ROE in the 2007 second quarter were 0.92% and 10.6%, respectively, compared with
1.11% and 12.9%, respectively, in the 2007 first quarter. The ROTE in the 2007 second quarter was
13.6%, compared with 16.5% in the prior quarter (see Table 1).
2007 First Six Months versus 2006 First Six Months
Net income for the first six month period of 2007 was $176.2 million, or $0.74 per common
share, compared with $216.1 million, or $0.90 per common share, in the comparable year-ago period.
This $39.8 million decrease in net income primarily reflected the negative impacts of:
|
|
|
$54.3 million increase in provision for credit losses, reflecting a higher ACL on both
an absolute basis and as a percentage of total loans and leases. This was due to
significant deterioration in commercial credit quality,
primarily in the eastern Michigan single-family homebuilder sector. Two credit
relationships in this sector, along with increases in monitored
credits, and a middle market commercial and industrial (C&I) loan in northern Ohio, accounted for a
significant portion of the increase in NPLs and the ACL. (See Provision for Credit Losses
and the Credit Risk discussions for details.) |
|
|
|
|
$21.2 million, or 7%, decline in total non-interest income. This reflected the negative
impacts of a decline in other income due to the continued decline in automobile operating
lease income (down $24.7 million), a decline in mortgage banking income reflecting negative
MSR fair value adjustments, net of hedge-related trading activity, |
28
|
|
|
and investment
securities losses due to impairment of certain investment securities. Partially offsetting
these negative impacts was growth in trust services, service charges on deposit accounts,
brokerage and insurance income, and other service charges and fees. (See Non-interest
Income discussion for details.) |
Partially offset by:
|
|
|
$28.5 million reduction in federal income tax expense, primarily due to the decrease in
pre-tax income. (See Provision for Income Taxes discussion for details.) |
|
|
|
|
$4.0 million, or 1%, decline in total non-interest expense. This reflected a decrease
in other expense due to the continued decline in automobile operating lease expense (down
$18.4 million), and a decline in telecommunication expenses, partially offset by increases
in outside data process and other services, net occupancy and professional services due
primarily to Sky Financial merger costs, as well as Unizan merger-related expenses. (See
Non-interest Expense discussion for details.) |
|
|
|
|
$3.1 million, or 1%, increase in net interest income. This reflected the favorable
impact of a $0.4 billion, or 1%, increase in average earning assets, partially offset by
the negative impact of a 2 basis point decline in the fully taxable equivalent net interest
margin to 3.31%. The increase in average earning assets was driven by a $0.7 billion, or
3%, increase in average total loans, consisting of a 9% increase in average total
commercial loans, partially offset by a 2% decline in average total consumer loans. (See
Net Interest Income discussion for details.) |
The ROA and ROE for the first six month period of 2007 were 1.01% and 11.7%, respectively,
compared with 1.26% and 15.2%, respectively, in the comparable year-ago period. The ROTE for the
first six months of 2007 was 15.1%, compared with 18.7% in the comparable year-ago period (see
Table 1).
29
Table 1 Selected Quarterly Income Statement Data (1), (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
2006 |
|
|
(in thousands, except per share amounts) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
|
Interest income |
|
$ |
542,461 |
|
|
$ |
534,949 |
|
|
$ |
544,841 |
|
|
$ |
538,988 |
|
|
$ |
521,903 |
|
Interest expense |
|
|
289,070 |
|
|
|
279,394 |
|
|
|
286,852 |
|
|
|
283,675 |
|
|
|
259,708 |
|
|
|
|
Net interest income |
|
|
253,391 |
|
|
|
255,555 |
|
|
|
257,989 |
|
|
|
255,313 |
|
|
|
262,195 |
|
Provision for credit losses |
|
|
60,133 |
|
|
|
29,406 |
|
|
|
15,744 |
|
|
|
14,162 |
|
|
|
15,745 |
|
|
|
|
Net interest income after provision for credit losses |
|
|
193,258 |
|
|
|
226,149 |
|
|
|
242,245 |
|
|
|
241,151 |
|
|
|
246,450 |
|
|
|
|
Service charges on deposit accounts |
|
|
50,017 |
|
|
|
44,793 |
|
|
|
48,548 |
|
|
|
48,718 |
|
|
|
47,225 |
|
Trust services |
|
|
26,764 |
|
|
|
25,894 |
|
|
|
23,511 |
|
|
|
22,490 |
|
|
|
22,676 |
|
Brokerage and insurance income |
|
|
17,199 |
|
|
|
16,082 |
|
|
|
14,600 |
|
|
|
14,697 |
|
|
|
14,345 |
|
Other service charges and fees |
|
|
14,923 |
|
|
|
13,208 |
|
|
|
13,784 |
|
|
|
12,989 |
|
|
|
13,072 |
|
Bank owned life insurance income |
|
|
10,904 |
|
|
|
10,851 |
|
|
|
10,804 |
|
|
|
12,125 |
|
|
|
10,604 |
|
Mortgage banking (loss) income |
|
|
7,122 |
|
|
|
9,351 |
|
|
|
6,169 |
|
|
|
8,512 |
|
|
|
13,616 |
|
Securities (losses) gains |
|
|
(5,139 |
) |
|
|
104 |
|
|
|
(15,804 |
) |
|
|
(57,332 |
) |
|
|
(35 |
) |
Other income |
|
|
34,403 |
|
|
|
24,894 |
|
|
|
38,994 |
|
|
|
35,711 |
|
|
|
41,516 |
|
|
|
|
Total non-interest income |
|
|
156,193 |
|
|
|
145,177 |
|
|
|
140,606 |
|
|
|
97,910 |
|
|
|
163,019 |
|
|
|
|
Personnel costs |
|
|
135,191 |
|
|
|
134,639 |
|
|
|
137,944 |
|
|
|
133,823 |
|
|
|
137,904 |
|
Outside data processing and other services |
|
|
25,701 |
|
|
|
21,814 |
|
|
|
20,695 |
|
|
|
18,664 |
|
|
|
19,569 |
|
Net occupancy |
|
|
19,417 |
|
|
|
19,908 |
|
|
|
17,279 |
|
|
|
18,109 |
|
|
|
17,927 |
|
Equipment |
|
|
17,157 |
|
|
|
18,219 |
|
|
|
18,151 |
|
|
|
17,249 |
|
|
|
18,009 |
|
Marketing |
|
|
8,986 |
|
|
|
7,696 |
|
|
|
6,207 |
|
|
|
7,846 |
|
|
|
10,374 |
|
Professional services |
|
|
8,101 |
|
|
|
6,482 |
|
|
|
8,958 |
|
|
|
6,438 |
|
|
|
6,292 |
|
Telecommunications |
|
|
4,577 |
|
|
|
4,126 |
|
|
|
4,619 |
|
|
|
4,818 |
|
|
|
4,990 |
|
Printing and supplies |
|
|
3,672 |
|
|
|
3,242 |
|
|
|
3,610 |
|
|
|
3,416 |
|
|
|
3,764 |
|
Amortization of intangibles |
|
|
2,519 |
|
|
|
2,520 |
|
|
|
2,993 |
|
|
|
2,902 |
|
|
|
2,992 |
|
Other expense |
|
|
19,334 |
|
|
|
23,426 |
|
|
|
47,334 |
|
|
|
29,165 |
|
|
|
30,538 |
|
|
|
|
Total non-interest expense |
|
|
244,655 |
|
|
|
242,072 |
|
|
|
267,790 |
|
|
|
242,430 |
|
|
|
252,359 |
|
|
|
|
Income before income taxes |
|
|
104,796 |
|
|
|
129,254 |
|
|
|
115,061 |
|
|
|
96,631 |
|
|
|
157,110 |
|
Provision (benefit) for income taxes (2) |
|
|
24,275 |
|
|
|
33,528 |
|
|
|
27,346 |
|
|
|
(60,815 |
) |
|
|
45,506 |
|
|
|
|
Net income |
|
$ |
80,521 |
|
|
$ |
95,726 |
|
|
$ |
87,715 |
|
|
$ |
157,446 |
|
|
$ |
111,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares diluted |
|
|
239,008 |
|
|
|
238,754 |
|
|
|
239,881 |
|
|
|
240,896 |
|
|
|
244,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income diluted |
|
$ |
0.34 |
|
|
$ |
0.40 |
|
|
$ |
0.37 |
|
|
$ |
0.65 |
|
|
$ |
0.46 |
|
Cash dividends declared |
|
|
0.265 |
|
|
|
0.265 |
|
|
|
0.250 |
|
|
|
0.250 |
|
|
|
0.250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
0.92 |
% |
|
|
1.11 |
% |
|
|
0.98 |
% |
|
|
1.75 |
% |
|
|
1.25 |
% |
Return on average total shareholders equity |
|
|
10.6 |
|
|
|
12.9 |
|
|
|
11.3 |
|
|
|
21.0 |
|
|
|
14.9 |
|
Return on average tangible shareholders equity (3) |
|
|
13.6 |
|
|
|
16.5 |
|
|
|
14.5 |
|
|
|
27.1 |
|
|
|
19.3 |
|
Net interest margin (4) |
|
|
3.26 |
|
|
|
3.36 |
|
|
|
3.28 |
|
|
|
3.22 |
|
|
|
3.34 |
|
Efficiency ratio (5) |
|
|
57.8 |
|
|
|
59.2 |
|
|
|
63.3 |
|
|
|
57.8 |
|
|
|
58.1 |
|
Effective tax rate |
|
|
23.2 |
|
|
|
25.9 |
|
|
|
23.8 |
|
|
|
(62.9 |
) |
|
|
29.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue fully taxable equivalent (FTE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
253,391 |
|
|
$ |
255,555 |
|
|
$ |
257,989 |
|
|
$ |
255,313 |
|
|
$ |
262,195 |
|
FTE adjustment |
|
|
4,127 |
|
|
|
4,047 |
|
|
|
4,115 |
|
|
|
4,090 |
|
|
|
3,984 |
|
|
|
|
Net interest income (4) |
|
|
257,518 |
|
|
|
259,602 |
|
|
|
262,104 |
|
|
|
259,403 |
|
|
|
266,179 |
|
Non-interest income |
|
|
156,193 |
|
|
|
145,177 |
|
|
|
140,606 |
|
|
|
97,910 |
|
|
|
163,019 |
|
|
|
|
Total revenue(4) |
|
$ |
413,711 |
|
|
$ |
404,779 |
|
|
$ |
402,710 |
|
|
$ |
357,313 |
|
|
$ |
429,198 |
|
|
|
|
|
|
|
(1) |
|
Comparisons for presented periods are impacted by a number of factors. Refer to the
Significant Items Influencing Financial Performance Comparisons for additional discussion
regarding these key factors. |
|
(2) |
|
The third quarter of 2006 includes $84.5 million benefit reflecting the resolution
of a federal income tax audit of tax years 2002 and 2003. |
|
(3) |
|
Net income less expense for amortization of intangibles (net of tax) for the period
divided by average tangible common shareholders equity. Average tangible common shareholders
equity equals average total common shareholders equity less average identifiable intangible assets
and goodwill. |
|
(4) |
|
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate. |
|
(5) |
|
Non-interest expense less amortization of intangibles divided by the sum of FTE net
interest income and non-interest income excluding securities gains (losses). |
|
(6) |
|
On July 1, 2007, Huntington acquired Sky Financial Group, Inc. Accordingly, the
balances presented do not include the impact of the acquisition. |
30
Table 2 Selected Year to Date Income Statement Data (1), (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Change |
|
(in thousands, except per share amounts) |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
|
|
Interest income |
|
$ |
1,077,410 |
|
|
$ |
986,690 |
|
|
$ |
90,719 |
|
|
|
9.2 |
% |
Interest expense |
|
|
568,464 |
|
|
|
480,815 |
|
|
|
87,649 |
|
|
|
18.2 |
|
|
|
|
Net interest income |
|
|
508,946 |
|
|
|
505,875 |
|
|
|
3,071 |
|
|
|
0.6 |
|
Provision for credit losses |
|
|
89,539 |
|
|
|
35,285 |
|
|
|
54,254 |
|
|
|
N.M. |
|
|
|
|
Net interest income after provision for credit losses |
|
|
419,407 |
|
|
|
470,590 |
|
|
|
(51,183 |
) |
|
|
(10.9 |
) |
|
|
|
Service charges on deposit accounts |
|
|
94,810 |
|
|
|
88,447 |
|
|
|
6,363 |
|
|
|
7.2 |
|
Trust services |
|
|
52,658 |
|
|
|
43,954 |
|
|
|
8,704 |
|
|
|
19.8 |
|
Brokerage and insurance income |
|
|
33,281 |
|
|
|
29,538 |
|
|
|
3,743 |
|
|
|
12.7 |
|
Other service charges and fees |
|
|
28,131 |
|
|
|
24,581 |
|
|
|
3,550 |
|
|
|
14.4 |
|
Bank owned life insurance income |
|
|
21,755 |
|
|
|
20,846 |
|
|
|
909 |
|
|
|
4.4 |
|
Mortgage banking income |
|
|
16,473 |
|
|
|
26,810 |
|
|
|
(10,337 |
) |
|
|
(38.6 |
) |
Securities (losses) gains (1) |
|
|
(5,035 |
) |
|
|
(55 |
) |
|
|
(4,980 |
) |
|
|
N.M. |
|
Other income |
|
|
59,297 |
|
|
|
88,432 |
|
|
|
(29,135 |
) |
|
|
(32.9 |
) |
|
|
|
Total non-interest income |
|
|
301,370 |
|
|
|
322,553 |
|
|
|
(21,183 |
) |
|
|
(6.6 |
) |
|
|
|
Personnel costs |
|
|
269,830 |
|
|
|
269,461 |
|
|
|
369 |
|
|
|
0.1 |
|
Outside data processing and other services |
|
|
47,515 |
|
|
|
39,420 |
|
|
|
8,095 |
|
|
|
20.5 |
|
Net occupancy |
|
|
39,325 |
|
|
|
35,893 |
|
|
|
3,432 |
|
|
|
9.6 |
|
Equipment |
|
|
35,376 |
|
|
|
34,512 |
|
|
|
864 |
|
|
|
2.5 |
|
Marketing |
|
|
16,682 |
|
|
|
17,675 |
|
|
|
(993 |
) |
|
|
(5.6 |
) |
Professional services |
|
|
14,583 |
|
|
|
11,657 |
|
|
|
2,926 |
|
|
|
25.1 |
|
Telecommunications |
|
|
8,703 |
|
|
|
9,815 |
|
|
|
(1,112 |
) |
|
|
(11.3 |
) |
Printing and supplies |
|
|
6,914 |
|
|
|
6,838 |
|
|
|
76 |
|
|
|
1.1 |
|
Amortization of intangibles |
|
|
5,039 |
|
|
|
4,067 |
|
|
|
972 |
|
|
|
23.9 |
|
Other expense |
|
|
42,760 |
|
|
|
61,436 |
|
|
|
(18,676 |
) |
|
|
(30.4 |
) |
|
|
|
Total non-interest expense |
|
|
486,727 |
|
|
|
490,774 |
|
|
|
(4,047 |
) |
|
|
(0.8 |
) |
|
|
|
Income before income taxes |
|
|
234,050 |
|
|
|
302,369 |
|
|
|
(68,319 |
) |
|
|
(22.6 |
) |
Provision for income taxes |
|
|
57,803 |
|
|
|
86,309 |
|
|
|
(28,506 |
) |
|
|
(33.0 |
) |
|
|
|
Net income |
|
$ |
176,247 |
|
|
$ |
216,060 |
|
|
$ |
(39,813 |
) |
|
|
(18.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares diluted |
|
|
238,881 |
|
|
|
239,451 |
|
|
|
(570 |
) |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted |
|
$ |
0.74 |
|
|
$ |
0.90 |
|
|
$ |
(0.16 |
) |
|
|
(17.8 |
)% |
Cash dividends declared |
|
|
0.530 |
|
|
|
0.500 |
|
|
|
0.030 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
1.01 |
% |
|
|
1.26 |
% |
|
|
(0.25 |
)% |
|
|
(19.8 |
)% |
Return on average total shareholders equity |
|
|
11.7 |
|
|
|
15.2 |
|
|
|
(3.5 |
) |
|
|
(23.0 |
) |
Return on average tangible shareholders equity (2) |
|
|
15.1 |
|
|
|
18.7 |
|
|
|
(3.6 |
) |
|
|
(19.3 |
) |
Net interest margin (3) |
|
|
3.31 |
|
|
|
3.33 |
|
|
|
(0.02 |
) |
|
|
(0.6 |
) |
Efficiency ratio (4) |
|
|
58.5 |
|
|
|
58.2 |
|
|
|
0.3 |
|
|
|
0.5 |
|
Effective tax rate |
|
|
24.7 |
|
|
|
28.5 |
|
|
|
(3.8 |
) |
|
|
(13.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue fully taxable equivalent (FTE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
508,946 |
|
|
$ |
505,875 |
|
|
$ |
3,071 |
|
|
|
0.6 |
% |
FTE adjustment (3) |
|
|
8,174 |
|
|
|
7,820 |
|
|
|
354 |
|
|
|
4.5 |
|
|
|
|
Net interest income |
|
|
517,120 |
|
|
|
513,695 |
|
|
|
3,425 |
|
|
|
0.7 |
|
Non-interest income |
|
|
301,370 |
|
|
|
322,553 |
|
|
|
(21,183 |
) |
|
|
(6.6 |
) |
|
|
|
Total revenue |
|
$ |
818,490 |
|
|
$ |
836,248 |
|
|
$ |
(17,758 |
) |
|
|
(2.1 |
)% |
|
|
|
|
|
|
N.M., not a meaningful value. |
|
(1) |
|
Comparisons for presented periods are impacted by a number of factors. Refer to the
Significant Items Influencing Financial Performance Comparisons for additional discussion
regarding these key factors. |
|
(2) |
|
Net income less expense for amortization of intangibles (net of tax) for the period
divided by average tangible common shareholders equity. Average tangible common shareholders
equity equals average total common shareholders equity less average identifiable intangible assets
and goodwill. |
|
(3) |
|
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate. |
|
(4) |
|
Non-interest expense less amortization of intangibles divided by the sum of FTE net
interest income and non-interest income excluding securities gains/(losses). |
|
(5) |
|
On July 1, 2007, Huntington acquired Sky Financial Group, Inc. Accordingly, the
balances presented do not include the impact of the acquisition. |
31
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons from the beginning of 2006 through the second quarter of 2007 were
impacted by a number of factors summarized below.
1. |
|
Balance Sheet Restructuring. In third and fourth quarters of 2006, we utilized the
excess capital resulting from the third quarters favorable resolution to certain federal
income tax audits to restructure certain under-performing components of the balance sheet.
Total securities losses as a result of these actions totaled $73.3 million. The
refinancing of FHLB funding and the sale of mortgage loans resulted in total charges of
$4.4 million, resulting in total balance sheet restructuring costs of $77.7 million ($0.21
per common share). Our actions impacted 2006 third and fourth quarter results as follows: |
|
|
|
$57.5 million pre-tax ($0.16 per common share) negative impact in the 2006 third
quarter from securities impairment. Subsequent to the end of the quarter, the company
initiated a review of its investment securities portfolio. The objective of this review
was to reposition the portfolio to optimize performance in light of changing economic
conditions and other factors. A total of $2.1 billion of securities, primarily
consisting of U.S. Treasury, agency securities, and mortgage-backed securities, as well
as certain other asset-backed securities, were identified as other-than-temporarily
impaired as a result of this review. |
|
|
|
|
$20.2 million pre-tax ($13.1 million after tax or $0.05 per common share) negative
impact in the 2006 fourth quarter related to costs associated with the completion of
the balance sheet restructuring. This consisted of $9.0 million pretax of investment
securities losses as well as $6.8 million of additional impairment on certain
asset-backed securities not included in the third quarter restructuring, and $4.4
million pre-tax of other balance sheet restructuring expenses, most notably FHLB
funding refinancing costs. |
2. |
|
Sky Financial Group Acquisition. The merger with Sky Financial Group (Sky Financial)
was completed on July 1, 2007. At the time of acquisition, Sky Financial had assets of
$16.7 billion, including $13.2 billion of loans and core deposits of $12.0 billion. Sky
Financial results will be reflected in consolidated results beginning in the 2007 third
quarter and, therefore, had no direct impact on balance sheet comparisons. Nevertheless,
the 2007 first and second quarters reflected merger costs of $0.8 million and $7.6
million, respectively. |
|
3. |
|
Unizan Acquisition. The merger with Unizan Financial Corp. (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. Unizan results were only in
consolidated results for a partial quarter in the 2006 first quarter, but fully impacted
all quarters thereafter. As a result, performance comparisons between the 2007 second
quarter and 2006 second quarter periods, as well as comparisons between the 2007 second
quarter and 2007 first quarter periods, are unaffected. However, comparisons between the
2007 six-month period and 2006 six-month period are affected, as Unizan results were
included in the 2006 period for four months. Comparisons of the first six months of 2007
with the first six months of 2006 are impacted as follows: |
|
|
|
Increased reported average balance sheet, revenue, expense, and credit quality
results (e.g., net charge-offs). |
|
|
|
|
Increased reported non-interest expense items as a result of costs incurred as part
of merger-integration activities, most notably employee retention bonuses, outside
programming services related to systems conversions, and marketing expenses related to
customer retention initiatives. These net merger costs were $1.0 million in the 2006
first quarter, $2.6 million in the 2006 second quarter, $0.5 million in the 2006 third
quarter, and a net cost recovery of $0.4 million in the 2006 fourth quarter. |
Given the impact of the merger on reported 2006 results, management believes that an
understanding of the impacts of the merger is necessary to understand better underlying
performance trends. When comparing post-merger period results to pre-merger periods, two
terms relating to the impact of the Unizan merger on reported results
are used: |
|
|
|
Merger-related refers to amounts and percentage changes representing the impact
attributable to the merger. |
|
|
|
|
Merger costs represent expenses associated with merger integration activities. |
An analysis reflecting the estimated impact of the Unizan merger on our reported average
balance sheet and income statement can be found in Table 24 Estimated Impact of Unizan
Merger. |
4. |
|
Mortgage servicing rights (MSRs) and related hedging. MSR fair values are very
sensitive to movements in |
32
|
|
|
interest rates as expected future net servicing income depends on
the projected outstanding principal balances of the underlying loans, which can be greatly
reduced by prepayments. Prepayments usually increase when mortgage interest rates decline
and decrease when mortgage interest rates rise. A hedging strategy is used to minimize the
impact from MSR fair value changes. However, volatile changes in interest rates can
diminish the effectiveness of these hedges. We typically report MSR fair value adjustments
net of hedge-related trading activity. Mortgage banking income included the following net
impact of MSR hedging activity (reference Table 8): |
|
|
|
|
|
|
|
|
|
|
|
|
|
($in millions) |
|
Pre-tax |
|
After tax |
|
Per Common Share |
1Q07 |
|
$ |
(2.0 |
) |
|
$ |
(1.3 |
) |
|
$ |
(0.01 |
) |
2Q07 |
|
|
(4.8 |
) |
|
|
(3.1 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6 Mo. 2007 |
|
$ |
(6.8 |
) |
|
$ |
(4.4 |
) |
|
$ |
(0.02 |
) |
|
1Q06 |
|
$ |
(0.6 |
) |
|
$ |
(0.4 |
) |
|
$ |
|
|
2Q06 |
|
|
1.5 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 Mo. 2006 |
|
$ |
1.0 |
|
|
$ |
0.6 |
|
|
$ |
|
|
3Q06 |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
4Q06 |
|
|
(2.5 |
) |
|
|
(1.6 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Mo. 2006 |
|
($ |
1.6 |
) |
|
$ |
(1.0 |
) |
|
$ |
|
|
|
|
|
Beginning in the first quarter of 2006, we adopted Statement of Financial Accounting
Standards (Statement) No. 156, Accounting for Servicing of Financial Assets (an amendment of
FASB Statement No. 140), which allowed us to carry MSRs at fair value. This resulted in a
$5.1 million pre-tax ($0.01 per common share) positive impact in the 2006 first quarter
(this impact is not reflected in the above table). Under the fair value approach, servicing
assets and liabilities are recorded at fair value at each reporting date. Changes in fair
value between reporting dates are recorded as an increase or decrease in mortgage banking
income. MSR assets are included in other assets (reference Tables 2, 5, and 6). |
5. |
|
Significant commercial loan provision expense. Performance for the 2007 second quarter
included $24.8 million ($16.1 million after tax, or $0.07 per common share) in provision
for credit losses associated with three credit relationships, two in the East Michigan
single-family home builder sector, and one northern Ohio commercial credit to an auto
industry-related manufacturing company. |
|
6. |
|
Effective tax rate. For 2006, impacts included an $84.5 million ($0.35 per common
share) reduction of federal income tax expense from the release of tax reserves as a result
of the resolution of the federal income tax audit for 2002 and 2003, and the recognition of
a federal tax loss carry back. |
|
7. |
|
Other significant items influencing earnings performance comparisons. In addition to
other items discussed separately in this section, a number of other items impacted
financial results. These included: |
2007 Second Quarter
|
|
|
$2.3 million pre-tax ($1.5 million after tax or $0.01 per common share) in equity investment gains. |
|
|
|
|
$5.1 million pre-tax ($3.3 million after tax or $0.01 per common share) of impairment
loss on certain investment securities backed by mortgage loans to borrowers with low
FICO scores. |
|
|
|
|
$4.1 million pre-tax ($2.7 million after tax or $0.01 per common share) gain from the
repayment of FHLB debt. |
2007 First Quarter
|
|
|
$8.5 million pre-tax ($5.5 million after tax or $0.02 per common share) in equity
investment losses, resulting from investments in three hedge funds. |
|
|
|
|
$1.9 million pre-tax ($1.2 million after tax or $0.01 per common share) negative
impact due to litigation losses. |
33
2006 Fourth Quarter
|
|
|
$10.0 million pre-tax ($6.5 million after tax or $0.03 per common share)
contribution to the Huntington Foundation. |
|
|
|
$5.2 million pre-tax ($3.6 million after tax or $0.02 per common share) increase in
automobile lease residual value losses. This increase reflected higher relative losses
on vehicles sold at auction, most notably high-line imports and larger sport utility
vehicles. |
|
|
|
$4.5 million pre-tax ($2.9 million after tax or $0.01 per common share) in severance
and consolidation expenses. This reflected severance-related expenses associated with a
reduction of 75 Regional Banking staff positions, as well as costs associated with the
retirements of a vice chairman and an executive vice president. |
|
|
|
$3.3 million pre-tax ($2.1 million after tax or $0.01 per common share) in equity
investment gains. |
|
|
|
$2.6 million pre-tax ($1.7 million after tax or $0.01 per common share) gain related
to the sale of MasterCard® stock. |
2006 Third Quarter
|
|
|
$2.1 million pre-tax ($0.01 per common share) negative impact associated with the
write-down of equity method investments. |
2006 Second Quarter
|
|
|
$2.3 million pre-tax ($1.5 million after tax or $0.1 per common share) positive
impact from equity investment gains. |
2006 First Quarter
|
|
|
$2.3 million pre-tax ($1.5 million after tax or $0.01 per common share) negative
impact, reflecting a cumulative adjustment to defer annual fees related to home equity
loans. |
Table 3 reflects the earnings impact of the above-mentioned significant items for periods
affected by this Discussion of Results of Operations:
34
Table 3 Significant Items Influencing Earnings Performance Comparison (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, 2007 |
|
March 31, 2007 |
|
June 30, 2006 |
|
(in millions) |
|
After-tax |
|
EPS |
|
After-tax |
|
EPS |
|
After-tax |
|
EPS |
|
Net income reported earnings |
|
$ |
80.5 |
|
|
|
|
|
|
$ |
95.7 |
|
|
|
|
|
|
$ |
111.6 |
|
|
|
|
|
Earnings per share, after tax |
|
|
|
|
|
$ |
0.34 |
|
|
|
|
|
|
$ |
0.40 |
|
|
|
|
|
|
$ |
0.46 |
|
Change from prior quarter $ |
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
0.03 |
|
|
|
|
|
|
|
0.01 |
|
Change from prior quarter % |
|
|
|
|
|
|
(15.0 |
)% |
|
|
|
|
|
|
8.1 |
% |
|
|
|
|
|
|
2.2 |
% |
|
Change from a year-ago $ |
|
|
|
|
|
$ |
(0.12 |
) |
|
|
|
|
|
$ |
(0.05 |
) |
|
|
|
|
|
$ |
0.01 |
|
Change from a year-ago % |
|
|
|
|
|
|
(26.1 |
)% |
|
|
|
|
|
|
(11.1 |
)% |
|
|
|
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant items favorable (unfavorable) impact: |
|
Earnings (2) |
|
EPS |
|
Earnings (2) |
|
EPS |
|
Earnings (2) |
|
EPS |
|
Debt repayment gain |
|
$ |
4.1 |
|
|
$ |
0.01 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Equity investment gains (losses) |
|
|
2.3 |
|
|
|
0.01 |
|
|
|
(8.5 |
) |
|
|
(0.02 |
) |
|
|
2.3 |
|
|
|
0.01 |
|
Significant commercial loan provision expense |
|
|
(24.8 |
) |
|
|
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger costs |
|
|
(7.6 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
(2.6 |
) |
|
|
(0.01 |
) |
Securities impairment |
|
|
(5.1 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR fair value adjustments, net of hedge-related trading activity |
|
|
(4.8 |
) |
|
|
(0.01 |
) |
|
|
(2.0 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
Litigation losses |
|
|
|
|
|
|
|
|
|
|
(1.9 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, 2007 |
|
June 30, 2006 |
|
(in millions) |
|
After-tax |
|
EPS |
|
After-tax |
|
EPS |
|
Net income reported earnings |
|
$ |
176.2 |
|
|
|
|
|
|
$ |
216.1 |
|
|
|
|
|
Earnings per share, after tax |
|
|
|
|
|
$ |
0.74 |
|
|
|
|
|
|
$ |
0.90 |
|
Change from a year-ago $ |
|
|
|
|
|
|
(0.16 |
) |
|
|
|
|
|
|
0.04 |
|
Change from a year-ago % |
|
|
|
|
|
|
(17.8 |
)% |
|
|
|
|
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant items favorable (unfavorable) impact: |
|
Earnings (2) |
|
EPS |
|
Earnings (2) |
|
EPS |
|
Debt repayment gain |
|
$ |
4.1 |
|
|
$ |
0.01 |
|
|
$ |
|
|
|
$ |
|
|
Significant commercial loan provision expense |
|
|
(24.8 |
) |
|
|
(0.07 |
) |
|
|
|
|
|
|
|
|
Merger costs |
|
|
(8.4 |
) |
|
|
(0.02 |
) |
|
|
(3.7 |
) |
|
|
(0.01 |
) |
MSR fair value adjustments, net of hedge-related trading activity |
|
|
(6.8 |
) |
|
|
(0.02 |
) |
|
|
1.0 |
|
|
|
0.01 |
|
Equity investment (losses) gains |
|
|
(6.2 |
) |
|
|
(0.02 |
) |
|
|
3.8 |
|
|
|
0.01 |
|
Securities impairment |
|
|
(5.1 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
Litigation losses |
|
|
(1.9 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
Change in value of MSR, net of hedging |
|
|
|
|
|
|
|
|
|
|
5.1 |
|
|
|
0.01 |
|
Adjustment to defer home equity annual fees |
|
|
|
|
|
|
|
|
|
|
(2.3 |
) |
|
|
(0.01 |
) |
|
|
|
(1) |
|
Refer to the Significant Items Influencing Financial Performance Comparisons for additional discussion regarding these items. |
|
(2) |
|
Pre-tax unless otherwise noted. |
35
Net Interest Income
(This section should be read in conjunction with Significant Items 1 and 3.)
2007 Second Quarter versus 2006 Second Quarter
Fully taxable equivalent net interest income decreased $8.7 million, or 3%, from the year-ago
quarter, reflecting the unfavorable impact of a $0.3 billion, or 1%, decrease in average earning
assets and a decrease in the fully taxable equivalent net interest
margin of 8 basis points to
3.26%. The decline in the net interest margin reflected a reversal of accrued interest on new
non-accrual loans and higher funding costs. Average total loans and leases increased $0.2 billion,
or 1%, primarily reflecting growth in commercial loans, partially offset by declines in total
consumer loans.
Average total commercial loans increased $0.9 billion, or 7%. This growth reflected a $0.7
billion, or 13%, increase in average middle market C&I loans and a $0.1 billion, or 6%, increase in
average small business loans. Average middle market commercial real
estate (CRE) loans were essentially unchanged.
Average total consumer loans declined $0.6 billion, or 4%. This reflected a $0.3 billion, or
6%, decrease in average residential mortgages due to the sale of $0.4 billion loans over the three
previous quarters. These sales were part of our interest rate risk management strategy. Average
home equity loans declined 1%.
Compared with the year-ago quarter, average total automobile loans and leases decreased $0.3
billion, or 6%, with strong growth in automobile loans offset by the continued decline in
automobile leases due to low consumer demand and competitive pricing.
Average automobile loans increased $0.3 billion, or 14%. This growth was indirectly related to
the introduction of the Huntington Plus program for automobile dealers late last year. This is a
program where lower credit-scored automobile loans are originated for dealers and then sold without
recourse the next day to an independent third party. As such, this program does not directly
impact average balances. However, it has influenced dealers to increase their overall allocation
of prime automobile loan applications to Huntington, and it contributed to the 7% increase in prime
loan production during the quarter and growth in related average balances.
Average total investment securities decreased 23% from the year-ago quarter, reflecting our
strategy to reduce the level of investment securities as part of our interest rate risk management
strategy.
Average total core deposits in the 2007 second quarter increased $0.4 billion, or 2%, from the
year-ago quarter. The increase reflected strong growth in average interest bearing demand deposits,
up $0.2 billion, or 10%. Average core certificates of deposit increased $0.5 billion, or 10%,
resulting from continued customer demand for higher, fixed rate deposit products. In contrast,
average savings and other domestic deposits declined $0.2 billion, or 8%, and average money market
accounts declined $0.1 billion.
2007 Second Quarter versus 2007 First Quarter
Compared with the 2007 first quarter, fully taxable equivalent net interest income decreased
$2.1 million, or 1%. The net interest margin declined 10 basis
points to 3.26%. The decrease in
net interest income was a result of the impact of higher non-accrual loans resulting in the
reversal of $1.7 million of accrued interest and higher funding costs.
Average total loans and leases increased 1% with good growth in average total commercial
loans, partially offset by a decline in average total consumer loans. Average total commercial
loans increased $0.4 billion, or 3%, from the prior quarter, reflecting good growth across all
regions except Michigan and Northwest Ohio.
Average residential mortgages decreased $0.1 billion, or 3%, reflecting the impact of the sale
of $109.5 million of residential mortgages at the end of the 2007 first quarter. Average home
equity loans increased 1% due to continued growth in the retail channel. The broker channel
portfolio continued to decline, reflecting less emphasis on broker-originated home equity loans.
Compared with the 2007 first quarter, average total automobile loans and leases declined 1%.
The decline primarily reflected a 9% decline in average automobile leases due to continued
portfolio runoff, although lease production increased
36
seasonally 32% from the 2007 first quarter. Average automobile loans increased 5% from the
2007 first quarter, reflecting a 12% increase in automobile loan production.
Average investment securities decreased $0.3 billion, or 7%, from the 2007 first quarter,
reflecting portfolio runoff from a planned reduction in the level of investment securities as part
of our interest rate risk management.
Average total core deposits increased 1% from the 2007 first quarter, reflecting growth in
both consumer and commercial core deposits. Average non-interest bearing demand deposits increased
2% and average interest bearing demand deposits increased 2%. Average core certificates of deposit
increased 2%, reflecting the same factors impacting comparisons to the year-ago quarter noted
above. Average savings and other domestic deposits increased 1% while average money market
deposits declined slightly.
Tables 4 and 5 reflect quarterly average balance sheets and rates earned and paid on
interest-earning assets and interest-bearing liabilities.
37
Table 4 Consolidated Quarterly Average Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
Fully taxable equivalent basis |
|
2007 |
|
2006 |
|
|
2Q07 vs 2Q06 |
(in millions) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
|
Amount |
|
|
Percent |
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
$ |
259 |
|
|
$ |
93 |
|
|
$ |
77 |
|
|
$ |
75 |
|
|
$ |
36 |
|
|
|
$ |
223 |
|
|
|
N.M. |
% |
Trading account securities |
|
|
230 |
|
|
|
48 |
|
|
|
116 |
|
|
|
96 |
|
|
|
100 |
|
|
|
|
130 |
|
|
|
N.M. |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
574 |
|
|
|
503 |
|
|
|
531 |
|
|
|
266 |
|
|
|
285 |
|
|
|
|
289 |
|
|
|
N.M. |
|
Loans held for sale |
|
|
291 |
|
|
|
242 |
|
|
|
265 |
|
|
|
275 |
|
|
|
287 |
|
|
|
|
4 |
|
|
|
1.4 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
3,253 |
|
|
|
3,595 |
|
|
|
3,792 |
|
|
|
4,364 |
|
|
|
4,494 |
|
|
|
|
(1,241 |
) |
|
|
(27.6 |
) |
Tax-exempt |
|
|
629 |
|
|
|
591 |
|
|
|
594 |
|
|
|
581 |
|
|
|
556 |
|
|
|
|
73 |
|
|
|
13.1 |
|
|
|
|
|
|
|
Total investment securities |
|
|
3,882 |
|
|
|
4,186 |
|
|
|
4,386 |
|
|
|
4,945 |
|
|
|
5,050 |
|
|
|
|
(1,168 |
) |
|
|
(23.1 |
) |
Loans and leases:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
|
6,209 |
|
|
|
6,070 |
|
|
|
5,882 |
|
|
|
5,651 |
|
|
|
5,512 |
|
|
|
|
697 |
|
|
|
12.6 |
|
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,245 |
|
|
|
1,151 |
|
|
|
1,170 |
|
|
|
1,129 |
|
|
|
1,248 |
|
|
|
|
(3 |
) |
|
|
(0.2 |
) |
Commercial |
|
|
2,865 |
|
|
|
2,772 |
|
|
|
2,839 |
|
|
|
2,846 |
|
|
|
2,845 |
|
|
|
|
20 |
|
|
|
0.7 |
|
|
|
|
|
|
|
Middle market commercial real estate |
|
|
4,110 |
|
|
|
3,923 |
|
|
|
4,009 |
|
|
|
3,975 |
|
|
|
4,093 |
|
|
|
|
17 |
|
|
|
0.4 |
|
Small business |
|
|
2,499 |
|
|
|
2,466 |
|
|
|
2,421 |
|
|
|
2,413 |
|
|
|
2,351 |
|
|
|
|
148 |
|
|
|
6.3 |
|
|
|
|
|
|
|
Total commercial |
|
|
12,818 |
|
|
|
12,459 |
|
|
|
12,312 |
|
|
|
12,039 |
|
|
|
11,956 |
|
|
|
|
862 |
|
|
|
7.2 |
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
2,322 |
|
|
|
2,215 |
|
|
|
2,111 |
|
|
|
2,079 |
|
|
|
2,044 |
|
|
|
|
278 |
|
|
|
13.6 |
|
Automobile leases |
|
|
1,551 |
|
|
|
1,698 |
|
|
|
1,838 |
|
|
|
1,976 |
|
|
|
2,095 |
|
|
|
|
(544 |
) |
|
|
(26.0 |
) |
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,873 |
|
|
|
3,913 |
|
|
|
3,949 |
|
|
|
4,055 |
|
|
|
4,139 |
|
|
|
|
(266 |
) |
|
|
(6.4 |
) |
Home equity |
|
|
4,973 |
|
|
|
4,913 |
|
|
|
4,973 |
|
|
|
5,041 |
|
|
|
5,029 |
|
|
|
|
(56 |
) |
|
|
(1.1 |
) |
Residential mortgage |
|
|
4,351 |
|
|
|
4,496 |
|
|
|
4,635 |
|
|
|
4,748 |
|
|
|
4,629 |
|
|
|
|
(278 |
) |
|
|
(6.0 |
) |
Other loans |
|
|
424 |
|
|
|
422 |
|
|
|
430 |
|
|
|
430 |
|
|
|
448 |
|
|
|
|
(24 |
) |
|
|
(5.4 |
) |
|
|
|
|
|
|
Total consumer |
|
|
13,621 |
|
|
|
13,744 |
|
|
|
13,987 |
|
|
|
14,274 |
|
|
|
14,245 |
|
|
|
|
(624 |
) |
|
|
(4.4 |
) |
|
|
|
|
|
|
Total loans and leases |
|
|
26,439 |
|
|
|
26,203 |
|
|
|
26,299 |
|
|
|
26,313 |
|
|
|
26,201 |
|
|
|
|
238 |
|
|
|
0.9 |
|
Allowance for loan and lease losses |
|
|
(297 |
) |
|
|
(278 |
) |
|
|
(282 |
) |
|
|
(291 |
) |
|
|
(293 |
) |
|
|
|
(4 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
Net loans and leases |
|
|
26,142 |
|
|
|
25,925 |
|
|
|
26,017 |
|
|
|
26,022 |
|
|
|
25,908 |
|
|
|
|
234 |
|
|
|
0.9 |
|
|
|
|
|
|
|
Total earning assets |
|
|
31,675 |
|
|
|
31,275 |
|
|
|
31,674 |
|
|
|
31,970 |
|
|
|
31,959 |
|
|
|
|
(284 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
Cash and due from banks |
|
|
748 |
|
|
|
826 |
|
|
|
830 |
|
|
|
823 |
|
|
|
832 |
|
|
|
|
(84 |
) |
|
|
(10.1 |
) |
Intangible assets |
|
|
626 |
|
|
|
627 |
|
|
|
631 |
|
|
|
634 |
|
|
|
638 |
|
|
|
|
(12 |
) |
|
|
(1.9 |
) |
All other assets |
|
|
2,398 |
|
|
|
2,480 |
|
|
|
2,617 |
|
|
|
2,633 |
|
|
|
2,554 |
|
|
|
|
(156 |
) |
|
|
(6.1 |
) |
|
|
|
|
|
|
Total Assets |
|
$ |
35,150 |
|
|
$ |
34,930 |
|
|
$ |
35,470 |
|
|
$ |
35,769 |
|
|
$ |
35,690 |
|
|
|
$ |
(540 |
) |
|
|
(1.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
3,591 |
|
|
$ |
3,530 |
|
|
$ |
3,580 |
|
|
$ |
3,509 |
|
|
$ |
3,594 |
|
|
|
$ |
(3 |
) |
|
|
(0.1 |
)% |
Demand deposits interest bearing |
|
|
2,404 |
|
|
|
2,349 |
|
|
|
2,219 |
|
|
|
2,169 |
|
|
|
2,187 |
|
|
|
|
217 |
|
|
|
9.9 |
|
Money market deposits |
|
|
5,466 |
|
|
|
5,489 |
|
|
|
5,548 |
|
|
|
5,689 |
|
|
|
5,591 |
|
|
|
|
(125 |
) |
|
|
(2.2 |
) |
Savings and other domestic deposits |
|
|
2,863 |
|
|
|
2,827 |
|
|
|
2,849 |
|
|
|
2,923 |
|
|
|
3,106 |
|
|
|
|
(243 |
) |
|
|
(7.8 |
) |
Core certificates of deposit |
|
|
5,591 |
|
|
|
5,455 |
|
|
|
5,380 |
|
|
|
5,334 |
|
|
|
5,083 |
|
|
|
|
508 |
|
|
|
10.0 |
|
|
|
|
|
|
|
Total core deposits |
|
|
19,915 |
|
|
|
19,650 |
|
|
|
19,576 |
|
|
|
19,624 |
|
|
|
19,561 |
|
|
|
|
354 |
|
|
|
1.8 |
|
Other domestic deposits of $100,000 or more |
|
|
1,124 |
|
|
|
1,219 |
|
|
|
1,282 |
|
|
|
1,141 |
|
|
|
1,086 |
|
|
|
|
38 |
|
|
|
3.5 |
|
Brokered deposits and negotiable CDs |
|
|
2,682 |
|
|
|
3,020 |
|
|
|
3,252 |
|
|
|
3,307 |
|
|
|
3,263 |
|
|
|
|
(581 |
) |
|
|
(17.8 |
) |
Deposits in foreign offices |
|
|
552 |
|
|
|
562 |
|
|
|
598 |
|
|
|
521 |
|
|
|
474 |
|
|
|
|
78 |
|
|
|
16.5 |
|
|
|
|
|
|
|
Total deposits |
|
|
24,273 |
|
|
|
24,451 |
|
|
|
24,708 |
|
|
|
24,593 |
|
|
|
24,384 |
|
|
|
|
(111 |
) |
|
|
(0.5 |
) |
Short-term borrowings |
|
|
2,075 |
|
|
|
1,863 |
|
|
|
1,832 |
|
|
|
1,660 |
|
|
|
2,042 |
|
|
|
|
33 |
|
|
|
1.6 |
|
Federal Home Loan Bank advances |
|
|
1,329 |
|
|
|
1,128 |
|
|
|
1,121 |
|
|
|
1,349 |
|
|
|
1,557 |
|
|
|
|
(228 |
) |
|
|
(14.6 |
) |
Subordinated notes and other long-term debt |
|
|
3,470 |
|
|
|
3,487 |
|
|
|
3,583 |
|
|
|
3,921 |
|
|
|
3,428 |
|
|
|
|
42 |
|
|
|
1.2 |
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
27,556 |
|
|
|
27,399 |
|
|
|
27,664 |
|
|
|
28,014 |
|
|
|
27,817 |
|
|
|
|
(261 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
All other liabilities |
|
|
960 |
|
|
|
987 |
|
|
|
1,142 |
|
|
|
1,276 |
|
|
|
1,284 |
|
|
|
|
(324 |
) |
|
|
(25.2 |
) |
Shareholders equity |
|
|
3,043 |
|
|
|
3,014 |
|
|
|
3,084 |
|
|
|
2,970 |
|
|
|
2,995 |
|
|
|
|
48 |
|
|
|
1.6 |
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
35,150 |
|
|
$ |
34,930 |
|
|
$ |
35,470 |
|
|
$ |
35,769 |
|
|
$ |
35,690 |
|
|
|
$ |
(540 |
) |
|
|
(1.5 |
)% |
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value. |
|
|
|
|
(1) |
|
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans. |
38
Table 5 Consolidated Quarterly Net Interest Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Fully taxable equivalent basis (1) |
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
|
6.47 |
% |
|
|
5.13 |
% |
|
|
5.50 |
% |
|
|
5.23 |
% |
|
|
7.05 |
% |
Trading account securities |
|
|
5.74 |
|
|
|
5.27 |
|
|
|
4.10 |
|
|
|
4.32 |
|
|
|
4.51 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
5.28 |
|
|
|
5.24 |
|
|
|
5.35 |
|
|
|
5.13 |
|
|
|
4.75 |
|
Loans held for sale |
|
|
5.79 |
|
|
|
6.27 |
|
|
|
6.01 |
|
|
|
6.24 |
|
|
|
6.23 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
6.11 |
|
|
|
6.13 |
|
|
|
6.05 |
|
|
|
5.49 |
|
|
|
5.34 |
|
Tax-exempt |
|
|
6.69 |
|
|
|
6.66 |
|
|
|
6.68 |
|
|
|
6.80 |
|
|
|
6.83 |
|
|
|
|
Total investment securities |
|
|
6.20 |
|
|
|
6.21 |
|
|
|
6.13 |
|
|
|
5.64 |
|
|
|
5.51 |
|
Loans and
leases: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
|
7.39 |
|
|
|
7.48 |
|
|
|
7.55 |
|
|
|
7.40 |
|
|
|
7.49 |
|
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
7.62 |
|
|
|
8.41 |
|
|
|
8.37 |
|
|
|
8.49 |
|
|
|
8.02 |
|
Commercial |
|
|
7.34 |
|
|
|
7.64 |
|
|
|
7.57 |
|
|
|
7.86 |
|
|
|
6.92 |
|
|
|
|
Middle market commercial real estate |
|
|
7.42 |
|
|
|
7.87 |
|
|
|
7.80 |
|
|
|
8.05 |
|
|
|
7.25 |
|
Small business |
|
|
7.30 |
|
|
|
7.24 |
|
|
|
7.18 |
|
|
|
7.13 |
|
|
|
6.94 |
|
|
|
|
Total commercial |
|
|
7.38 |
|
|
|
7.56 |
|
|
|
7.56 |
|
|
|
7.56 |
|
|
|
7.30 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
7.10 |
|
|
|
6.92 |
|
|
|
6.75 |
|
|
|
6.62 |
|
|
|
6.48 |
|
Automobile leases |
|
|
5.34 |
|
|
|
5.25 |
|
|
|
5.21 |
|
|
|
5.10 |
|
|
|
5.01 |
|
|
|
|
Automobile loans and leases |
|
|
6.39 |
|
|
|
6.25 |
|
|
|
6.03 |
|
|
|
5.88 |
|
|
|
5.74 |
|
Home equity |
|
|
7.63 |
|
|
|
7.67 |
|
|
|
7.75 |
|
|
|
7.62 |
|
|
|
7.46 |
|
Residential mortgage |
|
|
5.61 |
|
|
|
5.54 |
|
|
|
5.55 |
|
|
|
5.46 |
|
|
|
5.39 |
|
Other loans |
|
|
9.57 |
|
|
|
9.52 |
|
|
|
9.28 |
|
|
|
9.41 |
|
|
|
9.21 |
|
|
|
|
Total consumer |
|
|
6.69 |
|
|
|
6.58 |
|
|
|
6.58 |
|
|
|
6.46 |
|
|
|
6.35 |
|
|
|
|
Total loans and leases |
|
|
7.03 |
|
|
|
7.05 |
|
|
|
7.04 |
|
|
|
6.96 |
|
|
|
6.79 |
|
|
|
|
Total earning assets |
|
|
6.92 |
% |
|
|
6.98 |
% |
|
|
6.86 |
% |
|
|
6.73 |
% |
|
|
6.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Demand deposits interest bearing |
|
|
1.22 |
|
|
|
1.21 |
|
|
|
1.04 |
|
|
|
0.97 |
|
|
|
0.86 |
|
Money market deposits |
|
|
3.85 |
|
|
|
3.78 |
|
|
|
3.75 |
|
|
|
3.66 |
|
|
|
3.32 |
|
Savings and other domestic deposits |
|
|
2.16 |
|
|
|
2.02 |
|
|
|
1.90 |
|
|
|
1.75 |
|
|
|
1.59 |
|
Core certificates of deposit |
|
|
4.79 |
|
|
|
4.72 |
|
|
|
4.58 |
|
|
|
4.40 |
|
|
|
4.10 |
|
|
|
|
Total core deposits |
|
|
3.49 |
|
|
|
3.41 |
|
|
|
3.32 |
|
|
|
3.20 |
|
|
|
2.89 |
|
Other domestic deposits of $100,000 or more |
|
|
5.30 |
|
|
|
5.32 |
|
|
|
5.29 |
|
|
|
5.18 |
|
|
|
4.83 |
|
Brokered deposits and negotiable CDs |
|
|
5.53 |
|
|
|
5.50 |
|
|
|
5.53 |
|
|
|
5.50 |
|
|
|
5.12 |
|
Deposits in foreign offices |
|
|
3.16 |
|
|
|
2.99 |
|
|
|
3.18 |
|
|
|
3.12 |
|
|
|
2.68 |
|
|
|
|
Total deposits |
|
|
3.84 |
|
|
|
3.81 |
|
|
|
3.78 |
|
|
|
3.66 |
|
|
|
3.34 |
|
Short-term borrowings |
|
|
4.50 |
|
|
|
4.32 |
|
|
|
4.21 |
|
|
|
4.10 |
|
|
|
4.12 |
|
Federal Home Loan Bank advances |
|
|
4.76 |
|
|
|
4.44 |
|
|
|
4.50 |
|
|
|
4.51 |
|
|
|
4.34 |
|
Subordinated notes and other long-term debt |
|
|
5.96 |
|
|
|
5.77 |
|
|
|
5.96 |
|
|
|
5.75 |
|
|
|
5.67 |
|
|
|
|
Total interest bearing liabilities |
|
|
4.20 |
% |
|
|
4.14 |
% |
|
|
4.12 |
% |
|
|
4.02 |
% |
|
|
3.74 |
% |
|
|
|
Net interest rate spread |
|
|
2.72 |
% |
|
|
2.84 |
% |
|
|
2.74 |
% |
|
|
2.71 |
% |
|
|
2.81 |
% |
Impact of non-interest bearing funds on margin |
|
|
0.54 |
|
|
|
0.52 |
|
|
|
0.54 |
|
|
|
0.51 |
|
|
|
0.53 |
|
|
|
|
Net interest margin |
|
|
3.26 |
% |
|
|
3.36 |
% |
|
|
3.28 |
% |
|
|
3.22 |
% |
|
|
3.34 |
% |
|
|
|
|
|
|
(1) |
|
Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. See Table 1 for the FTE adjustment. |
|
(2) |
|
Loan, lease, and deposit average rates include impact of applicable derivatives and non-deferrable fees. |
|
(3) |
|
For purposes of this analysis, non-accrual loans are reflected in the average balances of loans. |
39
2007
First Six Months versus 2006 First Six Months
Fully taxable equivalent net interest income for the first six month period of 2007 increased
$3.4 million, or 1%, from the comparable year-ago period. This reflected the favorable impact of a
$0.4 billion, or 1%, increase in average earning assets partially offset by a 2 basis point decline
in the fully taxable equivalent net interest margin to 3.31%. The decline in the net interest
margin reflected a reversal of accrued interest on new non-accrual loans and higher funding costs.
Average total loans and leases increased $0.7 billion, or 3%. The Unizan merger contributed $0.6
billion of the increase.
Average total commercial loans increased $1.1 billion, or 9%, with the Unizan merger
contributing $0.3 billion. This growth reflected a $0.8 billion, or 15%, increase in average middle
market C&I loans and a $0.3 billion, or 13%, increase in average small business loans. Average
middle market CRE loans were essentially unchanged.
Average total consumer loans declined $0.3 billion, or 2%, despite a positive impact of $0.3
billion from the Unizan merger. The $0.3 billion decline primarily reflecting a $0.5 billion, or
25%, decrease in average automobile leases reflecting the continued decline in automobile leases
due to low consumer demand and competitive pricing. In contrast, average total automobile loans
increased $0.3 billion, or 12%, with this growth indirectly related to the introduction of the
Huntington Plus program for automobile dealers late last year. Average total residential
mortgages declined slightly despite a positive impact of $0.1 billion from the Unizan merger,
reflecting the impact of planned sales. Average home equity loans increased slightly, but would
have declined modestly without the favorable impact of the Unizan merger.
Average total investment securities decreased 17% from the year-ago six-month period,
reflecting our strategy to reduce the level of investment securities as part of our interest rate
risk management strategy.
Average total core deposits for the first six month period of 2007 increased $0.8 billion, or
4%, from the comparable year-ago period, with Unizan contributing $0.5 billion of the increase. The
increase reflected strong growth in average core certificates of deposit, up $0.8 billion, or 17%,
resulting from continued customer demand for higher, fixed rate deposit products. Average interest
bearing demand deposits increased $0.3 billion, or 14%. In contrast, average savings and other
domestic deposits declined $0.3 billion, or 8%, and average money market accounts declined $0.1
billion, or 2%.
40
Table 6 Consolidated YTD Average Balance Sheets and Net Interest Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD Average Balances |
|
YTD Average Rates (2) |
Fully taxable equivalent basis (1) |
|
Six Months Ending June 30, |
|
Change |
|
Six Months Ending June 30, |
(in millions of dollars) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
2007 |
|
2006 |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
$ |
212 |
|
|
$ |
29 |
|
|
$ |
183 |
|
|
|
N.M. |
% |
|
|
5.09 |
% |
|
|
7.38 |
% |
Trading account securities |
|
|
139 |
|
|
|
83 |
|
|
|
56 |
|
|
|
67.5 |
|
|
|
5.66 |
|
|
|
4.19 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
538 |
|
|
|
243 |
|
|
|
295 |
|
|
|
N.M. |
|
|
|
5.26 |
|
|
|
4.56 |
|
Loans held for sale |
|
|
266 |
|
|
|
281 |
|
|
|
(15 |
) |
|
|
(5.3 |
) |
|
|
6.01 |
|
|
|
6.08 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
3,423 |
|
|
|
4,317 |
|
|
|
(894 |
) |
|
|
(20.7 |
) |
|
|
6.12 |
|
|
|
5.19 |
|
Tax-exempt |
|
|
610 |
|
|
|
552 |
|
|
|
58 |
|
|
|
10.5 |
|
|
|
6.67 |
|
|
|
6.77 |
|
|
|
|
|
|
Total investment securities |
|
|
4,033 |
|
|
|
4,869 |
|
|
|
(836 |
) |
|
|
(17.2 |
) |
|
|
6.21 |
|
|
|
5.37 |
|
Loans and leases: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
|
6,140 |
|
|
|
5,348 |
|
|
|
792 |
|
|
|
14.8 |
|
|
|
7.44 |
|
|
|
7.29 |
|
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,199 |
|
|
|
1,352 |
|
|
|
(153 |
) |
|
|
(11.3 |
) |
|
|
8.00 |
|
|
|
7.76 |
|
Commercial |
|
|
2,820 |
|
|
|
2,656 |
|
|
|
164 |
|
|
|
6.2 |
|
|
|
7.49 |
|
|
|
6.62 |
|
|
|
|
|
|
Middle market commercial real estate |
|
|
4,019 |
|
|
|
4,008 |
|
|
|
11 |
|
|
|
0.3 |
|
|
|
7.64 |
|
|
|
7.00 |
|
Small business |
|
|
2,481 |
|
|
|
2,194 |
|
|
|
287 |
|
|
|
13.1 |
|
|
|
7.27 |
|
|
|
6.77 |
|
|
|
|
|
|
Total commercial |
|
|
12,640 |
|
|
|
11,550 |
|
|
|
1,090 |
|
|
|
9.4 |
|
|
|
7.47 |
|
|
|
7.09 |
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
2,269 |
|
|
|
2,019 |
|
|
|
250 |
|
|
|
12.4 |
|
|
|
7.01 |
|
|
|
6.44 |
|
Automobile leases |
|
|
1,624 |
|
|
|
2,157 |
|
|
|
(533 |
) |
|
|
(24.7 |
) |
|
|
5.29 |
|
|
|
4.99 |
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,893 |
|
|
|
4,176 |
|
|
|
(283 |
) |
|
|
(6.8 |
) |
|
|
6.29 |
|
|
|
5.69 |
|
Home equity |
|
|
4,943 |
|
|
|
4,932 |
|
|
|
11 |
|
|
|
0.2 |
|
|
|
7.65 |
|
|
|
7.19 |
|
Residential mortgage |
|
|
4,423 |
|
|
|
4,468 |
|
|
|
(45 |
) |
|
|
(1.0 |
) |
|
|
5.58 |
|
|
|
5.37 |
|
Other loans |
|
|
423 |
|
|
|
448 |
|
|
|
(25 |
) |
|
|
(5.6 |
) |
|
|
9.55 |
|
|
|
8.80 |
|
|
|
|
|
|
Total consumer |
|
|
13,682 |
|
|
|
14,024 |
|
|
|
(342 |
) |
|
|
(2.4 |
) |
|
|
6.65 |
|
|
|
6.22 |
|
|
|
|
|
|
Total loans and leases |
|
|
26,322 |
|
|
|
25,574 |
|
|
|
748 |
|
|
|
2.9 |
|
|
|
7.04 |
|
|
|
6.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses |
|
|
(288 |
) |
|
|
(288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases |
|
|
26,034 |
|
|
|
25,286 |
|
|
|
748 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
31,510 |
|
|
|
31,079 |
|
|
|
431 |
|
|
|
1.4 |
|
|
|
6.95 |
% |
|
|
6.38 |
% |
|
|
|
|
|
Cash and due from banks |
|
|
752 |
|
|
|
823 |
|
|
|
(71 |
) |
|
|
(8.6 |
) |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
626 |
|
|
|
500 |
|
|
|
126 |
|
|
|
25.2 |
|
|
|
|
|
|
|
|
|
All other assets |
|
|
2,441 |
|
|
|
2,486 |
|
|
|
(45 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
35,041 |
|
|
$ |
34,600 |
|
|
$ |
441 |
|
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
3,561 |
|
|
$ |
3,515 |
|
|
$ |
46 |
|
|
|
1.3 |
% |
|
|
|
% |
|
|
|
% |
Demand deposits interest bearing |
|
|
2,377 |
|
|
|
2,081 |
|
|
|
296 |
|
|
|
14.2 |
|
|
|
1.21 |
|
|
|
0.79 |
|
Money market deposits |
|
|
5,477 |
|
|
|
5,590 |
|
|
|
(113 |
) |
|
|
(2.0 |
) |
|
|
3.81 |
|
|
|
3.18 |
|
Savings and other domestic time deposits |
|
|
2,845 |
|
|
|
3,101 |
|
|
|
(256 |
) |
|
|
(8.3 |
) |
|
|
2.08 |
|
|
|
1.54 |
|
Core certificates of deposit |
|
|
5,523 |
|
|
|
4,738 |
|
|
|
785 |
|
|
|
16.6 |
|
|
|
4.76 |
|
|
|
3.98 |
|
|
|
|
|
|
Total core deposits |
|
|
19,783 |
|
|
|
19,025 |
|
|
|
758 |
|
|
|
4.0 |
|
|
|
3.45 |
|
|
|
2.78 |
|
Other domestic time deposits of $100,000 or more |
|
|
1,171 |
|
|
|
1,012 |
|
|
|
159 |
|
|
|
15.7 |
|
|
|
5.31 |
|
|
|
4.70 |
|
Brokered deposits and negotiable CDs |
|
|
2,850 |
|
|
|
3,203 |
|
|
|
(353 |
) |
|
|
(11.0 |
) |
|
|
5.51 |
|
|
|
4.91 |
|
Deposits in foreign offices |
|
|
557 |
|
|
|
469 |
|
|
|
88 |
|
|
|
18.8 |
|
|
|
3.07 |
|
|
|
2.65 |
|
|
|
|
|
|
Total deposits |
|
|
24,361 |
|
|
|
23,709 |
|
|
|
652 |
|
|
|
2.8 |
|
|
|
3.83 |
|
|
|
3.21 |
|
Short-term borrowings |
|
|
1,970 |
|
|
|
1,856 |
|
|
|
114 |
|
|
|
6.1 |
|
|
|
4.41 |
|
|
|
3.87 |
|
Federal Home Loan Bank advances |
|
|
1,229 |
|
|
|
1,505 |
|
|
|
(276 |
) |
|
|
(18.3 |
) |
|
|
4.61 |
|
|
|
4.17 |
|
Subordinated notes and other long-term debt |
|
|
3,478 |
|
|
|
3,392 |
|
|
|
86 |
|
|
|
2.5 |
|
|
|
5.87 |
|
|
|
5.44 |
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
27,477 |
|
|
|
26,947 |
|
|
|
530 |
|
|
|
2.0 |
|
|
|
4.16 |
|
|
|
3.59 |
|
|
|
|
|
|
All other liabilities |
|
|
974 |
|
|
|
1,275 |
|
|
|
(301 |
) |
|
|
(23.6 |
) |
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
3,029 |
|
|
|
2,863 |
|
|
|
166 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
35,041 |
|
|
$ |
34,600 |
|
|
$ |
441 |
|
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.79 |
|
|
|
2.79 |
|
Impact of non-interest bearing funds on margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.52 |
|
|
|
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.31 |
% |
|
|
3.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not
a meaningful value
|
|
|
(1) |
|
Fully taxable equivalent (FTE) yields are calculated assuming a 35% tax rate. |
|
(2) |
|
Loan and lease and deposit average rates include impact of applicable
derivatives and non-deferrable fees. |
|
(3) |
|
For purposes of this analysis, non-accrual loans are reflected in the
average balances of loans. |
41
Provision for Credit Losses
(This section should be read in conjunction with Significant Items 3, 5, 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.
The provision for credit losses in the 2007 second quarter was $60.1 million, up $44.4 million
from the year-ago quarter, and up $30.7 million from the 2007 first quarter. The provision for
credit losses in the 2007 second quarter exceeded same period net charge-offs by $25.6 million. The
increases in the provision for credit losses relative to both the year-ago quarter and the prior
quarter were attributable to increases in both the transaction and economic reserve components of
the allowance for loan losses. Compared with the prior quarter, the transaction reserve component
increased 5 basis points and the economic reserve component increased 2 basis points. The increase
in the transaction reserve component reflected the impact of increasing monitored credits,
primarily resulting from softness in the residential and commercial real estate markets in the
Midwest.
Non-Interest Income
(This section should be read in conjunction with Significant Items 1, 3, 4 and 7.)
Table 7 reflects non-interest income detail for each of the past five quarters and the first
six month periods of 2007 and 2006.
Table 7 Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
2Q07 vs 2Q06 |
(in thousands) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
Amount |
|
Percent |
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
50,017 |
|
|
$ |
44,793 |
|
|
$ |
48,548 |
|
|
$ |
48,718 |
|
|
$ |
47,225 |
|
|
|
$ |
2,792 |
|
|
|
5.9 |
% |
Trust services |
|
|
26,764 |
|
|
|
25,894 |
|
|
|
23,511 |
|
|
|
22,490 |
|
|
|
22,676 |
|
|
|
|
4,088 |
|
|
|
18.0 |
|
Brokerage and insurance income |
|
|
17,199 |
|
|
|
16,082 |
|
|
|
14,600 |
|
|
|
14,697 |
|
|
|
14,345 |
|
|
|
|
2,854 |
|
|
|
19.9 |
|
Other service charges and fees |
|
|
14,923 |
|
|
|
13,208 |
|
|
|
13,784 |
|
|
|
12,989 |
|
|
|
13,072 |
|
|
|
|
1,851 |
|
|
|
14.2 |
|
Bank owned life insurance income |
|
|
10,904 |
|
|
|
10,851 |
|
|
|
10,804 |
|
|
|
12,125 |
|
|
|
10,604 |
|
|
|
|
300 |
|
|
|
2.8 |
|
Mortgage banking (loss) income |
|
|
7,122 |
|
|
|
9,351 |
|
|
|
6,169 |
|
|
|
8,512 |
|
|
|
13,616 |
|
|
|
|
(6,494 |
) |
|
|
(47.7 |
) |
Securities (losses)/gains (1) |
|
|
(5,139 |
) |
|
|
104 |
|
|
|
(15,804 |
) |
|
|
(57,332 |
) |
|
|
(35 |
) |
|
|
|
(5,104 |
) |
|
|
N.M. |
|
Other income |
|
|
34,403 |
|
|
|
24,894 |
|
|
|
38,994 |
|
|
|
35,711 |
|
|
|
41,516 |
|
|
|
|
(7,113 |
) |
|
|
(17.1 |
) |
|
|
|
|
|
|
Total non-interest income |
|
$ |
156,193 |
|
|
$ |
145,177 |
|
|
$ |
140,606 |
|
|
$ |
97,910 |
|
|
$ |
163,019 |
|
|
|
$ |
(6,826 |
) |
|
|
(4.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
YTD 2007 vs 2006 |
(in thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
|
|
Service charges on deposit accounts |
|
$ |
94,810 |
|
|
$ |
88,447 |
|
|
$ |
6,363 |
|
|
|
7.2 |
% |
Trust services |
|
|
52,658 |
|
|
|
43,954 |
|
|
|
8,704 |
|
|
|
19.8 |
|
Brokerage and insurance income |
|
|
33,281 |
|
|
|
29,538 |
|
|
|
3,743 |
|
|
|
12.7 |
|
Other service charges and fees |
|
|
28,131 |
|
|
|
24,581 |
|
|
|
3,550 |
|
|
|
14.4 |
|
Bank owned life insurance income |
|
|
21,755 |
|
|
|
20,846 |
|
|
|
909 |
|
|
|
4.4 |
|
Mortgage banking income |
|
|
16,473 |
|
|
|
26,810 |
|
|
|
(10,337 |
) |
|
|
(38.6 |
) |
Securities losses |
|
|
(5,035 |
) |
|
|
(55 |
) |
|
|
(4,980 |
) |
|
|
N.M. |
|
Other income |
|
|
59,297 |
|
|
|
88,432 |
|
|
|
(29,135 |
) |
|
|
(32.9 |
) |
|
|
|
Total non-interest income |
|
$ |
301,370 |
|
|
$ |
322,553 |
|
|
$ |
(21,183 |
) |
|
|
(6.6 |
)% |
|
|
|
N.M., not a meaningful value.
|
|
|
(1) |
|
Includes $57.5 million of securities impairment losses for the third quarter of 2006. |
Table 8 details mortgage banking income and the net impact of MSR hedging activity for
each of the past five quarters and for the first six month periods of 2007 and 2006.
42
Table 8 Mortgage Banking Income and Net Impact of MSR Hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
2Q07 vs 2Q06 |
(in thousands) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
Amount |
|
Percent |
|
|
|
|
|
|
Mortgage Banking Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and secondary marketing |
|
$ |
6,771 |
|
|
$ |
4,940 |
|
|
$ |
4,057 |
|
|
$ |
3,070 |
|
|
$ |
7,091 |
|
|
|
$ |
(320 |
)% |
|
|
(4.5 |
)% |
Servicing fees |
|
|
6,976 |
|
|
|
6,820 |
|
|
|
6,662 |
|
|
|
6,077 |
|
|
|
5,995 |
|
|
|
|
981 |
|
|
|
16.4 |
|
Amortization of capitalized servicing (1) |
|
|
(4,449 |
) |
|
|
(3,638 |
) |
|
|
(3,835 |
) |
|
|
(4,484 |
) |
|
|
(3,293 |
) |
|
|
|
(1,156 |
) |
|
|
(35.1 |
) |
Other mortgage banking income |
|
|
2,822 |
|
|
|
3,247 |
|
|
|
1,778 |
|
|
|
3,887 |
|
|
|
2,281 |
|
|
|
|
541 |
|
|
|
23.7 |
|
|
|
|
|
|
|
Sub-total |
|
|
12,120 |
|
|
|
11,369 |
|
|
|
8,662 |
|
|
|
8,550 |
|
|
|
12,074 |
|
|
|
|
46 |
|
|
|
0.4 |
|
MSR valuation adjustment (1) |
|
|
16,034 |
|
|
|
(1,057 |
) |
|
|
(1,907 |
) |
|
|
(10,716 |
) |
|
|
8,281 |
|
|
|
|
7,753 |
|
|
|
93.6 |
|
Net trading gains (losses) related to MSR hedging |
|
|
(21,032 |
) |
|
|
(961 |
) |
|
|
(586 |
) |
|
|
10,678 |
|
|
|
(6,739 |
) |
|
|
|
(14,293 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
Total mortgage banking (loss) income |
|
$ |
7,122 |
|
|
$ |
9,351 |
|
|
$ |
6,169 |
|
|
$ |
8,512 |
|
|
$ |
13,616 |
|
|
|
$ |
(6,494 |
) |
|
|
(47.7) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized mortgage servicing rights (2) |
|
$ |
155,420 |
|
|
$ |
134,845 |
|
|
$ |
131,104 |
|
|
$ |
129,317 |
|
|
$ |
136,244 |
|
|
|
$ |
19,176 |
|
|
|
14.1 |
% |
Total mortgages serviced for others (2) |
|
|
8,693,000 |
|
|
|
8,494,000 |
|
|
|
8,252,000 |
|
|
|
7,994,000 |
|
|
|
7,725,000 |
|
|
|
|
968,000 |
|
|
|
12.5 |
|
MSR % of investor servicing portfolio |
|
|
1.79 |
% |
|
|
1.59 |
% |
|
|
1.59 |
% |
|
|
1.62 |
% |
|
|
1.76 |
% |
|
|
|
0.03 |
% |
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Impact of MSR Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment (1) |
|
$ |
16,034 |
|
|
$ |
(1,057 |
) |
|
$ |
(1,907 |
) |
|
$ |
(10,716 |
) |
|
$ |
8,281 |
|
|
|
$ |
7,753 |
|
|
|
93.6 |
% |
Net trading gains (losses) related to MSR hedging |
|
|
(21,032 |
) |
|
|
(961 |
) |
|
|
(586 |
) |
|
|
10,678 |
|
|
|
(6,739 |
) |
|
|
|
(14,293 |
) |
|
|
N.M. |
|
Net interest income related to MSR hedging |
|
|
248 |
|
|
|
|
|
|
|
(2 |
) |
|
|
38 |
|
|
|
|
|
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
Net impact of MSR hedging |
|
$ |
(4,750 |
) |
|
$ |
(2,018 |
) |
|
$ |
(2,495 |
) |
|
$ |
|
|
|
$ |
1,542 |
|
|
|
$ |
(6,292 |
) |
|
|
N.M. |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
YTD 2007 vs 2006 |
|
|
|
|
(in thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
Mortgage Banking Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and secondary marketing |
|
$ |
11,711 |
|
|
$ |
11,090 |
|
|
$ |
621 |
|
|
|
5.6 |
% |
|
|
|
|
Servicing fees |
|
|
13,796 |
|
|
|
11,920 |
|
|
|
1,876 |
|
|
|
15.7 |
|
|
|
|
|
Amortization of capitalized servicing (1) |
|
|
(8,087 |
) |
|
|
(6,825 |
) |
|
|
(1,262 |
) |
|
|
18.5 |
|
|
|
|
|
Other mortgage banking income |
|
|
6,069 |
|
|
|
4,507 |
|
|
|
1,562 |
|
|
|
34.7 |
|
|
|
|
|
|
|
|
Sub-total |
|
|
23,489 |
|
|
|
20,692 |
|
|
|
2,797 |
|
|
|
13.5 |
|
|
|
|
|
MSR valuation adjustment (1) |
|
|
14,977 |
|
|
|
17,494 |
|
|
|
(2,517 |
) |
|
|
(14.4 |
) |
|
|
|
|
Net trading gains (losses) related to MSR hedging |
|
|
(21,993 |
) |
|
|
(11,377 |
) |
|
|
(10,616 |
) |
|
|
93.3 |
|
|
|
|
|
|
|
|
Total mortgage banking income |
|
$ |
16,473 |
|
|
$ |
26,809 |
|
|
$ |
(10,336 |
) |
|
|
(38.6) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized mortgage servicing rights (2) |
|
$ |
155,420 |
|
|
$ |
136,244 |
|
|
$ |
19,176 |
|
|
|
14.1 |
% |
|
|
|
|
Total mortgages serviced for others (2) |
|
|
8,693,000 |
|
|
|
7,725,000 |
|
|
|
968,000 |
|
|
|
12.5 |
|
|
|
|
|
MSR % of investor servicing portfolio |
|
|
1.79 |
% |
|
|
1.76 |
% |
|
|
0.03 |
% |
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Impact of MSR Hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MSR valuation adjustment (1) |
|
$ |
14,977 |
|
|
$ |
17,494 |
|
|
$ |
(2,517 |
) |
|
|
(14.4 |
)% |
|
|
|
|
Net trading gains (losses) related to MSR hedging |
|
|
(21,993 |
) |
|
|
(11,377 |
) |
|
|
(10,616 |
) |
|
|
93.3 |
|
|
|
|
|
Net interest income related to MSR hedging |
|
|
248 |
|
|
|
|
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of MSR hedging |
|
$ |
(6,768 |
) |
|
$ |
6,117 |
|
|
$ |
(12,885 |
) |
|
|
N.M. |
% |
|
|
|
|
|
|
|
N.M., not a meaningful value.
|
|
|
(1) |
|
The change in fair value for the period represents the MSR
valuation adjustment, excluding amortization of
capitalized servicing. |
|
(2) |
|
At period end. |
43
2007 Second Quarter versus 2006 Second Quarter
Non-interest income decreased $6.8 million, or 4%, from the year-ago quarter, reflecting:
|
|
|
$7.5 million decline in other income, primarily related to a $10.5 million decrease in
automobile operating lease income as that portfolio continued its run off since no
automobile operating leases have been originated since April 2002. Partially offsetting
this decline were higher derivative fees and fees related to the Huntington Plus program. |
|
|
|
|
$6.5 million, or 48%, decline in mortgage banking income, driven entirely by the
negative net impact of MSR hedging. The net impact of MSR hedging included in mortgage
banking income represented a $5.0 million loss in the 2007 second quarter, compared with a
gain of $1.5 million in the 2006 second quarter. Core mortgage banking income was
essentially flat compared with the year-ago quarter. |
|
|
|
|
$5.1 million of impairment losses on certain investment securities backed by mortgage
loans to borrowers with low FICO scores. |
Partially offset by:
|
|
|
$4.1 million, or 18%, increase in trust services income, reflecting (1) a $2.3 million
increase in institutional trust income largely due to the acquisition of Unified Fund
Services, Inc. in December 2006, (2) a $1.2 million increase in fees from Huntington Funds,
reflecting 13% fund asset growth, and (3) a $0.6 million increase in personal trust fees. |
|
|
|
|
$2.9 million, or 20%, increase in brokerage and insurance income, reflecting strong
growth in mutual fund and annuity sales. |
|
|
|
|
$2.8 million, or 6%, increase in service charges on deposit accounts, reflecting a $2.0
million, or 7%, increase in personal service charges, primarily NSF/OD, and a $0.8 million,
or 5%, increase in commercial service charge income. |
|
|
|
|
$1.9 million, or 14%, increase in other service charges and fees, primarily reflecting a
$1.7 million, or 18%, increase in fees generated by higher debit card volume. |
2007 Second Quarter versus 2007 First Quarter
Non-interest income increased $11.0 million, or 8%, from the 2007 first quarter, reflecting:
|
|
|
$9.7 million increase in other income, as the first quarter included an $8.5 million
loss on equity investments compared with $2.3 million of such gains in the current quarter.
In addition, automobile operating lease income declined $1.3 million as that portfolio
continued its runoff. |
|
|
|
|
$5.2 million, or 12%, increase in service charges on deposit accounts, primarily due to
seasonally lower fees in the first quarter. |
|
|
|
|
$1.7 million, or 13%, increase in other service charges and fees, reflecting a $1.5
million, or 15%, increase in fees generated by higher debit card volume. |
|
|
|
|
$1.1 million, or 7%, increase in brokerage and insurance fees, reflecting a strong
increase in annuity sales volume. |
Partially offset by:
|
|
|
$5.1 million in impairment losses on certain investment securities backed by mortgage
loans to borrowers with low FICO scores. |
|
|
|
|
$2.2 million decline in mortgage banking income. The net impact of MSR hedging included
in mortgage banking income represented a $5.0 million loss in the 2007 second quarter,
compared with a $2.0 million loss in the first quarter. |
44
2007 First Six Months versus 2006 First Six Months
Non-interest income for the first six month period of 2007 decreased $21.2 million, or 7%,
from the comparable year-ago period, reflecting:
|
|
|
$30.2 million, or 35%, decline in other income. This primarily reflected a $24.7
million decline in automobile operating lease income as that portfolio continued to run off
and net losses of $6.2 million on equity investments. The Unizan merger contributed $1.4
million of growth in other income. |
|
|
|
|
$10.3 million, or 39%, decline in mortgage banking income. This reflects the impact of
MSR fair value adjustments, net of hedging related activities, as the first six month
period of 2007 included a negative net impact of $7.0 million, compared with a $6.1 million
impact in the comparable year-ago period which included the $5.1 million positive change in
the fair value of MSRs prior to the implementation of our hedging program. |
|
|
|
|
$5.0 million of investment securities losses, reflecting $8.4 million in impairment
losses in the first six month period of 2007 related to certain investment securities
backed by mortgage loans to borrowers with low FICO scores. |
Partially offset by:
|
|
|
$8.7 million ($1.1 million Unizan merger-related), or 20%, increase in trust services
income, reflecting (1) a $4.7 million increase in institutional trust income largely due to
the acquisition of Unified Fund Services, Inc. in December 2006, (2) a $2.2 million, or
15%, increase in fees from Huntington Funds, reflecting fund asset growth, and (3) a $1.7
million, or 8%, increase in personal trust fees, primarily reflecting asset growth. |
|
|
|
|
$6.4 million ($1.1 million Unizan merger-related), or 7%, increase in service charges on
deposit accounts, reflecting a $4.3 million, or 8%, increase in personal service charges,
primarily NSF/OD, and a $2.0 million, or 7%, increase in commercial service charge income. |
|
|
|
|
$3.7 million, or 13%, increase in brokerage and insurance income, reflecting strong
growth in mutual fund sales. |
|
|
|
|
$3.6 million, or 14%, increase in other service charges and fees, primarily reflecting a
$2.9 million, or 16%, increase in fees generated by higher debit card volume. |
Non-Interest Expense
(This section should be read in conjunction with Significant Items 1, 2, 3 and 7.)
Table 9 reflects non-interest expense detail for each of the last five quarters and for the
first six month periods of 2007 and 2006.
45
Table 9 Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
2Q07 vs |
2Q06 |
(in thousands) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
Amount |
|
Percent |
|
|
|
|
|
|
Salaries |
|
$ |
106,768 |
|
|
$ |
104,912 |
|
|
$ |
111,806 |
|
|
$ |
105,144 |
|
|
$ |
107,249 |
|
|
|
$ |
(481 |
) |
|
|
(0.4 |
)% |
Benefits |
|
|
28,423 |
|
|
|
29,727 |
|
|
|
26,138 |
|
|
|
28,679 |
|
|
|
30,655 |
|
|
|
|
(2,232 |
) |
|
|
(7.3 |
) |
|
|
|
|
|
|
Personnel costs |
|
|
135,191 |
|
|
|
134,639 |
|
|
|
137,944 |
|
|
|
133,823 |
|
|
|
137,904 |
|
|
|
|
(2,713 |
) |
|
|
(2.0 |
)% |
Outside data processing and other services |
|
|
25,701 |
|
|
|
21,814 |
|
|
|
20,695 |
|
|
|
18,664 |
|
|
|
19,569 |
|
|
|
|
6,132 |
|
|
|
31.3 |
|
Net occupancy |
|
|
19,417 |
|
|
|
19,908 |
|
|
|
17,279 |
|
|
|
18,109 |
|
|
|
17,927 |
|
|
|
|
1,490 |
|
|
|
8.3 |
|
Equipment |
|
|
17,157 |
|
|
|
18,219 |
|
|
|
18,151 |
|
|
|
17,249 |
|
|
|
18,009 |
|
|
|
|
(852 |
) |
|
|
(4.7 |
) |
Marketing |
|
|
8,986 |
|
|
|
7,696 |
|
|
|
6,207 |
|
|
|
7,846 |
|
|
|
10,374 |
|
|
|
|
(1,388 |
) |
|
|
(13.4 |
) |
Professional services |
|
|
8,101 |
|
|
|
6,482 |
|
|
|
8,958 |
|
|
|
6,438 |
|
|
|
6,292 |
|
|
|
|
1,809 |
|
|
|
28.8 |
|
Telecommunications |
|
|
4,577 |
|
|
|
4,126 |
|
|
|
4,619 |
|
|
|
4,818 |
|
|
|
4,990 |
|
|
|
|
(413 |
) |
|
|
(8.3 |
) |
Printing and supplies |
|
|
3,672 |
|
|
|
3,242 |
|
|
|
3,610 |
|
|
|
3,416 |
|
|
|
3,764 |
|
|
|
|
(92 |
) |
|
|
(2.4 |
) |
Amortization of intangibles |
|
|
2,519 |
|
|
|
2,520 |
|
|
|
2,993 |
|
|
|
2,902 |
|
|
|
2,992 |
|
|
|
|
(473 |
) |
|
|
(15.8 |
) |
Other expense |
|
|
19,334 |
|
|
|
23,426 |
|
|
|
47,334 |
|
|
|
29,165 |
|
|
|
30,538 |
|
|
|
|
(11,204 |
) |
|
|
(36.7 |
) |
|
|
|
|
|
|
Total non-interest expense |
|
$ |
244,655 |
|
|
$ |
242,072 |
|
|
$ |
267,790 |
|
|
$ |
242,430 |
|
|
$ |
252,359 |
|
|
|
$ |
(7,704 |
) |
|
|
(3.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
YTD 2007 vs 2006 |
(in thousands) |
|
2007 |
|
|
2006 |
|
|
Amount |
|
|
Percent |
|
|
|
|
Salaries |
|
$ |
211,680 |
|
|
$ |
208,707 |
|
|
$ |
2,973 |
|
|
|
1.4 |
% |
Benefits |
|
|
58,150 |
|
|
|
60,754 |
|
|
|
(2,604 |
) |
|
|
(4.3 |
) |
|
|
|
Personnel costs |
|
|
269,830 |
|
|
|
269,461 |
|
|
|
369 |
|
|
|
0.1 |
|
Outside data processing and other services |
|
|
47,515 |
|
|
|
39,420 |
|
|
|
8,095 |
|
|
|
20.5 |
|
Net occupancy |
|
|
39,325 |
|
|
|
35,893 |
|
|
|
3,432 |
|
|
|
9.6 |
|
Equipment |
|
|
35,376 |
|
|
|
34,512 |
|
|
|
864 |
|
|
|
2.5 |
|
Marketing |
|
|
16,682 |
|
|
|
17,675 |
|
|
|
(993 |
) |
|
|
(5.6 |
) |
Professional services |
|
|
14,583 |
|
|
|
11,657 |
|
|
|
2,926 |
|
|
|
25.1 |
|
Telecommunications |
|
|
8,703 |
|
|
|
9,815 |
|
|
|
(1,112 |
) |
|
|
(11.3 |
) |
Printing and supplies |
|
|
6,914 |
|
|
|
6,838 |
|
|
|
76 |
|
|
|
1.1 |
|
Amortization of intangibles |
|
|
5,039 |
|
|
|
4,067 |
|
|
|
972 |
|
|
|
23.9 |
|
Other expense |
|
|
42,760 |
|
|
|
61,436 |
|
|
|
(18,676 |
) |
|
|
(30.4 |
) |
|
|
|
Total non-interest expense |
|
$ |
486,727 |
|
|
|
490,774 |
|
|
$ |
(4,047 |
) |
|
|
(0.8 |
)% |
|
|
|
2007 Second Quarter versus 2006 Second Quarter
Non-interest expense decreased $7.7 million, or 3%, from the year-ago quarter, reflecting:
|
|
|
$11.2 million, or 37%, decrease in other expense, driven by $7.8 million lower
automobile operating lease expense as that portfolio continued its runoff. In addition,
the current quarter was reduced by a gain of $4.1 million related to the repayment of FHLB
debt. |
|
|
|
|
$2.7 million, or 2%, decrease in personnel expense driven by lower incentives. |
|
|
|
|
$1.4 million, or 13%, decrease in marketing expense reflecting lower television advertising. |
Partially offset by:
|
|
|
$6.1 million, or 31%, increase in outside data processing and other services expense,
including $4.1 million of Sky Financial merger costs. |
|
|
|
|
$1.8 million, or 29%, increase in professional services expense, including $1.1 million
of Sky Financial merger costs. |
46
2007 Second Quarter versus 2007 First Quarter
Non-interest expense increased $2.6 million, or 1%, from the 2007 first quarter, reflecting:
|
|
|
$3.9 million, or 18%, increase in outside data processing and other services expense,
including $3.5 million of increased Sky Financial merger costs. |
|
|
|
|
$1.6 million, or 25%, increase in professional services expense, including $1.0 million
of increased Sky Financial merger costs. |
|
|
|
|
$1.3 million, or 17%, increase in marketing costs, including $1.5 million of increased
Sky Financial merger costs. |
Partially offset by:
|
|
|
$4.1 million, or 17%, decline in other expense, reflecting the $4.1 million gain from
FHLB debt repayment and a decline of $1.9 million related to litigation losses incurred in
the 2007 first quarter. |
2007 First Six Months versus 2006 First Six Months
Non-interest expense for the first six month period of 2007 declined $4.0 million, or 1%, from
the comparable year-ago period, reflecting:
|
|
|
$18.7 million, or 30%, decline in other expense, primarily due to an $18.4 million
decline in automobile operating lease expense. Unizan contributed $2.0 million of
merger-related growth. |
|
|
|
|
$1.1 million, or 11%, decline in telecommunication expense. |
Partially offset by:
|
|
|
$8.1 million, or 21%, increase in outside data processing and other services expense,
including $4.5 million of Sky Financial merger costs. |
|
|
|
|
$3.4 million, or 10%, increase in net occupancy expenses. |
|
|
|
|
$2.9 million, or 25%, increase in professional services expense, reflecting higher
collection expenses and $1.2 million of Sky Financial merger costs. |
Provision for Income Taxes
(This section should be read in conjunction with Significant Item 6.)
The provision for income taxes in the second quarter of 2007 was $24.3 million and represented
an effective tax rate on income before taxes of 23.2%. The effective tax rates in the year-ago
quarter and first quarter of 2007 were 29.0% and 25.9%, respectively. The provision for income
taxes decreased $21.2 million from the year ago quarter and $9.3 million from first quarter 2007
primarily due to a decrease in pre-tax earnings, partially offset by an increase in tax-exempt
income and general business credits. The effective tax rate for the full year 2007 is estimated to
be 27.0%, although the third quarter rate is expected to be slightly higher, reflecting the impact
of the Sky Financial acquisition.
In the ordinary course of business, we operate in various taxing jurisdictions and are subject
to income and non-income 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.
The Internal Revenue Service is currently examining our federal tax returns for the years
ending 2004 and 2005. In addition, we are subject to ongoing tax examinations in various
jurisdictions. We believe that the resolution of these examinations will not have a significant
adverse impact on our consolidated financial position or results of operations.
47
RISK MANAGEMENT AND CAPITAL
Risk identification and monitoring are key elements in overall risk management. We believe our
primary risk exposures are credit, market, liquidity, and operational risk. Credit risk is
the risk of loss due to adverse changes in the borrowers ability to meet its financial obligations
under agreed upon terms. Market risk represents the risk of loss due to changes in the
market value of assets and liabilities due to changes in interest rates, exchange rates, and equity
prices. Liquidity risk arises from the possibility that funds may not be available to
satisfy current or future commitments based on external macro market issues, investor perception of
financial strength, and events unrelated to the company such as war, terrorism, or financial
institution market specific issues. Operational risk arises from the inherent day-to-day
operations of the company that could result in losses due to human error, inadequate or failed
internal systems and controls, and external events.
Credit Risk
Credit risk is the risk of loss due to adverse changes in a borrowers ability to meet its
financial obligations under agreed upon terms. We are subject to credit risk in lending, trading,
and investment activities. The nature and degree of credit risk is a function of the types of
transactions, the structure of those transactions, and the parties involved. The majority of our
credit risk is associated with lending activities, as the acceptance and management of credit risk
is central to profitable lending. Credit risk is incidental to trading activities and represents a
limited portion of the total risks associated with the investment portfolio. Credit risk is
mitigated through a combination of credit policies and processes and portfolio diversification.
The maximum level of credit exposure to individual commercial borrowers is limited by policy
guidelines based on the risk of default associated with the credit facilities extended to each
borrower or related group of borrowers. All authority to grant commitments is delegated through the
independent credit administration function and is monitored and regularly updated. Concentration
risk is managed via limits on loan type, geography, industry, loan quality factors, and country
limits. We continue to focus on extending credit to commercial customers with existing or
expandable relationships within our primary banking markets. Also, we continue to focus on
expanding existing relationships with our retail customers and adding new borrowers that meet our
risk profile.
The checks and balances in the credit process and the independence of the credit
administration and risk management functions are designed to assess the level of credit risk being
accepted, facilitate the early recognition of credit problems when they do occur, and to provide
for effective problem asset management and resolution.
Credit Exposure Mix
(This section should be read in conjunction with Significant Item 3.)
As shown in Table 10, at June 30, 2007, total credit exposure was $26.8 billion. Of this
amount, $13.8 billion, or 51%, represented total consumer loans and leases, a decrease from 54% at
June 30, 2006, and from 53% at December 31, 2006. Total commercial loans and leases represented
$13.1 billion, or 49%, up from 46% at June 30, 2006, and from 47% at December 31, 2006.
48
Table 10 Loans and Leases Composition (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
June 30, |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
By Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
$ |
6,210,709 |
|
|
|
23.2 |
% |
|
$ |
6,164,569 |
|
|
|
23.5 |
% |
|
$ |
5,961,445 |
|
|
|
22.8 |
% |
|
$ |
5,811,130 |
|
|
|
22.0 |
% |
|
$ |
5,654,537 |
|
|
|
21.5 |
% |
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,382,722 |
|
|
|
5.2 |
|
|
|
1,187,664 |
|
|
|
4.5 |
|
|
|
1,228,641 |
|
|
|
4.7 |
|
|
|
1,169,276 |
|
|
|
4.4 |
|
|
|
1,179,603 |
|
|
|
4.5 |
|
Commercial |
|
|
2,950,864 |
|
|
|
11.0 |
|
|
|
2,807,063 |
|
|
|
10.7 |
|
|
|
2,722,599 |
|
|
|
10.4 |
|
|
|
2,808,684 |
|
|
|
10.7 |
|
|
|
2,783,982 |
|
|
|
10.6 |
|
|
|
|
Middle market commercial real estate |
|
|
4,333,586 |
|
|
|
16.2 |
|
|
|
3,994,727 |
|
|
|
15.2 |
|
|
|
3,951,240 |
|
|
|
15.1 |
|
|
|
3,977,960 |
|
|
|
15.1 |
|
|
|
3,963,585 |
|
|
|
15.1 |
|
Small business |
|
|
2,507,728 |
|
|
|
9.4 |
|
|
|
2,474,955 |
|
|
|
9.4 |
|
|
|
2,441,837 |
|
|
|
9.3 |
|
|
|
2,418,709 |
|
|
|
9.2 |
|
|
|
2,413,646 |
|
|
|
9.1 |
|
|
|
|
Total commercial |
|
|
13,052,023 |
|
|
|
48.8 |
|
|
|
12,634,251 |
|
|
|
48.1 |
|
|
|
12,354,522 |
|
|
|
47.2 |
|
|
|
12,207,799 |
|
|
|
46.3 |
|
|
|
12,031,768 |
|
|
|
45.7 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
2,424,105 |
|
|
|
9.0 |
|
|
|
2,251,215 |
|
|
|
8.6 |
|
|
|
2,125,821 |
|
|
|
8.1 |
|
|
|
2,105,623 |
|
|
|
8.0 |
|
|
|
2,059,836 |
|
|
|
7.8 |
|
Automobile leases |
|
|
1,488,903 |
|
|
|
5.6 |
|
|
|
1,623,758 |
|
|
|
6.2 |
|
|
|
1,769,424 |
|
|
|
6.8 |
|
|
|
1,910,257 |
|
|
|
7.2 |
|
|
|
2,042,213 |
|
|
|
7.7 |
|
Home equity |
|
|
5,015,506 |
|
|
|
18.7 |
|
|
|
4,914,462 |
|
|
|
18.7 |
|
|
|
4,926,900 |
|
|
|
18.8 |
|
|
|
5,019,101 |
|
|
|
19.0 |
|
|
|
5,047,990 |
|
|
|
19.8 |
|
Residential mortgage |
|
|
4,398,720 |
|
|
|
16.4 |
|
|
|
4,404,220 |
|
|
|
16.8 |
|
|
|
4,548,849 |
|
|
|
17.4 |
|
|
|
4,678,577 |
|
|
|
17.7 |
|
|
|
4,739,814 |
|
|
|
18.0 |
|
Other loans |
|
|
432,256 |
|
|
|
1.5 |
|
|
|
437,117 |
|
|
|
1.6 |
|
|
|
427,909 |
|
|
|
1.7 |
|
|
|
440,145 |
|
|
|
1.8 |
|
|
|
432,960 |
|
|
|
1.0 |
|
|
|
|
Total consumer |
|
|
13,759,490 |
|
|
|
51.2 |
|
|
|
13,630,772 |
|
|
|
51.9 |
|
|
|
13,798,903 |
|
|
|
52.8 |
|
|
|
14,153,703 |
|
|
|
53.7 |
|
|
|
14,322,813 |
|
|
|
54.3 |
|
|
|
|
Total loans and leases |
|
$ |
26,811,513 |
|
|
|
100.0 |
|
|
$ |
26,265,023 |
|
|
|
100.0 |
|
|
$ |
26,153,425 |
|
|
|
100.0 |
|
|
$ |
26,361,502 |
|
|
|
100.0 |
|
|
$ |
26,354,581 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Business Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Ohio |
|
$ |
3,899,692 |
|
|
|
14.5 |
% |
|
$ |
3,796,470 |
|
|
|
14.5 |
% |
|
$ |
3,787,631 |
|
|
|
14.5 |
% |
|
$ |
3,895,724 |
|
|
|
14.8 |
% |
|
$ |
3,830,352 |
|
|
|
14.5 |
% |
Northwest Ohio |
|
|
449,232 |
|
|
|
1.7 |
|
|
|
455,075 |
|
|
|
1.7 |
|
|
|
461,622 |
|
|
|
1.8 |
|
|
|
465,413 |
|
|
|
1.8 |
|
|
|
450,961 |
|
|
|
1.7 |
|
Greater Cleveland |
|
|
2,099,941 |
|
|
|
7.8 |
|
|
|
2,019,820 |
|
|
|
7.7 |
|
|
|
1,920,421 |
|
|
|
7.3 |
|
|
|
1,953,851 |
|
|
|
7.4 |
|
|
|
1,966,013 |
|
|
|
7.5 |
|
Greater Akron/Canton |
|
|
1,330,102 |
|
|
|
5.0 |
|
|
|
1,318,932 |
|
|
|
5.0 |
|
|
|
1,326,374 |
|
|
|
5.1 |
|
|
|
1,357,028 |
|
|
|
5.1 |
|
|
|
1,422,016 |
|
|
|
5.4 |
|
Southern Ohio/Kentucky |
|
|
2,275,224 |
|
|
|
8.5 |
|
|
|
2,159,407 |
|
|
|
8.2 |
|
|
|
2,190,115 |
|
|
|
8.4 |
|
|
|
2,181,340 |
|
|
|
8.3 |
|
|
|
2,190,554 |
|
|
|
8.3 |
|
Mahoning Valley |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio Valley |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Michigan |
|
|
2,439,517 |
|
|
|
9.1 |
|
|
|
2,453,300 |
|
|
|
9.3 |
|
|
|
2,421,085 |
|
|
|
9.3 |
|
|
|
2,443,461 |
|
|
|
9.3 |
|
|
|
2,397,688 |
|
|
|
9.1 |
|
East Michigan |
|
|
1,654,934 |
|
|
|
6.2 |
|
|
|
1,646,028 |
|
|
|
6.3 |
|
|
|
1,630,050 |
|
|
|
6.2 |
|
|
|
1,602,647 |
|
|
|
6.1 |
|
|
|
1,591,995 |
|
|
|
6.0 |
|
Western Pennsylvania |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pittsburgh |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Indiana |
|
|
1,004,934 |
|
|
|
3.7 |
|
|
|
971,186 |
|
|
|
3.7 |
|
|
|
962,575 |
|
|
|
3.7 |
|
|
|
957,612 |
|
|
|
3.6 |
|
|
|
947,262 |
|
|
|
3.6 |
|
West Virginia |
|
|
1,148,573 |
|
|
|
4.3 |
|
|
|
1,109,197 |
|
|
|
4.2 |
|
|
|
1,123,817 |
|
|
|
4.3 |
|
|
|
1,102,407 |
|
|
|
4.2 |
|
|
|
1,071,552 |
|
|
|
4.1 |
|
Mortgage and equipment leasing groups |
|
|
3,634,720 |
|
|
|
13.5 |
|
|
|
3,562,933 |
|
|
|
13.6 |
|
|
|
3,576,634 |
|
|
|
13.6 |
|
|
|
3,627,708 |
|
|
|
13.7 |
|
|
|
3,595,044 |
|
|
|
13.7 |
|
|
|
|
Regional Banking |
|
|
19,936,869 |
|
|
|
74.4 |
|
|
|
19,492,348 |
|
|
|
74.2 |
|
|
|
19,400,324 |
|
|
|
74.2 |
|
|
|
19,587,191 |
|
|
|
74.3 |
|
|
|
19,463,437 |
|
|
|
73.9 |
|
Dealer Sales |
|
|
4,944,386 |
|
|
|
18.4 |
|
|
|
4,903,370 |
|
|
|
18.7 |
|
|
|
4,908,764 |
|
|
|
18.8 |
|
|
|
4,956,635 |
|
|
|
18.8 |
|
|
|
5,082,282 |
|
|
|
19.3 |
|
Private Financial and Capital Markets Group |
|
|
1,930,258 |
|
|
|
7.2 |
|
|
|
1,869,305 |
|
|
|
7.1 |
|
|
|
1,844,337 |
|
|
|
7.0 |
|
|
|
1,817,676 |
|
|
|
6.9 |
|
|
|
1,808,862 |
|
|
|
6.8 |
|
Treasury / Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
26,811,513 |
|
|
|
100.0 |
% |
|
$ |
26,265,023 |
|
|
|
100.0 |
% |
|
$ |
26,153,425 |
|
|
|
100.0 |
% |
|
$ |
26,361,502 |
|
|
|
100.0 |
% |
|
$ |
26,354,581 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
(1) |
|
Reflects post-Sky merger organizational structure that became effective on July 1, 2007, therefore, the balances presented do not include the impact of the acquisition. |
49
Commercial Credit
(This section should be read in conjunction with Significant Item 5.)
Commercial credit approvals are based on the financial strength of the borrower, assessment of
the borrowers management capabilities, industry sector trends, type of exposure, transaction
structure, and the general economic outlook. While these are the primary factors considered, there
are a number of other factors that may be considered in the decision process. There are two
processes for approving credit risk exposures. The first involves a centralized loan approval
process for the standard products and structures utilized in business banking. In this centralized
decision environment, individual credit authority is granted to certain individuals on a regional
basis to preserve our local decision-making focus. The second, and more prevalent approach,
involves individual approval of exposures. These approvals are consistent with the authority
delegated to officers located in the geographic regions who are experienced in the industries and
loan structures over which they have responsibility.
All commercial credit extensions are assigned internal risk ratings reflecting the borrowers
probability-of-default and loss-in-event-of-default. This two-dimensional rating methodology, which
results in 192 individual loan grades, provides granularity in the portfolio management process.
The probability-of-default is rated on a scale of 1-12 and is applied at the borrower level. The
loss-in-event-of-default is rated on a 1-16 scale and is associated with each individual credit
exposure based on the type of credit extension and the underlying collateral.
In commercial lending, ongoing credit management is dependent on the type and nature of the
loan. In general, quarterly monitoring is normal for all significant exposures. The internal risk
ratings are revised and updated with each periodic monitoring event. There is also extensive macro
portfolio management analysis on an ongoing basis. We continually review and adjust our risk
rating criteria based on actual experience, which may result in further changes to such criteria,
in future periods.
In addition to the initial credit analysis initiated by the portfolio manager during the
underwriting process, the loan review group performs independent credit reviews. The loan review
group reviews individual loans and credit processes and conducts a portfolio review at each of the
regions on a 15-month cycle. The loan review group validates the risk grades on a minimum of 50%
of the portfolio exposure each calendar year.
Borrower exposures may be designated as monitored credits when warranted by individual company
performance, or by industry and environmental factors. Such accounts are subjected to additional
quarterly reviews by the business line management, the loan review group, and credit administration
in order to adequately assess the borrowers credit status and to take appropriate action.
A specialized credit workout group is involved in the management of all monitored credits, and
handles commercial recoveries, workouts, and problem loan sales, as well as the day-to-day
management of relationships rated substandard or lower. The group is responsible for developing an
action plan, assessing the risk rating, and determining the adequacy of the reserve, the accrual
status, and the ultimate collectibility of the credits managed.
At June 30, 2007, we had $0.9 billion of loans to homebuilders, including loans made to both
middle market and small business homebuilders. Of this portfolio, 69% were to finance projects
where houses were currently under construction, 16% to finance the acquisition of land for future
development, and 15% in loans to finance the development of land.
While there was some geographic dispersion within this portfolio of loans, a large portion is
located in Ohio. Within our Ohio markets, the southern and central region housing markets have
historically demonstrated greater stability. Nonetheless, there has been a general slowdown in the
housing market, reflecting declining prices and excess inventories of houses to be sold. While the
expected slowdown in the spring and early summer home sales period did occur, in eastern Michigan
it was much worse than expected. As a result, homebuilders, especially the smaller homebuilders,
have shown signs of financial deterioration.
We have made adjustments to our internal risk ratings of the probability of default and the
loss in the event of default. These adjustments reflect the current condition of each homebuilder
relationship. As a result, we increased our reserves for these loans. We will continue to write
down appraised collateral values as warranted, based on our current assessment of
market conditions, including lower market valuations on finished units and an excess supply of
lots.
50
Consumer Credit
Consumer credit approvals are based on, among other factors, the financial strength of the
borrower, type of exposure, and the transaction structure. Consumer credit decisions are generally
made in a centralized environment utilizing decision models. There is also individual credit
authority granted to certain individuals on a regional basis to preserve our local decision-making
focus. Each credit extension is assigned a specific probability-of-default and
loss-in-event-of-default. The probability-of-default is generally a function of the borrowers most
recent credit bureau score (FICO), which we update quarterly, while the loss-in-event-of-default is
related to the type of collateral and the loan-to-value 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 and identify under-performing segments. This information is then
incorporated into future origination strategies. The independent risk management group has a
consumer process review component to ensure the effectiveness and efficiency of the consumer credit
processes.
Home equity loans and lines consist of both first and second position collateral with
underwriting criteria based on minimum FICO credit scores, debt-to-income ratios, and loan-to-value
ratios. We offer closed-end home equity loans with a fixed interest rate and level monthly
payments and a variable-rate, interest-only home equity line of credit. At June 30, 2007, we had
$2.0 billion of home equity loans and $3.0 billion of home equity lines of credit. The average
loan-to-value ratio of our home equity portfolio (both loans and lines) was 75% at June 30, 2007.
We do not originate home equity loans or lines that allow negative amortization, or have a
loan-to-value ratio at origination greater than 100%. Home equity loans are generally fixed rate
with periodic principal and interest payments. We originated $227 million of home equity loans in
the second quarter of 2007 with a weighted average loan-to-value ratio of 67% and a weighted
average FICO score of 742. Home equity lines of credit generally have variable rates of interest
and do not require payment of principal during the 10-year revolving period of the line. During
the second quarter of 2007, we originated commitments of $365 million of home equity lines. The
lines of credit originated during the quarter had a weighted average loan-to-value ratio of 76% and
a weighted average FICO score of 749.
At June 30, 2007, we had $4.4 billion of residential real estate loans. Adjustable-rate
mortgages (ARMs), primarily mortgages that have a fixed-rate for the first 3 to 5 years and then
adjust annually, comprised 64% of this portfolio. We do not originate residential mortgage loans
that (a) allow negative amortization, (b) have a loan-to-value ratio at origination greater than
100%, or (c) are option ARMs. Interest-only loans comprised $0.9 billion, or 19%, of residential
real estate loans at June 30, 2007. Interest only loans are underwritten to specific standards
including minimum FICO credit scores, stressed debt-to-income ratios, and extensive collateral
evaluation.
Collection action is initiated on an as needed basis through a centrally managed collection
and recovery function. The collection group employs a series of collection methodologies designed
to maintain a high level of effectiveness while maximizing efficiency. In addition to the retained
consumer loan portfolio, the collection group is responsible for collection activity on all sold
and securitized consumer loans and leases. (See the Non-performing Assets section of Credit Risk,
for further information regarding when consumer loans are placed on non-accrual status and when the
balances are charged-off to the allowance for loan and lease losses.)
Non-Performing
Assets (NPAs)
(This section should be read in conjunction with Significant Items 3 and 5.)
NPAs
consist of (1) NPLs, which represent loans and leases
that are no longer accruing interest and/or have been renegotiated to below market rates based upon
financial difficulties of the borrower, and (2) real estate acquired through foreclosure.
Middle-market C&I, CRE, and small business
loans are generally placed on non-accrual status when collection of principal or interest is in
doubt or when the loan is 90-days past due. When interest accruals are suspended, accrued interest
income is reversed with current year accruals charged to earnings and prior-year amounts generally
charged-off as a credit loss.
Consumer loans and leases, excluding residential mortgages and home equity lines and loans,
are not placed on non-accrual status but are charged-off in accordance with regulatory statutes,
which is generally no more than 120-days past due. Residential mortgages and home equity loans and
lines are placed on non-accrual status within 180-days past due as to
51
principal and 210-days past
due as to interest, regardless of collateral. A charge-off on a residential mortgage loan is
recorded when the loan has been foreclosed and the loan balance exceeds the fair value of the real
estate. The fair value of the collateral, less the cost to sell, is then recorded as real estate
owned.
When we believe the borrowers ability and intent to make periodic interest and principal
payments resume and collectibility is no longer in doubt, the loan is returned to accrual status.
Table 11 reflects period-end NPLs, NPAs, and past due loans and leases detail for each of the
last five quarters.
Table 11 Non-Performing Loans (NPLs), Non-Performing Assets (NPAs) and Past Due Loans and Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
June 30, |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
|
|
Non-accrual loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
$ |
41,644 |
|
|
$ |
32,970 |
|
|
$ |
35,657 |
|
|
$ |
37,082 |
|
|
$ |
45,713 |
|
Middle market commercial real estate |
|
|
81,108 |
|
|
|
42,458 |
|
|
|
34,831 |
|
|
|
27,538 |
|
|
|
24,970 |
|
Small business |
|
|
32,059 |
|
|
|
30,015 |
|
|
|
25,852 |
|
|
|
21,356 |
|
|
|
27,328 |
|
Residential mortgage |
|
|
39,868 |
|
|
|
35,491 |
|
|
|
32,527 |
|
|
|
30,289 |
|
|
|
22,786 |
|
Home equity |
|
|
16,837 |
|
|
|
16,396 |
|
|
|
15,266 |
|
|
|
13,047 |
|
|
|
14,466 |
|
|
|
|
Total NPLs |
|
|
211,516 |
|
|
|
157,330 |
|
|
|
144,133 |
|
|
|
129,312 |
|
|
|
135,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
47,712 |
|
|
|
47,762 |
|
|
|
47,898 |
|
|
|
40,615 |
|
|
|
34,743 |
|
Commercial |
|
|
1,957 |
|
|
|
1,586 |
|
|
|
1,589 |
|
|
|
1,285 |
|
|
|
1,062 |
|
|
|
|
Total other real estate, net |
|
|
49,669 |
|
|
|
49,348 |
|
|
|
49,487 |
|
|
|
41,900 |
|
|
|
35,805 |
|
|
|
|
Total NPAs |
|
$ |
261,185 |
|
|
$ |
206,678 |
|
|
$ |
193,620 |
|
|
$ |
171,212 |
|
|
$ |
171,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPAs guaranteed by the U.S. government |
|
$ |
24,877 |
|
|
$ |
28,748 |
|
|
$ |
33,858 |
|
|
$ |
33,676 |
|
|
$ |
30,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPLs as a % of total loans and leases |
|
|
0.79 |
% |
|
|
0.60 |
% |
|
|
0.55 |
% |
|
|
0.49 |
% |
|
|
0.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPAs as a % of total loans and leases and
other real estate |
|
|
0.97 |
|
|
|
0.79 |
|
|
|
0.74 |
|
|
|
0.65 |
|
|
|
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases past due 90
days or more |
|
$ |
67,277 |
|
|
$ |
70,179 |
|
|
$ |
59,114 |
|
|
$ |
62,054 |
|
|
$ |
48,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases past due 90 days or
more as a percent of total loans and leases |
|
|
0.25 |
% |
|
|
0.27 |
% |
|
|
0.23 |
% |
|
|
0.24 |
% |
|
|
0.19 |
% |
NPAs were $261.2 million at June 30, 2007, and represented 0.97%
of related assets. This represented a $90.1 million, or 53%, increase from $171.1 million, or
0.65% of related assets, at the end of the year-ago quarter; a $67.6 million, or 35%, increase from
$193.6 million, or 0.74% of related assets, at December 31, 2006; and a $54.5 million, or 26%,
increase from $206.7 million, or 0.79% of related assets, at March 31, 2007. The three commercial
loan relationships noted in prior comments accounted for $43.5 million of the net increase from the
prior quarter.
Contributing to the $90.1 million increase in NPAs from the year-ago period was a $76.3
million increase in NPLs and a $13.9 million increase in other real estate
owned (OREO). The $76.3 million, or 56%, increase in NPLs primarily reflected a $56.1 million
increase in middle market CRE NPLs, with $28.5 million related to the two
commercial real estate relationships classified as NPLs in the 2007 second quarter. Residential
mortgage NPLs increased $17.1 million from the year-ago quarter, continuing to reflect the softness
in the overall residential market. This increase was consistent with our expectations for the
portfolio and in line with the increased charge-off rates from the year-ago quarter.
52
Compared with the 2006 fourth quarter, NPAs increased $67.6 million, or 35%, almost entirely
due to higher NPLs as OREO was little changed. Of the $67.4 million increase in NPLs, middle
market CRE loans contributed $46.3 million, with $28.5 million attributable to the two eastern
Michigan commercial real estate relationships. Middle market C&I loan NPLs increased $6.0 million,
reflecting the $15.0 million related to the one northern Ohio commercial credit, partially offset
by declines in other loans. The majority of the remainder of the increase resulted from increases
of $7.3 million in residential mortgage and $6.2 million in small business.
Compared with the 2007 first quarter, NPAs increased $54.5 million, or 26%, almost entirely
due to higher NPLs as OREO was little changed. Of the $54.2 million increase in NPLs, middle
market CRE loans contributed $38.7 million, with $28.5 million attributable to the two eastern
Michigan commercial real estate relationships. Middle market C&I loan NPLs increased $8.7 million.
This reflected $15.0 million related to the one northern Ohio commercial credit, partially offset
by declines in other loans.
NPLs expressed as a percent of total loans and leases were 0.79% at June 30, 2007, up from
0.51% a year earlier, 0.55% at December 31, 2006, and from 0.60% at March 31, 2007.
The over 90-day delinquent, but still accruing, ratio was 0.25% at June 30, 2007, up from
0.19% at June 30, 2006 and from 0.23% at December 31, 2006, but down from 0.27% at March 31, 2007.
Non-performing asset activity for each of the last five quarters ended June 30, 2007, and for
the first six month periods of 2007 and 2006 was as follows:
Table 12 Non-Performing Assets (NPAs) Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
|
NPAs, beginning of period |
|
$ |
206,678 |
|
|
$ |
193,620 |
|
|
$ |
171,212 |
|
|
$ |
171,068 |
|
|
$ |
154,893 |
|
New NPAs |
|
|
112,348 |
|
|
|
51,588 |
|
|
|
60,287 |
|
|
|
55,490 |
|
|
|
52,498 |
|
Returns to accruing status |
|
|
(4,674 |
) |
|
|
(6,176 |
) |
|
|
(5,666 |
) |
|
|
(11,880 |
) |
|
|
(12,143 |
) |
NPA losses |
|
|
(27,149 |
) |
|
|
(9,072 |
) |
|
|
(11,908 |
) |
|
|
(14,143 |
) |
|
|
(6,826 |
) |
Payments |
|
|
(19,662 |
) |
|
|
(18,086 |
) |
|
|
(16,673 |
) |
|
|
(16,709 |
) |
|
|
(12,892 |
) |
Sales |
|
|
(6,356 |
) |
|
|
(5,196 |
) |
|
|
(3,632 |
) |
|
|
(12,614 |
) |
|
|
(4,462 |
) |
|
|
|
NPAs, end of period |
|
$ |
261,185 |
|
|
$ |
206,678 |
|
|
$ |
193,620 |
|
|
$ |
171,212 |
|
|
$ |
171,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(in thousands) |
|
2007 |
|
2006 |
|
NPAs, beginning of period |
|
$ |
193,620 |
|
|
$ |
117,155 |
|
New NPAs (1) |
|
|
163,936 |
|
|
|
106,266 |
|
Acquired NPAs |
|
|
|
|
|
|
33,843 |
|
Returns to accruing status |
|
|
(10,850 |
) |
|
|
(26,453 |
) |
Loan and lease losses |
|
|
(36,221 |
) |
|
|
(20,140 |
) |
Payments |
|
|
(37,748 |
) |
|
|
(26,087 |
) |
Sales |
|
|
(11,552 |
) |
|
|
(13,516 |
) |
|
NPAs, end of period |
|
$ |
261,185 |
|
|
$ |
171,068 |
|
|
|
|
|
|
(1) |
|
Beginning in the second quarter of 2006, new non-performing
assets includes OREO balances of loans in foreclosure which
are fully guaranteed by the U.S. Government that were
reported in 90 day past due loans and leases in prior
periods. |
53
Allowances for Credit Losses (ACL)
(This section should be read in conjunction with Significant Items 3 and 5.)
We maintain two reserves, both of which are available to absorb credit losses: the allowance
for loan and lease losses (ALLL) and the allowance for unfunded loan commitments and letters of
credit (AULC). When summed together, these reserves constitute the total ACL. Our credit
administration group is responsible for developing the methodology and determining the adequacy of
the ACL.
The ALLL represents the estimate of probable losses inherent in the loan portfolio at the
balance sheet date. Additions to the ALLL result from recording provision expense for loan losses
or recoveries, while reductions reflect charge-offs, net of recoveries, or the sale of loans. The
AULC is determined by applying the transaction reserve process, which is described later in this
section, to the unfunded portion of the portfolio adjusted by an applicable funding expectation.
We have an established monthly process to determine the adequacy of the ACL that relies on a
number of analytical tools and benchmarks. No single statistic or measurement, in itself,
determines the adequacy of the allowance. The allowance is comprised of two components: the
transaction reserve and the economic reserve.
The transaction reserve component of the ACL includes both (a) an estimate of loss based on
pools of commercial and consumer loans and leases with similar characteristics and (b) an estimate
of loss based on an impairment review of each loan greater than $500,000 that is considered to be
impaired. For commercial loans, the estimate of loss based on pools of loans and leases with
similar characteristics is made through the use of a standardized loan grading system that is
applied on an individual loan level and updated on a continuous basis. The reserve factors applied
to these portfolios were developed based on internal credit migration models that track historical
movements of loans between loan ratings over time and a combination of long-term average loss
experience of our own portfolio and external industry data. In the case of more homogeneous
portfolios, such as consumer loans and leases, the determination of the transaction reserve is
based on reserve factors that include the use of forecasting models to measure inherent loss in
these portfolios. We update the models and analyses frequently to capture the recent behavioral
characteristics of the subject portfolios, as well as any changes in the loss mitigation or credit
origination strategies. Adjustments to the reserve factors are made, as needed, based on observed
results of the portfolio analytics.
The economic reserve incorporates our determination of the impact of risks associated with the
general economic environment on the portfolio. The economic reserve is designed to address
economic uncertainties and is determined based on economic indices as well as a variety of other
economic factors that are correlated to the historical performance of the loan portfolio.
Currently, two national and two regionally focused indices are utilized. The two national indices
are: (1) the Real Consumer Spending, and (2) Consumer Confidence. The two regionally focused
indices are: (1) the Institute for Supply Management Manufacturing, and (2) Non-agriculture Job
Creation. Because of this more quantitative approach to recognizing risks in the general economy,
the economic reserve may fluctuate from period-to-period, subject to a minimum level specified by
policy.
At June 30, 2007, the ALLL was $307.5 million, up from $287.5 million a year earlier, $272.1
million at December 31, 2006, and $283.0 million at March 31, 2007. Expressed as a percent of total
average loans and leases, the ALLL ratio at June 30, 2007, was 1.15%, up from 1.09% a year ago,
1.04% at December 31, 2006, and 1.08% at March 31, 2007.
The increase in the transaction reserve component reflected the impact of increasing monitored
credits, primarily resulting from softness in the residential and commercial real estate markets in
the Midwest. The three relationships noted in the prior comments represented over half of the
additional required reserve, with the remaining increase associated with
the proper and timely recognition of relationships meeting the monitored credit definition.
Our reserve methodology is designed to increase the reserve levels as potential problems are
identified. Although monitored credits increased during the quarter, on both an absolute basis and
as a percentage of total loans and leases, they were consistent with the level of the year-ago
quarter.
The ALLL as a percent of NPLs was 145% at June 30, 2007, down from 213% a year ago, 189% at
December 31, 2006, and from 180% at March 31, 2007. The ALLL as a percent of NPAs was 118% at June
30, 2007, down from 168% a year ago, 141% at December 31, 2006, and from 137% at March 31, 2007.
At June 30, 2007, the AULC was $41.6 million, up from $38.9 million at the end of the year-ago
quarter, $40.2 million at December 31, 2006, and from $40.5 million at March 31, 2007.
54
On a combined basis, the ACL as a percent of total loans and leases at June 30, 2007, was
1.30%, up from 1.24% a year ago, 1.19% at December 31, 2006, and from 1.23% at March 31, 2007. The
ACL as a percent of NPAs was 134% at June 30, 2007, down from 191% a year earlier, 161% at December
31, 2006, and 157% at March 31, 2007.
Table 13 reflects activity in the ALLL and AULC for each of the last five quarters.
Table 13 Quarterly Credit Reserves Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
|
Allowance for loan and lease losses,
beginning of period |
|
$ |
282,976 |
|
|
$ |
272,068 |
|
|
$ |
280,152 |
|
|
$ |
287,517 |
|
|
$ |
283,839 |
|
Acquired allowance for loan and lease losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
(1) |
|
|
1,498 |
(1) |
Loan and lease losses |
|
|
(44,158 |
) |
|
|
(27,813 |
) |
|
|
(32,835 |
) |
|
|
(29,127 |
) |
|
|
(24,325 |
) |
Recoveries of loans previously charged off |
|
|
9,658 |
|
|
|
9,695 |
|
|
|
9,866 |
|
|
|
7,888 |
|
|
|
10,373 |
|
|
|
|
Net loan and lease losses |
|
|
(34,500 |
) |
|
|
(18,118 |
) |
|
|
(22,969 |
) |
|
|
(21,239 |
) |
|
|
(13,952 |
) |
|
|
|
Provision for loan and lease losses |
|
|
59,043 |
|
|
|
29,026 |
|
|
|
14,885 |
|
|
|
13,774 |
|
|
|
16,132 |
|
|
|
|
Allowance for loan and lease losses, end of period |
|
$ |
307,519 |
|
|
$ |
282,976 |
|
|
$ |
272,068 |
|
|
$ |
280,152 |
|
|
$ |
287,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, beginning of period |
|
$ |
40,541 |
|
|
$ |
40,161 |
|
|
$ |
39,302 |
|
|
$ |
38,914 |
|
|
$ |
39,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for unfunded loan commitments and
letters of credit losses |
|
|
1,090 |
|
|
|
380 |
|
|
|
859 |
|
|
|
388 |
|
|
|
(387 |
) |
|
|
|
Allowance for unfunded loan commitments
and letters of credit, end of period |
|
$ |
41,631 |
|
|
$ |
40,541 |
|
|
$ |
40,161 |
|
|
$ |
39,302 |
|
|
$ |
38,914 |
|
|
|
|
Total allowances for credit losses |
|
$ |
349,150 |
|
|
$ |
323,517 |
|
|
$ |
312,229 |
|
|
$ |
319,454 |
|
|
$ |
326,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses (ALLL) as %
of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction reserve |
|
|
0.94 |
% |
|
|
0.89 |
% |
|
|
0.86 |
% |
|
|
0.86 |
% |
|
|
0.89 |
% |
Economic reserve |
|
|
0.21 |
|
|
|
0.19 |
|
|
|
0.18 |
|
|
|
0.20 |
|
|
|
0.20 |
|
|
|
|
Total loans and leases |
|
|
1.15 |
% |
|
|
1.08 |
% |
|
|
1.04 |
% |
|
|
1.06 |
% |
|
|
1.09 |
% |
|
|
|
NPLs |
|
|
145 |
|
|
|
180 |
|
|
|
189 |
|
|
|
217 |
|
|
|
213 |
|
NPAs |
|
|
118 |
|
|
|
137 |
|
|
|
141 |
|
|
|
164 |
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses (ACL) as % of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
1.30 |
% |
|
|
1.23 |
% |
|
|
1.19 |
% |
|
|
1.21 |
% |
|
|
1.24 |
% |
NPLs |
|
|
165 |
|
|
|
206 |
|
|
|
217 |
|
|
|
247 |
|
|
|
241 |
|
NPAs |
|
|
134 |
|
|
|
157 |
|
|
|
161 |
|
|
|
187 |
|
|
|
191 |
|
Non-guaranteed commercial and NPAs |
|
|
249 |
|
|
|
360 |
|
|
|
389 |
|
|
|
456 |
|
|
|
403 |
|
|
|
|
|
(1) |
|
Represents an adjustment of the allowance and corresponding adjustment to loan balances, resulting from the Unizan merger. |
55
Table 14 reflects activity in the ALLL and AULC for the first six month periods of 2007
and 2006.
Table 14 Year to Date Credit Reserves Analysis
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(in thousands) |
|
2007 |
|
2006 |
|
Allowance for loan and lease losses,
beginning of period |
|
$ |
272,068 |
|
|
$ |
268,347 |
|
Acquired allowance for loan and lease losses |
|
|
|
|
|
|
23,685 |
|
Loan and lease losses |
|
|
(71,971 |
) |
|
|
(57,730 |
) |
Recoveries of loans previously charged off |
|
|
19,353 |
|
|
|
19,562 |
|
|
Net loan and lease losses |
|
|
(52,618 |
) |
|
|
(38,168 |
) |
|
Provision for loan and lease losses |
|
|
88,069 |
|
|
|
33,653 |
|
|
Allowance for loan and lease losses, end of period |
|
$ |
307,519 |
|
|
$ |
287,517 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, beginning of period |
|
$ |
40,161 |
|
|
$ |
36,957 |
|
Acquired AULC |
|
|
|
|
|
|
325 |
|
Provision for unfunded loan commitments and
letters of credit losses |
|
|
1,470 |
|
|
|
1,632 |
|
|
Allowance for unfunded loan commitments
and letters of credit, end of period |
|
$ |
41,631 |
|
|
$ |
38,914 |
|
|
Total allowances for credit losses |
|
$ |
349,150 |
|
|
$ |
326,431 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses (ALLL) as % of: |
|
|
|
|
|
|
|
|
Transaction reserve |
|
|
0.94 |
% |
|
|
0.89 |
% |
Economic reserve |
|
|
0.21 |
|
|
|
0.20 |
|
|
Total loans and leases |
|
|
1.15 |
% |
|
|
1.09 |
% |
|
Non-performing loans and leases (NPLs) |
|
|
145 |
|
|
|
213 |
|
Non-performing assets (NPAs) |
|
|
118 |
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses (ACL) as % of: |
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
1.30 |
% |
|
|
1.24 |
% |
Non-performing loans and leases |
|
|
165 |
|
|
|
241 |
|
Non-performing assets |
|
|
134 |
|
|
|
191 |
|
|
56
Net Charge-offs
(This section should be read in conjunction with Significant Items 3 and 5.)
Table 15 reflects net loan and lease charge-off detail for each of the last five quarters.
Table 15 Quarterly Net Charge-Off Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
|
Net charge-offs by loan and lease type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
$ |
3,628 |
|
|
$ |
(11 |
) |
|
$ |
(1,827 |
) |
|
$ |
1,742 |
|
|
$ |
(484 |
) |
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
2,876 |
|
|
|
9 |
|
|
|
3,957 |
|
|
|
(2 |
) |
|
|
(161 |
) |
Commercial |
|
|
10,428 |
|
|
|
377 |
|
|
|
144 |
|
|
|
644 |
|
|
|
1,557 |
|
|
|
|
Middle market commercial real estate |
|
|
13,304 |
|
|
|
386 |
|
|
|
4,101 |
|
|
|
642 |
|
|
|
1,396 |
|
Small business |
|
|
3,603 |
|
|
|
2,089 |
|
|
|
4,535 |
|
|
|
4,451 |
|
|
|
2,530 |
|
|
|
|
Total commercial |
|
|
20,535 |
|
|
|
2,464 |
|
|
|
6,809 |
|
|
|
6,835 |
|
|
|
3,442 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
1,631 |
|
|
|
2,853 |
|
|
|
2,422 |
|
|
|
1,759 |
|
|
|
1,172 |
|
Automobile leases |
|
|
2,699 |
|
|
|
2,201 |
|
|
|
2,866 |
|
|
|
2,306 |
|
|
|
1,758 |
|
|
|
|
Automobile loans and leases |
|
|
4,330 |
|
|
|
5,054 |
|
|
|
5,288 |
|
|
|
4,065 |
|
|
|
2,930 |
|
Home equity |
|
|
5,405 |
|
|
|
5,968 |
|
|
|
5,820 |
|
|
|
6,734 |
|
|
|
4,776 |
|
Residential mortgage |
|
|
1,695 |
|
|
|
1,931 |
|
|
|
2,226 |
|
|
|
876 |
|
|
|
688 |
|
Other loans |
|
|
2,535 |
|
|
|
2,701 |
|
|
|
2,826 |
|
|
|
2,729 |
|
|
|
2,116 |
|
|
|
|
Total consumer |
|
|
13,965 |
|
|
|
15,654 |
|
|
|
16,160 |
|
|
|
14,404 |
|
|
|
10,510 |
|
|
|
|
Total net charge-offs |
|
$ |
34,500 |
|
|
$ |
18,118 |
|
|
$ |
22,969 |
|
|
$ |
21,239 |
|
|
$ |
13,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs annualized percentages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
|
0.23 |
% |
|
|
|
% |
|
|
(0.12 |
)% |
|
|
0.12 |
% |
|
|
(0.04 |
)% |
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
0.92 |
|
|
|
|
|
|
|
1.35 |
|
|
|
|
|
|
|
(0.05 |
) |
Commercial |
|
|
1.46 |
|
|
|
0.05 |
|
|
|
0.02 |
|
|
|
0.09 |
|
|
|
0.22 |
|
|
|
|
Middle market commercial real estate |
|
|
1.29 |
|
|
|
0.04 |
|
|
|
0.41 |
|
|
|
0.06 |
|
|
|
0.14 |
|
Small business |
|
|
0.58 |
|
|
|
0.34 |
|
|
|
0.75 |
|
|
|
0.74 |
|
|
|
0.43 |
|
|
|
|
Total commercial |
|
|
0.64 |
|
|
|
0.08 |
|
|
|
0.22 |
|
|
|
0.23 |
|
|
|
0.12 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
0.28 |
|
|
|
0.52 |
|
|
|
0.46 |
|
|
|
0.34 |
|
|
|
0.23 |
|
Automobile leases |
|
|
0.70 |
|
|
|
0.52 |
|
|
|
0.62 |
|
|
|
0.47 |
|
|
|
0.34 |
|
|
|
|
Automobile loans and leases |
|
|
0.45 |
|
|
|
0.52 |
|
|
|
0.54 |
|
|
|
0.40 |
|
|
|
0.28 |
|
Home equity |
|
|
0.43 |
|
|
|
0.49 |
|
|
|
0.47 |
|
|
|
0.53 |
|
|
|
0.38 |
|
Residential mortgage |
|
|
0.16 |
|
|
|
0.17 |
|
|
|
0.19 |
|
|
|
0.07 |
|
|
|
0.06 |
|
Other loans |
|
|
2.39 |
|
|
|
2.56 |
|
|
|
2.63 |
|
|
|
2.54 |
|
|
|
1.89 |
|
|
|
|
Total consumer |
|
|
0.41 |
|
|
|
0.46 |
|
|
|
0.46 |
|
|
|
0.40 |
|
|
|
0.30 |
|
|
|
|
Net charge-offs as a % of average loans |
|
|
0.52 |
% |
|
|
0.28 |
% |
|
|
0.35 |
% |
|
|
0.32 |
% |
|
|
0.21 |
% |
|
|
|
57
Table 16 reflects net loan and lease charge-off detail for the first six month periods of
2007 and 2006.
Table 16 Year To Date Net Charge-Off Analysis
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(in thousands) |
|
2007 |
|
2006 |
|
Net charge-offs by loan and lease type: |
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
$ |
3,617 |
|
|
$ |
6,403 |
|
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
Construction |
|
|
2,885 |
|
|
|
(402 |
) |
Commercial |
|
|
10,805 |
|
|
|
1,767 |
|
|
Middle market commercial real estate |
|
|
13,690 |
|
|
|
1,365 |
|
Small business |
|
|
5,692 |
|
|
|
6,239 |
|
|
Total commercial |
|
|
22,999 |
|
|
|
14,007 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
Automobile loans |
|
|
4,484 |
|
|
|
4,149 |
|
Automobile leases |
|
|
4,900 |
|
|
|
5,273 |
|
|
Automobile loans and leases |
|
|
9,384 |
|
|
|
9,422 |
|
Home equity |
|
|
11,373 |
|
|
|
9,300 |
|
Residential mortgage |
|
|
3,626 |
|
|
|
1,403 |
|
Other loans |
|
|
5,236 |
|
|
|
4,036 |
|
|
Total consumer |
|
|
29,619 |
|
|
|
24,161 |
|
|
Total net charge-offs |
|
$ |
52,618 |
|
|
$ |
38,168 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs annualized percentages: |
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
|
0.12 |
% |
|
|
0.04 |
% |
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
Construction |
|
|
0.48 |
|
|
|
(0.06 |
) |
Commercial |
|
|
0.77 |
|
|
|
0.13 |
|
|
Middle market commercial real estate |
|
|
0.68 |
|
|
|
0.07 |
|
Small business |
|
|
0.46 |
|
|
|
0.57 |
|
|
Total commercial |
|
|
0.36 |
|
|
|
0.24 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
Automobile loans |
|
|
0.40 |
|
|
|
0.41 |
|
Automobile leases |
|
|
0.60 |
|
|
|
0.49 |
|
|
Automobile loans and leases |
|
|
0.48 |
|
|
|
0.45 |
|
Home equity |
|
|
0.46 |
|
|
|
0.38 |
|
Residential mortgage |
|
|
0.16 |
|
|
|
0.06 |
|
Other loans |
|
|
2.48 |
|
|
|
1.80 |
|
|
Total consumer |
|
|
0.43 |
|
|
|
0.34 |
|
|
Net charge-offs as a % of average loans |
|
|
0.40 |
% |
|
|
0.30 |
% |
|
2007 Second Quarter versus 2006 Second Quarter and 2007 First Quarter
Total net charge-offs for the 2007 second quarter were $34.5 million, or an annualized 0.52%
of average total loans and leases, including $12.2 million, or an annualized 0.18%, associated with
the two eastern Michigan commercial real estate credit relationships noted above. This performance
was above the long-term targeted range of 0.35%-0.45%, as well as being above the $14.0 million, or
an annualized 0.21%, in the year-ago quarter, $23.0 million, or an annualized 0.35%, in the 2006
fourth quarter, and $18.1 million, or an annualized 0.28%, of average total loans and leases in the
2007 first quarter. It is expected that full-year 2007 net charge-offs will be in the mid- to
upper-half of our targeted 0.35%-0.45% range, with commercial net charge-offs remaining under
pressure, but consumer portfolio net charge-offs remaining generally stable.
58
Total commercial net charge-offs in the second quarter were $20.5 million, or an annualized
0.64%. This increased $17.1 million from $3.4 million, or an annualized 0.12%, in the year-ago
quarter; increased $13.7 million from $6.8 million, or an annualized 0.22% in the 2006 fourth
quarter; and increased $18.1 million from $2.5 million, or an annualized 0.08%, in the 2007 first
quarter. The increase reflected the two commercial real estate credit relationships noted above.
Net charge-offs of small business loans were $3.6 million, or an annualized 0.58%, in the current
quarter. This compared unfavorably with $2.5 million, or an annualized 0.43%, in the year-ago
quarter, and $2.1 million, or an annualized 0.34%, in the 2007 first quarter; however, compared
favorably with $4.5 million, or an annualized 0.75%, in the 2006 fourth quarter.
Total consumer net charge-offs in the current quarter were $14.0 million, up $3.5 million, or
33%, from $10.5 million in the year-ago quarter; however, decreased $2.2 million, or 14%, from the
2006 fourth quarter and $1.7 million, or 11%, from the 2007 first quarter. When expressed as an
annualized percentage, total consumer net charge-offs in the 2007 second quarter were 0.41% of
average related loans, up from an annualized 0.30% in the year-ago quarter; however, down from an
annualized 0.46% in both the 2006 fourth quarter and 2007 first quarter.
Automobile loan and lease net charge-offs increased $1.4 million, or 48%, from the year-ago
quarter, but declined $1.0 million, or 18%, from the 2006 fourth quarter, and $0.7 million, or 14%,
from the 2007 first quarter. Expressed as an annualized percent of average total automobile loans
and leases, such charge-offs were 0.45% in the current quarter, up from an annualized 0.28% in the
year-ago quarter, but down from an annualized 0.54% in the 2006 fourth quarter and an annualized
0.52% in the 2007 first quarter. Some of the decline from the prior quarter was seasonal.
Overall, the automobile loan and lease portfolios continued to perform well within expectations.
Residential mortgage net charge-offs totaled $1.7 million, or an annualized 0.16% of related
average balances. While higher than $0.7 million, or an annualized 0.06%, in the year-ago quarter,
they were lower than the $2.2 million, or an annualized 0.19%, in the 2006 fourth quarter and the
$1.9 million, or an annualized 0.17%, in the 2007 first quarter.
Home equity net charge-offs in the 2007 second quarter were $5.4 million, or an annualized
0.43%, up from $4.8 million, or an annualized 0.38%, in the year-ago quarter, but down from $5.8
million, or an annualized 0.47%, in the 2006 fourth quarter, and $6.0 million, or an annualized
0.49%, in the 2006 first quarter.
2007 First Six Months versus 2006 First Six Months
Total net charge-offs for the first six month period of 2007 were $52.6 million, or an
annualized 0.40% of average total loans and leases, up from $38.2 million, or an annualized 0.30%
in the comparable year-ago period. While higher than in the comparable year-ago period, this
performance remained within our long-term annualized net charge-off targeted range of 0.35%-0.45%.
This increase was driven primarily by an increase in total commercial net charge-offs that
totaled $23.0 million, or an annualized 0.36 %, up $9.0 million, or 64%, from $14.0 million, or an
annualized 0.24%, in the comparable year-ago period. The increase reflected $12.2 million
associated with the two commercial real estate credit relationships noted above.
Total consumer net charge-offs in for the first six month period of 2007 were $29.6 million,
up $5.5 million, or 23%, from $24.2 million in the comparable year-ago period. When expressed as an
annualized percentage, total consumer net charge-offs for the first six month period of 2007 were
0.43% of average related loans, up from an annualized 0.34% in the comparable year-ago period.
Automobile loan and lease net charge-offs were little changed. Residential mortgage net
charge-offs totaled $3.6 million, or an annualized 0.16% of related average balances. Home equity
net charge-offs for the first six month period of 2007 were $11.4 million, or an annualized 0.46%,
up from $9.3 million, or an annualized 0.38%, in the comparable year-ago period.
Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities.
We incur market risk in the normal course of business through exposures to market interest rates,
foreign exchange rates, equity prices, credit
spreads, and expected lease residual values. We have identified two primary sources of market
risk: interest rate risk and price risk. Interest rate risk is our primary market risk.
59
Interest Rate Risk
Interest rate risk results from timing differences in the repricings and maturities of assets
and liabilities, and changes in relationships between market interest rates and the yields on
assets and rates on liabilities, as well as from the impact of embedded options, such as borrowers
ability to prepay residential mortgage loans at any time and depositors ability to terminate CDs
before maturity.
Our board of directors establishes broad policy limits with respect to interest rate risk. Our
Market Risk Committee (MRC) establishes specific operating guidelines within the parameters of the
board of directors policies. In general, we seek to minimize the impact of changing interest
rates on net interest income and the economic values of assets and liabilities. Our MRC regularly
monitors the level of interest rate risk sensitivity to ensure compliance with board of directors
approved risk limits.
Interest rate risk management is a dynamic process that encompasses monitoring loan and
deposit flows, investment and funding activities, and assessing the impact of the changing market
and business environments. Effective management of interest rate risk begins with understanding the
interest rate characteristics of assets and liabilities and determining the appropriate interest
rate risk posture given market expectations and policy objectives and constraints.
Interest rate risk modeling 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 horizon. Although bank owned life insurance and automobile operating
lease assets are classified as non-interest earning assets, and the income from these assets is in
non-interest income, these portfolios are included in the interest sensitivity analysis because
both have attributes similar to fixed-rate interest earning assets. The economic value of equity
(EVE) is calculated by subjecting the period-end balance sheet to changes in interest rates, and
measuring the impact of the changes on the values of the assets and liabilities. EVE serves as a
complement to income simulation modeling as it provides risk exposure estimates for time periods
beyond the one-year simulation horizon. Similar to income simulation modeling, EVE analysis also
includes the risks of bank owned life insurance and the mortgage servicing asset.
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 loans
and deposits. Balance sheet growth assumptions are also considered in the income simulation model.
The models include the effects of derivatives, such as interest rate swaps, interest rate caps,
floors, and other types of interest rate options, and account for changes in relationships among
interest rates (basis risk).
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 market rate scenarios include parallel rate shifts on both a gradual and immediate
basis, movements in rates that alter the shape of the yield curve (e.g., flatter or steeper yield
curve), and spot rates remaining unchanged for the entire measurement period. Scenarios are also
developed to measure basis risk, such as the impact of LIBOR-based rates rising or falling faster
than the prime rate.
The simulations for evaluating short-term interest rate risk exposure are scenarios that model
gradual 100 and 200 basis point increasing and decreasing parallel shifts in interest rates over
the next 12-month period beyond the interest rate change implied by the current yield curve. The
table below shows the results of the scenarios as of June 30, 2007, March 31, 2007, and December
31, 2006. All of the positions were well within the board of directors policy limits.
60
Table 17 Net Interest Income at Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income at Risk (%) |
Basis point change scenario |
|
-200 |
|
|
-100 |
|
|
+100 |
|
|
+200 |
|
|
|
|
June 30, 2007 |
|
|
-0.2 |
% |
|
|
+0.1 |
% |
|
|
+0.2 |
% |
|
|
+0.2 |
% |
March 31, 2007 |
|
|
-0.1 |
% |
|
|
+0.2 |
% |
|
|
+0.4 |
% |
|
|
+0.4 |
% |
December 31, 2006 |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
-0.2 |
% |
|
|
-0.4 |
% |
The primary simulations for EVE risk assume an immediate and parallel increase in rates of +/-
100 and +/- 200 basis points beyond any interest rate change implied by the current yield curve.
The table below outlines the June 30, 2007 results compared to March 31, 2007 and December 31,
2006.
Table 18 Economic Value of Equity at Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Value of Equity at Risk (%) |
Basis point change scenario |
|
-200 |
|
|
-100 |
|
|
+100 |
|
|
+200 |
|
|
|
|
June 30, 2007 |
|
|
+1.4 |
% |
|
|
+2.4 |
% |
|
|
-5.9 |
% |
|
|
-12.1 |
% |
March 31, 2007 |
|
|
-0.3 |
% |
|
|
+1.1 |
% |
|
|
-4.5 |
% |
|
|
-10.5 |
% |
December 31, 2006 |
|
|
+0.5 |
% |
|
|
+1.4 |
% |
|
|
-4.7 |
% |
|
|
-11.3 |
% |
The change in the EVE at risk from March 31, 2007 to June 30, 2007 was the result of two
primary factors: (1) higher market interest rates during the second quarter decreased the level of
projected prepayments on mortgage-related assets which resulted in additional sensitivity of EVE
risk, and (2) actions taken at the end of the second quarter to strategically manage the interest
rate risk of the combined Huntington/Sky balance sheet in anticipation of the Sky Financial
acquisition on July 1, 2007 temporarily increased the sensitivity of EVE risk to Huntingtons
stand-alone balance sheet as of June 30, 2007. However, it is anticipated that the EVE at risk of
the combined Huntington/Sky balance sheet will be less sensitive to changes in interest rates.
The change in the EVE at risk from December 31, 2006 to June 30, 2007 was the result of the
two factors discussed above as well as actions taken at the beginning of the first quarter to
strategically mitigate downside risk resulting from increases in market interest rates.
Price Risk
Price risk represents the risk of loss arising from adverse movements in the prices of
financial instruments that are carried at fair value and are subject to fair value accounting. We
have price risk from trading securities, which includes instruments to hedge MSRs. We also have
price risk from securities owned by our broker-dealer subsidiaries, the foreign exchange positions,
investments in private equity limited partnerships, investments in securities backed by mortgage
loans to borrowers with low FICO scores, and marketable equity securities held by our insurance
subsidiaries. We have established loss limits on the trading portfolio and on 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
The objective of effective liquidity management is to ensure that cash flow needs can be met
on a timely basis at a reasonable cost under both normal operating conditions and unforeseen
circumstances. The liquidity of the Bank, our primary subsidiary, is used to originate loans and
leases and to repay deposit and other liabilities as they become due or are demanded by customers.
Liquidity risk arises from the possibility that funds may not be available to satisfy current or
future commitments based on external macro market issues, asset and liability activities, investor
perception of financial strength, and events unrelated to the company such as war, terrorism, or
financial institution market specific issues.
61
Liquidity policies and limits are established by our board of directors, with operating limits
set by our MRC, based upon analyses of the ratio of loans to deposits, the percentage of assets
funded with non-core or wholesale funding and the amount of liquid assets available to cover
non-core funds maturities. In addition, guidelines are established to ensure diversification of
wholesale funding by type, source, and maturity and provide sufficient balance sheet liquidity to
cover
100% of wholesale funds maturing within a six month time period. A contingency funding plan is
in place, which includes forecasted sources and uses of funds under various scenarios in order to
prepare for unexpected liquidity shortages, including the implications of any rating changes. Our
MRC meets monthly to identify and monitor liquidity issues, provide policy guidance, and oversee
adherence to, and the maintenance of, an evolving contingency funding plan. We believe that
sufficient liquidity exists to meet our funding needs.
62
Table 19 Deposit Composition (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
June 30, |
|
|
|
March 31, |
|
|
|
December 31, |
|
|
|
September 30, |
|
|
|
June 30, |
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest
bearing |
|
$ |
3,625,540 |
|
|
|
14.7 |
% |
|
$ |
3,696,231 |
|
|
|
15.0 |
% |
|
$ |
3,615,745 |
|
|
|
14.4 |
% |
|
$ |
3,480,888 |
|
|
|
14.1 |
% |
|
$ |
3,530,828 |
|
|
|
14.4 |
% |
Demand deposits interest
bearing |
|
|
2,496,250 |
|
|
|
10.1 |
|
|
|
2,486,304 |
|
|
|
10.1 |
|
|
|
2,389,085 |
|
|
|
9.5 |
|
|
|
2,243,153 |
|
|
|
9.1 |
|
|
|
2,228,028 |
|
|
|
9.1 |
|
Money market deposits |
|
|
5,323,707 |
|
|
|
21.6 |
|
|
|
5,568,104 |
|
|
|
22.6 |
|
|
|
5,362,459 |
|
|
|
21.4 |
|
|
|
5,678,252 |
|
|
|
23.0 |
|
|
|
5,474,283 |
|
|
|
22.3 |
|
Savings and other domestic
deposits |
|
|
2,845,945 |
|
|
|
11.6 |
|
|
|
2,879,098 |
|
|
|
11.7 |
|
|
|
2,986,287 |
|
|
|
11.9 |
|
|
|
3,011,268 |
|
|
|
12.2 |
|
|
|
3,125,513 |
|
|
|
12.7 |
|
Core certificates of deposit |
|
|
5,738,598 |
|
|
|
23.3 |
|
|
|
5,408,289 |
|
|
|
22.0 |
|
|
|
5,364,610 |
|
|
|
21.4 |
|
|
|
5,313,473 |
|
|
|
21.5 |
|
|
|
5,171,410 |
|
|
|
21.0 |
|
|
|
|
Total core deposits |
|
|
20,030,040 |
|
|
|
81.3 |
|
|
|
20,038,026 |
|
|
|
81.4 |
|
|
|
19,718,186 |
|
|
|
78.6 |
|
|
|
19,727,034 |
|
|
|
79.9 |
|
|
|
19,530,062 |
|
|
|
79.5 |
|
Other domestic deposits of
$100,000 or more |
|
|
1,052,545 |
|
|
|
4.3 |
|
|
|
1,287,186 |
|
|
|
5.2 |
|
|
|
1,191,984 |
|
|
|
4.8 |
|
|
|
1,259,720 |
|
|
|
5.1 |
|
|
|
1,111,153 |
|
|
|
4.5 |
|
Brokered deposits and
negotiable CDs |
|
|
2,920,726 |
|
|
|
11.9 |
|
|
|
2,721,927 |
|
|
|
11.1 |
|
|
|
3,345,943 |
|
|
|
13.4 |
|
|
|
3,183,489 |
|
|
|
12.9 |
|
|
|
3,475,032 |
|
|
|
14.1 |
|
Deposits in foreign offices |
|
|
596,601 |
|
|
|
2.5 |
|
|
|
538,754 |
|
|
|
2.3 |
|
|
|
791,657 |
|
|
|
3.2 |
|
|
|
568,152 |
|
|
|
2.1 |
|
|
|
476,685 |
|
|
|
1.9 |
|
|
|
|
Total deposits |
|
$ |
24,599,912 |
|
|
|
100.0 |
% |
|
$ |
24,585,893 |
|
|
|
100.0 |
% |
|
$ |
25,047,770 |
|
|
|
100.0 |
% |
|
$ |
24,738,395 |
|
|
|
100.0 |
% |
|
$ |
24,592,932 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
6,267,644 |
|
|
|
31.3 |
% |
|
$ |
6,314,309 |
|
|
|
31.5 |
% |
|
$ |
6,063,372 |
|
|
|
30.8 |
% |
|
$ |
6,214,462 |
|
|
|
31.5 |
% |
|
$ |
5,906,817 |
|
|
|
30.2 |
% |
Personal |
|
|
13,762,396 |
|
|
|
68.7 |
|
|
|
13,723,717 |
|
|
|
68.5 |
|
|
|
13,654,814 |
|
|
|
69.2 |
|
|
|
13,512,572 |
|
|
|
68.5 |
|
|
|
13,623,245 |
|
|
|
69.8 |
|
|
|
|
Total core deposits |
|
$ |
20,030,040 |
|
|
|
100.0 |
% |
|
$ |
20,038,026 |
|
|
|
100.0 |
% |
|
$ |
19,718,186 |
|
|
|
100.0 |
% |
|
$ |
19,727,034 |
|
|
|
100.0 |
% |
|
$ |
19,530,062 |
|
|
|
100.0 |
% |
|
|
|
|
By Business Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Ohio |
|
$ |
5,366,222 |
|
|
|
21.6 |
% |
|
$ |
5,391,855 |
|
|
|
21.9 |
% |
|
$ |
5,337,964 |
|
|
|
21.3 |
% |
|
$ |
5,249,624 |
|
|
|
21.2 |
% |
|
$ |
5,150,636 |
|
|
|
20.9 |
% |
Northwest Ohio |
|
|
1,097,765 |
|
|
|
4.5 |
|
|
|
1,062,255 |
|
|
|
4.3 |
|
|
|
1,043,918 |
|
|
|
4.2 |
|
|
|
1,008,951 |
|
|
|
4.1 |
|
|
|
991,449 |
|
|
|
4.0 |
|
Greater Cleveland |
|
|
2,025,824 |
|
|
|
8.2 |
|
|
|
2,020,165 |
|
|
|
8.2 |
|
|
|
1,995,203 |
|
|
|
8.0 |
|
|
|
2,126,795 |
|
|
|
8.6 |
|
|
|
2,022,416 |
|
|
|
8.2 |
|
Greater Akron/Canton |
|
|
1,883,329 |
|
|
|
7.7 |
|
|
|
1,909,677 |
|
|
|
7.8 |
|
|
|
1,894,707 |
|
|
|
7.6 |
|
|
|
1,896,046 |
|
|
|
7.7 |
|
|
|
1,886,177 |
|
|
|
7.7 |
|
Southern Ohio / Kentucky |
|
|
2,353,087 |
|
|
|
9.6 |
|
|
|
2,353,129 |
|
|
|
9.6 |
|
|
|
2,275,880 |
|
|
|
9.1 |
|
|
|
2,212,443 |
|
|
|
8.9 |
|
|
|
2,226,410 |
|
|
|
9.1 |
|
Mahoning Valley |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio Valley |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Michigan |
|
|
2,820,076 |
|
|
|
11.5 |
|
|
|
2,826,489 |
|
|
|
11.5 |
|
|
|
2,757,434 |
|
|
|
11.0 |
|
|
|
2,938,112 |
|
|
|
11.9 |
|
|
|
2,794,728 |
|
|
|
11.4 |
|
East Michigan |
|
|
2,357,108 |
|
|
|
9.6 |
|
|
|
2,460,100 |
|
|
|
10.0 |
|
|
|
2,418,450 |
|
|
|
9.7 |
|
|
|
2,357,607 |
|
|
|
9.5 |
|
|
|
2,258,800 |
|
|
|
9.2 |
|
Western Pennsylvania |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pittsburgh |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Indiana |
|
|
851,839 |
|
|
|
3.5 |
|
|
|
903,119 |
|
|
|
3.7 |
|
|
|
819,106 |
|
|
|
3.3 |
|
|
|
847,726 |
|
|
|
3.4 |
|
|
|
828,706 |
|
|
|
3.4 |
|
West Virginia |
|
|
1,586,407 |
|
|
|
6.4 |
|
|
|
1,547,095 |
|
|
|
6.3 |
|
|
|
1,515,999 |
|
|
|
6.1 |
|
|
|
1,517,834 |
|
|
|
6.1 |
|
|
|
1,514,592 |
|
|
|
6.2 |
|
Mortgage and equipment leasing
groups |
|
|
176,214 |
|
|
|
0.7 |
|
|
|
163,456 |
|
|
|
0.7 |
|
|
|
171,946 |
|
|
|
0.7 |
|
|
|
146,119 |
|
|
|
0.6 |
|
|
|
165,846 |
|
|
|
0.7 |
|
|
|
|
Regional Banking |
|
|
20,517,871 |
|
|
|
83.3 |
|
|
|
20,637,340 |
|
|
|
83.9 |
|
|
|
20,230,607 |
|
|
|
80.8 |
|
|
|
20,301,257 |
|
|
|
82.1 |
|
|
|
19,839,760 |
|
|
|
80.7 |
|
Dealer Sales |
|
|
57,554 |
|
|
|
0.2 |
|
|
|
54,644 |
|
|
|
0.2 |
|
|
|
58,885 |
|
|
|
0.2 |
|
|
|
58,918 |
|
|
|
0.2 |
|
|
|
60,513 |
|
|
|
0.2 |
|
Private Financial and Capital
Markets Group |
|
|
1,103,760 |
|
|
|
4.5 |
|
|
|
1,171,982 |
|
|
|
4.8 |
|
|
|
1,162,335 |
|
|
|
4.6 |
|
|
|
1,144,731 |
|
|
|
4.6 |
|
|
|
1,217,627 |
|
|
|
5.0 |
|
Treasury / Other (2) |
|
|
2,920,727 |
|
|
|
12.0 |
|
|
|
2,721,927 |
|
|
|
11.1 |
|
|
|
3,595,943 |
|
|
|
14.4 |
|
|
|
3,233,489 |
|
|
|
13.1 |
|
|
|
3,475,032 |
|
|
|
14.1 |
|
|
|
|
Total deposits |
|
$ |
24,599,912 |
|
|
|
100.0 |
% |
|
$ |
24,585,893 |
|
|
|
100.0 |
% |
|
$ |
25,047,770 |
|
|
|
100.0 |
% |
|
$ |
24,738,395 |
|
|
|
100.0 |
% |
|
$ |
24,592,932 |
|
|
|
100.0 |
% |
|
|
|
(1) |
|
Reflects post-Sky merger organizational structure that became effective on July 1,
2007, therefore, the balances presented do not include the impact of the acquisition. |
|
(2) |
|
Comprised largely of brokered deposits and negotiable CDs. |
63
Parent Company Liquidity
The parent companys funding requirements consist primarily of dividends to shareholders,
income taxes, funding of non-bank subsidiaries, repurchases of our stock, debt service,
acquisitions, and operating expenses. 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.
We intend to maintain the Banks risk-based capital ratios at levels at which the Bank would
be considered to be well capitalized by regulators. As a result, the amount of dividends that can
be paid to the parent company depends on the Banks capital needs. Banking regulators also limit
the amount of cumulative dividends during the past two calendar years plus the current year-to-date
period cannot exceed the Banks net income during the same period. At June 30, 2007, the Bank had
tier one and total risk-based capital in excess of the minimum level required to be considered to
be well-capitalized of $151.2 million and $104.5 million, respectively. Based on the regulatory
dividend limitation, the Bank could have declared and paid $130.5 million of additional dividends to
the parent company at June 30, 2007 without regulatory approval. In July of 2007, the Bank
declared and paid a dividend of $150 million.
To help meet any additional liquidity needs, we have an open-ended, automatic shelf
registration statement filed and effective with the Securities and Exchange Commission, which
permits us to issue an unspecified amount of debt or equity securities.
At June 30, 2007, the parent company had $667.3 million in cash or cash equivalents. On July
2, 2007, as part of consideration for the merger with Sky Financial, the parent company made a cash
payment of $357 million.
Credit Ratings
Credit ratings by the three major credit rating agencies are an important component of our
liquidity profile. Among other factors, the credit ratings are based on financial strength, credit
quality and concentrations in the loan portfolio, the level and volatility of earnings, capital
adequacy, the quality of management, the liquidity of the balance sheet, the availability of a
significant base of core retail and commercial deposits, and our ability to access a broad array of
wholesale funding sources. Adverse changes in these factors could result in a negative change in
credit ratings and impact not only the ability to raise funds in the capital markets, but also the
cost of these funds. In addition, certain financial on- and off-balance sheet arrangements contain
credit rating triggers that could increase funding needs if a negative rating change occurs. Letter
of credit commitments for marketable securities, interest rate swap collateral agreements, and
certain asset securitization transactions contain credit rating provisions. (See the Liquidity
Risks section in Part 1 of the 2006 Annual Report on Form 10-K for additional discussion.)
Credit ratings as of June 30, 2007, for the parent company and the Bank were:
Table 20 Credit Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
|
Senior Unsecured |
|
|
Subordinated |
|
|
|
|
|
|
|
|
|
Notes |
|
|
Notes |
|
|
Short-Term |
|
|
Outlook |
|
|
|
|
Huntington Bancshares Incorporated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moodys Investor Service |
|
|
A3 |
|
|
Baal |
|
|
P-2 |
|
|
Stable |
Standard and Poors |
|
BBB+ |
|
BBB |
|
|
A-2 |
|
|
Stable |
Fitch Ratings |
|
|
A |
|
|
|
A- |
|
|
|
F1 |
|
|
Stable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Huntington National Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moodys Investor Service |
|
|
A2 |
|
|
|
A3 |
|
|
|
P-1 |
|
|
Stable |
Standard and Poors |
|
|
A- |
|
|
BBB+ |
|
|
A-2 |
|
|
Stable |
Fitch Ratings |
|
|
A |
|
|
|
A- |
|
|
|
F1 |
|
|
Stable |
|
64
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 we, and the Bank, are required to hold.
Table 21 below provides certain information about our standby letters of credit:
Table 21 Standby Letters of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in millions) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
|
Total outstanding |
|
$ |
1,230 |
|
|
$ |
1,197 |
|
|
$ |
1,156 |
|
|
$ |
1,136 |
|
|
$ |
1,121 |
|
Percent collateralized |
|
|
51 |
% |
|
|
48 |
% |
|
|
47 |
% |
|
|
45 |
% |
|
|
44 |
% |
Income recognized from issuance (1) |
|
$ |
3.2 |
|
|
$ |
3.2 |
|
|
$ |
3.1 |
|
|
$ |
3.0 |
|
|
$ |
3.0 |
|
Carrying amount of deferred revenue |
|
|
3.8 |
|
|
|
4.3 |
|
|
|
4.3 |
|
|
|
3.5 |
|
|
|
3.6 |
|
|
|
|
(1) |
|
Included in other non-interest income on the consolidated statement of income. |
We enter into forward contracts relating to the mortgage banking business. At June 30,
2007, December 31, 2006, and June 30, 2006, we had commitments to sell residential real estate
loans of $484.5 million, $319.9 million, and $341.5 million, respectively. These contracts mature
in less than one year.
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. We do not believe that off-balance sheet
arrangements will have a material impact on our liquidity or capital resources.
Operational Risk
As with all companies, there is risk inherent in the day-to-day operations that could result
in losses due to human error, inadequate or failed internal systems and controls, and external
events. Risk Management through a combination of business units and centralized processes, has the
responsibility to manage the risk for the company through a process that assesses the overall level
of risk on a regular basis and identifies specific risks and the steps being taken to control them.
Furthermore, a system of committees is established to provide guidance over the process and
escalate potential concerns to senior management on the Operational Risk Committee, executive
management on the Risk Management Committee, and the Risk Committee of the board of directors, as
appropriate.
Capital
Capital is managed both at the Bank and on a consolidated basis. Capital levels are maintained
based on regulatory capital requirements and the economic capital required to support credit,
market, liquidity, and operational risks inherent in our business, and to provide the flexibility
needed for future growth and new business opportunities. We place significant emphasis on the
maintenance of a strong capital position, which promotes investor confidence, provides access to
the national markets under favorable terms, and enhances business growth and acquisition
opportunities. The importance of managing capital is also recognized and we continually strive to
maintain an appropriate balance between capital adequacy and providing attractive returns to
shareholders.
65
Shareholders equity totaled $3.1 billion at June 30, 2007. This balance represented a slight
increase from December 31, 2006.
There were no share repurchases during the quarter. Under the current authorization announced
April 20, 2006, there are currently 3.9 million shares remaining available. When permitted, the
company may make additional share purchases from time-to-time in the open market or through
privately negotiated transactions depending on market conditions.
We evaluate several measures of capital, along with the customary three primary regulatory
ratios: Tier 1 Risk-based Capital, Total Risk-based Capital, and Tier 1 Leverage. The Federal
Reserve Board, which supervises and regulates the parent, sets minimum capital requirements for
each of these regulatory capital ratios. In the calculation of these risk-based capital ratios,
risk weightings are assigned to certain asset and off-balance sheet items such as interest rate
swaps, loan commitments, and securitizations.
During the second quarter of 2007, Huntington Capital III, a trust formed by us, issued $250
million of enhanced trust preferred securities. The securities were secured by junior subordinated
notes from the parent company. The enhanced trust preferred securities have a coupon of 6.65% for
the first ten years and a floating rate thereafter. They also have a scheduled maturity date of
2037 and may be called, at our discretion, at the 10th and 20th anniversaries
of the issuance of the notes. In accordance with FIN 46R, the trust is not consolidated in our
balance sheet; the junior subordinated notes issued by the parent company represent the obligation
reflected in our balance sheet. The junior subordinate notes issued to this trust qualify as Tier
1 regulatory capital for Huntington.
Our total risk-weighted assets, Tier 1 leverage, Tier 1 risk-based capital, and total
risk-based capital ratios for five quarters are shown in Table 22 and are well in excess of minimum
levels established for well capitalized institutions of 5.00%, 6.00%, and 10.00%, respectively.
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. At June 30, 2007, the Bank had regulatory capital ratios in excess of well
capitalized regulatory minimums.
At June 30, 2007, the tangible equity to assets ratio was 6.82%, up from 6.46% a year ago, but
down from 6.87% at December 31, 2006 and 7.06% at March 31, 2007. Based on our current estimates,
the tangible equity to assets ratio would be 5.84% upon the acquisition of Sky Financial on July 1,
2007. At June 30, 2007, the tangible equity to risk-weighted
assets ratio was 7.60%, up from 7.29%
at the end of the year-ago quarter, but down from 7.65% at December 31, 2006 and 7.70% at March 31,
2007. The decrease in these ratios from March 31, 2007, primarily reflected the impact of loan
growth and securities purchased near the end of the quarter in anticipation of the Sky Financial
merger.
Table 22 Capital Adequacy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well- |
|
|
|
|
|
|
|
|
Capitalized |
|
2007 |
|
2006 |
(in millions) |
|
Minimums |
|
June 30, |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
|
|
Total risk-weighted assets (1) |
|
|
|
|
|
$ |
32,121 |
|
|
$ |
31,473 |
|
|
$ |
31,155 |
|
|
$ |
31,330 |
|
|
$ |
31,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio (1) |
|
|
5.00 |
% |
|
|
9.07 |
% |
|
|
8.24 |
% |
|
|
8.00 |
% |
|
|
7.99 |
% |
|
|
7.62 |
% |
Tier 1 risk-based capital ratio (1) |
|
|
6.00 |
|
|
|
9.74 |
|
|
|
8.98 |
|
|
|
8.93 |
|
|
|
8.95 |
|
|
|
8.45 |
|
Total risk-based capital ratio (1) |
|
|
10.00 |
|
|
|
13.49 |
|
|
|
12.82 |
|
|
|
12.79 |
|
|
|
12.81 |
|
|
|
12.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity / asset ratio |
|
|
|
|
|
|
6.82 |
|
|
|
7.06 |
|
|
|
6.87 |
|
|
|
7.13 |
|
|
|
6.46 |
|
Tangible equity / risk-weighted assets ratio (1) |
|
|
|
|
|
|
7.60 |
|
|
|
7.70 |
|
|
|
7.65 |
|
|
|
7.97 |
|
|
|
7.29 |
|
Average equity / average assets |
|
|
|
|
|
|
8.66 |
|
|
|
8.63 |
|
|
|
8.70 |
|
|
|
8.30 |
|
|
|
8.39 |
|
|
|
|
(1) |
|
Based on an interim decision by the banking agencies on December 14, 2006,
Huntington has excluded the impact of adopting Statement 158 from the regulatory capital
calculations. |
66
On April 18, 2007, the board of directors declared a quarterly cash dividend on its
common stock of $0.265 per common share payable July 2, 2007, to shareholders of record on June 15,
2007. Subsequent to the end of the 2007 second quarter, the board of directors, on July 17, 2007,
declared a quarterly cash dividend on its common stock of $0.265 per common share, payable October
1, 2007, to shareholders of record on September 14, 2007.
Table 23 Quarterly Common Stock Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands, except per share amounts) |
|
Second |
|
First |
|
Fourth |
|
Third |
|
Second |
|
|
|
Common stock price, per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High (1) |
|
$ |
22.960 |
|
|
$ |
24.140 |
|
|
$ |
24.970 |
|
|
$ |
24.820 |
|
|
$ |
24.410 |
|
Low (1) |
|
|
21.300 |
|
|
|
21.610 |
|
|
|
22.870 |
|
|
|
23.000 |
|
|
|
23.120 |
|
Close |
|
|
22.740 |
|
|
|
21.850 |
|
|
|
23.750 |
|
|
|
23.930 |
|
|
|
23.580 |
|
Average closing price |
|
|
22.231 |
|
|
|
23.117 |
|
|
|
24.315 |
|
|
|
23.942 |
|
|
|
23.732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends, per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on common stock |
|
$ |
0.265 |
|
|
$ |
0.265 |
|
|
$ |
0.250 |
|
|
$ |
0.250 |
|
|
$ |
0.250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic |
|
|
236,032 |
|
|
|
235,586 |
|
|
|
236,426 |
|
|
|
237,672 |
|
|
|
241,729 |
|
Average diluted |
|
|
239,008 |
|
|
|
238,754 |
|
|
|
239,881 |
|
|
|
240,896 |
|
|
|
244,538 |
|
Ending |
|
|
236,244 |
|
|
|
235,714 |
|
|
|
235,474 |
|
|
|
237,921 |
|
|
|
237,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share |
|
$ |
12.97 |
|
|
$ |
12.95 |
|
|
$ |
12.80 |
|
|
$ |
13.15 |
|
|
$ |
12.38 |
|
Tangible book value per share |
|
|
10.33 |
|
|
|
10.29 |
|
|
|
10.12 |
|
|
|
10.50 |
|
|
|
9.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares repurchased |
|
|
|
|
|
|
|
|
|
|
3,050 |
|
|
|
|
|
|
|
8,100 |
|
|
|
|
(1) |
|
High and low stock prices are intra-day quotes obtained from NASDAQ. |
ESTIMATING THE FINANCIAL IMPACT DUE TO THE UNIZAN MERGER
The merger with Unizan Financial Corp. (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. Unizan results were only in consolidated results for a partial quarter
in the 2006 first quarter, but fully impact all quarters thereafter. As a result, performance
comparisons between the 2007 second quarter and 2006 second quarter periods, as well as comparisons
between the 2007 second quarter and 2007 first quarter periods, are unaffected. However,
comparisons between the 2007 six-month period and 2006 six-month period are affected, as Unizan
results were included in the 2006 period for four months. Comparisons of the first six months of
2007 with the first six months of 2006 are impacted as follows:
|
|
|
Increased reported average balance sheet, revenue, expense, and credit quality results
(e.g., net charge-offs). |
|
|
|
|
Increased reported non-interest expense items as a result of costs incurred as part of
merger-integration activities, most notably employee retention bonuses, outside programming
services related to systems conversions, and marketing expenses related to customer
retention initiatives. These net merger costs were $1.0 million in the
2006 first quarter, $2.6 million in the 2006 second quarter, $0.5 million in the 2006 third
quarter, and a net cost recovery of $0.4 million in the 2006 fourth quarter. |
Given the impact of the merger on reported 2006 results, management believes that an
understanding of the impacts of the merger is necessary to understand better underlying performance
trends. When comparing post-merger period results to pre-merger periods, two terms relating to the
impact of the Unizan merger on reported results are used:
|
|
|
Merger-related refers to amounts and percentage changes representing the impact attributable to the merger. |
67
|
|
|
Merger costs represent expenses associated with merger integration activities. |
The following methodology has been implemented to estimate the approximate effect of the
Unizan merger used to determine merger-related impacts.
Balance Sheet Items
For loans and leases, as well as core deposits, balances as of the acquisition date are
pro-rated to the post-merger period being used in the comparison. To estimate the impact on the
2006 first quarter average balances, one-third of the closing date balance was used as those
balances were in reported results for only one month of the quarter. To estimate a full quarters
impact, the closing date balance was held constant. Year-to-date estimated impacts for subsequent
periods were developed using this same pro-rata methodology. This methodology assumes acquired
balances remain constant over time.
Income Statement Items
For income statement line items, Unizans actual full year results for 2005 were used for
pro-rating the impact on post-merger periods. For example, to estimate a full quarters impact of
the merger on personnel costs, one-twelfth of Unizans full-year 2005 personnel costs was used.
Full quarter and year-to-date estimated impacts for subsequent periods were developed using this
same pro-rata methodology. This results in an approximate impact since the methodology does not
adjust for any unusual items or seasonal factors in Unizans 2005 reported results, or synergies
realized since the merger date. The one exception to this methodology relates to the amortization
of intangibles expense where the actual post-merger amount is used.
Table 24 provides detail of changes to selected reported results to quantify the estimated
impact of the Unizan merger and the impact of all other factors using this methodology:
68
Table 24 Estimated Impact of Unizan Merger
2007 Six Months versus 2006 Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unizan |
|
Other |
Average Loans and Deposits |
|
Six Months Ended June 30, |
|
Change |
|
Merger |
|
|
|
|
(in millions) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
Related |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
$ |
12,640 |
|
|
$ |
11,550 |
|
|
$ |
1,090 |
|
|
|
9.4 |
% |
|
$ |
264 |
|
|
$ |
826 |
|
|
|
7.2 |
% |
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,893 |
|
|
|
4,176 |
|
|
|
(283 |
) |
|
|
(6.8 |
) |
|
|
24 |
|
|
|
(307 |
) |
|
|
(7.4 |
) |
Home equity |
|
|
4,943 |
|
|
|
4,932 |
|
|
|
11 |
|
|
|
0.2 |
|
|
|
74 |
|
|
|
(63 |
) |
|
|
(1.3 |
) |
Residential mortgage |
|
|
4,423 |
|
|
|
4,468 |
|
|
|
(45 |
) |
|
|
(1.0 |
) |
|
|
136 |
|
|
|
(181 |
) |
|
|
(4.1 |
) |
Other consumer |
|
|
423 |
|
|
|
448 |
|
|
|
(25 |
) |
|
|
(5.6 |
) |
|
|
56 |
|
|
|
(81 |
) |
|
|
(18.1 |
) |
|
|
|
|
|
|
|
Total consumer |
|
|
13,682 |
|
|
|
14,024 |
|
|
|
(342 |
) |
|
|
(2.4 |
) |
|
|
290 |
|
|
|
(632 |
) |
|
|
(4.5 |
) |
|
|
|
|
|
|
|
Total loans |
|
$ |
26,322 |
|
|
$ |
25,574 |
|
|
$ |
748 |
|
|
|
2.9 |
% |
|
$ |
554 |
|
|
$ |
194 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
3,561 |
|
|
$ |
3,515 |
|
|
$ |
46 |
|
|
|
1.3 |
% |
|
$ |
58 |
|
|
$ |
(12 |
) |
|
|
(0.3 |
)% |
Demand deposits interest bearing |
|
|
2,377 |
|
|
|
2,081 |
|
|
|
296 |
|
|
|
14.2 |
|
|
|
31 |
|
|
|
265 |
|
|
|
12.7 |
|
Money market deposits |
|
|
5,477 |
|
|
|
5,590 |
|
|
|
(113 |
) |
|
|
(2.0 |
) |
|
|
140 |
|
|
|
(253 |
) |
|
|
(4.5 |
) |
Savings and other domestic deposits |
|
|
2,845 |
|
|
|
3,101 |
|
|
|
(256 |
) |
|
|
(8.3 |
) |
|
|
81 |
|
|
|
(337 |
) |
|
|
(10.9 |
) |
Core certificates of deposit |
|
|
5,523 |
|
|
|
4,738 |
|
|
|
785 |
|
|
|
16.6 |
|
|
|
206 |
|
|
|
579 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
Total core deposits |
|
|
19,783 |
|
|
|
19,025 |
|
|
|
758 |
|
|
|
4.0 |
|
|
|
516 |
|
|
|
242 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
Other deposits |
|
|
4,578 |
|
|
|
4,684 |
|
|
|
(106 |
) |
|
|
(2.3 |
) |
|
|
60 |
|
|
|
(166 |
) |
|
|
(3.5 |
) |
|
|
|
|
|
|
|
Total deposits |
|
$ |
24,361 |
|
|
$ |
23,709 |
|
|
$ |
652 |
|
|
|
2.8 |
% |
|
$ |
576 |
|
|
$ |
76 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unizan |
|
Other |
Selected Income Statement Categories |
|
Six Months Ended June 30, |
|
Change |
|
Merger |
|
Merger |
|
|
|
|
(in thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
Related |
|
Costs |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
Net interest income FTE |
|
$ |
517,120 |
|
|
$ |
513,695 |
|
|
$ |
3,425 |
|
|
|
0.7 |
% |
|
$ |
11,796 |
|
|
$ |
|
|
|
$ |
(8,371 |
) |
|
|
(1.6 |
)% |
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
94,810 |
|
|
$ |
88,447 |
|
|
$ |
6,363 |
|
|
|
7.2 |
% |
|
$ |
1,052 |
|
|
$ |
|
|
|
$ |
5,311 |
|
|
|
6.0 |
% |
Trust services |
|
|
52,658 |
|
|
|
43,954 |
|
|
|
8,704 |
|
|
|
19.8 |
|
|
|
1,102 |
|
|
|
|
|
|
|
7,602 |
|
|
|
17.3 |
|
Brokerage and insurance income |
|
|
33,281 |
|
|
|
29,538 |
|
|
|
3,743 |
|
|
|
12.7 |
|
|
|
304 |
|
|
|
|
|
|
|
3,439 |
|
|
|
11.6 |
|
Bank owned life insurance income |
|
|
21,755 |
|
|
|
20,846 |
|
|
|
909 |
|
|
|
4.4 |
|
|
|
524 |
|
|
|
|
|
|
|
385 |
|
|
|
1.8 |
|
Other service charges and fees |
|
|
28,131 |
|
|
|
24,581 |
|
|
|
3,550 |
|
|
|
14.4 |
|
|
|
206 |
|
|
|
|
|
|
|
3,344 |
|
|
|
13.6 |
|
Mortgage banking income (loss) |
|
|
16,473 |
|
|
|
26,810 |
|
|
|
(10,337 |
) |
|
|
(38.6 |
) |
|
|
172 |
|
|
|
|
|
|
|
(10,509 |
) |
|
|
(39.2 |
) |
Securities gains (losses) |
|
|
(5,035 |
) |
|
|
(55 |
) |
|
|
(4,980 |
) |
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
(4,980 |
) |
|
|
N.M. |
|
Other income |
|
|
59,297 |
|
|
|
88,432 |
|
|
|
(29,135 |
) |
|
|
(32.9 |
) |
|
|
1,424 |
|
|
|
|
|
|
|
(30,559 |
) |
|
|
(34.6 |
) |
|
|
|
|
|
|
|
Total non-interest income |
|
$ |
301,370 |
|
|
$ |
322,553 |
|
|
$ |
(21,183 |
) |
|
|
(6.6 |
)% |
|
$ |
4,784 |
|
|
$ |
|
|
|
$ |
(25,967 |
) |
|
|
(8.1 |
)% |
|
|
|
|
|
|
|
Personnel costs |
|
$ |
269,830 |
|
|
$ |
269,461 |
|
|
$ |
369 |
|
|
|
0.1 |
% |
|
$ |
5,150 |
|
|
$ |
909 |
|
|
$ |
(5,690 |
) |
|
|
(2.1 |
)% |
Net occupancy |
|
|
39,325 |
|
|
|
35,893 |
|
|
|
3,432 |
|
|
|
9.6 |
|
|
|
860 |
|
|
|
260 |
|
|
|
2,312 |
|
|
|
6.4 |
|
Outside data processing and other services |
|
|
47,515 |
|
|
|
39,420 |
|
|
|
8,095 |
|
|
|
20.5 |
|
|
|
334 |
|
|
|
1,337 |
|
|
|
6,424 |
|
|
|
16.3 |
|
Equipment |
|
|
35,376 |
|
|
|
34,512 |
|
|
|
864 |
|
|
|
2.5 |
|
|
|
344 |
|
|
|
45 |
|
|
|
475 |
|
|
|
1.4 |
|
Professional services |
|
|
14,583 |
|
|
|
11,657 |
|
|
|
2,926 |
|
|
|
25.1 |
|
|
|
982 |
|
|
|
102 |
|
|
|
1,842 |
|
|
|
15.8 |
|
Marketing |
|
|
16,682 |
|
|
|
17,675 |
|
|
|
(993 |
) |
|
|
(5.6 |
) |
|
|
178 |
|
|
|
734 |
|
|
|
(1,905 |
) |
|
|
(10.8 |
) |
Telecommunications |
|
|
8,703 |
|
|
|
9,815 |
|
|
|
(1,112 |
) |
|
|
(11.3 |
) |
|
|
244 |
|
|
|
115 |
|
|
|
(1,471 |
) |
|
|
(15.0 |
) |
Printing and supplies |
|
|
6,914 |
|
|
|
6,838 |
|
|
|
76 |
|
|
|
1.1 |
|
|
|
|
|
|
|
110 |
|
|
|
(34 |
) |
|
|
(0.5 |
) |
Amortization of intangibles |
|
|
5,039 |
|
|
|
4,067 |
|
|
|
972 |
|
|
|
23.9 |
|
|
|
840 |
|
|
|
|
|
|
|
132 |
|
|
|
3.2 |
|
Other expense |
|
|
42,760 |
|
|
|
61,436 |
|
|
|
(18,676 |
) |
|
|
(30.4 |
) |
|
|
2,018 |
|
|
|
38 |
|
|
|
(20,732 |
) |
|
|
(33.7 |
) |
|
|
|
|
|
|
|
Total non-interest expense |
|
$ |
486,727 |
|
|
$ |
490,774 |
|
|
$ |
(4,047 |
) |
|
|
(0.8 |
)% |
|
$ |
10,950 |
|
|
$ |
3,650 |
|
|
$ |
(18,647 |
) |
|
|
(3.8 |
)% |
|
|
|
|
|
|
|
N.M., not
a meaningful value
69
LINES OF BUSINESS DISCUSSION
This section reviews financial performance from a line of business perspective and should be
read in conjunction with the Discussion of Results of Operations, Note 14 of the Notes to Unaudited
Condensed Consolidated Financial Statements, and other sections for a full understanding of
consolidated financial performance.
We have three distinct lines of business: Regional Banking, Dealer Sales, and the Private
Financial and Capital Markets Group (PFCMG). A fourth segment includes our Treasury function and
other unallocated assets, liabilities, revenue, and expense. Lines of business results are
determined based upon our management reporting system, which assigns balance sheet and income
statement items to each of the business segments. The process is designed around our
organizational and management structure and, accordingly, the results derived are not necessarily
comparable with similar information published by other financial institutions. An overview of this
system is provided below, along with a description of each segment and discussion of financial
results.
Funds Transfer Pricing
We use a centralized funds transfer pricing (FTP) methodology to attribute appropriate net
interest income to the business segments. The Treasury/Other business segment charges (credits) an
internal cost of funds for assets held in (or pays for funding provided by) each line of business.
The FTP rate is based on prevailing market interest rates for comparable duration assets (or
liabilities). Deposits of an indeterminate maturity receive an FTP credit based on vintage-based
pool rates. Other assets, liabilities, and capital are charged (credited) with a four-year moving
average FTP rate. The intent of the FTP methodology is to eliminate all interest rate risk from
the lines of business by providing matched duration funding of assets and liabilities. The result
is to centralize the financial impact, management, and reporting of interest rate and liquidity
risk in Treasury/Other where it can be monitored and managed.
Treasury/Other
The Treasury function includes revenue and expense related to assets, liabilities, and equity
not directly assigned or allocated to one of the other three business segments. Assets in this
segment include investment securities and bank owned life insurance.
Net interest income includes the impact of administering our investment securities portfolios
and the net impact of derivatives used to hedge interest rate sensitivity. Non-interest income
includes miscellaneous fee income not allocated to other business segments such as bank owned life
insurance income and any investment securities and trading assets gains or losses. Non-interest
expense includes certain corporate administrative and other miscellaneous expenses not allocated to
other business segments. The provision for income taxes for the other business segments is
calculated at a statutory 35% tax rate, though our overall effective tax rate is lower. As a
result, Treasury reflects a credit for income taxes representing the difference between the actual
effective tax rate and the statutory tax rate used to allocate income taxes to the other segments.
70
Regional Banking
(This section should be read in conjunction with Significant Items 3, 5, and 7.)
Objectives, Strategies, and Priorities
Our Regional Banking line of business provides traditional banking products and services to
consumer, small business, and commercial customers. As of June 30, 2007, and excluding the impact
of the Sky Financial acquisition, it operated in eight regions within the five states of Ohio,
Michigan, West Virginia, Indiana, and Kentucky. It provided these services
through a banking network of 369 branches, and over 1,000 ATMs, along with Internet and
telephone banking channels. It also provides certain services outside of these five states,
including mortgage banking and equipment leasing. Each region is further divided into retail and
commercial banking units. Retail products and services include home equity loans and lines of
credit, first mortgage loans, direct installment loans, small business loans, personal and business
deposit products, as well as sales of investment and insurance services. At June 30, 2007, Retail
Banking accounted for 56% and 77% of total Regional Banking loans and deposits, respectively.
Commercial Banking serves middle market and large commercial banking relationships, which use a
variety of banking products and services including, but not limited to, commercial loans,
international trade, cash management, leasing, interest rate protection products, capital market
alternatives, 401(k) plans, and mezzanine investment capabilities.
We have a business model that emphasizes the delivery of a complete set of banking products
and services offered by larger banks, but distinguished by local decision-making about the pricing
and the offering of these products. Our strategy is to focus on building a deeper relationship
with our customers by providing a Simply the Best service experience. This focus on service
requires continued investments in state-of-the-art platform technology in our branches,
award-winning retail and business websites for our customers, extensive development of associates,
and internal processes that empower our local bankers to serve our customers better. We expect the
combination of local decision-making and Simply the Best service will result in a competitive
advantage and drive revenue and earnings growth.
Table 25 Key Indicators for Regional Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
Change |
(in thousands unless otherwise noted) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
|
|
Net income operating |
|
$ |
135,259 |
|
|
$ |
169,960 |
|
|
$ |
(34,701 |
) |
|
|
(20.4) |
% |
Total average assets (in millions of dollars) |
|
|
21,087 |
|
|
|
19,929 |
|
|
|
1,158 |
|
|
|
5.8 |
|
Total average deposits (in millions of dollars) |
|
|
20,309 |
|
|
|
19,300 |
|
|
|
1,009 |
|
|
|
5.2 |
|
Return on average equity |
|
|
21.6 |
% |
|
|
31.5 |
% |
|
|
(9.9) |
% |
|
|
(31.4 |
) |
Retail banking # DDA households (eop) (1) |
|
|
566,393 |
|
|
|
557,103 |
|
|
|
9,290 |
|
|
|
1.7 |
|
Retail banking # new relationships 90-day cross-sell (average)
(1) |
|
|
2.81 |
|
|
|
2.82 |
|
|
|
(0.01 |
) |
|
|
(0.4 |
) |
Small business # business DDA relationships (eop) (1) |
|
|
62,446 |
|
|
|
60,086 |
|
|
|
2,360 |
|
|
|
3.9 |
|
Small business # new relationships 90-day cross-sell (average)
(1) |
|
|
2.44 |
|
|
|
2.24 |
|
|
|
0.20 |
|
|
|
8.9 |
|
Commercial banking # customers (eop)(1) |
|
|
5,723 |
|
|
|
5,429 |
|
|
|
294 |
|
|
|
5.4 |
|
Mortgage banking closed loan volume (in millions)(1) |
|
$ |
1,479 |
|
|
$ |
1,427 |
|
|
$ |
52 |
|
|
|
3.6 |
|
|
eop End of Period. |
|
|
|
(1) |
|
Periods prior to the second quarter of 2006 exclude Unizan. |
2007 First Six Months versus 2006 First Six Months
Regional Banking contributed $135.3 million, or 77%, of the companys net operating earnings
for the first six month period of 2007 compared with $170.0 million in the comparable year-ago
period. The decline of $34.7 million, or 20% included:
71
|
|
|
$52.1 million increase in provision for credit loss, reflecting increases in our ACL
principally due to the impact of increased monitored credits, primarily resulting from
softness in the residential and commercial real estate markets in the Midwest.
Additionally, net charge-offs increased by 52% over the year-ago period and were directly
impacted by losses associated with two single-family homebuilders in the East Michigan
region, along with a C&I loan relationship in northern Ohio. |
|
|
|
|
$10.0 million, or 3%, increase in other non-interest expenses, reflecting higher
benefits and other personnel costs, as well as increased depreciation associated with
certain strategic initiatives and higher volume-related processing costs. Additionally,
the first six month period of 2007 saw a significant increase in loan collection and
foreclosure expenses compared with the year-ago period, which correlates with the conditions of the
current credit environment. |
|
|
|
|
$7.2 million, or 2%, decline in fully taxable equivalent net interest income, reflecting
spread compression in both loan and deposit portfolios, resulting from aggressive pricing
in a competitive rate environment. |
Partially offset by:
|
|
|
$18.7 million, or 20%, decrease in provision for income taxes primarily reflecting a
reduction in pretax income. |
|
|
|
|
$8.7 million, or 29%, increase in other non-interest income, reflecting increased
revenues from electronic banking and operating equipment lease income associated with
higher volumes and incremental gains on sale of certain loans and leases. Also, a portion
of the increase is attributable to increases in the volume of products and services sold in
the branch network. These increases were partially offset by a decline in mortgage revenue
resulting from the net impact of MSR hedging activity (reference Table 8). |
|
|
|
|
$6.2 million, or 7%, increase in service charges on deposit accounts, reflecting
increases in personal and commercial service charges. The service charge increases
resulted from underlying growth in both consumer checking households and business checking
relationships. |
Highlights of Regional Bankings performance during the first six month period of 2007 included:
|
|
|
Growth in consumer and commercial deposit balances and accounts over the comparable year ago period. |
|
|
|
|
10 basis-point increase in the ALLL as a percentage of total loans and leases over the
comparable year-ago period. |
|
|
|
|
4% increase in mortgage origination volume over the comparable year-ago period. |
|
|
|
|
4% increase in small deposit account relationships over the comparable year-ago period. |
|
|
|
|
10% growth in average commercial loan balances over the comparable year-ago period. |
|
|
|
|
Pricing strategies proved effective in generating year-to-date
average growth of 4.7% and 5.2% in average total loans and average
total deposits, respectively. |
72
Dealer Sales
(This section should be read in conjunction with Significant Item
7.)
Objectives, Strategies, and Priorities
Our Dealer Sales line of business provides a variety of banking products and services to more
than 3,500 automotive dealerships within our primary banking markets, as well as in Arizona,
Florida, Georgia, Nevada, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, and
Tennessee. Dealer Sales finances the purchase of automobiles by customers at the automotive
dealerships; purchases automobiles from dealers and simultaneously leases the automobiles to
consumers under long-term leases; finances dealerships new and used vehicle inventories, land,
buildings, and other real estate owned by the dealership, or dealer working capital needs; and
provides other banking services to the automotive dealerships and their owners. Competition from
the financing divisions of automobile manufacturers and from other financial institutions is
intense. Dealer Sales production opportunities are directly impacted by the general automotive
sales business, including programs initiated by manufacturers to enhance and increase sales
directly. We have been in this line of business for over 50 years.
The Dealer Sales strategy has been to focus on developing relationships with the dealership
through its finance department, general manager, and owner. An underwriter who understands each
local market makes loan decisions, though we prioritize maintaining pricing discipline over market
share.
Table 26 Key Indicators for Dealer Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
Change |
(in thousands unless otherwise noted) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
|
|
Net income operating |
|
$ |
27,225 |
|
|
$ |
33,428 |
|
|
$ |
(6,203 |
) |
|
|
(19) |
% |
Total average assets (in millions of dollars) |
|
|
4,924 |
|
|
|
5,482 |
|
|
|
(558 |
) |
|
|
(10 |
) |
Return on average equity |
|
|
29.4 |
% |
|
|
21.1 |
% |
|
|
8.3 |
% |
|
|
39 |
|
Automobile loans production (in millions) |
|
$ |
949.7 |
|
|
$ |
883.9 |
|
|
$ |
65.8 |
|
|
|
7 |
|
Automobile leases production (in millions) |
|
|
157.6 |
|
|
|
183.0 |
|
|
|
(25.4 |
) |
|
|
(14 |
) |
|
2007 First Six Months versus 2006 First Six Months
Dealer
Sales contributed $27.2 million, or 15%, of the companys net operating earnings for
the first six month period of 2007 compared with $33.4 million in the comparable year-ago period.
The decline of $6.2 million, or 19%, included:
|
|
|
$6.3 million decrease in automobile operating lease net income as that portfolio continues
to run off. |
|
|
|
|
$5.6 million decrease in fully taxable equivalent net interest income reflecting a $255
million, or 5%, decrease in average loans and leases as well as an 12 basis point decline
in the fully taxable equivalent net interest margin. The decline in average balances was
primarily attributed to direct finance leases which declined $534 million from $2.2 billion
in the first six month period of 2006 to $1.6 billion in the comparable 2007 period.
Additionally, lease production volumes declined to $158 million for the first six month
period of 2007 from $183 million for the comparable year-ago period, reflecting the
negative impact of special programs offered by automobile manufacturers captive finance
companies to enhance and increase new vehicle sales. Partially offsetting the decline in
lease balances was a $252 million increase in average indirect automobile loan balances.
This growth primarily reflected three factors: (1) the first quarter of 2007 purchase of
the residual portion of two matured 2003 automobile loan securitizations; (2) an increase
in loan production volumes despite a continued slowdown in new and used automobile sales at
franchised dealerships, indirectly attributed to the introduction in the fourth quarter of
2006 of the Huntington Plus program for automobile dealers, discussed below; and (3) a
decrease in automobile loan sales due to the completion of a two year flow sale program.
Loan sales totaled $253 million in the first six month period of 2007, compared with $377
million in the comparable year-ago period. |
|
|
|
|
The fully taxable equivalent net interest margin on average loan and direct finance lease
balances decreased to 2.56% for the first six month period of 2007 from 2.68% for the
comparable year-ago period. This decline reflected a continuation of competitive pricing
pressures and the resulting lower margins on new production as compared to margins on loans
and leases that are being repaid.
|
73
|
|
|
$1.2 million increase in provision for credit loss, primarily reflecting growth in total loans and direct finance leases during the first six month period of 2007
as compared with a decrease during the first six month period of 2006. This
change was primarily due to higher production as well as lower sales levels in 2007, noted
above. |
Partially offset by:
|
|
|
$3.5 million, or 13%, decrease in other non-interest expense primarily reflecting a $3.2
million decline in lease residual value insurance and other residual value losses,
resulting from an overall decline in the total lease portfolio along with lower relative
losses on automobiles sold at auction. |
|
|
|
|
$3.3 million, or 19%, decrease in tax expense provision primarily reflecting a reduction
in pretax income. |
Highlights of Dealer Sales performance during the first six month period of 2007 included:
|
|
|
Increased momentum from the Huntington Plus program introduced during the fourth
quarter of 2006. This is a program where lower credit-scored automobile loans are
originated for dealers and then sold without recourse the next day to an independent third
party. While this program does not directly impact average balances, it resulted in our
becoming more of a full spectrum lender to our dealers, thereby influencing them to
increase their overall allocation of prime automobile loan applications to Huntington. |
|
|
|
|
13% increase in average indirect automobile loan balances as compared with the first six
month period of 2006. |
|
|
|
|
7% increase in prime indirect automobile loan originations and a 34% increase in total
indirect automobile loan originations despite declines in industry-wide sales of new and
used automobiles. |
|
|
|
|
Relatively stable charge-off level of 0.41% of total loans and leases. |
74
Private Financial and Capital Markets Group
(This
section should be read in conjunction with Significant Items 3,
5, and 7.)
Objectives, Strategies, and Priorities
The Private Financial and Capital Markets Group (PFCMG) provides products and services
designed to meet the needs of higher net worth customers. Revenue is derived through the sale of
trust, asset management, investment advisory, brokerage, insurance, and private banking products
and services. It also focuses on financial solutions for corporate and institutional customers
that include investment banking, sales and trading of securities, mezzanine capital financing, and
risk management products. To serve high net worth customers, a unique distribution model is used
that employs a single, unified sales force to deliver products and services mainly through Regional
Banking distribution channels. PFCMG provides investment management and custodial services to our
30 proprietary mutual funds, including 10 variable annuity funds, which represented approximately
$4.1 billion in assets under management at June 30, 2007. The Huntington Investment Company offers
brokerage and investment advisory services to both Regional Banking and PFCMG customers through a
combination of licensed investment sales representatives and licensed personal bankers. PFCMGs
insurance entities provide a complete array of insurance products including individual life
insurance products ranging from basic term life insurance, to estate planning, group life and
health insurance, property and casualty insurance, mortgage title insurance, and reinsurance for
payment protection products. Income and related expenses from the sale of brokerage and insurance
products is shared with the line of business that generated the sale or provided the customer
referral, most notably Regional Banking.
PFCMGs primary goals are to consistently increase assets under management by offering
innovative products and services that are responsive to our clients changing financial needs and
to grow the balance sheet mainly through increased loan volume achieved through improved
cross-selling efforts. To grow managed assets, the Huntington Investment Company sales team has
been utilized as the distribution source for trust and investment management.
Table 27 Key Indicators for Private Financial and Capital Markets Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
Change |
(in thousands unless otherwise noted) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
|
|
Net income operating |
|
$ |
20,497 |
|
|
$ |
28,323 |
|
|
$ |
(7,826 |
) |
|
|
(27.6) |
% |
Total average assets (in millions of dollars) |
|
|
2,211 |
|
|
|
2,062 |
|
|
|
149 |
|
|
|
7.2 |
|
Return on average equity |
|
|
25.2 |
% |
|
|
37.2 |
% |
|
|
(12.0) |
% |
|
|
(32.3 |
) |
Total brokerage and insurance income |
|
$ |
32,729 |
|
|
$ |
26,824 |
|
|
$ |
5,905 |
|
|
|
22.0 |
|
Total assets under management (in billions) (1) |
|
|
12.6 |
|
|
|
12.0 |
|
|
|
0.6 |
|
|
|
5.0 |
|
Total trust assets (in billions) (1) |
|
|
53.3 |
|
|
|
48.5 |
|
|
|
4.8 |
|
|
|
9.9 |
|
|
|
|
(1) |
|
Periods prior to the second quarter of 2006 exclude Unizan. |
2007 First Six Months versus 2006 First Six Months
PFCMG contributed $20.5 million, or 12%, of the companys net operating earnings for the first
six month period of 2007 compared with $28.3 million in the comparable year-ago period. The
decline of $7.8 million, or 28%, included:
|
|
|
$13.5 million decrease in other non-interest income, reflecting a combination of: (1) a
net decrease of $10.0 million in equity portfolio fair value adjustments as our equity
portfolio realized losses of $6.2 million for the first six months of 2007 compared with
realized gains of $3.8 million during the first six months of 2006, (2) a $2.0 million
reduction in income from mezzanine financing gains reflecting gains in the first six month
period of 2006 that did not recur, and (3) a reclassification of $1.1 million of
institutional sales and trading revenue from other non-interest income to brokerage
revenue. |
75
|
|
|
$6.4 million, or 25%, increase in other non-interest expenses including increased
expenses of $3.6 million related to the Unified and Unizan acquisitions and $1.8 million
for outside fees and commissions primarily due to a negative
adjustment to the minority interest
distributions payable to the mezzanine lending joint venture partner
in the prior year period. |
|
|
|
|
$6.1 million, or 14%, increase in personnel costs, including increased expenses of: $2.5
million related to the acquisition of Unified Fund Services in December, 2006, $1.3
million related to the Unizan acquisition in March, 2006, and $1.8 million resulting from
the expansion of the Huntington Investment Companys sales force and the opening of new
trust offices in Dayton and Indianapolis. |
|
|
|
|
$0.9 million, or 29%, increase in provision for credit losses, reflecting a $5.7 million
charge-off on two related real estate mezzanine loans in the East Michigan region. |
Partially offset by:
|
|
|
$8.3 million, or 19%, increase in trust services income, reflecting year over year trust
asset growth of 10%. Growth of the Huntington Funds and the Huntington Asset Management
Account continued to be the primary drivers of core trust revenue growth, and the Unizan
and Unified acquisitions provided additional growth over the prior year period. |
|
|
|
|
$4.2 million, or 28%, decrease in provision for income taxes primarily reflecting a
reduction in pretax income. |
|
|
|
|
$3.8 million, or 21%, increase in brokerage and insurance income, reflecting
double-digit revenue growth in revenue for both products. Increased brokerage revenue
resulted from a 12% increase in mutual fund and annuity sales volume. The increase in
annuity revenue also reflected a continuing shift in product mix toward variable/indexed
annuities and an increase in products sold with an ongoing trailer fee. Mutual fund
revenue, in addition to the increase in sales volume, reflected an increase in 12b-1 fees
related to the increase in mutual fund assets under administration. Increased insurance
revenue resulted primarily from revenues earned by the captive insurance company, formed in
the second quarter of 2006. |
|
|
|
|
$1.8 million, or 5%, increase in fully taxable equivalent net interest income reflecting
$0.1 billion, or 7%, increase in total loans and leases partially offset by a 6 basis point
decline in the fully taxable equivalent net interest margin. Much of the decline in the
fully taxable equivalent net interest margin was due to flat deposit growth. |
Highlights of PFCMGs performance during the first six months of 2007 included:
|
|
|
Total trust asset growth of 10% in the first six month period of 2007 compared with the
first six month period of 2006, including growth in Huntington Fund assets of 13%. |
|
|
|
|
Successful integration of Unified Fund Services asset servicing business, adding
annualized trust revenue of nearly $10 million. |
|
|
|
|
12% increase in mutual fund and annuity sales volume in the first six month period of
2007 compared with the first six month period of 2006, resulting in a 10% increase in
retail deposit penetration from 5.1% to 5.6%. |
76
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures for the current period can be found in the Market
Risk section of this report, which includes changes in market risk exposures from disclosures
presented in Huntingtons 2006 Form 10-K.
Item 4. 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 Commissions 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 issuers
management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Huntingtons Management,
with the participation of its Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of Huntingtons 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, Huntingtons Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, Huntingtons disclosure controls and
procedures were effective.
There have not been any changes in Huntingtons 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, Huntingtons internal control over financial reporting.
Item 4T. Controls and Procedures
Not applicable
PART II. OTHER INFORMATION
In accordance with the instructions to Part II, the other specified items in this part have
been omitted because they are not applicable or the information has been previously reported.
77
Item 4. Submission of Matters to a Vote of Security Holders
Huntington held its annual meeting of shareholders on May 30, 2007. At this meeting, the
shareholders approved the following management proposals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abstain/ |
|
|
|
|
|
|
|
|
For |
|
Against |
|
Withheld |
|
Non-Votes |
|
1. |
|
|
The issuance of Huntington common stock, without
par value, in connection with the merger by and
among Huntington, Penguin Acquisition, LLC, a
Maryland limited liability company and wholly owned
subsidiary of Huntington, and Sky Financial Group |
|
|
141,556,968 |
|
|
|
3,199,524 |
|
|
|
2,665,779 |
|
|
|
45,412,778 |
|
|
2. |
|
|
Election of directors to serve as Class II
Directors until the 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Meeting of Shareholders as follows:* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas E. Hoaglin |
|
|
187,279,639 |
|
|
|
|
|
|
|
5,555,411 |
|
|
|
|
|
|
|
|
|
David P. Lauer |
|
|
185,948,127 |
|
|
|
|
|
|
|
6,886,923 |
|
|
|
|
|
|
|
|
|
Kathleen H. Ransier |
|
|
188,237,104 |
|
|
|
|
|
|
|
4,597,945 |
|
|
|
|
|
|
3. |
|
|
Ratification of Deloitte & Touche LLP as
independent auditors for Huntington for the year
2007. |
|
|
189,384,696 |
|
|
|
1,422,512 |
|
|
|
2,027,841 |
|
|
|
|
|
|
4. |
|
|
The 2007 Stock and Long-Term Incentive Plan |
|
|
130,339,425 |
|
|
|
13,524,446 |
|
|
|
3,558,400 |
|
|
|
45,412,778 |
|
|
5. |
|
|
The First Amendment to the Management Incentive Plan |
|
|
173,760,899 |
|
|
|
14,934,489 |
|
|
|
4,082,806 |
|
|
|
56,856 |
|
|
6. |
|
|
Amend Huntingtons charter to increase the
authorized common stock of Huntington from
500,000,000 shares to 1,000,000,000 shares |
|
|
180,290,819 |
|
|
|
9,566,089 |
|
|
|
2,921,285 |
|
|
|
56,856 |
|
|
|
|
* |
|
Raymond J. Biggs, John B. Gerlach, Jr., and Gene E. Little continue as Class I Directors. Don M.
Casto III, Michael J. Endres, Wm J. Lhota, and David L. Porteous continue as Class III Directors. |
Item 6. Exhibits
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SEC File or |
|
|
Exhibit |
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|
Report or Registration |
|
Registration |
|
Exhibit |
Number |
|
Document Description |
|
Statement |
|
Number |
|
Reference |
1.1
|
|
Underwriting Agreement
|
|
Current Report on Form 8-K dated May
7, 2007.
|
|
000-02525
|
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99.1 |
|
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|
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3.1
|
|
Articles of Restatement of Charter, Articles of
Amendment to Articles of Restatement of Charter, and
Articles Supplementary.
|
|
Annual Report on
Form 10-K for the
year ended December
31, 1993.
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|
000-02525
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3(i) |
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3.2
|
|
Articles of Amendment to Articles of Restatement of
Charter.
|
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Quarterly Report on
Form 10-Q for the
quarter ended March
31, 1998.
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|
000-02525
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3(i)(c) |
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3.3
|
|
Articles of Amendment of Huntington
Bancshares Incorporated.
|
|
Current Report on Form 8-K dated May
30, 2007
|
|
000-02525
|
|
3.1 |
|
|
|
|
|
|
|
|
|
3.4
|
|
Bylaws of Huntington Bancshares Incorporated, as
amended and restated, as of July 1, 2007
|
|
Current Report on
Form 8-K dated July
1, 2007
|
|
000-02525
|
|
3(ii).1 |
|
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|
3.5
|
|
Articles Supplementary
|
|
Annual Report on Form 10-K for the
year ended December
31, 2006.
|
|
000-02525
|
|
3.4 |
|
|
|
|
|
|
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|
|
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.
|
|
Annual Report on Form 10-K for the
year ended December
31, 2006.
|
|
000-02525
|
|
4.1 |
|
|
|
|
|
|
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|
|
10.1
|
|
Employment Agreement Amendment
No. 1 between Huntington Bancshares Incorporated and Marty E.
Adams, effective July 17, 2007.
|
|
Current Report on Form 8-K dated July
17, 2007
|
|
000-02525
|
|
99.2 |
78
Exhibits
Continued
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|
SEC File or |
|
|
Exhibit |
|
|
|
Report or Registration |
|
Registration |
|
Exhibit |
Number |
|
Document Description |
|
Statement |
|
Number |
|
Reference |
10.2
|
|
Restricted Stock Award Grant Notice to Marty E.
Adams, effective July 1, 2007.
|
|
Securities to be
Offered to
Employees in
Employee Benefit
Plans on Form S-8
dated July 6, 2007.
|
|
000-02525
|
|
4.E |
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10.3
|
|
Schedule Identifying Material
Details of Executive Agreements. |
|
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12.1
|
|
Ratio of Earnings to Fixed Charges. |
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31.1
|
|
Rule 13a-14(a) Certification Chief Executive
Officer. |
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|
31.2
|
|
Rule 13a-14(a) Certification Chief Financial
Officer. |
|
|
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|
|
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|
|
|
|
|
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|
|
32.1
|
|
Section 1350 Certification Chief Executive Officer. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
Section 1350 Certification Chief Financial Officer. |
|
|
|
|
|
|
79
SIGNATURES
Pursuant to the requirements 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.
Huntington Bancshares Incorporated
(Registrant)
|
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|
|
Date: August 9, 2007 |
/s/ Thomas E. Hoaglin
|
|
|
Thomas E. Hoaglin |
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
Date: August 9, 2007 |
/s/ Donald R. Kimble
|
|
|
Donald R. Kimble |
|
|
Chief Financial Officer |
|
|
80