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 March 31, 2007
Commission File Number 0-2525
Huntington Bancshares Incorporated
|
|
|
Maryland
(State or other jurisdiction of
incorporation or organization)
|
|
31-0724920
(I.R.S. Employer
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). o Yes þ No
There were
235,906,606 shares of Registrants without par value
common stock outstanding on April
30, 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) |
|
March 31, |
|
December 31, |
|
March 31, |
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
867,256 |
|
|
$ |
1,080,163 |
|
|
$ |
797,258 |
|
Federal funds sold and securities
purchased under resale agreements |
|
|
701,951 |
|
|
|
440,584 |
|
|
|
349,098 |
|
Interest bearing deposits in banks |
|
|
100,416 |
|
|
|
74,168 |
|
|
|
23,204 |
|
Trading account securities |
|
|
76,631 |
|
|
|
36,056 |
|
|
|
111,208 |
|
Loans held for sale |
|
|
277,538 |
|
|
|
270,422 |
|
|
|
311,138 |
|
Investment securities |
|
|
3,724,676 |
|
|
|
4,362,924 |
|
|
|
5,034,359 |
|
Loans and leases |
|
|
26,266,747 |
|
|
|
26,153,425 |
|
|
|
26,145,589 |
|
Allowance for loan and lease losses |
|
|
(282,976 |
) |
|
|
(272,068 |
) |
|
|
(283,839 |
) |
|
|
|
Net loans and leases |
|
|
25,983,771 |
|
|
|
25,881,357 |
|
|
|
25,861,750 |
|
|
|
|
Bank owned life insurance |
|
|
1,097,986 |
|
|
|
1,089,028 |
|
|
|
1,060,305 |
|
Premises and equipment |
|
|
377,687 |
|
|
|
372,772 |
|
|
|
375,740 |
|
Goodwill |
|
|
569,779 |
|
|
|
570,876 |
|
|
|
579,246 |
|
Other intangible assets |
|
|
57,165 |
|
|
|
59,487 |
|
|
|
60,563 |
|
Accrued income and other assets |
|
|
1,144,443 |
|
|
|
1,091,182 |
|
|
|
1,102,040 |
|
|
|
|
Total Assets |
|
$ |
34,979,299 |
|
|
$ |
35,329,019 |
|
|
$ |
35,665,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
24,585,893 |
|
|
$ |
25,047,770 |
|
|
$ |
24,555,163 |
|
Short-term borrowings |
|
|
1,577,732 |
|
|
|
1,676,189 |
|
|
|
1,687,536 |
|
Federal Home Loan Bank advances |
|
|
1,197,411 |
|
|
|
996,821 |
|
|
|
1,658,486 |
|
Other long-term debt |
|
|
2,173,818 |
|
|
|
2,229,140 |
|
|
|
2,035,576 |
|
Subordinated notes |
|
|
1,280,870 |
|
|
|
1,286,657 |
|
|
|
1,283,359 |
|
Deferred federal income tax liability |
|
|
396,005 |
|
|
|
443,921 |
|
|
|
685,559 |
|
Accrued expenses and other liabilities |
|
|
716,210 |
|
|
|
634,195 |
|
|
|
680,050 |
|
|
|
|
Total Liabilities |
|
|
31,927,939 |
|
|
|
32,314,693 |
|
|
|
32,585,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock authorized 6,617,808 shares;
none outstanding |
|
|
|
|
|
|
|
|
|
|
--- |
|
Common stock without par value; authorized
500,000,000 shares; issued 257,866,255
shares; outstanding 235,713,500; 235,474,366
and 245,183,441 shares, respectively |
|
|
2,563,426 |
|
|
|
2,560,569 |
|
|
|
2,548,185 |
|
Less 22,152,755; 22,391,889 and 12,682,814
treasury shares at cost, respectively |
|
|
(501,578 |
) |
|
|
(506,946 |
) |
|
|
(273,120 |
) |
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investment securities |
|
|
11,562 |
|
|
|
14,254 |
|
|
|
(52,710 |
) |
Unrealized gains on cash flow hedging derivatives |
|
|
12,901 |
|
|
|
17,008 |
|
|
|
24,559 |
|
Pension and
other postretirement benefit adjustments |
|
|
(83,972 |
) |
|
|
(86,328 |
) |
|
|
(3,283 |
) |
Retained earnings |
|
|
1,049,021 |
|
|
|
1,015,769 |
|
|
|
836,549 |
|
|
|
|
Total Shareholders Equity |
|
|
3,051,360 |
|
|
|
3,014,326 |
|
|
|
3,080,180 |
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
34,979,299 |
|
|
$ |
35,329,019 |
|
|
$ |
35,665,909 |
|
|
|
|
See notes to unaudited condensed consolidated financial statements
3
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(in thousands, except per share amounts) |
|
2007 |
|
2006 |
|
Interest and fee income |
|
|
|
|
|
|
|
|
Loans and leases |
|
|
|
|
|
|
|
|
Taxable |
|
$ |
461,141 |
|
|
$ |
399,346 |
|
Tax-exempt |
|
|
471 |
|
|
|
509 |
|
Investment securities |
|
|
|
|
|
|
|
|
Taxable |
|
|
55,115 |
|
|
|
52,108 |
|
Tax-exempt |
|
|
6,093 |
|
|
|
5,712 |
|
Other |
|
|
12,129 |
|
|
|
7,112 |
|
|
Total interest income |
|
|
534,949 |
|
|
|
464,787 |
|
|
Interest expenses |
|
|
|
|
|
|
|
|
Deposits |
|
|
196,723 |
|
|
|
148,314 |
|
Short-term borrowings |
|
|
19,837 |
|
|
|
14,665 |
|
Federal Home Loan Bank advances |
|
|
12,510 |
|
|
|
14,488 |
|
Subordinated notes and other long-term debt |
|
|
50,324 |
|
|
|
43,640 |
|
|
Total interest expense |
|
|
279,394 |
|
|
|
221,107 |
|
|
Net interest income |
|
|
255,555 |
|
|
|
243,680 |
|
Provision for credit losses |
|
|
29,406 |
|
|
|
19,540 |
|
|
Net interest income after provision for credit losses |
|
|
226,149 |
|
|
|
224,140 |
|
|
Service charges on deposit accounts |
|
|
44,793 |
|
|
|
41,222 |
|
Trust services |
|
|
25,894 |
|
|
|
21,278 |
|
Brokerage and insurance income |
|
|
16,082 |
|
|
|
15,193 |
|
Other service charges and fees |
|
|
13,208 |
|
|
|
11,509 |
|
Bank owned life insurance income |
|
|
10,851 |
|
|
|
10,242 |
|
Mortgage banking income |
|
|
9,351 |
|
|
|
13,194 |
|
Gains on sales of automobile loans |
|
|
1,144 |
|
|
|
448 |
|
Securities gains (losses) |
|
|
104 |
|
|
|
(20 |
) |
Other income |
|
|
23,750 |
|
|
|
46,468 |
|
|
Total non-interest income |
|
|
145,177 |
|
|
|
159,534 |
|
|
Personnel costs |
|
|
134,639 |
|
|
|
131,557 |
|
Outside data processing and other services |
|
|
21,814 |
|
|
|
19,851 |
|
Net occupancy |
|
|
19,908 |
|
|
|
17,966 |
|
Equipment |
|
|
18,219 |
|
|
|
16,503 |
|
Marketing |
|
|
7,696 |
|
|
|
7,301 |
|
Professional services |
|
|
6,482 |
|
|
|
5,365 |
|
Telecommunications |
|
|
4,126 |
|
|
|
4,825 |
|
Printing and supplies |
|
|
3,242 |
|
|
|
3,074 |
|
Amortization of intangibles |
|
|
2,520 |
|
|
|
1,075 |
|
Other expense |
|
|
23,426 |
|
|
|
30,898 |
|
|
Total non-interest expense |
|
|
242,072 |
|
|
|
238,415 |
|
|
Income before income taxes |
|
|
129,254 |
|
|
|
145,259 |
|
Provision for income taxes |
|
|
33,528 |
|
|
|
40,803 |
|
|
Net income |
|
$ |
95,726 |
|
|
$ |
104,456 |
|
|
|
|
|
|
|
|
|
|
|
Average common shares basic |
|
|
235,586 |
|
|
|
230,968 |
|
Average common shares diluted |
|
|
238,754 |
|
|
|
234,363 |
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
Net income basic |
|
$ |
0.41 |
|
|
$ |
0.45 |
|
Net income diluted |
|
|
0.40 |
|
|
|
0.45 |
|
Cash dividends declared |
|
|
0.265 |
|
|
|
0.250 |
|
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 |
|
|
Treasury Stock |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
(in thousands) |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Total |
|
|
Three Months Ended March 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,456 |
|
|
|
104,456 |
|
Unrealized net losses on investment securities
arising during the period, net of reclassification (1)
for net realized losses, net of tax of ($9,857). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,694 |
) |
|
|
|
|
|
|
(18,694 |
) |
Unrealized gains on cash flow hedging derivatives,
net of tax of $5,036. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,353 |
|
|
|
|
|
|
|
9,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle
for servicing financial assets, net of tax of $6,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,110 |
|
|
|
12,110 |
|
Cash dividends declared ($0.25 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,861 |
) |
|
|
(61,861 |
) |
Shares issued pursuant to acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,366 |
|
|
|
25,350 |
|
|
|
522,390 |
|
|
|
|
|
|
|
|
|
|
|
575,756 |
|
Recognition of the fair value of share-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,273 |
|
Treasury shares purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,831 |
) |
|
|
(113,326 |
) |
|
|
|
|
|
|
|
|
|
|
(113,326 |
) |
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(782 |
) |
|
|
569 |
|
|
|
11,671 |
|
|
|
|
|
|
|
|
|
|
|
10,889 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
(11 |
) |
|
|
(279 |
) |
|
|
|
|
|
|
|
|
|
|
(277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
|
|
|
|
|
257,866 |
|
|
|
2,548,185 |
|
|
|
(12,683 |
) |
|
|
(273,120 |
) |
|
|
(31,434 |
) |
|
|
836,549 |
|
|
|
3,080,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,726 |
|
|
|
95,726 |
|
Unrealized net losses on investment securities
arising during the period, net of reclassification (1)
for net realized gains, net of tax of ($1,255) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,692 |
) |
|
|
|
|
|
|
(2,692 |
) |
Unrealized losses on cash flow hedging derivatives,
net of tax of ($2,211) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,107 |
) |
|
|
|
|
|
|
(4,107 |
) |
Pension and
other postretirement benefit adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss, net of tax of ($1,101) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,045 |
|
|
|
|
|
|
|
2,045 |
|
Prior service costs, net of tax of ($70) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
131 |
|
Transition obligation, net of tax of ($97) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180 |
|
|
|
|
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.265 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,474 |
) |
|
|
(62,474 |
) |
Recognition of the fair value of share-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,940 |
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,008 |
) |
|
|
238 |
|
|
|
5,355 |
|
|
|
|
|
|
|
|
|
|
|
4,347 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75 |
) |
|
|
1 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
|
|
|
$ |
|
|
|
|
257,866 |
|
|
$ |
2,563,426 |
|
|
|
(22,153 |
) |
|
$ |
(501,578 |
) |
|
$ |
(59,509 |
) |
|
$ |
1,049,021 |
|
|
$ |
3,051,360 |
|
|
|
|
|
(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 three months ended March 31, 2007 and 2006, the reclassification adjustments were $104, net of tax of ($36), and ($20), net of tax of $7, respectively. |
See notes to unaudited condensed consolidated financial statements.
5
Huntington Bancshares Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(in thousands) |
|
2007 |
|
2006 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
95,726 |
|
|
$ |
104,456 |
|
Adjustments to reconcile net income to net cash provided by operating activites: |
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
29,406 |
|
|
|
19,540 |
|
Depreciation and amortization |
|
|
21,226 |
|
|
|
31,614 |
|
Increase in accrued income taxes |
|
|
134,384 |
|
|
|
49,020 |
|
Deferred income tax benefit |
|
|
(46,708 |
) |
|
|
(59,449 |
) |
Increase in trading account securities |
|
|
(40,575 |
) |
|
|
(23,845 |
) |
Originations of loans held for sale |
|
|
(600,113 |
) |
|
|
(616,943 |
) |
Principal payments on and proceeds from loans held for sale |
|
|
584,561 |
|
|
|
600,149 |
|
Other, net |
|
|
3,024 |
|
|
|
(79,288 |
) |
|
Net cash provided by operating activities |
|
|
180,931 |
|
|
|
25,254 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
(Increase) decrease in interest bearing deposits in banks |
|
|
(26,248 |
) |
|
|
2,283 |
|
Net cash received in acquisitions |
|
|
|
|
|
|
66,507 |
|
Proceeds from: |
|
|
|
|
|
|
|
|
Maturities and calls of investment securities |
|
|
118,718 |
|
|
|
110,777 |
|
Sales of investment securities |
|
|
426,156 |
|
|
|
61,687 |
|
Purchases of investment securities |
|
|
(21,620 |
) |
|
|
(462,392 |
) |
Proceeds from sales of loans |
|
|
108,698 |
|
|
|
|
|
Net loan and lease originations, excluding sales |
|
|
(240,481 |
) |
|
|
(28,721 |
) |
Proceeds from sale of operating lease assets |
|
|
12,323 |
|
|
|
47,952 |
|
Purchases of premises and equipment |
|
|
(18,563 |
) |
|
|
(7,476 |
) |
Other, net |
|
|
2,857 |
|
|
|
(4,589 |
) |
|
Net cash provided by (used for) investing activities |
|
|
361,840 |
|
|
|
(213,972 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
(Decrease) increase in deposits |
|
|
(464,425 |
) |
|
|
449,778 |
|
Decrease in short-term borrowings |
|
|
(98,457 |
) |
|
|
(280,864 |
) |
Proceeds from issuance of subordinated notes |
|
|
|
|
|
|
250,000 |
|
Proceeds from Federal Home Loan Bank advances |
|
|
200,600 |
|
|
|
1,407,050 |
|
Maturity of Federal Home Loan Bank advances |
|
|
(10 |
) |
|
|
(1,007,161 |
) |
Maturity of long-term debt |
|
|
(70,023 |
) |
|
|
(380,390 |
) |
Dividends paid on common stock |
|
|
(61,540 |
) |
|
|
(41,678 |
) |
Repurchases of common stock |
|
|
|
|
|
|
(113,326 |
) |
Other, net |
|
|
(456 |
) |
|
|
10,889 |
|
|
Net cash (used for) provided by financing activities |
|
|
(494,311 |
) |
|
|
294,298 |
|
|
Increase in cash and cash equivalents |
|
|
48,460 |
|
|
|
105,580 |
|
Cash and cash equivalents at beginning of period |
|
|
1,520,747 |
|
|
|
1,040,776 |
|
|
Cash and cash equivalents at end of period |
|
$ |
1,569,207 |
|
|
$ |
1,146,356 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
238 |
|
|
$ |
45,874 |
|
Interest paid |
|
|
294,617 |
|
|
|
212,279 |
|
Non-cash activities |
|
|
|
|
|
|
|
|
Common stock dividends accrued, paid in subsequent quarter |
|
|
48,205 |
|
|
|
49,060 |
|
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.
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.
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. The Company is currently assessing the impact this Statement will have on its
financial statements.
7
Note 3 Pending Acquisition of Sky Financial Group, Inc.
On December 20, 2006, Huntington announced the signing of a definitive agreement to acquire
Sky Financial Group, Inc. (Sky Financial) in a stock and cash transaction expected to be valued at
approximately $3.5 billion. Sky Financial is a $17.6 billion diversified financial holding company
with over 330 banking offices and over 400 ATMs. Sky Financial serves communities in Ohio,
Pennsylvania, Indiana, Michigan, and West Virginia. Sky Financials affiliates include: Sky Bank,
commercial and retail banking; Sky Trust, asset management services; and Sky Insurance, retail and
commercial insurance agency services.
Under the terms of the agreement, Sky Financial shareholders will receive 1.098 shares of
Huntington common stock, on a tax-free basis, and a taxable cash payment of $3.023 for each share
of Sky Financial common stock. The merger was unanimously approved by both boards and is expected
to close in the third quarter of 2007, pending customary regulatory approvals, as well as approval
by both companies shareholders.
Note 4 Goodwill and Other Intangible Assets
Goodwill by line of business as of March 31, 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 |
|
|
|
|
|
|
|
(1,306 |
) |
|
|
|
|
|
|
(1,097 |
) |
|
Balance, March 31, 2007 |
|
$ |
536,064 |
|
|
$ |
|
|
|
$ |
33,715 |
|
|
$ |
|
|
|
$ |
569,779 |
|
|
The change in goodwill for the three months ended March 31, 2007, primarily relates 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.
At March 31, 2007, December 31, 2006 and March 31, 2006, Huntingtons other intangible assets
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Accumulated |
|
Net |
(in thousands) |
|
Carrying Amount |
|
Amortization |
|
Carrying Value |
March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold purchased |
|
$ |
23,655 |
|
|
$ |
(19,835 |
) |
|
$ |
3,820 |
|
Core deposit intangible |
|
|
45,000 |
|
|
|
(9,378 |
) |
|
|
35,622 |
|
Borrower relationship |
|
|
6,570 |
|
|
|
(593 |
) |
|
|
5,977 |
|
Trust customers |
|
|
11,430 |
|
|
|
(1,056 |
) |
|
|
10,374 |
|
Other |
|
|
1,819 |
|
|
|
(447 |
) |
|
|
1,372 |
|
|
|
|
Total other intangible assets |
|
$ |
88,474 |
|
|
$ |
(31,309 |
) |
|
$ |
57,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold purchased |
|
$ |
23,655 |
|
|
$ |
(19,019 |
) |
|
$ |
4,636 |
|
Core deposit intangible |
|
|
45,000 |
|
|
|
(753 |
) |
|
|
44,247 |
|
Trust customers |
|
|
11,430 |
|
|
|
(94 |
) |
|
|
11,336 |
|
Other |
|
|
382 |
|
|
|
(38 |
) |
|
|
344 |
|
|
|
|
Total other intangible assets |
|
$ |
80,467 |
|
|
$ |
(19,904 |
) |
|
$ |
60,563 |
|
|
|
|
8
Amortization expense of other intangible assets for the three months ended March 31,
2007, and 2006, was $2.5 million and $1.1 million, respectively.
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 |
|
$ |
7,557 |
|
|
2008 |
|
|
8,888 |
|
|
2009 |
|
|
7,957 |
|
2010 |
|
|
7,132 |
|
|
2011 |
|
|
6,333 |
|
|
2012 |
|
|
4,966 |
|
|
Note 5 Loan Sales and Securitizations
Automobile loans
Huntington sold $141.3 million and $169.8 million of automobile loans in the first quarter of
2007 and 2006, resulting in pre-tax gains of $1.1 million and $0.4 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 payoff rates of the
underlying loan pools. Valuation calculations rely on the predicted payoff assumption and, if
actual payoff is quicker than expected, then future value would be impaired.
Changes in the carrying value of automobile loan servicing rights for the three months ended
March 31, 2007 and 2006, and the fair value at the end of each period were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
Carrying value, beginning of period |
|
$ |
7,916 |
|
|
$ |
10,805 |
|
New servicing assets |
|
|
1,026 |
|
|
|
998 |
|
Amortization |
|
|
(1,756 |
) |
|
|
(2,193 |
) |
Impairment charges |
|
|
|
|
|
|
|
|
|
|
|
Carrying value, end of period |
|
$ |
7,186 |
|
|
$ |
9,610 |
|
|
|
|
|
Fair value, end of period |
|
$ |
8,153 |
|
|
$ |
11,086 |
|
|
|
|
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 $3.0 million and $3.4 million for the three months ended March 31, 2007 and
2006, respectively.
Residential Mortgage Loans
During the first quarter of 2007, Huntington sold $108.7 million of residential mortgage loans
held for investment, resulting in a net pre-tax gain of $0.6 million. There were no sales of
residential mortgage loans held for investment in the first quarter of 2006.
9
A mortgage servicing right (MSR) is established only when the servicing is contractually
separated from the underlying mortgage loans by sale or securitization of the loans with servicing
rights retained.
At initial recognition, the MSR asset is established at its fair value using assumptions that
are consistent with assumptions used at the time to estimate the fair value of the total MSR
portfolio. The same risk management practices are applied to all MSRs and, accordingly, all MSRs
are identified as a single asset class. Subsequent to initial capitalization, MSR assets are
carried at fair value and are included in other assets. Any increase or decrease in fair value
during the period is recorded as an increase or decrease in mortgage banking income, which is
reflected in non-interest income in the consolidated income statement.
The following table is a summary of the changes in MSR fair value during the three months
ended March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(in thousands) |
|
2007 |
|
2006 |
|
|
|
Fair value, beginning of period |
|
$ |
131,104 |
|
|
|
109,890 |
|
New servicing assets created |
|
|
8,436 |
|
|
|
5,777 |
|
Servicing assets acquired |
|
|
|
|
|
|
1,909 |
|
Change in fair value during the period due to: |
|
|
|
|
|
|
|
|
Time decay (1) |
|
|
(1,076 |
) |
|
|
(923 |
) |
Payoffs (2) |
|
|
(2,562 |
) |
|
|
(2,609 |
) |
Changes in valuation inputs or assumptions (3) |
|
|
(1,057 |
) |
|
|
9,213 |
|
|
|
|
Fair value, end of period |
|
$ |
134,845 |
|
|
$ |
123,257 |
|
|
|
|
|
|
|
(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 March 31, 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 |
|
|
13.19 |
% |
|
$ |
(6,329 |
) |
|
$ |
(12,088 |
) |
Discount rate |
|
|
9.40 |
|
|
|
(4,890 |
) |
|
|
(9,440 |
) |
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 months ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(in thousands) |
|
2007 |
|
2006 |
|
|
|
Servicing fees |
|
$ |
6,820 |
|
|
$ |
5,925 |
|
Late fees |
|
|
708 |
|
|
|
610 |
|
Ancillary fees |
|
|
255 |
|
|
|
252 |
|
|
|
|
Total fee income |
|
$ |
7,783 |
|
|
$ |
6,787 |
|
|
|
|
10
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 March 31, 2007, December 31, 2006, and March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
December 31, 2006 |
|
March 31, 2006 |
|
|
Amortized |
|
|
|
|
|
Amortized |
|
|
|
|
|
Amortized |
|
|
(in thousands) |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
U.S. Treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
$ |
130 |
|
|
$ |
129 |
|
|
$ |
800 |
|
|
$ |
800 |
|
|
$ |
|
|
|
$ |
|
|
1-5 years |
|
|
648 |
|
|
|
650 |
|
|
|
1,046 |
|
|
|
1,056 |
|
|
|
21,253 |
|
|
|
20,466 |
|
6-10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,946 |
|
|
|
3,014 |
|
Over 10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Treasury |
|
|
778 |
|
|
|
779 |
|
|
|
1,846 |
|
|
|
1,856 |
|
|
|
24,199 |
|
|
|
23,480 |
|
|
Federal agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
2,249 |
|
|
|
2,248 |
|
|
|
1,848 |
|
|
|
1,847 |
|
|
|
|
|
|
|
|
|
1-5 years |
|
|
11,361 |
|
|
|
11,432 |
|
|
|
9,560 |
|
|
|
9,608 |
|
|
|
29,853 |
|
|
|
28,698 |
|
6-10 years |
|
|
3,455 |
|
|
|
3,460 |
|
|
|
4,353 |
|
|
|
4,355 |
|
|
|
|
|
|
|
|
|
Over 10 years |
|
|
1,222,972 |
|
|
|
1,230,560 |
|
|
|
1,261,423 |
|
|
|
1,265,651 |
|
|
|
1,244,278 |
|
|
|
1,197,187 |
|
|
Total mortgage-backed Federal agencies |
|
|
1,240,037 |
|
|
|
1,247,700 |
|
|
|
1,277,184 |
|
|
|
1,281,461 |
|
|
|
1,274,131 |
|
|
|
1,225,885 |
|
|
Other agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,099 |
|
|
|
44,247 |
|
1-5 years |
|
|
149,324 |
|
|
|
149,628 |
|
|
|
149,819 |
|
|
|
149,853 |
|
|
|
252,770 |
|
|
|
241,958 |
|
6-10 years |
|
|
|
|
|
|
|
|
|
|
98 |
|
|
|
96 |
|
|
|
51,048 |
|
|
|
47,467 |
|
Over 10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other Federal agencies |
|
|
149,324 |
|
|
|
149,628 |
|
|
|
149,917 |
|
|
|
149,949 |
|
|
|
348,917 |
|
|
|
333,672 |
|
|
Total Federal agencies |
|
|
1,389,361 |
|
|
|
1,397,328 |
|
|
|
1,427,101 |
|
|
|
1,431,410 |
|
|
|
1,623,048 |
|
|
|
1,559,557 |
|
|
Municipal securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
42 |
|
|
|
42 |
|
|
|
42 |
|
|
|
42 |
|
|
|
65 |
|
|
|
65 |
|
1-5 years |
|
|
9,726 |
|
|
|
9,734 |
|
|
|
10,553 |
|
|
|
10,588 |
|
|
|
145 |
|
|
|
145 |
|
6-10 years |
|
|
164,760 |
|
|
|
164,160 |
|
|
|
165,624 |
|
|
|
165,229 |
|
|
|
154,741 |
|
|
|
151,982 |
|
Over 10 years |
|
|
407,244 |
|
|
|
411,275 |
|
|
|
410,248 |
|
|
|
415,564 |
|
|
|
393,470 |
|
|
|
390,206 |
|
|
Total municipal securities |
|
|
581,772 |
|
|
|
585,211 |
|
|
|
586,467 |
|
|
|
591,423 |
|
|
|
548,421 |
|
|
|
542,398 |
|
|
Private label CMO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6-10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 10 years |
|
|
551,070 |
|
|
|
556,342 |
|
|
|
586,088 |
|
|
|
590,062 |
|
|
|
663,447 |
|
|
|
651,017 |
|
|
Total private label CMO |
|
|
551,070 |
|
|
|
556,342 |
|
|
|
586,088 |
|
|
|
590,062 |
|
|
|
663,447 |
|
|
|
651,017 |
|
|
Asset backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-5 years |
|
|
30,000 |
|
|
|
30,019 |
|
|
|
30,000 |
|
|
|
30,056 |
|
|
|
30,503 |
|
|
|
30,445 |
|
6-10 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 10 years |
|
|
987,045 |
|
|
|
987,849 |
|
|
|
1,544,572 |
|
|
|
1,552,748 |
|
|
|
2,071,020 |
|
|
|
2,071,735 |
|
|
Total asset backed securities |
|
|
1,017,045 |
|
|
|
1,017,868 |
|
|
|
1,574,572 |
|
|
|
1,582,804 |
|
|
|
2,101,523 |
|
|
|
2,102,180 |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 1 year |
|
|
6,500 |
|
|
|
6,487 |
|
|
|
4,800 |
|
|
|
4,784 |
|
|
|
2,400 |
|
|
|
2,400 |
|
1-5 years |
|
|
4,146 |
|
|
|
4,133 |
|
|
|
2,750 |
|
|
|
2,706 |
|
|
|
9,800 |
|
|
|
9,808 |
|
6-10 years |
|
|
642 |
|
|
|
644 |
|
|
|
|
|
|
|
|
|
|
|
1,252 |
|
|
|
1,186 |
|
Over 10 years |
|
|
44 |
|
|
|
86 |
|
|
|
44 |
|
|
|
86 |
|
|
|
44 |
|
|
|
43 |
|
Non-marketable equity securities |
|
|
150,754 |
|
|
|
150,754 |
|
|
|
150,754 |
|
|
|
150,754 |
|
|
|
136,123 |
|
|
|
136,123 |
|
Marketable equity securities |
|
|
4,698 |
|
|
|
5,044 |
|
|
|
6,481 |
|
|
|
7,039 |
|
|
|
5,271 |
|
|
|
6,167 |
|
|
Total other |
|
|
166,784 |
|
|
|
167,148 |
|
|
|
164,829 |
|
|
|
165,369 |
|
|
|
154,890 |
|
|
|
155,727 |
|
|
Total investment securities |
|
$ |
3,706,810 |
|
|
$ |
3,724,676 |
|
|
$ |
4,340,903 |
|
|
$ |
4,362,924 |
|
|
$ |
5,115,528 |
|
|
$ |
5,034,359 |
|
|
Duration in years (1) |
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
(1) |
|
The average duration assumes a market driven pre-payment rate on securities subject to pre-payment. |
11
At March 31, 2007, non marketable equity securities includes $123.0 million of stock of
the Federal Home Loan Bank of Cincinnati and $27.8 million of stock of the Federal Reserve Bank.
For the three months ended March 31, 2007, gross gains from sales of securities totaled $5.0
million and gross losses totaled $4.9 million. Gross losses for the three months ended March 31,
2007 included $3.3 million of impairment losses on certain securities backed by mortgage loans to
borrowers with low FICO scores. Including impairment recognized in the forth quarter of 2006, at
March 31, 2007, these securities had a carrying value of $14.8 million. Gross gains and losses
from the sales of securities were not material for the three months ended March 31, 2006.
As of March 31, 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. 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 March
31, 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 months ended March 31, 2007 and 2006, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(in thousands, except per share amounts) |
|
2007 |
|
2006 |
|
Net income |
|
$ |
95,726 |
|
|
$ |
104,456 |
|
Average common shares outstanding |
|
|
235,586 |
|
|
|
230,968 |
|
Dilutive potential common shares |
|
|
3,168 |
|
|
|
3,395 |
|
|
Diluted average common shares outstanding |
|
|
238,754 |
|
|
|
234,363 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.41 |
|
|
$ |
0.45 |
|
Diluted |
|
|
0.40 |
|
|
|
0.45 |
|
Options to purchase 6.9 million and 5.7 million shares during the three months ended
March 31, 2007 and 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 $25.21 per share and $25.68 per share for the three months ended March
31, 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.
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 24.8 million shares
of common stock authorized for issuance under the plans at March 31, 2007, 20.9 million were
outstanding and 3.9 million were available for future grants.
12
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 and the compensation costs would be 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.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
|
|
|
Assumptions |
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.57 |
% |
|
|
4.47 |
% |
Expected dividend yield |
|
|
4.45 |
|
|
|
4.32 |
|
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 |
|
|
$ |
4.33 |
|
Huntingtons stock option activity and related information for the three months ended March
31, 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 |
|
|
(316 |
) |
|
|
17.38 |
|
|
|
|
|
|
|
|
|
Forfeited/expired |
|
|
(179 |
) |
|
|
22.33 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
20,096 |
|
|
$ |
21.41 |
|
|
|
4.6 |
|
|
$ |
35,071 |
|
|
Exercisable at March 31, 2007 |
|
|
14,308 |
|
|
$ |
20.79 |
|
|
|
4.3 |
|
|
$ |
32,608 |
|
|
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 three months ended March 31, 2007 and 2006, was $1.9 million and $4.5 million,
respectively.
Cash received from the exercise of options for the three months ended March 31, 2007 and 2006
was $3.9 million and $9.4 million, respectively. The tax benefit realized for the tax deductions
from option exercises totaled $0.9 million for both the three months ended March 31, 2007 and 2006.
Huntington issues shares to fulfill stock option exercises and restricted stock units from
available shares held in treasury. At March 31, 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 March
31, 2007 and activity for the three months ended March 31, 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 |
|
|
4 |
|
|
|
23.70 |
|
Vested |
|
|
(5 |
) |
|
|
23.34 |
|
Forfeited |
|
|
(7 |
) |
|
|
23.34 |
|
|
Nonvested at March 31, 2007 |
|
|
460 |
|
|
$ |
23.38 |
|
|
13
As of March 31, 2007, the total compensation cost related to restricted stock units not yet
recognized was $7.9 million with a weighted-average expense recognition period of 2.3 years. The
total fair value of restricted stock units vested during the three months ended March 31, 2007, was
$0.1 million.
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 January 1, 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.
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 |
|
|
|
March 31, |
|
|
March 31, |
|
(in thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
4,445 |
|
|
$ |
4,309 |
|
|
$ |
374 |
|
|
$ |
337 |
|
Interest cost |
|
|
5,967 |
|
|
|
5,539 |
|
|
|
667 |
|
|
|
565 |
|
Expected return on plan assets |
|
|
(9,120 |
) |
|
|
(8,220 |
) |
|
|
|
|
|
|
|
|
Amortization of transition asset |
|
|
1 |
|
|
|
|
|
|
|
276 |
|
|
|
276 |
|
Amortization of prior service cost |
|
|
1 |
|
|
|
1 |
|
|
|
142 |
|
|
|
95 |
|
Settlements |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss (gain) |
|
|
3,115 |
|
|
|
4,377 |
|
|
|
(81 |
) |
|
|
(181 |
) |
|
|
|
|
|
|
|
|
- |
|
Benefit expense |
|
$ |
5,409 |
|
|
$ |
7,006 |
|
|
$ |
1,378 |
|
|
$ |
1,092 |
|
|
|
|
|
|
|
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 $0.8 million and $0.7 million for the three-month periods ended March 31, 2007 and
2006, respectively.
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 $2.8 million and $2.6 million for the three months
ended March 31, 2007 and 2006, respectively.
14
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 March 31, 2007, December 31, 2006, and March 31, 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
March 31, |
(in millions) |
|
2007 |
|
2006 |
|
2006 |
|
Contract amount represents credit risk |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
4,385 |
|
|
$ |
4,416 |
|
|
$ |
3,295 |
|
Consumer |
|
|
3,482 |
|
|
|
3,374 |
|
|
|
3,410 |
|
Commercial real estate |
|
|
1,664 |
|
|
|
1,645 |
|
|
|
1,648 |
|
Standby letters of credit |
|
|
1,197 |
|
|
|
1,156 |
|
|
|
1,095 |
|
Commercial letters of credit |
|
|
38 |
|
|
|
54 |
|
|
|
43 |
|
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 $4.3 million, $4.3 million, and $5.3 million at March 31, 2007, December
31, 2006, and March 31, 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 March
31, 2007, December 31, 2006, and March 31, 2006, Huntington had commitments to sell residential
real estate loans of $373.7 million, $319.9 million, and $406.3 million, respectively. These
contracts mature in less than one year.
During the 2005 second quarter, Huntington entered into a two-year agreement to sell a portion
of its monthly automobile loan production at the cost of such loans, subject to certain
limitations, provided the production meets certain pricing, asset quality, and volume parameters.
At March 31, 2007, approximately $61.8 million of automobile loans related to this commitment were
classified as held for sale.
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.
15
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 March 31, 2007, identified by the underlying interest
rate-sensitive instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Cash Flow |
|
|
(in thousands) |
|
Hedges |
|
Hedges |
|
Total |
|
Instruments associated with: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
625,000 |
|
|
$ |
315,000 |
|
|
$ |
940,000 |
|
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 March 31, 2007 |
|
$ |
1,425,000 |
|
|
$ |
840,000 |
|
|
$ |
2,265,000 |
|
|
The following table presents additional information about the interest rate swaps used in
Huntingtons Asset and Liability Management activities at March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Weighted-Average |
|
|
Notional |
|
Maturity |
|
Fair |
|
Rate |
(in thousands ) |
|
Value |
|
(years) |
|
Value |
|
Receive |
|
Pay |
|
Liability conversion swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed generic |
|
$ |
810,000 |
|
|
|
9.4 |
|
|
$ |
3,685 |
|
|
|
5.29 |
% |
|
|
5.57 |
% |
Receive fixed callable |
|
|
615,000 |
|
|
|
6.3 |
|
|
|
(10,912 |
) |
|
|
4.64 |
|
|
|
5.26 |
|
Pay fixed generic |
|
|
840,000 |
|
|
|
2.2 |
|
|
|
(2,057 |
) |
|
|
5.33 |
|
|
|
4.98 |
|
|
Total liability conversion swaps |
|
$ |
2,265,000 |
|
|
|
5.9 |
|
|
$ |
(9,284 |
) |
|
|
5.13 |
% |
|
|
5.27 |
% |
|
Interest rate caps used in Huntingtons Asset and Liability Management activities at March 31,
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 |
|
|
|
1.8 |
|
|
$ |
1,205 |
|
|
|
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 an increase to
net interest income of $0.4 million and $0.6 million for the three months ended March 31, 2007 and
2006, 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 March 31, 2007, December 31, 2006 and March 31, 2006, aggregate credit risk
associated with these derivatives, net of collateral that has been pledged by the counterparty, was
$23.6 million, $42.6 million and $21.3 million, respectively. The credit risk associated with
interest rate swaps is calculated after considering master netting agreements.
16
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
March 31, |
(in thousands) |
|
2007 |
|
2006 |
|
2006 |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock agreements |
|
$ |
383 |
|
|
$ |
236 |
|
|
$ |
250 |
|
Forward trades and options |
|
|
854 |
|
|
|
1176 |
|
|
|
3,053 |
|
|
Total derivative assets |
|
|
1,237 |
|
|
|
1,412 |
|
|
|
3,303 |
|
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock agreements |
|
|
(808 |
) |
|
|
(838 |
) |
|
|
(1,650 |
) |
Forward trades and options |
|
|
(417 |
) |
|
|
(699 |
) |
|
|
(32 |
) |
|
Total derivative liabilities |
|
|
(1,225 |
) |
|
|
(1,537 |
) |
|
|
(1,682 |
) |
|
Net derivative (liability) asset |
|
$ |
12 |
|
|
$ |
(125 |
) |
|
$ |
1,621 |
|
|
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 $3.0 million for the
three months ended March 31, 2007 and 2006, respectively. The total notional value of derivative
financial instruments used by Huntington on behalf of customers, including offsetting derivatives
was $4.9 billion, $4.6 billion, and $4.3 billion at March 31, 2007, December 31, 2006, and March
31, 2006, respectively. Huntingtons credit risk from interest rate swaps used for trading purposes
was $57.9 million, $40.0 million, and $56.2 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 March 31, 2007, was $2.1 billion. The total notional
amount corresponds to trading assets with a fair value of $1.7 million and trading liabilities with
a fair value of $1.4 million. Total losses for the three months ended March 31, 2007 and 2006
were $0.5 million and $4.3 million, respectively.
In connection with securitization activities, Huntington purchased interest rate caps with a
notional value totaling $1.6 billion. These purchased caps were assigned to the securitization
trust for the benefit of the security holders. Interest rate caps were also sold totaling $1.6
billion outside the securitization structure. Both the purchased and sold caps are marked to market
through income.
17
Note 13 Shareholders Equity
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 (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
months ended March 31, 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 located in eight operating regions within the five states
of Ohio, Michigan, West Virginia, Indiana, and Kentucky. It provides these services through a
banking network of 375 branches, 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. Retail Banking accounts for 57% 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, New Jersey, 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 the dealerships new and used vehicle inventories, dealership real estate, 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.
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.
18
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.
Use of Operating Earnings to Measure Segment Performance
Management uses earnings on an operating basis, rather than on a GAAP (reported) basis, to
measure underlying performance trends for each business segment. Analyzing earnings on an
operating basis is very helpful in assessing underlying performance trends, a critical factor used
to determine the success of strategies and future earnings capabilities. For the three months
ended March 31, 2007 and 2006, operating earnings were the same as reported GAAP.
Listed below are certain financial results by line of business. For the three months ended
March 31, 2007 and 2006, operating earnings were the same as reported earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
Income Statements |
|
Regional |
|
Dealer |
|
|
|
|
|
Treasury/ |
|
Huntington |
(in thousands) |
|
Banking |
|
Sales |
|
PFCMG |
|
Other |
|
Consolidated |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
215,060 |
|
|
$ |
31,641 |
|
|
$ |
19,177 |
|
|
$ |
(10,323 |
) |
|
$ |
255,555 |
|
Provision for credit losses |
|
|
(22,456 |
) |
|
|
(7,745 |
) |
|
|
795 |
|
|
|
|
|
|
|
(29,406 |
) |
Non-interest income |
|
|
86,482 |
|
|
|
13,181 |
|
|
|
36,713 |
|
|
|
8,801 |
|
|
|
145,177 |
|
Non-interest expense |
|
|
(162,902 |
) |
|
|
(19,587 |
) |
|
|
(40,232 |
) |
|
|
(19,351 |
) |
|
|
(242,072 |
) |
Income taxes |
|
|
(33,171 |
) |
|
|
(4,993 |
) |
|
|
(4,697 |
) |
|
|
9,333 |
|
|
|
(33,528 |
) |
|
Operating / reported net income |
|
$ |
83,013 |
|
|
$ |
12,497 |
|
|
$ |
11,756 |
|
|
$ |
(11,540 |
) |
|
$ |
95,726 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
208,080 |
|
|
$ |
34,831 |
|
|
$ |
17,569 |
|
|
$ |
(16,800 |
) |
|
$ |
243,680 |
|
Provision for credit losses |
|
|
(10,390 |
) |
|
|
(7,762 |
) |
|
|
(1,388 |
) |
|
|
|
|
|
|
(19,540 |
) |
Non-interest income |
|
|
77,792 |
|
|
|
26,992 |
|
|
|
40,894 |
|
|
|
13,856 |
|
|
|
159,534 |
|
Non-interest expense |
|
|
(142,148 |
) |
|
|
(31,780 |
) |
|
|
(30,711 |
) |
|
|
(33,776 |
) |
|
|
(238,415 |
) |
Income taxes |
|
|
(46,667 |
) |
|
|
(7,798 |
) |
|
|
(9,227 |
) |
|
|
22,889 |
|
|
|
(40,803 |
) |
|
Operating / reported net income |
|
$ |
86,667 |
|
|
$ |
14,483 |
|
|
$ |
17,137 |
|
|
$ |
(13,831 |
) |
|
$ |
104,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at |
|
Deposits at |
|
|
March 31, |
|
December 31, |
|
March 31, |
|
March 31, |
|
December 31, |
|
March 31, |
(in millions) |
|
2007 |
|
2006 |
|
2006 |
|
2007 |
|
2006 |
|
2006 |
|
|
|
|
|
Regional Banking |
|
$ |
21,154 |
|
|
$ |
20,933 |
|
|
$ |
20,769 |
|
|
$ |
20,637 |
|
|
$ |
20,231 |
|
|
$ |
20,233 |
|
Dealer Sales |
|
|
5,173 |
|
|
|
5,003 |
|
|
|
5,467 |
|
|
|
55 |
|
|
|
59 |
|
|
|
64 |
|
PFCMG |
|
|
2,236 |
|
|
|
2,153 |
|
|
|
2,090 |
|
|
|
1,172 |
|
|
|
1,162 |
|
|
|
1,177 |
|
Treasury / Other |
|
|
6,416 |
|
|
|
7,240 |
|
|
|
7,340 |
|
|
|
2,722 |
|
|
|
3,596 |
|
|
|
3,081 |
|
|
|
|
|
|
Total |
|
$ |
34,979 |
|
|
$ |
35,329 |
|
|
$ |
35,666 |
|
|
$ |
24,586 |
|
|
$ |
25,048 |
|
|
$ |
24,555 |
|
|
|
|
|
|
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
Huntington Bancshares Incorporated (we or our) is a multi-state diversified financial holding
company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through our
subsidiaries, we provide full-service commercial and consumer banking services, mortgage banking
services, automobile financing, equipment leasing, investment management, trust services, brokerage
services, reinsure private mortgage insurance; reinsure credit life and disability insurance; and
other insurance and financial products and services. Our banking offices are located in Ohio,
Michigan, West Virginia, Indiana, and Kentucky. Certain activities are also conducted in Arizona,
Florida, Georgia, Maryland, Nevada, New Jersey, North Carolina, Pennsylvania, South Carolina,
Tennessee, and Vermont. We have a foreign office in the Cayman Islands and another in Hong Kong.
The Huntington National Bank (the Bank), organized in 1866, is our only bank subsidiary.
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 these interim MD&A.
You should note the following discussion is divided into key segments:
|
|
|
Introduction - Provides overview comments on important matters including risk factors
and bank regulatory agreements. 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 approved 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 approved 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 the acquisition may not be fully realized
within the expected timeframes; disruption from the 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 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
20
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.
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 and / 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. (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.)
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.
Pending Acquisition of Sky Financial
On December 20, 2006, we announced the signing of a definitive agreement to acquire Sky
Financial Group, Inc. (Sky Financial) in a stock and cash transaction expected to be valued at
approximately $3.5 billion. As of March 31, 2007, Sky Financial was a $17.6 billion diversified
financial holding company with over 330 financial centers and over 400 ATMs. Sky Financial serves
communities in Ohio, Pennsylvania, Indiana, Michigan and West Virginia. Sky Financials financial
service affiliates include: Sky Bank, commercial and retail banking; Sky Trust, asset management
services; and Sky Insurance, retail and commercial insurance agency services.
Under the terms of the agreement, Sky Financial shareholders will receive 1.098 shares of
Huntington common stock, on a tax-free basis, and a taxable cash payment of $3.023 for each share
of Sky Financial common stock. The merger was unanimously approved by both boards and is expected
to close in the third quarter of 2007, pending customary regulatory approvals, as well as approval
by both companies shareholders.
21
DISCUSSION OF RESULTS OF OPERATIONS
This section provides a review of financial performance from a consolidated perspective. It
also includes a Significant Items Influencing Financial Performance Comparisons section that
summarizes key issues important for a complete understanding of performance trends. Key
consolidated balance sheet and income statement trends are discussed in this section. All earnings
per share data are reported on a diluted basis. For additional insight on financial performance,
this section should be read in conjunction with the Lines of Business Discussion.
Certain components of the Income Statement are naturally subject to more volatility than
others. As a result, such items may be viewed differently in comparing actual performance to
expectations and/or any implications resulting from an assessment of future performance trends.
Therefore, we believe the disclosure of certain Significant Items in current and prior period
results aids in better understanding corporate performance. The decision of whether to include or
exclude these items from an analysis of performance is subjective.
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. (The one exception is the provision for credit losses discussed below). Such
Significant Items generally fall within one of two categories: timing differences and other
items.
Timing Differences
Some of our regular business activities are volatile by nature; 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.
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-related
integration 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-off related to fraud; etc.
Provision for Credit Losses
While the provision for credit losses may vary significantly between periods, we exclude it
from the list of Significant Items.
The provision for credit losses is always an assumption in expectations of earnings and there
is apparent agreement among analysts that provision expense is included in the definition of
underlying or core earnings unlike timing differences or other items. In addition,
provision for credit losses 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. In addition, the factors influencing the level of provision for credit losses receive
detailed additional disclosure and analysis so that information is readily available to understand
the underlying factors that result in the reported provision for credit losses amount.
In addition, provision for credit losses 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, every analyst and most investors incorporate a
provision expense estimate in their financial performance estimates.
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
22
other factors described from time to time in
Huntingtons other filings with the Securities and Exchange Commission, could significantly impact
future periods.
Summary
Earnings comparisons of 2007 first quarter performance with that of the 2006 first and fourth
quarters were impacted by a number of factors, some related to changes in the economic and
competitive environment, while others reflected specific strategies or changes in accounting
practices. 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 First Quarter versus 2006 First Quarter
Net income for the first quarter of 2007 was $95.7 million, or $0.40 per common share,
compared with $104.5 million, or $0.45 per common share, in the year-ago quarter. This $8.7
million decrease in net income primarily reflected the negative impacts of:
|
|
|
$14.4 million, or 9% decline in total non-interest income. Items contributing to the
decline included (1) a $14.2 million decline in automobile operating lease income as that
portfolio continued to run off, (2) an $8.5 million loss on equity investments in the
current period, and (3) a decline in mortgage banking income primarily related to the
negative impact of a mortgage servicing rights (MSR) valuation adjustment. These negative
impacts were partially offset by higher trust services income, service charges on deposit
accounts, and other service charges and fees. The Unizan merger contributed $4.8 million
of growth to non-interest income. (See Non-interest Income discussion for details.) |
|
|
|
|
$9.9 million, or 51%, increase in provision for credit losses, reflecting a higher
allowance for credit losses for both an absolute and relative basis. This was due to
softness in the residential and commercial real estate markets as reflected in higher
levels of watch list credits. (See Provision for Credit Losses and the Credit Risk
discussions for details.) |
|
|
|
|
$3.7 million, or 2%, increase in total non-interest expense. This reflected higher
personnel, outside data processing and other service expenses, net occupancy, equipment,
amortization of intangibles, and professional services expense, partially offset by a $7.5
million decline in other expense, including a $10.6 million decline in automobile operating
lease expense. The Unizan merger contributed $11.5 million to the increase in total
non-interest expense. (See Non-interest Expense discussion for details.) |
Partially offset by:
|
|
|
$11.9 million, or 5%, increase in net interest income. This reflected the benefit of
$1.1 billion, or 4%, growth in average earning assets ($1.3 billion, or 5%, in average
total loans and leases), and a 4 basis point increase in the net interest margin to 3.36%
from 3.32% in the year-ago quarter. The Unizan merger added an estimated $11.8 million to
net interest income with the addition of $1.1 billion in loans and leases. (See Net
Interest Income discussion for details.) |
|
|
|
|
$7.3 million reduction in federal income tax expense, primarily due to an increase in
tax-exempt income and general business credits, as well as a decrease in pre-tax earnings.
(See Provision for Income Taxes discussion for details.) |
The return on average assets (ROA) and return on average equity (ROE) in the 2007 first
quarter were 1.11% and 12.9%, respectively, compared with 1.26% and 15.5%, respectively, in the
year-ago quarter (see Table 1).
2007 First Quarter versus 2006 Fourth Quarter
Net income for the first quarter of 2007 was $95.7 million, or $0.40 per common share,
compared with $87.7 million, or $0.37 per common share, in the prior quarter. This $8.0 million
increase in net income primarily reflected the positive impacts of:
23
|
|
|
$25.7 million, or 10%, reduction in total non-interest expense, reflecting higher 2006
fourth quarter other expense due to that quarters contribution to the Huntington
Foundation, higher residual value losses on automobile leases, costs associated with the
restructuring of FHLB advances; and a decrease in current quarter personnel and
professional services costs; partially offset by higher current quarter net occupancy,
marketing, and outside data processing and other services expense. (See Non-interest
Expense discussion for details.) |
|
|
|
|
$4.6 million, or 3%, increase in total non-interest income reflecting the positive
impact of a $15.9 million positive change in securities gains (losses) as the fourth
quarter included $15.8 million of securities losses associated with that quarters balance
sheet restructuring; and increases in mortgage banking, trust services, and brokerage and
insurance income; partially offset by a $14.0 million decline in other income, including
the current quarters equity investment loss compared with a gain on the sale of
MasterCardâ stock in the fourth quarter; and a seasonal decline in service charges on
deposit accounts. (See Non-interest Income discussion for details.) |
Partially offset by:
|
|
|
$13.7 million, or 9%, increase in provision for credit losses, reflecting a higher
allowance for credit losses for both an absolute and relative basis. This was due to
softness in the residential and commercial real estate markets as reflected in higher
levels of watch list credits. (See Provision for Credit Losses and the Credit Risk
discussions for details.) |
|
|
|
|
$6.2 million, or 2%, increase in federal income tax expense, primarily due to lower
pre-tax earnings in 2006. (See Provision for Income Taxes discussion for details.) |
|
|
|
|
$2.4 million, or 1%, decline in net interest income. This primarily reflected a decline
in average earning assets, primarily in average investment securities and average total
consumer loans, partially offset by the positive impact of an 8 basis point increase in the
net interest margin to 3.36%. (See Net Interest Income discussion for details.) |
The ROA and ROE in the 2007 first quarter were 1.11% and 12.9%, respectively, compared with
0.98% and 11.3%, respectively, in the 2006 fourth quarter (see Table 1).
24
Table 1 Selected Quarterly Income Statement Data (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands, except per share amounts) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
|
Interest income |
|
$ |
534,949 |
|
|
$ |
544,841 |
|
|
$ |
538,988 |
|
|
$ |
521,903 |
|
|
$ |
464,787 |
|
Interest expense |
|
|
279,394 |
|
|
|
286,852 |
|
|
|
283,675 |
|
|
|
259,708 |
|
|
|
221,107 |
|
|
|
|
Net interest income |
|
|
255,555 |
|
|
|
257,989 |
|
|
|
255,313 |
|
|
|
262,195 |
|
|
|
243,680 |
|
Provision for credit losses |
|
|
29,406 |
|
|
|
15,744 |
|
|
|
14,162 |
|
|
|
15,745 |
|
|
|
19,540 |
|
|
|
|
Net interest income after provision for credit losses |
|
|
226,149 |
|
|
|
242,245 |
|
|
|
241,151 |
|
|
|
246,450 |
|
|
|
224,140 |
|
|
|
|
Service charges on deposit accounts |
|
|
44,793 |
|
|
|
48,548 |
|
|
|
48,718 |
|
|
|
47,225 |
|
|
|
41,222 |
|
Trust services |
|
|
25,894 |
|
|
|
23,511 |
|
|
|
22,490 |
|
|
|
22,676 |
|
|
|
21,278 |
|
Brokerage and insurance income |
|
|
16,082 |
|
|
|
14,600 |
|
|
|
14,697 |
|
|
|
14,345 |
|
|
|
15,193 |
|
Other service charges and fees |
|
|
13,208 |
|
|
|
13,784 |
|
|
|
12,989 |
|
|
|
13,072 |
|
|
|
11,509 |
|
Bank owned life insurance income |
|
|
10,851 |
|
|
|
10,804 |
|
|
|
12,125 |
|
|
|
10,604 |
|
|
|
10,242 |
|
Mortgage banking (loss) income |
|
|
9,351 |
|
|
|
6,169 |
|
|
|
8,512 |
|
|
|
13,616 |
|
|
|
13,194 |
|
Gains on sales of automobile loans |
|
|
1,144 |
|
|
|
1,252 |
|
|
|
863 |
|
|
|
532 |
|
|
|
448 |
|
Securities (losses) gains |
|
|
104 |
|
|
|
(15,804 |
) |
|
|
(57,332 |
) |
|
|
(35 |
) |
|
|
(20 |
) |
Other income (2) |
|
|
23,750 |
|
|
|
37,742 |
|
|
|
34,848 |
|
|
|
40,984 |
|
|
|
46,468 |
|
|
|
|
Total non-interest income |
|
|
145,177 |
|
|
|
140,606 |
|
|
|
97,910 |
|
|
|
163,019 |
|
|
|
159,534 |
|
|
|
|
Personnel costs |
|
|
134,639 |
|
|
|
137,944 |
|
|
|
133,823 |
|
|
|
137,904 |
|
|
|
131,557 |
|
Outside data processing and other services |
|
|
21,814 |
|
|
|
20,695 |
|
|
|
18,664 |
|
|
|
19,569 |
|
|
|
19,851 |
|
Net occupancy |
|
|
19,908 |
|
|
|
17,279 |
|
|
|
18,109 |
|
|
|
17,927 |
|
|
|
17,966 |
|
Equipment |
|
|
18,219 |
|
|
|
18,151 |
|
|
|
17,249 |
|
|
|
18,009 |
|
|
|
16,503 |
|
Marketing |
|
|
7,696 |
|
|
|
6,207 |
|
|
|
7,846 |
|
|
|
10,374 |
|
|
|
7,301 |
|
Professional services |
|
|
6,482 |
|
|
|
8,958 |
|
|
|
6,438 |
|
|
|
6,292 |
|
|
|
5,365 |
|
Telecommunications |
|
|
4,126 |
|
|
|
4,619 |
|
|
|
4,818 |
|
|
|
4,990 |
|
|
|
4,825 |
|
Printing and supplies |
|
|
3,242 |
|
|
|
3,610 |
|
|
|
3,416 |
|
|
|
3,764 |
|
|
|
3,074 |
|
Amortization of intangibles |
|
|
2,520 |
|
|
|
2,993 |
|
|
|
2,902 |
|
|
|
2,992 |
|
|
|
1,075 |
|
Other expense (2) |
|
|
23,426 |
|
|
|
47,334 |
|
|
|
29,165 |
|
|
|
30,538 |
|
|
|
30,898 |
|
|
|
|
Total non-interest expense |
|
|
242,072 |
|
|
|
267,790 |
|
|
|
242,430 |
|
|
|
252,359 |
|
|
|
238,415 |
|
|
|
|
Income before income taxes |
|
|
129,254 |
|
|
|
115,061 |
|
|
|
96,631 |
|
|
|
157,110 |
|
|
|
145,259 |
|
Provision (benefit) for income taxes (3) |
|
|
33,528 |
|
|
|
27,346 |
|
|
|
(60,815 |
) |
|
|
45,506 |
|
|
|
40,803 |
|
|
|
|
Net income |
|
$ |
95,726 |
|
|
$ |
87,715 |
|
|
$ |
157,446 |
|
|
$ |
111,604 |
|
|
$ |
104,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares diluted |
|
|
238,754 |
|
|
|
239,881 |
|
|
|
240,896 |
|
|
|
244,538 |
|
|
|
234,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income diluted |
|
$ |
0.40 |
|
|
$ |
0.37 |
|
|
$ |
0.65 |
|
|
$ |
0.46 |
|
|
$ |
0.45 |
|
Cash dividends declared |
|
|
0.265 |
|
|
|
0.250 |
|
|
|
0.250 |
|
|
|
0.250 |
|
|
|
0.250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets |
|
|
1.11 |
% |
|
|
0.98 |
% |
|
|
1.75 |
% |
|
|
1.25 |
% |
|
|
1.26 |
% |
Return on average total shareholders equity |
|
|
12.9 |
|
|
|
11.3 |
|
|
|
21.0 |
|
|
|
14.9 |
|
|
|
15.5 |
|
Return on average tangible shareholders equity (4) |
|
|
16.5 |
|
|
|
14.5 |
|
|
|
27.1 |
|
|
|
19.3 |
|
|
|
18.0 |
|
Net interest margin (5) |
|
|
3.36 |
|
|
|
3.28 |
|
|
|
3.22 |
|
|
|
3.34 |
|
|
|
3.32 |
|
Efficiency ratio (6) |
|
|
59.2 |
|
|
|
63.3 |
|
|
|
57.8 |
|
|
|
58.1 |
|
|
|
58.3 |
|
Effective tax rate (3) |
|
|
25.9 |
|
|
|
23.8 |
|
|
|
(62.9 |
) |
|
|
29.0 |
|
|
|
28.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue fully taxable equivalent (FTE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
255,555 |
|
|
$ |
257,989 |
|
|
$ |
255,313 |
|
|
$ |
262,195 |
|
|
$ |
243,680 |
|
FTE adjustment |
|
|
4,047 |
|
|
|
4,115 |
|
|
|
4,090 |
|
|
|
3,984 |
|
|
|
3,836 |
|
|
|
|
Net interest income (5) |
|
|
259,602 |
|
|
|
262,104 |
|
|
|
259,403 |
|
|
|
266,179 |
|
|
|
247,516 |
|
Non-interest income |
|
|
145,177 |
|
|
|
140,606 |
|
|
|
97,910 |
|
|
|
163,019 |
|
|
|
159,534 |
|
|
|
|
Total revenue (5) |
|
$ |
404,779 |
|
|
$ |
402,710 |
|
|
$ |
357,313 |
|
|
$ |
429,198 |
|
|
$ |
407,050 |
|
|
|
|
|
|
|
(1) |
|
Comparisons for presented periods are impacted by a number of factors. Refer to the
Significant Items Influencing Financial Performance Comparisions for additional discussion
regarding these key factors. |
|
(2) |
|
Automobile operating lease income and expense is included in Other Income and
Other Expense, respectively. |
|
(3) |
|
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. |
|
(4) |
|
Net income less expense (net of tax) for amortization of intangibles for the period
divided by average tangible common shareholders equity. Average tangible common
shareholders equity equals average total common shareholders equity less average indentifiable
intangible assets and goodwill. |
|
(5) |
|
On a fully taxable equivalent (FTE) basis assuming a 35% tax rate. |
|
(6) |
|
Non-interest expense less amortization of intangibles divided by the sum of FTE net
interest income and non-interest income excluding securities gains (losses). |
25
Significant Items Influencing Financial Performance Comparisons
Earnings comparisons from the beginning of 2006 through the first quarter of 2007 were
impacted by a number of factors, reflecting specific strategies or changes in accounting practices.
Those key factors are 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. |
|
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 impact all
quarters thereafter. As a result, performance comparisons between 2007 first quarter and
the 2006 first quarter periods are affected, as Unizan results were not in the prior period
for a full quarter. In contrast, comparisons between the 2007 first and 2006 fourth
quarter results are not affected given Unizan fully impacted both of these quarters.
Comparisons of the 2007 first quarter compared with the 2006 first quarter reporting
periods 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, and a net cost recovery of $0.4 million in the 2006 fourth quarter. |
Given the impact of the merger on reported 2006 results, we believe 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 20 Estimated Impact of Unizan
Merger.
3. |
|
Mortgage servicing rights (MSRs) and related hedging. 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
reduced by prepayments. Prepayments usually increase when mortgage interest rates decline
and decrease when mortgage interest rates rise. |
|
|
|
Mortgage banking income reflected a $2.0 million pre-tax ($1.3 million after tax or $0.01
per common share) for the
2007 first quarter, and $2.5 million pre-tax ($1.6 million after tax or $0.01 per common
share) for the 2006 |
26
|
|
fourth quarter due to the negative MSR mark-to-market impact, net of
hedge-related trading activity. |
|
|
|
Beginning in the first quarter 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. 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). |
|
4. |
|
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. |
|
5. |
|
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 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 with a combined
market value at March 31, 2007 of $25.9 million. These funds are invested in financial
services-related companies, some of which are involved in sub-prime lending or related
activities, and were particularly hard hit by declining equity values. |
|
|
|
|
$1.9 million pre-tax ($1.2 million after tax or $0.01 per common share) negative
impact due to litigation losses inherited from a bank acquired more than 9 years ago. |
|
|
|
$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. |
|
|
|
$2.3 million pre-tax ($1.6 million after tax or $0.01 per common share) negative
impact, reflecting a cumulative adjustment to defer annual fees related to home equity
loans. This adjustment reduced the year-ago net interest margin by 3 basis points. |
Table 2 reflects the earnings impact of the above-mentioned significant items for periods
affected by this Discussion of Results of Operations:
27
Table 2 Significant Items Influencing Earnings Performance Comparison (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2007 |
|
December 31, 2006 |
|
March 31, 2006 |
(in millions) |
|
After-tax |
|
EPS |
|
After-tax |
|
EPS |
|
After-tax |
|
EPS |
|
Net income reported earnings |
|
$ |
95.7 |
|
|
|
|
|
|
$ |
87.7 |
|
|
|
|
|
|
$ |
104.5 |
|
|
|
|
|
Earnings per share, after tax |
|
|
|
|
|
$ |
0.40 |
|
|
|
|
|
|
$ |
0.37 |
|
|
|
|
|
|
$ |
0.45 |
|
Change from prior quarter $ |
|
|
|
|
|
|
0.03 |
|
|
|
|
|
|
|
(0.28 |
) |
|
|
|
|
|
|
0.01 |
|
Change from prior quarter % |
|
|
|
|
|
|
8.1 |
% |
|
|
|
|
|
|
(43.1 |
)% |
|
|
|
|
|
|
2.3 |
% |
|
Change from a year-ago $ |
|
|
|
|
|
$ |
(0.05 |
) |
|
|
|
|
|
$ |
(0.07 |
) |
|
|
|
|
|
$ |
0.04 |
|
Change from a year-ago % |
|
|
|
|
|
|
(11.1 |
)% |
|
|
|
|
|
|
(15.9 |
)% |
|
|
|
|
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant items - favorable (unfavorable) impact: |
|
Earnings (2) |
|
EPS |
|
Earnings (2) |
|
EPS |
|
Earnings (2) |
|
EPS |
|
Equity investment (losses)/gains |
|
$ |
(8.5 |
) |
|
$ |
(0.02 |
) |
|
$ |
3.3 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
MSR mark-to-market, net of hedge-related trading activity |
|
|
(2.0 |
) |
|
|
(0.01 |
) |
|
|
(2.5 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
Litigation losses |
|
|
(1.9 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale
of MasterCard® stock |
|
|
|
|
|
|
|
|
|
|
2.6 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
Completion of balance sheet restructuring |
|
|
|
|
|
|
|
|
|
|
(20.2 |
) |
|
|
(0.05 |
) |
|
|
|
|
|
|
|
|
Huntington Foundation contribution |
|
|
|
|
|
|
|
|
|
|
(10.0 |
) |
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
Automobile lease residual value losses |
|
|
|
|
|
|
|
|
|
|
(5.2 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
Severance and consolidation expenses |
|
|
|
|
|
|
|
|
|
|
(4.5 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
MSR FAS 156 accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5.1 |
|
|
$ |
0.01 |
|
Adjustment to defer home equity annual fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.3 |
) |
|
|
(0.01 |
) |
|
|
|
(1) |
|
See Significant Items Influencing Financial Performance discussion.
|
|
(2) |
|
Pre-tax unless otherwise noted. |
Net Interest Income
(This section should be read in conjunction with Significant Items 1 and 2.)
2007 First Quarter versus 2006 First Quarter
Fully taxable equivalent net interest income increased $12.1 million, or 5% ($11.8 million
merger-related), from the year-ago quarter, reflecting the favorable impact of a $1.1 billion, or
4%, increase in average earning assets, and an increase in the net interest margin of 4 basis
points to 3.36%. The cumulative adjustment for annual fees related to home equity loans reduced the
year-ago net interest margin by 3 basis points. Average total loans and leases increased $1.3
billion, or 5% ($1.1 billion merger-related). This primarily reflected growth in commercial loans,
partially offset by declines in total consumer loans.
Average total commercial loans increased $1.3 billion, or 12% ($0.5 billion merger-related).
This growth reflected a $0.9 billion, or 17%, increase in average middle market C&I loans and a
$0.4 billion, or 21%, increase in average small business loans. Average middle market CRE loans
were essentially unchanged.
Average residential mortgages increased $0.2 billion, or 4%, and average home equity loans
increased 2%. However, without the favorable impact attributed to the Unizan merger, both would
have declined. These declines reflected continued softness in these markets and sales of mortgage
loans in each of the last three quarters.
Compared with the year-ago quarter, average total automobile loans and leases decreased $0.3
billion, or 7%, with the Unizan merger having no significant impact. The decrease primarily
reflected continued softness in lease production levels over this period from low consumer demand
and competitive pricing.
Average automobile loans increased $0.2 billion, or 11%. This growth reflected two factors:
(1) the purchase of the residual portion of two matured 2003 automobile loan securitizations, and (2) growth
indirectly related to the introduction of the Huntington Plus program for automobile dealers in
the latter half of last year. This is a program where lower credit-
28
scored automobile loans are
originated for dealers and then sold without recourse the next day to an independent third party.
As such, this program did not directly impact average balances. However, it did influence dealers
to increase their overall allocation of automobile loan applications with higher credit scores to
Huntington, resulting in an 18% increase in prime loan production during the quarter as compared to
the fourth quarter of 2006 and growth in related average balances.
Average total investment securities decreased 11% from the 2006 first quarter, reflecting our
strategy to reduce the level of investment securities as part of our interest rate risk management.
Average total core deposits in the 2007 first quarter increased $1.2 billion, or 6% ($1.0
billion merger-related), from the year-ago quarter. Most of the increase reflected higher average
core certificates of deposit, which increased $1.1 billion ($0.4 billion merger-related) resulting
from continued customer demand for higher, fixed rate deposit products. Average interest bearing
demand deposits increased $0.4 billion, or 19% ($0.1 billion merger-related), and average
non-interest bearing deposits increased $0.1 billion, all merger-related. In contrast, average
savings and other domestic deposits declined $0.3 billion, or 9%, and average money market accounts
declined $0.1 billion, even though the Unizan merger added $0.2 billion and $0.3 billion of such
deposits, respectively.
2007 First Quarter versus 2006 Fourth Quarter
Compared with the 2006 fourth quarter, fully taxable equivalent net interest income decreased
$2.5 million, or 1%. This was principally due to the reduction in the number of days in the 2007
first quarter compared with the 2006 fourth quarter. It also reflected a decline in average
earning assets, primarily in average investment securities and average total consumer loans,
partially offset by the positive impact of an 8 basis point increase in the net interest margin to
3.36%. Half of the increase in the net interest margin reflected the benefit of a lower day count
in the first quarter versus fourth quarter, with the remaining improvement equally contributed by
an enriched earning asset mix and a lower cost funding mix.
Average total loans and leases declined less than one percent with good growth in average
total commercial loans more than offset by a decline in average total consumer loans.
Average total commercial loans increased $0.1 billion, or 1%, from the prior quarter. This
included 3% growth in average middle market C&I loans, reflecting a three-percentage point increase
in utilization rates. Average small business loans increased 2%. These increases were partially
offset by a 2% decline in average middle market CRE loans, reflecting softness in residential real
estate markets.
Average residential mortgages decreased $0.1 billion, or 3%, reflecting the full impact of the
sale of $103 million of mortgage loans at the end of the 2006 fourth quarter. Average home equity
loans declined 1%.
Compared with the 2006 fourth quarter, average total automobile loans and leases declined 1%.
The decline primarily reflected an 8% decline in average automobile leases as production levels
continued to decline with lease production down 3% from the 2006 fourth quarter. In contrast,
average automobile loans increased 5% from the 2006 fourth quarter, reflecting the purchase of the
residual portion of two matured 2003 automobile loan securitizations, as well as an 18% increase in
automobile loan production.
Average investment securities decreased $0.2 billion, or 5%, from the 2006 fourth quarter,
reflecting the decision to sell certain investment securities as part of our interest rate risk
management process.
Average total core deposits increased slightly from the 2006 fourth quarter, reflecting growth
in average total consumer core deposits, partially offset by a decline in average total commercial
core deposits. Average interest bearing demand deposits increased 6% and average core certificates
of deposit increased 1%, reflecting the factors impacting comparisons to the year-ago quarter noted
above. In contrast, average money market deposits, non-interest bearing demand deposits, and
savings and other domestic deposits each declined 1%. The decline in average non-interest bearing
demand deposits primarily reflected seasonal factors.
Tables 3 and 4 reflect quarterly average balance sheets and rates earned and paid on
interest-earning assets and interest-bearing liabilities.
29
Table 3 Consolidated Quarterly Average Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
Fully taxable equivalent basis |
|
2007 |
|
2006 |
|
|
1Q07 vs 1Q06 |
(in millions) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
Amount |
|
Percent |
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
$ |
93 |
|
|
$ |
77 |
|
|
$ |
75 |
|
|
$ |
36 |
|
|
$ |
24 |
|
|
|
$ |
69 |
|
|
|
N.M. |
% |
Trading account securities |
|
|
48 |
|
|
|
116 |
|
|
|
96 |
|
|
|
100 |
|
|
|
66 |
|
|
|
|
(18 |
) |
|
|
(27.3 |
) |
Federal funds sold and securities purchased
under resale agreements |
|
|
503 |
|
|
|
531 |
|
|
|
266 |
|
|
|
285 |
|
|
|
201 |
|
|
|
|
302 |
|
|
|
N.M. |
|
Loans held for sale |
|
|
242 |
|
|
|
265 |
|
|
|
275 |
|
|
|
287 |
|
|
|
274 |
|
|
|
|
(32 |
) |
|
|
(11.7 |
) |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
3,595 |
|
|
|
3,792 |
|
|
|
4,364 |
|
|
|
4,494 |
|
|
|
4,138 |
|
|
|
|
(543 |
) |
|
|
(13.1 |
) |
Tax-exempt |
|
|
591 |
|
|
|
594 |
|
|
|
581 |
|
|
|
556 |
|
|
|
548 |
|
|
|
|
43 |
|
|
|
7.8 |
|
|
|
|
|
|
|
Total investment securities |
|
|
4,186 |
|
|
|
4,386 |
|
|
|
4,945 |
|
|
|
5,050 |
|
|
|
4,686 |
|
|
|
|
(500 |
) |
|
|
(10.7 |
) |
Loans and
leases: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
|
6,070 |
|
|
|
5,882 |
|
|
|
5,651 |
|
|
|
5,512 |
|
|
|
5,174 |
|
|
|
|
896 |
|
|
|
17.3 |
|
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,151 |
|
|
|
1,170 |
|
|
|
1,129 |
|
|
|
1,248 |
|
|
|
1,457 |
|
|
|
|
(306 |
) |
|
|
(21.0 |
) |
Commercial |
|
|
2,772 |
|
|
|
2,839 |
|
|
|
2,846 |
|
|
|
2,845 |
|
|
|
2,464 |
|
|
|
|
308 |
|
|
|
12.5 |
|
|
|
|
|
|
|
Middle market commercial real estate |
|
|
3,923 |
|
|
|
4,009 |
|
|
|
3,975 |
|
|
|
4,093 |
|
|
|
3,921 |
|
|
|
|
2 |
|
|
|
0.1 |
|
Small business |
|
|
2,466 |
|
|
|
2,421 |
|
|
|
2,413 |
|
|
|
2,351 |
|
|
|
2,035 |
|
|
|
|
431 |
|
|
|
21.2 |
|
|
|
|
|
|
|
Total commercial |
|
|
12,459 |
|
|
|
12,312 |
|
|
|
12,039 |
|
|
|
11,956 |
|
|
|
11,130 |
|
|
|
|
1,329 |
|
|
|
11.9 |
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
2,215 |
|
|
|
2,111 |
|
|
|
2,079 |
|
|
|
2,044 |
|
|
|
1,994 |
|
|
|
|
221 |
|
|
|
11.1 |
|
Automobile leases |
|
|
1,698 |
|
|
|
1,838 |
|
|
|
1,976 |
|
|
|
2,095 |
|
|
|
2,221 |
|
|
|
|
(523 |
) |
|
|
(23.5 |
) |
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,913 |
|
|
|
3,949 |
|
|
|
4,055 |
|
|
|
4,139 |
|
|
|
4,215 |
|
|
|
|
(302 |
) |
|
|
(7.2 |
) |
Home equity |
|
|
4,913 |
|
|
|
4,973 |
|
|
|
5,041 |
|
|
|
5,029 |
|
|
|
4,833 |
|
|
|
|
80 |
|
|
|
1.7 |
|
Residential mortgage |
|
|
4,496 |
|
|
|
4,635 |
|
|
|
4,748 |
|
|
|
4,629 |
|
|
|
4,306 |
|
|
|
|
190 |
|
|
|
4.4 |
|
Other loans |
|
|
422 |
|
|
|
430 |
|
|
|
430 |
|
|
|
448 |
|
|
|
447 |
|
|
|
|
(25 |
) |
|
|
(5.6 |
) |
|
|
|
|
|
|
Total consumer |
|
|
13,744 |
|
|
|
13,987 |
|
|
|
14,274 |
|
|
|
14,245 |
|
|
|
13,801 |
|
|
|
|
(57 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
Total loans and leases |
|
|
26,203 |
|
|
|
26,299 |
|
|
|
26,313 |
|
|
|
26,201 |
|
|
|
24,931 |
|
|
|
|
1,272 |
|
|
|
5.1 |
|
Allowance for loan and lease losses |
|
|
(278 |
) |
|
|
(282 |
) |
|
|
(291 |
) |
|
|
(293 |
) |
|
|
(283 |
) |
|
|
|
5 |
|
|
|
1.8 |
|
|
|
|
|
|
|
Net loans and leases |
|
|
25,925 |
|
|
|
26,017 |
|
|
|
26,022 |
|
|
|
25,908 |
|
|
|
24,648 |
|
|
|
|
1,277 |
|
|
|
5.2 |
|
|
|
|
|
|
|
Total earning assets |
|
|
31,275 |
|
|
|
31,674 |
|
|
|
31,970 |
|
|
|
31,959 |
|
|
|
30,182 |
|
|
|
|
1,093 |
|
|
|
3.6 |
|
|
|
|
|
|
|
Cash and due from banks |
|
|
826 |
|
|
|
830 |
|
|
|
823 |
|
|
|
832 |
|
|
|
813 |
|
|
|
|
13 |
|
|
|
1.6 |
|
Intangible assets |
|
|
627 |
|
|
|
631 |
|
|
|
634 |
|
|
|
638 |
|
|
|
362 |
|
|
|
|
265 |
|
|
|
73.2 |
|
All other assets |
|
|
2,480 |
|
|
|
2,617 |
|
|
|
2,633 |
|
|
|
2,554 |
|
|
|
2,415 |
|
|
|
|
65 |
|
|
|
2.7 |
|
|
|
|
|
|
|
Total Assets |
|
$ |
34,930 |
|
|
$ |
35,470 |
|
|
$ |
35,769 |
|
|
$ |
35,690 |
|
|
$ |
33,489 |
|
|
|
$ |
1,441 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
3,530 |
|
|
$ |
3,580 |
|
|
$ |
3,509 |
|
|
$ |
3,594 |
|
|
$ |
3,436 |
|
|
|
$ |
94 |
|
|
|
2.7 |
% |
Demand deposits interest bearing |
|
|
2,349 |
|
|
|
2,219 |
|
|
|
2,169 |
|
|
|
2,187 |
|
|
|
1,974 |
|
|
|
|
375 |
|
|
|
19.0 |
|
Money market deposits |
|
|
5,489 |
|
|
|
5,548 |
|
|
|
5,689 |
|
|
|
5,591 |
|
|
|
5,588 |
|
|
|
|
(99 |
) |
|
|
(1.8 |
) |
Savings and other domestic deposits |
|
|
2,827 |
|
|
|
2,849 |
|
|
|
2,923 |
|
|
|
3,106 |
|
|
|
3,095 |
|
|
|
|
(268 |
) |
|
|
(8.7 |
) |
Core certificates of deposit |
|
|
5,455 |
|
|
|
5,380 |
|
|
|
5,334 |
|
|
|
5,083 |
|
|
|
4,389 |
|
|
|
|
1,066 |
|
|
|
24.3 |
|
|
|
|
|
|
|
Total core deposits |
|
|
19,650 |
|
|
|
19,576 |
|
|
|
19,624 |
|
|
|
19,561 |
|
|
|
18,482 |
|
|
|
|
1,168 |
|
|
|
6.3 |
|
Other domestic deposits of $100,000 or more |
|
|
1,219 |
|
|
|
1,282 |
|
|
|
1,141 |
|
|
|
1,086 |
|
|
|
938 |
|
|
|
|
281 |
|
|
|
30.0 |
|
Brokered deposits and negotiable CDs |
|
|
3,020 |
|
|
|
3,252 |
|
|
|
3,307 |
|
|
|
3,263 |
|
|
|
3,143 |
|
|
|
|
(123 |
) |
|
|
(3.9 |
) |
Deposits in foreign offices |
|
|
562 |
|
|
|
598 |
|
|
|
521 |
|
|
|
474 |
|
|
|
465 |
|
|
|
|
97 |
|
|
|
20.9 |
|
|
|
|
|
|
|
Total deposits |
|
|
24,451 |
|
|
|
24,708 |
|
|
|
24,593 |
|
|
|
24,384 |
|
|
|
23,028 |
|
|
|
|
1,423 |
|
|
|
6.2 |
|
Short-term borrowings |
|
|
1,863 |
|
|
|
1,832 |
|
|
|
1,660 |
|
|
|
2,042 |
|
|
|
1,669 |
|
|
|
|
194 |
|
|
|
11.6 |
|
Federal Home Loan Bank advances |
|
|
1,128 |
|
|
|
1,121 |
|
|
|
1,349 |
|
|
|
1,557 |
|
|
|
1,453 |
|
|
|
|
(325 |
) |
|
|
(22.4 |
) |
Subordinated notes and other long-term debt |
|
|
3,487 |
|
|
|
3,583 |
|
|
|
3,921 |
|
|
|
3,428 |
|
|
|
3,346 |
|
|
|
|
141 |
|
|
|
4.2 |
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
27,399 |
|
|
|
27,664 |
|
|
|
28,014 |
|
|
|
27,817 |
|
|
|
26,060 |
|
|
|
|
1,339 |
|
|
|
5.1 |
|
|
|
|
|
|
|
All other liabilities |
|
|
987 |
|
|
|
1,142 |
|
|
|
1,276 |
|
|
|
1,284 |
|
|
|
1,264 |
|
|
|
|
(277 |
) |
|
|
(21.9 |
) |
Shareholders equity |
|
|
3,014 |
|
|
|
3,084 |
|
|
|
2,970 |
|
|
|
2,995 |
|
|
|
2,729 |
|
|
|
|
285 |
|
|
|
10.4 |
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
34,930 |
|
|
$ |
35,470 |
|
|
$ |
35,769 |
|
|
$ |
35,690 |
|
|
$ |
33,489 |
|
|
|
$ |
1,441 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value. |
|
|
(1) |
|
For purposes of this analysis, non-accrual loans are reflected in the average
balances of loans. |
30
Table 4 Consolidated Quarterly Net Interest Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
Fully taxable equivalent basis (1) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in banks |
|
|
5.13 |
% |
|
|
5.50 |
% |
|
|
5.23 |
% |
|
|
7.05 |
% |
|
|
7.89 |
% |
Trading account securities |
|
|
5.27 |
|
|
|
4.10 |
|
|
|
4.32 |
|
|
|
4.51 |
|
|
|
2.94 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
5.24 |
|
|
|
5.35 |
|
|
|
5.13 |
|
|
|
4.75 |
|
|
|
4.30 |
|
Loans held for sale |
|
|
6.27 |
|
|
|
6.01 |
|
|
|
6.24 |
|
|
|
6.23 |
|
|
|
5.92 |
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
6.13 |
|
|
|
6.05 |
|
|
|
5.49 |
|
|
|
5.34 |
|
|
|
5.04 |
|
Tax-exempt |
|
|
6.66 |
|
|
|
6.68 |
|
|
|
6.80 |
|
|
|
6.83 |
|
|
|
6.71 |
|
|
|
|
Total investment securities |
|
|
6.21 |
|
|
|
6.13 |
|
|
|
5.64 |
|
|
|
5.51 |
|
|
|
5.23 |
|
Loans and leases: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
|
7.48 |
|
|
|
7.55 |
|
|
|
7.40 |
|
|
|
7.49 |
|
|
|
7.08 |
|
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
8.41 |
|
|
|
8.37 |
|
|
|
8.49 |
|
|
|
8.02 |
|
|
|
7.56 |
|
Commercial |
|
|
7.64 |
|
|
|
7.57 |
|
|
|
7.86 |
|
|
|
6.92 |
|
|
|
6.25 |
|
|
|
|
Middle market commercial real estate |
|
|
7.87 |
|
|
|
7.80 |
|
|
|
8.05 |
|
|
|
7.25 |
|
|
|
6.74 |
|
Small business |
|
|
7.24 |
|
|
|
7.18 |
|
|
|
7.13 |
|
|
|
6.94 |
|
|
|
6.57 |
|
|
|
|
Total commercial |
|
|
7.56 |
|
|
|
7.56 |
|
|
|
7.56 |
|
|
|
7.30 |
|
|
|
6.87 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
6.92 |
|
|
|
6.75 |
|
|
|
6.62 |
|
|
|
6.48 |
|
|
|
6.40 |
|
Automobile leases |
|
|
5.25 |
|
|
|
5.21 |
|
|
|
5.10 |
|
|
|
5.01 |
|
|
|
4.97 |
|
|
|
|
Automobile loans and leases |
|
|
6.25 |
|
|
|
6.03 |
|
|
|
5.88 |
|
|
|
5.74 |
|
|
|
5.65 |
|
Home equity |
|
|
7.67 |
|
|
|
7.75 |
|
|
|
7.62 |
|
|
|
7.46 |
|
|
|
6.88 |
|
Residential mortgage |
|
|
5.54 |
|
|
|
5.55 |
|
|
|
5.46 |
|
|
|
5.39 |
|
|
|
5.34 |
|
Other loans |
|
|
9.52 |
|
|
|
9.28 |
|
|
|
9.41 |
|
|
|
9.41 |
|
|
|
8.38 |
|
|
|
|
Total consumer |
|
|
6.58 |
|
|
|
6.58 |
|
|
|
6.46 |
|
|
|
6.35 |
|
|
|
6.08 |
|
|
|
|
Total loans and leases |
|
|
7.05 |
|
|
|
7.04 |
|
|
|
6.96 |
|
|
|
6.79 |
|
|
|
6.43 |
|
|
|
|
Total earning assets |
|
|
6.98 |
% |
|
|
6.86 |
% |
|
|
6.73 |
% |
|
|
6.55 |
% |
|
|
6.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Demand deposits interest bearing |
|
|
1.21 |
|
|
|
1.04 |
|
|
|
0.97 |
|
|
|
0.86 |
|
|
|
0.72 |
|
Money market deposits |
|
|
3.78 |
|
|
|
3.75 |
|
|
|
3.66 |
|
|
|
3.32 |
|
|
|
3.05 |
|
Savings and other domestic deposits |
|
|
2.02 |
|
|
|
1.90 |
|
|
|
1.75 |
|
|
|
1.59 |
|
|
|
1.49 |
|
Core certificates of deposit |
|
|
4.72 |
|
|
|
4.58 |
|
|
|
4.40 |
|
|
|
4.10 |
|
|
|
3.84 |
|
|
|
|
Total core deposits |
|
|
3.41 |
|
|
|
3.32 |
|
|
|
3.20 |
|
|
|
2.89 |
|
|
|
2.65 |
|
Other domestic deposits of $100,000 or more |
|
|
5.32 |
|
|
|
5.29 |
|
|
|
5.18 |
|
|
|
4.83 |
|
|
|
4.55 |
|
Brokered deposits and negotiable CDs |
|
|
5.50 |
|
|
|
5.53 |
|
|
|
5.50 |
|
|
|
5.12 |
|
|
|
4.69 |
|
Deposits in foreign offices |
|
|
2.99 |
|
|
|
3.18 |
|
|
|
3.12 |
|
|
|
2.68 |
|
|
|
2.62 |
|
|
|
|
Total deposits |
|
|
3.81 |
|
|
|
3.78 |
|
|
|
3.66 |
|
|
|
3.34 |
|
|
|
3.07 |
|
Short-term borrowings |
|
|
4.32 |
|
|
|
4.21 |
|
|
|
4.10 |
|
|
|
4.12 |
|
|
|
3.57 |
|
Federal Home Loan Bank advances |
|
|
4.44 |
|
|
|
4.50 |
|
|
|
4.51 |
|
|
|
4.34 |
|
|
|
3.99 |
|
Subordinated notes and other long-term debt |
|
|
5.77 |
|
|
|
5.96 |
|
|
|
5.75 |
|
|
|
5.67 |
|
|
|
5.22 |
|
|
|
|
Total interest bearing liabilities |
|
|
4.14 |
% |
|
|
4.12 |
% |
|
|
4.02 |
% |
|
|
3.74 |
% |
|
|
3.43 |
% |
|
|
|
Net interest rate spread |
|
|
2.84 |
% |
|
|
2.74 |
% |
|
|
2.71 |
% |
|
|
2.81 |
% |
|
|
2.78 |
% |
Impact of non-interest bearing funds on margin |
|
|
0.52 |
|
|
|
0.54 |
|
|
|
0.51 |
|
|
|
0.53 |
|
|
|
0.54 |
|
|
|
|
Net interest margin |
|
|
3.36 |
% |
|
|
3.28 |
% |
|
|
3.22 |
% |
|
|
3.34 |
% |
|
|
3.32 |
% |
|
|
|
|
|
|
(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. |
31
Provision for Credit Losses
(This section should be read in conjunction with Significant Item 2 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 first quarter was $29.4 million, up $9.9 million
from the year-ago quarter, and up $13.7 million from the 2006 fourth quarter. The provision for
credit losses in the 2007 first quarter exceeded same period net charge-offs by $11.3 million. The
increases in the provision for credit losses relative to both the year-ago quarter and the prior
quarter were attributable to an increase in the transaction reserve component of the allowance for
loan losses, which increased 3 basis points during the quarter. The economic reserve component
also increased 1 basis point during the quarter. A higher transaction reserve component was
attributable to softness in the residential and commercial real estate markets as reflected in
higher levels of watch list credits. The provision for credit losses in the year-ago quarter
reflected a 1 basis point decrease in the transaction reserve component. In the fourth quarter of
2006, the provision reflected a 2 basis point improvement in the economic reserve component
reflecting improvements in consumer confidence and consumer spending.
Non-Interest Income
(This section should be read in conjunction with Significant Items 1, 2, 3, and 5.)
Table 5 reflects non-interest income detail for each of the past five quarters.
Table 5 Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
1Q07 vs 1Q06 |
|
(in thousands) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
Amount |
|
Percent |
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
44,793 |
|
|
$ |
48,548 |
|
|
$ |
48,718 |
|
|
$ |
47,225 |
|
|
$ |
41,222 |
|
|
|
$ |
3,571 |
|
|
|
8.7 |
% |
Trust services |
|
|
25,894 |
|
|
|
23,511 |
|
|
|
22,490 |
|
|
|
22,676 |
|
|
|
21,278 |
|
|
|
|
4,616 |
|
|
|
21.7 |
|
Brokerage and insurance income |
|
|
16,082 |
|
|
|
14,600 |
|
|
|
14,697 |
|
|
|
14,345 |
|
|
|
15,193 |
|
|
|
|
889 |
|
|
|
5.9 |
|
Other service charges and fees |
|
|
13,208 |
|
|
|
13,784 |
|
|
|
12,989 |
|
|
|
13,072 |
|
|
|
11,509 |
|
|
|
|
1,699 |
|
|
|
14.8 |
|
Bank owned life insurance income |
|
|
10,851 |
|
|
|
10,804 |
|
|
|
12,125 |
|
|
|
10,604 |
|
|
|
10,242 |
|
|
|
|
609 |
|
|
|
5.9 |
|
Mortgage banking (loss) income |
|
|
9,351 |
|
|
|
6,169 |
|
|
|
8,512 |
|
|
|
13,616 |
|
|
|
13,194 |
|
|
|
|
(3,843 |
) |
|
|
(29.1 |
) |
Gains on sales of automobile loans |
|
|
1,144 |
|
|
|
1,252 |
|
|
|
863 |
|
|
|
532 |
|
|
|
448 |
|
|
|
|
696 |
|
|
|
N.M. |
|
Securities (losses) gains |
|
|
104 |
|
|
|
(15,804 |
) |
|
|
(57,332 |
) |
|
|
(35 |
) |
|
|
(20 |
) |
|
|
|
124 |
|
|
|
N.M. |
|
Other income (1) |
|
|
23,750 |
|
|
|
37,742 |
|
|
|
34,848 |
|
|
|
40,984 |
|
|
|
46,468 |
|
|
|
|
(22,718 |
) |
|
|
(48.9 |
) |
|
|
|
|
|
|
Total non-interest income |
|
$ |
145,177 |
|
|
$ |
140,606 |
|
|
$ |
97,910 |
|
|
$ |
163,019 |
|
|
$ |
159,534 |
|
|
|
$ |
(14,357 |
) |
|
|
(9.0 |
)% |
|
|
|
|
|
|
N.M., not a meaningful value.
|
|
|
(1) |
|
Automobile operating lease income and expense is included in Other Income and
Other Expense, respectively. |
Table 6 details mortgage banking income and the net impact of MSR hedging activity for each of
the past five quarters.
32
Table 6 Mortgage Banking Income and Net Impact of MSR Hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
1Q07 vs 1Q06 |
|
(in thousands) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
Amount |
|
Percent |
|
|
|
|
|
|
Mortgage Banking Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and secondary marketing |
|
$ |
4,940 |
|
|
$ |
4,057 |
|
|
$ |
3,070 |
|
|
$ |
7,091 |
|
|
$ |
3,999 |
|
|
|
$ |
941 |
|
|
|
23.5 |
% |
Servicing fees |
|
|
6,820 |
|
|
|
6,662 |
|
|
|
6,077 |
|
|
|
5,995 |
|
|
|
5,925 |
|
|
|
|
895 |
|
|
|
15.1 |
|
Amortization of capitalized servicing (1) |
|
|
(3,638 |
) |
|
|
(3,835 |
) |
|
|
(4,484 |
) |
|
|
(3,293 |
) |
|
|
(3,532 |
) |
|
|
|
(106 |
) |
|
|
(3.0 |
) |
Other mortgage banking income |
|
|
3,247 |
|
|
|
1,778 |
|
|
|
3,887 |
|
|
|
2,281 |
|
|
|
2,227 |
|
|
|
|
1,020 |
|
|
|
45.8 |
|
|
|
|
|
|
|
Sub-total |
|
|
11,369 |
|
|
|
8,662 |
|
|
|
8,550 |
|
|
|
12,074 |
|
|
|
8,619 |
|
|
|
|
2,750 |
|
|
|
31.9 |
|
MSR valuation adjustment (1) |
|
|
(1,057 |
) |
|
|
(1,907 |
) |
|
|
(10,716 |
) |
|
|
8,281 |
|
|
|
9,213 |
|
|
|
|
(10,270 |
) |
|
|
N.M. |
|
Net trading gains (losses) related to MSR hedging |
|
|
(961 |
) |
|
|
(586 |
) |
|
|
10,678 |
|
|
|
(6,739 |
) |
|
|
(4,638 |
) |
|
|
|
3,677 |
|
|
|
(79.3 |
) |
|
|
|
|
|
|
Total mortgage banking (loss) income |
|
$ |
9,351 |
|
|
$ |
6,169 |
|
|
$ |
8,512 |
|
|
$ |
13,616 |
|
|
$ |
13,194 |
|
|
|
$ |
(3,843 |
) |
|
|
(29.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized mortgage servicing rights (2) |
|
$ |
134,845 |
|
|
$ |
131,104 |
|
|
$ |
129,317 |
|
|
$ |
136,244 |
|
|
$ |
123,257 |
|
|
|
$ |
11,588 |
|
|
|
9.4 |
% |
Total mortgages serviced for others (2) |
|
|
8,494,000 |
|
|
|
8,252,000 |
|
|
|
7,994,000 |
|
|
|
7,725,000 |
|
|
|
7,585,000 |
|
|
|
|
909,000 |
|
|
|
12.0 |
|
MSR % of investor servicing portfolio |
|
|
1.59 |
% |
|
|
1.59 |
% |
|
|
1.62 |
% |
|
|
1.76 |
% |
|
|
1.63 |
% |
|
|
|
(0.04 |
)% |
|
|
(2.5 |
) |
|
|
|
|
|
|
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. |
2007 First Quarter versus 2006 First Quarter
Non-interest income decreased $14.4 million from the year-ago quarter, reflecting:
|
|
|
$22.7 million decline in other income primarily related to a $14.2 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. Also contributing to the
decline was an $8.5 million loss on equity investments in the current period (see
Significant Item 5). |
|
|
|
|
Since 2002, the company has invested $15.0 million in three financial services equity funds.
Management views such investments as helpful in improving competitive and market
intelligence. In 2006, financial services stock price performance was particularly strong
and equity investment gains were identified as Significant Items in the second and fourth
quarters. In contrast, during the 2007 first quarter, such equities significantly
underperformed, resulting in the current quarters loss. The total value of these
investments at March 31, 2007 was $25.9 million. |
|
|
|
|
$3.8 million, or 29%, decline in mortgage banking income, reflecting a $6.6 million
negative impact of MSR valuation adjustments, net of hedge-related trading activity, as the
prior year included a $5.1 million positive impact from adopting FAS 156, allowing MSRs to
be carried at fair value. Additionally, MSR valuation adjustments, net of hedge-related
trading activity, represented a $2.0 million net loss in the 2007 first quarter. This
negative impact was partially offset by a $2.8 million increase in other mortgage banking
income, primarily gains on sold loans, increases in origination and secondary marketing
income, and increased servicing fees. |
Partially offset by:
|
|
|
$4.6 million, or 22% ($1.1 million merger-related), increase in trust services income, reflecting (1) a $2.4 million increase in institutional trust income largely due to the acquisition of Unified Fund Services, Inc. in
December 2006, (2) a $1.1 million increase in personal trust income, mostly merger-related, and (3) a $1.0 million increase in fees from Huntington Funds, reflecting 15% fund asset growth. |
|
|
|
|
$3.6 million, or 9% ($1.1 million merger-related), increase in service charges on deposit accounts, reflecting a $2.3 million, or 9%, increase in personal service charges, primarily NSF/OD, and a $1.3 million, or 9%,
increase in commercial service charge income. |
33
|
|
|
$1.7 million, or 15% ($0.2 million merger-related), increase in other service charges and fees, primarily reflecting a $1.3 million, or 15%, increase in fees generated by higher debit card volume. |
2007 First Quarter versus 2006 Fourth Quarter
Non-interest income increased $4.6 million from the 2006 fourth quarter, reflecting:
|
|
|
$15.9 million positive change in securities gains (losses) as the current quarter included $0.1 million of investment securities gains, which compared favorably with $15.8 million of investment securities losses in the
prior quarter (see Significant Item 1). |
|
|
|
|
$3.2 million increase in mortgage banking income, primarily due to higher gains on the sales of mortgage loans than in the fourth quarter and increased origination and secondary marketing income. |
|
|
|
|
$2.4 million, or 10%, increase in trust services income, primarily reflecting the benefits from the Unified Fund Services acquisition. |
|
|
|
|
$1.5 million, or 10%, increase in brokerage and insurance income, reflecting higher annuity and mutual fund revenues. |
Partially offset by:
|
|
|
$14.0 million decline in other income, primarily reflecting the current quarters $8.5 million of equity investment losses compared with $3.3 million of such gains in the prior quarter. Also contributing to the decline in
other income was a $2.5 million decrease in automobile operating lease income, and the fact that the prior quarter included a $2.6 million gain on the sale of
MasterCard® stock. These
negatives were partially offset by fees associated with the Huntington Plus automobile dealer program and higher capital markets income. |
|
|
|
|
$3.8 million, or 8%, decline in service charges on deposit accounts, reflecting seasonal trends in NSF fees. |
Non-Interest Expense
(This section should be read in conjunction with Significant Items 1, 2, and 5.)
Table 7 reflects non-interest expense detail for each of the last five quarters.
Table 7 Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
1Q07 vs 1Q06 |
(in thousands) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
Amount |
|
Percent |
|
|
|
|
|
|
Salaries |
|
$ |
104,912 |
|
|
$ |
111,806 |
|
|
$ |
105,144 |
|
|
$ |
107,249 |
|
|
$ |
101,458 |
|
|
|
$ |
3,454 |
|
|
|
3.4 |
% |
Benefits |
|
|
29,727 |
|
|
|
26,138 |
|
|
|
28,679 |
|
|
|
30,655 |
|
|
|
30,099 |
|
|
|
|
(372 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
Personnel costs |
|
|
134,639 |
|
|
|
137,944 |
|
|
|
133,823 |
|
|
|
137,904 |
|
|
|
131,557 |
|
|
|
|
3,082 |
|
|
|
2.3 |
|
Outside data processing and other services |
|
|
21,814 |
|
|
|
20,695 |
|
|
|
18,664 |
|
|
|
19,569 |
|
|
|
19,851 |
|
|
|
|
1,963 |
|
|
|
9.9 |
|
Net occupancy |
|
|
19,908 |
|
|
|
17,279 |
|
|
|
18,109 |
|
|
|
17,927 |
|
|
|
17,966 |
|
|
|
|
1,942 |
|
|
|
10.8 |
|
Equipment |
|
|
18,219 |
|
|
|
18,151 |
|
|
|
17,249 |
|
|
|
18,009 |
|
|
|
16,503 |
|
|
|
|
1,716 |
|
|
|
10.4 |
|
Marketing |
|
|
7,696 |
|
|
|
6,207 |
|
|
|
7,846 |
|
|
|
10,374 |
|
|
|
7,301 |
|
|
|
|
395 |
|
|
|
5.4 |
|
Professional services |
|
|
6,482 |
|
|
|
8,958 |
|
|
|
6,438 |
|
|
|
6,292 |
|
|
|
5,365 |
|
|
|
|
1,117 |
|
|
|
20.8 |
|
Telecommunications |
|
|
4,126 |
|
|
|
4,619 |
|
|
|
4,818 |
|
|
|
4,990 |
|
|
|
4,825 |
|
|
|
|
(699 |
) |
|
|
(14.5 |
) |
Printing and supplies |
|
|
3,242 |
|
|
|
3,610 |
|
|
|
3,416 |
|
|
|
3,764 |
|
|
|
3,074 |
|
|
|
|
168 |
|
|
|
5.5 |
|
Amortization of intangibles |
|
|
2,520 |
|
|
|
2,993 |
|
|
|
2,902 |
|
|
|
2,992 |
|
|
|
1,075 |
|
|
|
|
1,445 |
|
|
|
N.M. |
|
Other expense (1) |
|
|
23,426 |
|
|
|
47,334 |
|
|
|
29,165 |
|
|
|
30,538 |
|
|
|
30,898 |
|
|
|
|
(7,472 |
) |
|
|
(24.2 |
) |
|
|
|
|
|
|
Total non-interest expense |
|
$ |
242,072 |
|
|
$ |
267,790 |
|
|
$ |
242,430 |
|
|
$ |
252,359 |
|
|
$ |
238,415 |
|
|
|
$ |
3,657 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
N.M., not a meaningful value.
|
|
|
(1) |
|
Automobile operating lease income and expense is included in Other Income and
Other Expense, respectively. |
34
2007 First Quarter versus 2006 First Quarter
Non-interest expense increased $3.7 million, or 2%, from the year-ago quarter, reflecting:
|
|
|
$3.1 million, or 2%, increase in personnel expense, with Unizan contributing $5.2 million, partially offset by lower full-time equivalent staff. |
|
|
|
|
$2.0 million, or 10%, increase in outside data processing and other services of which $0.3 million was Unizan merger-related and $0.6 million representing merger-costs associated with the pending Sky Financial merger. |
|
|
|
|
$1.9 million, or 11%, increase in net occupancy expense ($0.9 million merger-related). |
|
|
|
|
$1.7 million, or 10%, increase in equipment expense ($0.3 million merger-related), reflecting higher depreciation associated with recent technology investments. |
|
|
|
|
$1.4 million increase in the amortization of intangibles, all merger-related. |
|
|
|
|
$1.1 million, or 21%, increase in professional services expense. |
Partially offset by:
|
|
|
$7.5 million decline in other expense, reflecting a $10.6 million decline in automobile operating lease expense as that portfolio continued its runoff, partially offset by higher litigation losses. |
Current period non-interest expense included $0.8 million of merger-costs associated with the
pending acquisition of Sky Financial, of which $0.6 million consisted of outside programming costs.
The remaining merger-costs were spread over a number of expense categories.
2007 First Quarter versus 2006 Fourth Quarter
Non-interest expense decreased $25.7 million from the 2006 fourth quarter, reflecting:
|
|
|
$23.9 million decrease in other expense, reflecting higher 2006 fourth quarter expenses due to that quarters $10.0 million contribution to the Huntington Foundation, $5.2 million of higher residual value losses on
automobile leases, and $3.5 million related to the restructuring of FHLB advances, as well as a $1.9 million decline in automobile operating lease expense. |
|
|
|
|
$3.3 million, or 2%, decline in personnel costs, reflecting the 2006 fourth quarters $4.5 million of severance and consolidation costs. |
|
|
|
|
$2.5 million, or 28%, decrease in professional services, reflecting lower expenses associated with collection activities and lower consulting costs related to revenue initiatives. |
Partially offset by:
|
|
|
$2.6 million, or 15%, increase in net occupancy expense due to seasonally higher costs. |
|
|
|
|
$1.5 million, or 24%, increase in marketing expense. |
|
|
|
|
$1.1 million, or 5%, increase in outside data processing and other services expense, including $0.6 million of merger costs associated with the pending Sky Financial acquisition. |
Provision for Income Taxes
(This section should be read in conjunction with Significant Item 4.)
The provision for income taxes in the first quarter of 2007 was $33.5 million and represented
an effective tax rate on income before taxes of 25.9%. The effective tax rates in the year-ago
quarter and fourth quarter of 2006 were 28.1% and 23.8%, respectively. The provision for income
taxes decreased $7.3 million from a year-ago quarter, primarily due to an increase in tax-exempt
income and general business credits, as well as a decrease in pre-tax earnings. The provision
increased $6.2 million from fourth quarter 2006, due to lower pretax earnings in 2006. The
effective tax rate prior to the anticipated merger of Sky Financial should remain around the first
quarter 2007 level.
35
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.
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 in a centralized
database. Concentration risk is managed via limits on loan type, geography, industry, loan quality
factors, and country limits. We have focused on extending credit to commercial customers with
existing or expandable relationships within our primary banking markets.
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 2.)
As shown in Table 8, at March 31, 2007, total credit exposure was $26.3 billion. Of this
amount, $13.6 billion, or 52%, represented total consumer loans and leases, down from 55% in the
year-ago quarter, and $12.6 billion, or 48%, represented total commercial loans and leases, up from
45% a year ago.
36
Table 8 Loans and Leases Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
(in thousands) |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
March 31, |
|
|
|
By Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
$ |
6,164,569 |
|
|
|
23.5 |
% |
|
$ |
5,961,445 |
|
|
|
22.8 |
% |
|
$ |
5,811,130 |
|
|
|
22.0 |
% |
|
$ |
5,654,537 |
|
|
|
21.5 |
% |
|
$ |
5,331,497 |
|
|
|
20.4 |
% |
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,187,664 |
|
|
|
4.5 |
|
|
|
1,228,641 |
|
|
|
4.7 |
|
|
|
1,169,276 |
|
|
|
4.4 |
|
|
|
1,179,603 |
|
|
|
4.5 |
|
|
|
1,371,266 |
|
|
|
5.2 |
|
Commercial |
|
|
2,807,063 |
|
|
|
10.7 |
|
|
|
2,722,599 |
|
|
|
10.4 |
|
|
|
2,808,684 |
|
|
|
10.7 |
|
|
|
2,783,982 |
|
|
|
10.6 |
|
|
|
3,075,731 |
|
|
|
11.8 |
|
|
|
|
Middle market commercial real estate |
|
|
3,994,727 |
|
|
|
15.2 |
|
|
|
3,951,240 |
|
|
|
15.1 |
|
|
|
3,977,960 |
|
|
|
15.1 |
|
|
|
3,963,585 |
|
|
|
15.1 |
|
|
|
4,446,997 |
|
|
|
17.0 |
|
Small business |
|
|
2,474,955 |
|
|
|
9.4 |
|
|
|
2,441,837 |
|
|
|
9.3 |
|
|
|
2,418,709 |
|
|
|
9.2 |
|
|
|
2,413,646 |
|
|
|
9.1 |
|
|
|
2,039,537 |
|
|
|
7.8 |
|
|
|
|
Total commercial |
|
|
12,634,251 |
|
|
|
48.1 |
|
|
|
12,354,522 |
|
|
|
47.2 |
|
|
|
12,207,799 |
|
|
|
46.3 |
|
|
|
12,031,768 |
|
|
|
45.7 |
|
|
|
11,818,031 |
|
|
|
45.2 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
2,251,215 |
|
|
|
8.6 |
|
|
|
2,125,821 |
|
|
|
8.1 |
|
|
|
2,105,623 |
|
|
|
8.0 |
|
|
|
2,059,836 |
|
|
|
7.8 |
|
|
|
2,053,777 |
|
|
|
7.9 |
|
Automobile leases |
|
|
1,623,758 |
|
|
|
6.2 |
|
|
|
1,769,424 |
|
|
|
6.8 |
|
|
|
1,910,257 |
|
|
|
7.2 |
|
|
|
2,042,213 |
|
|
|
7.7 |
|
|
|
2,154,883 |
|
|
|
8.2 |
|
Home equity |
|
|
4,914,462 |
|
|
|
18.7 |
|
|
|
4,926,900 |
|
|
|
18.8 |
|
|
|
5,019,101 |
|
|
|
19.0 |
|
|
|
5,207,023 |
|
|
|
19.8 |
|
|
|
5,094,490 |
|
|
|
19.5 |
|
Residential mortgage |
|
|
4,405,944 |
|
|
|
16.8 |
|
|
|
4,548,849 |
|
|
|
17.4 |
|
|
|
4,678,577 |
|
|
|
17.7 |
|
|
|
4,739,814 |
|
|
|
18.0 |
|
|
|
4,604,705 |
|
|
|
17.6 |
|
Other loans |
|
|
437,117 |
|
|
|
1.6 |
|
|
|
427,909 |
|
|
|
1.7 |
|
|
|
440,145 |
|
|
|
1.8 |
|
|
|
273,927 |
|
|
|
1.0 |
|
|
|
419,703 |
|
|
|
1.6 |
|
|
|
|
Total consumer |
|
|
13,632,496 |
|
|
|
51.9 |
|
|
|
13,798,903 |
|
|
|
52.8 |
|
|
|
14,153,703 |
|
|
|
53.7 |
|
|
|
14,322,813 |
|
|
|
54.3 |
|
|
|
14,327,558 |
|
|
|
54.8 |
|
|
|
|
Total loans and leases |
|
$ |
26,266,747 |
|
|
|
100.0 |
|
|
$ |
26,153,425 |
|
|
|
100.0 |
|
|
$ |
26,361,502 |
|
|
|
100.0 |
|
|
$ |
26,354,581 |
|
|
|
100.0 |
|
|
$ |
26,145,589 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Business Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Ohio |
|
$ |
3,605,917 |
|
|
|
13.7 |
% |
|
$ |
3,570,157 |
|
|
|
13.7 |
% |
|
$ |
3,682,544 |
|
|
|
14.0 |
% |
|
$ |
3,598,342 |
|
|
|
13.7 |
% |
|
$ |
3,360,201 |
|
|
|
12.9 |
% |
Northern Ohio |
|
|
2,723,164 |
|
|
|
10.4 |
|
|
|
2,619,465 |
|
|
|
10.0 |
|
|
|
2,656,635 |
|
|
|
10.1 |
|
|
|
2,660,450 |
|
|
|
10.1 |
|
|
|
2,552,570 |
|
|
|
9.8 |
|
Southern Ohio / Kentucky |
|
|
2,159,407 |
|
|
|
8.2 |
|
|
|
2,196,779 |
|
|
|
8.4 |
|
|
|
2,185,979 |
|
|
|
8.3 |
|
|
|
2,195,013 |
|
|
|
8.3 |
|
|
|
2,121,870 |
|
|
|
8.1 |
|
Eastern Ohio |
|
|
1,260,388 |
|
|
|
4.8 |
|
|
|
1,309,260 |
|
|
|
5.0 |
|
|
|
1,348,217 |
|
|
|
5.1 |
|
|
|
1,416,505 |
|
|
|
5.4 |
|
|
|
1,825,985 |
|
|
|
7.0 |
|
West Michigan |
|
|
2,453,300 |
|
|
|
9.3 |
|
|
|
2,421,117 |
|
|
|
9.3 |
|
|
|
2,443,495 |
|
|
|
9.3 |
|
|
|
2,397,525 |
|
|
|
9.1 |
|
|
|
2,372,563 |
|
|
|
9.1 |
|
East Michigan |
|
|
1,647,751 |
|
|
|
6.3 |
|
|
|
1,636,901 |
|
|
|
6.3 |
|
|
|
1,609,932 |
|
|
|
6.1 |
|
|
|
1,597,741 |
|
|
|
6.1 |
|
|
|
1,536,284 |
|
|
|
5.9 |
|
West Virginia |
|
|
1,109,197 |
|
|
|
4.2 |
|
|
|
1,107,222 |
|
|
|
4.2 |
|
|
|
1,086,757 |
|
|
|
4.1 |
|
|
|
1,053,464 |
|
|
|
4.0 |
|
|
|
968,333 |
|
|
|
3.7 |
|
Indiana |
|
|
971,186 |
|
|
|
3.7 |
|
|
|
968,369 |
|
|
|
3.7 |
|
|
|
962,216 |
|
|
|
3.7 |
|
|
|
953,776 |
|
|
|
3.6 |
|
|
|
977,589 |
|
|
|
3.7 |
|
Mortgage and equipment leasing groups |
|
|
3,563,762 |
|
|
|
13.6 |
|
|
|
3,571,054 |
|
|
|
13.6 |
|
|
|
3,611,416 |
|
|
|
13.7 |
|
|
|
3,590,621 |
|
|
|
13.6 |
|
|
|
3,478,835 |
|
|
|
13.3 |
|
|
|
|
Regional Banking |
|
|
19,494,072 |
|
|
|
74.2 |
|
|
|
19,400,324 |
|
|
|
74.2 |
|
|
|
19,587,191 |
|
|
|
74.4 |
|
|
|
19,463,437 |
|
|
|
73.9 |
|
|
|
19,194,230 |
|
|
|
73.4 |
|
Dealer Sales |
|
|
4,903,370 |
|
|
|
18.7 |
|
|
|
4,908,764 |
|
|
|
18.7 |
|
|
|
4,956,635 |
|
|
|
18.7 |
|
|
|
5,082,282 |
|
|
|
19.3 |
|
|
|
5,218,941 |
|
|
|
20.0 |
|
Private Financial and Capital Markets Group |
|
|
1,869,305 |
|
|
|
7.1 |
|
|
|
1,844,337 |
|
|
|
7.1 |
|
|
|
1,817,676 |
|
|
|
6.9 |
|
|
|
1,808,862 |
|
|
|
6.8 |
|
|
|
1,732,418 |
|
|
|
6.6 |
|
Treasury / Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
26,266,747 |
|
|
|
100.0 |
% |
|
$ |
26,153,425 |
|
|
|
100.0 |
% |
|
$ |
26,361,502 |
|
|
|
100.0 |
% |
|
$ |
26,354,581 |
|
|
|
100.0 |
% |
|
$ |
26,145,589 |
|
|
|
100.0 |
% |
|
|
|
37
Commercial Credit
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 small business lending. 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 C&I and CRE 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. Analysis of actual default experience indicated
that the assigned probability of default was higher than our actual experience. We continually
review and adjust our 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, and the loan review group validates the risk grades on a minimum of
50% of the portfolio exposure.
Borrower exposures may be designated as watch list accounts 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 manages problem 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.
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), 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
38
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 March 31, 2007, we had
$1.9 billion of home equity loans and $3.1 billion of home equity lines of credit. The average
loan-to-value ratio of our home equity portfolio (both loans and lines) was 77% at March 31, 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 $211 million
of home equity loans in the first quarter of 2007 with a weighted average loan-to-value ratio of
66% 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 first quarter of 2007, we originated commitments of $351 million of home
equity lines. The lines of credit originated during the quarter had a weighted average
loan-to-value ratio of 75% and a weighted average FICO score of 748.
At March 31, 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 65% 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 $0.8 billion, or 17%, of residential
real estate loans at March 31, 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 Item 2.)
NPAs consist of (1) non-performing loans and leases (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 commercial and industrial (C&I), commercial real-estate (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 leases,
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 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 9 reflects period-end NPLs, NPAs, and past due loans and leases detail for each of the
last five quarters.
39
Table 9 Non-Performing Loans (NPLs), Non-Performing Assets (NPAs) and Past Due Loans and Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
March 31, |
|
|
|
Non-accrual loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
$ |
32,970 |
|
|
$ |
35,657 |
|
|
$ |
37,082 |
|
|
$ |
45,713 |
|
|
$ |
45,723 |
|
Middle market commercial real estate |
|
|
42,458 |
|
|
|
34,831 |
|
|
|
27,538 |
|
|
|
24,970 |
|
|
|
18,243 |
|
Small business |
|
|
30,015 |
|
|
|
25,852 |
|
|
|
21,356 |
|
|
|
27,328 |
|
|
|
28,389 |
|
Residential mortgage |
|
|
35,491 |
|
|
|
32,527 |
|
|
|
30,289 |
|
|
|
22,786 |
|
|
|
29,376 |
|
Home equity |
|
|
16,396 |
|
|
|
15,266 |
|
|
|
13,047 |
|
|
|
14,466 |
|
|
|
13,778 |
|
|
|
|
Total NPLs |
|
|
157,330 |
|
|
|
144,133 |
|
|
|
129,312 |
|
|
|
135,263 |
|
|
|
135,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
47,762 |
|
|
|
47,898 |
|
|
|
40,615 |
|
|
|
34,743 |
|
|
|
17,481 |
|
Commercial |
|
|
1,586 |
|
|
|
1,589 |
|
|
|
1,285 |
|
|
|
1,062 |
|
|
|
1,903 |
|
|
|
|
Total other real estate, net |
|
|
49,348 |
|
|
|
49,487 |
|
|
|
41,900 |
|
|
|
35,805 |
|
|
|
19,384 |
|
|
|
|
Total NPAs |
|
$ |
206,678 |
|
|
$ |
193,620 |
|
|
$ |
171,212 |
|
|
$ |
171,068 |
|
|
$ |
154,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPLs guaranteed by the U.S. government (1) |
|
$ |
28,748 |
|
|
$ |
33,858 |
|
|
$ |
33,676 |
|
|
$ |
30,710 |
|
|
$ |
18,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPLs as a % of total loans and leases |
|
|
0.60 |
% |
|
|
0.55 |
% |
|
|
0.49 |
% |
|
|
0.51 |
% |
|
|
0.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPAs as a % of total loans and leases and
other real estate |
|
|
0.79 |
|
|
|
0.74 |
|
|
|
0.65 |
|
|
|
0.65 |
|
|
|
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases past due 90
days or more (1) |
|
$ |
70,179 |
|
|
$ |
59,114 |
|
|
$ |
62,054 |
|
|
$ |
48,829 |
|
|
$ |
52,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans and leases past due 90 days or
more as a percent of total loans and leases |
|
|
0.27 |
% |
|
|
0.23 |
% |
|
|
0.24 |
% |
|
|
0.19 |
% |
|
|
0.20 |
% |
|
|
|
(1) |
|
Beginning in the second quarter of 2006, OREO includes 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. |
NPAs were $206.7 million at March 31, 2007, and represented 0.79% of related assets. This
represented a $51.8 million, or 33%, increase from $154.9 million, or 0.59% of related assets, at
the end of the year-ago quarter, and a $13.1 million, or 7%, increase from $193.6 million, or 0.74%
of related assets, at December 31, 2006.
Contributing to the $51.8 million increase in NPAs from the year-ago period was a $30.0
million increase in other real estate owned (OREO), reflecting foreclosed mortgage loans fully
guaranteed by the U.S. government, which prior to the 2006 second quarter were reported as over
90-day delinquent but still accruing loans. This change in reporting also contributed to the $10.5
million increase in assets guaranteed by the U.S. government, from $18.3 million at the end of the
2006 first quarter to $28.7 million at March 31, 2007. At March 31, 2007, 56% of total NPAs were
secured by residential real estate assets or were guaranteed by the U.S. Government, which have
shown low loss experience historically. This compared favorably with the 51% level of such NPAs at
the end of the year-ago quarter, but declined from 59% at December 31, 2006.
NPLs, which exclude OREO, increased $21.8 million, or 16%, from the year-earlier period to
$157.3 million at March 31, 2007. NPLs increased $13.2 million, or 9%, from December 31, 2006.
Contributing to the $13.2 million increase in NPLs, were increases in middle market CRE NPLs ($7.6
million, up 22%), small business NPLs ($4.2 million, up 16%), residential mortgages ($3.0 million,
up 9%), and home equity NPLs ($1.1 million, up 7%). These increases were partially offset by a
$2.7 million, or 8%, decline in middle market C&I NPLs.
40
For residential real estate secured portfolios, as assets are transferred to OREO status,
their values are written down to net realizable fair values, with a resulting increase in related
current period net charge-offs. This revaluation of the assets minimizes the potential for further
net charge-offs associated with these assets in coming periods. NPLs expressed as a percent of
total loans and leases were 0.60% at March 31, 2007, up from 0.52% a year earlier, and from 0.55%
at December 31, 2006.
The over 90-day delinquent, but still accruing, ratio was 0.27% at March 31, 2007, up from
0.20% at the end of the year-ago quarter, and up from 0.23% at December 31, 2006.
Non-performing asset activity for each of the last five quarters ended March 31, 2007, was as
follows:
Table 10 Non-Performing Assets (NPAs) Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
|
NPAs, beginning of period |
|
$ |
193,620 |
|
|
$ |
171,212 |
|
|
$ |
171,068 |
|
|
$ |
154,893 |
|
|
$ |
117,155 |
|
New NPAs (1) |
|
|
51,588 |
|
|
|
60,287 |
|
|
|
55,490 |
|
|
|
52,498 |
|
|
|
53,768 |
|
Acquired NPAs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,843 |
|
Returns to accruing status |
|
|
(6,176 |
) |
|
|
(5,666 |
) |
|
|
(11,880 |
) |
|
|
(12,143 |
) |
|
|
(14,310 |
) |
NPA losses |
|
|
(9,072 |
) |
|
|
(11,908 |
) |
|
|
(14,143 |
) |
|
|
(6,826 |
) |
|
|
(13,314 |
) |
Payments |
|
|
(18,086 |
) |
|
|
(16,673 |
) |
|
|
(16,709 |
) |
|
|
(12,892 |
) |
|
|
(13,195 |
) |
Sales |
|
|
(5,196 |
) |
|
|
(3,632 |
) |
|
|
(12,614 |
) |
|
|
(4,462 |
) |
|
|
(9,054 |
) |
|
|
|
NPAs, end of period |
|
$ |
206,678 |
|
|
$ |
193,620 |
|
|
$ |
171,212 |
|
|
$ |
171,068 |
|
|
$ |
154,893 |
|
|
|
|
|
|
|
(1) |
|
Beginning in the second quarter of 2006, OREO includes 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. |
Allowances for Credit Losses (ACL)
(This section should be read in conjunction with Significant Item 2.)
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 percentage.
We have an established 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
41
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.
This methodology allows for a more meaningful discussion of our view of the current economic
conditions and the potential impact on credit losses. The continued use of quantitative
methodologies for the transaction reserve and the introduction of the quantitative methodology for
the economic component may have the impact of more period-to-period fluctuation in the absolute and
relative level of the reserve than exhibited in prior-period results.
At March 31, 2007, the ALLL was $283.0 million, which was down slightly from $283.8 million a
year earlier, but $10.9 million higher than $272.1 million at December 31, 2006. Expressed as a
percent of period-end loans and leases, the ALLL ratio at March 31, 2007, was 1.08%, down from
1.09% a year ago, but up from 1.04% at December 31, 2006.
The increase in the transaction reserve component reflected pressure resulting from softness
in the residential and commercial real estate markets as reflected in higher levels of watch list
credits. Though watch list credits increased during the quarter, on both an absolute and relative
basis, they remained below the year-ago level.
The ALLL as a percent of NPLs was 180% at March 31, 2007, down from 209% a year ago, and from
189% at December 31, 2006. The ALLL as a percent of NPAs was 137% at March 31, 2007, down from 183%
a year ago, and from 141% at December 31, 2006. At March 31, 2007, the AULC was $40.5 million, up
from $39.3 million at the end of the year-ago quarter, and from $40.2 million at December 31, 2006.
On a combined basis, the ACL as a percent of total loans and leases at March 31, 2007, was
1.23%, down from 1.24% a year ago, but up from 1.19% at December 31, 2006. The ACL as a percent of
NPAs was 157% at March 31, 2007, down from 209% a year earlier and 161% at December 31, 2006. The
decline in the NPA coverage ratio reflected (1) a higher percentage of NPAs secured by residential
real estate or guaranteed by the U.S. Government, which have an inherently lower potential for
loss, and (2) a reporting change in 2006 to include in NPAs on foreclosed loans guaranteed by the
U.S. Government and serviced by Huntington, that had been previously reported as 90-day past due
loans.
Table 11 reflects activity in the ALLL and AULC for each of the last five quarters.
42
Table 11 Quarterly Credit Reserves Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
|
Allowance for loan and lease losses,
beginning of period |
|
$ |
272,068 |
|
|
$ |
280,152 |
|
|
$ |
287,517 |
|
|
$ |
283,839 |
|
|
$ |
268,347 |
|
Acquired allowance for loan and lease losses |
|
|
|
|
|
|
|
|
|
|
100 |
(1) |
|
|
1,498 |
(1) |
|
|
22,187 |
|
Loan and lease losses |
|
|
(27,813 |
) |
|
|
(32,835 |
) |
|
|
(29,127 |
) |
|
|
(24,325 |
) |
|
|
(33,405 |
) |
Recoveries of loans previously charged off |
|
|
9,695 |
|
|
|
9,866 |
|
|
|
7,888 |
|
|
|
10,373 |
|
|
|
9,189 |
|
|
|
|
Net loan and lease losses |
|
|
(18,118 |
) |
|
|
(22,969 |
) |
|
|
(21,239 |
) |
|
|
(13,952 |
) |
|
|
(24,216 |
) |
|
|
|
Provision for loan and lease losses |
|
|
29,026 |
|
|
|
14,885 |
|
|
|
13,774 |
|
|
|
16,132 |
|
|
|
17,521 |
|
|
|
|
Allowance for loan and lease losses, end of period |
|
$ |
282,976 |
|
|
$ |
272,068 |
|
|
$ |
280,152 |
|
|
$ |
287,517 |
|
|
$ |
283,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, beginning of period |
|
$ |
40,161 |
|
|
$ |
39,302 |
|
|
$ |
38,914 |
|
|
$ |
39,301 |
|
|
$ |
36,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired AULC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325 |
|
Provision for unfunded loan commitments and
letters of credit losses |
|
|
380 |
|
|
|
859 |
|
|
|
388 |
|
|
|
(387 |
) |
|
|
2,019 |
|
|
|
|
Allowance for unfunded loan commitments
and letters of credit, end of period |
|
$ |
40,541 |
|
|
$ |
40,161 |
|
|
$ |
39,302 |
|
|
$ |
38,914 |
|
|
$ |
39,301 |
|
|
|
|
Total allowances for credit losses |
|
$ |
323,517 |
|
|
$ |
312,229 |
|
|
$ |
319,454 |
|
|
$ |
326,431 |
|
|
$ |
323,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses (ALLL) as %
of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction reserve |
|
|
0.89 |
% |
|
|
0.86 |
% |
|
|
0.86 |
% |
|
|
0.89 |
% |
|
|
0.88 |
% |
Economic reserve |
|
|
0.19 |
|
|
|
0.18 |
|
|
|
0.20 |
|
|
|
0.20 |
|
|
|
0.21 |
|
|
|
|
Total loans and leases |
|
|
1.08 |
% |
|
|
1.04 |
% |
|
|
1.06 |
% |
|
|
1.09 |
% |
|
|
1.09 |
% |
|
|
|
NPLs |
|
|
180 |
|
|
|
189 |
|
|
|
217 |
|
|
|
213 |
|
|
|
209 |
|
NPAs |
|
|
137 |
|
|
|
141 |
|
|
|
164 |
|
|
|
168 |
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances for credit losses (ACL) as % of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
1.23 |
% |
|
|
1.19 |
% |
|
|
1.21 |
% |
|
|
1.24 |
% |
|
|
1.24 |
% |
NPLs |
|
|
206 |
|
|
|
217 |
|
|
|
247 |
|
|
|
241 |
|
|
|
238 |
|
NPAs |
|
|
157 |
|
|
|
161 |
|
|
|
187 |
|
|
|
191 |
|
|
|
209 |
|
Non-guaranteed commercial and NPAs |
|
|
360 |
|
|
|
389 |
|
|
|
456 |
|
|
|
403 |
|
|
|
425 |
|
|
|
|
|
(1) |
|
Represents an adjustment of the allowance and corresponding adjustment to loan balances, resulting from the Unizan merger. |
Net Charge-offs
(This section should be read in conjunction with Significant Item 2.)
Table 12 reflects net loan and lease charge-off detail for each of the last five quarters.
43
Table 12 Quarterly Net Charge-Off Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
|
Net charge-offs by loan and lease type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
$ |
(11 |
) |
|
$ |
(1,827 |
) |
|
$ |
1,742 |
|
|
$ |
(484 |
) |
|
$ |
6,887 |
|
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
9 |
|
|
|
3,957 |
|
|
|
(2 |
) |
|
|
(161 |
) |
|
|
(241 |
) |
Commercial |
|
|
377 |
|
|
|
144 |
|
|
|
644 |
|
|
|
1,557 |
|
|
|
210 |
|
|
|
|
Middle market commercial real estate |
|
|
386 |
|
|
|
4,101 |
|
|
|
642 |
|
|
|
1,396 |
|
|
|
(31 |
) |
Small business |
|
|
2,089 |
|
|
|
4,535 |
|
|
|
4,451 |
|
|
|
2,530 |
|
|
|
3,709 |
|
|
|
|
Total commercial |
|
|
2,464 |
|
|
|
6,809 |
|
|
|
6,835 |
|
|
|
3,442 |
|
|
|
10,565 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
2,853 |
|
|
|
2,422 |
|
|
|
1,759 |
|
|
|
1,172 |
|
|
|
2,977 |
|
Automobile leases |
|
|
2,201 |
|
|
|
2,866 |
|
|
|
2,306 |
|
|
|
1,758 |
|
|
|
3,515 |
|
|
|
|
Automobile loans and leases |
|
|
5,054 |
|
|
|
5,288 |
|
|
|
4,065 |
|
|
|
2,930 |
|
|
|
6,492 |
|
Home equity |
|
|
5,968 |
|
|
|
5,820 |
|
|
|
6,734 |
|
|
|
4,776 |
|
|
|
4,524 |
|
Residential mortgage |
|
|
1,931 |
|
|
|
2,226 |
|
|
|
876 |
|
|
|
688 |
|
|
|
715 |
|
Other loans |
|
|
2,701 |
|
|
|
2,826 |
|
|
|
2,729 |
|
|
|
2,116 |
|
|
|
1,920 |
|
|
|
|
Total consumer |
|
|
15,654 |
|
|
|
16,160 |
|
|
|
14,404 |
|
|
|
10,510 |
|
|
|
13,651 |
|
|
|
|
Total net charge-offs |
|
$ |
18,118 |
|
|
$ |
22,969 |
|
|
$ |
21,239 |
|
|
$ |
13,952 |
|
|
$ |
24,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs annualized percentages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle market commercial and industrial |
|
|
|
% |
|
|
(0.12 |
)% |
|
|
0.12 |
% |
|
|
(0.04 |
)% |
|
|
0.53 |
% |
Middle market commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
|
|
|
|
1.35 |
|
|
|
|
|
|
|
(0.05 |
) |
|
|
(0.07 |
) |
Commercial |
|
|
0.05 |
|
|
|
0.02 |
|
|
|
0.09 |
|
|
|
0.22 |
|
|
|
0.03 |
|
|
|
|
Middle market commercial real estate |
|
|
0.04 |
|
|
|
0.41 |
|
|
|
0.06 |
|
|
|
0.14 |
|
|
|
|
|
Small business |
|
|
0.34 |
|
|
|
0.75 |
|
|
|
0.74 |
|
|
|
0.43 |
|
|
|
0.73 |
|
|
|
|
Total commercial |
|
|
0.08 |
|
|
|
0.22 |
|
|
|
0.23 |
|
|
|
0.12 |
|
|
|
0.38 |
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loans |
|
|
0.52 |
|
|
|
0.46 |
|
|
|
0.34 |
|
|
|
0.23 |
|
|
|
0.60 |
|
Automobile leases |
|
|
0.52 |
|
|
|
0.62 |
|
|
|
0.47 |
|
|
|
0.34 |
|
|
|
0.63 |
|
|
|
|
Automobile loans and leases |
|
|
0.52 |
|
|
|
0.54 |
|
|
|
0.40 |
|
|
|
0.28 |
|
|
|
0.62 |
|
Home equity |
|
|
0.49 |
|
|
|
0.47 |
|
|
|
0.53 |
|
|
|
0.38 |
|
|
|
0.37 |
|
Residential mortgage |
|
|
0.17 |
|
|
|
0.19 |
|
|
|
0.07 |
|
|
|
0.06 |
|
|
|
0.07 |
|
Other loans |
|
|
2.56 |
|
|
|
2.63 |
|
|
|
2.54 |
|
|
|
1.89 |
|
|
|
1.72 |
|
|
|
|
Total consumer |
|
|
0.46 |
|
|
|
0.46 |
|
|
|
0.40 |
|
|
|
0.30 |
|
|
|
0.40 |
|
|
|
|
Net charge-offs as a % of average loans |
|
|
0.28 |
% |
|
|
0.35 |
% |
|
|
0.32 |
% |
|
|
0.21 |
% |
|
|
0.39 |
% |
|
|
|
2007 First Quarter versus 2006 First Quarter and 2005 Fourth Quarter
Total net charge-offs for the 2007 first quarter were $18.1 million, or an annualized 0.28% of
average total loans and leases. This performance remained below the long-term targeted range of
0.35%-0.45%. This was also below the $24.2 million, or an annualized 0.39%, in the year-ago
quarter and $23.0 million, or an annualized 0.35%, of average total loans and leases in the 2006
fourth quarter.
Total commercial net charge-offs in the first quarter were $2.5 million, or an annualized
0.08%. This was down $8.1 million from $10.6 million, or an annualized 0.38%, in the year-ago
quarter, and down from $6.8 million, or an annualized
44
0.22%, in the 2006 fourth quarter. The higher
level of middle market CRE net charge-offs in the 2006 fourth quarter was influenced by stress in
the housing market, and a charge-off associated with the strategic exit of a relationship with a
major Ohio-based homebuilder. Net charge-offs on small business loans were $2.1 million, or an
annualized 0.34%, in the current quarter. This compared favorably to $3.7 million, or an
annualized 0.73%, in the year-ago quarter, and $4.5 million, or an annualized 0.75%, in the 2006
fourth quarter.
Total consumer net charge-offs in the current quarter were $15.7 million, up $2.0 million, or
15%, from $13.7 million in the year-ago quarter. When expressed as an annualized percentage, total
consumer net charge-offs in the 2007 first quarter were 0.46% of average related loans, up from
0.40% in the year-ago quarter. Compared with the 2006 fourth quarter, total consumer net
charge-offs decreased $0.5 million, or 3%, from $16.2 million with the annualized net charge-off
ratio unchanged at an annualized 0.46% of average related loans.
Automobile loan and lease net charge-offs declined $1.4 million, or 22%, from the year-ago
quarter, and $0.2 million, or 4%, from the 2006 fourth quarter. Expressed as a percent of average
total automobile loans and leases, such charge-offs were 0.52% in the current quarter, down from
0.62% in the year-ago quarter and 0.54% in the prior quarter. Overall, the automobile loan and
lease portfolios continued to perform well within expectations.
Residential mortgage net charge-offs totaled $1.9 million, or an annualized 0.17% of related
average balances. While higher than $0.7 million, or an annualized 0.07%, in the year-ago quarter,
they were lower than the $2.2 million, or an annualized 0.19% in the prior quarter.
Home equity net charge-offs in the 2007 first quarter were $6.0 million, or an annualized
0.49%, up from $4.5 million, or an annualized 0.37%, in the year-ago quarter, and up from $5.8
million, or an annualized 0.47%, in the prior quarter.
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.
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
45
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 March 31, 2007, and December 31, 2006. All of
the positions were well within the board of directors policy limits.
Table 13 Net Interest Income at Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income at Risk (%) |
Basis point change scenario |
|
-200 |
|
-100 |
|
+100 |
|
+200 |
|
|
|
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 results compared to the previous quarter and policy limits.
Table 14 Economic Value of Equity at Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Value of Equity at Risk (%) |
Basis point change scenario |
|
-200 |
|
-100 |
|
+100 |
|
+200 |
|
|
|
March 31, 2007 |
|
|
-0.3 |
% |
|
|
+1.1 |
% |
|
|
-4.5 |
% |
|
|
-10.5 |
% |
December 31, 2006 |
|
|
+0.5 |
% |
|
|
+1.4 |
% |
|
|
-4.7 |
% |
|
|
-11.3 |
% |
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 mark-to-market 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, 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.
46
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.
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 the funding needs of the Bank and the parent company.
47
Table 15 Deposit Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands) |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
March 31, |
|
|
|
By Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
3,696,231 |
|
|
|
15.0 |
% |
|
$ |
3,615,745 |
|
|
|
14.4 |
% |
|
$ |
3,480,888 |
|
|
|
14.1 |
% |
|
$ |
3,530,828 |
|
|
|
14.4 |
% |
|
$ |
3,776,790 |
|
|
|
15.4 |
% |
Demand deposits interest bearing |
|
|
2,486,304 |
|
|
|
10.1 |
|
|
|
2,389,085 |
|
|
|
9.5 |
|
|
|
2,243,153 |
|
|
|
9.1 |
|
|
|
2,228,028 |
|
|
|
9.1 |
|
|
|
2,209,617 |
|
|
|
9.0 |
|
Money market deposits |
|
|
5,568,104 |
|
|
|
22.6 |
|
|
|
5,362,459 |
|
|
|
21.4 |
|
|
|
5,678,252 |
|
|
|
23.0 |
|
|
|
5,474,283 |
|
|
|
22.3 |
|
|
|
5,467,201 |
|
|
|
22.3 |
|
Savings and other domestic deposits |
|
|
2,879,098 |
|
|
|
11.7 |
|
|
|
2,986,287 |
|
|
|
11.9 |
|
|
|
3,011,268 |
|
|
|
12.2 |
|
|
|
3,125,513 |
|
|
|
12.7 |
|
|
|
3,585,840 |
|
|
|
14.6 |
|
Core certificates of deposit |
|
|
5,408,289 |
|
|
|
22.0 |
|
|
|
5,364,610 |
|
|
|
21.4 |
|
|
|
5,313,473 |
|
|
|
21.5 |
|
|
|
5,171,410 |
|
|
|
21.0 |
|
|
|
4,949,259 |
|
|
|
20.2 |
|
|
|
|
Total core deposits |
|
|
20,038,026 |
|
|
|
81.4 |
|
|
|
19,718,186 |
|
|
|
78.6 |
|
|
|
19,727,034 |
|
|
|
79.9 |
|
|
|
19,530,062 |
|
|
|
79.5 |
|
|
|
19,988,707 |
|
|
|
81.5 |
|
Other domestic deposits of $100,000 or more |
|
|
1,287,186 |
|
|
|
5.2 |
|
|
|
1,191,984 |
|
|
|
4.8 |
|
|
|
1,259,720 |
|
|
|
5.1 |
|
|
|
1,111,153 |
|
|
|
4.5 |
|
|
|
1,033,447 |
|
|
|
4.2 |
|
Brokered deposits and negotiable CDs |
|
|
2,721,927 |
|
|
|
11.1 |
|
|
|
3,345,943 |
|
|
|
13.4 |
|
|
|
3,183,489 |
|
|
|
12.9 |
|
|
|
3,475,032 |
|
|
|
14.1 |
|
|
|
3,081,211 |
|
|
|
12.5 |
|
Deposits in foreign offices |
|
|
538,754 |
|
|
|
2.3 |
|
|
|
791,657 |
|
|
|
3.2 |
|
|
|
568,152 |
|
|
|
2.1 |
|
|
|
476,685 |
|
|
|
1.9 |
|
|
|
451,798 |
|
|
|
1.8 |
|
|
|
|
Total deposits |
|
$ |
24,585,893 |
|
|
|
100.0 |
% |
|
$ |
25,047,770 |
|
|
|
100.0 |
% |
|
$ |
24,738,395 |
|
|
|
100.0 |
% |
|
$ |
24,592,932 |
|
|
|
100.0 |
% |
|
$ |
24,555,163 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
6,314,309 |
|
|
|
31.5 |
% |
|
$ |
6,063,372 |
|
|
|
30.8 |
% |
|
$ |
6,214,462 |
|
|
|
31.5 |
% |
|
$ |
5,906,817 |
|
|
|
30.2 |
% |
|
$ |
5,994,233 |
|
|
|
30.0 |
% |
Personal |
|
|
13,723,717 |
|
|
|
68.5 |
|
|
|
13,654,814 |
|
|
|
69.2 |
|
|
|
13,512,572 |
|
|
|
68.5 |
|
|
|
13,623,245 |
|
|
|
69.8 |
|
|
|
13,994,474 |
|
|
|
70.0 |
|
|
|
|
Total core deposits |
|
$ |
20,038,026 |
|
|
|
100.0 |
% |
|
$ |
19,718,186 |
|
|
|
100.0 |
% |
|
$ |
19,727,034 |
|
|
|
100.0 |
% |
|
$ |
19,530,062 |
|
|
|
100.0 |
% |
|
$ |
19,988,707 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Business Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Ohio |
|
$ |
5,042,229 |
|
|
|
20.5 |
% |
|
$ |
4,984,296 |
|
|
|
19.8 |
% |
|
$ |
4,884,052 |
|
|
|
19.8 |
% |
|
$ |
4,753,677 |
|
|
|
19.3 |
% |
|
$ |
5,056,754 |
|
|
|
20.7 |
% |
Northern Ohio |
|
|
3,673,519 |
|
|
|
14.9 |
|
|
|
3,572,069 |
|
|
|
14.3 |
|
|
|
3,662,243 |
|
|
|
14.9 |
|
|
|
3,536,794 |
|
|
|
14.4 |
|
|
|
3,594,515 |
|
|
|
14.6 |
|
Southern Ohio / Kentucky |
|
|
2,353,129 |
|
|
|
9.6 |
|
|
|
2,275,875 |
|
|
|
9.1 |
|
|
|
2,212,366 |
|
|
|
8.9 |
|
|
|
2,226,385 |
|
|
|
9.1 |
|
|
|
2,233,220 |
|
|
|
9.1 |
|
Eastern Ohio |
|
|
1,668,203 |
|
|
|
6.8 |
|
|
|
1,716,499 |
|
|
|
6.9 |
|
|
|
1,738,913 |
|
|
|
7.0 |
|
|
|
1,757,964 |
|
|
|
7.1 |
|
|
|
1,762,395 |
|
|
|
7.2 |
|
West Michigan |
|
|
2,826,489 |
|
|
|
11.5 |
|
|
|
2,757,440 |
|
|
|
11.0 |
|
|
|
2,941,889 |
|
|
|
11.9 |
|
|
|
2,798,498 |
|
|
|
11.4 |
|
|
|
2,830,635 |
|
|
|
11.5 |
|
East Michigan |
|
|
2,460,100 |
|
|
|
10.0 |
|
|
|
2,419,482 |
|
|
|
9.7 |
|
|
|
2,354,689 |
|
|
|
9.5 |
|
|
|
2,259,497 |
|
|
|
9.2 |
|
|
|
2,259,497 |
|
|
|
9.2 |
|
West Virginia |
|
|
1,547,095 |
|
|
|
6.3 |
|
|
|
1,513,768 |
|
|
|
6.0 |
|
|
|
1,513,206 |
|
|
|
6.1 |
|
|
|
1,512,351 |
|
|
|
6.1 |
|
|
|
1,533,274 |
|
|
|
6.2 |
|
Indiana |
|
|
903,119 |
|
|
|
3.7 |
|
|
|
819,278 |
|
|
|
3.3 |
|
|
|
847,824 |
|
|
|
3.4 |
|
|
|
828,787 |
|
|
|
3.4 |
|
|
|
809,176 |
|
|
|
3.3 |
|
Mortgage and equipment leasing groups |
|
|
163,456 |
|
|
|
0.7 |
|
|
|
171,900 |
|
|
|
0.7 |
|
|
|
146,075 |
|
|
|
0.6 |
|
|
|
165,807 |
|
|
|
0.7 |
|
|
|
153,444 |
|
|
|
0.6 |
|
|
|
|
Regional Banking |
|
|
20,637,339 |
|
|
|
83.9 |
|
|
|
20,230,607 |
|
|
|
80.8 |
|
|
|
20,301,257 |
|
|
|
82.1 |
|
|
|
19,839,760 |
|
|
|
80.7 |
|
|
|
20,232,910 |
|
|
|
82.4 |
|
Dealer Sales |
|
|
54,645 |
|
|
|
0.2 |
|
|
|
58,885 |
|
|
|
0.2 |
|
|
|
58,918 |
|
|
|
0.2 |
|
|
|
60,513 |
|
|
|
0.2 |
|
|
|
63,573 |
|
|
|
0.3 |
|
Private Financial and Capital Markets Group |
|
|
1,171,982 |
|
|
|
4.8 |
|
|
|
1,162,335 |
|
|
|
4.6 |
|
|
|
1,144,731 |
|
|
|
4.6 |
|
|
|
1,217,627 |
|
|
|
5.0 |
|
|
|
1,177,469 |
|
|
|
4.8 |
|
Treasury / Other (1) |
|
|
2,721,927 |
|
|
|
11.1 |
|
|
|
3,595,943 |
|
|
|
14.4 |
|
|
|
3,233,489 |
|
|
|
13.1 |
|
|
|
3,475,032 |
|
|
|
14.1 |
|
|
|
3,081,211 |
|
|
|
12.5 |
|
|
|
|
Total deposits |
|
$ |
24,585,893 |
|
|
|
100.0 |
% |
|
$ |
25,047,770 |
|
|
|
100.0 |
% |
|
$ |
24,738,395 |
|
|
|
100.0 |
% |
|
$ |
24,592,932 |
|
|
|
100.0 |
% |
|
$ |
24,555,163 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
(1) |
|
Comprised largely of brokered deposits and negotiable CDs. |
48
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. At March 31, 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 $211.8 million and $199.0 million, respectively. The Bank could have
declared and paid $95.1 million of additional dividends to the parent company at March 31, 2007
without regulatory approval.
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 March 31, 2007, the parent company had $371.1 million in cash or cash equivalents. There
is approximately $350 million that we anticipate will be paid by the parent company in connection
with the proposed acquisition of Sky Financial. We anticipate that we will issue debt obligations
prior to the acquisition to finance a portion of the $350 million payment. Considering this
potential obligation, and expected quarterly dividend payments, we believe the parent company has
sufficient liquidity to meet its cash flow obligations for the foreseeable future.
Credit Ratings
Credit ratings by the three major credit rating agencies are an important component of our
liquidity profile. Among other factors, the credit ratings are based on financial strength, credit
quality and concentrations in the loan portfolio, the level and volatility of earnings, capital
adequacy, the quality of management, the liquidity of the balance sheet, the availability of a
significant base of core retail and commercial deposits, and our ability to access a broad array of
wholesale 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 March 31, 2007, for the parent company and the Bank were:
Table 16 Credit Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 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 |
|
49
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 17 below provides certain information about our standby letters of credit:
Table 17 Standby Letters of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in millions) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
|
Total outstanding |
|
$ |
1,197 |
|
|
$ |
1,156 |
|
|
$ |
1,136 |
|
|
$ |
1,121 |
|
|
$ |
1,095 |
|
Percent collateralized |
|
|
48 |
% |
|
|
47 |
% |
|
|
45 |
% |
|
|
44 |
% |
|
|
49 |
% |
Income recognized from issuance(1) |
|
$ |
3.2 |
|
|
$ |
3.1 |
|
|
$ |
3.0 |
|
|
$ |
3.0 |
|
|
$ |
3.0 |
|
Carrying amount of deferred revenue |
|
|
4.3 |
|
|
|
4.3 |
|
|
|
3.5 |
|
|
|
3.6 |
|
|
|
5.3 |
|
|
|
|
(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 March 31,
2007, December 31, 2006, and March 31, 2006, we had commitments to sell residential real estate
loans of $373.7 million, $319.9 million, and $406.3 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 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.
50
Shareholders equity totaled $3.1 billion at March 31, 2007. This balance represented a
slight increase from December 31, 2006.
There were no share repurchases during the quarter under the current authorization, as all
such repurchases have been suspended pending shareholder approval of the Sky Financial merger. At
March 31, 2007, we had unused authority to repurchase up to 3.9 million common shares. This
authorization may be used to help mitigate the dilutive earnings impact resulting from the issuance
of stock options and restricted stock. All purchases under the current authorization will be made
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. Our Tier 1 Risk-based Capital, Total
Risk-based Capital, Tier 1 Leverage ratios and risk-adjusted assets for five years are shown in
Table 17 and are well in excess of minimum levels established for well capitalized institutions
of 6.00%, 10.00%, and 5.00%, 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 March 31, 2007, the Bank had regulatory capital ratios in excess of well
capitalized regulatory minimums.
At March 31, 2007, the tangible equity to assets ratio was 7.06%, up from 6.97% a year ago and
6.87% at December 31, 2006. At March 31, 2007, the tangible equity to risk-weighted assets ratio
was 7.69%, down from 7.80% at the end of the year-ago quarter, but up slightly from 7.65% at
December 31, 2006. The increase in the tangible equity to assets ratio was due primarily to
increased retained earnings.
Table 18 Capital Adequacy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in millions) |
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
March 31, |
|
|
|
Total risk-weighted assets (1) |
|
$ |
31,489 |
|
|
$ |
31,155 |
|
|
$ |
31,330 |
|
|
$ |
31,614 |
|
|
$ |
31,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio (1) |
|
|
8.24 |
% |
|
|
8.00 |
% |
|
|
7.99 |
% |
|
|
7.62 |
% |
|
|
8.53 |
% |
Tier 1 risk-based capital ratio (1) |
|
|
8.97 |
|
|
|
8.93 |
|
|
|
8.95 |
|
|
|
8.45 |
|
|
|
8.94 |
|
Total risk-based capital ratio (1) |
|
|
12.81 |
|
|
|
12.79 |
|
|
|
12.81 |
|
|
|
12.29 |
|
|
|
12.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity / asset ratio |
|
|
7.06 |
|
|
|
6.87 |
|
|
|
7.13 |
|
|
|
6.46 |
|
|
|
6.97 |
|
Tangible equity / risk-weighted assets ratio (1) |
|
|
7.70 |
|
|
|
7.65 |
|
|
|
7.97 |
|
|
|
7.29 |
|
|
|
7.80 |
|
Average equity / average assets |
|
|
8.63 |
|
|
|
8.70 |
|
|
|
8.30 |
|
|
|
8.39 |
|
|
|
8.15 |
|
|
|
|
(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. |
On January 18, 2007, the board of directors declared a quarterly cash dividend on its
common stock of $0.265 per common share payable April 2, 2007, to shareholders of record on March
15, 2007. Subsequent to the end of the 2007
first quarter, the board of directors on April 18, 2007, 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.
51
Table 19 Quarterly Common Stock Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
(in thousands, except per share amounts) |
|
First |
|
Fourth |
|
Third |
|
Second |
|
First |
|
|
|
Common stock price, per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High (1) |
|
$ |
24.140 |
|
|
$ |
24.970 |
|
|
$ |
24.820 |
|
|
$ |
24.410 |
|
|
$ |
24.750 |
|
Low (1) |
|
|
21.610 |
|
|
|
22.870 |
|
|
|
23.000 |
|
|
|
23.120 |
|
|
|
22.560 |
|
Close |
|
|
21.850 |
|
|
|
23.750 |
|
|
|
23.930 |
|
|
|
23.580 |
|
|
|
24.130 |
|
Average closing price |
|
|
23.117 |
|
|
|
24.315 |
|
|
|
23.942 |
|
|
|
23.732 |
|
|
|
23.649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends, per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on common stock |
|
$ |
0.265 |
|
|
$ |
0.250 |
|
|
$ |
0.250 |
|
|
$ |
0.250 |
|
|
$ |
0.250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average basic |
|
|
235,586 |
|
|
|
236,426 |
|
|
|
237,672 |
|
|
|
241,729 |
|
|
|
230,968 |
|
Average diluted |
|
|
238,754 |
|
|
|
239,881 |
|
|
|
240,896 |
|
|
|
244,538 |
|
|
|
234,363 |
|
Ending |
|
|
235,714 |
|
|
|
235,474 |
|
|
|
237,921 |
|
|
|
237,361 |
|
|
|
245,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share |
|
$ |
12.95 |
|
|
$ |
12.80 |
|
|
$ |
13.15 |
|
|
$ |
12.38 |
|
|
$ |
12.56 |
|
Tangible book value per share |
|
|
10.29 |
|
|
|
10.12 |
|
|
|
10.50 |
|
|
|
9.70 |
|
|
|
9.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares repurchased |
|
|
|
|
|
|
3,050 |
|
|
|
|
|
|
|
8,100 |
|
|
|
4,831 |
|
|
|
|
(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 2007 first quarter and the 2006 first quarter periods are affected, as Unizan
results were not in the prior period for a full quarter. In contrast, comparisons between the 2007
first and 2006 fourth quarter results are not affected given Unizan fully impacted both of these
quarters. Comparisons of the 2007 first quarter compared with the 2006 first quarter reporting
periods 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,
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. |
The following methodology has been implemented to estimate the approximate effect of the
Unizan merger used to determine merger-related impacts.
52
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 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. Full quarter 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 the 2006 first quarter
impact of the merger on personnel costs, one-twelfth of Unizans full-year 2005 personnel costs was
used. Full quarter 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 20 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:
53
Table 20 Estimated Impact of Unizan Merger
2007 First Quarter versus 2006 First Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unizan |
|
Other |
Average Loans and Deposits |
|
First Quarter |
|
Change |
|
Merger |
|
|
|
|
(in millions) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
Related |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle-market C&I |
|
$ |
6,070 |
|
|
$ |
5,174 |
|
|
$ |
896 |
|
|
|
17.3 |
% |
|
$ |
47 |
|
|
$ |
849 |
|
|
|
16.4 |
% |
Middle-market CRE |
|
|
3,923 |
|
|
|
3,921 |
|
|
|
2 |
|
|
|
0.1 |
|
|
|
482 |
|
|
|
(480 |
) |
|
|
(12.2 |
) |
Small business |
|
|
2,466 |
|
|
|
2,035 |
|
|
|
431 |
|
|
|
21.2 |
|
|
|
|
|
|
|
431 |
|
|
|
21.2 |
|
|
|
|
|
|
|
|
Total commercial |
|
|
12,459 |
|
|
|
11,130 |
|
|
|
1,329 |
|
|
|
11.9 |
|
|
|
529 |
|
|
|
800 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
Automobile loans and leases |
|
|
3,913 |
|
|
|
4,215 |
|
|
|
(302 |
) |
|
|
(7.2 |
) |
|
|
47 |
|
|
|
(349 |
) |
|
|
(8.3 |
) |
Home equity |
|
|
4,913 |
|
|
|
4,833 |
|
|
|
80 |
|
|
|
1.7 |
|
|
|
149 |
|
|
|
(69 |
) |
|
|
(1.4 |
) |
Residential mortgage |
|
|
4,496 |
|
|
|
4,306 |
|
|
|
190 |
|
|
|
4.4 |
|
|
|
272 |
|
|
|
(82 |
) |
|
|
(1.9 |
) |
Other consumer |
|
|
422 |
|
|
|
447 |
|
|
|
(25 |
) |
|
|
(5.6 |
) |
|
|
112 |
|
|
|
(137 |
) |
|
|
(30.6 |
) |
|
|
|
|
|
|
|
Total consumer |
|
|
13,744 |
|
|
|
13,801 |
|
|
|
(57 |
) |
|
|
(0.4 |
) |
|
|
580 |
|
|
|
(637 |
) |
|
|
(4.6 |
) |
|
|
|
|
|
|
|
Total loans |
|
$ |
26,203 |
|
|
$ |
24,931 |
|
|
$ |
1,272 |
|
|
|
5.1 |
% |
|
$ |
1,109 |
|
|
$ |
163 |
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits non-interest bearing |
|
$ |
3,530 |
|
|
$ |
3,436 |
|
|
$ |
94 |
|
|
|
2.7 |
% |
|
$ |
115 |
|
|
$ |
(21 |
) |
|
|
(0.6 |
)% |
Demand deposits interest bearing |
|
|
2,349 |
|
|
|
1,974 |
|
|
|
375 |
|
|
|
19.0 |
|
|
|
61 |
|
|
|
314 |
|
|
|
15.9 |
|
Money market deposits |
|
|
5,489 |
|
|
|
5,588 |
|
|
|
(99 |
) |
|
|
(1.8 |
) |
|
|
279 |
|
|
|
(378 |
) |
|
|
(6.8 |
) |
Savings and other domestic deposits |
|
|
2,827 |
|
|
|
3,095 |
|
|
|
(268 |
) |
|
|
(8.7 |
) |
|
|
162 |
|
|
|
(430 |
) |
|
|
(13.9 |
) |
Core certificates of deposit |
|
|
5,455 |
|
|
|
4,389 |
|
|
|
1,066 |
|
|
|
24.3 |
|
|
|
414 |
|
|
|
652 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
Total core deposits |
|
|
19,650 |
|
|
|
18,482 |
|
|
|
1,168 |
|
|
|
6.3 |
|
|
|
1,031 |
|
|
|
137 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
Other deposits |
|
|
4,801 |
|
|
|
4,546 |
|
|
|
255 |
|
|
|
5.6 |
|
|
|
120 |
|
|
|
135 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
24,451 |
|
|
$ |
23,028 |
|
|
$ |
1,423 |
|
|
|
6.2 |
% |
|
$ |
1,151 |
|
|
$ |
272 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unizan |
|
Other |
Selected Income Statement Categories |
|
First Quarter |
|
Change |
|
Merger |
|
Merger |
|
|
|
|
(in thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
Related |
|
Costs |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
Net interest income FTE |
|
$ |
259,602 |
|
|
$ |
247,516 |
|
|
$ |
12,086 |
|
|
|
4.9 |
% |
|
$ |
11,796 |
|
|
$ |
|
|
|
$ |
290 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
44,793 |
|
|
$ |
41,222 |
|
|
$ |
3,571 |
|
|
|
8.7 |
% |
|
$ |
1,052 |
|
|
$ |
|
|
|
$ |
2,519 |
|
|
|
6.1 |
% |
Trust services |
|
|
25,894 |
|
|
|
21,278 |
|
|
|
4,616 |
|
|
|
21.7 |
|
|
|
1,102 |
|
|
|
|
|
|
|
3,514 |
|
|
|
16.5 |
|
Brokerage and insurance income |
|
|
16,082 |
|
|
|
15,193 |
|
|
|
889 |
|
|
|
5.9 |
|
|
|
304 |
|
|
|
|
|
|
|
585 |
|
|
|
3.9 |
|
Bank owned life insurance income |
|
|
10,851 |
|
|
|
10,242 |
|
|
|
609 |
|
|
|
5.9 |
|
|
|
524 |
|
|
|
|
|
|
|
85 |
|
|
|
0.8 |
|
Other service charges and fees |
|
|
13,208 |
|
|
|
11,509 |
|
|
|
1,699 |
|
|
|
14.8 |
|
|
|
206 |
|
|
|
|
|
|
|
1,493 |
|
|
|
13.0 |
|
Mortgage banking income (loss) |
|
|
9,351 |
|
|
|
13,194 |
|
|
|
(3,843 |
) |
|
|
(29.1 |
) |
|
|
172 |
|
|
|
|
|
|
|
(4,015 |
) |
|
|
(30.4 |
) |
Securities gains (losses) |
|
|
104 |
|
|
|
(20 |
) |
|
|
124 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
N.M. |
|
Gains on sales of automobile loans |
|
|
1,144 |
|
|
|
448 |
|
|
|
696 |
|
|
|
N.M. |
|
|
|
|
|
|
|
|
|
|
|
696 |
|
|
|
N.M. |
|
Other income |
|
|
23,750 |
|
|
|
46,468 |
|
|
|
(22,718 |
) |
|
|
(48.9 |
) |
|
|
1,424 |
|
|
|
|
|
|
|
(24,142 |
) |
|
|
(52.0 |
) |
|
|
|
|
|
|
|
Total non-interest income |
|
$ |
145,177 |
|
|
$ |
159,534 |
|
|
$ |
(14,357 |
) |
|
|
(9.0 |
) |
|
$ |
4,784 |
|
|
$ |
|
|
|
$ |
(19,141 |
) |
|
|
(12.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
$ |
134,639 |
|
|
$ |
131,557 |
|
|
$ |
3,082 |
|
|
|
2.3 |
% |
|
$ |
5,150 |
|
|
$ |
|
|
|
$ |
(2,068 |
) |
|
|
(1.6 |
)% |
Net occupancy |
|
|
19,908 |
|
|
|
17,966 |
|
|
|
1,942 |
|
|
|
10.8 |
|
|
|
860 |
|
|
|
|
|
|
|
1,082 |
|
|
|
6.0 |
|
Outside data processing and other services |
|
|
21,814 |
|
|
|
19,851 |
|
|
|
1,963 |
|
|
|
9.9 |
|
|
|
334 |
|
|
|
|
|
|
|
1,629 |
|
|
|
8.2 |
|
Equipment |
|
|
18,219 |
|
|
|
16,503 |
|
|
|
1,716 |
|
|
|
10.4 |
|
|
|
344 |
|
|
|
|
|
|
|
1,372 |
|
|
|
8.3 |
|
Professional services |
|
|
6,482 |
|
|
|
5,365 |
|
|
|
1,117 |
|
|
|
20.8 |
|
|
|
982 |
|
|
|
|
|
|
|
135 |
|
|
|
2.5 |
|
Marketing |
|
|
7,696 |
|
|
|
7,301 |
|
|
|
395 |
|
|
|
5.4 |
|
|
|
178 |
|
|
|
|
|
|
|
217 |
|
|
|
3.0 |
|
Telecommunications |
|
|
4,126 |
|
|
|
4,825 |
|
|
|
(699 |
) |
|
|
(14.5 |
) |
|
|
244 |
|
|
|
|
|
|
|
(943 |
) |
|
|
(19.5 |
) |
Printing and supplies |
|
|
3,242 |
|
|
|
3,074 |
|
|
|
168 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
168 |
|
|
|
5.5 |
|
Amortization of intangibles |
|
|
2,520 |
|
|
|
1,075 |
|
|
|
1,445 |
|
|
|
N.M. |
|
|
|
1,379 |
|
|
|
|
|
|
|
66 |
|
|
|
6.1 |
|
Other expense |
|
|
23,426 |
|
|
|
30,898 |
|
|
|
(7,472 |
) |
|
|
(24.2 |
) |
|
|
2,018 |
|
|
|
|
|
|
|
(9,490 |
) |
|
|
(30.7 |
) |
|
|
|
|
|
|
|
Total non-interest expense |
|
$ |
242,072 |
|
|
$ |
238,415 |
|
|
$ |
3,657 |
|
|
|
1.5 |
|
|
$ |
11,489 |
|
|
$ |
|
|
|
$ |
(7,832 |
) |
|
|
(3.3 |
) |
|
|
|
|
|
|
|
54
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.
Use of Operating Earnings to Measure Segment Performance
We use earnings on an operating basis, rather than on a GAAP basis, to measure underlying
performance trends for each business segment. Operating earnings represent GAAP earnings adjusted
to exclude the impact of the significant items. Analyzing earnings on an operating basis is very
helpful in assessing underlying performance trends, a critical factor used to determine the success
of strategies and future earnings capabilities. For the three months ended March 31, 2007 and 2006,
operating earnings were the same as reported GAAP.
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 rate. 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 function
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.
55
Regional Banking
(This section should be read in conjunction with Significant Items 2 and 5.)
Objectives, Strategies, and Priorities
Our Regional Banking line of business provides traditional banking products and services to
consumer, small business, and commercial customers located in its eight operating regions within
the five states of Ohio, Michigan, West Virginia, Indiana, and Kentucky. It provides these
services through a banking network of 375 branches, 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 March 31, 2007, Retail
Banking accounted for 57% 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 21 Selected Quarterly Data for Regional Banking (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Change |
(in thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
|
|
Net income operating (1) |
|
$ |
83,013 |
|
|
$ |
86,667 |
|
|
$ |
(3,654 |
) |
|
|
(4.2) |
% |
Return on average equity |
|
|
27.1 |
% |
|
|
33.6 |
% |
|
|
(6.5 |
) |
|
|
(19.3 |
) |
Retail banking # DDA households (eop) (2) |
|
|
562,768 |
|
|
|
517,277 |
|
|
|
45,491 |
|
|
|
8.8 |
|
Retail banking # new relationships 90-day cross-sell (average)
(2) |
|
|
2.79 |
|
|
|
2.81 |
|
|
|
(0.02 |
) |
|
|
(0.7 |
) |
Small business # business DDA relationships (eop) (2) |
|
|
61,130 |
|
|
|
54,828 |
|
|
|
6,302 |
|
|
|
11.5 |
|
Small business # new relationships 90-day cross-sell (average)
(2) |
|
|
2.32 |
|
|
|
2.16 |
|
|
|
0.16 |
|
|
|
7.4 |
|
Commercial banking # customers (eop)(2) |
|
|
5,316 |
|
|
|
4,914 |
|
|
|
402 |
|
|
|
8.2 |
|
Mortgage banking closed loan volume (in millions)(2) |
|
$ |
619 |
|
|
$ |
596 |
|
|
$ |
23 |
|
|
|
3.9 |
|
eop End of Period.
|
|
|
(1) |
|
Operating basis, see Lines of Business section for definition. |
|
(2) |
|
Periods prior to the second quarter of 2006 exclude Unizan. |
2007 First Quarter versus 2006 First Quarter
Regional Banking net operating earnings for the 2007 first quarter were $83.0 million, down
$3.7 million, or 4%, from the prior-year period, and accounted for 87% of total company net
operating earnings. Results were significantly impacted by the acquisition of Unizan. Results of
the acquisition were not
56
reflected in line-of-business results until 2006 second quarter although the acquisition closed
March 1, 2006. The $3.7 million decline in net operating earnings reflected the negative impacts
of a $20.8 million, or 15%, increase in non-interest expenses and a $12.1 million increase in
provision for credit losses, partially offset by a $15.6 million increase in fully taxable
equivalent revenue and a $13.5 million reduction in provision for income taxes. ROE was 27.1% for
the 2007 first quarter, down from 33.6% in the prior-year period.
Revenue growth reflected a $7.0 million, or 3%, increase in fully taxable equivalent net
interest income which resulted from a $1.4 billion, or 8%, increase in average loan balances,
partially offset by a 19 basis point decline in the net interest margin. The increase in average loan
balances resulted primarily from the acquisition of Unizan and its related impact on results in the
Eastern Ohio region. Growth in other banking regions was mostly due to improved sales efforts.
The decline in the net interest margin resulted from lower spreads on loans and deposits acquired
with the Unizan acquisition and continued competitive pressures across all regions, which
contributed to spread compression in both loan and deposit portfolios. The following table
presents the average loans and leases by region compared with the prior year:
Regional Banking Average Loans & Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from |
|
|
First Quarter |
|
First Quarter |
(in millions of dollars) |
|
2007 |
|
2006 |
|
Region |
|
|
|
|
|
|
|
|
Central Ohio |
|
$ |
3,633 |
|
|
|
14 |
% |
Northern Ohio |
|
|
2,656 |
|
|
|
6 |
|
Southern Ohio / Kentucky |
|
|
2,181 |
|
|
|
4 |
|
Eastern Ohio |
|
|
1,283 |
|
|
|
47 |
|
West Michigan |
|
|
2,441 |
|
|
|
3 |
|
East Michigan |
|
|
1,626 |
|
|
|
5 |
|
West Virginia |
|
|
1,106 |
|
|
|
15 |
|
Indiana |
|
|
959 |
|
|
|
(6 |
) |
Mortgage and equipment leasing groups |
|
|
3,554 |
|
|
|
3 |
|
|
Total loans and leases |
|
$ |
19,439 |
|
|
|
8 |
% |
|
Average loans and leases increased across most categories compared to the first quarter of
2006, primarily due to the Unizan acquisition, including residential mortgages, commercial loans,
and home equity. Residential mortgage and home equity loan growth rates were 4% and 2%,
respectively. The growth in residential mortgage loans was aided by a 4% increase in closed loan
origination volume from 2006. Commercial loan growth reflected a 24% increase commercial and
industrial loans as well as a 16% growth in Business Banking.
The increase in the provision for credit losses resulted from a decline in the asset quality
of the loan portfolios, largely in the regions of East Michigan, Northern Ohio, and Southern Ohio.
Non-interest revenue grew $8.7 million, or 11%, again primarily reflecting the impact of the
Unizan acquisition. Growth in non-interest income is largely driven by our cross-sell ratio as
an indicator of our sales performance. This ratio measures success in selling multiple products to
households. In Retail Banking, the 90-day cross-sell ratio was 2.79 products per household while
the small business cross-sell ratio was 2.32 products per company.
Additionally, the Unizan acquisition contributed to the expansion in our customer base.
Period-end Retail Banking non-interest bearing checking account (DDA) households totaled 562,768,
an increase of 45,491, or 9%, from one year ago. The number of small business DDA relationships
increased 6,302, or 12%. We view the DDA as the primary banking relationship account, as most
additional services are cross-
57
sold to customers after first establishing a DDA account. As a result, growth in average
deposits was also broad-based, with the impact of the Unizan acquisition primarily impacting the
Eastern Ohio region:
Regional Banking Average Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from |
|
|
|
First Quarter |
|
|
First Quarter |
|
(in millions of dollars) |
|
2007 |
|
|
2006 |
|
|
Region |
|
|
|
|
|
|
|
|
Central Ohio |
|
$ |
4,822 |
|
|
|
5 |
% |
Northern Ohio |
|
|
3,636 |
|
|
|
1 |
|
Southern Ohio / Kentucky |
|
|
2,285 |
|
|
|
11 |
|
Eastern Ohio |
|
|
1,679 |
|
|
|
70 |
|
West Michigan |
|
|
2,790 |
|
|
|
|
|
East Michigan |
|
|
2,431 |
|
|
|
8 |
|
West Virginia |
|
|
1,533 |
|
|
|
4 |
|
Indiana |
|
|
870 |
|
|
|
17 |
|
Mortgage and equipment leasing groups |
|
|
175 |
|
|
|
8 |
|
|
Total deposits |
|
$ |
20,221 |
|
|
|
8 |
% |
|
The 8% increase in average deposits reflected 26% growth in time deposits. Interest bearing
and non-interest bearing demand deposits grew 4% and 3%, respectively, from the year-ago period,
while savings deposits declined 15%. The number of on-line consumer banking customers at March 31,
2007 grew 16% to 303,096 customers.
58
Dealer Sales
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, New Jersey, 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, dealership real estate, 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.
Automobile lease accounting significantly impacts the presentation of Dealer Sales financial
results. Automobile leases originated prior to May 2002 are accounted for as automobile operating
leases, with leases originated since April 2002 accounted for as direct financing leases. This
accounting treatment impacts a number of Dealer Sales financial performance results and trends
including net interest income, non-interest income, and non-interest expense. Residual values on
leased automobiles, including the accounting for residual value losses, are also an important
factor in the overall profitability of automobile leases.
Table 22 Selected Quarterly Data for Dealer Sales (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Change |
(in thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
|
|
Net income operating (1) |
|
$ |
12,497 |
|
|
$ |
14,483 |
|
|
$ |
(1,986 |
) |
|
|
(14) |
% |
Return on average equity |
|
|
26.4 |
% |
|
|
18.1 |
% |
|
|
8.3 |
|
|
|
46 |
|
Automobile loans production (in millions) |
|
$ |
447.4 |
|
|
$ |
416.3 |
|
|
$ |
31.1 |
|
|
|
7 |
|
Automobile leases production (in millions) |
|
|
68.0 |
|
|
$ |
73.9 |
|
|
|
(5.9 |
) |
|
|
(8 |
) |
|
|
|
(1) |
|
Operating basis, see Lines of Business section for definition. |
2007 First Quarter versus 2006 First Quarter
Dealer Sales net operating earnings for the 2007 first quarter were $12.5 million, down $2.0
million, or 14%, from the prior-year period, and accounted for 13% of total company net operating
earnings. This decline was primarily attributed to an 8% decline in average loan and lease
balances, as well as an 11 basis point decline in the net interest margin.
Direct finance lease average balances declined 24%, primarily reflecting continued softness in
lease production levels resulting from low consumer demand and competitive pricing.
Partially
offsetting the declines in average lease balances was an 11% increase in average
indirect automobile loans compared to the year-ago quarter. This growth reflected two factors: (1)
the purchase of the residual portion of two matured 2003 automobile loan securitizations; and (2)
growth indirectly attributed to the introduction of the Huntington Plus program for automobile
dealers in the latter half of 2006. Huntington Plus 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 the dealers, thereby influencing them to increase
their overall allocation of prime automobile loan applications to Huntington.
59
This contributed to
the 18% increase in higher credit score loan originations during the first quarter of 2007 as
compared to the fourth quarter of 2006 and, accordingly, the growth in related average balances.
The net interest margin on average loan and direct finance lease balances decreased from 2.68%
for the first quarter of 2006 to 2.57% for the 2007 first quarter. This decline reflects 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.
60
Private Financial and Capital Markets Group
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
29 proprietary mutual funds, including 10 variable annuity funds, which represented approximately
$4.1 billion in assets under management at March 31, 2007. The Huntington Investment Company
offers brokerage and investment advisory services to both Regional Banking and PFCMG customers
through a combination of more than 600 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 23 Selected Quarterly Data for Private Financial and Capital Markets Group (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Change |
(in thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
|
|
Net income operating (1) |
|
$ |
11,756 |
|
|
$ |
17,137 |
|
|
$ |
(5,381 |
) |
|
|
(31.4) |
% |
Return on average equity |
|
|
28.4 |
% |
|
|
50.0 |
% |
|
|
(21.6 |
) |
|
|
(43.2 |
) |
Total brokerage and insurance income |
|
$ |
15,749 |
|
|
$ |
13,498 |
|
|
$ |
2,251 |
|
|
|
16.7 |
|
Total assets under management (in billions)
(2) |
|
|
12.6 |
|
|
|
10.9 |
|
|
|
1.7 |
|
|
|
15.6 |
|
Total trust assets (in billions) (2) |
|
|
53.2 |
|
|
|
46.2 |
|
|
|
7.0 |
|
|
|
15.2 |
|
|
|
|
(1) |
|
Operating basis, see Lines of Business section for definition. |
|
(2) |
|
Periods prior to the second quarter of 2006 exclude Unizan. |
2007 First Quarter versus 2006 First Quarter
PFCMG net operating earnings for the 2007 first quarter were $11.8 million, down $5.4 million,
or 31%, from the prior-year period, and accounted for 12% of total company net operating earnings.
The largest contributing factor to the decline from the year-ago quarter was an $8.5 million
valuation adjustment on our equity investment portfolio, compared with a positive $1.4 million
equity investment portfolio valuation adjustment in the year-ago quarter.
We again had strong performance in our trust and asset management business. At March 31,
2007, assets under management were $12.6 billion, a 15% increase from March 31, 2006. Period end
total trust assets were $53.2 billion, up 15%, with total trust fees for the quarter increasing 22%
year-over-year. Results benefited from the Unizan acquisition
completed in first quarter 2006 and the Unified Services acquisition completed as of December
31, 2006. Though neither had a significant impact on the year over year trust asset growth, they
did contribute $3.7 million of the $4.6 million increase in trust income.
61
Growth in assets under management reflected: (1) approximately $0.2 billion in new Huntington
Asset Management Accounts (HAMA) were opened since March 31, 2006; (2) recent market expansion
efforts as our Palm Beach and Orlando offices which opened in mid-year 2005, and the Dayton,
Indianapolis, and St. Petersburg offices, which opened in the second quarter 2006, had combined
managed assets of $0.2 billion as of March 31, 2007; and (3) solid investment performance of the
Huntington proprietary mutual funds, which totaled $4.1 billion at quarter end, a 15% increase from
the prior year. Period end equity fund assets totaled $1.6 billion, up 12%, as three of the eight
equity funds eligible for rating had overall Morningstar 4 Star or 5 Star ratings, and one
fixed income fund having a 5 Star rating. Four of the eight equity funds ranked in the top 30%
of funds in their respective category for total returns for the one year period ended March 31,
2007.
Brokerage and insurance revenue increased $1.0 million, or 10%, with insurance revenue
increasing $1.2 million, or 45%. The growth in brokerage revenue resulted primarily from strong
growth in mutual fund sales reflective of improved market conditions, as well as growth in 12b-1
fees attributable to growth in customer account balances from a combination of increased sales and
market appreciation. Total brokerage assets under administration were $5.6 billion at March 31,
2007, up from $5.1 billion a year ago. The increase in insurance revenue reflected a $0.3 million
increase in advance market life agency business and revenues from the captive insurance company
formed in the 2006 second quarter.
Non-interest income declined $4.2 million, or 10%, reflecting the negative impact of the
equity investment portfolio valuation adjustments and $2.7 million in mezzanine financing gains
from the year-ago quarter that did not recur.
Non-interest expense increased $9.5 million, or 31%, from the year-ago quarter reflecting
increased expenses related to the Unizan and Unified acquisitions and increased expenses
commensurate with the growth of revenue.
62
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 disclosed in its filings with the Securities and Exchange Commission is recorded,
processed, summarized and reported appropriately and on a timely basis. 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.
63
Item 6. Exhibits
(a) Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEC File or |
|
|
Exhibit |
|
|
|
Report or Registration |
|
Registration |
|
Exhibit |
Number |
|
Document Description |
|
Statement |
|
Number |
|
Reference |
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
000-02525
|
|
3(i) |
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Articles of Amendment to Articles
of Restatement of Charter.
|
|
Quarterly Report on
Form 10-Q for the
quarter ended March
31, 1998.
|
|
000-02525
|
|
3(i)(c) |
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Amended and Restated Bylaws as of
February 21, 2007.
|
|
Annual Report on Form
10-K for the year
ended December 31,
2006.
|
|
000-02525
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
3.4
|
|
Articles Supplementary
|
|
Annual Report on Form
10-K for the year
ended December 31,
2006.
|
|
000-02525
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
12.1
|
|
Ratio of Earnings to Fixed Charges. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification
Chief Executive Officer. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification
Chief Financial Officer. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Section 1350 Certification Chief
Executive Officer. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
Section 1350 Certification Chief
Financial Officer. |
|
|
|
|
|
|
|
|
64
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)
|
|
|
|
|
Date: May 4, 2007 |
/s/ Thomas E. Hoaglin
|
|
|
Thomas E. Hoaglin |
|
|
Chairman, Chief Executive Officer and
President |
|
|
Date: May 4, 2007 |
/s/ Donald R. Kimble
|
|
|
Donald R. Kimble |
|
|
Chief Financial Officer |
|
|
65